[January 23, 2017]

First Defiance Financial Corp. Reports Record Full Year Earnings of $3.19 Per Share for 2016, Up 13.1% from Full Year 2015

First Defiance Financial Corp. (NASDAQ: FDEF) announced today that net income for the fiscal year ended December 31, 2016 totaled $28.8 million, or $3.19 per diluted common share, compared to $26.4 million or $2.82 per diluted common share for the year ended December 31, 2015.

For the fourth quarter 2016, First Defiance earned $7.4 million, or $0.81 per diluted common share compared to $6.6 million, or $0.71 per diluted common share for the fourth quarter of 2015.

"We are very pleased that our strong finish to 2016 allowed us to mark our fourth consecutive year of record earnings performance, with diluted earnings per share up 13.1% over last year. Also for the year, our return on assets was 1.20% on total assets that grew $178 million, or 7.7%," said Donald P. Hileman, President and Chief Executive Officer of First Defiance Financial Corp. "This notable performance in 2016 leaves us optimistic for overcoming potential challenges in 2017 and completing our upcoming merger with Commercial Bancshares, Inc. in February."

Net interest income up compared to fourth quarter 2015

Net interest income of $20.5 million in the fourth quarter of 2016 was up from $19.0 million in the fourth quarter of 2015. The growth in net interest income of $1.5 million included interest recoveries primarily from loan payoffs of $501,000 in the fourth quarter 2016 compared to $228,000 of interest recoveries in the fourth quarter 2015. Net interest margin was 3.76% for the fourth quarter of 2016, up from 3.69% in the third quarter 2016, but down slightly from 3.77% in the fourth quarter of 2015. Yield on interest earning assets increased by 4 basis points, to 4.16% in the fourth quarter of 2016 from 4.12% in the fourth quarter of 2015. The cost of interest-bearing liabilities increased by 7 basis points in the fourth quarter of 2016 to 0.53% from 0.46% in the fourth quarter of 2015.

"Our net interest income expansion in the fourth quarter was mainly driven by our continued balance sheet growth coupled with our steady net interest margin and further enhanced by recovered interest on loan payoffs," said Hileman. "In addition, we believe our interest rate risk is well balanced and positioned for prospective rate changes in 2017."

Non-interest income up from fourth quarter 2015

First Defiance's non-interest income for the fourth quarter of 2016 was $8.3 million compared to $7.7 million in the fourth quarter of 2015. Mortgage banking income increased to $1.9 million in the fourth quarter of 2016, up from $1.5 million in the fourth quarter of 2015 due to higher volumes of both purchase and refinance loans throughout our market area. Gains from the sale of mortgage loans increased in the fourth quarter of 2016 to $1.2 million from $836,000 in the fourth quarter of 2015. Mortgage loan servicing revenue was $922,000 in the fourth quarter of 2016, up slightly from $910,000 in the fourth quarter of 2015. First Defiance had a positive change in the valuation adjustment in mortgage servicing assets of $241,000 in the fourth quarter of 2016 compared to a positive adjustment of $75,000 in the fourth quarter of 2015.

For the fourth quarter 2016, service fees and other charges were $2.7 million, down $33,000 from $2.7 million in the fourth quarter of 2015; and commissions from the sale of insurance products were $2.3 million, up $45,000 from $2.3 million in the fourth quarter of 2015. Trust income was $445,000 in the fourth quarter of 2016, up from $367,000 in the fourth quarter of 2015.

"Total non-interest income in the fourth quarter grew $563,000, up 7.3% over the fourth quarter last year," said Hileman. "We were particularly pleased with our success in mortgage banking with fourth quarter loan origination levels up 38% from a year ago, and in trust income with revenues up 21% over the fourth quarter last year."

Non-interest expenses up from fourth quarter 2015

Total non-interest expense was $18.2 million in the fourth quarter of 2016, up from $17.3 million in the fourth quarter of 2015. The fourth quarter 2016 included expenses of $292,000 related to the pending merger of Commercial Bancshares, Inc. and $300,000 for a termination of a lease. Compensation and benefits in the fourth quarter of 2016 was $9.9 million, an increase of $64,000 compared to the fourth quarter of 2015. Increases in compensation for merit raises and staff additions for growth were mostly offset by lower costs for medical insurance and other benefits. Occupancy expense was $2.0 million in the fourth quarter 2016, up $147,000 from the fourth quarter 2015. Data processing cost was $1.6 million in the fourth quarter of 2016, up $213,000 from the fourth quarter of 2015. Other non-interest expense of $3.9 million in the fourth quarter of 2016, increased from $3.3 million in the fourth quarter of 2015 primarily due to merger related expenses and the lease termination.

Credit quality

Non-performing loans totaled $14.3 million at December 31, 2016, a decrease from $16.3 million at December 31, 2015. In addition, First Defiance had $455,000 of real estate owned at December 31, 2016, down from $1.3 million at December 31, 2015. Accruing troubled debt restructured loans were $10.5 million at December 31, 2016, a decrease from $11.2 million at December 31, 2015. For the fourth quarter of 2016, First Defiance recorded net recoveries of $110,000, compared to net recoveries of $129,000 in the fourth quarter of 2015. The allowance for loan loss as a percentage of total loans was 1.33% at December 31, 2016, compared to 1.41% at December 31, 2015.

The fourth quarter results included a credit provision for loan losses of $149,000 compared to an expense of $43,000 for the same period in 2015.

"Our fourth quarter results showed continued improvement in our asset quality as non-performing assets declined $4.1 million during the quarter to 0.60% of total assets," said Hileman. "This reduction, along with net recoveries on loans in the quarter, resulted in both a credit provision expense for the fourth quarter and an increase of our allowance for loan losses coverage of non-performing loans to 180% at year end."

Annual results

For the full year ended on December 31, 2016, net income totaled $28.8 million, or $3.19 per diluted common share, compared to $26.4 million or $2.82 per diluted common share for 2015.

Net interest income for 2016 totaled $78.9 million, compared with $74.1 million for 2015. Average interest-earning assets increased to $2.17 billion for 2016, compared to $2.00 billion in 2015. Net interest margin for 2016 was 3.74%, down 7 basis points from the 3.81% margin for 2015.

The provision for loan losses for 2016 was $283,000, compared to $136,000 in 2015, reflecting the continued strong credit quality throughout the year.

Non-interest income for the year 2016 was $34.0 million, compared to $31.8 million in 2015. Service fees and other charges were $10.9 million for 2016, up from $10.8 million in 2015. Mortgage banking income increased to $7.3 million for 2016, compared to $6.7 million in 2015. Gains on the sale of non-mortgage loans were $753,000 for 2016, compared to $824,000 during 2015. Insurance and investment sales revenues increased to $10.4 million for 2016, compared to $10.1 million for 2015. Non-interest income for 2016 included $509,000 of net securities gains compared to $22,000 of net securities gains for 2015.

Non-interest expense increased to $71.1 million for 2016 from $67.9 million in 2015. Compensation and benefits expense was $40.2 million for 2016 compared with $37.8 million for 2015. The $2.4 million increase in compensation and benefits over the prior year is mainly related to merit increases and new staff for growth strategies, higher incentive compensation accruals and higher medical insurance costs. Other expenses increased $603,000 mainly due to acquisition related costs for the pending acquisition of Commercial Bancshares, Inc. and the expense related to the lease termination. Occupancy expense also increased $221,000, and data processing expense increased $284,000. These increases were partially offset by decreases in FDIC insurance premiums of $155,000, amortization of intangibles of $165,000 and financial institutions taxes of $2,000.

Total assets at $2.5 billion

Total assets at December 31, 2016 were $2.48 billion compared to $2.30 billion at December 31, 2015. Net loans receivable (excluding loans held for sale) were $1.91 billion at December 31, 2016, compared to $1.78 billion at December 31, 2015. Total cash and cash equivalents were $99.0 million at December 31, 2016, compared to $79.8 million at December 31, 2015. Also, at December 31, 2016, goodwill and other intangible assets totaled $63.1 million compared to $63.7 million at December 31, 2015.

Total deposits at December 31, 2016 were $1.98 billion compared with $1.84 billion at December 31, 2015. Non-interest bearing deposits at December 31, 2016 were $487.7 million compared to $420.7 million at December 31, 2015. Total stockholders' equity was $293.0 million at December 31, 2016, compared to $280.2 million at December 31, 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 and other conditions set forth in the merger agreement.

Dividend to be paid February 24

The Board of Directors declared a quarterly cash dividend of $0.25 per common share payable February 24, 2017 to shareholders of record at the close of business on February 17, 2017. The dividend represents an annual dividend of 2.09 percent based on the First Defiance common stock closing price on January 20, 2017. First Defiance has approximately 8,984,456 common shares outstanding.

Conference call

First Defiance Financial Corp. will host a conference call at 11:00 a.m. ET on Tuesday, January 24, 2017 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/fdef170124.html.

The replay of the conference call Webcast will be available at www.fdef.com until Wednesday, January 24, 2018 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 35 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 website 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 December 31, 2016 consolidated financial statements as part of its Annual Report on Form 10-K 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.

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