Loans

Loans receivable consist of the following:

	March 31, 2018			December 31, 2017
	(In Thousands)
Real Estate:

Secured by 1-4 family residential	$	275,547		$	274,862
Secured by multi-family residential		270,733			248,092
Secured by commercial real estate		1,011,294			987,129
Construction		251,944			265,476
		1,809,518			1,775,559
Other Loans:
Commercial		500,496			526,142
Home equity and improvement		133,407			135,457
Consumer finance		28,035			29,109
		661,938			690,708
Total loans		2,471,456			2,466,267
Deduct:
Undisbursed loan funds		(111,450	)		(115,972	)
Net deferred loan origination fees and costs		(1,676	)		(1,582	)
Allowance for loan loss		(27,267	)		(26,683	)
Totals	$	2,331,063		$	2,322,030

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 quarters ended March 31, 2018 and 2017 by portfolio segment (In Thousands):

Quarter Ended March, 2018	1-4 Family Residential Real Estate			Multi- Family Residential Real Estate		Commercial Real Estate			Construction		Commercial			Home Equity and Improvement			Consumer Finance			Total
Beginning Allowance	$	2,532		$	2,702	$	10,354		$	647	$	7,965		$	2,255		$	228		$	26,683
Charge-Offs		(16	)		0		(55	)		0		(97	)		(117	)		(31	)		(316	)
Recoveries		24			0		184			0		1,757			28			2			1,995
Provisions		(6	)		281		290			20		(1,787	)		43			64			(1,095	)
Ending Allowance	$	2,534		$	2,983	$	10,773		$	667	$	7,838		$	2,209		$	263		$	27,267

Quarter Ended March 31, 2017	1-4 Family Residential Real Estate			Multi- Family Residential Real Estate			Commercial Real Estate			Construction		Commercial		Home Equity and Improvement			Consumer Finance			Total
Beginning Allowance	$	2,627		$	2,228		$	10,625		$	450	$	7,361	$	2,386		$	207		$	25,884
Charge-Offs		(49	)		0			(290	)		0		0		(54	)		(71	)		(464	)
Recoveries		56			32			34			0		115		33			4			274
Provisions		(13	)		(138	)		(159	)		8		333		(65	)		89			55
Ending Allowance	$	2,621		$	2,122		$	10,210		$	458	$	7,809	$	2,300		$	229		$	25,749

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 March 31, 2018 (In Thousands):

	1-4 Family		Multi Family
	Residential		Residential		Commercial						Home Equity		Consumer
	Real Estate		Real Estate		Real Estate		Construction		Commercial		& Improvement		Finance		Total
Allowance for loan losses:

Ending allowance balance attributable to loans:

Individually evaluated for impairment	$	218	$	2	$	164	$	-	$	83	$	312	$	-	$	779

Collectively evaluated for impairment		2,316		2,981		10,609		667		7,755		1,897		263		26,488

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

Total ending allowance balance	$	2,534	$	2,983	$	10,773	$	667	$	7,838	$	2,209	$	263	$	27,267

Loans:

Loans individually evaluated for impairment	$	7,117	$	2,042	$	30,070	$	-	$	10,328	$	1,463	$	36	$	51,056

Loans collectively evaluated for impairment		267,814		268,745		982,263		140,221		491,616		132,707		28,062		2,311,428

Loans acquired with deteriorated credit quality		1,045		300		2,024		-		318		-		-		3,687

Total ending loans balance	$	275,976	$	271,087	$	1,014,357	$	140,221	$	502,262	$	134,170	$	28,098	$	2,366,171

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, 2017 (In Thousands):

	1-4 Family		Multi Family
	Residential		Residential		Commercial						Home Equity		Consumer
	Real Estate		Real Estate		Real Estate		Construction		Commercial		& Improvement		Finance		Total
Allowance for loan losses:

Ending allowance balance attributable to loans:

Individually evaluated for impairment	$	167	$	7	$	118	$	-	$	187	$	279	$	-	$	758

Collectively evaluated for impairment		2,365		2,695		10,236		647		7,778		1,976		228		25,925

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

Total ending allowance balance	$	2,532	$	2,702	$	10,354	$	647	$	7,965	$	2,255	$	228	$	26,683

Loans:

Loans individually evaluated for impairment	$	6,910	$	2,278	$	31,821	$	-	$	14,373	$	1,176	$	50	$	56,608

Loans collectively evaluated for impairment		267,377		245,823		956,238		149,174		513,218		135,098		29,125		2,296,053

Loans acquired with deteriorated credit quality		1,069		301		2,121		-		337		-		-		3,828

Total ending loans balance	$	275,356	$	248,402	$	990,180	$	149,174	$	527,928	$	136,274	$	29,175	$	2,356,489

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 March 31, 2018
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized
Residential Owner Occupied	$	4,639	$	32	$	31
Residential Non Owner Occupied		2,509		44		41
Total Residential Real Estate		7,148		76		72
Construction		-		-		-
Multi-Family		2,049		27		26
CRE Owner Occupied		13,225		44		35
CRE Non Owner Occupied		3,482		34		34
Agriculture Land		11,516		95		42
Other CRE		1,486		25		20
Total Commercial Real Estate		29,709		198		131
Commercial Working Capital		5,208		24		24
Commercial Other		5,100		25		23
Total Commercial		10,308		49		47
Home Equity and Improvement		1,474		11		11
Consumer Finance		39		1		1
Total Impaired Loans	$	50,727	$	362	$	288

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 March 31, 2017
	Average Balance		Interest Income Recognized		Cash Basis Income Recognized
Residential Owner Occupied	$	2,820	$	28	$	28
Residential Non Owner Occupied		3,891		36		36
Total Residential Real Estate		6,711		64		64
Construction		3,374		10		10
Multi-Family		4,614		22		22
CRE Owner Occupied		4,499		42		39
CRE Non Owner Occupied		2,707		47		19
Agriculture Land		1,668		13		12
Other CRE		13,488		124		92
Total Commercial Real Estate		-		-		-
Commercial Working Capital		2,372		19		19
Commercial Other		1,722		21		16
Total Commercial		4,094		40		35
Home Equity and Improvement		1,254		10		10
Consumer Finance		74		1		1
Total Impaired Loans	$	28,995	$	249	$	212

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

	March 31, 2018						December 31, 2017
	Unpaid Principal Balance*		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance*		Recorded Investment		Allowance for Loan Losses Allocated
With no allowance recorded:
Residential Owner Occupied	$	2,744	$	2,597	$	-	$	2,507	$	2,364	$	-
Residential Non Owner Occupied		1,468		1,464		-		1,711		1,708		-
Total 1-4 Family Residential Real Estate		4,212		4,061		-		4,218		4,072		-
Multi-Family Residential Real Estate		1,863		1,870		-		2,095		2,102		-
CRE Owner Occupied		11,847		11,387		-		12,273		11,804		-
CRE Non Owner Occupied		3,035		2,873		-		3,085		2,925		-
Agriculture Land		11,682		11,860		-		13,029		13,185		-
Other CRE		959		748		-		981		768		-
Total Commercial Real Estate		27,523		26,868		-		29,368		28,682		-
Construction		-		-		-		-		-		-
Commercial Working Capital		4,888		4,815		-		5,462		5,422		-
Commercial Other		4,744		4,757		-		9,916		7,644		-
Total Commercial		9,632		9,572		-		15,378		13,066		-
Home Equity and Home Improvement		614		569		-		630		584		-
Consumer Finance		36		36		-		42		42		-
Total loans with no allowance recorded	$	43,880	$	42,976	$	-	$	51,731	$	48,548	$	-

With an allowance recorded:
Residential Owner Occupied	$	1,998	$	1,978	$	144	$	1,841	$	1,814	$	137
Residential Non Owner Occupied		1,076		1,078		74		1,031		1,024		30
Total 1-4 Family Residential Real Estate		3,074		3,056		218		2,872		2,838		167
Multi-Family Residential Real Estate		171		172		2		175		176		7
CRE Owner Occupied		2,077		1,616		50		2,007		1,546		44
CRE Non Owner Occupied		644		584		42		651		593		28
Agriculture Land		287		284		32		293		292		14
Other CRE		916		718		40		909		708		32
Total Commercial Real Estate		3,924		3,202		164		3,860		3,139		118
Construction		-		-		-		-		-		-
Commercial Working Capital		458		461		62		447		449		77
Commercial Other		293		295		21		854		858		110
Total Commercial		751		756		83		1,301		1,307		187
Home Equity and Home Improvement		898		894		312		596		592		279
Consumer Finance		-		-		-		8		8		-
Total loans with an allowance recorded	$	8,818	$	8,080	$	779	$	8,812	$	8,060	$	758

* Presented gross of charge offs

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

	March 31, 2018		December 31, 2017
	(In Thousands)
Non-accrual loans	$	27,925	$	30,715
Loans over 90 days past due and still accruing		-		-
Total non-performing loans		27,925		30,715
Real estate and other assets held for sale		1,440		1,532
Total non-performing assets	$	29,365	$	32,247
Troubled debt restructuring, still accruing	$	13,722	$	13,770

The following table presents the aging of the recorded investment in past due and non- accrual loans as of March 31, 2018, by class of loans (In Thousands):

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

Residential Owner Occupied	$	177,799	$	537	$	259	$	933	$	1,729	$	2,111
Residential Non Owner Occupied		96,275		76		-		97		173		342

Total 1-4 Family Residential Real Estate		274,074		613		259		1,030		1,902		2,453

Multi-Family Residential Real Estate		271,087		-		-		-		-		124

CRE Owner Occupied		407,019		592		76		847		1,515		10,170
CRE Non Owner Occupied		424,247		1,074		29		263		1,366		2,164
Agriculture Land		130,940		82		-		208		290		4,275
Other Commercial Real Estate		48,868		13		-		99		112		611

Total Commercial Real Estate		1,011,074		1,761		105		1,417		3,283		17,220

Construction		140,221		-		-		-		-		-

Commercial Working Capital		229,844		209		-		100		309		3,550
Commercial Other		271,422		49		-		638		687		3,620

Total Commercial		501,266		258		-		738		996		7,170

Home Equity/Home Improvement		133,552		29		7		582		618		909
Consumer Finance		27,764		199		96		39		334		39

Total Loans	$	2,359,038	$	2,860	$	467	$	3,806	$	7,133	$	27,915

The following table presents the aging of the recorded investment in past due and non-accrual loans as of December 31, 2017, by class of loans (In Thousands):

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

Residential Owner Occupied	$	175,139	$	821	$	1,033	$	1,227	$	3,081	$	2,510
Residential Non Owner Occupied		96,400		495		8		233		736		520

Total 1-4 Family Residential Real Estate		271,539		1,316		1,041		1,460		3,817		3,030

Multi-Family Residential Real Estate		247,980		422		-		-		422		128

CRE Owner Occupied		393,125		195		188		1,268		1,651		10,775
CRE Non Owner Occupied		403,656		1		91		424		516		2,431
Agriculture Land		131,753		412		-		66		478		4,144
Other Commercial Real Estate		58,784		13		-		204		217		734

Total Commercial Real Estate		987,318		621		279		1,962		2,862		18,084

Construction		149,174		-		-		-		-		-

Commercial Working Capital		233,632		102		1,264		876		2,242		2,369
Commercial Other		291,455		82		-		517		599		6,474

Total Commercial		525,087		184		1,264		1,393		2,841		8,843

Home Equity and Home Improvement		133,144		2,490		434		206		3,130		591
Consumer Finance		28,800		293		80		2		375		27

Total Loans	$	2,343,042	$	5,326	$	3,098	$	5,023	$	13,447	$	30,703

Troubled Debt Restructurings

As of March 31, 2018, and December 31, 2017, the Company had a recorded investment in troubled debt restructurings (“TDRs”) of $20.4 million and $21.7 million, respectively. The Company allocated $686,000 and $751,000 of specific reserves to those loans at March 31, 2018, and December 31, 2017, and had committed to lend additional amounts totaling up to $769,000 and $242,000 at March 31, 2018, and December 31, 2017, 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, as of March 31, 2018, $6.6 million were on non-accrual status and partial charge-offs have in some cases been taken against the outstanding balance. Loans modified as a TDR may have the financial effect of increasing the allowance associated with the loan. If the loan is determined to be collateral dependent, the estimated fair value of the collateral, less any selling costs is used to determine if there is a need for a specific allowance or charge-off. If the loan is determined to be cash flow dependent, the allowance is measured based on the present value of expected future cash flows discounted at the loan’s pre-modification effective interest rate.

The following table present loans by class modified as TDRs that occurred during the three month periods ending March 31, 2018, and March 31, 2017:

	Loans Modified as a TDR for the Three Months Ended March 31, 2018 ($ in thousands)				Loans Modified as a TDR for the Three Months Ended March 31, 2017 ($ in thousands)
Troubled Debt Restructurings	Number of Loans		Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)

1-4 Family Owner Occupied		3	$	145		4	$	100
1-4 Family Non Owner Occupied		1		69		2		84
Multi Family		0		-		0		-
CRE Owner Occupied		2		650		1		119
CRE Non Owner Occupied		0		-		0		-
Agriculture Land		0		-		0		-
Other CRE		0		-		0		-
Commercial Working Capital		4		2,114		0		-
Commercial Other		0		-		1		46
Home Equity and Improvement		0		-		1		25
Consumer Finance		0		-		2		15
Total		10	$	2,978		11	$	389

The loans described above decreased the ALLL by $5,000 in the three month period ending March 31, 2018 and decreased the ALLL by $19,000 in the three month period ending March 31, 2017.

Of the 2018 modifications, one was made a TDR due to terming out lines of credit, five were made TDR due to advancing or renewing money to a watch list credit, one loan made a TDR due to an reduction of the interest rate, and three were made a TDR because the current debt was refinanced due to maturity or for payment relief.

The following table present loans by class modified as TDRs for which there was a payment default within twelve months following the modification during the three month period ended March 31, 2018, and March 31, 2017:

	Three Months Ended March 31, 2018 ($ in thousands)				Three Months Ended March 31, 2017 ($ in thousands)
Troubled Debt Restructurings That Subsequently Defaulted	Number of Loans		Recorded Investment (as of period end)		Number of Loans		Recorded Investment (as of period end)

1-4 Family Owner Occupied		0	$	-		0	$	-
1-4 Family Non Owner Occupied		0		-		0		-
CRE Owner Occupied		0		-		0		-
CRE Non Owner Occupied		0		-		0		-
Agriculture Land		0		-		0		-
Other CRE		0		-		0		-
Commercial Working Capital or Other		0		-		0		-
Commercial Other		1		197		0		-
Home Equity and Improvement		0		-		0		-
Consumer Finance		0		-		0		-
Total		1	$	197		0	$	-

The TDRs that subsequently defaulted described above had no effect on the allowance for loan losses for the three month period ended March 31, 2018.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed on the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification.

Credit Quality Indicators

Loans are categorized into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Loans are analyzed individually by classifying the loans as to credit risk. This analysis includes all non-homogeneous loans, such as commercial and commercial real estate loans and certain homogenous mortgage, home equity and consumer loans. This analysis is performed on a quarterly basis. First Defiance uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Not Graded. Loans classified as not graded are generally smaller balance residential real estate, home equity and consumer installment loans which are originated primarily by using an automated underwriting system. These loans are monitored based on their delinquency status and are evaluated individually only if they are seriously delinquent.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of March 31, 2018, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (In Thousands):

Class	Pass		Special Mention		Substandard		Doubtful		Not Graded		Total

1-4 Family Owner Occupied	$	6,764	$	96	$	2,387	$	-	$	170,282	$	179,529
1-4 Family Non Owner Occupied		84,434		1,280		3,385		-		7,348		96,447

Total 1-4 Family Real Estate		91,198		1,376		5,772		-		177,630		275,976

Multi-Family Residential Real Estate		266,216		2,063		2,698		-		110		271,087

CRE Owner Occupied		384,271		11,521		13,100		-		125		409,017
CRE Non Owner Occupied		412,587		7,425		5,119		-		-		425,131
Agriculture Land		109,860		7,896		13,473		-		-		131,229
Other CRE		46,014		159		1,664		-		1,143		48,980

Total Commercial Real Estate		952,732		27,001		33,356		-		1,268		1,014,357

Construction		119,950		1,153		-		-		19,118		140,221

Commercial Working Capital		206,697		18,428		5,028		-		-		230,153
Commercial Other		263,830		2,831		5,448		-		-		272,109

Total Commercial		470,527		21,259		10,476		-		-		502,262

Home Equity and Home Improvement		-		-		931		-		133,239		134,170
Consumer Finance		-		-		128		-		27,970		28,098

Total Loans	$	1,900,623	$	52,852	$	53,361	$	-	$	359,335	$	2,366,171

As of December 31, 2017, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (In Thousands):

Class	Pass		Special Mention		Substandard		Doubtful		Not Graded		Total

Residential Owner Occupied	$	7,534	$	99	$	2,367	$	-	$	168,220	$	178,220
Residential Non Owner Occupied		85,802		935		3,835		-		6,564		97,136

Total 1-4 Family Real Estate		93,336		1,034		6,202		-		174,784		275,356

Multi-Family Residential Real Estate		242,969		2,503		2,819		-		111		248,402

CRE Owner Occupied		370,613		10,432		13,575		-		156		394,776
CRE Non Owner Occupied		395,264		3,464		5,444		-		-		404,172
Agriculture Land		114,776		2,639		14,816		-		-		132,231
Other CRE		56,133		165		1,788		-		915		59,001

Total Commercial Real Estate		936,786		16,700		35,623		-		1,071		990,180

Construction		125,519		1,254		-		-		22,401		149,174

Commercial Working Capital		222,526		7,605		5,743		-		-		235,874
Commercial Other		280,013		3,443		8,598		-		-		292,054

Total Commercial		502,539		11,048		14,341		-		-		527,928

Home Equity and Home Improvement		-		-		600		-		135,674		136,274
Consumer Finance		-		-		82		-		29,093		29,175

Total Loans	$	1,901,149	$	32,539	$	59,667	$	-	$	363,134	$	2,356,489

The Company has purchased loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The outstanding balance of those loans is as follows (In Thousands):

	March 31, 2018		December 31, 2017
1-4 Family Residential Real Estate	$	1,124	$	1,154
Multi-Family Residential Real Estate		307		309
Commercial Real Estate Loans		2,833		2,921
Commercial		389		407
Consumer		1		2
Total Outstanding Balance	$	4,654	$	4,793
Recorded Investment, net of allowance of $0	$	3,687	$	3,828

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

	2018			2017

Balance at January 1	$	804		$	-

New Loans Purchased		-			1,034
Accretion of Income		(15	)		-
Reclassification from Non-accretable		-			-
Charge-off of Accretable Yield		-			-
Balance at March 31	$	789		$	1,034

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses during the three months ended March 31, 2018 or 2017. No allowances for loan losses were reversed during the same period.

Contractually required payments receivable of loans purchased with evidence of credit deterioration during the period ended March 31, 2017, using information as of the date of acquisition are included in the table below. There were no such loans purchased during the period ended March 31, 2018. (In Thousands)

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

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

Fair Value of Acquired Loans at Acquisition $ 4,703

Foreclosure Proceedings

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $741,000 as of March 31, 2018.