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, 2016	(In Thousands)
Available-for-Sale Securities:
Obligations of U.S. government corporations and agencies	$	2,000	$	1	$	-		$	2,001
Mortgage-backed securities – residential		64,600		1,996		(5	)		66,591
REMICs		1,382		27		-			1,409
Collateralized mortgage obligations		65,640		1,393		(35	)		66,998
Preferred stock		-		1		-			1
Corporate bonds		10,910		53		(5	)		10,958
Obligations of state and political subdivisions		81,403		4,869		(7	)		86,265
Totals	$	225,935	$	8,340	$	(52	)	$	234,223

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

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

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

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

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

	Available-for-Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(In Thousands)
Due in one year or less	$	752	$	756	$	-	$	-
Due after one year through five years		19,083		19,426		93		93
Due after five years through ten years		32,492		34,459		-		-
Due after ten years		41,986		44,584		-		-
MBS/CMO/REMICS		131,622		134,998		98		100
	$	225,935	$	234,223	$	191	$	193

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

As of September 30, 2016, the Company’s investment portfolio consisted of 358 securities, 13 of which were in an unrealized loss position.

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

	Duration of Unrealized Loss Position
	Less than 12 Months					12 Months or Longer					Total
			Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loses
	(In Thousands)
At September 30, 2016
Available-for-sale securities:
Obligations of U.S. government corporations and agencies	$	2,048	$	(5	)	$	-	$	-		$	2,048	$	(5	)
Collateralized mortgage obligations		4,092		(15	)		1,312		(20	)		5,404		(35	)
Obligations of state and political subdivisions		804		(7	)		-		-			804		(7	)
Corporate bonds		2,010		(2	)		997		(3	)		3,007		(5	)
Held to maturity securities:
FHLMC/FNMA certificates		13		-			8		-			21		-
Total temporarily impaired securities	$	8,967	$	(29	)	$	2,317	$	(23	)	$	11,284	$	(52	)

	Duration of Unrealized Loss Position
	Less than 12 Months					12 Months or Longer					Total
			Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Loss			Value		Loss			Value		Loses
	(In Thousands)
At December 31, 2015
Available-for-sale securities:
Obligations of U.S. government corporations and agencies	$	993	$	(7	)	$	-	$	-		$	993	$	(7	)
Collateralized mortgage obligations		12,374		(150	)		8,158		(203	)		20,532		(353	)
Corporate bonds		983		(17	)		-		-			983		(17	)
Obligations of state and political subdivisions		-		-			433		(2	)		433		(2	)
Mortgage-backed securities-residential		12,525		(59	)		-		-			12,525		(59	)
Held to maturity securities:
FNMA certificates		13		(1	)		-		-			13		(1	)
Total temporarily impaired securities	$	26,888	$	(234	)	$	8,591	$	(205	)	$	35,479	$	(439	)

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

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

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

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

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

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
	(In Thousands)
Proceeds	$	6,356	$	-	$	14,871	$	-
Gross realized gains		151		-		509		-
Gross realized losses		-		-		-		-