FIRST DEFIANCE FINANCIAL CORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------

FORM 10-K
(Mark One)

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

For the fiscal year ended December 31, 1999

or

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

Commission File Number ________________

FIRST DEFIANCE FINANCIAL CORP.
(Exact name of registrant as specified in its charter)

OHIO 34-1803915
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)

601 Clinton Street, Defiance, Ohio 43512
(Address of principal executive offices) (Zip code)

Registrants telephone number, including area code: (419) 782-5015

Securities registered pursuant to Section 12(b) of the Act:
(None)

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.01 Per Share
(Title of class)

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

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

As of March 6, 2000, there were issued and outstanding 6,836,685 shares
of the Registrants common stock.

The aggregate market value of the voting stock held by non-affiliates
of the Registrant computed by reference to the average bid and ask price of such
stock as of March 6, 2000 was approximately $63.2 million.

-----------------

Documents Incorporated by References

List hereunder the following documents incorporated by reference and
Part III - Portions of the Proxy Statement for the Annual meeting of
Shareholders to be held on April 18, 2000 are incorporated by reference into
Part III therof.

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PART I

Item 1. Business

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

At December 31, 1999, the Company had consolidated assets of $988.0
million, consolidated deposits of $503.0 million, and consolidated stockholders'
equity of $89.4 million. The Company was incorporated in Ohio in June of 1995.
Its principal executive offices are located at 601 N. Clinton Street, Defiance,
Ohio 43512, and its telephone number is (419) 782-5015.

The Subsidiaries

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

First Federal Bank of the Midwest: First Federal Bank of the Midwest
("First Federal") is a federally chartered stock savings bank headquartered in
Defiance, Ohio. First Federal formerly did business as First Federal Savings and
Loan. On January 1, 1999 it adopted a federal savings bank charter and changed
its name to First Federal Bank of the Midwest. It conducts operations through
its main office and thirteen full service branch offices in Defiance, Fulton,
Hancock, Henry, Paulding, Putnam, and Williams Counties in northwest Ohio. First
Federal's deposits are insured by the Federal Deposit Insurance Corporation
("FDIC") under the Savings Association Insurance Fund ("SAIF"). First Federal is
a member of the Federal Home Loan Bank System.

First Federal is primarily engaged in attracting deposits from the
general public through its offices and using those and other available sources
of funds to originate loans secured by single-family residences
(one-to-four-family units) primarily located in the seven counties in which its
offices are located. First Federal also originates other real estate loans
secured by nonresidential and multi-family residential real estate and
construction loans. First Federal also holds a significant number of non real
estate loans including commercial, home improvement and equity, consumer finance
loans, primarily automobile loans, and mobile home loans. In addition, First
Federal invests in U.S. Treasury and federal government agency obligations,
obligations of the State of Ohio and its political subdivisions, mortgage-backed
securities which are issued by federal agencies, commercial paper, and corporate
bonds.

2

The Leader Mortgage Company: The Leader Mortgage Company ("The Leader")
is a single member limited liability company which is operated as a division of
First Federal. The Leader is a mortgage banking company which specializes in
servicing mortgage loans under various first-time homebuyer programs sponsored
by various state, county and municipal governmental entities. The Leader's
mortgage banking activities consist primarily of originating or purchasing
residential mortgage loans for either direct resale into secondary markets or to
be securitized under various Government National Mortgage Association ("GNMA")
bonds.

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

Securities

Management determines the appropriate classification of debt securities
at the time of purchase. Debt securities are classified as held-to-maturity when
First Defiance has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost. Debt
securities not classified as held-to-maturity and equity securities are
classified as available-for-sale. Available-for-sale securities are stated at
fair value. Loans held-for-sale securitized in the normal course of The Leader's
operations have been classified as trading securities, reported at fair market
value. The Leader has committed to sell the securities at their carrying value.

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

First Defiance's investment portfolio includes seven CMO and REMIC
issues totaling $6.9 million, all of which are fully amortizing securities. All
such investments are considered derivative securities. None of First Defiance's
investments are considered to be high risk and management does not believe the
risks associated with these investments to be significantly different from risks
associated with other pass-through mortgage backed securities. First Defiance
does not invest in off-balance sheet derivative securities.

3

The amortized cost and fair value of securities at December 31, 1999 by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Money market mutual
funds and other mutual funds are not due at a single maturity date. For purposes
of the maturity table, mortgage-backed securities, which are not due at a single
maturity date, have been allocated over maturity groupings based on the
weighted-average contractual maturities of underlying collateral. The
mortgage-backed securities may mature earlier than their weighted-average
contractual maturities because of principal prepayments.

Contractually Maturing Total
----------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted
Under 1 Average 1 - 5 Average 6-10 Average Over 10 Average
Year Rate Years Rate Years Rate Years Rate Amount Yield
---- ---- ----- ---- ----- ---- ----- ---- ------ -----
(Dollars in thousands)

Mortgage-backed
securities $ 311 5.60% $ 696 8.64% $ 90 9.14% $37,705 6.50% $38,802 6.54%
Corporate bonds 4,046 6.09% 10,819 6.68% 14,865 6.52%
REMICs and CMOs 6,426 6.39% 566 6.85% 6,992 6.42%
U.S. Government and
federal agency
obligations 15,814 6.25% 964 5.90% 16,778 6.23%
Obligations of
states and
political 634 5.26% 1,406 5.80% 3,759 5.25% 745 5.15% 6,544 5.36%
subdivisions
Trust preferred 2,000 9.13% 2,000 9.13%
stock
------ ------- ------- ------- -------
Total $4,991 $28,735 $11,239 $41,016 85,981
====== ======= ======= ======= =======
Mutual funds 8,981
Equity securities 343
Unrealized loss
on securities
available for
sale (1,659)
-------
Total $93,646
=======

The carrying value of investment securities is as follows:

December 31
1999 1998 1997
------- ------- -------
(In thousands)

Available-for-Sale Securities:
Corporate bonds $14,746 $11,196 $10,113
U. S. Treasury and other U. S. Government
agencies and corporations 16,374 7,063 58,851
Obligations of state and political subdivisions
5,381 5,286 550
Other 17,445 24,009 12,922
------- ------- -------
Totals $53,946 $47,554 $82,436
======= ======= =======

Trading Securities:
U.S. Treasury and other U.S.
Government agencies and corporations $29,805 $ -- $ --
------- ------- -------
$29,805 $ -- $ --
======= ======= =======

4

Held-to-Maturity Securities:
U. S. Treasury and other U. S. Government
agencies and corporations $ 8,997 $12,531 $19,715
Obligations of state and political subdivisions 898 1,010 1,238
------- ------- -------

Totals $ 9,895 $13,541 $20,953
======= ======= =======

For additional information regarding First Defiance's investment portfolio refer
to Note 4 to the consolidated financial statements.

Interest-Bearing Deposits

First Defiance has interest-bearing deposits in the FHLB of Cincinnati
amounting to $1.8 million and $5.3 million at December 31, l999 and l998.

Residential Loan Servicing Activities

First Federal and The Leader each has its own mortgage servicing
portfolio. At December 31, 1999, First Federal serviced approximately $88.6
million of mortgage loans, while The Leader's servicing portfolio amounted to
approximately $5.95 billion.

Servicing mortgage loans involves a contractual right to receive a fee
for processing and administering loan payments. This processing involves
collecting monthly mortgage payments on behalf of investors, reporting
information to those investors on a monthly basis and maintaining custodial
escrow accounts for the payment of principal and interest to investors and
property taxes and insurance premiums on behalf of borrowers. These payments are
held in custodial escrow accounts at First Federal, where the money can be
invested by the Company in interest-earning assets at returns that historically
have been greater than could be realized by the Company using the custodial
escrow deposits as compensating balances to reduce the effective borrowing cost
on the Company's warehouse credit facilities.

As compensation for its mortgage servicing activities, the Company
receives servicing fees usually ranging from 0.25% to 0.44% per annum of the
loan balances serviced, plus any late charges collected from delinquent
borrowers and other fees incidental to the services provided. At December 31,
1999, the Company's weighted-average servicing fee was .41%. In the event of a
default by the borrower, the Company receives no servicing fees until the
default is cured.

5

Servicing is provided on mortgage loans on a recourse or nonrecourse
basis. The Company's policy is to accept only a limited number of servicing
assets on a recourse basis. As of December 31, 1999, on the basis of outstanding
principal balances, only .07% of the mortgage servicing contracts owned by the
Company involved recourse servicing. To the extent that servicing is done on a
recourse basis, the Company is exposed to credit risk with respect to the
underlying loan in the event of a repurchase. Additionally, many of the
nonrecourse mortgage servicing contracts owned by the Company require the
Company to advance all or part of the scheduled payments to the owner of the
mortgage loan in the event of a default by the borrower. Many owners of mortgage
loans also require the servicer to advance insurance premiums and tax payments
on schedule even though sufficient escrow funds may not be available. The
Company, therefore, must bear the funding costs associated with making such
advances. If the delinquent loan does not become current, these advances are
typically recovered at the time of the foreclosure sale. Foreclosure expenses
are generally not fully reimbursable by the Federal National Mortgage
Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") or
the Government National Mortgage Association ("GNMA"), for whom the Company
provides significant amounts of mortgage loan servicing. As of December 31, 1999
and 1998, the Company had advanced approximately $5.6 million and $3.5 million,
respectively, in funds on behalf of third-party investors.

Mortgage servicing rights represent a contractual right to service, and
not a beneficial ownership interest in, underlying mortgage loans. Failure to
service the loans in accordance with contract or other applicable requirements
may lead to the termination of the servicing rights and the loss of future
servicing fees. To date, there have been no terminations of mortgage servicing
rights by any mortgage loan owners because of the Company's failure to service
the loans in accordance with its obligations.

The following table sets forth certain information regarding the
composition of the Company's mortgage servicing portfolio (excluding loans
subserviced for others) as of the dates indicated:

As of December 31
1999 1998 1997
---------- ---------- ----------
(In thousands)

FHA insured/VA guaranteed residential $4,641,778 $3,616,245
Conventional loans 1,205,908 1,086,575 $ 17,844
Other loans 191,377 153,049
---------- ---------- ----------
Total mortgage servicing portfolio $6,039,063 $4,855,869 $ 17,844
========== ========== ==========

Fixed rate loans $6,032,886 $4,847,764 $ 17,844
Adjustable rate loans 6,177 8,105
---------- ---------- ----------
Total mortgage servicing portfolio $6,039,063 $4,855,869 $ 17,844
========== ========== ==========

6

The following table shows the delinquency statistics for the mortgage loans
serviced by the Company (excluding loans subserviced for others) compared with
national average delinquency rates as of the dates presented:

As of December 31
-------------------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------------------------------
National National National
Company Average(1) Company Average(1) Company Average(1)
-------------------------------------------------------------------------------------------------------
Number Percentage Percentage Number Percentage Percentage Number Percentage Percentage
of of Servicing of of of Servicing of of of Servicing of
Loans Portfolio (2) Loans Loans Portfolio (2) Loans Loans Portfolio(2) Loans
----- ------------- ----- ----- ------------- ----- ----- ------------ -----

Loans delinquent for:
30-59 days 5,102 5.28% 2.88% 5,155 6.23% 2.96% 5 1.78% 3.03%
60-89 days 1,425 1.47 .63 1,435 1.73 .68 -- .71
90 days and over 1,007 1.04 .59 818 .99 .60 1 .36 .62
----- ---- ---- ----- ---- ---- - ---- ----
Total delinquencies 7,534 7.79% 4.10% 7,408 8.95% 4.24% 6 2.14% 4.36%
----- ---- ---- ----- ---- ---- - ---- ----
Foreclosures 2,167 2.24% 2,161 2.61% -- -- -- 1.11%
===== ==== ===== ==== ==== === ==== ====

(1) Source: Mortgage Bankers Association, "Delinquency Rates of I to 4 Unit
Residential Mortgage Loans" (Seasonally Adjusted) (Data as of September 30,
1999 and December 31, 1998 and 1997, respectively).
(2) Delinquencies and foreclosures generally exceed the national average due to
historically higher rates of delinquencies and foreclosures on FHA insured
and VA guaranteed residential mortgage loans.

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

As of December 31
---------------------------------------------------------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------------------------------------------------------
Percentage Percentage Percentage
Number Aggregate of Aggregate Number Aggregate of Aggregate Number Aggregate of Aggregate
of Principal Principal of Principal Principal of Principal Principal
Rate Loans Balance Balance Loans Balance Balance Loans Balance Balance
---- ----- ------- ------- ----- ------- ------- ----- ------- -------

Less than 5.00% 697 $ 32,872 .54% 1,144 $ 33,215 .68%
5.00% - 5.99% 18,326 1,238,781 20.51 9,510 565,162 11.64
6.00% - 6.99% 35,221 2,427,105 40.19 29,068 1,818,721 37.45
7.00% - 7.99% 31,094 1,721,873 28.51 30,383 1,718,098 35.38 54 $ 3,904 21.88%
8.00% - 8.99% 9,713 501,155 8.30 12,310 480,142 9.89 216 13,540 75.88%
9.00% and over 1,640 117,277 1.95 355 240,531 4.96 11 400 2.24
------ ---------- ------ ------ ---------- ------ --- ------- ------
Total 96,691 $6,039,063 100.00% 82,770 $4,855,869 100.00% 281 $17,844 100.00%
====== ========== ====== ====== ========== ====== === ======= ======

7

Loan administration fees decrease as the principal balance on the
outstanding loan decreases and as the remaining time to maturity of the loan
shortens. The following table sets forth certain information regarding the
remaining maturity of the mortgage loans serviced by the Company (excluding
loans subserviced for others) as of the dates shown. The changes in the
remaining maturities as a percentage of unpaid principal between 1998 and 1997,
as reflected below, are the result of acquisitions of mortgage servicing rights
completed during 1998.

As of December 31
------------------------------------------------------------------------------------------
1999 1998
------------------------------------------------------------------------------------------
Percentage Percentage
Number Percentage Unpaid Unpaid Number Percentage Unpaid Unpaid
of of Number Principal Principal of of Number Principal Principal
Maturity Loans of Loans Amount Amount Loans of Loans Amount Amount
--------
------------------------------------------------------------------------------------------
(Dollars in thousands)

1-5 years 4,102 4.24% $ 121,250 2.01% 5,843 7.06% $ 147,446 3.04%
6-10 years 5,823 6.02 120,517 2.00 5,053 6.10 147,092 3.03
11-15 years 1,457 1.51 99,207 1.64 1,756 2.12 104,796 2.16
16-20 years 4,894 5.06 209,012 3.46 6,643 8.03 288,755 5.95
21-25 years 12,702 13.14 745,418 12.34 16,136 19.49 960,928 19.79
More than 25 years 67,713 70.03 4,743,659 78.55 47,339 57.20 3,206,852 66.03
---------------------------------------------------------------------------------------------
Total 96,691 100.00% $6,039,063 100.00% 82,770 100.00% $4,855,869 100.00%
=============================================================================================

--------------------------------------------------
1997
--------------------------------------------------
Percentage
Number Percentage Unpaid Unpaid
of of Number Principal Principal
Loans of Loans Amount Amount
--------------------------------------------------

1-5 years
6-10 years
11-15 years
16-20 years
21-25 years
More than 25 years 281 100.00% $17,844 100.00%
-------------------------------------------
Total 281 100.00% $17,844 100.00%
===========================================

The following table sets forth the geographic distribution of the
mortgage loans (including delinquencies) serviced by the Company (excluding
loans subserviced for others) by state:

As of December 31
-------------------------------------------------------------------------------------------
1999 1998
-------------------------------------------------------------------------------------------
Percentage Percentage Percentage Percentage
of of of of
Number Aggregate Aggregate Total Number Aggregate Aggregate Total
of Principal Principal Delinqs. of Principal Principal Delinqs.
State Loans Balance Balance by State(1) Loans Balance Balance by State(1)
- ----- ----- ------- ------- ----------- ----- ------- ------- -----------
(Dollars in thousands)

Ohio 35,336 $2,230,168 36.93% 31.46% 36,761 $2,153,287 44.34% 38.12%
Florida 19,245 1,259,712 20.86 22.07 14,688 955,047 19.67 19.74
Louisiana 10,226 679,799 11.26 16.30 6,836 443,228 9.13 10.96
Washington 5,458 374,580 6.20 4.67 3,531 248,738 5.12 3.93
Other (2) 26,426 1,494,804 24.75 25.50 20,954 1,055,569 21.74 27.25
---------------------------------------------------------------------------------------------
Total 96,691 $6,039,063 100.00% 100.00% 82,770 $4,855,869 100.00% 100.00%
=============================================================================================

-----------------------------------------------
1997
-----------------------------------------------
Percentage Percentage
of of
Number Aggregate Aggregate Total
of Principal Principal Delinqs.
Loans Balance Balance by State(1)
----- ------- ------- -----------

Ohio 281 $17,844 100.00% 100.00%
Florida
Louisiana
Washington
Other (2)
-----------------------------------------------
Total 281 $17,844 100.00% 100.00%
===============================================

(1) In terms of number of loans outstanding.
(2) No other state accounted for greater than 6.00%, based on aggregate
principal balances of the Company's mortgage loan servicing portfolio as of
December 31, 1999.

8

Lending Activities

General. A savings association generally may not make loans to one
borrower and related entities in an amount which exceeds 15% of its unimpaired
capital and surplus, although loans in an amount equal to an additional 10% of
unimpaired capital and surplus may be made to a borrower if the loans are fully
secured by readily marketable securities. See "Regulation - Federal Regulation
of Savings Associations." At December 31, 1999, First Federal's limit on
loans-to-one borrower was $8.6 million and its five largest loans or groups of
loans to one borrower, including related entities, were $8.2 million, $6.6
million, $3.6 million, $3.3 million and $3.0 million. All of these loans or
groups of loans were performing in accordance with their terms at December 31,
1999.

9

Loan Portfolio Composition. Loan volume continues to be strong. The net
increase in net loans outstanding over the prior year was $134.4 million, $126.6
million, and $26.0 million in 1999, 1998, and 1997, respectively. The loan
portfolio contains no foreign loans nor any concentrations to identified
borrowers engaged in the same or similar industries exceeding 10% of total
loans.

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

December 31
-------------------------------------------------------------------------------------------
1999 1998 1997 1996
-------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount %
-------------------------------------------------------------------------------------------
(Dollars in thousands)

Real estate:
Single-family residential $458,442 64.1% $365,116 62.7% $255,428 57.0% $241,787 57.1%
Multi-family residential 11,427 1.6 13,763 2.4 9,363 2.1 9,175 2.2
Non-residential real estate 11,801 1.7 16,436 2.8 20,159 4.5 21,348 5.0
Construction 7,808 1.1 8,258 1.4 10,148 2.2 11,412 2.7
-------------------------------------------------------------------------------------------
Total real estate loans 489,478 68.5 403,573 69.3 295,098 65.8 283,722 67.0

Other:
Consumer finance 64,326 9.0 87,168 15.0 81,111 18.1 74,019 17.5
Commercial 138,125 19.3 70,109 12.0 29,758 6.6 26,674 6.3
Home equity and improvement 22,781 3.2 18,168 3.2 16,940 3.8 13,570 3.2
Mobile home 46 - 3,117 .5 25,424 5.7 25,199 6.0
-------------------------------------------------------------------------------------------
Total non-real estate loans 225,278 31.5 178,562 30.7 153,233 34.2 139,462 33.0
--------- -------- -------- --------
Total loans 714,756 100.0% 582,135 100.0% 448,331 100.0% 423,184 100.0%
===== ====== ====== ======
Less:
Loans in process 3,291 3,250 3,087 4,474
Deferred loan origination fees 764 612 646 568
Allowance for loan losses 7,758 9,789 2,686 2,217
--------- -------- -------- --------
Net loans $702,943 $568,484 $441,912 $415,925
========= ======== ======== ========

December 31
----------------------
1995
----------------------
Amount %
----------------------

Real estate:
Single-family residential $224,639 57.4%
Multi-family residential 16,929 4.3
Non-residential real estate 19,780 5.1
Construction 8,200 2.1
----------------------
Total real estate loans 269,548 68.9

Other:
Consumer finance 61,810 15.8
Commercial 23,647 6.0
Home equity and improvement 11,875 3.0
Mobile home 24,671 6.3
----------------------
Total non-real estate loans 122,003 31.1
---------
Total loans 391,551 100.0%
======
Less:
Loans in process 3,971
Deferred loan origination fees 559
Allowance for loan losses 1,817
.
---------
Net loans $ 385,204
=========

Included above, First Defiance had $239.6 million, $119.9 million,
$87,500, $558,600 and $3.8 million in loans classified as held for sale at
December 31, 1999, 1998, 1997, 1996, and 1995 respectively. The fair value of
such loans, which are all single-family residential mortgage loans, approximated
their carrying value for all years presented.

10

Contractual Principal Repayments and Interest Rates. The following
table sets forth certain information at December 31, 1999 regarding the dollar
amount of gross loans maturing in First Defiance's portfolio, based on the
contractual terms to maturity. Demand loans, loans having no stated schedule of
repayments and no stated maturity and overdrafts are reported as due in one year
or less.

Due 3-5 Due 5-10 Due 10-15 Due 15+
Due Due Years Years Years Years
Before Before After After After After
12/31/00 12/31/01 12/31/99 12/31/99 12/31/99 12/31/99 Total
-----------------------------------------------------------------------------------
(In thousands)

Real estate $259,397 $11,702 $44,049 $ 66,119 $47,957 $60,254 $489,478
Non-real estate:
Commercial 44,999 12,205 31,050 32,085 5,927 11,859 138,125
Home equity and
improvement 2,701 711 1,805 1,361 276 15,927 22,781
Mobile home 9 8 22 7 - - 46
Consumer finance 23,872 17,880 22,096 460 18 - 64,326
-----------------------------------------------------------------------------------
Total $330,978 $42,506 $99,022 $100,032 $54,178 $88,040 $714,756
===================================================================================

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

The following table sets forth the dollar amount of gross loans due
after one year from December 31, l999 which have fixed interest rates or which
have floating or adjustable interest rates.

Floating or
Fixed Adjustable
Rates Rates Total
-----------------------------------------------------
(In thousands)

Real estate $ 170,780 $ 59,301 $ 230,081
Non-real estate:
Commercial 39,270 53,856 93,126
Other 42,847 17,724 60,571
-----------------------------------------------------
$ 252,897 $ 130,881 $ 383,778
=====================================================

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

11

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

A commercial credit is first reviewed and underwritten by a commercial
loan officer, who may approve credits within his or her lending limit. Credits
exceeding an individual's lending limit may be approved by another loan officer
with limits sufficient to cover the exposure. All credits which exceed $100,000
in aggregate exposure must be presented for approval to the Senior Loan
Committee, a committee of senior lending personnel. Credits which exceed
$250,000 in aggregate exposure must be presented to for approval to the
Executive Loan Committee, a sub-committee of the Board of Directors.

A mortgage loan is initially reviewed by a mortgage loan originator.
Approval for conforming mortgage loans which are sold to the secondary market
occurs centrally by the Chief Underwriter or the Vice President of Mortgage
Lending. Non-conforming mortgage loans must be approved by either the Vice
President of Mortgage Lending or First Federal's Chief Operating Officer.

A consumer loan officer underwrites and may approve direct consumer
credits within their lending limits. Credits exceeding an officer's lending
limits may be approved by another loan officer with limits sufficient to cover
the exposure. All indirect consumer credits are underwritten and approved
centrally.

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

Adjustable rate loans represented 5.87% of First Defiance's total
originations of mortgage loans in 1999 compared to 14.0% and 34.7% during 1998
and 1997, respectively. First Defiance continues to hold adjustable-rate
securities in order improve its interest rate risk profile.

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

12

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

Year ended December 31
1999 1998 1997
----------- ----------- -----------
(In thousands)

Loan originations:
One to four family residential $ 154,142 $ 163,355 $ 72,752
Five or more family residential 313 2,168 1,464
Non-residential real estate 476 4,025 5,153
Construction 10,699 13,852 11,044
Commercial 149,819 98,148 31,435
Mobile home - 3,083 5,945
Home equity and improvement 10,223 15,381 10,103
Consumer 21,122 60,068 54,994
----------- ----------- -----------
Total loans originated 346,794 360,080 192,890

Loans acquired through purchase of The Leader:
One to four family residential - 127,170 -
Five or more family residential - 4,302 -
----------- ----------- -----------
- 131,472 -
Purchase of one to four family residential 1,797,959 596,681 -

Loan reductions:
Loan pay-offs 188,128 185,793 106,840
Mortgage loans sold 1,746,386 674,066 8,242
Periodic principal repayments 77,618 94,570 52,661
----------- ----------- -----------
2,012,132 954,429 167,743
----------- ----------- -----------
Net increase in total loans $ 132,621 $ 133,804 $ 25,147
=========== =========== ===========

13

Asset Quality

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

Delinquent Loans. The following table sets forth information concerning
delinquent loans at December 31, 1999, in dollar amount and as a percentage of
First Defiance's total loan portfolio. The amounts presented represent the total
outstanding principal balances of the related loans, rather than the actual
payment amounts which are past due.

30 to 59 Days 60 to 89 Days 90 Days and Over
-------------------------- --------------------------- ------------------------
Amount Percentage Amount Percentage Amount Percentage
-------------------------- --------------------------- ------------------------
(Dollars in thousands)

Single-family residential $1,067 0.15% $ 60 0.01% $ 146 0.02%
Non-residential and multi-family
residential 396 0.06 - - - -
Home equity and improvement 69 0.01 - - 30 -
Consumer finance 1,307 0.18 247 0.03 117 0.02
Commercial 49 0.00 10 - 737 0.10
------ ---- ---- ---- ------- ----
2,888 0.40 317 0.04 1,030 0.14

Single-family residential backed by
government guarantees 269 0.04 133 0.02 12,796 1.79
------ ---- ---- ---- ------- ----
Total $3,157 0.44% $450 0.06% $13,826 1.93%
====== ==== ==== ==== ======= ====

Total
-------------------------
Amount Percentage
-------------------------

Single-family residential $ 1,273 0.18%
Non-residential and multi-family
residential 396 0.06
Home equity and improvement 99 0.01
Consumer finance 1,671 0.23
Commercial 796 0.11
------- ----
4,235 0.59

Single-family residential backed by
government guarantees 13,198 1.85
------- ----
Total $17,433 2.44%
======= ====

14

Non-Performing Assets. All loans are reviewed on a regular basis and
are placed on a non-accrual status when, in the opinion of management, the
collection of additional interest is deemed insufficient to warrant further
accrual. Generally, First Defiance places all loans more than 90 days past due
on non-accrual status. When a loan is placed on non-accrual status, total unpaid
interest accrued to date is reserved. Subsequent payments are either applied to
the outstanding principal balance or recorded as interest income, depending on
the assessment of the ultimate collectibility of the loan. First Defiance
considers that a loan is impaired when, based on current information and events,
it is probable that they will be unable to collect all amounts due (both
principal and interest) according to the contractual terms of the loan
agreement. When a loan is impaired, First Defiance measures impairment based on
the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price, or the fair value
of the collateral, if collateral dependent. If the measure of the impaired loan
is less than the recorded investment, First Defiance will recognize an
impairment by creating a valuation allowance. This policy excludes large groups
of smaller-balance homogeneous loans that are collectively evaluated for
impairment such as residential mortgage, consumer installment, and credit card
loans. Impairment of loans having recorded investments of $570,000, $570,000 and
$537,000 has been recognized as of December 31, 1999, 1998 and 1997,
respectively. Interest received and recorded in income during 1999, 1998 and
1997 on impaired loans including interest received and recorded in income prior
to such impaired loan designation amounted to $36,000, $155,000, and $53,000,
respectively. Unrecorded interest income on these and all non-performing loans
in 1999, 1998 and 1997 was $154,000, $36,000, and $24,000, respectively. The
average recorded investment in impaired loans during 1999, 1998 and 1997 was
$570,000, $570,000, and $1.3 million, respectively. The total allowance for loan
losses related to these loans was $402,000, $402,000 and $327,000 at December
31, 1999, 1998 and 1997, respectively.

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

As of December 31, 1999, First Defiance's total non-performing loans
amounted to $1,030,000 or .14% of total loans, compared to $1,852,000 or .33% of
total loans, at December 31, 1998.

15

The following table sets forth the amounts and categories of First
Defiance's nonperforming assets and troubled debt restructurings at the dates
indicated.

December 31
1999 1998 1997 1996 1995
--------- --------- ------- ------- ------
(Dollars in thousands)

Non-performing loans:
Single-family residential $ 146 $ 171 $ 313 $ 88 $ 263
Non-residential and multi-family
residential real estate - - - 19 -
Commercial 737 1,330 570 1,561 268
Mobile home - 180 315 193 130
Consumer finance 147 171 167 111 111
--------- --------- ------- ------- ------
Total non-performing loans 1,030 1,852 1,365 1,972 772

Real estate owned 2,465 1,337 18 - 1
Other repossessed assets 92 180 523 267 172
--------- --------- ------- ------- ------
Total repossessed assets 2,557 1,517 541 267 173
--------- --------- ------- ------- ------
Total non-performing assets $ 3,587 $ 3,369 $ 1,906 $ 2,239 $ 945
========= ========= ======= ======= ======

Troubled debt restructurings $ - $ - $ - $ - $ 437
========= ========= ======= ======= ======

Total non-performing assets as a
percentage of total assets .36% .43% .33% .41% .18%
========= ========= ======= ======= ======

Total non-performing loans and troubled
debt restructurings as a percentage
of total loans .14% .33% .43% .53% .35%
========= ========= ======= ======= ======

Total non-performing assets and troubled
debt restructurings as a percentage
of total assets .36% .43% .33% .41% .26%
========= ========= ======= ======= ======

Allowance for loan losses as a percent
of total non-performing assets 216.3% 290.6% 140.9% 99.0% 192.3%
========= ========= ======= ======= ======

16

Allowance for Loan Losses. It is management's policy to maintain an
allowance for loan losses based upon an assessment of prior loss experience, the
volume and type of lending conducted by First Defiance, industry standards, past
due loans, general economic conditions and other factors related to the
collectibility of the loan portfolio. Although management believes that it uses
the best information available to make such determinations, future adjustments
to allowances may be necessary, and net earnings could be significantly
affected, if circumstances differ substantially from the assumptions used in
making the initial determinations.

At December 31, l999, First Defiance's allowance for loan losses
amounted to $7.8 million compared to $9.8 million at December 31, 1998. As of
December 31, 1999 and l998, $1.0 million and $1.5 million, respectively,
constituted an allowance with respect to specific loans or assets held for sale.
Charge-offs in non-real estate loans increased $664,000 for the year ended
December 31, 1999 over 1998 due to increases in lending and delinquencies in
this area. In addition, the majority of the mobile home portfolio was sold
during 1999 at a loss of $1.0 million.

The following table sets forth the activity in First Defiance's
allowance for loan losses during the periods indicated.

Year Ended December 31
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands)

Allowance at beginning of year $9,789 $2,686 $2,217 $1,817 $1,733
Provisions 1,925 7,769 1,613 1,020 374
Acquired allowance of The Leader - 1,194 - - -
Charge-offs:
Single-family real estate 1,843 352 - - -
Non-real estate:
Consumer finance 1,231 1,053 1,078 430 230
Mobile home 1,054 620 259 334 91
Commercial 107 55 4 12 23
------ ------ ------ ------ ------
Total non-real estate 2,392 1,728 1,341 776 344
------ ------ ------ ------ ------
Total charge-offs 4,235 2,080 1,341 776 344

Recoveries:
Consumer finance 279 220 195 152 51
Commercial - - - 4 -
Mobile home - - 2 - -
Assets held for sale - - - 3
------ ------ ------ ------ ------
Total 279 220 197 156 54
------ ------ ------ ------ ------
Allowance at end of year $7,758 $9,789 $2,686 $2,217 $1,817
====== ====== ====== ====== ======

Allowance for loan losses to total
non-performing loans at end of year 753.2% 528.6% 196.8% 112.4% 235.4%
Allowance for loan losses to total loans
at end of year 1.10 1.68% .60% .52% .46%
Allowance for loan losses to net
chargeoffs for the year 196.11 470.63 234.79 357.58 626.55
Net charge offs for the year to average
loans .56 .36 .27 .16 .08

17

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

December 31
1999 1998 1997
------------------------------------------------------------------------------
Percent of Percent of Percent of
total loans total loans total loans
Amount by category Amount by category Amount by category
---------------------------------------------------------------------------
(Dollars in thousands)

Real estate mortgage loans $1,964 68.5% $1,654 69.3% $ 351 65.8%
Other:
Commercial business 2,317 19.3 1,760 12.0 828 6.6
loans
Mobile home loans - - 1,309 .5 361 5.7
Consumer and home
equity and
improvement loans 3,477 12.2 5,066 18.2 1,146 21.9
------ ---- ------ ---- ------- ----
$7,758 100.0% $9,789 100.0% $2,686 100.0%
====== ===== ====== ===== ====== =====

Sources of Funds

General. Deposits are the primary source of First Defiance's funds for
lending and other investment purposes. In addition to deposits, First Defiance
derives funds from loan principal repayments. Loan repayments are a relatively
stable source of funds, while deposit inflows and outflows are significantly
influenced by general interest rates and money market conditions. Borrowings
from the Federal Home Loan Bank may be used on a short-term basis to compensate
for reductions in the availability of funds from other sources. They may also be
used on a longer term basis for general business purposes. First Defiance also
utilizes other banks to fund a portion of its mortgage banking operation.

Deposits. First Defiance's deposits are attracted principally from
within First Federal's primary market area through the offering of a broad
selection of deposit instruments, including checking accounts, money market
accounts, regular savings accounts, and term certificate accounts. Included
among these deposit products are individual retirement account certificates of
approximately $51.5 million at December 31, l999. Also included in these amounts
are $60.1 million of brokered certificates obtained from national brokers to
supplement First Defiance's funding requirements. Deposit account terms vary,
with the principal differences being the minimum balance required, the time
periods the funds must remain on deposit and the interest rate.

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

Year ended December 31
1999 1998
------------------ -------------------
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----

Non interest DDAs $13,165 - % $ 2,547 - % $ 2,545 - %
Interest bearing DDAs 73,377 2.97 66,806 2.65 48,766 2.88
Savings deposits 53,247 1.65 56,135 1.95 63,028 2.58
Time deposits 333,115 5.06 283,766 5.44 268,235 5.58
-------- ---- -------- ---- -------- ----
Totals $472,904 4.21% $409,254 4.48% $382,574 4.70%
======== ==== ======== ==== ======== ====

18

The following table sets forth the maturities of First Defiance's
certificates of deposit having principal amounts of $100,000 or more at December
31, 1999.

(In thousands)
Certificates of deposit maturing in quarter ending:
March 31, 2000 $17,129
June 30, 2000 11,454
September 30, 2000 9,373
December 31, 2000 10,650
After December 31, 2000 12,643
-------
Total certificates of deposit with
balances of $100,000 or more $61,249
=======

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

1999 1998
------ ----
(In thousands)

Demand, NOW and money market accounts $ 92 $ 78
Savings Accounts 5 2
Certificates 1,242 645
------ ----
$1,339 $725
====== ====

For additional information regarding First Defiance's deposits see Note 9 to the
financial statements.

Borrowings. First Defiance may obtain advances from the FHLB of
Cincinnati upon the security of the common stock it owns in that bank and
certain of its residential mortgage loans, provided certain standards related to
creditworthiness have been met. Such advances are made pursuant to several
credit programs, each of which has its own interest rate and range of
maturities. Such advances are generally available to meet seasonal and other
withdrawals of deposit accounts and to permit increased lending. See "Regulation
- - Federal Regulation of Savings Associations - Federal Home Loan Bank System."

In addition, First Defiance has utilized funding from banks and other
sources. As of December 31, 1999, First Defiance has available a $160 million
revolving warehouse loan agreement with various banks secured by mortgage loans
held for sale with interest at the federal funds rate plus 60 to 125 basis
points, or the LIBOR index plus 100 basis points. This funding facility had
$47.0 million outstanding against it as of December 31, 1999 with a weighted
average rate of 6.64%.

19

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

December 31
1999 1998 1997
---- ---- ----
(Dollars in thousands)

Long-term:
FHLB advances $ 187,410 $ 98,497 $ 4,529
Weighted average interest rate 5.28% 4.93% 6.57%
Notes $ 6,461 $ 368
Weighted average interest rate 4.31% 6.26%

Short-term:
FHLB advances $ 78,000 $ 69,645 $ 67,136
Weighted average interest rate 5.00% 5.18% 5.85%
Mortgage Warehouse borrowings $ 47,043
Weighted average interest rate 6.64%

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

Year ended December 31
1999 1998 1997
------------------------------------
(Dollars in thousands)

Long-term:
Maximum balance - FHLB $187,410 $ 98,497 $ 5,601
Average balance - FHLB 107,319 21,829 4,529
Weighted average interest rate
of FHLB advances 4.83% 5.87% 6.19%

Maximum balance - Term $ 6,472 $ 40,283 --
Average balance - Term 4,449 25,879 --
Weighted average interest rate of term
borrowings 4.02% 6.50% --

Short-term:
Maximum balance - FHLB $136,250 $ 69,645 $ 70,135
Average balance - FHLB 88,247 49,462 53,039
Weighted average interest rate
of FHLB advances 5.29% 5.43% 5.77%

Maximum balance - Mortgage Warehouse $ 49,632 $147,165 $ --
Average balance - Mortgage Warehouse 25,272 61,789 --
Weighted average interest rate
of Mortgage Warehouse 6.47% 4.46% 5.77%

Maximum balance - Line of Credit Facility $ 7,000 $ -- $ --
Average balance - Line of Credit Facility 90 -- --
Weighted average interest rate of
of Line of Credit Facility 6.22% -- --

20

$1.1 million of First Defiance's outstanding long-term FHLB advances
were obtained in the first calendar quarter of 1992 as part of the Company's
asset and liability management strategy and $1.3 million were obtained in the
fourth quarter of 1995 as part of the FHLB's Affordable Housing Program. First
Defiance utilizes short-term advances from the FHLB to meet cash flow needs and
for short-term investment purposes. There were $78.0 and $69.6 million in
short-term advances outstanding at December 31, 1999 and 1998, respectively.
First Defiance borrows funds under a variety of programs at the FHLB. At
December 31, 1999, $78.0 million was outstanding under First Defiance's REPO
Advance line of credit. The total available under the REPO line is $175.0
million. Amounts are generally borrowed under the REPO line on an overnight
basis.

For additional information regarding First Defiance's FHLB Advances,
warehouse and term debt see Notes 10 and 11 to the financial statements.

Employees

First Defiance had 363 employees at December 31, 1999. None of these
employees are represented by a collective bargaining agent, and First Defiance
believes that it enjoys good relations with its personnel.

Competition

The industries in which the Company operates are highly competitive.
The Company competes for the acquisition of mortgage loan servicing rights and
bulk loan portfolios mainly with mortgage companies, savings associations,
commercial banks and other institutional investors. The Company believes that it
has competed successfully for the acquisition of mortgage loan servicing rights
and bulk loan portfolios by relying on the advantages provided by its unique
corporate structure and the secondary marketing expertise of the employees in
each Subsidiary.

Competition in originating mortgage loans arises mainly from other
mortgage companies and commercial banks. The distinction among market
participants is based primarily on price and, to a lesser extent, the quality of
customer service and name recognition. Aggressive pricing policies of the
Company's competitors, especially during a declining period of mortgage loan
originations, could in the future result in a decrease in the Company's mortgage
loan origination volume and/or a decrease in the profitability of the Company's
loan originations, thereby reducing the Company's revenues and net income. The
Company competes for loans by offering competitive interest rates and product
types and by seeking to provide a higher level of personal service to mortgage
brokers and borrowers than is furnished by competitors. First Federal does have
a significant market share of the lending markets in which it conducts
operations.

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

21

Regulation

General. First Defiance, First Federal and Leader, as an operating
subsidiary of First Federal, are subject to regulation, examination and
oversight by the OTS. Because First Federal's deposits are insured by the FDIC,
First Federal is also subject to examination and regulation by the FDIC. First
Defiance and First Federal must file periodic reports with the OTS and
examinations are conducted periodically by the OTS and the FDIC to determine
whether First Federal is in compliance with various regulatory requirements and
is operating in a safe and sound manner. First Federal is a member of the FHLB
of Cincinnati.

First Federal and Leader are subject to various consumer protection and
fair lending laws. These laws govern, among other things, truth-in-lending
disclosure, equal credit opportunity, and, in the case of First Federal, fair
credit reporting and community reinvestment. Failure to abide by federal laws
and regulations governing community reinvestment could limit the ability of
First Federal to open a new branch or engage in a merger transaction. Community
reinvestment regulations evaluate how well and to what extent First Federal
lends and invests in its designated service area, with particular emphasis on
low-to-moderate income communities and borrowers in such areas.

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

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

22

The following table sets forth the amount and percentage level of
regulatory capital of First Federal at December 31, 1999, and the amount by
which it exceeds the minimum capital requirements. Tangible and core capital are
reflected as a percentage of adjusted total assets. Total (or risk-based)
capital, which consists of core and supplementary capital, is reflected as a
percentage of risk-weighted assets. Assets are weighted at percentage levels
ranging from 0% to 100% depending on their relative risk.

At December 31, 1999
Amount Percent
--------- ----
(In thousands)

Tangible capital $ 51,641 5.41%
Requirement 14,312 1.50
--------- ----
Excess $ 37,329 3.91
========= ====

Core capital $ 51,641 5.41
Requirement 38,165 4.00
--------- ----
Excess $ 13,476 1.41
========= ====

Total capital $ 57,594 10.09%
Risk-based requirement 45,668 8.00
--------- ----
Excess $ 11,926 2.09
========= ====

The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. At each successively lower defined capital category, an
association is subject to more restrictive and numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility in
determining how to resolve the problems of the institution. In addition, the OTS
generally can downgrade an association's capital category, notwithstanding its
capital level, if, after notice and opportunity for hearing, the association is
deemed to be engaging in an unsafe or unsound practice because it has not
corrected deficiencies that resulted in it receiving a less than satisfactory
examination rating on matters other than capital or it is deemed to be in an
unsafe or unsound condition. An undercapitalized association must submit a
capital restoration plan to the OTS and is subject to increased monitoring and
growth restrictions. Critically undercapitalized institutions must be placed in
conservatorship or receivership within 90 days of reaching that capitalization
level, except under limited circumstances.

23

First Federal's capital at December 31, 1999, meets the standards for a
well-capitalized institution, although its risk-based capital is just slightly
over the threshold for well-capitalized status. Leader has had a significant
effect on First Federal's risk-based capital, due to the treatment under OTS
regulations of mortgage servicing rights, which comprise a majority of Leaders'
assets. For risk-based capital calculations, OTS regulations limit the amount of
mortgage servicing rights that generally can be included in risk-based capital
to the lesser of (i) the amount of First Federal's core capital, or (ii) 90% of
the fair value of the servicing assets. As Leader's mortgage servicing portfolio
has grown at a faster rate than First Federal's core capital, First Federal's
risk-based capital level has been adversely affected. First Federal is pursuing
ways to permit Leader to continue to grow without jeopardizing First Federal's
qualification as a well-capitalized institution, but no assurance can be given
that First Federal will retain its well-capitalized classification. If First
Federal does not remain well-capitalized, its use of brokered deposits could be
adversely affected. Federal law requires that an institution which is adequately
capitalized must obtain FDIC approval to utilize brokered deposits. First
Federal has used brokered deposits to fund certain aspects of Leader's mortgage
banking activities.

The OTS has adopted an interest rate risk component to the risk-based
capital requirement. Pursuant to that requirement, a savings association must
measure the effect of an immediate 200 basis point change in interest rates on
the value of its portfolio, as determined under the methodology established by
the OTS. If the measured interest rate risk is above the level deemed normal
under the regulation, the association will be required to deduct one-half of
that excess exposure from its total capital when determining its level of
risk-based capital. (See Asset/Liability Management Section of Management's
Discussion and Analysis).

Federal law prohibits an insured institution from making a capital
distribution to anyone or paying management fees to any person having control of
the association if, after such distribution or payment, the association would be
undercapitalized. In addition, each company controlling an undercapitalized
association must guarantee that the association will comply with its capital
plan until the association has been adequately capitalized on an average during
each of four preceding calendar quarters and must provide adequate assurances of
performance. The aggregate liability pursuant to such guarantee is limited to
the lesser of (a) an amount equal to 5% of the association's total assets at the
time the institution became undercapitalized or (b) the amount that is necessary
to bring the association into compliance with all capital standards applicable
to such association at the time the association fails to comply with its capital
restoration plan.

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

24

An application must be submitted and approval from the OTS must be
obtained by a subsidiary of a savings and loan holding company (i) if the
proposed distribution would cause total distributions for the calendar year to
exceed net income for that year to date plus the savings association's retained
net income for that year to date plus the retained net income for the preceding
two years; (ii) if the savings association will not be at least adequately
capitalized following the capital distribution; (iii) if the proposed
distribution would violate a prohibition contained in any applicable statute,
regulation or agreement between the savings association and the OTS (or the
FDIC), or a condition imposed on the savings association in an OTS-approved
application or notice. If a savings association subsidiary of a holding company
is not required to file an application, it must file a notice of the proposed
capital distribution with the OTS. First Federal did not pay any dividends to
First Defiance during 1999.

Liquidity. OTS regulations require that each savings association
maintain an average daily balance of liquid assets (such as cash, certain time
deposits, bankers' acceptances and specified United States Government, state or
federal agency obligations) of not less than 4% of its net withdrawable savings
deposits plus borrowings payable in one year or less computed as of the end of
the prior quarter or based on the average daily balance during the prior
quarter. Monetary penalties may be imposed upon associations failing to meet
liquidity requirements. The eligible liquidity of First Federal, as computed
under current regulations, at December 31, 1999, was $30.6 million, or 6.07% and
exceeded the 4.0% liquidity requirement by approximately $10.5 million.

Qualified Thrift Lender Test. Savings associations must meet one of two
tests in order to be a qualified thrift lender ("QTL"). The first test requires
a savings association to maintain a specified level of investments in assets
that are designated as qualifying thrift investments ("QTIs"). Generally, QTIs
are assets related to domestic residential real estate and manufactured housing,
although they also include credit card, student and small business loans and
stock issued by any FHLB, the FHLMC or the FNMA. Under the QTL test, 65% of an
institution's "portfolio assets" (total assets less goodwill and other
intangibles, property used to conduct business and 20% of liquid assets) must
consist of QTI on a monthly average basis in nine out of every 12 months. The
second test permits a savings association to qualify as a QTL by meeting the
definition of "domestic building and loan association" under the Internal
Revenue Code of 1986, as amended (the "Code"). In order for an institution to
meet the definition of a "domestic building and loan association" under the
Code, at least 60% of its assets must consist of specified types of property,
including cash, loans secured by residential real estate or deposits,
educational loans and certain governmental obligations. The OTS may grant
exceptions to the QTL tests under certain circumstances. If a savings
association fails to meet either one of the QTL tests, the association and its
holding company become subject to certain operating and regulatory restrictions
and the savings association will not be eligible for new FHLB advances. At
December 31, 1999, First Federal met the QTL Test.

25

Lending Limits. OTS regulations generally limit the aggregate amount
that a savings association may lend to one borrower (the "Lending Limit") to an
amount equal to 15% of the savings association's total capital under the
regulatory capital requirements plus any additional loan reserve not included in
total capital (the "Lending Limit Capital"). A savings association may loan to
one borrower an additional amount not to exceed 10% of total capital plus
additional reserves if the additional loan amount is fully secured by certain
forms of "readily marketable collateral." Real estate is not considered "readily
marketable collateral." Certain types of loans are not subject to these limits.
In applying these limits, loans to certain borrowers may be aggregated.
Notwithstanding the specified limits, an association may lend to one borrower up
to $500,000 "for any purpose." At December 31, 1999, First Federal was in
compliance with this lending limit.

Transactions with Insiders and Affiliates. Loans to executive officers,
directors and principal shareholders and their related interests must conform to
the Lending Limit, and the total of such loans cannot exceed the association's
Lending Limit Capital. Most loans to directors, executive officers and principal
shareholders must be approved in advance by a majority of the "disinterested"
members of board of directors of the association with any "interested" director
not participating. All loans to directors, executive officers and principal
shareholders must be made on terms substantially the same as offered in
comparable transactions with the general public or as offered to all employees
in a company-wide benefit program. Loans to executive officers are subject to
additional restrictions. First Federal was in compliance with such restrictions
at December 31, 1999.

All transactions between savings associations and their affiliates must
comport with Sections 23A and 23B of the Federal Reserve Act ("FRA"). An
affiliate of a savings association is any company or entity that controls, is
controlled by or is under common control with the savings association. First
Defiance is an affiliate of First Federal. Generally, Sections 23A and 23B of
the FRA (i) limit the extent to which a savings association or its subsidiaries
may engage in "covered transactions" with any one affiliate to an amount equal
to 10% of such institution's capital stock and surplus, (ii) limit the aggregate
of all such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus, and (iii) require that all such transactions be on
terms substantially the same, or at least as favorable to the association, as
those provided in transactions with a non-affiliate. The term "covered
transaction" includes the making of loans, purchase of assets, issuance of a
guarantee and other similar types of transactions. In addition to the limits in
Sections 23A and 23B, a savings association may not make any loan or other
extension of credit to an affiliate unless the affiliate is engaged only in
activities permissible for a bank holding company and may not purchase or invest
in securities of any affiliate except shares of a subsidiary. First Federal was
in compliance with these requirements and restrictions at December 31, 1999.

Federal Deposit Insurance Corporation Regulations. The FDIC has
examination authority over all insured depository institutions, including First
Federal, and has authority to initiate enforcement actions if the FDIC does not
believe the OTS has taken appropriate action to safeguard safety and soundness
and the deposit insurance fund.

26

The FDIC administers two separate insurance funds, the Bank Insurance
Fund ("BIF") for commercial banks and state savings banks and the SAIF for
savings associations. The FDIC is required to maintain designated levels of
reserves in each fund. The FDIC may increase assessment rates for either fund if
necessary to restore the fund's ratio of reserves to insured deposits to its
target level within a reasonable time and may decrease such rates if such target
level has been met. The FDIC has established a risk-based assessment system for
both SAIF and BIF members. Under this system, assessments vary based on the risk
the institution poses to its deposit insurance fund. The risk level is
determined based on the institution's capital level and the FDIC's level of
supervisory concern about the institution.

FRB Reserve Requirements. FRB regulations currently require that
reserves of 3% of net transaction accounts (primarily NOW accounts) up to $44.3
million (subject to an exemption of up to $5.0 million), and of 10% of net
transaction accounts in excess of $44.3 million. At December 31, 1999, First
Federal was in compliance with its reserve requirements.

Federal Home Loan Banks. The FHLBs provide credit to their members in
the form of advances. First Federal is a member of the FHLB of Cincinnati and
must maintain an investment in the capital stock of that FHLB in an amount equal
to the greater of 1.0% of the aggregate outstanding principal amount of First
Federal's residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 5% of its advances from the FHLB.
First Federal is in compliance with this requirement with an investment in stock
of the FHLB of Cincinnati of $14.2 million at December 31, 1999.

Upon the origination or renewal of a loan or advance, the FHLB of
Cincinnati is required by law to obtain and maintain a security interest in
collateral in one or more of the following categories: fully disbursed, whole
first mortgage loans on improved residential property or securities representing
a whole interest in such loans; securities issued, insured or guaranteed by the
United States government or an agency thereof; deposits in any FHLB; or other
real estate related collateral (up to 30% of the member association's capital)
acceptable to the applicable FHLB, if such collateral has a readily
ascertainable value and the FHLB can perfect its security interest in the
collateral.

Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's performance
under the Community Reinvestment Act and its record of lending to first-time
home buyers. All long-term advances by each FHLB must be made only to provide
funds for residential housing finance.

Holding Company Regulation. First Defiance is a unitary savings and
loan holding company and is subject to OTS regulations, examination, supervision
and reporting requirements.

27

There are generally no restrictions on the activities of unitary
savings and loan holding companies. The broad latitude to engage in activities
under current law can be restricted if the OTS determines that there is
reasonable cause to believe that the continuation of an activity by a savings
and loan holding company constitutes a serious risk to the financial safety,
soundness or stability of its subsidiary savings association. The OTS may impose
such restrictions as deemed necessary to address such risk, including limiting
(i) payment of dividends by the savings association, (ii) transactions between
the savings association and its affiliates, and (iii) any activities of the
savings association that might create a serious risk that the liabilities of the
holding company and its affiliates may be imposed on the savings association.
Notwithstanding the foregoing rules as to permissible business activities of a
unitary savings and loan holding company, if the savings association subsidiary
of a holding company fails to meet the QTL Test, then its unitary holding
company would become subject to the activities restrictions applicable to
multiple holding companies. At December 31, 1999, First Federal met the QTL
Test.

Federal law generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company,
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof, which
is not a subsidiary. If First Defiance were to acquire control of another
savings institution, other than through a merger or other business combination
with First Federal, First Defiance would become a multiple savings and loan
holding company and its activities would thereafter be limited generally to
those activities authorized by the FRB as permissible for bank holding
companies.

On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was
enacted into law. The GLB Act repealed prior laws which had generally prevented
banks from affiliating with securities and insurance firms and made other
significant changes in the financial services in which various types of
financial institutions may engage. The GLB authorizes a new "financial holding
company," which can own banks and thrifts and which are also permitted to engage
in a variety of financial activities, including insurance and securities
underwriting and agency activities, as long as the depository institutions it
owns are well capitalized, well managed and meet certain other tests.

Prior to the GLB Act, unitary savings and loan holding companies which
met certain requirements were the only financial institution holding companies
that were permitted to engage in any type of business activity, whether or not
the activity was a financial service. The GLB Act continues those broad powers
for unitary thrift holding companies in existence on May 4, 1999, including
First Defiance. Any thrift holding company newly formed after May 4, 1999, or
any existing unitary thrift holding company acquired after that date by a
company which is not a "financial holding company" or an eligible unitary thrift
holding company, however, will be subject to the same restrictions as a multiple
thrift holding company, which generally is limited to activities that are
considered incidental to banking.

The GLB Act is not expected to have a material effect on the activities
in which First Defiance and First Federal currently engage, except to the extent
that competition from other types of financial institutions may increase as they
engage in activities not permitted prior to enactment of the GLB Act.

28

TAXATION

Federal Taxation

The Company and its subsidiaries are each subject to the federal tax
laws and regulations which apply to corporations generally. Certain thrift
institutions, including First Federal, were prior to the enactment of the Small
Business Jobs Protection Act, which was signed into law on August 21, 1996,
allowed deductions for bad debts under methods more favorable than those granted
to other taxpayers. Qualified thrift institutions could compute deductions for
bad debts using either the specific charge off method of Section 166 of the
Code, or the reserve method of Section 593 of the Code under which a thrift
institution annually could elect to deduct bad debts under either (i) the
"percentage of taxable income" method applicable only to thrift institutions, or
(ii) the "experience" method that also was available to small banks. Under the
"percentage of taxable income" method, a thrift institution generally was
allowed a deduction for an addition to its bad debt reserve equal to 8% of its
taxable income (determined without regard to this deduction and with additional
adjustments). Under the experience method, a thrift institution was generally
allowed a deduction for an addition to its bad debt reserve equal to the greater
of (i) an amount based on its actual average experience for losses in the
current and five preceding taxable years, or (ii) an amount necessary to restore
the reserve to its balance as of the close of the base year. A thrift
institution could elect annually to compute its allowable addition to bad debt
reserves for qualifying loans either under the experience method or the
percentage of taxable income method. For tax year 1995, First Federal used the
percentage of taxable income method.

Section 1616(a) of the Small Business Job Protection Act repealed the
Section 593 reserve method of accounting for bad debts by thrift institutions,
effective for taxable years beginning after 1995. Thrift institutions that would
be treated as small banks are allowed to utilize the experience method
applicable to such institutions, while thrift institutions that are treated as
large banks are required to use only the specific charge off method. For
purposes of this method, First Federal was treated as a large bank. The
percentage of taxable income method of accounting for bad debts is no longer
available for any financial institution.

A thrift institution required to change its method of computing
reserves for bad debt treated such change as a change in the method of
accounting, initiated by the taxpayer, and having been made with the consent of
the Secretary of the Treasury. Any adjustment under Section 481(a) of the Code
required to be recaptured with respect to such change generally will be
determined solely with respect to the "applicable excess reserves" of the
taxpayer. The amount of the applicable excess reserves being taken into account
ratably over a six-taxable year period, beginning with the first taxable year
beginning after 1995. Because First Federal met the defined residential loan
requirement, it was able to suspend the recapture of the excess reserves until
1998. In the case of a thrift institution that becomes a large bank, the amount
of the institution's applicable excess reserves generally is the excess of (i)
the balances of its reserve for losses on qualifying real property loans
(generally loans secured by improved real estate) and its reserve for losses on
nonqualifying loans (all other types of loans) as of the close of its last
taxable year beginning before January 1, 1996, over (ii) the balances of such
reserves as of the close of its last taxable year beginning before January 1,
1988 (i.e., the "pre-

29

1988 reserves"). In the case of a thrift institution that becomes a small bank,
the amount of the institution's applicable excess reserves generally is the
excess of (i) the balances of its reserve for losses on qualifying real property
loans and its reserve for losses on nonqualifying loans as of the close of its
last taxable year beginning before January 1, 1996, over (ii) the greater of the
balance of (a) its pre-1988 reserves or (b) what the thrift's reserves would
have been at the close of its last year beginning before January 1, 1996, had
the thrift always used the experience method.

In addition to the regular income tax, the Company and its subsidiaries
are subject to a minimum tax. An alternative minimum tax is imposed at a minimum
tax rate of 20% on "alternative minimum taxable income" (which is the sum of a
corporation's regular taxable income, with certain adjustments, and tax
preference items), less any available exemption. Such tax preference items
include interest on certain tax-exempt bonds issued after August 7, 1986. In
addition, 75% of the amount by which a corporation's "adjusted current earnings"
exceeds its alternative minimum taxable income computed without regard to this
preference item and prior to reduction by net operating losses, is included in
alternative minimum taxable income. Net operating losses can offset no more than
90% of alternative minimum taxable income. The alternative minimum tax is
imposed to the extent it exceeds the corporation's regular income tax. Payments
of alternative minimum tax may be used as credits against regular tax
liabilities in future years.

The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e) as modified by the Small Business Job Protection Act which
requires recapture in the case of certain excessive distributions to
shareholders. The pre-1988 reserves may not be utilized for payment of cash
dividends or other distributions to a shareholder (including distributions in
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). Distribution of a cash dividend by a thrift institution to a
shareholder is treated as made: first, out of the institution's post-1951
accumulated earnings and profits; second, out of the pre-1988 reserves; and
third, out of such other accounts as may be proper. To the extent a distribution
by First Federal to the Company is deemed paid out of its pre-1988 reserves
under these rules, the pre-1988 reserves would be reduced and First Federal's
gross income for tax purposes would be increased by the amount which, when
reduced by the income tax, if any, attributable to the inclusion of such amount
in its gross income, equals the amount deemed paid out of the pre-1988 reserves.
As of December 31, 1999, First Federal's pre-1988 reserves for tax purposes
totaled approximately $9.52 million.

The tax returns of First Federal have been audited or closed without
audit through the tax year ended December 31, 1995. The tax returns for The
Leader have been closed through their tax year ended September 30, 1995. In the
opinion of management, any examination of open returns would not result in a
deficiency which would have a material adverse effect on the financial condition
of First Defiance.

Ohio Taxation

The Company is subject to the Ohio corporation franchise tax, which, as
applied to the Company, is a tax measured by both net earnings and net worth.
The rate of tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio
taxable income and 8.5% of computed Ohio taxable income in excess of $50,000 or
(ii) 0.4% times taxable net worth.

30

In computing its tax under the net worth method, the Company may
exclude 100% of its investment in the capital stock of First Federal after the
Conversion, as reflected on the balance sheet of the Company, in computing its
taxable net worth as long as it owns at least 25% of the issued and outstanding
capital stock of First Federal. The calculation of the exclusion from net worth
is based on the ratio of the excludable investment (net of any appreciation or
goodwill included in such investment) to total assets multiplied by the net
value of the stock. As a holding company, the Company may be entitled to various
other deductions in computing taxable net worth that are not generally available
to operating companies. Effective for the 1999 tax year, a corporation that
qualifies as a "qualifying holding company" is exempt from tax on the net worth
basis. To be considered a qualifying holding company, a corporation must satisfy
certain criteria and must make an annual election to be treated as a qualified
holding company for tax purposes. Generally, to qualify as a qualifying holding
company, a large portion of a corporation's assets and income must be
attributable to holdings in other corporations or business organizations.

A special litter tax is also applicable to all corporations, including
the Company, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.

First Federal is a "financial institution" for State of Ohio tax
purposes. As such, it is subject to the Ohio corporate franchise tax on
"financial institutions," which is imposed annually at a rate of 1.5% of First
Federal's book net worth determined in accordance with GAAP. Effective for the
1999 tax year, the tax rate is 1.4% of book net worth. As a "financial
institution," First Federal is not subject to any tax based upon net income or
net profits imposed by the State of Ohio. On December 31, 1998, The Leader was
converted to a single-member limited liability company. As such, its operations
are not subject to state taxation as a separate entity.

Item 2. Properties

At December 31, 1999, First Federal conducted its business from its
main office at 601 Clinton Street, Defiance, Ohio, and thirteen other full
service branches in northwestern Ohio. At December 31, 1999, The Leader
conducted its business from leased office space at 1015 Euclid Avenue,
Cleveland, Ohio. First Insurance conducted its business from office space at 507
5th Street, Defiance, Ohio.

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

31

The following table sets forth certain information with respect to the
office and other properties of the Company at December 31, l999. See Note 8 to
the Consolidated Financial Statements.

Net book value
Description/address Leased/owned of property Deposits
- -----------------------------------------------------------------------------
(Dollars in thousands)
Main Office
601 Clinton Street Owned $ 5,853 $227,762
Defiance, OH

Branch Offices
204 E. High Street Owned 1,178 80,140
Bryan, OH

211 S. Fulton Street Owned 828 41,449
Wauseon, OH

625 Scott Street Owned 1,681 63,568
Napoleon, OH

1050 East Main Street Owned 627 17,801
Montpelier, OH

926 East High Street Owned 118 7,500
Bryan, OH

1333 Woodlawn Owned 82 15,389
Napoleon, OH

825 N. Clinton Street Owned 410 8,845
Defiance, OH

Inside Super K-Mart Leased 130 4,314
190 Stadium Dr.
Defiance, OH

905 N. Williams St. Owned 1,149 12,990
Paulding, OH

201 E. High St. Owned 616 7,088
Hicksville, OH

3900 N. Main St. Owned 1,509 15,444
Findlay, OH

11694 N. Countyline St. Leased - 679
Fostoria, OH

Main Office, The Leader
1015 Euclid Avenue Leased 221 N/A
Cleveland, OH

First Insurance & Investments
507 5th Street Owned 302 N/A
Defiance, OH

1401 South Jefferson Owned 252 N/A
Defiance, OH
------- --------
$14,654 $502,969
======= ========

32

Item 3. Legal Proceedings

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

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

No matters were submitted to a vote of securities holders during the
fourth quarter of l999.

PART II

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters

The Company's common stock trades on the Nasdaq Stock market under the
symbol "FDEF." As of March 6, 2000, the Company had 1,811 shareholders of
record. The table below shows the reported high and low sales prices of the
common stock and cash dividends declared per share of common stock during the
periods indicated in fiscal 1999 and 1998.

December 31, 1999 December 31, 1998
High Low Dividend High Low Dividend
-------------------------------------- ----------------------------------

Quarter Ended:
March 31 $14.50 $10.125 $.10 $15.875 $14.625 $.09
June 30 12.125 10.25 .10 15.875 14.00 .09
September 31 12.3125 10.00 .10 14.625 11.50 .09
December 31 11.8125 9.875 .11 15.00 11.00 .10

For information regarding restrictions on the payment of dividends, see
"Item 1. Business - Regulation - Limitations on Capital Distributions" in this
report.

33

Item 6. Selected Financial Data

The following table sets forth certain summary consolidated financial
data at or for the periods indicated. This information should be read in
conjunction with the Consolidated Financial Statements and notes thereto
included herein. See "Item 8. Financial Statements and Supplementary Data."

At or For Year Ended December 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ----------- ----------- ----------- ------------
(In Thousands, except per share data)

Selected Consolidated Financial Data:
Total assets $987,994 $785,399 $579,698 $543,411 $525,550
Loans held-to maturity, net 465,321 448,574 441,824 415,366 381,444
Loans held-for-sale 237,622 119,910 88 559 3,759
Allowance for loan losses 7,758 9,789 2,686 2,217 1,817
Non-performing assets 3,587 3,369 1,906 2,239 945
Securities available-for-sale 53,946 47,554 82,436 77,407 93,041
Trading securities 29,805 - - - -
Securities held-to-maturity 9,895 13,541 20,953 25,937 26,073
Mortgage servicing rights 97,519 76,452 188 121 -
Deposits and borrowers' escrow balances 564,511 511,313 395,983 383,139 382,414
FHLB advances 265,410 168,142 71,665 40,821 6,842
Stockholders' equity 89,416 93,710 106,884 116,565 133,506

Selected Consolidated Operating Results:
Total interest income $53,379 $49,056 $43,858 $41,257 $38,565
Total interest expense 31,582 26,946 21,387 19,459 20,289
Net interest income 21,797 22,110 22,471 21,798 18,276
Provision for loan losses 1,925 7,769 1,613 1,020 374
Non-interest income 40,794 17,528 1,627 1,328 1,035
Non-interest expense 1 47,414 26,940 14,093 15,958 10,560
Income before income taxes 13,252 4,929 8,392 6,148 8,377
Income taxes 4,629 1,818 2,985 1,997 2,856
Net income 8,623 3,111 5,407 4,151 5,521
Basic earnings per share 1,2, 1.33 0.42 0.65 0.43 0.54
Diluted earnings per share 1,2 1.29 0.40 0.62 0.42 0.53

Selected Financial Ratios and Other Data
Performance Ratios:
Return on average assets 1 0.99% 0.45% 0.96% 0.78% 1.13%
Return on average equity 1 9.52% 2.99% 4.69% 3.26% 6.14%
Interest rate spread 3 2.93% 3.25% 3.39% 3.22% 3.01%
Net interest margin 3 3.12% 3.62% 4.24% 4.31% 3.87%
Ratio of operating expense to
average total assets 1 5.44% 3.85% 2.51% 3.02% 2.16%

(footnotes on next page)

34

At or For Year Ended December 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands, except per share data)

Selected Financial Ratios and Other Data (continued):
Quality Ratios:
Non-performing assets to total assets
at end of period 4 0.36% 0.43% 0.33% 0.41% 0.24%
Allowance for loan losses to
non-performing assets 4 216.28% 209.56% 140.92% 99.02% 192.28%
Allowance for loan losses to total
loans receivable 1.09% 1.69% 0.60% 0.52% 0.47%

Capital Ratios:
Equity to total assets at end of period 9.05% 11.93% 18.44% 21.45% 25.40%
Tangible equity to tangible assets
at end of period 7.68% 10.41% 18.44% 21.45% 25.40%
Average equity to average assets 10.48% 14.86% 20.55% 24.07% 18.36%
Book value per share $13.12 $12.37 $12.53 $12.31 $12.16
Tangible book value per share $10.97 $10.61 $12.53 $12.31 $12.16
Ratio of average interest-earning assets
to average interest-bearing liabilities 104.52% 108.43% 121.45% 128.53% 120.41%

Cash Earnings:
Cash earnings 1 $9,382 $3,393 $5,407 $4,151 $5,521
Basic cash earnings per share 1 1.44 0.45 0.65 0.43 0.54
Diluted cash earnings per share 1 1.40 0.43 0.62 0.42 0.53
Cash return on average assets 1 1.09% 0.49% 0.96% 0.78% 1.13%
Cash return on average equity 1 11.99% 3.44% 4.69% 3.26% 6.14%
Ratio of cash operating expense to
average total tangible assets 1 15.43% 3.84% 2.51% 3.02% 2.16%

Stock Price and Dividend Information:
High $14.50 $15.875 $16.25 $12.50 $10.75
Low 9.875 11.00 11.75 9.875 5.75
Close 10.50 14.25 16.00 12.375 10.125
Cash dividend declared per share 0.41 0.37 0.33 0.29 0.28
Dividend payout ratio 5 30.83% 88.10% 50.77% 48.33% 51.85%

1. Non-interest expense for 1996 includes a one-time charge of $2.461 million
to recapitalize the Savings Association Insurance Fund (SAIF). Without the
SAIF charge, net income for 1996 would have been $5.775 million, or $.60
basic earnings per share ($.59 on a diluted basis), return on average
assets would have been 1.09%, return on equity would have been 4.54% and
the ratio of operating expense to total assets would have been 2.55%.
2. Earnings per share for 1995-1996 have been restated for FASB statement 128
3. Interest rate spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average rate on
interest-bearing liabilities. Net interest margin represents net interest
income as a percentage of average interest-earning assets.
4. Non-performing assets consist of non-accrual loans that are contractually
past due 90 days or more; loans that are deemed impaired under the criteria
of FASB Statement No. 114; and real estate, mobile homes and other assets
acquired by foreclosure or deed-in-lieu thereof.
5. Dividend payout ratio was calculated using basic earnings per share.

35

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

First Defiance is a unitary thrift holding company which conducts
business through its subsidiaries, First Federal, The Leader and First
Insurance.

First Federal is a federally chartered savings bank that provides
financial services to communities based in northwest Ohio where it operates 13
full-service branches, including a branch in Fostoria Ohio that opened in
November 1999. First Federal provides a broad range of financial services
including checking accounts, savings accounts, certificates of deposit,
individual retirement accounts, real estate mortgage loans, commercial loans,
consumer loans, home equity loans, and trust services.

The Leader is a mortgage banking company that specializes in servicing
loans originated under first-time homebuyer programs. Under these programs,
first-time homebuyers are able to obtain loans at rates generally below market
at the time of closing. The funds for the loans are available as a result of
bond issues through various state and local governmental units. The Leader, as
master servicer under the bond programs, purchases the loans from the
originator, principally other financial institutions or mortgage brokers. Once
purchased by The Leader, the loans under the specific bond programs are packaged
and GNMA securities are issued to the bond trustees under the programs. As of
December 31, 1999, The Leader services approximately 95,000 loans with a total
balance of $6.0 billion (including subservicing, 99,000 loans with a balance of
$6.3 billion). Of these loans, 79,000 are bond program loans with balances of
$5.0 billion. Because the loans under the first-time homebuyer programs are
issued at below market rates, they generally have significantly lower
pre-payments than conventional mortgage loans. The Leader also collects a
significant amount of ancillary fees, including late charges and credit life
insurance commissions.

First Insurance sells a variety of property and casualty, group health
and life insurance products and investment and annuity products. Because the
First Insurance acquisition occurred at the end of December 1998, only the
results of operations for the fiscal year ended December 31, 1999 are impacted
by this transaction.

Financial Condition

Total assets at December 31, 1999 were $988.0 million, an increase of
25.8% from December 31, 1998's total of $785.4 million. The July 1, 1998
acquisition of The Leader has continued to significantly impact the statement of
condition of First Defiance. As a result of increased production at The Leader,
loans held for sale and mortgage servicing rights increased from $119.9 million
and $76.5 million, respectively, as of December 31, 1998 to $237.6 million and
$97.5 million, respectively, at December 31, 1999. In addition, loans held for
sale which have been securitized in the normal course of The Leader's operations
have been included as trading securities in the investment portfolio. These
securities amounted to $29.8 million as of December 31, 1999 and there were no
such securities at December 31, 1998. Additionally, the balance of the Leader's

36

customer's principal and interest payments along with tax and insurance escrow
balances decreased from $76.7 million at December 31, 1998 to $61.0 million at
December 31, 1999. This decrease resulted from a decrease in refinancing
activities at the end of 1999 compared to 1998, which results in lower balances
held in The Leader's customer's principal and interest escrow accounts.

Leader's increased activity and the decrease in escrow balances were
funded primarily through Federal Home Loan Bank ("FHLB") debt, national
certificates of deposit, and other bank borrowings. FHLB debt grew $97.3 million
for the year, from $168.1 million as of December 31, 1998 to $265.4 million at
December 31, 1999. Brokered certificates of deposit increased from $9.4 million
at December 31, 1998 to $60.1 million as of December 31, 1999. Warehouse and
term notes payable increased from $368,000 to $53.5 million at December 31, 1998
and 1999, respectively.

Excluding The Leader's operations, loans receivable increased $16.6
million, from $448.6 million at December 31, 1998 to $465.3 million as of
December 31, 1999. This increase was the result of increases in the commercial
and home equity portfolios, partially offset by decreases in the mortgage and
consumer portfolios. Commercial loans increased $68.0 million, from $70.1
million at December 31, 1998 to $138.1 million as of December 31, 1999. Home
equity and improvement loans increased from $18.2 million to $22.8 million as of
December 31, 1998 and 1999, respectively. Mortgage loans decreased from $283.7
million as of December 31, 1998 to $251.9 million at December 31, 1999.
Additionally, consumer loans decreased $22.9 million, from $87.2 million to
$64.3 million as of December 31, 1998 and 1999, respectively. Management
believes that the Company will continue to achieve increases in the commercial
loan portfolio due to an increased emphasis on this type of lending. The 26%
year over year decrease in the consumer portfolio was anticipated by the Company
as a result of stricter underwriting standards that were implemented as a result
of credit quality issues noted in December of 1998. The decrease in the mortgage
portfolio resulted from decreased mortgage loan production compared to 1998
regular pay-downs of the existing portfolio and sales of all qualifying fixed
rate production into the secondary market.

Investment securities, which include available for sale, trading, and
held to maturity securities, increased by $32.5 million to $93.6 million from
$61.1 million. As discussed above, the increase was primarily the result of the
addition of $29.8 million in trading securities related to the securitization of
certain available for sale mortgage loans.

First Defiance had growth in deposits for the year of $69.0 million, to
$503.0 million at December 31, 1999 from $434.0 million at December 31, 1998.
The most significant growth was in certificates of deposit, which increased from
$291.7 million at December 31, 1998 to $355.0 million at December 31, 1999. The
majority of the growth in certificates of deposits resulted from the growth in
national or brokered certificates. In addition, money market demand accounts
increased to $46.7 million at December 31, 1999 from $33.9 million at December
31, 1998. Savings and checking accounts decreased from $54.6 million and $53.8
million, respectively, at December 31, 1998 to $49.2 million and $52.0 million,
respectively, at December 31, 1999.

37

Average Balances, Interest Rates and Yields

The following table presents for the periods indicated the total dollar amounts
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 dollars and rates, and the net interest margin. Dividends received on
Federal Home Loan Bank stock are included as interest income. The table does not
reflect the effect of income taxes.

Year Ended December 31,
-------------------------------------------------------------------------------------
1999 1998
------------------------------------------ -----------------------------------------
Average Yield/ Average Yield/
Balance Interest Rate (1) Balance Interest Rate
------------- ------------- -------------- ------------- ------------- -------------
(Dollars in thousands)

Interest-Earning Assets
Loans receivable $657,009 $ 49,927 7.60% $521,968 $ 43,369 8.31%
Securities 56,668 3,452 6.09 81,320 5,082 6.25
Interest bearing deposits -- -- -- 12,259 605 4.94
Dividends on FHLB stock 12,157 861 7.08 4,669 334 7.15
-------- -------- ---- -------- -------- ----
Total interest-earning assets 725,834 54,240 7.47 620,216 49,390 7.96
Non-interest-earning assets 145,667 78,706
-------- -------
Total assets $871,501 $698,922
-======== ========

Interest-Bearing Liabilities
Deposits $472,904 $ 19,889 4.21 $409,254 18,340 4.48
FHLB advances 195,566 9,872 5.05 75,062 4,171 5.56
Warehouse and term notes payable 29,721 1,821 6.13 87,668 4,435 5.06
-------- -------- ---- -------- -------- ----
Total interest-bearing liabilities 698,191 31,582 4.52 571,984 26,946 4.71
Non-interest-bearing liabilities 82,691 23,046
-------- --------
Total liabilities 780,882 595,030
Stockholders' equity 90,619 103,892
-------- --------
Total liabilities and stockholders' equity $871,501 $698,922
======== ========
Net interest income; interest rate spread $ 22,658 2.95% $ 22,444 3.25%
======== ==== ======== ====
Net interest margin (2) 3.12% 3.62%
==== ====
Average interest-earning assets to average
interest-bearing liabilities 104% 108%
===== ====

-----------------------------------------
1997
-----------------------------------------
Average Yield/
Balance Interest Rate
------------- ------------- -------------

Interest-Earning Assets
Loans receivable $428,550 $37,302 8.70%
Securities 103,304 6,556 6.35
Interest bearing deposits - - -
Dividends on FHLB stock 3,355 242 7.21
-------- ------- ----
Total interest-earning assets 535,209 44,100 8.24
Non-interest-earning assets 25,500
--------
Total assets $560,709
========

Interest-Bearing Liabilities
Deposits $382,574 17,992 4.70
FHLB advances 58,100 3,394 5.84
Warehouse and term notes payable - - -
-------- ------- ----
Total interest-bearing liabilities 440,674 21,386 4.85
Non-interest-bearing liabilities 4,804
--------
Total liabilities 445,478
Stockholders' equity 115,231
--------
Total liabilities and stockholders' equity $560,709
========
Net interest income; interest rate spread $22,714 3.39%
======= ====
Net interest margin (2) 4.24%
====

Average interest-earning assets to average
interest-bearing liabilities 121%
===

(1) At December 31, 1999, the yields earned and rates paid were as follows:
loans receivable, 7.69%; securities, 6.40%; other interest-earning assets,
7.00%; total interest-earning assets, 7.54%; deposits, 4.37%; FHLB
advances, 5.17%; warehouse and term notes payable 6.29% total
interest-bearing liabilities, 4.65%; and interest rate spread 2.89%.

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

38

Rate/Volume Analysis

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

Year Ended December 31,
----------------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
----------------------------------------------------------------------------------------
Increase Increase Increase Increase
(decrease) (decrease) Total (decrease) (decrease) Total
due to due to increase due to due to increase
rate volume (decrease) rate volume (decrease)
----------------------------------------------------------------------------------------
(In thousands)

Interest-Earning Assets
Loans $ (4,662) $ 11,220 $ 6,558 $(2,064) $ 8,131 $ 6,067
Securities (89) (1,541) (1,630) (79) (1,395) (1,474)
Interest bearing deposits - (605) (605) - 605 605
FHLB stock (9) 536 527 (3) 95 92
-------- -------- -------- ------- ------- -------
Total interest-earning assets $ (4,760) $ (9,610) $ 4,850 $(2,146) $ 7,436 $ 5,290
======== ======== ======== ======= ======= =======

Interest-Bearing Liabilities
Deposits $ (1,303) $ 2,852 $ 1,549 $ (907) $ 1,255 $ 348
FHLB advances (995) 6,696 5,701 (214) 991 777
Warehouse and term notes payable 317 (2,931) (2,614) - 4,435 4,435
-------- -------- -------- ------- ------- -------
Total interest-bearing liabilities $ (1,981) $ 6,617 $ 4,636 $(1,121) $ 6,681 $ 5,560
======== ======== ======== ======= ======= =======

Increase (decrease) in net interest income $ 214 $ (270)
======= ========

----------------------------------------
1997 vs. 1996
----------------------------------------
Increase Increase
(decrease) (decrease) Total
due to due to increase
rate volume (decrease)
----------------------------------------

Interest-Earning Assets
Loans $ 190 $2,477 $2,667
Securities 204 (270) (66)
Interest bearing deposits - - -
FHLB stock 7 28 35
----- ------ ------
Total interest-earning assets $ 401 $2,235 $2,636
===== ====== ======

Interest-Bearing Liabilities
Deposits $(642) $ 55 $ (587)
FHLB advances 164 2,350 2,514
Warehouse and term notes payable - - -
----- ------ ------
Total interest-bearing liabilities $(478) $2,405 $1,927
===== ====== ======

Increase (decrease) in net interest income $ 709
======

39

Results of Operations

General - First Defiance reported net income of $8.6 million for the
year ended December 31, 1999 compared to $3.1 million and $5.4 million for the
years ended December 31, 1998 and December 31, 1997 respectively. Net income for
1998 was negatively impacted by a $5.4 million pre-tax ($3.6 million after-tax
and $.46 on a diluted per share basis) fourth quarter adjustment to the reserve
for loan losses. See discussion on Provision for Loan Losses.

On a diluted per share basis, First Defiance's net income was $1.29,
$.40, and $.62 for the years ended December 31, 1999, 1998 and 1997
respectively. Earnings per share have been favorably impacted in both 1999 and
1998 by a reduction in average shares outstanding as a result of a number of
share repurchase programs. On a diluted basis, the average shares outstanding
have declined from 8.7 million in 1997 to 7.8 million in 1998 and 6.7 million in
1999. Since January 1998, a total of 2.0 million shares have been repurchased
under stock repurchase programs, including 816,000 in 1999.

Net interest income was $21.8 million for the year ended December 31,
1999, compared to $22.1 million and $22.5 million for the years ended December
31, 1998 and 1997 respectively. Net interest margin was 3.12%, 3.62%, and 4.24%
for the years ended December 31, 1999, 1998 and 1997, respectively. The decrease
in net interest margin in 1999 is primarily a result of the financing required
to support the $67.0 million increase in average non-interest earning assets
from $78.7 million in 1998 to $145.7 million in 1999. The increase in average
non-interest earning assets was the result of increases in the average balances
in mortgage servicing rights, goodwill, and prepaid expenses and other assets.
Mortgage servicing rights increased from an average of $35.5 million for 1998 to
$83.9 million for 1999, while goodwill increased from an average of $5.1 million
in 1998 to $12.5 million in 1999. These average non-earning assets increased due
to the fact that only six months of The Leader's operations were included in the
average balance for 1998 and total secondary market activity increased
dramatically in 1999. The decrease in the net interest margin in 1998 compared
to 1997 resulted from similar downward pressures corresponding to the increase
in average non-interest earning assets from $25.5 million for 1997 to $78.7
million for 1998.

The yield on interest earning assets was 7.47% for the year ended
December 31, 1999, a decrease from the years ended December 31, 1998 and 1997
when the yields on interest earning assets were 7.96% and 8.24%, respectively.
The decline in yields between 1999 and 1998 and the yields between 1998 and 1997
is primarily due to the addition of The Leader's mortgage loans available for
sale during the second half of 1998 and the subsequent increases in the average
balance on these loans. Those loans, which had an average balance of $186.8
million and $65.8 million for the years ended December 31, 1999 and 1998,
respectively, are generally originated under first-time homebuyer programs and
carried an average interest rate of 6.15% and 6.47% for the years ended December
31, 1999 and 1998, respectively. The Company's cost of funds decreased to 4.52%
for the year ended December 31, 1999 compared to 4.71% and 4.85%

40

for the years ended December 31, 1998 and 1997, respectively. As a result of the
decline in yield on average earning assets outpacing the decline in cost of
funds, the interest rate spread decreased to 2.95% for the year ended December
31, 1999 compared to 3.25% for 1998 and 3.39% for 1997.

The provision for loan losses for the year ended December 31, 1999 was
$1.9 million, compared to $7.8 million for 1998 and $1.6 million for 1997.

The addition of The Leader significantly impacts the comparability of
both non-interest income and non-interest expense because of the revenues and
costs associated with the mortgage banking operation are included for only the
last six months of 1998. For the year ended December 31, 1999 non-interest
income was $40.8 million compared to $17.5 million for 1998 and only $1.6
million for 1997. Non-interest expense for the year ended December 31, 1999 was
$47.4 million compared to $26.9 million for 1998 and $14.1 million for 1997.

Income for The Leader for the twelve months ended December 31, 1999 and
the six months ended December 31, 1998 included in First Defiance's results was
$4.1 million and $1.4 million, respectively. The net earnings of First Defiance
after factoring in the after-tax cost of funding the acquisition were increased
by $2.6 million and $747,000, or $.38 and $.10 per diluted share for the years
ended December 31, 1999 and 1998, respectively.

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

Total interest income increased by $4.3 million, or 8.81%, from $49.1
million for the year ended December 31, 1998 to $53.4 million for the year ended
December 31, 1999. The increase was due to a $135.1 million increase in the
average balance of loans outstanding for 1999 when compared to 1998. The yield
on those loans declined to 7.60% in 1999 versus 8.31% in 1998. The increase in
loans receivable was primarily attributable to the growth in the average balance
of The Leader's loans held for sale. The average balance of these loans grew
from $65.8 million for 1998 to $186.8 million for 1999. The increase of those
loans also caused the reduced yield because of the below market nature of loans
originated under the first-time homebuyer programs. Interest income was
favorably impacted by the increase in the average balance in commercial loans,
which was $107.3 million for 1999 compared to $42.5 million for 1998. The
increase in commercial loan balances occurred after the hiring of three
experienced commercial lenders and a commercial credit analyst during the second
half of 1998. The increases in loans held for sale and commercial loans were
partially offset by a $32.1 million decrease in the average balance on mortgage
loans and a $20.0 million decrease in the average balance on all consumer loans.
As discussed above, mortgage loan production for 1999 was lower than 1998 due to
the significant amount of refinance activity in the prior year. The decrease in
the average balance on consumer loans was anticipated as underwriting

41

standards were strengthened in response to credit qualify problems in this
portfolio noted in 1998. See the discussion of the provision for loan loss.

In 1998, total interest income increased by $5.2 million, or 11.9%,
from $43.9 million for the year ended December 31, 1997 to $49.1 million for the
year ended December 31, 1998. The increase was due to a $93.5 million increase
in the average balance of loans outstanding for 1998 when compared to 1997. The
increase was primarily attributable to the acquisition of The Leader's loans
available for sale, which averaged $131.5 million for the last six months of
1998, and an increase in the average balance of the commercial loan portfolio,
which increased from $28.3 million to $42.5 million as a result of the hiring of
three experienced commercial lenders in the second half of 1998. The yield on
those loans declined to 8.31% in 1998 versus 8.70% in 1997 because of the low
coupons on The Leader's available for sale portfolio.

Interest earnings from the investment portfolio and other interest
bearing deposits declined to $3.5 million in 1999 compared to $5.7 million in
1998 and $6.6 million in 1997. The decline in 1999 was due to a decrease in the
average balance of securities and other interest bearing deposits from $93.6
million in 1998 to $56.7 million in 1999. The decline was primarily due to
maturities and calls of securities during 1999 being used as a funding source
for the growth in the loan portfolio. The yield on the average portfolio balance
in 1999 was 6.09%. In 1998, the portfolio had a yield of 6.08% on an average
balance of $93.6 million while in 1997 the investment portfolio had a yield of
6.35% on an average balance of $103.3 million.

Interest expense increased by $4.7 million, or 17.2%, to $31.6 million
in 1999 compared to $26.9 million for 1998. This increase is due to the increase
in the average interest bearing liabilities from $572.0 million in 1998 to
$698.2 million in 1999. The increase in average interest bearing liabilities was
the result of increased funding requirements relating to the loans held for sale
and mortgage servicing rights at The Leader, net of the increase in average
escrow deposits (which are included in non-interest bearing liabilities) from
$12.4 million in 1998 to $70.9 million in 1999.

From the time that First Defiance acquired The Leader in June 1998
until December 1998, The Leader utilized a consortium of banks to provide its
funding needs for both warehoused mortgage loans and mortgage servicing rights.
In December 1998, the bank debts were paid off by First Defiance and replaced
with less costly internal sources of funding, primarily FHLB advances and
brokered certificates of deposit. As a result, the average balance of FHLB
advances in 1999 increased by $120.5 million to $195.6 million from $75.1
million in 1998. First Defiance took advantage of lower interest rates during
the later part of 1998 and the first several months of 1999 and fixed a portion
the advances for one, two and five years. Overall, the rate paid on FHLB
advances was 5.05% in 1999 compared to 5.56% in 1998. The increase in FHLB
advances replaced debt to outside banks, which had an average balance of $87.7
million in 1998 compared to $29.7 million in 1999. The average cost paid on
those outside borrowings in 1998 was a net 5.06% including a credit received
from the banks for borrowers escrow funds deposited in those financial
institutions. That credit, which was at a

42

federal funds rate, totaled $1.7 million in 1998. Excluding the credit for
escrow balances, the cost of bank financing in 1998 was 7.04%. As noted above,
for 1999, the borrowers escrow funds have been placed on deposit with First
Federal as a source of no-cost funds. The cost of the $29.7 million average bank
financing in 1999 was 6.13%. First Defiance retains warehouse lines of credit
with financial institutions totaling $170 million as of December 31, 1999 to
supplement its other funding sources.

In 1998, interest expense increased by $5.6 million, or 26.0%, to $26.9
million compared to $21.4 million for 1997. The large increase is primarily due
to the financing requirements of The Leader's operations. The average bank debt
outstanding for the six months that The Leader was included in First Defiance's
results in 1998 was approximately $175.3 million or $87.7 million average
balance for the year. The net cost of those funds was approximately 5.06%, net
of the credit that The Leader was receiving for escrow funds on deposit at the
banks' fed funds rates. Beginning in November 1998, those escrow balances were
placed on deposit with First Federal.

Interest expense in 1998 also increased because of an increase in the
average balance of deposits outstanding, which increased to $409.3 million in
1998 compared to $382.6 million in 1997. The average cost of those deposits
declined by 22 basis points in 1998, to 4.48% from 4.70% in 1997. The average
balance of FHLB advances increased to $75.1 million in 1998 from $58.1 million
in 1997. The average cost of those advances declined to 5.56% from 5.84%. The
balance in FHLB advances increased substantially in December 1998, as they were
used as the primary source of funding to replace The Leader's bank debt.

As a result of the foregoing, First Defiance's net interest income was
$21.8 million for the year ended December 31, 1999 compared to $22.1 million for
the year ended December 31, 1998 and $22.5 million for the year ended December
31, 1997. Net interest margin for the year ended December 31, 1999 declined to
3.12% from 3.62% for 1998 and 4.24% for 1997. The decline was due to the
financing of The Leader, particularly the financing of mortgage servicing rights
and goodwill, which are both non-interest earning assets. The balance of
mortgage servicing rights at December 31, 1999 was $97.5 million and the balance
of goodwill at that date was $14.7 million.

Provision for Loan Losses - First Defiance's provision for loan losses
was $1.9 million for the year ended December 31, 1999, compared to $7.8 million
and $1.6 million for the years ended December 31, 1998 and 1997, respectively.
Provisions for loan losses are charged to earnings to bring the total allowance
for loan losses to a level that is deemed appropriate by management. Factors
considered by management include identifiable risk in the portfolios, historical
experience, the volume and type of lending conducted by First Defiance, industry
standards, the amount of non-performing assets, including loans which meet the
FASB Statement No. 114 definition of impaired, general economic conditions,
particularly as they relate to First Defiance's market areas, and other factors
related to the collectability of First Defiance's loan portfolio.

43

In 1998, four factors combined to require the large increase in the
loan loss provision: an increase in charge-offs and delinquencies within First
Federal's consumer loan portfolio, rapid growth in First Federal's commercial
loan portfolio, the status of First Federal's mobile home loan portfolio, and
the acquisition of The Leader Mortgage Company. The consolidated allowance for
loan losses at December 31, 1999 was $7.8 million, compared to $9.8 million at
December 1998 and $2.7 million at December 31, 1997.

During 1998 First Federal experienced increased levels of charge-offs
of loans in its consumer loan portfolio, which is comprised primarily of
automobile loans. In response to the level of charge-offs and internal and
external reviews of this portfolio, management increased the allowance for
consumer loans by approximately $3.6 million. Subsequent to that review,
consumer loan underwriting and approval, which were previously performed through
First Federal's branch network, were centralized at the main office under
experienced underwriters with revised lending authority. The total outstanding
balance of consumer loans originated in 1997 and 1998 (the period identified in
the internal and external reviews to have the underwriting deficiencies) were
$67.9 million as of December 31, 1998 and declined to $38.6 million at December
31, 1999. The reserve against this portfolio was $4.3 million (or 6.33% of the
outstanding balance) at December 31, 1998 and $2.9 million (or 7.51% of the
outstanding balance) at December 31, 1999. Total consumer loans outstanding and
the corresponding reserves were $87.2 million and $5.1 million at December 31,
1998 and $64.3 million and $3.5 million at December 31, 1999.

The growth in the commercial loan portfolio also has resulted in an
increase in the allowance for loan losses. During 1998, when the balance of
commercial loans increased from $29.8 million to $70.1 million, the related
allowance for loan losses increased by $932,000. Commercial loans have continued
to experience significant growth in 1999 as the portfolio has grown to $138.1
million as of December 31, 1999. The related allowance for loan losses for
commercial loans grew $557,000 to $2.3 million at December 31, 1999.

During 1998, First Federal reserved 40% against the remaining mobile
home loan balances not already classified as doubtful or loss. This adjustment
resulted in increasing the mobile home loan loss allowance to $1.3 million at
December 31, 1998. In May of 1999, First Federal sold the remaining mobile home
portfolio, which had a net book value (after deducting the related reserve) of
$1.8 million, for $2.1 million.

During the last six months of 1998, there also was a $351,000 increase
in the provision for loan losses as a result of the acquisition of The Leader.
Most of the loans that are originated or acquired by The Leader have FHA or VA
guarantees. As a result, the risk of loss on those loans is limited to the legal
costs associated with foreclosure on the loan, which has averaged approximately
$1,600 per loan in foreclosure. This is a cost that The Leader incurs whether
the loan is included in its own portfolio or serviced for others. It has been
The Leader's general practice to repurchase loans which have a note rate of 8%
or greater that are in foreclosure out of the GNMA pool in order to avoid

44

having to advance principal and interest payments to the investors for those
loans, as is required under their agreements with GNMA. The Leader reserves for
the foreclosure losses when the loan goes to foreclosure, whether the loan is
purchased from the GNMA pool or not. Management also records an estimated loss
reserve to provide for potential losses as loans become delinquent based on The
Leader's historical loss experience on similar loans. A provision related to
those loans totaling $1.8 million was recorded by The Leader in 1999. The
increase in provision expense for The Leader in 1999 compared to 1998 was the
result of increased foreclosure proceedings along with increases in the general
reserve resulting from the increase in total number of loans serviced by The
Leader from 86,000 loans as of December 31, 1998 to 99,000 loans at December 31,
1999.

Total non-performing loans were $1.0 million, or .14% of total loans,
as of December 31, 1999, compared with $1.9 million, or .33% of total loans, as
of December 31, 1998, and $1.4 million, or .43% of total loans, as of December
31, 1997. Total charge-offs were $4.2 million, $2.1 million, and $1.3 million
for the periods ended December 31, 1999, 1998, and 1997, respectively. Over the
same periods, recoveries amounted to $279,000, $220,000, and $197,000,
respectively.

Non-interest Income - In acquiring The Leader, First Defiance exchanged
net interest income for a large increase in non-interest income, primarily loan
servicing fees and gains on sale of mortgage loans. Total non-interest income
increased by $23.3 million to $40.8 million for the year ended December 31, 1999
from $17.5 million for the year ended December 31, 1998. Non-interest income for
the year ended December 31, 1997 was only $1.6 million. For the year ended 1999,
The Leader recognized $27.9 million in loan servicing fees compared to $12.5
million for the six-months included in First Defiance's year ended December 31,
1998. Total gains on sale of mortgage loans at The Leader increased from $2.0
million for the six-months of 1998 to $6.3 million for 1999 primarily due to
increased loan production and sales. The Leader also realized a one-time gain on
the sale of non-core mortgage servicing rights totaling $479,000 in 1999.

Excluding The Leader's results, non-interest income was $4.8 million in
1999, $3.3 million in 1998, and $1.6 million in 1997. Total gains on sale of
loans (excluding The Leader) were $794,000 in 1999, compared to $1.4 million in
1998 and only $116,000 for 1997. The 1998 gains on sale included a $785,000 gain
in the third quarter of 1998 from the sale of $30.7 million of seasoned mortgage
loans. In 1998, First Federal also realized a $240,000 gain from its sale of a
large portion of its mobile home loan portfolio. Additionally, dividends on FHLB
stock increased to $861,000 in 1999 compared to $334,000 in 1998 and $242,000 in
1997. The increase in these dividends was the result of purchasing more stock
throughout 1998 and 1999 to support the additional borrowings at the FHLB.

The 1999 results also include the revenue associated First Insurance.
Total revenues for First Insurance for 1999 were $1.4 million.

45

Non-interest Expense - Total non-interest expense for 1999 was $47.4
million compared to $26.9 million for the year ended December 31, 1998 and $14.1
million for the year ended December 31, 1997. As with non-interest income, the
addition of The Leader in July 1998 significantly increased the consolidated
level of non-interest expense. For the six months from July 1 to December 31,
1998, The Leader's total non-interest expense was $12.2 million compared to
$29.6 million for the year ended December 31, 1999. Included in the 1999 total
are $10.1 million in compensation and benefits ($3.8 million in 1998), $1.6
million in occupancy costs ($489,000 in 1998), $12.6 million in amortization of
mortgage servicing rights ($5.3 million in 1998) and $2.1 million in
amortization of goodwill and other acquisition costs, including non-compete and
employment agreements ($1.1 million in 1998).

Excluding The Leader, non-interest expense for First Defiance for 1999
was $17.8 million compared to $14.7 million in 1998 and $14.1 million in 1997.
The increase from 1998 to 1999 was primarily due to compensation and benefit
expense that increased by $2.2 million over 1998. Of this increase, $1.0 million
related to compensation and benefits for First Insurance and $1.2 million
related to increases in compensation and benefits at First Federal. The First
Federal increase was due to a number of factors including increases in staffing
levels resulting from branch and product line (i.e., commercial lending and
trust services) expansion, the payment of incentive bonuses to salaried
employees, the payment of a discretionary contribution to the Company's 401(k)
plan, increases in the cost of the Company's group medical plan, and decreases
in the amount of payroll costs deferred because of a reduction in mortgage loan
production. The payment of incentive bonuses and discretionary 401(k)
contributions represented a partial payment of pools established at the
beginning of 1999. Certain targets were established for earnings per share,
revenue growth and efficiencies. The achievement of a portion of those
objectives resulted in a partial payment of the bonus and 401(k) pools. No bonus
or discretionary 401(k) payments were made in 1998, the first year of the
incentive based compensation programs.

In addition to compensation expense, occupancy costs increased $611,000
in 1999 resulting from the expansion of the branch network into Findlay and
Fostoria, depreciation on the Company's expanded wide area network, and
occupancy costs related to First Insurance. Data processing costs increased by
$258,000 in 1999 resulting from upgrading systems with the Company's third party
provider, Y2K related expenditures, and the expansion of the branch network.
Amortization of goodwill increased by $201,000 as a result of the First
Insurance acquisition. Additionally, other non-interest expenses increased
$374,000 as a result of the First Insurance acquisition, the expansion of the
Company's branch and ATM networks, costs associated with attracting national
certificates of deposit, and increases in the examination fees charged by the
regulators. These increases in non-interest expenses were partially mitigated by
a $290,000 reduction in state franchise tax due to tax planning strategies and a
$314,000 reduction in loan servicing due to the sale of the majority of the
mobile home portfolio in 1998.

Non-interest expense for First Defiance for 1998, excluding the impact
of The Leader would have increased by $649,000 over 1997. Occupancy expense
increased by

46

$665,000 due to the addition of the Hicksville and Paulding branches and a full
year of depreciation expense on major renovations completed in early to
mid-1997. Data processing costs increased by $200,000 due to the enhancement of
certain systems. Amortization of mortgage servicing rights increased by $240,000
due to an increase in loans serviced for others at First Federal. Also, state
franchise tax increased by $116,000. Those increases were partially offset by a
$740,000 decline in compensation, which decreased due to a reduction in ESOP
expense, the termination of First Federal's defined benefit pension plan, and a
reduction in year-end bonuses, including the elimination of year-end bonuses for
most of First Defiance's salaried personnel because of 1998 operating results.
Also, the discretionary contribution to the Company's 401(k) plan was not made
because the Board of Directors determined that the 1998 operating results did
not warrant such a contribution. Those adjustments more than offset increased
compensation related to staffing increases, including a full year with branches
in Paulding and Hicksville, the expansion of the commercial loan department
beginning in mid-1998, and the hiring of trust department personnel between July
and October.

Income Taxes - Income tax amounted to $4.6 million in 1999 compared to
$1.8 million in 1998 and $3.0 million in 1997. The effective tax rates for the
three years were 34.9%, 36.9%, and 35.6% respectively. The decrease in the
effective tax rate from 1998 to 1999 is the result of the increase in
non-taxable interest income and a reduction of income at the holding company
level that is subject to state income tax. The increase in the effective tax
rate from 1997 to 1998 is the result of the addition of non-deductible goodwill.
See Note 14 to the Consolidated Financial Statements.

Cash Earnings

The selected financial data presented in the following table highlights
the performance of First Defiance on a cash basis for each of the three years in
the period ended December 31, 1999. The data has been adjusted to exclude the
amortization of goodwill and the related tax benefit of tax deductible goodwill.
This goodwill resulted from the acquisitions of The Leader, and the insurance
agencies which were combined to form First Insurance and Investments which were
recorded using the purchase method of accounting. The amortization of goodwill
does not result in a cash expense and has essentially no economic impact on
liquidity and funds management activity. Cash basis financial data provide an
additional basis for measuring a company's ability to support future growth, pay
dividends, and repurchase shares. The cash basis data presented in the table
below has not been adjusted to exclude the impact of other non-cash items such
as depreciation, the provision for loan losses, and amortization of MRP and ESOP
expense.

47

1999 1998 1997
------- ------- -------
(dollars in thousands,
except per share amounts)

Year Ended December 31
Non-interest expense $46,639 $26,658 $14,093
Income before income taxes 14,027 5,211 8,392
Net income 9,382 3,393 5,407

Per Common Share
Net income per basic share $ 1.44 $ .45 $ .65
Net income per diluted share 1.40 .43 .62
Weighted average common shares
(000s) 6,502 7,491 8,360
Weighted average diluted common
shares (000s) 6,700 7,811 8,706

Performance Ratios
Return on average assets 1.09% .49% .96%
Return on average equity 11.99 3.44 4.69
Ratio of cash operating expense to
tangible assets 5.43 3.84 2.51

Goodwill
Goodwill average balance $12,519 $ 5,115 --
Goodwill amortization (after tax) 759 282 --

Concentrations of Credit Risk

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

Credit risk is increased by lending or investing activities that
concentrate a financial institution's assets in a way that exposes the
institution to a material loss from any single occurrence or group of related
occurrences. Diversifying loans and investments to prevent concentrations of
risks is one manner a financial institution can reduce potential losses due to
credit risk. Examples of asset concentrations would include multiple loans made
to a single borrower, and loans of inappropriate size relative to the total
capitalization of the institution. Management believes adherence to its loan and
investment policies allows it to control its exposure to concentrations of
credit risk at acceptable levels.

Liquidity and Capital Resources

First Federal is required under applicable federal regulations to
maintain specified levels of "liquid" investments in qualifying types of United
States Treasury, agency and other investments having maturities of five years or
less. Current OTS regulations require that a savings institutions maintain
liquid assets not less than 4% of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. First Federal's
liquidity exceeded applicable requirements at December 31, 1999.

48

Cash used in operating activities was $165.3 million for the year ended
December 31, 1999. Cash provided by operations was $51.3 million, and $11.6
million for the years ended December 31, 1998, and 1997, respectively. Cash was
generated by First Defiance's operating activities during the years ended
December 31, 1998 and 1997, primarily as a result of net income. In 1999, the
Company used more cash in operating activities than were provided because of net
growth in the held for sale loan portfolio which was funded through financing
activities. The adjustments to reconcile net income to cash provided by or used
in operations during the periods presented consist primarily of proceeds from
the sale of loans (less the origination of loans held for sale), the provision
for loan losses, depreciation expense, goodwill amortization, ESOP expense
related to the release of ESOP shares in accordance with AICPA SOP 93-6, the
origination of mortgage servicing rights and increases and decreases in other
assets and liabilities. The primary investing activity of First Defiance is
lending, which is funded with cash provided from operations and financing
activities, as well as proceeds from payments on existing loans and proceeds
from maturities of securities. In 1999 cash provided from the sale and maturity
of investment securities totaled $25.6 million, while $30.4 million in
additional securities were purchased. Principal financing activities include the
gathering of deposits and advance payments from loan servicing customers, the
utilization of FHLB advances, and borrowings from other bank sources. For the
year ended December 31, 1999, FHLB advances increased by $97.3 million,
warehouse and term notes payable increased by $53.1 million, and national
certificates of deposit increased by $50.7 million.

For additional information about cash flows from First Defiance's
operating, investing and financing activities, see the Consolidated Statements
of Cash Flows included in the Consolidated Financial Statements.

At December 31, 1999, First Defiance had an aggregate of $79.0 million
in unfunded commitments to originate loans (including unused portions of lines
of credit and letters of credit) and no commitments to purchase securities. At
the same date, First Defiance had commitments to sell $209.1 million of loans
held for sale. At that date First Defiance had commitments to acquire $222.0
million of mortgage loans under first-time home buyer programs, all of which
have offsetting commitments for sale into the secondary market as GNMA or FNMA
mortgage backed securities. Also as of December 31, 1999, the total amount of
certificates of deposit that are scheduled to mature by December 31, 2000 was
$293.2 million. First Defiance believes that it has adequate resources to fund
commitments as they arise. It can adjust the rate on savings certificates to
retain deposits in changing interest rate environments; it can sell or
securitize mortgage or non-mortgage loans; and it can turn to other sources of
financing including FHLB advances. Because the FHLB requires that the collateral
must exceed 150% of the outstanding advance balance, First Defiance may also
from time-to-time be required to utilize other sources of financing, including
brokered certificates of deposit and bank advances. At December 31, 1999 First
Defiance has $170 million of lines available from other financial institutions,
of which $47 million is being utilized.

49

Stockholders' equity decreased by $4.3 million, or 4.6% at December 31,
1999 compared to December 31, 1998 due to the repurchase of 816,000 shares of
First Defiance stock (10.8% of shares outstanding at the beginning of the year).
The shares in 1999 were repurchased at an average cost of $12.74 per share and,
as a result, stockholders equity was reduced by $10.4 million. First Defiance
made similar purchases of 1.2 million shares of common stock during 1998.
Additionally, shareholders equity was reduced by $1.3 million as a result of a
decrease in the market value of available for sale securities.

The equity reduction, caused by the factors discussed above, was offset
to a lesser degree by earnings retention, the vesting or issuance of shares
under the Company's Management Recognition Plan ("MRP") and Employee Stock
Ownership Plan ("ESOP"), and the issuance of stock under stock option programs.
Net income for 1999 was $8.6 million, of which $2.7 million was returned to
shareholders in the form of declared dividends ($.41 per share). The vesting of
MRP shares and release of ESOP shares increased equity by $381,000 and $622,000
respectively. Stock option exercises increased equity by approximately $417,000.
The book value of First Defiance's common stock was $13.12 at December 31, 1999,
compared to $12.37 at December 31, 1998. The tangible book value (excluding
goodwill) of those shares was $10.97 and $10.61 at December 31, 1999 and 1998.

First Federal is subject to various capital requirements of the Office
of Thrift Supervision. At December 31, 1999, First Federal had capital ratios
that exceeded the minimum regulatory requirements. See Item 1. Business -
Regulation - Regulatory Capital Requirements in this report.

Year 2000

During 1999, the Company prepared for potential computer system and
other problems related to the Year 2000 date change. The process involved the
identification and remediation of date recognition problems in computer systems,
software and other operating equipment. It also included working with
third-party vendors, developing and testing contingency plans, and planning for
potential liquidity needs associated with potential large cash withdrawals. To
date, no Year 2000 failures have been noted in any of the Company's systems.

Although considered unlikely, unanticipated problems in First
Defiance's core business processes or systems, including problems with
non-compliant third parties and general disruptions to the economy could still
occur despite efforts to remediate such problems and the related contingency
planning. Management will continue to monitor all processes throughout 2000 to
address any issues as they arise and ensure that all systems continue to
function appropriately.

Because its data processing functions are outsourced, the cost of Year
2000 remediation was not material to First Federal. First Federal's third party
processor assessed a fee of less than $50,000 to cover the cost of the test bank
established to

50

provide for the appropriate testing. Testing itself was performed by individuals
responsible for the various applications and was coordinated by the Vice
President of Operations. The cost of the individuals was not quantified, however
the three primary individuals involved devoted approximately 60% of their time
during the testing phase which was essentially completed during the 1999 first
quarter. First Federal's total out of pocket expenses recognized in conjunction
with Year 2000 compliance were less than $100,000 in 1999.

The estimated total cost of Year 2000 compliance by The Leader was
approximately $650,000 including the cost of hardware and software upgrades,
programming costs, and retention bonuses to key staff members involved in the
Year 2000 project. The portion of the costs associated with hardware
acquisitions was capitalized while internal programming costs and retention
payments were expensed. The retention bonuses will be paid to certain employees
who are still employed on June 30, 2000. Year 2000 expense for The Leader for
1999 was less than $300,000.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

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

First Defiance monitors interest rate risk on a monthly basis through
simulation analysis that measures the impact changes in interest rates can have
on net interest income. The simulation technique analyzes the effect of a
presumed 100 basis point shift in interest rates (which is consistent with
management's estimate of the range of potential interest rate fluctuations) and
takes into account prepayment speeds on amortizing financial instruments, loan
and deposit volumes and rates, non-maturity deposit assumptions and capital
requirements. The results of the simulation indicate that in an environment
where interest rates rise 100 basis points over a 12 month period, using 2000
projected amounts as a base case, First Defiance's net interest income would
decrease by 2.5%. Were interest rates to fall by 100 basis points during the
same 12-month period, the simulation indicates that net interest income would
increase by 2.5%.

The acquisition of The Leader Mortgage Company provided First Defiance
with a significant source of non-interest income. The mortgage banking
operations also serve as a countermeasure against the decline in the value of
mortgage loans during a rising rate environment because increases in interest
rates tend to increase the value of mortgage servicing rights because of the
resulting decrease in prepayment rates on the underlying loans. Conversely, in a
decreasing interest rate environment, the value of the mortgage

51

servicing portfolio tends to decrease due to increased prepayments on the
underlying loans. However, because The Leader's portfolio is comprised primarily
of below market-rate loans, the prepayments on the loans it serviced have been
much lower than industry averages. The Leader averaged 7.6% prepayments for the
year ended December 31, 1999 which is lower than the prepayment speeds for the
mortgage industry as a whole, and lower than the 11.1% experience for the year
ended December 31, 1998. The simulation model used by First Defiance measures
the impact of rising and falling interest rates on net interest income only. The
Company also monitors the potential change in the value of its mortgage
servicing portfolio given the same 100 basis point shift in interest rates. At
December 31, 1999, a 100 basis point decrease in interest rates would require
First Defiance to establish a reserve for impairment of mortgage servicing
rights of less than $25,000.

First Defiance, through The Leader, has significantly increased its
origination capabilities, on both a retail and wholesale basis. Loan production
at The Leader was $1.9 billion for the year ended December 31, 1999, compared to
$588.4 million for the six-months ended December 31, 1998. Mortgage servicing
rights increased from $76.5 million as of December 31, 1998 to $97.5 million as
of December 31, 1999. To protect themselves from the risk of changing interest
rates, mortgage banking companies frequently use off balance sheet financial
instruments to hedge the exposure of the mortgage loan pipeline. The Leader does
not need to hedge its mortgage loan pipeline because the trustees under the
various first-time homebuyer programs are required to fund the issuance of the
GNMA securities backed by the mortgages in The Leader's pipeline at a guaranteed
price.

First Defiance also has increased its lending activities in the
commercial loan area. While such loans carry higher credit risk than residential
mortgage lending they tend to be more rate sensitive than residential mortgage
loans. The balance of First Defiance's commercial portfolio increased to $138.1
million, which is split between $44.2 million of fixed rate loans and $93.9
million of adjustable rate loans at December 31, 1999. Certain of the loans
classified as adjustable have fixed rates for an initial term that may be as
long as five years. The maturities on fixed rate loans is generally less than
seven years. First Defiance also has significant balances of consumer loans
which tend to have a shorter duration than residential mortgage loans ($64.4
million at December 31, 1999) and home equity and improvement loans ($22.8
million at December 31, 1999) which fluctuate with changes in the prime lending
rate. Also, to limit its interest rate risk, First Federal has been selling
fixed rate mortgage loans with a maturity of 15 years or greater in the
secondary market. Historically, loans with maturities less than 20 years have
been retained in portfolio although First Federal began selling a portion of its
15 year fixed rate mortgage loans in the secondary market beginning in January
1999. For the year ended December 31, 1999, First Federal sold $39.7 million of
loans in the secondary market. At December 31, 1999 First Federal's servicing
portfolio totaled $88.6 million, compared to $62.2 million at December 31, 1998.

52

In addition to the simulation analysis, First Federal also utilizes the
"market value of net portfolio equity" ("NPV") methodology adopted by the OTS.
Under the NPV methodology, interest rate risk exposure ("IRR") is assessed by
reviewing the estimated changes in First Federal's net interest income ("NII")
and NPV that would hypothetically occur if interest rates simultaneously rise or
fall along the yield curve. Projected values of NII and NPV at both higher and
lower regulatory defined scenarios are compared to base case values (no change
in rates) to determine the sensitivity to changing interest rates. Presented in
the following table, as of December 31, 1999, is an analysis of First Federal's
(which for this purpose also includes The Leader) estimated interest rate risk
as measured by changes in NPV for instantaneous and sustained parallel shifts in
interest rates up and down 300 basis points in 100 point increments. Assumptions
used in calculating the amounts in this table are generally those assumptions
utilized by the OTS in assessing the interest rate risk of the thrifts it
regulates. However, because First Defiance utilizes a model that evaluates the
market value of mortgage servicing rights on a loan-by-loan basis, management
believes that the results generated by that model are more accurate than the
generic OTS assumptions. For purposes of this table, management's valuation of
mortgage servicing rights have been substituted for OTS' results. NPV is
calculated by the OTS for the purposes of interest rate risk assessment and
should not be considered as an indicator of value of First Federal.

December 31, 1999
-----------------------------------------------------------------------------------------------------
Net Portfolio Value as % of
Net Portfolio Value Present Value of Assets
Change in Rates $ Amount $ Change % Change NPV Ratio Change
--------------- -------- -------- -------- --------- ------
(Dollars in Thousands)

+300 bp 102,152 (23,298) (19) 10.96% (154) bp
+200 bp 111,042 (14,408) (11) 11.62% (88) bp
+100 bp 118,462 (6,988) (6) 12.10% (40) bp
0 bp 125,450 - - 12.50% -
-100 bp 127,324 1,874 1 12.45% (5) bp
-200 bp 120,895 (4,555) (4) 11.73% (77) bp
-300 bp 111,636 (13,814) (11) 10.82% (168) bp

In the event of a 300 basis point change in interest rates based upon
estimates as of December 31, 1999, First Federal would experience an 11%
decrease in NPV in a declining rate environment and a 19% decrease in NPV in a
rising rate environment. During periods of rising rates, the value of monetary
assets declines. Conversely, during periods of falling rates, the value of
monetary assets increases. Mortgage servicing rights act as a natural hedge to
these changes in value of other monetary assets as MSRs generally rise in value
in a rising rate environment and decline in value in a falling rate environment
because of the prepayments of the underlying mortgage loans. It should be noted
that the amount of change in value of specific assets and liabilities due to
changes in rates is not the same in a rising rate environment as in a falling
rate environment. Based on the NPV methodology, the decline in NPV in a rising
rate environment is because First Federal has used FHLB advances and deposits
with shorter terms than the assets in which it invests. The decline in NPV in a
falling rate environment is because of the reduction in value in mortgage
servicing rights. The analysis indicated that increases

53

or decreases in monetary assets and increases or decreases in mortgage servicing
rights generally offset each other in both rising and falling rate environments.

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

Forward Looking Information

Forward looking statements in this report are made in reliance upon the
safe harbor provisions of the private Securities Litigation Reform Act of 1995.
The statements in this report which are not historical fact are forward looking
statements and they include, among other statements, projections about growth in
the Financial Condition section and projections about interest rate risk
simulations included in the Asset/Liability Management section. Actual results
may differ from expectations contained in such forward looking information as a
result of factors including but not limited to the interest rate environment,
economic policy or condition, federal and state banking and tax regulations, and
competitive factors in the marketplace. Each of these factors could affect
estimates, assumptions, uncertainties and risks considered in the development of
forward looking information and could cause actual results to differ materially
from management's expectation regarding future performance.

54

Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Financial Condition...............................56

Consolidated Statements of Income ...........................................58

Consolidated Statements of Stockholders' Equity..............................59

Consolidated Statements of Cash Flows........................................60

Notes to Consolidated Financial Statements...................................62

Report of Independent Auditors..............................................103

55

First Defiance Financial Corp.

Consolidated Statements of Financial Condition

December 31
1999 1998
-------- --------
(In thousands)

Assets Cash and cash equivalents:
Cash and amounts due from depository institutions $ 13,102 $ 16,137
Interest-bearing deposits 3,134 4,369
-------- --------
16,236 20,506
Investment securities:
Available-for-sale, carried at fair value 53,946 47,554
Trading, carried at fair value 29,805 --
Held-to-maturity, carried at amortized cost
(fair value $9,953 and $13,753
at December 31, 1999 and 1998, respectively) 9,895 13,541
-------- --------
93,646 61,095

Loans receivable, net of allowance of $7,758
and $9,789 at December 31, 1999 and 1998,
respectively 465,321 448,574
Loans held for sale (fair value--
$237,622 and $120,097 at December 31, 1999
and 1998, respectively) 237,622 119,910
Mortgage servicing rights 97,519 76,452
Accrued interest receivable 3,868 3,605
Federal Home Loan Bank stock 14,181 10,826
Premises and equipment 21,311 19,057
Real estate and other assets held for sale 2,557 1,517
Goodwill, net of accumulated amortization of
$1,057 and $282 at December 31, 1999 and
1998, respectively 14,699 13,333
Other assets 21,034 10,524
-------- --------

Total assets $987,994 $785,399
======== ========

56

December 31
1999 1998
--------- ---------
(In thousands)

Liabilities and stockholders' equity
Liabilities:
Deposits $ 502,969 $ 433,979
Advances from the Federal Home Loan Bank 265,410 168,142
Warehouse and term notes payable 53,504 368
Accrued expenses and other liabilities 12,921 9,019
Deferred taxes 2,232 2,847
Advance payments by borrowers for taxes and
insurance 61,542 77,334
--------- ---------
Total liabilities 898,578 691,689

Stockholders' equity:
Preferred stock, no par value per share:
5,000 shares authorized; no shares
issued Common stock, $.01 par value per share:
20,000 shares authorized; 6,814 and 7,575
shares outstanding, respectively 68 76
Additional paid-in capital 53,181 58,681
Stock acquired by ESOP (3,664) (4,089)
Deferred compensation (458) (843)
Accumulated other comprehensive income,
net of tax of $(565) and $83 respectively (1,096) 162
Retained earnings 41,385 39,723
--------- ---------
Total stockholders' equity 89,416 93,710
--------- ---------

Total liabilities and stockholders' equity $ 987,994 $ 785,399
========= =========

See accompanying notes.

57

First Defiance Financial Corp.

Consolidated Statements of Income

Years Ended December 31
1999 1998 1997
------- ------- -------
(In thousands, except per share amounts)

Interest income:
Loans $49,927 $43,369 $37,302
Investment securities 3,307 5,082 6,458
Other 145 605 98
------- ------- -------
Total interest income 53,379 49,056 43,858

Interest expense:
Deposits 19,889 18,340 17,992
Federal Home Loan Bank advances and other 9,872 4,171 3,395
Warehouse and term notes payable 1,821 4,435 --
------- ------- -------
Total interest expense 31,582 26,946 21,387
------- ------- -------
Net interest income 21,797 22,110 22,471

Provision for loan losses 1,925 7,769 1,613
------- ------- -------
Net interest income after provision for loan losses 19,872 14,341 20,858

Non-interest income:
Mortgage banking income 28,156 12,071 84
Service fees and other charges 1,454 1,314 952
Gain on sale of loans 7,081 3,405 116
Gain on sale of mortgage servicing rights 479 -- --
Federal Home Loan Bank stock dividends 861 334 242
Net gain on sale of available-for-sale securities 1 -- 103
Other 2,762 404 130
------- ------- -------
40,794 17,528 1,627
Non-interest expense:
Compensation and benefits 19,401 10,985 7,905
Occupancy 4,128 2,394 1,241
Deposit insurance premiums 380 243 194
Franchise tax 983 1,273 1,101
Data processing 1,239 981 780
Mobile home loan servicing 25 339 457
Mortgage servicing rights amortization 12,711 5,385 17
Goodwill and other intangibles amortization 2,348 1,068 --
Other 6,199 4,272 2,398
------- ------- -------
47,414 26,940 14,093
------- ------- -------

Income before income taxes 13,252 4,929 8,392
Income taxes 4,629 1,818 2,985
------- ------- -------

Net income $ 8,623 $ 3,111 $ 5,407
======= ======= =======

Earnings per share
Basic $ 1.33 $ .42 $ .65
======= ======= =======
Diluted $ 1.29 $ .40 $ .62
======= ======= =======
Dividends declared per share $ .41 $ .37 $ .33
======= ======= =======

See accompanying notes.

58

First Defiance Financial Corp.
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1999, 1998 and 1997
(In thousands)

Stock Acquired By
----------------------- Accumulated
Common Stock Additional Management Other
------------------ Paid-In Recognition Comprehensive
Shares Amount Capital ESOP Plan Income
-------------------------------------------------------------------------

Balance at January 1, 1997 9,471 $ 95 $73,671 $(5,093) $(2,173) $ (397)
Comprehensive income:
Net income
Change in net unrealized gains and losses on
available-for-sale 347
securities, net of income taxes of $178

Total comprehensive income

ESOP shares released 288 559
Amortization of deferred compensation of Management 113 785
Recognition Plan
Shares issued under stock option plan 23 160
Acquisition of common stock for treasury (966) (10) (8,506)
Dividends declared
------------------------------------------------------------------------
Balance at December 31, 1997 8,528 85 65,726 (4,534) (1,388) (50)
Comprehensive income:
Net income
Change in net unrealized gains and losses on
available-for-sale 212
securities, net of income taxes of $108

Total comprehensive income

ESOP shares released 331 445
Amortization of deferred compensation of Management 66 545
Recognition Plan
Stock issued in acquisition 146 2 2,090
Shares issued under stock option plan 96 1 867
Acquisition of common stock for treasury (1,195) (12) (10,399)
Dividends declared
------------------------------------------------------------------------
Balance at December 31, 1998 7,575 76 58,681 (4,089) (843) 162

Comprehensive income:
Net income
Change in net unrealized gains and losses on
available-for-sale (1,258)
securities, net of income taxes of $648

Total comprehensive income

ESOP shares released 197 425
Amortization of deferred compensation of Management (4) 385
Recognition Plan
Shares issued under stock option plan 55 417
Acquisition of common stock for treasury (816) (8) (6,110)
Dividends declared
------------------------------------------------------------------------

Balance at December 31, 1999 6,814 $ 68 $53,181 $(3,664) $ (458) $(1,096)
========================================================================

Total
Retained Stockholders'
Earnings Equity
---------------------------

Balance at January 1, 1997 $50,462 $116,565
Comprehensive income:
Net income 5,407 5,407
Change in net unrealized gains and losses on
available-for-sale 347
securities, net of income taxes of $178
-------------
Total comprehensive income 5,754

ESOP shares released 847
Amortization of deferred compensation of Management 898
Recognition Plan
Shares issued under stock option plan 160
Acquisition of common stock for treasury (6,031) (14,547)
Dividends declared (2,793) (2,793)
----------------------------
Balance at December 31, 1997 47,045 106,884
Comprehensive income:
Net income 3,111 3,111
Change in net unrealized gains and losses on
available-for-sale 212
securities, net of income taxes of $108
-------------
Total comprehensive income 3,323

ESOP shares released 776
Amortization of deferred compensation of Management 611
Recognition Plan
Stock issued in acquisition 2,092
Shares issued under stock option plan 868
Acquisition of common stock for treasury (7,662) (18,073)
Dividends declared (2,771) (2,771)
----------------------------
Balance at December 31, 1998 39,723 93,710

Comprehensive income:
Net income 8,623 8,623
Change in net unrealized gains and losses on
available-for-sale (1,258)
securities, net of income taxes of $648
-------------
Total comprehensive income 7,365

ESOP shares released 622
Amortization of deferred compensation of Management 381
Recognition Plan
Shares issued under stock option plan 417
Acquisition of common stock for treasury (4,276) (10,394)
Dividends declared (2,685) (2,685)
----------------------------

Balance at December 31, 1999 $41,385 $89,416
============================

See accompanying notes.

59

First Defiance Financial Corp.

Consolidated Statements of Cash Flows

Years Ended December 31
1999 1998 1997
------------- ---------- ----------
(In thousands)

Operating activities
Net income $ 8,623 $ 3,111 $ 5,407
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Provision for loan losses 1,925 7,769 1,613
Provision for depreciation 1,745 1,278 736
Amortization of deferred compensation expense 484 545 785
Amortization of mortgage servicing rights 12,711 5,385 17
Amortization of goodwill 775 282 -
Release of ESOP shares 622 776 847
Loss (gain) on sale of office properties and equipment 31 (2) (3)
Net securities gains (1) - (103)
Gain on sale of loans (7,081) (3,405) (116)
Gain on sale of mortgage servicing rights (479) - -
Net securities amortization 110 73 41
Deferred federal income tax (credit) 58 (1,785) (43)
(Increase) decrease in interest receivable and other
assets (4,499) 29 (513)
Proceeds from sale of loans 1,753,467 677,925 8,358
Proceeds from sale of mortgage servicing rights 2,610 - -
Servicing rights on loans sold with servicing retained (35,909) (12,428) (84)
Origination of loans held for sale (1,895,505) (623,241) (7,771)
Net repurchase of loans held for sale (8,521) (3,143) -
Increase (decrease) in accrued interest and other
liabilities 3,465 (1,823) 2,414
------------- ---------- ----------
Net cash (used in) provided by operating activities (165,369) 51,346 11,585

Investing activities
Proceeds from maturities of available-for-sale securities 20,039 56,155 13,231
Proceeds from sale of available-for-sale securities 2,001 - 22,220
Purchases of available-for-sale securities (30,395) (20,967) (39,838)
Proceeds from maturities of held-to-maturity securities 3,594 7,354 4,929
Proceeds from sale of real estate and other assets held for
sale 3,079 1,805 1,519
Proceeds from sale of office properties and equipment
and investment properties 416 19 3
Purchase of mortgage servicing rights - (3,417) -
Acquisition of The Leader Mortgage Co., net of cash received - (30,142) -
Acquisition of The Insurance Center of Defiance,
net of cash received (1,918) (45) -
Adjustment of acquisition of First Insurance & Investments (274) - -
Acquisition of Moreland Greens 217 - -
Purchases of Federal Home Loan Bank stock - (7,062) (731)
Proceeds from sale of Federal Home Loan Bank stock (3,355) - -
Purchases of premises and equipment (4,417) (2,595) (5,280)
Net increase in mortgage and other loans (12,668) (53,171) (29,864)
------------- ---------- ----------
Net cash used in investing activities (23,681) (52,066) (33,811)

60

First Defiance Financial Corp.

Consolidated Statements of Cash Flows (continued)

Years Ended December 31
1999 1998 1997
--------- --------- ---------
(In thousands)

Financing activities
Net increase in deposits and advance payments by
borrowers for taxes and insurance 53,198 115,329 12,797
Net increase in Federal Home Loan Bank short-term advances 8,355 2,510 31,804
Proceeds from Federal Home Loan Bank long-term advances 105,000 95,000 --
Repayment of Federal Home Loan Bank long-term advances (16,087) (1,033) (960)
Repayment of long term notes (60) (54,101) --
Increase (decrease) in mortgage warehouse loans 47,043 (125,490) --
Purchase of common stock for treasury (10,394) (18,073) (14,547)
Cash dividends paid (2,692) (2,781) (2,783)
Proceeds from exercise of stock options 417 868 160
--------- --------- ---------
Net cash provided by financing activities 184,780 12,229 26,471
--------- --------- ---------

(Decrease) increase in cash and cash equivalents (4,270) 11,509 4,245
Cash and cash equivalents at beginning of period 20,506 8,997 4,752

Cash and cash equivalents at end of period $ 16,236 $ 20,506 $ 8,997
========= ========= =========

Supplemental cash flow information:
Interest paid $ 30,482 $ 28,041 $ 20,194
========= ========= =========
Income taxes paid $ 5,325 $ 2,567 $ 2,739
========= ========= =========
Transfers from loans to real estate, mobile homes
and other assets held for sale $ 2,533 $ 2,109 $ 1,793
========= ========= =========
Noncash operating activities:
Change in deferred taxes on net unrealized gains or
losses on available-for-sale securities $ (648) $ 108 $ 178
========= ========= =========
Noncash investing activities:
Change in net unrealized (loss) gain on available-for-sale
securities $ (1,906) $ 320 $ 525
========= ========= =========
Securitization of loans held for sale $ 29,805 $ -- $ --
========= ========= =========
Acquisition of The Insurance Center of Defiance for stock $ -- $ 2,092 $ --
========= ========= =========
Noncash financing activities:
Cash dividends declared but not paid $ 703 $ 710 $ 720
========= ========= =========

See accompanying notes.

61

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

December 31, 1999
1. Basis of Presentation

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

First Federal is primarily engaged in attracting deposits from the general
public through its offices and using those and other available sources of funds
to originate loans primarily in the counties in which its offices are located.
First Federal's traditional banking activities include originating and servicing
residential, commercial and consumer loans and providing a broad range of
depository and trust services. First Federal is subject to the regulations of
certain federal agencies and undergoes periodic examinations by those regulatory
authorities.

The Leader is a mortgage banking company that specializes in servicing mortgage
loans under first-time home-buyer programs sponsored by various state, county
and municipal governmental entities. The Leader's mortgage banking activities
consist primarily of originating or purchasing residential mortgage loans for
either direct resale into secondary markets or to be securitized under various
Government National Mortgage Association ("GNMA") bonds.

First Insurance & Investments is an insurance agency that does business in the
Defiance, Ohio area offering property and casualty, group health, and life
insurance products.

2. Statement of Accounting Policies

Use of Estimates

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates. Most significantly, First Defiance uses estimates in determining the
value of the allowance for loan losses and in the valuation of mortgage
servicing rights.

62

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

2. Statement of Accounting Policies--Continued

Earnings Per Share

Earnings per share are based on the weighted average number of shares of common
stock. Basic earnings per share excludes any dilutive effects of options and
unvested stock grants.

Cash and Cash Equivalents

Cash and cash equivalents include amounts due from banks and overnight
investments with the Federal Home Loan Bank ("FHLB"). Cash and amounts due from
depository institutions includes required balances at the FHLB and Federal
Reserve of approximately $350,000 and $100,000, respectively, at December 31,
1999.

Investment Securities

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

Debt securities not classified as held-to-maturity and equity securities are
classified as available-for-sale. Available-for-sale securities are stated at
fair value, with the unrealized gains and losses, net of tax, reported in a
separate component of stockholders' equity until realized.

Loans held for sale securitized in the normal course of The Leader's operations
have been classified as trading securities, reported at fair market value. These
securities have been committed to sell at their carrying value.

Realized gains and losses, and declines in value judged to be
other-than-temporary are included in gains (losses) on sale of securities. The
cost of mutual funds sold is based on the average cost method. The cost of all
other securities sold is based on the specific identification method.

63

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

2. Statement of Accounting Policies--Continued

Currently, First Defiance invests in on-balance sheet derivative securities as
part of the overall asset and liability management process. Such derivative
securities are disclosed in Note 4 and include agency step-up, REMIC and CMO
investments. Such investments are not classified as high risk at December 31,
1999 and do not present risk significantly different than other mortgage-backed
or agency securities. First Defiance does not invest in off-balance sheet
derivative securities.

Investments Required by Regulations

As a member of the FHLB System, First Federal is required to own stock of the
FHLB of Cincinnati in an amount principally equal to the greater of 1% of its
net home mortgage loans or 5% of FHLB advances, subject to periodic redemption
at par if the stock owned is over the minimum requirement. FHLB stock is a
restricted equity security that does not have a readily determinable fair value
and is carried at cost.

Loans Receivable

Investment in real estate mortgage loans consists principally of long-term
conventional loans collateralized by first mortgages on single-family
residences, other residential property, and commercial and industrial property.
Such loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans.

Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the aggregate.

Nonrefundable fees and related costs associated with originating or acquiring
real estate mortgage and other loans are capitalized and recognized as an
adjustment of the yield of the related loan.

Interest receivable is accrued on loans and credited to income as earned. The
accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is fully reserved.
Interest income is subsequently recognized only to the extent cash payments are
received.

64

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

2. Statement of Accounting Policies--Continued

Management's determination of the adequacy of the allowance for loan losses is
based on an evaluation of the portfolio, past loan loss experience, current
economic conditions, volume, growth and composition of the loan portfolio, and
other relevant factors. The allowance is increased by provisions for loan losses
charged against earnings and decreased by charge-offs (net of recoveries).

Mortgage Servicing Rights

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

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

Fair values for individual stratum are based on the present value of estimated
future cash flows using a discount rate (10.3%) commensurate with the risks
involved. Estimates of fair value include assumptions about prepayment (117%
PSA), default and interest rates, and other factors which are subject to change
over time. Changes in these underlying assumptions could cause the fair value of
mortgage servicing rights, and the related valuation allowance, to change
significantly in the future.

Real Estate and Other Assets Held for Sale

Assets held for sale are comprised of properties acquired through foreclosure
proceedings or acceptance of a deed in lieu of foreclosure. These properties are
carried at the lower of cost or fair value at time of foreclosure or insubstance
foreclosure. Loan losses arising from the acquisition of such property are
charged against the allowance for loan losses.

65

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

2. Statement of Accounting Policies--Continued

Premises and Equipment

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

Buildings and improvements 20 to 50 years
Furniture, fixtures and equipment 5 to 15 years

Long-lived assets to be held and those to be disposed of and certain intangibles
are evaluated for impairment using the guidance provided by SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. The provisions of this statement establish when an impairment
loss should be recognized and how it should be measured.

Income Taxes

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

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

An effective tax rate of 34% is used to determine after-tax components of other
comprehensive income included in the statements of stockholders' equity.

Business Combinations

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

66

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

2. Statement of Accounting Policies--Continued

Intangibles

The excess of the purchase price over the net identifiable tangible assets
acquired in purchase business combinations is recorded as goodwill. Goodwill
relating to The Leader acquisition is being amortized over a twenty-year period.
Goodwill relating to First Insurance & Investments is being amortized over a
fifteen-year period. Amounts paid for non-compete and employment agreements in
conjunction with the acquisition of The Leader have been capitalized and are
being amortized over the life of the agreements. On a periodic basis, management
reviews goodwill and other intangible assets to determine if events or changes
in circumstances indicate the carrying value of such assets is not recoverable,
in which case an impairment charge would be recorded.

Reporting Comprehensive Income

In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 130, Reporting Comprehensive Income.
This statement establishes standards for reporting the components of
comprehensive income and requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
included in a financial statement that is displayed with the same prominence as
other financial statements. Comprehensive income includes net income as well as
certain items that are reported directly within a separate component of
stockholders' equity and bypass net income. First Defiance adopted the
provisions of this statement in 1998. These disclosure requirements had no
impact on financial position or results of operations.

Disclosures about Segments of an Enterprise and Related Information

In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. The provisions of this statement require
disclosure of financial and descriptive information about an enterprise's
operating segments in annual and interim financial reports issued to
shareholders. This statement defines an operating segment as a component of an
enterprise that engages in business activities that generate revenue and incur
expense, whose operating results are reviewed by the chief operating decision
maker in the determination of resource allocation and performance, and for which
discrete financial information is available. The Company adopted the provisions
of this statement for 1998 annual reporting. These disclosure requirements had
no impact on financial position or results of operations.

67

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

2. Statement of Accounting Policies--Continued

Accounting for Derivative Instruments and Hedging Activities

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The provisions of this statement require
that derivative instruments be carried at fair value on the balance sheet. The
statement continues to allow derivative instruments to be used to hedge various
risks and sets forth specific criteria to be used to determine when hedge
accounting can be used. The statement also provides for offsetting changes in
fair value or cash flows of both the derivative and the hedged asset or
liability to be recognized in earnings in the same period; however, any changes
in fair value or cash flow that represent the ineffective portion of a hedge are
required to be recognized in earnings and cannot be deferred. For derivative
instruments not accounted for as hedges, changes in fair value are required to
be recognized in earnings.

The provisions of this statement become effective for quarterly and annual
reporting beginning June 15, 2000. Although the statement allows for early
adoption, First Defiance has no plans to adopt the provisions of SFAS No. 133
prior to the effective date. The impact of adopting the provisions of this
statement on First Defiance's financial position, results of operations and cash
flow subsequent to the effective date is not currently estimable and will depend
on the financial position of the Corporation and the nature and purpose of the
derivative instruments in use by management at that time.

Reclassifications

Certain reclassifications of 1998 and 1997 information have been made to conform
with the 1999 presentation.

68

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

3. Earnings Per Share

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

1999 1998 1997
------ ------ ------
(In thousands, except per share amounts)

Numerator for basic and diluted earnings
per share-net income $8,623 $3,111 $5,407
====== ====== ======

Denominator:
Denominator for basic earnings per
share-weighted-average shares 6,502 7,491 8,360
Effect of dilutive securities:
Employee stock options 113 223 252
Unvested Management Recognition
Plan stock 85 97 94
------ ------ ------
Dilutive potential common shares 198 320 346
------ ------ ------
Denominator for diluted earnings per
share-adjusted weighted-average shares 6,700 7,811 8,706
====== ====== ======

Basic earnings per share $ 1.33 $ .42 $ .65
====== ====== ======

Diluted earnings per share $ 1.29 $ .40 $ .62
====== ====== ======

69

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

4. Investment Securities

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

December 31, 1999
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-Sale Securities Cost Gains Losses Value
-------- ------- -------- ---------
(In thousands)

U.S. Treasury securities and obligations
of U.S. Government corporations and agencies $ 16,778 $ - $ 404 $ 16,374
Corporate bonds 14,865 - 119 14,746
Adjustable rate mortgage-backed security
mutual funds 8,981 - 319 8,662
REMIC 1,807 - 22 1,785
Collateralized mortgage obligations 5,185 12 94 5,103
Trust preferred stock 2,000 - 408 1,592
Equity securities 343 - 42 301
Obligations of state and political subdivisions 5,646 - 263 5,383
-------- ------- -------- ---------

Totals $ 55,605 $ 12 $ 1,671 $ 53,946
======== ======= ======== =========

Held-to-Maturity Securities

FHLMC certificates $ 3,416 $ 35 $ 8 $ 3,443
FNMA certificates 4,075 26 114 3,987
GNMA certificates 1,506 28 3 1,531
Obligations of states and political
subdivisions 898 94 - 992
-------- ------- -------- ---------

Totals $ 9,895 $ 183 $ 125 $ 9,953
======== ======= ======== =========

70

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

4. Investment Securities--Continued

December 31, 1998
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Available-for-Sale Securities Cost Gains Losses Value
------- ------- ------- -------
(In thousands)

U.S. Treasury securities and obligations
of U.S. Government corporations and agencies $ 7,021 $ 50 $ 8 $ 7,063
Commercial paper 5,961 5 -- 5,966
Corporate bonds 11,073 124 1 11,196
Adjustable rate mortgage-backed security
mutual funds 8,981 -- 247 8,734
REMIC 2,827 44 -- 2,871
Collateralized mortgage obligations 6,194 266 22 6,438
Obligations of state and political subdivisions 5,252 46 12 5,286
------- ------- ------- -------

Totals $47,309 $ 535 $ 290 $47,554
======= ======= ======= =======

Held-to-Maturity Securities

FHLMC certificates $ 5,258 $ 79 $ 27 $ 5,310
FNMA certificates 5,346 48 95 5,299
GNMA certificates 1,927 43 2 1,968
Obligations of states and political 1,010 166 -- 1,176
subdivisions
------- ------- ------- -------

Totals $13,541 $ 336 $ 124 $13,753
======= ======= ======= =======

The amortized cost and fair value of securities at December 31, 1999 by
contractual maturity are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Mutual funds are not
due at a single maturity date. For purposes of the maturity table,
mortgage-backed securities, which are not due at a single maturity date, have
been allocated over maturity groupings based on the weighted-average contractual
maturities of the underlying collateral. The mortgage-backed securities may
mature earlier than their weighted-average contractual maturities because of
principal prepayments.

71

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

4. Investment Securities--Continued

Available-for-Sale Held-to-Maturity
---------------------------- ----------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
---------- ---------- --------- ---------
(In thousands)

Due in one year or less $ 4,550 $ 4,544 $ 441 $ 442
Due after one year through
five years 31,618 31,018 1,045 1,076
Due after five years through
ten years 6,991 6,742 406 453
Due after ten years 3,122 2,677 8,003 7,982
---------- ---------- --------- ---------
46,281 44,981 9,895 9,953

Adjustable rate mortgage-backed
security mutual
funds 8,981 8,662 - -
Equity securities 343 303 - -
---------- ---------- --------- ---------

Totals $ 55,605 $ 53,946 $ 9,895 $ 9,953
========== ========== ========= =========

5. Loan Commitments and Delinquencies

Loan commitments are made to accommodate the financial needs of First Defiance's
customers. The associated credit risk is essentially the same as that involved
in extending loans to customers and is subject to First Defiance's normal credit
policies. Collateral such as mortgages on property and equipment, receivables
and inventory is obtained based on management's credit assessment of the
customer. At December 31, 1999, First Defiance's outstanding commitments to fund
long-term mortgage loans amounted to approximately $2,353,000 which were
comprised of approximately 42% fixed rate and 58% adjustable rate loans with
rates ranging from 7.50% to 9.125%. First Defiance's commitment to sell long
term mortgage loans amounted to $209,102,000 as of December 31, 1999. First
Defiance's maximum exposure to credit loss for loan commitments (unfunded loans,
unused lines of credit and letters of credit) was $78,996,000 at December 31,
1999.

Unpaid balances of mortgage and installment loans with contractual payments
delinquent 90 days or more totaled $13,826,000 at December 31, 1999 and
$12,854,000 at December 31, 1998. First Federal does not anticipate any
significant losses in the collection of these delinquent loans in excess of the
allowance for loan losses.

72

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

5. Loan Commitments and Delinquencies--Continued

Impaired loans having recorded investments of $570,000 at December 31, 1999 and
1998 has been recognized in conformity with FASB Statement No. 114, as amended
by FASB Statement No. 118. The average recorded investment in impaired loans
during 1999 and 1998 was $570,000. The total allowance for loan losses related
to these loans was $402,000 at December 31, 1999 and 1998. Interest received and
recorded in income during 1999, 1998 and 1997 on impaired loans included
interest received and recorded in income prior to such impaired loan designation
amounted to $36,000, $155,000 and $53,000, respectively.

Loans having carrying values of $2.5 million and $2.1 million were transferred
to real estate and other assets held for sale in 1999 and 1998, respectively.

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

6. Loans Receivable

December 31
1999 1998
-------- --------
(In thousands)

Loans receivable consist of the following at December 31:
Mortgage loans:
Secured by one-to-four-family residences $220,390 $245,206
Secured by other properties 21,502 27,454
Construction loans 7,808 8,258
Other mortgage loans 2,156 2,745
-------- --------
251,856 283,663
Other loans:
Automobile 55,673 75,166
Mobile home 46 3,117
Commercial 138,125 70,109
Home equity and improvement 22,781 18,168
Other 8,653 12,002
-------- --------
225,278 178,562
-------- --------
Total mortgage and other loans 477,134 462,225

Deduct:
Undisbursed loan funds 3,291 3,250
Net deferred loan origination fees and costs 764 612
Allowance for loan losses 7,758 9,789
-------- --------

Totals $465,321 $448,574
======== ========

73

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

6. Loans Receivable--Continued

Changes in the allowance for mortgage and other loan losses were as follows:

Year Ended December 31
1999 1998 1997
------- ------- -------
(In thousands)

Balance at beginning of year $ 9,789 $ 2,686 $ 2,217
Charge-offs (4,235) (2,080) (1,341)
Recoveries 279 220 197
------- ------- -------
Net charge-offs (3,956) (1,860) (1,144)
Acquired allowance of The Leader -- 1,194 --
Provision charged to income 1,925 7,769 1,613
------- ------- -------

Balance at end of year $ 7,758 $ 9,789 $ 2,686
======= ======= =======

Interest income on mortgage and other loans is as follows:

Year Ended December 31
1999 1998 1997
------- ------- -------
(In thousands)

Mortgage loans $32,453 $28,695 $23,259
Other loans 17,474 14,674 14,043
------- ------- -------

Totals $49,927 $43,369 $37,302
======= ======= =======

74

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

7. Mortgage Banking

The activity in Mortgage Servicing Rights ("MSRs") is summarized as follows:

Year Ended December 31
1999 1998 1997
-------- -------- --------
(In thousands)

Balance at beginning of period $ 76,452 $ 188 $ 121
Acquired in purchase of The Leader -- 65,804 --
Loans sold, servicing retained 35,909 12,428 84
Purchased -- 3,417 --
Proceeds from sale of MSR's (2,610) -- --
Gain on sale of MSR's 479 -- --
Amortization (12,711) (5,385) (17)
-------- -------- --------

Balance at end of period $ 97,519 $ 76,452 $ 188
======== ======== ========

Accumulated amortization of MSRs aggregates approximately $17.5 million, $5.4
million, and $19,000 at December 31, 1999, 1998 and 1997, respectively.

At December 31, 1999, the estimated fair value of the servicing rights was
$137.0 million, as determined using a mortgage servicing rights valuation model.

The Company's servicing portfolio (excluding subserviced loans) is comprised of
the following:

December 31
1999 1998
----------------------------------------------------
Number of Principal Number of Principal
Loans Outstanding Loans Outstanding
----------------------------------------------------
(Dollars in thousands)

GNMA 66,587 $4,292,854 57,204 $3,375,844
FNMA 11,572 725,372 11,058 684,107
FHLMC 2,463 103,618 2,273 82,500
Other VA, FHA, and
conventional loans 16,069 917,219 12,235 713,418
------ ---------- ------ ----------

Totals 96,691 $6,039,063 82,770 $4,855,869
====== ========== ====== ==========

75

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

7. Mortgage Banking--Continued

The components of mortgage banking income, net of amortization are as follows:

Year Ended December 31
1999 1998 1997
-------------------------------------
(In thousands)

Loan servicing fee income $ 25,040 $ 10,697 $ 84
Late charges 3,116 1,374 --
-------- -------- --------
Total mortgage banking income 28,156 12,071 84
Gain on sale of loans 7,081 3,405 116
Gain on sale of MSR's 479 -- --
Amortization of mortgage servicing
rights (12,711) (5,385) (17)
-------- -------- --------

Totals $ 23,005 $ 10,091 $ 183
======== ======== ========

8. Premises and Equipment

Premises and equipment are summarized as follows:

December 31
1999 1998
------- -------
(In thousands)

Cost:
Land $ 2,570 $ 2,281
Buildings 14,774 12,974
Leasehold improvements 466 276
Furniture, fixtures and equipment 9,309 7,493
Construction in process 331 408
------- -------
27,450 23,432

Less allowances for depreciation and
amortization 6,139 4,375
------- -------

$21,311 $19,057
======= =======

76

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

8. Premises and Equipment--Continued

Interest capitalized on construction projects amounted to approximately $22,300
and $11,600 for the years ended December 31, 1999 and 1998, respectively.

The Leader leases office space from a partnership whose controlling partners
include officers of the Leader. The five year lease agreement provides for
annual base rents of $436,000 plus additional rents based on increases in
operating expenses and taxes. There were no outstanding amounts payable under
the lease agreement as of December 31, 1999.

9. Deposits

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

Years Ended December 31
1999 1998 1997
------- ------- -------
(In thousands)

Checking and money market accounts $ 2,180 $ 1,770 $ 1,400
Savings accounts 879 1,096 1,625
Certificates 16,852 15,486 15,051
------- ------- -------
19,911 18,352 18,076

Less interest capitalized 22 12 84
------- ------- -------

Totals $19,889 $18,340 $17,992
======= ======= =======

At December 31, 1999, accrued interest payable amounted to $1,339,000 which was
comprised of $1,242,000, $92,000 and $5,000 for certificates, checking and money
market accounts, and savings accounts, respectively.

A summary of deposit balances is as follows:

December 31
1999 1998
-------- --------
(In thousands)

Savings accounts $ 49,217 $ 54,624
Checking accounts 51,969 53,778
Money Market demand accounts 46,692 33,914
Certificates of deposit 355,091 291,663
-------- --------

$502,969 $433,979
======== ========

77

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

9. Deposits--Continued

Scheduled maturities of certificates of deposit are as follows:

December 31,
1999
-------------
(In thousands)

2000 $ 293,203
2001 52,263
2002 2,827
2003 3,244
2004 1,804
2005 and thereafter 1,750
-------------
Total $ 355,091
=============

At December 31, 1999 and 1998 deposits of $125.0 million and $63.7 million,
respectively, were in excess of the $100,000 Federal Deposit Insurance
Corporation limit. At December 31, 1999 and 1998, $20.9 and $7.7 million,
respectively, in investment securities were pledged as collateral against public
deposits for certificates in excess of $100,000.

10. Advances from Federal Home Loan Bank

First Federal has the ability to borrow funds from the FHLB. First Federal
pledges its single-family residential mortgage loan portfolio and certain
securities in its investment portfolio as security for these advances. At
December 31, 1999, the total available for collateral amounted to approximately
$414.7 million. Advances secured by mortgages must have collateral to exceed
borrowings by 150%. Advances secured by investment securities must have 100%
collateral. The total level of borrowing is also limited to 25% of total assets.
First Federal has a maximum potential to acquire advances of approximately
$283.8 million from the FHLB.

The FHLB made a series of fixed rate long-term advances to First Defiance during
1992 and a long-term fixed rate advance under the FHLB Affordable Housing
Program in 1995. Additionally, as of December 31, 1999 there were $185.0 million
outstanding under various long-term FHLB advance programs.

78

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

10. Advances from Federal Home Loan Bank--Continued

Under one such program, $25.0 million was outstanding with a ten-year maturity
and is callable at the option of the FHLB after one year and on each quarter
thereafter. Under a second long-term advance program, First Defiance has $10.0
million outstanding for a ten-year term, callable at the option of the FHLB on
the advance's five-year anniversary. Under a third program, First Defiance has
$25.0 million outstanding for a five-year term, callable at the option of the
FHLB on the two-year anniversary. Under a fourth program, First Defiance has $30
million outstanding for a five-year term, callable at the option of the FHLB
after six months and on each quarter thereafter. Under a fifth program, First
Defiance has $60 million outstanding for a ten year term, callable at the option
of the FHLB after six months and on each quarter thereafter. The remaining $35.0
million of long-term advances has a two year term and no call provisions. The
total FHLB long-term advances bear a weighted average interest rate of 5.28% at
December 31, 1999.

Future minimum payments by fiscal year are as follows:

(In thousands)
------------

2000 $ 44,993
2001 8,664
2002 8,249
2003 33,068
2004 36,825
Thereafter 120,465
------------
Total minimum payments 252,264
Less amounts representing interest 64,854
------------

Totals $ 187,410
============

79

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

10. Advances from Federal Home Loan Bank--Continued

First Defiance also utilizes short-term advances from the FHLB to meet cash flow
needs and for short-term investment purposes. There were $78.0 million in
short-term advances outstanding at December 31, 1999 ($69.6 million at December
31, 1998). First Defiance borrows short-term advances under a variety of
programs at FHLB. At December 31, 1999, $78.0 million was outstanding under
First Defiance's REPO Advance line of credit. The total available under the REPO
line is $175.0 million. Amounts are generally borrowed under the REPO line on an
overnight basis. Other advances may be borrowed under the FHLB's short-term
fixed or LIBOR based programs, however there were no outstanding balances at
December 31, 1999. Information concerning short-term advances is summarized as
follows:

Year Ended December 31
1999 1998
-------- --------
(In thousands, except percentages)

Average balance during the year $ 88,247 $ 49,462
Maximum month-end balance during the year 136,250 69,645
Average interest rate during the year 5.29% 5.43%

80

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

11. Notes Payable

Total mortgage warehouse, revolving and term debt is summarized as follows:

December 31
1999 1998
---------- --------
(in thousands)

Mortgage Warehouse and revolving loans:
$160,000 revolving warehouse loan agreement with various banks, secured by
mortgage loans held for sale, interest at federal funds rate plus
0.60--1.25% or the LIBOR index plus 1.00% (6.64% weighted average rate at
December 31, 1999); $112,957,000 available at December 31, 1999 $ 47,043 $ -
---------- --------
$10,000 revolving line of credit facility, secured by corporate securities,
interest at federal funds rate plus 0.75%; $10,000,000 available at
December 31, 1999 - -
---------- --------

Total mortgage warehouse and revolving loans 47,043 -

Term Notes Payable:
Industrial Development Revenue Bonds payable to Cuyahoga County, secured by
real estate and a letter of credit, interest is calculated using a tax
exempt rate applicable for the prescribed adjustment period, currently
weekly. During 1999 the interest rate ranged from 3.0% to 4.95%. The
issue matures March 1, 2019. 5,025 -
Notes payable to the City of Cleveland, recorded at discounted value,
secured by real estate with interest at 0% per annum. Balance due at
maturity on March 1, 2009 is $928,450. 569 -
Note payable to City of Cleveland Housing Trust Fund, secured by real
estate, interest at 2% per annum, maturing March 1, 2009. 498 -
Note payable to bank, secured by real estate, interest at 7% per annum,
maturing March 1, 2019. 82 -
Note payable to related party, unsecured with interest at 5% per annum,
maturing October 1, 2004. 169 196
Note payable to bank, secured by business assets, interest at 7.5% per
annum, maturing March 1, 2003. 118 146
Note payable to bank, unsecured, with interest at 8.75% per annum, maturing
January 25, 2002. Refinanced March 1, 1999. - 26
---------- --------
Total term notes payable 6,461 368
---------- --------

Total borrowed money $ 53,504 $ 368
========== ========

81

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

11. Notes Payable -- continued

As of December 31, 1999 the maturities of term notes payable during the next
five years and thereafter are as follows (in thousands):

2000 $ 209
2001 224
2002 239
2003 241
2004 254
Thereafter 5,294
-------

$ 6,461
=======

12. Postretirement Benefits

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

82

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

12. Postretirement Benefits--Continued

The plan is not currently funded. The following table summarizes benefit
obligation and plan asset activity for the plan:

December 31
1999 1998
-------- --------
(In thousands)

Change in fair value of plan assets:
Balance at beginning of measurement period $ - $ -
Employer contribution 55 35
Participant contribution 4 3
Benefits paid (59) (38)
-------- --------
Balance at end of measurement period - -
Change in benefit obligation:
Balance at beginning of measurement period 852 787
Service cost 34 40
Interest costs 45 55
Participant contribution 4 (3)
Actuarial (gains) losses (125) 11
Benefits paid (58) (38)
-------- --------
Balance at end of measurement period 752 852
-------- --------
Funded status 752 852

Unrecognized prior service cost (51) (55)
Unrecognized net gain 137 17
-------- --------
Accrued postretirement benefit obligation
included in accrued interest and other expenses
in consolidated statement of financial condition $ 838 $ 814
======== ========

Net periodic postretirement benefit cost includes the following components:

Year Ended December 31
1999 1998 1997
-------- -------- --------
(In thousands)

Service cost-benefits attributable to service
during the period $ 34 $ 40 $ 50
Interest cost on accumulated postretirement benefit
obligation 45 55 51
Net amortization and deferral - 11 37
-------- -------- --------

Net periodic postretirement benefit cost $ 79 $ 106 $ 138
======== ======== ========

83

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

12. Postretirement Benefits--Continued

For measurement purposes, 4.25%, 4.25% and 5.0% annual rates of increase in the
per capita cost of covered health care benefits were assumed for 1999, 1998 and
1997. The health care cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed health care cost trend
rate by 1 percentage point for each year would increase the accumulated
postretirement benefit obligation as of December 31, 1999 by $137,000 and the
aggregate of the service and interest cost for the year then ended by $18,000.

The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 6.5% for 1999, 1998 and 1997.

13. Regulatory Matters

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

Quantitative measures established by regulation to ensure capital adequacy
require First Federal to maintain minimum amounts and ratios of Tier I and total
capital to risk-weighted assets and of Tier I capital to average assets. As of
December 31, 1999 and 1998, First Federal meets all capital adequacy
requirements to which it is subject.

84

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

13. Regulatory Matters--Continued

The most recent notification from the Office of Thrift Supervision categorized
First Federal as well capitalized under the regulatory framework.

The following schedule presents First Federal's regulatory capital ratios:

Regulatory Capital Standards
---------------------------------------------------------
Actual Required
--------------------- -----------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
(In thousands, except percentages)

As of December 31, 1999:
Tangible Capital $ 51,641 5.41% $ 14,312 1.5%
Core Capital 51,641 5.41 38,165 4.0
Risk-Based Capital 57,594 10.09 45,668 8.0

As of December 31, 1998:
Tangible Capital $ 52,265 6.80% $ 11,537 1.5%
Core Capital 52,265 6.80 30,766 4.0
Risk-Based Capital 82,187 14.82 44,363 8.0

14. Income Taxes

The components of income tax expense are as follows:

Years Ended December 31
1999 1998 1997
---------- ---------- ----------
(In thousands)

Current:
Federal $ 4,571 $ 3,584 $ 2,812
State - 19 216
Deferred (credit) 58 (1,785) (43)
---------- ---------- ----------

$ 4,629 $ 1,818 $ 2,985
========== ========== ==========

85

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

14. Income Taxes--Continued

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

Years Ended December 31
1999 1998 1997
---------- ---------- ----------
(In thousands)

Tax expense at statutory rate $ 4,507 $ 1,676 $ 2,853
Increases (decreases) in taxes from:
Goodwill amortization 249 96 -
State income tax--net of federal tax
benefit - 13 143
Tax exempt interest income (103) (84) (36)
Other (24) 117 25
---------- ---------- ----------

Totals $ 4,629 $ 1,818 $ 2,985
========== ========== ==========

86

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

14. Income Taxes--Continued

Deferred federal income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of First Defiance's deferred federal income tax assets and
liabilities are as follows:

December 31
1999 1998
------- -------
(In thousands)

Deferred federal income tax assets:
Net unrealized losses on available-for-sale
securities $ 565 $ --
Allowance for loan losses 2,518 3,907
Postretirement benefit costs 285 277
Deferred compensation and management
recognition plans 757 530
State income tax 23 29
Other 224 190
------- -------
Total deferred federal income tax assets 4,372 4,933
Deferred federal income tax liabilities:
Net unrealized gains on available-for-sale
securities -- 83
Mortgage servicing rights 5,114 6,272
FHLB stock dividends 1,019 727
Deferred loan origination fees and costs (net) 134 333
Other 337 365
------- -------
Total deferred federal income tax liabilities 6,604 7,780
------- -------
Net deferred federal income tax liability $(2,232) $(2,847)
======= =======

No valuation allowance was required at December 31, 1999 or 1998.

87

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

14. Income Taxes--Continued

Retained earnings at December 31, 1999 include financial statement tax bad debt
reserves of $10.4 million. The Small Business Job Protection Act of 1996 passed
on August 20, 1996 eliminated the special bad debt deduction previously granted
solely to thrifts. This results in the recapture of past taxes for permanent
deductions arising from the "applicable excess reserve," which is the total
amount of First Federal's reserve over its base year reserve as of December 31,
1987. The recapture tax is due in six equal annual installments beginning after
December 31, 1996. However, deferral of those payments was permitted for up to
two years, contingent upon satisfying a specified mortgage origination test for
1997 and 1998 (which was met). At December 31, 1999, First Federal had $830,000
in excess of the base year reserves. Deferred taxes have been provided related
to this item. No provision is required to be made for the $9.52 million of base
year reserves.

15. Employee Benefit Plans

Employees of First Federal are eligible to participate in the First Federal
Savings and Loan 401(k) Employee Savings Plan ("First Federal 401(k)") if they
meet certain age and service requirements. Under the First Federal 401(k), First
Federal matches 50% of the participants' contributions, to a maximum of 3% of
compensation. The First Federal 401(k) also provides for a discretionary First
Federal contribution in addition to the First Federal matching contribution. For
the year ended December 31, 1999, First Federal's matching contribution was
$171,000 and the discretionary company contribution was $419,000. For the year
ended December 31, 1998, First Federal's matching contribution was $92,400 and
there was no discretionary company contribution. Prior to 1998, the First
Federal 401(k) had been frozen, so there were no contributions to the plan for
1997.

The Leader sponsored The Leader Mortgage Company Savings and Investment Plan and
Trust ("The Leader 401(k)"). All employees of The Leader who met certain age and
eligibility requirements were eligible to participate. The Leader matched
employee contributions to The Leader 401(k) 100% up to federally proscribed
limits. Matching contributions to The Leader 401(k) from January 1, 1999 to
March 31, 1999 amounted to $70,000. Effective April 1, 1999, The Leader 401(k)
was merged into the First Federal 401(k), with all assets and liabilities of The
Leader 401(k) becoming assets and liabilities of the First Federal 401(k).

88

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

15. Employee Benefit Plans--Continued

First Insurance and Investments sponsored the Stauffer-Mendenhall Agency
Employees Retirement Savings Plan. ("First Insurance 401(k)"). All employees who
met certain age and eligibility requirements were eligible to participate. First
Insurance matched employee contributions to the First Insurance 401(k) 10% up to
federally proscribed limits. Matching contributions to the First Insurance
401(k) from January 1, 1999 to September 30, 1999 amounted to $3,000. Effective
October 1, 1999, the First Insurance 401(k) was merged into the First Federal
401(k), with all assets and liabilities of the First Insurance 401(k) becoming
assets and liabilities of the First Federal 401(k).

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

To fund the plan, the ESOP borrowed funds from First Defiance for the purpose of
purchasing shares of First Defiance common stock. The ESOP acquired a total of
863,596 shares in 1993 and 1995. The loan outstanding at December 31, 1999 was
$4,357,000. Principal and interest payments on the loan are due in equal
quarterly installments through June of 2008. The loan is collateralized by the
shares of First Defiance's common stock and is repaid by the ESOP with funds
from the Company's contributions to the ESOP, dividends on unallocated shares
and earnings on ESOP assets.

As principal and interest payments on the loan are paid, shares are released
from collateral and committed for allocation to active employees, based on the
proportion of debt service paid in the year. Shares held by the ESOP which have
not been released for allocation are reported as stock acquired by the ESOP plan
in the statement of financial condition. As shares are released, First Defiance
records compensation expense equal to the average fair value of the shares over
the period in which the shares were earned. Also, the shares released for
allocation are included in the average shares outstanding for earnings per share
computations. Dividends on allocated shares are recorded as a reduction of
retained earnings and dividends on unallocated shares are recorded as additional
ESOP expense. ESOP compensation expense was $470,000, $579,000 and $1,025,000
for 1999, 1998 and 1997, respectively. As of December 31, 1999, 450,643 ESOP
shares have been released for allocation of which 438,445 were allocated to
participants. The 412,954 unreleased shares have a fair value of $4.3 million at
December 31, 1999.

89

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

15. Employee Benefit Plans--Continued

The Shareholders of First Defiance approved and established Management
Recognition Plans ("MRP") in 1993 and 1996 to provide directors, officers and
employees with a proprietary interest in First Defiance as incentive to
contribute to its success. Cash was contributed to the MRP in the form of
deferred compensation amounting to $800,000 in 1993 and $2,817,452 in 1996. The
$800,000 contributed in 1993 was used to purchase 172,722 shares of First
Defiance common stock. All shares acquired in 1993 were granted on July 19,
1993. A total of 255,098 of the shares acquired in 1996 have been granted as of
December 31, 1999, not including 46,877 shares forfeited by participants who
terminated before their shares vested. The shares vest at a rate of 20% per year
over five years. First Defiance is amortizing the deferred compensation and
recording additions to stockholder's equity as the shares vest. Compensation
expense attributable to the MRP amounted to $385,000, $545,000 and $785,000 in
1999, 1998 and 1997 respectively.

First Federal had previously sponsored a defined benefit pension plan that
covered substantially all First Federal employees. During 1997, First Federal
amended the plan to eliminate all benefits for future service in connection with
a termination of the plan, which occurred in 1998. In conjunction with the
termination of the plan, all accumulated plan benefits became fully vested and
were distributed to participants in August, 1998.

Net periodic pension cost recognized for the year ended December 31, 1997
included the following components (in thousands, except percentages):

Service cost--benefits earned during the period $ 354
Interest cost on projected benefit obligation 291
Actual (return) loss on plan assets (6)
Net amortization and deferral 10
--------

Net periodic pension cost $ 649
========

Weighted average discount rate 6%
Rate of increase in future compensation levels -
Expected long-term rate of return on plan assets 5%

90

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

16. Stock Option Plans

First Defiance has established incentive stock option plans for its directors
and its employees and has reserved 1,033,485 shares of common stock for issuance
under the plans. A total of 773,204 shares are reserved for employees and
260,281 shares are reserved for directors. As of December 31, 1999, 871,426
options (654,108 for employees and 217,318 for directors) have been granted and
remain outstanding at option prices based on the market value of the underlying
shares on the date the options were granted. There are 321,785 options granted
under the 1993 plan that are currently exercisable while there are 607,462
options granted under the 1996 plan that vest at 20% per year beginning in 1997.
All options expire ten years from date of grant. Vested options of retirees
expire on the earlier of the scheduled expiration date or five years after the
retirement date for the 1993 plan and on the earlier of the scheduled expiration
date or twelve months after the retirement date for the 1996 plan.

FASB Statement No. 123, Accounting for Stock-Based Compensation defines a fair
value-based method of accounting for stock-based employee compensation plans.
Under the fair value-based method, compensation cost is measured at the grant
date based upon the value of the award and is recognized over the service
period. While the standard encourages entities to adopt this method of
accounting for employee stock compensation plans, it also allows an entity to
continue to measure compensation costs for its plans as prescribed in APB
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." First
Defiance has elected to continue to apply APB 25.

The following pro forma information regarding net income and earnings per share
assumes the adoption of Statement No. 123 for stock options. The estimated fair
value of the option is amortized to expense over the option and vesting period.
The fair value was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions:

December 31
1999 1998 1997
---- ---- ----

Risk free interest rate 5.56% 5.92% 6.23%
Dividend yield 2.49% 2.70% 2.68%
Volatility factors of expected market
price of stock 0.267% 0.282% 0.319%
Weighted average expected life 7.49 years 8.15 years 7.5 years
Weighted average grant date fair value
of options granted $ 3.48 $ 3.38 $ 2.83

91

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

16. Stock Option Plans--Continued

Based upon the above assumptions, pro forma net income and earnings per share
are as follows:

Years Ended December 31
1999 1998 1997
----------- ----------- ---------

Pro forma net income $ 8,310 $ 2,815 $ 5,015
=========== =========== =========

Pro forma earnings per share:
Basic $ 1.28 $ .38 $ .60
=========== =========== =========
Diluted $ 1.25 $ .36 $ .58
=========== =========== =========

The pro forma effects for 1999, 1998, and 1997 are not likely to be
representative of the pro forma effects for future years.

Because Statement No. 123 is applicable only to options granted subsequent to
December 31, 1994, options granted prior to December 31, 1994 do not have fair
value pro forma information provided.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
First Defiance's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

92

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

16. Stock Option Plans--Continued

The following table summarizes stock option activity for 1999 and 1998:

1999 1998
------------------------------------ ------------------------------------
Range of Range of
Option Option Option Option
Shares Prices Shares Prices
-------------------------------------------------------------------------

Outstanding at January 1 929,247 $4.63 to $15.50 870,140 $4.63 to $13.00
Granted 49,386 $11.25 to $11.75 183,702 $12.25 to $15.50
Exercised (55,219) $4.63 to $10.50 (95,933) $4.63 to $13.00
Expired or canceled (51,988) $10.50 to $15.50 (28,662) $4.63 to $13.00
-------------------------------------------------------------------------

Outstanding at December 31 871,426 $4.63 to $15.50 929,247 $4.63 to $15.50
=========================================================================

Exercisable to:
2000 26,209 $4.63 to $10.6575 30,581 $4.63 to $13.00
2002 26,000 $4.63 56,590 $4.63
2003 110,569 $4.63 124,214 $4.63
2004 21,590 $6.95 21,590 $6.95
2006 430,504 $10.375 to $10.6875 445,104 $10.375 to $10.6875
2007 68,966 $12.625 to $13.00 68,966 $10.625 to $13.00
2008 138,202 $12.25 to $15.50 182,202 $12.25 to $15.50
2009 49,386 $11.25 to $11.75
-------------------------------------------------------------------------

871,426 $4.63 to $15.50 929,247 $4.63 to $15.50
=========================================================================

Available for future grant
at December 3l 10,907 8,305
=========================================================================

17. Parent Company And Regulatory Restrictions

Dividends paid by First Federal to First Defiance are subject to various legal
and regulatory restrictions. First Federal can initiate dividend payments in
2000, without prior regulatory approval, of $8.5 million, plus an additional
amount equal to their net profits for 2000, as defined by statute, up to the
date of any such dividend declaration. No dividends were declared in 1999. In
1998, First Federal declared $20 million in dividends to the parent company.

93

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

17. Parent Company And Regulatory Restrictions--Continued

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

December 31
Statements of Financial Condition 1999 1998
------- -------
Assets (In thousands)

Cash and cash equivalents $ 137 $ 775
Investment securities, available for sale,
carried at fair value 67 --
Premises and equipment 552 --
Investment in subsidiaries 85,684 66,440
Subordinated debt receivable from First Federal -- 22,400
Loan receivable from First Federal Employee
Stock Ownership Plan 4,357 4,678
Other assets 111 103
------- -------

Total assets $90,908 $94,396
======= =======

Liabilities and stockholders' equity
Accrued liabilities $ 1,492 $ 686
Stockholders' equity 89,416 93,710
------- -------

Total liabilities and stockholders' equity $90,908 $94,396
======= =======

Year Ended December 31
Statements of income 1999 1998 1997
------- ------- -------
(In thousands)

Interest income $ -- $ -- $ 191
Interest on subordinated debt 895 1,063 2,475
Interest on loan to ESOP 392 419 454
Interest expense on notes payable (5) -- --
Other income 25 -- --
Gain on sale of investments -- -- 59
Non-interest expense (758) (350) (290)
------- ------- -------
Income before income taxes and equity
in earnings of subsidiaries 549 1,132 2,889
Income tax expense 343 399 1,124
------- ------- -------
Income before equity in earnings
of subsidiaries 206 733 1,765
Equity in earnings of subsidiaries 8,417 2,378 3,642
------- ------- -------

Net income $ 8,623 $ 3,111 $ 5,407
======= ======= =======

94

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

17. Parent Company And Regulatory Restrictions--Continued

Year Ended December 31
1999 1998 1997
--------- --------- ---------
(In thousands)
Statements of cash flows Operating activities:

Net income $ 8,623 $ 3,111 $ 5,407
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation 7 - -
Loss on sale of office properties and equipment 29 - -
Gain on sale of securities - - (58)
Provision for depreciation 7 - -
Loss or sale of office properties and equipment 29 - -
Deferred federal income taxes (credit) (19) (86) 10
Equity in earnings of subsidiaries (8,417) (2,378) (3,642)
Dividends received from subsidiary - 20,000 -
Change in other assets and liabilities 825 (8,401) 8,374
--------- --------- ---------
Net cash provided by operating activities 1,048 12,246 10,091

Investing activities:
Loan to subsidiary - (20,000) -
Proceeds from sale of available-for-sale securities - - 7,052
Proceeds from sale of office properties and equipment 416 - -
Principal payments received for subordinated debt 22,400 27,600 -
Purchase Insurance Center of Defiance - (50) -
Principal payments received on ESOP loan 321 294 466
Purchase of available-for-sale securities (70) - (112)
Purchase of premises and equipment (1,004) - -
--------- --------- ---------
Net cash provided by investing activities 22,063 7,844 7,406

Financing activities:
Stock options exercised 417 868 160
Purchase of common stock for treasury (10,394) (18,073) (14,547)
Capital contribution to subsidiaries (11,080) - -
Cash dividends paid (2,692) (2,781) (2,783)
--------- --------- ---------
Net cash used in financing activities (23,749) (19,986) (17,170)
--------- --------- ---------

Net (decrease) increase in cash and cash equivalents (638) 104 327
Cash and cash equivalents at beginning of year 775 671 344
--------- --------- ---------

Cash and cash equivalents at end of year $ 137 $ 775 $ 671
========= ========= =========
Non cash operating activities--change in deferred taxes
on net unrealized losses on available-for-sale securities $ (1) $ - $ -
========= ========= =========
Non cash investing activities--change in
net unrealized loss on available-for-sale securities $ (3) $ - $ -
========= ========= =========
Non cash financing activities--cash
dividends declared but not paid $ 703 $ 710 $ 720
========= ========= =========

95

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

18. Fair Value Statement of Consolidated Financial Condition

The following is a comparative condensed consolidated statement of financial
condition based on carrying and estimated fair values of financial instruments
as of December 31, 1999 and 1998. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. FASB Statement No. 107, Disclosures
about Fair Value of Financial Instruments excludes certain financial instruments
and all nonfinancial instruments from its disclosure requirements. Accordingly,
the aggregate fair value amounts presented do not represent the underlying value
of First Defiance Financial Corp.

December 31, 1999 December 31, 1998
-------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
Value Fair Values Value Fair Values
-----------------------------------------------------------------
(In thousands)

Assets:
Cash and cash equivalents $ 16,236 $ 16,236 $ 20,506 $ 20,506
Investment securities 93,646 93,704 61,095 61,307
Loans, net 702,943 699,987 568,484 573,396
----------- ----------- ----------- -----------
812,825 $ 809,927 650,085 $ 655,209
=========== ==========
Other assets 175,169 135,314
------------ -----------

Total assets $ 987,994 $ 785,399
=========== ===========
Liabilities and stockholders'
equity:
Deposits $ 502,969 $ 502,800 $ 433,979 $ 434,199
Advances from Federal Home
Loan Bank 265,410 265,169 168,142 168,143
Warehouse and term notes
payable 53,504 53,504 368 368
Advance payments by
borrowers for taxes and
insurance 61,542 61,542 77,334 77,334
----------- ----------- ----------- -----------
883,425 $ 883,015 679,823 $ 680,044
=========== ===========
Other liabilities 15,153 11,866
------------ -----------
898,578 691,689
Stockholders' equity 89,416 93,710
------------ -----------
Total liabilities and
stockholders' equity $ 987,994 $ 785,399
============ ===========

96

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

19. Acquisitions

On December 24, 1998, First Defiance completed the acquisition of the Insurance
Center of Defiance in a stock transaction valued at $2.1 million. The
acquisition has been accounted for as a purchase. First Defiance could be
subject to additional contingent consideration of up to $400,000 if certain
earnings criteria are met.

On September 1, 1999, First Insurance completed the asset acquisition of the
Defiance office of Insurance and Risk Management in a cash transaction valued at
$1.9 million. The acquisition has been accounted for as a purchase.

On July 1, 1998, First Federal completed the acquisition of The Leader, in a
cash transaction. At the date of acquisition, The Leader had assets of $197.3
million and equity of $14.0 million. The cash price of $34.9 million, including
$2 million held in escrow for indemnifiable claims, exceeded the fair value of
net assets acquired by approximately $11.3 million, which was recorded as
goodwill.

On May 31, 1999, The Leader exchanged a debt position in a partnership that
owned a Cleveland area apartment complex for a 100% ownership position.

Unaudited pro forma revenues, net income, basic and diluted earnings per share
for the years ended December 31, 1998 and 1997 had the purchase business
combinations been completed on January 1, 1997 were as follows:

Year Ended December 31
1998 1997
----------- ----------
(In thousands, except
per share amounts)

Revenues $ 85,386 $ 79,937
Net income $ 3,449 $ 4,075
Basic net income per share $ .46 $ .49
Diluted net income per share $ .44 $ .47

On a proforma basis, the First Insurance, Insurance and Risk Management, and
Cleveland partnership transactions were not considered to have a material
impact, and were therefore excluded from this disclosure.

97

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

19. Acquisitions--Continued

The Company expects to achieve operating cost savings primarily through the
utilization of lower cost sources of funding, the use of The Leader's custodial
escrow balances to reduce First Federal's cost of funds, consolidation of back
office functions, and the elimination of redundant expenses. The operating cost
savings are expected to be achieved in various amounts at various times during
the years subsequent to the acquisitions of The Leader and First Insurance and
not ratably over, or at the beginning or end of, such periods. No adjustment has
been reflected in the pro forma disclosures to reflect these anticipated cost
savings.

Net assets acquired in the acquisitions are as follows:

1999 1998
-------- --------
(In thousands)

Assets:
Loans held for sale $ -- $116,672
Mortgage servicing rights -- 65,804
Loans receivable -- 14,800
Goodwill 1,867 13,615
Cash 217 4,431
Property 29 --
Other assets 6,274 12,037

Liabilities assumed:
Warehouse and term notes 6,153 179,958
Other 316 10,691
-------- --------

$ 1,918 $ 36,710
======== ========

98

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

20. Line of Business Reporting

First Defiance operates two major lines of business. Retail banking, which
consists of the operations of First Federal, includes direct and indirect
lending, deposit-gathering, small business services, commercial lending and
consumer finance. Mortgage banking, which consists of the operations of The
Leader, includes buying and selling mortgages to the secondary market and the
subsequent servicing of these sold loans. The business units are identified by
the channels through which the product or service is delivered. The accounting
policies of the individual business units are the same as those of First
Defiance as described in Note 2. The retail-banking unit funds the
mortgage-banking unit and an investment/funding unit within the retail-banking
unit centrally manages interest rate risk. Transactions between business units
are primarily conducted at fair value, resulting in profits that are eliminated
for reporting consolidated results of operations.

The parent unit is comprised of the operations of First Insurance & Investments
and inter-segment income eliminations and unallocated expenses. Selected segment
information is included in the following table for 1999 and 1998 only, as there
were no distinct segments until July 1, 1998.

1999
-------------------------------------------------------
Retail Mortgage
Consolidated Parent Banking Banking
------------ ------ ------- -------
(In thousands)

Total interest income $ 53,379 $ (13,960) $ 54,388 $ 12,951
Total interest expense 31,582 (15,231) 35,657 11,156
--------- --------- --------- ---------
Net interest income 21,797 1,271 18,731 1,795
Provision for loan losses 1,925 6 149 1,770
--------- --------- --------- ---------
Net interest income after
provision 19,872 1,265 18,582 25
Non-interest income 40,794 1,039 3,747 36,008
Non-interest expense 47,414 1,824 16,023 29,567
--------- --------- --------- ---------
Income before income taxes 13,252 480 6,306 6,466
Income taxes 4,629 374 1,850 2,405
--------- --------- --------- ---------
Net income $ 8,623 $ 106 $ 4,456 $ 4,061
========= ========= ========= =========

Total assets $ 987,994 $(362,172) $ 926,139 $ 424,027
========= ========= ========= =========

99

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

20. Line of Business Reporting--Continued

1998
-----------------------------------------------------
Retail Mortgage
Consolidated Parent Banking Banking
------------ ------ ------- -------
(In thousands)

Total interest income $ 49,056 $ (510) $ 44,688 $ 4,878
Total interest expense 26,946 (1,992) 24,685 4,253
--------- --------- --------- ---------
Net interest income 22,110 1,482 20,003 625
Provision for loan losses 7,769 -- 7,418 351
--------- --------- --------- ---------
Net interest income after provision
14,341 1,482 12,585 274
Non-interest income 17,528 (144) 3,410 14,262
Non-interest expense 26,940 206 14,536 12,198
--------- --------- --------- ---------
Income before income taxes 4,929 1,132 1,459 2,338
Income taxes 1,818 399 513 906
--------- --------- --------- ---------
Net income $ 3,111 $ 733 $ 946 $ 1,432
========= ========= ========= =========

Total assets $ 785,399 $(231,950) $ 785,282 $ 232,067
========= ========= ========= =========

100

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

21. Quarterly Consolidated Results of Operations (Unaudited)

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

1999 Three Months Ended 1999
-----------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(In thousands, except per share amounts)

Interest income $12,481 $12,678 $13,732 $14,488
Interest expense 6,757 7,122 8,270 9,433
------- ------- ------- -------
Net interest income 5,724 5,556 5,462 5,055

Provision for loan losses 512 202 429 782
------- ------- ------- -------
Net interest income (loss) after
provision for loan
losses 5,212 5,354 5,033 4,273

Gain on sale of securities -- -- 1 --
Non-interest income 8,993 9,814 10,231 11,755
Non-interest expense 11,115 11,556 12,034 12,709
------- ------- ------- -------
Income (loss) before
income taxes 3,090 3,612 3,231 3,319
Income taxes 1,132 1,241 1,139 1,117
------- ------- ------- -------

Net income $ 1,958 $ 2,371 $ 2,092 $ 2,202
======= ======= ======= =======

Earnings per share:
Basic $ 0.29 $ 0.37 $ 0.32 $ 0.35
======= ======= ======= =======
Diluted $ 0.28 $ 0.36 $ 0.32 $ 0.34
======= ======= ======= =======

Average shares outstanding:
Basic 6,705 6,489 6,447 6,324
======= ======= ======= =======
Diluted 6,925 6,670 6,627 6,497
======= ======= ======= =======

101

First Defiance Financial Corp.

Notes to Consolidated Financial Statements - Continued

21. Quarterly Consolidated Results of Operations (Unaudited)--Continued

1998 Three Months Ended 1999
-----------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(In thousands, except per share amounts)

Interest income $ 11,342 $ 11,322 $ 12,976 $ 13,416
Interest expense 5,527 5,589 7,985 7,845
-------- -------- -------- --------
Net interest income 5,815 5,733 4,991 5,571

Provision for loan losses 448 239 1,039 6,043
-------- -------- -------- --------
Net interest income (loss) after
provision for loan
losses 5,367 5,494 3,952 (472)

Non-interest income 484 585 8,875 7,584
Non-interest expense 3,559 3,763 10,247 9,371
-------- -------- -------- --------
Income (loss) before
income taxes 2,292 2,316 2,580 (2,259)
Income taxes (credit) 784 771 919 (656)
-------- -------- -------- --------

Net income (loss) $ 1,508 $ 1,545 $ 1,661 $ (1,603)
======== ======== ======== ========

Earnings (loss) per share:
Basic $ .20 $ .21 $ .22 $ (.22)
======== ======== ======== ========
Diluted $ .19 $ .20 $ .21 $ (.22)
======== ======== ======== ========

Average shares outstanding:
Basic 7,606 7,464 7,513 7,370
======== ======== ======== ========
Diluted 7,985 7,814 7,786 7,658
======== ======== ======== ========

102

Report of Independent Auditors

To the Stockholders and the Board of Directors
First Defiance Financial Corp.

We have audited the consolidated statements of financial condition of First
Defiance Financial Corp. as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Defiance
Financial Corp. at December 31, 1999 and 1998, and the consolidated results of
its operations and cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.

/s/Ernst & Young LLP
--------------------
Ernst & Young LLP

Cleveland, Ohio
January 21, 2000

103

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

Not applicable.
PART III

Item 10. Directors and Executive Officers of the Registrant

The information required herein is incorporated by reference from pages
6 through 12 of the definitive proxy statement dated March 20, 2000. Otherwise,
the requirements of this Item 10 are not applicable.

Item 11. Executive Compensation

The information required herein is incorporated by reference from page
13 of the definitive proxy statement dated March 20, 2000.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required herein is incorporated by reference from page
3 of the definitive proxy statement dated March 20, 2000.

Item 13. Certain Relationships and Related Transactions

The information required herein is incorporated by reference from page
20 of the definitive proxy statement dated March 20, 2000.

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) (1) Financial Statements

The following consolidated financial statements are filed as a part of
this document under "Item 8. Financial Statements and Supplementary
Data."

Consolidated Statements of Financial Condition at December 31, 1999 and
1998.

Consolidated Statements of Income for each year in the three-year
period ended December 31, 1999.

104

Consolidated Statements of Stockholders' Equity for each year in the
three-year period ended December 31, 1999.

Consolidated Statements of Cash Flows for each year in the three-year
period ended December 31, 1999.

Notes to Consolidated Financial Statements.

Independent Auditors' Report.

(a) (2) Financial Statement Schedules

All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are included in the Notes to Financial Statements
incorporated herein by reference and therefore have been omitted.

(a) (3) Exhibits

The following exhibits are either filed as a part of this report or are
incorporated herein by reference to documents previously filed as indicated
below:

Exhibit
Number Description
- --------------------------------------------------------------------------------

3.1 Articles of Incorporation *
3.2 Form of Code of Regulations *
3.2 Bylaws *
4.1 Specimen Stock Certificate *
10.1 1996 Stock Option Plan **
10.2 1996 Management Recognition Plan and Trust ***
10.3 1993 Management Recognition Plan and Trust *
10.4 1993 Stock Incentive Plan *
10.5 1993 Directors' Stock Option Plan *
10.6 Employment Agreement with Don C. Van Brackel *
21.1 List of Subsidiaries of the Company ****
23.1 Consent of Independent Auditors ****
27 Financial Data Schedule ****

* Incorporated herein by reference to the like numbered exhibit in the
Registrant's Form S-1 (File No. 33-93354).
** Incorporated herein by reference to Appendix A to the 1996 Proxy Statement.
*** Incorporated herein by reference to Appendix B to the 1996 Proxy Statement.
**** Included herein.

105

(b) Reports on Form 8-K

None

(c) Exhibits

See (a)(3) above for all exhibits filed herewith or incorporated herein
by reference to documents previously filed and the Exhibit Index.

(d) Financial Statements excluded from Annual Report to Shareholders pursuant
to Rule 14a3(b)

There are no other financial statements and financial statement schedules
which were excluded from the Annual Report to Stockholders which are
required to be included herein.

SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

FIRST DEFIANCE FINANCIAL CORP.

March 20, 2000 By: /s/ William J. Small
--------------------
William J. Small
Chairman, President, CEO

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 20, 2000.

Signature Title
--------- -----

/s/ William J. Small Chairman of the Board, President and
- -------------------- CEO
William J. Small

/s/ John C. Wahl Executive Vice President and CFO
- ----------------
John C. Wahl

106

/s/ Don C. Van Brackel Director, Vice Chairman
- ----------------------
Don C. Van Brackel

/s/ Stephen L. Boomer Director
- ---------------------
Stephen L. Boomer

/s/ Dr. Douglas A. Burgei Director
- -------------------------
Dr. Douglas A. Burgei

/s/ Peter A. Diehl Director
- ------------------
Peter A. Diehl

/s/ Dr. John U. Fauster, III Director
- ----------------------------
Dr. John U. Fauster, III

/s/ Dr. Marvin J. Ludwig Director
- ------------------------
Dr. Marvin J. Ludwig

/s/ Gerald W. Monnin Director
- --------------------
Gerald W. Monnin

/s/ Thomas A. Voigt Director
- -------------------
Thomas A. Voigt

107