FIRST DEFIANCE FINANCIAL CORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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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, 2002

or

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

Commission File Number 0-26850

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

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

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

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

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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)

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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes |X| No |_|

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

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act)

Yes |X| No |_|

As of March 7, 2003, there were issued and outstanding 6,357,759 shares of the
Registrant's common stock.

The aggregate market value of the voting stock held by non-affiliates of
the Registrant computed by reference to the average bid and ask price of such
stock as of June 28, 2002 was approximately $136.5 million and as of March 7,
2003 was approximately $124.9 million.

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Documents Incorporated by Reference

Part III - Portions of the Proxy Statement for the Annual Meeting of
Shareholders to be held on April 22, 2003 are incorporated by reference into
Part III thereof.

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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 its subsidiaries (the
"Subsidiaries") focuses on traditional banking and property and casualty, life
and group health insurance products. The Company's traditional banking
activities include originating and servicing residential, commercial, and
consumer loans and providing a broad range of depository services. The Company's
insurance activities consist primarily of commissions relating to the sale of
property and casualty, life and group health insurance and investment products.

At December 31, 2002, the Company had consolidated assets of $884.2
million, consolidated deposits of $599.6 million, and consolidated stockholder's
equity of $120.1 million. The Company was incorporated in Ohio in June of 1995.
Its principal executive offices are located at 601 N. Clinton Street, Defiance,
Ohio 43512, and its telephone number is (419) 782-5015.

First Defiance previously owned The Leader Mortgage Company ("The
Leader"), a mortgage banking company located in Cleveland, Ohio. Effective April
1, 2002, First Defiance sold The Leader to U.S. Bank Home Mortgage, a unit of
U.S. Bank. The gain from the sale of that business, as well as all operating
results associated with The Leader, are reported as results of discontinued
operations for all periods. The results of operations of the subsidiaries and
the holding company are reflected in continuing operations.

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

The Subsidiaries

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

First Federal Bank of the Midwest: First Federal Bank of the Midwest
(First Federal) is a federally chartered stock savings bank headquartered in
Defiance, Ohio. It conducts operations through its main office and fourteen full
service branch offices in Defiance, Fulton, Hancock, Henry, Paulding, Seneca,
Williams and Wood Counties in northwest Ohio, as well as a loan production
office in Lucas County. 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 (FHLB)
System.

First Federal is primarily engaged in community banking. It attracts
deposits from the general public through its offices and uses those and other
available sources of funds to originate residential real estate loans,
non-residential real estate loans, commercial loans, home improvement and home
equity loans and consumer loans. In addition, First Federal invests in

-2-

U.S. Treasury and federal government agency obligations, obligations of the
State of Ohio and its political subdivisions, mortgage-backed securities which
are issued by federal agencies, including REMICs and CMOs and corporate bonds.

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

Securities

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

First Defiance's investment portfolio includes 12 CMO and REMIC issues
totaling $24.0 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 are significantly different from risks
associated with other pass-through mortgage-backed securities. First Defiance
does not invest in off-balance sheet derivative securities.

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

The amortized cost and fair value of securities at December 31, 2002 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.

-3-

Contractually Maturing Total
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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 $ -- -- $ 25 9.24% $ 2,988 5.23% $15,488 5.72% $ 18,501 5.65%
Corporate bonds 3,263 6.71 20,386 5.93 2,071 6.50 -- -- 25,720 6.08
REMICs and CMOs -- -- -- -- 5,037 5.95 18,979 5.88 24,016 5.89
U.S. Government and
federal agency
obligations 4,484 5.56 37,396 5.21 52,580 5.97 1,002 4.00 95,462 5.43
Obligations of
states and
political
subdivisions 495 2.83 4,513 5.20 17,164 4.47 8,307 5.12 30,479 4.73
Trust preferred
stock -- -- -- -- -- -- 7,238 5.37 7,238 5.37
------- ------- ------- ------- --------
Total $ 8,242 $62,320 $79,840 $51,014 201,416
======= ======= ======= =======
Mutual funds 2,109
Equity securities 69
Unrealized gain
on securities
available for
sale 9,931
--------
Total $213,525
========

The carrying value of investment securities is as follows:

December 31
2002 2001 2000
----------------------------
(In Thousands)

Available-for-Sale Securities:
Corporate bonds $ 27,453 $ 9,616 $11,884
U. S. Treasury and other U. S. Government
agencies and corporations 101,833 18,613 17,934
Obligations of state and political
subdivisions 31,115 8,251 6,018
Other 49,203 12,211 17,014
----------------------------
Total $209,604 $48,691 $52,850
============================

Held-to-Maturity Securities:
U. S. Treasury and other U. S. Government agencies
and corporations $ 3,331 $ 4,950 $ 6,928
Obligations of state and political
subdivisions 590 630 769
----------------------------
Total $ 3,921 $ 5,580 $ 7,697
============================

For additional information regarding First Defiance's investment portfolio
refer to Note 6 to the consolidated financial statements.

Interest-Bearing Deposits

First Defiance had interest-earning deposits in the FHLB of Cincinnati
amounting to $1.5 million and $478,000 at December 31, 2002 and 2001,
respectively.

-4-

Residential Loan Servicing Activities

Servicing mortgage loans for investors involves a contractual right to
receive a fee for processing and administering loan payments on mortgage loans
that are not owned by the Company and are not included on the Company's balance
sheet. This processing involves collecting monthly mortgage payments on behalf
of investors, reporting information to those investors on a monthly basis and
maintaining custodial escrow accounts for the payment of principal and interest
to investors and property taxes and insurance premiums on behalf of borrowers.
At December 31, 2002, First Federal serviced 4,296 loans totaling $324.9
million. The vast majority of the loans serviced for others are fixed rate
conventional mortgage loans.

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

The following table shows the delinquency statistics for the mortgage
loans serviced by the Company as of the dates presented. Information for years
prior to 2001 is not available.

As of December 31
---------------------------------------------
2002 2001
---------------------------------------------
Number Percentage Number Percentage
of of Servicing of of Servicing
Loans Portfolio (2) Loans Portfolio (2)
--------------------- ----------------------

Loans delinquent
for:
30-59 days 4 0.09% 21 0.65%
60-89 days 1 0.02 1 0.03
90 days and over 1 0.02 3 0.09
--------------------------------------------
Total delinquencies 6 0.13% 25 0.77%
============================================
Foreclosures -- -- 1 0.03%
============================================

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

As of December 31
2002 2001
-----------------------------------------------------------------------
Percentage Percentage
Number Aggregate of Aggregate Number Aggregate of Aggregate
of Principal Principal of Principal Principal
Rate Loans Balance Balance Loans Balance Balance
---- -----------------------------------------------------------------------
(Dollars in Thousands)

Less than 5.00% 6 $ 967 0.30% -- $ -- --
5.00% - 5.99% 1,010 91,620 28.20 61 7,426 3.36%
6.00% - 6.99% 2,005 156,888 48.28 1,309 99,647 45.05
7.00% - 7.99% 1,092 66,835 20.57 1,492 95,557 43.21
8.00% - 8.99% 178 8,408 2.59 335 18,058 8.17
9.00% and over 5 206 0.06 10 457 0.21
-----------------------------------------------------------------------
Total 4,296 $324,924 100.00% 3,207 $221,145 100.00%
=======================================================================

-5-

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

2002 2001
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Percent Percent
of of
Number Percent Unpaid Unpaid Number Percent 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 154 3.58% $ 8,956 2.76% 59 1.84 $ 676 0.31%
6-10 years 560 13.04 38,098 11.73 397 12.38 19,303 8.73
11-15 years 1,652 38.45 115,385 35.51 1,194 37.23 78,623 35.55
16-20 years 605 14.08 49,694 15.29 380 11.85 28,136 12.72
21-25 years 92 2.14 5,503 1.69 115 3.59 6,646 3.01
More than 25 years 1,233 28.71 107,288 33.02 1,062 33.11 87,761 39.68
-----------------------------------------------------------------------------------
Total 4,296 100.00% $ 324,924 100.00% 3,207 100.00% $221,145 100.00%
===================================================================================

Lending Activities

General. A savings bank generally may not make loans to one borrower and
related entities in an amount which exceeds 15% of its unimpaired capital and
surplus, although loans in an amount equal to an additional 10% of unimpaired
capital and surplus may be made to a borrower if the loans are fully secured by
readily marketable securities. Real estate is not considered "readily marketable
collateral." Certain types of loans are not subject to these limits. In applying
these limits, loans to certain borrowers may be aggregated. Notwithstanding the
specified limits, an association may lend to one borrower up to $500,000 "for
any purpose". At December 31, 2002, First Federal's limit on loans-to-one
borrower was $16.6 million and its five largest loans or groups of loans to one
borrower, including related entities, were $12.6 million, $10.9 million, $10.8
million, $10.2 million and $8.9 million. All of these loans or groups of loans
were performing in accordance with their terms at December 31, 2002.

Loan Portfolio Composition. The net increase in net loans outstanding over
the prior year was $76.6 million, ($30.2) million, and $80.2 million in 2002,
2001, and 2000, 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.

-6-

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

December 31
------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
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Amount % Amount % Amount % Amount % Amount %
------------------------------------------------------------------------------------------------
(Dollars in Thousands)

Real estate:
One to four family
residential $157,691 26.6 $167,764 32.9% $229,791 42.5% $203,743 44.3% $248,784 53.4%
Five or more family
residential (1) 32,324 5.5 21,757 4.3 15,686 2.9 11,086 2.4 13,763 3.0
Non-residential real
estate (1) 195,430 33.0 152,274 29.8 120,529 22.3 12,571 2.7 16,436 3.5
Construction 15,357 2.6 7,875 1.5 9,627 1.8 7,808 1.7 8,258 1.8
------------------------------------------------------------------------------------------------
Total real estate loans $400,802 67.7 349,670 68.5 375,633 695 235,208 51.1 287,241 61.7

Other:
Consumer finance 37,562 6.3 40,721 8.0 52,113 9.6 64,183 13.9 87,168 18.7
Commercial (1) 104,070 17.6 83,690 16.4 81,138 15.0 138,125 30.0 70,109 15.1
Home equity and
improvement 49,889 8.4 36,179 7.1 31,836 5.9 22,781 4.9 18,168 3.9
Mobile home 17 -- 12 -- 29 -- 46 -- 3,117 0.6
------------------------------------------------------------------------------------------------
Total non-real estate loans 191,538 32.3 160,602 31.5 165,116 30.5 225,135 48.9 178,562 38.3
------------------------------------------------------------------------------------------------
Total loans 592,340 100.0% 510,272 100.0% 540,749 100.0% 460,343 100.0% 465,803 100.0%
===== ===== ===== ===== =====
Less:
Loans in process 7,255 2,887 3,415 3,291 3,250
Deferred loan
origination fees 1,212 1,024 1,041 764 612
Allowance for loan losses 7,496 6,548 6,330 6,504 8,596
-------- -------- -------- -------- --------
Net loans $576,377 $499,813 $529,963 $449,784 $453,345
======== ======== ======== ======== ========

(1) For 1999 and 1998, most non-residential real estate loans were reported
with all other commercial loans.

Included above, First Defiance had $15.3 million and $672,000 in loans
classified as held for sale at December 31, 2002 and 2001 respectively. The fair
value of such loans, which are all single-family residential mortgage loans,
approximated their carrying value for both years presented. This information for
years prior to 2001 is not available.

Contractual Principal Repayments and Interest Rates. The following table
sets forth certain information at December 31, 2002 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
12/31/03 12/31/04 12/31/02 12/31/02 12/31/02 12/31/02 Total
-----------------------------------------------------------------------
(In Thousands)

Real estate $ 64,356 $29,304 $ 65,448 $184,329 $30,150 $27,215 $400,802
Non-real estate:
Commercial 52,965 12,339 29,377 8,897 160 332 104,070
Home equity and
improvement 1,628 749 5,827 1,742 568 39,375 49,889
Mobile home -- -- -- -- -- 17 17
Consumer finance 15,252 9,252 12,690 292 68 8 37,562
-----------------------------------------------------------------------
Total $134,201 $51,644 $113,342 $195,260 $30,946 $66,947 $592,340
=======================================================================

-7-

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, 2002 which have fixed interest rates or which have
floating or adjustable interest rates.

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

Real estate $ 83,102 $253,344 $336,446
Commercial 23,110 27,995 51,105
Other 29,647 40,941 70,588
----------------------------------
$135,859 $322,280 $458,139
==================================

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

First Defiance's loan approval process for all types of loans is intended
to assess the 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 loan application is first reviewed and underwritten by one of
the commercial loan officers, who may approve credits within their lending
limit. Credits exceeding an individual's lending limit must 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 review or
approval to the Senior Loan Committee comprised of senior lending personnel.
Credits which exceed $500,000 in aggregate exposure must be presented for
approval to the Executive Loan Committee, a committee of First Federal's 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 Senior Vice President of Mortgage Lending or approved
underwriters. Non-conforming mortgage loans must be approved by either the
Senior Vice President of Mortgage Lending or the Chief Lending Officer.

Consumer loan officers underwrite and may approve direct consumer credits
within their lending limits. Credits exceeding an officer's lending limits must
be approved by another loan

-8-

officer with limits sufficient to cover the exposure. All indirect consumer
credits are underwritten and approved by a centralized underwriting department.

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 14.80% of First Defiance's total
originations of mortgage loans in 2002 compared to 2.31% and 8.96% during 2001
and 2000, respectively.

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

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

Years ended December 31
2002 2001 2000
----------------------------------
(In Thousands)
Loan originations:
Single family residential $241,138 $ 202,528 $ 62,948
Multi-family residential (1) 58,111 50,507 31,118
Non-residential real estate (1) 98,116 76,680 47,937
Construction 17,751 9,693 12,665
Commercial 86,329 68,881 87,858
Home equity and improvement 32,310 20,521 13,832
Consumer finance 23,112 18,783 22,846
----------------------------------
Total loans originated 556,867 447,593 279,204

Loan reductions:
Loan pay-offs 190,485 242,468 125,092
Mortgage loans sold 207,348 187,969 34,952
Periodic principal repayments 82,470 47,306 38,981
----------------------------------
480,303 477,743 199,025
----------------------------------
Net increase in total loans $ 76,564 $ (30,150) $ 80,179
==================================

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,

-9-

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, 2002, in dollar amount and as a percentage of
First Defiance's total loan portfolio. The amounts presented represent the total
outstanding principal balances of the related loans, rather than the actual
payment amounts that are past due.

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

Single-family
residential $ 624 0.11% $ 175 0.03% $ 404 0.07% $ 1,203 0.21%
Non-residential and
Multi-
family residential 3,210 0.56 922 0.16 1,217 0.21 5,349 0.93
Home equity and
improvement 678 0.12 19 -- 5 -- 702 0.12
Consumer finance 339 0.06 49 0.01 20 -- 408 0.07
Commercial 1,473 0.25 100 0.02 879 0.15 2,452 0.42
-------------------------------------------------------------------------------
Total $6,324 1.10% $1,265 0.22% $2,525 0.43% $10,114 1.75%
===============================================================================

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
collectibility of additional interest is deemed insufficient to warrant further
accrual. Generally, First Defiance places all loans more than 90 days past due
on non-accrual status. When a loan is placed on non-accrual status, total unpaid
interest accrued to date is reversed. Subsequent payments are either applied to
the outstanding principal balance or recorded as interest income, depending on
the assessment of the ultimate collectibility of the loan. First Defiance
considers that a loan is impaired when, based on current information and events,
it is probable that it will be unable to collect all amounts due (both principal
and interest) according to the contractual terms of the loan agreement. First
Defiance measures impairment based on the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's observable
market price, or the fair value of the collateral, if collateral dependent. If
the measure of the impaired loan is less than the recorded investment, First
Defiance will recognize 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. Loans having recorded investments
of $593,000, $370,000 and $95,000 were considered impaired as of December 31,
2002, 2001 and 2000, respectively. There was $46,000 of interest received and
recorded in income during 2002 related to impaired loans including interest
received and recorded in income prior to such impaired loan designation. There
was $40,000 recorded in 2001 and no amounts recorded in 2000. Unrecorded
interest income based on the loan's contractual terms on these impaired loans
and all non-performing loans in 2002, 2001 and 2000 was $93,000, $67,000, and
$80,000, respectively. The average recorded investment in impaired loans during
2002, 2001 and 2000 was $697,000, $501,000, and $135,000, respectively. The
total allowance for loan losses related to these loans was $359,000, $202,000
and $95,000 at December 31, 2002, 2001 and 2000, respectively.

-10-

Real estate acquired by foreclosure is classified as real estate owned
until such time as it is sold. First Defiance also repossesses other assets
securing loans, consisting primarily of automobiles. When such property is
acquired it is recorded at the lower of the restated loan balance, less any
allowance for loss, or fair value. Costs relating to development and improvement
of property are capitalized, whereas costs relating to holding the property are
expensed. Valuations are periodically performed by management and 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, 2002, First Defiance's total non-performing loans
amounted to $2.5 million or 0.43% of total loans, compared to $2.4 million or
0.48% of total loans, at December 31, 2001. Non-performing loans are loans which
are more than 90 days past due. The non-performing loan balance includes
$240,000 of loans also considered impaired

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

December 31
2002 2001 2000 1999 1998
--------------------------------------------------
(Dollars in Thousands)

Non-performing loans:
Single-family residential $ 404 $1,151 $ 671 $ 146 $ 171
Non-residential and multi-family
residential real estate 1,217 972 572 -- --
Commercial (1) 879 110 140 737 1,330
Mobile home -- -- -- -- 180
Consumer finance 25 157 66 147 171
--------------------------------------------------
Total non-performing loans 2,525 2,390 1,449 1,030 1,852

Real estate owned 175 81 -- 136 --
Other repossessed assets 31 55 41 92 180
--------------------------------------------------
Total repossessed assets 206 136 41 228 180
--------------------------------------------------
Total non-performing assets $2,731 $2,526 $1,490 $1,258 $2,032
==================================================

Troubled debt restructurings $ -- $ -- $ -- $ -- $ --
==================================================
Total non-performing assets as a
percentage of total assets of
continuing operations 0.31% 0.39% 0.22% 0.22% 0.36%
==================================================
Total non-performing loans and troubled
debt restructurings as a percentage
of total loans 0.43% 0.47% 0.27% 0.22% 0.40%
==================================================
Total non-performing assets and troubled
debt restructurings as a percentage
of total assets 0.31% 0.39% 0.22% 0.22% 0.36%
==================================================
Allowance for loan losses as a percent
of total non-performing assets 274.48% 259.22% 424.83% 517.01% 422.98%
==================================================

(1) - In 1999 and 1998, non-residential and multi-family real estate loans
were included in commercial loans

-11-

In addition to the $2.5 million of loans reported above and the $353,000
of loans considered impaired, which are not included in the loans reported
above, there are approximately $4.6 million of performing loans where known
information about possible credit problems of the borrowers causes management to
have doubts as to the ability of such borrowers to comply with the present loan
repayment terms and which may result in the inclusion of such loans in
non-performing loans at some future date.

Allowance for Loan Losses. First Defiance maintains an allowance for loan
losses to absorb probable losses in the loan portfolio. The balance of the
allowance is based upon an assessment of prior loss experience, the volume and
type of lending conducted by First Defiance, industry standards, past due 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 the
allowances may be necessary, and net earnings could be significantly affected,
if circumstances differ substantially from the assumptions used in making the
initial determinations.

At December 31, 2002, First Defiance's allowance for loan losses amounted
to $7.5 million compared to $6.5 million at December 31, 2001. As of December
31, 2002 and 2001, $42,000 and $33,000, respectively, constituted an allowance
with respect to specific loans or assets held for sale. The following table sets
forth the activity in First Defiance's allowance for loan losses during the
periods indicated.

Years ended December 31
2002 2001 2000 1999 1998
-----------------------------------------------------
(Dollars in Thousands)

Allowance at beginning of year $6,548 $6,330 $6,504 $8,595 $2,686
Provision for credit losses 1,451 993 635 155 7,417
Charge-offs:
One to four family residential real
estate 110 152 -- -- --
Commercial real estate 184 130 182 -- --
Commercial 36 151 155 107 55
Consumer finance 390 599 692 1,364 1,053
Mobile home -- -- 2 1,054 620
-----------------------------------------------------
Total charge-offs 720 1,032 1,031 2,525 1,728
Recoveries 217 257 222 279 220
-----------------------------------------------------
Net charge-offs 503 775 809 2,246 1,508
-----------------------------------------------------
Ending allowance 7,496 6,548 6,330 6,504 8,595
=====================================================
Allowance for loan losses to total non-
performing loans at end of year 296.9% 274.0% 436.9% 631.5% 464.1%
Allowance for loan losses to total loans at
end of year 1.32 1.29 1.17 1.41 1.85
Allowance for loan losses to net charge-offs
for the year 1,490.26 844.90 782.45 289.58 569.96
Net charge-offs for the year to average loans 0.10 0.15 0.16 0.50 0.33

-12-

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
2002 2001 2000
------------------------------------------------------------------
Percent of Percent of Percent of
total loans total loans total loans
Amount by category Amount by category Amount by category
------------------------------------------------------------------
(Dollars in Thousands)

Single family residential $ 587 7.8% $ 613 9.3% $ 403 6.4%
Non-residential and
Multi- family
residential
Real estate 4,293 57.3 2,847 43.5 2,310 36.4
Other:
Commercial loans 1,729 23.1 1,734 26.5 1,355 21.4
Mobile home loans 2 -- 1 -- 1 --
Consumer and home equity
and improvement loans 885 11.8 1,353 20.7 2,268 35.8
------------------------------------------------------------------
$7,496 100.0% $6,548 100.0% $6,337 100.0%
==================================================================

Sources of Funds

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

Deposits. First Defiance's deposits are attracted principally from within
First Defiance's primary market area through the offering of a broad selection
of deposit instruments, including checking accounts, money market accounts,
regular savings accounts, and term certificate accounts. Included among these
deposit products are individual retirement account certificates of approximately
$63.7 million at December 31, 2002. Deposit account terms vary, with the
principal differences being the minimum balance required, the time periods the
funds must remain on deposit and the interest rate.

To supplement its funding needs, First Defiance also utilizes brokered
Certificates of Deposit. Such deposits, which were primarily acquired in prior
years to fund operations now discontinued, have maturities ranging from three
months to one year. The total balance of brokered certificates of deposit were
$26.1 million at December 31, 2002, a reduction from $87.0 million at December
31, 2001. Brokered certificates of deposit are not included in the following
tables as they have been reported as part of discontinued operations

-13-

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

Years ended December 31
2002 2001 2000
------------------ ------------------ -------------------
Amount Rate Amount Rate Amount Rate
---------------------------------------------------------------
(Dollars in Thousands)

Non-interest bearing
demand deposits $ 33,089 -- $ 31,684 -- $ 25,376 --
Interest bearing
demand deposits 162,664 1.66% 129,470 2.99% 91,934 3.65%
Savings deposits 39,129 0.94 36,670 1.55 43,818 1.69
Time deposits 345,740 3.89 293,130 5.63 301,520 5.74
---------------------------------------------------------------
Totals $580,622 2.84 $490,954 4.26% $450,838 4.75%
===============================================================

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, 2002.

(In Thousands)
--------------
Certificates of deposit maturing in quarter ending:
March 31, 2003 $10,974
June 30, 2003 14,152
September 30, 2003 15,177
December 31, 2003 6,707
After December 31, 2003 31,624
-------
Total certificates of deposit with
balances of $100,000 or more $78,634
=======

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

2002 2001
------------------
(In Thousands)

Interest bearing demand deposits and
money market accounts $ 23 $ 44
Savings Accounts -- 2
Certificates 301 853
------------------
$ 324 $ 899
==================

For additional information regarding First Defiance's deposits see Note 11
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, non-residential loans and investment securities
provided certain standards related to creditworthiness have been met. Such
advances are made pursuant to several credit programs, each of which has its own
interest rate and range of maturities.

-14-

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

December 31
2002 2001 2000
--------------------------------------
(Dollars in Thousands)
Long-term:
FHLB advances $ 146,096 $ 156,302 $ 116,758
Weighted average interest rate 4.95% 5.12% 6.06%
Notes $ 10 $ 49 $ 86
Weighted average interest rate 7.50 7.50% 7.50%

Short-term:
FHLB advances $ 3,000 $ 40,000 $ 106,500
Weighted average interest rate 1.50% 4.32% 6.50%
Revolving borrowings -- $ 20,675 $ 14,273
Weighted average interest rate -- 3.85% 7.71%
Securities sold under agreement
to repurchase $ 4,289 -- --
Weighted average interest rate 1.20% -- --

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

Years ended December 31
2002 2001 2000
--------------------------------------
(Dollars in Thousands)
Long-term:
FHLB Advances:
Maximum balance $ 156,269 $ 196,567 $ 187,371
Average balance 140,399 164,692 155,146
Weighted average interest rate 5.08% 5.25% 5.49%
Term Borrowings:
Maximum balance $ 46 $ 82 $ 115
Average balance 30 68 101
Weighted average interest rate 7.50% 7.50% 7.50%

-15-

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

Years ended December 31
2002 2002 2002
----------------------------
(Dollars in Thousands)

Short-term:
FHLB Advances:
Maximum balance $90,500 $111,000 $140,250
Average balance 17,118 62,695 72,384
Weighted average interest rate 2.08% 4.32% 6.53%
Revolving credit agreements:
Maximum balance $21,900 $ 20,647 $ 15,303
Average balance 6,787 18,840 9,616
Weighted average interest rate 3.68% 5.62% 7.54%
Securities sold under agreement to repurchase:
Maximum balance $ 4,298 -- --
Average balance 777 -- --
Weighted average interest rate 1.29% -- --

First Defiance borrows funds under a variety of programs at the FHLB. As
of December 31, 2002, there was $144.9 million outstanding under various
long-term FHLB advance programs. First Defiance utilizes short-term advances
from the FHLB to meet cash flow needs and for short-term investment purposes.
There were $3.0 million and $40.0 million in short-term advances outstanding at
December 31, 2002 and 2001, respectively. At December 31, 2002, $3.0 million was
outstanding under First Defiance's Cash Management advance line of credit. The
total available under the line is $15.0 million. Additionally, First Defiance
has $50.0 million available under a REPO advance line of credit. Amounts are
generally borrowed under these lines on an overnight basis.

As a member of the FHLB of Cincinnati, First Federal must maintain an
investment in the capital stock of that FHLB in an amount principally equal to
..15% of total assets plus an amount of at least 2% but no more than 4% of its
non-grandfathered mission asset activity (as defined in the FHLB's regulations).
First Federal is permitted to own stock in excess of the minimum requirement and
is in compliance with the minimum requirement with an investment in stock of the
FHLB of Cincinnati of $17.1 million at December 31, 2002.

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

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

-16-

Employees

First Defiance had 231 employees at December 31, 2002. None of these
employees are represented by a collective bargaining agent, and First Defiance
believes that it enjoys good relations with its personnel.

Competition

Competition in originating loans arises mainly from other savings
associations, commercial banks, and mortgage companies. The distinction among
market participants is based primarily on price and, to a lesser extent, the
quality of customer service and name recognition. The Company competes for loans
by offering competitive interest rates and product types and by seeking to
provide a higher level of personal service to mortgage brokers and borrowers
than is furnished by competitors. However, 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 on price and the quality of customer service and name
recognition. First Federal's cost of funds fluctuates with general market
interest rates. During certain interest rate environments, additional
significant competition for deposits may be expected from corporate and
governmental debt securities, as well as from money market mutual funds. First
Federal competes for conventional deposits by emphasizing quality of service,
extensive product lines and competitive pricing.

REGULATION

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

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

Regulatory Capital Requirements. First Federal is required by OTS
regulations to meet certain minimum capital requirements. Current capital
requirements call for tangible capital of 1.5% of adjusted total assets, core
capital of 4.0% of adjusted total assets, except for associations

-17-

with the highest examination rating and acceptable levels of risk, and
risk-based capital of 8% of risk-weighted assets.

The following table sets forth the amount and percentage level of
regulatory capital of First Federal at December 31, 2002, 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, 2002
Amount Percent
--------------------
(In Thousands)

Tangible capital $102,880 11.84%
Requirement 13,033 1.5
--------------------
Excess $ 89,847 10.34%
====================

Core capital $102,880 11.84%
Requirement 34,755 4.00
--------------------
Excess $ 68,125 7.84%
====================

Total capital $110,349 18.39%
Risk-based requirement 48,000 8.00
--------------------
Excess $ 62,349 10.39%
====================

First Federal's capital at December 31, 2002, meets the standards for a
well-capitalized institution.

Transactions with Insiders and Affiliates. Loans to executive officers,
directors and principal shareholders and their related interests must conform to
the lending limits. Most loans to directors, executive officers and principal
shareholders must be approved in advance by a majority of the "disinterested"
members of board of directors of the association with any "interested" director
not participating. All loans to directors, executive officers and principal
shareholders must be made on terms substantially the same as offered in
comparable transactions with the general public or as offered to all employees
in a company-wide benefit program. Loans to executive officers are subject to
additional restrictions. .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.

Holding Company Regulation. First Defiance is a unitary thrift holding
company and is subject to OTS regulations, examination, supervision and
reporting requirements. Federal law generally prohibits a thrift holding company
from controlling any other savings association or thrift holding company,
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof, which
is not a subsidiary. If First Defiance were to acquire control of another
savings institution, other than through a merger or other business combination
with First Federal, First Defiance would become

-18-

a multiple thrift holding company and its activities would thereafter be limited
generally to those activities authorized by the FRB as permissible for bank
holding companies.

Item 2. Properties

At December 31, 2002, First Federal conducted its business from its main
office at 601 Clinton Street, Defiance, Ohio, and fourteen other full service
banking centers and one loan production office in northwestern Ohio. First
Insurance conducted its business from leased office space at 419 5th Street,
Suite 1200, Defiance, Ohio.

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

The following table sets forth certain information with respect to the
office and other properties of the Company at December 31, 2002. See Note 10 to
the Consolidated Financial Statements.

Leased/ Net Book Value
Description/address Owned of Property Deposits
- -------------------------------------------------------------------------------
(Dollars in Thousands)
Main Office, First Federal
601 Clinton Street, Defiance, OH Owned $ 5,885 $ 221,832

Branch Offices, First Federal
204 E. High Street, Bryan, OH Owned 1,062 100,169
211 S. Fulton Street, Wauseon, OH Owned 753 42,279
625 Scott Street, Napoleon, OH Owned 1,534 68,169
1050 East Main Street, Montpelier, OH Owned 563 24,069
926 East High Street, Bryan, OH Owned 106 8,086
1333 Woodlawn, Napoleon, OH Owned 63 16,170
825 N. Clinton Street, Defiance, OH Owned 380 11,598
190 Stadium Dr., Defiance, OH Leased 59 7,372
905 N. Williams St., Paulding, OH Owned 1,061 22,401
201 E. High St., Hicksville, OH Owned 558 9,369
3900 N. Main St., Findlay, OH Owned 1,392 28,963
11694 N. Countyline St., Fostoria, OH Owned 888 13,438
1226 W. Wooster, Bowling Green, OH Owned 1,336 25,658
1690 Woodlands Dr., Maumee, OH Leased N/A N/A

First Insurance & Investments
419 5th Street, Site 1200, Defiance, OH Leased N/A N/A
--------------------------
$ 15,640 $ 599,573
==========================

-19-

Item 3. Legal Proceedings

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

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

No matters were submitted to a vote of securities holders during the fourth
quarter of 2002.

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 7, 2003, the Company had 1,574 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 2002 and 2001.

Year Ending
-------------------------------------------------------------
December 31, 2002 December 31, 2001
----------------------------- ----------------------------
High Low Dividend High Low Dividend
----------------------------- ----------------------------

Quarter Ended:
March 31 $ 17.25 $ 15.12 $ .13 $ 15.63 $ 10.69 $ .12
June 30 21.44 16.97 .13 17.20 13.50 .12
September 30 21.13 16.96 .13 18.00 13.28 .12
December 31 19.70 15.78 .15 15.24 12.79 .13

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

An application must be submitted and approval from the OTS must be
obtained by a subsidiary of a savings and loan holding company (i) if the
proposed distribution would cause total distributions for the calendar year to
exceed net income for that year to date plus the savings association's retained
net income for the preceding two years; (ii) if the savings association will not
be at least adequately capitalized following the capital distribution; or (iii)
if the proposed distribution would violate a prohibition contained in any
applicable statute, regulation or agreement between the savings association and
the OTS (or the FDIC), or a condition imposed on the savings association in an
OTS-approved application or notice. If a savings association subsidiary of a
holding company is not required to file an application, it must file a notice of
the proposed capital distribution with the OTS. First Federal paid $35.0 million
in dividends to First Defiance during 2002.

-20-

Item 6. Selected Financial Data

The following table sets forth certain summary consolidated financial data
at or for the periods indicated. Results of operations associated with The
Leader, including certain inter-company financing transactions, are reflected as
discontinued operations for all periods presented. Continuing operations reflect
the results of First Federal, First Insurance and First Defiance holding company
expenses for all periods presented. This information should be read in
conjunction with the Consolidated Financial Statements and notes thereto
included herein. See "Item 8. Financial Statements and Supplementary Data."

At or For Years ended December 31,
--------------------------------------------------------------
2002 2001 2000 1999 1998
--------------------------------------------------------------
(Dollars in Thousands, except per share data)

Selected Consolidated Financial Data:
Total assets $ 884,245 $1,132,648 $1,072,194 $987,994 $785,399
Assets of continuing operations 884,245 644,194 664,468 580,649 567,404
Loans held-to maturity, net 561,041 499,141 529,963 449,784 453,346
Loans held-for-sale 15,336 672 -- -- --
Allowance for loan losses 7,496 6,548 6,330 6,504 8,596
Non-performing assets 2,731 2,526 1,490 1,258 2,032
Securities available-for-sale 209,604 48,453 52,850 53,712 47,303
Securities held-to maturity 3,921 5,818 7,697 9,895 13,795
Mortgage servicing rights 2,090 1,821 1,131 996 450
Deposits and borrowers' escrow
balances 599,889 615,238 529,067 493,560 422,446
FHLB advances 149,096 196,302 223,258 265,410 168,142
Stockholders' equity 120,110 111,021 99,473 89,416 93,710

Selected Consolidated Operating Results:
Interest income from continuing
operations $ 46,141 $ 46,545 $ 46,941 $ 40,882 $ 44,428
Interest expense from continuing
operations 22,044 25,602 27,202 21,292 22,693
Net interest income from
continuing operations 24,097 20,943 19,739 19,590 21,735
Provision for loan losses 1,451 994 635 155 7,418
Non-interest income 12,921 10,220 6,676 4,881 3,266
Non-interest expense 26,161 22,948 20,178 17,965 14,798
Income before income taxes 9,406 7,221 5,602 6,351 2,785
Income taxes 2,986 2,423 1,734 2,072 980
Income from continuing operations 6,420 4,798 3,868 4,279 1,805
Discontinued operations, net of
tax 8,853 8,818 7,094 4,344 1,306
Cumulative effect of change in
method of accounting for
goodwill (194) -- -- -- --
Net income 15,079 13,616 10,962 8,623 3,111
Basic earnings per share from
continuing operations 1.01 0.74 0.61 0.66 0.24
Basic earnings per share 2.37 2.11 1.74 1.33 0.42
Diluted earnings per share from
continuing operations 0.97 0.72 0.60 0.64 0.23
Diluted earnings per share 2.28 2.05 1.71 1.29 0.40

-21-

At or for Years ended December 31,
------------------------------------------------------
2002 2001 2000 1999 1998
------------------------------------------------------
(Dollars in Thousands, except per share data)

Selected Financial Ratios and Other Data (from continuing operations):
Performance Ratios:
Return on average assets 0.77% 0.69% 0.60% 0.73% 0.31%
Return on average equity 5.39% 4.61% 4.13% 4.72% 1.74%
Interest rate spread (1) 2.83% 3.20% 3.08% 3.53% 3.29%
Net interest margin (1) 3.28% 3.64% 3.54%% 3.92% 4.00%
Ratio of operating expense to
Average total assets 3.16% 3.31% 3.11%% 3.06% 2.51%

Quality Ratios:
Non-performing assets to total
assets at end of period (2) 0.31% 0.39% 0.22% 0.22% 0.36%
Allowance for loan losses to
non-performing assets (2) 274.48% 259.22% 424.83% 517.01% 423.03%
Allowance for loan losses to total
loans receivable 1.30% 1.31% 1.19% 1.45% 1.90%

Capital Ratios (3):
Equity to total assets at end of
period 13.58% 17.23% 14.97% 15.40% 16.52%
Tangible equity to tangible assets
at end of period 13.23% 16.75% 14.46% 14.80% 16.18%
Average equity to average assets 14.36% 15.03% 14.45% 15.43% 17.62%
Book value per share $ 18.73 $ 16.20 $ 14.49 $ 13.12 $ 12.37
Tangible book value per share $ 18.17 $ 15.65 $ 13.92 $ 12.52 $ 12.07
Ratio of average interest-earning
assets to average interest-bearing
liabilities 115.57% 110.21% 110.02% 109.45% 117.35%

Stock Price and Dividend Information:
High $ 21.44 $ 18.00 $ 12.50 $ 14.50 $15.875
Low 15.12 10.69 7.63 9.875 11.00
Close 18.90 15.20 10.88 10.50 14.25
Cash dividends declared per share 0.54 .49 .45 0.41 0.37
Dividend payout ratio (4) 22.78% 23.22% 25.86% 30.83% 88.10%

(1) Interest rate spread represents the difference between the weighted
average yield on interest-earnings assets and the weighted average rate on
interest-bearing liabilities. Net interest margin represents net interest
income as a percentage of average interest-earnings assets.

(2) 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.

(3) Capital ratios are based on assets of continuing operations.

(4) Dividends payout ratio was calculated using basic earnings per share.

-22-

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

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

First Federal is a federally chartered savings bank that provides
financial services to communities based in northwest Ohio where it operates 14
full service branches and one commercial loan production office. First Federal
provides a broad range of financial services including checking accounts,
savings accounts, certificates of deposit, real estate mortgage loans,
commercial loans, consumer loans, home equity loans and trust services.

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

Effective April 1, 2002, First Defiance sold The Leader to U.S. Bank Home
Mortgage, a unit of U.S. Bank, and recognized an after-tax gain of $7.7 million,
or $1.16 per share from the sale. That gain, as well as all operating results
associated with The Leader, has been reported as results of discontinued
operations for all periods presented.

Financial Condition

Total assets at December 31, 2002 were $884.2 million compared to $1.13
billion at December 31, 2001. However, the 2001 total included $488.5 million of
assets of discontinued operations related to The Leader.

Net loans receivable increased by $61.9 million or 12.4%, to $561.0
million at December 31, 2002 from $499.1 million at December 31, 2001 and
investment securities increased by $159.3 million or 293.4% to $213.5 million at
December 31, 2002 from $54.3 million at December 31, 2001. Also at December 31,
2002, the Company had $15.3 million of mortgage loans available for sale
compared to only $672,000 at the same point in 2001 and had $15.1 million
invested in bank owned life insurance, which was a new asset on the Company's
balance sheet in 2002.

The increase in loans receivable was primarily in the non-residential real
estate loan, commercial loan, home equity and improvement loan and multi-family
real estate loan categories. Non-residential real estate loans increased by
$43.2 million, or 28.3%, to $195.4 million at December 31, 2002 from $152.3
million at December 31, 2001. Commercial loans increased by $20.4 million, or
24.4%, to $104.1 million at December 31, 2002 from $83.7 million at December 31,
2001. Home equity and improvement loans increased by $13.7 million, or 37.8%, to
$49.9 million at December 31, 2002 from $36.2 million at December 31, 2001.
Multi-family real estate loans increased by $10.6 million, or 48.6%, to $32.3
million at December 31, 2002 from $21.8 million at December 31, 2001. The
increases in the non-

-23-

residential real estate loan, commercial loan and multi-family real estate loan
categories are due to the Company's emphasis in originating loans in those
categories, especially in markets that the Company has recently entered
including Findlay, Bowling Green, and Toledo, Ohio. The increase in those loan
balances was slightly offset by a decrease in the balance of loans secured by
single-family residences. The balance of first-mortgage residential loans
declined to $142.4 million at December 31, 2002 compared to $167.1 million at
December 31, 2001, a decline of $24.7 million or 14.8%. This decline is a result
of the Company's strategy to sell most of the fixed-rate mortgage loans that the
Company originates in the secondary market.

The increase in the balance in investment securities is the result of the
reinvestment of the proceeds from the sale of The Leader. After the sale of The
Leader, First Defiance had net investible funds of approximately $365 million,
due both to the proceeds from the sale and due to the settlement of all
inter-company debt and inter-company deposit obligations between The Leader and
First Federal. Of this amount, $81.5 million was used to pay off FHLB overnight
advances and $19.6 million was used to pay off long-term debt. Management also
elected to prepay $25 million of fixed rate FHLB advances which was a portion of
the borrowings used to fund The Leader's operations, incurring a prepayment
penalty of $539,000 which has been included in discontinued operations. Of the
remaining funds, $130 million was invested in available for sale securities, and
the balance has been used to fund loan growth. Management has also invested
excess liquidity in shorter term investment securities.

The Company's total deposits declined to $599.6 million at December 31,
2002 from $614.8 million at December 31, 2001. This decline is due to a decrease
in brokered certificates of deposit, which were used to fund operations of The
Leader. Brokered CDs declined $62.5 million to $24.5 million at December 31,
2002 from $87.0 million at December 31, 2001. Excluding brokered CDs, First
Defiance's deposit balances were $575.1 million at December 31, 2002, an
increase of $47.3 million or 9.0% from the $527.8 million balance at December
31, 2001. The growth in core deposits was primarily due to growth in checking
accounts, which increased by $23.2 million or 37.2%, and in money market demand
accounts, which increased by $16.2 million or 14.4%. The growth in checking
accounts is due to an increase in commercial checking balances consistent with
the growth in the Company's commercial loan and non-residential real estate loan
portfolios as well as continued marketing efforts. The growth in the money
market demand accounts is primarily due to marketing that account as an
attractive alternative to certificates of deposit.

FHLB advances declined to $149.1 million at December 31, 2002 from $196.3
million at December 31, 2001. As of March 31, 2002, the day before the sale of
The Leader, First Defiance had borrowed an additional $41.4 million in advances
from the FHLB, for a total of $237.7 million. As noted above, $106.5 million of
those advances were paid off following the sale of The Leader. Since the sale,
First Defiance has made additional borrowings from the FHLB totaling $17.4
million to fund loan growth and investment strategies.

-24-

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. The table does
not reflect the effect of income taxes:

Year Ended December 31,
--------------------------------------------------------------------------------------------------
2002 2001 2000
--------------------------------------------------------------------------------------------------
Average Yield/Rate Average Yield/Rate Average Yield/Rate
Balance Interest (1) Balance Interest (1) Balance Interest (1)
--------------------------------------------------------------------------------------------------
(Dollars in Thousands)

Interest-Earning Assets:
Loans receivable $525,855 $36,871 7.01% $ 520,917 $42,794 8.22% $ 499,689 $42,601 8.53%
Securities 168,329 8,550 5.08% 57,770 3,480 6.02% 61,495 3,978 6.47%
Interest-earning deposits 44,285 720 1.63% 10,685 271 2.54% 11,547 362 3.14%
Dividends on FHLB stock 22,889 904 3.95% 15,669 1,055 6.73% 14,570 1,073 7.36%
--------------------------------------------------------------------------------------------------
Total interest-earning assets 761,357 47,045 6.18% 605,041 47,600 7.87% 587,301 48,014 8.18%
Non-interest-earning assets 185,140 493,998 421,990
-------- ---------- -----------
Total Assets $946,497 $1,099,039 $1,009,291
======== ========== ===========

Interest-Bearing Liabilities:
Interest-bearing deposits $547,533 $16,508 3.01% $ 459,270 $20,931 4.56% $ 437,272 $21,409 4.90%
FHLB advances 103,552 5,276 5.10% 70,868 3,609 5.09% 86,800 5,060 5.83%
Term notes 7,685 260 3.38% 18,875 1,062 5.63% 9,717 733 7.54%
--------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 658,769 22,044 3.35% 549,014 25,602 4.66% 533,789 27,202 5.10%
Non-interest bearing
demand deposits 33,089 -- 31,684 -- 13,566 --
----------------- -------------------- --------------------
Total including non-interest-
bearing demand deposits 691,858 22,044 3.19% 580,697 25,602 4.41% 547,355 27,202 4.97%
Other non-interest liabilities 135,567 414,240 368,316
-------- ----------- -----------
Total Liabilities 827,425 994,937 915,671
Stockholders' equity 119,072 104,102 93,620
-------- ----------- -----------
Total liabilities and
stockholders' equity $946,497 $1,099,039 $1,009,291
======== =========== ===========
Net interest income; interest
rate spread (2) $25,001 2.83% $21,998 3.20% $20,812 3.08%
================== ================== ===================
Net interest margin (3) 3.28% 3.64% 3.54%
======= ======= ==========
Average interest-earning
assets to average interest-
bearing liabilities 115.6% 110.2% 110.0%
======= ======= ==========

(1) At December 31, 2002, the yields earned and rates paid were as follows:
loans receivable, 6.31%; securities, 5.54%; FHLB stock, 4.25%; total
interest-earning assets, 6.07%; deposits, 2.42%; FHLB advances, 4.88%;
term notes, 1.21%; total interest-bearing liabilities, 2.91%; and interest
rate spread, 3.17%.

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

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

-25-

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,
--------------------------------------------------------------------------------------------------
2002 vs. 2001 2001 vs. 2000 2000 vs. 1999
--------------------------------------------------------------------------------------------------
Increase Increase Increase Increase Increase Increase
(decrease) (decrease) Total (decrease) (decrease) Total (decrease) (decrease) Total
due to due to increase due to due to increase due to due to increase
rate volume (decrease) rate volume (decrease) rate volume (decrease)
--------------------------------------------------------------------------------------------------
(in thousands)

Interest-Earning Assets
Loans $(6,329) $ 406 $(5,923) $(1,617) $ 1,810 $ 193 $1,293 $3,878 $5,171
Securities (1,590) 6,660 5,070 (257) (241) (498) 232 293 525
Interest-earning
deposits (403) 852 449 (64) (27) (91) 362 0 362
FHLB stock (637) 486 (151) (99) 81 (18) 45 170 215
--------------------------------------------------------------------------------------------------
Total interest-earning assets $(8,959) $ 8,404 $ (555) $(2,037) $ 1,623 $ (414) $1,931 4,342 6,273
==================================================================================================
Interest-Bearing
Liabilities
Deposits $(8,446) $ 4,023 $(4,423) $(1,555) $ 1,077 $ (478) $2,397 $1,587 $3,984
FHLB advances 3 1,664 1,667 (522) (929) (1,451) 677 708 1,385
Term notes (172) (630) (802) (362) 691 329 115 426 541
--------------------------------------------------------------------------------------------------
Total interest- bearing
liabilities $(8,615) $ 5,057 $(3,558) $(2,439) $ 839 $(1,600) $3,189 $2,721 $5,910
==================================================================================================
Increase in net interest income $ 3,003 $ 1,186 $ 363
======= ======= ======

Results of Operations

General - On April 1, 2002, First Defiance completed the sale of The
Leader to US Bancorp. As a result of this sale, management has classified the
operating results of The Leader as discontinued operations for all periods
presented. Also included in discontinued operations is the $7.7 million gain
realized from the sale of The Leader and the cost associated with early payment
penalties incurred in retiring certain FHLB advances which were used to fund
operations of The Leader. See Note 3 to the Consolidated Financial Statements.

First Defiance reported net income of $15.1 million for the year ended
December 31, 2002 compared to $13.6 million and $11.0 million for the years
ended December 31, 2001 and 2000 respectively. Income from continuing operations
was $6.2 million, $4.8 million and $3.9 million for the years ended December 31,
2002, 2001 and 2000 respectively. Excluding the cumulative effect adjustment for
a change in accounting for goodwill, First Defiance had income from continuing
operations of $6.4 million for the year ended December 31, 2002.

On a diluted per share basis, First Defiance earned $2.37 in 2002, $2.11
in 2001 and

-26-

$1.74 in 2000. Diluted per share income from continuing operations was $.94 in
2002 ($.97 before cumulative effect adjustment for change in accounting for
goodwill), $.72 in 2001 and $.60 in 2000.

Net interest income from continuing operations was $24.1 million for the
year ended December 31, 2002, compared to $20.9 million and $19.7 million for
the years ended December 31, 2001 and 2000 respectively. Net interest margin was
3.28%, 3.64% and 3.54% for the years ended December 31, 2002, 2001 and 2000
respectively. The decline in net interest margin from 2001 to 2002 was due
primarily to significant growth in lower-yielding interest-earning assets
resulting from the sale of The Leader. The proceeds from the sale were invested
primarily in investment securities, which lowered the average yield on total
interest-earning assets. The average balance of investment securities was $168.3
million in 2002 compared to just $57.8 million in 2001. The yield on those
securities was 5.08% in 2002 compared to 6.02% in 2001. The interest rate spread
also dropped in 2002, to 2.83% compared to 3.20% in 2001. The improvement in the
net interest margin in 2001 compared to 2000 is due primarily to an increase in
the average balance of non-interest bearing demand deposit accounts, which
increased from $13.6 million in 2000 to $31.7 million in 2001.

The yield on interest-earning assets declined by 169 basis points in 2002
compared to 2001 while the cost of interest-bearing liabilities declined by 131
basis points. A portion of the decline in the yield on assets is due to the mix
change caused by the growth in the investment securities portfolio as well a
$33.6 million increase in the average balance of interest-earning deposits that
First Defiance maintained in other banks. The decline in rates for both assets
and liabilities was due to the low level of interest rates throughout 2002.
Those low rates were the result of cuts by the Federal Reserve to its Federal
Funds rate implemented throughout 2001. The average rate on interest-bearing
deposits declined by 155 basis points in 2002 compared to 2001. The rates on
FHLB advances remained essentially flat in 2002 compared to 2001 as the majority
of those advances have fixed rates. The cost of brokered certificates of deposit
and a portion of the cost of FHLB advances was used to finance operations of The
Leader throughout 2000, 2001 and the first quarter of 2002. The cost associated
with those brokered certificates of deposit and advances has been reclassified
as discontinued operations.

In 2001 compared to 2000, the yield on interest earning assets declined by
31 basis points, to 7.87% from 8.18% while the cost of interest-bearing
liabilities declined by 44 basis points to 4.66% from 5.10%. Both asset yields
and liability costs were impacted in 2001 by declining interest rates driven by
the Federal Reserve's rate cuts.

The provision for loan losses for the year ended December 31, 2002 was
$1.5 million compared to $1.0 million in 2001 and $635,000 in 2000.

For the year ended December 31, 2002, non-interest income was $12.9
million compared to $10.2 million for 2001 and $6.7 million for 2000.
Non-interest expense for the year ended December 31, 2002 was $26.2 million
compared to $22.9 million for 2001 and $20.2 million for 2000.

-27-

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 declined by $404,000, or 1.0%, to $46.1 million for
the year ended December 31, 2002 from $46.5 million for the year ended December
31, 2001. Average loans receivable increased by $4.9 million to $525.8 million
in 2002 from $520.9 million in 2001 while the average balance of investment
securities increased to $168.3 million in 2002 from $57.8 million in 2001 and
interest-earning deposits held at other banks increased to $44.3 million in 2002
from $10.7 million in 2001. Although the average balance of all interest-earning
assets, including FHLB stock increased by $156.3 million in 2002 compared to
2001, the yield on those total assets fell to 6.18% in 2002 from 7.87% in 2001.

The average balance of non-residential real estate loans, multi-family
real estate loans, non-owner occupied residential mortgage loans and commercial
loans increased by $55.8 million, or 19.9% in 2002, to $335.6 million for the
year ended December 31, 2002 from $279.8 million for 2001. The increase in these
portfolios is the result of First Defiance's strategy to increase this type of
lending and was driven by growth in new markets, including Findlay, Bowling
Green and Toledo, Ohio, as well as gains in market share in existing markets.
The Company also had an increase in the average balance of home equity and
improvement loans, which averaged $43.4 million in 2002, up 28.7% from 2001's
average balance of $33.7 million. The increases in these average loan balances
were offset by declines in the Company's residential mortgage portfolio, which
had an average balance of $116.6 million in 2002 compared to $168.6 million in
2001, a drop of 30.9%. This portfolio continues to decline as low interest rates
caused a high level of refinancing activity, most of which is sold into the
secondary market. The Company's average balance of consumer loans also declined
in 2002, to $39.0 million from $47.0 million in 2001.

Interest earnings from the investment portfolio increased by $5.1 million
in 2002 compared to 2001 because of the growth in the investment portfolio
following the sale of The Leader. The average investment portfolio balance
increased to $168.3 million for 2002 compared to just $57.8 million for 2001.
The average yield on that portfolio was 5.08%, a 94 basis point decline from
2001's yield of 6.02%. First Defiance also had a large increase in
interest-earning deposits maintained at other banks, which increased to $44.3
million in 2002 from $10.7 million in 2001. The yield on those balances, which
is generally tied directly to the Federal Funds rate, was 1.63% in 2002 compared
to 2.54% in 2001.

In 2001, total interest income declined slightly, to $46.5 million from
$46.9 million in 2000. Income on loans was flat in 2001 compared to 2000 as the
increase in average loan balances to $520.9 million in 2001 from $500.0 in 2000
was offset by a 31 basis point decline in the yield on loans, to 8.22% in 2001
from 8.53% in 2000. Income from the investment portfolio in 2001 was $498,000
lower than in 2000 due both to a $3.7 million decrease in the average balance of
the investment portfolio and a 45 basis point decline in the yield on those
assets in 2002 compared to 2001.

-28-

Interest expense decreased by $3.6 million, or 13.9%, to $22.0 million in
2002 compared to $25.6 million in 2001. Interest expense on interest-bearing
deposits was $4.4 million lower in 2002 compared to 2001 despite an $88.3
million increase in the average balance of such deposits. The average cost of
interest-bearing deposits dropped to 3.01% in 2002 from 4.56% in 2001 due
primarily to significantly lower deposit CD and money market deposit account
rates as well as an improvement in the overall deposit mix. The decline in
interest expense on deposits was slightly offset by an increase in costs
associated with FHLB advances. In 2001, a portion of the expense for advances
was allocated to discontinued operations as those advances were used to fund the
operations of The Leader. In 2002, management repaid $25 million of advances,
incurring a $539,000 pre-payment penalty that was included in discontinued
operations. Management determined not to prepay the remaining FHLB advances
because of more substantial pre-payment penalties and the full amount of
outstanding balances were subsequently used to fund continuing operations.
Interest expense also decreased because of a decline in notes payable. In 2001
First Defiance borrowed $20 million from a bank to support overall operations.
That borrowing was paid off in 2002 upon the sale of The Leader.

In 2001, interest expense declined by $1.6 million, or 5.9%, to $25.6
million compared to $27.2 million for 2000. The decline is due to a 44 basis
point drop in the average cost of total interest bearing liabilities, to 4.66%
in 2001 from 5.10% in 2000. Deposit balances were up slightly in 2002 compared
to 2001 ($459.3 million compared to $437.3 million) while costs were lower by 34
basis points (4.56% compared to 4.90%). FHLB advances included in continuing
operations were lower in 2002 compared to 2001 ($70.9 million compared to $86.8
million) while term notes payable and other interest bearing liabilities
(primarily borrowings from another bank) were higher in 2002 compared to 2001
($18.9 million compared to $9.7 million).

As a result of the foregoing, First Defiance's net interest income was
$24.1 million for the year ended December 31, 2002 compared to $20.9 million for
the year ended December 31, 2001 and $19.7 million for the year ended December
31, 2000. Net interest margin from continuing operations for the year ended
December 31, 2002 decreased to 3.28% from 3.64% for 2001 and 3.54% for 2000.

Provision for Loan Losses - First Defiance's provision for loan losses was
$1.4 million for the year ended December 31, 2002 compared to $1.0 million and
$635,000 for the years ended December 31, 2001 and 2000 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 to
absorb probable losses in the loan portfolio. Factors considered by management
include identifiable risk in the portfolios, historical experience, the volume
and type of lending conducted by First Defiance, regulatory guidance, 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
collectibility of First Defiance's loan portfolio.

Continued growth in the non-residential loan and commercial loan
portfolios at First Defiance, which have an inherently higher level of risk than
other types of loans, as well as concerns about economic conditions in the
northwest Ohio market areas has caused the provision

-29-

for loan losses to increase in 2002 from 2001 and 2000 levels. The allowance for
loan losses totaled $7.5 million at December 31, 2002 compared to $6.5 million
at December 31, 2001 and $6.3 million at December 31, 2000. Total loan
charge-offs were $720,000 in 2002 compared to $1.0 million in both 2001 and 2000
while recoveries in those same years were $217,000, 257,000 and $222,000
respectively.

First Defiance's non-performing assets at December 31, 2002 were $2.7
million compared to $2.5 million at December 31, 2001 and $1.5 million at
December 31, 2000. Non-performing assets include loans that are 90 days past due
and all real estate owned and other foreclosed assets. Non-performing assets at
December 31, 2002 and 2001 by category were as follows:

December 31
2002 2001
-------------------
(In thousands)
Non-performing loans:
Single-family residential $ 404 $1,151
Non-residential and multi-family residential real
estate 1,217 972
Commercial 879 110
Consumer finance 25 157
-------------------
Total non-performing loans 2,525 2,290
Real estate owned and repossessed assets 206 136
-------------------
Total non-performing assets $2,731 $2,390
===================

While the non-performing commercial loan balances increased by $769,000
from 2001 to 2002, total commercial loans increased by $20.4 million during
those same periods. Non-performing loans in the non-residential and multi-family
residential real estate and commercial loan categories represent .53% and .84%
of the total loans in those categories respectively at December 31, 2002
compared to .55% and .13% respectively for the same categories at December 31,
2001. Of the combined $2.1 million of non-performing non-residential and
multi-family residential real estate loans and commercial loans at December 31,
2002, approximately $840,000 relates to a single lending relationship which
management believes will be resolved without incurring any significant loss.
Management also believes that the allowance for loan losses is adequate to cover
any potential losses from non-performing assets.

Non-interest Income - Non-interest income increased by $2.7 million to
$12.9 million for the year ended December 31, 2002 from $10.2 million in 2001
and $6.7 million in 2000. $1.5 million of the increase relates to higher gains
from sales of mortgage loans, which totaled $4.6 million in 2002 compared to
$3.1 million in 2001. The higher level of gains is due to increased mortgage
loan origination volume through First Federal's branch network. In 2002, First
Defiance originated a total of $252.5 million of mortgage loans compared to
$207.7 million in 2001, an increase of 21.6%.

Loan and deposit fees at First Defiance increased to $3.8 million in 2002
from $3.1 million in 2002, an increase of 22.6%. Insurance and investment sales
commissions recognized

-30-

in 2002 were $3.3 million compared to $3.0 million in 2001, an increase of
10.3%. Also First Defiance invested $15.0 in bank owned life insurance in the
fourth quarter of 2002. The earnings on bank owned life insurance, which are
included in non-interest income, were $144,000 in 2002.

In 2000 First Defiance realized $580,000 in gains from mortgage loan
sales, $2.3 million in loan and deposit service fees and $2.6 million from
insurance commissions.

Non-interest Expense - Total non-interest expense for 2002 was $26.2
million compared to $23.0 million for the year ended December 31, 2001 and $20.2
million for the year ended December 31, 2000. The $3.2 million increase from
2001 to 2002 is attributable primarily to increases in compensation and
benefits, which increased by $2.0 million and amortization and impairment of
mortgage servicing rights, which increased by $735,000. The 16% increase in
wages and benefits were attributable to staffing increases, wage increases, and
a significant increase in the Company's group health insurance. First Defiance's
full-time employment increased by 19 employees between the beginning and end of
2002 as the Company added the loan production office in the Toledo area and also
added several staff positions to support growth.

Despite the sale of The Leader, First Defiance continues to provide
mortgage banking services through its First Federal banking centers. At December
31, 2002 First Defiance serviced a total of 4,296 loans for others with a
principal balance of $324.9 million. The total servicing portfolio at December
31, 2001 was 3,207 loans with balances of $221.1 million. The mortgage servicing
rights associated with those loans had a net value of $2.1 million as of
December 31, 2002 after subtracting a $1.4 million reserve for impairment,
compared to $1.8 million at December 31, 2001 after subtracting $829,000 of
impairment. First Defiance recognized $517,000 in impairment expense in 2002
caused by declining market values for mortgage servicing rights in the low rate
environment. In 2001 First Defiance recognized $829,000 of impairment.
Amortization of mortgage servicing rights also increased significantly in 2002,
to $1.4 million from $392,000, due to increased refinancing activity in the low
interest rate environment and continued growth in the servicing portfolio.

The increase in non-interest expense from 2000 to 2001 was primarily in
compensation and benefits, which increased by $1.0 million, and in amortization
and impairment of mortgage servicing rights, which increased by $1.0 million.

Income Taxes - Income taxes from continuing operations amounted to $3.0
million in 2002 compared to $2.4 million in 2001 and $1.7 million in 2000. The
effective tax rates for those three years were 31.7%, 33.6% and 31.0%
respectively. The lower effective tax rate in 2002 is primarily due to a
significant increase in tax-exempt interest due to the Company's increased
investment in tax exempt securities in the investment portfolio.

Discontinued Operations - First Defiance's 2002 results included income
from discontinued operations of $8.9 million, or $1.34 per diluted share. The
amount included $7.7 million related to the after-tax gain on the sale of The
Leader, $2.0 million of income earned by The Leader during the three months the
subsidiary was operated by First Defiance, and $844,000

-31-

of other expenses associated with discontinued operations.

For 2001 and 2000 the operating results of The Leader have been reported
as discontinued operations, consistent with the classification in 2002 so that
all periods presented are comparative. Interest expense recorded at First
Federal which was associated solely with financing activities of The Leader,
primarily interest on brokered CDs and a portion of the Company's FHLB advances,
has also been reported as part of discontinued operations for those two periods.
Total discontinued operations for 2001 and 2000 were $8.8 million and $7.1
million respectively or $1.33 and $1.11 per share.

Change in Accounting for Goodwill - Effective January 1, 2002, First
Defiance adopted Financial Account Standards Board (FASB) Statement No. 142,
Goodwill and Other Intangible Assets. As required under the standard, management
evaluated goodwill recorded at its First Insurance & Investments subsidiary for
the purpose of measuring impairment and determined that such goodwill was
impaired by $238,000 ($194,000 or $.03 per share after tax) as of January 1,
2002. As permitted, this amount is reflected in the income statement as the
cumulative effect of a change in accounting principle.

In addition to the $238,000 of impaired goodwill, during 2002 First
Defiance paid additional consideration of $200,000 to settle a contingent payout
clause under an agreement entered into in 1998 when First Insurance was
acquired. Because this settlement was not reached until after January 1, 2002,
the impairment of the related goodwill created by the settlement is recorded as
an operating expense rather than as part of the cumulative effect adjustment.
The $200,000 payment has been included in other non-interest expense in the 2002
statement of income. As a result of Statement No. 142, First Defiance is no
longer required to recognize goodwill amortization as an expense. Such
amortization totaled $314,000 and $300,000 in 2001 and 2000 respectively. See
Footnote 4 to the Consolidated Financial Statements.

Concentrations of Credit Risk

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

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

-32-

Liquidity and Capital Resources

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

Cash used in operating activities was $75.3 million and $80.1 million in
2002 and 2001 and cash generated from operating activities was $81.7 million in
2000. Excluding the gain from the sale of discontinued operations and net
changes in assets and liabilities of discontinued operations, First Defiance
used $17.9 million in 2002 and generated cash from operations of $18.9 million
and $13.1 million in 2001 and 2000 respectively. The adjustments to reconcile
net income to cash provided by or used in operations during the periods
presented consist primarily of proceeds from the sale of loans (less the
origination of loans held for sale), the provision for loan losses, depreciation
expense, the origination, amortization and impairment of mortgage servicing
rights, ESOP expense related to the release of ESOP shares in accordance with
AICPA SOP 93-6 and increases and decreases in other assets and liabilities.

In a typical year, the primary investing activity of First Defiance is
lending, which is funded with cash provided from operating and financing
activities, as well as proceeds from payment on existing loans and proceeds from
maturities of securities. In 2002 , First Defiance realized proceeds from the
sale of The Leader of $371.8 million. During 2002, a total of $194.7 million was
used to purchase available for sale securities, $39.5 million in proceeds were
received from the maturing of available for sale securities and $64.0 million
was used to fund loan growth. In 2001 and 2000, only $5.1 million and $7.0
million respectively was invested in investment securities while $6.4 million
and $7.1 million in proceeds were received from the maturing of available for
sale securities. In 2001, the reduction in the loan portfolio provided $29.3
million in cash while in 2000, loan growth utilized $81.7 million in cash.

Principal financing activities include the gathering of deposits, the
utilization of FHLB advances, the sale of securities under agreements to
repurchase such securities and borrowings from other banks. In addition, First
Defiance also purchased common stock for its treasury. For the year ended
December 31, 2002, deposits declined by $15.3 million, primarily due to the
company not replacing $64.3 million of brokered certificates of deposit used to
fund The Leader's operations which matured during the year. By contrast, cash
generated from deposit balance increases were $86.2 million and $35.5 million in
2001 and 2000 respectively. Also in 2002 the Company repaid $62.2 million of
existing advances from the FHLB, borrowed $15 million of new advances from the
FHLB, repaid $18.2 million of borrowings from other banks, and repurchased $10.3
million of common stock for treasury. 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.

-33-

At December 31, 2002, First Defiance had the following commitments to fund
deposit, advance borrowing and lease obligations:

Maturity Dates by Period at December 31, 2002
-------------------------------------------------------
Less than After 5
Contractual Obligations Total 1 year 1-3 years 4-5 years years
- -----------------------------------------------------------------------------------------------------
(In thousands)

Savings, checking and demand accounts $253,653 $253,653 $ -- $ -- $ --
Certificates of deposit 345,920 211,806 125,124 8,175 815
FHLB overnight advances 3,000 3,000 -- -- --
FHLB fixed advances including interest (1) 193,206 8,221 46,037 10,836 128,112
Securities sold under repurchase
agreements 4,298 4,298 -- -- --
Other notes payable 10 10
Lease obligations 640 91 164 180 205
-------------------------------------------------------
Total contractual cash obligations $800,727 $481,079 $171,325 $19,191 $129,132
=======================================================

(1) Includes principal payments of $146,096 and interest payments of $47,110

At December 31, 2002, First Defiance had the following commitments to fund
loan or line of credit obligations:

Amount of Commitment Expiration by Period
Total --------------------------------------------
Amounts Less than 1 After 5
Commitments Committed year 1-3 years 4-5 years years
- ----------------------------------------------------------------------------------------
(In thousands)

Mortgage loans in process $ 7,256 $ 7,256 $ -- $ -- $ --
Commercial loans in process 17,133 8,477 8,656 -- --
Single-family mortgage loan
originations 10,281 10,280 -- -- --
Nonmortgage loan originations 43,614 43,614 -- -- --
Consumer lines of credit 41,555 665 6,573 3,603 30,714
Commercial lines of credit 43,237 -- 43,237 -- --
-------- ------- ------- ------ -------
Total commitments $163,076 $70,293 $58,466 $3,603 $30,714
======== ======= ======= ====== =======

In addition to the above commitments, at December 31, 2002 First Defiance
had commitments to sell $12.4 million of loans held for sale to Freddie Mac.

To meet its obligations, management can adjust the rate of savings
certificates to retain deposits in changing interest rate environments; it can
sell or securitize mortgage and non-mortgage loans; and it can turn to other
sources of financing including FHLB advances, the Federal Reserve Bank, bank
lines and brokered certificates of deposit. At December 31, 2002 First Defiance
had $72.0 million capacity under its agreements with the FHLB, the Federal
Reserve Bank and other banks.

Stockholders equity increased by $9.1 million, or 8.2% at December 31,
2002 compared to December 31, 2001. Net income for 2002 was $15.1 million, of
which $3.4 million was returned to shareholders in the form of declared
dividends ($.54 per share). The increase in the market value of available for
sale securities increased equity by $5.7 million. The vesting of Management
Recognition Plan shares and the release of ESOP shares increased equity by
$88,000 and $783,000 respectively. Stock option exercises increased equity by

-34-

approximately $1.2 million. The purchase of 550,149 shares of First Defiance
common stock for treasury at an average price of $18.68 reduced equity by $10.3
million. The book value of First Defiance's common stock was $18.73 per share at
December 31, 2002 compared to $16.20 per share at December 31, 2001. The
tangible book value (excluding goodwill) per share was $18.17 and $14.27 per
share at December 31, 2002 and 2001.

First Defiance is subject to various capital requirements of the Office of
Thrift Supervision. At December 31, 2002, First Federal had capital ratios that
exceeded the standard to be considered "well capitalized". For additional
information about First Federal's capital requirements, see Note 14 to the
Consolidated Financial Statements.

Pro Forma Income Statement

Management does not believe that the reported income from continuing
operations accurately represents the true financial picture of First Defiance
because the continuing operations results for the first three months of 2002 and
for all prior periods presented do not reflect the reinvestment of any of the
net proceeds realized from the sale of The Leader.

The following pro-forma income statement attempts to present what First
Defiance's results from continuing operations would have been had the sale of
The Leader occurred as of January 1, 2002 and the proceeds invested for the
period from January 1, 2002 to April 1, 2002. Management has estimated that
additional assets added to the balance sheet as a result of the sale would have
been reinvested to yield a weighted average rate of 4.44% for the first quarter
of 2002. Also, to the extent possible, management has assumed that proceeds from
the sale were used to prepay advances. Dollars are in thousands (except per
share amounts).

Continuing Pro Forma
Operations Pro Forma Continuing
As Reported Adjustments Operations
----------------------------------------

Interest income $ 46,141 3,043 (1) $ 49,184
Interest expense 22,044 2,516 (2) 24,560
--------- ---------
Net interest income 24,097 24,624
Provision for loan losses 1,451 1,451
------- -------
Net interest income after provision 22,646 23,173
Non-interest income 12,921 12,921
Non-interest expense 26,161 26,161
------- -------
Income before income taxes 9,406 9,933
Income taxes 2,986 185 (3) 3,171
------- -------

Net income from continuing operations $ 6,420 $ 6,762
======= =======
Net income per diluted share from continuing
operations $ 0.97 $ 1.02
======= =======

(1) Assumed $120 million invested at 5.65%, $154 million invested at 3.5% for
three months.

(2) Add back $799,000 of interest on brokered CDs classified as discontinued,
add back $2.2 million of interest on FHLB advances classified as
discontinued, subtract $326,000 interest on advances to be paid off,
subtract $157,000 interest on bank debt to be paid off.

(3) Income tax on $527,000 increase in net interest income at 35%

-35-

Subsequent Event

On February 22, 2003, First Defiance signed a Purchase and Assumption
Agreement with RFC Banking Company and its parent, Rurban Financial Corp., to
acquire banking centers located in Findlay, Ottawa, and McComb, Ohio. Under the
terms of the agreement, First Defiance will pay a purchase price equal to 10.5%
of all non-brokered deposit accounts plus an agreed upon amount for all real
estate, furnishings and equipment of those branches. In addition, First Defiance
will acquire certain loans of those banking centers. Total deposit balances of
those banking centers as of December 31, 2002 were approximately $176 million,
of which $40 million were brokered deposits. The approximate balance of the
loans to be acquired by First Defiance was $115 million as of December 31, 2002.

The acquisition is subject to regulatory approval. It is anticipated that
the transaction will close in the second quarter of 2003.

Critical Accounting Policies

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

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

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

Economic factors that are considered include levels of unemployment and
inflation, specific plant or business closings in the Company's market area, the
impact of strikes or other work stoppages, the impact of weather or
environmental conditions, especially relative to

-36-

agricultural borrowers and other matters than may have an impact on the economy
as a whole.

In addition to the identification of specific customer's who may be
potential credit problems, management considers its historical losses, the
results of independent loan reviews, an assessment of the adherence to
underwriting standards, the loss experience being reported by other financial
institutions operating in the Company's market area, and other factors in
providing reserves against loan balances that have not been specifically
classified. While management believes its allowance for loan losses is
conservatively determined based on the above factors, it does not believe the
allowances to be excessive or unnecessary. Refer to the section entitled
Allowance for Loan Losses and Note 3, Statement of Accounting Policies for a
further description of the Company's estimation process and methodology related
to the allowance for loan losses.

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

Key assumptions made by management relative to the valuation of mortgage
servicing rights include the stratification policy used in valuing servicing,
assumptions relative to future prepayments of mortgages, the potential value of
any escrow deposits maintained or ancillary income received as a result of the
servicing activity and discount rates used to value the present value of a
future cash flow stream. The value of mortgage servicing rights is especially
vulnerable in a falling interest rate environment. Refer also to the section
entitled Mortgage Servicing Rights and Note 2, Statement of Accounting Policies,
and Note 9, Mortgage Banking, for a further description of First Defiance's
process, methodology and assumptions.

SFAS 91 - Deferral of Fees: First Defiance believes that SFAS No. 91 -
Deferral of Fees is a critical accounting policy that utilizes estimates in its
preparation of its consolidated financial statements. First Defiance accounts
for loan origination and commitment fees and certain direct loan origination
costs by deferring the net fees, or net costs, and amortizing them as an
adjustment of the related loan's yield. While the amount of fees to be deferred
is generally apparent in the origination of a loan, the amount of costs,
especially indirect or allocated costs to defer is a judgment that management
makes based various time studies and cost accounting assumptions. Refer to the
section entitled Revenue Recognition and Note 3, Statement of Accounting
Policies, for a detailed description of First Defiance's process and
methodology.

-37-

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, First
Defiance's net interest income would increase by just 0.27% over the base case
scenario. Were interest rates to fall by 100 basis points during the same
12-month period, the simulation indicates that net interest income would
decrease by only 0.03%.

First Defiance has increased its lending activities in the non-residential
real estate and commercial loan areas. While such loans carry higher credit risk
than residential mortgage lending, they tend to be more rate sensitive than
residential mortgage loans. The balance of First Defiance's non-residential and
multi-family real estate loan portfolio increased to $227.8 million, which is
split between $12.7 million of fixed-rate loans and $215.1 million of
adjustable-rate loans at December 31, 2002. The commercial loan portfolio
increased to $104.1 million, which is split between $40.7 million of fixed-rate
loans and $63.4 million of adjustable-rate loans at December 31, 2002. Certain
of the loans classified as adjustable have fixed rates for an initial term that
may be as long as five years. The maturities on fixed-rate loans are generally
less than 7 years. First Defiance also has significant balances of consumer
loans ($37.6 million at December 31, 2002) which tend to have a shorter duration
than residential mortgage loans, and home equity and improvement loans ($49.9
million at December 31, 2002) which fluctuate with changes in the prime lending
rate. Also, to limit its interest rate risk, First Federal sells approximately
90% of its fixed-rate mortgage originations into the secondary market.

In addition to the simulation analysis, First Federal also prepares an
"economic value of equity" ("EVE") analysis. This analysis calculates the net
present value of First Federal's assets and liabilities in rate shock
environments that range from -200 basis points to +200 basis points. The results
of this analysis are reflected in the following table.

-38-

December 31, 2002
- -------------------------------------------------------------------------------------
Economic Value of Equity as % of
Economic Value of Equity Present Value of Assets
--------------------------------------------------------------------
Change in Rates $ Amount $ Change % Change Ratio Change
(Dollars in Thousands)
- -------------------------------------------------------------------------------------

+ 200 bp 115,229 1,138 1.00% 13.39% 58 bp
+ 100 bp 115,238 1,147 1.01% 13.16% 35 bp
0 bp 114,091 -- -- 12.81% --
-100 bp 111,792 (2,299) (2.02%) 12.35% (46) bp
-200 bp 112,933 (1,158) (1.01%) 12.28% (53) bp

Based on the above analysis, in the event of a 200 basis point change in
interest rates as of December 31, 2002, First Federal would experience a 1.0%
increase in its economic value of equity in a rising rate environment and only a
1.0% decrease in its economic value of equity in a declining 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. It should be noted that the amount of change in value of specific
assets and liabilities due to changes in rates is not the same in a rising rate
environment as in a falling rate environment. Based on the EVE analysis, the
change in the economic value of equity in both rising and falling rate
environments is generally negligible because both its assets and liabilities
have relatively short durations and the durations are fairly closely matched.
The average duration of its assets at December 31, 2002 was 1.70 years while the
average duration of its liabilities was 2.12 years.

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

Forward Looking Information

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, comments about the adequacy of the allowance
for loan losses and projections about interest rate 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 conditions,
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.

-39-

Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Financial Condition................................41
Consolidated Statements of Income.............................................43
Consolidated Statements of Stockholder's Equity...............................44
Consolidated Statements of Cash Flows.........................................45
Notes to Consolidated Financial Statements....................................47
Report of Independent Auditors................................................94

-40-

First Defiance Financial Corp.

Consolidated Statements of Financial Condition

December 31
2002 2001
-----------------------
(In Thousands)

Assets Cash and cash equivalents:
Cash and amounts due from depository institutions $ 17,263 $ 37,334
Interest-bearing deposits 11,395 766
-----------------------
28,658 38,100
Securities:
Available-for-sale, carried at fair value 209,604 48,691
Held-to-maturity, carried at amortized cost
(fair value $4,129 and $5,678 at
December 31, 2002 and 2001, respectively) 3,921 5,580
-----------------------
213,525 54,271

Loans receivable, net of allowance of $7,496 and
$6,548 at December 31, 2002 and 2001, respectively 561,041 499,141
Loans held for sale 15,336 672
Mortgage servicing rights 2,090 1,821
Accrued interest receivable 4,533 2,940
Federal Home Loan Bank stock and other interest-earning assets 18,302 16,306
Bank Owned Life Insurance 15,144 --
Premises and equipment 19,958 20,067
Real estate and other assets held for sale 206 136
Goodwill, net of accumulated amortization and impairment of
$1,240 and $802 at December 31, 2002 and 2001, respectively 3,636 3,749
Deferred taxes -- 339
Other assets 1,816 652
Assets held for sale -- 6,304
Assets of discontinued operations -- 488,150
-----------------------
Total assets $ 884,245 $1,132,648
=======================

-41-

December 31
2002 2001
--------------------------
(In Thousands)

Liabilities and stockholders' equity
Liabilities:
Deposits $ 599,573 $ 614,848
Advances from the Federal Home Loan Bank 149,096 196,302
Short term borrowings and other interest-bearing liabilities 4,308 20,724
Advance payments by borrowers 316 390
Deferred taxes 2,299 --
Other liabilities 8,543 6,517
Liabilities associated with assets held for sale -- 6,242
Liabilities of discontinued operations -- 176,604
--------------------------
Total liabilities 764,135 1,021,627

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; 6,412 and 6,854
shares outstanding, respectively 64 68
Additional paid-in capital 50,702 53,725
Stock acquired by ESOP (2,387) (2,813)
Deferred compensation (30) (82)
Accumulated other comprehensive income,
net of tax of $3,477 and $410, respectively 6,455 763
Retained earnings 65,306 59,360
--------------------------
Total stockholders' equity 120,110 111,021
--------------------------
Total liabilities and stockholders' equity $ 884,245 $ 1,132,648
==========================

See accompanying notes.

-42-

First Defiance Financial Corp.
Consolidated Statements of Income

Years ended December 31
2002 2001 2000
---------------------------------------
(In Thousands, except per share amount)

Interest income:
Loans $ 36,871 $ 42,794 $ 42,601
Investment securities 8,550 3,480 3,978
Interest-bearing deposits 720 271 362
---------------------------------------
Total interest income 46,141 46,545 46,941

Interest expense:
Deposits 16,508 20,931 21,409
Federal Home Loan Bank advances and other 5,276 3,609 5,060
Notes payable and warehouse loans 260 1,062 733
---------------------------------------
Total interest expense 22,044 25,602 27,202
---------------------------------------
Net interest income 24,097 20,943 19,739

Provision for loan losses 1,451 994 635
---------------------------------------
Net interest income after provision for loan losses 22,646 19,949 19,104

Non-interest income:
Service fees and other charges 3,767 3,065 2,286
Insurance commissions 3,266 2,961 2,598
Dividends on FHLB stock 904 1,055 1,073
Gain on sale of loans 4,565 3,061 580
Gain (Loss) on sale of securities 21 (137) (58)
Trust income 117 110 43
Income from Bank Owned Life Insurance 144 -- --
Other noninterest income 137 105 154
---------------------------------------
Total Noninterest Income 12,921 10,220 6,676

Non-interest expense:
Compensation and benefits 14,104 12,142 11,094
Occupancy 2,802 2,728 2,644
SAIF Deposit insurance premiums 123 124 120
State Franchise tax 1,351 1,306 1,123
Data processing 1,457 1,402 1,277
Amortization and impairment of mortgage servicing rights 1,956 1,221 222
Amortization of goodwill and other intangibles 200 314 300
Other noninterest expense 4,168 3,711 3,398
---------------------------------------
Total Noninterest Expense 26,161 22,948 20,178
---------------------------------------

Income before income taxes 9,406 7,221 5,602
Federal income taxes 2,986 2,423 1,734
---------------------------------------
Income from continuing operations 6,420 4,798 3,868
Discontinued operations, net of tax 8,853 8,818 7,094
---------------------------------------
Income before cumulative effect of a change in accounting principals 15,273 13,616 10,962
Cumulative effect of change in method of accounting for goodwill (194) -- --
---------------------------------------
Net income $ 15,079 $ 13,616 $ 10,962
=======================================

Earnings per share:
Basic
From continuing operations $ 1.01 $ 0.74 $ 0.61
Discontinued operations, net of tax $ 1.39 $ 1.37 $ 1.13
Cumulative effect of change in method of accounting for goodwill (0.03) -- --
Net income $ 2.37 $ 2.11 $ 1.74

Diluted
From continuing operations $ 0.97 $ 0.72 $ 0.60
Discontinued operations, net of tax $ 1.34 $ 1.33 $ 1.11
Cumulative effect of change in method of accounting for goodwill (0.03) -- --
Net income $ 2.28 $ 2.05 $ 1.71

Dividends declared per share $ 0.54 $ 0.49 $ 0.45

See accompanying notes.

-43-

First Defiance Financial Corp.

Consolidated Statements of Stockholders' Equity

Stock Acquired By
-------------------- Accumulated
Common Stock Additional Management Other Total
-------------- Paid-In Recognition Comprehensive Retained Stockholders'
Shares Amount Capital ESOP Plan Income Earnings Equity
-------------------------------------------------------------------------------------

Balance at January 1, 2000 6,814 $ 68 $ 53,181 $ (3,664) $ (458) $ (1,096) $ 41,385 $ 89,416
Comprehensive income:
Net income 10,963 10,963
Change in net unrealized gains and
losses on available-for-sale securities
net of income taxes of $450 1,143 1,143
--------
Total comprehensive income 12,106
ESOP shares released 71 426 497
Amortization of deferred compensation
of Management Recognition Plan,
net of income tax benefit of $35 (35) 254 219
Shares issued under stock option plans,
net of income tax benefit of $99 80 1 469 470
Acquisition of common stock for treasury (30) (174) (154) (328)
Dividends declared (2,907) (2,907)
-------------------------------------------------------------------------------------

Balance at December 31, 2000 6,864 69 53,512 (3,238) (204) 47 49,287 99,473
Comprehensive income:
Net income 13,616 13,616
Change in net unrealized gains and
losses on available-for-sale securities
net of income taxes of $461 716 716
--------
Total comprehensive income 14,332
ESOP shares released 173 425 598
Amortization of deferred compensation
of Management Recognition Plan,
net of income tax benefit of $63 63 122 185
Shares issued under stock option plans,
net of income tax benefit of $94 41 360 360
Acquisition of common stock for treasury (51) (383) (365) (748)
Dividends declared (3,179) (3,179)
-------------------------------------------------------------------------------------

Balance at December 31, 2001 6,854 69 53,725 (2,813) (82) 763 59,359 111,021
Comprehensive income:
Net income 15,079 15,079
Change in net unrealized gains and
losses on available-for-sale securities
net of income taxes of $3,075 5,692 5,692
--------
Total comprehensive income 20,771
ESOP shares released 357 426 783
Amortization of deferred compensation
of Management Recognition Plan,
net of income tax benefit of $36 36 52 88
Shares issued under stock option plans,
net of income tax benefit of $290 108 1 1,170 1,171
Acquisition of common stock for treasury (550) (6) (4,586) (5,683) (10,275)
Dividends declared (3,449) (3,449)
-------------------------------------------------------------------------------------

Balance at December 31, 2002 6,412 $ 64 $ 50,702 $ (2,387) $ (30) $ 6,455 $ 65,306 $120,110
=====================================================================================

See accompanying notes

-44-

First Defiance Financial Corp.

Consolidated Statements of Cash Flows

Years ended December 31
2002 2001 2000
-----------------------------------
(In Thousands)

Operating activities
Net income $ 15,079 $ 13,616 $ 10,963
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 1,451 994 635
Provision for depreciation 1,605 1,603 1,553
Net securities amortization 695 33 34
Amortization of mortgage servicing rights 1,439 392 222
Net impairment of of mortgage servicing rights 517 829 --
Amortization of goodwill -- 314 300
Net impairment of goodwill 438 -- --
Gain on sale of loans (4,565) (3,061) (580)
Gain on sale of discontinued operations (16,912) -- --
Amortization of Management Recognition Plan deferred compensation 88 185 219
Release of ESOP shares 783 598 497
Gain on sale of office properties and equipment -- -- (60)
(Gains) losses on sales of securities (21) 137 58
Deferred federal income tax (credit) (437) 207 514
Proceeds from sale of loans 197,249 190,352 35,610
Origination of mortgage servicing rights, net (2,225) (1,911) (357)
Origination of loans held for sale (207,348) (187,862) (34,708)
Increase (decrease) in interest receivable and other assets (17,998) 634 (700)
Decrease in assets held for sale 12 1,006 230
Decrease in liabilities held for sale -- (186) (228)
Increase in assets of discontinued operations (40,479) (80,728) (381)
Increase (decrease) in liabilities of discontinued operations -- (18,240) 68,935
Increase (decrease) in accrued interest and other liabilities (4,638) 1,016 (1,081)
-----------------------------------
Net cash provided by operating activities (75,267) (80,072) 81,675

Investing activities
Proceeds from maturities of held-to-maturity securities 1,623 2,089 2,169
Proceeds from maturities of available-for-sale securities 39,523 6,395 7,071
Proceeds from sale of available-for-sale securities 2,459 3,919 2,317
Proceeds from sale of real estate and other assets held for sale 597 296 795
Proceeds from sale of office properties and equipment -- 27 317
Proceeds from sale of discontinued operations 371,772 -- --
Purchases of available-for-sale securities (194,766) (5,120) (6,996)
Purchases of Federal Home Loan Bank stock (767) (1,055) (1,070)
Purchases of office properties and equipment (1,500) (1,652) (1,970)
Net (increase) decrease in loans receivable (64,018) 29,336 (81,743)
-----------------------------------
Net cash provided by investing activities 154,923 34,235 (79,110)

-45-

First Defiance Financial Corp.

Consolidated Statements of Cash Flows (continued)

Years ended December 31
2002 2001 2000
-----------------------------------

Financing activities
Net increase (decrease) in deposits $ 15,349 $ 86,172 $ 35,506
Repayment of Federal Home Loan Bank long-term advances (25,206) (454) (125,654)
Repayment of term notes payable (39) (36) (33)
Net increase (decrease) in Federal Home Loan Bank short-term advances (37,000) (116,500) 83,500
Net increase (decrease) in short-term line of credit (18,250) 6,250 12,000
Proceeds from Federal Home Loan Bank long-term advances 15,000 90,000 --
Increase in securities sold under repurchase agreements 4,299 -- --
Purchase of common stock for treasury (10,275) (748) (328)
Cash dividends paid (3,449) (3,109) (2,832)
Proceeds from exercise of stock options 1,171 360 470
-----------------------------------
Net cash used in financing activities (58,400) 61,935 2,629
-----------------------------------
Increase (decrease) in cash and cash equivalents (9,442) 16,098 5,194
Cash and cash equivalents at beginning of period 38,100 22,002 16,808
-----------------------------------
Cash and cash equivalents at end of period $ 28,658 $ 38,100 $ 22,002
===================================

Supplemental cash flow information:
Interest paid $ 21,337 $ 25,694 $ 25,231
===================================
Income taxes paid $ 14,260 $ 8,520 $ 6,400
===================================
Transfers from loans to real estate
and other assets held for sale $ 667 $ 391 $ 607
===================================
Noncash operating activities
Change in deferred taxes on net unrealized gains or
losses on available-for-sale securities $ 3,075 $ (461) $ (450)
===================================
Noncash investing activities
Increase (decrease) in net unrealized gain or (loss) on
available-for-sale securities $ 8,784 $ 1,177 $ 1,593
===================================
Noncash financing activities
Cash dividends declared but not paid $ 920 $ 848 $ 778
===================================

See accompanying notes.

-46-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

December 31, 2002

1. Basis of Presentation

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

First Federal is primarily engaged in attracting deposits from the general
public through its offices and using those and other available sources of funds
to originate loans primarily in the counties in which its offices are located.
First Federal's traditional banking activities include originating and servicing
residential, commercial and consumer loans and providing a broad range of
depository and trust services. First Federal is subject to the regulations of
certain federal agencies and undergoes periodic examinations by those regulatory
authorities. First Federal's wholly owned mortgage banking company, The Leader
Mortgage Company, LLC, was sold to US Bankcorp in a transaction that was
completed on April 1, 2002.

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

2. Statement of Accounting Policies

Use of Estimates

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

Earnings Per Share

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

-47-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

2. Statement of Accounting Policies (continued)

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 $1,279,000 and $2,309,000, respectively, at December
31, 2002.

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.

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.

Currently, First Defiance invests in derivative securities as part of the
overall asset and liability management process. Such derivative securities are
disclosed in Note 6 and include agency step-up, REMIC and CMO investments. Such
investments are not classified by management as high risk at December 31, 2002
and do not present risk significantly different than other mortgage-backed or
agency 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 .15% of total assets plus
an amount of at least 2% but no more than 4% of its non-grandfathered mission
asset activity (as defined in the FHLB's regulations). First Federal is
permitted to own stock in excess of the minimum requirement.

-48-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

2. Statement of Accounting Policies (continued)

FHLB stock is a restricted equity security that does not have a readily
determinable fair value and is carried at cost.

Loans Receivable

Loans are reported at the principal amount outstanding, net of unearned income.
Unearned income, which includes deferred fees net of deferred incremental loan
origination costs, is amortized to interest income generally over the
contractual life of the loan using the interest method.

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

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 reversed.
Interest income is subsequently recognized only to the extent cash payments are
received.

The allowance for loan losses is maintained at a level believed adequate by
management to absorb probable losses inherent in the loan portfolio and is based
on the size and current risk characteristics of the loan portfolio, an
assessment of individual problem loans, actual loss experience, current economic
events in specific industries and geographical areas, and other pertinent
factors including regulatory guidance and general economic conditions.
Determination of the allowance is inherently subjective as it requires
significant estimates, including the amounts and timing of expected future cash
flows on impaired loans, estimated losses on pools of homogeneous loans based on
historical loss experience and consideration of economic trends, all of which
may be susceptible to significant change. Loan losses are charged off against
the allowance, while recoveries of amounts previously charged off are credited
to the allowance. A provision for loan losses is charged to operations based on
management's periodic evaluation of the factors previously mentioned, as well as
other pertinent factors.

Marketing Costs

Marketing costs totaled $504,000, $463,000, and $459,000 in 2002, 2001, and
2000, respectively, and are expensed as incurred.

-49-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

2. Statement of Accounting Policies (continued)

Mortgage Servicing Rights

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

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

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

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, less estimated costs to dispose, at
the time of foreclosure or insubstance foreclosure. Loan losses arising from the
acquisition of such property are charged against the allowance for loan losses.

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 3 to 15 years

-50-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

2. Statement of Accounting Policies (continued)

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. 144,
Accounting for Long-Lived Assets to be Disposed of, relative to accounting for
long-lived assets and accounting for long-lived assets to be disposed of either
through sale, abandonment, exchange or a distribution to owners.

Income Taxes

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

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

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

Business Combinations

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

Intangibles

The excess of the purchase price over the net identifiable tangible assets
acquired in purchase business combinations is recorded as goodwill. Upon the
adoption of Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill
and Other Intangible Assets, goodwill relating to First Insurance & Investments
is no longer being periodically amortized but rather is tested at least annually
for impairment based on specific guidance included in SFAS No. 142. Management
utilizes an outside appraisal to estimate the fair value of reporting units for
the purpose of this impairment test. The impact on the statement of income from
the adoption of SFAS 142 is included in Note 4.

-51-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

2. Statement of Accounting Policies (continued)

Stock Options

At December 31, 2002, the Company had three stock-based compensations plans,
which are more fully described in Note 18. The Company accounts for those plans
under recognition and measurement principles of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees and related
Interpretations. Under APB No. 25, because the exercise price of the
Corporation's employee stock options equals the market price of the underlying
stock on the date of the grant, no compensation expense is recognized.

Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, Accounting for Stock-Based Compensation and has been determined as
if First Defiance had accounted for its employee stock options under the fair
value method of that Statement. Under the fair-value based method, compensation
cost is measured at the grant date based upon the value of the award and
recognized over the service period. For purposes of the pro forma disclosures,
the estimated fair value of the option is amortized to expense over the options'
vesting period.

The following pro forma results of operations use a fair value method of
accounting for stock options in accordance with SFAS No. 123. The estimated fair
value of the options are 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
2002 2001 2000
--------------------------------------

Risk free interest rate 5.74% 5.70% 6.00%
Dividend yield 2.93% 3.01% 4.80%
Volatility factors of expected market
price of stock 0.269% 0.268% 0.281%
Weighted average expected life 8.62 years 8.65 years 7.48 years
Weighted average grant date fair value
of options granted $ 3.44 $ 3.38 $ 3.47

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

-52-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

2. Statement of Accounting Policies (continued)

Years ended December 31
2002 2001 2000
------------------------------
Income from continuing operations $ 6,420 $ 4,798 $ 3,868
Stock-based compensation using the fair
value method, net of tax (197) (210) (346)
------------------------------
Pro forma net income from continuing
operations $ 6,223 $ 4,588 $ 3,522
==============================
Pro forma earnings per share:
Basic $ 0.97 $ 0.71 $ 0.56
==============================
Diluted $ 0.94 $ 0.69 $ 0.55
==============================

The pro forma effects for 2002, 2001 and 2000 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.

Accounting for Derivative Instruments and Hedging Activities

First Defiance's accounting policies for derivative instruments and hedging
activities reflect the provisions of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. All derivative instruments are
carried at fair value on the balance sheet. When the hedging critieria are met,
offsetting changes in fair value or cash flows of both the derivative and the
hedged asset or liability are deferred and 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 recognized in earnings and cannot be
deferred. For derivative instruments not accounted for as hedges, changes in
fair value are recognized in earnings as they occur.

Recent Accounting Pronouncements

Asset Retirement Obligations

In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires an entity to record a liability for an
obligation associated with the retirement of an asset at the time the liability
is incurred by capitalizing the cost as part of the carrying value of the
related asset and depreciating it over the remaining useful life of that asset.

-53-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

2. Statement of Accounting Policies (continued)

The standard is effective for the Company beginning January 1, 2003, and its
adoption is not expected to have a material impact on the Company's results of
operations, financial position or liquidity.

Accounting for Long-Lived Assets

SFAS No. 144, Accounting for Long-Lived Assets to be Disposed of, was issued in
October 2001 and addresses how to account for long-lived assets and how to
account for long-lived assets that an entity plans to dispose of either through
sale, abandonment, exchange or a distribution to owners. The new standard
supercedes SFAS No. 121, which addressed asset impairment, and certain
provisions of APB Opinion 30 related to reporting the effects of the disposal of
a business segment and requires expected future operating losses from
discontinued operations to be recorded in the period in which the losses are
incurred rather than the measurement date. Under SFAS No. 144, more dispositions
may qualify for discontinued operations treatment in the income statement. The
provisions of SFAS No. 144 became effective for the Company January 1, 2002 and
do not have a material impact on the Company's results of operations, financial
position or liquidity.

Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No.
13 and Technical Corrections

SFAS No. 145 rescinded SFAS No. 4, 44 and 64 and is effective for financial
statements issued for fiscal years beginning after May 15, 2002. Any gain or
loss on extinguishment of debt that was classified, as an extraordinary item in
prior periods presented that does not meet the criteria in APB 30 for
classification as an extraordinary item should be reclassified. Certain
provisions of SFAS No. 145 related to SFAS No. 13 are effective for transactions
occurring after May 15, 2002. All other provisions of SFAS 145 will be effective
for financial statements issued on or after May 15, 2002. SFAS 145 did not and
is not expected to have a material impact on the Company's results of
operations, financial position or liquidity.

Accounting for Costs Associated with Exit or Disposal Activities

SFAS No. 146, Accounting for Costs Associated with Exit of Disposal Activities,
was issued in June 2002 and replaces Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The
provisions of SFAS No. 146 address the accounting and reporting for one-time
employee termination benefits, certain contract termination costs and other
costs associated with exit or disposal activities such as facility closings or
consolidations and

-54-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

2. Statement of Accounting Policies (continued)

employee relocations. SFAS No. 146 is effective for exit or disposal activities
that are initiated after December 31, 2002, with early application encouraged.

The Company will adopt SFAS No. 146 prospectively as of January 1, 2003.

Acquisitions of Certain Financial Institutions

SFAS No. 147, Acquisitions of Certain Financial Institutions, was issued in
October 2002. SFAS No. 147 clarified the accounting for intangible assets and
goodwill in conjunction with the acquisition of certain financial institutions.
SFAS No. 147 also amends SFAS No. 144, (see above) to include in its scope
long-term customer relationship intangible assets of financial institutions such
as core deposit intangible assets. The provisions of SFAS No. 147 became
effective October 1, 2002 and had no impact on the Company's results of
operations, financial position or liquidity.

Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others

On November 25, 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN No. 45)
which expands on the accounting guidance of Statements No. 5, 57 and 107 and
incorporates without change the provisions of FASB Interpretation No. 34, which
is being superseded.

FIN No. 45, which is applicable to public and non-public entities, will
significantly change current practice in the accounting for, and disclosure of,
guarantees. Each guarantee meeting the characteristics described in FIN No. 45
is to be recognized and initially measured at fair value, which will be a change
from current practice for most entities. In addition, guarantors will be
required to make significant new disclosures, even if the likelihood of the
guarantor making payments under the guarantee is remote, which represents
another change from current general practice.

FIN No. 45's disclosure requirements are effective for financial statements of
interim or annual periods ending after December 15, 2002, while the initial
recognition and initial measurement provisions are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002.

-55-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

2. Statement of Accounting Policies (continued)

The Company has included FIN No. 45's required disclosures in Note 7. FIN No. 45
recognition and measurement provisions are not expected to have a material
impact on the Company's results of operations, financial position or liquidity
once adopted by the Company on January 1, 2003.

Consolidation of Variable Interest Entities

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN No. 46),
Consolidation of Variable Interest Entities. The objective of this
interpretation is to provide guidance on how to identify a variable interest
entity (VIE) and determine when the assets, liabilities, non-controlling
interests and results of operations of a VIE need to be included in a company's
consolidated financial statements. A company that holds variable interests in an
entity will need to consolidate the entity if the company's interest in the VIE
is such that the company will absorb a majority of the VIE's expected loss
and/or receive a majority of the entity's expected residual returns, if they
occur. FIN No. 46 also requires additional disclosures by primary beneficiaries
and other significant variable interest holders. The provisions of this
interpretation became effective upon issuance. As of December 31, 2002, the
Company was not party to any VIEs. The Company is currently assessing the
impact, if any, the interpretation will have on results of operation, financial
position, or liquidity, as it applies to other areas within the Company.

-56-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

3. Discontinued Operations

On April 1, 2002, First Defiance competed the sale of The Leader Mortgage
Company, LLC to US Bancorp. Discontinued operations as reported include the
operating results of The Leader for the periods owned, the gain realized by the
Company from the sale of The Leader, net of all expenses of the sale, and the
cost of the Company for early payment of certain FHLB advances and other
expenses. The components of discontinued operations are as follows (in
thousands):

2002 2001 2000
-------------------------------

Operations of The Leader $ 4,316 $ 15,343 $ 9,891
Net interest income (expense) allocated to discontinued
operations (1,250) (1,365) 1,384
Gain from sale of The Leader 16,959 -- --
Cost to terminate financing and other expenses associated
with discontinued operations (1,225) -- --
-------------------------------
Income from discontinued operations before income tax 18,800 13,978 11,275
Income tax on discontinued operations 9,947 5,160 4,181
-------------------------------
Income from discontinued operations $ 8,853 $ 8,818 $ 7,094
===============================

Net interest income or expense is allocated to discontinued operations, in
accordance with EITF 87-24, based on interest earned by First Federal on
intercompany loans to The Leader less interest expense, primarily brokered CDs
and a portion of FHLB advances utilized to fund those intercompany loans. In
2002 and 2001, First Federal had a negative spread in its borrowing relationship
with The Leader.

The gain from the sale of The Leader was based on the net proceeds from the
sale, after expenses, less the book value of First Defiance's investment in The
Leader. The Leader's net book value included goodwill of $9.6 million.

4. Change in Accounting Method

On January 1, 2002, First Defiance adopted SFAS No. 142, Goodwill and Other
Intangible Assets. As required by FAS No. 142, goodwill is no longer amortized
into the income statement over an estimated life but rather is tested at least
annually for impairment based on specific guidance included in FAS No. 142.
Based on an impairment test performed as of January 1, 2002, the Company
determined that a portion of previously recorded goodwill related to its First
Insurance business unit was impaired. The amount of impairment as of January 1,
2002, which

-57-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

4. Change in Accounting Method (continued)

was $238,000 or $194,000 after tax, is reflected in the financial statements as
an adjustment for the cumulative effect of an accounting change.

During 2002, management reached a settlement with the former shareholders of one
of the agencies acquired to form First Insurance related to an earn-out
provision of the original purchase agreement. The payment of $200,000 was
recorded as additional goodwill for First Insurance and was considered impaired.
This $200,000 impairment adjustment is recorded as a operating cost by First
Defiance in the 2002 statement of income. The remaining balance of goodwill
recorded at First Insurance totals $3.6 million at December 31, 2002.

Results from continuing operations for December 31, 2001 and 2000 include
goodwill amortization expense of $314,000 and $300,000 respectively. Had FAS No.
142 been in effect for those periods, the Company would have reported income
from continuing operation of $5.1 million for 2001 and $4.1 million for 2000.
These amounts were determined as follows (in thousands, except for per share
amounts):

2002 2001 2000
-------- -------- --------
Reported income from continuing operations $ 6,420 $ 4,798 $ 3,868
Add back: Goodwill amortization -- 314 300
Deduct: Tax benefit from deductible goodwill -- (55) (50)
-------- -------- --------
Adjusted income from continuing operations $ 6,420 $ 5,057 $ 4,118

Basic earnings per share:
Reported income from continuing operations $ 1.01 $ 0.74 $ 0.61
Add back: Goodwill amortization -- 0.05 0.05
Deduct: Tax benefit from deductible goodwill -- (0.01) (0.01)
-------- -------- --------
Adjusted income from continuing operations $ 1.01 $ 0.78 $ 0.65

Diluted earnings per share:
Reported income from continuing operations $ 0.97 $ 0.72 $ 0.60
Add back: Goodwill amortization -- 0.05 0.05
Deduct: Tax benefit from deductible goodwill -- (0.01) (0.01)
-------- -------- --------
Adjusted income from continuing operations $ 0.97 $ 0.76 $ 0.64

-58-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

5. Earnings Per Share

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

2002 2001 2000
----------------------------------------
(In Thousands, except per share amounts)

Numerator for basic and diluted earnings
per share-income from continuing operations $ 6,420 $ 4,798 $ 3,868
========================================
Denominator:
Denominator for basic earnings per
share-weighted-average shares 6,359 6,464 6,318
Effect of dilutive securities:
Employee stock options 236 149 39
Unvested Management Recognition
Plan stock 14 33 66
----------------------------------------
Dilutive potential common shares 250 182 105
----------------------------------------
Denominator for diluted earnings per
share-adjusted weighted-average shares 6,609 6,646 6,423
========================================
Basic earnings per share from continuing operations $ 1.01 $ 0.74 $ 0.61
========================================
Diluted earnings per share from continuing
operations $ 0.97 $ 0.72 $ 0.60
========================================

-59-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

6. Investment Securities

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

December 31, 2002
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------
(In Thousands)

Available-for-Sale Securities:
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies $ 95,462 $ 6,373 $ 2 $101,833
Corporate bonds 25,720 1,733 -- 27,453
Adjustable rate mortgage-backed security
mutual funds 2,109 -- 54 2,055
Adjustable rate mortgage-backed securities 15,169 269 -- 15,438
REMICs 12,636 232 -- 12,868
Collateralized mortgage obligations 11,380 201 42 11,539
Trust preferred stock 7,238 53 55 7,236
Equity securities 69 -- 2 67
Obligations of state and political
subdivisions 29,890 1,283 58 31,115
-------------------------------------------
Totals $199,673 $10,144 $ 213 $209,604
===========================================

Held-to-Maturity Securities:
FHLMC certificates $ 1,004 $ 32 $ 3 $ 1,033
FNMA certificates 1,691 29 6 1,714
GNMA certificates 636 25 -- 661
Obligations of states and political
subdivisions 590 131 -- 721
-------------------------------------------
Totals $ 3,921 $ 217 $ 9 $ 4,129
===========================================

-60-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

6. Investment Securities (continued)

December 31, 2001
----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------
(In Thousands)

Available-for-Sale Securities:
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies $17,708 $ 905 $ -- $18,613
Corporate bonds 9,322 294 -- 9,616
Adjustable rate mortgage-backed security
mutual funds 2,548 -- 70 2,478
Adjustable rate mortgage-backed securities 4,134 52 71 4,115
Collateralized mortgage obligations 3,546 69 16 3,599
Trust preferred stock 2,000 12 80 1,932
Equity securities 70 17 -- 87
Obligations of state and political
subdivisions 8,216 131 96 8,251
----------------------------------------
Totals $47,544 $ 1,480 $ 333 $48,691
========================================

Held-to-Maturity Securities:
FHLMC certificates $ 1,690 $ 25 $ 25 $ 1,690
FNMA certificates 2,389 26 52 2,363
GNMA certificates 871 22 -- 893
Obligations of states and political
subdivisions 630 102 -- 732
----------------------------------------
Totals $ 5,580 $ 175 $ 77 $ 5,678
========================================

The amortized cost and fair value of securities at December 31, 2002 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.

-61-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

6. 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 $ 8,242 $ 8,366 $ -- $ --
Due after one year through
five years 88,990 94,737 375 439
Due after five years through
ten years 56,010 59,616 332 418
Due after ten years 44,253 44,763 3,214 3,272
----------------------------------------------
197,495 207,482 3,921 4,129

Adjustable rate mortgage-backed
security mutual funds 2,109 2,055 -- --
Equity securities 69 67 -- --
----------------------------------------------
Totals $199,673 $209,604 $ 3,921 $ 4,129
==============================================

Investment securities with carrying amounts of $72.9 million and $18.5 million
at December 31, 2002 and 2001, respectively, were pledged as collateral on
public deposits and FHLB advances and for other purposes as required or
permitted by law.

7. Commitments and Contingent Liabilities

Loan Commitments

Loan commitments are made to accommodate the financial needs of the First
Federal's customers; however, there are no long-term, fixed-rate loan
commitments that result in market risk. Standby letters of credit commit the
Company to make payments on behalf of customers when certain specified future
events occur. They primarily are issued to facilitate customers' trade
transactions.

-62-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

7. Commitments and Contingent Liabilities (continued)

Both arrangements have credit risk, essentially the same as that involved in
extending loans to customers, and are subject to the Company's normal credit
policies. Collateral (e.g., securities, receivables, inventory and equipment) is
obtained based on Management's credit assessment of the customer.

The Company's maximum obligation to extend credit for loan commitments (unfunded
loans and unused lines of credit) and standby letters of credit outstanding on
December 31 was as follows (in thousands):

2002 2001
---------------------
Commercial $103,984 $ 52,978
Real Estate 17,537 27,396
Consumer 41,555 30,647
Standby Letters of
Credit 2,997 --
---------------------
Total $166,073 $111,021
---------------------

Lease Agreements

The Company has entered into lease agreements covering First Insurance's main
office, one banking center location and one loan office through 2010, with
options to renew.

Future minimum commitments under non-cancelable operating leases are as follows:

2003 $ 91,349
2004 78,118
2005 85,878
2006 89,758
2007 89,758
Thereafter 204,542

Rentals under operating leases and data processing costs amounted to $169,000,
$131,000 and $102,000 in 2002, 2001 and 2000, respectively.

-63-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

8. Loans Receivable

December 31
2002 2001
-------------------
(In Thousands)
Loans receivable consist of the following at December 31:
Real estate loans:
Secured by single family residential $142,355 $167,092
Secured by multi-family residential 32,324 21,757
Secured by non-residential real estate 195,431 152,274
Construction 15,357 7,875
-------------------
385,467 348,998
Other loans:
Automobile 30,229 33,323
Commercial 104,070 83,690
Home equity and improvement 49,890 36,179
Other 7,349 7,410
-------------------
191,538 160,602
-------------------
Total loans 577,005 509,600

Deduct:
Undisbursed loan funds 7,256 2,887
Net deferred loan origination fees and costs 1,212 1,024
Allowance for loan losses 7,496 6,548
-------------------
Totals $561,041 $499,141
===================

-64-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

8. Loans Receivable (continued)

Changes in the allowance for loan losses were as follows:

Years ended December 31
2002 2001 2000
------------------------------
(In Thousands)

Allowance at beginning of year $6,548 $6,330 $6,504

Provision for credit losses 1,451 994 635
Charge-offs 720 1,033 1,031
Recoveries 217 257 222
------------------------------
Net charge-offs 503 776 809
------------------------------
Ending allowance $7,496 $6,548 $6,330
==============================

Unpaid balances of loans with contractual payments delinquent 90 days or more
totaled $2,525,000 at December 31, 2002 and $2,371,000 at December 31, 2001.
First Federal does not anticipate any significant losses in the collection of
these delinquent loans in excess of the allowance for loan losses.

Impaired loans having recorded investments of $593,000 at December 31, 2002 and
$370,000 at December 31, 2001 have been recognized in conformity with FASB
Statement No. 114, as amended by FASB Statement No. 118. The average recorded
investment in impaired loans during 2002 and 2001 was $697,000 and $501,000,
respectively. The total allowance for loan losses related to these loans was
$359,000 and $202,000 at December 31, 2002 and 2001. There was $46,000 of
interest received and recorded in income during 2002 on impaired loans including
interest received and recorded in income prior to such impaired loan
designation. There was $40,000 recorded in 2001 and no interest recorded in
2000. Loans having carrying values of $667,000 and $391,000 were transferred to
real estate and other assets held for sale in 2002 and 2001, respectively.

-65-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

8. Loans Receivable (continued)

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

Interest income on loans is as follows:

Years ended December 31
2002 2001 2000
--------------------------------
(In Thousands)

Mortgage loans $ 9,088 $14,656 $17,950
Other loans 27,783 28,138 24,651
--------------------------------
Totals $36,871 $42,794 $42,601
================================

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

9. Mortgage Banking

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

Years ended December 31
2002 2001 2000
----------------------------------
(In Thousands)

Balance at beginning of period $ 1,821 $ 1,131 $ 996
Loans sold, servicing retained 2,225 1,911 357
Amortization (1,439) (392) (222)
Impairment of MSR's (517) (829) --
----------------------------------
Balance at end of period $ 2,090 $ 1,821 $ 1,131
==================================

At December 31, 2002, the estimated fair value of the servicing rights was $2.1
million, as determined using a mortgage servicing rights valuation model.

-66-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

9. Mortgage Banking (continued)

At December 31, 2002, the estimated fair value of the servicing rights was $2.1
million, as determined using a mortgage servicing rights valuation model. At
December 31, 2002, significant assumptions include prepayment rate of 441 PSA
and discount rate of 8.5%.

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

December 31
2002 2001
------------------------ ------------------------
Number of Principal Number of Principal
Loans Outstanding Loans Outstanding
---------------------------------------------------
(Dollars in Thousands)

Fannie Mae 1,432 $106,070 1,608 $128,698
Freddie Mac 2,864 218,854 1,599 92,447
---------------------------------------------------
Totals 4,296 $324,924 3,207 $221,145
===================================================

10. Premises and Equipment

Premises and equipment are summarized as follows:

December 31
2002 2001
---------------------
(In Thousands)
Cost:
Land $ 3,125 $ 2,771
Buildings 16,640 15,640
Leasehold improvements 466 466
Furniture, fixtures and equipment 9,914 9,053
Construction in process 71 804
---------------------
30,216 28,734
Less allowances for depreciation and
amortization 10,258 8,667
---------------------
$19,958 $20,067
=====================

There was $14,000 of interest capitalized in 2002 and none in 2001.

-67-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

11. Deposits

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

Years ended December 31
2002 2001 2000
-------------------------------
(In Thousands)

Checking and money market accounts $ 2,702 $ 3,871 $ 3,361
Savings accounts 366 569 740
Certificates of deposit 13,454 16,491 17,308
-------------------------------
16,522 20,931 21,409

Less interest capitalized 14 -- --
-------------------------------
Totals $16,508 $20,931 $21,409
===============================

Interest paid on brokered or national certificates of deposit in the amount of
$799,000 in 2002, $4.2 million in 2001 and $4.1 million in 2000 were
reclassified to discontinued operations as they were used to fund operations of
The Leader.

At December 31, 2001, accrued interest payable amounted to $324,000, which was
comprised of $301,000 and $23,000 for certificates of deposit and checking and
money market accounts respectively.

A summary of deposit balances is as follows:

December 31
2002 2001
-------------------------
(In Thousands)

Savings accounts $ 39,363 $ 36,951
Checking accounts 85,254 62,151
Money Market demand accounts 129,036 112,833
Certificates of deposit 345,920 402,913
-------------------------
$599,573 $614,848
=========================

-68-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

11. Deposits (continued)

Scheduled maturities of certificates of deposit are as follows:

December 31,
2002
--------------
(In Thousands)

2003 $ 211,806
2004 110,144
2005 14,980
2006 5,337
2007 2,838
2008 and thereafter 815
--------------
Total $ 345,920
==============

At December 31, 2002 and 2001, deposits of $139.3 million and $146.0 million,
respectively, were in excess of the $100,000 Federal Deposit Insurance
Corporation insurance limit. At December 31, 2002 and 2001, $22.9 million and
$18.5 million, respectively, in investment securities were pledged as collateral
against public deposits for certificates in excess of $100,000. In addition,
First Federal has a $7,000,000 depository bond with the State of Ohio, which can
be pledged as collateral against public deposits for certificates in excess of
$100,000.

12. Advances from Federal Home Loan Bank

First Federal has the ability to borrow funds from the FHLB. First Federal
pledges its single-family residential mortgage loan portfolio, certain
investment securities and certain multi-family or non-residential real estate
loans as security for these advances. Advances secured by investment securities
must have collateral to exceed borrowing by 105%. Advances secured by
residential mortgages must have collateral to exceed borrowings by 125%.
Advances secured by multi-family or non-residential real estate loans securities
must have 300% collateral. The total level of borrowing is also limited to 50%
of total assets. First Federal has a maximum potential to acquire advances of
approximately $195.5 million from the FHLB.

-69-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

12. Advances from Federal Home Loan Bank (continued)

The FHLB has made a series of advances totaling $130.0 million to First Defiance
that have fixed maturity dates but are callable at the option of the FHLB on a
specified date and quarterly thereafter. The terms of these advances are as
follows (in thousands):

Balance Interest Rate Call Date Maturity Date
- -----------------------------------------------------------

$ 10,000 4.94% 12/18/03 12/18/08
15,000 5.64% 01/26/03 10/26/09
10,000 5.84% 03/01/03 09/01/10
20,000 5.83% 01/20/03 10/20/05
10,000 5.95% 02/07/03 11/07/05
15,000 4.52% 01/10/03 01/10/11
10,000 4.76% 01/10/03 01/10/11
10,000 4.93% 02/02/04 02/02/11
20,000 4.07% 03/08/03 03/08/11
10,000 5.14% 03/08/04 03/08/11

The FHLB has made advances totaling $12.0 million to First Defiance that have
fixed maturity dates but which are callable after the call date only when
three-month LIBOR rates exceed the agreed upon strike rate in the advance
contract. The terms of these advances are as follows (in thousands):

Balance Interest Rate Call Date Maturity Date LIBOR "Strike" Rate
- --------------------------------------------------------------------------------

$ 7,000 3.54% 10/15/03 10/15/12 8.0%
5,000 3.85% 11/6/03 11/6/12 8.0%

When called, First Defiance has the option of paying off these advances, or
converting them to variable rate advances priced at the three month LIBOR rate.

First Defiance has an additional $4.1 million outstanding on a series of fixed
rate long-term advances. Of this amount, $1.2 million is a fixed rate advance
under the FHLB Affordable Housing Program in 1995. The total FHLB long-term
advances bear a weighted average interest rate of 4.95 % at December 31, 2002.

-70-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

12. Advances from Federal Home Loan Bank (continued)

Future minimum payments by fiscal year are as follows (in thousands):

2003 $ 8,221
2004 8,221
2005 37,816
2006 5,418
2007 5,418
Thereafter 128,112
---------
Total minimum payments 193,206
Less amounts representing interest 47,110
---------
Totals $ 146,096
=========

First Defiance also utilizes short-term advances from the FHLB to meet cash flow
needs and for short-term investment purposes. There were $3.0 million in
short-term advances outstanding at December 31, 2002 and $40.0 million at
December 31, 2001. First Defiance borrows short-term advances under a variety of
programs at FHLB. At December 31, 2002, $3.0 million was outstanding under First
Defiance's Cash Management Advance line of credit. The total available under the
Cash Management line is $15.0 million. In addition, First Defiance has $50.0
million available under a REPO Advance line of credit. Amounts are generally
borrowed under the Cash Management and REPO lines on an overnight basis. Other
advances may be borrowed under the FHLB's short-term fixed or LIBOR based
programs. Information concerning short-term advances is summarized as follows:

Years ended December 31
2002 2001
----------------------------------
(In Thousands, except percentages)

Average balance during the year $ 17,118 $ 62,695
Maximum month-end balance during the year 90,500 111,000
Average interest rate during the year 2.08% 4.32%

-71-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

13. Notes Payable and Other Short-term Borrowings

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

December 31
2002 2001
-------------------
(In Thousands)

Securities sold under agreement to repurchase (1.2% at December 31, 2002) $ 4,298
$10,000 revolving line of credit facility, unsecured, interest at
federal funds rate plus 0.45% (1.7% at December 31, 2002)
$10,000 available at December 31, 2002 --
$20,000 revolving line of credit facility, secured by the stock of
First Federal, interest at LIBOR plus 1.5% (3.62% at December 31, 2001)
Line retired in 2002, $1,750 available at December 31, 2001 $ 18,250
Contingency payable upon sale of certain real estate held for sale,
accruing interest at 5.574% per annum 2,425
Term note payable to bank, secured by business assets, interest at
7.5% per annum, maturing March 1, 2003 10 49
-------------------
Total borrowed money $ 4,308 $ 20,724
===================

14. 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. Persons who were born
after December 31, 1950 are not eligible for the medical coverage described
above at retirement. Rather, a medical spending account of up to $10,000 (based
on the participant's age and years of service) will be established to reimburse
medical expenses for those individuals.

-72-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

14. Postretirement Benefits (continued)

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

December 31
2002 2001
-------------------
(In Thousands)

Change in fair value of plan assets:
Balance at beginning of measurement period $ -- $ --
Employer contribution 80 60
Participant contribution 26 5
Benefits paid (106) (65)
-------------------
Balance at end of measurement period -- --

Change in benefit obligation:
Balance at beginning of measurement period 1,047 789
Service cost 31 22
Interest costs 76 45
Participant contribution 26 5
Plan amendments -- 13
Actuarial losses 229 238
Benefits paid (106) (65)
-------------------
Balance at end of measurement period 1,303 1,047
-------------------
Unfunded status 1,303 1,047
Unrecognized prior service cost (52) (56)
Unrecognized net (loss)gain (328) (102)
-------------------
Accrued postretirement benefit obligation included
in accrued interest and other expenses in consolidated statement
of financial condition $ 923 $ 889
===================

-73-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

14. Postretirement Benefits (continued)

Net periodic postretirement benefit cost includes the following components:

Years ended December 31
2002 2001 2000
-------------------------
(In Thousands)
Service cost-benefits attributable to service
during the period $ 31 $ 22 $ 34
Interest cost on accumulated postretirement
benefit obligation 76 45 47
Net amortization and deferral 8 29 1
-------------------------
Net periodic postretirement benefit cost $ 115 $ 96 $ 82
=========================

The assumed annual rate of increase in the per capita cost of covered health
care benefits is 9.00% for 2003 gradually trending downward to 4.5% by the year
2011. 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, 2002 by $183,000 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 2002, 7.0% for 2001 and 6.5% for
2000.

15. 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.

-74-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

15. Regulatory Matters (continued)

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, 2002 and 2001, First Federal meets all capital adequacy
requirements to which it is subject.

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

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

Required for Capital Required to be
Actual Adequacy Purposes Well Capitalized
--------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------

As of December 31, 2002:
Tangible Capital $102,880 11.84% $ 13,033 1.50% N/A N/A
Tier 1(Core)Capital 102,880 11.84% 34,755 4.00% $ 13,033 5.00%
Tier 1 Capital to
risk weighted assets 102,880 17.15% 24,000 4.00% 36,000 6.00%
Risk-Based Capital 110,349 18.39% 48,000 8.00% 60,000 10.00%
As of December 31, 2001:
Tangible Capital $ 70,568 6.59% $ 16,067 1.50% N/A N/A
Tier 1(Core)Capital 70,568 6.59% 42,845 4.00% $ 53,557 5.00%
Tier 1 Capital to
risk weighted assets 70,568 9.78% 28,874 4.00% 43,311 6.00%
Risk-Based Capital 79,600 11.03% 57,748 8.00% 72,185 10.0%

16. Income Taxes

The components of income tax expense for continuing operations (credit) are as
follows:

Years ended December 31
2002 2001 2000
-------------------------------
(In Thousands)
Current:
Federal $ 3,399 $ 2,164 $ 1,312
State and local 24 3 --
Deferred (credit) (437) 256 422
-------------------------------
$ 2,986 $ 2,423 $ 1,734
===============================

-75-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

16. Income Taxes (continued)

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

Years ended December 31
2002 2001 2000
------------------------------
(In Thousands)

Tax expense at statutory rate $ 3,292 $ 2,572 $ 1,961
Increases (decreases) in taxes from:
Goodwill amortization and impairment 70 55 55

State income tax--net of federal tax benefit 15 2 --
Tax exempt interest income (487) (183) (119)
Other 96 (23) (163)
------------------------------
Totals $ 2,986 $ 2,423 $ 1,734
==============================

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:

-76-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

16. Income Taxes (continued)

December 31
2002 2001
--------------------
(In Thousands)
Deferred federal income tax assets:
Allowance for loan losses $ 2,532 $ 2,128
Postretirement benefit costs 317 311
Deferred compensation and management
recognition plans 296 304
State income tax 6 --
Accrued disposition costs 490 --
Other 301 442
--------------------
Total deferred federal income tax assets 3,942 2,874

Deferred federal income tax liabilities:
Net unrealized gains on available-for-sale securities 3,477 402
FHLB stock dividends 2,061 1,792
Deferred loan origination fees and costs (net) 221 176
Fixed assets 473 317
Other 9 (152)
--------------------
Total deferred federal income tax liabilities 6,241 2,535
--------------------
Net deferred federal income tax asset (liability) $ 2,299 $ (339)
====================

The realization of the Company's deferred tax assets is dependent upon the
Company's ability to generate taxable income in future periods and the reversal
of deferred tax liabilities during the same period. The Company has evaluated
the available evidence supporting the realization of its deferred tax assets and
determined it is more likely than not that the assets will be realized and thus
no valuation allowance was required at December 31, 2002.

-77-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

16. Income Taxes (continued)

Retained earnings at December 31, 2002 include financial statement tax bad debt
reserves of $9.73 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, 2002, First Federal had $207,000
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.

17. Employee Benefit Plans

Employees of First Defiance are eligible to participate in the First Defiance
Financial Corp. 401(k) Employee Savings Plan (First Defiance 401(k)) if they
meet certain age and service requirements. Under the First Defiance 401(k),
First Defiance matches 50% of the participants' contributions, to a maximum of
3% of compensation. The First Defiance 401(k) also provides for a discretionary
First Defiance contribution in addition to the First Defiance matching
contribution. For the year ended December 31, 2002, First Defiance's matching
contribution included in continuing operations was $213,000 and there was no
discretionary company contribution. For the year ended December 31, 2001, First
Defiance's matching contribution included in continuing operations was $188,000
and the discretionary company contribution was $162,000. For the year ended
December 31, 2000, First Defiance's matching contribution included in continuing
operations was $158,000 and the discretionary contribution was $375,000.

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

-78-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

17. Employee Benefit Plans (continued)

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, 2002 was
$3,210,000. 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 $691,000, $523,000 and $328,000 for
2002, 2001 and 2000, respectively. As of December 31, 2002, 597,014 ESOP shares
have been released for allocation of which 584,816 were allocated to
participants. The 266,582 unreleased shares have a fair value of $5.0 million at
December 31, 2002.

Employees of The Leader participated in the ESOP. Upon the closing of the sale
of The Leader, all account balances of employees of The Leader vested and these
benefits were distributed to the former Leader participants based on their
benefit election. A total of 47,946 shares were allocated to these employees.

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 258,921 of the shares acquired in 1996 have been granted as of
December 31, 2002, not including 47,032 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

-79-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

17. Employee Benefit Plans (continued)

recording additions to stockholder's equity as the shares vest. Compensation
expense attributable to the MRP amounted to $52,000, $121,000 and $255,000 in
2002, 2002 and 2000 respectively.

18. Stock Option Plans

First Defiance has established incentive stock option plans for its directors
and its employees and has reserved 1,376,485 shares of common stock for issuance
under the plans. A total of 1,116,204 shares are reserved for employees and
260,281 shares are reserved for directors. As of December 31, 2002, 807,320
options (689,495 for employees and 117,825 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 109,726 options granted
under the 1993 plan that are currently exercisable, 526,594 options granted
under the 1996 plan that vest at 20% per year beginning in 1997 of which 478,718
are fully vested and currently exercisable and 171,000 options granted under the
2001 plan which vest at 20% per year beginning in 2002, of which 33,000 are
fully vested and currently exercisable. All options expire ten years from date
of grant. Vested options of retirees expire on the earlier of the scheduled
expiration date or five years after the retirement date for the 1993 and 2001
plans 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 pro forma results of operations included in Note 2 use a fair value method
of accounting for stock options in accordance with SFAS No. 123. The estimated
fair value of the options are 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 assumptions outlined in Note 2.

-80-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

18. Stock Option Plans (continued)

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.

The following table summarizes stock option activity for 2002 and 2001

2002 2001
------------------------------ -------------------------------
Range of Range of
Option Option Option Option
Shares Prices Shares Prices
----------------------------------------------------------------

Outstanding at January 1 975,782 $4.63 to $15.50 787,888 $4.63 to $15.50
Granted 9,000 $18.50 234,000 $14.00 to $14.05
Exercised or cashed out (172,873) $4.63 to $15.50 (41,106) $4.63 to $14.00
Expired or canceled (4,589) $14.05 to $18.50 (5,000) $11.75 to $14.00
----------------------------------------------------------------
Outstanding at December 31 807,320 $4.63 to $18.50 975,782 $4.63 to $15.50
================================================================

Exercisable to:
2002 -- -- 13,000 $4.63
2003 15,110 $4.63 50,581 $4.63
2006 384,740 $10.375 to $10.6785 430,104 $10.375 to $10.6875
2007 67,023 $12.625 to $13.00 68,966 $12.625 to $13.00
2008 128,559 $12.25 to $15.50 129,702 $12.25 to $15.50
2009 32,121 $11.25 to $11.75 46,886 $11.25 to $11.75
2010 1,767 $8.25 to $10.516 2,543 $8.25 5o $10.516
2011 172,000 $14.00 to $14.05 234,000 $14.00 to $14.05
2012 6,000 $18.50 -- --
----------------------------------------------------------------
807,320 $4.63 to $18.50 975,782 $4.63 to $15.50
================================================================
Available for future grant
at December 3l 123,953 128,364
======== ========

Upon the sale of The Leader, certain option holders were paid cash for the value
of their vested options in lien of issuing shares. These 65,000 options are not
available for future grants.

-81-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

19. Parent Company and Regulatory Restrictions

Dividends paid by First Federal to First Defiance are subject to various legal
and regulatory restrictions. Because First Federal paid $35.0 million in
dividends to First Defiance in 2002, it can initiate dividend payments in 2003
only equal to or less than the 2003 net profits, as defined by statutes, without
prior regulatory approval. First Federal can apply to the OTS to pay a dvidend
in excess of 2003 net profits.

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

December 31
Statements of Financial Condition 2002 2001
---------------------
(In Thousands)
Assets
Cash and cash equivalents $ 2,899 $ 156
Investment securities, available for sale,
carried at fair value 1,060 87
Investment in subsidiaries 113,358 126,182
Loan receivable from First Defiance Employee
Stock Ownership Plan 3,281 3,706
Other assets 8 142
---------------------
Total assets $ 120,606 $ 130,273
=====================

Liabilities and stockholders' equity
Notes payable $ -- $ 18,250
Accrued liabilities 496 1,002
Stockholders' equity 120,110 111,021
---------------------
Total liabilities and stockholders' equity $ 120,606 $ 130,273
=====================

-82-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

19. Parent Company and Regulatory Restrictions (continued)

Years ended December 31
Statements of Income 2002 2001 2000
---------------------------------
(In Thousands)

Interest on loan to ESOP $ 295 $ 330 $ 362
Interest expense on notes payable (164) (953) (624)
Other income 7 2 20
Noninterest expense (593) (638) (629)
---------------------------------
(Loss) income before income taxes
and equity in earnings of subsidiaries (455) (1,259) (871)
Income tax (credit) expense (138) (440) (316)
---------------------------------
(Loss) income before equity in
earnings of subsidiaries (317) (819) (555)
Equity in earnings of subsidiaries 15,396 14,435 11,518
---------------------------------
Net income $ 15,079 $ 13,616 $ 10,963
=================================

-83-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

19. Parent Company and Regulatory Restrictions (continued)

Years ended December 31
Statements of Cash Flows 2002 2001 2000
---------------------------------
(In Thousands)

Operating activities:
Net income $ 15,079 $ 13,616 $ 10,963
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Provision for depreciation -- -- 6
(Gain) loss on sale of office properties and equipment -- -- (6)
Deferred federal income taxes (credit) -- -- 28
Equity in earnings of subsidiaries (15,396) (14,435) (11,518)
Dividends received from subsidiary 35,000 -- 750
Change in other assets and liabilities (362) (136) (563)
---------------------------------
Net cash (used in) provided by operating activities 34,321 (955) (340)

Investing activities

Net increase (decrease) in short term line of credit -- -- 569
Purchase First Insurance and Investment (200) -- --
Principal payments received on ESOP loan 425 302 349
Purchase of available-for-sale securities (1,000) -- --
Purchase of premises and equipment -- -- (17)
---------------------------------
Net cash provided by investing activities (775) 302 901

Financing activities
Net increase (decrease) in short-term line of credit (18,250) 3,250 15,000
Stock options exercised 1,171 360 470
Purchase of common stock for treasury (10,275) (748) (328)
Capital contribution to subsidiaries -- -- (11,952)
Cash dividends paid (3,449) (3,109) (2,832)
---------------------------------
Net cash (used in) provided by financing activities (30,803) (247) 358
---------------------------------
Net (decrease) increase in cash and cash equivalents 2,743 (900) 919
Cash and cash equivalents at beginning of year 156 1,056 137
---------------------------------
Cash and cash equivalents at end of year $ 2,899 $ 156 $ 1,056
=================================
Non cash operating activities--change in deferred taxes
on net unrealized (losses) gains on available-for-sale
securities $ 7 $ 6 $ (13)
=================================
Non cash investing activities--change in net unrealized
gain (loss) on available-for-sale securities $ (27) $ (19) $ 39
=================================
Non cash financing activities--cash
dividends declared but not paid $ 920 $ 848 $ 778
=================================

-84-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

20. 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, 2002 and 2001. 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.

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

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

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

The fair value of loans which reprice within 90 days is equal to their carrying
amount. For other loans, the estimated fair value is calculated based on
discounted cash flow analysis, using interest rates currently being offered for
loans with similar terms. The fair value of loans have not been adjusted for
credit risk.

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

For deposits with fixed maturities, fair value is estimated based on interest
rates currently being offered on deposits with similar characteristics and
maturities.

FHLB advances with maturities greater than 90 days are valued based on
discounted cash flow analysis, using interest rates currently being quoted for
similar characteristics and maturities.

-85-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

20. Fair Value Statement of Consolidated Financial Condition (continued)

The cost or value of any call or put options are based on the estimated cost to
settle the option at December 31, 2002.

December 31, 2002 December 31, 2001
------------------------ ------------------------
Carrying Estimated Carrying Estimated
Value Fair Values Value Fair Values
----------------------------------------------------
(In Thousands)

Assets:
Cash and cash equivalents $ 28,658 $ 28,658 $ 38,100 $ 38,100
Investment securities 213,525 213,733 54,271 54,369
Loans, net 576,377 588,858 499,813 519,708
----------------------------------------------------
818,560 $ 831,249 592,184 $ 612,177
========== ==========
Other assets 65,685 540,464
---------- ----------
Total assets $ 884,245 $1,132,648
========== ==========
Liabilities and stockholders'
equity:
Deposits $ 599,573 $ 603,775 $ 614,848 $ 618,078
Advances from Federal Home Loan
Bank 149,096 157,165 196,302 208,646
Short term borrowings and other
interest bearing liabilities 4,308 4,308 20,724 20,724
Advance payments by borrowers
for taxes and insurance 316 316 390 390
----------------------------------------------------
753,293 $ 765,564 832,264 $ 847,838
========== ==========
Other liabilities 10,842 189,363
---------- ----------
764,135 1,021,627
Stockholders' equity 120,110 111,021
---------- ----------
Total liabilities and
stockholders' equity $ 884,245 $1,132,648
========== ==========

-86-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

21. Quarterly Consolidated Results of Operations (Unaudited)

The following is a summary of the quarterly consolidated results of operations,
which reflects the classification of The Leader as a discontinued operation:

Three Months Ended
-------------------------------------------------
2002 March 31 June 30 September 30 December 31
-------------------------------------------------
(In Thousands, except per share amounts)

Interest income $ 9,729 $11,914 $12,201 $ 12,297
Interest expense 4,201 6,189 5,952 5,701
-------------------------------------------------
Net interest income 5,528 5,725 6,249 6,596
Provision for loan losses 582 156 386 328
-------------------------------------------------
Net interest income after provision
for loan losses 4,946 5,569 5,863 6,268
Gain (Loss) on sale of securities (15) -- 36 --
Non-interest income 2,440 2,737 3,235 4,518
Non-interest expense 5,993 6,313 7,184 6,702
-------------------------------------------------
Income before income taxes 1,378 1,993 1,950 4,084
Income taxes 491 607 568 1,319
Income from continuing
operations 887 1,386 1,382 2,765
Discontinued operations, net of
tax 2,015 7,332 -- (494)
Income before cumulative effect
of change in accounting
principal 2,902 8,718 1,382 2,271
Cumulative effect of change in
accounting for goodwill (194) -- -- --
-------------------------------------------------
Net income $ 2,708 $ 8,718 $ 1,382 $ 2,271
=================================================

-87-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

21. Quarterly Consolidated Results of Operations (Unaudited) (continued)

Three Months Ended
--------------------------------------------------
2002 March 31 June 30 September 30 December 31
--------------------------------------------------
(In Thousands, except per share amounts)

Earnings per share:
Basic
From continuing operations $ 0.14 $ 0.22 $ 0.22 $ 0.45
Discontinued operations, net
of tax $ 0.31 $ 1.14 $ -- $ (0.08)
Cumulative effect of change
in method of accounting
for goodwill $ (0.03) $ -- $ -- $ --
--------------------------------------------------
Net Income $ 0.42 $ 1.36 $ 0.22 $ 0.37
==================================================

Diluted
From continuing operations $ 0.14 $ 0.21 $ 0.21 $ 0.43
Discontinued operations, net
of tax $ 0.30 $ 1.09 $ -- $ (0.08)
Cumulative effect of change
in method of accounting
for goodwill $ (0.03) $ -- $ -- $ --
--------------------------------------------------
Net Income $ 0.41 $ 1.30 $ 0.21 $ 0.35
==================================================

Average shares outstanding:
Basic 6,442 6,418 6,400 6,216
Diluted 6,663 6,689 6,652 6,471

-88-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

21. Quarterly Consolidated Results of Operations (Unaudited) (continued)

Three Months Ended
------------------------------------------------------
2001 March 31 June 30 September 30 December 31
------------------------------------------------------
(In Thousands, except per share amounts)

Interest income $ 12,297 $ 12,120 $ 11,492 $ 10,635
Interest expense 7,453 6,840 6,170 5,140
------------------------------------------------------
Net interest income 4,844 5,280 5,322 5,495
Provision for loan losses 135 252 272 335
------------------------------------------------------
Net interest income after provision
for loan losses 4,709 5,028 5,050 5,160
Loss on sale of securities (45) (15) (45) (32)
Non-interest income 2,199 2,610 2,510 3,038
Non-interest expense 5,461 5,451 5,642 6,393
------------------------------------------------------
Income before income taxes 1,402 2,172 1,873 1,773
Income taxes 457 725 625 615
Income from continuing operations 945 1,447 1,248 1,158
Discontinued operations, net of tax 2,110 1,139 1,722 3,847
------------------------------------------------------
Net income $ 3,055 $ 2,586 $ 2,970 $ 5,005
======================================================

Earnings per share:
Basic
From continuing operations $ 0.15 $ 0.22 $ 0.19 $ 0.18
Discontinued operations, net of tax $ 0.33 $ 0.18 $ 0.27 $ 0.59
------------------------------------------------------
Net Income $ 0.48 $ 0.40 $ 0.46 $ 0.77

Diluted
From continuing operations $ 0.15 $ 0.22 $ 0.19 $ 0.17
Discontinued operations, net of tax $ 0.32 $ 0.17 $ 0.26 $ 0.58
------------------------------------------------------
Net income $ 0.47 $ 0.39 $ 0.45 $ 0.75
======================================================

Average shares outstanding:
Basic 6,366 6,394 6,405 6,489
Diluted 6,536 6,603 6,601 6,643

-89-

First Defiance Financial Corp.

Notes to Consolidated Financial Statements

22. Subsequent Event (Unaudited)

On February 22, 2003, First Defiance signed a Purchase and Assumption Agreement
with RFC Banking Company and its parent Rurban Financial Corp. to acquire
banking centers located in Findlay, Ottawa, and McComb, Ohio. Under the terms of
the agreement, First Defiance will pay a purchase price equal to 10.5% of all
non-brokered deposit accounts plus an agreed upon amount for all furnishings and
equipment of those branches. In addition, First Defiance will acquire certain
loans of those banking centers. Total deposit balances of those banking centers
as of December 31, 2002 were approximately $176 million, of which $40 million
were brokered deposits. The approximate balance of the loans to be acquired by
First Defiance was $115 million as of December 31, 2002.

The acquisition is subject to regulatory approval. It is anticipated that the
transaction will close in the second quarter of 2003.

-90-

Report of Independent Auditors

The Board of Directors
First Defiance Financial Corp.

We have audited the accompanying consolidated statements of financial condition
of First Defiance Financial Corp. and subsidiaries as of December 31, 2002 and
2001, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2002. 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. and subsidiaries at December 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States.

As discussed in Note 4 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill.

/s/ Ernst & Young LLP

Cleveland, Ohio
January 17, 2003

-91-

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 11 of the definitive proxy statement dated March 19, 2003.

Item 11. Executive Compensation

The information required herein is incorporated by reference from the
Directors' Compensation section on page 11, the Executive Compensation section
beginning on page 12, the Report of the Compensation Committee on beginning on
page 13, the Stock Options section on page 14, the, the Employment Agreements
section on pages 15, and the Performance Graph on page 16 of the definitive
proxy statement dated March 19, 2003.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required herein is incorporated by reference from the
Beneficial Ownership section beginning on page 3 of the definitive proxy
statement dated March 19, 2003.

First Defiance maintains the 1993 Stock Incentive Plan, the 1993
Directors' Stock Option plan, the 1996 Stock Option Plan, the 2001 Stock Option
and Incentive Plan (collectively, the "Plans") and the 1996 Management
Recognition Plan and Trust ("MRP") under which it may issue equity securities to
its directors, officers and employees in exchange for goods and services. All of
the Plans and the MRP were approved by the shareholders of First Defiance.

The following table shows, as of December 31, 2002, the number of common
shares issuable upon the exercise of outstanding stock options, the weighted
average exercise price of those stock options, and the number of common shares
remaining for future issuance under the Plans and the MRP, excluding shares
issuable upon exercise of outstanding stock options.

-92-

Equity Compensation Plan Information
- -----------------------------------------------------------------------------------------------------
Number of securities
remaining available for
Number of securities future issuance under
to be issued upon Weighted-average equity compensation
exercise of exercise price of plans (excluding
outstanding options, outstanding options, securities reflected in
Plan Category warrants and rights warrants and rights column (a))
- ----------------------------------------------------------------------------------------------------
(a) (b) (c)
- ----------------------------------------------------------------------------------------------------

1993 Stock Incentive Plan 98,931 $11.51 -0-
1993 Directors Stock Option
Plan 10,795 $4.63 -0-
1996 Stock Option Plan 526,594 $11.73 12,953
2001 Stock Option and
Incentive Plan 171,000 $14.16 111,000
1996 Management
Recognition Plan and Trust N/A N/A 155

Item 13. Certain Relationships and Related Transactions

The information required herein is incorporated by reference from the
Indebtedness of Management section on page 17 of the definitive proxy statement
dated March 19, 2003.

Item 14. Controls and Procedures

The management of First Defiance is responsible for establishing and
maintaining effective disclosure controls and procedures, as defined under Rules
13a-14 and 15d-14 of the Securities Exchange Act of 1934. As of December 31,
2002, an evaluation was performed under the supervision and with the
participation of management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of First
Defiance's disclosure controls and procedures. Based on that evaluation,
management concluded that First Defiance's disclosure controls and procedures as
of December 31, 2002 were effective in ensuring that information required to be
disclosed in this Annual Report on Form 10-K were recorded, processed,
summarized and reported within the time period required by the United States
Securities and Exchange Commission's rules and forms.

Management's responsibilities related to establishing and maintaining
effective disclosure controls and procedures include maintaining effective
internal controls over financial reporting that are designed to produce reliable
financial statements in accordance with accounting policies generally accepted
in the United States of America. Management has assessed First Defiance's system
of internal control over financial reporting as described in "Internal Control -
Integrated Framework," issued by the

-93-

Committee of Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management believes that, as of December 31, 2002, its system of
internal control over financial reporting met those criteria.

There have been no significant changes in First Defiance's internal
controls or in other factors that could significantly affect internal controls
subsequent to December 31, 2002.

PART IV

Item 15. 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 as of December 31, 2002 and
2001

Consolidated Statements of Income for the years ended December 31, 2002,
2001 and 2000

Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2002, 2001 and 2000

Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000

Notes to Consolidated Financial Statements

Independent Auditor's 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
Consolidated Financial Statements incorporated herein by reference and
therefore have been omitted.

-94-

(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 (1)
3.2 Code of Regulations (1)
3.2 Bylaws (1)
10.1 1996 Stock Option Plan (2)
10.2 1996 Management Recognition Plan and Trust (2)
10.3 2001 Stock Option and Incentive Plan (3)
10.4 1993 Stock Incentive Plan (1)
10.5 1993 Directors' Stock Option Plan (1)
10.6 Employment Agreement with William J. Small (4)
10.7 Employment Agreement with James L. Rohrs (2)
10.8 Employment Agreement with John C. Wahl (2)
10.9 Employment Agreement with Gregory R. Allen (5)
13 Annual Report to Shareholders and Notice of Annual Meeting of
Shareholders and Proxy Statement (5)
21 List of Subsidiaries of the Company (5)
23 Consent of Ernst & Young LLP, Independent Auditors (5)
99.1 Certification of Chief Executive Officer (5)
99.2 Certification of Chief Financial Officer (5)

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

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

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

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

(5) Included herein

-95-

(b) Reports on Form 8-K

First Defiance Financial Corp. filed a report on Form 8-K with the
Securities and Exchange Commission on November 19, 2002 to provide an
analysis to enable investors to better evaluate an investment in the
Company in view of significant changes that occurred in the asset and
liability composition of First Defiance Financial Corp. as a result of the
sale of The Leader Mortgage Company LLC in April 2002. The discussion
included a general trend overview as well as management's best estimate of
financial condition and results of operations for the fourth quarter ended
December 31, 2002 and for the year ended December 31, 2003.

First Defiance Financial Corp. filed a report on Form 8-K with the
Securities and Exchange Commission on February 26, 2002 to announc the
execution of a Purchase and Assumption Agreement with Rurban Financial
Corp. and RFC Banking Company for the purchase of certain assets and
assumption of certain liabilities of RFC Banking Company branch offices
located in Findlay, Ottawa and McComb, Ohio.

-96-

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 19, 2003 By: /s/ John C. Wahl
-------------------------------------------
John C. Wahl, Exec.V.P, Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 19, 2003.

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

/s/ William J. Small Chairman of the Board, President and
- ----------------------------------- Chief Executive Officer
William J. Small

/s/ John C. Wahl Executive Vice President and
- ----------------------------------- Chief Financial Officer
John C. Wahl

/s/ James L. Rohrs Director, Executive Vice President
- -----------------------------------
James L. Rohrs

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

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

-97-

Certifications

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

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

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

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

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

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

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: March 19, 2003 /s/ William J. Small
-----------------------
Chairman, President and
Chief Executive Officer

-98-

I, John C. Wahl, Executive Vice President and Chief Financial Officer, certify
that:

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

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

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

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

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

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: March 19, 2003 /s/ John C. Wahl
----------------------------
Executive Vice President and
Chief Financial Officer

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