First Defiance Financial's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Jan.21.14 | About: First Defiance (FDEF)

First Defiance Financial Corp. (NASDAQ:FDEF)

Q4 2013 Results Earnings Call

January 21, 2014, 11:00 AM ET

Executives

Terra Via – Head-Media Relations

Donald P. Hileman – President and Chief Executive Officer

Kevin T. Thompson - Executive Vice President - Chief Financial Officer

James L. Rohrs - President and Chief Executive Officer - First Federal Bank

Analysts

Christopher W. Marinac - FIG Partners LLC

Daniel Cardenas - Raymond James Financial Inc.

John Barber – Keefe Bruyette & Woods Inc.

Operator

Good morning, and welcome to the First Defiance Financial Corporation’s Fourth Quarter and Full Year Earnings Conference Call. 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 2103 fourth quarter and year-end earnings conference call. This call is also being webcast and the audio replay will be available at the First Defiance website at fdef.com.

Providing commentary this morning will be Don Hileman, President and CEO of First Defiance and Kevin Thompson, 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. Hileman for his comments.

Donald P. Hileman

Good morning and welcome to the First Defiance Financial Corporation fourth and full year 2013 conference call. Last night we issued our 2013 earnings release and now we would like to discuss that release and give a look-forward into 2014. At the conclusion of our remarks 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 fourth quarter and the full year is our CFO, Kevin Thompson. Also joining us this morning to answer questions is Jim Rohrs, President and CEO of First Federal Bank.

As First Defiance’s new President and CEO I am proud to say I am following a wonderful leader, good friend of mine in Bill Small, who has led this organization for the past 14 years. He officially retired as of December 31st. However we will continue to benefit from his guidance as Chairman of the Board and he will be very active in helping First Defiance maintain continuity with our current strategic plan.

We have been transitioning the management team for the past several months and I believe we now have the team in place to continue to execute on our strategic plans and maneuver the performance of the organization to be consistently high performing organization.

Third quarter of 2013 net income on a GAAP basis was $5.1 million or $0.50 per diluted common share compared to $5.2 million and $0.52 per diluted common share in the fourth quarter of 2012. For the year-ended December 31, 2013, First Defiance earned $22.2 million or $2.19 per diluted common share compared to $18.7 million or $1.81 per diluted common share for 2012. The $22.2 million is another record high for net income at First Defiance, surpassing 2012 by 19%.

These results include the impact of our assessment of the final Volcker Rule regulations. We determined that we have two investments in collateralized debt obligations backed by trust-preferred securities that did not qualify for exemption. Consistent with the accounting guidance we raised these investments to fair value with very little impact of EPS for the quarter and full year by $0.02 per share.

We are very gratified by the steady improvement in overall performance in 2013 over 2012, even as the operating environment remains very challenging. In general we are seeing signs of more stability on our local economies and in some communities’ stronger economic growth. Employment numbers have improved but still have room for improvement to signal sustainable growth.

The communications from Washington are still [vague and] inconsistent levers on consumer and business confidence as we believe the level of confidence in government and in the consistency of economic stability are the key drivers of growth.

The modifications in the federal reserves’ monetary policy have affected the interest rate environment as we have seen rates slowly starting to rise. Even in this operating environment we have made considerable progress throughout the year and sustained this improvement through the fourth quarter.

A few key areas standout, credit quality improvement was significant and continued through 2013. Commercial loan demand improved and we finished the year with strong momentum. And finally our performance was strong despite a significant decline in mortgage banking environment in the second half of the year.

The increase in forecasted GDP is a positive sign that national -- nationally economic conditions are improving. We do anticipate that we will see the benefits from more purchases of consumer goods and the higher levels of production to meet the consumer demand. We believe this will lead to greater capital investment in 2014. We did see improved loan growth for the fourth quarter primarily in the latter part of the quarter which is clearly the period end growth of 5%.

Credit quality metrics of our existing loan portfolio improved as we move through the year in the fourth quarter. Non-performing assets declined almost $3 million or 7% year-over-year. Non-performing loans declined almost $5 million or 15% year-over-year. While we have seen the lowest non-performing levels in several years there is still room for improvement.

We have several larger credits that have remained stickier than we anticipated, but have shown more indications of improvement than deterioration. Classified loans and non-accrual loans also showed significant progress in the fourth quarter.

The deposit side of the balance sheet continued to have strong growth in the fourth quarter. The growth was primarily in the non-interest bearing and interest-bearing demand accounts. This is in part due to the lower interest rate environment which is many people in businesses parking funds in long-term accounts rather than tying up funds for any period of time.

In the near term however the significant deposit growth has led to a higher level of liquidity and lower than normal interest margin although the fourth quarter is still very a solid 3.61%. Going forward the combination of the loan growth, improved asset quality and favorable change in the mix of deposits will all continue to further lower in helping us maintain a strong non-interest margin.

Non-interest income in the 2013 fourth quarter was down over the linked-quarter and for the full year 2013 compared with the prior year even after netting the securities gains associated with the balance sheet restructure in 2012. The biggest driver was the decline in mortgage banking.

Mortgage loan production in the fourth quarter 2013 declined 72% from a record fourth quarter 2012. Annual mortgage production declined to $326 million from 2012 record level of $546 million. Increased income from our insurance and wealth management areas helped to mitigate the negative impact of mortgage banking in both the fourth quarter and the full year 2013.

Total non-interest expense increased slightly from the fourth quarter of 2012, excluding the $2 million pre-payment of penalty in the fourth quarter 2012 related to the balance sheet restructuring. The full year non-interest expense total was up about $1 million, net of the prepayment fees with most of the increase being in comp and benefits category.

Incentive compensation and health insurance costs both showed increases in 2013. These were partially offset with reductions in occupancy costs. We're pleased with the ability to increase the quarterly dividend to $0.15 per share which represents a yield of approximately 2.4%. Our continued strong performance and capital levels support this utilization of capital.

I will now ask Kevin Thompson to give you additional details for the quarter and for the 2013 year-end, before I wrap up with an overview and look-and-see what we think is developing in 2014. Kevin?

Kevin T. Thompson

Thank you, Don and good morning to everyone. As you heard from Don's comments we were pleased to finish off the year with another quarter of consistent solid financial performance. Despite the lower level of mortgage banking revenues we've now experienced during the second half of the year and of course the small negative impact from the impairment losses on the collateralized debt obligation securities that were among those considered disallowed under the revised final Volcker law of the Dodd-Frank Act.

Our core banking businesses, along with wealth management and insurance all made meaningful contributions to the quarter and our record year. Both loans and deposits showed good point-to-point growth during the quarter, particularly deposits. Although this led to an elevated level of liquidity during the quarter and the net interest margin tightened some as a result. Non-performers edged back down. Non-interest revenues, again except for mortgage held up well during the quarter and expenses remained inline.

All-in, as Don noted, earnings for the fourth quarter were $5.1 million or $0.50 per diluted share, which included the CDO loss impact of $219,000 after tax or $0.02 per diluted share. This compares to $0.52 in the fourth quarter of 2012. For the year earnings were a record $22.2 million or $2.19 per diluted share, up $0.38 per diluted share or 21% for the year on an EPS basis.

Now turning to the details of the income statement. Our net interest income was $17 million for the fourth quarter of 2013, down slightly versus $17.2 million on a linked-quarter basis, and $17.4 million in the fourth quarter of 2012. For the fourth quarter of 2013, our margin was 3.61%, a decrease from 3.84% in the third quarter and 3.92% in the fourth quarter last year. Most of the decrease was a result of exceptionally strong deposit growth of $77.3 million during the quarter which outpaced the loan growth, both in volume as loan growth was $19.2 million and timing as average loans were actually down on a linked-quarter basis. This led to significantly increased liquidity, which lowered our overall yield on earning assets and lowered the margin.

Our yield on earning assets declined 23 basis points on a linked-quarter basis, while our cost of interest bearing liabilities remained flat on a linked-quarter basis. Total new loans originated in the fourth quarter were put on at a weighted average rate of 4.5%, an increase from 4.18% in the third quarter of 2013. And so we saw just a slight contraction of our loan portfolio yields in the fourth quarter of 2013 declining just two basis points to 4.39% on a linked-quarter basis. As our earning asset mix improves going forward through additional growth in loans and investments we will expect our margin to improve accordingly.

Total non-interest income was $6.5 million in the fourth quarter of 2013, down from $7.3 million on a linked-quarter basis and down from $10.2 million in the fourth quarter of 2012. Lower mortgage banking revenues were the main reason and again the fourth quarter included $337,000 of pretax securities losses while the fourth quarter last year included $1.6 million in securities gains related to the balance sheet restructuring.

Service fee income was $2.5 million in the fourth quarter of 2013, a slight decrease from the $2.6 million in both the linked-quarter and the fourth quarter of 2012. Net NSF fee income was $826,000 in the fourth quarter of 2013, compared to $919,000 on a linked-quarter basis and $1 million in the fourth quarter of 2012. Insurance revenue was $2.1 million in the fourth quarter of 2013, up from the $2 million in the fourth quarter of 2012.

Regarding the decline in mortgage banking revenues it was mainly due to a lower valuation adjustment and to lower volumes, primarily in refinance activity resulting from higher rates during the quarter versus prior periods. Mortgage banking originations were $43 million in the fourth quarter of 2013, down from $61 million on a linked-quarter basis and down from $153 million in the fourth quarter of 2012. The percentage of originations for purchase and construction was 54% in the fourth quarter of 2013, up 49% on a linked-quarter basis and 19% in the fourth quarter of 2012.

Overall mortgage banking income for the fourth quarter of 2013 was $1.3 million compared with $1.8 million on a linked-quarter basis and $2.7 million in the fourth quarter of 2012. Gain on sale income dropped to $756,000 in the fourth quarter of 2013 compared with $894,000 on a linked quarter basis and $2.7 million in the fourth quarter of 2012.

In addition the fourth quarter included only a small valuation adjustment to mortgage servicing rights, a negative adjustment of $4,000 while the linked-quarter included a positive valuation adjustment of $480,000. In the fourth quarter 2012 the adjustment was a positive $96,000. At December 31, 2013 First Defiance had $1.4 billion in loans serviced for others. The mortgage servicing rights associated with those loans had a fair value of $9.7 million or 73 basis points of the outstanding loan balances service.

Total impairment reserves which are available for recapture in future periods totaled $1 million at year-end 2013. As for non-interest expense fourth quarter expenses totaled $15.9 million flat with the linked quarter and down when compared with $17.5 million in the fourth quarter 2012. The fourth quarter last year included a $2 million prepayment penalty incurred as part of the balance sheet restructure.

The fourth quarter compensation and benefits expense was $8.3 million, a $500,000 increase from the fourth quarter of 2012. FDIC costs were $359,000 in the fourth quarter of 2013, down from $660,000 in the fourth quarter last year due to the improvement in the company's risk category late in the first quarter of 2013.

Other non-interest expense was $3.5 million in the fourth quarter of 2013, up from $3.1 million on a linked-quarter basis but down from $4.8 million in the fourth quarter last year which again included a $2 million prepayment penalty. Total credit related costs which includes the net gain loss on the sale of OREO, OREO repairs and write-downs and collections costs were $835,000 in the fourth quarter and included $452,000 of OREO write-downs. As a result these costs were up from $484,000 in the linked quarter and up from $488,000 in the fourth quarter of 2012.

Regarding provision expense the fourth quarter of 2013 totaled $475,000, basically even with last quarter and down from $2.6 million in the fourth quarter last year. Net charge-offs were 39 basis points of average loans for the fourth quarter of 2013 and 23 basis points for the full year of 2013. This compares favorably with 59 basis points in the fourth quarter last year and 1.18% for all of 2012. And importantly the 23 basis points for net charge-offs in 2013 was the first full year in a while that is in-line with management's longer term expectations of 30 basis points or lower.

Of the total charge-offs for the quarter 52% related to commercial real estate loans, 32% commercial loans, 8% residential and 7% home equity while recoveries remained basically consistent at about 30% of losses. Our allowance for loan loss decreased to $25 million at December 31, 2013, from $26.7 million last at December 31, 2012.

The allowance percentage decreased to 1.58% from 1.75% a year ago, primarily due to the credit quality improvements achieved during the past year. While the allowance-to-loan ratio has decreased the allowance coverage of non-performing loans has increased. The allowance now represents 89.6% on our non-performing loans, up from 82% at December 31, 2012. As we've stated previously we believe the reserve percentage should track between the current level and 1.5% as asset quality continues to improve.

As for the asset quality numbers, we saw a decrease in the non-performing loans in the fourth quarter of 2013 to $27.8 million, down from $30.5 million on a linked-quarter basis, and down from $32.6 million at December 31, 2012. However our OREO balance increased on a linked-quarter basis to $5.9 million from $5.5 million and was up from a year ago.

Overall, non-performing assets decreased $2.3 million or 6.4% on a linked-quarter basis, and accruing restructured loans decreased $380,000 or 1.4% on a linked-quarter basis. Looking year-over-year, non-performing assets ended the year at $33.7 million or 1.58% of total assets, down from 1.78% of total assets at December 31, 2012.

Total classified loans also declined down to $55.6 million at December 31, 2013, compared with $59.7 million on a linked-quarter basis, and well below the $78.1 million at December 31, 2012. And we still look for continued improvement in the level of our classified assets.

The total past due and non-accrual rate was 1.95% at December 31, 2013, down from 2.59% at December 31, 2012. The delinquency rate for the loans 90-days past due and/or our non-accrual decreased to 1.73% this quarter from 1.93% on a linked-quarter basis and from 2.11% in the fourth quarter of 2012. We continue to be encouraged by the ongoing improved levels of 90-day delinquencies and non-accruals. Of the $27.8 million total non-accrual loans, $16.1 million or 58% are under 90 days past due.

The 30-day to 89-day delinquencies this quarter were up slightly from the linked-quarter but well below levels of fourth quarter 2012. While pleased with our progress we believe that we still have room for continued improvement in overall credit quality in and reductions in both non-performing and classified loans in the coming quarters.

Turning to the balance sheet, we saw a significant increase with total assets of $2.14 billion at December 31, 2013 up $79 million from last quarter-end and up $92 million from last year-end. Cash and equivalents, including the higher liquidity mentioned earlier increased to $179.3 million from $136.8 million at December 31, 2012. Securities increased slightly over the year to $198.6 million.

Gross loan balances increased $55.2 million or 3.6% year-over-year, including $19 million in the last quarter. We were pleased how our loan growth finished the year and we believe we have good momentum as we enter 2014.

Total deposits increased $68.3 million from a year ago and increased $77.3 million on a linked-quarter basis including a $48.1 million increase in non-interest bearing deposits this past quarter. Non-interest bearing deposits increased to $348.9 million at December 31, 2013 from $315.1 million at December 31, 2012. We are pleased with our ability to generate deposit growth while maintaining our lower cost of funds in this interest rate environment. While we will continue to focus on our deposit mix and pricing opportunities loan growth will be a top priority.

Looking at our capital position, total period end stockholders’ equity ended December 31, 2013 at $272.1 million, up from $258.1 million at December 31, 2012. Our capital position remains strong with period end shareholders’ equity to assets of 12.75% at December 31, 2013 compared to 12.66% at December 31, 2012. The bank's risk-based capital ratio remains strong at approximately 14.6%.

Regarding our stock repurchase program back in September the company announced a new share repurchase program that authorized the company to buyback 5% or approximately 489,000 shares of the common stock outstanding. And during the fourth quarter we did repurchase 71,000 shares. In our release last night we also announced that our quarterly dividend, which reflected a 50% increase rose to $0.15 per share. We consider both of these actions important in bringing additional value to our shareholders.

That concludes my financial review and now I'll turn the call back over to Don.

Donald P. Hileman

Thank you, Kevin. As we enter 2014, I feel very good about the way we have positioned First Defiance. We are coming off a record setting earnings performance in 2013, which followed improvement performance in 2012. We enter the New Year optimistic concerning the prospects for another successful year.

Unemployment rates throughout our markets have improved and we expect to see sustained improvement throughout the coming year. Manufacturing, led by automotive industry has been the primary reason for the rebound. We continue to see increased production at various facilities along with other positive economic development news, all of which helps us to build our optimism for future improvement.

Our three areas of focus at First Defiance are revenue growth, expense control and core balance sheet growth. We have made significant strides in three of these areas in recent quarters and we must continue with this effort to achieve even higher levels of profitability.

We do believe loan demand will improve in 2014 with most buyers in a stronger economic position than they were prior to the recession. Balance sheet of clients and their corresponding cash flows continue to improve. However there still remains some hesitancy on the part of many to make the commitments due to lack of the overall confidence in our economic growth.

While we have some clarity concerning what the future holds in regards to regulation taxes and healthcare costs it still has to be integrated into the economy. Sustaining the pace of the recovery is going to depend to a large degree on the level of confidence that can be established within the business community.

We see the turn toward optimism and if this continues loan demand will certainly build. We are committed to maintaining our underwriting standards and will not compromise on our standards to get loan growth. Pricing will be a challenge in this competitive environment and while we are not going to be out trying to buy business with illogical rates we will work hard to maintain and grow our existing relationships. All of this leads to the need for our focus on building our other revenue sources and controlling costs.

We have defined several key initiatives for 2014 that we believe will allow for a more focused approach to business. The first is business banking. We're organizing a business banking group that will provide for the needs of our mid-market clients in an expedited manner. We will be focusing on building small business relationships with more products and services oriented to their needs.

The second is alternative delivery. As technology continues to evolve our customers want to be able to bank at their convenience. In 2014 First Federal will be rolling out several key services that can help our customer’s bank anytime, anywhere through any device. These channels have the ability to produce revenue for the company by providing equitable cost per transaction than we've seen in the past. Alternative delivery channels, such as mobile banking, online banking, live chat, online mortgage applications, online credit applications and online account creation play a vital role in the future of our company. We look to expand these services in 2014.

We also continue to look for opportunities to strengthen and transform wealth management as growing sources of revenue. We've expanded our efforts to grow these product lines by streamlining processes and adding additional leadership. It’s important to reflect on 2013 as a great year for our company in the progress made to achieving our strategic goals. We were particularly pleased with the significant progress in credit quality reflected by lower charge-offs and overall lower classified loans.

We completed the implementation of a new commercial loan origination system and a new mortgage loan origination system. These systems will help enable us to be more efficient in the origination of loans and we anticipate that we will see the benefits related to increased efficiency and lower costs.

Our mission at First Defiance has not wavered. It is to be a community financial service provider that offers a complete line of financial products with a relationship oriented approach on a profitable basis. We're very encouraged by our recent performance but we also know there is still an upward potential. Our consistent strategy and business plan have served us well over the years and we've shown in recent years our ability to adapt to meet different challenges.

We also know that this strategy is designed for future opportunities and growth. We are confident in the strategy and the people we have working hard to execute our plan and we head into 2014 feeling optimistic with the opportunities ahead. We remain committed to all our constituents and appreciate the trust and commitment they have placed in us as we work to growth the company.

Thank you for your interest in First Defiance Financial Corp. and we thank you for joining us this morning. And now we will be happy to answer your questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from Christopher Marinac of FIG Partners.

Christopher W. Marinac - FIG Partners LLC

Thanks, good morning. And Don you mentioned towards the end of your comments about some of the initiatives you have on deposits and what not. How much of that is additional expenditure that we should see this year versus what's already in the expense run rate?

Donald P. Hileman

Most of it’s already factored in the expense run rate. While that was put in place in the latter part of this year, i.e. those origination systems, we started that, and some of that’s already factored in the fourth quarter as we move forward. So most of the expense is in there.

Christopher W. Marinac - FIG Partners LLC

Okay. So then is it fair that we may see some positive operating leverage as we look at the revenues versus expenses in the next few quarters?

Donald P. Hileman

That's our hope.

Christopher W. Marinac - FIG Partners LLC

Very good. And can you or Kevin just talk about the sort of, I guess the state of the economy up and down the actuary corridor as well as in the Michigan and to what extent is that expected to be even stronger as this year develops?

Donald P. Hileman

Yeah. I will say that, I think that was a lot of the driver in my comments about some of our optimism as we look to where we want to grow. We’re positioned well in Toledo market down in the Findlay and to Lima up and down the northwest quadrant of the I-75 corridor there. We're seeing really strong growth in our Findlay areas and we expect that to continue. It’s not consistent yet but we're seeing some pretty good signs that there is a lot of pent-up demand, more construction of some small manufacturing facilities et cetera. And we anticipate that improving over the course of '14.

Christopher W. Marinac - FIG Partners LLC

Okay. Great. Thanks very much.

Donald P. Hileman

Thanks a lot, Chris. Appreciate it.

Operator

And our next question is from Daniel Cardenas of Raymond James.

Daniel Cardenas - Raymond James Financial Inc.

Good morning, gentleman.

Donald P. Hileman

Good morning, Dan.

Kevin T. Thompson

Good morning.

Daniel Cardenas - Raymond James Financial Inc.

Couple of quick questions. On the business banking group, can you maybe give us some color as to where we are in that process? How many folks do you have on board right now? What's kind of the size of the team that you envision? And is that throughout your entire footprint or is it going to be concentrated more in the Ohio markets?

Donald P. Hileman

I will turn that over to Jim Rohrs.

James L. Rohrs

Yeah. That's a bank-wise strategy. It will be in all of our markets with the exception of the individual who tabs that up, one of our senior executives. We intend to staff this with reallocation of resources of existing people already on board. We'll have four -- we kept four marketers. We have a business specialist in each market area and the retail branch managers will play a role in this also.

So it's kind of a two-pronged attack. One is to serve a market that we don't serve well now, the small end of small business. And it's also later in the year would be more of an efficiency focus where we're going to move small relationships out of the commercial portfolios into small business where they can be better served and will find 80-20 rule will work there, where we're going to find the commercial lenders average loan size in their portfolio going up substantially, so that they will have capacity to do more business because of the small relationships with larger number of nodes moving out of their portfolios.

So it's both a revenue play where we want to service a market better that we don't serve now, the small and the small business and also an efficiency play where we want to move small loans out of commercial in to small business where they can be serviced more effectively and efficiently.

Daniel Cardenas - Raymond James Financial Inc.

Okay. But bottom line doesn't sound like you are going to be adding any additional expenses to the salary and wages line item.

James L. Rohrs

Some modest but we'll use the same origination system, there is some additional expenses for scoring models and things like that. But other than that it's pretty much reallocation of resources.

Donald P. Hileman

We have -- Dan, this is Don, identified two senior people to lead both that initiative and the alternative delivery initiative. We felt these were important enough that we've put people in charge of that on an individual basis. I think that kind of shows our commitment to those areas.

Daniel Cardenas - Raymond James Financial Inc.

And then in terms of the alternative delivery component are there going to be some additional expenses do you have to -- or do you need to make some significant investments in technology to roll that out the way you envision?

Donald P. Hileman

I would not say significant but I would say there is some additional expense or new technology to roll that out the way we envision. Some of that's already in place or planned, some of that is yet to come as we start to really crystallize that overall strategy. But I wouldn't, we don't need to swap our whole systems or any of that kind of expenses, just more of an enhancement and modest increase in expenses really to deal the alternative delivery.

James L. Rohrs

So we would essentially need two new products that are already launched, one we are in the process of implementing, one will be latter this year and once we get those online we'll have a very, very robust Internet banking alternative delivery set of products and then the challenges to market those.

Daniel Cardenas - Raymond James Financial Inc.

All right. And then may be just looking into capital, I mean you seem to be adequately, more than adequately capitalized and you're putting some of that to use through buybacks and dividend increases. May be just a discussion on M&A what's your appetite for traditional as well as non-bank M&A and what's the environment like right now?

Donald P. Hileman

Yeah our appetite continues to be such that we are looking for those opportunities, on both bank and non-bank opportunities. I’d say the environment is picking up. It seems there is lot more interest, a lot more discussion now on size of organization and the impact of lot of the regulatory environment that's trickled down now and we get a little bit better understanding of what that expense creep is going to be.

So I think the expectation is there will be a lot more discussions in 2014 in 2013 and we look to hopefully be in those discussions as an acquirer.

Daniel Cardenas - Raymond James Financial Inc.

Great, and then just lastly as you look at organic loan growth opportunities just kind of given some of your comments seems like that's kind of the low single digits, mid-single digit for 2014 is that the safe assumption?

Kevin T. Thompson

I think that's very consistent with what we expect internally.

Donald P. Hileman

It's going to be higher than in 2014 than it was in 2013.

Kevin T. Thompson

Right. We would like to see double-digit growth but that we don't expect to see that.

Daniel Cardenas - Raymond James Financial Inc.

After the deal, that is, right?

Kevin T. Thompson

Exactly.

Daniel Cardenas - Raymond James Financial Inc.

Okay, great. I'll step back. Thank you, guys.

Donald P. Hileman

Thanks a lot, Dan.

Operator

And the next question comes from John Barber of KBW.

John Barber – Keefe Bruyette & Woods Inc.

Good morning.

Donald P. Hileman

Good morning, John.

John Barber – Keefe Bruyette & Woods Inc.

Kevin you mentioned that new loan production in the fourth quarter was put in at 450 basis points that was up very significantly from last quarter. What do you think is driving that increases, less competition or is there mix shift or what exactly happened in the market?

Kevin T. Thompson

Probably little bit of everything. I think our competition still seems to be pretty steep to be honest with you. We've been working pretty hard on our loan pricing and obviously wages have risen. So I think just forces like that at work that have made the difference. And so we expect with the rising rate environment we expect that's going to continue favorably.

John Barber – Keefe Bruyette & Woods Inc.

Okay. Thanks for that color. And then switching to the deposit side could you make any additional tweaks to pricing this quarter that may be impacted for deposit flows?

Kevin T. Thompson

Not significantly, no. We really held pretty steady with our pricing, and if you look at our numbers through the quarter you see that the overall deposit costs were flat on a linked quarter basis and overall interest-bearing liability costs were flat on a linked-quarter basis. When you put together interest bearing liabilities and demand deposits our cost actually come down. So I mean we're -- up a basis point, not a whole lot of room to improve but we've been pretty consistent there and the dollars where it’s been coming in.

John Barber – Keefe Bruyette & Woods Inc.

Thanks and just the last one I had was related to buyback. How should we think about that going forward, is there a certain level you guys that would be more aggressive repurchasing shares or how do you think about it?

Donald P. Hileman

I think we'll see that continue throughout the year. We thought of a 5% as sort of on annual program if you will and we obviously began here in the fourth quarter. We expect to continue towards accomplishing the 5% buyback over the remainder of 2014.

John Barber – Keefe Bruyette & Woods Inc.

Great, thank you.

Donald P. Hileman

Sure.

Kevin T. Thompson

Thanks, John.

Operator

(Operator Instructions). I am showing no additional questions. I would like to turn the conference back over to management for any closing remarks.

Terra Via

Well, we thank you, for joining our conference call. And this concludes our call.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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