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Pinnacle Financial Partners Inc. (NASDAQ:PNFP)

Q4 2013 Results Earnings Call

January 22, 2014 9:30 AM ET

Executives

Terry Turner - President and CEO

Harold Carpenter - Chief Financial Officer

Analysts

Michael Rose - Raymond James

Jefferson Harralson - KBW

Peyton Green - Sterne Agee

Tyler Stafford - Stephens

Kevin Fitzsimmons - Sandler O'Neill

Brian Martin - FIG Partnersg

Operator

Good morning, everyone. And welcome to Pinnacle Financial Partners Fourth Quarter 2013 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 is available at the Investor Relations page on 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 open for questions after the presentation. (Operator Instructions)

Before we begin, Pinnacle does not provide earnings guidance or forecast. During this presentation, we may make comments which constitute forward-looking statements. All forward-looking statements are subject to risks and uncertainties and other facts that may cause the actual results and performance or achievements of Pinnacle Financial to differ materially from any results expressed or implied by such forward-looking statement. Many of such factors are beyond Pinnacle ability to control or predict and listeners are cautioned not to put undue reliance on such forward-looking statement.

A more detailed description of these and other risks is contained in Pinnacle Financial's most recent annual report on the 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 in the SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and reconciliation of non-GAAP measures to the comparable GAAP measures will be available on Pinnacle Financial website at www.pnfp.com.

With that, I’d now like to turn the presentation over to Mr. Terry Turner, Pinnacle's President and CEO. Sir, the floor yours.

Terry Turner

Good morning. Quite sometime we have been discussing our strategic approach to growth and profitability, essentially that we would grow our balance sheet to form loans at double-digit pace for a period of three years, while continuing non-interest expenses, which should result dramatically improved profitability as a result of operating leverage that that would provide. So, this morning, I thought I’d start with the dashboard that provides a simple snapshot of how that strategy worked throughout 2013 and specifically again in the fourth quarter.

As you can see on the first row graphs, we are outsized balance sheet growth in the form of loans of 11.6% for 2013, with the fourth quarter being the second highest quarterly volume and net loan growth since we published our multi-year target two years ago.

Frankly the thing, I have been more proud of in the loan growth is the growth in low cost core funding with DDA volumes up roughly 20% year-over-year and transaction accounts meaning DDA plus new accounts up 16.7% year-over-year and all that balance sheet growth is organic growth.

On the second row graph, you can see we have been able to translate the balance sheet growth and earnings growth. We have fully diluted EPS up 29.4% year-over-year, net income up 30.6% year-over-year and importantly, organic revenue growth of 7.7% in the base of pretty steep volume and margin headwinds.

As you can see on the third row graph, the dramatic improvement asset quality over the last several years which continued throughout 2013 and again in the fourth quarter has provided many credit leverage for our firm in 2013 and I believe will continue to provide many credit leverage throughout 2014.

As I alluded to you on the last slide, we began publicly discussing our long-term profitability targets on our fourth quarter 2011 earnings call. You can see in the graph on the left, we have made substantial progress since that time, now operating inside the target range of 1.10% to 1.30% for ROAA, albeit lower half of the range which leaves room for continued improvement.

Also as you can see on the smaller graphs to the right for each of the critical components prior to sustain that 1.10% to 1.30% ROAA, we are now operating better than or within the published targeted range, except for the expensed asset ratio where we have made 22 basis points of improvement over the last two years.

That said, the key for us is to continue the trajectory toward the targeted range for the expensed asset ratio is to contain expenses while continuing to grow loans and revenues, which we have consistently done each of the quarters over the last two years.

In terms of our published long-term growth target, we've been highlighting this chart since January of 2012. It was our belief at that time that our existing relationship managers plus several new managers that we intend too and indeed have hired had the capacity to produce approximately $1.3 billion in net loan growth over the three-year period beginning in 2012.

In this chart we are plotting the actual production today against that three-year target that we outlined two years ago. We grew net loans outstanding $420 million in 2012 and $432 million in 2013. I told you in the first two years since we announced our three-year target, we have added total of $853 million, which equates to a CAGR of 12.2% slightly better than the pace acquired to hit the three-year target at year end 2014.

So 2013 was a great year of execution and the fourth quarter was another quarter of execution in terms of taking market share and growing the balance sheet specifically net loan, growing revenues, while containing the expenses and continuing asset quality improvements, which should continue to provide credit leverage as we move through 2014.

I want to turn it over to Harold now to review in a little greater detail the results of the fourth quarter.

Harold Carpenter

Thanks, Terry. We have been providing this information related to loan growth to payoffs for several quarters and I guess that several items that we have been talking about for at least the last two years.

First off, loan growth will be lumpy between quarters and that we will not achieve our loan target on a straight line. That said, we remained very pleased with the energy of our sales force as new loan originations equates to more than $1.3 billion in 2013 with approximately $375 million of that in new loans in the fourth quarter. So we are fortunate and we are in two great markets and have the sales force that continued to grow loans organically.

As per the green bars and as we have mentioned in earlier calls, we and many other banks are experiencing significant levels of payoffs, this has and will continue to be a headwind from that loan growth. It’s the one thing that we underestimated when we charted out our anticipated growth prospects in the later part of 2011. Otherwise we believe we would produce outsized growth above our original aspect.

We anticipate that the first quarter of 2014 will be another quarter of greater than anticipated loan payoffs but that based on the strength of our markets and the efforts of our sales force we should experience modest growth in the first quarter of 2014, but we remained committed to achieving our loan growth targets over the remainder of the year.

Our last quarter’s conference call we stated there would likely be some margin contraction in the fourth quarter. We are somewhat more optimistic about the margin for 2014 and perhaps we were last quarter.

We continue to believe our margin will remain within the 370% to 380% range in 2014, including the first quarter and that we will again be -- but that will again be based on loan growth, as well as decreases in cost-to-funds.

We did see some improvement in our net interest income run rates in the fourth quarter over the third quarter as we reported a record $45 million in the fourth quarter and believe we will see continued increases in net interest income in 2014.

Concerning loans, as the chart indicates average loans were $3.98 billion while EOP loans were $163 million greater than average balance thus signaling increased late quarter business activity as borrowers were hustling to get fundings accomplished by year end.

Our thesis for the first quarter that will continue to see heavy payoffs during the quarter as an all likelihood, we had several borrowers seeking funding to the year end balance sheet to bolster cash.

Our belief is that we’ll see our sales force over come those obstacles and we’ll continue to experience growth and average loan balances in the first quarter of 2014, probably not too dissimilar to last year’s first quarter. As the loan yields, we’re still unaware on loan pricing and we expect we’ll likely we’re going to continue to see some reductions in loan yield but not at the pace we experienced in 2013.

This is likely due to all bankers becoming weary of a continuing drop in loan yields and all of us looking to find some solid pudding. We don’t think we’re at the bottom but it does appear to us we have reason to be more optimistic about loan yields this year.

As to the deposits, thankfully again here in the fourth quarter, we’re able to offset loan yield contraction by continuing to lower our cost of funds. We got that done while growing our average deposit about 5% during the quarter.

We continue to believe we have an opportunity to reduce cost of funds in 2014. It will require another significant effort on the part of our relationship managers to accomplish further reductions but we believe we have reason to believe they can make it happen.

As Terry mentioned, we continue to grow our noninterest bearing deposit business which we believe maybe the most valuable product in our bank. Year-over-year noninterest bearing demand deposits were up 31.3% with all of it being organic which is a huge positive for a CFO.

Our EOP average balance for an individual DDA was approximately $22,000 to $23,000, up 6% from 2012’s amount while the number of accounts were up 12% from last year’s EOP which means we continue to attract customers and grow low cost deposits to fund loan growth. Undoubtedly, we have depositors for our weighting loan of better interest rate cycle or some investment opportunity to reduce their operating accounts.

We do understand that. However, if you’ll recall this time last year, we were concerned that we had excess demand deposits due to the TARP program which expired at the end of 2012 but our sales force pushed through that as well.

Switching now to noninterest income, our fourth quarter core fee income was up 12.3% over the same quarter last year. We’ve seen outstanding growth in service charges, investment services and trust which should offset whatever declines we might experience in our mortgage origination business.

If you think about the loan term profitability target that we’ve set for each major element of the P&L statement for the algebra to work is critical that we grow our fee income as fast as we’re growing our loans and deposits. We think we can continue to do that in our fee businesses. We will be working to increase our revenues meaningfully in wealth management in 2014 while at the same time maintaining our mortgage market share.

We also have several tactical items aimed at interchange in credit cards that we hope will bolster our fee businesses in 2014. Other noninterest income will be choppy as those were loan sales, swap fees et cetera recorded and while those items will reoccur, we have budget targets to produce those revenues, we just can’t predict the timing.

Now as to operating leverage, our core efficiency ratio is at 56.3%, excluding ORE and Federal Home Loan Bank restructuring charges. You will note during the second quarter, we had a $2 million credit to other expenses for an all balance sheet reserve reversal related to a previously unfunded letter of credit which was funded in the second quarter and thus the $2 million reserve reversal was offset by $2 million increase to provision for loan losses.

That item prevented our fourth quarter core efficiency ratio from being the best number on the chart. I believe our firm had a great year in 2013 in terms of expense management. As we mentioned in the press release, year-over-year expenses again excluding ORE and Federal Home Loan bank charges were up only 0.6% while revenues excluding the impact of securities gains and losses in each period were up 7.7%.

As you know, one of our long-term profitability measures that we’re focused upon is the ratio of its business average assets. That number again including those items was down to 2.38% for the fourth quarter which is moving towards our long-term profitability range of 2.1% to 2.3%.

As far as 2014 is concerned, we’re likely to see increases that our 2014 expense base given we will continue to harp people and we have some CapEx matters that need to be considered this year.

That said, I have great confidence in the senior leadership of this firm and that they will continue to find appropriate ways to increase operating leverage of our firm. However, as we’ve said for the last two years, the primary strategy to decrease and to ultimately achieve a long-term expense asset ratio. We will be growing the loan portfolio of the firm with a corresponding increase and operating revenues and earnings.

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

Terry Turner

Thanks, Harold. I thought I would close today with some comments about valuation 2013 was a good year for our firm. We did see some multiple expansion and so I thought I would just comment on my views about the PNFP valuation.

First of all, 2013 as in every year, frankly our aspirations were high. Very few firms set multiple year double-digit organic balance sheet growth targets but we set them. We accomplished them and we hit them. We executed with precision now operating inside or better than the targeted ranges for ROAA, for the NIM, for the non-interest income and for net charge-offs. We grew the balance sheet and earnings at a double digit pace again in 2013.

And in terms of our track record for shareholders, our shares appreciated 72% during 2013. We initiated the quarterly cash dividend and we were the second highest performing bank staff among our peers over the last decade. And so I think that may rationalize or perhaps justify the multiple expansion that we’ve seen.

Real question is, how should shares of PFNP be valued going forward? And I want to say quickly, I recognized and appreciated that there are banks that have too higher multiples and I genuinely applaud their accomplishments. But here is how I think about PFNP. We continue to set aggressive targets for soundness, profitability and growth.

Our earnings are based on proven ability to grow revenues. In my judgment, the more valuable incomes stream and more is built on expense cutting. That revenue growth is organic. It’s not necessary for us to take on risks associated with M&A in order to produce outsized revenue growth.

We are able to produce outsized growth really for two reasons. One, because our markets are relatively more vibrant than most and two, because we create a competitive distinction in those markets. Quickly, roughly 90% of our assets were in Nashville, Tennessee, which continues its two-decade long track record for tracking jobs and has been the second fastest-growing MSA in the nations since the recovery began.

Not only that but third-party research, St. James said, we now established the number one lead bank market share among businesses for sales of $100 million to $500 million in Nashville, that’s a number one share position. That’s a valuable franchise and despite now being the leader, it’s not inconceivable to me that we can still double our current lead bank share in Nashville and we continue to be the fastest growing bank in Nashville since we launch there in 2007.

Our client satisfaction scores are meaningfully higher than all our major competitors in Nashville, which bodes well for our continuing ability to take share. And since the competitive distinction that we’ve achieved is primarily based on people and since we are reasonably recognized by the American Bankers, the best bank in America to work for, our competitive advantage in my judgment is a sustainable one. So in terms of valuation, that seems to me to be an extremely valuable earning strength.

Operator, with that we will stop and take questions.

Question-and-Answer Session

Operator

Sure. Thanks, sir. Thank you, Mr. Terry. (Operator Instructions) And it looks like our first question in the phone queue will come from the line of Michael Rose with Raymond James. Please go ahead. Your line is open.

Michael Rose - Raymond James

Hey. Good morning, guys. How are you?

Terry Turner

Good. How you doing, Mike?

Michael Rose - Raymond James

Good. Hey, just wanted to start on loan growth. It looks like quarter-to-quarter you hired about 13 people, how many of those are loan producers? And then as we think about 2014 and beyond as it relates to your pipeline and what you expect for loan growth. I mean, how should we think about the pace of paydowns? I mean, will the paydowns slow as rates rise and less is kind of taken away from kind of risk in the fixed income market. And then just to ramp it up, how should we think about your ability to attract lenders with some of the more distressed larger banks or are state banks getting back on their feet and getting a little bit more aggressive here? Thanks.

Terry Turner

Yeah, let me see if can get all those, Michael. I think, talk about hiring, first of all I would say and characterize our hiring this way. I think when we in January of 2012, we’re handling the fourth quarter earnings call, we put the targets out. We said we’re going to hire 12 revenue producers which we did. I believe the number that we hired last year was 11.

I think the number and again I’m not completely sure about this but three or four of those would have been fourth quarter hires. And so again maybe that I will give you some characterization of the pace of hiring essentially that we hire roughly the same number revenue producers in 2013 that we hired in 2012 and that we had continuing momentum as we hired in the fourth quarter.

You know my outlook is for 2014 that we’ll hire similar number to what we did in 2012 and 2013. So hopefully that’s helpful on hiring. I think, as it relates to our ability to continue to hire, I think there is nothing different in the hiring thesis. And I guess, the point that I’m really making is that my belief is that the job for a relationship manager is at an outpost location for a major regional company is a difficult existence.

And you know, we’re a great number. Those would have a preference to work for a local bank where they are active in the decision making of the company, know the decision makers and all those kinds of things, generally suffer from less bureaucracy which of course is the number one area tip for relationship managers and so forth. And so my belief is that order will continue to let us keep hiring people at the pace we have. Harold, did I get all the questions?

Harold Carpenter

I think so.

Terry Turner

Michael, I think I got it. If I didn’t, feel free to…

Michael Rose - Raymond James

Yes. Sorry, I asked such a myriad of questions there. Yeah. That does answer. If I can just ask one as a follow-up as we think about your kind of expense guidance for ‘14 being slightly up from the forth quarter run rate. Is that really contingent upon a much lower level of ORE cost and how should we think about in the expense phase from continue hires? Thanks.

Harold Carpenter

Yeah, Michael, I think you should exclude ORE from their assertion. I think, we believe ORE cost to be down this year. But we think salaries and other cost equipment, all that sort of stuff will also be up.

Michael Rose - Raymond James

Okay. Thanks for taking my questions.

Operator

Thank you, sir. And it looks like our next question in queue comes from Jefferson Harralson with KBW. Please go ahead. Your line is now open.

Jefferson Harralson - KBW

Hey thanks. Good morning guys.

Harold Carpenter

Hi Jefferson.

Jefferson Harralson - KBW

Can you talk about the nature of the industries where your loan growth is coming from and in the last year by this time we had people, we had a big loan growth at the end of the fourth quarter because -- there is some business transition is trying to get ahead of the tax curve but this year, it sounds like its different. Can you comment on anymore cover on the nature of this late quarter loan growth?

Terry Turner

Yeah, I think, I would say Jefferson that first of all the growth is concentrated in two asset classes, commercial mortgages and C&I lending that gets as it is difficult categories for our company, those two are growth categories. I think in terms of what's going on within C&I, it is a broadly diversified funding but I mean I couldn’t look at one industry segment or another. Inside both adds really where all our growth is coming from. I would say that there is a lot of activity in healthcare and so some volume of that would be healthcare related.

I would generally say that’s the most active sector within C&I. But again it’s not dominating by any means. It will just be the largest contributor. I do -- you are right. Last year, we did have a lot of people trying to get in front of tax changes and so forth. Obviously that’s not a catalyst for this year. But because of the commercial nature of our business, it is not uncommon that we have people that do hustle at year end to care of whatever balance sheet pressing they may want to do and so that does stimulates some transactions.

And I think, Jefferson, I don’t remember if you asked a question last time but somebody did asked the question about why we expected a bigger quarter in the fourth quarter in terms of loan funding. And I think the answer was because these commercial enterprises really do scramble around, trying to address balance sheets and do different things, get transactions closed that matched their fiscal year cycles and so forth. And so I would say that that is the catalyst even though it wasn’t quite as dramatic is a function of the tax laws that you saw the previous year.

Jefferson Harralson - KBW

Okay. And the CapEx matters, can you qualify that as technology-oriented and would you say they are regulator driven?

Terry Turner

No, I don’t think regulator driven would be the catalyst. I think it is -- we’ve got some just with the growth, we’ve got some -- we want to also -- beeps up our cyber security tools and all of that. So we’ve got some expenses there, but we’ve also got new branch in the budget this year, so we hope to get better accomplished in multiples towards the end of the year, those sort of things. But I don t think there is any regulatory kind of matters out there that’s requiring this increased CapEx.

Jefferson Harralson - KBW

Right. Thanks, again.

Harold Carpenter

And Jefferson, I just comment on -- I don’t know if this would help or not. But I would just go back and look at us over the last several years. We’ve been hustling, really trying to rebuild the core earnings capacity of the firm. Most of that activity was credit related as you know, but we’ve continued to push own software enhancements. And I would put them in really two broad categories.

One, we’re making meaningful investment in security related software, cyber crime and the like. And we’re also making meaningful enhancements on things that advance our, almost like consumer device technologies, primarily things, software that supports mobile banking and mobile deposit making and key statements and those guaranteed things. So those are the two categories, principal categories outside the investment in new branch office.

Jefferson Harralson - KBW

Okay. That makes sense. Thanks, guys.

Operator

Thank you, sir. And it looks like our next question in queue will come from the line of Peyton Green with Sterne Agee. Please go ahead. Your line is open.

Peyton Green - Sterne Agee

Hey guys. Good morning. I was just wondering maybe Harold, if you could talk about the securities book. I was just kind of looking at it. But most of the things seems to be in pretty good shape but there -- you had a little bit of agency exposure that I would guess is kind of your longest duration stuff and has lowest shield. In you margin guidance, do you anticipate doing any restructuring on that end, or is it just simply what you expect the deposit cost improvement versus the loan yield change to be?

Terry Turner

Yeah, Peyton, today I don’t -- I think those bonds were in okay shape. You are right, they are our there. They are out there by about 10-years average life. But right now, I’m thinking we will probably just keep on keep them, but we’ll constantly be looking at the bond book in total to try to figure out how we might better position this firm for a rising rate cycle that had started for all intensive purposes. But we don’t think we’ll see a significant rise in the loan rates over the next say a year or so.

Peyton Green - Sterne Agee

Okay. And then maybe, Terry can speak to this but the deposit growth has been quite strong and the mix has certainly been very, very good. Do you expect this year to be that kind of year also and I guess I think you all mentioned that 45% of the loan growth of the quarter was new clients? Any idea as to how much of the deposit growth or was that a mix of both?

Terry Turner

Since, as it’s relates to deposits growth, we do anticipate continued outsized growth in low cost categories, specifically DDA and NAV. If you -- when you think about the increase that we saw in DDA, you get a 6% increase in average balances and a 12% increase in the number of counts. So it’s pretty fundamental growth that’s occurring there and so, my belief is that that moment could continue forward. I am not aware of anything that are in row of that momentum. So I don’t know if that answers your question or not.

Peyton Green - Sterne Agee

Okay. No. That helps a lot. Thank you.

Terry Turner

Okay.

Operator

Thank you, sir. Our next question coming in the queue of Matt Olney with Stephens. Please go ahead. Your line is now open.

Tyler Stafford - Stephens

Hey. Good morning, guys. This is actually Tyler Stafford again for Matt. How are you?

Terry Turner

Good. How are you doing Tyler?

Harold Carpenter

Hi, Tyler.

Tyler Stafford - Stephens

I’m good. Thanks. I want to start on assets sensitivity, last quarter you said that another $200 million of floating assets, which puts you into deposited asset sensitivity count? Can you update us on how you feel about your asset sensitivity today and maybe your expectation for 2014?

Harold Carpenter

Tyler, that number is roughly the same today as it was at the end of September. We saw some decrease in loans, on forward loans, this quarter not a significant amount. But our goal, obviously this year, this will be the year for us to try to figure out ways to reduce the liability sensitivity at this firm and try to achieve some neutrality, probably over the next 12 months, maybe a little bit longer than that.

It does appear the economy is strengthening probably more rapidly than any of us had anticipated. So that will be one of the jobs that we will take on this year is to try to get this liability -- is where we are today, which I think is just slightly liability sensitive into the more neutral position.

Tyler Stafford - Stephens

Okay. Great. Thanks, Harold. And then on expenses, I apologies if I missed this in the opening remarks. But that other expenses line item dropped pretty significantly? Is there anything non-core in that or is that a good run rate?

Harold Carpenter

No. I think in the third quarter we had a big legal accrual that got paid in the fourth quarter or got reduced in the fourth quarter. So the fourth quarter is more of a run rate than the third quarter, I would say.

Tyler Stafford - Stephens

Okay. Great. Thanks guys.

Operator

Thank you, sir. Our next question in the queue comes from Kevin Fitzsimmons with Sandler O'Neill. Please go ahead. Your line is open.

Kevin Fitzsimmons - Sandler O'Neill

Hey. Good morning, everyone.

Terry Turner

Hi, Kevin.

Kevin Fitzsimmons - Sandler O'Neill

Just wanted to follow-up on your comments of loan growth? It seem like we had a high pace almost 18% end of period annualized growth in fourth quarter and you implied some of that was helped by just search and trying to get late year activity done? And we are coming off the third quarter which was a pretty low quarter for in terms of loan growth for you all? I think it was about [four unchanged] percent loan growth and now 18%?

So, I think, what you said is maybe it moderates a little bit going into the next quarter just with the search in your activity. So the way to look at loan growth into next quarter somewhere in the middle or somewhere like kind of the low double-digit base but not quite the 18% linked annualized like we saw this quarter? Thanks.

Harold Carpenter

Kevin, if I understand your question, I think, you are asking, do we anticipate that we would have an 18% growth rate in 2014 and if that’s a question, no, we don’t. The -- I believe, if you look at loan growth, again, just go back to the three-year target. I think the number we said was $1,270 billion. I think we said at the time that’s a little better than $400 million a year that we won’t bring it out on a quarterly basis on the straight line that will have quarterly fluctuations, but about $400 million a year was what we had said when we started out. We did $420 million in 2012. We did $432 million in 2013 and that’s about a 12% CAGR, that’s a pretty good assumption going forward in my opinion.

Kevin Fitzsimmons - Sandler O'Neill

Okay. Great. And then just one follow-up question. Terry, obviously the growth is really happening and coming to light in Knoxville as well as Nashville, how do you feel about new entries? I know you have mentioned new challenges in recent calls, how do you feel about opportunities for de novo entries in some of those markets?

Terry Turner

Kevin, I think maybe the best answer to give you is that I continue to have interest in both those markets, but I do not have anything that I am working on that is material or likely to occur in the very short-term.

Kevin Fitzsimmons - Sandler O'Neill

Okay. Great. Thank you very much.

Terry Turner

Okay.

Operator

Thank you, sir. Our next phone question will come from Brian Martin with FIG Partners. Please go ahead. Your line is now open.

Brian Martin - FIG Partners

Hey guys.

Terry Turner

Hey, what's up, Brain?

Brian Martin - FIG Partners

Hey, Harold, maybe you can just touch on your thought on being maybe a little bit more optimistic on the margin this quarter than you were last quarter? I mean is that just a function of the deposit gathering efforts that you guys anticipating in, primarily in ’14?

Harold Carpenter

Yeah, I think there is several factors that go into that. One is, we think we will be able to reduce our cost of funds some more in 2014. We won't be able to reduce it this much this year as we did last year. We think we are still in the hunt to increase our low cost core funding mix within deposit base, so that’s part of it. But we think we will also be increasing the loan to deposit ratio this year with our yield and earning asset. So, I think when you apply all that through a P&L, that margin ought to respond accordingly.

Brian Martin - FIG Partners

Fair enough. All right. And then maybe just one for Terry, just on kind of M&A. The valuation you’ve talked about with the stock going up as much it has. I mean, does M&A weigh anymore important as you look to 2014 at all with the increase in the currency?

Terry Turner

Brian, I would say and I think I have always answered those sorts of questions this way. When I think about our company, I think of us primarily as an organic grower. I think that’s part of the value of the firm. I do think we have an advantage stock. I do think there is an M&A way that is going to come. I'm certainly not predicting exactly when that's going to hit. I think everybody has been expecting it for some time. It has not yet materialized but I do believe an M&A wave is coming

And I have tried to always to say, boy, it's hard for me to imagine over two, three year period, we won't make an acquisition along the way. But I just want to reiterate that is not what I spent my time trying to figure out and that's not what I spent my energy on -- my energy. And really the energy of this entire firm is really focused on organic growth opportunities that we have which are substantial. So, I don't know if that’s helpful or not but that's about the best thing I know to say.

Brian Martin - FIG Partners

Okay. Yeah, I appreciate it. Thanks very much.

Operator

Thank you, sir. And it looks like our next question will come from [Mikel Roberts with Purcell Partners]. Please go ahead. Your line is open.

Unidentified Analyst

Thank you very much. Good morning, gentlemen. Thanks for taking my question. In prior quarter, you guys have sort of stated that you just haven’t been seeing the CapEx expansion from businesses in your markets that maybe you'd like to see. And given the strong C&I and CRE loan growth you had in this Q4, would you say that you are maybe starting to see this potential CapEx expansion and sort of animal spirits beginning to take shape?

Terry Turner

Boy, that’s a good question. I think -- I guess to be clear, I hope our characterization over the last few quarters has been that what we have seen is people that are taking on deferred capital expenditures would stay deferred through the recession and because we have been seeing that in planned equipment where people are refurbishing our fleet or those sorts of things. So we’ve been seeing that sort of CapEx for a period of time. But the count of capital, it’s been through that we’ve not seen, I would call bonafide growth where people were building plans, adding chips and doing those sorts of things and I would say no we still see almost none of that kind of activity.

Unidentified Analyst

Thank you very much.

Harold Carpenter

Okay.

Operator

Thank you, sir. (Operator Instructions) And it looks like our next question in the queue will come from the line of Peyton Green with Sterne Agee. Please go ahead. Your line is open.

Peyton Green - Sterne Agee

Just a follow-up. Sorry if I missed this, and you’ve already disclosed that. What, Harold, was the amount of loans, ebb and flows and then how much cushion did you have versus your kind of recurring loan renewal rates?

Harold Carpenter

It was just under $1.3 billion with an 84 basis point difference between the contract rate and the floor rate.

Peyton Green - Sterne Agee

Okay. Great. Thank you very much.

Operator

Thank you. (Operator Instructions) And presenters at this time, it looks like there are no additional questioners in the queue. This does conclude our time for questions and ladies and gentlemen, this does conclude today’s call. Thank you for your participation and have a wonderful day. Attendees, you may now log off at this time.

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