Mercantile Bank Corp (MBWM) 2011 Q4 法說會逐字稿

Good morning everyone. Welcome to the fourth-quarter and full-year 2011 earnings results conference call.

All participants will be in a listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity for you to ask questions. Please also note that today's event is being recorded.

I would now like to turn the conference call over to Ms. Karen Keller. Ms. Keller, please go ahead.

Thank you Jamie. Good morning, everyone, and thank you for joining us today for Mercantile Bank Corporation's conference call and webcast to discuss the Company's financial results for the fourth quarter and full year 2011. I'm Karen Keller with Lambert Edwards and Associates, Mercantile's investor relations firm. Joining me are members of their management team, including Michael Price, Chairman, President, and Chief Executive Officer; Robert Kaminski, Executive Vice President and Chief Operating Officer; and Chuck Christmas, Senior Vice President and Chief Financial Officer.

We will begin the call with management's prepared remarks and then open the call up for questions. However, before we begin today's call, it is my responsibility to inform you that this call may involve certain forward-looking statements such as projections of revenue, earnings and capital structure, as well as statements on the plans and objectives of the Company's business. The Company's actual results could differ materially from forward-looking statements made today due to the important factors described in the Company's latest Securities and Exchange Commission filing. The Company assumes no obligation to update any forward-looking statements made during the call.

If anyone does not already have a copy of the press release issued by Mercantile today, you can access it at the Company's website at www.Mercbank.com.

At this time, I'd like to turn the call over to Mercantile's CEO, Mike Price. Mike?

Thank you Karen. Good morning everyone. Thank you for joining us.

Earlier today, we released our fourth-quarter and 2011 full-year operating results which completed a strong year comprised of four consecutive quarters of positive earnings. 2011 was a turning point for Mercantile, marked by several key milestones that I am pleased to share with you today. Net profit has increased substantially, nonperforming assets have decreased significantly, and our Bank is continuing to grow stronger each quarter.

Over the past several years, we have communicated a number of strategic initiatives that have been our focus as we've managed through the effects of the Great Recession and returned the Company to sustained probability. Mercantile's officers and employees have worked relentlessly to reduce nonperforming assets, protect and improve our net interest margin, and reduce controllable costs, all while maintaining our well-capitalized position. We recognize there is still work to do, but we are very pleased with our progress and Mercantile's strengthened position as a result of our achievements. It is because of this effort, our improved operating performance and our belief that Mercantile should remain profitable that we were able to reverse the net deferred tax asset valuation allowance resulting in a federal income tax benefit of $27.4 million during the fourth quarter.

We enter 2012 well-positioned to continue our success as a major competitor in our markets. With the support of our customers and hard work of our associates, we have greatly reduced our problem assets, returned to solid profitability and continue to build a well-capitalized balance sheet. Our primary focus is return to building our franchise and helping our communities prosper.

On the call today, our Chief Financial Officer, Chuck Christmas, will provide some of the details of our financial results, followed by Chief Operating Officer Bob Kaminski and his comments regarding asset quality and other operational successes for the quarter. At this time, I'll turn it over to Chuck.

Thanks Mike. Good morning everybody.

This morning, we announced net income of $30 million for the fourth quarter of 2011 compared to a net loss of $5.3 million during the fourth quarter of last year. Net income totaled $36.1 million for the full year 2011 compared to a net loss of $14.6 million for all of 2010.

Our 2011 fourth-quarter and full-year operating results were positively affected by the reversal of the previously established net deferred tax asset valuation allowance, resulting in a federal income tax benefit, as Mike mentioned, of $27.4 million during the fourth quarter. Our operating results on a pretax basis, which I will refer to as our core operating results, also showed substantial improvement during 2011.

Our income before federal income tax during the fourth quarter of 2011 was $3 million, compared to a loss before federal income tax expense of $3 million during the fourth quarter of 2010. For all of 2011, our income before a federal income tax benefit was $10.1 million, compared to a loss of federal -- before federal income tax benefit of $13.4 million for all of 2010. These operating results reflect improvements in many key areas of our financial condition and operating performance, including significantly lower provision expense and nonperforming asset costs and improved net interest margin.

We are of course pleased to be able to report a net profit for the fourth quarter of 2011, our fourth consecutive profitable quarter, after two years of quarterly losses. These improved results are a reflection of the positive impact of numerous strategy developed and implemented over the past several years, combined with the somewhat improved economic conditions. Our dedicated efforts have contributed to the significant decline of our nonperforming asset levels and a prudent loan portfolio achieved through our home credit underwriting and administration practices.

Operationally, we have strengthened our net interest margin, significantly enhanced our regulatory capital ratios, improved our liquidity position through substantial local deposit growth, and dramatically reduced reliance on wholesale funding, all while lowering our overhead costs. Yes, more work lies ahead and while economic and regulatory headwinds may continue to face Mercantile, the banking industry, and the economy at all levels, we believe we are very well positioned to succeed as a strong community bank and continue to play a pivotal role within the markets we serve.

During the fourth quarter of 2011, we saw the continuation of many positive trends. I'd like to touch on a few of them now.

An improved net interest margin has provided substantial support to net interest income that has been negatively impacted by the decline in earning assets. Net interest income during the fourth quarter of 2011 was $12.3 million, or about 10% lower than the fourth quarter of 2010. Average total earning assets declined by about $278 million during the fourth quarter of 2011, compared to the fourth quarter of 2010. However, our net interest margin increased from 3.36% to 3.65%, or about 9%, during these comparable periods.

In comparing all of 2011 with all of 2010, our net interest income declined $5.1 million as average assets were down about $284 million, more than offsetting a 9% increase in our net interest margin. The improvement in our net interest margin is primarily due to a decline in our cost of funds which has more than offset a decline in our yield on assets.

The lower cost of funds primarily results from the maturity of higher costing certificates of deposit and borrowed funds, and reduced rates paid on local deposits. The lower yield on assets primarily results from several items, including a lower loan yield reflecting improved borrower financial performance and increased competition, lower securities yield reflecting US agency call and reinvestment activity, as well as principal pay-downs on higher-yielding mortgage-backed securities, and a higher level of Federal funds sold.

Provision to the reserve totaled $1.9 million during the fourth quarter of 2011, a substantial decline from the $6.8 million we expensed during the fourth quarter of 2011 and well below the average quarterly provision amount during the past three years. For all of 2011, provisions to the reserve totaled $6.9 million, dramatically lower than the $31.8 million expense during all of 2010.

Our loan-loss reserve was $36.5 million at year-end 2011, or about 3.41% of total loans. Despite the significant improved condition of our loan portfolio, our loan-loss reserve coverage ratio remains strong and is down only 5% from the level at year-end 2010.

Local deposit and [soup] accounts are up about $7 million during the fourth quarter of 2011 and they are up about $290 million since the end of 2008. Combined with the reduction in our loan portfolio, we've been able to reduce our level wholesale funds by about $1.04 billion since the end of 2008. As a percent of total funds, wholesale funds have declined from 71% at the end of 2008 to just over 30% at the end of 2011.

Nonperforming asset administration resolution costs remain elevated. However, the costs did decline during the fourth quarter of 2011 and for all of 2011. Nonperforming asset costs totaled $1.7 million during the fourth quarter of 2011, well below the $3 million expense in the fourth quarter of the previous year. For all of 2011, nonperforming asset costs totaled $8.3 million compared to $10.9 million in 2010. As with provision expense, we would expect continued reductions in nonperforming asset administration and resolution costs in future periods if the level of nonperforming assets continue to decline.

We remain a well-capitalized banking organization. As of December 31, 2011, our Bank's total risk-based capital ratio was 15.5% and in dollars was approximately $67 million higher than the 10% minimum required to be categorized as well-capitalized. At year-end 2010, our Bank's total risk-based capital ratio was 12.5% and the surplus was about $35 million.

Our efforts to right-size our balance sheet and improve our operating performance of the last few years have enhanced our regulatory capital ratios. At the present time, we believe our capital position is sufficient to fund our operations as well as provide for future growth opportunities.

Those are my prepared remarks. I'll now turn the call over to Bob.

Thank you Chuck. My comments this morning will give some color on new business development efforts and the asset quality of the loan portfolio. In 2011, Mercantile advanced several initiatives to increase client acquisition and business development activities. With some new marketing strategies as well as product development and fine-tuning, we continue to provide our staff with the best tools possible so they can execute our mission as a relationship-oriented community bank.

With our historically strong menu of loan and deposit products, value-added services such as payroll processing, business and consumer remote deposit capture, receivable and payable processing, plus our full electronic suite of products, Mercantile calling officers are well equipped to generate new business opportunities for our organization.

Our sales staff is energized and ready to share the Mercantile banking experience with their respective clients. While numerous competitors are in the market emphasizing low-priced banking, we are finding our success by combining exceptional service, cutting-edge products, and competitive rates. We are constantly reminded that the relationships we build with our customers are a highly-valued attribute of a strong community bank.

Developing banking relationships takes time as we work to gain the mutual familiarity and trust as opposed to the approach of selling on rate or price, which is a much quicker but potentially less stable proposition. Once prospects decide to move to Mercantile, the choice is typically based on very solid relationships that have significant staying power.

We are pleased with the progress made the economic recovery has begun. While portfolio pruning is still occurring -- was still occurring, which offset some of our gains, the relationship pipeline remains quite strong. We were able to witness some net loan growth near the end of the fourth quarter and into the first quarter of 2012.

As we had mentioned in the press release and in our earlier comments on the call, the health of Mercantile's loan portfolio continues to improve, although NPAs did show relatively small increase this quarter. NPAs would have continued to show a decline absent the proactive treatment of some totals in the non-owner occupied commercial real estate category in which we further downgraded some existing watchlist loans and realized the charge in the fourth quarter. With this action, NPAs increased to $60.4 million from $56.8 million at September 30, 2011, but showed a significant decrease from the $86.1 million at year-end 2010.

We continue to see good progress in the mission to reduce nonperforming assets to levels superior to that of our peer group. Appropriate action plans are in place to drive higher risk loans to resolution either by improvement in performance so they can be upgraded and removed from the watchlist, or by movement toward a liquidation plan.

While still higher than we anticipate seeing in the future, the Bank's internal problem loan list has been reduced to levels that we have not seen in over three years. The Bank's provision for loan losses in the fourth quarter was $1.9 million, and $6.9 million for all of 2011.

The reserve stands at a healthy 3.41% of total loans at December 31, 2011.

One of the improvements that we continued to witness in the fourth quarter is the significant pace of loan recoveries, which were $1.1 million in the fourth quarter and $4.2 million for the full-year 2011. This is reflective of the conservative practices employed by the Bank in recognizing loan losses, and also the diligent efforts by our loan work-out staff to obtain payment on previously charged off loans.

Another indicator of the improvement in the portfolio is the 30- to 89-day past-due loan measurement which stood at $216,000 at December 31, 2011, down from $1.1 million a year earlier.

Those are my prepared remarks. I'll now turn it back over to Mike.

Thanks Bob, and thanks to you to Chuck for your comments. At this time, operator, we would like to open the lines up for any questions.

(Operator Instructions). Terry McEvoy, Oppenheimer.

Thanks. Good morning. Chuck, you talked about the Bank having enough capital for growth opportunities, and in the press release, you talk about developing a framework for redeeming TARP. Could you maybe expand upon kind of the TARP redemption, and is that a separate capital discussion than just what you call growth capital today?

Yes, I think certainly when we look at our capital position, we are looking at everything, certainly earnings performance. We're looking at loan opportunities and the trends we are seeing in our loan portfolio. As we stated when we got TARP and we continue to state, we are going to get -- we want to get rid of TARP as soon as we can, redeem it, repay it, but we obviously want to do that prudently and looking at all those other things that are going on.

So when I look at our capital position and we are starting -- it looks like we're starting to hold our own on the loan portfolio totals as we go through the last couple of months here, we don't see any tremendous asset growth or loan growth coming anytime soon, but we think, as the economy continues to improve, and as Bob was mentioning, some of our marketing and calling efforts start to come to fruition, we would expect to see some loan growth. Obviously, what we do is overly those expectations with earnings expectations, how that impacts the capital ratios, and then certainly look into redeeming the TARP at some point.

This is Mike. We want to make sure we are clear. We don't expect to have a capital raise to pay TARP back. Our plan has been pretty clear right from the beginning that that's part of the planning that we believe that we can generate enough capital to do that. Obviously, the performance of the last year especially we think indicates that we are on the right track.

Then with 2011 now behind the Company, a lot of progress made on multiple initiatives in areas, could you talk about any kind of mid- to long-term targets or goals that this I'll call it new Mercantile Bank you think can produce, whether it's ROA, or ROE, that can be helpful to kind of get inside how you guys are looking at your business model going forward?

Yes, I appreciate the question. This is Mike again. I think we are really trying internally to formulate what those ROE and ROA targets would be. The reason I can't really give them to you right now is because we are still trying to formulate with the rest of the industry what the capital level of capital expectations are. For example, going forward, there's still a lot of noise out there, as I'm sure you're aware of, as to what regulators are expecting and etc., etc.

As you pointed out, 2011 was a tremendous year for us. We made so much progress on so many fronts, and we did exactly what we wanted to do, which was position ourselves going into this year to be able to get back and rebuild the franchise from a growth standpoint, and become the dominant player again that we have been in our markets for community banking. But I can assure you that we are constantly looking at improving all those ratios. We are glad that we've done what we have done so far.

But to give you something to say, hey, two years out, we would like to be here, four years out we would like to be here is a little premature for us right now, because we also want to make sure that we have a, as we talked about, a TARP repayment plan. We want to get the timing. We are getting closer and closer to that. That was kind of on our list of things to do, but it was down the list behind some things that we've already published. So once we start getting some of those things knocked out of the way, we'll be able to hone in on it for your better.

Great. I appreciate that. Thanks.

John Barber, KBW.

Good morning. Could you just start by talking about some of the main considerations that went into your auditors allowing you to reverse the valuation allowance against the CTA?

This is Chuck. I think we worked in concert with our auditors as well as our tax professionals. It's something we've been talking about, and I think other banks have probably been talking about as well as 2011 was going forward is exactly what are the rules, what are the guidelines, what are the expectations for reversing all or part of the valuation allowance on our deferred tax asset.

I think, as we're going through those discussions, I think the auditors were discussing amongst themselves so they could relay that to their clients and we could have those conversations, because it really came down to the biggest hurdle by far was what they term sustained profitability. One of the main reasons why most banks, including Mercantile, originally put the valuation allowance on there was that we were looking at three consecutive years of operating losses. That was kind of a negative milestone, if you will. So we went ahead at the end of '09 and established the valuation allowance and obviously maintained that through right up to the end of 2011.

But as -- we obviously became profitable in 2011. We're profitable every quarter. We were seeing improvement quarter-over-quarter in virtually all areas. You kind of obviously layer that onto future expectations of not only just 2012 but beyond. We certainly believe and I think Mike mentioned in his opening remarks that obviously we were profitable 2011 and we would expect to remain profitable in future periods. Taking all of that and looking at obviously confidentially the numbers that we were producing in our forecast, we came to the conclusion and obviously the parties that were also helping us agreed with us that the end of 2011 was an appropriate time to go ahead and do a full reversal of the valuation allowance.

One of the things that did come through in our discussions was it is kind of an all or nothing proposition. There's no phase-in of that. So we looked at it again, sized up where we were at, where we were at, where we have come, where we expect to go. Certainly sustained profitability is a hurdle we think we overcame, and again our partners agreed. Obviously, we reversed that valuation allowance.

Thanks for that detail Chuck. Can you also talk about just what a good effective tax rate is for 2012?

Yes. We would expect it to be somewhere around 29% would be our effective tax rate. Again, obviously that looks at us as a corporate tax rate of 35%, and then backing off tax-free incomes, primarily municipal bonds, as well as our Bank-owned life insurance.

All right, thanks. I know some questions were already asked about TARP repayment, but maybe I'll ask a little differently. Could you talk about the level of cash you have at the holding company, maybe how that compares to your annual expenses and also your ability to upstream cash from the Bank to the holding company?

That's a great question. I guess kind of a two-faceted answer I'll give you. We keep about on average about $0.5 million in cash at the parent company. It sits in a deposit account here at the Bank. Then we upstream dividends to the parent company on an as-needed basis pretty much reflecting the cash needs to pay interest on the trust preferred, to pay the cash dividends, if you will, on the preferred stock as well as pay corporate expenses. Corporate expenses run, by the way we allocate expenses between the Bank and the parent company, say, about $1 million a year. So you take that $1 million plus whatever we need for the trust preferred and the dividends on the preferred stock, and that's what our expectations are to go ahead and upstream that.

Certainly, we are a shell holding company that has no source of revenue other than dividends from the Bank. So any decision in regards to redeeming the TARP would require virtually dollar for dollar a cash dividend from the Bank. So when we look at managing the capital position of the Company, and that goes directly to our expectations and thoughts about redeeming the TARP, obviously we need to take into account that is going to require a cash dividend from the Bank, and how that is going to impact our regulatory capital ratios, how the examiners are going to react to that. I think, as everyone knows, to repay back TARP, you do need "the okay" from your primary federal regulator. For us it's the FDIC. So I'm sure those are the discussions that we will have with them.

As Mike said, we've put together our plan and have discussions with the FDIC. Obviously, they're going to look at asset quality trends and earnings performance trends and all that. But certainly what our pro forma capital ratios, regulatory capital ratios, will be, I'm sure will be a big part of that analysis as well. So that will blend together with all the other stuff we talked about in regards to capital management.

Thanks. One last one. The migration of non-owner occupied credits to nonaccrual status this quarter, was that limited to just a handful of credits or was it -- I guess could you quantify that?

As I mentioned in my comments, it was something that was nothing that was systemic or anything like that. It was a handful of relationships that we had on the watchlist. We felt it prudent as we approached year-end to take a good look at those, and the prospects and the trends and to move those to nonaccrual status.

John, that was Bob. This is Mike.

Just to underscore the fact of how conservative the treatment was, the loans we downgraded were actually contractually current with us, but we just saw additional weakness. As we've always said at each one of these quarterly meetings, we are very, very conservative. We don't kick the can down the road. We take it whenever we think there is weakness there. So to emphasize what Bob said, it's just some stuff that we saw an opportunity to do it and we did it.

Great. Thanks for taking my questions.

Stephen Geyen, Stifel Nicolaus.

Good morning guys. Maybe to just start off with the net interest margin up 15 basis points from the third quarter. I appreciate the color you gave us on the loan yield and securities. Maybe just a little more insight into some of the changes you saw at where the benefit came from?

I think -- this is Chuck. If you remember back in the third quarter when our margin went down a little bit, a large percentage of that, definitely more than half -- I don't know the number off the top, but it was significant -- was due to the present value adjustments for the cap corridor that we entered into late second quarter. The present value adjustments from September 30 to December 31 were pretty small. I think it was around $25,000 or $30,000 net. It was significantly higher than that during the third quarter, which brought our net interest margin down to the 3.50% level. I think it would have been around 3.6% had you backed out that adjustment.

So I think what we really see is the continuation of a margin that certainly has improved quite a bit over the last couple of years, and has held fairly steady, say, at the 3.60%, 3.65% level. We think that we will -- that barring any significant changes in market interest rates, we think our margin will be relatively steady throughout 2012 as well.

Again, as I mentioned, our loan yield has been coming down. Kind of good problem to have is that when our borrowers, some of our borrowers were facing financial difficulties, we were downgrading them, certainly we were increasing the rates on those credits along the way. Now what we see is a lot of improvement in their financial position, so they, quite frankly, they deserve a lower rate reflecting that, because, again, we are upgrading those credits. We get the benefit and the provision expense.

Certainly, competition is out there. There's a lot of players out there trying to grow their balance sheets. They understand and see the same stresses we have on our income statement, net interest income, and all the pressures that we are seeing with some of our income streams. Certainly a lot of competition out there is trying to build their balance sheets to try to help offset that. So we have seen, certainly seen the loan yield come down. It's probably been averaging maybe a 2 to 3 basis point per month decline. We think that will continue in all or part of 2012 and have budgeted for that.

Like most banks out there, we've seen quite a bit of call activity in our agency bond callable portfolio. Certainly, they are calling higher coupons. In those cases where we do have to put that money back to work in the investment portfolio, certainly the yield we are getting, especially with us, we are trying to shorten that a little bit because we do think over time rates will go up so we are not trying to lock a bunch of long-term stuff. We've seen the yield go down on that as well.

Where the offset is coming from and one of the things that helps the asset yield, you won't see that so much in the fourth quarter or anytime during 2011 but you'll definitely see that in 2012, is an expectation of a reduced level of Fed funds sold. I think we averaged almost $90 million throughout 2011, and that was pretty consistent on a quarter-by-quarter basis, at least the last couple that I know of specifically. We are currently at about $45 million, $50 million; that's where we want to be. So just a reduction of $40 million, $50 million on an asset that earns 25 basis points will obviously help overcome, at least in 2012, the reduced loan yield and securities yield.

Then, as I mentioned, we continue to see a cost -- a reduction in our cost of funds. Like most banks, especially when we got into summer and early fall, with the Fed making their announcements and seeing how the market rates reacted to that, we are able to reduce our deposit rates on virtually every product, so that's certainly help.

But then as we have been seeing over the last few years is we do still have some higher costing CDs and some borrowings that are repricing and will be coming up for repricing here in 2012 that we are able to replace at a lower rate.

So blend all that together, I know it's a lot of information, but blend that together, we would look for our asset yield to continue to come down, but we think the reduction in our cost of funds and mixing in the Fed funds change will provide for a relatively steady margin from the fourth-quarter 2011 performance.

That's helpful. Thank you. Maybe one last question for Bob. I guess it was Mike also that had mentioned that the outlook for customer -- from customers in the pipeline is looking a little bit better, or at least remains fairly strong relative to where you're at in third quarter. There was a comment in the press release about expanding your customer footprint. Could you expand on both of those as well?

We spent the last year doing is, as I mentioned in my comments, some new marketing initiatives, some new product that we rolled out, because we knew that the time was going to come when we were going to get back to a mode where we wanted to pursue growth opportunities. So it's kind of coming together as the plan called. Obviously the pressure is still in the market that we face in terms of competition, and a less than robust economy, but I think what we're looking to do is grow relationships. That's very important to us as opposed to transactions and deals as many of our competitors are prone to do these days. As I said, that takes some time.

As I mentioned in my third-quarter conference call comments, the pipeline was building nicely. I think we started to see some of that come to fruition at the end of the fourth quarter and into the first quarter this year. As I said, we are still doing some pruning, still some things that are going to offset some of those gains. But I think our folks that are out there every day on the street are excited about what they are seeing. The relationships they are engaging in are looking very promising. That set competition is very strong still, but I think the brand and banking that we are pursuing, relationship banking, different than many -- most of our competitors, is something that will give us -- will serve us very strongly in the long run as opposed to short-term gains and loans that are structured or priced weekly.

And one last question, just an accounting number. Chuck, do you have the total risk-weighted assets?

I do if you hang on just a quick second.

Sure.

$1.21 billion.

Got it. Thank you.

Jon Evans, Edmunds White Partners.

Obviously, you guys still think your stock is cheap, but can you talk a little bit about -- it has moved up? How about acquisitions and using your stock as a currency? Can you talk about consolidating maybe Michigan and some of the opportunities there, smaller banks?

Sure. This is Mike again. Yes, I think, as we kind of rank order some things that are on our list to do and/or consider, we have thought that consolidation in the industry is pending. We still think that's probably the case. We've talked about in previous conference calls we wanted to do the things that we need to do internally to strengthen our balance sheet and our currency to be able to participate if the opportunities are there and those right opportunities we think may be coming up maybe at the end of -- the latter part of this year and first part of '13.

You hit the nail on the head. One of the things to effectively do a strong acquisition is you need your currency to be stronger. We are happy and gratified to see, the last couple of weeks, the increase in our stock price. You're right. We think it's still too cheap. We're doing everything we can to prove to the world that we've not only turned this place around, but we really have a lot of momentum going into 2012 and beyond.

But yes, I think there's opportunity out there. I think, right now, the industry is kind of sorting itself out as to who the players are going to be and who is going to stay independent, and people are still continuing to get their loan portfolios cleaned up. But we are pretty far through that now generally as far as banks go, especially the banks that we are aware of in Michigan.

Two more questions. You talked about growing your loan portfolio at the end of the quarter. I guess that seems to be the big knock on you guys that you haven't been able to grow. Do you see growth in the first quarter or the second quarter, or how do you see the growth of the portfolio?

This is Mike again. I'll let Bob and Chuck enhance my answer. I kind of scratch my head a little bit when someone says, well, a big knock on us is we haven't been able to grow. You have to understand, if you followed our organization a few years ago, one of the reasons -- one of the things we wanted to do is shrink because when you're faced with the options that we are faced at, we could've done an incredibly dilutive event our common shareholders, and we held steadfastly. We didn't need to do that; we didn't want to do that. So one of the options facing us was let's shrink the Bank a little bit to help the capital ratios. We did a really good job of that.

The other area where shrinking the Bank helps is in the area of pruning the specially high risk type of lending practices that we wanted to reduce our concentration in. We did a great job with that as well. So when people say, well, the knock on your organization is you can't grow the Bank, I point back to people when we started the Bank 15 years ago, in the first 10 years of the existence of this Bank, we grew this Bank tremendously. The same people. We didn't forget. We understand what has to be done, but we've got some disciplines that we had to go through the last few years.

We also had some disciplines that Bob and Chuck and I have talked about the last few quarters as far as pricing and profitability. The industry -- and unfortunately we participated a little bit more than I would've liked -- the industry got away from the discipline of making sure that whatever you book is going to be profitable for you. We just kind of said we're going to go back to making sure that what we book is profitable, not just from a standpoint is it going to be good credit, but do the dynamics of pricing and structure make a lot of sense?

So I think it's premature for anybody to say -- to knock this employee group, this management team, or this board saying you can't grow the Bank. I think it would have been imprudent for any organization in the situation we've been in the last three years to go out and try to grow the balance sheet. That's just our opinion, but it's worked pretty well for us so far.

Now, going forward, we are seeing more opportunities, as I think Bob mentioned, that we have seen in a long time. It takes time to get the kind of good quality credits and relationships in the Bank that we want. We are well on the way to doing that, but there are also some uncontrollable things that are out there, as you might imagine. That is the pace of the growth of the economy. We are seeing that pick up a little bit as well.

So I think what we have kind of said is while we haven't given direct number growth of what we expect, we expect 2012 to be probably maybe a breakeven year as far as where our loan growth is. We'd like to see a little more growth in that, and maybe privately some of us might think we might be able to get that. But as you know, we are a pretty conservative organization. We never like to put out things that we know that may not be achievable, so that's kind of where we are at. But going forward, we certainly feel real good '12, 2013 and '14, real good about the growth prospects. From there, I'll turn it over to Bob or Chuck if they want to enhance that or if you want to follow up on that question.

Well said.

Well said.

Just the last question, so you did see a pickup in your nonperformers sequentially. Was that just more of a function that you guys had a phenomenal year and you just took a couple of credits at the end that maybe were suspect or potentially and you just moved them to nonperforming to clean it up, or can you help us understand that or is that a new trend?

You're zeroing in on the truth, and that's a pretty good guess. You're close. Basically, what we do -- and we do this every quarter, not just the end of the year -- but as we look at this, and we started this a few years ago when we had the spike in the nonperformers. As we look at the end of each quarter, we just thoroughly go through the portfolio. If we see a credit or a handful of credits that -- a couple of years ago, a couple of handfuls of credit -- that showed deterioration where we started to extrapolate where we expected that credit to be two to three quarters down the road or maybe a year down the road. If we were starting to envision, or if we ever envisioned that the credit probably is going to deteriorate rather than improve, we always take the conservative approach and downgrade it . So we had the same thing happen this quarter. We got to -- just very few credits that we've been well aware of that have been on the watchlist, took a look at the dynamics of it, didn't like what we were seeing. As I mentioned before, they were generally, I think maybe in every case, contractually current, but we just didn't like what we saw in some of those, and so we took the approach that we always take, which is to attack it head on, downgrade it. If it turns out better than we thought, so be it. But we just really don't believe in kicking the can down the road and dealing with something three or four quarters down the road that we kind of had maybe a funny feeling about at the end of the quarter.

Great. Thanks for your time and great job.

Thank you.

(Operator Instructions). Daniel Cardenas, Raymond James.

Good morning guys. Most my questions have been asked, just a couple of cleanup questions. As I'm looking at your nonperforming asset reconciliation, you're showing charge-offs about $890,000. But the next paragraph, we see loan charge-offs of $4.7 million. Can you kind of help me tie those two?

Yes, I think one of the things you've got to remember is when we do that nonperforming assets reconciliation, so for the fourth quarter, what we are talking is about what happened to the credits that were NPAs as of September 30. So we are not really necessarily -- so if we have a loan that's not a nonperforming asset as of September 30, but maybe we put it in the nonaccrual during the fourth quarter but we also take a charge on that, that will not show up in that table in that specific example.

Okay, got you. That make sense then. Then if you could, as I look at your reserves, how much of that is specific and how much of that is unallocated?

This is Robert. I don't have those numbers right in front me as far as specific and allocated. It's quite a complex calculation, as you might imagine. It is now affected by FAS 114s that were required for TDR types of loans. So that is a very hard to quantify moving target at any one time. But as I mentioned in my comments, the reserve is a healthy 3.41%, providing coverage, as our calculation showed at the quarter end, at the year-end, and we are pleased with where it sells in before year end.

Okay. Then as I look at your fee income, jumping over to the income statement, sequentially you're up about $200,000. What was the driver there?

Which summary are you looking at?

Your noninterest income.

Yes, there's nothing really specific in there. It depends on which time you are looking at. A lot of lumpiness that we have, I think that all banks have, is the mortgage making income. Everything else is pretty consistent. So without having that detail in front of me, I would guess that's probably where that's at.

That sounds good. Thanks guys.

At this time, I'm showing no additional questions. I'd like to turn the conference call back over to management for any closing remarks.

Thank you Jamie. Again, this is Mike Price. I just would like to finish by saying, as we look towards 2012, we remain focused on growing local deposits, diversifying our loan portfolio, limiting controllable expenses, continuing our work to enhance shareholder value. Our dedicated team is motivated to build on our success, and we remain convinced our long-standing relationships and proven excellence in community banking will serve us well as we continue on the path of achieving efficient and profitable growth.

Thank you to all of you for joining us this morning and for your interest in our Company. We look forward to talking with you again in another quarter after we discuss our first-quarter results.

That concludes today's conference call. We thank you for attending. You may now disconnect your telephone lines.