Pinnacle Financial Partners Inc (PNFPP) 2011 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Pinnacle Financial Partners fourth quarter 2011 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. Please note Pinnacle's Earnings Release and this morning's presentation are available on the Investor Relations page of their website at www.PNFP.com. Today's call is being recorded and will be available for replay on Pinnacle's website for the next 90 days. At this time, all participants have been placed in a listen-only mode. The floor will be opened for questions following the presentation. (Operator Instructions). Analysts will be given preference during the Q&A session. (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 the actual results, performance or achievements of Pinnacle Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond Pinnacle Financial's 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 is 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 statement 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. A presentation of the most directly comparable GAAP financial measures, and a reconciliation of the non-GAAP measures to the comparable GAAP measures will be available on Pinnacle Financial's website at www.PNFP.com.

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

Thank you, Operator. Good morning. As you've seen, we made $0.17 in EPS in the fourth quarter. As I compared our actuals to the various models that make up the consensus estimate of $0.19, most did not include the $0.03 to $0.04 in taxes, and the $0.02 in accelerated accretion associated with the 25% TARP repayment, which we'll talk about both those items in greater detail later in the call. So, adjusting for those two items that total roughly $0.05 to $0.06, in my view this was a great quarter for us. Throughout most of 2010 and all of 2011 we focused on two primary priorities. One, building the core earning capacity of the firm. The other, aggressively dealing with credit issues. We continued that march again this quarter. So, as usual, we'll address our substantial progress on both of these fronts in this call.

I mentioned last quarter that it was my intent to continue the same reporting format until I believe the resolution of credit issues no longer required such extensive review and we could focus our dialogue exclusively on expanding the core earnings of the firm. It's my belief that, while we still have several quarters until asset quality metrics have completely normalized, the absolute level of problem assets has been satisfactorily reduced. And the pace and reliability of reductions has been satisfactorily established such that we definitely should focus significantly more on the growth in core earnings. Consequently, Harvey White, who is Chief Credit Officer, deserves a great deal of credit for the significant improvement in asset quality, is here today one last time to answer questions. But going forward I'm afraid you're stuck with Harold and me.

A quick snapshot of the quarter shows meaningful continued core earnings momentum. The two most significant levers we have are accelerating loan volumes, particularly C&I volumes, and expanding the margin. Despite very significant headwinds created by our rapid disposition of problem assets, we still managed to grow end-of-period loans 1.6% on a linked quarter basis. And C&I plus owner-occupied real estate loans 4.7% on a linked quarter basis. That translates to roughly 6% annualized rate of growth for total loans. And a 19% annualized rate of growth for C&I. I highlight that C&I growth because, as most of you know, that's a primary thrust of our firm. And now that we're nearing the floor on the C&D loans and the pace of NPA dispositions is beginning to slow meaningfully, that growth in C&I will not be masked going forward to the extent it has been over the last year or so.

A further point as it relates to our ability to grow volumes is that average non-interest-bearing deposits grew at 5% on a linked quarter basis. And over 22.6% from the same quarter last year. 22.6% annualized growth in DDA. I highlight that not only because of the impact it can have on net interest margin but because generally DDA growth is the single best indicator of a bank's ability to gather primary banking relationships. By that I mean real clients. In fact, our DDA growth since June has primarily been fueled by account growth as average balance per accounts remained fairly constant. As credit costs subside, in my opinion, the real winners in this business will be those that can reliably grow primary banking relationships.

The net interest margin expanded nicely from 3.60% last quarter to 3.65% this quarter primarily aided by decreases in cost of funds quarter to quarter. That represents meaningful progress on a linked quarter basis and year-over-year. And it lends credence to the guidance that we provided three quarters ago that we would be able to operate our margin in a range of 3.60% to 3.73% over the next several quarters. Non-interest income exclusive of securities gains was down slightly on a linked quarter basis. But as you can see, the year-over-year comparison's very strong, up 10.7%. During the fourth quarter, we saw some slippage in our investment or brokerage income. But a bright spot was a huge increase in mortgage loan sales, as the pace of mortgage refinances remained very high, up 12.8% on a linked quarter basis. Most importantly, we continue to make substantial progress on pretax, preprovision earnings, exclusive of security sales and OREO expenses, up 6% for the quarter and 14.6% over the same quarter last year.

Now, let me summarize the asset quality improvements and specifically the reductions in problem loans. As you can see, we've continued to make meaningful progress, reducing virtually every important problem asset category this quarter, year-over-year and consecutively for between six and 11 quarters. Net charge-offs were roughly $6.3 million for the quarter. That's up 10.5% from the previous quarter. But OREO expenses of $4 million were down from $5.1 million in the prior quarter. And so, combining those two, our total credit losses were down 2.6% in the fourth quarter, 29.9% year-over-year, and for the sixth consecutive quarter.

Non-performing loans shrank by roughly $7 million during the quarter, from $55 million to $48 million, a linked quarter reduction of 12.4%. That's the seventh consecutive quarterly reduction there, down nearly 40.8% from last December. Non-performing assets -- and that's defined as NPLs plus OREO -- were down $12.6 million during the quarter. That's roughly 12.6%. Classified loans shrank by roughly $16.8 million during the fourth quarter, a linked quarter reduction of nearly 1.5%. That's also the sixth consecutive quarterly reduction, down 38.5% from last year. Potential problem loans shrank by approximately $8.9 million during the quarter. That's roughly 0.5% versus the third quarter and 42.9% year-over-year, which represents a very significant reduction to the risk in our loan portfolio.

We continued to reduce exposure in the construction and development portfolio. As everybody knows, that's the portfolio that's plagued us over the last two-and-a-half years. It's down 17.2% since last December and nearly 58.7% from its peak in March of 2009. As you can see, the pace of reduction has slowed meaningfully to just 1.6% during the quarter. We believe we're nearing the bottom in that category. And consequently it should discontinue to be a significant drag on loan growth going forward. Despite these solid improvements, we've still got room to improve core earnings as we continue to rid ourselves of problem assets. But, as you can see, fourth quarter was a great quarter in terms of execution against our two primary objectives.

Let me turn it over to Harold to review our performance in greater detail.

Thanks, Terry. This slide details the quarterly trends of our net interest income and our net interest margin. As you can see, our linked quarter net interest income between the fourth quarter of 2010 and the fourth quarter of 2011 increased by $3.2 million, and is up 9.2% from the fourth quarter of last year. We are again noting three main drivers for our margin expansion. We've seen NPAs decrease by approximately $50 million between the end of 2010 and 2011 while average loans between the fourth quarter of last year and 2011 are up about the same amount. However, the most important factor would be our continued decrease in funding costs. Our total funding costs have decreased from 1.22% for the fourth quarter of last year to now down to 0.69% in the fourth quarter of this year, based on the successful execution of deliberate action steps on the part of our relationship managers. We believe we still have room to expand our margins into 2012 as we continue to make progress toward our new goal of 3.72% to 3.8% over the next several quarters.

This slide again details some additional information on the good work we've done in growing our margin. As the blue bars indicate, we've seen our margin increase from 3.25% in the first quarter of 2010 to now 3.65%. This is driven largely by meaningful decreases in cost of funds, as the red line indicates. We remain optimistic that a further reduction in cost of funds will occur during the first quarter of 2012 as our cost deposits on the spot at the end of the year was approximately 0.56%. As to loan yields we've experienced a decrease in loan yields this year from 4.88% in the first quarter to 4.74% in the fourth quarter, a decrease of 14 basis points. As we've mentioned for several quarters, loan pricing is very competitive in Nashville and Knoxville for quality borrowers. As a result, we are not foreseeing an uptick in loan yields at this time and will focus on maintaining our current yields for so long as the rate curve remains at its current position.

We've shown this graph at numerous times. We believe it's a good reflection of the margin trends between what we would deem to be our customer bank, the core of our franchise, and the wholesale bank or the functions of our Treasury unit. The red line represents the customer bank margin where we continue to see solid expansion. This is net interest income from loans funded by our customer deposits. You can see it has ramped up nicely over the last few quarters and continues to show a positive trend, now with a 4.1% margin which we believe is a strong indication of the high quality of our franchise in two very attractive banking markets.

The blue line, or the Treasury margin, is much more volatile, being impacted most recently by significant prepayments in our bond portfolio. The Treasury margin represents primarily net interest income from the bond book that's funded by lower cost public funds and other wholesale deposits. It's also impacted by the absolute level of liquidity we maintain. Our strategy for 2012 is to lessen the impact of our bond portfolio on our revenue streams and let cash flows from the bond book help us fund high-quality lending opportunities. We're obviously very pleased with the efforts of our relationship managers and the progress we've made with respect to increasing our customer margins during this economic cycle. We believe we continue to grow the red line in 2012 as we focus on growing our loan portfolio, which Terry will speak to shortly.

As to margin enhancement opportunities, now I know that I sound like a broken record, as we have been detailing this information on this slide for several quarters. A consistent margin improvement opportunity continues to be within our upcoming maturities on CDs. The $175 million represents approximately 25% of our CD book. And as you can see, these CDs are currently priced at approximately 1.3%, and our target is to reprice in the 65 basis point range. We should note that during this entire time the average maturity of our CD book has remained at approximately eight to nine months.

Similar to the good work we've done on CDs, our sales force has done a remarkable job managing client interest costs on our money market accounts. We believe we have approximately $335 million in money market accounts where we need to continue to negotiate with these clients to get what we believe to be a fair rate in this interest rate environment. From this point, we believe a 5 to 10 basis point improvement in money market rate represents a reasonable target over the next quarter or so.

Now looking at our P&L trends, our adjusted pretax, preprovision increased from $14.1 million in the first quarter to $18.7 million in the fourth quarter, a 32.3% increase over this year. As noted at the bottom of the chart, we've highlighted a few items which impact our run rates, including securities transactions and ORE expenses. As to our expense run rates, excluding ORE costs, during 2011 our expense run rate was fairly stable. We anticipate 2012's expense run rate to increase slightly due primarily to increased compensation expenses associated with merit raises of around 4% which start in January, and the addition of new relationship managers. As many of you know, we have largely completed our branch buildout in Nashville but continue to believe we need to increase our presence in Knoxville. We're pencilling in a new branch location in Knoxville toward the end of this year, which will impact our expenses in 2012.

Given all these matters, we're projecting a slight uptick in our efficiency ratio, ex-ORE cost in the first quarter. And then we believe it will trend down for the remainder of the year such that we're hopeful it will be around 60% or slightly below by the fourth quarter of 2012.

Before I speak to credit, I wanted to cover taxes briefly. As we mentioned in last night's press release, we under-estimated operating results at the start of the fourth quarter. We also under-estimated our tax rate for the year. And these two matters resulted in our recording tax expense for the fourth quarter at an amount which was more than we would have anticipated, although it was based on the data we had at the time. For the year, the tax benefit we recorded in the third quarter, coupled with the tax expense in the fourth quarter, we ended up with a tax benefit of around $15.2 million for 2011. All that said, we still believe that an effective tax rate for 2012 should range between 31% and 34%, as we find our way back to taxation normalcy in this post DTA valuation world.

Now, switching gears briefly to our credit trends where I hope to deliver with the same degree of eloquence as Harvey has done over the last couple of years. I'm just thankful he's in the room to help answer questions. We've presented this slide for several quarters and it continues to tell the same story. The top segment, the top line, shows our non-accrual loans that are actually past due. As in the past, although this statistic is not on the slide, about $25.5 million, or slightly more than half of our non-accruals are not past due. These loans are paying as agreed but remain on non-accrual for a variety of reasons, but primarily because we're not satisfied that the cash flows being used to keep these loans current have the qualitative characteristics to return them to an accruing status at this time. When we believe the cash flows do meet our requirements for accrual then we'll return these loans to accruing status.

Now, back to the slide. The top section of the slide shows the loans, both accruing and non-accruing, that are past due which are being managed by our special assets personnel. But the point of the slide remains the last line. Our past rated credits still handled by relationship managers had past dues of just 14 basis points for this quarter. This number has been in a range of 8 to 20 basis points every quarter for at least the past year. This is extremely clean to us and it says that there are not many credits still in the line which are having difficulty paying us at this time.

Total credit costs continue to trend downward. As you know, we believe total credit costs for our firm is the sum of loan charge-offs and ORE expense. Thus we review these trends together. This bar graph shows that the sum of these two numbers has been decreasing, and decreasing steadily for the past six quarters. Over time, as our ORE book continues to trend downward, expenses associated with managing and disposing these properties should trend likewise. We estimate that approximately 20% of our ORE expense is tied up in the cost to maintain these assets, legal fees, maintenance, insurance, taxes, so on and so forth. On top of those costs you have appraisal markdowns and/or losses on dispositions. So we are incented to continue to get these assets through the process and into the hands of an owner who appreciates them more than we do. We're anticipating meaningful decrease in ORE expense this year.

Not included in ORE expenses are the ancillary costs associated with troubled asset dispositions. We're very pleased with the efforts of our special asset group professionals over the last couple of years. Our goal would be over time that we're able to decrease our expenses in this area, as well. At the peak this area required 29 employees. We're now at 21 employees and intend to reduce to approximately 12 employees by the end of 2012. As to charge-off, we recorded $30.4 million in net charge-offs in 2011, of which approximately 20% was related to one credit during the first quarter of 2011. That said, we believe net charge-offs should begin to trend toward a sustainable rate by the end of 2012, of 15 to 35 basis points.

I really like this slide. NPLs continue to trend downward. In addition, the line shows the ratio of allowance for loan losses to NPLs which reached 154.6% at the end of the year, up significantly from all of the 2010 levels and increasing each quarter. Based on the peer information that we look at, we believe this 155% will compare favorably to most peer groups.

The next slide's about our non-performing asset disposition activity. In each of the past six quarters, and as we have outlined for you as our targets, dispositions have approximated a range of $30 million to $45 million each quarter. Most of our nonperforming asset dispositions during those quarters were getting accomplished by selling nonperforming assets, or selling off properties, or resolving them rather than just charging them off. Given that we believe the absolute balances of our NPAs will trend downward, we now believe our target range will also decrease such that we're forecasting around $75 million to $100 million in dispositions during 2012 compared to the $133 million in 2011.

This next slide is intended to convey again that we believe we have our other real estate owned marked appropriately. The first column shows, for all ORE dispositions during 2011, the loan amount, less any charge-offs prior to foreclosure valuation losses while in ORE, typically from reappraisals, and the loss on disposition. So that 63.5% number represents what we ended up collecting of the loan after client payments for all the ORE dispositions so far this year. And then the right column uses the same methodology for the properties we still have in ORE as of December 31. It shows that we've already written down a loan to 58.5%. Since we've already written the remaining ORE down to less than what our year-to-date loss experience has been, we don't anticipate significant additional losses related to the eventual disposition of these assets.

We presented this slide for the first time at the end of the third quarter. The objective of the slide is to relay our current thoughts on how long it will take to rid ourselves of these properties. The slide shows that we expect $11.6 million of our ORE properties should be off our balance sheet within the next three to six months. I believe last quarter this amount was around $17.9 million. And during the fourth quarter we liquidated about $13.2 million in ORE. Then in the next column we've shown how much of our ORE is in active projects where sales activity continues and we expect the total liquidation to take place within a two-year time frame. And then the final column, labeled other properties, is where we do not have sales activity that would indicate a near-term sale. The total of this slowly-moving real estate is $6.5 million, all of which is in lots and land. Clearly this is where our challenges are. But fortunately this is a relatively low number as a percentage of our total ORE balances.

With that I'll turn it over to Terry to finish up.

Okay, thanks, Harold. As we move through 2012, and as I've discussed at the outset, it's my expectation that we'll continue to make meaningful reductions in credit costs from 2011 levels. But beyond that I expect the principal profit improvement levers to be continuing expansion of the margin, outsized loan growth, and redeeming the remainder of TARP. We made significant progress on our net interest margin from its low of 2.72% in March of 2009 to 3.65% last quarter. That's the fifth consecutive quarterly expansion. We expect continued margin expansion through the first half of 2012. You probably recall, we used a similar slide to this last quarter to size our ongoing margin expansion opportunity. This is an updated sizing, slightly higher than the sizing slide we showed you last quarter.

To help you think about the size of the ongoing margin expansion opportunity, let me start with the reduction in non-performing assets. As we continue to reduce the level of NPAs, and as we replace non-performing assets with performing loans, that lift in loan volume represents significant margin expansion opportunity. So even if we only move from the fourth quarter NPA, the total assets and OREO ratio of 2.66%, to just 1.50%, and reinvest in performing assets, that would improve the margin 2 to 4 basis points.

Harold highlighted the cost of fund reduction opportunity just a few minutes ago. That continues to be our most significant margin expansion opportunity. Over time we would expect that to translate to 3 to 7 basis points in margin. And over the last year or so, we've chosen to maintain excess liquidity on our balance sheet. As we begin to replace that liquidity with loan growth, we expect to add another 2 to 4 basis points in net interest margin. So you can see over time we believe that we still have a pretty good opportunity to grow our NIM, say from the current level of 3.65% to something in the range of 3.72% to 3.80%.

Now, as we turn our focus to our ability to grow balance sheet volumes in addition to the margin expansion we just discussed, I want to highlight what the current trends are. This slide details the strong and consistent growth we're experiencing in average DDA balances since the first quarter of 2010. We are particularly proud of the efforts of our sales force here. As I mentioned earlier, year-over-year growth in dollars is approximately 23%. At December 31, 2011, our average DDA count is $18,000, compared to $16,200 a year ago. That's an increase of 11.3%. And at the same time the absolute number of accounts is up almost 8.8%.

Additionally, from June to December this year -- so really just focusing on the second half of the year -- we experienced approximately 10.1% uptick in consumer transaction account openings. That's due to several things. One, increased marketing efforts across a broad spectrum but primarily focusing on owner-managed businesses; two, our partnering with the Tennessee Titans to increase the number of Titan checking accounts; and of course, thirdly, widely publicized discontent by debit card holders at larger regional banks. Most of you've heard me say this before, but I really do believe that the real winners in this business will be those that can reliably grow primary banking relationships. And those are principally measured by DDAs.

Again, continuing to focus on current volume growth trends. This slide details the quarterly growth that we've experienced in loans, particularly C&I and owner-occupied CRE loans. I want to remind you that this growth momentum has been established in the face of, number one, rapid rundown in the residential real estate portfolio which is now near a bottom. And, number two, rapid problem loan dispositions which, as Harold highlighted earlier, is expected to be significantly less in 2012 than in 2011. But even with these significant headwinds, fourth quarter loan growth annualized was roughly 6.5% and for C&I plus owner-occupied real estate roughly 19%. So, with little or no help from the economy, it appears our focused organic growth strategies are working.

Let me focus a little more discretely on those organic growth strategies. Since our inception in 2000 we built a great track record for hiring high-producing relationship managers and enabling them to move their long-term clients to us. We suspended our recruitment efforts over the last two years as we focused on problem asset resolution. So, as you might expect, over the last two years much of that relationship consolidation has been deferred. As we move forward, we believe that our existing financial advisors are now in a position to resume consolidating books of business and should produce an additional $900 million in loan growth.

Much has been said about our success in gathering business clients. However, embarrassingly, our penetration of the business owners and employees of those businesses is relatively low compared to peer banks. We're in the early stage execution of an initiative to increase the penetration of our owners and employees. We expect that approximately $100 million of the $900 million will come from that initiative. And the remaining $800 million will come from the completion of their consolidation of clients from their previous employers.

Also, we've recently rekindled our recruitment efforts. I mentioned in a previous call that we would hire approximately 10 new advisors, now, including someone to build our indirect auto lending program. We've updated that to an expectation for 11 new hires. Six of those are onboard. We have a signed commitment from one that will resign next week from a large regional bank here. And we're in late stage negotiation with another high-profile hire we expect to make by mid-February following receipt of his annual incentive payout. The average experience in our market for all six of the recent hires is well north of 20 years. The six recent hires should consolidate a total of $200 million in loan volume. $100 million of which is an indirect loan portfolio.

The projected hires, which is five, should produce another $175 million in loans by consolidating their previous clients. This is the same exact strategy we deployed so successfully during the first seven or eight years of our existence. It's the single best way I know of to take market share and grow a bank without taking on increased credit risk. These relationship managers move their longstanding relationships, leave any bad credits behind, you get relatively rapid growth with extraordinary asset quality. Our experience was, during the first eight years of the firm's existence deploying this strategy, we only incurred approximately 5 basis points in net charge-offs. So again, the idea is, it's a relatively safe way to grow the balance sheet.

The loan growth targets I just reviewed simply anticipate an economy that gets no worse. And while I'm not particularly optimistic about economic growth over the next several years on a national basis, I do expect our markets to outperform the nation. Here's a look at the job recovery in Nashville and Knoxville. The top left chart shows that since peak employment for the US in late 2007, the nation consistently lost jobs through mid-2010 before beginning to create jobs. Such that now the net number of jobs appears to be about 4.6% less than peak employment at the end of the year in 2007. In other words, from the bottom in mid-2010, the nation has only recovered about 27% of the jobs lost. You can compare that trend to the Nashville and Knoxville trends in the charts on the right. Nashville land Knoxville have recovered north of 50% of the jobs lost from peak employment in the second half of 2007, roughly twice the national rate of recovery.

Let me focus just a minute on the third profit improvement lever, which was TARP repayment. Following our 25% TARP redemption, the capital of the firm remains strong. Remaining TARP balances total roughly $70 million. There was a small quarterly decrease in risk-based capital ratios in the fourth quarter due to that repayment. But we still maintain $35 million in cash at the holding company. Annual cash requirements for the holding company, exclusive of TARP dividends, total about $8 million. And generally regulators like to see you maintain at least two years requirements.

The Bank currently has $20.8 million in dividend capacity based on the regulatory formula which limits dividends from the Bank to retained earnings during the current year, plus the last two years. And while it's taken a special appeal to the OCC to gain approval, the Bank could technically dividend $75 million to the holding company and still maintain an 8% leverage and a 12% total risk-based capital ratio, which are now our internal targets. So our capital position is very strong.

For the last five or six quarters I've tried to communicate our desire to be patient as it relates to TARP repayment, in an effort to allow things to stabilize and to minimize or avoid common share dilution. At this point, that continues to be my view of the course we should take. That said, I believe our substantial progress this quarter, combined with our current outlook for the next several quarters, may accelerate our opportunity to do that. First of all, and this is important, we don't know what the Fed would require of us to repay TARP. But based on our analysis of those who have redeemed 100% of TARP through September 30, 2011, if you consider our current Tier 1 leverage ratio, include a modest amount, say, $25 million of additional earnings, or perhaps some other form of alternative capital, that would put us well above the median on Tier 1 leverage ratios based on analysis of approximately 140 TARP redeemers. To be clear, I'm comparing what our Tier 1 leverage would be post TARP repayment to the current capital positions of all those who have repaid TARP, regardless of when they repaid TARP and after any common raises or subsequent earnings that they've produced.

As to total risk-based capital, our argument isn't quite as strong there but total risk-based capital includes Tier 2 capital, which can be easily augmented with a number of non-dilutive alternatives. Again, just to emphasize, we need regulatory cooperation to accomplish any of these particular tactics. But given the low cost of capital that TARP represents, I'm still willing to continue asset quality improvements and capital accretion through earnings, or some other alternative non common capital instrument in an effort to qualify for TARP repayment with little or no common dilution.

So specifically as it relates to first quarter, lending opportunities from both clients and prospects appear to be increasing. So we expect growing momentum in loan growth, particularly C&I. You heard Harold size the volume of CDs to be repriced in the first quarter at roughly $175 million. The rate pick-up should approximate 50 to 75 basis points there. That, in conjunction with the reinvestment in non-performing assets, should lead to continued margin expansion in the quarter. As it relates to NPL and NPA resolution, we expect the pace, as Harold said, to slow slightly in the first half of 2012 and slow meaningfully thereafter. As Harold said, roughly $25.5 million of our NPLs are contractually performing, leaving only about $22 million in some stage of delinquency or default. We've already scheduled foreclosures for $9 million of those during the first quarter. So, as we move into the first quarter of 2012, we're nearing the completion of our asset quality rehabilitation. And we're now focused primarily on building balance sheet volumes and expanding our margin as our march back to high performance continues.

Operator, I'm going to stop there and we'll open the floor for questions.

(Operator Instructions). Michael Rose from Raymond James.

Just a question on the loan growth outlook. How much of that going forward, or at least over the next couple quarters, do you expect to come from some of these new hires? And any comments on the trend in utilization rates of existing clients? Just trying to get a sense of how much of this is going to come from market share shift versus existing clients.

Let me talk about the working capital line utilization first. We have seen no expansion in line utilization. I think, Michael, you probably heard me say before, generally in these recessions we see the loan demand pick up in three different tranches. The first is deferred capital expenditures. We are seeing that. That is stimulating some of our loan demand -- equipment expenditures and the like. The second is expansion of working capital assets and associated lending on those, working capital lines and the like. We've seen no expansion in working capital lines. Of course, the third phase is bona fide expansion of capacity and we're certainly not really seeing that.

I think in total, switching gears I guess to the mix between the new hires, I guess we're expecting $300 million in total from the recent and upcoming hires. So that will give you some sense of what we're expecting from new people versus the existing FAs. And Michael, I would guess -- and this is an estimate, I don't know the exact number -- but I would think that in those recent hires, we probably produced somewhere between $30 million and $40 million in loans from that group already.

Okay, that's helpful. And then on the net charge-off guidance that you laid out, I think you said you expected to get to a sustainable rate of 15 to 35 basis points by the end of '12. Is that correct?

Yes, that's right.

Okay, I just wanted to clarify that. Thanks.

Jefferson Harralson from Keefe, Bruyette & Woods.

I feel I should ask Harvey a question, given this is our last shot at him.

(Laughter) He's pretty tough.

I want to ask you about the inflows. It still seems like a fairly high number. And you talk about the dispositions for next year. You've got relatively low charge-off guidance. But what's the general range of inflows we should expect for next year?

I still think it's going to be lower. And I keep pushing back, or pointing back, to the past dues that we have in our past credits, the fact that we have almost no risk rating downgrades when we have, whether it's external examiners coming in or OCC or our own internal loan reviews. So I continue to hang my hat on it. I think we have our past portfolio pretty well pegged. And most of the indicators I see indicate that we're going to continue to have reduced levels of inflows into the problem categories.

When I see, let's say, $10 million of inflows, what sort of generic loss expectation should I have on $10 million of inflows from next year? Is it relatively close to zero given your low net charge-off guidance? Or should I think that the first mark on some of these properties that are inflowing is going to be 20% or 25%?

Yes, I personally think it's going to be under the 25%. I'd say someplace, 15% probably is a good round number. But that's a guess. But, again, I think that we're on top of those enough. And the first cut we have at analyzing them and looking at them, we're going to be looking at a probably 10%, 15%, maybe as high as 20% cut.

And last question is on loan pricing. It seems as if the banks we're talking to that are getting a lot of loan growth are also complaining about the pricing. Can you just talk about what the typical price for -- if you can -- on owner-occupied CRE property, or what's the typical price on some of the C&I loans that you're doing?

It really depends on what part of the market. Your best credit risk, large syndicated credits, things like that, that are part of the national or regional market, are mighty competitive. Down in more your owner-managed companies, the lower end of the middle market, we're seeing more normal pricing. So it really isn't an across the board. But clearly there's pricing pressure on the upper end but much less so on the lower end.

Okay. How about the CRE piece of it? Is that a place where some banks are out of the markets, you're getting better pricing on the owner-occupied CRE? Or are we back to normal competition there?

It's getting more normal. I think we have enjoyed the fact that we have been willing to lend in both the owner-occupied and the non owner-occupied when there's a good project. Since we've been willing to lend we've been able to get the mix of fees and rate that we might not in a more competitive market. Don't see a whole lot of change in that. I think most of the projects we're looking at we're able to price them the way we want to price them, and typically able to get those because there are fewer competitors, as you suggest, that are aggressive in that space right now.

All right. Thanks, guys. I'll pass it on.

Kevin Fitzsimmons of Sandler O'Neill.

First question for Harvey. If you could just give us a sense, if things continue to play out like you expect, would it be reasonable to expect that reserve to loan ratio to continue to modestly contract? And do you see a floor level, maybe as it's perceived by regulators as a 2%, like a new floor, as you look into the back half of this year, early 2013? And then secondly, if I could just ask a little more color about the anticipated loan growth to come from the current advisors, the $900 million. The way it sounded, like you described it, that basically your model of hiring advisors and then getting them to bring over their business, you basically turned that off at some point and now you're about to turn it back on. And just if you can give a little more color on that. Thanks.

All right. Sure. In terms of the allowance, yes, the methodology we use to look at it obviously is based on what's our historic experience been. So as our experience gets better, then yes, our model would indicate a lowering allowance. What the new bottom is, I'm not sure. Terry and Harold you may have an opinion, talking to regulators. I don't think it's as low as it used to be. 150, 200 basis points, someplace in that range, I think is where it will probably settle out as the new normal. But I really don't have a real clear insight on that and I'm not getting much guidance.

As to the aspect of how much are we getting from current advisors, a lot of the ones, particularly the ones that came 10 years ago, have pretty much pulled over many of the ones that they have dealt with for years. However, those same advisors are well-known in the community. And just because there's an account out there that they personally didn't bank doesn't mean that they don't know those people, aren't known by those people, have standing in community. And can be pretty good generators of new loans that don't fit the typical model of their having dealt with them for years and years.

Also, I'd say there are a lot of financial advisors who haven't been here 10 years. You look at Knoxville, we've been there four years. So, by definition, every one of those advisors is still in the phase of continuing to bring over the accounts that they had at their former institution. So it is sort of a mixture. But I think the fact that we have experienced professionals, not only can they do their own book and get their own book. But I think that they have the ability to be effective in prospecting and in talking to people and converting accounts that were not necessarily their accounts for years and years. So I think it's a mixture across the board.

Harvey, I might jump in and hit at that a little bit. I think, Kevin, as it relates to the existing advisors, I think I was really trying to break it apart into two pieces. My own judgment is that we have not performed nearly at the level we should have with our existing advisors in terms of getting the owners and managers and the employees of those businesses to bank with us. That's probably $100 million of the $900 million capacity. I believe we continue to receive awards and recognition around our service levels, our overall client satisfaction, and so forth. Our reputation is very strong among these people. It's just not been a focused effort by our advisors. And so, as I said, we've got an initiative that has targeted that volume of both loans and deposits. And in early stages it looks like we'll be very successful there.

I think as it relates to your question about turning it off and so forth, I think I would say it this way, Kevin. We definitely turned off our recruitment efforts. As it relates to turning off the desire for people to consolidate their relationship, there's really no overt action to stop that. But I will tell you during a period probably for four to five quarters, normally we meet with our sales force every Monday morning. We talk about what we're working on and so forth. But during that period of five quarters or so, I never once asked our people to produce any loan volume. We never mentioned loan volume. It was never a topic of discussion. All our energy was spent on gathering low-cost core deposits and rehabilitating the credit portfolio. And so, while there's no specific action to turn it off, I think generally the management, the dialogue, the emphasis and all the signals in the Company would not have produced growth.

And then, candidly, a number of the financial advisors that were hired in the latter part of that earlier hiring period got here about the time the economy fell off the wagon there. And so many of their borrowing customers also were damaged, just like ours were here. And it wasn't an opportune time to move them from another bank to here. As we've talked before, my own sense is that the owner-managed businesses have done a pretty effective job at rehabilitating their companies, not so much by growing revenues but by cutting expenses. And many, in fact, most have transformed their Company into something that cash flows now and so forth. I think it's a combination of all those things that will let them be back in the business of consolidating their relationships.

Terry, just on that subject, though, I know you said you haven't mentioned loan growth in the meetings for a period of time but now it's definitely front and center. Have you guys adjusted incentives to back that up and to help stimulate that?

No, Kevin. A quick reminder. We've got a pretty well-entrenched philosophy here that we all win and lose together. And by that I mean 100% of our associates participate in annual cash incentives. We all earn those cash incentives the same way. We have to clear a soundness threshold first, and then the remainder is determined based on our earnings per share. For most of these revenue producers that you're asking about, their target is 20% of base pay. And so, to the extent we over achieve, we clear the soundness threshold and we over-achieve our earnings target, we pay more than targeted incentives. If we under-achieve the EPS targets, we pay less than target incentives. And if we don't clear the soundness threshold we don't pay any.

As you know, we've not paid any incentives in the last three years. We will be paying incentives for 2011 performance. Again, I rambled through that to say we're satisfied with that approach. We believe there's extraordinary teamwork. And so I believe that the drive toward the EPS growth can only be accomplished through lending volumes. And so I think there's adequate instance in the incentive plan. But we've not modified it and we're not specifically incenting loan growth.

Okay. Thank you.

Peyton Green of Sterne Agee.

A question on slide 22 of the slide deck that refers to the current advisors, recent hires and the projected new hires, and the loan and deposit growth that you attribute to those advisors. I guess the main question is over what time period would you hope to achieve that volume growth?

Peyton, that's roughly a three-year time frame.

Okay. And then if you could comment maybe a little bit about payoff activity. Are you still seeing reasonable payoff activity? And is it coming from capital markets or competitors?

We are seeing a fair amount of payoff activity. Harvey, you ought to comment. I don't see much in the way of competitive payoffs.

I'd say very little going to competitors. You do have a number -- the life insurance companies continue to be fairly active, more so than they have been in a couple of years. And so in the real estate space, you're getting even some long-term good rate, non-recourse opportunities for some of the developers to move debt. So we're seeing some of that. A little bit of liquidity events that either the customer gets sold or has liquidity, has equity raised that doesn't need the debt. But almost none in terms of losing current opportunities or current loans to competitors.

Harvey, my sense is that the healthcare sector in particular is one where you have a lot of new money moving around in their private equity and other, as you say, that are creating liquidity events and the like that are paying off bank debt. But it's probably more prominent in healthcare than anywhere else.

I'd say the equity events are in the healthcare. And then that plus the insurance company activity in the CRE is where the payoffs largely would be.

Okay. Great. Thank you very much.

(Operator Instructions). Bill Dezellem from Tieton Capital.

I'll also take one last shot with Harvey here. The non-performing reductions that you have had are clearly in top tier of banks. And I guess what we're trying to get our arms around is, to what degree is that a function of your market? And as Terry pointed out, the job re-creation? You've bounced back half of the job losses. To what degree it's a function of your markets or whether -- this is a little bit loaded -- but whether you guys are just that good?

I think our markets are good. I think that, for the most part, values have stabilized. As we've said before, we've slowed down the pace of dispositions and we can be a little bit more patient. I think the fact that we have taken, and continue to take, a retail versus a wholesale strategy, or disposition strategy, we have not done bulk sales and the like. We've tried to work most of our dispositions have been to folks we know, local folks. So I think you put that all together and I think that we just -- I don't know that I'd say we're that good but I think the strategies we used have worked and have paid off. And I'd say our special assets folks over the past two years ramped up pretty quickly and got pretty good at it pretty quickly. So I'd put a lot of it on their shoulders and just say they've done a phenomenal job of playing the problem assets correctly and being patient when patience was required, and being real aggressive when that was called for.

Harvey, you ought to feel free to comment, but it seems to me, I guess to expand on one of your points, which is the work of the special assets group, we allocated a large resource to working out problem credits. We built almost 30 people and dedicated them to the function of handling problem assets. Which I think has been the most important ingredient in really working down through it as a resource allocation. I think today we're down to about 21 people, so we've cut it in about a third. But we've still got a huge resource allocation working these problem credits.

Right. Terry knows but so the rest of you realize, going into '09 we really didn't have a special assets group. That idea of it peaked at 30, it peaked there pretty quickly. So there was a pretty steep learning curve. I think our guys got pretty good, pretty fast.

Would you please highlight the percentage of your problem loans that came from acquisitions versus those that were internally generated? And with that in mind, how does that shape your thought process about future acquisitions?

I'm not sure. In fact, I am sure I can't recite the number as you asked the question. But I might go at it this way. I can tell you that prior to our acquisitions, our residential real estate exposure was probably 4% or 5% of the loan book. Following acquisitions, it approached 20% of the loan book. And that phenomenon there, as I've said a number of times, was my principal mistake. We ended up with a 20% concentration, 20% of the loan book, in residential real estate. We concluded our last acquisition in late 2007. So we got it done just in time to ride the residential market down.

So again, I would hasten to say that, in my judgment, the quality of the due diligence turned out to be pretty good. I'm not saying it couldn't have been improved but it was pretty good. Again, the principal error was our acceptance of a concentration of residential real estate loans. I believe that the quality of the organizations that we acquired were good. What we were chasing, in the case of one, was a lead deposit market share in one of the fastest growing counties in the nation. We own that. We possess that. Our market share has grown there. It will be a meaningful cash flow contributor over time. In the case of the other, we were looking for expanded distribution to fill out our distribution footprint in the remainder of middle Tennessee. We now own that, possess that. That will produce a meaningful cash flow for us going forward and so forth. Again, I don't mean to ramble on and on but just try to put it in perspective. The principal issue that this Company had was the concentration of residential real estate, not flawed acquisitions, in my judgment.

And one final. As a result of what you just said, I presume that from your standpoint acquisitions then are still a viable part of your future strategy?

Yes. The way I would characterize it is this. When I think about our Company, I think of us primarily as an organic grower. As we do our strategic planning, that is principally where we aim. And I believe that we've established a track record of being able to successfully do that. I think we'll produce outsized growth based on nothing more than our ability to continue to move market share on an organic basis. I don't think of us largely as an acquisitive company. But that said, I can't imagine over the next five years that we wouldn't have acquired something somewhere along the way. I just don't view that to be our principal growth mechanism.

Great. Thank you both.

Brian Martin from FIG Partners.

Just two questions. One, maybe Terry you can just give a little color on your expectations for the cost of funds and how you expect that to play out here, just given the improvements you expect maybe over the next couple quarters. And then just the other question I have is just on the OREO expense line. Given that you've got the stuff marked down pretty significantly at the 58% level, can you just talk about what kind of reduction you would expect in the OREO expense in '12 versus '11?

Harold, why don't you take the OREO and I'll come back and talk about cost of funds.

Yes, Brian, we've been working on trying to forecast an ORE cost number for the last several months. We really believe that we think we can get that number from 2011 run rates down into the 50% to 60% range. That's going to take a lot of effort on the part of special assets to get that done. But like we've said earlier, we've got a big resource still there and those people are working day in and day out on those specific assets. So they're marketing them every day. Now, cost of funds, Terry's going to talk about cost of funds.

Brian, I think generally Harold hit on two slides in the presentation there. One that tried to quantify how much the cost of funds improvement opportunity would be associated with maturing CDs. And the other slide with the continued opportunity for reduction in the rates paid on money market deposit accounts. I think he quantified each of those components. I would say, generally, over the course of 2012, we're probably looking at another 15 basis points in cost of funds improvement.

Okay. All right. Thanks very much.

Mac Hodgson from SunTrust Robinson.

This is David Grayson in for Mac. Nice quarter, guys. I wanted to start with a quick question. You just talked about the ramp-down in the special assets group, going from 29 to 21. And I thought I heard previously, or earlier in the call, that the number was even lower than that 21 now. Maybe you can just provide a little color on where those people have been repurposed. Are they no longer with the organization? Are they in front line production? And if so, if they're involved with production, would their efforts be included in any of the loan growth expectations that underpin your near-term NIM guidance?

First of all, the 21 is where we currently are. I think that what Harold was talking about is getting down into the teens, the low teens by a year from now. So we are currently at 21 still. And that reduction has come from all of what you mentioned. Some have found other opportunities at other institutions. Some have gone back more into production. So it's a mixture of everything you mentioned.

Okay. Thanks. And then a question on the margin. You've given great color on the mechanics of the margin and what we're looking for going through 2012. But as I think about the margin beyond that, I know a lot can happen between now and 2013, 2014, hopefully we all get a more favorable yield curve for starters. But just in general I think about your non-interest bearing deposit growth vis-a-vis the margin longer term. How are you thinking about that? Do you think that, is 3.80% should be the low end of the range, downstream or are we getting to an equilibrium here?

I think this 3.80% number would be a good long-term sustainable target for this franchise and the kind of business that we pursue. We're very pleased with the DDA growth we've experienced. Our intentions are to hold onto that and grow that number consistently for as long as we've got a banking franchise in Nashville and Knoxville.

Okay. Then maybe a follow-up. As a C&I focused bank, your non-interest bearing deposits at 17% of deposits now, 17% or 18%, up meaningfully from a year ago. Is there a target you would like to get to that would be 20%, 25%? Do you think of it in those terms?

We really don't, David. What we focus on is getting in front of relationship managers and talking to them about the criticality of operating accounts and going after all of these small and mid-sized commercial businesses in Nashville and Knoxville. And that's a weekly chore. So we're in front of them quite a bit.

Okay. Thanks so much. That's all I had.

Peyton Green from Sterne Agee.

I'm actually good. Thank you.

Okay. Let me say then I think that we're really at the end of the questions. We appreciate you being with us. My sense of the quarter is a little noise associated with taxes and TARP repayment. But in terms of the two principal things we're trying to do -- expand the core earnings capacity and reduce our problem assets -- fourth quarter was a great quarter for us. Thanks so much.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of the day.