Pinnacle Financial Partners Inc (PNFPP) 2012 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Pinnacle Financial Partners' fourth-quarter 2012 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.

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 your questions following the presentation.

(Operator Instructions)

Analysts will be given preference during the Q&A. We ask that you please pick up your handset to allow optimal sound quality.

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 facts 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 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 the 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 am now going to turn the presentation over to Mr. Terry Turner, Pinnacle's President and CEO.

Good morning. Thanks for joining us today. For today's conference call, like we've done in previous quarterly calls, I'll briefly review the highlights of the fourth-quarter performance. Harold will review the fourth quarter in greater detail, and then I'll take some time to give you my thoughts on our growth prospects and what we're working on in 2013. And then we'll end with ample time for Q&A.

I want to begin by comparing our fourth-quarter result to the guidance that we provided at the conclusion of last quarter's call. Our asset quality metrics continued to improve, with NPAs dropping to 1.11% of loans in OREO from 1.65% in the prior quarter and 2.66% in the same quarter last year. We accomplished that with an annualized net charge-off ratio for the quarter of just 29 basis points. So, again, it looks like we're getting the rehabilitation generally the right way. I'm excited about the effort our relationship managers and Special Assets Group have put into this effort. They worked tirelessly over the last three years to get us to this position. Loans grew during the quarter by more than $187 million on a linked-quarter growth rate of 5.3%, or 12.8% year over year from 2011.

Beyond those two things, core deposits grew almost $300 million last quarter, $400 million for the year. Cost of funds continued to decline, down another 7 basis points on a linked-quarter basis to 46 basis points. Net interest income was up $1.3 million during the fourth quarter. 2012 net interest income was up 7.5% compared to 2011.

And of course, most important metric is EPS. Fully diluted EPS for the fourth quarter was $0.34, compared to last quarter's $0.33. I think it's important to note that fourth-quarter results included a $2.1 million charge due to the prepayment of an FHLB, Federal Home Loan Bank, advance, which was offset by a $2 million security gain.

For the year, fully diluted EPS was $1.10 in 2012, compared to $1.09 for last year. But as we mentioned in the press release last night, several items bear on the comparison between the two years. They were the accelerated accretion, which was triggered by our second-quarter 2012 redemption of the remaining preferred stock that was issued in conjunction with the TARP program, and the reversal of the valuation allowance for deferred taxes, which occurred in 2011. Taking those two items into account, this year's fully diluted EPS would have been approximately $1.15. And that's compared to last year's fully diluted EPS as adjusted at $0.43. And that's a 167.4% increase.

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 consecutive sequential quarters for the last 2.5 years. Net charge-offs were roughly $2.2 million for the quarter. OREO expenses were $1.4 million. And so, combining those two, our total credit metrics were down more than 29% in the fourth quarter, almost 67% year over year, and down for the 10th consecutive quarter.

Non-performing loans shrank roughly $13.7 million during the quarter, from $37 million to $23 million, a linked-quarter reduction of 37.6%. That's the 11th consecutive quarterly reduction there, down nearly 38% from last December. Non-performing assets -- and that's defined as NPLs plus OREO -- were down $17 million during the quarter. That's roughly a 29% decline.

Classified loans shrank by roughly $18 million during the third quarter, a linked-quarter reduction of more than 8%, which results in classified assets to Tier 1 capital plus allowance of a little less than 30%.

In conjunction with asset quality improvements, I wanted to discuss these charts that detail the significant progress we've made on credit cost. As you can see on the left, our NPAs are now $41.4 million. That's down from $132.4 million at the start of 2011. More importantly, we experienced in-flows of only $5.9 million in new NPAs this quarter. That's a little higher than last quarter, but still a relatively small amount. We had previously given guidance for dispositions of NPAs of somewhere between $75 million and $100 million in 2012, compared to $131 million in dispositions in 2011. And as it turns out, dispositions of NPAs were just over $83 million for 2012, approaching the midpoint of our guidance range.

During the quarter, we had a $5.6 million recovery on a loan that was charged off in 2009. As a result of that recovery, we determined we had a unique opportunity to reduce our NPA balances by accelerating our disposition strategy with respect to certain troubled assets, which included a bulk sale. That's a disposition tactic which is unusual for us. That sale and other asset dispositions effectively allowed our Special Assets Group to successfully off-ramp $22.9 million of non-performing assets during the quarter, while concurrently reducing our linked-quarter credit cost.

On the right, as to the allowance coverage, it's now risen to more than 300% of non-performing loans, which we believe will continue to compare favorably to the median of most of the banks that are in our peer group at this time. And barring any adverse changes to the broader economic environment that might cause us to think otherwise. We believe that some amount of reserve release will continue at least for the next several quarters, consistent with any improvement in the credit quality of our loan book. But these releases will probably be at a measured pace in amounts not too different from the last few previous quarters. As a result, credit quality improvement will continue to impact the absolute level of our loan reserves, but will be offset in whole or in part by our belief that we should experience loan growth for the remainder of the year.

A quick snapshot of the quarter also shows meaningful continued core earnings momentum. Over the last two years, the two most significant levers have been accelerating loan volumes -- particularly C&I volumes -- and expanding the margin. Despite significant headwinds, we still managed to grow end-of-period loans $187 million on a linked-quarter basis, and C&I plus owner-occupied real estate loans made up nearly $160 million of that.

Average non-interest-bearing deposits continued to grow at a significant pace. And as you can see, year-over-year comparison is very strong, up more than 38%. Harold will talk a little more about that here in a few minutes.

Our net interest margin expanded to 3.8% this quarter. That's actually better than our previous guidance. And non-interest income exclusive of security gains was up 15.9%, while total revenues are up 9.2%. Both of those are year-over-year comparisons.

In general, the fourth quarter was a great quarter in terms of execution against our primary priorities that we've been reviewing with you for some time. With that, let me turn it over to Harold for a little more in-depth review of the quarter.

Thanks, Terry. We've shown this slide for several quarters, as it details the quarterly trends of our net interest income and our net interest margin. We're obviously pleased about the continued progress we've made on both these measures. We reported 3.8% for our net interest margin for this quarter, which was good news to us. We're particularly pleased that our net interest income increased by 3.2% linked quarter, as top-line revenue growth is where our focus remains. We'll look at these results in somewhat more detail over the next few slides.

We introduced this slide to you last quarter. As to loan growth, obviously we are very pleased with the blue bars on this chart. As Terry mentioned, the end-of-period loans were up 12.8% over last year. We remain optimistic, given our pipeline, that loan growth will continue into 2013, although we are cautious about first-quarter loan growth, as we believe we will incur another quarter of significant paydowns, some of which were scheduled to occur in the fourth quarter but were postponed into 2013. However, loan yields, which are depicted by the green line, remain a challenge for our industry. Thus the increase of 2 basis points was indeed welcome.

As noted, we continue to experience high levels of early payoffs, which is obviously a headwind to loan growth. During the fourth quarter, we identified payoffs of more than $94 million. Based on client notifications that we've attained through our relationship managers, we anticipate more payoffs going into the first quarter of '13. We continue to believe our new loan pipelines will produce net growth in the first quarter, but not at the pace of the fourth quarter.

Now, many banks are talking about line utilization. We've again included in the supplemental information a chart on commercial line utilization. And that chart reflects that our commercial borrowers line utilization has not fluctuated very much over the last several quarters, ranging between 55% and 59%. We now have approximately $865 million in available commercial lines, up approximately 6% from the amount of the prior quarter, and hopefully pointing towards future funding. Our belief would be that as confidence hopefully is restored, some of these commitments will turn into funded borrowings.

We've shown this slide for many quarters, and it highlights the excellent job our relationship managers have done with respect to deposit pricing. As the green line indicates, we've experienced a meaningful decrease in cost of deposits over the last eight quarters. We remain optimistic that a further reduction, albeit at a slower pace, in cost of funds will occur in 2013 as we focus on reducing the cost of specific accounts. Not impacting cost of deposits, but cost of funds was the prepayment of approximately $60 million in Federal Home Loan Bank borrowings, which resulted in a $2.1 million prepayment charge in the fourth quarter. The Federal Home Loan Bank advances had an effective yield of 1.9%, so this should have a positive influence on our margins going forward, as well as free up some capacity at the Federal Home Loan Bank for future fundings.

Given the outlook for a slow- or no-growth economy, to hit our volume targets we have to gain market share. And to hit our margin targets, growing DDAs is a critical tactic. As you can see by the blue bars, our business model focuses significantly on attracting commercial businesses to our franchise. This slide details the strong and generally consistent growth we've experienced in average non-interest-bearing DDA accounts.

During the fourth quarter, our DDA balances increased by approximately $200 million. We've identified $100 million to $125 million of this growth as temporary, as we had several large depositors that needed us to keep the funds on our balance sheet at year-end for various purposes. We believe most of these funds have already left our Bank. We've experienced a few inquiries regarding the TAG program expiration. No doubt we'll see some movement in our DDA balances as customers either seek out US government-guaranteed investments, or will find a product to collateralize the deposit on our books.

When you compare our current DDA balances to those at December 31, 2010, which is when the TAG program started, we've set up approximately $351 million in new DDA accounts. During this time, far and away we've experienced the greatest growth in the number of DDA accounts with balances less than $250,000, which compose about 38% of the balances. These balances should be unaffected by any changes to the Transaction Account Guarantee program.

As to these newer DDA accounts with balances greater than $250,000, which represent 62% of the new balances, these are the accounts that could be at risk given the expiration of the TAG program. We've surveyed our relationship managers and periodically reviewed accounts greater than $5 million in account balances. We will continue to monitor our large DDA balances for unusual movement, and periodically survey our relationship managers concerning their larger deposit accounts. But our belief continues to be that any deposit outflows as a result of TAG expiration are very manageable. However, given the year-end run-up and the expiration of TAG, we are anticipating a decrease in DDA balances for the first quarter of this year.

Moving past the margin into credit cost; as Terry noted, total credit costs continue to trend downward. We traditionally define total credit costs for our Firm as the sum of net loan charge-offs and ORE expense. This bar graph shows the sum of net charge-offs and ORE have been decreasing, and decreasing steadily for the past seven quarters. As to charge-offs, we recorded $2.2 million in charge-offs in the fourth quarter of 2012, up $300,000 from the third quarter. Provision expense for the fourth quarter was $2.5 million, up from $1.4 million in the third quarter, due primarily to increased loan growth and the $300,000 in incremental charge-offs.

Our ORE book stands at $18.6 million at quarter end, the lowest level since the third quarter of 2009. Based on our review of potential first-quarter foreclosures, our ORE portfolio should remain fairly constant. We continue to believe that NPAs will trend downward over the next few quarters, but not at the same pace as was accomplished in 2012. Likewise, expenses associated with managing and disposing of these properties should also trend downward. Given fourth-quarter results, our general belief is that credit costs should stabilize in 2013 barring any unforeseen economic events which could cause unanticipated stress to our borrowers.

Moving down the P&L into fee revenues, core non-interest fee income is up 6.1% linked quarter. This slide depicts our three primary fee businesses. We've seen good growth in our deposit service fee and interchange categories this year, which we believe is primarily due to growth in retail deposit accounts. Wealth management, which is brokerage, trust and insurance, has been a steady performer all year. And with some lift from the capital markets, we should see some revenue benefit in 2013.

Mortgage origination has been hitting records all year long due to the extended refinance business. But we are also seeing some real positive signs in the residential housing markets in our trade areas over the last year, and believe home buying in our markets will be even stronger this coming year.

As to expenses, as you can see with this slide, our efficiency ratio is now at 58.8%, excluding ORE expense and the Federal Home Loan Bank restructuring charges, as well as the gain on the sale of securities. One of our long-term profitability measures that Terry will discuss in a moment is the ratio of expenses to average assets. That number, again, excluding ORE and Federal Home Loan Bank restructuring charges, was 2.52% for the fourth quarter. Still more than our long-term target, but we believe a favorable comparison to the median value of most banks in our peer group. That said, we remain focused on eliminating any unnecessary expense, as our senior leaders are looking to find ways to increase the operating leverage of our Firm. However, the primary strategy to decrease and to ultimately achieve our long-term expense-to-average asset ratio target will be growing the loan portfolio of this Firm.

As to the expense run rates for 2013, we'll be applying our usual merit raises to our associate base in January, which should approximate 3%. The marketing line experienced its usual fourth-quarter increase, so we anticipate first quarter to be less than the fourth quarter. The other expense category is about $2 million higher than usual, primarily due to the Federal Home Loan Bank restructuring charge. As to occupancy expense, we have largely completed our branch build-out in Nashville, but continue to believe we need to increase our presence in Knoxville. We're penciling in a new branch location in Knoxville in the first half of this year, which will have an impact on our expenses in 2013.

Finally, our adjusted pretax preprovision increased from $18.7 million in the fourth quarter of 2011 to $22 million in the third quarter of 2012, a year-over-year increase of 20.9%. Increasing our pretax preprovision number in the first quarter has typically been a challenge for us, as well as most community banks, as the first quarter will see the impact of fewer operating days, which impacts net interest income, as well as merit raises and increases in payroll taxes, which impact personnel costs. Again, the key to our ability to growing our operating earnings is gathering low-cost deposits and funding quality lending opportunities, which is what we will focus on again this year.

With that, I'll turn it back over to Terry.

Okay, thanks, Harold. As we discussed in the last several conference calls, I believe PNFP is at an inflection point. We're substantially done with our balance sheet rehabilitation, and are now able to focus more intently on high-performing profitability and returns, and seizing the rapid organic growth opportunities that we continue to believe exist for us. And we believe they exist primarily as a result of two things. Number one, the lending capacities of our lenders that are currently on our payroll. There are a good number of those that are still relatively early in the consolidation of their books of business. And then secondarily, the ongoing vulnerabilities at the large and regional competitors in our market who, according to Greenwich Research, continue to give up commercial market share.

On this slide, we've got the key strategic targets we've been discussing with you for several quarters. You can see there at the bottom a ROA target range of 1.10% to 1.30%. A NIM target range of 3.70% to 3.90%. Net charge-offs in a range of 20 to 35 basis points. Non-interest income to total average assets of 70 to 90 basis points. And non-interest expenses to total average assets of 2.10% to 2.30%. You can see that we made progress each quarter this year, and again in the fourth quarter of 2012 against those targets.

In the interest of time, I'm not going to spend any time on the margin, the charge-offs, the fees, because as you can see we're already operating inside those ranges, either very close to or better than the midpoint. And as Harold alluded to just a minute ago, the only item on that chart that is not at the range, or is not very close to the range, is the non-interest expense to total average asset number.

Let me remind you -- I've tried to say this before, but just as a quick reminder, in terms of hitting the range of 2.10% to 2.30%, it's my belief that that is the normalized run rate for this Firm. We operated in that range from 2003 to 2008. And we've been there for -- we operated there for six consecutive years, and of course, slipped outside that range as we headed into the recession that began in 2008.

So, when you start thinking about -- how is it that we get back to it? We do believe that we have some opportunities to cut normal operating expenses. You heard Harold allude to the fact that managers in our Company are looking for those expense improvement opportunities. We also believe that we are nearing the completion of our asset quality improvement efforts. And as those come to a conclusion, we will get improvement in non-interest expenses. Not only those that are outlined on the face of the statement in the OREO expense line, but also in the area of elevated lending expenses in things like legal fees, appraisal fees and so forth that are more or less buried in the expense lines of the Bank. And then secondarily, the staffing levels that are associated with a large special asset group that's been handling this. So, those are additional expense opportunities.

But again, I think it's -- to understand our Company, it's really important to understand that huge contributor to the ratio escalating over the last several years wasn't just the fact that expenses went up, but the fact that the assets came down. Assets had peaked roughly $5.1 billion in Q4 '09. But as a part of the asset rehabilitation focus that we've had, and the focus on earnings and so forth, assets declined by roughly $300 million. And we didn't make the choice from a strategic standpoint to cut expenses that were associated with revenue generation, even though the assets dropped during that period.

And in addition to that, not just avoiding the cutting of those expenses, we actually increased our [cadre] of relationship managers by a little more than 10% over the last 12 months or so. And so, we believe those two strategic choices have given us the capacity to capture market share, which we believe is available to us due to the vulnerabilities that we described earlier.

We've talked before, and will talk more in just a moment, about the $1.3 billion loan growth capacity that our existing relationship managers had at the beginning of 2012. But the point I really want to make sure is clear is that in broad, general terms, $1.3 billion of incremental loans on this expense base transforms the profitability and the non-interest-expense-to-asset ratio substantially. So, in terms of ROAA, if we were to hit the midpoint for each of the components listed above, that would produce an ROAA at the midpoint of the range. In other words, a 1.20% ROA.

As we just discussed, one of the critical tactics to achieving our long-term performance targets is to seize the growth and the market share movement opportunities that are probably unique to our competitive position. In late 2011, I highlighted my belief that our existing relationship managers, plus an additional 11 relationship managers that we intended to hire, had the capacity to produce approximately $1.3 billion in net loan growth over roughly a three-year period of time. In this chart, we're plotting the actual production in 2012 against the three-year capacity that we outlined more than a year ago.

I always try to caution you that you shouldn't expect that we'll produce the loan growth on a straight line quarterly basis. During 2012, we had a quarterly low of $46.5 million, and a quarterly high of $187 million. But round numbers, we're up a net of $420 million in 2012, and that's an annual growth rate of 12.8%. The required CAGR for loans required to hit that $1.3 billion target is 11.5%. And as I just mentioned, 2012 growth rate was 12.8%, so to date we're pretty close to the required growth rate.

As we mentioned in earlier calls, in particular in the last quarterly call, we are experiencing unprecedented levels of payoffs. That is a significant headwind to loan growth, and was again in the fourth quarter of 2012. During the fourth quarter, we recorded payoffs of approximately $94 million. That's slightly less than the third quarter of 2012, but still a very large number.

I believe that the acceleration in loan payoffs is largely tied to four phenomena. Number one, the availability of long-term fixed rates with non-core -- nonrecourse for income-producing real estate. That generally comes from non-bank providers like insurance companies and REITs. Number two, the sluggish momentum in the economy at large, which dampens loan demand.

Number three, the fact that corporate America is now willing to part with some of the cash that they have been storing up, and they use that to reduce indebtedness. That's particularly given the fact that they can earn so little on that cash, it's the most efficient use of their cash, to pay down debt.

And then number four, liquidity events for businesses, since a lot of owners decided to cash out because of an unwillingness to risk another business downturn or take advantage of 2012 tax rates. Obviously, that fourth element shouldn't continue to be quite as strong a factor. Nevertheless, it is my expectation that payoffs in the first quarter of 2013 may in fact hit a new high compared to our previous quarters.

Additionally, I would say I don't expect that we'll experience the same level of loan originations in the first quarter. We had a meaningful number of transactions that needed to close by year end. And so, as I mentioned a moment ago, we continue to believe that we'll hit our long-term loan growth targets. But there will be wide quarterly variations. My recollection is that last year's first-quarter growth was about $46 million, and I wouldn't be surprised at a similar phenomenon in 2013.

We have made significant progress on our net interest margin from its low of 2.72% in March of 2009, to 3.80% margin last quarter. That's the ninth consecutive quarterly expansion. We discussed our margin opportunities with you for many quarters. We have tried to be transparent about both the opportunities and the threats that we see.

Obviously, we continue to have opportunities to increase our margins based on the ongoing reductions in our cost of funds. But we anticipate that much, if not all, the margin gains -- much, if not all, of those will be tied up in offsetting the market trends that we see on loan and bond yields. For that reason, margin expansion at this level of rates continues to be challenging. And so, for us, while we don't look for a lot more in the way of margin expansion, we do believe that the rapid loan growth will facilitate increased core revenues over the next several quarters, and offset the impact of lower loan and bond yields.

Here's a chart that we have not used previously, but I want to discuss capital for a moment. We get a lot of questions about our appetite or willingness to pay a dividend for our common stockholders. I would say that I believe our industry is wrestling with how much -- how we're going to achieve required returns, given the elevated capital on our balance sheet. It's no secret that small-cap banks are keeping more tangible common equity than ever before. And for most of us, significantly more than our large cap competitors. As it relates to PNFP, we tend to be at the median of most small-cap peer groups on our tangible common equity levels.

As you know, there are many issues facing banks currently that will have direct impacts on capital, primarily Basel III. But you could add to that the FASB initiatives on the allowance for loan losses, liquidity coverage ratio requirements that are not yet known, and the list would go on beyond that. That said, and in spite of the future regulatory issues, it appears to me that eventually both the industry and Pinnacle will either have to grow into these capital levels via quality lending opportunities, or absent those, we'll have to give it back or figure out an appropriate exit strategy. As we've discussed today, we are optimistic that we've got a unique opportunity to grow our balance sheet. And we will no doubt use some of our excess capital to fund the quality lending opportunities that are available to us.

But going back to our long-term profitability targets that we just discussed, you know, if we hit the ROA hurdles, you should see the return on tangible common equity ratios responding similarly. And so, that said, I'm hopeful that we'll find our way to a point of being able to generate enough internal capital to satisfy the regulatory constraints, grow our balance sheet consistent with the great opportunities that we have, and eventually deploy a sustainable dividend strategy.

So, now, dialing it all the way back to the first quarter of 2013, the path forward continues to be pretty simple in my estimation. I believe we'll continue to make reductions in credit costs and problem loan levels. Beyond that, I expect the principal profit improvement lever to be loan growth. And so, those continue to be the principal priorities for our Firm.

Operator, with that, we'll stop and respond to any questions there might be.

Thank you, Mr. Turner. The floor is now open for your questions following the presentation.

(Operator Instructions)

Jefferson Harralson of KBW.

I wanted to ask you a question about the content of your loan growth. What types of companies are borrowing more money, and are you seeing any themes in this late-quarter loan growth that we're seeing?

Jefferson, this is Harold. We've looked at that from a variety of perspectives. Most of it was C&I. Substantially all of it was C&I, actually. We were really pleased that you get in there and you start digging around and trying to figure out -- what was it, a few big loans, or whatever. We did have one meaningful loan that we think is going to pay off here in the first quarter. But generally, we were pleased that ticket sizes were in the $5 million to $8 million range. We had a handful of those that are nice commercial accounts here in Nashville and Knoxville that we're real pleased with. The other thing that we're pleased with about those new loans were the rates we were getting. We were anticipating -- if you had asked me this question last year, I would have been real nervous about where loan yields are heading. But we were real pleased with these yields that are kind of starting to stabilize and maybe even hold up a little bit going into the first quarter.

That's kind of my follow-up is the -- with the loan yield going up, it seems that a 4.64% new loan or an average of new loans -- it must have been higher than 4.62% -- is higher than what the marketplace allows. I guess, can you comment on the ability or what's driving the ability to put on loans at these kinds of rates?

Yes. The new loans are coming in not quite as good as our average book, but not significantly off. We're getting renewals that are within 5 to 10 basis points either way on what's in the current book. Now, what does impact the quarter-to-quarter loan yields are prepayments. Because some of those have unamortized fees, and some of them are significant. And so when that loan pays off, we recognize that entire fee. So that could have some impact on why you're seeing some volatility in the loan yield.

Okay, thanks, guys.

Kevin Fitzsimmons of Sandler O'Neill.

I just want to go back to the loan growth question, kind of dove-tailing on Jefferson's. It seems like what you're saying is the pace of loan growth this quarter was a little more than you otherwise would have expected. You had some late quarter activity going on that you might not see next quarter in terms of originations. And also your payoffs, while high this quarter, you're saying it could be a new high next quarter. So could we expect this double-digit pace of growth maybe to be more of a single-digit, mid-single-digit type of annualized pace for first quarter?

Yes, Kevin. I think the thing I would say is, again, I'd just go back and we have tried to hit at this a number of times, we have sort of given a long-term capacity or growth target that we believe we can achieve. That's just short of $1.3 billion. To do that, you've got to grow a little better than $400 million a year. We believe that was a good assumption for 2012. I believe that's a good assumption for 2013.

But as you know, and as you watched our quarterly production through 2012, it was all over the place. It ranged from $46 million to $187 million. And the $47 million growth was in the first quarter. And in our Company, because of the C&I content, first quarter typically is a relatively slow loan-growth quarter. So many people are focused on getting transactions done to close out their year that the pay slows down the first quarter. So I believe you ought to assume we are going to grow at a double-digit pace in 2013. But I do believe it will easily be a single-digit growth rate in the first quarter.

Okay, great. Just one quick follow-up. You mentioned about how the yield -- you're pleased with the loan yields. Just curious how -- what you're seeing in terms of competition. I know earlier in the month the Wall Street Journal did an article where they were talking about loan competition. And they singled out Nashville and talked about JPMorgan getting more active there. And what are you -- are you seeing that have an effect, or is that something that may have an effect more over the course of the year? Thanks.

Yes, I think that it is a true thing that over the course of the last 24 months, that we've had either new entrants or increased emphasis by existing, large out-of-market players in the marketplace. I would say, generally, where we encounter them is way up in the sales range. In other words, upper middle market or even larger companies. And Kevin, as you know, that's not really the mainstay of this Company. We would be more of a true middle market lender, and certainly operate in the middle to lower end of what folks typically refer to as middle market.

So I ramble through that to say it's a fact that many have come to town. It is a fact that they use price and, frankly, terms, as a basis for competition. But it's also a fact that's not our bread and butter, and consequently we don't encounter them with great frequency. I think I would go on to say that as it relates to price competition, the same things that were true through most of 2012 are true today and I think will be true through most of 2013. And that is that the industry is awash with liquidity, and loan demand is fairly limited, and that creates a fiercely competitive loan pricing market. But honestly, where we're encountering that would be more with our traditional competitors than with some of those large out-of-market competitors that are anxious to get here or who have been here in a limited presence and want to grow their presence here.

Okay, thanks, guys.

Peyton Green of Sterne, Agee.

I was just wondering if you could talk, Terry, just a little bit about the opportunity to hire going forward, and how much hiring activity you would expect to do maybe on the production end of the Company. And also if there are any business line initiatives beyond just the traditional banking. I know revenues were strong in the trust area, and also insurance ticked up, and also in the investment services and brokerage.

Okay. I guess let me talk about hiring first and then I'll circle back on the fee revenues. Peyton, I think you know our Company well. We have really built the Company by hiring what we believe are the best bankers in the market -- well-experienced, well-tenured, large books of business. And generally hiring those folks out of large regional banks who move here and consequently move their books here. There might have been a year or two during the downturn -- say 2009 and '10 -- where we didn't hire people. But I would say we were hiring up until 2009, and we began hiring again in 2010. And so with that one period where we just said -- hey, we're not going to hire people, we're going to focus on cleaning up our balance sheet -- we have, I would say, run a continuous recruitment cycle.

We generally know who the players are that are available in the marketplace and have a pretty high success ratio at getting them. And an extraordinarily high success ratio in keeping them. So we gave a target in 2011 for how many people we would hire. We did that just to try to ensure that the market could get a picture of what we were trying to do. And specifically, that we were going back into the hiring business and that we would be able to produce out-sized growth based on that.

I think I've said subsequently, I don't want to keep updating the hiring targets and so forth. You just get too many variables to chase and too many updates to give and all those kinds of things. But it is a fair thing to say that I anticipate that we will hire a number of high-profile relationship managers in this market and in Knoxville in 2013. Those are not required in order to hit the loan growth targets that we've given. To the extent we're successful hiring them, that would be incremental to the loan growth targets that we've given. But again, my preference is not to get in the business of giving quarterly updates on hiring and those kinds of things.

I think as it relates to fee businesses and what's going on there, you know, we've got -- I guess I would say that we continue to have good opportunities in those fee businesses that we're in. And specifically those that you enumerated, the P&C insurance business and the brokerage business. I think in the case of mortgage fees, I think Harold tried to hit at that. We expect that to contract in 2013 because the refinance volumes will contract and the new home purchases won't be enough to close that gap. I think we -- I have mentioned, too, on these calls before in terms of additional business lines.

One where we said we would start a business, and have done that I think effectively, is indirect lending business. It's not a fee business but, again, has been a nice addition to both our volume and yield, loan yield considerations. I think beyond that, we have a number of what I would classify more as selling initiatives that have to do with driving up interchange income, both for debit cards and credit cards, and those kinds of things. But most of those are -- again, they're selling initiatives as opposed to new businesses or acquired businesses.

Okay. And maybe -- I mean, not a number, certainly, I understand that. But in terms of maybe qualitatively, how is the hiring pipeline today compared to maybe a year ago or six months ago?

I guess I would say it's roughly the same. You know, Peyton, there's no doubt there is a war for talent. And we're clearly not the only bank that has a desire to hire high-quality people. But I couldn't -- I don't think I could describe it as different today from 12 months ago.

Okay, great, thank you. And then with regard to the indirect business, to what degree has it ramped to where you think it will ultimately be? Is it still pretty early on?

It is. I don't have the number right in front of me, Peyton, but I think round numbers, I'm going to say the auto -- because there's a little bit of a floor plan in there. But let's say auto round numbers would be a $50 million asset business. And probably ought to be $100 million or maybe a little more than $100 million here in 12 months.

Okay, great, thank you very much.

(Operator Instructions)

Brian Martin of FIG Partners.

Hi, guys, nice quarter. Say, Terry, could you just talk a little bit -- or Harold, talk a little bit about the growth opportunities in 2013, just how you go about funding those. I mean, last year was a lot of the investment portfolio, along with deposits. But maybe just talk about your capacity to put on FHLB advances, or just kind of your willingness to put those on versus deposits, or just how we think about that in 2013.

Yes, Brian, that's a good question. We do believe that this bond book runoff is probably getting close to the bottom. So we should see some additional cash flows there, but not a lot. So we're back on trying to make sure that we can grow this core deposit base. We have capacity at the Federal Home Loan Bank to borrow some money, so in all likelihood our non-core ratios will increase some, but they won't get out of bounds. I think if you looked at some peer metrics right now, we are below peer on most of our, if not all of our, core funding metrics. So our above -- we're better than peer on core funding metrics. We think we've got some room to maybe increase those some to support this loan growth tactic.

Okay. And then just one thing. Maybe -- Terry talked a little about the paydowns being maybe a little bit elevated the first quarter. Can you just talk about your -- you know, last quarter it seemed like the expectations were only that paydowns would drop a bit. But when you look at it from year to year, '12 to '13, what are your expectations? Are your expectations that paydowns will be less in '13 than '12, even if they're more in the first quarter? Just kind of macro outlook on the paydowns.

Yes, I think you're right. 2013, we're not anticipating the significant level of paydowns that we experienced in 2012. But we do know certain accounts here today that will pay off here over the next few weeks. And that's caused us to believe that the first quarter number will at least equal if not get -- be a little higher than the fourth quarter. But we just don't believe we're going to see the rush that we had here, particularly in the fourth quarter, where we had accounts that were paying off for tax purposes or whatever.

Okay. And then just maybe lastly. You mentioned, Harold, just kind of your outlook that credit costs kind of begin to stabilize in 2013. When you are referring to credit costs -- so you just specifically looking at kind of OREO, and I guess just -- when you say stabilize, what, relative to kind of the fourth quarter levels? Or just are you looking more annually at what you saw in 2012?

Yes. It was, given the fourth quarter level. And credit costs would be net charge-offs and ORE expense. So I think you're on it.

Okay, all right. And I think just one last question. Just the in-flows to non-performing in the quarter. Just on the non-performing loans, they were about flat or maybe a little bit up. There was a pick-up in the TDRs. Was there anything that was driving that, or what led to that pick-up in the in-flows in TDRs?

We had about a $7 million to $8 million credit that we worked with the borrower on. So that put it into a restructured loan category. I guess where we are today is, we believe that loan will probably work its way out here over the next two to three quarters.

Okay, all right, thanks, guys.

I'm showing no further questions at this time. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a wonderful day.