8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): January 15, 2007

First Defiance Financial Corp.

(Exact name of registrant as specified in its charter)

Ohio	0-26850	34-1803915
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

   601 Clinton Street, Defiance, Ohio             43512    

(Address of principal executive offices) (Zip Code)

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

_________________________________________________

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4© under the Exchange Act (17-CFR 240.13e-4(c))

ITEM 2.02. RESULTS OF OPERATIONS AND FINANCIAL CONDITION

On January 15, 2007 First Defiance Financial Corp. issued a press release announcing results for the 2006 fourth quarter and full year period ended December 31, 2006. A copy of the press release is attached hereto as Exhibit 99.1.

The information in this Form 8-K and the attached Exhibit shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.

ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS

(a) Financial Statements of businesses acquired. Not Applicable

(b) Pro forma financial information. Not Applicable

(c) Exhibits

99.1 Press Release, dated January 15, 2007

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Current Report on Form 8-K to be signed on its behalf by the undersigned hereunto duly authorized.

First Defiance Financial Corp.
By:	/s/    John C. Wahl
	John C. Wahl Executive Vice President/ Chief Financial Officer

Date: January 16, 2007 

EX-99.1

Exhibit 99.1

	NEWS RELEASE
	Contact:	William J. Small
		Chairman, President and CEO
		(419) 782-5015
		bsmall@first-fed.com

For Immediate Release 

FIRST DEFIANCE ANNOUNCES 2006

FOURTH QUARTER AND ANNUAL EARNINGS

DEFIANCE, OHIO (January 15, 2007) - First Defiance Financial Corp. (NASDAQ: FDEF) today announced that net income for the fiscal year ended December 31, 2006 totaled $15.6 million, or $2.18 per diluted share compared to $12.0 million or $1.69 per diluted share for the year ended December 31, 2005. The prior year results included acquisition-related charges associated with the Company’s 2005 first quarter acquisition of ComBanc, Inc. and 2005 second quarter acquisition of The Genoa Savings and Loan Company totaling $3.5 million ($2.3 million after tax). If the acquisition related charges had been excluded from the 2005 results, core operating earnings would have been $14.2 million or $2.01 per diluted share. The 2006 results represent an 8.5% increase in earnings per share for core operations.

For the fourth quarter ended December 31, 2006, First Defiance earned $4.0 million or $0.55 per diluted share compared to $3.4 million or $0.48 per diluted share for the fourth quarter in 2005.

“We are very pleased with 8.5% growth in our core earnings per share for the year, especially considering how difficult the environment has been for banks over the last nine months,” commented William J. Small, Chairman, President and Chief Executive Officer of First Defiance. “The ongoing inversion of the yield curve, which began midway through 2006, has put extreme pressure on net interest margins. We were able to overcome the challenge of declining margins through initiatives that allowed us to realize significant growth in non-interest income, particularly fee income.”

“Results for the fourth quarter were improved at $0.55 per share,” added Mr. Small. “There were a number of factors that contributed to the favorable results, including continued better-than-expected experience with our self-insured medical plan, higher-than-anticipated cash flows on certain impaired loans that we obtained through our recent acquisitions, favorable adjustments to some of our incentive compensation accrual accounts and a reduction to our overall effective tax rate for the year based on the year-end analysis of our tax position.”

Net Interest Income Declined

Net interest income for the 2006 fourth quarter declined 2.9% to 12.2 million from $12.6 million earned in the fourth quarter of 2005, despite the fact that average interest-earning assets were $74.1 million higher in the last three months of 2006 than in the same period of 2005. Net

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interest margin for the 2006 fourth quarter, on a tax-equivalent basis, was 3.60%, a 32 basis point drop from the fourth quarter of 2005 and one basis point higher than the 2006 third quarter margin of 3.59%. The margin in the fourth quarter was aided by the accretion into interest income of $148,000 of loan purchase discounts recorded in conjunction with the Company’s recent acquisitions. Without that accretion, which is dependent on improvements in cash flows on loans identified as impaired, the margin for the fourth quarter would have been 3.56%. The margin decline in the 2006 fourth quarter compared to 2005 is due to asset yields increasing by 56 basis points compared to a 97 basis point increase in the Company’s funding costs during those same periods. First Defiance’s interest rate spread dropped from 3.66% in the 2005 fourth quarter to 3.25% in the last quarter of 2006.

Provision for Loan Losses Falls

The provision for loan losses was $318,000 for the fourth quarter of 2006 compared to $378,000 for the fourth quarter of 2005. The level of provision remained low despite a sharp increase in net charge-offs, which were $1.0 million for the 2006 fourth quarter ($1.1 million of charge-offs and $93,000 of recoveries). By comparison, charge-offs in the 2005 fourth quarter were $376,000 and recoveries were $47,000. The increase in charge-offs is the reflection of efforts by management to resolve a number of the problem loans absorbed through recent acquisitions. Of the $1.1 million of loans charged-off in the 2006 fourth quarter, $490,000 were acquired either in the ComBanc or Genoa acquisitions or in the 2003 acquisition of branches from RFC Banking Co. The loans charged off were fully reserved.

“Our credit department and our lenders have worked very hard at getting some of these loans resolved and we have more work to do,” said Mr. Small. “When we made these acquisitions, we accurately estimated the level of potential losses that were in the portfolio. However we significantly underestimated the time and effort it would take to resolve some of these matters. This continues to be an area of focus and we will likely see additional charge-offs in 2007. We recognize that the high level of charge-offs has reduced some of our coverage ratios, however, we also note that the loans we charged off were fully reserved. We remain confident that our remaining allowance for loan losses of $13.6 million is adequate and that all probable charge-offs are appropriately reserved. Also, while our charge-offs increased significantly in the fourth quarter, total net charge-offs for the full year were only 0.15% of average loans.”

“We’re disappointed that our non-performing assets didn’t drop much this quarter,” added Mr. Small, noting that non-performing assets were $9.9 million at December 31, 2006, down just slightly from $10.0 million at September 30, 2006. “However, we are encouraged by the progress made toward resolution of several large items in the non-performing categories. We expect to see improvement in this area over the next couple of quarters.”

Service Fees Continue to Increase

Total non-interest income increased to $4.9 million in the 2006 fourth quarter, from $3.8 million for the 2005 fourth quarter. Most of the increase was due to the implementation of an overdraft privilege product late in the 2006 first quarter that boosted checking account service fees. Total overdraft fees for the 2006 fourth quarter were $1.8 million, an increase of 125.8% from the $810,000 level of the fourth quarter of 2005.

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Non-Interest Expenses Up 4.9%

Non-interest expenses increased to $11.2 million in the 2006 fourth quarter, up from $10.7 million during the last three months of 2005. Compensation and benefits were essentially flat between the two periods at $5.9 million in each quarter. In 2006, lower costs resulting from favorable experience with the Company’s group medical plan have offset compensation increases between the two periods. Other significant increases in non-interest expense occurred in audit and examination charges, which were up $70,000; printing costs, which increased by $114,000; and expenses associated with other real estate owned, which were up by $78,000. Also, fees associated with the overdraft privilege program, which was a new expense in 2006, totaled $120,000 in the 2006 fourth quarter. Under the terms of the contract for the overdraft privilege program, quarterly fees of approximately this level will be paid through the first quarter of 2008.

Year-end adjustments based on a detailed analysis of tax accounts and the reversal of previously recorded tax reserves associated with resolved tax exposure items resulted in a drop in the effective tax rate to 29.6% for the 2006 fourth quarter.. The positive impact of these favorable adjustments for the quarter was approximately $150,000.

Annual Results

On an annual basis, earnings for 2006 were $15.6 million, an increase of 9.9% or $1.4 million over core operating earnings for 2005. Net interest income for the 2006 year totaled $49.0 million, an improvement of $1.7 million or 3.7% over 2005. For 2006, net interest margin, stated on a tax equivalent basis, declined to 3.68% from 3.87% for the year ended December 31, 2005. During that period the provision for loan losses increased to $1.8 million in 2006 from $1.4 million in 2005.

Non-interest income increased by $3.7 million, or 23.2%, to $19.6 million for the year ended December 31, 2006 from $15.9 million for 2005. Excluding gains from securities sales, which were $1.2 million in 2005 and a loss of $2,000 in 2006, non-interest income grew by $4.9 million or 33.8% in 2006 compared to 2005. Service fees, primarily associated with the overdraft privilege product, accounted for $3.7 million of the increase, insurance commissions increased by $346,000, and gains from the sale of SBA and farm loans increased by $126,000. In addition, during the 2006 second quarter, First Defiance sold its MasterCard portfolio and realized a $400,000 gain.

Non-interest expense totaled $43.8 million for 2006 and $43.9 million for 2005. However, the 2005 expenses included $3.5 million of acquisition-related costs. Excluding those items, non-interest expense was $40.4 million in 2005, or an increase in 2006 of $3.4 million or 8.3%. Compensation and benefits increased by $706,000 between 2005 and 2006 while occupancy costs were up by $452,000 and data processing increased by $442,000. The 2006 results reflect a full year of activity related to the acquisition of Genoa Savings and ComBanc while the 2005 results included just nine months of the Genoa acquisition and slightly more than 11 months of the ComBanc acquisition. Additional significant increases in non-interest expense in 2006 included advertising, which increased by $235,000; audit and exam fees, which were up $225,000; postage costs, which grew by $135,000; and printing and office supplies, which were

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 up $134,000. Also, the Company incurred fees to the vendor of the overdraft privilege program totaling $372,000 for the 10 months that the program was in place.

Assets End Year at $1.53 Billion

Total assets at December 31, 2006 totaled $1.53 billion compared with $1.46 billion at December 31, 2005. At December 31, 2006, net loans totaled $1.23 billion, deposits totaled $1.14 billion and stockholders equity was $159.8 million. At December 31, 2005, net loans, deposits and equity were $1.16 billion, $1.07 billion and $151.2 million, respectively. Goodwill and other intangible assets were $38.5 million at December 31, 2006 compared to $39.2 million at December 31, 2005.

Looking Ahead

“We believe that 2007 will be a another challenging year, especially if the current interest rate environment persists,” said Mr. Small. “It will be especially difficult to grow our top line revenue, which is net interest income, in the face of declining margins. For example, our tax-equivalent net interest margin in the 2006 first quarter was 3.84%. By comparison, our budget for the first quarter of 2007 projects a margin of just 3.40%. While it looks like we may have been conservative when we put that budget together, it’s clear that our net interest income, at least in the first part of 2007, will lag net interest income in 2006. For the full year in 2007, we believe our net interest margin will average somewhere in the 3.50% range. That level may be higher if we can get more slope in the yield curve, but it likely will be lower than the 2006 cumulative margin.”

“There is no question that the implementation of the overdraft privilege product and the related fee income it generated contributed to our positive performance in 2006,” added Mr. Small. “And while we expect those levels of fees to continue, the year-over-year growth won’t be significant once we get beyond the 2007 first quarter. While our budget for 2007 reflects total growth in fee income of more than 18%, we will have to work very hard to achieve that target.”

“On the expense side, we anticipate that our costs will grow by approximately 9%,” continued Mr. Small. “While we are very focused on controlling costs, we also recognize that we need to actively promote ourselves in the markets that we have recently entered and those initiatives are not inexpensive. We also need to bolster our operations staff to better serve our customers.”

“Overall we expect earnings for 2007 to be higher than they were in 2006 but not substantially higher given the challenges we are facing,” added Mr. Small. “In normal times we set goals to grow earnings by 10% and have usually been successful in meeting or exceeding the targets. However, like the rest of our industry, our realistic expectations for the coming year are in the range of 3% to 5% earnings growth.”

“I believe we have significant opportunities in our markets,” concluded Mr. Small. “The strategic initiatives that we are implementing will position us to take advantage of those opportunities. Further, we will continue to explore opportunities both to strengthen our position within our existing footprint and continue to expand our presence into adjacent markets.”

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Conference Call

First Defiance Financial Corp. will host a conference call at 11:00 a.m. (EDT) on Tuesday, January 16, 2007 to discuss the earnings results and business trends. The conference call may be accessed by calling 877-407-0782. The conference identification number for the call is 226322 Participants should be prepared to provide both the identification number to join the call.

Internet access to the call is also available (in listen-only mode) at the following URL: http://www.vcall.com/IC/CEPage.asp?ID=112645

The audio replay of the Internet Web cast will be available at www.fdef.com until February 2, 2007.

About First Defiance Financial Corp.

First Defiance Financial Corp., headquartered in Defiance, Ohio, is the holding company for First Federal Bank of the Midwest and First Insurance & Investments. First Federal operates 26 full service branches and 36 ATM locations in northwest Ohio. First Insurance & Investments is the largest property and casualty insurance agency in the Defiance, Ohio area and it also specializes in life and group health insurance and financial planning.

For more information, visit the company’s Web site at www.fdef.com.

-Financial Statements and Highlights Follow-

Safe Harbor Statement

This news release may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21 B of the Securities Act of 1934, as amended, which are intended to be safe harbors created thereby. Those statements may include, but are not limited to, all statements regarding intent, beliefs, expectations, projections, forecasts and plans of First Defiance Financial Corp. and its management, and specifically include statements regarding: future movements of interest rates and particularly 10-year Treasury notes, the production levels of mortgage loan generation, the ability to continue to grow loans and deposits, the ability to grow fee income, the ability to sustain credit quality ratios at current or improved levels, continued strength in the market area for First Federal Bank of the Midwest, and the ability of the Company to grow in existing and adjacent markets. These forward-looking statements involve numerous risks and uncertainties, including those inherent in general and local banking, insurance and mortgage conditions, competitive factors specific to markets in which the Company and its subsidiaries operate, future interest rate levels, legislative and regulatory decisions or capital market conditions and other risks and uncertainties detailed from time to time in the Company’s Securities and Exchange Commission (SEC) filings, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. One or more of these factors have affected or could in the future affect the Company’s business and financial results in future periods and could cause actual results to differ materially from plans and projections. Therefore, there can be no assurances that the forward-looking statements included in this news release will prove to be accurate. In light of the significant uncertainties in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other persons, that the objectives and plans of the Company will be achieved. All forward-looking statements made in this news release are based on information presently available to the management of the Company. The Company assumes no obligation to update any forward-looking statements.

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Consolidated Balance Sheets
First Defiance Financial Corp.
	December 31,			December 31,
(in thousands)	2006			2005
Assets
Cash and cash equivalents
Cash and amounts due from depository institutions	$	47,668		$	44,066
Interest-bearing deposits		2,355			5,190
		50,023			49,256
Securities
Available-for sale, carried at fair value		110,682			113,079
Held-to-maturity, carried at amortized cost		1,441			1,775
		112,123			114,854
Loans		1,239,889			1,178,154
Allowance for loan losses		(13,579	)		(13,673	)
Loans, net		1,226,310			1,164,481
Loans held for sale		3,426			5,282
Mortgage servicing rights		5,529			5,063
Accrued interest receivable		6,984			6,207
Federal Home Loan Bank stock and other interest-bearing assets		18,586			17,544
Bank Owned Life Insurance		25,326			24,346
Office properties and equipment		34,899			32,429
Real estate and other assets held for sale		2,392			404
Goodwill		35,090			35,084
Core deposit and other intangibles		3,397			4,117
Other assets		3,794			2,015
Total Assets	$	1,527,879		$	1,461,082
Liabilities and Stockholders’ Equity
Non-interest-bearing deposits	$	106,328		$	103,498
Interest-bearing deposits		1,032,117			966,003
Total deposits		1,138,445			1,069,501
Advances from Federal Home Loan Bank		162,228			180,960
Notes payable and other interest-bearing liabilities		30,424			25,748
Subordinated debentures		20,619			20,619
Advance payments by borrowers for tax and insurance		667			605
Deferred taxes		1,200			795
Other liabilities		14,471			11,638
Total liabilities		1,368,054			1,309,866
Stockholders’ Equity
Preferred stock		-			-
Common stock, net		117			117
Additional paid-in-capital		110,285			108,626
Stock acquired by ESOP		(627	)		(1,053	)
Accumulated other comprehensive income (loss)		(671	)		(22	)
Retained earnings		120,111			112,041
Treasury stock, at cost		(69,390	)		(68,493	)
Total stockholders’ equity		159,825			151,216
Total liabilities and stockholders’ equity	$	1,527,879		$	1,461,082

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Consolidated Statements of Income (Unaudited)
First Defiance Financial Corp.
	Three Months Ended					Twelve Months Ended
	December 31,					December 31,
(in thousands, except per share amounts)	2006			2005		2006			2005
Interest Income:
Loans	$	22,608		$	19,505	$	86,213		$	69,708
Investment securities		1,405			1,294		5,645			5,273
Interest-bearing deposits		20			87		165			364
FHLB stock dividends		277			251		1,042			829
Total interest income		24,310			21,137		93,065			76,174
Interest Expense:
Deposits		9,438			6,220		33,273			20,615
FHLB advances and other		2,107			1,975		8,885			7,625
Subordinated debentures		346			201		1,308			201
Notes Payable		174			139		577			451
Total interest expense		12,065			8,535		44,043			28,892
Net interest income		12,245			12,602		49,022			47,282
Provision for loan losses		318			378		1,756			1,442
Net interest income after provision for loan losses		11,927			12,224		47,266			45,840
Non-interest Income:
Service fees and other charges		2,645			1,581		9,303			5,603
Mortgage banking income		845			875		3,389			3,345
Gain on sale of non-mortgage loans		26			-		526			-
Gain on sale of securities		(2	)		-		(2	)		1,222
Insurance and investment sales commissions		888			956		4,531			4,185
Trust income		80			53		312			282
Income from Bank Owned Life Insurance		249			224		979			765
Other non-interest income		191			79		586			523
Total Non-interest Income		4,922			3,768		19,624			15,925
Non-interest Expense:
Compensation and benefits		5,901			5,870		24,152			23,446
Occupancy		1,310			1,227		5,103			4,651
State franchise tax		293			420		1,288			1,285
Acquisition related charges		-			20		-			3,476
Data processing		929			843		3,689			3,247
Amortization of intangibles		180			214		719			755
Other non-interest expense		2,597			2,090		8,888			7,082
Total Non-interest Expense		11,210			10,684		43,839			43,942
Income before income taxes		5,639			5,308		23,051			17,823
Income taxes		1,666			1,864		7,451			5,853
Net income	$	3,973		$	3,444	$	15,600		$	11,970
Earnings per share:
Basic	$	0.56		$	0.50	$	2.22		$	1.75
Diluted	$	0.55		$	0.48	$	2.18		$	1.69
Core operating earnings per share*:
Basic	$	0.56		$	0.50	$	2.22		$	2.08
Diluted	$	0.55		$	0.48	$	2.18		$	2.01
Average Shares Outstanding:
Basic		7,051			6,927		7,027			6,843
Diluted		7,168			7,161		7,163			7,096
* - See Non-GAAP Disclosure Reconciliations

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Financial Summary and Comparison
First Defiance Financial Corp.
	Three months ended or at									Twelve months ended
	December 31,									December 31,
(dollars in thousands, except per share data)	2006			2005			% change			2006			2005			% change
Summary of Operations
Tax-equivalent interest income (1)		24,459			21,283			14.9			93,661			76,798			22.0
Interest expense		12,065			8,535			41.4			44,043			28,892			52.4
Tax-equivalent net interest income (1)		12,394			12,748			(2.8	)		49,618			47,906			3.6
Provision for loan losses		318			378			(15.9	)		1,756			1,442			21.8
Tax-equivalent NII after provision for loan loss (1)		12,076			12,370			(2.4	)		47,862			46,464			3.0
Securities gains		(2	)		-			NM			(2	)		1,222			NM
Non-interest income-excluding securities gains		4,924			3,768			30.7			19,626			14,703			33.5
Non-interest expense		11,210			10,684			4.9			43,839			43,942			(0.2	)
Non-interest expense-excluding non-core charges		11,210			10,664			5.1			43,839			40,466			8.3
One time acquisition related charges		-			20			NM			-			3,476			NM
Income taxes		1,666			1,864			(10.6	)		7,451			5,853			27.3
Net Income		3,973			3,444			15.4			15,600			11,970			30.3
Core operating earnings (2)		3,973			3,457			14.9			15,600			14,229			9.6
Tax equivalent adjustment (1)		149			146			2.1			596			624			(4.5	)
At Period End
Assets		1,527,879			1,461,082			4.6
Earning assets		1,376,379			1,321,024			4.2
Loans		1,239,889			1,178,154			5.2
Allowance for loan losses		13,579			13,673			(0.7	)
Deposits		1,138,445			1,069,501			6.4
Stockholders’ equity		159,825			151,216			5.7
Average Balances
Assets		1,516,709			1,429,953			6.1			1,495,761			1,364,797			9.6
Earning assets		1,364,064			1,290,007			5.7			1,347,625			1,238,214			8.8
Deposits and interest-bearing liabilities		1,340,179			1,265,623			5.9			1,324,398			1,209,284			9.5
Loans		1,225,567			1,149,937			6.6			1,209,498			1,089,942			11.0
Deposits		1,125,641			1,058,660			6.3			1,101,512			1,018,777			8.1
Stockholders’ equity		159,314			150,063			6.2			155,548			144,983			7.3
Stockholders’ equity / assets		10.50	%		10.49	%		0.1			10.40	%		10.62	%		(2.1	)
Per Common Share Data
Net Income
Basic	$	0.56		$	0.50			12.0		$	2.22		$	1.75			26.9
Diluted		0.55			0.48			14.6		$	2.18			1.69			29.0
Core operating earnings (2)
Basic	$	0.56		$	0.50			12.7		$	2.22		$	2.08			6.7
Diluted	$	0.55		$	0.48			15.5		$	2.18			2.01			8.4
Dividends		0.25			0.24			4.2			0.97			0.90			7.8
Market Value:
High	$	30.70		$	30.06			2.1		$	30.70		$	31.44			(2.4	)
Low		26.87			25.56			5.1			25.09			25.29			(0.8	)
Close		30.25			27.09			11.7			30.25			27.09			11.7
Book Value		22.38			21.31			5.0			22.38			21.31			5.0
Tangible Book Value		16.99			15.76			7.8			16.99			15.76			7.8
Shares outstanding, end of period (000)		7,142			7,085			0.8			7,142			7,085			0.8
Performance Ratios (annualized)
Tax-equivalent net interest margin (1)		3.60	%		3.92	%		(8.0	)		3.68	%		3.87	%		(4.9	)
Return on average assets --GAAP		1.04	%		0.96	%		8.8			1.04	%		0.88	%		18.5
Return on average assets -- Core Operating		1.04	%		0.96	%		8.4			1.04	%		1.04	%		0.3
Return on average equity -- GAAP		9.89	%		9.11	%		8.6			10.03	%		8.26	%		21.4
Return on average equity -- Core Operating		9.89	%		9.14	%		8.2			10.03	%		9.81	%		2.2
Efficiency ratio (3) -- GAAP		64.73	%		64.69	%		0.1			63.31	%		70.18	%		(9.8	)
Efficiency ratio (3) -- Core Operating		64.73	%		64.57	%		0.2			63.31	%		64.63	%		(2.0	)
Effective tax rate		29.54	%		35.12	%		(15.9	)		32.32	%		32.84	%		(1.6	)
Dividend payout ratio (basic)		44.64	%		48.00	%		(7.0	)		43.69	%		51.43	%		(15.0	)

(1) Interest income on tax-exempt securities and loans has been adjusted to a tax-equivalent basis using the statutory federal income tax rate of 35%

(2) Core operating earnings = Net income plus after-tax effect of acquisition related and other one-time charges. See Non-GAAP Disclosure Reconciliation

(3) Efficiency ratio = Non-interest expense divided by sum of tax-equivalent net interest income plus non-interest income, excluding securities gains, net and asset sales gains, net.

NM Percentage change not meaningful

8

Non-GAAP Disclosure Reconciliations

First Defiance Financial Corp.

Management believes that the presentation of the non-GAAP financial measures in this release assists investors when comparing results period-to-period in a more meaningful and consistent manner and provides a better measure of results for First Defiance's ongoing operations.

Core operating earnings are net income adjusted to exclude discontinued operations, merger, integration and restructuring expenses and the results of certain significant transactions not representative of ongoing operations.

	Three months ended					Twelve months ended
	December 31,					December 31,
(dollars in thousands, except per share data)	2006		2005			2006		2005
Core Operating Earnings
Net Income	$	3,973	$	3,444		$	15,600	$	11,970
Acquisition related charges		-		20			-		3,476
Tax effect		-		(7	)		-		(1,217	)
After-tax non-operating items		-		13			-		2,259
Core operating earnings	$	3,973	$	3,457		$	15,600	$	14,229

Acquisition related charges in 2005 reflect charges associated with the acquisition of ComBanc, Inc. and Genoa Savings and Loan Company.

Core Operating earnings is used as the numerator to calculate core operating return on average assets, core operating return on average equity and core operating earnings per share. Additionally, non-operating items are deducted from non-interest expense in the numerator and non-interest income in the denominator of the core operating efficiency ratio disclosed in the tables. Comparable information on a GAAP basis is also provided in the tables.

Income from Mortgage Banking
Revenue from sales and servicing of mortgage loans consisted of the following:
	Three months ended						Twelve months ended
	December 31,						December 31,
(dollars in thousands)	2006			2005			2006			2005
Gain from sale of mortgage loans	$	615		$	609		$	2,423		$	2,291
Mortgage loan servicing revenue (expense):
Mortgage loan servicing revenue		412			385			1,576			1,421
Amortization of mortgage servicing rights		(157	)		(171	)		(612	)		(784	)
Mortgage servicing rights valuation adjustments		(24	)		52			2			417
		231			266			966			1,054
Total revenue from sale and servicing of mortgage loans	$	846		$	875		$	3,389		$	3,345

9

Yield Analysis
First Defiance Financial Corp.
	Three Months Ended December 31,
	2006							2005
	Average				Yield			Average				Yield
	Balance		Interest(1)		Rate(2)			Balance		Interest(1)		Rate(2)
Interest-earning assets:
Loans receivable	$	1,225,567	$	22,615		7.32	%	$	1,149,937	$	19,511		6.73	%
Securities		118,227		1,547		5.19	%		113,766		1,434		5.00	%
Interest Bearing Deposits		1,956		20		4.06	%		9,008		87		3.83	%
FHLB stock		18,314		277		6.00	%		17,296		251		5.76	%
Total interest-earning assets		1,364,064		24,459		7.11	%		1,290,007		21,283		6.55	%
Non-interest-earning assets		152,645							139,946
Total assets	$	1,516,709						$	1,429,953
Deposits and Interest-bearing liabilities:
Interest bearing deposits	$	1,025,941	$	9,438		3.65	%	$	965,629	$	6,220		2.56	%
FHLB advances and other		170,318		2,107		4.91	%		171,645		1,975		4.57	%
Other Borrowings		23,601		174		2.92	%		21,555		139		2.56	%
Subordinated debentures		20,619		346		6.66	%		13,763		201		5.79	%
Total interest-bearing liabilities		1,240,479		12,065		3.86	%		1,172,592		8,535		2.89	%
Non-interest bearing deposits		99,700		-		-			93,031		-		-
Total including non-interest-bearing demand deposits		1,340,179		12,065		3.57	%		1,265,623		8,535		2.68	%
Other non-interest-bearing liabilities		17,216							14,268
Total liabilities		1,357,395							1,279,891
Stockholders' equity		159,314							150,063
Total liabilities and stockholders' equity	$	1,516,709						$	1,429,954
Net interest income; interest rate spread			$	12,394		3.25	%			$	12,748		3.66	%
Net interest margin (3)						3.60	%						3.92	%
Average interest-earning assets to average interest bearing liabilities						110	%						110	%

	Twelve Months Ended December 31,
	2006							2005
	Average				Yield			Average				Yield
	Balance		Interest(1)		Rate(2)			Balance		Interest(1)		Rate(2)
Interest-earning assets:
Loans receivable	$	1,209,498	$	86,237		7.13	%	$	1,089,942	$	69,732		6.40	%
Securities		116,718		6,217		5.30	%		121,510		5,873		4.88	%
Interest Bearing Deposits		3,483		165		4.74	%		10,410		364		3.50	%
FHLB stock		17,926		1,042		5.81	%		16,352		829		5.07	%
Total interest-earning assets		1,347,625		93,661		6.95	%		1,238,214		76,798		6.20	%
Non-interest-earning assets		148,136							126,583
Total assets	$	1,495,761						$	1,364,797
Deposits and Interest-bearing liabilities:
Interest bearing deposits	$	1,006,468	$	33,273		3.31	%	$	932,036	$	20,615		2.21	%
FHLB advances and other		181,949		8,885		4.88	%		168,330		7,625		4.53	%
Other Borrowings		20,318		577		2.84	%		18,736		451		2.41	%
Subordinated debentures		20,619		1,308		6.34	%		3,441		201		5.84	%
Total interest-bearing liabilities		1,229,354		44,043		3.58	%		1,122,543		28,892		2.57	%
Non-interest bearing deposits		95,044		-		-			86,741		-		-
Total including non-interest-bearing demand deposits		1,324,398		44,043		3.33	%		1,209,284		28,892		2.39	%
Other non-interest-bearing liabilities		15,815							10,530
Total liabilities		1,340,213							1,219,814
Stockholders' equity		155,548							144,983
Total liabilities and stockholders' equity	$	1,495,761						$	1,364,797
Net interest income; interest rate spread			$	49,618		3.37	%			$	47,906		3.63	%
Net interest margin (3)						3.68	%						3.87	%
Average interest-earning assets to average interest bearing liabilities						110	%						110	%

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

(2)   Annualized

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

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Selected Quarterly Information
First Defiance Financial Corp.
(dollars in thousands, except per share data)	4th Qtr 2006			3rd Qtr 2006			2nd Qtr 2006			1st Qtr 2006			4th Qtr 2005
Summary of Operations
Tax-equivalent interest income (1)	$	24,459		$	24,240		$	23,107		$	21,853		$	21,283
Interest expense		12,065			11,883			10,694			9,400			8,535
Tax-equivalent net interest income (1)		12,394			12,357			12,413			12,453			12,748
Provision for loan losses		318			373			683			383			378
Tax-equivalent NII after provision for loan losses (1)		12,076			11,984			11,730			12,070			12,370
Investment securities gains		(2	)		-			-			-			-
Non-interest income (excluding securities gains/losses)		4,924			5,060			5,127			4,515			3,768
Non-interest expense		11,210			11,091			10,795			10,742			10,684
Acquisition and other non-core charges		-			-			-			-			20
Income taxes		1,666			1,982			1,955			1,848			1,864
Net income		3,973			3,823			3,953			3,851			3,444
Core operating earnings (2)		3,973			3,823			3,953			3,851			3,457
Tax equivalent adjustment (1)		149			148			154			144			146
At Period End
Total assets	$	1,527,879		$	1,524,679		$	1,514,666		$	1,478,190		$	1,461,082
Earning assets		1,376,379			1,378,707			1,377,560			1,344,189			1,321,024
Loans		1,239,889			1,236,712			1,237,464			1,207,582			1,178,154
Allowance for loan losses		13,579			14,298			14,239			13,848			13,673
Deposits		1,138,445			1,130,526			1,110,750			1,081,795			1,069,501
Stockholders’ equity		159,825			158,155			154,312			154,045			151,216
Stockholders’ equity / assets		10.46	%		10.37	%		10.19	%		10.42	%		10.35	%
Goodwill		35,090			35,124			35,124			35,084			35,084
Average Balances (3)
Total assets	$	1,516,709		$	1,512,644		$	1,494,535		$	1,459,158		$	1,429,953
Earning assets		1,364,064			1,363,714			1,346,630			1,316,096			1,290,007
Deposits and interest-bearing liabilities		1,340,179			1,340,020			1,325,344			1,292,046			1,265,623
Loans		1,225,567			1,225,456			1,209,263			1,177,707			1,149,937
Deposits		1,125,641			1,124,397			1,090,331			1,065,677			1,058,660
Stockholders’ equity		159,314			156,017			154,260			152,602			150,063
Stockholders’ equity / assets		10.50	%		10.31	%		10.32	%		10.46	%		10.49	%
Per Common Share Data
Net Income:
Basic	$	0.56		$	0.54		$	0.56		$	0.55		$	0.50
Diluted		0.55			0.53			0.55			0.54			0.48
Core operating earnings (2)
Basic	$	0.56		$	0.54		$	0.56		$	0.55		$	0.50
Diluted		0.55			0.53			0.55			0.54			0.48
Dividends		0.25			0.24			0.24			0.24			0.24
Market Value:
High	$	30.70		$	28.69		$	30.29		$	28.88		$	30.06
Low		26.87			25.18			25.09			25.39			25.56
Close		30.25			28.53			26.35			26.34			27.09
Book Value		22.38			22.16			21.68			21.51			21.31
Shares outstanding, end of period (in thousands)		7,142			7,140			7,117			7,165			7,085
Performance Ratios (annualized)
Tax-equivalent net interest margin (1)		3.60	%		3.59	%		3.69	%		3.84	%		3.92	%
Return on average assets -- GAAP		1.04	%		1.00	%		1.06	%		1.07	%		0.96	%
Return on average assets -- Core operating		1.04	%		1.00	%		1.06	%		1.07	%		0.96	%
Return on average equity -- GAAP		9.89	%		9.72	%		10.28	%		10.23	%		9.11	%
Return on average equity -- Core operating		9.89	%		9.72	%		10.28	%		10.23	%		9.14	%
Efficiency ratio (3) -- GAAP		64.73	%		63.68	%		61.55	%		63.31	%		64.69	%
Efficiency ratio -- Core operating		64.73	%		63.68	%		61.55	%		63.31	%		64.57	%
Effective tax rate		29.54	%		34.14	%		33.09	%		32.43	%		35.12	%
Dividend payout ratio (basic)		44.64	%		44.44	%		42.86	%		43.64	%		48.00	%

(1) Interest income on tax-exempt securities and loans has been adjusted to a tax-equivalent basis using the statutory federal income tax rate of 35%

(2) See Non-GAAP Disclosure Reconciliation

(3) Efficiency ratio = Non-interest expense divided by sum of tax-equivalent net interest income plus non-interest income, excluding securities gains, net and asset sales gains, net.

11

Selected Quarterly Information
First Defiance Financial Corp.
(dollars in thousands, except per share data)	4th Qtr 2006			3rd Qtr 2006			2nd Qtr 2006			1st Qtr 2006			4th Qtr 2005
Loan Portfolio Composition
One to four family residential real estate	$	250,808		$	260,028		$	270,493		$	268,380		$	275,497
Construction		17,339			16,578			19,912			18,462			21,173
Commercial real estate		579,860			568,346			549,345			544,342			551,983
Commercial		232,914			231,232			236,845			215,279			171,289
Consumer finance		43,770			46,969			49,593			52,530			55,297
Home equity and improvement		122,789			120,883			116,250			112,927			113,000
Total loans		1,247,480			1,244,036			1,242,438			1,211,920			1,188,239
Less:
Loans in process		6,409			6,118			9,111			7,443			8,782
Deferred loan origination fees		1,182			1,206			1,397			1,265			1,303
Allowance for loan loss		13,579			14,298			14,239			13,848			13,673
Net Loans	$	1,226,310		$	1,222,414		$	1,217,691		$	1,189,364		$	1,164,481
Allowance for loan loss activity
Beginning allowance	$	14,298		$	14,239		$	13,848		$	13,673		$	13,624
Provision for loan losses		318			373			683			383			378
Reserve from acquisitions
Reclassification between allowance for loan loss and
purchase loan discount on prior quarter acquisition
Credit loss charge-offs:
One to four family residential real estate		244			58			23			188			150
Commercial real estate		664			134			173			57			25
Commercial		62			85			13			17			55
Consumer finance		95			67			135			95			121
Home equity and improvement		65			48			21			32			25
Total charge-offs		1,130			392			365			389			376
Total recoveries		93			78			73			181			47
Net charge-offs (recoveries)		1,037			314			292			208			329
Ending allowance	$	13,579		$	14,298		$	14,239		$	13,848		$	13,673
Credit Quality
Non-accrual loans	$	7,510		$	7,018		$	5,504		$	3,856		$	4,952
Loans over 90 days past due and still accruing		-			-			-			-			-
Total non-performing loans (1)		7,510			7,018			5,504			3,856			4,952
Real estate owned (REO)		2,392			3,026			3,434			3,710			404
Total non-performing assets (1)	$	9,902		$	10,044		$	8,938		$	7,566		$	5,356
Net charge-offs		1,037			314			292			208			329
Allowance for loan losses / loans		1.10	%		1.16	%		1.16	%		1.15	%		1.16	%
Allowance for loan losses / non-performing assets		137.13	%		142.35	%		159.31	%		183.03	%		255.28	%
Allowance for loan losses / non-performing loans		180.81	%		203.73	%		258.70	%		359.13	%		276.11	%
Non-performing assets / loans plus REO		0.80	%		0.81	%		0.72	%		0.63	%		0.45	%
Non-performing assets / total assets		0.65	%		0.66	%		0.59	%		0.51	%		0.37	%
Net charge-offs / average loans (annualized)		0.34	%		0.10	%		0.10	%		0.07	%		0.11	%
Deposit Balances
Non-interest-bearing demand deposits	$	106,328		$	102,664		$	95,468		$	94,515		$	103,498
Interest-bearing demand deposits and money market		306,003			300,680			307,077			295,873			276,558
Savings deposits		74,491			73,518			76,603			80,826			82,766
Retail time deposits less than $100,000		493,594			469,939			442,915			437,609			408,384
Retail time deposits greater than $100,000		140,392			141,889			132,566			135,655			161,305
National/Brokered time deposits		17,637			41,836			56,121			37,317			36,990
Total deposits	$	1,138,445		$	1,130,526		$	1,110,750		$	1,081,795		$	1,069,501

(1) Non-performing loans consist of non-accrual loans that are contractually past due 90 days or more and loans that are deemed impaired under the criteria of FASB Statement No. 114. Non-performing assets are non-performing loans plus real estate and other assets acquired by foreclosure or deed-in-lieu thereof.

12