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Good morning my name is Natasha and I will be your conference facilitator.

At this time I would like to welcome everyone to the First Defiance fourth quarter 2004 earnings conference call. (OPERATOR INSTRUCTIONS).

As a reminder, today's conference is being recorded.

Thank you.

Ms. Merry, you may begin your conference.

Thank you.

Good morning everyone, and thank you for joining us for the First Defiance 2004 fourth quarter and full year results conference call.

This call is also being webcast and it will be available at the First Defiance website at www.fdef.com until February 28.

This morning we will start with comments on the results and the Company's outlook from Bill Small, Chairman, President and CEO of First Defiance followed by a report on the financial performance by Jack Wahl, the Company's Executive Vice President and Chief Financial Officer.

Before we begin, I will make a Safe Harbor statement for the call.

During this call management may make certain statements that are forward-looking as defined in the Private Securities Litigation Reform Act of 1995.

These statements are based on current expectations and assumptions that are subject to risks and uncertainties.

Actual results could vary materially because of factors discussed in yesterday's news release, in the Management Discussion and Analysis Section of the Company's Form 10-K and in other reports and filings with the Securities and Exchange Commission.

First Defiance Financial Corp. does not undertake any duty to update any forward-looking statements.

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

Good morning everyone.

Thank you for joining us for the First Defiance Financial Corp. fourth quarter 2004 conference call.

Last evening we released our earnings for the 2004 fourth quarter and our year-end results.

This morning we would like to give you a little bit more detail on that release.

As we typically do, I will review the activity for the quarter and the year, and then we will turn it over to Jack Wahl, or Chief Financial Officer, to give you a more detailed look at the numbers for the fourth quarter and the year 2004.

The fourth quarter of 2004 represented a very strong finish to an exciting year here at First Defiance.

The core operation of our organization carried us through a very solid quarter from an operational standpoint, while it the same time we continued to work toward the closing of two acquisitions that we announced during the last half of 2004.

Operationally our success was the result of maintaining our focus on a business strategy that has transformed us from a traditional thrift to a more diversified full-service community bank.

During the years 2002 and 2003 gain on sale of mortgage loans was a major revenue contributor for us.

We knew that going into 2004 that would changed dramatically, and we worked hard to make sure that we were prepared to deal with that change.

In 2004 our mortgage gain on sale declined by $4.7 million over the 2003 amount.

But we were able to come close to making up that entire difference by staying focused on our operating strategy.

As a result of that strategy, we recorded net income for the quarter of 3.5 million, or 55 cents per share.

This brought 2004 earnings to 10.8 million or $1.69 per share.

These numbers do include the effect of the onetime charge of 1.9 million pretax taken in the third quarter to settle a contingent liability related to the sale of the Leader Mortgage Company.

Factoring out that settlement, net income for 2004 would has been $12 million, or a $1.89 a share.

This compares with net income of 12.1 million, or $1.91 per share for 2003.

Total assets were 1.13 billion at December 31, 2004.

Strong loan growth again was a major driver in the success of our First Federal bank operation in the fourth quarter, as it had been throughout most of 2004.

Commercial loans and nonresidential real estate loans continue to be the strongest growth category as these loan balances increased 22.9 million during the fourth quarter and 94.7 million for the year.

This growth continues to improve our asset mix and differentiates our operating strategy from more traditional thrift.

We also believe that it has positioned us well for the years to come.

This strong loan growth, continuing change in our asset mix, and the Federal Reserve's interest rate bumps during the second half of 2004 resulted in net interest income growth of over $1 million over the fourth quarter of 2003 results.

The net interest margin continued to show solid improvement based on this performance.

I'm pleased to report that even with this sustained strong growth in loan production our asset quality remains very solid and outperforms most peers with similar loan mix characteristics.

Non-performing assets totaled just 18 basis points of total assets at December 31, 2004.

Net charge-offs for the quarter were 3 basis points annualized and 5 basis points for all of 2004, as we continue to put emphasis on solid loan policies and strong underwriting standards.

On the deposit side of the balance sheet, we continue to keep our focus on growing core deposits, primarily in noninterest bearing DDA accounts.

Our balance in this deposit category increased almost 15.5 percent year-over-year, and also helped contribute to the improving net interest margin.

Noninterest income continued to grow during the fourth quarter led by service fee income, which increased by almost 12 percent over the same quarter last year.

Net of mortgage gain on sale income, the year-over-year increase was 8.7 percent.

Managers' expense increased during the fourth quarter of 2004 to 7.8 million from 6.9 million in the 2003 fourth quarter.

However, the 2003 period included mortgage servicing right impairment recovery of $335,000, compared to impairment recovery of just 33,000 this year.

We also had two more offices in full operation that were not part of the 2003 expense numbers.

These are all indications that our core operation is very sound.

I would now like to call on Jack Wahl, our CFO, to give you the financial details for the fourth quarter and the year.

Good morning everyone.

As you can see from our earnings release we had very strong earnings in the 2004 fourth quarter.

There are a number of factors that I could point to as to why, but I think it probably boils down to one key number, our net interest income.

For the 2004 fourth quarter our net interest income increased by $1,034,000 from the fourth quarter of 2003, and by $428,000 over this year's third quarter.

Our margin for the 2004 fourth quarter was 3.67 percent, an improvement of 16 basis points over the 2003 fourth quarter and an improvement of 9 basis points in just the last three months.

This improvement is due to continued strong growth in our loan portfolio, loan rate increases, the changing asset mix, and improved interest rate spread, and growth in the average balance in our noninterest bearing deposits.

Let's look at these factors a little closer.

In the past year our net loans have increased by 140 million, or nearly 19 percent, and that growth is all organic.

There are no acquisitions in those increases.

Looking at the individual loan components, our commercial real estate loans have grown from 341.4 million to 415.6 million, or 22 percent.

Our commercial loan balances have grown from 120.7 million to 141.6 million, or 17 percent.

Our residential real estate loans, including construction loans, have grown from 178.7 million to 199.2 million, or 11 percent.

And our home equity balances have grown from 70 million to 90.8 million, or 30 percent.

That annual growth has been funded both through a $32 million reduction in our investment portfolio and an overall $69 million increase in deposits.

The deposit growth includes 33.8 million -- a 33.8 million increase in brokered certificates of deposit.

The average rate we're earning on those loan balances is up 15 basis points in the last quarter due primarily to the Fed rate increases and up 7 basis points for the fourth quarter over the fourth quarter of last year.

The overall yield on our total interest-earning assets for this year's fourth quarter compared to last year's period is 19 basis points higher due to the increase in higher yielding loans compared to investment securities.

While asset yields have gone up 19 basis points, our deposit costs are up just 8 basis points in net same period.

And our overall cost of interest-bearing liabilities for the fourth quarter increased by just 5 basis points.

As a result, our interest rate spread improved by 14 basis points period over period.

Our margin also improved because of an 8.2 million increase in the average balance of noninterest bearing deposits, as Bill noted.

For the year end 2004 our net interest income increased by 4.7 million, which was almost a dollar for dollar offset to the mortgage loan to the decline in mortgage loan gains, which decreased by $4.7 million.

The differences we have noted is that we think the margin improvement is sustainable, while we knew last year's high-volume of mortgage activity was not.

Our other results for the quarter were pretty much as anticipated.

We took 732,000 of gains out of the investment portfolio in the fourth quarter, and we still have unrealized gains in excess of 3.2 million remaining.

We are considering taking additional gains while the opportunity exists.

We also realized a death benefit of $180,000 in our bank owned life insurance program, and that income should be back down in the 185 to $195,000 range, against starting in this quarter.

On the expense side, we did not have any real large or unusual items.

The increase from prior periods is primarily due to routine wage increases, some staffing additions to handle the increased balance sheet growth, an increased occupancy due to the addition of two new branches in the last 13 months.

I know many of you are interested in our cost to implement the provisions of Sarbanes-Oxley Section 404, Internal Control Testing.

In our case we have been able to handle most of that testing with our existing internal resources and have not added staff.

We outsource our internal audit work, and we will probably end up paying that firm approximately $50,000 for assistance in testing controls that we couldn't test ourselves because of either time constraints or complex.

We also expect that our external audit fees will increase by approximately 40 to $50,000 as result of their expanded scope.

All in all I would estimate that our costs for compliance were greater than $100,000 but less than $150,000.

We will have our testing completed, and Ernst & Young will have completed their procedures for appropriate reporting in our 10-K.

In the earnings release we also provided guidance for 2005 based on next year's budget.

And we're comfortable that our estimate of earnings for 2005 -- in the 2005 -- in the $2.05 to $2.15 range.

That estimate does not include the onetime charges we will take in conjunction with the ComBanc and Genoa acquisitions.

We estimate the onetime charges for ComBanc after-tax will be in a range of 650 to $800,000, or 10 cents to 12 cents per share, while the estimate of the onetime charges for Genoa after-tax will be between 1.4 and 1.6 million, or approximately 20 to 23 cents per share.

Our projections do include estimates of first-year cost savings of 1.1 million before tax for the ComBanc acquisition from their current cost level, and 1.3 million pretax for cost savings for Genoa.

Of course we will realize just 75 percent of the first year cost savings for Genoa in 2005 as that acquisition is expected to close in early April.

Fully phased in pretax cost savings for the ComBanc and Genoa acquisitions are estimated at 1.4 million to 1.7 million respectively.

As we noted in the release, we have not included any revenue enhancements in our projections for either the ComBanc or Genoa acquisitions.

We do think that both markets offer great opportunities for growth beyond what either of those companies were doing on their own.

That concludes my remarks this morning on our financial results.

I will now turn the call back over to Bill for his concluding remarks.

And then we'll be glad to take your questions.

First I want to report that things are progressing smoothly toward the completion of our two acquisitions.

The first one ComBanc, or the Commercial Bank of Delphos, is scheduled to close this Friday, January 21st.

Conversion will take place this weekend, and we will open those 4 offices as branches of First Federal next Monday, January 24.

The second acquisition, Genoa Savings and Loan, is scheduled to close on April 8.

I do want to comment our conversion team for the outstanding job that they have been doing in preparing for these closings and conversions.

And we look forward to our new employees coming on board and the new customers that we will be serving.

Looking ahead at 2005 from an operations standpoint, I believe we are well-positioned for earnings growth.

Our strong production and commercial loans and nonresidential real estate loans will allow us to benefit from what we anticipate to be continued Fed rate increases during the year.

The economic outlook for Northwest Ohio continues to improve, and we're very excited about the opportunities we have for revenue enhancements in the new markets we are acquiring.

Not factoring any growth from our two acquisitions, we have forecasted loan growth of $97 million for 2005 and deposit growth of about 9 percent for the year.

We anticipate net interest margin to be about 3.55 to 3.65 percent in the first quarter of this year, softening from our fourth quarter margin, primarily due to the mark-to-market accounting of the acquisition.

We expect that margin to increase to the 3.7 to 3.8 percent range by the fourth quarter of 2005.

We anticipate mortgage gain on sale income to range between 450,000 and $800,000 per quarter, with the first and fourth quarters being near the low end of the range, and the second and third quarters being near the higher end.

Compensation and benefit expense is anticipated to be up about 13 percent, with salary increases in the 3 to 4 percent range, and benefit cost increases of about 10 percent.

This abyss also includes the new offices that will be added as a result of the acquisition.

All of this leading to our forecast of earnings per share being in the range, as Jack said, of $2.05 to $2.15 for 2005.

Our biggest challenge in the coming year will continue to be to grow our low cost deposits, especially commercial and retail checking account balances, to help fund the strong loan growth.

There's no question that we can continue to successfully grow our loans, and our track record on credit quality has been good.

But for us to exceed our profitability goals in 2005 and beyond, we're going to have to successfully grow those low-cost deposit balances.

We're confident that our community bank business plan and the success that it brought us year, along with our expanded market area, will enhance these opportunities.

I want to thank you for joining us this morning and we're now prepared to take your questions.

(OPERATOR INSTRUCTIONS).

Christopher Marinac with Fig Partners.

Could you elaborate just for housekeeping on the Bowling income this quarter, could you give a little more detail there?

We had a death benefit.

We had an employee that passed away that we had covered under our Bowling program.

We realized $180,000 of basically tax-free income from that benefit, which resulted in us reporting Bowling income for the quarter of $368,000.

But a typical quarter would be 185,000 to $195,000.

And then can you elaborate I guess on industrial activity happening in your area, and to what extent you expect it either to get stronger or to continue the sort of steady throughout this year?

We got here in Defiance a very nice Christmas present this year.

I've talked about I think in the past the fact that we have lost the Manville plant to an explosion and fire about a year and a half ago.

Manville in late December made the decision to rebuild that facility here in Defiance, which was very, very good news for us because they had a couple of other plants right here in town that we were afraid if they didn't come back with a new one that we may lose those.

So that was certainly very good news for us.

Also, we have continued to see expansion in a couple of the other large employers in our area during this past year, with General Motors here in Defiance at their powertrain facility expanding that, and also the Campbell Soup facility over in Napoleon.

Some of our newer markets, Findlay continues to show some nice growth over that way.

Again here in Defiance we picked up a new plant that is locating in town.

It is a plastics company based in Georgia, in fact near where you are at, that is building a new facility here that is going to start out, add 60 jobs at the beginning, but we expect that to more than double here in a very short time.

So we've seen some nice things come along.

And on top of that, as you know, we do some ag lending, and from an agricultural standpoint another solid year there.

So things look good right now here in Northwest Ohio.

Great.

And one last question, Bill, is can you talk about new lending staff or maybe additional lending staff at the ComBanc and Genoa Savings acquisitions in terms of helping to build out the commercial book of those two banks?

Yes.

We down in the ComBanc area, we will be picking up a couple of experienced lenders that are part of ComBanc that will be coming on board there.

And we think that their experience, coupled with our loan programs and the way that we've designed and developed those, and the expanded lending capability that they will have because of our size that that is going to present some good opportunities down that way.

As we add the Genoa operation there is not a lot of depth there as far as commercial lending, but we've already been in contact with a couple of experienced lenders from that area that have an interest in joining our team.

And we think really bode well for some opportunities in the greater Toledo market to add to, I think, a strong group of lenders we already have out of our Maumee office.

Jerry Cronin with Sandler O'Neill Asset Management.

Several questions if you don't mind.

I guess first of all just on the loan growth, I know you're projecting, if I did my math right, about 11 percent loan growth for 2005.

And I'm just curious why such a substantial drop in the growth rate versus 2004?

I think probably part of that is that we definitely benefited from the fact that we added the Toledo market and picked up some real momentum there early in the year.

We also think that part of maybe we tempered it a little bit because we know that we've got to probably direct some of our focus toward integrating the two acquisitions.

That I think hopefully is not going to take a lot of steam out of sales, but certainly is something that we want to make sure that we integrate those properly.

And our lending -- a couple of our key lending people will be working hard on making sure that that happens.

And secondly, just on the bond portfolio, I know you guys have been consistently running that down.

Is that still in the plans for 2005?

I don't think we can take the dollar amount of the portfolio any lower than we already have from a liquidity standpoint.

I do think we're going -- in anticipation of rates going up in 2005, we are looking right now at taking advantage of the gains that are in the portfolio now, perhaps repositioning ourselves to benefit when rates do rise later on in the year.

We will be picking up about another $50 million in investments through the ComBanc acquisition.

And some of that will be used to fund loan growth, but I anticipate that we will have some growth in the portfolio again just to maintain a minimum liquidity level.

Okay.

The comment that you gave, or the guidance I guess that you gave, on expensed growth for 2005 was pretty much confined to the salary and benefits expense.

What would that translate into for total expense growth for 2005?

And if you don't want to answer that, maybe I could say if compensation is about 60 percent of your overhead, and you factor in the 13 percent growth rate for that you have a 40 percent, maybe growing it 4 or 5 percent.

You come up with maybe a 10 percent total expense growth effect.

I am just wondering if that is a reasonable level?

I think probably a more reasonable estimate would be to take out the compensation from the total and estimate everything else growing at about 10 percent.

Okay.

And let me see.

Just one last question.

On the expense side, I know you had mentioned there was nothing unusual during the quarter, but it seemed like there was a fairly substantial jump up in both occupancy expense and the other expense line during the quarter.

So I'm just I guess trying to get my arms around what that was?

Occupancy, if you're comparing -- are you comparing it to the third quarter or to the fourth quarter of last year?

I'm actually comparing it sequentially.

Maybe that's part of my problem.

Yes, because we added a branch late December of '03.

We added a branch -- yes, late December '03 -- and we added a branch February of '04.

So that is -- that explains the occupancy and probably a portion of the other noninterest expense.

I looked at that category and I don't have those numbers in front of me, but nothing jumped out as being unusual in the quarter.

Jolene Kesernow (ph) with Prospector Partners.

I was wondering if you could tell me approximately what the loan to deposit ratio would be pro forma for the two acquisitions?

Does it get you under 100 percent or no?

Yes, it will get to under 100 percent.

I don't have that number in front of me.

That's okay.

But pro forma, it would be under 100?

Yes, with Delphos we're picking out about 170 million or so in deposits and about 120 million in loans.

So that will help.

Okay.

Do you have a goal to keep that in a certain range or not?

I'm just curious how you think about it.

We have no set target that we have ever put out on that.

And the growth that you have been experiencing this quarter and last quarter particularly in loans, but also in deposits, can you just help me understand where that is coming from?

About how much is coming from marketshares gains would you say, and how much is coming from organic growth?

And I know a good part of it is due to your expansion into newer markets.

And I was just wondering if you could help me understand where the growth is coming from?

I think on the lending side our newer markets have been big contributors, especially when we look at -- I talked before about Maumee or Toledo area and Bowling Green have been very good market areas for us, as has Findlay.

So as we've expanded into those nearer markets over the last several years, we're starting to get recognized a little bit more and had some good opportunities there.

And the same is true on the deposit side in those.

But we have also had some I think some nice marketshare pickups in some of our more IT established markets that not so much some of our newer offices, but in more of our established markets over on -- our Hicksville office over on the west side of this county was -- had very, very good growth last year, as did our Pauling office in Pauling County just south of here.

So we're very pleased with the balance actually that we have seen.

And as Jack pointed out, none of that growth came as a result of acquisitions last year.

It was all pretty much in-house growth.

And we have been able to pick up some new business relationships that I think have been very helpful.

If I can add to that.

We hired an experienced lender about 15 months ago or 18 months ago from a competitor who had a 12-month noncompete, non-solicit.

And he was very diligent in observing that noncompete agreement.

And when that expired here this fall, his portfolio has really taken off for us as well.

And I think that has been a factor in our growth.

Chris Kelly with Comissum (ph) Capital.

I just wanted to get a sense, it sounds like you're very well prepared for the acquisitions you're about to fold in.

But I just want to get a sense of how active your process right now is of continuing to look?

If I remember right you look for very much relation -- or people with a similar philosophy to your own style of banking.

And I am just trying to get a sense, are you actively continuing to look at more candidates?

Has that slowed down until you get these folded in?

Or if you could just sort of give us your current thoughts?

If I say yes, my conversion team will come in here and start pounding on me.

We are -- we always have our eyes open, and we have said this before.

We're not as aggressively pounding on doors right moment, because we know the importance of integrating these two properly.

But we're going to continue to keep our eyes open for opportunities.

We think our structure, the way we're set up here from an organizational standpoint that we still have some room that we could continue to grow.

We want to do that at -- to coin a phrase that everybody seems to use now -- at a measured pace.

And we will just continue to kind to keep our eyes and ears open, and continue to work on developing relationships with institutions throughout our area.

Steve Covington with Stifel.

Just a couple of quick ones.

I guess first of all, Jack, the ComBanc and the Genoa fully phased in expense save, were those after-tax numbers?

Those were pre-tax numbers.

Pre-tax.

Okay.

Thanks.

And I guess secondly, the expense numbers that you gave for '05 guidance, or the expense percentage increases, did those take into account the acquisitions?

Those are expenses over the current expenses being incurred by the acquisition targets, less the cost saves.

So in other words, if we've got 1 million in cost saves and --.

No, I'm sorry, I was talking about the '05 guidance price for overall expenses for the Company that you -- 13 percent increase in comp and benefits.

Yes, that 13 percent is an increase over our expense, plus the base expense of ComBanc and Genoa for the periods when they will be in our numbers, less the interest paid at cost savings.

Okay.

I got you.

Thank you.

Then lastly the margin assumptions -- benefits margin assumptions -- that you talk about for '05 guidance.

I think you mentioned that your base assumption is that there will be 4 fed funds increases during the year. (multiple speakers).

How sensitive are those margin assumptions to those prime rate increases?

Or I guess maybe how sensitive would it be if we have more increases or less increases?

We're pretty neutral right now.

I will confess that we -- that I have not really shocked it with both acquisitions laid in the model in addition to our own numbers.

If you just look at our balance sheet, we benefit by about $300,000 in a 12-month period, if there is a gradual 100 basis point rate increase.

But I have not factored in what that number is, including the ComBanc and Genoa numbers.

But it is fairly neutral.

Russ Huberman with Huberman Funds.

Could you tell us a little bit more about this -- the Delphos acquisition?

Is there much opportunity to grow there, and/or -- or that or the other acquisitions sort of do de novo branching or further fill ins and around those areas, or is there much opportunity there?

We think there is.

The Commercial Bank acquisition, the one we're closing this week, takes us into Allen County, which is just one county south now -- further south for our footprint.

And the biggest city there being Lima, we think there is very good potential for a bank with our operating philosophy and our size to be able to go in there and really pick up some marketshare.

Commercial Bank has done a very good job as far as marketshare in Delphos, which is their home base there in Allen county, and then has two offices right in Lima and another one in Elida, which is right outside Lima, that we think that particular part of the market area we think really presents a lot of potential.

As far as any further expansion of that area, we definitely see that that may be in the future.

Some additional locations would be a possibility I think in Lima down the road, as well as moving into Van Wert County.

Delphos sits right on the border, the county line of Van Wert and Allen County, so we think there is some potential for us to move less into Van Wert County.

As far as the Genoa acquisitions that will be closing in April, the key to that is the way it is situated around the Toledo market.

Again, they've done a very good job as far as marketshare in their home base of Genoa, but also have established some what we think are some branch locations that really presents some great potential in Harrisburg, which is an affluent suburb of the Toledo metropolitan area, and a very good location over in East Toledo in the Community of Oregon.

We definitely think that with what we have already established out of the Maumee office, and with these additional locations kind of giving us more of a circle around the greater Toledo market in and of itself presents an awful lot of potential.

And certainly is one area that we're going to be watching as far as maybe selecting some future locations to maybe establish other offices.

And in general are there still, I guess, smaller commercial banks in terms of acquisition opportunities which are becoming more attractively priced than say they were 6, 10 months or a year ago?

Or the asking prices are still fairly I would say aggressive?

I think that -- we think there are probably going to continue to be opportunities out there.

I think the environment is right for that, but we're going to be pretty disciplined.

We feel that we priced these two acquisitions.

We think we got a good acquisition as far as the way the pricing was structured and everything.

We will continue to be disciplined in our approach to that.

But we think there are going to be some opportunities coming down the road here.

And again in terms of any of your acquisitions, they have to be accretive the first year?

That has always kind of been our philosophy.

I'm not going to sit here and say that if we felt that we could really find some strategic value in the right acquisition -- we would certainly take a look at that.

But generally we feel that it should be accretive.

Jerry Cronin with Sandler O'Neill Asset Management.

I just wanted to follow-up on Steve's question about the noninterest expense.

So the numbers that you're quoting in our press release do actually include the impact of the acquisitions?

In the forecast?

Yes.

Yes.

Could you comment what the organic expense growth would be for First Defiance in '05?

Excluding the deals and the subsequent cost savings?

I don't have that number.

Very good.

Thank you.

At this time there are no further questions.

Ms. Merry, are there any closing remarks?

No, other than to thank everyone for joining us today, and to encourage you to call us at any time with questions.

And this will conclude our conference call.

Thank you.

This concludes today's First Defiance fourth quarter 2004 earnings conference call.

You may now disconnect.