First Defiance Financial's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Jan.24.12 | About: First Defiance (FDEF)

First Defiance Financial Corporation (NASDAQ:FDEF)

Q4 2011 Earnings Call

January 24, 2012 11:00 AM ET


Terra Via - IR

Bill Small - Chairman, President and CEO

Don Hileman - EVP and CFO

Jim Rohrs - President and CEO, First Federal Bank


John Barber - KBW

Howard Henick - Scurlydog Capital


Good morning, and welcome to the First Defiance Financial Corp. Fourth Quarter and 2011 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. Ms. Via, please go ahead.

Terra Via

Thank you. Good morning, everyone and thank you for joining us for today’s fourth quarter and full year 2011 conference call. This call is also being webcast and the audio replay will be available at the First Defiance 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 2011 fourth quarter and year-end results. Last night, we issued our 2011 earnings release and this morning, we would like to discuss that release and give you a look forward into 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 fourth quarter and the year is CFO, Don Hileman. Also with us, this morning to answer questions is Jim Rohrs, President and CEO of First Federal Bank.

Fourth quarter 2011 net income on a GAAP basis was $4.1 million or $0.36 per diluted common share compared to $2.3 million and $0.22 per diluted common share in the 2010 fourth quarter. For the year ended December 31, 2011, First Defiance earned $15.5 million or $1.42 per diluted common share compared to $8.1 million or $0.75 per diluted common share for 2010.

We are pleased with the improved performance in 2011 over last year, even as the operating environment remains shaky. As 2011 came to an end, we continued to see the economy struggle to gain traction. We’re still dealing with the high unemployment levels in the housing sector that has not found its footing. Some economic indicators are pointing toward a sustainable recovery. The job growth continues to lag and foreclosures on homes remain high.

Even in this operating environment, we made considerable progress throughout the year and sustain this improvement in the fourth quarter. Our fundamental operating metrics remain strong as we stay confident in our core strategies and continue to see improvement in asset quality trends. We saw some of the early impact of new regulations created from the Dodd-Frank Act throughout the year and the pressure just were put on certain revenue sources going forward.

However, proactive changes we made in our operations have allowed us to neutralize most of this earnings pressure and position us for the future. Lower credit related expenses, while still running considerably higher than historic levels were also a significant factor in the stronger earnings performance in 2011. Continuation of these trends along with the ability to grow loan balances will be critical to our success going forward.

The growth in loan balances for the second consecutive quarter was certainly a big positive as we ended the year. As loan demand remained somewhat softer than historic levels, we did see an increase in opportunities and we were able to increase loans by more than $26 million over the previous quarter end.

We have a disciplined pricing strategy that resulted in a relatively stable net interest margin year-over-year. We will continue to focus on managing the margin and adjusting our pricing strategy as changes in the market warrant.

Several other positive events took place throughout the past year. Most notable was the decision to pay a common dividend to our shareholders. At the end of 2009, we suspended common dividends as a means to preserve capital as the recession worsened. The Board continued to assess our dividend policy on a quarterly basis and made the decision to pay a $0.05 per share dividend in the fourth quarter of 2011. We will continue to prudently review our capital position in light of the economic environment as we evaluate future dividend decisions.

Asset quality performance in the fourth quarter remained stable with a slight increase in the 30 to 89 days past dues, but a significant decrease in non-accrual loans and non-performing assets. Provision expense in the fourth quarter 2011 was down significantly from the 2010 fourth quarter, and year-over-year expenses, provision expense declined almost 50%.

We had a sizable increase in charge-offs during the fourth quarter, as we were more aggressive in writing down collateral values and disposing of other real estate owned. Some of this is a result of guidance from the regulatory side, as we transitioned to the OCC as our primary bank regulator. It is significant to note that the charge-offs had for the most part been previously reserved for and had little direct impact on the bottom line.

With the increased charge-offs going against our reserves, it didn’t lower our allowance for loan losses to loans ratio but it remains in excess of 2%. Non-interest income in the 2011 fourth quarter was up compared to the linked-quarter and was relatively flat for full-year 2011 over the prior year.

The positive news was that we saw improvement each quarter in 2011 after a significant drop early in the year. Regulatory changes impacted certain areas of service fee income, and mortgage banking income was down 18% year-over-year. But we were able to offset those negative factors with improved revenue from other areas. Income from our insurance and wealth management areas were the major offsets to reduction in fees and mortgage income.

The acquisition of Payak-Dubbs Insurance Agency in July, our second insurance acquisition in the last two years added to our insurance agency performance, showing a revenue increase of over 38% compared to 2010. Our trust and investment lines within our wealth management department also continued to grow their business relationships leading to record revenue performance in those areas year-over-year.

Total non-interest expense was down for the quarter ended December 31, 2011 over the fourth quarter of 2010 and full year totals were also down. The 2010 fourth quarter and full year results included a large portion of the expenses related to our core system conversion. For the full year 2011, we did have an increase in compensation and benefits as salary increases were made in 2011 after no increases in 2010.

Incentive compensation and health insurance costs were also up in 2011. These were partially offset with reductions in deposit insurance premiums and credit related expenses in full year 2011 results. Total deposit balances at period end were up slightly from year-end 2010, but the mix made a very favorable change throughout the year as non-interest bearing balances were up significantly.

We continue to have success growing our non-interest bearing deposits as year-end balances were up 13.5% over December 31, 2010 balances and represented over 15% of total deposit balances at year-end. This strategy has also had a positive impact on net interest margin.

Our Asset/Liability Committee is very focused on managing the spread between loans and deposits, but there is little room left to lower deposit rates which requires us to be even more disciplined on the lending side and further emphasizes the need to focus on non-interest bearing deposits.

I will now ask Don Hileman to give you additional financial details for the quarter and the 2011 year-end before I wrap up with an overview and look at what we see developing for 2012. Don?

Don Hileman

Thank you, Bill, and good morning everyone. We are pleased with the improvement made in certain areas of our financial performance and the overall strong profitability in the fourth quarter and full year 2011.

We saw continued loan growth in the fourth quarter with annualized growth of 3%. The competitive pricing environment especially from larger regional banks continues to be aggressive but we have remained competitive without modifying our underwriting standards.

Net income was $4.1 million or $0.36 per diluted share compared with $2.3 million or $0.22 per diluted share in the fourth quarter of 2010, a 64% improvement. The increase in profitability was driven by a lower credit related cost and a lower provision for loan loss.

Credit related expenses, which includes the net gain or loss on the sale of OREO, OREO repairs and write-downs, collection costs and secondary market buyback costs remain significant with a total of $769,000 in the fourth quarter of 2011 compared with $1.4 million in the fourth quarter of 2010.

We have seen some improvement in the economic environment in some of our markets over the last several quarters resulting in some declines in the unemployment rate in our footprint and meaningful economic growth is developing slowly.

We are encouraged by the increased commercial loan applications and other indications of business expansion. We are pleased with the fourth quarter results and are seeing further opportunities to improve our overall performance as we enter into 2012.

While dissatisfied with the increase in net charge-offs this quarter, we believe overall credit quality is improving. We are focused on working through troubled credits and moving them through the credit process. Overall, we believe our risk profile for the company is moving in the direction of improvement.

Our provision expense totaled $4.1 million, partially driven by an additional provision for loan growth, was down from $5.7 million a year ago and up from $3.1 million on a linked-quarter basis. Our allowance for loan loss decreased to $33.3 million from $41.1 million at December 31, 2010. The allowance percentage decreased to 2.24% from 2.7% a year-ago.

The overall reserve percentage declined on a linked-quarter basis as well from 2.61% to 2.24%. The allowance represents 77.86% of our non-performing loans and improved the linked coverage from 74.39% on a linked-quarter basis.

The allowance to non-performing assets was 71.77% at December 31, 2011, an improvement from 66.82% on a linked-quarter basis. The 2011 fourth quarter provision was $4.9 million less than net charge-offs for the quarter. We had 15 credits with a total of $5.7 million of the total charge-offs for the quarter, $8.2 million of the total of $9.1 million in charge-offs had identified reserves.

Management believed it was appropriate at this time to be more aggressive in evaluating certain credits in order to aid in a more expedited resolution. The overall reserve level is adequate based on the continued general weakness in the economy. As we see improvement in the economic environment and continued reductions in classified loans.

We would expect a reduction in the overall allowance level. We did see a slowdown in new credits migrating to a substandard rating this quarter as well as an overall reduction in substandard credits.

Annualized net charge-offs were 249 basis points for the fourth quarter of 2011, compared with 158 basis points in the fourth quarter of 2010 and 155 basis points in the third quarter of 2011.

Of the total charge-offs, 74% related to commercial real estate loans, 16% to commercial, 7% to residential, and 3% to home equity. As we see improvements in our asset quality trends as well as in the economy, we’re more confident that we’re headed toward a consistent and steady improvement in the level of classified loans. We expect continued improvement in 2012.

Non-performing assets ended the fourth quarter at 46.3 million or 2.24% of total assets, down from 2.78% of total assets at December 31st, 2010, and down from 57 million or 2.77% of total assets on a linked quarter basis. Total non-performing loans decreased to 42.7 million from 51.2 million or 16.6% on a linked quarter basis and were up slightly from 47 million at December 31st, 2010.

Non-accrual loans saw a decrease in the fourth quarter of 2011. From the third quarter of 2011 as we charged-off as well as resolved certain substandard credits. Management continually evaluates the likelihood of the company not recovering the full principal and interest as agreed to in the original contract. Restructured loans remained relatively stable on a linked-quarter basis. Restructured loans are considered non-performing because of the changes in the original terms granted to borrowers. It is important to note that these loans are still accruing interest.

Total classified loans decreased 4.9 million to 123 million at December 31st, 2011 from 127 million at December 30th, 2011. Total delinquency rate was 3.2% at December 31st, 2011 down from 3.8% as of September 30th, 2011 and down from 3.4% at December 31st, 2010. The delinquency rate for 90 days past due and/or non-accrual decreased to 2.62% this quarter from 2.68% in the fourth quarter of 2010 and decreased from 3.27% on a linked-quarter basis.

While we are not satisfied with the overall levels of 90-day delinquencies of non-accruals, of the total non-accruals loans of 39.3 million, 17.6 million or 45% are under 90 days past due. We are also pleased that loans with payments 90 days are more past due declined 12.4 million or 25.6% in the quarter driven by charge-offs. We did see a modest increase in the 30-day to 90-day levels of delinquencies this quarter compared to the third quarter of 2011, and a reduction from the fourth quarter of 2010.

As I have mentioned in the past, we expect this indicator to be choppy in the near term until we see consistent downward trend development. Our OREO balance declined on a linked quarter basis and ended the fourth quarter of 2011 at 3.6 million, the lowest level since June of 2008. The OREO balances made up of 3.1 million of commercial real estate and 513,000 of residential real estate.

We had additions of only 240,000 in the fourth quarter of 2011, offset by sales of 2.2 million and valuation adjustments of 403,000. We are pleased with the declining level on the overall sales activity this quarter. We expect to see continued movement of credits in and out of OREO as we continue to move problem loans to resolution with activity consistent with this quarter, which is our improvement over the prior periods.

We experienced a pickup in mortgage activity this quarter compared to the last two quarters with volume increasing on a linked-quarter basis. Overall mortgage banking income for the quarter was 1.9 million compared with 1.4 million on a linked quarter basis and 2.7 million in the fourth quarter of 2010.

We had a gain on sale income of 1.7 million in the fourth quarter of 2011 compared with 2.1 million in the third quarter of 2011 and 1.8 million in the fourth quarter of 2010.

We also recorded a positive valuation adjustment to mortgage servicing rights of 181,000 in the fourth quarter of 2011, compared with a negative valuation adjustment of 1.1 million on a linked quarter basis and a positive valuation adjustment of 1.1 million in the fourth quarter of 2010.

The negative valuation adjustment in the third quarter of 2011 reflected the volatility of interest rate in our environment, which saw a decline in rates over the last quarter that affected the assumed prepayment speeds of the underlying collateral.

At December 31st, 2011, First Defiance had 1.3 billion in loan service for others. The mortgage servicing rights associated with those loans had a fair value of 8.7 million or 70 basis points of the outstanding loan balance serviced. Total impairment reserves which are available for recapture in future periods, totaled 1.5 million at quarter-end.

We did not have any OTTI charges in the fourth quarter of 2011, reflecting a more stable economic environment as it relates to our investments in trust preferred collateralized debt obligations or CDOs. Management believes that profitability is low that we will have any significant OTTI charges in the future. The stability of the marketplace and the continued analysis of the current portfolio assist us in making this conclusion.

And turning to other operating results, our net interest income was 17.5 million for the fourth quarter of 2011 compared with 17.8 million for the fourth quarter of 2010 and 17.6 million on a linked quarter basis. For the fourth quarter of 2011, our margin was 2.83%, down 6 basis points on both a linked quarter basis and from the fourth quarter of 2010.

The continued high level of liquidity has also impacted the margin even though we have seen overnight deposits declined $143 million at quarter end from a 160 million on a linked quarter basis. We anticipate continuing our strategy to increase liquidity through the securities purchases selectively deploying lower yielding overnight deposits into securities on the short to intermediate end of the yield curve until loan demand is consistent. Our securities portfolio increased to $233.6 million at December 31st, 2011 from a 166.1 million at year end 2010. We have been staying in the four to five year weighted average life range.

We believe that the economic backlog remains subdued and it is unlikely that we will see any actions by the Fed to raise rates well into 2013. We will continue this strategy until we see evidence of sustainable net loan growth, but as I mentioned earlier, we are encouraged by the loan growth in the last two quarters. Even with the give up in yield associated with high liquidity levels, we believe our liquidity position continues to be important and gives us added flexibility.

We placed a strong emphasis on non-interest bearing deposit accounts and saw the balances grow this quarter. Non-interest bearing deposits represented [50%] of total deposits at December 31st, 2011.

We are focused on pricing opportunities to maintain our margin, but it is becoming more difficult in this environment. We are particularly focused on asset pricing discipline and the challenges of maintaining asset yields. Our yield on earning assets declined 13 basis points while our cost of funds declined 6 basis points on a linked quarter basis. We have seen a broader base of very competitive pricing in our market area, which puts additional pressure on loan growth and improvement in asset yields.

Non-interest income was 7.9 million in the fourth quarter up from 7.6 million in the fourth quarter of 2010. Fee income increased to 3 million in the fourth quarter of 2011 from 2.9 million in the fourth quarter of 2010 and declined from 3.1 million on a linked-quarter basis. The year-over-year decline in fee income is directly attributable to the downward trend in net NSF fee income as a result of new regulations and changes in consumer patterns. And our net NSF fee income was 1.4 million in the fourth quarter of 2011 compared to 1.6 million in the fourth quarter of 2010. We are pleased with the relative stability of our interchange income though in this environment as well as service charge income.

Insurance revenue was 2 million in the fourth quarter of 2011, flat on a linked-quarter basis but up from 1.3 million in the fourth quarter of 2010. The year-over-year increase in insurance revenue is the result of additional revenue provided by the acquisition of a full service agency which closed July 1st, 2011. This acquisition added approximately 610,000 in quarterly revenue. Other non-interest income increased in the fourth quarter of 2011 from a negative 134,000 for the same period in 2010.

This was primarily a result of recording net gains of 237,000 on real estate owned property sales in the fourth quarter of 2011 compared to net losses of 475,000 for the same period in 2010. Overall non-interest expense decreased to 15.6 million this quarter compared to 16.5 million in the fourth quarter of 2010, but up from 15.5 million on a linked quarter basis.

The fourth quarter compensation and benefits expenses were flat at 8.1 million from 8.2 million on a linked quarter basis, an increase from 7.2 million in the fourth quarter of 2010. The increase in compensation and benefit expense over the fourth quarter of 2010 is due to the company freezing pay in 2010 coupled with healthcare cost increasing 434,000 over the fourth quarter of 2010 as a result of an increase in claims. Also, the acquisition of Payak-Dubbs added 381,000 in compensation and benefit expense in the fourth quarter of 2011.

Other non-interest expense decreased to 3.2 million in the fourth quarter from 4.4 million in the fourth quarter of 2010, an increase from 2.7 million on a linked-quarter basis. The main driver behind the decrease between 2011 and 2010 fourth quarters is 802,000 of core conversion charges recorded in the fourth quarter of 2010. On a linked-quarter basis, other non-interest expense increased 443,000 primarily due to an increase in credit related expenses of 275,000.

Following is a three quarter trend of certain significant expenses; real estate owned expenses were 741,000 in the fourth quarter of 2011 compared to 316,000 in the third quarter of 2011 and 772,000 in the fourth quarter of 2010.

Credit and collection expenses were 242,000 in the fourth quarter of 2011 compared to a 196,000 in the third quarter of 2011 and 162,000 in the fourth quarter of 2010. Secondary market buy-back losses were 23,000 in the fourth quarter of 2011 compared to a 99,000 in the third quarter of 2011 and there were no losses in the fourth quarter of 2010. We saw the balance sheet increase from the fourth quarter of 2010 with total assets of 2.07 billion at December 31st, 2011.

On the asset side, cash and equivalents grew 5.8 million or 3% over the year to 174.9 million at December 31st, 2011. Securities grew 67.5 million or 41% over the year to 233.6 million. Gross loan balances declined 32.4 million year-over-year, but grew 26.6 million on a linked-quarter basis.

Loan activity in general, has showed signs of picking up and we will continue to be prudent in our new loan activities. We have been disciplined in our underwriting and have not focused on growth at the expense of taking on greater credit risk or lowered rates aggressively to increase loan volume.

Total deposits increased 20.8 million over the same period a year ago and increased 6.3 million on a linked quarter basis. We are pleased with the mix of deposits, as we have seen a growth in non-interest bearing account balances. Non-interest bearing deposits increased to 245.9 million at December 31st, 2011 up from 216.7 million at December 31st, 2010. We continue to focus on growth in non-interest bearing balances in correlation with an overall strategy and efforts to reduce our cost of funds in this interest rate environment.

As noted previously, we completed a common stock offering in March of 2011 that increased shareholders’ equity by 20 million. Total shareholders’ equity ended December 31st, 2011 at 278.1 million, up from 240.3 million at December 2010. Our capital position remains strong with shareholders’ equity to assets improving to 13.3% at December 31st, 2011, from 11.7% at December 31st, 2010. The bank’s risk-based capital ratio is strong at approximately 15.4%.

The board continually assesses our involvement in the CPP program. As we have previously said, we continuously review our capital position and believe we can repay the CPP funds without an additional equity offering. While we know there are still many challenges to deal with moving forward, we believe that we have made continued progress over 2011 and feel we are well positioned for future success.

That completes my overview for the quarter and I’ll turn the call back to Bill.

Bill Small

Thank you, Don. As we move forward into 2012, we feel we have positive momentum and look to build on that. We’ve realized there are still challenges out there, as the economy tries to establish firmer footing. We do see signs of improvement in manufacturing and other sectors and that is certainly encouraging. Business inventories have been significantly reduced and the consumer seems to be gaining confidence. This bodes well for our commercial customers that have weathered the storm to this point and are now seeing some relief to cash flow pressures.

Unemployment numbers are still running high on this region compared to national numbers, but we're closing that gap as job growth in our region has actually been running ahead of national numbers for the past year. While this is encouraging, we feel that most companies remain slow to recall their workers until they develop more confidence in the strength and sustainability of the recovery.

The elevated unemployment levels will further strain consumers in meeting their debt obligations. Our credit fab continues to work at identifying any weaknesses early in order to mitigate potential losses.

On the commercial lending side, we are encouraged by the recent reversal in demand and the corresponding loan growth in the second half of 2011. However, we are very committed to not compromising our underwriting standards to get additional growth. We will continue to review credit concentrations by industry and have placed lower limits on lending within certain types of loan categories.

We have further segmented our commercial real estate portfolio to track the general performance of these segments and better analyze areas of potential weakness. We also coordinate calls between our lenders and our insurance agents to develop total financial relationships with our customers. Based on all this, our forecast shows modest loan growth in 2012.

Housing is one area that will continue to be a drag on the recovery. In this area, we feel that home prices have stabilized, but are below price levels of four or five years ago.

Foreclosures continue to run above normal levels and can be expected to stay on that page for a good portion of the year, adding to the inventory of homes on the market.

Mortgage rates started the year at historically low levels, and this will hopefully facilitate an increase in purchased money borrowing. At the lower rates we are currently seeing there could even be another round of refinancing that helps spur some additional residential mortgage production.

Deposit rates also remain low as banks have felt no pressure to increase rates while businesses and consumers continue to build their deposit balances.

The Federal Reserve’s announcement last year regarding holding interest rates down into 2013 should keep deposit rates depressed throughout the coming year. Deposit growth should remain subdued at least through the first half of the year unless the Fed decides to move rates sooner than currently anticipated.

We will continue to focus on growing non interest bearing deposits through renovated products and further developing existing relationships.

We will be closely monitoring the potential impact on non-interest income especially from bank fees as the Dodd Frank Act Legislation has developed into regulations and the establishment of the consumer financial protection bureau takes hold.

In addition, all of the campaign rhetoric leading up to November’s elections will probably add more uncertainty to the overall business environment. Based on these and other factors, we would anticipate this to be another year of relative inaction in Washington.

Even with all of this legislative, regulatory and economic uncertainty going on around us, I think there are many points of encouragement and strength as we move further into 2012. The general economic picture is more encouraging than it was six months ago. Economic indicators in the manufacturing sector and even in housing have been more positive in recent months. Consumer confidence while still tentative is growing as the markets recover and inflation stays under control.

As we stated last quarter, we continue to evaluate our participation and exit strategy related to TARP. We have until December 2013 to repay the funds before the dividend rate would increase to 9% but we are analyzing our position to determine the optimum time to make repayment.

In summary, even in light of the variety of the challenges First Defiance has an established strategy that has brought us through the recession and positioned us for future growth. While we saw significant improvement in credit quality during the past year, we see room for additional strengthening.

The interest rate environment will continue to challenge the net interest margin, but if we are able to continue our momentum with additional loan growth, it should help offset the impact on net interest income.

The challenges will always be there in this or any other industry. The key is being prepared to meet the challenges with the right game plan and I believe we have that plan in place.

We remain committed to all of our stakeholders, our shareholders, communities, employees and clients and appreciate their trust and commitment in us as we work to grow the company to benefit everyone.

Thank you for your interest in First Defiance Financial Corp. and we thank you for joining us this morning and now we’ll be happy to take your questions.

Question-and-Answer Session


(Operator Instructions) Our first question comes from John Barber at KBW.

John Barber - KBW

Were there any noticeable trends in your loan pipeline there in the fourth quarter and could you also just comment on the outlook for the year-to-date to loan pipeline?

Jim Rohrs

This is Jim Rohrs. We have seen some increase in new activity in the marketplace, which is encouraging. Some customers who are kind of dusting off projects they put on the shelf a couple of years ago, some companies being forced into having to buy additional equipment to meet demand and that’s kind of a nice thing to see. We’ve put more focus on business development here in the relatively recent past and are focusing on trying to do more in the commercial industrial area.

Bill Small

I think the other thing that has benefited us is, we have continued to be able to pick up some new relationships from some of the larger banks and that I think bodes well for us too John.

Jim Rohrs

Yeah there a lot of borrowers who got roughed up during the economic downturn or have very, very strong balance sheets and good income statements, good cash flow that remember the treatment they got and are looking to change relationships because of that.

John Barber - KBW

And could you just talk about your capital management priorities for 2012 and may be where TARP repayment falls in the list?

Don Hileman

Yeah. John, this is Don. I think as we’ve said, we are clearly focused on capital. We look at that quarterly. I think we are looking to hopefully accelerate our consideration of our CPP repayment.

As we look at our overall capital position part of that is as we get little bit more comfortable that we are in a position of sustained improvement in credit quality, our allowance levels that we can utilize some of that capital for the repayment of the CPP will get more comfortable with accelerating that.

But it’s something that we’re looking at consistently and that in the way of continuing dividend is something that the Board looks at on a quite frequent basis.

John Barber - KBW

Okay. And what’s a good effective tax rate for 2012?

Don Hileman

It should be pretty consistent with what we ended up the overall year with, somewhere around closer to 30%.

John Barber - KBW

And last one, do you have any updates on the MOU at this time or what (inaudible) for that to get removed?

Bill Small

Well, our first OCC exam took place in the fourth quarter after our transition out of OTS. We have not received the written report yet, and a lot will depend on how that comes through. We’re anxious to get that. We're I guess cautiously optimistic about what may come from that report, but until we have it in writing, we won’t know and once we have that report, once that’s finalized, I think we’ll have a clear picture of the status of the MOU.


(Operator Instructions). Our next question comes from Howard Henick at Scurlydog Capital.

Howard Henick - Scurlydog Capital

Hey guys, I just have a follow-up on the MOU question. You answered a bulk of my questions but is there anything that you will do differently once the MOU is listed versus what you are doing now or is it really almost a non-event?

Don Hileman

This is Don, Howard. I think it’s probably closer to a non-event than anything else. It gives us more flexibility to utilize equity for different purposes, dividends, et cetera without going to an extended approval process, but I think from a business perspective, Bill join me, I don’t see it being a big event at all.

Bill Small

Yeah. I would pretty much concur with what Don said. Obviously it does give us a little bit more flexibility I think the lifting of the MOU and exiting the capital purchase program, the TARP program, both of those will give us the ability to make some decisions a little bit more freely and that certainly would be welcome. But overall, I don’t see any significant difference.


(Operator Instructions). We show no further questions. I would like to turn the conference back over to management for any closing remarks.

Terra Via

Seeing there are no further questions, we thank you for joining us and this will conclude our call.


The conference is now concluded. Thank you for attending. You may now disconnect.

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