(1) Amounts are included in gains on sale or call of securities on the Consolidated Condensed Statements of Income. Income tax expense associated with the reclassification adjustments, included in federal income taxes, for the three months ended ~~March 31,~~June 30, 2016 and 2015 was ~~$46~~$79 and $0, respectively. Income tax expense associated with the reclassification adjustments, included in federal income taxes, for the six months ended June 30, 2016 and 2015 was $125 and $0, respectively.

First Defiance Financial Corp. (“First Defiance” or the “Company”) is a unitary thrift holding company that conducts business through its three wholly owned subsidiaries, First Federal Bank of the Midwest (“First Federal”), First Insurance Group of the Midwest, Inc. (“First Insurance”), and First Defiance Risk Management Inc. (“First Defiance Risk Management”). All significant intercompany transactions and balances are eliminated in consolidation.

First Federal is primarily engaged in attracting deposits from the general public through its offices and using those and other available sources of funds to originate loans primarily in the counties in which its offices are located. First Federal’s traditional banking activities include originating and servicing residential, non-residential real estate, commercial, home improvement and home equity and consumer loans and providing a broad range of depository, trust and wealth management services.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 Insurance is an insurance agency that conducts business through offices located in the Defiance, Maumee, Oregon, Bryan, Lima and Bowling Green, Ohio areas. First Insurance offers property and casualty insurance, life insurance and group health insurance.First Defiance Risk Management is a wholly-owned insurance company subsidiary of the Company that insures the Company and its subsidiaries against certain risks unique to the operations of the Company and for which insurance may not be currently available or economically feasible in today’s insurance marketplace. First Defiance Risk Management pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves.

The consolidated condensed statement of financial condition at December 31, 2015 has been derived from the audited financial statements at that date, which were included in First Defiance’s Annual Report on Form ~~10-K.~~10-K, for the year ended December 31, 2015.

The accompanying consolidated condensed financial statements as of ~~March 31,~~June 30, 2016 and for the three and six month periods ended ~~March 31,~~June 30, 2016 and 2015 have been prepared by First Defiance without audit and do not include information or footnotes necessary for the complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States. These consolidated condensed financial statements should be read in conjunction with the financial statements and notes thereto included in First Defiance's 2015 Annual Report on Form 10-K for the year ended December 31, 2015. However, in the opinion of management, all adjustments, consisting of only normal recurring items, necessary for the fair presentation of the financial statements have been made. The results for the three and six month ~~period~~periods ended ~~March 31,~~June 30, 2016 are not necessarily indicative of the results that may be expected for the entire year.

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. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

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

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09:Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in ASU 2016-09 simplify several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for public companies for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company ~~did not early~~elected to adopt ~~and is currently assessing the impact of~~ ASU 2016-09 ~~on its~~in the second quarter of 2016. As a result of adoption, net income for the first quarter of 2016 was revised to reflect a $99,000 reduction to tax expense, which increased net income by $99,000 and a credit to tax expense was recorded in the second quarter of 2016. Also as a result of adoption, the Company is accounting for forfeitures as they occur and the amounts previously recorded in equity are prospectively being recorded as income tax benefits. The excess income tax benefits are reflected in the operating activities in the Consolidated ~~Financial~~Condensed Statements ~~and disclosures.~~of Cash Flows.

In February 2016, FASB issued ASU 2016-02 (Topic 842):Leases. The main objective of ASU 2016-02 is to provide users with useful, transparent, and complete information about leasing transactions. ASU 2016-02 requires the rights and obligations associated with leasing arrangements be reflected on the balance sheet in order to increase transparency and comparability among organizations. Under the updated guidance, lessees will be required to recognize a right-to-use asset and a liability to make a lease payment and disclose key information about leasing arrangements. ASU 2016-02 is effective for public companies for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the impact of ASU 2016-02 on its Consolidated Financial Statements and disclosures.

In January 2016, FASB issued ASU 2016-01:Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The main objective of ASU 2016-01 is to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Some of the amendments in ASU 2016-01 include the following: 1) Require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; 3) Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and 4) Require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value; among others. For public business entities, the amendments of ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the effects of ASU 2016-01 on its Consolidated Financial Statements and disclosures.

In June 2016, the FASB issued ASU 2016-13:Financial Instruments-Credit Losses(Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for public companies for annual periods beginning after December 13, 2019, including interim periods within those fiscal years. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company has not yet determined the impact the adoption of ASU 2016-13 will have on the Consolidated Financial Statements and disclosures.

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:

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.

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

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

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

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

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

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

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:

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of ~~March 31,~~June 30, 2016, the significant unobservable inputs used in the fair value measurements were as follows:

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of December 31, 2015, the significant unobservable inputs used in the fair value measurements were as follows:

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a fair value of ~~$5.1~~$4.9 million, with ~~an $8,000~~a $16,000 valuation allowance and a fair value of $5.1 million, with an $8,000 valuation allowance at ~~March 31,~~June 30, 2016 and December 31, 2015, respectively. A provision recovery of ~~$119,000~~$79,000 and $198,000 for the three months and six months ended ~~March 31,~~June 30, 2016 and a provision recovery of ~~$621,000~~$98,000 and $719,000 for the three months and six months ended ~~March 31,~~June 30, 2015, ~~was~~were included in earnings.

Mortgage servicing rights which are carried at the lower of cost or fair value had a fair value of ~~$3.5~~$3.2 million with a valuation allowance of ~~$666,000~~$770,000 and a fair value of $872,000 with a valuation allowance of $645,000 at ~~March 31,~~June 30, 2016 and December 31, 2015, respectively. A charge of ~~$21,000~~$104,000 and $125,000 for the three and six months ended June 30, 2016 and a recovery of ~~$26,000~~$141,000 and $167,000 for the three and six months ended ~~March 31, 2016 and March 31,~~June 30, 2015, respectively, were included in earnings.

Real estate held for sale is determined using Level 3 inputs which include appraisals and are adjusted for estimated costs to sell. The change in fair value of real estate held for sale was $0 and ~~fixed assets transferred to real estate held for sale was~~ $53,000 ~~and $522,000~~ for the three and six months ended ~~March 31,~~June 30, 2016, ~~and March 31, 2015, respectively,~~ which was recorded directly as an adjustment to current earnings through non-interest expense. The change in fair value of real estate held for sale was $182,000 and $705,000 for the three and six months ended June 30, 2015.

In accordance with FASB ASC Topic 825, the Fair Value Measurements tables are a comparative condensed consolidated statement of financial condition based on carrying amount and estimated fair values of financial instruments as of ~~March 31,~~June 30, 2016 and December 31, 2015. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of First Defiance.

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

The carrying amount of cash and cash equivalents, term notes payable and advance payments by borrowers for taxes and insurance, as a result of their short-term nature, is considered to be equal to fair value and are classified as Level 1.

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

The fair value of loans that reprice within 90 days is equal to their carrying amount. For other loans, the estimated fair value is calculated based on discounted cash flow analysis, using interest rates currently being offered for loans with similar terms, resulting in a Level 3 classification. Impaired loans are valued at the lower of cost of fair value as previously described. The allowance for loan losses is considered to be a reasonable adjustment for credit risk. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price. The fair value of loans held for sale is estimated based on binding contracts and quotes from third party investors resulting in a Level 2 classification.

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

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

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

FHLB advances with maturities greater than 90 days are valued based on discounted cash flow analysis, using interest rates currently being quoted for similar characteristics and maturities resulting in a Level 2 classification. The cost or value of any call or put options is based on the estimated cost to settle the option at ~~March 31,~~June 30, 2016.

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

As of ~~March 31,~~June 30, 2016, ~~75,050~~65,800 options had been granted 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% per ~~year except for the 2009 grant to the Company’s executive officers, which vested 40% in 2011 and then 20% annually.~~year. All options expire ten years from the date of grant. Vested options of retirees expire on the earlier of the scheduled expiration date or three months after the retirement date.

In ~~2014,~~each of the years 2014-2016, the Company approved a ~~2014~~ Short-Term Incentive Plan (“STIP”) and a ~~2014~~ Long-Term Incentive Plan (“LTIP”) for selected senior members of management.

Under the 2014 ~~STIP,~~and 2015 STIPs, the participants ~~may~~could earn up to 30% to 45% of their salary for potential payout based on the achievement of certain corporate performance targets during the calendar year. The 2016 STIP allows participants to earn up to 10% to 45% of their salary for potential payout based on the achievement of certain corporate performance targets during the calendar year. The final amount of benefits under the ~~2014 STIP were~~STIPs is determined as of December 31 ~~2014~~of the same year and ~~were~~ paid out in cash in the first quarter of ~~2015.~~the following year. The participants are required to be employed on the day of payout in order to receive such payment.

Under ~~the 2014~~each LTIP, the participants may earn up to 20% to 45% of their salary for potential payout in the form of equity awards based on the achievement of certain corporate performance targets over a three-year period. The Company granted ~~30,538~~30,538; 24,757; and 24,526 RSU’s to the participants in the 2014, ~~LTIP~~2015 and 2016 LTIPs, respectively, effective January 1 ~~2014,~~in the year the award is made, which ~~represented~~represents the maximum target award. The amount of benefit under ~~the 2014~~each LTIP will be determined individually at the end of the 36 month performance period ending December ~~31, 2016.~~31. The benefits earned under ~~the 2014~~each LTIP will be paid out in equity in the first quarter ~~of 2017. The participants are required to be employed on the day of payout in order to receive such payment.~~

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

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

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

A total of 7,011 RSU’s were issued to the participants of the 2013 LTIP in the first quarter of 2016 for the year three performance period ended December 31, 2015.

In ~~2016,~~ the ~~Company approved a 2016 STIP and a 2016 LTIP for selected senior members of management.~~

Under the 2016 STIP, the participants could earn up to 10% to 45% of their salary for potential payout based on the achievement of certain corporate and personal performance targets during the calendar year. The final amount of benefits under the 2016 STIP will be determined as of December 31, 2016 and will be paid out in cash in the first quarter of 2017. The participants are required to be employed on the day of payout in order to receive such payment.

Under the 2016 LTIP, the participants may earn up to 20% to 45% of their salary for potential payout in the form of equity awards based on the achievement of certain corporate performance targets over a three-year period. The Company granted 24,526 RSU’s to the participants in the 2016 LTIP effective January 1, 2016, which represents the maximum target award. The amount of benefit under the 2016 LTIP will be determined individually at the end of the 36 month performance period ending December 31, 2018. The benefits earned under the 2016 LTIP will be paid out in common shares in the first quarter of 2019. The participants are required to be employed on the day of payout in order to receive such payment.

~~In the three~~six months ended ~~March 31,~~June 30, 2016, the Company also granted 2,022 restricted shares to employees. 1,000 of the shares have a one-year vesting period and the remaining 1,022 shares have a 4 year vesting period. The fair value of all granted restricted shares was determined by the stock price aton the date of the grant.

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

The fair value of stock options granted during the ~~three~~six months ended ~~March 31,~~June 30, 2016 was determined at the date of grant using the Black-Scholes stock option-pricing model and the following assumptions:

The weighted-average fair value of options granted was $13.95 for the ~~three~~six months ended ~~March 31,~~June 30, 2016 and $13.13 for the ~~three~~six months ended ~~March 31,~~June 30, 2015.

Following is ~~stock option~~ activity under the plans during the ~~three~~six months ended ~~March 31,~~June 30, 2016:

Proceeds, related tax benefits realized from options exercised and intrinsic value of options exercised were as follows (in 000’s):

As of ~~March 31,~~June 30, 2016, there was ~~$214,000~~$199,000 of total unrecognized compensation ~~cost~~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 ~~3.90~~3.67 years.

At ~~March 31,~~June 30, 2016, 75,468 RSU’s and ~~12,449~~12,161 stock grants were outstanding. Compensation expense is recognized over the performance period based on the achievements of targets as established ~~under~~with the plan documents. A total expense of ~~$261,000~~$707,000 was recorded during the ~~three~~six months ended ~~March 31,~~June 30, 2016 compared to an expense of ~~$226,000~~$477,000 for the same period in 2015. There was approximately ~~$191,000~~$367,000 included within other liabilities at ~~March 31,~~June 30, 2016 related to the STIP.

The maximum amount of compensation expense that may be recorded for the 2016 STIP and the 2014, 2015 and 2016 LTIPs at ~~March 31,~~June 30, 2016 is approximately $3.4 million. However, the estimated expense expected to be recorded as of ~~March 31,~~June 30, 2016 based on the performance measures in the plans, is $2.3 million of which ~~$1.6~~$1.3 million is unrecognized at ~~March 31,~~June 30, 2016 and will be recognized over the remaining performance periods.

First Defiance declared and paid a $0.22 ~~per~~ common stock dividend in the first ~~quarter~~and second quarters of 2016, and declared and paid a $0.175 and $0.20 per common stock dividend in the first ~~quarter~~and second quarters of ~~2015.~~2015, respectively.

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

There were 12,550 shares under option granted to employees excluded from the diluted earnings per common share calculation as they were anti-dilutive for both the three and six months ended ~~March 31, 2016. Options to acquire~~June 30, 2016, respectively. There were 6,750 and 16,750 shares ~~were~~under options granted to employees excluded from the diluted earnings per common share ~~calculations~~calculation as they were anti-dilutive for the three and six months ended ~~March 31, 2015.~~June 30, 2015, respectively.

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

Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
At December 31, 2015
Available-for-sale
Obligations of U.S. government corporations and agencies $ 3,000 $ 1 $ (7 ) $ 2,994
Mortgage-backed securities - residential 63,815 898 (59 ) 64,654
REMICs 1,592 28 - 1,620
Collateralized mortgage obligations 71,176 976 (353 ) 71,799
Preferred stock - 1 - 1
Corporate bonds 4,955 39 (17 ) 4,977
Obligations of state and political
subdivisions 85,680 4,712 (2 ) 90,390
Total Available-for-Sale $ 230,218 $ 6,655 $ (438 ) $ 236,435

Gross Gross
Amortized Unrecognized Unrecognized Fair
Cost Gains Losses Value
(In Thousands)
Held-to-Maturity Securities*:
FHLMC certificates $ 14 $ - $ - $ 14
FNMA certificates 74 2 (1 ) 75
GNMA certificates 31 1 - 32
Obligations of states and political subdivisions 124 - - 124
Total Held-to-Maturity $ 243 $ 3 $ (1 ) $ 245

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
	(In Thousands)
Held-to-Maturity Securities*:
FHLMC certificates	$	13	$	-	$	-		$	13
FNMA certificates		65		2		(1	)		66
GNMA certificates		27		-		-			27
Obligations of state and political subdivisions		93		-		-			93
Totals	$	198	$	2	$	(1	)	$	199

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
At December 31, 2015	(In Thousands)
Available-for-Sale Securities:
Obligations of U.S. government corporations and agencies	$	3,000	$	1	$	(7	)	$	2,994
Mortgage-backed securities - residential		63,815		898		(59	)		64,654
REMICs		1,592		28		-			1,620
Collateralized mortgage obligations		71,176		976		(353	)		71,799
Preferred stock		-		1		-			1
Corporate bonds		4,955		39		(17	)		4,977
Obligations of state and political subdivisions		85,680		4,712		(2	)		90,390
Total Available-for-Sale	$	230,218	$	6,655	$	(438	)	$	236,435

			Gross		Gross
	Amortized		Unrecognized		Unrecognized			Fair
	Cost		Gains		Losses			Value
	(In Thousands)
Held-to-Maturity Securities*:
FHLMC certificates	$	14	$	-	$	-		$	14
FNMA certificates		74		2		(1	)		75
GNMA certificates		31		1		-			32
Obligations of states and political subdivisions		124		-		-			124
Total Held-to-Maturity	$	243	$	3	$	(1	)	$	245

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

The amortized cost and fair value of the investment securities portfolio at ~~March 31,~~June 30, 2016 are shown below by contractual maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. For purposes of the maturity table, mortgage-backed securities (“MBS”), collateralized mortgage obligations (“CMO”) and REMICs, which are not due at a single maturity date, have not been allocated over the maturity groupings. These securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.

Available-for-Sale Held-to-Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
(In Thousands)
Due in one year or less $ 5,796 $ 5,824 $ - $ -
Due after one year through five years 10,945 11,395 124 124
Due after five years through ten years 35,632 37,833 - -
Due after ten years 39,842 41,953 - -
MBS/CMO/REMIC 128,081 130,828 111 114
$ 220,296 $ 227,833 $ 235 $ 238

	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(In Thousands)
Due in one year or less	$	2,718	$	2,751	$	-	$	-
Due after one year through five years		19,075		19,436		93		93
Due after five years through ten years		32,113		34,256		-		-
Due after ten years		40,184		42,801		-		-
MBS/CMO		125,516		128,730		105		106
	$	219,606	$	227,974	$	198	$	199

Investment securities with a carrying amount of ~~$142.6~~$148.5 million at ~~March 31,~~June 30, 2016 were pledged as collateral on public deposits, securities sold under repurchase agreements and ~~the~~ Federal Reserve discount window.

As of ~~March 31,~~June 30, 2016, the Company’s investment portfolio consisted of ~~357~~348 securities, 138 of which were in an unrealized loss position.

The following tables summarize First Defiance’s securities that were in an unrealized loss position at ~~March 31,~~June 30, 2016 and December 31, 2015:

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 March 31, 2016
Available-for-sale securities:
Collateralized mortgage obligations $ 1,921 $ (17 ) $ 8,505 $ (74 ) $ 10,426 $ (91 )
Obligations of state and political subdivisions 815 (23 ) - - 815 (23 )
Corporate bonds 989 (11 ) - - 989 (11 )
Total temporarily impaired securities $ 3,725 $ (51 ) $ 8,505 $ (74 ) $ 12,230 $ (125 )

	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 June 30, 2016
Available-for-sale securities:
Obligations of U.S. government corporations and agencies	$	-	$	-		$	2,749	$	(35	)	$	2,749	$	(35	)
Corporate bonds		989		(11	)		-		-			989		(11	)
Held to maturity securities:
FNMA certificates		32		(1	)		-		-			32		(1	)
Total temporarily impaired securities	$	1,021	$	(12	)	$	2,749	$	(35	)	$	3,770	$	(47	)

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, 2015
Available-for-sale securities:
Obligations of U.S. government corporations and agencies $ 993 $ (7 ) $ - $ - $ 993 $ (7 )
Collateralized mortgage obligations 12,374 (150 ) 8,158 (203 ) 20,532 (353 )
Corporate bonds 983 (17 ) - - 983 (17 )
Obligations of state and political subdivisions - - 433 (2 ) 433 (2 )
Mortgage-backed securities-residential 12,525 (59 ) - - 12,525 (59 )
Held to maturity securities:
FNMA certificates 13 (1 ) - - 13 (1 )
Total temporarily impaired securities $ 26,888 $ (234 ) $ 8,591 $ (205 ) $ 35,479 $ (439 )

	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, 2015
Available-for-sale securities:
Obligations of U.S. government corporations and agencies	$	993	$	(7	)	$	-	$	-		$	993	$	(7	)
Collateralized mortgage obligations		12,374		(150	)		8,158		(203	)		20,532		(353	)
Corporate bonds		983		(17	)		-		-			983		(17	)
Obligations of state and political subdivisions		-		-			433		(2	)		433		(2	)
Mortgage-backed securities-residential		12,525		(59	)		-		-			12,525		(59	)
Held to maturity securities:
FNMA certificates		13		(1	)		-		-			13		(1	)
Total temporarily impaired securities	$	26,888	$	(234	)	$	8,591	$	(205	)	$	35,479	$	(439	)

Realized gains from the sales and calls of investment securities totaled ~~$131,000~~$227,000 ($~~92,000~~148,000 after tax) in the ~~first~~second quarter of 2016, while there were no realized gains in the second quarter of 2015. There were realized gains from the sales and calls of investment securities totaling $358,000 ($233,000 after tax) for the first ~~quarter~~six months of 2016 compared to no realized gains for the first six months of 2015.

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

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

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

During the first ~~quarter~~six months of 2016 and 2015, management determined there was no OTTI.

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

	Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015		2016		2015
	(In Thousands)				(In Thousands)
Proceeds	$	5,360	$	-	$	3,155	$	-	$	8,515	$	-
Gross realized gains		131		-		227		-		358		-
Gross realized losses		-		-		-		-		-		-

~~Loans~~

8. Loans

Loans receivable consist of the following:

	March 31, 2016			December 31, 2015
	(In Thousands)						June 30, 2016			December 31, 2015
Real Estate:							(In Thousands)

Secured by 1-4 family residential	$	208,818		$	205,330		$	206,861		$	205,330
Secured by multi-family residential		181,486			167,558			193,016			167,558
Secured by commercial real estate		807,982			780,870			808,299			780,870
Construction		145,635			163,877			161,282			163,877
		1,343,921			1,317,635			1,369,458			1,317,635
Other Loans:
Commercial		412,911			419,349			428,599			419,349
Home equity and improvement		116,856			116,962			116,685			116,962
Consumer finance		15,679			16,281			16,690			16,281
		545,446			552,592			561,974			552,592
Total loans		1,889,367			1,870,227			1,931,432			1,870,227
Deduct:
Undisbursed loan funds		(63,267	)		(66,902	)		(68,850	)		(66,902	)
Net deferred loan origination fees and costs		(1,114	)		(1,108	)		(1,179	)		(1,108	)
Allowance for loan loss		(25,668	)		(25,382	)		(25,948	)		(25,382	)
Totals	$	1,799,318		$	1,776,835		$	1,835,455		$	1,776,835

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

The following table discloses allowance for loan loss activity for the quarter ended ~~March 31,~~June 30, 2016 and 2015 by portfolio segment (In Thousands):

Quarter Ended March 31, 2016	1-4 Family Residential Real Estate			Multi- Family Residential Real Estate		Commercial Real Estate			Construction			Commercial			Home Equity and Improvement			Consumer Finance			Total
Quarter Ended June 30, 2016																								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	$	3,212		$	2,151	$	11,772		$	517		$	5,255		$	2,304		$	171		$	25,382		$	3,109		$	2,250	$	11,644		$	489	$	5,820		$	2,232		$	124		$	25,668
Charge-Offs		(55	)		0		(13	)		0			(336	)		(30	)		0			(434	)		(37	)		0		0			0		(19	)		(66	)		(17	)		(139	)
Recoveries		86			0		177			0			19			39			35			356			34			0		229			0		56			34			13			366

Provisions		(134	)		99		(292	)		(28	)		882			(81	)		(82	)		364			(267	)		115		(969	)		144		883			78			69			53
Ending Allowance	$	3,109		$	2,250	$	11,644		$	489		$	5,820		$	2,232		$	124		$	25,668		$	2,839		$	2,365	$	10,904		$	633	$	6,740		$	2,278		$	189		$	25,948

Quarter Ended March 31, 2015	1-4 Family Residential Real Estate			Multi- Family Residential Real Estate		Commercial Real Estate			Construction		Commercial			Home Equity and Improvement			Consumer Finance			Total
Quarter Ended June 30, 2015																							1-4 Family Residential Real Estate			Multi- Family Residential Real Estate			Commercial Real Estate			Construction		Commercial			Home Equity and Improvement			Consumer Finance			Total
Beginning Allowance	$	2,494		$	2,453	$	11,268		$	221	$	6,509		$	1,704		$	117		$	24,766		$	2,483		$	2,554		$	11,684		$	303	$	6,766		$	1,420		$	92		$	25,302
Charge-Offs		(78	)		0		(155	)		0		(2	)		(43	)		(3	)		(281	)		(12	)		(114	)		(31	)		0		(23	)		(187	)		(13	)		(380	)
Recoveries		19			0		597			0		40			29			12			697			54			0			167			0		173			51			17			462

Provisions		48			101		(26	)		82		219			(270	)		(34	)		120			352			(171	)		276			5		(1,349	)		823			64			0
Ending Allowance	$	2,483		$	2,554	$	11,684		$	303	$	6,766		$	1,420		$	92		$	25,302		$	2,877		$	2,269		$	12,096		$	308	$	5,567		$	2,107		$	160		$	25,384

The following table discloses allowance for loan loss activity for the year-to-date periods ended June 30, 2016 and June 30, 2015 by portfolio segment and impairment method (In Thousands):

Year-to-date Period Ended June 30, 2016	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	$	3,212		$	2,151		$	11,772		$	517	$	5,255		$	2,304		$	171		$	25,382
Charge-Offs		(92	)		(0	)		(13	)		0		(355	)		(96	)		(17	)		(573	)
Recoveries		120			0			406			0		75			73			48			722
Provisions		(401	)		214			(1,261	)		116		1,765			(3	)		(13	)		417
Ending Allowance	$	2,839		$	2,365		$	10,904		$	633	$	6,740		$	2,278		$	189		$	25,948

Year-to-date Period Ended June 30, 2015	1-4 Family Residential Real Estate			Multi- Family Residential Real Estate			Commercial Real Estate			Construction		Commercial			Home Equity and Improvement			Consumer Finance			Total
Beginning Allowance	$	2,494		$	2,453		$	11,268		$	221	$	6,509		$	1,704		$	117		$	24,766
Charge-Offs		(90	)		(114	)		(186	)		0		(25	)		(230	)		(16	)		(661	)
Recoveries		73			0			764			0		213			80			29			1,159
Provisions		400			(70	)		250			87		(1,130	)		553			30			120
Ending Allowance	$	2,877		$	2,269		$	12,096		$	308	$	5,567		$	2,107		$	160		$	25,384

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 ~~March 31,~~June 30, 2016 (In Thousands):

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

Ending allowance balance attributable to loans:

Individually evaluated for impairment	$	197	$	-	$	154	$	-	$	11	$	38	$	-	$	400	$	125	$	1	$	108	$	-	$	14	$	40	$	-	$	288

Collectively evaluated for impairment		2,912		2,250		11,490		489		5,809		2,194		124		25,268		2,714		2,364		10,796		633		6,726		2,238		189		25,660

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

Total ending allowance balance	$	3,109	$	2,250	$	11,644	$	489	$	5,820	$	2,232	$	124	$	25,668	$	2,839	$	2,365	$	10,904	$	633	$	6,740	$	2,278	$	189	$	25,948

Loans:

Loans individually evaluated for impairment	$	7,570	$	4,543	$	18,517	$	-	$	5,423	$	1,740	$	69	$	37,862	$	7,113	$	4,021	$	15,920	$	-	$	3,564	$	1,638	$	64	$	32,320

Loans collectively evaluated for impairment		201,561		177,091		791,608		82,208		408,820		115,641		15,603		1,792,532		200,037		189,160		794,596		92,221		426,304		115,584		16,622		1,834,524

Loans acquired with deteriorated credit quality		-		-		150		-		15		-		-		165		-		-		147		-		13		-		-		160

Total ending loans balance	$	209,131	$	181,634	$	810,275	$	82,208	$	414,258	$	117,381	$	15,672	$	1,830,559	$	207,150	$	193,181	$	810,663	$	92,221	$	429,881	$	117,222	$	16,686	$	1,867,004

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, 2015 (In Thousands):

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

Ending allowance balance attributable to loans:

Individually evaluated for impairment	$	201	$	-	$	139	$	-	$	63	$	34	$	-	$	437

Collectively evaluated for impairment		3,011		2,151		11,633		517		5,192		2,270		171		24,945

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

Total ending allowance balance	$	3,212	$	2,151	$	11,772	$	517	$	5,255	$	2,304	$	171	$	25,382

Loans:

Loans individually evaluated for impairment	$	7,574	$	3,313	$	23,493	$	-	$	6,107	$	1,491	$	71	$	42,049

Loans collectively evaluated for impairment		198,106		164,382		759,281		96,845		414,527		115,977		16,199		1,765,317

Loans acquired with deteriorated credit quality		-		-		153		-		16		-		-		169

Total ending loans balance	$	205,680	$	167,695	$	782,927	$	96,845	$	420,650	$	117,468	$	16,270	$	1,807,535

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

	Three Months Ended June 30, 2016						Six Months Ended June 30, 2016
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized		Cash Basis Income Recognized
Residential Owner Occupied	$	3,774	$	36	$	34	$	3,900	$	75	$	73
Residential Non Owner Occupied		3,211		31		31		3,384		66		65
Total Residential Real Estate		6,985		67		65		7,284		141		138
Construction		-		-		-		-		-		-
Multi-Family		4,063		24		24		4,328		54		54
CRE Owner Occupied		7,169		42		37		8,130		104		85
CRE Non Owner Occupied		4,900		52		53		4,659		105		102
Agriculture Land		1,838		15		2		2,716		50		14
Other CRE		1,675		14		14		1,548		18		18
Total Commercial Real Estate		15,582		123		106		17,053		277		219
Commercial Working Capital		1,535		15		7		1,524		30		22
Commercial Other		1,783		9		9		3,014		28		27
Total Commercial		3,318		24		16		4,538		58		49
Home Equity and Improvement		1,699		13		13		1,724		28		28
Consumer Finance		68		1		1		71		2		2
Total Impaired Loans	$	31,715	$	252	$	225	$	34,998	$	560	$	490

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

Three Months Ended March 31, 2016
Average
Balance Interest
Income
Recognized Cash Basis
Income
Recognized
Residential Owner Occupied $ 4,025 $ 39 $ 39
Residential Non Owner Occupied 3,557 35 34
Total Residential Real Estate 7,582 74 73
Multi-Family 4,593 30 30
CRE Owner Occupied 9,090 62 48
CRE Non Owner Occupied 4,418 53 49
Agriculture Land 3,593 35 12
Other CRE 1,422 4 4
Total Commercial Real Estate 18,523 154 113
Construction - - -
Commercial Working Capital 1,513 15 15
Commercial Other 4,245 19 18
Total Commercial 5,758 34 33
Home Equity and Home Improvement 1,749 15 15
Consumer Finance 73 1 1
Total Impaired Loans $ 38,278 $ 308 $ 265

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

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

Three Months Ended March 31, 2015
Average
Balance Interest
Income
Recognized Cash Basis
Income
Recognized
Residential Owner Occupied $ 5,992 $ 68 $ 68
Residential Non Owner Occupied 4,347 41 40
Total Residential Real Estate 10,339 109 108
Multi-Family 2,463 8 8
CRE Owner Occupied 6,513 37 39
CRE Non Owner Occupied 10,187 133 135
Agriculture Land 760 7 13
Other CRE 2,441 10 9
Total Commercial Real Estate 19,901 187 196
Construction 150 2 2
Commercial Working Capital 1,866 13 13
Commercial Other 3,839 13 18
Total Commercial 5,705 26 31
Home Equity and Home Improvement 2,202 20 20
Consumer Finance 43 - -
Total Impaired Loans $ 40,803 $ 352 $ 365

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

	March 31, 2016						December 31, 2015						June 30, 2016						December 31, 2015
	Unpaid Principal Balance*		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance*		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance*		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance*		Recorded Investment		Allowance for Loan Losses Allocated
With no allowance recorded:
Residential Owner Occupied	$	1,450	$	1,455	$	-	$	1,383	$	1,360	$	-	$	1,498	$	1,477	$	-	$	1,383	$	1,360	$	-
Residential Non Owner Occupied		2,237		2,232		-		2,147		2,141		-		1,889		1,882		-		2,147		2,141		-
Total 1-4 Family Residential Real Estate		3,687		3,687		-		3,530		3,501		-		3,387		3,359		-		3,530		3,501		-
Multi-Family Residential Real Estate		4,688		4,543		-		3,463		3,313		-		4,112		3,965		-		3,463		3,313		-
CRE Owner Occupied		6,725		6,290		-		4,869		4,520		-		5,856		5,565		-		4,869		4,520		-
CRE Non Owner Occupied		3,441		3,183		-		7,932		7,685		-		4,012		3,772		-		7,932		7,685		-
Agriculture Land		3,529		3,602		-		3,546		3,596		-		1,775		1,802		-		3,546		3,596		-
Other CRE		964		934		-		4,076		4,046		-		1,282		1,177		-		4,076		4,046		-
Total Commercial Real Estate		14,659		14,009		-		20,423		19,847		-		12,925		12,316		-		20,423		19,847		-
Construction		-		-		-		-		-		-		-		-		-		-		-		-
Commercial Working Capital		1,264		1,267		-		1,644		1,648		-		1,525		1,490		-		1,644		1,648		-
Commercial Other		4,084		3,715		-		3,573		3,607		-		1,823		1,649		-		3,573		3,607		-
Total Commercial		5,348		4,982		-		5,217		5,255		-		3,348		3,139		-		5,217		5,255		-

Home Equity and Home Improvement		832		787		-		817		772		-
Home Equity and Improvement														825		780		-		817		772		-
Consumer Finance		68		69		-		60		59		-		48		48		-		60		59		-

Total loans with no allowance recorded	$	29,282	$	28,077	$	-	$	33,510	$	32,747	$	-	$	24,645	$	23,607	$	-	$	33,510	$	32,747	$	-

With an allowance recorded:
Residential Owner Occupied	$	2,609	$	2,556	$	183	$	2,918	$	2,837	$	188	$	2,448	$	2,421	$	97	$	2,918	$	2,837	$	188
Residential Non Owner Occupied		1,322		1,327		14		1,231		1,236		13		1,327		1,333		28		1,231		1,236		13
Total 1-4 Family Residential Real Estate		3,931		3,883		197		4,149		4,073		201		3,775		3,754		125		4,149		4,073		201
Multi-Family Residential Real Estate		-		-		-		-		-		-		55		56		1		-		-		-
CRE Owner Occupied		3,191		2,732		140		3,250		2,767		132		2,336		1,875		85		3,250		2,767		132
CRE Non Owner Occupied		1,291		1,225		10		385		308		2		1,304		1,234		16		385		308		2
Agriculture Land		68		69		1		68		69		2		68		71		-		68		69		2
Other CRE		905		482		3		926		502		3		844		424		7		926		502		3
Total Commercial Real Estate		5,455		4,508		154		4,629		3,646		139		4,552		3,604		108		4,629		3,646		139
Construction		-		-		-		-		-		-		-		-		-		-		-		-
Commercial Working Capital		200		201		9		594		596		62		207		208		11		594		596		62
Commercial Other		236		240		2		252		256		1		214		217		3		252		256		1
Total Commercial		436		441		11		846		852		63		421		425		14		846		852		63
Home Equity and Home Improvement		957		953		38		724		719		34		863		858		40		724		719		34
Consumer Finance		-		-		-		12		12		-		16		16		-		12		12		-
Total loans with an allowance recorded	$	10,779	$	9,785	$	400	$	10,360	$	9,302	$	437	$	9,682	$	8,713	$	288	$	10,360	$	9,302	$	437

* Presented gross of charge offs

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

	March 31, 2016		December 31, 2015		June 30, 2016		December 31, 2015
	(In Thousands)				(In Thousands)
Non-accrual loans	$	17,707	$	16,261	$	16,423	$	16,261
Loans over 90 days past due and still accruing		-		-		-		-
Total non-performing loans		17,707		16,261		16,423		16,261
Real estate and other assets held for sale		1,111		1,321		1,079		1,321
Total non-performing assets	$	18,818	$	17,582	$	17,502	$	17,582
Troubled debt restructuring, still accruing	$	11,284	$	11,178	$	9,648	$	11,178

The following table presents the aging of the recorded investment in past due and non accrual loans as of ~~March 31,~~June 30, 2016 by class of loans (In Thousands):

	Current		30-59 days		60-89 days		90+ days		Total Past Due		Total Non Accrual		Current		30-59 days		60-89 days		90+ days		Total Past Due		Total Non Accrual
Residential Owner Occupied	$	141,424	$	83	$	204	$	744	$	1,031	$	1,766	$	138,939	$	54	$	775	$	401	$	1,230	$	1,437
Residential Non Owner Occupied		65,891		63		54		668		785		1,359		66,218		199		220		344		763		1,268
Total 1-4 Family Residential Real Estate		207,315		146		258		1,412		1,816		3,125		205,157		253		995		745		1,993		2,705
Multi-Family Residential Real Estate		179,659		-		-		1,975		1,975		2,356		191,257		-		-		1,924		1,924		2,294

CRE Owner Occupied		342,703		54		-		491		545		4,843		341,301		1,040		-		978		2,018		4,787
CRE Non Owner Occupied		310,095		1,002		108		636		1,746		1,165		313,443		1,130		45		527		1,702		1,783
Agriculture Land		104,271		186		-		-		186		681		101,893		-		-		28		28		896
Other Commercial Real Estate		50,444		-		-		285		285		1,293		50,029		-		-		249		249		1,042

Total Commercial Real Estate		807,513		1,242		108		1,412		2,762		7,982		806,666		2,170		3,890		1,782		3,997		8,508

Construction		82,208		-		-		-		-		-		92,221		-		-		-		-		-

Commercial Working Capital		170,282		10		-		141		151		569		187,734		1,534		69		9		1,612		503
Commercial Other		241,556		163		-		2,106		2,269		2,990		239,092		812		-		631		1,443		1,727

Total Commercial		411,838		173		-		2,247		2,420		3,559		426,826		2,346		69		640		3,055		2,230

Home Equity/Home Improvement		116,440		792		113		36		941		674
Home Equity and Improvement														116,557		536		115		14		665		678
Consumer Finance		15,616		51		5		-		56		13		16,637		49		-		-		49		16

Total Loans	$	1,820,589	$	2,404	$	484	$	7,082	$	9,970	$	17,709	$	1,855,321	$	5,354	$	1,224	$	5,105	$	11,683	$	16,431

The following table presents the aging of the recorded investment in past due and ~~non-accrual~~non accrual loans as of December 31, 2015 by class of loans (In Thousands):

	Current		30-59 days		60-89 days		90+ days		Total Past Due		Total Non Accrual		Current		30-59 days		60-89 days		90+ days		Total Past Due		Total Non Accrual
Residential Owner Occupied	$	138,974	$	159	$	673	$	391	$	1,223	$	1,428	$	138,974	$	159	$	673	$	391	$	1,223	$	1,428
Residential Non Owner Occupied		64,577		324		356		226		906		1,179		64,577		324		356		226		906		1,179
Total 1-4 Family Residential Real Estate		203,551		483		1,029		617		2,129		2,607		203,551		483		1,029		617		2,129		2,607
Multi-Family Residential Real Estate		165,671		-		-		2,024		2,024		2,417		165,671		-		-		2,024		2,024		2,417

CRE Owner Occupied		322,940		772		1,218		1,266		3,256		4,141		322,940		772		1,218		1,266		3,256		4,141
CRE Non Owner Occupied		304,166		-		106		538		644		1,229		304,166		-		106		538		644		1,229
Agriculture Land		98,055		57		-		-		57		695		98,055		57		-		-		57		695
Other Commercial Real Estate		53,494		-		-		315		315		1,364		53,494		-		-		315		315		1,364

Total Commercial Real Estate		778,655		829		1,324		2,119		4,272		7,429		778,655		829		1,324		2,119		4,272		7,429

Construction		96,845		-		-		-		-		-		96,845		-		-		-		-		-

Commercial Working Capital		168,938		16		-		154		170		251		168,938		16		-		154		170		251
Commercial Other		249,070		203		46		2,223		2,472		2,833		249,070		203		46		2,223		2,472		2,833

Total Commercial		418,008		219		46		2,377		2,642		3,084		418,008		219		46		2,377		2,642		3,084

Home Equity and Home Improvement		116,599		733		92		44		869		689		116,599		733		92		44		869		689
Consumer Finance		16,216		27		3		24		54		36		16,216		27		3		24		54		36

Total Loans	$	1,795,545	$	2,291	$	2,494	$	7,205	$	11,990	$	16,262	$	1,795,545	$	2,291	$	2,494	$	7,205	$	11,990	$	16,262

Troubled Debt Restructurings

As of ~~March 31,~~June 30, 2016 and December 31, 2015, the Company had a recorded investment in troubled debt restructurings (“TDRs”) of ~~$17.5~~$15.2 million and $17.6 million, respectively. The Company allocated ~~$283,000~~$262,000 and $335,000 of specific reserves to those loans at ~~March 31,~~June 30, 2016 and December 31, 2015, and has committed to lend additional amounts totaling up to ~~$21,000~~$81,000 and $48,000 at ~~March 31,~~June 30, 2016 and December 31, 2015, respectively.

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

Of the loans modified in a TDR, ~~$6.2~~$5.6 million are on non-accrual status and partial charge-offs have in some cases been taken against the outstanding balance. Loans modified as a TDR may have the financial effect of increasing the allowance associated with the loan. If the loan is determined to be collateral dependent, the estimated fair value of the collateral, less any selling costs is used to determine if there is a need for a specific allowance or charge-off. If the loan is determined to be cash flow dependent, the allowance is measured based on the present value of expected future cash flows discounted at the loan’s pre-modification effective interest rate.

The following table presents loans by class modified as troubled debt restructurings that occurred during the three and six month ~~period~~periods ending ~~March 31,~~June 30, 2016 and ~~March 31,~~June 30, 2015:

	Loans Modified as a TDR for the Three Months Ended March 31, 2015 ($ in thousands)				Loans Modified as a TDR for the Three Months Ended March 31, 2015 ($ in thousands)				Loans Modified as a TDR for the Three Months Ended June 30, 2016 ($ in thousands)				Loans Modified as a TDR for the Six Months Ended June 30, 2016 ($ in thousands)
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)		Number of Loans		Recorded Investment (as of period end)
1-4 Family Owner Occupied		1	$	9		3	$	228		4	$	115		5	$	124
1-4 Family Non Owner Occupied		2		127		4		68		0		-		2		124
Multi Family										1		55		1		55
CRE Owner Occupied		0		-		0		-		0		-		0		-
CRE Non Owner Occupied		0		-		0		-		2		671		2		671
Agriculture Land		0		-		0		-		0		-		0		-
Other CRE		0		-		0		-		0		-		0		-
Commercial Working Capital		0		-		0		-		1		226		1		226
Commercial Other		0		-		0		-		1		606		1		606
Home Equity and Improvement		5		297		3		59		2		56		5		325
Consumer Finance		2		5		5		10		1		6		3		9
Total		10	$	438		15	$	365		12	$	1,735		20	$	2,140

The loans described above decreased the ALLL by ~~$15,000~~$29,000 in the three month period ending ~~March 31,~~June 30, 2016 and $43,000 in the six month period ending June 30, 2016.

	Loans Modified as a TDR for the Three Months Ended June 30, 2015 ($ in thousands)				Loans Modified as a TDR for the Six Months Ended June 30, 2015 ($ in thousands)
Troubled Debt Restructurings	Number of Loans		Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)
1-4 Family Owner Occupied		1	$	9		3	$	226
1-4 Family Non Owner Occupied		0		-		4		65
CRE Owner Occupied		1		582		1		582
CRE Non Owner Occupied		2		260		2		260
Agriculture Land		3		1,555		3		1,555
Other CRE		0		-		0		-
Commercial Working Capital		2		526		2		526
Commercial Other		1		57		1		57
Home Equity and Improvement		4		268		7		326
Consumer Finance		2		34		4		37
Total		16	$	3,291		27	$	3,634

The loans described above increased the ~~ALLL~~allowance for loan loss by ~~$64,000~~$53,000 in the three month period ending ~~March 31,~~June 30, 2015 and increased the allowance for loan loss by $116,000 in the six month period ending June 30, 2015.

Of the 2016 modifications, 5nine were made TDRs due to the fact that the borrower has been in bankruptcy, 1one was made a TDR due to ~~granting~~an interest only ~~payments, 1 was made TDR due to extending the maturity date, and 3~~period, three were made TDRs ~~because~~due to advancing funds to a watchlist credit, three were to extend the maturity of the loan, one was to term out a line of credit and five were made to refinance current debt ~~was refinanced~~ for payment relief.

The following table presents loans by class modified as TDRs for which there was a payment default within twelve months following the modification during the ~~quarters ending March 31,~~three and six month periods ended June 30, 2016 and ~~March 31,~~June 30, 2015:

	Three Months Ended June 30, 2016 ($ in thousands)				Six Months Ended June 30, 2016 ($ in thousands)
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans		Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)
1-4 Family Owner Occupied		0	$	-		0	$	-
1-4 Family Non Owner Occupied		0		-		0		-
CRE Owner Occupied		0		-		0		-
CRE Non Owner Occupied		1		15		1		15
Agriculture Land		0		-		0		-
Other CRE		0		-		0		-
Commercial Working Capital or Other		0		-		0		-
Commercial Other		0		-		0		-
Home Equity and Improvement		0		-		0		-
Consumer Finance		0		-		0		-
Total		1	$	15		1	$	15

Three Months Ended March 31, 2016
($ in thousands) Three Months Ended March 31, 2015
($ in thousands)
Troubled Debt Restructurings
That Subsequently Defaulted Number of
Loans Recorded Investment
(as of period end) Number of
Loans Recorded Investment
(as of period end)
1-4 Family Owner Occupied 0 $ - 1 $ 126
1-4 Family Non Owner Occupied 0 - 1 104
CRE Owner Occupied 0 - 0 -
CRE Non Owner Occupied 0 - 2 387
Agriculture Land 0 - 0 -
Other CRE 0 - 0 -
Commercial Working Capital or Other 0 - 1 120
Commercial Other 0 - 0 -
Home Equity and Improvement 0 - 0 -
Consumer Finance 0 - 0 -
Total 0 $ - 5 $ 737

The TDRs that subsequently defaulted described above had no ~~affect~~effect on the allowance for loan losses for the three and six month periods ~~ending March 31, 2016 or~~ended June 30, 2016.

	Three Months Ended June 30, 2015 ($ in thousands)				Six Months Ended June 30, 2015 ($ in thousands)
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans		Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)
1-4 Family Owner Occupied		0	$	-		0	$	-
1-4 Family Non Owner Occupied		1		104		1		104
CRE Owner Occupied		0		-		0		-
CRE Non Owner Occupied		0		-		0		-
Agriculture Land		0		-		0		-
Other CRE		0		-		0		-
Commercial Working Capital or Other		0		-		0		-
Commercial Other		0		-		0		-
Home Equity and Improvement		1		22		1		22
Consumer Finance		0		-		0		-
Total		2	$	126		2	$	126

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

The terms of certain other loans were modified during the period ending ~~March 31,~~June 30, 2016 ~~and the modifications~~that did not meet the definition of a TDR. The modification of these loans involved a modification of the terms of ~~the loans for~~a loan to borrowers who were not experiencing financial difficulties. A total of 63140 loans were modified under this definition during the three month period ended ~~March 31,~~June 30, 2016 and a total of 203 loans were modified under this definition during the six month period ended June 30, 2016.

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

Credit Quality Indicators

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

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

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of ~~March 31,~~June 30, 2016, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (In Thousands):

Class	Pass		Special Mention		Substandard		Doubtful		Not Graded		Total		Pass		Special Mention		Substandard		Doubtful		Not Graded		Total
1-4 Family Owner Occupied	$	4,940	$	121	$	2,298	$	-	$	135,096	$	142,455	$	5,350	$	120	$	2,080	$	-	$	132,619	$	140,169
1-4 Family Non Owner Occupied		56,739		1,263		4,416		-		4,258		66,676		56,808		1,259		3,973		-		4,941		66,981

Total 1-4 Family Real Estate		61,679		1,384		6,714		-		139,354		209,131		62,158		1,379		6,053		-		137,560		207,150

Multi-Family Residential Real Estate		176,033		488		4,996		-		117		181,634		186,747		1,909		4,409		-		116		193,181

CRE Owner Occupied		315,063		17,831		9,847		-		616		343,357		317,380		16,277		9,136		-		525		343,318
CRE Non Owner Occupied		304,891		884		5,943		-		13		311,731		307,586		1,004		6,545		-		10		315,145
Agriculture Land		98,378		2,253		3,826		-		-		104,457		99,447		487		1,986		-		-		101,920
Other CRE		47,059		583		2,572		-		516		50,730		46,810		77		2,704		-		689		50,280

Total Commercial Real Estate		765,391		21,551		22,188		-		1,145		810,275		771,223		17,845		20,371		-		1,2244		810,663

Construction		60,945		2,293		-		-		18,970		82,208		66,812		4,250		-		-		21,159		92,221

Commercial Working Capital		160,656		7,392		2,384		-		-		170,432		176,926		9,816		2,604		-		-		189,346
Commercial Other		234,166		4,305		5,355		-		-		243,826		231,192		6,094		3,249		-		-		240,535

Total Commercial		394,822		11,697		7,739		-		-		414,258		408,118		15,910		5,853		-		-		429,881

Home Equity and Home Improvement		-		-		738		-		116,643		117,381		-		-		662		-		116,560		117,222
Consumer Finance		-		-		14		-		15,658		15,672		-		-		16		-		16,670		16,686

Total Loans	$	1,458,870	$	37,413	$	42,389	$	-	$	291,887	$	1,830,559	$	1,495,058	$	41,293	$	37,364	$	-	$	294,175	$	1,867,890

As of December 31, 2015, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (In Thousands):

Class	Pass		Special Mention		Substandard		Doubtful		Not Graded		Total

Residential Owner Occupied	$	5,828	$	123	$	2,427	$	-	$	131,820	$	140,198
Residential Non Owner Occupied		55,169		1,420		4,439		-		4,454		65,482

Total 1-4 Family Real Estate		60,997		1,543		6,866		-		136,274		205,680

Multi-Family Residential Real Estate		163,405		498		3,675		-		117		167,695

CRE Owner Occupied		297,856		17,896		9,730		-		714		326,196
CRE Non Owner Occupied		293,057		2,143		9,595		-		15		304,810
Agriculture Land		92,262		1,947		3,903		-		-		98,112
Other CRE		47,109		469		5,739		-		492		53,809

Total Commercial Real Estate		730,284		22,455		28,967		-		1,221		782,927

Construction		76,152		2,159		-		-		18,534		96,845

Commercial Working Capital		163,071		2,497		3,540		-		-		169,108
Commercial Other		243,308		2,706		5,528		-		-		251,542

Total Commercial		406,379		5,203		9,068		-		-		420,650

Home Equity and Home Improvement		-		-		689		-		116,779		117,468
Consumer Finance		-		-		15		-		16,255		16,270

Total Loans	$	1,437,217	$	31,858	$	49,280	$	-	$	289,180	$	1,807,535

Foreclosure Proceedings

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled ~~$359,000~~$228,000 as of ~~March 31,~~June 30, 2016.

~~Mortgage Banking~~

9. Mortgage Banking

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

	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015			2016			2015
	(In Thousands)						(In Thousands)
Gain from sale of mortgage loans	$	994		$	1,285		$	1,426		$	1,246		$	2,420		$	2,531
Mortgage loans servicing revenue (expense):
Mortgage loans servicing revenue		877			875			876			852			1,753			1,727
Amortization of mortgage servicing rights		(311	)		(411	)		(434	)		(446	)		(745	)		(857	)
Mortgage servicing rights valuation adjustments		(21	)		26			(104	)		141			(125	)		167
		545			490			338			547			883			1,037

Net revenue from sale and servicing of mortgage loans	$	1,539		$	1,775		$	1,764		$	1,793		$	3,303		$	3,568

The unpaid principal balance of residential mortgage loans serviced for third parties was $1.35 billion at June 30, 2016 and $1.34 billion at ~~both March 31, 2016 and~~ December 31, 2015.

Activity for capitalized mortgage servicing rights and the related valuation allowance follows for the three and six months ended ~~March 31,~~June 30, 2016 and 2015:

							Three Months Ended June 30,						Six Months Ended June 30,
	March 31, 2016			March 31, 2015			2016			2015			2016			2015
	(In Thousands)						(In Thousands)
Mortgage servicing assets:
Balance at beginning of period	$	9,893		$	9,923		$	9,879		$	9,832		$	9,893		$	9,923
Loans sold, servicing retained		297			320			461			486			758			806
Amortization		(311	)		(411	)		(434	)		(446	)		(745	)		(857	)
Carrying value before valuation allowance at end of period		9,879			9,832			9,906			9,872			9,906			9,872

Valuation allowance:
Balance at beginning of period		(645	)		(911	)		(666	)		(885	)		(645	)		(911	)
Impairment (expense) recovery		(21	)		26
Impairment recovery (charges)								(104	)		141			(125	)		167
Balance at end of period		(666	)		(885	)		(770	)		(744	)		(770	)		(744	)
Net carrying value of MSRs at end of period	$	9,213		$	8,947		$	9,136		$	9,128		$	9,136		$	9,128
Fair value of MSRs at end of period	$	9,463		$	9,180		$	9,273		$	9,574		$	9,273		$	9,574

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

The Company established an accrual for secondary market buy-back losses that resulted in a reversal of ~~$59,000~~$9,000 and ~~$58,000~~$14,000 in the second quarter of 2016 and 2015, respectively. The Company reversed $68,000 and $72,000 in the first ~~quarter~~six months of 2016 and 2015, respectively. The reversals are mainly due to no actual losses being recorded in the first ~~quarter~~six months of 2016 and ~~2015, respectively.~~2015.

~~10.~~40

~~Deposits~~

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

The putable advance can be put back to the Company at the option of the FHLB on a quarterly basis. A $5.0 million putable advance with a weighted average rate of 2.35% was not yet callable by the FHLB at ~~March 31,~~June 30, 2016. The call date for this advance is ~~June 13,~~September 16, 2016 and the maturity date is March 12, 2018. Putable advances are callable at the option of the FHLB on a quarterly basis.

In March 2007, the Company sponsored an affiliated trust, First Defiance Statutory Trust II (Trust Affiliate II) that issued $15 million of Guaranteed Capital Trust Securities (Trust Preferred Securities). In connection with this transaction, the Company issued $15.5 million of Junior Subordinated Deferrable Interest Debentures (Subordinated Debentures) to Trust Affiliate II. The Company formed Trust Affiliate II for the purpose of issuing Trust Preferred Securities to third-party investors and investing the proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The Subordinated Debentures held by Trust Affiliate II are the sole assets of that trust. The Company is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability.Distributions on the Trust Preferred Securities issued by Trust Affiliate II are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 1.5%. The Coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate II was ~~2.13%~~2.15% as of ~~March 31,~~June 30, 2016 and 2.01% as of December 31, 2015.

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

The Company also sponsored an affiliated trust, First Defiance Statutory Trust I (Trust Affiliate I), that issued $20 million of Trust Preferred Securities in 2005. In connection with this transaction, the Company issued $20.6 million of Subordinated Debentures to Trust Affiliate I. Trust Affiliate I was formed for the purpose of issuing Trust Preferred Securities to third-party investors and investing the proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The Junior Debentures held by Trust Affiliate I are the sole assets of the trust. The Company is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability.Distributions on the Trust Preferred Securities issued by Trust Affiliate I are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 1.38%. The Coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate I was ~~2.01%~~2.03% and 1.89% on ~~March 31,~~June 30, 2016 and December 31, 2015 respectively.

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

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

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

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

The remaining contractual maturity of the securities sold under agreements to repurchase in the consolidated balance sheets as of ~~March 31,~~June 30, 2016 and December 31, 2015 is presented in the following tables.

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

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

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

In addition to the above commitments, First Defiance had commitments to sell ~~$31.3~~$40.8 million and $19.9 million of loans to Freddie Mac, Fannie Mae, Federal Home Loan Bank of Cincinnati or BB&T Mortgage at ~~March 31,~~June 30, 2016 and December 31, 2015, respectively.

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 2011. The Company currently operates primarily in the states of Ohio and Michigan, which tax financial institutions based on their equity rather than their income.As a result of adopting ASU 2016-09, a $31,000 credit to tax expense was recorded in the second quarter of 2016 and a $99,000 credit to tax expense was recorded in the first quarter of 2016.

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 ~~$23.0~~$29.6 million and $14.9 million of interest rate lock commitments at ~~March 31,~~June 30, 2016 and December 31, 2015, respectively. There were ~~$31.3~~$40.8 million and $19.9 million of forward commitments for the future delivery of residential mortgage loans at ~~March 31,~~June 30, 2016 and December 31, 2015, respectively.

The fair value of these mortgage banking derivatives are reflected by a derivative asset recorded in other assets in the Consolidated Statements of Condition. The table below provides data about the carrying values of these derivative instruments:

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

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

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

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

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

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

The general partner of each limited partnership has both the power to direct the activities which most significantly affect the performance of each partnership and the obligation to absorb losses or the right to receive benefits that could be significant to the entities. Therefore, the Company has determined that it is not the primary beneficiary of any LIHTC partnership. In January of 2014, the FASB issued ASU 2014-01“Accounting for Investments in Qualified Affordable Housing Projects.” The pronouncement permitted reporting entities to make an accounting policy election to account for these investments using the proportional amortization method if certain conditions exist. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received, and will recognize the net investment performance in the income statement as a component of income tax expense (benefit). The Company ~~utilized~~elected to early adopt ASU 2014-01 in January 2014. All of the Company’s investments are accounted for under the proportional amortization method, ~~for all~~as there were no investments held prior to January of ~~its instruments.~~2014. As of ~~March 31,~~June 30, 2016 and December 31, 2015 the Company had ~~$4.2~~$7.1 million and $4.3 million in qualified investments recorded in other assets and ~~$2.2~~$4.8 million and $2.4 million in unfunded commitments recorded in other liabilities, respectively.

As of ~~March 31,~~June 30, 2016, the expected payments for unfunded affordable housing commitments were as follows:

The following table presents tax credits and other tax benefits recognized and amortization expense related to affordable housing for the three and six months ended ~~March 31,~~June 30, 2016 and 2015.

There were no impairment losses of LIHTC investments for the three and six months ended ~~March 31,~~June 30, 2016 and 2015.

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

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

First Defiance is a unitary thrift holding company that conducts business through its wholly owned subsidiaries, First Federal, First Insurance and First Defiance Risk Management.

First Federal is a federally chartered stock savings bank that provides financial services to communities based in northwest Ohio, northeast Indiana, and southeastern Michigan where it operates 34 full service banking centers in twelve northwest Ohio counties, one northeast Indiana county, and one southeastern Michigan county. First Federal operates one loan production office in one central Ohio 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, Bryan, Bowling Green, Lima, Maumee and Oregon, Ohio areas.

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

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

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

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

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

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

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

The new rules include (a) a new common equity tier 1 (“CET1”) capital ratio of at least 4.5%, (b) a Tier 1 capital ratio of at least 6.0%, rather than the former 4.0%, (c) a minimum total capital ratio that remains at 8.0%, and (d) a minimum leverage ratio of 4%.

Common equity for the CET1 capital ratio includes common stock (plus related surplus) and retained earnings, plus limited amounts of minority interests in the form of common stock, less the majority of certain regulatory deductions.

Tier 1 capital includes common equity as defined for the CET1 capital ratio, plus certain non-cumulative preferred stock and related surplus, cumulative preferred stock and related surplus and trust preferred securities that have been grandfathered (but which are not permitted going forward), and limited amounts of minority interests in the form of additional Tier 1 capital instruments, less certain deductions.

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

The deductions from CET1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments and investments in the capital of unconsolidated financial institutions (above certain levels). The deductions phase in from 2015 through 2019.

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

The new rules also place restrictions on the payment of capital distributions, including dividends, and certain discretionary bonus payments to executive officers if the company does not hold a capital conservation buffer of greater than 2.5% composed of CET1 capital above its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. The capital conservation buffer phases in starting on January 1, 2016, at .625%. The implementation of Basel III did not have a material impact on First Defiance’s or First Federal’s capital ratios.

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

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

Fee Income Development - Generation of fee income and the diversification of revenue sources are accomplished through the mortgage banking operation, First Insurance 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 to 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 monitors the overall trends in the portfolio to maintain its industry and loan type concentration targets. First Federal maintains a problem loan remediation process that focuses on detection and resolution. First Federal maintains a strong process of internal control that subjects the loan portfolio to periodic internal reviews as well as independent third-party loan review.

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

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

Securities are classified as held-to-maturity when First Defiance has the positive intent and ability to hold the security to maturity. Held-to-maturity securities are stated at amortized cost and had a recorded value of ~~$235,000~~$198,000 at ~~March 31,~~June 30, 2016. Securities not classified as held-to-maturity are classified as available-for-sale, which are stated at fair value and had a recorded value of ~~$227.8~~$228.0 million at ~~March 31,~~June 30, 2016. The available-for-sale portfolio consists of obligations of U.S. Government corporations and agencies ($~~1.0~~3.0 million), certain municipal obligations ($~~91.0~~85.2 million), CMOs/REMICs ($~~71.1~~67.5 million), corporate bonds ($~~5.0~~11.0 million), ~~and~~ mortgage backed securities ($~~59.7~~61.3 million).

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

Lending - In order to properly assess the collateral dependent loans included in its loan portfolio, the Company has established policies regarding the monitoring of the collateral underlying such loans. The Company requires an appraisal that is less than one year old for all new 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.

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

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.

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

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

At ~~March 31,~~June 30, 2016, First Defiance's total assets, deposits and stockholders' equity amounted to ~~$2.36~~$2.41 billion, ~~$1.87~~$1.92 billion and ~~$280.4~~$286.6 million, respectively, compared to $2.30 billion, $1.84 billion and $280.2 million, respectively, at December 31, 2015.

Net loans receivable (excluding loans held for sale) increased ~~$22.5~~$58.6 million to ~~$1.80~~$1.84 billion. The variance in loans receivable between ~~March 31,~~June 30, 2016 and December 31, 2015 ~~includes~~include increases in commercial real estate loans (up ~~$41.0~~$52.9 million) ~~and~~, commercial loans (up $9.3 million), residential real estate loans (up ~~$3.5~~$1.5 million) and consumer loans (up $409,000). These increases were ~~partially~~slightly offset by decreases in construction loans (down ~~$18.2 million), commercial loans (down $6.4~~$4.5 million), home equity loans (down ~~$0.1 million) and consumer loans (down $0.6 million)~~$277,000).

The investment securities portfolio decreased ~~$8.6~~$8.5 million to ~~$228.1~~$228.2 million at ~~March 31,~~June 30, 2016 from $236.7 million at December 31, 2015. The decrease is the result of ~~$7.9~~$17.9 million of securities maturing or being called induring the ~~period and $5.4~~first six months of 2016 as well as sales of securities of $8.5 million. This was partially offset by purchases of $15.5 million of ~~securities being sold. This was somewhat offset by $3.4 million of securities being purchased in the period.~~securities. There was an unrealized gain in the investment portfolio of ~~$7.5~~$8.4 million at ~~March 31,~~June 30, 2016 compared to an unrealized gain of $6.2 million at December 31, ~~2015.~~2015 an increase of $2.2 million.

Deposits increased from $1.84 billion at December 31, 2015 to ~~$1.87~~$1.92 billion as of ~~March 31,~~June 30, 2016. Non-interest bearing demand deposits ~~decreased $5.4~~increased $22.1 million to ~~$426.1~~$442.8 million, interest bearing demand and money market deposits increased ~~$15.8~~$38.3 million to ~~$783.0~~$805.6 million, and savings deposits increased ~~$13.9~~$20.7 million to ~~$233.5~~$240.3 million. Retail time deposits ~~remained steady at $428.5~~increased $3.0 million to $431.6 million.

Stockholders’ equity increased from $280.2 million at December 31, 2015 to ~~$280.4~~$286.6 million at ~~March 31,~~June 30, 2016. The increase in stockholders’ equity was the result of recording net income of ~~$7.1~~$14.4 million, an increase in other comprehensive income of ~~$857,000~~$1.4 million and a ~~$314,000~~$490,000 increase due to the exercise of stock options. These were ~~mostly~~partially offset by ~~$2.0~~$3.9 million of common stock dividends being paid in the first ~~quarter~~six months of 2016 and $6.3 million in repurchased common stock.

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

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

601 Clinton Street, Defiance, Ohio			43512
(Address of principal executive office)		(Zip Code)

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

		Page Number
PART I.-FINANCIAL INFORMATION

Item 1.	Consolidated Condensed Financial Statements (Unaudited):
	Consolidated Condensed Statements of Financial Condition – ~~March 31,~~June 30, 2016 and December 31, 2015	2

	Consolidated Condensed Statements of Income - Three and six months ended ~~March 31,~~June 30, 2016 and 2015	4

	Consolidated Condensed Statements of Comprehensive Income – Three and six months ended ~~March 31,~~June 30, 2016 and 2015	5

	Consolidated Condensed Statements of Changes in Stockholders’ Equity – ~~Three~~Six months ended ~~March 31,~~June 30, 2016 and 2015	6

	Consolidated Condensed Statements of Cash Flows - ~~Three~~Six months ended ~~March 31,~~June 30, 2016 and 2015	7

	Notes to Consolidated Condensed Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	4648

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	6669

Item 4.	Controls and Procedures	6771

PART II-OTHER INFORMATION:

Item 1.	Legal Proceedings	6972

Item 1A.	Risk Factors	6972

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6972

Item 3.	Defaults upon Senior Securities	6972

Item 4.	Mine Safety Disclosures	6972

Item 5.	Other Information	6973

Item 6.	Exhibits	7073

	Signatures	7174

	March 31, 2016		December 31, 2015		June 30, 2016		December 31, 2015

Assets
Cash and cash equivalents:
Cash and amounts due from depository institutions	$	40,785	$	38,769	$	46,546	$	38,769
Federal funds sold		83,000		41,000		84,000		41,000
		123,785		79,769		130,546		79,769
Securities:
Available-for-sale, carried at fair value		227,833		236,435		227,974		236,435
Held-to-maturity, carried at amortized cost (fair value $238 and $245 at March 31, 2016 and December 31, 2015, respectively)		235		243
Held-to-maturity, carried at amortized cost (fair value $199 and $245 at June 30, 2016 and December 31, 2015, respectively)						198		243
		228,068		236,678		228,172		236,678
Loans held for sale		8,323		5,523		13,142		5,523
Loans receivable, net of allowance of $25,668 at March 31, 2016 and $25,382 at December 31, 2015, respectively		1,799,318		1,776,835
Loans receivable, net of allowance of $25,948 at June 30, 2016 and $25,382 at December 31, 2015, respectively						1,835,455		1,776,835
Accrued interest receivable		6,901		6,171		6,421		6,171
Federal Home Loan Bank stock		13,800		13,801		13,800		13,801
Bank owned life insurance		52,139		51,908		52,369		51,908
Premises and equipment		37,909		38,166		37,571		38,166
Real estate and other assets held for sale		1,111		1,321		1,079		1,321
Goodwill		61,798		61,798		61,798		61,798
Core deposit and other intangibles		1,714		1,871		1,567		1,871
Mortgage servicing rights		9,213		9,248		9,136		9,248
Other assets		14,852		14,587		18,543		14,587
Total assets	$	2,358,931	$	2,297,676	$	2,409,599	$	2,297,676

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

	Three Months Ended				Three Months Ended				Six Months Ended
	March 31,				June 30,				June 30,
	2016		2015		2016		2015		2016		2015
Interest Income
Loans	$	19,312	$	17,887	$	19,666	$	18,139	$	38,978	$	36,026
Investment securities:
Taxable		843		913		781		918		1,624		1,832
Non-taxable		787		779		762		803		1,549		1,581
Interest-bearing deposits		49		39		134		41		183		80
FHLB stock dividends		139		139		137		136		276		275
Total interest income		21,130		19,757		21,480		20,037		42,610		39,794
Interest Expense
Deposits		1,433		1,272		1,545		1,312		2,978		2,584
FHLB advances and other		297		110		321		173		618		283
Subordinated debentures		175		147		182		150		357		297
Securities sold under repurchase agreements		37		38
Notes payable						36		37		73		75
Total interest expense		1,942		1,567		2,084		1,672		4,026		3,239
Net interest income		19,188		18,190		19,396		18,365		38,584		36,555
Provision for loan losses		364		120		53		-		417		120
Net interest income after provision for loan losses		18,824		18,070		19,343		18,365		38,167		36,435
Non-interest Income
Service fees and other charges		2,644		2,529		2,799		2,690		5,443		5,219
Insurance commission income		3,136		3,139
Insurance commissions						2,504		2,344		5,640		5,483
Mortgage banking income		1,539		1,775		1,764		1,793		3,303		3,568
Gain on sale of non-mortgage loans		45		36		411		197		456		233
Gain on sale of securities		131		-
Gain on sale or call of securities						227		-		358		-
Trust income		427		357		409		367		836		725
Income from Bank Owned Life Insurance		231		208		230		212		461		420
Other non-interest income		483		237		231		206		714		443
Total non-interest income		8,636		8,281		8,575		7,809		17,211		16,091
Non-interest Expense
Compensation and benefits		10,185		8,922		9,770		9,182		19,955		18,105
Occupancy		1,785		1,764		1,828		1,809		3,613		3,573
FDIC insurance premium		327		351		329		319		656		670
Financial institutions tax		446		481		447		411		893		893
Data processing		1,460		1,523		1,641		1,599		3,101		3,121
Amortization of intangibles		157		217		147		162		304		379
Other non-interest expense		2,914		3,639		3,185		3,314		6,099		6,953
Total non-interest expense		17,274		16,897		17,347		16,796		34,621		33,694
Income before income taxes		10,186		9,454		10,571		9,378		20,757		18,832
Federal income taxes		3,116		2,853		3,307		2,815		6,324		5,668
Net Income	$	7,070	$	6,601	$	7,264	$	6,563	$	14,433	$	13,164

Earnings per common share (Note 6)
Basic	$	0.79	$	0.71	$	0.81	$	0.71	$	1.61	$	1.42
Diluted	$	0.78	$	0.69	$	0.80	$	0.70	$	1.59	$	1.39
Dividends declared per share (Note 5)	$	0.22	$	0.175	$	0.22	$	0.20	$	0.44	$	0.375
Average common shares outstanding (Note 6)
Basic		8,994		9,234		8,968		9,268		8,981		9,251
Diluted		9,064		9,611		9,036		9,349		9,050		9,483

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

Balance at January 1, 2016	$	-		9,102,831		$	127	$	-		$	125,734		$	3,622		$	219,737		$	(69,023	)	$	280,197
Net income																		14,433						14,433
Other comprehensive income															1,398									1,398
Stock option expense												120												120
Shares issued under stock option plan, net of 1,570 repurchased and retired				25,350								(23	)					(26	)		539			490
Restricted share activity under stock incentive plans				10,405								34						(72	)		225			187
Shares issued direct purchases				620								12									12			24
Shares repurchased				(167,746	)																(6,293	)		(6,293	)
Common stock dividends declared																		(3,940	)					(3,940	)
Balance at June 30, 2016	$	-		8,971,460		$	127	$	-		$	125,877		$	5,020		$	230,132		$	(74,540	)	$	286,616

Balance at January 1, 2015	$	-		9,234,534		$	127	$	878		$	136,266		$	4,114		$	200,600		$	(62,480	)	$	279,505
Net income																		13,164						13,164
Other comprehensive loss															(1,520	)								(1,520	)
Stock option expense												59												59
Warrant repurchase									(878	)		(11,101	)											(11,979	)
Shares issued under stock option plan, net of 12,844 repurchased and retired				62,410								213						(312	)		1,360			1,261
Restricted share activity under stock incentive plans				15,006								(223	)					185			270			232
Shares issued direct purchases				1,090								17									21			38
Shares repurchased				(37,857	)																(1,264	)		(1,264	)
Common stock dividends declared																		(3,468	)					(3,468	)
Balance at June 30, 2015	$	-		9,275,183		$	127	$	-		$	125,231		$	2,594		$	210,169		$	(62,093	)	$	276,028

March 31, 2016	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
June 30, 2016									Level 1 Inputs		Level 2 Inputs			Level 3 Inputs		Total Fair Value
	(In Thousands)								(In Thousands)
Available for sale securities:

Obligations of U.S. government corporations and agencies	$	-	$	1,009	$	-	$	1,009
Obligations of U.S. Government corporations and agencies									$	-	$	3,013		$	-	$	3,013
Mortgage-backed - residential		-		59,721		-		59,721		-		61,266			-		61,266
REMICs		-		1,579		-		1,579		-		1,522			-		1,522
Collateralized mortgage obligations- residential		-		69,528		-		69,528
Collateralized mortgage obligations-residential										-		65,942			-		65,942
Preferred stock		1		-		-		1		1		-			-		1
Corporate bonds				4,988		-		4,988		-		11,020			-		11,020
Obligations of state and political subdivisions		-		91,007		-		91,007		-		85,210			-		85,210
Mortgage banking derivative - asset		-		856		-		856		-		1,294			-		1,294
Mortgage banking derivative - liability		-		78		-		78		-		(306	)		-		(306	)

March 31, 2016	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
June 30, 2016									Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)								(In Thousands)
Impaired loans
1-4 Family Residential Real Estate	$	-	$	-	$	258	$	258	$	-	$	-	$	250	$	250
Multi Family Residential		-		-		83		83		-		-		76		76
Commercial Real Estate		-		-		4,650		4,650		-		-		4,362		4,362
Commercial loans		-		-		39		39		-		-		123		123
Home Equity and Improvement		-		-		81		81		-		-		80		80
Total Impaired loans		-		-		5,111		5,111		-		-		4,891		4,891

Mortgage servicing rights		-		3,547				3,547		-		3,248		-		3,248

Real estate held for sale		-
Residential		-		-		-		-		-		-		-		-
Commercial Real Estate		-		-		130		130		-		-		130		130
Total real estate held for sale		-		-		130		130		-		-		130		130

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

Impaired Loans- Applies to all loan classes	$	5,111	Appraisals which utilize sales comparison, net income and cost approach	Discounts for collection issues and changes in market conditions	10-30%	11%	$	4,891	Appraisals which utilize sales comparison, net income and cost approach	Discounts for collection issues and changes in market conditions		10-40%		11	%

Real estate held for sale – Applies to all classes	$	130	Appraisals which utilize sales comparison, net income and cost approach	Discounts for changes in market conditions	20%	20%	$	130	Appraisals which utilize sales comparison, net income and cost approach	Discounts for changes in market conditions		20%		20	%

	Carrying		Fair Value Measurements at March 31, 2016 (In Thousands)
	Value		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	123,785	$	123,785	$	123,785	$	-	$	-
Investment securities		228,068		228,071		1		228,070		-
Federal Home Loan Bank Stock		13,800		N/A		N/A		N/A		N/A
Loans, net, including loans held for sale		1,807,641		1,816,978		-		8,968		1,808,010
Accrued interest receivable		6,901		6,901		4		1,324		5,573

Financial Liabilities:
Deposits	$	1,871,157	$	1,875,050	$	426,053	$	1,449,852	$	-
Advances from Federal Home Loan Bank		84,664		85,127		-		85,127		-
Securities sold under repurchase agreements		57,985		57,985		-		57,985		-
Subordinated debentures		36,083		35,352		-		-		35,352

	Carrying		Fair Value Measurements at December 31, 2015 (In Thousands)										Fair Value Measurements at June 30, 2016 (In Thousands)
	Value		Total		Level 1		Level 2		Level 3		Carrying Value		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	79,769	$	79,769	$	79,769	$	-	$	-	$	130,546	$	130,546	$	130,546	$	-	$	-
Investment securities		236,678		236,680		1		236,679		-		228,172		228,173		1		228,172		-
Federal Home Loan Bank Stock		13,801		N/A		N/A		N/A		N/A		13,800		N/A		N/A		N/A		N/A
Loans, net, including loans held for sale		1,782,358		1,784,998		-		5,899		1,779,099		1,848,597		1,863,425		-		14,027		1,849,398
Accrued interest receivable		6,171		6,171		7		846		5,318		6,421		6,421		8		811		5,602

Financial Liabilities:
Deposits	$	1,836,137	$	1,840,464	$	420,691	$	1,419,773	$	-	$	1,920,270	$	1,925,357	$	442,811	$	1,482,546	$	-
Advances from Federal Home Loan Bank		59,902		59,653		-		59,653		-		84,425		85,058		-		85,058		-
Securities sold under repurchase agreements		57,188		57,188		-		57,188		-		52,989		52,989		-		52,989		-
Subordinated debentures		36,083		35,305		-		-		35,305		36,083		35,380		-		-		35,380

	Options Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in 000’s)
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, 2016		86,220		$	20.27						86,220		$	20.27
Forfeited or cancelled		-			-						-			-
Exercised		(17,670	)		20.03						(26,920	)		20.59
Granted		6,500			37.78						6,500			37.78
Options outstanding, March 31, 2016		75,050		$	21.84		3.71	$	1,244
Vested or expected to vest at March 31, 2016		75,050		$	21.84		3.71	$	1,244
Exercisable at March 31, 2016		57,250		$	18.49		2.11	$	1,140
Options outstanding, June 30, 2016											65,800		$	21.86		3.81	$	1,118
Vested or expected to vest at June 30, 2016											65,800		$	21.86		3.81	$	1,118
Exercisable at June 30, 2016											48,000		$	17.88		2.04	$	1,006

	Three Months Ended March 31,				Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015		2016		2015
Proceeds of options exercised	$	353	$	1,059	$	200	$	1,718	$	490	$	2,777
Related tax benefit recognized		75		91		36		139		110		230
Intrinsic value of options exercised		326		512		161		877		488		1,619

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

Unvested at January 1, 2016		74,545		$	25.86		10,927		$	30.98		74,545		$	25.86		10,927		$	30.98
Granted		24,526			39.30		9,033			23.28		24,526			39.30		10,905			23.39
Vested		(7,011	)		19.19		(7,011	)		19.19		(7,011	)		19.19		(9,171	)		22.50
Forfeited		(16,592	)		19.19		(500	)		32.00		(16,592	)		19.19		(500	)		32.00
Unvested at March 31, 2016		75,468		$	32.31		12,449		$	31.99
Unvested at June 30, 2016												75,468		$	32.31		12,161		$	32.77

	Three months ended June 30,				Six months ended June 30,
	2016		2015		2016		2015
Numerator for basic and diluted earnings per common share – Net income	$	7,264	$	6,563	$	14,433	$	13,164
Denominator:
Denominator for basic earnings per common share – weighted average common shares, including participating securities		8,968		9,268		8,981		9,251
Effect of warrants		-		-		-		147
Effect of employee stock options and restricted share activity		68		81		69		85

Denominator for diluted earnings per common share share		9,036		9,349		9,050		9,483
Basic earnings per common share	$	0.81	$	0.71	$	1.61	$	1.42
Diluted earnings per common share	$	0.80	$	0.70	$	1.59	$	1.39

	Three Months Ended March 31, 2016
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized
Residential Owner Occupied	$	4,025	$	39	$	39
Residential Non Owner Occupied		3,557		35		34
Total Residential Real Estate		7,582		74		73
Multi-Family		4,593		30		30
CRE Owner Occupied		9,090		62		48
CRE Non Owner Occupied		4,418		53		49
Agriculture Land		3,593		35		12
Other CRE		1,422		4		4
Total Commercial Real Estate		18,523		154		113
Construction		-		-		-
Commercial Working Capital		1,513		15		15
Commercial Other		4,245		19		18
Total Commercial		5,758		34		33
Home Equity and Home Improvement		1,749		15		15
Consumer Finance		73		1		1
Total Impaired Loans	$	38,278	$	308	$	265

	Three Months Ended March 31, 2015
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized
Residential Owner Occupied	$	5,992	$	68	$	68
Residential Non Owner Occupied		4,347		41		40
Total Residential Real Estate		10,339		109		108
Multi-Family		2,463		8		8
CRE Owner Occupied		6,513		37		39
CRE Non Owner Occupied		10,187		133		135
Agriculture Land		760		7		13
Other CRE		2,441		10		9
Total Commercial Real Estate		19,901		187		196
Construction		150		2		2
Commercial Working Capital		1,866		13		13
Commercial Other		3,839		13		18
Total Commercial		5,705		26		31
Home Equity and Home Improvement		2,202		20		20
Consumer Finance		43		-		-
Total Impaired Loans	$	40,803	$	352	$	365

	Three Months Ended March 31, 2016 ($ in thousands)				Three Months Ended March 31, 2015 ($ in thousands)
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans		Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)
1-4 Family Owner Occupied		0	$	-		1	$	126
1-4 Family Non Owner Occupied		0		-		1		104
CRE Owner Occupied		0		-		0		-
CRE Non Owner Occupied		0		-		2		387
Agriculture Land		0		-		0		-
Other CRE		0		-		0		-
Commercial Working Capital or Other		0		-		1		120
Commercial Other		0		-		0		-
Home Equity and Improvement		0		-		0		-
Consumer Finance		0		-		0		-
Total		0	$	-		5	$	737

	Overnight and Continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total
At March 31, 2016			(In Thousands)
Repurchase agreements:
Mortgage-backed securities – residential	$	26,836	$	-	$	-	$	-	$	26,836
Collateralized mortgage obligations		31,149		-		-		-		31,149
Total borrowings	$	57,985	$	-	$	-	$	-	$	57,985
Gross amount of recognized liabilities for repurchase agreements									$	57,985

	Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount			Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount
Three months ended March 31, 2016:	(In Thousands)
										(In Thousands)
Three months ended June 30, 2016:
Securities available for sale:
Change in net unrealized gain/loss during the period	$	1,450		$	(508	)	$	942		$	1,059		$	(370	)	$	689
Reclassification adjustment for net gains included in net income		(131	)		46			(85	)		(227	)		79			(148	)
Total other comprehensive loss	$	1,319		$	(462	)	$	857
Total other comprehensive income										$	832		$	(291	)	$	541

Three months ended March 31, 2015:
Six months ended June 30, 2016:
Securities available for sale:
Change in net unrealized gain/loss during the period	$	1,502		$	527		$	975		$	2,509		$	(878	)	$	1,631
Reclassification adjustment for net gains included in net income		-			-			-			(358	)		125			(233	)
Total other comprehensive loss	$	1,502		$	527		$	975
Total other comprehensive income										$	2,151		$	(753	)	$	1,398

							Accumulated									Accumulated
	Securities			Post-			Other			Securities			Post-			Other
	Available			retirement			Comprehensive			Available			retirement			Comprehensive
	For Sale			Benefit			Income			For Sale			Benefit			Income
	(In Thousands)									(In Thousands)
Balance January 1, 2016	$	4,042		$	(420	)	$	3,622		$	4,042		$	(420	)	$	3,622
Other comprehensive income before reclassifications		942			-			942			1,631			-			1,631
Amounts reclassified from accumulated other comprehensive income		(85	)		-			(85	)		(233	)		-			(233	)

Net other comprehensive income during period		857			-			857			1,398			-			1,398

Balance March 31, 2016	$	4,899		$	(420	)	$	4,479
Balance June 30, 2016										$	5,440		$	(420	)	$	5,020

Balance January 1, 2015	$	4,697		$	(583	)	$	4,114		$	4,697		$	(583	)	$	4,114
Other comprehensive income before reclassifications		975			-			975			(1,520	)		-			(1,520	)
Amounts reclassified from accumulated other comprehensive income		-			-			-			-			-			-

Net other comprehensive income during period		975			-			975			(1,520	)		-			(1,520	)

Balance March 31, 2015	$	5,672		$	(583	)	$	5,089
Balance June 30, 2015										$	3,177		$	(583	)	$	2,594

(dollars in thousands)	Amount		Amount
2016	$	1,259	$	1,261
2017		160		1,143
2018		414		1,137
2019		93		308
2020		66		179
Thereafter		247		778
Total Unfunded Commitments	$	2,239	$	4,806

	March 31,			December 31,			June 30,			December 31,
	2016			2015			2016			2015
	(In Thousands)						(In Thousands)
Non-performing loans:
One to four family residential real estate	$	3,130		$	2,610		$	2,708		$	2,610
Non-residential and multi-family residential real estate		10,344			9,848			10,799			9,848
Commercial		3,551			3,078			2,223			3,078
Construction		-			-			-			-
Home equity and improvement		673			689			677			689
Consumer Finance		9			36			16			36
Total non-performing loans		17,707			16,261			16,423			16,261

Real estate owned		1,111			1,321			1,079			1,321
Other repossessed assets		-			-			-			-
Total repossessed assets	$	1,111			1,321		$	1,079			1,321

Total Nonperforming assets	$	18,818		$	17,582		$	17,502		$	17,582

Restructured loans, accruing	$	11,284		$	11,178		$	9,648		$	11,178

Total nonperforming assets as a percentage of total assets		0.80	%		0.77	%		0.73	%		0.77	%
Total nonperforming loans as a percentage of total loans*		0.97	%		0.91	%		0.90	%		0.91	%
Total nonperforming assets as a percentage of total loans plus REO*		1.03	%		0.97	%		0.94	%		0.97	%
Allowance for loan losses as a percent of total nonperforming assets		136.40	%		144.36	%		148.26	%		144.36	%

	For the Three Months Ended March 31, 2016						As of March 31, 2016
	Net											For the Six Months Ended June 30, 2016						As of June 30, 2016
	Charge-offs (Recovery)			% of Total Net Charge-offs			Nonaccrual Loans		% of Total Non- Accrual Loans			Net Charge-offs (Recoveries)			% of Total Net Charge-offs (Recoveries)			Nonaccrual Loans		% of Total Non- Accrual Loans
	(In Thousands)						(In Thousands)					(In Thousands)						(In Thousands)
Residential	$	(31	)		(39.74	)%	$	3,130		17.68	%	$	(28	)		18.79	%	$	2,708		16.49	%
Construction		-			0.00	%		-		0.00	%		-			0.00	%		-		0.00	%
Commercial real estate		(164	)		(210.26	)%		10,344		58.42	%		(393	)		263.76	%		10,799		65.76	%
Commercial		317			406.41	%		3,551		20.05	%		280			(187.92	)%		2,223		13.54	%
Consumer		(35	)		(44.87	)%		9		0.05	%
Consumer finance													(31	)		20.81	%		16		0.10	%
Home equity and improvement		(9	)		(11.54	)%		673		3.80	%		23			(15.44	)%		677		4.12	%
Total	$	78			100.00	%	$	17,707		100.00	%	$	(149	)		100.00	%	$	16,423		100.00	%

	For the Three Months Ended March 31, 2015						As of March 31, 2015
	Net											For the Six Months Ended June 30, 2015						As of June 30, 2015
	Charge-offs (Recovery)			% of Total Net Charge-offs			Nonaccrual Loans		% of Total Non- Accrual Loans			Net Charge-offs (Recoveries)			% of Total Net Charge-offs (Recoveries)			Nonaccrual Loans		% of Total Non- Accrual Loans
	(In Thousands)						(In Thousands)					(In Thousands)						(In Thousands)
Residential	$	59			14.18	%	$	3,241		17.33	%	$	16			(3.21	)%	$	2,942		17.58	%
Construction		-			0.00	%		-		0.00	%		-			0.00	%		-		0.00	%
Commercial real estate		(442	)		(106.25	)%		11,399		60.95	%		(464	)		93.17	%		9,786		58.47	%
Commercial		(38	)		(9.13	)%		3,513		18.78	%		(188	)		37.75	%		3,446		20.59	%
Consumer		(9	)		(1.92	)%		16		0.09	%
Consumer finance													(11	)		2.21	%		10		0.06	%
Home equity and improvement		14			3.12	%		534		2.85	%		149			(29.92	)%		553		3.30	%
Total	$	(416	)		100.00	%	$	18,703		100.00	%	$	(498	)		100.00	%	$	16,737		100.00	%

	For the Quarter Ended														For the Quarter Ended
	1st 2016		4th 2015			3rd 2015			2nd 2015			1st 2015			2nd 2016			1st 2016		4th 2015			3rd 2015			2nd 2015
	(In Thousands)														(In Thousands)

Allowance at beginning of period	$	25,382	$	25,209		$	25,384		$	25,302		$	24,766		$	25,668		$	25,382	$	25,209		$	25,384		$	25,302
Provision for credit losses		364		43			(27	)		-			120			53			364		43			(27	)		-
Charge-offs:
Residential		55		8			185			11			78			37			55		8			185			11
Commercial real estate		13		103			64			146			155			-			13		103			64			146
Commercial		336		-			43			23			2			18			336		-			43			23
Consumer finance		-		32			5			13			3			18			-		32			5			13
Home equity and improvement		30		10			110			187			43			66			30		10			110			187
Total charge-offs		434		153			407			380			281			139			434		153			407			380
Recoveries		356		282			259			462			697			366			356		282			259			462
Net charge-offs		78		(129	)		148			(82	)		(416	)
Net charge-offs (recoveries)																(227	)		78		(129	)		148			(82	)
Ending allowance	$	25,668	$	25,382		$	25,209		$	25,384		$	25,302		$	25,948		$	25,668	$	25,382		$	25,209		$	25,384

	March 31, 2016					December 31, 2015					September 30, 2015					June 30, 2015					March 31, 2015					June 30, 2016					March 31, 2016					December 31, 2015					September 30, 2015					June 30, 2015
			Percent of					Percent of					Percent of					Percent of					Percent of					Percent of					Percent of					Percent of					Percent of					Percent of
			total loans					total loans					total loans					total loans					total loans					total loans					total loans					total loans					total loans					total loans
	Amount		by category			Amount		by category			Amount		by category			Amount		by category			Amount		by category			Amount		by category			Amount		by category			Amount		by category			Amount		by category			Amount		by category
	(Dollars In Thousands)																									(Dollars In Thousands)
Residential	$	3,109		11.05	%	$	3,212		10.98	%	$	2,779		11.48	%	$	2,877		11.68	%	$	2,483		11.79	%	$	2,839		10.71	%	$	3,109		11.05	%	$	3,212		10.98	%	$	2,779		11.48	%	$	2,877		11.68	%
Construction		489		7.71	%		517		8.76	%		239		7.22	%		308		7.98	%		303		7.25	%		633		8.35	%		489		7.71	%		517		8.76	%		239		7.22	%		308		7.98	%
Commercial real estate		13,894		52.37	%		13,923		50.71	%		14,397		51.55	%		14,365		50.40	%		14,238		50.77	%		13,269		51.84	%		13,894		52.37	%		13,923		50.71	%		14,397		51.55	%		14,365		50.40	%
Commercial		5,820		21.85	%		5,255		22.42	%		5,411		22.51	%		5,567		22.85	%		6,766		22.90	%		6,740		22.19	%		5,820		21.85	%		5,255		22.42	%		5,411		22.51	%		5,567		22.85	%
Consumer		124		0.83	%		171		0.87	%		158		0.88	%		160		0.85	%		92		0.87	%
Consumer finance																											189		0.86	%		124		0.83	%		171		0.87	%		158		0.88	%		160		0.85	%
Home equity and improvement		2,232		6.19	%		2,304		6.26	%		2,225		6.36	%		2,107		6.24	%		1,420		6.42	%		2,278		6.05	%		2,232		6.19	%		2,304		6.26	%		2,225		6.36	%		2,107		6.24	%
	$	25,668		100.00	%	$	25,382		100.00	%	$	25,209		100.00	%	$	25,384		100.00	%	$	25,302		100.00	%	$	25,948		100.00	%	$	25,668		100.00	%	$	25,382		100.00	%	$	25,209		100.00	%	$	25,384		100.00	%

	1st Qtr 2016			4th Qtr 2015			3rd Qtr 2015			2nd Qtr 2015			1st Qtr 2015
Allowance for loan losses / loans*		1.41	%		1.41	%		1.45	%		1.49	%		1.50	%
Allowance for loan losses to net charge-offs		32907.69	%		-19675.97	%		17033.11	%		-30956.10	%		-6082.21	%
Allowance for loan losses / non-performing assets		136.40	%		144.36	%		116.99	%		114.82	%		100.82	%
Allowance for loan losses / non-performing loans		144.96	%		156.09	%		151.75	%		151.66	%		135.28	%
Non-performing assets / loans plus REO*		1.03	%		0.97	%		1.24	%		1.29	%		1.48	%
Non-performing assets / total assets		0.80	%		0.77	%		0.97	%		1.01	%		1.14	%
Net charge-offs / average loans (annualized)		0.02	%		-0.03	%		0.03	%		-0.02	%		-0.10	%

	2nd Qtr 2016			1st Qtr 2016			4th Qtr 2015			3rd Qtr 2015			2nd Qtr2015
Allowance for loan losses / loans*		1.39	%		1.41	%		1.41	%		1.45	%		1.49	%
Allowance for loan losses to net charge-offs		-11430.84	%		32907.69	%		-19675.97	%		17033.11	%		-30956.10	%
Allowance for loan losses / non-performing assets		148.26	%		136.40	%		144.36	%		116.99	%		114.82	%
Allowance for loan losses / non-performing loans		158.00	%		144.96	%		156.09	%		151.75	%		151.66	%
Non-performing assets / loans plus REO*		0.94	%		1.03	%		0.97	%		1.24	%		1.29	%
Non-performing assets / total assets		0.73	%		0.80	%		0.77	%		0.97	%		1.01	%
Net charge-offs / average loans (annualized)		-0.05	%		0.02	%		-0.03	%		0.03	%		-0.02	%

December 31, 2015
	Actual					Minimum Required for Adequately Capitalized					Minimum Required for Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio
CET1 Capital (to Risk-Weighted Assets) (1)
Consolidated	$	218,297		10.71	%	$	91,710		4.5	%		N/A		N/A
First Federal	$	236,625		11.61	%	$	91,678		4.5	%	$	132,424		6.5	%

Tier 1 Capital (1)
Consolidated	$	253,297		11.46	%	$	88,424		4.0	%		N/A		N/A
First Federal	$	236,625		10.72	%	$	88,267		4.0	%	$	110,334		5.0	%

Tier 1 Capital (to Risk Weighted Assets) (1)
Consolidated	$	253,297		12.43	%	$	122,280		6.0	%		N/A		N/A
First Federal	$	236,625		11.61	%	$	122,237		6.0	%	$	162,983		8.0	%

Total Capital (to Risk Weighted Assets) (1)
Consolidated	$	278,679		13.67	%	$	163,040		8.0	%		N/A		N/A
First Federal	$	262,007		12.86	%	$	162,983		8.0	%	$	203,729		10.0	%

Net Interest Income Sensitivity Profile
	Impact on Future Annual Net Interest Income
(dollars in thousands)	March 31, 2016					December 31, 2015
Gradual Change in Interest Rates
+200	$	997		1.27	%	$	563		0.71	%
+100		484		0.62	%		215		0.27	%
-100		(1,674	)	-2.13	%		(1,332	)	-1.68	%

Immediate Change in Interest Rates
+200	$	2,421		3.08	%	$	1,660		2.09	%
+100		1,174		1.49	%		719		0.91	%
-100		(2,914	)	-3.74	%		(2,605	)	-3.28	%

December 31, 2015
Economic Value of Equity
Change in Rates	$ Amount		$ Change			% Change
	(Dollars in Thousands)
+400 bp		509,640		56,545			12.48	%
+ 300 bp		499,038		45,946			10.14	%
+ 200 bp		486,652		33,558			7.41	%
+ 100 bp		471,332		18,237			4.03	%
0 bp		453,095		-			-
- 100 bp		426,010		(27,085	)		(5.98	)%

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)		Maximum Number of Shares (or Approximate Dollar Value) that May Yet Be Purchased Under the Plans or Programs
Beginning Balance, December 31, 2015								95,246
January 1 – January 31, 2016		95,246	$	37.38		95,246		-
February 1 – February 29, 2016		72,500		37.69		72,500		377,500
March 1 – March 31, 2016		-		-		-		377,500
Total		167,746	$	37,51		167,746		377,500