Premier Financial Corp (OHIO) (PFC) 2011 Q3 法說會逐字稿

Good day, and welcome to the First Defiance Financial Corporation Third Quarter 2011 Earnings Conference Call and Webcast. (Operator instructions.)

Please note, this event is being recorded.

I would now like to turn the conference over to Terra Via. Ms. Via, the floor is yours, ma'am.

Thank you. Good morning, everyone, and thank you for joining us for today's third 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, EVP and CFO. 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 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 report on file with the Securities and Exchange Commission.

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

Thank you, Terra. Good morning, and thank you for joining us to review the 2011 third quarter results. Last night we issued our earnings release for the third quarter, and this morning we would like to discuss our financial performance during the period and what we see ahead of us for the balance of the year.

At the conclusion of our presentation, we will answer any questions you might have. Joining me on the call this morning to give more detail on the financial performance for the quarter is CFO, Don Hileman. Also with us this morning to assist in answering question is Jim Rohrs, President and CEO of First Federal Bank of the Midwest.

Third 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 third quarter. For the nine month period ended September 30, 2011, First Defiance earned $11.5 million, or $1.06 per diluted common share compared to $5.8 million, or $0.53 per diluted common share for the nine month period ended September 30, 2010. Lower provision expense, increased non-interest income, and reduced non-interest expenses all contributed to the earnings improvement this quarter compared to third quarter 2010.

The solid 2011 third quarter results were attained as the economy continues to show volatility. At the end of the second quarter this year, we were feeling more optimistic that we were continuing on the path of slow but steady economic improvement. As I told our employees at that time, it finally felt like we were playing offense again after having the defense on the field for the last three years. However, within a month, we were facing the debt ceiling crisis in Washington, followed shortly by the downgrade of US securities by Standard & Poors. These events, on top of a still-fragile housing market and elevated unemployment, have again shaken the confidence of the American public.

I do feel like we still have the offense on the field, but it is more of the "grind it out at three yards in a cloud of dust" rather than a wide-open attack. Even in this environment, we were encouraged by the core performance this quarter as we climb back toward a more normalized run rate.

Credit quality and the ongoing steps of moving credits through the process continues to play a major role in our financial performance. The increases in non-performings and the higher level of net charge-offs both involve previously identified credits, but changes involving those credits during the period necessitated further action. We remain confident that we have done a good job of identifying and reserving for credit issues, and this is reflected in a 40% drop in provision expense in the quarter year-over-year.

Loans over 30 days past due improved over the linked quarter and the year-ago period, indicating improvement in the early term of the credit cycle. Another positive factor related to credit quality this quarter is significant improvement in credit and collection cost over last year. A portion of this is attributed to our ability to continue to reduce our other real estate owned as we lowered that balance by over 20% to the linked quarter. Don will be giving you more detail on all of this in his analysis.

As credit quality issues continue to be dealt with and moved through the system, we see the credit metrics reflecting these moves. The significant increase in net charge-offs this quarter was mostly driven by dealing with previously identified problem credits. These credits had been properly reserved for prior to this period, and that is the main driver in the slight decline in the allowance for loan loss at September 30, 2011. Our loan loss reserve coverage remains strong even following the increased charge-offs. We were also encouraged by the continued reduction in OREO and anticipate further reduction in this balance over the next few quarters.

The increase in the net interest margin compared to the linked quarters and the margin stability over the past several years attests to our ability to manage asset and liability pricing through a tough interest rate environment. We were very pleased to see the efforts of a disciplined pricing strategy pay off in the margin performance. Maintaining that discipline is going to be very important, as it appears we are going to remain in a low rate environment for several more quarters. While there is limited room on the deposit side of the balance sheet to aid the margin, pricing on the asset side and managing the cash will be very important in future margin performance.

Non-interest income for the third quarter was heavily influenced by mortgage income results. While mortgage production picked up significantly during the third quarter, it was still well below the third quarter 2010 high levels, resulting in lower gain on sale income this year. Along with this, the lower market interest rates in residential mortgages resulted in additional mortgage servicing rights impairment compared to the period ending September 30, 2010. We offset some of the reduction in mortgage banking income with improvement this quarter in insurance commissions, wealth management income, and income from bank-owned life insurance over last year.

The July 1 acquisition of the Payak-Dubbs Insurance Agency will continue to positively impact our insurance commission income going forward.

Non-interest expense was down significantly compared to third quarter 2010 and up just slightly over the linked quarter. The one area that was up over both periods was compensation and benefits expense, which Don will detail in his comments. The primary factor in the improvement over last year was the lower credit and collection expenses. FDIC insurance premiums were also lower compared to last year as a result of changes made in the assessment by the Dodd-Frank Act.

I'll now ask Don Hileman to give you additional financial details for the quarter before I wrap up with an overview and a look at what we see developing for the final quarter of 2011. Don?

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 third quarter. This quarter we saw loan growth for the first quarter since 2009, with annualized growth of 3%. We are encouraged by the growth in our commercial loan pipeline. We are seeing a very competitive pricing environment, especially from larger regional banks, but we have remained competitive without modifying our underwriting standards. Stability in the net interest margin, coupled with the reduction of overall credit costs, helped offset a $1.1 million mortgage servicing rights impairment charge.

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 third quarter of 2010, a 79% improvement. The increase in profitability was driven by lower credit related costs 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, collections costs and secondary market buyback costs remain significant, with a total of $550,000 in the third quarter of 2011 compared with $2.8 million in the third quarter of 2010.

Our markets are persistently showing the effects of the difficult economic environment. While we have seen some declines in the unemployment rate in our footprint, meaningful economic growth is developing slowly. We're encouraged that we are seeing some signs -- some 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 third quarter results and seeing further opportunities to improve our overall performance. I will begin with a discussion of credit quality. While disappointed in the increase in non-performing loans this quarter, we had reductions in the 30-day past due loans, classified loans, and OREO balances. Overall, we believe our credit risk profile is moving in the direction of improvement. Our provision expense totaled $3.1 million, down from $5.2 million a year ago, and up from $2.4 million on a linked quarter basis. Our allowance for loan losses decreased to $38.1 million from $41.3 million at September 30, 2010. The allowance percentage decreased to 2.61% from 2.67% a year ago. The overall reserve declined on a linked quarter basis.

The 2011 third quarter provision was $2.4 million less than net charge-offs for the quarter. We had three credits that totaled $4.4 million of the total charge-offs this quarter. $6 million of the $6.1 million in gross charge-offs had identified reserves. The overall reserve level is adequate based on the continued general weakness in the economy. As we see improvement in the economic environment and the 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. Annualized net charge-offs were 155 basis points for the third quarter 2011 compared with 70 basis points in the third quarter of 2010 and 75 basis points in the second quarter of 2011. Of the total charge-offs, 43% are related to commercial real estate loans, 41% to commercial loans, 11% residential, and 5% home equity. As we see improvements in asset quality trends, as well as the economy, [we'll be] more confident that significant asset quality stress trends have turned the corner and are headed toward consistent and steady improvement.

At September 30, 2011, our allowance for loan losses represented 2.61% of total loans outstanding, down from 2.8% on a linked quarter basis and represents 74.39% of our nonperforming loans, down from 89.56% at the end of the third quarter of 2010. The allowance to nonperforming assets was 66.82% at September 30, 2011, down from 72.17% at September 30, 2010. Nonperforming assets ended the third quarter at $57 million, or 2.77% of total assets, down from 2.81% total assets at September 30, 2010 but up from $48.2 million, or 2.35% of total assets at June 30, 2011.

Total nonperforming loans increased to $51.2 million from $40.8 million on a linked quarter basis and were up from the third quarter of 2010. Non-accrual loans saw an increase in the third quarter from the second quarter of 2011 as we evaluated certain substandard credits and the likelihood of the Company not recovering full principal and interest as agreed to in the original contract. Restructured loans decreased $3.3 million from the linked quarter as $5.3 million migrated to non-accrual. Restructured loans are considered nonperforming because of the changes in the original terms granted to the borrowers. It's important to note that these loans are still accruing interest.

Total classified loans decreased $10 million to $127 million at September 30, 2011 from $137 million at June 30, 2011 and were basically flat with the same period of 2010. The total delinquency rate was 3.77% at September 30, 2011, up from 2.91% at September 30, 2010 and up from 3.34% on a linked quarter basis. The delinquency rate for the loans 90 days past due and-or on non-accrual increased to 3.27% this quarter from 2.68% in the fourth quarter of 2010 and up from 2.40% at September 30, 2010.

We are not satisfied with the overall levels of 90-day delinquencies and non-accruals. However, of the total non-accrual loans of $48.3 million, $23.2 million, or 48%, are under 90 days past due. Of the total amount of non-accruals added this quarter, 59% were current but exhibited some financial weakness that led us to put the loan on non-accrual. Even with an increase in the non-accrual loans, management believes our credit quality is showing signs of improvement. We are pleased that the loans with payments 90 days or more past due declined $2.8 million, or 10%. We also saw a decrease in the 30- to 89-day level of delinquencies this quarter compared to the third quarter of 2011 and on a linked quarter basis. As I have mentioned in the past, we expect this indicator to be somewhat choppy in the near-term until we see a consistent downward trend develop.

Our OREO balance declined on a linked quarter basis and ended the third quarter at $5.8 million. The OREO balance is made up of $5.1 million of commercial real estate and $700,000 of residential real estate. We had additions of $756,000 in the third quarter of 2011, offset by sales of $2.4 million and valuation adjustments of $93,000.

We are pleased with the declining level in the overall activity this quarter. We expect to see a continued movement of credits in and out of OREO as we move problem loans to resolution with the activity consistent with this quarter, which is an improvement over prior periods. We have seen more stabilization of values of OREO properties in the recent quarter, indicated by gains on sale which leads to some encouragement that we are seeing, or close to seeing, the bottom of the valuation declines.

We experienced a pickup in mortgage activity this quarter compared with the last two quarters, with volume increasing 69% on a linked quarter basis. Overall mortgage banking income for the quarter was $1.4 million compared to $2.3 million in the third quarter of 2010 and $1.9 million on a linked quarter basis. We had gain on sale income of $2.1 million in the third quarter of 2011 compared with $1.1 million in the second quarter of 2011 and $2.9 million in the third quarter of 2010.

We also recorded a negative valuation adjustment to mortgage servicing rights of $1.1 million in the third quarter of 2011 compared with a positive valuation adjustment of $316,000 on a linked quarter basis and a negative valuation adjustment of $527,000 in the third quarter of 2010. The negative valuation adjustment in the third quarter of 2011 reflected the volatile interest rate environment, which saw a decline in rates over the last quarter that affected the [resume] prepayment speeds on the underlying collateral.

At September 30, 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 69 basis points of the outstanding loan balances services. The impairment reserves, which are available for recapture in future periods, totaled $1.7 million at quarter-end.

We do not have any OTTI charges in the third quarter of 2011, reflecting a more stable economic environment as it relates to our investments and trust preferred collateralized debt obligations, or CDOs. Management believes the probability 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 assists us in making this conclusion.

Turning to other operating results, we saw net interest income was $17.6 million for the third quarter compared with $17.8 million for the third quarter of 2010 and $17.5 million on a linked quarter basis. For the quarter, our margin was 3.89%, up three basis points on a linked quarter basis and down 5 basis points from the third quarter of 2010. We have been successful in moving overnight funds into short- to intermediate-term securities during the quarter as we lowered 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 even though we have seen overnight deposits decline to $160 million at the end of the quarter from $185 million on a linked quarter basis. We anticipate continuing our strategy to increase security purchase activities in the fourth quarter, selectively deploying lower yielding overnight deposits into securities on the short- 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, and it is unlikely that we would see any actions by the Fed to raise rates until well into 2012. We will continue this 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 place a strong emphasis on non-interest bearing deposit accounts and saw the balances grow this quarter. Non-interest bearing deposits represented 15% of total deposits.

We are focused on pricing opportunities to maintain and expand margin. We are particularly focused on asset pricing discipline and the challenges of maintaining asset yields. Our yield in assets declined seven basis points, while the cost of funds declined 10 basis points on a linked quarter basis. We've seen a broader base of very competitive pricing in our market area, which puts additional pressure on loan growth and improvement in yields.

Non-interest income was $6.9 million in the third quarter, down from $7.5 million in the third quarter of 2010. Fee income increased to $3.1 million in the third quarter of 2011 from $2.7 million on a linked quarter basis and declined from $3.3 million in the third quarter of 2010. The year-over-year decline in fee income was directly attributable to the downward trend in net NSF income as a result of new regulations. NSF fee income was $1.5 million for the third quarter of 2011 compared to $1.9 million for the third quarter of 2010. We are pleased with the relative stability of our interchange income in this environment, as well as our service charge income.

Insurance revenue was $2 million in the third quarter of 2011, up from $1.4 million on a linked quarter basis and up from $1.4 million in the third quarter of 2010. The linked quarter insurance revenue increased as a result of the additional revenue provided by the acquisition of a full-service agency which closed July 1, 2011. This acquisition added approximately $579,000 in quarterly revenue.

Other non-interest income decreased in the third quarter of 2011 to a loss of $35,000 from $271,000 for the same period in 2010. This was primarily the result of recording a negative change in value on the deferred compensation plan of $285,000 in the third quarter of 2011 compared a positive valuation adjustment of $165,000 in third quarter of 2010. Net gains of $116,000 on real-estate owned property sales in the third quarter of 2011 compared to net losses of $45,000 for the same period in 2010.

Overall, non-interest expense decreased to $15.5 million this quarter compared to $17.1 million in the third quarter of 2010, but up from $15.1 million on a linked quarter basis. The third quarter compensation and benefits expense increased to $8.2 million from $7.5 million on a linked quarter basis and increased from $7.1 million in the third quarter of 2010. The increase in compensation and benefit expense over the third quarter of 2010 is due to the Company freezing pay in 2010, coupled with an increase in the expense and bonuses being paid due to an increase in performance, as well as the additional compensation from the insurance acquisition in the third quarter of 2011. The Company increased compensation late in the first quarter of 2011.

Healthcare costs also increased $145,000 over the third quarter of 2010. Other non-interest expense decreased to $2.7 million in the third quarter from $5.2 million in the third quarter of 2010 and declined to $3.2 million on a linked quarter basis. Decreases between the 2011 and 2010 third quarter include credit, collection, and real-estate owned expense reduction of $2.2 million and a negative adjustment in the value of deferred compensation of $283,000 in the third quarter of 2011 compared to a positive adjustment of $152,000 in the third quarter of 2010.

On a linked quarter, other non-interest expense declined $457,000 primarily due to the decrease in credit collection and real estate owned expenses of $363. The following is a three-quarter trend of certain significant expenses. Real-estate owned expenses were $316,000 in the third quarter of 2011 compared to $678,000 in the second quarter of 2011 and $2.1 million in the third quarter of 2010. Credit and collection expenses were $196,000 in the third quarter of 2011 compared to $244,000 in the second quarter of 2011 and $283,000 in the third quarter of 2010. Secondary market buyback losses were $99,000 in the third quarter of 2011 compared to $62,000 in the second quarter of 2011 and $397,000 in the third quarter of 2010.

We saw the balance sheet increase from the third quarter of 2010, with total assets of $2.06 billion at September 30, 2011. On the asset side, cash and equivalents grew $42 million over the year to $190 million at September 30, 2011. Securities grew $76 million over the year to $233 million. Gross loan balances declined $89 million year-over-year and grew $12 million on a linked quarter basis. Loan activity in general continues to be weak, but we are seeing some signs of increasing commercial loan pipeline.

We continue to be prudent in our new lending 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. We have been intent on making sure our service levels have not suffered as a result of the increased level of loan workouts. We've been able to develop strong new relationship with good commercial clients. Total deposits were flat for the same period a year ago but increased $16 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 $240 million at September 30, 2011, up from $213 million at September 30, 2010. We continue to focus on growth in non-interest bearing balances in correlation with an overall strategy and efforts to reduce cost of funds in this interest rate environment.

As noted, last quarter we completed a common stock offering in March of this year that increased shareholders' equity by $20 million. Total shareholders' equity ended September 30, 2011 at $275 million, up from $241 million at September 30, 2010. Our capital position remains strong, with shareholders' equity to assets improving to 13.22% at September 30, 2011 from 11.77% at September 30, 2010. The bank's risk-based capital ratio is strong at approximately 15.34%.

As our financial performance improves, we continue to evaluate our overall capital levels and our strategy for dividends and the repayment of our CPP investment. The Board continually assesses our involvement in this program. As we have previously said, we continually review our capital position and believe we can repay the CPP funds without an additional equity offering. While we know that there's still many challenges to deal with, moving forward, we believe that we have made continued progress in positioning the Company for future success.

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

Thank you, Don. As we move into the final quarter of 2011, we are aware that there are still challenges to a sustained economic recovery. Our three primarily focuses since the start of this year have 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, as I said earlier, we are now also playing offense again. The improvement of the overall credit environment is allowing us to direct more time and resources to loan production. It is an extremely challenging business development market out there right now, with limited loan demand and all banks in high liquidity positions.

We have worked to develop new loan programs that we feel will benefit our community business customers, retain market share, and create a fair return to our shareholders. We are hoping that loan demand continues to build now that we have stopped the trend of declining balances.

On the agricultural front, harvest is just underway due to the late planting and dry summer. Early reports are that yields are varying throughout the area, but most feel they are as good or better than anticipated based on the conditions this year.

Among the challenges still facing us is the legislative and regulatory environment. The regulations arising from the Dodd-Frank Wall Street Reform and Consumer Protection Act continue to be rolled out. The end result of all the new regulations will be an increase in compliance costs and potentially a decrease in revenue from certain sources. That makes it imperative that we continue to explore new revenue sources and maintain our focus on cost control.

Also under this legislation, we now have a new regulator for both the bank and the holding company. With the elimination of the Office of Thrift Supervision, the bank is now regulated by the Office of the Comptroller of the Currency, the OCC, and the holding company is regulated by the Federal Reserve. We are currently in the midst of our first bank examination with the OCC, and that will be followed by the initial Federal Reserve exam of our holding company.

On the economic front, unemployment continues to run slightly above the national average throughout our market, but we have seen this gap narrow. Obviously we are pleased to see any improvement in the employment data and the additional consumer confidence that will hopefully come 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 that this sector's recovery will remain slow. One bright spot was our mortgage production picked up significantly this quarter with the declining mortgage interest rates. While most of the originations were refinances, we did see some increase in purchase mortgages.

The challenges of the regulatory landscape, coupled with the continuing concerns for the economy, certainly present a tough environment for the financial services industry. However, we have seen some positive indicators that give us a sense of optimism for the future. Our focus remains on our proven community financial services strategy. With the staff and plan we have in place, we look forward to an improving future.

We thank you for joining us this morning, and now we will be happy to take your questions.

Thank you, sir. (Operator instructions.)

Bruce Baughman of Franklin.

Good morning.

Good morning, Bruce.

Morning, Bruce.

Hi. I think in Don's remarks, mentioned asset quality stress trends, and I think you said they're improving. Is that -- are you also having an improvement in the level of classified assets?

Yes. The overall classified assets dropped $10 million on a linked quarter basis.

$10 million, and to what level?

From $137 million to $127 million.

Okay, and what was it a year ago?

It was about $127 million a year ago. It's pretty flat from a year ago.

Okay. And you mentioned that--.

--It was actually (inaudible) at December 31 of 2010.

I'm sorry, say -- I missed that.

$138 million at December 31, 2010 were our classified balances.

And part of what we -- when I speak to the issue of the stress trends, we're seeing less migration into the substandard credits, and the same credits are being dealt with. And so that's an improvement. In our short-term (inaudible), we're not seeing as many new credits that we're rating [eights].

Okay. And what typically causes a credit to become rated classified if it's not already in non-performers?

Typically it's weakness in the earnings derived from the financial statements. Even if the credit is current, if the financial statements don't substantiate the ability of a company to make those payments going forward, based on historical earnings, it'll be a classified credit. But we have a significant number of classified loans that have never had a late payment.

So cash flow analysis is a primary driver.

Okay. And do you typically have collateral on those loans?

Yes, and typically guarantors also.

Okay. When those loans are collateralized and they become classified, does that require an appraisal?

Generally, yes, it does. It does require an evaluation of the collateral as a secondary repayment source.

Okay. And you mentioned the transition to the new regulators, and I think you said the first examination is underway already?

That is correct. It commenced right at the beginning of October here, early October.

Okay. Do you have -- do they tell you how long to expect it to continue?

We think the fieldwork will probably wrap up this week or early next week, and then -- but at this point we don't have an indication as to how soon they'll have a report to us.

Okay. And then my last question is when do you start filing call reports?

March 31 of 2012 is the first we will be required to.

We have the option if we want to early adopt at the end of the year here, and we're still evaluating that.

Okay, thanks. I'll--.

--Thank you.

Thank you.

Thank you.

John Barber of KBW.

Good morning.

Good morning.

Morning, John.

My first question was related to credit. I was just wondering if [you'd] talk about what drove the increase in your CRE non-performers this quarter. Was it limited to a few larger credits, or was it a number of small credits? And of the CRE non-performers that migrated non-performance status, were they previously identified?

Yes. Those were all previously identified and had reserves. So this movement to the non-performing is not going to increase the need for provision expense. Those credits had been identified as potential problem loans some time ago.

There was a couple larger ones in there, John. One in particular, I think off the top of my head, was about $4 million.

Okay. And [I see] the net loan growth this quarter, was the growth coming from any markets in particular, or was it across your footprint?

Pretty much across the footprint, some in our Eastern market, which includes the Toledo area, our Southern market, and we had some new volume in the Fort Wayne office.

I think a part of that loan is -- like Bill said, John, is that we're pleased that we've seen some of the more material payoffs and paydowns slow up quite a bit this quarter, too. So all year we've had decent amount of loan growth, but we've just not been able to make a net growth because of going out the back door, so to speak. So that's another change this quarter, is the slowdown in the actual payoffs that we're seeing.

Did any of the loan growth -- was it related to participations or shared national credits, or was it all organic that you guys originated?

No, all organic.

All right, thanks. And a question on the margin. Bill, in your prepared remarks, you said there's probably not a whole lot of room left to lower your deposit costs, but are there any opportunities on -- with borrowings, with FHLB or other debt instruments?

Yes. In fact, that's something that we have talked about here internally. We're continuing to investigate some options available to us there.

All right, thank you. And my last question, I think your recent insurance acquisition added about $0.06 per share. And are you seeing any other opportunities in your core markets? Are you interested in acquiring other insurance agencies?

Yes. I think our strategy still is to be acquisitive in the insurance area. We're kind of wanting to make sure absorb this one and get the full benefits of a bigger insurance agency operation under our belt. We do expect to have other looks as we go forward the rest of 2011, 2012.

Great. Thank you.

Thanks.

Thanks a lot.

Howard Henick of ScurlyDog Capital.

Thank you. A couple of quick questions here. Thanks for taking the call. The MOU [and] dividends -- I guess those are related questions -- when do you think those two things will get resolved, if at all?

Well, first off, the MOU does not prohibit us from paying dividends. We had suspended dividends before we went under an MOU. As I said earlier, we are currently in the midst of an exam, and as far as the MOU is concerned, we've really tried to stay focused and make sure we've made the progress toward meeting all of the requirements of the MOU. So we're -- at this point just have to wait and see what the exam results are.

As far as the dividend is concerned, as always, our Board continues to evaluate. Every time we start to see some improvement in this economy and start to build a little bit of confidence, it seems like there's something that happens out there. We've tried to take a very cautious approach as far as building our capital levels, and we will continue to look at that. It is fully our intention to return to paying a common dividend.

And the other question is you indicated, if I heard it correctly, that the reason your charge-offs were higher and your provisioning was because a lot of the charge-off loans were previously provided for. Can I ask what your general -- whether your non-allocated provisions were up or down this quarter? Does that make sense?

Yes, they were up slightly because of our quantitative analysis that we use historical charge-offs. So they were up because of that.

So non-allocated provisions were actually increased in this quarter?

Yes.

Good. Thank you. Okay. That's it. Thank you, guys.

Thank you.

Thank you.

(Operator instructions.)

Well, it appears that we have no further questions at this time. At this time, we'll go ahead and hand the conference back over to management for any closing remarks.

Seeing that there's no further questions, we thank you for joining us today, and that will end our call. Thank you.

And we thank you, ma'am, and we thank you, gentlemen, for your time. We thank you all for attending today's presentation. The conference call is now concluded. At this time you may disconnect your lines. Thank you.