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. YesxNo¨

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨Nox

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, $.01 Par Value – ~~10,145,890~~10,197,050 shares outstanding at April ~~28, 2017.~~30, 2018.

	March 31, 2017		December 31, 2016		March 31, 2018		December 31, 2017

Assets
Cash and cash equivalents:
Cash and amounts due from depository institutions	$	53,998	$	53,003	$	46,566	$	58,693
Federal funds sold		116,000		46,000		92,000		55,000
		169,998		99,003		138,566		113,693
Securities:
Available-for-sale, carried at fair value		260,601		250,992		270,110		260,650

Held-to-maturity, carried at amortized cost (fair value $773 and $187 at March 31, 2017 and December 31, 2016, respectively)		771		184
Held-to-maturity, carried at amortized cost
(fair value $642 and $649 at March 31, 2018 and December 31, 2017, respectively)						642		648
		261,372		251,176		270,752		261,298
Loans held for sale		7,955		9,607		11,266		10,435
Loans receivable, net of allowance of $25,749 at March 31, 2017 and $25,884 at December 31, 2016, respectively		2,212,257		1,914,603
Loans receivable, net of allowance of $27,267 at March 31, 2018 and $26,683 at December 31, 2017, respectively						2,331,063		2,322,030
Mortgage servicing rights		9,672		9,595		9,850		9,808
Accrued interest receivable		8,872		6,760		9,359		8,706
Federal Home Loan Bank stock		15,992		13,798		15,989		15,992
Bank owned life insurance		64,968		52,817		66,630		66,230
Premises and equipment		42,824		36,958		39,826		40,217
Real estate and other assets held for sale		705		455		1,440		1,532
Goodwill		90,768		61,798		98,569		98,569
Core deposit and other intangibles		6,004		1,336		5,356		5,703
Deferred Taxes		1,219		2,212
Deferred taxes						958		231
Other assets		36,091		17,479		23,360		38,959
Total assets	$	2,928,697	$	2,477,597	$	3,022,984	$	2,993,403

	March 31, 2017			December 31, 2016			March 31, 2018			December 31, 2017

Liabilities and stockholders’ equity
Liabilities:
Deposits	$	2,373,789		$	1,981,628		$	2,491,801		$	2,437,656
Advances from the Federal Home Loan Bank		105,104			103,943			71,001			84,279
Subordinated debentures		36,083			36,083			36,083			36,083
Securities sold under repurchase agreements		24,891			31,816			9,321			26,019
Advance payments by borrowers		1,840			2,650			2,482			2,925
Other liabilities		32,799			28,459			33,082			33,155
Total liabilities		2,574,506			2,184,579			2,643,770			2,620,117

Stockholders’ equity:
Preferred stock, $.01 par value per share: 37,000 shares authorized; no shares issued		-			-			–			–
Preferred stock, $.01 par value per share: 4,963,000 shares authorized; no shares issued		-			-
Common stock, $.01 par value per share: 25,000,000 shares authorized; 12,713,385 and 12,720,347 shares issued and 10,143,052 and 8,983,206 shares outstanding, respectively		127			127
Preferred stock, $.01 par value per share:
4,963,000 shares authorized; no shares issued								–			–
Common stock, $.01 par value per share:
25,000,000 shares authorized; 12,703,320 and 12,712,841 shares issued and 10,181,899 and 10,156,041 shares outstanding, respectively								127			127
Additional paid-in capital		160,397			126,390			160,547			160,940
Accumulated other comprehensive income, net of tax of $670 and $117, respectively		1,242			215
Accumulated other comprehensive income (loss), net of tax of $(677) and $117, respectively								(2,546	)		217
Retained earnings		243,446			240,592			271,426			262,900
Treasury stock, at cost, 2,570,333 and 3,737,141 shares respectively		(51,021	)		(74,306	)
Treasury stock, at cost, 2,521,421 and 2,556,800 shares respectively								(50,340	)		(50,898	)
Total stockholders’ equity		354,191			293,018			379,214			373,286

Total liabilities and stockholders’ equity	$	2,928,697		$	2,477,597		$	3,022,984		$	2,993,403

	Three Months Ended				Three Months Ended
	March 31,				March 31,
	2017		2016		2018			2017
Interest Income
Loans	$	21,969	$	19,312	$	26,526		$	21,969
Investment securities:
Taxable		979		843		802			979
Non-taxable		777		787		1,049			777
Interest-bearing deposits		145		49		297			145
FHLB stock dividends		166		139		231			166
Total interest income		24,036		21,130		28,905			24,036
Interest Expense
Deposits		1,796		1,433		2,611			1,796
FHLB advances and other		366		297		319			366
Subordinated debentures		215		175		280			215
Securities sold under repurchase agreements		14		37
Notes payable						8			14
Total interest expense		2,391		1,942		3,218			2,391
Net interest income		21,645		19,188		25,687			21,645
Provision for loan losses		55		364		(1,095	)		55
Net interest income after provision for loan losses		21,590		18,824		26,782			21,590
Non-interest Income
Service fees and other charges		2,760		2,644		3,131			2,760
Insurance commission income		3,457		3,136
Insurance commissions						4,277			3,457
Mortgage banking income		1,738		1,539		1,742			1,738
Gain on sale of non-mortgage loans		-		45		224			-
Gain on sale of securities		-		131
Trust income		450		427		552			450
Income from Bank Owned Life Insurance		1,823		231		400			1,823
Other non-interest income		321		483		377			321
Total non-interest income		10,549		8,636		10,703			10,549
Non-interest Expense
Compensation and benefits		14,335		10,185		13,249			14,335
Occupancy		1,837		1,785		2,071			1,837
FDIC insurance premium		290		327		360			290
Financial institutions tax		480		446		531			480
Data processing		1,939		1,460		2,105			1,939
Amortization of intangibles		232		157		347			232
Other non-interest expense		4,029		2,914		4,588			4,029
Total non-interest expense		23,142		17,274		23,251			23,142
Income before income taxes		8,997		10,186		14,234			8,997
Federal income taxes		3,857		3,017		2,497			3,857
Net Income	$	5,140	$	7,169	$	11,737		$	5,140

Earnings per common share (Note 6)
Basic	$	0.54	$	0.80	$	1.15		$	0.54
Diluted	$	0.54	$	0.79	$	1.15		$	0.54
Dividends declared per share (Note 5)	$	0.25	$	0.22	$	0.30		$	0.25
Average common shares outstanding (Note 6)
Basic		9,441		8,994		10,165			9,441
Diluted		9,497		9,064		10,219			9,497

(1) Amounts are included in gains on sale or call of securities on the ~~Consolidated Condensed Statements~~consolidated condensed statements of ~~Income.~~income. Income tax expense associated with the reclassification adjustments, included in federal income taxes, for the three months ended March 31, ~~2017~~2018 and ~~2016~~2017 was $0 and ~~$46,~~$0, respectively.

	Three Months Ended						Three Months Ended
	March 31,						March 31,
	2017			2016			2018			2017
Operating Activities
Net income	$	5,140		$	7,169		$	11,737		$	5,140
Items not requiring (providing) cash
Provision for loan losses		55			364			(1,095	)		55
Depreciation		867			818			867			867
Amortization of mortgage servicing rights, net of impairment recoveries		279			332			282			279
Amortization of core deposit and other intangible assets		232			157			347			232
Net amortization of premiums and discounts on loans and deposits		27			88
Net amortization (accretion)of premiums and discounts on loans and deposits								(52	)		27
Amortization of premiums and discounts on securities		240			193			284			240
Change in deferred taxes		777			264			20			777
Proceeds from the sale of loans held for sale		48,356			40,341			44,399			48,356
Originations of loans held for sale		(45,977	)		(42,444	)		(44,474	)		(45,977	)
Gain from sale of loans		(1,083	)		(1,039	)		(1,304	)		(1,083	)
Gain from sale or call of securities		-			(131	)
(Gain) loss on sale / write-down of real estate and other assets held for sale		-			(265	)
Loss on sale / write-down of real estate and other assets held for sale								537			-
Stock option expense		45			119			84			45
Restricted stock expense		525			64
Restricted stock (income) expense								(113	)		525
Income from bank owned life insurance		(1,823	)		(231	)		(400	)		(1,823	)
Excess tax benefit (expense) on stock compensation plans		(162	)		(99	)
Excess tax benefit on stock compensation plans								(148	)		(162	)
Changes in:
Accrued interest receivable		(790	)		(730	)		(653	)		(790	)
Other assets		(1,801	)		(793	)		(1,541	)		(1,801	)
Other liabilities		3,364			672			75			3,364
Net cash provided by operating activities		8,271			4,849			8,852			8,271

Investing Activities
Proceeds from maturities of held-to-maturity securities		5			8			6			5
Proceeds from maturities, calls and pay-downs of available-for-sale securities		5,960			7,903			5,860			5,960
Proceeds from sale of real estate and other assets held for sale		9			884
Proceeds from the sale of available-for-sale securities		-			5,360
Proceeds from sale of premises and equipment, real estate and other assets held for sale								249			9
Proceeds from sale of non-mortgage loans		9,880			2,828			4,050			9,880
Purchases of available-for-sale securities		(8,815	)		(2,875	)		(19,710	)		(8,815	)
Proceeds from Federal Home Loan stock redemption		-			1			3			-
Net cash received in acquisition		25,840			-
Net cash received in acquisitions								-			25,840
Investment in bank owned life insurance		(20,000	)		-			-			(20,000	)
Proceeds from sale of bank owned life insurance								17,689			-
Purchase of portfolio mortgage loans		(10,133	)		-			-			(10,133	)
Purchases of premises and equipment, net		(1,278	)		(562	)		(476	)		(1,278	)
Net increase in loans receivable		(12,851	)		(26,127	)		(12,335	)		(12,851	)
Net cash used by investing activities		(11,383	)		(12,580	)		(4,664	)		(11,383	)

Financing Activities
Net increase in deposits and advance payments by borrowers		83,369			34,124			53,631			83,369
Repayment of Federal Home Loan Bank advances		(242	)		(238	)		(23,278	)		(242	)
Proceeds from Federal Home Loan Bank advances		-			25,000			10,000			-
Increase in securities sold under repurchase agreements		(6,925	)		797
Decrease in securities sold under repurchase agreements								(16,698	)		(6,925	)
Proceeds from exercise of stock options		134			314			56			134
Proceeds from treasury stock sales		17			9
Net cash paid for repurchase of common stock		-			(6,293	)
Proceeds from direct stock sales								21			17
Cash dividends paid on common stock		(2,246	)		(1,966	)		(3,047	)		(2,246	)
Net cash provided by financing activities		74,107			51,747			20,685			74,107
Increase (decrease) in cash and cash equivalents		70,995			44,016
Increase in cash and cash equivalents								24,873			70,995
Cash and cash equivalents at beginning of period		99,003			79,769			113,693			99,003
Cash and cash equivalents at end of period	$	169,998		$	123,785		$	138,566		$	169,998

Supplemental cash flow information:
Interest paid	$	2,308		$	1,889		$	3,160		$	2,308
Income taxes paid	$	-		$	300		$	-		$	-
Transfers from loans to real estate and other assets held for sale	$	259		$	409		$	694		$	259
Securities purchased but not yet settled	$	1,668		$	529		$	-		$	1,668
Sale of bank owned life insurance not yet settled	$	17,840		$	-		$	-		$	17,840

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

First Federal is primarily engaged in attracting deposits from the general public through its offices and using those and other available sources of funds to originate loans primarily in the counties in which its offices are located. First Federal’s traditional banking activities include originating and servicing residential, non-residential real estate, commercial, home improvement and home equity and consumer loans and providing a broad range of depository, trust and wealth management services. In addition, First Federal invests in U.S. Treasury and federal government agency obligations, obligations of the State of Ohio and its political subdivisions, mortgage-backed securities that are issued by federal agencies, including real estate mortgage investment conduits (“REMICs”) and collateralized mortgage obligations (“CMOs”), and corporate bonds. First Insurance is an insurance agency that conducts business through offices located in the Defiance, ~~Maumee, Oregon,~~Sylvania, Bryan, Lima, Archbold, Fostoria, Tiffin, Findlay and Bowling Green, Ohio areas. First Insurance offers property and casualty insurance, life insurance and group health insurance. First Defiance Risk Management is a wholly-owned insurance company subsidiary of the Company that insures the Company and its subsidiaries against certain risks unique to the operations of the Company and for which insurance may not be currently available or economically feasible in today’s insurance marketplace. First Defiance Risk Management pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves.

The consolidated condensed statement of financial condition at December 31, ~~2016~~2017, has been derived from the audited financial statements at that date, which were included in First Defiance’s Annual Report on Form 10-K for the year ended December ~~31,2016.~~31, 2017.

The accompanying consolidated condensed financial statements as of March 31, ~~2017~~2018, and for the three month periods ended March 31, ~~2017~~2018 and ~~2016~~2017 have been prepared by First Defiance without audit and do not include information or footnotes necessary for the complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States. These consolidated condensed financial statements should be read in conjunction with the financial statements and notes thereto included in First Defiance's ~~2016~~2017 Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017. However, in the opinion of management, all adjustments, consisting of only normal recurring items, necessary for the fair presentation of the financial statements have been made. The results for the three month period ended March 31, ~~2017~~2018 are not necessarily indicative of the results that may be expected for the entire year.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in theconsolidated financial statements and accompanying notes. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

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

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

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

In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2017-08, “Premium Amortization on Purchased Callable Debt Securities.” This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Today, entities generally amortize the premium over the contractual life of the security. The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. ASU No. 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is currently evaluating the provisions of ASU No. 2017-08 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.

In ~~March 2017,~~May 2014, the FASB issued ASU No. ~~2017-07, “Improving~~2014-09, “Revenue from Contracts with Customers.” The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the ~~Presentation~~consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies generally will be required to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of ~~Net Periodic Pension Cost~~variable consideration to include in the transaction price and ~~Net Periodic Postretirement Benefit Cost.~~allocating the transaction price to each separate performance obligation. Subsequent to the issuance of ASU 2014-09, the FASB issued targeted updates to clarify specific implementation issues including ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ~~Under~~ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients,” and ASU No. 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the new guidance ~~employers will present~~did not have a material impact on revenue most closely associated with financial instruments, including interest income and expense. The Company completed its overall assessment of revenue streams and review of related contracts potentially affected by the ~~service cost component~~ASU, including trust and asset management fees, deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. Based on this assessment, the Company concluded that ASU 2014-09 did not materially change the method in which the Company currently recognizes revenue for these revenue streams. The Company adopted ASU 2014-09 and its related amendments on its required effective date of January 1, 2018, utilizing the modified retrospective approach. Since there was no net income impact upon adoption of the new guidance, a cumulative effect adjustment to opening retained earnings was not deemed necessary. See below for additional information related to revenue generated from contracts with customers.

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net ~~periodic benefit~~income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the ~~same income statement line item (e.g., Salaries~~fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and ~~Benefits) as~~financial liabilities by measurement category and form of financial asset (that is, securities or loans receivable) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other ~~employee compensation costs arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization in~~deferred tax assets. ~~Employers will present the other components separately (e.g., Other Noninterest Expense) from the line item that includes the service cost.~~The adoption of ASU No. ~~2017-07 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, however, the Company has decided~~2016-01 on January 1, 2018, did not to early adopt. Employers will apply the guidance on the presentation of the components of net periodic benefit cost in the income statement retrospectively. The guidance limiting the capitalization of net periodic benefit cost in assets to the service cost component will be applied prospectively. The Company expects to utilize the ASU’s practical expedient allowing entities to estimate amounts for comparative periods using the information previously disclosed in their pension and other postretirement benefit plan footnote. ASU No. 2017-07 is not expected to have a material impact on the Company’s Consolidated Financial Statements. Also in conjunction with the adoption, our fair value measurement of financial instruments will be based upon an exit price notion as required in ASU 2016-01. The guidance was applied on a prospective approach resulting in prior-periods no longer being comparable.

In ~~January 2017,~~February 2018, the FASB issued ASU No. ~~2017-04,~~~~“Simplifying the Test~~2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This ASU allows a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for ~~Goodwill Impairment.”~~ ~~The guidance removes Step 2~~certain income tax effects stranded in AOCI as a result of the ~~goodwill impairment test, which~~Tax Act. Consequently, the reclassification eliminates the stranded tax effects resulting from the Tax Act and is intended to improve the usefulness of information reported to financial statement users. However, because the ASU only relates to the reclassification of the income tax effects of the Tax Act, the underlying guidance that requires the effect of a ~~hypothetical purchase price allocation. Goodwill impairment will now~~change in tax laws or rates to be ~~the amount by which a reporting unit’s carrying value exceeds its fair value,~~included in income from continuing operations is not ~~to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged.~~affected. The Company adopted ASU No. ~~2017-04~~2018-02 during the first quarter of 2018, and elected to reclassify the income tax effects of the Tax Act from AOCI to retained earnings. The reclassification increased AOCI and decreased retained earnings by $47,000, with zero net effect on total shareholders’ equity.

In February 2016, the FASB issued ASU No. 2016-02 — Leases (Topic 842). The objective of the update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this update are effective for ~~interim and annual reporting periods~~fiscal years beginning after December 15, ~~2019, applied prospectively.~~2018, including interim periods within those fiscal years. Early adoption is ~~permitted for any impairment tests performed after January 1, 2017.~~permitted. The Company has not yet selected a transition method as it is in the process of determining the effect of the ASU on its consolidated financial statements and disclosures. The Company has several lease agreements, such as branch locations, which are currently considered operating leases, and therefore, not recognized on the Company’s consolidated condensed statements of financial condition. The Company expects the new guidance will require these lease agreements to ~~early adopt upon~~now be recognized on the ~~next goodwill impairment test in 2017.~~consolidated condensed statements of financial condition as a right-of-use asset and a corresponding lease liability. Therefore, the Company’s preliminary evaluation indicates the provisions of ASU No. ~~2017-04 is not~~2016-02 are expected to impact the Company’s consolidated condensed statements of financial condition, along with our regulatory capital ratios. However, the Company continues to evaluate the extent of potential impact the new guidance will have ~~a material impact~~ on the Company’s ~~Consolidated Financial Statements.~~consolidated financial statements. At March 31, 2018, the Company had contractual operating lease commitments of approximately $11.0 million, before considering renewal options that are generally present.

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

In January 2016, the FASB issued ASU No. 2016-01 — Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2017, and requires a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Early adoption is not permitted. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements. Management’s preliminary finding is that the new pronouncement will not have a significant impact on its results of operations. The pronouncement will require some revision to the Company’s disclosures within the consolidated financial statements and is currently evaluating the impact.

~~In May 2014, the FASB and the International~~ Accounting Standards ~~Board (the “IASB”~~Codification ("ASC") jointly issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP and International Financial Reporting Standards (“IFRS”). Previous revenue recognition guidance in GAAP consisted of broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. In contrast, IFRS provided limited revenue recognition guidance and, consequently, could be difficult to apply to complex transactions. Accordingly, the FASB and the IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that would: (1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing revenue issues; (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provide more useful information to users of financial statements through improved disclosure requirements; and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. To meet those objectives, the FASB issued ASU No. 2014-09,“606, Revenue from Contracts with ~~Customers.”~~Customers ("ASC 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The ~~standard’s~~ core principle ~~is that a company will~~requires an entity to recognize revenue ~~when it transfers promised~~to depict the transfer of goods or services to customers in an amount that reflects the consideration ~~to which the company~~that it expects to be entitled to receive in exchange for those goods or ~~services. In doing so, companies generally will be required to use more judgment and make more estimates than under current guidance. These may include identifying~~services recognized as performance obligations inare satisfied.

The majority of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans, letters of credit, and investment securities, as well as revenue related to our mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within our disclosures. Descriptions of our revenue-generating activities that are within the ~~contract, estimating the amount~~scope of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard was initially effective for public entities for interim and annual reporting periods beginning after December 15, 2016; early adoption was not permitted. However, in August 2015, the FASB issued ASU No. 2015-14,~~“Revenue from Contracts with Customers - Deferral of the Effective Date”~~ASC 606, which deferred the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current periodare presented in ~~the financial~~our income statements ~~with the cumulative effect~~as components of initially applying the standard recognized at the date of initial application. In addition, the FASB has begun to issue targeted updates to clarify specific implementation issues of ASU 2014-09. These updates include ASU No. 2016-08,~~“Principal versus Agent Considerations (Reporting Revenue Gross versus Net),”~~ ~~ASU No. 2016-10,~~~~“Identifying Performance Obligations and Licensing,”~~ ~~ASU No. 2016-12,~~~~“Narrow-Scope Improvements and Practical Expedients,”~~ ~~and ASU No. 2016-20~~~~“Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.”~~ ~~Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that~~non-interest income are accounted for under other GAAP, the Company does not expect the new guidance to have a material impact on revenue most closely associated with financial instruments, including interest income and expense. The Company is currently performing an overall assessment of revenue streams and reviewing contracts potentially affected by the ASU including trust and asset management fees, deposit related fees, interchange fees, and insurance commission income, to determine the potential impact the new guidance is expected to have on the Company’s Consolidated Financial Statements. The Company plans to adopt ASU No. 2014-09 on January 1, 2018 utilizing the modified retrospective approach.as follows:

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

The methods of determining the ~~use~~fair value of ~~valuation techniques that~~assets and liabilities presented in this note are consistent with our methodologies disclosed in Note 22 of the ~~market~~Company’s 2017 Form 10-K, except for the valuation of loans which was impacted by the adoption of ASU 2016-01. Prior to adopting the amendments included in the standard, the Company was permitted to measure fair value under an entry price notion. The entry price notion previously applied by the Company used a discounted cash flows technique to calculate the present value of expected future cash flows for a financial instrument. The exit price notion uses the same approach, ~~the income approach and/or the cost approach. The market approach uses prices and~~but also incorporates other ~~relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts,~~factors, such as ~~cash flows or earnings,~~enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets. As of March 31, 2018, the technique used by the Company to estimate the exit price of the loan portfolio consists of similar procedures to those used as of December 31, 2017, but with added emphasis on both illiquidity risk and credit risk not captured by the previously applied entry price notion. This credit risk assumption is intended to approximate the fair value that a ~~single present amount on~~market participant would realize in a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on the best information available.hypothetical orderly transaction. In that regard, FASB ASC Topic 820 established a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

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

Available for sale securities - Securities classified as available for sale are generally reported at fair value utilizing Level 2 inputs where the Company obtains fair value measurements from an independent pricing service that uses matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows and the bonds’ terms and conditions, among other things. Securities in Level ~~1 include federal agency preferred stock securities. Securities in Level~~ 2 include U.S. Government agencies, mortgage-backed securities, corporate bonds and municipal securities.

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

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

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Company’s asset quality or collections department reviews the assumptions and approaches utilized in the appraisal. Appraisal values are discounted from 0% to ~~20%~~30% to account for other factors that may impact the value of collateral. In determining the value of impaired collateral dependent loans and other real estate owned, significant unobservable inputs may be used, which include: physical condition of comparable properties sold, net operating income generated by the property and investor rates of return.

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

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

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

March 31, 2017	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
March 31, 2018									Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)								(In Thousands)
Available for sale securities:

Obligations of U.S. government corporations and agencies	$	-	$	3,954	$	-	$	3,954	$	-	$	2,501	$	-	$	2,501
Mortgage-backed - residential		-		80,872		-		80,872		-		62,418		-		62,418
REMICs		-		1,260		-		1,260		-		1,020		-		1,020
Collateralized mortgage obligations- residential		-		66,291		-		66,291		-		95,192		-		95,192
Preferred stock		1		-		-		1
Corporate bonds				13,083		-		13,083		-		13,042		-		13,042
Obligations of state and political subdivisions		-		95,140		-		95,140		-		95,937		-		95,937
Mortgage banking derivative - asset		-		598		-		598		-		652		-		652
Mortgage banking derivative - liability		-		42		-		42

December 31, 2016	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Available for sale securities:

Obligations of U.S. Government corporations and agencies	$	-	$	3,915	$	-	$	3,915
Mortgage-backed - residential		-		81,707		-		81,707
REMICs		-		1,307		-		1,307
Collateralized mortgage obligations-residential		-		63,005		-		63,005
Preferred stock		2		-		-		2
Corporate bonds		-		13,013		-		13,013
Obligations of state and political subdivisions		-		88,043				88,043
Mortgage banking derivative - asset		-		491		-		491
Mortgage banking derivative -liability										-		12		-		12

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

March 31, 2017	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
March 31, 2018									Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)								(In Thousands)
Impaired loans
Commercial Real Estate	$	-	$	-	$	1,252	$	1,252	$	-	$	-	$	-	$	-
Commercial										-		-		-		-
Total Impaired loans		-		-		1,252		1,252		-		-		-		-
Mortgage servicing rights		-		1,131				1,131		-		539		-		539

December 31, 2016	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Impaired loans
1-4 Family Residential Real Estate	$	-	$	-	$	316	$	316
Multi Family Residential		-		-		-		-
Commercial Real Estate		-		-		848		848
Commercial						332		332
Home Equity and Improvement		-		-		-		-
Total impaired loans		-		-		1,496		1,496

Mortgage servicing rights		-		657		-		657
Real estate held for sale
Residential		-		-		-		-
Commercial Real Estate		-		-		377		377		-		-		705		705
Total Real Estate held for sale		-		-		377		377		-		-		705		705

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of March 31, ~~2017,~~2018, the significant unobservable inputs used in the fair value measurements were as follows:

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of December 31, ~~2016,~~2017, the significant unobservable inputs used in the fair value measurements were as follows:

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

Impaired Loans- Applies to all loan classes	$	1,496	Appraisals which utilize sales comparison, net income and cost approach	Discounts for collection issues and changes in market conditions	10-30	%		11	%	$	4,604	Appraisals which utilize sales comparison, net income and cost approach	Discounts for collection issues and changes in market conditions		10-20%			10	%

Real estate held for sale – Applies to all classes	$	377	Appraisals which utilize sales comparison, net income and cost approach	Discounts for changes in market conditions	0-20	%		7	%	$	227	Appraisals which utilize sales comparison, net income and cost approach	Discounts for changes in market conditions		0	%		0	%

There were no impaired loans which were measured for impairment using the fair value of collateral at March 31, 2018. Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a fair value of ~~$1.3~~$4.6 million, with a no valuation allowance ~~and a fair value of $1.5 million, with a $1,000 valuation allowance at March 31, 2017 and~~ December 31, ~~2016, respectively.~~2017. A provision expense of $134,000 for the three months ended March 31, 2018 and $208,000 for the three months ended March 31, 2017, ~~and a provision recovery of $119,000 for the three months ended March 31, 2016 was~~were included in earnings.

Mortgage servicing rights which are carried at the lower of cost or fair value, had a fair value of ~~$1.1 million~~$539,000 with a valuation allowance of ~~$489,000~~$395,000 and a fair value of ~~$657,000~~$534,000 with a valuation allowance of ~~$522,000~~$432,000 at March 31, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. A recovery of ~~$33,000~~$37,000 and ~~a charge of $21,000~~$33,000 for the three months ended March 31, ~~2017~~2018, and March 31, ~~2016,~~2017, respectively, ~~were~~was included in earnings.

Real estate held for sale is determined using Level 3 inputs which include appraisals and are adjusted for estimated costs to sell. The ~~impact~~change in fair value of real estate held for sale was $544,000 for the three months ended March 31, 2018, which was recorded directly as an adjustment to current earnings ~~of the~~through non-interest expense. The change in fair value of real estate held for sale was not material for the three months ended March 31, 2017. The change in fair value of real estate held for sale was $53,000 for the three months ended March 31, 2016, which was recorded directly as an adjustment to current earnings through non-interest expense.

In accordance with FASB ASC Topic 825, the Fair Value Measurements tables are a comparative condensed consolidated statement of financial condition based on carrying amount and estimated fair values of financial instruments as of March 31, ~~2017~~2018, and December 31, ~~2016.~~2017. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of First Defiance.

Much of the information used to arrive at “fair value” is highly subjective and judgmental in nature and therefore the results may not be precise. Subjective factors include, among other things, estimated cash flows, risk characteristics and interest rates, all of which are subject to change. With the exception of investment securities, the Company’s financial instruments are not readily marketable and market prices do not exist. Since negotiated prices for the instruments, which are not readily marketable, depend greatly on the motivation of the buyer and seller, the amounts that will actually be realized or paid per settlement or maturity of these instruments could be significantly different.

The carrying amount of cash and cash equivalents ~~term~~and notes payable, ~~and advance payments by borrowers for taxes and insurance,~~ as a result of their short-term nature, is considered to be equal to fair value and are classified as Level 1.

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

The Company adopted the amendments to ASU 2016-01 relating to the loan portfolio for the quarter ended March 31, 2018 and an exit price income approach was used to determine the fair ~~value~~value. The loans were valued on an individual basis, with consideration given to the loans' underlying characteristics, including account types, remaining terms (in months), annual interest rates or coupons, interest types, past delinquencies, timing of ~~loans that reprice within 90 days is equal to their carrying amount. For other loans, the estimated fair value is calculated based on~~principal and interest payments, current market rates, loss exposures, and remaining balances. The model utilizes a discounted cash flow analysis, using interest rates currently being offered for loans with similar terms, resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as previously described. The allowance for loan losses is considered to be a reasonable adjustment for credit risk. The methods utilizedapproach to estimate the fair value of the loans ~~do not necessarily represent~~using assumptions for the coupon rates, remaining maturities, prepayment speeds, projected default probabilities, losses given defaults, and estimates of prevailing discount rates. The discounted cash flow approach models the credit losses directly in the projected cash flows. The model applies various assumptions regarding credit, interest, and prepayment risks for the loans based on loan types, payment types and fixed or variable classifications. As of December 31, 2017, the fair value was estimated by discounting the future cash flows using the rates at which similar notes would be written for the same remaining maturities or an ~~exit price.~~entry price income approach. The market rates used were based on current rates the Company would impose for similar loans and reflect a market participant assumption about risks associated with non-performance, illiquidity, and the structure and term of the loans along with local economic and market conditions. For all periods presented, the estimated fair value of impaired loans ~~held for sale~~ is ~~estimated~~ based on ~~binding contracts~~the fair value of the collateral, less estimated cost to sell, or the present value of the loan’s expected future cash flows (discounted at the loan’s effective interest rate). All impaired loans are classified as Level 3 and ~~quotes from third party investors resulting in a~~all other loans are classified as Level 2 ~~classification.~~within the valuation hierarchy.

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

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

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

FHLB advances with maturities greater than 90 days are valued based on discounted cash flow analysis, using interest rates currently being quoted for similar characteristics and maturities resulting in a Level 2 classification. The cost or value of any call or put options is based on the estimated cost to settle the option at March 31, ~~2017.~~2018.

First Defiance has established equity based compensation plans for its directors and employees. On March 15, 2010, the Board adopted, and the shareholders approved at the 2010 Annual Shareholders Meeting, the First Defiance Financial Corp. 2010 Equity Incentive Plan (the “2010 Equity Plan”). The 2010 Equity Plan replaced all existing ~~plans.~~plans although the Company’s former equity plans remain in existence to the extent there were outstanding grants thereunder at the time the 2010 Equity Plan was approved. All awards currently outstanding under prior plans will remain in effect in accordance with their respective terms. Any new awards will be made under the 2010 Equity Plan. The 2010 Equity Plan allows for issuance of up to 350,000 common shares through the award of options, stock grants, restricted stock units (“RSU”), stock appreciation rights or other stock-based awards.

As of March 31, ~~2017, 47,200~~2018, 37,200 options ~~had been granted and~~ remain outstanding at option prices based on the market value of the underlying shares on the date the options were granted. Options granted ~~under all plans~~ vest 20% per ~~year except for the 2009 grant to the Company’s executive officers, which vested 40% in 2011 and then 20% annually.~~year. All options expire ten years from the date of grant. Vested options of retirees expire on the earlier of the scheduled expiration date or three months after the retirement date.

~~In each of the years 2016-2017,~~Annually, the Company ~~approved~~approves a Short-Term (“STIP”) Equity Incentive Plan and a Long-Term (“LTIP”) Equity Incentive Plan for selected members of management.

Under the ~~2016~~2017 and ~~2017~~2018 STIPs, the participants could earn up to 10% to 45% of their salary for potential payout based on the achievement of certain corporate performance targets during the calendar year. The final amount of benefits under the STIPs is determined as of December 31 of the same year and paid out in cash in the first quarter of the following year. The participants are required to be employed on the day of payout in order to receive such payment.

Under each LTIP, the participants may earn up to 20% to 45% of their salary for potential payout in the form of equity awards based on the achievement of certain corporate performance targets over a three-year period. The Company granted 24,526, 20,657 and ~~20,657~~20,838 RSU’s to the participants in the 2016, 2017 and ~~2017~~2018 LTIPs, respectively, effective January 1 in the year the award was made, which represents the maximum target award. The amount of benefit under each LTIP will be determined individually at the end of the 36 month performance period ending December 31. The benefits earned under each LTIP will be paid out in equity in the first quarter following the end of the performance period. The participants are required to be employed on the day of payout in order to receive such payment.

A total of ~~19,219~~24,757 RSU’s were issued to the participants of the ~~2014~~2015 LTIP in the first quarter of ~~2017~~2018 for the three year performance period ended December 31, ~~2016.~~2017.

In the three months ended March 31, ~~2017,~~2018, the Company also granted to employees ~~2,924~~7,578 restricted shares, of which ~~2,727~~3,578 were restricted stock units and ~~197~~4,000 were restricted stock grants. ~~All of these~~The shares all have a three year vesting period. The fair value of all granted restricted shares was determined by the stock price at the date of the grant.

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

The fair value of stock options granted during the three months ended March 31, 2016 was determined at the date of grant using the Black-Scholes stock option-pricing model and the following assumptions:

There were no options granted during the three months ended March 31, ~~2017. The weighted-average fair value of options granted was $13.95 for the three months ended~~2018, or March 31, ~~2016.~~2017.

Following is stock option activity under the plans during the three months ended March 31, ~~2017:~~2018:

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

	Three Months Ended March 31,				Three Months Ended March 31,
	2017		2016		2018		2017
Proceeds of options exercised	$	134	$	314	$	56	$	134
Related tax benefit recognized		44		75		21		44
Intrinsic value of options exercised		200		326		253		200

As of March 31, ~~2017,~~2018, there was ~~$143,000~~$90,000 of total unrecognized compensation cost related to unvested stock options granted under the Company’s equity plans. The cost is expected to be recognized over a weighted-average period of ~~2.93~~2.1 years.

At March 31, ~~2017, 72,660~~2018, 72,197 RSU’s and ~~4,569~~14,536 restricted stock grants were ~~outstanding.~~unvested. Compensation expense is recognized over the performance period based on the achievements of targets as established under the plan documents. A total expense of ~~$849,000~~$565,000 was recorded during the three months ended March 31, ~~2017~~2018 compared to an expense of ~~$261,000~~$849,000 for the ~~same period in 2016. The increase in expense is attributable to the Company’s better performance in comparison to its targets.~~three months ended March 31, 2017. There was approximately ~~$188,000~~$211,000 and $774,000 included within other liabilities at March 31, 2018 and December 31, 2017, respectively, related to the STIP.

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

Unvested at January 1, 2017		75,468		$	32.31		11,161		$	32.30
Unvested at January 1, 2018												72,538		$	40.52		10,536		$	50.56
Granted		23,384			50.56		19,416			26.02		24,416			53.94		28,757			35.79
Vested		(19,219	)		25.77		(24,986	)		25.82		(24,757	)		32.30		(24,757	)		32.30
Forfeited		(6,973	)		25.77		(1,022	)		37.02		-			-		-			-
Unvested at March 31, 2017		72,660		$	40.54		4,569		$	40.01
Unvested at March 31, 2018												72,197		$	47.87		14,536		$	52.44

The maximum amount of compensation expense that may be recorded for the ~~2017~~2018 STIP and the ~~2015,~~ 2016, 2017 and ~~2017~~2018 LTIPs at March 31, ~~2017~~2018, is approximately ~~$3.8~~$3.9 million. However, the estimated expense expected to be recorded as of March 31, ~~2017~~2018, based on the performance measures in the plans, is ~~$3.5~~$3.6 million of which ~~$2.2~~$2.0 million is unrecognized at March 31, ~~2017~~2018 and will be recognized over the remaining performance periods.

First Defiance declared and paid a $0.30 per common stock dividend in the first quarter of 2018 and declared and paid a $0.25 per common stock dividend in the first quarter of ~~2017 and declared and paid a $0.22 per common stock dividend in the first quarter of 2016.~~2017.

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

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

	Three Months Ended March 31,
	2017		2016		Three Months Ended March 31,
	(In Thousands, except per share data)				2018		2017
					(In Thousands, except per share data)
Basic Earnings Per Share:
Net income available to common shareholders	$	5,140	$	7,169	$	11,737	$	5,140
Less: Income allocated to participating securities		1		3		3		1
Net income allocated to common shareholders		5,139		7,166		11,734		5,139

Weighted average common shares outstanding Including participating securities		9,446		9,006		10,176		9,446
Less: Participating securities		5		12		11		5
Average common shares		9,441		8,994		10,165		9,441

Basic earnings per common share	$	0.54	$	0.80	$	1.15	$	0.54

Diluted Earnings Per Share:
Net income allocated to common shareholders	$	5,139	$	7,166	$	11,734	$	5,139
Weighted average common shares outstanding for basic earnings per common share		9,441		8,994		10,165		9,441
Add: Dilutive effects of stock options		56		70		54		56
Average shares and dilutive potential common shares		9,497		9,064		10,219		9,497

Diluted earnings per common share	$	0.54	$	0.79	$	1.15	$	0.54

Shares subject to issue upon exercise of options of 3,500 in 2018 and 4,569 in 2017 ~~and 12,550 in 2016~~ were excluded from the diluted earnings per common share calculation as they were anti-dilutive.

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)									(In Thousands)
At March 31, 2017
At March 31, 2018
Available-for-Sale Securities:
Obligations of U.S. government corporations and agencies	$	4,000	$	-	$	(46	)	$	3,954	$	2,518	$	-	$	(17	)	$	2,501
Mortgage-backed securities – residential		81,016		587		(731	)		80,872		64,093		57		(1,732	)		62,418
REMICs		1,258		2		-			1,260		1,025		-		(5	)		1,020
Collateralized mortgage obligations		66,263		497		(469	)		66,291		97,115		46		(1,969	)		95,192
Trust preferred securities and preferred stock		-		1		-			1
Corporate bonds		12,917		171		(5	)		13,083		12,913		129		-			13,042
Obligations of state and political subdivisions		92,791		2,800		(451	)		95,140		95,080		1,711		(854	)		95,937
Totals	$	258,245	$	4,058	$	(1,702	)	$	260,601
Total Available-for-Sale										$	272,744	$	1,943	$	(4,577	)	$	270,110

			Gross		Gross						Gross		Gross
	Amortized		Unrecognized		Unrecognized		Fair		Amortized		Unrecognized		Unrecognized		Fair
	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
	(In Thousands)								(In Thousands)
Held-to-Maturity
Held-to-Maturity*
FHLMC certificates	$	12	$	-	$	-	$	12	$	10	$	-	$	-	$	10
FNMA certificates		56		2		-		58		41		1		-		42
GNMA certificates		23		1		-		24		17		-		-		17
Obligations of states and political subdivisions		93		-		-		93		580		-		-		580
Total Held-to-Maturity	$	184	$	3	$	-	$	187	$	648	$	1	$	-	$	649

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

The amortized cost and fair value of the investment securities portfolio at March 31, ~~2017~~2018, are shown below by contractual maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. For purposes of the maturity table, mortgage-backed securities (“MBS”), collateralized mortgage obligations (“CMO”) and REMICs, which are not due at a single maturity date, have not been allocated over the maturity groupings. These securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.

	Available-for-Sale				Held-to-Maturity				Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair		Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value		Cost		Value		Cost		Value
	(In Thousands)								(In Thousands)
Due in one year or less	$	1,457	$	1,463	$	-	$	-	$	1,408	$	1,420	$	-	$	-
Due after one year through five years		22,620		22,993		93		93		22,370		22,694		62		62
Due after five years through ten years		43,015		44,719		592		592		38,284		39,267		518		518
Due after ten years		42,616		43,003		-		-		48,449		48,099		-		-
MBS/CMO/REMIC		148,537		148,423		86		88		162,233		158,630		62		62
	$	258,245	$	260,601	$	771	$	773	$	272,744	$	270,110	$	642	$	642

Investment securities with a carrying amount of ~~$160.6~~$151.6 million at March 31, ~~2017~~2018, were pledged as collateral on public deposits, securities sold under repurchase agreements and the Federal Reserve discount window.

As of March 31, ~~2017,~~2018, the Company’s investment portfolio consisted of ~~445~~425 securities, ~~101~~167 of which were in an unrealized loss position.

The following tables summarize First Defiance’s securities that were in an unrealized loss position at March 31, ~~2017~~2018, and December 31, ~~2016:~~2017:

There were no realized gains from the sales and calls of investment securities in the first quarter of ~~2017, while there were realized gains of $131,000 ($92,000 after tax)~~2018 or in the first quarter of ~~2016.~~2017.

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

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

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

In the first quarter of ~~2017~~2018 and ~~2016,~~2017, management determined there was no OTTI.

~~The proceeds from the~~There were no sales ~~and~~or calls of securities ~~and~~during the ~~associated gains and losses are listed below:~~three months ended March 31, 2018 or 2017.

The table above includes loans acquired during 2017 totaling $284.9 million as of February 24, 2017, which is net of purchase discount on the acquired loans of $6.0 million. The recorded investment of these loans as of March 31, 2107 was $281.8 million, net of the purchase discount of $5.9 million.

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

The following table discloses allowance for loan loss activity for the quarters ended March 31, ~~2017~~2018 and ~~2016~~2017 by portfolio segment (In Thousands):

Quarter Ended March 31, 2017	1-4 Family Residential Real Estate			Multi- Family Residential Real Estate			Commercial Real Estate			Construction		Commercial		Home Equity and Improvement			Consumer Finance			Total
Quarter Ended March, 2018																							1-4 Family Residential Real Estate			Multi- Family Residential Real Estate		Commercial Real Estate			Construction		Commercial			Home Equity and Improvement			Consumer Finance			Total
Beginning Allowance	$	2,627		$	2,228		$	10,625		$	450	$	7,361	$	2,386		$	207		$	25,884		$	2,532		$	2,702	$	10,354		$	647	$	7,965		$	2,255		$	228		$	26,683
Charge-Offs		(49	)		0			(290	)		0		0		(54	)		(71	)		(464	)		(16	)		0		(55	)		0		(97	)		(117	)		(31	)		(316	)
Recoveries		56			32			34			0		115		33			4			274			24			0		184			0		1,757			28			2			1,995
Provisions		(13	)		(138	)		(159	)		8		333		(65	)		89			55			(6	)		281		290			20		(1,787	)		43			64			(1,095	)
Ending Allowance	$	2,621		$	2,122		$	10,210		$	458	$	7,809	$	2,300		$	229		$	25,749		$	2,534		$	2,983	$	10,773		$	667	$	7,838		$	2,209		$	263		$	27,267

Quarter Ended March 31, 2016	1-4 Family Residential Real Estate			Multi- Family Residential Real Estate		Commercial Real Estate			Construction			Commercial			Home Equity and Improvement			Consumer Finance			Total
Quarter Ended March 31, 2017																								1-4 Family Residential Real Estate			Multi- Family Residential Real Estate			Commercial Real Estate			Construction		Commercial		Home Equity and Improvement			Consumer Finance			Total
Beginning Allowance	$	3,212		$	2,151	$	11,772		$	517		$	5,255		$	2,304		$	171		$	25,382		$	2,627		$	2,228		$	10,625		$	450	$	7,361	$	2,386		$	207		$	25,884
Charge-Offs		(55	)		0		(13	)		0			(336	)		(30	)		0			(434	)		(49	)		0			(290	)		0		0		(54	)		(71	)		(464	)
Recoveries		86			0		177			0			19			39			35			356			56			32			34			0		115		33			4			274
Provisions		(134	)		99		(292	)		(28	)		882			(81	)		(82	)		364			(13	)		(138	)		(159	)		8		333		(65	)		89			55
Ending Allowance	$	3,109		$	2,250	$	11,644		$	489		$	5,820		$	2,232		$	124		$	25,668		$	2,621		$	2,122		$	10,210		$	458	$	7,809	$	2,300		$	229		$	25,749

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, ~~2017~~2018 (In Thousands):

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, ~~2016~~2017 (In Thousands):

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

Ending allowance balance attributable to loans:

Individually evaluated for impairment	$	202	$	4	$	255	$	-	$	35	$	313	$	-	$	809	$	167	$	7	$	118	$	-	$	187	$	279	$	-	$	758

Collectively evaluated for impairment		2,425		2,224		10,370		450		7,326		2,073		207		25,075		2,365		2,695		10,236		647		7,778		1,976		228		25,925

Acquired with deteriorated credit quality		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-		-

Total ending allowance balance	$	2,627	$	2,228	$	10,625	$	450	$	7,361	$	2,386	$	207	$	25,884	$	2,532	$	2,702	$	10,354	$	647	$	7,965	$	2,255	$	228	$	26,683

Loans:

Loans individually evaluated for impairment	$	6,898	$	3,483	$	13,570	$	-	$	2,154	$	1,269	$	59	$	27,433	$	6,910	$	2,278	$	31,821	$	-	$	14,373	$	1,176	$	50	$	56,608

Loans collectively evaluated for impairment		200,907		193,714		832,446		89,244		468,246		117,744		16,625		1,918,926		267,377		245,823		956,238		149,174		513,218		135,098		29,125		2,296,053

Loans acquired with deteriorated credit quality		-		-		-		-		11		-		-		11		1,069		301		2,121		-		337		-		-		3,828

Total ending loans balance	$	207,805	$	197,197	$	846,016	$	89,244	$	470,411	$	119,013	$	16,684	$	1,946,370	$	275,356	$	248,402	$	990,180	$	149,174	$	527,928	$	136,274	$	29,175	$	2,356,489

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

	Three Months Ended March 31, 2017						Three Months Ended March 31, 2018
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized		Cash Basis Income Recognized
Residential Owner Occupied	$	2,820	$	28	$	28	$	4,639	$	32	$	31
Residential Non Owner Occupied		3,891		36		36		2,509		44		41
Total Residential Real Estate		6,711		64		64		7,148		76		72
Construction								-		-		-
Multi-Family		3,374		10		10		2,049		27		26
CRE Owner Occupied		4,614		22		22		13,225		44		35
CRE Non Owner Occupied		4,499		42		39		3,482		34		34
Agriculture Land		2,707		47		19		11,516		95		42
Other CRE		1,668		13		12		1,486		25		20
Total Commercial Real Estate		13,488		124		92		29,709		198		131
Construction		-		-		-
Commercial Working Capital		2,372		19		19		5,208		24		24
Commercial Other		1,722		21		16		5,100		25		23
Total Commercial		4,094		40		35		10,308		49		47
Home Equity and Home Improvement		1,254		10		10
Home Equity and Improvement								1,474		11		11
Consumer Finance		74		1		1		39		1		1
Total Impaired Loans	$	28,995	$	249	$	212	$	50,727	$	362	$	288

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

	Three Months Ended March 31, 2016						Three Months Ended March 31, 2017
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized		Cash Basis Income Recognized
Residential Owner Occupied	$	4,025	$	39	$	39	$	2,820	$	28	$	28
Residential Non Owner Occupied		3,557		35		34		3,891		36		36
Total Residential Real Estate		7,582		74		73		6,711		64		64
Construction								3,374		10		10
Multi-Family		4,593		30		30		4,614		22		22
CRE Owner Occupied		9,090		62		48		4,499		42		39
CRE Non Owner Occupied		4,418		53		49		2,707		47		19
Agriculture Land		3,593		35		12		1,668		13		12
Other CRE		1,422		4		4		13,488		124		92
Total Commercial Real Estate		18,523		154		113		-		-		-
Construction		-		-		-
Commercial Working Capital		1,513		15		15		2,372		19		19
Commercial Other		4,245		19		18		1,722		21		16
Total Commercial		5,758		34		33		4,094		40		35
Home Equity and Home Improvement		1,749		15		15
Home Equity and Improvement								1,254		10		10
Consumer Finance		73		1		1		74		1		1
Total Impaired Loans	$	38,278	$	308	$	265	$	28,995	$	249	$	212

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

	March 31, 2017						December 31, 2016						March 31, 2018						December 31, 2017
	Unpaid Principal Balance*		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance*		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance*		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance*		Recorded Investment		Allowance for Loan Losses Allocated
With no allowance recorded:
Residential Owner Occupied	$	1,906	$	1,760	$	-	$	1,912	$	1,765	$	-	$	2,744	$	2,597	$	-	$	2,507	$	2,364	$	-
Residential Non Owner Occupied		1,769		1,762		-		1,691		1,683		-		1,468		1,464		-		1,711		1,708		-
Total 1-4 Family Residential Real Estate		3,675		3,522		-		3,603		3,448		-		4,212		4,061		-		4,218		4,072		-
Multi-Family Residential Real Estate		3,288		3,288		-		3,578		3,430		-		1,863		1,870		-		2,095		2,102		-
CRE Owner Occupied		3,048		2,611		-		2,652		2,353		-		11,847		11,387		-		12,273		11,804		-
CRE Non Owner Occupied		4,114		3,896		-		4,372		4,240		-		3,035		2,873		-		3,085		2,925		-
Agriculture Land		2,617		2,649		-		1,695		1,722		-		11,682		11,860		-		13,029		13,185		-
Other CRE		1,020		950		-		1,225		1,115		-		959		748		-		981		768		-
Total Commercial Real Estate		10,799		10,106		-		9,944		9,430		-		27,523		26,868		-		29,368		28,682		-
Construction		-		-		-		-		-		-		-		-		-		-		-		-
Commercial Working Capital		2,228		2,183		-		838		786		-		4,888		4,815		-		5,462		5,422		-
Commercial Other		1,782		1,620		-		1,179		967		-		4,744		4,757		-		9,916		7,644		-
Total Commercial		4,010		3,803		-		2,017		1,753		-		9,632		9,572		-		15,378		13,066		-
												-
Home Equity and Home Improvement		621		575		-		631		585		-		614		569		-		630		584		-
Consumer Finance		53		53		-		55		55	$	-		36		36		-		42		42		-

Total loans with no allowance recorded	$	22,446	$	21,347	$	-	$	19,828	$	8,701			$	43,880	$	42,976	$	-	$	51,731	$	48,548	$	-

With an allowance recorded:
Residential Owner Occupied	$	2,159	$	2,132	$	157	$	2,348	$	2,319	$	157	$	1,998	$	1,978	$	144	$	1,841	$	1,814	$	137
Residential Non Owner Occupied		1,078		1,071		39		1,137		1,131		45		1,076		1,078		74		1,031		1,024		30
Total 1-4 Family Residential Real Estate		3,237		3,203		196		3,485		3,450		202		3,074		3,056		218		2,872		2,838		167
Multi-Family Residential Real Estate		51		52		4		53		53		4		171		172		2		175		176		7
CRE Owner Occupied		2,291		1,831		96		2,362		1,894		102		2,077		1,616		50		2,007		1,546		44
CRE Non Owner Occupied		414		417		25		1,618		1,479		108		644		584		42		651		593		28
Agriculture Land		109		110		5		45		45		3		287		284		32		293		292		14
Other CRE		1,116		698		44		1,144		722		42		916		718		40		909		708		32
Total Commercial Real Estate		3,930		3,056		170		5,169		4,140		255		3,924		3,202		164		3,860		3,139		118
Construction		-		-		-		-		-		-		-		-		-		-		-		-
Commercial Working Capital		180		181		94		230		231		24		458		461		62		447		449		77
Commercial Other		124		127		7		167		170		11		293		295		21		854		858		110
Total Commercial		304		308		101		397		401		35		751		756		83		1,301		1,307		187
Home Equity and Home Improvement		631		627		300		688		684		313		898		894		312		596		592		279
Consumer Finance		18		17		1		4		4		-		-		-		-		8		8		-
Total loans with an allowance recorded	$	8,171	$	7,263	$	772	$	9,796	$	8,732	$	809	$	8,818	$	8,080	$	779	$	8,812	$	8,060	$	758

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

	March 31, 2017		December 31, 2016		March 31, 2018		December 31, 2017
	(In Thousands)				(In Thousands)
Non-accrual loans	$	15,057	$	14,348	$	27,925	$	30,715
Loans over 90 days past due and still accruing		-		-		-		-
Total non-performing loans		15,057		14,348		27,925		30,715
Real estate and other assets held for sale		705		455		1,440		1,532
Total non-performing assets	$	15,762	$	14,803	$	29,365	$	32,247
Troubled debt restructuring, still accruing	$	9,771	$	10,544	$	13,722	$	13,770

The following table presents the aging of the recorded investment in past due and non- accrual loans as of March 31, ~~2017~~2018, by class of loans (In Thousands):

													Current		30-59 days		60-89 days		90+ days		Total Past Due		Total Non- Accrual
	Current		30-59 days		60-89 days		90+ days		Total Past Due		Total Non- Accrual
Residential Owner Occupied	$	175,631	$	95	$	866	$	333	$	1,294	$	1,579	$	177,799	$	537	$	259	$	933	$	1,729	$	2,111
Residential Non Owner Occupied		99,595		50		284		312		646		1,175		96,275		76		-		97		173		342

Total 1-4 Family Residential Real Estate		275,226		145		1,150		645		1,940		2,754		274,074		613		259		1,030		1,902		2,453

Multi-Family Residential Real Estate		211,777		-		-		-		-		2,576		271,087		-		-		-		-		124

CRE Owner Occupied		384,192		710		45		1,337		2,092		3,172		407,019		592		76		847		1,515		10,170
CRE Non Owner Occupied		395,410		328		-		442		770		1,626		424,247		1,074		29		263		1,366		2,164
Agriculture Land		135,544		210		-		855		1,065		1,582		130,940		82		-		208		290		4,275
Other Commercial Real Estate		65,925		-		-		-		-		866		48,868		13		-		99		112		611

Total Commercial Real Estate		981,071		1,248		45		2,634		3,927		7,246		1,011,074		1,761		105		1,417		3,283		17,220

Construction		104,036		-		-		-		-		-		140,221		-		-		-		-		-

Commercial Working Capital		225,276		55		49		-		104		1,005		229,844		209		-		100		309		3,550
Commercial Other		278,789		1,455		142		326		1,923		497		271,422		49		-		638		687		3,620

Total Commercial		504,065		1,510		191		326		2,027		1,502		501,266		258		-		738		996		7,170

Home Equity/Home Improvement		132,993		173		42		398		613		875		133,552		29		7		582		618		909
Consumer Finance		27,417		108		130		77		315		101		27,764		199		96		39		334		39

Total Loans	$	2,236,585	$	3,184	$	1,558	$	4,080	$	8,822	$	15,054	$	2,359,038	$	2,860	$	467	$	3,806	$	7,133	$	27,915
Loans acquired with deteriorated credit quality (included in the totals above)	$	3,830	$	110	$	45	$	147	$	302	$	472
Loans acquired in current year (included in totals above)	$	279,502	$	820	$	341	$	1,130	$	2,291	$	1,476

The following table presents the aging of the recorded investment in past due and non-accrual loans as of December 31, ~~2016~~2017, by class of loans (In Thousands):

													Current		30-59 days		60-89 days		90+ days		Total Past Due		Total Non- Accrual
	Current		30-59 days		60-89 days		90+ days		Total Past Due		Total Non- Accrual
Residential Owner Occupied	$	139,015	$	56	$	842	$	544	$	1,442	$	1,931	$	175,139	$	821	$	1,033	$	1,227	$	3,081	$	2,510
Residential Non Owner Occupied		66,811		166		308		63		537		992		96,400		495		8		233		736		520

Total 1-4 Family Residential Real Estate		205,826		222		1,150		607		1,979		2,923		271,539		1,316		1,041		1,460		3,817		3,030

Multi-Family Residential Real Estate		197,197		-		-		-		-		2,637		247,980		422		-		-		422		128

CRE Owner Occupied		340,233		79		-		1,396		1,475		3,098		393,125		195		188		1,268		1,651		10,775
CRE Non Owner Occupied		338,724		81		16		426		523		1,808		403,656		1		91		424		516		2,431
Agriculture Land		102,397		-		-		-		-		755		131,753		412		-		66		478		4,144
Other Commercial Real Estate		62,415		-		-		249		249		1,292		58,784		13		-		204		217		734

Total Commercial Real Estate		843,769		160		16		2,071		2,247		6,953		987,318		621		279		1,962		2,862		18,084

Construction		89,244		-		-		-		-		-		149,174		-		-		-		-		-

Commercial Working Capital		202,786		-		10		38		48		435		233,632		102		1,264		876		2,242		2,369
Commercial Other		267,189		23		-		365		388		577		291,455		82		-		517		599		6,474

Total Commercial		469,975		23		10		403		436		1,012		525,087		184		1,264		1,393		2,841		8,843

Home Equity and Home Improvement		117,458		1,125		176		254		1,555		730		133,144		2,490		434		206		3,130		591
Consumer Finance		16,452		85		69		78		232		91		28,800		293		80		2		375		27

Total Loans	$	1,939,921	$	1,615	$	1,421	$	3,413	$	6,449	$	14,346	$	2,343,042	$	5,326	$	3,098	$	5,023	$	13,447	$	30,703

As of March 31, ~~2017~~2018, and December 31, ~~2016,~~2017, the Company had a recorded investment in troubled debt restructurings (“TDRs”) of ~~$15.5~~$20.4 million and ~~$16.8~~$21.7 million, respectively. The Company allocated ~~$688,000~~$686,000 and ~~$809,000~~$751,000 of specific reserves to those loans at March 31, ~~2017~~2018, and December 31, ~~2016,~~2017, and ~~has~~had committed to lend additional amounts totaling up to ~~$19,000~~$769,000 and ~~$20,000~~$242,000 at March 31, ~~2017~~2018, and December 31, ~~2016,~~2017, respectively.

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

Of the loans modified in a TDR, ~~$5.7~~as of March 31, 2018, $6.6 million ~~are~~were on non-accrual status and partial charge-offs have in some cases been taken against the outstanding balance. Loans modified as a TDR may have the financial effect of increasing the allowance associated with the loan. If the loan is determined to be collateral dependent, the estimated fair value of the collateral, less any selling costs is used to determine if there is a need for a specific allowance or charge-off. If the loan is determined to be cash flow dependent, the allowance is measured based on the present value of expected future cash flows discounted at the loan’s pre-modification effective interest rate.

The following table ~~presents~~present loans by class modified as ~~troubled debt restructurings~~TDRs that occurred during the three month periods ending March 31, ~~2017~~2018, and March 31, ~~2016:~~2017:

The loans described above decreased the ALLL by $5,000 in the three month period ending March 31, 2018 and decreased the ALLL by $19,000 in the three month period ending March 31, ~~2017 and increased the ALLL by $15,000 in the three month period ending March 31, 2016.~~2017.

Of the ~~2017~~2018 modifications, ~~4 were~~one was made ~~TDRs due to the fact that the borrower is in bankruptcy, 4 were made~~a TDR due to terming out lines of credit, 2five were made TDR due to advancing or renewing money to a watch list credit, one loan made a TDR due to an reduction of the interest rate, and ~~1 was~~three were made a TDR because the current debt was refinanced due to maturity or for payment relief.

~~There were no~~The following table present loans by class modified as TDRs for which there was a payment default within twelve months following the modification during the ~~quarters ending~~three month period ended March 31, ~~2017~~2018, and March 31, ~~2016.~~2017:

The TDRs that subsequently defaulted described above had no effect on the allowance for loan losses for the three month period ended March 31, 2018.

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

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

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

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of March 31, ~~2017, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (In Thousands):~~

~~As of December 31, 2016,~~2018, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (In Thousands):

Class	Pass		Special Mention		Substandard		Doubtful		Not Graded		Total		Pass		Special Mention		Substandard		Doubtful		Not Graded		Total
Residential Owner Occupied	$	5,980	$	402	$	1,824	$	-	$	132,250	$	140,456
Residential Non Owner Occupied		58,041		1,394		3,480		-		4,434		67,349

1-4 Family Owner Occupied													$	6,764	$	96	$	2,387	$	-	$	170,282	$	179,529
1-4 Family Non Owner Occupied														84,434		1,280		3,385		-		7,348		96,447

Total 1-4 Family Real Estate		64,021		1,796		5,304		-		136,684		207,805		91,198		1,376		5,772		-		177,630		275,976

Multi-Family Residential Real Estate		192,369		862		3,852		-		114		197,197		266,216		2,063		2,698		-		110		271,087

CRE Owner Occupied		316,335		20,559		4,430		-		384		341,708		384,271		11,521		13,100		-		125		409,017
CRE Non Owner Occupied		332,196		1,617		5,435		-		-		339,248		412,587		7,425		5,119		-		-		425,131
Agriculture Land		98,039		2,355		2,002		-		-		102,396		109,860		7,896		13,473		-		-		131,229
Other CRE		59,561		60		2,297		-		746		62,664		46,014		159		1,664		-		1,143		48,980

Total Commercial Real Estate		806,131		24,591		14,164		-		1,130		846,016		952,732		27,001		33,356		-		1,268		1,014,357

Construction		67,751		706		-		-		20,787		89,244		119,950		1,153		-		-		19,118		140,221

Commercial Working Capital		193,043		8,301		1,490		-		-		202,834		206,697		18,428		5,028		-		-		230,153
Commercial Other		262,076		3,749		1,752		-		-		267,577		263,830		2,831		5,448		-		-		272,109

Total Commercial		455,119		12,050		3,242		-		-		470,411		470,527		21,259		10,476		-		-		502,262

Home Equity and Home Improvement		-		-		696		-		118,317		119,013		-		-		931		-		133,239		134,170
Consumer Finance		-		-		90		-		16,594		16,684		-		-		128		-		27,970		28,098

Total Loans	$	1,585,391	$	40,005	$	27,348	$	-	$	293,626	$	1,946,370	$	1,900,623	$	52,852	$	53,361	$	-	$	359,335	$	2,366,171

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

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

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during the three months ended March 31, 2018 or 2017. No allowances for loan losses were reversed during the same period.

Contractually required payments receivable of loans purchased with evidence of credit deterioration during the period ended March 31, 2017, using information as of the date of acquisition are included in the table below. There were no such loans purchased during the ~~year~~period ended ~~December~~March 31, ~~2016.~~2018. (In Thousands)

1-4 Family Residential Real Estate	$	1,720	$	1,720
Commercial Real Estate		3,781		4,724
Commercial		785		785
Consumer		4		4
Total	$	6,290	$	7,233

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled ~~$226,000~~$741,000 as of March 31, ~~2017.~~2018.

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

	Three Months Ended March 31,						Three Months Ended March 31,
	2017			2016			2018			2017
	(In Thousands)						(In Thousands)
Gain from sale of mortgage loans	$	1,083		$	994		$	1,080		$	1,083
Mortgage loans servicing revenue (expense):
Mortgage loans servicing revenue		934			877			944			934
Amortization of mortgage servicing rights		(312	)		(311	)		(319	)		(312	)
Mortgage servicing rights valuation adjustments		33			(21	)		37			33
		655			545			662			655

Net revenue from sale and servicing of mortgage loans	$	1,738		$	1,539		$	1,742		$	1,738

The unpaid principal balance of residential mortgage loans serviced for third parties was ~~$1.38~~$1.39 billion at March 31, ~~2017~~2018, and ~~$1.37~~$1.39 billion at December 31, ~~2016.~~2017.

Activity for capitalized mortgage servicing rights and the related valuation allowance follows for the three months ended March 31, ~~2017~~2018 and ~~2016:~~2017:

	March 31, 2017			March 31, 2016			March 31, 2018			March 31, 2017
	(In Thousands)						(In Thousands)
Mortgage servicing assets:
Balance at beginning of period	$	10,117		$	9,893		$	10,240		$	10,117
Loans sold, servicing retained		356			297			324			356
Amortization		(312	)		(311	)		(319	)		(312	)
Carrying value before valuation allowance at end of period		10,161			9,879			10,245			10,161

Valuation allowance:
Balance at beginning of period		(522	)		(645	)		(432	)		(522	)
Impairment (expense) recovery		33			(21	)		37			33
Balance at end of period		(489	)		(666	)		(395	)		(489	)
Net carrying value of MSRs at end of period	$	9,672		$	9,213		$	9,850		$	9,672
Fair value of MSRs at end of period	$	10,013		$	9,463		$	10,280		$	10,013

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

The Company has established an accrual for secondary market buy-back ~~activity, a~~activity. A liability of ~~$51,000 and $79,000~~$43,000 was accrued at both March 31, ~~2017~~2018, and December 31, ~~2016,~~2017, respectively. ~~Expense (credit)~~There was no accrual recorded in the first quarter 2018 while a credit was recognized related to the accrual ~~was ($28,000) and ($59,000)~~of $28,000 in the first quarter 2017. The activity in the first quarters of 2018 and 2017 ~~and 2016, respectively. The reversals are mainly~~was due to no actual losses being ~~recorded in the first quarter of 2017 and 2016, respectively.~~recorded.

	March 31, 2017		December 31, 2016		March 31, 2018		December 31, 2017
	(In Thousands)				(In Thousands)
Non-interest-bearing checking accounts	$	579,943	$	487,663	$	550,742	$	571,360
Interest-bearing checking and money market accounts		973,459		816,665		1,055,416		1,005,519
Savings deposits		288,498		243,369		306,510		302,022
Retail certificates of deposit less than $250,000		490,953		400,080		512,746		504,912
Retail certificates of deposit greater than $250,000		40,936		33,851		66,387		53,843
	$	2,373,789	$	1,981,628	$	2,491,801	$	2,437,656

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

	March 31, 2017		December 31, 2016		March 31, 2018			December 31, 2017
	(In Thousands)				(In Thousands)
FHLB Advances:
Single maturity fixed rate advances	$	92,000	$	92,000	$	64,000		$	92,000
Putable advances		5,000		5,000		-			5,000
Amortizable mortgage advances		8,104		6,943		7,027			6,943
Fair value adjustment on acquired balances						(26	)		-
Total	$	105,104	$	103,943	$	71,001		$	103,943

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

The putable advance can be put back to the Company at the option of the FHLB on a quarterly basis. A $5.0 million putable advance with a weighted average rate of 2.35% was not yet callable by the FHLB at March 31, 2017. The call date for this advance is June 12, 2017 and the maturity date is March 12, 2018. Putable advances are callable at the option of the FHLB on a quarterly basis.

In March 2007, the Company sponsored an affiliated trust, First Defiance Statutory Trust II (Trust Affiliate II) that issued $15 million of Guaranteed Capital Trust Securities (Trust Preferred Securities). In connection with this transaction, the Company issued $15.5 million of Junior Subordinated Deferrable Interest Debentures (Subordinated Debentures) to Trust Affiliate II. The Company formed Trust Affiliate II for the purpose of issuing Trust Preferred Securities to third-party investors and investing the proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The Subordinated Debentures held by Trust Affiliate II are the sole assets of that trust. The Company is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability.Distributions on the Trust Preferred Securities issued by Trust Affiliate II are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 1.5%. The Coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate II was ~~2.65%~~3.62% as of March 31, ~~2017~~2018, and ~~2.46%~~3.09% as of December 31, ~~2016.~~2017.

The Trust Preferred Securities issued by Trust Affiliate II are subject to mandatory redemption, in whole or part, upon repayment of the Subordinated Debentures. The Company has entered into an agreement that fully and unconditionally guarantees the Trust Preferred Securities subject to the terms of the guarantee. The Trust Preferred Securities and Subordinated Debentures mature on June 15, 2037, but can be redeemed at the Company’s option at any time now.

The Company also sponsored an affiliated trust, First Defiance Statutory Trust I (Trust Affiliate I), that issued $20 million of Trust Preferred Securities in 2005. In connection with this transaction, the Company issued $20.6 million of Subordinated Debentures to Trust Affiliate I. Trust Affiliate I was formed for the purpose of issuing Trust Preferred Securities to third-party investors and investing the proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The Junior Debentures held by Trust Affiliate I are the sole assets of the trust. The Company is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability.Distributions on the Trust Preferred Securities issued by Trust Affiliate I are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 1.38%. The Coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate I was ~~2.53%~~3.50% and ~~2.34%~~2.97% on March 31, ~~2017~~2018 and December 31, ~~2016~~2017, respectively.

The Trust Preferred Securities issued by Trust Affiliate I are subject to mandatory redemption, in whole or in part, upon repayment of the Subordinated Debentures. The Company has entered into an agreement that fully and unconditionally guarantees the Trust Preferred Securities subject to the terms of the guarantee. The Trust Preferred Securities and Subordinated Debentures mature on December 15, 2035, but can be redeemed at the Company’s option at any time now.

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

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

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

The remaining contractual maturity of the securities sold under agreements to repurchase in the consolidated balance sheets as of March 31, ~~2017~~2018 and December 31, ~~2016~~2017, is presented in the following tables.

	Overnight and Continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total		Overnight and Continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total
			(In Thousands)										(In Thousands)
At March 31, 2017
At March 31, 2018
Repurchase agreements:
Mortgage-backed securities – residential	$	16,624	$	-	$	-	$	-	$	16,624	$	3,645	$	-	$	-	$	-	$	3,645
Collateralized mortgage obligations		8,267		-		-		-		8,267		5,676		-		-		-		5,676
Total borrowings	$	24,891	$	-	$	-	$	-	$	24,891	$	9,321	$	-	$	-	$	-	$	9,321
Gross amount of recognized liabilities for repurchase agreements									$	24,891									$	9,321

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

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

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

In addition to the above commitments, First Defiance had commitments to sell ~~$24.0~~$16.8 million and ~~$22.5~~$14.9 million of loans to Freddie Mac, Fannie Mae, Federal Home Loan Bank of Cincinnati or BB&T Mortgage at March 31, ~~2017~~2018, and December 31, ~~2016,~~2017, respectively.

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax in the state of Indiana. The Company is no longer subject to examination by taxing authorities for years before ~~2012.~~2013. The Company currently operates primarily in the states of Ohio and Michigan, which tax financial institutions based on their equity rather than their income.

Public law No. 115-97, known as the Tax Cuts and Jobs Act ("Tax Act"), enacted on December 22, 2017, reduced the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018.

Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. It is the Company’s practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. These mortgage banking derivatives are not designated in hedge relationships. First Federal had approximately ~~$18.9~~$25.0 million and ~~$14.1~~$14.8 million of interest rate lock commitments at March 31, ~~2017~~2018, and December 31, ~~2016,~~2017, respectively. There were ~~$24.0~~$16.7 million and ~~$22.5~~$23.2 million of forward commitments for the future delivery of residential mortgage loans at March 31, ~~2017~~2018, and December 31, ~~2016,~~2017, respectively.

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

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

	Three Months Ended March 31,				Three Months Ended March 31,
	2017		2016		2018		2017
	(In Thousands)				(In Thousands)
Derivatives not designated as hedging instruments

Mortgage Banking Derivatives – Gain (Loss)	$	65	$	438	$	42	$	65

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

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

	Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount			Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount
										(In Thousands)
Three months ended March 31, 2018:
Securities available for sale:
Change in net unrealized gain/loss during the period										$	(3,557	)	$	747		$	(2,810	)
Reclassification adjustment for net gains included in net income											-			-			-
Total other comprehensive loss										$	(3,557	)	$	747		$	(2,810	)
	(In Thousands)
Three months ended March 31, 2017:
Securities available for sale:
Change in net unrealized gain/loss during the period	$	1,580		$	(553	)	$	1,027		$	1,580		$	(553	)	$	1,027
Reclassification adjustment for net gains included in net income		-			-			-			-			-			-
Total other comprehensive loss	$	1,580		$	(553	)	$	1,027

Three months ended March 31, 2016:
Securities available for sale:
Change in net unrealized gain/loss during the period	$	1,450		$	(508	)	$	942
Reclassification adjustment for net gains included in net income		(131	)		46			(85	)
Total other comprehensive loss	$	1,319		$	(462	)	$	857
Total other comprehensive income										$	1,580		$	(553	)	$	1,027

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

							Accumulated									Accumulated
	Securities			Post-			Other			Securities			Post-			Other
	Available			retirement			Comprehensive			Available			retirement			Comprehensive
	For Sale			Benefit			Income			For Sale			Benefit			Income
										(In Thousands)
Balance January 1, 2018										$	601		$	(384	)	$	217
Other comprehensive income (loss) before reclassifications											(2,810	)		-			(2,810	)

Net other comprehensive income (loss) during period											(2,810	)		-			(2,810	)

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

Balance March 31, 2018										$	(2,080	)	$	(466	)	$	(2,546	)
	(In Thousands)
Balance January 1, 2017	$	504		$	(289	)	$	215		$	504		$	(289	)	$	215
Other comprehensive income before reclassifications		1,027			-			1,027			1,027			-			1,027
Amounts reclassified from accumulated other comprehensive income		-			-			-			-			-			-

Net other comprehensive income during period		1,027			-			1,027			1,027			-			1,027

Balance March 31, 2017	$	1,531		$	(289	)	$	1,242		$	1,531		$	(289	)	$	1,242

Balance January 1, 2016	$	4,042		$	(420	)	$	3,622
Other comprehensive income before reclassifications		942			-			942
Amounts reclassified from accumulated other comprehensive income		(85	)		-			(85	)

Net other comprehensive income during period		857			-			857

Balance March 31, 2016	$	4,899		$	(420	)	$	4,479

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

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

The general partner of each limited partnership has both the power to direct the activities which most significantly affect the performance of each partnership and the obligation to absorb losses or the right to receive benefits that could be significant to the entities. Therefore, the Company has determined that it is not the primary beneficiary of any LIHTC partnership. In January of 2014, the FASB issued ASU 2014-01“Accounting for Investments in Qualified Affordable Housing Projects.” The pronouncement permitted reporting entities to make an accounting policy election to account for these investments using the proportional amortization method if certain conditions exist. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received, and will recognize the net investment performance in the income statement as a component of income tax expense (benefit). The Company utilized the proportional amortization method for all of its instruments. As of March 31, ~~2017~~2018, and December 31, ~~2016~~2017, the Company had ~~$6.6~~$9.0 million and ~~$6.8~~$9.2 million in qualified investments recorded in other assets and ~~$4.3~~$5.4 million and ~~$4.3~~$6.2 million in unfunded commitments recorded in other liabilities, respectively.

As of March 31, ~~2017,~~2018, the expected payments for unfunded affordable housing commitments were as follows:

(dollars in thousands)	Amount		Amount
2017	$	1,897
2018		1,137	$	2,149
2019		307		1,351
2020		179		392
2021		160		368
2022				240
Thereafter		615		883
Total Unfunded Commitments	$	4,295	$	5,383

The following table presents tax credits and other tax benefits recognized and amortization expense related to affordable housing for the three and nine months ended March 31, ~~2017~~2018 and ~~2016.~~2017.

	Three Months Ended March 31,				Three Months Ended March 31,
(dollars in thousands)	2017		2016		2018		2017
Proportional Amortization Method
Tax credits and other tax benefits recognized	$	211	$	157	$	254	$	211
Amortization expense in federal income taxes		165		119		234		165

There were no impairment losses of LIHTC investments for the three months ended March 31, ~~2017~~2018 and ~~2016.~~2017.

Effective February 24, 2017, the Company acquired Commercial Bancshares, Inc. (“Commercial Bancshares”) and its subsidiary, The Commercial Savings Bank (“CSB”), pursuant to an Agreement and Plan of Merger (“merger agreement”), dated August 23, 2016. The acquisition was accomplished by the merger of Commercial Bancshares into First Defiance, immediately followed by the merger of CSB into ~~First Defiance’s banking subsidiary,~~ First Federal. CSB operated 7 full-service banking offices in northwest and north central, Ohio and 1 commercial loan production office in central Ohio. Commercial Bancshares’ consolidated assets and equity (unaudited) as of February 24, 2017, totaled $348.4 million and $37.5 million, respectively. The Company accounted for the transaction under the acquisition method of accounting which means that the acquired assets and liabilities were recorded at fair value at the date of acquisition. The fair value ~~estimates~~ included in these financial statements ~~are~~is based on ~~preliminary~~final valuations. ~~The Company does not expect material variances from these estimates and expects that final valuation estimates will be completed during the year ending December 31, 2017.~~

In accordance with ASC 805, the Company expensed approximately ~~$3.6~~$3.7 million of direct acquisition costs, of which $2.8 million was to settle employment and benefit agreements and for personnel expenses related to operating the new Commercial ~~Bancshare~~Bancshares locations. The Company recorded ~~$29.0~~$28.9 million of goodwill and $4.9 million of intangible ~~assets in the first quarter of 2017.~~assets. Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies expected to be derived from the combination of the two entities. The acquisition was consistent with the Company’s strategy to enhance and expand its presence in northwestern and north central Ohio. The acquisition offers the Company the opportunity to increase profitability by introducing existing products and services to the acquired customer base as well as add new customers in the expanded market area. The intangible assets are related to core deposits and are being amortized over 10 years on an accelerated basis. For tax purposes, goodwill totaling ~~$29.0~~$28.9 million is ~~non-deductible but will be~~non-deductible. Goodwill is evaluated annually for impairment. The following table summarizes the fair value of the total consideration transferred as part of the Commercial Bancshares acquisition as well as the fair value of identifiable assets and liabilities assumed as of the effective date of the ~~transaction.~~transaction

Under the terms of the merger agreement, Commercial Bancshares common shareholders had the opportunity to elect to receive 1.1808 shares of common stock of the Company or cash in the amount of $51.00 for each share of Commercial Bancshares common stock, subject to adjustment as provided for in the merger agreement. Total consideration for Commercial Bancshares common shares outstanding was paid 80% in Company stock and 20% in cash. The Company issued 1,139,502 shares of its common stock and paid $12.3 million in cash to the former shareholders of Commercial Bancshares.

The following table presents unaudited pro forma information as if the acquisition had occurred on January 1, 2016 after giving effect to certain adjustments. The unaudited pro forma information for the three months ended March 31, 2017 and March 31, 2016 includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, interest expense on deposits and borrowings acquired, and the related income tax effects. The unaudited pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed date.

The above pro forma financial information includes approximately $123,000 of net income related to the operations of Commercial Bancshares during the first quarter of 2017. The above pro forma financial information related to 2017 excludes non-recurring merger costs that totaled $3.6 million on a pre-tax basis. Under acquisition accounting treatment, loans are recorded at fair value which includes a credit risk component, and therefore the provision for loan losses recognized during the first quarter of 2016 was presumed to not be necessary.

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

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

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

This document contains GAAP financial measures and certain non-GAAP financial measures which are presented as management believes they are helpful in understanding the Company’s results of operations or financial position. Fully taxable-equivalent (“FTE”) is an adjustment to net interest income to reflect tax-exempt income on an equivalent before-tax basis. The following tables present a reconciliation of non-GAAP measures to their respective GAAP measures atfor the nine months ended March 31, ~~2017~~2018 and ~~2016.~~2017.

Non-GAAP Financial Measures – Net Interest Income on an FTE basis, Net Interest Margin and Efficiency Ratio
($ in Thousands)	March 31, 2017			March 31, 2016			March 31, 2018			March 31, 2017
Net interest income (GAAP)	$	21,645		$	19,188		$	25,687			21,645
Add: FTE adjustment		469			475			237			469
Net interest income on a FTE basis (1)	$	22,114		$	19,663		$	25,924			22,114

Noninterest income – less securities gains/losses (2)	$	10,549		$	8,505		$	10,703			10,549
Noninterest expense (3)		23,142			17,274			23,251			23,142
Average interest-earning assets net of average unrealized gains/losses on securities(4)		2,353,930			2,080,914			2,665,035			2,353,930
Average interest-earning assets		2,355,544			2,088,582			2,664,114			2,355,544
Average unrealized gains/losses on securities		1,614			7,668
Average unrealized gains/(losses) on securities								(921	)		1,614

Ratios:
Net interest margin (1) / (4)		3.81	%		3.80	%		3.95	%		3.81	%
Efficiency ratio (3) / (1) + (2)		70.85	%		61.32	%		63.48			70.85	%

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

First Defiance is a unitary thrift holding company that conducts business through its wholly owned subsidiaries, First Federal, First Insurance and First Defiance Risk Management.

First Federal is a federally chartered stock savings bank ~~that provides financial services to communities based~~headquartered in Defiance, Ohio. It conducts operations through thirty-six full-service banking center offices in Allen, Defiance, Fulton, Hancock, Henry, Lucas, Marion, Ottawa, Paulding, Putnam, Seneca, Williams, Wood, and Wyandot counties in northwest and central Ohio, two full-service banking center offices in Allen County in northeast Indiana, five full-service banking center offices in Lenawee County in southeast Michigan and ~~southeastern Michigan where it operates 43 full service banking centers. First Federal operates~~ one commercial loan production office in ~~central Ohio.~~Ann Arbor, Michigan that was opened late in the fourth quarter of 2017.

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

First Insurance ~~sells~~is a ~~variety~~wholly owned subsidiary of ~~property and casualty, group health and life and individual health and life insurance products.~~First Defiance. First Insurance is an insurance agency that ~~does~~conducts business through offices located in the ~~Defiance, Bryan,~~Archbold, Bowling Green, Bryan, Defiance, Findlay, Fostoria, Lima, Sylvania, and Tiffin, Ohio areas. The Maumee and Oregon offices were consolidated into a new office in Sylvania, Ohio ~~areas. On April 13, 2017,~~in January 2018. First Defiance acquired the business of Corporate One. Corporate One will be part of First Insurance. Corporate One is a full-service employee benefits consulting organization founded in 1996 with offices located in Archbold, Findlay, FostoriaInsurance offers property and Tiffin, Ohio. Corporate One consults employers to better manage their employee benefit programs to effectively lead them into the future. The transaction is expected to enhance employee benefit offeringscasualty insurance, life insurance and ~~expand First Insurance’s presence into adjacent markets in northwest Ohio.~~group health insurance.

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

Regulation - First Defiance is subject to regulation examination and oversight by the Federal Reserve Board (“Federal Reserve”). First Federal ~~are~~is subject to regulation, examination and oversight by the Office of the Comptroller of the Currency (“OCC”~~) and the Federal Reserve Board (“Federal Reserve”~~). Because the FDIC insures First Federal’s deposits, First Federal is also subject to examination and regulation by the FDIC. In addition, First Federal is subject to ~~regulation and examination by~~regulations of the Consumer Financial Protection Bureau (the “CFPB”), which was established by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). and has broad powers to adopt and enforce consumer protection regulations. First Defiance and First Federal must file periodic reports with the Federal Reserve and the OCC and examinations are conducted periodically by the Federal Reserve, the OCC and the FDIC to determine whether First Defiance and First Federal are in compliance with various regulatory requirements and are operating in a safe and sound manner. First 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 – The federal banking regulators have adopted risk-based capital guidelines for financial institutions and their holding companies, designed to absorb losses. The guidelines provide a systematic analytical framework, which makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures expressly into account in evaluating capital adequacy and minimizes disincentives to holding liquid, low-risk assets. Capital levels as measured by these standards are also used to categorize financial institutions for purposes of certain prompt corrective action regulatory provisions.

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

The ~~new~~ rules include (a) a ~~new~~minimum common equity ~~tier~~Tier 1 (“CET1”) capital ratio of ~~at least~~ 4.5%, (b) a minimum Tier 1 capital ratio of ~~at least~~ 6.0%~~, rather than the former 4.0%~~, (c) a minimum total capital ratio ~~that remains at~~of 8.0%, and (d) a minimum leverage ratio of 4%.

Common equity for the common equity ~~tier~~Tier 1 capital ratio includes common stock (plus related surplus) and retained earnings, plus limited amounts of minority interests in the form of common stock, less the majority of certain regulatory deductions.

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

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

The deductions from common equity tier 1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments and investments in the capital of unconsolidated financial institutions (above certain levels). .

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

The ~~new~~ rules also place restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive officers if the company does not hold a capital conservation buffer of greater than 2.5% composed of common equity tier 1 capital above its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. The capital conservation buffer phases in ~~from~~through January 1, ~~2016 until~~2019, and is currently 1.875%.

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

Effective January 1, ~~2019. It was 1.25%~~2015, in order to be "well-capitalized," a financial institution must have a common equity Tier 1 capital ratio of 6.5%, a total risk-based capital ratio of at ~~January~~least 10%, a Tier 1 ~~2017.~~risk-based capital of at least 8% and a leverage ratio of at least 5%, and the institution must not be subject to any written agreement, order, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. As of December 31, 2017, First Federal met the ratio requirements in effect at that date to be deemed "well-capitalized."

Deposit Insurance- ~~Substantially all of~~The FDIC maintains the ~~deposits~~DIF, which insures the deposit accounts of First Federal ~~are~~to the maximum amount provided by law. The general insurance limit is $250,000 per separately insured ~~up to applicable limits~~depositor. This insurance is backed by the ~~Deposit Insurance Fund~~full faith and credit of the United States government.

The FDIC ~~and First Federal is assessed~~assesses deposit insurance premiums ~~to maintain the Deposit Insurance Fund. Insurance premiums for~~on each insured institution ~~are determined~~quarterly based ~~upon~~on risk characteristics of the ~~institution’s capital level and supervisory rating provided~~institution. The FDIC may also impose a special assessment in an emergency situation.

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

The deposit insurance assessment base is average assets less average tangible equity. The FDIC set a target size for the Deposit Insurance Fund at 2% of insured deposits and a lower assessment rate schedule when the fund reaches 1.15% and, in lieu of dividends, the FDIC rule provides for a lower rate schedule when the reserve ratio reaches 2% and 2.5%. On June 30, 2016, the Deposit Insurance Fund surpassed its target of 1.15%, decreasing the assessment base based on the final rules approved by the FDIC Board of Directors on February 7, 2011, and April 26, 2016. The change to the assessment base and assessment rates, as well as the Deposit Insurance Fund restoration time frame, has lowered First Defiance’s deposit insurance assessment.

In addition, ~~the FDIC has proposed changing the deposit insurance premium assessment method for banks~~all institutions with ~~less than $10 billion in assets that have been~~deposits insured by the FDIC ~~for at least five years. The proposed changes would revise~~are required to pay assessments to fund interest payments on bonds issued by the ~~financial ratios method so that it would be based on~~Financing Corporation, a ~~statistical model estimating~~mixed-ownership government corporation established to recapitalize a predecessor to the ~~probability of failure of a bank over three years; update~~DIF. These assessments will continue until the ~~financial measures used~~Financing Corporation bonds mature in the financial ratios method consistent with the statistical model; and eliminate risk categories for established small banks and using the financial ratios method to determine assessment rates for all such banks (subject to minimum or maximum initial assessment rates based upon a bank’s composite examination rating).2019.

As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, federally-insured institutions. It also may prohibit any federally-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the Deposit Insurance Fund. The FDIC also has the authority to take enforcement actions against insured institutions. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged or is engaging in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or written agreement entered into with the FDIC. ~~The management of First Federal does not know of any practice, condition or violation that might lead to termination of deposit insurance.~~

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 “Better Together” as an indication of its commitment to local, responsive, personalized service. First Defiance believes this strategy results in greater customer loyalty and profitability through core relationships. First Defiance is focused on diversification of revenue sources and increased market penetration in areas where the growth potential exists for a balance between acquisition and organic growth. The primary elements of First Defiance’s business strategy are commercial banking, consumer banking, including the origination and sale of single-family residential loans, enhancement of fee income, wealth management and insurance sales, each united by a strong customer service culture throughout the organization.

Commercial and Commercial Real Estate Lending -Commercial and commercial real estate lending have been an ongoing focus and a major component of First Federal’s success. First Federal provides primarily commercial real estate and commercial business loans with an emphasis on owner- occupied commercial real estate and commercial business lending, including a focus on the deposit balances that accompany these relationships. First Federal’s client base tends to be small to middle market customers with annual gross revenues generally between $1 million and $50 million. First Federal’s focus is also on securing multiple guarantors in addition to collateral where possible. These customers require First Federal to have a high degree of knowledge and understanding of their business in order to provide them with solutions to 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 and implemented a program targeting the small business customer. Maintaining a diversified portfolio with an emphasis on monitoring industry concentrations and reacting to changes in the credit characteristics of industries is an ongoing focus.

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

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

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

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

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

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

Securities are classified as held-to-maturity when First Defiance has the positive intent and ability to hold the security to maturity. Held-to-maturity securities are stated at amortized cost and had a recorded value of ~~$771,000~~$642,000 at March 31, ~~2017.~~2018. Securities not classified as held-to-maturity are classified as available-for-sale, which are stated at fair value and had a recorded value of ~~$260.6~~$270.1 million at March 31, ~~2017.~~2018. The available-for-sale portfolio ~~consists of~~included obligations of U.S. Government corporations and agencies ($~~4.0~~2.5 million), certain municipal obligations ($~~95.1~~95.9 million), CMOs/REMICs ($~~67.5~~96.2 million), corporate bonds ($~~13.1~~13.0 million), and mortgage backed securities ($~~80.9~~62.4 million).

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

Lending - In order to properly assess the collateral dependent loans included in its loan portfolio, the Company has established policies regarding the monitoring of the collateral underlying such loans. The Company requires an appraisal that is less than one year old for all new collateral dependent real estate loans, and all renewed collateral dependent real estate loans where significant new money is extended. The appraisal process is handled by the 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,~~etc., First Federal will discount this amount to a more appropriate current value based on inputs from lenders and realtors. This amount may then be discounted further by First Federal’s estimation of the carrying and selling costs. In most instances, if the appraisal is more than twelve to fifteen months old, we may require a new appraisal. Finally, First Federal assesses whether there is any collateral short fall, taking into consideration guarantor support and liquidity, and determines if a charge off is necessary.

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

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

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

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

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

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

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

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

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

At March 31, ~~2017,~~2018, First Defiance's total assets, deposits and stockholders' equity amounted to ~~$2.93~~$3.02 billion, ~~$2.37~~$2.49 billion and ~~$354.2~~$379.2 million, respectively, compared to ~~$2.48~~$2.99 billion, ~~$1.98~~$2.44 billion and ~~$293.0~~$373.3 million, respectively, at December 31, 2016. Total assets increased $368.3 million, deposits increased $307.9 million and stockholders equity increased $56.5 million due to the acquisition of Commercial Bancshares. See Note 17 – Business Combinations for further details regarding the Commercial Bancshares acquisition and the impact to the individual categories.2017.

Net loans receivable (excluding loans held for sale) increased ~~$298.5~~$9.7 million to ~~$2.21~~$2.36 billion. The variance in loans receivable between March 31, ~~2017~~2018, and December 31, ~~2016~~2017 includes an increase of ~~$153.3~~$46.8 million in commercial real estate loans ,and a ~~$69.4~~$0.7 million increase in residential real estate ~~loans ,a $35.3~~loans. That growth was partially offset by a $13.5 million ~~increase in commercials loans, a $14.5 million increase in home equity loans , a $14.3 million increase~~decrease in construction loans, ~~and~~ a $11.0 million increase in consumer loans. The net loan amounts acquired from Commercial Bancshares at the acquisition date of February 24, 2017 resulted in a $159.2 million increase in commercial real estate loans a $58.4 million increase in residential real estate loans, a $35.1 million increase$25.6 decrease in commercial loans, a ~~$15.7~~$1.1 million ~~increase~~decrease in consumer loans and a $2.1 million decrease in home equity ~~loans, a $5.6 million increase in construction loans~~ and ~~a $10.9 million increase in consumer~~improvement loans.,

The investment securities portfolio increased ~~$10.2~~$9.5 million to ~~$261.3~~$270.8 million at March 31, ~~2017~~2018 from ~~$251.2~~$261.3 million at December 31, ~~2016.~~2017. The increase is a result of $19.7 million of securities being purchased during the period. This was offset by $5.9 million of securities maturing or being called in the period. There was ~~an unrealized gain~~a $3.6 million decrease in the ~~investment portfolio~~market value of ~~$4.1 million at March 31, 2017 compared to an unrealized gain of $3.4 million at December 31, 2016.~~

~~Goodwill and core deposit and other intangibles increased $29.0 million and $4.7 million, respectively to $90.8 million and $6.0 million, respectively due to~~available-for-sale securities during the ~~acquisition of Commercial Bancshares.~~period.

Deposits increased from ~~$1.98~~$2.44 billion at December 31, ~~2016~~2017, to ~~$2.37~~$2.49 billion as of March 31, ~~2017. Non-interest bearing demand deposits increased $92.3 million to $579.9 million, interest~~2018. Interest bearing demand and money market deposits increased ~~$156.8~~$49.9 million to ~~$973.5~~$1.06 billion, ~~and~~ savings deposits increased ~~$45.1~~$4.5 million to ~~$288.5 million. Retail~~$306.5 million, and retail time deposits increased ~~$98.0~~$20.4 million to ~~$531.9~~$579.1 million. ~~The net deposit amounts acquired from Commercial Bancshares at the acquisition date of February 24, 2107 resulted in a $56.1 million increase in~~ Non-interest bearing demand deposits ~~a $122.0~~decreased $20.6 million to $550.7 million.

Stockholders’ equity increased from $373.3 million at December 31, 2017, to $379.2 million at March 31, 2018. The increase in ~~interest bearing demand and money market deposits, a $31.6~~stockholders’ equity was the result of recording net income of $11.7 million. This was offset by $3.0 million ~~increase~~of common stock dividends being paid in ~~savings deposits~~the first three months of 2018 and a ~~$98.2~~$2.8 million ~~increase in retail time deposits.~~other comprehensive loss.

Stockholders’ equity increased from $293.0 million at December 31, 2016 to $354.2 million at March 31, 2017. The increase in stockholders’ equity was the result of recording net income of $5.1 million, an increase in other comprehensive income of $1.0 million and an increase due to the acquisition of Commercial Bancshares of $56.5 million as a result of issuing 1.1 million shares of common stock. This was offset by $2.2 million of common stock dividends being paid in the first quarter of 2017.

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

	Three Months Ended March 31,														Three Months Ended March 31,
	2017							2016							2018							2017
	Average				Yield/			Average				Yield/			Average				Yield/			Average				Yield/
	Balance		Interest(1)		Rate(2)			Balance		Interest(1)		Rate(2)			Balance		Interest(1)		Rate(2)			Balance		Interest(1)		Rate(2)
Interest-earning assets:
Loans receivable	$	2,026,067	$	22,020		4.41	%	$	1,796,200	$	19,363		4.34	%	$	2,316,316	$	26,550		4.65	%	$	2,026,067	$	22,020		4.41	%
Securities		254,842		2,174		3.48	(3)		233,815		2,054		3.65	(3)		263,596		2,064		3.16	(3)		254,842		2,174		3.48	(3)
Interest bearing deposits		60,083		145		0.98			44,766		49		0.44			68,211		297		1.77			60,083		145		0.98
FHLB stock		14,552		166		4.63			13,801		139		4.05			15,991		231		5.86			14,552		166		4.63
Total interest-earning assets		2,355,544		24,505		4.22			2,088,582		21,605		4.18			2,664,114		29,142		4.43			2,355,544		24,505		4.22
Non-interest-earning assets		266,858							225,621							313,750							266,858
Total assets	$	2,622,402						$	2,314,203						$	2,977,864						$	2,622,402

Interest-bearing liabilities:
Deposits	$	1,626,742	$	1,796		0.45	%	$	1,420,479	$	1,433		0.41	%	$	1,888,990	$	2,611		0.56	%	$	1,626,742	$	1,796		0.45	%
FHLB advances and other		104,277		366		1.42			78,670		297		1.52			78,923		319		1.64			104,277		366		1.42
Subordinated debentures		36,150		215		2.41			36,137		175		1.95			36,192		280		3.14			36,150		215		2.41
Securities sold under repurchase agreements		25,660		14		0.22			55,243		37		0.27			15,982		8		0.20			25,660		14		0.22
Total interest-bearing liabilities		1,792,829		2,391		0.54			1,590,529		1,942		0.49			2,020,087		3,218		0.65			1,792,829		2,391		0.54
Non-interest bearing deposits		482,895		-					414,866		-					545,450		-					482,895		-
Total including non-interest bearing demand deposits		2,275,724		2,391		0.43			2,005,395		1,942		0.39			2,565,537		3,218		0.51			2,275,724		2,391		0.43
Other non-interest-bearing liabilities		32,236							29,757							38,334							32,236
Total liabilities		2,307,960							2,035,152							2,603,871							2,307,960
Stockholders' equity		314,442							279,051							373,993							314,442
Total liabilities and stock- holders' equity	$	2,622,402						$	2,314,203						$	2,977,864						$	2,622,402
Net interest income; interest rate spread			$	22,114		3.68	%			$	19,663		3.69	%			$	25,924		3.78	%			$	22,114		3.68	%
Net interest margin (4)						3.81	%						3.80	%						3.95	%						3.81	%
Average interest-earning assets to average interest-bearing liabilities						131	%						131	%						132	%						131	%

On a consolidated basis, First Defiance’s net income for the quarter ended March 31, ~~2017~~2018, was ~~$5.1~~$11.7 million compared to net income of ~~$7.2~~$5.1 million for the comparable period in ~~2016.~~2017. On a per share basis, basic and diluted earnings per common share for the three months ended March 31, ~~2017~~2018, were ~~$0.54 and $0.54, respectively,~~both $1.15, compared to basic and diluted earnings per common share of ~~$0.80 and $0.79, respectively,~~$0.54 for the quarter ended March 31, ~~2016.~~2017.

First Defiance’s net interest income is determined by its interest rate spread (i.e. the difference between the yields on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities.

Net interest income was ~~$21.6~~$25.7 million for the quarter ended March 31, ~~2017,~~2018, up from ~~$19.2~~$21.6 million for the same period in ~~2016.~~2017. The tax-equivalent net interest margin was ~~3.81%~~3.95% for the quarter ended March 31, ~~2017, a slight~~2018, an increase from ~~3.80%~~3.81% for the same period in ~~2016.~~2017. The increase in margin between the ~~2017~~2018 and ~~2016~~2017 first quarters was primarily due to having a ~~slight~~full quarter of added operations from the CSB merger as well an increase in interest rates and organic growth. The yield on interest-earning ~~asset yields, which increased to 4.22%~~assets was 4.43% for the quarter ended March 31, ~~2017,~~2018, up 421 basis points from ~~4.18%~~4.22% for the same period in ~~2016.~~2017. The cost of interest-bearing liabilities between the two periods increased 511 basis points to ~~0.54%~~0.65% in the first quarter of ~~2017~~2018 from ~~0.49%~~0.54% in the same period in ~~2016. The acquisition of CSB’s earning asset mix and low cost deposits along with the rise in interest rates contributed to the increase in net interest income.~~2017.

Total interest income increased ~~$2.9~~$4.9 million to $28.9 million for the quarter ended March 31, 2018, from $24.0 million for the quarter ended March 31, ~~2017~~2017. This is due to continued loan growth, a full quarter of CSB operations and an increase in interest rates. Income from ~~$21.1~~loans increased to $26.5 million for the quarter ended March 31, ~~2016. This is due to continued loan growth and a more profitable earning asset mix. Income from loans increased to $22.0 million for the quarter ended March 31, 2017~~2018, compared to ~~$19.3~~$22.0 million for the same period in ~~2016~~2017 due to average loan growth of ~~$140.4 million due to the acquisition.~~$290.2 million. The increase in the loan portfolio yield to ~~4.41%~~4.65% at March 31, ~~2017~~2018, was due mainly to increasing interest ~~rates and the acquisition of CSB as the weighted average yield at the acquisition date was 4.59%.~~rates. The investment interest income increased ~~$126,000~~$95,000 in the first quarter of ~~2017~~2018 to ~~$1.8~~$1.9 million; however, the yield dropped 1732 basis points to 3.16% at March 31, 2018, compared to 3.48% at March 31, ~~2017 compared to 3.65% at March 31, 2016.~~2017. The decline in investment yield is primarily attributable to the reinvestment of matured securities at lower yields. Income from interest bearing deposits and FHLB stock ~~were $145,000~~increased to $297,000 and ~~$165,000~~$231,000 respectively in the first quarter of ~~2017~~2018 compared to ~~$49,000~~$145,000 and ~~$139,000~~$166,000 for the same period in ~~2016~~2017 due to increased interest rates.

Interest expense increased by ~~$449,000~~$827,000 in the first quarter of ~~2017~~2018 compared to the same period in ~~2016,~~2017, to ~~$2.4~~$3.2 million from ~~$1.9~~$2.4 million. The cost of interest bearing liabilities increased 511 basis points from ~~0.49% at March 31, 2016 to~~ 0.54% at March 31, ~~2017.~~2017 to 0.65% at March 31, 2018. Interest expense related to interest-bearing deposits was ~~$1.8~~$2.6 million in the first quarter of ~~2017~~2018 compared to ~~$1.4~~$1.8 million for the same period in ~~2016.~~2017. Interest expense recognized by the Company related to FHLB advances was ~~$366,000~~$319,000 in the first quarter of ~~2017~~2018 compared to ~~$297,000~~$366,000 for the same period in ~~2016 due to increased~~2017 as decreased volumes offset the increase in ~~lower cost advances.~~interest rates. Expenses on subordinated debentures and ~~securities sold under repurchase agreements~~notes payable were ~~$215,000~~$280,000 and ~~$14,000~~$8,000 respectively in the first quarter of ~~2017~~2018 compared to ~~$175,000~~$215,000 and ~~$37,000~~$14,000 respectively for the same period in ~~2016.~~2017.

The allowance for loan losses represents management’s assessment of the estimated probable incurred credit losses in the loan portfolio at each balance sheet date. Management analyzes the adequacy of the allowance for loan losses regularly through reviews of the loan portfolio. Consideration is given to economic conditions, changes in interest rates and the effect of such changes on collateral values and borrower’s ability to pay, changes in the composition of the loan portfolio and trends in past due and non-performing loan balances. The allowance for loan losses is a material estimate that is susceptible to significant fluctuation and is established through a provision for loan losses based on management’s evaluation of the inherent risk in the loan portfolio. In addition to extensive in-house loan monitoring procedures, the Company utilizes an outside party to conduct an independent loan review of commercial loan and commercial real estate loan relationships. The goal is to have approximately 55% to 60% of the portfolio reviewed annually. This includes all relationships over $5.0 million with new exposure greater than $2.0 million and a sample of other relationships greater than $5.0 million; loan relationships between $1.0 million and $5.0 million with new exposure greater than $750,000 and a sample of other relationships between $1.0 million and $5.0 million; and a sample of relationships less than $1.0 million. Management utilizes the results of this outside loan review to assess the effectiveness of its internal loan grading system as well as to assist in the assessment of the overall adequacy of the allowance for loan losses associated with these types of loans.

The allowance for loan loss is made up of two basic components. The first component of the allowance for loan loss is the specific reserve in which the Company sets aside reserves based on the analysis of individual impaired credits. In establishing specific reserves, the Company analyzes all substandard, doubtful and loss graded loans quarterly and makes judgments about the risk of loss based on the cash flow of the borrower, the value of any collateral and the financial strength of any guarantors. If the loan is impaired and cash flow dependent, then a specific reserve is established for the discount on the net present value of expected future cash flows. If the loan is impaired and collateral dependent, then any shortfall is usually charged off. The Company also considers the impacts of any Small Business Association or Farm Service Agency guarantees. The specific reserve portion of the allowance for loan losses was ~~$772,000~~$779,000 at March 31, ~~2017~~2018, and ~~$809,000~~$758,000 at December 31, ~~2016.~~2017.

The second component is a general reserve, which is used to record loan loss reserves for groups of homogenous loans in which the Company estimates the losses incurred in the portfolio based on quantitative and qualitative factors. For purposes of the general reserve analysis, the loan portfolio is stratified into nine different loan pools based on loan type to allocate historic loss experience. The loss experience factor is then applied to the non-impaired loan portfolio. The Company has refined the methodology to its allowance for loan loss calculation pertaining to the general reserve component for non-impaired loans. There was no change to the calculation of the component for reserves on impaired loans. Within the general reserve, the determination of the historical loss component was modified from using a three-year average annual loss rate to autilizes loss migration ~~measurement. The loss migration~~ measurement ~~implemented June 30, 2015, utilized an average of four (4) four-year loss migration periods~~ for each loan portfolio segment with differentiation between loan risk ~~grades. Prior to June 30, 2015,~~grades in calculating the ~~approach to this~~general reserve component ~~quantified the historical loss by calculating a rolling twelve quarter average annual loss rate~~ for ~~each portfolio segment, without differentiation between loan risk grades.~~non-impaired loans. Beginning December 31, 2016, the historical loss calculation was changed from using a an average of four (4) four-year loss migration periods to using an average of all four-year loss migration periods to the present beginning with data from the second quarter 2011. Management believes this enhancement is consistent with the rationale of the previous measurement but provides a more precise calculation of historical losses by incorporating more data points for the average loss ratio and including periods that provide a more complete coverage of the full business cycle. Management believes that capturing the risk grade changes and cumulative losses over the life cycle of a loan more accurately depicts management’s estimate of historical losses as well as being more reflective of the ongoing risks in the loan portfolio. ~~These modifications resulted in a change in the general reserves between the loan portfolio segments but did not have a material impact on the overall allowance for loan losses.~~

The quantitative general allowance increased ~~$300,000~~$1.3 million to ~~$9.0~~$7.3 million at March 31, ~~2017~~2018, from ~~$8.7~~$6.0 million at December 31, ~~2016~~2017 primarily due to an increase in the ~~balance~~balances of ~~criticized loans.~~special mention rated loans in the commercial loan portfolio.

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

The qualitative analysis at March 31, ~~2017~~2018, indicated a general reserve of ~~$15.9~~$19.3 million compared with ~~$16.4~~$20.0 million at December 31, ~~2016.~~2017, a decrease of $0.7 million. Management reviewed the overall economic, environmental and risk factors and determined that it was appropriate to make adjustments to these sub-factors based on that review.

The economic factors for all residential, consumer and home equity and improvement loan segments increase slight in the first three months of 2018 due to mixed trends in the U.S. economy particularly unemployment rates which increased slightly in all markets.

The environmental factors increased slightly in the first three months of 2018 in the commercial, commercial real estate and construction loan segments due to an increase in the mix of lending concentration in FFB’s defined metro markets.

The ~~economic~~risk factors for all ~~commercial and~~loan segments, but particularly the commercial loan ~~segments were reduced in the first quarter of 2017 due to stability in the U.S. economy and forecasts for continued strengthening of the labor market.~~

The environmental factors were decreased slightly in the first quarter of 2017 in all loan segments due to newer loan volume having a stricter adherence to loan policy, stability in the lending staff and the maturation of the process of centralized problem loan workout.

~~The risk factors for commercial, construction, home equity and residential loans~~segment, were decreased in the first ~~quarter~~three months of ~~2017 while the risk factors for commercial real estate and commercial loans were increased~~2018 due to favorable trends in the levels of non-performing loans and classified assets.

First Defiance’s general reserve percentages for main loan segments not otherwise classified ranged from ~~0.46%~~0.48% for construction loans to ~~1.72%~~1.55% for home equity and improvement loans at March 31, ~~2017.~~2018.

As a result of a large recovery resulting from to a large relationship that was previously downgraded being paid off, the quantitative and qualitative analyses, along with the change in specific reserves, the ~~Company’s~~Company had a negative provision for loan losses for the first quarter of ~~2017 was $55,000,~~2018 of $1,095,000 compared to ~~$364,000~~$55,000 for the same period in ~~2016.~~2017. The allowance for loan losses was ~~$25.7~~$27.3 million at March 31, 2018, and ~~$25.9~~$26.7 million ~~and~~at December 31, 2017. The allowance for loans losses represented ~~1.15%~~1.16% of loans, ~~(1.32% excluding acquired loans),~~ net of undisbursed loan funds and deferred fees and costs, at March 31, ~~2017~~2018 and ~~1.33%~~1.14% at December 31, ~~2016.~~ 2017.

The ~~loans acquired from CSB were recorded at fair value and have no allowance for loan loss attributed to them. The~~negative provision of ~~$55,000~~$1,095,000 was due mainly to total recoveries of $2.0 million, offset by charge offs of ~~$464,000~~$316,000, and ~~recoveries of $274,000, resulting~~resulted in an ~~decrease~~increase to the overall allowance for loan loss of ~~$135,000~~$584,000 for the first quarter of ~~2017.~~2018. In management’s opinion, the overall allowance for loan losses of ~~$25.7~~$27.3 million as of March 31, ~~2017~~2018, is adequate.

Management also assesses the value of real estate owned as of the end of each accounting period and recognizes write-downs to the value of that real estate in the income statement if conditions dictate. In the three month period ended March 31, ~~2017,~~2018, there were no$544,000 of write-downs of real estate held for sale. Management believes that the values recorded at March 31, ~~2017~~2018, for real estate owned and repossessed assets represent the realizable value of such assets.

Total classified loans increased to ~~$35.5~~$53.1 million at March 31, ~~2017,~~2018, compared to ~~$27.5~~$59.4 million at December 31, ~~2016. Classified loans acquired from CSB represent $6.0~~2017, a decrease of $6.3 million ofdue to a classified relationship that was paid off during the ~~increase.~~quarter.

First Defiance’s ratio of allowance for loan losses to non-performing loans was ~~170.8%~~97.6% at March 31, ~~2017~~2018, compared with ~~180.4%~~86.9% at December 31, ~~2016.~~2017. Management monitors collateral values of all loans included on the watch list that are collateral dependent and believes that allowances for those loans at March 31, ~~2017~~2018, are appropriate. Of the ~~$15.1~~$27.9 million in non-accrual loans at March 31, ~~2017, $11.0~~2018, $24.1 million or ~~73.0%~~86.4% are less than 90 days past due.

At March 31, ~~2017,~~2018, First Defiance had total non-performing assets of ~~$15.8~~$29.4 million, compared to ~~$14.8~~$32.2 million at December 31, ~~2016.~~2017. Non-performing assets include loans that are on non-accrual, real estate owned and other assets held for sale. Non-performing assets at March 31, ~~2017~~2018, and December 31, ~~2016~~2017, by category were as follows:

	March 31,			December 31,			March 31,			December 31,
	2017			2016			2018			2017
	(In Thousands)						(In Thousands)
Non-performing loans:
One to four family residential real estate	$	2,759		$	2,928		$	2,460		$	3,037
Non-residential and multi-family residential real estate		9,823			9,592			17,351			18,219
Commercial		1,498			1,007			7,166			8,841
Construction		-			-			-			-
Home equity and improvement		875			730			909			590
Consumer Finance		102			91			39			28
Total non-performing loans		15,057			14,348			27,925			30,715

Real estate owned		705			455			1,440			1,532
Other repossessed assets		-			-
Total repossessed assets	$	705			455		$	1,440			1,532

Total Nonperforming assets	$	15,762		$	14,803		$	29,365		$	32,247

Restructured loans, accruing	$	9,771		$	10,544		$	13,722		$	13,770

Total nonperforming assets as a percentage of total assets		0.54	%		0.60	%		0.97	%		1.08	%
Total nonperforming loans as a percentage of total loans*		0.67	%		0.74	%		1.18	%		1.31	%
Total nonperforming assets as a percentage of total loans plus REO*		0.70	%		0.76	%		1.24	%		1.37	%
Allowance for loan losses as a percent of total nonperforming assets		163.19	%		174.86	%		92.86	%		82.75	%

Non-performing loans in the commercial loan category represented ~~0.30%~~1.43% of the total loans in that category at March 31, ~~2017~~2018, compared to ~~0.21%~~1.68% for the same category at December 31, ~~2016.~~2017. Non-performing loans in the ~~commercial~~non-residential and multi-family residential real estate loan category were ~~0.82%~~1.35% of the total loans in this category at March 31, ~~2017~~2018, compared to ~~0.92%~~1.47% at December 31, ~~2016.~~2017. Non-performing loans in the residential loan category represented ~~1.00%~~0.89% of the total loans in that category at March 31, ~~2017~~2018, compared to ~~1.41%~~1.10% for the same category at December 31, ~~2016.~~2017.

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

												For the Three Months Ended March 31, 2018						As of March 31, 2018
	For the Three Months Ended March 31, 2017						As of March 31, 2017					Net
	Net Charge-offs (Recovery)			% of Total Net Charge-offs			Nonaccrual Loans		% of Total Non-Accrual Loans			Charge-offs (Recovery)			% of Total Net Charge-offs			Nonaccrual Loans		% of Total Non- Accrual Loans
	(In Thousands)						(In Thousands)					(In Thousands)						(In Thousands)
Residential	$	(7	)		(3.68	)%	$	2,759		18.32	%	$	(8	)		0.48	%	$	2,460		8.81	%
Construction		-			0.00	%		-		0.00	%		-			0.00	%		-		0.00	%
Commercial real estate		224			117.89	%		9,823		65.24	%		(129	)		7.68	%		17,351		62.13	%
Commercial		(115	)		(60.53	)%		1,498		9.95	%		(1,660	)		98.87	%		7,166		25.66	%
Consumer		67			35.27	%		102		0.68	%		29			(5.30	)%		39		0.14	%
Home equity and improvement		21			11.05	%		875		5.81	%		89			(1.73	)%		909		3.26	%
Total	$	190			100.00	%	$	15,074		100.00	%	$	(1,679	)		100.00	%	$	27,925		100.00	%

												For the Three Months Ended March 31, 2017						As of March 31, 2017
	For the Three Months Ended March 31, 2016						As of March 31, 2016					Net Charge-offs			% of Total Net			Nonaccrual		% of Total Non-
	Net Charge-offs (Recovery)			% of Total Net Charge-offs			Nonaccrual Loans		% of Total Non-Accrual Loans			(Recoveries)			Charge-offs			Loans		Accrual Loans
	(In Thousands)						(In Thousands)					(In Thousands)						(In Thousands)
Residential	$	(31	)		(39.74	)%	$	3,130		17.68	%	$	(7	)		(3.68	)%	$	2,759		18.32	%
Construction		-			0.00	%		-		0.00	%		-			0.00	%		-		0.00	%
Commercial real estate		(164	)		(210.26	)%		10,344		58.42	%		224			117.89	%		9,823		65.24	%
Commercial		317			406.41	%		3,551		20.05	%		(115	)		(60.53	)%		1,498		9.95	%
Consumer		(35	)		(44.87	)%		9		0.05	%
Consumer finance													67			35.27	%		102		0.68	%
Home equity and improvement		(9	)		(11.54	)%		673		3.80	%		21			11.05	%		875		5.81	%
Total	$	78			100.00	%	$	17,707		100.00	%	$	190			100.00	%	$	15,074		100.00	%

	For the Quarter Ended												For the Quarter Ended
	1st 2017		4th 2016			3rd 2016		2nd 2016			1st 2016		1st 2018			4th 2017			3rd 2017		2nd 2017		1st 2017
	(In Thousands)												(In Thousands)

Allowance at beginning of period	$	25,884	$	25,923		$	25,948	$	25,668		$	25,382	$	26,683		$	26,341		$	25,915	$	25,749	$	25,884
Provision for credit losses		55		(149	)		15		53			364		(1,095	)		314			462		2,118		55
Charge-offs:
Residential		49		147			111		37			55		16			170			60		-		49
Commercial real estate		290		-			79		-			13		55			29			-		110		290
Commercial		-		234			26		18			336		97			210			64		2,027		-
Consumer finance		71		53			24		18			-		31			27			20		21		71
Home equity and improvement		54		98			74		66			30		117			55			92		100		54
Total charge-offs		464		532			314		139			434		316			491			236		2,258		464
Recoveries		274		642			274		366			356		1,995			519			200		306		274
Net charge-offs		190		(110	)		40		(227	)		78		(1,679	)		(28	)		36		1,952		190
Ending allowance	$	25,749	$	25,884		$	25,923	$	25,948		$	25,668	$	27,267		$	26,683		$	26,341	$	25,915	$	25,749

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

	March 31, 2017					December 31, 2016					September 30, 2016					June 30, 2016					March 31, 2016					March 31, 2018					December 31, 2017					September 30, 2017					June 30, 2017					March 31, 2017
			Percent of					Percent of					Percent of					Percent of					Percent of					Percent of					Percent of					Percent of					Percent of					Percent of
			total loans					total loans					total loans					total loans					total loans					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			Amount		by category			Amount		by category			Amount		by category			Amount		by category			Amount		by category
	(Dollars In Thousands)																									(Dollars In Thousands)
Residential	$	2,621		11.86	%	$	2,627		10.20	%	$	2,432		10.34	%	$	2,839		10.71	%	$	3,109		11.05	%	$	2,534		11.15	%	$	2,532		11.14	%	$	2,538		11.33	%	$	2,641		11.68	%	$	2,621		11.86	%
Construction		458		8.55	%		450		8.99	%		412		8.76	%		633		8.35	%		489		7.71	%		667		10.19	%		647		10.76	%		578		10.23	%		540		9.91	%		458		8.55	%
Commercial real estate		12,332		51.12	%		12,853		51.13	%		12,787		51.64	%		13,269		51.84	%		13,894		52.37	%		13,756		51.88	%		13,056		50.10	%		12,774		50.38	%		12,329		49.93	%		12,332		51.12	%
Commercial		7,809		21.59	%		7,361		23.05	%		7,879		22.56	%		6,740		22.19	%		5,820		21.85	%		7,838		20.25	%		7,965		21.33	%		8,025		21.32	%		7,973		21.75	%		7,809		21.59	%
Consumer		229		1.19	%		207		0.82	%		216		0.85	%		189		0.86	%		124		0.83	%		263		1.13	%		228		1.18	%		241		1.21	%		233		1.22	%		229		1.19	%
Home equity and improvement		2,300		5.69	%		2,386		5.81	%		2,197		5.85	%		2,278		6.05	%		2,232		6.19	%		2,209		5.40	%		2,255		5.49	%		2,185		5.53	%		2,199		5.51	%		2,300		5.69	%
	$	25,749		100.00	%	$	25,884		100.00	%	$	25,923		100.00	%	$	25,948		100.00	%	$	25,668		100.00	%	$	27,267		100.00	%	$	26,683		100.00	%	$	26,341		100.00	%	$	25,915		100.00	%	$	25,749		100.00	%

	1st Qtr 2017			4th Qtr 2016			3rd Qtr 2016			2nd Qtr 2016			1st Qtr 2016			1st Qtr 2018			4th Qtr 2017			3rd Qtr 2017			2nd Qtr2017			1st Qtr 2017
Allowance for loan losses / loans*		1.15	%		1.33	%		1.35	%		1.39	%		1.41	%		1.16	%		1.14	%		1.16	%		1.15	%		1.15	%
Allowance for loan losses / non-performing assets		163.19	%		174.86	%		137.14	%		148.26	%		136.40	%		92.86	%		82.75	%		88.74	%		83.51	%		163.19	%
Allowance for loan losses / non-performing loans		170.82	%		180.40	%		142.45	%		158.00	%		144.96	%		97.64	%		86.87	%		90.36	%		85.36	%		171.82	%
Non-performing assets / loans plus REO*		0.70	%		0.76	%		0.98	%		0.94	%		1.03	%		1.24	%		1.37	%		1.30	%		1.38	%		0.70	%
Non-performing assets / total assets		0.54	%		0.60	%		0.77	%		0.73	%		0.80	%		0.97	%		1.08	%		1.01	%		1.07	%		0.54	%
Net charge-offs / average loans (annualized)		0.04	%		-0.02	%		0.01	%		-0.05	%		0.02	%		(0.29	)%		0.00	%		0.01	%		0.35	%		0.04	%

Total non-interest income increased ~~$1.9 million~~$154,000 in the first quarter of ~~2017~~2018 to ~~$10.5~~$10.7 million from ~~$8.6~~$10.5 million for the same period in ~~2016.~~2017. The first quarter 2017 included a $1.5 million enhancement value gain related to the purchase of bank owned life insurance. Excluding the enhancement gain, non-interest income increased $1.7 million.

Service Fees.Service fees and other charges increased by ~~$116,000~~$371,000 or ~~4.5%~~13.4% in the first quarter of ~~2017~~2018 compared to the same period in ~~2016~~2017. This is due mainly ~~due to increased deposit accounts and balances.~~

First Federal’s overdraft privilege program generally provides for the automatic payment of modest overdraft limits on all accounts deemed to be in good standing when the account is accessed using paper-based check processing, a teller withdrawal, a point-of-sale terminal, an ACH transaction, an online banking or voice-response transfer, or an ATM. To be in good standing, an account must be brought to a positive balance within a 30-day period and have not excessively used the overdraft privilege program. Overdraft limits are established for all customers without discrimination using a risk assessment approach for each account classification. The approach includes a systematic review and evaluation of the normal deposit flows made to each account classification to establish reasonable and prudent negative balance limits that would be routinely repaid by normal, expected and reoccurring deposits. The risk assessment by portfolio approach assumes a minimal degree of undetermined credit risk associated with unidentified individual accounts that are overdrawn for 30 or more days. Consumer accounts overdrawn for more than 60 days are automatically charged off. Fees are charged as a one-time fee per occurrence, up to five charges per day, and the fee charged for an item that is paid is equal to the ~~fee charged~~inclusion of operations from CSB for a ~~non-sufficient fund item that is returned.~~full quarter in 2018 versus 2017.

Overdrawn balances, net of allowance for losses, are reflected as loans on First Defiance’s balance sheet. The fees charged for this service are established based both on the return of processing costs plus a profit, and on the level of fees charged by competitors in the Company’s market area for similar services. These fees are considered to be compensation for providing a service to the customer and therefore deemed to be noninterest income rather than interest income. Fee income recorded for the quarters ending March 31, ~~2017~~2018 and ~~2016~~2017 related to the overdraft privilege product, net of adjustments to the allowance for uncollectible overdrafts, ~~were~~was $619,000 and $569,000, ~~and $657,000,~~ respectively. Accounts charged off are included in noninterest expense. The allowance for uncollectible overdrafts was $17,000 at March 31, 2018, $24,000 at December 31, 2017, and $12,000 at March 31, ~~2017, $14,000 at December 31, 2016 and $15,000 at March 31, 2016.~~2017.

Mortgage Banking Activity. Total revenue from the sale and servicing of mortgage loans ~~increased $199,000 to~~was flat at $1.7 million ~~for~~in both the first quarter of ~~2017 compared to $1.5 million for the same period of 2016 mostly due to higher mortgage volumes in the first quarter~~2018 and 2017.Gains ~~realized~~ from the sale of mortgage loans ~~increased~~also remained consistent at $1.1 million in the first quarters of 2018 and 2017. Mortgage loan servicing revenue was $944,000 in the first quarter of ~~2017 to $1.1 million~~2018, up slightly from ~~$994,000 in the first quarter of 2016. The mortgage loan servicing revenue increased $57,000 to~~ $934,000 in the first quarter of ~~2017 compared to $877,000~~2017. First Defiance had a positive change in the ~~same period in 2016. The Company recorded a positive~~ valuation adjustment ~~of $33,000 on~~in mortgage servicing ~~rights~~assets of $37,000 in the first quarter of ~~2017~~2018 compared towith a ~~negative valuation~~positive adjustment of ~~$21,000~~$33,000 in the first quarter of ~~2016.~~2017.

Insurance Commission Income. Incomefrom the sale of insurance ~~and investment~~ products ~~was~~were $4.3 million in the first quarter of 2018, up from $3.5 million in the first quarter of ~~2017, an~~2017.The increase is mainly driven by the operations of ~~$321,000 from $3.1~~the Corporate One merger that was complete on April 1, 2017.The first quarter of 2018 included contingent revenues of $1.0 million, incompared to $1.2 million during the first quarter of 2016. First Defiance’s insurance subsidiary, First Insurance, typically recognizes contingent revenues during the first quarter. These revenues are bonuses paid by insurance carriers when the Company achieves certain loss ratios or growth targets. In the first quarter of 2017, First Insurance earned $1.2 million of contingent income compared to $799,000 for the first quarter of 2016.2017.

Bank-Owned Life ~~Insurance.~~Insurance.Income from bank-owned life insurance was $400,000 for the first quarter of 2018, a decrease of $1.4 million from $1.8 million in the first quarter of ~~2017, an increase of $1.6 million from $231,000 in the first quarter of 2016.~~2017. In February 2017, the Company surrendered an underperforming BOLI policy and recorded a tax penalty of $1.7 million (recorded in income tax expense) and purchased a new BOLI policy receiving a $1.5 million enhancement value gain.

Non-interest expense increased $109,000 to ~~$23.1~~$23.3 million for the first quarter of ~~2017~~2018 compared to ~~$17.3~~$23.1 million for the same period in ~~2016. Included in the~~2017. The first quarter of 2017 ~~are~~included expenses of $3.6 million ofrelated to the CSB merger and conversion. Excluding the 2017 merger and conversion ~~related costs associated with~~expenses, the ~~acquisition~~increase in non-interest expenses was $3.7 million, mostly due to the additional expenses from the operations of ~~CSB.~~CSB and Corporate One mergers completed in 2017.

Compensation and Benefits. Compensation and benefits ~~increased~~decreased to $13.2 million in the first quarter of 2018, compared to $14.3 million ~~for~~in the first quarter ~~ended March 31, 2017 from $10.2 million for the same period~~of 2017. The decrease in ~~2016. The increase~~compensation and benefits year over year is mainly ~~attributable~~due to the first quarter of 2017 including $2.8 million of merger costs to settle employment and benefit agreements, ~~and for~~while the first quarter of 2018 includes a full quarter of personnel expenses ~~related~~for the acquired CSB and Corporate One locations.

Occupancy.Occupancy expense increased $234,000 to ~~operating~~$2.1 million for the ~~new~~quarter ended March 31, 2018, compared to $1.8 million for the same period in 2017, again mainly due to the CSB merger resulting in additional locations.

Other Non-Interest Expenses. Other non-interest ~~expenses~~expense of $4.6 million in the first quarter of 2018 increased ~~$1.1 to~~from $4.0 million ~~for~~in the first quarter ~~ended March 31,~~of 2017. Other expenses in the first quarter 2018 include OREO write-downs of $544,000, while the first quarter 2017 ~~from $2.9 million for the same period in 2016. The increase in other non-interest expense is primarily due to~~included $667,000 of CSB merger and conversion related ~~costs of $667,000.~~costs.

The efficiency ratio, considering tax equivalent interest income and excluding securities gains and losses, for the first quarter of ~~2017~~2018 was ~~70.85%~~63.48% compared to ~~61.32%~~70.85% for the first quarter of ~~2016. The first quarter of 2017 was negatively impacted by the aforementioned merger and conversion related costs.~~2017.

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

First Defiance computes federal income tax expense in accordance with ASC Topic 740, Subtopic 942, which resulted in an effective tax rate of ~~42.9%~~17.5% for the quarter ended March 31, ~~2017~~2018 compared to ~~29.6%~~42.9% for the same period in ~~2016.~~2017. The tax rate for 2018 is lower than the statutory 21% tax rate for the Company mainly because of investments in tax-exempt securities. The earnings on tax-exempt securities are not subject to federal income tax. The tax rate for 2017 is higher than the statutory 35% tax rate due to the $1.7 million tax penalty related to the surrender of a BOLI policy. The tax rate for 2016 is lower than the statutory 35% tax rate for the Company mainly because of investments in tax-exempt securities. The earnings on tax-exempt securities are not subject to federal income tax.

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

First Defiance had ~~$8.3~~$8.9 million of cash provided by operating activities during the first three months of ~~2017.~~2018. The Company's cash provided by operating activities resulted from the origination of loans held for sale and net income mostly offset by the proceeds on the sale of loans.

At March 31, ~~2017,~~2018, First Federal had ~~$75.3~~$228.0 million in outstanding loan commitments and loans in process to be funded generally within the next six months and an additional ~~$552.5~~$486.2 million committed under existing consumer and commercial lines of credit and standby letters of credit. Also at that date, First Federal had commitments to sell ~~$24.0~~$16.7 million of loans held-for-sale. First Defiance believes that it has adequate resources to fund commitments as they arise and that it can adjust the rate on savings certificates to retain deposits in changing interest rate environments. If First Defiance requires funds beyond its internal funding capabilities, advances from the FHLB of Cincinnati and other financial institutions are available.

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

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

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

The Company met each of the well capitalized ratio guidelines at March 31, ~~2017.~~2018. The following table indicates the capital ratios for First Defiance and First Federal at March 31, ~~2017~~2018, and December 31, ~~2016.~~2017. (In Thousands):

March 31, 2017
March 31, 2018																March 31, 2018
	Actual					Minimum Required for Adequately Capitalized					Minimum Required for Well Capitalized						Actual					Minimum Required for Adequately Capitalized					Minimum Required for Well Capitalized
	Amount		Ratio			Amount		Ratio(1)			Amount		Ratio				Amount		Ratio			Amount		Ratio(1)			Amount		Ratio
CET1 Capital (to Risk-Weighted Assets) (2)																CET1 Capital (to Risk-Weighted Assets) (2)
Consolidated	$	262,067		10.13	%	$	116,445		4.5	%		N/A		N/A			$	282,861		10.62	%	$	119,867		4.5	%		N/A		N/A
First Federal	$	284,119		10.98	%	$	116,464		4.5	%	$	168,226		6.5	%		$	308,709		11.60	%	$	119,753		4.5	%	$	172,977		6.5	%

Tier 1 Capital (1)
Consolidated	$	297,067		10.35	%	$	114,845		4.0	%		N/A		N/A			$	317,861		11.03	%	$	115,266		4.0	%		N/A		N/A
First Federal	$	284,119		9.91	%	$	114,660		4.0	%	$	143,325		5.0	%		$	308,709		10.60	%	$	114,995		4.0	%	$	143,743		5.0	%

Tier 1 Capital (to Risk Weighted Assets) (1)																Tier 1 Capital (to Risk Weighted Assets) (1)
Consolidated	$	297,067		11.48	%	$	155,260		6.0	%		N/A		N/A			$	317,861		11.93	%	$	159,823		6.0	%		N/A		N/A
First Federal	$	284,119		10.98	%	$	155,286		6.0	%	$	207,048		8.0	%		$	308,709		11.60	%	$	159,671		6.0	%	$	212,895		8.0	%

Total Capital (to Risk Weighted Assets) (1)																Total Capital (to Risk Weighted Assets) (1)
Consolidated	$	322,816		12.48	%	$	207,014		8.0	%		N/A		N/A			$	345,128		12.96	%	$	213,097		8.0	%		N/A		N/A
First Federal	$	309,868		11.97	%	$	207,048		8.0	%	$	258,809		10.0	%		$	335,976		12.63	%	$	212,895		8.0	%	$	266,119		10.0	%

As discussed in detail in the Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2017, First Defiance’s ability to maximize net income is dependent on management’s ability to plan and control net interest income through management of the pricing and mix of assets and liabilities. Because a large portion of assets and liabilities of First Defiance are monetary in nature, changes in interest rates and monetary or fiscal policy affect its financial condition and can have significant impact on the net income of the Company. First Defiance does not use off-balance sheet derivatives to enhance its risk management, nor does it engage in trading activities beyond the sale of mortgage loans.

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

The table below presents, for the twelve months subsequent to March 31, ~~2017~~2018 and December 31, ~~2016,~~2017, an estimate of the change in net interest income that would result from a gradual (ramp) and immediate (shock) change in interest rates, moving in a parallel fashion over the entire yield curve, relative to the measured base case scenario. Based on our net interest income simulation as of March 31, ~~2017,~~2018, net interest income sensitivity to changes in interest rates for the twelve months subsequent to March 31, ~~2017 was mainly neutral~~2018, remained relatively stable for the ramp and shock compared to the sensitivity profile for the twelve months subsequent to December 31, ~~2016.~~2017.

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

The results of all the simulation scenarios are within the board mandated guidelines as of March 31, ~~2017~~2018, except for the down 100 basis points over the first twelve months in a static and dynamic-shock balance sheet as well as in the down 100 basis points for a cumulative twenty-four months in a static and dynamic ramp balance sheet. Management is reviewing the board policy limits in all scenarios to determine if they are adequate and if so, any measures to be taken to bring the current results back into alignment with board guidelines.

In addition to the simulation analysis, First Defiance also uses an economic value of equity (“EVE”) analysis to measure risk in the balance sheet incorporating all cash flows over the estimated remaining life of all balance sheet positions. The EVE analysis generally calculates the net present value of First Federal’s assets and liabilities in rate shock environments that range from -400 basis points to +400 basis points. However, the likelihood of a decrease in rates beyond 100 basis points as of March 31, ~~2017~~2018, was considered to be unlikely given the current interest rate environment and, therefore, was not included in this analysis. The results of this analysis are reflected in the following tables for the three months ended March 31, ~~2017~~2018, and the year-ended December 31, ~~2016.~~2017.

December 31, 2016
March 31, 2018									March 31, 2018
Economic Value of Equity
Change in Rates	$ Amount		$ Change			% Change				$ Amount		$ Change			% Change
	(Dollars in Thousands)									(Dollars in Thousands)
+400 bp		569,397		85,791			17.74	%			713,388		64,905			10.01	%
+ 300 bp		553,285		69,679			14.41	%			701,930		53,448			8.24	%
+ 200 bp		534,478		50,873			10.52	%			687,487		39,005			6.01	%
+ 100 bp		512,132		28,526			5.90	%			671,285		22,802			3.52	%
0 bp		483,606		-			-				648,482		-			-
- 100 bp		429,266		(34,339	)		(7.10	)%			619,338		(29,144	)		(4.49	)%

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

An evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of ~~1934)~~1934, as amended) as of March 31, ~~2017.~~2018. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

No changes occurred in the Company’s internal controls over financial reporting during the quarter ended March 31, ~~2017~~2018, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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

There are no material changes from the risk factors set forth under Part I, Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017.

The Company ~~has~~had no unregistered sales of equity securities during the quarter ended March 31, ~~2017.~~2018.

The following table provides information regarding First Defiance’s purchases of its common stock during the three-month period ended March 31, ~~2017:~~2018:

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

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

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

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

		Page Number
PART I.-FINANCIAL INFORMATION

Item 1.	Consolidated Condensed Financial Statements (Unaudited):

	Consolidated Condensed Statements of Financial Condition – March 31, ~~2017~~2018 and December 31, ~~2016~~2017	2

	Consolidated Condensed Statements of Income - Three months ended March 31, ~~2017~~2018 and ~~2016~~2017	4

	Consolidated Condensed Statements of Comprehensive Income – Three months ended March 31, ~~2017~~2018 and ~~2016~~2017	5

	Consolidated Condensed Statements of Changes in Stockholders’ Equity – Three months ended March 31, ~~2017~~2018 and ~~2016~~2017	6

	Consolidated Condensed Statements of Cash Flows - Three months ended March 31, ~~2017~~2018 and ~~2016~~ 2017	7	7

	Notes to Consolidated Condensed Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	52

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	7372

Item 4.	Controls and Procedures	7574

PART II-OTHER INFORMATION:

Item 1.	Legal Proceedings	7675

Item 1A.	Risk Factors	7675

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7675

Item 3.	Defaults upon Senior Securities	7675

Item 4.	Mine Safety Disclosures	7675

Item 5.	Other Information	7775

Item 6.	Exhibits	7776

	Signatures	7877

	~~Three Months ended~~
	~~March 31, 2017~~		~~March 31, 2016~~
~~Expected average risk-free rate~~		-		~~2.24~~	%
~~Expected average life~~		-		~~10.00 years~~
~~Expected volatility~~		-		~~41.00~~	%
~~Expected dividend yield~~		-		~~2.33~~	%

	First Defiance Financial Corp.
	~~(Exact name of registrant as specified in its charter)~~

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

Balance at January 1, 2018	$	-		10,156,041	$	127	$	160,940		$	217		$	262,900		$	(50,898	)	$	373,286
Net income														11,737						11,737
Other comprehensive loss											(2,810	)								(2,810	)
Adoption of ASU 2018-02 – See Note 2											47			(47	)					-
Stock based compensation expenses								84												84
Shares issued under stock option plan, net of 612 repurchased and retired				5,638				(33	)					(36	)		125			56
Restricted share activity under stock incentive plans net of 8,909 repurchased and retired				19,848				(458	)					(81	)		426			(113	)
Shares issued from direct stock sales				372				14									7			21
Common stock dividends declared														(3,047	)					(3,047	)
Balance at March 31, 2018	$	-		10,181,899	$	127	$	160,547		$	(2,546	)	$	271,426		$	(50,340	)	$	379,214

Balance at January 1, 2017	$	-		8,983,206	$	127	$	126,390		$	215		$	240,591		$	(74,306	)	$	293,017
Net income														5,140						5,140
Other comprehensive income											1,027									1,027
Stock based compensation expenses								45												45
Shares issued under stock option plan, net of 6,962 repurchased and retired				588				22						(39	)		151			134
Capital stock issuance				1,139,502				33,792									22,740			56,532
Restricted share activity under stock incentive plans				19,416				138									387			525
Shares issued from direct stock sales				340				10									7			17
Common stock dividends declared														(2,246	)					(2,246	)
Balance at March 31, 2017	$	-		10,143,052	$	127	$	160,397		$	1,242		$	243,446		$	(51,021	)	$	354,191

			Fair Value Measurements at March 31, 2017 (In Thousands)
	Carrying Value		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	169,998	$	169,998	$	169,998	$	-	$	-
Investment securities		261,372		261,374		1		261,373		-
Federal Home Loan Bank Stock		15,992		N/A		N/A		N/A		N/A
Loans, net, including loans held for sale		2,221,070		2,207,503		-		8,425		2,199,078
Accrued interest receivable		8,872		8,872		5		1,465		7,402

Financial Liabilities:
Deposits	$	2,373,789	$	2,380,541	$	579,943	$	1,800,598	$	-
Advances from Federal Home Loan Bank		105,104		104,500		-		104,500		-
Securities sold under repurchase agreements		24,891		24,891		-		24,891		-
Subordinated debentures		36,083		34,735		-		-		34,735

			Fair Value Measurements at December 31, 2016 (In Thousands)
	Carrying Value		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	99,003	$	99,003	$	99,003	$	-	$	-
Investment securities		251,176		251,179		2		251,177		-
Federal Home Loan Bank Stock		13,798		N/A		N/A		N/A		N/A
Loans, net, including loans held for sale		1,924,210		1,911,280		-		9,917		1,901,363
Accrued interest receivable		6,760		6,760		9		867		5,884

Financial Liabilities:
Deposits	$	1,981,628	$	1,987,723	$	487,663	$	1,500,060	$	-
Advances from Federal Home Loan Bank		103,943		103,019		-		103,019		-
Securities sold under repurchase agreements		31,816		31,816		-		31,816		-
Subordinated debentures		36,083		34,718		-		-		34,718

	Options Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in 000’s)
Options outstanding, January 1, 2017		54,750		$	22.21
Forfeited or cancelled		-			-
Exercised		(7,550	)		22.89
Granted		-			-
Options outstanding, March 31, 2017		47,200		$	22.12		3.65	$	1,300
Vested or expected to vest at March 31, 2017		47,200		$	22.12		3.65	$	1,300
Exercisable at March 31, 2017		35,100		$	18.50		2.22	$	1,096

	Options Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in 000’s)
Options outstanding, January 1, 2018		43,450		$	21.62
Forfeited or cancelled		-			-
Exercised		(6,250	)		15.53
Granted		-			-
Options outstanding, March 31, 2018		37,200		$	22.60		3.32	$	1,291
Vested or expected to vest at March 31, 2018		37,200		$	22.60		3.32	$	1,291
Exercisable at March 31, 2018		29,450		$	19.74		2.36	$	1,107

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
	(In Thousands)
Held-to-Maturity Securities*:
FHLMC certificates	$	9	$	-	$	-	$	9
FNMA certificates		38		-		-		38
GNMA certificates		15		-		-		15
Obligations of state and political subdivisions		580		-		-		580
Total Held-to Maturity	$	642	$	-	$	-	$	642

	Duration of Unrealized Loss Position
	Less than 12 Months					12 Months or Longer					Total
			Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loses
	(In Thousands)
At March 31, 2017
Available-for-sale securities:
Obligations of U.S. government corporations and agencies	$	3,954	$	(46	)	$	-	$	-		$	3,954	$	(46	)
Mortgage-backed securities-residential		38,918		(731	)		-		-			38,918		(731	)
Collateralized mortgage obligations		26,997		(422	)	$	1,187	$	(47	)		28,184		(469	)
Obligations of state and political subdivisions		13,501		(451	)		-		-			13,501		(451	)
Corporate bonds		-		-			995		(5	)		995		(5	)
Total temporarily impaired securities	$	83,370	$	(1,650	)	$	2,182	$	(52	)	$	85,552	$	(1,702	)

	Loans Modified as a TDR for the Three Months Ended March 31, 2017 ($ in thousands)			Loans Modified as a TDR for the Three Months Ended March 31, 2016 ($ in thousands)
Troubled Debt Restructurings	Number of Loans	Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)
1-4 Family Owner Occupied	4	$	100		1	$	9
1-4 Family Non Owner Occupied	2		84		2		127
CRE Owner Occupied	1		119		0		-
CRE Non Owner Occupied	0		-		0		-
Agriculture Land	0		-		0		-
Other CRE	0		-		0		-
Commercial Working Capital	0		-		0		-
Commercial Other	1		46		0		-
Home Equity and Improvement	1		25		5		297
Consumer Finance	2		15		2		5
Total	11	$	389		10	$	438

	Loans Modified as a TDR for the Three Months Ended March 31, 2018 ($ in thousands)				Loans Modified as a TDR for the Three Months Ended March 31, 2017 ($ in thousands)
Troubled Debt Restructurings	Number of Loans		Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)

1-4 Family Owner Occupied		3	$	145		4	$	100
1-4 Family Non Owner Occupied		1		69		2		84
Multi Family		0		-		0		-
CRE Owner Occupied		2		650		1		119
CRE Non Owner Occupied		0		-		0		-
Agriculture Land		0		-		0		-
Other CRE		0		-		0		-
Commercial Working Capital		4		2,114		0		-
Commercial Other		0		-		1		46
Home Equity and Improvement		0		-		1		25
Consumer Finance		0		-		2		15
Total		10	$	2,978		11	$	389

	Three Months Ended March 31, 2018 ($ in thousands)				Three Months Ended March 31, 2017 ($ in thousands)
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans		Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)

1-4 Family Owner Occupied		0	$	-		0	$	-
1-4 Family Non Owner Occupied		0		-		0		-
CRE Owner Occupied		0		-		0		-
CRE Non Owner Occupied		0		-		0		-
Agriculture Land		0		-		0		-
Other CRE		0		-		0		-
Commercial Working Capital or Other		0		-		0		-
Commercial Other		1		197		0		-
Home Equity and Improvement		0		-		0		-
Consumer Finance		0		-		0		-
Total		1	$	197		0	$	-

	March 31, 2017
1-4 Family Residential Real Estate	$	1,541
Commercial Real Estate Loans		3,837
Commercial		742
Consumer		3
Total Outstanding Balance	$	6,123
Recorded Investment, net of allowance of $0	$	4,132

	2017
Balance at January 1	$	-
New Loans Purchased		1,034
Accretion of Income		-
Reclassifications from Non-accretable Difference Charge-off of Accretable Yield		-
Balance at March 31	$	1,034

Cash Flows Expected to be Collected at Acquisition		$	5,157
Fair Value of Acquired Loans at Acquisition		$	4,123

	March 31, 2017				December 31, 2016
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	49,810	$	125,148	$	34,432	$	106,356
Unused lines of credit		25,487		420,597		14,384		400,542
Standby letters of credit		-		6,719		-		9,668
Total	$	75,297	$	552,464	$	48,816	$	516,566

	February 24, 2017
	(In Thousands)

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

Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed:
Cash and Cash Equivalents		35,411
Federal Funds Sold		2,769
Securities		4,338
Loans		284,867
FHLB Stock of Cincinnati and Other Stock		2,194
Office Properties and Equipment		5,455
Intangible Assets		4,900
Bank-Owned Life Insurance		8,168
Accrued Interest Receivable and Other Assets		(3,606	)
Deposits – Non-Interest Bearing		(56,061	)
Deposits – Interest Bearing		(251,931	)
Advances from FHLB		(1,403	)
Accrued Interest Payable and Other Liabilities		(2,411	)
Total Identifiable Net Assets		39,902

Goodwill	$	28,970

	Pro Forma Three		Pro Forma Three
	Months Ended		Months Ended
	March 31, 2017		March 31, 2016
	(In Thousands)

Net Interest Income	$	23,837	$	22,798
Provision for Loan Losses		55		386
Non-Interest Income		10,828		9,121
Non-Interest Expense		21,234		20,103
Income Before Income Taxes		13,376		11,430
Income Tax Expense		5,141		3,413
Net Income	$	8,235	$	8,017
Diluted Earnings Per Share	$	0.81	$	0.79

Net Interest Income Sensitivity Profile
	Impact on Future Annual Net Interest Income
(dollars in thousands)	March 31, 2017					December 31, 2016
Gradual Change in Interest Rates
+200	$	2,395		2.38	%	$	1,970		2.32	%
+100		1,172		1.16	%		972		1.14	%
-100		(3,290	)	-3.27	%		(2,201	)	-2.59	%

Immediate Change in Interest Rates
+200	$	4,590		4.56	%	$	4,236		4.99	%
+100		2,111		2.10	%		2,131		2.51	%
-100		(6,401	)	-6.36	%		(4,132	)	-4.87	%

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of of Shares Purchased ~~Purchased~~ as Part of Publicly Announced Plans ~~Plans~~ or Programs		Maximum Number of Shares ~~(or~~ ~~Approximate Dollar~~ ~~Value)~~ that May Yet Be Be Purchased Under the ~~the~~ Plans or Programs(1)
Beginning Balance, December 31, ~~2016~~2017								377,500
January 1 – January 31, ~~2017~~2018		-	$	-		-		377,500
February 1 – February 28, ~~2017~~2018		-		-		-		377,500
March 1 – March 31, ~~2017~~2018		-		-		-		377,500
Total		-	$	-		-		377,500

	~~Exhibit 2.1~~		~~Agreement and plan of merger, dated August 23, 2016, by and between First Defiance and Commercial Bancshares, Inc. (1)~~
	~~Exhibit 2.2~~		~~Amendment to Agreement and Plan of Merger, dated October 31, 2016, by and between First Defiance and Commercial Bancshares, Inc. (2)~~
	Exhibit 3.1		Articles of Incorporation of First Defiance, ~~(3)~~as amended (1)
	Exhibit 3.2		Code of Regulations of First Defiance ~~(3)~~(1)
Exhibit 10.1	~~Exhibit 3.3~~		~~Certificate of~~First Amendment to ~~the Articles of Incorporation of First Defiance (4)~~Donald P. Hileman’s Employment Agreement (2)
Exhibit 10.2	First Amendment to Kevin T. Thompson’s Employment Agreement (2)
Exhibit 10.3	Change of Control and Non-Solicitation Agreement with John R. Reisner (3)
Exhibit 10.4	Change of Control and Non-Compete Agreement with Gregory R. Allen
Exhibit 31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	Exhibit 31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	Exhibit 32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	Exhibit 32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	Exhibit 101		The following financial information from the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, ~~2017~~2018 is formatted in eXtensible Business Reporting Language (“XBRL”): (i) Unaudited Consolidated Condensed Statements of Financial Condition at March 31, ~~2017~~2018 and December 31, ~~2016,~~2017, (ii) Unaudited Consolidated Condensed Statements of Income for the Three Months ended March 31, ~~2017~~2018 and ~~2016~~2017 (iii) Unaudited Consolidated Condensed Statements of Comprehensive Income for the Three Months ended March 31, ~~2017~~2018 and ~~2016,~~2017, (iv) Unaudited Consolidated Condensed Statements of Changes in Stockholders’ Equity for the Three Months ended March 31, ~~2017~~2018 and ~~2016,~~2017, (v) Unaudited Consolidated Condensed Statements of Cash Flows for the Three Months ended March 31, ~~2017~~2018 and ~~2016~~2017 and (vi) Notes to Unaudited Consolidated Condensed Financial Statements.

	First Defiance Financial Corp.
	(Registrant)

Date:May ~~10, 2017~~8, 2018	By:	/s/ Donald P. Hileman
		Donald P. Hileman
		President and
		Chief Executive Officer

Date:May ~~10, 2017~~8, 2018	By:	/s/ Kevin T. Thompson
		Kevin T. Thompson
		Executive Vice President and
		Chief Financial Officer