Premier Financial Corp (OHIO) (PFC) 2011 Q2 法說會逐字稿

Good morning, and welcome to the First Defiance Financial Corp. second 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 that this event is being recorded.

I now would like to turn the conference over to [Terra Via]. Miss Via, please go ahead.

Thank you. Good morning, everyone, and thank you for joining us for today's second quarter 2011 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 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 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, in the Company's reports on file with the Securities and Exchange Commission.

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

Thank you, Terra. Good morning and thank you for joining us for the First Defiance Financial Corp. conference call to review the 2011 second quarter. Last night we issued our earnings release reporting the second quarter and first-half 2011 results. This morning we would like to discuss that release and look forward into the second half of the year.

Joining me on the call this morning to give more detail on the financial performance through the second quarter is Executive Vice President and CFO, Don Hillman and also with us this morning to answer questions is Jim Rohrs, President and CEO of First Federal Bank. We will answer any question you might have at the conclusion of our presentation.

Second quarter 2011 net income, on a GAAP basis, was $4.8 million, or $0.43 per diluted common share. This compares to net income of $2.1 million and $0.19 per diluted common share in the 2010 second quarter. Net income for the first six months of 2011 is $7.4 million or $0.70 per diluted common share versus $3.6 million and $0.31 per diluted common share for the six months ending June 30, 2010.

The second quarter 2011 performance showed very encouraging progress during a period that still leaves a lot of questions about overall economic stability. Again this quarter, as in the past, the lower provision expense was a primary factor in the positive earnings impact. We also saw an increase in non-interest income over the second quarter of 2010 and the linked quarter while at the same time keeping non-interest expense in line.

As credit quality issues continue to be dealt with and moved through the system, we have been able to benefit from our prudent approach to asset quality management as reflected in our improved performance. While we are still seeing a degree of stress on certain credits, overall, we saw marked improvement in the majority of the loan portfolio. And we feel we have identified and are addressing the remaining issues.

The reduction in non-performing assets, other real estate owned and net charge-offs are all indications of this. But we did not get the reduction in classified assets that we had anticipated during the quarter. It was not the result of identifying new credit issues, but slower progress than we had hoped for on previously identified credits.

As I've said in the past, we are going to continue to take a conservative approach to the grading of our credits. The improvement in overall credit quality has brought most of our key credit metrics below the levels they were at the beginning of 2009, we are focused on driving them lower.

As loan quality continued its improvement through the quarter, loan balances remain a challenge. The slow loan environment that showed some signs of revival earlier in the spring has pulled back slightly. This slowness along with the decreases in loan balances resulting from working out problem loans and normal amortization resulted in a reduction in the loan portfolio for the fourth consecutive quarter. Late in the second quarter, we did see some improvement in this trend and we hope we can keep this momentum going.

The deposit side of the balance sheet continues to perform well for us as we've been able to continue reducing our cost of deposits and build our non-interest bearing deposits.

Non-interest deposits were up over $35 million, and almost 19% over the period ending June 30, 2010. As a result, this along with additional rate reduction on interest bearing accounts has helped us hold on margin in a relatively narrow range by offsetting lower yields on the asset side. However, this is bound to come under pressure eventually.

Net interest income for the quarter was basically flat with the year-ago period and the linked quarter. Net interest margin however dropped slightly compared to both periods. And the current interest rate environment does not show any sign of abating soon based on most forecasts, so we must remain diligent in our margin management.

Non-interest income was up in the second quarter of 2011, both to the year-ago period and the linked quarter. This is encouraging, but we will need to remain focused on recent regulatory changes and the impact they will have on certain fee structures. The increase in insurance revenue and wealth management income continued to positively impact our results and these are both areas that we will work to build on.

Non-interest expense was basically flat with the 2010 second quarter, but down about 10% compared to the linked quarter. The primary increase year-over-year was in the compensation related categories, that Don will detail, while we did see reduction in OREO, credit and collection related expenses.

I'll now ask Don Hileman to give you the financial details for the quarter and the first half of 2007 (sic - 2011), before I wrap up with an overview and a look at what we see developing for the balance of the year. Don?

Thank you, Bill, and good morning, everyone. We are pleased with the overall stronger profitability in the second quarter coupled with the progress in improving some of the asset quality metrics. Net income was $4.8 million, or $0.43 per share compared with $2.1 million, or $0.19 per share in the second quarter of 2010. The increase in profitability was driven by an improvement in credit quality with lower provision for loan loss and the reduction in credit related costs.

Credit related expenses, which includes net gain/loss on the sale of OREO, OREO repairs and write-downs, collection costs and secondary market buyback cost remain significant with a total of $918,000 in the second quarter of 2011, compared with $1.4 million in the second quarter of 2010.

Our markets are persistently showing the effects of the difficult economic environment. We are pleased with the trend of reducing unemployment rates in our market area, but meaningful economic growth is developing slowly. We encourage that we are seeing indications in our market area that the overall economic activity trend is indicating improvement. However, it will be irregular and take time to solidly develop with an extended ramp-up period well into 2012. We are pleased with the second quarter results and see further opportunities to improve.

I will begin with a discussion on credit quality. Our provision expense totaled $2.4 million, down from $5.4 million a year ago and down from $2.8 million on a linked-quarter basis. Our allowance for loan loss increased to $40.5 million from $38.9 million at June 30, 2010.

The allowance percentage increased to 2.80% from 2.47% a year ago. The change in the percentage is driven by both an increase in the allowance level and by the lower average loans outstanding. The overall reserve declined slightly on a linked-quarter basis. The second quarter provision was $268,000 less than net charge-offs for the quarter.

The strength of our reserve and improving asset quality is reflected by increases in the allowance to non-performing loans and the allowance to non-performing asset ratios this quarter.

The overall reserve level is adequate based on the continued general weakness in the economy and slower growth prospects in our geographic footprint. Annualized net charge-offs were 75 basis points for the second quarter of 2011, compared with 144 basis points in the second quarter of 2010 and 85 basis points in the first quarter of 2011.

Of the total charge-offs, 53% related to commercial real estate loans, 31% to residential, 12% home equity and consumer and 4% commercial loans. As we see improvements in our asset quality trends as well as in the economy, we will be more confident that significant asset quality stress trends have turned the corner and are headed toward consistent and steady improvement.

Our OREO balance declined on a linked-quarter basis and ended the second quarter at $7.5 million. OREO balance is made up of $5.3 million of commercial real estate and $2.2 million of residential real estate. We had additions of $1.9 million in the second quarter of 2011, offset by sales of $3.4 and valuation adjustments to $259,000. We are very active in seeking potential buyers of these properties and are pleased in the continued reduction of the OREO balance.

We expect to see continued movement of credits in and out of OREO as we continue to move problem loans to the resolution stage with activity consistent with this quarter. We are seeing some stabilization of values of the OREO properties in the recent quarter, as well as more interest from potential buyers.

At June 30, 2011, our allowance for loan losses represented 2.80% of total loans outstanding, up from 2.77% on a linked-quarter basis, it represents 99.41% of our non-performing loans, up from 89.53% on a linked-quarter basis.

The allowance to non-performing assets was 84.16% at June 30, 2011, up from 72.68% at June 30, 2010. Non-performing assets dropped 12% this quarter, ending at $48.2 million or 2.35% of total assets, down from 2.65% of total assets on a linked-quarter basis and down from $53.5 million, or 2.62% of total assets at June 30, 2010. Total non-performing loans decreased to $40.8 million from $45.6 million on a linked-quarter basis and were flat with the second quarter of 2010.

Non-accrual loan saw a 16% reduction in the second quarter from the first quarter of 2011. Restructured loans increased $1.6 million from last quarter. Restructuring loans are considered non-performing because of the changes in the original terms granted to the borrowers. It is important to note that these loans are still accruing. Total classified loans increased $6.1 million to $137.2 million at June 30, 2011 from $131.1 million at December 31, 2010.

Total delinquency rate was 3.34% at June 30, 2011, up from 2.70% at June 30, 2010 and down from 3.41% on a linked-quarter basis. Delinquency rate for loans 90 days past due and/or on non-accrual decreased to 2.37% this quarter from 2.68% in the fourth quarter of 2010 and up from 2.01% at June 30, 2010.

We are not satisfied with the overall levels of 90 day delinquencies on non-accruals. However, the total non-accrual loans of $34.5 million, $6.5 million, or 19% are under 90 days past due. While we did see an increase in the 30-day levels of delinquencies, we did not view it as an indicator of a trend. The 30 to 89-day past due increase was driven by one large credit that we had previously identified for monitoring.

Mortgage banking was up in the second quarter impacted by rising rates and seasonal patterns. We continue to see a tapering off of mortgage banking activity over the last several months. Overall, though, mortgage banking income for the quarter was $1.8 million, compared with $985,000 in the second quarter of 2010 and $1.3 million on a linked-quarter basis.

We had a gain on sale income of $1 million in the second quarter of 2011, compared with $1.2 million in the second quarter of 2010 and $726,000 in the second quarter of 2011. We also recorded a positive valuation adjustment to mortgage servicing rights of $316,000 in the second quarter of 2011, compared with negative valuation adjustments of $571,000 in the second quarter of 2010. And a positive valuation adjustment of $171,000 on a linked-quarter basis.

The positive valuation adjustment in the first and second quarters of 2011 reflects the steady change in the level of market interest rates over the last several quarters that affect the assumed prepayment speeds of the underlying collateral. At June 30, 2011 First Defiance had $1.3 billion on loan serviced for others.

The mortgage servicing rights associated with those loans had a fair value of $9.8 million, or 78 basis points of the outstanding loan balance to serviced. Total impairment reserves, which are available for recapture in future periods, totaled $638,000 at the end of the quarter. We did not have any OTTI charges in the second quarter of 2011, reflecting a more stable economic environment as it relates to our investments in trust preferred collateralized debt obligations. Management believes the probability is low that we will have any significant OTTI charges in the future. The stability of marketplace and the continued analysis of the current portfolio assist us in making this conclusion.

Turning to the other operating results, our net interest income was $17.5 million for the second quarter, compared to $17.6 million for the second quarter of 2010 and $17.2 million on a linked-quarter basis. For the quarter, our margin was 3.86%, down 3 basis points from the second quarter of 2010 as well as on a linked-quarter basis. We have been successful in lowering our cost of funds to offset the decline in asset yields.

We have seen more aggressive competitive pricing pressure and the downward repricing of variable rate loans based on the current yield curve. The continued high level of liquidity has also impacted the margin as we have seen an increase in overnight deposits, which were $185 million at the end of the quarter.

We anticipate continuing our increase in securities purchase activities in the third quarter, selectively deploying lower yielding overnight deposits into securities on the short-term to intermediate end of the yield curve. We have been staying in the four to five year weighted average life range.

We believe that the economic outlook remains subdued than it is unlikely that we will see any actions by the Fed to raise rates until and well into 2012. We will continue our strategy until we see evidence of sustainable net loan growth.

Even with the give up in yield associated with the high liquidity level, we believe our liquidity position continues to be important and gives us added flexibility. We're placing strong emphasis on non-interest bearing deposits and saw the balances grow this quarter. Non-interest bearing deposits represented 14.4% of total deposits. We are focused on pricing opportunities to maintain and expand the margin. We're particularly focused on asset pricing discipline and the challenges of maintaining asset yields.

Our yield on assets declined 60 basis points while our cost of funds declined 12 basis points on a linked-quarter basis. We're seeing a broader base of very competitive pricing in our market area, which puts added pressure on loan growth and improvement in asset yields.

Non-interest income was $6.8 million in the second quarter, up from $5.8 million in the second quarter of 2010. Fee income increased to $2.7 million in the second quarter of 2011 from $2.6 million on a linked-quarter basis and declined from $3.4 million in the second quarter of 2010.

The year-over-year decline in fee income is directly attributable to the downward trend in net NSF income as a result of new regulations. Net NSF fee income was $1.5 million for the second quarter of 2011, compared to $2.0 million for the second quarter of 2010. We are pleased with the relative stability of our interchange income as well as our service charge income.

Insurance revenue was $1.4 million in the second quarter of 2011, down from $1.7 million on a linked-quarter basis and up from $1.3 million in the second quarter of 2010. The linked-quarter insurance revenue decreased as a result of receiving contingent commissions of $329,000 in the first quarter of 2011.

The year-over-year insurance revenue increase is driven by the acquisition of a group benefits business line at the end of the second quarter 2010. This acquisition added approximately $218,000 in quarterly revenue. As previously announced on July 1, we acquired the business of an independent property and casualty agency, the two office locations within our franchise footprint. We expect this acquisition to generate approximately $200,000 of additional insurance commission per month.

Our non-interest income increased to $130 million in the second quarter of 2011 from a loss of $223,000 for the same period in 2010. This was the result of recording net gains of $38,000 on real estate-owned properties sales in the second quarter of 2011, compared with net losses of $207,000 for the same period in 2010.

Overall, non-interest expense increased to $15.1 million this quarter, compared to $15 million for the second quarter of 2010 and down from $16.6 million on a linked-quarter basis. The second quarter compensation and benefits expense decreased to $7.5 million from $7.8 million on a linked-quarter basis and increased from $6.6 million in the second quarter of 2010. The increase in compensation and benefits expense over the second quarter of 2010 is due to the Company freezing pay in 2010 coupled with no bonus accrual in the second quarter of 2010 based on the Company not meeting certain performance targets. Healthcare costs also increased to $117,000 over the second quarter of 2010.

Other non-interest expense decreased to $3.2 million in the second quarter from $3.8 million in the second quarter of 2010 and declined from $4.1 million on a linked-quarter basis. Decreases between 2011 and 2010 second quarters included credit, collection, and real estate-owned expense reductions of $403,000 and a positive adjustment in the second quarter of 2011 of $247,000.

On a linked-quarter, other non-interest expense declined $900,000, primarily due to secondary market buyback losses of $62,000 in the second quarter of 2011, compared to $228,000 in the first quarter of 2011. A positive client adjustment of $247,000 was expensed in the first quarter of 2011, but reversed in the second quarter of 2011.

Checking account charge-offs decreased to $122,000 in the second quarter of 2011 from the linked quarter and real estate-owned expenses decreased $40,000.

The following is a three-quarter trend of certain significant expenses, real estate-owned expenses were $678,000 in the second quarter of 2011, compared to $718,000 in the first quarter and $699,000 in the second quarter of 2010.

Credit and collection expenses were $244,000 in the second quarter of 2011, compared to $193,000 in the first quarter of 2011 and $356,000 in the second quarter of 2010. Secondary market buybacks were $62,000 in the second quarter of 2011, compared to $228,000 in the first quarter of 2011 and $97,000 in the second quarter of 2010.

We saw balance sheet increase slightly from the second quarter of 2010 with total assets of $2.05 billion at June 30, 2011.

On the asset side, cash and equivalents grew $92 million over the year to $214 million at June 30, 2011. Securities grew $52 million over the year to $212 million. Gross loan balances declined $122 million year-over-year and declined $22 million on a linked-quarter basis.

Loan activity in general continues to be weak, but we are seeing some signs of an increasing commercial loan pipeline. We continue to be prudent in our new lending activities. We've been disciplined in our underwriting, have not focused on growth at the expense of taking greater credit risk or lower rates aggressively to increase loan volume. We've been intent on making sure our service levels have not suffered as a result of increased loan levels on loan workouts. We've been able to develop stronger and new relationships with good commercial clients.

Total deposits declined $7 million from June 30, 2010, and declined $19 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 balances increased to $226 million at June 30, 2011, up from $190 million at June 30, 2010.

We continue to focus on growth in non-interest bearing balances in correlation with our overall strategy and efforts to reduce our cost of funds in this interest rate environment. As noted last quarter, we completed a common stock offering in March of this year and increased shareholders' equity by $20 million. Total shareholders' equity ended June 30, 2011 at $269 million, up from $238 million at June 30, 2010.

Our capital position remains strong with shareholders' equity to assets improving to 13.16% at June 30, 2011 from 11.71% at June 30, 2010. The bank's risk-based capital ratio is strong at approximately 15.3%. As our financial performance improves, we continue to evaluate our overall capital levels and our strategy for the repayment of our CPP investment. The Board continually assesses our involvement in this program. As we have previously said, we have targeted repayment of the funds within the five-year window, which ends at the latter part of 2013 without an additional equity offering.

We recently applied for Small Business Lending Funds to refinance our CPP investment. But based on recent changes in the program requirement relating to regulatory restrictions on paying dividend, we think it is unlikely at this point that we will participate in the Small Business Lending Fund program. We've been informed by the SEC that our next exam has been tentatively scheduled to start in November. We expect this to be a key process in the switch from the OTS to the OCC and look forward to validating with the regulators are improvement in several key areas such as asset quality.

While we know that there are still major headwinds to deal with such as lack of meaningful economic improvement, lack of borrower and consumer confidence and low interest rate environment, we feel we have strengthened the financial foundation of First Defiance to help navigate through these challenges.

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

Thank you, Don. As we progress through 2011, we are aware that there are still challenges to a sustained economic recovery. Our three primary focuses throughout the first half of 2011 has been asset quality, expense control, and core deposit growth. We have made significant strides in all three of these areas in recent quarters and we will continue with this effort to meet the challenges and return to higher levels of profitability.

While we are focused on these, we will be directing additional attention toward loan growth. The improvement of the overall credit environment will allow us to direct more time and resources to loan production. There's an extremely challenging business development market out there right now with limited loan demand and all banks in high liquidity positions.

We're devoting significant time and resources to develop sound loan programs that benefit our community business customers, retain market share, and create a fair return to our shareholders. We are hoping that recent indications of stronger loan demand continue to build and reverse the trend of declining balances.

The overall economic climate throughout our market areas shows indications of strengthening. Several larger corporations throughout our area including General Motors, Campbell Soup, Marathon Petroleum, and Johnson Controls have all made announcements of capital investments or structural changes will benefit their facilities within our footprint.

Commercial clients are showing improving cash flows and many are also reporting significant pick up in work orders and in some cases, new hiring. Agriculturally, the planting season was dramatically altered with this record setting rains in May. However, most fields are planted and with some well-timed rains along with commodity prices remaining strong, we anticipate it will be a decent year. Wheat harvest came in slightly better than expected in our area earlier this year.

Unemployment continues to run slightly above the national average throughout our market, but we have seen this gap narrow as growth throughout our region has actually outperformed national statistics the last few quarters. Obviously we are pleased to see any improvement in the employment data and the additional consumer confidence that this seems to bring with it.

The housing market continues to be the biggest question facing the full recovery of the economy. With supplies high and prices soft and in some areas still declining, it appears this sector's recovery will remain slow. Our mortgage production continues to reflect this, but we are again focusing on product development and enhancements that we feel can give us a competitive edge for the business that is out there.

We are keeping a cautious eye on the regulatory and legislative scene as regulators solely work on developing the regulations that will implement The Dodd-Frank Act. There are still many unanswered questions regarding this legislation and our industry is working hard to help shape the final regulations to have the least damaging affect to banks and their customers. We do feel that the recent decision regarding the interchange fee amendment may give us an opportunity in the short-term as we're exempt from the free reduction and the large banks look to raise other fees as they are [offset through] revenue loss.

I mentioned earlier, in non-interest income opportunities that we want to focus on and we made a significant commitment toward that with the acquisition of the Payak-Dubbs Insurance Agency effective July 1. This acquisition is a continuation of our strategic plan to be a full service financial service provider throughout our market. This gives us a strong presence in the greater Toledo area with a highly identifiable respected partner.

Our mission is to be a community bank that provides a complete line of financial services with a relationship-oriented approach on a profitable basis. The staff we have throughout this organization understands the importance of relationship banking and the importance of delivering on that mission. I thank them for their diligence and loyalty, and I thank you for joining us this morning on the call. And now we would be happy to take your questions.

(Operator Instructions). John Barber, KBW.

Good morning.

Good morning, John.

Don, I think you mentioned that loans 30 to 89 days past due were up largely due to one credit, was that in the CRE portfolio? And could you just give us a little bit of color on that loan?

Yes, it is. And it was one -- it was the credit that we've been monitoring. I'll let Jim, if there is any additional comments. But it was one that we've worked with. We still think there is a good opportunity that that will improve and become a performing -- move to stay performing, but it was a large credit that we felt that needed to be continued to monitor. So, I don't think there's -- we don't feel there's lot of risk in that increase in the 30 to 89 [discount].

Okay. And could you comment on the competition you're seeing for quality of loans, who you are competing against the most, is it the large regionals or other community banks? And could you just discuss the pricing environment also?

I'll let Jim answer that question.

We're seeing competition from both the community banks, our size and smaller and also from the regionals that become much more active and are getting active again in areas that they'd really kind of shy it away from non-owner occupied commercial real estate. So it's very competitive market out there and we're seeing some, what we would classify as irrational pricing out there and I -- we kind of joke the definition of irrational pricing has kind of changed, it seems like it keeps getting lower and lower as we continue through this rate environment is -- where rates are stagnant and no increase in size. So it's a very, very competitive market out there. Nobody wants to give up any existing business they have and every new piece of business is looked at by multiple vendors.

We saw a lot of competition, competitive pricing on the five-year fixed commercial product over the last quarter, now we're seeing that extend out on the duration as seven years and 10 years.

Even some 10-year and a 15-year, I heard this morning.

And could you talk about your pipeline, just how it compares to last quarter and maybe 12 months ago?

Better than 12 months ago, probably about the same as last quarter. We are looking at the significant number and size of new opportunities, but they are very, very competitive, so we're not winning as many of those as we had maybe two years ago. But confident that we'll hold our own in the marketplace. It's a tough environment out there, everybody wants to grow top-line revenue and there is more demand for loans out there than there are new loans in the marketplace.

All right. And my last question. I think you said that OCC's safety and soundness exam is scheduled for November. Would you expect to have the results in fourth quarter results then or will that be a first quarter '12 event?

That will probably go over into the first quarter, I would anticipate John, by the time they get in and do the field work and get everything processed, we do not anticipate having the firm results prior to 12/31. We'd be delighted to get it before that, but I doubt if it's going to move quite that fast.

Okay. Great. Thank you very much.

Thanks, John.

Thank you.

Bruce Baughman, Franklin.

Good morning.

Good morning, Bruce.

Could you go back over the ground around retiring the TARP preferred, the different considerations. They went by kind of fast?

Yes, we have our -- [initially we'll say] we had a target trying to get that repaid organically within the first five years, and the first five years is when the rate is flat and would increase after that period.

That's December of 2013.

Correct. We're somewhat optimistic, originally maybe refinancing it out into the Small Business Lending Fund, but some of those parameters changed here recently and as we are restricted to our memorandum of understanding about needing prior approval to pay any dividends and that includes dividends on our CPP funds. And that restriction while we've always received approval and we don't anticipate any problems in the future receiving approval to do that. The mere mechanics of having to request that approval is going to preclude us from participating in the Small Business Lending Funds.

Our plan is, we still feel very confident that without additional equity raised that we would have the resources to repay in full prior to the December 2013, end of our five-year period.

Is there anything that you're doing currently to prepare liquidity for a transaction like that?

Right now we have a liquidity, we're keeping that in our strategy that we would need that liquidity. From our standpoint, it's more of a -- we look at it in two standpoints. Liquidity, I think we've addressed that from a strategic standpoint, in a process standpoint it's getting the metrics improving such that we can feel comfortable enough to get regulatory approval to do it. And maintain strong capital ratios, so it's a balance of both liquidity and capital management.

It's obviously a component of our liquidity plan and capital plan and has been from the day we got into it.

What's the earliest timeframe you might go to the regulators and ask for permission to retire their preferred?

We have not may gone public with any statement on that yet, Bruce, and probably won't at this point yet.

Okay. Is that reticence a matter of procedure, I'm not really sure, why -- I don't understand whether it's a -- what the hesitation would be?

Well, I think one of it's just the transition with the regulators here. We're going from the OTS who had a specific viewpoint of things and now we're going to the OCC.

And then in the Fed as far as the holding company. So, some of that reticence is just understanding the regulatory environment we're going to be on with two new regulators. Part of it, trying to get a feel from them on what the triggers would be to move ahead with approval. As we've stated in the past, one of the things we believe is needs to improve from our perspective is our level of classified loans and assets, we're still focused on that. As I said, we didn't see an improvement in that this quarter, somewhat as a disappointment, but we believe we need to have more material improvement in our level of classified assets as well. So, I think there is a couple of those things that (inaudible) saying really why, when we will start to consider requesting approval.

Okay. Thank you.

Thanks.

(Operator Instructions) There are no more questions at the present time. So I'd like to turn the call back over to management for any closing remarks.

We thank you very much for joining us this morning and your participation and interest in First Defiance Financial and look forward to coming back and speaking with you next quarter. Thank you very much.

Thank you. And that concludes today's teleconference. You may now disconnect your phone lines. Thank you for participating and have a nice day.