First Defiance Financial Corp (FDEF) Q4 2018 Earnings Conference Call Transcript

FDEF earnings call for the period ending December 31, 2018.

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First Defiance Financial Corp  (NASDAQ:FDEF)
Q4 2018 Earnings Conference Call
Jan. 22, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Good morning and welcome to the First Defiance Fourth Quarter and Year-End 2018 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 Tera Murphy with First Defiance Financial Corporation. Thank you.

Tera Murphy -- Vice President and Marketing Director

Thank you. Good morning everyone and thank you for joining us for today's 2018 Fourth Quarter and Year-End Earnings Conference Call. This call is also being webcast and the audio replay will be available at the First Defiance website at fdef.com.

Providing commentary this morning will be Don Hileman, President and CEO of First Defiance; and Kevin Thompson, Executive Vice President and Chief Financial Officer. Following their prepared comments on the company's strategy and performance, they will be available to take your questions.

Before we begin, I'd like to remind you that during the conference call today, including during the question-and-answer period, you may hear forward-looking statements related to future financial results and business operations for First Defiance Financial Corp. Actual results may differ materially from current management forecast and projections, as a result of factors over which the company has no control. Information on these risk factors and additional information on forward-looking statements are included in the news release and in the company's reports on file with the Securities and Exchange Commission.

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

Donald Hileman -- President and Chief Executive Officer

Good morning and welcome to the First Defiance Financial Corporation's 2018 Fourth Quarter and Full Year Conference Call. Joining me on the call this morning to give more detail on our financial performance is our CFO, Kevin Thompson; also joining me is Paul Nungester, Director of Finance and Accounting; and Brent Beard, our Controller. Last night, we issued our 2018 fourth quarter and full year earnings release, and now we'd like to discuss that release and give you some insight into 2019. At the conclusion of our remarks, we will answer any questions you might have.

I'm very satisfied with the fourth quarter and the full-year 2018 results and the great momentum that the fourth quarter provided in growth, financial and strategic performance. Fourth quarter 2018 net income on a GAAP basis was $12.1 million or $0.59 per diluted common share, compared to $9.4 million and $0.46 per diluted common share in the fourth quarter of 2017. For the year ended December 31st, 2018, First Defiance earned $46.3 million or $2.26 per diluted common share compared to $32.3 million or $1.61 per diluted common share for 2017.

At quarter end, our total assets were $3.2 billion, up 6.3% from a year ago. We had healthy growth trends both in loans and deposits in the fourth quarter. Total loans at December 31st were up 8.2% over a year ago, and up 13.6% on a linked-quarter annualized basis. Total deposits were up 7.5% year-over-year and 15.3% on a linked-quarter annualized basis. The efficiency ratio decreased to 57.29% from 59.22% on a linked-quarter basis, and down from 59.37% at the end of the fourth quarter in 2017.

Our fourth quarter 2018 results reflect strong profitability with an ROA of 1.53% compared to 1.26% in the fourth quarter of 2017. Net charge-offs moderated lower in the fourth quarter, reflecting a net recovery of $220,000 compared to a net charge-off of 1.58 last quarter and recoveries of $28,000 in the fourth quarter of 2017.

Allowance for loan losses ended the year at a strong 1.12%. We're pleased with the continued positive momentum in lowering our non-performing loans to assets at 0.64% at year-end, down on both a linked-quarter and compared with year-end of 2017. We are very satisfied to see an increase in loans across our entire footprint in the fourth quarter, even in the face of strong competitive market pressures and somewhat uncertain economic conditions. While our legacy markets provided a consistent growth rate, our metro markets contributed to growth at an accelerated pace.

Total new loans originated in the fourth quarter were put on at an average weighted rate of 5.28% compared with 4.54% in the fourth quarter of 2017 and 5.12% in the third quarter of 2018. The overall yield on loans in the fourth quarter of 2018 was 4.95%, up 37 basis points from the fourth quarter of 2017.

Our core business strategy contributed to both growth in our net interest income and the solid performances of our non-interest income revenues on a quarterly basis. This is reflected in our solid net interest income increase in 2018, which was 12% over last year, net interest income also increased 3.5% on a linked-quarter basis.

We have moderated our expectations on the interest rate environment to be reflective of recent indications of more moderate changes to the federal funds rate increases over the course of 2019. We continue to measure our interest rate risk position and we are managing toward a neutral to slightly asset sensitive position. We are very satisfied with the consistency of our margin considering the very competitive operating and rate environments.

Our net interest margin increased to 4.02% over the fourth quarter of 2017 margin of 3.88%. We are very pleased with the continued strength of our margin and we expect our margin trend will continue to reflect a balance and (technical difficulty) discipline with growth. The credit quality metrics show continued improvement this quarter from last quarter and was significantly better than the year-end 2017. Our non-performing assets to total assets were 0.64% this quarter compared to 1.08% in the fourth quarter of 2017 and 0.73% last quarter.

Our overall capital planning is supported by our ongoing solid performance in capital levels. We are very pleased to announce an increase in our 2019 first quarter dividend to $0.19 per share, representing a 27% increase from a year ago and an annual dividend yield of approximately 2.8%. Under our existing authorization, we bought back 231,000 shares of common stock in the fourth quarter. At year-end, 524,000 shares of common stock remains available for repurchase.

I will now ask Kevin to provide additional financial details for the quarter and the full year before I conclude with an overview. Kevin?

Kevin Thompson -- Executive Vice President and Chief Financial Officer

Okay. Thank you, Don. Good morning, everyone. As Don stated, net income for the fourth quarter was $12.1 million or $0.59 per diluted share. These results included a positive adjustment of $636,000 after-tax or $0.03 per share for an accounting correction to our deferred compensation plan. With or without the adjustment, these results compare very favorably to prior year fourth quarter results of $9.4 million or $0.46 per diluted share. That's an increase in diluted EPS of 28.3% in total over the prior year, and 21.7% excluding the accounting adjustment.

Other non-operating items in the fourth quarter of 2018 netted to less than $0.005. Fourth quarter last year did include a modest impact from tax reform, which was more than offset by other non-operating items, securities gains, and a change to accrual accounting for our trust income. Altogether, non-operating items increased earnings in the fourth quarter last year about $0.01 a share. Excluding the accounting adjustment, the fourth quarter 2018 results reflect strong profitability with an ROA of 1.45%, return on tangible equity of 15.7%, net interest margin of 4.02%, solid expense control with an efficiency ratio of 59.47%, stable asset quality with net loan recoveries in the quarter, and very positive growth momentum for both loans and deposits.

Now for the details behind these highlights. Let's start with the balance sheet. For the fourth quarter, total loan growth was $83.7 million, 13.6% on an annualized basis, and up from $71 million last quarter and $27 million organically in the second quarter. We're very pleased to have our elevated growth rate continue in the fourth quarter and expect continued upper single-digit growth going forward into 2019.

On the other side of the ledger, total deposits also had a very strong finish to the year, reflecting an increase of $96.5 million, an annualized growth rate of 15.3% and up from last quarter when we had an increase of $35.3 million in deposits. So we were even more pleased to have such solid growth on both sides of the balance sheet in the quarter. This enabled our healthy earning asset mix and low-cost deposit funding to maintain our profitable margin and provided added lift as we enter into 2019, which leads us to the income statement and net interest income. For the fourth quarter 2018 net interest income was $28.5 million, up from $27.5 million in the linked-quarter and up $3.1 million or 12.2% from the $25.4 million in the fourth quarter last year. The increase was primarily driven by growth in our balance sheet, but also reflects margin expansion from a year ago. Loan yields have increased with the rate hikes over the past year while deposit funding costs, aided by a healthy mix of non-interest-bearing deposits, have been less impacted.

As a result, our margin this quarter was 4.02%, up 2 basis points from last quarter and up 14 basis points from 3.88% in the fourth quarter last year. On just a linked-quarter basis, our yield on loans was up 10 basis points to 4.95% for the fourth quarter 2018, while our cost of interest-bearing liabilities was also up 10 basis points on a linked-quarter basis. The margin expansion for the quarter coming from the contribution of our strong non-interest bearing deposit balances, which averaged 22.8% of total deposits in the fourth quarter.

With our outlook for continued balance sheet growth and our balanced exposure to interest rate changes, we believe that our margin will continue to perform well and generate continued solid growth in net interest income.

Now before turning directly to the non-interest income and expense components, let me provide some comments on our deferred compensation plan and the accounting impacts of those components. The significant change in the stock market over the fourth quarter along with an accounting correction generated some significant line item variances that I'd like to clarify. The deferred compensation plan, which originated in 2005, today has about $5 million in assets and liabilities, which are approximately matched in terms of investment elections.

Every quarter, other income and other expense reflect changes in the assets and liabilities, respectively. However, because the assets are inside a COLI structure, the earnings are tax-exempt, while the expense side is fully tax deductible. These results have always been part of our operating results with generally a neutral impact. For perspective, looking back over the past five years, while quarterly net income impact of this plan has at times been both positive and negative to earnings, but it has never had an impact greater than $0.01 a share per quarter or more than $0.02 per year over that period. This holds true for the fourth quarter and the year 2018 as well. That said, we are making an accounting change, which we expect to further reduce any impact of the plan on earnings going forward. This correction resulted in a one-time reduction to expense of about $806,000.

So let's get back to the numbers. Total net non-interest income was $8.4 million in the fourth quarter 2018, down from $9.9 million in the linked-quarter, and down from $9.9 million in the fourth quarter of 2017. The fourth quarter 2018 did include a negative impact of $690,000 due to the reduction in the deferred compensation plan assets versus $170,000 positive impact last year. In addition, the fourth quarter last year also included a change to accrual basis accounting for our trust income, which added an additional $428,000 to revenues that quarter.

Securities gains for the fourth quarter of 2018 were $97,000 compared to $160,000 in the fourth quarter last year. So excluding the deferred compensation plan impacts, securities gains and additional trust income from last year, quarterly non-interest income was down year-over-year about $100,000, a little over 1%. We had strong improvement in service fees, which was up $272,000 or 8.9%, driven primarily by overall organic growth. However, that was more than offset by lower mortgage revenues and additional other income reductions.

Mortgage banking revenues for the fourth quarter of 2018 were $1.4 million, down $432,000 from the linked-quarter, but also down $293,000 from the fourth quarter of 2017. The fourth quarter mortgage banking originations were $60.9 million with $44.9 million committed for sale compared to $63.8 million originated and $51.8 million committed for sale in the fourth quarter 2017.

We also had a somewhat larger seasonal decline in the pipeline at year-end than we experienced a year ago. As a result, gain on sale income was $758,000 in the fourth quarter 2018, compared to $1.3 million on a linked-quarter basis, and $1.1 million in the fourth quarter last year. On the positive side, early indications in January signal some pickup in volumes.

Insurance commissions were $3.1 million in the fourth quarter 2018, up from $3 million in the same quarter last year. Trust revenues were $503,000 in the fourth quarter, essentially flat with a year ago, excluding last year's accrual adjustment. Trust income was also impacted by the declining market conditions during the quarter.

As for non-interest expense, all-inclusive fourth quarter expenses totaled $21.2 million compared to $22.3 million in the linked-quarter and $21.1 million in the fourth quarter of 2017. Now, excluding the one-time accounting correction of a negative $806,000 and the change in deferred compensation plan liabilities, which was a negative $1,051,000 in the fourth quarter 2018 and a positive $200,000 in the fourth quarter last year, non-interest expenses would be $23.1 million compared to $20.9 million, up 10.2% primarily due to reinvesting some of the benefits of lower tax rates in support of our metro market growth strategies.

On a reported basis, our efficiency ratio was 57.29%. However, excluding the one-time accounting correction from non-interest expenses, the fourth quarter efficiency ratio would be 59.47% versus 59.37% in the fourth quarter 2017.

Regarding asset quality, provision expense in the fourth quarter of 2018 totaled $472,000 compared to a provision expense of $1.4 million last quarter and $314,000 in the fourth quarter last year. Provision in the fourth quarter 2018 was mainly driven by growth in the loan portfolio as the fourth quarter included net loan recoveries of $220,000 and improving asset quality metrics.

Our allowance for loan loss at December 31st, 2018 was $28.3 million, up $692,000 versus September 30th, and up $1.6 million from a year ago. The allowance to loan ratio at December 31st, 2018 was 1.12%, down 1 basis point from last quarter and down 2 basis points from last year-end. As for the non-performing balances, non-performing loans, OREO balances and troubled debt restructurings, all declined in the fourth quarter. Non-performing loans declined this quarter to $19 million from $20.9 million at last quarter-end and was down significantly from $30.7 million at December 31st, 2017.

Our OREO balance decreased this quarter to $1.2 million from $1.7 million last quarter and $1.5 million in the fourth quarter last year. Our accruing troubled debt restructured loans this quarter were $11.6 million, down from $12.6 million last quarter, and $13.8 million a year ago. With the change in non-performing assets over the last year, at year-end 2018, the allowance coverage of non-performing assets was 140% compared to just 83% at December 31st, 2017. We are very pleased with our asset quality position and improvement achieved this past year, but are always looking for improvement to further strengthen our growth strategies.

Looking at our capital position. Total period-end stockholders' equity finished the year at $399.6 million, up from $373.3 million at December 31st, 2017. During the quarter, we repurchased approximately 231,000 shares, leaving approximately 524,000 shares remaining under our current repurchase authorization.

Our capital position remains strong with quarter-end shareholders' equity to assets 12.56%, up from 12.47% last year and the Bank's total risk-based capital ratio was approximately 12.6% at quarter-end December 31st, 2018. Our capital position remains solid in support of our strategic growth and shareholder value enhancement objectives.

Regarding our year-to-date results, for the year 2018, net income was a record, $46.2 million or $2.26 per diluted share, up from net income of $32.3 million or $1.61 per diluted share for the year 2017, that's a 43% increase overall. However, 2017 was impacted by several non-operating items, mostly the acquisition cost for our mergers, but also our BOLI restructure transaction in the first quarter, the trust income accrual change, security transactions and the impact of tax reform.

The non-operating items together reduced earnings about $0.13 per share in 2017, while 2018 had only the deferred compensation one-time accounting adjustment in the fourth quarter and some securities gains, which together increased earnings about $0.04 per share. So our core earnings as we calculated are up about 28% in 2018 over 2017. Needless to say, we are very pleased with these results.

That completes my financial review. Now, I'll turn the call back over to Don.

Donald Hileman -- President and Chief Executive Officer

Thank you, Kevin. I can easily say, I'm delighted that 2018 marked our sixth consecutive year of record earnings for First Defiance. And as a community bank, our definition of success goes well beyond the numbers of our financial statements. Our employees have consistently risen to the challenge of finding smart solutions for our clients, communities and our shareholders. The synergies between our employees, both internally and within the communities we serve, have taken us to higher levels of performance and elevated our customer experience. In 2018, successful execution of our growth plans particularly in the metro markets of Fort Wayne, Indiana; and Toledo and Columbus, Ohio, helped us surpass $3 billion in assets.

Our commitment to these markets was evident through our dedication of resources, providing leadership in a way that keeps our decision making close to the customer, the addition of staff to support growth and the expansion of our branch network. We believe that the addition of our 44th full-service branch in Downtown Fort Wayne positions us well for growth in an area of Fort Wayne that's experiencing exciting economic development.

In addition, we feel well prepared for future expansion as we completed prototypes of our branch of the future. Our growth in both legacy and metro markets added opportunities to spread our Better Together philosophy. Our employees rallied behind our inaugural building better communities initiative in June by donating over 600 voluntary hours to create life-changing experiences for families and to share knowledge and resources with current and future homeowners.

The spirit of giving back continued as our employees performed over 700 random acts of kindness throughout our markets on a single day in November. The cycle of giving continued as we funded $10,000 worth of community generated ideas through the same Pay it Forward annual campaign to make places we call home even stronger. It's movements like these that will hit the core of who we are. We not only want to lead positive experiences within our communities, but for our customers as well.

As the client experience was a top strategic initiative for 2018, we were able to successfully implement enhancements to our treasury management services to provide new solutions like lockbox services, enhanced current products and procedures to make managing a business easier and more efficient.

As industry trends shift to banking that largely occurs outside of the branch, we were delighted to introduce online and mobile services common for larger financial institutions to our community bank clients. Our online banking and our online account opening enhancements give our customers more flexibility to perform transactions and open new accounts online any time. With the introduction of card controls within the First Federal mobile app, customers have a resource at their fingertips to control their debit card by setting spending limits, blocking access to card if it is misplaced and more. And most recently, by joining the MoneyPass ATM network, our customers now have access to more than 32,000 ATMs nationwide without a surcharge fee. As the banking behaviors of our customers change, we are committed to bring technology and convenience to our unique community banking experience.

This momentum we have built in the past 12 months will carry us forward in 2019. We will continue to focus on several key areas we believe very important, including core balance sheet growth with a focus on loan growth and deposit growth, overall revenue growth, expense control and improved asset quality that will improve our NPLs to assets beyond what we experienced in 2018.

While the lending environment remains very competitive, we feel we can utilize both our metro and legacy markets to achieve high single-digit loan growth without making significant concessions in rate and other terms through a strong process, relationship building and quality client-focused service.

We are very focused on deposit growth initiatives to develop a sustainable growth engine that will provide long-term organic deposit growth at a correlated pace with loan growth. We also continue to focus on growth in our insurance and wealth management revenues as part of our strategic plan. Building off an extensive internal education campaign for wealth management, we are in excellent position to share our wealth management solutions with our customers as we celebrate the 20th anniversary of our wealth management division. We're commemorating this milestone by paying it forward to 20 life changing organizations throughout the year, while sharing our wealth of knowledge in the form of helpful tips and personalized guidance.

Heightened focus on digital strategy will help us further enhance the customer experience in person, through our digital channels and within our internal operations. Our customers' expectation especially pertaining to digital delivery methods are changing at an accelerated pace and we're committed to providing our clients quality products and services within an environment (technical difficulty). We rely on our employees to help us identify ways to improve our customer experience and be part of implementing innovative solutions to reduce friction.

Our performance for 2018 and our plans for 2019 reflects our focus on shareholder value, and at the same time our commitment to be a strong partner in the communities we are proud to call home. We are confident that our emphasis on strategic initiatives and living our Better Together philosophy will continue to take us to new heights.

We appreciate the trust you have placed in us and thank you for joining us and for your interest in First Defiance Financial Corp. We will now be glad to take your questions.


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Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question will come from Nick Cucharale of Sandler O'Neill.

Nick Cucharale -- Sandler O'Neill -- Analyst

Good morning, gentlemen.

Kevin Thompson -- Executive Vice President and Chief Financial Officer

Hello, Nick.

Nick Cucharale -- Sandler O'Neill -- Analyst

Just first with respect to the 231,000 shares you repurchased in the quarter, what was the average execution price?

Paul D. Nungester -- Executive Vice President, Director of Finance and Accounting

It's just over $27 a share, $27.38.

Nick Cucharale -- Sandler O'Neill -- Analyst

Okay. And then secondly, a very strong quarter for loan growth. Geographically, was it broad based or were there some especially notable pockets of strength across your footprint?

Donald Hileman -- President and Chief Executive Officer

Brent?

Brent Beard -- Senior Vice President, Controller

Yeah, it was mainly in the fourth quarter, it was really over all of our footprints and not really one that's sticking out. If one was going to stick out,

it would be in the Southern market where we had the most growth here in Q4, but pretty well evenly stretched across our entire footprint.

Nick Cucharale -- Sandler O'Neill -- Analyst

Okay, great. And then in terms of the margin. I heard your remarks that you expect the margin to perform well in the coming periods. I was just hoping you could give us some color there. Is your expectation that the margin holds a pretty tight range for the next few periods or how are you thinking about that?

Donald Hileman -- President and Chief Executive Officer

Paul? Paul, you want to --

Paul D. Nungester -- Executive Vice President, Director of Finance and Accounting

Yeah. Overall, as Don alluded to earlier, obviously there's some headwinds out there. So we're factoring that in. We're very pleased with the performance we had on the margins so far, but we can see it tightening a bit here into 2019, with the uncertainty around Fed funds and things like that. We need to keep our eye on that and see how that kind of plays out, but we've been managing well, we've been expanding our loan yields and have good pricing discipline on the deposit side. So, while we might lose a couple of basis points here in 2019 compared to 2018 overall, we are still expecting a good trend there and strong performance.

Nick Cucharale -- Sandler O'Neill -- Analyst

Okay, great. And then I saw the tax rate ticked up a bit in the fourth quarter, what's your expectation for the tax rate in next period and across 2019?

Kevin Thompson -- Executive Vice President and Chief Financial Officer

Yeah, Nick. That was largely due to some of this deferred comp adjustments, particularly on the other income side. As I indicated, those are tax free dollars, so the negative item kind of had a funny impact on the effective tax rate. As we go forward, we're still looking around 18.5% range.

Nick Cucharale -- Sandler O'Neill -- Analyst

On a GAAP basis, right?

Kevin Thompson -- Executive Vice President and Chief Financial Officer

On a GAAP basis, that is correct.

Nick Cucharale -- Sandler O'Neill -- Analyst

Terrific. Thanks very much for taking my questions.

Kevin Thompson -- Executive Vice President and Chief Financial Officer

Sure.

Operator

The next question will come from Damon DelMonte of KBW.

Damon DelMonte -- KBW -- Analyst

Hey, good morning guys. How is it going today?

Donald Hileman -- President and Chief Executive Officer

Good, Damon.

Kevin Thompson -- Executive Vice President and Chief Financial Officer

Damon, how are you?

Damon DelMonte -- KBW -- Analyst

Doing great, thanks. Just wondering, Kevin, just with some of the noise that was going on in the expenses this quarter, what would be a decent range for a quarterly run rate on expenses as we look into 2019?

Kevin Thompson -- Executive Vice President and Chief Financial Officer

Yeah. If we adjust -- there's couple ways to kind of look at this depending -- again, if we adjust the fourth quarter for the odd impacts of the deferred comp plan, that was around a $23 million, $23.1 million number. And that would bring our full year expenses for 2018 to around $91.3 million. We look at our expectations for 2019, we're looking to grow overall expenses in the 5%, 5.5% range. As we look at the first quarter, which includes some resets on things and all, that's probably going to be up 1% to 1.25% over this adjusted fourth quarter level. And then we'll progress from there over the year. Does that help?

Damon DelMonte -- KBW -- Analyst

Yes, it does. Very much so, thank you. And then, can we maybe just go back to the outlook for loan growth. Can we just talk a little bit about which of the metro markets would you feel most comfortable with being the biggest driver of the growth opportunities? Is it the Columbus, Ohio area or Fort Wayne or Toledo or maybe it's all three. But can you just give a little bit more perspective on where you see the best opportunity?

Donald Hileman -- President and Chief Executive Officer

Sure. Yes, I think Columbus is going to continue to be a very strong market for us as we drive our performance forward. Fort Wayne is showing very positive signs of continued strong loan growth there. And Toledo, I think, is where we expect to perform well as well. So I think it's a combination of all three of those core legacy markets. And then if we look to expand in some other metro markets from a loan production standpoint to supplement those three core. So we expect strong results in all of them actually, Damon.

Damon DelMonte -- KBW -- Analyst

Okay. And then as far as the asset classes, where you're seeing the best growth opportunities? Is it just commercial real estate or are you seeing it on the actual C&I side or how about in that regard?

Donald Hileman -- President and Chief Executive Officer

Clearly, we are seeing most of it on a CRE standpoint, that's what we are, we're a CRE lender, majority of our portfolio growth is coming out and we expect that to be consistent. We're really looking at the types of CRE loans to make sure we're well positioned for the future there. But we expect a good chunk of our growth there as well. But we're also looking for the opportunities to balance it out with some C&I growth as well.

Damon DelMonte -- KBW -- Analyst

Okay, that's all that I had. Thank you very much, guys.

Donald Hileman -- President and Chief Executive Officer

Thank you.

Operator

(Operator Instructions) And our next question will come from Christopher Marinac of FIG Partners.

Christopher Marinac -- FIG Partners -- Analyst

Thanks. Good morning, guys. Looking at the next couple of quarters, does the potential for CECL in 2020 kind of change things from an M&A perspective? Does it make sellers more interested in talking with you? Just curious if that is something that would be a catalyst as this year unfolds.

Donald Hileman -- President and Chief Executive Officer

Sure, Chris, this is Don. I quite frankly haven't had a lot of conversations where that's been the majority of the discussion yet. I think it's probably on somebody's mind. But I would imagine after the first quarter when a lot of us will have run dual, get a little bit better understanding what that all means. There might be an impact, but I'm not really seeing that right now, Chris.

Christopher Marinac -- FIG Partners -- Analyst

Okay, great. And then I guess just kind of a separate kind of question on credit, has anything changed from your standpoint in terms of kind of how your watch list develops? I know that there is -- some of your industrial type of companies may have a different outlook than before. Just kind of curious on how it positions today compared to how credit felt 90 days ago?

Donald Hileman -- President and Chief Executive Officer

I don't know if there is a lot of change in how we feel about our credit in particularly over the 90-day period. We till feel pretty good about where we're positioned for the next -- at a minimum the next several quarters from a credit standpoint. I don't think -- as our comments reflected, we still think there's opportunity for us to continue to drive some positive movement in our non-performing loans downward, and we're not seeing any indication through heightened activity in our watch list that give us any pause to say that, it's not possible at this point. So I think we're probably feeling about the same as what we felt 90 days ago as far as our watch list and our credit quality.

Kevin Thompson -- Executive Vice President and Chief Financial Officer

Yeah, I would agree with Don's comments. I don't think we see too many things emerging on the horizon that have been significant to us and for the most part, we've had a lot of success in resolving maybe some longer standing problem credits and difficult things and I think we look to see some of that continue into 2019. So we're looking for continued positive credit trends, reducing non-performing levels, which from an earnings standpoint, we think will continue to contain provision expense. Yeah, when we look into 2019, we, obviously, had a pretty good year in 2018, we might see higher provisions, but not necessarily a lot higher, maybe $750,000 a quarter or so from a provision expense based upon continuing improving trends on the nonperforming levels and low levels of losses, which we had net recoveries in 2018. Don't know if we'll do that 2019, but we expect again continued good experience. So our outlook is still very positive here, Chris.

Christopher Marinac -- FIG Partners -- Analyst

Great, Kevin. Great, Don. Thank you very much for the background.

Donald Hileman -- President and Chief Executive Officer

All right, thank you. Have a good day.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Tera Murphy for any closing remarks.

Tera Murphy -- Vice President and Marketing Director

Thank you for joining us today, as we discussed our quarterly and year-end results. We appreciate your time and interest in First Defiance Financial Corp. Have a great day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 37 minutes

Call participants:

Tera Murphy -- Vice President and Marketing Director

Donald Hileman -- President and Chief Executive Officer

Kevin Thompson -- Executive Vice President and Chief Financial Officer

Nick Cucharale -- Sandler O'Neill -- Analyst

Paul D. Nungester -- Executive Vice President, Director of Finance and Accounting

Brent Beard -- Senior Vice President, Controller

Damon DelMonte -- KBW -- Analyst

Christopher Marinac -- FIG Partners -- Analyst

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