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
	(In Thousands)
At September 30, 2014
Available-for-Sale Securities:
Obligations of U.S. government corporations and agencies	$	1,000	$	-	$	(27)	$	973
Mortgage-backed securities – residential		58,669		895		(253)		59,311
Collateralized mortgage obligations		81,497		989		(636)		81,850
REMICs		1,875		4		-		1,879
Corporate bonds		6,898		127		(10)		7,015
Obligations of state and political subdivisions		82,794		4,601		(56)		87,339
Totals	$	232,733	$	6,616	$	(982)	$	238,367

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
	(In Thousands)
Held-to-Maturity Securities*:
FHLMC certificates	$	27	$	-	$	-	$	27
FNMA certificates		99		-		-		99
GNMA certificates		42		1		-		43
Obligations of state and political subdivisions		155		-		-		155
Totals	$	323	$	1	$	-	$	324

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(In Thousands)
At December 31, 2013
Available-for-Sale Securities:
Obligations of U.S. government corporations and agencies	$	5,000	$	-	$	(79)	$	4,921
Mortgage-backed securities - residential		41,368		765		(841)		41,292
Collateralized mortgage obligations		59,865		739		(763)		59,841
Trust preferred stock and preferred stock		3,264		683		(993)		2,954
Corporate bonds		8,854		129		(41)		8,942
Obligations of state and political subdivisions		78,426		2,704		(910)		80,220
Total Available-for-Sale	$	196,777	$	5,020	$	(3,627)	$	198,170

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
	(In Thousands)
Held-to-Maturity Securities*:
FHLMC certificates	$	31	$	-	$	-	$	31
FNMA certificates		120		4		-		124
GNMA certificates		50		2		-		52
Obligations of states and political subdivisions		186		-		-		186
Total Held-to-Maturity	$	387	$	6	$	-	$	393

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

The amortized cost and fair value of the investment securities portfolio at September 30, 2014 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	$	1,011	$	1,016	$	-	$	-
Due after one year through five years		7,697		7,979		155		155
Due after five years through ten years		32,980		34,664		-		-
Due after ten years		49,004		51,668		-		-
MBS/CMO		142,041		143,040		168		169
	$	232,733	$	238,367	$	323	$	324

Investment securities with a carrying amount of $138.7 million at September 30, 2014 were pledged as collateral on public deposits, securities sold under repurchase agreements, Federal Reserve discount window and FHLB advances.

As of September 30, 2014, the Company’s investment portfolio consisted of 354 securities, 53 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, 2014 and December 31, 2013:

	Duration of Unrealized Loss Position
	Less than 12 Months				12 Months or Longer				Total
			Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loses
	(In Thousands)
At September 30, 2014
Available-for-sale securities:
Obligations of U.S. government corporations and agencies	$	-	$	-	$	973	$	(27)	$	973	$	(27)
Mortgage-backed securities - residential		12,607		(32)		18,213		(221)		30,820		(253)
Collateralized mortgage obligations		16,695		(287)		12,196		(349)		28,891		(636)
Obligations of state and political subdivisions		2,152		(15)		3,283		(41)		5,435		(56)
Corporate bonds		-		-		990		(10)		990		(10)
Total temporarily impaired securities	$	31,454	$	(334)	$	35,655	$	(648)	$	67,109	$	(982)

	Duration of Unrealized Loss Position
	Less than 12 Months				12 Months or Longer				Total
			Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loses
	(In Thousands)
At December 31, 2013
Available-for-sale securities:
Obligations of U.S. government corporations and agencies	$	4,921	$	(79)	$	-	$	-	$	4,921	$	(79)
Mortgage-backed securities - residential		24,846		(841)		-		-		24,846		(841)
Collateralized mortgage obligations		26,530		(763)		-		-		26,530		(763)
Corporate bonds		2,959		(41)		-		-		2,959		(41)
Obligations of state and political subdivisions		19,209		(871)		375		(39)		19,584		(910)
Trust preferred stock and preferred stock		-		-		582		(993)		582		(993)
Total temporarily impaired securities	$	78,465	$	(2,595)	$	957	$	(1,032)	$	79,422	$	(3,627)

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

Realized gains from the sales of investment securities totaled $460,000 ($322,000 after tax) in the third quarter of 2014 while there were no realized gains in the third quarter of 2013. Realized gains from the sales of investment securities totaled $931,000 ($652,000 after tax) for the first nine months of 2014 compared to realized gains of $97,000 ($68,000 after tax) for the first nine months of 2013.

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.

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 2014 and 2013, management determined there was no OTTI. The Company held eight Collateralized Debt Obligations (“CDOs”) at December 31, 2013. Two of the eight securities were sold in January 2014 with no gain or loss associated with that transaction and three were sold in June 2014 for a loss of $329,000. The Company holds three CDOs at September 30, 2014 with a zero value.

There was no OTTI recognized in accumulated other comprehensive income (“AOCI”) at September 30, 2014. There was $645,000 recognized in AOCI at December 31, 2013.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2014		2013		2014		2013
	(In Thousands)
Proceeds	$	10,738	$	-	$	14,520	$	4,027
Gross realized gains		460		-		1,573		97
Gross realized losses		-		-		(642)		-