First Defiance CEO Discusses Q3 2010 Results - Earnings Call Transcript

First Defiance Financial Corp. ( FDEF)

Q3 2010 Earnings Call Transcript

October 26, 2010 11:00 am ET

Executives

Mary Beth Weisenburger – Director of Marketing

Bill Small – President, Chairman and CEO

Don Hileman – EVP and CFO

Analysts

Julienne Cassarino – Prospector Partners

John Barber – KBW

Chris Baldwin [ph] – Franklin [ph]

Presentation

Operator

Good morning and welcome to the First Defiance third quarter 2010 conference call. All participants will be in a listen-only mode. (Operator instructions) I would now like to turn the conference over to Mary Beth Weisenburger with First Defiance Financial Corp. Please go ahead.

Mary Beth Weisenburger

Thank you. Good morning everyone and thank you for joining us for today’s third quarter 2010 conference call. This call is also being webcast and the audio replay will be available at the First Defiance website at www.fdef.com. I would like to mention that currently we are experiencing severe weather in our area and we are hoping the power and connections are not disrupted during this call. Providing commentary this morning will be Bill Small, Chairman, President and CEO of First Defiance and Don Hileman, Executive Vice President and Chief Financial Officer. Following their prepared comments on the company’s strategy and performance, they will be available to take your questions.

Before we begin, I would like to remind you that during the conference call today including during the question and answer period, you may hear forward-looking statements related to future financial results and business operations for the First Defiance Financial Corp. Actual results may differ materially from current management forecasts and projections as a result of factors over which the company has no control. Information on these risk factors and additional information on forward-looking statements are included in the news release and in the company’s reports on file with the Securities and Exchange Commission.

And now I'll turn the call over to Mr. Small for his comments.

Bill Small

Thank you Mary Beth. Good morning and thank you for joining us to review the 2010 third-quarter results. Last night, we issued our earnings release for the third quarter and this morning we would like to discuss our financial performance during the period and what we see ahead of us for the balance of the year. At the conclusion of our presentation, we will answer any questions you might have. Joining me on the call this morning to give more detail on the financial performance for the quarter is our CFO, Don Hileman, also with us this morning to assist in answering questions is Jim Rohrs, President and CEO of First Federal Bank.

Third quarter 2010 net income on a GAAP basis was $2.3 million or $0.22 per diluted common share, compared to $329,000 and a negative $0.02 per diluted common share in the 2009 third quarter. For the nine-month period ended September 30, 2010, First Defiance earned $5.8 million or $0.53 per diluted common share, compared to $6.6 million or $0.66 per diluted common share for the nine-month period ended September 30, 2009. Significant net interest margin improvement was a positive in the third quarter. Net earnings were again challenged by provision expense, as well as mortgage servicing rights impairment.

The 2010 third quarter results continued to show a number of significant indicators that the core operation is running strong. Non-interest income was very strong during the period with mortgage production at record levels during the quarter leading to strong mortgage banking income. We also saw growth in income from insurance and investment services. The deposit mix continued its favorable trend as period-end balances and non-interest bearing deposits were up and CD balances were down compared to the linked quarter and third quarter 2009.

The quarter was not without its challenges however. Asset quality had a significant negative impact, again during the third quarter, as we booked $5.2 million in provision expense and also had a significant amount of collection and OREO expense. The lower interest rates during the period resulted in a mortgage servicing rights impairment charge of over $500,000 again this quarter. We also recognized additional other than temporary impairment on certain collateralized debt obligations in our portfolio during the third quarter. Don will give you more detail on these in his remarks.

Asset quality remains our primary focus. It is a priority to identify any weaknesses and performance or collateral as early as possible and to monitor and analyze each credit to assure proper levels of reserves. The provision expense in the second quarter was significantly driven by adjustments to several previously recognized problem loans or additional reserves were added for deteriorating collateral values. We have increased the allowance for loan losses to total loans to 2.66% as of September 30, 2010. We feel it is prudent for us to make conservative, to take a conservative approach in establishing reserves as the economy continues on the sluggish pace.

Charge offs for the quarter were up slightly over the same period last year but were down significantly compared to the linked quarter. As explained earlier this year we do expect the charge off levels to run higher than our historical performance over the next several quarters due to a number of credits migrating through the workout process for final disposition. The improvement in the net interest margin was obviously a highlight of the quarter. We are very pleased to see the efforts of the discipline pricing strategy payoff in the margin performance.

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