10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x         Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the Quarterly Period Ended September 30, 2013

OR

¨          Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, For the Transition Period from ___________to__________

Commission file number 0-26850

	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 has 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). Yesx  No¨

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Common Stock, $.01 Par Value – 9,784,737 shares outstanding at November 1, 2013.

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, 2013 and December 31, 2012	2
	Consolidated Condensed Statements of Income - Three and nine months ended September 30, 2013 and 2012	4
	Consolidated Condensed Statements of Comprehensive Income – Three and nine months ended September 30, 2013 and 2012	5
	Consolidated Condensed Statements of Changes in Stockholders’ Equity – Nine months ended September 30, 2013 and 2012	6
	Consolidated Condensed Statements of Cash Flows - Nine months ended September 30, 2013 and 2012	7
	Notes to Consolidated Condensed Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	50
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	72
Item 4.	Controls and Procedures	73
PART II-OTHER INFORMATION
Item 1.	Legal Proceedings	74
Item 1A.	Risk Factors	74
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	74
Item 3.	Defaults Upon Senior Securities	74
Item 4.	Mine Safety Disclosures	74
Item 5.	Other Information	74
Item 6.	Exhibits	74
	Signatures	75

1

 

PART I-FINANCIAL INFORMATION

Item 1. Financial Statement

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Financial Condition

(UNAUDITED)

(Amounts in Thousands, except per share data)

	September 30, 2013		December 31, 2012
Assets
Cash and cash equivalents:
Cash and amounts due from depository institutions	$	42,629	$	45,832
Federal funds sold		85,000		91,000
		127,629		136,832
Securities:
Available-for-sale, carried at fair value		184,119		194,101
Held-to-maturity, carried at amortized cost      (fair value $413 and $516 at September 30, 2013      and December 31, 2012, respectively)		407		508
		184,526		194,609
Loans held for sale		13,391		22,064
Loans receivable, net of allowance of $25,964 at September           30, 2013 and $26,711 at December 31, 2012, respectively		1,535,315		1,498,546
Accrued interest receivable		6,425		5,594
Federal Home Loan Bank stock		19,350		20,655
Bank owned life insurance		42,504		41,832
Premises and equipment		39,066		39,663
Real estate and other assets held for sale		5,518		3,805
Goodwill		61,525		61,525
Core deposit and other intangibles		3,793		4,738
Mortgage servicing rights		9,182		7,833
Deferred taxes		2,253		78
Other assets		7,953		9,174
Total assets	$	2,058,430	$	2,046,948

(continued)

2

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Financial Condition

(UNAUDITED)

(Amounts in Thousands, except per share data)

	September 30, 2013		December 31, 2012
Liabilities and stockholders’ equity
Liabilities:
Deposits	$	1,658,492	$	1,667,472
Advances from the Federal Home Loan Bank		22,761		12,796
Subordinated debentures		36,083		36,083
Securities sold under repurchase agreements		50,822		51,702
Advance payments by borrowers		1,752		1,473
Other liabilities		19,161		19,294
Total liabilities		1,789,071		1,788,820
Stockholders’ equity:
Preferred stock, $.01 par value per share:
5,000,000 shares authorized; no shares issued		–		–
Common stock, $.01 par value per share:
25,000,000 shares authorized; 12,735,313 and 12,739,496      shares issued and 9,784,737 and 9,729,466 shares      outstanding, respectively		127		127
Common stock warrant		878		878
Additional paid-in capital		136,257		136,046
Accumulated other comprehensive income, net of tax of $152 and $2,301,      respectively		282		4,274
Retained earnings		178,181		164,103
Treasury stock, at cost, 2,950,576 and 3,010,030 shares respectively		(46,366)		(47,300)
Total stockholders’ equity		269,359		258,128
Total liabilities and stockholders’ equity	$	2,058,430	$	2,046,948

See accompanying notes.

3

 

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Income

(UNAUDITED)

(Amounts in Thousands, except per share data)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Interest Income
Loans	$	17,197	$	18,000	$	51,040	$	54,847
Investment securities:
Taxable		667		1,093		2,019		3,473
Non-taxable		723		749		2,180		2,146
Interest-bearing deposits		44		43		174		249
FHLB stock dividends		205		213		631		656
Total interest income		18,836		20,098		56,044		61,371
Interest Expense
Deposits		1,356		1,909		4,514		6,394
FHLB advances and other		116		759		298		2,260
Subordinated debentures		150		172		452		813
Notes payable		58		83		178		284
Total interest expense		1,680		2,923		5,442		9,751
Net interest income		17,156		17,175		50,602		51,620
Provision for loan losses		476		705		1,349		8,306
Net interest income after provision for loan losses		16,680		16,470		49,253		43,314
Non-interest Income
Service fees and other charges		2,605		2,790		7,539		8,148
Insurance and investment commission income		2,225		1,952		7,538		6,679
Mortgage banking income		1,846		2,220		7,119		6,924
Gain on sale of non-mortgage loans		35		8		52		50
Gain on sale or call of securities		-		103		97		528
Trust income		196		147		545		470
Income from bank owned life insurance		212		244		672		683
Other non-interest income		170		316		535		712
Total non-interest income		7,289		7,780		24,097		24,194
Non-interest Expense
Compensation and benefits		8,718		8,245		25,991		24,760
Occupancy		1,739		2,170		5,087		5,718
FDIC insurance premium		326		691		1,257		2,031
State franchise tax		580		623		1,837		1,649
Data processing		1,318		1,140		3,812		3,477
Amortization of intangibles		296		344		945		1,068
Other non-interest expense		3,068		3,237		9,987		9,538
Total non-interest expense		16,045		16,450		48,916		48,241
Income before income taxes		7,924		7,800		24,434		19,267
Federal income taxes		2,445		2,366		7,286		5,759
Net Income	$	5,479	$	5,434	$	17,148	$	13,508
Dividends accrued on preferred shares	$	-	$	(3)	$	-	$	(900)
Accretion on preferred shares	$	-	$	(8)	$	-	$	(359)
Redemption of preferred shares	$	-	$	-	$	-	$	642
Net income applicable to common shares	$	5,479	$	5,423	$	17,148	$	12,891
Earnings per common share (Note 6)
Basic	$	0.56	$	0.56	$	1.76	$	1.33
Diluted	$	0.54	$	0.54	$	1.69	$	1.29
Dividends declared per share (Note 5)	$	0.10	$	0.05	$	0.30	$	0.15
Average common shares outstanding (Note 6)
Basic		9,780		9,729		9,763		9,728
Diluted		10,212		10,000		10,160		9,993

See accompanying notes.

4

 

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Comprehensive Income

(UNAUDITED)

(Amounts in Thousands)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
Net Income	$	5,479	$	5,434	$	17,148	$	13,508
Other comprehensive income:
Unrealized gains (losses) on securities available for sale		120		1,953		(6,044)		3,397
Reclassification adjustment for security (gains) losses
included in net income(1)		-		(103)		(97)		(528)
Income tax		(42)		(647)		2,149		(1,003)
Other comprehensive income (loss)		78		1,203		(3,992)		1,866
Comprehensive income	$	5,557	$	6,637	$	13,156	$	15,374

(1) Amounts are included in gains on sale or call of securities on the Consolidated Condensed Statements of Income. Income tax expense associated with the reclassification adjustments, included in federal income taxes, for the three months ended September 30, 2013 and 2012 was $0 and $31, respectively. Income tax expense associated with the reclassification adjustments, included in federal income taxes, for the nine months ended September 30, 2013 and 2012 was $29 and $158, respectively.

5

 

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Changes in Stockholders’ Equity

(UNAUDITED)

(Amounts in Thousands)

									Accumulated
					Common		Additional		Other						Total
	Preferred		Common		Stock		Paid-In		Comprehensive		Retained		Treasury		Stockholders’
	Stock		Stock		Warrant		Capital		Income (Loss)		Earnings		Stock		Equity
Balance at January 1, 2013	$	-	$	127	$	878	$	136,046	$	4,274	$	164,103	$	(47,300)	$	258,128
Net income		-		-		-		-		-		17,148		-		17,148
Other comprehensive loss		-		-		-		-		(3,992)		-		-		(3,992)
Stock option expense		-		-		-		35		-		-		-		35
20,707 shares issued     under stock option     plan with no income     tax benefit, net     of repurchases		-		-		-		(21)		-		(97)		390		272
Restricted share activity     under Stock Incentive     Plans including 31,796     shares issued		-		-		-		177		-		(45)		500		632
2,768 shares issued direct     purchases		-		-		-		20		-		-		44		64
Common stock dividends     declared		-		-		-		-		-		(2,928)		-		(2,928)
Balance at September 30,     2013	$	-	$	127	$	878	$	136,257	$	282	$	178,181	$	(46,366)	$	269,359
Balance at January 1, 2012	$	36,641	$	127	$	878	$	135,825	$	3,997	$	148,010	$	(47,351)	$	278,127
Net income		-		-		-		-		-		13,508		-		13,508
Change in net unrealized     gains and losses on     available-for-sale     securities										1,866						1,866
Stock option expense		-		-		-		82		-		-		-		82
500 shares issued under     stock option plan,     with no income tax     benefit		-		-		-		-		-		(4)		8		4
Restricted share activity     under Stock     Incentive Plans		-		-		-		230		-		-		30		260
637 shares issued direct     purchases		-		-		-		1		-		-		10		11
Preferred Stock Dividends     accrued		-		-		-		-		-		(900)		-		(900)
Accretion on preferred     shares		359		-		-		-		-		(359)		-		-
16,560 shares purchased     in U.S. Treasury     auction		(16,560)		-		-		-		-		618		-		(15,942)
20,440 shares purchased     in open market		(20,440)		-		-		-		-		24		-		(20,416)
Common stock dividends     declared		-		-		-		-		-		(1,464)		-		(1,464)
Balance at September 30,     2012	$	-	$	127	$	878	$	136,138	$	5,863	$	159,433	$	(47,303)	$	255,136

6

 

FIRST DEFIANCE FINANCIAL CORP.

Consolidated Condensed Statements of Cash Flows

(UNAUDITED)

(Amounts in Thousands)

	Nine Months Ended
	September 30,
	2013		2012
Operating Activities
Net income	$	17,148	$	13,508
Items not requiring (providing) cash
Provision for loan losses		1,349		8,306
Depreciation		2,356		2,552
Amortization of mortgage servicing rights, net of valuation adjustments		487		3,465
Amortization of core deposit and other intangible assets		945		1,068
Net amortization of premiums and discounts on loans and deposits		570		516
Amortization of premiums and discounts on securities		401		621
Loss on sale or disposals of property, plant and equipment		1		43
Change in deferred taxes		(27)		1,104
Proceeds from the sale of loans held for sale		271,413		381,875
Originations of loans held for sale		(259,616)		(374,872)
Gain from sale of loans		(5,012)		(7,940)
Gain from sale or call of securities		(97)		(528)
Loss on sale or write-down of real estate and other assets held for sale		418		302
Stock option expense		35		82
Restricted stock expense		632		260
Income from bank-owned life insurance		(672)		(683)
Changes in:
Accrued interest receivable		(831)		(677)
Other assets		1,221		(325)
Other liabilities		(133)		4,873
Net cash provided by operating activities		30,588		33,550
Investing Activities
Proceeds from maturities of held-to-maturity securities		100		76
Proceeds from maturities, calls and pay-downs of available-for-sale securities		30,258		49,571
Proceeds from sale of real estate and other assets held for sale		2,696		2,901
Proceeds from the sale of available-for-sale securities		4,027		8,538
Proceeds from sale of non-mortgage loans		11,648		371
Purchases of available-for-sale securities		(30,746)		(91,513)
Proceeds from Federal Home Loan Bank stock redemption		1,305		-
Purchase of bank-owned life insurance		-		(5,000)
Purchases of portfolio mortgage loans		(4,545)		-
Purchases of premises and equipment, net		(1,760)		(2,874)
Net increase in loans receivable		(50,568)		(43,572)
Net cash used in by investing activities		(37,585)		(81,502)
Financing Activities
Net increase (decrease) in deposits and advance payments by borrowers		(8,699)		12,689
Repayment of Federal Home Loan Bank advances		(35)		(34)
Increase in Federal Home Loan Bank short-term advances		10,000		-
Decrease in securities sold under repurchase agreements		(880)		(8,395)
Cash paid for redemption of preferred stock		-		(36,358)
Proceeds from exercise of stock options		272		4
Proceeds from treasury stock sales		64		11
Cash dividends paid on common stock		(2,928)		(1,464)
Cash dividends paid on preferred stock		-		(1,026)
Net cash used in financing activities		(2,206)		(34,573)
Decrease in cash and cash equivalents		(9,203)		(82,525)
Cash and cash equivalents at beginning of period		136,832		174,931
Cash and cash equivalents at end of period	$	127,629	$	92,406
Supplemental cash flow information:
Interest paid	$	5,427	$	9,814
Income taxes paid	$	8,300	$	800
Transfers from loans to real estate and other assets held for sale	$	4,827	$	2,418

See accompanying notes.

7

 

FIRST DEFIANCE FINANCIAL CORP.

Notes to Consolidated Condensed Financial Statements

(Unaudited at September 30, 2013 and 2012)

1. Basis of Presentation

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

First Federal is primarily engaged in community banking, attracting deposits from the general public and using those and other available sources of funds to originate loans primarily in the counties in which its offices are located. First Federal’s traditional banking activities include originating and servicing residential, commercial and consumer loans and providing a broad range of depository, trust and wealth management services. First Insurance is an insurance agency that does business in the Defiance, Archbold, Bryan, Bowling Green, Maumee and Oregon, Ohio areas, offering property and casualty, and group health and life insurance products. First Defiance Risk Management was incorporated on December 20, 2012, as a wholly-owned insurance company subsidiary of the Company to insure the Company and the Subsidiaries against certain risks unique to the operations of the Company and for which insurance may not be currently available or economically feasible in today’s insurance marketplace.

The consolidated condensed statement of financial condition at December 31, 2012 has been derived from the audited financial statements at that date, which were included in First Defiance’s Annual Report on Form 10-K.

The accompanying consolidated condensed financial statements as of September 30, 2013 and for the three and nine month periods ended September 30, 2013 and 2012 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 2012 Annual Report on Form 10-K for the year ended December 31, 2012. However, in the opinion of management, all adjustments, consisting of only normal recurring items, necessary for the fair presentation of the financial statements have been made. The results for the three and nine month periods ended September 30, 2013 are not necessarily indicative of the results that may be expected for the entire year.

8

 

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. Actual results could differ from those estimates. Significant areas where First Defiance uses estimates are the valuation of certain investment securities, the determination of the allowance for loan losses, the valuation of mortgage servicing rights and goodwill, the determination of unrecognized income tax benefits, and the determination of post-retirement benefits.

Earnings Per Common Share

Basic earnings per common share is computed by dividing net income applicable to common shares (net income less dividend requirements for preferred stock and accretion of preferred stock discount) by the weighted average number of common shares 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 or units and stock grants.

Accounting Standards Updates

In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The standard requires that companies present in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. The new requirements are effective for public companies in the fiscal years, and interim periods within those years, beginning after December 15, 2012. The Company adopted this standard on January 1, 2013. The effect of adopting this standard increased the Company’s disclosure surrounding reclassification items out of accumulated other comprehensive income.

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.

9

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. The Company classifies its pooled trust preferred collateralized debt obligations as Level 3. The portfolio consists of collateralized debt obligations backed by pools of trust preferred securities issued by financial institutions and insurance companies. Based on the lack of observable market data, the Company estimated fair values based on the observable data available and reasonable unobservable market data. The Company estimated fair value based on a discounted cash flow model, which used appropriately adjusted discount rates reflecting credit and liquidity risks. The Company used an independent third party, which is described further in Note 7.

10

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% to account for other factors that may impact the value of collateral. In determining the value of impaired collateral dependent loans and other real estate owned, significant unobservable inputs may be used, which include: physical condition of comparable properties sold, net operating income generated by the property and investor rates of return.

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

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

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

11

Assets and Liabilities Measured on a Recurring Basis

September 30, 2013	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Available for sale securities:
Obligations of U.S. Government corporations and agencies	$	-	$	4,931	$	-	$	4,931
Mortgage-backed - residential		-		36,939		-		36,939
Collateralized mortgage obligations		-		52,544		-		52,544
Trust preferred stock		-		-		1,890		1,890
Preferred stock		476		-		-		476
Corporate bonds		-		8,968		-		8,968
Obligations of state and political subdivisions		-		78,371				78,371
Mortgage banking derivative - asset		-		548		-		548
Mortgage banking derivative - liability		-		(247)		-		(247)

December 31, 2012	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Available for sale securities:
Obligations of U.S. Government corporations and agencies	$	-	$	11,069	$	-	$	11,069
U.S. treasury bonds		-		1,002		-		1,002
Mortgage-backed - residential		-		31,461		-		31,461
Collateralized mortgage obligations		-		57,466		-		57,466
Trust preferred stock		-		-		1,474		1,474
Preferred stock		134		-		-		134
Corporate bonds		-		8,884		-		8,884
Obligations of state and political subdivisions		-		82,611		-		82,611
Mortgage banking derivative - asset		-		950		-		950
Mortgage banking derivative - liability		-		(94)		-		(94)

There were no transfers between Level 1 and Level 2 during the periods ended September 30, 2013 or December 31, 2012.

The table below presents a reconciliation and income classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2013 and 2012:

12

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (In Thousands)
Beginning balance, January 1, 2013	$	1,474
Total gains or losses (realized/unrealized)
Included in earnings (realized)		-
Included in other comprehensive income (presented gross of taxes)		416
Amortization		-
Sales		-
Transfers in and/or out of Level 3		-
Ending balance, September 30, 2013	$	1,890

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (In Thousands)
Beginning balance, July 1, 2013	$	1,736
Total gains or losses (realized/unrealized)
Included in earnings (realized)		-
Included in other comprehensive income (presented gross of taxes)		154
Amortization		-
Sales		-
Transfers in and/or out of Level 3		-
Ending balance, September 30, 2013	$	1,890

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (In Thousands)
Beginning balance, January 1, 2012	$	1,342
Total gains or losses (realized/unrealized)
Included in earnings (realized)		81
Included in other comprehensive income (presented gross of taxes)		151
Amortization		-
Redemption		(266)
Transfers in and/or out of Level 3		-
Ending balance, September 30, 2012	$	1,308

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (In Thousands)
Beginning balance, July 1, 2012	$	1,227
Total gains or losses (realized/unrealized)
Included in earnings (realized)		-
Included in other comprehensive income (presented gross of taxes)		81
Amortization		-
Redemption		-
Transfers in and/or out of Level 3		-
Ending balance, September 30, 2012	$	1,308

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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, 2013	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Impaired loans
Residential Loans	$	-	$	-	$	353	$	353
Commercial Loans		-		-		1,159		1,159
Home Equity Loans		-		-		141		141
Multi Family Loans		-		-		355		355
CRE loans		-		-		6,435		6,435
Total impaired loans		-		-		8,443		8,443
Mortgage servicing rights		-		1,495		-		1,495
Real estate held for sale
Residential Loans		-		-		65		65
CRE loans		-		-		562		562
Total Real Estate held for sale		-		-		627		627

December 31, 2012	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Impaired loans
Residential Loans	$	-	$	-	$	599	$	599
Commercial Loans		-		-		771		771
Home Equity Loans		-		-		168		168
Multi Family Loans		-		-		407		407
CRE loans		-		-		12,126		12,126
Total Impaired loans		-		-		14,071		14,071
Mortgage servicing rights		-		7,833		-		7,833
Real estate held for sale
Residential Loans		-		-		61		61
CRE loans		-		-		385		385
Total Real Estate held for sale		-		-		446		446

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For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of September 30, 2013, the significant unobservable inputs used in the fair value measurements were as follows:

	Fair Value		Valuation Technique	Unobservable Inputs	Range of Inputs		Weighted Average
	(Dollars in Thousands)
Trust preferred stock	$	1,890	Discounted cash flow	Constant prepayment rate	2-40	%	40	%
				Expected asset default	0-30	%	15	%
				Expected recoveries	10-15	%	10	%
Impaired Loans- Applies to all loan classes	$	8,443	Appraisals	Discounts for collection issues and changes in market conditions	0-10	%	10	%
Real estate held for sale – Applies to all classes	$	627	Appraisals	Discounts for changes in market conditions	0-20	%	20	%

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of December 31, 2012, the significant unobservable inputs used in the fair value measurements were as follows:

	Fair Value		Valuation Technique	Unobservable Inputs	Range of Inputs		Weighted Average
	(Dollars in Thousands)
Trust preferred stock	$	1,474	Discounted cash flow	Constant prepayment rate	2-40	%	40	%
				Expected asset default	0-30	%	15	%
				Expected recoveries	10-15	%	10	%
Impaired Loans- Applies to all loan classes	$	14,071	Appraisals	Discounts for collection issues and changes in market conditions	0-10	%	10	%
Real estate held for sale – Applies to all classes	$	446	Appraisals	Discounts for changes in market conditions	0-20	%	20	%

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a fair value of $8.4 million, with a valuation allowance of $300,000 at September 30, 2013. A provision expense of $1.3 million for the three months ended September 30, 2013 was included in earnings. Provision expense of $2.5 million for the nine months ended September 30, 2013 was included in earnings.

Mortgage servicing rights, which are carried at the lower of cost or fair value, had a fair value of $1.5 million at September 30, 2013 with a valuation allowance of $1.0 million. A recovery of $480,000 for the three months and $1.3 million for the nine months ended September 30, 2013 was included in earnings.

Real estate held for sale is determined using Level 3 inputs which include appraisals and are adjusted for changes in market conditions. The change in fair value of real estate held for sale was $73,000 for the three months and $287,000 for the nine months ended September 30, 2013 which was recorded directly as an adjustment to current earnings through non-interest expense.

15

 

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a fair value of $14.1 million with a valuation allowance of $0 at December 31, 2012. Provision expense of $1.2 million for the three months ended September 30, 2012 was included in earnings. Provision expense of $5.4 million for the nine months ended September 30, 2012 was included in earnings.

Mortgage servicing rights which are carried at the lower of cost or fair value had a fair value of $7.8 million at December 31, 2012 resulting in a valuation allowance of $2.4 million. A charge of $600,000 for the three months and $855,000 for the nine months ended September 30, 2012 was included in earnings.

Real estate held for sale is determined using Level 3 inputs, which include appraisals and are adjusted for changes in market conditions. The change in fair value of real estate held for sale was $36,000 for the three months and $299,000 for the nine months ended September 30, 2012, which was recorded directly as an adjustment to current earnings through non-interest expense.

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, 2013 and December 31, 2012. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of First Defiance.

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

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

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

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

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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, 2013.

	Carrying		Fair Value Measurements at September 30, 2013 (In Thousands)
	Value		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	127,629	$	127,629	$	127,629	$	-	$	-
Investment securities		184,526		184,532		476		182,166		1,890
Federal Home Loan Bank Stock		19,350		N/A		N/A		N/A		N/A
Loans, net, including loans      held for sale		1,548,706		1,559,497		-		13,501		1,545,996
Accrued interest receivable		6,425		6,425		-		1,163		5,262
Financial Liabilities:
Deposits	$	1,658,492	$	1,661,109	$	300,891	$	1,360,218	$	-
Advances from Federal Home      Loan Bank		22,761		23,022		-		23,022		-
Securities sold under repurchase      agreements		50,822		50,822		-		50,822		-
Subordinated debentures		36,083		35,333		-		-		35,333

17

 

	Carrying		Fair Value Measurements at December 31, 2012 (In Thousands)
	Value		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	136,832	$	136,832	$	136,832	$	-	$	-
Investment securities		194,609		194,617		134		193,009		1,474
Federal Home Loan Bank Stock		20,655		N/A		N/A		N/A		N/A
Loans, net, including loans      held for sale		1,520,610		1,543,438		-		22,577		1,520,861
Accrued interest receivable		5,594		5,594		-		757		4,837
Financial Liabilities:
Deposits	$	1,667,472	$	1,671,713	$	315,132	$	1,356,581	$	-
Advances from Federal Home      Loan Bank		12,796		13,466		-		13,466		-
Securities sold under repurchase      agreements		51,702		51,702		-		51,702		-
Subordinated debentures		36,083		35,766		-		-		35,766

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 replaces all existing plans. All awards currently outstanding under prior plans will remain in effect in accordance with their respective terms. Any new awards will be made under the 2010 Equity Plan. The 2010 Equity Plan allows for issuance of up 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, 2013, 264,770 options had been granted and remain outstanding at option prices based on the market value of the underlying shares on the date the options were granted. Options granted under all plans vest 20% per year except for the 2009 grant to the Company’s executive officers, which vested 40% in 2011 and then 20% annually. 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 August 2011, the Company approved a 2011 Short-Term (“STIP”) and a 2011 Long-Term (“LTIP”) Equity Incentive Plan for selected members of management. The plans became effective January 1, 2011 and provide for cash and/or equity benefits if certain performance targets are achieved. Awards issued under these plans reduced the amount of awards available to be issued under the 2010 Equity Plan. 

In March 2012, the Company approved a 2012 STIP and a 2012 LTIP for selected members of management. The plans are effective January 1, 2012 and provide for cash and/or equity benefits if certain performance targets are achieved. Awards issued under these plans reduce the amount of awards available to be issued under the 2010 Equity Plan.

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Cash and/or equity benefits under the 2011 STIP and LTIP and 2012 STIP were paid out to the selected members of management in the first quarter of 2013 based on the achievement of certain performance targets. One member of management was not paid until April 2013.

In March 2013, the Company approved a 2013 STIP and a 2013 LTIP for selected members of management.

Under the 2013 STIP the participants may earn up to 25% to 45% of their salary for potential payout based on the achievement of certain corporate performance targets during the calendar year. The final amount of awards earned under the 2013 STIP will be determined as of December 31, 2013 and will be paid out in cash in the first quarter of 2014. The participants are required to be employed on the day of payout in order to receive such payment.

Under the 2013 LTIP the participants may earn up to 25% to 45% of their salary, depending upon their position, for potential payout in the form of equity awards based on the achievement of certain corporate performance targets over a three year period. The Company granted 86,065 RSUs to the participants in this plan effective January 1, 2013, which represents the maximum target award. The amount of benefit under the 2013 LTIP will be determined individually at the 12 month period ending December 31, 2013, the 24 month period ending December 31, 2014 and the 36 month period ending December 31, 2015. The awards’ vesting will be as follows: 16.7% of the target award after the end of the performance period ending December 31, 2013, 27.8% of the target award at the end of the performance period ending December 31, 2014 and 55.5% of the target award at the end of the performance period ending December 31, 2015. The RSUs shall vest between 0% and 100% of the applicable portion of the target award based on the portion of the performance targets that are achieved. RSUs settle in common shares in the first quarter following the close of the applicable performance period. The participants are required to be employed on the day of payout in order to receive the payment.

The fair value of each option award is estimated on the date of grant using the Black-Scholes model. Expected volatilities are based on historical volatilities of the Company’s common shares. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-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. There were no options granted during the nine months ended September 30, 2013 or 2012.

19

 

Following is activity under the plans during the nine months ended September 30, 2013:

Stock options	Options Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in 000’s)
Options outstanding, January 1, 2013		312,350	$	20.33
Forfeited or cancelled		14,000		20.66
Exercised		33,580		17.09
Granted		-		-
Options outstanding, September 30, 2013		264,770	$	20.73		3.47	$	1,177
Vested or expected to vest at September 30, 2013		264,770	$	20.73		3.47	$	1,177
Exercisable at September 30, 2013		251,900	$	21.30		3.36	$	999

As of September 30, 2013, there was $19,000 of total unrecognized compensation costs related to unvested stock options granted under the Company’s equity plans. The cost is expected to be recognized over a weighted-average period of 1.1 years.

At September 30, 2013, 106,061 RSU’s were outstanding. Compensation expense is recognized over the performance period based on the achievements of targets as established under the plan documents. Total accrued expense of $711,000 was recorded during the nine months ended September 30, 2013 and approximately $373,000 is included within other liabilities at September 30, 2013 related to the STIPs and LTIPs.

	Restricted Stock Units				Stock Grants
			Weighted-Average				Weighted-Average
			Grant Date				Grant Date
Unvested Shares	Shares		Fair Value		Shares		Fair Value
Unvested at January 1, 2013		38,871	$	14.74		11,260	$	13.28
Granted		91,187		19.42		20,639		15.77
Vested		(20,639)		15.77		(31,899)		14.89
Forfeited		(3,358)		11.97		-		-
Unvested at September 30, 2013		106,061	$	18.66		-	$	-

The maximum amount of compensation expense that may be recorded for the 2013 STIP and the 2012 and 2013 LTIPs at September 30, 2013 is approximately $2.9 million. However, the estimated expense expected to be recorded as of September 30, 2013 based on the performance measures in the plans, is $1.9 million of which $1.0 million is unrecognized at September 30, 2013 and will be recognized over the remaining performance periods.

5. Dividends on Common Stock

First Defiance declared and paid a $0.10 per share common stock dividend in the first, second and third quarter of 2013 and declared and paid a $0.05 per share common stock dividend in the first, second and third quarter of 2012.

20

 

6. Earnings Per Common Share 

The following table sets forth the computation of basic and diluted earnings per common share (in thousands except per share data):

	Three months ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012
Numerator for basic and diluted earnings per common share – Net income applicable to common shares	$	5,479	$	5,423	$	17,148	$	12,891
Denominator:
Denominator for basic earnings per common share – weighted average common shares, including participating securities		9,780		9,729		9,763		9,728
Effect of warrants		337		223		315		215
Effect of restricted stock units		38		20		29		25
Effect of employee stock options		57		28		53		25
Denominator for diluted earnings per common share		10,212		10,000		10,160		9,993
Basic earnings per common share	$	0.56	$	0.56	$	1.76	$	1.33
Diluted earnings per common share	$	0.54	$	0.54	$	1.69	$	1.29

There were 98,850 and 139,350 shares under options 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, 2013, respectively. There were 233,700 and 234,643 shares under option granted to employees excluded from the diluted earnings per common share calculation as they were anti-dilutive for the three months and nine months ended September 30, 2012, respectively.

21

 

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
At September 30, 2013
Available-for-Sale Securities:
Obligations of U.S. government corporations and      agencies	$	5,000	$	-	$	(69)	$	4,931
Mortgage-backed securities – residential		36,800		877		(738)		36,939
Collateralized mortgage obligations		52,306		848		(610)		52,544
Trust preferred securities and preferred stock		3,601		441		(1,676)		2,366
Corporate bonds		8,839		138		(9)		8,968
Obligations of state and political subdivisions		76,251		2,956		(836)		78,371
Totals	$	182,797	$	5,260	$	(3,938)	$	184,119
Held-to-Maturity Securities*:
FHLMC certificates	$	33	$	-	$	-	$	33
FNMA certificates		136		4		-		140
GNMA certificates		52		2		-		54
Obligations of state and political subdivisions		186		-		-		186
Totals	$	407	$	6	$	-	$	413

At December 31, 2012
Available-for-Sale Securities:
Obligations of U.S. government corporations      and agencies	$	11,000	$	69	$	-	$	11,069
U.S. treasury bonds		1,000		2		-		1,002
Mortgage-backed securities – residential		30,020		1,441		-		31,461
Collateralized mortgage obligations		55,962		1,504		-		57,466
Trust preferred securities and preferred stock		3,600		99		(2,091)		1,608
Corporate bonds		8,717		167		-		8,884
Obligations of state and political subdivisions		76,339		6,277		(5)		82,611
Totals	$	186,638	$	9,559	$	(2,096)	$	194,101
Held-to-Maturity Securities*:
FHLMC certificates	$	69	$	-	$	(1)	$	68
FNMA certificates		162		6		-		168
GNMA certificates		60		3		-		63
Obligations of state and political subdivisions		217		-		-		217
Totals	$	508	$	9	$	(1)	$	516

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

The amortized cost and fair value of the investment securities portfolio at September 30, 2013 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”) and collateralized mortgage obligations (“CMO”), 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.

22

	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(In Thousands)
Due in one year or less	$	2,255	$	2,262	$	-	$	-
Due after one year through five years		6,126		6,315		186		186
Due after five years through ten years		37,483		38,818		-		-
Due after ten years		47,827		47,241		-		-
MBS/CMO		89,106		89,483		221		227
	$	182,797	$	184,119	$	407	$	413

Investment securities with a carrying amount of $132.4 million at September 30, 2013 were pledged as collateral on public deposits, securities sold under repurchase agreements, Federal Reserve discount window and FHLB advances.

As of September 30, 2013, the Company’s investment portfolio consisted of 328 securities, 77 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, 2013 and December 31, 2012:

	Duration of Unrealized Loss Position
	Less than 12 Months				12 Month or Longer				Total
			Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Losses
	(In Thousands)
At September 30, 2013
Available-for-sale securities:
Obligations of U.S.     government corporations     and agencies	$	2,931	$	(69)	$	-	$	-	$	2,931	$	(69)
Mortgage-backed -     residential		19,456		(738)		-		-		19,456		(738)
Collateralized mortgage     obligations		19,948		(610)		-		-		19,948		(610)
Trust preferred stock and     preferred stock		-		-		1,890		(1,676)		1,890		(1,676)
Corporate bonds		2,991		(9)		-		-		2,991		(9)
Obligations of state and     political subdivisions		16,682		(836)		-		-		16,682		(836)
Total temporarily     impaired securities	$	62,008	$	(2,262)	$	1,890	$	(1,676)	$	63,898	$	(3,938)

23

 

	Duration of Unrealized Loss Position
	Less than 12 Months				12 Months or Longer				Total
			Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loses
		(In Thousands)
At December 31, 2012
Available-for-sale securities:
Mortgage-backed     securities - residential	$	1	$	-	$	-	$	-	$	1	$	-
Obligations of state and     political subdivisions		949		(5)		-		-		949		(5)
Trust preferred stock and     preferred stock		-		-		1,474		(2,091)		1,474		(2,091)
Total temporarily impaired     securities	$	950	$	(5)	$	1,474	$	(2,091)	$	2,424	$	(2,096)

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

There were no realized gains from the sales of investment securities in the third quarter of 2013 while there were realized gains of $103,000 ($72,000 after tax) in the third quarter of 2012. Realized gains from the sales of investment securities totaled $97,000 ($68,000 after tax) for the first nine months of 2013 compared to realized gains of $528,000 ($370,000 after tax) for the first nine months of 2012.

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 is 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.

24

For the first nine months of 2013 and 2012, management determined there was no OTTI.

The Company held eight CDOs at September 30, 2013. Four of those CDOs were written down in full prior to January 1, 2010. The remaining four CDOs have a total amortized cost of $3.6 million at September 30, 2013. Of these, two, with a total amortized cost of $1.6 million, were identified as OTTI in prior periods. The final two CDOs, with a total amortized cost of $2.0 million, continue to pay principal and interest payments in accordance with the contractual terms of the securities and no credit loss impairment has been identified in management’s analysis. Therefore, these two CDO investments have not been deemed by management to be OTTI.

Given the conditions in the debt markets today and the absence of observable transactions in the secondary and new issue markets, the Company’s CDOs will be classified within Level 3 of the fair value hierarchy because management determined that significant adjustments were required to determine fair value at the measurement date.

As required under FASB ASC Topic 320, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses.

The Company’s CDO valuations were supported by analysis prepared by an independent third party. Their approach to determining fair value involved several steps: 1) detailed credit and structural evaluation of each piece of collateral in the CDO; 2) collateral performance projections for each piece of collateral in the CDO (default, recovery and prepayment/amortization probabilities) and 3) discounted cash flow modeling.

Trust Preferred CDOs Discount Rate Methodology

First Defiance uses market-based yield indicators as a baseline for determining appropriate discount rates, and then adjusts the resulting discount rates on the basis of its credit and structural analysis of specific CDO instruments. The primary focus is on the returns a fixed income investor would require in order to allocate capital on a risk adjusted basis. There is currently no active market for trust preferred CDOs, however, First Defiance looks principally to market yields for stand-alone trust preferred securities issued by banks, thrifts and insurance companies for which there is an active and liquid market. The next step is to make a series of adjustments to reflect the differences that nevertheless exist between these products (both credit and structural) and, most importantly, to reflect idiosyncratic credit performance differences (both actual and projected) between these products and the underlying collateral in the specific CDOs. Importantly, as part of the analysis described above, First Defiance considers the fact that structured instruments frequently exhibit leverage not present in stand-alone instruments, and make adjustments as necessary to reflect this additional risk.

25

Fundamental to this evaluation is an assessment of the likelihood of CDO coverage test failures that would have the effect of diverting cash flow away from the relevant CDO bond for some period of time. Generally speaking, the Company adjusts indicative credit spreads upwards in the case of CDOs that have relatively weaker collateral and/or less cushion with respect to overcollateralization and interest coverage test ratios and downwards if the reverse is true. This aspect of the Company’s discount rate methodology is important because there is frequently a great difference in the risks present in CDO instruments that are otherwise very similar (i.e., CDOs with the same basic type of collateral, the same manager, the same vintage, etc., may exhibit vastly different performance characteristics). With respect to this last point, First Defiance notes that given today’s credit environment, characterized by high default and deferral rates, it is typically the case that deal-specific credit performance (determined on the basis of the credit characteristics of remaining collateral) is the best indicator of what a willing market participant would pay for an instrument.

The Company uses the same methodology for all of its CDOs and believes its valuation methodology is appropriate for all of its CDOs in accordance with FASB ASC Topic 320 as well as other related guidance. Beginning with the first quarter of 2013, the Company made the decision to only obtain the third party analysis twice a year, June and December, as a result of the stabilization in its current CDO portfolio. Management still obtains the fair value and cash flow value on a quarterly basis and prepares its internal other-than-temporary impairment analysis.

The default and recovery probabilities for each piece of collateral were formed based on the evaluation of the collateral credit and a review of historical industry default data and current/near-term operating conditions. For collateral that has already deferred, the Company assumed a recovery of 10% of par for banks, thrifts or other depository institutions and 15% for insurance companies. Although there is a possibility that the deferring collateral will become current at some point in the future, First Defiance has conservatively assumed that it will continue to defer and gradually will default.

The following table details the six securities with other-than-temporary impairment, their lowest credit rating at September 30, 2013 and the related credit losses recognized in earnings for the three month period ending March 31, 2013, June 30, 2013 and September 30, 2013 (In Thousands):

26

		TPREF Funding II		Alesco VIII		Preferred Term Security XXVII		Trapeza CDO I		Alesco Preferred Funding VIII		Alesco Preferred Funding IX
		Rated Caa3		Rated Ca		Rated C		Rated Ca		Not Rated		Not Rated		Total
Cumulative OTTI related to credit loss at January 1, 2013	$	323	$	1,000	$	78	$	857	$	453	$	465	$	3,176
Addition – Qtr 1		-		-		-		-		-		-		-
Cumulative OTTI related to credit loss at March 31, 2013	$	323	$	1,000	$	78	$	857	$	453	$	465	$	3,176
Addition – Qtr 2		-		-		-		-		-		-		-
Cumulative OTTI related to credit loss at June 30, 2013	$	323	$	1,000	$	78	$	857	$	453	$	465	$	3,176
Addition – Qtr 3		-		-		-		-		-		-		-
Cumulative OTTI related to credit loss at September 30, 2013	$	323	$	1,000	$	78	$	857	$	453	$	465	$	3,176

The amount of OTTI recognized in accumulated other comprehensive income (“AOCI”) was $639,000 for the above securities at September 30, 2013. There was $749,000 recognized in AOCI at December 31, 2012.

The following table provides additional information related to the four CDO investments for which a balance remains as of September 30, 2013 (dollars in thousands):

27

CDO	Class	Amortized Cost		Fair Value		Unrealized Loss		OTTI Losses 2013		Lowest Rating	Current Number of Banks and Insurance Companies	Actual Deferrals and Defaults as a %  of Current Collateral		Expected Deferrals and Defaults as a %  of Remaining Performing Collateral		Excess Sub- ordination as a  % of Current Performing Collateral
TPREF Funding II	B		673		271		(402)		-	Caa3	15	43.47	%	15.90	%	-	%
I-Preferred Term Sec I	B-1		1,000		686		(314)		-	CCC-	14	17.24	%	12.04	%	23.78	%
Dekania II CDO	C-1		990		612		(378)		-	CCC	31	-	%	13.29	%	26.51	%
Preferred Term Sec XXVII	C-1		903		321		(582)		-	C	32	26.15	%	18.83	%	5.99	%
Total		$	3,566	$	1,890	$	(1,676)	$	-

The Company’s assumed average lifetime default rate was 26.2% at the end of the third quarter 2013, down slightly with the second quarter 2013 of 26.7%.

There were no changes in the accumulated credit losses recognized in earnings for debt securities during the periods ended September 30, 2013 and 2012.

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
	(In thousands)				(In thousands)
Proceeds	$	-	$	2,122	$	4,027	$	8,538
Gross realized gains		-		103		97		528
Gross realized losses		-		-		-		-

28

 

8. Loans

Loans receivable consist of the following (in thousands):

	September 30,		December 31,
	2013		2012
Real Estate:
Secured by 1-4 family residential	$	191,984	$	200,826
Secured by multi-family residential		145,704		122,275
Secured by commercial real estate		675,411		675,110
Construction		59,567		37,788
		1,072,666		1,035,999
Other Loans:
Commercial		386,160		383,817
Home equity and improvement		105,727		108,718
Consumer Finance		16,659		15,936
		508,546		508,471
Total loans		1,581,212		1,544,470
Deduct:
Undisbursed loan funds		(19,189)		(18,478)
Net deferred loan origination fees and costs		(744)		(735)
Allowance for loan loss		(25,964)		(26,711)
Totals	$	1,535,315	$	1,498,546

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

The following table discloses allowance for loan loss activity for the quarter ended September 30, 2013 and September 30, 2012 by portfolio segment and impairment method ($ in thousands):

Quarter Ended September 30, 2013	1-4 Family Residential Real Estate		Construction		Multi- Family Residential Real Estate		Commercial Real Estate		Commercial		Home Equity and Improvement		Consumer		Total
Beginning Allowance	$	3,197	$	83	$	2,425	$	13,140	$	5,474	$	1,786	$	165	$	26,270
Charge-Offs		(78)		-		-		(829)		(39)		(170)		(33)		(1,149)
Recoveries		23		-		-		248		68		9		19		367
Provisions		(344)		36		107		525		43		98		11		476
Ending Allowance	$	2,798	$	119	$	2,532	$	13,084	$	5,546	$	1,723	$	162	$	25,964

Quarter Ended September 30, 2012	1-4 Family Residential Real Estate		Construction		Multi- Family Residential Real Estate		Commercial Real Estate		Commercial		Home Equity and Improvement		Consumer		Total
Beginning Allowance	$	3,104	$	46	$	2,610	$	13,914	$	5,156	$	1,435	$	144	$	26,409
Charge-Offs		(217)		-		-		(780)		(355)		(203)		(19)		(1,574)
Recoveries		26		-		122		430		140		38		14		770
Provisions		83		17		(261)		225		162		471		8		705
Ending Allowance	$	2,996	$	63	$	2,471	$	13,789	$	5,103	$	1,741	$	147	$	26,310

29

The following table discloses allowance for loan loss activity for the year-to-date ended September 30, 2013 and September 30, 2012 by portfolio segment and impairment method ($ in thousands):

Year-to-date Ended September 30, 2013	1-4 Family Residential Real Estate		Construction		Multi- Family Residential Real Estate		Commercial Real Estate		Commercial		Home Equity and Improvement		Consumer		Total
Beginning Allowance	$	3,506	$	75	$	2,197	$	12,702	$	6,325	$	1,759	$	147	$	26,711
Charge-Offs		(468)		-		(6)		(1,372)		(560)		(612)		(87)		(3,105)
Recoveries		155		-		-		516		201		70		67		1,009
Provisions		(395)		44		341		1,238		(420)		506		35		1,349
Ending Allowance	$	2,798	$	119	$	2,532	$	13,084	$	5,546	$	1,723	$	162	$	25,964

Year-to-date Ended September 30, 2012	1-4 Family Residential Real Estate		Construction		Multi- Family Residential Real Estate		Commercial Real Estate		Commercial		Home Equity and Improvement		Consumer		Total
Beginning Allowance	$	4,095	$	63	$	2,850	$	17,640	$	6,576	$	1,856	$	174	$	33,254
Charge-Offs		(1,539)		-		(555)		(10,170)		(3,507)		(668)		(74)		(16,513)
Recoveries		150		-		122		574		295		77		45		1,263
Provisions		290		-		54		5,745		1,739		476		2		8,306
Ending Allowance	$	2,996	$	63	$	2,471	$	13,789	$	5,103	$	1,741	$	147	$	26,310

 

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, 2013:

(In Thousands)
	1-4 Family				Multi- Family
	Residential				Residential		Commercial				Home Equity
	Real Estate		Construction		Real Estate		Real Estate		Commercial		& Improvement		Consumer		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	234	$	-	$	-	$	1,837	$	305	$	44	$	-	$	2,420
Collectively evaluated for impairment		2,564		119		2,532		11,247		5,241		1,679		162		23,544
Acquired with deteriorated credit quality		-		-		-		-		-		-		-		-
Total ending allowance balance	$	2,798	$	119	$	2,532	$	13,084	$	5,546	$	1,723	$	162	$	25,964
Loans:
Loans individually evaluated for impairment	$	10,514	$	261	$	865	$	40,960	$	9,729	$	2,499	$	71	$	64,899
Loans collectively evaluated for impairment		181,870		40,108		144,989		636,481		377,591		103,673		16,574		1,501,286
Loans acquired with deteriorated credit quality		31		-		-		231		29		-		-		291
Total ending loans balance	$	192,415	$	40,369	$	145,854	$	677,672	$	387,349	$	106,172	$	16,645	$	1,566,476

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, 2012:

(In Thousands)

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

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, 2013						Nine Months Ended September 30, 2013
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized		Cash Basis Income Recognized
Residential Owner Occupied	$	6,463	$	88	$	89	$	6,705	$	268	$	266
Residential Non Owner Occupied		4,261		42		43		4,465		116		117
Total Residential Real Estate		10,724		130		132		11,170		384		383
Construction		261		4		5		142		6		6
Multi-Family		1,078		9		9		1,261		20		21
CRE Owner Occupied		14,339		121		127		14,520		304		302
CRE Non Owner Occupied		23,254		237		264		23,786		675		687
Agriculture Land		674		4		2		800		21		13
Other CRE		3,226		14		14		4,297		28		24
Total Commercial Real Estate		41,493		376		407		43,403		1,028		1,026
Commercial Working Capital		3,058		13		14		2,273		33		37
Commercial Other		5,918		14		15		6,449		64		58
Total Commercial		8,976		27		29		8,722		97		95
Consumer		76		1		2		90		5		5
Home Equity and Home Improvement		2,596		29		29		2,684		95		91
Total Impaired Loans	$	65,204	$	576	$	613	$	67,472	$	1,635	$	1,627

33

 

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, 2012						Nine Months Ended September 30, 2012
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized		Cash Basis Income Recognized
Residential Owner Occupied	$	1,912		15	$	14	$	1,921	$	45	$	42
Residential Non Owner Occupied		6,141		54		58		5,397		126		129
Total Residential Real Estate		8,053		69		72		7,318		171		171
Construction		-		-		-		-		-		-
Multi-Family		811		10		10		627		11		11
CRE Owner Occupied		12,414		53		44		11,019		92		88
CRE Non Owner Occupied		14,881		104		161		15,231		284		287
Agriculture Land		773		6		1		1,107		20		15
Other CRE		5,987		1		1		7,015		4		4
Total Commercial Real Estate		34,055		164		207		34,372		400		394
Commercial Working Capital		2,048		9		11		2,005		13		15
Commercial Other		4,188		25		26		4,538		40		42
Total Commercial		6,236		34		37		6,543		53		57
Consumer		-		-		-		-		-		-
Home Equity and Home Improvement		36		-		-		37		2		2
Total Impaired Loans	$	49,191	$	277	$	326	$	48,897	$	637	$	635

34

The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2013: (In Thousands)

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no allowance recorded:
Residential Owner Occupied	$	4,902	$	4,862	$	-
Residential Non Owner Occupied		3,539		2,806		-
Total Residential Real Estate		8,441		7,668		-
Construction		300		261		-
Multi-Family Residential Real Estate		1,014		865		-
CRE Owner Occupied		10,313		8,552		-
CRE Non Owner Occupied		5,364		4,577		-
Agriculture Land		689		504		-
Other CRE		4,948		3,063		-
Total Commercial Real Estate		21,314		16,696		-
Commercial Working Capital		3,835		3,837		-
Commercial Other		4,846		4,797		-
Total Commercial		8,681		8,634		-
Consumer		71		71		-
Home Equity and Home Improvement		2,135		2,058		-
Total loans with no allowance recorded	$	41,956	$	36,253	$	-
With an allowance recorded:
Residential Owner Occupied	$	1,534	$	1,539	$	211
Residential Non Owner Occupied		1,305		1,307		23
Total Residential Real Estate		2,839		2,846		234
Construction		-		-		-
Multi-Family Residential Real Estate		-		-		-
CRE Owner Occupied		7,651		6,500		281
CRE Non Owner Occupied		17,905		17,451		1,546
Agriculture Land		251		258		8
Other CRE		83		55		2
Total Commercial Real Estate		25,890		24,264		1,837
Commercial Working Capital		-		-		-
Commercial Other		1,094		1,095		305
Total Commercial		1,094		1,095		305
Consumer		-		-		-
Home Equity and Home Improvement		439		441		44
Total loans with an allowance recorded	$	30,262	$	28,646	$	2,420

*Unpaid principal balance is not reduced for partial charge-offs.

Impaired loans have been recognized in conformity with FASB ASC Topic 310.

35

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2012: (In Thousands)

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no allowance recorded:
Residential Owner Occupied	$	5,427	$	5,357	$	-
Residential Non Owner Occupied		4,211		3,420		-
Total Residential Real Estate		9,638		8,777		-
Construction		300		45		-
Multi-Family Residential Real Estate		1,775		1,626		-
CRE Owner Occupied		12,314		9,782		-
CRE Non Owner Occupied		11,054		9,105		-
Agriculture Land		1,176		993		-
Other CRE		8,741		5,527		-
Total Commercial Real Estate		33,285		25,407		-
Commercial Working Capital		1,565		1,565		-
Commercial Other		6,367		5,338		-
Total Commercial		7,932		6,903		-
Consumer		125		124		-
Home Equity and Home Improvement		2,777		2,642		-
Total loans with no allowance recorded	$	55,832	$	45,524	$	-
With an allowance recorded:
Residential Owner Occupied	$	1,697	$	1,701	$	257
Residential Non Owner Occupied		1,449		1,452		24
Total Residential Real Estate		3,146		3,153		281
Construction		-		-		-
Multi-Family Residential Real Estate		-		-		-
CRE Owner Occupied		5,735		5,118		245
CRE Non Owner Occupied		15,301		15,357		820
Agriculture Land		111		112		3
Other CRE		88		59		2
Total Commercial Real Estate		21,235		20,646		1,070
Commercial Working Capital		300		301		10
Commercial Other		1,623		1,626		128
Total Commercial		1,923		1,927		138
Consumer		-		-		-
Home Equity and Home Improvement		36		36		2
Total loans with an allowance recorded	$	26,340	$	25,762	$	1,491

*Unpaid principal balance is not reduced for partial charge-offs.

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

	September 30,  2013		December 31, 2012
	(in thousands)
Non-accrual loans	$	30,512	$	32,570
Loans over 90 days past due and still accruing		-		-
Total non-performing loans		30,512		32,570
Real estate and other assets held for sale		5,518		3,805
Total non-performing assets	$	36,030	$	36,375

The following table presents the aging of the recorded investment in past due and non accrual loans as of September 30, 2013 by class of loans: (In Thousands)

	Current		30-59 days		60-89 days		90+ days		Total Past Due		Total Non Accrual
Residential Owner Occupied	$	122,038	$	593	$	203	$	956	$	1,752	$	1,117
Residential Non Owner Occupied		67,361		500		135		629		1,264		2,040
Total residential real estate		189,399		1,093		338		1,585		3,016		3,157
Construction		40,369		-		-		-		-		-
Multi-Family		145,854		-		-		-		-		613
CRE Owner Occupied		318,420		489		631		1,728		2,848		8,416
CRE Non Owner Occupied		227,935		1,348		224		1,286		2,858		5,621
Agriculture Land		78,134		23		134		76		233		682
Other Commercial Real Estate		45,403		337		-		1,504		1,841		3,094
Total Commercial Real Estate		669,892		2,197		989		4,594		7,780		17,813
Commercial Working Capital		156,532		349		-		433		782		3,188
Commercial Other		225,129		989		1,032		2,885		4,906		5,567
Total Commercial		381,661		1,338		1,032		3,318		5,688		8,755
Consumer		16,602		31		12		-		43		-
Home Equity / Home Improvement		104,430		1,416		149		177		1,742		178
Total Loans	$	1,548,207	$	6,075	$	2,520	$	9,674	$	18,269	$	30,516

The following table presents the aging of the recorded investment in past due and non accrual loans as of December 31, 2012 by class of loans: (In Thousands)

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	Current		30-59 days			60-89 days		90+ days		Total Past Due		Total Non Accrual
Residential Owner Occupied	$	125,362	$	1,238	$	604	$	945	$	2,787	$	1,125
Residential Non Owner Occupied		71,777		413		126		849		1,388		2,473
Total residential real estate		197,139		1,651		730		1,794		4,175		3,598
Construction		19,296		-		-		-		-		-
Multi-Family		122,455		-		-		-		-		1,178
CRE Owner Occupied		321,071		1,248		382		1,622		3,252		9,652
CRE Non Owner Occupied		235,592		134		1,321		2,480		3,935		6,674
Agriculture Land		72,092		84		31		-		115		813
Other Commercial Real Estate		36,510		21		875		3,560		4,456		4,761
Total Commercial Real Estate		665,265		1,487		2,609		7,662		11,758		21,900
Commercial Working Capital		161,110		-		155		1,204		1,359		1,528
Commercial Other		218,477		584		1,201		2,138		3,923		4,136
Total Commercial		379,587		584		1,356		3,342		5,282		5,664
Consumer		15,702		229		8		-		237		-
Home Equity / Home Improvement		106,458		2,294		225		217		2,736		217
Total Loans	$	1,505,902	$	6,245	$	4,928	$	13,015	$	24,188	$	32,557

Troubled Debt Restructurings

As of September 30, 2013 and December 31, 2012, the Company has a recorded investment in troubled debt restructurings (“TDRs”) of $33.6 million and $35.5 million, respectively. The Company has allocated $1.7 million of specific reserves to those loans as of September 30, 2013 and $1.1 million as of December 31, 2012, and has committed to lend additional amounts totaling up to $675,000 and $41,000 at September 30, 2013 and December 31, 2012, 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.

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Of the loans modified in a TDR, $5.5 million are on non-accrual status and partial charge-offs have in some cases been taken against the outstanding balance. Loans modified as a TDR may have the financial effect of increasing the allowance associated with the loan. If the loan is determined to be collateral dependent, the estimated fair value of the collateral, less any selling costs is used to determine if there is a need for a specific allowance or charge-off. If the loan is determined to be cash flow dependent, the allowance is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate.

The following table presents loans by class modified as TDRs that occurred during the three and nine month period ending September 30, 2013 and September 30, 2012:

	Loans Modified as a TDR for the Three Months Ended September 30, 2013 ($ in thousands)			Loans Modified as a TDR for the Nine Months Ended September 30, 2013 ($ in thousands)
Troubled Debt Restructurings	Number of Loans		Recorded Investment (as of period end)	Number of Loans		Recorded Investment (as of period end)
Residential Owner Occupied	0	$	-	8	$	746
Residential Non Owner Occupied	5		206	6		393
CRE Owner Occupied	1		47	5		802
CRE Non Owner Occupied	0		-	1		1,361
Agriculture Land	0		-	1		214
Other CRE	0		-	1		31
Commercial / Industrial	5		941	6		988
Home Equity / Improvement	4		66	13		536
Consumer	0		-	2		13
Total	15	$	1,260	43	$	5,084

The loans described above decreased the ALLL by $15,000 in the three month period ending September 30, 2013 and increased the ALLL by $359,000 in the nine month period ending September 30, 2013.

	Loans Modified as a TDR for the Three Months Ended September 30, 2012 ($ in thousands)			Loans Modified as a TDR for the Nine Months Ended September 30, 2012 ($ in thousands)
Troubled Debt Restructurings	Number of Loans	Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)
Residential Owner Occupied	2	$	221	7	$	778
Residential Non Owner Occupied	1		34	2		116
CRE Owner Occupied	3		565	5		1,461
CRE Non Owner Occupied	1		217	1		217
Agriculture Land	1		127	2		439
Other CRE	0		-	1		61
Commercial / Industrial	2		34	2		34
Home Equity / Improvement	0		-	0		-
Consumer	0		-	0		-
Total	10	$	1,198	20	$	3,106

The loans described above decreased the ALLL by $17,000 in the three month period ending September 30, 2012 and decreased the ALLL by $21,000 in the nine month period ending September 30, 2012.

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The following table presents loans by class modified as TDRs for which there was a payment default within twelve months following the modification during the period ending September 30, 2013 and September 30, 2012:

	Three Months Ended September 30, 2013 ($ in thousands)				Nine Months Ended September 30, 2013 ($ in thousands)
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans		Recorded Investment (as of period end)			Number of Loans	Recorded Investment (as of period end)
Residential Owner Occupied		4	$	339		5	$	432
Residential Non Owner Occupied		1		78		1		78
CRE Owner Occupied		0		-		0		-
CRE Non Owner Occupied		0		-		1		212
Agriculture Land		0		-		0		-
Other CRE		0		-		0		-
Commercial / Industrial		2		178		2		178
Home Equity / Improvement		2		38		2		38
Consumer		0		-		0		-
Total		9	$	633		11	$	938

The TDRs that subsequently defaulted described above did not have an impact on the allowance for loan losses for the three month period ended September 30, 2013, and decreased the allowance for loan losses by $11,000 for the nine month period ended September 30, 2013.

	Three Months Ended September 30, 2012 ($ in thousands)			Nine Months Ended September 30, 2012 ($ in thousands)
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans		Recorded Investment (as of period end)	Number of Loans		Recorded Investment (as of period end)
Residential Owner Occupied	0	$	-	0	$	-
Residential Non Owner Occupied	1		24	1		24
CRE Owner Occupied	0		-	0		-
CRE Non Owner Occupied	2		351	2		351
Agriculture Land	0		-	0		-
Other CRE	0		-	0		-
Commercial / Industrial	1		771	2		1,351
Home Equity / Improvement	0		-	0		-
Consumer	0		-	0		-
Total	4	$	1,146	5	$	1,726

The TDRs that subsequently defaulted described above did not have an impact on the allowance for loan losses for the three or the nine month periods ended September 30, 2012.

The terms of certain other loans were modified during the period ending September 30, 2013 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 48 loans were modified under this definition during the three month period ended September 30, 2013 and a total of 123 loans were modified under this definition during the nine month period ended September 30, 2013.

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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-homogenous 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, 2013, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows: (In Thousands)

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Category	Pass		Special Mention		Substandard		Doubtful		Not Graded		Total
Residential Owner Occupied	$	4,135	$	21	$	2,867	$	-	$	116,765	$	123,788
Residential Non Owner Occupied		53,120		3,233		6,030		-		6,244		68,627
Total residential real estate		57,255		3,254		8,897		-		123,009		192,415
Construction		30,865		-		261		-		9,243		40,369
Multi Family		142,044		654		2,177		-		979		145,854
CRE Owner Occupied		291,586		14,988		12,808		-		1,886		321,268
CRE Non Owner Occupied		201,459		12,571		16,642		-		121		230,793
Agriculture Land		76,373		770		1,224		-		-		78,367
Other CRE		40,935		1,694		3,856		-		759		47,244
Total Commercial Real Estate		610,353		30,023		34,530		-		2,766		677,672
Commercial Working Capital		148,492		4,389		4,431		-		-		157,312
Commercial Other		215,749		6,863		7,425		-		-		230,037
Total Commercial		364,241		11,252		11,856		-		-		387,349
Consumer		-		-		19		-		16,626		16,645
Home Equity/Improvement		-		-		857		9		105,306		106,172
Total	$	1,204,758	$	45,183	$	58,597	$	9	$	257,929	$	1,566,476

As of December 31, 2012, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows: (In Thousands)

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Category	Pass		Special Mention		Substandard		Doubtful		Not Graded		Total
Residential Owner Occupied	$	4,221	$	75	$	3,617	$	234	$	120,002	$	128,149
Residential Non Owner Occupied		55,771		2,453		8,248		-		6,693		73,165
Total residential real estate		59,992		2,528		11,865		234		126,695		201,314
Construction		11,360		-		45		-		7,891		19,296
Multi Family		118,121		910		2,404		-		1,020		122,455
CRE Owner Occupied		292,765		10,440		18,740		-		2,378		324,323
CRE Non Owner Occupied		207,745		9,077		22,615		-		90		239,527
Agriculture Land		69,924		769		1,514		-		-		72,207
Other CRE		31,875		891		7,222		-		978		40,966
Total Commercial Real Estate		602,309		21,177		50,091		-		3,446		677,023
Commercial Working Capital		156,433		3,587		2,449		-		-		162,469
Commercial Other		208,783		5,204		8,413		-		-		222,400
Total Commercial		365,216		8,791		10,862		-		-		384,869
Consumer		-		-		70		-		15,869		15,939
Home Equity/Improvement		-		-		668		64		108,462		109,194
Total	$	1,156,998	$	33,406	$	76,005	$	298	$	263,383	$	1,530,090

Beginning with the first quarter of 2013 allowance analysis, management decided to return to using a twelve quarter look-back period, from using an eight quarter look-back period that has been used since December 31, 2010, for calculating the historical loss ratio. Management is not certain that the relatively low levels of charge-offs incurred in recent quarters are sustainable given the low levels of economic growth in its markets and believes the longer look-back period better captures loan portfolio risks at this time.

9. 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,
	2013		2012		2013		2012
	(in thousands)				(in thousands)
Gain from sale of mortgage loans	$	894	$	2,888	$	4,960	$	7,890
Mortgage loans servicing revenue (expense):
Mortgage loans servicing revenue		901		824		2,646		2,499
Amortization of mortgage servicing rights		(429)		(892)		(1,752)		(2,610)
Mortgage servicing rights valuation adjustments		480		(600)		1,265		(855)
		952		(668)		2,159		(966)
Net revenue from sale and servicing of mortgage loans	$	1,846	$	2,220	$	7,119	$	6,924

The unpaid principal balance of residential mortgage loans serviced for third parties was $1.4 billion at September 30, 2013 and $1.3 billion at December 31, 2012.

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Activity for capitalized mortgage servicing rights and the related valuation allowance follows for the three and nine months ended September 30, 2013 and 2012:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(in thousands)				(in thousands)
Mortgage servicing assets:
Balance at beginning of period	$	10,234	$	10,059	$	10,121	$	10,219
Loans sold, servicing retained		400		969		1,836		2,527
Amortization		(429)		(892)		(1,752)		(2,610)
Carrying value before valuation allowance at end of period		10,205		10,136		10,205		10,136
Valuation allowance:
Balance at beginning of period		(1,503)		(1,784)		(2,288)		(1,529)
Impairment recovery (charges)		480		(600)		1,265		(855)
Balance at end of period		(1,023)		(2,384)		(1,023)		(2,384)
Net carrying value of MSRs at end of period	$	9,182	$	7,752	$	9,182	$	7,752
Fair value of MSRs at end of period	$	9,868	$	7,752	$	9,868	$	7,752

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.

An accrual for estimated secondary market buy-back losses of $399,000 was established in the third quarter of 2013. These losses were accrued and expensed as of September 30, 2013 based on an estimated exposure to repurchase requests resulting from notifications received about Freddie Mac’s review process during the third quarter of 2013.

An accrual reversal of $498,000 was recorded in the third quarter of 2013 as a result of Fannie Mae completing their post-foreclosure review process that began in the first quarter of 2013. The original accrual of these estimated losses was established in the first quarter of 2013. 

Secondary market buy-back losses were $(95,000) in the third quarter of 2013 compared to $115,000 for the same period in 2012. Secondary market buy-back losses were $547,000 for the nine months ended September 30, 2013 compared to $188,000 for the same period in 2012. The accrual for estimated buy-back losses was $399,000 at September 30, 2013.

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10. Deposits

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

	September 30, 2013		December 31, 2012
Non-interest-bearing checking accounts	$	300,891	$	315,132
Interest-bearing checking and money market accounts		681,987		664,857
Savings accounts		182,271		166,945
Retail certificates of deposit less than $100,000		318,317		342,472
Retail certificates of deposit greater than $100,000		175,026		176,029
Brokered or national certificates of deposit		-		2,037
Total	$	1,658,492	$	1,667,472

11. Borrowings

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

	September 30, 2013		December 31, 2012
	(in thousands)
FHLB Advances:
Putable advances		12,000		12,000
Amortizable mortgage advances		10,761		796
Total	$	22,761	$	12,796
Junior subordinated debentures owed to unconsolidated subsidiary trusts	$	36,083	$	36,083

The putable advances can be put back to the Company at the option of the FHLB on a quarterly basis. At September 30, 2013, $12.0 million of the putable advances with a weighted average rate of 2.72% were not yet callable by the FHLB. The call dates for these advances range from October 15, 2013 to December 12, 2013 and the maturity dates range from January 14, 2015 to March 12, 2018.

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 fixed rate equal to 6.441% for the first five years and a floating interest rate based on three-month LIBOR plus 1.5%. The Coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate II was 1.75% as of September 30, 2013 and 1.89% as of December 31, 2012.

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The Company also sponsored an affiliated trust, First Defiance Statutory Trust I (Trust Affiliate I), that issued $20 million of Trust Preferred Securities in 2005. In connection with this transaction, the Company issued $20.6 million of Subordinated Debentures to Trust Affiliate I. Trust Affiliate I was formed for the purpose of issuing Trust Preferred Securities to third-party investors and investing the proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The Junior Debentures held by Trust Affiliate I are the sole assets of the trust. The Company is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability.  Distributions on the Trust Preferred Securities issued by Trust Affiliate I are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 1.38%. The Coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate I was 1.63% and 1.77% on September 30, 2013 and December 31, 2012, respectively.

The Trust Preferred Securities issued by Trust Affiliates I and II are subject to mandatory redemption, in whole or part, upon repayment of the Subordinated Debentures. The Company has entered into agreements that fully and unconditionally guarantee the Trust Preferred Securities subject to the terms of the guarantees. The Trust Preferred Securities and Subordinated Debentures issued by Trust Affiliate I mature on December 15, 2035 but may be redeemed by the issuer at par after October 28, 2010. The Trust Preferred Securities issued by Trust Affiliate II mature on June 15, 2037, but may be redeemed at the Company’s option at any time on or after June 15, 2012, or at any time upon certain events.

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.

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):

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	September 30, 2013				December 31, 2012
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	41,090	$	46,655	$	50,205	$	48,035
Unused lines of credit		19,227		262,028		21,975		228,269
Standby letters of credit		-		16,652		-		18,166
Total	$	60,317	$	325,335	$	72,180	$	294,470

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 $13.3 million and $53.6 million of loans to Freddie Mac, Fannie Mae, FHLB of Cincinnati or BB&T Mortgage at September 30, 2013 and December 31, 2012, 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 2008. The Company currently operates primarily in the states of Ohio and Michigan, which tax financial institutions based on their equity rather than their income.

14. Derivative Financial Instruments

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 as hedge relationships. First Federal had approximately $9.1 million and $34.0 million of interest rate lock commitments at September 30, 2013 and December 31, 2012, respectively. There were $13.3 million and $53.6 million of forward commitments for the future delivery of residential mortgage loans at September 30, 2013 and December 31, 2012, respectively. 

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

September 30, 2013

December 31, 2012

Assets

(Liabilities)

Derivative

Assets

(Liabilities)

Derivative

Carrying

Carrying

Net Carrying

Carrying

Carrying

Net Carrying

Value

Value

Value

Value

Value

Value

(In Thousands)

Derivatives not designated as hedging instruments

Mortgage Banking Derivatives

$

548

$

(247)

$

301

$

950

$

(94)

$

856

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

47

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(In Thousands)				(In Thousands)
Derivatives not designated as hedging instruments
Mortgage Banking Derivatives – Gain (Loss)	$	(315)	$	28	$	(555)	$	418

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

15. Other Comprehensive Income (Loss)

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

	Before Tax Amount		Tax Expense (Benefit)		Net of Tax Amount
	(In Thousands)
Three months ended September 30, 2013:
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period	$	120	$	42	$	78
Reclassification adjustment for net gains included in net income		-		-		-
Total other comprehensive income (loss)	$	120	$	42	$	78

	Before Tax Amount		Tax Expense (Benefit)		Net of Tax Amount
	(In Thousands)
Nine months ended September 30, 2013:
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period	$	(6,044)	$	(2,120)	$	(3,924)
Reclassification adjustment for net gains included in net income		(97)		(29)		(68)
Total other comprehensive income (loss)	$	(6,141)	$	(2,149)	$	(3,992)

	Before Tax Amount		Tax Expense (Benefit)		Net of Tax Amount
	(In Thousands)
Three months ended September 30, 2012:
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period	$	1,953	$	678	$	1,275
Reclassification adjustment for net gains included in net income		(103)		(31)		(72)
Total other comprehensive income (loss)	$	1,850	$	647	$	1,203

	Before Tax Amount		Tax Expense (Benefit)		Net of Tax Amount
	(In Thousands)
Nine months ended September 30, 2012:
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period	$	3,397	$	1,161	$	2,236
Reclassification adjustment for net gains included in net income		(528)		(158)		(370)
Total other comprehensive income (loss)	$	2,869	$	1,003	$	1,866

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

					Accumulated
	Securities		Post-		Other
	Available		retirement		Comprehensive
	For Sale		Benefit		Income
	(In Thousands)
Balance January 1, 2013	$	4,851	$	(577)	$	4,274
Other comprehensive loss before      reclassifications		(3,924)		-		(3,924)
Amounts reclassified from accumulated other      comprehensive loss		(68)		-		(68)
Net other comprehensive loss during period		(3,992)		-		(3,992)
Balance September 30, 2013	$	859	$	(577)	$	282
Balance January 1, 2012	$	4,704	$	(707)	$	3,997
Other comprehensive loss before      reclassifications		2,236		-		2,236
Amounts reclassified from accumulated other      comprehensive loss		(370)		-		(370)
Net other comprehensive loss during period		1,866		-		1,866
Balance September 30, 2012	$	6,570	$	(707)	$	5,863

49

 

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

Forward-Looking Information

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

General

First Defiance is a unitary thrift holding company that conducts business through its Subsidiaries, First Federal, First Insurance and First Defiance Risk Management. First Federal is a federally chartered stock savings bank that provides financial services to communities through 32 full service banking centers in communities based in northwest Ohio, northeast Indiana, and southeastern Michigan. 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 insurance products, including property and casualty, group health and life, and individual health and life. Insurance products are sold through First Insurance’s offices in Defiance, Archbold, Bryan, Bowling Green, Maumee and Oregon, Ohio areas. First Defiance Risk Management is a wholly-owned insurance company subsidiary of the Company that insures the Company and the Subsidiaries against certain risks unique to the operations of the Company and for which insurance may not be currently available or economically feasible in today’s insurance marketplace. First Defiance Risk Management pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. First Defiance Risk Management was incorporated on December 20, 2012.

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 Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), includes provisions affecting large and small financial institutions alike, including several provisions that profoundly affect the regulation of community banks, thrifts, and bank and thrift holding companies, such as First Defiance. Also, the Dodd-Frank Act abolished the Office of Thrift Supervision effective July 21, 2011 and transferred its functions to the Office of the Comptroller of the Currency (“OCC”), FDIC, and Federal Reserve. The Dodd-Frank Act relaxed rules regarding interstate branching, allows financial institutions to pay interest on business checking accounts, changed the scope of federal deposit insurance coverage, imposed new capital requirements on bank and thrift holding companies, and imposed limits on debit card interchange fees charged by issuer banks (commonly known as the Durbin Amendment).

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The Dodd-Frank Act also established the Consumer Financial Protection Bureau (“CFPB”) as an independent bureau within the Federal Reserve, which has broad authority to regulate consumer financial products and services and entities offering such products and services, including banks. Many of the consumer financial protection functions formerly assigned to the federal banking and other designated agencies are now performed by the CFPB. The CFPB has broad rulemaking authority over providers of credit, savings, and payment services and products. In this regard, the CFPB has the authority to implement regulations under federal consumer protection laws and enforce those laws against, and examine, financial institutions. State officials also will be authorized to enforce consumer protection rules issued by the CFPB. This bureau also is authorized to collect fines and provide consumer restitution in the event of violations, engage in consumer financial education, track consumer complaints, request data, and promote the availability of financial services to underserved consumers and communities. The CFPB also is directed to prevent “unfair, deceptive or abusive practices” and ensure that all consumers have access to markets for consumer financial products and services and that such markets are fair, transparent, and competitive. Although the CFPB has begun to implement its regulatory, supervisory, examination, and enforcement authority, there continues to be significant uncertainty as to how the agency’s strategies and priorities will impact First Defiance.

The CFPB has indicated that mortgage lending is an area of supervisory focus and that it will concentrate its examination and rulemaking efforts on the variety of mortgage-related topics required under the Dodd-Frank Act, including steering consumers to less-favorable products, discrimination, abusive or unfair lending practices, predatory lending, origination disclosures, minimum mortgage underwriting standards, mortgage loan originator compensation, and servicing practices. The CFPB recently published several final regulations impacting the mortgage industry, including rules related to ability-to-pay, mortgage servicing, and mortgage loan originator compensation. The ability-to-repay rule makes lenders liable if they fail to assess ability to repay under a prescribed test, but also creates a safe harbor for so called “qualified mortgages.” The “qualified mortgages” standards include a tiered cap structure that places limits on the total amount of certain fees that can be charged on a loan, a 43% cap on debt-to-income (i.e., total monthly payments on debt to monthly gross income), exclusion of interest-only products, and other requirements. The 43% debt-to-income cap does not apply for the first seven years the rule is in effect for loans that are eligible for sale to Fannie Mae or Freddie Mac or eligible for government guarantee through the FHA or the Veterans Administration. Failure to comply with the ability-to-repay rule may result in possible CFPB enforcement action and special statutory damages plus actual, class action, and attorney fees damages, all of which a borrower may claim in defense of a foreclosure action at any time. First Defiance’s management team is currently assessing the impact of these requirements on our mortgage lending business.

In addition, the Federal Reserve and other federal bank regulatory agencies have issued a proposed rule under the Dodd-Frank Act that would exempt “qualified residential mortgages” from the securitization risk retention requirements of the Dodd-Frank Act. The final definition of what constitutes a “qualified residential mortgage” may impact the pricing and depth of the secondary market into which the Company may sell mortgages it originates. At this time, First Defiance cannot predict the content of the final CFPB and other federal agency regulations or the impact they might have on First Defiance’s financial results. The CFPB’s authority over mortgage lending, and its authority to change regulations adopted in the past by other regulators, or to rescind or ignore past regulatory guidance, could increase First Defiance’s compliance costs and litigation exposure.

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

New Capital Rules -  On July 2, 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-based capital rules applicable to First Defiance and First Federal. The FDIC and the OCC have subsequently approved these rules. The final rules were adopted following the issuance of proposed rules by the Federal Reserve in June 2012, and implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.

The rules include new risk-based capital and leverage ratios, which will be phased in from 2015 to 2019, and will refine the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to First Defiance and First Federal under the final rules are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The final rules also establish a “capital conservation buffer” above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital. The capital conservation buffer will be phased-in over four years beginning on January 1, 2016, as follows: the maximum buffer will be 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. This will result in the following minimum ratios beginning in 2019: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. Under the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

The final rules implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which will be phased out over time. However, the final rules provide that small depository institution holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes First Defiance) will be able to permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature.

52

The final rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including First Federal, if their capital levels begin to show signs of weakness. These revisions take effect January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions will be required to meet the following increased capital level requirements in order to qualify as “well capitalized”: (i) a new common equity Tier 1 capital ratio of 6.5%; (ii) a Tier 1 capital ratio of 8% (increased from 6%); (iii) a total capital ratio of 10% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 5% (increased from 4%).

The final rules set forth certain changes for the calculation of risk-weighted assets, which First Federal will be required to utilize beginning January 1, 2015. The standardized approach final rule utilizes an increased number of credit risk exposure categories and risk weights, and also addresses: (i) an alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act; (ii) revisions to recognition of credit risk mitigation; (iii) rules for risk weighting of equity exposures and past due loans; (iv) revised capital treatment for derivatives and repo-style transactions; and (v) disclosure requirements for top-tier banking organizations with $50 billion or more in total assets that are not subject to the “advanced approaches rules” that apply to banks with greater than $250 billion in consolidated assets.

Based on our current capital composition and levels, management believes it will be in compliance with the requirements as set forth in the final rules.

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 “Bank with the people you know and trust” 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 segments 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. In 2013, management intends to continue to focus on asset quality, core deposit growth, expense control as well as other opportunities to further service our customers.

53

Commercial and Commercial Real Estate Lending - Commercial and commercial real estate lending have been an ongoing focus and a major component of First Federal’s success. First Federal provides primarily commercial real estate and commercial business loans with an emphasis on owner occupied commercial real estate and commercial business lending with a focus on the deposit balances that accompany these relationships. First Federal’s client base tends to be small to middle market customers with annual gross revenues generally between $1 million and $50 million. First Federal’s focus is also on securing multiple guarantors in addition to collateral where possible. These customers require First Federal to have a high degree of knowledge and understanding of their business in order to provide them with solutions to their financial needs. First Federal’s “Customer First” philosophy and culture complements the needs 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. 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, NOW, money market, certificates of deposit, 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, installment loans and education loans. First Federal also offers online banking services, which include online bill pay along with debit cards.

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

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

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

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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 consider expansion opportunities, including bank and insurance acquisitions and de novo branching, with a particular focus on its primary geographic market area.

Investments - First Defiance invests in U.S. Treasury and federal government agency obligations, obligations of municipal and other political subdivisions, mortgage-backed securities that are issued by federal agencies, corporate bonds, and collateralized mortgage obligations ("CMOs") and real estate mortgage investment conduits. 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 $407,000 at September 30, 2013. 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 $184.1 million at September 30, 2013. The available-for-sale portfolio consists of obligations of U.S. Government corporations and agencies ($4.9 million), certain municipal obligations ($78.4 million), CMOs ($52.5 million), corporate bonds ($9.0 million), mortgage backed securities ($36.9 million), and trust preferred and preferred stock ($2.4 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.

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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 selling costs. In most instances, if the appraisal is more than twelve to fifteen months old, First Federal 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 more than 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.

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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, 2013, First Defiance's total assets, deposits and stockholders' equity amounted to $2.06 billion, $1.66 billion and $269.4 million, respectively, compared to $2.05 billion, $1.67 billion and $258.1 million, respectively, at December 31, 2012.

Net loans receivable (excluding loans held for sale) increased $36.8 million to $1.54 billion. The variance in loans receivable between September 30, 2013 and December 31, 2012 includes decreases in home equity and improvement loans (down $3.0 million) and one to four family residential real estate loans (down $8.8 million), while the remaining categories increased, including commercial real estate loans (up $23.7 million), commercial loans (up $2.3 million), construction loans (up $21.8 million), and consumer loans (up $723,000).

The investment securities portfolio decreased $10.1 million to $184.5 million at September 30, 2013 from $194.6 million at December 31, 2012. The decrease is the result of the change in market values in all the security categories, $17.7 million of securities maturing or being called in the period, principal pay downs of $12.6 million in CMOs and mortgage-backed securities, and $4.0 million from three securities being sold; which decreases were offset by $30.7 million of securities being purchased during the first nine months of 2013. There was an unrealized gain in the investment portfolio of $1.3 million at September 30, 2013 compared to an unrealized gain of $7.5 million at December 31, 2012.

Deposits decreased from $1.67 billion at December 31, 2012 to $1.66 billion as of September 30, 2013. Non-interest bearing demand deposits decreased $14.2 million to $300.9 million, retail time deposits decreased $25.2 million to $493.3 million, broker/national certificates of deposit decreased $2.0 million to zero. These decreases were offset by an increase in savings accounts of $15.3 million to $182.3 million and interest-bearing demand deposits and money market accounts of $17.1 million to $682.0 million.   

Stockholders’ equity increased from $258.1 million at December 31, 2012 to $269.4 million at September 30, 2013. The increase in stockholders’ equity was the result of recording net income of $17.1 million, partially offset by $2.9 million of common stock dividends being paid in the first nine months of 2013 and a $4.0 million decline in accumulated other comprehensive income.

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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,
	2013							2012
	Average				Yield/			Average				Yield/
	Balance		Interest (1)		Rate (2)			Balance		Interest (1)		Rate (2)
Interest-earning assets:
Loans receivable	$	1,548,718	$	17,214		4.41	%	$	1,481,995	$	18,024		4.84	%
Securities		184,413		1,779		3.83			274,327		2,245		3.37
Interest bearing deposits		64,142		44		0.27			72,738		43		0.24
FHLB stock		19,353		205		4.20			20,655		213		4.10
Total interest-earning assets		1,816,626		19,242		4.20			1,849,715		20,525		4.44
Non-interest-earning assets		209,651							197,424
Total assets	$	2,026,277						$	2,047,139
Interest-bearing liabilities:
Deposits	$	1,330,467	$	1,356		0.40	%	$	1,339,333	$	1,909		0.57	%
FHLB advances		21,003		116		2.19			81,812		759		3.69
Subordinated debentures		36,130		150		1.65			36,141		172		1.89
Notes payable		52,005		58		0.44			50,610		83		0.65
Total interest-bearing liabilities		1,439,605		1,680		0.46			1,507,896		2,923		0.77
Non-interest bearing deposits		302,245		-					266,416		-
Total including non-interest bearing     demand deposits		1,741,850		1,680		0.38			1,774,312		2,923		0.66
Other non-interest-bearing liabilities		18,939							21,235
Total liabilities		1,760,789							1,795,547
Stockholders' equity		265,488							251,592
Total liabilities and stock-     holders' equity	$	2,026,277						$	2,047,139
Net interest income; interest     rate spread			$	17,562		3.74	%			$	17,602		3.67	%
Net interest margin (3)						3.84	%						3.80	%
Average interest-earning assets     to average interest-bearing liabilities						126	%						123	%

(1)	Interest on certain tax-exempt loans and securities is not taxable for Federal income tax purposes. In order to compare the tax-exempt yields on these assets to taxable yields, the interest earned on these assets is adjusted to a pre-tax equivalent amount based on the marginal corporate federal income tax rate of 35%.
(2)	Annualized.
(3)	Net interest margin is net interest income divided by average interest-earning assets.

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	Nine Months Ended September 30,
	2013							2012
	Average				Yield/			Average				Yield/
	Balance		Interest (1)		Rate (2)			Balance		Interest (1)		Rate (2)
Interest-earning assets:
Loans receivable	$	1,523,216	$	51,092		4.48	%	$	1,467,038	$	54,925		5.00	%
Securities		192,309		5,373		3.74			261,628		6,775		3.58
Interest bearing deposits		85,483		174		0.27			128,711		249		0.26
FHLB stock		19,557		631		4.31			20,655		656		4.24
Total interest-earning assets		1,820,565		57,270		4.21			1,878,032		62,605		4.45
Non-interest-earning assets		207,732							198,740
Total assets	$	2,028,297						$	2,076,772
Interest-bearing liabilities:
Deposits	$	1,343,564	$	4,514		0.45	%	$	1,357,499	$	6,394		0.63	%
FHLB advances		16,078		298		2.48			81,823		2,260		3.69
Subordinated debentures		36,134		452		1.67			36,179		813		3.00
Notes payable		49,376		178		0.48			52,312		284		0.73
Total interest-bearing liabilities		1,445,152		5,442		0.50			1,527,813		9,751		0.85
Non-interest bearing deposits		299,190		-					257,540		-
Total including non-interest bearing     demand deposits		1,744,342		5,442		0.42			1,785,353		9,751		0.73
Other non-interest-bearing liabilities		20,820							20,595
Total liabilities		1,765,162							1,805,948
Stockholders' equity		263,135							270,824
Total liabilities and stock-     holders' equity	$	2,028,297						$	2,076,772
Net interest income; interest rate spread			$	51,828		3.70	%			$	52,854		3.60	%
Net interest margin (3)						3.82	%						3.78	%
Average interest-earning assets to average     interest-bearing liabilities						126	%						123	%

(1)	Interest on certain tax-exempt loans and securities is not taxable for Federal income tax purposes. In order to compare the tax-exempt yields on these assets to taxable yields, the interest earned on these assets is adjusted to a pre-tax equivalent amount based on the marginal corporate federal income tax rate of 35%.
(2)	Annualized.
(3)	Net interest margin is net interest income divided by average interest-earning assets.

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Results of Operations

Three Months Ended September 30, 2013 and 2012

On a consolidated basis, First Defiance’s net income for the quarter ended September 30, 2013 was $5.5 million compared to net income of $5.4 million for the comparable period in 2012. On a per share basis, basic and diluted earnings per common share for each of the three months ended September 30, 2013 and 2012 were $0.56 and $0.54, respectively.

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 $17.2 million for the quarter ended September 30, 2013, flat with the same period in 2012. The tax-equivalent net interest margin was 3.84% for the quarter ended September 30, 2013, up from 3.80% for the same period in 2012. The increased margin between the 2012 and 2013 third quarters was made possible by a balance sheet restructure completed in the fourth quarter of 2012, where the Company sold securities and paid off higher rate FHLB advances. This helped to offset the decrease in interest-earning asset yields, which decreased by 24 basis points to 4.20% in the third quarter of 2013 from 4.44% for the same period in 2012. The decrease in yields was partially offset by the cost of interest-bearing liabilities between the two periods decreasing 31 basis points to 0.46% in the third quarter of 2013 from 0.77% in the same period in 2012. Also, operating at a higher level of liquidity along with lower loan yields has impacted the net interest margin negatively in the third quarter of 2013. Management continues to analyze and look for additional opportunities to maintain its margin, as well as other alternatives to minimize the impact of the sustained low rate environment.

Total interest income decreased by $1.3 million, or 6.3%, to $18.8 million for the quarter ended September 30, 2013 from $20.1 million for the same period in 2012. The decrease in interest income was due to a decline in asset yields, mainly as a result of a drop in yields on loans receivable which declined 43 basis points to 4.41% at September 30, 2013. Interest income from loans decreased to $17.2 million for the quarter ended September 30, 2013 compared to $18.0 million for the same period in 2012, which represents a decline of 4.5%.   

Interest expense decreased by $1.2 million in the third quarter of 2013 compared to the same period in 2012, to $1.7 million from $2.9 million. This decrease was due to a 31 basis point decline in the average cost of interest-bearing liabilities in the third quarter of 2013, mainly due to the early payoff of FHLB advances as part of the balance sheet restructure completed in the fourth quarter of 2012 and the continued low rate environment resulting in decreases in rates on all the interest-bearing liability categories. Interest expense related to interest-bearing deposits was $1.4 million in the third quarter of 2013 compared to $1.9 million for the same period in 2012. Interest expense recognized by the Company related to subordinated debentures was $150,000 in the third quarter of 2013 compared to $172,000 for the same period in 2012. Expenses on FHLB advances and securities sold under repurchase agreements were $116,000 and $58,000 respectively in the third quarter of 2013 compared to $759,000 and $83,000 respectively for the same period in 2012.

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Allowance for Loan Losses

The allowance for loan losses represents management’s assessment of the estimated probable credit losses in the loan portfolio at each balance sheet date. Management analyzes the adequacy of the allowance for loan losses regularly through reviews of the loan portfolio. Consideration is given to economic conditions, changes in interest rates and the effect of such changes on collateral values and borrower’s ability to pay, changes in the composition of the loan portfolio and trends in past due and non-performing loan balances. The allowance for loan losses is a material estimate that is susceptible to significant fluctuation and is established through a provision for loan losses based on management’s evaluation of the inherent risk in the loan portfolio. In addition to extensive in-house loan monitoring procedures, the Company utilizes an outside party to conduct an independent loan review of all commercial loan and commercial real estate loan relationships that exceed $1.0 million of aggregate exposure over a twelve month period. Management utilizes the results of this outside loan review to assess the effectiveness of its internal loan grading system as well as to assist in the assessment of the overall adequacy of the allowance for loan losses associated with these types of loans.

The provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level which, in management’s best estimate, is necessary to absorb probable credit losses within the existing loan portfolio in the normal course of business. The allowance for loan loss is made up of two basic components. The first component is the specific allowance in which the Company sets aside reserves based on either the estimated shortfall of collateral on collateral dependent loans or the analysis of individual credits that are cash flow dependent, yet there is a discount between the present value of the future cash flows and the carrying value. This was $2.4 million at September 30, 2013. The second component is the general reserve. The general reserve is used to record loan loss reserves for groups of homogenous loans in which the Company estimates the losses incurred in the portfolios based on quantitative and qualitative factors. Due to the uncertainty of risks in the loan portfolio, the Company’s judgment on the amount of the allowance necessary to absorb loans losses is approximate.

The Company charges off any shortfall on collateral dependent loans. First Federal analyzes all loans on its classified and special mention lists at least quarterly and makes judgments about the risk of loss based on the cash flow of the borrower, the value of any collateral and the financial strength of any guarantor in determining the amount of impairment of individual loans and the charge off to be taken.

For purposes of the general reserve analysis, the loan portfolio is stratified into nine different loan pools based on loan type to allocate historic loss experience. The loss experience factor applied to the non-impaired loan portfolio was based upon historical losses of the most recent rolling twelve quarters ending September 30, 2013. Beginning with the first quarter of 2013 allowance analysis, management decided to return to using a twelve quarter look-back period, from using an eight quarter look-back period, for calculating the historical loss ratio. Management is not certain that the relatively low levels of charge-offs incurred in recent quarters are sustainable given the low levels of economic growth in its markets and believes the longer look-back period better captures loan portfolio risks at this time.

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The stratification of the loan portfolio resulted in a quantitative general allowance of $13.0 million at September 30, 2013 compared to $14.4 million at December 31, 2012. The decrease in the quantitative allowance was due to a decrease in the historical loss factors relating to commercial, commercial real estate, residential and consumer loans.

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

ECONOMIC

1)	Changes in international, national and local economic business conditions and developments, including the condition of various market segments.
2)	Changes in the value of underlying collateral for collateral dependent loans.

ENVIRONMENT

3)	Changes in the nature and volume in the loan portfolio.
4)	The existence and effect of any concentrations of credit and changes in the level of such concentrations.
5)	Changes in lending policies and procedures, including underwriting standards   and collection, charge-off and recovery practices.
6)	Changes in the quality and breadth of the loan review process.
7)	Changes in the experience, ability and depth of lending management and staff.

RISK

8)	Changes in the trends of the volume and severity of delinquent and classified loans, and changes in the volume of non-accrual loans, trouble debt restructuring, and other loan modifications.
9)	Changes in the political and regulatory environment.

The qualitative analysis at September 30, 2013 indicated a general reserve of $10.6 million compared with $10.8 million at December 31, 2012. Management reviewed the overall economic, environmental and risk factors and determined that it was appropriate to adjust several of these. Economic factors were decreased slightly for commercial and commercial real estate portfolios as a result of a slight improvement in the ratio of classified loans to Tier 1 plus allowance. The ratio has been below the long term target of 30% for the last two quarters reflecting sustainable improvement. The factor was also impacted by continued stability in current market values. This reduction was only applied to the pass rated credits. The risk factor was also adjusted due to the uncertainty surrounding the federal government fiscal policy matters. While management does not expect a material impact, uncertainty creates stress on the portfolio. This particularly relates to commercial real estate and commercial loans which resulted in a slight increase for this factor. For residential loans, this factor was decreased slightly. This category has seen continued stability in underwriting as well as a moderated focus on originations of single family loans for the portfolio. The risk factor changes were also only applied to the pass rated credits. First Defiance’s general reserve percentages for main loan segments not otherwise classified ranged from 0.20% for construction loans to 1.73% for nonresidential real estate loans.

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As a result of the quantitative and qualitative analyses, along with the change in specific reserves, the Company’s provision for loan losses for the third quarter of 2013 was $476,000, compared to $705,000 for the same period in 2012. The allowance for loan losses was $26.0 million and $26.7 million and represented 1.66% and 1.75% of loans, net of undisbursed loan funds and deferred fees and costs, as of September 30, 2013 and December 31, 2012, respectively. The provision of $476,000 was more than offset by charge offs of $1.1 million and recoveries of $367,000, resulting in a decrease to the overall allowance for loan loss of $306,000 in the third quarter. In management’s opinion, the overall allowance for loan losses of $26.0 million as of September 30, 2013 is adequate.

Management also assesses the value of real estate owned as of the end of each accounting period and recognizes write-downs to the value of that real estate in the income statement if conditions dictate. In the three month period ended September 30, 2013, First Defiance had write-downs that totaled $73,000 compared to write-downs of $36,000 for the same period in 2012. Management believes that the values recorded at September 30, 2013 for real estate owned and repossessed assets represent the realizable value of such assets.

Total classified loans decreased to $59.7 million at September 30, 2013, compared to $78.1 million at December 31, 2012. Included in classified loans is $9,000 of loans classified as doubtful at September 30, 2013, compared to $298,000 at December 31, 2012.

First Federal’s ratio of allowance for loan losses to non-performing loans was 85.1% at September 30, 2013 compared with 82.0% at December 31, 2012. Management monitors collateral values of all loans included on the watch list that are collateral dependent and believes that allowances for those loans at September 30, 2013 were appropriate. The Company experienced a slight increase in non-accrual loans in the third quarter of 2013. Of the total non-accrual loans, $20.8 million or 68.3%, are less than 90 days past due.

Non-performing assets include loans that are more than 90 days past due, non-accrual loans, real estate owned and other assets held for sale. Non-performing assets at September 30, 2013 and December 31, 2012 by category were as follows:

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Table 1 – Non-Performing Asset

	September 30,			December 31,
	2013			2012
	(In thousands)
Non-performing loans:
Single-family residential	$	3,159		$	3,602
Construction		-			-
Non-residential and multi-family residential real estate		18,426			23,090
Commercial		8,749			5,661
Consumer finance		-			-
Home equity and improvement		178			217
Total non-performing loans		30,512			32,570
Real estate owned and repossessed assets		5,518			3,805
Total non-performing assets	$	36,030		$	36,375
Allowance for loan losses as a percentage of total loans*		1.66	%		1.75	%
Allowance for loan losses as a percentage of non-performing assets		72.06	%		73.43	%
Allowance for loan losses as a percentage of non-performing loans		85.09	%		82.01	%
Total non-performing assets as a percentage of total assets		1.75	%		1.78	%
Total non-performing loans as a percentage of total loans*		1.95	%		2.14	%

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

The decrease in non-performing loans between December 31, 2012 and September 30, 2013 is primarily in commercial real estate loans. The balance of this type of non-performing loan was $4.7 million lower at September 30, 2013 compared to December 31, 2012.

Non-performing loans in the commercial real estate category represented 2.24% of the total loans in those categories at September 30, 2013 compared to 2.90% for the same category at December 31, 2012. Management believes that the current allowance for loan losses is appropriate and that the provision for loan losses recorded in the third quarter of 2013 is consistent with both charge-off experience and the risk inherent in the overall credits in the portfolio.

Non-performing assets, which include non-performing loans (non-accrual) and real estate owned, decreased to $36.0 million at September 30, 2013 from $36.4 million at December 31, 2012.

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.

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The following table details net charge-offs and nonaccrual loans by loan type. For the nine months ended and as of September 30, 2013, commercial real estate, which represented 51.93% of total loans, accounted for 41.13% of net charge-offs and 60.39% of nonaccrual loans, and commercial loans, which represented 24.42% of total loans, accounted for 17.13% of net charge-offs and 28.67% of nonaccrual loans. For the nine months ended and as of September 30, 2012, commercial real estate, which represented 51.87% of total loans, accounted for 65.76% of net charge-offs and 66.11% of nonaccrual loans, and commercial loans, which represented 23.93% of total loans, accounted for 21.06% of net charge-offs and 17.64% of nonaccrual loans.

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

	For the Nine Months Ended September 30, 2013					As of September 30, 2013
	Net		% of Total Net			Nonaccrual		% of Total Non-
	Charge-offs		Charge-offs			Loans		Accrual Loans
	(in thousands)					(in thousands)
Residential	$	313		14.93	%	$	3,159		10.35	%
Construction		-		0.00	%		-		0.00	%
Commercial real estate		862		41.13	%		18,426		60.39	%
Commercial		359		17.13	%		8,749		28.68	%
Consumer		20		0.95	%		-		0.00	%
Home equity and improvement		542		25.86	%		178		0.58	%
Total	$	2,096		100.00	%	$	30,512		100.00	%

	For the Nine Months Ended September 30, 2012					As of September 30, 2012
	Net		% of Total Net			Nonaccrual		% of Total Non-
	Charge-offs		Charge-offs			Loans		Accrual Loans
	(in thousands)					(in thousands)
Residential	$	1,389		9.11	%	$	5,784		15.30	%
Construction		-		0.00	%		-		0.00	%
Commercial real estate		10,029		65.76	%		24,991		66.11	%
Commercial		3,212		21.06	%		6,670		17.64	%
Consumer		29		0.19	%		15		0.04	%
Home equity and improvement		591		3.88	%		343		0.91	%
Total	$	15,250		100.00	%	$	37,803		100.00	%

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Table 3 – Allowance for Loan Loss Activity 

	For the Quarter Ended
	3rd 2013		2nd 2013		1st 2013		4th 2012		3rd 2012
	(Dollars in Thousands)
Allowance at beginning of period	$	26,270	$	26,459	$	26,711	$	26,310	$	26,409
Provision for credit losses		476		448		425		2,619		705
Charge-offs:
Residential		78		184		206		976		217
Commercial real estate		829		283		266		595		780
Commercial		39		316		205		540		355
Consumer finance		33		8		46		59		19
Home equity and improvement		170		170		272		497		203
Total charge-offs		1,149		961		995		2,667		1,574
Recoveries		367		324		318		449		770
Net charge-offs		782		637		677		2,218		804
Ending allowance	$	25,964	$	26,270	$	26,459	$	26,711	$	26,310

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, 2013				June 30, 2013				March 31, 2013				December 31, 2012				September 30, 2012
			Percent of				Percent of				Percent of				Percent of				Percent of
			total loans				total loans				total loans				total loans				total loans
	Amount		by category		Amount		by category		Amount		by category		Amount		by category		Amount		by category
Residential	$	2,798	12.14	%	$	3,197	12.47	%	$	3,433	13.00	%	$	3,506	13.00	%	$	2,996	13.75	%
Construction		119	3.77	%		83	2.63	%		67	2.20	%		75	2.45	%		63	2.06	%
Commercial real estate		15,616	51.93	%		15,565	51.98	%		15,777	52.74	%		14,899	51.63	%		16,260	51.87	%
Commercial		5,546	24.42	%		5,474	25.10	%		5,304	24.04	%		6,325	24.85	%		5,103	23.92	%
Consumer		162	1.05	%		165	1.07	%		155	1.02	%		147	1.03	%		147	1.10	%
Home equity and improvement		1,723	6.69	%		1,786	6.75	%		1,723	7.00	%		1,759	7.04	%		1,741	7.30	%
	$	25,964	100.00	%	$	26,270	100.00	%	$	26,459	100.00	%	$	26,711	100.00	%	$	26,310	100.00	%

Key Asset Quality Ratio Trends

Table 5 – Key Asset Quality Ratio Trends

	3rd Qtr 2013			2nd Qtr 2013			1st Qtr 2013			4th Qtr 2012			3rd Qtr 2012
Allowance for loan losses / loans*		1.66	%		1.68	%		1.76	%		1.75	%		1.74	%
Allowance for loan losses to net charge-offs		3320.20	%		4124.02	%		3908.27	%		1204.83	%		3272.39	%
Allowance for loan losses / non-performing assets		72.06	%		74.64	%		66.82	%		73.43	%		64.73	%
Allowance for loan losses / non-performing loans		85.09	%		91.69	%		74.99	%		82.01	%		69.60	%
Non-performing assets / loans plus REO*		2.30	%		2.24	%		2.62	%		2.38	%		2.68	%
Non-performing assets / total assets		1.75	%		1.70	%		1.94	%		1.78	%		1.98	%
Net charge-offs / average loans (annualized)		0.20	%		0.17	%		0.18	%		0.59	%		0.22	%

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

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Non-Interest Income

Total non-interest income decreased $491,000 in the third quarter of 2013 to $7.3 million from $7.8 million for the same period in 2012.

Service Fees. Service fees and other charges decreased by $185,000, or 6.6%, in the third quarter of 2013 compared to the same period in 2012.

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, 2013 and 2012 related to the overdraft privilege product, net of adjustments to the allowance for uncollectible overdrafts, were $919,000 and $1.1 million, respectively. Accounts charged off are included in noninterest expense. The allowance for uncollectible overdrafts was $12,000 at September 30, 2013, $4,000 at December 31, 2012 and $11,000 at September 30, 2012.

Mortgage Banking Activity. Total revenue from the sale and servicing of mortgage loans decreased $374,000 to $1.8 million for the third quarter of 2013 compared to $2.2 million for the same period of 2012. The uptick in mortgage rates has slowed mortgage originations which are down when compared to the same period of 2012. Gains realized from the sale of mortgage loans decreased in the third quarter of 2013 to $894,000 from $2.9 million in the third quarter of 2012. The amortization of mortgage servicing rights expense decreased $463,000 to $429,000 in the third quarter of 2013 compared to $892,000 in the same period in 2012. The Company recorded a positive valuation adjustment of $480,000 on mortgage servicing rights in the third quarter of 2013 compared to a negative valuation adjustment of $600,000 in the third quarter of 2012. The positive valuation adjustment in the third quarter of 2013 was driven by an increase in the fair values of certain sectors of the Company’s portfolio of mortgage servicing rights. The increase in fair values was driven by a slight increase in market rates in the third quarter of 2013 which also contributed to lower amortization of mortgage servicing rights in the third quarter of 2013.

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Insurance and Investment Sales Commissions. Income from the sale of insurance and investment products increased $273,000 in the third quarter of 2013 to $2.2 million from $2.0 million in the same period of 2012.

Impairment of Securities. First Defiance did not have any OTTI charges in the third quarter of 2013 or 2012 reflecting a more stable environment relating to its Trust Preferred CDO investments.

Non-Interest Expense

Non-interest expense decreased to $16.0 million for the third quarter of 2013 compared to $16.5 million for the same period in 2012.

Compensation and Benefits. Compensation and benefits increased to $8.7 million for the quarter ended September 30, 2013 from $8.2 million for the same period in 2012. The increase is mainly attributable to the Company granting pay increases year over year and an increase in medical insurance costs in the third quarter of 2013.

FDIC Insurance Premiums. FDIC expense decreased to $326,000 for the quarter ended September 30, 2013 from $623,000 for the same period in 2012 due to the improvement in the Company’s risk category late in the first quarter of 2013.

Other Non-Interest Expenses. Other non-interest expenses decreased by $169,000 to $3.1 million for the quarter ended September 30, 2013 from $3.2 million for the same period in 2012. Categories within other non-interest expenses that had the most significant changes was a decrease in secondary market buy-back losses of $210,000 somewhat offset by an increase in credit, collection and REO costs of $128,000.

The efficiency ratio, considering tax equivalent interest income and excluding securities gains and losses, for the third quarter of 2013 was 64.56% compared to 65.07% for the same period in 2012.

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 30.86% for the quarter ended September 30, 2013 compared to 30.33% for the same period in 2012. The tax rate is lower than the statutory 35% tax rate for the Company mainly because of investments in tax-exempt securities. The earnings on tax-exempt securities are not subject to federal income tax.

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Nine Months Ended September 30, 2013 and 2012

On a consolidated basis, First Defiance’s net income for the nine months ended September 30, 2013 was $17.1 million compared to income of $13.5 million for the comparable period in 2012. Net income applicable to common shares was $17.1 million for the nine months ended September 30, 2013 compared to $12.9 million for the comparable period in 2012. On a per share basis, basic and diluted earnings per common share for the nine months ended September 30, 2013 were $1.76 and $1.69, respectively, compared to basic and diluted earnings per common share of $1.33 and $1.29, respectively, for the comparable period in 2012.

Net Interest Income

Net interest income was $50.6 million for the nine months ended September 30, 2013 compared to $51.6 million for the same period in 2012. For the nine month period ended September 30, 2013, total interest income was $56.0 million, a $5.3 million decrease from the same period in 2012. At the quarter ended September 30, 2013, average earning assets decreased by $57.5 million compared to September 30, 2012 with the average yield declining 24 basis points as a result of a lower rate environment.

Interest expense decreased by $4.3 million to $5.4 million for the nine months ended September 30, 2013 compared to $9.8 million for the same period in 2012. The decline in the average cost of interest-bearing liabilities for the nine months ending September 30, 2013, to 0.50%, a 35 basis point decrease from the 0.85% average cost in the first nine months of 2012 is the result of the continued low rate environment, which has given management opportunities to re-price on the liability side.

Provision for Loan Losses

The provision for loan losses was $1.3 million for the nine months ended September 30, 2013, compared to $8.3 million during the nine months ended September 30, 2012. The large decline year over year was primarily the result of an improving economy and stability in the loan portfolio. Appraisal values are starting to level off, resulting in much lower charge offs compared to the same period in 2012. Charge-offs for the first nine months of 2013 were $3.1 million and recoveries of previously charged off loans totaled $1.0 million for net charge-offs of $2.1 million. By comparison, $16.5 million of charge-offs were recorded in the same period of 2012 and $1.3 million of recoveries were realized for net charge-offs of $15.2 million.

Non-Interest Income

Total non-interest income decreased slightly to $24.1 million for the nine months ended September 30, 2013 from $24.2 million recognized in the same period of 2012.

Mortgage Banking Activity. Total revenue from the sale and servicing of mortgage loans increased 2.8% to $7.1 million for the nine months ended September 30, 2013 from $6.9 million for the same period of 2012. Gains realized from the sale of mortgage loans decreased $2.9 million to $5.0 million for the first nine months of 2013 from $7.9 million during the same period of 2012. Mortgage loan servicing revenue increased slightly to $2.6 million in the first nine months of 2013 compared to $2.5 million the same period of 2012. The gains realized from the sale of mortgage loans were partially offset by the amortization of mortgage servicing rights in the amount of $1.8 million in the first nine months of 2013 down from $2.6 million in the same period of 2012. The Company recorded a positive valuation adjustment of $1.3 million in the first nine month of 2013 compared to a negative adjustment of $855,000 in the same period of 2012.

69

Insurance and Investment Sales Commission. Insurance and investment sales commission income increased $859,000 to $7.5 million for the nine months ended September 30, 2013, from $6.7 million during the same period of 2012. This is the result of receiving more contingent commission income in the first nine months of 2013 compared to the same period of 2012. In the first nine months of 2013, $944,000 was received compared to $508,000 in the same period of 2012.

Non-Interest Expense

Non-interest expense increased to $48.9 million for the first nine months of 2013 compared to $48.2 million for the same period in 2012.

Compensation and Benefits.  Compensation and benefits increased to $26.0 million for the nine months ended September 30, 2013 from $24.8 million for the same period in 2012. The increase is partly attributable to higher health insurance costs. Also, the Company granted pay increases and had higher incentive costs for the nine months ended September 30, 2013 compared to the same period in 2012.

FDIC Insurance Premiums. FDIC expense decreased to $1.3 million in the first nine months of 2013, from $2.0 million in the same period of 2012. This decrease was the result of a rate reduction on FDIC insurance premiums.

Other Non-Interest Expenses.  Other non-interest expenses increased by $449,000 to $10.0 million for the first nine months of 2013 from $9.5 million for the same period in 2012. Year-over-year increases between 2013 and 2012 include the result of establishing an accrual for estimated secondary market buy-back losses in response to notifications received about Fannie Mae and Freddie Mac’s post-foreclosure review process during the first nine months of 2013. Secondary market buy-back losses were $547,000 for the nine months ended September 30, 2013 compared to $188,000 for the same period in 2012. The accrual for estimated buy-back losses was $399,000 at September 30, 2013. See Note 9 in the Consolidated Condensed Financial Statements for further discussion relating to the secondary market buy-back accruals.

The efficiency ratio for the first nine months of 2013 was 64.51% compared to 63.04% for the same period of 2012.

Liquidity

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

70

First Defiance had $127.6 million of cash and cash equivalents at September 30, 2013, down $9.2 million from December 31, 2012. For the first nine months of 2013, $30.6 million of cash was provided by operating activities, with $37.6 million utilized in investing activities, primarily funding loans, and $2.2 million used for financing activities.

At September 30, 2013, First Federal had $87.7 million in outstanding loan commitments and loans in process to be funded generally within the next six months and an additional $297.9 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 $13.3 million of 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.

First Federal is required to maintain specified amounts of capital pursuant to regulations promulgated by the Office of the Comptroller of the Currency. The capital standards generally require the maintenance of regulatory capital sufficient to meet a tangible capital requirement, a core capital requirement, and a risk-based capital requirement. The following table sets forth First Federal's compliance with each of the capital requirements at September 30, 2013 (in thousands).

71

	Actual				Minimum Required for Adequately Capitalized				Minimum Required for Well Capitalized
		Amount	Ratio			Amount	Ratio			Amount	Ratio
Tier 1 Capital (1)
Consolidated	$	243,352	12.20	%	$	79,812	4.0	%		N/A	N/A
First Federal Bank	$	233,342	11.71	%	$	79,708	4.0	%	$	99,635	5.0	%
Tier 1 Capital (to Risk Weighted Assets) (1)
Consolidated	$	243,352	14.04	%	$	69,348	4.0	%		N/A	N/A
First Federal Bank	$	233,342	13.47	%	$	69,287	4.0	%	$	103,930	6.0	%
Total Capital (to Risk Weighted Assets) (1)
Consolidated	$	265,077	15.29	%	$	138,697	8.0	%		N/A	N/A
First Federal Bank	$	255,048	14.72	%	$	138,574	8.0	%	$	173,217	10.0	%

(1) Core capital is computed as a percentage of adjusted total assets of $2.00 billion for consolidated and the Bank. Risk-based capital is computed as a percentage of total risk-weighted assets of $1.73 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. 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, Valuation of Securities, 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 2013.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As discussed in detail in the 2012 Annual Report on Form 10-K, 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 results of the simulation indicate that in an environment where interest rates rise 100 basis points over a 24 month period, using September 30, 2013 amounts as a base case, First Defiance’s net interest income would be impacted by less than the board mandated guidelines of 10%.

72

 

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 calculates the net present value of First Federal’s assets and liabilities in rate shock environments that range from -400 basis points to +400 basis points. The likelihood of a decrease in rates as of September 30, 2013 was considered to be remote given the current interest rate environment and therefore, decreases below a down 100 basis point environment were not included. The results of this analysis are reflected in the following tables for the nine months ended September 30, 2013 and the year-ended December 31, 2012.

September 30, 2013
Economic Value of Equity
Change in Rates	$ Amount	$ Change	% Change
(Dollars in Thousands)
+400 bp	444,803	33,725	8.20	%
+ 300 bp	438,909	27,831	6.77	%
+ 200 bp	430,980	19,902	4.84	%
+ 100 bp	421,930	10,853	2.64	%
0 bp	411,078	–	–
- 100 bp	397,512	(13,566)	(3.30)	%

December 31, 2012
Economic Value of Equity
Change in Rates	$ Amount	$ Change	% Change
(Dollars in Thousands)
+400 bp	415,094	46,835	12.72	%
+ 300 bp	407,337	39,078	10.61	%
+ 200 bp	398,150	29,891	8.12	%
+ 100 bp	387,482	19,223	5.22	%
0 bp	368,259	–	–
- 100 bp	343,745	(24,514)	(6.66)	%

Item 4. Controls and Procedures

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

An evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of September 30, 2013. 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, 2013 that materially affected, or are reasonably likely to materially affect, the internal controls over financial reporting.

73

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, 2012.

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

First Defiance did not have any common stock repurchases during the third quarter of 2013, but on September 30, 2013, the Board of Directors announced a new share repurchase program of up to 5%, or approximately 489,000 shares, of the common stock outstanding.

Item 3. Defaults upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

Exhibit 3.1	Articles of Incorporation (1)
Exhibit 3.2	Code of Regulations (1)
Exhibit 3.3	Amendment to Articles of Incorporation (2)
Exhibit 31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1)	Incorporated herein by reference to the like numbered exhibit in the Registrant’s Form S-1 (File No. 33-93354)
(2)	Incorporated herein by reference to Exhibit 3 in Form 8-K filed December 8, 2008 (Film No. 081236105)

74

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 8, 2013	By:	/s/ William J. Small
		William J. Small
		Chairman, President and
		Chief Executive Officer
Date: November 8, 2013	By:	/s/ Donald P. Hileman
		Donald P. Hileman
		Executive Vice President and
		Chief Financial Officer
		(Principal Financial Officer)

75

 

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

I, William J. Small, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of First Defiance Financial Corp.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:	November 8, 2013	/s/ William J. Small
		William J. Small
		Chairman, President and
		Chief Executive Officer

 

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

I, Donald P. Hileman, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of First Defiance Financial Corp.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:	November 8, 2013	/s/ Donald P. Hileman
		Donald P. Hileman
		Executive Vice President and
		Chief Financial Officer

 

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of First Defiance Financial Corp. (the "Company") on Form 10-Q for the period ending September 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William J. Small, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this quarterly report on Form 10-Q that:

1.	The Report fully complies with the requirements of sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and
2.	The information contained in the Report fairly presents, in all material respects, the Company's financial condition and results of operations.

Date: November 8, 2013		/s/ William J. Small
	William J. Small
	Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

 

EX-32.2

EXHIBIT 32.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of First Defiance Financial Corp. (the "Company") on Form 10-Q for the period ending September 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Donald P. Hileman, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and in connection with this quarterly report on Form 10-Q that:

1.	The Report fully complies with the requirements of sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and
2.	The information contained in the Report fairly presents, in all material respects, the Company's financial condition and results of operations.

Date: November 8, 2013		/s/ Donald P. Hileman
	Donald P. Hileman
	Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

 

XML

Derivative Financial Instruments (Details Textual) (USD $) In Millions, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Interest Rate Derivative Instruments Not Designated as Hedging Instruments at Fair Value, Net	$ 9.1	$ 34.0
Derivative Asset, Notional Amount	$ 13.3	$ 53.6

XML

Other Comprehensive Income (Loss) (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Securities Available For Sale, Beginning balance			$ 4,851	$ 4,704
Securities Available For Sale, Other comprehensive loss before reclassifications			(3,924)	2,236
Securities Available For Sale, Amounts reclassified from accumulated other comprehensive loss			(68)	(370)
Securities Available For Sale, Net other comprehensive loss during period	78	1,203	(3,992)	1,866
Securities Available For Sale, Ending balance	859	6,570	859	6,570
Post-retirement Benefit, Beginning balance			(577)	(707)
Post-retirement Benefit, Other comprehensive loss before reclassifications			0	0
Post-retirement Benefit, Amounts reclassified from accumulated other comprehensive loss			0	0
Post-retirement Benefit, Net other comprehensive loss during period			0	0
Post-retirement Benefit, Ending balance	(577)	(707)	(577)	(707)
Accumulated Other Comprehensive Income, Beginning balance			4,274	3,997
Accumulated Other Comprehensive Income, Other comprehensive loss before reclassifications			(3,924)	2,236
Accumulated Other Comprehensive Income, Amounts reclassified from accumulated other comprehensive loss	0	(72)	(68)	(370)
Accumulated Other Comprehensive Income, Net other comprehensive loss during period			(3,992)	1,866
Accumulated Other Comprehensive Income, Ending balance	$ 282	$ 5,863	$ 282	$ 5,863

XML

Mortgage Banking

9 Months Ended

Sep. 30, 2013

Mortgage Banking [Abstract]

Mortgage Banking [Text Block]

9. 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,
	2013		2012		2013		2012
	(in thousands)				(in thousands)
Gain from sale of mortgage loans	$	894	$	2,888	$	4,960	$	7,890
Mortgage loans servicing revenue (expense):
Mortgage loans servicing revenue		901		824		2,646		2,499
Amortization of mortgage servicing rights		(429)		(892)		(1,752)		(2,610)
Mortgage servicing rights valuation adjustments		480		(600)		1,265		(855)
		952		(668)		2,159		(966)
Net revenue from sale and servicing of mortgage loans	$	1,846	$	2,220	$	7,119	$	6,924

The unpaid principal balance of residential mortgage loans serviced for third parties was $1.4 billion at September 30, 2013 and $1.3 billion at December 31, 2012.

Activity for capitalized mortgage servicing rights and the related valuation allowance follows for the three and nine months ended September 30, 2013 and 2012:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(in thousands)				(in thousands)
Mortgage servicing assets:
Balance at beginning of period	$	10,234	$	10,059	$	10,121	$	10,219
Loans sold, servicing retained		400		969		1,836		2,527
Amortization		(429)		(892)		(1,752)		(2,610)
Carrying value before valuation allowance at end of period		10,205		10,136		10,205		10,136
Valuation allowance:
Balance at beginning of period		(1,503)		(1,784)		(2,288)		(1,529)
Impairment recovery (charges)		480		(600)		1,265		(855)
Balance at end of period		(1,023)		(2,384)		(1,023)		(2,384)
Net carrying value of MSRs at end of period	$	9,182	$	7,752	$	9,182	$	7,752
Fair value of MSRs at end of period	$	9,868	$	7,752	$	9,868	$	7,752

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.

An accrual for estimated secondary market buy-back losses of $399,000 was established in the third quarter of 2013. These losses were accrued and expensed as of September 30, 2013 based on an estimated exposure to repurchase requests resulting from notifications received about Freddie Mac’s review process during the third quarter of 2013.

An accrual reversal of $498,000 was recorded in the third quarter of 2013 as a result of Fannie Mae completing their post-foreclosure review process that began in the first quarter of 2013.  The original accrual of these estimated losses was established in the first quarter of 2013. 

Secondary market buy-back losses were $(95,000) in the third quarter of 2013 compared to $115,000 for the same period in 2012.  Secondary market buy-back losses were $547,000 for the nine months ended September 30, 2013 compared to $188,000 for the same period in 2012.  The accrual for estimated buy-back losses was $399,000 at September 30, 2013.

XML

Investment Securities (Details 5) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Proceeds	$ 0	$ 2,122	$ 4,027	$ 8,538
Gross realized gains	0	103	97	528
Gross realized losses	$ 0	$ 0	$ 0	$ 0

XML

Consolidated Condensed Statements of Income (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Interest Income
Loans	$ 17,197	$ 18,000	$ 51,040	$ 54,847
Investment securities:
Taxable	667	1,093	2,019	3,473
Non-taxable	723	749	2,180	2,146
Interest-bearing deposits	44	43	174	249
FHLB stock dividends	205	213	631	656
Total interest income	18,836	20,098	56,044	61,371
Interest Expense
Deposits	1,356	1,909	4,514	6,394
FHLB advances and other	116	759	298	2,260
Subordinated debentures	150	172	452	813
Notes payable	58	83	178	284
Total interest expense	1,680	2,923	5,442	9,751
Net interest income	17,156	17,175	50,602	51,620
Provision for loan losses	476	705	1,349	8,306
Net interest income after provision for loan losses	16,680	16,470	49,253	43,314
Non-interest Income
Service fees and other charges	2,605	2,790	7,539	8,148
Insurance and investment commission income	2,225	1,952	7,538	6,679
Mortgage banking income	1,846	2,220	7,119	6,924
Gain on sale of non-mortgage loans	35	8	52	50
Gain on sale or call of securities	0	103	97	528
Trust income	196	147	545	470
Income from bank owned life insurance	212	244	672	683
Other non-interest income	170	316	535	712
Total non-interest income	7,289	7,780	24,097	24,194
Non-interest Expense
Compensation and benefits	8,718	8,245	25,991	24,760
Occupancy	1,739	2,170	5,087	5,718
FDIC insurance premium	326	691	1,257	2,031
State franchise tax	580	623	1,837	1,649
Data processing	1,318	1,140	3,812	3,477
Amortization of intangibles	296	344	945	1,068
Other non-interest expense	3,068	3,237	9,987	9,538
Total non-interest expense	16,045	16,450	48,916	48,241
Income before income taxes	7,924	7,800	24,434	19,267
Federal income taxes	2,445	2,366	7,286	5,759
Net Income	5,479	5,434	17,148	13,508
Dividends accrued on preferred shares	0	(3)	0	(900)
Accretion on preferred shares	0	(8)	0	(359)
Redemption of preferred shares	0	0	0	642
Net income applicable to common shares	$ 5,479	$ 5,423	$ 17,148	$ 12,891
Earnings per common share (Note 6)
Basic (in dollars per share)	$ 0.56	$ 0.56	$ 1.76	$ 1.33
Diluted (in dollars per share)	$ 0.54	$ 0.54	$ 1.69	$ 1.29
Dividends declared per share (Note 5) (in dollars per share)	$ 0.10	$ 0.05	$ 0.30	$ 0.15
Average common shares outstanding (Note 6)
Basic (in shares)	9,780	9,729	9,763	9,728
Diluted (in shares)	10,212	10,000	10,160	9,993

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Significant Accounting Policies

9 Months Ended

Sep. 30, 2013

Accounting Policies [Abstract]

Significant Accounting Policies [Text Block]

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. Actual results could differ from those estimates. Significant areas where First Defiance uses estimates are the valuation of certain investment securities, the determination of the allowance for loan losses, the valuation of mortgage servicing rights and goodwill, the determination of unrecognized income tax benefits, and the determination of post-retirement benefits.

Earnings Per Common Share

Basic earnings per common share is computed by dividing net income applicable to common shares (net income less dividend requirements for preferred stock and accretion of preferred stock discount) by the weighted average number of common shares 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 or units and stock grants.

Accounting Standards Updates

In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The standard requires that companies present in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. The new requirements are effective for public companies in the fiscal years, and interim periods within those years, beginning after December 15, 2012. The Company adopted this standard on January 1, 2013.  The effect of adopting this standard increased the Company’s disclosure surrounding reclassification items out of accumulated other comprehensive income.

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Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2013

Accounting Policies [Abstract]

Use of Estimates, Policy [Policy Text Block]

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Significant areas where First Defiance uses estimates are the valuation of certain investment securities, the determination of the allowance for loan losses, the valuation of mortgage servicing rights and goodwill, the determination of unrecognized income tax benefits, and the determination of post-retirement benefits.

Earnings Per Share, Policy [Policy Text Block]

Earnings Per Common Share

Basic earnings per common share is computed by dividing net income applicable to common shares (net income less dividend requirements for preferred stock and accretion of preferred stock discount) by the weighted average number of common shares 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 or units and stock grants.

New Accounting Pronouncements, Policy [Policy Text Block]

Accounting Standards Updates

In February 2013, the FASB issued ASU 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The standard requires that companies present in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. The new requirements are effective for public companies in the fiscal years, and interim periods within those years, beginning after December 15, 2012. The Company adopted this standard on January 1, 2013.  The effect of adopting this standard increased the Company’s disclosure surrounding reclassification items out of accumulated other comprehensive income.

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Mortgage Banking (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Mortgage servicing assets:
Balance at beginning of period	$ 10,234	$ 10,059	$ 10,121	$ 10,219
Loans sold, servicing retained	400	969	1,836	2,527
Amortization	(429)	(892)	(1,752)	(2,610)
Carrying value before valuation allowance at end of period	10,205	10,136	10,205	10,136
Valuation allowance:
Balance at beginning of period	(1,503)	(1,784)	(2,288)	(1,529)
Impairment recovery (charges)	480	(600)	1,265	(855)
Balance at end of period	(1,023)	(2,384)	(1,023)	(2,384)
Net carrying value of MSRs at end of period	9,182	7,752	9,182	7,752
Fair value of MSRs at end of period	$ 9,868	$ 7,752	$ 9,868	$ 7,752

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Loans (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Beginning Allowance	$ 26,270	$ 26,409	$ 26,711	$ 33,254
Charge-Offs	(1,149)	(1,574)	(3,105)	(16,513)
Recoveries	367	770	1,009	1,263
Provisions	476	705	1,349	8,306
Ending Allowance	25,964	26,310	25,964	26,310
One to Four Family Residential Real Estate [Member]
Beginning Allowance	3,197	3,104	3,506	4,095
Charge-Offs	(78)	(217)	(468)	(1,539)
Recoveries	23	26	155	150
Provisions	(344)	83	(395)	290
Ending Allowance	2,798	2,996	2,798	2,996
Construction Loans [Member]
Beginning Allowance	83	46	75	63
Charge-Offs	0	0	0	0
Recoveries	0	0	0	0
Provisions	36	17	44	0
Ending Allowance	119	63	119	63
Multi Family Residential Real Estate [Member]
Beginning Allowance	2,425	2,610	2,197	2,850
Charge-Offs	0	0	(6)	(555)
Recoveries	0	122	0	122
Provisions	107	(261)	341	54
Ending Allowance	2,532	2,471	2,532	2,471
Commercial Real Estate [Member]
Beginning Allowance	13,140	13,914	12,702	17,640
Charge-Offs	(829)	(780)	(1,372)	(10,170)
Recoveries	248	430	516	574
Provisions	525	225	1,238	5,745
Ending Allowance	13,084	13,789	13,084	13,789
Commercial Loan [Member]
Beginning Allowance	5,474	5,156	6,325	6,576
Charge-Offs	(39)	(355)	(560)	(3,507)
Recoveries	68	140	201	295
Provisions	43	162	(420)	1,739
Ending Allowance	5,546	5,103	5,546	5,103
Home Equity and Home Improvement [Member]
Beginning Allowance	1,786	1,435	1,759	1,856
Charge-Offs	(170)	(203)	(612)	(668)
Recoveries	9	38	70	77
Provisions	98	471	506	476
Ending Allowance	1,723	1,741	1,723	1,741
Consumer Loan [Member]
Beginning Allowance	165	144	147	174
Charge-Offs	(33)	(19)	(87)	(74)
Recoveries	19	14	67	45
Provisions	11	8	35	2
Ending Allowance	$ 162	$ 147	$ 162	$ 147

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Deposits

9 Months Ended

Sep. 30, 2013

Deposits [Abstract]

Deposit Liabilities Disclosures [Text Block]

10. Deposits

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

	September 30, 2013		December 31, 2012
Non-interest-bearing checking accounts	$	300,891	$	315,132
Interest-bearing checking and money market accounts		681,987		664,857
Savings accounts		182,271		166,945
Retail certificates of deposit less than $100,000		318,317		342,472
Retail certificates of deposit greater than $100,000		175,026		176,029
Brokered or national certificates of deposit		-		2,037
Total	$	1,658,492	$	1,667,472

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Investment Securities (Details) (USD $) In Thousands, unless otherwise specified	9 Months Ended		12 Months Ended
	Sep. 30, 2013		Dec. 31, 2012
Available-for-Sale Securities:
Available-for-Sale Securities, Amortized Cost	$ 182,797		$ 186,638
Available-for-Sale Securities, Gross Unrealized Gains	5,260		9,559
Available-for-Sale Securities, Gross Unrealized Losses	(3,938)		(2,096)
Available-for-Sale Securities, Fair Value	184,119		194,101
Held-to-Maturity Securities:
Held-to-Maturity Securities, Amortized Cost	407	[1]	508	[1]
Held-to-Maturity Securities, Gross Unrealized Gains	6	[1]	9	[1]
Held-to-Maturity Securities, Gross Unrealized Losses	0	[1]	(1)	[1]
Held-to-Maturity Securities, Fair Value	413	[1]	516	[1]
US Government Corporations and Agencies Securities [Member]
Available-for-Sale Securities:
Available-for-Sale Securities, Amortized Cost	5,000		11,000
Available-for-Sale Securities, Gross Unrealized Gains	0		69
Available-for-Sale Securities, Gross Unrealized Losses	(69)		0
Available-for-Sale Securities, Fair Value	4,931		11,069
US Treasury Securities [Member]
Available-for-Sale Securities:
Available-for-Sale Securities, Amortized Cost			1,000
Available-for-Sale Securities, Gross Unrealized Gains			2
Available-for-Sale Securities, Gross Unrealized Losses			0
Available-for-Sale Securities, Fair Value			1,002
Residential Mortgage Backed Securities [Member]
Available-for-Sale Securities:
Available-for-Sale Securities, Amortized Cost	36,800		30,020
Available-for-Sale Securities, Gross Unrealized Gains	877		1,441
Available-for-Sale Securities, Gross Unrealized Losses	(738)		0
Available-for-Sale Securities, Fair Value	36,939		31,461
Collateralized Mortgage Backed Securities [Member]
Available-for-Sale Securities:
Available-for-Sale Securities, Amortized Cost	52,306		55,962
Available-for-Sale Securities, Gross Unrealized Gains	848		1,504
Available-for-Sale Securities, Gross Unrealized Losses	(610)		0
Available-for-Sale Securities, Fair Value	52,544		57,466
Trust Preferred Securities and Preferred Stock [Member]
Available-for-Sale Securities:
Available-for-Sale Securities, Amortized Cost	3,601		3,600
Available-for-Sale Securities, Gross Unrealized Gains	441		99
Available-for-Sale Securities, Gross Unrealized Losses	(1,676)		(2,091)
Available-for-Sale Securities, Fair Value	2,366		1,608
Corporate Bond Securities [Member]
Available-for-Sale Securities:
Available-for-Sale Securities, Amortized Cost	8,839		8,717
Available-for-Sale Securities, Gross Unrealized Gains	138		167
Available-for-Sale Securities, Gross Unrealized Losses	(9)		0
Available-for-Sale Securities, Fair Value	8,968		8,884
US States and Political Subdivisions Debt Securities [Member]
Available-for-Sale Securities:
Available-for-Sale Securities, Amortized Cost	76,251		76,339
Available-for-Sale Securities, Gross Unrealized Gains	2,956		6,277
Available-for-Sale Securities, Gross Unrealized Losses	(836)		(5)
Available-for-Sale Securities, Fair Value	78,371		82,611
Held-to-Maturity Securities:
Held-to-Maturity Securities, Amortized Cost	186	[1]	217	[1]
Held-to-Maturity Securities, Gross Unrealized Gains	0	[1]	0	[1]
Held-to-Maturity Securities, Gross Unrealized Losses	0	[1]	0	[1]
Held-to-Maturity Securities, Fair Value	186	[1]	217	[1]
Federal Home Loan Mortgage Corporation Certificates and Obligations (FHLMC) [Member]
Held-to-Maturity Securities:
Held-to-Maturity Securities, Amortized Cost	33	[1]	69	[1]
Held-to-Maturity Securities, Gross Unrealized Gains	0	[1]	0	[1]
Held-to-Maturity Securities, Gross Unrealized Losses	0	[1]	(1)	[1]
Held-to-Maturity Securities, Fair Value	33	[1]	68	[1]
Federal National Mortgage Association Certificates and Obligations (FNMA) [Member]
Held-to-Maturity Securities:
Held-to-Maturity Securities, Amortized Cost	136	[1]	162	[1]
Held-to-Maturity Securities, Gross Unrealized Gains	4	[1]	6	[1]
Held-to-Maturity Securities, Gross Unrealized Losses	0	[1]	0	[1]
Held-to-Maturity Securities, Fair Value	140	[1]	168	[1]
Government National Mortgage Association Certificates and Obligations (GNMA) [Member]
Held-to-Maturity Securities:
Held-to-Maturity Securities, Amortized Cost	52	[1]	60	[1]
Held-to-Maturity Securities, Gross Unrealized Gains	2	[1]	3	[1]
Held-to-Maturity Securities, Gross Unrealized Losses	0	[1]	0	[1]
Held-to-Maturity Securities, Fair Value	$ 54	[1]	$ 63	[1]

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

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Loans (Details 2) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Allowance for loan losses:
Individually evaluated for impairment	$ 2,420	$ 1,491
Collectively evaluated for impairment	23,544	25,220
Acquired with deteriorated credit quality	0	0
Total ending allowance balance	25,964	26,711
Loans:
Loans individually evaluated for impairment	64,899	71,286
Loans collectively evaluated for impairment	1,501,286	1,458,300
Loans acquired with deteriorated credit quality	291	504
Total ending loans balance	1,566,476	1,530,090
One to Four Family Residential Real Estate [Member]
Allowance for loan losses:
Individually evaluated for impairment	234	281
Collectively evaluated for impairment	2,564	3,225
Acquired with deteriorated credit quality	0	0
Total ending allowance balance	2,798	3,506
Loans:
Loans individually evaluated for impairment	10,514	11,930
Loans collectively evaluated for impairment	181,870	189,348
Loans acquired with deteriorated credit quality	31	36
Total ending loans balance	192,415	201,314
Construction Loans [Member]
Allowance for loan losses:
Individually evaluated for impairment	0	0
Collectively evaluated for impairment	119	75
Acquired with deteriorated credit quality	0	0
Total ending allowance balance	119	75
Loans:
Loans individually evaluated for impairment	261	45
Loans collectively evaluated for impairment	40,108	19,251
Loans acquired with deteriorated credit quality	0	0
Total ending loans balance	40,369	19,296
Multi Family Residential Real Estate [Member]
Allowance for loan losses:
Individually evaluated for impairment	0	0
Collectively evaluated for impairment	2,532	2,197
Acquired with deteriorated credit quality	0	0
Total ending allowance balance	2,532	2,197
Loans:
Loans individually evaluated for impairment	865	1,626
Loans collectively evaluated for impairment	144,989	120,829
Loans acquired with deteriorated credit quality	0	0
Total ending loans balance	145,854	122,455
Commercial Real Estate [Member]
Allowance for loan losses:
Individually evaluated for impairment	1,837	1,070
Collectively evaluated for impairment	11,247	11,632
Acquired with deteriorated credit quality	0	0
Total ending allowance balance	13,084	12,702
Loans:
Loans individually evaluated for impairment	40,960	46,053
Loans collectively evaluated for impairment	636,481	630,534
Loans acquired with deteriorated credit quality	231	436
Total ending loans balance	677,672	677,023
Commercial Loan [Member]
Allowance for loan losses:
Individually evaluated for impairment	305	138
Collectively evaluated for impairment	5,241	6,187
Acquired with deteriorated credit quality	0	0
Total ending allowance balance	5,546	6,325
Loans:
Loans individually evaluated for impairment	9,729	8,830
Loans collectively evaluated for impairment	377,591	376,007
Loans acquired with deteriorated credit quality	29	32
Total ending loans balance	387,349	384,869
Home Equity and Home Improvement [Member]
Allowance for loan losses:
Individually evaluated for impairment	44	2
Collectively evaluated for impairment	1,679	1,757
Acquired with deteriorated credit quality	0	0
Total ending allowance balance	1,723	1,759
Loans:
Loans individually evaluated for impairment	2,499	2,678
Loans collectively evaluated for impairment	103,673	106,516
Loans acquired with deteriorated credit quality	0	0
Total ending loans balance	106,172	109,194
Consumer Loan [Member]
Allowance for loan losses:
Individually evaluated for impairment	0	0
Collectively evaluated for impairment	162	147
Acquired with deteriorated credit quality	0	0
Total ending allowance balance	162	147
Loans:
Loans individually evaluated for impairment	71	124
Loans collectively evaluated for impairment	16,574	15,815
Loans acquired with deteriorated credit quality	0	0
Total ending loans balance	$ 16,645	$ 15,939

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Fair Value (Details 2) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Impaired loans
Total impaired loans	$ 8,443	$ 14,071
Mortgage servicing rights	1,495	7,833
Real estate held for sale
Total Real Estate held for sale	627	446
Residential Mortgage [Member]
Impaired loans
Total impaired loans	353	599
Real estate held for sale
Total Real Estate held for sale	65	61
Commercial Loan [Member]
Impaired loans
Total impaired loans	1,159	771
Home Equity Line of Credit [Member]
Impaired loans
Total impaired loans	141	168
Multi Family Loans [Member]
Impaired loans
Total impaired loans	355	407
Commercial Real Estate [Member]
Impaired loans
Total impaired loans	6,435	12,126
Real estate held for sale
Total Real Estate held for sale	562	385
Fair Value, Inputs, Level 1 [Member]
Impaired loans
Total impaired loans	0	0
Mortgage servicing rights	0	0
Real estate held for sale
Total Real Estate held for sale	0	0
Fair Value, Inputs, Level 1 [Member] | Residential Mortgage [Member]
Impaired loans
Total impaired loans	0	0
Real estate held for sale
Total Real Estate held for sale	0	0
Fair Value, Inputs, Level 1 [Member] | Commercial Loan [Member]
Impaired loans
Total impaired loans	0	0
Fair Value, Inputs, Level 1 [Member] | Home Equity Line of Credit [Member]
Impaired loans
Total impaired loans	0	0
Fair Value, Inputs, Level 1 [Member] | Multi Family Loans [Member]
Impaired loans
Total impaired loans	0	0
Fair Value, Inputs, Level 1 [Member] | Commercial Real Estate [Member]
Impaired loans
Total impaired loans	0	0
Real estate held for sale
Total Real Estate held for sale	0	0
Fair Value, Inputs, Level 2 [Member]
Impaired loans
Total impaired loans	0	0
Mortgage servicing rights	1,495	7,833
Real estate held for sale
Total Real Estate held for sale	0	0
Fair Value, Inputs, Level 2 [Member] | Residential Mortgage [Member]
Impaired loans
Total impaired loans	0	0
Real estate held for sale
Total Real Estate held for sale	0	0
Fair Value, Inputs, Level 2 [Member] | Commercial Loan [Member]
Impaired loans
Total impaired loans	0	0
Fair Value, Inputs, Level 2 [Member] | Home Equity Line of Credit [Member]
Impaired loans
Total impaired loans	0	0
Fair Value, Inputs, Level 2 [Member] | Multi Family Loans [Member]
Impaired loans
Total impaired loans	0	0
Fair Value, Inputs, Level 2 [Member] | Commercial Real Estate [Member]
Impaired loans
Total impaired loans	0	0
Real estate held for sale
Total Real Estate held for sale	0	0
Fair Value, Inputs, Level 3 [Member]
Impaired loans
Total impaired loans	8,443	14,071
Mortgage servicing rights	0	0
Real estate held for sale
Total Real Estate held for sale	627	446
Fair Value, Inputs, Level 3 [Member] | Residential Mortgage [Member]
Impaired loans
Total impaired loans	353	599
Real estate held for sale
Total Real Estate held for sale	65	61
Fair Value, Inputs, Level 3 [Member] | Commercial Loan [Member]
Impaired loans
Total impaired loans	1,159	771
Fair Value, Inputs, Level 3 [Member] | Home Equity Line of Credit [Member]
Impaired loans
Total impaired loans	141	168
Fair Value, Inputs, Level 3 [Member] | Multi Family Loans [Member]
Impaired loans
Total impaired loans	355	407
Fair Value, Inputs, Level 3 [Member] | Commercial Real Estate [Member]
Impaired loans
Total impaired loans	6,435	12,126
Real estate held for sale
Total Real Estate held for sale	$ 562	$ 385

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Earnings Per Common Share (Tables)

9 Months Ended

Sep. 30, 2013

Earnings Per Share [Abstract]

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

The following table sets forth the computation of basic and diluted earnings per common share (in thousands except per share data):

	Three months ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012
Numerator for basic and diluted earnings per common share – Net income applicable to common shares	$	5,479	$	5,423	$	17,148	$	12,891
Denominator:
Denominator for basic earnings per common share – weighted average common shares, including participating securities		9,780		9,729		9,763		9,728
Effect of warrants		337		223		315		215
Effect of restricted stock units		38		20		29		25
Effect of employee stock options		57		28		53		25
Denominator for diluted earnings per common share		10,212		10,000		10,160		9,993
Basic earnings per common share	$	0.56	$	0.56	$	1.76	$	1.33
Diluted earnings per common share	$	0.54	$	0.54	$	1.69	$	1.29

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Stock Compensation Plans (Tables)

9 Months Ended

Sep. 30, 2013

Disclosure Of Compensation Related Costs, Share-Based Payments [Abstract]

Schedule of Share-based Compensation, Stock Options, Activity [Table Text Block]

Following is activity under the plans during the nine months ended September 30, 2013:

Stock options	Options Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in 000’s)
Options outstanding, January 1, 2013		312,350	$	20.33
Forfeited or cancelled		14,000		20.66
Exercised		33,580		17.09
Granted		-		-
Options outstanding, September 30, 2013		264,770	$	20.73		3.47	$	1,177
Vested or expected to vest at September 30, 2013		264,770	$	20.73		3.47	$	1,177
Exercisable at September 30, 2013		251,900	$	21.30		3.36	$	999

Schedule of Share-based Compensation, Restricted Stock Units Award Activity [Table Text Block]

Total accrued expense of $711,000 was recorded during the nine months ended September 30, 2013 and approximately $373,000 is included within other liabilities at September 30, 2013 related to the STIPs and LTIPs.

	Restricted Stock Units				Stock Grants
			Weighted-Average				Weighted-Average
			Grant Date				Grant Date
Unvested Shares	Shares		Fair Value		Shares		Fair Value
Unvested at January 1, 2013		38,871	$	14.74		11,260	$	13.28
Granted		91,187		19.42		20,639		15.77
Vested		(20,639)		15.77		(31,899)		14.89
Forfeited		(3,358)		11.97		-		-
Unvested at September 30, 2013		106,061	$	18.66		-	$	-

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Earnings Per Common Share (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Numerator for basic and diluted earnings per common share - Net income applicable to common shares (in dollars)	$ 5,479	$ 5,423	$ 17,148	$ 12,891
Denominator:
Denominator for basic earnings per common share - weighted average common shares, including participating securities (in shares)	9,780	9,729	9,763	9,728
Effect of warrants (in shares)	337	223	315	215
Effect of restricted stock units (in shares)	38	20	29	25
Effect of employee stock options (in shares)	57	28	53	25
Denominator for diluted earnings per common share (in shares)	10,212	10,000	10,160	9,993
Basic earnings per common share (in dollars per share)	$ 0.56	$ 0.56	$ 1.76	$ 1.33
Diluted earnings per common share (in dollars per share)	$ 0.54	$ 0.54	$ 1.69	$ 1.29

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Derivative Financial Instruments (Tables)

9 Months Ended

Sep. 30, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Schedule of Derivative Instruments in Statement of Financial Position Carrying Value [Table Text Block]

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

September 30, 2013

December 31, 2012

Assets

(Liabilities)

Derivative

Assets

(Liabilities)

Derivative

Carrying

Carrying

Net Carrying

Carrying

Carrying

Net Carrying

Value

Value

Value

Value

Value

Value

(In Thousands)

Derivatives not designated as hedging instruments

Mortgage Banking Derivatives

$

548

$

(247)

$

301

$

950

$

(94)

$

856

Schedule of Derivative Instruments, Gain (Loss) in Statement of Financial Performance [Table Text Block]

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,
	2013		2012		2013		2012
	(In Thousands)				(In Thousands)
Derivatives not designated as hedging instruments
Mortgage Banking Derivatives – Gain (Loss)	$	(315)	$	28	$	(555)	$	418

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Fair Value (Details 4) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2012	Dec. 31, 2011
Financial Assets, Carrying Value:
Cash and cash equivalents, Carrying Value	$ 127,629	$ 136,832	$ 92,406	$ 174,931
Investment securities, Carrying Value	184,526	194,609
Federal Home Loan Bank stock, Carrying Value	19,350	20,655
Loans, net, including loans held for sale, Carrying Value	1,548,706	1,520,610
Accrued interest receivable, Carrying Value	6,425	5,594
Financial Liabilities, Carrying Value:
Deposits, Carrying Value	1,658,492	1,667,472
Advances from Federal Home Loan Bank, Carrying Value	22,761	12,796
Securities sold under repurchase agreements, Carrying Value	50,822	51,702
Subordinated debentures, Carrying Value	36,083	36,083
Financial Assets, Fair Value:
Cash and cash equivalents, Fair Value	127,629	136,832
Investment securities, Fair Value	184,532	194,617
Loans, net, including loans held for sale, Fair Value	1,559,497	1,543,438
Accrued interest receivable, Fair Value	6,425	5,594
Financial Liabilities, Fair Value:
Deposits, Fair Value	1,661,109	1,671,713
Advances from Federal Home Loan Bank, Fair Value	23,022	13,466
Securities sold under repurchase agreements, Fair Value	50,822	51,702
Subordinated debentures, Fair Value	35,333	35,766
Fair Value, Inputs, Level 1 [Member]
Financial Assets, Fair Value:
Cash and cash equivalents, Fair Value	127,629	136,832
Investment securities, Fair Value	476	134
Loans, net, including loans held for sale, Fair Value	0	0
Accrued interest receivable, Fair Value	0	0
Financial Liabilities, Fair Value:
Deposits, Fair Value	300,891	315,132
Advances from Federal Home Loan Bank, Fair Value	0	0
Securities sold under repurchase agreements, Fair Value	0	0
Subordinated debentures, Fair Value	0	0
Fair Value, Inputs, Level 2 [Member]
Financial Assets, Fair Value:
Cash and cash equivalents, Fair Value	0	0
Investment securities, Fair Value	182,166	193,009
Loans, net, including loans held for sale, Fair Value	13,501	22,577
Accrued interest receivable, Fair Value	1,163	757
Financial Liabilities, Fair Value:
Deposits, Fair Value	1,360,218	1,356,581
Advances from Federal Home Loan Bank, Fair Value	23,022	13,466
Securities sold under repurchase agreements, Fair Value	50,822	51,702
Subordinated debentures, Fair Value	0	0
Fair Value, Inputs, Level 3 [Member]
Financial Assets, Fair Value:
Cash and cash equivalents, Fair Value	0	0
Investment securities, Fair Value	1,890	1,474
Loans, net, including loans held for sale, Fair Value	1,545,996	1,520,861
Accrued interest receivable, Fair Value	5,262	4,837
Financial Liabilities, Fair Value:
Deposits, Fair Value	0	0
Advances from Federal Home Loan Bank, Fair Value	0	0
Securities sold under repurchase agreements, Fair Value	0	0
Subordinated debentures, Fair Value	$ 35,333	$ 35,766

XML

Investment Securities (Details 1) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013		Dec. 31, 2012
Available-for-sale, Due in one year or less, Amortized Cost	$ 2,255
Available-for-sale, Due after one year through five years, Amortized Cost	6,126
Available-for-sale, Due after five years through ten years, Amortized Cost	37,483
Available-for-sale, Due after ten years, Amortized Cost	47,827
Available-for-sale, MBS/CMO, Amortized Cost	89,106
Available-for-sale, Amortized Cost	182,797
Available-for-sale, Due in one year or less, Fair Value	2,262
Available-for-sale, Due after one year through five years, Fair Value	6,315
Available-for-sale, Due after five years through ten years, Fair Value	38,818
Available-for-sale, Due after ten years, Fair Value	47,241
Available-for-sale, MBS/CMO, Fair Value	89,483
Available-for-sale, Fair Value	184,119		194,101
Held-to-maturity, Due in one year or less, Amortized Cost	0
Held-to-maturity, Due after one year through five years, Amortized Cost	186
Held-to-maturity, Due after five years through ten years, Amortized Cost	0
Held-to-maturity, Due after ten years, Amortized Cost	0
Held-to-maturity, MBS/CMO, Amortized Cost	221
Held-to-maturity, Amortized Cost	407	[1]	508	[1]
Held-to-maturity, Due in one year or less, Fair Value	0
Held-to-maturity, Due after one year through five years, Fair Value	186
Held-to-maturity, Due after five years through ten years, Fair Value	0
Held-to-maturity, Due after ten years, Fair Value	0
Held-to-maturity, MBS/CMO, Fair Value	227
Held-to-maturity, Fair Value	$ 413	[1]	$ 516	[1]

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

XML

Deposits (Tables)

9 Months Ended

Sep. 30, 2013

Deposits [Abstract]

Deposits [Table Text Block]

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

	September 30, 2013		December 31, 2012
Non-interest-bearing checking accounts	$	300,891	$	315,132
Interest-bearing checking and money market accounts		681,987		664,857
Savings accounts		182,271		166,945
Retail certificates of deposit less than $100,000		318,317		342,472
Retail certificates of deposit greater than $100,000		175,026		176,029
Brokered or national certificates of deposit		-		2,037
Total	$	1,658,492	$	1,667,472

XML

Loans (Details 9) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Financing Receivable, Net	$ 1,566,476	$ 1,530,090
Pass [Member]
Financing Receivable, Net	1,204,758	1,156,998
Special Mention [Member]
Financing Receivable, Net	45,183	33,406
Substandard [Member]
Financing Receivable, Net	58,597	76,005
Doubtful [Member]
Financing Receivable, Net	9	298
Not Graded [Member]
Financing Receivable, Net	257,929	263,383
Residential Owner Occupied [Member]
Financing Receivable, Net	123,788	128,149
Residential Owner Occupied [Member] | Pass [Member]
Financing Receivable, Net	4,135	4,221
Residential Owner Occupied [Member] | Special Mention [Member]
Financing Receivable, Net	21	75
Residential Owner Occupied [Member] | Substandard [Member]
Financing Receivable, Net	2,867	3,617
Residential Owner Occupied [Member] | Doubtful [Member]
Financing Receivable, Net	0	234
Residential Owner Occupied [Member] | Not Graded [Member]
Financing Receivable, Net	116,765	120,002
Residential Non Owner Occupied [Member]
Financing Receivable, Net	68,627	73,165
Residential Non Owner Occupied [Member] | Pass [Member]
Financing Receivable, Net	53,120	55,771
Residential Non Owner Occupied [Member] | Special Mention [Member]
Financing Receivable, Net	3,233	2,453
Residential Non Owner Occupied [Member] | Substandard [Member]
Financing Receivable, Net	6,030	8,248
Residential Non Owner Occupied [Member] | Doubtful [Member]
Financing Receivable, Net	0	0
Residential Non Owner Occupied [Member] | Not Graded [Member]
Financing Receivable, Net	6,244	6,693
Residential Real Estate [Member]
Financing Receivable, Net	192,415	201,314
Residential Real Estate [Member] | Pass [Member]
Financing Receivable, Net	57,255	59,992
Residential Real Estate [Member] | Special Mention [Member]
Financing Receivable, Net	3,254	2,528
Residential Real Estate [Member] | Substandard [Member]
Financing Receivable, Net	8,897	11,865
Residential Real Estate [Member] | Doubtful [Member]
Financing Receivable, Net	0	234
Residential Real Estate [Member] | Not Graded [Member]
Financing Receivable, Net	123,009	126,695
Construction Loans [Member]
Financing Receivable, Net	40,369	19,296
Construction Loans [Member] | Pass [Member]
Financing Receivable, Net	30,865	11,360
Construction Loans [Member] | Special Mention [Member]
Financing Receivable, Net	0	0
Construction Loans [Member] | Substandard [Member]
Financing Receivable, Net	261	45
Construction Loans [Member] | Doubtful [Member]
Financing Receivable, Net	0	0
Construction Loans [Member] | Not Graded [Member]
Financing Receivable, Net	9,243	7,891
Multi Family [Member]
Financing Receivable, Net	145,854	122,455
Multi Family [Member] | Pass [Member]
Financing Receivable, Net	142,044	118,121
Multi Family [Member] | Special Mention [Member]
Financing Receivable, Net	654	910
Multi Family [Member] | Substandard [Member]
Financing Receivable, Net	2,177	2,404
Multi Family [Member] | Doubtful [Member]
Financing Receivable, Net	0	0
Multi Family [Member] | Not Graded [Member]
Financing Receivable, Net	979	1,020
Commercial Real Estate Owner Occupied [Member]
Financing Receivable, Net	321,268	324,323
Commercial Real Estate Owner Occupied [Member] | Pass [Member]
Financing Receivable, Net	291,586	292,765
Commercial Real Estate Owner Occupied [Member] | Special Mention [Member]
Financing Receivable, Net	14,988	10,440
Commercial Real Estate Owner Occupied [Member] | Substandard [Member]
Financing Receivable, Net	12,808	18,740
Commercial Real Estate Owner Occupied [Member] | Doubtful [Member]
Financing Receivable, Net	0	0
Commercial Real Estate Owner Occupied [Member] | Not Graded [Member]
Financing Receivable, Net	1,886	2,378
Commercial Real Estate Non Owner Occupied [Member]
Financing Receivable, Net	230,793	239,527
Commercial Real Estate Non Owner Occupied [Member] | Pass [Member]
Financing Receivable, Net	201,459	207,745
Commercial Real Estate Non Owner Occupied [Member] | Special Mention [Member]
Financing Receivable, Net	12,571	9,077
Commercial Real Estate Non Owner Occupied [Member] | Substandard [Member]
Financing Receivable, Net	16,642	22,615
Commercial Real Estate Non Owner Occupied [Member] | Doubtful [Member]
Financing Receivable, Net	0	0
Commercial Real Estate Non Owner Occupied [Member] | Not Graded [Member]
Financing Receivable, Net	121	90
Agriculture Land [Member]
Financing Receivable, Net	78,367	72,207
Agriculture Land [Member] | Pass [Member]
Financing Receivable, Net	76,373	69,924
Agriculture Land [Member] | Special Mention [Member]
Financing Receivable, Net	770	769
Agriculture Land [Member] | Substandard [Member]
Financing Receivable, Net	1,224	1,514
Agriculture Land [Member] | Doubtful [Member]
Financing Receivable, Net	0	0
Agriculture Land [Member] | Not Graded [Member]
Financing Receivable, Net	0	0
Commercial Real Estate Other Receivable [Member]
Financing Receivable, Net	47,244	40,966
Commercial Real Estate Other Receivable [Member] | Pass [Member]
Financing Receivable, Net	40,935	31,875
Commercial Real Estate Other Receivable [Member] | Special Mention [Member]
Financing Receivable, Net	1,694	891
Commercial Real Estate Other Receivable [Member] | Substandard [Member]
Financing Receivable, Net	3,856	7,222
Commercial Real Estate Other Receivable [Member] | Doubtful [Member]
Financing Receivable, Net	0	0
Commercial Real Estate Other Receivable [Member] | Not Graded [Member]
Financing Receivable, Net	759	978
Commercial Real Estate [Member]
Financing Receivable, Net	677,672	677,023
Commercial Real Estate [Member] | Pass [Member]
Financing Receivable, Net	610,353	602,309
Commercial Real Estate [Member] | Special Mention [Member]
Financing Receivable, Net	30,023	21,177
Commercial Real Estate [Member] | Substandard [Member]
Financing Receivable, Net	34,530	50,091
Commercial Real Estate [Member] | Doubtful [Member]
Financing Receivable, Net	0	0
Commercial Real Estate [Member] | Not Graded [Member]
Financing Receivable, Net	2,766	3,446
Commercial Working Capital [Member]
Financing Receivable, Net	157,312	162,469
Commercial Working Capital [Member] | Pass [Member]
Financing Receivable, Net	148,492	156,433
Commercial Working Capital [Member] | Special Mention [Member]
Financing Receivable, Net	4,389	3,587
Commercial Working Capital [Member] | Substandard [Member]
Financing Receivable, Net	4,431	2,449
Commercial Working Capital [Member] | Doubtful [Member]
Financing Receivable, Net	0	0
Commercial Working Capital [Member] | Not Graded [Member]
Financing Receivable, Net	0	0
Commercial Loans Other [Member]
Financing Receivable, Net	230,037	222,400
Commercial Loans Other [Member] | Pass [Member]
Financing Receivable, Net	215,749	208,783
Commercial Loans Other [Member] | Special Mention [Member]
Financing Receivable, Net	6,863	5,204
Commercial Loans Other [Member] | Substandard [Member]
Financing Receivable, Net	7,425	8,413
Commercial Loans Other [Member] | Doubtful [Member]
Financing Receivable, Net	0	0
Commercial Loans Other [Member] | Not Graded [Member]
Financing Receivable, Net	0	0
Commercial Loan [Member]
Financing Receivable, Net	387,349	384,869
Commercial Loan [Member] | Pass [Member]
Financing Receivable, Net	364,241	365,216
Commercial Loan [Member] | Special Mention [Member]
Financing Receivable, Net	11,252	8,791
Commercial Loan [Member] | Substandard [Member]
Financing Receivable, Net	11,856	10,862
Commercial Loan [Member] | Doubtful [Member]
Financing Receivable, Net	0	0
Commercial Loan [Member] | Not Graded [Member]
Financing Receivable, Net	0	0
Consumer Loan [Member]
Financing Receivable, Net	16,645	15,939
Consumer Loan [Member] | Pass [Member]
Financing Receivable, Net	0	0
Consumer Loan [Member] | Special Mention [Member]
Financing Receivable, Net	0	0
Consumer Loan [Member] | Substandard [Member]
Financing Receivable, Net	19	70
Consumer Loan [Member] | Doubtful [Member]
Financing Receivable, Net	0	0
Consumer Loan [Member] | Not Graded [Member]
Financing Receivable, Net	16,626	15,869
Home Equity and Home Improvement [Member]
Financing Receivable, Net	106,172	109,194
Home Equity and Home Improvement [Member] | Pass [Member]
Financing Receivable, Net	0	0
Home Equity and Home Improvement [Member] | Special Mention [Member]
Financing Receivable, Net	0	0
Home Equity and Home Improvement [Member] | Substandard [Member]
Financing Receivable, Net	857	668
Home Equity and Home Improvement [Member] | Doubtful [Member]
Financing Receivable, Net	9	64
Home Equity and Home Improvement [Member] | Not Graded [Member]
Financing Receivable, Net	$ 105,306	$ 108,462

XML

Commitments, Guarantees and Contingent Liabilities (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Fixed Rate, Commitments to make loans	$ 41,090	$ 50,205
Fixed Rate, Unused lines of credit	19,227	21,975
Fixed Rate, Standby letters of credit	0	0
Fixed Rate, Total	60,317	72,180
Variable Rate, Commitments to make loans	46,655	48,035
Variable Rate, Unused lines of credit	262,028	228,269
Variable Rate, Standby letters of credit	16,652	18,166
Variable Rate, Total	$ 325,335	$ 294,470

XML

Loans (Details 8) (Subsequently Defaulted [Member], USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013 Number	Sep. 30, 2012 Number	Sep. 30, 2013 Number	Sep. 30, 2012 Number
Troubled Debt Restructurings That Subsequently Defaulted, Number of Loans	9	4	11	5
Troubled Debt Restructurings That Subsequently Defaulted, Recorded Investment	$ 633	$ 1,146	$ 938	$ 1,726
Residential Owner Occupied [Member]
Troubled Debt Restructurings That Subsequently Defaulted, Number of Loans	4	0	5	0
Troubled Debt Restructurings That Subsequently Defaulted, Recorded Investment	339	0	432	0
Residential Non Owner Occupied [Member]
Troubled Debt Restructurings That Subsequently Defaulted, Number of Loans	1	1	1	1
Troubled Debt Restructurings That Subsequently Defaulted, Recorded Investment	78	24	78	24
Commercial Real Estate Owner Occupied [Member]
Troubled Debt Restructurings That Subsequently Defaulted, Number of Loans	0	0	0	0
Troubled Debt Restructurings That Subsequently Defaulted, Recorded Investment	0	0	0	0
Commercial Real Estate Non Owner Occupied [Member]
Troubled Debt Restructurings That Subsequently Defaulted, Number of Loans	0	2	1	2
Troubled Debt Restructurings That Subsequently Defaulted, Recorded Investment	0	351	212	351
Agriculture Land [Member]
Troubled Debt Restructurings That Subsequently Defaulted, Number of Loans	0	0	0	0
Troubled Debt Restructurings That Subsequently Defaulted, Recorded Investment	0	0	0	0
Commercial Real Estate Other Receivable [Member]
Troubled Debt Restructurings That Subsequently Defaulted, Number of Loans	0	0	0	0
Troubled Debt Restructurings That Subsequently Defaulted, Recorded Investment	0	0	0	0
Commercial and Industrial [Member]
Troubled Debt Restructurings That Subsequently Defaulted, Number of Loans	2	1	2	2
Troubled Debt Restructurings That Subsequently Defaulted, Recorded Investment	178	771	178	1,351
Home Equity and Home Improvement [Member]
Troubled Debt Restructurings That Subsequently Defaulted, Number of Loans	2	0	2	0
Troubled Debt Restructurings That Subsequently Defaulted, Recorded Investment	38	0	38	0
Consumer Loan [Member]
Troubled Debt Restructurings That Subsequently Defaulted, Number of Loans	0	0	0	0
Troubled Debt Restructurings That Subsequently Defaulted, Recorded Investment	$ 0	$ 0	$ 0	$ 0

XML

Stock Compensation Plans (Details 1) (USD $)	9 Months Ended
	Sep. 30, 2013
Restricted Stock Units (RSUs) [Member]
Shares, Unvested at January 1, 2013	38,871
Shares, Granted	91,187
Shares, Vested	(20,639)
Shares, Forfeited	(3,358)
Shares, Unvested at September 30, 2013	106,061
Weighted-Average Grant Date Fair Value, Unvested at January 1, 2013	$ 14.74
Weighted-Average Grant Date Fair Value, Granted	$ 19.42
Weighted-Average Grant Date Fair Value, Vested	$ 15.77
Weighted-Average Grant Date Fair Value, Forfeited	$ 11.97
Weighted -Average Grant Date Fair Value, Unvested at September 30, 2013	$ 18.66
Stock Grants [Member]
Shares, Unvested at January 1, 2013	11,260
Shares, Granted	20,639
Shares, Vested	(31,899)
Shares, Forfeited	0
Shares, Unvested at September 30, 2013	0
Weighted-Average Grant Date Fair Value, Unvested at January 1, 2013	$ 13.28
Weighted-Average Grant Date Fair Value, Granted	$ 15.77
Weighted-Average Grant Date Fair Value, Vested	$ 14.89
Weighted-Average Grant Date Fair Value, Forfeited	$ 0
Weighted -Average Grant Date Fair Value, Unvested at September 30, 2013	$ 0

XML

Deposits (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Non-interest-bearing checking accounts	$ 300,891	$ 315,132
Interest-bearing checking and money market accounts	681,987	664,857
Savings accounts	182,271	166,945
Retail certificates of deposit less than $100,000	318,317	342,472
Retail certificates of deposit greater than $100,000	175,026	176,029
Brokered or national certificates of deposit	0	2,037
Total	$ 1,658,492	$ 1,667,472

XML

Fair Value (Tables)

9 Months Ended

Sep. 30, 2013

Fair Value Disclosures [Abstract]

Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis [Table Text Block]

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, 2013	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Available for sale securities:
Obligations of U.S. Government corporations and agencies	$	-	$	4,931	$	-	$	4,931
Mortgage-backed - residential		-		36,939		-		36,939
Collateralized mortgage obligations		-		52,544		-		52,544
Trust preferred stock		-		-		1,890		1,890
Preferred stock		476		-		-		476
Corporate bonds		-		8,968		-		8,968
Obligations of state and political subdivisions		-		78,371				78,371
Mortgage banking derivative - asset		-		548		-		548
Mortgage banking derivative - liability		-		(247)		-		(247)

December 31, 2012	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Available for sale securities:
Obligations of U.S. Government corporations and agencies	$	-	$	11,069	$	-	$	11,069
U.S. treasury bonds		-		1,002		-		1,002
Mortgage-backed - residential		-		31,461		-		31,461
Collateralized mortgage obligations		-		57,466		-		57,466
Trust preferred stock		-		-		1,474		1,474
Preferred stock		134		-		-		134
Corporate bonds		-		8,884		-		8,884
Obligations of state and political subdivisions		-		82,611		-		82,611
Mortgage banking derivative - asset		-		950		-		950
Mortgage banking derivative - liability		-		(94)		-		(94)

Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Table Text Block]

The table below presents a reconciliation and income classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2013 and 2012:

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (In Thousands)
Beginning balance, January 1, 2013	$	1,474
Total gains or losses (realized/unrealized)
Included in earnings (realized)		-
Included in other comprehensive income (presented gross of taxes)		416
Amortization		-
Sales		-
Transfers in and/or out of Level 3		-
Ending balance, September 30, 2013	$	1,890

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (In Thousands)
Beginning balance, July 1, 2013	$	1,736
Total gains or losses (realized/unrealized)
Included in earnings (realized)		-
Included in other comprehensive income (presented gross of taxes)		154
Amortization		-
Sales		-
Transfers in and/or out of Level 3		-
Ending balance, September 30, 2013	$	1,890

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (In Thousands)
Beginning balance, January 1, 2012	$	1,342
Total gains or losses (realized/unrealized)
Included in earnings (realized)		81
Included in other comprehensive income (presented gross of taxes)		151
Amortization		-
Redemption		(266)
Transfers in and/or out of Level 3		-
Ending balance, September 30, 2012	$	1,308

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (In Thousands)
Beginning balance, July 1, 2012	$	1,227
Total gains or losses (realized/unrealized)
Included in earnings (realized)		-
Included in other comprehensive income (presented gross of taxes)		81
Amortization		-
Redemption		-
Transfers in and/or out of Level 3		-
Ending balance, September 30, 2012	$	1,308

Schedule of Fair Value, Assets Measured on Non Recurring Basis [Table Text Block]

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, 2013	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Impaired loans
Residential Loans	$	-	$	-	$	353	$	353
Commercial Loans		-		-		1,159		1,159
Home Equity Loans		-		-		141		141
Multi Family Loans		-		-		355		355
CRE loans		-		-		6,435		6,435
Total impaired loans		-		-		8,443		8,443
Mortgage servicing rights		-		1,495		-		1,495
Real estate held for sale
Residential Loans		-		-		65		65
CRE loans		-		-		562		562
Total Real Estate held for sale		-		-		627		627

December 31, 2012	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Impaired loans
Residential Loans	$	-	$	-	$	599	$	599
Commercial Loans		-		-		771		771
Home Equity Loans		-		-		168		168
Multi Family Loans		-		-		407		407
CRE loans		-		-		12,126		12,126
Total Impaired loans		-		-		14,071		14,071
Mortgage servicing rights		-		7,833		-		7,833
Real estate held for sale
Residential Loans		-		-		61		61
CRE loans		-		-		385		385
Total Real Estate held for sale		-		-		446		446

Fair Value, Assets Measured on Recurring and Nonrecurring Basis [Table Text Block]

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of September 30, 2013, the significant unobservable inputs used in the fair value measurements were as follows:

	Fair Value		Valuation Technique	Unobservable Inputs	Range of Inputs		Weighted Average
	(Dollars in Thousands)
Trust preferred stock	$	1,890	Discounted cash flow	Constant prepayment rate	2-40	%	40	%
				Expected asset default	0-30	%	15	%
				Expected recoveries	10-15	%	10	%
Impaired Loans- Applies to all loan classes	$	8,443	Appraisals	Discounts for collection issues and changes in market conditions	0-10	%	10	%
Real estate held for sale – Applies to all classes	$	627	Appraisals	Discounts for changes in market conditions	0-20	%	20	%

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of December 31, 2012, the significant unobservable inputs used in the fair value measurements were as follows:

	Fair Value		Valuation Technique	Unobservable Inputs	Range of Inputs		Weighted Average
	(Dollars in Thousands)
Trust preferred stock	$	1,474	Discounted cash flow	Constant prepayment rate	2-40	%	40	%
				Expected asset default	0-30	%	15	%
				Expected recoveries	10-15	%	10	%
Impaired Loans- Applies to all loan classes	$	14,071	Appraisals	Discounts for collection issues and changes in market conditions	0-10	%	10	%
Real estate held for sale – Applies to all classes	$	446	Appraisals	Discounts for changes in market conditions	0-20	%	20	%

Fair Value, by Balance Sheet Grouping [Table Text Block]

The cost or value of any call or put options is based on the estimated cost to settle the option at September 30, 2013.

	Carrying		Fair Value Measurements at September 30, 2013 (In Thousands)
	Value		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	127,629	$	127,629	$	127,629	$	-	$	-
Investment securities		184,526		184,532		476		182,166		1,890
Federal Home Loan Bank Stock		19,350		N/A		N/A		N/A		N/A
Loans, net, including loans       held for sale		1,548,706		1,559,497		-		13,501		1,545,996
Accrued interest receivable		6,425		6,425		-		1,163		5,262
Financial Liabilities:
Deposits	$	1,658,492	$	1,661,109	$	300,891	$	1,360,218	$	-
Advances from Federal Home      Loan Bank		22,761		23,022		-		23,022		-
Securities sold under repurchase      agreements		50,822		50,822		-		50,822		-
Subordinated debentures		36,083		35,333		-		-		35,333

	Carrying		Fair Value Measurements at December 31, 2012 (In Thousands)
	Value		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	136,832	$	136,832	$	136,832	$	-	$	-
Investment securities		194,609		194,617		134		193,009		1,474
Federal Home Loan Bank Stock		20,655		N/A		N/A		N/A		N/A
Loans, net, including loans      held for sale		1,520,610		1,543,438		-		22,577		1,520,861
Accrued interest receivable		5,594		5,594		-		757		4,837
Financial Liabilities:
Deposits	$	1,667,472	$	1,671,713	$	315,132	$	1,356,581	$	-
Advances from Federal Home      Loan Bank		12,796		13,466		-		13,466		-
Securities sold under repurchase      agreements		51,702		51,702		-		51,702		-
Subordinated debentures		36,083		35,766		-		-		35,766

XML

Consolidated Condensed Statements of Changes in Stockholders' Equity (USD $) In Thousands	Total	Preferred Stock [Member]	Common Stock [Member]	Common Stock Warrant [Member]	Additional Paid-in Capital [Member]	Accumulated Other Comprehensive Income (Loss) [Member]	Retained Earnings [Member]	Treasury Stock [Member]
Balance at Dec. 31, 2011	$ 278,127	$ 36,641	$ 127	$ 878	$ 135,825	$ 3,997	$ 148,010	$ (47,351)
Net income	13,508	0	0	0	0	0	13,508	0
Other comprehensive loss	1,866
Change in net unrealized gains and losses on available-for-sale securities	1,866					1,866
Stock option expense	82	0	0	0	82	0	0	0
Shares issued under stock option plan, with no income tax benefit, net of repurchases	4	0	0	0	0	0	(4)	8
Restricted share activity under Stock Incentive Plans	260	0	0	0	230	0	0	30
Shares issued direct purchases	11	0	0	0	1	0	0	10
Preferred Stock Dividends accrued	(900)	0	0	0	0	0	(900)	0
Accretion on preferred shares	0	359	0	0	0	0	(359)	0
Shares purchased in U.S. Treasury auction	(15,942)	(16,560)	0	0	0	0	618	0
Shares purchased in open market	(20,416)	(20,440)	0	0	0	0	24	0
Common stock dividends declared	(1,464)	0	0	0	0	0	(1,464)	0
Balance at Sep. 30, 2012	255,136	0	127	878	136,138	5,863	159,433	(47,303)
Balance at Dec. 31, 2012	258,128	0	127	878	136,046	4,274	164,103	(47,300)
Net income	17,148	0	0	0	0	0	17,148	0
Other comprehensive loss	(3,992)	0	0	0	0	(3,992)	0	0
Stock option expense	35	0	0	0	35	0	0	0
Shares issued under stock option plan, with no income tax benefit, net of repurchases	272	0	0	0	(21)	0	(97)	390
Restricted share activity under Stock Incentive Plans	632	0	0	0	177	0	(45)	500
Shares issued direct purchases	64	0	0	0	20	0	0	44
Common stock dividends declared	(2,928)	0	0	0	0	0	(2,928)	0
Balance at Sep. 30, 2013	$ 269,359	$ 0	$ 127	$ 878	$ 136,257	$ 282	$ 178,181	$ (46,366)

XML

Consolidated Condensed Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Operating Activities
Net income	$ 17,148	$ 13,508
Items not requiring (providing) cash
Provision for loan losses	1,349	8,306
Depreciation	2,356	2,552
Amortization of mortgage servicing rights, net of valuation adjustments	487	3,465
Amortization of core deposit and other intangible assets	945	1,068
Net amortization of premiums and discounts on loans and deposits	570	516
Amortization of premiums and discounts on securities	401	621
Loss on sale or disposals of property, plant and equipment	1	43
Change in deferred taxes	(27)	1,104
Proceeds from the sale of loans held for sale	271,413	381,875
Originations of loans held for sale	(259,616)	(374,872)
Gain from sale of loans	(5,012)	(7,940)
Gain from sale or call of securities	(97)	(528)
Loss on sale or write-down of real estate and other assets held for sale	418	302
Stock option expense	35	82
Restricted stock expense	632	260
Income from bank-owned life insurance	(672)	(683)
Changes in:
Accrued interest receivable	(831)	(677)
Other assets	1,221	(325)
Other liabilities	(133)	4,873
Net cash provided by operating activities	30,588	33,550
Investing Activities
Proceeds from maturities of held-to-maturity securities	100	76
Proceeds from maturities, calls and pay-downs of available-for-sale securities	30,258	49,571
Proceeds from sale of real estate and other assets held for sale	2,696	2,901
Proceeds from the sale of available-for-sale securities	4,027	8,538
Proceeds from sale of non-mortgage loans	11,648	371
Purchases of available-for-sale securities	(30,746)	(91,513)
Proceeds from Federal Home Loan Bank stock redemption	1,305	0
Purchase of bank-owned life insurance	0	(5,000)
Purchases of portfolio mortgage loans	(4,545)	0
Purchases of premises and equipment, net	(1,760)	(2,874)
Net increase in loans receivable	(50,568)	(43,572)
Net cash used in by investing activities	(37,585)	(81,502)
Financing Activities
Net increase (decrease) in deposits and advance payments by borrowers	(8,699)	12,689
Repayment of Federal Home Loan Bank advances	(35)	(34)
Increase in Federal Home Loan Bank short-term advances	10,000	0
Decrease in securities sold under repurchase agreements	(880)	(8,395)
Cash paid for redemption of preferred stock	0	(36,358)
Proceeds from exercise of stock options	272	4
Proceeds from treasury stock sales	64	11
Cash dividends paid on common stock	(2,928)	(1,464)
Cash dividends paid on preferred stock	0	(1,026)
Net cash used in financing activities	(2,206)	(34,573)
Decrease in cash and cash equivalents	(9,203)	(82,525)
Cash and cash equivalents at beginning of period	136,832	174,931
Cash and cash equivalents at end of period	127,629	92,406
Supplemental cash flow information:
Interest paid	5,427	9,814
Income taxes paid	8,300	800
Transfers from loans to real estate and other assets held for sale	$ 4,827	$ 2,418

XML

Fair Value

9 Months Ended

Sep. 30, 2013

Fair Value Disclosures [Abstract]

Fair Value, Measurement Inputs, Disclosure [Text Block]

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.

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. The Company classifies its pooled trust preferred collateralized debt obligations as Level 3.  The portfolio consists of collateralized debt obligations backed by pools of trust preferred securities issued by financial institutions and insurance companies.  Based on the lack of observable market data, the Company estimated fair values based on the observable data available and reasonable unobservable market data. The Company estimated fair value based on a discounted cash flow model, which used appropriately adjusted discount rates reflecting credit and liquidity risks.  The Company used an independent third party, which is described further in Note 7.

Impaired loans - Fair values for impaired collateral dependent loans are generally based on appraisals obtained from licensed real estate appraisers and in certain circumstances consideration of offers obtained to purchase 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% to account for other factors that may impact the value of collateral. In determining the value of impaired collateral dependent loans and other real estate owned, significant unobservable inputs may be used, which include:  physical condition of comparable properties sold, net operating income generated by the property and investor rates of return.

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

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

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

Assets and Liabilities Measured on a Recurring Basis

September 30, 2013	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Available for sale securities:
Obligations of U.S. Government corporations and agencies	$	-	$	4,931	$	-	$	4,931
Mortgage-backed - residential		-		36,939		-		36,939
Collateralized mortgage obligations		-		52,544		-		52,544
Trust preferred stock		-		-		1,890		1,890
Preferred stock		476		-		-		476
Corporate bonds		-		8,968		-		8,968
Obligations of state and political subdivisions		-		78,371				78,371
Mortgage banking derivative - asset		-		548		-		548
Mortgage banking derivative - liability		-		(247)		-		(247)

December 31, 2012	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Available for sale securities:
Obligations of U.S. Government corporations and agencies	$	-	$	11,069	$	-	$	11,069
U.S. treasury bonds		-		1,002		-		1,002
Mortgage-backed - residential		-		31,461		-		31,461
Collateralized mortgage obligations		-		57,466		-		57,466
Trust preferred stock		-		-		1,474		1,474
Preferred stock		134		-		-		134
Corporate bonds		-		8,884		-		8,884
Obligations of state and political subdivisions		-		82,611		-		82,611
Mortgage banking derivative - asset		-		950		-		950
Mortgage banking derivative - liability		-		(94)		-		(94)

There were no transfers between Level 1 and Level 2 during the periods ended September 30, 2013 or December 31, 2012.

The table below presents a reconciliation and income classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2013 and 2012:

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (In Thousands)
Beginning balance, January 1, 2013	$	1,474
Total gains or losses (realized/unrealized)
Included in earnings (realized)		-
Included in other comprehensive income (presented gross of taxes)		416
Amortization		-
Sales		-
Transfers in and/or out of Level 3		-
Ending balance, September 30, 2013	$	1,890

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (In Thousands)
Beginning balance, July 1, 2013	$	1,736
Total gains or losses (realized/unrealized)
Included in earnings (realized)		-
Included in other comprehensive income (presented gross of taxes)		154
Amortization		-
Sales		-
Transfers in and/or out of Level 3		-
Ending balance, September 30, 2013	$	1,890

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (In Thousands)
Beginning balance, January 1, 2012	$	1,342
Total gains or losses (realized/unrealized)
Included in earnings (realized)		81
Included in other comprehensive income (presented gross of taxes)		151
Amortization		-
Redemption		(266)
Transfers in and/or out of Level 3		-
Ending balance, September 30, 2012	$	1,308

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) (In Thousands)
Beginning balance, July 1, 2012	$	1,227
Total gains or losses (realized/unrealized)
Included in earnings (realized)		-
Included in other comprehensive income (presented gross of taxes)		81
Amortization		-
Redemption		-
Transfers in and/or out of Level 3		-
Ending balance, September 30, 2012	$	1,308

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, 2013	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Impaired loans
Residential Loans	$	-	$	-	$	353	$	353
Commercial Loans		-		-		1,159		1,159
Home Equity Loans		-		-		141		141
Multi Family Loans		-		-		355		355
CRE loans		-		-		6,435		6,435
Total impaired loans		-		-		8,443		8,443
Mortgage servicing rights		-		1,495		-		1,495
Real estate held for sale
Residential Loans		-		-		65		65
CRE loans		-		-		562		562
Total Real Estate held for sale		-		-		627		627

December 31, 2012	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
	(In Thousands)
Impaired loans
Residential Loans	$	-	$	-	$	599	$	599
Commercial Loans		-		-		771		771
Home Equity Loans		-		-		168		168
Multi Family Loans		-		-		407		407
CRE loans		-		-		12,126		12,126
Total Impaired loans		-		-		14,071		14,071
Mortgage servicing rights		-		7,833		-		7,833
Real estate held for sale
Residential Loans		-		-		61		61
CRE loans		-		-		385		385
Total Real Estate held for sale		-		-		446		446

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of September 30, 2013, the significant unobservable inputs used in the fair value measurements were as follows:

	Fair Value		Valuation Technique	Unobservable Inputs	Range of Inputs		Weighted Average
	(Dollars in Thousands)
Trust preferred stock	$	1,890	Discounted cash flow	Constant prepayment rate	2-40	%	40	%
				Expected asset default	0-30	%	15	%
				Expected recoveries	10-15	%	10	%
Impaired Loans- Applies to all loan classes	$	8,443	Appraisals	Discounts for collection issues and changes in market conditions	0-10	%	10	%
Real estate held for sale – Applies to all classes	$	627	Appraisals	Discounts for changes in market conditions	0-20	%	20	%

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of December 31, 2012, the significant unobservable inputs used in the fair value measurements were as follows:

	Fair Value		Valuation Technique	Unobservable Inputs	Range of Inputs		Weighted Average
	(Dollars in Thousands)
Trust preferred stock	$	1,474	Discounted cash flow	Constant prepayment rate	2-40	%	40	%
				Expected asset default	0-30	%	15	%
				Expected recoveries	10-15	%	10	%
Impaired Loans- Applies to all loan classes	$	14,071	Appraisals	Discounts for collection issues and changes in market conditions	0-10	%	10	%
Real estate held for sale – Applies to all classes	$	446	Appraisals	Discounts for changes in market conditions	0-20	%	20	%

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a fair value of $8.4 million, with a valuation allowance of $300,000 at September 30, 2013. A provision expense of $1.3 million for the three months ended September 30, 2013 was included in earnings.  Provision expense of $2.5 million for the nine months ended September 30, 2013 was included in earnings.

Mortgage servicing rights, which are carried at the lower of cost or fair value, had a fair value of $1.5 million at September 30, 2013 with a valuation allowance of $1.0 million. A recovery of $480,000 for the three months and $1.3 million for the nine months ended September 30, 2013 was included in earnings.

Real estate held for sale is determined using Level 3 inputs which include appraisals and are adjusted for changes in market conditions. The change in fair value of real estate held for sale was $73,000 for the three months and $287,000 for the nine months ended September 30, 2013 which was recorded directly as an adjustment to current earnings through non-interest expense.

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a fair value of $14.1 million with a valuation allowance of $0 at December 31, 2012.  Provision expense of $1.2 million for the three months ended September 30, 2012 was included in earnings.  Provision expense of $5.4 million for the nine months ended September 30, 2012 was included in earnings.

Mortgage servicing rights which are carried at the lower of cost or fair value had a fair value of $7.8 million at December 31, 2012 resulting in a valuation allowance of $2.4 million. A charge of $600,000 for the three months and $855,000 for the nine months ended September 30, 2012 was included in earnings.

Real estate held for sale is determined using Level 3 inputs, which include appraisals and are adjusted for changes in market conditions. The change in fair value of real estate held for sale was $36,000 for the three months and $299,000 for the nine months ended September 30, 2012, which was recorded directly as an adjustment to current earnings through non-interest expense.

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, 2013 and December 31, 2012. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of First Defiance.

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

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

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

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

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, 2013.

	Carrying		Fair Value Measurements at September 30, 2013 (In Thousands)
	Value		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	127,629	$	127,629	$	127,629	$	-	$	-
Investment securities		184,526		184,532		476		182,166		1,890
Federal Home Loan Bank Stock		19,350		N/A		N/A		N/A		N/A
Loans, net, including loans       held for sale		1,548,706		1,559,497		-		13,501		1,545,996
Accrued interest receivable		6,425		6,425		-		1,163		5,262
Financial Liabilities:
Deposits	$	1,658,492	$	1,661,109	$	300,891	$	1,360,218	$	-
Advances from Federal Home      Loan Bank		22,761		23,022		-		23,022		-
Securities sold under repurchase      agreements		50,822		50,822		-		50,822		-
Subordinated debentures		36,083		35,333		-		-		35,333

	Carrying		Fair Value Measurements at December 31, 2012 (In Thousands)
	Value		Total		Level 1		Level 2		Level 3
Financial Assets:
Cash and cash equivalents	$	136,832	$	136,832	$	136,832	$	-	$	-
Investment securities		194,609		194,617		134		193,009		1,474
Federal Home Loan Bank Stock		20,655		N/A		N/A		N/A		N/A
Loans, net, including loans      held for sale		1,520,610		1,543,438		-		22,577		1,520,861
Accrued interest receivable		5,594		5,594		-		757		4,837
Financial Liabilities:
Deposits	$	1,667,472	$	1,671,713	$	315,132	$	1,356,581	$	-
Advances from Federal Home      Loan Bank		12,796		13,466		-		13,466		-
Securities sold under repurchase      agreements		51,702		51,702		-		51,702		-
Subordinated debentures		36,083		35,766		-		-		35,766

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Commitments, Guarantees and Contingent Liabilities (Details Textual) (USD $) In Millions, unless otherwise specified	9 Months Ended
	Sep. 30, 2013	Dec. 31, 2012
Line of Credit Facility, Period	60 days or less
Commitments and Loans, Available to Sell	$ 13.3	$ 53.6

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Basis of Presentation

9 Months Ended

Sep. 30, 2013

Organization, Consolidation and Presentation Of Financial Statements [Abstract]

Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]

1. Basis of Presentation

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

First Federal is primarily engaged in community banking, attracting deposits from the general public and using those and other available sources of funds to originate loans primarily in the counties in which its offices are located. First Federal’s traditional banking activities include originating and servicing residential, commercial and consumer loans and providing a broad range of depository, trust and wealth management services. First Insurance is an insurance agency that does business in the Defiance, Archbold, Bryan, Bowling Green, Maumee and Oregon, Ohio areas, offering property and casualty, and group health and life insurance products. First Defiance Risk Management was incorporated on December 20, 2012, as a wholly-owned insurance company subsidiary of the Company to insure the Company and the Subsidiaries against certain risks unique to the operations of the Company and for which insurance may not be currently available or economically feasible in today’s insurance marketplace.

The consolidated condensed statement of financial condition at December 31, 2012 has been derived from the audited financial statements at that date, which were included in First Defiance’s Annual Report on Form 10-K.

The accompanying consolidated condensed financial statements as of September 30, 2013 and for the three and nine month periods ended September 30, 2013 and 2012 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 2012 Annual Report on Form 10-K for the year ended December 31, 2012. However, in the opinion of management, all adjustments, consisting of only normal recurring items, necessary for the fair presentation of the financial statements have been made. The results for the three and nine month periods ended September 30, 2013 are not necessarily indicative of the results that may be expected for the entire year.

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Fair Value (Details Textual) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012	Dec. 31, 2012
Impaired Financing Receivable, Recorded Investment	$ 8,443,000		$ 8,443,000		$ 14,071,000
Impaired Financing Receivables, Provisional Expenses	1,300,000		2,500,000
Mortgage Servicing Rights at Fair Value	1,495,000		1,495,000		7,833,000
Valuation Allowance of Mortgage Servicing Rights	300,000		300,000		0
Proceeds from Collection of Loans Receivable	480,000		1,300,000
Real Estate Held-for-sale, Increase (Decrease) in Fair Value	73,000	36,000	287,000	299,000
Provision for Loan Losses Expensed		1,200,000		5,400,000
Charge of Mortgage Servicing Rights		600,000		855,000
Minimum [Member]
Fair Value Inputs, Discount Rate			0.00%
Maximum [Member]
Fair Value Inputs, Discount Rate			20.00%
Mortgage Services Rights [Member]
Valuation Allowance of Mortgage Servicing Rights	$ 1,000,000		$ 1,000,000		$ 2,400,000

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Investment Securities (Tables)

9 Months Ended

Sep. 30, 2013

Marketable Securities [Abstract]

Schedule of Available-for-sale and Held to Maturity Securities [Table Text Block]

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
At September 30, 2013
Available-for-Sale Securities:
Obligations of U.S. government corporations and      agencies	$	5,000	$	-	$	(69)	$	4,931
Mortgage-backed securities – residential		36,800		877		(738)		36,939
Collateralized mortgage obligations		52,306		848		(610)		52,544
Trust preferred securities and preferred stock		3,601		441		(1,676)		2,366
Corporate bonds		8,839		138		(9)		8,968
Obligations of state and political subdivisions		76,251		2,956		(836)		78,371
Totals	$	182,797	$	5,260	$	(3,938)	$	184,119
Held-to-Maturity Securities*:
FHLMC certificates	$	33	$	-	$	-	$	33
FNMA certificates		136		4		-		140
GNMA certificates		52		2		-		54
Obligations of state and political subdivisions		186		-		-		186
Totals	$	407	$	6	$	-	$	413

At December 31, 2012
Available-for-Sale Securities:
Obligations of U.S. government corporations      and agencies	$	11,000	$	69	$	-	$	11,069
U.S. treasury bonds		1,000		2		-		1,002
Mortgage-backed securities – residential		30,020		1,441		-		31,461
Collateralized mortgage obligations		55,962		1,504		-		57,466
Trust preferred securities and preferred stock		3,600		99		(2,091)		1,608
Corporate bonds		8,717		167		-		8,884
Obligations of state and political subdivisions		76,339		6,277		(5)		82,611
Totals	$	186,638	$	9,559	$	(2,096)	$	194,101
Held-to-Maturity Securities*:
FHLMC certificates	$	69	$	-	$	(1)	$	68
FNMA certificates		162		6		-		168
GNMA certificates		60		3		-		63
Obligations of state and political subdivisions		217		-		-		217
Totals	$	508	$	9	$	(1)	$	516

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

Investments Classified by Contractual Maturity Date [Table Text Block]

These securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.

	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(In Thousands)
Due in one year or less	$	2,255	$	2,262	$	-	$	-
Due after one year through five years		6,126		6,315		186		186
Due after five years through ten years		37,483		38,818		-		-
Due after ten years		47,827		47,241		-		-
MBS/CMO		89,106		89,483		221		227
	$	182,797	$	184,119	$	407	$	413

Unrealized Gain (Loss) on Investments [Table Text Block]

The following tables summarize First Defiance’s securities that were in an unrealized loss position at September 30, 2013 and December 31, 2012:

	Duration of Unrealized Loss Position
	Less than 12 Months				12 Month or Longer				Total
			Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Losses
	(In Thousands)
At September 30, 2013
Available-for-sale securities:
Obligations of U.S.     government corporations     and agencies	$	2,931	$	(69)	$	-	$	-	$	2,931	$	(69)
Mortgage-backed -     residential		19,456		(738)		-		-		19,456		(738)
Collateralized mortgage     obligations		19,948		(610)		-		-		19,948		(610)
Trust preferred stock and     preferred stock		-		-		1,890		(1,676)		1,890		(1,676)
Corporate bonds		2,991		(9)		-		-		2,991		(9)
Obligations of state and     political subdivisions		16,682		(836)		-		-		16,682		(836)
Total temporarily     impaired securities	$	62,008	$	(2,262)	$	1,890	$	(1,676)	$	63,898	$	(3,938)

	Duration of Unrealized Loss Position
	Less than 12 Months				12 Months or Longer				Total
			Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loses
		(In Thousands)
At December 31, 2012
Available-for-sale securities:
Mortgage-backed     securities - residential	$	1	$	-	$	-	$	-	$	1	$	-
Obligations of state and     political subdivisions		949		(5)		-		-		949		(5)
Trust preferred stock and     preferred stock		-		-		1,474		(2,091)		1,474		(2,091)
Total temporarily impaired     securities	$	950	$	(5)	$	1,474	$	(2,091)	$	2,424	$	(2,096)

Schedule of Other than Temporary Impairment, Credit Losses Recognized in Earnings [Table Text Block]

The following table details the six securities with other-than-temporary impairment, their lowest credit rating at September 30, 2013 and the related credit losses recognized in earnings for the three month period ending March 31, 2013, June 30, 2013 and September 30, 2013 (In Thousands):

		TPREF Funding II		Alesco VIII		Preferred Term Security XXVII		Trapeza CDO I		Alesco Preferred Funding VIII		Alesco Preferred Funding IX
		Rated Caa3		Rated Ca		Rated C		Rated Ca		Not Rated		Not Rated		Total
Cumulative OTTI related to credit loss at January 1, 2013	$	323	$	1,000	$	78	$	857	$	453	$	465	$	3,176
Addition – Qtr 1		-		-		-		-		-		-		-
Cumulative OTTI related to credit loss at March 31, 2013	$	323	$	1,000	$	78	$	857	$	453	$	465	$	3,176
Addition – Qtr 2		-		-		-		-		-		-		-
Cumulative OTTI related to credit loss at June 30, 2013	$	323	$	1,000	$	78	$	857	$	453	$	465	$	3,176
Addition – Qtr 3		-		-		-		-		-		-		-
Cumulative OTTI related to credit loss at September 30, 2013	$	323	$	1,000	$	78	$	857	$	453	$	465	$	3,176

Investment [Table Text Block]

The following table provides additional information related to the four CDO investments for which a balance remains as of September 30, 2013 (dollars in thousands):

CDO	Class	Amortized Cost		Fair Value		Unrealized Loss		OTTI Losses 2013		Lowest Rating	Current Number of Banks and Insurance Companies	Actual Deferrals and Defaults as a %  of Current Collateral		Expected Deferrals and Defaults as a %  of Remaining Performing Collateral		Excess Sub- ordination as a  % of Current Performing Collateral
TPREF Funding II	B		673		271		(402)		-	Caa3	15	43.47	%	15.90	%	-	%
I-Preferred Term Sec I	B-1		1,000		686		(314)		-	CCC-	14	17.24	%	12.04	%	23.78	%
Dekania II CDO	C-1		990		612		(378)		-	CCC	31	-	%	13.29	%	26.51	%
Preferred Term Sec XXVII	C-1		903		321		(582)		-	C	32	26.15	%	18.83	%	5.99	%
Total		$	3,566	$	1,890	$	(1,676)	$	-

Marketable Securities [Table Text Block]

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
	(In thousands)				(In thousands)
Proceeds	$	-	$	2,122	$	4,027	$	8,538
Gross realized gains		-		103		97		528
Gross realized losses		-		-		-		-

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Borrowings (Tables)

9 Months Ended

Sep. 30, 2013

Notes Payable and Other Short Term Borrowings [Abstract]

Federal Home Loan Bank Advances Disclosure [Table Text Block]

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

	September 30, 2013		December 31, 2012
	(in thousands)
FHLB Advances:
Putable advances		12,000		12,000
Amortizable mortgage advances		10,761		796
Total	$	22,761	$	12,796
Junior subordinated debentures owed to unconsolidated subsidiary trusts	$	36,083	$	36,083

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Borrowings (Details Textual) (USD $) In Millions, unless otherwise specified	9 Months Ended	12 Months Ended			3 Months Ended
	Sep. 30, 2013 Putable Advances [Member]	Dec. 31, 2005 Trust Affiliate I [Member]	Sep. 30, 2013 Trust Affiliate I [Member]	Dec. 31, 2012 Trust Affiliate I [Member]	Mar. 31, 2007 Trust Affiliate II [Member]	Sep. 30, 2013 Trust Affiliate II [Member]	Dec. 31, 2012 Trust Affiliate II [Member]
Federal Home Loan Bank, Advances, Balance Amount Yet to Be Called Series One	$ 12.0
Federal Home Loan Bank, Advances, Interest Rate on Balance Amount Yet to be Called Series One	2.72%
Federal Home Loan Bank, Advances, Branch of FHLB Bank, Call Date Earliest One	October 15, 2013
Federal Home Loan Bank, Advances, Branch of FHLB Bank, Call Date Last One	December 12, 2013
Federal Home Loan Bank, Advances, General Debt Obligations Disclosures, Due Date Earliest One	January 14, 2015
Federal Home Loan Bank, Advances, General Debt Obligations Disclosures, Due Date Last	March 12, 2018
Issuance of Trust Preferred Securities		20			15
Issuance of Subordinated Debentures		$ 20.6			$ 15.5
Federal Home Loan Bank, Advances, Maturities Summary, Average Interest Rate of Amounts Due within One Year of Balance Sheet Date					6.441%
Preferred Securities, Variable Interest Rate		LIBOR rate plus 1.38%			LIBOR plus 1.5%
Coupon Rate on Preferred Securities, Period End			1.63%	1.77%		1.75%	1.89%

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Fair Value (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Beginning balance	$ 1,736	$ 1,227	$ 1,474	$ 1,342
Total gains or losses (realized/unrealized)
Total gains or losses (realized/unrealized) Included in earnings (realized/unrealized)	0	0	0	81
Total gains or losses (realized/unrealized) Included in other comprehensive income (presented gross of taxes)	154	81	416	151
Amortization	0	0	0	0
Sales	0		0
Redemption		0		(266)
Transfers in and/or out of Level 3	0	0	0	0
Ending balance	$ 1,890	$ 1,308	$ 1,890	$ 1,308

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Borrowings (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
FHLB Advances:
Putable advances	$ 12,000	$ 12,000
Amortizable mortgage advances	10,761	796
Total	22,761	12,796
Junior subordinated debentures owed to unconsolidated subsidiary trusts	$ 36,083	$ 36,083

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Loans (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Jun. 30, 2013	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Dec. 31, 2011
Real Estate:
Real Estate	$ 1,072,666		$ 1,035,999
Other Loans:
Other Loans	508,546		508,471
Total loans	1,581,212		1,544,470
Deduct:
Undisbursed loan funds	(19,189)		(18,478)
Net deferred loan origination fees and costs	(744)		(735)
Allowance for loan loss	(25,964)	(26,270)	(26,711)	(26,310)	(26,409)	(33,254)
Totals	1,535,315		1,498,546
One to Four Family Residential Real Estate [Member]
Real Estate:
Real Estate	191,984		200,826
Multi Family Residential [Member]
Real Estate:
Real Estate	145,704		122,275
Commercial Real Estate [Member]
Real Estate:
Real Estate	675,411		675,110
Construction Loans [Member]
Real Estate:
Real Estate	59,567		37,788
Commercial Loan [Member]
Other Loans:
Other Loans	386,160		383,817
Home Equity and Home Improvement [Member]
Other Loans:
Other Loans	105,727		108,718
Consumer Loan [Member]
Other Loans:
Other Loans	$ 16,659		$ 15,936

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Investment Securities (Details 2) (USD $) In Thousands, unless otherwise specified	9 Months Ended	12 Months Ended
	Sep. 30, 2013	Dec. 31, 2012
Available-for-sale securities, Duration of Unrealized Loss Position, Less than 12 Month, Fair Value	$ 62,008	$ 950
Available-for-sale Securities, Duration of Unrealized Loss Position, Less than 12 Month, Gross Unrealized Loss	(2,262)	(5)
Available-for-sale securities, Duration of Unrealized Loss Position, 12 Month or Longer, Fair Value	1,890	1,474
Available-for-sale Securities, Duration of Unrealized Loss Position, 12 Month or Longer, Gross Unrealized Loss	(1,676)	(2,091)
Available-for-sale securities, Total, Fair Value	63,898	2,424
Available-for-sale securities, Total, Unrealized Loss	(3,938)	(2,096)
Us Government Corporations and Agencies Securities [Member]
Available-for-sale securities, Duration of Unrealized Loss Position, Less than 12 Month, Fair Value	2,931
Available-for-sale Securities, Duration of Unrealized Loss Position, Less than 12 Month, Gross Unrealized Loss	(69)
Available-for-sale securities, Duration of Unrealized Loss Position, 12 Month or Longer, Fair Value	0
Available-for-sale Securities, Duration of Unrealized Loss Position, 12 Month or Longer, Gross Unrealized Loss	0
Available-for-sale securities, Total, Fair Value	2,931
Available-for-sale securities, Total, Unrealized Loss	(69)
Residential Mortgage Backed Securities [Member]
Available-for-sale securities, Duration of Unrealized Loss Position, Less than 12 Month, Fair Value	19,456	1
Available-for-sale Securities, Duration of Unrealized Loss Position, Less than 12 Month, Gross Unrealized Loss	(738)	0
Available-for-sale securities, Duration of Unrealized Loss Position, 12 Month or Longer, Fair Value	0	0
Available-for-sale Securities, Duration of Unrealized Loss Position, 12 Month or Longer, Gross Unrealized Loss	0	0
Available-for-sale securities, Total, Fair Value	19,456	1
Available-for-sale securities, Total, Unrealized Loss	(738)	0
Collateralized Mortgage Obligations [Member]
Available-for-sale securities, Duration of Unrealized Loss Position, Less than 12 Month, Fair Value	19,948
Available-for-sale Securities, Duration of Unrealized Loss Position, Less than 12 Month, Gross Unrealized Loss	(610)
Available-for-sale securities, Duration of Unrealized Loss Position, 12 Month or Longer, Fair Value	0
Available-for-sale Securities, Duration of Unrealized Loss Position, 12 Month or Longer, Gross Unrealized Loss	0
Available-for-sale securities, Total, Fair Value	19,948
Available-for-sale securities, Total, Unrealized Loss	(610)
Trust Preferred Securities and Preferred Stock [Member]
Available-for-sale securities, Duration of Unrealized Loss Position, Less than 12 Month, Fair Value	0	0
Available-for-sale Securities, Duration of Unrealized Loss Position, Less than 12 Month, Gross Unrealized Loss	0	0
Available-for-sale securities, Duration of Unrealized Loss Position, 12 Month or Longer, Fair Value	1,890	1,474
Available-for-sale Securities, Duration of Unrealized Loss Position, 12 Month or Longer, Gross Unrealized Loss	(1,676)	(2,091)
Available-for-sale securities, Total, Fair Value	1,890	1,474
Available-for-sale securities, Total, Unrealized Loss	(1,676)	(2,091)
Corporate Bond Securities [Member]
Available-for-sale securities, Duration of Unrealized Loss Position, Less than 12 Month, Fair Value	2,991
Available-for-sale Securities, Duration of Unrealized Loss Position, Less than 12 Month, Gross Unrealized Loss	(9)
Available-for-sale securities, Duration of Unrealized Loss Position, 12 Month or Longer, Fair Value	0
Available-for-sale Securities, Duration of Unrealized Loss Position, 12 Month or Longer, Gross Unrealized Loss	0
Available-for-sale securities, Total, Fair Value	2,991
Available-for-sale securities, Total, Unrealized Loss	(9)
US States and Political Subdivisions Debt Securities [Member]
Available-for-sale securities, Duration of Unrealized Loss Position, Less than 12 Month, Fair Value	16,682	949
Available-for-sale Securities, Duration of Unrealized Loss Position, Less than 12 Month, Gross Unrealized Loss	(836)	(5)
Available-for-sale securities, Duration of Unrealized Loss Position, 12 Month or Longer, Fair Value	0	0
Available-for-sale Securities, Duration of Unrealized Loss Position, 12 Month or Longer, Gross Unrealized Loss	0	0
Available-for-sale securities, Total, Fair Value	16,682	949
Available-for-sale securities, Total, Unrealized Loss	$ (836)	$ (5)

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Dividends on Common Stock (Details Textual) (USD $)	3 Months Ended
	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012
Common Stock, Dividends, Per Share, Cash Paid	$ 0.10	$ 0.10	$ 0.10	$ 0.05	$ 0.05	$ 0.05

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Consolidated Condensed Statements of Financial Condition (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Sep. 30, 2013		Dec. 31, 2012
Held-to-maturity, fair value (in dollars)	$ 413	[1]	$ 516	[1]
Loans receivable, allowance (in dollars)	25,964		26,711
Preferred stock, par value (in dollars per share)	$ 0.01		$ 0.01
Preferred stock, shares authorized	5,000,000		5,000,000
Preferred stock, shares issued	0		0
Common stock, par value (in dollars per share)	$ 0.01		$ 0.01
Common stock, shares authorized	25,000,000		25,000,000
Common stock, shares issued	12,735,313		12,739,496
Common stock, shares outstanding	9,784,737		9,729,466
Accumulated other comprehensive income, tax effect (in dollars)	$ 152		$ 2,301
Treasury stock, shares	2,950,576		3,010,030

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

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Earnings Per Common Share

9 Months Ended

Sep. 30, 2013

Earnings Per Share [Abstract]

Earnings Per Share [Text Block]

6. Earnings Per Common Share 

The following table sets forth the computation of basic and diluted earnings per common share (in thousands except per share data):

	Three months ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012
Numerator for basic and diluted earnings per common share – Net income applicable to common shares	$	5,479	$	5,423	$	17,148	$	12,891
Denominator:
Denominator for basic earnings per common share – weighted average common shares, including participating securities		9,780		9,729		9,763		9,728
Effect of warrants		337		223		315		215
Effect of restricted stock units		38		20		29		25
Effect of employee stock options		57		28		53		25
Denominator for diluted earnings per common share		10,212		10,000		10,160		9,993
Basic earnings per common share	$	0.56	$	0.56	$	1.76	$	1.33
Diluted earnings per common share	$	0.54	$	0.54	$	1.69	$	1.29

There were 98,850 and 139,350 shares under options 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, 2013, respectively. There were 233,700 and 234,643 shares under option granted to employees excluded from the diluted earnings per common share calculation as they were anti-dilutive for the three months and nine months ended September 30, 2012, respectively.

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Consolidated Condensed Statements of Comprehensive Income (USD $) In Thousands, unless otherwise specified	3 Months Ended				9 Months Ended
	Sep. 30, 2013		Sep. 30, 2012		Sep. 30, 2013		Sep. 30, 2012
Net Income	$ 5,479		$ 5,434		$ 17,148		$ 13,508
Other comprehensive income:
Unrealized gains (losses) on securities available for sale	120		1,953		(6,044)		3,397
Reclassification adjustment for security (gains) losses included in net income(1)	0	[1]	(103)	[1]	(97)	[1]	(528)	[1]
Income tax	(42)		(647)		2,149		(1,003)
Other comprehensive income (loss)	78		1,203		(3,992)		1,866
Comprehensive income	$ 5,557		$ 6,637		$ 13,156		$ 15,374

[1] Amounts are included in gains on sale or call of securities on the Consolidated Condensed Statements of Income. Income tax expense associated with the reclassification adjustments, included in federal income taxes, for the three months ended September 30, 2013 and 2012 was $0 and $31, respectively. Income tax expense associated with the reclassification adjustments, included in federal income taxes, for the nine months ended September 30, 2013 and 2012 was $29 and $158, respectively.

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Loans (Details 3) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Average Balance	$ 65,204	$ 49,191	$ 67,472	$ 48,897
Interest Income Recognized	576	277	1,635	637
Cash Basis Income Recognized	613	326	1,627	635
Residential Owner Occupied [Member]
Average Balance	6,463	1,912	6,705	1,921
Interest Income Recognized	88	15	268	45
Cash Basis Income Recognized	89	14	266	42
Residential Non Owner Occupied [Member]
Average Balance	4,261	6,141	4,465	5,397
Interest Income Recognized	42	54	116	126
Cash Basis Income Recognized	43	58	117	129
Residential Real Estate [Member]
Average Balance	10,724	8,053	11,170	7,318
Interest Income Recognized	130	69	384	171
Cash Basis Income Recognized	132	72	383	171
Construction Loans [Member]
Average Balance	261	0	142	0
Interest Income Recognized	4	0	6	0
Cash Basis Income Recognized	5	0	6	0
Multi Family [Member]
Average Balance	1,078	811	1,261	627
Interest Income Recognized	9	10	20	11
Cash Basis Income Recognized	9	10	21	11
Commercial Real Estate Owner Occupied [Member]
Average Balance	14,339	12,414	14,520	11,019
Interest Income Recognized	121	53	304	92
Cash Basis Income Recognized	127	44	302	88
Commercial Real Estate Non Owner Occupied [Member]
Average Balance	23,254	14,881	23,786	15,231
Interest Income Recognized	237	104	675	284
Cash Basis Income Recognized	264	161	687	287
Agriculture Land [Member]
Average Balance	674	773	800	1,107
Interest Income Recognized	4	6	21	20
Cash Basis Income Recognized	2	1	13	15
Commercial Real Estate Other Receivable [Member]
Average Balance	3,226	5,987	4,297	7,015
Interest Income Recognized	14	1	28	4
Cash Basis Income Recognized	14	1	24	4
Commercial Real Estate [Member]
Average Balance	41,493	34,055	43,403	34,372
Interest Income Recognized	376	164	1,028	400
Cash Basis Income Recognized	407	207	1,026	394
Commercial Working Capital [Member]
Average Balance	3,058	2,048	2,273	2,005
Interest Income Recognized	13	9	33	13
Cash Basis Income Recognized	14	11	37	15
Commercial Loans Other [Member]
Average Balance	5,918	4,188	6,449	4,538
Interest Income Recognized	14	25	64	40
Cash Basis Income Recognized	15	26	58	42
Commercial Loan [Member]
Average Balance	8,976	6,236	8,722	6,543
Interest Income Recognized	27	34	97	53
Cash Basis Income Recognized	29	37	95	57
Consumer Loan [Member]
Average Balance	76	0	90	0
Interest Income Recognized	1	0	5	0
Cash Basis Income Recognized	2	0	5	0
Home Equity and Home Improvement [Member]
Average Balance	2,596	36	2,684	37
Interest Income Recognized	29	0	95	2
Cash Basis Income Recognized	$ 29	$ 0	$ 91	$ 2

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Consolidated Condensed Statements of Financial Condition (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Assets
Cash and amounts due from depository institutions	$ 42,629	$ 45,832
Federal funds sold	85,000	91,000
Cash and cash equivalents, at Carrying Value	127,629	136,832
Securities:
Available-for-sale, carried at fair value	184,119	194,101
Held-to-maturity, carried at amortized cost (fair value $413 and $516 at September 30, 2013 and December 31, 2012, respectively)	407	508
Marketable Securities, Total	184,526	194,609
Loans held for sale	13,391	22,064
Loans receivable, net of allowance of $25,964 at September 30, 2013 and $26,711 at December 31, 2012, respectively	1,535,315	1,498,546
Accrued interest receivable	6,425	5,594
Federal Home Loan Bank stock	19,350	20,655
Bank owned life insurance	42,504	41,832
Premises and equipment	39,066	39,663
Real estate and other assets held for sale	5,518	3,805
Goodwill	61,525	61,525
Core deposit and other intangibles	3,793	4,738
Mortgage servicing rights	9,182	7,833
Deferred taxes	2,253	78
Other assets	7,953	9,174
Total assets	2,058,430	2,046,948
Liabilities and stockholders' equity
Deposits	1,658,492	1,667,472
Advances from the Federal Home Loan Bank	22,761	12,796
Subordinated debentures	36,083	36,083
Securities sold under repurchase agreements	50,822	51,702
Advance payments by borrowers	1,752	1,473
Other liabilities	19,161	19,294
Total liabilities	1,789,071	1,788,820
Stockholders' equity:
Preferred stock, $.01 par value per share: 5,000,000 shares authorized; no shares issued	0	0
Common stock, $.01 par value per share: 25,000,000 shares authorized; 12,735,313 and 12,739,496 shares issued and 9,784,737 and 9,729,466 shares outstanding, respectively	127	127
Common stock warrant	878	878
Additional paid-in capital	136,257	136,046
Accumulated other comprehensive income, net of tax of $152 and $2,301, respectively	282	4,274
Retained earnings	178,181	164,103
Treasury stock, at cost, 2,950,576 and 3,010,030 shares respectively	(46,366)	(47,300)
Total stockholders' equity	269,359	258,128
Total liabilities and stockholders' equity	$ 2,058,430	$ 2,046,948

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Investment Securities (Details 3) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Sep. 30, 2013	Jun. 30, 2013	Mar. 31, 2013
Cumulative OTTI related to credit loss, Beginning balance	$ 3,176	$ 3,176	$ 3,176
Cumulative OTTI related to credit loss, Addtions	0	0	0
Cumulative OTTI related to credit loss, Ending balance	3,176	3,176	3,176
TPREF Funding II [Member] | Moodys, Caa3 Rating [Member]
Cumulative OTTI related to credit loss, Beginning balance	323	323	323
Cumulative OTTI related to credit loss, Addtions	0	0	0
Cumulative OTTI related to credit loss, Ending balance	323	323	323
Alesco VIII [Member] | Moodys, Ca Rating [Member]
Cumulative OTTI related to credit loss, Beginning balance	1,000	1,000	1,000
Cumulative OTTI related to credit loss, Addtions	0	0	0
Cumulative OTTI related to credit loss, Ending balance	1,000	1,000	1,000
Preferred Term Security XXVII [Member] | Moodys, C Rating [Member]
Cumulative OTTI related to credit loss, Beginning balance	78	78	78
Cumulative OTTI related to credit loss, Addtions	0	0	0
Cumulative OTTI related to credit loss, Ending balance	78	78	78
Trapeza Cdo I [Member] | Moodys, Ca Rating [Member]
Cumulative OTTI related to credit loss, Beginning balance	857	857	857
Cumulative OTTI related to credit loss, Addtions	0	0	0
Cumulative OTTI related to credit loss, Ending balance	857	857	857
Alesco Preferred Funding VIII [Member] | Not Rated [Member]
Cumulative OTTI related to credit loss, Beginning balance	453	453	453
Cumulative OTTI related to credit loss, Addtions	0	0	0
Cumulative OTTI related to credit loss, Ending balance	453	453	453
Alesco Preferred Funding IX [Member] | Not Rated [Member]
Cumulative OTTI related to credit loss, Beginning balance	465	465	465
Cumulative OTTI related to credit loss, Addtions	0	0	0
Cumulative OTTI related to credit loss, Ending balance	$ 465	$ 465	$ 465

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Derivative Financial Instruments (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Derivatives not designated as hedging instruments
Mortgage Banking Derivatives - Gain (Loss)	$ (315)	$ 28	$ (555)	$ 418

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Loans (Tables)

9 Months Ended

Sep. 30, 2013

Loans Receivable, Net [Abstract]

Schedule of Accounts, Notes, Loans and Financing Receivable [Table Text Block]

Loans receivable consist of the following (in thousands):

	September 30,		December 31,
	2013		2012
Real Estate:
Secured by 1-4 family residential	$	191,984	$	200,826
Secured by multi-family residential		145,704		122,275
Secured by commercial real estate		675,411		675,110
Construction		59,567		37,788
		1,072,666		1,035,999
Other Loans:
Commercial		386,160		383,817
Home equity and improvement		105,727		108,718
Consumer Finance		16,659		15,936
		508,546		508,471
Total loans		1,581,212		1,544,470
Deduct:
Undisbursed loan funds		(19,189)		(18,478)
Net deferred loan origination fees and costs		(744)		(735)
Allowance for loan loss		(25,964)		(26,711)
Totals	$	1,535,315	$	1,498,546

Schedule of Valuation Allowance for Impairment of Recognized Servicing Assets [Table Text Block]

The following table discloses allowance for loan loss activity for the quarter ended September 30, 2013 and September 30, 2012 by portfolio segment and impairment method ($ in thousands):

Quarter Ended September 30, 2013	1-4 Family Residential Real Estate		Construction		Multi- Family Residential Real Estate		Commercial Real Estate		Commercial		Home Equity and Improvement		Consumer		Total
Beginning Allowance	$	3,197	$	83	$	2,425	$	13,140	$	5,474	$	1,786	$	165	$	26,270
Charge-Offs		(78)		-		-		(829)		(39)		(170)		(33)		(1,149)
Recoveries		23		-		-		248		68		9		19		367
Provisions		(344)		36		107		525		43		98		11		476
Ending Allowance	$	2,798	$	119	$	2,532	$	13,084	$	5,546	$	1,723	$	162	$	25,964

Quarter Ended September 30, 2012	1-4 Family Residential Real Estate		Construction		Multi- Family Residential Real Estate		Commercial Real Estate		Commercial		Home Equity and Improvement		Consumer		Total
Beginning Allowance	$	3,104	$	46	$	2,610	$	13,914	$	5,156	$	1,435	$	144	$	26,409
Charge-Offs		(217)		-		-		(780)		(355)		(203)		(19)		(1,574)
Recoveries		26		-		122		430		140		38		14		770
Provisions		83		17		(261)		225		162		471		8		705
Ending Allowance	$	2,996	$	63	$	2,471	$	13,789	$	5,103	$	1,741	$	147	$	26,310

The following table discloses allowance for loan loss activity for the year-to-date ended  September 30, 2013 and September 30, 2012 by portfolio segment and impairment method ($ in thousands):

Year-to-date Ended September 30, 2013	1-4 Family Residential Real Estate		Construction		Multi- Family Residential Real Estate		Commercial Real Estate		Commercial		Home Equity and Improvement		Consumer		Total
Beginning Allowance	$	3,506	$	75	$	2,197	$	12,702	$	6,325	$	1,759	$	147	$	26,711
Charge-Offs		(468)		-		(6)		(1,372)		(560)		(612)		(87)		(3,105)
Recoveries		155		-		-		516		201		70		67		1,009
Provisions		(395)		44		341		1,238		(420)		506		35		1,349
Ending Allowance	$	2,798	$	119	$	2,532	$	13,084	$	5,546	$	1,723	$	162	$	25,964

Year-to-date Ended September 30, 2012	1-4 Family Residential Real Estate		Construction		Multi- Family Residential Real Estate		Commercial Real Estate		Commercial		Home Equity and Improvement		Consumer		Total
Beginning Allowance	$	4,095	$	63	$	2,850	$	17,640	$	6,576	$	1,856	$	174	$	33,254
Charge-Offs		(1,539)		-		(555)		(10,170)		(3,507)		(668)		(74)		(16,513)
Recoveries		150		-		122		574		295		77		45		1, 263
Provisions		290		-		54		5,745		1,739		476		2		8,306
Ending Allowance	$	2,996	$	63	$	2,471	$	13,789	$	5,103	$	1,741	$	147	$	26,310

Schedule of Allowance for Loan Losses and Recorded Investment in Portfolio Segment Based on Impairment [Table Text Block]

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, 2013:

(In Thousands)
	1-4 Family				Multi- Family
	Residential				Residential		Commercial				Home Equity
	Real Estate		Construction		Real Estate		Real Estate		Commercial		& Improvement		Consumer		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	234	$	-	$	-	$	1,837	$	305	$	44	$	-	$	2,420
Collectively evaluated for impairment		2,564		119		2,532		11,247		5,241		1,679		162		23,544
Acquired with deteriorated credit quality		-		-		-		-		-		-		-		-
Total ending allowance balance	$	2,798	$	119	$	2,532	$	13,084	$	5,546	$	1,723	$	162	$	25,964
Loans:
Loans individually evaluated for impairment	$	10,514	$	261	$	865	$	40,960	$	9,729	$	2,499	$	71	$	64,899
Loans collectively evaluated for impairment		181,870		40,108		144,989		636,481		377,591		103,673		16,574		1,501,286
Loans acquired with deteriorated credit quality		31		-		-		231		29		-		-		291
Total ending loans balance	$	192,415	$	40,369	$	145,854	$	677,672	$	387,349	$	106,172	$	16,645	$	1,566,476

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2012:

(In Thousands)

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

Loans Receivable, Impaired, Interest Income, Cash Basis Method [Table Text Block]

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, 2013						Nine Months Ended September 30, 2013
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized		Cash Basis Income Recognized
Residential Owner Occupied	$	6,463	$	88	$	89	$	6,705	$	268	$	266
Residential Non Owner Occupied		4,261		42		43		4,465		116		117
Total Residential Real Estate		10,724		130		132		11,170		384		383
Construction		261		4		5		142		6		6
Multi-Family		1,078		9		9		1,261		20		21
CRE Owner Occupied		14,339		121		127		14,520		304		302
CRE Non Owner Occupied		23,254		237		264		23,786		675		687
Agriculture Land		674		4		2		800		21		13
Other CRE		3,226		14		14		4,297		28		24
Total Commercial Real Estate		41,493		376		407		43,403		1,028		1,026
Commercial Working Capital		3,058		13		14		2,273		33		37
Commercial Other		5,918		14		15		6,449		64		58
Total Commercial		8,976		27		29		8,722		97		95
Consumer		76		1		2		90		5		5
Home Equity and Home Improvement		2,596		29		29		2,684		95		91
Total Impaired Loans	$	65,204	$	576	$	613	$	67,472	$	1,635	$	1,627

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, 2012						Nine Months Ended September 30, 2012
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized		Cash Basis Income Recognized
Residential Owner Occupied	$	1,912		15	$	14	$	1,921	$	45	$	42
Residential Non Owner Occupied		6,141		54		58		5,397		126		129
Total Residential Real Estate		8,053		69		72		7,318		171		171
Construction		-		-		-		-		-		-
Multi-Family		811		10		10		627		11		11
CRE Owner Occupied		12,414		53		44		11,019		92		88
CRE Non Owner Occupied		14,881		104		161		15,231		284		287
Agriculture Land		773		6		1		1,107		20		15
Other CRE		5,987		1		1		7,015		4		4
Total Commercial Real Estate		34,055		164		207		34,372		400		394
Commercial Working Capital		2,048		9		11		2,005		13		15
Commercial Other		4,188		25		26		4,538		40		42
Total Commercial		6,236		34		37		6,543		53		57
Consumer		-		-		-		-		-		-
Home Equity and Home Improvement		36		-		-		37		2		2
Total Impaired Loans	$	49,191	$	277	$	326	$	48,897	$	637	$	635

Impaired Financing Receivables [Table Text Block]

The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2013: (In Thousands)

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no allowance recorded:
Residential Owner Occupied	$	4,902	$	4,862	$	-
Residential Non Owner Occupied		3,539		2,806		-
Total Residential Real Estate		8,441		7,668		-
Construction		300		261		-
Multi-Family Residential Real Estate		1,014		865		-
CRE Owner Occupied		10,313		8,552		-
CRE Non Owner Occupied		5,364		4,577		-
Agriculture Land		689		504		-
Other CRE		4,948		3,063		-
Total Commercial Real Estate		21,314		16,696		-
Commercial Working Capital		3,835		3,837		-
Commercial Other		4,846		4,797		-
Total Commercial		8,681		8,634		-
Consumer		71		71		-
Home Equity and Home Improvement		2,135		2,058		-
Total loans with no allowance recorded	$	41,956	$	36,253	$	-
With an allowance recorded:
Residential Owner Occupied	$	1,534	$	1,539	$	211
Residential Non Owner Occupied		1,305		1,307		23
Total Residential Real Estate		2,839		2,846		234
Construction		-		-		-
Multi-Family Residential Real Estate		-		-		-
CRE Owner Occupied		7,651		6,500		281
CRE Non Owner Occupied		17,905		17,451		1,546
Agriculture Land		251		258		8
Other CRE		83		55		2
Total Commercial Real Estate		25,890		24,264		1,837
Commercial Working Capital		-		-		-
Commercial Other		1,094		1,095		305
Total Commercial		1,094		1,095		305
Consumer		-		-		-
Home Equity and Home Improvement		439		441		44
Total loans with an allowance recorded	$	30,262	$	28,646	$	2,420

*Unpaid principal balance is not reduced for partial charge-offs.

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2012: (In Thousands)

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no allowance recorded:
Residential Owner Occupied	$	5,427	$	5,357	$	-
Residential Non Owner Occupied		4,211		3,420		-
Total Residential Real Estate		9,638		8,777		-
Construction		300		45		-
Multi-Family Residential Real Estate		1,775		1,626		-
CRE Owner Occupied		12,314		9,782		-
CRE Non Owner Occupied		11,054		9,105		-
Agriculture Land		1,176		993		-
Other CRE		8,741		5,527		-
Total Commercial Real Estate		33,285		25,407		-
Commercial Working Capital		1,565		1,565		-
Commercial Other		6,367		5,338		-
Total Commercial		7,932		6,903		-
Consumer		125		124		-
Home Equity and Home Improvement		2,777		2,642		-
Total loans with no allowance recorded	$	55,832	$	45,524	$	-
With an allowance recorded:
Residential Owner Occupied	$	1,697	$	1,701	$	257
Residential Non Owner Occupied		1,449		1,452		24
Total Residential Real Estate		3,146		3,153		281
Construction		-		-		-
Multi-Family Residential Real Estate		-		-		-
CRE Owner Occupied		5,735		5,118		245
CRE Non Owner Occupied		15,301		15,357		820
Agriculture Land		111		112		3
Other CRE		88		59		2
Total Commercial Real Estate		21,235		20,646		1,070
Commercial Working Capital		300		301		10
Commercial Other		1,623		1,626		128
Total Commercial		1,923		1,927		138
Consumer		-		-		-
Home Equity and Home Improvement		36		36		2
Total loans with an allowance recorded	$	26,340	$	25,762	$	1,491

*Unpaid principal balance is not reduced for partial charge-offs.

Schedule of Non-Performing Loans and Real Estate Owned [Table Text Block]

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

	September 30,  2013		December 31, 2012
	(in thousands)
Non-accrual loans	$	30,512	$	32,570
Loans over 90 days past due and still accruing		-		-
Total non-performing loans		30,512		32,570
Real estate and other assets held for sale		5,518		3,805
Total non-performing assets	$	36,030	$	36,375

Schedule of Financing Receivables, Non Accrual Status [Table Text Block]

The following table presents the aging of the recorded investment in past due and non accrual loans as of September 30, 2013 by class of loans: (In Thousands)

	Current		30-59 days		60-89 days		90+ days		Total Past Due		Total Non Accrual
Residential Owner Occupied	$	122,038	$	593	$	203	$	956	$	1,752	$	1,117
Residential Non Owner Occupied		67,361		500		135		629		1,264		2,040
Total residential real estate		189,399		1,093		338		1,585		3,016		3,157
Construction		40,369		-		-		-		-		-
Multi-Family		145,854		-		-		-		-		613
CRE Owner Occupied		318,420		489		631		1,728		2,848		8,416
CRE Non Owner Occupied		227,935		1,348		224		1,286		2,858		5,621
Agriculture Land		78,134		23		134		76		233		682
Other Commercial Real Estate		45,403		337		-		1,504		1,841		3,094
Total Commercial Real Estate		669,892		2,197		989		4,594		7,780		17,813
Commercial Working Capital		156,532		349		-		433		782		3,188
Commercial Other		225,129		989		1,032		2,885		4,906		5,567
Total Commercial		381,661		1,338		1,032		3,318		5,688		8,755
Consumer		16,602		31		12		-		43		-
Home Equity / Home Improvement		104,430		1,416		149		177		1,742		178
Total Loans	$	1,548,207	$	6,075	$	2,520	$	9,674	$	18,269	$	30,516

The following table presents the aging of the recorded investment in past due and non accrual loans as of December 31, 2012 by class of loans: (In Thousands)

	Current		30-59 days			60-89 days		90+ days		Total Past Due		Total Non Accrual
Residential Owner Occupied	$	125,362	$	1,238	$	604	$	945	$	2,787	$	1,125
Residential Non Owner Occupied		71,777		413		126		849		1,388		2,473
Total residential real estate		197,139		1,651		730		1,794		4,175		3,598
Construction		19,296		-		-		-		-		-
Multi-Family		122,455		-		-		-		-		1,178
CRE Owner Occupied		321,071		1,248		382		1,622		3,252		9,652
CRE Non Owner Occupied		235,592		134		1,321		2,480		3,935		6,674
Agriculture Land		72,092		84		31		-		115		813
Other Commercial Real Estate		36,510		21		875		3,560		4,456		4,761
Total Commercial Real Estate		665,265		1,487		2,609		7,662		11,758		21,900
Commercial Working Capital		161,110		-		155		1,204		1,359		1,528
Commercial Other		218,477		584		1,201		2,138		3,923		4,136
Total Commercial		379,587		584		1,356		3,342		5,282		5,664
Consumer		15,702		229		8		-		237		-
Home Equity / Home Improvement		106,458		2,294		225		217		2,736		217
Total Loans	$	1,505,902	$	6,245	$	4,928	$	13,015	$	24,188	$	32,557

Troubled Debt Restructurings on Financing Receivables [Table Text Block]

The following table presents loans by class modified as TDRs that occurred during the three and nine month period ending September 30, 2013 and September 30, 2012:

	Loans Modified as a TDR for the Three Months Ended September 30, 2013 ($ in thousands)			Loans Modified as a TDR for the Nine Months Ended September 30, 2013 ($ in thousands)
Troubled Debt Restructurings	Number of Loans		Recorded Investment (as of period end)	Number of Loans		Recorded Investment (as of period end)
Residential Owner Occupied	0	$	-	8	$	746
Residential Non Owner Occupied	5		206	6		393
CRE Owner Occupied	1		47	5		802
CRE Non Owner Occupied	0		-	1		1,361
Agriculture Land	0		-	1		214
Other CRE	0		-	1		31
Commercial / Industrial	5		941	6		988
Home Equity / Improvement	4		66	13		536
Consumer	0		-	2		13
Total	15	$	1,260	43	$	5,084

	Loans Modified as a TDR for the Three Months Ended September 30, 2012 ($ in thousands)			Loans Modified as a TDR for the Nine Months Ended September 30, 2012 ($ in thousands)
Troubled Debt Restructurings	Number of Loans	Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)
Residential Owner Occupied	2	$	221	7	$	778
Residential Non Owner Occupied	1		34	2		116
CRE Owner Occupied	3		565	5		1,461
CRE Non Owner Occupied	1		217	1		217
Agriculture Land	1		127	2		439
Other CRE	0		-	1		61
Commercial / Industrial	2		34	2		34
Home Equity / Improvement	0		-	0		-
Consumer	0		-	0		-
Total	10	$	1,198	20	$	3,106

Troubled Debt Restructurings on Payments [Table Text Block]

The following table presents loans by class modified as TDRs for which there was a payment default within twelve months following the modification during the period ending September 30, 2013 and September 30, 2012:

	Three Months Ended September 30, 2013 ($ in thousands)				Nine Months Ended September 30, 2013 ($ in thousands)
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans		Recorded Investment (as of period end)			Number of Loans	Recorded Investment (as of period end)
Residential Owner Occupied		4	$	339		5	$	432
Residential Non Owner Occupied		1		78		1		78
CRE Owner Occupied		0		-		0		-
CRE Non Owner Occupied		0		-		1		212
Agriculture Land		0		-		0		-
Other CRE		0		-		0		-
Commercial / Industrial		2		178		2		178
Home Equity / Improvement		2		38		2		38
Consumer		0		-		0		-
Total		9	$	633		11	$	938

	Three Months Ended September 30, 2012 ($ in thousands)			Nine Months Ended September 30, 2012 ($ in thousands)
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans		Recorded Investment (as of period end)	Number of Loans		Recorded Investment (as of period end)
Residential Owner Occupied	0	$	-	0	$	-
Residential Non Owner Occupied	1		24	1		24
CRE Owner Occupied	0		-	0		-
CRE Non Owner Occupied	2		351	2		351
Agriculture Land	0		-	0		-
Other CRE	0		-	0		-
Commercial / Industrial	1		771	2		1,351
Home Equity / Improvement	0		-	0		-
Consumer	0		-	0		-
Total	4	$	1,146	5	$	1,726

Financing Receivable Credit Quality Indicators [Table Text Block]

As of September 30, 2013, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows: (In Thousands)

Category	Pass		Special Mention		Substandard		Doubtful		Not Graded		Total
Residential Owner Occupied	$	4,135	$	21	$	2,867	$	-	$	116,765	$	123,788
Residential Non Owner Occupied		53,120		3,233		6,030		-		6,244		68,627
Total residential real estate		57,255		3,254		8,897		-		123,009		192,415
Construction		30,865		-		261		-		9,243		40,369
Multi Family		142,044		654		2,177		-		979		145,854
CRE Owner Occupied		291,586		14,988		12,808		-		1,886		321,268
CRE Non Owner Occupied		201,459		12,571		16,642		-		121		230,793
Agriculture Land		76,373		770		1,224		-		-		78,367
Other CRE		40,935		1,694		3,856		-		759		47,244
Total Commercial Real Estate		610,353		30,023		34,530		-		2,766		677,672
Commercial Working Capital		148,492		4,389		4,431		-		-		157,312
Commercial Other		215,749		6,863		7,425		-		-		230,037
Total Commercial		364,241		11,252		11,856		-		-		387,349
Consumer		-		-		19		-		16,626		16,645
Home Equity/Improvement		-		-		857		9		105,306		106,172
Total	$	1,204,758	$	45,183	$	58,597	$	9	$	257,929	$	1,566,476

As of December 31, 2012, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows: (In Thousands)

Category	Pass		Special Mention		Substandard		Doubtful		Not Graded		Total
Residential Owner Occupied	$	4,221	$	75	$	3,617	$	234	$	120,002	$	128,149
Residential Non Owner Occupied		55,771		2,453		8,248		-		6,693		73,165
Total residential real estate		59,992		2,528		11,865		234		126,695		201,314
Construction		11,360		-		45		-		7,891		19,296
Multi Family		118,121		910		2,404		-		1,020		122,455
CRE Owner Occupied		292,765		10,440		18,740		-		2,378		324,323
CRE Non Owner Occupied		207,745		9,077		22,615		-		90		239,527
Agriculture Land		69,924		769		1,514		-		-		72,207
Other CRE		31,875		891		7,222		-		978		40,966
Total Commercial Real Estate		602,309		21,177		50,091		-		3,446		677,023
Commercial Working Capital		156,433		3,587		2,449		-		-		162,469
Commercial Other		208,783		5,204		8,413		-		-		222,400
Total Commercial		365,216		8,791		10,862		-		-		384,869
Consumer		-		-		70		-		15,869		15,939
Home Equity/Improvement		-		-		668		64		108,462		109,194
Total	$	1,156,998	$	33,406	$	76,005	$	298	$	263,383	$	1,530,090

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Other Comprehensive Income (Loss)

9 Months Ended

Sep. 30, 2013

Other Comprehensive Income (Loss), Net Of Tax [Abstract]

Other Comprehensive Income Loss [Text Block]

15. Other Comprehensive Income (Loss)

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

	Before Tax Amount		Tax Expense (Benefit)		Net of Tax Amount
	(In Thousands)
Three months ended September 30, 2013:
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period	$	120	$	42	$	78
Reclassification adjustment for net gains included in net income		-		-		-
Total other comprehensive income (loss)	$	120	$	42	$	78

	Before Tax Amount		Tax Expense (Benefit)		Net of Tax Amount
	(In Thousands)
Nine months ended September 30, 2013:
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period	$	(6,044)	$	(2,120)	$	(3,924)
Reclassification adjustment for net gains included in net income		(97)		(29)		(68)
Total other comprehensive income (loss)	$	(6,141)	$	(2,149)	$	(3,992)

	Before Tax Amount		Tax Expense (Benefit)		Net of Tax Amount
	(In Thousands)
Three months ended September 30, 2012:
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period	$	1,953	$	678	$	1,275
Reclassification adjustment for net gains included in net income		(103)		(31)		(72)
Total other comprehensive income (loss)	$	1,850	$	647	$	1,203

	Before Tax Amount		Tax Expense (Benefit)		Net of Tax Amount
	(In Thousands)
Nine months ended September 30, 2012:
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period	$	3,397	$	1,161	$	2,236
Reclassification adjustment for net gains included in net income		(528)		(158)		(370)
Total other comprehensive income (loss)	$	2,869	$	1,003	$	1,866

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

					Accumulated
	Securities		Post-		Other
	Available		retirement		Comprehensive
	For Sale		Benefit		Income
	(In Thousands)
Balance January 1, 2013	$	4,851	$	(577)	$	4,274
Other comprehensive loss before      reclassifications		(3,924)		-		(3,924)
Amounts reclassified from accumulated other      comprehensive loss		(68)		-		(68)
Net other comprehensive loss during period		(3,992)		-		(3,992)
Balance September 30, 2013	$	859	$	(577)	$	282
Balance January 1, 2012	$	4,704	$	(707)	$	3,997
Other comprehensive loss before      reclassifications		2,236		-		2,236
Amounts reclassified from accumulated other      comprehensive loss		(370)		-		(370)
Net other comprehensive loss during period		1,866		-		1,866
Balance September 30, 2012	$	6,570	$	(707)	$	5,863

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Stock Compensation Plans (Details Textual) (USD $)	9 Months Ended		9 Months Ended			9 Months Ended			9 Months Ended
	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2013 Short-term Equity Incentive Plan 2013 [Member]	Sep. 30, 2013 Equity Plan 2010 [Member]	Mar. 15, 2010 Equity Plan 2010 [Member]	Sep. 30, 2013 Long-term Equity Incentive Plan 2013 [Member]	Sep. 30, 2013 Restricted Stock Units (Rsus) [Member]	Dec. 31, 2012 Restricted Stock Units (Rsus) [Member]	Sep. 30, 2013 Stock Option Grant, 2009 [Member]	Sep. 30, 2013 Stock Option Grant, 2011 [Member]	Sep. 30, 2013 Stock Option Grant, Annual [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized					350,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Outstanding, Number	264,770	312,350
Share-based Compensation Arrangement by Share-based Payment Award, Maximum Vested Percentage, Year									20.00%	40.00%	20.00%
Stock Option Period, Description				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.
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Outstanding, Weighted Average Remaining Contractual Terms				10 years
Share-based Compensation Arrangement by Share-based Payment Award, Maximum Employee Subscription Rate, Range Minimum			25.00%			25.00%
Share-based Compensation Arrangement by Share-based Payment Award, Maximum Employee Subscription Rate, Range Maximum			45.00%			45.00%
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross							86,065
Option Subscription, Description						The amount of benefit under the 2013 LTIP will be determined individually at the 12 month period ending December 31, 2013, the 24 month period ending December 31, 2014 and the 36 month period ending December 31, 2015. The awards vesting will be as follows: 16.7% of the target award after the end of the performance period ending December 31, 2013, 27.8% of the target award at the end of the performance period ending December 31, 2014 and 55.5% of the target award at the end of the performance period ending December 31, 2015. The RSUs shall vest between 0% and 100% of the applicable portion of the target award based on the portion of the performance targets that are achieved. RSUs settle in common shares in the first quarter following the close of the applicable performance period. The participants are required to be employed on the day of payout in order to receive the payment.
Employee Service Share-based Compensation, Nonvested Awards, Total Compensation Cost Not yet Recognized, Stock Options	$ 19,000
Employee Service Share Based Compensation Nonvested Awards, Total Compensation Cost Not Yet Recognized, Period For Recognition (in years)	1 year 1 month 6 days
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Nonvested, Number							106,061	38,871
Allocated Share-based Compensation Expense	711,000		373,000			373,000
Compensation Expense, Maximum	2,900,000
Estimated Compensation Expense, Excepted	1,900,000
Unrecognized Compensation Expense	$ 1,000,000

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Other Comprehensive Income (Loss) (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended				9 Months Ended
	Sep. 30, 2013		Sep. 30, 2012		Sep. 30, 2013		Sep. 30, 2012
Securities available for sale and transferred securities: Before Tax Amount
Change in net unrealized gain/loss during the period, Before Tax Amount	$ 120		$ 1,953		$ (6,044)		$ 3,397
Reclassification adjustment for net gains included in net income, Before Tax Amount	0	[1]	(103)	[1]	(97)	[1]	(528)	[1]
Total other comprehensive income (loss), Before Tax Amount	120		1,850		(6,141)		2,869
Securities available for sale and transferred securities: Tax Expense (Benefit)
Change in net unrealized gain/loss during the period, Tax Expense (Benefit)	42		678		(2,120)		1,161
Reclassification adjustment for net gains included in net income, Tax Expense (Benefit)	0		(31)		(29)		(158)
Total other comprehensive income (loss), Tax Expense (Benefit)	42		647		(2,149)		1,003
Securities available for sale and transferred securities: Net of Tax Amount
Change in net unrealized gain/loss during the period, Net of Tax Amount	78		1,275		(3,924)		2,236
Reclassification adjustment for net gains included in net income, Net of Tax Amount	0		(72)		(68)		(370)
Total other comprehensive income (loss), Net of Tax Amount	$ 78		$ 1,203		$ (3,992)		$ 1,866

[1] Amounts are included in gains on sale or call of securities on the Consolidated Condensed Statements of Income. Income tax expense associated with the reclassification adjustments, included in federal income taxes, for the three months ended September 30, 2013 and 2012 was $0 and $31, respectively. Income tax expense associated with the reclassification adjustments, included in federal income taxes, for the nine months ended September 30, 2013 and 2012 was $29 and $158, respectively.

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Investment Securities (Details Textual) (USD $)	3 Months Ended			9 Months Ended		12 Months Ended
	Sep. 30, 2013 Numbers	Jun. 30, 2013	Sep. 30, 2012	Sep. 30, 2013 Numbers	Sep. 30, 2012	Dec. 31, 2012
Security Owned and Pledged as Collateral Carrying Value	$ 132,400,000			$ 132,400,000
Investment Portfolio, Number of Securities	328			328
Investment Portfolio, Number of Securities, Unrealized Loss	77			77
Realized Investment Gains (Losses)	0		103,000	97,000	528,000
Realized Investment Gains Losses, Net of Tax	0		72,000	68,000	370,000
Deferred Collateral Assumed Recovery Rate for Banks	10.00%			10.00%
Deferred Collateral Assumed Recovery Rate for Insurance Companies	15.00%			15.00%
Other Comprehensive Income (Loss), before Tax				639,000		749,000
Debt Instrument Debt Default, Percentage	26.20%	26.70%
Four Collateralized Debt Obligations [Member]
Collateralized Debt Obligations, Recognized Other than Temporary Impairment	3,600,000			3,600,000
Two Collateralized Debt Obligations [Member]
Collateralized Debt Obligations, Paying Principal and Interest	2,000,000			2,000,000
Collateralized Debt Obligations, Recognized Under Other than Temporary Impairment, Recognized Prior Period	$ 1,600,000			$ 1,600,000

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Loans (Details Textual) (USD $)	3 Months Ended		9 Months Ended				9 Months Ended
	Sep. 30, 2013 Number	Sep. 30, 2012	Sep. 30, 2013 Number	Sep. 30, 2012	Sep. 30, 2013 Troubled Debt Restructuring [Member]	Dec. 31, 2012 Troubled Debt Restructuring [Member]	Sep. 30, 2013 Troubled Debt Restructuring [Member] Subsequently Defaulted [Member]
Financing Receivable, Modifications, Recorded Investment					$ 33,600,000	$ 35,500,000
Specified Reserves, Provision for Troubled Debt Restructurings					1,700,000	1,100,000
Loans and Leases Receivable, Impaired, Commitment to Lend					675,000	41,000
Financing Receivables, Impaired, Troubled Debt Restructuring, Write-down					5,500,000
Financing Receivable, Modifications, Number of Contracts	48		123
Financing Receivable, Allowance for Credit Losses, Period Increase (Decrease)	$ 15,000	$ 17,000	$ 359,000	$ 21,000			$ 11,000

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Fair Value (Details 3) (USD $) In Thousands, unless otherwise specified							9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended	9 Months Ended	12 Months Ended
	Sep. 30, 2013	Jun. 30, 2013	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Dec. 31, 2011	Sep. 30, 2013 Range of Input 2-40% [Member]	Dec. 31, 2012 Range of Input 2-40% [Member]	Sep. 30, 2013 Range of Input 0-30% [Member]	Dec. 31, 2012 Range of Input 0-30% [Member]	Sep. 30, 2013 Range Of Input 10-15 [Member]	Dec. 31, 2012 Range Of Input 10-15 [Member]	Sep. 30, 2013 Range of Input 0-10% [Member]	Dec. 31, 2012 Range of Input 0-10% [Member]	Sep. 30, 2013 Range of Input 0-20% [Member]	Dec. 31, 2012 Range of Input 0-20% [Member]
Trust preferred stock, Fair Value	$ 1,890	$ 1,736	$ 1,474	$ 1,308	$ 1,227	$ 1,342	$ 1,890	$ 1,474
Impaired Loans- Applies to all loan classes, Fair Value	8,443		14,071										8,443	14,071
Real estate held for sale - Applies to all classes, Fair Value	$ 627		$ 446												$ 627	$ 446
Valuation Technique, Fair Value							Discounted cash flow	Discounted cash flow					Appraisals	Appraisals	Appraisals	Appraisals
Unobservable Inputs, Fair Value							Constant prepayment rate	Constant prepayment rate	Expected asset default	Expected asset default	Expected recoveries	Expected recoveries	Discounts for collection issues and changes in market conditions	Discounts for collection issues and changes in market conditions	Discounts for changes in market conditions	Discounts for changes in market conditions
Fair Value, Range of Input, Minimum							2.00%	2.00%	0.00%	0.00%	10.00%	10.00%	0.00%	0.00%	0.00%	0.00%
Fair Value, Range of Input, Maximum							40.00%	40.00%	30.00%	30.00%	15.00%	15.00%	10.00%	10.00%	20.00%	20.00%
Fair Value Measurement Weighted Average Range							40.00%	40.00%	15.00%	15.00%	10.00%	10.00%	10.00%	10.00%	20.00%	20.00%

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Other Comprehensive Income (Loss) (Tables)

9 Months Ended

Sep. 30, 2013

Other Comprehensive Income (Loss), Net Of Tax [Abstract]

Other Comprehensive Income Loss Reclassification Adjustments Related To Securities Available For Sale [Table Text Block]

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, 2013:
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period	$	120	$	42	$	78
Reclassification adjustment for net gains included in net income		-		-		-
Total other comprehensive income (loss)	$	120	$	42	$	78

	Before Tax Amount		Tax Expense (Benefit)		Net of Tax Amount
	(In Thousands)
Nine months ended September 30, 2013:
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period	$	(6,044)	$	(2,120)	$	(3,924)
Reclassification adjustment for net gains included in net income		(97)		(29)		(68)
Total other comprehensive income (loss)	$	(6,141)	$	(2,149)	$	(3,992)

	Before Tax Amount		Tax Expense (Benefit)		Net of Tax Amount
	(In Thousands)
Three months ended September 30, 2012:
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period	$	1,953	$	678	$	1,275
Reclassification adjustment for net gains included in net income		(103)		(31)		(72)
Total other comprehensive income (loss)	$	1,850	$	647	$	1,203

	Before Tax Amount		Tax Expense (Benefit)		Net of Tax Amount
	(In Thousands)
Nine months ended September 30, 2012:
Securities available for sale and transferred securities:
Change in net unrealized gain/loss during the period	$	3,397	$	1,161	$	2,236
Reclassification adjustment for net gains included in net income		(528)		(158)		(370)
Total other comprehensive income (loss)	$	2,869	$	1,003	$	1,866

Schedule of Accumulated Other Comprehensive Income (Loss) [Table Text Block]

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

					Accumulated
	Securities		Post-		Other
	Available		retirement		Comprehensive
	For Sale		Benefit		Income
	(In Thousands)
Balance January 1, 2013	$	4,851	$	(577 )	$	4,274
Other comprehensive loss before      reclassifications		(3,924)		-		(3,924)
Amounts reclassified from accumulated other      comprehensive loss		(68)		-		(68)
Net other comprehensive loss during period		(3,992)		-		(3,992)
Balance September 30, 2013	$	859	$	(577 )	$	282
Balance January 1, 2012	$	4,704	$	(707 )	$	3,997
Other comprehensive loss before      reclassifications		2,236		-		2,236
Amounts reclassified from accumulated other      comprehensive loss		(370)		-		(370)
Net other comprehensive loss during period		1,866		-		1,866
Balance September 30, 2012	$	6,570	$	(707 )	$	5,863

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Fair Value (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Available for sale securities:
Available for sale securities, Total Fair Value	$ 184,119	$ 194,101
US Government Corporations and Agencies Securities [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	4,931	11,069
US Government Corporations and Agencies Securities [Member] | Fair Value, Inputs, Level 1 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	0	0
US Government Corporations and Agencies Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	4,931	11,069
US Government Corporations and Agencies Securities [Member] | Fair Value, Inputs, Level 3 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	0	0
US Treasury Securities [Member]
Available for sale securities:
Available for sale securities, Total Fair Value		1,002
US Treasury Securities [Member] | Fair Value, Inputs, Level 1 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value		0
US Treasury Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value		1,002
US Treasury Securities [Member] | Fair Value, Inputs, Level 3 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value		0
Residential Mortgage Backed Securities [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	36,939	31,461
Residential Mortgage Backed Securities [Member] | Fair Value, Inputs, Level 1 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	0	0
Residential Mortgage Backed Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	36,939	31,461
Residential Mortgage Backed Securities [Member] | Fair Value, Inputs, Level 3 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	0	0
Collateralized Mortgage Backed Securities [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	52,544	57,466
Collateralized Mortgage Backed Securities [Member] | Fair Value, Inputs, Level 1 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	0	0
Collateralized Mortgage Backed Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	52,544	57,466
Collateralized Mortgage Backed Securities [Member] | Fair Value, Inputs, Level 3 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	0	0
Trust Preferred Stock [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	1,890	1,474
Trust Preferred Stock [Member] | Fair Value, Inputs, Level 1 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	0	0
Trust Preferred Stock [Member] | Fair Value, Inputs, Level 2 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	0	0
Trust Preferred Stock [Member] | Fair Value, Inputs, Level 3 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	1,890	1,474
Preferred Stock [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	476	134
Preferred Stock [Member] | Fair Value, Inputs, Level 1 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	476	134
Preferred Stock [Member] | Fair Value, Inputs, Level 2 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	0	0
Preferred Stock [Member] | Fair Value, Inputs, Level 3 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	0	0
Corporate Bond Securities [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	8,968	8,884
Corporate Bond Securities [Member] | Fair Value, Inputs, Level 1 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	0	0
Corporate Bond Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	8,968	8,884
Corporate Bond Securities [Member] | Fair Value, Inputs, Level 3 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	0	0
US States and Political Subdivisions Debt Securities [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	78,371	82,611
US States and Political Subdivisions Debt Securities [Member] | Fair Value, Inputs, Level 1 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	0	0
US States and Political Subdivisions Debt Securities [Member] | Fair Value, Inputs, Level 2 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	78,371	82,611
US States and Political Subdivisions Debt Securities [Member] | Fair Value, Inputs, Level 3 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value		0
Mortgage Banking Derivative Asset [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	548	950
Mortgage Banking Derivative Asset [Member] | Fair Value, Inputs, Level 1 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	0	0
Mortgage Banking Derivative Asset [Member] | Fair Value, Inputs, Level 2 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	548	950
Mortgage Banking Derivative Asset [Member] | Fair Value, Inputs, Level 3 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	0	0
Mortgage Banking Derivative Liability [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	(247)	(94)
Mortgage Banking Derivative Liability [Member] | Fair Value, Inputs, Level 1 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	0	0
Mortgage Banking Derivative Liability [Member] | Fair Value, Inputs, Level 2 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	(247)	(94)
Mortgage Banking Derivative Liability [Member] | Fair Value, Inputs, Level 3 [Member]
Available for sale securities:
Available for sale securities, Total Fair Value	$ 0	$ 0

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Dividends on Common Stock

9 Months Ended

Sep. 30, 2013

Dividends, Common Stock [Abstract]

Dividend on Common Stock [Text Block]

5. Dividends on Common Stock

First Defiance declared and paid a $0.10 per share common stock dividend in the first, second and third quarter of 2013 and declared and paid a $0.05 per share common stock dividend in the first, second and third quarter of 2012.

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Loans (Details 7) (Troubled Debt Restructuring [Member], USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013 Number	Sep. 30, 2012 Number	Sep. 30, 2013 Number	Sep. 30, 2012 Number
Troubled Debt Restructurings, Number of Loans	15	10	43	20
Troubled Debt Restructurings, Recorded Investment	$ 1,260	$ 1,198	$ 5,084	$ 3,106
Residential Owner Occupied [Member]
Troubled Debt Restructurings, Number of Loans	0	2	8	7
Troubled Debt Restructurings, Recorded Investment	0	221	746	778
Residential Non Owner Occupied [Member]
Troubled Debt Restructurings, Number of Loans	5	1	6	2
Troubled Debt Restructurings, Recorded Investment	206	34	393	116
Commercial Real Estate Owner Occupied [Member]
Troubled Debt Restructurings, Number of Loans	1	3	5	5
Troubled Debt Restructurings, Recorded Investment	47	565	802	1,461
Commercial Real Estate Non Owner Occupied [Member]
Troubled Debt Restructurings, Number of Loans	0	1	1	1
Troubled Debt Restructurings, Recorded Investment	0	217	1,361	217
Agriculture Land [Member]
Troubled Debt Restructurings, Number of Loans	0	1	1	2
Troubled Debt Restructurings, Recorded Investment	0	127	214	439
Commercial Real Estate Other Receivable [Member]
Troubled Debt Restructurings, Number of Loans	0	0	1	1
Troubled Debt Restructurings, Recorded Investment	0	0	31	61
Commercial and Industrial [Member]
Troubled Debt Restructurings, Number of Loans	5	2	6	2
Troubled Debt Restructurings, Recorded Investment	941	34	988	34
Home Equity and Home Improvement [Member]
Troubled Debt Restructurings, Number of Loans	4	0	13	0
Troubled Debt Restructurings, Recorded Investment	66	0	536	0
Consumer Loan [Member]
Troubled Debt Restructurings, Number of Loans	0	0	2	0
Troubled Debt Restructurings, Recorded Investment	$ 0	$ 0	$ 13	$ 0

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Mortgage Banking (Tables)

9 Months Ended

Sep. 30, 2013

Mortgage Banking [Abstract]

Mortgage Loans [Table Text Block]

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(in thousands)				(in thousands)
Gain from sale of mortgage loans	$	894	$	2,888	$	4,960	$	7,890
Mortgage loans servicing revenue (expense):
Mortgage loans servicing revenue		901		824		2,646		2,499
Amortization of mortgage servicing rights		(429)		(892)		(1,752)		(2,610)
Mortgage servicing rights valuation adjustments		480		(600)		1,265		(855)
		952		(668)		2,159		(966)
Net revenue from sale and servicing of mortgage loans	$	1,846	$	2,220	$	7,119	$	6,924

Capitalized Mortgage and Valuation Allowance [Table Text Block]

Activity for capitalized mortgage servicing rights and the related valuation allowance follows for the three and nine months ended September 30, 2013 and 2012:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(in thousands)				(in thousands)
Mortgage servicing assets:
Balance at beginning of period	$	10,234	$	10,059	$	10,121	$	10,219
Loans sold, servicing retained		400		969		1,836		2,527
Amortization		(429)		(892)		(1,752)		(2,610)
Carrying value before valuation allowance at end of period		10,205		10,136		10,205		10,136
Valuation allowance:
Balance at beginning of period		(1,503)		(1,784)		(2,288)		(1,529)
Impairment recovery (charges)		480		(600)		1,265		(855)
Balance at end of period		(1,023)		(2,384)		(1,023)		(2,384)
Net carrying value of MSRs at end of period	$	9,182	$	7,752	$	9,182	$	7,752
Fair value of MSRs at end of period	$	9,868	$	7,752	$	9,868	$	7,752

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Stock Compensation Plans (Details) (USD $) In Thousands, except Share data, unless otherwise specified	9 Months Ended
	Sep. 30, 2013
Options Outstanding, January 1, 2013	312,350
Options,Forfeited or cancelled	14,000
Options, Exercised	33,580
Options, Granted	0
Options Outstanding, September 30, 2013	264,770
Options Outstanding, Vested or expected to vest at September 30, 2013	264,770
Options, Exercisable at September 30, 2013	251,900
Weighted Average Exercise Price, Outstanding, January 1, 2013	$ 20.33
Weighted Average Exercise Price, Forfeited or cancelled	$ 20.66
Weighted Average Exercise Price, Exercised	$ 17.09
Weighted Average Exercise Price, Granted	$ 0
Weighted Average Exercise Price, Outstanding, September 30, 2013	$ 20.73
Weighted Average Exercise Price, Vested or expected to vest at September 30, 2013	$ 20.73
Weighted Average Exercise Price, Exercisable at September 30, 2013	$ 21.30
Weighted Average Remaining Contractual Term (in years), Outstanding, September 30, 2013	3 years 5 months 19 days
Weighted Average Remaining Contractual Term (in years), Vested or expected to vest at September 30, 2013	3 years 5 months 19 days
Weighted Average Remaining Contractual Term (in years), Exercisable at September 30, 2013	3 years 4 months 10 days
Aggregate Intrinsic Value, Outstanding, September 30, 2013	$ 1,177
Aggregate Intrinsic Value, Vested or expected to vest at September 30, 2013	1,177
Aggregate Intrinsic Value, Exercisable at September 30, 2013	$ 999

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Loans

9 Months Ended

Sep. 30, 2013

Loans Receivable, Net [Abstract]

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

8. Loans

Loans receivable consist of the following (in thousands):

	September 30,		December 31,
	2013		2012
Real Estate:
Secured by 1-4 family residential	$	191,984	$	200,826
Secured by multi-family residential		145,704		122,275
Secured by commercial real estate		675,411		675,110
Construction		59,567		37,788
		1,072,666		1,035,999
Other Loans:
Commercial		386,160		383,817
Home equity and improvement		105,727		108,718
Consumer Finance		16,659		15,936
		508,546		508,471
Total loans		1,581,212		1,544,470
Deduct:
Undisbursed loan funds		(19,189)		(18,478)
Net deferred loan origination fees and costs		(744)		(735)
Allowance for loan loss		(25,964)		(26,711)
Totals	$	1,535,315	$	1,498,546

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

The following table discloses allowance for loan loss activity for the quarter ended September 30, 2013 and September 30, 2012 by portfolio segment and impairment method ($ in thousands):

Quarter Ended September 30, 2013	1-4 Family Residential Real Estate		Construction		Multi- Family Residential Real Estate		Commercial Real Estate		Commercial		Home Equity and Improvement		Consumer		Total
Beginning Allowance	$	3,197	$	83	$	2,425	$	13,140	$	5,474	$	1,786	$	165	$	26,270
Charge-Offs		(78)		-		-		(829)		(39)		(170)		(33)		(1,149)
Recoveries		23		-		-		248		68		9		19		367
Provisions		(344)		36		107		525		43		98		11		476
Ending Allowance	$	2,798	$	119	$	2,532	$	13,084	$	5,546	$	1,723	$	162	$	25,964

Quarter Ended September 30, 2012	1-4 Family Residential Real Estate		Construction		Multi- Family Residential Real Estate		Commercial Real Estate		Commercial		Home Equity and Improvement		Consumer		Total
Beginning Allowance	$	3,104	$	46	$	2,610	$	13,914	$	5,156	$	1,435	$	144	$	26,409
Charge-Offs		(217)		-		-		(780)		(355)		(203)		(19)		(1,574)
Recoveries		26		-		122		430		140		38		14		770
Provisions		83		17		(261)		225		162		471		8		705
Ending Allowance	$	2,996	$	63	$	2,471	$	13,789	$	5,103	$	1,741	$	147	$	26,310

The following table discloses allowance for loan loss activity for the year-to-date ended September 30, 2013 and September 30, 2012 by portfolio segment and impairment method ($ in thousands):

Year-to-date Ended September 30, 2013	1-4 Family Residential Real Estate		Construction		Multi- Family Residential Real Estate		Commercial Real Estate		Commercial		Home Equity and Improvement		Consumer		Total
Beginning Allowance	$	3,506	$	75	$	2,197	$	12,702	$	6,325	$	1,759	$	147	$	26,711
Charge-Offs		(468)		-		(6)		(1,372)		(560)		(612)		(87)		(3,105)
Recoveries		155		-		-		516		201		70		67		1,009
Provisions		(395)		44		341		1,238		(420)		506		35		1,349
Ending Allowance	$	2,798	$	119	$	2,532	$	13,084	$	5,546	$	1,723	$	162	$	25,964

Year-to-date Ended September 30, 2012	1-4 Family Residential Real Estate		Construction		Multi- Family Residential Real Estate		Commercial Real Estate		Commercial		Home Equity and Improvement		Consumer		Total
Beginning Allowance	$	4,095	$	63	$	2,850	$	17,640	$	6,576	$	1,856	$	174	$	33,254
Charge-Offs		(1,539)		-		(555)		(10,170)		(3,507)		(668)		(74)		(16,513)
Recoveries		150		-		122		574		295		77		45		1,263
Provisions		290		-		54		5,745		1,739		476		2		8,306
Ending Allowance	$	2,996	$	63	$	2,471	$	13,789	$	5,103	$	1,741	$	147	$	26,310

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, 2013:

(In Thousands)
	1-4 Family				Multi- Family
	Residential				Residential		Commercial				Home Equity
	Real Estate		Construction		Real Estate		Real Estate		Commercial		& Improvement		Consumer		Total
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	234	$	-	$	-	$	1,837	$	305	$	44	$	-	$	2,420
Collectively evaluated for impairment		2,564		119		2,532		11,247		5,241		1,679		162		23,544
Acquired with deteriorated credit quality		-		-		-		-		-		-		-		-
Total ending allowance balance	$	2,798	$	119	$	2,532	$	13,084	$	5,546	$	1,723	$	162	$	25,964
Loans:
Loans individually evaluated for impairment	$	10,514	$	261	$	865	$	40,960	$	9,729	$	2,499	$	71	$	64,899
Loans collectively evaluated for impairment		181,870		40,108		144,989		636,481		377,591		103,673		16,574		1,501,286
Loans acquired with deteriorated credit quality		31		-		-		231		29		-		-		291
Total ending loans balance	$	192,415	$	40,369	$	145,854	$	677,672	$	387,349	$	106,172	$	16,645	$	1,566,476

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2012:

(In Thousands)

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

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, 2013						Nine Months Ended September 30, 2013
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized		Cash Basis Income Recognized
Residential Owner Occupied	$	6,463	$	88	$	89	$	6,705	$	268	$	266
Residential Non Owner Occupied		4,261		42		43		4,465		116		117
Total Residential Real Estate		10,724		130		132		11,170		384		383
Construction		261		4		5		142		6		6
Multi-Family		1,078		9		9		1,261		20		21
CRE Owner Occupied		14,339		121		127		14,520		304		302
CRE Non Owner Occupied		23,254		237		264		23,786		675		687
Agriculture Land		674		4		2		800		21		13
Other CRE		3,226		14		14		4,297		28		24
Total Commercial Real Estate		41,493		376		407		43,403		1,028		1,026
Commercial Working Capital		3,058		13		14		2,273		33		37
Commercial Other		5,918		14		15		6,449		64		58
Total Commercial		8,976		27		29		8,722		97		95
Consumer		76		1		2		90		5		5
Home Equity and Home Improvement		2,596		29		29		2,684		95		91
Total Impaired Loans	$	65,204	$	576	$	613	$	67,472	$	1,635	$	1,627

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, 2012						Nine Months Ended September 30, 2012
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized		Average Balance		Interest Income Recognized		Cash Basis Income Recognized
Residential Owner Occupied	$	1,912		15	$	14	$	1,921	$	45	$	42
Residential Non Owner Occupied		6,141		54		58		5,397		126		129
Total Residential Real Estate		8,053		69		72		7,318		171		171
Construction		-		-		-		-		-		-
Multi-Family		811		10		10		627		11		11
CRE Owner Occupied		12,414		53		44		11,019		92		88
CRE Non Owner Occupied		14,881		104		161		15,231		284		287
Agriculture Land		773		6		1		1,107		20		15
Other CRE		5,987		1		1		7,015		4		4
Total Commercial Real Estate		34,055		164		207		34,372		400		394
Commercial Working Capital		2,048		9		11		2,005		13		15
Commercial Other		4,188		25		26		4,538		40		42
Total Commercial		6,236		34		37		6,543		53		57
Consumer		-		-		-		-		-		-
Home Equity and Home Improvement		36		-		-		37		2		2
Total Impaired Loans	$	49,191	$	277	$	326	$	48,897	$	637	$	635

The following table presents loans individually evaluated for impairment by class of loans as of September 30, 2013: (In Thousands)

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no allowance recorded:
Residential Owner Occupied	$	4,902	$	4,862	$	-
Residential Non Owner Occupied		3,539		2,806		-
Total Residential Real Estate		8,441		7,668		-
Construction		300		261		-
Multi-Family Residential Real Estate		1,014		865		-
CRE Owner Occupied		10,313		8,552		-
CRE Non Owner Occupied		5,364		4,577		-
Agriculture Land		689		504		-
Other CRE		4,948		3,063		-
Total Commercial Real Estate		21,314		16,696		-
Commercial Working Capital		3,835		3,837		-
Commercial Other		4,846		4,797		-
Total Commercial		8,681		8,634		-
Consumer		71		71		-
Home Equity and Home Improvement		2,135		2,058		-
Total loans with no allowance recorded	$	41,956	$	36,253	$	-
With an allowance recorded:
Residential Owner Occupied	$	1,534	$	1,539	$	211
Residential Non Owner Occupied		1,305		1,307		23
Total Residential Real Estate		2,839		2,846		234
Construction		-		-		-
Multi-Family Residential Real Estate		-		-		-
CRE Owner Occupied		7,651		6,500		281
CRE Non Owner Occupied		17,905		17,451		1,546
Agriculture Land		251		258		8
Other CRE		83		55		2
Total Commercial Real Estate		25,890		24,264		1,837
Commercial Working Capital		-		-		-
Commercial Other		1,094		1,095		305
Total Commercial		1,094		1,095		305
Consumer		-		-		-
Home Equity and Home Improvement		439		441		44
Total loans with an allowance recorded	$	30,262	$	28,646	$	2,420

*Unpaid principal balance is not reduced for partial charge-offs.

Impaired loans have been recognized in conformity with FASB ASC Topic 310.

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2012: (In Thousands)

	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no allowance recorded:
Residential Owner Occupied	$	5,427	$	5,357	$	-
Residential Non Owner Occupied		4,211		3,420		-
Total Residential Real Estate		9,638		8,777		-
Construction		300		45		-
Multi-Family Residential Real Estate		1,775		1,626		-
CRE Owner Occupied		12,314		9,782		-
CRE Non Owner Occupied		11,054		9,105		-
Agriculture Land		1,176		993		-
Other CRE		8,741		5,527		-
Total Commercial Real Estate		33,285		25,407		-
Commercial Working Capital		1,565		1,565		-
Commercial Other		6,367		5,338		-
Total Commercial		7,932		6,903		-
Consumer		125		124		-
Home Equity and Home Improvement		2,777		2,642		-
Total loans with no allowance recorded	$	55,832	$	45,524	$	-
With an allowance recorded:
Residential Owner Occupied	$	1,697	$	1,701	$	257
Residential Non Owner Occupied		1,449		1,452		24
Total Residential Real Estate		3,146		3,153		281
Construction		-		-		-
Multi-Family Residential Real Estate		-		-		-
CRE Owner Occupied		5,735		5,118		245
CRE Non Owner Occupied		15,301		15,357		820
Agriculture Land		111		112		3
Other CRE		88		59		2
Total Commercial Real Estate		21,235		20,646		1,070
Commercial Working Capital		300		301		10
Commercial Other		1,623		1,626		128
Total Commercial		1,923		1,927		138
Consumer		-		-		-
Home Equity and Home Improvement		36		36		2
Total loans with an allowance recorded	$	26,340	$	25,762	$	1,491

*Unpaid principal balance is not reduced for partial charge-offs.

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

	September 30,  2013		December 31, 2012
	(in thousands)
Non-accrual loans	$	30,512	$	32,570
Loans over 90 days past due and still accruing		-		-
Total non-performing loans		30,512		32,570
Real estate and other assets held for sale		5,518		3,805
Total non-performing assets	$	36,030	$	36,375

The following table presents the aging of the recorded investment in past due and non accrual loans as of September 30, 2013 by class of loans: (In Thousands)

	Current		30-59 days		60-89 days		90+ days		Total Past Due		Total Non Accrual
Residential Owner Occupied	$	122,038	$	593	$	203	$	956	$	1,752	$	1,117
Residential Non Owner Occupied		67,361		500		135		629		1,264		2,040
Total residential real estate		189,399		1,093		338		1,585		3,016		3,157
Construction		40,369		-		-		-		-		-
Multi-Family		145,854		-		-		-		-		613
CRE Owner Occupied		318,420		489		631		1,728		2,848		8,416
CRE Non Owner Occupied		227,935		1,348		224		1,286		2,858		5,621
Agriculture Land		78,134		23		134		76		233		682
Other Commercial Real Estate		45,403		337		-		1,504		1,841		3,094
Total Commercial Real Estate		669,892		2,197		989		4,594		7,780		17,813
Commercial Working Capital		156,532		349		-		433		782		3,188
Commercial Other		225,129		989		1,032		2,885		4,906		5,567
Total Commercial		381,661		1,338		1,032		3,318		5,688		8,755
Consumer		16,602		31		12		-		43		-
Home Equity / Home Improvement		104,430		1,416		149		177		1,742		178
Total Loans	$	1,548,207	$	6,075	$	2,520	$	9,674	$	18,269	$	30,516

The following table presents the aging of the recorded investment in past due and non accrual loans as of December 31, 2012 by class of loans: (In Thousands)

	Current		30-59 days			60-89 days		90+ days		Total Past Due		Total Non Accrual
Residential Owner Occupied	$	125,362	$	1,238	$	604	$	945	$	2,787	$	1,125
Residential Non Owner Occupied		71,777		413		126		849		1,388		2,473
Total residential real estate		197,139		1,651		730		1,794		4,175		3,598
Construction		19,296		-		-		-		-		-
Multi-Family		122,455		-		-		-		-		1,178
CRE Owner Occupied		321,071		1,248		382		1,622		3,252		9,652
CRE Non Owner Occupied		235,592		134		1,321		2,480		3,935		6,674
Agriculture Land		72,092		84		31		-		115		813
Other Commercial Real Estate		36,510		21		875		3,560		4,456		4,761
Total Commercial Real Estate		665,265		1,487		2,609		7,662		11,758		21,900
Commercial Working Capital		161,110		-		155		1,204		1,359		1,528
Commercial Other		218,477		584		1,201		2,138		3,923		4,136
Total Commercial		379,587		584		1,356		3,342		5,282		5,664
Consumer		15,702		229		8		-		237		-
Home Equity / Home Improvement		106,458		2,294		225		217		2,736		217
Total Loans	$	1,505,902	$	6,245	$	4,928	$	13,015	$	24,188	$	32,557

Troubled Debt Restructurings

As of September 30, 2013 and December 31, 2012, the Company has a recorded investment in troubled debt restructurings (“TDRs”) of $33.6 million and $35.5 million, respectively. The Company has allocated $1.7 million of specific reserves to those loans as of September 30, 2013 and $1.1 million as of December 31, 2012, and has committed to lend additional amounts totaling up to $675,000 and $41,000 at September 30, 2013 and December 31, 2012, 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 million are on non-accrual status and partial charge-offs have in some cases been taken against the outstanding balance. Loans modified as a TDR may have the financial effect of increasing the allowance associated with the loan. If the loan is determined to be collateral dependent, the estimated fair value of the collateral, less any selling costs is used to determine if there is a need for a specific allowance or charge-off. If the loan is determined to be cash flow dependent, the allowance is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate.

The following table presents loans by class modified as TDRs that occurred during the three and nine month period ending September 30, 2013 and September 30, 2012:

	Loans Modified as a TDR for the Three Months Ended September 30, 2013 ($ in thousands)			Loans Modified as a TDR for the Nine Months Ended September 30, 2013 ($ in thousands)
Troubled Debt Restructurings	Number of Loans		Recorded Investment (as of period end)	Number of Loans		Recorded Investment (as of period end)
Residential Owner Occupied	0	$	-	8	$	746
Residential Non Owner Occupied	5		206	6		393
CRE Owner Occupied	1		47	5		802
CRE Non Owner Occupied	0		-	1		1,361
Agriculture Land	0		-	1		214
Other CRE	0		-	1		31
Commercial / Industrial	5		941	6		988
Home Equity / Improvement	4		66	13		536
Consumer	0		-	2		13
Total	15	$	1,260	43	$	5,084

The loans described above decreased the ALLL by $15,000 in the three month period ending September 30, 2013 and increased the ALLL by $359,000 in the nine month period ending September 30, 2013.

	Loans Modified as a TDR for the Three Months Ended September 30, 2012 ($ in thousands)			Loans Modified as a TDR for the Nine Months Ended September 30, 2012 ($ in thousands)
Troubled Debt Restructurings	Number of Loans	Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)
Residential Owner Occupied	2	$	221	7	$	778
Residential Non Owner Occupied	1		34	2		116
CRE Owner Occupied	3		565	5		1,461
CRE Non Owner Occupied	1		217	1		217
Agriculture Land	1		127	2		439
Other CRE	0		-	1		61
Commercial / Industrial	2		34	2		34
Home Equity / Improvement	0		-	0		-
Consumer	0		-	0		-
Total	10	$	1,198	20	$	3,106

The loans described above decreased the ALLL by $17,000 in the three month period ending September 30, 2012 and decreased the ALLL by $21,000 in the nine month period ending September 30, 2012.

The following table presents loans by class modified as TDRs for which there was a payment default within twelve months following the modification during the period ending September 30, 2013 and September 30, 2012:

	Three Months Ended September 30, 2013 ($ in thousands)				Nine Months Ended September 30, 2013 ($ in thousands)
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans		Recorded Investment (as of period end)			Number of Loans	Recorded Investment (as of period end)
Residential Owner Occupied		4	$	339		5	$	432
Residential Non Owner Occupied		1		78		1		78
CRE Owner Occupied		0		-		0		-
CRE Non Owner Occupied		0		-		1		212
Agriculture Land		0		-		0		-
Other CRE		0		-		0		-
Commercial / Industrial		2		178		2		178
Home Equity / Improvement		2		38		2		38
Consumer		0		-		0		-
Total		9	$	633		11	$	938

The TDRs that subsequently defaulted described above did not have an impact on the allowance for loan losses for the three month period ended September 30, 2013, and decreased the allowance for loan losses by $11,000 for the nine month period ended September 30, 2013.

	Three Months Ended September 30, 2012 ($ in thousands)			Nine Months Ended September 30, 2012 ($ in thousands)
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans		Recorded Investment (as of period end)	Number of Loans		Recorded Investment (as of period end)
Residential Owner Occupied	0	$	-	0	$	-
Residential Non Owner Occupied	1		24	1		24
CRE Owner Occupied	0		-	0		-
CRE Non Owner Occupied	2		351	2		351
Agriculture Land	0		-	0		-
Other CRE	0		-	0		-
Commercial / Industrial	1		771	2		1,351
Home Equity / Improvement	0		-	0		-
Consumer	0		-	0		-
Total	4	$	1,146	5	$	1,726

The TDRs that subsequently defaulted described above did not have an impact on the allowance for loan losses for the three or the nine month periods ended September 30, 2012.

The terms of certain other loans were modified during the period ending September 30, 2013 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 48 loans were modified under this definition during the three month period ended September 30, 2013 and a total of 123 loans were modified under this definition during the nine month period ended September 30, 2013.

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-homogenous 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, 2013, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows: (In Thousands)

Category	Pass		Special Mention		Substandard		Doubtful		Not Graded		Total
Residential Owner Occupied	$	4,135	$	21	$	2,867	$	-	$	116,765	$	123,788
Residential Non Owner Occupied		53,120		3,233		6,030		-		6,244		68,627
Total residential real estate		57,255		3,254		8,897		-		123,009		192,415
Construction		30,865		-		261		-		9,243		40,369
Multi Family		142,044		654		2,177		-		979		145,854
CRE Owner Occupied		291,586		14,988		12,808		-		1,886		321,268
CRE Non Owner Occupied		201,459		12,571		16,642		-		121		230,793
Agriculture Land		76,373		770		1,224		-		-		78,367
Other CRE		40,935		1,694		3,856		-		759		47,244
Total Commercial Real Estate		610,353		30,023		34,530		-		2,766		677,672
Commercial Working Capital		148,492		4,389		4,431		-		-		157,312
Commercial Other		215,749		6,863		7,425		-		-		230,037
Total Commercial		364,241		11,252		11,856		-		-		387,349
Consumer		-		-		19		-		16,626		16,645
Home Equity/Improvement		-		-		857		9		105,306		106,172
Total	$	1,204,758	$	45,183	$	58,597	$	9	$	257,929	$	1,566,476

As of December 31, 2012, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows: (In Thousands)

Category	Pass		Special Mention		Substandard		Doubtful		Not Graded		Total
Residential Owner Occupied	$	4,221	$	75	$	3,617	$	234	$	120,002	$	128,149
Residential Non Owner Occupied		55,771		2,453		8,248		-		6,693		73,165
Total residential real estate		59,992		2,528		11,865		234		126,695		201,314
Construction		11,360		-		45		-		7,891		19,296
Multi Family		118,121		910		2,404		-		1,020		122,455
CRE Owner Occupied		292,765		10,440		18,740		-		2,378		324,323
CRE Non Owner Occupied		207,745		9,077		22,615		-		90		239,527
Agriculture Land		69,924		769		1,514		-		-		72,207
Other CRE		31,875		891		7,222		-		978		40,966
Total Commercial Real Estate		602,309		21,177		50,091		-		3,446		677,023
Commercial Working Capital		156,433		3,587		2,449		-		-		162,469
Commercial Other		208,783		5,204		8,413		-		-		222,400
Total Commercial		365,216		8,791		10,862		-		-		384,869
Consumer		-		-		70		-		15,869		15,939
Home Equity/Improvement		-		-		668		64		108,462		109,194
Total	$	1,156,998	$	33,406	$	76,005	$	298	$	263,383	$	1,530,090

Beginning with the first quarter of 2013 allowance analysis, management decided to return to using a twelve quarter look-back period, from using an eight quarter look-back period that has been used since December 31, 2010, for calculating the historical loss ratio. Management is not certain that the relatively low levels of charge-offs incurred in recent quarters are sustainable given the low levels of economic growth in its markets and believes the longer look-back period better captures loan portfolio risks at this time.

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Derivative Financial Instruments (Details) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Derivatives not designated as hedging instruments
Mortgage Banking Derivatives Assets, Carrying Value	$ 548	$ 950
Mortgage Banking Derivatives Liabilities, Carrying Value	(247)	(94)
Mortgage Banking Derivatives, Net Carrying Value	$ 301	$ 856

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Stock Compensation Plans

9 Months Ended

Sep. 30, 2013

Disclosure Of Compensation Related Costs, Share-Based Payments [Abstract]

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

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 replaces all existing plans. All awards currently outstanding under prior plans will remain in effect in accordance with their respective terms. Any new awards will be made under the 2010 Equity Plan.  The 2010 Equity Plan allows for issuance of up 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, 2013, 264,770 options had been granted and remain outstanding at option prices based on the market value of the underlying shares on the date the options were granted. Options granted under all plans vest 20% per year except for the 2009 grant to the Company’s executive officers, which vested 40% in 2011 and then 20% annually.  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 August 2011, the Company approved a 2011 Short-Term (“STIP”) and a 2011 Long-Term (“LTIP”) Equity Incentive Plan for selected members of management.  The plans became effective January 1, 2011 and provide for cash and/or equity benefits if certain performance targets are achieved.  Awards issued under these plans reduced the amount of awards available to be issued under the 2010 Equity Plan. 

In March 2012, the Company approved a 2012 STIP and a 2012 LTIP for selected members of management.  The plans are effective January 1, 2012 and provide for cash and/or equity benefits if certain performance targets are achieved.  Awards issued under these plans reduce the amount of awards available to be issued under the 2010 Equity Plan.

Cash and/or equity benefits under the 2011 STIP and LTIP and 2012 STIP were paid out to the selected members of management in the first quarter of 2013 based on the achievement of certain performance targets. One member of management was not paid until April 2013.

In March 2013, the Company approved a 2013 STIP and a 2013 LTIP for selected members of management.

Under the 2013 STIP the participants may earn up to 25% to 45% of their salary for potential payout based on the achievement of certain corporate performance targets during the calendar year. The final amount of awards earned under the 2013 STIP will be determined as of December 31, 2013 and will be paid out in cash in the first quarter of 2014. The participants are required to be employed on the day of payout in order to receive such payment.

Under the 2013 LTIP the participants may earn up to 25% to 45% of their salary, depending upon their position, for potential payout in the form of equity awards based on the achievement of certain corporate performance targets over a three year period. The Company granted 86,065 RSUs to the participants in this plan effective January 1, 2013, which represents the maximum target award. The amount of benefit under the 2013 LTIP will be determined individually at the 12 month period ending December 31, 2013, the 24 month period ending December 31, 2014 and the 36 month period ending December 31, 2015. The awards’ vesting will be as follows: 16.7% of the target award after the end of the performance period ending December 31, 2013, 27.8% of the target award at the end of the performance period ending December 31, 2014 and 55.5% of the target award at the end of the performance period ending December 31, 2015. The RSUs shall vest between 0% and 100% of the applicable portion of the target award based on the portion of the performance targets that are achieved. RSUs settle in common shares in the first quarter following the close of the applicable performance period. The participants are required to be employed on the day of payout in order to receive the payment.

The fair value of each option award is estimated on the date of grant using the Black-Scholes model. Expected volatilities are based on historical volatilities of the Company’s common shares. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-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. There were no options granted during the nine months ended September 30, 2013 or 2012.

Following is activity under the plans during the nine months ended September 30, 2013:

Stock options	Options Outstanding		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in 000’s)
Options outstanding, January 1, 2013		312,350	$	20.33
Forfeited or cancelled		14,000		20.66
Exercised		33,580		17.09
Granted		-		-
Options outstanding, September 30, 2013		264,770	$	20.73		3.47	$	1,177
Vested or expected to vest at September 30, 2013		264,770	$	20.73		3.47	$	1,177
Exercisable at September 30, 2013		251,900	$	21.30		3.36	$	999

As of September 30, 2013, there was $19,000 of total unrecognized compensation costs related to unvested stock options granted under the Company’s equity plans. The cost is expected to be recognized over a weighted-average period of 1.1 years.

At September 30, 2013, 106,061 RSU’s were outstanding. Compensation expense is recognized over the performance period based on the achievements of targets as established under the plan documents. Total accrued expense of $711,000 was recorded during the nine months ended September 30, 2013 and approximately $373,000 is included within other liabilities at September 30, 2013 related to the STIPs and LTIPs.

	Restricted Stock Units				Stock Grants
			Weighted-Average				Weighted-Average
			Grant Date				Grant Date
Unvested Shares	Shares		Fair Value		Shares		Fair Value
Unvested at January 1, 2013		38,871	$	14.74		11,260	$	13.28
Granted		91,187		19.42		20,639		15.77
Vested		(20,639)		15.77		(31,899)		14.89
Forfeited		(3,358)		11.97		-		-
Unvested at September 30, 2013		106,061	$	18.66		-	$	-

The maximum amount of compensation expense that may be recorded for the 2013 STIP and the 2012 and 2013 LTIPs at September 30, 2013 is approximately $2.9 million.  However, the estimated expense expected to be recorded as of September 30, 2013 based on the performance measures in the plans, is $1.9 million of which $1.0 million is unrecognized at September 30, 2013 and will be recognized over the remaining performance periods.

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Consolidated Condensed Statements of Changes in Stockholders' Equity (Parenthetical)	9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012
Shares issued under stock option plan, with no income tax benefit (in shares)	20,707	500
Restricted share activity under Stock Incentive Plans (in shares)	31,796
Shares issued direct purchases (in shares)	2,768	637
Shares purchased in U.S. Treasury auction (in shares)		16,560
Shares purchased in open market (in shares)		20,440

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Investment Securities (Details 4) (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Sep. 30, 2013
Amortized Cost	$ 3,566
Fair Value	1,890
Unrealized Loss	(1,676)
OTTI Losses 2013	0
Class B [Member] | TPREF Funding II [Member] | Moodys, Caa3 Rating [Member]
Amortized Cost	673
Fair Value	271
Unrealized Loss	(402)
OTTI Losses 2013	0
Current Number of Banks and Insurance Companies	15
Actual Deferrals and Defaults as a percentage of Current Collateral	43.47%
Expected Deferrals and Defaults as a percentage of Remaining Performing Collateral	15.90%
Excess Sub-ordination as a percentage of Current Performing Collateral	0.00%
Class B 01 [Member] | I Preferred Term Sec I [Member] | Fitch, CCC Rating [Member]
Amortized Cost	1,000
Fair Value	686
Unrealized Loss	(314)
OTTI Losses 2013	0
Current Number of Banks and Insurance Companies	14
Actual Deferrals and Defaults as a percentage of Current Collateral	17.24%
Expected Deferrals and Defaults as a percentage of Remaining Performing Collateral	12.04%
Excess Sub-ordination as a percentage of Current Performing Collateral	23.78%
Class C 01 [Member] | Dekania Il Collateralized Debt Obligations [Member] | Fitch, CCC Rating [Member]
Amortized Cost	990
Fair Value	612
Unrealized Loss	(378)
OTTI Losses 2013	0
Current Number of Banks and Insurance Companies	31
Actual Deferrals and Defaults as a percentage of Current Collateral	0.00%
Expected Deferrals and Defaults as a percentage of Remaining Performing Collateral	13.29%
Excess Sub-ordination as a percentage of Current Performing Collateral	26.51%
Class C 01 [Member] | Preferred Term Sec XXVII [Member] | Moodys, C Rating [Member]
Amortized Cost	903
Fair Value	321
Unrealized Loss	(582)
OTTI Losses 2013	$ 0
Current Number of Banks and Insurance Companies	32
Actual Deferrals and Defaults as a percentage of Current Collateral	26.15%
Expected Deferrals and Defaults as a percentage of Remaining Performing Collateral	18.83%
Excess Sub-ordination as a percentage of Current Performing Collateral	5.99%

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Earnings Per Common Share (Details Textual)	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	98,850	233,700	139,350	234,643

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Commitments, Guarantees and Contingent Liabilities (Tables)

9 Months Ended

Sep. 30, 2013

Commitments and Contingencies Disclosure [Abstract]

Schedule of Line of Credit Facilities [Table Text Block]

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, 2013				December 31, 2012
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	41,090	$	46,655	$	50,205	$	48,035
Unused lines of credit		19,227		262,028		21,975		228,269
Standby letters of credit		-		16,652		-		18,166
Total	$	60,317	$	325,335	$	72,180	$	294,470

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Mortgage Banking (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2012	Sep. 30, 2013	Sep. 30, 2012
Gain from sale of mortgage loans	$ 894	$ 2,888	$ 4,960	$ 7,890
Mortgage loans servicing revenue (expense):
Mortgage loans servicing revenue	901	824	2,646	2,499
Amortization of mortgage servicing rights	(429)	(892)	(1,752)	(2,610)
Mortgage servicing rights valuation adjustments	480	(600)	1,265	(855)
Mortgage loans servicing revenue (expense), Total	952	(668)	2,159	(966)
Net revenue from sale and servicing of mortgage loans	$ 1,846	$ 2,220	$ 7,119	$ 6,924

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Loans (Details 4) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013		Dec. 31, 2012
Impaired loans
Unpaid Principal Balance, With No Related Allowance	$ 41,956	[1]	$ 55,832	[1]
Recorded Investment, With No Related Allowance	36,253		45,524
Allowance for Loan Losses Allocated, With No Related Allowance	0		0
Unpaid Principal Balance, With Related Allowance	30,262	[1]	26,340	[1]
Recorded Investment, With Related Allowance	28,646		25,762
Allowance for Loan Losses Allocated, With Related Allowance	2,420		1,491
Residential Owner Occupied [Member]
Impaired loans
Unpaid Principal Balance, With No Related Allowance	4,902	[1]	5,427	[1]
Recorded Investment, With No Related Allowance	4,862		5,357
Allowance for Loan Losses Allocated, With No Related Allowance	0		0
Unpaid Principal Balance, With Related Allowance	1,534	[1]	1,697	[1]
Recorded Investment, With Related Allowance	1,539		1,701
Allowance for Loan Losses Allocated, With Related Allowance	211		257
Residential Non Owner Occupied [Member]
Impaired loans
Unpaid Principal Balance, With No Related Allowance	3,539	[1]	4,211	[1]
Recorded Investment, With No Related Allowance	2,806		3,420
Allowance for Loan Losses Allocated, With No Related Allowance	0		0
Unpaid Principal Balance, With Related Allowance	1,305	[1]	1,449	[1]
Recorded Investment, With Related Allowance	1,307		1,452
Allowance for Loan Losses Allocated, With Related Allowance	23		24
Residential Real Estate [Member]
Impaired loans
Unpaid Principal Balance, With No Related Allowance	8,441	[1]	9,638	[1]
Recorded Investment, With No Related Allowance	7,668		8,777
Allowance for Loan Losses Allocated, With No Related Allowance	0		0
Unpaid Principal Balance, With Related Allowance	2,839	[1]	3,146	[1]
Recorded Investment, With Related Allowance	2,846		3,153
Allowance for Loan Losses Allocated, With Related Allowance	234		281
Construction Loans [Member]
Impaired loans
Unpaid Principal Balance, With No Related Allowance	300	[1]	300	[1]
Recorded Investment, With No Related Allowance	261		45
Allowance for Loan Losses Allocated, With No Related Allowance	0		0
Unpaid Principal Balance, With Related Allowance	0	[1]	0	[1]
Recorded Investment, With Related Allowance	0		0
Allowance for Loan Losses Allocated, With Related Allowance	0		0
Multi Family [Member]
Impaired loans
Unpaid Principal Balance, With No Related Allowance	1,014	[1]	1,775	[1]
Recorded Investment, With No Related Allowance	865		1,626
Allowance for Loan Losses Allocated, With No Related Allowance	0		0
Unpaid Principal Balance, With Related Allowance	0	[1]	0	[1]
Recorded Investment, With Related Allowance	0		0
Allowance for Loan Losses Allocated, With Related Allowance	0		0
Commercial Real Estate Owner Occupied [Member]
Impaired loans
Unpaid Principal Balance, With No Related Allowance	10,313	[1]	12,314	[1]
Recorded Investment, With No Related Allowance	8,552		9,782
Allowance for Loan Losses Allocated, With No Related Allowance	0		0
Unpaid Principal Balance, With Related Allowance	7,651	[1]	5,735	[1]
Recorded Investment, With Related Allowance	6,500		5,118
Allowance for Loan Losses Allocated, With Related Allowance	281		245
Commercial Real Estate Non Owner Occupied [Member]
Impaired loans
Unpaid Principal Balance, With No Related Allowance	5,364	[1]	11,054	[1]
Recorded Investment, With No Related Allowance	4,577		9,105
Allowance for Loan Losses Allocated, With No Related Allowance	0		0
Unpaid Principal Balance, With Related Allowance	17,905	[1]	15,301	[1]
Recorded Investment, With Related Allowance	17,451		15,357
Allowance for Loan Losses Allocated, With Related Allowance	1,546		820
Agriculture Land [Member]
Impaired loans
Unpaid Principal Balance, With No Related Allowance	689	[1]	1,176	[1]
Recorded Investment, With No Related Allowance	504		993
Allowance for Loan Losses Allocated, With No Related Allowance	0		0
Unpaid Principal Balance, With Related Allowance	251	[1]	111	[1]
Recorded Investment, With Related Allowance	258		112
Allowance for Loan Losses Allocated, With Related Allowance	8		3
Commercial Real Estate Other Receivables [Member]
Impaired loans
Unpaid Principal Balance, With No Related Allowance	4,948	[1]	8,741	[1]
Recorded Investment, With No Related Allowance	3,063		5,527
Allowance for Loan Losses Allocated, With No Related Allowance	0		0
Unpaid Principal Balance, With Related Allowance	83	[1]	88	[1]
Recorded Investment, With Related Allowance	55		59
Allowance for Loan Losses Allocated, With Related Allowance	2		2
Commercial Real Estate [Member]
Impaired loans
Unpaid Principal Balance, With No Related Allowance	21,314	[1]	33,285	[1]
Recorded Investment, With No Related Allowance	16,696		25,407
Allowance for Loan Losses Allocated, With No Related Allowance	0		0
Unpaid Principal Balance, With Related Allowance	25,890	[1]	21,235	[1]
Recorded Investment, With Related Allowance	24,264		20,646
Allowance for Loan Losses Allocated, With Related Allowance	1,837		1,070
Commercial Working Capital [Member]
Impaired loans
Unpaid Principal Balance, With No Related Allowance	3,835	[1]	1,565	[1]
Recorded Investment, With No Related Allowance	3,837		1,565
Allowance for Loan Losses Allocated, With No Related Allowance	0		0
Unpaid Principal Balance, With Related Allowance	0	[1]	300	[1]
Recorded Investment, With Related Allowance	0		301
Allowance for Loan Losses Allocated, With Related Allowance	0		10
Commercial Loans Other [Member]
Impaired loans
Unpaid Principal Balance, With No Related Allowance	4,846	[1]	6,367	[1]
Recorded Investment, With No Related Allowance	4,797		5,338
Allowance for Loan Losses Allocated, With No Related Allowance	0		0
Unpaid Principal Balance, With Related Allowance	1,094	[1]	1,623	[1]
Recorded Investment, With Related Allowance	1,095		1,626
Allowance for Loan Losses Allocated, With Related Allowance	305		128
Commercial Loan [Member]
Impaired loans
Unpaid Principal Balance, With No Related Allowance	8,681	[1]	7,932	[1]
Recorded Investment, With No Related Allowance	8,634		6,903
Allowance for Loan Losses Allocated, With No Related Allowance	0		0
Unpaid Principal Balance, With Related Allowance	1,094	[1]	1,923	[1]
Recorded Investment, With Related Allowance	1,095		1,927
Allowance for Loan Losses Allocated, With Related Allowance	305		138
Consumer Loan [Member]
Impaired loans
Unpaid Principal Balance, With No Related Allowance	71	[1]	125	[1]
Recorded Investment, With No Related Allowance	71		124
Allowance for Loan Losses Allocated, With No Related Allowance	0		0
Unpaid Principal Balance, With Related Allowance	0	[1]	0	[1]
Recorded Investment, With Related Allowance	0		0
Allowance for Loan Losses Allocated, With Related Allowance	0		0
Home Equity and Home Improvement [Member]
Impaired loans
Unpaid Principal Balance, With No Related Allowance	2,135	[1]	2,777	[1]
Recorded Investment, With No Related Allowance	2,058		2,642
Allowance for Loan Losses Allocated, With No Related Allowance	0		0
Unpaid Principal Balance, With Related Allowance	439	[1]	36	[1]
Recorded Investment, With Related Allowance	441		36
Allowance for Loan Losses Allocated, With Related Allowance	$ 44		$ 2

[1] Unpaid principal balance is not reduced for partial charge-offs.

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Borrowings

9 Months Ended

Sep. 30, 2013

Subordinated Borrowings [Abstract]

Subordinated Borrowings Disclosure [Text Block]

11. Borrowings

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

	September 30, 2013		December 31, 2012
	(in thousands)
FHLB Advances:
Putable advances		12,000		12,000
Amortizable mortgage advances		10,761		796
Total	$	22,761	$	12,796
Junior subordinated debentures owed to unconsolidated subsidiary trusts	$	36,083	$	36,083

The putable advances can be put back to the Company at the option of the FHLB on a quarterly basis. At September 30, 2013, $12.0 million of the putable advances with a weighted average rate of 2.72% were not yet callable by the FHLB. The call dates for these advances range from October 15, 2013 to December 12, 2013 and the maturity dates range from January 14, 2015 to March 12, 2018.

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 fixed rate equal to 6.441% for the first five years and a floating interest rate based on three-month LIBOR plus 1.5%.  The Coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate II was 1.75% as of September 30, 2013 and 1.89% as of December 31, 2012.

The Company also sponsored an affiliated trust, First Defiance Statutory Trust I (Trust Affiliate I), that issued $20 million of Trust Preferred Securities in 2005. In connection with this transaction, the Company issued $20.6 million of Subordinated Debentures to Trust Affiliate I. Trust Affiliate I was formed for the purpose of issuing Trust Preferred Securities to third-party investors and investing the proceeds from the sale of these capital securities solely in Subordinated Debentures of the Company. The Junior Debentures held by Trust Affiliate I are the sole assets of the trust. The Company is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability.  Distributions on the Trust Preferred Securities issued by Trust Affiliate I are payable quarterly at a variable rate equal to the three-month LIBOR rate plus 1.38%. The Coupon rate payable on the Trust Preferred Securities issued by Trust Affiliate I was 1.63% and 1.77% on September 30, 2013 and December 31, 2012, respectively.

The Trust Preferred Securities issued by Trust Affiliates I and II are subject to mandatory redemption, in whole or part, upon repayment of the Subordinated Debentures. The Company has entered into agreements that fully and unconditionally guarantee the Trust Preferred Securities subject to the terms of the guarantees. The Trust Preferred Securities and Subordinated Debentures issued by Trust Affiliate I mature on December 15, 2035 but may be redeemed by the issuer at par after October 28, 2010. The Trust Preferred Securities issued by Trust Affiliate II mature on June 15, 2037, but may be redeemed at the Company’s option at any time on or after June 15, 2012, or at any time upon certain events.

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.

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Investment Securities

9 Months Ended

Sep. 30, 2013

Marketable Securities [Abstract]

Investment [Text Block]

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
At September 30, 2013
Available-for-Sale Securities:
Obligations of U.S. government corporations and      agencies	$	5,000	$	-	$	(69)	$	4,931
Mortgage-backed securities – residential		36,800		877		(738)		36,939
Collateralized mortgage obligations		52,306		848		(610)		52,544
Trust preferred securities and preferred stock		3,601		441		(1,676)		2,366
Corporate bonds		8,839		138		(9)		8,968
Obligations of state and political subdivisions		76,251		2,956		(836)		78,371
Totals	$	182,797	$	5,260	$	(3,938)	$	184,119
Held-to-Maturity Securities*:
FHLMC certificates	$	33	$	-	$	-	$	33
FNMA certificates		136		4		-		140
GNMA certificates		52		2		-		54
Obligations of state and political subdivisions		186		-		-		186
Totals	$	407	$	6	$	-	$	413

At December 31, 2012
Available-for-Sale Securities:
Obligations of U.S. government corporations      and agencies	$	11,000	$	69	$	-	$	11,069
U.S. treasury bonds		1,000		2		-		1,002
Mortgage-backed securities – residential		30,020		1,441		-		31,461
Collateralized mortgage obligations		55,962		1,504		-		57,466
Trust preferred securities and preferred stock		3,600		99		(2,091)		1,608
Corporate bonds		8,717		167		-		8,884
Obligations of state and political subdivisions		76,339		6,277		(5)		82,611
Totals	$	186,638	$	9,559	$	(2,096)	$	194,101
Held-to-Maturity Securities*:
FHLMC certificates	$	69	$	-	$	(1)	$	68
FNMA certificates		162		6		-		168
GNMA certificates		60		3		-		63
Obligations of state and political subdivisions		217		-		-		217
Totals	$	508	$	9	$	(1)	$	516

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

The amortized cost and fair value of the investment securities portfolio at September 30, 2013 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”) and collateralized mortgage obligations (“CMO”), which are not due at a single maturity date, have not been allocated over the maturity groupings. These securities may mature earlier than their weighted-average contractual maturities because of principal prepayments.

	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(In Thousands)
Due in one year or less	$	2,255	$	2,262	$	-	$	-
Due after one year through five years		6,126		6,315		186		186
Due after five years through ten years		37,483		38,818		-		-
Due after ten years		47,827		47,241		-		-
MBS/CMO		89,106		89,483		221		227
	$	182,797	$	184,119	$	407	$	413

Investment securities with a carrying amount of $132.4 million at September 30, 2013 were pledged as collateral on public deposits, securities sold under repurchase agreements, Federal Reserve discount window and FHLB advances.

As of September 30, 2013, the Company’s investment portfolio consisted of 328 securities, 77 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, 2013 and December 31, 2012:

	Duration of Unrealized Loss Position
	Less than 12 Months				12 Month or Longer				Total
			Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Losses
	(In Thousands)
At September 30, 2013
Available-for-sale securities:
Obligations of U.S.     government corporations     and agencies	$	2,931	$	(69)	$	-	$	-	$	2,931	$	(69)
Mortgage-backed -     residential		19,456		(738)		-		-		19,456		(738)
Collateralized mortgage     obligations		19,948		(610)		-		-		19,948		(610)
Trust preferred stock and     preferred stock		-		-		1,890		(1,676)		1,890		(1,676)
Corporate bonds		2,991		(9)		-		-		2,991		(9)
Obligations of state and     political subdivisions		16,682		(836)		-		-		16,682		(836)
Total temporarily     impaired securities	$	62,008	$	(2,262)	$	1,890	$	(1,676)	$	63,898	$	(3,938)

	Duration of Unrealized Loss Position
	Less than 12 Months				12 Months or Longer				Total
			Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loses
		(In Thousands)
At December 31, 2012
Available-for-sale securities:
Mortgage-backed     securities - residential	$	1	$	-	$	-	$	-	$	1	$	-
Obligations of state and     political subdivisions		949		(5)		-		-		949		(5)
Trust preferred stock and     preferred stock		-		-		1,474		(2,091)		1,474		(2,091)
Total temporarily impaired     securities	$	950	$	(5)	$	1,474	$	(2,091)	$	2,424	$	(2,096)

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

There were no realized gains from the sales of investment securities in the third quarter of 2013 while there were realized gains of $103,000 ($72,000 after tax) in the third quarter of 2012. Realized gains from the sales of investment securities totaled $97,000 ($68,000 after tax) for the first nine months of 2013 compared to realized gains of $528,000 ($370,000 after tax) for the first nine months of 2012.

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 is 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.

For the first nine months of 2013 and 2012, management determined there was no OTTI.

The Company held eight CDOs at September 30, 2013. Four of those CDOs were written down in full prior to January 1, 2010. The remaining four CDOs have a total amortized cost of $3.6 million at September 30, 2013. Of these, two, with a total amortized cost of $1.6 million, were identified as OTTI in prior periods. The final two CDOs, with a total amortized cost of $2.0 million, continue to pay principal and interest payments in accordance with the contractual terms of the securities and no credit loss impairment has been identified in management’s analysis. Therefore, these two CDO investments have not been deemed by management to be OTTI.

Given the conditions in the debt markets today and the absence of observable transactions in the secondary and new issue markets, the Company’s CDOs will be classified within Level 3 of the fair value hierarchy because management determined that significant adjustments were required to determine fair value at the measurement date.

As required under FASB ASC Topic 320, declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment is related to credit losses.

The Company’s CDO valuations were supported by analysis prepared by an independent third party. Their approach to determining fair value involved several steps: 1) detailed credit and structural evaluation of each piece of collateral in the CDO; 2) collateral performance projections for each piece of collateral in the CDO (default, recovery and prepayment/amortization probabilities) and 3) discounted cash flow modeling.

Trust Preferred CDOs Discount Rate Methodology

First Defiance uses market-based yield indicators as a baseline for determining appropriate discount rates, and then adjusts the resulting discount rates on the basis of its credit and structural analysis of specific CDO instruments. The primary focus is on the returns a fixed income investor would require in order to allocate capital on a risk adjusted basis. There is currently no active market for trust preferred CDOs, however, First Defiance looks principally to market yields for stand-alone trust preferred securities issued by banks, thrifts and insurance companies for which there is an active and liquid market. The next step is to make a series of adjustments to reflect the differences that nevertheless exist between these products (both credit and structural) and, most importantly, to reflect idiosyncratic credit performance differences (both actual and projected) between these products and the underlying collateral in the specific CDOs. Importantly, as part of the analysis described above, First Defiance considers the fact that structured instruments frequently exhibit leverage not present in stand-alone instruments, and make adjustments as necessary to reflect this additional risk.

Fundamental to this evaluation is an assessment of the likelihood of CDO coverage test failures that would have the effect of diverting cash flow away from the relevant CDO bond for some period of time. Generally speaking, the Company adjusts indicative credit spreads upwards in the case of CDOs that have relatively weaker collateral and/or less cushion with respect to overcollateralization and interest coverage test ratios and downwards if the reverse is true. This aspect of the Company’s discount rate methodology is important because there is frequently a great difference in the risks present in CDO instruments that are otherwise very similar (i.e., CDOs with the same basic type of collateral, the same manager, the same vintage, etc., may exhibit vastly different performance characteristics). With respect to this last point, First Defiance notes that given today’s credit environment, characterized by high default and deferral rates, it is typically the case that deal-specific credit performance (determined on the basis of the credit characteristics of remaining collateral) is the best indicator of what a willing market participant would pay for an instrument.

The Company uses the same methodology for all of its CDOs and believes its valuation methodology is appropriate for all of its CDOs in accordance with FASB ASC Topic 320 as well as other related guidance. Beginning with the first quarter of 2013, the Company made the decision to only obtain the third party analysis twice a year, June and December, as a result of the stabilization in its current CDO portfolio. Management still obtains the fair value and cash flow value on a quarterly basis and prepares its internal other-than-temporary impairment analysis.

The default and recovery probabilities for each piece of collateral were formed based on the evaluation of the collateral credit and a review of historical industry default data and current/near-term operating conditions. For collateral that has already deferred, the Company assumed a recovery of 10% of par for banks, thrifts or other depository institutions and 15% for insurance companies. Although there is a possibility that the deferring collateral will become current at some point in the future, First Defiance has conservatively assumed that it will continue to defer and gradually will default.

The following table details the six securities with other-than-temporary impairment, their lowest credit rating at September 30, 2013 and the related credit losses recognized in earnings for the three month period ending March 31, 2013, June 30, 2013 and September 30, 2013 (In Thousands):

		TPREF Funding II		Alesco VIII		Preferred Term Security XXVII		Trapeza CDO I		Alesco Preferred Funding VIII		Alesco Preferred Funding IX
		Rated Caa3		Rated Ca		Rated C		Rated Ca		Not Rated		Not Rated		Total
Cumulative OTTI related to credit loss at January 1, 2013	$	323	$	1,000	$	78	$	857	$	453	$	465	$	3,176
Addition – Qtr 1		-		-		-		-		-		-		-
Cumulative OTTI related to credit loss at March 31, 2013	$	323	$	1,000	$	78	$	857	$	453	$	465	$	3,176
Addition – Qtr 2		-		-		-		-		-		-		-
Cumulative OTTI related to credit loss at June 30, 2013	$	323	$	1,000	$	78	$	857	$	453	$	465	$	3,176
Addition – Qtr 3		-		-		-		-		-		-		-
Cumulative OTTI related to credit loss at September 30, 2013	$	323	$	1,000	$	78	$	857	$	453	$	465	$	3,176

The amount of OTTI recognized in accumulated other comprehensive income (“AOCI”) was $639,000 for the above securities at September 30, 2013. There was $749,000 recognized in AOCI at December 31, 2012.

The following table provides additional information related to the four CDO investments for which a balance remains as of September 30, 2013 (dollars in thousands):

CDO	Class	Amortized Cost		Fair Value		Unrealized Loss		OTTI Losses 2013		Lowest Rating	Current Number of Banks and Insurance Companies	Actual Deferrals and Defaults as a %  of Current Collateral		Expected Deferrals and Defaults as a %  of Remaining Performing Collateral		Excess Sub- ordination as a  % of Current Performing Collateral
TPREF Funding II	B		673		271		(402)		-	Caa3	15	43.47	%	15.90	%	-	%
I-Preferred Term Sec I	B-1		1,000		686		(314)		-	CCC-	14	17.24	%	12.04	%	23.78	%
Dekania II CDO	C-1		990		612		(378)		-	CCC	31	-	%	13.29	%	26.51	%
Preferred Term Sec XXVII	C-1		903		321		(582)		-	C	32	26.15	%	18.83	%	5.99	%
Total		$	3,566	$	1,890	$	(1,676)	$	-

The Company’s assumed average lifetime default rate was 26.2% at the end of the third quarter 2013, down slightly with the second quarter 2013 of 26.7%.

There were no changes in the accumulated credit losses recognized in earnings for debt securities during the periods ended September 30, 2013 and 2012.

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2013		2012		2013		2012
	(In thousands)				(In thousands)
Proceeds	$	-	$	2,122	$	4,027	$	8,538
Gross realized gains		-		103		97		528
Gross realized losses		-		-		-		-

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Mortgage Banking (Details Textual) (USD $)	3 Months Ended	9 Months Ended		3 Months Ended		9 Months Ended
	Sep. 30, 2013	Sep. 30, 2013	Dec. 31, 2012	Sep. 30, 2013 Secondary Market Buy Back Losses [Member]	Sep. 30, 2012 Secondary Market Buy Back Losses [Member]	Sep. 30, 2013 Secondary Market Buy Back Losses [Member]	Sep. 30, 2012 Secondary Market Buy Back Losses [Member]
Residential Mortgage Loans, Unpaid Balance	$ 1,400,000,000	$ 1,400,000,000	$ 1,300,000,000
Accrual Reversal Amount	498,000
Accrual For Estimated Secondary Market Buy Back Losses	$ 399,000	$ 399,000		$ (95,000)	$ 115,000	$ 547,000	$ 188,000

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Derivative Financial Instruments

9 Months Ended

Sep. 30, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

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 as hedge relationships.  First Federal had approximately $9.1 million and $34.0 million of interest rate lock commitments at September 30, 2013 and December 31, 2012, respectively.  There were $13.3 million and $53.6 million of forward commitments for the future delivery of residential mortgage loans at September 30, 2013 and December 31, 2012, respectively. 

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

September 30, 2013

December 31, 2012

Assets

(Liabilities)

Derivative

Assets

(Liabilities)

Derivative

Carrying

Carrying

Net Carrying

Carrying

Carrying

Net Carrying

Value

Value

Value

Value

Value

Value

(In Thousands)

Derivatives not designated as hedging instruments

Mortgage Banking Derivatives

$

548

$

(247)

$

301

$

950

$

(94)

$

856

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
	(In Thousands)				(In Thousands)
Derivatives not designated as hedging instruments
Mortgage Banking Derivatives – Gain (Loss)	$	(315)	$	28	$	(555)	$	418

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

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Commitments, Guarantees and Contingent Liabilities

9 Months Ended

Sep. 30, 2013

Commitments and Contingencies Disclosure [Abstract]

Commitments Contingencies and Guarantees [Text Block]

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, 2013				December 31, 2012
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	41,090	$	46,655	$	50,205	$	48,035
Unused lines of credit		19,227		262,028		21,975		228,269
Standby letters of credit		-		16,652		-		18,166
Total	$	60,317	$	325,335	$	72,180	$	294,470

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 $13.3 million and $53.6 million of loans to Freddie Mac, Fannie Mae, FHLB of Cincinnati or BB&T Mortgage at September 30, 2013 and December 31, 2012, respectively.

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Document And Entity Information	9 Months Ended
	Sep. 30, 2013	Nov. 01, 2013
Document Information [Line Items]
Entity Registrant Name	FIRST DEFIANCE FINANCIAL CORP
Entity Central Index Key	0000946647
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Trading Symbol	FDEF
Entity Common Stock, Shares Outstanding		9,784,737
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2013
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2013

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Income Taxes

9 Months Ended

Sep. 30, 2013

Income Tax Disclosure [Abstract]

Income Tax Disclosure [Text Block]

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 2008. The Company currently operates primarily in the states of Ohio and Michigan, which tax financial institutions based on their equity rather than their income.

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Loans (Details 6) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Current	$ 1,548,207	$ 1,505,902
30-59 days	6,075	6,245
60-89 days	2,520	4,928
90+ days	9,674	13,015
Total Past Due	18,269	24,188
Total Non Accrual	30,516	32,557
Residential Owner Occupied [Member]
Current	122,038	125,362
30-59 days	593	1,238
60-89 days	203	604
90+ days	956	945
Total Past Due	1,752	2,787
Total Non Accrual	1,117	1,125
Residential Non Owner Occupied [Member]
Current	67,361	71,777
30-59 days	500	413
60-89 days	135	126
90+ days	629	849
Total Past Due	1,264	1,388
Total Non Accrual	2,040	2,473
Residential Real Estate [Member]
Current	189,399	197,139
30-59 days	1,093	1,651
60-89 days	338	730
90+ days	1,585	1,794
Total Past Due	3,016	4,175
Total Non Accrual	3,157	3,598
Construction Loans [Member]
Current	40,369	19,296
30-59 days	0	0
60-89 days	0	0
90+ days	0	0
Total Past Due	0	0
Total Non Accrual	0	0
Multi Family [Member]
Current	145,854	122,455
30-59 days	0	0
60-89 days	0	0
90+ days	0	0
Total Past Due	0	0
Total Non Accrual	613	1,178
Commercial Real Estate Owner Occupied [Member]
Current	318,420	321,071
30-59 days	489	1,248
60-89 days	631	382
90+ days	1,728	1,622
Total Past Due	2,848	3,252
Total Non Accrual	8,416	9,652
Commercial Real Estate Non Owner Occupied [Member]
Current	227,935	235,592
30-59 days	1,348	134
60-89 days	224	1,321
90+ days	1,286	2,480
Total Past Due	2,858	3,935
Total Non Accrual	5,621	6,674
Agriculture Land [Member]
Current	78,134	72,092
30-59 days	23	84
60-89 days	134	31
90+ days	76	0
Total Past Due	233	115
Total Non Accrual	682	813
Commercial Real Estate Other Receivable [Member]
Current	45,403	36,510
30-59 days	337	21
60-89 days	0	875
90+ days	1,504	3,560
Total Past Due	1,841	4,456
Total Non Accrual	3,094	4,761
Commercial Real Estate [Member]
Current	669,892	665,265
30-59 days	2,197	1,487
60-89 days	989	2,609
90+ days	4,594	7,662
Total Past Due	7,780	11,758
Total Non Accrual	17,813	21,900
Commercial Working Capital [Member]
Current	156,532	161,110
30-59 days	349	0
60-89 days	0	155
90+ days	433	1,204
Total Past Due	782	1,359
Total Non Accrual	3,188	1,528
Commercial Loans Other [Member]
Current	225,129	218,477
30-59 days	989	584
60-89 days	1,032	1,201
90+ days	2,885	2,138
Total Past Due	4,906	3,923
Total Non Accrual	5,567	4,136
Commercial Loan [Member]
Current	381,661	379,587
30-59 days	1,338	584
60-89 days	1,032	1,356
90+ days	3,318	3,342
Total Past Due	5,688	5,282
Total Non Accrual	8,755	5,664
Consumer Loan [Member]
Current	16,602	15,702
30-59 days	31	229
60-89 days	12	8
90+ days	0	0
Total Past Due	43	237
Total Non Accrual	0	0
Home Equity and Home Improvement [Member]
Current	104,430	106,458
30-59 days	1,416	2,294
60-89 days	149	225
90+ days	177	217
Total Past Due	1,742	2,736
Total Non Accrual	$ 178	$ 217

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Loans (Details 5) (USD $) In Thousands, unless otherwise specified	Sep. 30, 2013	Dec. 31, 2012
Non-accrual loans	$ 30,512	$ 32,570
Loans over 90 days past due and still accruing	0	0
Total non-performing loans	30,512	32,570
Real estate and other assets held for sale	5,518	3,805
Total non-performing assets	$ 36,030	$ 36,375