UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended~~June~~September 30, 2015

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

For the Transition Period from ___________to__________

Commission file number0-26850

	First Defiance Financial Corp.
	(Exact name of registrant as specified in its charter)

~~(Exact name of registrant as specified in its charter)~~

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 office)		(Zip Code)

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

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

Indicate by check mark whether the registrant submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YesxNo¨

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

	Large accelerated filer	¨	Accelerated filer	x
	Non-accelerated filer	¨	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨Nox

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, $.01 Par Value – ~~9,277,113~~9,172,657 shares outstanding at ~~July 31,~~October 30, 2015.

FIRST DEFIANCE FINANCIAL CORP.

INDEX

		Page Number
PART I.-FINANCIAL INFORMATION

Item 1.	Consolidated Condensed Financial Statements (Unaudited):
	Consolidated Condensed Statements of Financial Condition – ~~June~~September 30, 2015 and December 31, 2014	2

	Consolidated Condensed Statements of Income - Three and ~~six~~nine months ended ~~June~~September 30, 2015 and 2014	4

	Consolidated Condensed Statements of Comprehensive Income – Three and ~~six~~nine months ended ~~June~~September 30, 2015 and 2014	5

	Consolidated Condensed Statements of Changes in Stockholders’ Equity – ~~Six~~Nine months ended ~~June~~September 30, 2015 and 2014	6

	Consolidated Condensed Statements of Cash Flows - ~~Six~~Nine months ended ~~June~~September 30, 2015 and 2014	7

	Notes to Consolidated Condensed Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	4749

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	7073

Item 4.	Controls and Procedures	7274

PART II-OTHER INFORMATION:

Item 1.	Legal Proceedings	7376

Item 1A.	Risk Factors	7376

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7376

Item 3.	Defaults upon Senior Securities	7376

Item 4.	Mine Safety Disclosures	7376

Item 5.	Other Information	7477

Item 6.	Exhibits	7477

	Signatures	7578

PART I-FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Financial Condition

(UNAUDITED)

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

	June 30, 2015		December 31, 2014		September 30, 2015		December 31, 2014

Assets
Cash and cash equivalents:
Cash and amounts due from depository institutions	$	33,586	$	41,936	$	34,308	$	41,936
Federal funds sold		32,000		71,000		39,000		71,000
		65,586		112,936		73,308		112,936
Securities:
Available-for-sale, carried at fair value		237,012		239,321		236,926		239,321
Held-to-maturity, carried at amortized cost (fair value $261 and $308 at June 30, 2015 and December 31, 2014, respectively)		257		313
Held-to-maturity, carried at amortized cost (fair value $253 and $308 at September 30, 2015 and December 31, 2014, respectively)						251		313
		237,269		239,634		237,177		239,634
Loans held for sale		9,793		4,535		6,701		4,535
Loans receivable, net of allowance of $25,384 at June 30, 2015 and $24,766 at December 31, 2014, respectively		1,680,332		1,622,020
Loans receivable, net of allowance of $25,209 at September 30, 2015 and $24,766 at December 31, 2014, respectively						1,708,329		1,622,020
Accrued interest receivable		6,204		6,037		7,142		6,037
Federal Home Loan Bank stock		13,802		13,802		13,802		13,802
Bank owned life insurance		51,433		47,013		51,671		47,013
Premises and equipment		39,393		40,496		38,993		40,496
Real estate and other assets held for sale		5,371		6,181		4,936		6,181
Goodwill		61,525		61,525		61,798		61,525
Core deposit and other intangibles		2,016		2,395		2,034		2,395
Mortgage servicing rights		9,128		9,012		9,194		9,012
Deferred taxes		69		-
Other assets		14,589		13,366		13,196		13,366
Total assets	$	2,196,510	$	2,178,952	$	2,228,281	$	2,178,952

(continued)

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Financial Condition

(UNAUDITED)

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

	June 30, 2015			December 31, 2014			September 30, 2015			December 31, 2014

Liabilities and stockholders’ equity
Liabilities:
Deposits	$	1,763,390		$	1,760,813		$	1,793,053		$	1,760,813
Advances from the Federal Home Loan Bank		41,050			21,544			40,801			21,544
Subordinated debentures		36,083			36,083			36,083			36,083
Securities sold under repurchase agreements		54,237			54,759			53,838			54,759
Advance payments by borrowers		2,492			2,309			1,864			2,309
Deferred taxes		-			1,176			978			1,176
Other liabilities		23,230			22,763			23,108			22,763
Total liabilities		1,920,482			1,899,447			1,949,725			1,899,447

Stockholders’ equity:
Preferred stock, $.01 par value per share: 37,000 shares authorized; no shares issued		–			–
Preferred stock, $.01 par value per share: 4,963,000 shares authorized; no shares issued		–			–
Common stock, $.01 par value per share: 25,000,000 shares authorized; 12,722,469 and 12,735,313 shares issued and 9,275,183 and 9,234,534 shares outstanding, respectively		127			127
Preferred stock, $.01 par value per share:
5,000,000 shares authorized; no shares issued								–			–
Common stock, $.01 par value per share:
25,000,000 shares authorized; 12,722,469 and 12,735,313 shares issued and 9,171,948 and 9,234,534 shares outstanding, respectively								127			127
Common stock warrant		-			878			-			878
Additional paid-in capital		125,231			136,266			125,615			136,266
Accumulated other comprehensive income, net of tax of $1,397 and $2,214, respectively		2,594			4,114
Accumulated other comprehensive income, net of tax of $2,106 and $2,214, respectively								3,909			4,114
Retained earnings		210,169			200,600			215,007			200,600
Treasury stock, at cost, 3,447,286 and 3,500,779 shares respectively		(62,093	)		(62,480	)
Treasury stock, at cost, 3,550,521 and 3,500,779 shares respectively								(66,102	)		(62,480	)
Total stockholders’ equity		276,028			279,505			278,556			279,505

Total liabilities and stockholders’ equity	$	2,196,510		$	2,178,952		$	2,228,281		$	2,178,952

See accompanying notes

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Income

(UNAUDITED)

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

	Three Months Ended				Six Months Ended				Three Months Ended					Nine Months Ended
	June 30,				June 30,				September 30,					September 30,
	2015		2014		2015		2014		2015			2014		2015		2014
Interest Income
Loans	$	18,139	$	16,878	$	36,026	$	33,529	$	18,419		$	17,365	$	54,445	$	50,894
Investment securities:
Taxable		918		852		1,832		1,627		880			933		2,712		2,560
Non-taxable		803		756		1,581		1,508		796			787		2,377		2,295
Interest-bearing deposits		41		118		80		219		33			64		113		283
FHLB stock dividends		136		170		275		365		138			137		413		502
Total interest income		20,037		18,774		39,794		37,248		20,266			19,286		60,060		56,534
Interest Expense
Deposits		1,312		1,327		2,584		2,685		1,363			1,304		3,947		3,989
FHLB advances and other		173		133		283		266		178			131		461		397
Subordinated debentures		150		146		297		292		154			147		451		439
Notes payable		37		39		75		80		38			41		113		121
Total interest expense		1,672		1,645		3,239		3,323		1,733			1,623		4,972		4,946
Net interest income		18,365		17,129		36,555		33,925		18,533			17,663		55,088		51,588
Provision for loan losses		-		446		120		549		(27	)		406		93		955
Net interest income after provision for loan losses		18,365		16,683		36,435		33,376		18,560			17,257		54,995		50,633
Non-interest Income
Service fees and other charges		2,690		2,508		5,219		4,832		2,799			2,660		8,018		7,492
Insurance commissions		2,344		2,244		5,483		5,274		2,310			2,366		7,793		7,640
Mortgage banking income		1,793		1,540		3,568		2,787		1,680			1,545		5,248		4,332
Gain on sale of non-mortgage loans		197		36		233		39		543			40		776		79
Gain on sale or call of securities		-		471		-		471		-			460		-		931
Trust income		367		302		725		580		370			315		1,095		895
Income from Bank Owned Life Insurance		212		235		420		454		238			1,130		658		1,584
Other non-interest income		206		281		443		506		42			840		485		1,346
Total non-interest income		7,809		7,617		16,091		14,943		7,982			9,356		24,073		24,299
Non-interest Expense
Compensation and benefits		9,182		8,709		18,105		17,181		9,791			9,287		27,896		26,468
Occupancy		1,809		1,704		3,573		3,292		1,788			1,613		5,361		4,905
FDIC insurance premium		319		353		670		738		329			350		999		1,088
Financial institutions tax		411		514		893		1,009		447			515		1,340		1,524
Data processing		1,599		1,479		3,121		2,844		1,531			1,489		4,652		4,333
Amortization of intangibles		162		274		379		563		157			269		536		832
Other non-interest expense		3,314		3,324		6,953		7,391		2,805			3,248		9,758		10,639
Total non-interest expense		16,796		16,357		33,694		33,018		16,848			16,771		50,542		49,789
Income before income taxes		9,378		7,943		18,832		15,301		9,694			9,842		28,526		25,143
Federal income taxes		2,815		2,254		5,668		4,433		2,998			2,773		8,666		7,206
Net Income	$	6,563	$	5,689	$	13,164	$	10,868	$	6,696		$	7,069	$	19,860	$	17,937

Earnings per common share (Note 6)
Basic	$	0.71	$	0.59	$	1.42	$	1.13	$	0.72		$	0.75	$	2.15	$	1.87
Diluted	$	0.70	$	0.57	$	1.39	$	1.08	$	0.72		$	0.71	$	2.11	$	1.79
Dividends declared per share (Note 5)	$	0.20	$	0.15	$	0.375	$	0.30	$	0.20		$	0.15	$	0.575	$	0.45
Average common shares outstanding (Note 6)
Basic		9,268		9,607		9,251		9,644		9,238			9,445		9,247		9,577
Diluted		9,349		10,066		9,483		10,096		9,322			9,903		9,430		10,031

See accompanying notes

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Comprehensive Income

(UNAUDITED)

(Amounts in Thousands)

	Three Months Ended						Six Months Ended						Three Months Ended						Nine Months Ended
	June 30,						June 30,						September 30,						September 30,
	2015			2014			2015			2014			2015			2014			2015			2014
Net Income	$	6,563		$	5,689		$	13,164		$	10,868		$	6,696		$	7,069		$	19,860		$	17,937

Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale		(3,839	)		2,743			(2,337	)		4,465			2,024			707			(313	)		5,172
Reclassification adjustment for security gains (losses) included in net income(1)		-			(471	)		-			(471	)
Reclassification adjustment for security gains (losses)
included in net income(1)														-			(460	)		-			(931	)
Income tax benefit (expense)		1,344			(795	)		817			(1,397	)		(709	)		(87	)		108			(1,485	)
Other comprehensive income (loss)		(2,495	)		1,477			(1,520	)		2,597			1,315			160			(205	)		2,756

Comprehensive income	$	4,068		$	7,166		$	11,644		$	13,465		$	8,011		$	7,229		$	19,655		$	20,693

(1) Amounts are included in gains on sale or call of securities on the Consolidated Condensed Statements of Income. Income tax expense associated with the reclassification adjustments, included in federal income taxes, for the three months ended ~~June~~September 30, 2015 and 2014 was $0 and ~~$141,~~$138, respectively. Income tax expense associated with the reclassification adjustments, included in federal income taxes, for the ~~six~~nine months ended ~~June~~September 30, 2015 and 2014 was $0 and ~~$141,~~$279, respectively.

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Statement of Changes in Stockholders’ Equity

(UNAUDITED)

(Amounts in Thousands, except share data)

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

Balance at January 1, 2015	$	-	$	127	$	878		$	136,266		$	4,114		$	200,600		$	(62,480	)	$	279,505		$	-	$	127	$	878		$	136,266		$	4,114		$	200,600		$	(62,480	)	$	279,505
Net income															13,164						13,164																19,860						19,860
Other comprehensive loss												(1,520	)								(1,520	)												(205	)								(205	)
Stock option expense									59												59										103												103
Warrant repurchase						(878	)		(11,101	)											(11,979	)						(878	)		(11,101	)											(11,979	)
65,206 shares issued under stock option plan, with $659 income tax benefit, net of 12,844 repurchased and retired									213						(312	)		1,360			1,261
Restricted share activity under stock incentive Plans, including 15,006 shares issued									(223	)					185			270			232
1,090 shares issued direct purchases									17									21			38
37,857 shares repurchased																		(1,264	)		(1,264	)
67,460 shares issued under stock option plan, with $151 income tax benefit, net of 14,340 repurchased and/or retired																															443						(313	)		1,429			1,559
Restricted share activity, including 15,506 shares issued																															(121	)					185			270			334
1,487 shares issued from direct purchases																															25									27			52
147,039 shares repurchased																																								(5,348	)		(5,348	)
Common stock dividends declared															(3,468	)					(3,468	)															(5,325	)					(5,325	)
Balance at June 30, 2015	$	-	$	127	$	-		$	125,231		$	2,594		$	210,169		$	(62,093	)	$	276,028
Balance at September 30, 2015																							$	-	$	127	$	-		$	125,615		$	3,909		$	215,007		$	(66,102	)	$	278,556

Balance at January 1, 2014	$	-	$	127	$	878		$	136,403		$	545		$	182,290		$	(48,096	)	$	272,147		$	-	$	127	$	878		$	136,403		$	545		$	182,290		$	(48,096	)	$	272,147
Net income															10,868						10,868																17,937						17,937
Other comprehensive income												2,597									2,597													2,756									2,756
Stock option expense									34												34										60												60
26,900 shares issued under stock option plan with $58 income tax benefit, net of repurchases									18						(23	)		438			433
35,450 shares issued under stock option plan with $67 income tax benefit, net of repurchases																															15						(46	)		569			538
Restricted share activity under Stock Incentive Plans including 13,087 shares issued									(342	)								212			(130	)									(313	)								212			(101	)
2,352 shares issued direct purchases									26									38			64
247,269 shares repurchased																		(6,675	)		(6,675	)
2,678 shares issued from direct purchases																															29									44			73
399,288 shares repurchased																																								(10,873	)		(10,873	)
Common stock dividends declared															(2,889	)					(2,889	)															(4,304	)					(4,304	)
Balance at June 30, 2014	$	-	$	127	$	878		$	136,139		$	3,142		$	190,246		$	(54,083	)	$	276,449
Balance at September 30, 2014																							$	-	$	127	$	878		$	136,194		$	3,301		$	195,877		$	(58,144	)	$	278,233

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Cash Flows

(UNAUDITED)

(Amounts in Thousands)

	Six Months Ended						Nine Months Ended
	June 30,						September 30,
	2015			2014			2015			2014
Operating Activities
Net income	$	13,164		$	10,868		$	19,860		$	17,937
Items not requiring (providing) cash
Provision for loan losses		120			549			93			955
Depreciation		1,624			1,462			2,439			2,189
Amortization of mortgage servicing rights, net of impairment recoveries		690			623			1,073			921
Amortization of core deposit and other intangible assets		379			563			536			832
Net amortization of premiums and discounts on loans and deposits		231			295			333			422
Amortization of premiums and discounts on securities		376			156			551			300
Loss on write-downs of property, plant and equipment		426			-			428			-
Change in deferred taxes		(428	)		(218	)		(90	)		(43	)
Proceeds from the sale of loans held for sale		108,174			69,421			167,687			115,877
Originations of loans held for sale		(111,707	)		(67,695	)		(167,380	)		(111,940	)
Gain from sale of loans		(2,764	)		(1,667	)		(4,504	)		(2,680	)
Gain from sale or call of securities		-			(471	)		-			(931	)
Loss on sale or write-down of real estate and other assets held for sale		259			3
(Gain)/Loss on sale or write-down of real estate and other assets held for sale								281			(167	)
Stock option expense		59			34			103			60
Restricted stock expense (benefit)		232			(130	)		334			(101	)
Income from bank owned life insurance		(420	)		(454	)		(658	)		(1,584	)
Changes in:
Accrued interest receivable		(167	)		48			(1,105	)		(1,125	)
Other assets		(1,223	)		(5,094	)		170			(4,579	)
Other liabilities		467			3,190			194			3,888
Net cash provided by (used in) operating activities		9,492			11,483			20,345			20,231

Investing Activities
Proceeds from maturities of held-to-maturity securities		55			56			62			63
Proceeds from maturities, calls and pay-downs of available-for-sale securities		15,648			9,958			22,215			15,293
Proceeds from sale of real estate and other assets held for sale		1,690			1,295			2,103			2,071
Proceeds from the sale of available-for-sale securities		-			3,782			-			14,520
Proceeds from sale of non-mortgage loans		501			10,584			16,178			15,556
Purchases of available-for-sale securities		(16,051	)		(43,550	)		(20,684	)		(64,678	)
Proceeds from Federal Home Loan Bank stock redemption		-			5,548			-			5,548
Purchase of bank-owned life insurance		(4,000	)		(4,000	)		(4,000	)		(4,000	)
Net cash paid in Insurance acquisition								(297	)		-
Proceeds from cash surrender value of bank-owned life insurance								-			594
Proceeds from bank-owned life insurance death benefit								-			910
Purchases of portfolio mortgage loans		-			(5,118	)		-			(16,594	)
Purchases of premises and equipment, net		(1,214	)		(2,335	)		(1,631	)		(3,580	)
Net increase in loans receivable		(59,803	)		(7,945	)		(103,009	)		(56,654	)
Net cash used in investing activities		(63,174	)		(31,725	)		(89,063	)		(90,951	)

Financing Activities
Net increase (decrease) in deposits and advance payments by borrowers		2,760			6,187			31,795			(4,818	)
Repayment of Federal Home Loan Bank advances		(7,494	)		(486	)		(7,743	)		(730	)
Increase in Federal Home Loan Bank advances		27,000			-			27,000			-
Increase (decrease) in securities sold under repurchase agreements		(522	)		536			(921	)		8,170
Repayment of warrants		(11,979	)		-			(11,979	)		-
Proceeds from exercise of stock options		1,261			433			1,559			538
Proceeds from treasury stock sales		38			64			52			73
Cash dividends paid on common stock		(3,468	)		(2,889	)		(5,325	)		(4,304	)
Net cash paid for repurchase of common stock		(1,264	)		(6,675	)		(5,348	)		(10,873	)
Net cash provided by (used in) financing activities		6,332			(2,830	)		29,090			(11,944	)
Increase (decrease) in cash and cash equivalents		(47,350	)		(23,072	)		(39,628	)		(82,664	)
Cash and cash equivalents at beginning of period		112,936			179,318			112,936		$	179,318
Cash and cash equivalents at end of period	$	65,586		$	156,246		$	73,308		$	96,654

Supplemental cash flow information:
Interest paid	$	3,218		$	3,310		$	4,939		$	4,920
Income taxes paid	$	5,200		$	3,650		$	7,300		$	6,050
Transfers from loans to real estate and other assets held for sale	$	872		$	993		$	872		$	1,371
Transfers from property and equipment to real estate and other assets held for sale							$	267		$	-
Transfers from loans held-for-sale to loans							$	-		$	1,178

See accompanying notes.

FIRST DEFIANCE FINANCIAL CORP.

Notes to Consolidated Condensed Financial Statements (UNAUDITED)

~~June~~September 30, 2015 and 2014

~~1. Basis of Presentation~~

Basis of Presentation

First Defiance Financial Corp. (“First Defiance” or the “Company”) is a unitary thrift holding company that conducts business through its three wholly owned subsidiaries, First Federal Bank of the Midwest (“First Federal”), First Insurance Group of the Midwest, Inc. (“First Insurance”), and First Defiance Risk Management Inc. (“First Defiance Risk Management”). 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, non-residential real estate, commercial, home improvement and home equity and consumer loans and providing a broad range of depository, trust and wealth management services. First Insurance is an insurance agency that does business in the Defiance, Bryan, Bowling Green, Maumee, Oregon and ~~Oregon,~~Lima, Ohio areas, offering property and casualty, group health and life insurance ~~products.First~~products.On September 1, 2015, First Insurance acquired a group medical benefits business from Buckeye Insurance Consultants, Inc. located in Lima, Ohio for a cash purchase price of $495,000 of which $198,000 is set aside for contingent payments to be paid in cash in 2016, 2017 and 2018 if certain conditions regarding future revenue are met. As of September 30, 2015, management had determined there was goodwill of $273,000 and identifiable intangible assets of $175,000 consisting of a customer relationship intangible of $64,000 and a non-compete intangible of $111,000 related to the acquisition. Disclosure of pro forma results of this acquisition are not material to the Company’s consolidated financial statements. First Defiance Risk Management is a wholly-owned insurance company subsidiary of the Company to insure the Company and its subsidiaries against certain risks unique to the operations of the Company and for which insurance may not be currently available or economically feasible in today’s insurance marketplace. First Defiance Risk Management pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves.

The consolidated condensed statement of financial condition at December 31, 2014 has been derived from the audited financial statements at that date, which were included in First Defiance’s Annual Report on Form 10-K.

The accompanying consolidated condensed financial statements as of ~~June~~September 30, 2015 and for the three and ~~six~~nine month periods ended ~~June~~September 30, 2015 and 2014 have been prepared by First Defiance without audit and do not include information or footnotes necessary for the complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States. These consolidated condensed financial statements should be read in conjunction with the financial statements and notes thereto included in First Defiance's 2014 Annual Report on Form 10-K for the year ended December 31, 2014. However, in the opinion of management, all adjustments, consisting of only normal recurring items, necessary for the fair presentation of the financial statements have been made. The results for the three and ~~six~~nine month periods ended ~~June~~September 30, 2015 are not necessarily indicative of the results that may be expected for the entire year.

2.~~Significant Accounting Policies~~

Significant Accounting Policies

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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.

Allowance for Loan Losses

Beginning June 30, 2015, the Company refined the methodology to its allowance for loan loss calculation pertaining to the general reserve component for non-impaired loans. There was no change to the calculation of the component for reserves on impaired loans. Within the general reserve, the determination of the historical loss component was modified from using a three-year average annual loss rate to a loss migration measurement. The loss migration measurement implemented June 30, 2015, utilizes an average of four (4) four-year loss migration periods for each loan portfolio segment with differentiation between loan risk grades. This approach provides for a more precise reflection of probable incurred losses by risk grade within each loan portfolio segment over an average loan life cycle. Management believes that capturing the risk grade changes and cumulative losses over the life cycle of a loan more accurately depicts management’s estimate of historical losses as well as being more reflective of the ongoing risks in the loan portfolio, thereby requiring less weight to the subjective components of the allowance for loan losses. Prior to June 30, 2015, the approach to this component quantified the historical loss by calculating a rolling twelve quarter average annual loss rate for each portfolio segment, without differentiation between loan risk grades. This modification resulted in a change of the general reserves between the loan portfolio segments but did not have a material impact on the overall allowance for loan losses.

Earnings Per Common Share

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

Newly Issued Accounting Standards

Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606).” ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 was originally going to be effective for the Company on January 1, 2017; however, the FASB recently issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date" which deferred the effective date of ASU 2014-09 by one year to January 1, 2018. The Company is currently evaluating the potential impact of ASU 2014-09 on its Consolidated Financial Statements.

In June 2014, the FASB issued ASU No. 2014-11,"Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures." The new guidance aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as repurchase financings with the accounting for other typical repurchase agreements. Going forward, these transactions would all be accounted for as secured borrowings. The guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement, which has resulted in outcomes referred to as off-balance-sheet accounting. The amendments in the ASU require a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. The amendments in the ASU also require expanded disclosures about the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The Company adopted the amendments in this ASU effective January 1, 2015. In addition, the expanded disclosures about the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings iswere effective for the Company’s reporting period ending June 30, 2015. All of the Company's repurchase agreements are typical in nature (i.e., not repurchase-to-maturity transactions or repurchase agreements executed as a repurchase financing) and are accounted for as secured borrowings. As such, the adoption of ASU No. 2014-11 did not have a material impact on the Company's Consolidated Financial Statements.

In January 2014, the FASB issued ASU No. 2014-01,"Accounting for Investments in Qualified Affordable Housing Projects." ASU 2014-01 applies to all reporting entities that invest in qualified affordable housing projects through limited liability entities. The pronouncement permits reporting entities to make an accounting policy election to account for these investments using the proportional amortization method if certain conditions exist. The pronouncement also requires disclosure that enables users of its financial statements to understand the nature of these investments. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The pronouncement should be applied retrospectively for all periods presented, effective for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption iswas permitted. The Company early adopted ASU 2014-01 in January 2014 and such adoption did not have a material impact on the Company’s Consolidated Financial Statements.

In January 2014, the FASB issued ASU No. 2014-04, “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” The objective of the amendments in ASU 2014-04 to Topic 310, “Receivables - Troubled Debt Restructurings by Creditors,”is to reduce diversity by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. An entity can elect to adopt the amendments using either a modified retrospective transition method or a prospective transition method. Early adoption iswas permitted. The Company adopted ASU 2014-04 on January 1, 2015 and such adoption did not have a material impact on the Company’s Consolidated Financial Statements.

~~3. Fair Value~~

Fair Value

FASB ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

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

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

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

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

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

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

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

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

Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Company’s asset quality or collections department reviews the assumptions and approaches utilized in the appraisal. Appraisal values are generally discounted from 0% to ~~20%~~30% to account for other factors that may impact the value of collateral. In determining the value of impaired collateral dependent loans and other real estate owned, significant unobservable inputs may be used, which include: ~~physical condition of comparable properties sold, net operating income generated by the property and investor rates of return.~~discounts for collection issues and/or changes in market conditions.

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

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

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

Assets and Liabilities Measured on a Recurring Basis

June 30, 2015	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
September 30, 2015									Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)								(In Thousands)
Available for sale securities:

Obligations of U.S. government corporations and agencies	$	-	$	2,982	$	-	$	2,982	$	-	$	3,003	$	-	$	3,003
Mortgage-backed - residential		-		59,713		-		59,713		-		62,051		-		62,051
REMICs		-		1,751		-		1,751		-		1,682		-		1,682
Collateralized mortgage obligations		-		77,287		-		77,287		-		73,790		-		73,790
Preferred stock		1		-		-		1		1		-		-		1
Corporate bonds		1,995		3,998		-		5,993		1,989		3,993		-		5,982
Obligations of state and political subdivisions		-		89,285		-		89,285		-		90,417		-		90,417
Mortgage banking derivative - asset		-		732		-		732		-		738		-		738
Mortgage banking derivative - liability		-		-		-		-		-		100		-		100

December 31, 2014	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Available for sale securities:

Obligations of U.S. Government corporations and agencies	$	-	$	980	$	-	$	980
Mortgage-backed - residential		-		59,856		-		59,856
REMICs		-		1,839		-		1,839
Collateralized mortgage obligations		-		81,121		-		81,121
Preferred stock		1		-		-		1
Corporate bonds		1,989		5,003		-		6,992
Obligations of state and political subdivisions		-		88,532				88,532
Mortgage banking derivative - asset		-		351		-		351
Mortgage banking derivative - liability		-		24		-		24

December 31, 2014	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Available for sale securities:

Obligations of U.S. Government corporations and agencies	$	-	$	980	$	-	$	980
Mortgage-backed - residential		-		59,856		-		59,856
REMICs		-		1,839		-		1,839
Collateralized mortgage obligations		-		81,121		-		81,121
Preferred stock		1		-		-		1
Corporate bonds		1,989		5,003		-		6,992
Obligations of state and political subdivisions		-		88,532		-		88,532
Mortgage banking derivative - asset		-		351		-		351
Mortgage banking derivative - liability		-		24		-		24

There were no assets measured at fair value on a recurring basis using Level 3 inputs for the ~~six~~nine months ended ~~June~~September 30, 2015.

The table below presents a reconciliation and income classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and ~~six~~nine months ended ~~June~~September 30, 2014:

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (In Thousands)	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (In Thousands)				Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (In Thousands)
Beginning balance, January 1, 2014		$	582			$	582
Total gains or (losses) (realized/unrealized)
Included in earnings (realized)			(329	)			(329	)
Included in other comprehensive income (presented gross of taxes)			993				993
Amortization			-				-
Sales			(1,246	)			(1,246	)
Transfers in and/or out of Level 3			-				-
Ending balance, June 30, 2014		$	-

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (In Thousands)
Beginning balance, April 1, 2014		$	704
Total gains or (losses) (realized/unrealized)
Included in earnings (realized)			(329	)
Included in other comprehensive income (presented gross of taxes)			871
Amortization			-
Sales			(1,246	)
Transfers in and/or out of Level 3			-
Ending balance, June 30, 2014		$	-
Ending balance, September 30, 2014						$	-

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (In Thousands)
Beginning balance, July 1, 2014	$	-
Total gains or (losses) (realized/unrealized)
Included in earnings (realized)		-
Included in other comprehensive income (presented gross of taxes)		-
Amortization		-
Sales		-
Transfers in and/or out of Level 3		-
Ending balance, September 30, 2014	$	-

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

Assets and Liabilities Measured on a Non-Recurring Basis

June 30, 2015	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
September 30, 2015									Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)								(In Thousands)
Impaired loans
1-4 Family Residential Real Estate	$	-	$	-	$	408	$	408	$	-	$	-	$	278	$	278
Multi Family Residential		-		-		107		107		-		-		102		102
Commercial Real Estate		-		-		5,304		5,304		-		-		4,726		4,726
Commercial loans		-		-		61		61		-		-		-		-
Home Equity and Improvement		-		-		95		95		-		-		94		94
Total Impaired loans		-		-		5,975		5,975		-		-		5,200		5,200
Mortgage servicing rights		-		954		-		954		-		874		-		874
Real estate held for sale
Residential		-		-		66		66		-		-		66		66
CRE		-		-		342		342		-		-		285		285
Total real estate held for sale		-		-		408		408		-		-		351		351

December 31, 2014	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)								(In Thousands)
Impaired loans
1-4 Family Residential Real Estate	$	-	$	-	$	419	$	419	$	-	$	-	$	419	$	419
Multi Family Residential		-		-		269		269		-		-		269		269
Commercial Real Estate		-		-		6,665		6,665		-		-		6,665		6,665
Commercial		-		-		340		340		-		-		340		340
Home Equity and Improvement		-		-		98		98		-		-		98		98
Total impaired loans		-		-		7,791		7,791		-		-		7,791		7,791
Mortgage servicing rights		-		1,034		-		1,034		-		1,034		-		1,034
Real estate held for sale
Residential		-		-		-		-		-		-		-		-
CRE		-		-		739		739		-		-		739		739
Total real estate held for sale		-		-		739		739		-		-		739		739

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of ~~June~~September 30, 2015, the significant unobservable inputs used in the fair value measurements were as follows:

Fair
Value
Valuation Technique Unobservable Inputs
Range of
Inputs

Weighted
Average

(Dollars in Thousands)

Impaired Loans- Applies to all loan classes $ 5,975 Appraisals which utilize sales comparison, net income and cost approach Discounts for collection issues and changes in market conditions 10-30 % 11 %

Real estate held for sale – Applies to all classes $ 408 Appraisals which utilize sales comparison, net income and cost approach Discounts for changes in market conditions 20-30 % 27 %

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

Impaired Loans- Applies to all loan classes	$	5,200	Appraisals which utilize sales comparison, net income and cost approach	Discounts for collection issues and changes in market conditions	10-30%		11	%

Real estate held for sale – Applies to all classes	$	351	Appraisals which utilize sales comparison, net income and cost approach	Discounts for changes in market conditions	20-30%		28	%

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of December 31, 2014, the significant unobservable inputs used in the fair value measurements were as follows:

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

Impaired Loans- Applies to all loan classes	$	7,791	Appraisals which utilize sales comparison, net income and cost approach	Discounts for collection issues and changes in market conditions		10-30%		11	%	$	7,791	Appraisals which utilize sales comparison, net income and cost approach	Discounts for collection issues and changes in market conditions	10-30%		11	%

Real estate held for sale – Applies to all classes	$	739	Appraisals which utilize sales comparison, net income and cost approach	Discounts for changes in market conditions		20-40%		28	%	$	739	Appraisals which utilize sales comparison, net income and cost approach	Discounts for changes in market conditions	20-40%		28	%

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a fair value of ~~$6.0~~$5.2 million, with a ~~$12,000~~$13,000 valuation allowance and a fair value of $7.8 million, with a $19,000 valuation allowance at ~~June~~September 30, 2015 and December 31, 2014, respectively. A provision expense of $59,000 and a provision recovery of ~~$98,000 and $719,000~~$659,000 for the three months and ~~six~~nine months ended ~~June~~September 30, 2015 and a provision expense of ~~$725,000~~$1.4 million and ~~$1.5~~$2.9 million for the three and ~~six~~nine months ended ~~June~~September 30, 2014 was included in earnings.

Mortgage servicing rights which are carried at the lower of cost or fair value had a fair value of ~~$954,000~~$874,000 with a valuation allowance of ~~$743,000~~$720,000 and a fair value of $1.0 million with a valuation allowance of $911,000 at ~~June~~September 30, 2015 and December 31, 2014, respectively. A recovery of ~~$141,000~~$24,000 and ~~$167,000~~$191,000 for the three and ~~six~~nine months ended ~~June~~September 30, 2015 and a recovery of ~~$44,000~~$68,000 and ~~$37,000~~$105,000 for the three and ~~six~~nine months ended ~~June~~September 30, 2014, respectively, were included in earnings.

Real estate held for sale is determined using Level 3 inputs which include appraisals and are adjusted for estimated costs to sell. The change in fair value of real estate held for sale and fixed assets transferred to real estate held for sale was ~~$182,000~~$19,000 and ~~$705,000~~$724,000 for the three and ~~six~~nine months ended ~~June~~September 30, 2015, which was recorded directly as an adjustment to current earnings through non-interest expense. The change in fair value of real estate held for sale was ~~$73,000~~$53,000 and $126,000 for the three and ~~six~~nine months ended ~~June~~September 30, 2014.

In accordance with FASB ASC Topic 825, the Fair Value Measurements tables are a comparative condensed consolidated statement of financial condition based on carrying amount and estimated fair values of financial instruments as of ~~March 31,~~September 30, 2015 and December 31, 2014. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of First Defiance.

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

The carrying amount of cash and cash equivalents, 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 and are classified as Level 1.

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

The fair value of loans that 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, resulting in a Level 3 classification. Impaired loans are valued at the lower of cost of fair value as previously described. The allowance for loan losses is considered to be a reasonable adjustment for credit risk. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price. The fair value of loans held for sale is estimated based on binding contracts and quotes from third party investors resulting in a Level 2 classification.

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

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

The fair values of securities sold under repurchase agreements are equal to their carrying amounts resulting in a Level 2 classification. The carrying value of subordinated debentures and deposits with fixed maturities is estimated based on discounted cash flow analyses based on interest rates currently being offered on instruments with similar characteristics and maturities resulting in a Level 3 classification.

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 resulting in a Level 2 classification. The cost or value of any call or put options is based on the estimated cost to settle the option at ~~June~~September 30, 2015.

Fair Value Measurements at June 30, 2015
(In Thousands)

Carrying
Value
Total Level 1 Level 2 Level 3
Financial Assets:
Cash and cash equivalents $ 65,586 $ 65,586 $ 65,586 $ - $ -
Investment securities 237,269 237,273 1,996 235,277 -
Federal Home Loan Bank Stock 13,802 N/A N/A N/A N/A
Loans, net, including loans held for sale 1,690,125 1,699,398 - 10,216 1,689,182
Accrued interest receivable 6,204 6,204 - 860 5,344

Financial Liabilities:
Deposits $ 1,763,390 $ 1,766,560 $ 378,970 $ 1,387,590 $ -
Advances from Federal Home Loan Bank 41,050 41,209 - 41,209 -
Securities sold under repurchase agreements 54,237 54,237 - 54,237 -
Subordinated debentures 36,083 35,318 - - 35,318

Fair Value Measurements at December 31, 2014
(In Thousands)

Carrying
Value
Total Level 1 Level 2 Level 3
Financial Assets:
Cash and cash equivalents $ 112,936 $ 112,936 $ 112,936 $ - $ -
Investment securities 239,634 239,629 1,990 237,639 -
Federal Home Loan Bank Stock 13,802 N/A N/A N/A N/A
Loans, net, including loans held for sale 1,626,555 1,632,507 - 4,741 1,627,766
Accrued interest receivable 6,037 6,037 3 846 5,188

Financial Liabilities:
Deposits $ 1,760,813 $ 1,762,733 $ 379,552 $ 1,383,181 $ -
Advances from Federal Home Loan Bank 21,544 21,772 - 21,772 -
Securities sold under repurchase agreements 54,759 54,759 - 54,759 -
Subordinated debentures 36,083 35,307 - - 35,307

			Fair Value Measurements at September 30, 2015 (In Thousands)
	Carrying Value		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	73,308	$	73,308	$	73,308	$	-	$	-
Investment securities		237,177		237,179		1,990		235,189		-
Federal Home Loan Bank Stock		13,802		N/A		N/A		N/A		N/A
Loans, net, including loans held for sale		1,715,030		1,730,554		-		7,245		1,723,309
Accrued interest receivable		7,142		7,142		-		1,368		5,774

Financial Liabilities:
Deposits	$	1,793,053	$	1,796,922	$	392,103	$	1,404,819	$	-
Advances from Federal Home Loan Bank		40,801		41,155		-		41,155		-
Securities sold under repurchase agreements		53,838		53,838		-		53,838		-
Subordinated debentures		36,083		35,307		-		-		35,307

			Fair Value Measurements at December 31, 2014 (In Thousands)
	Carrying Value		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	112,936	$	112,936	$	112,936	$	-	$	-
Investment securities		239,634		239,629		1,990		237,639		-
Federal Home Loan Bank Stock		13,802		N/A		N/A		N/A		N/A
Loans, net, including loans held for sale		1,626,555		1,632,507		-		4,741		1,627,766
Accrued interest receivable		6,037		6,037		3		846		5,188

Financial Liabilities:
Deposits	$	1,760,813	$	1,762,733	$	379,552	$	1,383,181	$	-
Advances from Federal Home Loan Bank		21,544		21,772		-		21,772		-
Securities sold under repurchase agreements		54,759		54,759		-		54,759		-
Subordinated debentures		36,083		35,307		-		-		35,307

~~4. Stock Compensation Plans~~

Stock Compensation Plans

First Defiance has established equity based compensation plans for its directors and employees. On March 15, 2010, the Board adopted, and the shareholders approved at the 2010 Annual Shareholders Meeting, the First Defiance Financial Corp. 2010 Equity Incentive Plan (the “2010 Equity Plan”). The 2010 Equity Plan replaced all pre-existing plans. All awards currently outstanding under prior plans will remain in effect in accordance with their respective terms. Any new awards will be made under the 2010 Equity Plan. The 2010 Equity Plan allows for issuance of up to 350,000 common shares through the award of options, stock grants, restricted stock units (“RSU”), stock appreciation rights or other stock-based awards.

As of ~~June~~September 30, 2015, ~~96,820~~93,070 options are outstanding at option prices based on the market value of the underlying shares on the date the options were granted. Options granted under all plans vest 20% per year except for the 2009 grant to the Company’s executive officers, which vested 40% in 2011 and then 20% annually. All options expire ten years from the date of grant. Vested options of retirees expire on the earlier of the scheduled expiration date or three months after the retirement date.

In 2014, the Company approved a 2014 Short-Term (“STIP”) Equity Incentive Plan and a 2014 Long-Term (“LTIP”) Equity Incentive Plan for selected members of management.

Under the 2014 STIP, the participants may earn up to 30% to 45% of their salary for potential payout based on the achievement of certain corporate performance targets during the calendar year. The final amount of benefits under the 2014 STIP were determined as of December 31, 2014 and paid out in cash in the first quarter of 2015. The participants are required to be employed on the day of payout in order to receive such payment.

Under the 2014 LTIP, the participants may earn up to 20% to 45% of their salary for potential payout in the form of equity awards based on the achievement of certain corporate performance targets over a three-year period. The Company granted 30,538 RSU’s to the participants in the 2014 LTIP effective January 1, 2014, which represents the maximum target award. The amount of benefit under the 2014 LTIP will be determined individually at the end of the 36 month performance period ending December 31, 2016. The awards will vest at the end of the performance period ending December 31, 2016. The benefits earned under the 2014 LTIP will be paid out in equity in the first quarter of 2017. The participants are required to be employed on the day of payout in order to receive such payment.

In 2015, the Company approved a 2015 STIP and a 2015 LTIP for selected members of management.

Under the 2015 STIP, the participants may earn up to 30% to 45% of their salary for potential payout based on the achievement of certain corporate performance targets during the calendar year. The final amount of benefits under the 2015 STIP will be determined as of December 31, 2015 and will be paid out in cash in the first quarter of 2016. The participants are required to be employed on the day of payout in order to receive such payment.

Under the 2015 LTIP, the participants may earn up to 20% to 45% of their salary for potential payout in the form of equity awards based on the achievement of certain corporate performance targets over a three-year period. The Company granted 24,757 RSU’s to the participants in the 2015 LTIP effective January 1, 2015, which represents the maximum target award. The amount of benefit under the 2015 LTIP will be determined individually at the end of the 36 month performance period ending December 31, 2017. The awards will vest at the end of the performance period ending December 31, 2017. The benefits earned under the 2015 LTIP will be paid out in equity in the first quarter of 2018. The participants are required to be employed on the day of payout in order to receive such payment.

In the ~~second quarter of~~nine months ended September 30, 2015, the Company granted 2,660 restricted shares. 2,160 ~~restricted~~ shares were issued to ~~directors. These shares~~directors and have a one-year vesting period. 500 shares were issued to an employee with a 3 year vesting period.

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

The fair value of stock options granted during the ~~six~~nine months ended ~~June~~September 30, 2015 was determined at the date of grant using the Black-Scholes stock option-pricing model and the following assumptions:

	Six Months ended						Nine Months ended
	June 30, 2015			June 30, 2014			September 30, 2015			September 30, 2014
Expected average risk-free rate		2.04	%		1.64	%		2.04	%		1.51	%
Expected average life		10.00 years			7.44 years			10.00 years			7.44 years
Expected volatility		42.00	%		44.62	%		42.00	%		44.62	%
Expected dividend yield		2.10	%		2.17	%		2.10	%		2.22	%

The weighted-average fair value of options granted was $13.13 for the ~~six~~nine months ended ~~June~~September 30, 2015 and ~~$11.25~~$10.79 for the ~~six~~nine months ended ~~June~~September 30, 2014.

Following is activity under the plans during the ~~six~~nine months ended ~~June~~September 30, 2015:

Stock options	Options Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in 000’s)		Options Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in 000’s)
Options outstanding, January 1, 2015		173,720		$	20.80						173,720		$	20.80
Forfeited or cancelled		(5,100	)		25.36						(5,100	)		25.36
Exercised		(78,050	)		22.01						(81,800	)		22.00
Granted		6,250			32.94						6,250			32.94
Options outstanding, June 30, 2015		96,820		$	20.37		3.72	$	1,661
Vested or expected to vest at June 30, 2015		96,820		$	20.37		3.72	$	1,661
Exercisable at June 30, 2015		82,170		$	18.74		2.77	$	1,544
Options outstanding, September 30, 2015											93,070		$	20.32		3.54	$	1,512
Vested or expected to vest at September 30, 2015											93,070		$	20.32		3.54	$	1,512
Exercisable at September 30, 2015											78,420		$	18.60		2.56	$	1,409

As of ~~June~~September 30, 2015, there was ~~$157,000~~$147,000 of total unrecognized compensation costs related to unvested stock options granted under the Company’s equity plans. The cost is expected to be recognized over a weighted-average period of ~~4.06~~3.81 years.

At ~~June~~September 30, 2015, 74,545 RSU’s and ~~7,927~~8,427 stock grants were outstanding. Compensation expense is recognized over the performance period based on the achievements of targets as established with the plan documents. A total expense of ~~$477,000~~$730,000 was recorded during the ~~six~~nine months ended ~~June~~September 30, 2015 compared to an expense of ~~$130,000~~$389,000 for the same period in 2014. The lower expense in the first ~~six~~nine months of 2014 was due to accrual reversals primarily from the 2013 LTIP adjusting for the actual payout in year one and two as well as adjusting the estimated ~~payouts~~payout in year ~~two and~~ three. There was approximately ~~$193,000~~$318,000 included within other liabilities at ~~June~~September 30, 2015 related to the STIP.

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

Unvested at January 1, 2015		91,812		$	21.00		5,767		$	25.97		91,812		$	21.00		5,767		$	25.97
Granted		24,757			32.30		15,006			19.51		24,757			32.30		15,506			19.91
Vested		(12,846	)		17.20		(12,846	)		17.20		(12,846	)		17.20		(12,846	)		17.20
Forfeited		(29,178	)		19.48		-			-		(29,178	)		19.48		-			-
Unvested at June 30, 2015		74,545		$	25.86		7,927		$	27.95
Unvested at September 30, 2015												74,545		$	25.86		8,427		$	28.19

The maximum amount of compensation expense that may be recorded for the 2015 STIP and the 2013, 2014 and 2015 LTIPs at ~~June~~September 30, 2015 is approximately ~~$3.6~~$2.7 million. However, the estimated expense expected to be recorded as of ~~June~~September 30, 2015 based on the performance measures in the ~~plans,~~plan, is ~~$1.8~~$1.7 million of which ~~$967,000~~$740,000 is unrecognized at ~~June~~September 30, 2015 and will be recognized over the remaining performance periods.

~~5. Dividends on Common Stock~~

Dividends on Common Stock

First Defiance declared and paid a $0.175 common stock dividend in the first quarter and a $0.20 per common stock dividend in the ~~first~~second and ~~second~~third quarters of ~~2015, respectively, and~~2015. First Defiance declared and paid a $0.15 per common stock dividend in the first, second and ~~second~~third quarters of 2014.

~~6. Earnings Per Common Share~~

Earnings Per Common Share

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

	Three months ended June 30,				Six months ended June 30,				Three months ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014		2015		2014		2015		2014
Numerator for basic and diluted earnings per common share – Net income	$	6,563	$	5,689	$	13,164	$	10,868	$	6,696	$	7,069	$	19,860	$	17,937
Denominator:
Denominator for basic earnings per common share – weighted average common shares, including participating securities		9,268		9,607		9,251		9,644		9,238		9,445		9,247		9,577
Effect of warrants		-		350		147		345		-		350		99		347
Effect of employee stock options and restricted share activity		81		109		85		107		84		108		84		107

Denominator for diluted earnings per common share share		9,349		10,066		9,483		10,096
Denominator for diluted earnings per common share										9,322		9,903		9,430		10,031
Basic earnings per common share	$	0.71	$	0.59	$	1.42	$	1.13	$	0.72	$	0.75	$	2.15	$	1.87

Diluted earnings per common share	$	0.70	$	0.57	$	1.39	$	1.08	$	0.72	$	0.71	$	2.11	$	1.79

There were ~~6,750~~6,250 and 16,750 shares under option granted to employees excluded from the diluted earnings per common share calculation as they were anti-dilutive for the three and ~~six~~nine months ended ~~June~~September 30, 2015, respectively. There were ~~1,000~~10,500 and ~~35,000~~43,000 shares under options granted to employees excluded from the diluted earnings per common share calculation as they were anti-dilutive for the three and ~~six~~nine months ended ~~June~~September 30, 2014, respectively.

~~7. Investment Securities~~

Investment Securities

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
At June 30, 2015	(In Thousands)
										(In Thousands)
At September 30, 2015
Available-for-Sale Securities:
Obligations of U.S. government corporations and agencies	$	3,000	$	-	$	(18	)	$	2,982	$	3,000	$	3	$	-		$	3,003
Mortgage-backed securities – residential		59,181		768		(236	)		59,713		60,713		1,338		-			62,051
REMICs		1,722		29		-			1,751		1,638		44		-			1,682
Collateralized mortgage obligations		76,556		1,094		(363	)		77,287		72,391		1,561		(162	)		73,790
Trust preferred securities and preferred stock		-		1		-			1		-		1		-			1
Corporate bonds		5,935		62		(4	)		5,993		5,947		51		(16	)		5,982
Obligations of state and political subdivisions		85,731		3,778		(224	)		89,285		86,326		4,134		(43	)		90,417
Totals	$	232,125	$	5,732	$	(845	)	$	237,012	$	230,015	$	7,132	$	(221	)	$	236,926

Amortized
Cost

Gross
Unrecognized
Gains

Gross
Unrecognized
Losses
Fair Value
(In Thousands)
Held-to-Maturity Securities*:
FHLMC certificates $ 16 $ - $ - $ 16
FNMA certificates 82 3 - 85
GNMA certificates 35 1 - 36
Obligations of state and political subdivisions 124 - - 124
Totals $ 257 $ 4 $ - $ 261

Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
At December 31, 2014
Available-for-sale
Obligations of U.S. government corporations and agencies $ 1,000 $ - $ (20 ) $ 980
Mortgage-backed securities - residential 58,380 1,476 - 59,856
REMICs 1,820 19 - 1,839
Collateralized mortgage obligations 80,252 1,280 (411 ) 81,121
Trust preferred stock and preferred stock - 1 - 1
Corporate bonds 6,913 85 (6 ) 6,992
Obligations of state and political subdivisions 83,732 4,827 (27 ) 88,532
Total Available-for-Sale $ 232,097 $ 7,688 $ (464 ) $ 239,321

Amortized Cost
Gross
Unrecognized
Gains

Gross
Unrecognized
Losses
Fair Value
(In Thousands)
Held-to-Maturity*:
FHLMC certificates $ 26 $ - $ (8 ) $ 18
FNMA certificates 93 2 - 95
GNMA certificates 39 1 - 40
Obligations of states and political subdivisions 155 - - 155
Total Held-to-Maturity $ 313 $ 3 $ (8 ) $ 308

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
	(In Thousands)
Held-to-Maturity Securities*:
FHLMC certificates	$	15	$	-	$	-		$	15
FNMA certificates		79		2		(1	)		80
GNMA certificates		33		1		-			34
Obligations of state and political subdivisions		124		-		-			124
Totals	$	251	$	3	$	(1	)	$	253

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In Thousands)
At December 31, 2014
Available-for-sale
Obligations of U.S. government corporations and agencies	$	1,000	$	-	$	(20	)	$	980
Mortgage-backed securities - residential		58,380		1,476		-			59,856
REMICs		1,820		19		-			1,839
Collateralized mortgage obligations		80,252		1,280		(411	)		81,121
Trust preferred stock and preferred stock		-		1		-			1
Corporate bonds		6,913		85		(6	)		6,992
Obligations of state and political subdivisions		83,732		4,827		(27	)		88,532
Total Available-for-Sale	$	232,097	$	7,688	$	(464	)	$	239,321

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
	(In Thousands)
Held-to-Maturity*:
FHLMC certificates	$	26	$	-	$	(8	)	$	18
FNMA certificates		93		2		-			95
GNMA certificates		39		1		-			40
Obligations of states and political subdivisions		155		-		-			155
Total Held-to-Maturity	$	313	$	3	$	(8	)	$	308

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

The amortized cost and fair value of the investment securities portfolio at ~~June~~September 30, 2015 are shown below by contractual maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. For purposes of the maturity table, mortgage-backed securities (“MBS”), collateralized mortgage obligations (“CMO”) and REMICs, which are not due at a single maturity date, have not been allocated over the maturity groupings. These securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.

	Available-for-Sale				Held-to-Maturity				Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair		Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value		Cost		Value		Cost		Value
	(In Thousands)								(In Thousands)
Due in one year or less	$	1,246	$	1,256	$	-	$	-	$	1,250	$	1,254	$	-	$	-
Due after one year through five years		14,772		15,078		124		124		15,188		15,501		124		124
Due after five years through ten years		36,311		38,157		-		-		35,329		37,188		-		-
Due after ten years		42,337		43,770		-		-		43,506		45,460		-		-
MBS/CMO		137,459		138,751		133		137		134,742		137,523		127		129
	$	232,125	$	237,012	$	257	$	261	$	230,015	$	236,926	$	251	$	253

Investment securities with a carrying amount of $134.3 million at ~~June~~September 30, 2015 were pledged as collateral on public deposits, securities sold under repurchase agreements and Federal Reserve discount window.

As of ~~June~~September 30, 2015, the Company’s investment portfolio consisted of ~~366~~367 securities, 7828 of which were in an unrealized loss position.

The following tables summarize First Defiance’s securities that were in an unrealized loss position at ~~June~~September 30, 2015 and December 31, 2014:

	Duration of Unrealized Loss Position															Duration of Unrealized Loss Position
	Less than 12 Months					12 Months or Longer					Total					Less than 12 Months					12 Months or Longer					Total
			Gross					Gross										Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loses			Value		Loss			Value		Loss			Value		Loses
	(In Thousands)															(In Thousands)
At June 30, 2015
At September 30, 2015
Available-for-sale securities:
Obligations of U.S. government corporations and agencies	$	1,994	$	(6	)	$	988	$	(12	)	$	2,982	$	(18	)	$	-	$	-		$	-	$	-		$	-	$	-
Collateralized mortgage obligations		11,258		(96	)		10,325		(267	)		21,583		(363	)		-		-			8,574		(162	)		8,574		(162	)
Mortgage-backed securities - residential		33,958		(236	)		-		-			33,958		(236	)
Obligations of state and political subdivisions		14,101		(208	)		415		(16	)		14,516		(224	)		5,150		(34	)		424		(9	)		5,574		(43	)
Corporate bonds		1,996		(4	)		-		-			1,996		(4	)		984		(16	)		-		-			984		(16	)
Held to maturity securities:
FHLMC/FNMA certificates																	20		(1	)		9		-			29		(1	)
Total temporarily impaired securities	$	63,307	$	(550	)	$	11,728	$	(295	)	$	75,035	$	(845	)	$	6,154	$	(51	)	$	9,007	$	(171	)	$	15,161	$	(222	)

	Duration of Unrealized Loss Position
	Less than 12 Months					12 Months or Longer					Total
			Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loses
	(In Thousands)
At December 31, 2014
Available-for-sale securities:
Obligations of U.S. government corporations and agencies	$	-	$	-		$	980	$	(20	)	$	980	$	(20	)
Collateralized mortgage obligations		4,466		(138	)		14,633		(273	)		19,099		(411	)
Corporate bonds		-		-			994		(6	)		994		(6	)
Obligations of state and political subdivisions		1,194		(8	)		1,499		(19	)		2,693		(27	)
Held to maturity securities:
FHLMC certificates		18		(8	)		-		-			18		(8	)
Total temporarily impaired securities	$	5,678	$	(154	)	$	18,106	$	(318	)	$	23,784	$	(472	)

With the exception of corporate bonds, the above securities all have fixed interest rates, and all securities have defined maturities. Their fair value is sensitive to movements in market interest rates. First Defiance has the ability and intent to hold these investments for a time necessary to recover the amortized cost without impacting its liquidity position and it is not more than likely that the Company will be required to sell the investments before anticipated recovery.

~~There were no realized gains from the sales of investment securities in the first and second quarters of 2015.~~

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least quarterly, and more frequently when economic or market conditions warrant such an evaluation. The investment portfolio is evaluated for OTTI by segregating the portfolio into two general segments. Investment securities classified as available-for-sale or held-to-maturity are generally evaluated for OTTI under FASB ASC Topic 320. Certain collateralized debt obligations (“CDOs”) are evaluated for OTTI under FASB ASC Topic 325, Investment – Other.

When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss. If an entity intends to sell or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected compared to the book value of the security and is recognized in earnings. The amount of OTTI related to other factors shall be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings shall become the new amortized cost basis of the investment.

In the ~~first~~three or nine months ended September 30, 2015 and ~~second quarters of 2015,~~September 30, 2014, management determined there was no OTTI.

The Company holds three CDO’s at ~~June~~September 30, 2015 and December 31, 2014 with a zero value.

The amount of OTTI recognized in accumulated other comprehensive income (“AOCI”) was zero at ~~June~~September 30, 2015 and December 31, 2014.

The proceeds from the sales and calls of securities and the associated gains and losses are listed below:

	Three Months Ended June 30,					Six Months Ended June 30,					Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014			2015		2014			2015		2014		2015		2014
	(In Thousands)										(In Thousands)
Proceeds	$	-	$	2,128		$	-	$	3,782		$	-	$	10,738	$	-	$	14,520
Gross realized gains		-		1,113			-		1,113			-		460		-		1,573
Gross realized losses		-		(642	)		-		(642	)		-		-		-		(642	)

~~8. Loans~~

Loans

Loans receivable consist of the following:

							September 30, 2015			December 31, 2014
	June 30, 2015			December 31, 2014			(In Thousands)
	(In Thousands)
Real Estate:
Secured by 1-4 family residential	$	205,044		$	206,437		$	205,370		$	206,437
Secured by multi-family residential		162,595			156,530			163,255			156,530
Secured by commercial real estate		722,530			683,958			758,952			683,958
Construction		140,114			112,385			129,230			112,385
		1,230,283			1,159,310			1,256,807			1,159,310
Other Loans:
Commercial		401,247			399,730			402,681			399,730
Home equity and improvement		109,694			111,813			113,781			111,813
Consumer Finance		14,911			15,466			15,774			15,466
		525,852			527,009			532,236			527,009
Total loans		1,756,135			1,686,319			1,789,043			1,686,319
Deduct:
Undisbursed loan funds		(49,477	)		(38,653	)		(54,484	)		(38,653	)
Net deferred loan origination fees and costs		(942	)		(880	)		(1,021	)		(880	)
Allowance for loan loss		(25,384	)		(24,766	)		(25,209	)		(24,766	)
Totals	$	1,680,332		$	1,622,020		$	1,708,329		$	1,622,020

Loan segments have been identified by evaluating the portfolio based on collateral and credit risk characteristics.

The following table discloses allowance for loan loss activity for the quarter ended ~~June~~September 30, 2015 and 2014 by portfolio segment (In Thousands):

Quarter Ended June 30, 2015	1-4 Family Residential Real Estate			Multi- Family Residential Real Estate			Commercial Real Estate			Construction		Commercial			Home Equity and Improvement			Consumer Finance			Total
Quarter Ended September 30, 2015																								1-4 Family Residential Real Estate			Multi- Family Residential Real Estate			Commercial Real Estate			Construction			Commercial			Home Equity and Improvement			Consumer Finance			Total
Beginning Allowance	$	2,483		$	2,554		$	11,684		$	303	$	6,766		$	1,420		$	92		$	25,302		$	2,877		$	2,269		$	12,096		$	308		$	5,567		$	2,107		$	160		$	25,384

Charge-Offs		(12	)		(114	)		(31	)		0		(23	)		(187	)		(13	)		(380	)		(185	)		0			(64	)		0			(43	)		(110	)		(5	)		(407	)

Recoveries		54			0			167			0		173			51			17			462			105			0			25			0			42			76			11			259

Provisions		352			(171	)		276			5		(1,349	)		823			64			0			(18	)		(25	)		96			(69	)		(155	)		152			(8	)		(27	)
Ending Allowance	$	2,877		$	2,269		$	12,096		$	308	$	5,567		$	2,107		$	160		$	25,384		$	2,779		$	2,244		$	12,153		$	239		$	5,411		$	2,225		$	158		$	25,209

Quarter Ended June 30, 2014	1-4 Family Residential Real Estate			Multi- Family Residential Real Estate			Commercial Real Estate			Construction		Commercial			Home Equity and Improvement			Consumer Finance			Total
Quarter Ended September 30, 2014																								1-4 Family Residential Real Estate			Multi- Family Residential Real Estate		Commercial Real Estate			Construction		Commercial			Home Equity and Improvement			Consumer Finance			Total
Beginning Allowance	$	2,639		$	2,615		$	11,987		$	138	$	5,610		$	1,647		$	147		$	24,783		$	2,345		$	2,480	$	11,476		$	199	$	6,199		$	1,780		$	148		$	24,627

Charge-Offs		(42	)		(0	)		(39	)		0		(973	)		(80	)		(12	)		(1,146	)		(95	)		-		(246	)		-		(1,272	)		(42	)		(16	)		(1,671	)

Recoveries		98			2			200			0		173			55			16			544			13			2		978			-		109			87			16			1,205

Provisions		(350	)		(137	)		(672	)		61		1,389			158			(3	)		446			161			99		(1,121	)		15		1,384			(134	)		2			406
Ending Allowance	$	2,345		$	2,480		$	11,476		$	199	$	6,199		$	1,780		$	148		$	24,627		$	2,424		$	2,581	$	11,087		$	214	$	6,420		$	1,691		$	150		$	24,567

The following table discloses allowance for loan loss activity for the year-to-date periods ended ~~June~~September 30, 2015 and ~~June~~September 30, 2014 by portfolio segment and impairment method (In Thousands):

Year-to-date Period Ended June 30, 2015	1-4 Family Residential Real Estate			Multi- Family Residential Real Estate			Commercial Real Estate			Construction		Commercial			Home Equity and Improvement			Consumer			Total
Year-to-date Period Ended September 30, 2015																								1-4 Family Residential Real Estate			Multi- Family Residential Real Estate			Commercial Real Estate			Construction		Commercial			Home Equity and Improvement			Consumer			Total
Beginning Allowance	$	2,494		$	2,453		$	11,268		$	221	$	6,509		$	1,704		$	117		$	24,766		$	2,494		$	2,453		$	11,268		$	221	$	6,509		$	1,704		$	117		$	24,766

Charge-Offs		(90	)		(114	)		(186	)		0		(25	)		(230	)		(16	)		(661	)		(275	)		(114	)		(250	)		0		(68	)		(340	)		(21	)		(1,068	)

Recoveries		73			0			764			0		213			80			29			1,159			178			0			789			0		255			156			40			1,418

Provisions		400			(70	)		250			87		(1,130	)		553			30			120			382			(95	)		346			18		(1,285	)		705			22			93
Ending Allowance	$	2,877		$	2,269		$	12,096		$	308	$	5,567		$	2,107		$	160		$	25,384		$	2,779		$	2,244		$	12,153		$	239	$	5,411		$	2,225		$	158		$	25,209

Year-to-date Period Ended June 30, 2014	1-4 Family Residential Real Estate			Multi- Family Residential Real Estate			Commercial Real Estate			Construction		Commercial			Home Equity and Improvement			Consumer			Total
Year-to-date Ended September 30, 2014																								1-4 Family Residential Real Estate			Multi- Family Residential Real Estate		Commercial Real Estate			Construction		Commercial			Home Equity and Improvement			Consumer			Total
Beginning Allowance	$	2,847		$	2,508		$	12,000		$	134	$	5,678		$	1,635		$	148		$	24,950		$	2,847		$	2,508	$	12,000		$	134	$	5,678		$	1,635		$	148		$	24,950

Charge-Offs		(270	)		(0	)		(267	)		0		(1,498	)		(264	)		(23	)		(2,322	)		(364	)		-		(514	)		-		(2,770	)		(306	)		(39	)		(3,993	)

Recoveries		154			5			922			0		249			86			34			1,450			167			7		1,901			-		358			172			50			2,655

Provisions		(386	)		(33	)		(1,179	)		65		1,770			323			(11	)		549			(226	)		66		(2,300	)		80		3,154			190			(9	)		955
Ending Allowance	$	2,345		$	2,480		$	11,476		$	199	$	6,199		$	1,780		$	148		$	24,627		$	2,424		$	2,581	$	11,087		$	214	$	6,420		$	1,691		$	150		$	24,567

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of ~~June~~September 30, 2015 (In Thousands):

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

Ending allowance balance attributable to loans:

Individually evaluated for impairment	$	248	$	-	$	220	$	-	$	13	$	25	$	32	$	538	$	186	$	-	$	137	$	-	$	11	$	24	$	-	$	358

Collectively evaluated for impairment		2,629		2,269		11,876		308		5,554		2,082		128		24,846		2,593		2,244		12,016		239		5,400		2,201		158		24,851

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

Total ending allowance balance	$	2,877	$	2,269	$	12,096	$	308	$	5,567	$	2,107	$	160	$	25,384	$	2,779	$	2,244	$	12,153	$	239	$	5,411	$	2,225	$	158	$	25,209

Loans:

Loans individually evaluated for impairment	$	9,807	$	2,256	$	20,358	$	-	$	5,124	$	2,394	$	62	$	40,001	$	9,417	$	3,139	$	12,914	$	-	$	3,979	$	2,168	$	54	$	31,671

Loans collectively evaluated for impairment		195,613		160,442		704,220		90,626		397,369		107,774		14,835		1,670,879		196,331		160,191		748,367		74,677		400,087		112,108		15,706		1,707,467

Loans acquired with deteriorated credit quality		1		-		160		-		19		-		-		180		-		-		156		-		18		-		-		174

Total ending loans balance	$	205,421	$	162,698	$	724,738	$	90,626	$	402,512	$	110,168	$	14,897	$	1,711,060	$	205,748	$	163,330	$	761,437	$	74,677	$	404,084	$	114,276	$	15,760	$	1,739,312

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2014 (In Thousands):

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

Ending allowance balance attributable to loans:

Individually evaluated for impairment	$	216	$	-	$	1,003	$	-	$	30	$	24	$	-	$	1,273

Collectively evaluated for impairment		2,278		2,453		10,265		221		6,479		1,680		117		23,493

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

Total ending allowance balance	$	2,494	$	2,453	$	11,268	$	221	$	6,509	$	1,704	$	117	$	24,766

Loans:

Loans individually evaluated for impairment	$	10,281	$	2,482	$	28,117	$	150	$	5,739	$	2,242	$	34	$	49,045

Loans collectively evaluated for impairment		196,582		154,178		657,677		73,572		395,270		110,040		15,417		1,602,736

Loans acquired with deteriorated credit quality		1		-		163		-		22		-		-		186

Total ending loans balance	$	206,864	$	156,660	$	685,957	$	73,722	$	401,031	$	112,282	$	15,451	$	1,651,967

~~The following table presents the average balance, interest income recognized and cash basis income recognized on impaired loans by class of loans (In Thousands):~~

Three Months Ended June 30, 2015 Six Months Ended June 30, 2015
Average
Balance Interest
Income
Recognized Cash Basis
Income
Recognized Average
Balance Interest
Income
Recognized Cash Basis
Income
Recognized
Residential Owner Occupied $ 5,819 $ 68 $ 67 $ 5,905 $ 136 $ 135
Residential Non Owner Occupied 4,027 38 39 4,187 79 79
Total Residential Real Estate 9,846 106 106 10,092 215 214
Construction - - - 75 2 2
Multi-Family 2,408 5 6 2,435 13 14
CRE Owner Occupied 6,711 41 29 6,612 78 68
CRE Non Owner Occupied 9,452 111 129 9,820 244 264
Agriculture Land 2,228 25 15 1,494 32 28
Other CRE 2,118 16 16 2,280 26 25
Total Commercial Real Estate 20,509 193 189 20,206 380 385
Commercial Working Capital 1,537 14 12 1,702 27 25
Commercial Other 3,622 13 17 3,731 26 35
Total Commercial 5,159 27 29 5,433 53 60
Home Equity and Home Improvement 2,409 21 21 2,305 41 41
Consumer 65 1 1 54 1 1
Total Impaired Loans $ 40,396 $ 353 $ 352 $ 40,600 $ 705 $ 717

The following table presents the average balance, interest income recognized and cash basis income recognized on impaired loans by class of loans (In Thousands):

	Three Months Ended June 30, 2014						Six Months Ended June 30, 2014						Three Months Ended September 30, 2015						Nine Months Ended September 30, 2015
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized		Cash Basis Income Recognized
Residential Owner Occupied	$	6,133	$	81	$	75	$	6,231	$	166	$	158	$	5,750	$	67	$	66	$	5,854	$	203	$	201
Residential Non Owner Occupied		3,715		32		33		3,900		70		71		3,762		38		38		4,045		117		117
Total Residential Real Estate		9,848		113		108		10,131		236		229		9,512		105		104		9,899		320		318
Construction		261		3		4		261		6		9		-		-		-		50		2		2
Multi-Family		369		1		1		378		2		2		3,168		12		11		2,680		25		25
CRE Owner Occupied		8,967		37		33		9,402		73		68		6,475		39		39		6,566		117		117
CRE Non Owner Occupied		18,469		201		204		18,912		405		408		2,696		29		29		7,445		273		273
Agriculture Land		683		5		3		685		8		5		2,236		21		2		1,741		53		30
Other CRE		1,788		5		6		1,825		10		11		1,509		5		5		2,023		31		30
Total Commercial Real Estate		29,907		248		246		30,824		496		492		12,916		94		75		17,775		474		450
Commercial Working Capital		3,286		8		8		3,105		11		11		1,030		11		11		1,478		38		36
Commercial Other		4,552		2		1		4,756		4		3		2,989		7		6		3,483		33		41
Total Commercial		7,838		10		9		7,861		15		14		4,019		18		17		4,961		71		77
Home Equity and Home Improvement		2,095		25		25		2,267		50		50		2,160		19		19		2,257		60		60
Consumer		51		1		1		54		2		2		58		1		2		55		2		3
Total Impaired Loans	$	50,369	$	401	$	394	$	51,776	$	807	$	798	$	31,833	$	249	$	228	$	37,677	$	954	$	935

The following table presents the average balance, interest income recognized and cash basis income recognized on impaired loans by class of loans (In Thousands):

	Three Months Ended September 30, 2014						Nine Months Ended September 30, 2014
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized		Cash Basis Income Recognized
Residential Owner Occupied	$	6,242	$	84	$	84	$	6,235	$	250	$	245
Residential Non Owner Occupied		3,537		31		31		3,778		101		101
Total Residential Real Estate		9,779		115		115		10,013		351		346
Construction		261		4		4		261		10		13
Multi-Family		349		1		1		368		3		3
CRE Owner Occupied		8,238		35		29		9,014		108		97
CRE Non Owner Occupied		18,144		200		200		18,656		605		605
Agriculture Land		536		3		2		635		11		7
Other CRE		2,576		5		5		2,075		15		16
Total Commercial Real Estate		29,494		243		236		30,381		739		725
Commercial Working Capital		3,111		9		9		3,107		20		20
Commercial Other		4,325		4		3		4,612		8		6
Total Commercial		7,436		13		12		7,719		28		26
Home Equity and Home Improvement		2,185		25		24		2,240		75		74
Consumer		47		1		1		52		3		3
Total Impaired Loans	$	49,551	$	402	$	393	$	51,034	$	1,209	$	1,190

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

	June 30, 2015						December 31, 2014						September 30, 2015						December 31, 2014
	Unpaid Principal Balance*		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance*		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance*		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance*		Recorded Investment		Allowance for Loan Losses Allocated
With no allowance recorded:
Residential Owner Occupied	$	3,713	$	3,606	$	-	$	3,967	$	3,859	$	-	$	3,852	$	3,746	$	-	$	3,967	$	3,859	$	-
Residential Non Owner Occupied		3,526		3,517		-		3,763		3,670		-		3,527		3,535		-		3,763		3,670		-
Total 1-4 Family Residential Real Estate		7,239		7,123		-		7,730		7,529		-		7,379		7,281		-		7,730		7,529		-
Multi-Family Residential Real Estate		2,408		2,256		-		2,627		2,482		-		3,287		3,139		-		2,627		2,482		-
CRE Owner Occupied		4,249		3,903		-		7,109		6,481		-		4,163		3,821		-		7,109		6,481		-
CRE Non Owner Occupied		2,406		2,144		-		4,106		3,759		-		2,631		2,370		-		4,106		3,759		-
Agriculture Land		2,134		2,183		-		213		208		-		2,134		2,184		-		213		208		-
Other CRE		2,073		1,751		-		2,923		2,378		-		1,019		979		-		2,923		2,378		-
Total Commercial Real Estate		10,862		9,981		-		14,351		12,826		-		9,947		9,354		-		14,351		12,826		-
Construction		-		-		-		150		150		-		-		-		-		150		150		-
Commercial Working Capital		900		904		-		1,155		1,157		-		463		467		-		1,155		1,157		-
Commercial Other		3,367		3,193		-		3,966		3,663		-		2,610		2,611		-		3,966		3,663		-
Total Commercial		4,267		4,097		-		5,121		4,820		-		3,073		3,078		-		5,121		4,820		-

Home Equity and Home Improvement		2,349		2,298		-		2,192		2,140		-		2,135		2,084		-		2,192		2,140		-
Consumer Finance		29		29		-		35		34		-		54		54		-		35		34		-

Total loans with no allowance recorded	$	27,154	$	25,784	$	-	$	32,206	$	29,981	$	-	$	25,875	$	24,990	$	-	$	32,206	$	29,981	$	-

With an allowance recorded:
Residential Owner Occupied	$	2,183	$	2,186	$	241	$	2,112	$	2,114	$	204	$	1,970	$	1,972	$	182	$	2,112	$	2,114	$	204
Residential Non Owner Occupied		494		498		7		636		638		12		160		164		4		636		638		12
Total 1-4 Family Residential Real Estate		2,677		2,684		248		2,748		2,752		216		2,130		2,136		186		2,748		2,752		216
Multi-Family Residential Real Estate		-		-		-		-		-		-		-		-		-		-		-		-
CRE Owner Occupied		3,231		2,832		169		2,667		2,257		148		3,025		2,608		125		2,667		2,257		148
CRE Non Owner Occupied		7,156		7,093		44		13,020		12,606		842	��	386		310		4		13,020		12,606		842
Agriculture Land		123		112		1		333		320		10		121		111		1		333		320		10
Other CRE		583		340		6		137		108		3		955		531		7		137		108		3
Total Commercial Real Estate		11,093		10,377		220		16,157		15,291		1,003		4,487		3,560		137		16,157		15,291		1,003
Construction		-		-		-		-		-		-		-		-		-		-		-		-
Commercial Working Capital		713		714		9		649		650		21		622		624		8		649		650		21
Commercial Other		310		313		4		264		269		9		273		277		3		264		269		9
Total Commercial		1,023		1,027		13		913		919		30		895		901		11		913		919		30
Home Equity and Home Improvement		95		96		25		101		102		24		84		84		24		101		102		24
Consumer Finance		32		33		32		-		-		-		-		-		-		-		-		-
Total loans with an allowance recorded	$	14,920	$	14,217	$	538	$	19,919	$	19,064	$	1,273	$	7,596	$	6,681	$	358	$	19,919	$	19,064	$	1,273

* Presented gross of charge offs

The following table presents the current balance of the aggregate amounts of non-performing assets, comprised of non-performing loans and real estate owned on the dates indicated:

	June 30, 2015		December 31, 2014		September 30, 2015		December 31, 2014
	(In Thousands)				(In Thousands)
Non-accrual loans	$	16,737	$	24,130	$	16,612	$	24,130
Loans over 90 days past due and still accruing		-		-		-		-
Total non-performing loans		16,737		24,130		16,612		24,130
Real estate and other assets held for sale		5,371		6,181		4,936		6,181
Total non-performing assets	$	22,108	$	30,311	$	21,548	$	30,311
Troubled debt restructuring, still accruing	$	22,234	$	24,686	$	13,786	$	24,686

The following table presents the aging of the recorded investment in past due and non accrual loans as of ~~June~~September 30, 2015 by class of loans (In Thousands):

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

Residential Owner Occupied	$	141,983	$	-	$	427	$	290	$	717	$	1,502	$	139,765	$	-	$	406	$	286	$	692	$	1,422
Residential Non Owner Occupied		61,597		245		157		722		1,124		1,440		63,898		642		128		623		1,393		1,323

Total 1-4 Family Residential Real Estate		203,580		245		584		1,012		1,841		2,942		203,663		642		534		909		2,085		2,745

Multi-Family Residential Real Estate		160,594		-		-		2,104		2,104		2,123		161,262		-		-		2,068		2,068		2,491

CRE Owner Occupied		314,314		106		1,277		2,051		3,434		4,652		325,006		112		-		2,527		2,639		4,289
CRE Non Owner Occupied		262,442		108		2,186		358		2,652		1,093		291,214		121		-		357		478		1,055
Agriculture Land		98,224		62		427		-		489		452		96,007		190		104		-		294		838
Other Commercial Real Estate		42,860		-		-		323		323		1,461		45,484		-		-		315		315		1,414

Total Commercial Real Estate		717,840		276		3,890		2,732		6,898		7,658		757,711		423		104		3,199		3,726		7,596

Construction		90,626		-		-		-		-		-		74,604		-		73		-		73		-

Commercial Working Capital		153,126		145		-		327		472		397		153,408		-		-		166		166		245
Commercial Other		245,954		5		1,857		1,098		2,960		3,054		248,227		2		207		2,074		2,283		2,878

Total Commercial		399,080		150		1,857		1,425		3,432		3,451		401,635		2		207		2,240		2,449		3,123

Consumer Finance		14,881		16		-		-		16		10		15,671		62		9		18		89		29
Home Equity/Home Improvement		109,229		658		254		27		939		553		113,698		459		76		43		578		632

Total Loans	$	1,695,830	$	1,345	$	6,585	$	7,300	$	15,230	$	16,737	$	1,728,244	$	1,588	$	1,003	$	8,477	$	11,068	$	16,616

The following table presents the aging of the recorded investment in past due and non accrual loans as of December 31, 2014 by class of loans (In Thousands):

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

Residential Owner Occupied	$	141,597	$	39	$	1,079	$	365	$	1,483	$	1,702
Residential Non Owner Occupied		62,991		110		105		578		793		1,625

Total 1-4 Family Residential Real Estate		204,588		149		1,184		943		2,276		3,327

Multi-Family Residential Real Estate		156,413		247		-		-		247		2,546

CRE Owner Occupied		299,500		163		1,566		1,753		3,482		7,004
CRE Non Owner Occupied		243,341		119		416		1,308		1,843		2,582
Agriculture Land		93,529		-		14		-		14		686
Other Commercial Real Estate		43,835		155		-		258		413		2,359

Total Commercial Real Estate		680,205		437		1,996		3,319		5,752		12,631

Construction		73,722		-		-		-		-		-

Commercial Working Capital		135,009		-		-		951		951		1,103
Commercial Other		262,982		67		10		2,012		2,089		3,897

Total Commercial		397,991		67		10		2,963		3,040		5,000

Consumer Finance		15,326		68		57		-		125		12
Home Equity/Home Improvement		110,940		1,236		-		106		1,342		619

Total Loans	$	1,639,185	$	2,204	$	3,247	$	7,331	$	12,782	$	24,135

Troubled Debt Restructurings

As of ~~June~~September 30, 2015 and December 31, 2014, the Company had a recorded investment in troubled debt restructurings (“TDRs”) of ~~$29.0~~$20.5 million and $33.0 million, respectively. The Company allocated ~~$431,000~~$256,000 and $1.1 million of specific reserves to those loans at ~~June~~September 30, 2015 and December 31, 2014, and has committed to lend additional amounts totaling up to ~~$28,000~~$81,000 and $69,000 at ~~June~~September 30, 2015 and December 31, 2014, respectively.

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

Of the loans modified in a TDR, ~~$6.7~~$6.8 million are on non-accrual status and partial charge-offs have in some cases been taken against the outstanding balance. Loans modified as a TDR may have the financial effect of increasing the allowance associated with the loan. If the loan is determined to be collateral dependent, the estimated fair value of the collateral, less any selling costs is used to determine if there is a need for a specific allowance or charge-off. If the loan is determined to be cash flow dependent, the allowance is measured based on the present value of expected future cash flows discounted at the loan’s pre-modification effective interest rate.

The following table presents loans by class modified as troubled debt restructurings that occurred during the three and ~~six~~nine month periods ending ~~June~~September 30, 2015 and ~~June~~September 30, 2014:

Loans Modified as a TDR for the Three
Months Ended June 30, 2015
($ in thousands) Loans Modified as a TDR for the Six
Months Ended June 30, 2015
($ in thousands)
Troubled Debt Restructurings Number of
Loans Recorded Investment
(as of period end) Number of
Loans Recorded Investment
(as of period end)

1-4 Family Owner Occupied 1 $ 9 3 $ 226
1-4 Family Non Owner Occupied 0 - 4 65
CRE Owner Occupied 1 582 1 582
CRE Non Owner Occupied 2 260 2 260
Agriculture Land 3 1,555 3 1,555
Other CRE 0 - 0 -
Commercial Working Capital 2 526 2 526
Commercial Other 1 57 1 57
Home Equity and Improvement 4 268 7 326
Consumer Finance 2 34 4 37
Total 16 $ 3,291 27 $ 3,634

	Loans Modified as a TDR for the Three Months Ended September 30, 2015 ($ in thousands)			Loans Modified as a TDR for the Nine Months Ended September 30, 2015 ($ in thousands)
Troubled Debt Restructurings	Number of Loans	Recorded Investment (as of period end)		Number of Loans	Recorded Investment (as of period end)

1-4 Family Owner Occupied	0	$	-	3	$	226
1-4 Family Non Owner Occupied	0		-	4		63
CRE Owner Occupied	1		72	2		632
CRE Non Owner Occupied	0		-	2		252
Agriculture Land	0		-	3		1,552
Other CRE	0		-	0		-
Commercial Working Capital	2		114	4		119
Commercial Other	1		19	2		73
Home Equity and Improvement	4		114	11		217
Consumer Finance	2		2	6		37
Total	10	$	321	37	$	3,171

The loans described above ~~increased~~decreased the ALLL by ~~$53,000~~$3,000 in the three month period ending ~~June~~September 30, 2015 and ~~increased the ALLL by $116,000~~$23,000 in the ~~six~~nine month period ending ~~June~~September 30, 2015.

Loans Modified as a TDR for the Three
Months Ended June 30, 2014
($ In Thousands) Loans Modified as a TDR for the Six
Months Ended June 30, 2014
($ In Thousands)
Troubled Debt Restructurings Number of Loans Recorded
Investment (as of
period end) Number of Loans Recorded
Investment (as of
period end)

Residential Owner Occupied 7 $ 674 15 $ 1,372
Residential Non Owner Occupied 0 - 0 -
CRE Owner Occupied 0 - 0 -
CRE Non Owner Occupied 0 - 1 358
Agriculture Land 0 - 0 -
Other CRE 0 - 0 -
Commercial working capital or other 9 727 11 1,676
Home Equity / Improvement 4 82 7 167
Consumer Finance 1 17 2 19
Total 21 $ 1,500 36 $ 3,592

	Loans Modified as a TDR for the Three Months Ended September 30, 2014 ($ In Thousands)			Loans Modified as a TDR for the Nine Months Ended September 30, 2014 ($ In Thousands)
Troubled Debt Restructurings	Number of Loans	Recorded Investment (as of period end)		Number of Loans	Recorded Investment (as of period end)

Residential Owner Occupied	2	$	308	17	$	1,680
Residential Non Owner Occupied	2		361	2		361
CRE Owner Occupied	0		-	0		-
CRE Non Owner Occupied	1		135	2		493
Agriculture Land	0		-	0		-
Other CRE	0		-	0		-
Commercial working capital or other	2		24	13		1,700
Home Equity / Improvement	5		234	12		401
Consumer Finance	1		3	3		22
Total	13	$	1,065	49	$	4,657

The loans described above increased the allowance for loan loss by ~~$65,000~~$60,000 in the three month period ending ~~June~~September 30, 2014 and ~~decreased~~increased the allowance for loan loss by ~~$5,000~~$55,000 in the ~~six~~nine month period ending ~~June~~September 30, 2014.

Of the 2015 modifications, 913 were made TDRs due to the fact that the borrower has been in bankruptcy, 1 was made TDR due to extending the amortization, 1 was made a TDR due to an interest only period, 1 was made a TDR due to extending the maturity, 11 were made TDRs due to advancing funds to a watchlist credit, 13 was to term out a line of credit and 47 were made to refinance current debt for payment relief.

The following table presents loans by class modified as TDRs for which there was a payment default within twelve months following the modification during the three and ~~six~~nine month periods ended ~~June~~September 30, 2015 and ~~June~~September 30, 2014:

Three Months Ended June 30, 2015
($ in thousands) Six Months Ended June 30, 2015
($ in thousands)
Troubled Debt Restructurings
That Subsequently Defaulted Number of
Loans Recorded Investment
(as of period end) Number of
Loans Recorded Investment
(as of period end)

1-4 Family Owner Occupied 0 $ - 0 $ -
1-4 Family Non Owner Occupied 1 104 1 104
CRE Owner Occupied 0 - 0 -
CRE Non Owner Occupied 0 - 0 -
Agriculture Land 0 - 0 -
Other CRE 0 - 0 -
Commercial Working Capital or Other 0 - 0 -
Commercial Other 0 - 0 -
Home Equity and Improvement 1 22 1 22
Consumer Finance 0 - 0 -
Total 2 $ 126 2 $ 126

	Three Months Ended September 30, 2015 ($ in thousands)			Nine Months Ended September 30, 2015 ($ in thousands)
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans	Recorded Investment (as of period end)		Number of Loans	Recorded Investment (as of period end)
1-4 Family Owner Occupied	0	$	-	0	$	-
1-4 Family Non Owner Occupied	0		-	1		105
CRE Owner Occupied	0		-	0		-
CRE Non Owner Occupied	0		-	0		-
Agriculture Land	0		-	0		-
Other CRE	0		-	0		-
Commercial Working Capital or Other	1		120	1		120
Commercial Other	5		1,829	5		1,829
Home Equity and Improvement	0		-	1		22
Consumer Finance	0		-	0		-
Total	6	$	1,949	8	$	2,076

The TDRs that subsequently defaulted described above had no effect on the allowance for loan losses for the three and ~~six~~nine month periods ended ~~June~~September 30, 2015.

Three Months Ended June 30, 2014
($ In Thousands) Six Months Ended June 30, 2014
($ In Thousands)
Troubled Debt Restructurings
That Subsequently Defaulted Number of Loans Recorded
Investment (as of
period end) Number of
Loans Recorded
Investment (as of
period end)

Residential Owner Occupied 1 $ 67 1 $ 67
Residential Non Owner Occupied 1 183 1 183
CRE Owner Occupied 4 153 4 153
CRE Non Owner Occupied 0 - 0 -
Agriculture Land 0 - 0 -
Other CRE 0 - 0 -
Commercial working capital or other 3 387 3 387
Home Equity / Improvement 0 - 0 -
Consumer Finance 0 - 0 -
Total 8 $ 790 9 $ 790

	Three Months Ended September 30, 2014 ($ In Thousands)			Nine Months Ended September 30, 2014 ($ In Thousands)
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans	Recorded Investment (as of period end)		Number of Loans	Recorded Investment (as of period end)

Residential Owner Occupied	1	$	80	1	$	80
Residential Non Owner Occupied	0		0	1		182
CRE Owner Occupied	4		146	4		146
CRE Non Owner Occupied	0		-	0		-
Agriculture Land	0		-	0		-
Other CRE	0		-	0		-
Commercial working capital or other	4		1,269	4		1,269
Home Equity / Improvement	0		-	0		-
Consumer Finance	0		-	0		-
Total	9	$	1,495	10	$	1,677

The TDRs that subsequently defaulted described above decreased the allowance for loan losses by ~~$2,000~~$15,000 for the three and ~~six~~nine month ~~period~~periods ended ~~June~~September 30, 2014.

The terms of certain other loans were modified during the period ending ~~June~~September 30, 2015 that did not meet the definition of a TDR. The modification of these loans involved a modification of the terms of a loan to borrowers who were not experiencing financial difficulties. A total of ~~115~~59 loans were modified under this definition during the three month period ended ~~June~~September 30, 2015 and a total of ~~153~~212 loans were modified under this definition during the ~~six~~nine month period ended ~~June~~September 30, 2015.

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

Credit Quality Indicators

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

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

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of ~~June~~September 30, 2015, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (In Thousands):

Class	Pass		Special Mention		Substandard		Doubtful		Not Graded		Total		Pass		Special Mention		Substandard		Doubtful		Not Graded		Total

1-4 Family Owner Occupied	$	5,153	$	155	$	2,262	$	-	$	135,130	$	142,700	$	5,516	$	150	$	1,970	$	-	$	132,820	$	140,456
1-4 Family Non Owner Occupied		51,673		2,071		4,229		-		4,748		62,721		54,283		2,088		4,394		-		4,527		65,292

Total 1-4 Family Real Estate		56,826		2,226		6,491		-		139,878		205,421		59,799		2,238		6,364		-		137,347		205,748

Multi-Family Residential Real Estate		158,945		214		2,653		-		886		162,698		159,206		208		3,798		-		118		163,330

CRE Owner Occupied		287,339		22,652		6,826		-		930		317,747		299,619		20,719		6,489		-		819		327,646
CRE Non Owner Occupied		254,929		6,053		4,061		-		52		265,095		284,404		2,900		4,371		-		17		291,692
Agriculture Land		95,480		2,215		1,019		-		-		98,714		92,750		993		2,557		-		-		96,300
Other CRE		39,321		62		3,277		-		522		43,182		41,836		779		2,686		-		498		45,799

Total Commercial Real Estate		677,069		30,982		15,183		-		1,504		724,738		718,609		25,391		16,103		-		1,334		761,437

Construction		77,346		347		-		-		12,933		90,626		60,624		-		-		-		14,053		74,677

Commercial Working Capital		148,750		3,662		1,187		-		-		153,599		149,408		3,350		817		-		-		153,575
Commercial Other		240,718		3,905		4,290		-		-		248,913		243,224		3,680		3,605		-		-		250,509

Total Commercial		389,468		7,567		5,477		-		-		402,512		392,632		7,030		4,422		-		-		404,084

Home Equity and Home Improvement		-		-		560		-		109,608		110,168		-		-		559		-		113,717		114,276
Consumer Finance		-		-		7		-		14,890		14,897		-		-		8		-		15,752		15,760

Total Loans	$	1,359,654	$	41,336	$	30,371	$	-	$	279,699	$	1,711,060	$	1,390,870	$	34,867	$	31,254	$	-	$	282,321	$	1,739,312

As of December 31, 2014, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (In Thousands):

Class	Pass		Special Mention		Substandard		Doubtful		Not Graded		Total

1-4 Family Owner Occupied	$	4,230	$	131	$	3,048	$	365	$	135,306	$	143,080
1-4 Family Non Owner Occupied		51,327		2,404		4,872		7		5,174		63,784

Total 1-4 Family Real Estate		55,557		2,535		7,920		372		140,480		206,864

Multi-Family Residential Real Estate		152,290		220		3,236		-		914		156,660

CRE Owner Occupied		273,406		18,448		9,953		-		1,175		302,982
CRE Non Owner Occupied		224,073		7,898		13,186		-		27		245,184
Agriculture Land		90,875		1,849		819		-		-		93,543
Other CRE		40,147		63		3,466		-		572		44,248

Total Commercial Real Estate		628,501		28,258		27,424		-		1,774		685,957

Construction		62,355		-		150		-		11,217		73,722

Commercial Working Capital		128,229		6,287		1,444		-		-		135,960
Commercial Other		253,576		6,504		4,991		-		-		265,071

Total Commercial		381,805		12,791		6,435		-		-		401,031

Home Equity and Home Improvement		-		-		1,647		106		110,529		112,282
Consumer Finance		-		-		125		-		15,326		15,451

Total Loans	$	1,280,508	$	43,804	$	46,937	$	478	$	280,240	$	1,651,967

Foreclosure Proceedings

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled ~~$367,000~~$140,000 as of ~~June~~September 30, 2015.

Mortgage Banking

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

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014			2015			2014			2015			2014
	(In Thousands)						(In Thousands)						(In Thousands)
Gain from sale of mortgage loans	$	1,246		$	986		$	2,531		$	1,628		$	1,197		$	973		$	3,728		$	2,601
Mortgage loans servicing revenue (expense):
Mortgage loans servicing revenue		852			878			1,727			1,782			866			870			2,593			2,652
Amortization of mortgage servicing rights		(446	)		(368	)		(857	)		(660	)		(407	)		(366	)		(1,264	)		(1,026	)
Mortgage servicing rights valuation adjustments		141			44			167			37			24			68			191			105
		547			554			1,037			1,159			483			572			1,520			1,731

Net revenue from sale and servicing of mortgage loans	$	1,793		$	1,540		$	3,568		$	2,787		$	1,680		$	1,545		$	5,248		$	4,332

The unpaid principal balance of residential mortgage loans serviced for third parties was ~~$1.34~~$1.35 billion at ~~June~~September 30, 2015 and ~~$1.35 billion at~~ December 31, 2014.

Activity for capitalized mortgage servicing rights and the related valuation allowance follows for the three and ~~six~~nine months ended ~~June~~September 30, 2015 and 2014:

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014			2015			2014			2015			2014
	(In Thousands)						(In Thousands)						(In Thousands)
Mortgage servicing assets:
Balance at beginning of period	$	9,832		$	10,048		$	9,923		$	10,133		$	9,872		$	9,993		$	9,923		$	10,133
Loans sold, servicing retained		486			313			806			520			449			348			1,255			868
Amortization		(446	)		(368	)		(857	)		(660	)		(407	)		(366	)		(1,264	)		(1,026	)
Carrying value before valuation allowance at end of period		9,872			9,993			9,872			9,993			9,914			9,975			9,914			9,975

Valuation allowance:
Balance at beginning of period		(885	)		(1,034	)		(911	)		(1,027	)		(744	)		(990	)		(911	)		(1,027	)
Impairment recovery (charges)		141			44			167			37			24			68			191			105
Balance at end of period		(744	)		(990	)		(744	)		(990	)		(720	)		(922	)		(720	)		(922	)
Net carrying value of MSRs at end of period	$	9,128		$	9,003		$	9,128		$	9,003		$	9,194		$	9,053		$	9,194		$	9,053
Fair value of MSRs at end of period	$	9,574		$	9,584		$	9,574		$	9,584		$	9,629		$	9,933		$	9,629		$	9,933

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

The Company established an accrual for secondary market buy-back losses that resulted in a reversal of ~~$72,000~~$84,000 for the first ~~six~~nine months of 2015 mainly due to no actual losses being recorded in 2015. In the first ~~six~~nine months of 2014, the Company accrued ~~$184,000~~$276,000 which was ~~mostly~~partially offset by reversing $67,000 of accrued expenses related to the Freddie Mac post-foreclosure review that began in the third quarter of 2013 and was reversed in 2014 with no losses resulting.

10.

Deposits

A summary of deposit balances is as follows (in thousands):

	June 30, 2015		December 31, 2014		September 30, 2015		December 31, 2014
	(In Thousands)				(In Thousands)
Non-interest-bearing checking accounts	$	378,970	$	379,552	$	392,103	$	379,552
Interest-bearing checking and money market accounts		722,813		727,729		745,233		727,729
Savings deposits		218,055		203,673		216,613		203,673
Retail certificates of deposit less than $250,000		419,990		422,907		414,366		422,907
Retail certificates of deposit greater than $250,000		23,562		26,952		24,738		26,952
	$	1,763,390	$	1,760,813	$	1,793,053	$	1,760,813

11.

Borrowings

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

	June 30, 2015		December 31, 2014		September 30, 2015		December 31, 2014
	(In Thousands)				(In Thousands)
FHLB Advances:
Single maturity fixed rate advances	$	27,000	$	-	$	27,000	$	-
Putable advances		5,000		12,000		5,000		12,000
Amortizable mortgage advances		9,050		9,544		8,801		9,544
Total	$	41,050	$	21,544	$	40,801	$	21,544

Junior subordinated debentures owed to unconsolidated subsidiary trusts	$	36,083	$	36,083	$	36,083	$	36,083

The putable advance can be put back to the Company at the option of the FHLB on a quarterly basis. A $5.0 million putable advance with a weighted average rate of 2.35% was not yet callable by the FHLB at ~~June~~September 30, 2015. The call date for this advance is ~~September~~December 14, 2015 and the maturity date is March 12, 2018. Putable advances are callable at the option of the FHLB on a quarterly basis.

In March 2007, the Company sponsored an affiliated trust, First Defiance Statutory Trust II (Trust Affiliate II) that issued $15 million of Guaranteed Capital Trust Securities (Trust Preferred Securities). In connection with this transaction, the Company issued $15.5 million of Junior Subordinated Deferrable Interest Debentures (Subordinated Debentures) to Trust Affiliate II. The Company formed Trust Affiliate II for the purpose of issuing Trust Preferred Securities to third-party investors and investing the proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The Subordinated Debentures held by Trust Affiliate II are the sole assets of that trust. The Company is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability.Distributions on the Trust Preferred Securities issued by Trust Affiliate II are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 1.5%. The Coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate II was ~~1.78%~~1.83% as of ~~June~~September 30, 2015 and 1.74% as of December 31, 2014.

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

The Company also sponsored an affiliated trust, First Defiance Statutory Trust I (Trust Affiliate I), that issued $20 million of Trust Preferred Securities in 2005. In connection with this transaction, the Company issued $20.6 million of Subordinated Debentures to Trust Affiliate I. Trust Affiliate I was formed for the purpose of issuing Trust Preferred Securities to third-party investors and investing the proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The Junior Debentures held by Trust Affiliate I are the sole assets of the trust. The Company is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability.Distributions on the Trust Preferred Securities issued by Trust Affiliate I are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 1.38%. The Coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate I was ~~1.66%~~1.71% and 1.62% on ~~June~~September 30, 2015 and December 31, 2014 respectively.

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

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

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

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

The remaining contractual maturity of the securities sold under agreements to repurchase in the consolidated balance sheets as of ~~June~~September 30, 2015 and December 31, 2014 is presented in the following tables.

	Overnight and Continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total		Overnight and Continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total
At June 30, 2015			(In Thousands)
At September 30, 2015													(In Thousands)
Repurchase agreements:
Mortgage-backed securities – residential	$	17,023	$	-	$	-	$	-	$	17,023	$	19,618	$	-	$	-	$	-	$	19,618
Collateralized mortgage obligations		37,214		-		-		-		37,214		34,220		-		-		-		34,220
Total borrowings	$	54,237	$	-	$	-	$	-	$	54,237	$	53,838	$	-	$	-	$	-	$	53,838
Gross amount of recognized liabilities for repurchase agreements									$	54,237									$	53,838

	Overnight and Continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total		Overnight and Continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total
At December 31, 2014			(In Thousands)										(In Thousands)
Repurchase agreements:
Mortgage-backed securities – residential	$	16,570	$	-	$	-	$	-	$	16,570	$	16,570	$	-	$	-	$	-	$	16,570
Collateralized mortgage obligations		38,189		-		-		-		38,189		38,189		-		-		-		38,189
Total borrowings	$	54,759	$	-	$	-	$	-	$	54,759	$	54,759	$	-	$	-	$	-	$	54,759
Gross amount of recognized liabilities for repurchase agreements									$	54,759									$	54,759

~~12. Commitments, Guarantees and Contingent Liabilities~~

12.

Commitments, Guarantees and Contingent Liabilities

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

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

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

June 30, 2015 December 31, 2014
Fixed Rate Variable Rate Fixed Rate Variable Rate
Commitments to make loans $ 43,201 $ 99,351 $ 37,546 $ 69,232
Unused lines of credit 17,148 295,745 20,385 307,449
Standby letters of credit - 17,809 - 17,886
Total $ 60,349 $ 412,905 $ 57,931 $ 394,567

	September 30, 2015				December 31, 2014
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	40,383	$	82,986	$	37,546	$	69,232
Unused lines of credit		22,767		299,208		20,385		307,449
Standby letters of credit		-		19,799		-		17,886
Total	$	63,150	$	401,993	$	57,931	$	394,567

Commitments to make loans are generally made for periods of 60 days or less. In addition to the above commitments, First Defiance had commitments to sell ~~$25.2~~$24.1 million and $11.6 million of loans to Freddie Mac, Fannie Mae, Federal Home Loan Bank of Cincinnati or BB&T Mortgage at ~~June~~September 30, 2015 and December 31, 2014, respectively.

~~13. Income Taxes~~

13.

Income Taxes

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax in the state of Indiana. The Company is no longer subject to examination by taxing authorities for years before 2010. The Company currently operates primarily in the states of Ohio and Michigan, which tax financial institutions based on their equity rather than their income.

~~14. Derivative Financial Instruments~~

14.

Derivative Financial Instruments

Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. It is the Company’s practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. These mortgage banking derivatives are not designated in hedge relationships. First Federal had approximately ~~$17.3~~$17.9 million and $7.4 million of interest rate lock commitments at ~~June~~September 30, 2015 and December 31, 2014, respectively. There were ~~$25.2~~$24.1 million and $11.6 million of forward commitments for the future delivery of residential mortgage loans at ~~June~~September 30, 2015 and December 31, 2014, respectively.

The fair value of these mortgage banking derivatives are reflected by a derivative asset. The table below provides data about the carrying values of these derivative instruments:

June 30, 2015

December 31, 2014

Assets

(Liabilities)

Assets

(Liabilities)

September30, 2015

December 31, 2014

Derivative

Assets

(Liabilities)

Assets

(Liabilities)

Carrying

Net Carrying

Carrying

Net Carrying

Derivative

Value

Carrying

Net Carrying

Carrying

Net Carrying

(In Thousands)

Value

(In Thousands)

Derivatives not designated as hedging instruments

Mortgage Banking Derivatives

732

351

327

Mortgage Banking

Derivatives

738

(100

)

638

351

(24

)

327

The table below provides data about the amount of gains and losses recognized in income on derivative instruments not designated as hedging instruments:

	Three Months Ended June 30,					Six Months Ended June 30,				Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014		2015		2014		2015			2014			2015		2014
	(In Thousands)					(In Thousands)				(In Thousands)
Derivatives not designated as hedging instruments

Mortgage Banking Derivatives – Gain (Loss)	$	(33	)	$	128	$	405	$	178	$	(94	)	$	(27	)	$	311	$	151

The above amounts are included in mortgage banking income with gain on sale of mortgage loans.

Note 15 - Other Comprehensive Income (Loss)

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

	Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount			Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount
	(In Thousands)									(In Thousands)
Three months ended June 30, 2015:
Three months ended September 30, 2015:
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period	$	(3,839	)	$	(1,344	)	$	(2,495	)
Change in net unrealized gain (loss) during the period										$	2,024		$	709		$	1,315
Reclassification adjustment for net gains included in net income											-			-			-
Total other comprehensive Income (loss)										$	2,024		$	709		$	1,315

Nine months ended September 30, 2015:
Securities available for sale and transferred securities:
Change in net unrealized gain (loss) during the period										$	(313	)	$	(108	)	$	(205	)
Reclassification adjustment for net gains included in net income		-			-			-			-			-			-
Total other comprehensive loss	$	(3,839	)	$	(1,344	)	$	(2,495	)	$	(313	)	$	(108	)	$	(205	)

Six months ended June 30, 2015:
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period	$	(2,337	)	$	(817	)	$	(1,520	)
Reclassification adjustment for net gains included in net income		-			-			-
Total other comprehensive loss	$	(2,337	)	$	(817	)	$	(1,520	)

	Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount			Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount
Three months ended June 30, 2014:
Three months ended September 30, 2014:
Securities available for sale and transferred securities:
Change in net unrealized gain (loss) during the period	$	2,743		$	936		$	1,807		$	707		$	225		$	482
Reclassification adjustment for net gains included in net income		(471	)		(141	)		(330	)		(460	)		(138	)		(322	)
Total other comprehensive loss	$	2,272		$	795		$	1,477
Total other comprehensive income (loss)										$	247		$	87		$	160

	Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount			Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount
Six months ended June 30, 2014:
Nine months ended September 30, 2014:
Securities available for sale and transferred securities:
Change in net unrealized gain (loss) during the period	$	4,465		$	1,538		$	2,927		$	5,172		$	1,764		$	3,408
Reclassification adjustment for net gains included in net income		(471	)		(141	)		(330	)		(931	)		(279	)		(652	)
Total other comprehensive loss	$	3,994		$	1,397		$	2,597
Total other comprehensive Income (loss)										$	4,241		$	1,485		$	2,756

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

							Accumulated									Accumulated
	Securities			Post-			Other			Securities			Post-			Other
	Available			retirement			Comprehensive			Available			retirement			Comprehensive
	For Sale			Benefit			Income			For Sale			Benefit			Income
	(In Thousands)									(In Thousands)
Balance January 1, 2015	$	4,697		$	(583	)	$	4,114		$	4,697		$	(583	)	$	4,114
Other comprehensive income before reclassifications		(1,520	)		-			(1,520	)
Other comprehensive income (loss) before reclassifications											(205	)		-			(205	)
Amounts reclassified from accumulated other comprehensive income		-			-			-			-			-			-

Net other comprehensive income during period		(1,520	)		-			(1,520	)		(205	)		-			(205	)

Balance June 30, 2015	$	3,177		$	(583	)	$	2,594
Balance September 30, 2015										$	4,492		$	(583	)	$	3,909


Balance January 1, 2014	$	906		$	(361	)	$	545		$	906		$	(361	)	$	545
Other comprehensive income before reclassifications		2,927			-			2,927
Other comprehensive income (loss) before reclassifications											3,408			-			3,408
Amounts reclassified from accumulated other comprehensive income		(330	)		-			(330	)		(652	)		-			(652	)

Net other comprehensive income during period		2,597			-			2,597			2,756			-			2,756

Balance June 30, 2014	$	3,503		$	(361	)	$	3,142
Balance September 30, 2014										$	3,662		$	(361	)	$	3,301

Note 16 – Affordable Housing Projects Tax Credit Partnership

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

The Company is a limited partner in each LIHTC Partnership. A separate unrelated third party is the general partner. Each limited partnership is managed by the general partner, who exercises full control over the affairs of the limited partnership. The general partner has all the rights, powers and authority granted or permitted to be granted to a general partner of a limited partnership. Duties entrusted to the general partner of each limited partnership include, but are not limited to: investment in operating companies, company expenditures, investment of excess funds, borrowing funds, employment of agents, disposition of fund property, prepayment and refinancing of liabilities, votes and consents, contract authority, disbursement of funds, accounting methods, tax elections, bank accounts, insurance, litigation, cash reserve, and use of working capital reserve funds. Except for limited rights granted to consent to certain transactions, the limited partner(s) may not participate in the operation, management, or control of the limited partnership’s business, transact any business in the limited partnership’s name or have any power to sign documents for or otherwise bind the limited partnership. In addition, the general partner may only be removed by the limited partner(s) in the event the general partner fails to comply with the terms of the agreement or is negligent in performing its duties.

The general partner of each limited partnership has both the power to direct the activities which most significantly affect the performance of each partnership and the obligation to absorb losses or the right to receive benefits that could be significant to the entities. Therefore, the Company has determined that it is not the primary beneficiary of any LIHTC partnership. In January of 2014, the FASB issued ASU 2014-01“Accounting for Investments in Qualified Affordable Housing Projects.” The pronouncement permitted reporting entities to make an accounting policy election to account for these investments using the proportional amortization method if certain conditions exist. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received, and will recognize the net investment performance in the income statement as a component of income tax expense (benefit). The Company elected to early adopt ASU 2014-01 in January 2014. All of the Company’s investments are accounted for under the proportional amortization method, as there were no investments held prior to January of 2014. As of ~~June~~September 30, 2015 and December 31, 2014 the Company had ~~$4.5~~$4.4 million and $4.6 million in qualified investments recorded in other assets and ~~$2.9~~$2.6 million and $3.0 million in unfunded commitments recorded in other liabilities, respectively.

Unfunded Commitments

As of ~~June~~September 30, 2015, the expected payments for unfunded affordable housing commitments were as follows:

(dollars in thousands)	Amount		Amount
2015	$	1,333	$	997
2016		612		612
2017		160		160
2018		414		414
2019		93		93
Thereafter		312		312
Total Unfunded Commitments	$	2,924	$	2,588

The following table presents tax credits and other tax benefits recognized and amortization expense related to affordable housing for the three and ~~six~~nine months ended ~~June~~September 30, 2015 and 2014.

Three Months Ended June 30,
(dollars in thousands) 2015 2014
Proportional Amortization Method
Tax credits and other tax benefits recognized $ 118 $ 332
Amortization expense in federal income taxes 89 44

Six Months Ended June 30,
(dollars in thousands) 2015 2014
Proportional Amortization Method
Tax credits and other tax benefits recognized $ 236 $ 332
Amortization expense in federal income taxes 179 44

	Three Months Ended September 30,
(dollars in thousands)	2015		2014
Proportional Amortization Method
Tax credits and other tax benefits recognized	$	118	$	65
Amortization expense in federal income taxes		89		48

	Nine Months Ended September 30,
(dollars in thousands)	2015		2014
Proportional Amortization Method
Tax credits and other tax benefits recognized	$	354	$	397
Amortization expense in federal income taxes		268		296

There were no impairment losses of LIHTC investments for the three and ~~six~~nine months ended ~~June~~September 30, 2015 and 2014.

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

Forward-Looking Information

Certain statements contained in this quarterly report are not historical facts, including but not limited to statements that can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “anticipate”, or “continue” or the negative thereof or other variations thereon or comparable terminology are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21B of the Securities Exchange Act of 1934, as amended. Actual results could differ materially from those indicated in such statements due to risks, uncertainties and changes with respect to a variety of market and other factors. The Company assumes no obligation to update any forward-looking statements.

General

First Defiance is a unitary thrift holding company that conducts business through its wholly owned subsidiaries, First Federal, First Insurance and First Defiance Risk Management. First Federal is a federally chartered stock savings bank that provides financial services to communities through 33 full service banking centers in communities based in northwest Ohio, northeast Indiana, and southeastern Michigan. First Federal operates one loan production office in central Ohio. 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 and wealth management services through its extensive branch network.

First Insurance sells a variety of property and casualty, group health and life, and individual health and life insurance products. Insurance products are sold through First Insurance’s offices in Defiance, Bryan, Bowling Green, Maumee, Oregon and ~~Oregon,~~Lima, Ohio areas.On September 1, 2015, First Insurance acquired a group medical benefits business from Buckeye Insurance Consultants, Inc. located in Lima, Ohio for a cash purchase price of $495,000 of which $198,000 is set aside for contingent payments to be paid in cash in 2016, 2017 and 2018 if certain conditions regarding future revenue are met. As of September 30, 2015, management had determined there was goodwill of $273,000 and identifiable intangible assets of $175,000 consisting of a customer relationship intangible of $64,000 and a non-compete intangible of $111,000 related to the acquisition.

First Defiance Risk Management is a wholly-owned insurance company subsidiary of the Company that insures the Company and its subsidiaries against certain risks unique to the operations of the Company and for which insurance may not be currently available or economically feasible in today’s insurance marketplace. First Defiance Risk Management pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves.

Impact of Legislation -Over the last several years, Congress and the U.S. Department of the Treasury have enacted legislation and taken actions to address the disruptions in the financial system, declines in the housing market, and the overall regulation of financial institutions and the financial system. In this regard, the 2010 Dodd-Frank Act, includes provisions affecting large and small financial institutions alike, including several provisions that profoundly affect the regulation of community banks, thrifts, and bank and thrift holding companies, such as First Defiance. The Dodd-Frank Act relaxed rules regarding interstate branching, allows financial institutions to pay interest on business checking accounts, changed the scope of federal deposit insurance coverage, imposed new capital requirements on bank and thrift holding companies, and imposed limits on debit card interchange fees charged by issuer banks (commonly known as the Durbin Amendment).

The Dodd-Frank Act also established the CFPB as an independent bureau within the Federal Reserve, which has broad authority to regulate consumer financial products and services and entities offering such products and services, including banks.

The CFPB has indicated that mortgage lending is an area of supervisory focus and that it will concentrate its examination and rulemaking efforts on the variety of mortgage-related topics required under the Dodd-Frank Act, including steering consumers to less-favorable products, discrimination, abusive or unfair lending practices, predatory lending, origination disclosures, minimum mortgage underwriting standards, mortgage loan originator compensation, and servicing practices. The CFPB recently published numerous final regulations impacting the mortgage industry, including rules related to ability-to-pay, mortgage servicing, and mortgage loan originator compensation and more regulations are anticipated. First Defiance cannot predict the content of the final CFPB and other federal agency regulations or the impact they might have on First Defiance’s financial results. The CFPB’s authority over mortgage lending, and its authority to change regulations adopted in the past by other regulators, or to rescind or ignore past regulatory guidance, could increase First Defiance’s compliance costs and litigation exposure.

Volcker Rules -On December 10, 2013, the Board of Governors of the Federal Reserve System, the OCC, the FDIC, the Securities and Exchange Commission, and the Commodity Futures Trading Commission ~~(“Regulators”~~(collectively, “Regulators”) adopted the final version of the Volcker Rule (“Final Volcker Rule”). The Final Volcker Rule restricts United States banks from making certain kinds of speculative investments that do not benefit their customers. The Final Volcker Rule’s purpose is to put in place, as mandated under Section 619 of the Dodd-Frank Act, regulations to help avoid the financial crisis that occurred during the recent past. The Final Volcker Rule is intended to effectively reduce risks posed to banking entities by proprietary trading activities and investments in or relationships with covered funds while permitting banking entities to continue to provide client-oriented financial services that are critical to capital generation and liquid markets.

On January 14, 2014, the Regulators issued an interim final rule (“Interim Final Volcker Rule”) regarding the treatment of certain collateralized debt obligations backed by trust preferred securities (“TruPS-backed CDOs”) under the Final Volcker Rule implementing Section 619 of the Dodd-Frank Act. The Interim Final Volcker Rule, which does not technically amend the Final Volcker Rule but will operate as a “companion rule” to the Final Volcker Rule, specifies that the Final Volcker Rule’s covered fund restrictions do not apply to the ownership by a banking entity of an interest in, or sponsorship of, any issuer of TruPS-backed CDOs if certain conditions are met. Contemporaneously with the Regulators release of the Interim Final Volcker Rule, the Regulators issued a non-exclusive list of issuers of TruPS-backed CDOs that meet the requirements of the Interim Final Volcker Rule. The Interim Final Volcker Rule provides that a banking entity “may rely” on this list.

First Defiance’s management team continues to actively monitor the implementation of the Dodd-Frank Act and the regulations promulgated thereunder and assess its probable impact on the business, financial condition, and results of operations of First Defiance. However, the ultimate effect of the Dodd-Frank Act on the financial services industry in general, and First Defiance in particular, continues to be uncertain.

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

Prior to January 1, 2015, the guidelines applicable to First Defiance and First Federal included a minimum for the ratio of total capital to risk-weighted assets of 8%, with at least half of the ratio composed of common shareholders’ equity, minority interests in certain equity accounts of consolidated subsidiaries and a limited amount of qualifying preferred stock and qualified trust preferred securities, less goodwill and certain other intangible assets (known as “Tier 1” risk-based capital). The guidelines also provided for a minimum ratio of Tier 1 capital to average assets, or “leverage ratio,” of 3% for savings and loan holding companies that meet certain criteria, including having the highest regulatory rating, and 4% for all other savings and loan holding companies.

The risk-based capital guidelines adopted by the federal banking agencies are based on the “International Convergence of Capital Measurement and Capital Standard” (Basel I), published by the Basel Committee on Banking Supervision (the “Basel Committee”) in 1988. In 2004, the Basel Committee published a new capital adequacy framework (Basel II) for large, internationally active banking organizations and in December 2010 and January 2011, the Basel Committee issued an update to Basel II (“Basel III”). The Basel Committee frameworks did not become applicable to financial institutions supervised in the United States until adopted into United States law or regulations. Although the United States banking regulators imposed some of the Basel II and Basel III rules on financial institutions with $250 billion or more in assets or $10 billion of on-balance sheet foreign exposure, it was not until July 2013 that the United States banking regulators issued final (or, in the case of the FDIC, interim final) new capital rules applicable to smaller banking organizations which also implement certain of the provisions of the Dodd-Frank Act (the “Basel III Capital Rules”). The new minimum capital requirements became effective on January 1, 2015, whereas a new capital conservation buffer and deductions from common equity capital phase in from January 1, 2016, through January 1, 2019, and most deductions from common equity tier 1 capital will phase in from January 1, 2015, through January 1, 2019.

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

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

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

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

The deductions from common equity tier 1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments and investments in the capital of unconsolidated financial institutions (above certain levels). The deductions phase in from 2015 through 2019.

Under the guidelines, capital is compared to the relative risk related to the balance sheet. To derive the risk included in the balance sheet, one of several risk weights is applied to different balance sheet and off-balance sheet assets, primarily based on the relative credit risk of the counterparty. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Some of the risk weightings have been changed effective January 1, 2015.

The new rules also place restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive officers if the company does not hold a capital conservation buffer of greater than ~~2.5 percent~~2.5% composed of common equity tier 1 capital above its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than ~~2.5 percent~~2.5% at the beginning of the quarter. The capital conservation buffer phases in starting on January 1, 2016, at ~~.625 percent.~~.625%. The implementation of Basel III did not have a material impact on First Defiance’s or First Federal’s capital ratios.

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

Commercial and Commercial Real Estate Lending -Commercial and commercial real estate lending have been an ongoing focus and a major component of First Federal’s success. First Federal provides primarily commercial real estate and commercial business loans with an emphasis on owner occupied commercial real estate and commercial business lending with a focus on the deposit balances that accompany these relationships. First Federal’s client base tends to be small to middle market customers with annual gross revenues generally between $1 million and $50 million. First Federal’s focus is also on securing multiple guarantors in addition to collateral where possible. These customers require First Federal to have a high degree of knowledge and understanding of their business in order to provide them with solutions to their financial needs. First Federal’s Customer First philosophy and culture complements this need of its clients. First Federal believes this personal service model differentiates First Federal from its competitors, particularly the larger regional institutions. First Federal offers a wide variety of products to support commercial clients including remote deposit capture and other cash management services. First Federal also believes that the small business customer is a strong market for First Federal. First Federal participates in many of the Small Business Administration lending programs and implemented a new program in 2014 targeting the small business customer. Maintaining a diversified portfolio with an emphasis on monitoring industry concentrations and reacting to changes in the credit characteristics of industries is an ongoing focus.

Consumer Banking -First Federal offers customers a full range of deposit and investment products including demand, checking, money market, certificates of deposits, Certificate of Deposit Account Registry Service (“CDARS”) and savings accounts. First Federal offers a full range of investment products through the wealth management department and a wide variety of consumer loan products, including residential mortgage loans, home equity loans, and installment loans. First Federal also offers online banking services, which include mobile banking, online bill pay along with debit cards.

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

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

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

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

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

Securities are classified as held-to-maturity when First Defiance has the positive intent and ability to hold the security to maturity. Held-to-maturity securities are stated at amortized cost and had a recorded value of ~~$257,000~~$251,000 at ~~June~~September 30, 2015. Securities not classified as held-to-maturity are classified as available-for-sale, which are stated at fair value and had a recorded value of ~~$237.0~~$236.9 million at ~~June~~September 30, 2015. The available-for-sale portfolio consists of obligations of U.S. Government corporations and agencies ($3.0 million), certain municipal obligations ($~~89.3~~90.4 million), CMOs/REMICs ($~~79.0~~75.4 million), corporate bonds ($6.0 million), and mortgage backed securities ($~~59.7~~62.1 million).

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

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

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

First Federal ~~Bank~~ has a qualified individual in the Credit Department perform a review of all commercial appraisals or evaluations received. If an appraisal or evaluation is not reviewed by credit department personnel, it will be reviewed by a qualified person independent of the transaction. During the review the individual shall review the appraisal for accuracy, reasonableness of assumptions used, appropriateness of comparables used, and the reasonableness of the opinion of value. For appraisals ordered to determine or update collateral values for criticized loans, a qualified individual in the Credit Department will perform a comprehensive review on the appraisal for loan exposure of $250,000 or more. For loans less than $250,000, the workout officer will perform an administrative review.

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

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

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

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

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

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

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

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

Changes in Financial Condition

At ~~June~~September 30, 2015, First Defiance's total assets, deposits and stockholders' equity amounted to ~~$2.20~~$2.23 billion, ~~$1.76~~$1.79 billion and ~~$276.0~~$278.6 million, respectively, compared to $2.18 billion, $1.76 billion and $279.5 million, respectively, at December 31, 2014.

Net loans receivable (excluding loans held for sale) increased ~~$58.3~~$86.3 million to ~~$1.68~~$1.71 billion. The variance in loans receivable between ~~June~~September 30, 2015 and December 31, 2014 include increases in commercial real estate loans (up ~~$44.6~~$81.7 million), commercial loans (up $2.9 million), home equity and improvement loans (up $2.0 million), and construction loans (up ~~$27.7 million) and commercial loans (up $1.5~~$1.0 million). These increases were ~~partially~~just slightly offset by ~~decreases~~a decrease in residential real estate loans (down ~~$1.4~~$1.1 million)~~, home equity loans (down $2.1 million) and consumer loans (down $555,000)~~.

The investment securities portfolio decreased ~~$2.4~~$2.5 million to ~~$237.3~~$237.2 million at ~~June~~September 30, 2015 from $239.6 million at December 31, 2014. The decrease is the result of ~~$15.6~~$22.2 million of securities maturing or being called during the first ~~six~~nine months of ~~2015 as well as a decrease in the unrealized gains of $2.3 million.~~2015. This was partially offset by purchases of ~~$16.1~~$20.7 million of securities. There was an unrealized gain in the investment portfolio of ~~$4.9~~$6.9 million at ~~June~~September 30, 2015 compared to an unrealized gain of $7.2 million at December 31, 2014.

Deposits ~~remained flat~~increased $32.2 million to $1.79 billion at September 30, 2015 from $1.76 billion at ~~June 30, 2015 and~~ December 31, 2014. Non-interest bearing demand deposits ~~decreased $582,000~~increased $12.6 million to ~~$379.0~~$392.1 million, interest-bearing demand deposits and money market accounts ~~decreased $4.9~~increased $17.5 million to ~~$722.8~~$745.2 million and savings deposits increased $12.9 million to $216.6 million. These increases were partially offset by a decrease in retail time deposits ~~decreased $6.3~~of $10.8 million to ~~$443.6 million. These decreases were mostly offset by an increase in savings accounts of $14.4 million to $218.1~~$439.1 million.

Stockholders’ equity decreased slightly from $279.5 million at December 31, 2014 to ~~$276.0~~$278.6 million at ~~June~~September 30, 2015. The decrease in stockholders’ equity was the result of the $12.0 million cost of repurchasing the warrant issued to the ~~U.S~~U.S. Treasury under the TARP Capital Purchase Program, ~~$3.5~~$5.3 million of common stock dividends being paid in the first ~~six~~nine months of 2015, ~~$1.3~~and $5.3 million in repurchased common stock in the first ~~six~~nine months of ~~2015 and a decrease in other comprehensive income of $1.5 million.~~2015. These were ~~partially~~mostly offset by recording net income of ~~$13.2~~$19.9 million and a ~~$1.3~~$1.6 million increase due to stock option exercises.

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

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

	Three Months Ended June 30,														Three Months Ended September 30,
	2015							2014							2015							2014
	Average				Yield/			Average				Yield/			Average				Yield/			Average				Yield/
	Balance		Interest(1)		Rate(2)			Balance		Interest(1)		Rate(2)			Balance		Interest(1)		Rate(2)			Balance		Interest(1)		Rate(2)
Interest-earning assets:
Loans receivable	$	1,673,750	$	18,186		4.36	%	$	1,551,799	$	16,918		4.37	%	$	1,696,370	$	18,472		4.32	%	$	1,586,652	$	17,406		4.35	%
Securities		245,539		2,153		3.63			217,848		2,015		3.79			236,485		2,105		3.63			235,459		2,144		3.70
Interest bearing deposits		58,739		41		0.28			168,991		118		0.28			53,627		33		0.24			98,738		64		0.26
FHLB stock		13,802		136		3.95			13,802		170		4.94			13,802		138		3.97			13,802		137		3.94
Total interest-earning assets		1,991,830		20,516		4.15			1,952,440		19,221		3.96			2,000,284		20,748		4.13			1,934,651		19,751		4.06
Non-interest-earning assets		220,773							213,046							222,559							218,575
Total assets	$	2,212,603						$	2,165,486						$	2,222,843						$	2,153,226

Interest-bearing liabilities:
Deposits	$	1,397,966	$	1,312		0.38	%	$	1,407,795	$	1,327		0.38	%	$	1,397,965	$	1,363		0.39	%	$	1,396,698	$	1,304		0.37	%
FHLB advances and other		39,578		173		1.75			22,116		133		2.41			41,047		178		1.72			21,872		131		2.38
Subordinated debentures		36,128		150		1.67			36,132		146		1.62			36,128		154		1.69			36,129		147		1.61
Securities sold under repurchase agreements		52,754		37		0.28			51,478		39		0.30			54,598		38		0.28			56,776		41		0.29
Total interest-bearing liabilities		1,526,426		1,672		0.44			1,517,521		1,645		0.43			1,529,738		1,733		0.45			1,511,475		1,623		0.43
Non-interest bearing deposits		382,946		-					348,303		-					388,849		-					341,796		-
Total including non-interest bearing demand deposits		1,909,372		1,672		0.35			1,865,824		1,645		0.35			1,918,587		1,733		0.36			1,853,271		1,623		0.35
Other non-interest-bearing liabilities		28,992							23,172							27,021							22,987
Total liabilities		1,938,364							1,888,996							1,945,608							1,876,258
Stockholders' equity		274,239							276,490							277,235							276,968
Total liabilities and stockholders' equity	$	2,212,603						$	2,165,486
Total liabilities and stock- holders' equity															$	2,222,843						$	2,153,226
Net interest income; interest rate spread			$	18,844		3.71	%			$	17,576		3.53	%			$	19,015		3.68	%			$	18,128		3.63	%
Net interest margin (3)						3.81	%						3.62	%						3.78	%						3.73	%
Average interest-earning assets to average interest-bearing liabilities						130	%						129	%						131	%						128	%

(1)

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

(2)

Annualized

(3)

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

Six Months Ended June 30,
2015 2014
Average Yield/ Average Yield/
Balance Interest (1) Rate (2) Balance Interest (1) Rate (2)
Interest-earning assets:
Loans receivable $ 1,660,404 $ 36,118 4.39 % $ 1,548,351 $ 33,590 4.37 %
Securities 243,281 4,264 3.65 210,061 3,947 3.88
Interest bearing deposits 57,659 80 0.28 170,829 219 0.26
FHLB stock 13,802 275 4.02 15,552 365 4.73
Total interest-earning assets 1,975,146 40,737 4.18 1,944,793 38,121 3.95
Non-interest-earning assets 221,135 211,134
Total assets $ 2,196,281 $ 2,155,927

Interest-bearing liabilities:
Deposits $ 1,396,114 $ 2,584 0.37 % $ 1,403,873 $ 2,685 0.39 %
FHLB advances 30,534 283 1.87 22,240 266 2.41
Subordinated debentures 36,129 297 1.66 36,133 292 1.63
Notes payable 53,312 75 0.28 52,033 80 0.31
Total interest-bearing liabilities 1,516,089 3,239 0.43 1,514,279 3,323 0.44
Non-interest bearing deposits 374,533 - 344,795 -
Total including non-interest bearing demand deposits 1,890,622 3,239 0.35 1,859,074 3,323 0.36
Other non-interest-bearing liabilities 28,581 21,735
Total liabilities 1,919,203 1,880,809
Stockholders' equity 277,078 275,118
Total liabilities and stockholders' equity $ 2,196,281 $ 2,155,927
Net interest income; interest rate spread $ 37,498 3.75 % $ 34,798 3.51 %
Net interest margin (3) 3.84 % 3.62 %
Average interest-earning assets to average interest-bearing liabilities 130 % 128 %

	NineMonths Ended September 30,
	2015							2014
	Average				Yield/			Average				Yield/
	Balance		Interest (1)		Rate (2)			Balance		Interest (1)		Rate (2)
Interest-earning assets:
Loans receivable	$	1,672,393	$	54,590		4.36	%	$	1,561,118	$	50,996		4.37	%
Securities		241,016		6,369		3.64			218,527		6,091		3.83
Interest bearing deposits		56,315		113		0.27			146,798		283		0.26
FHLB stock		13,802		413		4.00			14,969		502		4.48
Total interest-earning assets		1,983,526		61,485		4.16			1,941,412		57,872		3.99
Non-interest-earning assets		221,609							213,615
Total assets	$	2,205,135						$	2,155,027

Interest-bearing liabilities:
Deposits	$	1,396,731	$	3,947		0.38	%	$	1,401,481	$	3,989		0.38	%
FHLB advances		34,038		461		1.81			22,117		397		2.40
Subordinated debentures		36,129		451		1.67			36,132		439		1.62
Securities sold under repurchase agreements		53,740		113		0.28			53,614		121		0.30
Total interest-bearing liabilities		1,520,638		4,972		0.44			1,513,344		4,946		0.44
Non-interest bearing deposits		379,305		-					343,795		-
Total including non-interest bearing demand deposits		1,899,943		4,972		0.35			1,857,139		4,946		0.36
Other non-interest-bearing liabilities		28,062							22,154
Total liabilities		1,928,005							1,879,293
Stockholders' equity		277,130							275,734
Total liabilities and stock- holders' equity	$	2,205,135						$	2,155,027
Net interest income; interest rate spread			$	56,513		3.72	%			$	52,926		3.55	%
Net interest margin (3)						3.82	%						3.65	%
Average interest-earning assets to average interest-bearing liabilities						130	%						128	%

(1)

(2)

Annualized.

(3)

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

Results of Operations

Three Months Ended ~~June~~September 30, 2015 and 2014

On a consolidated basis, First Defiance’s net income for the quarter ended ~~June~~September 30, 2015 was ~~$6.6~~$6.7 million compared to net income of ~~$5.7~~$7.1 million for the comparable period in 2014. On a per share basis, basic and diluted earnings per common share for the quarter ended ~~June~~September 30, 2015 were ~~$0.71 and $0.70, respectively,~~both $0.72, compared to basic and diluted earnings per common share of ~~$0.59~~$0.75 and ~~$0.57,~~$0.71, respectively, for the same period in 2014. Earnings in the third quarter of 2014 were positively impacted by $299,000 of after tax gains on the sale of securities, a $903,000 tax-free benefit from a bank-owned life insurance policy and a $498,000 tax free gain realized through the company’s deferred compensation plan trust. Additional net adjustments to income taxes of $250,000, which included the write-off of a portion of unused deferred tax assets, negatively impacted third quarter 2014 results. These items combined increased the third quarter 2014 net income by $1.45 million, or $0.15 per diluted common share.

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.

Net interest income was ~~$18.4~~$18.5 million for the quarter ended ~~June~~September 30, 2015, up from ~~$17.1~~$17.7 million for the same period in 2014. The tax-equivalent net interest margin was ~~3.81%~~3.78% for the quarter ended ~~June~~September 30, 2015, an increase from ~~3.62%~~3.73% for the same period in 2014. The increase in margin between the 2014 and 2015 ~~second~~third quarters was due to an increase in interest-earning asset yields, which increased to ~~4.15%~~4.13% for the quarter ended ~~June~~September 30, 2015, up 197 basis points from ~~3.96%~~4.06% for the same period in 2014. The cost of interest-bearing liabilities between the two periods increased 12 basis ~~point~~points to ~~0.44%~~0.45% in the ~~second~~third quarter of 2015 from 0.43% in the same period in 2014. Average ~~loans~~loan balances grew ~~$122.0~~$109.7 million year over year which were ~~mainly~~partially funded by overnight interest bearing deposits which declined ~~$110.3~~$45.1 million for that same period. This change in earning asset mix resulted in a positive impact to the net interest margin. Management continues to analyze and look for additional opportunities to maintain its margin, as well as other alternatives to minimize the impact of a looming rate increase in the near future.

Total interest income increased ~~$1.3 million~~$980,000 to ~~$20.0~~$20.3 million for the quarter ended ~~June~~September 30, 2015 from ~~$18.8~~$19.3 million for the same period in 2014. Continued steady loan demand and an increase in the average balance of the investment portfolio continued the shift of earning assets out of lower yielding interest bearing deposits into higher yielding earning assets. The yield on total interest earning assets improved to ~~4.15% at June~~4.13% for the quarter ended September 30, 2015 from ~~3.96%~~4.06% for the same period in 2014. The loan portfolio yield decreased slightly to ~~4.36% at June~~4.32% for the quarter ended September 30, 2015 from ~~4.37%~~4.35% for the same period in 2014 while investment portfolio yields declined to 3.63% ~~at June~~for the quarter ended September 30, 2015 from ~~3.79% at June 30,~~3.70% for the same period in 2014. Income from loans increased to ~~$18.1~~$18.5 million for the quarter ended ~~June~~September 30, 2015 compared to ~~$16.9~~$17.4 million for the same period in 2014 due to ~~$122.0~~$109.7 million of average loan growth year over year as well as a recovery of approximately ~~$100,000~~$55,000 of non-accrual interest as a result of pay-offs and loans being put back on accrual status. Interest income from investments ~~increased to~~remained steady at $1.7 million for the ~~quarter~~quarters ended ~~June~~September 30, 2015 ~~compared to $1.6 million for the same period in 2014 due to increased average volumes.~~and 2014.

Total interest expense increased ~~by $27,000~~$110,000 in the ~~second~~third quarter of 2015 compared to the same period in 2014, to ~~$1.67~~$1.7 million from ~~$1.65~~$1.6 million. There was a 12 basis point increase in the average cost of interest-bearing liabilities in the ~~second~~third quarter of 2015 due to a slight increase in the rates on interest bearing deposits and an increase in the volume of FHLB advances. Interest expense related to interest-bearing deposits ~~declined slightly~~increased to ~~$1.31~~$1.4 million in the ~~second~~third quarter of 2015 from ~~$1.33~~$1.3 million in the same period in 2014. Interest expense recognized by the Company related to subordinated debentures was ~~$150,000~~$154,000 in the ~~second~~third quarter of 2015 compared to ~~$146,000~~$147,000 for the same period in 2014. Expenses on FHLB advances and securities sold under repurchase agreements were ~~$173,000~~$178,000 and ~~$37,000~~$38,000 respectively in the ~~second~~third quarter of 2015 compared to ~~$133,000~~$131,000 and ~~$39,000~~$41,000 respectively for the same period in 2014.

Allowance for Loan Losses

The allowance for loan losses represents management’s assessment of the estimated probable incurred credit losses in the loan portfolio at each balance sheet date. Management analyzes the adequacy of the allowance for loan losses regularly through reviews of the loan portfolio. Consideration is given to economic conditions, changes in interest rates and the effect of such changes on collateral values and borrower’s ability to pay, changes in the composition of the loan portfolio and trends in past due and non-performing loan balances. The allowance for loan losses is a material estimate that is susceptible to significant fluctuation and is established through a provision for loan losses based on management’s evaluation of the inherent risk in the loan portfolio. In addition to extensive in-house loan monitoring procedures, the Company utilizes an outside party to conduct an independent loan review of ~~all~~ commercial loan and commercial real estate loan relationships. The goal is to have approximately 55% to 60% of the portfolio ~~reviewed.~~reviewed annually. This includes all relationships over $5.0 million with new exposure greater than $2.0 million and a sample of those relationships greater than $5.0 million; loan relationships between $1.0 million and $5.0 million with new exposure greater than $750,000 and a sample of those relationships between $1.0 million and $5.0 million; and a sample of relationships less than $1.0 million. Management utilizes the results of this outside loan review to assess the effectiveness of its internal loan grading system as well as to assist in the assessment of the overall adequacy of the allowance for loan losses associated with these types of loans.

The provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level which, in management’s best estimate, is necessary to absorb incurred credit losses within the existing loan portfolio in the normal course of business. The allowance for loan loss is made up of two basic components. The first component is the specific allowance in which the Company sets aside reserves based on the analysis of individual credits that are cash flow dependent, yet there is a discount between the present value of the future cash flows and the carrying value. This was ~~$538,000~~$358,000 at ~~June~~September 30, 2015. The second component is the general reserve. The general reserve is used to record loan loss reserves for groups of homogenous loans in which the Company estimates the losses incurred in the portfolios based on quantitative and qualitative factors. Due to the uncertainty of risks in the loan portfolio, the Company’s judgment on the amount of the allowance necessary to absorb loans losses is approximate.

Due to regulatory guidance, the Company no longer carries specific reserves on collateral dependent loans, and instead charges off any shortfall. First Federal analyzes all loans on its classified and special mention lists at least quarterly and makes judgments about the risk of loss based on the cash flow of the borrower, the value of any collateral and the financial strength of any guarantor in determining the amount of impairment of individual loans and the charge off to be taken.

For purposes of the general reserve analysis, the loan portfolio is stratified into nine different loan pools based on loan type and by market area to allocate historic loss experience. The loss experience factor ~~was~~is then applied to the non-impaired loan portfolio.Beginning June 30, 2015, the Company refined the methodology to its allowance for loan loss calculation pertaining to the general reserve component for non-impaired loans. There was no change to the calculation of the component for reserves on impaired loans. Within the general reserve, the determination of the historical loss component was modified from using a three-year average annual loss rate to a loss migration measurement. The loss migration measurement implemented June 30, 2015, utilizes an average of four (4) four-year loss migration periods for each loan portfolio segment with differentiation between loan risk grades. This approach provides for a more precise reflection of probable incurred losses by risk grade within each loan portfolio segment over an average loan life cycle. Management believes that capturing the risk grade changes and cumulative losses over the life cycle of a loan more accurately depicts management’s estimate of historical losses as well as being more reflective of the ongoing risks in the loan portfolio, thereby requiring less weight to the subjective components of the allowance for loan losses. Prior to June 30, 2015, the approach to this component quantified the historical loss by calculating a rolling twelve quarter average annual loss rate for each portfolio segment, without differentiation between loan risk grades. This modification resulted in a change of the general reserves between the loan portfolio segments but did not have a material impact on the overall allowance for loan losses. The stratification and loss migration analysis of the loan portfolio resulted in an increase in the quantitative general allowance to $9.6 million at ~~June~~September 30, 2015 compared to $7.8 million at December 31, 2014.

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

ECONOMIC

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

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

ENVIRONMENT

Changes in the nature and volume in the loan portfolio.

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

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

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

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

RISK

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

Changes in the political and regulatory environment.

The qualitative analysis at ~~June~~September 30, 2015 indicated a general reserve of $15.3 million compared with $15.7 million at December 31, 2014. Management reviewed the overall economic, environmental and risk factors. ~~The~~During the third quarter, the economic factors were decreased slightly due to the improvement in unemployment rates in the Northwest Ohio, Indiana and Michigan markets. Most national and regional economic indicators have also maintained favorable conditions. The environmental factors were increased due to the strong growth achieved in the first ~~six~~nine months of 2015 amidst highly competitive conditions on pricing and terms, including the continued growth in our new Business Banking initiative, and balances generated from the expansion of our Columbus loan production office. Changes in the commercial lending credit process were also factors considered in the ~~qualitative analysis.~~environmental increases. The qualitative risk factors have been decreased as a result of continued favorable trends in asset quality and management’s consideration that implementing loss migration analysis results in more precise calculation of risk.

First Defiance’s general reserve percentages for main loan segments ranged from ~~0.34%~~0.32% for pass rated construction loans to ~~13.62%~~13.73% for special mention rated commercial loans at ~~June~~September 30, 2015.

As a result of the quantitative and qualitative analyses, along with the change in specific reserves, the Company recorded noa credit provision for loan losses of $27,000 in the ~~second~~third quarter of 2015 compared to ~~$446,000~~an expense of $406,000 for the same period in 2014. The allowance for loan losses was ~~$25.4~~$25.2 million and $24.8 million and represented ~~1.49%~~1.45% and 1.50% of loans, net of undisbursed loan funds and deferred fees and costs, as of ~~June~~September 30, 2015 and December 31, 2014, respectively. Charge offs of ~~$380,000~~$407,000 were partially offset by recoveries of ~~$462,000,~~$259,000, resulting in ~~an increase~~a reduction to the overall allowance for loan loss of ~~$82,000~~$148,000 for the ~~second~~third quarter of 2015. In management’s opinion, the overall allowance for loan losses of ~~$25.4~~$25.2 million as of ~~June~~September 30, 2015 is adequate.

Management also assesses the value of real estate owned as of the end of each accounting period and recognizes write-downs to the value of that real estate in the income statement if conditions dictate. For the quarter ended ~~June~~September 30, 2015, First Defiance had write-downs that totaled ~~$182,000~~$19,000 for real estate held for sale. Management believes that the values recorded at ~~June~~September 30, 2015 for real estate owned and repossessed assets represent the realizable value of such assets.

Total classified loans ~~decreased to $30.3~~are $31.1 million at ~~June~~September 30, 2015, a significant decrease compared to $47.3 million at December 31, 2014.

First Defiance’s ratio of allowance for loan losses to non-performing loans was ~~151.7%~~151.8% at ~~June~~September 30, 2015 compared with 102.6% at December 31, 2014. Management monitors collateral values of all loans included on the watch list that are collateral dependent and believes that the allowances for those loans at ~~June~~September 30, 2015 are appropriate. Of the ~~$16.7~~$16.6 million in non-accrual loans at ~~June~~September 30, 2015, ~~$9.4~~$8.1 million or ~~56.4%~~49.0% are less than 90 days past due.

At ~~June~~September 30, 2015, First Defiance had total non-performing assets of ~~$22.1~~$21.5 million, compared to $30.3 million at December 31, 2014. Non-performing assets include loans that are on non-accrual, real estate owned and other assets held for sale. Non-performing assets at ~~June~~September 30, 2015 and December 31, 2014 by category were as follows:

Table 1 – Nonperforming Asset

	June 30,			December 31,			September 30,			December 31,
	2015			2014			2015			2014
	(In Thousands)						(In Thousands)
Non-performing loans:
One to four family residential real estate	$	2,942		$	3,332		$	2,745		$	3,332
Non-residential and multi-family residential real estate		9,786			15,174			10,090			15,174
Commercial		3,446			4,993			3,117			4,993
Construction		-			-			-			-
Home equity and improvement		553			619			631			619
Consumer Finance		10			12			29			12
Total non-performing loans		16,737			24,130			16,612			24,130

Real estate owned		5,371			6,181			4,936			6,181
Other repossessed assets		-			-			-			-
Total repossessed assets	$	5,371			6,181		$	4,936			6,181

Total Nonperforming assets	$	22,108		$	30,311		$	21,548		$	30,311

Restructured loans, accruing	$	22,234		$	24,686		$	13,786		$	24,686

Total nonperforming assets as a percentage of total assets		1.01	%		1.39	%		0.97	%		1.39	%
Total nonperforming loans as a percentage of total loans*		0.98	%		1.47	%		0.96	%		1.47	%
Total nonperforming assets as a percentage of total loans plus REO*		1.29	%		1.83	%		1.24	%		1.83	%
Allowance for loan losses as a percent of total nonperforming assets		114.82	%		81.71	%		116.99	%		81.71	%

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

The decrease in non-performing loans between December 31, 2014 and ~~June~~September 30, 2015 is primarily in commercial real estate loans. The balance of these types of non-performing loans was ~~$5.4~~$5.1 million lower at ~~June~~September 30, 2015 compared to December 31, 2014 mainly due to some of these relationships paying off.

Non-performing loans in the commercial loan category represented ~~0.86%~~0.77% of the total loans in those categories at ~~June~~September 30, 2015 compared to 1.25% for the same category at December 31, 2014. Non-performing loans in the commercial real estate loan category represented ~~1.11%~~1.09% of the total loans in those categories at ~~June~~September 30, 2015 compared to 1.81% for the same category at December 31, 2014. Management believes that the current allowance for loan losses is appropriate and that the provision for loan losses is consistent with both charge-off experience and the risk inherent in the overall credits in the portfolio.

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

The following table details net charge-offs and non-accrual loans by loan type. For the ~~six~~nine months ended and as of ~~June~~September 30, 2015, commercial real estate, which represented ~~50.40%~~51.55% of total loans, accounted for ~~93.17%~~121.43% of net recoveries and ~~58.47%~~60.75% of non-accrual loans, and commercial loans, which represented ~~22.85%~~22.51% of total loans, accounted for ~~37.75%~~53.43% of net recoveries and ~~20.59%~~18.76% of non-accrual loans. For the ~~six~~nine months ended and as of ~~June~~September 30, 2014, commercial real estate, which represented ~~49.36%~~49.65% of total loans, accounted for ~~(75.69)~~(104.33)% of net charge-offs (recovery) and ~~59.56%~~61.59% of non-accrual loans, and commercial loans, which represented ~~24.01%~~23.35% of total loans, accounted for ~~143.12%~~180.27% of net charge-offs and ~~28.36%~~24.55% of non-accrual loans.

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

	For the Six Months Ended June 30, 2015						As of June 30, 2015
	Net Charge-offs			% of Total Net			Nonaccrual		% of Total Non-			For the Nine Months Ended September 30, 2015						As of September 30, 2015
	(Recoveries)			Charge-offs			Loans		Accrual Loans			Net Charge-offs (Recoveries)			% of Total Net Charge-offs			Nonaccrual Loans		% of Total Non- Accrual Loans
	(In Thousands)						(In Thousands)					(In Thousands)							(In Thousands)
Residential	$	16			(3.21	)%	$	2,942		17.58	%	$	97			(27.71	)%	$	2,745		16.52	%
Construction		-			0.00	%		-		0.00	%		-			0.00	%		-		0.00	%
Commercial real estate		(464	)		93.17	%		9,786		58.47	%		(425	)		121.43	%		10,090		60.75	%
Commercial		(188	)		37.75	%		3,446		20.59	%		(187	)		53.43	%		3,117		18.76	%
Consumer		(11	)		2.21	%		10		0.06	%		(19	)		5.43	%		29		0.17	%
Home equity and improvement		149			(29.92	)%		553		3.30	%		184			(52.57	)%		631		3.80	%
Total	$	(498	)		100.00	%	$	16,737		100.00	%	$	(350	)		100.00	%	$	16,612		100.00	%

For the Six Months Ended June 30, 2014 As of June 30, 2014
Net
Charge-offs % of Total Net Nonaccrual % of Total Non-
(Recoveries) Charge-offs Loans Accrual Loans
(In Thousands) (In Thousands)
Residential $ 116 13.30 % $ 2,901 11.67 %
Construction - 0.00 % - 0.00 %
Commercial real estate (660 ) (75.69 )% 14,807 59.56 %
Commercial 1,248 143.12 % 7,052 28.36 %
Consumer (11 ) (1.26 )% - 0.00 %
Home equity and improvement 179 20.53 % 103 0.41 %
Total $ 872 100.00 % $ 24,863 100.00 %

	For the Nine Months Ended September 30, 2014						As of September 30, 2014
	Net Charge-offs (Recoveries)			% of Total Net Charge-offs			Nonaccrual Loans		% of Total Non- Accrual Loans
	(In Thousands)						(In Thousands)
Residential	$	197			14.80	%	$	3,053		13.55	%
Construction		-			0.00	%		-		0.00	%
Commercial real estate		(1,394	)		(104.33	)%		13,873		61.59	%
Commercial		2,412			180.27	%		5,530		24.55	%
Consumer		(11	)		(0.75	)%		-		0.00	%
Home equity and improvement		134			10.01	%		69		0.31	%
Total	$	1,338			100.00	%	$	22,525		100.00	%

Table 3 – Allowance for Loan Loss Activity

	For the Quarter Ended													For the Quarter Ended
	2nd 2015			1st 2015			4th 2014			3rd 2014		2nd 2014		3rd 2015			2nd 2015			1st 2015			4th 2014			3rd 2014
	(In Thousands)													(In Thousands)

Allowance at beginning of period	$	25,302		$	24,766		$	24,567		$	24,627	$	24,783	$	25,384		$	25,302		$	24,766		$	24,567		$	24,627
Provision for credit losses		-			120			162			406		446		(27	)		-			120			162			406
Charge-offs:
Residential		11			78			61			95		42		185			11			78			61			95
Commercial real estate		146			155			505			246		39		64			146			155			505			246
Commercial		23			2			212			1,272		973		43			23			2			212			1,272
Consumer finance		13			3			1			16		12		5			13			3			1			16
Home equity and improvement		187			43			87			42		80		110			187			43			87			42
Total charge-offs		380			281			866			1,671		1,146		407			380			281			866			1,671
Recoveries		462			697			903			1,205		544		259			462			697			903			1,205
Net charge-offs (recoveries)		(82	)		(416	)		(37	)		466		602		148			(82	)		(416	)		(37	)		466
Ending allowance	$	25,384		$	25,302		$	24,766		$	24,567	$	24,627	$	25,209		$	25,384		$	25,302		$	24,766		$	24,567

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

Table 4 – Allowance for Loan Loss Allocation by Loan Category

	June 30, 2015					March 31, 2015					December 31, 2014					September 30, 2014					June 30, 2014					September 30, 2015					June 30, 2015					March 31, 2015					December 31, 2014					September 30, 2014
			Percent of					Percent of					Percent of					Percent of					Percent of					Percent of					Percent of					Percent of					Percent of					Percent of
			total loans					total loans					total loans					total loans					total loans					total loans					total loans					total loans					total loans					total loans
	Amount		by category			Amount		by category			Amount		by category			Amount		by category			Amount		by category			Amount		by category			Amount		by category			Amount		by category			Amount		by category			Amount		by category
	(Dollars In Thousands)																									(Dollars In Thousands)
Residential	$	2,877		11.68	%	$	2,483		11.79	%	$	2,494		12.24	%	$	2,424		12.44	%	$	2,345		12.30	%	$	2,779		11.48	%	$	2,877		11.68	%	$	2,483		11.79	%	$	2,494		12.24	%	$	2,424		12.44	%
Construction		308		7.98	%		303		7.25	%		221		6.66	%		214		6.95	%		199		6.68	%		239		7.22	%		308		7.98	%		303		7.25	%		221		6.66	%		214		6.95	%
Commercial real estate		14,365		50.40	%		14,238		50.77	%		13,721		49.84	%		13,668		49.65	%		13,956		49.36	%		14,397		51.55	%		14,365		50.40	%		14,238		50.77	%		13,721		49.84	%		13,668		49.65	%
Commercial		5,567		22.85	%		6,766		22.90	%		6,509		23.70	%		6,420		23.35	%		6,199		24.01	%		5,411		22.51	%		5,567		22.85	%		6,766		22.90	%		6,509		23.70	%		6,420		23.35	%
Consumer		160		0.85	%		92		0.87	%		117		0.92	%		150		0.99	%		148		0.97	%		158		0.88	%		160		0.85	%		92		0.87	%		117		0.92	%		150		0.99	%
Home equity and improvement		2,107		6.24	%		1,420		6.42	%		1,704		6.64	%		1,691		6.62	%		1,780		6.68	%		2,225		6.36	%		2,107		6.24	%		1,420		6.42	%		1,704		6.64	%		1,691		6.62	%
	$	25,384		100.00	%	$	25,302		100.00	%	$	24,766		100.00	%	$	24,567		100.00	%	$	24,627		100.00	%	$	25,209		100.00	%	$	25,384		100.00	%	$	25,302		100.00	%	$	24,766		100.00	%	$	24,567		100.00	%

Key Asset Quality Ratio Trends

Table 5 – Key Asset Quality Ratio Trends

	2nd Qtr 2015			1st Qtr 2015			4th Qtr 2014			3rd Qtr2014			2ndQtr 2014			3rd Qtr 2015			2nd Qtr 2015			1st Qtr 2015			4th Qtr 2014			3rdQtr 2014
Allowance for loan losses / loans*		1.49	%		1.50	%		1.50	%		1.50	%		1.56	%		1.45	%		1.49	%		1.50	%		1.50	%		1.50	%
Allowance for loan losses to net charge-offs		-30956.10	%		-6082.21	%		-66935.14	%		5271.89	%		4090.86	%		17033.11	%		-30956.10	%		-6082.21	%		-66935.14	%		5271.89	%
Allowance for loan losses / non-performing assets		114.82	%		100.82	%		81.71	%		88.21	%		80.96	%		116.99	%		114.82	%		100.82	%		81.41	%		88.21	%
Allowance for loan losses / non-performing loans		151.66	%		135.28	%		102.64	%		109.07	%		99.05	%		151.75	%		151.66	%		135.28	%		102.64	%		109.07	%
Non-performing assets / loans plus REO*		1.29	%		1.48	%		1.83	%		1.70	%		1.92	%		1.24	%		1.29	%		1.48	%		1.83	%		1.70	%
Non-performing assets / total assets		1.01	%		1.14	%		1.39	%		1.29	%		1.41	%		0.97	%		1.01	%		1.14	%		1.39	%		1.29	%
Net charge-offs / average loans (annualized)		-0.02	%		-0.10	%		-0.01	%		0.12	%		0.16	%		0.03	%		-0.02	%		-0.10	%		-0.01	%		0.12	%

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

Non-Interest Income.

Total non-interest income ~~increased $192,000 in~~for the ~~second~~third quarter of 2015 ~~to $7.8~~was $8.0 million ~~from $7.6~~compared with

$9.4 million ~~for~~in the ~~same period in~~third quarter of 2014.

Service Fees.Service fees and other charges increased by ~~$182,000~~$139,000 or ~~7.3%~~5.2% in the ~~second~~third quarter of 2015 compared to the same period in 2014 due to new fee structures and product redesigns implemented late in 2014.

First Federal’s overdraft privilege program generally provides for the automatic payment of modest overdraft limits on all accounts deemed to be in good standing when the account is accessed using paper-based check processing, a teller withdrawal, a point-of-sale terminal, an ACH transaction, an online banking or voice-response transfer, or an ATM. To be in good standing, an account must be brought to a positive balance within a 30-day period and have not excessively used the overdraft privilege program. Overdraft limits are established for all customers without discrimination using a risk assessment approach for each account classification. The approach includes a systematic review and evaluation of the normal deposit flows made to each account classification to establish reasonable and prudent negative balance limits that would be routinely repaid by normal, expected and reoccurring deposits. The risk assessment by portfolio approach assumes a minimal degree of undetermined credit risk associated with unidentified individual accounts that are overdrawn for 30 or more days. Consumer accounts overdrawn for more than 60 days are automatically charged off. Fees are charged as a one-time fee per occurrence, up to five charges per day, and the fee charged for an item that is paid is equal to the fee charged for a non-sufficient fund item that is returned.

Overdrawn balances, net of allowance for losses, are reflected as loans on First Defiance’s balance sheet. The fees charged for this service are established based both on the return of processing costs plus a profit, and on the level of fees charged by competitors in the Company’s market area for similar services. These fees are considered to be compensation for providing a service to the customer and therefore deemed to be noninterest income rather than interest income. Fee income recorded for the quarters ending ~~June~~September 30, 2015 and 2014 related to the overdraft privilege product, net of adjustments to the allowance for uncollectible overdrafts, were ~~$705,000~~$752,000 and ~~$737,000,~~$839,000, respectively. Accounts charged off are included in noninterest expense. The allowance for uncollectible overdrafts was ~~$26,000~~$27,000 at ~~June~~September 30, 2015, $16,000 at December 31, 2014 and ~~$12,000~~$16,000 at ~~June~~September 30, 2014.

Mortgage Banking ~~Activity.~~Activity. Total revenue from the sale and servicing of mortgage loans increased ~~$253,000~~$135,000 to ~~$1.8~~$1.7 million for the ~~second~~third quarter of 2015 compared to $1.5 million for the same period in 2014.Mortgage banking activity was elevated from the ~~second~~third quarter a year ago, with our markets experiencing higher purchase and refinance loan volumes. Gains realized from the sale of mortgage loans increased in the ~~second~~third quarter of 2015 to $1.2 million from ~~$986,000 for~~$1.0 million in the same period in 2014. Mortgage loan servicing revenue was $866,000 in the third quarter of 2015, down slightly from $870,000 in the third quarter of 2014. The amortization of mortgage servicing rights expense increased ~~$78,000~~$41,000 to ~~$446,000~~$407,000 in the ~~second~~third quarter of 2015 compared to ~~$368,000~~$366,000 for the same period in 2014. The Company recorded a positive valuation adjustment of ~~$141,000~~$24,000 on mortgage servicing rights in the ~~second~~third quarter of 2015 compared to a positive valuation adjustment of ~~$44,000 for the same period in 2014.~~

~~Insurance Sales Commissions.~~ ~~Income from the sale of insurance and investment products was $2.3 million in the second quarter of 2015 compared to $2.2 million~~$68,000 for the same period in 2014.

Gain on Sale on Non-Mortgage Loans.Gains on the sale of non-mortgages, which include SBA and FSA loans, totaled $543,000 in the third quarter of 2015 compared to $40,000 in the third quarter of 2014. The Company has built up its pipeline of eligible small business administration loans since last year and increased its selling efforts in 2015.

Gain on Sale of Securities. The third quarter 2015 had no gains or losses on the sale of securities, while the third quarter of 2014 included gains of $460,000.

Trust Income.Trust income was ~~$367,000~~$370,000 in the ~~second~~third quarter of 2015, up ~~21.5%~~17.5% from ~~$302,000~~$315,000 for the same period in 2014.

Income from Bank Owned Life Insurance (“BOLI”).BOLI income decreased $892,000 in the third quarter of 2015 compared to the same period of 2014, resulting from a tax-free benefit from a BOLI policy due to a death claim in 2014.

Other Non-Interest Income. Other income decreased $798,000 in the third quarter of 2015 compared to the same period of 2014, which is mainly the result of a $498,000 tax-free gain realized in 2014 through the Company’s deferred compensation plan trust attributable to the aforementioned death claim.

Non-Interest Expense.

Non-interest expense increased to $16.8 million for the ~~second~~third quarter of 2015, ~~compared to $16.4 million for~~an increase of only $77,000 from the ~~same period in~~third quarter of 2014.

Compensation and Benefits. Compensation and benefits increased to ~~$9.2~~$9.8 million for the quarter ended ~~June~~September 30, 2015 from ~~$8.7~~$9.3 million for the same period in 2014. The increase is mainly attributable to merit increases and higher incentive ~~compensation accruals partially offset by lower medical insurance costs.~~compensation.

Occupancy Expense.Occupancy expense was $1.8 million in the ~~second~~third quarter 2015, up from ~~$1.7~~$1.6 million for the same period in 2014. The increase is attributable to projects relating to preventative maintenance and upkeep of the Company’s branch network.

~~Data Processing~~Other Non-Interest Expense. ~~Data processing cost increased to $1.6~~Other non-interest expense of $2.8 million in the ~~second~~third quarter of 2015, decreased from ~~$1.5~~$3.2 million ~~for~~in the ~~same period in 2014. The increase in data processing is~~third quarter of 2014 primarily due to ~~the implementation of new products in the electronic delivery channel.~~reduced costs for advertising and management consulting.

The efficiency ratio, considering tax equivalent interest income and excluding securities gains and losses, for the ~~second~~third quarter of 2015 was ~~63.02%~~62.41% compared to ~~66.16%~~62.06% for the same period in 2014.

Income Taxes.

First Defiance computes federal income tax expense in accordance with ASC Topic 740, Subtopic 942, which resulted in an effective tax rate of ~~30.02%~~30.93% for the quarter ended ~~June~~September 30, 2015 compared to ~~28.38%~~28.18% for the same period in 2014. The tax rate is lower than the statutory 35% tax rate for the Company mainly because of investments in tax-exempt securities and bank-owned life insurance (“BOLI”). The earnings on tax-exempt securities and BOLI are not subject to federal income tax.

~~Six~~Nine Months Ended ~~June~~September 30, 2015 and 2014

On a consolidated basis, First Defiance’s net income for the ~~six~~nine months ended ~~June~~September 30, 2015 was ~~$13.2~~$19.9 million compared to income of ~~$10.9~~$17.9 million for the same period in 2014. On a per share basis, basic and diluted earnings per common share for the ~~six~~nine months ended ~~June~~September 30, 2015 were ~~$1.42~~$2.15 and ~~$1.39,~~$2.11, respectively, compared to basic and diluted earnings per common share of ~~$1.13~~$1.87 and ~~$1.08,~~$1.79, respectively, for the same period in 2014.

Net Interest Income

Net interest income was ~~$36.6~~$55.1 million for the ~~six~~nine months ended ~~June~~September 30, 2015 compared to ~~$33.9~~$51.6 million for the same period in 2014. For the ~~six~~nine month period ended ~~June~~September 30, 2015, total interest income ~~was $39.8~~increased $3.5 million to $60.1 million compared to ~~$37.2~~$56.5 million for the same period in 2014.

Interest expense ~~decreased~~increased by ~~$84,000~~$26,000 to ~~$3.2~~$5.0 million for the ~~six~~nine months ended ~~June~~September 30, 2015 compared to ~~$3.3~~$4.9 million for the same period in 2014.

Net interest margin for the first ~~six~~nine months of 2015 was ~~3.84%~~3.82%, up 2217 basis points from the ~~3.62%~~3.65% margin reported in the ~~six~~nine month period ended ~~June~~September 30, 2014.

Provision for Loan Losses

The provision for loan losses was ~~$120,000~~$93,000 for the ~~six~~nine months ended ~~June~~September 30, 2015, compared to ~~$549,000~~$955,000 during the ~~six~~nine months ended ~~June~~September 30, 2014. Charge-offs for the first ~~half~~nine months of 2015 ~~were $661,000~~totaled $1.1 million and recoveries of previously charged off loans totaled ~~$1.2~~$1.4 million for net recoveries of ~~$498,000.~~$349,000. By comparison, ~~$2.3~~$4.0 million of charge-offs were recorded in the same period of 2014 and ~~$1.5~~$2.7 million of recoveries were realized for net charge-offs of ~~$872,000.~~$1.3 million.

Non-Interest Income

Total non-interest income ~~increased~~decreased to ~~$16.1~~$24.1 million for the ~~six~~nine months ended ~~June~~September 30, 2015 from ~~$14.9~~$24.3 million recognized for the same period in 2014.

Service Fees.Service fees and other charges were ~~$5.2~~$8.0 million for the first ~~six~~nine months of 2015, up from ~~$4.8~~$7.5 million for the same period in 2014.

Mortgage Banking Activity. Total revenue from the sale and servicing of mortgage loans increased ~~$781,000~~$916,000 to ~~$3.6~~$5.2 million for the ~~six~~nine months ended ~~June~~September 30, 2015 from ~~$2.8~~$4.3 million for the same period in 2014. Gains realized from the sale of mortgage loans increased ~~$903,000~~$1.1 million to ~~$2.5~~$3.7 million for the first ~~half~~nine months of 2015 from ~~$1.6~~$2.6 million for the same period in 2014. Mortgage loan servicing revenue remained relatively flat at ~~$1.7~~$2.6 million in the first ~~half~~nine months of 2015 compared to ~~$1.8~~$2.7 million for the same period in 2014. The gains realized from the sale of mortgage loans were partially offset by the amortization of mortgage servicing rights in the amount of ~~$857,000~~$1.3 million in the first ~~half~~nine months of 2015 up from ~~$660,000~~$1.0 for the same period in 2014. The Company recorded a positive valuation adjustment of ~~$167,000~~$191,000 in the ~~first half of~~nine months ended September 30, 2015 compared to a positive adjustment of ~~$37,000~~$105,000 in the ~~first half~~same period of 2014.

Gain on Sale on Non-Mortgage Loans.Gains on the sale of non-mortgages, which include SBA and FSA loans, totaled $776,000 for the first nine months of 2015 compared to $79,000 for the same period in 2014. The Company has built up its pipeline of eligible small business administration loans since last year and increased its selling efforts in 2015.

Gain on Sale of Securities.First Defiance recorded no gains on the sale of investments in the ~~first half of~~nine months ended 2015 compared to net gains of ~~$471,000~~$931,000 in the ~~first half~~same period in 2014.

BOLI and Other Non-Interest Income.The year-to-date decreases of ~~2014.~~$926,000 and $861,000, respectively, were both impacted by the positive adjustments mentioned above in the quarterly analysis.

Non-Interest Expense

Non-interest expense was ~~$33.7~~$50.5 million for the first ~~six~~nine months of 2015, up slightly from ~~$33.0~~$49.8 million for the same period in 2014.

Compensation and Benefits. Compensation and benefits increased to ~~$18.1~~$27.9 million for the ~~six~~nine months ended ~~June~~September 30, 2015 compared to ~~$17.2~~$26.5 million for the same period in 2014. The increase is mainly attributable to merit increases and higher incentive compensation ~~accruals partially offset by lower medical insurance costs.~~accruals.

Occupancy Expense.Occupancy expense increased ~~$281,000~~$456,000 to ~~$3.6~~$5.4 million for the ~~six~~nine months ended ~~June~~September 30, 2015, up from ~~$3.3~~$4.9 million for the same period in 2014. The increase is mainly attributable to projects relating to preventative maintenance and upkeep of the Company’s branch network.

Data Processing. Data processing expenses increased to ~~$3.1~~$4.7 million in the first ~~six~~nine months of 2015, from ~~$2.8~~$4.3 million for the same period in 2014. This increase is primarily due to Company strategic initiatives in implementing new products and alternative delivery channels for new and existing products.

Other Non-Interest Expenses. Other non-interest expenses decreased ~~$438,000~~$881,000 to ~~$7.0~~$9.8 million for the first ~~six~~nine months of 2015 from ~~$7.4~~$10.6 million for the same period in 2014. ~~Year-over-year decreases~~The significant year-over-year decrease between 2015 and 2014 ~~include~~includes $786,000 of costs associated with the termination of First Federal’s merger agreement with First Community Bank in the first quarter of 2014.

The efficiency ratio for the first ~~half~~nine months of 2015 was ~~62.87%~~62.72% compared to ~~67.01%~~65.26% for the same period in 2014.

Liquidity

As a regulated financial institution, First Federal is required to maintain appropriate levels of "liquid" assets to meet short-term funding requirements.

First Defiance had ~~$9.5~~$20.3 million of cash provided by operating activities during the first ~~six~~nine months of 2015.

At ~~June~~September 30, 2015, First Federal had ~~$142.6~~$123.4 million in outstanding loan commitments and loans in process to be funded generally within the next six months and an additional ~~$340.4~~$341.8 million committed under existing consumer and commercial lines of credit and standby letters of credit. Also at that date, First Federal had commitments to sell ~~$25.2~~$24.1 million of mortgage ~~loans at June 30, 2015.~~loans. First Defiance believes that it has adequate resources to fund commitments as they arise and that it can adjust the rate on savings certificates to retain deposits in changing interest rate environments. If First Defiance requires funds beyond its internal funding capabilities, advances from the FHLB of Cincinnati and other financial institutions are available.

Liquidity risk arises from the possibility that the Company may not be able to meet its financial obligations and operating cash needs or may become overly reliant upon external funding sources. In order to manage this risk, the Company’s Board of Directors has established a Liquidity Policy that identifies primary sources of liquidity, establishes procedures for monitoring and measuring liquidity and quantifies minimum liquidity requirements. This policy designates First Federal’s Asset/Liability Committee (“ALCO”) as the body responsible for meeting these objectives. The ALCO reviews liquidity on a monthly basis and approves significant changes in strategies that affect balance sheet or cash flow positions. Liquidity is centrally managed on a daily basis by the Company’s Chief Financial Officer and Controller.

Capital Resources

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

Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts and bank holding companies. The net unrealized gain or loss on available-for-sale securities is generally not included in computing regulatory capital. During the first quarter of 2015, the Company adopted the new Basel III regulatory capital framework as approved by the federal banking agencies. The adoption of this new framework modified the calculation of the various capital ratios, added a new ratio, common equity tier 1, and revised the adequately and well capitalized thresholds. Additionally, under the new rule, in order to avoid limitations on capital distributions, including dividend payments, the Company must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer is being phased in from 0.0% for 2015 to 2.50% by 2019. The amounts shown below as the adequately capitalized ratio plus capital conservation buffer, includes the fully phased-in 2.50% buffer.

The Company met each of the well capitalized ratio guidelines at ~~June~~September 30, 2015. The following table indicates the capital ratios for First Defiance and First Federal at ~~June~~September 30, 2015 and December 31, 2014. (In Thousands):

As of June 30, 2015
As of September 30, 2015													As of September 30, 2015
	Leverage			Tier 1 Risk- Based			Common Equity Tier 1			Total Risk-Based				Leverage			Tier 1 Risk- Based			Common Equity Tier 1			Total Risk-Based
First Federal Bank of the Midwest		10.93	%		12.24	%		12.24	%		13.50	%			11.01	%		12.07	%		12.07	%		13.32	%
First Defiance Financial Corp.		11.69	%		13.12	%		13.12	%		14.37	%			11.69	%		12.85	%		12.85	%		14.10	%
Adequately capitalized ratio		4.00	%		6.00	%		4.50	%		8.00	%			4.00	%		6.00	%		4.50	%		8.00	%
Adequately capitalized ratio plus capital conservation buffer (fully phased-in)		4.00	%		8.50	%		7.00	%		10.50	%			4.00	%		8.50	%		7.00	%		10.50	%
Well capitalized ratio (First Federal only)		5.00	%		8.00	%		6.50	%		10.00	%			5.00	%		8.00	%		6.50	%		10.00	%

As of December 31, 2014
	Leverage			Tier 1 Risk- Based			Common Equity Tier 1		Total Risk-Based
First Federal Bank of the Midwest		11.31	%		13.21	%		N/A		14.46	%
First Defiance Financial Corp.		11.89	%		13.89	%		N/A		15.15	%
Adequately capitalized ratio		4.00	%		4.00	%		N/A		8.00	%
Well capitalized ratio (First Federal only)		5.00	%		6.00	%		N/A		10.00	%

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 included in the Company’s Annual Report on Form 10-K. Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. Those policies which are identified and discussed in detail in the Company’s Annual Report on Form 10-K include the Allowance for Loan Losses, Goodwill, and the Valuation of Mortgage Servicing Rights. There have been no material changes in assumptions or judgments relative to those critical policies during the first ~~six~~nine months of 2015. Management has modified the historical loss rate calculation in the allowance for loan loss methodology as ~~of June 30, 2015 and is~~ described in Note 2 – Significant Accounting Policies. This modification did not have a material impact on the allowance for loan losses.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As discussed in detail in the Annual Report on Form 10-K for the year ended December 31, 2014, First Defiance’s ability to maximize net income is dependent on management’s ability to plan and control net interest income through management of the pricing and mix of assets and liabilities. Because a large portion of assets and liabilities of First Defiance are monetary in nature, changes in interest rates and monetary or fiscal policy affect its financial condition and can have significant impact on the net income of the Company. First Defiance does not use off-balance sheet derivatives to enhance its risk management, nor does it engage in trading activities beyond the sale of mortgage loans.

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

The table below presents, for the twelve months subsequent to ~~June~~September 30, 2015 and December 31, 2014, an estimate of the change in net interest income that would result from a gradual (ramp) and immediate (shock) change in interest rates, moving in a parallel fashion over the entire yield curve, relative to the measured base case scenario. Based on our net interest income simulation as of ~~June~~September 30, 2015, net interest income ~~is expected~~sensitivity to ~~slightly decrease, almost neutral, as~~changes in interest rates ~~rise.~~for the twelve months subsequent to September 30, 2015 was mainly neutral for the ramp and less sensitive for the shock compared to the sensitivity profile for the twelve months subsequent to December 31, 2014. This is due in part to our strategy to grow longer term loans and fund that growth out of existing liquidity. Based on our net interest income simulation as of June 30, 2015, net interest income sensitivity to changes in interest rates for the twelve months subsequent to June 30, 2015 was mainly neutral for the Ramp and less sensitive for the shock compared to the sensitivity profile for the twelve months subsequent to December 31, 2014.

Net Interest Income Sensitivity Profile	Net Interest Income Sensitivity Profile
		Impact on Future Annual Net Interest Income										Impact on Future Annual Net Interest Income
(dollars in thousands)		June 30, 2015					December 31, 2014					September 30, 2015					December 31, 2014
Gradual Change in Interest Rates
+200		$	(370	)	-0.49	%	$	702		0.98	%	$	(401	)	-0.53	%	$	702		0.98	%
+100			(340	)	-0.45	%		155		0.22	%		(346	)	-0.46	%		155		0.22	%
-100			(704	)	-0.93	%		(667	)	-0.93	%		(675	)	-0.89	%		(667	)	-0.93	%

Immediate Change in Interest Rates
+200		$	258		0.34	%	$	2,274		3.16	%	$	452		0.60	%	$	2,274		3.16	%
+100			(10	)	-0.01	%		877		1.22	%		28		0.04	%		877		1.22	%
-100			(1,978	)	-2.60	%		(1,713	)	-2.38	%		(1,990	)	-2.62	%		(1,713	)	-2.38	%

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

The results of all the simulation scenarios are within the board mandated guidelines as of ~~June~~September 30, 2015.

In addition to the simulation analysis, First Defiance also uses an economic value of equity (“EVE”) analysis to measure risk in the balance sheet incorporating all cash flows over the estimated remaining life of all balance sheet positions. The EVE analysis generally calculates the net present value of First Federal’s assets and liabilities in rate shock environments that range from -400 basis points to +400 basis points. However, the likelihood of a decrease in rates beyond 100 basis points as of ~~June~~September 30, 2015 was considered to be remote given the current interest rate environment and, therefore, was not included in this analysis. The results of this analysis are reflected in the following tables for the ~~six~~nine months ended ~~June~~September 30, 2015 and the year-ended December 31, 2014.

June 30, 2015
Economic Value of Equity
Change in Rates $ Amount $ Change % Change
(Dollars in Thousands)
+ 400 bp 464,990 37,091 8.67 %
+ 300 bp 458,813 30,914 7.22 %
+ 200 bp 451,414 23,515 5.50 %
+ 100 bp 444,143 16,244 3.80 %
0 bp 427,899 – –
- 100 bp 406,827 (21,072 ) (4.92 )%
December 31, 2014
September 30, 2015 September 30, 2015
Economic Value of Equity
Change in Rates $ Amount $ Change % Change $ Amount $ Change % Change
(Dollars in Thousands) (Dollars in Thousands)
+ 400 bp 475,594 47,730 11.16 %
+400 bp 474,532 43,215 10.02 %
+ 300 bp 467,028 39,164 9.15 % 467,418 36,100 8.37 %
+ 200 bp 457,038 29,174 6.82 % 458,707 27,390 6.35 %
+ 100 bp 446,184 18,320 4.28 % 447,269 15,951 3.70 %
0 bp 427,864 - - 431,317 - -
- 100 bp 403,088 (24,776 ) (5.79 )% 407,168 (24,149 ) (5.60 )%

December 31, 2014
Economic Value of Equity
Change in Rates $ Amount $ Change % Change
(Dollars in Thousands)
+400 bp 475,594 47,730 11.16 %
+ 300 bp 467,028 39,164 9.15 %
+ 200 bp 457,038 29,174 6.82 %
+ 100 bp 446,184 18,320 4.28 %
0 bp 427,864 - -
- 100 bp 403,088 (24,776 ) (5.79 )%
Item 4. Controls and Procedures

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

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An evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of ~~June~~September 30, 2015. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

No changes occurred in the Company’s internal controls over financial reporting during the quarter ended ~~June~~September 30, 2015 that materially affected, or are reasonably likely to materially affect, the internal controls over financial reporting.
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FIRST DEFIANCE FINANCIAL CORP.

PART II-OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There are no material changes from the risk factors set forth under Part I, Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

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

The following table provides information regarding First Defiance’s purchases of its common stock during the three-month period ended ~~June~~September 30, 2015:

Period Total Number of
Shares
Purchased (1) Average Price
Paid Per
Share Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs (2) Maximum Number of
Shares (or Approximate
Dollar Value) that May
Yet Be Purchased Under
the Plans or Programs (3)
Beginning Balance, April 1, 2015 296,041
April 1 – April 30, 2015 2,321 $ 33.45 - 296,041
May 1 – May 31, 2015 - - - 296,041
June 1 – June 30, 2015 - - - 296,041
Total 2,321 $ 33.45 - 296,041
Period Total Number of
Shares
Purchased (1) Average Price
Paid Per
Share Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs (2) Maximum Number of
Shares (or Approximate
Dollar Value) that May
Yet Be Purchased Under
the Plans or Programs (3)
Beginning Balance, July 1, 2015 283,197
July 1 – July 31, 2015 - $ - - 283,197
August 1 – August 31, 2015 87,777 37.37 - 195,420
September 1 – September 30, 2015 21,405 37.57 - 174,015
Total 109,182 $ 37.41 - 174,015

(1) The share purchases in the second quarter of 2015 were made in conjunction with the cashless exercise of stock options by First Defiance’s employees and directors.

(2) First Defiance’s publicly announced stock repurchase program became effective October 20, 2014. Up to 469,000 shares were authorized to be purchased under the program. There is no expiration date for the program.

(3) The number of shares shown represents, as of the end of each period, the maximum number of shares of common stock that may yet be purchased under the publicly announced stock repurchase program. The shares may be purchased, from time to time, depending on market conditions.

Item 3. Defaults upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.
76
Item 5. Other Information

Not applicable.

Item 6. Exhibits

Exhibit 3.1 Articles of Incorporation (1)

Exhibit 3.2 Code of Regulations (1)

Exhibit 3.3 Amendment to Articles of Incorporation (2)

Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 101 The following financial information from the Registrant's Quarterly Report on Form 10-Q for the quarter ended ~~June~~September 30, 2015 is formatted in eXtensible Business Reporting Language (“XBRL”): (i) Unaudited Consolidated Condensed Balance Sheet at ~~June~~September 30, 2015 and December 31, 2014, (ii) Unaudited Consolidated Condensed Statements of Income for the Three and ~~Six~~Nine Months ended ~~June~~September 30, 2015 and 2014 (iii) Unaudited Consolidated Condensed Statements of Comprehensive Income for the Three and ~~Six~~Nine Months ended ~~June~~September 30, 2015 and 2014, (iv) Unaudited Consolidated Condensed Statements of Changes in Stockholder’ Equity for the ~~Six~~Nine Months ended ~~June~~September 30, 2015 and 2014, (v) Unaudited Consolidated Condensed Statements of Cash Flows for the ~~Six~~Nine Months ended ~~June~~September 30, 2015 and 2014 and (vi) Notes to Unaudited Consolidated Condensed Financial Statements.

(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 exhibit 3 in Form 8-K filed December 8, 2008 (Film No. 081236105)
77
FIRST DEFIANCE FINANCIAL CORP.

SIGNATURES

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

First Defiance Financial Corp.
(Registrant)

Date: ~~August 7,~~November 6, 2015 By: /s/ Donald P. Hileman
Donald P. Hileman
President and
Chief Executive Officer

Date: ~~August 7,~~November 6, 2015 By: /s/ Kevin T. Thompson
Kevin T. Thompson
Executive Vice President and
Chief Financial Officer

75 78

	Three Months Ended June 30, 2015						Six Months Ended June 30, 2015
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized		Cash Basis Income Recognized
Residential Owner Occupied	$	5,819	$	68	$	67	$	5,905	$	136	$	135
Residential Non Owner Occupied		4,027		38		39		4,187		79		79
Total Residential Real Estate		9,846		106		106		10,092		215		214
Construction		-		-		-		75		2		2
Multi-Family		2,408		5		6		2,435		13		14
CRE Owner Occupied		6,711		41		29		6,612		78		68
CRE Non Owner Occupied		9,452		111		129		9,820		244		264
Agriculture Land		2,228		25		15		1,494		32		28
Other CRE		2,118		16		16		2,280		26		25
Total Commercial Real Estate		20,509		193		189		20,206		380		385
Commercial Working Capital		1,537		14		12		1,702		27		25
Commercial Other		3,622		13		17		3,731		26		35
Total Commercial		5,159		27		29		5,433		53		60
Home Equity and Home Improvement		2,409		21		21		2,305		41		41
Consumer		65		1		1		54		1		1
Total Impaired Loans	$	40,396	$	353	$	352	$	40,600	$	705	$	717

	Loans Modified as a TDR for the Three Months Ended June 30, 2015 ($ in thousands)				Loans Modified as a TDR for the Six Months Ended June 30, 2015 ($ in thousands)
Troubled Debt Restructurings	Number of Loans		Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)

1-4 Family Owner Occupied		1	$	9		3	$	226
1-4 Family Non Owner Occupied		0		-		4		65
CRE Owner Occupied		1		582		1		582
CRE Non Owner Occupied		2		260		2		260
Agriculture Land		3		1,555		3		1,555
Other CRE		0		-		0		-
Commercial Working Capital		2		526		2		526
Commercial Other		1		57		1		57
Home Equity and Improvement		4		268		7		326
Consumer Finance		2		34		4		37
Total		16	$	3,291		27	$	3,634

	Three Months Ended June 30, 2015 ($ in thousands)				Six Months Ended June 30, 2015 ($ in thousands)
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans		Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)

1-4 Family Owner Occupied		0	$	-		0	$	-
1-4 Family Non Owner Occupied		1		104		1		104
CRE Owner Occupied		0		-		0		-
CRE Non Owner Occupied		0		-		0		-
Agriculture Land		0		-		0		-
Other CRE		0		-		0		-
Commercial Working Capital or Other		0		-		0		-
Commercial Other		0		-		0		-
Home Equity and Improvement		1		22		1		22
Consumer Finance		0		-		0		-
Total		2	$	126		2	$	126

	Three Months Ended June 30, 2014 ($ In Thousands)				Six Months Ended June 30, 2014 ($ In Thousands)
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans		Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)

Residential Owner Occupied		1	$	67		1	$	67
Residential Non Owner Occupied		1		183		1		183
CRE Owner Occupied		4		153		4		153
CRE Non Owner Occupied		0		-		0		-
Agriculture Land		0		-		0		-
Other CRE		0		-		0		-
Commercial working capital or other		3		387		3		387
Home Equity / Improvement		0		-		0		-
Consumer Finance		0		-		0		-
Total		8	$	790		9	$	790

	Six Months Ended June 30,
(dollars in thousands)	2015		2014
Proportional Amortization Method
Tax credits and other tax benefits recognized	$	236	$	332
Amortization expense in federal income taxes		179		44

	For the Six Months Ended June 30, 2014						As of June 30, 2014
	Net Charge-offs			% of Total Net			Nonaccrual		% of Total Non-
	(Recoveries)			Charge-offs			Loans		Accrual Loans
	(In Thousands)						(In Thousands)
Residential	$	116			13.30	%	$	2,901		11.67	%
Construction		-			0.00	%		-		0.00	%
Commercial real estate		(660	)		(75.69	)%		14,807		59.56	%
Commercial		1,248			143.12	%		7,052		28.36	%
Consumer		(11	)		(1.26	)%		-		0.00	%
Home equity and improvement		179			20.53	%		103		0.41	%
Total	$	872			100.00	%	$	24,863		100.00	%

June 30, 2015
Economic Value of Equity
Change in Rates	$ Amount		$ Change			% Change
	(Dollars in Thousands)
+ 400 bp		464,990		37,091			8.67	%
+ 300 bp		458,813		30,914			7.22	%
+ 200 bp		451,414		23,515			5.50	%
+ 100 bp		444,143		16,244			3.80	%
0 bp		427,899		–			–
- 100 bp		406,827		(21,072	)		(4.92	)%

Period	Total Number of Shares Purchased (1)		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)		Maximum Number of Shares (or Approximate Dollar Value) that May Yet Be Purchased Under the Plans or Programs (3)
Beginning Balance, April 1, 2015								296,041
April 1 – April 30, 2015		2,321	$	33.45		-		296,041
May 1 – May 31, 2015		-		-		-		296,041
June 1 – June 30, 2015		-		-		-		296,041
Total		2,321	$	33.45		-		296,041

Exhibit 3.1		Articles of Incorporation (1)

Exhibit 3.2		Code of Regulations (1)

Exhibit 3.3		Amendment to Articles of Incorporation (2)

Exhibit 31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 101		The following financial information from the Registrant's Quarterly Report on Form 10-Q for the quarter ended ~~June~~September 30, 2015 is formatted in eXtensible Business Reporting Language (“XBRL”): (i) Unaudited Consolidated Condensed Balance Sheet at ~~June~~September 30, 2015 and December 31, 2014, (ii) Unaudited Consolidated Condensed Statements of Income for the Three and ~~Six~~Nine Months ended ~~June~~September 30, 2015 and 2014 (iii) Unaudited Consolidated Condensed Statements of Comprehensive Income for the Three and ~~Six~~Nine Months ended ~~June~~September 30, 2015 and 2014, (iv) Unaudited Consolidated Condensed Statements of Changes in Stockholder’ Equity for the ~~Six~~Nine Months ended ~~June~~September 30, 2015 and 2014, (v) Unaudited Consolidated Condensed Statements of Cash Flows for the ~~Six~~Nine Months ended ~~June~~September 30, 2015 and 2014 and (vi) Notes to Unaudited Consolidated Condensed Financial Statements.

	First Defiance Financial Corp.
	(Registrant)

Date: ~~August 7,~~November 6, 2015	By:	/s/ Donald P. Hileman
		Donald P. Hileman
		President and
		Chief Executive Officer


Date: ~~August 7,~~November 6, 2015	By:	/s/ Kevin T. Thompson
		Kevin T. Thompson
		Executive Vice President and
		Chief Financial Officer