FDEF First Defiance Financial Corporation

• Diluted earnings per share of $0.78 for 2016 third quarter, up from $0.72 in the 2015 third quarter
• Net income of $7.0 million for 2016 third quarter, up from $6.7 million in the 2015 third quarter
• Return on average assets of 1.16% for the 2016 third quarter, compared to 1.20% in the 2015 third quarter
• Net interest margin of 3.69% for the 2016 third quarter, compared to 3.78% in the 2015 third quarter
• Loan growth of $64.3 million during 2016 third quarter
• Deposit growth of $7.4 million during 2016 third quarter
• Non-performing assets, including accruing TDRs, down 21% from 2015 third quarter

First Defiance Financial Corp. (NASDAQ: FDEF) announced today that net income for the third quarter ended September 30, 2016 totaled $7.0 million, or $0.78 per diluted common share, compared to $6.7 million or $0.72 per diluted common share for the quarter ended September 30, 2015.

“Our third quarter results demonstrated our focus on maintaining strong financial performance as we grow our business,” said Donald P. Hileman, President and Chief Executive Officer of First Defiance Financial Corp. “Our diluted earnings per share was $0.78 in the third quarter, an 8.3% increase over third quarter last year and $2.37 year to date, up 12.3% from the prior year. We are pleased with our momentum as we prepare for our pending merger with Commercial Bancshares, Inc. that is anticipated to be completed early next year.”

Net Interest Income up Compared to Third Quarter 2015

Net interest income of $19.8 million in the third quarter of 2016 was up from $18.5 million in the third quarter of 2015. Net interest margin was 3.69% for the third quarter of 2016, down from 3.71% in the second quarter of 2016, and down from 3.78% in the third quarter of 2015. Yield on interest earning assets decreased by 4 basis points, to 4.09% in the third quarter of 2016 from 4.13% in the third quarter of 2015. The cost of interest-bearing liabilities increased by 7 basis points in the third quarter of 2016 to 0.52% from 0.45% in the third quarter of 2015.

“Our robust loan growth kept our net interest margin healthy and propelled our net interest income expansion in the third quarter,” said Hileman. “Commercial loan demand remained strong in our markets contributing to total loan growth of just over $64 million in the third quarter of 2016 and an increase in net interest income of $1.3 million, or 6.9% over the third quarter last year.”

Non-Interest Income up from Third Quarter 2015

First Defiance’s non-interest income for the third quarter of 2016 was $8.5 million compared with $8.0 million in the third quarter of 2015. The third quarter of 2016 included gains of $151,000 from the sale of securities, compared to no gains or losses in the third quarter of 2015.

Mortgage banking income was $2.0 million in the third quarter of 2016, an increase from $1.7 million in the third quarter of 2015. Mortgage originations totaled $101.7 million in the third quarter of 2016, up from $75.9 million in the second quarter of 2016 and up from $68.2 million in the same quarter last year. Gains from the sale of mortgage loans increased in the third quarter of 2016 to $1.7 million from $1.2 million in the third quarter of 2015. Mortgage loan servicing revenue was $885,000 in the third quarter of 2016, up slightly from $866,000 in the third quarter of 2015. First Defiance had a positive change in the valuation adjustment in mortgage servicing assets of $7,000 in the third quarter of 2016 compared with a positive adjustment of $24,000 in the third quarter of 2015. In addition, gains on the sale of non-mortgages, which include SBA and FSA loans, totaled $148,000 in the third quarter of 2016 compared to $543,000 in the third quarter of 2015.

For the third quarter of 2016, commissions from the sale of insurance products were $2.5 million, up from $2.3 million in the third quarter of 2015; and service fees and other charges were $2.8 million in the third quarter of 2016, even with $2.8 million in the third quarter of 2015. Trust income was $420,000 in the third quarter of 2016, up 13.5% from $370,000 in the third quarter of 2015.

“In the third quarter, we had particularly strong growth in several of our key non-interest income business lines. Compared to the third quarter last year, mortgage banking revenues grew 21.4%, insurance commissions were up 7.1% and trust income rose 13.5%,” continued Hileman. “Total non-interest income, excluding securities gains, increased 4.9% over this same period in the prior year.”

Non-Interest Expenses up from Third Quarter 2015

Total non-interest expense was $18.3 million in the third quarter of 2016, an increase from $16.8 million in the third quarter of 2015. Compensation and benefits increased to $10.3 million in the third quarter of 2016, compared to $9.8 million in the third quarter of 2015. The increase in compensation and benefits from a year ago is mainly related to merit increases, staff additions to support growth strategies and higher incentive compensation, less reduced medical insurance costs. Other non-interest expense of $3.4 million in the third quarter of 2016 was up from $2.8 million in the third quarter of 2015. The increase in other non-interest expense was primarily due to deferred compensation plan costs which totaled $296,000 in the third quarter 2016 versus a credit of $182,000 in the same quarter last year. In addition, non-interest expense in the third quarter 2016 included $252,000 for costs related to the pending merger with Commercial Bancshares, Inc.

Credit Quality

Total non-performing assets totaled $18.9 million at September 30, 2016, a decrease from $21.5 million at September 30, 2015. Non-performing loans totaled $18.2 million at September 30, 2016, an increase from $16.6 million at September 30, 2015. In addition, First Defiance had $704,000 of real estate owned at September 30, 2016 compared to $4.9 million at September 30, 2015. Accruing troubled debt restructured loans were $9.1 million at September 30, 2016 compared with $13.8 million at September 30, 2015. For the third quarter of 2016, First Defiance recorded net charge-offs of $40,000, compared to net charge-offs of $148,000 in the third quarter of 2015. The allowance for loan loss as a percentage of total loans was 1.35% at September 30, 2016 compared with 1.45% at September 30, 2015.

The third quarter of 2016 results include a provision for loan losses of $15,000 compared with a credit provision of $27,000 for the same period in 2015.

“We are pleased that our credit quality remained strong and held steady in the third quarter,” said Hileman. “Our total non-performing assets including accruing troubled debt restructurings declined 21% from last year and at the end of the third quarter were 0.77% of total assets. Our allowance for loan losses coverage of our non-performing loans was 142.5% at the end of the third quarter.”

Year-To-Date Results

For the nine-month period ended September 30, 2016, net income totaled $21.5 million, or $2.37 per diluted common share, compared to $19.9 million, or $2.11 per diluted common share for the nine months ended September 30, 2015.

Net interest income was $58.4 million for the first nine months of 2016 compared with $55.1 million in the first nine months of 2015. Average interest-earning assets increased to $2.148 billion in the first nine months of 2016, compared to $1.984 billion in the first nine months of 2015. Net interest margin for the first nine months of 2016 was 3.73%, down 9 basis points from the 3.82% margin reported in the nine month period ended September 30, 2015.

The provision for loan losses in the first nine months of 2016 was $432,000, compared to $93,000 recorded during the first nine months of 2015.

Non-interest income for the first nine months of 2016 was $25.7 million, compared to $24.1 million during the same period of 2015. Service fees and other charges were $8.2 million for the first nine months of 2016, up from $8.0 million during the same period of 2015. Mortgage banking income increased to $5.3 million for the first nine months of 2016, compared with $5.2 million during the same period of 2015. Insurance commissions rose to $8.1 million for the first nine months of 2016, compared with $7.8 million for the same period of 2015. Non-interest income for the first nine months of 2016 included $509,000 of gains on the sale of securities compared with no securities gains or losses during the same period of 2015.

Non-interest expense was $52.9 million for the first nine months of 2016, up from $50.5 million for the same period of 2015. Compensation and benefits expense was $30.2 million for the first nine months of 2016 compared with $27.9 million during the same period of 2015. The increase in compensation and benefits over the prior year is mainly related to merit increases, staff additions to support growth strategies and higher medical insurance costs. Expenses also included increases in occupancy of $74,000 and data processing of $71,000 and decreases in the amortization of intangibles of $117,000 and other expenses of $271,000. The decrease in other expenses from the prior year was due to lower OREO write-downs of $650,000 and management consulting of $381,000 partially offset by higher deferred compensation plan costs of $484,000. In addition, non-interest expense in the first nine months of 2016 included $252,000 for costs related to the pending merger with Commercial Bancshares, Inc.

Total Assets at $2.45 Billion

Total assets at September 30, 2016 were $2.45 billion compared to $2.30 billion at December 31, 2015 and $2.23 billion at September 30, 2015. Loans receivable (excluding loans held for sale) were $1.93 billion at September 30, 2016 compared to $1.80 billion at December 31, 2015 and $1.73 billion at September 30, 2015. Total cash and cash equivalents were $104.8 million at September 30, 2016 compared with $79.8 million at December 31, 2015 and $73.3 million at September 30, 2015. Also, at September 30, 2016, goodwill and other intangible assets totaled $63.2 million compared to $63.7 million at December 31, 2015 and $63.8 million at September 30, 2015.

Total deposits at September 30, 2016 were $1.93 billion compared with $1.84 billion at December 31, 2015 and $1.79 billion at September 30, 2015. Non-interest bearing deposits at September 30, 2016 were $443.3 million compared to $420.7 million at December 31, 2015 and $392.1 million at September 30, 2015. Total stockholders’ equity was $292.1 million at September 30, 2016 compared to $280.2 million at December 31, 2015 and $278.6 million at September 30, 2015.

Pending merger with Commercial Bancshares, Inc.

On August 23, 2016, First Defiance announced a definitive agreement to acquire Commercial Bancshares, Inc. and its wholly-owned subsidiary, Commercial Savings Bank (“CSB”). CSB, a $342 million commercial bank operates 7 full service branches in Wyandot, Marion and Hancock counties in Ohio. The merger is expected to close in the first quarter of 2017 and is subject to Commercial Bancshares shareholder approval, regulatory approval, and other conditions set forth in the merger agreement.

Dividend to be Paid November 18

The Board of Directors declared a quarterly cash dividend of $0.22 per common share payable November 18, 2016 to shareholders of record at the close of business on November 11, 2016. The dividend represents an annual dividend of 2.00% percent based on the First Defiance common stock closing price on October 14, 2016. First Defiance has approximately 8,980,867 common shares outstanding.

Conference Call

First Defiance Financial Corp. will host a conference call at 11:00 a.m. ET on Tuesday, October 18, 2016 to discuss the earnings results and business trends. The conference call may be accessed by calling 1-877-444-1726. In addition, a live webcast may be accessed at http://services.choruscall.com/links/fdef161018.html.

Audio replay of the Internet Webcast will be available at www.fdef.com until October 18, 2017 at 9:00 a.m. ET.

First Defiance Financial Corp.

First Defiance Financial Corp., headquartered in Defiance, Ohio, is the holding company for First Federal Bank of the Midwest and First Insurance Group. First Federal Bank operates 34 full-service branches and numerous ATM locations in northwest Ohio, southeast Michigan and northeast Indiana and a loan production office in Columbus, Ohio. First Insurance Group is a full-service insurance agency with six offices throughout northwest Ohio.

For more information, visit the company’s Web site at www.fdef.com.

Financial Statements and Highlights Follow -

Safe Harbor Statement

This news release may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21 B of the Securities Act of 1934, as amended, which are intended to be safe harbors created thereby. Those statements may include, but are not limited to, all statements regarding intent, beliefs, expectations, projections, forecasts and plans of First Defiance Financial Corp. and its management, and specifically include statements regarding: changes in economic conditions, the nature, extent and timing of governmental actions and reforms, future movements of interest rates, the production levels of mortgage loan generation, the ability to continue to grow loans and deposits, the ability to benefit from a changing interest rate environment, the ability to sustain credit quality ratios at current or improved levels, the ability to sell real estate owned properties, continued strength in the market area for First Federal Bank of the Midwest, and the ability to grow in existing and adjacent markets. These forward-looking statements involve numerous risks and uncertainties, including those inherent in general and local banking, insurance and mortgage conditions, competitive factors specific to markets in which First Defiance and its subsidiaries operate, future interest rate levels, legislative and regulatory decisions or capital market conditions and other risks and uncertainties detailed from time to time in our Securities and Exchange Commission (SEC) filings, including our Annual Report on Form 10-K for the year ended December 31, 2015. One or more of these factors have affected or could in the future affect First Defiance's business and financial results in future periods and could cause actual results to differ materially from plans and projections. Therefore, there can be no assurances that the forward-looking statements included in this news release will prove to be accurate. In light of the significant uncertainties in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by First Defiance or any other persons, that our objectives and plans will be achieved. All forward-looking statements made in this news release are based on information presently available to the management of First Defiance. We assume no obligation to update any forward-looking statements.

As required by U.S. GAAP, First Defiance will evaluate the impact of subsequent events through the issuance date of its September 30, 2016 consolidated financial statements as part of its Quarterly Report on Form 10-Q to be filed with the SEC. Accordingly, subsequent events could occur that may cause First Defiance to update its critical accounting estimates and to revise its financial information from that which is contained in this news release.

        Consolidated Balance Sheets (Unaudited) First Defiance Financial Corp.   September 30,

December 31,

(in thousands)     2016     2015   Assets Cash and cash equivalents Cash and amounts due from depository institutions $ 47,797 $ 38,769 Interest-bearing deposits   57,000     41,000   104,797

 

79,769 Securities

 

Available-for sale, carried at fair value 234,223 236,435 Held-to-maturity, carried at amortized cost   191     243   234,414 236,678   Loans 1,925,694 1,802,217 Allowance for loan losses   (25,923 )   (25,382 ) Loans, net 1,899,771 1,776,835 Loans held for sale 9,839 5,523 Mortgage servicing rights 9,308 9,248 Accrued interest receivable 7,452 6,171 Federal Home Loan Bank stock 13,800 13,801 Bank Owned Life Insurance 52,594 51,908 Office properties and equipment 36,983 38,166 Real estate and other assets held for sale 704 1,321 Goodwill 61,798 61,798 Core deposit and other intangibles 1,452 1,871 Other assets   17,128     14,587   Total Assets $ 2,450,040   $ 2,297,676     Liabilities and Stockholders’ Equity Non-interest-bearing deposits $ 443,321 $ 420,691 Interest-bearing deposits   1,484,365     1,415,446   Total deposits 1,927,686 1,836,137 Advances from Federal Home Loan Bank 114,184 59,902 Notes payable and other interest-bearing liabilities 50,493 57,188 Subordinated debentures 36,083 36,083 Advance payments by borrowers for tax and insurance 2,073 2,674 Deferred taxes 1,775 877 Other liabilities   25,608     24,618   Total Liabilities 2,157,902 2,017,479 Stockholders’ Equity Preferred stock - - Common stock, net 127 127 Additional paid-in-capital 126,200 125,734 Accumulated other comprehensive income 4,967 3,622 Retained earnings 235,203 219,737 Treasury stock, at cost   (74,359 )   (69,023 ) Total stockholders’ equity   292,138     280,197   Total Liabilities and Stockholders’ Equity $ 2,450,040   $ 2,297,676                               Consolidated Statements of Income (Unaudited) First Defiance Financial Corp.         Three Months Ended Nine Months Ended

September 30,

September 30,

(in thousands, except per share amounts)     2016     2015 2016     2015 Interest Income:         Loans $ 20,264 $ 18,419 $ 59,242 $ 54,445 Investment securities 1,498 1,676 4,671 5,089 Interest-bearing deposits 104 33 287 113 FHLB stock dividends   137   138     413   413 Total interest income 22,003 20,266 64,613 60,060 Interest Expense:

 

Deposits 1,635 1,363 4,613 3,947 FHLB advances and other 322 178 940 461 Subordinated debentures 191 154 548 451 Notes Payable   35   38     108   113 Total interest expense   2,183   1,733     6,209   4,972 Net interest income 19,820 18,533 58,404 55,088 Provision for loan losses   15   (27 )   432   93 Net interest income after provision for loan losses 19,805 18,560 57,972 54,995 Non-interest Income: Service fees and other charges 2,765 2,799 8,208 8,018 Mortgage banking income 2,039 1,680 5,342 5,248 Gain on sale of non-mortgage loans 148 543 604 776 Gain on sale of securities 151 - 509 - Insurance commissions 2,473 2,310 8,113 7,793 Trust income 420 370 1,256 1,095 Income from Bank Owned Life Insurance 225 238 686 658 Other non-interest income   305   42     1,019   485 Total Non-interest Income 8,526 7,982 25,737 24,073 Non-interest Expense: Compensation and benefits 10,295 9,791 30,250 27,896 Occupancy 1,822 1,788 5,435 5,361 FDIC insurance premium 352 329 1,008 999 Financial institutions tax 446 447 1,339 1,340 Data processing 1,622 1,531 4,723 4,652 Acquisition related charges 252 - 252 - Amortization of intangibles 115 157 419 536 Other non-interest expense   3,388   2,805     9,487   9,758 Total Non-interest Expense   18,292   16,848     52,913   50,542 Income before income taxes 10,039 9,694 30,796 28,526 Income taxes   2,994   2,998     9,318   8,666 Net Income $ 7,045 $ 6,696   $ 21,478 $ 19,860     Earnings per common share: Basic $ 0.78 $ 0.72 $ 2.39 $ 2.15 Diluted $ 0.78 $ 0.72 $ 2.37 $ 2.11   Average Shares Outstanding: Basic 8,976 9,238 8,980 9,247 Diluted 9,050 9,322 9,050 9,430                             Financial Summary and Comparison (Unaudited) First Defiance Financial Corp.     Three Months Ended Nine Months Ended

September 30,

September 30,

(dollars in thousands, except per share data)   2016   2015   % change   2016   2015   % change Summary of Operations           Tax-equivalent interest income (1) $ 22,449 $ 20,748 8.2 % $ 65,994 $ 61,485 7.3 % Interest expense 2,183 1,733 26.0 6,209 4,972 24.9 Tax-equivalent net interest income (1) 20,266 19,015 6.6 59,785 56,513 5.8 Provision for loan losses 15 (27 ) NM 432 93 364.5 Tax-equivalent NII after provision for loan loss (1) 20,251 19,042 6.3 59,353 56,420 5.2 Investment Securities gains 151 - NM 509 - NM Non-interest income (excluding securities gains/losses) 8,375 7,982 4.9 25,228 24,073 4.8 Non-interest expense 18,292 16,848 8.6 52,913 50,542 4.7 Income taxes 2,994 2,998 (0.1 ) 9,318 8,666 7.5 Net Income 7,045 6,696 5.2 21,478 19,860 8.1 Tax equivalent adjustment (1)     446       482     (7.5 )     1,381       1,425     (3.1 ) At Period End Assets 2,450,040 2,228,281 10.0 Earning assets 2,240,747 2,030,218 10.4 Loans 1,925,694 1,733,538 11.1 Allowance for loan losses 25,923 25,209 2.8 Deposits 1,927,686 1,793,053 7.5 Stockholders’ equity     292,138       278,556     4.9               Average Balances Assets 2,425,535 2,222,843 9.1 2,376,934 2,205,135 7.8 Earning assets 2,194,170 2,000,284 9.7 2,148,438 1,983,526 8.3 Loans 1,879,760 1,696,370 10.8 1,834,981 1,672,393 9.7 Deposits and interest-bearing liabilities 2,103,054 1,918,587 9.6 2,062,637 1,899,943 8.6 Deposits 1,929,368 1,786,814 8.0 1,889,284 1,776,036 6.4 Stockholders’ equity 288,609 277,235 4.1 283,411 277,130 2.3 Stockholders’ equity / assets     11.90 %     12.47 %   (4.6 )     11.92 %     12.57 %   (5.1 ) Per Common Share Data Net Income Basic $ 0.78 $ 0.72 8.3 $ 2.39 $ 2.15 11.2 Diluted 0.78 0.72 8.3 2.37 2.11 12.3 Dividends 0.22 0.20 10.0 0.66 0.575 14.8 Market Value: High $ 46.83 $ 39.95 17.2 $ 46.83 $ 39.95 17.2 Low 35.90 35.03 2.5 34.80 29.05 19.8 Close 44.64 36.56 22.1 44.64 36.56 22.1 Common Book Value 32.53 30.37 7.1 32.53 30.37 7.1 Tangible Common Book Value (1) 25.49 23.41 8.9 25.49 23.41 8.9 Shares outstanding, end of period (000)     8,980       9,172     (2.1 )     8,980       9,172     (2.1 ) Performance Ratios (annualized) Tax-equivalent net interest margin (2) 3.69 % 3.78 % (2.5 ) 3.73 % 3.82 % (2.4 ) Return on average assets 1.16 % 1.20 % (3.3 ) 1.21 % 1.20 % 0.2 Return on average equity 9.71 % 9.58 % 1.3 10.12 % 9.58 % 5.7 Efficiency ratio (3) 63.87 % 62.41 % 2.3 62.24 % 62.72 % (0.8 ) Effective tax rate 29.82 % 30.93 % (3.6 ) 30.26 % 30.38 % (0.4 ) Dividend payout ratio (basic)     28.21 %     27.78 %   1.5       27.62 %     26.74 %   3.3      

(1) Tangible common book value = total stockholders' equity less the sum of goodwill, core deposit and other intangibles, and preferred stock divided by shares outstanding at the end of the period.

(2) Interest income on tax-exempt securities and loans has been adjusted to a tax-equivalent basis using the statutory federal income tax rate of 35%

(3) Efficiency ratio = Non-interest expense divided by sum of tax-equivalent net interest income plus non-interest income, excluding securities gains or losses, net.

NM Percentage change not meaningful                             Income from Mortgage Banking                

Revenue from sales and servicing of mortgage loans consisted of the following:

  Three Months Ended Nine Months Ended

September 30,

September 30,

(dollars in thousands)     2016     2015     2016     2015   Gain from sale of mortgage loans $ 1,683 $ 1,197 $ 4,103 $ 3,728 Mortgage loan servicing revenue (expense): Mortgage loan servicing revenue 885 866 2,638 2,593 Amortization of mortgage servicing rights (536 ) (407 ) (1,281 ) (1,264 ) Mortgage servicing rights valuation adjustments   7         24     (118 )       191     356         483     1,239         1,520   Total revenue from sale and servicing of mortgage loans $ 2,039       $ 1,680   $ 5,342       $ 5,248                                         Yield Analysis First Defiance Financial Corp.   Three Months Ended September 30, (dollars in thousands) 2016 2015 Average Yield Average Yield Balance Interest(1) Rate(2) Balance Interest(1) Rate(2) Interest-earning assets: Loans receivable $ 1,879,760 $ 20,316 4.30 % $ 1,696,370 $ 18,472 4.32 % Securities 231,864 1,892 3.37 % (3 ) 236,485 2,105 3.63 % (3 ) Interest Bearing Deposits 68,746 104 0.60 % 53,627 33 0.24 % FHLB stock   13,800   137 3.95 %   13,802   138 3.97 % Total interest-earning assets 2,194,170 22,449 4.09 % 2,000,284 20,748 4.13 % Non-interest-earning assets   231,365   222,559 Total assets $ 2,425,535 $ 2,222,843 Deposits and Interest-bearing liabilities: Interest bearing deposits $ 1,487,465 $ 1,635 0.44 % $ 1,397,965 $ 1,363 0.39 % FHLB advances and other 84,598 322 1.51 % 41,047 178 1.72 % Subordinated debentures 36,140 191 2.10 % 36,128 154 1.69 % Notes payable   52,948   35 0.26 %   54,598   38 0.28 % Total interest-bearing liabilities 1,661,151 2,183 0.52 % 1,529,738 1,733 0.45 % Non-interest bearing deposits   441,903   - -   388,849   - - Total including non-interest-bearing demand deposits 2,103,054 2,183 0.41 % 1,918,587 1,733 0.36 % Other non-interest-bearing liabilities   33,872   27,021 Total liabilities 2,136,926 1,945,608 Stockholders' equity   288,609   277,235 Total liabilities and stockholders' equity $ 2,425,535   $ 2,222,843   Net interest income; interest rate spread $ 20,266 3.57 % $ 19,015 3.68 % Net interest margin (4) 3.69 % 3.78 % Average interest-earning assets to average interest bearing liabilities 132 % 131 %   Nine Months Ended September 30, 2016 2015 Average Yield Average Yield Balance Interest(1) Rate Balance Interest(1) Rate Interest-earning assets: Loans receivable $ 1,834,981 $ 59,395 4.32 % $ 1,672,393 $ 54,590 4.36 % Securities 230,058 5,899 3.55 % (3 ) 241,016 6,369 3.64 % (3 ) Interest Bearing Deposits 69,599 287 0.55 % 56,315 113 0.27 % FHLB stock   13,800   413 4.00 %   13,802   413 4.00 % Total interest-earning assets 2,148,438 65,994 4.12 % 1,983,526 61,485 4.16 % Non-interest-earning assets   228,496   221,609 Total assets $ 2,376,934 $ 2,205,135 Deposits and Interest-bearing liabilities: Interest bearing deposits $ 1,457,010 $ 4,613 0.42 % $ 1,396,731 $ 3,947 0.38 % FHLB advances and other 82,598 940 1.52 % 34,038 461 1.81 % Subordinated debentures 36,140 548 2.03 % 36,129 451 1.67 % Notes payable   54,615   108 0.27 %   53,740   113 0.28 % Total interest-bearing liabilities 1,630,363 6,209 0.51 % 1,520,638 4,972 0.44 % Non-interest bearing deposits   432,274   - -   379,305   - - Total including non-interest-bearing demand deposits 2,062,637 6,209 0.40 % 1,899,943 4,972 0.35 % Other non-interest-bearing liabilities   30,886   28,062 Total liabilities 2,093,523 1,928,005 Stockholders' equity   283,411   277,130 Total liabilities and stockholders' equity $ 2,376,934   $ 2,205,135   Net interest income; interest rate spread $ 59,785 3.61 % $ 56,513 3.72 % Net interest margin (4) 3.73 % 3.82 % Average interest-earning assets to average interest bearing liabilities 132 % 130 %    

(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) Securities yield = annualized interest income divided by the average balance of securities, excluding average unrealized gains/losses. (4) Net interest margin is net interest income divided by average interest-earning assets.                         Selected Quarterly Information First Defiance Financial Corp.           (dollars in thousands, except per share data)   3rd Qtr 2016   2nd Qtr 2016   1st Qtr 2016   4th Qtr 2015   3rd Qtr 2015 Summary of Operations Tax-equivalent interest income (1) $ 22,449 $ 21,940 $ 21,605 $ 21,256 $ 20,748 Interest expense 2,183 2,084 1,942 1,809 1,733 Tax-equivalent net interest income (1) 20,266 19,856 19,663 19,447 19,015 Provision for loan losses 15 53 364 43 (27 ) Tax-equivalent NII after provision for loan losses (1) 20,251 19,803 19,299 19,404 19,042 Investment securities gains, net of impairment 151 227 131 22 - Non-interest income (excluding securities gains/losses) 8,375 8,348 8,505 7,708 7,982 Non-interest expense 18,292 17,347 17,274 17,347 16,848 Income taxes 2,994 3,307 3,017 2,744 2,998 Net income 7,045 7,264 7,169 6,563 6,696 Tax equivalent adjustment (1)     446       460       475       480       482   At Period End Total assets $ 2,450,040 $ 2,409,599 $ 2,358,931 $ 2,297,676 $ 2,228,281 Earning assets 2,240,747 2,200,517 2,158,177 2,099,219 2,030,218 Loans 1,925,694 1,861,403 1,824,986 1,802,217 1,733,538 Allowance for loan losses 25,923 25,948 25,668 25,382 25,209 Deposits 1,927,686 1,920,270 1,871,157 1,836,137 1,793,053 Stockholders’ equity 292,138 286,616 280,418 280,197 278,556 Stockholders’ equity / assets 11.92 % 11.89 % 11.89 % 12.19 % 12.50 % Goodwill     61,798       61,798       61,798       61,798       61,798   Average Balances Total assets $ 2,425,535 $ 2,391,064 $ 2,314,203 $ 2,276,060 $ 2,222,843 Earning assets 2,194,170 2,162,574 2,088,582 2,051,331 2,000,284 Loans 1,879,760 1,828,984 1,796,200 1,732,472 1,696,370 Deposits and interest-bearing liabilities 2,103,054 2,079,442 2,005,395 1,967,199 1,918,587 Deposits 1,929,368 1,903,139 1,835,345 1,823,396 1,786,814 Stockholders’ equity 288,609 282,573 279,051 279,192 277,235 Stockholders’ equity / assets     11.90 %     11.82 %     12.06 %     12.27 %     12.47 % Per Common Share Data Net Income: Basic $ 0.78 $ 0.81 $ 0.80 $ 0.72 $ 0.72 Diluted 0.78 0.80 0.79 0.71 0.72 Dividends 0.22 0.22 0.220 0.200 0.200 Market Value: High $ 46.83 $ 41.21 $ 40.98 $ 42.46 $ 39.95 Low 35.90 37.53 34.80 35.01 35.03 Close 44.64 38.85 38.41 37.78 36.56 Common Book Value 32.53 31.95 31.29 30.78 30.37 Shares outstanding, end of period (in thousands)     8,980       8,971       8,961       9,102       9,172   Performance Ratios (annualized) Tax-equivalent net interest margin (1) 3.69 % 3.71 % 3.80 % 3.77 % 3.78 % Return on average assets 1.16 % 1.22 % 1.25 % 1.14 % 1.20 % Return on average equity 9.71 % 10.34 % 10.33 % 9.33 % 9.58 % Efficiency ratio (2) 63.87 % 61.51 % 61.32 % 63.88 % 62.41 % Effective tax rate 29.82 % 31.28 % 29.62 % 29.48 % 30.93 % Common dividend payout ratio (basic)     28.21 %     27.16 %     27.50 %     27.78 %     27.78 % (1) Interest income on tax-exempt securities and loans has been adjusted to a tax-equivalent basis using the statutory federal income tax rate of 35% (2) Efficiency ratio = Non-interest expense divided by sum of tax-equivalent net interest income plus non-interest income, excluding securities gains, net.                         Selected Quarterly Information First Defiance Financial Corp.           (dollars in thousands, except per share data)   3rd Qtr 2016   2nd Qtr 2016   1st Qtr 2016   4th Qtr 2015   3rd Qtr 2015 Loan Portfolio Composition One to four family residential real estate $ 209,097 $ 206,861 $ 208,818 $ 205,330 $ 205,370 Construction 177,075 161,282 145,635 163,877 129,230 Commercial real estate 1,043,820 1,001,315 989,468 948,428 922,207 Commercial 456,099 428,599 412,911 419,349 402,681 Consumer finance 17,251 16,690 15,679 16,281 15,774 Home equity and improvement   118,165       116,685       116,856       116,962       113,781   Total loans 2,021,507 1,931,432 1,889,367 1,870,227 1,789,043 Less: Undisbursed loan funds 94,552 68,850 63,267 66,902 54,484 Deferred loan origination fees 1,261 1,179 1,114 1,108 1,021 Allowance for loan loss   25,923       25,948       25,668       25,382       25,209   Net Loans $ 1,899,771     $ 1,835,455     $ 1,799,318     $ 1,776,835     $ 1,708,329                         Allowance for loan loss activity Beginning allowance $ 25,948 $ 25,668 $ 25,382 $ 25,209 $ 25,384 Provision for loan losses 15 53 364 43 (27 ) Credit loss charge-offs: One to four family residential real estate 111 37 55 8 185 Commercial real estate 79 0 13 103 64 Commercial 26 18 336 0 43 Consumer finance 24 18 0 32 5 Home equity and improvement   74       66       30       10       110   Total charge-offs 314 139 434 153 407 Total recoveries   274       366       356       282       259   Net charge-offs (recoveries)   40       (227 )     78       (129 )     148   Ending allowance $ 25,923     $ 25,948     $ 25,668     $ 25,382     $ 25,209                         Credit Quality Total non-performing loans (1) $ 18,198 $ 16,423 $ 17,707 $ 16,261 $ 16,612 Real estate owned (REO)   704       1,079       1,111       1,321       4,936   Total non-performing assets (2) $ 18,902     $ 17,502     $ 18,818     $ 17,582     $ 21,548   Net charge-offs (recoveries) 40 (227 ) 78 (129 ) 148   Restructured loans, accruing (3) 9,113 9,648 11,284 11,178 13,786   Allowance for loan losses / loans 1.35 % 1.39 % 1.41 % 1.41 % 1.45 % Allowance for loan losses / non-performing assets 137.14 % 148.26 % 136.40 % 144.36 % 116.99 % Allowance for loan losses / non-performing loans 142.45 % 158.00 % 144.96 % 156.09 % 151.75 % Non-performing assets / loans plus REO 0.98 % 0.94 % 1.03 % 0.97 % 1.24 % Non-performing assets / total assets 0.77 % 0.73 % 0.80 % 0.77 % 0.97 % Net charge-offs / average loans (annualized) 0.01 % -0.05 % 0.02 % -0.03 % 0.03 %                       Deposit Balances Non-interest-bearing demand deposits $ 443,321 $ 442,811 $ 426,053 $ 420,691 $ 392,103 Interest-bearing demand deposits and money market 810,429 805,550 783,016 767,201 745,233 Savings deposits 241,016 240,316 233,546 219,655 216,613 Retail time deposits less than $100,000 274,421 277,904 279,376 278,707 282,331 Retail time deposits greater than $100,000   158,499       153,689       149,166       149,883       156,773   Total deposits $ 1,927,686     $ 1,920,270     $ 1,871,157     $ 1,836,137     $ 1,793,053     (1) Non-performing loans consist of non-accrual loans. (2) Non-performing assets are non-performing loans plus real estate and other assets acquired by foreclosure or deed-in-lieu thereof. (3) Accruing restructured loans are loans with known credit problems that are not contractually past due and therefore are not included in non-performing loans.                             Loan Delinquency Information First Defiance Financial Corp.                 (dollars in thousands)

 

 

30 to 89 days Non Accrual      

Total Balance

   

Current

    past due     Loans   September 30, 2016                         One to four family residential real estate $ 209,097 $ 205,471 $ 706 $ 2,920 Construction 177,075 177,075 - - Commercial real estate 1,043,820 1,032,260 258 11,302 Commercial 456,099 452,669 185 3,245 Consumer finance 17,251 17,048 190 13 Home equity and improvement   118,165       116,653       794       718 Total loans $ 2,021,507     $ 2,001,176     $ 2,133     $ 18,198   December 31, 2015                         One to four family residential real estate $ 205,330 $ 201,806 $ 914 $ 2,610 Construction 163,877 163,877 - - Commercial real estate 948,428 937,844 736 9,848 Commercial 419,349 416,114 157 3,078 Consumer finance 16,281 16,215 30 36 Home equity and improvement   116,962       115,465       808       689 Total loans $ 1,870,227     $ 1,851,321     $ 2,645     $ 16,261   September 30, 2015                         One to four family residential real estate $ 205,370 $ 201,797 $ 828 $ 2,745 Construction 129,230 129,095 135 - Commercial real estate 922,207 911,878 239 10,090 Commercial 402,681 399,547 17 3,117 Consumer finance 15,774 15,676 69 29 Home equity and improvement   113,781       112,620       530       631 Total loans $ 1,789,043     $ 1,770,613     $ 1,818     $ 16,612  

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First Defiance Financial Corp.Donald P. HilemanPresident and CEO419-782-5104dhileman@first-fed.com