PART I

Item 1. Business

First Defiance Financial Corp. (“First Defiance” or “the Company”) is a unitary thrift holding company that, through its subsidiaries, First Federal Bank of the Midwest (“First Federal”), First Insurance Group of the Midwest, Inc. (“First Insurance”), and First Defiance Risk Management Inc. (collectively, “the Subsidiaries”), focuses on traditional banking and property and casualty, life and group health insurance products. First Federal’s banking activities include originating and servicing residential, commercial, and consumer loans and providing a broad range of depository services. First Insurance’s activities consist primarily of selling property and casualty, life and group health insurance products. First Defiance Risk Management ~~was incorporated on December 20, 2012, as~~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.

The Company’s philosophy is to grow and prosper, building long-term relationships based on top quality service, high ethical standards and safe and sound assets. The Company operates as a locally oriented, community-based financial services organization, augmented by experienced, centralized support in select critical areas. The Company’s local market orientation is reflected in its market area management and local advisory boards, which are comprised of local business persons, professionals and other community representatives that assist area management in responding to local banking needs.

The Company’s operating objectives include expansion, diversification within its markets, growth of its fee-based income and growth ~~internally~~organically and through acquisitions of financial institutions, branches and financial services businesses. The Company seeks merger or acquisition partners that are culturally similar, have experienced management and possess either significant market area presence or have the potential for improved profitability through financial management, economies of scale and expanded services. The Company regularly evaluates merger and acquisition opportunities and conducts due diligence activities related to possible transactions with other financial institutions. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving cash, debt or equity securities may occur. Acquisitions typically involve the payment of a premium over book and market values and, therefore, some dilution of the Company’s tangible book value and net income per common share may occur in any future transaction.

At December 31, ~~2012,~~2013, the Company had consolidated assets of ~~$2.05~~$2.14 billion, consolidated deposits of ~~$1.67~~$1.74 billion, and consolidated stockholders’ equity of ~~$258.1~~$272.1 million. The Company was incorporated in Ohio in June of 1995. Its principal executive offices are located at 601 N. Clinton Street, Defiance, Ohio 43512, and its telephone number is (419) 782-5015.

On February 18, 2014, the Company announced the signing of a definitive agreement to acquire First Community Bank (FCB”). Under the merger agreement First Federal will acquire FCB in a cash transaction in which FCB will merge with and into First Federal. FCB operates four branches in the Columbus, Ohio market and at December 31, 2013, had assets of $101.4 million, loans of $65.4 million, deposits of $90.5 million and common equity of $10.6 million. Under the terms of the merger agreement, First Federal will pay $12.9 million in cash for all outstanding shares of FCB, subject to certain adjustment factors. The transaction is expected to close by the end of the third quarter of 2014.

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

United State Securities and Exchange Commission (“SEC”).

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The Subsidiaries

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

First Federal Bank of the Midwest:First Federal is a federally chartered stock savings bank headquartered in Defiance, Ohio. It conducts operations through 26 full service banking center offices in Allen, Defiance, Fulton, Hancock, Henry, Lucas, Ottawa, Paulding, Putnam, Seneca, Williams and Wood counties in northwest Ohio, 1 full service banking center office in Allen County in northeast Indiana and 65 full service banking center offices in Lenawee County in southeast Michigan.

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On March 14, 2008, First Defiance completed the acquisition of Pavilion Bancorp, Inc (“Pavilion”) and its subsidiary, Bank of Lenawee. That acquisition added eight banking branch offices located in Lenawee and Hillsdale counties in Michigan. The one branch in Hillsdale County that was acquired in the Pavilion acquisition was closed in January 2010. On January 21, 2005, First Defiance completed the acquisition of ComBanc, Inc. (“ComBanc”) and its subsidiary, the Commercial Bank, Delphos, Ohio. That acquisition added four branch offices located in Allen County, Ohio, which was adjacent to First Defiance’s existing footprint. On April 8, 2005, First Defiance completed the acquisition of the Genoa Savings and Loan Company, (“Genoa”) which added three offices in the metropolitan Toledo, Ohio area.

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

First Insurance Group of the Midwest: First Insurance is a wholly owned subsidiary of First Defiance. First Insurance is an insurance agency that conducts business in the Defiance, ~~Archbold,~~ Maumee, Oregon, Bryan and Bowling Green, Ohio areas. First Insurance offers property and casualty insurance, life insurance and group health insurance. On July 1, 2011, First Insurance acquired Payak-Dubbs Insurance Agency, Inc. (“PDI”) headquartered in Maumee and Oregon, Ohio. In May 2010, First Insurance acquired a group medical benefits business line from Andres O’Neil & Lowe Insurance Agency. See Note 3 – Acquisitions in the Notes to the financial statements for additional information.

First Defiance Risk Management: First Defiance Risk Management was incorporated on December 20, 2012, as 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.

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.

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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 has 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, including FDIC-assisted transactions. 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 with the most recent bank acquisition completed in 2008. 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. First Defiance completed its acquisition of PDI on July 1, 2011, which was merged into First Insurance with offices located in Maumee and Oregon, Ohio.

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Securities

First Defiance’s securities portfolio is managed in accordance with a written policy adopted by the Board of Directors and administered by the Investment Committee. The Chief Financial Officer of First Federal, Chief Executive Officer of First Federal, and the Chief Executive Officer of First Defiance can each approve transactions up to $3 million. Two of the three officers are required to approve transactions between $3 million and $5 million. All transactions in excess of $5 million must be approved by the Board of Directors.

First Defiance’s investment portfolio includes ~~41 CMO and REMIC~~48 collateralized mortgage obligation (“CMO”) issues totaling ~~$57.5~~$59.8 million, all of which are fully amortizing securities. Management does not believe the risks associated with any of its CMO ~~or REMIC~~ investments are significantly different from risks associated with other pass-through mortgage-backed securities. First Defiance did not have any off-balance sheet derivative securities at December 31, ~~2012.~~

2013.

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

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The carrying value of securities at December 31, ~~2012~~2013 by contractual maturity is shown below. Expected maturities will differ from contractual maturities because issuers 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, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities of underlying collateral. The mortgage-backed securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.

Contractually Maturing Total
Weighted Weighted Weighted Weighted
Under 1 Average 1 - 5 Average 6-10 Average Over 10 Average
Year Rate Years Rate Years Rate Years Rate Amount Yield
(Dollars in Thousands)
Mortgage-backed securities $ 6,222 3.80 % $ 14,687 3.71 % $ 8,094 3.54 % $ 2,380 3.26 % $ 31,383 3.64 %
CMOs 15,995 3.89 28,522 3.42 11,076 2.96 1,873 2.53 57,466 3.44
U.S. treasury bonds 1,000 0.63 - - - - - - 1,000 0.63
U.S. government and federal agency obligations - - 4,000 2.18 7,000 1.86 - - 11,000 1.97
Obligations of states and political subdivisions (1) 250 5.49 2,985 3.36 26,164 3.48 46,204 3.93 75,603 3.76
Trust preferred stock and preferred stock - - - - 17 - 3,640 2.26 3,657 2.25
Corporate bonds - - 9,000 0.83 - - - - 9,000 0.83
Total $ 23,467 $ 59,194 $ 52,351 $ 54,097 $ 189,109
Unamortized premiums/ (discounts) (1,963 )
Unrealized gain on securities available for sale 7,463
Total $ 194,609

~~(1) Tax exempt yield based on effective tax rate of 35%. Actual coupon rate is approximately equal to the weighted average rate disclosed in the table times 65%.~~

	Contractually Maturing																	Total
			Weighted				Weighted				Weighted				Weighted
	Under 1		Average		1 - 5		Average		6-10		Average		Over 10		Average
	Year		Rate		Years		Rate		Years		Rate		Years		Rate		Amount		Yield
	(Dollars in Thousands)
Mortgage-backed securities	$	6,088	3.54	%	$	17,057	3.36	%	$	11,061	3.21	%	$	5,362	3.03	%	$	39,568	3.30	%
CMOs		9,646	3.33			27,274	3.05			16,840	2.71			5,293	2.53			59,052	2.95
U.S. government and federal agency obligations		-	-			-	-			5,000	1.80			-	-			5,000	1.80
Obligations of states and political subdivisions (1)		135	4.79			4,343	3.42			30,876	3.44			42,516	3.84			77,870	3.66
Trust preferred stock and preferred stock		-	-			-	-			17	-			3,247	2.38			3,264	2.37
Corporate bonds		2,000	1.04			3,854	0.64			3,000	1.16			-	-			8,854	0.90
Total	$	17,869			$	52,528			$	66,794			$	56,418			$	193,608
Unamortized premiums/ (discounts)																		3,550
Unrealized gain on securities available for sale																		1,399
Total																	$	198,557

(1)

Tax exempt yield based on effective tax rate of 35%. Actual coupon rate is approximately equal to the weighted average rate disclosed in the table times 65%.

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The carrying value of investment securities is as follows:

December 31
2012 2011 2010
(In Thousands)
Available-for-sale securities:
Obligations of U.S. government corporations and agencies $ 11,069 $ 17,085 $ 11,985
U.S. treasury bonds 1,002 2,010 -
Obligations of state and political subdivisions 82,611 71,503 52,750
CMOs, REMICS and mortgage-backed securities 88,927 132,619 95,174
Trust preferred stock and preferred stock 1,608 1,450 1,546
Corporate bonds 8,884 8,252 3,797
Total $ 194,101 $ 232,919 $ 165,252

Held-to-maturity securities:
Mortgage-backed securities $ 291 $ 353 $ 440
Obligations of state and political subdivisions 217 308 399
Total $ 508 $ 661 $ 839

	December 31
	2013		2012		2011
	(In Thousands)
Available-for-sale securities:
Obligations of U.S. government corporations and agencies	$	4,921	$	11,069	$	17,085
U.S. treasury bonds		-		1,002		2,010
Obligations of state and political subdivisions		80,220		82,611		71,503
CMOs, REMICS and mortgage-backed securities		101,133		88,927		132,619
Trust preferred stock and preferred stock		2,954		1,608		1,450
Corporate bonds		8,942		8,884		8,252
Total	$	198,170	$	194,101	$	232,919

Held-to-maturity securities:
Mortgage-backed securities	$	201	$	291	$	353
Obligations of state and political subdivisions		186		217		308
Total	$	387	$	508	$	661

For additional information regarding First Defiance’s investment portfolio, refer to Note 5 – Investment Securities to the consolidated financial statements.

Interest-Bearing Deposits

The Company had ~~$91.0~~$143.0 million and ~~$143.0~~$91.0 million in overnight investments at the Federal Reserve at December 31, ~~2012~~2013 and ~~2011,~~2012, respectively, which amount is included in interest-bearing deposits. First Defiance had interest-earning deposits in the FHLB of Cincinnati and other financial institutions amounting to ~~$1.7~~$2.3 million and ~~$1.6~~$1.7 million at December 31, 2013 and 2012, ~~and 2011,~~ respectively.

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Residential Loan Servicing Activities

Servicing mortgage loans for investors involves a contractual right to receive a fee for processing and administering loan payments on mortgage loans that are not owned by the Company and are not included on the Company’s balance sheet. This processing involves collecting monthly mortgage payments on behalf of investors, reporting information to those investors on a monthly basis and maintaining custodial escrow accounts for the payment of principal and interest to investors and property taxes and insurance premiums on behalf of borrowers. At December 31, ~~2012,~~2013, First Federal serviced ~~13,927~~14,319 loans totaling ~~$1.33~~$1.37 billion. The vast majority of the loans serviced for others are fixed rate conventional mortgage loans. The Company primarily sells its loans to Freddie Mac, Fannie Mae and FHLB. At December 31, ~~2012, 59.16%~~2013, 60.50%, ~~39.36%~~38.48% and ~~1.38%~~0.88% of the Company’s sold loans were to Freddie Mac, Fannie Mae and FHLB, respectively.

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

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

December 31
2012 2011 2010
Percentage Percentage Percentage
Number Aggregate of Aggregate Number Aggregate of Aggregate Number Aggregate of Aggregate
of Principal Principal of Principal Principal of Principal Principal
Rate Loans Balance Balance Loans Balance Balance Loans Balance Balance
(Dollars in Thousands)

Less than 5.00% 8,601 $ 949,306 71.45 % 6,287 $ 696,666 54.84 % 5,074 $ 576,628 45.22 %
5.00% - 5.99% 3,218 243,077 18.29 4,457 370,355 29.15 5,059 437,984 34.35
6.00% - 6.99% 1,746 116,855 8.80 2,383 177,353 13.96 2,923 229,524 18.00
7.00% - 7.99% 322 18,055 1.36 402 24,288 1.91 468 29,047 2.28
8.00% - 8.99% 35 1,231 0.09 42 1,523 0.12 49 1,719 0.13
9.00% and over 5 193 0.01 5 202 0.02 7 278 0.02
Total 13,927 $ 1,328,717 100.00 % 13,576 $ 1,270,387 100.00 % 13,580 $ 1,275,180 100.00 %

	- 7 -

	December 31
	2013					2012					2011
				Percentage					Percentage					Percentage
	Number		Aggregate	of Aggregate		Number		Aggregate	of Aggregate		Number		Aggregate	of Aggregate
	of		Principal	Principal		of		Principal	Principal		of		Principal	Principal
Rate	Loans		Balance	Balance		Loans		Balance	Balance		Loans		Balance	Balance
	(Dollars in Thousands)

Less than 3.00%	1,901	$	220,376	16.07	%	1,182	$	148,144	11.15	%	109	$	12,501	0.98	%
3.00% -3.99%	4,771		544,512	39.71		3,822		454,634	34.22		1,693		208,158	16.39
4.00% -4.99%	3,508		333,469	24.32		3,597		346,528	26.08		4,485		476,007	37.47
5.00% - 5.99%	2,537		177,999	12.98		3,218		243,077	18.29		4,457		370,355	29.15
6.00% - 6.99%	1,316		80,457	5.87		1,746		116,855	8.79		2,383		177,353	13.96
7.00% and over	286		14,428	1.05		362		19,479	1.47		449		26,013	2.05
Total	14,319	$	1,371,241	100.00	%	13,927	$	1,328,717	100.00	%	13,576	$	1,270,387	100.00	%

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

2012 2011 2010
Maturity Number
of Loans % of
Number
of Loans Unpaid
Principal
Amount % of
Unpaid
Principal
Amount Number
of Loans % of
Number
of Loans Unpaid
Principal
Amount % of
Unpaid
Principal
Amount Number
of Loans % of
Number
of Loans Unpaid
Principal
Amount % of
Unpaid
Principal
Amount
(Dollars in Thousands)

1–5 years 507 3.64 % $ 10,537 0.79 % 375 2.76 % $ 6,267 0.49 % 400 2.95 % $ 12,692 1.00 %
6–10 years 4,030 28.94 395,066 29.73 1,677 12.35 72,700 5.72 1,961 14.44 90,706 7.11
11–15 years 1,391 9.99 134,916 10.16 3,326 24.50 310,369 24.43 2,944 21.68 273,714 21.46
16–20 years 1,846 13.25 163,929 12.34 1,026 7.56 99,650 7.84 865 6.37 84,865 6.66
21–25 years 1,370 9.84 60,618 4.56 2,347 17.29 220,429 17.35 2,426 17.86 231,232 18.13
More than 25 years 4,783 34.34 563,651 42.42 4,825 35.54 560,972 44.17 4,984 36.70 581,971 45.64
Total 13,927 100.00 % $ 1,328,717 100.00 % 13,576 100.00 % $ 1,270,387 100.00 % 13,580 100.00 % $ 1,275,180 100.00 %

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	December 31
	2013							2012							2011
						% of							% of							% of
		% of			Unpaid	Unpaid			% of			Unpaid	Unpaid			% of			Unpaid	Unpaid
	Number	Number			Principal	Principal		Number	Number			Principal	Principal		Number	Number			Principal	Principal
Maturity	of Loans	of Loans			Amount	Amount		of Loans	of Loans			Amount	Amount		of Loans	of Loans			Amount	Amount
	(Dollars in Thousands)

1–5 years	846	5.91	%	$	19,593	1.43	%	507	3.64	%	$	10,537	0.79	%	375	2.76	%	$	6,267	0.49	%
6–10 years	1,009	7.05			52,404	3.82		4,030	28.94			395,066	29.73		1,677	12.35			72,700	5.72
11–15 years	4,340	30.31			420,362	30.66		1,391	9.99			134,916	10.16		3,326	24.50			310,369	24.43
16–20 years	1,704	11.90			158,467	11.56		1,846	13.25			163,929	12.34		1,026	7.56			99,650	7.84
21–25 years	1,218	8.51			102,844	7.50		1,370	9.84			60,618	4.56		2,347	17.29			220,429	17.35
More than 25 years	5,202	36.32			617,571	45.03		4,783	34.34			563,651	42.42		4,825	35.54			560,972	44.17
Total	14,319	100.00	%	$	1,371,241	100.00	%	13,927	100.00	%	$	1,328,717	100.00	%	13,576	100.00	%	$	1,270,387	100.00	%

Lending Activities

General–A savings bank generally may not make loans to one borrower and related entities in an amount which exceeds 15% of its unimpaired capital and surplus, although loans in an amount equal to an additional 10% of unimpaired capital and surplus may be made to a borrower if the loans are fully secured by readily marketable collateral. Real estate is not considered “readily marketable collateral.” Certain types of loans are not subject to these limits. In applying these limits, loans to certain borrowers may be aggregated. Notwithstanding the specified limits, a savings bank may lend to one borrower up to $500,000 “for any purpose.” At December 31, ~~2012,~~2013, First Federal’s limit on loans-to-one borrower was ~~$36.3~~$39.1 million and its five largest loans (including available lines of credit) or groups of loans to one borrower, including related entities, were ~~$30.6~~$33.4 million, ~~$27.2~~$30.4 million, ~~$25.5~~$29.2 million, ~~$23.9~~$27.0 million and ~~$23.0~~$23.3 million. All of these loans or groups of loans were performing in accordance with their terms at December 31, ~~2012.~~2013.

Loan Portfolio Composition –The net increase or (decrease) in net loans receivable over the prior year was $57.0 million, $44.7 million ~~($24.6 million)~~ and ($~~102.2~~24.6 million) at December 31, 2013, 2012, ~~2011,~~ and ~~2010,~~2011, respectively. The loan portfolio contains no foreign loans. The Company’s loan portfolio is concentrated geographically in its northwest Ohio, northeast Indiana and southeast Michigan market areas. Management has identified lending for income generating rentalproperties as an industry concentration.Total loans for income generating property totaled ~~$355.4~~$408.4 million at December 31, ~~2012,~~2013, which represents ~~23%~~25.3% of the Company’s loan portfolio.

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

December 31
2012 2011 2010 2009 2008
Amount % Amount % Amount % Amount % Amount %
(Dollars in Thousands)
Real estate:
Single family residential $ 200,826 13.0 % $ 203,401 13.6 % $ 205,938 13.5 % $ 227,592 13.8 % $ 251,807 15.4 %
Five or more family residential 122,275 7.9 126,246 8.4 120,534 7.9 103,169 6.3 78,427 4.8
Nonresidential real estate 675,110 43.7 649,746 43.3 646,478 42.2 703,721 42.8 677,313 41.3
Construction 37,788 2.5 31,552 2.1 30,340 2.0 48,625 3.0 72,938 4.4
Total real estate loans 1,035,999 67.1 1,010,945 67.4 1,003,290 65.6 1,083,107 65.9 1,080,485 65.9

Other:
Consumer finance 15,936 1.0 18,887 1.3 22,848 1.5 34,105 2.0 41,012 2.5
Commercial 383,817 24.9 349,053 23.2 369,959 24.2 379,408 23.1 356,574 21.8
Home equity and improvement 108,718 7.0 122,143 8.1 133,593 8.7 147,977 9.0 161,106 9.8
Total non-real estate loans 508,471 32.9 490,083 32.6 526,400 34.4 561,490 34.1 558,692 34.1
Total loans 1,544,470 100.0 % 1,501,028 100.0 % 1,529,690 100.0 % 1,644,597 100.0 % 1,639,177 100.0 %
Less:
Loans in process 18,478 13,243 9,267 26,494 20,892
Deferred loan origination fees 735 709 920 981 1,050
Allowance for loan losses 26,711 33,254 41,080 36,547 24,592
Net loans $ 1,498,546 $ 1,453,822 $ 1,478,423 $ 1,580,575 $ 1,592,643

		December 31
		2013				2012				2011				2010				2009
		Amount	%			Amount	%			Amount	%			Amount	%			Amount	%
		(Dollars in Thousands)
Real estate:
Single family residential	$	195,752	12.2	%	$	200,826	13.0	%	$	203,401	13.6	%	$	205,938	13.5	%	$	227,592	13.8	%
Five or more family residential		148,952	9.2			122,275	7.9			126,246	8.4			120,534	7.9			103,169	6.3
Nonresidential real estate		670,666	41.6			675,110	43.7			649,746	43.3			646,478	42.2			703,721	42.8
Construction		86,058	5.3			37,788	2.5			31,552	2.1			30,340	2.0			48,625	3.0
Total real estate loans		1,101,428	68.3			1,035,999	67.1			1,010,945	67.4			1,003,290	65.6			1,083,107	65.9

Other:
Consumer finance		16,902	1.0			15,936	1.0			18,887	1.3			22,848	1.5			34,105	2.0
Commercial		388,236	24.1			383,817	24.9			349,053	23.2			369,959	24.2			379,408	23.1
Home equity and improvement		106,930	6.6			108,718	7.0			122,143	8.1			133,593	8.7			147,977	9.0
Total non-real estate loans		512,068	31.7			508,471	32.9			490,083	32.6			526,400	34.4			561,490	34.1
Total loans		1,613,496	100.0	%		1,544,470	100.0	%		1,501,028	100.0	%		1,529,690	100.0	%		1,644,597	100.0	%
Less:
Loans in process		32,290				18,478				13,243				9,267				26,494
Deferred loan origination fees		758				735				709				920				981
Allowance for loan losses		24,950				26,711				33,254				41,080				36,547
Net loans	$	1,555,498			$	1,498,546			$	1,453,822			$	1,478,423			$	1,580,575

In addition to the loans reported above, First Defiance had $9.1 million, $22.1 million, $13.8 million, $18.1 million, ~~$10.3 million,~~ and ~~$11.0~~$10.3 million in loans classified as held for sale at December 31, 2013, 2012, 2011, 2010 ~~2009~~ and ~~2008,~~2009, respectively. The fair value of such loans, which are all single-family residential mortgage loans, approximated their carrying value for all years presented.

Contractual Principal, Repayments and Interest Rates –The following table sets forth certain information at December 31, ~~2012~~2013 regarding the dollar amount of gross loans maturing in First Defiance’s portfolio, based on the contractual terms to maturity. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less.

~~- 7 -~~

Years After December 31, 2012

Due Less
than 1
Due 1-2 Due 3-5 Due 5-10 Due 10-15 Due 15+ Total
(In Thousands)
Real estate $ 300,811 $ 138,188 $ 418,785 $ 102,165 $ 29,533 $ 46,517 $ 1,035,999
Non-real estate:
Commercial 258,184 42,240 79,939 3,454 - - 383,817
Home equity and improvement 64,760 8,344 31,471 3,557 226 360 108,718
Consumer finance 6,656 4,266 4,771 214 26 3 15,936
Total $ 630,411 $ 193,038 $ 534,966 $ 109,390 $ 29,785 $ 46,880 $ 1,544,470

		Years After December 31, 2013
		Due Less
		than 1		Due 1-2		Due 3-5		Due 5-10		Due 10-15		Due 15+		Total
		(In Thousands)
Real estate	$	274,718	$	124,116	$	525,816	$	95,005	$	27,520	$	54,253	$	1,101,428
Non-real estate:
Commercial		253,764		48,475		81,270		4,727		-		-		388,236
Home equity and improvement		70,633		8,930		22,389		3,887		382		709		106,930
Consumer finance		7,201		4,274		5,237		167		23		-		16,902
Total	$	606,316	$	185,795	$	634,712	$	103,786	$	27,925	$	54,962	$	1,613,496

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

	- 9 -

The following table sets forth the dollar amount of gross loans due after one year from December 31, ~~2012~~2013 which have fixed interest rates or which have floating or adjustable interest rates.

Floating or
Fixed Adjustable
Rates Rates Total
(In Thousands)

Real estate $ 307,820 $ 427,368 $ 735,188
Commercial 113,123 12,510 125,633
Other 52,209 1,029 53,238
$ 473,152 $ 440,907 $ 914,059

				Floating or
		Fixed		Adjustable
		Rates		Rates		Total
	(In Thousands)

Real estate	$	302,710	$	524,000	$	826,710
Commercial		120,499		13,973		134,472
Other		45,137		861		45,998
	$	468,346	$	538,834	$	1,007,180

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

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

A commercial loan application is first reviewed and underwritten by one of the commercial loan officers, who may approve credits within their lending limit. Another loan officer with limits sufficient to cover the exposure must approve credits exceeding an individual’s lending limit. All credits which exceed $100,000 in aggregate exposure must be presented for review or approval to the Senior Loan Committee comprised of senior lending personnel. Credits which exceed $2,000,000 in aggregate exposure must be presented for approval to the Executive Loan ~~Committee, a committee of First Federal’s Board of Directors.~~

Committee.

Residential mortgage applications are accepted by retail lenders or branch managers, who utilize an automated underwriting system to review the loan request. First Federal also receives mortgage applications via an online residential mortgage origination system. A final approval of all residential mortgage applications is made by a member of a centralized underwriting staff within their designated lending limits. Loan requests in excess or outside an individual underwriter’s limit are approved by the Senior Loan Committee and, if necessary, by the Executive Loan Committee.

~~- 8 -~~

Retail lenders and branch managers are authorized to originate and approve direct consumer loan requests that are within policy guidelines and within the lender’s approved lending limit. Loans in excess of the lender’s approved lending limit may be approved by retail lending managers up to their approved lending limit. Loans in excess of the retail lending manager’s authorized lending limit or outside of policy must be approved by Senior Loan Committee and, if necessary, by the Executive Loan Committee. Indirect consumer loans originated by auto dealers are underwritten and approved by a designated underwriter in accordance with company policy and lending limits.

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

	- 10 -

Adjustable-rate loans represented ~~7.1%~~9.2% of First Defiance’s total originations of one-to-four family residential mortgage loans in ~~2012~~2013 compared to 7.1% and 5.4% during 2012 and ~~6.6% during~~ 2011, ~~and 2010,~~ respectively.

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

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

Years Ended December 31
2012 2011 2010
(In Thousands)
Loan originations:
Single family residential $ 546,773 $ 282,321 $ 420,644
Multi-family residential 28,521 11,401 44,173
Non-residential real estate 191,742 125,884 149,717
Construction 33,557 29,189 11,821
Commercial 603,415 186,338 290,501
Home equity and improvement 32,684 19,063 15,289
Consumer finance 9,722 10,216 12,230
Total loans originated 1,446,414 664,412 944,375
Loans Purchased: - 25,842 -
Loan reductions:
Loan pay-offs 299,479 227,812 254,537
Loans sold 514,351 266,580 390,908
Periodic principal repayments 580,919 228,810 406,056
1,394,749 723,202 1,051,501
Net (decrease) increase in total loans and loans held for sale $ 51,665 $ (32,948 ) $ (107,126 )

	Years Ended December 31
	2013		2012		2011
	(In Thousands)
Loan originations:
Single family residential	$	326,700	$	546,773	$	282,321
Multi-family residential		50,874		28,521		11,401
Non-residential real estate		113,999		191,742		125,884
Construction		67,530		33,557		29,189
Commercial		435,248		603,415		186,338
Home equity and improvement		41,552		32,684		19,063
Consumer finance		10,043		9,722		10,216
Total loans originated		1,045,946		1,446,414		664,412
Loans purchased:		4,545		-		25,842
Loan reductions:
Loan pay-offs		205,254		299,479		227,812
Loans sold		315,812		514,351		266,580
Periodic principal repayments		473,343		580,919		228,810
		994,409		1,394,749		723,202
Net (decrease) increase in total loans and loans held for sale	$	56,082	$	51,665	$	(32,948)

Asset Quality

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

~~- 9 -~~

Delinquent Loans — The following table sets forth information concerning delinquent loans at December 31, ~~2012,~~2013, in dollar amount and as a percentage of First Defiance’s total loan portfolio. The amounts presented represent the total outstanding principal balances of the related loans, rather than the actual payment amounts that are past due.

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

One to four family residential real estate $ 1,632 0.10 % $ 728 0.05 % $ 1,799 0.12 % $ 4,159 0.27 %
Construction - 0.00 - 0.00 - 0.00 - 0.00
Nonresidential and Multi- family residential 1,482 0.10 2,602 0.17 7,650 0.49 11,734 0.76
Home equity and improvement 2,276 0.15 223 0.01 217 0.01 2,716 0.17
Consumer finance 227 0.01 8 0.00 - 0.00 235 0.01
Commercial 580 0.04 1,338 0.09 3,342 0.22 5,260 0.35
Total $ 6,197 0.40 % $ 4,899 0.32 % $ 13,008 0.84 % $ 24,104 1.56 %

	- 11 -

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

One to four family residential real estate	$	2,045	0.12	%	$	594	0.04	%	$	1,394	0.09	%	$	4,033		0.25	%
Nonresidential and Multi- family residential		1,420	0.09			1,410	0.09			5,936	0.36			8,766		0.54
Commercial		37	0.00			26	0.00			3,984	0.25			4,047		0.25
Construction		-	0.00			-	0.00			-	0.00			-		0.00
Home Equity and Improvement		1,153	0.07			153	0.01			413	0.03			1,719		0.11
Consumer Finance		131	0.01			-	0.00			-	0.00			131		0.01
Total	$	4,786	0.29	%	$	2,183	0.14	%	$	11,727	0.73	%	$	18,696		1.16	%

Overall, the level of delinquencies at December 31, ~~2012~~2013 has decreased from the levels at December 31, ~~2011,~~2012, when First Defiance reported that ~~2.35%~~1.56% of its outstanding loans were at least 30 days delinquent. The level of total loans 90 or more days delinquent has decreased to 0.73% at December 31, 2013 from 0.84% at December 31, ~~2012 from 1.47% at December 31, 2011.~~2012. The level of total loans 60-89 days delinquent ~~increased~~decreased to 0.14% at December 31, 2013 from 0.32% at December 31, ~~2012 from 0.29% at December 31, 2011.~~2012. Overall, the level of loans that were 30 to 59 days past due past due decreased from ~~0.59% at December 31, 2011 to~~ 0.40% at December 31, ~~2012.~~2012 to 0.29% at December 31, 2013. Management has assessed the collectability of all loans that are 90 days or more delinquent as part of its procedures in establishing the allowance for loan losses.

Nonperforming Assets –All loans are reviewed on a regular basis and are placed on non-accrual status when, in the opinion of management, the collectability of additional interest is ~~deemed insufficient to warrant further accrual.~~not expected. Generally, First Defiance places all loans more than 90 days past due on non-accrual status. First Defiance also places loans on non-accrual when the loan is paying as agreed but the Company believes the financial condition of the borrower is such that this classification is warranted. When a loan is placed on non-accrual status, total unpaid interest accrued to date is reversed. Subsequent payments are generally applied to the outstanding principal balance but may be recorded as interest income, depending on the assessment of the ultimate collectability of the loan. First Defiance considers that a loan is impaired when, based on current information and events, it is probable that it will be unable to collect all amounts due (both principal and interest) according to the contractual terms of the loan agreement. First Defiance measures impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral, if collateral dependent. If the estimated recoverability of the impaired loan is less than the recorded investment, First Defiance will recognize impairment by allocating a portion of the allowance for loan ~~losses.~~

~~Impaired loans acquired in the ComBanc, Genoa and Pavilion acquisitions have been accounted for under the provisions of FASB ASC Topic 310 Subtopic 30,~~~~Loans and Debt Securities Acquired with Deteriorated Credit Quality.~~ ~~Such loans were recorded at their fair value, which was estimated based~~losses on ~~the expected~~ cash flow ofdependent loans and by charging off the acquired loan. In the Genoa acquisition, 10 loan relationships with a stated value of $1.5 million were recorded at $721,000. In the ComBanc acquisition, 12 loan relationships with a stated value of $3.4 million were recorded at $2.0 million. In the Pavilion acquisition, 12 loan relationships with a stated value of $6.4 million were recorded at $4.4 million. Of all these impaired loans that were acquired in an acquisition, as of December 31, 2012, 8 loan relationships remained with a contractual balance of $855,000 and were recorded at $512,000. If management’s expectations about the cash flow of those loans changes over time, the difference will be recognized as a yield adjustment over the remaining life of the respective loan. In 2012, $173,000 of impairment was recognized as a yield adjustment. There were no significant changes in the expected cash flows of the remaining loan relationships in 2012.deficiency on collateral dependent loans.

~~- 10 -~~

Loans originated by First Federal having principal balances of $57.3 million, $71.1 million ~~$47.9 million~~ and ~~$70.9~~$47.9 million were considered impaired as of December 31, 2013, 2012 ~~2011~~ and ~~2010,~~2011, respectively. The ~~increase~~decrease in impaired loans from ~~2011~~2012 to ~~2012~~2013 is mainly due to a concerted effort by management and the ~~increase in troubled debt restructurings, which increased due primarily~~lending staff to ~~new regulatory guidance released in July~~work specific credits out of ~~2012 and discussion with our primary~~the bank ~~regulator.~~or back to performing status. These amounts of impaired loans exclude large groups of small-balance homogeneous loans that are collectively evaluated for impairment such as residential mortgage, consumer installment and credit card loans. There was ~~$1.3~~$2.1 million of interest received and recorded in income during ~~2012~~2013 related to impaired loans. There was ~~$1.6~~$1.3 million and ~~$2.0~~$1.6 million recorded in ~~2011~~2012 and ~~2010,~~2011, respectively. Unrecorded interest income based on the loan’s contractual terms on these impaired loans and all non-performing loans in 2013, 2012 and 2011 ~~and 2010~~ was $1.1 million, $2.5 million, ~~$2.3 million,~~ and ~~$2.0~~$2.3 million, respectively. The average recorded investment in impaired loans during 2013, 2012 ~~2011~~ and ~~2010~~2011 (excluding loans accounted for under FASB ASC Topic 310 Subtopic 30) was $64.7 million, $53.3 million ~~$61.0 million~~ and ~~$64.4~~$61.0 million, respectively. The total allowance for loan losses related to these loans was $1.4 million, $1.5 million, ~~$7.2 million,~~ and ~~$16.6~~$7.2 million at December 31, 2013, 2012 and 2011, ~~and 2010,~~ respectively.

	- 12 -

Real estate acquired by foreclosure is classified as real estate owned until such time as it is sold. First Defiance also repossesses other assets securing loans, consisting primarily of automobiles. When such property is acquired it is recorded at fair value less cost to sell. Costs relating to development and improvement of property are capitalized, whereas costs relating to holding the property are expensed. Valuations are periodically performed by management and a write-down of the value is recorded with a corresponding charge to operations if it is determined that the carrying value of property exceeds its estimated net realizable value. During ~~2012,~~2013, First Defiance recognized ~~$416,000~~$740,000 of expense related to write-downs in value of real estate acquired by foreclosure. The balance of real estate owned at December 31, ~~2012~~2013 was ~~$3.8~~$5.9 million.

As of December 31, ~~2012,~~2013, First Defiance’s total non-performing loans amounted to ~~$32.6~~$27.8 million or ~~2.14%~~1.76% of total loans (net of undisbursed loan funds and deferred fees and costs), compared to ~~$39.3~~$32.6 million or ~~2.64%~~2.14% of total loans, at December 31, ~~2011.~~2012. Non-performing loans are loans which are more than 90 days past due or on nonaccrual. The nonperforming loan balance includes ~~$28.0~~$23.8 million of loans originated by First Federal also considered impaired or acquired loans accounted for under Topic 310 Subtopic 30.

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

~~- 11 -~~

December 31
2012 2011 2010 2009 2008
(Dollars in Thousands)
Nonperforming loans:
One to four family residential real estate $ 3,602 $ 3,890 $ 7,232 $ 5,349 $ 4,584
Construction - - 64 675 72
Nonresidential and multi-family residential real estate 23,090 28,150 21,737 24,042 19,979
Commercial 5,661 6,884 11,547 10,615 2,881
Home equity and improvement 217 394 446 451 432
Consumer finance - 10 14 59 69
Total nonperforming loans 32,570 39,328 41,040 41,191 28,017

Real estate owned 3,805 3,608 9,591 13,413 6,973
Other repossessed assets - 20 - 114 27
Total repossessed assets 3,805 3,628 9,591 13,527 7,000

Total nonperforming assets $ 36,375 $ 42,956 $ 50,631 $ 54,718 $ 35,017

Restructured loans, accruing $ 28,203 $ 3,380 $ 6,001 $ 6,715 $ 6,250

Total nonperforming assets as a percentage of total assets 1.78 % 2.08 % 2.49 % 2.66 % 1.79 %
Total nonperforming loans as a percentage of total loans* 2.14 % 2.64 % 2.70 % 2.55 % 1.73 %
Allowance for loan losses as a percent of total nonperforming assets 73.43 % 77.41 % 81.14 % 66.79 % 70.23 %

	December 31
	2013			2012			2011			2010			2009
	(Dollars in Thousands)
Nonperforming loans:
One to four family residential real estate	$	3,273		$	3,602		$	3,890		$	7,232		$	5,349
Nonresidential and multi-family residential real estate		15,834			23,090			28,150			21,737			24,042
Commercial		8,327			5,661			6,884			11,547			10,615
Construction		-			-			-			64			675
Home Equity and Improvement		413			217			394			446			451
Consumer finance		-			-			10			14			59
Total nonperforming loans		27,847			32,570			39,328			41,040			41,191

Real estate owned		5,859			3,805			3,608			9,591			13,413
Other repossessed assets		-			-			20			-			114
Total repossessed assets		5,859			3,805			3,628			9,591			13,527

Total nonperforming assets	$	33,706		$	36,375		$	42,956		$	50,631		$	54,718

Restructured loans, accruing	$	27,630		$	28,203		$	3,380		$	6,001		$	6,715

Total nonperforming assets as a percentage of total assets		1.58	%		1.78	%		2.08	%		2.49	%		2.66	%
Total nonperforming loans as a percentage of total loans*		1.76	%		2.14	%		2.64	%		2.70	%		2.55	%
Total nonperforming assets as a percentage of total loans plus REO*		2.12	%		2.38	%		2.88	%		3.70	%		3.77	%
Allowance for loan losses as a percent of total nonperforming assets		74.02	%		73.43	%		77.41	%		81.14	%		66.79	%

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

	- 13 -

Allowance for Loan Losses –First Defiance maintains an allowance for loan losses to absorb probable incurred credit losses in the loan portfolio. The allowance for loan loss is made up of two components. The first is a general reserve, which is used to record loan loss reserves for groups of homogenous loans in which the Company estimates the losses incurred in the portfolio based on quantitative and qualitative factors. Quantitative factors are primarily the historical loss experience of the portfolio for the most recent ~~two~~three years. Qualitative factors that may lead the Company to add additional general reserves on the non-impaired loan portfolio include such things as: changes in international, national and local economic business conditions, changes in the value of underlying collateral for collateral dependent loans, changes in the political and regulatory environment and changes in the trends of the loan portfolio.

The second component of the allowance for loan loss is the specific reserve in which the Company sets aside reserves based on the analysis of individual credits. In evaluating the adequacy of its allowance each quarter, management grades all loans in the commercial portfolio. In establishing specific reserves, the Company analyzes all substandard, doubtful and loss graded loans quarterly and makes judgments about the risk of loss based on the cash flow of the borrower, the value of any collateral and the financial strength of any guarantors. If the loan is cash flow dependent, then a specific reserve is established for the discount on the net present value of expected future cash flows. If the loan is collateral dependent, then any shortfall is usually charged off. The Company also considers the impacts of any Small Business Association or Farm Service Agency guarantees. An internal loan review of all loan relationships between $250,000 and $1,000,000 is performed annually. Management also engages a third-party to do an annual review of all loan relationships in excess of $1,000,000. Both of these loan reviews, among other things, independently assess management’s loan grades.
~~- 12 -~~
Loans charged-off are charged against the allowance when such loans meet the Company’s established policy on loan charge-offs and the allowance itself is adjusted quarterly by recording a provision for loan losses. As such, actual losses and losses provided for should be approximately the same if the overall quality, composition and size of the portfolio remained static. To the extent that the portfolio grows at a rapid rate or overall quality deteriorates, the provision generally will exceed charge-offs, as ~~happened~~ in ~~2008 through~~2009 and 2010. However, in certain circumstances, as ~~happened~~ in 2011 ~~and 2012,~~through 2013, net charge-offs may exceed the provision for loan losses when management determines that loans previously provided for in the allowance for loan losses are uncollectible and should be charged off or as overall credit improves. Although management believes that it uses the best information available to make such determinations, future adjustments to the allowances may be necessary, and net earnings could be significantly affected, if circumstances differ substantially from the assumptions used in making the initial determinations.
At December 31, ~~2012,~~2013, First Defiance’s allowance for loan losses amounted to ~~$26.7~~$25.0 million compared to ~~$33.3~~$26.7 million at December 31, ~~2011.~~2012. The following table sets forth the activity in First Defiance’s allowance for loan losses during the periods indicated.
Years Ended December 31
2012 2011 2010 2009 2008
(Dollars in Thousands)

Allowance at beginning of year $ 33,254 $ 41,080 $ 36,547 $ 24,592 $ 13,890
Provision for credit losses 10,924 12,434 23,177 23,232 12,585
Allowance acquired in acquisitions - - - - 4,258
Charge-offs:
Single family residential real estate (2,515 ) (2,753 ) (3,092 ) (2,281 ) (1,185 )
Commercial real estate and multi-family (11,319 ) (13,150 ) (9,928 ) (5,799 ) (3,758 )
Commercial (4,047 ) (4,398 ) (5,118 ) (2,664 ) (813 )
Consumer finance (133 ) (95 ) (124 ) (320 ) (380 )
Home equity and improvement (1,165 ) (1,052 ) (1,066 ) (762 ) (363 )
Total charge-offs (19,179 ) (21,448 ) (19,328 ) (11,826 ) (6,499 )
Recoveries 1,712 1,188 684 549 358
Net charge-offs (17,467 ) (20,260 ) (18,644 ) (11,277 ) (6,141 )
Ending allowance $ 26,711 $ 33,254 $ 41,080 $ 36,547 $ 24,592

Allowance for loan losses to total non- performing loans at end of year 82.01 % 84.56 % 100.10 % 88.73 % 87.78 %
Allowance for loan losses to total loans at end of year* 1.75 % 2.24 % 2.70 % 2.26 % 1.52 %
Allowance for loan losses to net charge-offs for the year 152.92 % 164.14 % 220.34 % 324.08 % 400.46 %
Net charge-offs for the year to average loans 1.18 % 1.41 % 1.21 % 0.70 % 0.41 %
- 14 -

Years Ended December 31
2013 2012 2011 2010 2009
(Dollars in Thousands)

Allowance at beginning of year $ 26,711 $ 33,254 $ 41,080 $ 36,547 $ 24,592
Provision for credit losses 1,824 10,924 12,434 23,177 23,232
Allowance acquired in acquisitions - - - - -
Charge-offs:
Single family residential real
    estate (643) (2,515) (2,753) (3,092) (2,281)
Commercial real estate and
    multi-family (2,475) (11,319) (13,150) (9,928) (5,799)
Commercial (1,230) (4,047) (4,398) (5,118) (2,664)
Consumer finance (94) (133) (95) (124) (320)
Home equity and improvement (757) (1,165) (1,052) (1,066) (762)
Total charge-offs (5,199) (19,179) (21,448) (19,328) (11,826)
Recoveries 1,614 1,712 1,188 684 549
Net charge-offs (3,585) (17,467) (20,260) (18,644) (11,277)
Ending allowance $ 24,950 $ 26,711 $ 33,254 $ 41,080 $ 36,547

Allowance for loan losses to total
    non-performing loans at end of
    year 89.60 % 82.01 % 84.56 % 100.10 % 88.73 %
Allowance for loan losses to total
    loans at end of year* 1.58 % 1.75 % 2.24 % 2.70 % 2.26 %
Allowance for loan losses to net
    charge-offs for the year 695.96 % 152.92 % 164.14 % 220.34 % 324.08 %
Net charge-offs for the year to
    average loans 0.23 % 1.18 % 1.41 % 1.21 % 0.70 %
* Total loans are net of undisbursed loan funds and deferred fees and costs.
The provision for credit losses has decreased in ~~2012~~2013 and ~~2011~~2012 from previous years due to ~~a stabilization~~improved credit quality of the loan portfolio. Charge-offs ~~remained high in 2012 but~~ trended downward in ~~the two most recent quarters.~~2013. Management anticipates a stable to lower level of net charge-offs in ~~2013~~2014 compared to ~~2012~~2013 and feels that the level of the allowance for loan losses at December 31, ~~2012~~2013 is sufficient to cover the estimated losses incurred but not yet recognized in the loan portfolio.
The following table sets forth information concerning the allocation of First Defiance’s allowance for loan losses by loan categories at the dates indicated. For information about the percent of total loans in each category to total loans, see “Lending Activities-Loan Portfolio Composition.”
December 31
2013 2012 2011 2010 2009
Percent of Percent of Percent of Percent of Percent of
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
(Dollars in Thousands)
Single family residential and
    construction $ 2,981 17.5 % $ 3,581 15.5 % $ 4,158 15.7 % $ 6,029 15.5 % $ 6,048 16.8 %
Nonresidential and Multi-family
    residential real estate 14,508 50.8 14,899 51.6 20,490 51.7 22,355 50.1 18,876 49.1
Other:
Commercial loans 5,678 24.1 6,325 24.9 6,576 23.2 10,871 24.2 9,444 23.1
Consumer and home equity
    and improvement loans 1,783 7.6 1,906 8.0 2,030 9.4 1,825 10.2 2,179 11.0
$ 24,950 100.0 % $ 26,711 100.0 % $ 33,254 100.0 % $ 41,080 100.0 % $ 36,547 100.0 %
- 1315 -

December 31
2012 2011 2010 2009 2008
Percent of Percent of Percent of Percent of Percent of
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
(Dollars in Thousands)
Single family residential and construction $ 3,581 15.5 % $ 4,158 15.7 % $ 6,029 15.5 % $ 6,048 16.8 % $ 3,678 19.8 %
Nonresidential and Multi-family residential real
estate 14,899 51.6 20,490 51.7 22,355 50.1 18,876 49.1 13,436 46.1
Other:
Commercial loans 6,325 24.9 6,576 23.2 10,871 24.2 9,444 23.1 6,351 21.8
Consumer and home equity and improvement loans 1,906 8.0 2,030 9.4 1,825 10.2 2,179 11.0 1,127 12.3
$ 26,711 100.0 % $ 33,254 100.0 % $ 41,080 100.0 % $ 36,547 100.0 % $ 24,592 100.0 %
Sources of Funds
General–Deposits are the primary source of First Defiance’s funds for lending and other investment purposes. In addition to deposits, First Defiance derives funds from loan principal repayments. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows are significantly influenced by general interest rates and money market conditions. Borrowings from the FHLB may be used on a short-term basis to compensate for reductions in the availability of funds from other sources. They may also be used on a longer-term basis for general business purposes. During 2007, First Defiance issued $15.0 million of trust preferred securities through an unconsolidated affiliated trust. Proceeds from the offering were used for general corporate purposes including funding of dividends and stock buybacks as well as bolstering regulatory capital at the First Federal level. First Defiance also issued $20.0 million of similar trust preferred securities in 2005.
Deposits– First Defiance’s deposits are attracted principally from within First Defiance’s primary market area through the offering of a broad selection of deposit instruments, including checking accounts, money market accounts, ~~regular~~ savings accounts, and term certificate accounts. Deposit account terms vary, with the principal differences being the minimum balance required, the time periods the funds must remain on deposit, and the interest rate.
To supplement its funding needs, First Defiance also utilizes the national market for Certificates of Deposit. Such deposits have maturities ranging from one to thirty-five months. These deposits are issued at the current rates available to customers in our market areas. The total balance of national certificates of deposit was ~~$2.0 million~~$0 and ~~$10.6~~$2.0 million at December 31, 2013 and 2012, ~~and 2011,~~ respectively.
Average balances and average rates paid on deposits are as follows:
Years Ended December 31
2012 2011 2010
Amount Rate Amount Rate Amount Rate
(Dollars in Thousands)
Non-interest-bearing demand deposits $ 266,913 - $ 231,343 - $ 200,864 -
Interest bearing demand deposits 629,568 0.20 % 592,093 0.36 % 529,078 0.59 %
Savings deposits 164,508 0.07 153,318 0.16 139,049 0.26
Time deposits 558,648 1.21 613,374 1.60 721,203 2.18
Totals $ 1,619,637 0.50 % $ 1,590,128 0.77 % $ 1,590,194 1.21 %
~~- 14 -~~
Years Ended December 31
2013 2012 2011
Amount Rate Amount Rate Amount Rate
(Dollars in Thousands)
Non-interest-bearing demand deposits $ 308,591 - $ 266,913 - $ 231,343 -
Interest bearing demand deposits 677,903 0.17 % 629,568 0.20 % 592,093 0.36 %
Savings deposits 179,041 0.05 164,508 0.07 153,318 0.16
Time deposits 496,360 0.95 558,648 1.21 613,374 1.60
Totals $ 1,661,895 0.36 % $ 1,619,637 0.50 % $ 1,590,128 0.77 %
The following table sets forth the maturities of First Defiance’s retail certificates of deposit having principal amounts greater than $100,000 at December 31, ~~2012~~2013 (in thousands):
Retail certificates of deposit maturing in quarter ending:
March 31, 2013 $ 34,052
June 30, 2013 26,614
September 30, 2013 30,059
December 31, 2013 21,143
After December 31, 2013 64,161
Total retail certificates of deposit with balances greater than $100 $ 176,029
Retail certificates of deposit maturing in quarter ending:
March 31, 2014 $ 28,608
June 30, 2014 28,862
September 30, 2014 30,192
December 31, 2014 15,194
After December 31, 2014 69,598
Total retail certificates of deposit with balances greater than $100,000 $ 172,454
At December 31, ~~2012,~~2013, the Company had total deposits having principal amounts greater than $250,000 of ~~$387.0~~$393.0 million.
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The following table details the deposit accrued interest payable as of December 31:
2012 2011
(In Thousands)

Interest bearing demand deposits and money market accounts $ 58 $ 26
Certificates of deposit 13 92
$ 71 $ 118
2013 2012
(In Thousands)

Interest bearing demand deposits and money market accounts $ 14 $ 13
Certificates of deposit 34 58
$ 48 $ 71
For additional information regarding First Defiance’s deposits see Note 11 to the financial statements.
Borrowings—First Defiance may obtain advances from the FHLB of Cincinnati by pledging certain of its residential mortgage loans, non-residential loans, multi-family loans, home equity loans and investment securities provided certain standards related to creditworthiness have been met. Such advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities.
The following table sets forth certain information as to First Defiance’s FHLB advances and other borrowings at the dates indicated.
December 31
2012 2011 2010
(Dollars in Thousands)
Long-term:
FHLB advances $ 12,796 $ 81,841 $ 116,885
Weighted average interest rate 2.80 % 3.66 % 3.68 %

Short-term:
FHLB advances $ - $ - $ -
Weighted average interest rate - - -
Securities sold under agreement to repurchase $ 51,702 $ 60,386 $ 56,247
Weighted average interest rate 0.63 % 0.92 % 0.98 %
~~- 15 -~~
December 31
2013 2012 2011
(Dollars in Thousands)
Long-term:
FHLB advances $ 22,520 $ 12,796 $ 81,841
Weighted average interest rate 2.36 % 2.80 % 3.66 %

Short-term:
Securities sold under agreement to repurchase $ 51,919 $ 51,702 $ 60,386
Weighted average interest rate 0.31 % 0.63 % 0.92 %
The following table sets forth the maximum month-end balance and average balance of First Defiance’s long-term FHLB advances and other borrowings during the periods indicated.
Years Ended December 31
2012 2011 2010
(Dollars in Thousands)
Long-term:
FHLB advances:
Maximum balance $ 81,838 $ 116,882 $ 146,927
Average balance 66,121 93,652 127,281
Weighted average interest rate 3.67 % 3.43 % 3.70 %
Years Ended December 31
2013 2012 2011
(Dollars in Thousands)
Long-term:
FHLB advances:
Maximum balance $ 22,765 $ 81,838 $ 116,882
Average balance 16,569 66,121 93,652
Weighted average interest rate 2.62 % 3.67 % 3.43 %
- 17 -

The following table sets forth the maximum month-end balance and average balance of First Defiance’s short-term FHLB advances and other borrowings during the periods indicated.
Years Ended December 31
2012 2011 2010
(Dollars in Thousands)
Short-term:
FHLB advances:
Maximum balance $ - $ - $ -
Average balance - 16 -
Weighted average interest rate - 0.17 % -
Securities sold under agreement to repurchase:
Maximum balance $ 57,050 $ 61,240 $ 56,247
Average balance 53,171 56,495 47,088
Weighted average interest rate 0.70 % 0.94 % 0.97 %
Years Ended December 31
2013 2012 2011
(Dollars in Thousands)
Short-term:
FHLB advances:
Maximum balance $ 50,000 $ - $ -
Average balance 1,164 - 16
Weighted average interest rate 0.09 % - 0.17 %
Securities sold under agreement to repurchase:
Maximum balance $ 57,182 $ 57,050 $ 61,240
Average balance 50,877 53,171 56,495
Weighted average interest rate 0.44 % 0.70 % 0.94 %
First Defiance borrows funds under a variety of programs at the FHLB. As of December 31, ~~2012,~~2013, there was ~~$12.8~~$22.5 million outstanding under various long-term FHLB advance programs. First Defiance utilizes short-term advances from the FHLB to meet cash flow needs and for short-term investment purposes. At December 31, ~~2012~~2013 and December 31, ~~2011,~~2012, no outstanding balances existed under First Defiance’s Cash Management Advance Line of Credit. The total available under this line is $15.0 million. Additionally, First Defiance has $100.0 million available under a REPO line of credit. Amounts are generally borrowed under these lines on an overnight basis. First Federal’s total borrowing capacity at the FHLB is limited by various collateral requirements. Eligible collateral includes mortgage loans, home equity loans, non-mortgage loans, cash, and investment securities. At December 31, ~~2012,~~2013, other than amounts available on the REPO and Cash Management line, First Federal had additional borrowing capacity with the FHLB of ~~$324.9~~$428.7 million as a result of these collateral requirements.
As a member of the FHLB of Cincinnati, First Federal must maintain a minimum investment in the capital stock of that FHLB in an amount defined in the FHLB’s regulations. First Federal is permitted to own stock in excess of the minimum requirement and is in compliance with the minimum requirement with an investment in stock of the FHLB of Cincinnati of $19.3 million at December 31, ~~2012.~~2013. First Federal also acquired $2.0 million in stock of the FHLB of Indianapolis from the Pavilion acquisition, which had a balance of $1.3 million at December 31, 2012. ~~All~~The balance of ~~the FHLB of Indianapolis~~this stock was ~~redeemed in the first quarter of~~$10,000 at December 31, 2013.
Each FHLB is required to establish standards of community investment or service that its members must maintain for continued access to long-term advances from the FHLB. The standards take into account a member’s performance under the Community Reinvestment Act and its record of lending to first-time homebuyers.
~~- 16 -~~
For additional information regarding First Defiance’s FHLB advances and other debt see Notes 12 and 14 to the financial statements.
Subordinated Debentures -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 the transaction, the Company issued $15.5 million of Junior Subordinated Deferrable Interest Debentures (Subordinated Debentures) to Trust Affiliate II. Trust Affiliate II 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 Subordinated Debentures held by Trust Affiliate II are the sole assets of the trust. 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 1.75% and 1.89% as of December 31, ~~2012. As of December 31, 2011, the rate was a fixed rate equal to 6.44%.~~2013 and 2012 respectively.
- 18 -

The Trust Preferred Securities 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 June 15, 2037, but could have been redeemed at the Company’s option at any time on or after June 15, 2012, or at any time upon certain events.
In October 2005, the Company formed an affiliated trust, First Defiance Statutory Trust I (“Trust Affiliate I”) that issued $20 million of Trust Preferred Securities. In connection with the 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 Subordinated Debentures held by Trust Affiliate I are the sole assets of the trust. 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%, or 1.63% and 1.77% as of December 31, ~~2012. The rate was 1.73% at December 31, 2011.~~
2013 and 2012 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 could have been redeemed by the issuer at par after October 28, 2010. The Subordinated Debentures mature on December 15, 2035.
Repurchase of Preferred ~~Stock~~Shares related to the Capital Purchase Program
In June 2012, the U.S. Treasury sold its preferred ~~stock~~shares of the Company through a public offering structured as a modified Dutch auction. The Company bid on its preferred ~~stock~~shares in the auction after receiving approval from its regulators. The clearing price per ~~share for the~~ preferred ~~shares~~share was $962.66 (compared to a par value of $1,000.00 per share) and the Company was successful in repurchasing 16,560 of the 37,000 preferred shares outstanding through the auction process. The Company also ~~successfully~~ acquired an additional 19,440 preferred shares in the secondary market prior to the end of the second quarter of 2012. The remaining 1,000 outstanding preferred shares were purchased at par value on July 18, 2012. The clearing prices per ~~share for the~~ preferred ~~shares~~share purchased in the secondary market were as follows: 1,100 shares at $997.50, ~~1,500~~2,500 shares at $1,000.00 and 16,840 shares at $998.75.
~~On July 18, 2012, the Company purchased the remaining 1,000 preferred shares at par value to complete the entire repurchase of the 37,000 preferred shares.~~
~~- 17 -~~
The net balance sheet impact of the repurchase was a reduction to stockholders’ equity of $36.4 million which is comprised of a decrease in preferred ~~stock~~shares of $37.0 million and a $642,000 increase to retained earnings related to the discount on the shares repurchased, which is also included in net income applicable to common shares for purposes of calculating earnings per share.
Included in the 2012 operating results is $181,000 of costs incurred by the Company related to the U.S. Treasury’s offering. These costs ~~are~~were not tax-deductible.
Balance Sheet Restructure
In the fourth quarter of 2012, the Company executed a balance sheet restructuring strategy to enhance the Company’s current and future profitability while increasing its capital ratios and protecting the balance sheet against rising rates. The strategy required taking an after tax loss of approximately $260,000 by selling $60 million in securities for a gain of $1.6 million and paying off $62.0 million in FHLB advances with a prepayment penalty of $2.0 million.
- 19 -

Employees
First Defiance had ~~553~~549 employees at December 31, ~~2012.~~2013. None of these employees are represented by a collective bargaining agent, and First Defiance believes that it maintains good relationships with its personnel.
Competition
Competition in originating non-residential mortgage and commercial loans comes mainly from commercial banks with banking center offices in the Company’s market area. Competition for the origination of mortgage loans arises mainly from savings associations, commercial banks, and mortgage companies. The distinction among market participants is based on a combination of price, the quality of customer service and name recognition. The Company competes for loans by offering competitive interest rates and product types and by seeking to provide a higher level of personal service to borrowers than is furnished by competitors. First Federal has a significant market share of the lending markets in which it conducts operations.
Management believes that First Federal’s most direct competition for deposits comes from local financial institutions. The distinction among market participants is based on price and the quality of customer service and name recognition. First Federal’s cost of funds fluctuates with general market interest rates. During certain interest rate environments, additional significant competition for deposits may be expected from corporate and governmental debt securities, as well as from money market mutual funds. First Federal competes for conventional deposits by emphasizing quality of service, extensive product lines and competitive pricing.
Regulation
General –Provisions of The Dodd-Frank Wall Street Reform and Consumer Protections Act (the “Dodd-Frank Act”) required the transfer of Office of Thrift Supervision functions to the Office of the Comptroller of the Currency (“OCC”), the FDIC, the Federal Reserve Board (“Federal Reserve”) and the Bureau of Consumer Financial Protection on July 21, 2011. As a result, First Defiance and First Federal are subject to regulation, examination and oversight by the Office of the Comptroller of the Currency (“OCC”) and the Federal Reserve ~~and the OCC, respectively.~~Board (“Federal Reserve”). Because the FDIC insures First Federal’s deposits, First Federal is also subject to examination and regulation by the FDIC. First Defiance and First Federal must file periodic reports with the Federal Reserve and the OCC and examinations are conducted periodically by the Federal Reserve, OCC and the FDIC to determine whether First Defiance and First Federal are in compliance with various regulatory requirements and are operating in a safe and sound manner. First Federal is subject to various consumer protection and fair lending laws. These laws govern, among other things, truth-in-lending disclosure, equal credit opportunity, and, in the case of First Federal, fair credit reporting and community reinvestment. Failure to abide by federal laws and regulations governing community reinvestment could limit the ability of First Federal to open a new branch or engage in a merger transaction. Community reinvestment regulations evaluate how well and to what extent First Federal lends and invests in its designated service area, with particular emphasis on low-to-moderate income communities and borrowers in such areas.
~~- 18 -~~
First Defiance is also subject to various Ohio laws which restrict takeover bids, tender offers and control-share acquisitions involving public companies which have significant ties to Ohio.
Regulatory Capital Requirements –First Federal ~~Bank~~ is required by regulations to meet certain minimum capital requirements. Current capital requirements call for core capital of 4.0% of adjusted total assets, except for associations with the highest examination rating and acceptable levels of risk, and risk-based capital of 8.0% of risk-weighted assets.
- 20 -

The following table sets forth the amount and percentage level of regulatory capital of First Federal ~~Bank~~ at December 31, ~~2012,~~2013, and the amount by which it exceeds the minimum capital requirements. Tier 1 capital is reflected as a percentage of adjusted total assets. Tier 1 capital to risk-weighted assets and total (or risk-based) capital, which consists of core and supplementary capital, is reflected as a percentage of risk-weighted assets. Assets, excluding the collateralized debt obligation securities, are weighted at percentage levels ranging from 0% to 100% depending on their relative risk.
Actual Minimum Required for
Adequately Capitalized Minimum Required for Well
Capitalized
Amount Ratio Amount Ratio Amount Ratio
Tier 1 Capital (1)
Consolidated $ 226,931 11.48 % $ 79,056 4.0 % N/A N/A
First Federal Bank $ 215,432 10.92 % $ 78,914 4.0 % $ 98,642 5.0 %

Tier 1 Capital (to Risk Weighted Assets) (1)
Consolidated $ 226,931 13.41 % $ 67,715 4.0 % N/A N/A
First Federal Bank $ 215,432 12.74 % $ 67,632 4.0 % $ 101,448 6.0 %

Total Capital (to Risk Weighted Assets) (1)
Consolidated $ 248,161 14.66 % $ 135,430 8.0 % N/A N/A
First Federal Bank $ 236,635 14.00 % $ 135,264 8.0 % $ 169,080 10.0 %
The collateralized debt obligations securities are subject to the dollar-for-dollar capital requirement.
Minimum Required for Minimum Required for Well
Actual Adequately Capitalized Capitalized
Amount Ratio Amount Ratio Amount Ratio
Tier 1 Capital (1)
Consolidated $ 246,258 11.86 % $ 83,045 4.0 % N/A N/A
First Federal $ 235,699 11.36 % $ 82,978 4.0 % $ 103,722 5.0 %

Tier 1 Capital (to Risk Weighted Assets) (1)
Consolidated $ 246,258 13.98 % $ 70,473 4.0 % N/A N/A
First Federal $ 235,699 13.39 % $ 70,418 4.0 % $ 105,627 6.0 %

Total Capital (to Risk Weighted Assets) (1)
Consolidated $ 268,317 15.23 % $ 140,947 8.0 % N/A N/A
First Federal $ 257,741 14.64 % $ 140,836 8.0 % $ 176,046 10.0 %
(1) Core capital is computed as a percentage of adjusted total assets of ~~$1.98~~$2.08 billion and ~~$1.97~~$2.07 billion for consolidated and ~~the bank,~~First Federal, respectively. Risk-based capital is computed as a percentage of total risk-weighted assets of ~~$1.69~~$1.76 billion and ~~$1.69~~$1.76 billion for consolidated and ~~the bank,~~First Federal, respectively.
To be categorized as a well-capitalized institution, institutions need to maintain a tier 1 (core) capital ratio of 5%, a tier 1 capital to risk-weighted assets ratio of 6%, and a risk-based capital ratio of 10%. First ~~Federal Bank’s~~Federal’s capital at December 31, ~~2012~~2013 meets the standards for a well-capitalized institution. There are no conditions or events since the most recent notification from any of the regulatory agencies regarding those capital standards that management believes have changed any of the well-capitalized categorizations of First ~~Federal Bank.~~Federal. First Defiance does not have capital requirements at this time.
Dividends -First Defiance’s payment of dividends to its shareholders is generally funded by the payment of dividends by the ~~Subsidiaries.Dividends~~Subsidiaries. Dividends paid by First Federal to First Defiance are subject to various regulatory restrictions. First Federal can initiate dividend payments equal to its net profits (as defined by statute) for the current year plus the preceding two calendar years. First Federal paid $3.0 million and $37.0 million in dividends in 2013 and 2012, respectively. First Insurance paid $1.5 million and ~~did not~~$300,000 in dividends to First Defiance during 2013 and 2012, respectively.
First Defiance’s ability to pay dividends to its shareholders is primarily dependent on the ability of the Subsidiaries to pay dividends to First Defiance. Capital distributions include, without limitation, payments of cash dividends, repurchases and certain other acquisitions by an association of its shares and payments to shareholders of another association in ~~2011.~~
~~- 19 -~~
an acquisition of such other association.
Transactions with Insiders and Affiliates -Loans to executive officers, directors and principal shareholders and their related interests must conform to the lending limits. Most loans to directors, executive officers and principal shareholders must be approved in advance by a majority of the “disinterested” members of board of directors of the association with any “interested” director not participating. All loans to directors, executive officers and principal shareholders must be made on terms substantially the same as offered in comparable transactions with the general public or as offered to all employees in a company-wide benefit program. Loans to executive officers are subject to additional restrictions. In addition, all related party transactions must be approved by the Company’s audit committee pursuant to NASDAQ Rule 5630, including loans made by financial institutions in the ordinary course of business. All transactions between savings associations and their affiliates must comport with Sections 23A and 23B of the Federal Reserve Act (FRA) and the Federal ~~Reserve Board’s~~Reserve’s (FRB) Regulation W. An affiliate of a savings association is any company or entity that controls, is controlled by, or is under common control with the savings association. First Defiance and First Insurance are affiliates of First Federal.
- 21 -

Holding Company Regulation -First Defiance is a unitary thrift holding company and is subject to the Federal Reserve regulations, examination, supervision and reporting requirements. Federal law generally prohibits a thrift holding company from controlling any other savings association or thrift holding company, without prior approval of the Federal Reserve, or from acquiring or retaining more than 5% of the voting shares of a savings association or holding company thereof, which is not a subsidiary.
Deposit Insurance -First Federal is ~~amember~~a member of the Deposit Insurance Fund (“DIF”), which is administered by the FDIC. Deposit accounts at First Federal are insured by the FDIC, generally up to a maximum of $250,000. Further, from December 31, 2010 through December 31, 2012, deposits held in noninterest-bearing transaction accounts were fully insured by the FDIC regardless of the amount in the account. The Bank opted to participate in the FDIC’s Transaction Account Guarantee Program, which expired on December 31, 2012. ~~See “Temporary Liquidity Guarantee Program” below.~~
During 2008, there were higher levels of bank failures which dramatically increased resolution costs of the FDIC and depleted the DIF. In order to maintain a strong funding position and restore reserve ratios of the DIF, on December 16, 2008, the FDIC issued a final rule that raised the then current assessment rates of insured institutions uniformly by 7 basis points (7 cents for every $100 of deposits), beginning with the first quarter of 2009. Further, beginning April 1, 2009, the FDIC required higher risk institutions to pay a larger share of premiums by factoring in rate adjustments based on secured liabilities and unsecured debt levels. On May 22, 2009, the FDIC issued a final rule that imposed a special assessment for the second quarter of 2009 of 5 basis points on each insured depositary institution’s assets minus its Tier 1 capital as of June 30, 2009, which was collected on September 30, 2009 in the amount of $906,000 for First Federal. On November 12, 2009, the FDIC issued a final rule requiring insured depository institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The prepaid assessments for these periods were collected on December 30, 2009, along with the regular quarterly risk-based deposit insurance assessment for the third quarter of 2009. For the fourth quarter of 2009 and for all of 2010, the prepaid assessment rate was based on each institution’s total base assessment rate in effect on September 30, 2009, modified to assume that the assessment rate in effect for the institution on September 30, 2009, was in effect for the entire third quarter of 2009. As of December 31, 2012 and 2011, $0 and $2.4 million in prepaid deposit insurance assessments is included in other assets in the accompanying consolidated balance sheet.
In October 2010, the FDIC adopted a new DIF restoration plan to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. Under the new restoration plan, the FDIC will maintain the current schedule of assessment rates for all depository institutions. At least semi-annually, the FDIC will update its loss and income projections for the fund and, if needed, will increase or decrease assessment rates, following notice-and-comment rulemaking if required.
~~- 20 -~~
Insurance of deposits may be terminated by the FDIC upon finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. Management does not currently know of any practice, condition or violation that might lead to termination of the deposit insurance.
~~Temporary Liquidity Guarantee Program -~~On October 14, 2008, the FDIC announced a new program, the Temporary Liquidity Guarantee Program. This program had two components – The Debt Guarantee Program and the Transaction Account Guarantee Program. The Debt Guarantee Program guaranteed newly issued senior unsecured debt of a participating organization, up to certain limits established for each institution, issued between October 14, 2008 and June 30, 2009. The FDIC will pay the unpaid principal and interest on an FDIC-guaranteed debt instrument upon the uncured failure of the participating entity to make a timely payment of principal or interest in accordance with the terms of the instrument. The guarantee remained in effect until June 30, 2012. In return for the FDIC’s guarantee, participating institutions will pay the FDIC a fee based on the amount and maturity of the debt. The Company opted to participate in the Debt Guarantee Program.
The Transaction Account Guarantee Program provided full deposit insurance coverage for non-interest bearing transaction deposit accounts, regardless of dollar amount, until December 31, 2012. An annualized 25 basis point assessment (increased from 10 basis points) on balances in noninterest-bearing transaction accounts that exceed the existing deposit insurance limit of $250,000 was assessed on a quarterly basis to insured depository institutions that had not opted out of this component of the Temporary Liquidity Guarantee Program. The Company opted to participate in the Transaction Account Guarantee Program, which expired on December 31, 2012.
~~- 21 -~~
~~Item 1A. Risk Factors~~
The risks listed below present risks that could have a material impact on the Company’s financial condition, results of operations, or business. The risks and uncertainties described below are the not the only ones facing the Company. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Company’s business operations.
~~Economic conditions may adversely affect First Defiance’s operations and financial condition.~~
~~Local Economic Conditions -~~ First Defiance conducts its banking and insurance business primarily in northwest Ohio, northeast Indiana and southeast Michigan. Unemployment rates for most of the counties within our geographic market area are above the median rate for the United States and above the median rates for the States of Ohio, Indiana, and Michigan. As reported for December 2012, the 14 counties in which our offices are located had unemployment rates between 5.2% and 10.9%, but all experienced an improvement in their unemployment rate in 2012 compared to 2011. In addition, real estate values in certain First Defiance’s markets have declined and may continue to decline in 2013. High unemployment and declining real estate values have a negative impact on the Company’s earnings and financial condition because:
· ~~more borrowers are unable to make payments on their loans;~~
· ~~the value of collateral securing loans has declined; and~~
· ~~the overall quality of the loan portfolio has declined.~~
~~General Economic Conditions~~ - Dramatic declines in real estate values, along with high unemployment, disrupted the national credit and capital markets over the last several years. As a result, many financial institutions have had to seek additional capital, to merge with larger and stronger institutions, to seek government assistance or bankruptcy protection and, in some cases; they have been forced into a sale or closed by the bank regulatory agencies. Many lenders and institutional investors have reduced and, in some cases, ceased to provide funding to borrowers, including to other financial institutions, because of concern about the stability of the financial markets and the strength of counterparties. It is difficult to predict how long these economic conditions will exist, which of our markets, products or other businesses will ultimately be affected, and whether management’s actions will effectively mitigate these external factors. The reduced availability of credit, the lack of confidence in the financial sector, decreased consumer confidence, increased volatility in the financial markets and reduced business activity could materially and adversely affect our business, financial condition and results of operations.
~~While economic conditions are beginning to improve slightly, First Defiance faces the following risks:~~
· inability of borrowers to make timely repayments of their loans, or decreases in value of real estate collateral securing the payment of such loans resulting in significant credit losses, which could result in increased delinquencies, foreclosures and customer bankruptcies, any of which could have a material adverse effect on our operating results;
· increased regulation of the financial services industry, including heightened legal standards and regulatory requirements or expectations; compliance with such regulation will likely increase costs and may limit the Company’s ability to pursue business opportunities;
· further disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations, may result in an inability to borrow on favorable terms or at all from other financial institutions;
· ~~increased competition among financial services companies due to the consolidation of financial institutions, which may adversely affect our ability to market the Company’s products and services; and~~
~~- 22 -~~
· ~~further increases in FDIC insurance premiums due to the market developments which have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits.~~
~~Declining Real Estate Values -~~Approximately 74.1% of the loans in First Federal’s portfolio are secured in whole or in part by real estate. Because residential real estate prices have declined, some of our borrowers have mortgages that exceed the value of their homes. The decline in home values, coupled with the weakened economy, has increased defaults and foreclosures. Commercial real estate values have also declined, and the owners of many income-producing properties are experiencing declines in their revenue, which may adversely affect their ability to repay their loans. Foreclosures and resolutions of nonperforming loans require significant personnel resources and involve other costs that may increase our operating expenses. Properties acquired through foreclosure or by deed in lieu of foreclosure are taking longer to sell in the current economy, which increases the Company’s expenses for managing, maintaining and insuring real estate owned. If First Federal is unable to sell properties at a price that will cover its expenses as well as the unpaid principal and interest on the loan, the resulting write-downs and losses will adversely affect First Defiance’s net income. The reduced levels of home sales have had a materially adverse effect on the prices achieved on the sale of foreclosed properties. Further decline in home values may escalate these problems, resulting in higher delinquencies, greater charge-offs, and increased losses on the sale of foreclosed real estate in future periods.
V~~olatile Capital Markets -~~The capital and credit markets have experienced severe volatility and disruption. In some cases, the markets have produced downward pressure on credit availability for certain issuers. Continuing market disruption and volatility could have an adverse effect on the Company’s ability to access capital and on its business, financial condition and results of operations.
First Defiance’s stock price may fluctuate significantly in the future and these fluctuations may be unrelated to the underlying performance of First Defiance. General market price declines and overall market volatility in the future could adversely affect the price of its common stock, and the current market price of the stock may not be indicative of future market prices.
~~First Defiance’s stock price has been volatile in the past and several factors could cause the price to fluctuate substantially in the future. These factors include:~~
· ~~Actions by government regulators;~~
· ~~First Defiance’s announcements of developments related to its business;~~
· ~~Fluctuation in our results of operation;~~
· ~~Sales of substantial amounts of our securities into the marketplace;~~
· ~~New reports of trends, concerns and other issues related to the financial services industry.~~
First Defiance’s loan portfolio includes a concentration of commercial real estate loans and commercial loans, which involve risks specific to real estate value and the successful operations of these businesses.
At December 31, 2012, First Federal’s portfolio of commercial real estate loans totaled $797.4 million, or approximately 51.6% of total loans. First Federal’s commercial real estate loans typically have higher principal amounts than residential real estate loans, and many of our commercial real estate borrowers have more than one loan outstanding. As a result, an adverse development on one loan can expose First Defiance to greater risk of loss on other loans. Additionally, repayment of the loans is generally dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic conditions and events outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties.
~~- 23 -~~
At December 31, 2012, First Federal’s portfolio of commercial loans totaled $383.8 million, or approximately 24.9% of total loans. Commercial loans generally expose First Defiance to a greater risk of nonpayment and loss than commercial real estate or residential real estate loans since repayment of such loans often depends on the successful operations and income stream of the borrowers.First Federal’s commercial loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower such as accounts receivable, inventory, machinery or real estate. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing other loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any exists.
First Defiance targets its business lending towards small and medium-sized businesses, many of which have fewer financial resources than larger companies and may be more susceptible to economic downturns. If general economic conditions negatively impact these businesses, First Defiance’s results of operations and financial condition may be adversely affected.
~~Increases to the allowance for loan losses may cause First Defiance’s earnings to decrease.~~
First Federal makes a number of assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. In determining the amount of the allowance for loan losses, First Federal relies on loan quality reviews, past loss experience, and an evaluation of economic conditions, among other factors. If its assumptions prove to be incorrect, First Federal’s allowance for loan losses may not be sufficient to cover actual losses, resulting in additions to the allowance. In addition, bank regulators periodically review First Federal’s allowance and may require First Federal to increase its allowance. Material additions to the allowance and any loan losses that exceed First Federal’s reserves would materially adversely affect our results of operations and financial condition.
~~Changes in interest rates can adversely affect First Defiance’s profitability~~
First Defiance’s earnings and financial condition are dependent to a large degree upon net interest income, which is the difference, or spread, between interest earned from loans and investments and interest paid on deposits and borrowings. Interest rates are highly sensitive to many factors, including:
· ~~the rate of inflation;~~
· ~~economic conditions;~~
· ~~federal monetary policies; and~~
· ~~stability of domestic and foreign markets.~~
Because First Defiance’s interest-bearing liabilities may reprice or mature more quickly than its interest-earning assets, an increase in interest rates could result in a decrease in First Defiance’s net interest income.
First Federal originates a significant amount of residential mortgage loans that it sells in the secondary market. The origination of residential mortgage loans is highly dependent on the local real estate market and the current interest rates. Increasing interest rates tend to reduce the origination of loans for sale and consequently fee income, which First Defiance reports as mortgage banking income. Conversely, decreasing interest rates have the effect of causing clients to refinance mortgage loans faster than anticipated. This causes the value of mortgage servicing rights on the loans sold to be lower than originally anticipated. If this happens, First Defiance may be required to write down the value of its mortgage servicing rights faster than anticipated, which will increase expense and lower earnings. Accelerated repayments on loans and mortgage backed securities could result in the reinvestment of funds at lower rates than the loans or securities were paying.
~~- 24 -~~
~~Laws and regulations may affect First Defiance’s results of operations~~.
The earnings of financial institutions are affected by the regulations and policies of various regulatory authorities, including the Federal Reserve Board, which regulates the money supply, and the Federal Reserve which regulates the Company and OCC which regulates First Federal, and the FDIC, which regulates First Federal. The Federal Reserve has extensive supervisory authority over the Company, affecting a comprehensive range of matters relating to ownership and control of First Defiance’s shares, First Defiance’s acquisition of other companies and businesses, permissible activities for the Company to engage in, maintenance of adequate capital levels and other aspects of operations. These supervisory and regulatory powers are intended primarily for the protection for First Defiance’s depositors and customers and the deposit insurance fund, rather than First Defiance’s shareholders.
In connection with its supervision of First Defiance, it’s former primary regulator, the Office of Thrift Supervision (“OTS”), which was eliminated and replaced by the Federal Reserve, and the Company entered into a memorandum of understanding, which is a tool employed by bank regulatory agencies to address areas of concern to the regulator. The memorandum for the Company requires that it submit to the Federal Reserve specific strategies for increasing and maintaining capital at targets, to be established by First Defiance’s board of directors that are commensurate with First Defiance’s risk profile. At December 31, 2012, the Company and First Federal’s capital ratios exceeded all the regulatory thresholds to be considered “well-capitalized.” The memorandum also requires that First Defiance obtain approval from the Federal Reserve before it pays any dividends, including dividends on common shares, orincur, issue, renew, or rollover any debt. First Federal also agreed to a memorandum of understanding with the OTS, which was eliminated and replaced by the OCC, the principal terms of which related to First Federal’s risk profile and asset quality. First Federal’s memorandum was terminated in February 2013.
Comprehensive revisions to the regulatory capital framework were proposed by the FRB, OCC, and FDIC in June 2012. Included within those revisions is the Basel III, which incorporates changes made by the Basel Committee on Banking Supervision to the Basel Capital framework in addition to implementing relevant provisions of the Dodd-Frank Act. The Basel III specifically revises what qualifies as regulatory capital, raises minimum requirements and introduces the concept of additional capital buffers. The need to maintain more and higher quality capital as well as greater liquidity going forward could limit our business activities, including lending, and our ability to expand, either organically or through acquisitions. In addition, the new liquidity standards could require us to increase our holdings of highly liquid short-term investments, thereby reducing our ability to invest in longer-term assets even if more desirable from a balance sheet management perspective.
The laws and regulations applicable to the banking industry could change at any time. As a result of ongoing challenges facing the U.S. economy in particular, the potential exists for new laws and regulations, and bank regulatory agencies are expected to be active in responding to concerns and trends identified in examinations. Increased regulation could increase~~First Defiance’scost of compliance and reduce its income to the extent that they limit the manner in whichFirst Defiance~~may conduct business, including its ability to offer new products, charge fees for specific products and services, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads.
~~First Defiance’s ability to meet cash flow needs on a timely basis at a reasonable cost may adversely affect net income~~.
~~First Defiance’s~~principal sources of liquidity are local deposits and wholesale funding sources such as FHLB advances, Federal Funds purchased, securities sold under repurchase agreements, and brokered or other out-of-market certificate of deposit purchases. Also,~~First Defiancemaintains a portfolio of securities that can be used as a secondary source of liquidity.~~First Defiance’s access to funding sources in amounts adequate to finance or capitalize its activities or on terms that are acceptable could be impaired by factors that affect First Defiance directly or the financial services industry or economy in general, such as further disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.
~~- 25 -~~
Other possible sources of liquidity include the sale or securitization of loans, the issuance of additional collateralized borrowings beyond those currently utilized with the FHLB, the issuance of debt securities and the issuance of preferred or common securities in public or private transactions, or borrowings from a commercial bank.~~First Defiancedoes not currently have any borrowings from a commercial bank, but it has used them in the past. Pursuant to the MOU,First Defiancemust obtain Federal Reserve approval before incurring or issuing any debt.~~
Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, pay dividends to First Defiance’s shareholders, or fulfill obligations such as repaying First Defiance’s borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, results of operations and financial condition.
~~Competition affects First Defiance’s earnings.~~
~~First Defiance’s~~continued profitability depends on its ability to continue to effectively compete to originate loans and attract and retain deposits. Competition for both loans and deposits is intense in the financial services industry. The Company competes in its market area by offering superior service and competitive rates and products. The type of institutions First Defiance competes with include large regional commercial banks, smaller community banks, savings institutions, mortgage banking firms, credit unions, finance companies, brokerage firms, insurance agencies and mutual funds. As a result of their size and ability to achieve economies of scale, certain of~~First Defiance’scompetitors can offer a broader range of products and services than the Company can offer. To stay competitive in its market area,First Defiancemay need to adjust the interest rates on its products to match rates of its competition, which could have a negative impact on net interest margin.~~
~~The increasing complexity of First Defiance’s operations presents varied risks that could affect its earnings and financial condition~~.
~~First Defiance~~processes a large volume of transactions on a daily basis and is exposed to numerous types of risks related to internal processes, people and systems. These risks include, but are not limited to, the risk of fraud by persons inside or outside the Company, the execution of unauthorized transactions by employees, errors relating to transaction processing and systems, breaches of data security and our internal control system and compliance with a complex array of consumer and safety and soundness regulations.~~First Defiance~~could also experience additional loss as a result of potential legal actions that could arise as a result of operational deficiencies or as a result of noncompliance with applicable laws and regulations.
~~First Defiance~~has established and maintains a system of internal controls that provides management with information on a timely basis and allows for the monitoring of compliance with operational standards. These systems have been designed to manage operational risks at an appropriate, cost effective level. Procedures exist that are designed to ensure that policies relating to conduct, ethics, and business practices are followed. Losses from operational risks may still occur, however, including losses from the effects of operational errors.
~~First Defiance’s~~operations are also dependent on its existing infrastructure, including equipment and facilities. Extended disruption of vital infrastructure as a result of fire, power loss, natural disaster, telecommunications failures, computer hacking or viruses, terrorist activity or the domestic response to such activity, or other events outside of the control of management could have a material adverse impact on its business, results of operations, cash flows and financial condition.~~First Defiancehas a business recovery plan, but there are no assurances that such a plan will work as intended or that it will prevent significant interruptions to operations.~~
~~- 26 -~~
~~Unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of the Company’s computer systems or otherwise, could severely harm its business.~~
In the normal course of business, First Defiance collects, processes and retains sensitive and confidential client and customer information on behalf of First Defiance and other third parties. Despite the security measures the Company has in place, First Defiance’s facilities and systems, and those of the Company’s third party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, lost or misplaced data, or other similar events. Any security breach involving the unauthorized disclosure or loss of confidential customer information, whether by First Defiance or by the Company’s third party vendors, could severely damage First Defiance’s reputation, expose the Company to risks of litigation and liability, disrupt First Defiance’s operations and have a material adverse effect on First Defiance’s business.
~~Item 1B. Unresolved Staff Comments~~
~~None.~~
~~Item 2. Properties~~
At December 31, 2012, First Federal conducted its business from its main office at 601 Clinton Street, Defiance, Ohio, and thirty-two other full service banking centers in northwest Ohio, northeast Indiana and southeast Michigan. First Insurance conducted its business from leased office space at 419 5^th Street, Suite 1200, Defiance, Ohio; 209 West Poe Road, Bowling Green, Ohio; 214 N. Defiance Street, Archbold, Ohio; 926 East High Street, Bryan, Ohio; 1755 Indian Wood Circle, Maumee, Ohio and 4350 Navarre Ave, Oregon, Ohio.
~~On September 14, 2012 the Company signed a lease for a new location for its Fort Wayne, IN office. The branch is now located on Dupont Road.~~
~~On August 31, 2012 the Company closed its branch on E. Chicago Blvd, Tecumseh, MI. This was a leased facility.~~
~~On June 25, 2012 the Company opened a second branch in Bowling Green, OH located on North Main Street. This branch is owned.~~
In 2009, the Company closed the Cole Street branch in Lima, Ohio which was owned. As of December 31, 2009, the Cole Street branch in Lima, Ohio was transferred at its fair value of $300,000 to other real estate owned. This property was written down in 2011 and 2012 and was sold in October of 2012 for $170,000.
First Defiance maintains its headquarters in the main office of First Federal at 601 Clinton Street, Defiance, Ohio. Back-office operation departments, including information technology, loan processing and underwriting, deposit processing, accounting and risk management are headquartered in an operations center located at 25600 Elliott Road, Defiance, Ohio.
~~- 27 -~~
~~The following table sets forth certain information with respect to the office and other properties of the Company at December 31, 2012. See Note 10 to the Consolidated Financial Statements.~~
Leased/ Net Book Value
Description/address Owned of Property Deposits
(In Thousands)
Main Office, First Federal
601 Clinton St., Defiance, OH Owned $ 4,102 $ 224,036
Operations Center
25600 Elliott Rd., Defiance, OH Owned 5,479 N/A
Mobile Banking
1011 W. Beecher St., Adrian, MI Owned 197 N/A
Branch Offices, First Federal
204 E. High St., Bryan, OH* Owned 686 127,104
211 S. Fulton St., Wauseon, OH Owned 467 52,127
625 Scott St., Napoleon, OH Owned 1,047 71,232
1050 East Main St., Montpelier, OH Owned 359 39,468
926 East High St., Bryan, OH* Owned 87 -
1800 Scott St., Napoleon, OH Owned 1,316 27,609
1177 N. Clinton St., Defiance, OH Owned, Land Lease 923 37,839
905 N. Williams St., Paulding, OH Owned 770 57,392
201 E. High St., Hicksville, OH Owned 365 27,381
3900 N. Main St., Findlay, OH Owned 979 56,571
11694 N. Countyline St., Fostoria, OH Owned 638 37,005
1226 W. Wooster, Bowling Green, OH Owned 1,013 89,261
301 S. Main St., Findlay, OH Owned 1,018 55,574
405 E. Main St., Ottawa, OH Owned 339 84,415
124 E. Main St., McComb, OH Owned 195 22,938
7591 Patriot Dr., Findlay, OH Owned 1,144 31,453
417 W Dussell Dr., Maumee, OH Owned, Land Lease 871 49,279
230 E. Second St., Delphos, OH Owned 1,032 100,865
105 S. Greenlawn Ave., Elida, OH Owned 330 47,384
2600 Allentown Rd., Lima, OH Owned 796 50,057
22020 W. State Rt. 51, Genoa, OH Owned 860 31,114
3426 Navarre Ave., Oregon, OH Owned 943 26,108
1077 Louisiana Ave., Perrysburg, OH Owned 1,099 29,800
2565 Shawnee Rd., Lima, OH Owned 1,457 38,417
1595 Dupont Rd., Fort Wayne, IN Leased - 19,215
135 South Main St., Glandorf, OH Leased - 11,005
300 N. Main St., Adrian, MI Owned 734 64,296
1701 W. Maumee St., Adrian, MI Owned 164 45,412
211 W. Main St., Morenci, MI Owned 165 28,207
539 S. Meridian, Hudson, MI Owned 576 40,253
1449 W. Chicago Blvd., Tecumseh, MI Owned 1,501 42,612
1200 North Main St., Bowling Green OH Owned 1,673 2,043

First Insurance Group
419 5^th Street, Suite 1200, Defiance, OH Leased 28 N/A
209 West Poe Road, Bowling Green, OH Leased 11 N/A
214 N. Defiance St., Archbold, OH Leased - N/A
926 E. High St., Bryan, OH** Leased - N/A
1755 Indian Wood Circle, Maumee, OH Leased - N/A
4350 Navarre Ave, Oregon, OH Leased - N/A
$ 33,364 $ 1,667,472
*~~The Bryan East (926 East High St.) deposits are now included in the Bryan Main (204 E. High Street) totals.~~
** Located in the Bryan East branch.
~~- 28 -~~
~~Item 3. Legal Proceedings~~
First Defiance is involved in routine legal proceedings occurring in the ordinary course of business which, in the aggregate, are believed by management to be immaterial to the financial condition of First Defiance.
~~Item 4. Mine Safety Disclosures~~
~~Not applicable.~~
~~PART II~~
~~Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities~~
~~The Company’s common shares trade on The NASDAQ Global Select Market under the symbol “FDEF.” As of February 19, 2013, the Company had 2,097 shareholders of record.~~
~~The table below shows the reported high and low sales prices of the common shares and cash dividends declared per common share during the periods indicated in 2012 and 2011.~~
Years Ending
December 31, 2012 December 31, 2011
High Low Dividend High Low Dividend

Quarter ended:
March 31 $ 17.76 $ 14.41 $ 0.05 $ 14.64 $ 11.89 $ -
June 30 17.46 15.23 0.05 15.00 13.22 -
September 30 18.06 15.80 0.05 15.51 12.60 -
December 31 19.38 15.75 0.05 15.39 13.00 0.05
First Defiance’s ability to pay dividends to its shareholders is primarily dependent on the ability of the Subsidiaries to pay dividends to First Defiance. The OCC advised the Company that prior approval would be required to pay dividends utilizing borrowings or other sources of funds to which the Company may have access to. Capital distributions include, without limitation, payments of cash dividends, repurchases and certain other acquisitions by an association of its shares and payments to shareholders of another association in an acquisition of such other association.
First Federal paid $37.0 million in dividends to First Defiance during 2012. First Insurance paid $300,000 in dividends to First Defiance during 2012. There were no dividends paid by First Federal or First Insurance in 2011.
The line graph below compares the yearly percentage change in cumulative total shareholder return on First Defiance common shares and the cumulative total return of the NASDAQ Composite Index, the SNL NASDAQ Bank Index and the SNL Midwest Thrift Index. An investment of $100 on December 31, 2007, and the reinvestment of all dividends are assumed. The performance graph represents past performance and should not be considered to be an indication of future performance.
~~- 29 -~~
Period Ending
Index 12/31/07 12/31/08 12/31/09 12/31/10 12/31/11 12/31/12
First Defiance Financial Corp. 100.00 37.59 57.71 60.83 74.84 99.62
NASDAQ Composite 100.00 60.02 87.24 103.08 102.26 120.42
SNL Bank NASDAQ Index 100.00 72.62 58.91 69.51 61.67 73.51
SNL Midwest Thrift Index 100.00 88.86 74.85 60.68 53.52 69.20
~~First Defiance did not purchase any of its common shares during 2012, but has 93,124 shares that may be purchased under a plan announced by the Board of Directors on July 18, 2003.~~
~~- 30 -~~
~~Item 6. Selected Financial Data~~
The following table is derived from the Company’s audited financial statements as of and for the five years ended December 31, 2012. The following consolidated selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related notes included elsewhere in this Form 10-K. The operating results of the acquired companies are included with the Company’s results of operations since their respective dates of acquisition.
As of and For the Year Ended December 31
2012 2011 2010 2009 2008
(Dollars in Thousands, Except Per Share Data
Financial Condition:
Total assets $ 2,046,948 $ 2,068,190 $ 2,035,517 $ 2,057,523 $ 1,957,400
Investment securities 194,609 233,580 166,091 139,378 118,461
Loans receivable, net 1,498,546 1,453,822 1,478,423 1,580,575 1,592,643
Allowance for loan losses 26,711 33,254 41,080 36,547 24,592
Nonperforming assets (1) 36,375 42,956 50,631 54,718 35,017
Deposits and borrowers’ escrow balances 1,668,945 1,597,643 1,576,356 1,580,891 1,470,564
FHLB advances 12,796 81,841 116,885 146,927 156,067
Stockholders’ equity 258,128 278,127 240,331 234,086 229,159
Share Information:
Basic earnings per share 1.86 1.44 0.75 0.64 0.91
Diluted earnings per share 1.81 1.42 0.75 0.63 0.91
Book value per common share 26.44 24.74 25.00 24.26 23.67
Tangible book value per common share 19.63 17.78 17.16 16.44 15.67
Cash dividends per common share 0.20 0.05 - 0.295 0.95
Dividend payout ratio 10.75 % 3.47 % NM 46.09 % 10.44 %
Weighted average diluted shares outstanding 9,998 9,540 8,153 8,196 7,919
Shares outstanding end of period 9,729 9,726 8,118 8,118 8,117
Operations:
Interest income $ 80,943 $ 87,067 $ 95,865 $ 100,579 $ 103,463
Interest expense 11,937 17,186 25,702 33,257 41,268
Net interest income 69,006 69,881 70,163 67,322 62,195
Provision for loan losses 10,924 12,434 23,177 23,232 12,585
Non-interest income 34,374 27,516 27,590 26,295 19,069
Non-interest expense 65,780 62,764 63,463 60,524 57,794
Income before tax 26,676 22,199 11,113 9,861 10,885
Federal income tax 8,012 6,665 3,005 2,667 3,528
Net Income 18,664 15,534 8,108 7,194 7,357
Performance Ratios:
Return on average assets 0.90 % 0.75 % 0.39 % 0.36 % 0.40 %
Return on average equity 6.99 % 5.89 % 3.40 % 3.09 % 3.85 %
Interest rate spread (2) 3.64 % 3.69 % 3.68 % 3.50 % 3.51 %
Net interest margin (2) 3.81 % 3.88 % 3.89 % 3.76 % 3.80 %
Ratio of operating expense to
average total assets 3.19 % 3.05 % 3.09 % 2.99 % 3.12 %
Efficiency ratio (3) 63.93 % 63.62 % 63.89 % 61.50 % 67.74 %
Capital Ratios:
Equity to total assets at end of period 12.61 % 13.45 % 11.81 % 11.38 % 11.71 %
Tangible common equity to tangible assets
at end of period 9.64 % 8.65 % 7.06 % 6.69 % 6.72 %
Average equity to average assets 12.95 % 12.82 % 11.62 % 11.49 % 10.30 %
Asset Quality Ratios:
Nonperforming assets to total assets
at end of period (1) 1.78 % 2.08 % 2.49 % 2.66 % 1.79 %
Allowance for loan losses to total loans* 1.75 % 2.24 % 2.70 % 2.26 % 1.52 %
Net charge-offs to average loans 1.18 % 1.41 % 1.21 % 0.70 % 0.41 %
~~(1)~~ ~~Nonperforming assets consist of non-accrual loans that are contractually past due 90 days or more and real estate, mobile homes and other assets acquired by foreclosure or deed-in-lieu thereof.~~
~~(2)~~ Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate on interest-bearing liabilities. Net interest margin represents net interest income as a percentage of average interest-earning assets. Interest income on tax-exempt securities and loans has been adjusted to a tax-equivalent basis using the statutory federal income tax rate of 35%.
~~(3)~~ ~~Efficiency ratio represents non-interest expense divided by the sum of tax-equivalent net interest income plus non-interest income, excluding securities gain or losses, net.~~
* Total loans are net of undisbursed loan funds and deferred fees and costs.
~~- 31 -~~
~~Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations~~
~~Forward-Looking Statements and Factors that Could Affect Future Results~~
Certain statements contained in this Annual Report on Form 10-K that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“Act”), notwithstanding that such statements are not specifically identified as such. In addition, certain statements may be contained in the Company’s future filings with the SEC, in press releases, and in oral and written statements made by or with the approval of the Corporation that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per common share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of First Defiance or its management or Board of Directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “continue”, “remain”, “will”, “should”, “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:
· ~~Local, regional, national and international economic conditions and the impact they may have on the Company and its customers and the Company’s assessment of that impact.~~
· ~~Volatility and disruption in national and international financial markets.~~
· ~~Government intervention in the U.S. financial system.~~
· ~~Changes in the level of non-performing assets and charge-offs.~~
· ~~Changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements.~~
· ~~The effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board.~~
· ~~Inflation, interest rate, securities market and monetary fluctuations.~~
· ~~Political instability.~~
· ~~Acts of God or of war or terrorism.~~
· ~~The timely development and acceptance of new products and services and perceived overall value of these products and services by users.~~
· ~~Changes in consumer spending, borrowing and saving habits.~~
· ~~Changes in the financial performance and/or condition of the Company’s borrowers.~~
· ~~Technological changes including core system conversions.~~
· ~~Acquisitions and integration of acquired businesses.~~
· ~~The ability to increase market share and control expenses.~~
· ~~Changes in the competitive environment among financial holding companies and other financial service providers.~~
· ~~The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company and the subsidiaries must comply.~~
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· The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters.
· The costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews.
· ~~Greater than expected costs or difficulties related to the integration of new products and lines of business.~~
· ~~The Company’s success at managing the risks involved in the foregoing items.~~
Forward-looking statements speak only as of the date on which such statements are made. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.
The following section presents information to assess the financial condition and results of operations of First Defiance. This section should be read in conjunction with the consolidated financial statements and the supplemental financial data contained elsewhere in this Annual Report on Form 10-K.
~~Overview~~
~~First Defiance is a unitary thrift holding company that conducts business through its 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 based in northwest Ohio, northeast Indiana, and southeastern Michigan where it operates 33 full service banking centers in 12 northwest Ohio counties, 1 northeast Indiana county, and 1 southeastern Michigan county.
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. First Insurance is an insurance agency that does business in the Defiance, Archbold, Bryan, Bowling Green, Maumee and Oregon, Ohio areas. On July 1, 2011, the Company completed its acquisition of Payak-Dubbs Insurance Agency, Inc. (“PDI”), an independent property and casualty insurance agency with two office locations based in Maumee, Ohio and Oregon, Ohio for a cash price of $4.8 million. PDI was merged into First Insurance. See Note 3 – Acquisitions in the Notes to the 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. First Defiance Risk Management was incorporated on December 20, 2012.
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Recent Developments
Impact of Legislation -Over the last ~~four-and-a-half~~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 Wall Street Reform and Consumer Protection Act (“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. Also, the Dodd-Frank Act abolished the Office of Thrift Supervision effective July 21, 2011 and transferred its functions to the Office of the Comptroller of the Currency (“OCC”), FDIC, and Federal Reserve. 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 Consumer Financial Protection Bureau (“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. Many of the consumer financial protection functions formerly assigned to the federal banking and other designated agencies are now performed by the CFPB. The CFPB has broad rulemaking authority over providers of credit, savings, and payment services and products. In this regard, the CFPB has the authority to implement regulations under federal consumer protection laws and enforce those laws against, and examine, financial institutions. State officials also will be authorized to enforce consumer protection rules issued by the CFPB. This bureau also is authorized to collect fines and provide consumer restitution in the event of violations, engage in consumer financial education, track consumer complaints, request data, and promote the availability of financial services to underserved consumers and communities. The CFPB also is directed to prevent “unfair, deceptive or abusive practices” and ensure that all consumers have access to markets for consumer financial products and services and that such markets are fair, transparent, and competitive. Although the CFPB has begun to implement its regulatory, supervisory, examination, and enforcement authority, there continues to be significant uncertainty as to how the agency’s strategies and priorities will impact First Defiance.
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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 several final regulations impacting the mortgage industry, including rules related to ability-to-pay, mortgage servicing, and mortgage loan originator compensation. The ability-to-repay rule makes lenders liable if they fail to assess ability to repay under a prescribed test, but also creates a safe harbor for so called “qualified mortgages.” The “qualified mortgages” standards include a tiered cap structure that places limits on the total amount of certain fees that can be charged on a loan, a 43% cap on debt-to-income (i.e., total monthly payments on debt to monthly gross income), exclusion of interest-only products, and other requirements. The 43% debt-to-income cap does not apply for the first seven years the rule is in effect for loans that are eligible for sale to Fannie Mae or Freddie Mac or eligible for government guarantee through the FHA or the Veterans Administration. Failure to comply with the ability-to-repay rule may result in possible CFPB enforcement action and special statutory damages plus actual, class action, and attorney fees damages, all of which a borrower may claim in defense of a foreclosure action at any time. First Defiance’s management team is currently assessing the impact of these requirements on our mortgage lending business.
In addition, the Federal Reserve and other federal bank regulatory agencies have issued a proposed rule under the Dodd-Frank Act that would exempt “qualified residential mortgages” from the securitization risk retention requirements of the Dodd-Frank Act. The final definition of what constitutes a “qualified residential mortgage” may impact the pricing and depth of the secondary market into which the Company may sell mortgages it originates. At this time, 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.
In addition to the CFPB’s authority over mortgage lending, the Dodd-Frank Act includes a series of provisions covering mortgage loan origination standards affecting, among other things, originator compensation, minimum repayment standards, and pre-payments. Moreover, the Dodd-Frank Act requires public companies like First Defiance to hold shareholder advisory “say-on-pay” votes on executive compensation at least once every three years and submit related proposals to a vote of shareholders. First Defiance held its first such “say-on-pay” vote at its 2013 annual meeting of shareholders.
New Volcker Rules -On December 10, 2013, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodity Futures Trading Commission (“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.
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On January 14, 2014, the Regulatorsissued 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 owns eight collateralized debt obligations (“CDOs”). Six of those CDOs were on the Regulators non-exclusive list or have no book value while the other two CDOs were deemed to be disallowed under the Interim Final Volcker Rule. These two CDOs were subsequently sold on January 15, 2014.
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 Proposed Capital Rules -On ~~June 7, 2012,~~July 2, 2013, the Federal Reserve approved ~~proposed~~final rules that ~~would~~ substantially amend the regulatory risk-based capital rules applicable to First Defiance and First Federal. The FDIC and the OCC have subsequently approved these rules. The final rules were adopted following the issuance of proposed rules onby the Federal Reserve in June ~~12, 2012. The proposed rules~~2012, and implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. “Basel III” refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements.
The ~~proposed rules received extensive comments during a comment period that ran through October 2012. Further guidance from the bank regulatory agencies is expected in early 2013.~~
~~The proposed~~ rules include new risk-based capital and leverage ratios, which ~~would~~will be phased in from ~~2013~~2015 to 2019, and ~~would~~will refine the definition of what constitutes “capital” for purposes of calculating those ratios. The ~~proposed~~ new minimum capital level requirements applicable to First Defiance and First Federal under the ~~proposals would be:~~final rules are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The ~~proposed~~final rules ~~would~~ also establish a “capital conservation buffer” ~~of 2.5%~~ above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. The capital conservation buffer will be phased-in over four years beginning on January 1, 2016, as follows: the maximum buffer will be 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and ~~would~~2.5% for 2019 and thereafter. This will result in the following minimum ~~ratios:~~ratios beginning in 2019: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.
The ~~new~~final rules implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, ~~conservation buffer requirement would~~including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which will be phased out over time. However, the final rules provide that small depository institution holding companies with less than $15 billion in ~~beginning~~total assets as of December 31, 2009 (which includes First Defiance) will be able to permanently include non-qualifying instruments that were issued and included in ~~January 2016 at 0.625% of risk-weighted assets and would increase by that amount each year~~Tier 1 or Tier 2 capital prior to May 19, 2010 in additional Tier 1 or Tier 2 capital until ~~fully implemented in January 2019.~~
they redeem such instruments or until the instruments mature.
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The ~~federal bank regulatory agencies~~final rules also ~~proposed~~contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including First Federal, if their capital levels begin to show signs of weakness. These revisions ~~would~~ take effect January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions ~~would~~will be required to meet the following increased capital level requirements in order to qualify as “well ~~capitalized:”~~capitalized”: (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).
The ~~proposed~~final rules set forth certain changes for the calculation of risk-weighted assets, which ~~we would~~First Federal will be required to utilize beginning January 1, 2015. The standardized approach ~~proposed~~final rule utilizes an increased number of credit risk exposure categories and risk weights, and also addresses: (i) ~~a proposed~~an alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act; (ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity exposures and past due loans; (iv) revised capital treatment for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking organizations with $50 billion or more in total assets that are not subject to the ~~“advance approach~~“advanced approaches rules” that apply to banks with greater than $250 billion in consolidated assets.
Based on our current capital composition and levels, management believes it ~~would~~will be in compliance with the requirements as set forth in the ~~proposed rules if they were presently in effect.~~
final rules.
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~~Business Strategy~~Item 1A. Risk Factors
The risks listed below present risks that could have a material impact on the Company’s financial condition, results of operations, or business. The risks and uncertainties described below are the not the only ones facing the Company. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Company’s business operations.
Economic conditions may adversely affect First Defiance’s ~~primary objective is~~operations and financial condition.
Local Economic Conditions - First Defiance conducts its banking and insurance business primarily in northwest Ohio, northeast Indiana and southeast Michigan. Unemployment rates for most of the counties within our geographic market area are above the median rate for the United States and above the median rates for the states of Ohio, Indiana, and Michigan. As reported for December 2013, the 14 counties in which our offices are located had unemployment rates between 5.2% and 11.5%, and 10 either stayed the same or experienced an improvement in their unemployment rate in 2013 compared to 2012. However, real estate values in certain First Defiance’s markets are still unstable and may continue to be ~~a high performing community banking organization, well regarded~~so in 2014. While the Company has seen improvement in the unemployment rates in its market ~~areas.~~areas and housing values starting to recover, high unemployment and unstable real estate values could have a negative impact on the Company’s earnings and financial condition because:
· more borrowers are unable to make payments on their loans;
· the value of collateral securing loans has declined; and
· the overall quality of the loan portfolio has declined.
General Economic Conditions - Dramatic declines in real estate values, along with high unemployment, disrupted the national credit and capital markets over the last several years.
While economic conditions are beginning to improve slightly, First Defiance ~~accomplishes this through emphasis on local decision making and empowering its employees with tools and knowledge~~continues to ~~serve its customers’ needs.~~face the following risks:
· inability of borrowers to make timely repayments of their loans, or decreases in value of real estate collateral securing the payment of such loans resulting in significant credit losses, which could result in increased delinquencies, foreclosures and customer bankruptcies, any of which could have a material adverse effect on our operating results;
· increased regulation of the financial services industry, including heightened legal standards and regulatory requirements or expectations; compliance with such regulation will likely increase costs and may limit the Company’s ability to pursue business opportunities;
· further disruptions in the capital markets or other events, including actions by rating agencies and deteriorating investor expectations, may result in an inability to borrow on favorable terms or at all from other financial institutions;
· increased competition among financial services companies due to the consolidation of financial institutions, which may adversely affect our ability to market the Company’s products and services; and
· further increases in FDIC insurance premiums due to the market developments which have significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits.
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Declining Real Estate Values -Approximately 74.9% of the loans in First ~~Defiance believes~~Defiance’s portfolio are secured in ~~a “Customer First” philosophy~~whole or in part by real estate. Because residential real estate prices have declined, some of our borrowers have mortgages that ~~is strengthened by its Trusted Advisor initiative. First Defiance also has a tagline~~exceed the value of ~~“Bank~~their homes. The decline in home values, coupled with the ~~people you know~~weakened economy, has increased defaults and ~~trust” as an indication~~foreclosures. Commercial real estate values have also declined, and the owners of ~~its commitment~~many income-producing properties are experiencing declines in their revenue, which may adversely affect their ability to ~~local, responsive, personalized service. First Defiance believes this strategy results~~repay their loans. Foreclosures and resolutions of nonperforming loans require significant personnel resources and involve other costs that may increase our operating expenses. Properties acquired through foreclosure or by deed in ~~greater customer loyalty~~lieu of foreclosure are taking longer to sell in the current economy, which increases the Company’s expenses for managing, maintaining and ~~profitability through core relationships.~~insuring real estate owned. If First Defiance is ~~focused~~unable to sell properties at a price that will cover its expenses as well as the unpaid principal and interest on ~~diversification~~the loan, the resulting write-downs and losses will adversely affect First Defiance’s net income. The reduced levels of ~~revenue sources~~home sales have had a materially adverse effect on the prices achieved on the sale of foreclosed properties. Further decline in home values may escalate these problems, resulting in higher delinquencies, greater charge-offs, and increased losses on the sale of foreclosed real estate in future periods.
Volatile Capital Markets -The capital and credit markets have experienced volatility and disruption. In some cases, the markets have produced downward pressure on credit availability for certain issuers. Continuing market ~~penetration~~disruption and volatility could have an adverse effect on the Company’s ability to access capital and on its business, financial condition and results of operations.
First Defiance’s stock price may fluctuate significantly in ~~areas where~~ the ~~growth potential exists for a balance between acquisition~~future and ~~organic growth. The primary elements~~these fluctuations may be unrelated to the underlying performance of First Defiance. General market price declines and overall market volatility in the future could adversely affect the price of its common stock, and the current market price of the stock may not be indicative of future market prices.
First Defiance’s ~~business strategy are commercial banking, consumer banking, including~~stock price has been volatile in the ~~origination~~past and ~~sale~~several factors could cause the price to fluctuate substantially in the future. These factors include:
· Actions by government regulators;
· First Defiance’s announcements of developments related to its business;
· Fluctuation in First Defiance’s results of operation;
· Sales of substantial amounts of First Defiance’s securities into the marketplace; and
· New reports of trends, concerns and other issues related to the financial services industry.
First Defiance’s loan portfolio includes a concentration 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~~loans and ~~a major component~~commercial loans, which involve risks specific to real estate value and the successful operations of these businesses.
At December 31, 2013, First Federal’s ~~success. First Federal provides primarily~~portfolio of commercial real estate ~~and commercial business~~ loans ~~with an emphasis on owner occupied~~totaled $819.6 million, or approximately 50.8% of total loans. First Federal’s commercial real estate loans typically have higher principal amounts than residential real estate loans, and many of our commercial real estate borrowers have more than one loan outstanding. As a result, an adverse development on one loan can expose First Defiance to greater risk of loss on other loans. Additionally, repayment of the loans is generally dependent, in large part, on sufficient income from the properties securing the loans to cover operating expenses and debt service. Economic conditions and events outside of the control of the borrower or lender could negatively impact the future cash flow and market values of the affected properties.
At December 31, 2013, First Federal’s portfolio of commercial loans totaled $388.2 million, or approximately 24.1% of total loans. Commercial loans generally expose First Defiance to a greater risk of nonpayment and loss than commercial real estate or residential real estate loans since repayment of such loans often depends on the successful operations and income stream of the borrowers.First Federal’s commercial loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower such as accounts receivable, inventory, machinery or real estate. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing other loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any exists.
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First Defiance targets its business lending ~~with~~towards small and medium-sized businesses, many of which have fewer financial resources than larger companies and may be more susceptible to economic downturns. If general economic conditions negatively impact these businesses, First Defiance’s results of operations and financial condition may be adversely affected.
Increases to the allowance for loan losses may cause First Defiance’s earnings to decrease.
First Federal makes a ~~focus~~number of assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. In determining the amount of the allowance for loan losses, First Federal relies on ~~the deposit balances that accompany these relationships.~~loan quality reviews, past loss experience, and an evaluation of economic conditions, among other factors. If its assumptions prove to be incorrect, First Federal’s ~~client base tends~~allowance for loan losses may not be sufficient to ~~be small~~cover actual losses, resulting in additions to ~~middle market customers with annual gross revenues generally between $1 million and $50 million.~~the allowance. In addition, bank regulators periodically review First Federal’s ~~focus is also on securing multiple guarantors in addition to collateral were possible. These customers~~allowance and may require First Federal to increase its allowance. Material additions to the allowance and any loan losses that exceed First Federal’s reserves would materially adversely affect First Defiance’s results of operations and financial condition.
Changes in interest rates can adversely affect First Defiance’s profitability
First Defiance’s earnings and financial condition are dependent to a large degree upon net interest income, which is the difference, or spread, between interest earned from loans and investments and interest paid on deposits and borrowings. Interest rates are highly sensitive to many factors, including:
· the rate of inflation;
· economic conditions;
· federal monetary policies; and
· stability of domestic and foreign markets.
Because First Defiance’s interest-bearing liabilities may reprice or mature more quickly than its interest-earning assets, an increase in interest rates could result in a decrease in First Defiance’s net interest income.
First Federal originates a significant amount of residential mortgage loans that it sells in the secondary market. The origination of residential mortgage loans is highly dependent on the local real estate market and the current interest rates. Increasing interest rates tend to reduce the origination of loans for sale and consequently fee income, which First Defiance reports as mortgage banking income. Conversely, decreasing interest rates have the effect of causing clients to refinance mortgage loans faster than anticipated. This causes the value of mortgage servicing rights on the loans sold to be lower than originally anticipated. If this happens, First Defiance may be required to write down the value of its mortgage servicing rights faster than anticipated, which will increase expense and lower earnings. Accelerated repayments on loans and mortgage backed securities could result in the reinvestment of funds at lower rates than the loans or securities were paying.
Laws and regulations may affect First Defiance’s results of operations.
The earnings of financial institutions are affected by the regulations and policies of various regulatory authorities, including the Federal Reserve, which regulates the money supply, and the Federal Reserve which regulates the Company and OCC which regulates First Federal, and the FDIC, which regulates First Federal. The Federal Reserve has extensive supervisory authority over the Company, affecting a comprehensive range of matters relating to ownership and control of First Defiance’s shares, First Defiance’s acquisition of other companies and businesses, permissible activities for the Company to engage in, maintenance of adequate capital levels and other aspects of operations. These supervisory and regulatory powers are intended primarily for the protection for First Defiance’s depositors and customers and the deposit insurance fund, rather than First Defiance’s shareholders.
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Comprehensive revisions to the regulatory capital framework were finalized by the FRB, OCC, and FDIC in 2013. Included within those revisions is Basel III, which incorporates changes made by the Basel Committee on Banking Supervision to the Basel Capital framework in addition to implementing relevant provisions of the Dodd-Frank Act. Basel III specifically revises what qualifies as regulatory capital, raises minimum requirements and introduces the concept of additional capital buffers. The need to maintain more and higher quality capital as well as greater liquidity going forward could limit our business activities, including lending, and our ability to expand, either organically or through acquisitions. In addition, the new liquidity standards could require us to increase our holdings of highly liquid short-term investments, thereby reducing our ability to invest in longer-term assets even if more desirable from a balance sheet management perspective.
The laws and regulations applicable to the banking industry could change at any time. As a result of ongoing challenges facing the U.S. economy in particular, the potential exists for new laws and regulations, and bank regulatory agencies are expected to be active in responding to concerns and trends identified in examinations. Increased regulation could increaseFirst Defiance’scost of compliance and reduce its income to the extent that they limit the manner in whichFirst Defiancemay conduct business, including its ability to offer new products, charge fees for specific products and services, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads.
First Defiance’s ability to meet cash flow needs on a timely basis at a reasonable cost may adversely affect net income.
First Defiance’sprincipal sources of liquidity are local deposits and wholesale funding sources such as FHLB advances, Federal Funds purchased, securities sold under repurchase agreements, and brokered or other out-of-market certificate of deposit purchases. Also,First Defiancemaintains a portfolio of securities that can be used as a secondary source of liquidity. First Defiance’s access to funding sources in amounts adequate to finance or capitalize its activities or on terms that are acceptable could be impaired by factors that affect First Defiance directly or the financial services industry or economy in general, such as further disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.
Other possible sources of liquidity include the sale or securitization of loans, the issuance of additional collateralized borrowings beyond those currently utilized with the FHLB, the issuance of debt securities and the issuance of preferred or common securities in public or private transactions, or borrowings from a commercial bank. First Defiancedoes not currently have any borrowings from a commercial bank, but it has used them in the past.
Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, pay dividends to First Defiance’s shareholders, or fulfill obligations such as repaying First Defiance’s borrowings or meeting deposit withdrawal demands, any of which could have a ~~high degree~~material adverse impact on our liquidity, business, results of ~~knowledge~~operations and ~~understanding~~financial condition.
Competition affects First Defiance’s earnings.
First Defiance’scontinued profitability depends on its ability to continue to effectively compete to originate loans and attract and retain deposits. Competition for both loans and deposits is intense in the financial services industry. The Company competes in its market area by offering superior service and competitive rates and products. The type of institutions First Defiance competes with include large regional commercial banks, smaller community banks, savings institutions, mortgage banking firms, credit unions, finance companies, brokerage firms, insurance agencies and mutual funds. As a result of their ~~business~~size and ability to achieve economies of scale, certain ofFirst Defiance’scompetitors can offer a broader range of products and services than the Company can offer. To stay competitive in ~~order~~its market area,First Defiancemay need to ~~provide them with solutions~~adjust the interest rates on its products to ~~their financial needs. First Federal’s Customer First philosophy and culture complements this need~~match rates of its ~~clients.~~competition, which could have a negative impact on net interest margin.
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The increasing complexity of First Defiance’s operations presents varied risks that could affect its earnings and financial condition.
First Defianceprocesses a large volume of transactions on a daily basis and is exposed to numerous types of risks related to internal processes, people and systems. These risks include, but are not limited to, the risk of fraud by persons inside or outside the Company, the execution of unauthorized transactions by employees, errors relating to transaction processing and systems, breaches of data security and our internal control system and compliance with a complex array of consumer and safety and soundness regulations.First Defiancecould also experience additional loss as a result of potential legal actions that could arise as a result of operational deficiencies or as a result of noncompliance with applicable laws and regulations.
First Defiancehas established and maintains a system of internal controls that provides management with information on a timely basis and allows for the monitoring of compliance with operational standards. These systems have been designed to manage operational risks at an appropriate, cost effective level. Procedures exist that are designed to ensure that policies relating to conduct, ethics, and business practices are followed. Losses from operational risks may still occur, however, including losses from the effects of operational errors.
First Defiance’soperations are also dependent on its existing infrastructure, including equipment and facilities. Extended disruption of vital infrastructure as a result of fire, power loss, natural disaster, telecommunications failures, computer hacking or viruses, terrorist activity or the domestic response to such activity, or other events outside of the control of management could have a material adverse impact on its business, results of operations, cash flows and financial condition.First Defiancehas a business recovery plan, but there are no assurances that such a plan will work as intended or that it will prevent significant interruptions to operations.
Unauthorized disclosure of sensitive or confidential client or customer information, whether through a breach of the Company’s computer systems or otherwise, could severely harm its business.
In the normal course of business, First Defiance collects, processes and retains sensitive and confidential client and customer information on behalf of First Defiance and other third parties. Despite the security measures the Company has in place, First Defiance’s facilities and systems, and those of the Company’s third party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, lost or misplaced data, or other similar events. Any security breach involving the unauthorized disclosure or loss of confidential customer information, whether by First Defiance or by the Company’s third party vendors, could severely damage First Defiance’s reputation, expose the Company to risks of litigation and liability, disrupt First Defiance’s operations and have a material adverse effect on First Defiance’s business.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
At December 31, 2013, First Federal ~~believes this personal~~conducted its business from its main office at 601 Clinton Street, Defiance, Ohio, and thirty-one other full service ~~model differentiates~~banking centers in northwest Ohio, northeast Indiana and southeast Michigan. First Insurance conducted its business from leased office space at 419 5^th Street, Suite 1200, Defiance, Ohio; 209 West Poe Road, Bowling Green, Ohio; 926 East High Street, Bryan, Ohio; 1755 Indian Wood Circle, Maumee, Ohio and 4350 Navarre Ave, Oregon, Ohio.
In September 2013, First Federal ~~from~~closed its ~~competitors, particularly~~branch on 926 E. High Street, Bryan, Ohio. This building is owned by First Federal.
In October 2013, First Insurance closed its insurance office on 214 N. Defiance St., Archbold, Ohio. This was a leased facility.
First Defiance maintains its headquarters in the ~~larger regional institutions.~~main office of First Federal ~~offers a wide variety of products~~at 601 Clinton Street, Defiance, Ohio. Back-office operation departments, including information technology, loan processing and underwriting, deposit processing, accounting and risk management are headquartered in an operations center located at 25600 Elliott Road, Defiance, Ohio.
- 31 -

The following table sets forth certain information with respect to ~~support commercial clients including remote deposit capture~~the offices and other properties of the Company at December 31, 2013. See Note 9 to the Consolidated Financial Statements.
Leased/ Net Book Value
Description/address Owned of Property Deposits
(In Thousands)
Main Office, First Federal
601 Clinton St., Defiance, OH Owned $ 4,476 $ 220,886
Operations Center
25600 Elliott Rd., Defiance, OH Owned 5,311 N/A
Mobile Banking
1011 W. Beecher St., Adrian, MI Owned 190 N/A
Branch Offices, First Federal
204 E. High St., Bryan, OH* Owned 649 134,120
211 S. Fulton St., Wauseon, OH Owned 437 52,457
625 Scott St., Napoleon, OH Owned 999 68,800
1050 East Main St., Montpelier, OH Owned 347 39,415
926 East High St., Bryan, OH* Owned 87 -
1800 Scott St., Napoleon, OH Owned 1,269 28,394
1177 N. Clinton St., Defiance, OH Owned, Land Lease Leased 875 38,915
905 N. Williams St., Paulding, OH Owned 738 61,033
201 E. High St., Hicksville, OH Owned 346 30,422
3900 N. Main St., Findlay, OH Owned 937 47,654
11694 N. Countyline St., Fostoria, OH Owned 638 40,681
1226 W. Wooster, Bowling Green, OH Owned 979 101,144
301 S. Main St., Findlay, OH Owned 960 56,849
405 E. Main St., Ottawa, OH Owned 324 88,830
124 E. Main St., McComb, OH Owned 186 19,862
7591 Patriot Dr., Findlay, OH Owned 1,115 35,557
417 W Dussell Dr., Maumee, OH Owned, Land Lease 830 53,861
230 E. Second St., Delphos, OH Owned 989 95,362
105 S. Greenlawn Ave., Elida, OH Owned 319 47,180
2600 Allentown Rd., Lima, OH Owned 770 45,466
22020 W. State Rt. 51, Genoa, OH Owned 829 30,908
3426 Navarre Ave., Oregon, OH Owned 910 29,771
1077 Louisiana Ave., Perrysburg, OH Owned 1,070 30,963
2565 Shawnee Rd., Lima, OH Owned 1,406 70,821
1595 Dupont Rd., Fort Wayne, IN Leased 28 21,388
135 South Main St., Glandorf, OH Leased - 16,149
300 N. Main St., Adrian, MI Owned 704 64,288
1701 W. Maumee St., Adrian, MI Owned 160 45,320
211 W. Main St., Morenci, MI Owned 159 28,771
539 S. Meridian, Hudson, MI Owned 555 39,935
1449 W. Chicago Blvd., Tecumseh, MI Owned 1,472 45,946
1200 North Main St., Bowling Green OH Owned 1,644 4,644

First Insurance Group
419 5th Street, Suite 1200, Defiance, OH Leased 17 N/A
209 West Poe Road, Bowling Green, OH Leased 8 N/A
926 E. High Street, Bryan, OH Leased - N/A
1755 Indian Wood Circle, Maumee, OH Leased - N/A
4350 Navarre Ave, Oregon, OH Leased - N/A
$ 32,733 $ 1,735,792
*The Bryan East (926 East High St.) deposits are now included in the Bryan Main (204 E. High Street) totals.
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Item 3. Legal Proceedings
First Defiance is involved in routine legal proceedings occurring in the ordinary course of business which, in the aggregate, are believed by management to be immaterial to the financial condition of First Defiance.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common shares trade on The NASDAQ Global Select Market under the symbol “FDEF.” As of February 21, 2014, the Company had 2,020 shareholders of record.
The table below shows the reported high and low sales prices of the common shares and cash dividends declared per common share during the periods indicated in 2013 and 2012.
Years Ending
December 31, 2013 December 31, 2012
High Low Dividend High Low Dividend

Quarter ended:
March 31 $ 23.75 $ 18.42 $ 0.10 $ 17.76 $ 14.41 $ 0.05
June 30 23.75 20.80 0.10 17.46 15.23 0.05
September 30 28.46 22.49 0.10 18.06 15.80 0.05
December 31 27.25 23.31 0.10 19.38 15.75 0.05
The line graph below compares the yearly percentage change in cumulative total shareholder return on First Defiance common shares and the cumulative total return of the NASDAQ Composite Index, the SNL NASDAQ Bank Index and the SNL Midwest Thrift Index. An investment of $100 on December 31, 2008, and the reinvestment of all dividends are assumed. The performance graph represents past performance and should not be considered to be an indication of future performance.
- 33 -

Period Ending
Index 12/31/08 12/31/09 12/31/10 12/31/11 12/31/12 12/31/13
First Defiance Financial Corp. 100.00 153.53 161.82 199.10 265.02 364.68
NASDAQ Composite 100.00 145.36 171.74 170.38 200.63 281.22
SNL Bank NASDAQ 100.00 81.12 95.71 84.92 101.22 145.48
SNL Midwest Thrift 100.00 84.23 68.28 60.23 77.87 96.03
The following table provides information regarding First Defiance’s purchases of its common stock during the three-month period ended December 31, 2013:
Total Number of
Shares Purchased Maximum Number of
as Part of Shares (or Approximate
Total Number of Average Price Publicly Dollar Value) that May
Shares Paid Per Announced Plans Yet Be Purchased Under
Period Purchased Share or Programs (1) the Plans or Programs (2)
October 1 – October 31, 2013 - $ - - -
November 1 – November 30, 2013 23,127 25.16 23,127 465,873
December 1 – December 31, 2013 47,839 25.89 47,839 418,034
Total 70,966 $ 25.65 70,966 418,034
- 34 -

(1) The reported shares were repurchased pursuant to First Defiance’s publicly announced stock repurchase program, which became effective September 30, 2013. Up to 489,000 shares were authorized to be purchased under the program. There is no expiration date for the program.
(2) 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 publicly announced stock repurchase programs. The shares may be purchased, from time to time, depending on market conditions.
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Item 6.       Selected Financial Data
The following table is derived from the Company’s audited financial statements as of and for the five years ended December 31, 2013. The following consolidated selected financial data should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related notes included elsewhere in this Form 10-K. The operating results of the acquired companies are included with the Company’s results of operations since their respective dates of acquisition.
As of and For the Year Ended December 31
2013 2012 2011 2010 2009
(Dollars in Thousands, Except Per Share Data
Financial Condition:
Total assets $ 2,137,148 $ 2,046,948 $ 2,068,190 $ 2,035,517 $ 2,057,523
Investment securities 198,557 194,609 233,580 166,091 139,378
Loans receivable, net 1,555,498 1,498,546 1,453,822 1,478,423 1,580,575
Allowance for loan losses 24,950 26,711 33,254 41,080 36,547
Nonperforming assets (1) 33,706 36,375 42,956 50,631 54,718
Deposits and borrowers’ escrow balances 1,737,311 1,668,945 1,597,643 1,576,356 1,580,891
FHLB advances 22,520 12,796 81,841 116,885 146,927
Stockholders’ equity 272,147 258,128 278,127 240,331 234,086
Share Information:
Basic earnings per share 2.28 1.86 1.44 0.75 0.64
Diluted earnings per share 2.19 1.81 1.42 0.75 0.63
Book value per common share 27.91 26.44 24.74 25.00 24.26
Tangible book value per common share 21.22 19.63 17.78 17.16 16.44
Cash dividends per common share 0.40 0.20 0.05 - 0.295
Dividend payout ratio 17.45 % 10.75 % 3.47 % NM 46.09 %
Weighted average diluted shares outstanding 10,171 9,998 9,540 8,153 8,196
Shares outstanding end of period 9,720 9,729 9,726 8,118 8,118
Operations:
Interest income $ 74,781 $ 80,943 $ 87,067 $ 95,865 $ 100,579
Interest expense 7,170 11,937 17,186 25,702 33,257
Net interest income 67,611 69,006 69,881 70,163 67,322
Provision for loan losses 1,824 10,924 12,434 23,177 23,232
Non-interest income 30,570 34,374 27,516 27,590 26,295
Non-interest expense 64,844 65,780 62,764 63,463 60,524
Income before tax 31,513 26,676 22,199 11,113 9,861
Federal income tax 9,278 8,012 6,665 3,005 2,667
Net Income 22,235 18,664 15,534 8,108 7,194
Performance Ratios:
Return on average assets 1.08 % 0.90 % 0.75 % 0.39 % 0.36 %
Return on average equity 8.39 % 6.99 % 5.89 % 3.40 % 3.09 %
Interest rate spread (2) 3.65 % 3.64 % 3.69 % 3.68 % 3.50 %
Net interest margin (2) 3.76 % 3.81 % 3.88 % 3.89 % 3.76 %
Ratio of operating expense to
     average total assets 3.16 % 3.19 % 3.05 % 3.09 % 2.99 %
Efficiency ratio (3) 64.81 % 63.93 % 63.62 % 63.89 % 61.50 %
Capital Ratios:
Equity to total assets at end of period 12.73 % 12.61 % 13.45 % 11.81 % 11.38 %
Tangible common equity to tangible assets
     at end of period 9.94 % 9.64 % 8.65 % 7.06 % 6.69 %
Average equity to average assets 12.92 % 12.95 % 12.82 % 11.62 % 11.49 %
Asset Quality Ratios:
Nonperforming assets to total assets
     at end of period (1) 1.58 % 1.78 % 2.08 % 2.49 % 2.66 %
Allowance for loan losses to total
     loans* 1.58 % 1.75 % 2.24 % 2.70 % 2.26 %
Net charge-offs to average loans 0.23 % 1.18 % 1.41 % 1.21 % 0.70 %
(1)
   Nonperforming assets consist of non-accrual loans that are contractually past due 90 days or more and real estate, mobile homes and other assets acquired by foreclosure or deed-in-lieu thereof.
(2)
  Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate on interest-bearing liabilities. Net interest margin represents net interest income as a percentage of average interest-earning assets. Interest income on tax-exempt securities and loans has been adjusted to a tax-equivalent basis using the statutory federal income tax rate of 35%.
(3)
  Efficiency ratio represents non-interest expense divided by the sum of tax-equivalent net interest income plus non-interest income, excluding securities gain or losses, net.
* Total loans are net of undisbursed loan funds and deferred fees and costs.
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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements and Factors that Could Affect Future Results
Certain statements contained in this Annual Report on Form 10-K that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“Act”), notwithstanding that such statements are not specifically identified as such. In addition, certain statements may be contained in the Company’s future filings with the SEC, in press releases, and in oral and written statements made by or with the approval of the Corporation that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per common share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of First Defiance or its management ~~services.~~or Board of Directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “continue”, “remain”, “will”, “should”, “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:
· Local, regional, national and international economic conditions and the impact they may have on the Company and its customers and the Company’s assessment of that impact.
· Volatility and disruption in national and international financial markets.
· Government intervention in the U.S. financial system.
· Changes in the level of non-performing assets and charge-offs.
· Changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements.
· The effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board.
· Inflation, interest rate, securities market and monetary fluctuations.
· Political instability.
· Acts of God or of war or terrorism.
· The timely development and acceptance of new products and services and perceived overall value of these products and services by users.
· Changes in consumer spending, borrowing and saving habits.
· Changes in the financial performance and/or condition of the Company’s borrowers.
· Technological changes including core system conversions.
· Acquisitions and integration of acquired businesses.
· The ability to increase market share and control expenses.
· Changes in the competitive environment among financial holding companies and other financial service providers.
· The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which the Company and the subsidiaries must comply.
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· The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters.
· The costs and effects of legal and regulatory developments including the resolution of legal proceedings or regulatory or other governmental inquiries and the results of regulatory examinations or reviews.
· Greater than expected costs or difficulties related to the integration of new products and lines of business.
· The Company’s success at managing the risks involved in the foregoing items.
Forward-looking statements speak only as of the date on which such statements are made. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.
The following section presents information to assess the financial condition and results of operations of First Defiance. This section should be read in conjunction with the consolidated financial statements and the supplemental financial data contained elsewhere in this Annual Report on Form 10-K.
Overview
First Defiance is a unitary thrift holding company that conducts business through its subsidiaries, First Federal, ~~also believes that the small business customer~~First Insurance and First Defiance Risk Management.
First Federal is a ~~strong market for First Federal.~~ federally chartered stock savings bank that provides financial services to communities based in northwest Ohio, northeast Indiana, and southeastern Michigan where it operates 32 full service banking centers in 12 northwest Ohio counties, 1 northeast Indiana county, and 1 southeastern Michigan county.
First Federal ~~participates in many of the Small Business Administration lending programs. Maintaining~~provides 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~~broad range of ~~deposit and investment products~~financial services including ~~demand, NOW, money market,~~checking accounts, savings accounts, certificates of ~~deposits, CDARS and savings accounts. First Federal offers a full range of investment products through the wealth management department and a wide variety of~~deposit, real estate mortgage loans, commercial loans, consumer ~~loan products, including residential mortgage~~ loans, home equity loans ~~installment loans~~ and ~~education loans. First Federal also offers online banking services, which include online bill pay along with debit cards.~~
~~Fee Income Development -~~ ~~Generation of fee income~~trust and ~~the diversification of revenue sources are accomplished through the mortgage banking operation, insurance subsidiary and the~~ wealth management ~~department as~~services through its extensive branch network.
              First ~~Defiance seeks to reduce reliance on retail transaction fee income.~~
~~Deposit Growth -~~Insurance sells a variety of property and casualty, group health and life and individual health and life insurance products. First ~~Federal’s focus has been to grow core deposits with~~Insurance is an ~~emphasis on total relationship banking with both our retail and commercial customers. First Federal has initiated a pricing strategy~~insurance agency that ~~considers the whole relationship of the customer. First Federal will continue to focus on increasing its market share~~does business in the ~~communities it serves by providing quality products with extraordinary customer service, business development strategies~~Defiance, Bryan, Bowling Green, Maumee and ~~branch expansion. First Federal will look to grow its footprint in areas believed to further compliment its overall market share and compliment its strategy of being a high performing community bank.~~
~~- 36 -~~
~~Asset Quality -~~ ~~Maintaining a strong credit culture is of~~Oregon, Ohio areas. On July 1, 2011, 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 in. 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, including FDIC-assisted transactions. 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 with the most recent acquisition completed in 2008. 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. First Defiance completed its acquisition of Payak-Dubbs Insurance Agency, Inc. (“PDI”), an independent property and casualty insurance agency with two office locations based in Maumee, Ohio and Oregon, Ohio for a cash price of $4.8 million. PDI ~~on July 1, 2011, which~~ was merged into First ~~Insurance with offices located~~Insurance. See Note 3 – Acquisitions in ~~Maumee and Oregon, Ohio.~~
~~Common Stock Offering~~
~~During~~ the ~~first quarter~~Notes to the Financial Statements.
               First Defiance Risk Managementis a wholly-owned insurance company subsidiary of ~~2011,~~ the Company ~~completed an underwritten public common stock offering by issuing 1,600,800 shares~~to insure the Company and its subsidiaries against certain risks unique to the operations of the ~~Company’s common stock, including 208,800 shares issued pursuant~~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 ~~the exercise~~spread a limited amount of the underwriter’s over-allotment option, at a price of $13.25 per share for gross proceeds of $21.2 million. The net proceeds to the Company after deducting underwriting discounts and commissions and offering expenses were $19.9 million.
risk among themselves. First Defiance Risk Management was incorporated on December 20, 2012.
- 38 -

Financial Condition
Assets at December 31, ~~2012~~2013 totaled ~~$2.05~~$2.14 billion compared to ~~$2.07~~$2.05 billion at December 31, ~~2011, a decrease~~2012, an increase of ~~$21.2~~$90.2 million or ~~1.0%~~4.4%. Cash and cash equivalents ~~decreased $38.1~~increased $42.5 million to $179.3 million at December 31, 2013 from $136.8 million at December 31, ~~2012 from $174.9 million at December 31, 2011.~~2012. The ~~decrease~~increase in assets was due to an increase in ~~part to~~ the ~~Company’s restructure~~deposit base as of ~~the balance sheet, which included selling $60.0 million in securities and paying off $62.0 million in FHLB advances.~~December 31, 2013. The Company continues to deploy lower yielding overnight deposits into securities on the short to intermediate end of the yield curve until loan demand becomes more consistent.
Securities
The securities portfolio ~~decreased $39.0~~increased $3.9 million to ~~$194.6~~$198.6 million at December 31, ~~2012.~~2013. The ~~2012~~2013 activity in the portfolio included ~~$91.5~~$49.2 million of purchases, ~~$21.5~~$19.4 million of amortization and maturities, ~~$38.1~~$16.2 million of principal pay-downs and ~~$70.1~~$4.0 million of securities being sold. There was a net ~~increase~~decrease of ~~$226,000~~$6.1 million in market value on available-for-sale securities. The Company also recorded ~~$5,000~~$337,000 of other-than-temporary impairment on ~~one~~two collateralized debt ~~obligation~~obligations in ~~2012.~~2013. See Note 5 – Investment Securities in the Notes to the financial statements for additional information.
Loans
Loans receivable, net of undisbursed loan funds and deferred fees and costs, increased ~~$38.2~~$55.2 million to ~~$1.53~~$1.58 billion at December 31, ~~2012.~~2013. For more details on the loan balances, see Note 7 – Loans Receivable in the Notes to the Financial Statements.
~~- 37 -~~
The majority of First Defiance’s non-residential real estate and commercial loans are to small and mid-sized businesses. The combined commercial, non-residential real estate and multi-family real estate loan portfolios totaled ~~$1.18~~$1.21 billion and ~~$1.13~~$1.18 billion at December 31, ~~2012~~2013 and ~~2011,~~2012, respectively, and accounted for approximately ~~77.3%~~74.9% and ~~75.0%~~76.5% of First Defiance’s loan portfolio at the end of those respective periods. First Defiance believes it has been able to establish itself as a leader in its market area in the commercial and commercial real estate lending area by hiring experienced lenders and providing a high level of customer service to its commercial lending clients.
The one-to-four family residential portfolio totaled ~~$200.8~~$195.8 million at December 31, ~~2012,~~2013, compared with ~~$203.4~~$200.8 million at the end of ~~2011.~~2012. At the end of ~~2012,~~2013, those loans comprised ~~13.2%~~12.1% of the total loan portfolio, down from ~~13.6%~~13.0% at December 31, ~~2011.~~
2012.
Construction loans, which include one to four family and commercial real estate properties, increased to $86.1 million at December 31, 2013 compared to $37.8 million at December 31, ~~2012 compared to $31.6 million at December 31, 2011.~~2012. These loans accounted for approximately ~~2.5%~~5.3% and ~~2.1%~~2.5% of the total loan portfolio at December 31, 2013 and 2012, ~~and 2011,~~ respectively.
Home equity and home improvement loans declined to ~~$108.7~~$106.9 million at December 31, ~~2012,~~2013, from ~~$122.1~~$108.7 million at the end of ~~2011.~~2012. At the end of ~~2012,~~2013, those loans comprised ~~7.0%~~6.6% of the total loan portfolio, down from ~~8.1%~~7.0% at December 31, ~~2011.~~
2012.
Consumer finance and mobile home loans were ~~just $15.9~~$16.9 million at December 31, ~~2012, down~~2013, up from ~~$18.9~~$15.9 million at the end of ~~2011.~~2012. These loans comprised just ~~1.0%~~1.1% and ~~1.3%~~1.0% of the total portfolio at December 31, 2013 and 2012, ~~and 2011,~~ respectively.
In order to properly assess the collateral dependent loans included in its loan portfolio, the Company has established policies regarding the monitoring of the collateral underlying such loans. The Company requires an appraisal that is less than one year old for all new collateral dependent real estate loans, and all renewed collateral dependent real estate loans where significant new money is extended. The appraisal process is handled by the 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.
- 39 -

First Federal generally does not require updated appraisals for performing loans unless significant new money is requested by the borrower.
When a collateral dependent loan is downgraded to classified status, First Federal 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.~~appraisal may be required. 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.
When a collateral dependent loan moves to non-performing status, First Federal generally gets a new third party appraisal and charges the loan down appropriately based upon the new appraisal and an estimate of costs to liquidate the collateral. All properties that are moved into the Other Real Estate Owned (“OREO”) category are supported by current appraisals, and the OREO is carried at the lower of cost or fair value, which is determined based on appraised value less First Federal’s estimate of the liquidation costs.
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.
~~- 38 -~~
All loans over 90 days past due and/or on non-accrual are classified as non-performing loans. Non-performing status automatically occurs in the month in which the 90 day delinquency occurs.
As stated above, once a collateral dependent loan is identified as non-performing, First Federal generally gets an appraisal.
Appraisals are received within approximately 60 days after they are requested. The First Federal Loan Loss Reserve Committee reviews the amount of each new appraisal and makes any necessary charge off decisions at its meeting prior to the end of each quarter.
Any partially charged-off collateral dependent loans are considered non-performing, and as such, would need to show an extended period of time with satisfactory payment performance as well as cash flow coverage capability supported by current financial statements before First Federal 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 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 Troubled Debt Restructurings, 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. As of December 31, ~~2012~~2013 and December 31, ~~2011,~~2012, First Federal Bank had ~~$28.2~~$27.6 million and ~~$3.4~~$28.2 million, respectively, of loans that were still performing and which were classified as Troubled Debt Restructurings.
- 40 -

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 that exceed $1 million of aggregate exposure over a twelve month period. 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 ~~$1.5~~$1.4 million at December 31, ~~2012.~~2013. 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.
~~- 39 -~~
Due to regulatory guidance, the Company no longer carries specific reserves on collateral dependent loans, and instead usually 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 purpose 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 applied to the non-impaired loan portfolio was based upon historical losses of the most recent weighted rolling ~~eight~~twelve quarters ending December 31, ~~2012.~~
2013.
The stratification of the loan portfolio resulted in a quantitative general allowance of $11.2 million at December 31, 2013 compared to $14.4 million at December 31, ~~2012 compared to $19.5 million at December 31, 2011.~~2012. The decrease in the quantitative allowance was due to a decrease in the historical loss factors relating to commercial, commercial real estate, residential and consumer loans.
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;~~factors: economic, environment and risk.
- 41 -

ECONOMIC
~~ECONOMIC~~
1) Changes in international, national and local economic business conditions and developments, including the condition of various market segments.
2) Changes in the value of underlying collateral for collateral dependent loans.
ENVIRONMENT
3) Changes in the nature and volume in the loan portfolio.
4) The existence and effect of any concentrations of credit and changes in the level of such concentrations.
5) Changes in lending policies and procedures, including underwriting standards and ~~collect,~~collection, charge-off and recovery practices.
6) Changes in the quality and breadth of the loan review process.
7) Changes in the experience, ability and depth of lending management and staff.
RISK
8) 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.
9) Changes in the political and regulatory environment.
The qualitative analysis at December 31, ~~2012~~2013 indicated a general reserve of ~~$10.8~~$12.3 million compared with ~~$6.5~~$10.8 million at December 31, ~~2011.~~2012. Management reviewed the overall economic, environmental and risk factors and determined that it was appropriate to increase several of ~~these~~the factors as a result of recent experience indicating continued declines in commercial real estate appraised values, rising interest rates in 2013 coupled with the forecast for continued higher rates in 2014, and slightly rising unemployment rates in several Northwest Ohio counties. While management believes that the overall economy and operating environment has generally stabilized in 2013 and the risk of a further significant contraction in the near term is low in our markets, management still anticipates that economic growth will be slow to moderate over the next twelve months. Management also anticipates that past due tolevels and classified loan levels will possibly fluctuate over the ~~continued uncertainty of~~next several quarters but directionally trend toward improvement until a sustainable improvement in the economy and the impact on GDP of the fiscal cliff decisions as well as the impacts of the debt ceiling negotiations. The fluctuation in unemployment rates in some of the counties we serve also contributed to an increase in the economic factors. Finally the risk profile was increased due to a continued focus by our regulators for stability in the allowance levels.asset quality metrics can be realized. First Defiance’s general reserve percentages for main loan segments not otherwise classified ranged from ~~0.20%~~0.25% for construction loans to ~~1.81%~~1.68% for nonresidential real estate loans.
~~- 40 -~~
As a result of the quantitative and qualitative ~~analyses,~~analysis, along with the change in specific reserves, the Company’s provision for loan losses for ~~2012~~2013 was ~~$10.9~~$1.8 million compared to ~~$12.4~~$10.9 million for ~~2011.~~2012. The allowance for loan losses was $25.0 million at December 31, 2013 and $26.7 million at December 31, 2012 and ~~$33.3 million at December 31, 2011~~represented 1.58% and ~~represented~~ 1.75% ~~and 2.24%~~ of loans, net of undisbursed loan funds and deferred fees and costs, respectively. That decrease was mainly the result of ~~higher~~the lower quantitative factors driven by lower charge ~~off activity~~offs and improvement in overall credit risk ~~profile.~~profile as well as the overall higher balance of loans. The pace of the decline in real estate values has slowed and in some markets has stabilized. While some collateral dependent loans no longer have enough collateral value to support the outstanding balance Management believes it has processes in place to identify and assess market values. Management has expanded its credit monitoring functions even further beyond its traditionally strong focus. Additional asset review functions and more delinquent loan reporting requirements have been added to assist in this monitoring. Management will continually review credit concentrations by industry and has placed lower limits on lending within certain types of loan categories. Management has also segmented the commercial real estate portfolio to track the general performance of these segments to further refine the predictive process of identifying potential problem loans. The provision was offset by charge offs of ~~$19.2 million~~$5.2 and recoveries of ~~$1.7~~$1.6 million resulting in a decrease to the overall allowance for loan loss of ~~$6.6~~$1.7 million. In management’s opinion, the overall allowance for loan losses of ~~$26.7~~$25.0 million as of December 31, ~~2012~~2013 is adequate.
- 42 -

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. In ~~2012,~~2013, First Defiance recorded real estate owned write-downs that totaled ~~$416,000.~~$740,000. These amounts were included in other non-interest expense. Management believes that the values recorded at December 31, ~~2012~~2013 for real estate owned and repossessed assets represent the realizable value of such assets.
Total classified loans decreased to $55.6 million at December 31, 2013, compared to $78.1 million at December 31, ~~2012, compared to $122.5 million at December 31, 2011.~~
2012.
First Defiance’s ratio of allowance for loan losses to non-performing loans was 89.6% at December 31, 2013 compared with 82.0% at December 31, ~~2012 compared with 84.6% at December 31, 2011.~~2012. Management monitors collateral values of all loans included on the watch list that are collateral dependent and believes that allowances for those loans at December 31, ~~2012~~2013 are appropriate.
At December 31, ~~2012,~~2013, First Defiance had total non-performing assets of ~~$36.4~~$33.7 million, compared to ~~$43.0~~$36.4 million at December 31, ~~2011.~~2012. Non-performing assets include loans that are 90 days past due, real estate owned and other assets held for sale. ~~Non-performing assets at December 31, 2012 and 2011 by category were as follows:~~
~~- 41 -~~
~~Table 1 – Nonperforming Asset~~
December 31
2012 2011
(In thousands)
Non-performing loans:
Single-family residential $ 3,602 $ 3,890
Construction - -
Non-residential and multi-family residential real estate 23,090 28,150
Commercial 5,661 6,884
Consumer finance - 10
Home equity and improvement 217 394
Total non-performing loans 32,570 39,328
Real estate owned and repossessed assets 3,805 3,628
Total non-performing assets $ 36,375 $ 42,956

Allowance for loan losses as a percentage of total loans* 1.75 % 2.24 %
Allowance for loan losses as a percentage of non-performing assets 73.43 % 77.41 %
Allowance for loan losses as a percentage of non-performing loans 82.01 % 84.56 %
Total non-performing assets as a percentage of total assets 1.78 % 2.08 %
Total non-performing loans as a percentage of total loans* 2.14 % 2.64 %
* Total loans are net of undisbursed loan funds and deferred fees and costs.
The decrease in non-performing loans between December 31, ~~2011~~2012 and December 31, ~~2012~~2013 is ~~primarily~~ in non-residential and multi-family residential real ~~estate as well as in the commercial loans.~~estate. The balance of non-residential and multi-family residential real estate ~~and commercial~~ non-performing loans was ~~$5.1 million and $1.2~~$7.3 million higher at December 31, ~~2011~~2012 compared to December 31, ~~2012, respectively. Approximately $11.1~~2013. This was partially offset by an increase in commercial loans of $2.7 million ~~of 2011 non-performing loans are still considered non-performing loans at~~from December 31, 2012 ~~and $1.6 million of real estate owned at~~to December 31, 2012 were in real estate owned at December 31, 2011. The commercial and non-residential real estate and multi-family real estate loans that are non-performing at December 31, 2012 are comprised of 79 relationships, with 16 relationships making up $19.0 million of the $28.8 million total. By comparison, at December 31, 2011, 9 relationships made up $20.8 million of commercial and non-residential real estate and multi-family real estate loans total of $35.0 million.
2013.
Non-performing loans in the single-family residential, non-residential and multi-family residential real estate and commercial loan categories represent ~~1.79%~~1.67%, ~~2.90%~~1.93% and ~~1.47%~~2.14% of the total loans in those categories respectively at December 31, ~~2012~~2013 compared to ~~1.91%~~1.79%, ~~3.63%~~2.90% and ~~1.97%~~1.47% respectively for the same categories at December 31, ~~2011.~~2012. Management believes that the current allowance for loan losses is appropriate and that the provision for loan losses recorded in ~~2012~~2013 is consistent with both charge-off experience and the risk inherent in the overall credits in the portfolio.
~~Non-performing assets, which include non-accrual loans and real estate owned, decreased to $36.4 million at December 31, 2012 from $43.0 million at December 31, 2011.~~
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.
~~- 42 -~~
~~The following table details~~
For the twelve months ended and as of December 31, 2013, commercial real estate, which represented 50.80% of total loans, accounted for 45.69% of net charge-offs and 56.86% of nonaccrual loans, ~~by loan type.~~and commercial loans, which represented 24.06% of total loans, accounted for 26.22% of net charge-offs and 29.90% of nonaccrual loans. For the twelve months ended and as of December 31, 2012, commercial real estate, which represented 51.63% of total loans, accounted for 58.98% of net charge-offs and 70.89% of nonaccrual loans, and commercial loans, which represented 24.85% of total loans, accounted for 21.11% of net charge-offs and 17.38% of nonaccrual loans. For the twelve months ended and as of December 31, 2011, commercial real estate, which represented 51.70% of total loans, accounted for 62.28% of net charge-offs and 71.58% of nonaccrual loans, and commercial loans, which represented 23.25% of total loans, accounted for 19.77% of net charge-offs and 17.50% of nonaccrual loans.
- 43 -

Table 21 – Net Charge-offs and Non-accruals by Loan Type
For the Twelve Months Ended December 31, 2012 As of December 31, 2012
Net % of Total Net Nonaccrual % of Total Non-
Charge-offs Charge-offs Loans Accrual Loans
(in thousands) (in thousands)
Residential $ 2,338 13.38 % $ 3,602 11.06 %
Construction - 0.00 % - 0.00 %
Commercial real estate 10,302 58.98 % 23,090 70.89 %
Commercial 3,688 21.11 % 5,661 17.38 %
Consumer finance 69 0.40 % - 0.00 %
Home equity and improvement 1,070 6.13 % 217 0.67 %
Total $ 17,467 100.00 % $ 32,570 100.00 %
For the Twelve Months Ended December 31, 2011 As of December 31, 2011
Net % of Total Net Nonaccrual % of Total Non-
Charge-offs Charge-offs Loans Accrual Loans
(in thousands) (in thousands)
Residential $ 2,626 12.96 % $ 3,890 9.89 %
Construction - 0.00 % - 0.00 %
Commercial real estate 12,617 62.28 % 28,150 71.58 %
Commercial 4,005 19.77 % 6,884 17.50 %
Consumer finance 25 0.12 % 10 0.03 %
Home equity and improvement 987 4.87 % 394 1.00 %
Total $ 20,260 100.00 % $ 39,328 100.00 %
~~- 43 -~~
~~Table 3 – Allowance for Loan Loss Activity~~
For the Quarter Ended
4th 2012 3rd 2012 2nd 2012 1st 2012 4th 2011
(dollars in thousands)

Allowance at beginning of period $ 26,310 $ 26,409 $ 28,833 $ 33,254 $ 38,110
Provision for credit losses 2,619 705 4,097 3,503 4,099
Charge-offs:
Residential 976 217 584 738 666
Commercial real estate 595 780 5,448 4,496 6,738
Commercial 540 355 486 2,666 1,423
Consumer finance 59 19 14 41 27
Home equity and improvement 497 203 254 211 251
Total charge-offs 2,667 1,574 6,786 8,152 9,105
Recoveries 449 770 265 228 150
Net charge-offs 2,218 804 6,521 7,924 8,955
Ending allowance $ 26,711 $ 26,310 $ 26,409 $ 28,833 $ 33,254
For the Twelve Months Ended December 31, 2013 As of December 31, 2013
Net % of Total Net Nonaccrual % of Total Non-
Charge-offs Charge-offs Loans Accrual Loans
(in thousands) (in thousands)
Residential $ 361 10.07 % $ 3,273 11.76 %
Construction - 0.00 % - 0.00 %
Commercial real estate 1,638 45.69 % 15,834 56.86 %
Commercial 940 26.22 % 8,327 29.90 %
Consumer finance 14 0.39 % - 0.00 %
Home equity and improvement 632 17.63 % 413 1.48 %
Total $ 3,585 100.00 % $ 27,847 100.00 %
For the Twelve Months Ended December 31, 2012 As of December 31, 2012
Net % of Total Net Nonaccrual % of Total Non-
Charge-offs Charge-offs Loans Accrual Loans
(in thousands) (in thousands)
Residential $ 2,338 13.38 % $ 3,602 11.06 %
Construction - 0.00 % - 0.00 %
Commercial real estate 10,302 58.98 % 23,090 70.89 %
Commercial 3,688 21.11 % 5,661 17.38 %
Consumer finance 69 0.40 % - 0.00 %
Home equity and improvement 1,070 6.13 % 217 0.67 %
Total $ 17,467 100.00 % $ 32,570 100.00 %
The following table sets forth information concerning the allocation of First Defiance’s allowance for loan losses by loan categories at ~~the dates indicated.~~
December 31, 2013 and December 31, 2012.
Table 42 – Allowance for Loan Loss Allocation by Loan Category
December 31, 2012 September 30, 2012 June 30, 2012 March 31, 2012 December 31, 2011
Percent of Percent of Percent of Percent of Percent of
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
(dollars in thousands)
Residential $ 3,506 13.00 % $ 2,996 13.75 % $ 3,104 13.94 % $ 3,373 13.58 % $ 4,095 13.55 %
Construction 75 2.45 % 63 2.06 % 48 1.52 % 73 2.44 % 63 2.10 %
Commercial real estate 14,899 51.63 % 16,260 51.87 % 16,562 51.33 % 19,031 53.10 % 20,490 51.70 %
Commercial 6,325 24.85 % 5,103 23.92 % 5,087 24.64 % 4,693 21.97 % 6,576 23.25 %
Consumer 147 1.03 % 147 1.10 % 140 1.13 % 178 1.19 % 174 1.26 %
Home equity and improvement 1,759 7.04 % 1,741 7.30 % 1,468 7.44 % 1,485 7.72 % 1,856 8.14 %
$ 26,711 100.00 % $ 26,310 100.00 % $ 26,409 100.00 % $ 28,833 100.00 % $ 33,254 100.00 %
December 31, 2013 December 31, 2012
Percent of Percent of
total loans total loans
Amount by category Amount by category
(dollars in thousands)
Residential $ 2,847 12.13 % $ 3,506 13.00 %
Construction 134 5.33 % 75 2.45 %
Commercial real estate 14,508 50.80 % 14,899 51.63 %
Commercial 5,678 24.06 % 6,325 24.85 %
Consumer 148 1.05 % 147 1.03 %
Home equity and improvement 1,635 6.63 % 1,759 7.04 %
$ 24,950 100.00 % $ 26,711 100.00 %
~~Key Asset Quality Ratio Trends~~
~~Table 5 – Key Asset Quality Ratio Trends~~
4^th Qtr 2012 3^rd Qtr 2012 2^nd Qtr 2012 1^st Qtr 2012 4^th Qtr 2011
Allowance for loan losses / loans* 1.75 % 1.74 % 1.76 % 1.96 % 2.24 %
Allowance for loan losses to net charge-offs 1204.83 % 3272.39 % 404.98 % 363.87 % 371.35 %
Allowance for loan losses / non-performing assets 73.43 % 64.73 % 58.38 % 59.13 % 77.41 %
Allowance for loan losses / non-performing loans 82.01 % 69.60 % 63.33 % 63.58 % 84.56 %
Non-performing assets / loans plus REO* 2.38 % 2.68 % 3.01 % 3.30 % 2.88 %
Non-performing assets / total assets 1.78 % 1.98 % 2.19 % 2.28 % 2.08 %
Net charge-offs / average loans (annualized) 0.59 % 0.22 % 1.78 % 2.18 % 2.49 %
* Total loans are net of undisbursed funds and deferred fees and costs.
- 44 -

Loans Acquired with Impairment
Certain loans acquired ~~in the ComBanc, Genoa, and Pavilion acquisitions~~ had evidence that the credit quality of the loan had deteriorated since its origination and, in management’s assessment at the acquisition date, it was probable that First Defiance would be unable to collect all contractually required payments due. In accordance with FASB ASC Topic 310 Subtopic 30,Loans and Debt Securities Acquired with Deteriorated Credit Quality, these loans were recorded based on management’s estimate of the fair value of the loans. At the acquisition date of January 21, 2005, loans with a contractual receivable of $3.4 million were acquired from ComBanc and were deemed impaired. Those loans were recorded at a net realizable value of $2.0 million. On April 8, 2005, loans with a contractual receivable of $1.5 million were acquired from Genoa and were deemed impaired. Those loans were recorded at a net realizable value of $721,000. On March 14, 2008, loans with a contractual receivable of $6.4 million were acquired from Pavilion and were deemed impaired. Those loans were recorded at a net realizable value of $4.4 million.
As of December 31, ~~2012,~~2013, the total contractual receivable for those loans was ~~$855,000~~$503,000 and the recorded value was ~~$512,000.~~
$230,000.
High Loan-to-Value Mortgage Loans
The majority of First Defiance’s mortgage loans are collateralized by one-to-four-family residential real estate, have loan-to-value ratios of 80% or less, and are made to borrowers in good credit standing. First Federal usually requires residential mortgage loan borrowers whose loan-to-value is greater than 80% to purchase private mortgage insurance (PMI). Management also periodically reviews and monitors the financial viability of its PMI providers.
First Federal originates and retains a limited number of residential mortgage loans with loan-to-value ratios that exceed 80% where PMI is not required if the borrower possesses other demonstrable strengths. The loan-to-value ratios on these loans are generally limited to 85% and exceptions must be approved by First Federal’s senior loan committee. Management monitors the balance of one-to-four family residential loans, including home equity loans and committed lines of credit that exceed certain loan to value standards (90% for owner occupied residences, 85% for non-owner occupied residences and one-to-four family construction loans, 75% for developed land and 65% for raw land). During 2011, management purchased two groups of single family loans to medical professionals that had LTV’s greater than 90%. These loans were primarily variable rate loans originated in Ohio in 2011. These purchases led to the growth in the high loan to value mortgage pool. Total loans that exceed those standards described above at December 31, ~~2012~~2013 totaled ~~$45.2~~$43.7 million, compared to ~~$51.7~~$45.2 million at December 31, ~~2011.~~2012. These loans are generally paying as agreed.
First Defiance does not make interest-only first-mortgage residential loans, nor does it have residential mortgage loan products or other consumer products that allow negative ~~amortization~~amortization..
Goodwill and Intangible Assets
Goodwill ~~at December 31, 2012~~ was ~~$61.5 million compared to~~ $61.5 million at December 31, ~~2011.~~2013 and 2012. No impairment of goodwill was recorded in ~~2012~~2013 or ~~2011.~~2012. Core deposit intangibles and other intangible assets decreased to $3.5 million at December 31, 2013 compared to $4.7 million at December 31, ~~2012 compared to $6.2 million at December 31, 2011.~~2012. During ~~2012,~~2013, changes to the core deposit intangibles and other intangibles were due to the recognition of ~~$1.4~~$1.2 million of amortization expense.
~~- 45 -~~
Deposits
Total deposits at December 31, ~~2012~~2013 were ~~$1.667~~$1.74 billion compared to ~~$1.596~~$1.67 billion at December 31, ~~2011,~~2012, an increase of ~~$71.2~~$68.3 million or ~~4.5%~~4.1%. Non-interest bearing deposits increased ~~$69.2~~$33.8 million or ~~28.1%~~10.7% while interest bearing deposits increased ~~$2.0~~$34.5 million or ~~0.2%~~2.6%. Non-interest bearing checking accounts grew by ~~$69.2~~$33.8 million, money market and interest bearing checking accounts grew by ~~$55.8~~$51.1 million, and savings grew by ~~$11.8~~$18.1 million while retail certificates of deposit declined by ~~$57.0~~$32.7 million. Management periodically utilizes the national market for certificates of deposit to supplement its funding needs. The balance of national CD’s decreased to $0 at December 31, 2013, from $2.0 million at December 31, ~~2012, from $10.6 million at December 31, 2011.~~2012. For more details on the deposit balances in general see Note 11 – Deposits.
Borrowings
FHLB advances totaled $22.5 million at December 31, 2013 compared to $12.8 million at December 31, ~~2012 compared to $81.8 million at December 31, 2011.~~2012. The balance at the end of ~~2012~~2013 includes $12.0 million of convertible advances with rates ranging from 2.35% to 3.04%. These advances are all callable by the FHLB, at which point they would convert to a three-month LIBOR advance if not paid off. Those advances have final maturity dates ranging from 2015 to 2018. In addition, First Defiance has ~~one $796,000~~two fixed-rate ~~advance~~advances totaling $10.5 million with ~~a rate of~~rates ranging from 1.78% to 4.10%. The change in FHLB advances is the result of ~~paying off four putable advances totaling $32.0 million, three strike-rate advances totaling $17.0 million, and two single maturity~~securing an advance in the third quarter of 2013 in order to match fund certain fixed rate ~~advances totaling $20.0 million. The large pay down in FHLB advances was in large part due to a balance sheet restructure that took place in the fourth quarter of 2012.~~
In October 2012, the Company executed a balance sheet restructuring strategy to enhance the Company’s current and future profitability while increasing its capital ratios and protecting the balance sheet against rising rates. The strategy required taking an after tax loss of approximately $260,000 through selling $60.0 million in securities for a gain of $1.6 million and paying off $62.0 million in FHLB advances with a prepayment penalty of $2.0 million. The anticipated ongoing positive effects of this strategy include: 1) increases the net interest margin and net interest income, 2) improves all capital ratios and 3) increases return on average assets and return on average equity.
loan requests.
- 45 -

               At December 31, ~~2012,~~2013, First Defiance also had ~~$51.7~~$51.9 million of securities that were sold with agreements to repurchase, compared to ~~$60.4 million of repurchase funding at December 31, 2011.~~
~~Capital Resources~~
~~Total shareholders’ equity decreased $20.0 million to $258.1~~$51.7 million at December 31, 2012.
Capital Resources
               Total stockholders’ equity increased $14.0 million to $272.1 million at December 31, 2013. This ~~decrease~~increase is ~~primarily the~~a result of net income of $22.2 million, partially offset by a decrease in the ~~Company’s early payoff~~market value of the ~~Capital Purchase Program funds obtained from the Treasury~~available-for-sale security portfolio in the amount of ~~$37.0~~$3.7 million ~~preferred stock dividends of $900,000,~~ and ~~$2.0~~$3.9 million in common stock dividends. ~~These decreases were offset by $18.7 million of net income. In 2003,~~On September 30, 2013, the ~~Company’s~~ Board of Directors authorized a new share repurchase program of up to 5%, or approximately 489,000 shares, of the ~~repurchase~~common stock outstanding. During the fourth quarter 2013, 70,966 shares were repurchased, resulting in a $1.8 million decrease in stockholders’ equity, and a total of ~~640,000 shares, 93,124 of which remain available for repurchase.~~39,330 stock options were exercised resulting in a $350,000 increase in stockholders’ equity. During 2012, no shares were repurchased, but a total of 500 stock options were exercised ~~by three employees,~~ resulting in a $4,000 increase in ~~shareholders~~stockholders’ equity. ~~During 2011, no shares were repurchased but a total of 850 stock options were exercised by four employees, resulting in a $11,000 increase in shareholders equity.~~
~~- 46 -~~
Results of Operations
Summary
First Defiance reported net income of ~~$18.7~~$22.2 million for the year ended December 31, ~~2012~~2013 compared to ~~$15.5~~$18.7 million and ~~$8.1~~$15.5 million for the years ended December 31, ~~2011~~2012 and ~~2010,~~2011, respectively. Net income applicable to common shares was $22.2 million in 2013 compared with $18.0 million in 2012 ~~compared with~~and $13.5 million in ~~2011 and $6.1 million in 2010.~~2011. On a diluted per common share basis, First Defiance earned $2.19 in 2013, $1.81 in 2012 and $1.42 in ~~2011 and $0.75 in 2010.~~
2011.
First Defiance’s 2013 and 2012 net income of $22.2 million and $18.7 million respectively, did not include any acquisition related costs. The 2011 net income included $234,000 of acquisition related costs resulting from the PDI acquisition. ~~The 2010 net income included $63,000 of acquisition related costs resulting from the Andres O’Neil & Lowe Insurance Agency (“AOL”) acquisition.~~ Excluding ~~these items,~~this item, core earnings were $22.2 million, $18.7 million ~~$15.7 million~~ and ~~$8.1~~$15.7 million for the years ended December 31, 2013, 2012 ~~2011~~ and ~~2010~~2011, respectively. On a diluted per share basis, core earnings amounted to $2.19, $1.81 ~~$1.43~~ and ~~$0.75~~$1.43 for those same three periods.
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.
As demand for new lending opportunities increased ~~slightly~~modestly in ~~2012,~~2013 coupled with a surge in deposits, the Company continued to invest some of its liquidity into investment securities. This may continue into ~~2013~~2014 as management deems it appropriate within its liquidity strategy and consideration of overall loan ~~demand.~~
demand and deposit growth.
Net interest income was ~~$69.0~~$67.6 million for the year ended December 31, ~~2012~~2013 compared to ~~$69.9~~$69.0 million and ~~$70.2~~$69.9 million for the years ended December 31, ~~2011~~2012 and ~~2010,~~2011, respectively. The tax-equivalent net interest margin was ~~3.81%~~3.76%, ~~3.88%~~3.81% and ~~3.89%~~3.88% for the years ended December 31, 2013, 2012 ~~2011~~ and ~~2010,~~2011, respectively. The margin was down slightly between ~~2011~~2012 and ~~2012.~~2013. Interest-earning asset yields decreased 3630 basis points (to 4.14% in 2013 from 4.44% in ~~2012 from 4.80% in 2011)~~2012) and the cost of interest bearing liabilities between the two periods decreased 3330 basis points (to 0.49% in 2013 from 0.79% in 2012).
               Total interest income decreased by $6.1 million or 7.6% to $74.8 million for the year ended December 31, 2013 from $80.9 million for the year ended December 31, 2012. The decrease in interest income was due to a decline in asset yields, mainly as a result of a drop in yields on loans receivable which declined 46 basis points to 4.46% at December 31, 2013. Interest income from loans decreased to $68.1 million for 2013 compared to $72.6 million in 2012 which represents a decline of 6.3%.
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               During the same period, the average balance of investment securities decreased to $191.0 million for 2013 from ~~1.12%~~$247.4 million for the year ended December 31, 2012. Interest income from the investment portfolio decreased to $5.6 million for 2013 from $7.1 million for 2012. The decline in ~~2011).~~
average balance and interest income was a result of a balance sheet restructure that took place late in 2012. The tax-equivalent yield on the investment portfolio was 3.78% in 2013 compared to 3.63% in 2012. The overall duration of investments increased to 4.5 years at December 31, 2013 from 3.5 years at December 31, 2012.
               Interest expense decreased by $4.8 million in 2013 compared to 2012, to $7.2 million from $11.9 million. This decrease was due to a 30 basis point decline in the average cost of interest-bearing liabilities in 2013. Interest expense related to interest-bearing deposits was $5.9 million in 2013 and $8.2 million in 2012. Expenses on FHLB advances and other interest bearing funding sources were $434,000 and $222,000 respectively in 2013 and $2.4 million and $373,000 respectively in 2012. Interest expense recognized by the Company related to subordinated debentures was $601,000 in 2013 and $971,000 in 2012.
Total interest income decreased by $6.1 million or 7.0% to $80.9 million for the year ended December 31, 2012 from $87.1 million for the year ended December 31, 2011. The decrease in interest income was due to a decline in asset yields, mainly as a result of a drop in yields on loans receivable which declined 57 basis points to 4.92% at December 31, 2012. Interest income from loans decreased to $72.6 million for 2012 compared to $78.6 million in 2011 which represents a decline of 7.7%.
During the same period, the average balance of investment securities increased to $247.4 million for 2012 from $205.6 million for the year ended December 31, 2011. Interest income from the investment portfolio remained flat at $7.1 million from 2011 to 2012. The tax-equivalent yield on the investment portfolio was 3.63% in 2012 compared to 4.19% in 2011. The overall duration of investments decreased to 3.5 years at December 31, 2012 from 3.7 years at December 31, 2011.
Interest expense decreased by $5.3 million in 2012 compared to 2011, to $11.9 million from $17.2 million. This decrease was due to a 33 basis point decline in the average cost of interest-bearing liabilities in 2012. Interest expense related to interest-bearing deposits was $8.2 million in 2012 and $12.2 million in 2011. Expenses on FHLB advances and other interest bearing funding sources were $2.4 million and $373,000 respectively in 2012 and $3.2 million and $530,000 respectively in 2011. Interest expense recognized by the Company related to subordinated debentures was $1.0 million in 2012 and $1.3 million in 2011.
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Total interest income decreased by $8.8 million or 9.2% to $87.1 million for the year ended December 31, 2011 from $95.9 million for the year ended December 31, 2010. The decrease in interest income was due to a decline in asset yields, mainly as a result of a drop in yields on loans receivable which declined 28 basis points to 5.49% at December 31, 2011. Interest income from loans decreased to $78.6 million for 2011 compared to $88.6 million in 2010 which represents a decline of 11.3%.
During the same period the average balance of investment securities increased to $205.6 million for 2011 from $154.6 million for the year ended December 31, 2010. Interest income from the investment portfolio increased $1.0 million from 2010 to 2011. The tax-equivalent yield on the investment portfolio was 4.19% in 2011 compared to 4.71% in 2010. The investment portfolio yield decreased coupled by a narrowing of the overall duration of investments to 3.7 years at December 31, 2011 from 3.9 years at December 31, 2010.
Interest expense decreased by $8.5 million in 2011 compared to 2010, to $17.2 million from $25.7 million. This decrease was due to a 49 basis point decline in the average cost of interest-bearing liabilities in 2011. The average balance of interest-bearing deposits increased by $30.5 million at December 31, 2011 compared to December 31, 2010. Interest expense related to interest-bearing deposits was $12.2 million in 2011 and $19.2 million in 2010. Expenses on FHLB advances and other interest bearing funding sources were $3.2 million and $530,000 respectively in 2011 and $4.7 million and $455,000 respectively in 2010. Interest expense recognized by the Company related to subordinated debentures was $1.3 million in 2011 and in 2010.
The following table shows an analysis of net interest margin on a tax equivalent basis for the years ended December 31, 2013, 2012 ~~2011~~ and ~~2010:~~
2011:
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Table 63 – Net Interest Margin
Year Ended December 31
(In Thousands)
2012 2011 2010
Average
Balance Interest
(1) Yield/
Rate (2) Average
Balance Interest
(1) Yield/
Rate Average
Balance Interest
(1)
Yield/
Rate

(Dollars in Thousands)
Interest-Earning Assets:
Loans receivable $ 1,477,681 $ 72,724 4.92 % $ 1,437,588 $ 78,773 5.49 % $ 1,538,388 $ 88,775 5.77 %
Securities 247,442 8,675 3.63 % 205,609 8,440 4.19 % 154,648 7,151 4.71 %
Interest-earning deposits 116,562 300 0.26 % 184,126 466 0.25 % 121,911 303 0.25 %
FHLB stock 20,655 899 4.35 % 20,831 867 4.17 % 21,375 879 4.11 %
Total interest-earning assets 1,862,340 82,598 4.44 % 1,848,154 88,546 4.80 % 1,836,322 97,108 5.29 %
Non-interest-earning assets 201,212 210,216 218,486

Total Assets $ 2,063,552 $ 2,058,370 $ 2,054,808

Interest-Bearing Liabilities:
Interest-bearing deposits $ 1,352,724 $ 8,169 0.60 % $ 1,358,785 $ 12,175 0.90 % $ 1,389,330 $ 19,222 1.38 %
FHLB advances 66,121 2,424 3.67 % 93,669 3,203 3.43 % 127,281 4,711 3.70 %
Other borrowings 53,155 373 0.70 % 56,464 530 0.94 % 47,046 455 0.97 %
Subordinated debentures 36,169 971 2.68 % 36,213 1,278 3.54 % 36,228 1,314 3.63 %
Total interest-bearing liabilities 1,508,169 11,937 0.79 % 1,545,131 17,186 1.12 % 1,599,885 25,702 1.61 %
Non-interest bearing demand deposits 266,913 - 231,343 - 200,864 -
Total including non-interest- bearing demand deposits
1,775,082 11,937 0.67 % 1,776,474 17,186 0.97 % 1,800,749 25,702 1.43 %
Other non-interest liabilities 21,276 17,983 15,264
Total Liabilities 1,796,358 1,794,457 1,816,013
Stockholders’ equity 267,194 263,913 238,795
Total liabilities and stockholders’ equity $ 2,063,552 $ 2,058,370 $ 2,054,808
Net interest income; interest rate spread (3) $ 70,661 3.64 % $ 71,360 3.69 % $ 71,406 3.68 %

Net interest margin (4) 3.81 % 3.88 % 3.89 %
Average interest-earning assets to average interest- bearing liabilities 123.5 % 119.6 % 114.8 %
Year Ended December 31
(In Thousands)
2013 2012 2011
Average Interest Yield/ Average Interest Yield/ Average Interest Yield/
Balance (1) Rate (2) Balance (1) Rate Balance (1) Rate

Interest-Earning Assets:
Loans receivable $ 1,528,176 $ 68,147 4.46 % $ 1,477,681 $ 72,724 4.92 % $ 1,437,588 $ 78,773 5.49 %
Securities 191,039 7,158 3.78 % 247,442 8,675 3.63 % 205,609 8,440 4.19 %
Interest-earning deposits 106,742 282 0.26 % 116,562 300 0.26 % 184,126 466 0.25 %
FHLB stock 19,505 826 4.23 % 20,655 899 4.35 % 20,831 867 4.17 %
Total interest-earning
     assets 1,845,462 76,413 4.14 % 1,862,340 82,598 4.44 % 1,848,154 88,546 4.80 %
Non-interest-earning
     assets 206,788 201,212 210,216

Total Assets $ 2,052,250 $ 2,063,552 $ 2,058,370

Interest-Bearing Liabilities:
Interest-bearing deposits $ 1,353,304 $ 5,913 0.44 % $ 1,352,724 $ 8,169 0.60 % $ 1,358,785 $ 12,175 0.90 %
FHLB advances 17,733 434 2.45 % 66,121 2,424 3.67 % 93,669 3,203 3.43 %
Subordinated debentures 36,133 601 1.66 % 36,169 971 2.68 % 36,213 1,278 3.54 %
Other borrowings 50,877 222 0.44 % 53,155 373 0.70 % 56,464 530 0.94 %
Total interest-bearing
     liabilities 1,458,047 7,170 0.49 % 1,508,169 11,937 0.79 % 1,545,131 17,186 1.12 %
Non-interest bearing
    demand deposits 308,591 - 266,913 - 231,343 -
Total including non-
    interest- bearing
    demand deposits 1,766,638 7,170 0.41 % 1,775,082 11,937 0.67 % 1,776,474 17,186 0.97 %
Other non-interest
    liabilities 20,547 21,276 17,983
Total Liabilities 1,787,185 1,796,358 1,794,457
Stockholders’ equity 265,065 267,194 263,913
Total liabilities and
    stockholders’ equity $ 2,052,250 $ 2,063,552 $ 2,058,370
Net interest income;
    interest rate spread (3) $ 69,243 3.65 % $ 70,661 3.64 % $ 71,360 3.69 %

Net interest margin (4) 3.76 % 3.81 % 3.88 %
Average interest-earning
    assets to average interest-
    bearing liabilities 126.6 % 123.5 % 119.6 %
(1)Interest on certain tax exempt loans (amounting to $129,000, $192,000 and $231,000 in 2013, 2012 and 2011 respectively) and tax-exempt securities ($2.9 million, $2.9 million and $2.5 million in 2013, 2012, and 2011) is not taxable for Federal income tax purposes. The average balance of such loans was $4.2 million, $4.9 million and $5.5 million in 2013, 2012, and 2011 while the average balance of such securities was $76.0 million, $73.7 million and $60.5 million in 2013, 2012, and 2011, respectively. 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)At December 31, 2013, the yields earned and rates paid were as follows: loans receivable, 4.30%; securities, 3.14%; FHLB stock,4.00%; total interest-earning assets, 4.17%; deposits, 0.24%; FHLB advances, 2.36%; other borrowings, 0.29%, subordinated debentures,1.67%; total including non- interest-bearing liabilities, 0.29%; and interest rate spread, 3.88%.
~~(1)~~(3) Interest on certain tax exempt loans (amounting to $192,000, $231,000 and $274,000 in 2012, 2011 and 2010 respectively) and tax-exempt securities ($2.9 million, $2.5 million and $2.0 million in 2012, 2011 and 2010) is not taxable for Federal income tax purposes. The average balance of such loans was $4.9 million, $5.5 million and $6.1 million in 2012, 2011 and 2010 while the average balance of such securities was $73.7 million, $60.5 million and $47.0 million in 2012, 2011 and 2010 respectively. 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)~~ At December 31, 2012, the yields earned and rates paid were as follows: loans receivable, 4.56%; securities, 3.35%; FHLB stock,4.61%; total interest-earning assets, 4.42%; deposits, 0.33%; FHLB advances,2.80%; other borrowings, 0.62%, subordinated debentures,1.82%; total including non- interest-bearing liabilities, 0.39%; and interest rate spread, 4.04%.
~~(3)~~ Interest rate spread is the difference in the yield on interest-earning assets and the cost of interest-bearing liabilities.
(4) Net interest margin is net interest income divided by average interest-earning assets.
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The following table describes the extent to which changes in interest rates and changes in volume of interest-related assets and liabilities have affected First Defiance’s tax-equivalent interest income and interest expense during the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change in volume multiplied by prior year rate), (ii) change in rate (change in rate multiplied by prior year volume), and (iii) total change in rate and volume. The combined effect of changes in both rate and volume has been allocated proportionately to the change due to rate and the change due to volume.
Table 74 – Changes in Interest Rates and Volumes
Year Ended December 31
2012 vs. 2011 2011 vs. 2010
Increase
(decrease)
due to
rate Increase
(decrease)
due to
volume Total
increase
(decrease) Increase
(decrease)
due to
rate Increase
(decrease)
due to
volume Total
increase
(decrease)
Interest-Earning Assets
Loans $ (8,198 ) $ 2,149 $ (6,049 ) $ (4,352 ) $ (5,650 ) $ (10,002 )
Securities (1,336 ) 1,571 235 (869 ) 2,158 1,289
Interest-earning deposits 8 (174 ) (166 ) 6 157 163
FHLB stock 39 (7 ) 32 11 (23 ) (12 )
Total interest-earning assets $ (9,487 ) $ 3,539 $ (5,948 ) $ (5,204 ) $ (3,358 ) $ (8,562 )

Interest-Bearing Liabilities
Deposits $ (3,952 ) $ (54 ) $ (4,006 ) $ (6,634 ) $ (413 ) $ (7,047 )
FHLB advances 218 (997 ) (779 ) (338 ) (1,170 ) (1,508 )
Term notes (127 ) (30 ) (157 ) (14 ) 89 75
Subordinated Debentures (305 ) (2 ) (307 ) (35 ) (1 ) (36 )
Total interest- bearing liabilities $ (4,166 ) $ (1,083 ) $ (5,249 ) $ (7,021 ) $ (1,495 ) $ (8,516 )

Increase (decrease) in net interest income $ (699 ) $ (46 )
Year Ended December 31
2013 vs. 2012 2012 vs. 2011
Increase Increase Increase Increase
(decrease) (decrease) Total (decrease) (decrease) Total
due to due to increase due to due to increase
rate volume (decrease) rate volume (decrease)
Interest-Earning Assets
Loans $ (7,000) $ 2,423 $ (4,577) $ (8,198) $ 2,149 $ (6,049)
Securities 565 (2,082) (1,517) (1,336) 1,571 235
Interest-earning deposits 8 (26) (18) 8 (174) (166)
FHLB stock (24) (49) (73) 39 (7) 32
Total interest-earning
     assets $ (6,451) $ 266 $ (6,185) $ (9,487) $ 3,539 $ (5,948)

Interest-Bearing
     Liabilities
Deposits $ (2,260) $ 4 $ (2,256) $ (3,952) $ (54) $ (4,006)
FHLB advances (620) (1,370) (1,990) 218 (997) (779)
Subordinated Debentures (369) (1) (370) (305) (2) (307)
Notes Payable (135) (16) (151) (127) (30) (157)
Total interest- bearing
     liabilities $ (3,384) $ (1,383) $ (4,767) $ (4,166) $ (1,083) $ (5,249)

Increase (decrease) in
     net interest income $ (1,418) $ (699)
Provision for Loan Losses – First Defiance’s provision for loan losses was ~~$10.9~~$1.8 million for the year ended December 31, ~~2012~~2013 compared to $10.9 million for December 31, 2012 and $12.4 million for December 31, ~~2011 and $23.2 million for December 31, 2010.~~2011.
Provisions for loan losses are charged to earnings to bring the total allowance for loan losses to a level deemed appropriate by management to absorb probable losses incurred in the loan portfolio. Factors considered by management include identifiable risk in the portfolios, historical experience, the volume and type of lending conducted by First Defiance, the amount of non-performing loans (including loans which meet the FASB ASC Topic 310 definition of impaired), the amount of loans graded by management as substandard, doubtful, or loss, general economic conditions (particularly as they relate to First Defiance’s market areas); and other factors related to the collectability of First Defiance’s loan portfolio. See also Allowance for Loan Losses in Management’s Discussion and Analysis and Note 7 to the audited financial statements.
Noninterest Income –Noninterest income ~~increased~~decreased by ~~$6.9~~$3.8 million or ~~0.3%~~11.1% in ~~2012~~2013 to ~~$34.4~~$30.6 million from ~~$27.5~~$34.4 million for the year ended December 31, ~~2011.~~2012. That followed ~~a decrease~~an increase of ~~$74,000~~$6.9 million or ~~0.3%~~24.9% in ~~2011~~2012 from ~~$27.6~~$27.5 million in ~~2010.~~2011.
Service fees and other charges decreased to ~~$10.8~~$10.0 million for the year ended December 31, 2013 from $10.8 million for 2012 ~~from~~and $11.4 million for ~~2011 and $12.7 million for 2010.~~2011. The decline in income in 2013 and 2012 ~~and~~from 2011 mainly related to a new rule issued by the Federal Reserve Board that became effective in the third quarter of 2010 as well as changes in customer behavior patterns. This rule prohibits financial institutions from charging consumers fees for paying overdrafts on automated teller machines and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions. Consumers must be provided a notice that explains the financial institution’s overdraft services, including the fees associated with the service, and the consumer’s choices.
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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 years ending December 31, ~~2012~~2013 and ~~2011~~2012 related to the overdraft privilege product, net of adjustments to the allowance for uncollectible overdrafts, were ~~$4.4~~$3.5 million and ~~$5.4~~$4.4 million, respectively. Accounts charged off are included in noninterest expense. The allowance for uncollectible overdrafts was $22,000 at December 31, 2013 and $4,000 at December 31, ~~2012 and $67,000 at December 31, 2011.~~
2012.
Noninterest income also includes gains, losses and impairment on investment securities. In ~~2012,~~2013, First Defiance realized a $240,000 net loss on securities compared to a $2.1 million net gain ~~on securities compared to~~in 2012 and a $216,000 net gain in ~~2011~~2011. In 2013, 2012 and ~~a $339,000 net loss in 2010. In 2012,~~ 2011, ~~and 2010,~~ First Defiance recognized other-than-temporary impairment (“OTTI”) charges for certain impaired investment securities, where, in management’s opinion, the value of the investment will not be recovered. The total OTTI charges in ~~2012~~2013 were ~~$5,000~~$337,000 and gains on sale or call of securities were ~~$2.1 million.~~$97,000. Management recorded ~~$5,000~~$337,000 of OTTI on its investment of ~~one~~two trust preferred collateralized debt obligation (“CDOs”) ~~as a result of management’s analysis of~~that were considered disallowed under the Interim Final Volcker Rule announced on January 14, 2014 and which required the Company to liquidate these securities. The Company held eight CDOs at December 31, ~~2012.~~2013. Four of those CDOs were written down in full prior to January 1, 2010. The remaining four CDOs have a total amortized cost of ~~$3.6~~$3.4 million at December 31, ~~2012.~~2013. Of these four, ~~two, with a total amortized cost of $1.6 million,~~all were identified as OTTI in prior periods. The final two CDOs, with a total amortized cost of $2.0 million, continue to pay principal and interest payments in accordance with the contractual terms of the securities and no credit loss impairment has been identified in management’s analysis. Therefore, these two CDO investments have not been deemed by management to behaving OTTI. In ~~2011,~~2012, the total OTTI charges were $5,000 and gains on sale or call of securities were $2.1 million. The total OTTI charges in 2011 were $2,000 and gains on sale or call of securities were $218,000. The total OTTI charges in 2010 were $331,000 and losses on sale or call of securities were $8,000. Management recorded $214,000 of OTTI on its investments of three trust preferred collateralized debt obligations (“CDOs”) and a $117,000 write-down of its perpetual preferred securities issued by Fannie Mae and Freddie Mac as a result of management’s analysis of the securities. In 2010, there were 30 securities called or matured and four securities sold, resulting in a net loss of $8,000.
In October 2012, the Company executed a balance sheet restructuring strategy to enhance the Company’s current and future profitability while increasing its capital ratios and protecting the balance sheet against rising rates. The strategy required taking an after tax loss of approximately $260,000 through selling $60.0 million in securities for a gain of $1.6 million and paying off $62.0 million in FHLB advances with a prepayment penalty of $2.0 million. The anticipated ongoing positive effects of this strategy include: 1) increases the net interest margin and net interest income, 2) improves all capital ratios and 3) increases return on average assets and return on average equity.
~~- 51 -~~
Mortgage banking income includes gains from the sale of mortgage loans, fees for servicing mortgage loans for others an offset for amortization of mortgage servicing rights, and adjustments for impairment in the value of mortgage servicing rights. Mortgage banking income totaled $8.4 million, $9.7 million and $6.4 million in 2013, 2012 and ~~$7.8~~2011, respectively. The $1.2 million decrease in 2013 from 2012 is attributable to a $4.9 million decrease in the gain on sale of loans, partially offset by a $2.0 million positive change in the valuation adjustments on mortgage servicing rights and a decrease of $1.5 million in ~~2012, 2011 and 2010, respectively.~~mortgage servicing rights amortization expense. The positive valuation adjustment is a reflection of the increase in the fair value of certain sectors of the Company’s portfolio of mortgage servicing rights. First Defiance originated $291.7 million of residential mortgages for sale into the secondary market in 2013 compared with $521.5 million in 2012. The $3.3 million increase in mortgage banking income in 2012 from 2011 is attributable to a $5.0 million increase in the gain on sale of loans, offset by a $355,000 negative change in the valuation adjustments on mortgage servicing rights and an increase of $1.4 million in mortgage servicing rights amortization expense. The negative change of $355,000 in servicing rights valuation adjustments was due to an impairment charge of $759,000 in 2012 compared with an impairment charge of $404,000 in 2011. The impairment charge is a reflection of the decline in the fair value of certain sectors of the Company’s portfolio of mortgage servicing rights. First Defiance originated $521.5 million of residential mortgages for sale into the secondary market in 2012 compared with $262.8 million in 2011. The $1.4 million decrease in 2011 from 2010 is attributable to a $1.4 million decrease in the gain on sale of loans and a $757,000 negative change in the valuation adjustments on mortgage servicing rights which were partially offset by an increase of $284,000 in servicing revenue and a decrease of $473,000 in the amortization of mortgage servicing rights expense. The negative change of $757,000 in servicing rights valuation adjustments was due to an impairment charge of $404,000 in 2011 compared with a recapture of $353,000 in 2010. First Defiance originated $262.8 million of residential mortgages for sale into the secondary market in 2011 compared with $388.1 million in 2010. The balance of the mortgage servicing right valuation allowance stands at ~~$2.3~~$1.0 million at the end of ~~2012.~~2013. See Note 8 to the financial statements.
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               Insurance and investment commission income increased $951,000 or 11.0% to $9.6 million in 2013 from $8.7 million in 2012 in large part due to an increase in contingent income of $436,000. Contingent commissions are bonus payments received by First Defiance’s insurance subsidiary for effective underwriting. Insurance and investment commission income increased $1.6 million or 22.0% to $8.7 million in 2012 from $7.1 million in 2011 primarily due to the acquisition of PDI ~~a full insurance agency which closed~~ on July 1, 2011, allowing 2012 to be the first year to realize a full year’s income from the acquisition, coupled with an increase in contingent income of $179,000. Contingent commissions are bonus payments received by First Defiance’s insurance subsidiary for effective underwriting. Insurance and investment commission income increased $2.0 million or 38.3% in 2011 primarily due to the acquisition of PDI, a full insurance agency which closed on July 1, 2011, coupled with an increase in contingent income of $226,000. The PDI acquisition added approximately $1.2 million in revenue in 2011.
Noninterest Expense – Total noninterest expense for ~~2012~~2013 was $64.8 million compared to $65.8 million ~~compared to~~for the year ended December 31, 2012 and $62.8 million for the year ended December 31, ~~2011 and $63.5 million for the year ended December 31, 2010.~~2011. The 2011 total includes $234,000 ~~of acquisition related charges and the 2010 total includes $63,000~~ of acquisition related charges. Noninterest expense, excluding the acquisition related charges in 2011 ~~and 2010~~ was $62.5 million.
               Compensation and benefits increased $1.7 million or 5.3% in 2013 to $34.3 million from $32.6 million in 2012. The increase in compensation and ~~$63.4~~benefits is due to merit increases and an increase in incentive expense of $481,000 as a direct reflection of the improved financial performance of the Company as well as increased medical insurance costs. FDIC insurance costs decreased $1.1 million ~~respectively.~~or 40.0% to $1.6 million from $2.7 million in 2012. The FDIC decrease is due to the improvement in the Company’s risk category in 2013. State franchise tax decreased $172,000 or 6.9% in 2013 to $2.3 million from $2.5 million in 2012. Occupancy costs decreased $816,000 or 10.8% in 2013 to $6.8 million from $7.6 million in 2012 due to an increase in deferred rent liabilities in 2012. Data processing increased $465,000 or 10.0% in 2013 to $5.1 million from $4.7 million in 2012 from the Company’s ongoing projects to enhance product offerings and gain efficiencies through the utilization of technology. The other noninterest expense category decreased $1.2 million primarily due to a one-time penalty of $2.0 million for the prepayment of $62 million in FHLB advances as part of the Company’s balance sheet restructure in 2012. This was partially offset by higher real estate owned expenses and an increase in management consulting.
Compensation and benefits increased $1.0 million or 3.2% in 2012 to $32.6 million from $31.6 million in 2011. The increase in compensation and benefits iswas due to the full impact of the acquisition of PDI, and an increase in incentive expense of $490,000 as a direct reflection of the improved financial performance of the Company. FDIC insurance costs decreased $231,000 or 7.9% to $2.7 million from $2.9 million in 2011. The decrease reflects the change in the assessment rate calculation per the Dodd-Frank regulations. State franchise tax increased $485,000 or 24.1% in 2012 to $2.5 million from $2.0 million in 2011. This increase is due to new rates being issued by the state of Ohio. Occupancy costs increased $412,000 or 5.8% in 2012 to $7.6 million from $7.2 million in 2011 due to an increase in deferred rent liabilities. Data processing increased $403,000 or 9.5% in 2012 to $4.7 million from $4.3 million in 2011 as the Company initiated projects to help gain efficiencies and utilize technology. The other noninterest expense category (including acquisition related charges in 2011) increased $1.4 million primarily due to a one-time prepayment penalty of $2.0 million in relation to the prepayment of $62 million in FHLB advances as part of the Company’s balance sheet restructure ~~which took place~~ in ~~October~~ 2012.
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~~Compensation and benefits increased $4.2 million or 15.2% in 2011~~
Income Taxes – Income taxes amounted to ~~$31.6 million from $27.4~~$9.3 million in 2010. The increase in compensation and benefits is due to the Company freezing pay in 2010, an increase in health care costs of $813,000 due to an increase in claims, the acquisition of PDI which added approximately $797,000 in compensation and benefits expense and an increase in incentive expense of $1.5 million as a direct reflection of the improved financial performance of the Company. FDIC insurance costs decreased $844,000 or 22.4% to $2.9 million from $3.8 million in 2010. The decrease reflects the change in the assessment rate calculation per the Dodd-Frank regulations. Data processing decreased $652,000 or 13.3% in 2011 to $4.3 million from $4.9 million in 2010 as the Company gained efficiencies from switching to a new core systems provider in late 2010. The other noninterest expense category (including acquisition related charges in 2011 and 2010) decreased $3.5 million due to credit, collection and OREO charges decreasing $2.1 million and $1.3 million of core conversion related costs recorded in 2010.
~~Income Taxes~~ – ~~Income taxes amounted~~2013 compared to $8.0 million in 2012 ~~compared to~~and $6.7 million in ~~2011 and $3.0 million in 2010.~~2011. The effective tax rates for those years were ~~30.0%~~29.4%, 30.0%, and ~~27.0%~~30.0%, respectively. The tax rate is lower than the statutory 35% tax rate for the Company mainly because of investments in tax-exempt securities. The earnings on tax-exempt securities are not subject to federal income tax. See Note 18 – Income Taxes in the Notes to the financial statements for further details.
Concentrations of Credit Risk
Financial institutions such as First Defiance generate income primarily through lending and investing activities. The risk of loss from lending and investing activities includes the possibility that losses may occur from the failure of another party to perform according to the terms of the loan or investment agreement. This possibility is known as credit risk.
Lending or investing activities that concentrate assets in a way that exposes the Company to a material loss from any single occurrence or group of occurrences increases credit risk. Diversifying loans and investments to prevent concentrations of risks is one way a financial institution can reduce potential losses due to credit risk. Examples of asset concentrations would include multiple loans made to a single borrower and loans of inappropriate size relative to the total capitalization of the institution. Management believes adherence to its loan and investment policies allows it to control its exposure to concentrations of credit risk at acceptable levels. First Defiance’s loan portfolio is concentrated geographically in its northwest Ohio, northeast Indiana and southeast Michigan market areas. Management has also identified lending for income-generating rental properties as an industry concentration. Total loans for income generating property totaled ~~$355.4~~$408.4 million at December 31, ~~2012,~~2013, which represents ~~23%~~25.3% of the Company’s loan portfolio. Management believes it has the skill and experience to manage any risks associated with this type of lending. Loans in this category are generally paying as agreed without any unusual or unexpected levels of delinquency. The delinquency rate in this category, which is any loan 30 days or more past due, was ~~0.80%~~0.82% at December 31, ~~2012.~~2013. There are no other industry concentrations that exceed 10% of the Company’s loan portfolio.
Liquidity and Capital Resources
The Company’s primary source of liquidity is its core deposit base, raised through First Federal’s branch network, along with wholesale sources of funding and its capital base. These funds, along with investment securities, provide the ability to meet the needs of depositors while funding new loan demand and existing commitments.
Cash generated from operating activities was $42.6 million, $31.9 million and $38.5 million in 2013, 2012 and ~~$32.2 million in 2012,~~ 2011, ~~and 2010,~~ respectively. The adjustments to reconcile net income to cash provided by or used in operations during the periods presented consist primarily of proceeds from the sale of loans (less the origination of loans held for sale), the provision for loan losses, depreciation expense, the origination, amortization and impairment of mortgage servicing rights and increases and decreases in other assets and liabilities.
~~- 53 -~~
The primary investing activity of First Defiance is lending, which is funded with cash provided from operating and financing activities, as well as proceeds from payment on existing loans and proceeds from maturities of investment securities. On July 1, 2011, First Defiance completed the acquisition of Payak-Dubbs Insurance Agency, Inc. (“PDI”), a full insurance agency, ~~from Payak-Dubbs Insurance Agency, Inc.~~ for $4.0 million in cash. Also in 2011, the Company purchased $25.8 million in portfolio residential home loans.
In considering the more typical investing activities, during 2013, $35.1 million and $4.0 million was generated from the combination of maturity or pay-downs and the sale or call of available-for-sale investment securities, respectively and $78.6 million was used by an increase in loans while $49.2 million was used to purchase available-for-sale investment securities. During 2012, $60.1 million and $72.3 million was generated from the combination of maturity or pay-downs ~~calls~~and the sale or ~~sale~~call of available-for-sale investment securities, respectively, and $65.0 million was used by an increase in loans while $91.5 million was used to purchase available-for-sale investment securities. During 2011, $52.1 million and $8.7 million was generated from the combination of maturity or pay-downs ~~calls~~and the sale or ~~sale~~call of available-for-sale investment securities, respectively and $31.1 million was provided by a decline in loan growth while $120.5 million was used to purchase available-for-sale investment securities. During 2010, $46.8 million and $448,000 was generated from the maturity, pay-downs, calls or sale of available-for-sale investment securities and $53.8 million was provided by a decline in loan growth while $76.4 million was used to purchase available-for-sale investment securities.
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Principal financing activities include the gathering of deposits, the utilization of FHLB advances, and the sale of securities under agreements to repurchase such securities and borrowings from other banks. For 2013, total deposits increased by $68.4 million. The amount of deposits acquired from out of market sources decreased in 2013 by $2.0 million. For 2012, total deposits increased by $71.3 million. The amount of deposits acquired from out of market sources decreased in 2012 by $8.6 million. For 2011, total deposits increased by $21.3 million. The amount of deposits acquired from out of market sources decreased in 2011 by $31.1 million. ~~For 2010, total deposits decreased~~In 2013, securities sold under repurchase arrangements increased by ~~$4.5 million. The amount of deposits~~$217,000 and the Company acquired ~~from out of market sources decreased~~$10.0 million in ~~2010 by $5.6 million.~~FHLB advances and paid $3.9 million in common stock dividends. In 2012, securities sold under repurchase arrangements decreased by $8.7 million and the Company paid off $69.0 million in FHLB advances primarily as a result of the balance sheet restructure and paid $36.4 million as a result of redeeming its preferred stock both decreasing the financing activity. In 2011, securities sold under repurchase arrangements increased by $4.1 million and the Company completed its common stock offering that increased the financing activities by $19.9 million. ~~Also in 2010, securities sold under repurchase arrangements increased by $7.8 million.~~ For additional information about cash flows from First Defiance’s operating, investing and financing activities, see the Consolidated Statements of Cash Flows included in the Consolidated Financial Statements.
At December 31, ~~2012,~~2013, First Defiance had the following commitments to fund deposit, advance, borrowing obligations and post-retirement benefits:
Table 85 – Contractual Obligations
Maturity Dates by Period at December 31, 2012
Contractual Obligations Total Less than
1 year 1-3 years 4-5 years After 5
years
(In Thousands)
Certificates of deposit $ 520,538 $ 307,445 $ 205,889 $ 6,536 $ 668
FHLB fixed advances including interest (1) 13,933 410 8,262 238 5,023
Subordinated debentures 36,083 - - - 36,083
Securities sold under repurchase agreements 51,702 51,702 - - -
Unrecognized tax benefits 65 65 - - -
Lease obligations 7,885 732 1,231 1,109 4,813
Post-retirement benefits 1,606 120 271 310 905
Total contractual obligations $ 631,812 $ 360,474 $ 215,653 $ 8,193 $ 47,492
Maturity Dates by Period at December 31, 2013
Less than After 5
Contractual Obligations Total 1 year 1-3 years 4-5 years years
(In Thousands)
Certificates of deposit $ 485,789 $ 296,186 $ 138,843 $ 50,611 $ 149
FHLB fixed advances including interest (1) 23,935 1,502 10,156 12,277 -
Subordinated debentures 36,083 - - - 36,083
Securities sold under repurchase agreements 51,919 51,919 - - -
Lease obligations 7,648 706 1,214 983 4,745
Post-retirement benefits 1,605 140 260 313 892
Total contractual obligations $ 606,979 $ 350,453 $ 150,473 $ 64,184 $ 41,869
(1) Includes principal payments of ~~$12,796~~$22,520 and interest payments of ~~$1,137~~$1,415
At December 31, ~~2012,~~2013, First Defiance had the following commitments to fund loan or line of credit obligations:
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Table 96 - Commitments
Total Amount of Commitment Expiration by Period
Commitments Amounts
Committed
Less than
1 year 1-3 years 4-5 years After 5
years
(In Thousands)
Retail Lines of Credit $ 91,731 $ 8,538 $ 15,914 $ 22,265 $ 45,014
Commercial Lines of Credit 158,514 144,136 13,877 501 -
Retail Other Unused Commitments 3,724 3,720 - 1 3
Commercial Other Unused Commitments 30,248 3,573 2,951 4,369 19,355
Residential Real Estate to Originate 32,509 32,509 - - -
Other Real Estate to Originate 25,267 25,267 - - -
Non-Mortgage to Originate 6,491 6,491 - - -
Total loan commitments 348,484 224,234 32,742 27,136 64,372

Standby letters of credit 18,166 17,697 388 81 -

Total Commitments $ 366,650 $ 241,931 $ 33,130 $ 27,216 $ 64,372
Total Amount of Commitment Expiration by Period
Amounts Less than After 5
Commitments Committed 1 year 1-3 years 4-5 years years
(In Thousands)
Fixed commitments to make loans $ 57,914 $ 48,866 $ 1,630 $ 2,537 $ 4,881
Variable commitments to make loans 59,632 39,120 3,095 438 16,979
Fixed unused lines of credit 18,047 6,746 5,648 5,651 2
Variable unused lines of credit 257,939 161,093 33,357 13,362 50,127
Total loan commitments 393,532 255,825 43,730 21,988 71,989

Standby letters of credit 17,680 3,490 13,750 440 -

Total Commitments $ 411,212 $ 259,315 $ 57,480 $ 22,428 $ 71,989
In addition to the above commitments, at December 31, ~~2012~~2013 First Defiance had commitments to sell ~~$53.6~~$12.1 million of loans to Freddie Mac, Fannie Mae, FHLB of Cincinnati or BB&T Mortgage.
To meet its obligations management can adjust the rate of savings certificates to retain deposits in changing interest rate environments; it can sell or securitize mortgage and non-mortgage loans; and it can turn to other sources of financing including FHLB advances, the Federal Reserve Bank, and brokered certificates of deposit. At December 31, ~~2012,~~2013, First Defiance had ~~$324.9~~$428.7 million capacity under its agreements with the FHLB.
First Federal is subject to various capital requirements of the OCC. At December 31, ~~2012,~~2013, First Federal had capital ratios that exceeded the standard to be considered “well capitalized.” For additional information about First Defiance and First Federal’s capital requirements, see Note 17 – Regulatory Matters to the Consolidated December 31, ~~2012~~2013 Financial Statements.
Critical Accounting Policies
First Defiance has established various accounting policies that govern the application of accounting principles generally accepted in the United States in the preparation of its financial statements. The significant accounting policies of First Defiance are described in the footnotes to the consolidated financial statements. Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities; Management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from these judgments and estimates, which could have a material impact on the carrying value of assets and liabilities and the results of operations of First Defiance.
Allowance for Loan Losses -First Defiance believes the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of its consolidated financial statements. In determining the appropriate estimate for the allowance for loan losses, management considers a number of factors relative to both specific credits in the loan portfolio and macro-economic factors relative to the economy of the United States as a whole and the economy of the northwest Ohio, northeast Indiana and southeast Michigan regions in which the Company does business.
~~- 55 -~~
Factors relative to specific credits that are considered include a customer’s payment history, a customer’s recent financial performance, an assessment of the value of collateral held, knowledge of the customer’s character, the financial strength and commitment of any guarantors, the existence of any customer or industry concentrations, changes in a customer’s competitive environment and any other issues that may impact a customer’s ability to meet his obligations.
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Economic factors that are considered include levels of unemployment and inflation, specific plant or business closings in the Company’s market area, the impact of strikes or other work stoppages, the impact of weather or environmental conditions, especially relative to agricultural borrowers, and other matters that may have an impact on the economy as a whole.
In addition to the identification of specific customers who may be potential credit problems, management considers its historical losses, the results of independent loan reviews, an assessment of the adherence to underwriting standards, and other factors in providing for loan losses that have not been specifically classified. Management believes that the level of its allowance for loan loss is sufficient to cover the estimates loss incurred but not yet recognized on the loan portfolio. Refer to the section titled “Allowance for Loan Losses” and Note 2, Statement of Accounting Policies for a further description of the Company’s estimation process and methodology related to the allowance for loan losses.
Valuation of Mortgage Servicing Rights - First Defiance believes the valuation of mortgage servicing rights is a critical accounting policy that requires significant estimates in preparation of its consolidated financial statements. First Defiance recognizes as separate assets the value of mortgage servicing rights, which are acquired through loan origination activities. First Defiance does not purchase any mortgage servicing rights.
Key assumptions made by management relative to the valuation of mortgage servicing rights include the stratification policy used in valuing servicing, assumptions relative to future prepayments of mortgages, the potential value of any escrow deposits maintained or ancillary income received as a result of the servicing activity and discount rates used to value the present value of a future cash flow stream. In assessing the value of the mortgage servicing rights portfolio, management utilizes a third party that specializes in valuing servicing portfolios. That third party reviews key assumptions with management prior to completing the valuation. Prepayment speeds are determined based on projected median prepayment speeds for 15 and 30 year mortgage backed securities. Those speeds are then adjusted up or down based on the size of the loan. The discount rate used in this analysis is the pretax yield generally required by purchasers of bulk servicing rights as of the valuation date. The value of mortgage servicing rights is especially vulnerable in a falling interest rate environment. Refer also to the section entitled Mortgage Servicing Rights and Note 2 - Statement of Accounting Policies, and Note 8 - Mortgage Banking, for a further description of First Defiance’s valuation process, methodology and assumptions along with sensitivity analyses.
Valuation of Securities -First Defiance believes the valuation of certain securities is a critical accounting policy that requires significant estimates in preparation of its consolidated financial ~~statements.This~~statements. This is pertaining to the Company’s investment in certain trust preferred debt obligations securities (“CDOs”).As required by FASB 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 other-than-temporary impairment that does not relate to the credit losses is recognized in other comprehensive income. The fair values of these CDOs, which are backed by trust preferred securities issued by banks, thrifts and insurance companies, have a fair value of ~~$1.6~~$2.2 million as of December 31, ~~2012. The market for these securities~~2013. Two of the collateralized debt obligations backed by insurance companies were disallowed under the Final Interim Volcker Rule that was announced January 14, 2014 and were classified as Level 1 in the fair value hierarchy at December 31, ~~2012 is not active~~2013 due to receiving a final selling price and ~~markets for similar securities~~subsequently being sold on January 15, 2014. The remaining two collateralized debt obligations are ~~also not active. The inactivity was evidenced first~~backed by ~~a significant widening of~~financial institutions are allowed under the ~~bid-ask spread~~Final Interim Volcker Rule and classified as Level 3 in the ~~brokered markets in which CDOs trade and then by a significant decrease in~~fair value hierarchy based on the ~~volume~~lack of ~~trades relative to historical levels. There are currently very few market participants who are willing and/or able to transact for these securities.~~observable market.
~~- 56 -~~
The market values for these securities (and any securities other than those issued or guaranteed by the U.S. Treasury) are very depressed relative to historical levels. Thus in today’s market, a low market price for a particular bond may only provide evidence of stress in the credit markets in general versus being an indicator of credit problems with a particular issue.
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Given the conditions in the debt markets today and the absence of observable transactions in the secondary and new issue markets, management has determined: 1) The few observable transactions and market quotations that are available are not reliable for the purpose of determining fair value at December 31, ~~2012;~~2013; 2) An income valuation approach technique (present value technique) that maximizes the use of relevant observable inputs and minimizes the use of observable inputs will be equally or more representative of fair value than the market approach valuation used at the prior measurement dates and 3) The Company’s CDOs will be classified within Level 3 of the fair value hierarchy because management determined that significant adjustments were required to determine fair value at the measurement date.
The Company’s Level 3 CDO valuations were supported by an analysis prepared by an independent third party. Their approach to determining fair value involved several steps: 1) Detailed credit and structural evaluation of each piece of collateral in the CDO; 2) Collateral performance projections for each piece of collateral in the CDO (default, recovery and prepayment/amortization probabilities) and 3) Discounted cash flow modeling.
Goodwill -First Defiance has two reporting units: First Federal and First Insurance. At December 31, ~~2012, we~~2013, First Defiance had goodwill of $61.5 million, including ~~$51.05~~$51.0 million in First Federal, representing 83% of total goodwill and $10.5 million in First Insurance, representing 17% of total goodwill. The carrying value of goodwill is tested annually for impairment or more frequently if it is determined ~~that we should do so.~~appropriate. The evaluation for impairment involves comparing the current estimated fair value of each reporting unit to its carrying value, including goodwill. If the current estimated fair value of a reporting unit exceeds its carrying value, no additional testing is required and impairment loss is not recorded. If the estimated fair value of a reporting unit is less than the carrying value, further valuation procedures are performed and could result in impairment of goodwill being recorded. Further valuation procedures would include allocating the estimated fair value to all assets and liabilities of the reporting unit to determine an implied goodwill value. If the implied value of goodwill of a reporting unit is less than the carrying amount of that goodwill, an impairment loss is recognized in an amount equal to that excess.
If for any future period ~~we determine~~First Defiance determines that there has been impairment in the carrying value of ~~our~~ goodwill balances, weFirst Defiance will record a charge to ~~our~~ earnings, which could have a material adverse effect on ~~our~~ net income, but not ~~our~~ risk-based capital ratios.
~~We have~~
               First Defiance has core deposit and other intangible assets resulting from acquisitions which are subject to amortization. ~~We determine~~First Defiance determines the amount of identifiable intangible assets based upon independent core deposit and customer relationship analyses at the time of the acquisition. Intangible assets with finite useful lives are evaluated for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. No events or changes in circumstances that would indicate that the carrying amount of any identifiable intangible assets may not be recoverable had occurred during the years ended December 31, ~~2012~~2013 and ~~2011.~~
2012.
- 5756 -

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk
Asset/Liability Management
A significant portion of the Company’s revenues and net income is derived from net interest income and, accordingly, the Company strives to manage its interest-earning assets and interest-bearing liabilities to generate an appropriate contribution from net interest income. Asset and liability management seeks to control the volatility of the Company’s performance due to changes in interest rates. The Company attempts to achieve an appropriate relationship between rate sensitive assets and rate sensitive liabilities. First Defiance does not presently use off balance sheet derivatives to enhance its risk management.
First Defiance monitors interest rate risk on a monthly basis through simulation analysis that measures the impact changes in interest rates can have on net interest income. The simulation technique analyzes the effect of a presumed 100 basis point shift in interest rates (which is consistent with management’s estimate of the range of potential interest rate fluctuations) and takes into account prepayment speeds on amortizing financial instruments, loan and deposit volumes and rates, non-maturity deposit assumptions and capital requirements. ~~The~~At December 31, 2013, the results of the simulation indicate that in an environment where interest rates rise 100 basis points over a 24 month period, First Defiance’s net interest income would increase by ~~3.72%~~3.23% over the base case scenario. It should be noted that other areas of First Defiance’s income statement, such as gains from sales of mortgage loans and amortization of mortgage servicing rights are also impacted by fluctuations in interest rates but are not considered in the simulation of net interest income.
The majority of First ~~Defiance’s~~Federal’s lending activities are in non-residential real estate and commercial loan areas. While such loans carry higher credit risk than residential mortgage lending, they tend to be more rate sensitive than residential mortgage loans. The balance of First ~~Defiance’s~~Federal’s non-residential and multi-family real estate loan portfolio was ~~$797.4~~$819.6 million, which was split between ~~$153.9~~$154.4 million of fixed-rate loans and ~~$643.5~~$665.2 million of adjustable-rate loans at December 31, ~~2012.~~2013. The commercial loan portfolio increased to ~~$383.8~~$388.2 million, which is split between ~~$150.4~~$167.4 million of fixed-rate loans and ~~$233.4~~$220.8 million of adjustable-rate loans at December 31, ~~2012.~~2013. Certain loans classified as adjustable have fixed rates for an initial term that may be as long as five years. The maturities on fixed-rate loans are generally less than seven years. First ~~Defiance~~Federal also has significant balances of home equity and improvement loans ($~~108.7~~106.9 million at December 31, ~~2012)~~2013) of which ~~$70.5~~$75.5 million fluctuate with changes in the prime lending ~~rate. Approximately $38.2~~rate and $31.4 million of home equity and improvement loans have fixed ~~rates but the maturities on those loans range from three to five years.~~rates. First ~~Defiance~~Federal also has consumer loans ($~~15.9~~16.9 million at December 31, ~~2012)~~2013) which tend to have a shorter duration than residential mortgage loans. Also, to limit its interest rate risk, as well as to provide liquidity, First Federal sells a majority of its fixed-rate mortgage originations into the secondary market.
In addition to the simulation analysis, First Federal also prepares an “economic value of equity” (“EVE”) analysis. ~~For 2012, this~~This 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. ~~The~~However, the likelihood of a decrease in interest rates beyond 100 basis points as of December 31, ~~2012~~2013 was considered to be remote given the current interest rate levels and therefore was not included in this ~~analysis but management believed it to be prudent to include a down 100 basis point environment.~~analysis. The results of this analysis are reflected in the following table.
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Table 107 – Economic Value of Equity Analysis
December 31, 2012
Economic Value of Equity as % of
Economic Value of Equity Present Value of Assets
Change in Rates $ Amount $ Change % Change Ratio Change
(Dollars in Thousands)
+ 400 bp 415,094 46,835 12.72 % 21.49 % 356 bp
+ 300 bp 407,337 39,078 10.61 % 20.76 % 283 bp
+ 200 bp 398,150 29,891 8.12 % 19.97 % 204 bp
+ 100 bp 387,482 19,223 5.22 % 19.12 % 119 bp
        0 bp 368,259 - - 17.93 % –
- 100 bp 343,745 (24,514 ) (6.66 )% 16.57 % (136 )bp
December 31, 2011
Economic Value of Equity as % of
Economic Value of Equity Present Value of Assets
Change in Rates $ Amount $ Change % Change Ratio Change
(Dollars in Thousands)
+ 400 bp 471,564 64,772 15.92 % 24.08 % 450 bp
+ 300 bp 460,756 53,964 13.27 % 23.17 % 359 bp
+ 200 bp 447,035 40,243 9.89 % 22.15 % 257 bp
+ 100 bp 430,361 23,570 5.79 % 21.00 % 142 bp
        0 bp 406,792 - - 19.58 % –
December 31, 2013
Economic Value of Equity as % of
Economic Value of Equity Present Value of Assets
Change in Rates $ Amount $ Change % Change Ratio Change
(Dollars in Thousands)
+ 400 bp 474,469 41,679 9.63 % 23.83 % 350 bp
+ 300 bp 467,691 34,901 8.06 % 23.10 % 277 bp
+ 200 bp 458,844 26,054 6.02 % 22.28 % 195 bp
+ 100 bp 447,701 14,911 3.45 % 21.38 % 105 bp
0 bp 432,790 - - 20.33 % –
- 100 bp 413,917 (18,873) (4.36) % 19.19 % (114) bp
December 31, 2012
Economic Value of Equity as % of
Economic Value of Equity Present Value of Assets
Change in Rates $ Amount $ Change % Change Ratio Change
(Dollars in Thousands)
+ 400 bp 415,094 46,835 12.72 % 21.49 % 356 bp
+ 300 bp 407,337 39,078 10.61 % 20.76 % 283 bp
+ 200 bp 398,150 29,891 8.12 % 19.97 % 204 bp
+ 100 bp 387,482 19,223 5.22 % 19.12 % 119 bp
0 bp 368,259 - - 17.93 % –
- 100 bp 343,745 (24,514) (6.66) % 16.57 % (136) bp
Based on the above analysis, in the event of a 200 basis point increase in interest rates as of December 31, ~~2012,~~2013, First Federal would experience ~~an 8.12%~~a 6.02% increase in its economic value of equity. During periods of rising rates, the value of monetary assets declines. Conversely, during periods of falling rates, the value of monetary assets increases. It should be noted that the amount of change in value of specific assets and liabilities due to changes in rates is not the same in a rising rate environment as in a falling rate environment. Based on the EVE analysis, the change in the economic value of equity in both rising and falling rate environments is relatively low because both its assets and liabilities have relatively short durations. The average duration of its assets at December 31, ~~2011~~2013 was ~~1.49~~1.59 years while the average duration of its liabilities was ~~2.84~~2.91 years.
In evaluating First Federal’s exposure to interest rate risk, certain shortcomings inherent in each of the methods of analysis presented must be considered. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market rates while interest rates on other types of financial instruments may lag behind current changes in market rates. Furthermore, in the event of changes in rates, prepayments and early withdrawal levels could differ significantly from the assumptions in calculating the table and the results therefore may differ from those presented.
- 5958 -

Item 8.   Financial Statements and Supplementary Data
Management’s Report on Internal Control Over Financial Reporting
The management of First Defiance Financial Corp. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of management, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in the 1992 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
Based on our evaluation under the framework in the 1992 Internal Control – Integrated Framework, management concluded that our internal control over financial reporting was effective as of December 31, ~~2012.~~
2013.
Crowe Horwath LLP, the independent registered public accounting firm that audited the consolidated financial statements of the Company included in this Annual Report on Form 10-K, has issued a report on the effectiveness of the Company’s internal control over financial reporting as of December 31, ~~2012.~~2013. The report, which expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, ~~2012,~~2013, is included below.
~~William J. Small~~ Donald P. Hileman Kevin T. Thompson
~~Chairman,~~Executive Vice President and Executive Vice President and
Chief Executive Officer Chief Financial Officer
- 6059 -

Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated statements of financial condition of First Defiance Financial Corp. (the Company) as of December 31, ~~2012~~2013 and ~~2011~~2012 and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, ~~2012.~~2013. We also have audited First Defiance Financial Corp.’s internal control over financial reporting as of December 31, ~~2012,~~2013, based on criteria established in the 1992 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of First Defiance Financial Corp. as of December 31, ~~2012~~2013 and ~~2011,~~2012, and the results of its operations and its cash flows for each of the three years in the period ended December 31, ~~2012~~2013 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, First Defiance Financial Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2012,~~2013, based on criteria established in the 1992 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Crowe Horwath LLP
South Bend, Indiana
February 28, ~~2013~~
2014
- 6160 -

First Defiance Financial Corp.
Consolidated Statements of Financial Condition
December 31
2012 2011
(Dollars In Thousands, except share
and per share data)
Assets
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 45,832 $ 31,931
Federal funds sold 91,000 143,000
136,832 174,931

Securities available-for-sale, carried at fair value 194,101 232,919
Securities held-to-maturity, carried at amortized cost (fair value $516 and $672 at December 31, 2012 and 2011 respectively) 508 661
194,609 233,580
Loans held for sale 22,064 13,841
Loans receivable, net of allowance of $26,711 and $33,254 at December 31, 2012 and 2011, respectively 1,498,546 1,453,822
Mortgage servicing rights 7,833 8,690
Accrued interest receivable 5,594 6,142
Federal Home Loan Bank (FHLB) stock 20,655 20,655
Bank owned life insurance 41,832 35,908
Premises and equipment 39,663 40,045
Real estate and other assets held for sale (REO) 3,805 3,628
Goodwill 61,525 61,525
Core deposit and other intangibles 4,738 6,151
Deferred taxes 78 629
Other assets 9,174 8,643
Total assets $ 2,046,948 $ 2,068,190
December 31
2013 2012

(Dollars In Thousands, except share
and per share data)
Assets
Cash and cash equivalents:
Cash and amounts due from depository institutions $ 36,318 $ 45,832
Federal funds sold 143,000 91,000
179,318 136,832

Securities available-for-sale, carried at fair value 198,170 194,101
Securities held-to-maturity, carried at amortized cost (fair value $393 and $516
    at December 31, 2013 and 2012 respectively) 387 508
198,557 194,609
Loans held for sale 9,120 22,064
Loans receivable, net of allowance of $24,950 and $26,711 at December 31,
    2013 and 2012, respectively 1,555,498 1,498,546
Mortgage servicing rights 9,106 7,833
Accrued interest receivable 5,778 5,594
Federal Home Loan Bank (FHLB) stock 19,350 20,655
Bank owned life insurance 42,715 41,832
Premises and equipment 38,597 39,663
Real estate and other assets held for sale (REO) 5,859 3,805
Goodwill 61,525 61,525
Core deposit and other intangibles 3,497 4,738
Deferred taxes 565 78
Other assets 7,663 9,174
Total assets $ 2,137,148 $ 2,046,948
- 6261 -

First Defiance Financial Corp
Consolidated Statements of Financial Condition (continued)
December 31
2012 2011
(Dollars In Thousands, except share
and per share data)
Liabilities and stockholders’ equity
Liabilities:
Deposits:
Noninterest-bearing $ 315,132 $ 245,927
Interest-bearing 1,352,340 1,350,314
Total 1,667,472 1,596,241
Advances from the Federal Home Loan Bank 12,796 81,841
Securities sold under agreements to repurchase and other 51,702 60,386
Subordinated debentures 36,083 36,083
Advance payments by borrowers 1,473 1,402
Other liabilities 19,294 14,110
Total liabilities 1,788,820 1,790,063

Commitments and Contingent (Note 6)

Stockholders’ equity:
Preferred stock, $.01 par value per share: 37,000 shares authorized; 0 and 37,000 issued with a liquidation preference of $0 and $37,231, net of discount – 36,641
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; 12,739,496 and 12,739,496 shares issued and 9,729,466 and 9,726,243 shares outstanding, respectively 127 127
Common stock warrant 878 878
Additional paid-in capital 136,046 135,825
Accumulated other comprehensive income, net of tax of $2,301 and $2,153, respectively 4,274 3,997
Retained earnings 164,103 148,010
Treasury stock, at cost, 3,010,030 and 3,013,253 shares respectively (47,300 ) (47,351 )
Total stockholders’ equity 258,128 278,127

Total liabilities and stockholders’ equity $ 2,046,948 $ 2,068,190
December 31
2013 2012

(Dollars In Thousands, except share
and per share data)
Liabilities and stockholders’ equity
Liabilities:
Deposits:
Noninterest-bearing $ 348,943 $ 315,132
Interest-bearing 1,386,849 1,352,340
Total 1,735,792 1,667,472
Advances from the Federal Home Loan Bank 22,520 12,796
Securities sold under agreements to repurchase and other 51,919 51,702
Subordinated debentures 36,083 36,083
Advance payments by borrowers 1,519 1,473
Other liabilities 17,168 19,294
Total liabilities 1,865,001 1,788,820

Commitments and Contingent (Note 6)

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; 12,735,313 and 12,739,496 shares issued
    and 9,719,521 and 9,729,466 shares outstanding, respectively 127 127
Common stock warrant 878 878
Additional paid-in capital 136,403 136,046
Accumulated other comprehensive income, net of tax of $294 and $2,301,
    respectively 545 4,274
Retained earnings 182,290 164,103
Treasury stock, at cost, 3,015,792 and 3,010,030 shares respectively (48,096) (47,300)
Total stockholders’ equity 272,147 258,128

Total liabilities and stockholders’ equity $ 2,137,148 $ 2,046,948
See accompanying notes.
- 62 -

FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Income
(Amounts in Thousands, except per share data)

Years Ended December 31
2013 2012 2011
Interest Income
Loans $ 68,077 $ 72,621 $ 78,648
Investment securities:
Taxable 2,695 4,241 4,571
Tax-exempt 2,901 2,882 2,515
Interest-bearing deposits 282 300 466
FHLB stock dividends 826 899 867
Total interest income 74,781 80,943 87,067

Interest Expense
Deposits 5,913 8,169 12,175
Federal Home Loan Bank advances and other 434 2,424 3,203
Subordinated debentures 601 971 1,278
Securities sold under agreement to repurchase 222 373 530
Total interest expense 7,170 11,937 17,186
Net interest income 67,611 69,006 69,881

Provision for loan losses 1,824 10,924 12,434
Net interest income after provision for loan losses 65,787 58,082 57,447

Noninterest Income
Service fees and other charges 10,045 10,779 11,387
Mortgage banking income 8,443 9,665 6,437
Insurance commissions 9,627 8,676 7,109
Gain on sale of non-mortgage loans 101 70 361
Gain (loss) on sale or call of securities 97 2,139 218
Other-than-temporary impairment (OTTI) losses on investment securities
Total gains (impairment losses) on investment securities (337) (31) (44)
Losses recognized in other comprehensive income - 26 42
Net impairment loss recognized in earnings (337) (5) (2)
Trust income 761 616 599
Income from bank owned life insurance 883 924 929
Other noninterest income 950 1,510 478
Total noninterest income 30,570 34,374 27,516

Noninterest Expense
Compensation and benefits 34,301 32,566 31,554
Occupancy 6,762 7,578 7,166
FDIC insurance 1,616 2,691 2,922
Data processing 5,125 4,660 4,257
Acquisition related charges - - 234
Other noninterest expense 17,040 18,285 16,631
Total noninterest expense 64,844 65,780 62,764

Income before income taxes 31,513 26,676 22,199
Federal income taxes 9,278 8,012 6,665
Net Income $ 22,235 $ 18,664 $ 15,534

Dividends Accrued on Preferred Shares $ - $ (900) $ (1,850)
Accretion on Preferred Shares $ - $ (359) $ (178)
Redemption of Preferred Shares $ - $ 642 $ -
Net Income Applicable to Common Shares $ 22,235 $ 18,047 $ 13,506
Earnings per common share:
Basic $ 2.28 $ 1.86 $ 1.44
Diluted $ 2.19 $ 1.81 $ 1.42
Dividends declared per common share $ 0.40 $ 0.20 $ 0.05
See accompanying ~~notes.~~notes
- 63 -
~~FIRST DEFIANCE FINANCIAL CORP.~~
~~Consolidated Statements of Income~~
~~(Amounts in Thousands, except per share data)~~
Years Ended December 31
2012 2011 2010
Interest Income
Loans $ 72,621 $ 78,648 $ 88,628
Investment securities:
Taxable 4,241 4,571 4,070
Tax-exempt 2,882 2,515 1,985
Interest-bearing deposits 300 466 303
FHLB stock dividends 899 867 879
Total interest income 80,943 87,067 95,865

Interest Expense
Deposits 8,169 12,175 19,222
Federal Home Loan Bank advances and other 2,424 3,203 4,711
Subordinated debentures 971 1,278 1,314
Securities sold under agreement to repurchase 373 530 455
Total interest expense 11,937 17,186 25,702
Net interest income 69,006 69,881 70,163

Provision for loan losses 10,924 12,434 23,177
Net interest income after provision for loan losses 58,082 57,447 46,986

Noninterest Income
Service fees and other charges 10,779 11,387 12,740
Mortgage banking income 9,665 6,437 7,847
Insurance commissions 8,676 7,109 5,140
Gain on sale of non-mortgage loans 70 361 516
Gain (loss) on sale or call of securities 2,139 218 (8 )
Other-than-temporary impairment (OTTI) losses on investment securities
Total impairment losses on investment securities (31 ) (44 ) (367 )
Losses recognized in other comprehensive income 26 42 36
Net impairment loss recognized in earnings (5 ) (2 ) (331 )
Trust income 616 599 507
Income from bank owned life insurance 924 929 1,146
Other noninterest income 1,510 478 33
Total noninterest income 34,374 27,516 27,590

Noninterest Expense
Compensation and benefits 32,566 31,554 �� 27,403
Occupancy 7,578 7,166 7,048
FDIC insurance 2,691 2,922 3,766
Data processing 4,660 4,257 4,909
Acquisition related charges - 234 63
Other noninterest expense 18,285 16,631 20,274
Total noninterest expense 65,780 62,764 63,463

Income before income taxes 26,676 22,199 11,113
Federal income taxes 8,012 6,665 3,005
Net Income $ 18,664 $ 15,534 $ 8,108

Dividends Accrued on Preferred Shares $ (900 ) $ (1,850 ) $ (1,850 )
Accretion on Preferred Shares $ (359 ) $ (178 ) $ (170 )
Redemption of Preferred Shares $ 642 $ - $ -
Net Income Applicable to Common Shares $ 18,047 $ 13,506 $ 6,088
Earnings per common share:
Basic $ 1.86 $ 1.44 $ 0.75
Diluted $ 1.81 $ 1.42 $ 0.75
Dividends declared per common share $ 0.20 $ 0.05 $ -
~~See accompanying notes~~
~~- 64 -~~
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Comprehensive Income
(Amounts in Thousands)
For the Year Ended December 31
2012 2011 2010
(In Thousands)
Net income $ 18,664 $ 15,534 $ 8,108
Change in securities available-for-sale (AFS):
Unrealized holding gains (losses) on available-for-sale securities arising during the period 2,360 7,404 (1,010 )
Reclassification adjustment for (gains) losses realized in income (2,139 ) (218 ) 8
Other-than-temporary impairment losses on AFS securities realized in income 5 2 331
Net unrealized gains (losses) 226 7,188 (671 )

Income tax effect (79 ) (2,516 ) 235
Net of tax amount 147 4,672 (436 )

Change in unrealized gain on postretirement benefit:
Net gain (loss) on defined benefit postretirement medical plan realized during the period 148 (537 ) 349
Net amortization and deferral 51 25 39
Net gain (loss) activity during the period 199 (512 ) 388
Income tax effect (69 ) 179 (136 )
Net of tax amount 130 (333 ) 252

Total other comprehensive income (loss) 277 4,339 (184 )
Comprehensive income $ 18,941 $ 19,873 $ 7,924
For the Years Ended December 31
2013 2012 2011
(In Thousands)
Net income $ 22,235 $ 18,664 $ 15,534
Change in securities available-for-sale (AFS):
Unrealized holding gains (losses) on available-for-sale securities arising during the period (6,309) 2,360 7,404
Reclassification adjustment for (gains) losses realized in income (97) (2,139) (218)
Other-than-temporary impairment losses on AFS securities realized in income 337 5 2
Net unrealized gains (losses) (6,069) 226 7,188

Income tax effect 2,124 (79) (2,516)
Net of tax amount (3,945) 147 4,672

Change in unrealized gain on postretirement benefit:
Net gain (loss) on defined benefit postretirement medical plan
    realized during the period 287 148 (537)
Net amortization and deferral 46 51 25
Net gain (loss) activity during the period 333 199 (512)
Income tax effect (117) (69) 179
Net of tax amount 216 130 (333)

Total other comprehensive income (loss) (3,729) 277 4,339
Comprehensive income $ 18,506 $ 18,941 $ 19,873
- 6564 -

FIRST DEFIANCE FINANCIAL CORP.
Consolidated ~~Statement~~Statements of Changes in Stockholders’ Equity
(In Thousands, except number of shares)
Stock Accumulated
Common Additional Acquired Other Total
Preferred Common Stock Treasury Paid-In by Comprehensive Retained Stockholder’s
Stock Stock Warrant Stock Capital ESOP Income (Loss) Earnings Equity

Balance at January 1, 2010 $ 36,293 $ 127 $ 878 $ (72,631 ) $ 140,677 $ - $ (158 ) $ 128,900 $ 234,086
Net income 8,108 8,108
Other comprehensive income (184 ) (184 )
Stock option expense 168 168
250 stock options exercised, with no income tax benefit 3 3
Preferred stock dividends accrued (1,850 ) (1,850 )
Accretion on preferred shares 170 (170 ) -
Balance at December 31, 2010 $ 36,463 $ 127 $ 878 $ (72,628 ) $ 140,845 $ - $ (342 ) $ 134,988 $ 240,331
Net income 15,534 15,534
Other comprehensive income 4,339 4,339
Stock option expense 144 144
850 stock options exercised, with no income tax benefit 14 (3 ) 11
1,600,800 shares issued capital stock 25,156 (5,297 ) 19,859
Restricted share activity under stock incentive plans 75 136 211
2,085 shares issued direct purchases 32 (3 ) 29
Preferred stock dividends accrued (1,850 ) (1,850 )
Accretion on preferred shares 178 (178 ) -
Common stock dividends declared (481 ) (481 )
Balance at December 31, 2011 $ 36,641 $ 127 $ 878 $ (47,351 ) $ 135,825 $ - $ 3,997 $ 148,010 $ 278,127
Net income 18,664 18,664
Other comprehensive income 277 277
Stock option expense 104 104
500 shares issued under stock option plan, with no income tax benefit 8 (4 ) 4
Restricted share activity under stock incentive Plans 30 116 146
836 shares issued direct purchases 13 1 14
Preferred stock dividends accrued (900 ) (900 )
Accretion on preferred shares 359 (359 ) -
16,560 shares purchased in Treasury auction (16,560 ) 618 (15,942 )
20,440 shares purchased in open market (20,440 ) 24 (20,416 )
Common stock dividends declared (1,950 ) (1,950 )
Balance at December 31, 2012 $ - $ 127 $ 878 $ (47,300 ) $ 136,046 $ - $ 4,274 $ 164,103 $ 258,128
Accumulated
Common Additional Other Total
Preferred Common Stock Paid-In Comprehensive Retained Treasury Stockholder’s
Stock Stock Warrant Capital Income (Loss) Earnings Stock Equity

Balance at December 31, 2010 $ 36,463 $ 127 $ 878 $ 140,845 $ (342) $ 134,988 $ (72,628) $ 240,331
Net income 15,534 15,534
Other comprehensive income 4,339 4,339
Stock option expense 144 144
850 stock options exercised,
    with no income tax benefit (3) 14 11
1,600,800 shares issued capital stock (5,297) 25,156 19,859
Restricted share activity under
    stock incentive plans 136 75 211
2,085 shares issued direct
    purchases (3) 32 29
Preferred stock dividends
    accrued (1,850) (1,850)
Accretion on preferred shares 178 (178) -
Common stock dividends
    declared (481) (481)
Balance at December 31, 2011 $ 36,641 $ 127 $ 878 $ 135,825 $ 3,997 $ 148,010 $ (47,351) $ 278,127
Net income 18,664 18,664
Other comprehensive income 277 277
Stock option expense 104 104
500 shares issued under stock
    option plan, with no income
    tax benefit (4) 8 4
Restricted share activity under
    stock incentive Plans 116 30 146
836 shares issued direct
    purchases 1 13 14
Preferred stock dividends
    accrued (900) (900)
Accretion on preferred shares 359 (359) -
16,560 shares purchased in
    Treasury auction (16,560) 618 (15,942)
20,440 shares purchased in open
    market (20,440) 24 (20,416)
Common stock dividends
    declared (1,950) (1,950)
Balance at December 31, 2012 $ - $ 127 $ 878 $ 136,046 $ 4,274 $ 164,103 $ (47,300) $ 258,128
Net income 22,235 22,235
Other comprehensive loss (3,729) (3,729)
Stock option expense 44 44
35,147 shares issued under stock
    option plan, with $54 in income
    tax benefit (34) (97) 481 350
Restricted share activity under
    stock incentive Plans 327 (44) 500 783
2,768 shares issued direct
    purchases 20 44 64
70,966 shares repurchased (1,821) (1,821)
Common stock dividends
    declared (3,907) (3,907)
Balance at December 31, 2013 $ - $ 127 $ 878 $ 136,403 $ 545 $ 182,290 $ (48,096) $ 272,147
See accompanying notes
- 65 -

FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Cash Flows
(Amounts in Thousands)
Years Ended December 31
2013 2012 2011

Operating Activities
Net income $ 22,235 $ 18,664 $ 15,534
Adjustments to reconcile net income to net cash provided by operating
    activities:
Provision for loan losses 1,824 10,924 12,434
Provision for depreciation 3,110 3,416 3,436
Net amortization of premium and discounts on loans, securities, deposits
    and debt obligations 1,235 1,497 396
Amortization of mortgage servicing rights 2,098 3,562 2,169
Net (recovery) impairment of mortgage servicing rights (1,261) 759 404
Amortization of intangibles 1,241 1,413 1,442
Gain on sale of loans (5,817) (10,669) (5,968)
Loss on sale or disposals of property, plant and equipment 1 179 59
Loss on sale or write-down of REO 883 427 947
OTTI losses on investment securities 337 5 2
(Gain) loss on sale or call of securities (97) (2,139) (218)
Change in deferred taxes 1,519 779 2,839
Proceeds from sale of loans held for sale 308,260 520,376 263,336
Stock option expense 44 104 144
Restricted stock unit expense 783 146 211
Origination of loans held for sale (294,941) (521,464) (262,825)
Income from bank owned life insurance (883) (924) (929)
Change in interest receivable and other assets 1,327 17 2,961
Change in accrued interest and other liabilities (2,535) 4,838 2,365
Net cash provided by operating activities 39,363 31,910 38,739

Investing Activities
Proceeds from maturities, calls and paydowns of held-to-maturity securities 121 152 178
Proceeds from maturities, calls and paydowns of available-for-sale
securities 35,072 60,057 52,097
Proceeds from sale of available-for-sale securities 4,027 72,262 8,719
Proceeds from sale of REO 2,899 3,444 9,630
Proceeds from sale of office properties and equipment - 10 17
Purchases of available-for-sale securities (49,230) (91,513) (120,499)
Purchases of office properties and equipment (2,045) (3,223) (2,041)
Investment in bank owned life insurance - (5,000) -
Proceeds from FHLB stock redemption 1,305 - 357
Net cash paid in Payak-Dubbs acquisition - - (3,914)
Purchase of portfolio mortgage loans (4,545) - (25,842)
Proceeds from sale of non-mortgage loans 13,369 4,644 9,212
Net decrease (increase) in loans receivable (70,845) (65,005) 31,137
Net cash provided by (used) in investing activities (69,872) (24,172) (40,949)
- 66 -
~~FIRST DEFIANCE FINANCIAL CORP.~~
~~Consolidated Statements of Cash Flows~~
~~(Amounts in Thousands)~~
Years Ended December 31
2012 2011 2010
Operating Activities
Net income $ 18,664 $ 15,534 $ 8,108
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 10,924 12,434 23,177
Provision for depreciation 3,416 3,436 3,403
Net amortization of premium and discounts on loans, securities, deposits and debt obligations 1,497 396 1,503
Amortization of mortgage servicing rights 3,562 2,169 2,642
Net impairment (recovery) of mortgage servicing rights 759 404 (353 )
Amortization of intangibles 1,413 1,442 1,495
Gain on sale of loans (10,669 ) (5,968 ) (7,533 )
Loss on sale or disposals of property, plant and equipment 179 59 12
Loss on sale or write-down of REO 427 947 4,050
OTTI losses on investment securities 5 2 331
(Gain) loss on sale or call of securities (2,139 ) (218 ) 8
Change in deferred taxes 779 2,839 (2,417 )
Proceeds from sale of loans held for sale 520,376 263,336 384,492
Stock option expense 104 144 168
Restricted stock unit expense 146 211 -
Origination of loans held for sale (521,464 ) (262,825 ) (388,064 )
Income from bank owned life insurance (924 ) (929 ) (1,146 )
Change in interest receivable and other assets 17 2,961 3,664
Change in accrued interest and other liabilities 4,838 2,365 (1,340 )
Net cash provided by operating activities 31,910 38,739 32,200

Investing Activities
Proceeds from maturities, calls and paydowns of held-to-maturity securities 152 178 1,081
Proceeds from maturities, calls and paydowns of available-for-sale securities 60,057 52,097 46,765
Proceeds from sale of available-for-sale securities 72,262 8,719 448
Proceeds from sale of REO 3,444 9,630 10,511
Proceeds from sale of office properties and equipment 10 17 1
Purchases of available-for-sale securities (91,513 ) (120,499 ) (76,439 )
Purchases of office properties and equipment (3,223 ) (2,041 ) (1,562 )
Investment in bank owned life insurance (5,000 ) - (3,757 )
Proceed from insurance death benefit - - 728
Net cash paid in Andres O’Neil & Lowe acquisition - - (1,500 )
Proceeds from FHLB stock redemption - 357 364
Net cash paid in Payak-Dubbs acquisition - (3,914 ) -
Purchase of portfolio mortgage loans - (25,842 ) -
Proceeds from sale of non-mortgage loans 4,644 9,212 13,949
Net decrease (increase) in loans receivable (65,005 ) 31,137 53,767
Net cash provided by (used) in investing activities (24,172 ) (40,949 ) 44,356
FIRST DEFIANCE FINANCIAL CORP.
Consolidated Statements of Cash Flows (continued)
(Amounts in Thousands)
Years Ended December 31
2013 2012 2011

Financing Activities
Net increase (decrease) in deposits 68,368 71,318 21,314
Repayment of Federal Home Loan Bank long-term advances (276) (69,045) (35,044)
Proceeds from Federal Home Loan Bank long-term advances 10,000 - -
Cash paid for redemption of preferred stock - (36,358) -
Increase (decrease) in securities sold under repurchase agreements 217 (8,684) 4,139
Cash dividends paid on common stock (3,907) (1,950) (481)
Cash dividends paid on preferred stock - (1,136) (1,850)
Net cash received from common stock issuance - - 19,859
Net cash paid for repurchase of common stock (1,821) - -
Proceeds from exercise of stock options 350 4 11
Proceeds from treasury stock sales 64 14 29
Net cash (used) provided by financing activities 72,995 (45,837) 7,977

Increase (decrease) in cash and cash equivalents 42,486 (38,099) 5,767
Cash and cash equivalents at beginning of period 136,832 174,931 169,164
Cash and cash equivalents at end of period $ 179,318 $ 136,832 $ 174,931

Supplemental cash flow information:
Interest paid $ 7,179 $ 12,251 $ 17,464
Income taxes paid $ 10,500 $ 4,000 $ 4,875
Transfers from loans to other real estate owned and other assets held for sale $ 5,836 $ 4,048 $ 4,614

Transfer from loans held for sale to loans $ 3,231 $ - $ 7,596

Securities traded but not yet settled $ 742 $ 405 $ -
See accompanying notes.
- 67 -
~~FIRST DEFIANCE FINANCIAL CORP.~~
~~Consolidated Statements of Cash Flows (continued)~~
~~(Amounts in Thousands)~~
Years Ended December 31
2012 2011 2010
Financing Activities
Net increase (decrease) in deposits 71,318 21,314 (4,468 )
Repayment of Federal Home Loan Bank long-term advances (69,045 ) (35,044 ) (30,042 )
Cash paid for redemption of preferred stock (36,358 ) - -
Increase (decrease) in securities sold under repurchase agreements (8,684 ) 4,139 7,849
Cash dividends paid on common stock (1,950 ) (481 ) -
Cash dividends paid on preferred stock (1,136 ) (1,850 ) (1,850 )
Net cash received from common stock issuance - 19,859 -
Proceeds from exercise of stock options 4 11 3
Proceeds from treasury stock purchases 14 29 -
Net cash (used) provided by financing activities (45,837 ) 7,977 (28,508 )

Increase (decrease) in cash and cash equivalents (38,099 ) 5,767 48,048
Cash and cash equivalents at beginning of period 174,931 169,164 121,116
Cash and cash equivalents at end of period $ 136,832 $ 174,931 $ 169,164

Supplemental cash flow information:
Interest paid $ 12,251 $ 17,464 $ 26,212
Income taxes paid $ 4,000 $ 4,875 $ 5,800
Transfers from loans to other real estate owned and other assets held for sale $ 4,048 $ 4,614 $ 12,147

Transfer from loans held for sale to loans $ - $ 7,596 $ -

Securities traded but not yet settled $ 405 $ - $ -
~~See accompanying notes.~~
~~- 68 -~~
Notes to the Consolidated Financial Statements
1. 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, commercial 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, ~~Archbold,~~ Bryan, Bowling Green, Maumee and Oregon, Ohio areas, offering property and casualty, and group health and life insurance products.First Defiance Risk Managementwas incorporated on December 20, 2012, as 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.~~marketplace
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2. Statement of Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States 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. Significant areas where First Defiance uses estimates are the valuation of certain investment securities, the determination of the allowance for loan losses, the valuation of mortgage servicing rights and goodwill, the determination of unrecognized income tax benefits, and the ~~determination~~fair value of ~~post-retirement benefits.~~
financial instruments.
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income applicable to common shares (net income less dividend requirements for preferred stock, accretion of preferred stock discount and redemption of preferred stock) 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. Also seeNote 4.
4.
Comprehensive Income
Comprehensive income (loss) consists of net income and other comprehensive income (loss). Other comprehensive income includes unrealized gains and losses on available-for-sale securities and the net unrecognized actuarial losses and unrecognized prior service costs associated with the Company’s Defined Benefit Postretirement Medical Plan. All items included in other comprehensive income are reported net of tax. See alsoNotes 5 and 16 and the ~~Statement~~Statements of Comprehensive Income.
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Cash Flows
Cash and cash equivalents include amounts due from banks and overnight investments with the Federal Home Loan Bank (FHLB) and the Federal Reserve Bank (FRB). Cash and amounts due from depository institutions include required balances on hand or on deposit at the FHLB and Federal Reserve of approximately ~~$1,679,000~~$2,295,000 and ~~$3,497,000,~~$4,200,000, respectively, at December 31, ~~2012~~2013 to meet regulatory reserve and clearing requirements. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions and repurchase agreements.
Investment Securities
Management determines the appropriate classification of debt securities at the time of purchase and evaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when First Defiance has the positive intent and ability to hold the securities to maturity and are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity.
Debt securities not classified as held-to-maturity and equity securities are classified as available-for-sale. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported in other comprehensive income (loss) until realized. Realized gains and losses are included in gains (losses) on securities or other-than-temporary impairment losses on securities. Realized gains and losses on securities sold are recognized on the trade date based on the specific identification method.
Interest income includes amortization of purchase premiums and discounts. Premiums and discounts are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are expected. Securities with unrealized losses are reviewed quarterly to determine if value impairment is other–than-temporary. In performing this review management considers the length of time and extent that fair value has been less than cost, the financial condition of the issuer, the impact of changes in market interest rates on market value and whether the Company intends to sell or it would be more than likely required to sell the securities prior to their anticipated recovery. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) other-than-temporary impairment (OTTI) related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.
FHLB Stock
As a member of the FHLB System, First Federal is required to own stock of the FHLB of Cincinnati in an amountprincipally equal to 0.15% of total assets plus an amount of at least 2% but no more than 4% of its non-grandfathered mission asset activity (as defined in the FHLB’s regulations). First Federal is permitted to own stock in excess of the minimum requirement. FHLB stock is a restricted equity security that does not have a readily determinable fair value and is carried at cost. It is evaluated for impairment based upon the ultimate recovery of par value. Both cash and stock dividends are reported as income. At December 31, ~~2012,~~2013, the ~~balance at FHLB of Cincinnati was~~Company holds $19.3 ~~million. First Federal acquired $2.0~~ million ~~of stock from the Pavilion acquisition which is held~~ at the FHLB of ~~Indianapolis~~Cincinnati and ~~is required to be held for five years from~~$10,000 at the ~~date~~FHLB of ~~acquisition of March 14, 2008. The balance of this stock was $1.3 million at December 31, 2012.~~
Indianapolis.
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Loans Receivable
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal amount outstanding, net of deferred loan fees and costs, purchase premiums and discounts and the allowance for loan losses. Deferred fees net of deferred incremental loan origination costs, are amortized to interest income generally over the contractual life of the loan using the interest method without anticipating prepayments. The recorded investment in loans includes accrued interest receivable and net deferred fees and costs and undisbursed loan amounts.
Mortgage loans originated and intended for sale in the secondary market are classified as loans held for sale and are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Mortgage loans held for sale are generally sold with servicing rights retained. The carrying value of mortgage loans sold is reduced by the amount allocated to the servicing right. Gains or losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.
During 2013, 2012 and 2011, the Company realized losses totaling $597,000, $73,000 and $413,000 pertaining to loans sold to Fannie Mae and Freddie Mac but ~~returned~~repurchased due to underwriting issues. Repurchase losses are recognized when the Company determines they are probable and estimable. No$67,000 was accrued at December 31, 2013 while no amount was accrued at December 31, 2012 and 2011 for such losses.
Interest receivable is accrued on loans and credited to income as earned. The accrual of interest on loans 90 days delinquent or impaired is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. For these loans, interest accrual is only to the extent cash payments are received. The accrual of interest on these loans is generally resumed after a pattern of repayment has been established and the collection of principal and interest is reasonably assured.
Acquired Loans
Valuation allowances for all acquired loans subject to FASB ASC Topic 310 reflect only those losses incurred after acquisition—that is, the present value of cash flows expected at acquisition that are not expected to be collected.
The Company acquires loans individually and in groups or portfolios. At acquisition, the Company reviews each loan to determine whether there is evidence of deterioration of credit quality since origination and if it is probable that it will be unable to collect all amounts due according to the loan’s contractual terms. If both conditions exist, the Company determines whether each such loan is to be accounted for individually or whether such loans will be assembled into pools of loans based on common risk characteristics (credit score, loan type and date of origination). The Company considers expected prepayments, and estimates the amount and timing of undiscounted expected principal, interest, and other cash flows (expected at acquisition) for each loan and subsequently aggregated pool of loans.
The Company determines the excess of the loan’s or pool’s scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted (nonaccretable difference). The remaining amount—representing the excess of the loan’s cash flows expected to be collected over the amount paid—is accreted into interest income over the remaining life of the loan or pool (accretable yield).
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Over the life of the loan or pool, the Company continues to estimate cash flows expected to be collected, and evaluates whether the present value of its loans determined using the effective interest rates has decreased and, if so, recognizes a loss. The present value of any subsequent increase in the loan’s or pool’s actual cash flows or cash flows expected to be collected is used first to reverse any existing valuation allowance for that loan or pool. For any remaining increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield recognized on a prospective basis over the loan’s or pool’s remaining life.
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Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by management to absorb probable incurred losses in the loan portfolio and is based on the size and current risk characteristics of the loan portfolio, an assessment of individual problem loans, actual loss experience,, current ~~economicevents~~economicevents in specific industries and geographical areas and other pertinent factors, including general economic conditions. Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience and consideration of economic trends, all of which may be susceptible to significant change. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.
During 2012, weFirst Defiance changed the process used to calculate the historical loss percentages included in ~~our~~the general allocation. Previously, all charge offs processed against loans were included in the period they were incurred with no consideration given to when a specific reserve was established. During 2012, the historical loss calculation included specific reserves on collaterally dependent impaired loans in the quarter in which the loss was identified and included charge-offs on loans that did not previously have specific reserves.
~~Also during 2012, we applied an equal 12.5% weighting~~
During 2013, management elected to ~~each of~~return to using a three year look-back period in calculating the ~~eight quarters in our two year~~ historical loss ~~history; whereas previously we had weighted~~ratio. Management is not certain that the ~~most~~relatively low levels of charge offs incurred in the recent quarters are sustainable given the continued low levels of economic growth in the Company’s markets warranting the need to return to a three year ~~at 80% and~~look-back. All quarters are given equal weighting in the ~~previous year at 20%.~~
calculation, which is unchanged from 2012.
Loan losses are charged off against the allowance when in management’s estimation it is unlikely that the loan will be collected, while recoveries of amounts previously charged off are credited to the allowance. A provision for loan loss is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors in order to maintain the allowance for loan losses at the level deemed adequate by management. The determination of whether a loan is considered past due or delinquent is based on the contractual payment terms. Loans are considered past due when the contractual amounts due with respect to principal and interest are not received within 30 days of the contractual due date. All loans are placed on nonaccrual status at 90 days past due unless the loan is adequately secured and is in process of collection. Any loan in the portfolio may be placed on nonaccrual status prior to becoming 90 days past due when collection of principal or interest is in doubt.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. Impaired loans have been recognized in conformity with FASB ASC Topic 310.
A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loans agreement. Loans, for which terms have been modified and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.  A cash flow analysis of the net present value is performed and an allowance may be established based on the outcome of that analysis, or if the loan is deemed to be collateral dependent an allowance is established based on the fair value of collateral. All modifications are reviewed by the ~~Bank’s~~First Federal’s senior loan committee to determine whether or not the modification constitutes a troubled debt restructure. Commercial and commercial real estate loans are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net of the allowance allocation which is determined based on the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.
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The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent ~~two~~three years. Loss experience is adjusted for other economic factors based on the identified risks, credit related or trends present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following portfolio segments have been identified:
Commercial Real Estate Loans (consisting of multi-family residential and non-residential): Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans. These loans are viewed primarily as cash flow loans and the repayment of these loans is largely dependent on the successful operation of the property. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market such as geographic location and/or property type.
Commercial Loans: Commercial credit is extended primarily to middle market customers. Such credits are typically comprised of working capital loans, loans for physical asset expansion, asset acquisition loans and other business loans. Loans to closely held businesses will generally be guaranteed in full or for a meaningful amount by the businesses' principal owners. Commercial loans are made based primarily on the historical and projected cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not behave as forecasted and collateral securing loans may fluctuate in value due to economic or individual performance factors. Minimum standards and underwriting guidelines have been established for all commercial loan types.
Consumer: Consumer loans are generally made to borrowers for a specific consumer purchase and are made based on their ability to repay with their current debt to income as well as the underlying collateral value of the item being purchased. Credit scores are part of the decision process of whether or not credit is extended. Minimum standards and underwriting guidelines have been established for all consumer loan types.
1-4 Family Residential Real Estate: 1-4 family residential real estate loans can be categorized two different ways. One part of this portfolio is owner occupied and are made based primarily on the ability of the individual borrower to support the payments as well as the payments of any other debt the borrower may have outstanding at the time the loan is made. The other part of this portfolio is non-owner occupied income producing property and is made primarily based on the cash flow stream from rental income as well as the cash flow support from the borrower’s unrelated cash flow. Both types of loans have a secondary repayment source of the underlying collateral and generally the loans are not extended at higher than an 80% LTV. Minimum standards and underwriting guidelines have been established for all 1-4 family residential real estate loan types.
Construction: The Company defines construction loans as loans where the loan proceeds are controlled by the Company and used exclusively for the improvement of real estate in which the Company holds a mortgage.
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Home Equity and Improvement: Home Equity and Improvement loans are made to borrowers based on their ability to repay with their current debt to income as well as the underlying collateral value of the real estate taken as security. Minimum standards and underwriting guidelines have been established for all 1-4 family residential real estate loan types.
Consumer, 1-4 family residential real estate (including construction) and home equity and improvement loans are subject to adverse employment conditions in the local economy which could increase default rate on loans.
Servicing Rights
Servicing rights are recognized separately when they are acquired through sales of loans. Servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. The Company compares the valuation model inputs and results to published industry data in order to validate the model results and assumptions. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying ~~loans.~~loans, driven, generally, by changes in market interest rates
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Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. Changes in valuation allowances are reported withmortgage banking incomeon the income statement. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.
Servicing fee income, which is reported on the income statement withmortgage banking income, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal, or a fixed amount per loan, and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Servicing fees totaled ~~$3.4~~$3.6 million, $3.4 million and ~~$3.1~~$3.4 million for the years ended December 31, 2013, 2012 ~~2011~~ and ~~2010.~~2011. Late fees and ancillary fees related to loan servicing are not material. SeeNote 8.8
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Bank Owned Life Insurance
The Company has purchased life insurance policies on certain key employees. Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Premises and Equipment and Long Lived Assets
Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation and amortization computed principally by the straight-line method over the following estimated useful lives:
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Buildings and improvements 20 to 50 years
Furniture, fixtures and equipment 3 to 15 years
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Long-lived assets to be held and those to be disposed of and certain intangibles are periodically evaluated for ~~impairment.~~impairment. SeeNote 9.
9.
Goodwill and Other Intangibles
Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009, is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Company has selected November 30 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on ~~our~~First Defiance’s balance sheet.
Other intangible assets consist of core deposit and acquired customer relationship intangible assets arising from whole bank, insurance and branch acquisitions. They are initially recorded at fair value and then amortized on an accelerated basis over their estimated lives, which range from five years for non-compete agreements to 10 to 20 years for core deposit and customer relationship intangibles. SeeNote ~~10.~~
10.
Real Estate and Other Assets Held for Sale
Other assets held for sale are comprised of properties acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. These assets are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Losses arising from the acquisition of such property are charged against the allowance for loan losses at the time of acquisition. These properties are carried at the lower of cost or fair value, less estimated costs to dispose. If fair value declines subsequent to foreclosure, the property is written down against expense. Costs after acquisition are expensed.
Stock Compensation Plans
Compensation cost is recognized for stock options and restricted share awards issued to employees and directors, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. Restricted stock awards are valued at the market value of Company stock at the date of the grant. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. SeeNote ~~20.~~
20.
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed inNote ~~22.~~22. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
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Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
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Mortgage Banking Derivatives
Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest on the loan is locked. The Company enters into forward commitments for the future delivery of mortgage loans when interest rate locks are entered into, in order to hedge the change in interest rates resulting from its commitments to fund the loans. Changes in fair values of these derivatives are included in mortgage banking income.
Operating Segments
Management considers the following factors in determining the need to disclose separate operating segments: 1) The nature of products and services, which are all financial in nature; 2) The type and class of customer for the products and services; in First Defiance’s case retail customers for retail bank and insurance products and commercial customers for commercial loan, deposit, life, health and property and casualty insurance needs; 3) The methods used to distribute products or provide services; such services are delivered through banking and insurance offices and through bank and insurance customer contact representatives. Retail and commercial customers are frequently targets for both banking and insurance products; 4) The nature of the regulatory environment; both banking and insurance entities are subject to various regulatory bodies and a number of specific regulations.
Quantitative thresholds as stated in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280,Segment Reportingare monitored. For the year ended December 31, ~~2012,~~2013, the reported revenue for First Insurance was ~~8.3%~~9.1% of total revenue for First Defiance. Total revenue includes net interest income (before provision for loan losses) plus non-interest income. Net income for First Insurance for the year ended December 31, ~~2012~~2013 was ~~4.6%~~4.4% of consolidated net income. Total assets of First Insurance at December 31, ~~2012~~2013 were ~~0.8%~~0.7% of total assets. First Insurance does not meet any of the quantitative thresholds of FASB ASC Topic 280. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable segment.
Dividend Restriction
Banking regulations require maintaining certain capital levels and may limit the dividends paid by the savings bank to the holding company. SeeNote 17 for further details on restrictions.
Loan Commitments and Related Financial Instruments
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
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Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any such matters that will have a material effect on the financial statements.
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Income Taxes
Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized.
An effective tax rate of 35% is used to determine after-tax components of other comprehensive income (loss) included in the statements of stockholders’ equity. SeeNote ~~18.~~
18.
A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that isgreater than 50%likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
The Company recognizes interest and/or penalties related to income tax matters in income tax expense.
Retirement Plans
Pension expense is the net of service and interest cost, return on plan assets and amortization of gains and losses not immediately recognized. Employee 401(k) plan expense is the amount of matching contributions. Deferred compensation and supplemental retirement plan expense allocates the benefits over years of service.
Reclassifications
Some items in the prior year financial statements were reclassified to conform to the current presentation.
Accounting Standards Updates
~~In May 2011, the FASB issued ASU No. 2011-04,~~~~Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs~~. The amendments in this ASU generally represent clarifications of Topic 820, but also include some instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This ASU results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and IFRSs. The amendments in this ASU are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted. The amendments of this update did not have a material impact on the Company’s financial position, results of operations or cash flows.
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~~In June 2011, the FASB issued ASU No. 2011-05,~~~~Amendments to Topic 220, Comprehensive Income~~. Under the amendments in this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments of this ASU should be applied retrospectively. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require any transition disclosures. The provisions of this update did not have a material impact on the Company’s financial position, results of operations or cash flows.
~~In September 2011, the FASB issued ASU No. 2011-08,~~~~Testing Goodwill for Impairment.~~ The provisions of ASU No. 2011-08 permits an entity an option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further impairment testing is required. ASU No. 2011-08 includes examples of events and circumstances that may indicate that a reporting unit’s fair value is less than its carrying amount. The provisions of ASU No. 2011-08 are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted provided that the entity has not yet performed its annual impairment test for goodwill. The provisions of this update did not have a material impact on the Company’s financial position, results of operations or cash flows.
~~In December 2011, the FASB issued ASU No. 2011-12,~~Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU 2011-12 defers changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments to allow the FASB time to re-deliberate whether to require presentation of such adjustments on the face of the financial statements to show the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. ASU 2011-12 allows entities to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. All other requirements in ASU 2011-05 are not affected by ASU 2011-12. ASU 2011-12 is effective for annual and interim periods beginning after December 15, 2011 and did not have a material impact on the Company’s financial position, results of operations or cash flows.
~~In July 2012, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2012-02,~~~~“Testing Indefinite-Lived Intangible Assets for Impairment.”~~The provisions of ASU No. 2012-02 permit an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform a quantitative impairment test, as is currently required by GAAP. ASU No. 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of ASU No. 2012-02 is expected to have no impact on the Company’s financial position, results of operations or cash flows.
In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This update requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The Company adopted this standard on January 1, 2013. The effect of adopting this standard increased the Company’s disclosure surrounding reclassification items out of accumulated other comprehensive income.
In January 2014, the FASB issued ASU 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 ~~required~~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 31, 2014. An entity can elect to adopt the amendments using either a modified retrospective transition method or a prospective transition method. Early adoption is permitted. The adoption of this ~~update prospectively for the quarter ending March 31, 2013. This update may result in revised disclosures in the Company’s financial statements but will~~guidance is not expected to have ana material impact on the Company’s ~~financial position, results of operations or cash flows.~~
Consolidated Financial Statements.
- 7876 -

3. Acquisitions
On July 1, 2011, First Defiance acquired PDI, an insurance agency headquartered in Maumee and Oregon, Ohio, for a cash purchase price ~~$4.8~~of $4.8 million and future consideration to be paid in cash in 2012, 2013, and 2014. As of December 31, ~~2012,~~2013, management has reported goodwill of approximately ~~$4.0~~$4.0 million and identifiable intangible assets of ~~$1.1 million~~$810,000 consisting of a customer relationship intangible of ~~$697,000~~$551,000 and a non-compete intangible of ~~$363,000. A~~$259,000. The transaction included a contingent payable with a maximum cash payout of ~~$626,000 was also recorded in the transaction~~$822,800, of which ~~$70,000~~$596,000 and $70,000 was paid in 2013 and 2012, ~~resulting in a payable~~respectively. The accrued liability was adjusted at December 31, ~~2012~~2013 and ended the year at $137,000 representing the present value of ~~$556,000.~~the remaining cash eligible for payment of $157,000. The remaining $20,000 will be expensed in 2014 with the final payout. The Company accounted for the transaction under the acquisition method of accounting which requires purchased assets and assumed liabilities to be recorded at their respective acquisition date fair value. Disclosure of pro forma results of this acquisition is not material to the Company’s consolidated financial statements.

4. Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings per common share:
2012 2011 2010
(In Thousands, Except Per Share Amounts)
Numerator for basic and diluted earnings per common share-net income applicable to common shares $ 18,047 $ 13,506 $ 6,088
Denominator:
Denominator for basic earnings per common share-weighted-average common shares, including participating securities 9,728 9,371 8,118
Effect of dilutive securities:
Employee stock options 51 15 1
Warrants 219 154 34
Dilutive potential common shares 270 169 35
Denominator for diluted earnings per common share 9,998 9,540 8,153
Basic earnings per common share $ 1.86 $ 1.44 $ .75
Diluted earnings per common share $ 1.81 $ 1.42 $ .75
2013 2012 2011
(In Thousands, Except Per Share Amounts)
Numerator for basic and diluted earnings per
    common share-net income applicable to common
    shares $ 22,235 $ 18,047 $ 13,506
Denominator:
Denominator for basic earnings per common
    share-weighted-average common shares, including
    participating securities 9,764 9,728 9,371
Effect of dilutive securities:
Employee stock options 87 51 15
Warrants 320 219 154
Dilutive potential common shares 407 270 169
Denominator for diluted earnings per common share 10,171 9,998 9,540
Basic earnings per common share $ 2.28 $ 1.86 $ 1.44
Diluted earnings per common share $ 2.19 $ 1.81 $ 1.42
Shares under option of132,750 in 2013,229,550 in 2012 and255,700 in 2011 ~~and 363,050 in 2010~~ were excluded from the diluted earnings per common share calculation as they were anti-dilutive.
~~- 79 -~~
- 77 -

5. Investment Securities
The following tables summarize the amortized cost and fair value of available-for-sale securities and held-to-maturity investment securities portfolio at December 31, ~~2012~~2013 and ~~2011~~2012 and the corresponding amounts of gross unrealized gains and losses were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
2012
Available-for-sale
Obligations of U.S. government corporations and agencies $ 11,000 $ 69 $ - $ 11,069
U.S. treasury bonds 1,000 2 - 1,002
Mortgage-backed securities - residential 30,020 1,441 - 31,461
Collateralized mortgage obligations 55,962 1,504 - 57,466
Trust preferred stock and preferred stock 3,600 99 (2,091 ) 1,608
Corporate bonds 8,717 167 - 8,884
Obligations of state and political
subdivisions 76,339 6,277 (5 ) 82,611
Total Available-for-Sale $ 186,638 $ 9,559 $ (2,096 ) $ 194,101

Held-to-Maturity
FHLMC certificates $ 69 $ - $ (1 ) $ 68
FNMA certificates 162 6 - 168
GNMA certificates 60 3 - 63
Obligations of states and political subdivisions 217 - - 217
Total Held-to-Maturity $ 508 $ 9 $ (1 ) $ 516
~~- 80 -~~
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value

(In Thousands)
2013
Available-for-sale
Obligations of U.S. government corporations and
    agencies $ 5,000 $ - $ (79) $ 4,921
Mortgage-backed securities - residential 41,368 765 (841) 41,292
Collateralized mortgage obligations 59,865 739 (763) 59,841
Trust preferred stock and preferred stock 3,264 683 (993) 2,954
Corporate bonds 8,854 129 (41) 8,942
Obligations of state and political subdivisions 78,426 2,704 (910) 80,220
Total Available-for-Sale $ 196,777 $ 5,020 $ (3,627) $ 198,170

Gross Gross
Amortized Unrecognized Unrecognized Fair
Cost Gains Losses Value

(In Thousands)
Held-to-Maturity
FHLMC certificates $ 31 $ - $ - $ 31
FNMA certificates 120 4 - 124
GNMA certificates 50 2 - 52
Obligations of states and political
    subdivisions 186 - - 186
Total Held-to-Maturity $ 387 $ 6 $ - $ 393
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
2012
Available-for-sale
Obligations of U.S. government corporations and
     agencies $ 11,000 $ 69 $ - $ 11,069
U.S. treasury bonds 1,000 2 - 1,002
Mortgage-backed securities - residential 30,020 1,441 - 31,461
Collateralized mortgage obligations 55,962 1,504 - 57,466
Trust preferred stock and preferred stock 3,600 99 (2,091) 1,608
Corporate bonds 8,717 167 - 8,884
Obligations of state and political subdivisions 76,339 6,277 (5) 82,611
Total Available-for-Sale $ 186,638 $ 9,559 $ (2,096) $ 194,101
- 78 -

Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
2011
Available-for-sale
Obligations of U.S. government corporations and agencies $ 16,989 $ 96 $ - $ 17,085
U.S. treasury bonds 2,000 10 - 2,010
Mortgage-backed securities - residential 68,400 2,318 (2 ) 70,716
REMICs 2,863 31 - 2,894
Collateralized mortgage obligations 57,083 1,926 - 59,009
Trust preferred stock and preferred stock 3,790 73 (2,413 ) 1,450
Corporate bonds 8,629 - (377 ) 8,252
Obligations of state and political subdivisions 65,928 5,580 (5 ) 71,503
Total Available-for-Sale $ 225,682 $ 10,034 $ (2,797 ) $ 232,919

Held-to-Maturity
FHLMC certificates $ 82 $ 1 $ - $ 83
FNMA certificates 199 4 - 203
GNMA certificates 72 3 - 75
Obligations of states and political subdivisions 308 3 - 311
Total Held-to-Maturity $ 661 $ 11 $ - $ 672
Gross Gross
Amortized Unrecognized Unrecognized Fair
Cost Gains Losses Value
(In Thousands)
Held-to-Maturity
FHLMC certificates $ 69 $ - $ (1) $ 68
FNMA certificates 162 6 - 168
GNMA certificates 60 3 - 63
Obligations of states and political subdivisions 217 - - 217
Total Held-to-Maturity $ 508 $ 9 $ (1) $ 516
The amortized cost and fair value of the investment securities portfolio at December 31, ~~2012~~2013 and ~~2011~~2012 are shown below by contractual maturity. Expected maturities will differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. For purposes of the maturity tables below, mortgage-backed securities and collateralized mortgage obligations, ~~and REMICs,~~ which are not due at a single maturity date, have not been allocated over maturity groupings.
Available-for-Sale Held-to-Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
(In Thousands)
2012
Due in one year or less $ 1,252 $ 1,258 $ - $ -
Due after one year through
five years 15,719 15,996 - -
Due after five years through
ten years 33,743 36,024 217 217
Due after ten years 49,942 51,896 - -
MBS/CMO 85,982 88,927 291 299
$ 186,638 $ 194,101 $ 508 $ 516
~~- 81 -~~
Available-for-Sale
Amortized Fair
Cost Value

(In Thousands)
2013
Available-for-sale
Due in one year or less $ 2,135 $ 2,137
Due after one year through
     five years 8,198 8,526
Due after five years through
     ten years 38,707 40,016
Due after ten years 46,504 46,358
MBS/CMO 101,233 101,133
Total $ 196,777 $ 198,170

Held-to-maturity
Due after five years through
        ten years $ 186 $ 186
MBS/CMO 201 207
Total $ 387 $ 393
Available-for-Sale
Amortized Fair
Cost Value

(In Thousands)
2012
Available-for-sale
Due in one year or less $ 1,252 $ 1,258
Due after one year through
    five years 15,719 15,996
Due after five years through
    ten years 33,743 36,024
Due after ten years 49,942 51,896
MBS/CMO 85,982 88,927
$ 186,638 $ 194,101

Held-to-maturity
Due after five years through
      ten years $ 217 $ 217
MBS/CMO 291 299
Total $ 508 $ 516
- 79 -

Securities pledged at year-end ~~2012~~2013 and ~~2011~~2012 had a carrying amount of ~~$135.0~~$132.7 million and ~~$144.1~~$135.0 million and were pledged to secure public deposits, securities sold under repurchase agreements and FHLB advances.
As of December 31, ~~2012,~~2013, the Company’s investment portfolio consisted of ~~338~~337 securities, 1488 of which were in an unrealized loss position. The Company does not hold any single security that is greater than ~~10%~~10% of the Company’s equity at December 31, ~~2012.~~
2013.
The following table summarizes First Defiance’s securities that were in an unrealized loss position at December 31, ~~2012~~2013 and December 31, ~~2011:~~
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, 2012
Available-for-sale securities:
Mortgage-backed securities - residential $ 1 $ - $ - $ - $ 1 $ -
Obligations of state and political subdivisions 949 (5 ) - - 949 (5 )
Trust preferred stock and preferred stock - - 1,474 (2,091 ) 1,474 (2,091 )
Total temporarily impaired securities $ 950 $ (5 ) $ 1,474 $ (2,091 ) $ 2,424 $ (2,096 )

At December 31, 2011
Available-for-sale securities:
Mortgage-backed securities - residential $ 2,030 $ (2 ) $ - $ - $ 2,030 $ (2 )
Obligations of state and political subdivisions - - 746 (5 ) 746 (5 )
Trust preferred stock and preferred stock - - 1,342 (2,413 ) 1,342 (2,413 )
Corporate bonds 8,252 (377 ) - - 8,252 (377 )
Total temporarily impaired securities $ 10,282 $ (379 ) $ 2,088 $ (2,418 ) $ 12,370 $ (2,797 )
2012:
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, 2013
Available-for-sale securities:
Obligations of U.S. government
   corporations and agencies $ 4,921 $ (79) $ - $ - $ 4,921 $ (79)
Mortgage-backed securities
   - residential 24,846 (841) - - 24,846 (841)
Collateralized mortgage
   obligations 26,530 (763) - - 26,530 (763)
Corporate bonds 2,959 (41) - - 2,959 (41)
Obligations of state and political
   subdivisions 19,209 (871) 375 (39) 19,584 (910)
Trust preferred stock and
   preferred stock - - 582 (993) 582 (993)
Total temporarily impaired
   securities $ 78,465 $ (2,595) $ 957 $ (1,032) $ 79,422 $ (3,627)

At December 31, 2012
Available-for-sale securities:
Mortgage-backed securities
   - residential $ 1 $ - $ - $ - $ 1 $ -
Obligations of state and political
   subdivisions 949 (5) - - 949 (5)
Trust preferred stock and
   preferred stock - - 1,474 (2,091) 1,474 (2,091)
Total temporarily impaired
   securities $ 950 $ (5) $ 1,474 $ (2,091) $ 2,424 $ (2,096)
With the exception of ~~Trust Preferred Stock,~~trust preferred stock, 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.
Realized gains from the sales and calls of investment securities totaled ~~$2.1 million~~$97,000 ($~~1.4 million~~68,000 after tax) in ~~2012~~2013 while there were realized gains of ~~$218,000~~$2.1 million ($~~142,000~~1.4 million after tax) and ~~realized losses of $(8,000)~~$218,000 ($142,000 after tax) in 2012 and 2011, ~~and 2010,~~ respectively.
- 80 -

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequent 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.
~~- 82 -~~
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 2013, management determined that two CDOs had OTTI resulting in a write-down of $337,000 ($219,000 after tax). The 2013 OTTI is related to two CDOs that were disallowed under the Final Interim Volcker Rule of the Dodd-Frank Act released on January 14, 2014 requiring the Company to liquidate these securities before a certain date. The Company received Level 1 pricing and wrote these two CDOs to that value as of December 31, 2013 and subsequently sold these two securities on January 15, 2014. In 2012, management determined that one CDO had OTTI resulting in a write-down of ~~$4,500~~$4,500 ($2,900 after tax). In 2011, management determined that one CDO had OTTI resulting in a write-down of ~~$2,200~~$2,200 ($1,400 after tax). In 2010, management determined OTTI on three CDOs resulting in a write-down of $214,000 ($139,000 after tax). Also in 2010, management deemed it necessary based on the current economic conditions, to further write-down the perpetual preferred stock of Fannie Mae and Freddie Mac which resulted in a permanent write-down of $117,000 ($76,000 after tax).
The Company held eight CDOs at December 31, ~~2012.~~2013. Four of those CDOs were written down in full prior to January 1, 2010. The remaining four CDOs have a total amortized cost of ~~$3.6~~$3.2 million at December 31, ~~2012.~~2013. Of these, two, with a total amortized cost of ~~$1.6~~$1.7 million, ~~were identified~~have been sold in January 2014 as ~~OTTI in prior periods.~~stated above. The final two CDOs, with a total amortized cost of ~~$2.0~~$1.5 million, ~~continue to pay principal and interest payments~~had OTTI in accordance with the contractual terms of the securities and no credit loss impairment has been identified in management’s analysis. Therefore, these two CDO investments have not been deemed by management to be OTTI.
prior periods.
Given the conditions in the debt markets today and the absence of observable transactions in the secondary and new issue markets, the Company’s CDOs, excluding the two CDOs sold in January 2014, will be classified within Level 3 of the fair value hierarchy because management determined that significant adjustments were required to determine fair value at the measurement date.
The two CDOs sold in January 2014, will be classified within Level 1 of the fair value hierarchy.
As required under FASB 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 Company’s Level 3 CDO valuations were supported by analysis prepared by an independent third party. Their approach to determining fair value involved several steps: 1) detailed credit and structural evaluation of each piece of collateral in the CDO; 2) collateral performance projections for each piece of collateral in the CDO (default, recovery and prepayment/amortization probabilities) and 3) discounted cash flow modeling.
- 81 -

Trust Preferred CDOs Discount Rate Methodology
First Defiance uses market-based yield indicators as a baseline for determining appropriate discount rates, and then adjusts the resulting discount rates on the basis of its credit and structural analysis of specific CDO instruments. The primary focus is on the returns a fixed income investor would require in order to allocate capital on a risk adjusted basis. There is currently no active market for trust preferred CDOs, however, First Defiance looks principally to market yields for stand-alone trust preferred securities issued by banks, thrifts and insurance companies for which there is an active and liquid market. The next step is to make a series of adjustments to reflect the differences that nevertheless exist between these products (both credit and structural) and, most importantly, to reflect idiosyncratic credit performance differences (both actual and projected) between these products and the underlying collateral in the specific CDOs. Importantly, as part of the analysis described above, First Defiance considers the fact that structured instruments frequently exhibit leverage not present in stand-alone instruments, and makes adjustments as necessary to reflect this additional risk.
~~- 83 -~~
Fundamental to this evaluation is an assessment of the likelihood of CDO coverage test failures that would have the effect of diverting cash flow away from the relevant CDO bond for some period of time. Generally speaking, the Company adjusts indicative credit spreads upwards in the case of CDOs that have relatively weaker collateral and/or less cushion with respect to overcollateralization and interest coverage test ratios and downwards if the reverse is true. This aspect of the Company’s discount rate methodology is important because there is frequently a great difference in the risks present in CDO instruments that are otherwise very similar (i.e. CDOs with the same basic type of collateral, the same manager, the same vintage, etc., may exhibit vastly different performance characteristics). With respect to this last point, First Defiance notes that given today’s credit environment, characterized by high default and deferral rates, it is typically the case that deal-specific credit performance (determined on the basis of the credit characteristics of remaining collateral) is the best indicator of what a willing market participant would pay for an instrument.
The Company ~~uses the same methodology for all of its CDOs and~~ believes its valuation methodology is appropriate for all of its CDOs in accordance with FASB ASC Topic 320 as well as other related guidance.
The default and recovery probabilities for each piece of collateral were formed based on the evaluation of the collateral credit and a review of historical industry default data and current/near-term operating conditions. For collateral that has already deferred, the Company assumed a recovery of ~~10%~~10% of par for banks, thrifts or other depository institutions, and ~~15%~~15% for insurance companies. ~~Although there is a possibility that~~The Company’s assumed average lifetime default rate declined to26.2% at the ~~deferring collateral will become current~~end of 2013 from27.9% at ~~some point in~~ the ~~future, First Defiance has conservatively assumed that it will continue to defer and gradually will default.~~
~~- 84 -~~
end of 2012.
The following table details the six securities with OTTI, their lowest credit rating at December 31, 2012 and the related credit losses recognized in earnings for the four quarters ended March 31, 2012, June 30, 2012, September 30, 2012 and December 31, 2012 (In Thousands):
TPREF
Funding II
Rated Alesco
VIII Preferred
Term Sec
XXVII Trapeza
CDO I Alesco
Preferred
Funding
VIII Alesco
Preferred
Funding
IX
Caa3 Rated Ca Rated C Rated Ca Not Rated Not Rated Total
Amount of OTTI related to credit loss at January 1, 2012 $ 318 $ 1,000 $ 78 $ 857 $ 453 $ 465 $ 3,171
Addition – Qtr 1 - - - - - - -
Amount of OTTI related to credit loss at March 31, 2012 $ 318 $ 1,000 $ 78 $ 857 $ 453 $ 465 $ 3,171
Addition – Qtr 2 - - - - - - -
Amount of OTTI related to credit loss at June 30, 2012 $ 318 $ 1,000 $ 78 $ 857 $ 453 $ 465 $ 3,171
Addition – Qtr 3 - - - - - - -
Amount of OTTI related to credit loss at September 30, 2012 $ 318 $ 1,000 $ 78 $ 857 $ 453 $ 465 $ 3,171
Addition – Qtr 4 5 - - - - - 5
Amount of OTTI related to credit loss at December 31, 2012 $ 323 $ 1,000 $ 78 $ 857 $ 453 $ 465 $ 3,176
The amount of OTTI recognized in accumulated other comprehensive income (“AOCI”) was ~~$749,000~~$645,000 for the above ~~six~~eight securities at December 31, ~~2012.~~2013. There was ~~$847,000~~$749,000 recognized in accumulated other comprehensive income at December 31, ~~2011.~~
~~The~~2012.
The following table provides additional information related to the four CDO investments for which a balance remains as of December 31, ~~2012~~2013 (dollars in thousands):
CDO Class Amortized
Cost Fair
Value Unrealized
Loss OTTI
Losses
2013 Lowest
Rating Current
Number of
Banks and
Insurance
Companies Actual
Deferrals
and
Defaults
as a % of
Current
Collateral Expected
Deferrals
and Defaults
as a % of
Remaining
Performing
Collateral Excess Sub-
ordination
as a % of
Current
Performing
Collateral
TPREF Funding II B $ 673 $ 266 $ 407 $ 0 Caa3 16 41.10 % 13.48 % - %
I-Preferred Term Sec I B-1 839 839 - 161 CCC- 14 17.24 % 11.72 %* 23.61 %
Dekania II CDO C-1 815 815 - 176 CCC 30 - % 13.16 %* 26.03 %
Preferred Term Sec XXVII C-1 902 316 586 0 C 32 26.18 % 18.29 % 6.39 %
Total $ 3,229 $ 2,236 $ 993 $ 337
*Assumption not applicable as Level 1 pricing was utilized at December 31, 2013.
- 8582 -

CDO Class Amortized
Cost Fair
Value Unrealized
Loss OTTI
Losses
2012 Lowest
Rating Current
Number of
Banks and
Insurance
Companies Actual
Deferrals
and
Defaults
as a % of
Current
Collateral Expected
Deferrals
and Defaults
as a % of
Remaining
Performing
Collateral Excess Sub-
ordination
as a % of
Current
Performing
Collateral

TPREF Funding II B 673 209 464 5 Caa3 15 43.47 % 17.92 % -%

I-Preferred Term Sec I B-1 1,000 542 458 0 CCC 15 7.96 % 23.00 % 25.62 %

Dekania II CDO C-1 990 505 485 0 CCC 32 -% 13.69 % 29.62 %

Preferred Term Sec XXVII C-1 902 218 684 0 C 32 27.09 % 22.29 % 6.23 %

Total $ 3,565 $ 1,474 $ 2,091 $ 5
The increase in OTTI in 2012 was the result of a slight deterioration in the performance of the underlying collateral. Specifically, depreciation was driven by both realized credit events (i.e. defaults and deferrals) and weakening credit fundamentals in some of the performing collateral, which led to an increased probability of default going forward. The Company’s assumed average lifetime default rate declined to 27.9% at the end of 2012 from 28.3% at the end of 2011.
The table below presents a roll-forward of the credit losses relating to debt securities recognized in earnings for the years ended December 31, 2013, 2012 ~~2011~~ and ~~2010~~2011 (in thousands):
2012 2011 2010
Beginning balance, January 1 $ 3,251 $ 3,249 $ 5,296
Additions for amounts related to credit loss for which an OTTI was not previously recognized - - 76

Reductions for amounts realized for securities sold/redeemed during the period (80 ) - (2,261 )

Reductions for amounts related to securities for which the Company intends to sell or that it will be more likely than not that the Company will be required to sell prior to recovery of amortized cost basis - - -

Reductions for increase in cash flows expected to be collected that are Recognized over the remaining life of the security - - -

Increases to the amount related to the credit loss for which Other-than-temporary was previously recognized 5 2 138

Ending balance, December 31 $ 3,176 $ 3,251 $ 3,249
~~- 86 -~~
2013 2012 2011
Beginning balance, January 1 $ 3,176 $ 3,251 $ 3,249
Additions for amounts related to credit loss for which an OTTI was
    not previously recognized 337 - -

Reductions for amounts realized for securities sold/redeemed during
    the period - (80) -

Reductions for amounts related to securities for which the
    Company intends to sell or that it will be more likely than not that
    the Company will be required to sell prior to recovery of amortized
    cost basis - - -

Reductions for increase in cash flows expected to be collected that are
    Recognized over the remaining life of the security - - -

Increases to the amount related to the credit loss for which Other-than-
    temporary was previously recognized - 5 2

Ending balance, December 31 $ 3,513 $ 3,176 $ 3,251
The proceeds from sales and calls of securities and the associated gains and losses are listed below:
2012 2011 2010
(In Thousands)
Proceeds $ 72,262 $ 8,719 $ 448
Gross realized gains 2,163 218 3
Gross realized losses (24 ) - (11 )
~~The following table summarizes the changes within each classification of accumulated other comprehensive income for the years ended December 31, 2012 and 2011:~~
Unrealized gains
(losses) on available
for sale securities Postretirement
Benefit Accumulated
other
comprehensive
income (loss),
net
(In Thousands)
Balance at December 31, 2011 $ 4,704 $ (707 ) $ 3,997
Other comprehensive income (loss), net 147 130 277
Balance at December 31, 2012 $ 4,851 $ (577 ) $ 4,274
Unrealized gains
(losses) on available
for sale securities Postretirement
Benefit Accumulated
other
comprehensive
income (loss), net
(In Thousands)
Balance at December 31, 2010 $ 32 $ (374 ) $ (342 )
Other comprehensive income (loss), net 4,672 (333 ) 4,339
Balance at December 31, 2011 $ 4,704 $ (707 ) $ 3,997
2013 2012 2011
(In Thousands)
Proceeds $ 4,027 $ 72,262 $ 8,719
Gross realized gains 97 2,163 218
Gross realized losses - (24) -

6. Commitments and Contingent Liabilities
Loan Commitments
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 on December 31 was as follows ~~(in thousands)~~(in thousands):
~~- 87 -~~
2013 2012
Fixed Rate Variable Rate Fixed Rate Variable Rate
Commitments to make loans $ 57,914 $ 59,632 $ 50,205 $ 48,035
Unused lines of credit 18,047 257,939 21,975 228,269
Standby letters of credit - 17,680 - 18,166
Total $ 75,962 $ 335,251 $ 72,180 $ 294,470
- 83 -

2012 2011
Fixed Rate Variable Rate Fixed Rate Variable Rate
Commitments to make loans $ 50,205 $ 48,035 $ 38,399 $ 47,037
Unused lines of credit 21,975 228,269 24,943 184,446
Standby letters of credit - 18,166 4,600 21,507
Total $ 72,180 $ 294,470 $ 67,942 $ 252,990
Commitments to make loans are generally made for periods of 60 days or ~~less.~~less. The fixed rate loan commitments at December 31, ~~2012~~2013 have interest rates ranging from ~~2.00%~~2.00% to ~~18.00%~~18.00% and maturities ranging from less than 1 year to 30 ~~years.~~
years.
In addition to the above commitments, at December 31, ~~2012,~~2013, First Defiance had commitments to sell ~~$53.6~~$12.1 million of loans to Freddie Mac, Fannie Mae, ~~Federal Home Loan Bank~~FHLB of Cincinnati or BB&T Mortgage.

7.Loans
Loans receivable consist of the ~~following (in thousands):~~
December 31,
2012 December 31,
2011
Real Estate:
Secured by 1-4 family residential $ 200,826 $ 203,401
Secured by multi-family residential 122,275 126,246
Secured by commercial real estate 675,110 649,746
Construction 37,788 31,552
1,035,999 1,010,945
Other Loans:
Commercial 383,817 349,053
Home equity and improvement 108,718 122,143
Consumer Finance 15,936 18,887
508,471 490,083
Total loans 1,544,470 1,501,028
Deduct:
Undisbursed loan funds (18,478 ) (13,243 )
Net deferred loan origination fees and costs (735 ) (709 )
Allowance for loan loss (26,711 ) (33,254 )
Totals $ 1,498,546 $ 1,453,822
following:
December 31,
2013 December 31,
2012
(In Thousands)
Real Estate:
Secured by 1-4 family residential $ 195,752 $ 200,826
Secured by multi-family residential 148,952 122,275
Secured by commercial real estate 670,666 675,110
Construction 86,058 37,788
1,101,428 1,035,999
Other Loans:
Commercial 388,236 383,817
Home equity and improvement 106,930 108,718
Consumer Finance 16,902 15,936
512,068 508,471
Total loans 1,613,496 1,544,470
Deduct:
Undisbursed loan funds (32,290) (18,478)
Net deferred loan origination fees and costs (758) (735)
Allowance for loan loss (24,950) (26,711)
Totals $ 1,555,498 $ 1,498,546
Loan segments have been identified by evaluating the portfolio based on collateral and credit risk characteristics.
- 8884 -

The following table discloses allowance for loan loss activity year to date as of December 31, ~~2012,~~2013, December 31, ~~2011,~~2012, and December 31, ~~2010~~2011 by portfolio segment and impairment method (in thousands):
Year to Date December 31,
2012 1-4 Family
Residential
Real Estate Construction Multi- Family
Residential
Real Estate Commercial
Real Estate Commercial Home Equity
and
Improvement Consumer Total
Beginning Allowance $ 4,095 $ 63 $ 2,850 $ 17,640 $ 6,576 $ 1,856 $ 174 $ 33,254

Charge-Offs (2,515 ) - (555 ) (10,764 ) (4,047 ) (1,165 ) (133 ) (19,179 )

Recoveries 177 - 122 895 359 95 64 1,712

Provisions 1,749 12 (220 ) 4,931 3,437 973 42 10,924
Ending Allowance $ 3,506 $ 75 $ 2,197 $ 12,702 $ 6,325 $ 1,759 $ 147 $ 26,711
Year-to-Date December 31,
2011 1-4 Family
Residential
Real Estate Construction Multi- Family
Residential
Real Estate Commercial
Real Estate Commercial Home Equity
and
Improvement Consumer Total
Beginning Allowance $ 5,956 $ 73 $ 2,147 $ 20,208 $ 10,871 $ 1,528 $ 297 $ 41,080

Charge-Offs (2,753 ) - (792 ) (12,358 ) (4,398 ) (1,052 ) (95 ) (21,448 )

Recoveries 127 - - 533 393 65 70 1,188

Provisions 765 (10 ) 1,495 9,257 (290 ) 1,315 (98 ) 12,434
Ending Allowance $ 4,095 $ 63 $ 2,850 $ 17,640 $ 6,576 $ 1,856 $ 174 $ 33,254
Year to Date December 31,
2010 1-4 Family
Residential
Real Estate Construction Commercial
RE & Multi-
Family
Residential RE Commercial Home Equity
and
Improvement Consumer Total
Beginning Allowance $ 6,048 $ - $ 18,876 $ 9,444 $ 1,664 $ 515 $ 36,547

Charge-Offs (3,092 ) - (9,928 ) (5,118 ) (1,066 ) (124 ) (19,328 )

Recoveries 170 - 50 259 98 107 684

Provisions 2,830 73 13,357 6,286 832 (201 ) 23,177
Ending Allowance $ 5,956 $ 73 $ 22,355 $ 10,871 $ 1,528 $ 297 $ 41,080
Year to Date December 31,
2013 1-4 Family
Residential
Real Estate Multi-Family
Residential
Real Estate Commercial
Real Estate Construction Commercial Home Equity
and
Improvement Consumer
Finance Total
Beginning Allowance $ 3,506 $ 2,197 $ 12,702 $ 75 $ 6,325 $ 1,759 $ 147 $ 26,711
Charge-Offs (643) (6) (2,469) - (1,230) (757) (94) (5,199)
Recoveries 282 - 837 - 290 125 80 1,614
Provisions (298) 317 930 59 293 508 15 1,824
Ending Allowance $ 2,847 $ 2,508 $ 12,000 $ 134 $ 5,678 $ 1,635 $ 148 $ 24,950

Year to Date December 31,
2012 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 $ 4,095 $ 2,850 $ 17,640 $ 63 $ 6,576 $ 1,856 $ 174 $ 33,254
Charge-Offs (2,515) (555) (10,764) - (4,047) (1,165) (133) (19,179)
Recoveries 177 122 895 - 359 95 64 1,712
Provisions 1,749 (220) 4,931 12 3,437 973 42 10,924
Ending Allowance $ 3,506 $ 2,197 $ 12,702 $ 75 $ 6,325 $ 1,759 $ 147 $ 26,711
Year-to-Date December 31,
2011 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 $ 5,956 $ 2,147 $ 20,208 $ 73 $ 10,871 $ 1,528 $ 297 $ 41,080
Charge-Offs (2,753) (792) (12,358) - (4,398) (1,052) (95) (21,448)
Recoveries 127 - 533 - 393 65 70 1,188
Provisions 765 1,495 9,257 (10) (290) 1,315 (98) 12,434
Ending Allowance $ 4,095 $ 2,850 $ 17,640 $ 63 $ 6,576 $ 1,856 $ 174 $ 33,254
- 8985 -

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, 2013:
(In Thousands)
1-4 Family Multi Family
Residential Residential Commercial Home Equity Consumer
Real Estate Real Estate Real Estate Commercial Construction & Improvement Finance Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment $ 220 $ - $ 1,121 $ - $ 6 $ 45 $ - $ 1,392
Collectively evaluated for impairment 2,627 2,508 10,879 134 5,672 1,590 148 23,558
Acquired with deteriorated credit quality - - - - - - - -
Total ending allowance balance $ 2,847 $ 2,508 $ 12,000 $ 134 $ 5,678 $ 1,635 $ 148 $ 24,950
Loans:
Loans individually evaluated for impairment $ 10,245 $ 840 $ 34,874 $ 263 $ 8,737 $ 2,429 $ 53 $ 57,441
Loans collectively evaluated for impairment 185,923 148,294 637,657 53,467 380,711 104,958 16,838 1,527,848
Loans acquired with deteriorated credit quality 29 - 174 - 27 - - 230
Total ending loans balance $ 196,197 $ 149,134 $ 672,705 $ 53,730 $ 389,475 $ 107,387 $ 16,891 $ 1,585,519
- 86 -

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, 2012:
~~(In~~ (In Thousands)
1-4 Family Multi- Family
Residential Residential Commercial Home Equity
Real Estate Construction Real Estate Real Estate Commercial & Improvement Consumer Total
Allowance for loan losses:

Ending allowance balance attributable to loans:

Individually evaluated for impairment $ 281 $ - $ - $ 1,070 $ 138 $ 2 $ - $ 1,491

Collectively evaluated for impairment 3,225 75 2,197 11,632 6,187 1,757 147 25,220

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

Total ending allowance balance $ 3,506 $ 75 $ 2,197 $ 12,702 $ 6,325 $ 1,759 $ 147 $ 26,711

Loans:

Loans individually evaluated for impairment $ 11,930 $ 45 $ 1,626 $ 46,053 $ 8,830 $ 2,678 $ 124 $ 71,286

Loans collectively evaluated for impairment 189,348 19,251 120,829 630,534 376,007 106,516 15,815 1,458,300

Loans acquired with deteriorated credit quality 36 - - 436 32 - - 504

Total ending loans balance $ 201,314 $ 19,296 $ 122,455 $ 677,023 $ 384,869 $ 109,194 $ 15,939 $ 1,530,090
1-4 Family Multi Family
Residential Residential Commercial Home Equity Consumer
Real Estate Real Estate Real Estate Commercial Construction & Improvement Finance Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment $ 281 $ - $ 1,070 $ - $ 138 $ 2 $ - $ 1,491
Collectively evaluated for impairment 3,225 2,197 11,632 75 6,187 1,757 147 25,220
Acquired with deteriorated credit quality - - - - - - - -
Total ending allowance balance $ 3,506 $ 2,197 $ 12,702 $ 75 $ 6,325 $ 1,759 $ 147 $ 26,711
Loans:
Loans individually evaluated for impairment $ 11,930 $ 1,626 $ 46,053 $ 45 $ 8,830 $ 2,678 $ 124 $ 71,286
Loans collectively evaluated for impairment 189,348 120,829 630,534 19,251 376,007 106,516 15,815 1,458,300
Loans acquired with deteriorated credit quality 36 - 436 - 32 - - 504
Total ending loans balance $ 201,314 $ 122,455 $ 677,023 $ 19,296 $ 384,869 $ 109,194 $ 15,939 $ 1,530,090
- 9087 -

~~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, 2011:~~
~~(In Thousands)~~
1-4 Family Multi- Family
Residential Residential Commercial Home Equity
Real Estate Construction Real Estate Real Estate Commercial & Improvement Consumer Total
Allowance for loan losses:

Ending allowance balance attributable to loans:

Individually evaluated for impairment $ 654 $ - $ 195 $ 5,400 $ 969 $ - $ - $ 7,218

Collectively evaluated for impairment 3,441 63 2,655 12,240 5,607 1,856 174 26,036

Acquired with deteriorated credit quality - - - - -

Total ending allowance balance $ 4,095 $ 63 $ 2,850 $ 17,640 $ 6,576 $ 1,856 $ 174 $ 33,254

Loans:

Loans individually evaluated for impairment $ 4,537 $ - $ 1,435 $ 34,009 $ 6,773 $ 40 $ - $ 46,794

Loans collectively evaluated for impairment 199,453 18,288 125,080 616,856 343,147 122,623 18,910 1,444,357

Loans acquired with deteriorated credit quality 70 - - 825 312 - - 1,207

Total ending loans balance $ 204,060 $ 18,288 $ 126,515 $ 651,690 $ 350,232 $ 122,663 $ 18,910 $ 1,492,358
~~- 91 -~~
The following table presents the average balance, interest income recognized and cash basis income recognized on impaired loans by class of loans.(In Thousands)
Twelve Months Ended December 31,
2012
Average
Balance Interest
Income
Recognized Cash Basis
Income
Recognized
Residential Owner Occupied $ 2,946 $ 137 $ 136
Residential Non Owner Occupied 5,291 173 177
Total Residential Real Estate 8,237 310 313
Construction 9 - -
Multi-Family 826 22 21
CRE Owner Occupied 11,755 190 176
CRE Non Owner Occupied 17,156 540 559
Agriculture Land 1,062 31 23
Other CRE 6,672 15 15
Total Commercial Real Estate 36,645 776 773
Commercial Working Capital 2,021 26 29
Commercial Other 5,018 87 90
Total Commercial 7,039 113 119
Consumer 25 3 3
Home Equity and Home Improvement 563 33 33
Total Impaired Loans $ 53,344 $ 1,257 $ 1,262
Twelve Months Ended December 31,
2013
Average
Balance Interest
Income
Recognized Cash Basis
Income
Recognized
Residential Owner Occupied $ 6,529 $ 345 $ 343
Residential Non Owner Occupied 4,453 162 163
Total 1-4 Family Residential Real Estate 10,982 507 506
Multi-Family Residential Real Estate 1,176 27 28
CRE Owner Occupied 14,313 376 386
CRE Non Owner Occupied 22,339 901 909
Agriculture Land 987 26 16
Other CRE 4,162 43 38
Total Commercial Real Estate 41,801 1,346 1,349
Construction 165 10 8
Commercial Working Capital 2,085 33 36
Commercial Other 6,521 75 70
Total Commercial 8,606 108 106
Consumer Finance 83 6 6
Home Equity and Home Improvement 2,631 121 117
Total Impaired Loans $ 65,444 $ 2,125 $ 2,120
- 9288 -

The following table presents the average balance, interest income recognized and cash basis income recognized on impaired loans by class of loans. (In Thousands)
Twelve Months Ended December 31,
2012
Average
Balance Interest
Income
Recognized Cash Basis
Income
Recognized
Residential Owner Occupied $ 2,946 $ 137 $ 136
Residential Non Owner Occupied 5,291 173 177
Total 1-4 Family Residential Real Estate 8,237 310 313
Multi-Family Residential Real Estate 826 22 21
CRE Owner Occupied 11,755 190 176
CRE Non Owner Occupied 17,156 540 559
Agriculture Land 1,062 31 23
Other CRE 6,672 15 15
Total Commercial Real Estate 36,645 776 773
Construction 9 - -
Commercial Working Capital 2,021 26 29
Commercial Other 5,018 87 90
Total Commercial 7,039 113 119
Consumer Finance 25 3 3
Home Equity and Home Improvement 563 33 33
Total Impaired Loans $ 53,344 $ 1,257 $ 1,262
- 89 -

The following table presents the average balance, interest income recognized and cash basis income recognized on impaired loans by class of loans:(In Thousands)
Twelve Months Ended December 31,
2011
Average
Balance Interest
Income
Recognized Cash Basis
Income
Recognized
Residential Owner Occupied $ 2,689 $ 68 $ 67
Residential Non Owner Occupied 2,646 85 87
Total Residential Real Estate 5,335 153 154
Construction 25 - -
Multi-Family 2,097 88 83
CRE Owner Occupied 10,631 302 282
CRE Non Owner Occupied 19,351 777 724
Agriculture Land 1,932 47 47
Other CRE 7,952 54 43
Total Commercial Real Estate 39,866 1,180 1,096
Commercial Working Capital 3,758 74 77
Commercial Other 9,660 194 191
Total Commercial 13,418 268 268
Consumer - - -
Home Equity and Home Improvement 258 12 12
Total Impaired Loans $ 60,999 $ 1,701 $ 1,613
Twelve Months Ended
December 31, 2010

Average balance of individually impaired loans during the year $ 64,429
Interest income recognized 2,237
Cash Basis Income recognized 2,017
Twelve Months Ended December 31,
2011
Average
Balance Interest
Income
Recognized Cash Basis
Income
Recognized
Residential Owner Occupied $ 2,689 $ 68 $ 67
Residential Non Owner Occupied 2,646 85 87
Total 1-4 Family Residential Real Estate 5,335 153 154
Multi-Family Residential Real Estate 2,097 88 83
CRE Owner Occupied 10,631 302 282
CRE Non Owner Occupied 19,351 777 724
Agriculture Land 1,932 47 47
Other CRE 7,952 54 43
Total Commercial Real Estate 39,866 1,180 1,096
Construction 25 - -
Commercial Working Capital 3,758 74 77
Commercial Other 9,660 194 191
Total Commercial 13,418 268 268
Consumer Finance - - -
Home Equity and Home Improvement 258 12 12
Total Impaired Loans $ 60,999 $ 1,701 $ 1,613
- 9390 -

The following table presents loans individually evaluated for impairment by class of ~~loans as of December 31, 2012:~~loans:(In Thousands)
Unpaid
Principal
Balance* Recorded
Investment Allowance
for Loan
Losses
Allocated
With no allowance recorded:
Residential Owner Occupied $ 5,427 $ 5,357 $ -
Residential Non Owner Occupied 4,211 3,420 -
Total Residential Real Estate 9,638 8,777 -
Construction 300 45 -
Multi-Family Residential Real Estate 1,775 1,626 -
CRE Owner Occupied 12,314 9,782 -
CRE Non Owner Occupied 11,054 9,105 -
Agriculture Land 1,176 993 -
Other CRE 8,741 5,527 -
Total Commercial Real Estate 33,285 25,407 -
Commercial Working Capital 1,565 1,565 -
Commercial Other 6,367 5,338 -
Total Commercial 7,932 6,903 -
Consumer 125 124 -
Home Equity and Home Improvement 2,777 2,642 -
Total loans with no allowance recorded $ 55,832 $ 45,524 $ -

With an allowance recorded:
Residential Owner Occupied $ 1,697 $ 1,701 $ 257
Residential Non Owner Occupied 1,449 1,452 24
Total Residential Real Estate 3,146 3,153 281
Construction - - -
Multi-Family Residential Real Estate - - -
CRE Owner Occupied 5,735 5,118 245
CRE Non Owner Occupied 15,301 15,357 820
Agriculture Land 111 112 3
Other CRE 88 59 2
Total Commercial Real Estate 21,235 20,646 1,070
Commercial Working Capital 300 301 10
Commercial Other 1,623 1,626 128
Total Commercial 1,923 1,927 138
Consumer - - -
Home Equity and Home Improvement 36 36 2
Total loans with an allowance recorded $ 26,340 $ 25,762 $ 1,491
December 31, 2013 December 31, 2012
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 $ 4,744 $ 4,729 $ - $ 5,427 $ 5,357 $ -
Residential Non Owner Occupied 4,844 4,329 - 4,211 3,420 -
Total 1-4 Family Residential Real Estate 9,588 9,058 - 9,638 8,777 -
Multi-Family Residential Real Estate 989 840 - 1,775 1,626 -
CRE Owner Occupied 11,105 8,376 - 12,314 9,782 -
CRE Non Owner Occupied 9,399 7,740 - 11,054 9,105 -
Agriculture Land 629 488 - 1,176 993 -
Other CRE 3,274 2,452 - 8,741 5,527 -
Total Commercial Real Estate 24,407 19,056 - 33,285 25,407 -
Construction 300 263 - 300 45 -
Commercial Working Capital 3,147 3,146 - 1,565 1,565 -
Commercial Other 6,063 5,415 - 6,367 5,338 -
Total Commercial 9,210 8,561 - 7,932 6,903 -
Consumer 53 53 - 125 124 -
Home Equity and Home Improvement 1,985 1,992 - 2,777 2,642 -
Total loans with no allowance recorded $ 46,532 $ 39,823 $ - $ 55,832 $ 45,524 $ -

With an allowance recorded:
Residential Owner Occupied $ 1,100 $ 1,103 $ 218 $ 1,697 $ 1,701 $ 257
Residential Non Owner Occupied 84 84 2 1,449 1,452 24
Total 1-4 Family Residential Real Estate 1,184 1,187 220 3,146 3,153 281
Multi-Family Residential Real Estate - - - - - -
CRE Owner Occupied 3,212 2,765 166 5,735 5,118 245
CRE Non Owner Occupied 12,756 12,803 946 15,301 15,357 820
Agriculture Land 195 197 7 111 112 3
Other CRE 82 53 2 88 59 2
Total Commercial Real Estate 16,245 15,818 1,121 21,235 20,646 1,070
Construction - - - - - -
Commercial Working Capital - - - 300 301 10
Commercial Other 176 176 6 1,623 1,626 128
Total Commercial 176 176 6 1,923 1,927 138
Consumer - - - - - -
Home Equity and Home Improvement 436 437 45 36 36 2
Total loans with an allowance recorded $ 18,041 $ 17,618 $ 1,392 $ 26,340 $ 25,762 $ 1,491
* Presented gross of charge offs
- 9491 -

~~The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2011:~~~~(In Thousands)~~
Unpaid
Principal
Balance* Recorded
Investment Allowance
for Loan
Losses
Allocated
With no allowance recorded:
Residential Owner Occupied $ 981 $ 984 $ -
Residential Non Owner Occupied 1,871 1,877 -
Total Residential Real Estate 2,852 2,861 -
Construction - - -
Multi-Family Residential Real Estate 1,138 1,137 -
CRE Owner Occupied 5,868 5,879 -
CRE Non Owner Occupied 8,408 8,421 -
Agriculture Land 1,072 1,073 -
Other CRE 5,607 5,605 -
Total Commercial Real Estate 20,955 20,978 -
Commercial Working Capital 1,391 1,393 -
Commercial Other 3,444 3,453 -
Total Commercial 4,835 4,846 -
Consumer - - -
Home Equity and Home Improvement 39 40 -
Total loans with no allowance recorded $ 29,819 $ 29,862 $ -

With an allowance recorded:
Residential Owner Occupied $ 1,020 $ 1,020 $ 373
Residential Non Owner Occupied 726 726 281
Total Residential Real Estate 1,746 1,746 654
Construction - - -
Multi-Family Residential Real Estate 298 298 195
CRE Owner Occupied 2,284 2,284 589
CRE Non Owner Occupied 8,589 8,596 3,235
Agriculture Land 300 300 163
Other CRE 2,676 2,676 1,413
Total Commercial Real Estate 13,849 13,856 5,400
Commercial Working Capital 358 358 192
Commercial Other 1,879 1,881 777
Total Commercial 2,237 2,239 969
Consumer - - -
Home Equity and Home Improvement - - -
Total loans with an allowance recorded $ 18,130 $ 18,139 $ 7,218
* Presented net of charge-offs
~~- 95 -~~
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:
December 31,
2012 December 31,
2011
(in thousands)
Non-accrual loans $ 32,570 $ 39,328
Loans over 90 days past due and still accruing - -
Total non-performing loans 32,570 $ 39,328
Real estate and other assets held for sale 3,805 3,628
Total non-performing assets $ 36,375 $ 42,956

Troubled debt restructuring, still accruing $ 28,203 $ 3,380
December 31,
2013 December 31,
2012
(in thousands)
Non-accrual loans $ 27,847 $ 32,570
Loans over 90 days past due and still accruing - -
Total non-performing loans 27,847 32,570
Real estate and other assets held for sale 5,859 3,805
Total non-performing assets $ 33,706 $ 36,375

Troubled debt restructuring, still accruing $ 27,630 $ 28,203
The following table presents the aging of the recorded investment in past due and non-accrual loans as of December 31, 2013 by class of loans: (In Thousands)
Current 30-59 days 60-89 days 90+ days Total
Past Due Total Non
Accrual

Residential Owner Occupied $ 126,855 $ 1,530 $ 191 $ 1,009 $ 2,730 $ 1,329
Residential Non Owner Occupied 65,292 531 403 386 1,320 1,943

Total 1-4 Family Residential Real Estate 192,147 2,061 594 1,395 4,050 3,272

Multi-Family Residential Real Estate 149,134 - - - - 583

CRE Owner Occupied 311,253 334 495 3,671 4,500 7,492
CRE Non Owner Occupied 225,433 1,067 918 902 2,887 4,717
Agriculture Land 81,954 21 - 73 94 630
Other Commercial Real Estate 45,297 - - 1,287 1,287 2,412

Total Commercial Real Estate 663,937 1,422 1,413 5,933 8,768 15,251

Construction 53,730 - - - - -

Commercial Working Capital 155,373 - - 419 419 2,917
Commercial Other 230,054 37 26 3,566 3,629 5,419

Total Commercial 385,427 37 26 3,985 4,048 8,336

Consumer Finance 16,759 131 - 131 -
Home Equity/Home Improvement 105,657 1,163 155 413 1,731 413

Total Loans $ 1,566,791 $ 4,814 $ 2,188 $ 11,726 $ 18,728 $ 27,855
- 92 -

The following table presents the aging of the recorded investment in past due and non-accrual loans as of December 31, 2012 by class of loans:(In Thousands)
Current 30-59 days 60-89 days 90+ days Total
Past Due Total Non
Accrual

Residential Owner Occupied $ 125,362 $ 1,238 $ 604 $ 945 $ 2,787 $ 1,125
Residential Non Owner Occupied 71,777 413 126 849 1,388 2,473

Total Residential Real Estate 197,139 1,651 730 1,794 4,175 3,598

Construction 19,296 - - - - -
Multi-Family 122,455 - - - - 1,178

CRE Owner Occupied 321,071 1,248 382 1,622 3,252 9,652
CRE Non Owner Occupied 235,592 134 1,321 2,480 3,935 6,674
Agriculture Land 72,092 84 31 - 115 813
Other Commercial Real Estate 36,510 21 875 3,560 4,456 4,761

Total Commercial Real Estate 665,265 1,487 2,609 7,662 11,758 21,900

Commercial Working Capital 161,110 - 155 1,204 1,359 1,528
Commercial Other 218,477 584 1,201 2,138 3,923 4,136

Total Commercial 379,587 584 1,356 3,342 5,282 5,664

Consumer 15,702 229 8 - 237 -
Home Equity/Home Improvement 106,458 2,294 225 217 2,736 217

Total Loans $ 1,505,902 $ 6,245 $ 4,928 $ 13,015 $ 24,188 $ 32,557
~~- 96 -~~
Current 30-59 days 60-89 days 90+ days Total
Past Due Total Non
Accrual

Residential Owner Occupied $ 125,362 $ 1,238 $ 604 $ 945 $ 2,787 $ 1,125
Residential Non Owner Occupied 71,777 413 126 849 1,388 2,473

Total 1-4 Family Residential Real Estate 197,139 1,651 730 1,794 4,175 3,598

Multi-Family Residential Real Estate 122,455 - - - - 1,178

CRE Owner Occupied 321,071 1,248 382 1,622 3,252 9,652
CRE Non Owner Occupied 235,592 134 1,321 2,480 3,935 6,674
Agriculture Land 72,092 84 31 - 115 813
Other Commercial Real Estate 36,510 21 875 3,560 4,456 4,761

Total Commercial Real Estate 665,265 1,487 2,609 7,662 11,758 21,900

Construction 19,296 - - - - -

Commercial Working Capital 161,110 - 155 1,204 1,359 1,528
Commercial Other 218,477 584 1,201 2,138 3,923 4,136

Total Commercial 379,587 584 1,356 3,342 5,282 5,664

Consumer Finance 15,702 229 8 - 237 -
Home Equity/Home Improvement 106,458 2,294 225 217 2,736 217

Total Loans $ 1,505,902 $ 6,245 $ 4,928 $ 13,015 $ 24,188 $ 32,557
~~The following table presents the aging of the recorded investment in past due and non-accrual loans as of December 31, 2011 by class of loans:~~~~(In Thousands)~~
Current 30-59 days 60-89 days 90+ days Total Past
Due Total Non
Accrual

Residential Owner Occupied $ 131,014 $ 1,573 $ 220 $ 1,996 $ 3,789 $ 2,490
Residential Non Owner Occupied 67,516 563 410 768 1,741 1,397

Total Residential Real Estate 198,530 2,136 630 2,764 5,530 3,887

Construction 18,288 - - - - -
Multi-Family 125,050 1,022 - 443 1,465 443

CRE Owner Occupied 288,096 1,468 993 4,771 7,232 7,691
CRE Non Owner Occupied 243,016 921 1,990 3,384 6,295 10,398
Agriculture Land 70,490 - - 456 456 1,275
Other Commercial Real Estate 30,056 98 - 5,951 6,049 8,342

Total Commercial Real Estate 631,658 2,487 2,983 14,562 20,032 27,706

Commercial Working Capital 137,310 - 223 242 465 1,410
Commercial Other 209,187 278 59 2,933 3,270 5,481

Total Commercial 346,497 278 282 3,175 3,735 6,891

Consumer 18,736 129 35 10 174 10
Home Equity/Home Improvement 119,400 2,602 267 394 3,263 394

Total Loans $ 1,458,159 $ 8,654 $ 4,197 $ 21,378 $ 34,199 $ 39,331
Troubled Debt Restructurings
As of December 31, ~~2012~~2013 and ~~2011,~~2012, the Company has a recorded investment in troubled debt restructurings (“TDRs”) of ~~$35.5~~$33.4 million and ~~$14.7~~$35.5 million, respectively. The Company has allocated ~~$1.1~~$1.2 million and ~~$1.8~~$1.1 million, of specific reserves to those loans at December 31, ~~2012~~2013 and ~~2011,~~2012, and has committed to lend additional amounts totaling up to ~~$41,000~~$300,000 and ~~$64,000~~$41,000 at December 31, ~~2012~~2013 and ~~2011.~~
2012.
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.
~~- 97 -~~
- 93 -

Of the loans modified in a TDR, ~~$7.2~~$5.7 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’spre-modification effective interest rate.
The following table presents loans by class modified as TDRs that occurred during the ~~year~~years ending December 31, 2013, 2012, and 2011 (Dollars in Thousands):
Loans Modified as a TDR for the Twelve
Months Ended December 31, 2012
Troubled Debt Restructurings Number of Loans Recorded
Investment (as of
period end)

Residential Owner Occupied 87 $ 6,052
Residential Non Owner Occupied 8 666
CRE Owner Occupied 9 3,859
CRE Non Owner Occupied 13 13,942
Agriculture Land 3 474
Other CRE 1 59
Commercial / Industrial 7 1,196
Home Equity / Improvement 127 2,663
Consumer 27 124
Total 282 $ 29,035
Loans Modified as a TDR for the
Twelve Months Ended December
31, 2013 Loans Modified as a TDR for the
Twelve Months Ended December
31, 2012 Loans Modified as a TDR for the
Twelve Months Ended December
31, 2011
Troubled Debt Restructurings Number of
Loans Recorded
Investment (as of
period end) Number of
Loans Recorded
Investment (as of
period end) Number of
Loans Recorded
Investment (as of
period end)

1-4 Family Owner Occupied 10 $ 752 87 $ 6,052 4 $ 250
1-4 Family Non Owner Occupied 5 390 8 666 1 305
CRE Owner Occupied 9 714 9 3,859 6 426
CRE Non Owner Occupied 2 1,364 13 13,942 6 4,628
Agriculture Land 2 269 3 474 - -
Other CRE 3 417 1 59 - -
Commercial Working Capital or Other 8 1,602 7 1,196 6 2,379
Home Equity and Improvement 15 561 127 2,663 1 22
Consumer Finance 3 15 27 124 - -
Total 57 $ 6,084 282 $ 29,035 24 $ 8,010
The ~~TDRs~~loans described above increased the ALLL by $27,000 for the year ended December 31, 2013, decreased the ~~allowance for loan losses~~ALLL by ~~$1.2~~$1.2 million for the year ended December 31,2012, ~~after $2.4 million of charge-offs during~~and decreased the ALLL by $479,000 for the year ended December 31, ~~2012.~~
2011.
Of ~~these~~the 2013 modifications, ~~237~~10 were made TDRs due to the fact that the borrower has been in bankruptcy, 157 were made TDRs due to a rate reduction, 145 were made TDRs due to interest only periods, 62 were made TDRs due to extending the amortization, ~~4 were restructured with an associated charge off, 3~~18 were made TDRs due to an extension of maturity, ~~and 3~~4 were made TDRs due to a reduction in the ~~payment.~~
~~The following table presents loans by class modified as TDRs that occurred during the year ending December 31, 2011:~~
payment, 4 were made to advance funds to a substandard credit, 6 were made to refinance current debt, and 1 loan was made for a different modification.
- 9894 -

Loans Modified as a TDR for the Twelve
Months Ended December 31, 2011
Troubled Debt Restructurings Number of Loans Recorded
Investment (as of
period end)

Residential Owner Occupied 4 $ 250
Residential Non Owner Occupied 1 305
CRE Owner Occupied 6 426
CRE Non Owner Occupied 6 4,628
Agriculture Land - -
Other CRE - -
Commercial / Industrial 6 2,379
Home Equity / Improvement 1 22
Consumer - -
Total 24 $ 8,010
The troubled debt restructurings described above decreased the allowance for loan losses by $479,000 for the year ended December 31, 2011, after $2.1 million of charge-offs during the year ended December 31, 2011.
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 ~~year~~years ending December 31, ~~2012:~~
Troubled Debt Restructurings
That Subsequently Defaulted: Number of
Loans Recorded
Investment
(as of Period
End)

Residential Owner Occupied 6 $ 462
Residential Non Owner Occupied 2 203
CRE Owner Occupied - -
CRE Non Owner Occupied 3 555
Agriculture Land - -
Other CRE - -
Commercial / Industrial 5 2,129
Home Equity / Improvement 7 166
Consumer - -
Total 23 $ 3,515
2013, 2012, and 2011:
Twelve Months Ended
December 31, 2013 ($ in
thousands) Twelve Months Ended
December 31, 2012 ($ in
thousands) Twelve Months Ended
December 31, 2011 ($ 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) Number of
Loans Recorded
Investment
(as of Period
End)

Residential Owner Occupied 6 $ 409 6 $ 462 2 $ 206
Residential Non Owner Occupied - - 2 203 - -
CRE Owner Occupied 2 290 - - 1 1,495
CRE Non Owner Occupied 1 212 3 555 - -
Agriculture Land - - - - - -
Other CRE 1 323 - - - -
Commercial / Industrial 5 889 5 2,129 1 53
Home Equity / Improvement 3 315 7 166 - -
Consumer - - - - - -
Total 18 $ 2,438 23 $ 3,515 4 $ 1,754
The TDRs that subsequently defaulted described above ~~decreased~~increased the ~~allowance for loan losses~~ALLL by ~~$631,000~~$21,000 after $58,000 in charge-offs for the year ended December 31, ~~2012, after $1.5 million of charge-offs during the year ended December 31, 2012.~~
~~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 year ending December 31, 2011:~~
~~- 99 -~~
Troubled Debt Restructurings
That Subsequently Defaulted: Number of
Loans Recorded
Investment
(as of Period
End)
Residential Owner Occupied 2 $ 206
Residential Non Owner Occupied - -
CRE Owner Occupied 1 1,495
CRE Non Owner Occupied 1 -
Agriculture Land - -
Other CRE - -
Commercial / Industrial 2 53
Home Equity / Improvement - -
Consumer - -
Total 6 $ 1,754
~~The TDRs that subsequently defaulted described above~~2013, decreased the ~~allowance for loan losses~~ALLL by ~~$851,000~~$631,000 after $1.5 million in charge-offs for the year ended December 31, ~~2011,~~2012, and increased the ALLL by $29,000 after ~~$1.5 million of~~$500,000 in charge-offs ~~during~~for the year ended December 31, 2011.
A default for purposes of this disclosure is a TDR loan in which the borrower is 90 days contractually past due under the modified terms.
The terms of certain other loans were modified during the ~~period~~periods ending December 31, 2013 and 2012 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 152 loans were modified under this definition during the twelve month period ended December 31, 2013 and a total of 343 loans were modified under this definition during the twelve month period ended December 31, 2012.
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.
- 95 -

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.
~~- 100 -~~
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 December 31, 2013, 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 $ 4,287 $ 18 $ 3,515 $ - $ 121,765 $ 129,585
1-4 Family Non Owner Occupied 51,660 2,894 5,699 - 6,359 66,612

Total 1-4 Family Real Estate 55,947 2,912 9,214 - 128,124 196,197

Multi-Family Residential Real Estate 145,407 875 1,888 - 964 149,134

CRE Owner Occupied 291,770 10,584 11,665 - 1,734 315,753
CRE Non Owner Occupied 200,790 10,254 17,185 - 91 228,320
Agriculture Land 80,418 578 1,051 - - 82,047
Other CRE 40,676 2,074 3,104 - 731 46,585

Total Commercial Real Estate 613,654 23,490 33,005 - 2,556 672,705

Construction 43,465 - 263 - 10,002 53,730

Commercial Working Capital 148,703 3,429 3,660 - - 155,792
Commercial Other 219,790 6,994 6,899 - - 233,683

Total Commercial 368,493 10,423 10,559 - - 389,475

Home Equity and Home Improvement - - 755 45 106,587 107,387
Consumer Finance - - 31 - 16,860 16,891

Total Loans $ 1,226,966 $ 37,700 $ 55,715 $ 45 $ 265,093 $ 1,585,519
- 96 -

As of December 31, 2012, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:(In Thousands)
Category Pass Special
Mention Substandard Doubtful Not
Graded Total

Residential Owner Occupied $ 4,221 $ 75 $ 3,617 $ 234 $ 120,002 $ 128,149
Residential Non Owner Occupied 55,771 2,453 8,248 - 6,693 73,165
Total Residential Real Estate 59,992 2,528 11,865 234 126,695 201,314
Construction 11,360 - 45 - 7,891 19,296
Multi-Family 118,121 910 2,404 - 1,020 122,455

CRE Owner Occupied 292,765 10,440 18,740 - 2,378 324,323
CRE Non Owner Occupied 207,745 9,077 22,615 - 90 239,527
Agriculture Land 69,924 769 1,514 - - 72,207
Other Commercial Real Estate 31,875 891 7,222 - 978 40,966

Total Commercial Real Estate 602,309 21,177 50,091 - 3,446 677,023

Commercial Working Capital 156,433 3,587 2,449 - - 162,469
Commercial Other 208,783 5,204 8,413 - - 222,400

Total Commercial 365,216 8,791 10,862 - - 384,869

Consumer - - 70 - 15,869 15,939
Home Equity/Home Improvement - - 668 64 108,462 109,194

Total Loans $ 1,156,998 $ 33,406 $ 76,005 $ 298 $ 263,383 $ 1,530,090
Class Pass   Special
Mention Substandard Doubtful      Not
Graded Total

1-4 Family Owner Occupied $ 4,221 $ 75 $ 3,617 $ 234 $ 120,002 $ 128,149
1-4 Family Non Owner Occupied 55,771 2,453 8,248 - 6,693 73,165

Total 1-4 Family Real Estate 59,992 2,528 11,865 234 126,695 201,314

Multi-Family Residential Real Estate 118,121 910 2,404 - 1,020 122,455

CRE Owner Occupied 292,765 10,440 18,740 - 2,378 324,323
CRE Non Owner Occupied 207,745 9,077 22,615 - 90 239,527
Agriculture Land 69,924 769 1,514 - - 72,207
Other CRE 31,875 891 7,222 - 978 40,966

Total Commercial Real Estate 602,309 21,177 50,091 - 3,446 677,023

Construction 11,360 - 45 - 7,891 19,296

Commercial Working Capital 156,433 3,587 2,449 - - 162,469
Commercial Other 208,783 5,204 8,413 - - 222,400

Total Commercial 365,216 8,791 10,862 - - 384,869

Home Equity and Home Improvement - - 668 64 108,462 109,194
Consumer Finance - - 70 - 15,869 15,939

Total Loans $ 1,156,998 $ 33,406 $ 76,005 $ 298 $ 263,383 $ 1,530,090
- ~~101~~97 -

~~As of December 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:~~~~(In Thousands)~~
Category Pass Special
Mention Substandard Doubtful Not
Graded Total

Residential Owner Occupied $ 5,496 $ 205 $ 4,383 $ - $ 124,720 $ 134,804
Residential Non Owner Occupied 48,653 2,965 8,408 - 9,231 69,257
Total Residential Real Estate 54,149 3,170 12,791 - 133,951 204,061
Construction 13,417 - 127 - 4,744 18,288
Multi-Family 117,699 3,519 4,186 - 1,111 126,515

CRE Owner Occupied 256,861 12,058 26,323 - 84 295,326
CRE Non Owner Occupied 210,113 5,390 33,656 - 152 249,311
Agriculture Land 66,484 1,723 2,740 - - 70,947
Other Commercial Real Estate 21,616 2,687 10,661 - 1,141 36,105

Total Commercial Real Estate 555,074 21,858 73,380 - 1,377 651,689

Commercial Working Capital 125,149 6,125 6,501 - - 137,775
Commercial Other 182,964 10,328 19,165 - - 212,457

Total Commercial 308,113 16,453 25,666 - - 350,232

Consumer - - 63 10 18,837 18,910
Home Equity/Home Improvement - - 1,734 - 120,928 122,662

Total Loans $ 1,048,452 $ 45,000 $ 117,947 $ 10 $ 280,948 $ 1,492,357
~~- 102 -~~
Certain loans acquired ~~in the Pavilion Bancorp, ComBanc and Genoa acquisitions~~ had evidence that the credit quality of the loan had deteriorated since its origination and in management’s assessment at the acquisition date it was probable that the First Defiance would be unable to collect all contractually required payments due. In accordance with FASB ASC Topic 310 Subtopic 30,Loans and Debt Securities Acquired with Deteriorated Credit Quality, these loans have been recorded based on management’s estimate of the fair value of the loans. Details of these loans are as follows:
Contractual
Amount
Receivable Impairment
Discount Recorded
Loan
Receivable
(In Thousands)
Balance at December 31, 2009 $ 5,006 $ 1,618 $ 3,388
Principal payments received (1,056 ) - (1,056 )
Loans charged off (300 ) (300 ) -
Additional provision for loan loss (168 ) - (168 )
Loan accretion recorded - (32 ) 32
Balance at December 31, 2010 3,482 1,286 2,196
Principal payments received (413 ) - (413 )
Loans charged off (250 ) (250 ) -
Additional provision for loan loss (613 ) - (613 )
Loan accretion recorded - (33 ) 33
Balance at December 31, 2011 2,206 1,003 1,203
Principal payments received (697 ) - (697 )
Loans charged off (487 ) (487 ) -
Additional provision for loan loss (167 ) - (167 )
Loan accretion recorded - (173 ) 173
Balance at December 31, 2012 $ 855 $ 343 $ 512
~~Interest income on loans is as follows:~~
Years Ended December 31
2012 2011 2010
(In Thousands)
Commercial and non-residential real-estate loans $ 58,389 $ 63,229 $ 71,547
Residential loans 7,618 7,545 7,679
Other loans 6,614 7,874 9,402
Totals $ 72,621 $ 78,648 $ 88,628
First Defiance’s loan portfolio is concentrated geographically in its northwest Ohio market area. Management has also identified lending for income-generating rental properties as an industry concentration. Total loans for income generating property totaled $355.4 million at December 31, 2012, which represents 23% of the Company’s loan portfolio. The Company’s loans receivable are primarily to borrowers in the Northwest Ohio, Northeast Indiana or Southeast Michigan areas.
~~- 103 -~~
Contractual
Amount
Receivable Impairment
Discount Recorded
Loan
Receivable
(In Thousands)
Balance at January 1, 2011 $ 3,482 $ 1,286 $ 2,196
Principal payments received (413) - (413)
Loans charged off (250) (250) -
Additional provision for loan loss (613) - (613)
Loan accretion recorded - (33) 33
Balance at December 31, 2011 2,206 1,003 1,203
Principal payments received (697) - (697)
Loans charged off (487) (487) -
Additional provision for loan loss (167) - (167)
Loan accretion recorded - (173) 173
Balance at December 31, 2012 855 343 512
Principal payments received (108) - (108)
Loans charged off (41) (41) -
Additional provision for loan loss (203) - (203)
Loan accretion recorded - (29) 29
Balance at December 31, 2013 $ 503 $ 273 $ 230
Loans to executive officers, directors, and their affiliates are as follows (in thousands):
Years Ended December 31
2012 2011

Beginning balance $ 4,775 $ 5,109
New loans 5,036 5,546
Effect of changes in composition of related parties (878 ) -
Repayments (5,444 ) (5,880 )
Ending Balance $ 3,489 $ 4,775
Years Ended December 31
2013 2012

Beginning balance $ 3,489 $ 4,775
New loans 8,874 5,036
Effect of changes in composition of related parties - (878)
Repayments (8,651) (5,444)
Ending Balance $ 3,712 $ 3,489
- 98 -

8. Mortgage Banking
Net revenues from the sales and servicing of mortgage loans consisted of the following:
Years Ended December 31
2012 2011 2010
(In Thousands)
Gain from sale of mortgage loans $ 10,599 $ 5,607 $ 7,017
Mortgage loan servicing revenue (expense):
Mortgage loan servicing revenue 3,387 3,403 3,119
Amortization of mortgage servicing rights (3,562 ) (2,169 ) (2,642 )
Mortgage servicing rights valuation adjustments (759 ) (404 ) 353
(934 ) 830 830
Net revenue from sale and servicing of mortgage loans $ 9,665 $ 6,437 $ 7,847
Years Ended December 31
2013 2012 2011
(In Thousands)
Gain from sale of mortgage loans $ 5,716 $ 10,599 $ 5,607
Mortgage loan servicing revenue (expense):
Mortgage loan servicing revenue 3,564 3,387 3,403
Amortization of mortgage servicing rights (2,098) (3,562) (2,169)
Mortgage servicing rights valuation adjustments 1,261 (759) (404)
2,727 (934) 830
Net revenue from sale and servicing of mortgage loans $ 8,443 $ 9,665 $ 6,437
The unpaid principal balance of residential mortgage loans serviced for third parties was ~~$1.3~~$1.4 billion at December 31, ~~2012~~2013 and $1.3 billion at December 31, ~~2011.~~
2012.
Activity for capitalized mortgage servicing rights and the related valuation allowance follows:
Years Ended December 31
2012 2011 2010
(In Thousands)
Mortgage servicing assets:
Balance at beginning of period $ 10,219 $ 10,602 $ 10,436
Loans sold, servicing retained 3,464 1,786 2,808
Servicing assets acquired -
Amortization (3,562 ) (2,169 ) (2,642 )
Carrying value before valuation allowance at end of period 10,121 10,219 10,602

Valuation allowance:
Balance at beginning of period (1,529 ) (1,125 ) (1,478 )
Impairment recovery (charges) (759 ) (404 ) 353
Balance at end of period (2,288 ) (1,529 ) (1,125 )
Net carrying value of MSRs at end of period $ 7,833 $ 8,690 $ 9,477
Fair value of MSRs at end of period $ 7,833 $ 8,690 $ 9,477
~~- 104 -~~
Years Ended December 31
2013 2012 2011

(In Thousands)
Mortgage servicing assets:
Balance at beginning of period $ 10,121 $ 10,219 $ 10,602
Loans sold, servicing retained 2,110 3,464 1,786
Amortization (2,098) (3,562) (2,169)
Carrying value before valuation allowance at end of period 10,133 10,121 10,219

Valuation allowance:
Balance at beginning of period (2,288) (1,529) (1,125)
Impairment recovery (charges) 1,261 (759) (404)
Balance at end of period (1,027) (2,288) (1,529)
Net carrying value of MSRs at end of period $ 9,106 $ 7,833 $ 8,690
Fair value of MSRs at end of period $ 9,686 $ 7,833 $ 8,690
Amortization of mortgage servicing rights is computed based on payments and payoffs of the related mortgage loans serviced.
- 99 -

The Company’s servicing portfolio is comprised of the following:
December 31
2012 2011
Number of Principal Number of Principal
Investor Loans Outstanding Loans Outstanding
(Dollars in Thousands)
Fannie Mae 5,190 $ 522,978 4,964 $ 494,115
Freddie Mac 8,550 786,124 8,328 743,707
Federal Home Loan Bank 166 18,330 262 31,139
Other 21 1,285 22 1,426
Totals 13,927 $ 1,328,717 13,576 $ 1,270,387
December 31
2013 2012
Number of Principal Number of Principal
Investor Loans Outstanding Loans Outstanding
(In Thousands)
Fannie Mae 5,304 $ 527,666 5,190 $ 522,978
Freddie Mac 8,873 829,594 8,550 786,124
Federal Home Loan Bank 116 12,093 166 18,330
Other 26 1,888 21 1,285
Totals 14,319 $ 1,371,241 13,927 $ 1,328,717
Custodial escrow balances maintained in connection with serviced loans were ~~$9,736,000~~$10.4 million and ~~$9,057,000~~$9.7 million at December 31, 2013 and 2012, respectively.
Significant assumptions at December 31, 2013 used in determining the value of MSRs include a weighted average prepayment rate of212 prepayment speed assumption (“PSA”)and ~~2011, respectively.~~
a weighted average discount rate of10.04%. Significant assumptions at December 31, 2012 used in determining the value of MSRs include a weighted average prepayment rate of328 PSAand a weighted average discount rate of ~~10.04%~~10.04%. ~~Significant assumptions at December 31, 2011 used in determining the value of MSRs include a weighted average prepayment rate of 329 PSA and a weighted average discount rate of 9.03%.~~
A sensitivity analysis of the current fair value to immediate ~~10%~~10% and ~~20%~~20% adverse changes in those assumptions as of December 31, ~~2012~~2013 is presented below. These sensitivities are hypothetical. Changes in fair value based on 10% and 20% variation in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the MSR is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, changes in mortgage interest rates, which drive changes in prepayment rate estimates, could result in changes in the discount rates), which might magnify or counteract the sensitivities.
10% Adverse 20% Adverse
Change Change
(Dollars in Thousands)
Assumption:
Decline in fair value from increase in prepayment rate $ 349 $ 743
Declines in fair value from increase in discount rate 217 480
~~- 105 -~~
10% Adverse 20% Adverse
Change Change
(In Thousands)
Assumption:
Decline in fair value from increase in prepayment rate $ 454 $ 861
Declines in fair value from increase in discount rate 318 725
- 100 -

9. Premises and Equipment
Premises and equipment are summarized as follows:
December 31
2012 2011
(In Thousands)
Cost:
Land $ 7,376 $ 6,836
Land improvements 1,310 1,269
Buildings 39,691 38,529
Leasehold improvements 435 606
Furniture, fixtures and equipment 27,596 26,075
Construction in process 262 946
76,670 74,261
Less allowances for depreciation and amortization 37,007 34,216
$ 39,663 $ 40,045
December 31
2013 2012
(In Thousands)
Cost:
Land $ 7,960 $ 7,376
Land improvements 1,310 1,310
Buildings 39,716 39,691
Leasehold improvements 469 435
Furniture, fixtures and equipment 28,654 27,596
Construction in process 514 262
78,623 76,670
Less allowances for depreciation and amortization 40,026 37,007
$ 38,597 $ 39,663
Depreciation expense was ~~$3,416,000, $3,436,000~~$3.1 million, $3.4 million and ~~$3,404,000~~$3.4 million for the years ended December 31, 2013, 2012 and 2011, ~~and 2010,~~ respectively.
Lease Agreements
The Company has entered into lease agreements covering the ~~six~~five First Insurance Group’s offices, two banking center locations, two land leases for which the Company owns the banking centers, one land lease which is primarily used for parking, one land lease for future branch development and numerous stand-alone Automated Teller Machine sites with varying terms and options to renew.

Future minimum commitments under non-cancelable operating leases are as follows ~~(in thousands)~~(in thousands):
2013 $ 732
2014 620
2015 611
2016 597
2017 512
Thereafter 4,813
Total $ 7,885
2014 $ 706
2015 613
2016 601
2017 512
2018 471
Thereafter 4,745
Total $ 7,648
Rentals under operating leases amounted to ~~$1.2~~$723,000, $1.2 million ~~$669,000~~ and ~~$465,000~~$669,000 in 2013, 2012, and 2011, ~~and 2010,~~ respectively.

~~- 106 -~~
10. Goodwill and Intangible Assets
Goodwill
~~The~~
The change in the carrying amount of goodwill for the year is as ~~follows:~~
December 31
2012 2011

Beginning balance $ 61,525 $ 57,556
Goodwill acquired or adjusted during the year - 3,969
Ending balance $ 61,525 $ 61,525
follows(In Thousands):
December 31
2013 2012

Beginning balance $ 61,525 $ 61,525
Goodwill acquired or adjusted during the year - -
Ending balance $ 61,525 $ 61,525
- 101 -

Acquired Intangible Assets
Activity in ~~intangibles~~intangible assets for the years ended December 31, 2013, 2012 ~~2011~~ and ~~2010~~2011 was as follows:
Gross
Carrying Accumulated Net
Amount Amortization Value
(In Thousands)
Balance as of January 1, 2010 $ 12,102 $ (5,214 ) $ 6,888
Intangible assets acquired 735 - 735
Amortization of intangible assets - (1,495 ) (1,495 )
Balance as of December 31, 2010 12,837 (6,709 ) 6,128
Intangible assets acquired 1,465 - 1,465
Amortization of intangible assets - (1,442 ) (1,442 )
Balance as of December 31, 2011 14,302 (8,151 ) 6,151
Amortization of intangible assets - (1,413 ) (1,413 )
Balance as of December 31, 2012 $ 14,302 $ (9,564 ) $ 4,738
~~Aggregate amortization expense was $1,413,000, $1,442,000 and $1,495,000 for 2012, 2011 and 2010 respectively.~~
Gross
Carrying Accumulated Net
Amount Amortization Value
(In Thousands)
Balance as of January 1, 2011 $ 12,837 $ (6,709) $ 6,128
Intangible assets acquired 1,465 - 1,465
Amortization of intangible assets - (1,442) (1,442)
Balance as of December 31, 2011 14,302 (8,151) 6,151
Amortization of intangible assets - (1,413) (1,413)
Balance as of December 31, 2012 14,302 (9,564) 4,738
Amortization of intangible assets - (1,241) (1,241)
Balance as of December 31, 2013 $ 14,302 $ (10,805) $ 3,497
Estimated amortization expense for each of the next five years and thereafter (in thousands) is as follows:
2013 $ 1,242
2014 1,102
2015 687
2016 501
2017 372
Thereafter 834
Total $ 4,738
~~- 107 -~~
2014 $ 1,102
2015 687
2016 501
2017 372
2018 301
Thereafter 534
Total $ 3,497

11. Deposits
The following schedule sets forth interest expense by type of deposit:
Years Ended December 31
2012 2011 2010
(In Thousands)
Checking and money market accounts $ 1,368 $ 2,144 $ 3,117
Savings accounts 116 249 362
Certificates of deposit 6,685 9,782 15,743
Totals $ 8,169 $ 12,175 $ 19,222
Years Ended December 31
2013 2012 2011
(In Thousands)
Checking and money market accounts $ 1,125 $ 1,368 $ 2,144
Savings accounts 90 116 249
Certificates of deposit 4,698 6,685 9,782
Totals $ 5,913 $ 8,169 $ 12,175
Accrued interest payable on deposit accounts amounted to ~~$71,000~~$48,000 and ~~$118,000~~$71,000 December 31, ~~2012~~2013 and ~~2011,~~2012, respectively, which was comprised of ~~$58,000~~$34,000 and ~~$13,000~~ $14,000for certificates of deposit and checking and money market accounts, respectively, at December 31, ~~2012~~2013 and ~~$92,000~~$58,000 and ~~$26,000~~ $13,000for certificates of deposit and checking and money market accounts, respectively, at December 31, ~~2011.~~
2012.
- 102 -

A summary of deposit balances is as follows:
December 31
2012 2011
(In Thousands)
Non-interest bearing checking accounts $ 315,132 $ 245,927
Interest bearing checking and money market accounts 664,857 609,057
Savings deposits 166,945 155,101
Retail certificates of deposit less than $100,000 342,472 387,607
Retail certificates of deposit greater than $100,000 176,029 187,913
Brokered or national certificates of deposit 2,037 10,636
$ 1,667,472 $ 1,596,241
December 31
2013 2012
(In Thousands)
Non-interest bearing checking accounts $ 348,943 $ 315,132
Interest bearing checking and money market accounts 715,939 664,857
Savings deposits 185,121 166,945
Retail certificates of deposit less than $100,000 313,335 342,472
Retail certificates of deposit greater than $100,000 172,454 176,029
Brokered or national certificates of deposit - 2,037
$ 1,735,792 $ 1,667,472
Scheduled maturities of certificates of deposit at December 31, ~~2012~~2013 are as follows (in thousands):
2013 $ 307,445
2014 173,513
2015 32,376
2016 5,549
2017 987
2018 and thereafter 668
Total $ 520,538
2014 $ 296,186
2015 87,059
2016 51,784
2017 8,980
2018 41,631
2019 and thereafter 149
Total $ 485,789
At December 31, ~~2012~~2013 and ~~2011,~~2012, deposits of ~~$749.2~~$823.7 million and ~~$685.0~~$749.2 million, respectively, were in excess of ~~$100,000.~~$100,000. Of these same deposits at December 31, ~~2012~~2013 and ~~2011,~~2012, deposits of ~~$387.0~~$393.0 million and ~~$328.1~~$387.0 million, respectively, were in excess of the ~~$250,000~~$250,000 FDIC insurance limit. At December 31, 2013 and 2012, ~~and 2011, $57.5~~$54.1 million and ~~$66.4~~$57.5 million, respectively, in investment securities were pledged as collateral against public deposits for certificates in excess of ~~$100,000~~$100,000 and an additional ~~$77.5~~$78.5 million and ~~$77.7~~$77.5 million of securities were pledged at December 31, ~~2012~~2013 and December 31, ~~2011,~~2012, respectively, as collateral against deposits from private entities in excess of ~~$100,000.~~
$100,000.

~~- 108 -~~
12. Advances from Federal Home Loan Bank
First Federal has the ability to borrow funds from the FHLB. First Federal pledges its single-family residential mortgage loan portfolio, certain investment securities, certain first mortgage home equity loans, certain multi-family or non-residential real estate loans, and certain agriculture real estate loans as security for these advances. Advances secured by investment securities must have collateral of at least ~~105%~~105% of the borrowing. Advances secured by residential mortgages must have collateral of at least ~~125%~~125% of the borrowings. Advances secured by multi-family or non-residential real estate loans, and agriculture real estate loans must have ~~300%~~300% collateral coverage. The total level of borrowing is also limited to ~~50%~~50% of total assets and at least ~~50%~~50% of the borrowings must be secured by either one-to-four family residential mortgages or investment securities. Total loans pledged to the FHLB at December 31, ~~2012~~2013 and December 31, ~~2011~~2012 were ~~$666.5~~$676.6 million and ~~$640.2~~$666.5 million, respectively. First Federal may obtain advances of up to approximately ~~$324.9~~$428.7 million from the FHLB at December 31, ~~2012.~~
2013.
- 103 -

At year-end, advances from the FHLB were as follows:
Principal Terms Advance
Amount Range of Maturities Weighted
Average
Interest
Rate
(in Thousands)
December 31, 2012
Short-term borrowings $ - Overnight 0.00 %
Single maturity fixed rate advances - N/A 0.00 %
Putable advances 12,000 January 2015 to March 2018 2.72 %
Strike-rate advances - N/A 0.00 %
Amortizable mortgage advances 796 December 2015 4.10 %
$ 12,796

December 31, 2011
Short-term borrowings $ - Overnight 0.00 %
Single maturity fixed rate advances 20,000 January 2013 to October 2013 2.79 %
Putable advances 44,000 February 2013 to March 2018 4.10 %
Strike-rate advances 17,000 October 2012 to February 2013 3.61 %
Amortizable mortgage advances 841 December 2015 4.10 %
$ 81,841
In October 2012, the Company executed a balance sheet restructuring strategy to enhance the Company’s current and future profitability while increasing its capital ratios and protecting the balance sheet against rising rates. The strategy required taking an after tax loss of approximately $260,000 through selling $60 million in securities for a gain of $1.6 million and paying off $62 million in FHLB advances with a prepayment penalty of $2.0 million.
Principal Terms Advance
Amount Range of Maturities Weighted
Average
Interest
Rate
(in Thousands)
December 31, 2013
Putable advances $ 12,000 January 2015 to March 2018 2.72 %
Amortizable mortgage advances 10,520 December 2015 to September 2018 1.95 %
$ 22,520

December 31, 2012
Putable advances $ 12,000 January 2015 to March 2018 2.72 %
Amortizable mortgage advances 796 December 2015 4.10 %
$ 12,796
Putable advances are callable at the option of the FHLB on a quarterly basis. Strike rate advances are callable at the option of the FHLB only when three-month LIBOR rates exceed the agreed upon strike rate in the advance contract. Such strike rates range from 7.5% to 8.0%. When called, First Defiance has the option of paying off these advances or converting them to variable rate advances at the three month LIBOR rate.
~~- 109 -~~
Estimated future minimum payments by fiscal year based on maturity date and current interest rates are as follows ~~(in thousands)~~(in thousands):
2013 $ 410
2014 410
2015 7,852
2016 119
2017 119
Thereafter 5,023
Total minimum payments 13,933
Less amounts representing interest 1,137
Totals $ 12,796
2014 $ 1,502
2015 8,944
2016 1,212
2017 1,212
2018 11,065
Total minimum payments 23,935
Less amounts representing interest 1,415
Totals $ 22,520
First Defiance also utilizes short-term advances from the FHLB to meet cash flow needs and for short-term investment purposes. First Defiance borrows short-term advances under a variety of programs at FHLB. At December 31, ~~2012~~2013 and December 31, ~~2011,~~2012, there were no amounts outstanding under First Defiance’s Cash Management Advance line of credit. The total available under this line is ~~$15.0~~$15.0 million. In addition, First Defiance has a ~~$100.0~~$100.0 million REPO Advance line of credit available. There were no borrowings against this line at December 31, ~~2012~~2013 and December 31, ~~2011.~~2012. Amounts are generally borrowed under the Cash Management and REPO lines on an overnight basis.

13. Junior Subordinated Debentures Owed to Unconsolidated Subsidiary Trust
In March 2007, the Company sponsored an affiliated trust, First Defiance Statutory Trust II (Trust Affiliate II) that issued ~~$15~~$15 million of Guaranteed Capital Trust Securities (Trust Preferred Securities). In connection with the transaction, the Company issued ~~$15.5~~$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 ~~1.89%~~1.75% and1.89% as of December 31, ~~2012. As of December 31, 2011the fixed rate was equal to 6.441%.~~
2013 and 2012 respectively.
- 104 -

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 may be redeemed at the Company’s option at any time on or after June 15, 2012, or at any time upon certain events.
The Company also sponsors an affiliated trust, First Defiance Statutory Trust I (Trust Affiliate I), that issued ~~$20~~$20 million of Trust Preferred Securities in 2005. In connection with this transaction, the Company issued ~~$20.6~~$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 ~~1.77%~~1.63% and ~~1.73%~~1.77% as of December 31, 2013 and 2012 ~~and 2011~~ respectively.
~~- 110 -~~
~~The~~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 Junior Debentures mature December 15, 2035 but may be redeemed by the issuer at par after October 28, 2010.
The subordinated debentures may be included in Tier 1 capital (with certain limitations applicable) under current regulatory guidelines and interpretations.
A summary of all junior subordinated debentures issued by the Company to affiliates follows. These amounts represent the par value of the obligations owed to these affiliates, including the Company’s equity interest in the trusts. Junior subordinated debentures owed to the following affiliates were as ~~follows:~~
December 31
2012 2011
First Defiance Statutory Trust I due December 2035 $ 20,619 $ 20,619
First Defiance Statutory Trust II due June 2037 15,464 15,464
Total junior subordinated debentures owed to unconsolidated subsidiary Trusts $ 36,083 $ 36,083
follows(In Thousands):
December 31
2013 2012
First Defiance Statutory Trust I due December 2035 $ 20,619 $ 20,619
First Defiance Statutory Trust II due June 2037 15,464 15,464
Total junior subordinated debentures owed to unconsolidated subsidiary Trusts $ 36,083 $ 36,083
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.
- 105 -

14. Notes Payable and Other Short-term Borrowings
Total short-term borrowings, revolving and term debt is summarized as follows:
Years Ended December 31
2012 2011
(In Thousands, Except Percentages)
Securities sold under agreement to repurchase
Amounts outstanding at year-end $ 51,702 $ 60,386
Year-end interest rate 0.63 % 0.92 %
Average daily balance during year 53,171 56,495
Maximum month-end balance during the year 57,050 61,240
Average interest rate during the year 0.70 % 0.94 %
Years Ended December 31
2013 2012
(In Thousands, Except Percentages)
Securities sold under agreement to repurchase
Amounts outstanding at year-end $ 51,919 $ 51,702
Year-end interest rate 0.31 % 0.63 %
Average daily balance during year 50,877 53,171
Maximum month-end balance during the year 57,182 57,050
Average interest rate during the year 0.44 % 0.70 %
As of December 31, ~~2012~~2013 and December 31, ~~2011,~~2012, First Federal ~~Bank~~ had the following lines of credit facilities available for short-term borrowing purposes:
A ~~$10.2~~$10.8 million line of credit with the Federal Reserve Bank Discount Window at an interest rate of50 basis points over the fed funds rate. The fed funds rate as of December, 31, ~~2012~~2013 was ~~0.25%~~0.25%.
A ~~$15~~$15 million line of credit with the Bank of America. The rate on this line of credit is Bank of America’s fed funds rate, which floats daily.
Further, the Company has agreed with its primary regulator not to incur, issue, renew or roll-over any debt, increase any current lines of credit, or guarantee the debt of any entity without the Federal Reserve’s prior approval.
~~- 111 -~~

15.Other ~~Non-Interest~~Noninterest Expense
The following is a summary of other ~~non-interest~~noninterest expense:
Years Ended December 31
2012 2011 2010
(In Thousands)
Legal and other professional fees $ 2,571 $ 2,473 $ 3,045
Marketing 1,400 1,392 1,191
State franchise taxes 2,495 2,010 2,088
REO expenses and write-downs 1,121 2,453 4,324
Printing and office supplies 527 502 529
Amortization of intangibles 1,413 1,442 1,495
Postage 567 674 668
Check charge-offs and fraud losses 153 493 407
Credit and collection expense 948 874 1,149
Other * 7,090 4,318 5,378
Total other non-interest expense $ 18,285 $ 16,631 $ 20,274
Years Ended December 31
2013 2012 2011
(In Thousands)
Legal and other professional fees $ 2,947 $ 2,571 $ 2,473
Marketing 1,563 1,400 1,392
State franchise taxes 2,323 2,495 2,010
REO expenses and write-downs 1,584 1,121 2,453
Printing and office supplies 449 527 502
Amortization of intangibles 1,241 1,413 1,442
Postage 531 567 674
Check charge-offs and fraud losses 172 153 493
Credit and collection expense 915 948 874
Other * 5,315 7,090 4,318
Total other noninterest expense $ 17,040 $ 18,285 $ 16,631
*Included in Other for 2012 is ~~$2.0~~$2.0 million in FHLB pre-payment penalties.

16. Postretirement Benefits
First Defiance sponsors a defined benefit postretirement plan that is intended to supplement Medicare coverage for certain retirees who meet minimum age requirements. First Federal employees who retired prior to April 1, 1997 who completed 20 years of service after age 40 receive full medical coverage at no cost. Such coverage continues for surviving spouses of those participants for one year, after which coverage may be continued provided the spouse pays 50% of the average cost. First Federal employees retiring after April 1, 1997 are provided medical benefits at a cost based on their combined age and years of service at retirement. Surviving spouses are also eligible for continued coverage after the retiree is deceased at a subsidy level that is 10% less than what the retiree is eligible for. First Federal employees retiring before July 1, 1997 receive dental and vision care in addition to medical coverage. First Federal employees who retire after July 1, 1997 are not eligible for dental or vision care, but those retirees and their spouses each receive up to $200 annually in a medical spending account. Funds in that account may be used for payment of uninsured medical expenses.
- 106 -

First Federal employees who were born after December 31, 1950 are not eligible for the medical coverage described above at retirement. Rather, a medical spending account of up to $10,000 (based on the participant’s age and years of service) will be established to reimburse medical expenses for those individuals. First Insurance employees who were born before December 31, 1950 can continue coverage until they reach age 65, or in lieu of continuing coverage, can elect the medical spending account option, subject to eligibility requirements. Employees hired or acquired after January 1, 2003 are eligible only for the medical spending account option.
Included in accumulated other comprehensive income at December 31, 2013, 2012 and 2011 are the following amounts that have not yet been recognized in net periodic benefit cost:
~~- 112 -~~
December 31
2012 2011 2010
(In Thousands)
Unrecognized prior service cost $ 30 $ 46 $ 56
Unrecognized actuarial losses 858 1,041 519
Total recognized in Accumulated Other Comprehensive Income 888 1,087 575
Income tax effect (311 ) (380 ) (201 )
Net amount recognized in Accumulated Other Comprehensive Income $ 577 $ 707 $ 374
December 31
2013 2012 2011
(In Thousands)
Unrecognized prior service cost $ 78 $ 30 $ 46
Unrecognized actuarial losses 477 858 1,041
Total recognized in Accumulated Other Comprehensive Income 555 888 1,087
Income tax effect (194) (311) (380)
Net amount recognized in Accumulated Other Comprehensive Income $ 361 $ 577 $ 707
The prior service cost and actuarial loss included in other comprehensive income and expected to be recognized in net postretirement benefit cost during the fiscal year-ended December 31, ~~2013~~2014 is ~~$39,000 ($25,000 net of tax) and~~ $12,000 ($8,000 net of tax) and $14,000 ($9,000 net of tax), respectively.
Reconciliation of Funded Status and Accumulated Benefit Obligation
The plan is not currently funded. The following table summarizes benefit obligation and plan asset activity for the plan measured as of December 31 each year:
December 31
2012 2011
(In Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 3,117 $ 2,497
Service cost 88 73
Interest cost 120 128
Participant contribution 16 14
Actuarial (gains) / losses (148 ) 537
Acquisition 60 -
Benefits paid (113 ) (132 )
Benefit obligation at end of year 3,140 3,117
Change in fair value of plan assets:
Balance at beginning of year - –
Employer contribution 97 118
Participant contribution 16 14
Benefits paid (113 ) (132 )
Balance at end of year - –
Funded status at end of year $ (3,140 ) $ (3,117 )
December 31
2013 2012
(In Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 3,140 $ 3,117
Service cost 82 88
Interest cost 118 120
Participant contribution 25 16
Actuarial (gains) / losses (347) (148)
Acquisition - 60
Benefits paid (139) (113)
Benefit obligation at end of year 2,878 3,140
Change in fair value of plan assets:
Balance at beginning of year - -
Employer contribution 114 97
Participant contribution 25 16
Benefits paid (139) (113)
Balance at end of year - -
Funded status at end of year $ (2,878) $ (3,140)
- 107 -

Net periodic postretirement benefit cost includes the following components:
Years Ended December 31
2012 2011 2010
(In Thousands)
Service cost-benefits attributable to service during the period $ 88 $ 73 $ 73
Interest cost on accumulated postretirement benefit obligation 120 128 146
Net amortization and deferral 51 25 39
Net periodic postretirement benefit cost 259 226 258
Net (gain) / loss during the year (148 ) 537 (349 )
Amortization of prior service cost and actuarial losses (51 ) (25 ) (39 )
Total recognized in comprehensive income (199 ) 512 (388 )
Total recognized in net periodic postretirement benefit cost and other comprehensive income $ 60 $ 738 $ (130 )
~~- 113 -~~
Years Ended December 31
2013 2012 2011
(In Thousands)
Service cost-benefits attributable to service during the period $ 82 $ 88 $ 73
Interest cost on accumulated postretirement benefit obligation 118 120 128
Net amortization and deferral 46 51 25
Net periodic postretirement benefit cost 246 259 226
Net (gain) / loss during the year (347) (148) 537
Impact of prior year acquisition 60 - -
Amortization of prior service cost and actuarial losses (46) (51) (25)
Total recognized in comprehensive income (333) (199) 512
Total recognized in net periodic postretirement benefit
       cost and other comprehensive income $ (87) $ 60 $ 738
The following assumptions were used in determining the components of the postretirement benefit obligation:
2012 2011 2010
Weighted average discount rates:
Used to determine benefit obligations at December 31 4.00 % 4.25 % 5.25 %
Used to determine net periodic postretirement benefit cost for years ended December 31 4.25 % 5.25 % 5.70 %

Assumed health care cost trend rates at December 31:
Health care cost trend rate assumed for next year 8.00 % 7.50 % 8.00 %
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) 5.00 % 4.00 % 4.00 %
Year that rate reaches ultimate trend rate 2019 2019 2019
2013 2012 2011
Weighted average discount rates:
Used to determine benefit obligations at December 31 4.75 % 4.00 % 4.25 %
Used to determine net periodic postretirement benefit cost for years ended
    December 31 4.00 % 4.25 % 5.25 %

Assumed health care cost trend rates at December 31:
Health care cost trend rate assumed for next year 7.50 % 8.00 % 7.50 %
Rate to which the cost trend rate is assumed to decline (the ultimate
    trend rate) 5.00 % 5.00 % 4.00 %
Year that rate reaches ultimate trend rate 2019 2019 2019
The following benefits are expected to be paid over the next five years and in aggregate for the next five years thereafter. Because the plan is unfunded, the expected net benefits to be paid and the estimated Company contributions are the same amount.
Expected to be Paid
(In Thousands)
2013 $ 120
2014 138
2015 133
2016 145
2017 165
2018 through 2022 905
Expected to be Paid
(In Thousands)

2014 $ 140
2015 128
2016 132
2017 160
2018 153
2019 through 2023 892
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effect:
One-Percentage-Point
Increase One-Percentage-Point
Decrease
Year Ended December 31 Year Ended December 31
2012 2011 2012 2011
(In Thousands)
Effect on total of service and interest cost $ 30 $ 27 $ (25 ) $ (23 )
Effect on postretirement benefit obligation 406 431 (344 ) (364 )
One-Percentage-Point
Increase One-Percentage-Point
Decrease
Year Ended December 31 Year Ended December 31
2013 2012 2013 2012
(In Thousands)
Effect on total of service and interest cost $ 28 $ 30 $ (24) $ (25)
Effect on postretirement benefit obligation 351 406 (299) (344)
The Company expects to contribute ~~$120,000~~$140,000 before reflecting expected Medicare retiree drug subsidy payments in ~~2013.~~
2014.
- 108 -

17. Regulatory Matters
First Federal is subject to minimum capital adequacy guidelines.  Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators, which could have a material impact on First Federal’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, First Federal must maintain capital amounts in excess of specified minimum ratios based on quantitative measures of First Federal’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.
Quantitative measures to ensure capital adequacy require First Federal to maintain minimum amounts and ratios (as set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and Tier 1 capital to adjusted total assets.
~~- 114 -~~
The following schedule presents First Defiance consolidated and First ~~Federal Bank’s~~Federal’s regulatory capital ratios as of December 31, ~~2012~~2013 and December 31, ~~2011:~~
December 31, 2012
Actual Minimum Required for
Adequately Capitalized Minimum Required for Well
Capitalized
Amount Ratio Amount Ratio Amount Ratio
Tier 1 Capital (1)
Consolidated $ 226,931 11.48 % $ 79,056 4.0 % N/A N/A
First Federal Bank $ 215,432 10.92 % $ 78,914 4.0 % $ 98,642 5.0 %

Tier 1 Capital (to Risk Weighted Assets) (1) ��
Consolidated $ 226,931 13.41 % $ 67,715 4.0 % N/A N/A
First Federal Bank $ 215,432 12.74 % $ 67,632 4.0 % $ 101,448 6.0 %

Total Capital (to Risk Weighted Assets) (1)
Consolidated $ 248,161 14.66 % $ 135,430 8.0 % N/A N/A
First Federal Bank $ 236,635 14.00 % $ 135,264 8.0 % $ 169,080 10.0 %
2012:
December 31, 2013
Actual Minimum Required for
Adequately Capitalized Minimum Required for Well
Capitalized
Amount Ratio Amount Ratio Amount Ratio
Tier 1 Capital (1)
Consolidated $ 246,258 11.86 % $ 83,045 4.0 % N/A N/A
First Federal $ 235,699 11.36 % $ 82,978 4.0 % $ 103,722 5.0 %

Tier 1 Capital (to Risk
Weighted Assets) (1)
Consolidated $ 246,258 13.98 % $ 70,473 4.0 % N/A N/A
First Federal $ 235,699 13.39 % $ 70,418 4.0 % $ 105,627 6.0 %

Total Capital (to Risk
Weighted Assets) (1)
Consolidated $ 268,317 15.23 % $ 140,947 8.0 % N/A N/A
First Federal $ 257,741 14.64 % $ 140,836 8.0 % $ 176,046 10.0 %
(1)
Core capital is computed as a percentage of adjusted total assets of ~~$1.98~~$2.08 billion and ~~$1.97~~$2.07 billion for consolidated and the bank, respectively. Risk-based capital is computed as a percentage of total risk-weighted assets of ~~$1.69~~$1.76 billion and ~~$1.69~~$1.76 billion for consolidated and ~~the bank,~~First Federal, respectively.
December 31, 2011
Actual Minimum Required for
Adequately Capitalized Minimum Required for Well
Capitalized
Amount Ratio Amount Ratio Amount Ratio
Tier 1 Capital (1)
Consolidated $ 245,458 12.30 % $ 79,848 4.0 % N/A N/A
First Federal Bank $ 231,787 11.62 % $ 79,757 4.0 % $ 99,697 5.0 %

Tier 1 Capital (to Risk Weighted Assets) (1)
Consolidated $ 245,458 14.97 % $ 65,573 4.0 % N/A N/A
First Federal Bank $ 231,787 14.16 % $ 65,492 4.0 % $ 98,238 6.0 %

Total Capital (to Risk Weighted Assets) (1)
Consolidated $ 265,949 16.22 % $ 131,147 8.0 % N/A N/A
First Federal Bank $ 252,411 15.42 % $ 130,984 8.0 % $ 163,730 10.0 %
December 31, 2012
Actual Minimum Required for
Adequately Capitalized Minimum Required for Well
Capitalized
Amount Ratio Amount Ratio Amount Ratio
Tier 1 Capital (1)
Consolidated $ 226,931 11.48 % $ 79,056 4.0 % N/A N/A
First Federal Bank $ 215,432 10.92 % $ 78,914 4.0 % $ 98,642 5.0 %

Tier 1 Capital (to Risk
Weighted Assets) (1)
Consolidated $ 226,931 13.41 % $ 67,715 4.0 % N/A N/A
First Federal Bank $ 215,432 12.74 % $ 67,632 4.0 % $ 101,448 6.0 %

Total Capital (to Risk
Weighted Assets) (1)
Consolidated $ 248,161 14.66 % $ 135,430 8.0 % N/A N/A
First Federal Bank $ 236,635 14.00 % $ 135,264 8.0 % $ 169,080 10.0 %
~~(1)~~- 109 -

(1)
Core capital is computed as a percentage of adjusted total assets of ~~$2.00~~$2.00 billion and ~~$1.99~~$1.99 billion for consolidated and the bank, respectively. Risk-based capital is computed as a percentage of total risk-weighted assets of ~~$1.64~~$1.64 billion and ~~$1.64~~$1.64 billion for consolidated and ~~the bank,~~First Federal, respectively.
Management believes that, as of December, 31, ~~2012,~~2013, First Federal ~~Bank~~ was “well capitalized” based on the ratios presented above. There are no conditions or events since the most recent notification from any of the regulatory agencies regarding those capital standards that management believes have changed any of the well capitalized categorizations of First Federal. First Defiance does not have capital requirements at this time.
First Federal ~~Bank~~ is subject to the regulatory capital requirements administered by the OCC and FDIC. Regulatory authorities can initiate certain mandatory actions if First Federal ~~Bank~~ fails to meet the minimum capital requirements, which could have a direct material effect on the Corporation’s financial statements. Management believes, as of December 31, ~~2012,~~2013, that First Federal ~~Bank~~ meets all capital adequacy requirements to which they are subject.
~~- 115 -~~
First Defiance is a unitary thrift holding company and is regulated by the Federal Reserve. First Defiance is subject to regulatory capital requirements under the Federal Reserve.
Dividend Restrictions - Dividends paid by First Federal to First Defiance are subject to various regulatory restrictions. First Federal paid ~~$37.0~~$3.0 million in dividends in ~~2012~~2013 and ~~did not pay dividends~~$37.0 million in ~~2011.~~2012. First Federal can initiate dividend payments equal to its net profits (as defined by statute) for ~~2011~~2012 and ~~2012~~2013 plus ~~2013~~2014 net profits. During ~~2013,~~2014, First Federal ~~can’t~~can declare ~~any~~ dividends in the amount of $360,000 from its earnings in ~~2011~~2012 and ~~2012 but can~~2013 and from any of its ~~2013~~2014 net profits to First Defiance. First Insurance paid ~~$300,000~~$1.5 million in dividends in ~~2012~~2013 and ~~did not pay~~$300,000 in dividends to First Defiance in ~~2011.~~
2012.

18. Income Taxes
The components of income tax expense are as follows:
Years Ended December 31
2012 2011 2010
(In Thousands)
Current:
Federal $ 7,862 $ 3,714 $ 5,372
State and local (50 ) (91 ) 50
Deferred 200 3,042 (2,417 )
$ 8,012 $ 6,665 $ 3,005
Years Ended December 31
2013 2012 2011
(In Thousands)
Current:
Federal $ 7,751 $ 7,862 $ 3,714
State and local 9 (50) (91)
Deferred 1,518 200 3,042
$ 9,278 $ 8,012 $ 6,665
The provision for income taxes differs from that computed at the statutory corporate tax rate as follows:
Years Ended December 31
2012 2011 2010
(In Thousands)
Tax expense at statutory rate (35%) $ 9,337 $ 7,769 $ 3,889
Increases (decreases) in taxes from:
State income tax – net of federal tax benefit (32 ) (59 ) 32
Tax exempt interest income, net of TEFRA (1,047 ) (926 ) (745 )
Bank owned life insurance (374 ) (230 ) (278 )
Stock option expense 22 36 54
Other 106 75 53
Totals $ 8,012 $ 6,665 $ 3,005
Years Ended December 31
2013 2012 2011
(In Thousands)
Tax expense at statutory rate (35%) $ 11,030 $ 9,337 $ 7,769
Increases (decreases) in taxes from:
State income tax – net of federal tax benefit 4 (32) (59)
Tax exempt interest income, net of TEFRA (1,043) (1,047) (926)
Bank owned life insurance (449) (374) (230)
Stock option expense 12 22 36
Captive insurance (415) - -
Other 139 106 75
Totals $ 9,278 $ 8,012 $ 6,665
- 110 -

Deferred federal income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
~~- 116 -~~
Significant components of First Defiance’s deferred federal income tax assets and liabilities are as follows:
December 31
2012 2011
(In Thousands)
Deferred federal income tax assets:
Allowance for loan losses $ 9,349 $ 11,639
Postretirement benefit costs 1,078 1,090
Deferred compensation 1,095 910
Impaired loans 1,531 809
Capital loss carry-forward 596 621
Impaired investments 846 872
Accrued vacation 499 521
Allowance for real estate held for sale losses 484 195
Deferred loan origination fees and costs 251 238
Other 844 460
Total deferred federal income tax assets 16,573 17,355

Deferred federal income tax liabilities:
FHLB stock dividends 3,259 3,284
Goodwill 4,293 3,781
Mortgage servicing rights 2,742 3,043
Fixed assets 1,353 1,449
Other intangible assets 954 1,393
Loan mark to market 766 1,062
Net unrealized gains on available-for-sale securities 2,612 2,533
Other 516 384
Total deferred federal income tax liabilities 16,495 16,929
Net deferred federal income tax asset (liability) $ 78 $ 426
December 31
2013 2012
(In Thousands)
Deferred federal income tax assets:
Allowance for loan losses $ 8,798 $ 9,349
Postretirement benefit costs 1,013 1,078
Deferred compensation 1,412 1,095
Impaired loans 986 1,531
Capital loss carry-forward 555 596
Impaired investments 971 846
Accrued vacation 581 499
Allowance for real estate held for sale losses 277 484
Deferred loan origination fees and costs 265 251
Other 718 844
Total deferred federal income tax assets 15,576 16,573

Deferred federal income tax liabilities:
FHLB stock dividends 3,238 3,259
Goodwill 4,586 4,293
Mortgage servicing rights 3,211 2,742
Fixed assets 1,693 1,353
Other intangible assets 607 954
Loan mark to market 515 766
Net unrealized gains on available-for-sale securities 488 2,612
Prepaid expenses 617 464
Other 56 52
Total deferred federal income tax liabilities 15,011 16,495
Net deferred federal income tax asset (liability) $ 565 $ 78
The realization of the Company’s deferred tax assets is dependent upon the Company’s ability to generate taxable income in future periods and the reversal of deferred tax liabilities during the same period and the ability to carryback any losses. The Company has evaluated the available evidence supporting the realization of its deferred tax assets and determined it is more likely than not that the assets will be realized and thus no valuation allowance was required at December 31, ~~2012.~~
2013.
At December 31, ~~2012,~~2013, the Company had capital loss carry-forwards of ~~$1.7~~$1.7 million which will expire onDecember 31, ~~2014.~~2014. No valuation allowance has been recorded as management has evaluated evidence supporting the realization of this asset and determined it is more likely than not that the asset will be realized.
Retained earnings at December 31, ~~2012~~2013 include approximately ~~$11.0~~$11.0 million for which no tax provision for federal income taxes has been made. This amount represents the tax bad debt reserve at December 31, 1987, which is the end of the Company’s base year for purposes of calculating the bad debt deduction for tax purposes. If this portion of retained earnings is used in the future for any purpose other than to absorb bad debts, the amount used will be added to future taxable income. The unrecorded deferred tax liability on the above amount at December 31, ~~2012~~2013 was approximately ~~$3.85~~$3.85 million.
- ~~117~~111 -

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Balance at January 1, 2010 $ 346
Additions based on tax positions related to the current year -
Additions for tax positions of prior years -
Reductions for tax positions of prior years -
Reductions due to the statute of limitations (65 )
Settlements -
Balance at December 31, 2010 $ 281

Balance at January 1, 2011 $ 281
Additions based on tax positions related to the current year -
Additions for tax positions of prior years -
Reductions for tax positions of prior years -
Reductions due to the statute of limitations (140 )
Settlements -
Balance at December 31, 2011 $ 141

Balance at January 1, 2012 $ 141
Additions based on tax positions related to the current year -
Additions for tax positions of prior years -
Reductions for tax positions of prior years -
Reductions due to the statute of limitations (76 )
Settlements -
Balance at December 31, 2012 $ 65
~~The entire amount of unrecognized tax benefits would affect the Company’s effective tax rate if recognized.~~
Balance at January 1, 2011 $ 281
Additions based on tax positions related to the current year -
Additions for tax positions of prior years -
Reductions for tax positions of prior years -
Reductions due to the statute of limitations (140)
Settlements -
Balance at December 31, 2011 $ 141

Balance at January 1, 2012 $ 141
Additions based on tax positions related to the current year -
Additions for tax positions of prior years -
Reductions for tax positions of prior years -
Reductions due to the statute of limitations (76)
Settlements -
Balance at December 31, 2012 $ 65

Balance at January 1, 2013 $ 65
Additions based on tax positions related to the current year -
Additions for tax positions of prior years -
Reductions for tax positions of prior years -
Reductions due to the statute of limitations (65)
Settlements -
Balance at December 31, 2013 $ -
The Company does not expect the total amount of unrecognized tax benefits to significantly increase ~~or decrease~~ in the next twelve months.
The total amount of interest and penalties recorded in the income statement, net of the related federal tax ~~benefit,~~effect, for the year ended December 31, ~~2012~~2013 was a net reversal of ~~$22,000,~~$26,000, and the amount accrued for interest and penalties (net of the related federal tax ~~benefit)~~effect) at December 31, ~~2012~~2013 was ~~$26,000.~~
zero.
The total amount of interest and penalties recorded in the income statement, net of the related federal tax ~~benefit,~~effect, for the year ended December 31, ~~2011~~2012 was ~~$14,000,~~a net reversal of $22,000, and the amount accrued for interest and penalties (net of the related federal tax ~~benefit)~~effect) at December 31, ~~2011~~2012 was ~~$73,000.~~
$26,000.
The total amount of interest and penalties recorded in the income statement, net of the related federal tax ~~benefit,~~effect, for the year ended December 31, ~~2010~~2011 was ~~$23,000,~~$14,000, and the amount accrued for interest and penalties (net of the related federal tax ~~benefit)~~effect) at December 31, ~~2010~~2011 was ~~$105,000.~~
$73,000.
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 ~~2008.~~2009. The Company currently operates primarily in the states of Ohio and Michigan, which tax financial institutions based on their equity rather than their income.
~~- 118 -~~
- 112 -

19. Employee Benefit Plans
401(k) Plan
Employees of First Defiance are eligible to participate in the First Defiance Financial Corp. 401(k) Employee Savings Plan (First Defiance 401(k)) if they meet certain age and service requirements. Beginning in 2009, under the First Defiance 401(k),First Defiance matches 100% of the participants’ contributions up to 3% of compensation and then 50% of the participants’ contributions for the next 2% of compensation. Previously, matching contributions were 50% of the first 3% of participants contributions. The First Defiance 401(k) also provides for a discretionary First Defiance contribution in addition to the First Defiance matching contribution. First Defiance matching contributions totaled ~~$799,000, $717,000~~$868,000, $799,000 and ~~$660,000~~$717,000 for the years ended December 31, 2013, 2012 ~~2011~~ and ~~2010,~~2011, respectively. There were no discretionary contributions in any of those years.
Group Life Plan
On June 30, 2010, First Federal adopted the First Federal Bank of the Midwest Executive Group Life Plan – Post Separation (the “Group Life Plan”) in which various employees, including the Company’s named executive officers, may participate. Under the terms of the Group Life Plan, First Federal will purchase and own life insurance policies covering the lives of employees selected by the board of directors of First Federal as participants. There was ~~$76,000, $137,000~~($35,000), $76,000, and ~~$547,000~~$137,000 of expense recorded for the years ended December 31, 2013, 2012 ~~2011~~ and ~~2010,~~2011, respectively, with a liability of ~~$760,000, $683,000~~$724,000, $760,000 and ~~$547,000~~$683,000 for future benefits recorded at December 31, 2013, 2012 and 2011, ~~and 2010,~~ respectively.
~~20. Stock~~ In 2013, management changed the discount rate to4.75% to reflect the current interest rate environment which resulted in a reduction of the group life plan liability as of December 31, 2013.

20.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 replaces all 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 to350,000 common shares through the award of options, stock grants, restricted stock units (“RSU”), stock appreciation rights or other stock-based awards.
As of December 31, ~~2012, 312,350~~2013,251,020 options have been granted pursuant to the 2010 equity plan and previous plans, and remain 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%~~20% per year except for the 2009 grant to the Company’s executive officers, which vested ~~40%~~40% in 2011 and then ~~20%~~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.
On
In August ~~15,~~ 2011, the Company approved a 2011 Short-Term (“STIP”) Equity Incentive Plan and a 2011 Long-Term (“LTIP”) Equity Incentive Plan for selected members of management. The Plans wereeffective January 1, 2011 and provide for cash and/or equity benefits if certain performance targets are achieved. Equity awards issued under these plans will reduce the amount of the awards available to be issued under the 2010 Equity Plan.
On
- 113 -

In March 9, 2012, the Company approved a 2012 STIP and a 2012 LTIP for selected members of management. The plans were effective January 1, 2012 and provide for cash and/or equity benefits if certain performance targets are achieved. Equity awards issued under these plans will reduce the amount of awards available to be issued under the 2010 Equity Plan.
~~- 119 -~~
Under ~~both~~the 2011 and 2012 STIPs the participants may earn up to 25% to 45% of their salary for potential payout based on the achievement of certain corporate and/or market area performance targets during the calendar year. The final value of the awards to be made under the 2012 STIP will be determined as of December 31 of each year and will be paid out in cash and/or equity, as elected by the participant, in accordance with the following vesting schedule: 50% in the first quarter after the calendar year, 25% on the one-year anniversary of the grant date, and 25% on the second-year anniversary. The participants are required to be employed on the day of payout in order to receive an award. In December 2012, the Company amended the 2011 STIP and accelerated the payout, so that the remaining 50% of the award was paid in December 2012, rather than 25% at the beginning of 2013 and 25% at the beginning of 2014.
Under ~~both~~the 2011 and 2012 LTIPs the participants may earn up to 25% to 45% of their salary for potential payout based on the achievement of certain corporate performance targets either over a two or three year period. The final amount of benefit under the 2011 LTIP was determined as of December 31, 2012 and the final amount of benefit under the 2012 LTIP will be determined as of December 31, 2014. The benefits earned under the plans will be paid out in cash and/or equity, as elected by the participant, in the first quarter following the close of the performance period. The participants are required to be employed on the day of payout in order to receive the payment.
In March 2013, the Company approved a 2013 STIP and a 2013 LTIP for selected members of management. Under the 2013 STIP the participants may earn up to 25% 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 awards earned under the 2013 STIP will be determined as of December 31, 2013 and will be paid out in cash in the first quarter of 2014. The participants are required to be employed on the day of payout in order to receive such payment.
Under the 2013 LTIP the participants may earn up to 25% to 45% of their salary, depending upon their position, 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 granted86,065 RSUs to the participants in this plan effective January 1, 2013, which represents the maximum target award.The amount of benefit under the 2013 LTIP will be determined individually at the 12 month period ending December 31, 2013, the 24 month period ending December 31, 2014 and the 36 month period ending December 31, 2015. The awards’ vesting will be as follows: 16.7% of the target award after the end of the performance period ending December 31, 2013, 27.8% of the target award at the end of the performance period ending December 31, 2014 and 55.5% of the target award at the end of the performance period ending December 31, 2015. The RSUs shall vest between 0% and 100% of the applicable portion of the target award based on the portion of the performance targets that are achieved. RSUs settle in common shares in the first quarter following the close of the applicable performance period. The participants are required to be employed on the day of payout in order to receive the payment.   Equity awards issued under these plans will reduce the amount of awards available to be issued under the 2010 Equity Plan.
��
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 shares. 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-freeinterest 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~~ There were no stock options granted ~~was determined using the following weighted-average assumptions as of grant date.~~
Year Ended December 31
2012 2011 2010
Risk-free interest rate - - 1.57 %
Expected term - - 7.2 years
Expected stock price volatility - - 44.6 %
Dividend yield - - 0.00 %
in 2013, 2012 or 2011.
- 114 -

Following is activity under the plans during ~~2012:~~
Stock options: Options
Outstanding Weighted
Average
Exercise Price Weighted
Average
Remaining
Contractual
Term (in years) Aggregate
Intrinsic
Value
(in 000’s)
Options outstanding, January 1, 2012 317,800 $ 20.35
Forfeited or cancelled (4,950 ) 22.37
Exercised (500 ) 9.22
Granted - -
Options outstanding, December 31, 2012 312,350 $ 20.33 3.93 $ 746
Vested or expected to vest at December 31, 2012 312,350 $ 20.33 3.93 $ 746
Exercisable at December 31, 2012 272,360 $ 21.50 3.62 $ 474
~~- 120 -~~
2013:
Stock options: Options
Outstanding Weighted
Average
Exercise Price Weighted
Average
Remaining
Contractual
Term (in years) Aggregate
Intrinsic
Value
(in 000’s)
Options outstanding, January 1, 2013 312,350 $ 20.33
Forfeited or cancelled (22,000) 22.31
Exercised (39,330) 16.55
Granted - -
Options outstanding, December 31, 2013 251,020 $ 20.75 3.16 $ 1,415
Vested or expected to vest at
   December 31, 2013 251,020 $ 20.75 3.16 $ 1,415
Exercisable at December 31, 2013 240,350 $ 21.26 3.06 $ 1,239
Information related to the stock option plans follows:
Year Ended December 31.
2012 2011 2010
(in thousands, except per share amounts)
Intrinsic value of options exercised $ 4 $ 1 $ 1
Cash received from option exercises 5 11 3
Tax benefit realized from option exercises - - -
Weighted average fair value of options granted - - $ 4.05
Year Ended December 31
2013 2012 2011

(in thousands, except per share amounts)
Intrinsic value of options exercised $ 310 $ 4 $ 1
Cash received from option exercises 350 5 11
Tax benefit realized from option exercises 54 - -
Weighted average fair value of options granted - - -
As of December 31, ~~2012,~~2013, there was ~~$48,000~~$6,000 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 ~~1.4~~0.3 years.
At December 31, ~~2012, 11,260 stock grants and 38,871~~2013,106,061 RSU’s were outstanding. Compensation expense is recognized over the performance period based on the achievement of established targets. Total expense of ~~$677,000~~$1.0 million, $677,000 and $492,000 was recorded during the ~~year~~years ended December 31, 2013, 2012 and 2011, respectively, and approximately ~~$530,000~~ $540,000and $530,000 is included within other liabilities at December 31, 2013 and 2012, respectively, related to the STIPs and ~~LTIPs.~~
Restricted Stock Units Stock Grants
Weighted-Average Weighted-Average
Grant Date Grant Date
Unvested Shares Shares Fair Value Shares Fair Value

Unvested at January 1, 2012 27,108 $ 11.97 4,738 $ 14.00
Granted 27,714 15.86 13,044 12.76
Vested (11,157 ) 11.97 (6,522 ) 12.76
Forfeited (4,794 ) 11.97 - -
Unvested at December 31, 2012 38,871 $ 14.74 11,260 $ 13.28
LTIPs.
Restricted Stock Units Stock Grants
Weighted-Average Weighted-Average
Grant Date Grant Date
Unvested Shares Shares Fair Value Shares Fair Value

Unvested at January 1, 2013 38,871 $ 14.74 11,260 $ 13.28
Granted 91,187 19.42 20,639 15.77
Vested (20,639) 15.77 (31,899) 14.89
Forfeited (3,358) 11.97 - -
Unvested at December 31, 2013 106,061 $ 18.66 - $ -
The maximum amount of compensation expense that may be earned for the ~~2012~~2013 STIP and ~~both~~the 2012 and 2013 LTIPs at December 31, ~~2012~~2013 is approximately ~~$2.5~~$2.9 million. However, the estimated expense expected to be earned as of December 31, ~~2012~~2013 based on the performance measures in the plans, is ~~$921,000~~$1.9 million of which ~~$243,000~~$787,000 is unrecognized at December 31, ~~2012~~2013 and will be recognized over the remaining performance period.
- 115 -

As of December 31, 2013 and 2012, 202,405 and ~~2011,~~ 290,234 ~~and 326,708~~ shares, respectively, were available for grant under the Company’s stock option plans. Options forfeited or cancelled under all plans except the 2010 plan are no longer available for grant to other participants.

~~- 121 -~~
21. Parent Company Statements
Condensed parent company financial statements, which include transactions with subsidiaries, follow:
December 31
Statements of Financial Condition 2012 2011
(In Thousands)
Assets
Cash and cash equivalents $ 8,884 $ 11,466
Available for Sale Securities 1,002 2,010
Investment in banking subsidiary 270,444 287,823
Investment in non-bank subsidiaries 13,034 12,205
Other assets 1,766 1,783
Total assets $ 295,130 $ 315,287

Liabilities and stockholders’ equity:
Subordinated debentures $ 36,083 $ 36,083
Accrued liabilities 919 1,077
Stockholders’ equity 258,128 278,127
Total liabilities and stockholders’ equity $ 295,130 $ 315,287
Years Ended December 31
Statements of Income 2012 2011 2010
(In Thousands)
Dividends from subsidiaries $ 37,300 $ - $ 5,802
Interest on investments 12 8 -
Interest expense (971 ) (1,278 ) (1,315 )
Other income - 1 -
Noninterest expense (1,013 ) (690 ) (857 )
Income (loss) before income taxes and equity in earnings of subsidiaries 35,328 (1,959 ) 3,630
Income tax credit (669 ) (665 ) (739 )
Income (loss) before equity in earnings of subsidiaries 35,997 (1,294 ) 4,369
Undistributed equity in (distributions in excess of) earnings of subsidiaries (17,333 ) 16,828 3,739
Net income $ 18,664 $ 15,534 $ 8,108
Comprehensive income $ 18,941 $ 19,873 $ 7,924

December 31
Statements of Financial Condition 2013 2012
(In Thousands)
Assets
Cash and cash equivalents $ 8,228 $ 8,884
Available for Sale Securities - 1,002
Investment in banking subsidiary 285,813 270,444
Investment in non-bank subsidiaries 13,518 13,034
Other assets 1,774 1,766
Total assets $ 309,333 $ 295,130

Liabilities and stockholders’ equity:
Subordinated debentures $ 36,083 $ 36,083
Accrued liabilities 1,103 919
Stockholders’ equity 272,147 258,128
Total liabilities and stockholders’ equity $ 309,333 $ 295,130
Years Ended December 31
Statements of Income 2013 2012 2011
(In Thousands)

Dividends from subsidiaries $ 4,500 $ 37,300 $ -
Interest on investments 18 12 8
Interest expense (601) (971) (1,278)
Other income 1 - 1
Noninterest expense (853) (1,013) (690)
Income (loss) before income taxes and equity in
    earnings of subsidiaries 3,065 35,328 (1,959)
Income tax credit (415) (669) (665)
Income (loss) before equity in earnings of subsidiaries 3,480 35,997 (1,294)
Undistributed equity in (distributions in excess of)
    earnings of subsidiaries 18,755 (17,333) 16,828
Net income $ 22,235 $ 18,664 $ 15,534
Comprehensive income $ 18,506 $ 18,941 $ 19,873

- ~~122~~116 -

Years Ended December 31
Statements of Cash Flows 2012 2011 2010
(In Thousands)
Operating activities:
Net income $ 18,664 $ 15,534 $ 8,108
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Distribution in excess of (undistributed equity in) earnings of subsidiaries 17,333 (16,828 ) (3,739 )
Change in other assets and liabilities 97 109 (1,045 )
Net cash provided by (used in) operating activities 36,094 (1,185 ) 3,324
Investing activities:
Investment in non-bank subsidiary (250 ) (4,785 ) (1,500 )
Purchase of available-for-sale securities 0 (2,000 ) -
Sale of available-for-sale securities 1,000 - -
Net cash (used in) provided by investing activities 750 (6,785 ) (1,500 )
Financing activities:
Stock Options Exercised 4 11 3
Treasury stock purchases 14 29 -
Cash dividends paid (3,086 ) (2,331 ) (1,850 )
Proceeds from issuance of common stock - 19,859 -
Preferred Stock payoff (36,358 ) - -
Net cash used in financing activities (39,426 ) 17,567 (1,847 )
Net increase (decrease) in cash and cash equivalents (2,582 ) 9,598 (23 )
Cash and cash equivalents at beginning of year 11,466 1,868 1,891
Cash and cash equivalents at end of year $ 8,884 $ 11,466 $ 1,868
Years Ended December 31
Statements of Cash Flows 2013 2012 2011
(In Thousands)
Operating activities:
Net income $ 22,235 $ 18,664 $ 15,534
Adjustments to reconcile net income to
    net cash (used in) provided by
    operating activities:
Distribution in excess of (undistributed
    equity in) earnings of subsidiaries (18,755) 17,333 (16,828)
Change in other assets and liabilities 176 97 109
Net cash provided by (used in) operating activities 3,656 36,094 (1,185)

Investing activities:
Investment in non-bank subsidiary - (250) (4,785)
Purchase of available-for-sale securities - - (2,000)
Sale of available-for-sale securities 1,002 1,000 -
Net cash (used in) provided by investing activities 1,002 750 (6,785)

Financing activities:
Repurchase of common stock (1,821) - -
Cash dividends paid (3,907) (3,086) (2,331)
Stock Options Exercised 350 4 11
Treasury stock sales 64 14 29
Proceeds from issuance of common stock - - 19,859
Preferred Stock payoff - (36,358) -
Net cash used in financing activities (5,314) (39,426) 17,568

Net increase (decrease) in cash and cash equivalents (656) (2,582) 9,598
Cash and cash equivalents at beginning of year 8,884 11,466 1,868
Cash and cash equivalents at end of year $ 8,228 $ 8,884 $ 11,466

22. 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:
~~- 123 -~~
·- 117 -

⋅
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. Securities in Level 2 include U.S. Government agencies, mortgage-backed securities, corporate bonds and municipal securities. The Company classifies its pooled trust preferred collateralized debt obligations as Level 1 and Level 3. The portfolio consists of collateralized debt obligations backed by pools of trust preferred securities issued by financial institutions and insurance companies. ~~Based~~Two collateralized debt obligations backed by insurance companies were classified as Level 1 at December 31, 2013 due to receiving a Level 1 price at which the securities were subsequently sold on January 15, 2014 as a result of these securities being disallowed under the final interim Volcker rule that was announced January 14, 2014. The two collateralized debt obligations backed by financial institutions are allowed under the final interim Volcker Rule and classified as Level 3 based on the lack of observable market data, the Company estimated fair values based on the observable data available and reasonable unobservable market data. The Company estimated fair value based on a discounted cash flow model, which used appropriately adjusted discount rates reflecting credit and liquidity risks. The Company used an independent third party, which is described further in Note 5.
7.
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 propertiesprior to foreclosure. ~~Appraisals for collateral dependent impaired loans are ordered annually. These appraisals are ordered and reviewed by the Company’s loan officers or loan workout personnel.~~ 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 inon 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. ~~Appraisal values for impaired loans of all loan classes are discounted between a range of 0% to 10% to account for various factors that may impact the value of collateral.~~
~~- 124 -~~
- 118 -

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 ~~loan workout personnel~~asset quality or collections department reviews the assumptions and approaches utilized in the appraisal. Appraisal values ~~for all classes of real estate held for sale~~ are discounted ~~between a range of 0%~~from0% to ~~20%~~20% to account for ~~various~~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.
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).
~~- 125 -~~
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:
- 119 -

Assets and Liabilities Measured on a Recurring Basis
December 31, 2012 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 $ - $ 11,069 $ - $ 11,069
U.S. treasury bonds 1,002 1,002
Mortgage-backed - residential - 31,461 - 31,461
Collateralized mortgage obligations - 57,466 - 57,466
Trust preferred stock - - 1,474 1,474
Preferred stock 134 - - 134
Corporate bonds - 8,884 - 8,884
Obligations of state and political subdivisions - 82,611 - 82,611
Mortgage banking derivative - asset - 950 - 950
Mortgage banking derivative - liability - (94 ) - (94 )
December 31, 2013 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 $ - $ 4,921 $ - $ 4,921
Mortgage-backed - residential - 41,292 - 41,292
Collateralized mortgage obligations - 59,841 - 59,841
Trust preferred stock 1,654 - 582 2,236
Preferred stock 718 - - 718
Corporate bonds - 8,942 - 8,942
Obligations of state and political
   subdivisions - 80,220 80,220
Mortgage banking derivative - asset - 295 - 295
Mortgage banking derivative - liability - - - -

December 31, 2012 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 $ - $ 11,069 $ - $ 11,069
U.S. treasury bonds - 1,002 - 1,002
Mortgage-backed - residential - 31,461 - 31,461
Collateralized mortgage obligations - 57,466 - 57,466
Trust preferred stock - - 1,474 1,474
Preferred stock 134 - - 134
Corporate bonds - 8,884 - 8,884
Obligations of state and political subdivisions - 82,611 - 82,611
Mortgage banking derivative - asset - 950 - 950
Mortgage banking derivative - liability - (94) - (94)
Trust preferred stock in the amount of $1,654,000 was transferred from level 3 to level 1 in 2013 due to two securities being disallowed under the final interim Volcker Rule resulting in the company selling these two securities on January 15, 2014after obtaining a Level 1 price. The selling price (Level 1) was used to determine the fair value at December 31, 2013. There were no transfers between ~~levels 1 and 2 for~~Levels during the ~~year~~period ended December 31, ~~2012 and 2011.~~
December 31, 2011 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 $ - $ 17,085 $ - $ 17,085
U.S. treasury bonds 2,010 2,010
Mortgage-backed - residential - 70,716 - 70,716
REMICs - 2,894 - 2,894
Collateralized mortgage obligations - 59,009 - 59,009
Trust preferred stock - - 1,342 1,342
Preferred stock 108 - - 108
Corporate bonds 8,252 8,252
Obligations of state and political subdivisions - 71,503 - 71,503
Mortgage banking derivative - asset - 865 - 865
Mortgage banking derivative - liability (258 ) (258 )
~~- 126 -~~
2012.
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 years ended December 31, ~~2012~~2013 and ~~2011:~~
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(In Thousands)
Beginning balance, January 1, 2012 $ 1,342
Total gains or losses (realized/unrealized)
Included in earnings (unrealized) 76
Included in other comprehensive income (presented gross of taxes) 322
Amortization -
Redemption (266 )
Transfers in and/or out of Level 3 -
Ending balance, December 31, 2012 $ 1,474
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
(In Thousands)
Beginning balance, January 1, 2011 $ 1,498
Total gains or losses (realized/unrealized)
Included in earnings (unrealized) (2 )
Included in other comprehensive income (presented gross of taxes) (159 )
Amortization 5
Transfers in and/or out of Level 3 -
Ending balance, December 31, 2011 $ 1,342
Changes in Unrealized Gains/Losses for the Year
Relating to Assets Still Held at Reporting
Date for the Year Ended December 31
(In Thousands)

Trust Preferred Stock
2012 2011 2010
Interest income on securities $ 160 $ 71 $ 77

Other changes in fair value (84 ) (73 ) (291 )

Total $ 76 $ (2 ) $ (214 )
2012:
~~- 127 -~~
- 120 -

Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
(In Thousands)
2013 2012
Beginning balance $ 1,474 $ 1,342
Total gains or losses (realized/unrealized)
Included in earnings (realized) (337) 76
Included in other comprehensive income
    (presented gross of taxes) 1,099 322
Amortization - -
Redemption - (266)
Transfers in and/or out of Level 3 (1,654) -
Ending balance $ 582 $ 1,474
Changes in Unrealized Gains/Losses Recorded in Earnings
For the Year Relating to Level 3 Assets Still Held at Reporting
Date for the Year Ended December 31
(In Thousands)

Trust Preferred Stock
2013 2012 2011
Interest income on securities $ 83 $ 160 $ 71

Other changes in fair value (420) (84) (73)

Total $ (337) $ 76 $ (2)
- 121 -

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
December 31, 2013 Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Fair
Value

(In Thousands)
Impaired loans
1-4 Family Residential Real Estate $ - $ - $ 259 $ 259
Multi Family Residential - - 338 338
Commercial Real Estate - - 9,590 9,590
Home Equity and Improvement - - 531 531
Total impaired loans - - 10,718 10,718
Mortgage servicing rights - 1,370 - 1,370
Real estate held for sale
Residential - - 112 112
CRE - - 1,278 1,278
Total Real Estate held for sale - - 1,390 1,390

December 31, 2012 Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Fair
Value

(In Thousands)
Impaired loans
1-4 FamilyResidential Real Estate $ - $ - $ 599 $ 599
Multi Family Residential - - 407 407
Commercial Real Estate - - 12,126 12,126
Commercial - - 771 771
Home Equity and Improvement - - 168 168
Total Impaired loans - - 14,071 14,071
Mortgage servicing rights - 7,833 - 7,833
Real estate held for sale
Residential - - 61 61
CRE - - 385 385
Total Real Estate held for sale - - 446 446
- 122 -

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of December 31, 2013, 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)

Trust preferred stock $ 582 Discounted cash flow Constant prepayment rate 2-40 % 40 %
Expected asset default 0-30 % 15 %
Expected recoveries 10-15 % 10 %
Impaired Loans- Applies to all loan classes $ 10,718 Appraisals which utilize sales comparison, net income and cost approach Discounts for collection issues and changes in market conditions 0-10 % 10 %
Real estate held for sale – Applies to all classes $ 1,390 Appraisals which utilize sales comparison, net income and cost approach Discounts for changes in market conditions 0-20 % 20 %
For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of December 31, 2012, the significant unobservable inputs used in the fair value measurements were as follows:
Fair
Value Valuation Technique Unobservable Inputs Range of
Inputs
(Dollars in Thousands)

Trust preferred stock $ 1,474 Discounted cash flow Constant prepayment rate 2-40%
Expected asset default 0-30%
Expected recoveries 0-15%
Impaired Loans- Applies to all loan classes $ 14,071 Appraisals Discounts for collection issues and changes in market conditions 0-10%
Real estate held for sale – Applies to all classes $ 446 Appraisals Discounts for changes in market conditions 0-20%
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~~
December 31, 2012 Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Fair
Value
(In Thousands)
Impaired loans
Residential Loans $ - $ - $ 599 $ 599
Commercial Loans - - 771 771
Home Equity Loans - - 168 168
Multi Family Loans - - 407 407
CRE Loans - - 12,126 12,126
Total Impaired loans - - 14,071 14,071
Mortgage servicing rights - 7,833 - 7,833
Real estate held for sale
Residential - - 61 61
CRE - - 385 385
Total Real Estate held for sale - - 446 446
December 31, 2011 Level 1 Inputs Level 2 Inputs Level 3 Inputs Total Fair
Value
(In Thousands)
Impaired loans
Residential Loans $ - $ - $ 1,092 $ 1,092
Commercial Loans - - 1,268 1,268
Multi Family Loans - 103 103
CRE loans - - 8,449 8,449
Total Impaired loans - - 10,912 10,912
Mortgage servicing rights - 8,690 - 8,690
Real estate held for sale
Residential - - 28 28
CRE - - 1,600 1,600
Total Real Estate held for sale - - 1,628 1,628
~~- 128 -~~

Fair
Value Valuation Technique Unobservable Inputs Range of
Inputs Weighted
Average

(Dollars in Thousands)

Trust preferred stock $ 1,474 Discounted cash flow Constant prepayment rate 2-40 % 40 %
Expected asset default 0-30 % 15 %
Expected recoveries 10-15 % 10 %
Impaired Loans- Applies to all loan classes $ 14,071 Appraisals which utilize sales comparison, net income and cost approach Discounts for collection issues and changes in market conditions 0-10 % 10 %
Real estate held for sale – Applies to all classes $ 446 Appraisals which utilize sales comparison, net income and cost approach Discounts for changes in market conditions 0-20 % 20 %
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a fair value of ~~$14,071~~$10.7 million, with ano valuation allowance and a fair value of $0$14.1 million with no valuation allowance at December 31, 2013 and 2012. ~~Provision~~A provision expense of ~~$6.3~~$3.2 million and $6.3 million for the ~~year~~years ended December 31, 2013 and 2012 related to these impaired loans was included in earnings.
Mortgage servicing rights, which are carried at the lower of cost or fair value, had a fair value of ~~$7.8~~$1.4 million with a valuation allowance of $1.0 million and a fair value of $7.8 million with a valuation allowance of $2.3 million at December 31, 2013 and 2012, ~~resulting in~~respectively. A recovery of $1.3 million and a ~~valuation allowance of $2.3 million. A~~ charge of ~~$759,000~~$759,000 for the ~~year~~years ended December 31, 2013 and 2012 was 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.~~changes in market conditions. The change in fair value of real estate held for sale was ~~$416,000~~$740,000 and $416,000 for the ~~year~~years ended December 31, 2013 and 2012 which was recorded directly as an adjustment to current earnings through non-interest expense.
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a fair value of $10.9 million, with a valuation allowance of $7.2 million at December 31, 2011. A provision expense of $5.4 million for the year ended December 31, 2011 was included in earnings.
Mortgage servicing rights that are carried at the lower of cost or fair value had a fair value of $8.7 million at December 31, 2011, resulting in a valuation allowance of $1.5 million. A charge of $404,000 for the year ended December 31, 2011 was included in earnings.
Real estate held for sale is determined using Level 3 inputs which include current and prior appraisals and estimated costs to sell. The change in fair value of real estate held for sale was $1.0 million for the year ended December 31, 2011, which was recorded directly as an adjustment to current earnings through non-interest expense.
- 123 -

In accordance with FASB ASC Topic 825, the ~~following table is~~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 ofDecember 31, ~~2012~~ 2013and December 31, ~~2011.~~2012. 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 or 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.
~~- 129 -~~
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 ~~asset.~~
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 December 31, ~~2012.~~
Fair Value Measurements at December 31, 2012
(In Thousands)
Carrying
Value Total Level 1 Level 2 Level 3
Financial Assets:
Cash and cash equivalents $ 136,832 $ 136,832 $ 136,832 $ - $ -
Investment securities 194,609 194,617 134 193,009 1,474
Federal Home Loan Bank Stock 20,655 N/A N/A N/A N/A
Loans, net, including loans held for sale 1,520,610 1,543,438 - 22,577 1,520,861
Accrued interest receivable 5,594 5,594 - 757 4,837

Financial Liabilities:
Deposits $ 1,667,472 $ 1,671,713 $ 315,132 $ 1,356,581 $ -
Advances from Federal Home Loan Bank 12,796 13,466 - 13,466 -
Securities sold under repurchase agreements 51,702 51,702 - 51,702 -
Subordinated debentures 36,083 35,766 - - 35,766
~~- 130 -~~
2013.
- 124 -

December 31, 2011
Carrying Estimated
Value Fair Values

Assets:
Cash and cash equivalents $ 174,931 $ 174,931
Investment securities 233,580 233,591
Federal Home Loan Bank Stock 20,655 N/A
Loans, net, including loans held for sale 1,467,663 1,494,573
Mortgage banking derivative asset 865 865
Accrued interest receivable 6,142 6,142
1,903,836 $ 1,910,102
Other assets 164,354
Total assets $ 2,068,190

Liabilities and stockholders’ equity:
Deposits $ 1,596,241 $ 1,603,111
Advances from Federal Home Loan Bank 81,841 85,196
Securities sold under repurchase agreements 60,386 60,386
Subordinated debentures 36,083 31,814
Accrued interest payable 446 446
Mortgage banking derivative liability 258 258
Advance payments by borrowers for taxes and insurance 1,402 1,402
1,776,399 $ 1,782,613
Other liabilities 13,664
Total liabilities 1,790,063
Stockholders’ equity 278,127
Total liabilities and stockholders’ equity $ 2,068,190
Fair Value Measurements at December 31, 2013
(In Thousands)
Carrying
Value Total Level 1 Level 2 Level 3
Financial Assets:
Cash and cash equivalents $ 179,318 $ 179,318 $ 179,318 $ - $ -
Investment securities 198,557 198,563 2,372 195,609 582
Federal Home Loan Bank Stock 19,350 N/A N/A N/A N/A
Loans, net, including loans
    held for sale 1,564,618 1,568,929 - 9,140 1,559,789
Accrued interest receivable 5,778 5,778 4 696 5,078

Financial Liabilities:
Deposits $ 1,735,792 $ 1,738,216 $ 348,943 $ 1,389,273 $ -
Advances from Federal Home
    Loan Bank 22,520 22,713 - 22,713 -
Securities sold under repurchase
    agreements 51,919 51,919 - 51,919 -
Subordinated debentures 36,083 35,237 - - 35,237

Fair Value Measurements at December 31, 2012
(In Thousands)
Carrying
Value Total Level 1 Level 2 Level 3
Financial Assets:
Cash and cash equivalents $ 136,832 $ 136,832 $ 136,832 $ - $ -
Investment securities 194,609 194,617 134 193,009 1,474
Federal Home Loan Bank Stock 20,655 N/A N/A N/A N/A
Loans, net, including loans
    held for sale 1,520,610 1,543,438 - 22,577 1,520,861
Accrued interest receivable 5,594 5,594 - 757 4,837

Financial Liabilities:
Deposits $ 1,667,472 $ 1,671,713 $ 315,132 $ 1,356,581 $ -
Advances from Federal Home
     Loan Bank 12,796 13,466 - 13,466 -
Securities sold under repurchase
     agreements 51,702 51,702 - 51,702 -
Subordinated debentures 36,083 35,766 - - 35,766
- 125 -

23.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 ~~$34.0~~$7.5 million and ~~$21.7~~$34.0 million of interest rate lock commitments at December 31, ~~2012~~2013 and ~~2011,~~2012, respectively. There were ~~$53.6~~$12.1 million and ~~$34.4~~$53.6 million of forward commitments for the future delivery of residential mortgage loans at December 31, 2013 and 2012, ~~and 2011,~~ respectively.
~~- 131 -~~
The fair value of these mortgage banking derivatives are reflected by a derivative asset or a derivative liability. The table below provides data about the carrying values of these derivative instruments:
December 31, 2012 December 31, 2011

Assets (Liabilities) Assets (Liabilities)
Derivative Derivative
Carrying Carrying Net Carrying Carrying Carrying Net Carrying
Value Value Value Value Value Value
(In Thousands)
Derivatives not designated as hedging instruments
Mortgage Banking Derivatives $ 950 $ (94 ) $ 856 $ 865 $ (258 ) $ 607
December 31, 2013 December 31, 2012
Assets (Liabilities) Assets (Liabilities)
Derivative Derivative
Carrying Carrying Net Carrying Carrying Carrying Net Carrying
Value Value Value Value Value Value
(In Thousands)
Derivatives not designated as
   hedging instruments
Mortgage Banking
   Derivatives $ 295 $ - $ 295 $ 950 $ (94) $ 856
The table below provides data about the amount of gains and losses recognized in income on derivative instruments not designated as hedging instruments:
Twelve Months Ended December 31,
2012 2011 2010
Derivatives not designated as hedging instruments

Mortgage Banking Derivatives – Gain (Loss) $ 249 $ 252 $ (115 )
Twelve Months Ended December 31,
2013 2012 2011

(In Thousands)
Derivatives not designated as hedging
instruments

Mortgage Banking Derivatives – Gain (Loss) $ (526) $ 249 $ 252
The above amounts are included in mortgage banking income with gain on sale of mortgage loans. During 2013 and 2011, management determined that a group of loans, previously classified as held for sale, were no longer sellable and were transferred back into the portfolio. As a result, a ~~$90,000~~$34,000 and $90,000 loss related to a fair value adjustment on those loans was recorded in ~~2011.~~
~~- 132 -~~
2013 and 2011, respectively.No such adjustments were made in 2012.
- 126 -

~~24.~~
24. Quarterly Consolidated Results of Operations (Unaudited)
The following is a summary of the quarterly consolidated results of operations:
Three Months Ended
March 31 June 30 September 30 December 31
2012 (In Thousands, Except Per Share Amounts)
Interest income $ 20,754 $ 20,519 $ 20,098 $ 19,572
Interest expense 3,555 3,273 2,923 2,186
Net interest income 17,199 17,246 17,175 17,386
Provision for loan losses 3,503 4,097 705 2,619
Net interest income after provision for loan losses 13,696 13,149 16,470 14,767
Gain on sale, call or write-down of securities 43 382 103 1,606
Noninterest income 8,376 7,612 7,677 8,575
Noninterest expense 16,259 15,532 16,450 17,539
Income before income taxes 5,856 5,611 7,800 7,409
Income taxes 1,703 1,690 2,366 2,253
Net income $ 4,153 $ 3,921 $ 5,434 $ 5,156

Dividends declared on Preferred Shares (462 ) (435 ) (3 ) -
Accretion on Preferred Shares (46 ) (305 ) (8 ) -
Redemption of Preferred Shares - 642 - -
Net income applicable to common shares $ 3,645 $ 3,823 $ 5,423 $ 5,156

Earnings per common share:
Basic $ 0.37 $ 0.39 $ 0.56 $ 0.53
Diluted $ 0.37 $ 0.38 $ 0.54 $ 0.52
Average shares outstanding:
Basic 9,726 9,729 9,729 9,729
Diluted 9,970 9,985 10,000 10,012
Three Months Ended
March 31 June 30 September 30 December 31
(In Thousands, Except Per Share Amounts)
2011
Interest income $ 22,158 $ 21,973 $ 21,666 $ 21,270
Interest expense 4,956 4,457 4,019 3,754
Net interest income 17,202 17,516 17,647 17,516
Provision for loan losses 2,833 2,405 3,097 4,099
Net interest income after provision for loan losses 14,369 15,111 14,550 13,417
Gain on sale, call or write-down of securities 47 - - 169
Noninterest income 5,898 6,838 6,857 7,707
Noninterest expense 16,626 15,086 15,462 15,589
Income before income taxes 3,688 6,863 5,945 5,704
Income taxes 1,028 2,113 1,884 1,640
Net income $ 2,660 $ 4,750 $ 4,061 $ 4,064

Dividends declared on Preferred Shares (462 ) (463 ) (463 ) (462 )
Accretion on Preferred Shares (43 ) (44 ) (45 ) (46 )
Net income applicable to common shares $ 2,155 $ 4,243 $ 3,553 $ 3,556

Earnings per common share:
Basic $ 0.25 $ 0.44 $ 0.37 $ 0.37
Diluted $ 0.25 $ 0.43 $ 0.36 $ 0.36
Average shares outstanding:
Basic 8,519 9,724 9,725 9,726
Diluted 8,671 9,902 9,895 9,908
~~- 133 -~~
Three Months Ended
March 31 June 30 September 30 December 31

(In Thousands, Except Per Share Amounts)
2013
Interest income $ 18,476 $ 18,732 $ 18,836 $ 18,737
Interest expense 1,949 1,814 1,680 1,727
Net interest income 16,527 16,918 17,156 17,010
Provision for loan losses 425 448 476 475
Net interest income after provision for
   loan losses 16,102 16,470 16,680 16,535
Gain on sale, call or write-down of securities 53 44 - (337)
Noninterest income 8,909 7,804 7,289 6,808
Noninterest expense 17,199 15,674 16,045 15,926
Income before income taxes 7,865 8,644 7,924 7,080
Income taxes 2,306 2,535 2,445 1,992
Net income $ 5,559 $ 6,109 $ 5,479 $ 5,088

Dividends declared on Preferred Shares - - - -
Accretion on Preferred Shares - - - -
Net income applicable to common shares $ 5,559 $ 6,109 $ 5,479 $ 5,088

Earnings per common share:
Basic $ 0.57 $ 0.63 $ 0.56 $ 0.52
Diluted $ 0.55 $ 0.60 $ 0.54 $ 0.50
Average shares outstanding:
Basic 9,736 9,774 9,780 9,766
Diluted 10,105 10,156 10,212 10,198
- 127 -

~~25.~~
Three Months Ended
March 31 June 30 September 30 December 31
(In Thousands, Except Per Share Amounts)
2012
Interest income $ 20,754 $ 20,519 $ 20,098 $ 19,572
Interest expense 3,555 3,273 2,923 2,186
Net interest income 17,199 17,246 17,175 17,386
Provision for loan losses 3,503 4,097 705 2,619
Net interest income after provision for
   loan losses 13,696 13,149 16,470 14,767
Gain on sale, call or write-down of securities 43 382 103 1,606
Noninterest income 8,376 7,612 7,677 8,575
Noninterest expense 16,259 15,532 16,450 17,539
Income before income taxes 5,856 5,611 7,800 7,409
Income taxes 1,703 1,690 2,366 2,253
Net income $ 4,153 $ 3,921 $ 5,434 $ 5,156

Dividends declared on Preferred Shares (462) (435) (3) -
Accretion on Preferred Shares (46) (305) (8) -
Redemption of Preferred Shares - 642 - -
Net income applicable to common shares $ 3,645 $ 3,823 $ 5,423 $ 5,156

Earnings per common share:
Basic $ 0.37 $ 0.39 $ 0.56 $ 0.53
Diluted $ 0.37 $ 0.38 $ 0.54 $ 0.52
Average shares outstanding:
Basic 9,726 9,729 9,729 9,729
Diluted 9,970 9,985 10,000 10,012

25. Preferred Stock
On December 5, 2008, as part of the Capital Purchase Program (“CPP”), the Company entered into a Letter Agreement and Securities Purchase Agreement (collectively, the “Purchase Agreement”) with the U.S. Treasury, pursuant to which the Company sold ~~$37.0~~$37.0 million shares of newly authorized Fixed Rate Cumulative Perpetual Preferred Stock, par value ~~$0.01~~$0.01 per share and liquidation value ~~$1,000~~$1,000 per share (“Senior Preferred Shares”) and also issued warrants (the “Warrants”) to the U.S. Treasury to acquire an additional550,595 of common shares having an exercise price of ~~$10.08~~$10.08 per share. The Warrants have a term of10 years.
The Senior Preferred Shares qualified as Tier 1 capital and paid cumulative dividends at a rate of 5%5% per annum for the first five years, and 9%9% per annum thereafter. The Senior Preferred Shares could be redeemed by the Company after three years. The Senior Preferred Shares were not subject to any contractual restrictions on transfer, except that the U.S. Treasury or any its transferees may affect any transfer that, as a result of such transfer, would require the Company to become subject to the periodic reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934.
Pursuant to the terms of the Purchase Agreement, the ability of the Company to declare or pay dividends or distributions on, or purchase, redeem or otherwise acquire for consideration, its common shares was subject to restrictions, including a restriction against increasing dividends from the last quarterly cash dividend per share of ~~$0.26~~$0.26 declared on the common stock prior to October 14, 2008. The redemption, purchase or other acquisition of trust preferred securities of the Company or its affiliates also was restricted.
- 128 -

The Purchase Agreement also subjected the Company to certain of the executive compensation limitations included in the Emergency Economic Stabilization Act of 2008 (the “EESA”). As a condition to the closing of the transaction, the Company’s Senior Executive Officers (as defined in the Purchase Agreement) (the “Senior Executive Officers”), (i) voluntarily waived any claim against the U.S. Treasury or the Company for any changes to such officer’s compensation or benefits that are required to comply with the regulation issued by the U.S. Treasury under the CPP and acknowledged that the regulation may require modification of the compensation, bonus, incentive and other benefit plans, arrangements and policies and agreements as they relate to the period the U.S. Treasury owns the Senior Preferred Shares of the Company; and (ii) entered into a letter agreement with the Company amending the Benefit Plans with respect to such Senior Executive Officers as may be necessary, during the period that the U.S. Treasury owns the Senior Preferred Shares, as necessary to comply with Section 111(b) of the EESA.
In June 2012, the U.S. Treasury sold its preferred ~~stock~~shares of the Company through a public offering structured as a modified Dutch auction. The Company bid on its preferred ~~stock~~shares in the auction after receiving approval from its regulators. The clearing price per ~~share for the~~ preferred ~~shares~~share was ~~$962.66~~$962.66 (compared to a par value of $1,000.00 per share) and the Company was successful in repurchasing16,560 of the37,000 preferred shares outstanding through the auction process. The Company ~~successfully~~also acquired an additional19,440 preferred shares in the secondary market prior to the end of the second ~~quarter.~~quarterof 2012. The remaining 1,000 outstanding preferred shares were purchased at par value on July 18, 2012. The clearing prices per ~~share for the~~ preferred ~~shares~~share purchased in the secondary market were as follows: 1,100 shares at ~~$997.50, 1,500~~$997.50,2,500 shares at ~~$1,000.00~~$1,000.00 and16,840 shares at ~~$998.75.~~
~~On July 18, 2012, the Company purchased the remaining 1,000 preferred shares at par value to complete the entire repurchase of the 37,000 preferred shares.~~
~~- 134 -~~
$998.75.
The net balance sheet impact was a reduction to stockholders’ equity of $36.4 million which is comprised of a decrease in preferred stock of $37.0 million and a ~~$642,000~~$642,000 increase to retained earnings related to the discount on the shares repurchased, which is also included in net income applicable to common shares for purposes of calculating earnings per share.
Included in the 2012 operating results is $181,000 of costs incurred by the Company related to the U.S. Treasury’s offering. All these costs were incurred in the second quarter of 2012. These costs are not tax-deductible.

26. Balance Sheet Restructure
In October 2012, the Company executed a balance sheet restructuring strategy to enhance the Company’s current and future profitability while increasing its capital ratios and protecting the balance sheet against rising rates. The strategy required taking an after tax loss of approximately ~~$260,000~~$260,000 through selling ~~$60.0~~$60.0 million in securities for a gain of ~~$1.6~~$1.6 million and paying off ~~$62.0~~$62.0 million in FHLB advances with a prepayment penalty of ~~$2.0~~$2.0 million.
- ~~135~~129 -

27. 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 and OTTI losses on investment securities in the accompanying consolidated condensed statements of income.
Before Tax Tax Expense Net of Tax
Amount (Benefit) Amount

Twelve months ended December 31, 2013: (In Thousands)
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period $ (6,309) $ (2,216) $ (4,093)
Reclassification adjustment for net (gains) losses included in net income 240 92 148
Change in postretirement benefit obligation 333 117 216
Total other comprehensive income (loss) $ (5,736) $ (2,007) $ (3,729)
Before Tax Tax Expense Net of Tax
Amount (Benefit) Amount

Twelve months ended December 31, 2012: (In Thousands)
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period $ 2,360 $ 846 $ 1,514
Reclassification adjustment for net (gains) losses included in net income (2,134) (767) (1,367)
Change in postretirement benefit obligation 199 69 130
Total other comprehensive income (loss) $ 425 $ 148 $ 277
Activity in accumulated other comprehensive income (loss), net of tax, was as follows:
Accumulated
Securities Post- Other
Available retirement Comprehensive
For Sale Benefit Income
(In Thousands)
Balance January 1, 2013 $ 4,851 $ (577) $ 4,274
Other comprehensive loss before
    reclassifications (4,093) 216 (3,877)
Amounts reclassified from accumulated other
     comprehensive loss 148 - 148

Net other comprehensive loss during period (3,945) 216 (3,729)

Balance December 31, 2013 $ 906 $ (361) $ 545

Balance January 1, 2012 $ 4,704 $ (707) $ 3,997
Other comprehensive loss before
     reclassifications 1,514 130 1,644
Amounts reclassified from accumulated other
     comprehensive loss (1,367) - (1,367)

Net other comprehensive loss during period 147 130 277

Balance December 31, 2012 $ 4,851 $ (577) $ 4,274
- 130 -

28. Subsequent Event
On February 18, 2014, the Company announced the signing of a definitive agreement to acquire First Community Bank (FCB”). Under the merger agreement First Federal will acquire FCB in a cash transaction in which FCB will merge with and into First Federal. FCB operates four branches in the Columbus, Ohio market and at December 31, 2013, had assets of $101.4 million (unaudited), loans of $65.4 million (unaudited), deposits of $90.5 million (unaudited) and common equity of $10.6 million (unaudited). Under the terms of the merger agreement, First Federal will pay $12.9 million in cash for all outstanding shares of FCB, subject to certain adjustment factors. The transaction is expected to close by the end of the third quarter of 2014.
- 131 -

Item 9.       Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.    Controls and Procedures
First Defiance’s management carried out an evaluation, under the supervision and with the participation of the chief executive officer and the chief financial officer, of the effectiveness of First Defiance’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, ~~2012.~~2013. Based upon that evaluation, the chief executive officer along with the chief financial officer concluded that First Defiance’s disclosure controls and procedures as of December 31, ~~2012,~~2013, are effective.
The information set forth under “Management’s Report on Internal Control Over Financial Reporting” and “Report of Independent Registered Public Accounting Firm” included in Item 8 above is incorporated herein by reference.
~~Changes in Internal Control Over Financial Reporting~~
There were no changes in First Defiance’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal quarter ended December 31, ~~2012~~2013 that have materially affected, or are reasonably likely to materially affect First Defiance’s internal control over financial reporting.
Item 9B.    Other Information
None
PART III
Item 10.    Directors, Executive Officers and Corporate Governance
The information required herein is incorporated by reference from the sections captioned: “Proposal 1 - Election of Directors”, ~~“Executive~~“Executive Officers”, and “Section 16(a) Beneficial Ownership Reporting Compliance” of the definitive proxy statement to be filed on or about March ~~22, 2013~~24, 2014 (the “Proxy Statement”).
First Defiance has adopted a Code of Ethics applicable to all officers, directors and employees that complies with SEC requirements, and is available on its Internet site atwww.fdef.com under Governance Documents.
Item 11.    Executive Compensation
Information required by this item is set forth under the captions “Compensation Discussions and Analysis,” “Executive Compensation,” “Director Compensation,” “Compensation Committee Report” and “Compensation Committee Interlocks and Insider Participation” of the Proxy Statement.
Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information set forth under the caption “Beneficial Ownership” of the Proxy Statement is incorporated herein by reference.
- ~~136~~132 -

Equity Compensation Plans
The following table provides information as of December 31, ~~2012~~2013 with respect to the shares of First Defiance common stock that may be issued under First Defiance’s existing equity compensation plans.
Plan Category Number of securities to
be Issued Upon
Exercise of Outstanding
Options, Warrants and
Rights Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in Column
(a))
(a) (b) (c)
Equity Compensation Plans Approved by Security Holders 312,350 $ 20.33 294,869
Number of Securities
Remaining Available
for Future Issuance
Number of securities to Under Equity
be Issued Upon Weighted Average Compensation Plans
Exercise of Outstanding Exercise Price of (Excluding Securities
Options, Warrants and Outstanding Options, Reflected in Column
Plan Category Rights Warrants and Rights (a))
(a) (b) (c)
Equity Compensation Plans Approved by Security Holders 251,020 $ 20.75 202,405
Item 13.    Certain Relationships and Related Transactions, and Director Independence
The information set forth under the captions “Composition of the Board” and “Related Person Transactions” of the Proxy Statement is incorporated herein by reference.
Item 14.    Principal Accountant Fees and Services
The information set forth under the caption “Independent Registered Public Accounting Firm” of the Proxy Statement is incorporated herein by reference.
- ~~137~~133 -

PART IV
Item 15. Exhibits, Financial Statement Schedules
~~PART IV~~
~~Item 15. Exhibits, Financial Statement Schedules~~
~~(a) Financial Statements~~
(a) Financial Statements
(1) The following documents are filed as Item 8 of this Form 10-K.
(A) Report of Independent Registered Public Accounting Firm (Crowe Horwath LLP)
(B) Consolidated Statements of Financial Condition as of December 31, ~~2012~~ 2013and ~~2011~~2012
(C) Consolidated Statements of Income for the years ended December 31, 2013,2012 ~~2011~~ and ~~2010~~2011
(D) Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012 ~~2011~~ and ~~2010~~2011
(E) Consolidated Statements of Stockholders’ Equity for the years endedDecember 31, 2013, 2012 ~~2011~~ and ~~2010~~2011
(F) Consolidated Statements of Cash Flows for the years ended December 31,2013, 2012 ~~2011~~ and ~~2010~~2011
(G) Notes to Consolidated Financial Statements
(2) WeSeparate financial statement schedules are not ~~filing separate financial statement schedules~~being filed because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or the related notes.
(3) The exhibits required by this item are listed in the Exhibit Index of this Form 10-K. The management contracts and compensation plans or arrangements required to be filed towith this Form 10-K are listed as Exhibits 10.1 through ~~10.26.~~10.35.
- ~~138~~134 -

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

February 28, ~~2013~~2014 By: /s/ ~~Donald P. Hileman~~Kevin T. Thompson
~~Donald P. Hileman,~~Kevin T. Thompson, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 28, ~~2013.~~
2014.
Signature Title

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

/s/ Donald P. Hileman Executive Vice President and Chief
Donald P. Hileman Executive Officer
/s/ Kevin T. Thompson Executive Vice President and Chief
Kevin T. Thompson Financial Officer (principal accounting officer)

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

/s/ Stephen L. Boomer Director, Vice Chairman
Stephen L. Boomer

/s/ John L. Bookmyer Director
John L. Bookmyer

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

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

/s/ Barb A. Mitzel Director
Barb A. Mitzel

/s/ Jean A. Hubbard Director
Jean A. Hubbard

/s/ Samuel S. Strausbaugh Director
Samuel S. Strausbaugh

/s/ Thomas A. Voigt Director
Thomas A. Voigt
- ~~139~~135 -

Exhibit Index
This report incorporates by reference the documents listed below that we have previously filed with the SEC. The SEC allows us to incorporate by reference information in this document. The information incorporated by reference is considered to be part of this document.
This information may be read and copied at the Public Reference Room of the SEC at 100 F Street, N.E., Washington D.C. 20549. The SEC also maintains an internet web site that contains reports, proxy statements, and other information about issuers, like First Defiance, who file electronically with the SEC. The address of the site ishttp://www.sec.gov. The reports and other information filed by First Defiance with the SEC are also available at the First Defiance Financial Corp. web site. The address of the site ishttp://www.fdef.com. Except as specifically incorporated by reference into this Annual Report on Form 10-K, information on those web sites is not part of this report.
Exhibit
Number Description
3.1 Articles of Incorporation (1)
3.2 Code of Regulations (1)

3.3 Amendment to Articles of Incorporation (11)
4.1
Agreement to furnish instruments and agreements defining
rights of holders of long-term debt
(17)
4.2 Form of Warrant for Purchase of Shares of Common Stock (15)
10.1 1996 Stock Option Plan (2)
10.2 Form of Incentive Stock Option Award Agreement under 2001 Plan (3)
10.3 Form of Nonqualified Stock Option Award Agreement under 1996 Plan (3)
10.4 1996 Management Recognition Plan and Trust (8)
10.5 2001 Stock Option and Incentive Plan (5)
10.6 Employment Agreement with William J. Small (6)
10.7 Employment Agreement with James L. Rohrs (7)
10.8 Employment Agreement with Donald P. Hileman (18)
10.9 Employment Agreement with Gregory R. Allen (9)
10.10 2005 Stock Option and Incentive Plan (10)
10.11 Letter Agreement, dated December 5, 2008, between First Defiance and the U.S. Treasury (12)
10.12 2008 Long Term Incentive Compensation Plan (LTIP) (13)
10.13 Form of Contingent Award Agreement under LTIP (14)
10.14 Form of Stock Option Award Agreement under 2005 Plan (4)
10.15 Amendment to all Employment Agreements for CPP (4)
10.16 Form of Agreement for CPP Compensation Standards (21)
10.17 Form of Option Award Agreement with EESA restriction under 2005 Plan (21)
10.18 First Federal Executive Group Life Plan – Post Separation (19)
10.19 2010 Equity Incentive Plan (20)
10.20 Underwriting Agreement dated March 23, 2011 (27)
10.21 First Defiance Deferred Compensation Plan (33)
10.22 Form of Restricted Stock Award Agreement (22)
10.23 2010 Equity Plan Form of Long-Term Incentive Plan Award Agreement (23)
10.24 2010 Equity Plan Form of Short-Term Incentive Plan Award Agreement (24)
10.25 2010 Equity Plan Form of Long-Term Incentive Plan Award Agreement
(with TARP Restrictions) (25)
10.26 2010 Equity Plan Form of Short-Term Incentive Plan Award Agreement
(with TARP Restrictions) (26)
10.27 First Amendment to First Defiance Financial Corp. 2010 Equity Incentive Plan (28)
10.28 First Defiance Financial Corp. and Affiliates Incentive Compensation Plan (29)
Exhibit

Number

Description

3.1 Articles of Incorporation (1)
3.2 Code of Regulations (1)

3.3 Amendment to Articles of Incorporation (11)
4.1
Agreement to furnish instruments and agreements definingrights of holders of long-term debt
(17)
4.2 Form of Warrant for Purchase of Shares of Common Stock (15)
10.1 1996 Stock Option Plan (2)
10.2 Form of Incentive Stock Option Award Agreement under 2001 Plan (3)
10.3 Form of Nonqualified Stock Option Award Agreement under 1996 Plan (3)
10.4 1996 Management Recognition Plan and Trust (8)
10.5 2001 Stock Option and Incentive Plan (5)
10.6 Employment Agreement with William J. Small (6)
10.7 Employment Agreement with James L. Rohrs (7)
10.8 Employment Agreement with Donald P. Hileman (18)
10.9 Employment Agreement with Gregory R. Allen (9)
10.10 2005 Stock Option and Incentive Plan (10)
10.11 Letter Agreement, dated December 5, 2008, between First Defiance and the U.S. Treasury (12)
10.12 2008 Long Term Incentive Compensation Plan (LTIP) (13)
10.13 Form of Contingent Award Agreement under LTIP (14)
10.14 Form of Stock Option Award Agreement under 2005 Plan (4)
10.15 Amendment to all Employment Agreements for CPP (4)
10.16 Form of Agreement for CPP Compensation Standards (21)
10.17 Form of Option Award Agreement with EESA restriction under 2005 Plan (21)
10.18 First Federal Executive Group Life Plan – Post Separation (19)
10.19 2010 Equity Incentive Plan (20)
10.20 Underwriting Agreement dated March 23, 2011 (27)
10.21 First Defiance Deferred Compensation Plan (33)
10.22 Form of Restricted Stock Award Agreement (22)
10.23 2010 Equity Plan Form of Long-Term Incentive Plan Award Agreement (23)
10.24 2010 Equity Plan Form of Short-Term Incentive Plan Award Agreement (24)
10.25
2010 Equity Plan Form of Long-Term Incentive Plan Award Agreement(with TARP Restrictions)
(25)
10.26
2010 Equity Plan Form of Short-Term Incentive Plan Award Agreement(with TARP Restrictions)
(26)
10.27 First Amendment to First Defiance Financial Corp. 2010 Equity Incentive Plan (28)
10.28 First Defiance Financial Corp. and Affiliates Incentive Compensation Plan (29)
- ~~140~~136 -

10.29 First Defiance Financial Corp. Long-Term Restricted Stock Unit Award Agreement (2012 Long Term Incentive – TARP Applicable) (30)
10.30 First Defiance Financial Corp. Long-Term Restricted Stock Unit Award Agreement (2012 Long Term Incentive) (31)
10.31 Underwriting Agreement dated June 13, 2012 (32)
21 List of Subsidiaries of the Company (17)
23.1 Consent of Crowe Horwath LLP (17)
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (17)
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (17)
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (17)
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (17)
99.1 PEO TARP Capital Purchase Program Certification (17)
99.2 PFO TARP Capital Purchase Program Certification (17)
101*
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Condensed Balance Sheet, (ii) the Consolidated Condensed Statements of Income, (iii) the Consolidated Condensed Statements of Changes in Equity, (iv) the Consolidated Condensed Statements of Cash Flows, and (v) the Notes to Consolidated Condensed Financial Statements tagged as blocks of text and in detail.
(17)
10.29 First Defiance Financial Corp. Long-Term Restricted Stock Unit Award Agreement (2012 Long Term Incentive – TARP Applicable) (30)
10.30 First Defiance Financial Corp. Long-Term Restricted Stock Unit Award Agreement (2012 Long Term Incentive) (31)
10.31 Underwriting Agreement dated June 13, 2012 (32)
10.32 Employment Agreement with Donald P. Hileman (34)
10.33 Employment Agreement with Kevin T. Thompson (35)
10.34 Form of Restricted Stock Award Agreement (36)
10.35 Consulting Agreement with William J. Small (37)
21 List of Subsidiaries of the Company (17)
23.1 Consent of Crowe Horwath LLP (17)
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (17)
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (17)
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (17)
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (17)
101*    Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Condensed Balance Sheet, (ii) the Consolidated Condensed Statements of Income, (iii) the Consolidated Condensed Statements of Changes in Equity, (iv) the Consolidated Condensed Statements of Cash Flows, and (v) the Notes to Consolidated Condensed Financial Statements tagged as blocks of text and in detail.    (17)
(1) Incorporated herein by reference to the like numbered exhibit in the Registrant’s Form S-1 (File No. 33-93354)
(2) Incorporated herein by reference to like numbered exhibit in Registrant’s 2001 Form 10-K (Film No. 02580719)
(3) Incorporated herein by reference to like numbered exhibit in Registrant’s 2004 Form 10-K (Film No. 0568550)
(4) Incorporated herein by reference to like numbered exhibit in Registrant’s 2008 Form 10-K (Film No. 09683948)
(5) Incorporated herein by reference to Appendix B to the 2001 Proxy Statement (Film No. 1577137)
(6) Incorporated herein by reference to exhibit 10.1 in Form 8-K filed October 1, 2007 (Film No. 071144951)
(7) Incorporated herein by reference to exhibit 10.2 in Form 8-K filed October 1, 2007 (Film No. 071144951)
(8) Incorporated herein by reference to exhibit 10.2 in Registrant’s 2001 Form 10-K (Film No. 02580719)
(9) Incorporated herein by reference to exhibit 10.4 in Form 8-K filed October 1, 2007 (Film No. 071144951)
(10) Incorporated herein by reference to Appendix A to the 2005 Proxy Statement (Film No. 05692264)
(11) Incorporated herein by reference to exhibit 3 in Form 8-K filed December 8, 2008 (Film No. 081236105)
(12) Incorporated herein by reference to exhibit 10 in Form 8-K filed December 8, 2008 (Film No. 081236105)
(13) Incorporated herein by reference to exhibit 10.1 in Form 8-K filed December 12, 2008 (Film No. 081245224)
(14) Incorporated herein by reference to exhibit 10.2 in Form 8-K filed December 12, 2008 (Film No. 081245224)
- 137 -

(15) Incorporated herein by reference to exhibit 4 in Form 8-K filed December 8, 2008 (Film No. 081236105)
(17) Included herein
~~- 141 -~~
(18) Incorporated herein by reference to exhibit 10.1 in Form 8-K filed December 16, 2009 (Film No. 091245196)
(19) Incorporated herein by reference to exhibit 10.1 in Form 10-Q filed November 2, 2010 (Film No. 101158262)
(20) Incorporated herein by reference to Annex A to 2010 Proxy Statement (Film No. 10693151)
(21) Incorporated herein by reference to like numbered exhibit in Registrant’s 2010 Form 10-K (Film No. 10652528)
(22) Incorporated herein by reference to exhibit 10.1 in Form 10-Q filed May 5, 2011 (Film No. 11803357)
(23) Incorporated herein by reference to exhibit 10.1 in Form 10-Q filed November 8, 2011 (Film No. 111188059)
(24) Incorporated herein by reference to exhibit 10.2 in Form 10-Q filed November 8, 2011 (Film No. 111188059)
(25) Incorporated herein by reference to exhibit 10.3 in Form 10-Q filed November 8, 2011 (Film No. 111188059)
(26) Incorporated herein by reference to exhibit 10.4 in Form 10-Q filed November 8, 2011 (Film No. 111188059)
(27) Incorporated herein by reference to exhibit 1 in Form 8-K filed March 29, 2011 (Film No. 11719267)
(28) Incorporated herein by reference to exhibit 10.1 in Form 8-K filed March 15, 2012 (Film No. 12694926)
(29) Incorporated herein by reference to exhibit 10.2 in Form 8-K filed March 15, 2012 (Film No. 12694926)
(30) Incorporated herein by reference to exhibit 10.3 in Form 8-K filed March 15, 2012 (Film No. 12694926)
(31) Incorporated herein by reference to exhibit 10.4 in Form 8-K filed March 15, 2012 (Film No. 12694926)
(32) Incorporated herein by reference to exhibit 1.1 in Form 8-K filed June 15, 2012 (Film No. 12910514)
(33) Incorporated herein by reference to exhibit 10.1 in Form 8-K filed December 23, 2005 (Film No. 051284175)
(34) Incorporated herein by reference to exhibit 10.1 in Form 8-K filed December 30, 2013 (Film No. 131303552)
(35) Incorporated herein by reference to exhibit 10.2 in Form 8-K filed December 30, 2013 (Film No. 131303552)
(36) Incorporated herein by reference to exhibit 10.3 in Form 8-K filed December 30, 2013 (Film No. 131303552)
(37) Incorporated herein by reference to exhibit 10.4 in Form 8-K filed December 30, 2013 (Film No. 131303552
* As provided in Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
- ~~142~~138 -

OHIO	34-1803915
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
601 Clinton Street, Defiance, Ohio	43512
(Address of principal executive offices)	(Zip code)

Common Stock, Par Value $0.01 Per Share		The NASDAQ Stock Market
(Title of Class)		(Name of each exchange on which registered)

		Page
PART I
Item 1.	Business	3
Item 1A.	Risk Factors	2226
Item 1B.	Unresolved Staff Comments	2731
Item 2.	Properties	2731
Item 3.	Legal Proceedings	2933
Item 4.	Mine Safety Disclosures	2933

PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	2933
Item 6.	Selected Financial Data	3136
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	3237
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	5857
Item 8.	Financial Statements and Supplementary Data	6059
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial ~~Disclosures~~Disclosure	~~136~~133
Item 9A.	Controls and Procedures	~~136~~133
Item 9B.	Other Information	~~136~~133

PART III
Item 10.	Directors, Executive Officers and Corporate Governance	~~136~~133
Item 11.	Executive Compensation	~~136~~133
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~136~~133
Item 13.	Certain Relationships and Related Transactions, and Director Independence	~~137~~134
Item 14.	Principal Accounting Fees and Services	~~137~~134

PART IV
Item 15.	Exhibits, Financial Statement Schedules	~~138~~135

SIGNATURES		~~139~~136

	Years After December 31, 2012
	Due Less than 1		Due 1-2			Due 3-5	Due 5-10		Due 10-15		Due 15+		Total
	(In Thousands)
Real estate	$	300,811	$	138,188	$	418,785	$	102,165	$	29,533	$	46,517	$	1,035,999
Non-real estate:
Commercial		258,184		42,240		79,939		3,454		-		-		383,817
Home equity and improvement		64,760		8,344		31,471		3,557		226		360		108,718
Consumer finance		6,656		4,266		4,771		214		26		3		15,936
Total	$	630,411	$	193,038	$	534,966	$	109,390	$	29,785	$	46,880	$	1,544,470

Retail certificates of deposit maturing in quarter ending:
March 31, 2013	$	34,052
June 30, 2013		26,614
September 30, 2013		30,059
December 31, 2013		21,143
After December 31, 2013		64,161
Total retail certificates of deposit with balances greater than $100	$	176,029

Retail certificates of deposit maturing in quarter ending:
March 31, 2014	$	28,608
June 30, 2014		28,862
September 30, 2014		30,192
December 31, 2014		15,194
After December 31, 2014		69,598
Total retail certificates of deposit with balances greater than $100,000	$	172,454

	Actual					Minimum Required for Adequately Capitalized					Minimum Required for Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Tier 1 Capital (1)
Consolidated	$	226,931		11.48	%	$	79,056		4.0	%		N/A		N/A
First Federal Bank	$	215,432		10.92	%	$	78,914		4.0	%	$	98,642		5.0	%

Tier 1 Capital (to Risk Weighted Assets) (1)
Consolidated	$	226,931		13.41	%	$	67,715		4.0	%		N/A		N/A
First Federal Bank	$	215,432		12.74	%	$	67,632		4.0	%	$	101,448		6.0	%

Total Capital (to Risk Weighted Assets) (1)
Consolidated	$	248,161		14.66	%	$	135,430		8.0	%		N/A		N/A
First Federal Bank	$	236,635		14.00	%	$	135,264		8.0	%	$	169,080		10.0	%

					Minimum Required for				Minimum Required for Well
	Actual				Adequately Capitalized				Capitalized
	Amount		Ratio		Amount		Ratio		Amount		Ratio
Tier 1 Capital (1)
Consolidated	$	246,258	11.86	%	$	83,045	4.0	%		N/A	N/A
First Federal	$	235,699	11.36	%	$	82,978	4.0	%	$	103,722	5.0	%

Tier 1 Capital (to Risk Weighted Assets) (1)
Consolidated	$	246,258	13.98	%	$	70,473	4.0	%		N/A	N/A
First Federal	$	235,699	13.39	%	$	70,418	4.0	%	$	105,627	6.0	%

Total Capital (to Risk Weighted Assets) (1)
Consolidated	$	268,317	15.23	%	$	140,947	8.0	%		N/A	N/A
First Federal	$	257,741	14.64	%	$	140,836	8.0	%	$	176,046	10.0	%

	Leased/	Net Book Value
Description/address	Owned	of Property		Deposits
		(In Thousands)
Main Office, First Federal
601 Clinton St., Defiance, OH	Owned	$	4,102	$	224,036
Operations Center
25600 Elliott Rd., Defiance, OH	Owned		5,479		N/A
Mobile Banking
1011 W. Beecher St., Adrian, MI	Owned		197		N/A
Branch Offices, First Federal
204 E. High St., Bryan, OH*	Owned		686		127,104
211 S. Fulton St., Wauseon, OH	Owned		467		52,127
625 Scott St., Napoleon, OH	Owned		1,047		71,232
1050 East Main St., Montpelier, OH	Owned		359		39,468
926 East High St., Bryan, OH*	Owned		87		-
1800 Scott St., Napoleon, OH	Owned		1,316		27,609
1177 N. Clinton St., Defiance, OH	Owned, Land Lease		923		37,839
905 N. Williams St., Paulding, OH	Owned		770		57,392
201 E. High St., Hicksville, OH	Owned		365		27,381
3900 N. Main St., Findlay, OH	Owned		979		56,571
11694 N. Countyline St., Fostoria, OH	Owned		638		37,005
1226 W. Wooster, Bowling Green, OH	Owned		1,013		89,261
301 S. Main St., Findlay, OH	Owned		1,018		55,574
405 E. Main St., Ottawa, OH	Owned		339		84,415
124 E. Main St., McComb, OH	Owned		195		22,938
7591 Patriot Dr., Findlay, OH	Owned		1,144		31,453
417 W Dussell Dr., Maumee, OH	Owned, Land Lease		871		49,279
230 E. Second St., Delphos, OH	Owned		1,032		100,865
105 S. Greenlawn Ave., Elida, OH	Owned		330		47,384
2600 Allentown Rd., Lima, OH	Owned		796		50,057
22020 W. State Rt. 51, Genoa, OH	Owned		860		31,114
3426 Navarre Ave., Oregon, OH	Owned		943		26,108
1077 Louisiana Ave., Perrysburg, OH	Owned		1,099		29,800
2565 Shawnee Rd., Lima, OH	Owned		1,457		38,417
1595 Dupont Rd., Fort Wayne, IN	Leased		-		19,215
135 South Main St., Glandorf, OH	Leased		-		11,005
300 N. Main St., Adrian, MI	Owned		734		64,296
1701 W. Maumee St., Adrian, MI	Owned		164		45,412
211 W. Main St., Morenci, MI	Owned		165		28,207
539 S. Meridian, Hudson, MI	Owned		576		40,253
1449 W. Chicago Blvd., Tecumseh, MI	Owned		1,501		42,612
1200 North Main St., Bowling Green OH	Owned		1,673		2,043

First Insurance Group
419 5^th Street, Suite 1200, Defiance, OH	Leased		28		N/A
209 West Poe Road, Bowling Green, OH	Leased		11		N/A
214 N. Defiance St., Archbold, OH	Leased		-		N/A
926 E. High St., Bryan, OH**	Leased		-		N/A
1755 Indian Wood Circle, Maumee, OH	Leased		-		N/A
4350 Navarre Ave, Oregon, OH	Leased		-		N/A
		$	33,364	$	1,667,472

	Years Ending
	December 31, 2012						December 31, 2011
	High		Low		Dividend		High		Low		Dividend

Quarter ended:
March 31	$	17.76	$	14.41	$	0.05	$	14.64	$	11.89	$	-
June 30		17.46		15.23		0.05		15.00		13.22		-
September 30		18.06		15.80		0.05		15.51		12.60		-
December 31		19.38		15.75		0.05		15.39		13.00		0.05

	*Period Ending*
Index	12/31/07		12/31/08		12/31/09		12/31/10		12/31/11		12/31/12
First Defiance Financial Corp.		100.00		37.59		57.71		60.83		74.84		99.62
NASDAQ Composite		100.00		60.02		87.24		103.08		102.26		120.42
SNL Bank NASDAQ Index		100.00		72.62		58.91		69.51		61.67		73.51
SNL Midwest Thrift Index		100.00		88.86		74.85		60.68		53.52		69.20

	As of and For the Year Ended December 31
	2012			2011			2010			2009			2008
	(Dollars in Thousands, Except Per Share Data
Financial Condition:
Total assets	$	2,046,948		$	2,068,190		$	2,035,517		$	2,057,523		$	1,957,400
Investment securities		194,609			233,580			166,091			139,378			118,461
Loans receivable, net		1,498,546			1,453,822			1,478,423			1,580,575			1,592,643
Allowance for loan losses		26,711			33,254			41,080			36,547			24,592
Nonperforming assets (1)		36,375			42,956			50,631			54,718			35,017
Deposits and borrowers’ escrow balances		1,668,945			1,597,643			1,576,356			1,580,891			1,470,564
FHLB advances		12,796			81,841			116,885			146,927			156,067
Stockholders’ equity		258,128			278,127			240,331			234,086			229,159
Share Information:
Basic earnings per share		1.86			1.44			0.75			0.64			0.91
Diluted earnings per share		1.81			1.42			0.75			0.63			0.91
Book value per common share		26.44			24.74			25.00			24.26			23.67
Tangible book value per common share		19.63			17.78			17.16			16.44			15.67
Cash dividends per common share		0.20			0.05			-			0.295			0.95
Dividend payout ratio		10.75	%		3.47	%		NM			46.09	%		10.44	%
Weighted average diluted shares outstanding		9,998			9,540			8,153			8,196			7,919
Shares outstanding end of period		9,729			9,726			8,118			8,118			8,117
Operations:
Interest income	$	80,943		$	87,067		$	95,865		$	100,579		$	103,463
Interest expense		11,937			17,186			25,702			33,257			41,268
Net interest income		69,006			69,881			70,163			67,322			62,195
Provision for loan losses		10,924			12,434			23,177			23,232			12,585
Non-interest income		34,374			27,516			27,590			26,295			19,069
Non-interest expense		65,780			62,764			63,463			60,524			57,794
Income before tax		26,676			22,199			11,113			9,861			10,885
Federal income tax		8,012			6,665			3,005			2,667			3,528
Net Income		18,664			15,534			8,108			7,194			7,357
Performance Ratios:
Return on average assets		0.90	%		0.75	%		0.39	%		0.36	%		0.40	%
Return on average equity		6.99	%		5.89	%		3.40	%		3.09	%		3.85	%
Interest rate spread (2)		3.64	%		3.69	%		3.68	%		3.50	%		3.51	%
Net interest margin (2)		3.81	%		3.88	%		3.89	%		3.76	%		3.80	%
Ratio of operating expense to
average total assets		3.19	%		3.05	%		3.09	%		2.99	%		3.12	%
Efficiency ratio (3)		63.93	%		63.62	%		63.89	%		61.50	%		67.74	%
Capital Ratios:
Equity to total assets at end of period		12.61	%		13.45	%		11.81	%		11.38	%		11.71	%
Tangible common equity to tangible assets
at end of period		9.64	%		8.65	%		7.06	%		6.69	%		6.72	%
Average equity to average assets		12.95	%		12.82	%		11.62	%		11.49	%		10.30	%
Asset Quality Ratios:
Nonperforming assets to total assets
at end of period (1)		1.78	%		2.08	%		2.49	%		2.66	%		1.79	%
Allowance for loan losses to total loans*		1.75	%		2.24	%		2.70	%		2.26	%		1.52	%
Net charge-offs to average loans		1.18	%		1.41	%		1.21	%		0.70	%		0.41	%

	Period Ending
Index	12/31/08	12/31/09	12/31/10	12/31/11	12/31/12	12/31/13
First Defiance Financial Corp.	100.00	153.53	161.82	199.10	265.02	364.68
NASDAQ Composite	100.00	145.36	171.74	170.38	200.63	281.22
SNL Bank NASDAQ	100.00	81.12	95.71	84.92	101.22	145.48
SNL Midwest Thrift	100.00	84.23	68.28	60.23	77.87	96.03

				Total Number of
				Shares Purchased	Maximum Number of
				as Part of	Shares (or Approximate
	Total Number of		Average Price	Publicly	Dollar Value) that May
	Shares		Paid Per	Announced Plans	Yet Be Purchased Under
Period	Purchased	Share		or Programs (1)	the Plans or Programs (2)
October 1 – October 31, 2013	-	$	-	-	-
November 1 – November 30, 2013	23,127		25.16	23,127	465,873
December 1 – December 31, 2013	47,839		25.89	47,839	418,034
Total	70,966	$	25.65	70,966	418,034

	For the Twelve Months Ended December 31, 2012					As of December 31, 2012
	Net		% of Total Net			Nonaccrual		% of Total Non-
	Charge-offs		Charge-offs			Loans		Accrual Loans
	(in thousands)					(in thousands)
Residential	$	2,338		13.38	%	$	3,602		11.06	%
Construction		-		0.00	%		-		0.00	%
Commercial real estate		10,302		58.98	%		23,090		70.89	%
Commercial		3,688		21.11	%		5,661		17.38	%
Consumer finance		69		0.40	%		-		0.00	%
Home equity and improvement		1,070		6.13	%		217		0.67	%
Total	$	17,467		100.00	%	$	32,570		100.00	%

	For the Twelve Months Ended December 31, 2011					As of December 31, 2011
	Net		% of Total Net			Nonaccrual		% of Total Non-
	Charge-offs		Charge-offs			Loans		Accrual Loans
	(in thousands)					(in thousands)
Residential	$	2,626		12.96	%	$	3,890		9.89	%
Construction		-		0.00	%		-		0.00	%
Commercial real estate		12,617		62.28	%		28,150		71.58	%
Commercial		4,005		19.77	%		6,884		17.50	%
Consumer finance		25		0.12	%		10		0.03	%
Home equity and improvement		987		4.87	%		394		1.00	%
Total	$	20,260		100.00	%	$	39,328		100.00	%

	For the Quarter Ended
	4th 2012		3rd 2012		2nd 2012		1st 2012		4th 2011
	(dollars in thousands)

Allowance at beginning of period	$	26,310	$	26,409	$	28,833	$	33,254	$	38,110
Provision for credit losses		2,619		705		4,097		3,503		4,099
Charge-offs:
Residential		976		217		584		738		666
Commercial real estate		595		780		5,448		4,496		6,738
Commercial		540		355		486		2,666		1,423
Consumer finance		59		19		14		41		27
Home equity and improvement		497		203		254		211		251
Total charge-offs		2,667		1,574		6,786		8,152		9,105
Recoveries		449		770		265		228		150
Net charge-offs		2,218		804		6,521		7,924		8,955
Ending allowance	$	26,711	$	26,310	$	26,409	$	28,833	$	33,254

	For the Twelve Months Ended December 31, 2013				As of December 31, 2013
	Net		% of Total Net		Nonaccrual		% of Total Non-
	Charge-offs		Charge-offs		Loans		Accrual Loans
	(in thousands)					(in thousands)
Residential	$	361	10.07	%	$	3,273	11.76	%
Construction		-	0.00	%		-	0.00	%
Commercial real estate		1,638	45.69	%		15,834	56.86	%
Commercial		940	26.22	%		8,327	29.90	%
Consumer finance		14	0.39	%		-	0.00	%
Home equity and improvement		632	17.63	%		413	1.48	%
Total	$	3,585	100.00	%	$	27,847	100.00	%

	December 31, 2012					September 30, 2012					June 30, 2012					March 31, 2012					December 31, 2011
			Percent of					Percent of					Percent of					Percent of					Percent of
			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
	(dollars in thousands)
Residential	$	3,506		13.00	%	$	2,996		13.75	%	$	3,104		13.94	%	$	3,373		13.58	%	$	4,095		13.55	%
Construction		75		2.45	%		63		2.06	%		48		1.52	%		73		2.44	%		63		2.10	%
Commercial real estate		14,899		51.63	%		16,260		51.87	%		16,562		51.33	%		19,031		53.10	%		20,490		51.70	%
Commercial		6,325		24.85	%		5,103		23.92	%		5,087		24.64	%		4,693		21.97	%		6,576		23.25	%
Consumer		147		1.03	%		147		1.10	%		140		1.13	%		178		1.19	%		174		1.26	%
Home equity and improvement		1,759		7.04	%		1,741		7.30	%		1,468		7.44	%		1,485		7.72	%		1,856		8.14	%
	$	26,711		100.00	%	$	26,310		100.00	%	$	26,409		100.00	%	$	28,833		100.00	%	$	33,254		100.00	%

	4^th Qtr 2012			3^rd Qtr 2012			2^nd Qtr 2012			1^st Qtr 2012			4^th Qtr 2011
Allowance for loan losses / loans*		1.75	%		1.74	%		1.76	%		1.96	%		2.24	%
Allowance for loan losses to net charge-offs		1204.83	%		3272.39	%		404.98	%		363.87	%		371.35	%
Allowance for loan losses / non-performing assets		73.43	%		64.73	%		58.38	%		59.13	%		77.41	%
Allowance for loan losses / non-performing loans		82.01	%		69.60	%		63.33	%		63.58	%		84.56	%
Non-performing assets / loans plus REO*		2.38	%		2.68	%		3.01	%		3.30	%		2.88	%
Non-performing assets / total assets		1.78	%		1.98	%		2.19	%		2.28	%		2.08	%
Net charge-offs / average loans (annualized)		0.59	%		0.22	%		1.78	%		2.18	%		2.49	%

	Year Ended December 31
	(In Thousands)
	2012							2011							2010
	Average Balance		Interest (1)		Yield/ Rate (2)			Average Balance		Interest (1)		Yield/ Rate			Average Balance		Interest (1)		Yield/ Rate
	(Dollars in Thousands)
Interest-Earning Assets:
Loans receivable	$	1,477,681	$	72,724		4.92	%	$	1,437,588	$	78,773		5.49	%	$	1,538,388	$	88,775		5.77	%
Securities		247,442		8,675		3.63	%		205,609		8,440		4.19	%		154,648		7,151		4.71	%
Interest-earning deposits		116,562		300		0.26	%		184,126		466		0.25	%		121,911		303		0.25	%
FHLB stock		20,655		899		4.35	%		20,831		867		4.17	%		21,375		879		4.11	%
Total interest-earning assets		1,862,340		82,598		4.44	%		1,848,154		88,546		4.80	%		1,836,322		97,108		5.29	%
Non-interest-earning assets		201,212							210,216							218,486

Total Assets	$	2,063,552						$	2,058,370						$	2,054,808

Interest-Bearing Liabilities:
Interest-bearing deposits	$	1,352,724	$	8,169		0.60	%	$	1,358,785	$	12,175		0.90	%	$	1,389,330	$	19,222		1.38	%
FHLB advances		66,121		2,424		3.67	%		93,669		3,203		3.43	%		127,281		4,711		3.70	%
Other borrowings		53,155		373		0.70	%		56,464		530		0.94	%		47,046		455		0.97	%
Subordinated debentures		36,169		971		2.68	%		36,213		1,278		3.54	%		36,228		1,314		3.63	%
Total interest-bearing liabilities		1,508,169		11,937		0.79	%		1,545,131		17,186		1.12	%		1,599,885		25,702		1.61	%
Non-interest bearing demand deposits		266,913		-					231,343		-					200,864		-
Total including non-interest- bearing demand deposits		1,775,082		11,937		0.67	%		1,776,474		17,186		0.97	%		1,800,749		25,702		1.43	%
Other non-interest liabilities		21,276							17,983							15,264
Total Liabilities		1,796,358							1,794,457							1,816,013
Stockholders’ equity		267,194							263,913							238,795
Total liabilities and stockholders’ equity	$	2,063,552						$	2,058,370						$	2,054,808
Net interest income; interest rate spread (3)			$	70,661		3.64	%			$	71,360		3.69	%			$	71,406		3.68	%

Net interest margin (4)						3.81	%						3.88	%						3.89	%
Average interest-earning assets to average interest- bearing liabilities						123.5	%						119.6	%						114.8	%

	Year Ended December 31
	2012 vs. 2011									2011 vs. 2010
	Increase (decrease) due to rate			Increase (decrease) due to volume			Total increase (decrease)			Increase (decrease) due to rate			Increase (decrease) due to volume			Total increase (decrease)
Interest-Earning Assets
Loans	$	(8,198	)	$	2,149		$	(6,049	)	$	(4,352	)	$	(5,650	)	$	(10,002	)
Securities		(1,336	)		1,571			235			(869	)		2,158			1,289
Interest-earning deposits		8			(174	)		(166	)		6			157			163
FHLB stock		39			(7	)		32			11			(23	)		(12	)
Total interest-earning assets	$	(9,487	)	$	3,539		$	(5,948	)	$	(5,204	)	$	(3,358	)	$	(8,562	)

Interest-Bearing Liabilities
Deposits	$	(3,952	)	$	(54	)	$	(4,006	)	$	(6,634	)	$	(413	)	$	(7,047	)
FHLB advances		218			(997	)		(779	)		(338	)		(1,170	)		(1,508	)
Term notes		(127	)		(30	)		(157	)		(14	)		89			75
Subordinated Debentures		(305	)		(2	)		(307	)		(35	)		(1	)		(36	)
Total interest- bearing liabilities	$	(4,166	)	$	(1,083	)	$	(5,249	)	$	(7,021	)	$	(1,495	)	$	(8,516	)

Increase (decrease) in net interest income							$	(699	)							$	(46	)

Financial Condition

Results of Operations

The following table shows an analysis of net interest margin on a tax equivalent basis for the years ended December 31, 2013, 2012 2011 and 2010:2011:

The following table shows an analysis of net interest margin on a tax equivalent basis for the years ended December 31, 2013, 2012 2011 and 2010:
2011:

	Year Ended December 31
	2013 vs. 2012						2012 vs. 2011
	Increase		Increase				Increase		Increase
	(decrease)		(decrease)		Total		(decrease)		(decrease)		Total
	due to		due to		increase		due to		due to		increase
	rate		volume		(decrease)		rate		volume		(decrease)
Interest-Earning Assets
Loans	$	(7,000)	$	2,423	$	(4,577)	$	(8,198)	$	2,149	$	(6,049)
Securities		565		(2,082)		(1,517)		(1,336)		1,571		235
Interest-earning deposits		8		(26)		(18)		8		(174)		(166)
FHLB stock		(24)		(49)		(73)		39		(7)		32
Total interest-earning assets	$	(6,451)	$	266	$	(6,185)	$	(9,487)	$	3,539	$	(5,948)

Interest-Bearing Liabilities
Deposits	$	(2,260)	$	4	$	(2,256)	$	(3,952)	$	(54)	$	(4,006)
FHLB advances		(620)		(1,370)		(1,990)		218		(997)		(779)
Subordinated Debentures		(369)		(1)		(370)		(305)		(2)		(307)
Notes Payable		(135)		(16)		(151)		(127)		(30)		(157)
Total interest- bearing liabilities	$	(3,384)	$	(1,383)	$	(4,767)	$	(4,166)	$	(1,083)	$	(5,249)

Increase (decrease) in net interest income					$	(1,418)					$	(699)

	Maturity Dates by Period at December 31, 2012
Contractual Obligations	Total		Less than 1 year		1-3 years		4-5 years		After 5 years
	(In Thousands)
Certificates of deposit	$	520,538	$	307,445	$	205,889	$	6,536	$	668
FHLB fixed advances including interest (1)		13,933		410		8,262		238		5,023
Subordinated debentures		36,083		-		-		-		36,083
Securities sold under repurchase agreements		51,702		51,702		-		-		-
Unrecognized tax benefits		65		65		-		-		-
Lease obligations		7,885		732		1,231		1,109		4,813
Post-retirement benefits		1,606		120		271		310		905
Total contractual obligations	$	631,812	$	360,474	$	215,653	$	8,193	$	47,492

	Maturity Dates by Period at December 31, 2013
			Less than						After 5
Contractual Obligations	Total		1 year		1-3 years		4-5 years		years
	(In Thousands)
Certificates of deposit	$	485,789	$	296,186	$	138,843	$	50,611	$	149
FHLB fixed advances including interest (1)		23,935		1,502		10,156		12,277		-
Subordinated debentures		36,083		-		-		-		36,083
Securities sold under repurchase agreements		51,919		51,919		-		-		-
Lease obligations		7,648		706		1,214		983		4,745
Post-retirement benefits		1,605		140		260		313		892
Total contractual obligations	$	606,979	$	350,453	$	150,473	$	64,184	$	41,869

	Total		Amount of Commitment Expiration by Period
Commitments	Amounts Committed		Less than 1 year		1-3 years		4-5 years		After 5 years
	(In Thousands)
Retail Lines of Credit	$	91,731	$	8,538	$	15,914	$	22,265	$	45,014
Commercial Lines of Credit		158,514		144,136		13,877		501		-
Retail Other Unused Commitments		3,724		3,720		-		1		3
Commercial Other Unused Commitments		30,248		3,573		2,951		4,369		19,355
Residential Real Estate to Originate		32,509		32,509		-		-		-
Other Real Estate to Originate		25,267		25,267		-		-		-
Non-Mortgage to Originate		6,491		6,491		-		-		-
Total loan commitments		348,484		224,234		32,742		27,136		64,372

Standby letters of credit		18,166		17,697		388		81		-

Total Commitments	$	366,650	$	241,931	$	33,130	$	27,216	$	64,372

	Total		Amount of Commitment Expiration by Period
	Amounts		Less than						After 5
Commitments	Committed		1 year		1-3 years		4-5 years		years
	(In Thousands)
Fixed commitments to make loans	$	57,914	$	48,866	$	1,630	$	2,537	$	4,881
Variable commitments to make loans		59,632		39,120		3,095		438		16,979
Fixed unused lines of credit		18,047		6,746		5,648		5,651		2
Variable unused lines of credit		257,939		161,093		33,357		13,362		50,127
Total loan commitments		393,532		255,825		43,730		21,988		71,989

Standby letters of credit		17,680		3,490		13,750		440		-

Total Commitments	$	411,212	$	259,315	$	57,480	$	22,428	$	71,989

December 31, 2012
									Economic Value of Equity as % of
	Economic Value of Equity								Present Value of Assets
Change in Rates	$ Amount		$ Change			% Change			Ratio			Change
	(Dollars in Thousands)
+ 400 bp		415,094		46,835			12.72	%		21.49	%		356	bp
+ 300 bp		407,337		39,078			10.61	%		20.76	%		283	bp
+ 200 bp		398,150		29,891			8.12	%		19.97	%		204	bp
+ 100 bp		387,482		19,223			5.22	%		19.12	%		119	bp
0 bp		368,259		-			-			17.93	%		–
- 100 bp		343,745		(24,514	)		(6.66	)%		16.57	%		(136	)bp



~~William J. Small~~	Donald P. Hileman	Kevin T. Thompson
~~Chairman,~~Executive Vice President and	Executive Vice President and
Chief Executive Officer	Chief Financial Officer

	For the Year Ended December 31
	2012			2011			2010
	(In Thousands)
Net income	$	18,664		$	15,534		$	8,108
Change in securities available-for-sale (AFS):
Unrealized holding gains (losses) on available-for-sale securities arising during the period		2,360			7,404			(1,010	)
Reclassification adjustment for (gains) losses realized in income		(2,139	)		(218	)		8
Other-than-temporary impairment losses on AFS securities realized in income		5			2			331
Net unrealized gains (losses)		226			7,188			(671	)

Income tax effect		(79	)		(2,516	)		235
Net of tax amount		147			4,672			(436	)

Change in unrealized gain on postretirement benefit:
Net gain (loss) on defined benefit postretirement medical plan realized during the period		148			(537	)		349
Net amortization and deferral		51			25			39
Net gain (loss) activity during the period		199			(512	)		388
Income tax effect		(69	)		179			(136	)
Net of tax amount		130			(333	)		252

Total other comprehensive income (loss)		277			4,339			(184	)
Comprehensive income	$	18,941		$	19,873		$	7,924

	For the Years Ended December 31
	2013		2012		2011
	(In Thousands)
Net income	$	22,235	$	18,664	$	15,534
Change in securities available-for-sale (AFS):
Unrealized holding gains (losses) on available-for-sale securities arising during the period		(6,309)		2,360		7,404
Reclassification adjustment for (gains) losses realized in income		(97)		(2,139)		(218)
Other-than-temporary impairment losses on AFS securities realized in income		337		5		2
Net unrealized gains (losses)		(6,069)		226		7,188

Income tax effect		2,124		(79)		(2,516)
Net of tax amount		(3,945)		147		4,672

Change in unrealized gain on postretirement benefit:
Net gain (loss) on defined benefit postretirement medical plan realized during the period		287		148		(537)
Net amortization and deferral		46		51		25
Net gain (loss) activity during the period		333		199		(512)
Income tax effect		(117)		(69)		179
Net of tax amount		216		130		(333)

Total other comprehensive income (loss)		(3,729)		277		4,339
Comprehensive income	$	18,506	$	18,941	$	19,873

														Stock		Accumulated
						Common					Additional			Acquired		Other						Total
	Preferred			Common		Stock		Treasury			Paid-In			by		Comprehensive			Retained			Stockholder’s
	Stock			Stock		Warrant		Stock			Capital			ESOP		Income (Loss)			Earnings			Equity

Balance at January 1, 2010	$	36,293		$	127	$	878	$	(72,631	)	$	140,677		$	-	$	(158	)	$	128,900		$	234,086
Net income																				8,108			8,108
Other comprehensive income																	(184	)					(184	)
Stock option expense												168											168
250 stock options exercised, with no income tax benefit									3														3
Preferred stock dividends accrued																				(1,850	)		(1,850	)
Accretion on preferred shares		170																		(170	)		-
Balance at December 31, 2010	$	36,463		$	127	$	878	$	(72,628	)	$	140,845		$	-	$	(342	)	$	134,988		$	240,331
Net income																				15,534			15,534
Other comprehensive income																	4,339						4,339
Stock option expense												144											144
850 stock options exercised, with no income tax benefit									14											(3	)		11
1,600,800 shares issued capital stock									25,156			(5,297	)										19,859
Restricted share activity under stock incentive plans									75			136											211
2,085 shares issued direct purchases									32			(3	)										29
Preferred stock dividends accrued																				(1,850	)		(1,850	)
Accretion on preferred shares		178																		(178	)		-
Common stock dividends declared																				(481	)		(481	)
Balance at December 31, 2011	$	36,641		$	127	$	878	$	(47,351	)	$	135,825		$	-	$	3,997		$	148,010		$	278,127
Net income																				18,664			18,664
Other comprehensive income																	277						277
Stock option expense												104											104
500 shares issued under stock option plan, with no income tax benefit									8											(4	)		4
Restricted share activity under stock incentive Plans									30			116											146
836 shares issued direct purchases									13			1											14
Preferred stock dividends accrued																				(900	)		(900	)
Accretion on preferred shares		359																		(359	)		-
16,560 shares purchased in Treasury auction		(16,560	)																	618			(15,942	)
20,440 shares purchased in open market		(20,440	)																	24			(20,416	)
Common stock dividends declared																				(1,950	)		(1,950	)
Balance at December 31, 2012	$	-		$	127	$	878	$	(47,300	)	$	136,046		$	-	$	4,274		$	164,103		$	258,128