For the ~~Quarterly Period EndedSeptember 30, 2017~~quarterly period ended March 31, 2020

For the ~~Transition Period~~transition period from ~~___________to__________~~_____________ to _______________

(Exact ~~name~~Name of ~~registrant~~Registrant as ~~specified~~Specified in its ~~charter)~~Charter)

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

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☒ No x No¨☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes☒ No x☐ No¨

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

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

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

Indicate by check mark whether the ~~number of shares outstanding of each~~registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the ~~issuer's classes~~Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐

As of June 5, 2020, the registrant had 37,285,731 shares of common stock, as$.01 par value per share, outstanding.

In accordance with the Securities and Exchange Commission Order Under Section 36 of the ~~latest practical date. Common Stock, $.01 Par Value – 10,155,833 shares outstanding at October~~Securities Exchange Act of 1934 Modifying Exemptions from the Reporting and Proxy Delivery Requirements for Public Companies, SEC Release No. 34-88465, dated March 25, 2020 (the “Order”), First Defiance relied on the relief provided by the Order to delay the filing of this Quarterly Report on Form 10-Q for the quarter ended March 31, ~~2017.~~2020 (the “First Quarter Form 10-Q”) by up to 45 days. We experienced significant disruptions to our business and operations as a result of the COVID-19 pandemic. In particular, we have a majority of our employees working remotely, including most of our finance staff. In addition, we rely on several third parties to perform analyses related to the preparation of our financial statements, and those third parties have also experienced disruptions to their operations due to COVID-19. Accordingly, we relied on the Order to postpone the filing of our First Quarter Form 10-Q to provide us with additional time to develop and process our financial information as well as prepare additional required disclosures related to COVID -19.

Pursuant to the requirements of the Order, we filed a Form 8-K with the Commission on April 29, 2020, indicating our intention to rely upon the Order with respect to the filing of this Form 10-Q. This Form 10-Q is being filed within the 45-day extension period provided by the Order.

	~~Page Number~~
~~PART I.-FINANCIAL INFORMATION~~		Page Number

PART I - FINANCIAL INFORMATION

Item 1.	Consolidated Condensed Financial Statements (Unaudited):	2

	Consolidated Condensed Statements of Financial Condition – ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~2019	2

	Consolidated Condensed Statements of Income - Three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019	4

	Consolidated Condensed Statements of Comprehensive Income – Three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019	5

	Consolidated Condensed Statements of Changes in Stockholders’ Equity – ~~Nine~~Three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019	6

	Consolidated Condensed Statements of Cash Flows - ~~Nine~~Three months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019	7

	Notes to Consolidated Condensed Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	57 45

Item 3.3	Quantitative and Qualitative Disclosures about Market Risk	80 65

Item 4.4	Controls and Procedures	82 67

PART ~~II-OTHER~~II - OTHER INFORMATION:

Item 1.1	Legal Proceedings	83 71

Item 1A.	Risk Factors	83 71

Item 2.2	Unregistered Sales of Equity Securities and Use of Proceeds	83 72

Item 3.3	Defaults upon Senior Securities	83 73

Item 4.4	Mine Safety Disclosures	83 73

Item 5.5	Other Information	84 73

Item 6.6	Exhibits	84 73

	Signatures		85 75

~~PART I-FINANCIAL INFORMATION~~

PART I-FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Financial Condition

(UNAUDITED)

(Amounts in Thousands, except share and per share data)

	March 31, 2020		December 31, 2019
Assets
Cash and cash equivalents:
Cash and amounts due from depository institutions	$	79,000	$	46,254
Interest-bearing deposits		66,217		85,000
		145,217		131,254
Securities available-for-sale, carried at fair value		534,206		283,448
Loans held for sale, carried at fair value		58,222		—
Loans held for sale, at lower of cost or market		27,372		18,008
Loans receivable, net of allowance for credit losses of $85,859 at March 31, 2020 and $31,243 at December 31, 2019, respectively		5,028,058		2,746,321
Mortgage servicing rights		15,742		10,267
Accrued interest receivable		19,048		10,244
Federal Home Loan Bank stock		89,252		11,915
Bank owned life insurance		142,259		75,544
Premises and equipment		59,870		39,563
Real estate and other assets held for sale		548		100
Goodwill		317,520		100,069
Core deposit and other intangibles		35,540		3,772
Other assets		66,088		38,487
Total assets	$	6,538,942	$	3,468,992

(continued)

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Financial Condition

(UNAUDITED)

(Amounts in Thousands, except share and per share data)

	March 31, 2020			December 31, 2019
Liabilities and stockholders’ equity
Liabilities:
Deposits	$	4,994,148		$	2,870,325
Advances from the Federal Home Loan Bank		486,000			85,063
Subordinated debentures		36,083			36,083
Securities sold under repurchase agreements		1,961			2,999
Advance payments by borrowers		23,962			5,491
Deferred taxes		3,642			905
Other liabilities		76,303			41,959
Total liabilities		5,622,099			3,042,825

Stockholders’ equity:
Preferred stock, $.01 par value per share: 37,000 shares authorized; no shares issued	—			—
Preferred stock, $.01 par value per share: 4,963,000 shares authorized; no shares issued	—			—
Common stock, $.01 par value per share: 50,000,000 shares authorized; 43,297,259 and 25,371,086 shares issued and 37,286,574 and 19,729,886 shares outstanding at March 31, 2020 and December 31, 2019, respectively		306			127
Additional paid-in capital		687,996			161,955
Accumulated other comprehensive income (loss), net of tax of $3,208 and $1,221, respectively		12,068			4,595
Retained earnings		295,467			329,175
Treasury stock, at cost, 6,011,529 shares at March 31, 2020 and 5,641,200 shares at December 31, 2019		(78,994	)		(69,685	)
Total stockholders’ equity		916,843			426,167
Total liabilities and stockholders’ equity	$	6,538,942		$	3,468,992

September 30,
2017 December 31,
2016

Assets
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 55,731 $ 53,003
Federal funds sold 69,000 46,000
124,731 99,003
Securities:
Available-for-sale, carried at fair value 260,034 250,992
Held-to-maturity, carried at amortized cost (fair value $728 and $187 at September 30, 2017 and December 31, 2016, respectively) 728 184
260,762 251,176
Loans held for sale 12,200 9,607
Loans receivable, net of allowance of $26,341 at September 30, 2017 and $25,884 at December 31, 2016, respectively 2,249,701 1,914,603
Mortgage servicing rights 9,693 9,595
Accrued interest receivable 9,864 6,760
Federal Home Loan Bank stock 15,992 13,798
Bank owned life insurance 65,811 52,817
Premises and equipment 41,536 36,958
Real estate and other assets held for sale 532 455
Goodwill 98,370 61,798
Core deposit and other intangibles 6,061 1,336
Deferred taxes 1,042 2,212
Other assets 38,735 17,479
Total assets $ 2,935,030 $ 2,477,597

See accompanying notes.

~~(continued)~~3

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of ~~Financial Condition~~

~~(UNAUDITED)~~

~~(Amounts in Thousands, except share and per share data)~~

September 30,
2017 December 31,
2016

Liabilities and stockholders’ equity
Liabilities:
Deposits $ 2,360,675 $ 1,981,628
Advances from the Federal Home Loan Bank 104,555 103,943
Subordinated debentures 36,083 36,083
Securities sold under repurchase agreements 22,939 31,816
Notes Payable 6,500 -
Advance payments by borrowers 2,265 2,650
Other liabilities 34,089 28,459
Total liabilities 2,567,106 2,184,579

Stockholders’ equity:
Preferred stock, $.01 par value per share: 37,000 shares authorized; no shares issued – –
Preferred stock, $.01 par value per share: 4,963,000 shares authorized; no shares issued – –
Common stock, $.01 par value per share:
25,000,000 shares authorized; 12,712,840 and 12,720,347 shares issued and 10,149,184 and 8,983,206 shares outstanding, respectively 127 127
Additional paid-in capital 160,653 126,390
Accumulated other comprehensive income, net of tax of $1,151 and $117, respectively 2,138 215
Retained earnings 256,041 240,592
Treasury stock, at cost, 2,563,656 and 3,737,141 shares respectively (51,035 ) (74,306 )
Total stockholders’ equity 367,924 293,018

Total liabilities and stockholders’ equity $ 2,935,030 $ 2,477,597

~~See accompanying notes~~

~~FIRST DEFIANCE FINANCIAL CORP.~~

~~Consolidated Condensed Statements of~~(Loss) Income

(UNAUDITED)

(Amounts in Thousands, except ~~share and~~ per share data)

	Three Months Ended March 31,
	2020			2019
Interest Income
Loans	$	51,460		$	31,214
Investment securities:
Taxable		1,834			1,365
Non-taxable		883			840
Interest-bearing deposits		230			285
FHLB stock dividends		115			215
Total interest income		54,522			33,919
Interest Expense
Deposits		7,771			5,005
FHLB advances and other		1,006			276
Subordinated debentures		273			364
Notes payable		9			4
Total interest expense		9,059			5,649
Net interest income		45,463			28,270
Credit loss expense		43,786			212
Net interest income after credit loss expense		1,677			28,058
Non-interest Income
Service fees and other charges		5,183			3,007
Insurance commissions		5,155			4,115
Mortgage banking income		848			1,841
Gain on sale of non-mortgage loans		234			89
Trust income		838			523
Income from Bank Owned Life Insurance		781			392
Other non-interest income		960			846
Total non-interest income		13,999			10,813
Non-interest Expense
Compensation and benefits		17,585			14,085
Occupancy		3,731			2,241
FDIC insurance premium		492			273
Financial institutions tax		834			556
Data processing		3,040			2,297
Acquisition related charges		11,486			—
Amortization of intangibles		1,245			299
Other non-interest expense		5,355			5,115
Total non-interest expense		43,768			24,866
Income before income taxes		(28,092	)		14,005
Federal income taxes		(5,610	)		2,523
Net (loss) income	$	(22,482	)	$	11,482
(Loss) earnings per common share
Basic	$	(0.71	)	$	0.57
Diluted	$	(0.71	)	$	0.57

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
Interest Income
Loans $ 25,975 $ 20,264 $ 73,263 $ 59,242
Investment securities:
Taxable 896 767 2,817 2,391
Non-taxable 792 731 2,378 2,280
Interest-bearing deposits 209 104 555 287
FHLB stock dividends 209 137 562 413
Total interest income 28,081 22,003 79,575 64,613
Interest Expense
Deposits 2,391 1,635 6,357 4,613
FHLB advances and other 431 322 1,211 940
Subordinated debentures 239 191 682 548
Notes payable 13 35 41 108
Total interest expense 3,074 2,183 8,291 6,209
Net interest income 25,007 19,820 71,284 58,404
Provision for loan losses 462 15 2,635 432
Net interest income after provision for loan losses 24,545 19,805 68,649 57,972
Non-interest Income
Service fees and other charges 3,153 2,765 9,073 8,208
Insurance commissions 3,082 2,473 9,834 8,113
Mortgage banking income 1,698 2,039 5,266 5,342
Gain on sale of non-mortgage loans 82 148 172 604
Gain on sale or call of securities 158 151 425 509
Trust income 486 420 1,400 1,256
Income from Bank Owned Life Insurance 421 225 2,666 686
Other non-interest income 415 305 1,348 1,019
Total non-interest income 9,495 8,526 30,184 25,737
Non-interest Expense
Compensation and benefits 11,780 10,295 37,588 30,250
Occupancy 1,960 1,822 5,751 5,435
FDIC insurance premium 330 352 973 1,008
Financial institutions tax 404 446 1,418 1,339
Data processing 1,874 1,622 5,832 4,723
Amortization of intangibles 364 115 931 419
Other non-interest expense 3,728 3,640 11,718 9,739
Total non-interest expense 20,440 18,292 64,211 52,913
Income before income taxes 13,600 10,039 34,622 30,796
Federal income taxes 4,219 2,994 11,753 9,318
Net Income $ 9,381 $ 7,045 $ 22,869 $ 21,478

Earnings per common share (Note 6)
Basic $ 0.92 $ 0.78 $ 2.31 $ 2.39
Diluted $ 0.92 $ 0.78 $ 2.29 $ 2.37
Dividends declared per share (Note 5) $ 0.25 $ 0.22 $ 0.75 $ 0.66
Average common shares outstanding (Note 6)
Basic 10,149 8,976 9,913 8,980
Diluted 10,209 9,050 9,970 9,050

See accompanying notes.

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Comprehensive Income

(UNAUDITED)

(Amounts in Thousands)

	Three Months Ended March 31,
	2020			2019
Net (loss) income	$	(22,482	)	$	11,482

Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale		9,458			4,603
Reclassification adjustment for securities gains included in net income		—			—
Income tax expense (benefit)		(1,985	)		(968	)
Net of tax amount		7,473			3,635

Change in unrealized gain/(loss) on postretirement benefit:
Reclassification adjustment for deferred tax on defined benefit postretirement medical plan		—			82
Net of tax amount		—			82

Total other comprehensive income (loss)		7,473			3,717

Comprehensive (loss) income	$	(15,009	)	$	15,199

Three Months Ended Nine Months Ended
September 30, September 30,
2017 2016 2017 2016
Net income $ 9,381 $ 7,045 $ 22,869 $ 21,478

Other comprehensive income:
Unrealized gains (losses) on securities available for sale (777 ) 69 3,383 2,579
Reclassification adjustment for security gains included in net income(1) (158 ) (151 ) (425 ) (509 )
Income tax expense 327 29 (1,035 ) (725 )
Other comprehensive income (608 ) (53 ) 1,923 1,345

Comprehensive income $ 8,773 $ 6,992 $ 24,792 $ 22,823

(1) Amounts are included in gains on sale or call of securities on the consolidated condensed statements of income. Income tax expense associated with the reclassification adjustments, included in federal income taxes, for the three months ended September 30, 2017 and 2016 was $55 and $53, respectively. Income tax expense associated with the reclassification adjustments, included in federal income taxes, for the nine months ended September 30, 2017 and 2016 was $148 and $178, respectively.See accompanying notes.

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Statement of Changes in Stockholders’ Equity

(UNAUDITED)

(Amounts in Thousands, except share data)

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

Balance at January 1, 2017 $ - 8,983,206 $ 127 $ 126,390 $ 215 $ 240,592 $ (74,306 ) $ 293,018
Net income 22,869 22,869
Other comprehensive income 1,923 1,923
Stock based compensation expenses 133 133
Shares issued under stock option plan, net of 7,507 repurchased and retired 4,043 51 (83 ) 230 198
Capital stock issuance 1,139,502 33,792 22,740 56,532
Restricted share activity under stock incentive plans 21,377 254 (17 ) 280 517
Shares issued from direct stock sales 1,056 33 21 54
Common stock dividends declared (7,320 ) (7,320 )
Balance at September 30, 2017 $ - 10,149,184 $ 127 $ 160,653 $ 2,138 $ 256,041 $ (51,035 ) $ 367,924

Balance at January 1, 2016 $ - 9,102,831 $ 127 $ 125,734 $ 3,622 $ 219,737 $ (69,023 ) $ 280,197
Net income 21,478 21,478
Other comprehensive income 1,345 1,345
Stock based compensation expenses 226 226
Shares issued under stock option plan, net of 1,612 repurchased and retired 33,808 (18 ) (26 ) 711 667
Restricted share activity under stock incentive plans 10,405 236 (72 ) 225 389
Shares issued from direct stock sales 1,068 22 21 43
Shares repurchased (167,746 ) (6,293 ) (6,293 )
Common stock dividends declared (5,914 ) (5,914 )
Balance at September 30, 2016 $ - 8,980,366 $ 127 $ 126,200 $ 4,967 $ 235,203 $ (74,359 ) $ 292,138

	Preferred Stock		Common Stock Shares			Common Stock		Additional Paid-In Capital			Accumulated Other Comprehensive Income		Retained Earnings			Treasury Stock			Total Stockholders Equity
Balance at January 1, 2020	$	—		19,729,886		$	127	$	161,955		$	4,595	$	329,175		$	(69,685	)	$	426,167
Net (loss)														(22,482	)					(22,482	)
Other comprehensive income												7,473								7,473
Adoption of ASC 326														(2,566	)					(2,566	)
Deferred compensation plan				7,524					(94	)							94			—
Stock based compensation expenses									1,230								6			1,236
Capital stock issuance				17,927,017			179		526,696											526,875
Vesting of incentive plans				39,548					(1,989	)							493			(1,496	)
Restricted share issuance				13,349					198					(374	)		176			—
Restricted share forfeitures				(750	)															—
Shares issued from direct stock sales																				—
Shares repurchased				(430,000	)												(10,078	)		(10,078	)
Common stock dividends declared ($0.22 per share)														(8,286	)					(8,286	)
Balance at March 31, 2020	$	—		37,286,574		$	306	$	687,996		$	12,068	$	295,467		$	(78,994	)	$	916,843

	Preferred Stock		Common Stock Shares			Common Stock		Additional Paid-In Capital			Accumulated Other Comprehensive Income			Retained Earnings			Treasury Stock			Total Stockholders Equity
Balance at January 1, 2019	$	—		20,171,392		$	127	$	161,593		$	(2,148	)	$	295,588		$	(55,571	)	$	399,589
Net income															11,482						11,482
Other comprehensive income												3,717									3,717
Deferred compensation plan									(22	)								42			20
Stock based compensation expenses									11												11
Shares issued under stock option plan, net of 178 repurchased and retired				17,822					(22	)					(5	)		212			185
Restricted share activity under stock incentive plans net of 25,195 repurchased and retired				38,890					(751	)								440			(311	)
Shares issued from direct stock sales				1,065					19									12			31
Shares repurchased				(515,977	)													(15,147	)		(15,147	)
Common stock dividends declared ($0.19 per share)															(3,788	)					(3,788	)
Balance at March 31, 2019	$	—	$	19,713,192		$	127	$	160,828		$	1,569		$	303,277		$	(70,012	)	$	395,789

See accompanying notes.

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Cash Flows

(UNAUDITED)

(Amounts in Thousands)

	Three Months Ended March 31,
	2020			2019
Operating Activities
Net (loss) income	$	(22,482	)	$	11,482
Items not requiring (providing) cash:
Provision for credit losses		43,786			212
Depreciation		1,631			1,031
Amortization of mortgage servicing rights, net of impairment charges/recoveries		5,648			399
Amortization of core deposit and other intangible assets		1,245			299
Net accretion of premiums and discounts on loans and deposits		(1,745	)		(155	)
Amortization of premiums and discounts on securities		633			285
Change in deferred taxes		77			155
Proceeds from the sale of loans held for sale		101,090			38,910
Originations of loans held for sale		(110,026	)		(37,513	)
Gain from sale of loans		(5,136	)		(1,390	)
Loss on sale or write down of property plant and equipment		0			10
Gain/loss on sale / write-down of real estate and other assets held for sale		10			249
Stock option expense		1,236			11
Restricted stock vesting		(1,496	)		(311	)
Income from bank owned life insurance		(781	)		(392	)
Excess tax benefit on stock compensation plans		—			(105	)
Changes in:
Accrued interest receivable		(438	)		(1,539	)
Other assets		(2,416	)		(3,609	)
Other liabilities		2,525			1,662
Net cash provided by operating activities		13,361			9,691

Investing Activities
Proceeds from maturities, calls and pay-downs of available-for-sale securities		19,389			6,673
Proceeds from sale of premises and equipment, real estate and other assets held for sale		481			161
Proceeds from sale of non-mortgage loans		3,241			1,749
Purchases of available-for-sale securities		—			(8,172	)
Purchases of Federal Home Loan stock		(64,584	)		—
Proceeds from Federal Home Loan stock redemption		—			1,982
Net cash from acquisition (Reference Footnote 18 Business Combinations)		52,448			—
Purchases of premises and equipment, net		(722	)		(793	)
Net increase in loans receivable		(44,623	)		(10,959	)
Net cash used by investing activities		(34,370	)		(9,359	)
Financing Activities
Net increase in deposits and advance payments by borrowers		34,437			64,201
Net Proceeds from (repayment of) Federal Home Loan Bank advances		19,937			(30,031	)
Decrease in securities sold under repurchase agreements		(1,038	)		(2,228	)
Net cash paid for repurchase of common stock		(10,078	)		(15,147	)
Proceeds from exercise of stock options		—			185
Proceeds from direct stock sales		—			31
Cash dividends paid on common stock		(8,286	)		(3,788	)
Net cash provided by financing activities		34,972			13,223
Increase in cash and cash equivalents		13,963			13,555
Cash and cash equivalents at beginning of period		131,254			98,962
Cash and cash equivalents at end of period	$	145,217		$	112,517
Supplemental cash flow information:
Interest paid	$	9,028		$	5,593
Income taxes paid	$	—		$	—
Initial recognition of right-of-use asset	$	8,994		$	8,808
Initial recognition of lease liability	$	9,143		$	9,339
Initial recognition of ASC 326	$	2,566		$	—
Transfers from loans to real estate and other assets held for sale	$	37		$	146

Nine Months Ended
September 30,
2017 2016
Operating Activities
Net income $ 22,869 $ 21,478
Items not requiring (providing) cash
Provision for loan losses 2,635 432
Depreciation 2,674 2,514
Amortization of mortgage servicing rights, net of impairment recoveries 1,080 1,399
Amortization of core deposit and other intangible assets 931 419
Net amortization (accretion)of premiums and discounts on loans and deposits (602 ) 254
Amortization of premiums and discounts on securities 935 627
Change in deferred taxes 220 174
Proceeds from the sale of loans held for sale 157,127 197,167
Originations of loans held for sale (157,321 ) (198,839 )
Gain from sale of loans (3,749 ) (4,707 )
Gain from sale or call of securities (425 ) (509 )
Loss on sale or disposal of premises and equipment 48 -
Gain on sale / write-down of real estate and other assets held for sale (57 ) (269 )
Stock option expense 133 226
Restricted stock expense 517 389
Income from bank owned life insurance (2,666 ) (686 )
Excess tax benefit on stock compensation plans (168 ) (184 )
Changes in:
Accrued interest receivable (1,782 ) (1,281 )
Other assets (2,743 ) (3,475 )
Other liabilities 2,348 1,174
Net cash provided by operating activities 22,004 16,303

Investing Activities
Proceeds from maturities of held-to-maturity securities 48 52
Proceeds from maturities, calls and pay-downs of available-for-sale securities 20,339 25,765
Proceeds from sale of premises and equipment, real estate and other assets held for sale 1,028 1,368
Proceeds from the sale of available-for-sale securities 18,047 14,871
Proceeds from sale of non-mortgage loans 19,142 13,967
Purchases of available-for-sale securities (41,235 ) (35,538 )
Proceeds from Federal Home Loan stock redemption - 1
Net cash received in acquisitions 19,359 -
Investment in bank owned life insurance (20,000 ) -
Purchase of portfolio mortgage loans (11,476 ) -
Purchases of premises and equipment, net (2,491 ) (1,289 )
Net increase in loans receivable (59,339 ) (137,511 )
Net cash used by investing activities (56,578 ) (118,314 )

Financing Activities
Net increase in deposits and advance payments by borrowers 70,539 90,949
Repayment of Federal Home Loan Bank advances (792 ) (718 )
Proceeds from Federal Home Loan Bank advances - 55,000
Increase in notes payable 6,500 -
Decrease in securities sold under repurchase agreements (8,877 ) (6,695 )
Proceeds from exercise of stock options 198 667
Proceeds from direct stock sales 54 43
Net cash paid for repurchase of common stock - (6,293 )
Cash dividends paid on common stock (7,320 ) (5,914 )
Net cash provided by financing activities 60,302 127,039
Increase (decrease) in cash and cash equivalents 25,728 25,028
Cash and cash equivalents at beginning of period 99,003 79,769
Cash and cash equivalents at end of period $ 124,731 $ 104,797

Supplemental cash flow information:
Interest paid $ 8,177 $ 6,151
Income taxes paid $ 10,900 $ 9,900
Transfers from loans to real estate and other assets held for sale $ 328 $ 526
Securities purchased but not yet settled $ - $ 935
Sale of bank owned life insurance not yet settled $ 17,840 $ -

See accompanying notes.

Refer to Note 18 – Business Combinations for non-cash activity.

FIRST DEFIANCE FINANCIAL CORP.

Notes to Consolidated Condensed Financial Statements (UNAUDITED)

March 31, 2020 and 2019

7 1.	Basis of Presentation

~~FIRST DEFIANCE FINANCIAL CORP.~~

~~Notes to Consolidated Condensed Financial Statements (UNAUDITED)~~

~~September 30, 2017 and 2016~~

~~1. Basis of Presentation~~

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

On January 31, 2020, First Defiance completed its previously announced acquisition of United Community Financial Corp., an Ohio corporation (“UCFC”), pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated as of September 9, 2019, by and between First Defiance and UCFC. At the effective time of the merger (the “Merger”), UCFC merged with and into First Defiance, with First Defiance surviving the Merger. Simultaneously with the completion of the Merger, First Defiance converted from a unitary thrift holding company to a bank holding company, making an election to be a financial holding company.

Immediately following the Merger, First Federal, acquired UCFC’s wholly owned bank subsidiary, Home Savings Bank (“Home Savings”). Immediately prior to the merger of the banks, First Federal converted from a federal thrift into an Ohio state-chartered bank. In addition, immediately following the merger of the banks, UCFC’s wholly-owned insurance subsidiaries, HSB Insurance, LLC and United American Financial Services, Inc., each merged into First Insurance, with First Insurance surviving the mergers. First Defiance acquired two additional subsidiaries in the Merger, HSB Capital, LLC and HSB Insurance, Inc.

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

HSB Capital was formed as an Ohio limited liability company by UCFC during 2016 for the purpose of providing mezzanine funding for customers of Home Savings. Mezzanine loans are offered by HSB Capital to customers in the Company’s market area and are expected to be repaid from the cash flow from operations of the business.

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

First Defiance Risk Management is a wholly-owned insurance company subsidiary of the Company that insures the Company and its subsidiaries against certain risks unique to the operations of the Company and for which insurance may not be currently available or economically feasible in today’s insurance marketplace.

First Defiance Risk Management pools resources with several other similar insurance company subsidiaries of financial institutions to help minimize the risk allocable to each participating insurer.

HSB Insurance, Inc. was formed on June 1, 2017 as a Delaware-based captive insurance company that insures against certain risks that are unique to the operations of the Company and its subsidiaries and for which insurance may not be currently available or economically feasible; by pooling resources with several other insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves.

HSB Insurance, Inc. is subject to regulations of the State of Delaware and undergoes periodic examinations by the Delaware Division of Insurance.

The consolidated condensed statement of financial condition at December 31, ~~2016~~2019, has been derived from the audited financial statements at that date, which were included in First Defiance’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~

2019 (the “2019 Form 10-K”).

The accompanying consolidated condensed financial statements as of ~~September 30, 2017~~March 31, 2020, and for the three ~~and nine~~ month periods ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 have been prepared by ~~First Defiance~~the Company without audit and do not include information or footnotes necessary for the complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United ~~States.~~States (“GAAP”). These consolidated condensed financial statements should be read in conjunction with the financial statements and notes thereto included in ~~First Defiance's 2016 Annual Report on~~the 2019 Form ~~10-K for the year ended December 31, 2016.~~10-K. However, in the opinion of management, all adjustments, consisting of only normal recurring items, necessary for the fair ~~statement~~presentation of ~~results in~~ the financial statements have been made. The results for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2017~~March 31, 2020, are not necessarily indicative of the results that may be expected for the entire year.

8 2.	Significant Accounting Policies

2.~~Significant~~ Accounting ~~Policies~~Standards Adopted in 2020

~~Use of Estimates~~

~~The preparation of consolidated financial statements in conformity with accounting principles generally accepted in~~ASU 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the ~~United States of America requires management~~Disclosure Requirements for Fair Value Measurement: In August 2018, the FASB issued ASU 2018-13 - Fair Value Measurement (Topic 820): Disclosure Framework - Changes to ~~make estimates and assumptions that affect~~ the ~~amounts reported in~~Disclosure Requirements for Fair Value Measurement. This ASU modifies the consolidated financial statements and accompanying notes. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

~~Earnings Per Common Share~~

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

~~Goodwill and Other Intangibles~~

~~Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the~~ fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009, is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interestsmeasurements in ~~the acquiree, over the fair value of the net assets acquired~~Topic 820, Fair Value Measurement by removing, modifying and ~~liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired~~adding certain requirements. The amendments in ~~a purchase business combination and determined to have an indefinite useful life~~this ASU are not amortized, but tested for impairment at least annually. The Company has selected November 30 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on First Defiance’s balance sheet.

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

~~Newly Issued Accounting Standards~~

In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2017-08, “Premium Amortization on Purchased Callable Debt Securities.” This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Today, entities generally amortize the premium over the contractual life of the security. The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. ASU No. 2017-08 is effective for fiscal years, and interim ~~and annual reporting~~ periods within those fiscal years, beginning after December 15, ~~2018; early~~2019. Early adoption is ~~permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made~~permitted upon issuance of this ASU. An entity is permitted to ~~retained earnings as~~early adopt and remove or modify disclosures upon issuance of the ~~beginning~~ASU and delay adoption of the ~~first reporting period in which the~~additional disclosures until their effective date. The adoption of this guidance ~~is adopted. The Company plans to adopt the provisions of ASU No. 2017-08~~ on January 1, ~~2018 and does~~2020 did not ~~expect the adoption to~~ have a material impact on the Company’s consolidated financial statements.

~~In January 2017, the FASB issued~~ ASU ~~No.~~ 2017-04,“ Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill ~~Impairment.”~~ ~~The guidance~~Impairment: Issued in January 2017, ASU 2017-04 simplifies the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. In computing the implied fair value of goodwill under Step 2, an entity, prior to the amendments in ASU 2017-04, had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities, including unrecognized assets and liabilities, in accordance with the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. However, under the amendments in ASU 2017-04, an entity should (1) perform its annual or interim goodwill

impairment test by comparing the fair value of a reporting unit with its carrying amount, and (2) recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, with the understanding that the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, ASU 2017-04 removes the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment ~~test, which requires a hypothetical purchase price allocation. Goodwill impairment~~test. ASU 2017-04 became effective for the Company on January 1, 2020, and the amendments of this ASU will ~~now~~ be ~~the amount by which a reporting unit’s carrying value exceeds its fair value, not~~applicable to ~~exceed~~ the ~~carrying amount of goodwill. All other~~ goodwill impairment ~~guidance will remain largely unchanged. ASU No. 2017-04 is effective~~testing for interim and annual reporting periods beginning after December 15, 2019, applied prospectively. Early adoption is permitted for any impairment tests performed after January 1, 2017. The Company expects to early adopt upon the next goodwill impairment test in 2017. ASU No. 2017-04 is not expected to have a material impact on the Company’s consolidated financial statements.2020.

~~In June 2016, the FASB issued~~ ASU ~~No.~~ 2016-13,“ Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial ~~Instruments.”~~ ~~This~~Instruments: Issued in June 2016, ASU ~~significantly changes how entities~~2016-13 will ~~measure~~add FASB ASC Topic 326, “Financial Instruments-Credit Losses” and finalizes amendments to FASB ASC Subtopic 825-15, “Financial Instruments-Credit Losses.” The amendments of ASU 2016-13 are intended to provide financial statement users with more decision-useful information related to expected credit losses ~~for most~~on financial ~~assets~~instruments and ~~certain~~ other ~~instruments that aren’t measured at fair value through net income. In issuing the standard, the FASB is responding~~commitments to ~~criticism that today’s guidance delays recognition of~~extend credit ~~losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as~~by replacing the current ~~expected credit~~incurred loss ~~(“CECL”) model, will apply to: (1) financial assets subject to~~impairment methodology with a methodology that reflects expected credit losses and ~~measured~~requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. The amendments of ASU 2016-13 eliminate the probable initial recognition threshold and, in turn, reflect an entity’s current estimate of all expected credit losses. ASU 2016-13 does not specify the method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. The amendments of ASU 2016-13, and all subsequent ASUs issued by FASB to provide additional guidance and clarification related to this Topic, became effective for the Company on January 1, 2020.

As a result of adopting the amendments of ASU 2016-13, the Company recorded an increase to its allowance for credit losses of $2.4 million and an increase to its allowance for credit losses on off-balance sheet credit exposures of $0.9 million resulting in a one-time cumulative effect adjustment through retained earnings of $2.6 million net of $.7 million tax at ~~amortized cost,~~the date of adoption. Future changes in the allowance for credit losses on off-balance sheet credit exposures will be recorded in other liabilities. This adjustment included a qualitative adjustment to the allowance for credit losses related to loans and ~~(2) certain~~an allowance on off-balance sheet credit exposures. ~~This includes, but is~~The Company estimates losses over an approximate one-year forecast period using Moody’s baseline economic forecasts, and then reverts to longer term historical loss experience over a three-year period.

Accounting Standards not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized costyet adopted:

ASU No. 2020-04: Reference Rate Reform – Facilitation of the ~~securities. As a result, entities will recognize improvements~~Effects of Reference Rate Reform on Financial Reporting (Topic 848): This guidance provides temporary options to ~~estimated credit losses immediately~~ease the potential burden in ~~earnings rather than as interest income over time, as they do today.~~accounting for reference rate reform. It is intended to help stakeholders during the global market-wide reference rate transition period. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective ~~(i.e., modified retrospective approach).~~as of March 12, 2020 through December 31, 2022. The Company anticipates being fully prepared to implement a replacement for the reference rate and has ~~begun its implementation efforts by establishing~~determined that any change will not have a Company-wide implementation committee. The committee’s initial review indicates the Company has maintained sufficient historical loan data to support the requirement of this pronouncement and is currently evaluating the various loss methodologies to determine their correlationsmaterial impact to the ~~Company’s loan segments historical performance. Early adoption is permitted, however, the Company does not currently plan to early adopt this ASU.~~consolidated financial statements.

Fair Value

In February 2016, the FASB issued ASU No. 2016-02 — Leases (Topic 842). The objective of the update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company has not yet selected a transition method as it is in the process of determining the effect of the ASU on its consolidated financial statements and disclosures. The Company has several lease agreements, such as branch locations, which are currently considered operating leases, and therefore, not recognized on the Company’s consolidated condensed statements of financial condition. The Company expects the new guidance will require these lease agreements to now be recognized on the consolidated condensed statements of financial condition as a right-of-use asset and a corresponding lease liability. Therefore, the Company’s preliminary evaluation indicates the provisions of ASU No. 2016-02 are expected to impact the Company’s consolidated condensed statements of financial condition, along with our regulatory capital ratios. However, the Company continues to evaluate the extent of potential impact the new guidance will have on the Company’s consolidated financial statements. At September 30, 2017, the Company had contractual operating lease commitments of approximately $4.5 million, before considering renewal options that are generally present.

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

In May 2014, the FASB and the International Accounting Standards Board (the “IASB”) jointly issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP and International Financial Reporting Standards (“IFRS”). Previous revenue recognition guidance in GAAP consisted of broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. In contrast, IFRS provided limited revenue recognition guidance and, consequently, could be difficult to apply to complex transactions. Accordingly, the FASB and the IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that would: (1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing revenue issues; (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provide more useful information to users of financial statements through improved disclosure requirements; and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. To meet those objectives, the FASB issued ASU No. 2014-09,~~“Revenue from Contracts with Customers.”~~ The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies generally will be required to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard was initially effective for public entities for interim and annual reporting periods beginning after December 15, 2016; early adoption was not permitted. However, in August 2015, the FASB issued ASU No. 2015-14,~~“Revenue from Contracts with Customers - Deferral of the Effective Date”~~ which deferred the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. In addition, the FASB has begun to issue targeted updates to clarify specific implementation issues of ASU 2014-09. These updates include ASU No. 2016-08,~~“Principal versus Agent Considerations (Reporting Revenue Gross versus Net),”~~ ~~ASU No. 2016-10,~~~~“Identifying Performance Obligations and Licensing,”~~ ~~ASU No. 2016-12,~~~~“Narrow-Scope Improvements and Practical Expedients,”~~ ~~and ASU No. 2016-20~~~~“Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.”~~ Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the Company does not expect the new guidance to have a material impact on revenue most closely associated with financial instruments, including interest income. The Company is substantially complete with its overall assessment of revenue streams and reviewing of related contracts potentially affected by the ASU, including trust and asset management fees, deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. The Company’s assessment suggests that adoption of this ASU should not materially change the method in which we currently recognize revenue for these revenue streams. In addition, the Company is evaluating the ASU’s expanded disclosure requirements. The Company plans to adopt ASU No. 2014-09 on January 1, 2018 utilizing the modified retrospective approach with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be material.

~~3. Fair Value~~

FASB ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value

of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

FASB ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on the best information available. In that regard, FASB ASC Topic 820 established a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

~~Level 1~~~~: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.~~

Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by a correlation or other means.

~~Level 2~~: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by a correlation or other means.

Level 3: Unobservable inputs for determining fair value of assets and liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

~~Level 3~~: Unobservable inputs for determining fair value of assets and liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

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

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

Loans held for sale, carried at fair value – The Company elected the fair value option for all conventional residential one-to four-family loans held for sale and all permanent construction loans held for sale that were acquired from UCFC in the merger. In addition, the Company has elected the fair value option for all loans held for sale originated after January 31, 2020.

The fair value of conventional loans held for sale is determined using the current 15 day forward contract price for either 15 or year conventional mortgages and the 60 day forward contract price for either 15

or 30 year Federal Housing Authority mortgages (Level 2). The fair value of permanent construction loans held for sale is determined using the current 60 day forward contract price for 15 or 30 years conventional mortgages which is then adjusted for unobservable market data such as estimated fall out rates and estimated time from origination to completion of construction (Level 3).

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

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

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Company’s asset quality or collections department reviews the assumptions and approaches utilized in the appraisal. Appraisal values are discounted from 0% to 30% to account for other factors that may impact the value of collateral. In determining the value of impaired collateral dependent loans and other real estate owned, significant unobservable inputs may be used, which ~~include:~~include but are not limited to: physical condition of comparable properties sold, net operating income generated by the property and investor rates of return.

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

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

Purchased and written certificate of deposit option – The Company acquired purchased and written certificate of deposit options in its merger with UCFC. These written and purchased options are mirror

derivative instruments which are carried at fair value on the statement of financial condition. The Company uses an independent third party that performs a market valuation analysis for purchased and written certificate of deposit options. (Level 2)

Interest rate swaps – The Company periodically enters into interest rate swap agreements with its commercial customers who desire a fixed rate loan term that is longer than the Company is willing to extend. The Company then enters into a reciprocal swap agreement with a third party that offsets the interest rate risk from the interest rate swap extended to the customer. The interest rate swaps are derivative instruments which are carried at fair value on the statement of financial condition. The Company uses an independent third party that performs a market valuation analysis for both swap positions. (Level 2)

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

Assets and Liabilities Measured on a Recurring Basis

September 30, 2017 Level 1
Inputs Level 2
Inputs Level 3
Inputs Total Fair
Value
(In Thousands)
Available for sale securities:

Obligations of U.S. government corporations and agencies $ - $ 1,987 $ - $ 1,987
Mortgage-backed - residential - 74,470 - 74,470
REMICs - 1,130 - 1,130
Collateralized mortgage obligations- residential - 72,975 - 72,975
Preferred stock 1 - - 1
Corporate bonds - 13,100 - 13,100
Obligations of state and political subdivisions - 96,371 - 96,371
Mortgage banking derivative - asset - 821 - 821

December 31, 2016 Level 1
Inputs Level 2
Inputs Level 3
Inputs Total Fair
Value
(In Thousands)
Available for sale securities:
Obligations of U.S. Government corporations and agencies $ - $ 3,915 $ - $ 3,915
Mortgage-backed - residential - 81,707 - 81,707
REMICs - 1,307 - 1,307
Collateralized mortgage obligations-residential - 63,005 - 63,005
Preferred stock 2 - - 2
Corporate bonds - 13,013 - 13,013
Obligations of state and political subdivisions - 88,043 88,043
Mortgage banking derivative - asset - 491 - 491

March 31, 2020	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total FairValue
	(In Thousands)
Assets:
Available for sale securities:
Obligations of U.S. federal government corporations and agencies	$	—	$	30,282	$	—	$	30,282
Mortgage-backed securities		—		201,026		—		201,026
Collateralized mortgage obligations		—		137,608		—		137,608
Corporate bonds		—		22,067		—		22,067
Obligations of state and political subdivisions		—		137,393		5,830		143,223
Loans held for sale, at fair value		—		13,802		44,420		58,222
Purchased certificate of deposit option		—		86		—		86
Interest rate swaps		—		1,868		—		1,868
Mortgage banking derivative		—		4,073		—		4,073
Liabilities:		—						—
Written certificate of deposit option		—		86		—		86
Interest rate swaps		—		2,119		—		2,119
Mortgage banking derivative		—		586		—		586

December 31, 2019	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total FairValue
	(In Thousands)
Available for sale securities:
Obligations of U.S. federal government corporations and agencies	$	—	$	2,524	$	—	$	2,524
Mortgage-backed securities		—		89,647		—		89,647
REMICs		—		1,636		—		1,636
Collateralized mortgage obligations		—		82,101		—		82,101
Corporate bonds		—		12,101		—		12,101
Obligations of state and political subdivisions		—		92,028		3,411		95,439
Mortgage banking derivative - asset		—		892		—		892

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

Assets and Liabilities Measured on a Non-Recurring Basis

September 30, 2017 Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Fair
Value
(In Thousands)
Impaired loans
Commercial Real Estate $ - $ - $ 1,829 $ 1,829
Commercial - - 2,830 2,830
Total Impaired loans - - 4,659 4,659
Mortgage servicing rights - 6,944 - 6,944
Real estate held for sale
Commercial Real Estate - - 227 227
Total Real Estate held for sale - - 227 227

December 31, 2016 Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Fair
Value
(In Thousands)
Impaired loans
1-4 Family Residential Real Estate $ - $ - $ 316 $ 316
Commercial Real Estate - - 848 848
Commercial 332 332
Total impaired loans - - 1,496 1,496
Mortgage servicing rights - 657 - 657
Commercial Real Estate - - 377 377
Total Real Estate held for sale - - 377 377

March 31, 2020	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Impaired loans
Commercial real estate		—		—		206		206
Commercial		—		—		228		228
Total impaired loans		—		—		434		434
Mortgage servicing rights		—		12,781		—		12,781

December 31, 2019	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Impaired loans
Commercial real estate	$	—	$	—	$	68	$	68
Commercial		—		—		38		38
Total impaired loans		—		—		106		106
Mortgage servicing rights		—		273		—		273

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of ~~September 30, 2017,~~March 31, 2020, the significant unobservable inputs used in the fair value measurements were as follows:

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

Impaired Loans- Applies to all loan classes $ 4,659 Appraisals which utilize sales comparison, net income and cost approach Discounts for collection issues and changes in market conditions 10 % 10 %
Real estate held for sale – Applies to all classes $ 227 Appraisals which utilize sales comparison, net income and cost approach Discounts for changes in market conditions 3 % 3 %

Fair

Value

Valuation

Technique

Unobservable

Inputs

Range of

Inputs

Weighted

Average

(Dollars in Thousands)

Impaired Loans- Applies to all loan

classes

434

Appraisals which utilize sales comparison, net income and cost approach

Discounts for collection issues and changes in market conditions

10-20%

10.86

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of December 31, ~~2016,~~2019, the significant unobservable inputs used in the fair value measurements were as follows:

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

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

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

Fair Value

Valuation Technique

Unobservable Inputs

Range of

Inputs

Weighted

Average

(Dollars in Thousands)

Impaired Loans- Applies to all loan

classes

Appraisals which utilize sales comparison, net income and cost approach

Discounts for collection issues and changes in market conditions

10-13%

10.86

~~Impaired loans, which are measured for impairment using~~The Company has elected the fair value option for new applications taken post January 31, 2020, and subsequently originated for residential mortgage and permanent construction loans held for sale. These loans are intended for sale and the Company believes that fair value is the best indicator of the ~~collateral for collateral dependent~~resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policies. None of these loans are 90 or more days past due nor on nonaccrual status as of March 31, 2020. There were no loans at December 31, 2019, where the fair value option had abeen elected.

The aggregate fair value of ~~$4.7~~these loans at March 31, 2020 was $58.2 million ~~with no valuation allowance~~ and ~~a fair value of $1.5 million, with a $1,000 valuation allowance at September 30, 2017 and December 31, 2016, respectively.~~A provision expense of $8,000 and $821,000 for the three months and nine months ended September 30, 2017 and a provision recovery of $6,000 and $204,000 for the three months and nine months ended September 30, 2016, were included in earnings.

~~Mortgage servicing rights which are carried at the lower of cost or fair value,~~they had a ~~fair value~~contractual balance of ~~$6,944,000 with a valuation allowance~~$52.6 million for this same period. The $5.6 million difference between these two figures was recorded in gains and losses on the sale of ~~$501,000 and a fair value of $657,000 with a valuation allowance of $522,000 at September 30, 2017 and December 31, 2016, respectively.~~A charge of $27,000 and a recovery of $21,000 for the three and nine months ended September 30, 2017 and a recovery of $7,000 and a charge $118,000 for the three and nine months ended September 30, 2016, respectively, were included in earnings.

~~Real estate~~loans held for sale ~~is determined using Level 3 inputs which include appraisals and are adjusted for estimated costs to sell. The change in fair value of real estate held for sale was $20,000 for~~during the ~~three and nine months~~quarter ended ~~September 30, 2017, which was recorded directly as an adjustment to current earnings through non-interest expense.The change in fair value of real estate held for sale was $22,000 and $74,000 for the three and nine months ended September 30, 2016.~~March 31, 2020.

In accordance with FASB ASC Topic 825, the Fair Value Measurements tables are a comparative condensed consolidated statement of financial condition based on carrying amount and estimated fair values of financial instruments as of ~~September 30, 2017~~March 31, 2020, and December 31, ~~2016.~~2019. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of First Defiance.

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

The carrying amount of cash and cash equivalents and notes payable, as a result of their short-term nature, is considered to be equal to fair value and are classified as Level 1.

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

The ~~fair value~~Company’s loans were valued on an individual basis, with consideration given to the loans underlying characteristics, including account types, remaining terms (in months), annual interest rates or coupons, interest types, past delinquencies, timing of ~~loans that reprice within 90 days is equal to their carrying amount. For other loans, the estimated fair value is calculated based on~~principal and interest payments, current market rates, loss exposures, and remaining balances. The model utilizes a discounted cash flow analysis, using interest rates currently being offered for loans with similar terms, resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as previously described. The allowance for loan losses is considered to be a reasonable adjustment for credit risk. The methods utilizedapproach to estimate the fair value of the loans ~~do not necessarily represent an exit price.~~using assumptions for the coupon rates, remaining maturities, prepayment speeds, projected default probabilities, losses given defaults, and estimates of prevailing discount rates. The discounted cash flow approach models the credit losses directly in the projected cash flows. The model applies various assumptions regarding credit, interest, and prepayment risks for the loans based on loan types, payment types and fixed or variable classifications. The estimated fair value of impaired loans ~~held for sale~~ is ~~estimated~~ based on ~~binding contracts and quotes from third party investors resulting in a~~the fair value of the collateral, less estimated cost to sell, or the present value of the loan’s expected future cash flows (discounted at the loan’s effective interest rate). All impaired loans are classified as Level ~~2 classification.~~

3 within the valuation hierarchy.

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

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

The fair values of securities sold under repurchase agreements are equal to their carrying amounts resulting in a Level 21 classification. The carrying value of subordinated debentures was considered to be the carrying value as the debt is floating rate and deposits with fixed maturities is estimated based discounted cash flow analyses based on interest rates currently being offered on instruments with similar characteristics and maturities resulting in a Level 3 classification.can be prepaid at any time without penalty.

FHLB advances with maturities greater than 90 days are valued based on a discounted cash flow analysis, using interest rates currently being quoted for similar characteristics and maturities resulting in a Level 2 classification. The cost or value of any call or put options is based on the estimated cost to settle the option at ~~September 30, 2017.~~March 31, 2020.

			Fair Value Measurements at March 31, 2020
			(In Thousands)
	Carrying Value		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	145,217	$	145,217	$	145,217	$	—	$	—
Investment securities		534,206		534,206		—		528,376		5,830
Federal Home Loan Bank Stock		89,252	N/A		N/A		N/A		N/A
Loans receivable, net		5,028,058		5,141,454		—		—		5,141,454
Loans held for sale, carried at fair value		58,222		58,222		—		13,802		44,420
Loans held for sale, carried at lower of cost or market		27,372		28,383		—		28,383		—

Financial Liabilities:
Deposits	$	4,994,148	$	5,003,154	$	3,717,546	$	1,285,608	$	—
Advances from Federal Home Loan Bank		486,000		487,027		—		487,027		—
Securities sold under repurchase agreements		1,961		1,961		—		1,961		—
Subordinated debentures		36,083		36,083		—		36,083		—

			Fair Value Measurements at December 31, 2019
			(In Thousands)
	Carrying Value		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	131,254	$	131,254	$	131,254	$	—	$	—
Investment securities		283,448		283,448		—		280,037		3,411
FHLB Stock		11,915	N/A		N/A		N/A		N/A
Loans, net, including loans held for sale		2,764,329		2,756,092		—		18,456		2,737,636

Financial Liabilities:
Deposits	$	2,870,325	$	2,871,166	$	2,131,537	$	739,629	$	—
Advances from FHLB		85,063		85,003		—		85,003		—
Securities sold under repurchase agreements		2,999		2,999		2,999		—		—
Subordinated debentures		36,083		36,083		—		36,083		—

Stock Compensation Plans

Fair Value Measurements at September 30, 2017
(In Thousands)
Carrying
Value Total Level 1 Level 2 Level 3
Financial Assets:
Cash and cash equivalents $ 124,731 $ 124,731 $ 124,731 $ - $ -
Investment securities 260,762 260,762 1 260,761 -
Federal Home Loan Bank Stock 15,992 N/A N/A N/A N/A
Loans, net, including loans held for sale 2,261,901 2,248,724 - 12,698 2,236,026
Accrued interest receivable 9,864 9,864 7 1,504 8,353

Financial Liabilities:
Deposits $ 2,360,675 $ 2,368,438 $ 519,911 $ 1,848,527 $ -
Advances from Federal Home Loan Bank 104,555 104,062 - 104,062 -
Securities sold under repurchase agreements 22,939 22,939 - 22,939 -
Notes Payable 6,500 6,500 6,500 - -
Subordinated debentures 36,083 34,763 - - 34,763

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

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

~~4. Stock Compensation Plans~~

First Defiance has established equity based compensation plans for its directors and employees. On ~~March 15, 2010,~~February 27, 2018, the Board adopted, and the shareholders approved at the ~~2010~~2018 Annual Shareholders Meeting, the First Defiance Financial Corp. ~~2010~~2018 Equity Incentive Plan (the ~~“2010~~“2018 Equity Plan”). The ~~2010~~2018 Equity Plan replaced all existing plans, although the Company’s former equity plans remain in existence to the extent there were outstanding grants thereunder at the time the ~~2010~~2018 Equity Plan was approved. In addition, as a result of the Merger, First Defiance assumed certain outstanding stock options granted under UCFC’s Amended and Restated 2007 Long-Term Incentive Plan and UCFC’s 2015 Long Term Incentive Plan (the “UCFC 2015 Plan”). First Defiance also assumed the UCFC 2015 Plan with respect to the available shares under the UCFC 2015 Plan as of the effective date of the Merger, with appropriate adjustments to the number of shares available to reflect the Merger. The stock options assumed from UCFC in the Merger will become exercisable solely to purchase shares of First Defiance, with appropriate adjustments to the number of shares subject to the assumed stock options and the exercise price of such stock options. All awards currently outstanding under prior plans will remain in effect in accordance with their respective terms. Any new awards will be made under the ~~2010~~2018 Equity Plan. The ~~2010~~2018 Equity Plan allows for issuance of up to ~~350,000~~900,000 common shares through the award of options, stock grants, restricted stock units (“RSU”), stock appreciation rights or other stock-based awards.

As of ~~September 30, 2017, 43,200~~March 31, 2020, 57,683 options ~~had been granted and remain~~to acquire First Defiance shares were outstanding at option prices based on the market value of the underlying shares on the date the options were granted. Of this figure, 39,983 are associated with the conversion of all of the outstanding stock options on the books of UCFC into stock options of First Defiance at the same conversion price and ratio applied to UCFC common shares at January 31, 2020. Options granted in prior years vest 20% per year. All options expire ten years from the date of grant. Vested options of retirees expire on the earlier of the scheduled expiration date or three months after the retirement date.

~~Beginning in 2014, the~~The Company ~~annually has~~ approved a Short-Term Incentive Plan (“STIP”) and a Long-Term Equity Incentive Plan ~~and a Long-Term~~ (“LTIP”) ~~Equity Incentive Plan~~ for selected members of management.

Under the ~~2016~~2019 and ~~2017~~2020 STIPs, the participants could earn ~~up to~~between 10% to 45% of their salary for potential payout based on the achievement of certain corporate performance targets during the calendar year. The final amount of benefits under the STIPs is determined as of December 31 of the same year and paid out in cash in the first quarter of the following year. The participants are required to be employed on the day of payout in order to receive ~~such~~the payment.

Under each LTIP, the participants ~~may~~could earn ~~up to~~between 20% to 45% of their salary for potential payout in the form of equity awards based on the achievement of certain corporate performance targets over a three-year period. The Company ~~granted 24,526 and 20,657~~plans to grant these RSU’s to ~~the~~ participants in the ~~2016 and 2017 LTIPs, respectively, effective January 1 in the year the award was made, which represents the maximum target award.~~second quarter of 2020. The amount of benefit under each LTIP will be determined individually at the end of the 36 month performance period ending December 31. The benefits earned under each LTIP will be paid out in equity in the first quarter following the end of the performance period. The participants are required to be employed on the day of payout in order to receive ~~such~~the payment.

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

In the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2020, the Company also granted ~~to employees 4,763 restricted~~13,349 shares of ~~which 2,727 were~~ restricted stock ~~units and 2,036 were restricted stock grants. Of the 4,763 restricted~~to directors. These shares ~~granted, 1,839 were issued to directors and~~ have a one-year vesting period. ~~The remaining 2,924 were issued to employees and have a three year vesting period. The fair value of all granted restricted shares was determined by the stock price at the date of the grant.~~

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

The fair value of stock options granted during the nine months ended September 30, 2016 was determined at the date of grant using the Black-Scholes stock option-pricing model and the following assumptions:

	~~Nine Months ended~~
	~~September 30, 2017~~		~~September 30,2016~~
~~Expected average risk-free rate~~		-		~~2.24~~	%
~~Expected average life~~		-		~~10.00 years~~
~~Expected volatility~~		-		~~41.00~~	%
~~Expected dividend yield~~		-		~~2.33~~	%

~~The weighted-average fair value of options granted was $13.95 for the nine months ended September 30, 2016. No options have been issued in 2017.~~

Following is stock option activity under the plans during the ~~nine~~three months ended ~~September 30, 2017:~~March 31, 2020:

Options
Outstanding Weighted
Average
Exercise Price Weighted
Average
Remaining
Contractual
Term (in years) Aggregate
Intrinsic
Value
(in 000’s)
Options outstanding, January 1, 2017 54,750 $ 22.21
Forfeited or cancelled - -
Exercised (11,550 ) 24.41
Granted - -
Options outstanding, September 30, 2017 43,200 $ 21.62 3.40 $ 1,334
Vested or expected to vest at September 30, 2017 43,200 $ 21.62 3.40 $ 1,334
Exercisable at September 30, 2017 31,100 $ 17.31 1.87 $ 1,094

	Options Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in 000’s)
Options outstanding, January 1, 2020		17,700	$	17.60
Forfeited or cancelled		—		—
Exercised		—		—
Exchanged		39,983		16.00
Granted		—		—
Options outstanding, March 31, 2020		57,683	$	16.49		5.06	$	152
Vested or expected to vest at March 31, 2020		57,683	$	16.49		5.06	$	152
Exercisable at March 31, 2020		55,783	$	16.41		5.04	$	152

All of the 39,983 options exchanged are associated with the conversion of all of the outstanding stock options on the books of UCFC into stock options of First Defiance.

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

	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2017		2016		2017		2016		2020		2019
Proceeds of options exercised	$	-	$	175	$	198	$	667	$	—	$	185
Related tax benefit recognized		-		16		54		158		—		4
Intrinsic value of options exercised		-		196		301		684		—		360

As of ~~September 30, 2017,~~March 31, 2020, there was ~~$116,000~~$10,000 of total unrecognized compensation cost related to unvested stock options granted under the Company’s equity plans. The cost is expected to be recognized over a weighted-average period of ~~2.5~~0.76 years.

At ~~September 30, 2017, 72,660 RSU’s~~March 31, 2020, 46,129 RSUs and ~~4,536~~60,650 restricted stock grants were ~~outstanding.~~unvested. Compensation expense related to RSUs and STIP is recognized over the performance period based on the achievements of targets as established under the plan documents. ~~A total~~Total expense of ~~$373,000 and $1.5~~$1.0 million was recorded during the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020, compared to an expense of ~~$263,000 and $970,000~~$523,000 for the three ~~and nine~~ months ended ~~September 30, 2016. The increase in expense year-to-date is attributable to the Company’s better performance in comparison to its targets.~~March 31, 2019. There was approximately ~~$550,000~~$858,000 and ~~$773,000~~$1.2 million included within other liabilities at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, respectively, related to the STIP.

	Restricted Stock Units					Stock Grants
Unvested Shares	Shares			Weighted- Average Grant Date Fair Value		Shares			Weighted- Average Grant Date Fair Value
Unvested at January 1, 2020		158,470		$	25.72		48,545		$	27.49
Granted		—			—		13,349			25.75
Vested		(86,050	)		25.48		(1,244	)		28.60
Forfeited		(26,291	)		25.58		—			—
Unvested at March 31, 2020		46,129		$	26.24		60,650		$	27.09

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

Unvested at January 1, 2017 75,468 $ 32.31 11,161 $ 32.30
Granted 23,384 50.56 21,377 28.39
Vested (19,341 ) 25.77 (26,980 ) 26.70
Forfeited (6,973 ) 25.77 (1,022 ) 37.02
Unvested at September 30, 2017 72,660 $ 40.54 4,536 $ 46.09

The maximum amount of compensation expense that may be recorded for the ~~2017 STIP and the 2015, 2016 and 2017~~active LTIPs at ~~September 30, 2017~~March 31, 2020, is approximately ~~$3.9~~$2.7 million. However, the estimated expense expected to be recorded as of ~~September 30, 2017~~March 31, 2020, based on the performance measures in the plans, is ~~$3.0~~$2.7 million, of which ~~$1.1~~$2.5 million is unrecognized at ~~September 30, 2017~~March 31, 2020, and will be recognized over the remaining performance periods.

5. ~~Dividends on Common Stock~~

Dividends on Common Stock

First Defiance ~~declared and paid a $0.25 per common stock dividend in the first, second and third quarters of 2017 and~~ declared and paid a $0.22 per common stock dividend in the first ~~second~~quarter of 2020 and ~~third quarters~~declared and paid a $0.19 per common stock dividend in the first quarter of ~~2016.~~2019.

6. ~~Earnings Per Common Share~~

(Loss) Earnings Per Common Share

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

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

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
(In Thousands, except per share data)
Basic Earnings Per Share:
Net income available to common shareholders $ 9,381 $ 7,045 $ 22,869 $ 21,478
Less: Income allocated to participating securities 1 3 3 9
Net income allocated to common shareholders 9,380 7,042 22,866 21,469

Weighted average common shares outstanding Including participating securities 10,154 8,987 9,918 8,991
Less: Participating securities 5 11 5 11
Average common shares 10,149 8,976 9,913 8,980

Basic earnings per common share $ 0.92 $ 0.78 2.31 2.39

Diluted Earnings Per Share:
Net income allocated to common shareholders $ 9,380 $ 7,042 $ 22,866 21,469
Weighted average common shares outstanding for basic earnings per common share 10,149 8,976 9,913 8,980
Add: Dilutive effects of stock options 60 74 57 70
Average shares and dilutive potential common shares 10,209 9,050 9,970 9,050

Diluted earnings per common share $ 0.92 $ 0.78 2.29 2.37

	Three Months Ended March 31,
	2020			2019
	(In Thousands, except per share data)
Basic (Loss) Earnings Per Share:
Net (loss) income available to common shareholders	$	(22,482	)	$	11,482
Less: (loss) income allocated to participating securities		(39	)		9
Net (loss) income allocated to common shareholders		(22,443	)		11,473

Weighted average common shares outstanding including participating securities		31,721			20,030
Less: Participating securities		55			16
Average common shares		31,666			20,014

Basic (loss) earnings per common share	$	(0.71	)	$	0.57
Diluted (Loss) Earnings Per Share:
Net (loss) income allocated to common shareholders	$	(22,443	)	$	11,473
Weighted average common shares outstanding for basic (loss) earnings per common share		31,666			20,014
Add: Dilutive effects of stock options		—			81
Average shares and dilutive potential common shares		31,666			20,095

Diluted (loss) earnings per common share	$	(0.71	)	$	0.57

~~There were~~

Since net income allocated to common shareholders was negative for the quarter ended March 31, 2020, there is no ~~shares excluded from~~dilutive effect of stock options included in the diluted (loss) earnings per common share ~~calculation for the three and nine months ended September 30, 2017, as no~~calculation. 3,376 shares ~~were anti-dilutive during this time period. Shares~~ subject to issue upon exercise of options of ~~7,300 and 12,550 for the three and nine month periods~~ in ~~2016~~2019 were excluded from the diluted earnings per common share calculation as they were anti-dilutive.

Investment Securities

~~7. Investment Securities~~

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

Amortized
Cost Gross
Unrealized
Gains Gross
Unrealized
Losses Fair Value
(In Thousands)
At September 30, 2017
Available-for-Sale Securities:
Obligations of U.S. government corporations and agencies $ 2,000 $ - $ (13 ) $ 1,987
Mortgage-backed securities – residential 74,344 565 (439 ) 74,470
REMICs 1,124 �� 6 - 1,130
Collateralized mortgage obligations 72,758 550 (333 ) 72,975
Preferred stock - 1 - 1
Corporate bonds 12,915 185 - 13,100
Obligations of state and political subdivisions 93,160 3,302 (91 ) 96,371
Total Available-for-Sale $ 256,301 $ 4,609 $ (876 ) $ 260,034

Amortized
Cost Gross
Unrecognized
Gains Gross
Unrecognized
Losses Fair Value
(In Thousands)
Held-to-Maturity Securities*:
FHLMC certificates $ 10 $ - $ - $ 10
FNMA certificates 46 - - 46
GNMA certificates 18 - - 18
Obligations of state and political subdivisions 654 - - 654
Total Held-to Maturity $ 728 $ - $ - $ 728

Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
At December 31, 2016
Available-for-sale
Obligations of U.S. government corporations and agencies $ 4,000 $ - $ (85 ) $ 3,915
Mortgage-backed securities - residential 82,619 390 (1,302 ) 81,707
REMICs 1,309 - (2 ) 1,307
Collateralized mortgage obligations 63,204 422 (621 ) 63,005
Preferred stock - 2 - 2
Corporate bonds 12,919 97 (3 ) 13,013
Obligations of state and political subdivisions 86,165 2,491 (613 ) 88,043
Total Available-for-Sale $ 250,216 $ 3,402 $ (2,626 ) $ 250,992

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
At March 31, 2020
Available-for-Sale Securities:
Obligations of U.S. government corporations and agencies	$	28,871	$	1,411	$	—		$	30,282
Mortgage-backed securities		193,575		7,455		(4	)		201,026
Collateralized mortgage obligations		134,144		3,476		(12	)		137,608
Corporate bonds		22,381		74		(388	)		22,067
Obligations of state and political subdivisions		139,652		4,252		(681	)		143,223
Total Available-for-Sale	$	518,623	$	16,668	$	(1,085	)	$	534,206

As a result of the merger, securities with a fair value of $262.8 million were acquired on January 31, 2020.

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In Thousands)
At December 31, 2019
Available-for-sale
Obligations of U.S. government corporations and agencies	$	2,518	$	6	$	—		$	2,524
Mortgage-backed securities		88,380		1,380		(113	)		89,647
Collateralized mortgage obligations		83,008		814		(85	)		83,737
Corporate bonds		12,011		90		—			12,101
Obligations of state and political subdivisions		91,406		4,042		(9	)		95,439
Total Available-for-Sale	$	277,323	$	6,332	$	(207	)	$	283,448

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

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

The amortized cost and fair value of the investment securities portfolio at ~~September 30, 2017~~March 31, 2020, are shown below by contractual maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. For purposes of the maturity table, mortgage-backed securities (“MBS”), and collateralized mortgage obligations (“CMO”) ~~and REMICs,~~ which are not due at a single maturity date, have not been allocated over the maturity groupings. These securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.

Available-for-Sale Held-to-Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
(In Thousands)
Due in one year or less $ 1,210 $ 1,212 $ - $ -
Due after one year through five years 21,301 21,800 62 62
Due after five years through ten years 43,275 44,919 592 592
Due after ten years 42,289 43,528 - -
MBS/CMO/REMIC 148,226 148,575 74 74
$ 256,301 $ 260,034 $ 728 $ 728

	Available-for-Sale
	Amortized Cost		Fair Value
	(In Thousands)
Due in one year or less	$	4,393	$	4,391
Due after one year through five years		20,876		20,747
Due after five years through ten years		65,575		67,675
Due after ten years		100,060		102,759
MBS/CMO		327,719		338,634
	$	518,623	$	534,206

Investment securities with a carrying amount of ~~$152.9~~$321.3 million at ~~September 30, 2017~~March 31, 2020, were pledged as collateral on public deposits, securities sold under repurchase agreements and the Federal Reserve discount window.

~~As of September 30, 2017, the Company’s investment portfolio consisted of 430 securities, 63 of which were in an unrealized loss position.~~

The following tables summarize First Defiance’s securities that were in an unrealized loss position at ~~September 30, 2017~~March 31, 2020, and December 31, ~~2016:~~2019:

	Duration of Unrealized Loss Position															Duration of Unrealized Loss Position
	Less than 12 Months					12 Months or Longer					Total					Less than 12 Months				12 Months or Longer					Total
			Gross					Gross								Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss			Fair Value		Unrealized Losses
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			(In Thousands)
	Value		Loss			Value		Loss			Value		Loses
	(In Thousands)
At September 30, 2017
At March 31, 2020
Available-for-sale securities:
Obligations of U.S. government corporations and agencies	$	1,987	$	(13	)	$	-	$	-		$	1,987	$	(13	)
Mortgage-backed securities-residential		16,350		(114	)		13,018		(325	)		29,368		(439	)
Collateralized mortgage obligations		18,164		(136	)		9,195		(197	)		27,359		(333	)
Obligations of state and political subdivisions		3,498		(26	)		2,462		(65	)		5,960		(91	)
Total temporarily impaired securities	$	39,999	$	(289	)	$	24,675	$	(587	)	$	64,674	$	(876	)

	Duration of Unrealized Loss Position
	Less than 12 Months					12 Months or Longer					Total
			Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loses
	(In Thousands)
At December 31, 2016
Available-for-sale securities:
Obligations of U.S. government corporations and agencies	$	3,915	$	(85	)	$	-	$	-		$	3,915	$	(85	)
Mortgage-backed securities-residential		63,736		(1,302	)		-		-			63,736		(1,302	)
REMICs		1,308		(2	)		-		-			1,308		(2	)
Mortgage-backed securities																	—		—		199		(4	)		199		(4	)
Collateralized mortgage obligations		28,882		(566	)		1,227		(55	)		30,110		(621	)						8,793		(12	)		8,793		(12	)
Corporate bonds		-		-			997		(3	)		997		(3	)						16,933		(388	)		16,933		(388	)
Obligations of state and political subdivisions		19,172		(613	)		-		-			19,172		(613	)						38,674		(681	)		38,674		(681	)
Total temporarily impaired securities	$	117,013	$	(2,568	)	$	2,224	$	(58	)	$	119,238	$	(2,626	)	$	—	$	—	$	64,599	$	(1,085	)	$	64,599	$	(1,085	)

	Duration of Unrealized Loss Position
	Less than 12 Months					12 Months or Longer					Total
	Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss			Fair Value		Unrealized Losses
	(In Thousands)
At December 31, 2019
Available-for-sale securities:
Mortgage-backed securities-residential	$	13,830	$	(42	)	$	9,721	$	(71	)	$	23,551	$	(113	)
Collateralized mortgage obligations		7,448		(29	)		5,549		(56	)		12,997		(85	)
Obligations of state and political subdivisions		1,413		(9	)		-		-			1,413		(9	)
Total temporarily impaired securities	$	22,691	$	(80	)	$	15,270	$	(127	)	$	37,961	$	(207	)

There were ~~realized gains~~no sales of ~~$158,000 ($103,000 after tax) from~~securities during the ~~sales and calls of investment securities in the third quarter of 2017 and $425,000 ($276,000 after tax) for the nine~~three months ended ~~September 30, 2017, while there were realized gains of $151,000 ($98,000 after tax) in the third quarter of 2016 and $509,000 ($331,000 after tax) for the nine months ended September 30, 2016.~~March 31, 2020 or 2019.

~~Management evaluates~~ASU 2016-13 makes targeted improvements to the accounting for credit losses on securities available for ~~other-than-temporary impairment (“OTTI”) at least quarterly, and more frequently when economic or market conditions warrant such an evaluation.~~sale. The ~~investment portfolio is evaluated~~concept of other than-temporarily impaired has been replaced with the allowance for ~~OTTI by segregating the portfolio into two general segments. Investment~~credit losses. Unlike securities ~~classified as available-for-sale or held-to-maturity are generally evaluated~~held to maturity, securities available for ~~OTTI under FASB ASC Topic 320. Certain collateralized debt obligations (“CDOs”)~~sale are evaluated ~~for OTTI under FASB ASC Topic 325, Investment – Other.~~on an individual level and pooling of securities is not allowed.

Quarterly, the Company evaluates if any security has a fair value less than its amortized cost. Once these securities are identified, in order to determine whether a decline in fair value resulted from a credit loss or other factors, the Company performs further analysis as outlined below:

Review the extent to which the fair value is less than the amortized cost and observe the security’s lowest credit rating as reported by third-party credit ratings companies.

~~When OTTI occurs under either model, the amount~~Any securities that are downgraded by a third party ratings company above would be subjected to additional analysis that may include, but is not limited to: changes in market interest rates, changes in securities credit ratings, security type, service area economic factors, financial performance of the ~~OTTI recognized in earnings depends on whether an entity intends to sell~~issuer/or obligor of the ~~security or more likely than not~~underlying issue and third-party guarantee.

If the Company determines that a credit loss exists, the credit portion of the allowance will be ~~required to sell~~measured using a discounted cash flow (DCF) analysis using the ~~security before recovery~~effective interest rate as of ~~its amortized cost basis less any current period credit loss. If an entity intends to sell or more likely than not will be required to sell~~ the ~~security before recovery~~security’s purchase date. The amount of ~~its amortized cost basis less any current period~~ credit loss the ~~OTTI shall~~Company records will be ~~recognized in earnings equal~~limited to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected compared to the book value of the security and is recognized in earnings. The amount of OTTI related to other factors shall be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings shall become the new amortized cost basis of the investment.

With the exception of corporate bonds, the above securities all have fixed interest rates, and all securities have defined maturities. Their fair value is sensitive to movements in market interest rates. First Defiance has the ability and intent to hold these investments for a time necessary to recoverby which the amortized cost ~~without impacting its liquidity position~~exceeds the fair value. As of March 31, 2020, management had determined that no credit loss exists. Accrued interest on AFS debt securities totaled $2.8 million at March 31, 2020 and it is ~~not more than likely that the Company will be required to sell the investments before anticipated recovery.~~

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

~~The proceeds~~excluded from the ~~sales and calls~~ACLS. Accrued interest on AFS debt securities is presented as a component of ~~securities and~~otherassets on the ~~associated gains and losses are listed below:~~Company’s balance sheet.

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
(In Thousands)
Proceeds $ 10,226 $ 6,356 $ 18,047 $ 14,871
Gross realized gains 166 151 433 509
Gross realized losses 8 - 8 -

Loans

~~8. Loans~~

~~Loans receivable consist of the following:~~

September 30,
2017 December 31,
2016
(In Thousands)
Real Estate:

Secured by 1-4 family residential $ 271,051 $ 207,550
Secured by multi-family residential 212,092 196,983
Secured by commercial real estate 993,603 843,579
Construction 244,920 182,886
1,721,666 1,430,998
Other Loans:
Commercial 510,240 469,055
Home equity and improvement 132,220 118,429
Consumer finance 29,009 16,680
671,469 604,164
Total loans 2,393,135 2,035,162
Deduct:
Undisbursed loan funds (115,714 ) (93,355 )
Net deferred loan origination fees and costs (1,379 ) (1,320 )
Allowance for loan loss (26,341 ) (25,884 )
Totals $ 2,249,701 $ 1,914,603

The table above includes loans acquired during 2017 totaling $285.4 million as of February 24, 2017, which is net of purchase discount on the acquired loans of $5.4 million. The recorded investment of these loans as of September 30, 2017 was $232.5 million, net of the purchase discount of $4.2 million.

Loan segments have been identified by evaluating the portfolio based on collateral and credit risk characteristics. Loans receivable consist of the following:

	March 31, 2020			December 31, 2019
	(In Thousands)
Real Estate:
Residential	$	1,265,901		$	324,773
Commercial		2,200,266			1,506,026
Construction		521,442			305,305
		3,987,609			2,136,104
Other Loans:
Commercial		897,865			578,071
Home equity and improvement		301,146			122,864
Consumer finance		137,679			37,649
		1,336,690			738,584
Loans before deferred loan origination fees and costs		5,324,299			2,874,688
Deduct:
Undisbursed construction loan funds		(206,236	)		(126,108	)
Net deferred loan origination fees and costs		(4,146	)		(2,259	)
Allowance for credit losses		(85,859	)		(31,243	)
Total loans	$	5,028,058		$	2,715,078

The following table discloses allowance for ~~loan~~credit loss activity for the quarters ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019 by portfolio segment (In Thousands):

Quarter Ended September 30,
2017 1-4 Family
Residential
Real Estate Multi-
Family
Residential
Real Estate Commercial
Real Estate Construction Commercial Home Equity
and
Improvement Consumer
Finance Total
Beginning Allowance $ 2,641 $ 2,193 $ 10,136 $ 540 $ 7,973 $ 2,199 $ 233 $ 25,915

Charge-Offs (60 ) 0 0 0 (64 ) (92 ) (20 ) (236 )

Recoveries 11 0 103 0 18 59 9 200

Provisions (54 ) 110 232 38 98 19 19 462
Ending Allowance $ 2,538 $ 2,303 $ 10,471 $ 578 $ 8,025 $ 2,185 $ 241 $ 26,341

Quarter Ended September 30,
2016 1-4 Family
Residential
Real Estate Multi-
Family
Residential
Real Estate Commercial
Real Estate Construction Commercial Home Equity
and
Improvement Consumer
Finance Total
Beginning Allowance $ 2,839 $ 2,365 $ 10,904 $ 633 $ 6,740 $ 2,278 $ 189 $ 25,948

Charge-Offs (111 ) 0 (79 ) 0 (26 ) (74 ) (24 ) (314 )

Recoveries 3 0 62 0 159 40 10 274

Provisions (299 ) (185 ) (280 ) (221 ) 1,006 (47 ) 41 15
Ending Allowance $ 2,432 $ 2,180 $ 10,607 $ 412 $ 7,879 $ 2,197 $ 216 $ 25,923

~~The following table discloses allowance for loan loss activity for the year-to-date periods ended September 30, 2017 and 2016 by portfolio segment and impairment method (In Thousands):~~

Year-to-date Period Ended September 30, 2017	1-4 Family Residential Real Estate			Multi- Family Residential Real Estate		Commercial Real Estate			Construction			Commercial			Home Equity and Improvement			Consumer Finance			Total
Quarter Ended March 31, 2020																								Residential Real Estate			Commercial Real Estate			Construction			Commercial			Home Equity and Improvement			Consumer Finance			Total
Beginning Allowance	$	2,627		$	2,228	$	10,625		$	450		$	7,361		$	2,386		$	207		$	25,884		$	2,867		$	16,302		$	996		$	9,003		$	1,700		$	375		$	31,243

Impact of ASC 326 Adoption																									1,765			3,682			(223	)		(2,263	)		(521	)		(86	)		2,354
Acquisition related allowance for credit loss (PCD)																									1,077			4,053			—			2,272			248			48			7,698
Charge-Offs		(109	)		0		(400	)		0			(2,091	)		(246	)		(112	)		(2,958	)		(184	)		(16	)		—			(96	)		(30	)		(108	)		(434	)

Recoveries		100			32		220			0			227			118			83			780			101			340			—			669			42			60			1,212

Provisions		(80	)		43		26			128			2,528			(73	)		63			2,635
Provisions(1)(2)																									17,698			18,154			111			2,316			2,515			2,992			43,786
Ending Allowance	$	2,538		$	2,303	$	10,471		$	578		$	8,025		$	2,185		$	241		$	26,341		$	23,324		$	42,515		$	884		$	11,901		$	3,954		$	3,281		$	85,859

Year-to-date Period Ended September 30, 2016	1-4 Family Residential Real Estate			Multi- Family Residential Real Estate		Commercial Real Estate			Construction			Commercial			Home Equity and Improvement			Consumer Finance			Total
Beginning Allowance	$	3,212		$	2,151	$	11,772		$	517		$	5,255		$	2,304		$	171		$	25,382

Charge-Offs		(203	)		0		(92	)		0			(381	)		(170	)		(41	)		(887	)

Recoveries		123			0		468			0			234			113			58			996

Provisions		(700	)		29		(1,541	)		(105	)		2,771			(50	)		28			432
Ending Allowance	$	2,432		$	2,180	$	10,607		$	412		$	7,879		$	2,197		$	216		$	25,923

(1)

Allowance/provision are not comparable to prior periods due to the adoption of CECL.

(2)

Provision for the quarter ended March, 31, 2020 includes $25.9 million as a result of the Merger with UCFC in the first quarter

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2017 (In Thousands):

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

Ending allowance balance attributable to loans:

Individually evaluated for impairment $ 165 $ 3 $ 109 $ - $ 56 $ 281 $ $ 614

Collectively evaluated for impairment 2,373 2,300 10,362 578 7,969 1,904 241 25,727

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

Total ending allowance balance $ 2,538 $ 2,303 $ 10,471 $ 578 $ 8,025 $ 2,185 $ 241 $ 26,341

Loans:

Loans individually evaluated for impairment $ 6,975 $ 2,069 $ 30,387 $ - $ 14,019 $ 1,199 $ 51 $ 54,700

Loans collectively evaluated for impairment 263,456 210,030 964,767 129,333 497,712 131,562 28,967 2,225,827

Loans acquired with deteriorated credit quality 1,092 303 2,137 - 333 - - 3,865

Total ending loans balance $ 271,523 $ 212,402 $ 997,291 $ 129,333 $ 512,064 $ 132,761 $ 29,018 $ 2,284,392

Quarter Ended March 31, 2019	Residential Real Estate			Commercial Real Estate			Construction		Commercial			Home Equity and Improvement			Consumer Finance			Total
Beginning Allowance	$	2,881		$	15,142		$	682	$	7,281		$	2,026		$	319		$	28,331
Charge-Offs		(172	)		—			—		(187	)		(33	)		(142	)		(534	)
Recoveries		13			96			—		12			24			10			155
Provisions		89			(169	)		49		170			(89	)		162			212
Ending Allowance	$	2,811		$	15,069		$	731	$	7,276		$	1,928		$	349		$	28,164

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, ~~2016 (In Thousands)~~2019 (in thousands):

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

Ending allowance balance attributable to loans:

Individually evaluated for impairment $ 202 $ 4 $ 255 $ - $ 35 $ 313 $ - $ 809

Collectively evaluated for impairment 2,425 2,224 10,370 450 7,326 2,073 207 25,075

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

Total ending allowance balance $ 2,627 $ 2,228 $ 10,625 $ 450 $ 7,361 $ 2,386 $ 207 $ 25,884

Loans:

Loans individually evaluated for impairment $ 6,898 $ 3,483 $ 13,570 $ - $ 2,154 $ 1,269 $ 59 $ 27,433

Loans collectively evaluated for impairment 200,907 193,714 832,446 89,244 468,246 117,744 16,625 1,918,926

Loans acquired with deteriorated credit quality - - - - 11 - - 11

Total ending loans balance $ 207,805 $ 197,197 $ 846,016 $ 89,244 $ 470,411 $ 119,013 $ 16,684 $ 1,946,370

As of December 31, 2019	Residential Real Estate		Commercial Real Estate		Construction		Commercial		Home Equity and Improvement		Consumer Finance		Total
Allowance for credit loss attributable to:
Individually evaluated for impairment	$	115	$	85	$	—	$	174	$	48	$	—	$	422
Collectively evaluated for impairment		2,752		16,217		996		8,829		1,652		375		30,821
Acquired with deteriorated credit quality		—		—		—		—		—		—		—
Total Allowance	$	2,867	$	16,302	$	996	$	9,003	$	1,700	$	375	$	31,243


Loans:
Individually evaluated for impairment	$	7,049	$	21,132	$	—	$	6,655	$	759	$	28	$	35,623
Collectively evaluated for impairment		318,106		1,490,306		206,721		573,244		122,963		37,808		2,749,148
Acquired with deteriorated credit quality		989		921		—		12		—		—		1,922
Total loans	$	326,144	$	1,512,359	$	206,721	$	579,911	$	123,722	$	37,836	$	2,786,693

The following table presents the average balance, interest income recognized and cash basis income recognized on impaired loans by class of loans ~~(In Thousands)~~for the three months ended March 31, 2019 (in thousands):

Three Months Ended September 30, 2017 Nine Months Ended September 30, 2017
Average
Balance Interest
Income
Recognized Cash Basis
Income
Recognized Average
Balance Interest
Income
Recognized Cash Basis
Income
Recognized
Residential Owner Occupied $ 4,188 $ 37 $ 37 $ 3,699 $ 99 $ 99
Residential Non Owner Occupied 2,706 33 33 3,136 104 104
Total Residential Real Estate 6,894 70 70 6,835 203 203
Construction - - - - - -
Multi-Family 2,084 9 9 2,534 28 28
CRE Owner Occupied 12,127 24 22 9,613 70 70
CRE Non Owner Occupied 3,484 32 31 3,845 105 98
Agriculture Land 13,547 148 44 8,719 335 126
Other CRE 1,590 27 22 1,637 50 42
Total Commercial Real Estate 30,748 231 119 23,814 560 �� 336
Commercial Working Capital 7,033 38 38 5,115 86 90
Commercial Other 5,926 31 27 5,126 82 60
Total Commercial 12,959 69 65 10,241 168 150
Home Equity and Improvement 1,206 11 10 1,228 32 31
Consumer Finance 54 1 1 62 3 4
Total Impaired Loans $ 53,945 $ 391 $ 274 $ 44,714 $ 994 $ 752

	Three Months Ended March 31, 2019
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized
Residential Owner Occupied	$	4,552	$	64	$	60
Residential Non Owner Occupied		2,080		30		32
Total Residential Real Estate		6,632		94		92
CRE Owner Occupied		7,365		166		132
CRE Non Owner Occupied		1,989		33		26
Multi-Family Real Estate		1,332		20		20
Agriculture Land		12,903		206		197
Other CRE		1,154		34		33
Total Commercial Real Estate		24,743		459		408
Construction		—		—		—
Commercial Working Capital		8,089		143		91
Agriculture Production		—		—		—
Commercial Other		1,870		27		24
Total Commercial		9,959		170		115
Home Equity and Improvement		921		14		13
Consumer Finance		36		1		1
Total Impaired Loans	$	42,291	$	738	$	629

The following table presents the ~~average balance, interest income recognized and cash~~amortized cost basis ~~income recognized on impaired~~of collateral-dependent loans by class of loans ~~(In Thousands)~~and collateral type as of March 31, 2020 (in thousands):

	March 31, 2020
	Real Estate		Equipment and Machinery		Inventory and Receivables		Vehicles		Total
Real Estate:
Residential	$	1,505	$	—	$	—	$	—	$	1,505
Commercial		18,688		—		—		—		18,688
Construction		—		—		—		—		—

Other Loans:
Commercial		440		4,010		1,285		332		6,067
Home equity and improvement		1		—		—		—		1
Consumer finance		—		—		—		72		72

Total	$	20,634	$	4,010	$	1,285	$	404	$	26,333

Three Months Ended September 30, 2016 Nine Months Ended September 30, 2016
Average
Balance Interest
Income
Recognized Cash Basis
Income
Recognized Average
Balance Interest
Income
Recognized Cash Basis
Income
Recognized
Residential Owner Occupied $ 3,876 $ 34 $ 33 $ 3,892 $ 109 $ 106
Residential Non Owner Occupied 2,935 29 29 3,234 95 94
Total Residential Real Estate 6,811 63 62 7,126 204 200
Construction - - - - - -
Multi-Family 3,607 14 14 4,087 68 68
CRE Owner Occupied 7,171 30 30 7,810 134 115
CRE Non Owner Occupied 6,341 73 73 5,220 178 175
Agriculture Land 1,851 16 2 2,427 66 16
Other CRE 1,570 13 13 1,556 31 31
Total Commercial Real Estate 16,933 132 118 17,013 409 337
Commercial Working Capital 2,259 26 11 1,769 56 33
Commercial Other 2,198 8 7 2,742 36 34
Total Commercial 4,457 34 18 4,511 92 67
Home Equity and Improvement 1,446 12 12 1,631 40 40
Consumer Finance 65 1 1 69 3 3
Total Impaired Loans $ 33,319 $ 256 $ 225 $ 34,437 $ 816 $ 715

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

	December 31, 2019
	Unpaid Principal Balance*		Recorded Investment		Allowance for Credit Loss Allocated
With no allowance recorded:
Residential Owner Occupied	$	86	$	86	$	—
Residential Non Owner Occupied		962		967		—
Total Residential Real Estate		1,048		1,053		—
CRE Owner Occupied		5,098		4,814		—
CRE Non Owner Occupied		1,815		1,006		—
Multi-Family Real Estate		128		130		—
Agriculture Land		12,734		12,792		—
Other CRE		—		—		—
Total Commercial Real Estate		19,775		18,742		—
Construction		—		—		—
Commercial Working Capital		5,417		5,435		—
Agriculture Production		—		—		—
Commercial Other		469		471		—
Total Commercial		5,886		5,906		—
Home Equity and Improvement		151		151		—
Consumer Finance		—		—		—
Total loans with no allowance recorded	$	26,860	$	25,852	$	—

With an allowance recorded:
Residential Owner Occupied	$	5,137	$	4,977	$	104
Residential Non Owner Occupied		1,014		1,019		11
Total Residential Real Estate		6,151		5,996		115
CRE Owner Occupied		2,085		1,623		60
CRE Non Owner Occupied		317		319		13
Multi-Family Real Estate		—		—		—
Agriculture Land		262		268		3
Other CRE		401		180		9
Total Commercial Real Estate		3,065		2,390		85
Construction		—		—		—
Commercial Working Capital		682		450		150
Agriculture Production		—		—		—
Commercial Other		318		299		24
Total Commercial		1,000		749		174
Home Equity and Improvement		654		608		48
Consumer Finance		28		28		—
Total loans with an allowance recorded	$	10,898	$	9,771	$	422

September 30, 2017 December 31, 2016
Unpaid
Principal
Balance* Recorded
Investment Allowance
for Loan
Losses
Allocated Unpaid
Principal
Balance* Recorded
Investment Allowance
for Loan
Losses
Allocated
With no allowance recorded:
Residential Owner Occupied $ 2,400 $ 2,416 $ - $ 1,912 $ 1,765 $ -
Residential Non Owner Occupied 1,755 1,748 - 1,691 1,683 -
Total 1-4 Family Residential Real Estate 4,155 4,164 - 3,603 3,448 -
Multi-Family Residential Real Estate 2,012 2,020 - 3,578 3,430 -
CRE Owner Occupied 10,461 9,993 - 2,652 2,353 -
CRE Non Owner Occupied 3,397 3,171 - 4,372 4,240 -
Agriculture Land 13,068 13,315 - 1,695 1,722 -
Other CRE 1,011 804 - 1,225 1,115 -
Total Commercial Real Estate 27,937 27,283 - 9,944 9,430 -
Construction - - - - - -
Commercial Working Capital 8,066 7,998 - 838 786 -
Commercial Other 7,594 5,522 - 1,179 967 -
Total Commercial 15,660 13,520 - 2,017 1,753 -
Home Equity and Home Improvement 332 609 - 631 585 -
Consumer Finance 43 43 - 55 55 $ -
Total loans with no allowance recorded $ 50,139 $ 47,639 $ - $ 19,828 $ 8,701

With an allowance recorded:
Residential Owner Occupied $ 1,887 $ 1,866 $ 140 $ 2,348 $ 2,319 $ 157
Residential Non Owner Occupied 955 945 25 1,137 1,131 45
Total 1-4 Family Residential Real Estate 2,842 2,811 165 3,485 3,450 202
Multi-Family Residential Real Estate 49 49 3 53 53 4
CRE Owner Occupied 2,432 1,973 51 2,362 1,894 102
CRE Non Owner Occupied 292 294 15 1,618 1,479 108
Agriculture Land 108 110 2 45 45 3
Other CRE 927 727 41 1,144 722 42
Total Commercial Real Estate 3,759 3,104 109 5,169 4,140 255
Construction - - - - - -
Commercial Working Capital 163 163 21 230 231 24
Commercial Other 333 336 35 167 170 11
Total Commercial 496 499 56 397 401 35
Home Equity and Home Improvement 593 590 281 688 684 313
Consumer Finance 8 8 - 4 4 -
Total loans with an allowance recorded $ 7,747 $ 7,061 $ 614 $ 9,796 $ 8,732 $ 809

* Presented gross of charge offs

Non-performing loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. All loans greater than 90 days past due are placed on non-accrual status. Effective January 1, 2020 with the adoption of ASC Topic 326, the Company began including non-accrual purchase credit deteriorated (PCD) loans in its non-performing loans. As such, the non-performing loans as of March 31, 2020 include PCD loans accounted for pursuant to ASC Topic 326 as these loans are individually evaluated. The non-performing loans do not include PCD (formerly purchase credit impaired (PCI)) loans as of December 31, 2019, as the PCD loans prior to adopting ASC Topic 326 were evaluated on a pool basis. The following table presents the current balance of the aggregate amounts of non-performing assets, comprised of non-performing loans and real estate owned onas of the dates indicated:

	September 30, 2017		December 31, 2016		March 31, 2020		December 31, 2019
	(In Thousands)				(In Thousands)
Non-accrual loans	$	29,152	$	14,348	$	32,593	$	13,437
Loans over 90 days past due and still accruing		-		-		99		—
Total non-performing loans		29,152		14,348		32,692		13,437
Real estate and other assets held for sale		532		455		548		100
Total non-performing assets	$	29,684	$	14,803	$	33,240	$	13,537
Troubled debt restructuring, still accruing	$	13,044	$	10,544	$	7,473	$	8,486

The following table presents the aging of the ~~recorded investment~~amortized cost in past due and non- accrual loans as of ~~September 30, 2017~~March 31, 2020, by class of loans (In Thousands):

Current 30-59 days 60-89 days 90+ days Total
Past Due Total
Non-
Accrual

Residential Owner Occupied $ 171,835 $ 1,105 $ 21 $ 1,281 $ 2,407 $ 2,797
Residential Non Owner Occupied 96,055 638 93 495 1,226 572

Total 1-4 Family Residential Real Estate 267,890 1,743 114 1,776 3,633 3,369

Multi-Family Residential Real Estate 212,402 - - - - -

CRE Owner Occupied 395,228 62 143 1,107 1,312 10,745
CRE Non Owner Occupied 402,153 350 - 544 894 2,516
Agriculture Land 135,673 103 - 294 397 3,288
Other Commercial Real Estate 61,427 207 - - 207 545

Total Commercial Real Estate 994,481 722 143 1,945 2,810 17,094

Construction 129,333 - - - - -

Commercial Working Capital 227,422 1,522 539 75 2,136 4,067
Commercial Other 281,773 - 379 354 733 4,004

Total Commercial 509,195 1,522 918 429 2,869 8,071

Home Equity/Home Improvement 131,141 1,347 158 115 1,620 546
Consumer Finance 28,762 164 52 40 256 58

Total Loans $ 2,273,204 $ 5,498 $ 1,385 $ 4,305 $ 11,188 $ 29,138
Loans acquired with deteriorated credit quality (included in the totals above) $ 3,698 $ 33 $ - $ 134 $ 167 $ 1,925

Loans acquired in current year (included in totals above) $ 228,225 $ 2,911 $ 625 $ 701 $ 4,237 $ 4,855

	Current		30 - 59 days		60 - 89 days		90 + days		Total Past Due		Total Non- Accrual
Real Estate:
Residential		1,242,282		2,649		1,303		—		3,952		2,985
Commercial		2,160,018		57		5		—		62		5,196
Construction		310,783		8		—		—		8		—

Other Loans:
Commercial		867,758		124		125		—		249		3,961
Home equity and improvement		292,442		2,490		218		—		2,708		—
Consumer finance		131,117		343		29		99		471		728
PCD		66,286		2,393		795		—		3,188		19,723

Total Loans	$	5,070,686	$	8,064	$	2,475	$	99	$	10,638	$	32,593

The following table presents the aging of the recorded investment in past due and non-accrual loans as of December 31, ~~2016~~2019, by class of loans (In Thousands):

Current 30-59 days 60-89 days 90+ days Total
Past Due Total
Non-
Accrual

Residential Owner Occupied $ 139,015 $ 56 $ 842 $ 544 $ 1,442 $ 1,931
Residential Non Owner Occupied 66,811 166 308 63 537 992

Total 1-4 Family Residential Real Estate 205,826 222 1,150 607 1,979 2,923

Multi-Family Residential Real Estate 197,197 - - - - 2,637

CRE Owner Occupied 340,233 79 - 1,396 1,475 3,098
CRE Non Owner Occupied 338,724 81 16 426 523 1,808
Agriculture Land 102,397 - - - - 755
Other Commercial Real Estate 62,415 - - 249 249 1,292

Total Commercial Real Estate 843,769 160 16 2,071 2,247 6,953

Construction 89,244 - - - - -

Commercial Working Capital 202,786 - 10 38 48 435
Commercial Other 267,189 23 - 365 388 577

Total Commercial 469,975 23 10 403 436 1,012

Home Equity and Home Improvement 117,458 1,125 176 254 1,555 730
Consumer Finance 16,452 85 69 78 232 91

Total Loans $ 1,939,921 $ 1,615 $ 1,421 $ 3,413 $ 6,449 $ 14,346

	Current		30 - 59 days		60 - 89 days		90 + days		Total Past Due		Total Non Accrual
Real Estate:
Residential		323,600		1,328		570		646		2,544		2,411
Commercial		1,509,132		339		172		2,716		3,227		7,609
Construction		206,721		—		—		—		—		—

Other Loans:
Commercial		576,988		273		206		2,444		2,923		2,961
Home equity and improvement		122,487		956		240		39		1,235		449
Consumer finance		37,622		143		64		7		214		7

Total Loans	$	2,776,550	$	3,039	$	1,252	$	5,852	$	10,143	$	13,437

Troubled Debt Restructurings

As of ~~September 30, 2017~~March 31, 2020, and December 31, ~~2016,~~2019, the Company had a recorded investment in troubled debt restructurings (“TDRs”) of ~~$22.6~~$13.8 million and ~~$16.8~~$15.1 million, respectively. The Company allocated ~~$602,000~~$301,000 and ~~$809,000~~$388,000 of specific reserves to those loans at ~~September 30, 2017~~March 31, 2020, and December 31, ~~2016,~~2019, respectively, and had committed to lend additional amounts totaling up to ~~$55,000~~$250,000 and ~~$20,000~~$226,000 at ~~September 30, 2017~~March 31, 2020, and December 31, ~~2016,~~2019, respectively.

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

Of the loans modified in a TDR as of ~~September 30, 2017 $9.6~~March 31, 2020, $6.3 million were on non-accrual status and partial charge-offs have in some cases been taken against the outstanding balance. Loans modified as a TDR may have the financial effect of increasing the allowance associated with the loan. If the loan is determined to be collateral dependent, the estimated fair value of the collateral, less any selling costs is used to determine if there is a need for a specific allowance or charge-off. If the loan is determined to be cash flow dependent, the allowance is measured based on the present value of expected future cash flows discounted at the loan’s pre-modification effective interest rate.

The following tables present loans by class modified as TDRs that occurred during the three month periods ending March 31, 2020, and ~~nine month periods ending September 30, 2017 and September 30, 2016:~~March 31, 2019:

Loans Modified as a TDR for the Three
Months Ended September 30, 2017
($ in thousands) Loans Modified as a TDR for the Nine
Months Ended September 30, 2017
($ in thousands)
Troubled Debt Restructurings Number of
Loans Recorded Investment
(as of period end) Number of
Loans Recorded Investment
(as of period end)

1-4 Family Owner Occupied 10 $ 420 18 $ 923
1-4 Family Non Owner Occupied 0 - 3 104
Multi Family 0 - 0 -
CRE Owner Occupied 0 - 1 116
CRE Non Owner Occupied 0 - 0 -
Agriculture Land 3 280 5 1,731
Other CRE 0 - 2 165
Commercial Working Capital 2 345 7 2,396
Commercial Other 1 47 5 3,511
Home Equity and Improvement 2 72 4 150
Consumer Finance 1 7 3 10
Total 19 $ 1,171 48 $ 9,106

	Loans Modified as a TDR for the Three Months Ended March 31, 2020 ($ in thousands)
Troubled Debt Restructurings	Number of Loans		Recorded Investment (as of period end)
Real Estate:
Residential		2	$	378
Commercial		1		93
Construction		—		—

Other Loans:
Commercial		5		156
Home equity and improvement		1		26
Consumer finance		—		—

Total		9	$	653

The loans described above increased the allowance for credit losses (“ACL”) by $29,000 in the three month period ending March 31, 2020.

	Loans Modified as a TDR for the Three Months Ended March 31, 2019 ($ in thousands)
Troubled Debt Restructurings	Number of Loans		Recorded Investment (as of period end)
Real Estate:
Residential		3	$	473
Commercial		—		—
Construction		—		—

Other Loans:
Commercial		1		14
Home equity and improvement		1		20
Consumer finance		1		7

Total		6	$	514

The loans described above decreased the ALLL by ~~$5,000~~$6,000 in the three month period ending ~~September 30, 2017 and decreased the ALLL by $29,000 in the nine month period ending September 30, 2017.~~

Loans Modified as a TDR for the Three
Months Ended September 30, 2016
($ in thousands) Loans Modified as a TDR for the Nine
Months Ended September 30, 2016
($ in thousands)
Troubled Debt Restructurings Number of
Loans Recorded Investment
(as of period end) Number of
Loans Recorded Investment
(as of period end)

1-4 Family Owner Occupied 5 $ 86 10 $ 208
1-4 Family Non Owner Occupied 1 8 3 128
Multi Family 0 - 1 54
CRE Owner Occupied 0 - 0 -
CRE Non Owner Occupied 2 215 4 870
Agriculture Land 1 46 1 46
Other CRE 0 - 0 -
Commercial Working Capital 0 - 1 226
Commercial Other 0 - 1 590
Home Equity and Improvement 4 52 8 340
Consumer Finance 1 13 2 16
Total 14 $ 420 31 $ 2,478

~~The loans described above increased the ALLL by $31,000 in the three month period ending September 30, 2016 and decreased the ALLL by $9,000 in the nine month period ending September 30, 2016.~~

March 31, 2019.

Of the 2017 modifications, 12 were made TDRs due to the fact that the borrower is in bankruptcy, 5 were made TDR due to terming out lines of credit, 11 were made TDR due to advancing or renewing money to a watch list credit, 7 loans were placed under a forbearance agreement, and 13 were made a TDR because the current debt was refinanced due to maturity or for payment relief.

The following tables present loans by class modified as TDRs for which there was a payment default within twelve months following the modification during the three ~~and nine~~ month periods ended ~~September 30, 2017~~March 31, 2020, and ~~September 30, 2016:~~March 31, 2019:

Three Months Ended September 30, 2017
($ in thousands) Nine Months Ended September 30, 2017
($ in thousands)
Troubled Debt Restructurings
That Subsequently Defaulted Number of
Loans Recorded Investment
(as of period end) Number of
Loans Recorded Investment
(as of period end)

1-4 Family Owner Occupied 0 $ - 0 $ -
1-4 Family Non Owner Occupied 0 - 0 -
CRE Owner Occupied 0 - 0 -
CRE Non Owner Occupied 0 - 0 -
Agriculture Land 0 - 0 -
Other CRE 0 - 0 -
Commercial Working Capital or Other 0 - 1 225
Commercial Other 0 - 0 -
Home Equity and Improvement 0 - 0 -
Consumer Finance 0 - 0 -
Total 0 $ - 1 $ 225

	Three Months Ended March 31, 2020
	($ in thousands)
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans		Recorded Investment (as of period end)
Real Estate:
Residential		3	$	268
Commercial		1		172
Construction		—		—

Other Loans:
Commercial		1		132
Home equity and improvement		1		146
Consumer finance		—		—

Total		6	$	718

The TDRs that subsequently defaulted described above had no effect on the ~~allowance for loan losses~~ACL for the three month period ended March 31, 2020 and ~~nine month periods ended September 30, 2017.~~

Three Months Ended September 30, 2016
($ in thousands) Nine Months Ended September 30, 2016
($ in thousands)
Troubled Debt Restructurings
That Subsequently Defaulted Number of
Loans Recorded Investment
(as of period end) Number of
Loans Recorded Investment
(as of period end)

1-4 Family Owner Occupied 1 $ 190 1 $ 190
1-4 Family Non Owner Occupied 0 - 0 -
CRE Owner Occupied 0 - 0 -
CRE Non Owner Occupied 0 - 1 11
Agriculture Land 0 - 0 -
Other CRE 0 - 0 -
Commercial Working Capital or Other 0 - 0 -
Commercial Other 0 - 0 -
Home Equity and Improvement 0 - 0 -
Consumer Finance 0 - 0 -
Total 1 $ 190 2 $ 201

~~The TDRs that subsequently defaulted described above had no effect on~~increased the ~~allowance for loan losses~~ACL by $15,000 for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2016.~~

March 31, 2020.

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

	Three Months Ended March 31, 2019
	($ in thousands)
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans		Recorded Investment (as of period end)
Real Estate:
Residential		1	$	76
Commercial		—		—
Construction		—		—
		—		—
Other Loans:		—		—
Commercial		3		2,544
Home equity and improvement		1		61
Consumer finance		—		—

Total		5	$	2,681

The TDRs that subsequently defaulted described above decreased the ALLL by $1,000 for the three month period ended March 31, 2019.

Credit Quality Indicators

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

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

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of ~~September 30, 2017,~~March 31, 2020, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (In Thousands):

Class	Pass		Special Mention		Substandard		Doubtful		Not Graded		Total
Real Estate:
Residential		1,046,718		390		3,685		—		198,426		1,249,219
Commercial		2,108,684		28,045		27,272		—		1,275		2,165,276
Construction		290,253		—		—		—		20,538		310,791

Other Loans:
Commercial		839,917		20,477		11,574		—		—		871,968
Home equity and improvement		194,262		—		322		—		100,566		295,150
Consumer finance		100,059		—		31		13		32,213		132,316
PCD		27,851		21,151		40,195		—		—		89,197

Total Loans	$	4,607,744	$	70,063	$	83,079	$	13	$	353,018	$	5,113,917

Class Pass Special
Mention Substandard Doubtful Not
Graded Total

1-4 Family Owner Occupied $ 7,792 $ 211 $ 2,557 $ - $ 163,681 $ 174,241
1-4 Family Non Owner Occupied 87,087 2,138 3,236 - 4,821 97,282

Total 1-4 Family Real Estate 94,879 2,349 5,793 - 168,502 271,523

Multi-Family Residential Real Estate 208,997 968 2,325 - 112 212,402

CRE Owner Occupied 373,218 10,835 12,287 - 201 396,541
CRE Non Owner Occupied 393,425 4,149 5,473 - - 403,047
Agriculture Land 118,739 2,563 14,769 - - 136,071
Other CRE 58,668 221 1,851 - 892 61,632

Total Commercial Real Estate 944,050 17,768 34,380 - 1,093 997,291

Construction 103,565 1,178 - - 24,590 129,333

Commercial Working Capital 212,733 8,442 8,383 - - 229,558
Commercial Other 270,813 5,279 6,414 - - 282,506

Total Commercial 483,546 13,721 14,797 - - 512,064

Home Equity and Home Improvement - - 588 - 132,173 132,761
Consumer Finance - - 127 - 28,891 29,018

Total Loans $ 1,835,037 $ 35,984 $ 58,010 $ - $ 355,361 $ 2,284,392

Loans acquired with deteriorated credit quality (included in the totals above) $ 46 $ 1,333 $ 2,482 - $ 4 $ 3,865

Loans acquired in current year (included in totals above) $ 168,826 $ 4,742 $ 14,553 - $ 44,341 $ 232,462

As of December 31, ~~2016,~~2019, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (In Thousands):

Class Pass Special
Mention Substandard Doubtful Not
Graded Total

Residential Owner Occupied $ 5,980 $ 402 $ 1,824 $ - $ 132,250 $ 140,456
Residential Non Owner Occupied 58,041 1,394 3,480 - 4,434 67,349

Total 1-4 Family Real Estate 64,021 1,796 5,304 - 136,684 207,805

Multi-Family Residential Real Estate 192,369 862 3,852 - 114 197,197

CRE Owner Occupied 316,335 20,559 4,430 - 384 341,708
CRE Non Owner Occupied 332,196 1,617 5,435 - - 339,248
Agriculture Land 98,039 2,355 2,002 - - 102,396
Other CRE 59,561 60 2,297 - 746 62,664

Total Commercial Real Estate 806,131 24,591 14,164 - 1,130 846,016

Construction 67,751 706 - - 20,787 89,244

Commercial Working Capital 193,043 8,301 1,490 - - 202,834
Commercial Other 262,076 3,749 1,752 - - 267,577

Total Commercial 455,119 12,050 3,242 - - 470,411

Home Equity and Home Improvement - - 696 - 118,317 119,013
Consumer Finance - - 90 - 16,594 16,684

Total Loans $ 1,585,391 $ 40,005 $ 27,348 $ - $ 293,626 $ 1,946,370

Class	Pass		Special Mention		Substandard		Doubtful		Not Graded		Total
Real Estate:
Residential		159,539		415		3,479		—		162,711		326,144
Commercial		1,460,989		27,197		23,097		—		1,076		1,512,359
Construction		182,858		1,645		—		—		22,218		206,721

Other Loans:
Commercial		548,012		24,162		7,737		—		—		579,911
Home equity and improvement		—		—		315		—		123,407		123,722
Consumer finance		—		—		20		—		37,816		37,836

Total Loans	$	2,351,398	$	53,419	$	34,648	$	—	$	347,228	$	2,786,693

The table below presents the amortized cost basis of loans by credit quality indicator and class of loans based on the most recent analysis performed ($ in thousands):

	Term of loans by origination
	2020			2019		2018		2017		2016		Prior		Revolving Loans		Total
As of March 31, 2020

Real Estate
Residential:
Risk Rating
Pass	$	58,175		$	162,634	$	206,799	$	190,256	$	186,702	$	437,887	$	2,691	$	1,245,144
Special Mention		—			97		58		—		123		98		14		390
Substandard		—			—		236		63		219		3,167		—		3,685
Doubtful		—			—		—		—		—		—		—		—
Total	$	58,175		$	162,731	$	207,093	$	190,319	$	187,044	$	441,152	$	2,705	$	1,249,219

Commercial:
Risk Rating
Pass	$	105,546		$	450,533	$	370,078	$	391,162	$	243,768	$	530,218	$	18,654	$	2,109,959
Special Mention		—			1,664		999		3,096		2,628		18,935		723		28,045
Substandard		—			291		1,607		2,497		1,340		18,839		2,698		27,272
Doubtful		—			—		—		—		—		—		—		—
Total	$	105,546		$	452,488	$	372,684	$	396,755	$	247,736	$	567,992	$	22,075	$	2,165,276

Construction:			��
Risk Rating
Pass	$	4,502		$	148,694	$	94,356	$	49,665	$	13,137	$	437	$	-	$	310,791
Special Mention		—			—		—		—		—		—		—		—
Substandard		—			—		—		—		—		—		—		—
Doubtful		—			—		—		—		—		—		—		—
Total	$	4,502		$	148,694	$	94,356	$	49,665	$	13,137	$	437	$	-	$	310,791

Other Loans
Commercial:
Risk Rating
Pass	$	55,857		$	191,337	$	108,146	$	61,628	$	34,192	$	43,359	$	345,398	$	839,917
Special Mention		25			881		129		2,970		60		592		15,820		20,477
Substandard		22			136		228		231		340		273		10,344		11,574
Doubtful		—			—		—		—		—		—		—		—
Total	$	55,904		$	192,354	$	108,503	$	64,829	$	34,592	$	44,224	$	371,562	$	871,968

Home equity and Improvement:
Risk Rating
Pass	$	2,741		$	10,976	$	5,857	$	9,960	$	9,489	$	36,520	$	219,285	$	294,828
Special Mention		—			—		—		—		—		—		—		—
Substandard		—			—		—		—		—		80		242		322
Doubtful		—			—		—		—		—		—		—		—
Total	$	2,741		$	10,976	$	5,857	$	9,960	$	9,489	$	36,600	$	219,527	$	295,150

Consumer Finance:
Risk Rating
Pass	$	11,543		$	52,569	$	30,898	$	17,149	$	8,692	$	4,922	$	6,499	$	132,272
Special Mention		—			—		—		—		—		—		—		—
Substandard		—			—		—		31		—		—		—		31
Doubtful		—			—		6		—		7		—		—		13

Total	$	11,543	$	52,569	$	30,904	$	17,180	$	8,699	$	4,922	$	6,499	$	132,316

PCD:
Risk Rating
Pass	$	-	$	292	$	546	$	1,015	$	783	$	16,847	$	8,368	$	27,851
Special Mention		—		24		2,783		9,697		1,496		4,441		2,710		21,151
Substandard		—		102		110		17,378		1,776		11,970		8,859		40,195
Doubtful		—		—		—		—		—		—		—		—
Total	$	-	$	418	$	3,439	$	28,090	$	4,055	$	33,258	$	19,937	$	89,197

Allowance for Credit Losses (ACL)

The Company has adopted ASU 2016-13 (Topic 326 – Credit Losses) to calculate the ACL which requires a projection of credit loss over the contract lifetime of the credit adjusted for prepayment tendencies. This valuation account is deducted from the loans amortized cost basis to present the net amount expected to be collected on the loan. The ACL is adjusted through the provision for credit losses and reduced by net charge offs of loans.

The credit loss estimation process involves procedures that consider the unique characteristics of the Company’s portfolio segments. These segments are further disaggregated into the loan pools for monitoring. When computing allowance levels, a model of risk characteristics, such as loss history and delinquency status, along with current conditions and a supportable forecast is used to determine credit loss assumptions.

The Company is generally utilizing two methodologies to analyze loan pools, discounted cash flows (“DCF”) and probability of default/loss given default (“PD/LGD”).

A default can be trigger by one of several different asset quality factors including past due status, non-accrual status or if the loan has had a charge-off. The PD/LGD utilizes charge off data from the Federal Financial Institutions Examination Council to construct a default rate. The Company estimates losses over an approximate one-year forecast period using Moody’s baseline economic forecasts, and then reverts to longer term historical loss experience over a three-year period. This default rate is further segmented based on the risk of the credit assigning a higher default rate to riskier credits.

The DCF methodology was selected as the most appropriate for loan segments with longer average lives and regular payment structures. The DCF model has two key components, the loss driver analysis combined with a cash flow analysis. The contractual cash flow is adjusted for PD/LGD and prepayment speed to establish a reserve level. The prepayment studies are updated quarterly by a third-party for each applicable pool.

The remaining life method was selected for the consumer loan segment since the pool contains loans with many different structures and payment streams and collateral. The weighted average remaining life uses an average annual charge-off rate applied to the contractual term, further adjusted for estimated prepayments to determine the unadjusted historical charge-off rate for the remaining balance of assets.

Portfolio Segments	Loan Pool	Methodology	Loss Drivers
Residential real estate	1-4 Family nonowner occupied	DCF	National unemployment
	1-4 Family owner occupied	DCF	National unemployment
Commercial real estate	Commercial real estate nonowner occupied	DCF	National unemployment
	Commercial real estate owner occupied	DCF	National unemployment
	Multi Family	DCF	National unemployment
	Agriculture Land	DCF	National unemployment
	Other commercial real estate	DCF	National unemployment
Construction secured by real estate	Construction	PD/LGD	Call report loss history

Commercial	Commercial working capital	PD/LGD	Call report loss history
	Agriculture production	PD/LGD	Call report loss history
	Other commercial	PD/LGD	Call report loss history
Home equity and improvement	Home equity and improvement	PD/LGD	Call report loss history
Consumer finance	Consumer finance	Remaining life	Call report loss history

According to the accounting standard an entity may make an accounting policy election not to measure an allowance for credit losses for accrued interest receivable if the entity writes off the applicable accrued interest receivable balance in a timely manner. The Company has made the accounting policy election not to measure an allowance for credit losses for accrued interest receivables for all loan segments. Current policy dictates that a loan will be placed on nonaccrual status, with the current accrued interest receivable balance being written off, upon the loan being 90 days delinquent or when the loan is deemed to be collateral dependent and the collateral analysis shows less than 1.2 times discounted collateral coverage based on a current assessment of the value of the collateral.

In addition to the ASC Topic 326 requires the Company to establish a liability for anticipated credit losses for unfunded commitments. To accomplish this, the company must first establishes a loss expectation for extended (funded) commitments. This loss expectation, expressed as a ratio to the amortized cost basis, is then applied to the portion of unfunded commitments not considered unilaterally cancelable, and considered by the company’s management as likely to fund over the life of the instrument. At March 31, 2020, the Company had $1.3 billion in unfunded commitments and set aside $5.7 million in anticipated credit losses. This reserve is recorded in other liabilities as opposed to the ACL.

The determination of ACL is complex and the Company makes decisions on the effects of matters that are inherently uncertain. Evaluations of the loan portfolio and individual credits require certain estimates, assumptions and judgements as to the facts and circumstances related to particular situations or credits. There may be significant changes in the ACL in future periods determined by prevailing factors at that point in time along with future forecasts.

Purchased Loans

As a result of the Merger, the Company acquired $2.3 billion in loans. Par value of purchased loans ~~for which there was, at acquisition,~~follows (in thousands):

	2020
Par value of acquired loans at acquisition	$	2,314,588
Credit discount		34,610
Non-credit discount/(premium) at acquisition		(8,497	)
Purchase price of loans at acquisition	$	2,340,701

Under ASU Topic 326, when loans are purchased with evidence of more than insignificant deterioration of credit ~~quality since origination~~they are accounted for as purchase credit deteriorated (“PCD”). PCD loans acquired in a transaction are marked to fair value and ~~it was probable, at~~a mark on yield is recorded. In addition, an adjustment is made to the ACL for the expected loss on the acquisition ~~that all contractually required payments would not be collected.~~date. These loans are assessed on a regular basis and subsequent adjustments to the ACL are recorded on the income statement. On January 31, 2020, the Company acquired PCD loans with a fair value of $79.1 million, credit discount $7.7 million and a noncredit discount of $4.1 million. The outstanding balance ~~of those~~at March 31, 2020 and related allowance on these loans is as follows ~~(In Thousands)~~(in thousands):

September 30, 2017

1-4 Family Residential Real Estate $ 1,496
Commercial Real Estate Loans 2,963
Commercial 414
Consumer 2
Total Outstanding Balance $ 4,875

Recorded Investment, net of allowance of $0 $ 3,865

Accretable yield, or income expected to be collected, is as follows:

2017

Balance at January 1 $ -
New Loans Purchased 1,018
Accretion of Income (163 )
Reclassifications from Non-accretable -
Charge-off of Accretable Yield (8 )
Balance at September 30 $ 847

	Loan Balance		ACL Balance
	(In Thousands)
Real Estate:
Residential	$	17,651	$	1,345
Commercial		37,070		3,935
Construction		1,034		52
		55,755		5,332
Other Loans:
Commercial		25,921		2,255
Home equity and improvement		6,268		258
Consumer finance		1,253		64
		33,442		2,577
Total	$	89,197	$	7,909

~~For those purchased loans disclosed above,~~At March 30, 2020 the Company ~~did not increase the allowance~~had $2.0 million in loans that had previously been accounted for ~~loan losses during the three or nine months ended September 30, 2017. No allowances for loan losses were reversed during the same period.~~

~~Contractually required payments receivable of loans purchased with evidence of~~as purchase credit deterioration during the period ended September 30, 2017 using information as of the date of acquisition are included in the table below. There were no such loans purchased during the year ended December 31, 2016. (In Thousands)

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

~~Cash Flows Expected to be Collected at Acquisition $ 5,721~~

~~Fair Value of Acquired Loans at Acquisition $ 4,703~~impaired.

Foreclosure Proceedings

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled ~~$18,000~~$6.3 million as of ~~September 30, 2017.~~March 31, 2020, and $981,000 as of December 31, 2019. The increase is a result of the merger with UCFC.

Mortgage Banking

~~Mortgage Banking~~

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

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2017			2016			2020			2019
	(In Thousands)												(In Thousands)
Gain from sale of mortgage loans	$	1,200		$	1,683		$	3,577		$	4,103		$	4,902		$	1,301
Mortgage loans servicing revenue (expense):
Mortgage loans servicing revenue		911			885			2,769			2,638			1,594			939
Amortization of mortgage servicing rights		(386	)		(536	)		(1,101	)		(1,281	)		(1,163	)		(286	)
Mortgage servicing rights valuation adjustments		(27	)		7			21			(118	)		(4,485	)		(113	)
		498			356			1,689			1,239			(4,054	)		540

Net revenue from sale and servicing of mortgage loans	$	1,698		$	2,039		$	5,266		$	5,342		$	848		$	1,841

The unpaid principal balance of residential mortgage loans serviced for third parties was ~~$1.38~~$3.0 billion at ~~September 30, 2017~~March 31, 2020, and ~~$1.37~~$1.46 billion at December 31, ~~2016.~~

2019.

Activity for capitalized mortgage servicing rights and the related valuation allowance follows for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2020 and ~~2016:~~2019:

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2017			2016			2020			2019
	(In Thousands)												(In Thousands)
Mortgage servicing assets:
Balance at beginning of period	$	10,154		$	9,906		$	10,117		$	9,893		$	10,801		$	10,419
Loans sold, servicing retained		426			701			1,178			1,459			1,376			278
Mortgage servicing rights acquired														9,747			—
Amortization		(386	)		(536	)		(1,101	)		(1,281	)		(1,163	)		(286	)
Carrying value before valuation allowance at end of period		10,194			10,071			10,194			10,071			20,761			10,411

Valuation allowance:
Balance at beginning of period		(474	)		(770	)		(522	)		(645	)		(534	)		(300	)
Impairment recovery (charges)		(27	)		7			21			(118	)		(4,485	)		(113	)
Balance at end of period		(501	)		(763	)		(501	)		(763	)		(5,019	)		(413	)
Net carrying value of MSRs at end of period	$	9,693		$	9,308		$	9,693		$	9,308		$	15,742		$	9,998
Fair value of MSRs at end of period	$	9,750		$	9,493		$	9,750		$	9,493		$	16,105		$	10,264

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

estimable.

The Company has established an accrual for secondary market buy-back activity. A liability of ~~$45,000 and $79,000~~$43,000 was accrued at ~~September 30, 2017~~both March 31, 2020, and December 31, ~~2016,~~2019, respectively. ~~Expense (credit)~~There was no expense or credit recognized related to the accrual ~~was ($34,000) and ($131,000)~~ in the ~~nine~~three months ended March 31, 2020 or 2019.

10.

Leases

Due to the merger with UCFC, on January 31, 2020, the Company performed a valuation on UCFC’s leases to determine an initial right of use asset (ROU asset) and lease liability. The Company recorded an initial ROU asset of $5.0 million and a lease liability of $5.1 million for these leases.

The Company’s lease agreements have maturity dates ranging from December 2020 to September ~~30, 2017~~2044, some of which include options for multiple five and ~~2016,~~ten year extensions. The weighted average remaining life of the lease term for these leases was 17.58 years as of March 31, 2020 and 17.07 years as of December 31, 2019. The weighted average discount rate for leases was 2.55% as of March 3, 2020 and 3.17% as of December 31, 2019.

The total operating lease costs were $517,000 for the three months ended March 31, 2020, and $243,000 for the three months ended March 31, 2019, respectively. The ~~reversals are mainly due to no actual losses being recorded~~right-of-use asset, included in ~~the~~other assets, was $17.7 million and $8.9 million at March 31, 2020 and December 31, 2019, respectively. The lease liabilities, included in ~~the first nine months~~other liabilities, were $18.2 million and $9.5 million as of ~~2017~~March 31, 2020 and ~~2016,~~December 31, 2019, respectively.

Undiscounted cash flows included in lease liabilities have expected contractual payments as follows:

(in thousands)	March 31, 2020
2020	$	1,913
2021		2,295
2022		1,944
2023		1,539
2024		1,311
Thereafter		14,911
Total undiscounted minimum lease payments	$	23,913
Present value adjustment		(5,687	)
Total lease liabilities	$	18,226

11.

Deposits

~~10.~~

~~Deposits~~

A summary of deposit balances is as follows:

	September 30, 2017		December 31, 2016		March 31, 2020		December 31, 2019
	(In Thousands)				(In Thousands)
Non-interest-bearing checking accounts	$	519,911	$	487,663	$	1,041,315	$	630,359
Interest-bearing checking and money market accounts		989,514		816,665		2,052,935		1,198,012
Savings deposits		296,230		243,369		623,331		303,166
Retail certificates of deposit less than $250,000		504,277		400,080		1,091,003		631,253
Retail certificates of deposit greater than $250,000		50,743		33,851		185,564		107,535
	$	2,360,675	$	1,981,628	$	4,994,148	$	2,870,325

12.

~~11.~~

Borrowings

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

September 30,
2017

December 31,
2016

(In Thousands)
FHLB Advances:
Single maturity fixed rate advances $ 92,000 $ 92,000
Putable advances 5,000 5,000
Amortizable mortgage advances 7,583 6,943
Fair value adjustment on acquired balances (28 ) -
Total $ 104,555 $ 103,943
Junior subordinated debentures owed to unconsolidated subsidiary trusts $ 36,083 $ 36,083
Notes payable $ 6,500 $ -

	March 31, 2020		December 31, 2019
	(In Thousands)
FHLB Advances:
Single maturity fixed rate advances	$	486,000	$	83,999
Amortizable mortgage advances		—		1,085
Overnight advances		—		—
Fair value adjustment on acquired balances		—		(21	)
Total	$	486,000	$	85,063
Junior subordinated debentures owed to unconsolidated subsidiary trusts	$	36,083	$	36,083

The ~~putable advance can be put back to the Company~~FHLB advances outstanding at ~~the option~~March 31, 2020, have maturities of ~~the FHLB on a quarterly basis. A~~$451.0 million in 2020, $5.0 million ~~putable advance with a weighted average rate~~in 2021 and $10.0 maturing in each of ~~2.35% was not yet callable by the FHLB at September 30, 2017. The call date for this advance is December 12, 2017~~2022, 2023 and ~~the maturity date is March 12, 2018. Putable advances are callable at the option of the FHLB on a quarterly basis.~~2024.

In March 2007, the Company sponsored an affiliated trust, First Defiance Statutory Trust II ~~(Trust~~(“Trust Affiliate ~~II)~~II”) that issued $15 million of Guaranteed Capital Trust Securities ~~(Trust~~(“Trust Preferred ~~Securities)~~Securities”). In connection with this transaction, the Company issued $15.5 million of Junior Subordinated Deferrable Interest Debentures (Subordinated Debentures) to Trust Affiliate II. The Company formed Trust Affiliate II for the purpose of issuing Trust Preferred Securities to third-party investors and investing the proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The Subordinated Debentures held by Trust Affiliate II are the sole assets of that trust. The Company is not considered the primary beneficiary of ~~this~~ Trust Affiliate II (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability. Distributions on the Trust Preferred Securities issued by Trust Affiliate II are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 1.5%. The ~~Coupon~~coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate II was ~~2.83%~~2.24% as of ~~September 30, 2017~~March 31, 2020, and ~~2.46%~~4.29% as of December 31, ~~2016.~~

2019.

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

The Company also sponsored an affiliated trust, First Defiance Statutory Trust I ~~(Trust~~(“Trust Affiliate I)I”), that issued $20 million of Trust Preferred Securities in 2005. In connection with this transaction, the Company issued $20.6 million of Subordinated Debentures to Trust Affiliate I. Trust Affiliate I was formed for the purpose of issuing Trust Preferred Securities to third-party investors and investing the proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The Junior Debentures held by Trust Affiliate I are the sole assets of the trust. The Company is not considered the primary beneficiary of ~~this~~ Trust Affiliate I (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability.Distributions on the Trust Preferred Securities issued by Trust Affiliate I are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 1.38%. The ~~Coupon~~coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate I was ~~2.71%~~2.12% and ~~2.34%~~4.17% on ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016~~2019, respectively.

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

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

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

On December 29, 2016, First Defiance entered into a loan agreement with First Tennessee Bank for a $20 million line of credit. The rate on the line of credit is at three-month LIBOR plus 1.95%. As of September 30, 2017 and December 31, 2016, the rate payable was 3.28% and 2.91% respectively. The outstanding balance at September 30, 2017 was $6.5 million, is included in notes payable and is due at maturity.

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

The ~~remaining contractual maturity~~balance of ~~the securities sold under~~repurchase agreements ~~to repurchase in the consolidated balance sheets as of September 30, 2017~~was $2.0 million and $3.0 million at March 31, 2020 and December 31, ~~2016 is presented in~~2019, respectively. All of the ~~following tables.~~repurchase agreements were overnight and continuous as of March 31, 2020 and December 31, 2019. The repurchase agreements were collateralized by investment securities having a market value of $5.6 million and $5.8 at March 31, 2020 and December 31, 2019, respectively.

Overnight and
Continuous Up to 30
Days 30-90 Days Greater
than 90
Days Total
(In Thousands)
At September 30, 2017
Repurchase agreements:
Mortgage-backed securities – residential $ 6,115 $ - $ - $ - $ 6,115
Collateralized mortgage obligations 16,824 - - - 16,824
Total borrowings $ 22,939 $ - $ - $ - $ 22,939
Gross amount of recognized liabilities for repurchase agreements $ 22,939

Overnight and
Continuous Up to 30
Days 30-90 Days Greater
than 90
Days Total
(In Thousands)
At December 31, 2016
Repurchase agreements:
Mortgage-backed securities – residential $ 21,222 $ - $ - $ - $ 21,222
Collateralized mortgage obligations 10,594 - - - 10,594
Total borrowings $ 31,816 $ - $ - $ - $ 31,816
Gross amount of recognized liabilities for repurchase agreements $ 31,816

13.

~~12.~~

Commitments, Guarantees and Contingent Liabilities

Loan commitments are made to accommodate the financial needs of First Federal’s ~~customers; however, there are no long-term, fixed-rate loan~~customers 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~~management’s credit assessment of the customer.

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

	September 30, 2017				December 31, 2016
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate		March 31, 2020		December 31, 2019
Commitments to make loans	$	51,442	$	175,344	$	34,432	$	106,356	$	361,397	$	178,811
Unused lines of credit		8,956		413,370		14,384		400,542		895,487		433,109
Standby letters of credit		-		6,910		-		9,668		12,745		14,215
Total	$	60,398	$	595,624	$	48,816	$	516,566	$	1,269,629	$	626,135

Commitments to make loans are generally made for periods of 60 days or less. In addition to the above commitments, First Defiance had commitments to sell $21.7 million and $22.5 million of loans to Freddie Mac, Fannie Mae, Federal Home Loan Bank of Cincinnati or BB&T Mortgage at September 30, 2017 and December 31, 2016, respectively.

14.

~~13.~~

Income Taxes

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax in the state of Indiana. The Company is no longer subject to examination by taxing authorities for years before ~~2012.~~2015. The Company currently operates primarily in the states of Ohio, Michigan, Pennsylvania and ~~Michigan,~~West Virginia which tax financial institutions based on their equity rather than their income.

For further information on taxes refer to the discussion on CECL in Note 8. Loans and the Merger information in Note 18. Business Combinations.

15.

~~14.~~

Derivative Financial Instruments

~~Commitments to fund certain mortgage loans (interest rate locks) to be sold into~~At March 31, 2020, the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. It is the Company’s practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. These mortgage banking derivatives are not designated in hedge relationships. First FederalCompany had approximately ~~$21.5 million and $14.1~~$262.9 million of interest rate lock commitments ~~at September 30, 2017~~ and ~~December 31, 2016, respectively. There were $30.8 million and $22.5~~$318.1 million of forward commitments for the future delivery of residential mortgage loans and forward sales of mortgage backed securities. These commitments are considered derivatives. The Company had $17.0 million of interest rate lock commitments and $34.4 million of forward commitments at ~~September 30, 2017 and~~ December 31, ~~2016, respectively.~~

2019.

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

September30, 2017

December 31, 2016

March 31, 2020

December 31, 2019

Assets

(Liabilities)

Assets

(Liabilities)

Assets

(Liabilities)

Assets

(Liabilities)

Derivative

Carrying

Net Carrying

Carrying

Net Carrying

Carrying

Net Carrying

Carrying

Net Carrying

Value

(In Thousands)

Derivatives not designated as hedging instruments

Mortgage Banking Derivatives

821

491

4,073

586

3,487

883

)

892

Interest Rate Swaps

The ~~table below~~Company maintains an interest rate protection program for commercial loan customers that was acquired in the merger with UCFC. Under this program, the Company provides ~~data about~~a customer with a fixed rate loan while creating a variable rate asset for the ~~amount~~Company by the customer entering into an interest rate swap

with terms that match the loan. The Company offsets its risk exposure by entering into an offsetting interest rate swap with an unaffiliated institution. The Company had interest rate swaps associated with commercial loans with a notional value of ~~gains~~$50.1 million and ~~losses recognized~~fair value of $1.9 million in ~~income on derivative instruments not designated as hedging instruments:~~other assets and $2.1 million in other liabilities at March 31, 2020. The difference in fair value of $194,000 between the asset and liability represents a credit valuation adjustment that flows through noninterest income. Since January 31, 2020, $108,000 of the $194,000 has flowed through noninterest income. The remainder was part of the Merger consideration. The Company had no interest rate swaps outstanding at December 31, 2019.

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
(In Thousands)
Derivatives not designated as hedging instruments

Mortgage Banking Derivatives – Gain (Loss) $ 47 $ (193 ) $ 330 $ 237

Equity Linked Time Deposit

The ~~above amounts~~Company also acquired time deposits in its acquisition of UCFC that have written and purchased option derivatives to facilitate an equity linked time deposit product. The time deposit provides the purchaser a guaranteed return of principal at maturity plus a potential equity return (a written option), while the Bank receives a known stream of funds based on the equity return (a purchase option). The written and purchased options are ~~included in mortgage banking income with gain~~mirror derivative instruments which are carried at fair value on ~~sale~~the consolidated statement of ~~mortgage loans.~~financial condition. At March 31, 2020, the balance of the equity linked time deposits was $9.6 million and the written and purchased options each had a fair value of $86,000.

16.

~~15.~~

Other Comprehensive Income

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

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

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

Before Tax
Amount Tax Expense
(Benefit) Net of Tax
Amount
(In Thousands)
Three months ended September 30, 2016:
Securities available for sale and transferred securities:
Change in net unrealized gain (loss) during the period $ 69 $ (24 ) $ 45
Reclassification adjustment for net gains included in net income (151 ) 53 (98 )
Total other comprehensive income (loss) $ (82 ) $ 29 $ (53 )

Nine months ended September 30, 2016:
Securities available for sale and transferred securities:
Change in net unrealized gain (loss) during the period $ 2,579 $ (903 ) $ 1,676
Reclassification adjustment for net gains included in net income (509 ) 178 (331 )
Total other comprehensive income (loss) $ 2,070 $ (725 ) $ 1,345

	Before Tax Amount		Tax (Expense) Benefit			Net of Tax Amount
	(In Thousands)
Three months ended March 31, 2020:
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period	$	9,458	$	(1,985	)	$	7,473
Reclassification adjustment for net gains included in net income		—		—			—
Defined benefit postretirement medical plan:
Reclassification adjustment for deferred tax on defined benefit postretirement medical plan		—		—			—
Total other comprehensive loss	$	9,458	$	(1,985	)	$	7,473

	Before Tax Amount		Tax Expense (Benefit)			Net of Tax Amount
	(In Thousands)
Three months ended March 31, 2019:
Securities available for sale:
Change in net unrealized gain/loss during the period	$	4,603	$	(968	)	$	3,635
Reclassification adjustment for net gains included in net income		—		—			—
Defined benefit postretirement medical plan:
Reclassification adjustment for deferred tax on defined benefit
Postretirement medical plan		—		82			82
Total other comprehensive loss	$	4,603	$	(886	)	$	3,717

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

							Accumulated			Securities Available For Sale			Post- retirement Benefit			Accumulated Other Comprehensive Income (Loss)
	Securities			Post-			Other			(In Thousands)
	Available			retirement			Comprehensive
	For Sale			Benefit			Income
	(In Thousands)
Balance January 1, 2017	$	504		$	(289	)	$	215
Balance January 1, 2020										$	4,839		$	(244	)	$	4,595
Other comprehensive income before reclassifications		2,200			-			2,200			7,473			—			7,473
Amounts reclassified from accumulated other comprehensive income		(277	)		-			(277	)		—			—			—

Net other comprehensive income during period		1,923			-			1,923			7,473			—			7,473

Balance September 30, 2017	$	2,427		$	(289	)	$	2,138
Balance March 31, 2020										$	12,312		$	(244	)	$	12,068

Balance January 1, 2016	$	4,042		$	(420	)	$	3,622
Balance January 1, 2019										$	(2,057	)	$	(91	)	$	(2,148	)
Other comprehensive income (loss) before reclassifications		1,676			-			1,676			3,635			—			3,635
Amounts reclassified from accumulated other comprehensive income		(331	)		-			(331	)		—			82			82

Net other comprehensive income during period		1,345			-			1,345			3,635			82			3,717

Balance September 30, 2016	$	5,387		$	(420	)	$	4,967
Balance March 31, 2019										$	1,578		$	(9	)	$	1,569

17.

~~16.~~

~~Affordable Housing Projects Tax Credit Partnership~~

Subsequent Event

The COVID-19 pandemic is creating extensive disruptions to the global economy and to the lives of individuals throughout the world. Business and consumer customers of the Bank are experiencing varying degrees of financial distress, which is expected to increase over the coming months and will likely adversely affect their ability to pay interest and principal on their loans and the value of the collateral securing their obligations may decline. These uncertainties may negatively impact the Statement of Financial Condition, the Statement of Income and the Statement of Cash Flows of the Company.

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

The Company is a limited partner in each LIHTC Partnership. A separate unrelated third party is the general partner. Each limited partnership is managed by the general partner, who exercises full control over the affairs of the limited partnership. The general partner has all the rights, powers and authority granted or permitted to be granted to a general partner of a limited partnership. Duties entrustedresponded to the ~~general partner of each limited partnership include, but are not limited to: investment~~pandemic in operating companies, company expenditures, investment of excess funds, borrowing funds, employment of agents, disposition of fund property, prepayment and refinancing of liabilities, votes and consents, contract authority, disbursement of funds, accounting methods, tax elections, bank accounts, insurance, litigation, cash reserve, and use of working capital reserve funds. Except for limited rights granted to consent to certain transactions, the limited partner(s) may not participatenumerous ways, including by actively participating in the ~~operation, management, or control of the limited partnership’s business, transact any business~~Paycheck Protection Program (“PPP”) and distributing nearly $450 million to small businesses in ~~the limited partnership’s name or have any power to sign documents for or otherwise bind the limited partnership.~~our markets. In addition, the ~~general partner may only be removed by~~Company continues to receive requests for payment deferrals on loans. Through May, the ~~limited partner(s)~~Company approved approximately 600 deferrals totaling $611.3 million in net balances. Almost half of the ~~event~~deferrals were for the ~~general partner fails to comply~~full six month period with the ~~terms~~next largest category being a three month deferral. These actions may impact the Company’s performance during the remainder of 2020 although the ~~agreement or is negligent in performing its duties.~~specific details cannot be determined at this time.

18.

Business Combinations

~~The general partner of each limited partnership has both~~Effective January 31, 2020, the ~~power to direct the activities which most significantly affect the performance of each partnership~~Company merged with UCFC and ~~the obligation to absorb losses or the right to receive benefits that could be significant~~its subsidiaries, pursuant to the ~~entities. Therefore,~~Merger Agreement. Pursuant to the ~~Company has determined that it is not~~Merger Agreement, UCFC was merged with and into First Defiance. Immediately following the ~~primary beneficiary of any LIHTC partnership. In January of 2014, the FASB issued ASU 2014-01~~~~“Accounting for Investments in Qualified Affordable Housing Projects.”~~ The pronouncement permitted reporting entities to make an accounting policy election to account for these investments using the proportional amortization method if certain conditions exist. Under the proportional amortization method, an entity amortizes the initial costMerger, Home Savings was merged with and into First Federal Bank of the ~~investment in proportion to~~Midwest, with First Federal surviving the ~~tax credits~~Merger. In addition, UCFC’s wholly-owned insurance subsidiaries, HSB Insurance, LLC and ~~other tax benefits received, and will recognize~~United American Financial Services, Inc., each merged with the net investment performance in the income statement as a component of income tax expense (benefit). The Company utilized the proportional amortization method for all of its instruments. As of September 30, 2017 and December 31, 2016 the Company had $9.3 million and $6.8 million in qualified investments recorded in other assets and $6.7 million and $4.3 million in unfunded commitments recorded in other liabilities, respectively.

~~Unfunded Commitments~~

~~As of September 30, 2017, the expected payments for unfunded affordable housing commitments were as follows:~~

(dollars in thousands) Amount
2017 $ 1,318
2018 1,977
2019 1,372
2020 429
2021 393
Thereafter 1,178
Total Unfunded Commitments $ 6,667

~~The following table presents tax credits and other tax benefits recognized and amortization expense related to affordable housing for the three and nine months ended September 30, 2017 and 2016.~~

Three Months Ended September 30,
(dollars in thousands) 2017 2016
Proportional Amortization Method
Tax credits and other tax benefits recognized $ 218 $ 170
Amortization expense in federal income taxes 173 130

Nine Months Ended September 30,
(dollars in thousands) 2017 2016
Proportional Amortization Method
Tax credits and other tax benefits recognized $ 640 $ 484
Amortization expense in federal income taxes 502 368

~~There were no impairment losses of LIHTC investments for the three and nine months ended September 30, 2017 and 2016.~~

~~17.~~

~~Business Combinations~~

Effective February 24, 2017, the Company acquired Commercial Bancshares, Inc. (“Commercial Bancshares”) and its subsidiary, The Commercial Savings Bank (“CSB”), pursuant to an Agreement and Plan of Merger (“merger agreement”), dated August 23, 2016. The acquisition was accomplished by the merger of Commercial Bancshares into First Defiance, immediately followed by the merger of CSB into First Defiance’s bankingCompany’s wholly-owned insurance subsidiary, First ~~Federal. CSB operated 7 full-service banking offices in northwest and north central, Ohio and 1 commercial loan production office in central Ohio. Commercial Bancshares’~~Insurance Group of the Midwest, Inc., with First Insurance Group of the Midwest, Inc. surviving the Merger. UCFC’s consolidated assets and equity (unaudited) as of ~~February 24, 2017~~January 31, 2020 totaled ~~$348.4 million~~$2.8 billion and ~~$37.5~~$324.5 million, respectively. The Company accounted for the transaction under the acquisition method of

accounting, which means that the acquired assets and liabilities were recorded at fair value at the date of acquisition. The fair value estimates included in these financial statements are based on preliminary valuations. ~~The Company does not expect material variances from these estimates and expects that final valuation estimates will be completed during the year ending December 31, 2017.~~

In accordance with ASC 805, the Company expensed approximately ~~$3.7~~$11.5 million of direct acquisition costs during the three months ended March 31, 2020, of which ~~$2.8~~$4.7 million was to settle employment and benefit agreements and for personnel expenses related to operating the new ~~Commercial Bancshares~~UCFC locations. The Company recorded ~~$28.7~~$217.5 million of goodwill and ~~$4.9~~$33.0 million of intangible ~~assets.~~assets in the first quarter of 2020. Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies expected to be derived from the combination of the two entities. The ~~acquisition~~Merger was consistent with the Company’s strategy to enhance and expand its presence in ~~northwestern and north central~~northern Ohio. The ~~acquisition~~Merger offers the Company the opportunity to increase profitability by introducing existing products and services to the acquired customer base as well as add new customers in the expanded market area. The intangible assets are related to core deposits, ~~and~~which are being amortized over 10 years on an accelerated basis, and customer relationships, which are being amortized over 10 years on a straight-line basis. For tax purposes, goodwill ~~totaling $28.7 million~~ is non-deductible but will be evaluated annually for impairment. The following table summarizes the fair value of the total consideration transferred as part of the ~~Commercial Bancshares acquisition~~Merger as well as the fair value of identifiable assets and liabilities assumed as of the effective date of the transaction.

	January 31, 2020
	(In Thousands)

Cash Consideration	$	132
Equity - Dollar Value of Issued Shares		526,875
Fair Value of Total Consideration Transferred		527,007

Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed:
Cash and Cash Equivalents		52,580
Securities available for sale		262,753
Net loans, including loans held for sale and allowance		2,340,701
FHLB Stock		12,753
Office Properties and Equipment		21,216
Intangible Assets		33,014
Bank Owned Life Insurance		65,934
Mortgage Servicing Rights		9,747
Accrued Interest Receivable and Other Assets		34,452
Deposits - Non-Interest Bearing		(430,921	)
Deposits - Interest Bearing		(1,651,669	)
Advances from FHLB		(381,000	)
Deferred tax liability		(2,262	)
Accrued Interest Payable and Other Liabilities		(57,742	)
Total Identifiable Net Assets		309,556

Goodwill	$	217,451

February 24, 2017
(In Thousands)

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

Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed:
Cash and Cash Equivalents 35,411
Federal Funds Sold 2,769
Securities 4,338
Loans 285,448
FHLB Stock of Cincinnati and Other Stock 2,194
Office Properties and Equipment 5,455
Intangible Assets 4,900
Bank-Owned Life Insurance 8,168
Accrued Interest Receivable and Other Assets 3,606
Deposits – Non-Interest Bearing (56,061 )
Deposits – Interest Bearing (251,931 )
Advances from FHLB (1,403 )
Accrued Interest Payable and Other Liabilities (2,717 )
Total Identifiable Net Assets 40,177

Goodwill $ 28,695

~~Under the terms~~As a result of the ~~merger agreement, Commercial Bancshares common shareholders had~~Merger and in accordance with the ~~opportunity to elect to receive 1.1808 shares of common stock of the Company or cash in the amount of $51.00 for~~Merger Agreement, each share of ~~Commercial Bancshares~~UCFC common stock ~~subject~~issued and outstanding immediately prior to ~~adjustment as provided for~~the effective time was converted into 0.3715 share of First Defiance common stock. No fractional shares of First Defiance common stock were issued in the ~~merger agreement. Total consideration for Commercial Bancshares common shares outstanding was paid 80%~~Merger, and UCFC’s shareholders became entitled to receive cash in ~~Company stock and 20% in cash.~~lieu of fractional shares. The Company issued ~~1,139,502~~17,927,017 First Defiance common shares ~~of its common stock~~ and paid ~~$12.3~~approximately $0.1 million ~~in cash~~ to UCFC shareholders as a result of the ~~former shareholders~~Merger. The fair value of ~~Commercial Bancshares.~~First Defiance common shares issued as part of the consideration paid for the UCFC

common shares was determined based on the closing price of the Company’s common shares on the effective date of the Merger.

The following table presents unaudited pro forma information as if the acquisition had occurred on January 1, ~~2016~~2019, after giving effect to certain adjustments. The unaudited pro forma information for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2020 and ~~September 30, 2016~~March 31, 2019 includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, interest expense on deposits and borrowings acquired, and the related income tax effects. The unaudited pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed date.

	Pro Forma Three Months Ended March 31,
	2020			2019
	(In Thousands)
Net interest income	$	53,380		$	52,460
Provision for credit losses		(17,831	)		(273	)
Non-interest income		17,281			16,796
Non-interest expense		(41,141	)		(43,946	)
Income (loss) before income taxes		11,689			25,037
Income tax benefit (expense)		(2,734	)		(4,498	)
Net income (loss)	$	8,955		$	20,539
Diluted earnings per share	$	0.24		$	0.54

Pro Forma Nine Pro Forma Nine
Months Ended Months Ended
September 30, 2017 September 30, 2016
(In Thousands)

Net Interest Income $ 73,476 $ 67,008
Provision for loan losses 2,635 984
Non-Interest Income 30,463 26,646
Non-Interest Expense 62,067 57,453
Income Before Income Taxes 39,237 35,217
Income Tax Expense 13,112 10,733
Net Income $ 26,125 $ 24,484
Diluted Earnings Per Share $ 2.58 $ 2.40

The above pro forma financial information ~~includes approximately $3.1 million of net income~~ related to ~~the operations of Commercial Bancshares during the first nine months of 2017.~~2020 excludes non-recurring merger costs that totaled $11.5 million on a pre-tax basis. The above pro forma financial information ~~related to 2017~~ excludes ~~non-recurring merger costs that totaled $3.7~~the $25.9 million ~~on a~~ pre-tax ~~basis.~~provision expense recognized for the three months ended March 31, 2020 under CECL for acquired non-PCD loans as CECL was not effective as of the assumed transaction date of January 1, 2019.

On April 13, 2017, First Defiance and Corporate One Benefits Agency, Inc. (“Corporate One”) jointly announced the acquisition of Corporate One’s business by First Defiance. The total purchase price paid in cash was made up of the following: $6.5 million was paid at closing, $500,000 is due in July 2018, and $2.3 million at the end of a three-year earn-out based on the compound annual growth rate of net revenue over the performance period of Corporate One, for a total purchase price of $9.3 million. The recorded fair value of the $2.3 million earn-out was $1.8 million at September 30, 2017. As of September 30, 2017, total Company recorded goodwill of $7.9 million and identifiable intangible assets of $756,000 consisting of customer relationship intangible of $564,000 and a non-compete intangible of $192,000. The fair value estimates are preliminary and subject to revision until final values are determined by management, which is expected to occur by December 31, 2017. Corporate One was merged into First Insurance. Corporate One was a full-service employee benefits consulting organization founded in 1996 with offices located in Archbold, Findlay, Fostoria and Tiffin, Ohio. Corporate One consulted employers to better manage their employee benefit programs to effectively lead them into the future. It is anticipated that the transaction will enhance employee benefit offerings and expand First Insurance’s presence into adjacent markets in northwest Ohio.

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

Forward-Looking Information

~~Certain statements contained in this~~This quarterly report ~~are not~~may contain certain forward-looking statements of historical facts, including but not limited to statements that can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “anticipate”, or “continue” or the negative thereof or other variations thereon or comparable terminology are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section ~~21E~~21 B of the Securities Exchange Act of 1934, as amended. ~~Actual~~Those statements may include, but are not limited to, all statements regarding intent, beliefs, expectations, projections, forecasts and plans of First Defiance Financial Corp. (“First Defiance” or the “Company”) 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 ability to benefit from a changing interest rate environment; the production levels of mortgage loan generation; the ability to continue to grow loans and deposits; the ability to sustain credit quality ratios at current or improved levels; continued strength in the market area for First Federal; the ability to sell real estate owned properties; and the ability to grow in existing and adjacent markets. These forward-looking statements involve numerous risks and uncertainties, including: impacts from the novel coronavirus (COVID-19) pandemic on our business, operations, customers and capital position; higher default rates on loans made to our customers related to COVID-19 and its impact on our customers’ operations and financial condition; the impact of COVID-19 on local, national and global economic conditions; unexpected changes in interest rates or disruptions in the mortgage market related to COVID-19 or responses to the health crisis; the effects of various governmental responses to the COVID-19 pandemic; those inherent in general and local banking, insurance and mortgage conditions; competitive factors specific to markets in which First Defiance 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 our Securities and Exchange Commission (SEC) filings, including our Annual Report on Form 10-K for the year ended December 31, 2019. One or more of these factors have affected or could in the future affect First Defiance’s business and financial results in future periods and could cause actual results to differ materially from ~~those indicated~~plans and projections. Therefore, there can be no assurances that the forward-looking statements included in this quarterly report 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 First Defiance or any other persons, that our objectives and plans will be achieved. All forward-looking statements ~~due~~made in this quarterly report are based on information presently available to ~~risks, uncertainties~~the management of First Defiance and ~~changes with respect to a variety~~speak only as of ~~market and other factors. The Company assumes~~the date on which they are made. We assume no obligation to update any forward-looking ~~statements.~~

statements, whether as a result of new information, future developments or otherwise, except as may be required by law.

Non-GAAP Financial Measures

~~This document contains~~In addition to results presented in accordance with GAAP, this report includes non-GAAP financial measures. The Company believes these non-GAAP financial measures provide additional information that is useful to investors in helping to understand the underlying performance and trends of the Company. The Company monitors the non-GAAP financial measures and ~~certain non-GAAP financial measures which are presented as~~the Company’s management believes they are helpful to investors because they provide an additional tool to use in ~~understanding~~evaluating the Company’s ~~results~~financial and business trends and operating results. In addition, the Company’s management uses these non-GAAP measures to compare the Company’s performance to that of ~~operations or financial position.~~prior periods for trend analysis and for budgeting and planning purposes. Fully taxable-equivalent (“FTE”) is an adjustment to net interest income to reflect tax-exempt income on an equivalent before-tax basis.

Non-GAAP financial measures have inherent limitations, which are not required to be uniformly applied and are not audited. Readers should be aware of these limitations and should be cautious with respect to the use of such measures. To mitigate these limitations, the Company has practices in place to ensure that these measures are calculated using the appropriate GAAP or regulatory components in their entirety and to ensure

that our performance is properly reflected to facilitate consistent period-to-period comparisons. The Company’s method of calculating these non-GAAP measures may differ from methods used by other companies. Although the Company believes the non-GAAP financial measures disclosed in this report enhance investors' understanding of our business and performance, these non-GAAP measures should not be considered in isolation, or as a substitute for those financial measures prepared in accordance with GAAP.

The following tables present a reconciliation of non-GAAP measures to their respective GAAP measures for the ~~nine months~~three month periods ended ~~September 30, 2017~~March 31, 2020 and ~~2016.~~2019.

Non-GAAP Financial Measures – Net Interest Income on an FTE basis, Net Interest Margin and Efficiency Ratio

Non-GAAP Financial Measures – Net Interest Income on an
FTE basis, Net Interest Margin and Efficiency Ratio
($ in Thousands) September 30,
2017 September 30,
2016
Net interest income (GAAP) $ 71,284 $ 58,404
Add: FTE adjustment 1,432 1,381
Net interest income on a FTE basis (1) $ 72,716 $ 59,785

Noninterest income – less securities gains/losses (2) $ 29,759 $ 25,228
Noninterest expense (3) 64,211 52,913
Average interest-earning assets net of average unrealized gains/losses on securities(4) 2,508,254 2,140,426
Average interest-earning assets 2,511,469 2,148,438
Average unrealized gains/losses on securities 3,215 8,012

Ratios:
Net interest margin (1) / (4) 3.88 % 3.73 %
Efficiency ratio (3) / (1) + (2) 62.66 % 62.24 %

	Three Months Ended March 31,
	2020			2019
	(In Thousands)
Net interest income (GAAP)	$	45,463		$	28,270
Add: FTE adjustment		251			247
Net interest income on a FTE basis (1)	$	45,714		$	28,517

Non-interest income-less securities gains/losses (2)		13,999			10,813
Non-interest expense (3)		43,768			24,866
Average interest-earning assets net of average
unrealized gains/losses on securities (4)		4,852,863			2,873,133
Average interest-earning assets		4,862,532			2,871,340
Average unrealized gains/losses on securities		9,669			(1,793	)

Ratios:
Net interest margin (1) / (4)		3.78	%		4.03	%
Efficiency ratio (3) / (1) + (2)		73.30	%		63.22	%

Critical Accounting Policies

~~First Defiance~~The Company has established various accounting policies which govern the application of ~~accounting principles generally accepted in the United States~~GAAP in the preparation of its financial statements. The significant accounting policies of ~~First Defiance~~the Company are described in the footnotes to the consolidated financial statements included in the ~~Company’s Annual Report on~~2019 Form ~~10-K.~~10-K and in Footnote 2 of this document. Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. Those policies which are identified and discussed in detail in the ~~Company’s Annual Report on~~2019 Form 10-K and in Footnote 2 of this document include the Allowance for ~~Loan~~Credit Losses, Goodwill, and the Valuation of Mortgage Servicing Rights. ~~There have been no material changes in assumptions or judgments relative to those critical policies during the first nine months of 2017.~~

General

First Defiance Financial Corp. is a ~~unitary thrift~~financial holding company that conducts business through its wholly owned subsidiaries, First Federal Bank of the Midwest (“First Federal” or the “Bank”), First Insurance ~~and~~Group of the Midwest, Inc. (“First Insurance”), First Defiance Risk ~~Management.~~Management Inc. (“First Defiance Risk Management”), HSB Capital, LLC (HSB Capital”), and HSB Insurance, Inc. (“HSB Insurance”).

Immediately following the Merger, First Federal, ~~is a federally chartered stock savings~~acquired UCFC’s wholly owned bank ~~that provides financial services~~subsidiary, Home Savings Bank. Immediately prior to ~~communities based in northwest and central Ohio, northeast Indiana, and southeastern Michigan where it operates 42 full service banking centers.~~the merger of the banks, First Federal ~~operates one loan production office~~converted from a federal thrift into an Ohio state-chartered bank. In addition, immediately following the merger of the banks, UCFC’s wholly-owned insurance subsidiaries, HSB Insurance, LLC and United American Financial Services, Inc., each merged into First Insurance, with First Insurance surviving the mergers. The Company acquired two additional subsidiaries in ~~central~~the Merger, HSB Capital and HSB Insurance.

The Bank is an Ohio state chartered bank headquartered in Youngstown, Ohio. ~~On June 30, 2017, First Federal closed its full service~~It conducts operations through 77 banking center ~~located at 1660 Tiffin Avenue~~offices, 12 loan offices and 3 wealth offices in ~~Findlay, Ohio. Management’s decision to consolidate this banking center was based on the close proximity of other Findlay,~~ Ohio, ~~banking centers.~~Michigan, Indiana, Pennsylvania and West Virginia.

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

HSB Capital was formed as an Ohio limited-liability company by UCFC during 2016 for the purpose of providing mezzanine funding for customers of Home Savings. Mezzanine loans are offered by HSB Capital to customers in the Company’s market area and are expected to be repaid from the cash flow from operations of the business.

First Insurance ~~sells~~is a ~~variety~~wholly owned subsidiary of ~~property and casualty, group health and life and individual health and life insurance products.~~the Company. First Insurance is an insurance agency that ~~does~~conducts business inthroughout the ~~Defiance, Bryan, Bowling Green, Lima, Maumee~~Company’s markets. First Insurance offers property and Oregon, Ohio areas. Effective April 1, 2017, First Defiance acquired the business of Corporate One. Corporate One was merged into First Insurance. Corporate One was a full-service employee benefits consulting organization founded in 1996 with offices located in Archbold, Findlay, Fostoriacasualty insurance, life insurance and Tiffin, Ohio. Corporate One consulted employers to better manage their employee benefit programs to effectively lead them into the future. The transaction is expected to enhance employee benefit offerings and expand First Insurance’s presence into adjacent markets in northwest Ohio.

group health insurance.

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

Regulation ~~- First Defiance and First Federal are~~ – The Company is subject to regulation, examination and oversight by the ~~Office of the Comptroller of the Currency (“OCC”) and the~~ Federal Reserve Board (“Federal Reserve”)~~. Because~~ and the ~~FDIC insures First Federal’s deposits, First Federal is also subject to examination and regulation by the FDIC. In addition, First Federal~~SEC. The Bank is subject to regulation, examination and ~~examination~~oversight by the Federal Deposit Insurance Corporation (FDIC) and the Division of Financial Institutions of the Ohio Department of Commerce (ODFI). In addition, the Bank is subject to regulations of the Consumer Financial Protection Bureau (the “CFPB”) which was established by the 2010 Dodd-Frank Wall Street Reform and

Consumer Protection Act (“Dodd-Frank Act”)~~. First Defiance~~ and ~~First Federal~~has broad powers to adopt and enforce consumer protection regulations. The Company and the Bank must file periodic reports with the Federal Reserve, and ~~the OCC and~~ examinations are conducted periodically by the Federal Reserve, ~~OCC~~the FDIC and the ~~FDIC~~ODFI to determine whether ~~First Defiance~~the Company and ~~First Federal~~the Bank are in compliance with various regulatory requirements and are operating in a safe and sound manner. First Federal is subject to various consumer protection and fair lending laws. These laws govern, among other things, truth-in-lending disclosure, equal credit opportunity, and, in the case of First Federal, fair credit reporting and community reinvestment. Failure to abide by federal laws and regulations governing community reinvestment could limit the ability of First Federal to open a new branch or engage in a merger transaction. Community reinvestment regulations evaluate how well and to what extent First Federal lends and invests in its designated service area, with particular emphasis on low-to-moderate income communities and borrowers in such areas.

~~First Defiance~~The Company 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.

Economic Growth, Regulatory Relief and Consumer Protection Act

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

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

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

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

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

Regulatory Capital Requirements and Prompt Corrective Action – The federal banking regulators have adopted risk-based capital guidelines for financial institutions and their holding companies, designed to absorb losses. The guidelines provide a systematic analytical framework, which makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures expressly into account in evaluating capital adequacy and minimizes disincentives to holding liquid, low-risk assets. Capital levels as measured by these standards are also used to categorize financial institutions for purposes of certain prompt corrective action regulatory provisions.

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

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

Common equity for the ~~common equity tier 1~~CET1 capital ratio includes common stock (plus related surplus) and retained earnings, plus limited amounts of minority interests in the form of common stock, less the majority of certain regulatory deductions.

Tier 1 capital includes common equity as defined for the ~~common equity tier 1~~CET1 capital ratio, plus certain non-cumulative preferred stock and related surplus, cumulative preferred stock and related surplus and trust preferred securities that have been grandfathered (but which are not permitted going forward), and limited amounts of minority interests in the form of additional Tier 1 capital instruments, less certain deductions.

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

The deductions from ~~common equity tier 1~~CET1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments and investments in the capital of unconsolidated financial institutions (above certain levels).

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

The ~~new~~ rules also place restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive officers if the company does not hold a capital conservation buffer of greater than 2.5% composed of ~~common equity tier 1~~CET1 capital above its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. The capital conservation buffer ~~phases~~was fully phased in ~~through~~effective January 1, ~~2019. It was 1.25%~~2019 at ~~January 1, 2017.~~2.5%.

The federal banking agencies have established a system of “prompt corrective action” to resolve certain problems of undercapitalized banks. This system is based on five capital level categories for insured depository institutions: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized”

~~Deposit Insurance~~ ~~- Substantially all~~and “critically undercapitalized.” The federal banking agencies may (or in some cases must) take certain supervisory actions depending upon a bank's capital level. For example, the banking agencies must appoint a receiver or conservator for a bank within 90 days after it becomes "critically undercapitalized" unless the bank's primary regulator determines, with the concurrence of the FDIC, that other action would better achieve regulatory purposes. Banking operations otherwise may be significantly affected depending on a bank's capital category. For example, a bank that is not "well capitalized" generally is prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market, and the holding company of ~~First Federal are insured up~~any undercapitalized depository institution must guarantee, in part, specific aspects of the bank's capital plan for the plan to ~~applicable limits by~~be acceptable.

In order to be “well-capitalized,” a financial institution must have a CET1 capital ratio of 6.5%, a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital of at least 8% and a leverage ratio of at least 5%, and the institution must not be subject to any written agreement, order, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. As of March 31, 2020, the Bank met the ratio requirements in effect to be deemed "well-capitalized."

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

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

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

1.35%. The ~~deposit insurance assessment base is average assets less average tangible equity.~~DRR reached 1.36% at March 31, 2019. The FDIC set a target size for the Deposit Insurance Fund at 2% of insured deposits and a lower assessment rate schedule when the fund reaches 1.15% and, in lieu of dividends, the FDIC rule provides for a lower rate schedulecredits will be applied when the reserve ratio ~~reaches 2% and 2.5%~~is at least 1.38%. ~~On June 30, 2016,~~The rules also changed the ~~Deposit Insurance Fund surpassed its target of 1.15%, decreasing the assessment base. The change~~method to ~~the assessment base and~~determine risk-based assessment rates ~~as well as the Deposit Insurance Fund restoration time frame, lowered First Defiance’s deposit insurance assessment.~~

~~In addition, the FDIC has proposed changing the deposit insurance premium assessment method~~ for established banks with less than $10 billion in assets to better ensure that ~~have been insured by the FDIC~~banks taking on greater risks pay more for at least five years. The proposed changes would revise the financial ratios method so that it would be based on a statistical model estimating the probability of failure of a bank over three years; update the financial measures used in the financial ratios method consistent with the statistical model; and eliminate risk categories for established small banks and using the financial ratios method to determine assessment rates for all such banks (subject to minimum or maximum initial assessment rates based upon a bank’s composite examination rating).

deposit insurance than less risky banks.

As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, federally-insured institutions. It also may prohibit any federally-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the ~~Deposit Insurance Fund.~~DIF. The FDIC also has the authority to take enforcement actions against insured institutions. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged or is engaging in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or written agreement entered into with the FDIC.

Business Strategy – The ~~management of First Federal does not know of any practice, condition or violation that might lead to termination of deposit insurance.~~

~~Business Strategy~~ ~~- First Defiance’s~~Company’s primary objective is to be a high-performing ~~community banking organization,~~community-focused financial institution, well regarded in its market areas. ~~First Defiance~~The Company accomplishes this through emphasis on local decision making and empowering its employees with tools and knowledge to serve its customers’ needs. First Defiance believes in a “Customer First” philosophy that is strengthened by its Trusted Advisor initiative. First Defiance also has a tagline of “Better Together” as an indication of its commitment to local, responsive, personalized service. First DefianceThe Company believes this strategy results in greater customer loyalty and profitability through core relationships. ~~First Defiance~~The Company is focused on diversification of revenue sources and increased market penetration in areas where the growth potential exists for a balance between acquisition and organic growth. The primary elements of ~~First Defiance’s~~the Company’s business strategy are commercial banking, consumer banking, including the

origination and sale of single-family residential loans, enhancement of fee income, wealth management and insurance sales, each united by a strong customer service culture throughout the organization.

Commercial and Commercial Real Estate Lending -Commercial and commercial real estate lending have been an ongoing focus and a major component of ~~First Federal’s~~the Company’s success. ~~First Federal~~The Company provides primarily commercial real estate and commercial business loans with an emphasis on ~~owner- occupied~~owner-occupied commercial real estate and commercial business lending, including a focus on the deposit balances that accompany these relationships. ~~First Federal’s~~The Company’s client base tends to be small to middle market customers with annual gross revenues generally between $1 million and $50 million. ~~First Federal’s~~The Company’s focus is also on securing multiple guarantors in addition to collateral where possible. These customers require ~~First Federal~~the Company to have a high degree of knowledge and understanding of their business in order to provide them with solutions to meet their financial needs. ~~First Federal’s “Customer First” philosophy and culture complements this need of its clients. First Federal~~The Company believes this personal service model differentiates ~~First Federal~~it from its competitors, particularly the larger regional institutions. ~~First Federal~~The Company offers a wide variety of products to support commercial clients including remote deposit capture and other cash management services. ~~First Federal~~The Company also believes that the small business customer is a strong market for ~~First Federal. First Federal~~it. The Company participates in many of the Small Business Administration (“SBA”) lending programs and implemented a program targeting the small business customer. Maintaining a diversified portfolio with an emphasis on monitoring industry concentrations and reacting to changes in the credit characteristics of industries is an ongoing focus.

Consumer Banking -~~First Federal~~– The Company offers customers a full range of deposit and investment products including demand, checking, money market, certificates of deposits, Certificate of Deposit Account Registry Service ~~(“CDARS”)~~ and savings accounts. ~~First Federal~~The Company offers a full range of investment products through the wealth management department and a wide variety of consumer loan products, including residential mortgage loans, home equity loans, and installment loans. ~~First Federal~~The Company also offers online banking services, which include mobile banking, ~~people-to-people~~People Pay, online bill pay, ~~(“P2P”)~~ and online ~~bill pay.~~account opening as well as the MoneyPass ATM Network offering access to our customers to over 32,000 ATMs nationwide without a surcharge fee.

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

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

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

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

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

The Company’s securities portfolio is classified as either “available-for-sale” or “held-to-maturity.” Securities classified as available-for-sale may be sold prior to maturity due to changes in interest rates, prepayment risks, and availability of alternative investments, or to meet the Company’s liquidity needs. Securities are classified as held-to-maturity when ~~First Defiance~~the Company has the positive intent and ability to hold the security to maturity. Held-to-maturity securities are stated at amortized cost and had a recorded value of $728,000 at September 30, 2017. Securities not classified as held-to-maturity are classified as available-for-sale, which are stated at fair value and had a recorded value of $260.0 million at September 30, 2017. The available-for-sale portfolio included obligations of U.S. Government corporations and agencies ($2.0 million), certain municipal obligations ($96.4 million), CMOs/REMICs ($74.1 million), corporate bonds ($13.1 million), and mortgage backed securities ($74.5 million).

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

Lending - In order to properly assess the collateral dependent loans included in its loan portfolio, the Company has established policies regarding the monitoring of the collateral underlying such loans. The Company requires an appraisal that is less than one year old for all new collateral dependent real estate loans, and all renewed collateral dependent real estate loans where significant new money is extended. The appraisal process is handled by the Company’s Credit Department, which selects the appraiser and orders the appraisal. ~~First Defiance’s~~The Company’s loan policy prohibits the account officer from talking or communicating with the appraiser to ~~insure~~ensure that the appraiser is not influenced by the account officer in any way in making their determination of value.

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

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

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

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

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

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

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

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

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

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

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

Changes in Financial Condition

At ~~September 30, 2017, First Defiance's~~March 31, 2020, the Company's total assets ~~deposits and stockholders' equity~~ amounted to ~~$2.93~~$6.5 billion ~~$2.36 billion and $367.9 million, respectively,~~ compared to ~~$2.48~~$3.5 billion ~~$1.98 billion and $293.0 million, respectively,~~ at December 31, ~~2016. Total assets increased $456.7 million, deposits increased $379.0 million and stockholders’ equity increased $74.9 million~~2019. The increase is primarily ~~due~~attributable to the ~~acquisition~~Merger which added $2.8 billion in identified assets as of ~~Commercial Bancshares. See Note 17 – Business Combinations for further details regarding the Commercial Bancshares acquisition and the impact to the individual categories.~~January 31, 2020.

~~Net~~Gross loans receivable, ~~(excluding~~excluding loans held for ~~sale) increased $335.1 million~~sale, were $5.1 billion at March 31, 2020, compared to ~~$2.25 billion. The variance in~~$2.8 billion at December 31, 2019. For the quarter, gross loans receivable between September 30, 2017 and December 31, 2016 includes an increase of $165.1 million in commercial real estate loans, $63.5 million increase in residential real estate loans (includes $11.5 million of purchased portfolio mortgage loans), $41.2 million increase in commercials loans, $13.8 million increase in home equity loans, $39.7 million increase in construction loans and $12.3 million increase in consumer loans. The net loan amounts acquiredgrew $2.3 billion, including $2.2 billion from ~~Commercial Bancshares at~~ the acquisition date of February 24, 2017 resulted in a $159.5 million increase in commercial real estate loans a $58.6 million increase in residential real estate loans, a $35.1 million increase in commercial loans, a $15.7 million increase in home equity loans, a $5.6 million increase in construction loans and a $10.9 million increase in consumer loans.

Merger.

The investment securities portfolio increased ~~$9.6~~$250.8 million to ~~$260.8~~$534.2 million at ~~September 30, 2017~~March 31, 2020 from ~~$251.2~~$283.4 million at December 31, ~~2016. There was an unrealized gain~~2019. The increase is a result of $262.8 million of available for sale securities acquired in the ~~investment portfolio~~Merger and a $9.5 million increase in the market value of ~~$4.6~~available-for-sale securities offset by runoff and amortization of $21.5 million during the quarter.

Deposits increased $2.1 billion from $2.9 billion at ~~September 30, 2017 compared~~December 31, 2019, to ~~an unrealized gain~~$5.0 billion as of ~~$3.4~~March 31, 2020. The increase was due to the deposits acquired in the Merger which added $430.9 million of non-interest deposits and $1.7 billion of interest-bearing deposits.

Stockholders’ equity increased $490.2 million from $426.2 million at December 31, ~~2016.~~

~~Goodwill and core deposit and other intangibles increased $36.6 million and $4.7 million, respectively~~2019, to $98.4 million and $6.1 million, respectively due to the acquisition of Commercial Bancshares and Corporate One. The acquisition of Commercial Bancshares increased goodwill by $28.7 million and core deposit and other intangibles by $4.9 million. The acquisition of Corporate One increased goodwill by $7.9 million and other intangibles by $756,000.

Deposits increased from $1.98 billion at December 31, 2016 to $2.36 billion as of September 30, 2017. Non-interest bearing demand deposits increased $32.2 million to $519.9 million, interest bearing demand and money market deposits increased $172.8 million to $989.5 billion, savings deposits increased $52.9 million to $296.2 million, and retail time deposits increased $121.1 million to $555.1 million. The net deposit amounts acquired from Commercial Bancshares at the acquisition date of February 24, 2017 resulted in a $56.1 million increase in non-interest bearing demand deposits, $122.0 million increase in interest bearing demand and money market deposits, $31.6 million increase in savings deposits and $98.2 million increase in retail time deposits.

~~Stockholders’ equity increased from $293.0~~$916.4 million at ~~December~~March 31, ~~2016 to $367.9 million at September 30, 2017.~~2020. The increase in stockholders’ equity was primarily the result of ~~recording net income of $22.9~~the Merger and $7.5 million ~~an increase~~ in other comprehensive ~~income~~gain. The increase was partially offset by the repurchase of ~~$1.9 million and an increase due to the acquisition of Commercial Bancshares of $56.5 million as a result of issuing 1.1 million~~430,000 shares of common ~~stock. These were offset by $7.3~~stock totaling $10.1 million, the net operating loss of $22.5 million and $8.3 million of common stock dividends ~~being paid in the first nine months of 2017.~~paid.

Average Balances, Net Interest Income and Yields Earned and Rates Paid

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

	Three Months Ended September 30,														Three Months Ended March 31,
	2017							2016							2020							2019
	Average				Yield/			Average				Yield/			Average				Yield/			Average				Yield/
	Balance		Interest(1)		Rate(2)			Balance		Interest(1)		Rate(2)			Balance		Interest(1)		Rate(2)			Balance		Interest(1)		Rate(2)
Interest-earning assets:
Loans receivable	$	2,251,071	$	26,025		4.59	%	$	1,879,760	$	20,316		4.30	%	$	4,317,857	$	51,485		4.80	%	$	2,517,283	$	31,238		5.03	%
Securities(3)		259,310		2,114		3.29	(3)		231,864		1,892		3.37	(3)		449,744		2,943		2.69			295,824		2,428		3.31
Interest bearing deposits		64,090		209		1.29			68,746		104		0.60			68,980		230		1.34			44,752		285		2.58
FHLB stock		15,992		209		5.18			13,800		137		3.95			25,951		115		1.78			13,481		215		6.47
Total interest-earning assets		2,590,463		28,557		4.38			2,194,170		22,449		4.09			4,862,532		54,773		4.54			2,871,340		34,166		4.82
Non-interest-earning assets		316,332							231,365							495,066							311,672
Total assets	$	2,906,795						$	2,425,535						$	5,357,598						$	3,183,012

Interest-bearing liabilities:
Deposits	$	1,818,670	$	2,391		0.52	%	$	1,487,465	$	1,635		0.44	%	$	3,343,833	$	7,771		0.93	%	$	2,061,023	$	5,005		0.98	%
FHLB advances and other		104,648		431		1.63			84,598		322		1.51			209,508		1,006		1.93			58,954		276		1.90
Subordinated debentures		36,158		239		2.62			36,140		191		2.10			36,083		273		3.04			36,083		364		4.09
Securities sold under repurchase agreements		28,182		13		0.18			52,948		35		0.26			2,359		9		1.53			5,431		4		0.30
Total interest-bearing liabilities		1,987,658		3,074		0.61			1,661,151		2,183		0.52			3,591,783		9,059		1.01			2,161,491		5,649		1.06
Non-interest bearing deposits		520,147		-					441,903		-					896,220		—		—			581,135		—
Total including non-interest bearing demand deposits		2,507,805		3,074		0.49			2,103,054		2,183		0.41			4,488,003		9,059		0.81			2,742,626		5,649		0.84
Other non-interest-bearing liabilities		35,378							33,872							82,758							45,248
Total liabilities		2,543,183							2,136,926							4,570,761							2,787,874
Stockholders' equity		363,612							288,609
Total liabilities and stock- holders' equity	$	2,906,795						$	2,425,535
Stockholders’ equity																786,837							395,138
Total liabilities and stock-Holders’ equity															$	5,357,598						$	3,183,012
Net interest income; interest rate spread			$	25,483		3.77	%			$	20,266		3.57	%			$	45,714		3.53	%			$	28,517		3.76	%
Net interest margin (4)						3.91	%						3.69	%						3.78	%						4.03	%
Average interest-earning assets to average interest-bearing liabilities						130	%						132	%						135	%						133	%

(1)

~~(1)~~

Interest on certain tax-exempt loans and securities is not taxable for ~~Federal~~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%~~21%.

~~(2)~~

~~Annualized~~

~~(3)~~

~~Securities yield=annualized interest income divided by the average balance of securities, excluding average unrealized gains/losses.~~

~~(4)~~

~~Net interest margin is net interest income divided by average interest-earning assets.~~

Nine Months Ended September 30,
2017 2016
Average Yield/ Average Yield/
Balance Interest (1) Rate (2) Balance Interest (1) Rate (2)
Interest-earning assets:
Loans receivable $ 2,171,733 $ 73,415 4.52 % $ 1,834,981 $ 59,395 4.32 %
Securities 257,924 6,475 3.40 (3) 230,058 5,899 3.55 (3)
Interest bearing deposits 66,299 555 1.12 69,599 287 0.55
FHLB stock 15,513 562 4.84 13,800 413 4.00
Total interest-earning assets 2,511,469 81,007 4.32 2,148,438 65,994 4.12
Non-interest-earning assets 301,091 228,496
Total assets $ 2,812,560 $ 2,376,934

Interest-bearing liabilities:
Deposits $ 1,743,769 $ 6,357 0.49 % $ 1,457,010 $ 4,613 0.42 %
FHLB advances 104,616 1,211 1.55 82,598 940 1.52
Subordinated debentures 36,155 682 2.51 36,140 548 2.03
Securities sold under repurchase agreements 27,484 41 0.20 56,615 108 0.27
Total interest-bearing liabilities 1,912,024 8,291 0.58 1,630,363 6,209 0.51
Non-interest bearing deposits 521,161 - 432,274 -
Total including non-interest bearing demand deposits 2,433,185 8,291 0.46 2,062,637 6,209 0.40
Other non-interest-bearing liabilities 34,183 30,886
Total liabilities 2,467,368 2,093,523
Stockholders' equity 345,192 283,411
Total liabilities and stock- holders' equity $ 2,812,560 $ 2,376,934
Net interest income; interest rate spread $ 72,716 3.74 % $ 59,785 3.61 %
Net interest margin (4) 3.88 % 3.73 %
Average interest-earning assets to average interest-bearing liabilities 131 % 132 %

(2)

~~(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%.

Annualized

(3)

~~(2)~~

~~Annualized~~

~~(3)~~

Securities ~~yield=~~yield is annualized interest income divided by the average balance of securities, excluding average unrealized gains/losses. See Non-GAAP Financial Measure discussion for further details.

(4)

~~(4)~~

Net interest margin is net interest income divided by average interest-earning assets. See Non-GAAP Financial Measure discussion for further details.

Results of Operations

Three Months Ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~

2019

On a consolidated basis, ~~First Defiance’s~~the Company reported a net ~~income~~loss for the quarter ended ~~September 30, 2017 was $9.4~~March 31, 2020 of $22.5 million compared to net income of ~~$7.0~~$11.5 million for the comparable period in ~~2016.~~2019. On a per share basis, the basic and diluted loss per share was $0.71 for the three months ended March 31, 2020 and basic and diluted earnings per common share were $0.57 for the three months ended ~~September 30, 2017 were both $0.92,~~March 31, 2019. The year-to-year results are impacted by the Merger and include $43.8 million in credit loss expense, $25.9 million related to acquisition accounting, for an after-tax cost of $20.5 million. The results for the first quarter of 2020 also included $11.5 million of acquisition-related charges, which had an after-tax cost of $9.5 million. The results for the first quarter of 2020 include two months of activity for UCFC compared to ~~basic and diluted earnings per common share of $0.78 each for the quarter ended September 30, 2016.~~

none in 2019

Net Interest Income

~~First Defiance’s~~The Company’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 ~~$25.0~~$45.5 million for the quarter ended ~~September 30, 2017,~~March 31, 2020, up from ~~$19.8~~$28.3 million for the same period in ~~2016.~~2019. The tax-equivalent net interest margin was ~~3.91%~~3.78% for the quarter ended ~~September 30, 2017, an increase~~March 31, 2020, a decrease from ~~3.69%~~4.03% for the same period in ~~2016.~~2019. The ~~increase~~decrease in margin between the ~~2017~~2020 and ~~2016 third~~2019 first quarters was primarily due to ~~CSB’s~~a decrease in the yield on earning ~~asset mix as well an increase~~assets. The decline in interest ~~rates.~~rates in the in 2019 and through the first quarter of 2020 was the primary reason for this decrease along with the Merger. The yield on interest-earning assets was ~~4.38%~~4.54% for the quarter ended ~~September 30, 2017, up 29~~March 31, 2020, down 28 basis points from ~~4.09%~~4.82% for the same period in ~~2016.~~2019. The cost of interest-bearing liabilities between the two periods ~~increased 9~~declined 5 basis points to ~~0.61%~~1.01% in the ~~third~~first quarter of ~~2017~~2020 from ~~0.52%~~1.06% in the ~~same period in 2016.~~

first quarter of 2019.

Total interest income increased ~~$6.1~~$20.6 million to ~~$28.1~~$54.5 million for the quarter ended ~~September 30, 2017~~March 31, 2020, from ~~$22.0~~$33.9 million for the quarter ended ~~September 30, 2016.~~March 31, 2019. This increase is due to continued solid loan growth and the ~~CSB acquisition and a more profitable~~Merger which resulted in average earning asset ~~mix.~~growth of $2.0 billion year-over-year. Income from loans increased to ~~$26.0~~$51.5 million for the quarter ended ~~September 30, 2017~~March 31, 2020, compared to ~~$20.3~~$31.2 million for the same period in ~~2016~~2019 due to average loan growth of ~~$371.3 million due primarily from the CSB acquisition.~~$1.8 billion. The ~~increase~~decrease in the loan portfolio yield to ~~4.59% at September 30, 2017 was due to increasing interest rates and~~4.80% for the acquisition of CSB as the weighted average yield at the acquisition date was 4.59%. The investment interest income increased $190,000 in the third quarter of 2017 to $1.7 million; however, the yield dropped 8 basis points to 3.29% at September 30, 2017 compared to 3.37% at September 30, 2016. The decline in investment yield is primarily attributable to the reinvestment of matured securities at lower yields. Incomethree months ended March 31, 2020 from ~~interest bearing deposits and FHLB stock increased to $209,000 and $209,000 respectively in the third quarter of 2017 compared to $104,000 and $137,000~~5.03% for the same period in ~~2016~~2019, was due mainly to declining rates. Interest income from investments increased ~~interest rates.~~

~~Interest expense increased by $891,000~~$512,000 in the ~~third~~first quarter of ~~2017~~2020 to $2.7 million compared to the same period in ~~2016,~~2019. The yield decreased 62 basis points to ~~$3.1~~2.69% for the three months ended March 31, 2020, compared to 3.31% for the same period in 2019. Income from interest bearing deposits decreased to $230,000 in the first quarter of 2020 compared to $285,000 for the same period in 2019 while income from FHLB stock decreased to $115,000 in the first quarter of 2020 compared to $215,000 for the same period in 2019.

Interest expense increased by $3.4 million in the first quarter of 2020 compared to the same period in 2019, to $9.1 million from ~~$2.2~~$5.6 million. ~~The cost of interest bearing liabilities increased 9 basis points from 0.52% at September 30, 2016~~This increase was due to ~~0.61% at September 30, 2017.~~growth in deposits along with the Merger. Interest expense related to interest-bearing deposits was ~~$2.4~~$7.8 million in the ~~third~~first quarter of ~~2017~~2020 compared to ~~$1.6~~$5.0 million for the same period in ~~2016.~~2019. Interest expense recognized by the Company related to FHLB advances was ~~$431,000~~$1.0 million in the ~~third~~first quarter of ~~2017~~2020 compared to ~~$322,000~~$276,000 for the same period in ~~2016 due mainly to~~2019 as a result of increased ~~volumes.~~volume from the merger. Expenses on subordinated debentures and notes payable were ~~$239,000~~$273,000 and ~~$13,000~~$9,000 respectively in the ~~third~~first quarter of ~~2017~~2020 compared to ~~$191,000~~$364,000 and ~~$35,000~~$4,000 respectively for the same period in ~~2016.~~

2019.

Allowance for ~~Loan~~Credit Losses

(“ACL”)

The ~~allowance~~Company adopted ASU 2016-13, the Current Expected Credit Loss (“CECL”) model on January 1, 2020. Under CECL, a valuation reserve will be established in the ACL and maintained through expense in the provision for ~~loan losses~~credit losses. Upon adoption of CECL, the Company made a one-time adjustment, net of taxes, to retained earnings for $1.9 million. The ACL represents management’s assessment of the estimated ~~probable incurred~~ credit losses in the ~~loan portfolio at each balance sheet date.~~Company will receive over the life of the loan. ACL requires a projection of credit losses over the contract lifetime of the credit adjusted for prepayment tendencies. Management analyzes the adequacy of the ~~allowance for loan losses~~ACL regularly through reviews of the loan portfolio. Consideration is given to economic conditions, changes in interest rates and the effect of such changes on collateral values and borrower’s ability to pay, changes in the composition of the loan portfolio and trends in past due and non-performing loan balances. The ~~allowance for loan losses~~ACL is a material estimate that is susceptible to significant fluctuation and is established through a provision for ~~loan~~credit losses based on management’s evaluation of the inherent risk in the loan portfolio. In addition to extensive in-house loan monitoring procedures, the Company utilizes an outside party to conduct an independent loan review of commercial loan and commercial real estate loan relationships. The Company’s goal is to have ~~approximately 55% to 60%~~50% or greater of the portfolio reviewed annually. This includes all relationships over $5.0 million with new exposure greater than $2.0 million and a sample of other relationships greater than $5.0 million; loan relationships between $1.0 million and $5.0 million with new exposure greater than $750,000 and a sample of other relationships between $1.0 million and $5.0 million; and a sample of relationships less than $1.0 million. Management utilizes the results of this outside loan review to assess the effectiveness of its internal loan grading system as well as to assist in the assessment of the overall adequacy of the ~~allowance for loan losses~~ACL associated with these types of loans.

The ~~allowance for loan loss~~ACL is made up of two basic components. The first component of the allowance for ~~loan~~credit loss is the specific reserve in which the Company sets aside reserves based on the analysis of individual impaired credits. In establishing specific reserves, the Company analyzes all substandard, doubtful and loss graded loans quarterly and makes judgments about the risk of loss based on the cash flow of the borrower, the value of any collateral and the financial strength of any guarantors. If the loan is impaired and cash flow dependent, then a specific reserve is established for the discount on the net present value of expected future cash flows. If the loan is impaired and collateral dependent, then any shortfall is usually charged off. The Company also considers the impacts of any ~~Small Business Association~~SBA or Farm Service Agency guarantees. The specific reserve portion of the ~~allowance for loan losses~~ACL was ~~$614,000~~$683,000 at ~~September 30, 2017~~March 31, 2020, and ~~$809,000~~$422,000 at December 31, ~~2016.~~

2019.

The second component is a general reserve, which is used to record loan loss reserves for groups of homogenous loans in which the Company estimates the potential losses ~~incurred~~over the contractual lifetime of the loan adjusted for prepayment tendencies. In addition the future economic environment is incorporated in projection with loss expectations to revert to the ~~portfolio based on quantitative~~long-run historical mean after such time as management can no longer make or obtain a reasonable and ~~qualitative factors.~~supportable forecast. For purposes of the general reserve analysis, the six loan portfolio ~~is stratified~~segments are further segregated into ~~nine~~thirteen different loan pools ~~based on loan type~~ to allocate ~~historic~~ the ACL. Residential real estate is further segregated into owner occupied and nonowner occupied for ACL. Commercial real estate is split into owner occupied, nonowner occupied, multifamily, agriculture land and other commercial real estate. And commercial credits are comprised of commercial working capital, agriculture production and other commercial credits. The Company utilizes three different methodologies to analyze loan pools.

Discounted cash flows (DCF) was selected as the appropriate method for loan segments with longer average lives and regular payment structures. This method is applied to a majority of the Company’s real estate loans. DCF generates cash flow projections at the instrument level where payment expectations are adjusted for prepayment and curtailment to produce an expected cashflow stream. This expected cashflow stream is compared to the net present value of expected cash flows to establish a valuation account for these loans.

The probability of default/loss ~~experience.~~ given default methodology was selected as most appropriate for loan segments with average lives of three years or less and/or irregular payment structures. This methodology was used for home equity and commercial portfolios. A loan is considered to default if one of the following is detected:

Becomes 90 days or more past due

Is place on nonaccrual

Is marked as a troubled debt restructuring

Is partially or wholly charge-off

The ~~loss experience factor~~default rate is ~~then~~measured on the current life of the loan segment using s weighted average of the four most recent quarters. PD/LGD is determined on a dollar-ratio basis, measuring the ratio of net charged off principal to defaulted principal.

The consumer portfolio contains loans with many different payment structures, payment streams and collateral. The remaining life method was deemed most appropriate for these loans. The weighted average remaining life uses an annual charge-off rate over several vintages to estimate credit losses. The average annual charge-off rate is applied to the ~~non-impaired loan portfolio.~~contractual term adjusted for prepayments.

Additionally, CECL requires a reasonable and supportable forecast when establishing the ACL. The Company utilizes loss migration measurement for each loan portfolio segment with differentiation between loan risk grades in calculating the general reserve component for non-impaired loans. Beginning December 31, 2016 theestimates losses over an approximate one-year forecast period using Moody’s baseline economic forecasts, and then reverts to longer term historical loss calculation was changed from using an average of four (4) four-year loss migration periods to using an average of all four-year loss migration periods to the present beginning with data from the second quarter 2011. Management believes this enhancement is consistent with the rationale of the previous measurement but providesexperience over a more precise calculation of historical losses by incorporating more data points for the average loss ratio and including periods that provide a more complete coverage of the full business cycle. Management believes that capturing the risk grade changes and cumulative losses over the life cycle of a loan more accurately depicts management’s estimate of historical losses as well as being more reflective of the ongoing risks in the loan portfolio. These modifications resulted in a change in the general reserves between the loan portfolio segments but did not have a material impact on the overall allowance for loan losses.

three-year period.

The quantitative general allowance ~~decreased $2.1 million~~increased to ~~$6.6~~$41.6 million at ~~September 30, 2017~~March 31, 2020, from ~~$8.7~~$6.6 million at December 31, ~~2016 primarily due to a decrease in the historical loss rates from the migration analysis.~~

2019.

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

ECONOMIC

~~ECONOMIC~~

Changes in international, national and local economic business conditions and developments, including the condition of various market segments.

Changes in the value of underlying collateral for collateral dependent loans.

ENVIRONMENT

~~ENVIRONMENT~~

Changes in the nature and volume in the loan portfolio.

The existence and effect of any concentrations of credit and changes in the level of such concentrations.

Changes in lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices.

Changes in the quality and breadth of the loan review process.

Changes in the experience, ability and depth of lending management and staff.

RISK

~~RISK~~

Changes in the trends of the volume and severity of delinquent and classified loans, and changes in the volume of non-accrual loans, ~~trouble debt restructuring,~~TDRs, and other loan modifications.

Changes in the political and regulatory environment.

The qualitative analysis ~~at September 30, 2017~~ indicated a general reserve of ~~$19.2~~$35.8 million at March 31, 2020 compared ~~with $16.4~~to $24.2 million at December 31, ~~2016, an~~2019. The increase was mainly due to the Merger, which increased the pool of ~~$2.8 million.~~loans to which the qualitative reserves are applied, and changes in the economy. Management reviewed the overall economic, environmental and risk factors and determined that it was appropriate to make adjustments to these sub-factors based on that review.

The economic factors for all ~~commercial and commercial~~ loan segments ~~were reduced in all loan segments~~increased in the first ~~nine~~three months of ~~2017~~2020, due to ~~stability~~a slight increase in ~~the U.S. economy~~local unemployment levels and ~~forecasts for continued strengthening of the labor market.~~

uncertainty in global economic conditions.

The environmental factors ~~increased slightly in the first nine months of 2017 in~~for the commercial ~~commercial~~ real estate, commercial loan and construction loan segments decreased in the first three months of 2020, mainly due to ~~an increase~~decreases in credit ~~concentration in both loans to one borrower~~concentrations and ~~portfolio concentration limits as well as changes~~strengthened credit function. The environmental factors for the home equity and improvement, consumer and residential loan segments remained flat in the ~~lending staff.~~

first three months of 2020.

The risk factors for ~~all loan segments, but particularly the~~ commercial ~~loan segment, were~~real estate, construction, and consumer loans increased in the first ~~nine~~three months of ~~2017~~2020 primarily due to unfavorable trends in ~~the levels of non-performing~~external factors. The risk factors for commercial, home equity and improvement, and residential loans ~~and classified assets. The increase is mainly attributable to two loan relationships that were downgraded and placed on non-accrual~~decreased in the ~~second quarter.~~first three months of 2020 primarily due to favorable trends in non-performing assets.

~~First Defiance’s~~The Company’s general reserve percentages for main loan segments not otherwise classified ranged from ~~0.46%~~0.45% for construction loans to ~~1.60%~~2.46% for ~~home equity and improvement~~consumer loans at ~~September 30, 2017.~~March 31, 2020.

Under CECL, when loans are purchased with evidence of more than insignificant deterioration of credit they are accounted for as purchase credit deteriorated (“PCD”). PCD loans acquired in a transaction are marked to fair value and a mark on yield is recorded. In addition, an adjustment is made to the ACL for the expected loss through retained earnings on the acquisition date. These loans are assessed on a regular basis and subsequent adjustments to the ACL are recorded on the income statement. On January 31, 2020, the Company acquired PCD loans with a fair value of $79.1 million, a recorded adjustment on yield of $4.1 million and an increase to the ACL of $7.7million.

As a result of the quantitative and qualitative analyses, along with the change in specific reserves and the decrease in net charge-offs in the quarter, the Company’s provision for ~~loan~~credit losses for the ~~third~~first quarter of ~~2017~~2020 was ~~$462,000~~$43.8 million, including $25.9 million attributable to the acquisition, compared to ~~$15,000~~$0.2 million for the same period in ~~2016.~~2019. The ~~allowance for loan losses~~ACL was ~~$26.3~~$85.9 million at ~~September 30, 2017~~March 31, 2020 and ~~$25.9~~$31.2 million at December 31, ~~2016.~~2019. The ~~allowance for loans losses~~ACL represented ~~1.16%~~1.68% of loans, net of undisbursed loan funds and deferred fees and costs, at ~~September 30, 2017~~March 31, 2020 and ~~1.33%~~1.12% at December 31, ~~2016.~~

The provision of $462,000 was offset by charge offs of $236,000 and with the addition of recoveries of $200,000, resulted in an increase to the overall allowance for loan loss of $426,000 for the third quarter of 2017. 2019. In management’s opinion, the overall ~~allowance for loan losses~~ACL of ~~$26.3~~$85.9 million as of ~~September 30, 2017~~March 31, 2020, is ~~adequate. The loans acquired from CSB were recorded at fair value with purchase accounting adjustments discounting the loan balance instead of an allowance for loan~~adequate to cover current estimated credit losses.

Management also assesses the value of ~~real estate owned~~OREO as of the end of each accounting period and recognizes write-downs to the value of that real estate in the income statement if conditions dictate. In the three month period ended ~~September 30, 2017,~~March 31, 2020, there were no write-downs of real estate held for sale. Management believes that the values recorded at ~~September 30, 2017~~March 31, 2020, for ~~real estate owned~~OREO and repossessed assets represent the realizable value of such assets.

Total classified loans increased to ~~$57.6~~$70.5 million at ~~September 30, 2017,~~March 31, 2020, compared to ~~$27.5~~$34.2 million at December 31, ~~2016,~~2019, an increase of ~~$30.1 million. There were two loan relationships totaling $13.6~~$36.3 million ~~that were downgraded and resulted in an increase in net charge offs in the second quarter of 2017.In addition, there were $16.4 million of newly classified loans from the CSB acquisition~~primarily due to ~~new financial information received.~~the acquisition of HSB.

~~First Defiance’s~~The Company’s ratio of ~~allowance for loan losses~~ALLL to non-performing loans was ~~90.4%~~263.4% at ~~September 30, 2017~~March 31, 2020, compared with ~~180.4%~~232.5% at December 31, ~~2016.~~2019. Management monitors collateral values of all loans included on the watch list that are collateral dependent and believes that allowances for those loans at ~~September 30, 2017~~March 31, 2020, are appropriate. Of the ~~$29.2~~$32.6 million in non-accrual loans at ~~September 30, 2017, $24.8~~March 31, 2020, $16.9 million or ~~85.2%~~51.8% are less than 90 days past due.

At ~~September 30, 2017, First Defiance~~March 31, 2020, the Company had total non-performing assets of ~~$29.7~~$33.1 million, compared to ~~$14.8~~$13.6 million at December 31, ~~2016.~~2019. Non-performing assets include loans that are on non-accrual, ~~real estate owned~~OREO and other assets held for sale. Non-performing assets at ~~September 30, 2017~~March 31, 2020, and December 31, ~~2016~~2019, by category were as follows:

~~Table 1 – Nonperforming Asset~~

	March 31,			December 31,
	2020			2019
	(In Thousands)
Non-performing loans:
One to four family residential real estate	$	6,707		$	2,411
Non-residential and multi-family residential real estate		19,386			7,609
Commercial		3,961			2,961
Home equity and improvement		1,299			449
Consumer finance		1,240			7
Total non-performing loans		32,593			13,437

Real estate owned		548			100
Total repossessed assets		548			100

Total Nonperforming assets	$	33,141		$	13,537
TDR loans, accruing				$	8,486

Total nonperforming assets as a percentage of total assets		0.51	%		0.39	%
Total nonperforming loans as a percentage of total loans*					0.49	%
Total nonperforming assets as a percentage of total loans plus REO*		0.65	%		0.49	%
ACL as a percent of total nonperforming assets		259.07	%		230.80	%

September 30, December 31,
2017 2016
(In Thousands)
Non-performing loans:
One to four family residential real estate $ 3,368 $ 2,928
Non-residential and multi-family residential real estate 17,110 9,592
Commercial 8,070 1,007
Construction - -
Home equity and improvement 545 730
Consumer Finance 59 91
Total non-performing loans 29,152 14,348

Real estate owned 532 455
Total repossessed assets $ 532 455

Total Nonperforming assets $ 29,684 $ 14,803
��
Restructured loans, accruing $ 13,044 $ 10,544

Total nonperforming assets as a percentage of total assets 1.01 % 0.60 %
Total nonperforming loans as a percentage of total loans* 1.28 % 0.74 %
Total nonperforming assets as a percentage of total loans plus REO* 1.30 % 0.76 %
Allowance for loan losses as a percent of total nonperforming assets 88.74 % 174.86 %

*	* Total loans are net of undisbursed loan funds and deferred fees and costs.

Non-performing loans in the commercial loan category represented ~~1.58%~~0.44% of the total loans in that category at ~~September 30, 2017~~March 31, 2020, compared to ~~0.21%~~0.51% for the same category at December 31, ~~2016.~~2019. Non-performing loans in the non-residential and multi-family residential real estate loan category were ~~1.42%~~0.88% of the total loans in this category at ~~September 30, 2017~~March 31, 2020, compared to ~~0.92%~~0.51% at December 31, ~~2016. This increase is due to the downgrade of two loan relationships that were placed on nonaccrual during the second quarter.~~2019. Non-performing loans in the residential loan category represented ~~1.24%~~0.53% of the total loans in that category at ~~September 30, 2017~~March 31, 2020, compared to ~~1.41%~~0.74% for the same category at December 31, ~~2016.~~2019.

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

The following table details net charge-offs and nonaccrual loans by loan type.

~~Table 2 – Net Charge-offs and Non-Accruals by Loan Type~~

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

For the Nine Months Ended September 30, 2016 As of September 30, 2016
Net
Charge-offs
(Recoveries) % of Total Net
Charge-offs Nonaccrual
Loans % of Total Non-
Accrual Loans
(In Thousands) (In Thousands)
Residential $ 80 (73.39 )% $ 2,920 16.05 %
Construction - 0.00 % - 0.00 %
Commercial real estate (376 ) 344.94 % 11,302 62.10 %
Commercial 147 (134.86 )% 3,245 17.83 %
Consumer finance (17 ) 15.60 % 13 0.07 %
Home equity and improvement 57 (52.29 )% 718 3.95 %
Total $ (109 ) 100.00 % $ 18,198 100.00 %

~~Table 3 – Allowance for Loan Loss Activity~~

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

Allowance at beginning of period $ 25,915 $ 25,749 $ 25,884 $ 25,923 $ 25,948
Provision for credit losses 462 2,118 55 (149 ) 15
Charge-offs:
Residential 60 - 49 147 111
Commercial real estate - 110 290 - 79
Commercial 64 2,027 - 234 26
Consumer finance 20 21 71 53 24
Home equity and improvement 92 100 54 98 74
Total charge-offs 236 2,258 464 532 314
Recoveries 200 306 274 642 274
Net charge-offs 36 1,952 190 (110 ) 40
Ending allowance $ 26,341 $ 25,915 $ 25,749 $ 25,884 $ 25,923

	For the Three Months Ended March 31, 2020						As of March 31, 2020
	Net Charge-offs (Recovery)			% of Total Net Charge-offs			Nonaccrual Loans		% of Total Non- Accrual Loans
	(In Thousands)						(In Thousands)
Residential	$	83			(10.67	)%	$	6,707		20.58	%
Construction		—			—			—		—
Multi-Family residential and Commercial real estate		(324	)		41.65	%		19,386		59.48	%
Commercial		(573	)		73.65	%		3,961		12.15	%
Consumer Finance		48			(6.17	)%		1,240		3.80	%
Home equity and improvement		(12	)		1.54	%		1,299		3.99	%
Total	$	(778	)		100.00	%	$	32,593		100.00	%

	For the Three Months Ended March 31, 2019						As of March 31, 2019
	Net Charge-offs (Recovery)			% of Total Net Charge-offs			Nonaccrual Loans		% of Total Non-Accrual Loans
	(In Thousands)						(In Thousands)
Residential	$	159			41.70	%	$	3,184		18.04	%
Construction		—			0.00	%		—		0.00	%
Commercial real estate		(96	)		(25.33	)%		9,460		53.61	%
Commercial		175			46.17	%		4,358		24.70	%
Consumer		132			35.09	%		38		0.22	%
Home equity and improvement		9			2.37	%		605		3.43	%
Total	$	379			100.00	%	$	17,645		100.00	%

	For the Quarter Ended
	1st 2020			4th 2019		3rd 2019		2nd 2019			1st 2019
	(In Thousands)
Allowance at beginning of period	$	31,243		$	30,250	$	28,934	$	28,164		$	28,331
Impact of ASC 326 adoption		2,354			—		—		—			—
Acquisition related allowance for credit losses (PCD)		7,698			—		—		—			—
Provision for credit losses		43,786			1,084		1,327		282			212
Charge-offs:
Residential		184			258		74		11			172
Multi-Family residential and Commercial real estate		16			133		—		15			—
Commercial		96			303		25		13			187
Consumer finance		108			34		80		33			142
Home equity and improvement		30			136		12		64			33
Total charge-offs		434			864		191		136			534
Recoveries		1,212			773		180		624			155
Net charge-offs		(778	)		91		11		(488	)		379
Ending allowance	$	85,859		$	31,243	$	30,250	$	28,934		$	28,164

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

~~Table 4 – Allowance for Loan Loss Allocation by Loan Category~~

	September 30, 2017					June 30, 2017					March 31, 2017					December 31, 2016					September 30, 2016
			Percent of					Percent of					Percent of					Percent of					Percent of
			total loans					total loans					total loans					total loans					total loans			March 31, 2020					December 31, 2019					September 30, 2019					June 30, 2019					March 31, 2019
	Amount		by category			Amount		by category			Amount		by category			Amount		by category			Amount		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			Amount		Percent of total loans by category
	(Dollars In Thousands)																									(Dollars In Thousands)
Residential	$	2,538		11.33	%	$	2,641		11.68	%	$	2,621		11.86	%	$	2,627		10.20	%	$	2,432		10.34	%	$	23,324		23.78	%	$	2,867		11.30	%	$	2,938		11.94	%	$	2,793		11.67	%	$	2,811		11.96	%
Construction		578		10.23	%		540		9.91	%		458		8.55	%		450		8.99	%		412		8.76	%		884		9.79	%		996		10.60	%		1,103		11.13	%		887		12.16	%		731		11.32	%
Commercial real estate		12,774		50.38	%		12,329		49.93	%		12,332		51.12	%		12,853		51.13	%		12,787		51.64	%
Multi-Family residential and Commercial real estate																											42,515		41.32	%		16,302		52.40	%		16,195		51.70	%		15,251		51.12	%		15,069		51.87	%
Commercial		8,025		21.32	%		7,973		21.75	%		7,809		21.59	%		7,361		23.05	%		7,879		22.56	%		11,901		16.86	%		9,003		20.10	%		7,888		19.43	%		7,888		19.21	%		7,276		18.95	%
Consumer		241		1.21	%		233		1.22	%		229		1.19	%		207		0.82	%		216		0.85	%		3,281		2.59	%		375		1.30	%		374		1.32	%		352		1.28	%		349		1.27	%
Home equity and improvement		2,185		5.53	%		2,199		5.51	%		2,300		5.69	%		2,386		5.81	%		2,197		5.85	%		3,954		5.66	%		1,700		4.30	%		1,752		4.48	%		1,763		4.56	%		1,928		4.63	%
	$	26,341		100.00	%	$	25,915		100.00	%	$	25,749		100.00	%	$	25,884		100.00	%	$	25,923		100.00	%	$	85,859		100.00	%	$	31,243		100.00	%	$	30,250		100.00	%	$	28,934		100.00	%	$	28,164		100.00	%

~~Key Asset Quality Ratio Trends~~

~~Table 5 –~~ Key Asset Quality Ratio Trends

3rd Qtr 2017 2nd Qtr 2017 1st Qtr 2017 4th Qtr 2016 3rd Qtr2016
Allowance for loan losses / loans* 1.16 % 1.15 % 1.15 % 1.33 % 1.35 %
Allowance for loan losses / non-performing assets 88.74 % 83.51 % 163.19 % 174.86 % 137.14 %
Allowance for loan losses / non-performing loans 90.36 % 85.36 % 171.82 % 180.40 % 142.45 %
Non-performing assets / loans plus REO* 1.30 % 1.38 % 0.70 % 0.76 % 0.98 %
Non-performing assets / total assets 1.01 % 1.07 % 0.54 % 0.60 % 0.77 %
Net charge-offs / average loans (annualized) 0.01 % 0.35 % 0.04 % -0.02 % 0.01 %

	1st Qtr 2020			4th Qtr 2019			3rd Qtr 2019			2nd Qtr 2019			1st Qtr 2019
Allowance for credit losses / loans*		1.68	%		1.12	%		1.13	%		1.10	%		1.10	%
Allowance for credit losses / non-performing assets		259.07	%		230.42	%		206.10	%		188.69	%		151.53	%
Allowance for credit losses / non-performing loans		263.43	%		232.13	%		206.10	%		188.69	%		159.61	%
Non-performing assets / loans plus OREO*		0.65	%		0.49	%		0.55	%		0.58	%		0.73	%
Non-performing assets / total assets		0.51	%		0.39	%		0.44	%		0.47	%		0.58	%
Net charge-offs / average loans (annualized)		-0.07	%		0.01	%		0.00	%		(0.08	)%		0.06	%

*	Total loans are net of undisbursed funds and deferred fees and costs.

* Total loans are net of undisbursed funds and deferred fees and costs.

Non-Interest Income..

Total non-interest income increased ~~$1.0~~$3.2 million in the ~~third~~first quarter of ~~2017~~2020 to ~~$9.5~~$14.0 million from ~~$8.5~~$10.8 million for the same period in ~~2016 due largely to the inclusion of operations from the CSB and Corporate One acquisitions.~~2019.

Service Fees.Service fees and other charges increased by ~~$388,000 or 14.0%~~$2.2 million in the ~~third~~first quarter of ~~2017~~2020 compared to the same period in ~~2016.~~

~~Overdrawn balances, net of allowance for losses, are reflected as loans on First Defiance’s balance sheet.~~2019. The fees charged for this service are established based both on the return of processing costs plus a profit, and on the level of fees charged by competitors in the Company’s market area for similar services. These fees are considered to be compensation for providing a serviceincrease is due primarily to the customer and therefore deemed to be noninterest income rather than interest income. Fee income recorded for the quarters ending September 30, 2017 and 2016 related to the overdraft privilege product, net of adjustments to the allowance for uncollectible overdrafts, were $641,000 and $588,000, respectively. Accounts charged off are included in noninterest expense. The allowance for uncollectible overdrafts was $19,000 at September 30, 2017, $14,000 at December 31, 2016 and $16,000 at September 30, 2016.Merger.

Mortgage Banking Activity. ~~Total revenue from the sale and servicing of mortgage loans~~Mortgage banking income decreased ~~$341,000~~ to ~~$1.7 million for the third quarter of 2017 compared to $2.0 million for the same period of 2016. Mortgage originations totaled $71.8~~$0.8 million in the ~~third~~first quarter of ~~2017, down~~2020 from ~~$101.7~~$1.8 million in the ~~same~~first quarter ~~in 2016.~~of 2019. Gains ~~realized~~ from the sale of mortgage loans ~~decreased in the third quarter of 2017~~increased to ~~$1.2 million from $1.7~~$4.9 million in the ~~third~~first quarter of ~~2016. The mortgage~~2020 from $1.3 million in the first quarter of 2019. Mortgage loan servicing revenue increased ~~$26,000~~ to ~~$911,000~~$1.6 million in the ~~third~~first quarter of ~~2017~~2020 from $0.9 million in the first quarter of 2019. Amortization of mortgage servicing rights increased to $1.2 million in the first quarter of 2020 from $286,000 in the first quarter of 2019. The Company had a negative change in the valuation adjustment in mortgage servicing assets of $4.5 million in the first quarter of 2020 compared with a negative adjustment of $113,000 in the first quarter of 2019. The year-over-year change is primarily due to the significant decline in rates with the 10-year treasury declining 122 basis points during the first quarter of 2020 compared to ~~$885,000~~a 28 basis point decline in the first quarter of 2019.

Bank-Owned Life Insurance. Income from bank-owned life insurance was $781,000 for the first quarter of 2020 compared to $392,000 in the first quarter of 2019. This increase was primarily a result of the Merger.

Other Non-Interest Income. Other non-interest income increased to $960,000 in the first quarter of 2020 from the same period in 2016. The Company recorded a negative valuation adjustment of $27,000 on mortgage servicing rights in the third quarter of 2017 compared to a positive valuation adjustment of $7,000 in the third quarter of 2016.

~~Insurance Commission Income.~~ ~~Income from the sale of insurance and investment products was $3.1 million in the third quarter of 2017, an increase of $609,000 from $2.5 million in the third quarter of 2016. The increase is~~2019 due ~~to added commissions from the Corporate One merger.~~

~~Other Non-Interest Income.~~~~Other non-interest income was $415,000 in the third quarter of 2017, an increase of $110,000 compared~~mainly to the ~~same period in 2016 mainly due to gains from the sale of real estate owned and an increase in the value of the assets of the deferred compensation plan.~~

Merger.

Non-Interest Expense.

Non-interest expense increased ~~$2.1~~$18.9 million to ~~$20.4~~$43.8 million for the ~~third~~first quarter of ~~2017~~2020 compared to ~~$18.3~~$24.9 million for the same period in ~~2016.~~2019. The increase ~~in non-interest expenses was mostly due~~is mainly attributable to the ~~additional expenses from~~Merger. Acquisition related charges associated with the ~~operations~~merger totaled $11.5 million in the first quarter of ~~CSB and Corporate One acquisitions.~~2020.

Compensation and Benefits. Compensation and benefits increased to ~~$11.8~~$17.6 million ~~for~~in the first quarter ~~ended September 30, 2017 from $10.3~~of 2020, compared to $14.1 million ~~for~~in the ~~same period in 2016.~~ first quarter of 2019. The increase ~~of $1.5 million~~in compensation and benefits from a year ago is ~~mainly attributable to personnel expenses related to operating the new CSB and Corporate One locations.~~

~~Data Processing.~~~~Data processing expense increased $252,000 to $1.9 million for the quarter ended September 30, 2017 compared to $1.6 million for the same period in 2016 again~~ mainly due to the ~~CSB merger as well as increased costs related to other strategic initiatives.~~

~~Other Non-Interest Expenses~~. Other non-interest expenses increased $88,000 to $3.7 million for the quarter ended September 30, 2017 from $3.6 million for the same period in 2016. There were no merger and conversion related cost in the third quarter of 2017 compared to $299,000 in the third quarter of 2016. This decrease wasMerger offset by ~~increases in expenses associated with~~increased contra salary expense from greater loan origination ~~auditing and marketing.~~volume.

~~The efficiency ratio, considering tax equivalent interest income and excluding securities gains and losses, for the third quarter of 2017 was 58.70% compared~~Occupancy. Occupancy expense increased to ~~63.87% for the third quarter of 2016.~~

~~Income Taxes.~~

First Defiance computes federal income tax expense in accordance with ASC Topic 740, Subtopic 942, which resulted in an effective tax rate of 31.0% for the quarter ended September 30, 2017 compared to 29.8% for the same period in 2016. The tax rate for the third quarter of 2017 is lower than the statutory 35% tax rate for the Company mainly because of investments in tax-exempt securities. The earnings on tax-exempt securities are not subject to federal income tax.

~~Nine Months Ended September 30, 2017 and 2016~~

On a consolidated basis, First Defiance’s net income for the nine months ended September 30, 2017 was $22.9 million compared to income of $21.5 million for the same period in 2016. On a per share basis, basic and diluted earnings per common share for the nine months ended September 30, 2017 were $2.31 and $2.29, respectively, compared to basic and diluted earnings per common share of $2.39 and $2.37, respectively, for the same period in 2016.

The first nine months of 2017 includes the results from the operations of the CSB acquisition completed on February 24, 2017 and Corporate One acquired on April 1, 2017. In addition, the first nine months of 2017 includes merger and conversion expenses related to the acquisitions of $4.0 million, which had an after tax impact of $2.8 million, or $0.28 per diluted share.

~~Net Interest Income~~

~~Net interest income was $71.3 million for the first nine months of 2017 compared with $58.4~~$3.7 million in the first ~~nine months~~quarter of ~~2016. Average interest-earning assets increased to $2.51 billion in the first nine months of 2017~~2020 compared to ~~$2.15 billion in the first nine months of 2016.~~

For the nine month period ended September 30, 2017, total interest income increased by $15.0 million to $79.6 million compared to $64.6 million for the same period in 2016. Interest expense increased by $2.1 million to $8.3 million for the nine months ended September 30, 2017 compared to $6.2 million for the same period in 2016.

~~Net interest margin for the first nine months of 2017 was 3.88%, up 15 basis points from the 3.73% margin reported in the nine month period ended September 30, 2016.~~

~~Provision for Loan Losses~~

The provision for loan losses was $2.6 million for the nine months ended September 30, 2017, compared to $432,000 during the nine months ended September 30, 2016. Year to date 2017 charge-offs were $3.0 million and recoveries of previously charged off loans totaled $780,000 for net charge offs of $2.2 ~~million. By comparison, $887,000 of charge-offs were recorded in the same period of 2016 and $996,000 of recoveries were realized for net recoveries of $109,000.~~

~~Non-Interest Income~~

~~Total non-interest income increased $4.5 million to $30.2 million for the nine months ended September 30, 2017 from $25.7 million recognized for the same period in 2016.~~

~~Service Fees.~~~~Service fees and other charges were $9.1 million for the first nine months of 2017, up from $8.2 million for the same period in 2016. This is primarily due to the CSB merger.~~

~~Mortgage Banking Activity.~~ Total revenue from the sale and servicing of mortgage loans decreased $76,000 to $5.27 million for the nine months ended September 30, 2017 from $5.34 million for the same period in 2016. Gains realized from the sale of mortgage loans decreased $526,000 to $3.6 million for the first nine months of 2017 from $4.1 million for the same period in 2016. Mortgage loan servicing revenue increased to $2.8 million in the first ~~nine months~~quarter of ~~2017 from $2.6 million for the same period in 2016.~~2019. The ~~Company recorded a positive valuation adjustment of $21,000 in the first nine months of 2017 compared to a negative adjustment of $118,000 in the first nine months of 2016.~~

~~Sale of Non Mortgage Loans~~~~. Gain on the sale of non-mortgages, which includes SBA and FSA loans, totaled $172,000 in the first nine months of 2017, a $432,000 decrease compared to $604,000 in the first nine months of 2016,~~increase was due to ~~a decrease in~~ the ~~volume of sellable SBA and FSA loans.~~Merger with UCFC.

~~Insurance Commission Income.~~ ~~Income from the sale of insurance and investment products~~Data Processing. Data processing cost was ~~$9.8~~$3.0 million in the first ~~nine months~~quarter of ~~2017,~~2020, an increase of ~~$1.7~~$0.7 million from ~~$8.1~~$2.3 million in the first ~~nine months~~quarter of ~~2016. The increase~~2019. This is ~~primarily~~ due to ~~added commissions~~the Merger with UCFC.

Amortization of Intangibles. Expense from the ~~Corporate One merger and a $400,000 increase in contingent commission income recognized in 2017 compared~~amortization of intangibles increased to ~~2016.~~

~~Bank-Owned Life Insurance~~.~~Income from bank-owned life insurance was $2.7~~$1.2 million in the first ~~nine months~~quarter of ~~2017, an increase of $2.0~~2020 from $0.3 million ~~from $686,000~~ in the ~~same period~~first quarter of 2016. In February 2017, the Company surrendered an underperforming BOLI policy and recorded a tax penalty of $1.7 million (recorded in income tax expense) and purchased a new BOLI policy receiving a $1.5 million enhancement value gain.

~~Non-Interest Expense~~

~~Non-interest expense was $64.2 million for the first nine months of 2017, up from $52.9 million for the same period in 2016.~~

~~Compensation and Benefits~~. Compensation and benefits increased to $37.6 million for the nine months ended September 30, 2017 compared to $30.3 million for the same period in 2016. The increase is mainly related to merit increases, staff additions to support growth strategies and increased personnel expenses related to operating the new CSB and Corporate One locations.

~~Data Processing~~~~. Data processing expense increased $1.1 million to $5.8 million year to date 2017 compared to $4.7 million for the same period in 2016~~2019 due to the ~~CSB acquisition and other strategic spending initiatives.~~Merger with UCFC.

~~Other Non-Interest Expenses~~. Other non-interest expenses increased $2.0 million to $11.7 million for the first nine months of 2017 from $9.7 million for the same period in 2016. The increase in other non-interest expense is primarily due to CSB and Corporate One merger and conversion related costs of $1.1 million as well as increased expenses associated with loan origination, legal fees and general operating expenses which as a result of an expanded customer base.

~~The efficiency ratio for the first nine months of 2017 was 62.66% compared to 62.24% for the same period in 2016.~~

Liquidity

As a regulated financial institution, ~~First Federal~~the Company is required to maintain appropriate levels of ~~"liquid"~~“liquid” assets to meet short-term funding requirements. The Company’s liquidity, primarily represented by cash and cash equivalents, is a result of its operating, investing and financing activities.

~~First Defiance had $22.0 million~~The principal source of ~~cash~~funds for the Company are deposits, loan repayments, maturities of securities, borrowings from financial institutions and other funds provided by ~~operating activities during~~operations. The Bank also has the ~~first nine months of 2017. The Company's cash provided by operating activities resulted~~ability to borrow from the ~~origination of loans held for sale~~FHLB. While scheduled loan repayments and ~~net income mostly offset~~maturing investments are relatively predictable, deposit flows and early loan repayments are more influenced by interest rates, general economic conditions and competition. Investments in liquid assets maintained by the ~~proceeds~~Company and the Bank are based upon management’s assessment of (1) the need for funds, (2) expected deposit flows, (3) yields available on short-term liquid assets, and (4) objectives of the ~~sale~~asset and liability management program.

The Bank’s Asset/Liability Committee (ALCO) is responsible for establishing and monitoring liquidity guidelines, policies and procedures. ALCO uses a variety of ~~loans.~~

methods to monitor the liquidity position of the Bank including liquidity analyses that measure potential sources and uses of funds over future periods out to one year. ALCO also performs contingency funding analyses to determine the Bank’s ability to meet potential liquidity needs under stress scenarios that cover varying time horizons ranging from immediate to longer term.

At ~~September 30, 2017, First Federal~~March 31, 2020, the Bank had ~~$226.8 million in outstanding loan commitments~~on-hand liquidity, defined as cash and ~~loans in process to be funded generally within the next six months~~cash equivalents, unencumbered securities and an additional ~~$429.2 million committed under existing consumer and commercial lines~~FHLB borrowing capacity, of credit and standby letters of credit. Also at that date, First Federal had commitments to sell $21.7 million of loans held-for-sale. First Defiance believes that it has adequate resources to fund commitments as they arise and that it can adjust the rate on savings certificates to retain deposits in changing interest rate environments. If First Defiance requires funds beyond its internal funding capabilities, advances from the FHLB of Cincinnati and other financial institutions are available.

$1.3 billion.

Liquidity risk arises from the possibility that the Company may not be able to meet its financial obligations and operating cash needs or may become overly reliant upon external funding sources. In order to manage this risk, the Company’s Board of Directors has established a Liquidity Policy that identifies primary sources of liquidity, establishes procedures for monitoring and measuring liquidity and quantifies minimum liquidity requirements. This policy designates ~~First Federal’s~~the Bank’s Asset/Liability Committee (“ALCO”) as the body

responsible for meeting these objectives. The ALCO reviews liquidity on a monthly basis and approves significant changes in strategies that affect balance sheet or cash flow positions. ~~Liquidity is centrally managed on a daily basis by the Company’s Chief Financial Officer and Controller.~~

Capital Resources

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

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

In the first quarter of 2020, the federal banking agencies approved the final rules implementing the Current Expected Credit Loss model known as CECL. Under the final rules the Company had the ability to phase in the effects of the adoption of CECL which it chose not to elect. The full effect of the adoption of CECL was absorbed in the Company’s March 31, 2020 capital calculations.

The Company met each of the ~~well capitalized~~well-capitalized ratio guidelines at ~~September 30, 2017.~~March 31, 2020. The following table indicates the capital ratios for ~~First Defiance~~the Company (consolidated) and ~~First Federal~~the Bank at ~~September 30, 2017~~March 31, 2020, and December 31, ~~2016.~~2019. (In Thousands):

September 30, 2017
		Actual					Minimum Required for Adequately Capitalized					Minimum Required for Well Capitalized					March 31, 2020
		Amount		Ratio			Amount		Ratio(1)			Amount		Ratio			Actual					Minimum Required for Adequately Capitalized					Minimum Required for Well Capitalized
																	Amount		Ratio			Amount		Ratio(1)			Amount		Ratio
CET1 Capital (to Risk-Weighted Assets) (2)
CET1 Capital (to Risk-Weighted Assets)
Consolidated		$	267,424		10.43	%	$	115,396		4.5	%		N/A		N/A		$	556,796		10.48	%	$	238,991		4.5	%	N/A		N/A
First Federal		$	294,325		11.49	%	$	115,250		4.5	%	$	166,523		6.5	%	$	563,438		10.65	%	$	238,090		4.5	%	$	343,907		6.5	%

Tier 1 Capital (1)
Consolidated		$	302,424		10.78	%	$	112,188		4.0	%		N/A		N/A		$	591,796		11.85	%	$	199,761		4.0	%	N/A		N/A
First Federal		$	294,325		10.51	%	$	111,981		4.0	%	$	139,976		5.0	%	$	563,438		11.29	%	$	199,599		4.0	%	$	199,599		5.0	%

Tier 1 Capital (to Risk Weighted Assets) (1)	Tier 1 Capital (to Risk Weighted Assets) (1)
Consolidated		$	302,424		11.79	%	$	153,862		6.0	%		N/A		N/A		$	591,796		11.14	%	$	318,655		6.0	%	N/A		N/A
First Federal		$	294,325		11.49	%	$	153,713		6.0	%	$	204,951		8.0	%	$	563,438		10.65	%	$	317,453		6.0	%	$	423,271		8.0	%

Total Capital (to Risk Weighted Assets) (1)	Total Capital (to Risk Weighted Assets) (1)
Consolidated		$	328,765		12.82	%	$	205,149		8.0	%		N/A		N/A		$	658,423		12.40	%	$	424,874		8.0	%	N/A		N/A
First Federal		$	320,666		12.52	%	$	204,951		8.0	%	$	256,189		10.0	%	$	629,817		11.90	%	$	423,271		8.0	%	$	529,088		10.0	%

(1)

~~(1)~~

Excludes capital conservation buffer of ~~1.25%~~2.50%.

	December 31, 2019
	Actual					Minimum Required for Adequately Capitalized					Minimum Required to be Well Capitalized for Prompt Corrective Action
	Amount		Ratio			Amount		Ratio(1)			Amount		Ratio
CET1 Capital (to Risk-Weighted Assets) (2)
Consolidated	$	322,813		10.60	%	$	137,001		4.5	%	N/A		N/A
First Federal	$	335,251		11.03	%	$	136,752		4.5	%	$	197,531		6.5	%

Tier 1 Capital (2)
Consolidated	$	357,813		10.78	%	$	132,805		4.0	%	N/A		N/A
First Federal	$	335,251		10.13	%	$	132,435		4.0	%	$	165,544		5.0	%


Tier 1 Capital (to Risk Weighted Assets) (2)
Consolidated	$	357,813		11.75	%	$	182,667		6.0	%	N/A		N/A
First Federal	$	335,251		11.03	%	$	182,336		6.0	%	$	243,114		8.0	%

Total Capital (to Risk Weighted Assets) (2)
Consolidated	$	389,056		12.78	%	$	243,556		8.0	%	N/A		N/A
First Federal	$	366,494		12.06	%	$	243,114		8.0	%	$	303,893		10.0	%

(1)	Excludes capital conservation buffer of 2.50% as of ~~September 30, 2017~~December 31, 2019.

(2)

~~(2)~~

Core capital is computed as a percentage of adjusted total assets of ~~$2.80~~$3.32 billion for consolidated and ~~the Bank, respectively. Risk-based capital is computed as a percentage of total risk-weighted assets of $2.56 billion for consolidated and the Bank, respectively.~~

December 31, 2016
Actual Minimum Required for
Adequately Capitalized Minimum Required for Well
Capitalized
Amount Ratio Amount Ratio(1) Amount Ratio

CET1 Capital (to Risk-Weighted Assets) (2)
Consolidated $ 234,809 10.45 % $ 101,108 4.5 % N/A N/A
First Federal $ 242,928 10.81 % $ 101,116 4.5 % $ 146,057 6.5 %

Tier 1 Capital (1)
Consolidated $ 269,809 11.24 % $ 95,975 4.0 % N/A N/A
First Federal $ 242,928 10.14 % $ 95,791 4.0 % $ 119,739 5.0 %

Tier 1 Capital (to Risk Weighted Assets) (1)
Consolidated $ 269,809 12.01 % $ 134,811 6.0 % N/A N/A
First Federal $ 242,928 10.81 % $ 134,822 6.0 % $ 179,763 8.0 %

Total Capital (to Risk Weighted Assets) (1)
Consolidated $ 295,693 13.16 % $ 179,748 8.0 % N/A N/A
First Federal $ 268,812 11.96 % $ 179,763 8.0 % $ 224,703 10.0 %

~~(1)~~

~~Excludes capital conservation buffer of 0.625% as of December 31, 2016~~

~~(2)~~

~~Core capital is computed as a percentage of adjusted total assets of $2.40 billion for consolidated and $2.39 billion~~ for the Bank. Risk-based capital is computed as a percentage of total risk-weighted assets of ~~$2.25~~$3.04 billion for consolidated and for the Bank.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As discussed in detail in the ~~Annual Report on~~2019 Form 10-K, ~~for the year ended December 31, 2016,~~ First Defiance’s ability to maximize net income is dependent on management’s ability to plan and control net interest income through management of the pricing and mix of assets and liabilities. Because a large portion of assets and liabilities of First Defiance are monetary in nature, changes in interest rates and monetary or fiscal policy affect its financial condition and can have significant impact on the net income of the Company. First Defiance does not use off-balance sheet derivatives to enhance its risk management, nor does it engage in trading activities beyond the sale of mortgage loans.

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

The table below presents, for the twelve months subsequent to ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019, an estimate of the change in net interest income that would result from ~~a gradual (ramp) and~~an immediate (shock) change in interest rates, moving in a parallel fashion over the entire yield curve, relative to the measured base case scenario. Based on our net interest income simulation as of ~~September 30, 2017,~~March 31, 2020, net interest income sensitivity to changes in

interest rates for the twelve months subsequent to ~~September 30, 2017 was slightly more liability sensitive~~March 31, 2020, remained relatively stable for the ~~ramp and~~ shock compared to the sensitivity profile for the twelve months subsequent to December 31, ~~2016.~~2019.

Net Interest Income Sensitivity Profile

	Impact on Future Annual Net Interest Income
(dollars in thousands)	March 31, 2020					December 31, 2019
Immediate Change in Interest Rates
+200	$	6,175		3.03	%	$	4,477		3.80	%
+100		4,298		2.11	%		2,487		2.11	%
-100		(2,970	)	-1.46	%		(5,335	)	-4.53	%

Net Interest Income Sensitivity Profile
Impact on Future Annual Net Interest Income
(dollars in thousands) September 30, 2017 December 31, 2016
Gradual Change in Interest Rates
+200 $ 917 0.93 % $ 1,970 2.32 %
+100 472 0.48 % 972 1.14 %
-100 (3,023 ) -3.07 % (2,201 ) -2.59 %

Immediate Change in Interest Rates
+200 $ 2,179 2.15 % $ 4,236 4.99 %
+100 1,132 1.12 % 2,131 2.51 %
-100 (6,125 ) -6.04 % (4,132 ) -4.87 %

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

The results of all the simulation scenarios are within the ~~board~~Company’s Board mandated guidelines as of September 30, 2017 except for the down 100 basis points over the first twelve months in a static and dynamic-shock balance sheet as well as in the down 100 basis points for a cumulative twenty-four months in a static and dynamic ramp balance sheet. Management is reviewing the board policy limits in all scenarios to determine if they are adequate and if so, any measures to be taken to bring the current results back into alignment with board guidelines.

March 31, 2020.

In addition to the simulation analysis, First Defiance also uses an economic value of equity (“EVE”) analysis to measure risk in the balance sheet incorporating all cash flows over the estimated remaining life of all balance sheet positions. The EVE analysis generally calculates the net present value of First Federal’s assets and liabilities in rate shock environments that range from -400 basis points to +400 basis points. However, the likelihood of a decrease in rates beyond 100 basis points as of September 30, 2017 was considered to be unlikely given the current interest rate environment and, therefore, was not included in this analysis. The results of this analysis are reflected in the following tables for the ~~nine months~~quarter ended ~~September 30, 2017~~March 31, 2020, and the ~~year-ended~~year ended December 31, ~~2016.~~2019.

	March 31, 2020
	Economic Value of Equity
Change in Rates	$ Amount		$ Change		% Change
	(Dollars in Thousands)
+400 bp		1,155,092		189,516		19.63	%
+ 300 bp		1,153,709		188,133		19.48	%
+ 200 bp		1,141,487		175,911		18.22	%
+ 100 bp		1,100,496		134,920		13.97	%
0 bp		965,576		—		—

September 30, 2017
Economic Value of Equity
									December 31, 2019
									Economic Value of Equity
Change in Rates	$ Amount		$ Change			% Change			$ Amount		$ Change			% Change
	(Dollars in Thousands)								(Dollars in Thousands)
+400 bp		670,902		98,100			17.13	%		769,381		107,066			16.17	%
+ 300 bp		652,116		79,314			13.85	%		753,286		90,971			13.74	%
+ 200 bp		630,161		57,360			10.01	%		729,852		67,537			10.20	%
+ 100 bp		603,939		31,137			5.44	%		701,004		38,689			5.84	%
0 bp		572,801		-			-			662,315		—			—
- 100 bp		531,789		(41,013	)		(7.16	)%		601,361		(60,954	)		(9.20	)%

December 31, 2016
Economic Value of Equity
Change in Rates $ Amount $ Change % Change
(Dollars in Thousands)
+400 bp 569,397 85,791 17.74 %
+ 300 bp 553,285 69,679 14.41 %
+ 200 bp 534,478 50,873 10.52 %
+ 100 bp 512,132 28,526 5.90 %
0 bp 483,606 - -
- 100 bp 429,266 (34,339 ) (7.10 )%

Item 4. Controls and Procedures

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

An evaluation was carried out under the supervision and with the participation of the ~~Company's~~Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of ~~September 30, 2017.~~March 31, 2020. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

No changes occurred in the Company’s internal controls over financial reporting during the quarter ended ~~September 30, 2017~~March 31, 2020, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

FIRST DEFIANCE FINANCIAL CORP.

PART II-OTHER INFORMATION

Item 1.Legal Proceedings

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

Item 1A. Risk Factors

~~There~~We are ~~no material changes from~~supplementing the risk factors ~~set forth under Part I, Item 1A. “Risk Factors”~~previously disclosed in ~~the Company’s~~our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016.~~2019, filed with the Securities and Exchange Commission, with the following additional risk factor:

The outbreak of the novel coronavirus (“COVID-19”) has adversely impacted our business and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

We have identified specific areas, such as MSR’s and Goodwill, which could be impacted by COVID-19. We have assessed these specific items and determined they have not been significantly impacted as of the date of this report, but have the potential for future risk.

The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, increased unemployment levels and decreased consumer confidence generally. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities. The COVID-19 pandemic could influence the recognition of credit losses in our loan portfolios and will increase our allowance for credit losses, particularly as businesses remain closed and as more customers are expected to draw on their lines of credit or seek additional loans to help finance their businesses. Furthermore, the pandemic could affect the stability of our deposit base as well as our capital and liquidity position, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, result in lost revenue and cause us to incur additional expenses. Similarly, because of changing economic and market conditions affecting issuers, we may be required to recognize other-than-temporary impairments in future periods on goodwill or the securities we hold as well as reductions in other comprehensive income.

The extent of the impact of the COVID-19 pandemic on our capital, liquidity, and other financial positions and on our business, results of operations, and prospects will depend on a number of evolving factors, including:

•The duration, extent, and severity of the pandemic. COVID-19 has not been contained and could affect significantly more households and businesses. The duration and severity of the pandemic continue to be impossible to predict.

•The response of governmental and nongovernmental authorities. Many of the actions taken by authorities have been directed at curtailing personal and business activity to contain COVID-19 while

simultaneously deploying fiscal-and monetary-policy measures to assist in mitigating the adverse effects on individuals and businesses.

•The effect on our customers, counterparties, employees, and third-party service providers. COVID-19 and its associated consequences and uncertainties may affect individuals, households, and businesses differently and unevenly. In the near-term if not longer, however, our credit, operational, and other risks are generally expected to increase.

•The effect on economies and markets. Whether the actions of governmental and nongovernmental authorities will be successful in mitigating the adverse effects of COVID-19 is unclear. National, regional, and local economies and markets could suffer disruptions that are lasting.

•The success of hardship relief efforts to bridge the gap to reopening the economy. The U.S. government has implemented programs to directly compensate individuals and grant or loan money to businesses in an effort to provide funding while the economy is shut down. Many banks, including First Federal Bank of the Midwest, have implemented hardship relief programs that include payment deferral and short-term funding options. The success of these programs could mute the effect on the Company’s credit losses, which may be difficult to determine.

In an effort to help our customers during this time, First Defiance has maintained full staffing of all branch drive-thru lanes, provided for branch lobby appointments, communicated with and encouraged our customers to use our free self-service tools such as ATMs and mobile/online technology, reduced or waived various customer fees, implemented loan payment deferral programs and participated in governmental stimulus programs such as the Small Business Administration Payment Protection Program (“PPP”). A significant number of our borrowers have enrolled in one of our programs to defer some or all loan payments for up to six months. These programs may negatively impact our revenue and other results of operations in the near term and, if not effective in mitigating the effect of COVID-19 on our customers, may adversely affect our business and results of operations more substantially over a longer period of time.

The sharp deterioration in the United States economy that has resulted from the COVID-19 pandemic and the actions taken by the federal and state governments to slow the spread of that virus have resulted in a significant increase in the unemployment rate throughout the United States, including in the local economies in which we conduct business. We anticipate that this increase in unemployment will affect the ability of some of our clients to repay their loans on a timely basis and will adversely affect the financial results of our commercial clients in localities with high unemployment, resulting in loan defaults and the possible impairments in the value of our collateral. These developments could adversely impact our results of operations and financial condition, although the extent of such impact cannot be determined at this time.

There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the outbreak is highly uncertain and subject to change. We do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole. Even after COVID-19 has subsided, we may continue to experience materially adverse impacts to our business. However, the effects could have a material impact on our results of operations and heighten many of our known risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Our participation in the PPP may expose us to reputational harm, increased litigation risk, as well as the risk that the SBA may not fund some or all of the guarantees associated with PPP loans.

Lenders participating in the PPP have faced increased public scrutiny about their loan application process and procedures, and the nature and type of the borrowers receiving PPP loans. We depend on our reputation as a trusted and responsible financial services company to compete effectively in the communities that we serve, and any negative public or customer response to, or any litigation or claims that might arise out

of, our participation in the PPP and any other legislative or regulatory initiatives and programs that may be enacted in response to the COVID-19 pandemic, could adversely impact our business. Other banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP, and we may be subject to the same or similar litigation. In addition, if the SBA determines that there is a deficiency in the manner in which a PPP loan was originated, funded, or serviced by us, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from us.

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

The Company had no unregistered sales of equity securities during the quarter ended ~~September 30, 2017.~~

March 31, 2020.

The following table provides information regarding First Defiance’s purchases of its common stock during the three-month period ended ~~September 30, 2017:~~March 31, 2020:

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(1)
Beginning Balance, December 31, 2019								500,000
January 1 – January 31, 2020		—	$	—		—		500,000
February 1 – February 29, 2020		50,000		27.28		50,000		950,000
March 1 – March 31, 2020		380,000		22.93		380,000		570,000
Total		430,000		23.44		430,000		570,000

~~Period~~

(1)

~~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~~

On May ~~Yet Be~~
~~Purchased Under the~~
~~Plans or Programs(1)~~

~~Beginning Balance, June 30, 2017~~

~~377,500~~

~~July 1 – July 31, 2017~~

~~377,500~~

~~August 1 – August 31, 2017~~

~~377,500~~

~~September 1 – September 30, 2017~~

~~377,500~~

~~Total~~

~~377,500~~

~~(1)~~

~~On January 29, 2016,~~23, 2019, the Company announced that its Board of Directors authorized ~~another~~a program for the repurchase of up to 5%500,000 shares of ~~the~~its outstanding common ~~shares or 450,000~~stock. On February 18, 2020, the Company announced that its Board of Directors increased the program by an additional 500,000 shares. There is no expiration date for the repurchase program.

Item 3. Defaults ~~Defaults~~ upon Senior Securities

Not applicable.

Item 4. Mine ~~Mine~~ Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

~~Item 5.~~~~Other Information~~

~~Not applicable.~~

~~Item 6.~~~~Exhibits~~

~~Exhibit 2.1~~		~~Agreement and Plan of Merger, dated August 23, 2016, by and between First Defiance and Commercial Bancshares, Inc. (1)~~
~~Exhibit 2.2~~		~~Amendment to Agreement and Plan of Merger, dated October 31, 2016, by and between First Defiance and Commercial Bancshares, Inc. (2)~~
Exhibit 3.1		Amended and Restated Articles of Incorporation of First Defiance ~~as amended (3)~~(reflecting all amendments filed with the Ohio Secretary of State) [restated for purposes of SEC reporting compliance only – not filed with the Ohio Secretary of State] (incorporated herein by reference to Exhibit 3.1 in Registrant’s Form 8-K filed February 3, 2020 (File No. 000-26850))

Exhibit ~~3.2~~3.2*		Amended and Restated Code of Regulations of First Defiance ~~(3)~~(reflecting all amendments) (incorporated by reference to Exhibit 3.1 in Registrant’s Form 8-K filed June 3, 2020)


Exhibit 10.1		Form of Amendment to Performance-Based Restricted Stock Unit Award Agreements by and between First Defiance Financial Corp. and Donald P. Hileman (incorporated herein by reference to Exhibit 10.1 in Registrant’s Form 8-K filed January 21, 2020 (File No. 000-26850))

Exhibit 10.2		Form of Amendment to Performance-Based Restricted Stock Unit Award Agreements – Long Term Growth by and between First Defiance Financial Corp. and Donald P. Hileman (incorporated herein by reference to Exhibit 10.2 in Registrant’s Form 8-K filed January 21, 2020 (File No. 000-26850))

Exhibit 10.3		Form of Amendment to Performance-Based Restricted Stock Unit Award Agreements (incorporated herein by reference to Exhibit 10.3 in Registrant’s Form 8-K filed January 21, 2020 (File No. 000-26850))

Exhibit 10.4		Form of Amendment to Performance-Based Restricted Stock Unit Award Agreements – Long Term Growth (incorporated herein by reference to Exhibit 10.4 in Registrant’s Form 8-K filed January 21, 2020 (File No. 000-26850)).

Exhibit 10.5*		Form of Severance and Change in Control Agreement.

Exhibit 31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 101		The following financial information from the Registrant's Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2017~~March 31, 2020 is formatted in eXtensible Business Reporting Language (“XBRL”): (i) Unaudited Consolidated Condensed Statements of Financial Condition at ~~September 30, 2017~~March 31, 2020 and December 31, ~~2016,~~2019; (ii) Unaudited Consolidated Condensed Statements of Income for the Three and ~~Nine~~Three Months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019; (iii) Unaudited Consolidated Condensed Statements of Comprehensive Income for the Three ~~and Nine~~ Months ended ~~September 30, 2017~~March 31, 2020 and ~~2016,~~2019; (iv) Unaudited Consolidated Condensed Statements of Changes in Stockholders’ Equity for the ~~Nine~~Three Months ended ~~September 30, 2017~~March 31, 2020 and ~~2016,~~2019; (v) Unaudited Consolidated Condensed Statements of Cash Flows for the ~~Nine~~Three Months ended ~~September 30, 2017~~March 31, 2020 and ~~2016~~2019; and (vi) Notes to Unaudited Consolidated Condensed Financial Statements.

~~(1)~~

~~Incorporated herein by reference to the like numbered exhibit in Form 8-K filed August 24, 2016 (Film No. 161848221).~~

~~(2)~~

~~Incorporated herein by reference to the like numbered exhibit in Form 10-K for the year ended December 31, 2016 (Film No. 17645447).~~

~~(3)~~

~~Incorporated herein by reference to the like numbered exhibit in the Registrant’s Form S-3 (File No. 333-163014), filed on November 10, 2009.~~

84 *	Filed herewith.

+
Pursuant to Item 601(b)(2) of Regulation S-K, certain schedules and similar attachments have been omitted. The Registrant hereby agrees to furnish a copy of any omitted schedule or similar attachment to the SEC upon request.

FIRST DEFIANCE FINANCIAL CORP.

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.
	(Registrant)

Date: June 18, 2020
~~Date:~~ ~~November 8, 2017~~ By:	~~By:~~	/s/ Donald P. Hileman
			Donald P. Hileman
		~~President and~~
		Chief Executive Officer

Date: June 18, 2020		By:	/s/ Paul D. Nungester, Jr.
~~Date:~~ ~~November 8, 2017~~	~~By:~~	~~/s/ Kevin T. Thompson~~	Paul D. Nungester, Jr.
		~~Kevin T. Thompson~~
		Executive Vice President and
			Chief Financial Officer

Ohio		34-1803915
(State or other jurisdiction of		~~(I.R.S. Employer~~
incorporation or organization)		(I.R.S. Employer Identification ~~Number)~~No.)

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

Large accelerated filer	¨	☐	Accelerated filerx	☒

Non-accelerated filer	¨	☐	Smaller reporting company¨	☐

Emerging growth company		☐

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
Interest Income
Loans	$	25,975	$	20,264	$	73,263	$	59,242
Investment securities:
Taxable		896		767		2,817		2,391
Non-taxable		792		731		2,378		2,280
Interest-bearing deposits		209		104		555		287
FHLB stock dividends		209		137		562		413
Total interest income		28,081		22,003		79,575		64,613
Interest Expense
Deposits		2,391		1,635		6,357		4,613
FHLB advances and other		431		322		1,211		940
Subordinated debentures		239		191		682		548
Notes payable		13		35		41		108
Total interest expense		3,074		2,183		8,291		6,209
Net interest income		25,007		19,820		71,284		58,404
Provision for loan losses		462		15		2,635		432
Net interest income after provision for loan losses		24,545		19,805		68,649		57,972
Non-interest Income
Service fees and other charges		3,153		2,765		9,073		8,208
Insurance commissions		3,082		2,473		9,834		8,113
Mortgage banking income		1,698		2,039		5,266		5,342
Gain on sale of non-mortgage loans		82		148		172		604
Gain on sale or call of securities		158		151		425		509
Trust income		486		420		1,400		1,256
Income from Bank Owned Life Insurance		421		225		2,666		686
Other non-interest income		415		305		1,348		1,019
Total non-interest income		9,495		8,526		30,184		25,737
Non-interest Expense
Compensation and benefits		11,780		10,295		37,588		30,250
Occupancy		1,960		1,822		5,751		5,435
FDIC insurance premium		330		352		973		1,008
Financial institutions tax		404		446		1,418		1,339
Data processing		1,874		1,622		5,832		4,723
Amortization of intangibles		364		115		931		419
Other non-interest expense		3,728		3,640		11,718		9,739
Total non-interest expense		20,440		18,292		64,211		52,913
Income before income taxes		13,600		10,039		34,622		30,796
Federal income taxes		4,219		2,994		11,753		9,318
Net Income	$	9,381	$	7,045	$	22,869	$	21,478

Earnings per common share (Note 6)
Basic	$	0.92	$	0.78	$	2.31	$	2.39
Diluted	$	0.92	$	0.78	$	2.29	$	2.37
Dividends declared per share (Note 5)	$	0.25	$	0.22	$	0.75	$	0.66
Average common shares outstanding (Note 6)
Basic		10,149		8,976		9,913		8,980
Diluted		10,209		9,050		9,970		9,050

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

Balance at January 1, 2017	$	-		8,983,206		$	127	$	126,390		$	215	$	240,592		$	(74,306	)	$	293,018
Net income														22,869						22,869
Other comprehensive income												1,923								1,923
Stock based compensation expenses									133											133
Shares issued under stock option plan, net of 7,507 repurchased and retired				4,043					51					(83	)		230			198
Capital stock issuance				1,139,502					33,792								22,740			56,532
Restricted share activity under stock incentive plans				21,377					254					(17	)		280			517
Shares issued from direct stock sales				1,056					33								21			54
Common stock dividends declared														(7,320	)					(7,320	)
Balance at September 30, 2017	$	-		10,149,184		$	127	$	160,653		$	2,138	$	256,041		$	(51,035	)	$	367,924

Balance at January 1, 2016	$	-		9,102,831		$	127	$	125,734		$	3,622	$	219,737		$	(69,023	)	$	280,197
Net income														21,478						21,478
Other comprehensive income												1,345								1,345
Stock based compensation expenses									226											226
Shares issued under stock option plan, net of 1,612 repurchased and retired				33,808					(18	)				(26	)		711			667
Restricted share activity under stock incentive plans				10,405					236					(72	)		225			389
Shares issued from direct stock sales				1,068					22								21			43
Shares repurchased				(167,746	)												(6,293	)		(6,293	)
Common stock dividends declared														(5,914	)					(5,914	)
Balance at September 30, 2016	$	-		8,980,366		$	127	$	126,200		$	4,967	$	235,203		$	(74,359	)	$	292,138

September 30, 2017	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Impaired loans
Commercial Real Estate	$	-	$	-	$	1,829	$	1,829
Commercial		-		-		2,830		2,830
Total Impaired loans		-		-		4,659		4,659
Mortgage servicing rights		-		6,944		-		6,944
Real estate held for sale
Commercial Real Estate		-		-		227		227
Total Real Estate held for sale		-		-		227		227

December 31, 2016	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Impaired loans
1-4 Family Residential Real Estate	$	-	$	-	$	316	$	316
Commercial Real Estate		-		-		848		848
Commercial						332		332
Total impaired loans		-		-		1,496		1,496
Mortgage servicing rights		-		657		-		657
Commercial Real Estate		-		-		377		377
Total Real Estate held for sale		-		-		377		377

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

Impaired Loans- Applies to all loan classes	$	4,659	Appraisals which utilize sales comparison, net income and cost approach	Discounts for collection issues and changes in market conditions		10	%		10	%
Real estate held for sale – Applies to all classes	$	227	Appraisals which utilize sales comparison, net income and cost approach	Discounts for changes in market conditions		3	%		3	%

	Options Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in 000’s)
Options outstanding, January 1, 2017		54,750		$	22.21
Forfeited or cancelled		-			-
Exercised		(11,550	)		24.41
Granted		-			-
Options outstanding, September 30, 2017		43,200		$	21.62		3.40	$	1,334
Vested or expected to vest at September 30, 2017		43,200		$	21.62		3.40	$	1,334
Exercisable at September 30, 2017		31,100		$	17.31		1.87	$	1,094

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

Unvested at January 1, 2017		75,468		$	32.31		11,161		$	32.30
Granted		23,384			50.56		21,377			28.39
Vested		(19,341	)		25.77		(26,980	)		26.70
Forfeited		(6,973	)		25.77		(1,022	)		37.02
Unvested at September 30, 2017		72,660		$	40.54		4,536		$	46.09


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

	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(In Thousands)
Due in one year or less	$	1,210	$	1,212	$	-	$	-
Due after one year through five years		21,301		21,800		62		62
Due after five years through ten years		43,275		44,919		592		592
Due after ten years		42,289		43,528		-		-
MBS/CMO/REMIC		148,226		148,575		74		74
	$	256,301	$	260,034	$	728	$	728

Quarter Ended September 30, 2017	1-4 Family Residential Real Estate			Multi- Family Residential Real Estate			Commercial Real Estate			Construction			Commercial			Home Equity and Improvement			Consumer Finance			Total
Beginning Allowance	$	2,641		$	2,193		$	10,136		$	540		$	7,973		$	2,199		$	233		$	25,915

Charge-Offs		(60	)		0			0			0			(64	)		(92	)		(20	)		(236	)

Recoveries		11			0			103			0			18			59			9			200

Provisions		(54	)		110			232			38			98			19			19			462
Ending Allowance	$	2,538		$	2,303		$	10,471		$	578		$	8,025		$	2,185		$	241		$	26,341

Quarter Ended September 30, 2016	1-4 Family Residential Real Estate			Multi- Family Residential Real Estate			Commercial Real Estate			Construction			Commercial			Home Equity and Improvement			Consumer Finance			Total
Beginning Allowance	$	2,839		$	2,365		$	10,904		$	633		$	6,740		$	2,278		$	189		$	25,948

Charge-Offs		(111	)		0			(79	)		0			(26	)		(74	)		(24	)		(314	)

Recoveries		3			0			62			0			159			40			10			274

Provisions		(299	)		(185	)		(280	)		(221	)		1,006			(47	)		41			15
Ending Allowance	$	2,432		$	2,180		$	10,607		$	412		$	7,879		$	2,197		$	216		$	25,923

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

Ending allowance balance attributable to loans:

Individually evaluated for impairment	$	165	$	3	$	109	$	-	$	56	$	281	$		$	614

Collectively evaluated for impairment		2,373		2,300		10,362		578		7,969		1,904		241		25,727

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

Total ending allowance balance	$	2,538	$	2,303	$	10,471	$	578	$	8,025	$	2,185	$	241	$	26,341

Loans:

Loans individually evaluated for impairment	$	6,975	$	2,069	$	30,387	$	-	$	14,019	$	1,199	$	51	$	54,700

Loans collectively evaluated for impairment		263,456		210,030		964,767		129,333		497,712		131,562		28,967		2,225,827

Loans acquired with deteriorated credit quality		1,092		303		2,137		-		333		-		-		3,865

Total ending loans balance	$	271,523	$	212,402	$	997,291	$	129,333	$	512,064	$	132,761	$	29,018	$	2,284,392

	Three Months Ended September 30, 2017						Nine Months Ended September 30, 2017
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized			Cash Basis Income Recognized
Residential Owner Occupied	$	4,188	$	37	$	37	$	3,699	$	99		$	99
Residential Non Owner Occupied		2,706		33		33		3,136		104			104
Total Residential Real Estate		6,894		70		70		6,835		203			203
Construction		-		-		-		-		-			-
Multi-Family		2,084		9		9		2,534		28			28
CRE Owner Occupied		12,127		24		22		9,613		70			70
CRE Non Owner Occupied		3,484		32		31		3,845		105			98
Agriculture Land		13,547		148		44		8,719		335			126
Other CRE		1,590		27		22		1,637		50			42
Total Commercial Real Estate		30,748		231		119		23,814		560	��		336
Commercial Working Capital		7,033		38		38		5,115		86			90
Commercial Other		5,926		31		27		5,126		82			60
Total Commercial		12,959		69		65		10,241		168			150
Home Equity and Improvement		1,206		11		10		1,228		32			31
Consumer Finance		54		1		1		62		3			4
Total Impaired Loans	$	53,945	$	391	$	274	$	44,714	$	994		$	752

	Three Months Ended September 30, 2016						Nine Months Ended September 30, 2016
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized		Cash Basis Income Recognized
Residential Owner Occupied	$	3,876	$	34	$	33	$	3,892	$	109	$	106
Residential Non Owner Occupied		2,935		29		29		3,234		95		94
Total Residential Real Estate		6,811		63		62		7,126		204		200
Construction		-		-		-		-		-		-
Multi-Family		3,607		14		14		4,087		68		68
CRE Owner Occupied		7,171		30		30		7,810		134		115
CRE Non Owner Occupied		6,341		73		73		5,220		178		175
Agriculture Land		1,851		16		2		2,427		66		16
Other CRE		1,570		13		13		1,556		31		31
Total Commercial Real Estate		16,933		132		118		17,013		409		337
Commercial Working Capital		2,259		26		11		1,769		56		33
Commercial Other		2,198		8		7		2,742		36		34
Total Commercial		4,457		34		18		4,511		92		67
Home Equity and Improvement		1,446		12		12		1,631		40		40
Consumer Finance		65		1		1		69		3		3
Total Impaired Loans	$	33,319	$	256	$	225	$	34,437	$	816	$	715

	Current		30-59 days		60-89 days		90+ days		Total Past Due		Total Non- Accrual

Residential Owner Occupied	$	171,835	$	1,105	$	21	$	1,281	$	2,407	$	2,797
Residential Non Owner Occupied		96,055		638		93		495		1,226		572

Total 1-4 Family Residential Real Estate		267,890		1,743		114		1,776		3,633		3,369

Multi-Family Residential Real Estate		212,402		-		-		-		-		-

CRE Owner Occupied		395,228		62		143		1,107		1,312		10,745
CRE Non Owner Occupied		402,153		350		-		544		894		2,516
Agriculture Land		135,673		103		-		294		397		3,288
Other Commercial Real Estate		61,427		207		-		-		207		545

Total Commercial Real Estate		994,481		722		143		1,945		2,810		17,094

Construction		129,333		-		-		-		-		-

Commercial Working Capital		227,422		1,522		539		75		2,136		4,067
Commercial Other		281,773		-		379		354		733		4,004

Total Commercial		509,195		1,522		918		429		2,869		8,071

Home Equity/Home Improvement		131,141		1,347		158		115		1,620		546
Consumer Finance		28,762		164		52		40		256		58

Total Loans	$	2,273,204	$	5,498	$	1,385	$	4,305	$	11,188	$	29,138
Loans acquired with deteriorated credit quality (included in the totals above)	$	3,698	$	33	$	-	$	134	$	167	$	1,925

Loans acquired in current year (included in totals above)	$	228,225	$	2,911	$	625	$	701	$	4,237	$	4,855

	Loans Modified as a TDR for the Three Months Ended September 30, 2017 ($ in thousands)				Loans Modified as a TDR for the Nine Months Ended September 30, 2017 ($ in thousands)
Troubled Debt Restructurings	Number of Loans		Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)

1-4 Family Owner Occupied		10	$	420		18	$	923
1-4 Family Non Owner Occupied		0		-		3		104
Multi Family		0		-		0		-
CRE Owner Occupied		0		-		1		116
CRE Non Owner Occupied		0		-		0		-
Agriculture Land		3		280		5		1,731
Other CRE		0		-		2		165
Commercial Working Capital		2		345		7		2,396
Commercial Other		1		47		5		3,511
Home Equity and Improvement		2		72		4		150
Consumer Finance		1		7		3		10
Total		19	$	1,171		48	$	9,106

	Three Months Ended September 30, 2017 ($ in thousands)				Nine Months Ended September 30, 2017 ($ in thousands)
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans		Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)

1-4 Family Owner Occupied		0	$	-		0	$	-
1-4 Family Non Owner Occupied		0		-		0		-
CRE Owner Occupied		0		-		0		-
CRE Non Owner Occupied		0		-		0		-
Agriculture Land		0		-		0		-
Other CRE		0		-		0		-
Commercial Working Capital or Other		0		-		1		225
Commercial Other		0		-		0		-
Home Equity and Improvement		0		-		0		-
Consumer Finance		0		-		0		-
Total		0	$	-		1	$	225

	Three Months Ended September 30, 2016 ($ in thousands)				Nine Months Ended September 30, 2016 ($ in thousands)
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans		Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)

1-4 Family Owner Occupied		1	$	190		1	$	190
1-4 Family Non Owner Occupied		0		-		0		-
CRE Owner Occupied		0		-		0		-
CRE Non Owner Occupied		0		-		1		11
Agriculture Land		0		-		0		-
Other CRE		0		-		0		-
Commercial Working Capital or Other		0		-		0		-
Commercial Other		0		-		0		-
Home Equity and Improvement		0		-		0		-
Consumer Finance		0		-		0		-
Total		1	$	190		2	$	201

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

	Overnight and Continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total
			(In Thousands)
At September 30, 2017
Repurchase agreements:
Mortgage-backed securities – residential	$	6,115	$	-	$	-	$	-	$	6,115
Collateralized mortgage obligations		16,824		-		-		-		16,824
Total borrowings	$	22,939	$	-	$	-	$	-	$	22,939
Gross amount of recognized liabilities for repurchase agreements									$	22,939

	Nine Months Ended September 30,
(dollars in thousands)	2017		2016
Proportional Amortization Method
Tax credits and other tax benefits recognized	$	640	$	484
Amortization expense in federal income taxes		502		368

	February 24, 2017
	(In Thousands)

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

Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed:
Cash and Cash Equivalents		35,411
Federal Funds Sold		2,769
Securities		4,338
Loans		285,448
FHLB Stock of Cincinnati and Other Stock		2,194
Office Properties and Equipment		5,455
Intangible Assets		4,900
Bank-Owned Life Insurance		8,168
Accrued Interest Receivable and Other Assets		3,606
Deposits – Non-Interest Bearing		(56,061	)
Deposits – Interest Bearing		(251,931	)
Advances from FHLB		(1,403	)
Accrued Interest Payable and Other Liabilities		(2,717	)
Total Identifiable Net Assets		40,177

Goodwill	$	28,695

	Pro Forma Nine		Pro Forma Nine
	Months Ended		Months Ended
	September 30, 2017		September 30, 2016
	(In Thousands)

Net Interest Income	$	73,476	$	67,008
Provision for loan losses		2,635		984
Non-Interest Income		30,463		26,646
Non-Interest Expense		62,067		57,453
Income Before Income Taxes		39,237		35,217
Income Tax Expense		13,112		10,733
Net Income	$	26,125	$	24,484
Diluted Earnings Per Share	$	2.58	$	2.40

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

	For the Nine Months Ended September 30, 2016						As of September 30, 2016
	Net Charge-offs (Recoveries)			% of Total Net Charge-offs			Nonaccrual Loans		% of Total Non- Accrual Loans
	(In Thousands)						(In Thousands)
Residential	$	80			(73.39	)%	$	2,920		16.05	%
Construction		-			0.00	%		-		0.00	%
Commercial real estate		(376	)		344.94	%		11,302		62.10	%
Commercial		147			(134.86	)%		3,245		17.83	%
Consumer finance		(17	)		15.60	%		13		0.07	%
Home equity and improvement		57			(52.29	)%		718		3.95	%
Total	$	(109	)		100.00	%	$	18,198		100.00	%

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

Allowance at beginning of period	$	25,915	$	25,749	$	25,884	$	25,923		$	25,948
Provision for credit losses		462		2,118		55		(149	)		15
Charge-offs:
Residential		60		-		49		147			111
Commercial real estate		-		110		290		-			79
Commercial		64		2,027		-		234			26
Consumer finance		20		21		71		53			24
Home equity and improvement		92		100		54		98			74
Total charge-offs		236		2,258		464		532			314
Recoveries		200		306		274		642			274
Net charge-offs		36		1,952		190		(110	)		40
Ending allowance	$	26,341	$	25,915	$	25,749	$	25,884		$	25,923

	3rd Qtr 2017			2nd Qtr 2017			1st Qtr 2017			4th Qtr 2016			3rd Qtr2016
Allowance for loan losses / loans*		1.16	%		1.15	%		1.15	%		1.33	%		1.35	%
Allowance for loan losses / non-performing assets		88.74	%		83.51	%		163.19	%		174.86	%		137.14	%
Allowance for loan losses / non-performing loans		90.36	%		85.36	%		171.82	%		180.40	%		142.45	%
Non-performing assets / loans plus REO*		1.30	%		1.38	%		0.70	%		0.76	%		0.98	%
Non-performing assets / total assets		1.01	%		1.07	%		0.54	%		0.60	%		0.77	%
Net charge-offs / average loans (annualized)		0.01	%		0.35	%		0.04	%		-0.02	%		0.01	%