Investment Securities

12 Months Ended

Dec. 31, 2014

5. Investment Securities

The following tables summarize the amortized cost and fair value of available-for-sale securities and held-to-maturity investment securities at December 31, 2014 and 2013 and the corresponding amounts of gross unrealized gains and losses:

			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
	(In Thousands)
2014
Available-for-sale
Obligations of U.S. government corporations and agencies	$	1,000	$	-	$	(20)	$	980
Mortgage-backed securities - residential		58,380		1,476		-		59,856
REMICs		1,820		19		-		1,839
Collateralized mortgage obligations		80,252		1,280		(411)		81,121
Trust preferred stock and preferred stock		-		1		-		1
Corporate bonds		6,913		85		(6)		6,992
Obligations of state and political subdivisions		83,732		4,827		(27)		88,532
Total Available-for-Sale	$	232,097	$	7,688	$	(464)	$	239,321

			Gross		Gross
	Amortized		Unrecognized		Unrecognized		Fair
	Cost		Gains		Losses		Value
	(In Thousands)
Held-to-Maturity
FHLMC certificates	$	26	$	-	$	(8)	$	18
FNMA certificates		93		2		-		95
GNMA certificates		39		1		-		40
Obligations of states and political subdivisions		155		-		-		155
Total Held-to-Maturity	$	313	$	3	$	(8)	$	308

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

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

The amortized cost and fair value of the investment securities portfolio at December 31, 2014 is shown below by contractual maturity. Expected maturities will differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. For purposes of the maturity tables below, mortgage-backed securities and collateralized mortgage obligations, which are not due at a single maturity date, have not been allocated over maturity groupings.

	Available-for-Sale
	Amortized		Fair
	Cost		Value
	(In Thousands)
2014
Available-for-sale
Due in one year or less	$	2,004	$	2,017
Due after one year through five years		9,714		10,066
Due after five years through ten years		38,648		40,861
Due after ten years		41,279		43,561
MBS/CMO/REMIC		140,452		142,816
Total	$	232,097	$	239,321

Held-to-maturity
Due after five years through ten years	$	155	$	155
MBS/CMO		158		153
Total	$	313	$	308

Securities pledged at year-end 2014 and 2013 had a carrying amount of $141.2 million and $132.7 million and were pledged to secure public deposits, securities sold under repurchase agreements and FHLB advances.

As of December 31, 2014, the Company’s investment portfolio consisted of 356 securities, 26 of which were in an unrealized loss position. The Company does not hold any single security that is greater than 10% of the Company’s equity at December 31, 2014.

The following table summarizes First Defiance’s securities that were in an unrealized loss position at December 31, 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 December 31, 2014
Available-for-sale securities:
Obligations of U.S. government corporations and agencies	$	-	$	-	$	980	$	(20)	$	980	$	(20)
Collateralized mortgage obligations		4,466		(138)		14,633		(273)		19,099		(411)
Corporate bonds		-		-		994		(6)		994		(6)
Obligations of state and political subdivisions		1,194		(8)		1,499		(19)		2,693		(27)
Held to maturity securities:
FHLMC certificates		18		(8)		-		-		18		(8)
Total temporarily impaired securities	$	5,678	$	(154)	$	18,106	$	(318)	$	23,784	$	(472)

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 and calls of investment securities totaled $932,000 ($652,000 after tax) in 2014 while there were realized gains of $97,000 ($68,000 after tax) and $2.1 million ($1.4 million after tax) in 2013 and 2012, respectively.

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

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

In 2014, management determined there was no OTTI. In 2013, management determined that two CDOs had OTTI resulting in a write-down of $337,000 ($219,000 after tax). The 2013 OTTI was related to two CDOs that were disallowed under the Final Interim Volcker Rule of the Dodd-Frank Act released on January 14, 2014, requiring the Company to liquidate these securities before a certain date. The Company received Level 1 pricing and wrote these two CDOs to that value as of December 31, 2013 and subsequently sold these two securities on January 15, 2014. In 2012, management determined that one CDO had OTTI resulting in a write-down of $4,500 ($2,900 after tax).

The Company holds three CDOs at December 31, 2014 with a zero value.

The amount of OTTI recognized in accumulated other comprehensive income (“AOCI”) relating to the CDOs was zero at December 31, 2014. There was $645,000 of OTTI recognized in accumulated other comprehensive income at December 31, 2013.

The table below presents a roll-forward of the credit losses relating to debt securities recognized in earnings for the years ended December 31, 2014, 2013 and 2012 (In Thousands):

	2014		2013		2012
Beginning balance, January 1	$	3,513	$	3,176	$	3,251
Additions for amounts related to credit loss for which an OTTI
was not previously recognized		-		337		-

Reductions for amounts realized for securities sold/redeemed during the period		(3,513)		-		(80)

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

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

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

Ending balance, December 31	$	-	$	3,513	$	3,176

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

	2014		2013		2012
	(In Thousands)
Proceeds	$	14,913	$	4,027	$	72,262
Gross realized gains		1,574		97		2,163
Gross realized losses		(642)		-		(24)