UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period EndedSeptember 30, ~~2016~~2017

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

For the Transition Period from ___________to__________

Commission file number0-26850

~~First Defiance Financial Corp.~~

First Defiance Financial Corp.

(Exact name of registrant as specified in its charter)

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


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

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

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

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

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

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

Emerging growth company¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, $.01 Par Value – ~~8,981,025~~10,155,833 shares outstanding at October 31, ~~2016.~~2017.

FIRST DEFIANCE FINANCIAL CORP.

INDEX

		Page Number
PART I.-FINANCIAL INFORMATION

Item 1.	Consolidated Condensed Financial Statements (Unaudited):
	Consolidated Condensed Statements of Financial Condition – September 30, ~~2016~~2017 and December 31, ~~2015~~2016	2

	Consolidated Condensed Statements of Income - Three and nine months ended September 30, ~~2016~~2017 and ~~2015~~2016	4

	Consolidated Condensed Statements of Comprehensive Income – Three and nine months ended September 30, ~~2016~~2017 and ~~2015~~2016	5

	Consolidated Condensed Statements of Changes in Stockholders’ Equity – Nine months ended September 30, ~~2016~~2017 and ~~2015~~2016	6

	Consolidated Condensed Statements of Cash Flows - Nine months ended September 30, ~~2016~~2017 and ~~2015~~2016	7

	Notes to Consolidated Condensed Financial Statements	8

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	4957

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	7280

Item 4.	Controls and Procedures	7482

PART II-OTHER INFORMATION:

Item 1.	Legal Proceedings	7583

Item 1A.	Risk Factors	7583

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7583

Item 3.	Defaults upon Senior Securities	7583

Item 4.	Mine Safety Disclosures	7583

Item 5.	Other Information	7684

Item 6.	Exhibits	7684

	Signatures	77	85

PART I-FINANCIAL INFORMATION

Item 1. Financial Statements

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Financial Condition

(UNAUDITED)

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

	September 30,		December 31,
	2016		2015		September 30, 2017		December 31, 2016

Assets
Cash and cash equivalents:
Cash and amounts due from depository institutions	$	47,797	$	38,769	$	55,731	$	53,003
Federal funds sold		57,000		41,000		69,000		46,000
		104,797		79,769		124,731		99,003
Securities:
Available-for-sale, carried at fair value		234,223		236,435		260,034		250,992
Held-to-maturity, carried at amortized cost (fair value $193 and $245 at September 30, 2016 and December 31, 2015, respectively)		191		243
Held-to-maturity, carried at amortized cost (fair value $728 and $187 at September 30, 2017 and December 31, 2016, respectively)						728		184
		234,414		236,678		260,762		251,176
Loans held for sale		9,839		5,523		12,200		9,607
Loans receivable, net of allowance of $25,923 at September 30, 2016 and $25,382 at December 31, 2015, respectively		1,899,771		1,776,835
Loans receivable, net of allowance of $26,341 at September 30, 2017 and $25,884 at December 31, 2016, respectively						2,249,701		1,914,603
Mortgage servicing rights						9,693		9,595
Accrued interest receivable		7,452		6,171		9,864		6,760
Federal Home Loan Bank stock		13,800		13,801		15,992		13,798
Bank owned life insurance		52,594		51,908		65,811		52,817
Premises and equipment		36,983		38,166		41,536		36,958
Real estate and other assets held for sale		704		1,321		532		455
Goodwill		61,798		61,798		98,370		61,798
Core deposit and other intangibles		1,452		1,871		6,061		1,336
Mortgage servicing rights		9,308		9,248
Deferred taxes						1,042		2,212
Other assets		17,128		14,587		38,735		17,479
Total assets	$	2,450,040	$	2,297,676	$	2,935,030	$	2,477,597

(continued)

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Financial Condition

(UNAUDITED)

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

	September 30,			December 31,
	2016			2015			September 30, 2017			December 31, 2016

Liabilities and stockholders’ equity
Liabilities:
Deposits	$	1,927,686		$	1,836,137		$	2,360,675		$	1,981,628
Advances from the Federal Home Loan Bank		114,184			59,902			104,555			103,943
Subordinated debentures		36,083			36,083			36,083			36,083
Securities sold under repurchase agreements		50,493			57,188			22,939			31,816
Notes Payable								6,500			-
Advance payments by borrowers		2,073			2,674			2,265			2,650
Deferred taxes		1,775			877
Other liabilities		25,608			24,618			34,089			28,459
Total liabilities		2,157,902			2,017,479			2,567,106			2,184,579

Stockholders’ equity:
Preferred stock, $.01 par value per share: 37,000 shares authorized; no shares issued		-			-			–			–
Preferred stock, $.01 par value per share: 4,963,000 shares authorized; no shares issued		-			-			–			–
Common stock, $.01 par value per share: 25,000,000 shares authorized; 12,720,347 and 12,721,959 shares issued and 8,980,366 and 9,102,831 shares outstanding, respectively		127			127
Common stock, $.01 par value per share:
25,000,000 shares authorized; 12,712,840 and 12,720,347 shares issued and 10,149,184 and 8,983,206 shares outstanding, respectively								127			127
Additional paid-in capital		126,200			125,734			160,653			126,390
Accumulated other comprehensive income, net of tax of $2,675 and $1,950, respectively		4,967			3,622
Accumulated other comprehensive income, net of tax of $1,151 and $117, respectively								2,138			215
Retained earnings		235,203			219,737			256,041			240,592
Treasury stock, at cost, 3,739,981 and 3,619,128 shares respectively		(74,359	)		(69,023	)
Treasury stock, at cost, 2,563,656 and 3,737,141 shares respectively								(51,035	)		(74,306	)
Total stockholders’ equity		292,138			280,197			367,924			293,018

Total liabilities and stockholders’ equity	$	2,450,040		$	2,297,676		$	2,935,030		$	2,477,597

See accompanying notes

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Income

(UNAUDITED)

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

	Three Months Ended					Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,					September 30,				September 30,				September 30,
	2016		2015			2016		2015		2017		2016		2017		2016
Interest Income
Loans	$	20,264	$	18,419		$	59,242	$	54,445	$	25,975	$	20,264	$	73,263	$	59,242
Investment securities:
Taxable		767		880			2,391		2,712		896		767		2,817		2,391
Non-taxable		731		796			2,280		2,377		792		731		2,378		2,280
Interest-bearing deposits		104		33			287		113		209		104		555		287
FHLB stock dividends		137		138			413		413		209		137		562		413
Total interest income		22,003		20,266			64,613		60,060		28,081		22,003		79,575		64,613
Interest Expense
Deposits		1,635		1,363			4,613		3,947		2,391		1,635		6,357		4,613
FHLB advances and other		322		178			940		461		431		322		1,211		940
Subordinated debentures		191		154			548		451		239		191		682		548
Notes payable		35		38			108		113		13		35		41		108
Total interest expense		2,183		1,733			6,209		4,972		3,074		2,183		8,291		6,209
Net interest income		19,820		18,533			58,404		55,088		25,007		19,820		71,284		58,404
Provision for loan losses		15		(27	)		432		93		462		15		2,635		432
Net interest income after provision for loan losses		19,805		18,560			57,972		54,995		24,545		19,805		68,649		57,972
Non-interest Income
Service fees and other charges		2,765		2,799			8,208		8,018		3,153		2,765		9,073		8,208
Insurance commissions		2,473		2,310			8,113		7,793		3,082		2,473		9,834		8,113
Mortgage banking income		2,039		1,680			5,342		5,248		1,698		2,039		5,266		5,342
Gain on sale of non-mortgage loans		148		543			604		776		82		148		172		604
Gain on sale or call of securities		151		-			509		-		158		151		425		509
Trust income		420		370			1,256		1,095		486		420		1,400		1,256
Income from Bank Owned Life Insurance		225		238			686		658		421		225		2,666		686
Other non-interest income		305		42			1,019		485		415		305		1,348		1,019
Total non-interest income		8,526		7,982			25,737		24,073		9,495		8,526		30,184		25,737
Non-interest Expense
Compensation and benefits		10,295		9,791			30,250		27,896		11,780		10,295		37,588		30,250
Occupancy		1,822		1,788			5,435		5,361		1,960		1,822		5,751		5,435
FDIC insurance premium		352		329			1,008		999		330		352		973		1,008
Financial institutions tax		446		447			1,339		1,340		404		446		1,418		1,339
Data processing		1,622		1,531			4,723		4,652		1,874		1,622		5,832		4,723
Acquisition related charges		252		-			252		-
Amortization of intangibles		115		157			419		536		364		115		931		419
Other non-interest expense		3,388		2,805			9,487		9,758		3,728		3,640		11,718		9,739
Total non-interest expense		18,292		16,848			52,913		50,542		20,440		18,292		64,211		52,913
Income before income taxes		10,039		9,694			30,796		28,526		13,600		10,039		34,622		30,796
Federal income taxes		2,994		2,998			9,318		8,666		4,219		2,994		11,753		9,318
Net Income	$	7,045	$	6,696		$	21,478	$	19,860	$	9,381	$	7,045	$	22,869	$	21,478

Earnings per common share (Note 6)
Basic	$	0.78	$	0.72		$	2.39	$	2.15	$	0.92	$	0.78	$	2.31	$	2.39
Diluted	$	0.78	$	0.72		$	2.37	$	2.11	$	0.92	$	0.78	$	2.29	$	2.37
Dividends declared per share (Note 5)	$	0.22	$	0.20		$	0.66	$	0.575	$	0.25	$	0.22	$	0.75	$	0.66
Average common shares outstanding (Note 6)
Basic		8,976		9,238			8,980		9,247		10,149		8,976		9,913		8,980
Diluted		9,050		9,322			9,050		9,430		10,209		9,050		9,970		9,050

See accompanying ~~notes~~notes.

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Comprehensive Income

(UNAUDITED)

(Amounts in Thousands)

Three Months Ended Nine Months Ended
September 30, September 30,
2016 2015 2016 2015
Net Income $ 7,045 $ 6,696 $ 21,478 $ 19,860

Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale 69 2,024 2,579 (313 )
Reclassification adjustment for security (gains) losses
included in net income(1) (151 ) - (509 ) -
Income tax benefit (expense) 29 (709 ) (725 ) 108
Other comprehensive income (loss) (53 ) 1,315 1,345 (205 )

Comprehensive income $ 6,992 $ 8,011 $ 22,823 $ 19,655

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
Net income	$	9,381		$	7,045		$	22,869		$	21,478

Other comprehensive income:
Unrealized gains (losses) on securities available for sale		(777	)		69			3,383			2,579
Reclassification adjustment for security gains included in net income(1)		(158	)		(151	)		(425	)		(509	)
Income tax expense		327			29			(1,035	)		(725	)
Other comprehensive income		(608	)		(53	)		1,923			1,345

Comprehensive income	$	8,773		$	6,992		$	24,792		$	22,823

(1) Amounts are included in ~~gain~~gains on sale or call of securities on the ~~Consolidated Condensed Statements~~consolidated condensed statements of ~~Income.~~income. Income tax expense associated with the reclassification adjustments, included in federal income taxes, for the three months ended September 30, 2017 and 2016 was $55 and ~~2015 was~~ $53, ~~and $0,~~ respectively. Income tax expense associated with the reclassification adjustments, included in federal income taxes, for the nine months ended September 30, 2017 and 2016 was $148 and ~~2015 was~~ $178, ~~and $0,~~ respectively.

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Statement of Changes in Stockholders’ Equity

(UNAUDITED)

(Amounts in Thousands, except share data)

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 21,478 21,478
Other comprehensive income 1,345 1,345
Stock option expense 226 226
Shares issued under stock option plan, net of 1,612 repurchased and/or retired 33,808 (18 ) (26 ) 711 667
Restricted share activity under stock incentive plans 10,405 236 (72 ) 225 389
Shares issued from direct stock sales 1,068 22 21 43
Shares repurchased (167,746 ) (6,293 ) (6,293 )
Common stock dividends declared (5,914 ) (5,914 )
Balance at September 30, 2016 $ - 8,980,366 $ 127 $ - $ 126,200 $ 4,967 $ 235,203 $ (74,359 ) $ 292,138

Balance at January 1, 2015 $ - 9,234,534 $ 127 $ 878 $ 136,266 $ 4,114 $ 200,600 $ (62,480 ) $ 279,505
Net income 19,860 19,860
Other comprehensive loss (205 ) (205 )
Stock option expense 103 103
Warrant repurchase (878 ) (11,101 ) (11,979 )
Shares issued under stock option plan, net of 12,844 repurchased and retired 67,960 227 (313 ) 1,429 1,343
Restricted share activity under stock incentiveplans 15,006 (121 ) 185 270 334
Excess tax benefit under stock option plan 216 216
Shares issued direct stock sales 1,487 25 27 52
Shares repurchased (147,039 ) (5,348 ) (5,348 )
Common stock dividends declared (5,325 ) (5,325 )
Balance at September 30, 2015 $ - 9,171,948 $ 127 $ - $ 125,615 $ 3,909 $ 215,007 $ (66,102 ) $ 278,556

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

Balance at January 1, 2017	$	-		8,983,206		$	127	$	126,390		$	215	$	240,592		$	(74,306	)	$	293,018
Net income														22,869						22,869
Other comprehensive income												1,923								1,923
Stock based compensation expenses									133											133
Shares issued under stock option plan, net of 7,507 repurchased and retired				4,043					51					(83	)		230			198
Capital stock issuance				1,139,502					33,792								22,740			56,532
Restricted share activity under stock incentive plans				21,377					254					(17	)		280			517
Shares issued from direct stock sales				1,056					33								21			54
Common stock dividends declared														(7,320	)					(7,320	)
Balance at September 30, 2017	$	-		10,149,184		$	127	$	160,653		$	2,138	$	256,041		$	(51,035	)	$	367,924

Balance at January 1, 2016	$	-		9,102,831		$	127	$	125,734		$	3,622	$	219,737		$	(69,023	)	$	280,197
Net income														21,478						21,478
Other comprehensive income												1,345								1,345
Stock based compensation expenses									226											226
Shares issued under stock option plan, net of 1,612 repurchased and retired				33,808					(18	)				(26	)		711			667
Restricted share activity under stock incentive plans				10,405					236					(72	)		225			389
Shares issued from direct stock sales				1,068					22								21			43
Shares repurchased				(167,746	)												(6,293	)		(6,293	)
Common stock dividends declared														(5,914	)					(5,914	)
Balance at September 30, 2016	$	-		8,980,366		$	127	$	126,200		$	4,967	$	235,203		$	(74,359	)	$	292,138

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Cash Flows

(UNAUDITED)

(Amounts in Thousands)

	Nine Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2017			2016
Operating Activities
Net income	$	21,478		$	19,860		$	22,869		$	21,478
Items not requiring (providing) cash
Provision for loan losses		432			93			2,635			432
Depreciation		2,514			2,439			2,674			2,514
Amortization of mortgage servicing rights, net of impairment recoveries		1,399			1,073			1,080			1,399
Amortization of core deposit and other intangible assets		419			536			931			419
Net amortization of premiums and discounts on loans and deposits		254			333
Net amortization (accretion)of premiums and discounts on loans and deposits								(602	)		254
Amortization of premiums and discounts on securities		627			551			935			627
Loss on write-downs of property, plant and equipment		-			428
Change in deferred taxes		174			(90	)		220			174
Proceeds from the sale of loans held for sale		197,167			167,687			157,127			197,167
Originations of loans held for sale		(198,839	)		(167,380	)		(157,321	)		(198,839	)
Gain from sale of loans		(4,707	)		(4,504	)		(3,749	)		(4,707	)
Gain from sale or call of securities		(509	)		-			(425	)		(509	)
(Gain)/Loss on sale or write-down of real estate and other assets held for sale		(269	)		281
Loss on sale or disposal of premises and equipment								48			-
Gain on sale / write-down of real estate and other assets held for sale								(57	)		(269	)
Stock option expense		226			103			133			226
Restricted stock expense		389			334			517			389
Income from bank owned life insurance		(686	)		(658	)		(2,666	)		(686	)
Excess tax benefits from share-based compensation		(184	)		-
Excess tax benefit on stock compensation plans								(168	)		(184	)
Changes in:
Accrued interest receivable		(1,281	)		(1,105	)		(1,782	)		(1,281	)
Other assets		(3,475	)		170			(2,743	)		(3,475	)
Other liabilities		1,174			194			2,348			1,174
Net cash provided by operating activities		16,303			20,345			22,004			16,303

Investing Activities
Proceeds from maturities of held-to-maturity securities		52			62			48			52
Proceeds from maturities, calls and pay-downs of available-for-sale securities		25,765			22,215			20,339			25,765
Proceeds from sale of real estate and other assets held for sale		1,368			2,103
Proceeds from sale of premises and equipment, real estate and other assets held for sale								1,028			1,368
Proceeds from the sale of available-for-sale securities		14,871			-			18,047			14,871
Proceeds from sale of non-mortgage loans		13,967			16,178			19,142			13,967
Purchases of available-for-sale securities		(35,538	)		(20,684	)		(41,235	)		(35,538	)
Proceeds from Federal Home Loan Bank stock redemption		1			-
Purchase of bank-owned life insurance		-			(4,000	)
Net cash paid in Insurance acquisition		-			(297	)
Proceeds from Federal Home Loan stock redemption								-			1
Net cash received in acquisitions								19,359			-
Investment in bank owned life insurance								(20,000	)		-
Purchase of portfolio mortgage loans								(11,476	)		-
Purchases of premises and equipment, net		(1,289	)		(1,631	)		(2,491	)		(1,289	)
Net increase in loans receivable		(137,511	)		(103,009	)		(59,339	)		(137,511	)
Net cash used in investing activities		(118,314	)		(89,063	)
Net cash used by investing activities								(56,578	)		(118,314	)

Financing Activities
Net increase in deposits and advance payments by borrowers		90,949			31,795			70,539			90,949
Repayment of Federal Home Loan Bank advances		(718	)		(7,743	)		(792	)		(718	)
Increase in Federal Home Loan Bank advances		55,000			27,000
Proceeds from Federal Home Loan Bank advances								-			55,000
Increase in notes payable								6,500			-
Decrease in securities sold under repurchase agreements		(6,695	)		(921	)		(8,877	)		(6,695	)
Repayment of warrants		-			(11,979	)
Proceeds from exercise of stock options		667			1,559			198			667
Proceeds from direct stock sales		43			52			54			43
Net cash paid for repurchase of common stock								-			(6,293	)
Cash dividends paid on common stock		(5,914	)		(5,325	)		(7,320	)		(5,914	)
Net cash paid for repurchase of common stock		(6,293	)		(5,348	)
Net cash provided by financing activities		127,039			29,090			60,302			127,039
Increase (decrease) in cash and cash equivalents		25,028			(39,628	)		25,728			25,028
Cash and cash equivalents at beginning of period		79,769			112,936			99,003			79,769
Cash and cash equivalents at end of period	$	104,797		$	73,308		$	124,731		$	104,797

Supplemental cash flow information:
Interest paid	$	6,151		$	4,939		$	8,177		$	6,151
Income taxes paid	$	9,900		$	7,300		$	10,900		$	9,900
Transfers from loans to real estate and other assets held for sale	$	526		$	872		$	328		$	526
Transfers from property and equipment to real estate and other assets held for sale	$	-		$	267
Securities purchased but not yet settled	$	935		$	-		$	-		$	935
Sale of bank owned life insurance not yet settled							$	17,840		$	-

See accompanying notes.

~~FIRST DEFIANCE FINANCIAL CORP.~~

~~Notes to Consolidated Condensed Financial Statements (UNAUDITED)~~

~~September 30, 2016 and 2015~~

FIRST DEFIANCE FINANCIAL CORP.

Notes to Consolidated Condensed Financial Statements (UNAUDITED)

September 30, 2017 and 2016

1. Basis of Presentation

~~Basis of Presentation~~

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

First Federal is primarily engaged in attracting deposits from the general public through its offices and using those and other available sources of funds to originate loans primarily in the counties in which its offices are located. First Federal’s traditional banking activities include originating and servicing residential, non-residential real estate, commercial, home improvement and home equity and consumer loans and providing a broad range of depository, trust and wealth management services. 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, Archbold, Fostoria, Tiffin, Findlay 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~~2016 has been derived from the audited financial statements at that date, which were included in First Defiance’s Annual Report on Form 10-K for the year ended December 31, ~~2015.~~2016.

The accompanying consolidated condensed financial statements as of September 30, ~~2016~~2017 and for the three and nine month periods ended September 30, ~~2016~~2017 and ~~2015~~2016 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~~2016 Annual Report on Form 10-K for the year ended December 31, ~~2015.~~2016. However, in the opinion of management, all adjustments, consisting of only normal recurring items, necessary for the fair ~~presentation~~statement of results in the financial statements have been made. The results for the three and nine month periods ended September 30, ~~2016~~2017 are not necessarily indicative of the results that may be expected for the entire year.

~~Significant Accounting Policies~~

2.Significant Accounting Policies

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.

Earnings Per Common Share

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

Goodwill and Other Intangibles

Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009, is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Company has selected November 30 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on First Defiance’s balance sheet.

Other intangible assets consist of core deposit and acquired customer relationship intangible assets arising from whole bank, insurance and branch acquisitions. They are initially recorded at fair value and then amortized on an accelerated basis over their estimated lives, which range from five years for non-compete agreements to 10 to 20 years for core deposit and customer relationship intangibles.

Newly Issued Accounting Standards

In March ~~2016,~~2017, the Financial Accounting Standards Board (“FASB”) issued Accounting ~~Standards~~Standard Update (“ASU”) ~~2016-09:~~~~Compensation – Stock Compensation (Topic 718): Improvements~~No. 2017-08, “Premium Amortization on Purchased Callable Debt Securities.” This ASU shortens the amortization period for the premium on certain purchased callable debt securities to ~~Employee Share-Based Payment Accounting~~.the earliest call date. Today, entities generally amortize the premium over the contractual life of the security. The ~~amendments in ASU 2016-09 simplify several aspects of~~new guidance does not change the accounting for ~~employee share-based payment transactions, including~~purchased callable debt securities held at a discount; the ~~accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows.~~discount continues to be amortized to maturity. ASU ~~2016-09~~No. 2017-08 is effective ~~for public companies~~ for interim and annual reporting periods beginning after December 15, ~~2016, with~~2018; early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company ~~elected~~plans to adopt the provisions of ASU ~~2016-09 in~~No. 2017-08 on January 1, 2018 and does not expect the ~~second quarter of 2016. As~~adoption to have a ~~result of adoption, net income for~~material impact on 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 Condensed Statements of Cash Flows.Company’s consolidated financial statements.

In ~~February 2016,~~January 2017, the FASB issued ASU ~~2016-02 (Topic 842):~~No. 2017-04,~~Leases~~“Simplifying the Test for Goodwill Impairment.”. The ~~main objective~~guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. 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 2016-02No. 2017-04 is effective ~~for public companies~~ for interim and annual reporting periods beginning after December 15, ~~2018, with early~~2019, applied prospectively. Early adoption ~~permitted.~~is permitted for any impairment tests performed after January 1, 2017. The Company expects to early adopt upon the next goodwill impairment test in 2017. ASU No. 2017-04 is ~~currently assessing~~not expected to have a material impact on 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~~Company’s consolidated 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. statements.

In June 2016, the FASB issued ASU ~~2016-13:~~No. 2016-13,~~Financial Instruments-Credit Losses~~~~(Topic 326):~~ “Measurement of Credit Losses on Financial ~~Instruments~~Instruments.”~~. The~~ This ASU ~~requires an organization to~~significantly changes how entities will measure ~~all expected~~ credit losses for most financial assets ~~held~~and certain other instruments that aren’t measured at fair value through net income. In issuing the ~~reporting date based on historical experience,~~standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current ~~conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their~~expected credit loss ~~estimates. Many~~(“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the ~~loss estimation techniques applied today~~securities. As a result, entities will ~~still be permitted, although the inputs~~recognize improvements to ~~those techniques will change to reflect the full amount of expected~~estimated credit ~~losses. Organizations will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Additionally, the~~losses immediately in earnings rather than as interest income over time, as they do today. The ASU ~~amends~~also simplifies the accounting model for ~~credit losses on available-for-sale~~purchased credit-impaired debt securities and ~~purchased~~loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial ~~assets with~~asset by credit ~~deterioration.~~quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for ~~public companies for~~interim and annual reporting periods beginning after December ~~13, 2019, including~~15, 2019; early adoption is permitted for interim and annual reporting periods ~~within those fiscal years.~~beginning after December 15, 2018. Entities will apply the ~~standard's~~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.~~effective (i.e., modified retrospective approach). The Company has begun its implementation efforts by establishing a Company-wide implementation committee. The committee’s initial review indicates the Company has maintained sufficient historical loan data to support the requirement of this pronouncement and is currently evaluating the various loss methodologies to determine their correlations to the Company’s loan segments historical performance. Early adoption is permitted, however, the Company does not currently plan to early adopt this ASU.

In February 2016, the FASB issued ASU No. 2016-02 — Leases (Topic 842). The objective of the update is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company has not yet ~~determined~~selected a transition method as it is in the process of determining the effect of the ASU on its consolidated financial statements and disclosures. The Company has several lease agreements, such as branch locations, which are currently considered operating leases, and therefore, not recognized on the Company’s consolidated condensed statements of financial condition. The Company expects the new guidance will require these lease agreements to now be recognized on the consolidated condensed statements of financial condition as a right-of-use asset and a corresponding lease liability. Therefore, the Company’s preliminary evaluation indicates the provisions of ASU No. 2016-02 are expected to impact the ~~adoption~~Company’s consolidated condensed statements of ~~ASU 2016-13~~financial condition, along with our regulatory capital ratios. However, the Company continues to evaluate the extent of potential impact the new guidance will have on the ~~Consolidated Financial Statements and disclosures.~~Company’s consolidated financial statements. At September 30, 2017, the Company had contractual operating lease commitments of approximately $4.5 million, before considering renewal options that are generally present.

In January 2016, the FASB issued ASU No. 2016-01 — Financial Instruments — Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2017, and requires a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Early adoption is not permitted. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements. Management’s preliminary finding is that the new pronouncement will not have a significant impact on its results of operations. The pronouncement will require some revision to the Company’s disclosures within the consolidated financial statements and is currently evaluating the impact.

In May 2014, the FASB and the International Accounting Standards Board (the “IASB”) jointly issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP and International Financial Reporting Standards (“IFRS”). Previous revenue recognition guidance in GAAP consisted of broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. In contrast, IFRS provided limited revenue recognition guidance and, consequently, could be difficult to apply to complex transactions. Accordingly, the FASB and the IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that would: (1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing revenue issues; (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provide more useful information to users of financial statements through improved disclosure requirements; and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. To meet those objectives, the FASB issued ASU No. 2014-09,“Revenue from Contracts with Customers.” The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies generally will be required to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The standard was initially effective for public entities for interim and annual reporting periods beginning after December 15, 2016; early adoption was not permitted. However, in August 2015, the FASB issued ASU No. 2015-14,“Revenue from Contracts with Customers - Deferral of the Effective Date” which deferred the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. In addition, the FASB has begun to issue targeted updates to clarify specific implementation issues of ASU 2014-09. These updates include ASU No. 2016-08,“Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10,“Identifying Performance Obligations and Licensing,” ASU No. 2016-12,“Narrow-Scope Improvements and Practical Expedients,” and ASU No. 2016-20“Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the Company does not expect the new guidance to have a material impact on revenue most closely associated with financial instruments, including interest income. The Company is substantially complete with its overall assessment of revenue streams and reviewing of related contracts potentially affected by the ASU, including trust and asset management fees, deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. The Company’s assessment suggests that adoption of this ASU should not materially change the method in which we currently recognize revenue for these revenue streams. In addition, the Company is evaluating the ASU’s expanded disclosure requirements. The Company plans to adopt ASU No. 2014-09 on January 1, 2018 utilizing the modified retrospective approach with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be material.

3.12

3. Fair Value

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

10 13

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

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

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

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

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

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

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

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

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

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).

12 15

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

Assets and Liabilities Measured on a Recurring Basis

September 30, 2016	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
September 30, 2017									Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)								(In Thousands)
Available for sale securities:

Obligations of U.S. government corporations and agencies	$	-	$	2,001	$	-	$	2,001	$	-	$	1,987	$	-	$	1,987
Mortgage-backed - residential		-		66,591		-		66,591		-		74,470		-		74,470
REMICs		-		1,409		-		1,409		-		1,130		-		1,130
Collateralized mortgage obligations		-		66,998		-		66,998
Collateralized mortgage obligations- residential										-		72,975		-		72,975
Preferred stock		1		-		-		1		1		-		-		1
Corporate bonds		-		10,958		-		10,958		-		13,100		-		13,100
Obligations of state and political subdivisions		-		86,265		-		86,265		-		96,371		-		96,371
Mortgage banking derivative - asset		-		921		-		921		-		821		-		821
Mortgage banking derivative - liability		-		126		-		126

December 31, 2016									Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
									(In Thousands)
Available for sale securities:
Obligations of U.S. Government corporations and agencies									$	-	$	3,915	$	-	$	3,915
Mortgage-backed - residential										-		81,707		-		81,707
REMICs										-		1,307		-		1,307
Collateralized mortgage obligations-residential										-		63,005		-		63,005
Preferred stock										2		-		-		2
Corporate bonds										-		13,013		-		13,013
Obligations of state and political subdivisions										-		88,043				88,043
Mortgage banking derivative - asset										-		491		-		491

December 31, 2015 Level 1
Inputs Level 2
Inputs Level 3
Inputs Total Fair
Value
(In Thousands)
Available for sale securities:

Obligations of U.S. Government corporations and agencies $ - $
2,994
$ - $
2,994

Mortgage-backed – residential - 64,654 - 64,654
REMICs - 1,620 - 1,620
Collateralized mortgage obligations-residential - 71,799 - 71,799
Preferred stock 1 - - 1
Corporate bonds - 4,977 - 4,977
Obligations of state and political subdivisions - 90,390 90,390
Mortgage banking derivative - asset - 558 - 558

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

Assets and Liabilities Measured on a Non-Recurring Basis

September 30, 2016	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
September 30, 2017									Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
									(In Thousands)
Impaired loans
Commercial Real Estate									$	-	$	-	$	1,829	$	1,829
Commercial										-		-		2,830		2,830
Total Impaired loans										-		-		4,659		4,659
Mortgage servicing rights										-		6,944		-		6,944
Real estate held for sale
Commercial Real Estate										-		-		227		227
Total Real Estate held for sale										-		-		227		227

December 31, 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	$	-	$	-	$	8	$	8	$	-	$	-	$	316	$	316
Multi Family Residential		-		-		-		-
Commercial Real Estate		-		-		863		863		-		-		848		848
Commercial loans		-		-		111		111
Home Equity and Improvement		-		-		-		-
Total Impaired loans		-		-		982		982
Commercial														332		332
Total impaired loans										-		-		1,496		1,496
Mortgage servicing rights		-		3,023		-		3,023		-		657		-		657
Real estate held for sale
CRE		-		-		377		377
Commercial Real Estate										-		-		377		377
Total Real Estate held for sale										-		-		377		377

December 31, 2015 Level 1 Inputs Level 2 Inputs
Level 3 Inputs
Total Fair
Value
(In Thousands)
Impaired loans
1-4 Family Residential Real Estate $ - $ - $ 398 $ 398
Multi Family Residential - - 91 91
Commercial Real Estate - - 4,575 4,575
Commercial - -
Home Equity and Improvement - - 82 82
Total impaired loans - - 5,146 5,146

Mortgage servicing rights - 872 - 872
Real estate held for sale
Commercial Real Estate - - 280 280

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of September 30, 2017, the significant unobservable inputs used in the fair value measurements were as follows:

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

Impaired Loans- Applies to all loan classes	$	4,659	Appraisals which utilize sales comparison, net income and cost approach	Discounts for collection issues and changes in market conditions		10	%		10	%
Real estate held for sale – Applies to all classes	$	227	Appraisals which utilize sales comparison, net income and cost approach	Discounts for changes in market conditions		3	%		3	%

14 17

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

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

Impaired Loans- Applies to all loan classes	$	982	Appraisals which utilize sales comparison, net income and cost approach	Discounts for collection issues and changes in market conditions		10-30%		11%	$	1,496	Appraisals which utilize sales comparison, net income and cost approach	Discounts for collection issues and changes in market conditions		10-30%		11	%

Real estate held for sale – Applies to all classes	$	377	Appraisals which utilize sales comparison, net income and cost approach	Discounts for changes in market conditions		0-20%		7%	$	377	Appraisals which utilize sales comparison, net income and cost approach	Discounts for changes in market conditions		0-20%		7	%

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:

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

Impaired Loans- Applies to all loan classes $ 5,146 Appraisals which utilize sales comparison, net income and cost approach Discounts for collection issues and changes in market conditions 10-30% 11%

Real estate held for sale – Applies to all classes $ 280 Appraisals which utilize sales comparison, net income and cost approach Discounts for changes in market conditions 30% 30%

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a fair value of ~~$982,000,~~$4.7 million, with ~~a $19,000~~no valuation allowance and a fair value of ~~$5.1~~$1.5 million, with ~~an $8,000~~a $1,000 valuation allowance at September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively.A provision expense of $8,000 and $821,000 for the three months and nine months ended September 30, 2017 and a provision recovery of $6,000 and ~~a provision recovery of~~ $204,000 for the three months and nine months ended September 30, 2016, ~~and a provision expense of $59,000 and a provision recovery of $659,000 for the three and nine months ended September 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 ~~$3.0 million~~$6,944,000 with a valuation allowance of ~~$763,000~~$501,000 and a fair value of ~~$872,000~~$657,000 with a valuation allowance of ~~$645,000~~$522,000 at September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively.A charge of $27,000 and a recovery of $21,000 for the three and nine months ended September 30, 2017 and a recovery of $7,000 and a charge of $118,000 for the three and nine months ended September 30, 2016, ~~and a recovery of $24,000 and $191,000 for the three and nine months ended September 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 $20,000 for the three and ~~fixed assets transferred~~nine months ended September 30, 2017, 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 $22,000 and $74,000 for the three and nine months ended September 30, 2016, 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 $19,000 and $724,000 for the three and nine months ended September 30, 2015.2016.

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 September 30, ~~2016~~2017 and December 31, ~~2015.~~2016. 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~~and 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 ofor 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 September 30, ~~2016.~~2017.

Fair Value Measurements at September 30, 2016
(In Thousands)

Carrying
Value Total Level 1 Level 2 Level 3
Financial Assets:
Cash and cash equivalents $ 104,797 $ 104,797 $ 104,797 $ - $ -
Investment securities 234,414 234,416 1 234,415 -
Federal Home Loan Bank Stock 13,800 N/A N/A N/A N/A
Loans, net, including loans held for sale 1,909,610 1,920,543 - 10,515 1,910,028
Accrued interest receivable 7,452 7,452 - 1,291 6,161

Financial Liabilities:
Deposits $ 1,927,686 $ 1,933,607 $ 443,321 $ 1,490,286 $ -
Advances from Federal Home Loan Bank 114,184 114,572 - 114,572 -
Securities sold under repurchase agreements 50,493 50,493 - 50,493 -
Subordinated debentures 36,083 34,780 - - 34,780

Fair Value Measurements at December 31, 2015
(In Thousands)

Carrying
Value Total Level 1 Level 2 Level 3
Financial Assets:
Cash and cash equivalents $ 79,769 $ 79,769 $ 79,769 $ - $ -
Investment securities 236,678 236,680 1 236,679 -
Federal Home Loan Bank Stock 13,801 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
Accrued interest receivable 6,171 6,171 7 846 5,318

Financial Liabilities:
Deposits $ 1,836,137 $ 1,840,464 $ 420,691 $ 1,419,773 $ -
Advances from Federal Home Loan Bank 59,902 59,653 - 59,653 -
Securities sold under repurchase agreements 57,188 57,188 - 57,188 -
Subordinated debentures 36,083 35,307 - - 35,305

17 19

~~Incentive Compensation Plans~~

			Fair Value Measurements at September 30, 2017 (In Thousands)
	Carrying Value		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	124,731	$	124,731	$	124,731	$	-	$	-
Investment securities		260,762		260,762		1		260,761		-
Federal Home Loan Bank Stock		15,992		N/A		N/A		N/A		N/A
Loans, net, including loans held for sale		2,261,901		2,248,724		-		12,698		2,236,026
Accrued interest receivable		9,864		9,864		7		1,504		8,353

Financial Liabilities:
Deposits	$	2,360,675	$	2,368,438	$	519,911	$	1,848,527	$	-
Advances from Federal Home Loan Bank		104,555		104,062		-		104,062		-
Securities sold under repurchase agreements		22,939		22,939		-		22,939		-
Notes Payable		6,500		6,500		6,500		-		-
Subordinated debentures		36,083		34,763		-		-		34,763

			Fair Value Measurements at December 31, 2016 (In Thousands)
	Carrying Value		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	99,003	$	99,003	$	99,003	$	-	$	-
Investment securities		251,176		251,179		2		251,177		-
Federal Home Loan Bank Stock		13,798		N/A		N/A		N/A		N/A
Loans, net, including loans held for sale		1,924,210		1,911,280		-		9,917		1,901,363
Accrued interest receivable		6,760		6,760		9		867		5,884

Financial Liabilities:
Deposits	$	1,981,628	$	1,987,723	$	487,663	$	1,500,060	$	-
Advances from Federal Home Loan Bank		103,943		103,019		-		103,019		-
Securities sold under repurchase agreements		31,816		31,816		-		31,816		-
Subordinated debentures		36,083		34,718		-		-		34,718

4. Stock Compensation Plans

First Defiance has established equity based compensation plans for its directors and employees. On March 15, 2010, the Board adopted, and the shareholders approved at the 2010 Annual Shareholders Meeting, the First Defiance Financial Corp. 2010 Equity Incentive Plan (the “2010 Equity Plan”). The 2010 Equity Plan replaced all ~~pre-existing plans.~~existing plans although the Company’s former equity plans remain in existence to the extent there were outstanding grants thereunder at the time the 2010 Equity Plan was approved. 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 September 30, ~~2016, 57,300~~2017, 43,200 options ~~are~~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. 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 each of~~Beginning in 2014, the ~~years 2014-2016, the~~ Company annually has approved a Short-Term (“STIP”) Equity Incentive Plan and a Long-Term (“LTIP”) Equity Incentive Plan for selected members of management.

Under the ~~2014~~2016 and ~~2015~~2017 STIPs, 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 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 STIPs is determined as of December 31 of the same year and paid out in cash in the first quarter of the following year. The participants are required to be employed on the day of payout in order to receive such payment.

Under 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; 24,757;~~24,526 and ~~24,526~~20,657 RSU’s to the participants in the ~~2014, 2015~~2016 and ~~2016~~2017 LTIPs, respectively, effective January 1 in the year the award was made, which represents the maximum target award. The amount of benefit under each LTIP will be determined individually at the end of the 36 month performance period ending December 31. The benefits earned under each LTIP will be paid out in equity in the first quarter following the end of the performance period. The participants are required to be employed on the day of payout in order to receive such payment.

A total of ~~7,011~~19,219 RSU’s were issued to the participants of the ~~2013~~2014 LTIP in the first quarter of ~~2016~~2017 for the three year performance period ended December 31, ~~2015.~~2016.

In the nine months ended September 30, ~~2016,~~2017, the Company also granted ~~3,894~~to employees 4,763 restricted ~~shares. 1,872~~ shares, of which 2,727 were restricted stock units and 2,036 were restricted stock grants. Of the 4,763 restricted shares granted, 1,839 were issued to directors and ~~1,000 shares were issued to employees that~~ have a one-year vesting period. ~~1,022 shares~~The remaining 2,924 were issued to ~~an employee with~~employees and have a ~~four~~three year vesting period. The fair value of all granted restricted shares was determined by the stock price at 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.

18 21

The fair value of stock options granted during the nine months ended September 30, 2016 was determined at the date of grant using the Black-Scholes stock option-pricing model and the following assumptions:

Nine Months Ended
September 30,
2016 September 30,
2015
Expected average risk-free rate 2.24% 2.04%
Expected average life 10.00 years 10.00 years
Expected volatility 41.00% 42.00%
Expected dividend yield 2.33% 2.10%

	Nine Months ended
	September 30, 2017		September 30,2016
Expected average risk-free rate		-		2.24	%
Expected average life		-		10.00 years
Expected volatility		-		41.00	%
Expected dividend yield		-		2.33	%

The weighted-average fair value of options granted was $13.95 for the nine months ended September 30, ~~2016 and $13.13 for the nine months ended September 30, 2015.~~2016. No options have been issued in 2017.

Following is stock option activity under the plans during the nine months ended September 30, ~~2016:~~2017:

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
Forfeited or cancelled - -
Exercised (35,420 ) 20.59
Granted 6,500 37.78
Options outstanding, September 30, 2016 57,300 $ 22.05 3.88 $ 1,294
Vested or expected to vest at September 30, 2016 57,300 $ 22.05 3.88 $ 1,294
Exercisable at September 30, 2016 39,500 $ 17.30 1.87 $ 1,080

	Options Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in 000’s)
Options outstanding, January 1, 2017		54,750		$	22.21
Forfeited or cancelled		-			-
Exercised		(11,550	)		24.41
Granted		-			-
Options outstanding, September 30, 2017		43,200		$	21.62		3.40	$	1,334
Vested or expected to vest at September 30, 2017		43,200		$	21.62		3.40	$	1,334
Exercisable at September 30, 2017		31,100		$	17.31		1.87	$	1,094

Proceeds, related tax benefits realized from options exercised and intrinsic value of options exercised were as follows ~~(In Thousands)~~(in thousands):

Three Months Ended Nine Months Ended
September 30, September 30,
2016 2015 2016 2015
Proceeds of options exercised $ 175 $ 154 $ 667 $ 1,559
Related tax benefit recognized 46 21 158 151
Intrinsic value of options exercised 196 121 684 941

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
Proceeds of options exercised	$	-	$	175	$	198	$	667
Related tax benefit recognized		-		16		54		158
Intrinsic value of options exercised		-		196		301		684

As of September 30, ~~2016,~~2017, there was ~~$185,000~~$116,000 of total unrecognized compensation ~~costs~~cost 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 ~~3.43~~2.5 years.

At September 30, ~~2016, 75,468~~2017, 72,660 RSU’s and ~~12,161~~4,536 restricted stock grants were outstanding. Compensation expense is recognized over the performance period based on the achievements of targets as established ~~with~~under the plan documents. A total expense of ~~$970,000~~$373,000 and $1.5 million was recorded during the three and nine months ended September 30, ~~2016~~2017 compared to an expense of ~~$730,000~~$263,000 and $970,000 for the ~~same period~~three and nine months ended September 30, 2016. The increase in ~~2015.~~expense year-to-date is attributable to the Company’s better performance in comparison to its targets. There was approximately ~~$541,000~~$550,000 and $773,000 included within other liabilities at September 30, 2017 and December 31 2016, respectively, related to the STIP.

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

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

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

Unvested at January 1, 2017		75,468		$	32.31		11,161		$	32.30
Granted		23,384			50.56		21,377			28.39
Vested		(19,341	)		25.77		(26,980	)		26.70
Forfeited		(6,973	)		25.77		(1,022	)		37.02
Unvested at September 30, 2017		72,660		$	40.54		4,536		$	46.09

The maximum amount of compensation expense that may be recorded for the ~~2016~~2017 STIP and the ~~2014,~~ 2015, 2016 and ~~2016~~2017 LTIPs at September 30, ~~2016~~2017 is approximately ~~$3.6~~$3.9 million. However, the estimated expense expected to be recorded as of September 30, ~~2016;~~2017 based on the performance measures in the plans, is ~~$2.3~~$3.0 million of which ~~$917,000~~$1.1 million is unrecognized at September 30, ~~2016~~2017 and will be recognized over the remaining performance periods.

~~Dividends on Common Stock~~

5. Dividends on Common Stock

First Defiance declared and paid a $0.25 per common stock dividend in the first, second and third quarters of 2017 and declared and paid a $0.22 per common stock dividend in the first, second and third quarters of 2016. ~~First Defiance~~

6. Earnings Per Common Share

Basic earnings per share are calculated using the two-class method. The two-class method is an earnings allocation formula under which earnings per share is calculated from common stock and participating securities according to dividends declared and ~~paid a $0.175~~participation rights in undistributed earnings. Under this method, all earnings distributed and undistributed, are allocated to participating securities and common ~~stock dividend in the first quarter and a $0.20 per common stock dividend in the second and third quarters of 2015.~~shares based on their respective rights to receive dividends. Unvested share-based payment awards that contain non-forfeitable rights to dividends are considered participating securities (i.e. unvested restricted stock), not subject to performance based measures.

20 23

~~Earnings Per Common Share~~

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

Three months ended Nine months ended
September 30, September 30,
2016 2015 2016 2015
Numerator for basic and diluted earnings per common share – Net income $ 7,045 $ 6,696 $ 21,478 $ 19,860
Denominator:
Denominator for basic earnings per common share – weighted average common shares, including participating securities 8,976 9,238 8,980 9,247
Effect of warrants - - - 99
Effect of employee stock options and restricted share activity 74 84 70 84

Denominator for diluted earnings per common share share 9,050 9,322 9,050 9,430
Basic earnings per common share $ 0.78 $ 0.72 $ 2.39 $ 2.15
Diluted earnings per common share $ 0.78 $ 0.72 $ 2.37 $ 2.11

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
	(In Thousands, except per share data)
Basic Earnings Per Share:
Net income available to common shareholders	$	9,381	$	7,045	$	22,869	$	21,478
Less: Income allocated to participating securities		1		3		3		9
Net income allocated to common shareholders		9,380		7,042		22,866		21,469

Weighted average common shares outstanding Including participating securities		10,154		8,987		9,918		8,991
Less: Participating securities		5		11		5		11
Average common shares		10,149		8,976		9,913		8,980

Basic earnings per common share	$	0.92	$	0.78		2.31		2.39

Diluted Earnings Per Share:
Net income allocated to common shareholders	$	9,380	$	7,042	$	22,866		21,469
Weighted average common shares outstanding for basic earnings per common share		10,149		8,976		9,913		8,980
Add: Dilutive effects of stock options		60		74		57		70
Average shares and dilutive potential common shares		10,209		9,050		9,970		9,050

Diluted earnings per common share	$	0.92	$	0.78		2.29		2.37

There were no shares excluded from the diluted earnings per share calculation for the three and nine months ended September 30, 2017, as no shares were anti-dilutive during this time period. Shares subject to issue upon exercise of options of 7,300 and 12,550 ~~shares under option granted to employees~~for the three and nine month periods in 2016 were excluded from the diluted earnings per common share calculation as they were anti-dilutive for the three and nine months ended September 30, 2016, respectively. There were 6,250 and 16,750 shares under option granted to employees excluded from the diluted earnings per common share calculation as they were anti-dilutive for the three and nine months ended September 30, 2015, respectively.anti-dilutive.

~~Investment Securities~~24

7. Investment Securities

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost			Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
At September 30, 2016	(In Thousands)
										(In Thousands)
At September 30, 2017
Available-for-Sale Securities:
Obligations of U.S. government corporations and agencies	$	2,000	$	1	$	-		$	2,001	$	2,000		$	-	$	(13	)	$	1,987
Mortgage-backed securities – residential		64,600		1,996		(5	)		66,591		74,344			565		(439	)		74,470
REMICs		1,382		27		-			1,409		1,124	��		6		-			1,130
Collateralized mortgage obligations		65,640		1,393		(35	)		66,998		72,758			550		(333	)		72,975
Preferred stock		-		1		-			1		-			1		-			1
Corporate bonds		10,910		53		(5	)		10,958		12,915			185		-			13,100
Obligations of state and political subdivisions		81,403		4,869		(7	)		86,265		93,160			3,302		(91	)		96,371
Totals	$	225,935	$	8,340	$	(52	)	$	234,223
Total Available-for-Sale										$	256,301		$	4,609	$	(876	)	$	260,034

										Amortized Cost			Gross Unrecognized Gains		Gross Unrecognized Losses			Fair Value
										(In Thousands)
Held-to-Maturity Securities*:
FHLMC certificates										$	10		$	-	$	-		$	10
FNMA certificates											46			-		-			46
GNMA certificates											18			-		-			18
Obligations of state and political subdivisions											654			-		-			654
Total Held-to Maturity										$	728		$	-	$	-		$	728

													Gross		Gross
										Amortized			Unrealized		Unrealized			Fair
										Cost			Gains		Losses			Value
										(In Thousands)
At December 31, 2016
Available-for-sale
Obligations of U.S. government corporations and agencies										$	4,000		$	-	$	(85	)	$	3,915
Mortgage-backed securities - residential											82,619			390		(1,302	)		81,707
REMICs											1,309			-		(2	)		1,307
Collateralized mortgage obligations											63,204			422		(621	)		63,005
Preferred stock											-			2		-			2
Corporate bonds											12,919			97		(3	)		13,013
Obligations of state and political subdivisions											86,165			2,491		(613	)		88,043
Total Available-for-Sale										$	250,216		$	3,402	$	(2,626	)	$	250,992

21 25

Amortized
Cost Gross
Unrecognized
Gains Gross
Unrecognized
Losses Fair Value
(In Thousands)
Held-to-Maturity Securities*:
FHLMC certificates $ 12 $ - $ - $ 12
FNMA certificates 61 2 - 63
GNMA certificates 25 - - 25
Obligations of state and political subdivisions 93 - - 93
Totals $ 191 $ 2 $ - $ 193

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				Gross		Gross
	Cost		Gains		Losses			Value		Amortized		Unrecognized		Unrecognized		Fair
	(In Thousands)									Cost		Gains		Losses		Value
Held-to-Maturity Securities*:
										(In Thousands)
Held-to-Maturity*
FHLMC certificates	$	14	$	—	$	—		$	14	$	12	$	-	$	-	$	12
FNMA certificates		74		2		(1	)		75		56		2		-		58
GNMA certificates		31		1		—			32		23		1		-		24
Obligations of states and political subdivisions		124		—		—			124		93		-		-		93
Total Held-to-Maturity	$	243	$	3	$	(1	)	$	245	$	184	$	3	$	-	$	187

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

The amortized cost and fair value of the investment securities portfolio at September 30, ~~2016~~2017 are shown below by contractual maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. For purposes of the maturity table, mortgage-backed securities (“MBS”), collateralized mortgage obligations (“CMO”) and REMICs, which are not due at a single maturity date, have not been allocated over the maturity groupings. These securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.

	Available-for-Sale				Held-to-Maturity				Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair		Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value		Cost		Value		Cost		Value
	(In Thousands)								(In Thousands)
Due in one year or less	$	752	$	756	$	-	$	-	$	1,210	$	1,212	$	-	$	-
Due after one year through five years		19,083		19,426		93		93		21,301		21,800		62		62
Due after five years through ten years		32,492		34,459		-		-		43,275		44,919		592		592
Due after ten years		41,986		44,584		-		-		42,289		43,528		-		-
MBS/CMO/REMICS		131,622		134,998		98		100
MBS/CMO/REMIC										148,226		148,575		74		74
	$	225,935	$	234,223	$	191	$	193	$	256,301	$	260,034	$	728	$	728

Investment securities with a carrying amount of ~~$149.8~~$152.9 million at September 30, ~~2016~~2017 were pledged as collateral on public deposits, securities sold under repurchase agreements and the Federal Reserve discount window.

As of September 30, ~~2016,~~2017, the Company’s investment portfolio consisted of ~~358~~430 securities, 1363 of which were in an unrealized loss position.

The following tables summarize First Defiance’s securities that were in an unrealized loss position at September 30, ~~2016~~2017 and December 31, ~~2015:~~2016:

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 September 30, 2016
Available-for-sale securities:
Obligations of U.S. government corporations and agencies $ 2,048 $ (5 ) $ - $ - $ 2,048 $ (5 )
Collateralized mortgage obligations 4,092 (15 ) 1,312 (20 ) 5,404 (35 )
Obligations of state and political subdivisions 804 (7 ) - - 804 (7 )
Corporate bonds 2,010 (2 ) 997 (3 ) 3,007 (5 )
Held to maturity securities:
FHLMC/FNMA certificates 13 - 8 - 21 -
Total temporarily impaired securities $ 8,967 $ (29 ) $ 2,317 $ (23 ) $ 11,284 $ (52 )

	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 September 30, 2017
Available-for-sale securities:
Obligations of U.S. government corporations and agencies	$	1,987	$	(13	)	$	-	$	-		$	1,987	$	(13	)
Mortgage-backed securities-residential		16,350		(114	)		13,018		(325	)		29,368		(439	)
Collateralized mortgage obligations		18,164		(136	)		9,195		(197	)		27,359		(333	)
Obligations of state and political subdivisions		3,498		(26	)		2,462		(65	)		5,960		(91	)
Total temporarily impaired securities	$	39,999	$	(289	)	$	24,675	$	(587	)	$	64,674	$	(876	)

	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, 2016
Available-for-sale securities:
Obligations of U.S. government corporations and agencies	$	3,915	$	(85	)	$	-	$	-		$	3,915	$	(85	)
Mortgage-backed securities-residential		63,736		(1,302	)		-		-			63,736		(1,302	)
REMICs		1,308		(2	)		-		-			1,308		(2	)
Collateralized mortgage obligations		28,882		(566	)		1,227		(55	)		30,110		(621	)
Corporate bonds		-		-			997		(3	)		997		(3	)
Obligations of state and political subdivisions		19,172		(613	)		-		-			19,172		(613	)
Total temporarily impaired securities	$	117,013	$	(2,568	)	$	2,224	$	(58	)	$	119,238	$	(2,626	)

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~~There were realized gains of $158,000 ($103,000 after tax) from the sales and calls of investment securities ~~totaled~~in the third quarter of 2017 and $425,000 ($276,000 after tax) for the nine months ended September 30, 2017, while there were realized gains of $151,000 ($98,000 after tax) in the third quarter of 2016 ~~while there were no realized gains in the third quarter of 2015. There were realized gains from the sales~~ and ~~calls of investment securities totaling~~ $509,000 ($331,000 after tax) for the ~~first~~ nine months ~~of 2016 compared to no realized gains for the first nine months of 2015.~~ended September 30, 2016.

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 ~~not~~ be required to sell the investments before anticipated recovery.

~~During~~In the ~~first nine months~~third quarter of ~~2016~~2017 and ~~2015,~~2016, 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
September 30,

Nine Months Ended
September 30,

2016 2015 2016 2015
(In Thousands)
Proceeds $ 6,356 $ - $ 14,871 $ -
Gross realized gains 151 - 509 -
Gross realized losses - - - -

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
	(In Thousands)
Proceeds	$	10,226	$	6,356	$	18,047	$	14,871
Gross realized gains		166		151		433		509
Gross realized losses		8		-		8		-

25 28

~~Loans~~

8. Loans

Loans receivable consist of the following:

	September 30, 2016			December 31, 2015			September 30, 2017			December 31, 2016
	(In Thousands)						(In Thousands)
Real Estate:

Secured by 1-4 family residential	$	209,097		$	205,330		$	271,051		$	207,550
Secured by multi-family residential		199,829			167,558			212,092			196,983
Secured by commercial real estate		843,991			780,870			993,603			843,579
Construction		177,075			163,877			244,920			182,886
		1,429,992			1,317,635			1,721,666			1,430,998
Other Loans:
Commercial		456,099			419,349			510,240			469,055
Home equity and improvement		118,165			116,962			132,220			118,429
Consumer finance		17,251			16,281			29,009			16,680
		591,515			552,592			671,469			604,164
Total loans		2,021,507			1,870,227			2,393,135			2,035,162
Deduct:
Undisbursed loan funds		(94,552	)		(66,902	)		(115,714	)		(93,355	)
Net deferred loan origination fees and costs		(1,261	)		(1,108	)		(1,379	)		(1,320	)
Allowance for loan loss		(25,923	)		(25,382	)		(26,341	)		(25,884	)
Totals	$	1,899,771		$	1,776,835		$	2,249,701		$	1,914,603

The table above includes loans acquired during 2017 totaling $285.4 million as of February 24, 2017, which is net of purchase discount on the acquired loans of $5.4 million. The recorded investment of these loans as of September 30, 2017 was $232.5 million, net of the purchase discount of $4.2 million.

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~~quarters ended September 30, ~~2016~~2017 and ~~2015~~2016 by portfolio segment (In Thousands):

Quarter Ended
September 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 $ 2,839 $ 2,365 $ 10,904 $ 633 $ 6,740 $ 2,278 $ 189 $ 25,948
Charge-Offs (111 ) 0 (79 ) 0 (26 ) (74 ) (24 ) (314 )
Recoveries 3 0 62 0 159 40 10 274
Provisions (299 ) (185 ) (280 ) (221 ) 1,006 (47 ) 41 15
Ending Allowance $ 2,432 $ 2,180 $ 10,607 $ 412 $ 7,879 $ 2,197 $ 216 $ 25,923

Quarter Ended September 30, 2015	1-4 Family Residential Real Estate			Multi-Family Residential Real Estate			Commercial Real Estate			Construction			Commercial			Home Equity and Improvement			Consumer Finance			Total
Quarter Ended September 30, 2017																									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	$	2,877		$	2,269		$	12,096		$	308		$	5,567		$	2,107		$	160		$	25,384		$	2,641		$	2,193		$	10,136		$	540		$	7,973		$	2,199		$	233		$	25,915

Charge-Offs		(185	)		0			(64	)		0			(43	)		(110	)		(5	)		(407	)		(60	)		0			0			0			(64	)		(92	)		(20	)		(236	)

Recoveries		105			0			25			0			42			76			11			259			11			0			103			0			18			59			9			200

Provisions		(18	)		(25	)		96			(69	)		(155	)		152			(8	)		(27	)		(54	)		110			232			38			98			19			19			462
Ending Allowance	$	2,779		$	2,244		$	12,153		$	239		$	5,411		$	2,225		$	158		$	25,209		$	2,538		$	2,303		$	10,471		$	578		$	8,025		$	2,185		$	241		$	26,341

Quarter Ended September 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																									$	2,839		$	2,365		$	10,904		$	633		$	6,740		$	2,278		$	189		$	25,948

Charge-Offs																										(111	)		0			(79	)		0			(26	)		(74	)		(24	)		(314	)

Recoveries																										3			0			62			0			159			40			10			274

Provisions																										(299	)		(185	)		(280	)		(221	)		1,006			(47	)		41			15
Ending Allowance																									$	2,432		$	2,180		$	10,607		$	412		$	7,879		$	2,197		$	216		$	25,923

The following table discloses allowance for loan loss activity for the year-to-date periods ended September 30, ~~2016~~2017 and ~~September 30, 2015~~2016 by portfolio segment and impairment method (In Thousands):

Year-to-date Period Ended
September 30, 2016 1-4 Family
Residential
Real Estate Multi-Family
Residential
Real Estate Commercial Real
Estate Construction Commercial Home Equity
and
Improvement Consumer Total
Beginning Allowance $ 3,212 $ 2,151 $ 11,772 $ 517 $ 5,255 $ 2,304 $ 171 $ 25,382
Charge-Offs (203 ) 0 (92 ) 0 (381 ) (170 ) (41 ) (887 )
Recoveries 123 0 468 0 234 113 58 996
Provisions (700 ) 29 (1,541 ) (105 ) 2,771 (50 ) 28 432
Ending Allowance $ 2,432 $ 2,180 $ 10,607 $ 412 $ 7,879 $ 2,197 $ 216 $ 25,923

Year-to-date Period Ended September 30, 2015	1-4 Family Residential Real Estate			Multi- Family Residential Real Estate			Commercial Real Estate			Construction		Commercial			Home Equity and Improvement			Consumer			Total
Year-to-date Period Ended September 30, 2017																								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		$	2,627		$	2,228	$	10,625		$	450		$	7,361		$	2,386		$	207		$	25,884

Charge-Offs		(275	)		(114	)		(250	)		0		(68	)		(340	)		(21	)		(1,068	)		(109	)		0		(400	)		0			(2,091	)		(246	)		(112	)		(2,958	)

Recoveries		178			0			789			0		255			156			40			1,418			100			32		220			0			227			118			83			780

Provisions		382			(95	)		346			18		(1,285	)		705			22			93			(80	)		43		26			128			2,528			(73	)		63			2,635
Ending Allowance	$	2,779		$	2,244		$	12,153		$	239	$	5,411		$	2,225		$	158		$	25,209		$	2,538		$	2,303	$	10,471		$	578		$	8,025		$	2,185		$	241		$	26,341

Year-to-date Period Ended September 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																									(203	)		0		(92	)		0			(381	)		(170	)		(41	)		(887	)

Recoveries																									123			0		468			0			234			113			58			996

Provisions																									(700	)		29		(1,541	)		(105	)		2,771			(50	)		28			432
Ending Allowance																								$	2,432		$	2,180	$	10,607		$	412		$	7,879		$	2,197		$	216		$	25,923

27 30

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 September 30, ~~2016~~2017 (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	$	101	$	1	$	89	$	-	$	24	$	39	$	-	$	254	$	165	$	3	$	109	$	-	$	56	$	281	$		$	614

Collectively evaluated for impairment		2,331		2,179		10,518		412		7,855		2,158		216		25,669		2,373		2,300		10,362		578		7,969		1,904		241		25,727

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

Total ending allowance balance	$	2,432	$	2,180	$	10,607	$	412	$	7,879	$	2,197	$	216	$	25,923	$	2,538	$	2,303	$	10,471	$	578	$	8,025	$	2,185	$	241	$	26,341

Loans:

Loans individually evaluated for impairment	$	6,767	$	3,580	$	16,885	$	-	$	4,416	$	1,424	$	66	$	33,138	$	6,975	$	2,069	$	30,387	$	-	$	14,019	$	1,199	$	51	$	54,700

Loans collectively evaluated for impairment		202,600		196,409		829,692		82,254		453,130		117,290		17,186		1,898,561		263,456		210,030		964,767		129,333		497,712		131,562		28,967		2,225,827

Loans acquired with deteriorated credit quality		-		-		144		-		12		-		-		156		1,092		303		2,137		-		333		-		-		3,865

Total ending loans balance	$	209,367	$	199,989	$	846,721	$	82,254	$	457,558	$	118,714	$	17,252	$	1,931,855	$	271,523	$	212,402	$	997,291	$	129,333	$	512,064	$	132,761	$	29,018	$	2,284,392

28 31

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~~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	$	201	$	-	$	139	$	-	$	63	$	34	$	-	$	437	$	202	$	4	$	255	$	-	$	35	$	313	$	-	$	809

Collectively evaluated for impairment		3,011		2,151		11,633		517		5,192		2,270		171		24,945		2,425		2,224		10,370		450		7,326		2,073		207		25,075

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

Total ending allowance balance	$	3,212	$	2,151	$	11,772	$	517	$	5,255	$	2,304	$	171	$	25,382	$	2,627	$	2,228	$	10,625	$	450	$	7,361	$	2,386	$	207	$	25,884

Loans:

Loans individually evaluated for impairment	$	7,574	$	3,313	$	23,493	$	-	$	6,107	$	1,491	$	71	$	42,049	$	6,898	$	3,483	$	13,570	$	-	$	2,154	$	1,269	$	59	$	27,433

Loans collectively evaluated for impairment		198,106		164,382		759,281		96,845		414,527		115,977		16,199		1,765,317		200,907		193,714		832,446		89,244		468,246		117,744		16,625		1,918,926

Loans acquired with deteriorated credit quality		-		-		153		-		16		-		-		169		-		-		-		-		11		-		-		11

Total ending loans balance	$	205,680	$	167,695	$	782,927	$	96,845	$	420,650	$	117,468	$	16,270	$	1,807,535	$	207,805	$	197,197	$	846,016	$	89,244	$	470,411	$	119,013	$	16,684	$	1,946,370

29 32

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

	Three Months Ended September 30, 2017						Nine Months Ended September 30, 2017
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized			Cash Basis Income Recognized
Residential Owner Occupied	$	4,188	$	37	$	37	$	3,699	$	99		$	99
Residential Non Owner Occupied		2,706		33		33		3,136		104			104
Total Residential Real Estate		6,894		70		70		6,835		203			203
Construction		-		-		-		-		-			-
Multi-Family		2,084		9		9		2,534		28			28
CRE Owner Occupied		12,127		24		22		9,613		70			70
CRE Non Owner Occupied		3,484		32		31		3,845		105			98
Agriculture Land		13,547		148		44		8,719		335			126
Other CRE		1,590		27		22		1,637		50			42
Total Commercial Real Estate		30,748		231		119		23,814		560	��		336
Commercial Working Capital		7,033		38		38		5,115		86			90
Commercial Other		5,926		31		27		5,126		82			60
Total Commercial		12,959		69		65		10,241		168			150
Home Equity and Improvement		1,206		11		10		1,228		32			31
Consumer Finance		54		1		1		62		3			4
Total Impaired Loans	$	53,945	$	391	$	274	$	44,714	$	994		$	752

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

Three Months Ended September 30, 2016 Nine Months Ended September 30, 2016
Average
Balance Interest
Income
Recognized Cash Basis
Income
Recognized Average
Balance Interest
Income
Recognized Cash Basis
Income
Recognized
Residential Owner Occupied $ 3,876 $ 34 $ 33 $ 3,892 $ 109 $ 106
Residential Non Owner Occupied 2,935 29 29 3,234 95 94
Total Residential Real Estate 6,811 63 62 7,126 204 200
Construction - - - - - -
Multi-Family 3,607 14 14 4,087 68 68
CRE Owner Occupied 7,171 30 30 7,810 134 115
CRE Non Owner Occupied 6,341 73 73 5,220 178 175
Agriculture Land 1,851 16 2 2,427 66 16
Other CRE 1,570 13 13 1,556 31 31
Total Commercial Real Estate 16,933 132 118 17,013 409 337
Commercial Working Capital 2,259 26 11 1,769 56 33
Commercial Other 2,198 8 7 2,742 36 34
Total Commercial 4,457 34 18 4,511 92 67
Home Equity and Home Improvement 1,446 12 12 1,631 40 40
Consumer Finance 65 1 1 69 3 3
Total Impaired Loans $ 33,319 $ 256 $ 225 $ 34,437 $ 816 $ 715

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

	Three Months Ended September 30, 2015						Nine Months Ended September 30, 2015						Three Months Ended September 30, 2016						Nine Months Ended September 30, 2016
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized		Cash Basis Income Recognized
Residential Owner Occupied	$	5,750	$	67	$	66	$	5,854	$	203	$	201	$	3,876	$	34	$	33	$	3,892	$	109	$	106
Residential Non Owner Occupied		3,762		38		38		4,045		117		117		2,935		29		29		3,234		95		94
Total Residential Real Estate		9,512		105		104		9,899		320		318		6,811		63		62		7,126		204		200
Construction		-		-		-		50		2		2		-		-		-		-		-		-
Multi-Family		3,168		12		11		2,680		25		25		3,607		14		14		4,087		68		68
CRE Owner Occupied		6,475		39		39		6,566		117		117		7,171		30		30		7,810		134		115
CRE Non Owner Occupied		2,696		29		29		7,445		273		273		6,341		73		73		5,220		178		175
Agriculture Land		2,236		21		2		1,741		53		30		1,851		16		2		2,427		66		16
Other CRE		1,509		5		5		2,023		31		30		1,570		13		13		1,556		31		31
Total Commercial Real Estate		12,916		94		75		17,775		474		450		16,933		132		118		17,013		409		337
Commercial Working Capital		1,030		11		11		1,478		38		36		2,259		26		11		1,769		56		33
Commercial Other		2,989		7		6		3,483		33		41		2,198		8		7		2,742		36		34
Total Commercial		4,019		18		17		4,961		71		77		4,457		34		18		4,511		92		67
Home Equity and Home Improvement		2,160		19		19		2,257		60		60
Home Equity and Improvement														1,446		12		12		1,631		40		40
Consumer Finance		58		1		2		55		2		3		65		1		1		69		3		3
Total Impaired Loans	$	31,833	$	249	$	228	$	37,677	$	954	$	935	$	33,319	$	256	$	225	$	34,437	$	816	$	715

31 34

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

	September 30, 2016						December 31, 2015						September 30, 2017						December 31, 2016
	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	$	1,591	$	1,569	$	-	$	1,383	$	1,360	$	-	$	2,400	$	2,416	$	-	$	1,912	$	1,765	$	-
Residential Non Owner Occupied		2,486		2,478		-		2,147		2,141		-		1,755		1,748		-		1,691		1,683		-
Total 1-4 Family Residential Real Estate		4,077		4,047		-		3,530		3,501		-		4,155		4,164		-		3,603		3,448		-
Multi-Family Residential Real Estate		3,675		3,525		-		3,463		3,313		-		2,012		2,020		-		3,578		3,430		-
CRE Owner Occupied		5,646		5,331		-		4,869		4,520		-		10,461		9,993		-		2,652		2,353		-
CRE Non Owner Occupied		6,373		5,940		-		7,932		7,685		-		3,397		3,171		-		4,372		4,240		-
Agriculture Land		1,841		1,884		-		3,546		3,596		-		13,068		13,315		-		1,695		1,722		-
Other CRE		1,256		1,152		-		4,076		4,046		-		1,011		804		-		1,225		1,115		-
Total Commercial Real Estate		15,116		14,307		-		20,423		19,847		-		27,937		27,283		-		9,944		9,430		-
Construction		-		-		-		-		-		-		-		-		-		-		-		-
Commercial Working Capital		2,176		2,162		-		1,644		1,648		-		8,066		7,998		-		838		786		-
Commercial Other		2,005		1,917		-		3,573		3,607		-		7,594		5,522		-		1,179		967		-
Total Commercial		4,181		4,079		-		5,217		5,255		-		15,660		13,520		-		2,017		1,753		-

Home Equity and Home Improvement		716		670		-		817		772		-		332		609		-		631		585		-
Consumer Finance		59		59		-		60		59		-		43		43		-		55		55	$	-
Total loans with no allowance recorded	$	27,824	$	26,687	$	-	$	33,510	$	32,747	$	-	$	50,139	$	47,639	$	-	$	19,828	$	8,701

With an allowance recorded:
Residential Owner Occupied	$	2,340	$	2,313	$	93	$	2,918	$	2,837	$	188	$	1,887	$	1,866	$	140	$	2,348	$	2,319	$	157
Residential Non Owner Occupied		415		407		8		1,231		1,236		13		955		945		25		1,137		1,131		45
Total 1-4 Family Residential Real Estate		2,755		2,720		101		4,149		4,073		201		2,842		2,811		165		3,485		3,450		202
Multi-Family Residential Real Estate		54		55		1		-		-		-		49		49		3		53		53		4
CRE Owner Occupied		2,261		1,791		79		3,250		2,767		132		2,432		1,973		51		2,362		1,894		102
CRE Non Owner Occupied		340		341		4		385		308		2		292		294		15		1,618		1,479		108
Agriculture Land		46		47		1		68		69		2		108		110		2		45		45		3
Other CRE		822		399		5		926		502		3		927		727		41		1,144		722		42
Total Commercial Real Estate		3,469		2,578		89		4,629		3,646		139		3,759		3,104		109		5,169		4,140		255
Construction		-		-		-		-		-		-		-		-		-		-		-		-
Commercial Working Capital		107		107		2		594		596		62		163		163		21		230		231		24
Commercial Other		367		230		22		252		256		1		333		336		35		167		170		11
Total Commercial		474		337		24		846		852		63		496		499		56		397		401		35
Home Equity and Home Improvement		788		754		39		724		719		34		593		590		281		688		684		313
Consumer Finance		8		7		-		12		12		-		8		8		-		4		4		-
Total loans with an allowance recorded	$	7,548	$	6,451	$	254	$	10,360	$	9,302	$	437	$	7,747	$	7,061	$	614	$	9,796	$	8,732	$	809

* Presented gross of charge offs

32 35

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:

September 30,
2016
December 31,
2015
(In Thousands)
Non-accrual loans $ 18,198 $ 16,261
Loans over 90 days past due and still accruing - -
Total non-performing loans 18,198 16,261
Real estate and other assets held for sale 704 1,321
Total non-performing assets $ 18,902 $ 17,582
Troubled debt restructuring, still accruing $ 9,113 $ 11,178

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

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

Residential Owner Occupied $ 141,829 $ 30 $ 573 $ 847 $ 1,450 $ 1,834
Residential Non Owner Occupied 65,410 481 78 119 678 1,081

Total 1-4 Family Residential Real Estate 207,239 511 651 966 2,128 2,915

Multi-Family Residential Real Estate 199,989 - - - - 2,713

CRE Owner Occupied 348,245 134 1,128 1,678 2,940 4,972
CRE Non Owner Occupied 331,569 158 488 272 918 1,753
Agriculture Land 107,249 53 - - 53 857
Other Commercial Real Estate 55,498 - - 249 249 1,004

Total Commercial Real Estate 842,561 345 1,616 2,199 4,160 8,586

Construction 82,254 - - - - -

Commercial Working Capital 202,496 - 790 39 829 1,207
Commercial Other 252,800 188 17 1,228 1,433 2,059

Total Commercial 455,296 188 807 1,267 2,262 3,266

Home Equity/Home Improvement 117,737 657 162 158 977 719
Consumer Finance 17,057 131 64 - 195 13

Total Loans $ 1,922,133 $ 1,832 $ 3,300 $ 4,590 $ 9,722 $ 18,212

	September 30, 2017		December 31, 2016
	(In Thousands)
Non-accrual loans	$	29,152	$	14,348
Loans over 90 days past due and still accruing		-		-
Total non-performing loans		29,152		14,348
Real estate and other assets held for sale		532		455
Total non-performing assets	$	29,684	$	14,803
Troubled debt restructuring, still accruing	$	13,044	$	10,544

33 36

The following table presents the aging of the recorded investment in past due and ~~non~~non- accrual loans as of ~~December 31, 2015~~September 30, 2017 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	$	171,835	$	1,105	$	21	$	1,281	$	2,407	$	2,797
Residential Non Owner Occupied		64,577		324		356		226		906		1,179		96,055		638		93		495		1,226		572

Total 1-4 Family Residential Real Estate		203,551		483		1,029		617		2,129		2,607		267,890		1,743		114		1,776		3,633		3,369

Multi-Family Residential Real Estate		165,671		-		-		2,024		2,024		2,417		212,402		-		-		-		-		-

CRE Owner Occupied		322,940		772		1,218		1,266		3,256		4,141		395,228		62		143		1,107		1,312		10,745
CRE Non Owner Occupied		304,166		-		106		538		644		1,229		402,153		350		-		544		894		2,516
Agriculture Land		98,055		57		-		-		57		695		135,673		103		-		294		397		3,288
Other Commercial Real Estate		53,494		-		-		315		315		1,364		61,427		207		-		-		207		545

Total Commercial Real Estate		778,655		829		1,324		2,119		4,272		7,429		994,481		722		143		1,945		2,810		17,094

Construction		96,845		-		-		-		-		-		129,333		-		-		-		-		-

Commercial Working Capital		168,938		16		-		154		170		251		227,422		1,522		539		75		2,136		4,067
Commercial Other		249,070		203		46		2,223		2,472		2,833		281,773		-		379		354		733		4,004

Total Commercial		418,008		219		46		2,377		2,642		3,084		509,195		1,522		918		429		2,869		8,071

Home Equity and Home Improvement		116,599		733		92		44		869		689
Home Equity/Home Improvement														131,141		1,347		158		115		1,620		546
Consumer Finance		16,216		27		3		24		54		36		28,762		164		52		40		256		58

Total Loans	$	1,795,545	$	2,291	$	2,494	$	7,205	$	11,990	$	16,262	$	2,273,204	$	5,498	$	1,385	$	4,305	$	11,188	$	29,138
Loans acquired with deteriorated credit quality (included in the totals above)													$	3,698	$	33	$	-	$	134	$	167	$	1,925

Loans acquired in current year (included in totals above)													$	228,225	$	2,911	$	625	$	701	$	4,237	$	4,855

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

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

Residential Owner Occupied	$	139,015	$	56	$	842	$	544	$	1,442	$	1,931
Residential Non Owner Occupied		66,811		166		308		63		537		992

Total 1-4 Family Residential Real Estate		205,826		222		1,150		607		1,979		2,923

Multi-Family Residential Real Estate		197,197		-		-		-		-		2,637

CRE Owner Occupied		340,233		79		-		1,396		1,475		3,098
CRE Non Owner Occupied		338,724		81		16		426		523		1,808
Agriculture Land		102,397		-		-		-		-		755
Other Commercial Real Estate		62,415		-		-		249		249		1,292

Total Commercial Real Estate		843,769		160		16		2,071		2,247		6,953

Construction		89,244		-		-		-		-		-

Commercial Working Capital		202,786		-		10		38		48		435
Commercial Other		267,189		23		-		365		388		577

Total Commercial		469,975		23		10		403		436		1,012

Home Equity and Home Improvement		117,458		1,125		176		254		1,555		730
Consumer Finance		16,452		85		69		78		232		91

Total Loans	$	1,939,921	$	1,615	$	1,421	$	3,413	$	6,449	$	14,346

Troubled Debt Restructurings

As of September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, the Company had a recorded investment in troubled debt restructurings (“TDRs”) of ~~$14.7~~$22.6 million and ~~$17.6~~$16.8 million, respectively. The Company allocated ~~$254,000~~$602,000 and ~~$335,000~~$809,000 of specific reserves to those loans at September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, and ~~has~~had committed to lend additional amounts totaling up to ~~$10,000~~$55,000 and ~~$48,000~~$20,000 at September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, 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, ~~$5.5~~as of September 30, 2017 $9.6 million ~~are~~were 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~~tables present loans by class modified as ~~troubled debt restructurings~~TDRs that occurred during the three month periods and nine month periods ending September 30, ~~2016~~2017 and September 30, ~~2015:~~2016:

	Loans Modified as a TDR for the Three Months Ended September 30, 2017 ($ in thousands)				Loans Modified as a TDR for the Nine Months Ended September 30, 2017 ($ 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		10	$	420		18	$	923
1-4 Family Non Owner Occupied		0		-		3		104
Multi Family		0		-		0		-
CRE Owner Occupied		0		-		1		116
CRE Non Owner Occupied		0		-		0		-
Agriculture Land		3		280		5		1,731
Other CRE		0		-		2		165
Commercial Working Capital		2		345		7		2,396
Commercial Other		1		47		5		3,511
Home Equity and Improvement		2		72		4		150
Consumer Finance		1		7		3		10
Total		19	$	1,171		48	$	9,106

The loans described above decreased the ALLL by $5,000 in the three month period ending September 30, 2017 and decreased the ALLL by $29,000 in the nine month period ending September 30, 2017.

	Loans Modified as a TDR for the Three Months Ended September 30, 2016 ($ in thousands)				Loans Modified as a TDR for the Nine Months Ended September 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)

1-4 Family Owner Occupied		5	$	86		10	$	208
1-4 Family Non Owner Occupied		1		8		3		128
Multi Family		0		-		1		54
CRE Owner Occupied		0		-		0		-
CRE Non Owner Occupied		2		215		4		870
Agriculture Land		1		46		1		46
Other CRE		0		-		0		-
Commercial Working Capital		0		-		1		226
Commercial Other		0		-		1		590
Home Equity and Improvement		4		52		8		340
Consumer Finance		1		13		2		16
Total		14	$	420		31	$	2,478

The loans described above increased the ALLL by $31,000 in the three month period ending September 30, 2016 and decreased the ALLL by $9,000 in the nine month period ending September 30, 2016.

35 40

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

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

Total 10 $ 321 37 $ 3,171

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

Of the ~~2016~~2017 modifications, 1012 were made TDRs due to the fact that the borrower ~~has been~~is in bankruptcy, ~~1 was~~5 were made TDR due to terming out lines of credit, 11 were made TDR due to advancing or renewing money to a watch list credit, 7 loans were placed under a forbearance agreement, and 13 were made a TDR because the current debt was refinanced due to ~~an interest only period, 6 were made TDRs due to extending the~~ maturity ~~4 were made TDRs due to advancing funds to a watchlist credit, 1 was to term out a line of credit and 9 were made to refinance current debt~~or for payment relief.

The following ~~table presents~~tables present loans by class modified as TDRs for which there was a payment default within twelve months following the modification during the three and nine month periods ended September 30, ~~2016~~2017 and September 30, ~~2015:~~2016:

	Three Months Ended September 30, 2016 ($ in thousands)				Nine Months Ended September 30, 2016 ($ in thousands)				Three Months Ended September 30, 2017 ($ in thousands)				Nine Months Ended September 30, 2017 ($ in thousands)
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans		Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)

1-4 Family Owner Occupied		1	$	190		1	$	190		0	$	-		0	$	-
1-4 Family Non Owner Occupied		0		-		0		-		0		-		0		-
CRE Owner Occupied		0		-		0		-		0		-		0		-
CRE Non Owner Occupied		0		-		1		11		0		-		0		-
Agriculture Land		0		-		0		-		0		-		0		-
Other CRE		0		-		0		-		0		-		0		-
Commercial Working Capital or Other		0		-		0		-		0		-		1		225
Commercial Other		0		-		0		-		0		-		0		-
Home Equity and Improvement		0		-		0		-		0		-		0		-
Consumer Finance		0		-		0		-		0		-		0		-

Total		1	$	190		2	$	201		0	$	-		1	$	225

The TDRs that subsequently defaulted described above had no effect on the allowance for loan losses for the three and nine month periods ended September 30, 2017.

	Three Months Ended September 30, 2016 ($ in thousands)				Nine Months Ended September 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		1	$	190		1	$	190
1-4 Family Non Owner Occupied		0		-		0		-
CRE Owner Occupied		0		-		0		-
CRE Non Owner Occupied		0		-		1		11
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	$	190		2	$	201

The TDRs that subsequently defaulted described above had no effect on the allowance for loan losses for the three and nine month periods ended September 30, 2016.

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

1-4 Family Owner Occupied 0 $ - 0 $ -
1-4 Family Non Owner Occupied 0 - 1 105
CRE Owner Occupied 0 - 0 -
CRE Non Owner Occupied 0 - 0 -
Agriculture Land 0 - 0 -
Other CRE 0 - 0 -
Commercial Working Capital or Other 1 120 1 120
Commercial Other 5 1,829 5 1,829
Home Equity and Improvement 0 - 1 22
Consumer Finance 0 - 0 -

Total 6 $ 1,949 8 $ 2,076

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

The terms of certain other loans were modified during the period ending September 30, 2016 that did not meet the definition of a TDR. The modification of these loans involved a modification of the terms of a loan to borrowers who were not experiencing financial difficulties. A total of 81 loans were modified under this definition during the three month period ended September 30, 2016 and a total of 284 loans were modified under this definition during the nine month period ended September 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 September 30, 2017, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (In Thousands):

Class	Pass		Special Mention		Substandard		Doubtful		Not Graded		Total

1-4 Family Owner Occupied	$	7,792	$	211	$	2,557	$	-	$	163,681	$	174,241
1-4 Family Non Owner Occupied		87,087		2,138		3,236		-		4,821		97,282

Total 1-4 Family Real Estate		94,879		2,349		5,793		-		168,502		271,523

Multi-Family Residential Real Estate		208,997		968		2,325		-		112		212,402

CRE Owner Occupied		373,218		10,835		12,287		-		201		396,541
CRE Non Owner Occupied		393,425		4,149		5,473		-		-		403,047
Agriculture Land		118,739		2,563		14,769		-		-		136,071
Other CRE		58,668		221		1,851		-		892		61,632

Total Commercial Real Estate		944,050		17,768		34,380		-		1,093		997,291

Construction		103,565		1,178		-		-		24,590		129,333

Commercial Working Capital		212,733		8,442		8,383		-		-		229,558
Commercial Other		270,813		5,279		6,414		-		-		282,506

Total Commercial		483,546		13,721		14,797		-		-		512,064

Home Equity and Home Improvement		-		-		588		-		132,173		132,761
Consumer Finance		-		-		127		-		28,891		29,018

Total Loans	$	1,835,037	$	35,984	$	58,010	$	-	$	355,361	$	2,284,392

Loans acquired with deteriorated credit quality (included in the totals above)	$	46	$	1,333	$	2,482		-	$	4	$	3,865

Loans acquired in current year (included in totals above)	$	168,826	$	4,742	$	14,553		-	$	44,341	$	232,462

As of December 31, 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	$	5,585	$	286	$	1,637	$	-	$	135,771	$	143,279
1-4 Family Non Owner Occupied		57,485		926		3,581		-		4,096		66,088
Residential Owner Occupied													$	5,980	$	402	$	1,824	$	-	$	132,250	$	140,456
Residential Non Owner Occupied														58,041		1,394		3,480		-		4,434		67,349

Total 1-4 Family Real Estate		63,070		1,212		5,218		-		139,867		209,367		64,021		1,796		5,304		-		136,684		207,805

Multi-Family Residential Real Estate		195,606		310		3,958		-		115		199,989		192,369		862		3,852		-		114		197,197

CRE Owner Occupied		319,942		23,239		7,564		-		440		351,185		316,335		20,559		4,430		-		384		341,708
CRE Non Owner Occupied		325,109		1,016		6,355		-		6		332,486		332,196		1,617		5,435		-		-		339,248
Agriculture Land		102,228		2,869		2,206		-		-		107,303		98,039		2,355		2,002		-		-		102,396
Other CRE		52,585		-		2,420		-		742		55,747		59,561		60		2,297		-		746		62,664

Total Commercial Real Estate		799,864		27,124		18,545		-		1,188		846,721		806,131		24,591		14,164		-		1,130		846,016

Construction		63,927		-		-		-		18,327		82,254		67,751		706		-		-		20,787		89,244

Commercial Working Capital		189,208		11,509		2,608		-		-		203,325		193,043		8,301		1,490		-		-		202,834
Commercial Other		244,846		6,579		2,808		-		-		254,233		262,076		3,749		1,752		-		-		267,577

Total Commercial		434,054		18,088		5,416		-		-		457,558		455,119		12,050		3,242		-		-		470,411

Home Equity and Home Improvement		-		-		691		-		118,023		118,714		-		-		696		-		118,317		119,013
Consumer Finance		-		-		13		-		17,239		17,252		-		-		90		-		16,594		16,684

Total Loans	$	1,556,521	$	46,734	$	33,841	$	-	$	294,759	$	1,931,855	$	1,585,391	$	40,005	$	27,348	$	-	$	293,626	$	1,946,370

38 44

AsThe Company has purchased loans, for which there was, at acquisition, evidence of ~~December 31, 2015,~~deterioration of credit quality since origination and ~~based on the most recent analysis performed, the risk category~~it was probable, at acquisition, that all contractually required payments would not be collected. The outstanding balance of ~~loans by class of~~those 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

	September 30, 2017

1-4 Family Residential Real Estate	$	1,496
Commercial Real Estate Loans		2,963
Commercial		414
Consumer		2
Total Outstanding Balance	$	4,875

Recorded Investment, net of allowance of $0	$	3,865

Accretable yield, or income expected to be collected, is as follows:

	2017

Balance at January 1	$	-
New Loans Purchased		1,018
Accretion of Income		(163	)
Reclassifications from Non-accretable		-
Charge-off of Accretable Yield		(8	)
Balance at September 30	$	847

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during the three or nine months ended September 30, 2017. No allowances for loan losses were reversed during the same period.

Contractually required payments receivable of loans purchased with evidence of credit deterioration during the period ended September 30, 2017 using information as of the date of acquisition are included in the table below. There were no such loans purchased during the year ended December 31, 2016. (In Thousands)

1-4 Family Residential Real Estate	$	1,720
Commercial Real Estate		4,724
Commercial		785
Consumer		4
Total	$	7,233

Cash Flows Expected to be Collected at Acquisition $ 5,721

Fair Value of Acquired Loans at Acquisition $ 4,703

Foreclosure Proceedings

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled ~~$142,000~~$18,000 as of September 30, ~~2016.~~2017.

39 45

Mortgage Banking

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

	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015			2017			2016			2017			2016
	(In Thousands)												(In Thousands)
Gain from sale of mortgage loans	$	1,683		$	1,197		$	4,103		$	3,728		$	1,200		$	1,683		$	3,577		$	4,103
Mortgage loans servicing revenue (expense):
Mortgage loans servicing revenue		885			866			2,638			2,593			911			885			2,769			2,638
Amortization of mortgage servicing rights		(536	)		(407	)		(1,281	)		(1,264	)		(386	)		(536	)		(1,101	)		(1,281	)
Mortgage servicing rights valuation adjustments		7			24			(118	)		191			(27	)		7			21			(118	)
		356			483			1,239			1,520			498			356			1,689			1,239

Net revenue from sale and servicing of mortgage loans	$	2,039		$	1,680		$	5,342		$	5,248		$	1,698		$	2,039		$	5,266		$	5,342

The unpaid principal balance of residential mortgage loans serviced for third parties was ~~$1.37~~$1.38 billion at September 30, ~~2016~~2017 and ~~$1.34~~$1.37 billion at December 31, ~~2015.~~2016.

Activity for capitalized mortgage servicing rights and the related valuation allowance follows for the three and nine months ended September 30, ~~2016~~2017 and ~~2015:~~2016:

Three Months Ended
September 30,

Nine Months Ended
September 30,

2016 2015 2016 2015
(In Thousands)
Mortgage servicing assets:
Balance at beginning of period $ 9,906 $ 9,872 $ 9,893 $ 9,923
Loans sold, servicing retained 701 449 1,459 1,255
Amortization (536 ) (407 ) (1,281 ) (1,264 )
Carrying value before valuation allowance at end of period 10,071 9,914 10,071 9,914

Valuation allowance:
Balance at beginning of period (770 ) (744 ) (645 ) (911 )
Impairment recovery (charges) 7 24 (118 ) 191
Balance at end of period (763 ) (720 ) (763 ) (720 )
Net carrying value of MSRs at end of period $ 9,308 $ 9,194 $ 9,308 $ 9,194
Fair value of MSRs at end of period $ 9,493 $ 9,629 $ 9,493 $ 9,629

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(In Thousands)
Mortgage servicing assets:
Balance at beginning of period	$	10,154		$	9,906		$	10,117		$	9,893
Loans sold, servicing retained		426			701			1,178			1,459
Amortization		(386	)		(536	)		(1,101	)		(1,281	)
Carrying value before valuation allowance at end of period		10,194			10,071			10,194			10,071

Valuation allowance:
Balance at beginning of period		(474	)		(770	)		(522	)		(645	)
Impairment recovery (charges)		(27	)		7			21			(118	)
Balance at end of period		(501	)		(763	)		(501	)		(763	)
Net carrying value of MSRs at end of period	$	9,693		$	9,308		$	9,693		$	9,308
Fair value of MSRs at end of period	$	9,750		$	9,493		$	9,750		$	9,493

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 has established an accrual for secondary market buy-back ~~losses that resulted~~activity. A liability of $45,000 and $79,000 was accrued at September 30, 2017 and December 31, 2016, respectively. Expense (credit) recognized related to the accrual was ($34,000) and ($131,000) in ~~a reversal of $131,000 for~~ the ~~first~~ nine months ~~of 2016. In the first nine months of 2015, the Company reversed $84,000.~~ended September 30, 2017 and 2016, respectively. The reversals are mainly due to no actual losses being recorded in the in the first nine months of 2017 and 2016, ~~and 2015. There is approximately $83,000 and $226,000 accrued and included within other liabilities at September 30, 2016 and 2015, respectively, for potential secondary market buy-back losses.~~respectively.

10.

Deposits

A summary of deposit balances is as follows:

	September 30, 2016		December 31, 2015		September 30, 2017		December 31, 2016
	(In Thousands)				(In Thousands)
Non-interest-bearing checking accounts	$	443,321	$	420,691	$	519,911	$	487,663
Interest-bearing checking and money market accounts		810,393		767,201		989,514		816,665
Savings deposits		241,016		219,655		296,230		243,369
Retail certificates of deposit less than $250,000		399,749		403,902		504,277		400,080
Retail certificates of deposit greater than $250,000		33,207		24,688		50,743		33,851
	$	1,927,686	$	1,836,137	$	2,360,675	$	1,981,628

11.

Borrowings

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

	September 30, 2016		December 31, 2015		September 30, 2017			December 31, 2016
	(In Thousands)				(In Thousands)
FHLB Advances:
Single maturity fixed rate advances	$	72,000	$	47,000	$	92,000		$	92,000
Putable advances		5,000		5,000		5,000			5,000
Amortizable mortgage advances		7,184		7,902		7,583			6,943
Overnight advances		30,000		-
Fair value adjustment on acquired balances						(28	)		-
Total	$	114,184	$	59,902	$	104,555		$	103,943

Junior subordinated debentures owed to unconsolidated subsidiary trusts	$	36,083	$	36,083	$	36,083		$	36,083
Notes payable					$	6,500		$	-

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 September 30, ~~2016.~~2017. The call date for this advance is December 12, ~~2016~~2017 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 ~~2.35%~~2.83% as of September 30, ~~2016~~2017 and ~~2.01%~~2.46% as of December 31, ~~2015.~~2016.

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 ~~2.23%~~2.71% and ~~1.89%~~2.34% on September 30, ~~2016~~2017 and December 31, ~~2015~~2016 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.

On December 29, 2016, First Defiance entered into a loan agreement with First Tennessee Bank for a $20 million line of credit. The rate on the line of credit is at three-month LIBOR plus 1.95%. As of September 30, 2017 and December 31, 2016, the rate payable was 3.28% and 2.91% respectively. The outstanding balance at September 30, 2017 was $6.5 million, is included in notes payable and is due at maturity.

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 September 30, ~~2016~~2017 and December 31, ~~2015~~2016 is presented in the following tables.

	Overnight and Continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total			Overnight and Continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total
	(In Thousands)													(In Thousands)
At September 30, 2016
At September 30, 2017
Repurchase agreements:
Mortgage-backed securities – residential	$	26,433	$	-	$	-	$	-	$	26,433		$	6,115	$	-	$	-	$	-	$	6,115
Collateralized mortgage obligations		24,060		-		-		-		24,060			16,824		-		-		-		16,824
Total borrowings	$	50,493	$	-	$	-	$	-	$	50,493		$	22,939	$	-	$	-	$	-	$	22,939
Gross amount of recognized liabilities for repurchase agreements									$	50,493	Gross amount of recognized liabilities for repurchase agreements									$	22,939

	Overnight and Continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total			Overnight and Continuous		Up to 30 Days		30-90 Days		Greater than 90 Days		Total
	(In Thousands)													(In Thousands)
At December 31, 2015
At December 31, 2016
Repurchase agreements:
Mortgage-backed securities – residential	$	23,998	$	-	$	-	$	-	$	23,998		$	21,222	$	-	$	-	$	-	$	21,222
Collateralized mortgage obligations		33,190		-		-		-		33,190			10,594		-		-		-		10,594
Total borrowings	$	57,188	$	-	$	-	$	-	$	57,188		$	31,816	$	-	$	-	$	-	$	31,816
Gross amount of recognized liabilities for repurchase agreements									$	57,188	Gross amount of recognized liabilities for repurchase agreements									$	31,816

12.

Commitments, Guarantees and Contingent Liabilities

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

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

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

September 30, 2016 December 31, 2015
Fixed Rate Variable Rate Fixed Rate Variable Rate
Commitments to make loans $ 51,486 $ 120,932 $ 80,862 $ 76,253
Unused lines of credit 15,689 420,335 31,991 323,171
Standby letters of credit - 9,891 - 19,632
Total $ 67,175 $ 551,158 $ 112,853 $ 419,056

	September 30, 2017				December 31, 2016
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	51,442	$	175,344	$	34,432	$	106,356
Unused lines of credit		8,956		413,370		14,384		400,542
Standby letters of credit		-		6,910		-		9,668
Total	$	60,398	$	595,624	$	48,816	$	516,566

Commitments to make loans are generally made for periods of 60 days or less. In addition to the above commitments, First Defiance had commitments to sell ~~$38.1~~$21.7 million and ~~$19.9~~$22.5 million of loans to Freddie Mac, Fannie Mae, Federal Home Loan Bank of Cincinnati or BB&T Mortgage at September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively.

13.

Income Taxes

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax in the state of Indiana. The Company is no longer subject to examination by taxing authorities for years before ~~2011.~~2012. 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 $54,000 credit to tax expense was recorded in the third quarter of 2016 and a $184,000 credit to tax expense was recorded for the first nine months of 2016.~~

14.

Derivative Financial Instruments

Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. It is the Company’s practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. These mortgage banking derivatives are not designated in hedge relationships. First Federal had approximately ~~$19.9~~$21.5 million and ~~$14.9~~$14.1 million of interest rate lock commitments at September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively. There were ~~$38.1~~$30.8 million and ~~$19.9~~$22.5 million of forward commitments for the future delivery of residential mortgage loans at September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, respectively.

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

September30, 2016

December 31, 2015

September30, 2017

December 31, 2016

Assets

(Liabilities)

Assets

(Liabilities)

Assets

(Liabilities)

Assets

(Liabilities)

Derivative

Carrying

Net Carrying

Carrying

Net Carrying

Carrying

Net Carrying

Carrying

Net Carrying

Value

(In Thousands)

Derivatives not designated as hedging instruments

Mortgage Banking Derivatives

921

(126

)

795

558

821

491

44 50

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

	Three Months Ended September 30,						Nine Months Ended September 30,				Three Months Ended September 30,					Nine Months Ended September 30,
	2016			2015			2016		2015		2017		2016			2017		2016
	(In Thousands)										(In Thousands)
Derivatives not designated as hedging instruments

Mortgage Banking Derivatives – Gain (Loss)	$	(193	)	$	(94	)	$	237	$	311	$	47	$	(193	)	$	330	$	237

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

~~Note 15 - Other Comprehensive Income (Loss)~~

15.

Other Comprehensive Income

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

Before Tax
Amount Tax Expense
(Benefit) Net of Tax
Amount
(In Thousands)
Three months ended September 30, 2016:
Securities available for sale and transferred securities:
Change in net unrealized gain (loss) during the period $ 69 $ (24 ) $ 45
Reclassification adjustment for net gains included in net income (151 ) 53 (98 )
Total other comprehensive income (loss) $ (82 ) $ 29 $ (53 )

Nine months ended September 30, 2016:
Securities available for sale and transferred securities:
Change in net unrealized gain (loss) during the period $ 2,579 $ (903 ) $ 1,676
Reclassification adjustment for net gains included in net income (509 ) 178 (331 )
Total other comprehensive income (loss) $ 2,070 $ (725 ) $ 1,345

	Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount
	(In Thousands)
Three months ended September 30, 2017:
Securities available for sale:
Change in net unrealized gain/loss during the period	$	(777	)	$	272		$	(505	)
Reclassification adjustment for net gains included in net income		(158	)		55			(103	)
Total other comprehensive loss	$	(935	)	$	327		$	(608	)

Nine months ended September 30, 2017:
Securities available for sale:
Change in net unrealized gain/loss during the period	$	3,383		$	(1,183	)	$	2,200
Reclassification adjustment for net gains included in net income		(425	)		148			(277	)
Total other comprehensive income	$	2,958		$	(1,035	)	$	1,923

	Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount			Before Tax Amount			Tax Expense (Benefit)			Net of Tax Amount
	(In Thousands)									(In Thousands)
Three months ended September 30, 2015:
Three months ended September 30, 2016:
Securities available for sale and transferred securities:
Change in net unrealized gain (loss) during the period	$	2,024		$	709		$	1,315		$	69		$	(24	)	$	45
Reclassification adjustment for net gains included in net income		-			-			-			(151	)		53			(98	)
Total other comprehensive income (loss)	$	2,024		$	709		$	1,315		$	(82	)	$	29		$	(53	)

Nine months ended September 30, 2015:
Nine months ended September 30, 2016:
Securities available for sale and transferred securities:
Change in net unrealized gain (loss) during the period	$	(313	)	$	(108	)	$	(205	)	$	2,579		$	(903	)	$	1,676
Reclassification adjustment for net gains included in net income		-			-			-			(509	)		178			(331	)
Total other comprehensive income (loss)	$	(313	)	$	(108	)	$	(205	)	$	2,070		$	(725	)	$	1,345

45 51

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

							Accumulated									Accumulated
	Securities			Post-			Other			Securities			Post-			Other
	Available			retirement			Comprehensive			Available			retirement			Comprehensive
	For Sale			Benefit			Income			For Sale			Benefit			Income
										(In Thousands)
Balance January 1, 2017										$	504		$	(289	)	$	215
Other comprehensive income before reclassifications											2,200			-			2,200
Amounts reclassified from accumulated other comprehensive income											(277	)		-			(277	)

Net other comprehensive income during period											1,923			-			1,923

Balance September 30, 2017										$	2,427		$	(289	)	$	2,138
	(In Thousands)
Balance January 1, 2016	$	4,042		$	(420	)	$	3,622		$	4,042		$	(420	)	$	3,622
Other comprehensive income (loss) before reclassifications		1,676			-			1,676			1,676			-			1,676
Amounts reclassified from accumulated other comprehensive income		(331	)		-			(331	)		(331	)		-			(331	)

Net other comprehensive income during period		1,345			-			1,345			1,345			-			1,345

Balance September 30, 2016	$	5,387		$	(420	)	$	4,967		$	5,387		$	(420	)	$	4,967

Balance January 1, 2015	$	4,697		$	(583	)	$	4,114
Other comprehensive income (loss) before reclassifications		(205	)		-			(205	)
Amounts reclassified from accumulated other comprehensive income		-			-			-

Net other comprehensive income during period		(205	)		-			(205	)

Balance September 30, 2015	$	4,492		$	(583	)	$	3,909

~~Note 16 – Affordable Housing Projects Tax Credit Partnership~~

16.

Affordable Housing Projects Tax Credit Partnership

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

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

46 52

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. ~~All~~In January of 2014, the ~~LIHTC’s~~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 ~~are accounted for under~~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 ~~there were no investments held prior to January~~a component of ~~2014.~~income tax expense (benefit). The Company utilized the proportional amortization method for all of its instruments. As of September 30, ~~2016~~2017 and December 31, ~~2015~~2016 the Company had ~~$6.9~~$9.3 million and ~~$4.3~~$6.8 million in qualified investments recorded in other assets and ~~$4.6~~$6.7 million and ~~$2.4~~$4.3 million in unfunded commitments recorded in other liabilities, respectively.

Unfunded Commitments

As of September 30, ~~2016,~~2017, the expected payments for unfunded affordable housing commitments were as ~~follows (In Thousands):~~follows:

	Amount
2016	$	1,089
(dollars in thousands)			Amount
2017		1,143	$	1,318
2018		1,137		1,977
2019		308		1,372
2020		179		429
2021				393
Thereafter		778		1,178
Total Unfunded Commitments	$	4,634	$	6,667

The following table presents tax credits and other tax benefits recognized and amortization expense related to affordable housing for the three and nine months ended September 30, ~~2016~~2017 and ~~2015 (In Thousands):~~2016.

	Three Months Ended September 30,				Three Months Ended September 30,
	2016		2015
(dollars in thousands)					2017		2016
Proportional Amortization Method
Tax credits and other tax benefits recognized	$	170	$	118	$	218	$	170
Amortization expense in federal income taxes		130		89		173		130

Nine Months Ended
September 30,
2016 2015
Proportional Amortization Method
Tax credits and other tax benefits recognized $ 484 $ 354
Amortization expense in federal income taxes 368 268

	Nine Months Ended September 30,
(dollars in thousands)	2017		2016
Proportional Amortization Method
Tax credits and other tax benefits recognized	$	640	$	484
Amortization expense in federal income taxes		502		368

There were no impairment losses of LIHTC investments for the three and nine months ended September 30, ~~2016~~2017 and ~~2015.~~2016.

17.

Business Combinations

~~Note 17 – Acquisition~~

~~On August 23, 2016, First Defiance announced~~Effective February 24, 2017, the ~~execution of a definitive agreement (the “Agreement”) to acquire~~Company acquired Commercial Bancshares, Inc. (“Commercial Bancshares”) and its ~~wholly-owned~~ subsidiary, The Commercial Savings Bank (“CSB”)~~. Each~~, pursuant to an Agreement and Plan of Merger (“merger agreement”), dated August 23, 2016. The acquisition was accomplished by the merger of Commercial Bancshares ~~shareholder~~into First Defiance, immediately followed by the merger of CSB into First Defiance’s banking subsidiary, First Federal. CSB operated 7 full-service banking offices in northwest and north central, Ohio and 1 commercial loan production office in central Ohio. Commercial Bancshares’ consolidated assets and equity (unaudited) as of February 24, 2017 totaled $348.4 million and $37.5 million, respectively. The Company accounted for the transaction under the acquisition method of accounting which means that the acquired assets and liabilities were recorded at fair value at the date of acquisition. The fair value estimates included in these financial statements are based on preliminary valuations. The Company does not expect material variances from these estimates and expects that final valuation estimates will be completed during the year ending December 31, 2017.

In accordance with ASC 805, the Company expensed approximately $3.7 million of direct acquisition costs, of which $2.8 million was to settle employment and benefit agreements and for personnel expenses related to operating the new Commercial Bancshares locations. The Company recorded $28.7 million of goodwill and $4.9 million of intangible assets. Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies expected to be derived from the combination of the two entities. The acquisition was consistent with the Company’s strategy to enhance and expand its presence in northwestern and north central Ohio. The acquisition offers the Company the opportunity to increase profitability by introducing existing products and services to the acquired customer base as well as add new customers in the expanded market area. The intangible assets are related to core deposits and are being amortized over 10 years on an accelerated basis. For tax purposes, goodwill totaling $28.7 million is non-deductible but will be evaluated annually for impairment. The following table summarizes the fair value of the total consideration transferred as part of the Commercial Bancshares acquisition as well as the fair value of identifiable assets and liabilities assumed as of the effective date of the transaction.

	February 24, 2017
	(In Thousands)

Cash Consideration	$	12,340
Equity – Dollar Value of Issued Shares		56,532
Fair Value of Total Consideration Transferred		68,872

Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed:
Cash and Cash Equivalents		35,411
Federal Funds Sold		2,769
Securities		4,338
Loans		285,448
FHLB Stock of Cincinnati and Other Stock		2,194
Office Properties and Equipment		5,455
Intangible Assets		4,900
Bank-Owned Life Insurance		8,168
Accrued Interest Receivable and Other Assets		3,606
Deposits – Non-Interest Bearing		(56,061	)
Deposits – Interest Bearing		(251,931	)
Advances from FHLB		(1,403	)
Accrued Interest Payable and Other Liabilities		(2,717	)
Total Identifiable Net Assets		40,177

Goodwill	$	28,695

Under the terms of the merger agreement, Commercial Bancshares common shareholders had the opportunity to elect to receive 1.1808 shares of ~~First Defiance~~ common stock ~~(“First Defiance Shares”)~~of the Company or cash in the amount of $51.00 ~~in cash,~~for each share of Commercial Bancshares common stock, subject to ~~total~~adjustment as provided for in the merger agreement. Total consideration ~~being~~for Commercial Bancshares common shares outstanding was paid 80% in ~~First Defiance Shares~~Company stock and 20% in ~~cash as provided in the Agreement. Based on the twenty-day average closing price~~cash. The Company issued 1,139,502 shares of ~~First Defiance Shares of $43.19 ending August 22, 2016, the transaction is valued at approximately $63~~its common stock and paid $12.3 million in cash to the aggregate, including cash payment of approximately $1.5 million to cancel outstanding options. On June 30, 2016, Commercial Bancshares had $342 million in assets, $298 million in loans and $301 million in deposits at its seven banking offices. The transaction is expected to be completed in the first quarter of 2017, pending regulatory approvals, the approval offormer shareholders of Commercial ~~Bancshares~~Bancshares.

The following table presents unaudited pro forma information as if the acquisition had occurred on January 1, 2016 after giving effect to certain adjustments. The unaudited pro forma information for the nine months ended September 30, 2017 and September 30, 2016 includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, interest expense on deposits and borrowings acquired, and the ~~completion~~related income tax effects. The unaudited pro forma financial information is not necessarily indicative of ~~other customary closing conditions.~~

the results of operations that would have occurred had the transaction been effected on the assumed date.

48 55

	Pro Forma Nine		Pro Forma Nine
	Months Ended		Months Ended
	September 30, 2017		September 30, 2016
	(In Thousands)

Net Interest Income	$	73,476	$	67,008
Provision for loan losses		2,635		984
Non-Interest Income		30,463		26,646
Non-Interest Expense		62,067		57,453
Income Before Income Taxes		39,237		35,217
Income Tax Expense		13,112		10,733
Net Income	$	26,125	$	24,484
Diluted Earnings Per Share	$	2.58	$	2.40

The above pro forma financial information includes approximately $3.1 million of net income related to the operations of Commercial Bancshares during the first nine months of 2017. The above pro forma financial information related to 2017 excludes non-recurring merger costs that totaled $3.7 million on a pre-tax basis.

On April 13, 2017, First Defiance and Corporate One Benefits Agency, Inc. (“Corporate One”) jointly announced the acquisition of Corporate One’s business by First Defiance. The total purchase price paid in cash was made up of the following: $6.5 million was paid at closing, $500,000 is due in July 2018, and $2.3 million at the end of a three-year earn-out based on the compound annual growth rate of net revenue over the performance period of Corporate One, for a total purchase price of $9.3 million. The recorded fair value of the $2.3 million earn-out was $1.8 million at September 30, 2017. As of September 30, 2017, total Company recorded goodwill of $7.9 million and identifiable intangible assets of $756,000 consisting of customer relationship intangible of $564,000 and a non-compete intangible of $192,000. The fair value estimates are preliminary and subject to revision until final values are determined by management, which is expected to occur by December 31, 2017. Corporate One was merged into First Insurance. Corporate One was a full-service employee benefits consulting organization founded in 1996 with offices located in Archbold, Findlay, Fostoria and Tiffin, Ohio. Corporate One consulted employers to better manage their employee benefit programs to effectively lead them into the future. It is anticipated that the transaction will enhance employee benefit offerings and expand First Insurance’s presence into adjacent markets in northwest Ohio.

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

Forward-Looking Information

Certain statements contained in this quarterly report are not 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 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.

Non-GAAP Financial Measures

This document contains GAAP financial measures and certain non-GAAP financial measures which are presented as management believes they are helpful in understanding the Company’s results of operations or financial position. Fully taxable-equivalent (“FTE”) is an adjustment to net interest income to reflect tax-exempt income on an equivalent before-tax basis. The following tables present a reconciliation of non-GAAP measures to their respective GAAP measures for the nine months ended September 30, 2017 and 2016.

Non-GAAP Financial Measures – Net Interest Income on an FTE basis, Net Interest Margin and Efficiency Ratio
($ in Thousands)	September 30, 2017			September 30, 2016
Net interest income (GAAP)	$	71,284		$	58,404
Add: FTE adjustment		1,432			1,381
Net interest income on a FTE basis (1)	$	72,716		$	59,785

Noninterest income – less securities gains/losses (2)	$	29,759		$	25,228
Noninterest expense (3)		64,211			52,913
Average interest-earning assets net of average unrealized gains/losses on securities(4)		2,508,254			2,140,426
Average interest-earning assets		2,511,469			2,148,438
Average unrealized gains/losses on securities		3,215			8,012

Ratios:
Net interest margin (1) / (4)		3.88	%		3.73	%
Efficiency ratio (3) / (1) + (2)		62.66	%		62.24	%

Critical Accounting Policies

First Defiance has established various accounting policies which govern the application of accounting principles generally accepted in the United States in the preparation of its financial statements. The significant accounting policies of First Defiance are described in the footnotes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K. Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. Those policies which are identified and discussed in detail in the Company’s Annual Report on Form 10-K include the Allowance for Loan Losses, Goodwill, and the Valuation of Mortgage Servicing Rights. There have been no material changes in assumptions or judgments relative to those critical policies during the first nine months of 2017.

General

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

First Federal is a federally chartered stock savings bank that provides financial services to communities based in northwest and central Ohio, northeast Indiana, and southeastern Michigan where it operates 3442 full service banking ~~centers in twelve northwest Ohio counties, one northeast Indiana county, and one southeastern Michigan county.~~centers. First Federal operates one loan production office in ~~one~~ central Ohio. On June 30, 2017, First Federal closed its full service banking center located at 1660 Tiffin Avenue in Findlay, Ohio. Management’s decision to consolidate this banking center was based on the close proximity of other Findlay, Ohio ~~county.~~banking centers.

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. Effective April 1, 2017, First Defiance acquired the business of Corporate One. Corporate One was merged into First Insurance. Corporate One was a full-service employee benefits consulting organization founded in 1996 with offices located in Archbold, Findlay, Fostoria and Tiffin, Ohio. Corporate One consulted employers to better manage their employee benefit programs to effectively lead them into the future. The transaction is expected to enhance employee benefit offerings and expand First Insurance’s presence into adjacent markets in northwest Ohio.

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.

~~On August 23, 2016,~~Regulation - First Defiance ~~announced~~and First Federal are subject to regulation, examination and oversight by the ~~execution~~Office of the Comptroller of the Currency (“OCC”) and the Federal Reserve Board (“Federal Reserve”). Because the FDIC insures First Federal’s deposits, First Federal is also subject to examination and regulation by the FDIC. In addition, First Federal is subject to regulation and examination by the Consumer Financial Protection Bureau (the “CFPB”) established by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). First Defiance and First Federal must file periodic reports with the Federal Reserve and the OCC and examinations are conducted periodically by the Federal Reserve, OCC and the FDIC to determine whether First Defiance and First Federal are in compliance with various regulatory requirements and are operating in a ~~definitive agreement (the “Agreement”)~~safe and sound manner. First Federal is subject to ~~acquire Commercial Bancshares~~various consumer protection and ~~its wholly-owned subsidiary, CSB. Each Commercial Bancshares shareholder will receive 1.1808 shares~~fair lending laws. These laws govern, among other things, truth-in-lending disclosure, equal credit opportunity, and, in the case of First ~~Defiance Shares or $51.00 in cash, subject~~Federal, fair credit reporting and community reinvestment. Failure to ~~total consideration being paid 80% in First Defiance Shares~~abide by federal laws and ~~20% in cash as provided in~~regulations governing community reinvestment could limit the ~~Agreement. Based on the twenty-day average closing price~~ability of First ~~Defiance Shares of $43.19 ending August 22, 2016, the transaction is valued at approximately $63 million~~Federal to open a new branch or engage in ~~the aggregate, including cash payment of approximately $1.5 million~~a merger transaction. Community reinvestment regulations evaluate how well and to ~~cancel outstanding options. On June 30, 2016, Commercial Bancshares had $342 million~~what extent First Federal lends and invests in ~~assets, $298 million~~its designated service area, with particular emphasis on low-to-moderate income communities and borrowers in loans and $301 million in deposits at its seven banking offices. The transaction is expected to be completed in the first quarter of 2017, pending regulatory approvals, the approval of shareholders of Commercial Bancshares and the completion of other customary closing conditions.such areas.

49 58

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

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

The CFPB has indicated that mortgage lending is an area of supervisory focus and that it will concentrate its examination and rulemaking efforts on the variety of mortgage-related topics required under the Dodd-Frank Act, including steering consumers to less-favorable products, discrimination, abusive or unfair lending practices, predatory lending, origination disclosures, minimum mortgage underwriting standards, mortgage loan originator compensation, and servicing practices. The CFPB 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~~is also subject to various Ohio laws which restrict takeover bids, tender offers and ~~other federal agency regulations or the impact they might~~control-share acquisitions involving public companies which have ~~on First Defiance’s financial results. The CFPB’s authority over mortgage lending, and its authority~~significant ties 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.~~Ohio.

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.

In July 2013, 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.~~Act. The new minimum capital requirements became effective on January 1, 2015, ~~whereas~~and include a new capital conservation buffer and deductions from common equity capital ~~phase~~that phases 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~~common equity tier 1 capital ratio includes common stock (plus related surplus) and retained earnings, plus limited amounts of minority interests in the form of common stock, less the majority of certain regulatory deductions.

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

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

The deductions from ~~CET1~~common equity tier 1 capital include goodwill and other intangibles, certain deferred tax assets, mortgage-servicing assets above certain levels, gains on sale in connection with a securitization, investments in a banking organization’s own capital instruments and investments in the capital of unconsolidated financial institutions (above certain levels). ~~The deductions phase in from 2015 through 2019.~~

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

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~~common equity tier 1 capital above its minimum risk-based capital requirements, or if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of the quarter. The capital conservation buffer phases in ~~starting on~~through January 1, 2019. It was 1.25% at January 1, 2017.

Deposit Insurance - Substantially all of the deposits of First Federal are insured up to applicable limits by the Deposit Insurance Fund of the FDIC, and First Federal is assessed deposit insurance premiums to maintain the Deposit Insurance Fund. Insurance premiums for each insured institution are determined based upon the institution’s capital level and supervisory rating provided to the FDIC by the institution’s primary federal regulator and other information deemed by the FDIC to be relevant to the risk posed to the Deposit Insurance Fund by the institution. The assessment rate is then applied to the amount of the institution’s deposits to determine the institution’s insurance premium.

The deposit insurance assessment base is average assets less average tangible equity. The FDIC set a target size for the Deposit Insurance Fund at 2% of insured deposits and a lower assessment rate schedule when the fund reaches 1.15% and, in lieu of dividends, the FDIC rule provides for a lower rate schedule when the reserve ratio reaches 2% and 2.5%. On June 30, 2016, ~~at .625%.~~the Deposit Insurance Fund surpassed its target of 1.15%, decreasing the assessment base. The ~~implementation of Basel III did not have a material impact on~~change to the assessment base and assessment rates, as well as the Deposit Insurance Fund restoration time frame, lowered First Defiance’s deposit insurance assessment.

In addition, the FDIC has proposed changing the deposit insurance premium assessment method for banks with less than $10 billion in assets that have been insured by the FDIC for at least five years. The proposed changes would revise the financial ratios method so that it would be based on a statistical model estimating the probability of failure of a bank over three years; update the financial measures used in the financial ratios method consistent with the statistical model; and eliminate risk categories for established small banks and using the financial ratios method to determine assessment rates for all such banks (subject to minimum or maximum initial assessment rates based upon a bank’s composite examination rating).

As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, federally-insured institutions. It also may prohibit any federally-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the Deposit Insurance Fund. The FDIC also has the authority to take enforcement actions against insured institutions. Insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged or is engaging in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or written agreement entered into with the FDIC. The management of First ~~Federal’s capital ratios.~~Federal does not know of any practice, condition or violation that might lead to termination of deposit insurance.

51 60

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, people-to-people pay (“P2P”) 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.

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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 ~~$191,000~~$728,000 at September 30, ~~2016.~~2017. 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 ~~$234.2~~$260.0 million at September 30, ~~2016.~~2017. The available-for-sale portfolio ~~consists of~~included obligations of U.S. Government corporations and agencies ($2.0 million), certain municipal obligations ($~~86.3~~96.4 million), CMOs/REMICs ($~~68.4~~74.1 million), corporate bonds ($~~11.0~~13.1 million), and mortgage backed securities ($~~66.6~~74.5 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., 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.

Changes in Financial Condition

At September 30, ~~2016,~~2017, First Defiance's total assets, deposits and stockholders' equity amounted to ~~$2.45~~$2.93 billion, ~~$1.93~~$2.36 billion and ~~$292.1~~$367.9 million, respectively, compared to ~~$2.30~~$2.48 billion, ~~$1.84~~$1.98 billion and ~~$280.2~~$293.0 million, respectively, at December 31, ~~2015.~~2016. Total assets increased $456.7 million, deposits increased $379.0 million and stockholders’ equity increased $74.9 million primarily due to the acquisition of Commercial Bancshares. See Note 17 – Business Combinations for further details regarding the Commercial Bancshares acquisition and the impact to the individual categories.

Net loans receivable (excluding loans held for sale) increased ~~$122.9~~$335.1 million to ~~$1.90~~$2.25 billion. The variance in loans receivable between September 30, ~~2016~~2017 and December 31, ~~2015 include increases~~2016 includes an increase of $165.1 million in commercial real estate loans, ~~(up $95.4 million), commercial loans (up $36.8 million), home equity and improvement loans (up $1.2 million), and~~$63.5 million increase in residential real estate loans ~~(up $3.8 million). These increases were slightly offset by a decrease~~(includes $11.5 million of purchased portfolio mortgage loans), $41.2 million increase in commercials loans, $13.8 million increase in home equity loans, $39.7 million increase in construction loans ~~(down $14.5 million).~~and $12.3 million increase in consumer loans. The net loan amounts acquired from Commercial Bancshares at the acquisition date of February 24, 2017 resulted in a $159.5 million increase in commercial real estate loans a $58.6 million increase in residential real estate loans, a $35.1 million increase in commercial loans, a $15.7 million increase in home equity loans, a $5.6 million increase in construction loans and a $10.9 million increase in consumer loans.

The investment securities portfolio ~~decreased $2.3~~increased $9.6 million to ~~$234.4~~$260.8 million at September 30, ~~2016~~2017 from ~~$236.7~~$251.2 million at December 31, ~~2015. The decrease is the result of $25.8 million of securities maturing or being called and $14.9 million of securities being sold during the first nine months of~~ 2016. ~~This was partially offset by purchases of $35.5 million of securities.~~ There was an unrealized gain in the investment portfolio of ~~$8.3~~$4.6 million at September 30, ~~2016~~2017 compared to an unrealized gain of ~~$6.2~~$3.4 million at December 31, ~~2015.~~2016.

Goodwill and core deposit and other intangibles increased $36.6 million and $4.7 million, respectively to $98.4 million and $6.1 million, respectively due to the acquisition of Commercial Bancshares and Corporate One. The acquisition of Commercial Bancshares increased goodwill by $28.7 million and core deposit and other intangibles by $4.9 million. The acquisition of Corporate One increased goodwill by $7.9 million and other intangibles by $756,000.

Deposits increased ~~$91.5 million to $1.93 billion at September 30, 2016~~ from ~~$1.84~~$1.98 billion at December 31, ~~2015.~~2016 to $2.36 billion as of September 30, 2017. Non-interest bearing demand deposits increased ~~$22.6~~$32.2 million to ~~$443.3~~$519.9 million, ~~interest-bearing~~interest bearing demand ~~deposits~~ and money market ~~accounts~~deposits increased ~~$43.2~~$172.8 million to ~~$810.4 million,~~$989.5 billion, savings deposits increased ~~$21.4~~$52.9 million to ~~$241.0~~$296.2 million, and retail time deposits increased ~~$4.3~~$121.1 million to ~~$432.9~~$555.1 million. The net deposit amounts acquired from Commercial Bancshares at the acquisition date of February 24, 2017 resulted in a $56.1 million increase in non-interest bearing demand deposits, $122.0 million increase in interest bearing demand and money market deposits, $31.6 million increase in savings deposits and $98.2 million increase in retail time deposits.

Stockholders’ equity increased from $293.0 million at December 31, 2016 to ~~$292.1~~$367.9 million at September 30, ~~2016 from $280.2 million at December 31, 2016.~~2017. The increase in stockholders’ equity was the result of recording net income of ~~$21.5~~$22.9 million, an increase in other comprehensive income of ~~$1.3~~$1.9 million and ~~a $667,000~~an increase due to the ~~exercise~~acquisition of ~~stock options.~~Commercial Bancshares of $56.5 million as a result of issuing 1.1 million shares of common stock. These were ~~partially~~ offset by ~~$5.9~~$7.3 million of common stock dividends being paid in the first nine months of ~~2016 and $6.3 million in repurchased common stock.~~2017.

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

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

	Three Months Ended September 30,														Three Months Ended September 30,
	2016							2015							2017							2016
	Average				Yield/			Average				Yield/			Average				Yield/			Average				Yield/
	Balance		Interest(1)		Rate(2)			Balance		Interest(1)		Rate(2)			Balance		Interest(1)		Rate(2)			Balance		Interest(1)		Rate(2)
Interest-earning assets:
Loans receivable	$	1,879,760	$	20,316		4.30	%	$	1,696,370	$	18,472		4.32	%	$	2,251,071	$	26,025		4.59	%	$	1,879,760	$	20,316		4.30	%
Securities		231,864		1,892		3.37	(3)		236,485		2,105		3.63	(3)		259,310		2,114		3.29	(3)		231,864		1,892		3.37	(3)
Interest bearing deposits		68,746		104		0.60			53,627		33		0.24			64,090		209		1.29			68,746		104		0.60
FHLB stock		13,800		137		3.95			13,802		138		3.97			15,992		209		5.18			13,800		137		3.95
Total interest-earning assets		2,194,170		22,449		4.09			2,000,284		20,748		4.13			2,590,463		28,557		4.38			2,194,170		22,449		4.09
Non-interest-earning assets		231,365							222,559							316,332							231,365
Total assets	$	2,425,535						$	2,222,843						$	2,906,795						$	2,425,535

Interest-bearing liabilities:
Deposits	$	1,487,465	$	1,635		0.44	%	$	1,397,965	$	1,363		0.39	%	$	1,818,670	$	2,391		0.52	%	$	1,487,465	$	1,635		0.44	%
FHLB advances and other		84,598		322		1.51			41,047		178		1.72			104,648		431		1.63			84,598		322		1.51
Subordinated debentures		36,140		191		2.10			36,128		154		1.69			36,158		239		2.62			36,140		191		2.10
Securities sold under repurchase agreements		52,948		35		0.26			54,598		38		0.28			28,182		13		0.18			52,948		35		0.26
Total interest-bearing liabilities		1,661,151		2,183		0.52			1,529,738		1,733		0.45			1,987,658		3,074		0.61			1,661,151		2,183		0.52
Non-interest bearing deposits		441,903		-					388,849		-					520,147		-					441,903		-
Total including non-interest bearing demand deposits		2,103,054		2,183		0.41			1,918,587		1,733		0.36			2,507,805		3,074		0.49			2,103,054		2,183		0.41
Other non-interest-bearing liabilities		33,872							27,021							35,378							33,872
Total liabilities		2,136,926							1,945,608							2,543,183							2,136,926
Stockholders' equity		288,609							277,235							363,612							288,609
Total liabilities and stock- holders' equity	$	2,425,535						$	2,222,843						$	2,906,795						$	2,425,535
Net interest income; interest rate spread			$	20,266		3.57	%			$	19,015		3.68	%			$	25,483		3.77	%			$	20,266		3.57	%
Net interest margin (4)						3.69	%						3.78	%						3.91	%						3.69	%
Average interest-earning assets to average interest-bearing liabilities						132	%						131	%						130	%						132	%

(1)

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

(2)

Annualized

(3)

Securities yield=annualized interest income divided by the average balance of securities, excluding average unrealized gains/losses.

(4)

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

57 66

	NineMonths Ended September 30,														Nine Months Ended September 30,
	2016							2015							2017							2016
	Average				Yield/			Average				Yield/			Average				Yield/			Average				Yield/
	Balance		Interest(1)		Rate(2)			Balance		Interest(1)		Rate(2)			Balance		Interest (1)		Rate (2)			Balance		Interest (1)		Rate (2)
Interest-earning assets:
Loans receivable	$	1,834,981	$	59,395		4.32	%	$	1,672,393	$	54,590		4.36	%	$	2,171,733	$	73,415		4.52	%	$	1,834,981	$	59,395		4.32	%
Securities		230,058		5,899		3.55	(3)		241,016		6,369		3.64	(3)		257,924		6,475		3.40	(3)		230,058		5,899		3.55	(3)
Interest bearing deposits		69,599		287		0.55			56,315		113		0.27			66,299		555		1.12			69,599		287		0.55
FHLB stock		13,800		413		4.00			13,802		413		4.00			15,513		562		4.84			13,800		413		4.00
Total interest-earning assets		2,148,438		65,994		4.12			1,983,526		61,485		4.16			2,511,469		81,007		4.32			2,148,438		65,994		4.12
Non-interest-earning assets		228,496							221,609							301,091							228,496
Total assets	$	2,376,934						$	2,205,135						$	2,812,560						$	2,376,934

Interest-bearing liabilities:
Deposits	$	1,457,010	$	4,613		0.42	%	$	1,396,731	$	3,947		0.38	%	$	1,743,769	$	6,357		0.49	%	$	1,457,010	$	4,613		0.42	%
FHLB advances		82,598		940		1.52			34,038		461		1.81			104,616		1,211		1.55			82,598		940		1.52
Subordinated debentures		36,140		548		2.03			36,129		451		1.67			36,155		682		2.51			36,140		548		2.03
Securities sold under repurchase agreements		54,615		108		0.27			53,740		113		0.28			27,484		41		0.20			56,615		108		0.27
Total interest-bearing liabilities		1,630,363		6,209		0.51			1,520,638		4,972		0.44			1,912,024		8,291		0.58			1,630,363		6,209		0.51
Non-interest bearing deposits		432,274		-					379,305		-					521,161		-					432,274		-
Total including non-interest bearing demand deposits		2,062,637		6,209		0.40			1,899,943		4,972		0.35			2,433,185		8,291		0.46			2,062,637		6,209		0.40
Other non-interest-bearing liabilities		30,886							28,062							34,183							30,886
Total liabilities		2,093,523							1,928,005							2,467,368							2,093,523
Stockholders' equity		283,411							277,130							345,192							283,411
Total liabilities and stock- holders' equity	$	2,376,934						$	2,205,135						$	2,812,560						$	2,376,934
Net interest income; interest rate spread			$	59,785		3.61	%			$	56,513		3.72	%			$	72,716		3.74	%			$	59,785		3.61	%
Net interest margin (4)						3.73	%						3.82	%						3.88	%						3.73	%
Average interest-earning assets to average interest-bearing liabilities						132	%						130	%						131	%						132	%

(1)

(2)

~~Annualized.~~Annualized

(3)

Securities yield=annualized interest income divided by the average balance of securities, excluding average unrealized gains/losses. See Non-GAAP Financial Measure discussion for further details.

(4)

Net interest margin is net interest income divided by average interest-earning assets. See Non-GAAP Financial Measure discussion for further details.

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Results of Operations

Three Months Ended September 30, ~~2016~~2017 and ~~2015~~2016

On a consolidated basis, First Defiance’s net income for the quarter ended September 30, ~~2016~~2017 was ~~$7.0~~$9.4 million compared to net income of ~~$6.7~~$7.0 million for the comparable period in ~~2015.~~2016. On a per share basis, basic and diluted earnings per common share for the ~~quarter~~three months ended September 30, ~~2016~~2017 were both ~~$0.78,~~$0.92, compared to basic and diluted earnings per common share of ~~$0.72~~$0.78 each for the ~~same period in 2015.~~quarter ended September 30, 2016.

Net Interest Income

First Defiance’s net interest income is determined by its interest rate spread (i.e. the difference between the yields on its interest-earning assets and the rates paid on its interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities.

Net interest income was ~~$19.8~~$25.0 million for the quarter ended September 30, ~~2016,~~2017, up from ~~$18.5~~$19.8 million for the same period in ~~2015.~~2016. The tax-equivalent net interest margin was ~~3.69%~~3.91% for the quarter ended September 30, ~~2016, a decrease~~2017, an increase from ~~3.78%~~3.69% for the same period in ~~2015.~~2016. The ~~decrease~~increase in margin between the ~~2016~~2017 and ~~2015~~2016 third quarters was primarily due to ~~a decrease~~CSB’s earning asset mix as well an increase in interest rates. The yield on interest-earning ~~asset yields, which decreased to 4.09%~~assets was 4.38% for the quarter ended September 30, ~~2016, down 4~~2017, up 29 basis points from ~~4.13%~~4.09% for the same period in ~~2015.~~2016. The cost of interest-bearing liabilities between the two periods increased 79 basis points to ~~0.52%~~0.61% in the third quarter of ~~2016~~2017 from ~~0.45%~~0.52% in the same period in 2015. Total average loans grew $183.4 million since September 30, 2015 while interest bearing liabilities, including non-interest bearing demand deposits, increased $184.5 million for that same period. The change in interest bearing liability mix combined with lower earning asset yields resulted in a lower net interest margin for the third quarter of 2016. Management is encouraged by the continued growth in loan and deposit balances and looks for additional opportunities to maintain or minimize any negative impact to its margin in this sustained low rate environment.

Total interest income increased ~~$1.7~~$6.1 million to $28.1 million for the quarter ended September 30, 2017 from $22.0 million for the quarter ended September 30, ~~2016~~2016. This is due to continued loan growth, the CSB acquisition and a more profitable earning asset mix. Income from loans increased to $26.0 million for the quarter ended September 30, 2017 compared to $20.3 million for the same period in ~~2015.~~2016 due to average loan growth of $371.3 million due primarily from the CSB acquisition. The increase in the loan portfolio yield ~~on total interest earning assets decreased~~ to ~~4.09% for the quarter ended~~4.59% at September 30, ~~2016~~2017 was due to increasing interest rates and the acquisition of CSB as the weighted average yield at the acquisition date was 4.59%. The investment interest income increased $190,000 in the third quarter of 2017 to $1.7 million; however, the yield dropped 8 basis points to 3.29% at September 30, 2017 compared to 3.37% at September 30, 2016. The decline in investment yield is primarily attributable to the reinvestment of matured securities at lower yields. Income from ~~4.13%~~interest bearing deposits and FHLB stock increased to $209,000 and $209,000 respectively in the third quarter of 2017 compared to $104,000 and $137,000 for the same period in ~~2015. The loan portfolio yield decreased slightly~~2016 due to ~~4.30% for~~increased interest rates.

Interest expense increased by $891,000 in the third quarter ~~ended September 30, 2016 from 4.32% for~~of 2017 compared to the same period in ~~2015 while investment portfolio yields declined~~2016, to ~~3.37% for the quarter ended~~$3.1 million from $2.2 million. The cost of interest bearing liabilities increased 9 basis points from 0.52% at September 30, 2016 ~~from 3.63% for the same period in 2015. The decline in the investment yield~~to 0.61% at September 30, 2017. Interest expense related to interest-bearing deposits was ~~mainly attributed to an increase in amortization expense as the prepayments speeds increased~~$2.4 million in the third quarter ~~as rates declined as well as new purchases being recorded below the current portfolio yield. Income from loans increased to $20.3 million for the quarter ended September 30, 2016~~of 2017 compared to ~~$18.4~~$1.6 million for the same period in 2015 due to $183.4 million of average loan growth year over year. Interest income from investments decreased to $1.5 million for the quarter ended September 30, 2016 from $1.7 million for the same period in 2015 due to the aforementioned drop in yield above.

Total interest expense increased $450,000 in the third quarter of 2016 compared to the same period in 2015, to $2.2 million from $1.7 million. There was a 7 basis point increase in the average cost of interest-bearing liabilities in the third quarter of 2016 due to a slight increase in the rates on interest bearing deposits. Interest expense related to interest-bearing deposits increased to $1.6 million in the third quarter of 2016 from $1.4 million in the same period in 2015.2016. Interest expense recognized by the Company related to ~~subordinated debentures~~FHLB advances was ~~$191,000~~$431,000 in the third quarter of ~~2016~~2017 compared to ~~$154,000~~$322,000 for the same period in ~~2015.~~2016 due mainly to increased volumes. Expenses on ~~FHLB advances~~subordinated debentures and ~~securities sold under repurchase agreements~~notes payable were ~~$322,000~~$239,000 and ~~$35,000~~$13,000 respectively in the third quarter of ~~2016~~2017 compared to ~~$178,000~~$191,000 and ~~$38,000~~$35,000 respectively for the same period in ~~2015.~~2016.

Allowance for Loan Losses

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

The allowance for loan loss is made up of two basic components. The first component of the allowance for loan loss is the specific reserve in which the Company sets aside reserves based on the analysis of individual impaired credits. In establishing specific reserves, the Company analyzes all substandard, doubtful and loss graded loans quarterly and makes judgments about the risk of loss based on the cash flow of the borrower, the value of any collateral and the financial strength of any guarantors. If the loan is impaired and cash flow dependent, then a specific reserve is established for the discount on the net present value of expected future cash flows. If the loan is impaired and collateral dependent, then any shortfall is usually charged off. The Company also considers the impacts of any Small Business Association or Farm Service Agency guarantees. The specific ~~reserves were $254,000~~reserve portion of the allowance for loan losses was $614,000 at September 30, ~~2016 compared to $437,000~~2017 and $809,000 at December 31, ~~2015.~~2016.

The second component is a general reserve, which is used to record loan loss reserves for groups of homogenous loans in which the Company estimates the losses incurred in the portfolio based on quantitative and qualitative factors. For purposes of the general reserve analysis, the loan portfolio is stratified into nine different loan pools based on loan type to allocate historic loss experience. The loss experience factor is then applied to the non-impaired loan portfolio. ~~Beginning June 30, 2015, the~~The Company refined the methodology to its allowance for loan loss calculation pertaining to the general reserve component for non-impaired loans. There was no change to the calculation of the component for reserves on impaired loans. Within the general reserve, the determination of the historical loss component was modified from using a three-year average annual loss rate to autilizes loss migration ~~measurement. The loss migration~~ measurement ~~implemented June 30, 2015, utilizes an average of four (4) four-year loss migration periods~~ for each loan portfolio segment with differentiation between loan risk ~~grades. This approach~~grades in calculating the general reserve component for non-impaired loans. Beginning December 31, 2016 the historical loss calculation was changed from using an average of four (4) four-year loss migration periods to using an average of all four-year loss migration periods to the present beginning with data from the second quarter 2011. Management believes this enhancement is consistent with the rationale of the previous measurement but provides ~~for~~ a more precise ~~reflection~~calculation of ~~probable incurred~~historical losses by ~~risk grade within each loan portfolio segment over an~~incorporating more data points for the average ~~loan life~~loss ratio and including periods that provide a more complete coverage of the full business cycle. Management believes that capturing the risk grade changes and cumulative losses over the life cycle of a loan more accurately depicts management’s estimate of historical losses as well as being more reflective of the ongoing risks in the loan portfolio. Prior to June 30, 2015, the approach to this component quantified the historical loss by calculating a rolling twelve quarter average annual loss rate for each portfolio segment, without differentiation between loan risk grades. This modificationThese modifications resulted in a change in the general reserves between the loan portfolio segments but did not have a material impact on the overall allowance for loan losses.

The quantitative general allowance decreased ~~$900,000~~$2.1 million to ~~$8.9~~$6.6 million at September 30, ~~2016~~2017 from ~~$9.8~~$8.7 million at December 31, ~~2015~~2016 primarily due to ~~the roll off of~~ a ~~high charge-off quarter~~decrease in the historical loss rates from the migration ~~analysis resulting in a lower migration loss percentage for a majority of loan segments.~~analysis.

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

ECONOMIC

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

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

ENVIRONMENT

Changes in the nature and volume in the loan portfolio.

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

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

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

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

RISK

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

Changes in the political and regulatory environment.

The qualitative analysis at September 30, ~~2016~~2017 indicated a general reserve of ~~$16.8~~$19.2 million compared with ~~$15.2~~$16.4 million at December 31, ~~2015.~~2016, an increase of $2.8 million. Management reviewed the overall economic, environmental and risk factors and determined that it was appropriate to ~~increase, primarily, the~~make adjustments to these sub-factors based on that review.

The economic factors for all commercial and commercial loan segments were reduced in all loan segments in the first nine months of 2017 due to ~~uncertain global economic conditions and related market volatility which present higher than normal risks to~~stability in the U.S. ~~economy.~~economy and forecasts for continued strengthening of the labor market.

The environmental factors increased slightly in the first nine months of 2017 in the commercial, commercial real estate and construction loan segments due to an increase in credit concentration in both loans to one borrower and portfolio concentration limits as well as changes in the lending staff.

The risk factors for all loan segments, but particularly the commercial loan segment, were increased in the first nine months of 2017 due to unfavorable trends in the levels of non-performing loans and classified assets. The increase is mainly attributable to two loan relationships that were downgraded and placed on non-accrual in the second quarter.

First Defiance’s general reserve percentages for main loan segments not otherwise classified ranged from ~~0.50%~~0.46% for ~~pass rated~~ construction loans to ~~1.81%~~1.60% for home equity and improvement loans at September 30, ~~2016.~~2017.

As a result of the quantitative and qualitative analyses, along with the change in specific reserves, the ~~Company recorded a~~Company’s provision for loan losses ~~of $15,000 in~~for the third quarter of ~~2016~~2017 was $462,000 compared to ~~a credit provision of $27,000~~$15,000 for the same period in ~~2015.~~2016. The allowance for loan losses was $26.3 million at September 30, 2017 and $25.9 million ~~and $25.4 million and~~at December 31, 2016. The allowance for loans losses represented ~~1.35% and 1.41%~~1.16% of loans, net of undisbursed loan funds and deferred fees and costs, ~~as of~~at September 30, ~~2016~~2017 and 1.33% at December 31, ~~2015, respectively. Charge~~2016.

The provision of $462,000 was offset by charge offs of ~~$314,000 were partially offset by~~$236,000 and with the addition of recoveries of ~~$274,000 and a provision of $15,000,~~$200,000, resulted in ~~a slight decrease~~an increase to the overall allowance for loan loss of ~~$25,000~~$426,000 for the third quarter of ~~2016.~~2017. In management’s opinion, the overall allowance for loan losses of ~~$25.9~~$26.3 million as of September 30, ~~2016~~2017 is adequate. The loans acquired from CSB were recorded at fair value with purchase accounting adjustments discounting the loan balance instead of an allowance for loan losses.

Management also assesses the value of real estate owned as of the end of each accounting period and recognizes write-downs to the value of that real estate in the income statement if conditions dictate. ~~For~~In the ~~quarter~~three month period ended September 30, ~~2016, First Defiance had~~2017, there were no write-downs ~~that totaled $22,000 for~~of real estate held for sale. Management believes that the values recorded at September 30, ~~2016~~2017 for real estate owned and repossessed assets represent the realizable value of such assets.

Total classified loans ~~decreased~~increased to ~~$33.7~~$57.6 million at September 30, ~~2016,~~2017, compared to ~~$49.1~~$27.5 million at December 31, ~~2015.~~2016, an increase of $30.1 million. There were two loan relationships totaling $13.6 million that were downgraded and resulted in an increase in net charge offs in the second quarter of 2017.In addition, there were $16.4 million of newly classified loans from the CSB acquisition due to new financial information received.

First Defiance’s ratio of allowance for loan losses to non-performing loans was ~~142.5%~~90.4% at September 30, ~~2016~~2017 compared with ~~156.1%~~180.4% at December 31, ~~2015.~~2016. Management monitors collateral values of all loans included on the watch list that are collateral dependent and believes that ~~the~~ allowances for those loans at September 30, ~~2016~~2017 are appropriate. Of the ~~$18.2~~$29.2 million in non-accrual loans at September 30, ~~2016, $13.5~~2017, $24.8 million or ~~74.0%~~85.2% are less than 90 days past due.

At September 30, ~~2016,~~2017, First Defiance had total non-performing assets of ~~$18.9~~$29.7 million, compared to ~~$17.6~~$14.8 million at December 31, ~~2015.~~2016. Non-performing assets include loans that are on non-accrual, real estate owned and other assets held for sale. Non-performing assets at September 30, ~~2016~~2017 and December 31, ~~2015~~2016 by category were as follows:

Table 1 – Nonperforming Asset

	September 30,			December 31,			September 30,			December 31,
	2016			2015			2017			2016
	(In Thousands)						(In Thousands)
Non-performing loans:
One to four family residential real estate	$	2,920		$	2,610		$	3,368		$	2,928
Non-residential and multi-family residential real estate		11,302			9,848			17,110			9,592
Commercial		3,245			3,078			8,070			1,007
Construction		-			-			-			-
Home equity and improvement		718			689			545			730
Consumer Finance		13			36			59			91
Total non-performing loans		18,198			16,261			29,152			14,348

Real estate owned		704			1,321			532			455
Other repossessed assets		-			-
Total repossessed assets	$	704			1,321		$	532			455

Total Nonperforming assets	$	18,902		$	17,582		$	29,684		$	14,803
										��
Restructured loans, accruing	$	9,113		$	11,178		$	13,044		$	10,544

Total nonperforming assets as a percentage of total assets		0.77	%		0.77	%		1.01	%		0.60	%
Total nonperforming loans as a percentage of total loans*		0.95	%		0.91	%		1.28	%		0.74	%
Total nonperforming assets as a percentage of total loans plus REO*		0.98	%		0.97	%		1.30	%		0.76	%
Allowance for loan losses as a percent of total nonperforming assets		137.14	%		144.36	%		88.74	%		174.86	%

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

Non-performing loans in the commercial loan category represented ~~0.71%~~1.58% of the total loans in ~~those categories~~that category at September 30, ~~2016~~2017 compared to ~~0.73%~~0.21% for the same category at December 31, ~~2015.~~2016. Non-performing loans in the ~~commercial~~non-residential and multi-family residential real estate loan category ~~represented 1.08%~~were 1.42% of the total loans in ~~those categories~~this category at September 30, ~~2016~~2017 compared to ~~1.04%~~0.92% at December 31, 2016. This increase is due to the downgrade of two loan relationships that were placed on nonaccrual during the second quarter. Non-performing loans in the residential loan category represented 1.24% of the total loans in that category at September 30, 2017 compared to 1.41% for the same category at December 31, 2015. Management believes that the current allowance for loan losses is appropriate and that the provision for loan losses is consistent with both charge-off experience and the risk inherent in the overall credits in the portfolio.2016.

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

63 72

The following table details net charge-offs and nonaccrual loans by loan type.

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

	For the Nine Months Ended September 30, 2016						As of September 30, 2016
	Net											For the Nine Months Ended September 30, 2017					As of September 30, 2017
	Charge-offs (Recoveries)			% of Total Net Charge-offs			Nonaccrual Loans		% of Total Non- Accrual Loans			Net Charge-offs (Recovery)		% of Total Net Charge-offs			Nonaccrual Loans		% of Total Non- Accrual Loans
	(In Thousands)						(In Thousands)					(In Thousands)					(In Thousands)
Residential	$	80			(73.39	)%	$	2,920		16.05	%	$	9		0.41	%	$	3,368		11.55	%
Construction		-			0.00	%		-		0.00	%		-		0.00	%		-		0.00	%
Commercial real estate		(376	)		344.94	%		11,302		62.10	%		148		6.80	%		17,110		58.69	%
Commercial		147			(134.86	)%		3,245		17.83	%		1,864		85.58	%		8,070		27.69	%
Consumer finance		(17	)		15.60	%		13		0.07	%
Consumer													29		1.33	%		59		0.20	%
Home equity and improvement		57			(52.29	)%		718		3.95	%		128		5.88	%		545		1.87	%
Total	$	(109	)		100.00	%	$	18,198		100.00	%	$	2,178		100.00	%	$	29,152		100.00	%

	For the Nine Months Ended September 30, 2015						As of September 30, 2015
	Net											For the Nine Months Ended September 30, 2016						As of September 30, 2016
	Charge-offs (Recoveries)			% of Total Net Charge-offs			Nonaccrual Loans		% of Total Non- Accrual Loans			Net Charge-offs (Recoveries)			% of Total Net Charge-offs			Nonaccrual Loans		% of Total Non- Accrual Loans
	(In Thousands)						(In Thousands)					(In Thousands)						(In Thousands)
Residential	$	97			(27.71	)%	$	2,745		16.52	%	$	80			(73.39	)%	$	2,920		16.05	%
Construction		-			0.00	%		-		0.00	%		-			0.00	%		-		0.00	%
Commercial real estate		(425	)		121.43	%		10,090		60.75	%		(376	)		344.94	%		11,302		62.10	%
Commercial		(187	)		53.43	%		3,117		18.76	%		147			(134.86	)%		3,245		17.83	%
Consumer finance		(19	)		5.43	%		29		0.17	%		(17	)		15.60	%		13		0.07	%
Home equity and improvement		184			(52.57	)%		631		3.80	%		57			(52.29	)%		718		3.95	%
Total	$	(350	)		100.00	%	$	16,612		100.00	%	$	(109	)		100.00	%	$	18,198		100.00	%

Table 3 – Allowance for Loan Loss Activity

	For the Quarter Ended													For the Quarter Ended
	3rd 2016		2nd 2016			1st 2016		4th 2015			3rd 2015			3rd 2017		2nd 2017		1st 2017		4th 2016			3rd 2016
	(In Thousands)													(In Thousands)

Allowance at beginning of period	$	25,948	$	25,668		$	25,382	$	25,209		$	25,384		$	25,915	$	25,749	$	25,884	$	25,923		$	25,948
Provision for credit losses		15		53			364		43			(27	)		462		2,118		55		(149	)		15
Charge-offs:
Residential		111		37			55		8			185			60		-		49		147			111
Commercial real estate		79		-			13		103			64			-		110		290		-			79
Commercial		26		18			336		-			43			64		2,027		-		234			26
Consumer finance		24		18			-		32			5			20		21		71		53			24
Home equity and improvement		74		66			30		10			110			92		100		54		98			74
Total charge-offs		314		139			434		153			407			236		2,258		464		532			314
Recoveries		274		366			356		282			259			200		306		274		642			274
Net charge-offs (recoveries)		40		(227	)		78		(129	)		148
Net charge-offs															36		1,952		190		(110	)		40
Ending allowance	$	25,923	$	25,948		$	25,668	$	25,382		$	25,209		$	26,341	$	25,915	$	25,749	$	25,884		$	25,923

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

Table 4 ��– Allowance for Loan Loss Allocation by Loan Category

	September 30, 2016					June 30, 2016					March 31, 2016					December 31, 2015					September 30, 2015					September 30, 2017					June 30, 2017					March 31, 2017					December 31, 2016					September 30, 2016
			Percent of					Percent of					Percent of					Percent of					Percent of					Percent of					Percent of					Percent of					Percent of					Percent of
			total loans					total loans					total loans					total loans					total loans					total loans					total loans					total loans					total loans					total loans
	Amount		by category			Amount		by category			Amount		by category			Amount		by category			Amount		by category			Amount		by category			Amount		by category			Amount		by category			Amount		by category			Amount		by category
	(Dollars In Thousands)																									(Dollars In Thousands)
Residential	$	2,432		10.34	%	$	2,839		10.71	%	$	3,109		11.05	%	$	3,212		10.98	%	$	2,779		11.48	%	$	2,538		11.33	%	$	2,641		11.68	%	$	2,621		11.86	%	$	2,627		10.20	%	$	2,432		10.34	%
Construction		412		8.76	%		633		8.35	%		489		7.71	%		517		8.76	%		239		7.22	%		578		10.23	%		540		9.91	%		458		8.55	%		450		8.99	%		412		8.76	%
Commercial real estate		12,787		51.64	%		13,269		51.84	%		13,894		52.37	%		13,923		50.71	%		14,397		51.55	%		12,774		50.38	%		12,329		49.93	%		12,332		51.12	%		12,853		51.13	%		12,787		51.64	%
Commercial		7,879		22.56	%		6,740		22.19	%		5,820		21.85	%		5,255		22.42	%		5,411		22.51	%		8,025		21.32	%		7,973		21.75	%		7,809		21.59	%		7,361		23.05	%		7,879		22.56	%
Consumer		216		0.85	%		189		0.86	%		124		0.83	%		171		0.87	%		158		0.88	%		241		1.21	%		233		1.22	%		229		1.19	%		207		0.82	%		216		0.85	%
Home equity and improvement		2,197		5.85	%		2,278		6.05	%		2,232		6.19	%		2,304		6.26	%		2,225		6.36	%		2,185		5.53	%		2,199		5.51	%		2,300		5.69	%		2,386		5.81	%		2,197		5.85	%
	$	25,923		100.00	%	$	25,948		100.00	%	$	25,668		100.00	%	$	25,382		100.00	%	$	25,209		100.00	%	$	26,341		100.00	%	$	25,915		100.00	%	$	25,749		100.00	%	$	25,884		100.00	%	$	25,923		100.00	%

Key Asset Quality Ratio Trends

Table 5 – Key Asset Quality Ratio Trends

	3rd Qtr 2016			2nd Qtr 2016			1st Qtr 2016			4th Qtr 2015			3rd Qtr 2015			3rd Qtr 2017			2nd Qtr 2017			1st Qtr 2017			4th Qtr 2016			3rd Qtr2016
Allowance for loan losses / loans*		1.35	%		1.39	%		1.41	%		1.41	%		1.45	%		1.16	%		1.15	%		1.15	%		1.33	%		1.35	%
Allowance for loan losses / non-performing assets		137.14	%		148.26	%		136.40	%		144.36	%		116.99	%		88.74	%		83.51	%		163.19	%		174.86	%		137.14	%
Allowance for loan losses / non-performing loans		142.45	%		158.00	%		144.96	%		156.09	%		151.75	%		90.36	%		85.36	%		171.82	%		180.40	%		142.45	%
Non-performing assets / loans plus REO*		0.98	%		0.94	%		1.03	%		0.97	%		1.24	%		1.30	%		1.38	%		0.70	%		0.76	%		0.98	%
Non-performing assets / total assets		0.77	%		0.73	%		0.80	%		0.77	%		0.97	%		1.01	%		1.07	%		0.54	%		0.60	%		0.77	%
Net charge-offs / average loans (annualized)		0.01	%		-0.05	%		0.02	%		-0.03	%		0.03	%		0.01	%		0.35	%		0.04	%		-0.02	%		0.01	%

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

Non-Interest Income.

Total non-interest income ~~for the third quarter of 2016 was $8.5 million compared with $8.0~~increased $1.0 million in the third quarter of ~~2015.~~2017 to $9.5 million from $8.5 million for the same period in 2016 due largely to the inclusion of operations from the CSB and Corporate One acquisitions.

Service Fees.Service fees and other charges ~~decreased~~increased by ~~$34,000 to $2.77 million~~$388,000 or 14.0% in the third quarter of ~~2016~~2017 compared to ~~$2.80 in~~ the same period in ~~2015.~~2016.

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

Overdrawn balances, net of allowance for losses, are reflected as loans on First Defiance’s balance sheet. The fees charged for this service are established based both on the return of processing costs plus a profit, and on the level of fees charged by competitors in the Company’s market area for similar services. These fees are considered to be compensation for providing a service to the customer and therefore deemed to be noninterest income rather than interest income. Fee income recorded for the quarters ending September 30, ~~2016~~2017 and ~~2015~~2016 related to the overdraft privilege product, net of adjustments to the allowance for uncollectible overdrafts, were ~~$659,000~~$641,000 and ~~$752,000,~~$588,000, respectively. Accounts charged off are included in noninterest expense. The allowance for uncollectible overdrafts was $19,000 at September 30, 2017, $14,000 at December 31, 2016 and $16,000 at September 30, ~~2016, $18,000 at December 31, 2015 and $27,000 at September 30, 2015.~~2016.

Mortgage Banking ~~Activity~~Activity.. Total revenue from the sale and servicing of mortgage loans ~~increased $359,000~~decreased $341,000 to ~~$2.0~~$1.7 million for the third quarter of ~~2016~~2017 compared to ~~$1.7~~$2.0 million for the same period ~~in 2015.~~of 2016. Mortgage ~~banking activity was elevated from~~originations totaled $71.8 million in the third quarter ~~a year ago, with our markets experiencing higher purchase and refinance loan volumes.~~of 2017, down from $101.7 million in the same quarter in 2016. Gains realized from the sale of mortgage loans ~~increased~~decreased in the third quarter of ~~2016~~2017 to $1.2 million from $1.7 million ~~from $1.2 million~~in the third quarter of 2016. The mortgage loan servicing revenue increased $26,000 to $911,000 in the third quarter of 2017 compared to $885,000 in the same period in 2015. Mortgage loan servicing revenue was $885,000 in the third quarter of 2016, up slightly from $866,000 in the third quarter of 2015. The amortization of mortgage servicing rights expense increased $129,000 to $536,000 in the third quarter of 2016 compared to $407,000 for the same period in 2015.2016. The Company recorded a ~~positive~~negative valuation adjustment of ~~$7,000~~$27,000 on mortgage servicing rights in the third quarter of ~~2016~~2017 compared to a positive valuation adjustment of ~~$24,000 for the same period in 2015.~~

~~Gain on Sale on Non-Mortgage Loans.~~~~Gains on the sale of non-mortgages, which include SBA and FSA loans, totaled $148,000~~$7,000 in the third quarter of ~~2016 compared to $543,000~~2016.

Insurance Commission Income. Income from the sale of insurance and investment products was $3.1 million in the third quarter of ~~2015 mainly due to a decrease in volume~~2017, an increase of ~~these types of loans.~~

~~Gain on Sale of Securities.~~ ~~The third quarter 2016 had $151,000 in gains on the sale of securities, compared to no gain or losses~~$609,000 from $2.5 million in the third quarter of ~~2015.~~2016. The increase is due to added commissions from the Corporate One merger.

~~Trust~~Other Non-Interest Income.~~Trust~~Other non-interest income was ~~$420,000~~$415,000 in the third quarter of ~~2016, up 13.5% from $370,000 for the same period in 2015.~~

~~Other Non-Interest Income~~~~. Other income increased $263,000 in the third quarter~~2017, an increase of ~~2016~~$110,000 compared to the same period in 2016 mainly due to gains from the sale of ~~2015, which is mainly the result of a $62,000~~real estate owned and an increase in the value of the assets of the ~~Company’s~~ deferred compensation ~~plan versus a decrease of $166,000 in the third quarter of 2015.~~plan.

Non-Interest Expense.

Non-interest expense increased $2.1 million to ~~$18.3~~$20.4 million for the third quarter of ~~2016, an increase of $1.5 million~~2017 compared to ~~$16.8~~$18.3 million for the same period in 2016. The increase in non-interest expenses was mostly due to the ~~third quarter~~additional expenses from the operations of ~~2015.~~CSB and Corporate One acquisitions.

Compensation and Benefits. Compensation and benefits increased to ~~$10.3~~$11.8 million for the quarter ended September 30, ~~2016~~2017 from ~~$9.8~~$10.3 million for the same period in ~~2015.~~2016. The increase of $1.5 million is mainly attributable to ~~merit increases, staff additions~~personnel expenses related to ~~support growth strategies~~operating the new CSB and ~~higher incentive compensation.~~Corporate One locations.

~~Acquisition Related Charges.~~Data Processing.~~There was~~Data processing expense increased $252,000of to $1.9 million for the quarter ended September 30, 2017 compared to $1.6 million for the same period in 2016 again mainly due to the CSB merger as well as increased costs related to other strategic initiatives.

Other Non-Interest Expenses. Other non-interest expenses increased $88,000 to $3.7 million for the ~~pending~~quarter ended September 30, 2017 from $3.6 million for the same period in 2016. There were no merger ~~with Commercial Bancshares included in expenses~~and conversion related cost in the third quarter of ~~2016.~~

~~Other Non-Interest Expense~~.~~Other non-interest expense of $3.4 million~~2017 compared to $299,000 in the third quarter of ~~2016, increased from $2.8 million~~2016. This decrease was offset by increases in the third quarter of 2015 primarily due to an increase in the value of the liabilities of the deferred compensation plan which totaled $296,000 in the third quarter 2016 versus a credit of $182,000 in the same quarter of 2015.expenses associated with loan origination, auditing and marketing.

The efficiency ratio, considering tax equivalent interest income and excluding securities gains and losses, for the third quarter of ~~2016~~2017 was ~~63.87%~~58.70% compared to ~~62.41%~~63.87% for the ~~same period in 2015.~~third quarter of 2016.

Income Taxes.

~~Income Taxes~~.

First Defiance computes federal income tax expense in accordance with ASC Topic 740, Subtopic 942, which resulted in an effective tax rate of ~~29.82%~~31.0% for the quarter ended September 30, ~~2016~~2017 compared to ~~30.93%~~29.8% for the same period in ~~2015.~~2016. The tax rate for the third quarter of 2017 is lower than the statutory 35% tax rate for the Company mainly because of investments in tax-exempt ~~securities and bank-owned life insurance (“BOLI”).~~securities. The earnings on tax-exempt securities ~~and BOLI~~ are not subject to federal income tax. ~~As a result of adopting ASU 2016-09, a $54,000 credit to tax expense was recorded in the third quarter of 2016.~~

Nine Months Ended September 30, ~~2016~~2017 and ~~2015~~2016

On a consolidated basis, First Defiance’s net income for the nine months ended September 30, ~~2016~~2017 was ~~$21.5~~$22.9 million compared to income of ~~$19.9~~$21.5 million for the same period in ~~2015.~~2016. On a per share basis, basic and diluted earnings per common share for the nine months ended September 30, ~~2016~~2017 were ~~$2.39~~$2.31 and ~~$2.37,~~$2.29, respectively, compared to basic and diluted earnings per common share of ~~$2.15~~$2.39 and ~~$2.11,~~$2.37, respectively, for the same period in ~~2015.~~2016.

The first nine months of 2017 includes the results from the operations of the CSB acquisition completed on February 24, 2017 and Corporate One acquired on April 1, 2017. In addition, the first nine months of 2017 includes merger and conversion expenses related to the acquisitions of $4.0 million, which had an after tax impact of $2.8 million, or $0.28 per diluted share.

Net Interest Income

Net interest income was $71.3 million for the first nine months of 2017 compared with $58.4 million in the first nine months of 2016. Average interest-earning assets increased to $2.51 billion in the first nine months of 2017 compared to $2.15 billion in the first nine months of 2016.

For the nine month period ended September 30, 2017, total interest income increased by $15.0 million to $79.6 million compared to $64.6 million for the same period in 2016. Interest expense increased by $2.1 million to $8.3 million for the nine months ended September 30, ~~2016~~2017 compared to ~~$55.1~~$6.2 million for the same period in ~~2015. For the nine month period ended September 30, 2016, total interest income increased $4.6 million to $64.6 million compared to $60.1 million for the same period in 2015.~~

Interest expense increased by $1.2 million to $6.2 million for the nine months ended September 30, 2016 compared to $5.0 million for the same period in 2015. The increase is attributable to average interest-bearing liabilities increasing $109.7 million from September 30, 2015 to September 30, 2016.

Net interest margin for the first nine months of ~~2016~~2017 was ~~3.73%~~3.88%, ~~down 9~~up 15 basis points from the ~~3.82%~~3.73% margin reported in the nine month period ended September 30, ~~2015.~~2016.

Provision for Loan Losses

The provision for loan losses was ~~$432,000~~$2.6 million for the nine months ended September 30, ~~2016,~~2017, compared to ~~$93,000~~$432,000 during the nine months ended September 30, ~~2015. Charge-offs for the first nine months of 2016 totaled $887,000~~2016. Year to date 2017 charge-offs were $3.0 million and recoveries of previously charged off loans totaled ~~$996,000~~$780,000 for net ~~recoveries~~charge offs of ~~$109,000.~~$2.2 million. By comparison, ~~$1.1 million~~$887,000 of charge-offs were recorded in the same period of ~~2015~~2016 and ~~$1.4 million~~$996,000 of recoveries were realized for net recoveries of ~~$349,000.~~$109,000.

Non-Interest Income

Total non-interest income increased $4.5 million to ~~$25.7~~$30.2 million for the nine months ended September 30, ~~2016~~2017 from ~~$24.1~~$25.7 million recognized for the same period in ~~2015.~~2016.

Service Fees.Service fees and other charges were ~~$8.2~~$9.1 million for the first nine months of ~~2016,~~2017, up from ~~$8.0~~$8.2 million for the same period in ~~2015.~~2016. This is primarily due to the CSB merger.

Mortgage Banking Activity. Total revenue from the sale and servicing of mortgage loans ~~was $5.3~~decreased $76,000 to $5.27 million for the nine months ended September 30, ~~2016 compared to $5.2~~2017 from $5.34 million for the same period in ~~2015.~~2016. Gains realized from the sale of mortgage loans ~~increased $375,000~~decreased $526,000 to ~~$4.1~~$3.6 million for the first nine months of ~~2016~~2017 from ~~$3.7~~$4.1 million for the same period in ~~2015.~~2016. Mortgage loan servicing revenue ~~remained flat at $2.6~~increased to $2.8 million in the first nine months of ~~2016 and 2015. The gains realized~~2017 from $2.6 million for the ~~sale of mortgage loans were partially offset by a decrease~~same period in ~~the valuation of mortgage servicing rights.~~2016. The Company recorded a positive valuation adjustment of $21,000 in the first nine months of 2017 compared to a negative ~~valuation~~ adjustment of $118,000 in the first nine months ~~ended September 30, 2016 compared to a positive adjustment~~ of ~~$191,000 in the same period of 2015.~~2016.

~~Gain on~~ Sale ~~on Non-Mortgage Loans.~~of Non Mortgage Loans. Gain on the sale of non-mortgages, which includes SBA and FSA loans, totaled $172,000 in the first nine months of 2017, a $432,000 decrease compared to $604,000 in the first nine months of 2016, ~~compared~~due to ~~$776,000~~a decrease in the ~~same period~~volume of ~~2015, a decrease of $172,000.~~

sellable SBA and FSA loans.

~~Gain on Sale of Securities.~~

Insurance Commission Income. ~~First Defiance recorded a gain on~~Income from the sale ~~or call~~ of ~~securities of $509,000~~insurance and investment products was $9.8 million in the first nine months of ~~2016 compared with no securities gains or losses during the same period~~2017, an increase of ~~2015.~~

~~Other Non-Interest Income.~~ Other income increased $534,000 for the first nine months of 2016 compared to the same period of 2015, which is mainly the result of a $48,000 increase in the value of the liabilities of the Company’s deferred compensation plan versus a decrease of $237,000$1.7 million from $8.1 million in the first nine months of ~~2015.~~2016. The increase is primarily due to added commissions from the Corporate One merger and a $400,000 increase in contingent commission income recognized in 2017 compared to 2016.

Bank-Owned Life Insurance.Income from bank-owned life insurance was $2.7 million in the first nine months of 2017, an increase of $2.0 million from $686,000 in the same period of 2016. In February 2017, the Company surrendered an underperforming BOLI policy and recorded a tax penalty of $1.7 million (recorded in income tax expense) and purchased a new BOLI policy receiving a $1.5 million enhancement value gain.

Non-Interest Expense

Non-interest expense was ~~$52.9~~$64.2 million for the first nine months of ~~2016,~~2017, up from ~~$50.5~~$52.9 million for the same period in ~~2015.~~2016.

Compensation and Benefits. Compensation and benefits increased to ~~$30.3~~$37.6 million for the nine months ended September 30, ~~2016~~2017 compared to ~~$27.9~~$30.3 million for the same period in ~~2015.~~2016. The increase is mainly ~~attributable~~related to merit increases, staff additions to support growth strategies and ~~higher medical insurance costs.~~increased personnel expenses related to operating the new CSB and Corporate One locations.

~~Acquisition Related Charges.~~Data Processing~~There was $252,000of costs related~~. Data processing expense increased $1.1 million to $5.8 million year to date 2017 compared to $4.7 million for the same period in 2016 due to the ~~pending merger with Commercial Bancshares included in expenses in the first nine months of 2016.~~CSB acquisition and other strategic spending initiatives.

Other Non-Interest Expenses. Other non-interest expenses ~~decreased $271,000~~increased $2.0 million to ~~$9.5~~$11.7 million for the first nine months of ~~2016~~2017 from ~~$9.8~~$9.7 million for the same period in ~~2015.~~2016. The ~~decrease~~increase in other non-interest expense is primarily due to ~~lower OREO write-downs of $650,000~~CSB and ~~management consulting of $381,000 partially offset by higher deferred compensation plan~~Corporate One merger and conversion related costs of ~~$484,000~~$1.1 million as well as increased expenses associated with loan origination, legal fees and general operating expenses which as a result of an expanded customer base.

The efficiency ratio for the first nine months of ~~2016~~2017 was ~~62.24%~~62.66% compared to ~~62.72%~~62.24% for the same period in ~~2015.~~

~~Income Taxes~~.

First Defiance computes federal income tax expense in accordance with ASC Topic 740, Subtopic 942, which resulted in an effective tax rate of 30.26% for the first nine months of 2016 compared to 30.38% for the same period in 2015. The tax rate is lower than the statutory 35% tax rate for the Company mainly because of investments in tax-exempt securities and bank-owned life insurance (“BOLI”). The earnings on tax-exempt securities and BOLI are not subject to federal income tax. ~~As a result of adopting ASU 2016-09, a $184,000 credit to tax expense was recorded for the first nine months of~~ 2016.

Liquidity

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

First Defiance had ~~$16.3~~$22.0 million of cash provided by operating activities during the first nine months of ~~2016.~~2017. The Company's cash provided by operating activities resulted from the origination of loans held for sale and net income mostly offset by the proceeds on the sale of loans.

At September 30, ~~2016,~~2017, First Federal had ~~$172.4~~$226.8 million in outstanding loan commitments and loans in process to be funded generally within the next six months and an additional ~~$445.9~~$429.2 million committed under existing consumer and commercial lines of credit and standby letters of credit. Also at that date, First Federal had commitments to sell ~~$38.1~~$21.7 million of ~~mortgage loans.~~loans held-for-sale. First Defiance believes that it has adequate resources to fund commitments as they arise and that it can adjust the rate on savings certificates to retain deposits in changing interest rate environments. If First Defiance requires funds beyond its internal funding capabilities, advances from the FHLB of Cincinnati and other financial institutions are available.

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

Capital Resources

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

In July 2013, the federal banking agencies approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (commonly known as Basel III). Under the final rules, which began for the Company and the Bank on January 1, ~~2015~~2016 and are subject to a phase-in period through January 1, 2019, minimum requirements increased for both quantity and quality of capital held by the Company and the Bank. The rules include a new minimum common equity Tier 1 capital to risk-weighted assets ratio (“CET1”) of 4.5% and a capital conservation buffer of ~~2.5%~~0.625% of risk-weighted assets ~~which when~~during 2016 and 1.25% during the year 2017, and increasing each year until fully phased-in during 2019 at 2.50%, effectively ~~results~~resulting in a minimum CET1 ratio of 7.0%. Basel III raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5% when fully phased-in), which effectively results in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and requires a minimum leverage ratio of 4.0%. Basel III also makes changes to risk weights for certain assets and off-balance sheet exposures.

The Company met each of the well capitalized ratio guidelines at September 30, ~~2016.~~2017. The following table indicates the capital ratios for First Defiance and First Federal at September 30, ~~2016~~2017 and December 31, ~~2015.~~2016. (In Thousands):

September 30, 2016
September 30, 2017																September 30, 2017
	Actual					Minimum Required for Adequately Capitalized					Minimum Required for Well Capitalized						Actual					Minimum Required for Adequately Capitalized					Minimum Required for Well Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio				Amount		Ratio			Amount		Ratio(1)			Amount		Ratio
CET1 Capital (to Risk-Weighted Assets) (1)

CET1 Capital (to Risk-Weighted Assets) (2)																CET1 Capital (to Risk-Weighted Assets) (2)
Consolidated	$	229,022		10.34	%	$	99,628		4.5	%		N/A		N/A			$	267,424		10.43	%	$	115,396		4.5	%		N/A		N/A
First Federal	$	244,589		11.08	%	$	99,298		4.5	%	$	143,431		6.5	%		$	294,325		11.49	%	$	115,250		4.5	%	$	166,523		6.5	%

Tier 1 Capital (1)
Consolidated	$	264,022		11.20	%	$	94,287		4.0	%		N/A		N/A			$	302,424		10.78	%	$	112,188		4.0	%		N/A		N/A
First Federal	$	244,589		10.39	%	$	94,146		4.0	%	$	117,683		5.0	%		$	294,325		10.51	%	$	111,981		4.0	%	$	139,976		5.0	%

Tier 1 Capital (to Risk Weighted Assets) (1)
Consolidated	$	264,022		11.93	%	$	132,838		6.0	%		N/A		N/A			$	302,424		11.79	%	$	153,862		6.0	%		N/A		N/A
First Federal	$	244,589		10.39	%	$	132,398		6.0	%	$	176,530		8.0	%		$	294,325		11.49	%	$	153,713		6.0	%	$	204,951		8.0	%

Total Capital (to Risk Weighted Assets) (1)
Consolidated	$	289,945		13.10	%	$	177,117		8.0	%		N/A		N/A			$	328,765		12.82	%	$	205,149		8.0	%		N/A		N/A
First Federal	$	270,512		12.26	%	$	176,530		8.0	%	$	220,663		10.0	%		$	320,666		12.52	%	$	204,951		8.0	%	$	256,189		10.0	%

(1)

Excludes capital conservation buffer of 1.25% as of September 30, 2017

(2)

Core capital is computed as a percentage of adjusted total assets of ~~$2.36~~$2.80 billion for consolidated and ~~$2.35~~the Bank, respectively. Risk-based capital is computed as a percentage of total risk-weighted assets of $2.56 billion for consolidated and the Bank, respectively.

December 31, 2016
	Actual					Minimum Required for Adequately Capitalized					Minimum Required for Well Capitalized
	Amount		Ratio			Amount		Ratio(1)			Amount		Ratio

CET1 Capital (to Risk-Weighted Assets) (2)
Consolidated	$	234,809		10.45	%	$	101,108		4.5	%		N/A		N/A
First Federal	$	242,928		10.81	%	$	101,116		4.5	%	$	146,057		6.5	%

Tier 1 Capital (1)
Consolidated	$	269,809		11.24	%	$	95,975		4.0	%		N/A		N/A
First Federal	$	242,928		10.14	%	$	95,791		4.0	%	$	119,739		5.0	%

Tier 1 Capital (to Risk Weighted Assets) (1)
Consolidated	$	269,809		12.01	%	$	134,811		6.0	%		N/A		N/A
First Federal	$	242,928		10.81	%	$	134,822		6.0	%	$	179,763		8.0	%

Total Capital (to Risk Weighted Assets) (1)
Consolidated	$	295,693		13.16	%	$	179,748		8.0	%		N/A		N/A
First Federal	$	268,812		11.96	%	$	179,763		8.0	%	$	224,703		10.0	%

(1)

Excludes capital conservation buffer of 0.625% as of December 31, 2016

(2)

Core capital is computed as a percentage of adjusted total assets of $2.40 billion for consolidated and $2.39 billion for the Bank. Risk-based capital is computed as a percentage of total risk-weighted assets of ~~$2.21~~$2.25 billion for consolidated and the Bank.

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 %

~~(1)~~

Core capital is computed as a percentage of adjusted total assets of $2.21 billion for consolidated and the Bank. Risk-based capital is computed as a percentage of total risk-weighted assets of $2.04 billion for consolidated and the Bank.

~~Critical Accounting Policies~~

First Defiance has established various accounting policies which govern the application of accounting principles generally accepted in the United States in the preparation of its financial statements. The significant accounting policies of First Defiance are described in the footnotes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities; management considers such accounting policies to be critical accounting policies. Those policies which are identified and discussed in detail in the Company’s 2015 Annual Report on Form 10-K include the Allowance for Loan Losses, Goodwill, and the Valuation of Mortgage Servicing Rights. There have been no material changes in assumptions or judgments relative to those critical policies during the first nine months of 2016.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As discussed in detail in the Annual Report on Form 10-K for the year ended December 31, ~~2015,~~2016, First Defiance’s ability to maximize net income is dependent on management’s ability to plan and control net interest income through management of the pricing and mix of assets and liabilities. Because a large portion of assets and liabilities of First Defiance are monetary in nature, changes in interest rates and monetary or fiscal policy affect its financial condition and can have significant impact on the net income of the Company. First Defiance does not use off-balance sheet derivatives to enhance its risk management, nor does it engage in trading activities beyond the sale of mortgage loans.

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

The table below presents, for the twelve months subsequent to September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, an estimate of the change in net interest income that would result from a gradual (ramp) and immediate (shock) change in interest rates, moving in a parallel fashion over the entire yield curve, relative to the measured base case scenario. Based on our net interest income simulation as of September 30, ~~2016,~~2017, net interest income sensitivity to changes in interest rates for the twelve months subsequent to September 30, ~~2016~~2017 was slightly more ~~asset~~liability sensitive for the ramp and shock compared to the sensitivity profile for the twelve months subsequent to December 31, ~~2015. This is due in part to our strategy to grow longer term loans and fund that growth out of existing liquidity.~~2016.

72 80

Net Interest Income Sensitivity Profile
	Impact on Future Annual Net Interest Income										Impact on Future Annual Net Interest Income
(dollars in thousands)	September 30, 2016					December 31, 2015					September 30, 2017					December 31, 2016
Gradual Change in Interest Rates
+200	$	1,299		1.59	%	$	563		0.71	%	$	917		0.93	%	$	1,970		2.32	%
+100		626		0.77	%		215		0.27	%		472		0.48	%		972		1.14	%
-100		(1,706	)	-2.09	%		(1,332	)	-1.68	%		(3,023	)	-3.07	%		(2,201	)	-2.59	%

Immediate Change in Interest Rates
+200	$	3,171		3.89	%	$	1,660		2.09	%	$	2,179		2.15	%	$	4,236		4.99	%
+100		1.563		1.92	%		719		0.91	%		1,132		1.12	%		2,131		2.51	%
-100		(3,213	)	-3.94	%		(2,605	)	-3.28	%		(6,125	)	-6.04	%		(4,132	)	-4.87	%

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

The results of all the simulation scenarios are within the board mandated guidelines as of September 30, ~~2016.~~2017 except for the down 100 basis points over the first twelve months in a static and dynamic-shock balance sheet as well as in the down 100 basis points for a cumulative twenty-four months in a static and dynamic ramp balance sheet. Management is reviewing the board policy limits in all scenarios to determine if they are adequate and if so, any measures to be taken to bring the current results back into alignment with board guidelines.

In addition to the simulation analysis, First Defiance also uses an economic value of equity (“EVE”) analysis to measure risk in the balance sheet incorporating all cash flows over the estimated remaining life of all balance sheet positions. The EVE analysis generally calculates the net present value of First Federal’s assets and liabilities in rate shock environments that range from -400 basis points to +400 basis points. However, the likelihood of a decrease in rates beyond 100 basis points as of September 30, ~~2016~~2017 was considered to be ~~remote~~unlikely given the current interest rate environment and, therefore, was not included in this analysis. The results of this analysis are reflected in the following tables for the nine months ended September 30, ~~2016~~2017 and the year-ended December 31, ~~2015.~~2016.

September 30, 2016
Economic Value of Equity
Change in Rates $ Amount $ Change % Change
(Dollars in Thousands)
+400 bp 513,532 85,225 19.90 %
+ 300 bp 497,338 69,032 16.12 %
+ 200 bp 478,862 50,555 11.80 %
+ 100 bp 456,498 28,191 6.58 %
0 bp 428,307 - -
- 100 bp 389,679 (38,627 ) (9.02 )%
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 )%

73 81


September 30, 2017
Economic Value of Equity
Change in Rates $ Amount $ Change % Change
(Dollars in Thousands)
+400 bp 670,902 98,100 17.13 %
+ 300 bp 652,116 79,314 13.85 %
+ 200 bp 630,161 57,360 10.01 %
+ 100 bp 603,939 31,137 5.44 %
0 bp 572,801 - -
- 100 bp 531,789 (41,013 ) (7.16 )%
December 31, 2016
Economic Value of Equity
Change in Rates $ Amount $ Change % Change
(Dollars in Thousands)
+400 bp 569,397 85,791 17.74 %
+ 300 bp 553,285 69,679 14.41 %
+ 200 bp 534,478 50,873 10.52 %
+ 100 bp 512,132 28,526 5.90 %
0 bp 483,606 - -
- 100 bp 429,266 (34,339 ) (7.10 )%
Item 4. Controls and Procedures

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

An evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of ~~1934)~~1934, as amended) as of September 30, ~~2016.~~2017. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

No changes occurred in the Company’s internal controls over financial reporting during the quarter ended September 30, ~~2016~~2017 that materially affected, or are reasonably likely to materially affect, the Company’s internal ~~controls~~control over financial reporting.

74 82

FIRST DEFIANCE FINANCIAL CORP.

PART II-OTHER INFORMATION

Item 1.Legal Proceedings

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

Item 1A. Risk Factors

There are no material changes from the risk factors set forth under Part I, Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2015.~~2016.

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

~~(a)~~ ~~The Company had no unregistered sales of equity securities during the quarter ended September 30, 2016.~~
~~(b)~~ ~~Not applicable.~~
~~(c)~~ ~~The following table provides information regarding First Defiance’s purchases of its common stock during the three-month period ended September 30, 2016:~~
The Company had no unregistered sales of equity securities during the quarter ended September 30, 2017.
The following table provides information regarding First Defiance’s purchases of its common stock during the three-month period ended September 30, 2017:

Period Total Number of
of Shares
Purchased Average Price
Paid Per
Share Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs Maximum Number of
Shares  that May Yet Be
Purchased Under the
Plans or ~~Programs (1)~~Programs(1)
Beginning Balance, ~~July 1, 2016~~June 30, 2017 377,500
July 1 – July 31, ~~2016~~2017 - $ - - 377,500
~~August1~~August 1 – August 31, ~~2016~~2017 - - - 377,500
September 1 – September 30, ~~2016~~2017 - - - 377,500
Total - $ - - 377,500

(1) On January 29, 2016, the Company announced that its Board of Directors authorized another program for the repurchase of up to 5% of the outstanding common shares or 450,000 shares. There is no expiration date for the ~~new~~ repurchase program. ~~No shares were repurchased during the quarter ended September 30, 2016.~~

Item 3.Defaults upon Senior Securities

Not applicable.

Item 4.Mine Safety Disclosures

Not applicable.

75 83

Item 5.Other Information

~~(a)~~ ~~Not applicable.~~
~~(b)~~ ~~There have been no material changes to the procedures by which shareholders may recommend nominees to the First Defiance Board of Directors.~~
Not applicable.

Item 6.Exhibits

Exhibit 2.1 Agreement and Plan of Merger, dated ~~as of~~ August 23, 2016, by and between First Defiance and Commercial Bancshares, Inc. (1)
Exhibit 2.2 Amendment to Agreement and Plan of Merger, dated October 31, 2016, by and between First Defiance and Commercial Bancshares, Inc. (2)
Exhibit 3.1 Articles of Incorporation of First Defiance, ~~(2)~~as amended (3)
Exhibit 3.2 Code of Regulations of First Defiance ~~(2)~~(3)
Exhibit ~~3.3~~31.1 ~~Certificate of Amendment to Articles of Incorporation of FirstDefiance (3)~~
~~Exhibit 31.1~~ Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 101 The following financial information from the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2016~~2017 is formatted in eXtensible Business Reporting Language (“XBRL”): (i) Unaudited Consolidated Condensed ~~Balance Sheet~~Statements of Financial Condition at September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, (ii) Unaudited Consolidated Condensed Statements of Income for the Three and Nine Months ended September 30, ~~2016~~2017 and ~~2015~~2016 (iii) Unaudited Consolidated Condensed Statements of Comprehensive Income for the Three and Nine Months ended September 30, ~~2016~~2017 and ~~2015,~~2016, (iv) Unaudited Consolidated Condensed Statements of Changes in ~~Stockholder’~~Stockholders’ Equity for the Nine Months ended September 30, ~~2016~~2017 and ~~2015,~~2016, (v) Unaudited Consolidated Condensed Statements of Cash Flows for the Nine Months ended September 30, ~~2016~~2017 and ~~2015~~2016 and (vi) Notes to Unaudited Consolidated Condensed Financial Statements.

(1) Incorporated herein by reference to the like numbered exhibit in ~~the Registrant’s~~ Form 8-K filed on August 24, 2016 (Film No. 161848221).
(2) Incorporated herein by reference to the like numbered exhibit in Form 10-K for the ~~Registrant’s Form S-1 (File~~year ended December 31, 2016 (Film No. ~~33-93354), filed on June 9, 1995.~~17645447).
(3) Incorporated herein by reference to the like numbered exhibit 3 in the Registrant’s Form ~~8-K~~S-3 (File No. 333-163014), filed ~~December 8, 2008 (Film No. 081236105).~~on November 10, 2009.

76 84

FIRST DEFIANCE FINANCIAL CORP.

SIGNATURES

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

First Defiance Financial Corp.
(Registrant)

Date:  November ~~7, 2016~~8, 2017 By: /s/ Donald P. Hileman
Donald P. Hileman
President and
Chief Executive Officer

Date:  November ~~7, 2016~~8, 2017 By: /s/ Kevin T. Thompson
Kevin T. Thompson
Executive Vice President and
Chief Financial Officer
77 85

	Nine Months Ended
	September 30, 2016		September 30, 2015
Expected average risk-free rate		2.24%		2.04%
Expected average life		10.00 years		10.00 years
Expected volatility		41.00%		42.00%
Expected dividend yield		2.33%		2.10%

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
Forfeited or cancelled		-			-
Exercised		(35,420	)		20.59
Granted		6,500			37.78
Options outstanding, September 30, 2016		57,300		$	22.05		3.88	$	1,294
Vested or expected to vest at September 30, 2016		57,300		$	22.05		3.88	$	1,294
Exercisable at September 30, 2016		39,500		$	17.30		1.87	$	1,080

Quarter Ended September 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	$	2,839		$	2,365		$	10,904		$	633		$	6,740		$	2,278		$	189		$	25,948
Charge-Offs		(111	)		0			(79	)		0			(26	)		(74	)		(24	)		(314	)
Recoveries		3			0			62			0			159			40			10			274
Provisions		(299	)		(185	)		(280	)		(221	)		1,006			(47	)		41			15
Ending Allowance	$	2,432		$	2,180		$	10,607		$	412		$	7,879		$	2,197		$	216		$	25,923

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

1-4 Family Owner Occupied		0	$	-		0	$	-
1-4 Family Non Owner Occupied		0		-		1		105
CRE Owner Occupied		0		-		0		-
CRE Non Owner Occupied		0		-		0		-
Agriculture Land		0		-		0		-
Other CRE		0		-		0		-
Commercial Working Capital or Other		1		120		1		120
Commercial Other		5		1,829		5		1,829
Home Equity and Improvement		0		-		1		22
Consumer Finance		0		-		0		-

Total		6	$	1,949		8	$	2,076

September 30, 2016
Economic Value of Equity
Change in Rates	$ Amount		$ Change			% Change
	(Dollars in Thousands)
+400 bp		513,532		85,225			19.90	%
+ 300 bp		497,338		69,032			16.12	%
+ 200 bp		478,862		50,555			11.80	%
+ 100 bp		456,498		28,191			6.58	%
0 bp		428,307		-			-
- 100 bp		389,679		(38,627	)		(9.02	)%

Period	Total Number of of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or ~~Programs (1)~~Programs(1)
Beginning Balance, ~~July 1, 2016~~June 30, 2017								377,500
July 1 – July 31, ~~2016~~2017		-	$	-		-		377,500
~~August1~~August 1 – August 31, ~~2016~~2017		-		-		-		377,500
September 1 – September 30, ~~2016~~2017		-		-		-		377,500
Total		-	$	-		-		377,500

	Exhibit 2.1		Agreement and Plan of Merger, dated ~~as of~~ August 23, 2016, by and between First Defiance and Commercial Bancshares, Inc. (1)
Exhibit 2.2		Amendment to Agreement and Plan of Merger, dated October 31, 2016, by and between First Defiance and Commercial Bancshares, Inc. (2)
Exhibit 3.1		Articles of Incorporation of First Defiance, ~~(2)~~as amended (3)
	Exhibit 3.2		Code of Regulations of First Defiance ~~(2)~~(3)
	Exhibit ~~3.3~~31.1	~~Certificate of Amendment to Articles of Incorporation of FirstDefiance (3)~~
	~~Exhibit 31.1~~	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	Exhibit 31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	Exhibit 32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	Exhibit 32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	Exhibit 101		The following financial information from the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2016~~2017 is formatted in eXtensible Business Reporting Language (“XBRL”): (i) Unaudited Consolidated Condensed ~~Balance Sheet~~Statements of Financial Condition at September 30, ~~2016~~2017 and December 31, ~~2015,~~2016, (ii) Unaudited Consolidated Condensed Statements of Income for the Three and Nine Months ended September 30, ~~2016~~2017 and ~~2015~~2016 (iii) Unaudited Consolidated Condensed Statements of Comprehensive Income for the Three and Nine Months ended September 30, ~~2016~~2017 and ~~2015,~~2016, (iv) Unaudited Consolidated Condensed Statements of Changes in ~~Stockholder’~~Stockholders’ Equity for the Nine Months ended September 30, ~~2016~~2017 and ~~2015,~~2016, (v) Unaudited Consolidated Condensed Statements of Cash Flows for the Nine Months ended September 30, ~~2016~~2017 and ~~2015~~2016 and (vi) Notes to Unaudited Consolidated Condensed Financial Statements.

	First Defiance Financial Corp.
	(Registrant)

Date: November ~~7, 2016~~8, 2017	By:	/s/ Donald P. Hileman
		Donald P. Hileman
		President and
		Chief Executive Officer

Date: November ~~7, 2016~~8, 2017	By:	/s/ Kevin T. Thompson
		Kevin T. Thompson
		Executive Vice President and
		Chief Financial Officer