First Merchants Corp (FRMEP) 2011 Q4 法說會逐字稿

Good afternoon and welcome to the First Merchants Corporation fourth quarter 2011 earnings 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 Michael C. Rechin. Please go ahead.

Thank you, Valerie.

Welcome to our earnings conference call and webcast for the fourth quarter ending December 31, 2011. Joining me today are John Martin, our Chief Credit Officer, and Mark Hardwick, our Chief Financial Officer. Earlier today, about 10.00AM we released our earnings through press release and our presentation today speaks to the material from that release. The directions that point to the webcast were also contained at the backend of that release and my comments begin on page 4, a slide titled Fourth Quarter 2011 Highlights.

We're really pleased with the quarter. The quarter contains what were perhaps our cleanest results of the year, reflecting a continuation of our strong margin and improvement of our overall credit metrics. The change for our Company in the fourth quarter was the turn to a modest growth in loans for the quarter. Overall, we were pleased with the quarter in nearly every respect. As our press release states, our sequential quarterly 2011 earnings adjusted for third quarter's TARP repayment charge were $0.17, $0.18, $0.21, $0.24, respectively. Mark, at this point, is going to take you through more of the detail on our financial results.

My comments will begin on slide 6. Total assets are virtually identical to this time last year. However, the investment portfolio increased by $119 million during the year, as loans declined by $126 million. Our allowance on line 3 totals 2.6% of loans, or $71 million, and $7.6 million of the allowance is comprised of specific impairment reserves. That means the remaining $63.3 million of the allowance or 2.4% of loans are general allocations or AFC450 reserves.

The composition of our loan portfolio on slide 7 is diversified. It's granular, and it allows for pricing power. Our Community Bank balance sheet produced a 5.41% yield on loans for the quarter, down just 25 basis points from the fourth quarter of 2010 and down 4 basis points from the third quarter of 2011.

On slide 8, our $946 million bond portfolio continues to perform well, producing higher-than-average yields with a moderately longer duration than peer. Our 3.91% yield compares favorably to the peer averages of 3.26% and our duration is just a year longer at 4.3 years. We have $152 million that will mature throughout 2012 in the bond portfolio with a yield of 3.39% and $129 million that will mature in 2013 with a current yield of 3.08%. Given the current reinvestment rates, the portfolio should still produce approximately a 3.80% yield for all of 2012.

Line 1 on slide 9 shows our non-maturity deposits. They continue to grow despite lower interest rates and lower interest expense and are reflective of the core value of the Corporation. Customer time deposits on line 2 continued to decline, despite our premium specials relative to the Federal Home Bank and broker deposits of approximately 20 basis points on the two- and three-year points of the curve. Line 4 increased during the year, as we extended Federal Home Loan Bank advances, taking advantage of some of the low interest rates and improving our ALCO sensitivity position. And we also grew repurchase agreements as our core customers continue to look for some collateral for the largest relationships on a balance sheet. Lines 7, 8, and 9 reflect the repayment of TARP. The issuance of preferred shares through our participation in the SBLF and the addition of 2.8 million shares of common stock issued on September 9, 2011. Our tangible book value per share now totals $9.64 per share.

The mix of our deposits on slide 10 continues to improve and our total deposit expense is now just 87 basis points, down 55 basis points from the fourth quarter of 2010. Our least expensive categories, demand and savings, now totals 70% of deposits. All regulatory capital ratios on slide 11 are well above the OCC and the Federal Reserve's definition of well-capitalized, and all Basel III proposed minimums. Given the earnings power of First Merchants Bank, management and the Board believes it has adequate capital flexibility for future growth and we actually upstreamed $2.5 million from the bank to the parent in the fourth quarter.

The Corporation's net interest margin totaled 3.98% for all of 2011, an 11-basis point improvement over 2010 but more importantly, on slide 12, our net interest income on a fully taxable equivalent basis has grown for the fourth consecutive quarter. We felt great about the increase in our net interest income. And actually the slight decline that we saw in our margin quarter over quarter was primarily due to about $100 million of temporary liquidity that we had on our balance sheet, where we had increases in public funds that we were laying off and Fed funds sold for the quarter at a really minimal spread. Total non-interest income on slide 13 reflects volatility the due to line 6, securities gains and losses. However, when normalized on line 10, the year improved by $500,000 or 1%, despite the decline in service charges on the deposits of $1.3 million. Mortgage production on line 6 improved by $612,000 for the year, and other income increased by $800,000 due primarily to increased fees from the sale of back-to-back hedges with our commercial borrowers totalling $523,000.

Non-interest expenses in slide 14 totaled $135.9 million for the year, down $6.4 million from 2010. Reductions in ORE and credit related expenses are encouraging and they represent 62% of the annual decline in the total expense category. The remainder of the expense reductions can be attributed to a couple of items, the FDIC expense reduction of $2.6 million, and salary and benefit expense reductions of $1.4 million.

Please turn to slide 15. Our pretax pre-provision run rate recovered in 2011 was $70.9 million or 1.7% of average assets. Line 8 gains and losses due to our TARP exchange in 2010 and our TARP exit in 2011 create more noise in our financial statements than we would prefer. So on the next slide, slide 16, we have normalized or adjusted our EPS to reflect our core earnings trends, absent TARP gains and losses. As you can see when adjusting out the $0.40 gain in the second quarter of 2010, and the $0.46 loss in the third quarter of 2011, our EPS run rate is gaining traction. We're especially pleased with the trend line during last 1.5 years, from their $0.02 to $0.24 per quarter and for the fourth quarter of 2011, we feel that it should serve as a really strong launching point into 2012.

Now John Martin, our Chief Credit Officer, will discuss our satisfying credit quality trends.

Thanks, Mark, and good afternoon, everyone. I'll start by referencing slides 18 and 19, where I'll begin by covering the asset quality summary.

Credit metrics continue to improve in both the linked quarter and year over year, as both the national and regional economy has seen some recovery. As shown on lines 10 and 9 on slide 18, and the corresponding graph on the top of slide 19, respectively, criticized and classified assets declined $73.8 million and $85.8 million from 2010, and on a linked quarter basis by $28.7 million and $20.9 million.

We continue to see improvement in the C&I portfolio while commercial real estate and commercial real estate values continue to be a source of challenge. On line 2, other real estate owned declined $4.6 million year over year and $3.1 million from the third quarter. As mentioned in the past two quarters, we moved a single relationship that contained three multifamily properties from non-accruing to ORE. In the fourth quarter, one of those properties sold, reducing ORE by $2 million. An additional $60,000 market value adjustment was taken at the time of the sale. ORE and credit-related expenses declined for the full year 2011 from $12.4 million to $10.6 million in 2010. The most significant portion of this total is related to the market valuation adjustments resulting from the annual reappraisal of properties, as well as from valuation adjustments that are occurred at sale. We would expect to see ongoing improvement in the valuation adjustments as market conditions continue to stabilize.

Moving to line 3, the structure loans were up year over year $7.2 million as we continue to pursue a strategy of restructuring borrower debt, where appropriate, to accelerate portfolio improvement. We continue to look for ways to restructure loans to viable borrowers that have become over leveraged due to declines in their business or due to a lower market values or vacancy in the instance of investment real estate. On a quarterly basis, restructured loans increased $7.6 million which included two separate relationships, each totaling $5 million, to both a C&I and an investment real estate borrower. Given the situation of each relationship, we viewed restructure to be the best alternative to maximize recovery in the long-run while creating a right sized obligation on market terms that will return to accrual with demonstrated performance in subsequent quarters.

Please turn your attention to line 6 of slide 18 and also at the bottom of slide 19. Specific impairment reserves declined by $600,000 in the quarter, and $6.3 million year over year. Despite this, on line 8, the allowance for loan and lease losses improved as a percentage of non-accrual loans from 92.6% to 101.9% in the linked quarter and from 91.6% to 101.9% year over year. I'll speak to both provisioning and charge-off further when we get to slide 21, but suffice it to say that despite the decrease in the allowance, most all other metrics improved at a rate greater than the absolute decline in the allowance.

Now please turn to slide 20, where I'll walk through the NPA reconciliation. I continue to highlight in this slide the improvement in asset quality, with the box on line 1 to the far left, where at the beginning of the third quarter 2010, NPAs and 90 plus days delinquent reached $146.5 million and then trace it to our year end 2011 ending balance of $100.8 million. Significant progress has been made in asset quality and we continue to work to reduce these numbers further. Now, please direct your attention to the far right column labeled Q4 '11 where walk through the current quarter's changes. We began the quarter with total NPAs and 90+ days delinquent at $106.7 million. For the quarter, we added $10.2 million in new non-accruals. The top three relationships totaled $2.8 million and were all small dollar investment real estate related.

Moving to lines 3 and 4, the new non-accrual loans were offset by $7.6 million moving to accrual, paid off or restructured. On line 4, we returned to a more normalized level of movement from non-accrual to ORE with no significant size property added in the category. On a combined basis, our four top properties represented $7.5 million. As color, the balance of ORE portfolio is split in number evenly between commercial and single-family residences.

Moving on to line 5, gross charge-offs were $10.7 million, down from the previous quarter of $11.6 million and more in line with quarters Q3 2010 to Q1 2011. The net result on line 6 showed a $9.3 million decline in non-accrual loans. Other real estate on line 7 increased by $1.2 million. The disposition as mentioned earlier of $2 million contributed to this, due to $3.3 million in ORE sold on line 8. The net change in ORE for the quarter then is shown on line 10 of $4 million. Finishing out the quarterly migration then, 90-day delinquent loans decreased roughly $1 million and restructured loans increased by $7.6 million, resulting from the restructures described earlier. We expect to show improvement in the category in the first quarter with the elimination of notes restructured to market terms during the year and have been paying as agreed for at least six months.

Now, please turn to slide 21. The allowance for loan and lease losses declined from $73 million to $71 million in the linked quarter and from $83 million to $71 million year over year. As a percentage of average annualized loans, this represented a 30-basis point decline, and when compared to a 56-basis point decline in net charge-offs as a percentage of annualized loans year over year, the allowance continues to provide adequate coverage.

Then turning to slide 22, in summary, our credit metrics are improving in most all categories. We continue to work down our non-performing assets through restructures and asset dispositions. Our criticizing classified assets have moderated, and the ORE and other credit related expenses continue to come down. And finally, while our provision expense has been lower than net charge-offs in the most recent quarter, our non-accrual coverage continues to improve with overall improvement in credit quality.

I'll now turn the call back over to Mike Rechin for his remarks. Mike?

Thank you, John. I appreciate the update.

Wanted to move to page 24 were have a couple of final thoughts on 2011. Three of them, actually. The first point summarizes nearly a full 100-basis point improvement in our tangible common equity. We repaid our TARP obligation, as Mark covered, without significant dilution and coupled with the SBLF funding, provided the Company with more flexibility. In combination with greater internal capital generation, we can revisit the best use of the earnings level at the bank going forward.

Second point, while it reads a little trite, it means a lot to me when I talk about solidifying our brand position as a community bank. Through the credit cycle, we resisted this temptation to accelerate asset quality statistics that were heavy and behaved like our bankers feel a community bank behaves, patiently and working with our borrowers. And it's been neither fast nor inexpensive. But the yield at this point reflecting on John's comments speak to an equal number of refinancing affected outside our Company, with upgrades by hanging in with management teams we feel like have a plan that they can execute against. And so I read a lot into the second bullet point on that page and I'm hoping that as the turn continues, should the economy accommodate, we are able to hit a nice single-digit, high single-digit earning asset run rate out of our loan portfolio.

And it runs to the last point on page 24, the beginnings of organic balance sheet growth, an inflection point in total loans in the fourth quarter. Our pipeline has been transitioning onto our balance sheet and then finally, last quarter, marginally eclipsed the rate of repayment from amortization and those credit related exits we needed to make. Organic loan growth demand is not robust but it is building and in combination with aggressive market coverage produces strong commercial loan pipelines.

Let's flip to 25. I'll cover a couple of these points before we take questions. Whether it's by market geography or line of business, we expect to see positive balance movement in 2012. We've got momentum in commercial banking and a productive early investment in a larger business banking sales force. And I'll touch on our mortgage business in a minute where I will lift out of really qualified, higher-dollar focused on the for-sale market mortgage business that's been with us about three quarters now and partially responsible for the really significant volumes, both in mortgage loans closed and the sale proceeds from those that we've enjoyed throughout 2012, but most visibly in the fourth quarter.

Our net growth in the fourth quarter is a directional change but the magnitude of it, which is modest, really belies our activity in the market coverage, in our relationship servicing, and our new client acquisition. We like where we are right now. We understand that community banks might have less revenue diversity than money center banks. We accept it, and the opportunity that it provides. The focus on many of our senior managers is on capital strategy and continued asset quality improvement. The focus of even more of our senior managers is on being in front of our customers, listening, servicing, responding.

On our last call, I referred to our priorities of productivity and efficiency. You can see the remainder of the page describes our efforts to get better return on our technology investments and identifying customer needs. In addition, we've got specific plans in place that manage our all-in expense base. We have an execution plan that balances maintaining a high net interest margin and growing net interest income and overall revenue. So we expect to grow our income again.

The last point just acknowledges the likely increase in M&A activity going forward. We've not made an acquisition since late 2008, but know that we have a history of successful, customer-friendly integrations and expense rationalizations. We look forward to prudently participating in any consolidation of the financial services industry as a buyer that falls within our franchise.

At this point, Valerie, I'd ask you to open the phone for questions.

We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Scott Siefers of Sandler O'Neill.

Good afternoon, guys.

Hi, Scott. Good afternoon.

Mark, probably best place to start is with you. Can you talk about your ability to preserve the margin as you look into 2012? You noted the 87 basis points all-in cost of deposits which seemingly allows for a little additional room to go down. Then I think you suggested only about 10 basis points of yield compression expected in the securities portfolio throughout the year? Maybe if you could just touch on those in a little more detail and provide a broad outlook for your ability to hold the margin in?

I mentioned this quarter and I think it's worth highlighting again, we had about $100 million of public money, on average for the quarter, that can hold down our margin by about 11 basis points. And so the net interest income was as expected, but margin reported, with a little bit less, given that $100 million that's tough to make any spread off of. Going forward, we do feel good about our ability to maintain our margin. Our yield on our loans only declined by about 4 basis points. And then with the 10 basis points or so of decline in the bond portfolio we're anticipating this year, we think we can make up the difference through a repricing of borrowings and really, repricing of CDs.

In our current portfolio, our CDs are still -- we have about $446 million that are priced at [1.21%]. And those are CDs under $100,000. Over $100,000 are still [1.29%]. Those maturities continue to come at us at $50 million to $60 million a month. And it gives us the opportunity to keep reducing the rate, our current specials. We're under 1% on everything. So, I'm encouraged by our ability to maintain our margin, at least throughout the rest of 2012, in what's obviously a really low and flat interest-rate environment. 2013 becomes a little bit more challenging as our deposit expenses will find a bottom. But throughout 2012, we still feel really good about our ability to maintain margins.

Perfect, thank you. And then, Mike, I was hoping you could expand on some of the momentum in the loan portfolio. It was obviously, at least psychologically, a pretty important quarter in that you've flattened out the loan portfolio after a period of contraction. I wonder if you could expand a little on some of your comments from just a moment ago, as to where you're seeing the most and least strength at this point.

Sure. As you can see in the press release, we still haven't solved for the consumer loan demand yet. So, we're having to continue to work through the drag on what appeared to be, despite what I think of, are really sharp offers and well-thought out solutions for consumers. You aren't going to see any growth there if you look at the last couple of quarters. Our pipeline there is steady. Others, I think, continued deleveraging at the consumer level. We're a commercial bank. The majority effect, when you look at the balance sheet, so that's why I continue be encouraged, not only psychologically as you referenced about getting over the hump in the fourth quarter, but what we see going forward.

We have two flavors of pipeline, if you will, Scott. One of them is where we've actually issued commitments. We're working on documents that lead to a closing and then one that is provided by the bankers, where we like the risk. We're in the process of moving towards those same two items, a signed commitment letter and loan docs. And we actually had a higher, end of the third quarter, we had a higher firm pipeline of things that are moving towards the closing, probably about $70 million higher than at year end. Because we did pick up that onrush into the fourth quarter. It's dwarfed by that pipeline where we have credit approvals in place and are trying to get them signed by the prospective either clients or prospects, where it's up $110 million from the third quarter. It's more than twice what it was in the fourth quarter of last year. And most pleasing to Mike Stewart, our Chief Banking Officer, it comes from every geography we're in.

So, while it would expect the greater Indianapolis market to provide a disproportionate amount of our on balance sheet growth in 2012, our plan actually calls to get net growth in each of the six markets that Mike manages the business by. The Columbus in particular I am excited about as we look at the macro level dynamics of the places we do business. They have seen the greatest decline in unemployment, and is by virtually any metric, marginally more healthy than Indianapolis. Our leadership there is responded and adding bankers all through the second half of 2012. I think we've worked our way through their acclimation to our Company and they bring a wealth of Rolodex that we look to take advantage of. Did that answer your question?

It does. Thank you. Also when you were wrapping up your prepared remarks, you alluded to the expense base and not sure if you said formal cost initiatives, but basically I think you alluded to kind of holding line. Can you talk a little bit how you see the expense base panning out for next year?

Yes, I can. I think that the fourth quarter coming down from the third quarter is pretty representative of where we ought to be. Again, I think we've got some people expenses that'll probably -- our all-in people expense for 2012 will likely be about flat. What took place in the fourth quarter was really significant commissions paid to the mortgage folks, which is their only manner of compensation, and so the swell in the fees they generated off the volume they closed reflects itself in the same period. In the fourth quarter, also, our numbers were up mildly. We had $220,000 of severance expense. There's a couple of comments on the last page that refer to looking at retail in our delivery system. That speaks not only to the staffing, vis-a-vis the transactions coming out of our stores, but also to the efficiency of the stores themselves.

The vast majority of that severance that I referenced can come from fine-tuning in that and then it affords us the reinvestment, if you will, of many of those dollars into our business banking segment. Which is really, as I think we've talked about in the past, covers our $10 million in below and revenue size, in our footprint, in concentric areas around the banking centers. So, we'll have a little bit of sales person build in any part of the line side. The rest of it, it's going to be a pretty firm tie, based on we see. We have capacity to service our customers and take on the growth that our plan calls for.

Okay, perfect. Thank you very much.

Thank you.

The next question comes from Stephen Geyen of Stifel Nicolaus.

Good morning. Or good afternoon, guys. How are you today?

Good, Steve.

Just curious. You talked a bit about the provision level and also provisions being a little below net charge-offs. I guess you discussed it in pieces. Maybe if you could put it together and just wondering if there's any change in the general reserve and how that's calculated. The net charge-offs have been declining at a pretty decent clip for several quarters. And then maybe just a rough idea or thoughts on specific reserves as well.

I will pick up on this specific reserve and hit on a couple of them, and Mark, if you want to add. These specific reserves that you can see came down and obviously that's a reflection on those loans that have individual specifics. They decline for the quarter. I would say the FAS 5 pool, the general allocation, really was in line with the last quarter, as were the environmental factors. So, really the reduction came out of the specifics and the other categories were for the most part unchanged.

The only thing I would add is if you go back same time period last year, we had as part of those FAS 5 or the ACS 450 pools, we had $54 million that were tied to historical allocations and those have come down to $32 million. And so that the offset has been a doubling of environmental factors. We're trying to ensure that as we move forward that we adequately reserved as we continue to see what the tail of the credit cycle has to offer.

Okay. And FDIC expense, down again quarter to quarter. Just curious was it really just based on changes in the deposits, or were there other factors as well?

We continue to try to get our arms around their calculations and they're surprisingly complex. We're comfortable with the current level and feel great about the ability to maintain that through the rest of 2012.

Okay. And thoughts on the tax rate for 2012?

The tax rate has been volatile, but volatile for reasons that you can see in the income statement. I was walking through that today, expecting a question. If you look at the income before taxes of $9.860 million that we had for the quarter and you add back the tax exempt loan interest of $93,000, further up on the page, and then look at the tax-exempt bond income of $2.550 million -- I should say reduce, not add back. And then deduct from the $9.860 million the cash surrender value of life insurance of $8.03 million and 35% of that remaining balance of $6.4 million is $2.245 million and we're at $2.299 million. It is the way that the calculation should work and we feel good about the quarter.

In September, it was a little more complicated, because some of our TARP dollars were flowing through interest expense and it was not tax-deductible. We had about $580,000 that ran through those numbers. And also in the third quarter, we put about $250,000 additional in the reserve. We've had the IRS in as well is the state. We don't really see any problems, just making sure that we have some additional cushion there, depending on what kind of findings they might come back with. And then if you do the same math, even all the way back in the second quarter, the same thing holds true. The $6.884 million pre-tax, and deduct those three items. They're all tax-exempt. And use 35%, it works out like it should. It's just hard to give a flat rate.

Got it, okay. Appreciate it. Thank you.

Thank you.

Your next question comes from Joe Stieven of Stieven Capital.

Good afternoon, guys. Thanks for taking the question. This is Steve, actually. And the SBLF, the rate, following up on the growth comment, do you believe it's reasonable that you could get that SBLF rate down from the initial 5%, given growth expectations?

That's a great question. When we applied, move through the process, accepted and closed, all of our contemplation for it was that we would not qualify. And in 2012, I think it's really unlikely that we would. You may recall, we started. If you look at that, you can see our balance sheets. You can't necessarily see the loans that fit the definition of the SBLF but we were the better part of $200 million behind from the baseline to the date we closed. We had a, not greatly surprising, but a larger growth in that category in our first measurement period which was September 30, 2011, and so we're getting ready to submit our work for year-end that's going to show growth in that category again. How fast we bite into that number to achieve net growth won't happen this year. But as I would've been more bearish about the possibility of reducing that cost of capital four months ago than I would be today. But it's a function of safe and sound demand. There's no amount of capital reduction that merits credit cost.

Okay. Fair enough. And then can you just talk generally -- I know it's only been several months, and it's still very inexpensive capital, but in what time period you think you would start considering paying back little pieces of that SBLF? Is that probably a 2013 conversation? What is your thought process there?

Yes, we internally have -- when we look at the tangible common equity levels, we'd still like to get those above 7% and the Tier 1 common is really close. We'd like to push it above 9%. And then we can start talking about alternative uses of the bank's liquidity as it flows up to the holding company.

Okay. Thanks guys. Congratulations on a great year.

Thank you.

The next question comes from John Barber of KBW.

Good afternoon, guys.

Hi, John.

Good afternoon to you.

You mentioned the upstream dot $2.5 million in cash from the bank to the holding company. Can you give us an update on how much cash you have at the holding company right now and how that compares to your annual expenses?

We're over $20 million, we're around $21 million or $22 million. I don't have that exact number with me. We filed with our Y-9, the LP report. It's roughly 2 years of parent company liquidity.

Okay, thanks. And you mentioned you're seeking M&A growth opportunities. Could you just remind us of what your ideal size targets would be? I think you said you look exclusively in market, is that right?

We feel like we have greater confidence, and as such, interest and perhaps risk-taking in a market that would be contiguous to where we already are. And at our size of balance sheet, a lot of it would depend on the health of the organization, how much credit risk was incumbent in its acquisition. But $1 billion to us would be not only right at the top end of anything we've done in the past, but I think it fits best our capital profile. So, if you lay out the Ohio and Indiana markets, it suggests companies that have some touch to markets that have the ability to grow. That doesn't mean we don't look at contiguous states. We just have less market knowledge on them.

Great, thank you.

The next question comes from Brian Martin of FIG Partners.

Mark, you commented on the upstream. What are your plans on upstreaming in 2012? Are there plans to upstream more capital? Is that the plan at this point? How are you thinking about that?

Our plan for 2012 is, we're likely to just continue a similar pace, that $2.5 million a quarter, and just to cover the parent company's expenses. And then as we move into 2013, the 3-year rule -- look-back in terms of overall earnings. We'll have our loss year behind us and it gives us a lot more flexibility. 2008 will be behind us by next year.

Okay. Perfect. And then just one thing or two things on credit. I think you talked about the increase in TDRs, but maybe John mentioned it. I thought that I heard you guys expected to see some of that decline in the first quarter. Maybe what your thoughts were on how much of that comes down in the first quarter, and the current mix of TDRs. It sounds like the two that came onboard this quarter were in the $5 million range and that most of the TDRs commercial rather than residential? Does that seem fair as far as the mix goes?

Yes, the mix is the preponderance of the A note, B note restructuring that we're doing -- are the commercial. We do some residential, but it is by far the preponderance.

Okay. And then as far as the improvement you expect on the TDRs or how much you expect to drop? Did you say that, John, or did I mishear what you said?

I don't have the number as a percentage at this point. I would think it's going to be fairly meaningful in relationship to the total. You've got to look back through the year and look at which ones are, which once had been paying for six months, and that analysis will do as we look into the next quarter.

Okay. And then, John, your thoughts on -- with credit getting better here, and everything directionally going the right way. When you look at the loss content, as far as the charge-offs go, in 2012, do expect a pretty meaningful drop from the current type of pace we're at? Or is that not a fair statement when you think about where we are in the credit cycle?

Yes, I see charge-offs coming probably where we are at, to somewhere lower than where we are at now. I don't have an estimate beyond just the experiential day by day, week by week sort of information. But I guess I'd say that probably on pace and I would expect that they would be below where they are today by 10%, 20%, something like that.

Okay. And lastly, the inflows in the quarter were really low. Can you give a little bit of color on what made that up? And I don't know if you said it, or it's in the release, I didn't see it. But the 30 to 89 day past due, where those are at?

We've got a couple of large names in the 30 to 89 day past due bucket that we were negotiating at the end of the quarter that drove that number. I think in terms of the -- you wanted to know about the non-accrual composition?

Yes, just that inflow of composition.

Yes, we had -- let me get to my references here. I think our largest one was a fairly granular individual rental real estate, totaled roughly $1 million. It was all real estate, small dollar real estate related.

Okay. All right, I appreciate the color. Nice quarter.

Thank you, Brian.

The next question is a follow-up from Scott Siefers of Sandler O'Neill.

Hello. I think most of my questions have been answered. I had two. Mike, as you think about capital, building in presumably will continue to build going forward, but as you get a little more flexibility on upstreaming and being out of the TARP part of it -- granted, we have SBLF -- but what are going to be the capital management priorities? How are you looking at flexibility as you continue to build the capital base?

Based on valuation and where we've been and are, stock repurchases aren't on our radar screen. I can't imagine that being a priority. The common dividend is something that we'd probably like to revisit, maybe this year. We see the guidance that comes out and we're obviously well beneath the guidance and making a change there is something we would contemplate. We want to get our handle around growing capital and loan growth at the same time. We had a smaller balance sheet year for a couple of years and so there hasn't been a lot of claim for the capital to fund loans. What I'd prefer to do is to just have a 6% or 8% a year growing loan portfolio the called for some capital and then evaluate after that.

The small business fund, going back to that aspect of the question, one of the things we've always liked about it was the flexibility and repayment, that not only didn't call for dollar-for-dollar equity raises, but offered no firm schedule so that based on quarter to quarter cash in you could evaluate it.

I agree. Okay, perfect. Thank you. And Mark, just a housekeeping question. If you just do the quarter's net income divided by shares, I think you get $0.22 versus the $0.24. Is that a GAAP catch-up because of the different share count? What is driving that?

It is. The average shares for the year, were almost 26.7 million and so that produces a $0.34 year-to-date EPS. And through three quarters, we had $0.10 including the one-time charge. And the quarterly average was 28.7 million and the quarterly average is higher because of the equity raise that we did in the third quarter. It would've produced $0.22 per share. That math is correct but the quarter has to equal the year-to-date, less the prior quarters.

Yes. Okay, perfect. Thank you very much.

Thank you.

Thanks, Scott.

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

I really have none. My colleagues and I are appreciative of the interest and the questions. Appreciate your time today. Look forward to talking to you when we have our first quarter results.

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