Pinnacle Financial Partners Inc (PNFPP) 2010 Q4 法說會逐字稿

Good morning, everyone, and welcome to Pinnacle Financial Partners fourth-quarter 2010 earnings conference call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer. He is joined by Harold Carpenter, Chief Financial Officer, and Harvey White, Chief Credit Officer.

Today's call is being recorded and will be available for replay this afternoon by dialing 888-203-1112 and using the pass code 14241935. Please note Pinnacle earnings release and this morning's presentation are available on the Investor Relations page of their website at www.PNFP.com. This webcast will be available on Pinnacle's website for the next 120 days.

At this time all participants have been placed in a listen-only mode. The floor will be open for questions following the presentation. (Operator Instructions)

Before we begin, Pinnacle does not provide earnings, guidance, or forecasts. During this presentation we may make comments which may constitute forward-looking statements. All forward-looking statements are subject to risks, uncertainties, and other factors that may cause actual results, performance, or achievements of Pinnacle Financial to differ materially from any results expressed or implied by such forward looking statements.

Many such factors are beyond Pinnacle's financial ability to control or predict and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks contained in Pinnacle Financial's most recent annual report on Form 10-K. Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events, or otherwise.

In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. The presentation of most directly comparable GAAP financial measures and a reconciliation of non-GAAP measures to the comparable GAAP measures will be available on Pinnacle Financial's website at www.PNFP.com.

With that I will now turn the presentation over to Mr. Terry, Pinnacle's President and CEO.

Thank you, operator. Good morning. Throughout 2010 we have focused on two critical priorities; number one is aggressively dealing with credit issues and number two is building on the core earnings capacity of the firm. And so, as usual, we will address our progress on both of those fronts this morning.

After we have had a chance to thoroughly discuss our progress on both of these priorities, then I will spend a few minutes highlighting some of the opportunities we see as we move into 2011. And then we will conclude with Q&A as usual.

In regard to the same two critical priorities that we have been addressing in each of these quarterly conference calls through most of 2010, let me begin on the left with priority number one, aggressively dealing with credit issues. As you can see, we made meaningful progress reducing virtually every important problem asset category this quarter. Net charge-offs were roughly $7.2 million for the quarter, down slightly from the previous quarter and well below the rate for all of 2010.

Non-performing assets, and that is defined by NPLs plus OREO, were down $11.4 million during the quarter or 8%. Non-performing loan inflows continued to slow this quarter, down to just $26 million during the fourth quarter from $34 million in the prior quarter. Non-performing loans shrank by roughly $22 million during the quarter from $103 million to $81 million, a linked quarter reduction of 22%. That is the third consecutive quarterly reduction there.

Criticized and classified assets shrank by roughly $34 million during the fourth quarter, a linked quarter reduction of 6.5%. That also is the third consecutive quarterly reduction. Our 30- to 90-day past dues were just 29 bps at the end of the fourth quarter, down from an already low 55 bps in the third quarter. And we have continued to reduce exposure in the construction development portfolio that has plagued us the last two years now at just $331 million, nearly half what it was at its peak, and down 10% this quarter.

In terms of building the core earnings capacity of the firm, you can see most importantly EPS continued to expand from roughly $0.02 last quarter to $0.07 this quarter. The net interest margin expanded nicely from 3.23% last quarter to 3.29% this quarter. We had increases in loan yields and meaningful decreases in cost of funds quarter to quarter.

The margin was also aided by the growth in DDA. Average balances were up almost 8% over last quarter. Core deposits as a whole continued rapid expansion during the fourth quarter, up roughly 4.3% for the quarter and over 20% for the year. And total loan attrition slowed again this quarter, but importantly our most important asset class, loans to businesses, have now grown for the second consecutive quarter and at an accelerating pace.

We have still got lots of room to reduce problem assets and improve earnings, but as you can see from a very high level, fourth quarter was a very good quarter in terms of execution against our two primary priorities.

What I would like to do now is to turn it over to Harvey White, Chief Credit Officer, to review the first priority in greater detail followed by Harold who will review the second priority in greater detail. Then at the conclusion I will come back and talk a little further about opportunities as we move into 2011. Harvey?

Thank you, Terry. Terry just now spoke of many of the improvements in credit quality for the fourth quarter of 2010. What I will be doing is going over some of these same indicators, but in some cases in greater detail and in some cases speaking to earlier quarters and trends not just the fourth quarter.

Terry mentioned that NPA, again that non-performing loans plus OREO or other real estate owned, decreased in the fourth quarter and in fact this continues a trend. For the second half of 2010 NPAs decreased $20.4 million or 12.7%. The fact that OREO is 42% -- you will see this later as well. 42% NPAs indicates that we continue to be aggressive in moving problem loans from NPLs to other real estate owned and then on to ultimate resolution.

The non-performing asset resolutions I will discuss in more detail slide in just a few minutes. Three consecutive quarters of NPL and criticized classified reduction is a great trend to be able to report and pretty much speaks for itself. We have later slides focusing on the construction book, but I will just say here that we have made significant progress in the full year of 2010 with a $194 million or 37% reduction since year-end. We are now below 70% of risk-based capital in this category, which is good.

On the next slide, slide six demonstrates that our problem asset levels appear to have peaked out looking at it two different ways. First, the line represents the total of criticized plus classified assets in absolute dollars and relate to the scale on the right. These peaked in the first quarter of 2010, were down slightly in the second quarter, and then have come down as well in the third quarter and again in the fourth quarter.

The second way of looking at them in this chart is a bar chart and relates to the scale on the left which shows potential problem loans, and those are classified assets performing relative to total loans. This measure peaked in the second quarter of 2010 and has shown very good improvement in both the third and fourth quarters.

The next slide we [put unpaid] past dues in non-performing loans for each of the basic loan categories. In peer comparison our peers are banks that are over $3 billion in assets for the most recent Uniform Bank Performance Report as of the third quarter of 2010. As you see, our numbers are better than peers in all categories.

The top line, the worst category of course is the construction and land development category. This 13.15% is very high for us but it is slightly better than peers and is improving with each quarter. In fact, every category has improved each quarter except for the slight uptick in the third quarter for C&I. And an overall we are noticeably better than our peers.

Slide eight shows two different, but related issues. In an earlier slide we showed where criticized and classified loans had decreased every quarter since first quarter in 2010. This slide demonstrates the same issue but looking at non-performing loans, which are represented by the bar graph. They peaked in first quarter of 2010 and have decreased every quarter since.

In addition, the line on this chart is the allowance for loan losses expressed as a percentage of non-performing loans. This has been increasing or improving ever since the first quarter of 2010 and is now above 100%, which is at the high end of our peer group which is a good thing.

The next slide speaks to some of the detail of our other real estate owned. The point of this slide is that the OREO balances are broadly covered 115% by generally current appraised real estate values. You will note that the average age overall is about four months of these appraisals.

We anticipate continued high levels of OREO over the next few quarters as we continue to move troubled loans through OREO to ultimate resolution. Again, the fact that 42% of our non-performing assets are OREO indicates that we are aggressive in pushing these assets through the process. This could be and probably will be impacted somewhat by the possibility that some of our borrowers would declare bankruptcy in order to avoid foreclosure, which obviously slows the movement through the process to ultimate resolution.

The next slide is about non-performing asset disposition activity. You may remember the high second quarter number is in large part due to our charging off almost half of that $68.8 million in the second quarter.

The good news in this slide is that in each of the third and fourth quarters disposition was in the $43 million to $37 million range and each quarter the charge offs were in the $7 million, $7.5 million range. So, obviously, most of the non-performing asset disposition in the third and fourth quarters was getting accomplished by selling the NPAs or selling the properties rather than charging them off.

The next slide shows the 30- to 90-day past due loans by category. Earlier I spoke to the non-performing assets and 90-day capacity numbers in these same categories and showed that we were working these problem assets down and were ahead of peers in doing so. This slide represents the 30- to 90-day past dues in these very same loan categories. These past-due levels are low relative to peers and are trending in the right direction.

The next slide is yet another cut at what we see in our past due statistics. Since past dues are an indicator of developing problems, we have divided our past due loans into two groups. At the top half of the chart are the non-accruals and the credits that had been identified as problem loans and typically have been moved to special assets. Then at the bottom half are the past dues where these loans, which are still past credits and are still handled in the line.

The point of this slide and the point I would like to make here is that at the bottom, for those loans that are still past credits and still handled in the line, that 13 basis points of past dues and the 18 basis points last quarter, those are extremely low numbers for almost any portfolio. And I interpret this to indicate once again that our loan officers have done a good job of identifying problem credits, getting them to special assets, and so we don't have many that are past credits out there who are struggling to pay us that would indicate future problems.

The next slide, slide 13, I think is very powerful. There are really two things to look at at work here. The first is that there is a significant and steady decrease in the volume of credits that are moving from a pass rating to a fail, and fail is criticized, classified, or doubtful. That is represented by the blue bars in your charts.

And again, since the second quarter of 2009 you will see a good and very significant steady decrease in these -- in the movement from pass to fail.

Then the second thing to notice is the red bars because starting in the first quarter of 2010 we began to have more credits that were moving from a fail category to a pass category. This is sometimes due to improving customer results, sometimes due to structural changes that we are able to negotiate, but in any event we are glad to see more and more move from fail to pass categories and these changes are moving up.

The fourth quarter of 2010 was slightly below the third quarter and I attribute this in large part to the fact that by the fourth quarter of any year, even if we do see improving interim performance, we will often wait until year-end numbers are received before upgrading, which is typically our first or second quarter of the next year event.

With that I will turn it over to Harold Carpenter.

Thanks, Harvey. We continue to focus on building the core earnings capacity of our firm. We are pleased with the margin performance at 3.29% during the fourth-quarter along with modest improvements in both fees and expenses.

Core funding continues to be exceptional as we strengthen our funding base. We are particularly pleased in the growth of non-interest-bearing deposits and believe we will continue to have success over the next few quarters. As I will discuss in a few slides, we are also very pleased with how our relationship managers have managed their clients on both sides of our balance sheet with emphasis on deposit accounts that have above-market funding costs.

We maintained about $231 million in low yield funds and other investments in the fourth quarter compared to $270 million in the third quarter, a slight decrease. This additional liquidity, however, amounted to about a six basis point margin dilution. It will take us a few more quarters to trend this additional liquidity.

We are also seeing some thawing in local loan demand as we are particularly pleased in growth in our C&I and owner-occupied CRE book during the fourth quarter.

Regarding margins, the chart above details the quarterly trends of our net interest margin. As noted, we finished the quarter with a 3.29% margin. Also during the quarter, we reversed $387,000 in accrued interest related to inflows from new non-performers compared to $582,000 in the third quarter this year.

During 2010 we recorded interest reversals of $2.6 million which impacted our margins meaningfully throughout the year. Hopefully, as NPA inflows continue to reduce this will also be less of a risk factor to our future margin.

The chart on the bottom is a trend of non-interest expense for this year. Our salesforce has done a great job in 2010 of reducing our cost of funds and we anticipate continued reductions in 2011. This is a slide we have shown before as we believe it's a good reflection of the margin trends within our balance sheet and is a testament to the great work our relationship management has done over the past year and a half.

The red line represents the customer margin. This is a net interest income from loans funded by customer core and relationship-based non-core deposits. You can see it has ramped up nicely over the last few quarters.

The blue line or the treasury margin is much more volatile and has had a negative trend. Treasury margin represents primarily net interest income from the bond book that is funded by wholesale deposits. It's also materially impacted by the absolute level of liquidity we maintain. As noted previously, our goal is to reduce liquidity over the next several quarters.

Obviously, and to put it quite simply, our goal is to get the blue line to reverse field and stop the decent while we continue to grow the red line. As a result the green line should continue to trend upwards.

So more information on the good work we have done on growing core deposits. As the blue bars indicate, we have seen core deposits increase by almost 18% from the fourth quarter of last year while at the same time reducing our overall cost of funds from 1.65% at the third quarter of last year to 1.22% as of fourth quarter of this year.

As to the CD book, a consistent margin improvement opportunity continues to be within our upcoming maturities on CDs. The $232 million represents about 22% of our CD book and, as you can see, these CDs are currently priced in the low 2%s and our target is to reprice into the low 1%s. We will continue to emphasize money market accounts in order to reduce our funding costs further and thus also increase our core funding metrics.

More information on funding sources as this chart details the progress we have made in funding mix. Similar to what has been going on in our construction development book and the positive changes we have made in restructuring our loan mix, we continue to be pleased about the transitions we have made in our funding base over the last six-plus quarters as we continue to reduce our wholesale funding sources.

Even though the competition for our deposits remains intense in our markets, our salesforce has been very effective in gathering core funding. And as noted, over the long haul this should serve to enhance our net interest income.

This slide details the growth we are experiencing in DDA accounts. We believe these green bars provide further validation of the local market acceptance of our firm and our strategies. Year-over-year growth in dollars is approximately 11.4%. Our average DDA account is almost $17,000 currently compared to about $16,000 a year ago, an increase of around 7.5% while at the same time the absolute number of accounts is up almost 10%.

We have not shown this slide before but it gives us a hint of the optimism concerning loan growth. As the blue bars indicate, you can see that net change in loan balances are beginning to trend in the right direction while the core of our business, C&I and owner occupied CRE, is making positive strides with about $30 million in net growth in the fourth quarter of 2010.

We have indicated several initiatives that we are deploying to help increase our net loan balances. We are refocusing our efforts on small business and have realigned certain personnel such that they can spend 100% of their time on securing strong client relationships in this segment. As to middle market commercial lending, we are seeing that many of our clients have cautiously worked through the last few years and are now beginning to display renewed confidence about purchasing new equipment, adding inventories, or otherwise looking at borrowing money again.

Additionally, our salesforce is also looking at gaining new clients. Using their years of experience in our markets they are displaying a renewed energy for sales calling in Nashville and Knoxville. We believe 2011 is a good time to again capitalize on the competitive vulnerabilities and continue moving market share.

Regarding our run rates on fees overall, we expect fee revenues to be fairly flat for the next few quarters. We are pleased to see the uptick in fees in the fourth quarter. Service charges made a modest comeback this year as we continued life under the new Reg E rules. While insurance had a good fourth quarter, we believe insurance pipelines appear to be opening up somewhat.

Mortgage had another great quarter. You can see loan sales were $1.4 million for the quarter on volumes of $144 million, primarily related to refinance business that has been very strong for the last few months. At quarter end mortgage did have a strong pipeline, albeit not as strong as prior quarters, so we expect originations to drop off somewhat in 2011.

As we have mentioned before, mortgage repurchases are not an issue for us. We have been deliberate in our method of delivering loans to the secondary market and intentionally have systems in place to mitigate and help eliminate mortgage repurchase risk. We believe this strategy has served our shareholders well.

As to expenses impacting our run rate, it's obviously the volatility of other real estate expense. Aside from ORE cost, generally run rates are up primarily due to increased personnel costs. Four new branches have come online in the last year and 39 or so new customer contact positions have been added since September of last year.

We have also increased our expense base in such areas as compliance, special assets, and other related areas. We do not anticipate our head count increasing this year. We will continue to have elevated ORE expenses in 2011 as we continue to work out our ORE balances.

Going into the first quarter of 2011 we should see immediate expense increases in run rates due to merit increases, increased benefit costs, and reestablishment of incentive accruals for our cash incentive plans. As you may know, in both 2009 and 2010 we did not award any cash incentives to our associates.

As for taxes, given the valuation allowance that we posted in the second quarter, we are reflecting a tax benefit of approximately $700,000 during the fourth quarter. We believe the tax line will continue to have a minimal impact on our results going into 2011.

Once profitability has been restored for a reasonable time and such profitability is considered sustainable that valuation allowance will be reversed. As you might imagine, reversal of the valuation allowance requires a great deal of judgment and will be based on the circumstances that exist as of that future date.

With that I will turn it back over to Terry to wrap up.

Okay, thanks Harold. As you can see, in terms of executing on the two critical priorities for our firm, fourth quarter 2010 was a good quarter. As we turn our focus to 2011, I think you should expect much of the same. In other words, the top two priorities will continue to be aggressively dealing with credit issues and building the core earnings capacity of the firm.

But I wanted to take just a few minutes and talk about some of the specific opportunities we see as we move forward. Let me start with capital. As you can see, the capitalization of the firm is very strong, particularly now that we are beginning to see some market stabilization and improving asset quality metrics. Of course, it's benefited by $95 million of TARP funding.

The question we normally get asked is how do you intend to refinance TARP. Most analysts and institutional investors generally start by making some assumption about trough capital -- in other words, the low point before capital begins to be accreted by the operation of the bank -- and then make an assumption that the entire TARP repayment plus any capital shortfall will be filled by a common stock offering at some discount to current share prices to determine the amount that expected share dilution.

I have said for a number of quarters that I had become much more patient as it related to TARP repayment, believing that the further repayment were delayed the smaller the amount of dilution we would have to accept. And that we were thinking, I guess specifically with the passage of the Small Business Jobs and Credit Act of 2010, that we might find a way to get TARP repaid with no dilution at all to existing shareholders. Honestly, that is an important objective of mine since I am one of those.

Specifically, in our last call we indicated that it was impossible to know for sure whether the SBLF would provide a suitable capital instrument to refinance TARP since the regs had not been promulgated, but that based on everything we could see from the law it looked like it would be a potentially appealing source of capital.

On December 20 the SBLF regs were published. Honestly, I have heard all kinds of responses by bankers and others as to whether this is an attractive source of capital. But my suspicion is that if I were to come to you and say that I have found a source or a potential source for $110 million of senior perpetual non-cumulative preferred stock where the maximum coupon rate will never exceed 9% but it will start at 5% with a potential to reduce as low as 1% during its first 4.5 years and that I would use that to refinance TARP as opposed to issuing common stock, you would probably be very excited.

As you might guess, I still don't know everything I need to know to be 100% certain that we will ultimately avail ourselves of this option, but our preliminary review of the regs continues to indicate that this is an attractive option. I am hopeful that over the next few weeks we will be able to get all our questions answered by Treasury and the regulators and finalize our path forward on that.

I will talk about balance sheet growth opportunities just a minute. First of all, it appears to me that our markets are beginning to stabilize and we are seeing a few more loan requests from existing clients. We are beginning to see a resurgence of corporate relocation activity here in Nashville and that is what really fueled its outsized growth over the last two decades. So we believe that should enable our market to outperform the nation.

But still my plan and assumption is that the economic environment is still not sufficient to provide adequate loan growth, so the principal driver of loan growth for us will have to be market share movement. Fortunately, we have proven our ability to move market share.

In just a minute I will show you that in just 10 short years we have become the market leader in most important bank to 18% of small and midsized businesses in middle Tennessee. So we clearly know how to exploit the vulnerabilities of these large regional and national franchises. Happily, according to Greenwich research, 66% of small and midsized businesses are willing to switch banks. So the environment to move market share for our firm is perhaps even better than the environment in which we climbed from de novo bank to a market leader.

This chart is Greenwich research. It addresses small and middle market businesses with sales from $1 million to $500 million in Nashville, Tennessee. The y-axis is the market share penetration, in other words, the percentage of businesses who have some relationship with the bank, and the x-axis is client satisfaction.

The crosshair really represents the median of the top five banks in the state and so the idea here is to get into the top right quadrant. You would be an outperformer in terms of translating client satisfaction into market share were you in the top right quadrant.

As you can see, really in just 10 short years at 23% we are actually challenging 100-year-old franchises in terms of market share and we are relatively unchallenged in terms of client satisfaction. So the marketplace does appreciate what we are offering and again we have been highly successful at taking share from those large regional banks.

Now this chart gives you a chance to see not only the trends, but in addition the penetration share. Again that is the percentage of businesses who have any relationship with the bank. But more importantly the percentage of lead relationships; that is the volume of businesses that describe you as their lead or most important bank.

The first column matches the market share numbers we have just looked at on the previous chart. It's penetration share. Again, the percentage of businesses who have any relationship with the bank. As you can see, Pinnacle is the only one of the top five banks with strong penetration share this year.

The second column looks at the more important lead share. And as you can see, Pinnacle has grown lead share as well and is now number one in our market in terms of lead market shares. So as you can see, some of our primary competitors are losing both penetration share and lead share. Again, the point is not only have we been, but we should continue to be, successful aggregating small and midsize business clients in our markets.

On margin expansion, we have made significant progress on our net interest margin from its low of 2.72% in March of 2009 to 3.29% last quarter. We expect continued margin expansion. To help you think about size in that margin expansion opportunity, as we replace non-performing assets with performing loans that lift in loan yield represents a significant margin expansion opportunity.

Assuming we move from the fourth quarter NPA to loans and OREO ratio of 4.29% just down to 1.50%, that would improve the margin 5 to 9 bps. Harold highlighted the cost of funds reduction opportunity just a few minutes ago. Over time we would expect that to translate into 12 to 21 bps in margin and over the last year or so we have chosen to maintain excess liquidity on our balance sheet. Harold highlighted that just a minute ago.

As we begin to replace that liquidity with loan growth we expect that to add 3 to 9 bps in net interest margin. So as you can see, we believe that we still have opportunity to grow our NIM from 3.29% at the current level to something in the range of 3.45% to 3.70%.

On expenses we have been and will continue reviewing our expense base looking for opportunities. As to the core earnings capacity and expense growth, our branch build out is substantially complete in Nashville and with only a couple of branches needed in Knoxville. Eventually I would I guess that through most of the history of the firm the aggressive branch build out has been a drag on our efficiency.

Second matter is our special asset group. Obviously as we continue to make headway on reducing problem credits we would look for a reduction in headcount there. Currently that represents annual compensation expense of about $2.2 million. Of course, problem loans also result in elevated expenses in other areas such as appraisals, legal expenses, and so forth.

I would point out that excluding OREO expense and security gains our year-to-date efficiency ratio has been in the low 60%s. We believe that over the long term we will operate it at less than 60%.

So really I guess with much the same summary as the last several quarters, we continue to very aggressively address problem credits. We continue to pursue meaningful NPA resolutions and expect those going forward. We are making great progress on that front.

You should expect continued reductions in problem loans, also in our exposure to construction and development lending. I would say that we are fortunate to serve attractive markets. We are beginning to see some early signs of economic stabilization. National's unemployment rate and ability to attract new jobs is beginning to show signs of life and we continue to find great opportunity in terms of competitive vulnerabilities and I think that is really an important point about the growth profile of the firm going forward.

We are particularly focused on growing the core earnings capacity of the Company and I believe that we can continue rapid core funding growth and continue our margin expansion as Harold developed that case earlier.

Operator, we will stop there and open for questions.

(Operator Instructions) Kevin Fitzsimmons, Sandler O'Neill.

Morning, everyone. Just a couple questions. First, Terry, I was wondering if you could just give a little more color on what makes you so optimistic about the stabilization you are seeing in terms of the prospects for loan growth and whether that is more new demand you are seeing or whether it's your ability to take market share. And any specific industries within there that you are seeing real signs of life.

And then secondly, just on the subject of OREO resolutions, I think you said you would expect an elevated pace of these OREO resolutions over the next few quarters or so. Would it be a similar pace to what we have seen, kind of that high $30 million or so pace per quarter, or would you all consider something a little more accelerated, like bulk sales? Or is that really not on the table for you? Thanks.

Kevin, let me talk about loan demand first. I want to be clear. I think the principle loan growth opportunity that our firm has really relates to market share movement. It is more about market share movement than it is about incremental lending tied to pure economic activity.

But I will say that both anecdotally and through the numbers we are beginning to encounter more borrowers who are considering additions, acquisitions, other things that would have a little more of an economic thrust to it. And so my sense of pure loan demand is I wouldn't want to characterize it as strong by any means. I would just characterize that it has improved over the last three or four quarters.

I think when you look for industries in particular where you are beginning to see a fair amount of loan activity, I would highlight healthcare as one in particular that seems to be doing well and has a fair amount of growth potential.

I think -- switching to your question relative to OREO, I think generally you should expect that we would move at a similar pace. We are satisfied with the loss ratios that we are achieving. I think in the press release we highlighted the fact that in our OREO expense is really only $124,000 related to ongoing loss as a result of the sale.

And the losses were really generated by -- the bigger part of the losses were really generated by write-downs related to updated appraisals. I think you know we -- those problem asset categories refresh our appraisals at least every nine months.

And so my point there is that if you go back several quarters ago we were at less than 100 days in terms of average age of our OREO book. We have moved it out to, I think maybe two or three quarters ago, about 118 days, last quarter 142 days; we are about the same thing now. And so we have lengthened the time a little bit.

Again I think it's a very short book but we have lengthened that time which is resulting in substantially less OREO losses on sale of assets and so we are generally comparable with that. I would not want to say that we would absolutely rule out any bulk sales, but at the same time I would just say that I think the most readable planning assumption is that we will probably continue at the disposition rate maybe in the high end of that range that we highlighted on the slide for the next several quarters.

Okay. Just one follow-up on the subject of loan demand and talking about mainly market share movement. You talked about your team refocusing on small business and middle market, but I thought I heard you also allude to some competitors being more vulnerable. Is that more smaller banks that are just not in a position to grow loans or is it the large banks that are distracted or a little of both? Who would you be taking these loans from?

We would generally take share from the large regional banks in our market, Kevin. And I would say -- I don't think that their vulnerability -- I didn't mean to characterize that their vulnerability was significantly worse than it would have been or significantly greater than it would have been over the last decade. But, again, I think the market share charts do indicate that the large regional banks are giving up both lead share and touch share or penetration share. That is a continuing phenomenon in 2010 and I would expect it to be a continuing phenomenon in 2011.

The relative advantage for us in terms of market share movement is -- I think one of the points that we tried to draw out in Harvey's comments relative to credit is that we -- I think we have done a great job of identifying the problem credits that we have and isolating them in a special assets group. You remember he talked about the book being managed by SAG versus the book being managed by the line relationship units. Of course, the delinquencies in the line relationship unit are negligible.

So the point of that is we are in a position where we can begin to focus outwardly and capitalize on that vulnerability in a way that is different and better probably than we have been able to do over the last four or five quarters.

Okay, great. Thank you.

Mac Hodgson, SunTrust Robinson Humphrey.

Good morning. On the OREO kind of question again, given that OREO balances are going up, should we expect a similar level of OREO expenses the next several quarters as you continue to work those out?

I would say you ought to expect generally a similar level of total OREO. It might be slightly down; I wouldn't look for a meaningful increase there.

Okay. Harold, could you -- is it possible to quantify the expected increase in personal expenses in the first quarter on the payroll tax and then I think reinstatement of the 401(k) or some of those things you mentioned?

Yes, Mac, I will go and let you know the incentive accrual this year we are looking at somewhere around $7 million or so would be kind of a reasonable number that we are looking at for the entire 2011. And that has not -- that number has not been in our run rates for the last couple of years. You can go back and look at the trends and see where we may have started it and had to reverse it out because of earnings, because all of our incentive plans are based on performance.

Okay.

Mac, to be clear, you were asking about the level of OREO balances not the level of OREO expenses, is that right?

No, the OREO expenses.

Oh, excuse me, on expenses. I think expenses would be down period-to-period. As I say, the loss experience that we are encountering has been pretty modest in terms of losses on sales and I believe that appraisals are starting to stabilize. And so we would have an expectation that both based on the volume of appraisals that we expect to get during the first quarter to stay current with our nine-month threshold.

And due just to the fact that values do look like they are stabilizing that they ought to be less, OREO expenses ought to be less in the first quarter than in the fourth quarter.

Okay, great. Just one last one on the small business loan fund, it sounds like you expect to come to a decision on that in the next -- maybe this quarter, maybe first. Is that accurate?

And then second, if you decide not to go that route, Terry, is kind of the plan -- you have obviously wanted to be patient on capital. Would the plan then be to continue to wait on exiting TARP until closer to the reset to 9% or how do you think about it if you don't go the small business route basically?

Yes, I think I guess your first point about trying to reach a conclusion on the SBLF, I do expect that we will reach a conclusion on the SBLF in the first quarter. To some extent it's a little bit outside our control. While broad regulations have been published, procedures for how things are handled by the Treasury and the regulators really haven't been promulgated and so there is some uncertainty on how they will handle certain things and so forth.

So we are relying on their ability to get that done. But I believe it is a priority of the administration to deploy the funds in the SBLF in an attempt to incent small business lending. So I guess a long-winded way to say I am optimistic that it will happen in the first quarter. It's a little bit outside my control, but assuming they get all our questions answered and we can come to conclusion we will do that -- we will conclude very quickly I think.

I guess the question on what if we don't do the SBLF. I think at this point I wouldn't want to offer what the resolution is, Mac. As you know, there are lots of variables that include things like what the share price is, where it's trading, those kinds of things. We have had, I guess, a nice run up in the stock over the last several months, but the price at which you are issuing shares would be an influencer about the timing of repayment as well.

I guess, while we are pleased with the run up in the stock, my own personal opinion is the stock is still undervalued and hate to issue common even at these prices. So we just have to see.

Okay, that is helpful. Thanks.

Kevin Reynolds, Wunderlich Securities.

I guess a question -- most of my questions have been answered, but as I look out there across the landscape we have seen a couple of sizable acquisitions here recently at what I think are pretty spectacular prices, at least at this point in the cycle. Certainly the one we got earlier this week was a little surprising in terms of how high the price was in terms of tangible book multiples.

What does that -- when you see that does that make you rethink your position in the world? Your stock is not trading at 2.3 times tangible book. If someone came along and started talking, I mean is there -- do you feel like you are far enough along in your own recovery here where you could say, you know what, we are kind of getting as good as we can be here maybe and if somebody wants it they can have it?

Boy, Kevin, that is a great question. I would say, I guess, two things. One, obviously it's gratifying to see multiples go up. As I said, it's gratifying to see our stock come up roughly 50%. I mean we are pleased that there is more interest in bank stocks, which I think is just reflective that a lot of people do believe that banks are now to a point in the credit cycle that they can better understand what that risk is in a portfolio that is being acquired and those kinds of things.

So I mean it would be hard for me to say that is anything but good news. But that said, Kevin, I think I have said over and over, and I mean it sincerely, I am a large shareholder in this firm and believe that I think like a large shareholder in the firm. And so my intent is to do whatever we need to do to produce the best long-term reward for our shareholders.

We are not short-term thinkers. I think we have proved that. We have had -- you know this -- in the history of the firm we have had people asking us when we were going to sell this company going back to 2002, 2003, 2004. We have always believed that we have got a great market opportunity and that we could produce more value by operating this firm than to sell it to somebody else. If we ever got to a point where we didn't feel that way then that is the point we would change our mind.

I guess I could -- thanks for answering. But if I could, let me throw something back at you. Here recently I think I sort of heard you say at some point that -- and when your stock was a lot lower -- that as you put up results, as you started to gain the confidence back that it wouldn't be inconceivable to one day see your stock valued like peers around 1.5 times tangible book, which would get you in the $15 to $16 range.

One day sounded like a period that might last longer than a couple of months to get there. So the question is you have gotten -- based on the context of that conversation it seems like we have kind of gotten all the way back, now what do we do?

Well, Kevin, I don't mean to give a light answer. I think one time in some informal comments somebody said, well, your stock has really come down from its peak. Where it was it, $37 or something like that? And I said, yes, maybe if it got back there again might be willing to sell it. The analyst said, well, I don't think you would.

And so the point he was making was the Company is doing well, it's going forward. There is always a tendency to continue to operate the business as long as you believe you can move the Company forward at a pace faster than an acquirer is going to move it back.

And so again, it's a question I can't answer any better than we are going -- we pay attention. We believe we have a wonderful opportunity in this franchise, but if we ever got to a point where it looked like somebody could do it better then we would have to obviously address that.

Okay. And then I guess the last question, let me ask this one to you and all your guys. Are you still having fun?

I can tell you I am having substantially -- this is the most fun I have had in four quarters.

Okay, fair enough. Thanks a lot.

Peyton Green, Sterne Agee.

Good morning. A question on the C&D side. Trying not to beat a dead horse, but you all have a slide in here about the performing criticized. There was significant, I guess, improvement in that on the residential land development piece and then also on the commercial land development piece. But both are pretty high I guess.

Is there any -- how could you differentiate among the commercial and the residential land components and kind of what you would expect the payoff cycle to be like for those going forward as opposed to the charge-off cycle?

All right. I think one thing I would say to that is call your attention to the OREO disposition where we talk about those that are identified as problems that we have already gotten in, how much was the ultimate charge-off in the beginning, and what have we charged them down to.

The point of that slide -- and I think that is in 45. The point of that slide is you look at our disposition activity over time and what we realize relative to the original loan is the left column where we are showing that over time we have realized 49% of the original loan. The right column shows that what is in OREO right now we have already written down to 44% of the original loan.

So the point of that slide is to say those that we have identified and already moved into OREO we don't see a great deal of loss at disposition. I think Terry mentioned as well the OREO expense and the breakdown between what is write downs and what is hits that we take at disposition. So I think that if you looked at the two -- your specific question here was to look at the two.

Quite frankly, I think that the commercial will stand up better. I think there is a shorter supply of that. There are parts of our market area, the isolated pockets that have pushing nine years, 10 years of residential lots inventory and it's going to be hard for those values to come back anytime soon. But having said that, I really would reflect back on slide 45 and say that those that we think we have a problem with we think we have already taken those hits.

Okay, great. And then, Harold, in terms of the incentive accrual of $7 million or so in 2011, what has to happen on kind of pretax income for that number to sustain itself over all four quarters of the year I guess?

Peyton, we don't normally disclose that number but you can rest assured that it's a meaningful number and is profitable. So we are anticipating profits this year. Our associates here are -- will be challenged on that front and we think that if we achieve that amount of money that an incentive award will be earned.

Peyton, if I could I might add to Harold's comments, the incentive plan is fundamentally the same as it has been since we started the firm and two broad things have to occur. One is we have to clear a soundness or an asset quality measurement that is a threshold in order to pay incentives, and then generally, assuming that threshold is cleared, then the remainder is tied to earnings.

Again, you have followed our firm for a while and the history of the Company. We have paid our incentives to our associates in a range of 0% to 120% of target. When we produce outsized earnings results we have paid. When we don't produce earnings results they do go to zero as has been the case the last two years.

Okay. But I guess is the target, in terms of the soundness threshold, is that relative to peers or is it an absolute number that the Board sets forth or how do you --?

It's an absolute number that the Board sets forth.

Okay. And then in terms of the excess liquidity, if it continues to kind of grind higher, how long will you sit with that in your pocket?

Well, we continued to do -- we approached this on several fronts. One is we are beginning to see some loan growth so that should dilute liquidity over time. We are hopeful for that.

If that doesn't materialize, we still grind on the deposit book. We have still got some outsized depositors as far as rate is concerned. We will continue to push on that front to try to find the bottom. Our sales force has been really good at that over the last, say, three to four quarters and they continue to work on it to just try to find the bottom on these deposit costs.

And then, lastly, we continue to look at the bond book. We are not interested in growing the bond book but here in the last two to three months there has been a little uptick in bond rates. That would be our least favorable option.

Okay. I guess on the CD front why not price the marginal CD more aggressively? Because the cost of CDs didn't really go down linked quarter and they are not down that much year over year. I mean at 2% or 1.90% versus an earning asset yield on the short term of 20 basis points you are leaving a lot. It's just a loss every quarter. Why not get more aggressive with the CDs I guess is my question.

Yes, the reason -- let me tell you a little bit about that CD book variance. First of all, there was probably a lot of wholesale funding in the prior number so that wholesale funding was typically cheaper. It was shorter in duration and all that so a lot of our CD book is transitioned to local market CDs.

And we will continue to work that number down. Like we have got this $230 million that is coming up here in the first quarter, we will get those numbers down into the low 1%s.

Okay, great. Thank you.

Brian Martin, FIG Partners.

Just wanted to find out how relevant acquisitions are in your future and just I guess if you guys are satisfied with sticking with 100% growth at this point, organic growth.

Brian, I didn't hear the first part of your question but I think you were asking about what role M&A, acquisitions played in our future growth. Is that it?

Yes, just how relevant that is versus just kind of sticking with the 100% organic growth.

Well, I think what we have said is for the foreseeable future we do like the organic growth opportunity. We think our market is going to yield us outsized organic growth and that ought to be the principle mechanism by which we grow our firm.

I think you heard me say this before, I never say never. I don't want to say we would never do it, but I do think it's very unlikely in the short run that we would be utilizing acquisitions as opposed to organic growth.

Okay, all right. Thanks a lot.

Michael Rose, Raymond James.

Good morning, guys. I had a question on the margin slide, I think it's slide 30. How quickly do you think you can recapture some of that? It looks like it's an additional 20 to roughly 40 basis points.

And then how does that outlook play into expansion opportunities on the loan side? It looks like loan yields were up a little bit. Is there room there or are competitive trends going to constrain that potential?

On the margin, Michael, we think we have got a pretty good pace going here over the last few quarters and we think that pace ought to continue here in the next two to three quarters as far as margin expansion is concerned.

Okay, so about the same magnitude as the six basis points, roughly?

Yes, I think that is a reasonable run rate.

I think, Michael, I might add -- you asked about loan yields. We did get some loan yield improvement in the fourth quarter. It would be hard for me to project that we are going to have much expansion in loan yields in 2011. I just think that there are too many banks chasing too few credits to really let much yield expansion occur.

Okay. That is what I thought; I figured I would just ask. All right, that is all I have, guys. Thanks a lot.

Bryce Roe, Robert W. Baird.

Thanks, guys. My questions were answered. Thank you.

Steve Moss, Janney Montgomery.

I wanted to ask about, I guess first off, in terms of the remaining $490 million potential problem loans, what is the loan mix there?

Hold on, Steve. Okay, now the number you are looking for is on construction and development?

The potential problem loan mix, just the mix by type.

All right. We have got about $70 million or so in construction, about $60 million in C&I. CRE is about $60 million so the rest is scattered out amongst the other categories.

Okay. So about $200-plus million is going to be resi related?

Well, about -- well, I got $70 million in construction and $60 million to $70 million in CRE, so that is $130 million of $229 million. And I have got about $60 million in C&I.

Okay. I guess it was criticized and classified assets in terms of the [6.95].

Oh, I thought you said potential problems.

Yes. Well, I guess we might be using a little mix of terms. Yes, potential problem and criticized.

Okay. Potential problem would -- I mean criticized and classified construction would be closer to $100 million and I think that number may be on a slide in the back. And then CRE would be $110 million and C&I would be about $75 million.

Okay, that is helpful. And then with regard to just the AD&C loans that have been reviewed, are you reviewing all of them on a quarterly basis?

You are talking about for mortgage repurchase?

No, AD&C, construction loans.

I thought you said agency. You said A&D.

Well, any that are problem loans are relooked at quarterly. If they are in the pass categories, we are looking at them twice a year. So, yes, any that show weakness we are doing quarterly.

Okay. And in terms of the twice-a-year pass categories is that generally Q4 and Q2 or is that on a rolling basis?

It would be on a rolling basis. We would key off of when the maturities are because we want to look at them once at maturity and then once sort of off cycle.

Okay. And last question with regard to troubled debt restructurings moving up a little bit is that commercial real estate or I guess what is that?

Actually most of that movement was in two loans, both were real estate. One was a commercial real estate and actually the other -- and it's about half and half -- the other is real estate but it's owner occupied. There is an operating company that is struggling and this is the real estate loan for their buildings. So it's centered in two loans.

Okay, thank you very much.

Thank you. And now we will end the call due to time constraints. We will contact those still in the queue later today.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.