10-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_______________

FORM 10-K

(Mark One)

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

For the fiscal year Ended December 31, 2006

or

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

Commission File Number0-26850

_____________

FIRST DEFIANCE FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

_____________

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

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

_______________

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

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

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

None

(Title of Class)

_______________

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

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

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

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

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

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨No x

As of March 12, 2007, there were issued and outstanding 7,155,562 shares of the Registrant’s common stock.

The aggregate market value of the voting stock held by non-affiliates of the Registrant computed by reference to the average bid and ask price of such stock as of June 30, 2006 was approximately $176.5 million

Documents Incorporated by Reference

Parts I and II of this Form 10-K incorporate by reference certain information from the registrant’s Annual Report to shareholders for the period ended December 31, 2006. Part III of this Form 10-K incorporates by reference certain information from the registrant’s definitive Proxy Statement for the 2007 Annual Shareholders’ Meeting.

PART I

Item 1. Business

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

At December 31, 2006, the Company had consolidated assets of $1.528 billion, consolidated deposits of $1.138 billion, and consolidated stockholder’s equity of $159.8 million. The Company was incorporated in Ohio in June of 1995. Its principal executive offices are located at 601 N. Clinton Street, Defiance, Ohio 43512, and its telephone number is (419) 782-5015.

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

The Subsidiaries

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

First Federal Bank of the Midwest:First Federal Bank of the Midwest (First Federal) is a federally chartered stock savings bank headquartered in Defiance, Ohio. As of December 31, 2006, it conducts operations through its main office and 26 full service branch offices in Allen, Defiance, Fulton, Hancock, Henry, Lucas, Ottawa, Paulding, Putnam, Seneca, Williams and Wood Counties in northwest Ohio.

On January 21, 2005, First Defiance completed the acquisition of ComBanc, Inc. (ComBanc) and its subsidiary, the Commercial Bank, Delphos, Ohio. That acquisition added four branch offices located in Allen County, Ohio which is adjacent to First Defiance’s existing footprint. On April 8, 2005, First Defiance completed the acquisition of the Genoa Savings and Loan Company, (Genoa) which added three offices in the metropolitan Toledo, Ohio area.

First Federal is primarily engaged in community banking. It attracts deposits from the general public through its offices and uses those and other available sources of funds to originate residential real estate loans, non-residential real estate loans, commercial loans, home improvement and home equity loans and consumer loans. In addition, First Federal invests in U.S. Treasury and federal government agency obligations, obligations of the State of Ohio and its political subdivisions, mortgage-backed securities which are issued by federal agencies, including REMICs and 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.

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First Insurance & Investments: First Insurance & Investments (First Insurance) is a wholly owned subsidiary of First Defiance. First Insurance is an insurance agency that does business in the Defiance, Ohio area. First Insurance offers property and casualty insurance, life insurance, group health insurance, and investment products.

Securities

First Defiance’s securities portfolio is managed in accordance with a written policy adopted by the Board of Directors and administered by the Investment Committee. The Chief Financial Officer, the Chief Operating Officer, and the Chief Executive Officer of First Federal can each approve transactions up to $1 million. Two of the three officers are required to approve transactions between $1 million and $5 million. All transactions in excess of $5 million must be approved by the Board of Directors.

First Defiance’s investment portfolio includes 23 CMO and REMIC issues totaling $23.0 million, all of which are fully amortizing securities. One of these securities with a carrying value of $3.1 million is considered to be “high risk” based on the stress test developed by the banking regulators. Management does not believe the risks associated with any of its CMO or REMIC investments, including the security that failed the stress test developed by the banking regulators are significantly different from risks associated with other pass-through mortgage-backed securities. First Defiance does not invest in off-balance sheet derivative securities.

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

The amortized cost and fair value of securities at December 31, 2006 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Money market mutual funds and other mutual funds are not due at a single maturity date. For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities of underlying collateral. The mortgage-backed securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.

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	Contractually Maturing																				Total
	Under 1 Year		Weighted Average Rate			1 - 5 Years		Weighted Average Rate			6-10 Years		Weighted Average Rate			Over 10 Years		Weighted Average Rate			Amount			Yield
	(Dollars in Thousands)
Mortgage-backed securities	$	3,602		5.21	%	$	9,889		5.19	%	$	4,642		5.24	%	$	1,499		5.42	%	$	19,632			5.22	%
REMICs and CMOs		3,184		4.41			12,387		4.54			7,518		5.18			173		4.85			23,262			4.73
U.S. government and federal agency obligations		11,000		4.15			21,550		5.14			3,570		5.42			− -		−			36,120			4.87
Obligations of states and political subdivisions (1)		610		4.60			8,695		4.60			2,701		4.89			12,765		4.77			24,771			4.72
Trust preferred stock		−					−					−					8,134		7.76			8,134			7.76
Total	$	18,396				$	52,521				$	18,431				$	22,571				$	111,919
Unamortized premiums/ (discounts)																						351
Unrealized loss on securities available for sale																						(147	)
Total																					$	112,123

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

The carrying value of investment securities is as follows:

	December 31
	2006		2005		2004
	(In Thousands)
Available-for-sale securities:
Corporate bonds	$	−	$	−	$	6,468
U. S. treasury and federal agency obligations		36,043		41,065		50,313
Obligations of state and political subdivisions		25,254		23,818		32,092
CMOs, REMICS and mortgage-backed securities		41,207		40,395		41,765
Other		8,178		7,801		6,365
Total	$	110,682	$	113,079	$	137,003
Held-to-maturity securities:
Mortgage-backed securities	$	1,081	$	1,330	$	1,725
Obligations of state and political subdivisions		360		445		530
Total	$	1,441	$	1,775	$	2,255

For additional information regarding First Defiance’s investment portfolio refer to Note 5 to the consolidated financial statements.

Interest-Bearing Deposits

First Defiance had interest-earning deposits in the FHLB of Cincinnati amounting to $2.4 million and $5.2 million at December 31, 2006 and 2005, respectively.

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Residential Loan Servicing Activities

Servicing mortgage loans for investors involves a contractual right to receive a fee for processing and administering loan payments on mortgage loans that are not owned by the Company and are not included on the Company’s balance sheet. This processing involves collecting monthly mortgage payments on behalf of investors, reporting information to those investors on a monthly basis and maintaining custodial escrow accounts for the payment of principal and interest to investors and property taxes and insurance premiums on behalf of borrowers. At December 31, 2006, First Federal serviced 8,097 loans totaling $665.4 million. The vast majority of the loans serviced for others are fixed rate conventional mortgage loans.

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

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

	December 31
	2006							2005							2004
Rate	Number of Loans		Aggregate Principal Balance		Percentage of Aggregate Principal Balance			Number of Loans		Aggregate Principal Balance		Percentage of Aggregate Principal Balance			Number of Loans		Aggregate Principal Balance		Percentage of Aggregate Principal Balance
	(Dollars in Thousands)
Less than 5.00%		810	$	65,938		9.91	%		865	$	74,784		12.41	%		770	$	72,321		15.59	%
5.00% - 5.99%		3,473		280,779		42.20			3,689		310,665		51.56			2,881		244,842		52.79
6.00% - 6.99%		3,129		278,651		41.87			2,356		190,172		31.56			1,609		126,132		27.20
7.00% - 7.99%		582		36,158		5.43			465		21,766		3.61			383		17,810		3.84
8.00% - 8.99%		86		3,476		0.52			108		4,483		0.74			63		2,503		0.54
9.00% and over		17		437		0.07			28		641		0.10			4		182		0.04
Total		8,097	$	665,439		100.00	%		7,511	$	602,511		100.00	%		5,710	$	463,790		100.00	%

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

	2006										2005										2004
Maturity	Number of Loans		% of Number of Loans			Unpaid Principal Amount		% of Unpaid Principal Amount			Number of Loans		% of Number of Loans			Unpaid Principal Amount		% of Unpaid Principal Amount			Number of Loans		% of Number of Loans			Unpaid Principal Amount		% of Unpaid Principal Amount
	(Dollars in Thousands)
1-5 years		559		6.90	%	$	40,545		6.09	%		546		7.27	%	$	40,710		6.76	%		392		6.88	%	$	30,317		6.54	%
6-10 years		659		8.14			26,342		3.96			602		8.01			27,965		4.64			614		10.75			41,076		8.86
11-15 years		2,408		29.74			163,796		24.61			2,573		34.26			177,564		29.47			2,122		37.16			153,680		33.14
16-20 years		992		12.25			81,262		12.21			1,006		13.39			83,444		13.85			787		13.78			67,964		14.65
21-25 years		338		4.17			28,604		4.30			207		2.76			17,254		2.86			107		1.87			8,551		1.84
More than 25 years		3,141		38.80			324,890		48.83			2,577		34.31			255,574		42.42			1,688		29.56			162,202		34.97
Total		8,097		100.00	%	$	665,439		100.00	%		7,511		100.00	%	$	602,511		100.00	%		5,710		100.00	%	$	463,790		100.00	%

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Lending Activities

General - A savings bank generally may not make loans to one borrower and related entities in an amount which exceeds 15% of its unimpaired capital and surplus, although loans in an amount equal to an additional 10% of unimpaired capital and surplus may be made to a borrower if the loans are fully secured by readily marketable securities. Real estate is not considered “readily marketable collateral.” Certain types of loans are not subject to these limits. In applying these limits, loans to certain borrowers may be aggregated. Notwithstanding the specified limits, a savings bank may lend to one borrower up to $500,000 “for any purpose”. At December 31, 2006, First Federal’s limit on loans-to-one borrower was $23.0 million and its five largest loans (including available lines of credit) or groups of loans to one borrower, including related entities, were $16.5 million, $16.0 million, $14.3 million, $13.2 million and $10.6 million. All of these loans or groups of loans were performing in accordance with their terms at December 31, 2006.

Loan Portfolio Composition - The net increase in net loans receivable over the prior year was $61.8 million, $285.6 million, and $143.7 million in 2006, 2005, and 2004, respectively. First Defiance acquired net loans of $117.5 million in the ComBanc acquisition and $66.9 million in the Genoa acquisition in 2005. The loan portfolio contains no foreign loans nor any concentrations to identified borrowers engaged in the same or similar industries exceeding 10% of total loans.

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

	December 31
	2006					2005					2004					2003					2002
	Amount		%			Amount		%			Amount		%			Amount		%			Amount		%
Real estate:
One to four family residential	$	250,808		20.1	%	$	275,497		23.2	%	$	187,775		20.9	%	$	162,111		21.6	%	$	142,355		24.7	%
Five or more family residential		57,263		4.6			50,040		4.2			39,049		4.4			30,322		4.0			32,324		5.6
Nonresidential real estate		522,597		41.9			501,943		42.2			376,115		42.0			311,101		41.4			195,431		33.9
Construction		17,339		1.4			21,173		1.8			15,507		1.7			16,830		2.3			15,357		2.6
Total real estate loans		848,007		68.0			848,653		71.4			618,446		69.0			520,364		69.3			385,467		66.8
Other:
Consumer finance		43,320		3.5			54,657		4.6			45,213		5.1			39,808		5.3			37,562		6.5
Commercial		232,914		18.7			171,289		14.4			141,644		15.8			120,677		16.0			104,070		18.0
Home equity and improvement		122,789		9.8			113,000		9.5			90,839		10.1			70,038		9.3			49,889		8.7
Mobile home		450		−			640		.1			299		−			449		0.1			17		-
Total non-real estate loans		399,473		32.0			339,586		28.6			277,995		31.0			230,972		30.7			191,538		33.2
Total loans		1,247,480		100.0	%		1,188,239		100.0	%		896,441		100.0	%		751,336		100.0	%		577,005		100.0	%
Less:
Loans in process		6,409					8,782					6,341					6,079					7,255
Deferred loan origination fees		1,182					1,303					1,232					1,158					1,212
Allowance for loan losses		13,579					13,673					9,956					8,844					7,496
Net loans	$	1,226,310				$	1,164,481				$	878,912				$	735,255				$	561,042

In addition to the loans reported above, First Defiance had $3.4 million, $5.3 million, $2.3 million, $5.9 million and $15.3 million in loans classified as held for sale at December 31, 2006, 2005, 2004, 2003 and 2002, respectively. The fair value of such loans, which are all single-family residential mortgage loans, approximated their carrying value for all years presented.

Contractual Principal, Repayments and Interest Rates -The following table sets forth certain information at December 31, 2006 regarding the dollar amount of gross loans maturing in First Defiance’s portfolio, based on the contractual terms to maturity. Demand loans, loans having no stated schedule of repayments and no stated maturity and overdrafts are reported as due in one year or less.

					Due 3-5		Due 5-10		Due 10-15		Due 15+
	Due Before December 31				Years After December 31
	2007		2008		2006		2006		2006		2006		Total
	(In Thousands)
Real estate	$	117,485	$	55,894	$	170,170	$	379,588	$	52,559	$	72,311	$	848,007
Non-real estate:
Commercial		123,165		32,485		56,734		20,109		396		25		232,914
Home equity and improvement		10,011		2,115		54,576		5,254		666		50,167		122,789
Mobile home		76		93		145		134		2		−		450
Consumer finance		17,494		11,037		14,063		556		116		54		43,320
Total	$	268,231	$	101,624	$	295,688	$	405,641	$	53,739	$	122,557	$	1,247,480

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

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The following table sets forth the dollar amount of gross loans due after one year from December 31, 2006 which have fixed interest rates or which have floating or adjustable interest rates.

	Fixed Rates		Floating or Adjustable Rates		Total
	(In Thousands)
Real estate	$	123,789	$	603,954	$	727,743
Commercial		13,135		97,057		110,192
Other		82,737		57,734		140,471
	$	219,661	$	758,745	$	978,406

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

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

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

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

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

First Defiance offers adjustable-rate loans in order to decrease the vulnerability of its operations to changes in interest rates. The demand for adjustable-rate loans in First Defiance’s primary market area has been a function of several factors, including customer preference, the level of interest rates, the expectations of changes in the level of interest rates and the difference between the interest rates offered for fixed-rate loans and adjustable-rate loans. The relative amount of fixed-rate and adjustable-rate residential loans that can be originated at any time is largely determined by the demand for each in a competitive environment.

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Adjustable-rate loans represented 6.0% of First Defiance’s total originations of mortgage loans in 2006 compared to 17.3% and 22.1% during 2005 and 2004, respectively.

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

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

	Years Ended December 31
	2006		2005		2004
	(In Thousands)
Loan originations:
Single family residential	$	162,499	$	164,687	$	132,463
Multi-family residential		71,671		85,733		76,483
Non-residential real estate		168,909		162,823		137,524
Construction		24,026		27,637		20,983
Commercial		174,081		133,021		110,915
Home equity and improvement		40,498		34,221		38,552
Consumer finance		42,162		50,056		27,250
Total loans originated		683,846		658,178		544,170
Loans acquired in acquisitions		−		184,218		−
Loan reductions:
Loan pay-offs		242,137		261,046		223,976
Mortgage loans sold		134,000		111,345		104,968
Periodic principal repayments		250,324		175,220		73,698
		626,461		547,611		402,642
Net increase in total loans	$	57,385	$	294,785	$	141,528

The loans acquired in the Genoa acquisition by category were as follows : Single family residential - $36.3 million, multi-family residential - $719,000, non-residential real estate - $7.5 million, construction - $4.5 million, commercial - $1.7 million, home equity and improvement - $13.4 million and consumer finance - $3.7 million.

The loans acquired in the ComBanc acquisition by category were as follows: Single family residential - $33.1 million, multi-family residential - $2.8 million, non-residential real estate - $57.2 million, construction - $1.9 million, commercial - $12.7 million, home equity and improvement - $4.6 million and consumer finance - $7.2 million.

Asset Quality

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

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Delinquent Loans — The following table sets forth information concerning delinquent loans at December 31, 2006, in dollar amount and as a percentage of First Defiance’s total loan portfolio. The amounts presented represent the total outstanding principal balances of the related loans, rather than the actual payment amounts that are past due.

	30 to 59 Days					60 to 89 Days					90 Days and Over					Total
	Amount		Percentage			Amount		Percentage			Amount		Percentage			Amount		Percentage
	(Dollars in Thousands)
Single - family residential	$	1,450		0.12	%	$	908		0.07	%	$	1,694		0.14	%	$	4.052		0.33	%
Nonresidential and Multi- family residential		1,666		0.14			420		0.03			4,977		0.40			7,063		0.57
Home equity and improvement		991		0.08			93		0.01			286		0.02			1,370		0.11
Consumer finance		271		0.02			18		0.00			54		0.00			343		0.03
Commercial		451		0.04			77		0.01			272		0.02			800		0.07
Total	$	4,829		0.40	%	$	1,516		0.12	%	$	7,283		0.58	%	$	13,628		1.11	%

Overall the level of delinquencies at December 31, 2006 was improved from the levels at December 31, 2005, when First Defiance reported that 2.41% of its outstanding loans were at least 30 days delinquent. However the level of total loans 90 or more days delinquent has increased to 0.58% at December 31, 2006 from 0.42% at December 31, 2005. Overall the level of loans that were 30 to 59 days past due and 60 to 89 days past due dropped from $11.9 million (1.02%) and $11.3 million (0.70%) respectively at December 31, 2005 to $4.8 million (0.40%) and $1.5 million (0.12%) respectively at December 31, 2006. Management has assessed the collectibility of all loans that are 90 days or more delinquent as part of its procedures in establishing the allowance for loan losses.

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

Impaired loans acquired in the ComBanc and Genoa acquisitions have been accounted for under the provisions of AICPA Statement of Position 03-3 - Accounting for Certain Loans or Debt Securities Acquired in a Transfer. Such loans were recorded at their fair value, which was estimated based on the expected cash flow of the acquired loan. In the Genoa acquisition, 10 loan relationships with a stated value of $1.5 million were recorded at $721,000. In the ComBanc acquisition, 12 loan relationships with a stated value of $3.4 million were recorded at $2.0 million. At December 31, 2006, those loans had a contractual balance of $4.1 million and were recorded at $2.4 million. If management expectations about the cash flow of those loans changes over time, the difference will be recognized as a yield adjustment over the remaining life of the respective loan. There were no significant changes in the expected cash flows of the 22 loans identified as impaired in the acquisitions during 2006.

-10-

Loans originated by First Federal having recorded investments of $4.2 million, $822,000, and $505,000 were considered impaired as of December 31, 2006, 2005 and 2004, respectively. These amounts exclude large groups of small-balance homogeneous loans that are collectively evaluated for impairment such as residential mortgage, consumer installment, and credit card loans. There was $111,000 of interest received and recorded in income during 2006 related to impaired loans. There was $61,000 and $36,000 recorded in 2005 and 2004 respectively. Unrecorded interest income based on the loan’s contractual terms on these impaired loans and all non-performing loans in 2006, 2005 and 2004 was $389,000, $235,000, and $102,000, respectively. The average recorded investment in impaired loans during 2006, 2005 and 2004 (excluding loans accounted for under SOP 03-3) was $4.4 million, $1.1 million and $732,000, respectively. The total allowance for loan losses related to these loans was $969,000, $380,000, and $253,000 at December 31, 2006, 2005 and 2004, respectively.

Real estate acquired by foreclosure is classified as real estate owned until such time as it is sold. First Defiance also repossesses other assets securing loans, consisting primarily of automobiles. When such property is acquired it is recorded at the lower of the restated loan balance, less any allowance for loss, or fair value. Costs relating to development and improvement of property are capitalized, whereas costs relating to holding the property are expensed. Valuations are periodically performed by management and a write-down of the value is recorded with a corresponding charge to operations if it is determined that the carrying value of property exceeds its estimated net realizable value.

As of December 31, 2006, First Defiance’s total non-performing loans amounted to $7.3 million or .59% of total loans, compared to $5.0 million or 0.42% of total loans, at December 31, 2005. Non-performing loans are loans which are more than 90 days past due and are all classified as non-accrual at December 31, 2006. The nonperforming loan balance includes $4.0 million of loans originated by First Federal also considered impaired and $399,000 of acquired loans accounted for under SOP 03-3.

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

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	December 31
	2006			2005			2004			2003			2002
	(Dollars in Thousands)
Nonperforming loans:
Single-family residential	$	1,694		$	2,648		$	419		$	471		$	404
Nonresidential and multi-family residential real estate		4,977			1,917			1,014			1,092			1,217
Commercial		272			287			450			949			879
Mobile home		−			−			−			−			−
Consumer finance		340			100			10			33			25
Total nonperforming loans		7,283			4,952			1,893			2,545			2,525
Real estate owned		2,321			315			49			397			175
Other repossessed assets		71			89			49			7			31
Total repossessed assets		2,392			404			98			404			206
Total nonperforming assets	$	9,675		$	5,356		$	1,991		$	2,949		$	2,731
Troubled debt restructurings	$	−		$	−		$	−		$	−		$	−
Total nonperforming assets as a percentage of total assets of continuing operations		0.63	%		0.37	%		0.18	%		0.28	%		0.31	%
Total nonperforming loans and troubled debt restructurings as a percentage of total loans		0.59	%		0.42	%		0.21	%		0.34	%		0.43	%
Allowance for loan losses as a percent of total nonperforming assets		140.35	%		255.28	%		500.05	%		299.90	%		274.48	%

In addition to the $9.7 million of loans reported above and $2.7 million of loans considered impaired (including loans accounted for under SOP 03-3), which are not included in the loans reported above, there are approximately $31.4 million of performing loans where known information about possible credit problems of the borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in the inclusion of such loans in non-performing loans at some future date. In analyzing these loans for the purpose of determining the adequacy of the allowance for loan losses, management has determined that these loans generally have significant collateral, strong guarantors, or both.

Allowance for Loan Losses -First Defiance maintains an allowance for loan losses to absorb probable credit losses in the loan portfolio. The balance of the allowance is based upon an assessment of prior loss experience, the volume and type of lending conducted by First Defiance, industry standards, past due loan amounts and trends, general economic conditions and other factors related to the collectibility of the loan portfolio. The Company principally uses its own loss experience in calculating its loan loss provision. However, in those instances where the Company’s experience with certain types of lending is new or recent and therefore historical losses are less meaningful, management will consider such other factors as industry loss statistics, experience of other financial institutions operating in the same geographic area, and inherent risks associated with the borrower in determining the required allowance. In evaluating the adequacy of its allowance each quarter, management grades all loans in the commercial portfolio using a scale of one to ten. Loans graded in the three worst categories (substandard, doubtful and loss) generally have specific allowances. Loans graded as substandard would generally have allowances that range between zero and 20% based on management’s knowledge of the credit and other local factors. Substandard loans that have no allowances generally exhibit negative financial characteristics, such as poor cash flow or declining sales, but have offsetting credit strengths, such as an abundance of collateral or the existence of a strong guarantor. Loans classified as doubtful generally have an allowance of 50% and loans classified as loss have a 100% loan loss provision, unless other facts and circumstances, such as strength of collateral or strength of guarantors warrant a different percentage. Management also engages a third-party to perform an independent loan review on a semi-annual basis. That third party reviews all loan relationships in excess of $250,000 and, among other things, challenges management’s loan grades.

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Loans charged-off are charged against the allowance when such loans meet the Company’s established policy on loan charge-offs and the allowance itself is adjusted quarterly by recording a provision for loan losses. As such, actual losses and losses provided for should be approximately the same if the overall quality, composition and size of the portfolio remains static. To the extent that the portfolio grows at a rapid rate or overall quality deteriorates, the provision generally will exceed charge-offs. However, in certain circumstances, including in 2006, charge-offs may exceed the provision for loan losses when management determines that loans previously provided for in the allowance for loan losses are uncollectible and should be charged off. Although management believes that it uses the best information available to make such determinations, future adjustments to the allowances may be necessary, and net earnings could be significantly affected, if circumstances differ substantially from the assumptions used in making the initial determinations.

At December 31, 2006, First Defiance’s allowance for loan losses amounted to $13.6 million compared to $13.7 million at December 31, 2005. The following table sets forth the activity in First Defiance’s allowance for loan losses during the periods indicated.

	Years Ended December 31
	2006			2005			2004			2003			2002
	(Dollars in Thousands)
Allowance at beginning of year	$	13,673		$	9,956		$	8,844		$	7,496		$	6,548
Provision for credit losses		1,756			1,442			1,549			1,719			1,451
Allowance acquired in acquisitions		−			3,027			−			−			−
Charge-offs:
One to four family residential real estate		513			182			52			18			110
Commercial real estate		1,028			226			58			162			184
Commercial		177			267			390			375			36
Consumer finance		392			354			186			170			390
Home equity and improvement		166			25			−			−			−
Total charge-offs		2,276			1,054			686			725			720
Recoveries		426			302			249			354			217
Net charge-offs		1,850			752			437			371			503
Ending allowance	$	13,579		$	13,673		$	9,956		$	8,844		$	7,496
Allowance for loan losses to total non-performing loans at end of year		186.45	%		276.11	%		525.94	%		347.50	%		296.87	%
Allowance for loan losses to total loans at end of year		1.10	%		1.16	%		1.13	%		1.19	%		1.32	%
Allowance for loan losses to net charge-offs for the year		734.00	%		1,818.22	%		2,278.26	%		2,383.82	%		1,490.26	%
Net charge-offs for the year to average loans		0.15	%		0.07	%		0.05	%		0.06	%		0.10	%

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The provision for credit losses has remained stable over the five-year period shown in the above table. Although charge-offs increased significantly in 2006 over previous year levels, the relative level of loan charge-offs is still considered low when compared to a peer group of Midwest Banks with assets between $750 million and $2.5 billion.. The allowance for loan losses increased significantly in 2005 because of allowances acquired in the acquisitions. The level of charge-offs increased in 2006 and 2005 because of general growth in the overall portfolio as well as activity related primarily to acquired loans. Management anticipates that the level of charge-offs will remain higher than historical levels as loans acquired in the two acquisitions are charged off. Management also believes the level of allowance for loan losses acquired in the acquisitions is sufficient to cover the anticipated charge-offs of these acquired loans.

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

	December 31
	2006					2005					2004					2003					2002
	Amount		Percent of total loans by category			Amount		Percent of total loans by category			Amount		Percent of total loans by category			Amount		Percent of total loans by category			Amount		Percent of total loans by category
	(Dollars in Thousands)
Single family residential	$	2,077		20.1	%	$	1,484		23.2	%	$	239		22.8	%	$	386		24.4	%	$	587		29.2	%
Nonresidential and Multi-family residential real estate		8,551		46.5			8,965		46.4			6,538		46.3			6,265		45.1			4,293		38.5
Other:
Commercial loans		2,244		18.7			2,287		14.4			2,454		15.8			1,424		15.9			1,729		17.6
Consumer and home equity and improvement loans		707		14.7			937		16.0			725		15.1			769		14.6			887		14.7
	$	13,579		100.0	%	$	13,673		100.0	%	$	9,956		100.0	%	$	8,844		100.0	%	$	7,496		100.0	%

Sources of Funds

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

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

To supplement its funding needs, First Defiance also utilizes brokered Certificates of Deposit. Such deposits have maturities ranging from three months to one year. The total balance of brokered certificates of deposit was $17.6 million at December 31, 2006. Brokered CDs at December 31, 2005 totaled $37.0 million.

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

	Years Ended December 31
	2006					2005					2004
	Amount		Rate			Amount		Rate			Amount		Rate
	(Dollars in Thousands)
Non-interest-bearing demand deposits	$	95,044		−		$	86,741		−		$	56,241		−
Interest bearing demand deposits		289,214		2.44	%		273,502		1.19	%		232,044		0.74	%
Savings deposits		76,775		0.36			87,708		0.27			53,247		0.25
Time deposits		640,479		4.05			570,826		3.00			413,796		2.68
Totals	$	1,101,512		3.02	%	$	1,018,777		2.02	%	$	755,328		1.71	%

The following table sets forth the maturities of First Defiance’s certificates of deposit having principal amounts of $100,000 or more at December 31, 2006 (in thousands):

Certificates of deposit maturing in quarter ending:
March 31, 2007	$	58,326
June 30, 2007		45,674
September 30, 2007		26,989
December 31, 2006		24,632
After December 31, 2007		17,783
Total certificates of deposit with balances of $100,000 or more	$	173,404

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

	2006		2005
	(In Thousands)
Interest bearing demand deposits and money market accounts	$	216	$	120
Savings Accounts		−		−
Certificates		1,651		876
	$	1,867	$	996

For additional information regarding First Defiance’s deposits see Note 10 to the financial statements.

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

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

	December 31
	2006			2005			2004
	(Dollars in Thousands)
Long-term:
FHLB advances	$	129,128		$	152,460		$	151,713
Weighted average interest rate		5.01	%		4.65	%		4.62	%
Short-term:
FHLB advances	$	33,100		$	28,500		$	26,500
Weighted average interest rate		5.18	%		3.65	%		2.20	%
Revolving borrowings		-			-			3,000
Weighted average interest rate		-			-			2.25	%
Securities sold under agreement to repurchase	$	30,424		$	25,748		$	11,804
Weighted average interest rate		2.98	%		2.68	%		1.57	%

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

	Years Ended December 31
	2006			2005			2004
	(Dollars in Thousands)
Long-term:
FHLB advances:
Maximum balance	$	152,164		$	154,602		$	153,373
Average balance		141,836			153,267			152,547
Weighted average interest rate		4.89	%		4.63	%		4.61	%

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

	Years Ended December 31
	2006			2005			2004
	(Dollars in Thousands)
Short-term:
FHLB advances:
Maximum balance	$	57,500		$	45,000		$	28,500
Average balance		40,104			14,313			15,577
Weighted average interest rate		5.10	%		3.79	%		1.55	%
Revolving credit agreements:
Maximum balance	$	-		$	43,799		$	3,000
Average balance		80			301			1,349
Weighted average interest rate		5.13	%		2.25	%		2.20	%
Securities sold under agreement to repurchase:
Maximum balance	$	30,424		$	25,748		$	12,606
Average balance		20,318			17,718			10,612
Weighted average interest rate		2.84	%		2.18	%		1.08	%

First Defiance borrows funds under a variety of programs at the FHLB. As of December 31, 2006, there was $129.1 million outstanding under various long-term FHLB advance programs. First Defiance utilizes short-term advances from the FHLB to meet cash flow needs and for short-term investment purposes. There were $33.1 million and $28.5 million in short-term advances outstanding at December 31, 2006 and 2005, respectively. At December 31, 2006, $33.1 million was outstanding under First Defiance’s REPO advance line of credit. The total available under the line is $100.0 million. Additionally, First Defiance has $15.0 million available under a Cash Management advance line of credit. Amounts are generally borrowed under these lines on an overnight basis. First Federal’s total borrowing capacity at the FHLB is limited by various collateral requirements. Eligible collateral includes mortgage loans, non-mortgage loans, cash and investment securities. At December 31, 2006, irregardless of amounts available on the REPO and Cash Management line, First Federal’s additional borrowing capacity with the FHLB was $50.8 million due to these collateral requirements.

As a member of the FHLB of Cincinnati, First Federal must maintain a minimum investment in the capital stock of that FHLB in an amount defined in the FHLB’s regulations. First Federal is permitted to own stock in excess of the minimum requirement and is in compliance with the minimum requirement with an investment in stock of the FHLB of Cincinnati of $18.6 million at December 31, 2006.

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

For additional information regarding First Defiance’s FHLB advances and other debt see Notes 11, 12 and 13 to the financial statements.

Subordinated Debentures -In October 2005, the Company formed an affiliated trust, First Defiance Statutory Trust I (the Trust Affiliate), that issued $20 million of Guaranteed Capital Trust Securities (Trust Preferred Securities). In connection with the transaction, the Company issued $20.6 million of Junior Subordinated Deferrable Interest Debentures (Subordinated Debentures) to the Trust Affiliate. The Trust Affiliate was formed for the purpose of issuing Trust Preferred Securities to third-party investors and investing the proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The Subordinated Debentures held by the Trust Affiliate are the sole assets of the trust. Distributions on the Trust Preferred Securities issued by the Trust Affiliate are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 1.38%, or 6.74% as of December 31, 2006.

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

Employees

First Defiance had 476 employees at December 31, 2006. None of these employees are represented by a collective bargaining agent, and First Defiance believes that it enjoys good relations with its personnel.

Competition

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

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

-18-

Regulation

General - First Defiance and First Federal are subject to regulation, examination and oversight by the OTS. Because the FDIC insures First Federal’s deposits, First Federal is also subject to examination and regulation by the FDIC. First Defiance and First Federal must file periodic reports with the OTS and examinations are conducted periodically by the OTS and the FDIC to determine whether First Federal is in compliance with various regulatory requirements and is operating in a safe and sound manner. First Federal is subject to various consumer protection and fair lending laws. These laws govern, among other things, truth-in-lending disclosure, equal credit opportunity, and, in the case of First Federal, fair credit reporting and community reinvestment. Failure to abide by federal laws and regulations governing community reinvestment could limit the ability of First Federal to open a new branch or engage in a merger transaction. Community reinvestment regulations evaluate how well and to what extent First Federal lends and invests in its designated service area, with particular emphasis on low-to-moderate income communities and borrowers in such areas.

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

Regulatory Capital Requirements - First Federal is required by OTS regulations to meet certain minimum capital requirements. Current capital requirements call for tangible capital of 1.5% of adjusted total assets, core capital of 4.0% of adjusted total assets, except for associations with the highest examination rating and acceptable levels of risk, and risk-based capital of 8% of risk-weighted assets.

The following table sets forth the amount and percentage level of regulatory capital of First Federal at December 31, 2006, and the amount by which it exceeds the minimum capital requirements. Tangible and core capital are reflected as a percentage of adjusted total assets. Total (or risk-based) capital, which consists of core and supplementary capital, is reflected as a percentage of risk-weighted assets. Assets are weighted at percentage levels ranging from 0% to 100% depending on their relative risk.

	December 31, 2006
	Amount		Percent
	(In Thousands)
Tangible Capital	$	140,017		9.42	%
Requirement		22,293		1.50
Excess	$	117,724		7.92	%
Core Capital	$	140,017		9.42	%
Requirement		59,448		4.00
Excess	$	80,569		5.42	%
Total risked-based capital	$	153,596		11.85	%
Risk-based requirement		103,716		8.00
Excess	$	49,880		3.85	%

First Federal’s capital at December 31, 2006, meets the standards for a well-capitalized institution. There are no conditions or events since the most recent notification from the OTS regarding those capital standards that management believes have changed any of the well-capitalized categorizations of First Federal.

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Transactions with Insiders and Affiliates. Loans to executive officers, directors and principal shareholders and their related interests must conform to the lending limits. Most loans to directors, executive officers and principal shareholders must be approved in advance by a majority of the “disinterested” members of board of directors of the association with any “interested” director not participating. All loans to directors, executive officers and principal shareholders must be made on terms substantially the same as offered in comparable transactions with the general public or as offered to all employees in a company-wide benefit program. Loans to executive officers are subject to additional restrictions. In addition, all related party transactions must be approved by the Company’s audit committee pursuant to Nasdaq Rule 4350(h), including loans made by financial institutions in the ordinary course of business. All transactions between savings associations and their affiliates must comport with Sections 23A and 23B of the Federal Reserve Act (FRA) and the Federal Reserve Board’s Regulation W. An affiliate of a savings association is any company or entity that controls, is controlled by or is under common control with the savings association. First Defiance is an affiliate of First Federal.

Holding Company Regulation. First Defiance is a unitary thrift holding company and is subject to OTS 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 OTS, 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. If First Defiance were to acquire control of another savings institution, other than through a merger or other business combination with First Federal, First Defiance would become a multiple thrift holding company and its activities would thereafter be limited generally to those activities authorized by the FRB as permissible for bank holding companies.

Item 1A. Risk Factors

Interest Rate Risk

The earnings and financial condition of First Defiance are dependent to a large degree upon net interest income, which is the difference between interest earned from loans and investments and interest paid on deposits and borrowings. The narrowing of the spread between interest earned on loans and investments and interest paid on deposits and borrowings could adversely affect our earnings and financial condition.

Interest rates are highly sensitive to many factors including:

· The rate of inflation;

· Economic conditions;

· Federal monetary policies;

· Stability of domestic and foreign markets.

Changes in market interest rates will also affect the level of prepayments on loans as well as the payments received on mortgage backed securities, requiring the reinvestment at lower rates than the loans or securities were paying.

First Federal Bank originates a significant amount of residential mortgage loans for sale and for our portfolio. The origination of residential mortgage loans is highly dependent on the local real estate market and the level of interest rates. Increasing interest rates tend to reduce the origination of loans for sale and consequently fee income, which we report as mortgage banking income. Conversely, decreasing interest rates have the effect of causing clients to refinance mortgage loans faster than anticipated. This causes the value of mortgage servicing rights on the loans sold to be lower than originally anticipated. If this happens, the Company may be required to write down the value of our mortgage servicing rights faster than anticipated, which will increase expense and lower earnings.

-20-

Credit Risk

First Defiance’s earnings and financial condition may be adversely affected if the Company fails to adequately manage credit risk. The Company’s primary business is the origination and underwriting of loans. This business requires the Company to take “credit risk” which is the risk of losing principal and interest income because borrowers fail to repay their loans. The ability of borrowers to repay their loans and the value of collateral securing such loans may be affected by a number of factors including:

· A slowdown in the local economy where the Company’s markets are located or the national economy;

· A downturn in the business sectors in which the Company’s loan customers operate;

· A rapid increase in interest rates.

Liquidity Risk

Liquidity is the ability to meet cash flow needs on a timely basis at a reasonable cost. The liquidity of the Company is used to make loans and to repay deposit liabilities as they become due or are demanded by customers. Liquidity policies and limits are established by the board of directors, with limits monitored by the Asset/Liability committee.

First Defiance’s sources of liquidity include both local deposits and wholesale funding sources. Wholesale funding sources include Federal Home Loan Bank advances, Federal Funds purchased, securities sold under repurchase agreements, brokered or other out-of-market certificate of deposit purchases, and a line of credit with a commercial bank. Also the Company maintains a portfolio of securities that can be used as a secondary source of liquidity. Other sources of liquidity that may be available if necessary include the sale or securitization of loans, the issuance of additional collateralized borrowings beyond those currently utilized with the Federal Home Loan Bank, the issuance of debt securities and the issuance of preferred or common securities in public or private transactions.

The inability of the Company to access the above listed sources of liquidity when needed could cause First Federal to be unable to meet customer needs, which could adversely impact its financial condition, results of operations, cash flow, or regulatory capital levels. For further discussion, see the “Liquidity and Capital Resources” section included in the 2006 Annual Report to Stockholders, which is filed as Exhibit 13.1 to this report, and incorporated herein by reference.

Economy

The Company operates its banking and insurance business units within the geographic area comprised of the northwest corner of the state of Ohio and adjacent counties in Indiana and Michigan. Weaknesses in this geographic market area could be caused by such factors as an increase in the unemployment rate, a decrease in real estate values, or significant increases in interest rates. Any such weakness could have a negative impact on our earnings and financial condition because:

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· Demand for our products and services may go down;

· Borrowers may be unable to make payments on their loans;

· The value of collateral securing loans may decline;

· The overall quality of the loan portfolio may decline;

· Local market-area deposits may decline, impacting the Company’s cost of funding and its liquidity.

Competition

Competition in the Company’s market area may reduce First Defiance’s ability to originate loans and attract and retain deposits. First Defiance faces competition both in originating loans and attracting deposits. Competition is intense in the financial services industry. The Company competes in its market area by offering superior service and competitive rates and products. The type of institutions First Defiance competes with include large regional commercial banks, smaller community banks, savings institutions, mortgage banking firms, credit unions, finance companies, brokerage firms, insurance agencies and mutual funds. As a result of their size and ability to achieve economies of scale, certain of First Defiance’s competitors can offer a broader range of products and services than the Company can offer. To stay competitive in its market area, First Defiance may need to adjust the interest rates on its products to match rates of its competition, which will have a negative impact on net interest margin. The Company’s continued profitability depends on its ability to continue to effectively compete in its market areas.

Operational Risks

First Defiance processes a large volume of transactions on a daily basis and is exposed to numerous types of risks resulting from inadequate or failed internal processes, people and systems. These risks include but are not limited to the risk of fraud by persons inside or outside the Company, the execution of unauthorized transactions by employees, errors relating to transaction processing and systems, and breaches of the internal control system and compliance requirements. The risk of loss also includes the potential legal actions that could arise as a result of operational deficiencies or as a result of noncompliance with applicable regulatory standards.

The Company has established and maintains a system of internal controls that provide management with information on a timely basis and allows for the monitoring of compliance with operational standards. While not foolproof, these systems have been designed to manage operational risks at an appropriate, cost effective level. Procedures exist that are designed to ensure that policies relating to conduct, ethics, and business practices are followed. Periodically losses from operational risks may occur, including the effects of operational errors. Such losses are included in non-interest expense as incurred. While management continually monitors the system of internal control, as well as data processing systems and corporate-wide processes and procedures, there can be no assurance that future losses will not occur.

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

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Government Regulation

First Defiance’s business may be adversely affected by changes in the regulatory environment or by changes in government policies as a whole. The earnings of financial institutions such as First Defiance and First Federal are affected by the policies of the regulatory authorities, including the Federal Reserve Board, which regulates the money supply, and the Office of Thrift Supervision, which regulates unitary thrift holding companies such as First Defiance and savings banks such as First Federal.

Among the methods employed by the Federal Reserve Board are open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, and changes in the reserve requirement against member bank deposits. These tools are utilized by the Federal Reserve in varying combinations to influence overall growth and distribution of bank loans, investments and deposits and they have a significant impact on interest rates charged on loans and paid on deposits. The influence of the monetary policies of the Federal Reserve Board is expected to have a continuing and profound effect on the operating results of commercial and savings banks.

Policies, administration guidelines, and regulatory practices of the Office of Thrift Supervision and other banking regulators have a significant impact on the operations of First Federal and First Defiance. It is possible that certain of those regulations will negatively impact the Company’s operating results or financial condition.

Item 1B. Unresolved Staff Comments

None.

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Item 2. Properties

At December 31, 2006, First Federal conducted its business from its main office at 601 Clinton Street, Defiance, Ohio, and twenty-five other full service banking centers in northwestern Ohio. First Insurance conducted its business from leased office space at 419 5^th Street, Suite 1200, Defiance, Ohio.

First Defiance maintains its headquarters in the main office of First Federal at 601 Clinton Street, Defiance, Ohio.

The following table sets forth certain information with respect to the office and other properties of the Company at December 31, 2006. See Note 9 to the Consolidated Financial Statements.

Description/address	Leased/ Owned		Net Book Value of Property		Deposits
			(In Thousands)
Main Office, First Federal
601 Clinton Street, Defiance, OH		Owned	$	5,414	$	226,276
Branch Offices, First Federal
204 E. High Street, Bryan, OH		Owned		915		106,429
211 S. Fulton Street, Wauseon, OH		Owned		636		49,644
625 Scott Street, Napoleon, OH		Owned		1,339		67,683
1050 East Main Street, Montpelier, OH		Owned		471		34,854
926 East High Street, Bryan, OH		Owned		92		7,173
1800 Scott Street, Napoleon, OH		Owned		1,602		20,883
1177 N. Clinton Street, Defiance, OH		Leased		1,212		29,766
905 N. Williams St., Paulding, OH		Owned		958		35,186
201 E. High St., Hicksville, OH		Owned		481		17,352
3900 N. Main St., Findlay, OH		Owned		1,226		40,068
11694 N. Countyline St., Fostoria, OH		Owned		788		21,701
1226 W. Wooster, Bowling Green, OH		Owned		1,214		56,839
301 S. Main St., Findlay, OH		Owned		1,338		34,075
405 E. Main St., Ottawa, OH		Owned		453		66,957
124 E. Main St., McComb, OH		Owned		248		20,583
7591 Patriot Dr., Findlay, OH		Owned		1,341		11,318
417 W Dussell Dr., Maumee, OH		Leased		1,118		30,153
230 E. Second St., Delphos, OH		Owned		1,288		99,564
105 S. Greenlawn Ave., Elida, OH		Owned		399		36,782
2600 Allentown Rd., Lima, OH		Owned		950		34,319
2285 N. Cole St., Lima, OH		Owned		482		9,326
22020 W. State Rt. 51, Genoa, OH		Owned		1,062		41,769
2760 Navarre Ave., Oregon, OH		Leased		263		19,077
1077 Louisiana Ave., Perrysburg, OH		Leased		86		15,100
2565 Shawnee Road, Lima, OH		Owned		1,766		5,568
First Insurance & Investments
419 5th Street, Suite 1200, Defiance, OH		Leased		184		N/A
			$	27,326	$	1,138,445

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Item 3. Legal Proceedings

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

Item 4. Submission of Matters to a Vote of Securities Holders

No matters were submitted to a vote of securities holders during the fourth quarter of 2006.

PART II

Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters and Issuers Purchases of Common Stock

The Company’s common stock trades on The Nasdaq Stock Market under the symbol “FDEF.” As of March 2, 2007, the Company had 2,075 shareholders of record.

The table below shows the reported high and low sales prices of the common stock and cash dividends declared per share of common stock during the periods indicated in 2006 and 2005.

	Years Ending
	December 31, 2006						December 31, 2005
	High		Low		Dividend		High		Low		Dividend
Quarter ended:
March 31	$	28.88	$	25.39	$	.24	$	29.90	$	26.00	$	.22
June 30		30.29		25.09		.24		30.46		25.29		.22
September 30		28.69		25.18		.24		31.44		26.21		.22
December 31		30.70		26.87		.25		30.06		25.56		.24

The OTS imposes various restrictions or requirements on the ability of associations to make capital distributions. Capital distributions include, without limitation, payments of cash dividends, repurchases and certain other acquisitions by an association of its shares and payments to stockholders of another association in an acquisition of such other association.

An application must be submitted and approval from the OTS must be obtained by a subsidiary of a savings and loan holding company (i) if the proposed distribution would cause total distributions for the calendar year to exceed net income for that year to date plus the savings association’s retained net income for the preceding two years; (ii) if the savings association will not be at least adequately capitalized following the capital distribution; or (iii) if the proposed distribution would violate a prohibition contained in any applicable statute, regulation or agreement between the savings association and the OTS (or the FDIC), or a condition imposed on the savings association in an OTS-approved application or notice. If a savings association subsidiary of a holding company is not required to file an application, it must file a notice of the proposed capital distribution with the OTS. First Federal did not pay any dividends to First Defiance during 2006 and $34.4 million during 2005.

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The line graph below compares the yearly percentage change in cumulative total shareholder return on First Defiance common stock and the cumulative total return of the NASDAQ Composite Index, the SNL NASDAQ Bank Index and the SNL Midwest Thrift Index. An investment of $100 on December 31, 2001, and the reinvestment of all dividends are assumed.

		Period Ending
Index	12/31/01	12/31/02	12/31/03	12/31/04	12/31/05	12/31/06
First Defiance Financial Corp.	100.00	128.27	180.91	207.84	201.50	233.26
NASDAQ Composite	100.00	68.76	103.67	113.16	115.57	127.58
SNL NASDAQ Bank Index	100.00	102.85	132.76	152.16	147.52	165.62
SNL Midwest Thrift Index	100.00	128.91	179.09	197.78	193.27	219.35

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First Defiance completed the following common stock repurchases during the 2006 fourth quarter:

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (a)
October 1, 2006 to October 21. 2006		3,309	$	28.53		3,309		312,910
November 1, 2006 to November 30, 2006 (b)		3,309	$	28.85		1,727		311,183
December 1, 2006 to December 31, 2006		425	$	30.00		425		310,758
Total		7,043	$	28.77		5,461		310,758

(a) On July 18, 2003, First Defiance announced that its Board of Directors had authorized management to repurchase up to 10% of the Registrant’s common stock through open market or in any private transaction. The authorization, which is for 639,828 shares, does not have an expiration date.

(b) November purchases included 1,582 shares acquired upon exercise of stock options.

Item 6. Selected Financial Data

Information required by this item is set forth on pages 12 and 13 in the 2006 Annual Report to Stockholders, which is filed as Exhibit 13.1 to this report, and incorporated by reference.

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

Information required by this item is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the 2006 Annual Report to Stockholders, which is filed as Exhibit 13.1 to this report, and incorporated herein by reference.

Item 7a: Quantitative and Qualitative Disclosures About Market Risk

Information required by this item is set forth in the caption “Quantitative and Qualitative Disclosure About Market Risk” included in the 2006 Annual Report to Stockholders, which is filed as Exhibit 13.1 to this report and incorporated herein by reference.

Item 8. Financial Statements and Supplementary Data

Information required by this item is set forth in the Reports of Independent Registered Public Accounting Firms, Consolidated Statements of Financial Condition, Consolidated Statements of Income, Consolidated Statements of Stockholders’ Equity, Consolidated Statements of Cash Flows and Notes to Consolidated Financial Statements included in the 2006 Annual Report to Stockholders, which is filed as Exhibit 13.1 to this report and incorporated herein by reference.

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Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.

None.

Item 9a: Controls and Procedures

First Defiance’s management carried out an evaluation, under the supervision and with the participation of the chief executive officer and the chief financial officer, of the effectiveness of the design and operation of First Defiance’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2006, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the chief executive officer along with the chief financial officer concluded that First Defiance’s disclosure controls and procedures as of December 31, 2006, are effective in timely alerting them to material information relating to First Defiance Financial Corp. (including its consolidated subsidiaries) required to be included in First Defiance’s periodic filings under the Exchange Act.

Internal Control Over Financial Reporting

Information required by this item is set forth in “Report of Management and “Report of Independent Registered Public Accounting Firm” included in the 2006 Annual Report to Stockholders which is filed as Exhibit 13.1 to this report and incorporated herein by reference.

Changes in Internal Control Over Financial Reporting

There were no changes in First Defiance’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect First Defiance’s internal control over financial reporting.

Item 9b: Other Information

None

PART III

Item 10: Directors and Executive Officers of the Registrant

The information required herein is incorporated by reference from the sections captioned: “Proposal 1 - Election of Directors”, “Executive Officers”, and “Section 16(a) Beneficial Ownership Compliance” of the definitive proxy statement dated March 16, 2007.

First Defiance has adopted a Code of Ethics applicable to all officers, directors and employees that complies with SEC requirements.

Item 11: Executive Compensation

Information required by this item is set forth under the captions “Executive Compensation” and “Director Compensation” of the definitive proxy statement dated March 16, 2007.

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Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is set forth under the caption “Beneficial Ownership” of the definitive proxy statement dated March 16, 2007.

Equity Compensation Plans

The following table provides information as of December 31, 2006 with respect to the shares of First Defiance Financial Corp. common stock that may be issued under First Defiance’s existing equity compensation plans.

Plan Category	Number of securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights		Weighted Average Exercise Price of Outstanding Options, Warrants and Rights		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
	(a)		(b)		(c)
1993 Stock Incentive Plan		20,836	$	12.93		-0-
1996 Stock Option Plan		82,218	$	14.56		250
2001 Stock Option and Incentive Plan		216,300	$	18.91		9,100
2005 Stock Option and Incentive Plan		84,800	$	26.29		266,050
1996 Management Recognition Plan		N/A		N/A		155

Item 13: Certain Relationships and Related Transactions, and Director Independence

Information required by this item is set forth under the captions “Composition of the Board” and “Related Person Transactions” of the definitive proxy statement dated March 16, 2007.

Item 14: Principal Accountant Fees and Services

Information required by this item is set forth under the caption “Independent Registered Public Accounting Firm” of the definitive proxy statement dated March 16, 2007.

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PART IV

Item 15: Exhibits and Financial Statement Schedules

(a) The following documents are filed as part of this report:

The report of independent registered public accounting firms and consolidated financial statements appearing in our 2006 Annual Report on the pages indicated below are incorporated by reference in Item 8.

	Annual Report Page
Report of Independent Registered Public Accounting Firm (Crowe Chizek and Company LLC)	32
Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements (Ernst & Young LLP)	33
Consolidated Statements of Financial Condition as of December 31, 2006 and 2005	34
Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004	35
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2006, 2005 and 2004	36
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004	37
Notes to Consolidated Financial Statements	39

(1) We are not filing separately financial statement schedules because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or the related notes.

(2) The exhibits required by this item are listed in the Exhibit Index of this Form 10-K. The management contracts and compensation plans or arrangements required to be filed as exhibits to this Form 10-K are listed as Exhibits 10.1 through 10.12.

(3) See Item 15(a)(2) above.

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SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) 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.

	FIRST DEFIANCE FINANCIAL CORP.
March 15, 2007	By:	/s/ John C. Wahl
		John C. Wahl, Exec.V.P, Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 15, 2007.

Signature	Title
/s/ William J. Small	Chairman of the Board, President and
William J. Small	Chief Executive Officer
/s/ John C. Wahl	Executive Vice President and
John C. Wahl	Chief Financial Officer
/s/ James L. Rohrs	Director, Executive Vice President
James L. Rohrs
/s/ Stephen L. Boomer	Director, Vice Chairman
Stephen L. Boomer
/s/ John L. Bookmyer	Director
John L. Bookmyer
/s/ Dr. Douglas A. Burgei	Director
Dr. Douglas A. Burgei
/s/ Peter A. Diehl	Director
Peter A. Diehl
/s/ Dr. John U. Fauster, III	Director
Dr. John U. Fauster, III
/s/ Dwain I. Metzger	Director
Dwain I. Metzger
/s/ Gerald W. Monnin	Director
Gerald W. Monnin
/s/ Samuel S. Strausbaugh	Director
Samuel S. Strausbaugh
/s/ Thomas A. Voigt	Director
Thomas A. Voigt

-31-

Exhibit Index

This report incorporates by reference the documents listed below that we have previously filed with the SEC. The SEC allows us to incorporate by reference information in this document. The information incorporated by reference is considered to be part of this document.

This information may be read and copied at the Public Reference Room of the SEC at 100 F Street, N.E., Washington D.C. 20549. The SEC also maintains an internet web site that contains reports, proxy statements, and other information about issuers, like First Defiance, who file electronically with the SEC. The address of the site is http://www.sec.gov. The reports and other information filed by First Defiance with the SEC are also available at the First Defiance Financial Corp. web site. The address of the site is http://www.fdef.com. Except as specifically incorporated by reference into this Annual Report on Form 10-K, information on those web sites is not part of this report.

Exhibit
Number	Description
3.1	Articles of Incorporation	(1)
3.2	Code of Regulations	(1)
3.2	Bylaws	(1)
4	Agreement to furnish instruments and agreements defining rights of holders of long-term debt	(4)
10.1	1996 Stock Option Plan	(2)
10.2	Form of Incentive Stock Option Award Agreement	(3)
10.3	Form of Nonqualified Stock Option Award Agreement	(3)
10.4	1996 Management Recognition Plan and Trust	(2)
10.5	2001 Stock Option and Incentive Plan	(5)
10.6	1993 Stock Incentive Plan	(1)
10.7	Employment Agreement with William J. Small	(6)
10.8	Employment Agreement with James L. Rohrs	(2)
10.9	Employment Agreement with John C. Wahl	(2)
10.10	Employment Agreement with Gregory R. Allen	(7)
10.11	Description of Annual Bonus	(8)
10.12	2005 Stock Option and Incentive Plan	(9)
13.1	2006 Annual Report to Stockholders	(4)
14	Code of Ethics	(4)
21	List of Subsidiaries of the Company	(4)
23.1	Consent of Crowe Chizek and Company LLC	(4)
23.2	Consent of Ernst & Young LLP	(4)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	(4)
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	(4)
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	(4)
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	(4)

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

(2) Incorporated herein by reference to like numbered exhibit in Registrant’s 2001 Form 10-K

(3) Incorporated herein by reference to like numbered exhibit in Registrant’s 2004 Form 10-K

(4) Included herein

(5) Incorporated herein by reference to Appendix B to the 2001 Proxy Statement

(6) Incorporated herein by reference to like numbered exhibit in Registrant’s 2000 Form 10-K

(7) Incorporated herein by reference to like numbered exhibit in Registrant’s 2002 Form 10-K

(8) Incorporated herein by reference to like numbered exhibit in Registrant’s 2005 Form 10-K

(9) Incorporated herein by reference to Appendix A to the 2005 Proxy Statement

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EX-4

March 15, 2007

Securities and Exchange Commission

100 F Street, N.E.

Washington, D.C. 20549

Re: First Defiance Financial Corp. - Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2006

Ladies and Gentlemen:

Today, First Defiance Financial Corp., an Ohio corporation (“First Defiance”), is filing its Annual Report on Form 10-K for the fiscal year ended December 31, 2006 (the “Form 10-K”) with the Securities and Exchange Commission (the “SEC”).

Pursuant to the instructions relating to the Exhibits in Item 601(b)(4)(iii) of Regulation S-K, First Defiance hereby agrees to furnish the SEC, upon request, copies of instruments and agreements, defining the rights of holders of First Defiance’s long-term debt and of the long-term debt of its consolidated subsidiaries, which are not being filed as exhibits to the Form 10-K. The total amount of securities issued under any instrument of such long-term debt does not exceed 10% of the total assets of First Defiance and its subsidiaries on a consolidated basis.

Very truly yours,

FIRST DEFIANCE FINANCIAL CORP.

/s/ John C. Wahl

John C. Wahl

Chief Financial Officer

EX-13

FIRST DEFIANCE FINANCIAL CORP. PROFILE

First Defiance Financial Corp., headquartered in Defiance, OH is the holding company for First Federal Bank of the Midwest and First Insurance & Investments. First Federal Bank operates 26 full service branches and 36 ATMs in twelve counties in northwest Ohio. First Insurance & Investments is the largest property and casualty insurance company in the Defiance, Ohio area, specializing in life and group health insurance as well as financial planning.

Chartered in 1935 as a mutual savings and loan company, First Federal converted to a Mutual Holding Company and issued its first stock to the public and employees in 1993. In September 1995, First Federal converted to a full stock company, trading stock on the NASDAQ under the ticker symbol FDEF. At the same time, First Defiance Financial Corp. was founded as the holding company for First Federal. The bank’s name was changed to First Federal Bank of the Midwest in 1999, to reflect our desire to provide more comprehensive financial products and services. In the same year, First Insurance & Investments was added to the growing list of financial services.

Since 2003, First Defiance has acquired three banking offices, opened three de novo offices and acquired ComBanc, Inc, based in Delphos, Ohio in Allen County, and Genoa Savings and Loan, based near Toledo in Genoa, Ohio.

We invite you to review the enclosed materials highlighting the past successes and future plans of First Defiance Financial Corp.

Safe Harbor Statement

Statements contained in this Annual Report may not be based on historical facts and are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1993, as amended, and Section 21B of the Securities Act of 1934, as amended. Actual results could vary materially depending on risks and uncertainties inherent in general and local banking and insurance 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. The Company assumes no responsibility to update this information. For more details, please refer to the Company’s SEC filings, including its most recent Annual Report on from 10-K and quarterly reports on Form 10-Q.

TABLE OF CONTENTS
Financial Highlights	1
Chairman’s Letter to Shareholders	2
A High Performing Community Bank Strategy	6
Financial Information	11
Shareholder Information	Inside Back Cover

2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

2006 FINANCIAL HIGHLIGHTS (In Thousands, Except Per Share Amounts)
Summary of operating results	2006			2005			% Change
Net interest income	$	49,022		$	47,282			3.7	%
Provision for loan losses		1,756			1,442			21.8	%
Non-interest income (excluding securities gains/losses)		19,626			14,703			33.5	%
Securities gains (losses)		(2	)		1,222			NM
Non-interest expense (excluding non-recurring items)		43,839			40,466			8.3	%
Net income		15,600			11,970			30.3	%
Acquisition-related and other significant non-recurring items		-			3,476			NM
Core operating earnings		15,600			14,229			9.6	%
Balance Sheet Data
Total Assets	$	1,527,879		$	1,461,082			4.6	%
Loans, net		1,226,310			1,164,481			5.3	%
Deposits		1,138,445			1,069,501			6.4	%
Stockholders’ equity		159,825			151,216			5.7	%
Allowance for loan losses		13,579			13,673			-0.7	%
Key Ratios:
Return on average equity - core earnings		10.03	%		9.81	%		2.2	%
Return on average assets - core earnings		1.04	%		1.04	%		0.0	%
Average net interest margin		3.68	%		3.87	%		-4.9	%
Efficiency ratio - core earnings		63.31	%		64.63	%		2.0	%
Share information:
Basic earnings per share	$	2.22		$	1.75			26.9	%
Diluted earnings per share		2.18			1.69			29.0	%
Basic core earnings per share		2.22			2.08			6.7	%
Diluted core earnings per share		2.18			2.01			8.5	%
Dividends per common share		0.97			0.90			7.8	%
Book value per common share		22.38			21.31			5.0	%
Shares outstanding at end of period		7,142			7,085			0.8	%

Core earnings reflect net income less the after-tax impact of acquisition-related and other signifi cant non-recurring transactions.

NM -- % not meaningful

1

2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

2006 CHAIRMAN’S LETTER

As I look back over 2006, I am extremely pleased with the way First Defi ance Financial Corp. responded to the unique economic conditions that developed over the course of the year. The unprecedented interest rate environment, which affected virtually the entire banking industry, presented an arduous challenge and I am happy to report that our eff orts resulted in another successful and profi table year for our shareholders.

WILLIAM J. SMALL

CHAIRMAN, PRESIDENT & CEO

2

2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

As a result of ongoing inflation fears, the Federal Reserve Open Market Committee raised rates through mid-year and continued to express concerns about inflation through the third quarter. From a banking perspective, this type of rate and monetary policy environment created new dilemmas. Through the Fed’s 17 consecutive interest rate increases, banks benefited from rising yields on loan portfolios even as higher yields on short term Treasury notes drove up deposit costs. Once the Fed took a break from upward rate adjustments, banks no longer had the ability to off set the rising cost of funds, which continued to climb as maturing certificates of deposits repriced at higher rates. This put even more strain on already compressed net interest margins.

FOCUS ON NON-INTEREST INCOME

As a result of this rate environment, the challenge became finding ways to supplement net interest income, the revenue lifeline for banks, with other forms of revenue. Simply growing earning assets was no longer the answer to growing overall revenue. Companies that recognized this shift early and were able to come up with new and increased sources of non-interest income had the advantage of off setting the impact of the falling net interest margin with these other revenue sources. Our team chose to address this challenge by formulating our own High Performing Community Bank strategy, a clear and concise business plan that not only helps us address the current short-term rate environment issues, but also guides our decisions for long-term success. Using this strategy helped us focus on new ways to build our non-interest income in 2006:

Ÿ The single largest new contribution to non-interest income last year was our overdraft privilege service. Overdraft privilege is tied to most of our retail checking account products and protects customers from having checks returned for non-sufficient funds. This program, which was implemented in March of 2006, resulted in an increase in pre-tax income totaling $2.6 million, net of program expenses and related charge-offs. We anticipate that this service will continue to generate similar returns in the future.

Ÿ The Trust Department restructured its fee schedule early in 2006 resulting in approximately 12% more revenue for that department.

Ÿ We completed a full service fee review during the last half of the year and have added some new fees to the schedule and implemented several increases that are effective as of the beginning of 2007. These changes keep us in line with fee schedules used by banks throughout our market area.

Ÿ We continue to see significant growth in debit card fee income, which increased by 25.1% in 2006. We expect fees will continue to grow in this area as we focus on getting more cards in customers’ hands and increasing the usage of those cards.

First Insurance & Investments, our insurance and investment business unit, also grew revenue in a very challenging premium environment. Property and casualty premiums were flat at best in 2006, but thanks to new business booked and strong quality performance related to loss control, we were able to increase revenue within this business unit. In February 2007, First Defiance executed an agreement to acquire Huber, Harger, Welt & Smith, an insurance firm in the Bowling Green, Ohio area. The addition of this new insurance territory to the First Insurance & Investments market means we are able to expand our reach and continue to grow our non-interest income.

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

MARKET GROWTH AND PRODUCT DEVELOPMENT—COMMUNITY BANK STYLE

As the largest independent community bank in northwest Ohio, we believe it’s important to off er banking services when and where customers need them. In 2006, we divided our market into two separate geographic market areas with their own market presidents and retail administrators. This change in our internal structure helps us protect our reputation for true, local decision-making and enables us to deliver faster, close-to-home service to all of our customers throughout our 12-county footprint. In April, we relocated our Napoleon Woodlawn office to the north side of Napoleon in a high traffic retail area, and began offering extended evening and weekend hours at that location and at our Findlay East banking center, which is similarly situated in a high traffic retail location. In July we opened our 26th office in the Shawnee area of Lima, giving us an excellent opportunity to grow deposits in that developing market.

Innovative new product offerings were also a significant part of our success in 2006. Remote Deposit Service, a product designed to attract commercial checking accounts, was introduced in November and has shown positive early results. The commercial checking accounts are an integral part of the funding plan for our loan growth and we believe this new product will be an important tool in helping us meet our aggressive deposit balance growth targets in 2007. We also promoted our CDARS (Certificate of Deposit Account Registry Service) product, which allows our customers to secure additional deposit insurance coverage through a pooling of their deposits with other institutions. The CDARS program received an additional boost in mid-year when the State of Ohio approved it for public fund deposits.

These efforts resulted in a year of earnings growth for our shareholders, despite all of the obstacles we faced. We are proud of that accomplishment, especially since our market footprint is frequently depicted as being part of the non-growth “rust belt” region of the United States. I often tell people that from an investment perspective, I feel we suffer from “geographic discrimination.” We recognize that northwest Ohio is not a high growth part of the country, but we also know that there is good economic diversity throughout our region and we work with many solid, well-run businesses that appreciate our banking philosophy. Our status as the largest community bank franchise in our market area and our reputation for putting our customers first are significant advantages.

MOVING FORWARD —2007

Looking ahead, it will be imperative that we are creative in our approach to offering relationship banking services that meet our customers’ needs and produce the returns expected by our investors. As part of our High Performing Community Bank strategy, we are focusing on customer and product profitability measures to help guide our decisions. We are working hard to reach the full potential of our newer and larger markets such as Findlay, Toledo and Lima. We will continue to evaluate new market opportunities, including the possible entry into markets across state lines, such as in Fort Wayne, Indiana, where we already have a solid base of loan clients. We are combining our trust department and our investment services into a new wealth management group that we believe will better serve our customer base and be more efficient. Continuing our focus on efficiency, we have started construction of a new operations center to bring together all four of our back office customer support service locations into one centralized location. We anticipate this project will be completed and become operational late in the fourth quarter of 2007.

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

We cannot control what happens in the overall economic and interest rate environment. What we can do, and will continue to do, is be prepared with a solid business plan that gives us the direction we need to face the economic forecast, as well as the flexibility to adapt to changes as they develop. We have an outstanding team in place that understands our High Performing Community Bank strategy and what is needed to effectively implement it. I believe we were successful at meeting the challenges in 2006 and we are well prepared and well positioned for 2007 and beyond.

Thank you for your confidence and investment in First Defiance Financial Corp.

Sincerely,

William J. Small

Chairman, President, and CEO

“Our status as the largest community bank franchise in our market area and our reputation for putting our customers first are significant advantages.”

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

A HIGH PERFORMING COMMUNITY BANK STRATEGY

At First Federal Bank, we believe by employing the “best and brightest” and following a clear, concise retail and commercial business plan that builds on our core values, we are on the path to becoming an even higher performing community bank. In 2006, we presented to all 400+ employees of our organization a strategic plan that introduced our distinct definition of a High Performing Community Bank and the steps we will take to reach that pinnacle. We developed goals for the year that were aligned with that vision, including efficiency and process improvement opportunities, enhancement of our sales culture, and deposit growth strategies. With those targets in mind, we set out to make 2006 another rewarding year for the bank, for our shareholders, and for our customers.

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

ACHIEVING DEPOSIT GROWTH GOALS

As part of First Federal Bank’s goal of improving the deposit mix while meeting the specific financial needs of our customers, we concentrated on advantageous new relationship accounts in 2006, including Free PLUS and Premium Checking Accounts for retail customers. These accounts reward customers for multiple banking relationships with First Federal, boost customer loyalty and provide additional opportunities for us to build a stronger demand deposit base. The new products were promoted through corporate-wide quarterly campaigns that helped take our deposit balances to over $1.1 billion in 2006. And because we realize that the success of new products depends on how well our staff and customers know and understand them, all of our products and services are backed by newly-developed comprehensive product and sales training programs.

On the commercial deposit side, we rolled out a revolutionary product that has the potential to fundamentally alter a business customer’s banking experience—Remote Deposit Service (RDS). RDS allows a business to scan and send retail checks directly to First Federal Bank without having to physically make a trip to the bank. Six weeks after the introduction of RDS, commercial cash deposits related to RDS had already grown to $2 million. RDS is another shining example of First Federal Bank’s unique ability to off er the resources and expertise of a larger bank, with the advantage of a personalized approach typically found only in smaller banks.

Mark Ferris, AVP, Commercial Loans (left), and Ken Wenner, VP of Commercial Deposit Sales assist Phillip Maag of Ayersville Telephone Company with Remote Deposit Service.

MAXIMIZING MARKET GROWTH POTENTIAL

First Federal Bank has expanded into new markets in recent years, through both acquisitions and organic growth initiatives. These new markets offer exciting potential and we intend to capitalize on the growing momentum there. In Lima, for example, we opened a new office in the Shawnee area in July of 2006. In less than six months, deposits grew to over $5 million in that suburban location.

Representatives from First Federal Bank and the Lima Area Chamber of Commerce celebrate the ribbon cutting of First Federal Bank’s Lima Shawnee office.

In Napoleon, we ushered in a new era of convenience as we opened a larger, more customer-friendly offi ce in a busy retail area of the community, and began offering extended weekend and evening banking hours there and in our Findlay market, much to the delight of our customers. In the suburban Toledo market, we are viewed by our customers as a welcomed alternative to the larger regional banks, with faster turn-around times and more personal customer service. We will continue to tell the First Federal Bank story in our newest locations and capture increased deposit market share along the way.

Greg Wannemacher (left), President of Wannemacher Enterprises, Inc. discusses commercial services with Ron Elwer, Commercial Lender in Delphos.

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

PROCESS IMPROVEMENT

RESULTS IN HAPPY CUSTOMERS

Continual process improvement is critical to achieving High Performing Bank status. Two of the areas we scrutinized in 2006 were our mortgage loan and new account opening processes. Through the diligent efforts of multi-disciplinary teams, we dramatically reduced the paperwork required to open a new account for a customer, and further reduced the turn-around time for our mortgage loans. We also implemented a customer satisfaction survey, which identified strengths and weaknesses and allowed us to pinpoint training needs. These changes translate to happier customers, happier employees and a higher performing bank.

Laura Michalak, AVP, Retail Lender in Perrysburg (left) , Arlene Gerig, Re/Max Preferred, Shannon Doughty, homeowner and Judy Gorun, Re/Max Preferred gather on a chilly day to welcome Shannon into her new home.

COMMUNITY BANK = COMMUNITY SUPPORT

Our employees, our customers, and our communities know that First Federal Bank takes seriously its obligation to “give back.” In 2006, we donated over $350,000 to improve the lives of the citizens in our markets, to promote community pride and to educate students on financial issues. Our employees have a reputation for rolling up their sleeves, volunteering their time and helping to raise funds for groups such as the American Cancer Society, participating in capital campaigns for new additions to youth centers and serving as members of the board of local non-profit organizations. It’s all part of the enjoyment of working at First Federal, and part of the satisfaction of being a genuine community bank.

INSURANCE AND INVESTMENT SOLUTIONS

Through First Insurance & Investments, we have built a collection of insurance products that provide tailored solutions for individuals, families and businesses in our market. Led by an experienced team of professionals, the company offers a full range of individual and group coverage options, property and casualty insurance, risk management and employee benefit programs. Our ability to meet the varied needs of our customers has helped us grow to be the largest property and casualty insurance agency in the Defiance, Ohio area.

A robust line of investment products is also critical to our success. With an eye toward the thousands of Baby Boomers in our region nearing retirement, we will be developing a fresh approach to our financial planning services by packaging all of our trust, investment and asset management options under one combined wealth management program in 2007.

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

Board of Directors: (L to R) Douglas A. Burgei, Samuel S. Strausbaugh, John U. Fauster, Dwain I. Metzger, Stephen L. Boomer, William J. Small, James L. Rohrs, Gerald W. Monnin, John L. Bookmyer, Peter A. Diehl, Thomas A. Voigt

FIRST DEFIANCE FINANCIAL CORP.

BOARD OF DIRECTORS

William J. Small - 1,3,7,8 Chairman, President, and Chief Executive Officer, First Defiance Financial Corp. Age 56, Joined Company in 1994, Director Since 1998	Stephen L. Boomer - 1,2,4,6,7,8 Vice Chairman, First Defiance Financial Corp. President, Arps Dairy, Defiance, Ohio Age 56, Director Since 1994	John L. Bookmyer - 2,4 Executive Vice President, Blanchard Valley Health System, Findlay, Ohio Age 42, Director Since 2005
Douglas A. Burgei, D.V.M. - 3,5,6 Veterinarian, Napoleon, Ohio Age 52, Director Since 1995	Peter A. Diehl - 2,4,5 Retired Business Owner, Defiance, Ohio Age 56, Director Since 1998	John U. Fauster, III, D.D.S. - 3,5,6 Retired Dentist, Defiance, Ohio Age 69, Director Since 1975
Dwain I. Metzger - 5,6 Farmer, Elida, Ohio Age 65, Director Since 2005	Gerald W. Monnin - 4,5,6 Retired Business Owner Defiance, Ohio Age 68, Director Since 1997	James L. Rohrs - 1,3,8 President and Chief Operating Officer, First Federal Bank,
		Executive Vice President,
Samuel S. Strausbaugh - 2,3,8 Co-President, Chief Financial Officer, Defiance Metal Products Defiance, Ohio Age 43, Director Since 2006	Thomas A. Voigt - 4,5,6 Vice President, General Manager, Bryan Publishing Company, Bryan, Ohio Age 64, Director Since 1995	First Defiance Financial Corp. Age 59, Joined Company 1999, Director Since 2002

Executive Vice Presidents: (L to R): Jeff ery D. Vereecke, Gregory R. Allen, Rachel L. Ulrich, John C. Wahl, Dennis E. Rose

FIRST DEFIANCE FINANCIAL CORP.

CORPORATE OFFICERS

William J. Small Chairman, President and Chief Executive Officer Joined Company in 1994	John C. Wahl Executive Vice President, Chief Financial Officer and Corporate Treasurer Age 46, Joined Company in 1994	James L. Rohrs President, Chief Operating Officer Joined Company in 1999
John W. Boesling Senior Vice President, Corporate Secretary Age 59, Joined Company in 1971	Rachel L. Ulrich Executive Vice President Age 41, Joined Company in 1996	Richard J. Mitsdarfer Senior Vice President, Chief Risk Officer Age 58, Joined Company in 2006

KEY FOR BOARD OF DIRECTORS:

1. Permanent Member of Executive Committee

2. Audit Committee

3. Investment Committee

4. Compensation Committee

5. Long Range Planning Committee

6. Corporate Governance Committee

7. Trust Committee

8. First Insurance & Investments Board of Directors

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

FIRST FEDERAL BANK OF THE MIDWEST

William J. Small Chairman and Chief Executive Officer	Rachel L. Ulrich Executive Vice President, Human Resources	Lisa R. Christy Senior Vice President, Trust	Eric A. Morman Senior Vice President, Commercial Lending
James L. Rohrs President and COO	Jeffery D. Vereecke Executive Vice President, Retail Banking	Timothy K. Harris Senior Vice President, Commercial Lending	Michael D. Mulford Senior Vice President, Credit Administration
Gregory R. Allen Executive Vice President, Southern Market Area President	John C. Wahl Executive Vice President, Finance Chief Financial Officer	Nancy K. Kistler Senior Vice President, Loan Operations	Patrick S. Rothgery Senior Vice President, Residential Lending
Dennis E. Rose, Jr. Executive Vice President, Operations	John W. Boesling Senior Vice President, Secretary	David J. Kondas Senior Vice President, Wealth Management	Mary Beth K. Weisenburger Senior Vice President, Marketing
	Patricia A. Cooper Senior Vice President, BSA, Security	Kathleen A. Miller Senior Vice President, Information Technology	Paul N. Windisch Senior Vice President, Business Development
		Richard J. Mitsdarfer Senior Vice President, Risk Management

FIRST INSURANCE & INVESTMENTS, INC.

Steven P. Grosenbacher President Kenneth G. Keller Executive Vice President, Group Health & Life Timothy S. Whetstone Executive Vice President, Secretary Lawrence H. Woods Executive Vice President, Property & Casualty

COMMUNITY ADVISORY BOARDS

DEFIANCE, OHIO	FOSTORIA, OHIO	NAPOLEON, OHIO	WAUSEON, OHIO
Jean Hubbard The Hubbard Company	Steve Dandurand Corporate One Benefi Agency, Inc.	Greg Beck Beck Construction	Kerry Ackerman J and B Feed Company
Bryan Keller Keller Trucking	Peggy Frankart Fostoria Community Hospital	Jeff ery Spangler Holgate Metal Fab, Inc.	Bill Fortier Aquatek Water Conditioning
Brad Mangas B.E. Mangas Construction	Frank Kinn Business/Financial Consultant	Kay Wesche Henry County Development Services	Leon Mann Trailite Sales, Inc.
Mike Koester Koester Corporation	Lynn Radabaugh Maple Grove Quarry, Inc.	Bradley Westhoven Midwest Wood Trim, Inc.	Steven McElrath BMW Services
Rick Weaver Poggemeyer Design	Tom Reineke Reineke Ford	Susan Witt Engineer, Gerken Paving
DELPHOS, OHIO	HICKSVILLE, OHIO	OTTAWA, OHIO	WILLIAMS COUNTY, OHIO
Richard Thompson Thompson Seed Farm	Larry Haver Mayor of Hicksville	Kevin Ellerbrock Kevin Ellerbrock Construction	Stacey Bock Midwest Community Health Associates
Robert J. Schulte, Jr. HR Services	Michael Headley H & W Automotive Parts, Inc.	Kenneth Konst Farmer	Walter Bumb D.D.S.
Timothy DeHaven DeHaven Garden Center	Robert Ramus Robert Ramus D.D.S.	Mike Ruhe Ret. Supt., O-G Schools	LeRoy Feather Community Hospitals of Williams County
FINDLAY, OHIO		Dean Walther Optometrist	Renee Isaac Educator
James Koehler Country Club Acres, Inc.		PAULDING, OHIO	Martin Sostoi Attorney
Paul Kramer Kramer Enterprises, Inc.		Joseph Burkard Paulding County Prosecutor	James (Chip) Wood Bryan Ford Lincoln Mercury
M. Michael Roberts dmh Toyota-Lift		William Shugars Paulding School Administration
Dr. Alan Tong Cascade Women’s Health

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

FINANCIAL INFORMATION

TABLE OF CONTENTS

Selected Consolidated Financial Data	12
Management’s Discussion and Analysis of Financial Conditions and Results of Operations	14
Management’s Report on Internal Control Over Financial Reporting	30
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting	31
Reports of Independent Registered Public Accounting Firms.	32
Consolidated Statements of Financial Condition.	34
Consolidated Statements of Income	35
Consolidated Statements of Stockholders’ Equity	36
Consolidated Statements of Cash Flows	37
Notes to Consolidated Financial Statements.	39

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth certain summary consolidated financial data at or for the periods indicated. In 2002, results of operations associated with First Defiance’s former Leader Mortgage Subsidiary, including certain inter-company financing transactions, are reflected as discontinued operations. Continuing operations reflect the results of First Federal, First Insurance and First Defiance holding company expenses for all periods presented. This information should be read in conjunction with the Consolidated Financial Statements and notes thereto, and Management’s Discussion and Analysis and Results of Operations and Financial Condition. The Consolidated Balance Sheets as of December 31, 2006 and 2005 and the Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004, are included elsewhere in this Annual Report.

	As of and For the Year Ended December 31,
	2006		2005		2004		2003		2002
	(Dollars in Thousands, Except Per Share Amounts)
Financial Condition:
Total assets	$	1,527,879	$	1,461,082	$	1,126,667	$	1,040,599	$	884,245
Investment securities		112,123		114,854		139,258		171,035		213,525
Loans held-to maturity, net		1,226,310		1,164,481		878,912		735,255		561,041
Allowance for loan losses		13,579		13,673		9,956		8,844		7,496
Nonperforming assets (1)		9,902		5,356		1,990		2,949		2,731
Deposits and borrowers’ escrow balances		1,139,112		1,070,106		797,979		729,227		599,889
FHLB advances		162,228		180,960		178,213		164,522		149,096
Stockholders’ equity		159,825		151,216		126,874		124,269		120,110
Share Information:
Basic earnings per share, continuing ops.	$	2.22	$	1.75	$	1.77	$	2.00	$	1.01
Basic earnings per share		2.22		1.75		1.77		2.00		2.37
Diluted earnings per share, continuing ops.		2.18		1.69		1.69		1.91		0.97
Diluted earnings per share		2.18		1.69		1.69		1.91		2.28
Book value per common share		22.38		21.34		20.20		19.64		18.73
Tangible book value per common share		16.99		15.81		17.19		16.39		18.17
Cash Dividends per common share		0.97		0.90		0.82		0.65		0.54
Weighted average diluted shares outstanding		7,168		7,096		6,371		6,319		6,609
Shares outstanding end of period		7,142		7,085		6,280		6,328		6,412
Operations:
Interest income from continuing operations	$	93,065	$	76,174	$	54,731	$	50,629	$	46,908
Interest expense from continuing operations		44,043		28,892		20,381		20,855		22,044
Net interest income from continuing operations		49,022		47,282		34,350		29,774		24,864
Provision for loan losses		1,756		1,442		1,548		1,719		1,451
Non-interest income		19,624		15,925		13,996		16,843		10,401
Non-interest expense		43,839		43,942		31,200		27,126		24,408
Income before tax		23,051		17,823		15,598		17,772		9,406
Federal income tax		7,451		5,853		4,802		5,690		2,986
Income from continuing operations		15,600		11,970		10,796		12,082		6,420
Discontinued operations, net of tax		-		-		-		-		8,853
Cumulative effect of change in method of accounting for goodwill		-		-		-		-		(194	)
Net income		15,600		11,970		10,796		12,082		15,079

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

	As of and For the Year Ended December 31,
	2006			2005			2004			2003			2002
	(Dollars in Thousands, Except Per Share Amounts)
Performance Ratios:
Return on average assets		1.04	%		0.88	%		1.01	%		1.24	%		0.77	%
Return on average equity		10.03	%		8.26	%		8.57	%		9.97	%		5.39	%
Interest rate spread (2)		3.37	%		3.63	%		3.37	%		3.13	%		2.92	%
Net interest margin (2)		3.68	%		3.87	%		3.60	%		3.42	%		3.38	%
Ratio of operating expense from continuing
operations to average total assets		2.93	%		3.22	%		2.98	%		2.91	%		3.16	%
Efficiency ratio - continuing operations		63.31	%		70.18	%		65.91	%		60.31	%		69.40	%
Capital Ratios:
Equity to total assets at end of period		10.46	%		10.35	%		11.26	%		11.94	%		13.58	%
Tangible equity to tangible assets
at end of period		8.15	%		7.88	%		9.74	%		10.17	%		13.23	%
Average equity to average assets		10.40	%		10.62	%		11.76	%		12.43	%		14.36	%
Asset Quality Ratios:
Nonperforming assets to total assets at end of period (1)		0.63	%		0.37	%		0.18	%		0.28	%		0.31	%
Allowance for loan losses to total loans receivable		1.10	%		1.16	%		1.13	%		1.19	%		1.32	%
Net charge-off s to average loans		0.15	%		0.07	%		0.05	%		0.06	%		0.10	%

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

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

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis of financial condition and results of operations contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results could diff er materially from those projected in such forward-looking statements.

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

OVERVIEW

First Defiance is a unitary thrift holding company which conducts business through its subsidiaries, First Federal Bank of the Midwest and First Insurance & Investments.

First Federal is a federally chartered savings bank that provides financial services to communities based in northwest Ohio where it operates 26 full service banking centers in 12 northwest Ohio counties.

On January 21, 2005, First Defiance acquired ComBanc, Inc., headquartered in Delphos, Ohio in a transaction valued at $38.3 million including acquisition costs. ComBanc’s subsidiary, the Commercial Bank, operated four banking offices in Delphos, Lima and Elida, Ohio. On April 8, 2005, First Defiance acquired The Genoa Savings and Loan Company (Genoa), in an $11.2 million transaction. Genoa operated offices in Genoa, Oregon, Perrysburg and Maumee Ohio. The acquired Maumee offi ce was merged with First Federal’s existing Maumee office. First Defiance acquired $117.5 million of loans and $163.7 million of deposits in the ComBanc acquisition and $66.9 million of loans and $76.8 million of deposits in the Genoa transaction. For more details on the ComBanc and Genoa acquisitions, see Note 3 - Acquisitions in the Notes to the Financial Statements.

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

First Insurance sells a variety of property and casualty, group health and life, and individual health and life insurance products and investment and annuity products. Insurance products are sold through First Insurance’s office in Defiance, Ohio while investment and annuity products are sold through registered investment representatives located at four of First Federal’s banking center locations.

FINANCIAL CONDITION

Assets at December 31, 2006 totaled $1.53 billion compared to $1.46 billion at December 31, 2005, an increase of $66.8 million or 4.6%. The majority of First Defiance’s asset growth was in loans, which increased by $61.8 million, or 5.3% to $1.23 billion at December 31, 2006 after allowance for loan losses, from $1.16 billion at December 31, 2005. The increase in assets was primarily funded through growth in deposits, which increased by $68.9 million or 6.4%, to $1.14 billion at December 31, 2006 from $1.07 billion at December 31, 2005.

SECURITIES

The securities portfolio declined $2.7 million to $112.1 million at December 31, 2006. The activity in the portfolio in 2006 included $17.6 million of purchases, $17.0 million of amortization and maturities, $3.1 million of sales and a net decrease of $112,000 in market value. The decline in market value in 2006 was attributable primarily to rising interest rates and that decline is believed to be temporary. Management utilizes its securities portfolio for liquidity purposes. The investment portfolio has declined from a high of $213.5 million at the end of 2002 as maturing securities have been used to fund loan growth. Management does not believe the securities portfolio will decline further from the level it was at on December 31, 2006.

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

LOANS

Gross Loans receivable increased by $61.7 million or 5.2% to $1.24 billion at December 31, 2006 from $1.18 billion at December 31, 2005. The most significant growth occurred in commercial loans, which increased by $61.6 million between December 31, 2005 and December 31, 2006, and in commercial real estate loans, which increased by $27.9 million. First Defiance also experienced $9.8 million of growth in its home equity and improvement loans. One-to-four family residential loans and construction loans declined by $26.1 million between the end of 2005 and the end of 2006 and consumer finance loans declined by $11.5 million.

The majority of First Defiance’s lending activity that is retained in the loan portfolio is to small and mid-sized businesses in the form of commercial and commercial real estate loans. The combined commercial and commercial real estate portfolios totaled $812.8 million and $799.6 million at December 31, 2006 and 2005 respectively and accounted for approximately 65.5% and 61.3% of First Defiance’s loan portfolio at the end of those respective periods. First Defiance believes it has been able to establish itself as a leader in its market area in the commercial and commercial lending area by hiring experienced lenders and providing a high level of customer service to its commercial lending clients.

The one-to-four family residential portfolio, including residential construction loans, totaled $261.7 million at December 31, 2006, down from $287.9 million at the end of 2005. At the end of 2006 those loans comprised 21.1% of the total loan portfolio, down from 24.4% at December 31, 2005. The decline in the mortgage portfolio reflects the Company’s strategy of selling the majority of its fixed rate mortgage production in the secondary market, most of it with servicing retained. During 2006 a significant number of loans in the portfolio were refinanced with loans that were sold. The level of residential loan production did not change significantly between 2005 and 2006.

Home equity and home improvement loans grew to $122.8 million at December 31, 2006, or 9.9% of the portfolio, up from $113.0 million at the end of 2005, or 9.6% of total loans. The growth in this portion of the portfolio is the result of customers utilizing existing lines of credit as well as focused marketing efforts of this product.

Consumer finance loans were just $43.8 million at December 31, 2006, down from $55.3 million at the end of 2005. These loans comprised just 3.5% and 4.7% of the total portfolio at December 31, 2006 and 2005 respectively. A portion of the decline in balances is the result of First Defiance selling its $2.1 million credit card portfolio late in the 2006 second quarter. The balance of the decline reflects the Company’s strategy of not pricing aggressively in this highly competitive segment of the market.

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses represents management’s assessment of the estimated probable credit losses in the loan portfolio at each balance sheet date. Lending activities contain risks of loan losses. Management analyzes the adequacy of the allowance for loan losses regularly through reviews of the performance of the loan portfolio. Consideration is given to economic conditions, changes in interest rates and the effect of such changes on collateral values and borrower’s ability to pay, changes in the composition of the loan portfolio, and trends in past due and non-performing loan balances. The allowance for loan losses is a material estimate that is susceptible to significant fluctuation and is established through a provision for loan losses based on management’s evaluation of the inherent risk in the loan portfolio. In addition to extensive in-house loan monitoring procedures, the Company utilizes an outside party to conduct an independent loan review of all commercial loan and commercial real estate loan relationships that exceed $250,000 of aggregate exposure. Management utilizes the results of this outside loan review to assess the effectiveness of its internal loan grading system as well as to assist in the assessment of the overall adequacy of the allowance for loan losses associated with this type of loan.

At December 31, 2006, the allowance for loan losses was $13.6 million compared to $13.7 million at December 31, 2005. The reduction of the allowance in 2006 is the result of a higher than normal level of loan charge-off s as management attempted to resolve credit issues that were previously identified in the portfolio and reserved for. Those balances represented 1.10% and 1.16% of outstanding loans as of December 31, 2006 and December 31, 2005 respectively.

In determining the appropriate level for the allowance for loan losses, First Defiance evaluates all loans in its portfolio. While allowances are frequently required for loans classified as substandard, it is possible for a relationship to be graded as substandard based on the financial performance of the credit for which no allowance is required because of other factors such as value of collateral or creditworthiness of guarantors. At December 31, 2006, a total of $10.4 million of loans are classified as substandard for which some level of reserve ranging between 20% and 50% of the outstanding balance is required. A total of $25.7 million in additional credits were classified as substandard at December 31, 2006 for which no reserve is required. First Defiance also has classified $379,000 as doubtful at December 31, 2006. First Defiance also utilizes a general reserve percentage for loans not otherwise classified which ranges from 0.062% for mortgage loans to 1.50% for consumer loans. General reserves for commercial and commercial real estate loans, the largest category in First Defiance’s portfolio, are established at 1.10% of the outstanding balance. The reserve percentage utilized for these loans is based on both historical losses in the Company’s portfolio, national statistics on loss percentages and empirical evidence regarding the strength of the economy in First Defiance’s general market area.

First Defiance’s ratio of allowance for loan losses to non-performing loans dropped from 276.1% at the end of 2005 to 186.4% at December 31, 2006. Through its due diligence prior to making the 2005 acquisitions, management was aware of the existence of non-performing loans in both portfolios. At December 31, 2006, First Defiance had total non-performing assets of $9.7 million, compared to $5.4 million at December 31, 2005. Non-performing assets include loans that are 90 days past due and all real estate owned and other foreclosed assets. Non-performing assets at December 31, 2006 and 2005 by category were as follows:

	December 31,
	2006		2005
	(In Thousands)
Non-performing loans:
Single-family residential	$	2,029	$	2,648
Non-residential and multi-family residential real estate		5,206		1,917
Commercial		-		287
Consumer finance		48		100
Total non-performing loans		7,283		4,952
Real estate owned and repossessed assets		2,392		404
Total non-performing assets	$	9,675	$	5,356

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

The 2006 total non-performing assets included $3.8 million related to either the ComBanc or Genoa acquisitions. The balance of non-performing assets which were either originated by First Defiance or acquired in the 2003 RFC branch acquisition were $5.9 million compared to $2.1 million of non-performing assets at December 31, 2005. While the level of classified loans has increased, year over year, management believes that the current allowance for loan losses is appropriate and that the provision for loan losses recorded in 2006 is consistent with both charge-off experience and the strength of the overall credits in the portfolio.

Non-performing loans in the single-family residential, non-residential and multi-family residential real estate and commercial loan categories represent .81%, .90% and 0% of the total loans in those categories respectively at December 31, 2006 compared to 0.94%, 0.35% and 0.17% respectively for the same categories at December 31, 2005.

LOANS ACQUIRED WITH IMPAIRMENT

Certain loans acquired in the ComBanc and Genoa acquisitions had evidence that the credit quality of the loan had deteriorated since its origination and in management’s assessment at the acquisition date it was probable that First Defiance would be unable to collect all contractually required payments due. In accordance with American Institute of Certified Public Accountants Statement of Position 03-3 - Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3), these loans were recorded based on management’s estimate of the fair value of the loans. At the acquisition date of January 21, 2005, loans with a contractual receivable of $3.4 million were acquired from Combanc which were deemed impaired. Those loans were recorded at a net realizable value of $2.1 million. On April 8, 2005, loans with contractual receivable totals of $1.5 million were acquired from Genoa which were deemed impaired. Those loans were recorded at a net realizable value of $735,000. As of December 31, 2006, the total contractual receivable for those loans was $4.1 million and the recorded value was $2.4 million.

HIGH LOAN-TO-VALUE MORTGAGE LOANS

The majority of First Defiance’s mortgage loans are collateralized by one-to-four-family residential real estate, have loan-to-value ratios of 80% or less, and are made to borrowers in good credit standing. First Federal usually requires residential mortgage loan borrowers whose loan-to-value is greater than 80% to purchase private mortgage insurance (PMI). First Federal does originate and retain a limited number of residential mortgage loans with loan-to-value ratios that exceed 80% where PMI is not required if the borrower possesses other demonstrable strengths. The loan-to-value ratios on these loans are generally limited to 85% and exceptions must be approved by First Federal’s senior loan committee. Management monitors the balance of one-to-four family residential loans, including home equity loans and committed lines of credit, that exceed certain loan to value standards (90% for owner occupied residences, 85% for non-owner occupied residences and one-to-four family construction loans, 75% for developed land and 65% for raw land). Total loans that exceed those standards at December 31, 2006 totaled $33.1 million. These loans are generally paying as agreed.

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

GOODWILL AND INTANGIBLE ASSETS

Goodwill remained fl at at $35.0 million at December 31, 2006 after the ComBanc and Genoa acquisitions added $12.4 million and $4.3 million respectively to Goodwill in 2005. No impairment of goodwill was recorded in 2006. Core deposit intangibles and other intangible assets decreased $720,000 during 2006 to $3.4 million from $4.1 million at the end of 2005, due to the amortization.

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

DEPOSITS

Total deposits at December 31, 2006 were $1.14 billion compared to $1.07 billion at December 31, 2005, an increase of $68.9 million or 6.4%. Non-interest bearing checking grew by $2.8 million, money market and interest bearing checking accounts grew by $29.4 million, certificates of deposit increased by $44.9 million while savings declined by $8.3 million. Management periodically utilizes brokered certificates of deposit to supplement its funding needs. At December 31, 2006 the balance of brokered CDs totaled $17.6 million, down from $37.0 million at December 31, 2005. During that same period, retail deposits greater than $100,000 also declined, to $140.4 million from $161.3 million.

BORROWINGS

FHLB advances totaled $162.2 million at December 31, 2006 compared to $180.1 million at December 31, 2005. The balance at the end of 2006 includes $90.0 million of convertible advances with rates ranging from 4.71% to 5.84%. These advances are all callable by the FHLB, at which point they would convert to a three-month LIBOR advance if not paid off. Those advances have final maturity dates ranging from 2010 to 2013. In addition, First Defiance has advances totaling $27 million that are callable by the FHLB only if the three-month LIBOR rate exceeds a strike rate ranging from 7.5% to 8.0%. The rate on those advances ranges from 3.48% to 5.14%. First Defiance also has $12.1 million outstanding at the FHLB under a series of fixed-rate loans and $33.1 million borrowed on an overnight basis at December 31, 2006.

First Defiance also has $30.4 million of securities that have been sold at December 31, 2006 with agreements to repurchase, an increase of this type of funding of $4.7 million over December 31, 2005.

In October 2005, the Company issued $20.6 million of Subordinated Debentures. These debentures were issued to an unconsolidated affiliated trust that purchased them with the proceeds from a $20 million issue of trust preferred securities to an outside party. The proceeds of the Subordinated Debentures were used for general corporate purposes. The Subordinated Debentures have a rate equal to three-month LIBOR plus 1.38%, or 6.74% at December 31, 2006.

CAPITAL RESOURCES

Total shareholders’ equity increased $8.6 million to $159.8 million at December 31, 2006. This increase is primarily the result of the Company’s $15.6 million of net income. The increase was off set by $6.8 million of dividends ($0.97 per share declared) and a $576,000 net of tax adjustment to initially apply FAS No. 158, Employers Accounting for Defined Benefit Pension Plans and other Post Retirement Plans, which is included in other comprehensive income. In 2003 the Company’s board of directors authorized the repurchase of 640,000 shares. A total of 106,020 shares were repurchased in 2006 under that program at an average cost of $26.06, thus reducing shareholders equity by $2.8 million. A total of 310,758 shares remain to be purchased under the authorization. Also during 2006, a total of 203,595 stock options were exercised by employees, resulting in a $2.3 million increase in shareholders equity. In exercising those options, certain employees paid their option exercise price by returning shares to the Company, which reduced equity by approximately $1.1 million. A total of 41,381 shares were returned to the Company in conjunction with option exercises at an average price of $26.38 per share.

18

2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

RESULTS OF OPERATIONS

SUMMARY

First Defiance reported net income of $15.6 million for the year ended December 31, 2006 compared to $12.0 million and $10.8 million for the years ended December 31, 2005 and 2004 respectively. On a diluted per share basis, First Defiance earned $2.18 in 2006, $1.69 in 2005 and $1.69 in 2004.

The 2005 net income amount includes $3.5 million of acquisition related costs that were incurred as part of the ComBanc and Genoa acquisitions. These costs included such items as the expense to terminate data processing contracts, severance agreements with employees who were not retained, and other costs resulting from the acquisition or related transition efforts. After tax, these costs amounted to $2.3 million, or $.32 per share. The 2004 results included a $1.9 million pretax charge to reflect final settlement of certain contingent liabilities related to the 2002 sale of the Company’s former Leader Mortgage subsidiary to US Bancorp. After tax, that amount was $1.25 million or $0.20 per diluted share. Excluding these non-operating items, core earnings were $15.6 million, $14.2 million and $12.0 million for the years ended December 31, 2006, 2005 and 2004 respectively. On a diluted per share basis, core earnings amounted to $2.18, $2.01 and $1.89 for those three periods. A reconciliation of GAAP earnings to core earnings is as follows:

	Year Ended December 31,
	2006		2005			2004
	(In Thousands, Except Per Share Amounts)
GAAP Net Income	$	15,600	$	11,970		$	10,796
One-time acquisition related charges		−		3,476			−
Settlement of contingent liability		−		−			1,927
Tax effect		−		(1,217	)		(674	)
Core Operating Earnings	$	15,600	$	14,229		$	12,049
Basic earnings per share:
GAAP	$	2.22	$	1.75		$	1.77
Core Operating Earnings	$	2.22	$	2.08		$	2.07
Diluted earnings per share:
GAAP	$	2.18	$	1.69		$	1.69
Core Operating Earnings	$	2.18	$	2.01		$	1.89

19

2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

NET INTEREST INCOME

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

Net interest income was $49.0 million for the year ended December 31, 2006 compared to $47.3 million and $34.4 million for the years ended December 31, 2005 and 2004 respectively. The tax-equivalent net interest margin was 3.68%, 3.87% and 3.62% for the years ended December 31, 2006, 2005 and 2004 respectively. The decrease in margin between 2006 and 2005 is due to a declining interest rate spread, which decreased to 3.37% for the year ended December 31, 2006 compared to 3.63% for 2005. The decline in spread between 2005 and 2006 occurred due to interest-earning asset yields increasing by just 75 basis points (to 6.95% in 2006 from 6.20% in 2005) while the cost of interest bearing liabilities between the two periods increased by 101 basis points (to 3.58% in 2006 from 2.57% in 2005). The margin compression resulting from narrowing spreads was slightly off set by an $8.3 million increase in non-interest bearing deposits and an $18.9 million increase in average equity. Management anticipates the margin compression will continue into 2007 as they expect the cost of funding will continue to rise as certificates of deposit continue to reprice at higher rates, while asset yields have appeared to have peaked since the Federal Reserve Open Market Committee stopped raising rates in mid 2006.

The increase in margin between 2004 and 2005 was due to an improved interest rate spread, which increased to 3.63% for the year ended December 31, 2005 compared to 3.39% for 2004. The improved spread resulted from a 51 basis point improvement in the yield on interest-earning assets (to 6.20% in 2005 from 5.71% in 2004) while the cost of interest bearing liabilities between the two periods increased by just 26 basis points (to 2.58% in 2005 from 2.32% in 2004). Margin also improved in 2005 as a result of the improved mix between loans and investment securities, the $30.5 million increase in the average balance of non-interest bearing deposits and a $19.1 million increase in average equity for the year.

Total interest income increased by $16.9 million, or 22.1% to $93.1 million for the year ended December 31, 2006 from $76.2 million for the year ended December 31, 2005. The increase in interest income was due to an increase in the average balance in loans receivable, to $1.21 billion for the twelve months of 2006 compared to $1.09 billion for 2005. In addition to the increase in loan balances, the average yield on loans increased to 7.13% for 2006 compared to 6.40% in 2005, a 73 basis point improvement. Interest income from loans increased to $86.2 million for 2006 compared to $69.7 million in 2005 which represented growth of 23.7%.

During the same period the average balance of investment securities dropped to $116.7 million for 2006 from $121.5 million for the year ended December 31, 2005. Interest income from the investment portfolio increased $372,000 to $5.6 million in 2006 from $5.3 million in 2005. The increase is due to the 42 basis point increase in the yield as lower yielding securities matured in 2006. The tax equivalent yield on the investment portfolio was 5.30% in 2006 compared to 4.88% in 2005.

Interest expense increased by $15.2 million in 2006 compared to 2005, to $44.0 million from $28.9 million. This increase was due to a $106.8 million increase in the average balance of interest bearing liabilities in 2006 compared to 2005 as well as a 101 basis point increase in the average cost of those liabilities. The balance of interest-bearing deposits increased by $66.1 million between December 31, 2005 and December 31, 2006. Of that growth, $44.9 million was in certificates of deposit, which have a higher cost than transaction accounts. Interest expense related to these interest-bearing deposits was $33.3 million in 2006 and $20.6 million in 2005. Expenses on FHLB advances and other interest bearing funding sources were $8.9 million in 2006 and $7.6 million in 2005. First Defiance issued $20.6 million of junior subordinated debentures in the fourth quarter of 2005 in conjunction with a trust preferred offering by an unconsolidated affiliated subsidiary. Interest expense recognized by the Company related to those subordinated debentures was $1.3 million in 2006 compared to just $201,000 in 2005.

Total interest income increased by $21.4 million, or 39.2% to $76.2 million for the year ended December 31, 2005 from $54.7 million for the year ended December 31, 2004. The increase in income was due to an increase in the average balance in loans receivable, to $1.09 billion for the twelve months of 2005 compared to $806.9 million for 2004. During the same period the average balance of investment securities dropped to $121.5 million for 2005 from $152.3 million for the year ended December 31, 2004. In addition to the increase in loan balances, the average yield on loans increased to 6.40% for 2005 compared to 5.87% for 2004, a 53 basis point improvement.

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

Interest expense increased by $8.5 million in 2005 compared to 2004, to $28.9 million from $20.4 million. This increase was due to a $232.9 million increase in the average balance of interest bearing deposits in 2005 compared to 2004 as well as a 36 basis point increase in the cost of those deposits. Total interest bearing deposits acquired in the acquisitions was $217.8 million. For the year, the balance of interest-bearing deposits increased by $230.8 between December 31, 2004 and December 31, 2005. Of that growth, $182.4 million was in certificates of deposit. Interest expense on interest-bearing deposits was $20.6 million in 2005 and $12.9 million in 2004. Expenses on FHLB advances and other interest bearing funding sources were not significantly different between 2004 and 2005. First Defiance issued $20.6 million of junior subordinated debentures in conjunction with a trust preferred offering by an unconsolidated affiliated subsidiary. Interest expense recognized by the Company related to those subordinated debentures was $201,000 in 2005.

The following table shows an analysis of net interest margin on a tax equivalent basis for the years ended December 31, 2006, 2005 and 2004:

								Year Ended December 31,
	2006							2005							2004
	Average Balance		Interest (1)		Yield/ Rate (2)			Average Balance		Interest (1)		Yield/ Rate (2)			Average Balance		Interest (1)		Yield/ Rate (2)
	(Dollars in Thousands)
Interest-Earning Assets:
Loans receivable	$	1,209,498		86,237		7.13	%	$	1,089,942		69,732		6.40	%	$	806,880		47,360		5.87	%
Securities		116,718		6,217		5.30	%		121,510		5,873		4.88	%		152,316		7,499		4.92	%
Interest-earning deposits		3,483		165 4.		74	%		10,410		364		3.50	%		2,447		43		1.76	%
Dividends on FHLB stock		17,926		1,042		5.81	%		16,352		829		5.07	%		14,839		612		4.12	%
Total interest-earning assets		1,347,625		93,661		6.95	%		1,238,214		76,798		6.20	%		976,482		55,514		5.69	%
Non-interest-earning assets		148,136							126,583							94,321
Total Assets	$	1,495,761						$	1,364,797						$	1,070,803
Interest-Bearing Liabilities:
Interest-bearing deposits	$	1,006,468	$	33,273		3.31	%	$	932,036	$	20,615		2.21	%	$	699,087	$	12,950		1.85	%
FHLB advances		181,869		8,878		4.88	%		167,427		7,602		4.54	%		169,463		7,317		4.32	%
Other borrowings		20,398		584		2.86	%		19,639		474		2.41	%		10,608		114		1.07	%
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	%		879,158		20,381		2.32	%
Non-interest bearing demand deposits		95,044		−					86,741		−					56,241		−
Total including non-interest-bearing demand deposits		1,324,398		44,043		3.33	%		1,209,284		28,892		2.39	%		935,399		20,381		2.18	%
Other non-interest liabilities		15,815							10,530							9,484
Total Liabilities		1,340,213							1,219,814							935,399
Stockholders’ equity		155,548							144,983							125,920
Total liabilities and stockholders’ equity	$	1,495,761						$	1,364,797						$	1,070,803
Net interest income; Interest rate spread (3)			$	49,618		3.37	%			$	47,906		3.63	%			$	35,133		3.37	%
Net interest margin (4)						3.68	%						3.87	%						3.60	%
Average interest-earning Assets to average interestbearing liabilities						109.6	%						110.3	%						111.1	%

(1) Interest on certain tax exempt loans (amounting to $48,000, $47,000 and $29,000 in 2006, 2005 and 2004 respectively) and tax-exempt securities ($1.1 million, $1.2 million and $1.5 million in 2006, 2005 and 2004) is not taxable for Federal income tax purposes. The average balance of such loans was $1.0 million, $1.0 million and $722,000 in 2006, 2005 and 2004 while the average balance of such securities was $25.2 million, $25.1 million and $32.8 million in 2006, 2005 and 2004 respectively. 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) At December 31, 2006, the yields earned and rates paid were as follows: loans receivable, 6.84%; securities, 5.09%; FHLB stock, 6.05%; total interest-earning assets, 6.69%; deposits, 3.24%; FHLB advances, 5.05%; other borrowings, 2.98%; total interest-bearing liabilities, 3.46%; and interest rate spread, 3.23%.

(3) Interest rate spread is the difference in the yield on interest-earning assets and the cost of interest-bearing liabilities.

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

21

2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected First Defiance’s interest income and expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior year rate), (ii) change in rate (change in rate multiplied by prior year volume), and (iii) total change in rate and volume. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.

	Year Ended December 31,
	2006 vs. 2005								2005 vs. 2004
	Increase (decrease) due to rate		Increase (decrease) due to volume			Total increase (decrease)			Increase (decrease) due to rate			Increase (decrease) due to volume			Total increase (decrease)
Interest-Earning Assets	(In Thousands)
Loans	$	8,428	$	8,077		$	16,505		$	4,567		$	17,805		$	22,372
Securities		561		(217	)		344			(135	)		(1,491	)		(1,626	)
Interest-earning deposits		227		(426	)		(199	)		75			246			321
FHLB stock		129		84			213			150			67			217
Total interest-earning assets	$	9,345	$	7,518		$	16,863		$	4,657		$	16,627		$	21,284
Interest-Bearing Liabilities
Deposits	$	10,898	$	1,760		$	12,658		$	2,821		$	4,844		$	7,665
FHLB advances		594		682			1,276			372			(87	)		285
Term notes		91		19			110			214			146			360
Subordinated Debentures		19		1,088			1,107			−			201			201
Total interest-bearing liabilities	$	11,602	$	3,549		$	15,151		$	3,407		$	5,104		$	8,511
Increase in net interest income						$	1,712								$	12,773

Provision for Loan Losses - First Defiance’s provision for loan losses was $1.8 million for the year ended December 31, 2006 compared to $1.4 million and $1.5 million for the years ended December 31, 2005 and 2004 respectively.

Provisions for loan losses are charged to earnings to bring the total allowance for loan losses to a level deemed appropriate by management to absorb probable losses in the loan portfolio. Factors considered by management include identifiable risk in the portfolios; historical experience; the volume and type of lending conducted by First Defiance; the amount of nonperforming assets, including loans which meet the FASB Statement No. 114 definition of impaired; the amount of assets graded by management as substandard, doubtful, or loss; general economic conditions, particularly as they relate to First Defiance’s market areas; and other factors related to the collectability of First Defiance’s loan portfolio. See also Allowance for Loan Losses in Management’s Discussion and Analysis and Note 7 to the audited financial statements.

Non-interest Income - Non-interest income increased by $3.7 million or 23.2% in 2006 to $19.6 million from $15.9 million for the year ended December 31, 2005. In 2004, $14.0 million of non-interest income was recognized. Most of the increase in 2006 was in service fees and other charges, which increased to $9.3 million for the year ended December 31, 2006 from $5.6 million for 2005, an increase of $3.7 million or 66.0%. The implementation of an overdraft privilege product in 2006 was the primary reason for the increase in service fees. Service fee income was $4.2 million in 2004.

Non-interest income also includes investment securities gains or losses. In 2006, First Defiance realized a $2,000 loss on securities compared to $1.2 million and $1.4 million of gains in 2005 and 2004 respectively. In 2005 and 2004, management took advantage of favorable prices in the bond portfolio resulting from lower long-term interest rates. Generally in those years, as investments were sold out of the investment portfolio, the related proceeds were used to fund loan growth or they were reinvested in shorter-term securities in order to position the Company for an eventual overall rate increase. There was only a minor amount of sales activity in the investment portfolio in 2006.

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

Mortgage banking income includes gains from the sale of mortgage loans, fees for servicing mortgage loans for others, and an off set for amortization of mortgage servicing rights, and adjustments for impairment in the value of mortgage servicing rights. Mortgage banking income totaled $3.4 million, $3.3 million and $2.8 million in 2006, 2005 and 2004 respectively. The modest growth in 2006 over 2005 was primarily attributable to a $154,000 increase in mortgage servicing fees resulting from a $63 million increase in the portfolio of mortgage loans serviced for others and gains from sale of mortgage loans, which increased $133,000 in 2006 from 2005. Those increases were off set by a reduction in the recovery of previously recorded mortgage servicing rights impairment reserves, which resulted in $417,000 of income in 2005 compared with just $2,000 in 2006. The $574,000 of growth in 2005 compared with 2004 was primarily attributable to that recapture of $417,000 of previously recorded mortgage servicing rights impairment and a $295,000 increase in mortgage servicing fees, the result of a $139 million increase in the portfolio of mortgage loans serviced. Gains from the sale of mortgage loans totaled $2.3 million for both 2005 and 2004. Mortgage servicing rights impairment adjustments in 2004 resulted in impairment expense of $1,000. The balance of the impairment allowance stands at just $80,000 at the end of 2006. See Note 8 to the financial statements.

Non-interest Expense - Total non-interest expense for 2006 was $43.8 million compared to $43.9 million for the year ended December 31, 2005 and $31.2 million for the year ended December 31, 2004. The 2005 total includes $3.5 million of acquisition related charges while the 2004 amount includes a charge of $1.9 million related to the final settlement of a contingent liability related to First Defiance’s 2002 sale of its Leader Mortgage subsidiary. Non-interest expense, excluding the acquisition related charges in 2005 and the settlement of the contingency in 2004, was $40.4 million and $29.3 million respectively for those two years.

Compensation and benefits increased by $706,000 in 2006 compared to 2005, to $24.2 million in 2006 from $23.4 million in 2005. A portion of the increase in compensation was due to having a full year of compensation and benefits costs associated with the Genoa acquisition compared to just under nine months in 2005 and $268,000 related to the expensing of stock options in accordance with FAS No. 123R, Share-Based Payment which is a new item in 2006. The balance of the increase in compensation and benefits resulted from general staffing increases and cost of living pay increases. Also in 2006, occupancy costs increased to $5.1 million from $4.7 million in 2005, and data processing increased to $3.7 million from $3.2 million. The majority of these increases were a result of the acquisitions and other growth initiatives. First Defiance’s other non-interest expense category also increased to $8.9 million in 2006 from $7.1 million in 2005. Increases in that category resulted from higher levels of advertising (up $235,000), printing and office supplies (up $134,000), postage (up $136,000) and bad check charge-off s and other related deposit account losses (up $94,000). Overdraft protection fees were $372,000 in 2006, which was a new expense related to the overdraft privilege product.

The increase in non-interest expense in 2005 from 2004 was primarily due to a $6.0 million increase in compensation and benefits expense, mostly due to staffing increases from the acquisitions, the addition of staff in central operations to service the larger branch network and increases to the cost of First Defiance’s health insurance. Occupancy costs, data processing costs, state franchise tax and amortization of intangibles including core deposit intangibles and customer relationship intangibles increased $1.4 million, $800,000, $400,000 and $600,000, respectively. The majority of these increases were a result of the growth due to the acquisitions.

The 2005 non-interest expense included $3.5 million of acquisition related costs. Of these costs, $1.05 million related to the ComBanc acquisition and $2.45 related to the Genoa acquisition. For ComBanc, the most significant costs included $471,000 in severance and other termination payments to employees not retained and $222,000 related to the cancellation of certain contracts. For Genoa, the most significant costs included $1.3 million for the termination of a long-term data processing contract and other long-term contracts and lease arrangements and $364,000 for severance and other payments to employees not retained.

Income Taxes - Income taxes amounted to $7.5 million in 2006 compared to $5.9 million in 2005 and $4.8 million in 2004. The effective tax rates for those years were 32.3%, 32.8%, and 30.8% respectively. The tax rate is lower than the statutory 35% tax rate for the Company because of investments in tax-exempt securities and in Bank Owned Life Insurance (BOLI). The earnings on such investments are not subject to federal income tax. The increase in the effective tax rate in 2005 compared to 2004 is primarily the result of lower levels of interest income from tax-exempt securities in 2005 compared to 2004 and a reduction in earnings from BOLI. See note 17 to the financial statements.

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

CONCENTRATIONS OF CREDIT RISK

Financial institutions such as First Defiance generate income primarily through lending and investing activities. The risk of loss from lending and investing activities includes the possibility that losses may occur from the failure of another party to perform according to the terms of the loan or investment agreement. This possibility is known as credit risk.

Lending or investing activities that concentrate assets in a way that exposes the Company to a material loss from any single occurrence or group of occurrences increases credit risk. Diversifying loans and investments to prevent concentrations of risks is one manner a financial institution can reduce potential losses due to credit risk. Examples of asset concentrations would include multiple loans made to a single borrower and loans of inappropriate size relative to the total capitalization of the institution. Management believes adherence to its loan and investment policies allows it to control its exposure to concentrations of credit risk at acceptable levels. First Defiance’s loan portfolio is concentrated geographically in its northwest Ohio market area. There are no industry concentrations that exceed 10% of the Company’s loan portfolio.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s primary source of liquidity is its core deposit base, raised through First Federal’s branch network, along with unused wholesale sources of funding and its capital base. These funds, along with investment securities, provide the ability to meet the needs of depositors while funding new loan demand and existing commitments.

Cash generated from operating activities was $22.7 million, $16.6 million and $16.3 million in 2006, 2005 and 2004 respectively. The adjustments to reconcile net income to cash provided by or used in operations during the periods presented consist primarily of proceeds from the sale of loans (less the origination of loans held for sale), the provision for loan losses, depreciation expense, the origination, amortization and impairment of mortgage servicing rights, ESOP expense related to the release of ESOP shares in accordance with AICPA SOP 93-6 and increases and decreases in other assets and liabilities.

In a typical year, the primary investing activity of First Defiance is lending, which is funded with cash provided from operating and financing activities, as well as proceeds from payment on existing loans and proceeds from maturities of investment securities. In 2005, First Defiance completed the acquisitions of ComBanc and Genoa. In the case of the ComBanc acquisition, which was purchased with a combination of stock and cash, First Defiance realized an increase in cash of $52.7 million after netting the cash that was acquired from ComBanc. ComBanc’s cash level was high because they liquidated their investment portfolio in advance of the acquisition closing date. In the case of the Genoa acquisition, the acquisition resulted in a net reduction in cash of $612,000 after netting Genoa’s cash balances against the purchase price.

In considering the more typical investing activities, during 2006, $16.6 million and $3.1 million was generated from the maturity or sale of available-for-sale investment securities, respectively, while $68.7 million was used to fund loan growth and $17.6 million was used to purchase available-for-sale investment securities. During 2005, $27.9 million and $24.2 million was generated from the maturity or sale of available-for-sale investment securities, respectively, while $104.1 million was used fund loan growth and $30.3 million was used to purchase available-for-sale investment securities. During 2004, $42.8 million and $20.7 million was generated from the maturity of investment securities and sale of available-for-sale investment securities, respectively, while $144.7 million was used to fund loan growth and $34.3 million was used to purchase available-for-sale investment securities.

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

Principal financing activities include the gathering of deposits, the utilization of FHLB advances, and the sale of securities under agreements to repurchase such securities and borrowings from other banks. In addition, First Defiance also purchased common stock for its treasury. For 2006, total deposits increased by $69.3 million, including $88.3 million of growth in retail deposit balances. The amount of deposits acquired from CD brokers or other out of market sources declined in 2006 by $19.4 million. For 2005, total deposits (excluding deposits acquired in the acquisitions) increased by $31.9 million, including $44.4 million of growth in retail deposit balances. The amount of deposits acquired from CD brokers or other out of market sources declined in 2005 by $12.5 million. For the year ended December 31, 2004, deposits increased by $69.1 million, including $58.6 million of growth in retail deposits generated by the First Federal Bank branch network, and $10.5 million in net growth in deposits acquired from CD brokers or other out of market sources. Also in 2006, Short-term advances from the FHLB increased by $4.6 million and there were no borrowings on lines of credit from other banks. Also securities sold under repurchase arrangements increased by $4.7 million. In 2005, First Defiance issued $20.6 million of subordinated debentures to an unconsolidated affiliated trust and that trust issued $20 million of trust preferred stock to outside investors. The result of obtaining the trust preferred funding was that borrowings on lines of credit from other banks of $3 million were paid off . Short-term advances from the FHLB did increase by $2 million in 2005. Also securities sold under repurchase arrangements increased by $7.3 million. In 2004, First Defiance borrowed $15.5 million in short-term advances from the FHLB and $3.0 million on from other financial institutions under short-term lines of credit. The Company repurchased $3.9 million, $1.5 million, $4.7 million of common stock for treasury in 2006, 2005 and 2004 respectively. For additional information about cash flows from First Defiance’s operating, investing and financing activities, see the Consolidated Statements of Cash Flows included in the Consolidated Financial Statements.

At December 31, 2006, First Defiance had the following commitments to fund deposit, advance and borrowing obligations:

	Maturity Dates by Period at December 31, 2006
Contractual Obligations	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
	(In Thousands)
Savings, checking and demand accounts	$	486,822	$	486,822	$	−	$	−	$	−
Certifi cates of deposit		651,623		571,963		75,756		3,447		457
FHLB overnight advances		33,100		33,100		−		−		−
FHLB fi xed advances including interest (1)		159,589		7,331		22,658		73,591		56,009
Subordinated debentures		20,619		−		−		−		20,619
Securities sold under repurchase agreements		30,424		30,424		−		−		−
Lease obligations		4,258		320		457		362		3,119
Total contractual cash obligations	$	1,386,435	$	1,129,960	$	98,871	$	77,400	$	80,204

(1) Includes principal payments of $129,092 and interest payments of $30,497

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

At December 31, 2006, First Defiance had the following commitments to fund loan or line of credit obligations:

	Amount of Commitment Expiration by Period
Commitments	Total Amounts Committed		Less than 1 year		1-3 years		4-5 years		After 5 years
	(In Thousands)
Residential real estate loans in process	$	43,910	$	43,910	$	−	$	−	$	−
Commercial loans in process		8,518		8,518		−		−		−
One-to-four family mortgage loan originations		5,329		2,405		615		133		2,176
Multifamily originations		3,693		3,693		−		−		−
Other real estate originations		25,725		2,868		4,603		1,358		16,896
Nonmortgage loan originations		10,235		3,124		−		4,743		2,368
Consumer lines of credit		93,536		3,443		20,036		15,222		54,835
Commercial lines of credit		69,403		68,573		58		−		772
Total loan commitments		260,349		136,534		25,312		21,456		77,047
Standby letters of credit		16,869		13,005		3,864		−		−
Total Commitments	$	277,218	$	149,539	$	29,176	$	21,456	$	77,047

In addition to the above commitments, at December 31, 2006 First Defiance had commitments to sell $7.2 million of loans held for sale to Freddie Mac.

To meet its obligations, management can adjust the rate of savings certificates to retain deposits in changing interest rate environments; it can sell or securitize mortgage and non-mortgage loans; and it can turn to other sources of financing including FHLB advances, the Federal Reserve Bank, bank lines and brokered certificates of deposit. At December 31, 2006 First Defiance had $50.8 million capacity under its agreements with the FHLB and other banks.

First Defiance is subject to various capital requirements of the Office of Thrift Supervision. At December 31, 2006, First Federal had capital ratios that exceeded the standard to be considered “well capitalized”. For additional information about First Federal’s capital requirements, see Note 16 to the Consolidated Financial Statements.

CRITICAL ACCOUNTING POLICIES

First Defiance has established various accounting policies which govern the application of accounting principles generally accepted in the United States in the preparation of its financial statements. The significant accounting policies of First Defiance are described in the footnotes to the consolidated financial statements. 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. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates, which could have a material impact on the carrying value of assets and liabilities and the results of operations of First Defiance.

Allowance for Loan Losses: First Defiance believes the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of its consolidated financial statements. In determining the appropriate estimate for the allowance for loan losses, management considers a number of factors relative to both specific credits in the loan portfolio and macro-economic factors relative to the economy of the United States as a whole and the economy of the northwest Ohio region in which the Company does business.

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

Factors relative to specific credits that are considered include a customer’s payment history, a customer’s recent financial performance, an assessment of the value of collateral held, knowledge of the customer’s character, the financial strength and commitment of any guarantors, the existence of any customer or industry concentrations, changes in a customer’s competitive environment, and any other issues that may impact a customer’s ability to meet his obligations.

Economic factors that are considered include levels of unemployment and inflation, specific plant or business closings in the Company’s market area, the impact of strikes or other work stoppages, the impact of weather or environmental conditions, especially relative to agricultural borrowers and other matters that may have an impact on the economy as a whole.

In addition to the identification of specific customers who may be potential credit problems, management considers its historical losses, the results of independent loan reviews, an assessment of the adherence to underwriting standards, the loss experience being reported by other financial institutions operating in the Company’s market area, and other factors in providing for loan losses that have not been specifically classified. While management believes its allowance for loan losses is conservatively determined based on the above factors, it does not believe the allowances to be excessive or unnecessary. Refer to the section titled “Allowance for Loan Losses” and Note 2, Statement of Accounting Policies for a further description of the Company’s estimation process and methodology related to the allowance for loan losses.

Valuation of Mortgage Servicing Rights: First Defiance believes the valuation of mortgage servicing rights is a critical accounting policy that requires significant estimates in preparation of its consolidated financial statements. First Defiance recognizes as separate assets the value of mortgage servicing rights, which are acquired through loan origination activities. First Defiance does not purchase any mortgage servicing rights.

Key assumptions made by management relative to the valuation of mortgage servicing rights include the stratification policy used in valuing servicing, assumptions relative to future prepayments of mortgages, the potential value of any escrow deposits maintained or ancillary income received as a result of the servicing activity and discount rates used to value the present value of a future cash flow stream. In assessing the value of the mortgage servicing rights portfolio, management utilizes a third party that specializes in valuing servicing portfolios. That third party reviews key assumptions with management prior to completing the valuation. Prepayment speeds are determined based on projected median prepayment speeds for 15 and 30 year mortgage backed securities. Those speeds are then adjusted up or down based on the size of the loan. The discount rate used in this analysis is the pretax yield generally required by purchasers of bulk servicing rights as of the valuation date. The value of mortgage servicing rights is especially vulnerable in a falling interest rate environment. Refer also to the section entitled Mortgage Servicing Rights and Note 2, Statement of Accounting Policies, and Note 8, Mortgage Banking, for a further description of First Defiance’s valuation process, methodology and assumptions along with sensitivity analyses.

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

ASSET/LIABILITY MANAGEMENT

A significant portion of the Company’s revenues and net income is derived from net interest income and, accordingly, the Company strives to manage its interest-earning assets and interest-bearing liabilities to generate an appropriate contribution from net interest income. Asset and liability management seeks to control the volatility of the Company’s performance due to changes in interest rates. The Company attempts to achieve an appropriate relationship between rate sensitive assets and rate sensitive liabilities. First Defiance does not presently use off balance sheet derivatives to enhance its risk management.

First Defiance monitors 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 results of the simulation indicate that in an environment where interest rates rise 100 basis points over a 12 month period, First Defiance’s net interest income would increase by just 1.19% over the base case scenario. Were interest rates to fall by 100 basis points during the same 12-month period, the simulation indicates that net interest income would decrease by only 0.30%. It should be noted that other areas of First Defiance’s income statement, such as gains from sales of mortgage loans and amortization of mortgage servicing rights are also impacted by fluctuations in interest rates but are not considered in the simulation of net interest income.

The majority of First Defiance’s lending activities are in the non-residential real estate and commercial loan areas. While such loans carry higher credit risk than residential mortgage lending, they tend to be more rate sensitive than residential mortgage loans. The balance of First Defiance’s non-residential and multi-family real estate loan portfolio was $579.9 million, which is split between $105.1 million of fixed-rate loans and $474.8 million of adjustable-rate loans at December 31, 2006. The commercial loan portfolio increased to $232.9 million, which is split between $82.4 million of fixed-rate loans and $150.5 million of adjustable-rate loans at December 31, 2006. Certain of the loans classified as adjustable have fixed rates for an initial term that may be as long as five years. The maturities on fixed-rate loans are generally less than 7 years. First Defiance also has significant balances of home equity and improvement loans ($122.8 million at December 31, 2006) which fluctuate with changes in the prime lending rate; and consumer loans ($43.8 million at December 31, 2006) which tend to have a shorter duration than residential mortgage loans. Also, to limit its interest rate risk, (as well as to provide liquidity) First Federal sells a majority of its fixed-rate mortgage originations into the secondary market.

In addition to the simulation analysis, First Federal also prepares an “economic value of equity” (“EVE”) analysis. This analysis calculates the net present value of First Federal’s assets and liabilities in rate shock environments that range from -300 basis points to +300 basis points. The results of this analysis are reflected in the following table.

	December 31, 2006
	Economic Value of Equity								Economic Value of Equity as % of Present Value of Assets
Change in Rates	$ Amount		$ Change			% Change			Ratio			Change
	(Dollars in Thousands)
+ 300 bp		172,982		(32,304	)		(15.74	%)		12.04	%		(152) bp
+ 200 bp		183,727		(21,559	)		(10.50	%)		12.57	%		(99) bp
+ 100 bp		195,048		(10,238	)		(4.99	%)		13.11	%		(45) bp
0 bp		205,286		-			-			13.56	%		-
-100 bp		213,078		7,792			3.80	%		13.86	%		30 bp
-200 bp		218,372		13,086			6.37	%		14.01	%		45 bp
-300 bp		223,151		17,865			8.70	%		14.13	%		57 bp

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

Based on the above analysis, in the event of a 200 basis point increase in interest rates as of December 31, 2006, First Federal would experience a 10.50% decrease in its economic value of equity. If rates would fall by 200 basis points its economic value of equity would increase by 6.37%. During periods of rising rates, the value of monetary assets declines. Conversely, during periods of falling rates, the value of monetary assets increases. It should be noted that the amount of change in value of specific assets and liabilities due to changes in rates is not the same in a rising rate environment as in a falling rate environment. Based on the EVE analysis, the change in the economic value of equity in both rising and falling rate environments is relatively low because both its assets and liabilities have relatively short durations and the durations are fairly closely matched. The average duration of its assets at December 31, 2006 was 1.66 years while the average duration of its liabilities was 1.18 years.

In evaluating First Federal’s exposure to interest rate risk, certain shortcomings inherent in each of the methods of analysis presented must be considered. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market rates while interest rates on other types of financial instruments may lag behind current changes in market rates. Furthermore, in the event of changes in rates, prepayments and early withdrawal levels could differ significantly from the assumptions in calculating the table and the results therefore may differ from those presented.

FORWARD LOOKING INFORMATION

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. It is intended that such forward-looking statements are covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995. This statement is included for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies, and expectations are generally identifiable by use of the words believe, expect, intend, anticipate, estimate, project, may or similar expressions. The presentation and discussion of the provision and allowance for loan losses, statements concerning future profitability or future growth and projections about interest rate simulations included in the Asset/Liability Management section are examples of inherently forward-looking statements in that they involve judgements and statements of belief as to the outcome of future events. The ability of management to predict results or the actual effect of future strategies is inherently uncertain. Factors which could have a material adverse affect on operations and future prospects include, but are not limited to, changes in: interest rates, general economic conditions, both nationally and within the region that First Defiance operates, legislative or regulatory changes, monetary and fiscal policy of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or make-up of the loan and investment portfolios, demand for loan and deposit products, competition, demand for financial products in the First Defiance market areas and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning First Defiance and its business, including additional factors that could materially affect its financial results and financial condition are included in its filings with the Securities and Exchange Commission.

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of First Defiance Financial Corp. is responsible for establishing and maintaining adequate internal control over financial reporting. First Defiance’s internal control over financial reporting is a process designed under the supervision of First Defiance’s chief executive officer and chief financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of First Defiance’s financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

First Defiance’s management assessed the effectiveness of its internal control over financial reporting as of December 31, 2006 based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control-Integrated Framework.” Based on the assessment, management determined that, as of December 31, 2006, First Defiance’s internal control over financial reporting is effective based on those criteria. Management’s assessment of the effectiveness of First Defiance’s internal control over financial reporting as of December 31, 2006 has been audited by Crowe Chizek and Company LLC, an independent registered public accounting firm, as stated in their report which follows under the heading Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting.

WILLIAM J. SMALL	JOHN C. WAHL
Chairman, President and	Executive Vice President and
Chief Executive Officer	Chief Financial Officer

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Board of Directors and Stockholders First Defiance Financial Corp. Defiance, Ohio

We have audited management’s assertion, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that First Defiance Financial Corp. (the Company) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that First Defiance Financial Corp. maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also in our opinion, First Defiance Financial Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial condition of First Defiance Financial Corp. as of December 31, 2006, and the related consolidated statements of income, stockholders’ equity and cash flows for the year then ended and our report dated March 12, 2007 expressed an unqualified opinion on those consolidated financial statements.

Crowe Chizek and Company LLC    

Cleveland, Ohio

March 12, 2007

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders First Defiance Financial Corp. Defiance, Ohio

We have audited the accompanying consolidated statements of financial condition of First Defiance Financial Corp. as of December 31, 2006 and 2005 and the related consolidated statements of income, stockholders’ equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated financial statements of First Defiance Financial Corp. for the year ended December 31, 2004 were audited by other auditors whose report dated March 8, 2005 expressed an unqualified opinion on those statements.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Defiance Financial Corp. as of December 31, 2006 and 2005, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 12, 2007 expressed an unqualified opinion thereon.

As disclosed in Note 2, during 2006 the Company adopted new accounting guidance for post-retirement benefits.

Crowe Chizek and Company LLC    

Cleveland, Ohio

March 12, 2007

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON CONSOLIDATED FINANCIAL STATEMENTS

The Board of Directors

First Defiance Financial Corp.

We have audited the accompanying consolidated statements of income, changes in stockholders’ equity, and cash flows of First Defiance Financial Corp. and subsidiaries for the year ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of First Defiance Financial Corp. and subsidiaries for the year ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

Cleveland, Ohio

March 8, 2005

33

2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	December 31,
	2006			2005
Assets	(In Thousands)
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
Securities held-to-maturity, carried at amortized cost (fair value $1,492 and $ 1,845 at December 31, 2006 and 2005 respectively)		1,441			1,775
Loans receivable, net of allowance of $13,579 and $13,673 at December 31, 2006 and 2005, respectively		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		18,586			17,544
Bank owned life insurance		25,326			24,346
Premises 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
Deposits
Noninterest-bearing	$	106,328		$	103,498
Interest-bearing		1,032,117			966,003
Total		1,138,445			1,069,501
Advances from the Federal Home Loan Bank		162,228			180,960
Short term borrowings and other interest-bearing liabilities		30,424			25,748
Subordinated debentures		20,619			20,619
Advance payments by borrowers		667			605
Deferred taxes		1,295			795
Other liabilities		14,376			11,638
Total liabilities		1,368,054			1,309,866
Stockholders' equity:
Preferred stock, no par value per share: 5,000 shares authorized; no shares issued
Common stock, $.01 par value per share: 20,000 shares authorized; 11,703 and 11,701 shares issued and 7,142 and 7,085 shares outstanding, respectively		117			117
Additional paid-in capital		110,285			108,626
Stock acquired by ESOP		(628	)		(1,053	)
Accumulated other comprehensive income (loss), net of tax of $(362) and $(13), respectively		(671	)		(22	)
Retained earnings		120,112			112,041
Treasury stock, at cost, 4,561 and 4,616 shares respectively		(69,390	)		(68,493	)
Total stockholders' equity		159,825			151,216
Total liabilities and stockholders' equity	$	1,527,879		$	1,461,082

See accompanying notes.

34

2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME

	Years Ended December31,
	2006			2005		2004
	(In Thousands, Except Per Share Amount)
Interest income
Loans	$	86,213		$	69,708	$	47,345
Investment securities:
Taxable		4,511			4,081		5,205
Tax-exempt		1,134			1,192		1,526
Interest-bearing deposits		165			364		43
FHLB stock dividends		1,042			829		612
Total interest income		93,065			76,174		54,731
Interest expense
Deposits		33,273			20,615		12,950
Federal Home Loan Bank advances and other		8,885			7,625		7,317
Subordinated debentures		1,308			201		-
Notes payable		577			451		114
Total interest expense		44,043			28,892		20,381
Net interest income		49,022			47,282		34,350
Provision for loan losses		1,756			1,442		1,548
Net interest income after provision for loan losses		47,266			45,840		32,802
Noninterest income
Service fees and other charges		9,303			5,603		4,215
Mortgage banking income		3,389			3,345		2,771
Insurance commissions		4,531			4,185		4,052
Gain on sale of non-mortgage loans		526			-		-
Gain (loss) on sale or write-down of securities		(2	)		1,222		1,426
Trust income		312			282		225
Income from bank owned life insurance		980			765		947
Other noninterest income		585			523		360
Total noninterest income		19,624			15,925		13,996
Noninterest expense
Compensation and benefits		24,152			23,446		17,422
Occupancy		5,103			4,651		3,294
Data processing		3,689			3,247		2,363
Acquisition related charges		-			3,476		-
Settlement of contingent liability		-			-		1,927
Other noninterest income		10,895			9,122		6,194
Total noninterest expense		43,839			43,942		31,200
Income before income taxes		23,051			17,823		15,598
Federal income taxes		7,451			5,853		4,802
Net income	$	15,600		$	11,970	$	10,796
Earnings per share:
Basic	$	2.22		$	1.75	$	1.77
Diluted	$	2.18		$	1.69	$	1.69
Dividends declared per share	$	0.97		$	0.90	$	0.82

See accompanying notes.

35

2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

								Stock			Accumulated
						Additional		Acquited			Other						Total
	Common		Treasury			Paid-in		by			Comprehensive			Retained			Stockholders
	Stock		Stock			Capital		ESOP			Income (Loss)			Earnings			Equity
	(In Thousands)
Balance at January 1, 2004	$	110	$	(66,257	)	$	87,107	$	(1,904	)	$	4,017		$	101,196		$	124,269
Comprehensive income:
Net income		-		-			-		-			-			10,796			10,796
Change in net unrealized gains andlosses on available-for-sale securities,net of income taxes of $(1,015) (a)		-		-			-		-			(1,886	)		-			(1,886	)
Total comprehensive income																		8,910
ESOP shares released		-		-			845		425			-			-			1,270
Amortization of deferred compensationof Management Recognition Plan,including income tax benefit of $12		-		-			19		-			-			-			19
Shares issued under stock option plan,including income tax benefit of $553		-		1,938			553		-			-			(383	)		2,108
Acquisition of common stock for treasury		-		(4,691	)		-		-			-			-			(4,691	)
Dividends declared		-		-			-		-			-			(5,011	)		(5,011	)
Balance at December 31, 2004		110		(69,010	)		88,524		(1,479	)		2,131			106,598			126,874
Comprehensive income:
Net income		-		-			-		-			-			11,970			11,970
Change in net unrealized gains andlosses on available-for-sale securities,net of income taxes of ($ 1,160) (a)		-		-			-		-			(2,153	)		-			(2,153	)
Total comprehensive income																		9,817
ESOP shares released		-		-			924		426			-			-			1,350
Shares issued to acquire ComBanc, Inc.		7		186			18,911		-			-			-			19,104
Amortization of deferred compensationof Management Recognition Plan,including income tax benefit of $4		-		-			6		-			-			-			6
Shares issued under stock option plan,including income tax benefit of $261		-		1,878			261		-			-			(317	)		1,822
Acquisition of common stock for treasury		-		(1,547	)		-		-			-			-			(1,547	)
Dividends declared		-		-			-		-			-			(6,210	)		(6,210	)
Balance at December 31, 2005		117		(68,493	)		108,626		(1,053	)		(22	)		112,041			151,216
Comprehensive income:
Net income		-		-			-		-			-			15,600			15,600
Change in net unrealized gains andlosses on available-for-sale securities,net of income taxes of ($39) (a)		-		-			-		-			(73	)		-			(73	)
Total comprehensive income																		15,527
Adjustment to initially apply SFASNo.158, net of tax of ($310)		-		-			-		-			(576	)		-			(576	)
ESOP shares released		-		-			901		425			-			-			1,326
Stock option expense		-		-			268		-			-			-			268
Amortization of deferred compensationof Management Recognition Plan,including income tax benefit of $4		-		-			4		-			-			-			4
Shares issued under stock option plan,including income tax benefit of $481		-		3,046			486		-			-			(703	)		2,829
Acquisition of common stock for treasury		-		(3,943	)		-		-			-			-			(3,943	)
Dividends declared		-		-			-		-			-			(6,826	)		(6,826	)
Balance at December 31, 2006	$	117	$	(69,390	)	$	110,285	$	(628	)	$	(671	)	$	120,112		$	159,825

(a) Net of reclassification adjustments. Reclassification adjustments represent net unrealized gains (losses) as of December 31 of the prior year on securities available-for-sale that were sold during the current year. The reclassification adjustment was -0- in 2006, $1.3 million ($884,000 after tax) in 2005 and $1.82 million ($1.18 after tax) in 2004.

See accompanying notes.

36

2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2006			2005			2004
	(In Thousands)
Operating activities
Net income	$	15,600		$	11,970		$	10,796
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,756			1,442			1,548
Provision for depreciation		2,738			2,396			1,798
Net amortization of premium and discounts on loans, securities, deposits and debt obligations		532			1,152			564
Amortization of mortgage servicing rights		612			784			704
Net impairment (recovery) of mortgage servicing rights		(2	)		(417	)		1
Amortization of intangibles		720			755			110
Gain on sale of loans		(2,950	)		(2,426	)		(2,523	)
Amortization of Management Recognition Plan deferred compensation		-			6			19
Gain on sale of property, plant and equipment		(104	)		(116	)
FHLB stock dividends		(1,042	)		(835	)		(610	)
Release of ESOP shares		1,326			1,350			1,270
(Gains) loss on sales or write-down of securities		2			(1,222	)		(1,426	)
Deferred federal income tax		870			249			90
Proceeds from sale of loans		140,828			112,731			106,620
Stock option expense		268			-			-
Origination of loans held for sale		(137,624	)		(114,332	)		(101,391	)
Income from bank owned life insurance		(980	)		(765	)		(947	)
Change in interest receivable and other assets		(2,616	)		1,285			(136	)
Change in accrued interest and other liabilities		1,804			2,574			(234	)
Net cash provided by operating activities		21,738			16,581			16,253
Investing activities
Proceeds from maturities of held-to-maturity securities		358			357			403
Proceeds from maturities of available-for-sale securities		16,649			27,882			42,850
Proceeds from sale of available-for-sale securities		3,073			24,160			20,747
Proceeds from sale of real estate and other assets held for sale		2,229			475			996
Proceeds from sale of office properties and equipment		213			1,286			2
Purchases of available-for-sale securities		(17,551	)		(30,271	)		(34,262	)
Proceeds from sale of Federal Home Loan Bank stock		-			-			5,000
Purchases of office properties and equipment		(5,317	)		(5,296	)		(2,202	)
Investment in bank owned life insurance		-			(5,000	)		-
Proceed from insurance death benefit		-			-			318
Net cash received for acquisition of ComBanc, Inc.		-			52,687			-
Net cash paid for acquisition of Genoa Savings and Loan Co.		-			(612	)		-
Proceeds from sale of non-mortgage loans		4,929			-			-
Net increase in loans receivable		(73,060	)		(104,103	)		(144,660	)
Net cash used in investing activities		(68,477	)		(38,435	)		(110,808	)

(CONTINUED)

37

2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

	Years Ended December 31,
	2006			2005			2004
Financing activities
Net increase in deposits		69,291			31,931			69,090
Repayment of Federal Home Loan Bank long-term advances		(68,206	)		(2,457	)		(1,809	)
Net increase in Federal Home Loan Bank short-term advances		4,600			2,000			15,500
Net increase (decrease) in short-term line of credit		-			(3,000	)		3,000
Proceeds from Federal Home Loan Bank long-term advances		45,000			-			-
Increase (decrease) in securities sold under repurchase agreements		4,676			7,334			(463	)
Proceeds from issuance of subordinated debentures		-			20,619			-
Purchase of common stock for treasury		(2,852	)		(1,547	)		(4,691	)
Cash dividends paid		(6,741	)		(5,852	)		(4,889	)
Proceeds from exercise of stock options		1,257			1,561			1,555
Excess tax benefit from exercise of stock options		481			-			-
Net cash provided by financing activities		47,506			50,589			77,293
Increase (decrease) in cash and cash equivalents		767			28,735			(17,262	)
Cash and cash equivalents at beginning of period		49,256			20,521			37,783
Cash and cash equivalents at end of period	$	50,023		$	49,256		$	20,521
Supplemental cash flow information
Interest paid	$	43,197		$	28,327		$	20,432
Income taxes paid	$	5,956		$	5,053		$	4,149
Stock options exercised using common stock for treasury	$	1,091			-			-
Transfers from loans to other real estate owned and other assets held for sale	$	4,217		$	605		$	690

First Defiance acquired all of the capital stock ComBanc Inc. and the Genoa Savings and Loan Company for $38.3 million and $11.2 million respectively in 2005. In conjunction with the acquisitions, liabilities were assumed as follows:

	ComBanc			Genoa			Total
Fair value of assets acquired	$	213,927		$	88,077		$	302,004
Purchase price		(38,339	)		(11,212	)		(49,551	)
Liabilities assumed	$	175,588		$	76,865		$	252,453

See accompanying notes.

38

2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

First Defiance Financial Corp. (First Defiance) is a holding company that conducts business through its two wholly owned subsidiaries, First Federal Bank of the Midwest, Defiance Ohio (First Federal) and First Insurance & Investments (First Insurance). All significant intercompany transactions and balances are eliminated in consolidation.

First Federal is primarily engaged in attracting deposits from the general public through its offices and using those and other available sources of funds to originate loans primarily in the counties in which its offices are located. First Federal’s traditional banking activities include originating and servicing residential, commercial and consumer loans and providing a broad range of depository and trust services. First Insurance & Investments is an insurance agency that does business in the Defiance, Ohio area offering property and casualty, group health, and life insurance and investment and annuity products.

2. STATEMENT OF ACCOUNTING POLICIES

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Significant areas where First Defiance uses estimates are the determination of the allowance for loan losses, the valuation of mortgage servicing rights and goodwill, and the determination of post-retirement benefits.

Earnings Per Share

Basic earnings per share is net income divided by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options and stock grants. Unreleased shares held by the Company’s Employee Stock Ownership Plan are not included in average shares for purposes of calculating earnings per share. As shares are released for allocation, they are included in the average shares outstanding. Also see note 18.

Comprehensive Income

Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on available for sale investment securities and the net unrecognized actuarial losses and unrecognized prior service costs associated with the Company’s Defined Benefit Postretirement Medical Plan. All items included in other comprehensive income are reported net of tax. See also notes 5 and 15.

Cash and Cash Equivalents

Cash and cash equivalents include amounts due from banks and overnight investments with the Federal Home Loan Bank (FHLB). Cash and amounts due from depository institutions includes required balances at the FHLB and Federal Reserve of approximately $130,000 and $100,000, respectively, at December 31, 2006. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, and repurchase agreements.

Investment Securities

Management determines the appropriate classification of debt securities at the time of purchase and evaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when First Defiance has the positive intent and ability to hold the securities to maturity and are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity.

Debt securities not classified as held-to-maturity and equity securities are classified as available for sale. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported in other comprehensive income until realized. Realized gains and losses, and unrealized losses judged to be other-than-temporary, are included in gains (losses) on securities. Realized gains and losses on securities sold are based on the specific identification method.

39

2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

FHLB Stock

As a member of the FHLB System, First Federal is required to own stock of the FHLB of Cincinnati in an amount principally equal to 0.15% of total assets plus an amount of at least 2% but no more than 4% of its non-grandfathered mission asset activity (as defined in the FHLB’s regulations). First Federal is permitted to own stock in excess of the minimum requirement. FHLB stock is a restricted equity security that does not have a readily determinable fair value and is carried at cost. It is evaluated for impairment based upon the ultimate recovery of par value. Both cash and stock dividends are reported as income.

Loans Receivable

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal amount outstanding, net of deferred loan fees and costs and the allowance for loan losses. Deferred fees net of deferred incremental loan origination costs, are amortized to interest income generally over the contractual life of the loan using the interest method.

Mortgage loans originated and intended for sale in the secondary market are classified as loans held for sale and are carried at the lower of aggregate cost or market, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.

Interest receivable is accrued on loans and credited to income as earned. The accrual of interest on loans 90 days delinquent or impaired is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. The accrual of interest on these loans is generally resumed after a pattern of repayment has been established and the collection of principal and interest is reasonably assured.

The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred losses in the loan portfolio and is based on the size and current risk characteristics of the loan portfolio, an assessment of individual problem loans, actual loss experience, current economic events in specific industries and geographical areas, and other pertinent factors including general economic conditions. Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience and consideration of economic trends, all of which may be susceptible to significant change. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

Loan losses are charged off against the allowance when in management’s estimation it is unlikely that the loan will be collected, while recoveries of amounts previously charged off are credited to the allowance. A provision for loan losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors in order to maintain the allowance for loan losses at the level deemed adequate by management. The determination of whether a loan is considered past due or delinquent is based on the contractual payment terms.

A loan is impaired when full payment under the loan terms is not expected. Commercial and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

Acquired Loans

Valuation allowances for all acquired loans subject to SOP 03-3 reflect only those losses incurred after acquisition—that is, the present value of cash flows expected at acquisition that are not expected to be collected.

40

2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

The Company acquires loans individually and in groups or portfolios. At acquisition, the Company reviews each loan to determine whether there is evidence of deterioration of credit quality since origination and if it is probable that it will be unable to collect all amounts due according to the loan’s contractual terms. If both conditions exist, the Company determines whether each such loan is to be accounted for individually or whether such loans will be assembled into pools of loans based on common risk characteristics (credit score, loan type, and date of origination). The Company considers expected prepayments, and estimates the amount and timing of undiscounted expected principal, interest, and other cash flows (expected at acquisition) for each loan and subsequently aggregated pool of loans. The Company determines the excess of the loan’s or pool’s scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted (nonaccretable difference). The remaining amount — representing the excess of the loan’s cash flows expected to be collected over the amount paid — is accreted into interest income over the remaining life of the loan or pool (accretable yield).

Over the life of the loan or pool, the Company continues to estimate cash flows expected to be collected, and evaluates whether the present value of its loans determined using the effective interest rates has decreased and if so, recognizes a loss. The present value of any subsequent increase in the loan’s or pool’s actual cash flows or cash flows expected to be collected is used first to reverse any existing valuation allowance for that loan or pool. For any remaining increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield recognized on a prospective basis over the loan’s or pool’s remaining life.

Loan Commitments and Related Financial Instruments

Financial instruments include off balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Marketing Costs

Marketing costs are expensed as incurred.

Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

Dividend Restriction

Banking regulations require maintaining certain capital levels and may limit the dividends paid by the bank to the holding company. These restrictions pose no practical limit on the ability of the bank or holding company to pay dividends at historical levels. See Note 20.

Mortgage Servicing Rights

The total cost of loans originated or purchased is allocated between loans and servicing rights based on the relative fair values of each at the time of sale. The servicing rights capitalized are amortized in proportion to and over the period of estimated servicing income.

Mortgage servicing rights are periodically evaluated for impairment. For purposes of measuring impairment, mortgage servicing rights are stratified based on predominant risk characteristics of the underlying serviced loans. These risk characteristics include loan type (fixed or adjustable rate) and interest rate. Impairment represents the excess of amortized cost of an individual mortgage servicing rights stratum over its fair value, and is recognized through a valuation allowance.

Fair values for individual stratum are based on the present value of estimated future cash flows using a discount rate commensurate with the risks involved. Estimates of fair value include assumptions about prepayment, default and interest rates, and other factors which are subject to change over time. Changes in these underlying assumptions could cause the fair value of mortgage servicing rights, and the related valuation allowance, to change significantly in the future.

41

2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

Servicing fee income is recorded for fees earned for serviced loans. The fees are based on a contractual percentage of the outstanding principal and are recorded as income when earned. The amortization of mortgage servicing rights is netted with loan servicing fee income and along with mortgage loans gain on sale are reported collectively as mortgage banking income on the consolidated statements of income.

Real Estate and Other Assets Held for Sale

Other assets held for sale are comprised of properties acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. These properties are carried at the lower of cost or fair value, less estimated costs to dispose, at the time of foreclosure or insubstance foreclosure. Losses arising from the acquisition of such property are charged against the allowance for loan losses at the time of acquisition. If fair value declines subsequent to foreclosure, the property is written down against expense. Costs after acquisition are expensed.

Premises and Equipment and Long Lived Assets

Premises and equipment are carried at cost less accumulated depreciation and amortization computed principally by the straight-line method over the following estimated useful lives:

Buildings and improvements	20 to 50 years
Furniture, fixtures and equipment	3 to 15 years

Long-lived assets to be held and those to be disposed of and certain intangibles are evaluated for impairment using the guidance provided by Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for Long-Lived Assets to be Disposed of, relative to accounting for long-lived assets and accounting for long-lived assets to be disposed of either through sale, abandonment, exchange or a distribution to owners.

Income Taxes

Deferred income taxes reflect the temporary tax consequences on future years of differences between the tax basis and financial statement amounts of assets and liabilities at each year-end.

Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

An effective tax rate of 35% is used to determine after-tax components of other comprehensive income (loss) included in the statements of stockholders’ equity.

Business Combinations

Business combinations, which have been accounted for under the purchase method of accounting, include the results of operations of the acquired business from the date of acquisition. Net assets of companies acquired are recorded at their estimated fair value as of the date of acquisition.

Goodwill and Other Intangibles

Core deposit intangibles are a measure of the value of checking and savings deposits acquired in business combinations accounted for under the purchase method. Core deposit intangibles are amortized on an accelerated basis over the estimated lives of the existing deposit relationships acquired, but not exceeding 10 years. Customer Relationship Intangibles are a measure of the value of customer relationships accounted for under the purchase method. The Customer Relationship Intangible is amortized over the estimated contractual life of the existing relationship and is limited to 10 years. Goodwill is the excess of the purchase price over the fair value of the assets and liabilities and identifiable intangible assets of companies acquired through business combinations accounted for under the purchase method. Goodwill is evaluated at the business unit level, which for First Defiance are First Federal Bank and First Insurance. At both December 31, 2006 and December 31, 2005, goodwill at First Federal totaled $31.3 million. At December 31, 2006 and 2005, core deposit intangibles had a gross carrying value of $4.5 million and accumulated amorization of $1.5 million and $873,000 respectively. At December 31, 2006 and 2005, customer relationship intangibles had a gross carrying value of $574,000 and accumulated amoization of $154,000 and $62,000 respectively. At both December 31, 2006 and 2005 goodwill totaled $3.8 million at First Insurance.

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

Core deposit intangibles are amortized over the life of the related deposits, not to exceed ten years. Amortization expense for core deposit intangibles was $627,000, $693,000 and $110,000 in 2006, 2005 and 2004 respectively. Customer relationship intangibles are amortized over the estimated life of the customer relationship, not to exceed 10 years. Amortization expense for customer relationship intangibles was $92,000 and $62,000 in 2006 and 2005. Amortization of intangibles is expected to total, $573,000, $469,000, $410,000, $402,000 and $402,000 in 2007, 2008, 2009, 2010 and 2011 respectively. Goodwill is not subject to amortization but its value is assessed annually to determine if there is any impairment of value.

Settlement of Contingent Liability

First Defiance sold its former Leader Mortgage subsidiary in 2002. During 2004, the Purchaser of that unit asserted certain claims against First Defiance under the Purchase and Sale Agreement. First Defiance settled all matters related to the sale of Leader Mortgage in the 2004 third quarter and it recognized a pre-tax charge of $1.9 million, which is included in the 2004 Consolidated Statement of Income.

Stock Compensation Plans

Effective January 1, 2006, First Defiance adopted Statement of Financial Accounting Standard (SFAS) No. 123(R), Share-based Payment, which requires recognition of compensation cost for all stock-based awards to be based on the grant-date fair value over the service period of stock-based awards, which is usually the same as the vesting period. The fair value of stock options is determined using the Black-Scholes valuation model, which is consistent with the Company’s valuation methodology previously utilized for options in footnote disclosures required under SFAS No. 123. The exercise price of stock grants has been and will continue to be based on the market value of the stock at the date of grant. The Company has adopted SFAS No. 123(R) using the modified prospective method, which provides for no retroactive application to prior periods and no cumulative effect adjustment to equity accounts. It also provides for expense recognition, for both new and existing stock-based awards, as the required services are rendered. SFAS No. 123(R) also amends SFAS No. 95, Statement of Cash Flows and requires tax benefits relating to excess stock-based compensation deductions to be presented in the statement of cash flows as financing cash inflows. In accordance with Staff Accounting Bulletin No. 107 (SAB 107) issued by the Securities and Exchange Commission, stock-based compensation has been classified in the same expense category as cash compensation and has been included in the Compensation and Benefits line of the Consolidated Statements of Income for 2006.

Prior to January 1, 2006, the Company accounted for stock-based compensation expense using the intrinsic method as required by Accounting Principles Board (ABP) Opinion No. 25, Accounting for Stock Issued to Employees as permitted by SFAS No. 123 Accounting for Stock-Based Compensation. No compensation cost for stock options was reflected in net income for the years ended December 31, 2005 and 2004, as all options granted had an exercise price equal to the market price of the underlying common stock at the date of grant.

The adoption of SFAS No. 123(R) had the following impact on reported amounts compared with amounts that would have been reported using the intrinsic value method under previous accounting.

	2006
	Using Previous		SFAS 123(R)			As Reported
	Accounting		Adjustments
	(In Thousands, Except Per Share Amounts)
Income before income taxes	$	23,322	$	(271	)	$	23,051
Income taxes		7,454		(3	)		7,451
Net income	$	15,868		(268	)	$	15,600
Basic earnings per share	$	2.26	$	(.04	)	$	2.22
Diluted earnings per share	$	2.22	$	(.04	)	$	2.18
Cash flow from operating activities	$	22,219	$	(481	)	$	21,738
Cash flow from financing activities	$	47,025	$	481		$	47,506

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

The following tables illustrate the effect on net income and earnings per share if expense had been measured using the fair value recognition provisions of SFAS 123(R) for the years ended December 31, 2005 and 2004:

	2005							2004
	(In Thousands, Except Per Share Amounts)
						Pro Forma							Pro Forma
			Pro Forma			as if Under				Pro Forma			as if Under
	As Reported		Adjustments			SFAS 123(R)		As Reported		Adjustments			SFAS 123(R)
Income before income taxes	$	17,823	$	(272	)	$	17,551	$	15,598	$	(221	)	$	15,377
Income taxes		5,853		(4	)		5,848		4,802		(5	)		4,797
Net income	$	11,970	$	(268	)	$	11,703	$	10,796	$	(216	)	$	10,580
Basic earnings per share	$	1.75	$	(.04	)	$	1.71	$	1.77	$	(.03	)	$	1.74
Diluted earnings per share	$	1.69	$	(.04	)	$	1.65	$	1.69	$	(.03	)	$	1.66

The fair value of stock options granted during 2006, 2005 and 2004 was determined at the date of grant using the Black-Scholes option-pricing model and utilized the following assumptions:

	December 31,
	2006			2005			2004
Risk free interest rate		5.16	%		4.40	%		4.73	%
Weighted average expected life		6.5 years			10 years			10 years
Volatility factors of expected market price of stock		22.4	%		22.4	%		22.9	%
Dividend yield		3.62	%		3.39	%		2.96	%

The expected average risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. The expected average life represents the period of time that options granted are expected to be outstanding giving consideration to vesting schedules, historical exercise and forfeiture patterns. Expected volatility is based on historical price fluctuations of the Company’s common stock. The expected dividend yield is based on historical dividend payments and stock prices.

Bank Owned Life Insurance

The Company has purchased life insurance policies on certain executives and senior managers. Company owned life insurance is recorded at its cash surrender value, or the amount that can be realized.

Postretirement Benefits

The Company sponsors a defined benefit postretirement plan that provides medical benefits to eligible retirees. Postretirement benefit expense is accrued based on the expected future cost of providing benefits during the years service is rendered by the employee.

Fair Value of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Operating Segments

While the chief decision-makers monitor the revenue streams of the various products and services, there is one identifiable segment and the remaining identifiable segments are not material and operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable segment.

Reclassifications

Some items in the prior year financial statements were reclassified to conform to the current presentation.

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

Adoption of New Accounting Standards

Accounting for Defined Benefit Pension and Other Postretirement Plans In September 2006, the FASB issued SFAS No. 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of SFAS Nos. 87, 88, 106, and 132(R) (“Statement 158”). Statement 158 requires plan sponsors of defined benefit pension and other postretirement benefit plans (collectively, “postretirement benefit plans”) to recognize the funded status of their postretirement benefit plans in the statement of financial position, measure the fair value of plan assets and benefit obligations as of the date of the fiscal year-end statement of financial position, and provide additional disclosures. On December 31, 2006, the Company adopted the recognition and disclosure provisions of Statement 158. The effect of adopting Statement 158 on the Company’s financial condition at December 31, 2006 has been included in the accompanying consolidated financial statements. Statement 158 did not have an effect on the Company’s consolidated financial condition at December 31, 2005 and 2004. Statement 158’s provisions regarding the change in the measurement date of postretirement benefit plans are not applicable as the Company already uses a measurement date of December 31 for its postretirement medical plan. See Note 15 for further discussion of the effect of adopting Statement 158 on the Company’s consolidated financial statements.

Effect of Newly Issued but Not Yet Effective Accounting Standards

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140. This Statement provides: 1) revised guidance on when a servicing asset and servicing liability should be recognized; 2) requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; 3) permits an entity to elect to measure servicing assets and servicing liabilities at exercise price each reporting date and report changes in fair value in earnings in the period in which the changes occur; 4) upon initial adoption, permits a onetime reclassification of available-for-sale securities to trading securities for securities which are identified as off setting the entity’s exposure to changes in the fair value of servicing assets or liabilities that a servicer elects to subsequently measure at fair value; and 5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional footnote disclosures. This standard is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006 with the effects of initial adoption being reported as a cumulative-effect adjustment to retained earnings. The adoption of this statement will not have a material impact on consolidated financial position or results of operation.

Fair Value Measurements

In September 2006, FASB issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. The Company has not yet completed its evaluation of the impact of the adoption of this standard.

Accounting for Uncertainty in Income Taxes

In July 2006, FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No, 109 (“FIN 48”), which prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company has adopted FIN 48 effective January 1, 2007. The effect of adoption of FIN 48 was not material.

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

Accounting for Deferred Compensation and Postretirement Benefit Aspects

of Endorsement Split-Dollar Life Insurance Arrangements

In September 2006, the FASB Emerging Issues Task Force (“EITF”) finalized Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This issue requires that a liability be recorded during the service period when a spilt-dollar life insurance agreement continues after participants’ employment or retirement. The required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. This issue is effective for fiscal years beginning after December 15, 2007. The Company does not have any split-dollar life insurance agreements that continue after participants’ employment.

Accounting for Purchases of Life Insurance

In September 2006, the FASB EITF finalized Issue No. 06-5, Accounting for Purchases of Life Insurance - Determining the Amount That Could be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance). This issue requires that a policyholder consider contractual terms of a life insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater surrender value if all individual policies in a group are surrendered at the same time, that the surrender value be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the issue discusses whether the cash surrender value should be discounted when the policyholder is contractually limited in its ability to surrender a policy. This issue is effective for fiscal years beginning after December 15, 2006. The adoption of this issue will not have a material impact on the financial statements.

3. ACQUISITIONS

On April 8, 2005, The Company acquired the Genoa Savings and Loan Company (“Genoa”), a savings and loan headquartered in Genoa, Ohio for a total purchase price of $11.2 million including direct acquisition costs of $220,000. Genoa shareholders received cash of $11.0 million in the all-cash transaction.

On January 21, 2005, First Defiance acquired ComBanc, Inc. (“ComBanc”), a bank-holding company and its wholly-owned subsidiary, the Commercial Bank by acquiring all of the outstanding capital stock of ComBanc for an aggregate purchase price of $38.3 million, including direct acquisition costs of $542,000. ComBanc shareholders received 733,775 shares of First Defiance stock and cash of $18.7 million.

The acquisitions enhanced First Defiance’s community bank operations by giving them a larger presence in the Toledo, Ohio market area following the Genoa acquisition and allowing them to expand into the Allen County, Ohio area, which was adjacent to existing markets, following the ComBanc acquisition. The value of the common stock issued for the ComBanc acquisition was determined based on an average of the closing price for two days before and after the date the final exchange terms were determined. The following table presents the allocation of the purchase price, including direct acquisition costs, for the Genoa and ComBanc acquisitions to assets acquired and liabilities assumed, based on their fair values:

	Genoa		ComBanc
	(In Thousands)
Cash and cash equivalents	$	10,600	$	71,915
Investment securities		15		502
Loans, net of allowances for loan losses		66,905		117,494
Premises and equipment		2,345		4,106
Goodwill and other intangibles		5,501		15,522
Other assets		2,711		4,388
Total assets acquired		88,077		213,927
Deposits		76,786		163,668
Borrowings		-		9,863
Other liabilities		79		2,057
Total liabilities acquired		76,865		175,588
Net assets acquired	$	11,212	$	38,339

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

The following (unaudited) pro forma consolidated results of operations for 2005 have been prepared as if the acquisitions of ComBanc and Genoa occurred as of the beginning of that year.

	Year Ended December 31,
	2005		2004
	(In Thousands, Except Per Share Amounts)
Net interest income	$	48,542	$	44,085
Net income	$	13,775	$	10,057
Net income per share - basic	$	2.00	$	1.47
Net income per share - Diluted	$	1.93	$	1.42

The pro forma results include amortization of fair value adjustments on loans, deposits and FHLB advances, amortization of newly created intangibles, and post-merger acquisition related charges. The pro forma average common shares outstanding used to compute the pro forma basic and diluted income per share includes adjustments for shares issued for the ComBanc acquisition. The pro forma results presented do not include $3.5 million of acquisition related costs included in First Defiance’s 2005 income statement, nor do they reflect cost savings or revenue enhancements anticipated from the acquisitions. These pro forma results are not necessarily indicative of what actually would have occurred if the acquisitions had been completed as of the beginning of each period presented, nor are they necessarily indicative of future results.

On February 28, 2007 The Company completed the acquisition of Huber, Harger, Welt & Smith Insurance Agency, Inc., a property and casualty insurance agency located in Bowling Green, OH for approximately 77,000 shares of First Defiance Financial Corp. common stock. Disclosure of pro forma results of this aquisition is immaterial to the Company’s consolidated financial statements.

4. EARNINGS PER SHARE

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

	2006		2005		2004
	(In Thousands, Except Per Share Amounts)
Numerator for basic and diluted earnings per share net income	$	15,600	$	11,970	$	10,796
Denominator:
Denominator for basic earnings per share weighted-average shares		7,028		6,843		6,094
Effect of dilutive securities:
Employee stock options		135		252		275
Unvested Management Recognition Plan stock		-		1		2
Dilutive potential common shares		135		253		277
Denominator for diluted earnings per share adjusted weighted-average shares		7,163		7,096		6,371
Basic earnings per share	$	2.22	$	1.75	$	1.77
Diluted earnings per share	$	2.18	$	1.69	$	1.69

Shares under option of 149,053 in 2006, 3,000 in 2005 and 3,000 in 2004 were excluded from the diluted earnings per share calculation as they were anti-dilutive.

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

5. INVESTMENT SECURITIES

The following fair value of available for sale securities and the related unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In Thousands)
At December 31, 2006
Obligations of U.S. government corporations and agencies	$	36,108	$	106	$	(171	)	$	36,043
Mortgage-backed securities		18,595		23		(276	)		18,342
REMICs		3,071		-		(11	)		3,060
Collateralized mortgage obligations		20,099		52		(346	)		19,805
Trust preferred stock		8,116		82		(20	)		8,178
Obligations of state and political subdivisions		24,840		418		(4	)		25,254
Totals	$	110,829	$	681	$	(828	)	$	110,682
At December 31, 2005
Obligations of U.S. government corporations and agencies	$	41,173	$	217	$	(325	)	$	41,065
Mortgage-backed securities		19,959		35		(263	)		19,731
REMICs		998		-		(7	)		991
Collateralized mortgage obligations		20,002		1		(330	)		19,673
Trust preferred stock		7,725		76		-			7,801
Obligations of state and political subdivisions		23,257		574		(13	)		23,818
Totals	$	113,114	$	903	$	(938	)	$	113,079

The amortized cost, unrecognized gains and losses, and fair value of securities held to maturity were as follows:

			Gross		Gross
	Amortized		Unrecognized		Unrecognized			Fair
	Cost		Gains		Losses			Value
	(In Thousands)
At December 31, 2006
FHLMC certificates	$	272	$	8	$	-		$	280
FNMA certificates		614		5		(4	)		615
GNMA certificates		195		1		-			196
Obligations of states and political subdivisions		360		41		-			401
Totals	$	1,441	$	55	$	(4	)	$	1,492
At December 31, 2005
FHLMC certificates	$	333	$	11	$	-		$	344
FNMA certificates		756		4		(3	)		757
GNMA certificates		241		-		(1	)		240
Obligations of states and political subdivisions		445		59		-			504
Totals	$	1,775	$	74	$	(4	)	$	1,845

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

The amortized cost and fair value of securities at December 31, 2006 by contractual maturity are shown below. 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, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities of the underlying collateral. The mortgage-backed securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.

	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(In Thousands)
Due in one year or less	$	17,968	$	17,791	$	382	$	388
Due after one year through five years		51,804		51,571		809		842
Due after five years through ten years		18,270		18,288		226		238
Due after ten years		22,787		23,032		24		24
	$	110,829	$	110,682	$	1,441	$	1,492

Investment securities with carrying amounts of $85.0 million and $82.3 million at December 31, 2006 and 2005, respectively, were pledged as collateral on public deposits, securities sold under repurchase agreements and FHLB advances and for other purposes required or permitted by law.

The following table summarizes First Defiance’s securities that were in an unrealized loss position at December 31, 2006 and December 31, 2005:

	Duration of Unrealized Loss Position
	Less than 12 Months					12 Month or Longer					Total
			Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loses
	(In Thousands)
At December 31, 2006
Available-for-sale securities:
Obligations of U.S. govt. corps. and agencies	$	2,484	$	(7	)	$	15,403	$	(164	)	$	17,887	$	(171	)
Mortgage-backed securities		1,936		(12	)		11,471		(264	)		13,407		(276	)
Collateralized mortgage obligations and REMICs		3,545		(12	)		16,320		(345	)		19,865		(357	)
Obligations of state and political subdivisions		1,630		(4	)		39		−			1,669		(4	)
Trust Preferred stock		1,906		(20	)		−		−			1,906		(20	)
Held to maturity securities:
Mortgage-backed securities		157		(3	)		207		(1	)		364		(4	)
Total temporarily impaired securities	$	11,658	$	(58	)	$	43,440	$	(774	)	$	55,098	$	(832	)
At December 31, 2005
Available-for-sale securities:
Obligations of U.S. govt. corps. and agencies	$	16,873	$	(173	)	$	8,845	$	(152	)	$	25,718	$	(325	)
Mortgage-backed securities		9,488		(151	)		4,352		(112	)		13,840		(263	)
Collateralized mortgage obligations and REMICs		5,780		(62	)		11,687		(275	)		17,467		(337	)
Obligations of state and political subdivisions		1,368		(13	)		20		−			1,388		(13	)
Held to maturity securities:
Mortgage-backed securities		320		(1	)		177		(3	)		497		(4	)
Total temporarily impaired securities	$	33,829	$	(400	)	$	25,081	$	(542	)	$	58,910	$	(942	)

The above securities all have fixed interest rates and 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. Realized gains from the sale of investment securities totaled $73,000, $1.2 million and $1.4 million ($47,000, $798,000 and $927,000 after tax) in 2006, 2005 and 2004 respectively. Realized losses from securities transactions were $5,000 ($3,000 after tax) in 2005. There were no realized losses during 2006 and 2004. Management deemed that the value of certain investments in trust preferred stock was impaired in 2006 and wrote the investment down by $75,000 ($49,000 after tax).

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

6. COMMITMENTS AND CONTINGENT LIABILITIES

Loan Commitments

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 on December 31 was as follows (in thousands):

	2006		2005
Loan commitments	$	260,349	$	275,982
Standby letters of credit		16,869		8,785
Total	$	277,218	$	284,767

Lease Agreements

The Company has entered into lease agreements covering First Insurance’s main office, one banking center location and the land on which one banking center was constructed and numerous stand-alone Automated Teller Machine sites with varying terms and options to renew.

Future minimum commitments under non-cancelable operating leases are as follows (in thousands):

2007	$	312
2008		217
2009		224
2010		196
2011		150
Thereafter		3,114
Total	$	4,213

Rentals under operating leases amounted to $353,000, $329,000, and $237,000, in 2006, 2005, and 2004, respectively.

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

7. LOANS RECEIVABLE

Loans receivable consist of the following at December 31:

	December 31,
	2006			2005
	(In Thousands)
Real estate loans:
Secured by single family residential	$	250,808		$	275,497
Secured by multi-family residential		57,263			50,040
Secured by non-residential real estate		522,597			501,943
Construction		17,339			21,173
		848,007			848,653
Other loans:
Automobile		33,093			37,584
Commercial		232,914			171,289
Home equity and improvement		122,789			113,000
Other		10,677			17,713
		399,473			339,586
Total loans		1,247,480			1,188,239
Deduct:
Undisbursed loan funds		(6,409	)		(8,782	)
Net deferred loan origination fees and costs		(1,182	)		(1,303	)
Allowance for loan losses		(13,579	)		(13,673	)
Totals	$	1,226,310		$	1,164,481

Changes in the allowance for loan losses were as follows:

	Years Ended December 31,
	2006		2005		2004
	(In Thousands)
Allowance at beginning of year	$	13,673	$	9,956	$	8,844
Provision for credit losses		1,756		1,442		1,548
Acquired in acquisitions		−		3,027		−
Charge-off s		2,276		1,054		685
Recoveries		426		302		249
Net charge-offs		1,850		752		436
Ending allowance	$	13,579	$	13,673	$	9,956

Unpaid balances of loans with contractual payments delinquent 90 days or more totaled $7.3 million at December 31, 2006 and $5.0 million at December 31, 2005.

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

Impaired loans having recorded investments of $4.2 million at December 31, 2006 and $822,000 at December 31, 2005, have been recognized in conformity with FASB Statement No. 114, as amended by FASB Statement No. 118. The average recorded investment in impaired loans during 2006, 2005 and 2004 was $4.4 million, 1.1 million, and $732,000 respectively. The total allowance for loan losses related to these loans was $969,000 and $380,000 at December 31, 2006 and 2005. There was $111,000, $61,000 and $36,000 of interest received and recorded in income during 2006, 2005 and 2004 respectively on impaired loans during the impairment period. Loans having carrying values of $4.2 million and $605,000 were transferred to real estate and other assets held for sale in 2006 and 2005, respectively. At December 31, 2006 and December 31, 2005, non-performing loans were $7.3 million and $5.0 million respectively. There was no accrued interest recorded on impaired or non-performing loans at December 31, 2006 or 2005. Also there was $562,000 of loans deemed impaired for which there was no allowance for loan loss allocation at December 31, 2006. There were no loans impaired for which there was no allowance for loan loss allocation at December 31, 2005.

First Defiance is not committed to lend additional funds to debtors whose loans have been modified.

Certain loans acquired in the ComBanc and Genoa acquisitions had evidence that the credit quality of the loan had deteriorated since its origination and in management’s assessment at the acquisition date it was probable that First Defiance would be unable to collect all contractually required payments due. In accordance with American Institute of Certified Public Accountants Statement of Position 03-3 - Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP 03-3), these loans have been recorded based on management’s estimate of the fair value of the loans. Detail of these loans are as follows:

	Contractual			Impairment			Recorded
	Amount			Discount			Loan
	Receivable						Receivable
	(In Thousands)
Amounts recorded in 2005 acquisitions:
Genoa	$	1,547		$	826		$	721
ComBanc		3,387			1,362			2,025
Total acquired		4,934			2,188			2,746
Principal payments received		(139	)		−			(139	)
Loans charged off		(169	)		(169	)		−
Loan accretion recorded		−			−			−
Balance at December 31, 2005	$	4,626		$	2,019		$	2,607
Principal payments received		(129	)		−			(129	)
Loans charged off		(198	)		(198	)		−
Additional provision for loan loss		(189	)		−			(189	)
Loan accretion recorded		−			(138	)		138
Balance at December 31, 2006	$	4,110		$	1,683		$	2,427

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

Interest income on loans is as follows:

	Years Ended December 31,
	2006		2005		2004
	(In Thousands)
Commercial and non-residential real-estate loans	$	63,140	$	49,869	$	34,506
Mortgage loans		10,526		9,549		6,272
Other loans		12,547		10,290		6,567
Totals	$	86,213	$	69,708	$	47,345

There are no industry concentrations (exceeding 10% of gross loans) in First Federal’s non-residential real estate and commercial loan portfolios. The Company’s loans receivable are primarily to borrowers in the Northwest Ohio, Northeast Indiana or Southeast Michigan areas.

Loans to executive officers and directors and their affiliates during 2006 were as follows (in thousands):

Beginning balance	$	3,213
New loans		5,204
Effect of change in composition of related parties		(2	)
Repayments		(4,077	)
Ending balance	$	4,338

All such loans are paying as agreed.

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

8. MORTGAGE BANKING

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

	Years Ended December 31,
	2006			2005			2004
	(In Thousands)
Gain from sale of mortgage loans	$	2,424		$	2,291		$	2,350
Mortgage loan servicing revenue (expense):
Mortgage loan servicing revenue		1,575			1,421			1,126
Amortization of mortgage servicing rights		(612	)		(784	)		(704	)
Mortgage servicing rights valuation adjustments		2			417			(1	)
		966			1,054			421
Net revenue from sale and servicing of mortgage loans	$	3,389		$	3,345		$	2,771

The unpaid principal balance of residential mortgage loans serviced for third parties was $665.4 million at December 31, 2006 compared to $602.5 million at December 31, 2005.

Activity for capitalized mortgage servicing rights and the related valuation allowance follows:

	Years Ended December 31,
	2006			2005			2004
	(In Thousands)
Mortgage servicing assets:
Balance at beginning of period	$	5,145		$	4,205		$	4,037
Loans sold, servicing retained		1,076			906			872
NBV of servicing assets acquired		-			926			−
Impairment deemed permanent		-			(108	)		−
Amortization		(612	)		(784	)		(704	)
Carrying value before valuation allowance at end of period		5,609			5,145			4,205
Valuation allowance:
Balance at beginning of period		(82	)		(607	)		(606	)
Impairment recovery (charges)		2			417			(1	)
Impairment deemed permanent		-			108			−
Balance at end of period		(80	)		(82	)		(607	)
Net carrying value of MSRs at end of period	$	5,529		$	5,063		$	3,598
Fair value of MSRs at end of period	$	6,684		$	6,471		$	3,743

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

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

The Company’s servicing portfolio is comprised of the following:

	December 31,
	2006				2005
	Number of		Principal		Number of		Principal
Investor	Loans		Outstanding		Loans		Outstanding
	(Dollars In Thousands)
Fannie Mae		724	$	52,807		601	$	39,094
Freddie Mac		7,345		612,024		6,858		562,199
Other		28		608		52		1,218
Totals		8,097	$	665,439		7,511	$	602,511

Significant assumptions at December 31, 2006 used in determining the value of MSRs include a weighted average prepayment rate of 230 PSA and a weighted average discount rate of 8.90%.

A sensitivity analysis of the current fair value to immediate 10% and 20% adverse changes in those assumptions as of December 31, 2006 is presented below. These sensitivities are hypothetical. Changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the MSR is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, changes in mortgage interest rates, which drive changes in prepayment rate estimates, could result in changes in the discount rates), which might magnify or counteract the sensitivities.

	10% Adverse		20% Adverse
	Change		Change
	(In Thousands)
Assumption:
Decline in fair value from increase in prepayment rate	$	287	$	551
Declines in fair value from increase in discount rate		190		370

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

9. PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows:

	December 31,
	2006		2005
	(In Thousands)
Cost:
Land	$	5,337	$	5,071
Buildings		28,663		25,764
Leasehold improvements		416		416
Furniture, fixtures and equipment		17,313		15,649
Construction in process		896		1,020
		52,625		47,920
Less allowances for depreciation and amortization		17,726		15,491
	$	34,899	$	32,429

Depreciation expense was $2.7 million, $2.4 million and $1.8 million for the years ended December 31, 2006, 2005 and 2004 respectively.

The Company has entered into commitments to construct an operations center with a total estimated cost of $8.5 million. At December 31, 2006, $510,000 of costs were incurred and included in the construction in process and $282,000 of costs were incurred for the acquisition of land associated with this project.

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

10. DEPOSITS

The following schedule sets forth interest expense by type of savings deposit:

	Years Ended December 31,
	2006			2005			2004
	(In Thousands)
Checking and money market accounts	$	7,052		$	3,264		$	1,722
Savings accounts		276			239			134
Certificates of deposit		25,974			17,119			11,100
		33,302			20,622			12,956
Less interest capitalized		(29	)		(7	)		(6	)
Totals	$	33,273		$	20,615		$	12,950

At December 31, 2006, accrued interest payable on deposit accounts amounted to $1,867,000, which was comprised of $1,651,000 and $216,000 for certificates of deposit and checking and money market accounts respectively.

A summary of deposit balances is as follows:

	December 31,
	2006		2005
	(In Thousands)
Non-interest bearing checking accounts	$	106,328	$	103,498
Interest bearing checking and money market accounts		306,003		276,558
Savings deposits		74,491		82,766
Retail certificates of deposit less than $100,000		493,594		408,384
Retail certificates of deposit greater than $100,000		140,392		161,305
Brokered or national certificates of deposit		17,637		36,990
	$	1,138,445	$	1,069,501

Scheduled maturities of certificates of deposit at December 31, 2006 are as follows (in thousands):

2007	$	571,964
2008		70,242
2009		5,513
2010		2,258
2011		1,189
2012 and thereafter		457
Total	$	651,623

At December 31, 2006 and 2005, deposits of $274.1 million and $303.3 million, respectively, were in excess of the $100,000 Federal Deposit Insurance Corporation insurance limit. At December 31, 2006 and 2005, $39.1 million and $42.4 million, respectively, in investment securities were pledged as collateral against public deposits for certificates in excess of $100,000 and an additional $39.7 million and $38.7 million of securities were pledged at December 31, 2006 and December 31, 2005, respectively as collateral against deposits from private entities in excess of $100,000. Also, First Federal holds $10.8 million in depository bonds at December 31, 2006 with governmental entities, which can be pledged as collateral against public deposits in excess of $100,000.

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

11. ADVANCES FROM FEDERAL HOME LOAN BANK

First Federal has the ability to borrow funds from the FHLB. First Federal pledges its single-family residential mortgage loan portfolio, certain investment securities and certain multi-family or non-residential real estate loans as security for these advances. Advances secured by investment securities must have collateral of at least 105% of the borrowing. Advances secured by residential mortgages must have collateral of at least 125% of the borrowings. Advances secured by multifamily or non-residential real estate loans securities must have 300% collateral coverage. The total level of borrowing is also limited to 50% of total assets and at least 50% of the borrowings must be secured by either one-to-four family residential mortgages or investment securities. Total loans pledged to the FHLB at December 31, 2006 and December 31, 2005 were $472.2 million and $465.9 million respectively. First Federal has a maximum potential to acquire advances of approximately $212.9 million from the FHLB at December 31, 2006.

At year-end, advances from the FHLB were as follows:

Principal Terms	Advance Amount			Range of Maturities		Weighted Average Interest Rate
	(In Thousands)
December 31, 2006
Short-term borrowings		$	33,100		Overnight		4.10	%
Single maturity fixed rate advances			10,000		December 2008		4.94	%
Single maturity LIBOR based advances			45,000		March 2011 to November 2011		5.36	%
Putable advances			45,000		September 2010 to November 2013		5.25	%
Strike-rate advances			27,000		March 2011 to February 2013		4.18	%
Amortizable mortgage advances			2,128		March 2008 to December 2015		3.28	%
		$	162,228
December 31, 2005
Short-term borrowings		$	28,500		Overnight		4.12	%
Single maturity fixed rate advances			10,000		December 2008		4.94	%
Putable advances			111,000		December 2008 to November 2013		4.77	%
Strike-rate advances			27,000		March 2011 to February 2013		4.18	%
Amortizable mortgage advances			4,460		March 2008 to December 2015		3.94	%
		$	180,960

Putable advances are callable at the option of the FHLB on a quarterly basis. Strike rate advances are callable at the option of the FHLB only when three-month LIBOR rates exceed the agreed upon strike rate in the advance contract. Such strike rates range from 7.5% to 8.0%. When called, First Defiance has the option of paying off these advances, or converting them to variable rate advances at the three month LIBOR rate. First Defiance has three advances totaling $45 million outstanding at December 31, 2006 that were converted from callable advances. These advances can be paid in full without penalty at any quarterly repricing date.

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

Estimated future minimum payments by fiscal year based on maturity date and current interest rates are as follows

(in thousands):

2007	$	7,420
2008		16,780
2009		6,065
2010		15,869
2011		67,384
Thereafter		45,931
Total minimum payments		159,449
Less amounts representing interest		30,357
Totals	$	129,092

First Defiance also utilizes short-term advances from the FHLB to meet cash flow needs and for short-term investment purposes. First Defiance borrows short-term advances under a variety of programs at FHLB. At December 31, 2006, $33.1 million was outstanding under First Defiance’s REPO Advance line of credit. The total available under the REPO Advance line is $100.0 million. In addition, First Defiance has $15.0 million available under a Cash Management Advance line of credit and there were no borrowings against that line at December 31, 2006 or 2005. Amounts are generally borrowed under the Cash Management and REPO lines on an overnight basis. Amounts available under the various lines are also subject to the Company’s overall borrowing limitations. Information concerning short-term advances is summarized as follows:

	Years Ended December 31,
	2006			2005
	(Dollars In Thousands)
Average daily balance during the year	$	40,104		$	14,313
Maximum month-end balance during the year		57,500			45,000
Average interest rate during the year		5.10	%		3.79	%

12. JUNIOR SUBORDINATED DEBENTURES OWED TO UNCONSOLIDATED SUBSIDIARY TRUST

As of December 31, 2006, the Company sponsored an affiliated trust, First Defiance Statutory Trust I (the Trust Affiliate), that issued $20 million of Guaranteed Capital Trust Securities (Trust Preferred Securities). In connection with this transaction, the Company issued $20.6 million of Junior Subordinated Deferrable Interest Debentures (Subordinated Debentures) to the Trust Affiliate. The Trust Affiliate 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 the Trust Affiliate are the sole assets of the trust.

Distributions on the Trust Preferred Securities issued by the Trust Affiliate are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 1.38%. The Coupon rate payable on the Trust Preferred Securities issued by the Trust was 6.74% and 5.87% as of December 31, 2006 and 2005 respectively.

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

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

13. NOTES PAYABLE AND OTHER SHORT-TERM BORROWINGS

Total short term borrowings, revolving and term debt is summarized as follows:

	Years Ended December 31,
	2006			2005
	(Dollars In Thousands)
Securities sold under agreement to repurchase
Amounts outstanding at year-end	$	30,424		$	25,748
Year-end interest rate		2.98	%		2.68	%
Average daily balance during year		20,318			17,718
Maximum month-end balance during the year		30,424			25,748
Average interest rate during the year		2.84	%		2.18	%
Revolving line of credit facilities to financial institutions
Average daily balance during year	$	80		$	301
Maximum month-end balance during the year		−			43,799
Average interest rate during the year		5.13	%		2.25	%

As of December 31, 2006, First Defiance had the following line of credit facilities available for short-term borrowing purposes:

A $15 million revolving line of credit facility with a financial institution. The facility is unsecured and has an interest rate of fed funds rate plus 0.45%. There were no amounts outstanding on the line at December 31, 2006 or 2005. The maximum borrowed at any point in time under the line was $0 and $4.0 million in 2006 and 2005, respectively. The average balance outstanding for the year was $0 and $67,000 in 2006 and 2005, respectively.

A $20 million fed funds line of credit with a financial institution. The line is unsecured and has an interest rate of the institution’s fed funds rate. There were no amounts outstanding on the line at December 31, 2006 and 2005. The maximum borrowed at any point in time under the line was $20.0 million in both 2006 and 2005, and the average balance outstanding was $80,000 and $554,000 in 2006 and 2005, respectively.

A $15 million fed funds line of credit with a financial institution. The line is unsecured and has an interest rate of the institution’s fed funds rate. There were no amounts outstanding on the line at December 31, 2006. This line of credit was established in 2006 and was not used.

A $5.0 million revolving line of credit with a financial institution. There was no amount outstanding on the line at December 31, 2006 and 2005. The line is secured by the stock of First Federal Bank and the interest rate is either the lender’s prime rate or LIBOR plus 1.75%, whichever is selected by First Defiance. The maximum borrowed at any point in time under the line was $0 and $3.0 million in 2006 and 2005, and the average balance outstanding was $0 and $1.3 million in 2006 and 2005, respectively.

14. OTHER NON-INTEREST EXPENSE

The following is a summary of other non-interest expense:

	Years Ended December 31,
	2006		2005		2004
	(In Thousands)
Legal and other professional fees	$	1,732	$	1,366	$	1,343
Marketing		1,330		1,095		592
State franchise taxes		1,288		1,285		868
Printing and office supplies		879		745		577
Postage		781		645		422
Amortization of intangibles		719		755		110
Other		4,166		3,231		2,282
Total other non-interest expense	$	10,895	$	9,122	$	6,194

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

15. POSTRETIREMENT BENEFITS

First Defiance sponsors a defined benefit postretirement plan that is intended to supplement Medicare coverage for certain retirees who meet minimum age requirements. First Federal employees who retired prior to April 1, 1997 who completed 20 years of service after age 40 receive full medical coverage at no cost. Such coverage continues for surviving spouses of those participants for one year, after which coverage may be continued provided the spouse pays 50% of the average cost. First Federal employees retiring after April 1, 1997 are provided medical benefits at a cost based on their combined age and years of service at retirement. Surviving spouses are also eligible for continued coverage after the retiree is deceased at a subsidy level that is 10% less than what the retiree is eligible for. First Federal employees retiring before July 1, 1997 receive dental and vision care in addition to medical coverage. First Federal employees who retire after July 1, 1997 are not eligible for dental or vision care, but those retirees and their spouses each receive up to $200 annually in a medical spending account. Funds in that account may be used for payment of uninsured medical expenses.

First Federal employees who were born after December 31, 1950 are not eligible for the medical coverage described above at retirement. Rather, a medical spending account of up to $10,000 (based on the participant’s age and years of service) will be established to reimburse medical expenses for those individuals. First Insurance employees who were born before December 31, 1950 can continue coverage until they reach age 65, or in lieu of continuing coverage, can elect the medical spending account option, subject to eligibility requirements. Employees hired or acquired after January 1, 2003 are eligible only for the medical spending account option.

Adoption of Statement 158

On December 31, 2006, the Company adopted the recognition and disclosure provisions of FASB Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No 87, 88, 106 and 132(R) (“Statement 158”). Statement 158 required the Company to recognize the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of its defined benefit postretirement medical plan in the December 31, 2006 statement of financial position, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The adjustment to accumulated other comprehensive income at adoption represents the net unrecognized actuarial losses and unrecognized prior service costs, which were previously netted against the plan’s funded status in the Company’s statement of financial position pursuant to the provisions of Statement 106. These amounts will be subsequently recognized as net periodic pension cost pursuant to the Company’s historical accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic pension cost in the same periods will be recognized as a component of other comprehensive income. Those amounts will be subsequently recognized as a component of net periodic cost on the same basis as the amounts recognized in accumulated other comprehensive income at adoption of Statement 158.

The incremental effects of adopting the provisions of Statement 158 on the Company’s statement of financial position at December 31, 2006 are presented in the following table. The adoption of Statement 158 had no effect on the Company’s consolidated statement of income for the year ended December 31, 2006, or for any prior period presented, and it will not effect the Company’s operating results in future periods.

	At December 31, 2006
	Prior to Adopting Statement 158			Effect of Adopting Statement 158			As Reported at December 31, 2006
	(In Thousands)
Accrued Postretirement Liability	$	1,232		$	886		$	2,118
Deferred income tax liability		(1,605	)		310			(1,295	)
Accumulated other comprehensive income (loss)		(95	)		(576	)		(671	)

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

Included in accumulated other comprehensive income at December 31, 2006 are the following amounts that have not yet been recognized in net periodic pension cost: unrecognized prior service costs of $69,000 ($45,000 net of tax) and unrecognized actuarial losses of $817,000 ($531,000 net of tax). The prior service cost and actuarial loss included in other comprehensive income and expected to be recognized in net postretirement benefit cost during the fiscal year-ended December 31, 2007 is $8,000 ($5,000 net of tax) and $30,000 ($19,000 net of tax), respectively.

Reconciliation of Funded Status and Accumulated Benefit Obligation

The plan is not currently funded. The following table summarizes benefit obligation and plan asset activity for the plan measured as of December 31 each year:

	December 31,
	2006			2005
	(In Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year	$	1,581		$	1,630
Service cost		40			49
Interest cost		107			97
Participant contribution		38			34
Plan amendments		-			38
Actuarial (gains)/losses		524			(141	)
Benefits paid		(172	)		(126	)
Benefit obligation at end of year		2,118			1,581
Change in fair value of plan assets:
Balance at beginning of year		-			-
Employer contribution		134			92
Participant contribution		38			34
Benefits paid		(172	)		(126	)
Balance at end of year		-			-
Funded status at end of year	$	(2,118	)	$	(1,581	)

At December 31, 2005, unrecognized prior service cost and net losses totaled $77,000 and $317,000 respectively.

Net periodic postretirement benefit cost includes the following components:

	Years Ended December 31,
	2006		2005		2004
	(In Thousands)
Service cost-benefits attributable to service during the period	$	40	$	49	$	48
Interest cost on accumulated postretirement benefit obligation		107		97		97
Net amortization and deferral		32		25		23
Net periodic postretirement benefit cost	$	179	$	171	$	168

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

The following assumptions were used in determining the components of the postretirement benefit obligation:

	2006			2005
Weighted average discount rates:
Used to determine benefit obligations at December 31		5.75	%		5.75	%
Used to determine net periodic postretirement benefit cost for years ended December 31		5.75	%		6.00	%
Assumed health care cost trend rates at December 31:
Health care cost trend rate assumed for next year		10.00	%		8.00	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)		4.00	%		4.00	%
Year that rate reaches ultimate trend rate		2019			2014

The following benefits are expected to be paid over the next five years and in aggregate for the next five years thereafter. Because the plan is unfunded, the expected net benefits to be paid and the estimated Company contributions are the same amount. The Company has elected to opt for the Federal subsidy approach in lieu of coverage under Medicare Part D. These amounts include an estimate of that tax-free Federal subsidy:

	Before Reflecting Medicate Part D Subsidy		Impact of Medicare Part D Subsidy			After Reflecting Medicare Part D Subsidy
	(In Thousands)
2007	$	118	$	(22	)	$	96
2008		130		(25	)		105
2009		140		(29	)		111
2010		154		(31	)		123
2011		165		(34	)		131
2012 through 2016		1,014		(257	)		757

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effect (in thousands):

	One-Percentage-Point Increase				One-Percentage-Point Decrease
	Year Ended December 31				Year Ended December 31
	2006		2005		2006			2005
	(In Thousands)
Effect on total of service and interest cost	$	25	$	19	$	(21	)	$	(16	)
Effect on postretirement benefit obligation		262		197		(221	)		(166	)

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2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

16. REGULATORY MATTERS

First Federal is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, First Federal must meet specific capital guidelines that involve quantitative measures of First Federal’s assets, liabilities and certain off -balance-sheet items as calculated under regulatory accounting practices. First Federal’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require First Federal to maintain minimum amounts and ratios of Tier I and total capital to risk-weighted assets and of Tier I capital to average assets. As of December 31, 2006 and 2005, First Federal meets all capital adequacy requirements to which it is subject and the most recent notification from the Office of Thrift Supervision (OTS) categorized First Federal as well capitalized under the regulatory framework. There are no conditions or events since these notifications that management believes have changed any of the well-capitalized categorizations of First Federal. The following schedule presents First Federal’s regulatory capital ratios:

						Required for Capital					Required to be
	Actual					Adequacy Purposes					Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2006	(Dollars in Thousands)
Tangible Capital	$	140,017		9.42	%	$	22,293		1.50	%		N/A		N/A
Tier 1 (Core) Capital		140,017		9.42	%		59,448		4.00	%	$	74,311		5.00	%
Tier 1 Capital to risk-weighted assets		140,017		10.80	%		51,859		4.00	%		77,787		6.00	%
Risk-Based Capital		153,596		11.85	%		103,716		8.00	%		129,645		10.00	%
As of December 31, 2005
Tangible Capital	$	120,072		8.47	%	$	21,276		1.50	%		N/A		N/A
Tier 1 (Core) Capital		120,072		8.47	%		56,736		4.00	%	$	70,920		5.00	%
Tier 1 Capital to risk-weighted assets		120,072		10.63	%		45,161		4.00	%		67,742		6.00	%
Risk-Based Capital		133,679		11.84	%		90,323		8.00	%		112,904		10.00	%

First Defiance is a unitary thrift holding company and is regulated by the OTS. The OTS does not have defined capital requirements for unitary thrift holding companies.

64

2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

17. INCOME TAXES

The components of income tax expense are as follows:

	Years Ended December 31,
	2006		2005		2004
	(In Thousands)
Current:
Federal	$	6,579	$	5,367	$	4,677
State and local		2		7		35
Deferred		870		479		90
	$	7,451	$	5,853	$	4,802

The provision for income taxes differs from that computed at the statutory corporate tax rate as follows:

	Years Ended December 31,
	2006			2005			2004
	(In Thousands)
Tax expense at statutory rate (35%)	$	8,068		$	6,238		$	5,457
Increases (decreases) in taxes from:
ESOP adjustments		163			193			83
State income tax - net of federal tax benefit		-			-			23
Tax exempt interest income		(414	)		(394	)		(498	)
Bank owned life insurance		(367	)		(268	)		(332	)
Stock option expense under FAS 123(R)		90			-			-
Other		(89	)		84			69
Totals	$	7,451		$	5,853		$	4,802

Deferred federal income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

65

2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

Significant components of First Defiance’s deferred federal income tax assets and liabilities are as follows:

	December 31,
	2006			2005
	(In Thousands)
Deferred federal income tax assets:
Allowance for loan losses	$	4,584		$	4,565
Postretirement benefit costs		741			415
Deferred compensation		669			547
Impaired loans		589			706
Accrued vacation		291			259
Deferred loan origination fees and costs		134			51
Employee Stock Ownership Plan		123			185
Deposit and FHLB advance mark to market		59			150
Net unrealized losses on available-for-sale securities		52			13
Other		143			296
Total deferred federal income tax assets		7,385			7,187
Deferred federal income tax liabilities:
FHLB stock dividends		2,949			2,585
Goodwill		1,484			1,084
Mortgage servicing rights		1,478			1,207
Fixed assets		1,321			1,277
Core deposit intangible		1,039			1,265
Loan mark to market		315			564
Other		94			-
Total deferred federal income tax liabilities		8,680			7,982
Net deferred federal income tax liability	$	(1,295	)	$	(795	)

The realization of the Company’s deferred tax assets is dependent upon the Company’s ability to generate taxable income in future periods and the reversal of deferred tax liabilities during the same period. The Company has evaluated the available evidence supporting the realization of its deferred tax assets and determined it is more likely than not that the assets will be realized and thus no valuation allowance was required at December 31, 2006.

Retained earnings at December 31, 2006 include approximately $11.0 million for which no tax provision for federal income taxes has been made. This amount represents the tax bad debt reserve at December 31, 1987, which is the end of the Company’s base year for purposes of calculating the bad debt deduction for tax purposes. If this portion of retained earnings is used in the future for any purpose other than to absorb bad debts, the amount used will be added to future taxable income. The unrecorded deferred tax liability on the above amount at December 31, 2006 was approximately $3.85 million.

66

2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

18. EMPLOYEE BENEFIT PLANS

ESOP Plan

First Defiance has an Employee Stock Ownership Plan (ESOP) covering all employees of First Defiance age 21 or older who have at least one year of credited service. Contributions to the ESOP are made by First Defiance and are determined by First Defiance’s Board of Directors at their discretion. The contributions may be made in the form of cash or First Defiance common stock. The annual contributions may not be greater than the amount deductible for federal income tax purposes and cannot cause First Federal to violate regulatory capital requirements.

To fund the plan, the ESOP borrowed funds from First Defiance for the purpose of purchasing shares of First Defiance common stock. The ESOP acquired a total of 863,596 shares in 1993 and 1995. The loan outstanding at December 31, 2006 and 2005 was $1,134,000 and $1,722,000 respectively. Principal and interest payments on the loan are due in equal quarterly installments through June of 2008. The loan is collateralized by the shares of First Defiance’s common stock and is repaid by the ESOP with funds from the Company’s contributions to the ESOP, dividends on unallocated shares and earnings on ESOP assets.

As principal and interest payments on the loan are paid, shares are released from collateral and committed for allocation to active employees, based on the proportion of debt service paid in the year. Shares held by the ESOP which have not been released for allocation are reported as stock acquired by the ESOP plan in the statement of financial condition. As shares are released, First Defiance records compensation expense equal to the average fair value of the shares over the period in which the shares were earned. Also, the shares released for allocation are included in the average shares outstanding for earnings per share computations. Dividends on allocated shares are recorded as a reduction of retained earnings and dividends on unallocated shares are recorded as additional ESOP expense. ESOP compensation expense was $891,000, $976,000, and $956,000, for 2006, 2005 and 2004, respectively. Shares held by the ESOP at December 31 were as follows:

	Year Ended December 31, 2006									Year Ended December 31, 2005
	Allocated			Unallocated			Total			Allocated			Unallocated			Total
Beginning Balance		474,200			132,408			606,608			435,174			181,199			616,373
Allocation of shares to participants		48,790			(48,790	)		-			48,791			(48,791	)		-
Distribution of shares to former participants		(24,741	)		-			(24,741	)		(9,765	)		-			(9,765	)
Ending Balance		498,249			83,618			581,867			474,200			132,408			606,608

Of the 83,618 unallocated shares at December 31, 2006, 12,197 were released during the 2006 fourth quarter for allocation in 2007. The 71,421 unreleased shares have a fair value of $2.2 million at December 31, 2006, while the fair value of 120,211 unreleased shares at December 31, 2005 was $3.3 million. A total of $553,000 and $532,000 of dividends in 2006 and 2005, respectively, were used for debt service.

401(k) Plan

Employees of First Defiance are eligible to participate in the First Defiance Financial Corp. 401(k) Employee Savings Plan (First Defiance 401(k)) if they meet certain age and service requirements. Under the First Defiance 401(k), First Defiance matches 50% of the participants’ contributions, to a maximum of 3% of compensation. The First Defiance 401(k) also provides for a discretionary First Defiance contribution in addition to the First Defiance matching contribution. First Defiance matching contributions totaled $355,000, $333,000 and $293,000 for the years ended December 31, 2006, 2005 and 2004 respectively. There were no discretionary contributions in any of those years.

67

2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

19. STOCK OPTION PLANS

First Defiance has established incentive stock option plans for its directors and its employees and has reserved 1,727,485 shares of common stock for issuance under the plans. A total of 1,467,204 shares are reserved for employees and 260,281 shares are reserved for directors. As of December 31, 2006, 404,154 options (394,439 for employees and 9,715 for directors) have been granted and remain outstanding at option prices based on the market value of the underlying shares on the date the options were granted. There are 20,836 options granted under the 1993 plan that are currently exercisable, 82,218 options granted under the 1996 plan that vest at 20% per year beginning in 1997 of which 77,776 are fully vested and currently exercisable, 216,300 options granted under the 2001 plan which vest at 20% per year beginning in 2002, of which 157,030 are fully vested and currently exercisable and 84,800 options granted under the 2005 plan which vest at 20% per year beginning in 2006, of which 7,160 are fully vested and currently exercisable. All options expire ten years from date of grant. Vested options of retirees expire on the earlier of the scheduled expiration date or five years after the retirement date for the 1993, 2001 and 2005 plans and on the earlier of the scheduled expiration date or twelve months after the retirement date for the 1996 plan.

The following table summarizes stock option activity for 2006:

	Options			Weighted Average
	Outstanding			Option Prices
Balance at January 1, 2006		569,099		$	16.00
Granted		50,250			26.58
Exercised		(203,595	)		11.54
Forfeited		(11,600	)		23.26
Balance at December 31, 2006		404,154		$	19.36

The weighted-average fair value of options granted during the years ended December 31, 2006, 2005 and 2004 were $5.96, $5.67 and $6.85 respectively.

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

	Year ended December 31,
	2006		2005
Proceeds of options exercised	$	2,348	$	1,561
Related tax benefit recognized		481		261
Intrinsic value of options exercised		3,092		1,906

As of December 31, 2006 and 2005, 275,400 and 314,050 shares, respectively, were available for grant under the Company’s stock option plans.

The aggregate intrinsic value of all options outstanding at December 31, 2006 was $4.40 million. The aggregate intrinsic value of all options that were exercisable at December 31, 2006 was $3.73 million.

Information about stock options outstanding is as follows:

	Outstanding						Exercisable
Range of Exercise Prices	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Shares		Weighted Average Exercise Price
$10.52 - $12.99		26,000	$	11.54		2.69		26,000	$	11.54
$13.00 - $17.99		174,951		14.20		3.34		174,951		14.20
$18.00 - $23.99		48,150		19.41		6.16		28,650		19.36
$24.00 - $28.75		155,053		26.11		8.34		33,201		26.61
Total at December 31, 2006		404,154	$	19.36		5.56		262,802	$	16.03

68

2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

20. PARENT COMPANY AND REGULATORY RESTRICTIONS

Dividends paid by First Federal to First Defiance are subject to various regulatory restrictions. In accordance with these restrictions, First Federal must submit a request to the Office of Thrift Supervision to initiate dividend payments.

Condensed parent company financial statements, which include transactions with subsidiaries, follow:

	December 31,
Statements of Financial Condition	2006		2005
	(In Thousands)
Assets
Cash and cash equivalents	$	1,317	$	9,406
Investment securities, available for sale, carried at fair value		1,916		1,494
Investment in subsidiaries		177,691		160,035
Loan receivable from First Defiance Employee Stock Ownership Plan		1,134		1,722
Other assets		667		706
Total assets	$	182,725	$	173,363
Liabilities and stockholders’ equity:
Subordinated debentures	$	20,619	$	20,619
Accrued liabilities		2,281		1,528
Stockholders’ equity		159,825		151,216
Total liabilities and stockholders’ equity	$	182,725	$	173,363

	Years Ended December 31,
Statements of Income	2006			2005			2004
	(In Thousands)
Dividends from subsidiaries	$	1,000		$	34,415		$	5,500
Interest on loan to ESOP	$	119		$	169		$	214
Interest expense		(1,310	)		(275	)		(3	)
Other income		140			102			45
Noninterest expense		(653	)		(637	)		(470	)
Loss before income taxes and equity in earnings of subsidiaries		(704	)		33,774			5,286
Income tax (credit)		(577	)		(212	)		(56	)
Loss before equity in earnings of subsidiaries		(127	)		33,986			5,342
Undistributed equity in (distributions in excess of) earnings of subsidiaries		15,727			(22,016	)		5,454
Net income	$	15,600		$	11,970		$	10,796

69

2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

	Years Ended December 31,
Statements of Cash Flows	2006			2005			2004
	(In Thousands)
Operating activities:
Net income	$	15,600		$	11,970		$	10,796
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Distribution in excess of (undistributed equity in) earnings of subsidiaries		(15,727	)		22,016			(5,454	)
Security impairment loss		75			-			-
Change in other assets and liabilities		695			232			699
Net cash provided by operating activities		643			34,218			6,041
Investing activities:
Investment in unconsolidated trust subsidiary		-			(619	)		-
Cash paid for ComBanc, Inc.,		-			(18,693	)		-
Cash paid for Genoa Savings and Loan Company		-			(10,869	)		-
Principal payments received on ESOP loan		588			552			505
Purchase of available-for-sale securities		(500	)		(500	)		-
Maturities of available-for-sale securities		35			-			-
Sale of available-for-sale securities		-			70			-
Net cash (used in) provided by investing activities		123			(30,059	)		505
Financing activities:
Proceeds from issuance of subordinated debt securities		-			20,619			-
Capital contribution to subsidiary		(1,000	)		(10,000	)		-
Stock options exercised		1,257			1,561			1,556
Excess tax benefit from exercise of stock options		481			-			-
Purchase of common stock for treasury		(2,852	)		(1,547	)		(4,691	)
Cash dividends paid		(6,741	)		(5,852	)		(5,011	)
Net cash used in financing activities		(8,855	)		4,781			(8,146	)
Net increase (decrease) in cash and cash equivalents		(8,089	)		8,940			(1,600	)
Cash and cash equivalents at beginning of year		9,406			466			2,066
Cash and cash equivalents at end of year	$	1,317		$	9,406		$	466

70

2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

21. FAIR VALUE STATEMENT OF CONSOLIDATED FINANCIAL CONDITION

The following is a comparative condensed consolidated statement of financial condition based on carrying amount and estimated fair values of financial instruments as of December 31, 2006 and 2005. Statement of Financial Accounting Standards (SFAS) No. 107, Disclosures about Fair Value of Financial Instruments excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of First Defiance Financial Corp.

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, warehouse and term notes payable and advance payments by borrowers for taxes and insurance, as a result of their short-term nature, is considered to be equal to fair value.

For investment securities, fair value has been based or current market quotations. If market prices are not available, fair value has been estimated based upon the quoted price of similar instruments.

The fair value of loans which reprice within 90 days is equal to their carrying amount. For other loans, the estimated fair value is calculated based on discounted cash flow analysis, using interest rates currently being offered for loans with similar terms. The allowance for loan losses is considered to be a reasonable adjustment for credit risk.

SFAS No. 107 requires that the fair value of demand, savings, NOW and certain money market accounts be equal to their carrying amount. The Company believes that the fair value of these deposits may be greater or less than that prescribed by SFAS No. 107.

The carrying value of Subordinated Debentures and deposits with fixed maturities is estimated based on interest rates currently being offered on instruments with similar characteristics and maturities. FHLB advances with maturities greater than 90 days are valued based on discounted cash flow analysis, using interest rates currently being quoted for similar characteristics and maturities. The cost or value of any call or put options is based on the estimated cost to settle the option at December 31, 2006.

	December 31, 2006				December 31, 2005
	Carrying		Estimated		Carrying		Estimated
	Value		Fair Values		Value		Fair Values
	(In Thousands)
Assets:
Cash and cash equivalents	$	50,023	$	50,023	$	49,256	$	49,256
Investment securities		112,123		112,174		114,854		114,924
Loans, net, including loans held for sale		1,229,736		1,223,886		1,169,763		1,165,508
		1,391,882	$	1,386,083		1,333,873	$	1,329,688
Other assets		135,997				127,209
Total assets	$	1,527,879			$	1,461,082
Liabilities and stockholders’ equity:
Deposits	$	1,138,445	$	1,137,904	$	1,069,501	$	1,067,279
Advances from Federal Home Loan Bank		162,228		160,403		180,960		179,435
Subordinated debentures		20,619		19,967		20,619		20,619
Short term borrowings and other interest bearing liabilities		30,424		30,424		25,748		25,748
Advance payments by borrowers for taxes and insurance		667		667		605		605
		1,352,383	$	1,349,365		1,297,433	$	1,293,686
Other liabilities		15,671				12,433
Total liabilities		1,368,054				1,309,866
Stockholders’ equity		159,825				151,216
Total liabilities and stockholders’ equity	$	1,527,879			$	1,461,082

71

2006 ANNUAL REPORT FIRST DEFIANCE FINANCIAL CORP.

22. QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the quarterly consolidated results of operations:

	Three Months Ended
	March 31*		June 30*		September 30		December 31
	(In Thousands, Except Per Share Amounts)
2006
Interest income	$	21,709	$	22,953	$	24,092	$	24,311
Interest expense		9,400		10,694		11,883		12,066
Net interest income		12,309		12,259		12,209		12,245
Provision for loan losses		383		683		373		317
Net interest income after provision for loan losses		11,926		11,576		11,836		11,928
Gain (loss) on sale or write-down of securities		-		-		-		(2	)
Noninterest income		4,515		5,127		5,060		4,924
Noninterest expense		10,742		10,795		11,091		11,211
Income before income taxes		5,699		5,908		5,805		5,639
Income taxes		1,848		1,955		1,982		1,666
Net income	$	3,851	$	3,953	$	3,823	$	3,973
Earnings per share:
Basic	$	0.55	$	0.56	$	0.54	$	0.56
Diluted	$	0.54	$	0.55	$	0.53	$	0.55
Average shares outstanding:
Basic		7,005		7,029		7,032		7,051
Diluted		7,182		7,162		7,146		7,168
2005
Interest income	$	16,436	$	18,669	$	19,932	$	21,137
Interest expense		5,826		6,816		7,715		8,535
Net interest income		10,610		11,853		12,217		12,602
Provision for loan losses		347		349		368		378
Net interest income after provision for loan losses		10,263		11,504		11,849		12,224
Gain on sale of securities		621		515		86		-
Noninterest income		3,640		3,365		3,930		3,768
Noninterest expense		10,244		12,518		10,496		10,684
Income before income taxes		4,280		2,866		5,369		5,308
Income taxes		1,409		838		1,742		1,864
Net income	$	2,871	$	2,028	$	3,627	$	3,444
Earnings per share:
Basic	$	0.43	$	0.30	$	0.53	$	0.50
Diluted	$	0.41	$	0.28	$	0.51	$	0.48
Average shares outstanding:
Basic		6,668		6,896		6,908		6,927
Diluted		6,945		7,119		7,159		7,161

*  - The significant increase in noninterest expense and resulting decline in net income for the quarters ended March 31 and June 30, 2005 was primarily due to $884,000 and $2.5 million in those quarters respectively of acquisition related charges associated with the previously disclosed 2005 acquisitions.

72

SHAREHOLDER INFORMATION

ANNUAL MEETING

The Annual Meeting of Shareholders of First Defiance Financial Corp. will be held on Tuesday, April 17, 2007 at 1:00 p.m. at the office of First Federal Bank, 601 Clinton Street, Defiance, Ohio 43512.

INVESTOR INFORMATION

Shareholders, investors and analysts interested in additional information about First Defiance Financial Corp. may contact John C. Wahl, Chief Financial Officer, at the corporate office, (419)782-5015.

FIRST DEFIANCE ON THE WEB

First Defiance Financial Corp. is located on the Internet at www.fdef.com

STOCK TRANSFER AGENT

Shareholders with questions concerning the transfer of shares, lost certificates, dividend payments, dividend reinvestment, receipt of multiple dividend checks, duplicate mailings or changes of address should contact:

Registrar and Transfer Company

First Defiance Financial Corp. Transfer Agent

10 Commerce Drive

Cranford, NJ 07016-3573

Telephone: 800-368-5948

SECURITIES LISTING

First Defiance Financial Corp. common stock trades on the National Market System of the NASDAQ Stock Market under the symbol FDEF.

As of March 2, 2007, there were approximately 2,075 stockholders of record and 7,155,562 shares outstanding.

PRICE RANGE

Year Ended December 31, 2006
	High		Low
First Quarter	$	28.88	$	25.39
Second Quarter	$	30.29	$	25.09
Third Quarter	$	28.69	$	25.18
Fourth Quarter	$	30.70	$	26.87

Year Ended December 31, 2005
	High		Low
First Quarter	$	29.90	$	26.00
Second Quarter	$	30.46	$	25.29
Third Quarter	$	31.44	$	26.21
Fourth Quarter	$	30.06	$	25.56

DIVIDENDS POLICY

Cash dividends on the common stock are declared quarterly and have been paid since First Defiance and its predecessor, First Federal Savings and Loan, went public in 1993. The company’s Board of Directors has increased the quarterly rate annually since 1993. The current annual dividend rate is $1.00 per share.

DIVIDEND REINVESTMENT PLAN

Shareholders may automatically reinvest dividends in additional First Defiance Financial Corp. common stock through the Dividend Reinvestment Plan, which also provides for purchase by voluntary cash contributions. For additional information, please contact the Registrar and Transfer Company at 800-368-5948.

AUDITORS

Crowe Chizek and Company

330 East Jefferson Boulevard

South Bend, Indiana 46624

GENERAL COUNSEL

Vorys, Sater, Seymour and Pease LLP

Suite 2100 Atrium Two

221 East Fourth Street

Cincinnati, Ohio 45201

First Defiance Financial Corp.

601 Clinton Street

Defiance, OH 43512

www.fdef.com

419-782-5015

First Federal Bank of the Midwest

601 Clinton Street

Defiance, OH 43512

www.fi rst-fed.com

419-782-5015

First Insurance & Investments

419 Fifth Street, Suite 1200

Defiance, OH 43512

www.fi rstii.com

419-784-5431

For investor relations information access www.fdef.com

EX-14

First Defiance Financial Corp. and Subsidiaries

Conflict of Interest/Code of Ethics Policy

February 20, 2006 

In order to protect First Defiance Financial Corp. (Company) and its subsidiaries from self-dealing, fraud and misconduct of directors, management and employees, the Board of Directors of the Company (Board) intends to hold its directors and employees accountable to the policies and procedures contained in this code of ethics and to require the reporting of any violations hereof. This code of ethics shall apply to the directors and employees of the Company and its wholly owned subsidiaries, First Federal Bank of the Midwest (First Federal) and First Insurance and Investments. References to the Company herein shall be deemed to include First Federal and First Insurance and Investments.

Conflicts of Interest

First Federal Bank employees should not represent the bank in any transaction where he/she has a material connection or a financial interest in the transaction. Examples of material connection include a member of the employee’s immediate family, which includes siblings, spouse, children, parents, or someone living in the same household as the employee, whether the transaction involves them as individuals or as principals in a firm doing business with First Federal Bank.

Employees should avoid taking part in transactions involving any of the above circumstances. By “transactions” we mean not only should a loan officer not originate, underwrite, or approve credit to him/herself or any member of the loan officers' immediate family, or to any business in which the loan officer has a personal financial or business interest or relationship, but also no employee should approve overdrafts, accept a check on uncollected funds, or waive loan or deposit fees in any transaction that they have a material connection or a financial interest as defined above. Refraining from this type of activity will avoid the appearance of a conflict of interest and impropriety. Another loan officer/employee must administer these types of transactions.

No loan officer shall extend credit to a client who is purchasing an item of personal or real property owned by the loan officer, their immediate family, or their related interest.

No employee of First Federal shall engage in the purchase of real or personal property that has become the possession of First Federal by repossession unless the item is purchased by normal bidding process. The Market Area President will establish the minimum bid.

Authorized Infringements to the Policy

If exceptions to the Board of Directors’ approved Loan Policy are properly documented and justified by the loan officer, and approved by the Market Area President, it shall not be considered a violation of policy.

All directors and employees are required to act in a responsible and respectable manner and to remain free of influences that may result in the loss of objectivity regarding business conducted with the Company's customers or the Company itself. Each director and employee must disclose and avoid any interest or activities involving another organization or individual that may result in a conflict of interest between the Company or its subsidiary and that organization or individual. This code of ethics has been adopted to assist all directors and employees in determining what is appropriate personal and professional conduct and reaffirms the Company's policies of ethical conduct. Violations of these rules, policies or procedures provide a basis for disciplinary action, which may include termination.

At the Company's discretion and judgment, the Company may revise, withdraw or add any rules, policies, or procedures at any time. Changes and amendments to this code of ethics will be approved by the Company's Board and disclosed or reported in compliance with any SEC or Nasdaq regulations. In addition to this code of ethics, directors and employees must also comply with the Company’s Commercial and Consumer Lending Policies, the Insider Trading Policy, the First Federal Employee Handbook, and Reg FD guidelines.

I. Confidential Information

All oral or written information concerning the Company, its customers, business partners, suppliers or others related to the Company that is acquired during the scope of an employee or director's employment or directorship and that is not otherwise available to the public constitutes confidential information. All directors and employees of the Company may use confidential information for the Company's business purposes only and may not use such information for personal, familial, or other gain. Confidential information may not be disclosed to others except when such disclosure is authorized by the Company or legally required.

In addition, although information may be available to the public, it may be deemed proprietary information that is the property of the Company. Proprietary information includes work product produced for the Company by directors or employees, customer and prospective customer names, presentation materials, marketing materials, product information and business methods or processes. Directors and employees have no personal right to such proprietary information during or after employment with the Company and may use such information for the Company's business purposes only.

II. Investments

Personal investments should be made with prudence, avoiding situations that may raise conflict of interest issues. Directors and employees should avoid substantial investments in the business of a customer or supplier unless there is no possibility for a conflict of interest. Confidential or proprietary information of the Company may not be used as a means for personal gain.

If directors or employees purchase Company stock, they are encouraged to hold such stock for long-term investment. The purchase or sale of Company stock based on insider information is prohibited. Other Company policies related to trading in Company stock are contained in the Company's Insider Trading Policy.

III. Gifts and Entertainment

Employees shall not (a) solicit anything of value from prospective or current customers, associates, or any other individual or business in return for any business, service or confidential information of the Company, or (b) accept anything of value (other than compensation paid by the Company) from prospective or current customers, associates, or any other individual or business either before or after a transaction is discussed or completed.

Unsolicited gifts from prospective or current customers, associates, or any other individual or business should be declined to avoid any appearance of impropriety with the following exceptions:

·   Business meals;

·   Holiday gifts;

·   Gifts based upon a personal relationship pre-dating your involvement with the Company;

·   Discounts or rebates generally available to the public.

Even if an unsolicited gift meets one of the above exceptions, directors and employees should consider the reasonableness of the gift’s value to avoid potential conflict of interest issues. Generally, if the value of the gift is greater than $100, it should be rejected.

Employees are expected to participate in entertainment and activities of reasonable cost to facilitate business. Tickets for sporting, cultural, or other events purchased by the Company are to be used for entertaining potential or current customers, suppliers, or others for business purposes. If it is determined prior to the event that the tickets will not be used for such business purposes, tickets may be offered to directors or employees.

IV. External Involvement

The Company encourages involvement in outside activities, including charitable and political functions. At no time, however, will directors or employees solicit the Company’s employees for political contributions or coerce or pressure others into contributing to any organization. Federal law prohibits First Federal from making contributions to political candidates. Outside activities must not give the perception of benefit to the Company or that connections with the Company are sought or desired.

Offers of directorship to any outside organization that has or desires a business relationship with the Company, or to any institution within the financial industry, must be reported to the Chairman of the Board of Director, or the corporate governance committee prior to acceptance.

Capitalizing on opportunities for personal gain or compensation outside of the Company for the performance of services for the Company is strictly prohibited. Employees must report any additional employment outside of the Company to such employee's immediate supervisor.

V. Conduct of Insiders

"Insider" is defined as a director, executive officer, or 10% shareholder of the Company. Insiders must take care that their conduct does not violate rules relating to self-dealing and personal gain. At no time are Insiders allowed to take advantage of their position in the Company for personal profit or influence over credit and other decisions with regard to their business or personal interest.

Decisions relating to the sale or purchase of Company assets and services must be made in the best interest of the Company, with no influence on insiders resulting from gifts, entertainment, or gratuities. All conduct of such business must be at "arm's length."

VI. Compliance with Laws

The Company is subject to numerous federal, state and local laws, rules and regulations. Directors and employees are expected to comply with these laws, rules and regulations, including the policies, guidelines and procedures that the Company has adopted to facilitate such compliance.

VII. Company Reporting

All directors and employees must disclose to management all information necessary to assist the Company in creating full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with the SEC and other regulators and in other public communications made by the Company. All directors and employees must honestly and accurately record and report all business information. All financial transactions must be executed in accordance with management's authorization, and must be recorded in a proper manner in order to maintain accountability for the Company's assets.

VIII. Extensions of Credit to Insiders

Any and all loans to Insiders must be made on substantially the same terms including interest rate and collateral, as a loan made to an unrelated party. Loans to Insiders must also be subject to the same underwriting process as comparable transactions made between First Federal and the general public.

A Director or employee is prohibited from being involved in the loan approval process where such director or employee may benefit directly or indirectly from the decision to grant credit. This prohibition extends to professional relationships with any company or firm receiving remuneration as a result of a decision to grant credit.

First Federal is subject to laws regulating and restricting loans to directors and certain employees, including Regulation O. Directors and employees should consult the Company’s Commercial and Consumer Lending Policies regarding such lending restrictions.

IX. Employee Accounts

All employees are encouraged to maintain their personal accounts at First Federal to allow First Federal to provide services and direct deposit of payroll checks. Under no circumstances will First Federal pay a rate of interest in excess of the rate available to all customers.

All applicable fees, including overdraft charges, will be assessed on all accounts of employees, directors, principal shareholders, and executive officers.

X. Procedures for Reporting Violations

Directors or employees who discover that any other director or employee is engaging in an illegal or unethical act (other than accounting, accounting controls or auditing matters - see the next paragraph) have the responsibility to promptly notify the Audit Committee of the Board of Directors.

Any oral notification should be followed up with a written report. A report can be submitted anonymously or on a confidential basis. If a report is submitted on a confidential basis, the reporting director or employee's name will not be disclosed in the Company's investigation, but the Company may be required to disclose the person's name to government entities. There will be no retaliation against a person making good faith reports or complaints.

If a director or employee has a complaint or a concern about any accounting practice, accounting control, or auditing matters at the Company (for example, if it is believed that an accounting or auditing practice is questionable or incorrect), the director or employee must submit a complaint or concern to:

Audit Committee of the Board of Directors

c/o TeleSentry toll free at 888-883-1499

A complaint or concern can be submitted anonymously or on a confidential basis. If submitted on a confidential basis, the director or employee's name will not be disclosed in the Company's investigation, but the Company may be required to disclose the person's name to governmental entities. There will be no retaliation against any person making good faith reports or complaints.

On an annual basis, the Compliance Officer will conduct a review of procedures, documentation, and minutes of the meetings of the Board to test compliance with code of ethics. It will report its findings to the audit committee of the Board of Directors.

XI. Consequence of Noncompliance

Failure to comply with this code of ethics may result in the termination of employment or other disciplinary action. The action will be commensurate with the seriousness of the conduct and an evaluation of the situation.

All violations of this code of ethics will be reported to the Board. Termination of employment or other disciplinary action may be determined by an officer who is either the direct or indirect supervisor of the employee concerned.

XII. Questions

Refer any question regarding proper conduct or this code of ethics to an immediate supervisor. Director or employee’s actions or acceptance of gifts that are not specifically discussed in this code of ethics must be reviewed as to intent and purpose. Directors and employees should ask themselves: "If this situation were to be made public, would my conduct be embarrassing or come into question?"

XIII. Waivers

Any waiver of this code of ethics for directors or executive officers of the Company may be made only by the Board and must be promptly disclosed to shareholders, along with the reasons for the waiver.

EX-21

Exhibit 21

List of Subsidiaries of First Defiance Financial Corp.

First Federal Bank of the Midwest

First Defiance Loan Servicing Company

First Defiance Service Company

First Insurance & Investments, Inc.

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statement (Form S-8) pertaining to the First Defiance Financial Corp. 2005 Stock Option and Incentive Plan; Registration Statement (Form S-8) pertaining to the First Defiance Financial Corp. 2001 Stock Option and Incentive Plan; Registration Statement (Form S-8) pertaining to the First Defiance Financial Corp. 1993 Stock Incentive Plan and the 1993 Director’s Stock Option Plan; and Registration Statement (Form S-8) pertaining to First Defiance Financial Corp. Employee Investment Plan of our report dated March 12, 2007 on the consolidated financial statements of First Defiance Financial Corp. and our report dated the same date on First Defiance Financial Corp. management’s assessment of the effectiveness of internal control over financial reporting and on the effectiveness of internal control over financial reporting of First Defiance Financial Corp. which reports are included in Form 10-K for First Defiance Financial Corp. for the year ended December 31, 2006.

/s/ Crowe Chizek and Company LLC

Cleveland, Ohio

March 12, 2007

EX-23.2

Exhibit 23.2

Consent of Ernst & Young LLP,

Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the following Registration Statements of First Defiance Financial Corp. of our report dated March 8, 2005, with respect to the consolidated statements of income, changes in stockholders’ equity and cash flows of First Defiance Financial Corp. and subsidiaries for the year ended December 31, 2004, included in this Annual Report (Form 10-K) for the year ended December 31, 2006.

Registration Form	Statement No.	Description
S-8	333-127110	Securities to be offered to employees in employee benefit plans
S-4, as amended	333-119821	Registration of securities, business combinations
S-4	333-119821	Registration of securities, business combinations
S-8	333-65740	Securities to be offered to employees in employee benefit plans
S-8	333-45142	Securities to be offered to employees in employee benefit plans

/s/ Ernst & Young LLP

Cleveland, Ohio

March 9, 2007

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, William J. Small, Chief Executive Officer, certify that:

1) I have reviewed this annual report on Form 10-K of First Defiance Financial Corp.

2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registration and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operations of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: March 15, 2007

/s/ William J. Small

William J. Small

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, John C. Wahl, Chief Financial Officer, certify that:

1) I have reviewed this annual report on Form 10-K of First Defiance Financial Corp.

2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4) The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registration and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operations of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: March 15, 2007

/s/ John C. Wahl

John C. Wahl

Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of First Defiance Financial Corp (the “Registrant”) on Form 10-K for the year ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William J. Small, Chairman, President and Chief Executive Officer of the Registrant, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

By:	/s/ William J. Small
	Name: William J. Small
	Title: Chairman, President and Chief Executive Officer

Date: March 15, 2007

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of First Defiance Financial Corp (the “Registrant”) on Form 10-K for the year ended December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John C. Wahl, Executive Vice President and Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

By:	/s/ John C. Wahl
	Name: John C. Wahl
	Title: Executive Vice President and Chief Financial Officer

Date: March 15, 2007