First Defiance Financial Corp. Reports $5.4 Million of Net Income For The 2012 Third Quarter, Up 34% From Third Quarter 2011 - Net Income of $5.4 million for 2012 third quarter, up from $4.1 million in the third quarter of 2011

- Diluted earnings per share for the 2012 third quarter of $0.54 up from $0.36 in the third quarter of 2011

- Provision for Loan Losses of $705,000, down from $3.1 million in the third quarter of 2011

- Net Interest Margin of 3.80%, down from 3.89% for the third quarter of 2011

DEFIANCE, Ohio, Oct 22, 2012 /PRNewswire/ -- First Defiance Financial Corp. (NASDAQ: FDEF) announced today that net income for its third quarter ended September 30, 2012 totaled $5.4 million, or $0.54 per diluted common share, compared to $4.1 million or $0.36 per diluted common share for the same period in 2011.

"We are extremely pleased with the earnings results this quarter, not just with the strong bottom line number, but with the overall quality behind the earnings. The third quarter highlight was the substantial reduction in the level of provision of loan loss, which helped drive our earnings growth for the quarter," said William J. Small, Chairman, President, and Chief Executive Officer of First Defiance Financial Corp. "We are also pleased that we continued to see loan growth during the quarter, as well as improvement in our linked quarter margin."

Credit Quality

The third quarter results include expense for provision for loan losses of $705,000, compared with $3.1 million for the same period in 2011 and $4.1 million in the second quarter of 2012.   

Non-performing loans totaled $42.1 million at September 30, 2012, a decrease of $3.2 million or 7% from $45.3 million at June 30, 2012. The September 30, 2012 balance included $37.8 million of loans that are on non-accrual and another $4.3 million of loans that are still accruing, but are considered non-performing because of changes in terms granted to borrowers. In addition, First Defiance had $2.8 million of real estate owned at September 30, 2012 which is down from $5.8 million at September 30, 2011. For the third quarter of 2012, First Defiance recorded net charge-offs of $804,000, which when annualized, represented 0.22% of average loans outstanding at September  30, 2012, down from the second quarter of 2012 level of 1.78%. The allowance for loan loss as a percentage of total loans decreased to 1.74% at September 30, 2012 from 2.24% and 2.61% at December 31, 2011 and September 30, 2011, respectively.

"We saw a substantial decline in the level of charge offs during the quarter reaching the lowest levels since before the economic downturn.  We have also made continued improvement in our levels of non-performing assets," Small said. "We believe we are at a point where declines in property values have materially slowed and has led to a more stable loan portfolio valuation."

Net Interest Margin down from 2011 Third Quarter

Net interest income was $17.2 million in the third quarter of 2012 compared to $17.6 million for the same period in 2011.  Net interest margin was 3.80% for the third quarter of 2012 compared to 3.75% in the second quarter of 2012 and 3.89% in the third quarter of 2011. The cost of interest-bearing liabilities and non-interest-bearing demand deposits decreased by 24 basis points, to 0.66% from 0.90% for the third quarter of 2011, but this was offset by a decline in the yield on interest earning assets of 32 basis points, to 4.44% for the third quarter of 2012 from 4.76% for the 2011 third quarter.

"The challenges on the net interest margin in this low rate environment persist and will continue as competitive pressures increase," said Small. "We are very pleased that we were able to maintain our overall consistent asset yield compared with the second quarter of 2012."

Non-Interest Income

First Defiance's non-interest income for the third quarter of 2012 was $7.8 million compared with $6.9 million for the same period in 2011. Service fees and other charges were $2.8 million for the third quarter of 2012, compared with $3.1 million in the third quarter of 2011. Non-sufficient funds income was $1.1 million in the third quarter of 2012, down $379,000 from the third quarter of 2011. Other non-interest income increased to $316,000 in the third quarter of 2012 from a loss of $34,000 for the same period of 2011. This was the result of an increase of $75,000 in the value of the assets of the deferred compensation plan in the third quarter of 2012, compared to a decrease in those assets of $285,000 for the same period in 2011.  Mortgage banking income increased to $2.2 million for the third quarter of 2012 from $1.4 million in the third quarter of 2011. Gains from the sale of mortgage loans increased in the third quarter of 2012 to $2.9 million from $2.1 million in the third quarter of 2011. Mortgage loan servicing revenue was down slightly at $824,000 in the third quarter of 2012 compared with $852,000 in the third quarter of 2011.  

The third quarter of 2012 saw a continuation of the low interest rate environment which led to a negative adjustment to previously recorded mortgage servicing rights ("MSR") impairment. First Defiance had a negative change in the valuation adjustment in mortgage servicing assets of $600,000 in the third quarter of 2012, compared with a negative valuation adjustment of $1,072,000 in the third quarter of 2011. The negative MSR valuation adjustment is a reflection of the decrease in the fair value of certain sectors of the Company's portfolio of MSRs for this period. The interest rate environment that gives rise to increased mortgage origination activity also typically causes increases in MSR amortization and impairment, creating a natural hedge in the mortgage banking line of business. 

"We have been able to steadily increase our mortgage banking income which drove the year over year improvement in our non-interest income," said Small.

Non-Interest Expenses

Total non-interest expense was $16.5 million for the third quarter of 2012, compared with $15.5 million in the third quarter of 2011.

Compensation and benefits expense increased $72,000 to $8.2 million, compared to the third quarter of 2011 and $8.0 million in the second quarter of 2012.  Other non-interest expense increased to $3.2 million in the third quarter of 2012 from $2.7 million for the third quarter of 2011. The other non-interest expense increase is mainly attributable to the $107,000 increase in the value of the liabilities of the deferred compensation plan for the third quarter of 2012 compared to a decrease in those liabilities of $283,000 for the same period of 2011.  Credit, collection and real estate owned costs were $456,000 for the third quarter of 2012 compared to $573,000 in the same period of 2011 and secondary market buy-back losses were $115,000 in the third quarter of 2012 compared to $99,000 in the same period of 2011. 

"These continue to be very challenging economic times which are compounded by the distraction of the elections," said Small. "While the earnings for the quarter were positively impacted by lower provision expense and stronger mortgage banking income, we are not losing focus on our base operating strategy and core results. We continue to concentrate on improvement in asset quality which will result in lower credit costs as well as to focus on ways to become more efficient in our delivery of quality products and services."

Year-To-Date Results

Net income for the first nine months of 2012 totaled $13.5 million, or $1.29 per diluted common share, compared to $11.5 million or $1.06 per diluted common share for the same period in 2011.  The YTD EPS results include the positive impact of $.06 per diluted share relating to the redemption of the TARP preferred shares.

For the nine month period ended September 30, 2012, net interest income totaled $51.6 million, compared with $52.4 million in the first nine months of 2011. Average interest-earning assets increased to $1.878 billion for the first nine months of 2012, compared to $1.844 billion for the first nine months of 2011. Net interest margin for the first nine months of 2012 was 3.78%, down 11 basis points from the 3.89% margin reported in the nine month period ended September 30, 2011.

The provision for loan losses for the first nine months of 2012 was $8.3 million, flat with the same period in 2011.

Non-interest income for the first nine months of 2012 was $24.2 million, compared to $19.6 million during the same period of 2011. Service fees and other charges were $8.1 million for the first nine months of 2012, down $287,000 compared to the first nine months of 2011. Mortgage banking income increased to $6.9 million in the first nine months of 2012, compared with $4.5 million in the first nine months of 2011. Insurance and investment sales revenues increased to $6.7 million for the first nine months of 2012, compared with $5.1 million during the first nine months of 2011. Non-interest income for the first nine months of 2012 included $528,000 of gain on the sale of securities compared with $49,000 in the first nine months of 2011.

Non-interest expense increased to $48.2 million for the first nine months of 2012 from $47.2 million in the first nine months of 2011. Compensation and benefits expense increased $1.3 million in the first nine months of 2012 compared to the first nine months of 2011 mainly resulting from the insurance acquisition in July 2011 which added $1.2 million in compensation and benefits expense in the first nine months of 2012 compared to $415,000 for the same period in 2011.  Credit, collection and real estate owned costs have decreased $766,000 in the first nine months of 2012 from the first nine months of 2011 and secondary market buy-back losses have declined $201,000 in the first nine months of 2012 from the first nine months of 2011.

Total Assets at $2.06 Billion

Total assets at September 30, 2012 were $2.06 billion, compared to $2.07 billion at December 31, 2011 and $2.06 billion at September 30, 2011. Net loans receivable (excluding loans held for sale) were $1.49 billion at September 30, 2012, compared to $1.45 billion at December 31, 2011 and $1.42 billion at September 30, 2011. Total cash and cash equivalents were $92.4 million at September 30, 2012, compared with $174.9 million at December 31, 2011 and $190.2 million at September 30, 2011. Also at September 30, 2012, goodwill and other intangible assets totaled $66.6 million, compared to $67.7 million at December 31, 2011 and $68.1 million at September 30, 2011.

Total deposits at September 30, 2012 were $1.61 billion compared with $1.60 billion at December 31, 2011 and $1.59 billion at September 30, 2011. Non-interest bearing deposits at September 30, 2012 were $271.3 million, compared to $245.9 million at December 31, 2011 and $239.6 million at September 30, 2011. Total stockholders' equity was $255.1 million at September 30, 2012, compared to $278.1 million at December 31, 2011 and $275.1 million at the September 30, 2011.

Conference Call

First Defiance Financial Corp. will host a conference call at 11:00 a.m. (EST) on Tuesday, Oct 23, 2012 to discuss the earnings results and business trends. The conference call may be accessed by calling 1-877-317-6789. A live webcast may be accessed at http://services.choruscall.com/links/fdef121023.html

Audio replay of the Internet Web cast will be available at www.fdef.com until October 23, 2013 at 9:00 a.m.

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 operates 33 offices and 42 ATM locations in northwest Ohio, southeast Michigan and Fort Wayne, Indiana. First Insurance Group specializes in property and casualty and group health and life insurance, with six offices throughout northwest Ohio.

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

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