~~(1)Share and per share data has been adjusted to reflect a 2-for-1 stock split on July 12, 2018.~~

(1) Amounts are included in gains on sale or call of securities on the consolidated condensed statements of income. Income tax expense associated with the reclassification adjustments, included in federal income taxes, for the three months ended September 30, 2018 and 2017 was $16 and $55, respectively. Income tax expense associated with the reclassification adjustments, included in federal income taxes, for the nine months ended September 30, 2018 and 2017 was $16 and $148, respectively.

										Accumulated																					Accumulated
			Common				Additional			Other									Total					Common				Additional			Other									Total
	Preferred		Stock		Common		Paid-In			Comprehensive			Retained			Treasury			Stockholders’			Preferred		Stock		Common		Paid-In			Comprehensive			Retained			Treasury			Stockholders’
	Stock		Shares⁽¹⁾		Stock		Capital			Income			Earnings			Stock			Equity			Stock		Shares⁽¹⁾		Stock		Capital			Income			Earnings			Stock			Equity

Balance at January 1, 2018	$	-		20,312,082	$	127	$	160,940		$	217		$	262,900		$	(50,898	)	$	373,286
Balance at December 31, 2017																						$	-		20,312,082	$	127	$	160,940		$	217		$	262,900		$	(50,898	)	$	373,286
Net income														34,152						34,152															11,737						11,737
Other comprehensive loss											(5,185	)								(5,185	)											(2,810	)								(2,810	)
Adoption of ASU 2018-02 – See Note 2											47			(47	)					-												47			(47	)					-
Stock based compensation expenses								295												295									84												84
Shares issued under stock option plan, net of 8,872 repurchased and retired				38,628				(93	)					(270	)		474			111
Shares issued under stock option plan, net of 1,224 repurchased and retired																									11,276				(33	)					(36	)		125			56
Restricted share activity under stock incentive plans net of 17,818 repurchased and retired				48,300				(14	)					(201	)		512			297					39,696				(458	)					(81	)		426			(113	)
Shares issued from direct stock sales				2,451				51									24			75					744				14									7			21
Common stock dividends declared														(9,574	)					(9,574	)														(3,047	)					(3,047	)
Balance at September 30, 2018	$	-		20,401,461	$	127	$	161,179		$	(4,921	)	$	286,960		$	(49,888	)	$	393,457





Balance at January 1, 2017	$	-		17,966,412	$	127	$	126,390		$	215		$	240,592		$	(74,306	)	$	293,018
Balance at March 31, 2018																						$	-		20,363,798	$	127	$	160,547		$	(2,546	)	$	271,426		$	(50,340	)	$	379,214
Net income														22,869						22,869															11,109						11,109
Other comprehensive income											1,923									1,923
Other comprehensive loss																																(689	)								(689	)
Stock based compensation expenses								133												133									88												88
Shares issued under stock option plan, net of 15,014 repurchased and retired				8,086				51						(83	)		230			198
Capital stock issuance				2,279,004				33,792									22,740			56,532
Restricted share activity under stock incentive plans				42,754				254						(17	)		280			517
Shares issued under stock option plan, net of 7,648 repurchased and retired																									27,352				(60	)					(234	)		349			55
Restricted share activity under stock incentive plans net of 0 repurchased and retired																									4,104				253						(120	)		40			173
Shares issued from direct stock sales				2,112				33									21			54					924				19									10			29
Common stock dividends declared														(7,320	)					(7,320	)														(3,059	)					(3,059	)
Balance at September 30, 2017	$	-		20,298,368	$	127	$	160,653		$	2,138		$	256,041		$	(51,035	)	$	367,924

Balance at June 30, 2018																						$	-		20,396,178	$	127	$	160,847		$	(3,235	)	$	279,122		$	(49,941	)	$	386,920

	Nine Months Ended						Six Months Ended
	September 30,						June 30,
	2018			2017			2019			2018
Operating Activities
Net income	$	34,152		$	22,869		$	23,681		$	22,846
Items not requiring (providing) cash:
Provision for loan losses		704			2,635			494			(672	)
Depreciation		2,688			2,674			2,073			1,719
Amortization of mortgage servicing rights, net of impairment recoveries		918			1,080
Amortization of mortgage servicing rights, net of impairment charges/recoveries								980			586
Amortization of core deposit and other intangible assets		998			931			575			679
Net accretion of premiums and discounts on loans and deposits		(238	)		(602	)		(450	)		(192	)
Amortization of premiums and discounts on securities		905			935			633			588
Change in deferred taxes		224			220			(246	)		70
Proceeds from the sale of loans held for sale		161,185			157,127			99,438			100,481
Originations of loans held for sale		(160,655	)		(157,321	)		(104,974	)		(103,730	)
Gain from sale of loans		(4,044	)		(3,749	)		(3,186	)		(2,731	)
Gain from sale or call of securities		(76	)		(425	)
Loss on sale or disposal of premises and equipment		13			48
Loss on sale or write down of property plant and equipment								10			-
Gain/loss on sale / write-down of real estate and other assets held for sale		529			(57	)		278			529
Stock option expense		295			133			266			172
Restricted stock expense		297			517
Restricted stock (income)/expense								(239	)		60
Income from bank owned life insurance		(1,365	)		(2,666	)		(919	)		(966	)
Excess tax benefit on stock compensation plans		(162	)		(168	)		(106	)		(158	)
Changes in:
Accrued interest receivable		(2,552	)		(1,782	)		(1,130	)		(769	)
Other assets		(2,985	)		(2,743	)		(5,417	)		(2,219	)
Other liabilities		2,187			2,348			1,246			(3,382	)
Net cash provided by operating activities		33,018			22,004			13,007			12,911

Investing Activities
Proceeds from maturities of held-to-maturity securities		45			48			38			41
Proceeds from maturities, calls and pay-downs of available-for-sale securities		19,916			20,339			16,432			12,519
Proceeds from sale of premises and equipment, real estate and other assets held for sale		482			1,028			1,073			343
Proceeds from the sale of available-for-sale securities		1,944			18,047
Proceeds from sale of non-mortgage loans		28,277			19,142			14,378			14,086
Purchases of available-for-sale securities		(51,535	)		(41,235	)		(11,211	)		(42,839	)
Proceeds from Federal Home Loan stock redemption		1,775			-			2,302			3
Net cash received in acquisitions		-			19,359
Proceeds from sale of bank owned life insurance								-			17,689
Purchases of premises and equipment, net								(1,372	)		(1,946	)
Investment in bank owned life insurance		-			(20,000	)		(6,600	)		-
Proceeds from bank owned life insurance death benefit		336			-			93			336
Proceeds from sale of bank owned life insurance		17,689			-
Purchase of portfolio mortgage loans		-			(11,476	)
Purchases of premises and equipment, net		(2,911	)		(2,491	)
Net increase in loans receivable		(136,083	)		(59,339	)		(98,035	)		(49,941	)
Net cash used by investing activities		(120,065	)		(56,578	)		(82,902	)		(49,709	)

Financing Activities
Net increase in deposits and advance payments by borrowers								59,652			53,612
Repayment of Federal Home Loan Bank advances								(35,062	)		(28,557	)
Proceeds from Federal Home Loan Bank advances								35,000			30,000
Net change in Federal Home Loan Bank advances								20,051			-
Decrease in securities sold under repurchase agreements								(2,677	)		(19,120	)
Net cash paid for repurchase of common stock								(15,147	)		-
Proceeds from exercise of stock options								191			111
Proceeds from direct stock sales								57			50
Cash dividends paid on common stock								(7,535	)		(6,106	)
Net cash provided by financing activities								54,530			29,990
Increase in cash and cash equivalents								(15,365	)		(6,808	)
Cash and cash equivalents at beginning of period								98,962			113,693
Cash and cash equivalents at end of period							$	83,597		$	106,885

Supplemental cash flow information:
Interest paid							$	11,811		$	6,901
Income taxes paid							$	4,200		$	5,250
Initial recognition of right-of-use asset							$	8,808		$	-
Initial recognition of lease liability							$	9,339		$	-
Transfers from loans to real estate and other assets held for sale							$	146		$	930
Securities purchased but not yet settled							$	-		$	397

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~~community banking. It attracts deposits from the general public through its offices and ~~using~~website, and uses 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 real estate ~~non-residential~~loans, commercial real estate loans, commercial loans, home improvement and home equity loans and consumer ~~loans and providing a broad range of depository, trust and wealth management services.~~loans. In addition, First Federal invests in U.S. Treasury and federal government agency obligations, obligations of the State of Ohio and its political subdivisions, mortgage-backed securities that are issued by federal agencies, including real estate mortgage investment conduits (“REMICs”) and residential collateralized mortgage obligations (“CMOs”), and corporate bonds. First Federal’s deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”). First Federal is a member of the Federal Home Loan Bank (“FHLB”) System.

First Insurance is an insurance agency that conducts business ~~through~~throughout First Federal’s markets. The Maumee and Oregon, Ohio, offices ~~located~~were consolidated into a new office in ~~the Defiance,~~ Sylvania, ~~Bryan, Lima, Archbold, Fostoria, Tiffin, Findlay and Bowling Green,~~ Ohio, ~~areas.~~in January 2018. 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~~help minimize the risk ~~among themselves.~~allocable to each participating insurer.

The consolidated condensed statement of financial condition at December 31, ~~2017,~~2018, 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, ~~2017~~2018 (the ~~“2017~~“2018 Form 10-K”).

The accompanying consolidated condensed financial statements as of ~~September~~June 30, ~~2018,~~2019, and for the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018 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 (“GAAP”). These consolidated condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the ~~2017~~2018 Form 10-K. 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 and ~~nine~~six month ~~period~~periods ended ~~September~~June 30, ~~2018,~~2019, are not necessarily indicative of the results that may be expected for the entire year.

On June 22, 2018, the Company announced a stock split in the form of a share distribution of one common share for each outstanding common share. The stock split was distributed on July 12, 2018, to shareholders of record as of July 2, 2018. All share and per share data in this Quarterly Report on Form 10-Q has been adjusted and is reflective of the stock split.

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

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 awards that contain rights to nonforfeitable dividends are considered participating securities for the calculation. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options, 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 ~~May 2014,~~February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.” This 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 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 variable consideration to include in the transaction price and 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),” 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, this 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 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 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 “Revenue Recognition” 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 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 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 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 deferred tax assets. The adoption of ASU No. 2016-01 on January 1, 2018, did not have a material impact on the Company’s consolidated financial statements. Also in conjunction with the adoption, the Company’s fair value measurement of financial instruments was 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 February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This ASU allows a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for certain income tax effects stranded in AOCI as a result of public law No. 115-97, known as the Tax Cuts and Jobs Act (“Tax Act”). Consequently, the reclassification eliminates the stranded tax effects resulting from the Tax Act and is intended to improve the usefulness of information reported to financial statement users. However, because the ASU only relates to the reclassification of the income tax effects of the Tax Act, the underlying guidance that requires the effect of a change in tax laws or rates to be included in income from continuing operations is not affected. The Company adopted ASU No. 2018-02 during the first quarter of 2018, and elected to reclassify the income tax effects of the Tax Act from AOCI to retained earnings. The reclassification increased AOCI and decreased retained earnings by $47,000, with zero net effect on total shareholders’ equity.

~~In February 2016, the FASB issued ASU No.~~ 2016-02, — Leases (Topic 842). The ~~objective of~~guidance in the update supersedes the requirements in ASC Topic 840, Leases. The guidance is intended to increase transparency and comparability among organizations by recognizing ~~lease~~right-of-use assets and lease liabilities on the balance ~~sheet and disclosing key information about leasing arrangements. The amendments in~~sheet. For public companies, this update ~~are~~was effective for ~~fiscal years~~interim and annual periods beginning after December 15, ~~2018, including interim periods within those fiscal years. Early~~2018. The Company adopted this guidance in the first quarter of 2019. Upon adoption, ~~is permitted.~~the Company elected a practical expedient which allows existing leases to retain their classification as operating leases. The Company has ~~not yet selected~~elected to account for lease and related nonlease components as a ~~transition method as it is in the process of determining the effect of the ASU on its consolidated financial statements and disclosures.~~single lease component. The Company has ~~several~~also elected to not recognize right-of-use assets and lease ~~agreements, such as branch locations,~~liabilities arising from short-term leases, which are ~~currently considered operating leases, and therefore, not recognized on~~twelve months or less. Implementation of the ~~Company’s consolidated condensed statements~~guidance resulted in the recording of ~~financial condition. The Company expects the new guidance will require these lease agreements to now be recognized on the 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. 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 haveliability on the ~~Company’s~~balance sheet; however it does not have a material impact on the Company's other consolidated financial statements. ~~At September 30, 2018, the Company had contractual operating lease commitments of approximately $11.0 million, before considering renewal options that are generally present.~~See additional disclosures in Note 10.

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~~are not 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~~2019. Early adoption is permitted for interim and annual reporting periods beginning after December 15, ~~2018.~~2018; however, the Company does not currently plan to adopt this ASU early. As a result of this ASU, the Company could experience an increase in its allowance. 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). Interagency guidance issued in December 2018 allows for a three-year phase-in of the cumulative-effect adjustment for regulatory capital reporting purposes. The Company ~~has begun~~continues its implementation efforts ~~by establishing a~~through its established Company-wide implementation committee along with ~~engaging~~ a third-party software vendor to assist in the implementation process. The committee’s ~~initial~~ 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~~The Company is currently running parallel computations in 2019 and continues to evaluate the impact of adoption ~~is permitted, however, the Company does not currently plan to adopt~~of this ~~ASU early.~~ASU.

Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

The majority of the Company’s revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as loans, letters of credit, and investment securities, as well as revenue related to mortgage servicing activities, as these activities are subject to other GAAP discussed elsewhere within the Company’s disclosures. Descriptions of the Company’s revenue-generating activities that are within the scope of ASC 606, which are presented in the Company’s statement of income as components of non-interest income are as follows:

FASB ASC Topic 820, Fair Value Measurements, 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~~FASB ASC Topic 820 requires the use of ~~determining the fair value of assets and liabilities presented in this note~~valuation techniques that are consistent with the ~~methodologies disclosed in Note 22 of~~market approach, the ~~2017 Form 10-K, except for~~income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation ~~of loans which was impacted by the adoption of ASU 2016-01~~techniques to convert future amounts, such as ~~discussed in Note 2 above. Prior~~cash flows or earnings, 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 single present amount on a discounted ~~cash flows technique~~basis. The cost approach is based on the amount that currently would be required to ~~calculate~~replace the ~~present value~~service capacity of ~~expected future cash flows for a financial instrument. The exit price notion uses~~an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the ~~same approach, but also incorporates other factors, such as enhanced credit risk, illiquidity risk and~~assumptions that market ~~factors~~participants would use in pricing the asset or liability. Inputs may be observable, meaning those that ~~sometimes exist~~reflect the assumptions market participants would use in ~~exit prices in dislocated markets. As of September 30, 2018,~~pricing the ~~technique used by~~asset or liability developed based on 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 market participant would realize in a hypothetical orderly transaction.best information available. In that regard, FASB ASC Topic 820 established a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

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 2 include U.S. federal 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 investor’s 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 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 but are not limited to: 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:

September 30, 2018	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
June 30, 2019									Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)								(In Thousands)
Available for sale securities:
Obligations of U.S. federal government corporations and agencies	$	-	$	2,470	$	-	$	2,470	$	-	$	2,533	$	-	$	2,533
Mortgage-backed - residential		-		66,463		-		66,463		-		79,204		-		79,204
REMICs		-		2,814		-		2,814		-		2,412		-		2,412
Collateralized mortgage obligations-residential		-		97,970		-		97,970
Collateralized mortgage obligations- residential										-		97,526		-		97,526
Preferred Stock										1		-		-		1
Corporate bonds		-		13,057		-		13,057		-		12,986		-		12,986
Obligations of state and political subdivisions		-		100,188		-		100,188		-		101,453		-		101,453
Mortgage banking derivative - asset		-		665		-		665		-		1,392		-		1,392
Mortgage banking derivative - liability										-		205		-		205

December 31, 2017	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
December 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. federal government corporations and agencies	$	-	$	508	$	-	$	508	$	-	$	2,503	$	-	$	2,503
Mortgage-backed - residential		-		59,269		-		59,269		-		74,710		-		74,710
REMICs		-		1,065		-		1,065		-		2,709		-		2,709
Collateralized mortgage obligations-residential		-		93,876		-		93,876		-		101,461		-		101,461
Preferred stock		1		-		-		1
Corporate bonds		-		13,103		-		13,103		-		12,806		-		12,806
Obligations of state and political subdivisions		-		92,828				92,828		-		99,887				99,887
Mortgage banking derivative - asset		-		609		-		609		-		367		-		367
Mortgage banking derivative -liability		-		11		-		11		-		73		-		73

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:

September 30, 2018	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
June 30, 2019									Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
									(In Thousands)
	(In Thousands)
Impaired loans
Commercial real estate	$	-	$	-	$	410	$	410	$	-	$	-	$	459	$	459
Commercial		-		-		1,713		1,713		-		-		205		205
Total impaired loans		-		-		2,123		2,123		-		-		664		664
Mortgage servicing rights		-		567		-		567		-		288		-		288
Real estate held for sale
Commercial real estate		-		-		739		739
Total real estate held for sale		-		-		739		739

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of ~~September~~June 30, ~~2018,~~2019, 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, ~~2017,~~2018, the significant unobservable inputs used in the fair value measurements were as follows:

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

Impaired Loans- Applies to all loan classes	$	4,604	Appraisals which utilize sales comparison, net income and cost approach	Discounts for collection issues and changes in market conditions	10-20%	10%	$	1,775	Appraisals which utilize sales comparison, net income and cost approach	Discounts for collection issues and changes in market conditions	10-13%		10.86%

Real estate held for sale – Applies to all classes	$	227	Appraisals which utilize sales comparison, net income and cost approach	Discounts for changes in market conditions	0%	0%	$	705	Appraisals which utilize sales comparison, net income and cost approach	Discounts for changes in market conditions	20%		20%

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a fair value of ~~$2.1 million,~~$664,000 with a $91,000 valuation allowance ~~of $10,000~~ and a fair value of ~~$4.6~~$1.8 million with a no$9,000 valuation allowance at ~~September~~June 30, ~~2018~~2019, and December 31, ~~2017,~~2018, respectively. ~~A provision~~Provision expense of ~~$1.1 million~~$52,000 and ~~$1.2 million~~$176,000 were included in earnings for the three and ~~nine~~six months ended ~~September~~June 30, 2019. A provision recovery of $72,000 for the three months ended June 30, 2018 and a provision expense of~~$8,000 and $821,000~~ $61,000 for the ~~three months and nine~~six months ended ~~September~~June 30, ~~2017,respectively,~~2018 were included in earnings.

Mortgage servicing rights, which are carried at the lower of cost or fair ~~value. Certain mortgage servicing right tranches~~value, had a fair value of ~~$567,000~~$288,000 with a valuation allowance of ~~$341,000~~$603,000 and a fair value of ~~$534,000~~$629,000 with a valuation allowance of ~~$432,000~~$300,000 at ~~September~~June 30, ~~2018~~2019, and December 31, ~~2017,~~2018, respectively. C~~A recovery~~harges of ~~$8,000~~$190,000 and ~~$91,000~~$303,000 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018, respectively,~~2019 and ~~a charge~~recoveries of ~~$27,000~~$47,000 and ~~a recovery of $21,000~~$83,000 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, respectively, ~~was~~were 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 change in fair value of real estate held for sale was ~~$8,000~~$0 and ~~$552,000~~$264,000 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, respectively, which was recorded directly as an adjustment to current earnings through non-interest expense.The change in fair value of real estate held for sale was ~~$20,000~~$0 and $544,000 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018.

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 ~~September~~June 30, ~~2018,~~2019, and December 31, ~~2017.~~2018. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of First Defiance.

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

The carrying amount of cash and cash equivalents and notes payable, 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 of Cincinnati (“FHLB”)~~FHLB stock due to restrictions placed on its transferability.

The Company adopted the amendments to ASU 2016-01 relating to the loan portfolio in the first quarter of 2018 and an exit price income approach is now used to determine the fair value. The loans were valued on an individual basis, with consideration given to the loans underlying characteristics, including account types, remaining terms (in months), annual interest rates or coupons, interest types, past delinquencies, timing of principal and interest payments, current market rates, loss exposures, and remaining balances. The model utilizes a discounted cash flow approach to estimate the fair value of the loans using assumptions for the coupon rates, remaining maturities, prepayment speeds, projected default probabilities, losses given defaults, and estimates of prevailing discount rates. The discounted cash flow approach models the credit losses directly in the projected cash flows. The model applies various assumptions regarding credit, interest, and prepayment risks for the loans based on loan types, payment types and fixed or variable classifications. 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 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 is based on the fair value of the collateral, less estimated cost to sell, or the present value of the loan’s expected future cash flows (discounted at the loan’s effective interest rate). All impaired loans are classified as Level 3 within the valuation hierarchy.

The fair value of 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, checking 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 a 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 ~~September~~June 30, ~~2018.~~2019.

			Fair Value Measurements at September 30, 2018 (In Thousands)								Carrying		Fair Value Measurements at June 30, 2019 (In Thousands)
	Carrying Value		Total		Level 1		Level 2		Level 3		Value		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	99,526	$	99,526	$	99,526	$	-	$	-	$	83,597	$	83,597	$	83,597	$	-	$	-
Investment securities		283,565		283,565		-		283,565		-		296,600		296,599		1		296,598		-
Federal Home Loan Bank Stock		14,217		N/A		N/A		N/A		N/A		11,915		N/A		N/A		N/A		N/A
Loans, net, including loans held for sale		2,441,203		2,395,975		-		12,887		2,383,088		2,609,794		2,631,763		-		14,982		2,616,781
Accrued interest receivable		11,258		11,258		11		1,665		9,582		10,771		10,771		3		1,225		9,543

Financial Liabilities:
Deposits	$	2,524,431	$	2,516,006	$	556,316	$	1,959,690	$	-	$	2,680,637	$	2,681,088	$	584,735	$	2,096,353	$	-
Advances from Federal Home Loan Bank		100,220		99,043		-		99,043		-		105,178		105,063		-		105,063		-
Securities sold under repurchase agreements		4,162		4,162		-		4,162		-		3,064		3,064		-		3,064		-
Subordinated debentures		36,083		34,986		-		-		34,986		36,083		32,330		-		-		32,330

First Defiance has established equity based compensation plans for its directors and employees. On February 27, 2018, the Board adopted, and the shareholders approved at the 2018 Annual Shareholders Meeting, the First Defiance Financial Corp. 2018 Equity Incentive Plan (the “2018 Equity Plan”). The 2018 Equity Plan replaced all existing plans, although the Company’s former equity plans remain in existence to the extent there were outstanding grants thereunder at the time the 2018 Equity Plan was approved. All awards currently outstanding under prior plans will remain in effect in accordance with their respective terms. Any new awards will be made under the 2018 Equity Plan. The 2018 Equity Plan allows for issuance of up to 900,000 common shares through the award of options, stock grants, restricted stock units (“RSU”), stock appreciation rights or other stock-based awards.

As of ~~September~~June 30, ~~2018, 39,400~~2019, 20,200 options to acquire First Defiance shares were outstanding at option prices based on the market value of the underlying shares on the date the options were granted. Options granted vest 20% per year. All options expire ten years from the date of grant. Vested options of retirees expire on the earlier of the scheduled expiration date or three months after the retirement date.

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

Under the ~~2017~~2018 and ~~2018~~2019 STIPs, the participants could earn between 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 the payment.

Under each LTIP, the participants ~~may~~could earn between 20% to 45% of their salary for potential payout in the form of equity awards based on the achievement of certain corporate performance targets over a three-year period. The Company granted ~~49,052, 41,314~~41,676 and ~~41,676 RSU’s~~69,014 RSUs to the participants in the ~~2016, 2017~~2018 and ~~2018~~2019 LTIPs, respectively, effective January 1 in the year the award was made, which represents the maximum target award. The amount of benefit under each LTIP will be determined individually at the end of the 36 month performance period ending December 31. The benefits earned under each LTIP will be paid out in equity in the first quarter following the end of the performance period. The participants are required to be employed on the day of payout in order to receive the payment.

A total of ~~49,514 RSU’s~~48,363 RSUs were issued to the participants of the ~~2015~~2016 LTIP in the first quarter of ~~2018~~2019 for the three year performance period ended December 31, ~~2017.~~2018.

In the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, the Company also granted to employees ~~23,952 restricted~~13,916 RSUs and 24,651 shares of ~~which 7,348 were RSUs and 16,604 were~~ restricted ~~stock grants.~~stock. Of the ~~16,604~~24,651 restricted shares granted, ~~4,104~~5,258 were issued to directors and have a one-year vesting period. The remaining ~~12,500~~19,393 were issued to employees and have a three-year vesting period. The fair value of all granted restricted shares was determined by the stock price aton 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.

There were no options granted during the three or ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, or ~~September~~June 30, ~~2017.~~2018.

Following is stock option activity under the plans during the ~~nine~~six months ended ~~September~~June 30, ~~2018:~~2019:

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

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
Proceeds of options exercised	$	-	$	-	$	111	$	198	$	6	$	55	$	191	$	111
Related tax benefit recognized		-		-		28		54		-		6		4		28
Intrinsic value of options exercised		-		-		1,034		301		30		781		390		1,034

As of ~~September~~June 30, ~~2018,~~2019, there was ~~$63,000~~$27,000 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 ~~1.7~~1.3 years.

At ~~September~~June 30, ~~2018, 144,586 RSU’s~~2019, 160,995 RSUs and ~~34,372~~48,919 restricted stock grants were 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 ~~$470,000~~$437,000 and ~~$1.4 million~~$960,000 was recorded during the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 compared to an expense of ~~$373,000~~$343,000 and ~~$1.5 million~~$907,000 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. There was approximately ~~$622,000~~$457,000 and ~~$774,000~~$961,000 included within other liabilities at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, 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, 2018		145,076		$	20.26		21,072		$	25.28
Unvested at January 1, 2019												144,586		$	23.94		30,372		$	28.48
Granted		49,024			26.97		66,118			19.68		82,930			25.61		78,922			22.25
Vested		(49,514	)		16.15		(52,818	)		16.81		(54,771	)		20.13		(60,375	)		21.17
Forfeited		-			-		-			-		(11,750	)		25.63		-			-
Unvested at September 30, 2018		144,586		$	23.94		34,372		$	30.19
Unvested at June 30, 2019												160,995		$	25.72		48,919		$	27.18

The maximum amount of compensation expense that may be recorded for the ~~2018~~2019 STIP and the ~~2016, 2017 and 2018~~active LTIPs at ~~September 30, 2018,~~March 31, 2019, is approximately ~~$4.3~~$4.8 million. However, the estimated expense expected to be recorded as of ~~September~~June 30, ~~2018,~~2019, based on the performance measures in the plans, is ~~$3.5~~$3.8 million of which ~~$1.3~~$2.0 million is unrecognized at ~~September~~June 30, ~~2018,~~2019, and will be recognized over the remaining performance periods.

First Defiance declared and paid a $0.19 per common stock dividend in the first and second quarters of 2019 and declared and paid a $0.15 per common stock dividend in the first and second quarters of ~~2018 and a $0.17 per common stock dividend in the third quarter of~~ 2018. ~~Dividends declared and paid were $0.125 per common stock dividend in the first, second and third quarters of 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 September 30,				Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017		2019		2018		2019		2018
	(In Thousands, except per share data)								(In Thousands, except per share data)
Basic Earnings Per Share: Net income available to common shareholders	$	11,306	$	9,381	$	34,152	$	22,869
Basic Earnings Per Share:
Net income available to common shareholders									$	12,199	$	11,109	$	23,681	$	22,846
Less: Income allocated to participating securities		1		1		3		3		1		1		2		2
Net income allocated to common shareholders		11,305		9,380		34,149		22,866		12,198		11,108		23,679		22,844

Weighted average common shares outstanding including participating securities⁽¹⁾		20,409		20,308		20,382		19,836		19,791		20,399		19,908		20,370
Less: Participating securities		9		10		9		10		11		11		11		11
Average common shares⁽¹⁾		20,400		20,298		20,373		19,826		19,780		20,388		19,897		20,359

Basic earnings per common share	$	0.55	$	0.46		1.68		1.15	$	0.62	$	0.54		1.19		1.12

Diluted Earnings Per Share:
Net income allocated to common shareholders	$	11,305	$	9,380	$	34,149	$	22,866	$	12,198	$	11,108	$	23,679	$	22,844
Weighted average common shares outstanding for basic earnings per common share⁽¹⁾		20,400		20,298		20,373		19,826		19,780		20,388		19,897		20,359
Add: Dilutive effects of stock options		67		120		92		114		80		104		79		107
Average shares and dilutive potential common shares⁽¹⁾		20,467		20,418		20,465		19,940		19,860		20,492		19,976		20,466

Diluted earnings per common share	$	0.55	$	0.46		1.67		1.15	$	0.61	$	0.54		1.19		1.12

(1)Share and per share data in above table has been adjusted for a 2-for-1 stock split on July 12, 2018.

There were no6,171 shares for both the three and six month periods in 2019 that were excluded from the diluted earnings per common share calculation as they were anti-dilutive. There were no anti-dilutive shares for both the three and ~~nine months ended September 30,~~six month periods in 2018 ~~and September 30, 2017, as no shares were anti-dilutive during these time periods.~~excluded subject to issue upon exercise of options.

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
At September 30, 2018	(In Thousands)
										(In Thousands)
At June 30, 2019
Available-for-Sale Securities:
Obligations of U.S. federal government corporations and agencies	$	2,519	$	-	$	(49	)	$	2,470
Obligations of U.S. government corporations and agencies										$	2,519	$	14	$	-		$	2,533
Mortgage-backed securities – residential		68,863		25		(2,425	)		66,463		78,553		876		(225	)		79,204
REMICs		2,842		-		(28	)		2,814		2,390		22		-			2,412
Collateralized mortgage obligations		100,874		15		(2,919	)		97,970		96,574		1,062		(110	)		97,526
Preferred stock											-		1		-			1
Corporate bonds		12,911		146		-			13,057		12,906		97		(17	)		12,986
Obligations of state and political subdivisions		100,592		1,034		(1,438	)		100,188		97,886		3,572		(5	)		101,453
Total Available-for-Sale	$	288,601	$	1,220	$	(6,859	)	$	282,962	$	290,828	$	5,644	$	(357	)	$	296,115

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value		Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
	(In Thousands)								(In Thousands)
Held-to-Maturity Securities*:
FHLMC certificates	$	8	$	-	$	-	$	8	$	7	$	-	$	-		$	7
FNMA certificates		33		-		-		33		25		-		(1	)		24
GNMA certificates		13		-		-		13		9		-		-			9
Obligations of state and political subdivisions		549		-		-		549		444		-		-			444
Total Held-to Maturity	$	603	$	-	$	-	$	603	$	485	$	-	$	(1	)	$	484

			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
	(In Thousands)									(In Thousands)
At December 31, 2017
At December 31, 2018
Available-for-sale
Obligations of U.S. federal government corporations and agencies	$	518	$	-	$	(10	)	$	508
Obligations of U.S. government corporations and agencies										$	2,519	$	2	$	(18	)	$	2,503
Mortgage-backed securities - residential		59,942		90		(763	)		59,269		76,165		111		(1,566	)		74,710
REMICs		1,072		-		(7	)		1,065		2,712		4		(7	)		2,709
Collateralized mortgage obligations		94,588		180		(892	)		93,876
Preferred stock		-		1		-			1
Collateralized mortgage obligations - residential											103,026		124		(1,689	)		101,461
Corporate bonds		12,914		189		-			13,103		12,910		44		(148	)		12,806
Obligations of state and political subdivisions		90,692		2,426		(290	)		92,828		99,349		1,258		(720	)		99,887
Total Available-for-Sale	$	259,726	$	2,886	$	(1,962	)	$	260,650	$	296,681	$	1,543	$	(4,148	)	$	294,076

			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	$	10	$	-	$	-	$	10	$	8	$	-	$	-	$	8
FNMA certificates		41		1		-		42		31		-		-		31
GNMA certificates		17		-		-		17		12		-		-		12
Obligations of states and political subdivisions		580		-		-		580		475		-		-		475
Total Held-to-Maturity	$	648	$	1	$	-	$	649	$	526	$	-	$	-	$	526

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

The amortized cost and fair value of the investment securities portfolio at ~~September~~June 30, ~~2018,~~2019, 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	$	1,410	$	1,414	$	31	$	31	$	5,594	$	5,614	$	-	$	-
Due after one year through five years		23,134		23,379		-		-		17,876		18,079		-		-
Due after five years through ten years		38,981		39,586		518		518		33,585		34,483		444		444
Due after ten years		52,497		51,336		-		-		56,256		58,797		-		-
MBS/CMO/REMIC		172,579		167,247		54		54		177,517		179,142		41		40
	$	288,601	$	282,962	$	603	$	603	$	290,828	$	296,115	$	485	$	484

Investment securities with a carrying amount of ~~$144.5~~$154.2 million at ~~September~~June 30, ~~2018,~~2019, were pledged as collateral on public deposits, securities sold under repurchase agreements and the Federal Reserve discount window.

As of ~~September~~June 30, ~~2018,~~2019, the Company’s investment portfolio consisted of ~~438~~434 securities, ~~223~~39 of which were in an unrealized loss position.

The following tables summarize First Defiance’s securities that were in an unrealized loss position at ~~September~~June 30, ~~2018,~~2019, and December 31, ~~2017:~~2018:

	Duration of Unrealized Loss Position															Duration of Unrealized Loss Position
	Less than 12 Months					12 Months or Longer					Total					Less than 12 Months					12 Months or Longer					Total
			Gross					Gross										Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loses			Value		Loss			Value		Loss			Value		Loses
	(In Thousands)															(In Thousands)
At December 31, 2017
At December 31, 2018
Available-for-sale securities:
Obligations of U.S. government corporations and agencies	$	-	$	-		$	508	$	(10	)	$	508	$	(10	)	$	-	$	-		$	500	$	(18	)	$	500	$	(18	)
Mortgage-backed securities-residential		27,881		(215	)		19,038		(548	)		46,919		(763	)		11,589		(71	)		48,665		(1,495	)		60,254		(1,566	)
REMICs		1,065		(7	)		-		-			1,065		(7	)
REMIC’s																	-		-			857		(7	)		857		(7	)
Collateralized mortgage obligations		49,107		(320	)		20,804		(572	)		69,911		(892	)		11,613		(53	)		70,585		(1,636	)		82,198		(1,689	)
Corporate Bonds																	5,752		(148	)		-		-			5,752		(148	)
Obligations of state and political subdivisions		14,249		(163	)		3,370		(127	)		17,619		(290	)		11,974		(69	)		16,492		(651	)		28,466		(720	)
Held to maturity securities:		12		-			9		-			21		-
Total temporarily impaired securities	$	92,314	$	(705	)	$	43,729	$	(1,257	)	$	136,043	$	(1,962	)	$	40,928	$	(341	)	$	137,099	$	(3,807	)	$	178,027	$	(4,148	)

There were ~~net~~no realized gains ~~of $76,000 ($60,000 after tax)~~ from the sales and calls of investment securities ~~for~~in the three and ~~nine months ended September~~six month periods ending June 30, ~~2018, while there were net realized gains of $158,000 ($103,000 after tax) in the third quarter of 2017~~2019 and ~~$425,000 ($276,000 after tax) for the nine months ended September 30, 2017.~~2018.

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, Investments-Debt and Equity Securities. 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.

~~For~~In the ~~three~~second quarter of 2019 and ~~nine months ended September 30,~~ 2018, ~~and 2017,~~ management determined there was no OTTI.

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

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 ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018 by portfolio segment (In Thousands):

Quarter Ended September 30, 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 June 30, 2019																						1-4 Family Residential Real Estate			Multi- Family Residential Real Estate		Commercial Real Estate			Construction		Commercial			Home Equity and Improvement			Consumer Finance			Total
Beginning Allowance	$	2,641		$	2,193	$	10,136	$	540	$	7,973		$	2,199		$	233		$	25,915		$	2,811		$	3,068	$	12,001		$	731	$	7,276		$	1,928		$	349		$	28,164
Charge-Offs		(60	)		0		0		0		(64	)		(92	)		(20	)		(236	)		(11	)		0		(15	)		0		(13	)		(64	)		(33	)		(136	)
Recoveries		11			0		103		0		18			59			9			200			156			24		269			0		94			60			21			624
Provisions		(54	)		110		232		38		98			19			19			462			(163	)		10		(106	)		156		531			(161	)		15			282
Ending Allowance	$	2,538		$	2,303	$	10,471	$	578	$	8,025		$	2,185		$	241		$	26,341		$	2,793		$	3,102	$	12,149		$	887	$	7,888		$	1,763		$	352		$	28,934

The following table discloses allowance for loan loss activity for the year-to-date periods ended ~~September~~June 30, ~~2018~~2019 and ~~September~~June 30, ~~2017~~2018 by portfolio segment (In Thousands):

Year-to-date Period Ended September 30, 2018	1-4 Family Residential Real Estate			Multi- Family Residential Real Estate		Commercial Real Estate			Construction			Commercial			Home Equity and Improvement			Consumer Finance			Total
Year-to-date Period Ended June 30, 2019																								1-4 Family Residential Real Estate			Multi- Family Residential Real Estate			Commercial Real Estate			Construction		Commercial			Home Equity and Improvement			Consumer Finance			Total
Beginning Allowance	$	2,532		$	2,702	$	10,354		$	647		$	7,965		$	2,255		$	228		$	26,683		$	2,881		$	3,101		$	12,041		$	682	$	7,281		$	2,026		$	319		$	28,331
Charge-Offs		(230	)		0		(1,357	)		0			(709	)		(194	)		(128	)		(2,618	)		(183	)		0			(15	)		0		(200	)		(97	)		(175	)		(670	)
Recoveries		85			40		392			0			2,200			132			21			2,870			170			36			353			0		106			84			30			779
Provisions		437			270		2,279			(32	)		(2,295	)		(122	)		167			704			(75	)		(35	)		(230	)		205		701			(250	)		178			494
Ending Allowance	$	2,824		$	3,012	$	11,668		$	615		$	7,161		$	2,071		$	288		$	27,639		$	2,793		$	3,102		$	12,149		$	887	$	7,888		$	1,763		$	352		$	28,934

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 ~~September~~June 30, ~~2018~~2019 (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, ~~2017~~2018 (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	$	167	$	7	$	118	$	-	$	187	$	279	$	-	$	758	$	175	$	3	$	95	$	-	$	79	$	242	$	1	$	595

Collectively evaluated for impairment		2,365		2,695		10,236		647		7,778		1,976		228		25,925		2,706		3,098		11,946		682		7,202		1,784		318		27,736

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

Total ending allowance balance	$	2,532	$	2,702	$	10,354	$	647	$	7,965	$	2,255	$	228	$	26,683	$	2,881	$	3,101	$	12,041	$	682	$	7,281	$	2,026	$	319	$	28,331

Loans:

Loans individually evaluated for impairment	$	6,910	$	2,278	$	31,821	$	-	$	14,373	$	1,176	$	50	$	56,608	$	6,774	$	1,347	$	26,334	$	-	$	10,477	$	963	$	45	$	45,940

Loans collectively evaluated for impairment		267,377		245,823		956,238		149,174		513,218		135,098		29,125		2,296,053		315,385		277,105		1,102,355		142,096		500,730		128,065		34,486		2,500,222

Loans acquired with deteriorated credit quality		1,069		301		2,121		-		337		-		-		3,828		1,012		296		846		-		177		-		-		2,331

Total ending loans balance	$	275,356	$	248,402	$	990,180	$	149,174	$	527,928	$	136,274	$	29,175	$	2,356,489	$	323,171	$	278,748	$	1,129,535	$	142,096	$	511,384	$	129,028	$	34,531	$	2,548,493

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 September 30, 2018						Nine Months Ended September 30, 2018						Three Months Ended June 30, 2019						Six Months Ended June 30, 2019
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized		Cash Basis Income Recognized
Residential Owner Occupied	$	4,848	$	41	$	41	$	4,695	$	113	$	110	$	5,212	$	46	$	44	$	4,882	$	110	$	104
Residential Non Owner Occupied		2,371		31		31		2,424		105		102		2,040		26		26		2,060		56		56
Total Residential Real Estate		7,219		72		72		7,119		218		212		7,252		72		70		6,942		166		160
Construction		-		-		-		-		-		-		-		-		-		-		-		-
Multi-Family		1,582		22		22		1,744		71		70		305		7		7		819		27		27
CRE Owner Occupied		10,058		57		49		10,545		179		156		7,514		57		45		7,439		223		177
CRE Non Owner Occupied		2,321		19		18		2,815		76		75		1,942		18		18		1,966		51		44
Agriculture Land		14,115		150		96		13,370		400		248		13,734		170		94		13,319		376		291
Other CRE		1,223		25		25		1,346		75		67		796		19		17		975		53		50
Total Commercial Real Estate		27,717		251		188		28,076		730		546		23,986		264		174		23,699		703		562
Commercial Working Capital		10,181		91		84		8,059		196		180		7,594		83		71		7,842		226		162
Commercial Other		3,282		34		31		3,809		88		83		1,549		21		21		1,709		48		45
Total Commercial		13,463		125		115		11,868		284		263		9,143		104		92		9,551		274		207
Home Equity and Improvement		1,091		9		9		1,195		29		29		889		6		5		905		20		18
Consumer Finance		33		1		1		35		3		3		25		-		-		30		1		1
Total Impaired Loans	$	51,105	$	480	$	407	$	50,037	$	1,334	$	1,123	$	41,600	$	453	$	348	$	41,946	$	1,191	$	975

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 September 30, 2017						Nine Months Ended September 30, 2017						Three Months Ended June 30, 2018						Six Months Ended June 30, 2018
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized		Cash Basis Income Recognized
Residential Owner Occupied	$	4,188	$	37	$	37	$	3,699	$	99	$	99	$	4,598	$	40	$	38	$	4,619	$	72	$	69
Residential Non Owner Occupied		2,706		33		33		3,136		104		104		2,392		30		30		2,450		74		71
Total Residential Real Estate		6,894		70		70		6,835		203		203		6,990		70		68		7,069		146		140
Construction		-		-		-		-		-		-		-		-		-		-		-		-
Multi-Family		2,084		9		9		2,534		28		28		1,600		22		22		1,825		49		48
CRE Owner Occupied		12,127		24		22		9,613		70		70		8,352		78		72		10,789		122		107
CRE Non Owner Occupied		3,484		32		31		3,845		105		98		2,642		23		23		3,062		57		57
Agriculture Land		13,547		148		44		8,719		335		126		14,478		155		110		12,997		250		152
Other CRE		1,590		27		22		1,637		50		42		1,329		25		22		1,407		50		42
Total Commercial Real Estate		30,748		231		119		23,814		560		336		26,801		281		227		28,255		479		358
Commercial Working Capital		7,033		38		38		5,115		86		90		8,788		81		72		6,998		105		96
Commercial Other		5,926		31		27		5,126		82		60		3,046		29		29		4,073		54		52
Total Commercial		12,959		69		65		10,241		168		150		11,834		110		101		11,071		159		148
Home Equity and Improvement		1,206		11		10		1,228		32		31		1,019		9		9		1,247		20		20
Consumer Finance		54		1		1		62		3		4		35		1		1		37		2		2
Total Impaired Loans	$	53,945	$	391	$	274	$	44,714	$	994	$	752	$	48,279	$	493	$	428	$	49,504	$	855	$	716

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

	September 30, 2018						December 31, 2017						June 30, 2019						December 31, 2018
	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	$	751	$	625	$	-	$	2,507	$	2,364	$	-	$	384	$	385	$	-	$	901	$	775	$	-
Residential Non Owner Occupied		999		1,004		-		1,711		1,708		-		891		894		-		950		955		-
Total 1-4 Family Residential Real Estate		1,750		1,629		-		4,218		4,072		-		1,275		1,279		-		1,851		1,730		-
Multi-Family Residential Real Estate		1,530		1,537		-		2,095		2,102		-		135		136		-		1,296		1,302		-
CRE Owner Occupied		7,086		5,835		-		12,273		11,804		-		6,953		5,813		-		7,464		6,202		-
CRE Non Owner Occupied		1,913		1,748		-		3,085		2,925		-		1,750		1,585		-		1,824		1,659		-
Agriculture Land		13,675		13,883		-		13,029		13,185		-		13,276		13,470		-		14,915		14,994		-
Other CRE		471		479		-		981		768		-		449		453		-		464		462		-
Total Commercial Real Estate		23,145		21,945		-		29,368		28,682		-		22,428		21,321		-		24,667		23,317		-
Construction		-		-		-		-		-		-		-		-		-		-		-		-
Commercial Working Capital		9,657		9,420		-		5,462		5,422		-		6,309		6,333		-		7,569		7,498		-
Commercial Other		2,736		2,548		-		9,916		7,644		-		1,407		1,400		-		2,095		2,100		-
Total Commercial		12,393		11,968		-		15,378		13,066		-		7,716		7,733		-		9,664		9,598		-
Home Equity and Home Improvement		-		-		-		630		584		-		-		-		-		-		-		-
Consumer Finance		-		-		-		42		42		-		-		-		-		-		-		-
Total loans with no allowance recorded	$	38,818	$	37,079	$	-	$	51,731	$	48,548	$	-	$	31,554	$	30,469	$	-	$	37,478	$	35,947	$	-

With an allowance recorded:
Residential Owner Occupied	$	4,169	$	4,129	$	165	$	1,841	$	1,814	$	137	$	5,004	$	4,843	$	172	$	3,926	$	3,884	$	148
Residential Non Owner Occupied		1,210		1,214		25		1,031		1,024		30		1,104		1,108		24		1,152		1,160		27
Total 1-4 Family Residential Real Estate		5,379		5,343		190		2,872		2,838		167		6,108		5,951		196		5,078		5,044		175
Multi-Family Residential Real Estate		44		45		2		175		176		7		43		43		2		44		44		3
CRE Owner Occupied		3,656		3,172		40		2,007		1,546		44		2,110		1,628		29		2,419		1,935		38
CRE Non Owner Occupied		624		485		20		651		593		28		334		337		14		350		353		16
Agriculture Land		281		279		5		293		292		14		552		555		5		37		38		2
Other CRE		1,130		713		32		909		708		32		522		303		17		1,107		691		39
Total Commercial Real Estate		5,691		4,649		97		3,860		3,139		118		3,518		2,823		65		3,913		3,017		95
Construction		-		-		-		-		-		-		-		-		-		-		-		-
Commercial Working Capital		526		528		62		447		449		77		866		869		147		525		528		55
Commercial Other		456		454		55		854		858		110		144		147		14		560		352		24
Total Commercial		982		982		117		1,301		1,307		187		1,010		1,016		161		1,085		880		79
Home Equity and Home Improvement		1,159		1,082		255		596		592		279		926		881		66		1,013		963		242
Consumer Finance		31		31		1		8		8		-		22		22		-		45		45		1
Total loans with an allowance recorded	$	13,286	$	12,132	$	662	$	8,812	$	8,060	$	758	$	11,627	$	10,736	$	490	$	11,178	$	9,993	$	595

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:

The following table presents the aging of the recorded investment in past due and non- accrual loans as of ~~September~~June 30, ~~2018,~~2019, 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	$	192,769	$	372	$	1,427	$	1,756	$	3,555	$	3,167	$	201,501	$	1,015	$	844	$	984	$	2,843	$	2,931
Residential Non Owner Occupied		117,104		163		22		174		359		333		118,191		33		3		21		57		249

Total 1-4 Family Residential Real Estate		309,873		535		1,449		1,930		3,914		3,500		319,692		1,048		847		1,005		2,900		3,180

Multi-Family Residential Real Estate		270,868		-		-		-		-		118		282,067		-		-		-		-		-

CRE Owner Occupied		413,049		321		2		158		481		5,172		409,221		244		104		489		837		3,214
CRE Non Owner Occupied		503,533		-		-		140		140		790		549,736		-		108		481		589		639
Agriculture Land		127,076		39		-		2,988		3,027		5,319		127,030		222		103		-		325		4,351
Other Commercial Real Estate		49,335		-		-		-		-		290		45,775				-		11		11		29

Total Commercial Real Estate		1,092,993		360		2		3,286		3,648		11,571		1,131,762		466		315		981		1,762		8,233

Construction		130,516		-		-		-		-		-		200,767		-		-		-		-		-

Commercial Working Capital		213,113		17		-		2,870		2,887		4,359		234,347		140		-		2,681		2,821		2,914
Commercial Other		274,999		31		-		433		464		772		294,958		105		59		218		382		423

Total Commercial		488,112		48		-		3,303		3,351		5,131		529,305		245		59		2,899		3,203		3,337

Home Equity/Home Improvement		128,489		1,348		138		207		1,693		562		125,556		946		186		114		1,246		552
Consumer Finance		32,228		186		44		23		253		34		35,247		232		-		19		251		20
				��
Total Loans	$	2,453,079	$	2,477	$	1,633	$	8,749	$	12,859	$	20,916	$	2,624,396	$	2,937	$	1,407	$	5,018	$	9,362	$	15,322

The following table presents the aging of the recorded investment in past due and non-accrual loans as of December 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	$	175,139	$	821	$	1,033	$	1,227	$	3,081	$	2,510	$	199,664	$	887	$	821	$	1,402	$	3,110	$	3,266
Residential Non Owner Occupied		96,400		495		8		233		736		520		119,988		64		180		165		409		363

Total 1-4 Family Residential Real Estate		271,539		1,316		1,041		1,460		3,817		3,030		319,652		951		1,001		1,567		3,519		3,629

Multi-Family Residential Real Estate		247,980		422		-		-		422		128		278,748		-		-		-		-		102

CRE Owner Occupied		393,125		195		188		1,268		1,651		10,775		416,879		52		300		138		490		4,377
CRE Non Owner Occupied		403,656		1		91		424		516		2,431		534,823		6		119		-		125		620
Agriculture Land		131,753		412		-		66		478		4,144		129,040		66		-		2,869		2,935		5,253
Other Commercial Real Estate		58,784		13		-		204		217		734		45,232		11		-		-		11		-

Total Commercial Real Estate		987,318		621		279		1,962		2,862		18,084		1,125,974		135		419		3,007		3,561		10,250

Construction		149,174		-		-		-		-		-		142,096		-		-		-		-		-

Commercial Working Capital		233,632		102		1,264		876		2,242		2,369		217,832		268		-		3,838		4,106		4,021
Commercial Other		291,455		82		-		517		599		6,474		289,125		32		54		235		321		480

Total Commercial		525,087		184		1,264		1,393		2,841		8,843		506,957		300		54		4,073		4,427		4,501

Home Equity and Home Improvement		133,144		2,490		434		206		3,130		591		127,346		1,446		146		90		1,682		394
Consumer Finance		28,800		293		80		2		375		27		34,224		134		77		96		307		126

Total Loans	$	2,343,042	$	5,326	$	3,098	$	5,023	$	13,447	$	30,703	$	2,534,997	$	2,966	$	1,697	$	8,833	$	13,496	$	19,002

As of ~~September~~June 30, ~~2018,~~2019, and December 31, ~~2017,~~2018, the Company had a recorded investment in troubled debt restructurings (“TDRs”) of ~~$20.3~~$17.3 million and ~~$21.7~~$19.2 million, respectively. The Company allocated ~~$658,000~~$399,000 and ~~$751,000~~$581,000 of specific reserves to those loans at ~~September~~June 30, ~~2018,~~2019, and December 31, ~~2017,~~2018, respectively, and had committed to lend additional amounts totaling up to ~~$278,000~~$315,000 and ~~$242,000~~$169,000 at ~~September~~June 30, ~~2018,~~2019, and December 31, ~~2017,~~2018, 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 as of ~~September~~June 30, ~~2018, $7.7~~2019, $6.9 million 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 tables present loans by class modified as TDRs that occurred during the three and ~~nine~~six month periods ending ~~September~~June 30, ~~2018,~~2019, and ~~September~~June 30, ~~2017:~~2018:

	Loans Modified as a TDR for the Three Months Ended September 30, 2018 ($ in thousands)				Loans Modified as a TDR for the Nine Months Ended September 30, 2018 ($ in thousands)				Loans Modified as a TDR for the Three Months Ended June 30, 2019 ($ in thousands)				Loans Modified as a TDR for the Six Months Ended June 30, 2019 ($ in thousands)
Troubled Debt Restructurings	Number of Loans		Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)
1-4 Family Owner Occupied		2	$	149		14	$	770		4	$	434		7	$	907
1-4 Family Non Owner Occupied		1		29		3		170		0		-		0		-
Multi Family		0		-		0		-		0		-		0		-
CRE Owner Occupied		4		335		11		1,849		0		-		0		-
CRE Non Owner Occupied		0		-		1		44		0		-		0		-
Agriculture Land		0		-		0		-		0		-		0		-
Other CRE		0		-		0		-		0		-		0		-
Commercial Working Capital		0		-		5		2,823		1		46		1		46
Commercial Other		1		66		1		66		0		-		1		13
Home Equity and Improvement		5		123		7		123		1		26		2		26
Consumer Finance		4		10		4		10		1		1		2		1
Total		17	$	712		46	$	5,855		7	$	507		13	$	993

The loans described above increased the allowance for loan and lease losses (“ALLL”) by $27,000 in the three month period ending June 30, 2019, and increased the ALLL by $21,000 in the six month period ending June 30, 2019.

The loans described above decreased the allowance for loan and lease losses (“ALLL”) by ~~$39,000~~$16,000 in the three month period ending ~~September~~June 30, 2018 and decreased the ALLL by ~~$60,000~~$21,000 in the ~~nine~~six month period ending ~~September~~June 30, 2018.

~~The loans described above decreased the ALLL by $5,000 in the three month period ending September 30, 2017 and decreased the ALLL by $29,000 in the nine month period ending September 30, 2017.~~

Of the ~~2018~~2019 modifications, ~~four were made a TDR due to terming out lines of credit, 18 were made TDR due to advancing or renewing money to a watch list credit, one loan made a TDR due to a reduction of the interest rate, 13~~six were made a TDR due to bankruptcy and 10seven were made a TDR because the current debt was refinanced due to maturity or for payment relief.

The following tables present loans by class modified as TDRs for which there was a payment default within twelve months following the modification during the three and ~~nine~~six month periods ended ~~September~~June 30, ~~2018,~~2019, and ~~September~~June 30, ~~2017:~~2018:

	Three Months Ended September 30, 2018 ($ in thousands)				Nine Months Ended September 30, 2018 ($ in thousands)				Three Months Ended June 30, 2019 ($ in thousands)				Six Months Ended June 30, 2019 ($ 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)		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	$	92		2	$	168
1-4 Family Non Owner Occupied		0		-		0		-		1		21		1		21
CRE Owner Occupied		0		-		0		-		0		-		0		-
CRE Non Owner Occupied		0		-		0		-		0		-		0		-
Agriculture Land		0		-		0		-		0		-		0		-
Other CRE		0		-		0		-		0		-		0		-
Commercial Working Capital or Other		3	$	2,644		3		2,644		0		-		3		2,311
Commercial Other		1		30		2		226		0		-		0		-
Home Equity and Improvement		1		61		1		61		0		-		1		61
Consumer Finance		0		-		0		-		0		-		0		-
Total		5	$	2,735		6	$	2,931		2	$	113		1	$	2,561

The TDRs that subsequently defaulted described above increased the allowance for loan losses by $5,000 and $4,000 for the three and six month period ended June 30, 2019.

The TDRs that subsequently defaulted described above had no effect on the ALLL for the three and ~~nine~~six month period ended ~~September~~June 30, 2018.

~~The TDRs that subsequently defaulted described above had no effect on the ALLL for the three and nine month periods ended September 30, 2017.~~

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 ~~September~~June 30, 2019, 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, 2018, 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, 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):

Accretable yield, or income expected to be collected, is as follows:
	2018			2017			2019			2018
Balance at January 1	$	804		$	-		$	468		$	804
New Loans Purchased		-			1,018			-			-
Accretion of Income		(115	)		(163	)		(18	)		(56	)
Reclassification from Non-accretable		-			-			-			-
Charge-off of Accretable Yield		(197	)		(8	)		-			(10	)
Balance at September 30	$	492		$	847
Balance at June 30							$	450		$	738

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during the ~~three or nine~~six months ended ~~September~~June 30, ~~2018~~2019 or ~~2017.~~2018. No allowances for loan losses were reversed during the same period.

Contractually required payments receivable of loans purchased with evidence of credit deterioration during the period ended September 30, 2017, using information as of the date of acquisition are included in the table below. There were no such loans purchased during the period ended September 30, 2018. (In Thousands)

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled ~~$642,000~~$705,000 as of ~~September~~June 30, ~~2018~~2019 and ~~$626,000~~$796,000 as of December 31, ~~2017.~~2018.

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

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
	(In Thousands)												(In Thousands)
Gain from sale of mortgage loans	$	1,280		$	1,200		$	3,744		$	3,577		$	1,775		$	1,383		$	3,076		$	2,464
Mortgage loans servicing revenue (expense):
Mortgage loans servicing revenue		929			911			2,806			2,769			943			933			1,882			1,877
Amortization of mortgage servicing rights		(340	)		(386	)		(1,009	)		(1,101	)		(391	)		(350	)		(677	)		(669	)
Mortgage servicing rights valuation adjustments		8			(27	)		91			21			(190	)		47			(303	)		83
		597			498			1,888			1,689			362			630			902			1,291

Net revenue from sale and servicing of mortgage loans	$	1,877		$	1,698		$	5,632		$	5,266		$	2,137		$	2,013		$	3,978		$	3,755

The unpaid principal balance of residential mortgage loans serviced for third parties was ~~$1.41~~$1.42 billion at ~~September~~June 30, ~~2018~~2019 and ~~$1.39~~$1.41 billion at December 31, ~~2017.~~2018.

Activity for capitalized mortgage servicing rights and the related valuation allowance follows for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017:~~2018:

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 liability of $43,000 was accrued at both ~~September~~June 30, ~~2018,~~2019, and December 31, ~~2017,~~2018, respectively. There was no expense or credit recognized related to the accrual in the three ~~and nine~~or six months ended ~~September~~June 30, ~~2018, while a credit of $34,000 and $131,000 was recognized in the three and nine months ended September 30, 2017.~~2019 or 2018.

Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. The Company chose to use the effective date approach. As such, all periods presented after January 1, 2019 are under ASC 842 whereas periods presented prior to January 1, 2019 are in accordance with prior lease accounting of ASC 840. Financial information was not updated and the disclosures required under ASC 842 were not provided for dates and periods before January 1, 2019.

As of June 30, 2019, the Company has entered into lease agreements covering seven First Insurance offices, five banking center locations, one loan production office, two land leases for which the Company owns the banking centers, one land lease which is primarily used for parking, one land lease for future branch development and numerous stand-alone Automated Teller Machine sites with varying terms and options to renew. First Federal and First Insurance share office space for one lease as a branch and insurance office. The lease agreements have maturity dates ranging from December 2019 to December 2039, some of which include options for multiple five and ten year extensions. The weighted average remaining life of the lease term for these leases was 17.80 years as of June 30, 2019.

The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded with the remaining lease term as of January 1, 2019 for leases that existed at adoption and as of the lease commencement date for leases subsequently entered in to. The weighted average discount rate for leases was 3.49% as of June 30, 2019.

The total operating lease costs were $233,000 and $475,000 for the three and six months ended June 30, 2019, respectively, and $244,000 and $493,000 for the three and six months ended June 30, 2018, respectively.

The short-term lease costs and cash payments on operating leases were $0 and $225 for the three months ended June 30, 2019 respectively. The right-of-use asset, included in other assets, and lease liabilities, included in other liabilities, were $8.5 million and $9.0 million as of June 30, 2019 respectively.

Total estimated rental commitments for the operating leases were as follows as of June 30, 2019:

~~10. Deposits~~Future minimum commitments under non-cancelable operating leases were as follows as of December 31, 2018:

A reconciliation of the undiscounted cash flows in the maturity analysis above and the lease liability recognized in the consolidated balance sheet as of June 30, 2019, is shown below.

On February 28, 2019, the Company entered into a new lease agreement with an effective date of January 1, 2020, which will result in an additional right-of-use asset and lease liability of approximately $2.0 million.

	September 30, 2018		December 31, 2017		June 30, 2019		December 31, 2018
	(In Thousands)				(In Thousands)
Non-interest-bearing checking accounts	$	556,316	$	571,360	$	584,735	$	607,198
Interest-bearing checking and money market accounts		1,016,294		1,005,519		1,088,694		1,040,471
Savings deposits		293,359		302,022		304,051		292,829
Retail certificates of deposit less than $250,000		564,379		504,912		610,345		591,822
Retail certificates of deposit greater than $250,000		94,083		53,843		92,812		88,562
	$	2,524,431	$	2,437,656	$	2,680,637	$	2,620,882

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

	September 30, 2018			December 31, 2017			June 30, 2019			December 31, 2018
	(In Thousands)						(In Thousands)
FHLB Advances:
Single maturity fixed rate advances	$	59,000		$	72,000		$	84,000		$	59,000
Putable advances		-			5,000
Amortizable mortgage advances		1,243			7,306			1,149			1,213
Overnight advances		40,000			-			20,051			25,000
Fair value adjustment on acquired balances		(23	)		(27	)		(22	)		(24	)
Total	$	100,220		$	84,279		$	105,178		$	85,189
Junior subordinated debentures owed to unconsolidated subsidiary trusts	$	36,083		$	36,083		$	36,083		$	36,083

In March 2007, the Company sponsored an affiliated trust, First Defiance Statutory Trust II ~~(Trust~~(“Trust Affiliate ~~II)~~II”) that issued $15 million of Guaranteed Capital Trust Securities ~~(Trust~~(“Trust Preferred ~~Securities)~~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 Affiliate II (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~~coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate II was ~~3.83%~~3.91% as of ~~September~~June 30, ~~2018,~~2019, and ~~3.09%~~4.29% as of December 31, ~~2017.~~2018.

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~~(“Trust Affiliate I)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 Affiliate I (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~~coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate I was ~~3.71%~~3.79% and ~~2.97%~~4.17% on ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

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

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

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 ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, 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
At September 30, 2018			(In Thousands)
													(In Thousands)
At June 30, 2019
Repurchase agreements:
Mortgage-backed securities – residential	$	3,875	$	-	$	-	$	-	$	3,875	$	3,064	$	-	$	-	$	-	$	3,064
Collateralized mortgage obligations		287		-		-		-		287
Total borrowings	$	4,162	$	-	$	-	$	-	$	4,162	$	3,064	$	-	$	-	$	-	$	3,064
Gross amount of recognized liabilities for repurchase agreements									$	4,162									$	3,064

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):

	September 30, 2018				December 31, 2017				June 30, 2019				December 31, 2018
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate		Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	43,359	$	171,337	$	42,458	$	161,778	$	88,737	$	144,249	$	44,352	$	114,308
Unused lines of credit		9,729		381,265		6,245		408,831		7,804		397,825		7,523		382,189
Standby letters of credit		-		7,256		-		7,605		-		9,206		-		7,239
Total	$	53,088	$	559,858	$	48,703	$	578,214	$	96,541	$	551,280	$	51,875	$	503,736

Commitments to make loans are generally made for periods of 60 days or less. In addition to the above commitments, First Defiance had commitments to sell ~~$20.0~~$37.1 million and ~~$14.9~~$8.6 million of loans to Freddie Mac, Fannie Mae, FHLB or BB&T Mortgage at ~~September~~June 30, ~~2018,~~2019, and December 31, ~~2017,~~2018, 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 ~~2013.~~2014. The Company currently operates primarily in the states of Ohio and Michigan, which tax financial institutions based on their equity rather than their income.

~~The Tax Act 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 ~~$19.2~~$37.1 million and ~~$14.8~~$8.6 million of interest rate lock commitments at ~~September~~June 30, ~~2018,~~2019, and December 31, ~~2017,~~2018, respectively. There were ~~$26.8~~$37.1 million and ~~$23.2~~$11.5 million of forward commitments for the future delivery of residential mortgage loans at ~~September~~June 30, ~~2018,~~2019, and December 31, ~~2017,~~2018, respectively.

The fair value of these mortgage banking derivatives are reflected by a derivative asset recorded in other assets in the Consolidated Statements of Financial 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 September 30,					Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2018			2017		2018		2017		2019		2018		2019		2018
	(In Thousands)									(In Thousands)
Derivatives not designated as hedging instruments

Mortgage Banking Derivatives – Gain (Loss)	$	(111	)	$	47	$	67	$	330	$	455	$	136	$	893	$	178

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
Three months ended September 30, 2018:	(In Thousands)
									(In Thousands)
Three months ended June 30, 2019:
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period									$	3,289	$	(691	)	$	2,598
Reclassification adjustment for net gains included in net income										-		-			-
Defined benefit postretirement medical plan:
Reclassification adjustment for deferred tax on defined benefit postretirement medical plan										-		-			-
Total other comprehensive loss									$	3,289	$	(691	)	$	2,598

Six months ended June 30, 2019:
Securities available for sale:
Change in net unrealized gain/loss during the period	$	(2,058	)	$	432	$	(1,626	)	$	7,892	$	(1,659	)	$	6,233
Reclassification adjustment for net gains included in net income		(76	)		16		(60	)
Defined benefit postretirement medical plan:
Reclassification adjustment for deferred tax on defined benefit
Postretirement medical plan										-		82			82
Total other comprehensive loss	$	(2,134	)	$	448	$	(1,686	)	$	7,892	$	(1,577	)	$	6,315

Nine months ended September 30, 2018:
Securities available for sale:
Change in net unrealized gain/loss during the period	$	(6,487	)	$	1,362	$	(5,125	)
Reclassification adjustment for net gains included in net income		(76	)		16		(60	)
Total other comprehensive loss	$	(6,563	)	$	1,378	$	(5,185	)

	Before Tax Amount			Tax (Expense) Benefit			Net of Tax Amount			Before Tax Amount			Tax Expense (Benefit)		Net of Tax Amount
Three months ended September 30, 2017:	(In Thousands)
										(In Thousands)
Three months ended June 30, 2018:
Securities available for sale:
Change in net unrealized gain/loss during the period	$	(777	)	$	272		$	(505	)	$	(872	)	$	183	$	(689	)
Reclassification adjustment for net gains included in net income		(158	)		55			(103	)					-		-
Total other comprehensive loss	$	(935	)	$	327		$	(608	)	$	(872	)	$	183	$	(689	)

Nine months ended September 30, 2017:
Six months ended June 30, 2018:
Securities available for sale:
Change in net unrealized gain/loss during the period	$	3,383		$	(1,183	)	$	2,200		$	(4,429	)	$	930	$	(3,499	)
Reclassification adjustment for net gains included in net income		(425	)		148			(277	)		-			-		-
Total other comprehensive income	$	2,958		$	(1,035	)	$	1,923
Total other comprehensive loss										$	(4,429	)	$	930	$	(3,499	)

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 (Loss)			For Sale			Benefit			Income (Loss)
	(In Thousands)									(In Thousands)
Balance January 1, 2018	$	601		$	(384	)	$	217
Balance January 1, 2019										$	(2,057	)	$	(91	)	$	(2,148	)
Other comprehensive income before reclassifications		(5,125	)		-			(5,125	)		6,233			-			6,233
Amounts reclassified from accumulated other comprehensive income		(60	)		-			(60	)		-			82			82

Net other comprehensive income during period		(5,185	)		-			(5,185	)		6,233			82			6,315

Balance June 30, 2019										$	4,176		$	(9	)	$	4,167

Balance January 1, 2018										$	601		$	(384	)	$	217
Other comprehensive income (loss) before reclassifications											(3,499	)		-			(3,499	)

Net other comprehensive income (loss) during period											(3,499	)		-			(3,499	)

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

Balance September 30, 2018	$	(4,455	)	$	(466	)	$	(4,921	)


Balance January 1, 2017	$	504		$	(289	)	$	215
Other comprehensive income before reclassifications		2,200			-			2,200
Amounts reclassified from accumulated other comprehensive income		(277	)		-			(277	)

Net other comprehensive income during period		1,923			-			1,923

Balance September 30, 2017	$	2,427		$	(289	)	$	2,138
Balance June 30, 2018										$	(2,769	)	$	(466	)	$	(3,235	)

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.~~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 statement of income as a component of income tax expense (benefit). The Company utilized the proportional amortization method for all of its instruments. As of ~~September~~June 30, ~~2018,~~2019, and December 31, ~~2017,~~2018, the Company had ~~$11.5~~$13.7 million and ~~$9.2~~$11.3 million in qualified investments recorded in other assets and ~~$7.2~~$8.8 million and ~~$6.2~~$6.9 million in unfunded commitments recorded in other liabilities, respectively.

As of ~~September~~June 30, ~~2018,~~2019, the expected payments for unfunded affordable housing commitments were as follows:

(dollars in thousands)	Amount		Amount
2018	$	1,205
2019		1,917	$	1,806
2020		1,954		2,402
2021		467		2,318
2022		338		525
2023				409
Thereafter		1,297		1,334
Total Unfunded Commitments	$	7,178	$	8,794

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 ~~September~~June 30, ~~2018~~2019 and ~~2017.~~2018.

	Nine Months Ended September 30,				Three Months Ended June 30,
(dollars in thousands)	2018		2017		2019		2018
Proportional Amortization Method
Tax credits and other tax benefits recognized	$	785	$	640	$	328	$	254
Amortization expense in federal income taxes		703		502		284		234

There were no impairment losses of LIHTC investments for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~2018.

Effective February 24, 2017, the Company acquired Commercial Bancshares, Inc. (“Commercial Bancshares”) and its subsidiary, The Commercial Savings Bank (“CSB”), pursuant to an Agreement and Plan of Merger (“merger agreement”), dated August 23, 2016. The acquisition was accomplished by the merger of Commercial Bancshares into First Defiance, immediately followed by the merger of CSB into First Federal. CSB operated 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 included in these financial statements is based on final valuations.

In accordance with ASC Topic 805, Business Combinations, the Company expensed approximately $3.7 million of direct acquisition costs, of which $2.8 million was to settle employment and benefit agreements and for personnel expenses related to operating the new Commercial Bancshares locations. The Company recorded $28.9 million of goodwill and $4.9 million of intangible assets. Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized and is primarily 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 $28.9 million is 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.

Under the terms of the merger agreement, Commercial Bancshares common shareholders had the opportunity to elect to receive 2.3616 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 2,279,004 shares of its common stock and paid $12.3 million in cash to the former shareholders of Commercial Bancshares.

On April 13, 2017, First Defiance and Corporate One Benefits Agency, Inc. (“Corporate One”) jointly announced the acquisition of Corporate One’s business by First Defiance. The total purchase price paid in cash was made up of the following: $6.5 million was paid at closing, $500,000 was due and paid the second quarter of 2018, and up to $2.3 million may be due at the end of a three-year earn-out based on the compound annual growth rate of net revenue over the performance period of Corporate One, for a total purchase price of $9.3 million. The recorded fair value of the $2.3 million earn-out was $1.8 million at December 31, 2017. As of December 31, 2017, total Company recorded goodwill of $7.9 million as well as identifiable intangible assets of $756,000 consisting of a customer relationship intangible of $564,000 and a non-compete intangible of $192,000. The fair value included in these financial statements is based on final valuation. Corporate One was a full-service employee benefits consulting organization founded in 1996 with offices located in Archbold, Findlay, Fostoria and Tiffin, Ohio. Corporate One consulted employers to better manage their employee benefit programs to effectively lead them into the future. 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 and other publicly available documents, including the documents incorporated herein by reference, 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”, “intend”, “plan”, “seek”, “believe”, “protect”, “estimate”, “likely”, “should”, 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~~In addition to results presented in accordance with GAAP, this report includes non-GAAP financial ~~measures and certain~~measures. The Company believes these non-GAAP financial measures ~~which are presented as management believes they are helpful~~provide additional information that is useful to investors in ~~understanding~~helping to understand the ~~Company’s results~~underlying performance and trends of ~~operations or financial position.~~the Company. Fully taxable-equivalent (“FTE”) is an adjustment to net interest income to reflect tax-exempt income on an equivalent before-tax basis.

Non-GAAP financial measures have inherent limitations, which are not required to be uniformly applied and are not audited. Readers should be aware of these limitations and should be cautious with respect to the use of such measures. To mitigate these limitations, The Company has practices in place to ensure that these measures are calculated using the appropriate GAAP or regulatory components in their entirety and to ensure that our performance is properly reflected to facilitate consistent period-to-period comparisons. The Company’s method of calculating these non-GAAP measures may differ from methods used by other companies. Although the Company believes the non-GAAP financial measures disclosed in this report enhance investors' understanding of our business and performance, these non-GAAP measures should not be considered in isolation, or as a substitute for those financial measures prepared in accordance with GAAP.

The following tables present a reconciliation of non-GAAP measures to their respective GAAP measures for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017.~~2018.

First Defiance has established various accounting policies which govern the application of GAAP 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 ~~2017~~2018 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 ~~2017~~2018 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 ~~nine~~six months of ~~2018.~~2019.

First Defiance Financial Corp. (“First Defiance” or ~~the “Company”~~“the Company”) is a unitary thrift holding company that, ~~conducts business~~ through its ~~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”~~(collectively, “the Subsidiaries”)., focuses on traditional banking and property, casualty, life and group health insurance products.

On June 22, 2018, the Company announced a stock split in the form of a share distribution of one common share for each of the Company’s authorized and outstanding common shares. The stock split was distributed on July 12, 2018, to shareholders of record as of July 2, 2018. All share and per share data in this Quarterly Report on Form 10-Q has been adjusted and is reflective of the stock split.

First Federal is a federally chartered stock savings bank 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, three full-service banking center offices in Allen County in northeast Indiana, five full-service banking center offices in Lenawee County in southeast Michigan and one commercial loan production office in Ann Arbor, ~~Michigan that was opened late in the fourth quarter of 2017.~~Michigan.

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

First Insurance is a wholly owned subsidiary of First Defiance. First Insurance is an insurance agency that conducts business ~~through offices located in the Archbold, Bowling Green, Bryan, Defiance, Findlay, Fostoria, Lima, Sylvania, and Tiffin, Ohio areas.~~throughout First Federal’s markets. The Maumee and Oregon, Ohio, offices were consolidated into a new office in Sylvania, Ohio, in January 2018. First Insurance offers property and casualty insurance, life insurance and group health insurance.

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

Regulation - First Defiance is subject to regulation, examination and oversight by the Federal Reserve Board (“Federal Reserve”). First Federal is subject to regulation, examination and oversight by the Office of the Comptroller of the Currency (“OCC”). Because the ~~Federal Deposit Insurance Corporation (“FDIC”)~~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 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 Defiance is also subject to various Ohio laws ~~that~~which restrict takeover bids, tender offers and control-share acquisitions involving public companies ~~that~~which have significant ties to Ohio.

On May 25, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Regulatory Relief Act”) was signed into law. The Regulatory Relief Act was designed to provide regulatory relief for banking organizations, particularly for all but the very largest, those with assets in excess of $250 billion. Bank holding companies with assets of less than $100 billion are no longer subject to enhanced prudential standards, and those with assets between $100 billion and $250 billion will be relieved of those requirements in 18 months, unless the Federal Reserve Board takes action to maintain those standards. Certain regulatory requirements applied only to banks with assets in excess of $50 billion and so did not apply to First Federal even before the enactment of the Regulatory Relief Act.

The Regulatory Relief Act also provides that the banking regulators must adopt regulations implementing the provision that banking organizations with assets of less than $10 billion are permitted to satisfy capital standards and be considered “well capitalized” under the prompt corrective action framework if their leverage ratios of tangible assets to average consolidated assets is between 8% and 10%, unless the bank’s federal banking agency determines that the organization’s risk profile warrants a more stringent leverage ratio. The OCC, the Federal Reserve Board and the FDIC have proposed for comment the leverage ratio framework for any banking organization with total consolidated assets of less than $10 billion, limited amounts of certain types of assets and off-balance sheet exposures, and a community bank leverage ratio greater than 9%. The community bank leverage ratio would be calculated as the ratio of tangible equity capital divided by average total consolidated assets. Tangible equity capital would be defined as total bank equity capital or total holding company equity capital, as applicable, prior to including minority interests, and excluding accumulated other comprehensive income, deferred tax assets arising from net operating loss and tax credit carry forwards, goodwill and other intangible assets (other than mortgage servicing assets). Average total assets would be calculated in a manner similar to the current tier 1 leverage ratio denominator in that amounts deducted from the community bank leverage ratio numerator would also be excluded from the community bank leverage ratio denominator.

The OCC, the Federal Reserve Board and the FDIC also adopted a rule providing banking organizations the option to phase in over a three-year period the day-one adverse effects on regulatory capital that may result from the adoption of new current expected credit loss methodology accounting under GAAP.

The Regulatory Relief Act also relieves bank holding companies and banks with assets of less than $100 billion in assets from certain record-keeping, reporting and disclosure requirements.

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

Regulatory Capital Requirements and Prompt Corrective Action – - 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~~federal 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, ~~whereas~~and a new capital conservation buffer and deductions from common equity capital ~~phase~~phased 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 rules include (a) a minimum common equity Tier 1 (“CET1”) capital ratio of 4.5%, (b) a minimum Tier 1 capital ratio of 6.0%, (c) a minimum total capital ratio of 8.0%, and (d) a minimum leverage ratio of 4%.

Common equity for the CET1 capital ratio includes common stock (plus related surplus) and retained earnings, plus limited amounts of minority interests in the form of common stock, less the majority of certain regulatory deductions.

Tier 1 capital includes common equity as defined for the CET1 capital ratio, plus certain non-cumulative preferred stock and related surplus, cumulative preferred stock and related surplus 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 (“ALLL”),~~ALLL, subject to new eligibility criteria, less applicable deductions.

The deductions from CET1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments and investments in the capital of unconsolidated financial institutions (above certain levels).

Under the guidelines, capital is compared to the relative risk 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 rules also place restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive officers if the company does not hold a capital conservation buffer of greater than 2.5% composed of CET1 capital above its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. The capital conservation buffer ~~phases~~was fully phased in ~~through~~effective January 1, 2019 ~~and is currently 1.875%~~at 2.5%.

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

In order to be “well-capitalized,” a financial institution must have a CET1 capital ratio of 6.5%, a total risk-based capital ratio of at least 10%, a Tier 1 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 ~~September~~June 30, ~~2018,~~2019, First Federal met the ratio requirements in effect to be deemed "well-capitalized."

Deposit Insurance - ~~The~~The FDIC maintains the ~~Depositors~~Deposit Insurance Fund (“~~DIF”~~DIF’), which insures the deposit accounts of First Federal to the maximum amount provided by law. The general insurance limit is $250,000 per separately insured depositor. This insurance is backed by the full faith and credit of the United States government.

The FDIC assesses deposit insurance premiums on each insured institution quarterly based on risk characteristics of the institution. The FDIC may also impose a special assessment in an emergency situation.

Pursuant to the Dodd-Frank Act, the FDIC has established 2.0% as the designated reserve ratio (“DRR”), which is the 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 Dodd-Frank Act. The Dodd-Frank Act requires the FDIC to 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 increase of the DRR to 1.35%. The DRR reached 1.36% at September 30, 2018. The credits will be applied when the reserve ratio is at least 1.38%. The rules also changed the method to determine risk-based assessment rates for established banks with less than $10 billion in assets to better ensure that banks taking on greater risks pay more for deposit insurance than less risky banks.

In addition, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, a mixed-ownership government corporation established to recapitalize a predecessor to the DIF. These assessments will continue until the Financing Corporation bonds mature in September 2019.

As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, federally-insured institutions. It also may prohibit any federally-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the DIF. The FDIC also has the authority to take enforcement actions against insured institutions. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged or is engaging in unsafe 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.

Business Strategy - First Defiance’s primary objective is to be a high-performing ~~community focused~~community-focused financial institution, well regarded in its market areas. First Defiance accomplishes this through emphasis on local decision making and empowering its employees with tools and knowledge to serve its customers’ needs. First Defiance believes in a “Customer First” philosophy that is strengthened by its 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 meet 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 (“SBA”) 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”)~~online bill pay, and online ~~bill pay.~~account opening as well as the MoneyPass ATM Network offering access to our customers to over 32,000 ATMs nationwide without a surcharge fee.

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

Deposit Growth - First Federal’s focus has been to grow core deposits with an emphasis on total relationship banking 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 expansion 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, Investments –Debt and Equity Securities.

First Defiance’s securities portfolio is classified as either “available-for-sale” or “held-to-maturity.” Securities classified as available-for-sale may be sold prior to maturity due to changes in interest rates, prepayment risks, and availability of alternative investments, or to meet the Company’s liquidity needs. Securities classified as available-for-sale, which are stated at fair value, had a recorded value of $296.1 million at June 30, 2019. The available-for-sale portfolio included obligations of U.S. federal government corporations and agencies ($2.5 million), certain municipal obligations ($101.5 million), CMOs/REMICs ($99.9 million), corporate bonds ($13.0 million), and mortgage backed securities ($79.2 million). 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 ~~$603,000~~$485,000 at ~~September~~June 30, 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 $283.0 million at September 30, 2018. The available-for-sale portfolio included obligations of U.S. federal government corporations and agencies ($2.5 million), certain municipal obligations ($100.2 million), CMOs/REMICs ($100.8 million), corporate bonds ($13.1 million), and mortgage backed securities ($66.5 million).2019.

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 Company’s 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 ensure that the appraiser is not influenced by the account officer in any way in making their determination of value.

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

When a collateral dependent loan is downgraded to classified status, First Federal reviews the most current appraisal on file and, if necessary, based on First Federal’s assessment of the appraisal, such as age, market, etc., First Federal will discount this amount to a more appropriate current value based on inputs from lenders and realtors. This amount may then be discounted further by First Federal’s estimation of the carrying and selling costs. In most instances, if the appraisal is more than twelve to fifteen months old, a new appraisal may be required. Finally, First Federal assesses whether there is any collateral short fall, taking into consideration guarantor support and liquidity, and determines if a charge off is necessary.

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 troubled debt restructuring (“TDR”) if First Federal for economic or legal reasons related to the borrower’s financial difficulties grants a concession to the borrower that it would not otherwise consider. For loans that are considered TDRs, 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 ALLL. 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, Federal Home Loan Bank of Cincinnati (“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, non-interest expenses (such as employee compensation and benefits, occupancy and equipment expense, deposit insurance premiums, and miscellaneous other expenses) and federal income tax expense.

At ~~September~~June 30, ~~2018,~~2019, First Defiance's total assets, deposits and stockholders’ equity amounted to ~~$3.10~~$3.28 billion, ~~$2.52~~$2.68 billion and ~~$393.5~~$407.2 million, respectively, compared to ~~$2.99~~$3.18 billion, ~~$2.44~~$2.62 billion and ~~$373.3~~$399.6 million, respectively, at December 31, ~~2017.~~2018.

Net loans receivable (excluding loans held for sale) increased ~~$106.7~~$83.6 million to ~~$2.43~~$2.6 billion. The variance in loans receivable between ~~September~~June 30, ~~2018,~~2019, and December 31, ~~2017~~2018, includes an increase of ~~$126.3~~$58.6 million in construction loans, a $21.0 million increase in commercial loans, a $3.3 million increase in commercial real estate loans, ~~$38.4~~a $3.3 million increase in multi-family residential ~~real estate~~ loans and ~~$3.3~~a $0.9 million increase in consumer loans. That growth was ~~partially~~slightly offset by a ~~$18.4 million decrease in construction loans, a $36.7 decrease in commercial loans, and a $6.2~~$2.3 million decrease in home equity and improvement loans and a $0.6 million decrease in residential real estate loans.

The investment securities portfolio increased ~~$22.3~~$2.0 million to ~~$283.6~~$296.6 million at ~~September~~June 30, ~~2018~~2019 from ~~$261.3~~$294.6 million at December 31, ~~2017.~~2018. The increase is ~~mainly~~ a result of ~~$51.5~~$11.2 million of securities being purchased during the ~~period. This was offset by $19.9~~first six months of 2019 as well as a $7.9 million ~~of securities maturing or being called in the period, $1.9 million in the sale of securities and $0.9 million in amortization. Lastly, there was a $6.6 million decrease~~increase in the market value of available-for-sale securities during the period ended ~~September~~June 30, ~~2018.~~2019. This was offset by $16.4 million of securities maturing or being called in the first half of 2019 and $0.6 million in amortization.

Deposits increased $59.8 million from ~~$2.44~~$2.62 billion at December 31, ~~2017,~~2018, to ~~$2.52~~$2.68 billion as of ~~September~~June 30, ~~2018.~~2019. Interest bearing demand and money market deposits increased ~~$10.8~~$48.2 million to ~~$1.02~~$1.09 billion, ~~and~~ retail time deposits increased ~~$99.7~~$22.8 million to ~~$658.5 million. Non-interest bearing demand deposits decreased $15.0 million to $556.3~~$703.2 million and savings deposits ~~decreased $8.7~~increased $11.2 million to ~~$293.4~~$304.1 million. These increases were partially offset by a $22.5 million decrease in non-interest bearing demand deposits to $584.7 million.

Stockholders’ equity increased $7.6 million from ~~$373.3~~$399.6 million at December 31, ~~2017,~~2018, to ~~$393.5~~$407.2 million at ~~September~~June 30, ~~2018.~~2019. The increase in stockholders’ equity was primarily the result of recording net income of ~~$34.2 million. This~~$23.7 million and $6.3 million in other comprehensive gain. The increase was partially offset by ~~$9.6~~the repurchase of 515,977 shares of common stock totaling $15.1 million and $7.5 million of common stock dividends being ~~paid in the first nine months of 2018 and $5.2 million other comprehensive loss.~~paid.

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

	Three Months Ended September 30,														Three Months Ended June 30,
	2018							2017							2019							2018
	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	$	2,403,932	$	29,397		4.85	%	$	2,251,071	$	26,025		4.59	%	$	2,561,341	$	32,683		5.12	%	$	2,337,294	$	27,685		4.75	%
Securities (3)		286,507		2,308		3.16			259,310		2,114		3.29			299,235		2,364		3.19			280,131		2,265		3.20
Interest bearing deposits		49,734		275		2.19			64,090		209		1.29			41,934		260		2.49			80,914		373		1.85
FHLB stock		14,388		240		6.62			15,992		209		5.18			12,077		183		6.08			15,989		227		5.69
Total interest-earning assets		2,754,561		32,220		4.63			2,590,463		28,557		4.38			2,914,587		35,490		4.89			2,714,328		30,550		4.51
Non-interest-earning assets		304,664							316,332							309,410							304,480
Total assets	$	3,059,225						$	2,906,795						$	3,223,997						$	3,018,808

Interest-bearing liabilities:
Deposits	$	1,955,518	$	3,753		0.76	%	$	1,818,670	$	2,391		0.52	%	$	2,093,751	$	5,581		1.07	%	$	1,933,409	$	3,144		0.65	%
FHLB advances and other		77,719		342		1.75			104,648		431		1.63			62,466		304		1.95			67,261		282		1.68
Subordinated debentures		36,196		334		3.66			36,158		239		2.62			36,083		350		3.89			36,198		320		3.55
Securities sold under
repurchase agreements		5,431		5		0.37			28,182		13		0.18
Securities sold under repurchase agreements																4,607		17		1.48			9,140		6		0.26
Total interest-bearing liabilities		2,074,864		4,434		0.85			1,987,658		3,074		0.61			2,196,907		6,252		1.14			2,046,008		3,752		0.74
Non-interest bearing deposits		558,190		-					520,147		-					584,309		-					554,021		-
Total including non-interest bearing demand deposits		2,633,054		4,434		0.67			2,507,805		3,074		0.49			2,781,216		6,252		0.90			2,600,029		3,752		0.58
Other non-interest-bearing liabilities		36,810							35,378							44,169							37,614
Total liabilities		2,669,864							2,543,183							2,825,385							2,637,643
Stockholders’ equity		389,361							363,612							398,612							381,165
Total liabilities and stock-
Holders’ equity	$	3,059,225						$	2,906,795
Total liabilities and stock- Holders’ equity															$	3,223,997						$	3,018,808
Net interest income; interest rate spread			$	27,786		3.78	%			$	25,483		3.77	%			$	29,238		3.75	%			$	26,798		3.77	%
Net interest margin (4)						4.00	%						3.91	%						4.03	%						3.95	%
Average interest-earning assets to average interest-bearing liabilities						133	%						130	%						133	%						133	%

	Nine Months Ended September 30,														Six Months Ended June 30,
	2018							2017							2019							2018
	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	$	2,352,514	$	83,633		4.75	%	$	2,171,733	$	73,415		4.52	%	$	2,539,312	$	63,921		5.08	%	$	2,326,805	$	54,236		4.70	%
Securities (3)		276,745		6,637		3.21			257,924		6,475		3.40			297,530		4,792		3.25			271,864		4,329		3.21
Interest bearing deposits		66,283		945		1.91			66,299		555		1.12			43,343		545		2.54			74,557		670		1.81
FHLB stock		15,456		698		6.04			15,513		562		4.84			12,779		398		6.28			15,990		458		5.78
Total interest-earning assets		2,710,998		91,913		4.53			2,511,469		81,007		4.32			2,892,964		69,656		4.86			2,689,216		59,693		4.48
Non-interest-earning assets		307,634							301,091							310,540							309,120
Total assets	$	3,018,632						$	2,812,560						$	3,203,504						$	2,998,336

Interest-bearing liabilities:
Deposits	$	1,925,972	$	9,508		0.66	%	$	1,743,769	$	6,357		0.49	%	$	2,077,387	$	10,586		1.03	%	$	1,911,199	$	5,755		0.61	%
FHLB advances		74,634		943		1.69			104,616		1,211		1.55			60,710		580		1.93			73,092		601		1.66
Subordinated debentures		36,195		934		3.45			36,155		682		2.51			36,083		714		3.99			36,195		600		3.34
Securities sold under repurchase agreements		10,185		19		0.25			27,484		41		0.20			5,019		21		0.84			12,561		14		0.22
Total interest-bearing liabilities		2,046,986		11,404		0.74			1,912,024		8,291		0.58			2,179,199		11,901		1.10			2,033,047		6,970		0.69
Non-interest bearing deposits		552,554		-					521,161		-					582,722		-					549,735		-
Total including non-interest bearing demand deposits		2,599,540		11,404		0.59			2,433,185		8,291		0.46			2,761,921		11,901		0.87			2,582,782		6,970		0.54
Other non-interest-bearing liabilities		37,586							34,183							44,708							37,975
Total liabilities		2,637,126							2,467,368							2,806,629							2,620,757
Stockholders' equity		381,506							345,192							396,875							377,579
Total liabilities and stock-holders' equity	$	3,018,632						$	2,812,560
Total liabilities and stock- holders' equity															$	3,203,504						$	2,998,336
Net interest income; interest rate spread			$	80,509		3.79	%			$	72,716		3.74	%			$	57,755		3.76	%			$	52,723		3.79	%
Net interest margin (4)						3.97	%						3.88	%						4.03	%						3.95	%
Average interest-earning assets to average interest-bearing liabilities						132	%						131	%						133	%						132	%

On a consolidated basis, First Defiance’s net income for the quarter ended ~~September~~June 30, ~~2018,~~2019, was ~~$11.3~~$12.2 million compared to net income of ~~$9.4~~$11.1 million for the comparable period in ~~2017.~~2018. On a per share basis, basic earnings per share were $0.62 and diluted earnings per common share were $0.61 for the three months ended ~~September~~June 30, ~~2018, were both $0.55,~~2019, compared to basic and diluted earnings per ~~common~~ share of ~~$0.46~~$0.54 for the quarter ended ~~September~~June 30, ~~2017.~~2018.

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 ~~$27.5~~$29.0 million for the quarter ended ~~September~~June 30, ~~2018,~~2019, up from ~~$25.0~~$26.5 million for the same period in ~~2017.~~2018. The tax-equivalent net interest margin was ~~4.00%~~4.03% for the quarter ended ~~September~~June 30, ~~2018,~~2019, an increase from ~~3.91%~~3.95% for the same period in ~~2017.~~2018. The increase in margin between the 2019 and 2018 ~~and 2017 third~~second quarters was primarily ~~a result of the rate hikes over the past year coupled with growth on interest-earning~~due to an increase in average earning assets ~~outpacing growth of interest-bearing liabilities.~~and an increase in rates. The yield on interest-earning assets was ~~4.63%~~4.89% for the quarter ended ~~September~~June 30, ~~2018,~~2019, up 2538 basis points from ~~4.38%~~4.51% for the same period in ~~2017.~~2018. The cost of interest-bearing liabilities between the two periods increased 2440 basis points to ~~0.85%~~1.14% in the ~~third~~second quarter of ~~2018~~2019 from ~~0.61%~~0.74% in the ~~same period in 2017.~~second quarter of 2018.

Total interest income increased ~~$3.9~~$4.9 million to ~~$32.0~~$35.2 million for the quarter ended ~~September~~June 30, ~~2018,~~2019, from ~~$28.1~~$30.3 million for the quarter ended ~~September~~June 30, ~~2017.~~2018. This ~~was primarily~~is due to ~~continued~~solid loan growth and an increase in ~~interest~~ rates. Income from loans increased to ~~$29.4~~$32.7 million for the quarter ended ~~September~~June 30, ~~2018,~~2019, compared to ~~$26.0~~$27.7 million for the same period in ~~2017~~2018 due to average loan growth of ~~$152.9~~$224.0 million. The increase in the loan portfolio yield to ~~4.85% at September~~5.12% for the three months ended June 30, ~~2018~~2019 from ~~4.59% at September 30, 2017,~~4.75% for the same period in 2018, was due mainly to increasing interest ~~rates. The investment interest~~rates and management’s continued discipline on loan pricing. Interest income from investments increased ~~$389,000~~$99,000 in the ~~third~~second quarter of ~~2018~~2019 to $2.1 ~~million; however,~~million. The yield decreased slightly to 3.19% for the ~~yield dropped 13 basis points to 3.16% at September~~three months ended June 30, ~~2018,~~2019, compared to 3.29% at September 30, 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 increased to $275,000 and $240,000, respectively, in the third quarter of 2018 compared to $209,000 and $209,0003.20% for the same period in ~~2017 due~~2018. Income from interest bearing deposits and FHLB stock decreased to ~~increased~~$260,000 and $183,000 respectively in the second quarter of 2019 compared to $373,000 and $227,000 for the same period in 2018 as decreased volumes offset the increase in interest rates.

Interest expense increased by ~~$1.3~~$2.5 million in the ~~third~~second quarter of ~~2018~~2019 compared to the same period in ~~2017,~~2018, to ~~$4.4~~$6.3 million from ~~$3.1~~$3.8 million. The cost of ~~interest-bearing~~interest bearing liabilities increased 2440 basis points from ~~0.61%~~0.74% at ~~September~~June 30, ~~2017~~2018 to ~~0.85%~~1.14% at ~~September~~June 30, ~~2018.~~2019. Interest expense related to interest-bearing deposits was ~~$3.8~~$5.6 million in the ~~third~~second quarter of ~~2018~~2019 compared to ~~$2.4~~$3.1 million for the same period in ~~2017.~~2018. Interest expense recognized by the Company related to FHLB advances was ~~$342,000~~$304,000 in the ~~third~~second quarter of ~~2018~~2019 compared to ~~$431,000~~$282,000 for the same period in ~~2017~~2018 as decreased volumes offset the increase in interest rates. Expenses on subordinated debentures and notes payable were ~~$334,000~~$350,000 and ~~$5,000,~~$17,000 respectively in the ~~third~~second quarter of ~~2018~~2019 compared to ~~$239,000~~$320,000 and ~~$13,000~~$6,000 respectively for the same period in ~~2017.~~2018.

The ALLL 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 ALLL 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 ALLL 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 Company’s 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 ALLL associated with these types of loans.

The ALLL 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 SBA or Farm Service Agency ~~(“FSA”)~~ guarantees. The specific reserve portion of the ALLL was ~~$662,000~~$490,000 at ~~September~~June 30, ~~2018,~~2019, and ~~$758,000~~$595,000 at December 31, ~~2017.~~2018.

The second component is a general reserve, which is used to record loan loss reserves for groups of homogenous loans in which the Company estimates the potential losses incurred in the portfolio based on quantitative and qualitative factors. For purposes of the general reserve analysis, the loan portfolio is stratified into nine different loan pools based on loan type to allocate historic loss experience. The loss experience factor is then applied to the non-impaired loan portfolio. The Company utilizes a loss migration measurement for each loan portfolio segment with differentiation between loan risk grades in calculating the general reserve component for non-impaired loans. The Company’s historical loss calculation uses an average of all four-year loss migration periods to the present beginning with data from the second quarter 2011. Management believes this provides a precise calculation of historical losses by incorporating more data points for the average loss ratio and including periods that provide a more complete coverage of the full business cycle. Management believes that capturing the risk grade changes and cumulative losses over the life cycle of a loan more accurately depicts management’s estimate of historical losses as well as being more reflective of the ongoing risks in the loan portfolio.

The quantitative general allowance increased $100,000 to ~~$6.1~~$6.0 million at ~~September~~June 30, ~~2018,~~2019, from ~~$6.0~~$5.9 million at December 31, ~~2017.~~2018.

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 September 30, 2018,~~ indicated a general reserve of ~~$20.9~~$22.5 million at June 30, 2019 compared ~~with $20.0~~to $21.8 million at December 31, ~~2017, an increase of $900,000.~~2018. 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 loan segments decreased in the first ~~nine~~six months of ~~2018~~2019, due to ~~strengthening~~the favorable economic trends inand the ~~U.S. economy particularly unemployment rates which decreased in all markets.~~continued strength of collateral values.

The environmental factors for ~~all loan segments, but particularly~~ the commercial real estate, commercial loan and ~~commercial~~construction loan segments increased in the first ~~nine~~six months of ~~2018~~2019, mainly due to ~~an increase~~increases in credit concentrations and ~~an increase in the mix of lending in First Federal’s defined metro markets.~~deviations.

The risk factors for ~~all~~the residential and home equity loan segments ~~but particularly~~were increased slightly while the ~~commercial loan segment, were~~risk factors for the construction loans decreased slightly in the first ~~nine~~six months of ~~2018 due to favorable trends in the levels of non-performing loans and classified assets.~~2019.

First Defiance’s general reserve percentages for main loan segments not otherwise classified ranged from ~~0.47%~~0.44% for construction loans to ~~1.51%~~1.44% for home equity and improvement loans at ~~September~~June 30, ~~2018.~~2019.

As a result of the quantitative and qualitative analyses, along with the change in specific reserves and the increase in net charge-offs in the quarter, the Company’s provision for loan losses for the ~~third~~second quarter of ~~2018~~2019 was ~~$1.4 million~~$282,000 compared to ~~$462,000~~$423,000 for the same period in ~~2017.~~2018. The ALLL was ~~$27.6~~$28.9 million at ~~September~~June 30, ~~2018~~2019 and ~~$26.7~~$28.3 million at December 31, ~~2017.~~2018. The allowance for loans losses represented ~~1.13%~~1.10% of loans, net of undisbursed loan funds and deferred fees and costs, at ~~September~~June 30, ~~2018~~2019 and ~~1.14%~~1.12% at December 31, ~~2017.~~2018. In management’s opinion, the overall ALLL of ~~$27.6~~$28.9 million as of ~~September~~June 30, ~~2018,~~2019, is adequate to cover probable incurred losses.

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 and ~~nine~~six month periods ended ~~September~~June 30, ~~2018,~~2019, there were ~~$8,000 and $552,000, respectively of~~ write-downs of real estate held for ~~sale.~~sale in the amounts of $0 and $264,000, respectively. Management believes that the values recorded at ~~September~~June 30, ~~2018,~~2019, for real estate owned and repossessed assets represent the realizable value of such assets.

Total classified loans decreased to ~~$51.9~~$42.1 million at ~~September~~June 30, ~~2018,~~2019, compared to ~~$59.4~~$50.8 million at December 31, ~~2017,~~2018, a decrease of ~~$7.5~~$8.7 million due to payoffs and ~~an upgrade~~upgrades of a classified ~~relationship~~relationships during the ~~second quarter.~~first six months of 2019.

First Defiance’s ratio of ALLL to non-performing loans was ~~132.1%~~188.7% at ~~September~~June 30, ~~2018,~~2019, compared with ~~86.9%~~149.0% at December 31, ~~2017.~~2018. Management monitors collateral values of all loans included on the watch list that are collateral dependent and believes that allowances for those loans at ~~September~~June 30, ~~2018,~~2019, are appropriate. Of the ~~$20.9~~$15.3 million in non-accrual loans at ~~September~~June 30, ~~2018, $12.2~~2019, $9.4 million or ~~58.2%~~63.2% are less than 90 days past due.

At ~~September~~June 30, ~~2018,~~2019, First Defiance had total non-performing assets of ~~$22.6~~$15.3 million, compared to ~~$32.2~~$20.2 million at December 31, ~~2017.~~2018. Non-performing assets include loans that are on non-accrual, OREO and other assets held for sale. Non-performing assets at ~~September~~June 30, ~~2018,~~2019, and December 31, ~~2017,~~2018, by category were as follows:

	September 30,			December 31,			June 30,			December 31,
	2018			2017			2019			2018
	(In Thousands)						(In Thousands)
Non-performing loans:
One to four family residential real estate	$	3,512		$	3,037		$	3,194		$	3,640
Non-residential and multi-family residential real estate		11,692			18,219			8,233			10,357
Commercial		5,129			8,841			3,337			4,500
Construction		-			-			-			-
Home equity and improvement		562			590			550			393
Consumer finance		34			28			20			126
Total non-performing loans		20,929			30,715			15,334			19,016

Real estate owned		1,676			1,532			-			1,205
Total repossessed assets	$	1,676			1,532			-			1,205

Total Nonperforming assets	$	22,605		$	32,247		$	15,334		$	20,221

TDR loans, accruing	$	12,611		$	13,770		$	10,308		$	11,573

Total nonperforming assets as a percentage of total assets		0.73	%		1.08	%		0.47	%		0.64	%
Total nonperforming loans as a percentage of total loans*		0.85	%		1.31	%		0.58	%		0.75	%
Total nonperforming assets as a percentage of total loans plus REO*		0.92	%		1.37	%		0.58	%		0.80	%
ALLL as a percent of total nonperforming assets		122.27	%		82.75	%		188.69	%		140.11	%
* Total loans are net of undisbursed loan funds and deferred fees and costs.

Non-performing loans in the commercial loan category represented ~~1.05%~~0.63% of the total loans in that category at ~~September~~June 30, ~~2018,~~2019, compared to ~~1.68%~~0.88% for the same category at December 31, ~~2017.~~2018. Non-performing loans in the non-residential and multi-family residential real estate loan category were ~~0.86%~~0.58% of the total loans in this category at ~~September~~June 30, ~~2018,~~2019, compared to ~~1.47%~~0.74% at December 31, ~~2017.~~2018. Non-performing loans in the residential loan category represented ~~1.12%~~0.99% of the total loans in that category at ~~September~~June 30, ~~2018,~~2019, compared to ~~1.10%~~1.13% for the same category at December 31, ~~2017.~~2018.

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

	For the Nine Months Ended September 30, 2018						As of September 30, 2018					For the Six Months Ended June 30, 2019						As of June 30, 2019
	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	$	145			(57.54	)%	$	3,512		16.78	%	$	13			(11.93	)%	$	3,194		20.83	%
Construction		-			0.00	%		-		0.00	%		-			0.00	%		-		0.00	%
Commercial real estate		925			(367.06	)%		11,692		55.87	%
Multi-Family residential and Commercial real estate													(372	)		341.28	%		8,233		53.69	%
Commercial		(1,491	)		591.67	%		5,129		24.51	%		92			(84.40	)%		3,337		21.76	%
Consumer		107			(42.47	)%		34		0.16	%
Consumer Finance													145			(133.02	)%		20		0.13	%
Home equity and improvement		62			(24.60	)%		562		2.68	%		13			(11.93	)%		550		3.59	%
Total	$	(252	)		100.00	%	$	20,929		100.00	%	$	(109	)		100.00	%	$	15,334		100.00	%

	For the Quarter Ended												For the Quarter Ended
	3rd 2018		2nd 2018		1st 2018			4th 2017			3rd 2017		2nd 2019			1st 2019		4th 2018		3rd 2018		2nd 2018
	(In Thousands)												(In Thousands)

Allowance at beginning of period	$	27,321	$	27,267	$	26,683		$	26,341		$	25,915	$	28,164		$	28,331	$	27,639	$	27,321	$	27,267
Provision (credit) for loan losses		1,376		423		(1,095	)		314			462		282			212		472		1,376		423
Charge-offs:
Residential		136		78		16			170			60		11			172		31		136		78
Commercial real estate		1,048		254		55			29			-
Construction														-			-		-		-		-
Multi-Family residential and Commercial real estate														15			-		30		1,048		254
Commercial		528		84		97			210			64		13			187		15		528		84
Consumer finance		25		72		31			27			20		33			142		105		25		72
Home equity and improvement		36		41		117			55			92		64			33		75		36		41
Total charge-offs		1,773		529		316			491			236		136			534		256		1,773		529
Recoveries		715		160		1,995			519			200		624			155		476		715		160
Net charge-offs		1,058		369		(1,679	)		(28	)		36		(488	)		379		220		1,058		369
Ending allowance	$	27,639	$	27,321	$	27,267		$	26,683		$	26,341	$	28,934		$	28,164	$	28,331	$	27,639	$	27,321

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

	September 30, 2018					June 30, 2018					March 31, 2018					December 31, 2017					September 30, 2017					June 30, 2019					March 31, 2019					December 31, 2018					September 30, 2018					June 30, 2018
			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	$	2,824		12.04	%	$	2,682		12.18	%	$	2,534		11.15	%	$	2,532		11.14	%	$	2,538		11.33	%	$	2,793		11.67	%	$	2,811		11.96	%	$	2,881		12.11	%	$	2,824		12.04	%	$	2,682		12.18	%
Construction		615		10.54	%		737		11.25	%		667		10.19	%		647		10.76	%		578		10.23	%		887		12.16	%		731		11.32	%		682		9.97	%		615		10.54	%		737		11.25	%
Commercial real estate		14,680		52.39	%		14,166		50.85	%		13,756		51.88	%		13,056		50.10	%		12,774		50.38	%
Multi-Family residential and Commercial real estate																											15,251		51.12	%		15,069		51.87	%		15,142		52.71	%		14,680		52.39	%		14,166		50.85	%
Commercial		7,161		18.81	%		7,455		19.39	%		7,838		20.25	%		7,965		21.33	%		8,025		21.32	%		7,888		19.21	%		7,276		18.95	%		7,281		19.12	%		7,161		18.81	%		7,455		19.39	%
Consumer		288		1.25	%		249		1.18	%		263		1.13	%		228		1.18	%		241		1.21	%		352		1.28	%		349		1.27	%		319		1.29	%		288		1.25	%		249		1.18	%
Home equity and improvement		2,071		4.97	%		2,032		5.15	%		2,209		5.40	%		2,255		5.49	%		2,185		5.53	%		1,763		4.56	%		1,928		4.63	%		2,026		4.80	%		2,071		4.97	%		2,032		5.15	%
	$	27,639		100.00	%	$	27,321		100.00	%	$	27,267		100.00	%	$	26,683		100.00	%	$	26,341		100.00	%	$	28,934		100.00	%	$	28,164		100.00	%	$	28,331		100.00	%	$	27,639		100.00	%	$	27,321		100.00	%

	3rd Qtr 2018			2nd Qtr 2018			1st Qtr 2018			4th Qtr 2017			3rd Qtr 2017			2nd Qtr 2019			1st Qtr 2019			4th Qtr 2018			3rd Qtr 2018			2nd Qtr 2018
Allowance for loan losses / loans*		1.13	%		1.15	%		1.16	%		1.14	%		1.16	%		1.10	%		1.10	%		1.12	%		1.13	%		1.15	%
Allowance for loan losses / non-performing assets		122.27	%		135.69	%		92.86	%		82.75	%		88.74	%		188.69	%		151.53	%		140.11	%		122.27	%		135.69	%
Allowance for loan losses / non-performing loans		132.06	%		148.97	%		97.64	%		86.87	%		90.36	%		188.69	%		159.61	%		148.99	%		132.06	%		148.97	%
Non-performing assets / loans plus OREO*		0.92	%		0.84	%		1.24	%		1.37	%		1.30	%		0.58	%		0.73	%		0.80	%		0.92	%		0.84	%
Non-performing assets / total assets		0.73	%		0.66	%		0.97	%		1.08	%		1.01	%		0.47	%		0.58	%		0.64	%		0.73	%		0.66	%
Net charge-offs / average loans (annualized)		0.18	%		0.06	%		(0.29	)%		0.00	%		0.01	%		(0.08	)%		0.06	%		(0.04	)%		0.18	%		0.06	%

Total non-interest income increased ~~$427,000~~$272,000 in the ~~third~~second quarter of ~~2018~~2019 to ~~$9.9~~$10.5 million from ~~$9.5~~$10.2 million for the same period in ~~2017. The third quarter of 2018 had $76,000 in net gains or losses from the sale of securities, while the third quarter 2017 included gains of $158,000 from the sale of securities.~~2018.

Service Fees.Service fees and other charges increased by ~~$182,000 or 5.8%~~$5,000 in the ~~third~~second quarter of ~~2018~~2019 compared to the same period in ~~2017. This is due mainly to growth in the number of loan and deposit accounts in 2018 compared to 2017.~~2018.

Overdrawn balances, net of an 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 non-interest income rather than interest income. Fee income recorded for the quarters ending ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018 related to the overdraft privilege product, net of adjustments to the allowance for uncollectible overdrafts, was ~~$686,000~~$582,000 and ~~$641,000,~~$615,000, respectively. Accounts charged off are included in non-interest expense. The allowance for uncollectible overdrafts was ~~$21,000~~$13,000 at ~~September~~June 30, ~~2018, $24,000~~2019, $34,000 at December 31, ~~2017,~~2018, and ~~$19,000~~$16,000 at ~~September~~June 30, ~~2017.~~2018.

Mortgage Banking Activity. ~~Total revenue from the sale and servicing of mortgage loans was $1.9~~ Mortgage banking income increased to $2.1 million in the ~~third~~second quarter of ~~2018, up~~2019 from ~~$1.7~~$2.0 million in the ~~third~~second quarter of ~~2017.~~2018. Gains from the sale of mortgage loans~~were $1.3~~ increased to $1.8 million in the ~~third~~second quarter of ~~2018, up~~2019 from ~~$1.2~~$1.4 million in the ~~third~~second quarter of ~~2017~~.2018. Mortgage loan servicing revenue ~~was $929,000~~remained flat at $0.9 million in the ~~third quarter~~second quarters of ~~2018, up slightly from $911,000 in the third quarter of 2017.~~2019 and 2018. First Defiance had a ~~positive~~negative change in the valuation adjustment in mortgage servicing assets of ~~$8,000~~$190,000 in the ~~third~~second quarter of ~~2018~~2019 compared with a ~~negative~~positive adjustment of ~~$27,000~~$47,000 in the ~~third~~second quarter of ~~2017.~~2018.

Insurance Commission Income. Incomefrom the sale of insurance products ~~increased $172,000 or 5.6% to $3.3~~was $3.6 million in the ~~third~~second quarter of 2019, up from $3.5 million in the second quarter of 2018, upa 3.5% increase.

Bank-Owned Life Insurance.Income from ~~$3.1 million~~bank-owned life insurance was $527,000 for the second quarter of 2019, down from $566,000 in the ~~third~~second quarter of ~~2017.~~2018. This decrease was primarily a result of a $75,000 decrease in death benefits received in the second quarter of 2019 versus the second quarter of 2018.

Non-interest expense increased ~~$1.8~~$1.6 million to ~~$22.3~~$24.2 million for the ~~third~~second quarter of ~~2018~~2019 compared to ~~$20.4~~$22.7 million for the same period in ~~2017.~~2018. The increase is mainly attributable to the increase in compensation and benefits of ~~$1.1~~$1.5 million further explained in the section below.

Compensation and Benefits.Compensation and benefits increased to $14.4 million in the second quarter of 2019, compared to $12.9 million in the ~~third~~second quarter of ~~2018, compared to $11.8 million in the third quarter of 2017.~~2018. The increase in compensation and benefits ~~versus the prior~~from a year ~~reflects merit increases, additional increases~~ago is mainly due to ~~minimum pay levels, and increases~~additions to staff to ~~achieve the overall~~support growth ~~strategies.~~strategies, merit increases, and higher medical benefit costs.

Occupancy.Occupancy expense increased by ~~$194,000~~$278,000 to ~~$2.2~~$2.3 million for the quarter ended ~~September~~June 30 ~~2018,~~2019, compared to the same period in ~~2017.~~2018. This can be attributed to continued growth ~~strategies and newly signed leases in metro markets.~~strategies.

Data Processing. Data processing ~~expense increased $287,000 to $2.2 million in the third quarter of 2018 compared to$1.9 million for the third quarter of 2017.~~

~~Other Non-Interest Expenses~~~~. Other non-interest expense of $4.0 million in the third quarter of 2018 increased from $3.7~~cost was $2.3 million in the second quarter of ~~2017. Other expenses~~2019, up from $2.1 million in the ~~third~~second quarter ~~2018 include an~~of 2018.

Other Non-Interest Expenses.Other non-interest expense of $4.2 million in the second quarter of 2019 decreased $430,000 from $4.6 million in the second quarter of 2018. The decrease in other non-interest expenses from a year ago is primarily due to a $105,000 increase in ~~advertising~~the liabilities of the deferred compensation plan in ~~certain markets as well as an~~the second quarter of 2019 compared to a $445,000 increase for the same period in ~~management consulting expenses.~~2018.

The efficiency ratio, considering tax equivalent interest income and excluding securities gains and losses, for the ~~third~~second quarter of ~~2018~~2019 was ~~59.22%~~61.01% compared to ~~58.70%~~61.24% for the ~~third~~second quarter of ~~2017.~~2018.

~~Nine~~Six Months Ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018

On a consolidated basis, First Defiance’s net income for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 was ~~$34.2~~$23.7 million compared to income of ~~$22.9~~$22.8 million for the same period in ~~2017.~~2018. On a per share basis, basic and diluted earnings per common share for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 were ~~$1.68 and $1.67, respectively,~~both $1.19, compared to basic and diluted earnings per common share of ~~$1.15 and $1.15, respectively,~~$1.12 for the same period in ~~2017.~~2018.

The first nine months of 2018 includes the results from the operations of the Commercial Savings Bank (“CSB”) acquisition completed on February 24, 2017 and the Corporate One Benefits Agency, Inc. (“Corporate One”) acquisition completed on April 1, 2017. In addition, the first nine months of 2017 includes merger and conversion expenses related to the acquisitions of $3.9 million, which had an after tax impact of $2.8 million, or $0.14 per diluted share.

Net interest income was ~~$79.8~~$57.3 million for the first ~~nine~~six months of ~~2018~~2019 compared with ~~$71.3~~$52.2 million in the first ~~nine~~six months of ~~2017.~~2018. Average interest-earning assets increased to ~~$2.71~~$2.89 billion in the first ~~nine~~six months of ~~2018~~2019 compared to ~~$2.51~~$2.69 billion in the first ~~nine~~six months of ~~2017.~~2018.

For the ~~nine~~six month period ended ~~September~~June 30, ~~2018,~~2019, total interest income was ~~$91.2~~$69.2 million compared to ~~$79.6~~$59.2 million for the same period in ~~2017.~~2018. Interest expense increased by ~~$3.1~~$4.9 million to ~~$11.4~~$11.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 compared to ~~$8.3~~$7.0 million for the same period in ~~2017.~~2018.

Net interest margin for the first ~~nine~~six months of ~~2018~~2019 was ~~3.97%~~4.03%, up 98 basis points from the ~~3.88%~~3.95% margin reported in the ~~nine~~six month period ended ~~September~~June 30, ~~2017.~~2018.

The provision for loan losses was ~~$704,000~~$494,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, compared to ~~$2.6 million expense~~a credit of $672,000 during the ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2018. Charge-offs for the first ~~nine months~~half of ~~2018~~2019 were ~~$2.6 million~~$670,000 and recoveries of previously charged off loans totaled ~~$2.9 million~~$779,000 for net recoveries of ~~$252,000.~~$109,000. By comparison, ~~$3.0 million~~$845,000 of charge-offs were recorded in the same period of ~~2017~~2018 and ~~$780,000~~$2.2 million of recoveries were realized for net ~~charge-offs~~recoveries of ~~$2.2~~$1.3 million.

Total non-interest income increased ~~$655,000~~$382,000 to ~~$30.8~~$21.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 from ~~$30.2~~$20.9 million recognized for the same period in ~~2017.~~2018.

Service Fees.Service fees and other charges were ~~$9.8~~$6.3 million for the first ~~nine~~six months of ~~2018, up~~2019, a decrease of $119,000 from ~~$9.1~~$6.4 million for the same period in ~~2017. This is mainly due to the increased loan and deposit base year over year.~~2018.

Mortgage Banking Activity. Total revenue from the sale and servicing of mortgage loans increased ~~$366,000~~$223,000 to ~~$5.6~~$4.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 from ~~$5.3~~$3.8 million for the same period in ~~2017.~~2018. Gains realized from the sale of mortgage loans increased ~~$167,000~~$612,000 to ~~$3.7~~$3.1 million for the first ~~nine~~six months of ~~2018~~2019 from ~~$3.6~~$2.5 million for the same period in ~~2017.~~2018. Mortgage loan servicing revenue ~~increased slightly to $2.8~~remained steady at $1.88 million in both the first ~~nine months~~half of ~~2018 from $2.77 million for the same period in 2017.~~2019 and 2018. The Company recorded a ~~positive~~negative valuation adjustment of ~~$91,000~~$303,000 in the first ~~nine~~six months of ~~2018~~2019 compared to a positive adjustment of ~~$21,000~~$83,000 in the first ~~nine~~six months of ~~2017.~~2018.

Insurance Commission Income. Income from the sale of insurance and investment products was ~~$11.0~~$7.73 million in the first ~~nine~~six months of ~~2018, an increase~~2019, a decrease of ~~$1.2 million~~$39,000 from ~~$9.8~~$7.77 million in the first ~~nine~~six months of ~~2017. The increase is~~2018.

Other Non-Interest Income.Other non-interest income for the first six months of 2019 was $1.3 million, up from $658,000 in the first six months of 2018 primarily due to ~~added commissions from~~a $619,000 increase in the ~~Corporate One merger completed on April 1, 2017.~~assets of the deferred compensation plan compared to a $112,000 decrease for the same period in 2018. This was mainly due to improved stock market performance in the first six months of 2019.

~~Bank-Owned Life Insurance~~.Income from bank-owned life insurance was $1.4 million in the first nine months of 2018, a decrease of $1.3 million from $2.7 million in the same period of 2017. In February 2017, the Company surrendered an underperforming BOLI policy, 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 was ~~$68.2~~$49.1 million for the first ~~nine~~six months of ~~2018,~~2019, up ~~$4.0 million~~ from ~~$64.2~~$45.9 million for the same period in ~~2017.~~2018.

Compensation and Benefits. Compensation and benefits increased to ~~$39.0~~$28.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, compared to ~~$37.6~~$26.1 million for the same period in ~~2017.~~2018. The increase is mainly related to merit increases, additional increases to minimum pay levels, higher incentive compensation, increases to staff related to growth strategies and ~~increased personnel expenses related to operating the new CSB and Corporate One locations.~~higher medical costs.

Occupancy.Occupancy expense increased by ~~$500,000~~$448,000 to ~~$6.3~~$4.5 million for the ~~nine~~six months ended ~~September~~June 30 ~~2018,~~2019, compared ~~$5.8 million in~~to the same period in ~~2017.~~2018. This can be attributed to continued growth ~~strategies and newly signed leases in metro markets.~~strategies.

Data Processing. Data processing ~~expense increased $517,000 to $6.3~~cost was $4.6 million in the first ~~nine months~~half of ~~2018 compared to $5.8~~2019, up from $4.2 million ~~for~~in the first ~~nine months~~half of ~~2017 due to strategic spending initiatives.~~2018.

Other Non-Interest Expenses. Other non-interest expenses increased ~~$1.5 million~~$97,000 to ~~$13.2~~$9.3 million for the first ~~nine~~six months of ~~2018~~2019 from ~~$11.7~~$9.2 million for the same period in ~~2017.~~2018. The increase in other non-interest expense is primarily due to ~~an OREO write-down of $544,000 and other miscellaneous expense increases over the previous year comparative period.~~a $196,000 increase in debit card reward program

The efficiency ratio for the first ~~nine~~six months of ~~2018~~2019 was ~~61.29%~~62.11% compared to ~~62.66%~~62.35% for the same period in ~~2017.~~2018.

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 ~~18.09%~~18.24% for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 compared to ~~33.95%~~18.14% for the same period in ~~2017.~~2018. 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.

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 ~~$33.0~~$13.0 million of cash provided by operating activities during the first ~~nine~~six months of ~~2018.~~2019. The Company's cash provided by operating activities primarily resulted from the origination of loans held for sale and net income mostly offset by the proceeds on the sale of loans.

At ~~September~~June 30, ~~2018,~~2019, First Federal had ~~$214.7~~$233.0 million in outstanding loan commitments and loans in process to be funded generally within the next six months and an additional ~~$398.3~~$414.8 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 ~~$20.0~~$37.1 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 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 the 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~~were 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 CET1 capital to risk-weighted assets ratio of 4.5% and a capital conservation buffer of 0.625% of risk-weighted assets during 2016, 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 ~~September~~June 30, ~~2018.~~2019. The following table indicates the capital ratios for First Defiance (consolidated) and First Federal at ~~September~~June 30, ~~2018,~~2019, and December 31, ~~2017.~~2018. (In Thousands):

As discussed in detail in ~~First Defiance’s Annual Report on~~the 2018 Form 10-K, ~~for the year ended December 31, 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 ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, an estimate of the change in net interest income that would result from a gradual (ramp) and immediate (shock) change in interest rates, moving in a parallel fashion over the entire yield curve, relative to the measured base case scenario. Based on our net interest income simulation as of ~~September~~June 30, ~~2018,~~2019, net interest income sensitivity to changes in interest rates for the twelve months subsequent to ~~September~~June 30, ~~2018,~~2019, remained relatively stable for the ramp and shock compared to the sensitivity profile for the twelve months subsequent to December 31, ~~2017.~~2018.

Net Interest Income Sensitivity Profile	Net Interest Income Sensitivity Profile
		Impact on Future Annual Net Interest Income										Impact on Future Annual Net Interest Income
(dollars in thousands)		September 30, 2018					December 31, 2017					June 30, 2019					December 31, 2018
Gradual Change in Interest Rates
+200		$	1,545		1.36	%	$	2,354		2.18	%	$	2,027		1.70	%	$	1,910		1.61	%
+100			749		0.66	%		1,200		1.11	%		1,106		0.93	%		981		0.83	%
-100			(1,742	)	-1.54	%		(3,033	)	-2.81	%		(2,323	)	-1.95	%		(2,025	)	-1.71	%
-200													(6,511	)	-5.45	%		(6,236	)	-5.27	%

Immediate Change in Interest Rates
+200		$	2,953		2.60	%	$	4,821		4.47	%	$	4,584		3.84	%	$	3,424		2.89	%
+100			1,586		1.40	%		2,463		2.28	%		2,521		2.11	%		1,865		1.57	%
-100			(4,883	)	-4.31	%		(6,223	)	-5.77	%		(4,995	)	-4.18	%		(5,057	)	-4.27	%

-200													(14,113	)	-11.82	%		(14,455	)	-12.21	%

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

The results of all the simulation scenarios are within the Company’s Board mandated guidelines as of ~~September~~June 30, ~~2018,~~2019, except for the down 200 basis points over the first twelve months in a dynamic and static shock balance sheet and the down 200 basis points over the cumulative 24 months in both a dynamic and static 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 200 basis points as of ~~September~~June 30, ~~2018,~~2019, 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 ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, and the year-ended December 31, ~~2017.~~2018.

September 30, 2018
June 30, 2019				June 30, 2019
Economic Value of Equity
Change in Rates	$ Amount	$ Change	% Change		$ Amount		$ Change			% Change
	(Dollars in Thousands)				(Dollars in Thousands)
+400 bp	718,064	58,359	8.85%			718,641		86,204			13.63	%
+ 300 bp	708,925	49,220	7.46%			705,339		72,902			11.53	%
+ 200 bp	695,958	36,253	5.50%			689,531		57,093			9.03	%
+ 100 bp	680,279	20,574	3.12%			666,329		33,892			5.36	%
0 bp	659,704	-	-			632,437		-			-
- 100 bp	623,802	(35,903)	(5.44)%			578,773		(53,665	)		(8.49	)%
- 200 bp	568,249	(91,455)	(13.86)%			505,420		(127,018	)		(20.08	)%

December 31, 2017
December 31, 2018				December 31, 2018
Economic Value of Equity
Change in Rates	$ Amount	$ Change	% Change		$ Amount		$ Change			% Change
	(Dollars in Thousands)				(Dollars in Thousands)
+400 bp	700,563	80,544	12.99%			751,259		66,752			9.75	%
+ 300 bp	685,883	65,864	10.62%			741,404		56,897			8.31	%
+ 200 bp	668,127	48,108	7.76%			729,505		44,998			6.57	%
+ 100 bp	647,439	27,420	4.42%			710,688		26,181			3.82	%
0 bp	620,019	-	-			684,507		-			-
- 100 bp	585,967	(34,052)	(5.49)%			642,625		(41,882	)		(6.12	)%
-200 bp						578,124		(106,383	)		(15.54	)%

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, 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, as amended) as of ~~September~~June 30, ~~2018.~~2019. 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 ~~September~~June 30, ~~2018,~~2019, 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, ~~2017.~~2018.

The Company had no unregistered sales of equity securities during the quarter ended ~~September~~June 30, ~~2018.~~2019.

The following table provides information regarding First Defiance’s purchases of its common stock during the three-month period ended ~~September~~June 30, ~~2018 (share data has been adjusted to reflect a 2-for-1 stock split on July 12, 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 filerx
Non-accelerated filer¨		Smaller reporting company¨
Emerging growth company¨

Title of each class		Trading symbol		Name of each exchange on which registered
Common Stock, Par Value $0.01 Per Share		FDEF		The NASDAQ Stock Market

		Page Number
PART I.-FINANCIAL INFORMATION

Item 1.	Consolidated Condensed Financial Statements (Unaudited):

	Consolidated Condensed Statements of Financial Condition – ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018	2

	Consolidated Condensed Statements of Income - Three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018	4

	Consolidated Condensed Statements of Comprehensive Income – Three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018	5

	Consolidated Condensed Statements of Changes in Stockholders’ Equity – ~~Nine~~Three and Six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018	6

	Consolidated Condensed Statements of Cash Flows - ~~Nine~~Six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018	7

	Notes to Consolidated Condensed Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	5550

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	7774

Item 4.	Controls and Procedures	7875

PART II-OTHER INFORMATION:

Item 1.	Legal Proceedings	7976

Item 1A.	Risk Factors	7976

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7976

Item 3.	Defaults upon Senior Securities	7976

Item 4.	Mine Safety Disclosures	7976

Item 5.	Other Information	7976

Item 6.	Exhibits	8077

	Signatures	8178

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

	September 30, 2018		December 31, 2017

Assets
Cash and cash equivalents:
Cash and amounts due from depository institutions	$	55,526	$	58,693
Federal funds sold		44,000		55,000
		99,526		113,693
Securities:
Available-for-sale, carried at fair value		282,962		260,650
Held-to-maturity, carried at amortized cost
(fair value $603 and $649 at September 30, 2018 and December 31, 2017, respectively)		603		648
		283,565		261,298
Loans held for sale		12,485		10,435
Loans receivable, net of allowance of $27,639 at September 30, 2018 and $26,683 at December 31, 2017, respectively		2,428,718		2,322,030
Mortgage servicing rights		10,054		9,808
Accrued interest receivable		11,258		8,706
Federal Home Loan Bank stock		14,217		15,992
Bank owned life insurance		67,259		66,230
Premises and equipment		40,413		40,217
Real estate and other assets held for sale		1,676		1,532
Goodwill		98,569		98,569
Core deposit and other intangibles		4,705		5,703
Deferred taxes		1,385		231
Other assets		24,255		38,959
Total assets	$	3,098,085	$	2,993,403

	September 30, 2018			December 31, 2017

Liabilities and stockholders’ equity
Liabilities:
Deposits	$	2,524,431		$	2,437,656
Advances from the Federal Home Loan Bank		100,220			84,279
Subordinated debentures		36,083			36,083
Securities sold under repurchase agreements		4,162			26,019
Advance payments by borrowers		4,523			2,925
Other liabilities		35,209			33,155
Total liabilities		2,704,628			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:
50,000,000 shares authorized; 25,398,992 and 25,425,682 shares issued and 20,401,461 and 20,312,082 shares outstanding at September 30, 2018 and December 31, 2017, respectively⁽¹⁾		127			127
Additional paid-in capital		161,179			160,940
Accumulated other comprehensive income (loss), net of tax of $(1,308) and $117, respectively		(4,921	)		217
Retained earnings		286,960			262,900
Treasury stock, at cost, 4,997,531 shares at September 30, 2018 and 5,113,600 shares at December 31, 2017⁽¹⁾		(49,888	)		(50,898	)
Total stockholders’ equity		393,457			373,286
Total liabilities and stockholders’ equity	$	3,098,085		$	2,993,403

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Interest Income
Loans	$	29,371	$	25,975	$	83,557	$	73,263
Investment securities:
Taxable		1,207		896		3,445		2,817
Non-taxable		870		792		2,522		2,378
Interest-bearing deposits		275		209		945		555
FHLB stock dividends		240		209		698		562
Total interest income		31,963		28,081		91,167		79,575
Interest Expense
Deposits		3,753		2,391		9,508		6,357
FHLB advances and other		342		431		943		1,211
Subordinated debentures		334		239		934		682
Notes payable		5		13		19		41
Total interest expense		4,434		3,074		11,404		8,291
Net interest income		27,529		25,007		79,763		71,284
Provision for loan losses		1,376		462		704		2,635
Net interest income after provision for loan losses		26,153		24,545		79,059		68,649
Non-interest Income
Service fees and other charges		3,335		3,153		9,762		9,073
Insurance commissions		3,254		3,082		11,024		9,834
Mortgage banking income		1,877		1,698		5,632		5,266
Gain on sale of non-mortgage loans		33		82		300		172
Gain on sale or call of securities		76		158		76		425
Trust income		514		486		1,588		1,400
Income from Bank Owned Life Insurance		399		421		1,365		2,666
Other non-interest income		434		415		1,092		1,348
Total non-interest income		9,922		9,495		30,839		30,184
Non-interest Expense
Compensation and benefits		12,882		11,780		39,016		37,588
Occupancy		2,154		1,960		6,251		5,751
FDIC insurance premium		255		330		817		973
Financial institutions tax		531		404		1,593		1,418
Data processing		2,161		1,874		6,349		5,832
Amortization of intangibles		319		364		998		931
Other non-interest expense		3,984		3,728		13,178		11,718
Total non-interest expense		22,286		20,440		68,202		64,211
Income before income taxes		13,789		13,600		41,696		34,622
Federal income taxes		2,483		4,219		7,544		11,753
Net Income	$	11,306	$	9,381	$	34,152	$	22,869

Earnings per common share⁽¹⁾
Basic	$	0.55	$	0.46	$	1.68	$	1.15
Diluted	$	0.55	$	0.46	$	1.67	$	1.15
Dividends declared per share⁽¹⁾	$	0.17	$	0.125	$	0.47	$	0.375
Average common shares outstanding⁽¹⁾
Basic		20,400		20,298		20,373		19,826
Diluted		20,467		20,418		20,465		19,940


Financing Activities
Net increase in deposits and advance payments by borrowers		88,184			70,539
Repayment of Federal Home Loan Bank advances		(34,059	)		(792	)
Proceeds from Federal Home Loan Bank advances		50,000			-
Increase in notes payable		-			6,500
Decrease in securities sold under repurchase agreements		(21,857	)		(8,877	)
Proceeds from exercise of stock options		111			198
Proceeds from direct stock sales		75			54
Cash dividends paid on common stock		(9,574	)		(7,320	)
Net cash provided by financing activities		72,880			60,302
Increase in cash and cash equivalents		(14,167	)		25,728
Cash and cash equivalents at beginning of period		113,693			99,003
Cash and cash equivalents at end of period	$	99,526		$	124,731

Supplemental cash flow information:
Interest paid	$	11,335		$	8,177
Income taxes paid	$	6,950		$	10,900
Transfers from loans to real estate and other assets held for sale	$	1,141		$	328
Securities purchased but not yet settled	$	577		$	-
Sale of bank owned life insurance not yet settled	$	-		$	17,840

			Fair Value Measurements at December 31, 2017 (In Thousands)
	Carrying Value		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	113,693	$	113,693	$	113,693	$	-	$	-
Investment securities		261,298		261,299		1		261,298		-
Federal Home Loan Bank Stock		15,992		N/A		N/A		N/A		N/A
Loans, net, including loans held for sale		2,332,465		2,315,791		-		10,830		2,304,961
Accrued interest receivable		8,706		8,706		13		917		7,776

Financial Liabilities:
Deposits	$	2,437,656	$	2,444,683	$	571,360	$	1,873,323	$	-
Advances from Federal Home Loan Bank		84,279		83,261		-		83,261		-
Securities sold under repurchase agreements		26,019		26,019		-		26,019		-
Subordinated debentures		36,083		35,385		-		-		35,385

	Options Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in 000’s)
Options outstanding, January 1, 2018		86,900		$	10.81
Forfeited or cancelled		-			-
Exercised		(47,500	)		8.15
Granted		-			-
Options outstanding, September 30, 2018		39,400		$	14.00		5.21	$	635
Vested or expected to vest at September 30, 2018		39,400		$	14.00		5.21	$	635
Exercisable at September 30, 2018		23,900		$	12.22		4.39	$	428

	Options Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in 000’s)
Options outstanding, January 1, 2019		39,400		$	14.00
Forfeited or cancelled		-			-
Exercised		(19,200	)		10.15
Granted		-			-
Options outstanding, June 30, 2019		20,200		$	17.66		5.27	$	221
Vested or expected to vest at June 30, 2019		20,200		$	17.66		5.27	$	221
Exercisable at June 30, 2019		14,500		$	17.48		4.90	$	161

	September 30, 2018			December 31, 2017
Real Estate:	(In Thousands)

Secured by 1-4 family residential	$	313,300		$	274,862
Secured by multi-family residential		270,554			248,092
Secured by commercial real estate		1,092,533			987,129
Construction		274,344			265,476
		1,950,731			1,775,559
Other Loans:
Commercial		489,393			526,142
Home equity and improvement		129,295			135,457
Consumer finance		32,379			29,109
		651,067			690,708
Total loans		2,601,798			2,466,267
Deduct:
Undisbursed loan funds		(143,286	)		(115,972	)
Net deferred loan origination fees and costs		(2,155	)		(1,582	)
Allowance for loan loss		(27,639	)		(26,683	)
Totals	$	2,428,718		$	2,322,030

Quarter Ended September 30, 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	$	2,682		$	2,913	$	11,253		$	737		$	7,455		$	2,032		$	249		$	27,321
Charge-Offs		(136	)		0		(1,048	)		0			(528	)		(36	)		(25	)		(1,773	)
Recoveries		27			38		182			0			413			47			8			715
Provisions		251			61		1,281			(122	)		(179	)		28			56			1,376
Ending Allowance	$	2,824		$	3,012	$	11,668		$	615		$	7,161		$	2,071		$	288		$	27,639

Quarter Ended June 30, 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	$	2,534		$	2,983		$	10,773		$	667	$	7,838		$	2,209		$	263		$	27,267
Charge-Offs		(78	)		0			(254	)		0		(84	)		(41	)		(72	)		(529	)
Recoveries		34			2			26			0		30			57			11			160
Provisions		192			(72	)		708			70		(329	)		(193	)		47			423
Ending Allowance	$	2,682		$	2,913		$	11,253		$	737	$	7,455		$	2,032		$	249		$	27,321

Year-to-date Period Ended June 30, 2018	1-4 Family Residential Real Estate			Multi- Family Residential Real Estate		Commercial Real Estate			Construction		Commercial			Home Equity and Improvement			Consumer Finance			Total
Beginning Allowance	$	2,532		$	2,702	$	10,354		$	647	$	7,965		$	2,255		$	228		$	26,683
Charge-Offs		(94	)		0		(309	)		0		(181	)		(158	)		(103	)		(845	)
Recoveries		58			2		210			0		1,787			85			13			2,155
Provisions		186			209		998			90		(2,116	)		(150	)		111			(672	)
Ending Allowance	$	2,682		$	2,913	$	11,253		$	737	$	7,455		$	2,032		$	249		$	27,321

	Three Months Ended June 30, 2018 ($ in thousands)				Six Months Ended June 30, 2018 ($ 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		0		-		1		196
Home Equity and Improvement		0		-		0		-
Consumer Finance		0		-		0		-
Total		0	$	-		1	$	196

	Three Months Ended September 30, 2017 ($ in thousands)				Nine Months Ended September 30, 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		-		1		225
Commercial Other		0		-		0		-
Home Equity and Improvement		0		-		0		-
Consumer Finance		0		-		0		-
Total		0	$	-		1	$	225

Class	Pass		Special Mention		Substandard		Doubtful		Not Graded		Total

1-4 Family Owner Occupied	$	8,741	$	87	$	3,400	$	-	$	192,116	$	204,344
1-4 Family Non Owner Occupied		109,285		604		2,691		-		5,668		118,248

Total 1-4 Family Real Estate		118,026		691		6,091		-		197,784		322,592

Multi-Family Residential Real Estate		281,210		-		751		-		106		282,067

CRE Owner Occupied		388,488		13,825		7,668		-		77		410,058
CRE Non Owner Occupied		542,751		4,963		2,611		-		-		550,325
Agriculture Land		110,181		2,253		14,921		-		-		127,355
Other CRE		43,374		579		843		-		990		45,786

Total Commercial Real Estate		1,084,794		21,620		26,043		-		1,067		1,133,524

Construction		178,822		1,603		-		-		20,342		200,767

Commercial Working Capital		220,234		10,006		6,928		-		-		237,168
Commercial Other		285,150		8,028		2,162		-		-		295,340

Total Commercial		505,384		18,034		9,090		-		-		532,508

Home Equity and Home Improvement		-		-		422		-		126,380		126,802
Consumer Finance		-		-		81		-		35,417		35,498

Total Loans	$	2,168,236	$	41,948	$	42,478	$	-	$	381,096	$	2,633,758

Class	Pass		Special Mention		Substandard		Doubtful		Not Graded		Total
1-4 Family Owner Occupied	$	9,157	$	92	$	3,469	$	-	$	183,606	$	196,324
1-4 Family Non Owner Occupied		106,173		971		3,167		-		7,152		117,463
Total 1-4 Family Real Estate		115,330		1,063		6,636		-		190,758		313,787
Multi-Family Residential Real Estate		268,568		-		2,192		-		108		270,868

CRE Owner Occupied		397,700		6,030		9,707		-		94		413,531
CRE Non Owner Occupied		495,282		5,840		2,551		-		-		503,673
Agriculture Land		110,548		4,193		15,361		-		-		130,102
Other CRE		46,819		151		1,293		-		1,072		49,335

Total Commercial Real Estate		1,050,349		16,214		28,912		-		1,166		1,096,641

Construction		111,374		467		-		-		18,675		130,516

Commercial Working Capital		198,315		7,454		10,230		-		-		215,999
Commercial Other		263,539		8,309		3,616		-		-		275,464

Total Commercial		461,854		15,763		13,846		-		-		491,463

Home Equity and Home Improvement		-		-		605		-		129,577		130,182
Consumer Finance		-		-		155		-		32,326		32,481

Total Loans	$	2,007,475	$	33,507	$	52,346	$	-	$	372,610	$	2,465,938

	June 30, 2019		December 31, 2018
1-4 Family Residential Real Estate	$	1,029	$	1,045
Multi-Family Residential Real Estate		293		300
Commercial Real Estate Loans		741		899
Commercial		181		227
Consumer		-		-
Total Outstanding Balance	$	2,244	$	2,471
Recorded Investment, net of allowance of $0	$	2,067	$	2,331

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

Cash Flows Expected to be Collected at Acquisition	$	5,721
Fair Value of Acquired Loans at Acquisition	$	4,703

Remainder of 2019	$	452
2020		982
2021		941
2022		864
2023		840
Thereafter		11,379
Total	$	15,458

Undiscounted cash flows	$	15,458
Undiscounted cash flows associated with new lease effective 1/1/2020		(2,496	)
Discount effect of cash flows		(3,920	)
Total	$	9,042

	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		285,448
FHLB Stock of Cincinnati and Other Stock		2,194
Office Properties and Equipment		5,256
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		(2,717	)
Total Identifiable Net Assets		39,978

Goodwill	$	28,894

	For the Nine Months Ended September 30, 2017					As of September 30, 2017
	Net
	Charge-offs (Recovery)		% of Total Net Charge-offs			Nonaccrual Loans		% of Total Non- Accrual Loans
	(In Thousands)					(In Thousands)
Residential	$	9		0.41	%	$	3,368		11.55	%
Construction		-		0.00	%		-		0.00	%
Commercial real estate		148		6.80	%		17,110		58.69	%
Commercial		1,864		85.58	%		8,070		27.69	%
Consumer		29		1.33	%		59		0.20	%
Home equity and improvement		128		5.88	%		545		1.87	%
Total	$	2,178		100.00	%	$	29,152		100.00	%

	For the Six Months Ended June 30, 2018						As of June 30, 2018
	Net
	Charge-offs (Recovery)			% of Total Net Charge-offs			Nonaccrual Loans		% of Total Non- Accrual Loans
	(In Thousands)						(In Thousands)
Residential	$	36			(2.75	)%	$	2,411		13.15	%
Construction		-			0.00	%		-		0.00	%
Commercial real estate		97			(7.41	)%		10,240		55.84	%
Commercial		(1,606	)		122.60	%		5,145		28.05	%
Consumer		90			(6.87	)%		65		0.35	%
Home equity and improvement		73			(5.57	)%		479		2.61	%
Total	$	(1,310	)		100.00	%	$	18,340		100.00	%

September 30, 2018
	Actual					Minimum Required for Adequately Capitalized					Minimum Required for Well Capitalized
	Amount		Ratio			Amount		Ratio(1)			Amount		Ratio
CET1 Capital (to Risk-Weighted Assets) (2)
Consolidated	$	300,186		11.06	%	$	122,179		4.5	%		N/A		N/A
First Federal	$	319,815		11.79	%	$	122,079		4.5	%	$	176,337		6.5	%

Tier 1 Capital (1)
Consolidated	$	335,186		11.30	%	$	118,659		4.0	%		N/A		N/A
First Federal	$	319,815		10.81	%	$	118,357		4.0	%	$	147,946		5.0	%

Tier 1 Capital (to Risk Weighted Assets) (1)
Consolidated	$	335,186		12.35	%	$	162,905		6.0	%		N/A		N/A
First Federal	$	319,815		11.79	%	$	162,772		6.0	%	$	217,030		8.0	%

Total Capital (to Risk Weighted Assets) (1)
Consolidated	$	362,825		13.36	%	$	217,206		8.0	%		N/A		N/A
First Federal	$	347,454		12.81	%	$	217,030		8.0	%	$	271,287		10.0	%

Exhibit 3.1		Articles of Incorporation of First Defiance (1)
Exhibit 3.2		Amendment to Articles of Incorporation of First Defiance (2)
Exhibit 3.3		Code of Regulations of First Defiance (3)
Exhibit 10.1		Employment Agreement, dated as of May 1, 2019, among First Defiance Financial Corp., First Federal Bank of the Midwest, and Paul D. Nungester, Jr. (4)
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 ~~September~~June 30, ~~2018~~2019 is formatted in eXtensible Business Reporting Language (“XBRL”): (i) Unaudited Consolidated Condensed Statements of Financial Condition at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, (ii) Unaudited Consolidated Condensed Statements of Income for the Three and ~~Nine~~Six Months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018 (iii) Unaudited Consolidated Condensed Statements of Comprehensive Income for the Three and ~~Nine~~Six Months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, (iv) Unaudited Consolidated Condensed Statements of Changes in Stockholders’ Equity for the ~~Nine~~Six Months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, (v) Unaudited Consolidated Condensed Statements of Cash Flows for the ~~Nine~~Six Months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018 and (vi) Notes to Unaudited Consolidated Condensed Financial Statements.

	First Defiance Financial Corp.
	(Registrant)


Date: ~~November~~August 9, ~~2018~~2019	By:		/s/ Donald P. Hileman
			Donald P. Hileman
		President and
	~~President and~~	Chief Executive Officer

Date: August 9, 2019	By:	/s/ Paul D. Nungester, Jr.
			Paul D. Nungester, Jr.
~~Date: November 9, 2018~~	~~By:~~		~~/s/ Kevin T. Thompson~~
			~~Kevin T. Thompson~~
			Executive Vice President and
		Chief Financial Officer