First Merchants Corporation (FRME) Q4 2011 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the First Merchants Corporation Fourth Quarter 2011 Earnings Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Michael C. Rechin. Please go ahead.

Thank you, Valerie. Welcome to our earnings conference call and webcast for the fourth quarter ending December 31, 2011. Joining me today are John Martin, our Chief Credit Officer; and Mark Hardwick, our Chief Financial Officer. Earlier today, about 10:00 a.m., we released our earnings through a press release, and our presentation today speaks of the material from that release. The directions that point to the webcast were also contained at the back end of that release. And my comments begin on Page 4, a slide titled, Fourth Quarter 2011 Highlights. And we're really pleased with the quarter. It's -- the quarter contains what were perhaps our cleanest results for the year, reflecting a continuation of our strong margin and an improvement in our overall credit metrics. A change for our company in the fourth quarter was the turn to a modest growth in loans for the quarter. Overall, we're pleased with the quarter in nearly every respect, as our press release states, a sequential quarterly 2011 earning adjusted for the third quarter's TARP repayment charge for $0.17, $0.18, $0.21 and $0.24, respectively. Mark, at this point, is going to take you through more of the detail in our financial results.

My comments will begin on Slide 6. Total assets are virtually identical to this time last year. However, the investment portfolio increased by $119 million during the year, as loans declined by $126 million. Our allowance, on Line 3, totals 2.6% of loans or $71 million, and $7.6 million of the allowance is comprised of specific impairment reserves. That means the remaining $63.3 million of the allowance are 2.4% of loans are general allocations or ASC 450 reserves. The composition of our loan portfolio on Slide 7 is diversified. Its granular and it allows for pricing power. Our community bank balance sheet produced a 5.41% yield on loans for the quarter, down just 25 basis points from the fourth quarter of 2010, and down 4 basis points from the third quarter of 2011. On Slide 8, our $946 million bond portfolio continues to perform well, producing higher-than-average yields with a moderately longer duration than peer. Our 3.91% yield compares favorably to the peer averages of 3.26%, and our duration is just a year longer at 4.3 years. We have $152 million that will mature throughout 2012 in the bond portfolio with a yield of 3.39% and $129 million that will mature in 2013 with a current yield of 3.08%. Given the current reinvestment rates, the portfolio should still produce approximately a 3.80% yield for all of 2012. Line 1 on Slide 9, shows our non-maturity deposits. They continue to grow despite lower interest rates, and lower interest expense, and are reflective of the core value of the corporation. Customer time deposits, on Line 2, continue to decline despite our premium specials relative to the Federal Home Bank and brokered deposits of approximately 20 basis points on the 2- and 3-year points of the curve. Line 4 increased during the year, as we extended Federal Home Loan Bank advances, taking advantage of some of the low interest rates and improving our ALCO sensitivity position. And we also grew repurchase agreements, as our core customers continue to look for some collateral for the largest relationships on the balance sheet. Line 7, 8 and 9 reflect the repayment of TARP, the issuance of preferred shares through our participation in the SBLF, and the addition of 2.8 million shares of common stock issued on September 9, 2011. Our tangible book value per share now totals $9.64 per share. The mix of our deposits on Slide 10 continues to improve. And our total deposit expense is now on just 87 basis points, down 55 basis points from the fourth quarter of 2010. Our least expensive categories, demand and savings, now total 70% of deposits. All regulatory capital ratios on Slide 11 are well above the OCC in the Federal Reserve's definitions of well-capitalized and all Basel III proposed minimums. Given the earnings power of First Merchants Bank, management and the board believes, it has adequate capital flexibility for future growth, and we actually upstream $2.5 million from the bank to the parent in the fourth quarter. The corporation's net interest margin totaled 3.98 for all of 2011, an 11 basis point improvement over 2010. But more importantly, on Slide 12, our net interest income on a fully taxable equivalent basis has grown for the fourth consecutive quarter. We talked great about the increase in our net interest income, and actually, the slight decline that we saw in our margin quarter-over-quarter was primarily due to about $100 million of temporary liquidity, that we had on our balance sheet, where we had increases in public funds that we were laying off in Fed funds sold for the quarter at a really minimal spread. Total non-interest income on Slide 13 reflects volatility due to Line 6, securities, gains and losses. However when normalized, on Line 10, the year improved by $500,000 or 1% decline -- despite the decline in service charges on deposits of $1.3 million. Mortgage production on Line 6 improved by $612,000 for the year, and other income increased by $800,000, due primarily to increased fees from the sale of back-to-back hedges with our commercial borrowers totaling $523,000. Non-interest expense on Slide 14 totaled $135.9 million for the year, down $6.4 million from 2010. Productions in OREO and credit-related expenses are encouraging, and they represent 62% of the annual decline in the total expense category. The remainder of the expense productions can be attributed to couple of items, the FDIC expense production of $2.6 million and salary and benefit expense productions of $1.4 million. Please turn to Slide 15. Our pretax pre-provision run rate recovered in 2011, the $70.9 million or 1.7% of average assets. Line 8 gains and losses due to TARP -- due to our TARP exchange in 2010 and our TARP exit in 2011 create more noise on our financial statements than we would prefer. So on the next slide or Slide 16, we've normalized or adjusted our EPS to reflect our core earnings trends absent TARP gains and losses. As you can see, when adjusting out the $0.40 gain in the second quarter of 2010 and the $0.46 loss in the third quarter of 2011, our EPS run rate is gaining traction. We're especially pleased with the trend line during the last year -- last 1.5 years from $0.02 to $0.24 per quarter. And for the fourth quarter of 2011, we feel that it should serve as a really strong launching point into 2012. Now John Martin, our Chief Credit Officer, will discuss our satisfying credit quality trends.

Thanks, Mark, and good afternoon, everyone. I'll start by referencing Slides 18 and 19, where I'll begin by covering the asset quality summary. Credit metrics continue to improve in both the linked quarter and year-over-year, as both the national and regional economy had seen some recovery. As shown on Lines 10 and 9 on Slide 18 and the corresponding graph on the top of Slide 19, respectively, criticized and classified assets declined $73.8 million and $85.8 million from 2010 and on a linked quarter basis by $28.7 million and $20.9 million. We continue to see improvement in the C&I portfolio, while commercial real estate and commercial real estate values continue to be a source of challenge. On Line 2, other real estate owned declined $4.6 million year-over-year and $3.1 million from the third quarter. As mentioned in the past 2 quarters, we moved to single relationship that contained 3 multifamily properties from non-accruing to ORE. In the fourth quarter, one of those properties sold, reducing ORE by $2 million. An additional $60,000 market value adjustment was taken at the time of the sale. ORE and credit-related expenses declined for the full year 2011 from $12.4 million to $10.6 million in 2010. The most significant portion of this total is related to the market valuation adjustments resulting from the annual reappraisal of properties, as well as from valuation adjustments that are occurred at sale. We would expect to see ongoing improvement and evaluation adjustments as market conditions continue to stabilize. Moving to Line 3. Restructured loans were up year-over-year of $7.2 million, as we continue to pursue a strategy of restructuring borrower debt where appropriate to accelerate portfolio improvement. We continue to look for ways to restructure loans to viable borrowers that have become overleveraged due to declines in their business or due to lower market values or vacancy in the instance of investment real estate. On a quarterly basis, restructured loans increased $7.6 million, which included 2 separate relationships, each totaling $5 million, to both C&I and an investment real estate borrower. Given the situation of each relationship, we viewed restructured to be the best alternative to maximize recovery in the long run, while creating a right-sized obligation on market terms that will return to accrual with demonstrated performance in subsequent quarters. Please turn your attention to Line 6 on Slide 18, and also at the bottom of Slide 19. Specific impairment reserves declined by $600,000 in the quarter and $6.3 million year-over-year. Despite this, on Line 8, the allowance for loan and lease losses improved as percentage of nonaccrual loans from 92.6% to 101.9% in the linked quarter and from 91.6% to 101.9% year-over-year. I'll speak to both provisioning and charge-off further, when we get to Slide 21. But suffice it to say, that despite the decrease in the allowance, most all other metrics improved at a rate greater than the absolute decline in the allowance. Now please turn to Slide 20, where I'll walk through the NPA reconciliation. I continue to highlight in this slide the improvement in asset quality, with the box on Line 1 to the far left, where at the beginning of the third quarter 2010, NPAs and 90-plus days delinquent reached $146.5 million. Then, trace it to our year-end 2011 ending balance of $100.8 million. Significant progress has been made in asset quality, and we continue to work to reduce these numbers further. Now please direct your attention to the far right column labeled, Q4 '11, where I'll walk through the current quarter's changes. We began the quarter with total NPAs and 90-plus days delinquent at $106.7 million. For the quarter, we added $10.2 million in new nonaccruals. The top 3 relationships totaled $2.8 million, and were all small dollar investment real estate related. Moving to Line 3 and 4, the new nonaccrual loans were offset by $7.6 million moving to accrual, paid off or restructured. On Line 4, we returned to a more normalized level of movement from nonaccrual to ORE with no significant-sized property added in the category. On a combined basis, our 4 top properties represented $7.5 million. As color, the balance of ORE portfolio is split in number evenly between commercial and single family residences. And moving down to Line 5, gross charge-offs were $10.7 million, down from the previous quarter of $11.6 million and more in line with quarters Q3 2010 to Q1 2011. The result -- the net result on Line 6 showed a $9.3 million decline in nonaccruals loans. Other real estate on Line 7 increased by $1.2 million. The disposition, as mentioned earlier, of $2 million contributed this, due to $3.3 million in OREO sold on Line 8. The net change in ORE for the quarter then is shown in Line 10 of $4 million. Finishing out, the quarterly migration then, 90-day delinquent loans decreased roughly $1 million or $1 million, and restructured loans increased by $7.6 million, resulting from the restructures described earlier. We expect to show improvement in the category in the first quarter with the elimination of notes restructured to market terms during the year of paying as agreed for at least 6 months. Now please turn to Slide 21. The allowance for loan and lease losses declined from $73 million to $71 million in the linked quarter and from $83 million to $71 million year-over-year. As a percentage of annualized or average annualized loans, this represents a 30 basis point decline, and when compared to 56 basis point decline in net charge-offs, as a percentage of annualized loans year-over-year, the allowance continues to provide adequate coverage. Then, turning to Slide 22. In summary, our credit metrics are improving in almost all categories. We continue to work down our nonperforming assets through restructures and asset dispositions. Our criticizing classified assets have moderated, and the ORE and other credit-related expenses continue to come down. And finally, while our provision expense has been lower than net charge-offs in the most recent quarter, our nonaccrual coverage continues to improve with overall improvement in credit quality. I'll now turn the call back over to Mike Rechin for his remarks.

Thank you, John. Appreciate the update. I wanted to move to Page 24 where I have a couple of final thoughts on 2011, 3 of them actually. The first point summarizes nearly a full 100 basis point improvement in tangible common equity. We repaid our TARP obligation, as Mark covered, without significant dilution and coupled with the SBLF funding, provide the company with more flexibility. In combination with greater internal capital generation, we can revisit the best use of the earnings level at the bank going forward. Second point, while it reads a little trite, it means a lot to me, when I talk about solidifying our brand position as a community bank. Through the credit cycle, we resisted the temptation to accelerate asset quality statistics that were heavy, and behaved like our bankers feel a community bank behaves, patiently and working with our borrowers, and it's been neither fast nor inexpensive. But the yield at this point, reflecting on John's comments, speak to kind of an equal number of refinancing affected outside our company with upgrades. By hanging in with management teams, we feel like have a plan that they can execute against. And so I read a lot into the second bullet point on that page, and I'm hoping that as the turn continues, should the economy accommodate, we are able to hit a nice single-digit, high single-digit earning asset run rate out of our loan portfolio. Then, it kind of runs to the last point on Page 24, the beginnings of organic balance sheet growth, an inflection point in total loans in the fourth quarter. Our pipeline has been transitioning onto our balance sheet, and then finally last quarter marginally eclipsed the rate of repayment from amortization and those credit-related exits we needed to make. Organic loan growth demand is not robust, but it is building. And in combination with aggressive market coverage, produces strong commercial loan pipelines. Let's look to 25. Cover a couple of these points before we take questions. Whether it's by market geography or line of business, we expect to see positive balance movement in 2012. We've got momentum in commercial banking and a productive early investment in a larger business banking sales force. And I'll touch on our mortgage business in a minute, where I'll lift out of a really qualified higher dollar focused on the for sale market. Mortgage business has been with us about 3 quarters now and partially responsible for the really significant volumes both in mortgage loans closed and in the sale proceeds from those that we've enjoyed throughout 2012 but most visibly in the fourth quarter. Our net growth in the fourth quarter is directional change, but the magnitude of it, which is modest, really belies our activity in the market coverage, in our relationship servicing and our new client acquisition. We like where we are right now. We understand that community banks might have less revenue diversities than money center banks. We accept it and the opportunity that it provides. The focus on many of our senior managers is on capital strategy and continued asset quality improvement. The focus of even more over senior managers is on being in front of our customers, listening, servicing, responding. On our last call, I referred to our priorities of productivity and efficiency. You can see the remainder of the page describes our efforts to get better return on our technology investments in identifying customer needs. In addition, we've got specific plans in place that manage our all-in expense base. We have an execution plan that balances maintaining a high net interest margin and growing net interest income and overall revenue, so we expect to grow our income again. Last point just acknowledges the likely increase in M&A activity going forward. We've not made an acquisition since late 2008. But know, that we have a history of successful customer-friendly integrations and expense rationalization. We look forward to prudently participating in any consolidation of the financial services industry as a fire that falls within our franchise. At this point, Valerie, I'd ask you to open the phone for questions.

[Operator Instructions] Our first question comes from Scott Siefers of Sandler O'Neill.

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

Yes, the -- I'd mentioned this quarter -- and I think it's worth highlighting again. We had about $100 million of public money, on average for the quarter that's going to pull down our margins by about 11 basis points. And so the net interest income was as expected with margin reported was a little bit less, given that $100 million that it's tough to make any spread off of. Going forward, we do feel good about our ability to maintain our margin. Our yield on our loans only declined by about 4 basis points. And then with the 10 basis points or so of decline in the bond portfolio we're anticipating this year, we think we can make up the difference, through overpricing of borrowings and really repricing of CDs. In our current portfolio, our CDs are still -- we have about $446 million that are priced at 121 and those are CDs under $100,000. CDs over $100,000 are still 129. So those maturities continue to come at us at $50 million to $60 million a month, and it gives us the opportunity to keep producing a rate, our current specials. We were under 1% on everything. So encouraged by our ability to maintain our margin at least throughout the rest of 2012 and what's obviously a really low and flat interest rate environment. 2013 becomes a little bit more challenging, as our deposit expenses will find a bottom. But throughout 2012, we still feel really good about our ability to maintain margin.

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

Sure. As you can see in the press release, we're still not -- haven't solved for the consumer loan demand yet, and so we're having to continue to work through the drag on what appeared to be despite what I think of are really sharp offers and well-thought-out solutions for consumer needs. You aren't going to see any growth there, if you look at the last couple of quarters. Our pipeline there is kind of steady. Others just, I think, continued deleveraging at the consumer level. The -- we're a commercial bank, a majority effect when you look at the balance sheet, and so that's why I'm continued to be encouraged not only psychologically as you referenced about getting over the hump in the fourth quarter, but kind of what we see going forward. We have 2 flavors of pipeline, if you will, Scott. One of them is where we've actually issued commitments. We're working on documents that lead to a closing and then one that's provided by the bankers where we like the risk. We're in the process of moving towards those same 2 items, the signed commitment letter and loan docs. And so we actually had a higher -- in the third quarter, we had a higher firm pipeline of things that are moving towards the closing, probably about $70 million higher than at year end because we did pick up that onrush into the fourth quarter. That -- it's dwarfed by that pipeline, where we have credit approvals in place and are trying to get them signed by the prospective either clients or prospects, where it's up $110 million from the third quarter. It's more than twice what it was in the fourth quarter of last year. And most pleasing to Mike Stewart, our Chief Banking Officer, it comes from every geography we're in. So while I would expect the greater Indianapolis market to provide disproportionate amount of our on-balance sheet growth in 2012, our plan actually calls to get net growth in each of the 6 markets that Mike manages the business by. The Columbus in particular I'm excited about, as we look out at the macro-level dynamics of the places we do business. They've seen the greatest decline in unemployment and as by virtually any metric, marginally more healthy in Indianapolis. Our leadership there has responded in adding bankers all through the second half of 2012, and I think we've kind of worked our way through their acclamation to our company, and they bring a wealth of roller decks, that we look to take advantage of. So does that answer your question?

It does. It does. And then you also in -- when you were wrapping up your prepared remarks, you alluded to the expense base, and I'm not sure if you said like formal cost initiatives, but basically kind of I think you alluded to kind of holding the line. Can you talk a little bit about how you see the expense base standing out for next year -- for this year?

I think that the fourth quarter coming down from the third quarter is pretty representative of where we ought to be. Again, I think we've got some people expenses that will probably -- our all-in people expense for 2012 will likely be about flat. What took place in the fourth quarter was really significant commissions paid to the mortgage folks, which is their only manner of compensation. And so the swell in the fees they generated off the volume they closed reflects itself in the same period. In the fourth quarter, also our numbers were up mildly. We had $220,000 of severance expense. There was a couple of comments on that last page, that referred to looking at retail on our delivery system. That speaks not only to the staffing vis-a-vis the transactions coming out of our stores, but also just to the efficiency of the stores themselves. And so the vast majority of that severance that I referenced just come from fine tuning in that. And then it affords us the reinvestment, if you will, of many of those dollars into our business banking segment, which is really, as I think we've talked in the past, kind of covers our $10 million and below in revenue size in our footprint kind of in concentric areas around the banking centers. So we'll have a little bit of salesperson build in any part of the line side. The rest of it is going to be a pretty firm tie based on what we'd see. We have capacity to service our customers, and they'd gotten the growth that our plan calls for.

The next question comes from Stephen Geyen of Stifel, Nicolaus.

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

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

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

Okay. And the FDIC expenses are down again quarter-to-quarter. Just curious was it really just based on changes in the deposits? Or were there other factors involved?

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

Okay. And thoughts on the tax rate for 2012?

The tax rate has been volatile but volatile for reasons that are -- that you can see in the income statement. And I was walking through that today expecting a question. But if you look at the income before tax, the $9,860,000 that we have for the quarter and then you just -- and add back the tax of inflow and interest of $93,000 further up on the page and then look at the tax exempt bond income of $2,550,000 -- and I should say reduced, not add back -- and then deduct from the $9,860,000 also the cash surrender value of life insurance of 803 and 35% of that remaining balance of $6,004,000 is 2245. We were at 2299. So it is the way that the calculation should work. And we feel good about the quarter. In September, it was a little more complicated, because some of our TARP dollars were flowing through interest expense, and it was not tax deductible. We had about $580,000 that ran through those numbers. And also in the third quarter, we've put about $250,000 additional in the reserve. We have had the IRS and as well as the state. We don't really see any problems, just making sure that we have some additional cushion there, depending on what kind of findings they might come back with. So -- and then if you do the same math and even all the way back in the third or the second quarter, the same thing holds true, the 6.884 pretax and add back in those or deduct those 3 items, they're all tax exempt and use 35%. It works out like it should. It's just hard to give a flat rate.

The next question comes from Joe Stieven of Stieven Capital.

This is Steve actually. In the SBLF, the rate -- I guess, following up on the growth comment, do you believe it's reasonable that you could get that SBLF rate down from the initial 5% given growth expectation?

It's a great question. When we applied, moved through the process, accepted and closed, all of our contemplation for it was that we would not qualify. And in 2012, I think it's really unlikely that we would. You may recall, we started -- we've looked, but you can see our balance. You can't necessarily see the loans that fit the definition of the SBLF, but we were the better part of $200 million behind from the baseline to the date we closed. We had a -- not greatly surprising but a larger growth in that category in our first measurement period, which was 9/30 of '11, and so we're getting ready to submit our work for year end. It's going to show growth in that category again. How fast we bite into that number to achieve net growth won't happen this year, but as I would have been more bearish about the possibility of reducing the cost to capital 4 months ago than I would be today, but it's a function of safe and sound demand. But there's no amount of capital reduction that merits credit cost.

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

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

Your next question comes from John Barber of KBW.

You've mentioned you upstreamed at $2.5 million of cash from the bank to the holding company. Could you just give us an update on how much cash you have at the holding company right now and how that compares to your annual expenses?

We're over -- we're around $21 million or $22 million. It's -- I don't have that exact number with me. It's what we filed with our Y9 VLP [ph] report. But it's roughly 2 years of parent company liquidity.

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

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

The next question comes from Brian Martin of FIG Partners.

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

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

Okay. Perfectly, I mean, just 1 thing or 2 things on credit. I think you talked about the increasing TDRs but you also -- maybe John mentioned it -- that I thought they heard that guys expected to see some of that decline in the first quarter. Maybe just what your thoughts on it or how much of that comes down in the first quarter? And then just kind of the current mix of TDRs, it sounds like if the 2 that came on board this quarter in the $5 million range, that most of the TDRs right now are commercial rather than residential. Does that seem fair as far as the mix goes?

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

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

Yes. I don't have the number as a percentage at this point. I'd -- we think it's going to be a fairly meaningful relationship to the total. And you got to look back through the year and look at which ones are, which ones have been paying for 6 months and that analysis we'll do as we look into the next quarter.

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

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

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

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

Yes, just that inflow composition.

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

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

So I think most of my questions have been asked, but I had 2. Just, Mike, on -- as you think about capital building and presumably will continue to build going forward, but as you get a little more flexibility on upstreaming and being out of the TARP part of it, kind of we've got the SBLF, but what are going to be the capital management priorities? And how are you looking at flexibility as you continue to build the capital base?

Well, based on valuation and where we've been and are, stock repurchases aren't on our radar screen. I can't imagine that being a priority. The common dividend is something that we'd probably like to revisit. Maybe this year, we see the guidance that comes out, we're obviously well beneath the guidance and making a change their or something we would contemplate. We want to get our handle around growing capital and loan growth at the same time. We have -- had a smaller balance sheet here for a couple of years, and so there hasn't been a lot of claim for that capital to fund loans. What I'd prefer to do is to just have a 6% or an 8% a year growing loan portfolio that called for some capital and evaluate it after that. That small business funding fund, going back to that aspect of the question, one of the things we always liked about it was the flexibility in repayment that not only didn't call for dollar per dollar equity raises but offered no firm schedule so that based on quarter-to-quarter cash-in, you could evaluate it.

I agree. And then, Mark, just kind of a housekeeping question, so if you just do the quarter's net income divided by shares, I think, you had 22 versus the 24. Is that just like a GAAP catch-up, because of the differing share count? Or what's driving that?

Yes. It is the average shares for the year were $26 million, almost $26.7 million, and so that produces a $0.34 year-to-date EPS. And through 3 quarters, we had $0.10 including the onetime charge. And the quarterly average was $28.7 million, and the quarterly average is higher because of the equity raise that we did in the third quarter. And it would have produced $0.22 per share. So yes, that math is correct, but it's the quarter has to equal the year-to-date less the prior quarters.

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

Valerie, I really have none. We're -- my colleagues and I are appreciative of the interest and the questions. Appreciate your time today. Look forward to talking to you at the -- when we have our first quarter results.

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