First Defiance Financial's CEO Discusses Q1 2012 Results - Earnings Call Transcript

First Defiance Financial (FDEF)

Q1 2012 Earnings Call

April 24, 2012 11:00 AM ET


Terra Via – IR

Bill Small – President and CEO

Don Hileman – EVP and CFO


John Barber – KBW


Good day and welcome to the First Defiance Financial Corp. First Quarter Earnings Conference Call and webcast. All participants will be in listen-only mode. (Operator Instructions). After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Terra Via. Please go ahead.

Terra Via

Thank you. Good morning, everyone and thank you for joining us for today’s first quarter 2012 conference call. This call is also being webcast and the audio replay will be available at First Defiance's website at

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’d 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 the future financial results and business operations for 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 Terra. Good morning and thank you for joining us for the First Defiance Financial Corp conference call to review the 2012 first quarter. Last night we issued our earnings release reporting the first quarter 2012 results and this morning we would like to discuss that release and look forward at the balance of 2012. 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 first quarter is Executive Vice President and CFO, Don Hileman. Also with us this morning to answer questions is Jim Rohrs, President and CEO of First Federal Bank.

First quarter 2012 net income on a GAAP basis was $4.2 million or $0.37 per diluted common share. This compares to net income of $2.7 million and $0.25 per diluted common share in the 2011 first quarter. The 2012 first quarter earnings results are an encouraging start to the year but still demonstrate the challenges of the last several years. Among the strong positives in the quarter was our non-interest income which was driven by very solid mortgage production throughout the quarter and we held the line on expenses.

However while we see improvement in the overall credit quality at the bank continuing we still saw asset issues negatively impacting earnings. Margin compression also worked as a deterrent to higher earnings as the historically low interest rate environment drags on.

Credit quality has been the most significant factor impacting earnings over the past couple of years and while we are still seeing a degree of stress on certain credits overall we saw marked improvement in several key metrics.

Reduction in classified loans and lower delinquencies are both strong indicators of the overall improvement of the credit quality however increases in non-performing loans, primarily driven by additional loans placed on non-accrual and another quarter of high levels of charge offs continue to show the late period effects of the recent economic recession.

Some of these increases are the result of credits finally working their way through the cycle and also to changes in our treatment of credits based on guidance from our new regulator. The increases involve credits that had been previously identified as having weaknesses but we have adjusted our procedures and the treatment of some of these credits based on the guidance.

Loan balances dropped during the first three months of 2012 in virtually all loan categories after two consecutive quarters of growth. Soft loan demand, strong liquidity position on the part of borrowers, and a very competitive lending environment, all contributed to the decrease in loans.

Loan balances have been effected by the higher level of charge offs last several quarters also. One significant characteristic that was very notable that quarter was a decline in outstanding balances on farm lines of credit. Many of our agricultural customers have had several consecutive strong performance years that puts them in a position to utilize cash for input expenses this year and as a result they have or dramatically reduced draws on their operating lines. This is obviously a positive for all but it has had a negative impact on loan balances.

The one strong area for loan production during the first quarter was in residential real estate loans. Mortgage production continued, in fact increased its strong performance that goes back to the middle of last year. First quarter 2012 mortgage production more than doubled the 2011 first-quarter and the month of March 2012 production alone nearly exceeded the entire first quarter 2011 level. This is not only the result of outstanding work by our loan originators but a tremendous and efficient effort fire underwriters and processors to keep up with our originators.

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