8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

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

Date of Report (Date of earliest event reported): July 20, 2009

FIRST DEFIANCE FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

OHIO	0-26850	34-1803915
(State or other jurisdiction of incorporation)	(Commission File No.)	(IRS Employer I.D. No.)

601 Clinton Street, Defiance, Ohio 43512

(Address of principal executive offices) (Zip Code)

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

Not Applicable

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

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

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

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

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

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

Section 2 – Financial Information.

Item 2.02 Results of Operations and Financial Condition.

On July 20, 2009, First Defiance Financial Corp. (“FDEF”) issued a press release regarding its earnings for the quarter ended June 30, 2009. The press release is attached as Exhibit 99.1.

Section 7 – Regulation FD.

Item 7.01 Regulation FD Disclosure

Attached hereto as Exhibit 99.2 is the transcript from FDEF’s earnings call on July 21, 2009.

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SIGNATURES

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

FIRST DEFIANCE FINANCIAL CORP.
By:	/s/ Donald P. Hileman
	Donald P. Hileman
	Chief Financial Officer

Date: July 20, 2009

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EX-99.1

Exhibit 99.1

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

For Immediate Release

FIRST DEFIANCE ANNOUNCES 2009

SECOND QUARTER EARNINGS

• Net Income of $2.9 million for 2009 second quarter up from $2.7 million in the second quarter of 2008

• Provision for Loan Losses of $4.0 million reflects challenging credit environment

• Recapture of $1.5 million of previously recorded MSR impairment

• Other-Than-Temporary Impairment of $874,000 recognized on certain investment securities

• FDIC special assessment of $900,000

• Second quarter loan growth of $24.6 million

DEFIANCE, OHIO (July 20, 2009) – First Defiance Financial Corp. (NASDAQ: FDEF) today announced that net income for its second quarter ended June 30, 2009 totaled $2.9 million, or $0.29 per diluted common share, compared to $2.74 million or $0.34 per diluted common share for the quarter ended June 30, 2008. The 2008 results included $262,000 of acquisition-related charges associated with the March 14, 2008 acquisition of Pavilion Bancorp of Adrian, Michigan (Pavilion) and its subsidiary the Bank of Lenawee.

For the six month period ended June 30, 2009, First Defiance earned $6.3 million or $0.65 per diluted common share compared to $6.15 million or $0.80 per diluted common share for the six month period ended June 30, 2008. Excluding the after-tax cost of the $1.0 million acquisition-related charges from the 2008 results, First Defiance earned $6.81 million, or $0.88 per diluted common share for the first half of 2008.

“Given the economic environment, we are pleased with our second quarter results,” said William J. Small, Chairman, President and Chief Executive Officer of First Defiance Financial Corp. “Net income increased compared to last year’s second quarter, and record-breaking mortgage volume boosted non-interest income. Credit quality was once again the major drag on the results for the quarter as many of our borrowers continue to face challenges. The FDIC special assessment, which was assessed on all FDIC insured institutions to rebuild the insurance

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reserves, and some additional other-than-temporary impairment also negatively impacted earnings. Even in this environment we were able to grow loans and deposits including 10% growth in non-interest bearing demand deposits from the first quarter of 2009.”

Credit Quality

The second quarter 2009 results include expense for provision for loan losses of $4.0 million, compared with $2.8 million in the same period in 2008 and $2.7 million in the first quarter of 2009.

Non-performing loans totaled $41.8 million at June 30, 2009, an increase from $36.7 million at March 31, 2009. The June 30, 2009 balance included $35.5 million of loans that are 90 days past due and another $6.3 million of loans considered non-performing because of changes in terms granted to borrowers although the loans are still accruing interest. In addition, First Defiance had $8.6 million of Real Estate Owned at June 30, 2009. For the second quarter of 2009, First Defiance recorded net charge-offs of $3.8 million, which represented 0.96% of average loans outstanding (annualized) for the quarter.

“First Federal Bank has a long history of excellent asset quality, but in the current economic situation, we, like most other banks, continue to see deterioration in some credits in our portfolio. These charge-offs were not unexpected, and were accounted for in our provision for loan losses in the quarter. Two credit relationships, one a land development credit and the other a manufacturing business, accounted for more than 60% of the charge-off amount this quarter. We continue to monitor the portfolio and the economic environments in our markets closely and react quickly to any identified weaknesses,” Small said.

Investment Portfolio

The Other-Than-Temporary Impairment (OTTI) charge recognized by First Defiance in the second quarter of 2009 totaled $874,000. The OTTI charge for the quarter related to four Trust Preferred Collateralized Debt Obligations (CDOs) with a remaining book value of $2.3 million. First Defiance also has one other CDO investment that had an OTTI charge in the first quarter of 2009, which has a remaining book value of $243,000 and market value of $163,000 at June 30, 2009. The OTTI charge is due to the credit deterioration of the underlying collateral.

First Defiance also has other Trust Preferred CDO investments with a total book value of $3.8 million and market value of $1.4 million at June 30, 2009. The decline in value of those investments is primarily due to the overall lack of liquidity in the CDO market. These investments continue to pay principal and interest payments in accordance with the contractual terms of the securities. Management has not deemed the impairment in value of these CDO investments to be Other-Than-Temporary, and, therefore, has not recognized the reduction in value of those investments in earnings.

Net Interest Margin

Net interest income was basically flat compared to the 2008 second quarter, with a slight decrease to $16.2 million for the second quarter of 2009. Net interest margin was 3.61% for the 2009 second quarter compared to 3.71% in the first quarter of 2009 and 3.91% in the second quarter of 2008. Yield on interest earning assets declined by 79 basis points, to 5.50% from

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6.29% in the 2008 second quarter while the cost of interest-bearing liabilities and non-interest-bearing demand deposits decreased by 44 basis points, to 1.95% from 2.39%.

“Despite the fact that we are seeing some encouraging signs of economic recovery in our markets, the challenges to net interest margin are far from over,” said Small. “It’s a low rate environment, which requires that we focus on a disciplined pricing strategy to strengthen net interest margin for the remainder of the year.”

Non-Interest Income

Non-interest income for the 2009 second quarter increased to $8.4 million from $6.2 million in the second quarter of 2008. Most of the increase was in mortgage banking income, which increased to $4.0 million in the 2009 second quarter from $1.5 million for the same period in 2008. Gains from the sale of mortgage loans nearly tripled in the second quarter of 2009 to $2.9 million from $1.0 million in the second quarter of 2008. Mortgage loan servicing revenue remained relatively flat for the 2009 second quarter compared to 2008. The increases in gains and servicing revenue were offset by expense increases of $765,000 for the amortization of mortgage servicing rights due to the higher refinance activity during the quarter.

First Defiance recaptured $1.5 million of the mortgage servicing rights (MSR) valuation adjustment in the second quarter of 2009 compared with a recapture of $167,000 in the second quarter of 2008. The MSR valuation adjustment is a reflection of the increase in the fair value of certain sectors of the Company’s portfolio of mortgage servicing rights.

Loss on investment securities for the second quarter of 2009 was $750,000, which included $874,000 of OTTI charges compared with a loss of $432,000 in the second quarter of 2008 related to OTTI charges.

“Mortgage banking activity in the second quarter surpassed all expectations,” commented Small. “We broke records that were in place from the refinancing boom of 2002 through 2004. It’s an accomplishment for a bank our size to generate $198.0 million in loans in a single quarter. We were also able to recapture a sizeable amount of the mortgage servicing impairment that we took in the 2008 fourth quarter to offset the increased amortization of the mortgage servicing rights due to the heavy refinancing during the quarter. We believe that the mortgage production will drop off in the second half of the year as mortgage rates have risen off the early-year lows. However, we are seeing a pick up in mortgages for the purchase of homes in recent months compared to most of the activity earlier in the year being for refinancing of existing mortgages.”

Non-Interest Expenses

Total non-interest expense increased to $16.1 million for the quarter ended June 30, 2009, an increase from the $15.5 million of non-interest expense, which included $262,000 of acquisition related charges, recognized in the 2008 second quarter. FDIC insurance expense increased to $1.5 million in the second quarter of 2009 from $431,000 in the same period of 2008 as a result of the FDIC rate increases, higher insured deposits and a special assessment of $900,000.

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Compensation and benefits increased by 3.6% compared to 2008, driven largely by increased medical costs. Other non-interest expense decreased to $3.0 million in the second quarter of 2009 from $3.5 million in the second quarter of 2008. The second quarter of 2008 included an expense of $752,000 associated with losses related to a former investment advisor. The period over period expense reduction benefit was offset partially by credit, collection and OREO-related costs, which increased $574,000 over the second quarter of 2008.

Year-To-Date Results

For the six month period ended June 30, 2009, net interest income totaled $32.2 million, compared with $29.8 million in the first six months of 2008. Average interest-earning assets increased to $1.81 billion for the first half of 2009 compared to $1.58 billion for the first half of 2008. Net interest margin for the first six months of 2009 was 3.66%, down 18 basis points from the 3.84% margin reported in the six month period ended June 30, 2008.

The provision for loan losses for the first half of 2009 was $6.7 million, compared to $3.9 million recorded during the first six months of 2008.

Non-interest income for the first half of 2009 was $15.2 million compared to $12.2 million during the same period of 2008. Most of the non-interest income increase was in mortgage banking, which increased 156% to $6.7 million for the first six months of 2009 compared to $2.6 million in the first six months of 2008. In addition, service fees and other charges were $6.4 million for the first half of 2009 compared to $6.0 million during the first half of 2008. The 2009 first half non-interest income was reduced by $1.6 million of OTTI charges recognized for impaired investment securities.

Non-interest expense increased to $31.1 million for the first six months of 2009 from $29.0 million in 2008. Excluding one-time acquisition-related charges of $1.0 million, non-interest expense was $28.0 million for the first six months of 2008. Most of the 2009 increase relates to ongoing costs of operating the eight branches acquired in the Pavilion acquisition for the full period in 2009. In addition, FDIC insurance expense has increased by $1.6 million due to changes in the assessment rates, a 2009 special assessment of $900,000 and full utilization early in the 2008 first quarter of credits issued by the FDIC. Credit, collection and OREO-related costs have increased $1.1 million in the first six months of 2009 over the first six months of 2008. Year to date 2008 non-interest expense included the $752,000 of expense associated with losses related to a former investment advisor.

“These are interesting times in banking,” said Small. “We are proud of our ability to meet the challenges to date, and we are keeping a watchful eye on the federal government initiatives that are coming down the road. Regulation changes, stimulus package ramifications and special assessments by the FDIC will certainly have an impact on our operations in the future.”

Total Assets at $2.02 Billion

Total assets at June 30, 2009 were $2.02 billion, compared to $1.93 billion at June 30, 2008. Net loans receivable (excluding loans held for sale) were $1.58 billion at June 30, 2009 compared to $1.56 billion at June 30, 2008. Total cash and cash equivalents were $88.8 million at June 30, 2009 compared with $44.7 million at June 30, 2008, an increase of $44.1 million.

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Total deposits at June 30, 2009 were $1.55 billion compared to $1.43 billion at June 30, 2008, an increase of $126 million. Non-interest bearing deposits at June 30, 2009 were $180.0 million compared to $181.0 million at June 30, 2008. Total stockholders’ equity was $231.6 million at June 30, 2009 compared to $193.8 million at June 30, 2008. Also at June 30, 2009, goodwill and other intangible assets totaled $64.2 million compared to $65.3 million at June 30, 2008.

Conference Call

First Defiance Financial Corp. will host a conference call at 11:00 a.m. (EDT) on Tuesday, July 21, 2009 to discuss the earnings results and business trends. The conference call may be accessed by calling 1-800-860-2442. A live webcast may be accessed at http://www.talkpoint.com/viewer/starthere.asp?Pres=126299.

Audio replay of the Internet Web cast will be available at www.fdef.com until Wednesday August 5, 2009 at 9:00 a.m.

First Defiance Financial Corp.

First Defiance Financial Corp., headquartered in Defiance, Ohio, is the holding company for First Federal Bank of the Midwest and First Insurance & Investments. First Federal operates 35 full service branches and 47 ATM locations in northwest Ohio, southeast Michigan and Fort Wayne, Indiana. First Insurance & Investments specializes in property and casualty and group health and life insurance, with offices in Defiance and Bowling Green, Ohio.

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

Financial Statements and Highlights Follow-

Safe Harbor Statement

This news release may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21 B of the Securities Act of 1934, as amended, which are intended to be safe harbors created thereby. Those statements may include, but are not limited to, all statements regarding intent, beliefs, expectations, projections, forecasts and plans of First Defiance Financial Corp. and its management, and specifically include statements regarding: changes in economic conditions, the nature, extent and timing of governmental actions and reforms, future movements of interest rates, the production levels of mortgage loan generation, the ability to continue to grow loans and deposits, the ability to benefit from a changing interest rate environment, the ability to sustain credit quality ratios at current or improved levels, the ability to sell OREO properties, continued strength in the market area for First Federal Bank of the Midwest, and the ability of the Company to grow in existing and adjacent markets. These forward-looking statements involve numerous risks and uncertainties, including those inherent in general and local banking, insurance and mortgage conditions, competitive factors specific to markets in which the Company and its subsidiaries operate, future interest rate levels, legislative and regulatory decisions or capital market conditions and other risks and uncertainties detailed from time to time in the Company’s Securities and Exchange Commission (SEC) filings, including the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. One or more of these factors have affected or could in the future affect the Company’s business and financial results in future periods and could cause actual results to differ materially from plans and projections. Therefore, there can be no assurances that the forward-looking statements included in this news release will prove to be accurate. In light of the significant uncertainties in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other persons, that the objectives and plans of the Company will be achieved. All forward-looking

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statements made in this news release are based on information presently available to the management of the Company. The Company assumes no obligation to update any forward-looking statements.

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Consolidated Balance Sheets

First Defiance Financial Corp.

(in thousands)	(Unaudited) June 30, 2009			December 31, 2008			June 30, 2008
Assets
Cash and cash equivalents
Cash and amounts due from depository institutions	$	31,606		$	40,980		$	44,621
Interest-bearing deposits		57,178			5,172			59
		88,784			46,152			44,680
Securities
Available-for sale, carried at fair value		133,009			117,575			118,825
Held-to-maturity, carried at amortized cost		831			886			1,035
		133,840			118,461			119,860
Loans		1,610,460			1,617,235			1,582,751
Allowance for loan losses		(25,840	)		(24,592	)		(20,578	)
Loans, net		1,584,620			1,592,643			1,562,173
Loans held for sale		23,835			10,960			11,711
Mortgage servicing rights		8,919			6,611			9,348
Accrued interest receivable		7,023			7,293			7,650
Federal Home Loan Bank stock		21,376			21,376			21,118
Bank Owned Life Insurance		28,884			28,747			28,950
Office properties and equipment		46,835			47,756			47,999
Real estate and other assets held for sale		8,567			7,000			3,158
Goodwill		56,585			56,585			56,111
Core deposit and other intangibles		7,598			8,344			9,195
Deferred taxes		52			336			—
Other assets		6,645			5,136			6,233
Total Assets	$	2,023,563		$	1,957,400		$	1,928,186
Liabilities and Stockholders’ Equity
Non-interest-bearing deposits	$	180,035		$	176,063		$	181,034
Interest-bearing deposits		1,373,109			1,293,849			1,246,107
Total deposits		1,553,144			1,469,912			1,427,141
Advances from Federal Home Loan Bank		146,947			156,067			191,895
Notes payable and other interest-bearing liabilities		40,284			49,454			59,039
Subordinated debentures		36,083			36,083			36,083
Advance payments by borrowers for tax and insurance		389			652			599
Deferred taxes		—			—			3,623
Other liabilities		14,033			16,073			16,006
Total liabilities		1,790,880			1,728,241			1,734,386
Stockholders’ Equity
Preferred stock- including warrants and amortization of discount on preferred shares		37,000			37,000			—
Preferred stock discount		(789	)		(867	)		—
Common stock, net		127			127			127
Common stock warrant		878			878			—
Additional paid-in-capital		140,567			140,449			140,297
Accumulated other comprehensive loss		(1,813	)		(1,904	)		(2,533	)
Retained earnings		129,344			126,114			128,536
Treasury stock, at cost		(72,631	)		(72,638	)		(72,627	)
Total stockholders’ equity		232,683			229,159			193,800
Total liabilities and stockholders’ equity	$	2,023,563		$	1,957,400		$	1,928,186

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Consolidated Statements of Income (Unaudited)

First Defiance Financial Corp.

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands, except per share amounts)	2009			2008			2009			2008
Interest Income:
Loans	$	23,086		$	24,506		$	46,463		$	47,319
Investment securities		1,474			1,462			2,966			2,947
Interest-bearing deposits		33			15			47			113
FHLB stock dividends		229			254			468			497
Total interest income		24,822			26,237			49,944			50,876
Interest Expense:
Deposits		6,859			7,522			14,042			16,193
FHLB advances and other		1,279			1,545			2,598			3,200
Subordinated debentures		369			456			795			984
Notes Payable		136			468			293			662
Total interest expense		8,643			9,991			17,728			21,039
Net interest income		16,179			16,246			32,216			29,837
Provision for loan losses		3,965			2,797			6,711			3,855
Net interest income after provision for loan losses		12,214			13,449			25,505			25,982
Non-interest Income:
Service fees and other charges		3,326			3,417			6,412			6,039
Mortgage banking income		3,983			1,501			6,697			2,616
Gain on sale of non-mortgage loans		45			8			100			43
Loss on securities		(750	)		(432	)		(1,422	)		(513	)
Insurance and investment sales commissions		1,293			1,267			2,816			3,202
Trust income		103			118			205			229
Income from Bank Owned Life Insurance		78			254			137			527
Other non-interest income		281			17			218			22
Total Non-interest Income		8,359			6,150			15,163			12,165
Non-interest Expense:
Compensation and benefits		7,585			7,318			14,950			14,441
Occupancy		1,924			1,944			4,041			3,613
FDIC insurance premium		1,497			431			2,064			465
State franchise tax		596			513			1,097			1,007
Acquisition related charges		—			262			—			1,012
Data processing		1,176			1,134			2,230			2,163
Amortization of intangibles		355			420			746			611
Other non-interest expense		3,000			3,493			6,001			5,679
Total Non-interest Expense		16,133			15,515			31,129			28,991
Income before income taxes		4,440			4,084			9,539			9,156
Income taxes		1,539			1,349			3,230			3,002
Net Income	$	2,901		$	2,735		$	6,309		$	6,154
Dividends Accrued on Preferred Shares		(468	)		—			(930	)		—
Accretion on Preferred Shares		(40	)		—			(78	)		—
Net Income Applicable to Common Shares	$	2,393		$	2,735		$	5,301		$	6,154
Earnings per common share:
Basic	$	0.29		$	0.34		$	0.65		$	0.80
Diluted	$	0.29		$	0.34		$	0.65		$	0.80
Core operating earnings per common share*:
Basic	$	0.29		$	0.36		$	0.65		$	0.89
Diluted	$	0.29		$	0.36		$	0.65		$	0.88
Average Shares Outstanding:
Basic		8,117			8,094			8,117			7,662
Diluted		8,123			8,126			8,117			7,701

* -See Non-GAAP Disclosure Reconciliations

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Financial Summary and Comparison

First Defiance Financial Corp.

	(Unaudited) Three Months Ended June 30,								(Unaudited) Six Months Ended June 30,
(dollars in thousands, except per share data)	2009			2008			% change		2009			2008			% change
Summary of Operations
Tax-equivalent interest income (1)		25,117			26,453		(5.1	)		50,496			51,296		(1.6	)
Interest expense		8,643			9,991		(13.5	)		17,728			21,039		(15.7	)
Tax-equivalent net interest income (1)		16,474			16,462		0.1			32,768			30,257		8.3
Provision for loan losses		3,965			2,797		41.8			6,711			3,855		74.1
Tax-equivalent NII after provision for loan loss (1)		12,509			13,665		(8.5	)		26,057			26,402		(1.3	)
Securities losses		(750	)		(432	)	73.6			(1,422	)		(513	)	177.2
Non-interest income-excluding securities losses		9,109			6,582		38.4			16,585			12,678		30.8
Non-interest expense		16,133			15,515		4.0			31,129			28,991		7.4
Non-interest expense-excluding non-core charges		16,133			15,253		5.8			31,129			27,979		11.3
One time acquisition related charges		—			262		NM			—			1,012		NM
Income taxes		1,539			1,349		14.1			3,230			3,002		7.6
Net Income		2,901			2,735		6.1			6,309			6,154		2.5
Dividends Declared on Preferred Shares		(468	)		—		NM			(930	)		—		NM
Accretion on Preferred Shares		(40	)		—		NM			(78	)		—		NM
Net Income Applicable to Common Shares		2,393			2,735		(12.5	)		5,301			6,154		(13.9	)
Core operating earnings (2)		2,901			2,905		(0.1	)		6,309			6,812		(7.4	)
Tax equivalent adjustment (1)		295			216		36.6			552			420		31.4
At Period End
Assets		2,023,563			1,928,925		4.9
Earning assets		1,846,689			1,736,238		6.4
Loans		1,610,460			1,582,751		1.8
Allowance for loan losses		25,840			20,578		25.6
Deposits		1,553,144			1,427,141		8.8
Stockholders’ equity		232,683			194,280		19.8
Average Balances
Assets		2,027,760			1,898,165		6.8			2,006,373			1,771,801		13.2
Earning assets		1,828,272			1,689,398		8.2			1,805,144			1,582,640		14.1
Deposits and interest-bearing liabilities		1,778,848			1,678,026		6.0			1,757,890			1,561,570		12.6
Loans		1,592,513			1,544,409		3.1			1,594,553			1,435,438		11.1
Deposits		1,552,533			1,423,266		9.1			1,533,295			1,329,810		15.3
Stockholders’ equity		231,397			195,845		18.2			230,748			183,769		25.6
Stockholders’ equity / assets		11.41	%		10.32	%	10.6			11.50	%		10.37	%	10.9
Per Common Share Data
Net Income
Basic	$	0.29		$	0.34		(14.7	)	$	0.65		$	0.80		(18.8	)
Diluted		0.29			0.34		(14.7	)		0.65			0.80		(18.8	)
Core operating earnings (2)
Basic	$	0.29		$	0.36		(17.9	)	$	0.65		$	0.89		(26.5	)
Diluted		0.29			0.36		(17.6	)		0.65			0.88		(26.2	)
Dividends		0.085			0.26		(67.3	)		0.255			0.52		(51.0	)
Market Value:
High	$	14.25		$	20.00		(28.8	)	$	14.25		$	22.51		(36.7	)
Low		6.10			15.90		(61.6	)		3.76			15.90		(76.4	)
Close		13.00			16.01		(18.8	)		13.00			16.01		(18.8	)
Book Value		24.10			23.93		0.7			24.10			23.93		0.7
Tangible Book Value		16.19			15.89		1.9			16.19			15.89		1.9
Shares outstanding, end of period (000)		8,118			8,118		(0.0	)		8,118			8,118		(0.0	)
Performance Ratios (annualized)
Tax-equivalent net interest margin (1)		3.61	%		3.92	%	(7.9	)		3.66	%		3.85	%	(5.0	)
Return on average assets -GAAP		0.57	%		0.58	%	(1.1	)		0.63	%		0.70	%	(9.4	)
Return on average assets -Core Operating		0.57	%		0.62	%	(7.4	)		0.63	%		0.77	%	(17.6	)
Return on average equity- GAAP		5.03	%		5.62	%	(10.5	)		5.51	%		6.73	%	(18.1	)
Return on average equity- Core Operating		5.03	%		5.97	%	(15.8	)		5.51	%		7.45	%	(26.0	)
Efficiency ratio (3) -GAAP		63.06	%		67.33	%	(6.3	)		63.07	%		67.52	%	(6.6	)
Efficiency ratio (3) -Core Operating		63.06	%		66.19	%	(4.7	)		63.07	%		65.17	%	(3.2	)
Effective tax rate		34.66	%		33.03	%	4.9			33.86	%		32.79	%	3.3
Dividend payout ratio (basic)		29.31	%		76.47	%	(61.7	)		39.23	%		65.00	%	(39.6	)

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

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

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

NM Percentage change not meaningful

9

Non-GAAP Disclosure Reconciliations

First Defiance Financial Corp.

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

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

Core Operating Earnings	Three months ended June 30,					Six Months Ended June 30,
(dollars in thousands, except per share data)	2009		2008			2009		2008
Net Income	$	2,901	$	2,735		$	6,309	$	6,154
Acquisition related charges		—		262			—		1,012
Tax effect		—		(92	)		—		(354	)
After-tax non-operating items		—		170			—		658
Core operating earnings	$	2,901	$	2,905		$	6,309	$	6,812

Acquisition related charges in 2008 reflect charges associated with the acquisition of Pavilion Bancorp.

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

Income from Mortgage Banking

Revenue from sales and servicing of mortgage loans consisted of the following:

	Three months ended June 30,						Six Months Ended June 30,
(dollars in thousands)	2009			2008			2009			2008
Gain from sale of mortgage loans	$	2,922		$	1,041		$	5,735		$	2,184
Mortgage loan servicing revenue (expense):
Mortgage loan servicing revenue		695			682			1,384			1,148
Amortization of mortgage servicing rights		(1,154	)		(389	)		(2,111	)		(740	)
Mortgage servicing rights valuation adjustments		1,520			167			1,689			24
		1,061			460			962			432
Total revenue from sale and servicing of mortgage loans	$	3,983		$	1,501		$	6,697		$	2,616

10

Yield Analysis

First Defiance Financial Corp.

	Three Months Ended June 30,
	2009						2008
	Average Balance		Interest(1)		Yield Rate(2)		Average Balance		Interest(1)		Yield Rate(2)
Interest-earning assets:
Loans receivable	$	1,592,513	$	23,116	5.82	%	$	1,544,409	$	24,536	6.39	%
Securities		130,663		1,739	5.26	%		121,506		1,648	5.42	%
Interest Bearing Deposits		83,720		33	0.16	%		2,616		15	2.31	%
FHLB stock		21,376		229	4.30	%		20,867		254	4.90	%
Total interest-earning assets		1,828,272		25,117	5.50	%		1,689,398		26,453	6.29	%
Non-interest-earning assets		199,488						208,767
Total assets	$	2,027,760					$	1,898,165
Deposits and Interest-bearing liabilities:
Interest bearing deposits	$	1,377,317	$	6,859	2.00	%	$	1,252,165	$	7,522	2.42	%
FHLB advances and other		146,951		1,279	3.49	%		164,811		1,545	3.77	%
Other Borrowings		43,122		136	1.27	%		53,724		468	3.50	%
Subordinated debentures		36,242		369	4.08	%		36,225		456	5.06	%
Total interest-bearing liabilities		1,603,632		8,643	2.16	%		1,506,925		9,991	2.67	%
Non-interest bearing deposits		175,216		—	—			171,101		—	—
Total including non-interest-bearing demand deposits		1,778,848		8,643	1.95	%		1,678,026		9,991	2.39	%
Other non-interest-bearing liabilities		17,515						24,294
Total liabilities		1,796,363						1,702,320
Stockholders’ equity		231,397						195,845
Total liabilities and stockholders’ equity	$	2,027,760					$	1,898,165
Net interest income; interest rate spread			$	16,474	3.34	%			$	16,462	3.62	%
Net interest margin (3)					3.61	%					3.91	%
Average interest-earning assets to average interest bearing liabilities					114	%					112	%
	Six Months Ended June 30,
	2009						2008
	Average Balance		Interest(1)		Yield Rate(2)		Average Balance		Interest(1)		Yield Rate(2)
Interest-earning assets:
Loans receivable	$	1,594,553	$	46,521	5.88	%	$	1,435,438	$	47,363	6.64	%
Securities		124,988		3,460	5.51	%		119,112		3,323	5.60	%
Interest Bearing Deposits		64,227		47	0.15	%		8,352		113	2.72	%
FHLB stock		21,376		468	4.42	%		19,738		497	5.06	%
Total interest-earning assets		1,805,144		50,496	5.61	%		1,582,640		51,296	6.52	%
Non-interest-earning assets		201,229						189,161
Total assets	$	2,006,373					$	1,771,801
Deposits and Interest-bearing liabilities:
Interest bearing deposits	$	1,362,747	$	14,042	2.08	%	$	1,181,938	$	16,193	2.76	%
FHLB advances and other		147,021		2,598	3.56	%		155,666		3,200	4.13	%
Other Borrowings		41,327		293	1.43	%		39,841		662	3.34	%
Subordinated debentures		36,247		795	4.41	%		36,253		984	5.46	%
Total interest-bearing liabilities		1,587,342		17,728	2.25	%		1,413,698		21,039	2.99	%
Non-interest bearing deposits		170,548		—	—			147,872		—	—
Total including non-interest-bearing demand deposits		1,757,890		17,728	2.03	%		1,561,570		21,039	2.71	%
Other non-interest-bearing liabilities		17,735						26,462
Total liabilities		1,775,625						1,588,032
Stockholders’ equity		230,748						183,769
Total liabilities and stockholders’ equity	$	2,006,373					$	1,771,801
Net interest income; interest rate spread			$	32,768	3.36	%			$	30,257	3.53	%
Net interest margin (3)					3.66	%					3.84	%
Average interest-earning assets to average interest bearing liabilities					114	%					112	%

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

(2) Annualized

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

11

Selected Quarterly Information

First Defiance Financial Corp.

(dollars in thousands, except per share data)	2nd Qtr 2009			1st Qtr 2009			4th Qtr 2008			3rd Qtr 2008			2nd Qtr 2008
Summary of Operations
Tax-equivalent interest income (1)	$	25,117		$	25,379		$	26,188		$	26,876		$	26,453
Interest expense		8,643			9,085			9,952			10,277			9,991
Tax-equivalent net interest income (1)		16,474			16,294			16,236			16,599			16,462
Provision for loan losses		3,965			2,746			3,824			4,907			2,797
Tax-equivalent NII after provision for loan losses (1)		12,509			13,548			12,412			11,692			13,665
Investment securities gains (losses)		(750	)		(672	)		(596	)		(2,051	)		(432	)
Non-interest income (excluding securities gains/losses)		9,109			7,476			3,360			6,191			6,582
Non-interest expense		16,133			14,996			13,571			15,233			15,515
Acquisition and other on-time charges		—			—			85			20			262
Income taxes		1,539			1,691			482			44			1,349
Net income		2,901			3,408			880			322			2,735
Dividends Declared on Preferred Shares		(468	)		(463	)		(134	)		—			—
Accretion on Preferred Shares		(40	)		(38	)		(11	)		—			—
Net Income Applicable to Common Shares		2,393			2,907			735			322			2,735
Core operating earnings (2)		2,901			3,408			935			335			2,905
Tax equivalent adjustment (1)		295			257			243			233			216
At Period End
Total assets	$	2,023,563		$	2,010,662		$	1,957,400		$	1,922,026		$	1,928,925
Earning assets		1,846,689			1,838,397			1,773,204			1,741,438			1,736,238
Loans		1,610,460			1,585,897			1,617,235			1,596,327			1,582,751
Allowance for loan losses		25,840			25,694			24,592			23,445			20,578
Deposits		1,553,144			1,540,235			1,469,912			1,435,804			1,427,141
Stockholders’ equity		232,683			230,608			229,159			189,676			194,280
Stockholders’ equity / assets		11.50	%		11.47	%		11.71	%		9.87	%		10.07	%
Goodwill		56,585			56,585			56,585			56,830			56,111
Average Balances
Total assets	$	2,027,760		$	1,984,985		$	1,938,461		$	1,928,987		$	1,898,165
Earning assets		1,828,272			1,782,019			1,730,284			1,727,343			1,689,398
Deposits and interest-bearing liabilities		1,778,848			1,736,933			1,718,315			1,712,212			1,678,026
Loans		1,592,513			1,596,592			1,591,144			1,585,489			1,544,409
Deposits		1,552,533			1,514,059			1,466,366			1,437,273			1,423,266
Stockholders’ equity		231,397			230,099			201,499			194,452			195,845
Stockholders’ equity / assets		11.41	%		11.59	%		10.39	%		10.08	%		10.32	%
Per Common Share Data
Net Income:
Basic	$	0.29		$	0.36		$	0.09		$	0.04		$	0.34
Diluted		0.29			0.36			0.09			0.04			0.34
Core operating earnings (2)
Basic		0.29			0.36			0.10			0.04			0.36
Diluted		0.29			0.36			0.10			0.04			0.36
Dividends		0.085			0.17			0.17			0.26			0.26
Market Value:
High	$	14.25		$	8.95		$	14.50		$	17.66		$	20.00
Low		6.10			3.76			6.00			10.00			15.90
Close		13.00			6.08			7.73			11.01			16.01
Book Value		24.10			23.85			23.67			23.37			23.93
Shares outstanding, end of period (in thousands)		8,118			8,117			8,117			8,117			8,118
Performance Ratios (annualized)
Tax-equivalent net interest margin (1)		3.61	%		3.71	%		3.72	%		3.81	%		3.91	%
Return on average assets -GAAP		0.57	%		0.70	%		0.18	%		0.07	%		0.58	%
Return on average assets -Core Operating		0.57	%		0.70	%		0.19	%		0.07	%		0.62	%
Return on average equity- GAAP		5.03	%		6.02	%		1.74	%		0.66	%		5.62	%
Return on average equity- Core Operating		5.03	%		6.02	%		1.85	%		0.69	%		5.97	%
Efficiency ratio (3) -GAAP		63.06	%		63.09	%		69.25	%		66.84	%		67.33	%
Efficiency ratio (3) -Core Operating		63.06	%		63.09	%		68.82	%		66.75	%		66.19	%
Effective tax rate		34.66	%		33.16	%		35.39	%		12.02	%		33.03	%
Common dividend payout ratio (basic)		29.31	%		47.22	%		188.89	%		650.00	%		76.47	%

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

(2) See Non-GAAP Disclosure Reconciliation

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

12

Selected Quarterly Information

First Defiance Financial Corp.

(dollars in thousands, except per share data)	2nd Qtr 2009			1st Qtr 2009			4th Qtr 2008			3rd Qtr 2008			2nd Qtr 2008
Loan Portfolio Composition
One to four family residential real estate	$	238,000		$	241,119		$	251,807		$	250,244		$	251,887
Construction		44,670			50,534			72,938			75,822			83,279
Commercial real estate		768,636			764,841			755,740			746,676			731,472
Commercial		382,434			350,070			356,574			353,453			351,812
Consumer finance		38,074			38,676			41,012			41,964			41,251
Home equity and improvement		151,213			156,668			161,106			158,992			153,715
Total loans		1,623,027			1,601,908			1,639,177			1,627,151			1,613,416
Less:
Loans in process		11,602			14,954			20,892			29,794			29,585
Deferred loan origination fees		965			1,057			1,050			1,030			1,080
Allowance for loan loss		25,840			25,694			24,592			23,445			20,578
Net Loans	$	1,584,620		$	1,560,203		$	1,592,643		$	1,572,882		$	1,562,173
Allowance for loan loss activity
Beginning allowance		25,694			24,592		$	23,445		$	20,578		$	18,556
Provision for loan losses		3,965			2,746			3,824			4,907			2,797
Reserve from acquisitions		—			—			—			121			38
Credit loss charge-offs:
One to four family residential real estate		505			148			369			478			281
Commercial real estate		2,066			669			1,480			1,495			319
Commercial		950			702			593						220
Consumer finance		83			123			224			73			56
Home equity and improvement		301			130			57			216			18
Total charge-offs		3,905			1,772			2,723			2,262			894
Total recoveries		86			128			46			101			81
Net charge-offs (recoveries)		3,819			1,644			2,677			2,161			813
Ending allowance	$	25,840		$	25,694		$	24,592		$	23,445		$	20,578
Credit Quality
Non-accrual loans	$	35,528		$	29,473		$	28,017		$	24,630		$	17,727
Restructured loans, accruing		4,845			7,199			6,250			905			—
Total non-performing loans (1)		40,373			36,672			34,267			25,535			17,727
Real estate owned (REO)		8,567			7,839			7,000			4,776			3,158
Total non-performing assets (2)	$	48,940		$	44,511		$	41,267		$	30,311		$	20,885
Net charge-offs		3,819			1,644			2,677			2,161			813
Allowance for loan losses / loans		1.60	%		1.62	%		1.52	%		1.47	%		1.30	%
Allowance for loan losses / non-performing assets		52.80	%		57.73	%		59.59	%		77.35	%		98.53	%
Allowance for loan losses / non-performing loans		64.00	%		70.06	%		71.77	%		91.82	%		116.08	%
Non-performing assets / loans plus REO		3.02	%		2.79	%		2.54	%		1.89	%		1.32	%
Non-performing assets / total assets		2.42	%		2.21	%		2.11	%		1.57	%		1.08	%
Net charge-offs / average loans (annualized)		0.96	%		0.41	%		0.67	%		0.56	%		0.21	%
Deposit Balances
Non-interest-bearing demand deposits	$	180,035		$	163,855		$	176,063		$	158,139		$	181,034
Interest-bearing demand deposits and money market		456,177			413,104			374,488			365,251			401,401
Savings deposits		135,821			132,590			132,145			145,019			146,697
Retail time deposits less than $100,000		568,595			608,811			578,245			557,643			514,209
Retail time deposits greater than $100,000		165,401			171,588			170,485			177,848			163,614
National/Brokered time deposits		47,115			50,287			38,486			31,904			20,186
Total deposits	$	1,553,144		$	1,540,235		$	1,469,912		$	1,435,804		$	1,427,141

(1) Non-performing loans consist of non-accrual loans that are contractually past due 90 days or more and loans that are deemed impaired under the criteria of FASB Statement No. 114.

(2) Non-performing assets are non-performing loans plus real estate and other assets acquired by foreclosure or deed-in-lieu thereof.

13

Loan Delinquency Information

First Defiance Financial Corp.

(dollars in thousands)	Total Balance		Current		30 to 89 days past due		Non Accrual Loans		Troubled Debt Restructuring
June 30, 2009
One to four family residential real estate	$	238,000	$	224,165	$	5,594	$	5,541	$	3,019
Construction		44,670		44,416		194		60		—
Commercial real estate		768,636		726,778		13,212		25,672		1,769
Commercial		382,434		374,761		3,781		3,589		57
Consumer finance		38,074		37,595		440		39		—
Home equity and improvement		151,213		147,975		2,611		627		—
Total loans	$	1,623,027	$	1,555,690	$	25,832	$	35,528	$	4,845
March 31, 2009
One to four family residential real estate	$	241,119	$	230,751	$	4,201	$	6,167	$	1,333
Construction		50,534		50,112		297		125		—
Commercial real estate		764,841		733,251		13,140		18,450		4,474
Commercial		350,070		342,951		3,111		4,008		1,369
Consumer finance		38,676		38,318		301		57		—
Home equity and improvement		156,668		153,206		2,796		666		23
Total loans	$	1,601,908	$	1,548,589	$	23,846	$	29,473	$	7,199
December 31, 2008
One to four family residential real estate	$	251,807	$	242,547	$	4,676	$	4,584	$	1,101
Construction		72,938		72,814		52		72		—
Commercial real estate		755,740		730,355		5,406		19,979		2,205
Commercial		356,574		352,022		1,671		2,881		2,944
Consumer finance		41,012		40,428		515		69		—
Home equity and improvement		161,106		155,650		5,024		432		—
Total loans	$	1,639,177	$	1,593,816	$	17,344	$	28,017	$	6,250
June 30, 2008
One to four family residential real estate	$	251,887	$	243,444	$	2,870	$	5,573	$	—
Construction		83,279		80,372		1,766		1,141		—
Commercial real estate		731,472		710,980		11,230		9,262		—
Commercial		351,812		347,020		3,899		893		—
Consumer finance		41,251		40,714		352		185		—
Home equity and improvement		153,715		151,217		1,825		673		—
Total loans	$	1,613,416	$	1,573,747	$	21,942	$	17,727	$	—

14

EX-99.2

Exhibit 99.2

Operator: Hello, and welcome to the First Defiance Financial Corporation, Second Quarter Earnings Conference Call. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today’s presentation. [Operator Instructions]. Now I would like to turn the conference over to Ms. Carol Merry. Ms. Merry, you may begin.

Carol Merry, Executive Counselor, Director of Investor Relations, Fahlgren Mortine Public Relations

Providing commentary this morning will be Bill Small, Chairman, President and CEO of First Defiance, and Don Hileman, Senior Vice President and Chief Financial Officer. Following their prepared comments on the company’s strategy and performance, they will be available to take your questions.

Before we begin, I’d like to remind you that certain statements made during the conference call that are not historical, including statements made during the Q&A period, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on information and assumptions available to management at this time and they are subject to change. Actual results may differ materially. First Defiance assumes no obligation to update such forward-looking statements to reflect the impact of circumstances or events that may arise after the date of the forward-looking statements.

For a complete discussion of the risks and uncertainties that may cause future events to differ from the results discussed in these forward-looking statements, please refer to the earnings release and materials filed with the SEC, including the Company’s most recent Form 10-K and 8-K filings.

And now I will turn the call over to Mr. Small for his comments.

William J. Small, Chairman, President and Chief Executive Officer

Thank you, Carol. Good morning and thank you for joining us to review the 2009 second quarter result. Last night, we issued our 2009 second quarter earnings release and this morning, we would like to discuss performance during the quarter and what we see ahead for —ahead of us for the balance of 2009. At the conclusion of our presentation, we will answer any questions you might have.

Joining me on the call this morning to give more detail on the financial performance for the quarter is our CFO, Don Hileman, and also with us this morning to assist and answering questions is Jim Rohrs, President and CEO of First Federal Bank.

Given the economic environment, we are pleased with our second quarter results. Net income increased compared to last year’s second quarter. The second quarter 2009 net income on a GAAP basis was $2.9 million or $0.29 per diluted common share compared to $2.7 million and $0.34 per diluted share in the 2008 second quarter.

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The significant difference in the per share income is primarily due to the preferred dividend being paid on the preferred shares issued for the US Treasury’s Capital Purchase Program. For the six-month period ended June 30, 2009, First Defiance earned $6.3 million or $0.65 per diluted common share, compared to 6.15 million or $0.80 per diluted common share for the six-month period ended June 30, 2008. Excluding the after tax cost of $1 million of acquisition-related charges for the 2008 result First Defiance earned 6.81 million or $0.88 per diluted share for the first half of 2008. The 2009 second quarter results while still not back to a normal run rate had a number of significant indicators that the core operation is running strong. Another record setting quarter of mortgage production was supported by solid growth in commercial loans and deposits. Deposit growth was not as strong during the second quarter as it was in the first quarter, but it was positive. The deposit mix improved during the second quarter, with 10% growth in non-interest bearing deposits and a reduction in certificates of deposit over the previous quarter, which is all part of our strategy. Non-interest income was up for the quarter versus second quarter 2008, and the linked quarter. Mortgage income was a primary driver of this increase, both because of record mortgage loan production and also the recapture of $1.5 million in mortgage servicing rights impairment, as mortgage interest rates were rising off of their first quarter lows. This impairment recovery corresponds with the rising mortgage rates, and results in a higher valuation of the servicing rights. The quarter was not without its challenges, however. Asset quality had a significant negative impact during the second quarter, as we booked $4 million in provision expense, representing a significant increase over the linked quarter and the 2008 second quarter. Don will give you more detail on the provision and allowance coverage in his remarks. The FDIC special assessment of five basis points was also booked entirely in this quarter and totaled $900,000. This special assessment was levied against all FDIC insured institutions, and our expectation is that we will see a similar sized assessment in the fourth quarter of this year. We also recognized additional other-than-temporary impairment on certain collateralized debt obligations in our portfolio during the second quarter. Asset qualities are primary focus right now. We continue to make it our priority to identify any weaknesses as early as possible and to monitor and analyze each credit to assure proper levels of reserves. The provision expense in the second quarter was a combination of weakening in some credits and adjustments to several previously recognized problem loans where additional reserves were added for falling collateral values. We’ve increased the allowance for loan losses to total loans from 1.3% at June 30, 2008 to 1.6% at June 30, 2009. This compares to our peer group median of 1.37% as of March 31, 2009. As I mentioned earlier, non-interest income was strong this quarter, primarily due to the mortgage business. We originated $198 million in mortgage loans during the quarter to continue as a leading mortgage originator throughout our market. Other non-interest income categories were relatively flat in comparison to the linked quarter and second quarter, 2008. The increase in non-interest expense was driven primarily by the increase in FDIC expenses, both from the special assessment and higher regular premium rates. Collection and OREO expenses were also a major expense factor in the quarter. I will now ask Don Hileman to give you additional financial details for the quarter, before I wrap up with an overview and a look at what we see developing in the months ahead. Don?

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Donald P. Hileman, Senior Vice President and Chief Financial Officer

Thank you, Bill, and good morning everyone. Challenging operating environment continued in the second quarter, and we anticipate overall weak economic activity throughout the remainder of the year in our market area. We continue to see double-digit unemployment in all the primary counties in our market area, and anticipate higher rates over the course of the year in selected areas. While we do not have a direct concentration in a lot of related commercial lending, we do have retail customers whose livelihood depends on the automotive and related industries, remain —we’ll remain cautiously optimistic based on the initial announcements of plant closings that the facilities in our market will remain open. As we review our financial performance, credit quality remains a key driver. But, we had additional significant items that contributed to the flat year-over-year second quarter core income. I will begin with a discussion on credit quality. We saw another quarter in which we had a high level of provision for loan losses. As Bill noted, our provision extends total 4 million, up from 2.7 million in the first quarter as we increased our allowance for loan losses to 25.8 million after recording 3.8 million of net charge-offs in the quarter. Annualized net charge-offs were 96 basis points of total loans for the second quarter of 2009, up from 0.41% in the first quarter and up from 0.21% in the second quarter of 2008. Of the total net charge-offs, 63% or 2.4 million were related to two credit relationships. Of the commercial real-estate total charge-offs of 2.1 million, 1.7 or 80% were related to those relationships and 800,000 or 83% of the total commercial charge-offs of 950,000 are related to those credit relationships. We are constantly analyzing our loan portfolio, we have made decisions to reallocate resources to work with past due clients to determine a course of action that we hope will mitigate potential losses on client relationships. We have been actively working with residential borrowers to determine qualification for loan modifications. We calculate our allowance for loan losses by analyzing all loans on our watch list and making judgments about the risk of loss based on the cash flow of the borrower, the value of any collateral and the financial strength of any guarantors. Based on those judgments, we record a specific amount of loan losses against each loan we analyze. The provision for loan losses is the adjustment we make to the allowance for loan losses necessary, for the allowance to be adequate based on the losses we estimate to be in the portfolio. In our review, we have determined and it is appropriate to use a more correct trend of activity as a guide for determining our reserve adequacy. We believe this is consistent with the operating environment we foresee in the remainder —for the remainder of the year. At June 30, our allowance for loan losses represented 1.6% of total loans outstanding, a decrease of two basis points over the last quarter and 64% of our non-performing loans. Non-performing assets ended the quarter at 48.9 million or 2.42% of assets, up from 44.5 million last quarter, which was 2.21% of our total assets. Total non-performing loans increased 3.7 million or 10% during the quarter. The non-accrual loans increased 6 million and restructured loans decreased 2.3 million, primarily due to charge-off of large credit that closed their doors. Restructured loans are considered non-performing because of changes in the original terms granted to borrowers. These loans are still accruing. This is a way we can work with our borrowers who have the ability to repay to mitigate loss potential. The delinquency rate for loans 90 days past due or on non-accrual increased to 2.21% this quarter from

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1.86% in the first quarter of 2009. The increase in the level of 90 days past due from the last quarter is due to an increase in commercial real estate, 90 days past due of 7.2 million with all other loan categories declining from last quarter. The total delinquency rate increased to 3.36% on March 31 to 3.81% at the end of June 2009. The composition of the 90-day past due non-accrual total at the end of the second quarter breaks down in to certain sectors with a comparison to the linked quarter, with commercial real estate at 3.34%, up from 2.41%; one-to-four family residential at 2.33%, down from 2.56%; commercial at 0.64%, down from 1.14%; home equity 0.41%, down from 0.43%; construction 0.13%, down from 0.25%; and consumer 0.10%, down from 0.15%. While the non-performing loan amounts have increased primarily in commercial real estate; we believe that our portfolio is well-positioned with a diversified portfolio. Loan averaged to loan size, very little presence in problematic segments such as big-box retailer and large office buildings encourage [ph] to generally underwritten on a cash flow basis and require meaningful equity and personal guarantees.

Mortgage banking was again very strong in the second quarter, continuing the momentum of the first quarter, with a gain on sale income of 2.9 million in the second quarter of 2009, compared with 1 million in the second quarter of 2008 and 2.8 million in the first quarter of 2009. We also recorded a positive valuation adjustment to mortgage servicing rights of 1.5 million in the second quarter, compared with a positive adjustment of a 167,000 in the second quarter of 2008.

At June 30, First Defiance had 1.16 billion in loan service for others. The mortgage servicing rights associated with those loans had a fair value of 8.9 million or 77 basis points of outstanding loan balance of service. Total impairment reserves, which are available for recapture in future periods, totaled 1.1 million at the end of the quarter. While we are pleased with the mortgage loan activity in the first half of the year, we have seen signs of slowing in refinance activity with a slight increase in purchase activity.

The economic environment continues to add stress on our investments and Trust Preferred Collateralized Debt Obligations or CDOs, and required additional other-than-temporary impairment write-downs in the second quarter. The CDOs are made up of pooled investments of trust preferred securities, primarily by commercial banks and through us. As the issuing institutions experience financial difficulties, they can defer payments and in many cases we have seen the institutions default on their issue, which is a negative impact on the collateral supporting those pooled investments.

The OTTI charge recognized in the second quarter of 2009 totaled $874,000. The other-than-temporary charge in the quarter related to four trust preferred CDO investments that had a remaining book value of 2.3 million. First Defiance has one other CDO that is considered unimpaired [ph] with a book value of 243,000 in which we took a first quarter charge. The rest of the trust preferred CDO investments in the portfolio have a book value of 3.8 million and market values of 1.4 million at June 30, 2009. The decline in the value of those investments is primarily due to the overall lack of liquidity in the CDO market. These investments continue to pay principal and interest payments in accordance with the contractual terms of the securities. Management has not deemed the impairment

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in value of those CDOs to be other-than-temporary and therefore has not recognized the reduction in value of those investments and earnings. The other-than-temporary charge was partially offset by a $125,000 out of gain on the sale of securities.

Turning to the operating result, the net non —our net interest income of 16.1 million for the quarter was flat on a linked-quarter basis and basically flat with 16.2 million in the second quarter of 2008. For the quarter, our margin was 3.61, which was a 30 basis points decline from the second quarter of 2008 and a 10 basis point decline from the first quarter of 2009. Falling interest rates continue to impact us on both the asset and liability side. We continue to look for opportunities to reprice deposits in line with market rates. This remains challenging and we feel that we have hit the floor on some products, but we still have some opportunities on term accounts. The margin was impacted by higher levels of overnight funds invested at an average of 16 basis points. Fee income continues to be strong, but declined slightly to 3.3 million in the second quarter of 2009 from 3.4 million last year. Insurance revenue was 1.3 million in the second quarter of 2009, up slightly from the second quarter of 2008.

Overall non-interest expense increased to 16.1 million this quarter compared with 15.5 million in the second quarter of 2008 and 15 million on a linked-quarter basis. The second quarter compensation and benefits expense was up due primarily to higher medical costs. FDIC Insurance expense increased to 1.5 million in the second quarter of 2009 or 431 million in the same period of 2008. As a result of the FDIC rate increases, higher insured deposit balances and a five basis point special assessment of 900,000. We believe there is a high probability of another special assessment in the fourth quarter of this year.

Other non-interest expense decreased to 3 million in the second quarter from 3.5 million in the second quarter of 2008, increases in expenses of 574,000 for credit, collection in OREO, 283,000 related to deferred compensation evaluation, which is offset by reductions of 256,000 to marketing and 767,000 fraud losses. The second quarter of 2008 included 752,000 of expense associated with losses related to a former investment advisor. We saw balance sheet growth with total assets growing 95.3 million from June 2008 to 2.02 billion and growing 12.9 million on linked-quarter basis. Total deposits grew 126.5 million from June of 2008 and 12.9 million on a linked-quarter basis, reflecting growth and core deposits and increased customer deposit relationships. Loan balances increased 24.6 million on a linked-quarter basis, while cash and equivalents decreased 22.8 million. We are pleased with the growth of new activity during the quarter. We have been able to develop strong new relationships with commercial clients. We believe that the control of the growth is reflective of the environment and we are well positioned for future growth.

That completes my overview for the quarter and I’ll turn the call back to Bill.

William J. Small, Chairman, President and Chief Executive Officer

Thank you, Don. As we move into the second half of 2009, we are continuing to address the challenges that face all of us. The overall economic climate throughout our market area is among the largest of these challenges. Unemployment numbers run higher in this region compared to national numbers and we may see this continue for several months as employment recovery usually lags overall economic improvement. We are certainly encouraged by the fact that at this time, none of the automotive facility is scheduled for closures are in or near our market area. As Don mentioned, First Federal Bank has a very small direct credit exposure to the automotive industry. But, we know that many of our customers have some dependence on it.

We are encouraged by the fact that many of these plants are returning to production and we have heard reports from suppliers that new orders are being received and there are plans for some to begin adding staff soon to meet these production needs. We have increased our credit monitoring, our asset review functions and delinquent loan reporting requirements. We continually review credit concentrations by industry and have placed lower limits on lending within certain types of loan categories. We currently only have two industry classifications that have over a 5% concentration in our entire portfolio of over 1.6 billion in total loans.

Within this portfolio, our largest concentration is in the category of lessors of non-residential buildings, with a balance of just over $231 million; a total of 2.5 million or just over 1% of that is over 90 days past due. All commercial construction and land development loans [ph] totaled less than $100 million, down from over a $123 million a year ago, with 4.15% over 30 days past due. In our entire commercial loan portfolio, our top 10 loan categories by NAICS code, totals $666 million with a total delinquency rate of 3.75% over 30 days past due. This is a difficult environment to forecast in as conditions are constantly changing. As we anticipated, loan growth did pick up during the second quarter and we expect this to continue through the second half of the year. Mortgage loan production has already subsided, as a recent refinancing bench appears to be over. We have seen increases in purchase applications in the past six weeks, and were recently approved as an FHA lender. That should produce additional purchase mortgage opportunities for us. Pricing discipline on both sides of the balance sheet and non-interest bearing deposit growth will be very important, as we work to maintain our net interest margin.

The residual effect of all the stresses on the economy during the past 12 to 18 months has created an extremely challenging banking environment. But it can also be a time of great opportunity for banks like ours. We remain well-capitalized with a proven operating strategy. We will prudently manage our capital, and as we move forward through the second half of 2009, we will work diligently on the factors within our controls to continue to grow profitably. For those factors beyond our control, we will monitor and be prepared to respond to.

We thank you for joining us this morning, and now we will be happy to take your questions.

QUESTION AND ANSWER SECTION

Operator: [Operator Instructions]. Our first question comes from Eileen Rooney at KBW.

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<Q – Eileen Rooney>: Good morning everyone.

<A>: Good morning, Eileen.

<A>: Good morning.

<Q – Eileen Rooney>: Just a question on the outlook for the margin. It sounds like you are doing a couple of things on the deposit side, and reducing some of the higher cost deposit categories. I’m ust wondering if there —what the opportunities are to increase our asset yields.

<A>: We think there are opportunities there to get better pricing on the loan side. We are seeing fairly strong loan demand in our markets. Part of that due to the fact that some of the regional banks in our area are getting out of certain types of lending regardless of the quality of the credits, so we are able to, to some degree pick and choose what loan relationships we want to book and we are very insistent on that, that those be complete relationships with non-interest bearing deposits. And matter of fact our Board meeting last night there is a report in that package that shows historical loans that are booked that as of the report, they did not have non-interest bearing deposit accounts. And I’ve got a tour [ph] here to research that report and report back because we do monitor that because those deposits are very important as in terms of improving the profitability on that loan relationship and our subsequent margin.

<Q – Eileen Rooney>: Okay. And I noticed some —it looks like you guys are building a little bit of liquidity on the balance sheet, your interest bearing, your average interest bearing deposits and your securities portfolio increased. But the interest bearing deposits really increased quite a bit. I am ust wondering, what —if there is an opportunity to may be move some of that into higher yielding security insurance, that’s not something you are interested in doing right now?

<A>: Eileen, this is Don. We were trying to balance that mix there. We did have an opportunity to grow the securities portfolio during the quarter. But as Jim said, we are still seeing pretty good loan demand, and we are balancing the impact of funding those loans versus the securities portfolio and the effect on the yield so. We still do think there’s opportunities for movement into more higher yielding assets there, but it will be a blend between the two —we won’t overly weight the securities portfolio.

<Q – Eileen Rooney>: Got it, and then ust one unrelated question. Just wondering when your last regulatory exam was?

<A>: They are here right now.

<Q – Eileen Rooney>: There are, okay.

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<A>: Yes, Yes. We are —we have OTS and currently we expect they will probably wrap up end of next week as far as their field visits, and have a period of time while we wait for the written report. But they are outside right now.

<Q – Eileen Rooney>: Okay, great. Well, thanks a lot guys.

<A>: Okay. Thank you, Eileen.

Operator: [Operator Instructions]. And we show no further questions at this time. I would like to turn the conference back over to management for any closing remark.

All right, if there are no further questions, we thank you for joining us today. And this will conclude our conference.

Operator: Thank you for attending today’s presentation. You may now disconnect.

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