Pinnacle Financial Partners Inc (PNFP) 2009 Q3 法說會逐字稿

Good morning everyone, and welcome to the Pinnacle Financial Partners third quarter 2009 earnings results 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. Today's call is being recorded and will be available for replay this afternoon by calling 888-203-1112 and using the pass code 2648974.

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. This webcast will be available on Pinnacle's website for the next 120 days.

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

Before we begin, Pinnacle does not provide earnings guidance or forecasts. During this presentation we may make comments which may constitute forward-looking statements. All forward-looking statements are subject to risks, uncertainties and other 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 and quarterly reports on Form 10-Q. Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise.

In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. 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 our 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.

Thank you operator. Good morning. Harold and I will try to get through the slides in 25 to 30 minutes, which is our typical presentation format, and hopefully that will leave about 30 minutes for Q&A following that.

As was mentioned in the release that went out yesterday after the market close, I think the slide presentation was posted on the investor relations page of our website at that time as well.

As I suspect everybody knows, we reported a net loss available to common stockholders for the third quarter up $4.9 million. That translates to a fully diluted loss per share of $0.15, including the impact of the TARP dividend, which was approximately $1.5 million or roughly $0.03 in earnings per share.

As we walk through the presentation to help you understand the various components of our earnings and associated trends, I think you will see two important themes similar to the past. First of all we continue to aggressively deal with credit issues, and secondly, we are successfully building the pre-provision earnings capacity of the firm.

As you can see, third quarter's net charge-offs annualized amounted to 58 basis points, which was slightly higher than we would've projected. We did see NPAs elevate from 3.34% in the second quarter to 3.98% in the third quarter, and as a result of the continued slippage there in asset quality, we increased our allowance of total loans from 1.86% in the second quarter to 2.30% in the third quarter.

We saw meaningful resolutions of nonperforming assets during the third quarter, approximately $38 million. And I think one of the most critical initiatives for us has been the reduction in our construction portfolio, which is down $61 million or so, about 9.5% since year-end.

The second major theme is that we continue to focus on the pre-provision earnings capacity of the firm. The year-over-year loan growth was 13%. It was approximately 7% on a linked quarter annualized basis. The year-over-year core funding growth was 16% and was actually 28% on a linked quarter annualized basis. And our net interest income growth was 18% year-over-year with a linked quarter annualized growth rate of roughly 53%. Harold will break down those components further in just a minute.

But before we do that I want to focus on asset quality. One of the most significant initiatives that we have undertaken to solidify our loan portfolio is to remix the portfolio by reducing the real estate concentration, particularly as it relates to residential development and construction.

On this chart we are comparing the broad portfolio components at 09/30 with those at year-end '08. And as you can see there on the top line, we have significantly reduced the exposure in both (technical difficulty) million dollars as I mentioned a moment ago, almost 10%.

As most of you know we generally look at the CRE owner occupied category as a C&I credit. Specifically we are financing the business's building and securing it with the real estate, but we are actually underwriting the cash flows of the business. So when you combine that line item with the C&I line item below, you can see that we are achieving most of our growth in the C&I category, which has always been the principal focus of this firm.

I personally believe that that shift away from construction and land development back to C&I should be one of the most constructive things we could do to -- in an attempt to produce sustainable asset quality.

As we go to the next slide, I want a further break down that $584 million in construction and development loans because I think we're making great headway within the various subcategories as well.

Breaking down that 583 -- $584 million and looking at where the most significant reductions have taken place, beginning at the top you can see that we have reduced residential spec homes by $37.3 million or 38% since year-end. The less risky category of residential custom homes, by $6.6 million or 23% year-end. Condos, by $6.1 million or 13% since year-end. And then skipping a line there, residential development, by $29 million or 12% since year-end.

Not only are we achieving meaningful reductions in the construction and development category as a whole, we are achieving the most significant reductions in what I view to be the most problematic subcategories within the construction and development category. I would tell you that it is our intent to continue meaningful reductions in that category over the next two or three quarters.

While we are on this slide I might comment on the commercial construction category. While it has seen some growth, the vast majority of those construction loans are either build-to-suits or loans with committed permanent takeouts. And so I would view those to generally be a significantly less risky category of the real estate lending broad category.

So overall I think the point is that we are achieving meaningful, important mix shifts which are intended to lead to improved and sustainable asset quality.

Let me talk just a minute about the commercial real estate market here in Nashville. I'll start you out on the left side of the slide. Here are the market vacancy rates, and in general you might describe Nashville as an average performer. There are a lot of markets that are performing better and a lot that are performing worse. But it's fair to say that the vacancy trend would be up in all four of these categories.

As you look at our portfolio more specifically, you can look at the pie chart on the right of the slide there, almost half of our CRE is in the owner occupied category, which as we just discussed a minute ago I view to be the least risky category. And then beyond that we've got a pretty balanced portfolio.

As you look at the components, I think it's important to focus on the kind of clients we do business with in each of these segments. In the case of real estate we don't have any malls, we don't have any trophy projects, we don't have any grocery-anchored centers. Generally we finance things like single credit tenant properties occupied by the Tractor Supply's, the CVS's, the Walgreens of the world. And we have a few small neighborhood type centers.

In the case of office space, we have really no downtown class A office space. That's not a loan category for us. In general when we talk about office space, to us that will consist of things like small single tenant buildings and multitenant suburban buildings with stabilized operating histories and relatively long lease maturities.

And then in the case of warehouse, we have no significant boat-building type space. Generally we tend to finance office warehouse and small warehouse buildings in infield locations that again have stabilized operating histories.

Looking at the asset quality metrics, specifically past-dues and nonperforming loans, for each of the basic categories the three leftmost columns on this slide contain the 30 to 90 day past-due information for Pinnacle this quarter, second quarter and first quarter followed by the highlighted column in the center of the slide there, which is the 30 to 90 day past-due percentages for our peers, and in this case our peers are the greater than $3 billion banks per the second quarter UBPR. As you can see, total past-dues between 30 and 90 days are generally better than peers.

Now on the right half of the chart you've got a similar comparison of the greater the 90 day past-due's and nonperforming loans for our third quarter, second quarter, then first quarter, followed by the 90 day past-due's and NPLs for our peers. And as you can see in the total, total numbers are slightly better than peers. But that's with somewhat better performance on C&I and somewhat worse performance on the construction and land development category, as we have talked about in the past and as we have highlighted here today.

In the case of nonperforming loans that total $122 million or 3.37% of loans, the pie chart on the right of that slide contains the breakdown of nonperforming loans. As you can see, by far the largest combined components or the largest two components of NPLs are land development and residential construction, again, I think consistent with what we have seen in the past.

Our OREO totals are $22.8 million at quarter end. That brings the total and NPAs to $144.5 million or 3.98% of loans.

In an effort to give you some sense of what comprises the nonaccruing loans and the granularity there, the largest one of those is a $12.7 million exposure to a downtown condo developer here in Nashville. This is one of those projects that we've talked about in the past that's clearly not performing consistent with its original pro forma. However it does continue to be a viable project, we believe. We've received roughly $5 million in pay-downs over the last two quarters on that credit. At my last report they had sales contracts on seven units, they continue to expect future sales based on the current foot traffic that they have, albeit slower than what the original plan was. This is an example of the type of risk rating discipline that we've talked about for some time in that the loan continues to pay as agreed, but we classify it as a nonperforming loan because sales performance is slower than the original pro forma.

Number two is an $11.7 million retail strip center where we are actively pursuing various remedies and are currently optimistic that we ought to be able to remediate this credit fairly soon, I would guess most likely in the first quarter of 2010. Specifically the borrower is in late stage negotiation on LOIs that would permit us to significantly reduce our exposure to the current borrower and restructure any remaining loan to the existing borrower on a satisfactory basis. So again, our current projection would be that we should have a happy ending on that credit as well.

In the number three position there is a residential developer. Frankly we expect to move to foreclosure on this borrower during the fourth quarter.

And then number four, an $8.1 million developer who participates in both commercial and residential development. It's likely that we will also commence foreclosure on this borrower during the fourth quarter. And I might comment that this loan has been written down to the appraised value less selling cost, so that's what it's being carried at there.

You can see 230 accounts make up the remainder of the nonperforming loans, and I would also comment that our NPLs are all in our primary markets.

Here's some detail on our ORE book. The point of the slide is that are ORE balances are broadly covered 136% by generally current appraised real estate values. Our ORE is up slightly during the third quarter but has generally remained in that $18 million to $22 million range for a number of quarters now. In other words, we've been generally successful in moving it out as fast as it's been washing in on us.

You can see the bullet points there in the lower right corner of that slide. I just want to point out that we currently have under contract about $8 million of the ORE. We also expect absolute auctions on about $2.6 million, which would bring the so-called known ORE liquidations to roughly $10 million during the fourth quarter. Nevertheless, I would say you might expect our ORE balance will likely increase during the fourth quarter. As I mentioned earlier, we will take several land development projects back during this quarter.

Let me give you a little color commentary on the third quarter charge-offs. You can see there are four credits here that make up more than half of the quarterly charge-offs there. Number one is a $1.2 million write-down to a tire supplier. The tire supplier really supplied heavy equipment. And in addition to supplying operators of heavy construction equipment, this particular borrower had something of a concentration to copper miners. There's been significant volatility in the price of copper, which has altered the economics of that, and basically a number of copper mines have shut down. And so the combination of that along with the rest of that business being focused on construction and development, site development and so forth, that is a struggling borrower, and so it really represents the devaluing of both inventory and accounts receivable.

Number two, at $660,000 is a residential site development contractor. I think we've talked before, these borrowers that are focused in that industry continued to struggle. And this particular write-down of course is really based on the degradation in the equipment value, which serves as our collateral.

The -- next to there are residential developers, and again, these are write-downs which are intended to bring the carrying value to appraised value less selling costs.

So hopefully that will give you a little insight into what's going on in terms of asset quality and specifically net charge-offs.

I'm going to turn it over to Harold now to talk a little bit more about the financials.

I'll cover capital funding and make some brief comments about our third quarter P&L.

Our capital ratios remained very strong as of the end of September. As you know, we received approximate $109 million from a common equity offering that was completed just before the end of the second quarter this year. We also received $95 million in proceeds from the U.S. Treasury Capital Purchase Program back in December of 2008.

As noted in yesterday's press release, we have elected to withdraw our application to redeem our preferred shares issued from the Capital Purchase Program until the present economic recovery appears to have enough traction to limit the possibilities of what many economists are referring to as a potential double dip recession.

We realize there have been many positive events that give us confidence that the recession may in fact be subsiding, including a local employment rate which deteriorated fairly rapidly here in Nashville and now appears to be moderating. However, even though residential home loans are occurring, that business is sluggish at best as it will remain a buyer's market for an extended period of time. We also believe residential development is on more than just an extended hold.

Additionally we've had more than a few conversations with our regulators that indicate that increased capital levels for our industry now appear to be more likely than not. Thus, we believe that holding onto the capital at this time is the better play.

At the end of the third quarter our holding company injected $65 million into our bank to bolster its capital ratios, thus reducing our holding company's cash balance to now around $95 million.

Our prior strategy was to maintain cash at the holding company and fund the bank's capital accounts when required. Our current strategy is for our bank's capital ratios to have meaningful regulatory provisions that for our bank's operations to generate enough internal capital, thus the bank becomes capital accretive on a linked quarter basis more sooner than later. As a result we've increased the capital levels of our bank meaningfully and are likely to slow our growth rate from our prior double digit growth rates as we make capital accretion a near-term strategic goal.

As to the TARP repayment, we noted our reasons for our current decisions. At the end of the day, if the economy begins to really improve, then that will bring with it good news on numerous fronts as well as renewing our desire to redeem the TARP preferred.

Now we'll turn to funding sources. We are very excited about the transition we've made in our funding base over this year as we continue to reduce our reliance on wholesale funding sources. Last year as rates dropped, we increased our reliance on wholesale funding in order to maintain both our growth and maximize our margins. There was significant deposit advertising in our local markets last year from banks that had significant liquidity needs, thus causing core deposit interest rates to be more inflated than they would have been otherwise. That particular issue had since subsided.

Even though competition for deposits remains intense in our markets, our sales force has been very effective in gathering relationship-based funding. We believe we will continue to reduce our reliance on brokered deposits and Federal Home Loan Bank borrowings in a meaningful way over the short and intermediate term. We are also initiating several new core deposit growth initiatives including enhancement of our treasury management services and some limited new retail deposit growth initiatives in some of the communities that we serve.

In the end we've seen our relationship funding increase from 69% at the end of December to 74% currently and are working diligently to increase our relationship funding to more than 80% of total funding over the next year or so.

Concerning our margins, the chart details the quarterly transfer net interest income and our net interest margin. We continue to manage certain action plans in order to mitigate our exposure to the current loan rate low rate environment, but as you can see, our linked quarter net interest income between the third and second quarter increased by 13.2%. We finished the quarter with a 3.05% margin, slightly better than we had anticipated. We remain optimistic that we are continuing to increase our margins in the fourth quarter with increased pricing on assets, continued positive changes in our funding mix.

As to specific items impacting our margins, loan floors continue to have a positive impact on our margins, as do increased core fundings. Negatively impacting our margins this year is the obvious increase in nonperforming loans. However, we do have reason to be optimistic as we continue to work on increasing our floors, but we also work on increasing our spreads on variable rate loans so that when rates do begin to rise, we will be in a better position to capitalize on a rising rate environment.

Incorporated into our optimism about increasing margins in '09 is that we are not forecasting increased revenues by the Federal Reserve until late 2010, thus we are forecasting a fairly consistent rate environment over the next several quarters.

This is a chart we've shown at various times detailing why we think we should be able to increase our loan yields over the short term. Our records show that roughly 13% of our loan portfolio will either mature or renew within the next six months, but we should be able to take loans in the high 3's and low 4's into the 5% range, primarily by getting the appropriate floors on these loans and increasing the spreads of pricing index on other variable-rate credits.

As to CDs, our second margin improvement (technical difficulty) opportunities in our CD book and the upcoming maturities there. The $845 million represents 42% of our CD book. As many of you know our CD book has traditionally been fairly short, with 80% maturing in less than a year. We should be able to reduce our brokered rates from the high 1's and low 2's, shown on the slide, to approximate 1%. As to client CDs, you can see mid 2's and low 3's should reprice into the 2% range.

This chart is one way to look at how our provisions expense has trended over the last few quarters. As you know, our loan growth impacts our allowance for loan losses as there are inherent risks for losses in any loan you book including new ones. Net charge-offs also impact the absolute level of provisioning with $5.2 million in third-quarter charge-offs detailed in the September column on the page. Additionally with the increase in the allowance accounts during the third quarter, this equated to approximately $15.4 million in additional provision expense.

As to looking ahead, we experienced a significant downgrading of our loan portfolio during the third quarter with now more than 7% of our accruing loans rated substandard. In the second quarter we conducted a review of our portfolio focusing on our construction and development portfolio and to a lesser extent other commercial loans. In the third quarter we experienced continued degradation of some of these previously identified problem credits as well as further slippage in the remaining book, based on two things -- increased management emphasis on identifying problem credits, and borrowers continued to be negatively impacted as this credit cycle extends.

We also believe we are grading credits in a way that consistently passes regulatory muster, which we believe continues to evolve and is tied to even from last year. We had numerous conversations with our regulators during the quarter about risk rating, which helped us not only to be more consistent in our risk rating processes but also understand more precisely what new issues the regulators are focused on. We don't believe at this point that we are in for a similar level of increases in substandard loans in the fourth quarter, but in all likelihood the absolute level of potential problem loans will increase as the recession continues to impact our borrowings.

This chart reflects the trends in our (technical difficulty) pretax pre-provision income over the last five quarters. The information at the bottom of the slide details some factors that have impacted these quarterly trends. In the end, we believe it's all about revenue growth, so we will continue to work on increasing our margins and growing our fee businesses back to historical levels.

Now before I turn it back over to Terry, I'll comment briefly on goodwill. Our usual formal evaluation of goodwill is in process as of today. We don't believe any intangible impairment exists. But as you know, a key component of determining whether any entity has intangible impairment in the price of stock and what caused the price of stock to fluctuate through the quarterly filing date. We anticipate filing our 10-Q within the next few days. Thus, we will continue to monitor our share price through that time.

With that I'll hand this back over to Terry to finish up.

We've talked about two trends as we've gone through the presentation. Number one, aggressively dealing with problem loans; and number two, growing the pre-provision earnings capacity of the firm. Despite the fact that the economic landscape is difficult, the competitive landscape remains attractive, and we believe should permit us to continue growth in gathering clients and the associated loan and deposit volumes, albeit in the case of loans, at a slower pace than our prior track record.

As most of you know, the FDIC's annual market share data was released last week. Our markets generally continue to show market share declines for most large regional banks, and Pinnacle continues to be the fastest growing in the market.

More specifically, on this chart, you can see that as of June 30, 2009, Regions had given up an excess of 1% share, Bank of America actually had a gain during the prior year, and SunTrust gave up almost 75 basis points. And just underneath those big three you can see Pinnacle is the largest locally owned alternative there, grew just under a full point, basically 97 basis points year-over-year.

Knoxville continues to be a similar story. The three large regionals in that market all continued to give up share as well. We were actually able to move into the top 10 as the fastest growing in that market after effectively two years there. And so the point here, again, is that the competitive landscape in our market should allow us to continue to expand the pre-provision earnings capacity of the firm.

So again, we are aggressively addressing problem credits. We have undertaken significant reserve building over the last couple of quarters. I would say modest reserve building may continue in the fourth quarter. You should expect us to pursue meaningful NPA resolutions, and you should also expect us to continue reductions in our exposure to construction and development lending.

Also we believe we will be able to responsibly grow our pre-provision earnings capacity. Mentioned several times, we continue to have meaningful loan growth opportunities. As Harold mentioned in his presentation, heretofore we have typically been producing double-digit growth. I would say it is more likely a modest single -- a moderate single-digit growth rate. But we will be able to continue to grow loans.

We will have more significant opportunity in growing our core funding, as you saw our recent trends there are very strong. And we should be able to continue to expand our net interest income both on the strength of the balance sheet growth but really more importantly on an ability to continue the net interest margin expansion.

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

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

I was wondering if you could delve a little deeper into -- Harold, I think you mentioned the whole subject of that last quarter you did a thorough review of construction. And then I didn't quite catch then what happened this quarter. Was it a matter of just construction deteriorating even more? Or expanding that detailed thorough review into the other segments of the portfolio? If you can go into that.

And secondly, Terry, if you can just go into -- you mentioned there's been a couple references during the call to many conversations with the regulators. Just wondering, were a lot of the -- were some of the charge-offs from this quarter direct results of downgrades from the regulators in terms of the credits? And if you can give us a sense on that? Thanks.

Kevin, let's see, let me start with the first question, which is really focused on continuing deterioration in the loan portfolio. I think I would go at it this way. As you know, we did a meaningful scrub of the portfolio in the second quarter. I don't recall the exact numbers, but I think that we covered 83% of the C&D book, meaning 17% remaining, and 62% of the remaining risk rated assets, so you know, 38% to 40% remaining uncovered there.

As I look at the continuing deterioration this quarter, I would say that some portion of the deterioration would have occurred in previously reviewed credits. In other words, their situation got worse. I have not been able to do a detailed analysis of that, but a back of the envelope estimate would be that probably 10% to 15% of the third-quarter slippage occurred in those credits that have been previously reviewed and found themselves in a still more difficult situation. The remainder would have come in areas that were either not problems or not reviewed in -- before.

We have continued the emphasis really trying to complete the scouring of our book. There's been significant managerial emphasis in the company on getting to the remaining pieces of the portfolio. And while we didn't construct a project discipline similar to what we did in the second quarter, again, we did ask our financial advisors to go back into the areas that had not been covered and reassess those and make sure of those risk ratings. So there's been significant emphasis there that I'm certain to produce some downgrades.

But again, I would not underestimate the fact that it is -- I think I described this last time. It is a fast-moving economy. We are operating on real-time. And we continue to see financial statements that are worse this period than the prior period. So there again are the -- clearly the bigger piece would be continued degradation on credits that were not part of the second quarter review. But again, to be candid, there would have been further slippage even in some of those credits as well.

Relative to conversations with the OCC, as you know, we've -- all of us I suppose have an annual routine review by the OCC. Ours generally occurs during the second quarter. We have not received a written report, but the financials themselves will certainly reflect any information that we would've gleaned in that review.

I think Harold's comments really talked about continuing to refine. I think -- let me back up just a second. I think we talked about going back into the third quarter of last year that the OCC had really provided a more stricter view of commercial real estate credit, specifically as it related to projects that weren't performing consistent with their original pro forma. It's my understanding that has been more broadly disseminated now. I've talked to a number of other bankers that are really hearing the same thing.

In this review, though, I would say that I saw further tightening by the OCC in terms -- or at least in our understanding of how you would deal with those loans that are not performing consistent with the original pro forma.

I don't want to drag this on too long, but let me give you an example. For a real estate project not performing consistent with original pro forma, we've talked about over the last 12 months or so we have been focused on gaining curtailments, generally a 10% curtailment for land and 5% for vertical construction. An increased requirement that we learned this time is, in addition to gaining those curtailments, you need to receive six further payments in this new status before you could upgrade that to something other than a criticized asset. So again, it's a subtle point, but it does influence the numbers.

To get down to your specific question relative to charge-offs, Harold, I believe this is accurate, there would have been no directed --

Kevin, I don't recall any directed charge-offs as a result of that exam.

Okay, so it was more just about making the risk rating system consistent with their changing interpretation of things.

That's true.

That's a way to put it, I guess.

I think that's fair, Kevin.

All right. Great. Thank you guys.

Kevin Reynolds, Wunderlich Securities.

My question was I guess sort of from -- maybe more from 30,000 feet, or at least more market-based. You talked today about in real-time the economy is worse than it was the prior period, which was worse than it was in the prior period. Are we still managing through what is likely to be a shorter term phenomenon? Is this thing a couple of quarters? Or do you think that there is a -- sort of a permanent reset or a permanent impairment, if you will, of kind of the overall economic level at the local level that we're going to have to adjust to? And is it a multi-year process to manage through?

That's a great question. Obviously I wish I were certain as to the answer. I would say that what shapes my thinking primarily is the outlook for employment or job growth. If you -- in simple terms, to me that will be the principal driver, the return in the economy. If you get meaningful job growth, you drive up consumer confidence, you drive up consumer spending, you absorb real estate. And those are the various things that need to occur for us to be in a positive slope from an economic standpoint.

I would say that on a -- you know the national numbers. I would say Nashville has had two decades of outperformance in terms of job growth. My belief about the reason for that job growth has been the broad attractiveness of the market, specifically as it relates to -- it's a low-tax state, no-income-tax state, and so forth. But in this economic landscape, most companies are not making decisions to relocate and so forth. So that has stemmed the job growth in Nashville. It was modestly net negative in 2008 and a continuation of that in 2009.

My belief is you're going to have to have a return to a broader -- to a better economy from the broad perspective, from the US perspective, which would drive companies to begin to make these relocation decisions. My own belief is that Nashville will outperform once you get to an environment where companies want to relocate, and that's what drove our job growth in the past. All the things that were in place that brought that about, the specifically low tax rates and so forth, are still in place. So it will be attractive.

So again, not to ramble too long, but it -- I think my own opinion is that relative to job growth, I think it's going to be a significant period of time before we return to job or employment levels that we enjoyed prior to say 2008.

And then I guess along the same lines, so if you're recalibrating us all to think about your balance sheet and your business in terms of lower growth rates than in the past, I'm assuming that this is -- that the trade-off is lower growth rates, higher capital retention, and in your mind because of the competitive landscape, higher profitability on a slower growing balance sheet, and therefore -- is that what you would be telling us?

That's exactly right.

Okay. Thank you.

I think you'll see us become -- we'll have more emphasis on margin improvement, loan pricing specifically. It's no secret that our loan pricing, when you compare it to whatever peer group, we are at the bottom, so we think we have room to get up there.

And I guess one final question -- and I don't mean to dominate this period here. But offense relative to defense, you sound like that in the very near term, at least for calendar 2009, you're still playing defense on your own -- you're managing through credits. Is 2010 a year of transition? Or do you think it's one of more of offensive posture? Or are we still going to be a defensive football team in the next season?

I'll be honest with you, I got distracted in part of the question there, but relative to us being an offensive team versus a defensive team, we will clearly be an offensive team.

I think the point that I tried to make in the presentation is that what has driven the growth of this firm always has been more about the competitive landscape then the economic landscape. Unfortunately today the economic landscape weighs on us in terms of asset quality and therefore earnings growth and so forth. But our ability to gain high-profile employees and our ability to gain high-profile clients continues to be extraordinarily attractive.

And so as an example, you look at our growth in say loan growth this quarter, you're talking about 7% on a linked quarter annualized basis. That sort of growth feels very comfortable and consistent with what we are talking about. We are not talking about taking it to zero. We are taking about mid single digits during this period of time.

I would point out that we do expect more dramatic growth in the core funding category than that and likely would see continued double-digit growth there.

Thanks a lot, I'll step aside.

Michael Rose, Raymond James.

Just a quick question on the margin. Can you give us a sense for what it would be on a core basis ex some of the credit impact this quarter and last?

What we looked at during the quarter was the reversal of over about $600,000 in previously accrued interest income. So I think that works out to be about 6 basis points or something like that.

That's helpful. And just on the runoff, I think you'd mentioned earlier in the call that you expect to run off the C&D portfolio pretty meaningfully in the next two to three quarters. As we think about your franchise going forward, what percentage do you think that will play in a normalized environment?

We've got several internal targets on that particular line item. We have not released them, but we are focused here making some real short-term progress on particularly getting reductions in the residential construction, spec homes, and residential development. That's played into some of this growth rate reduction that Terry mentioned earlier.

So it doesn't seem like you're going to really curtail on being more aggressive and in trying to bring on new customers. It's just on a net basis your growth will be a little slower because you're going to run off these portfolios. Is that fair?

I think that's generally close. I would say the point -- that is consistent with your comment -- we tried to make earlier is that we are trying to bring about a mix shift where we are reducing our exposure in the C&D and increasing our exposure in the C&I and CRE owner-occupied categories. So that does have a netting effect, but it is still meaningful growth in the C&I category.

That's helpful. Last question if I could. Your potential problem loans went up pretty significantly from the prior quarter. Was that the same sort of trend as you've seen in the rest of the different stages of delinquency, where it was more C&D related?

I think that's generally true. I'm just trying to think down through the problem categories, but I would say it would be accurate that -- Harold, I think it would be accurate on any problem loan category?

Yes, I think that's true.

I just wanted to make sure. Thank you.

Yes. The C&D category remains our most toxic asset (inaudible - background noise)

Great, thank you.

Peyton Green, Sterne Agee.

A couple questions in terms of the funding and earning asset side. In thinking about the margin going forward, one, on the lending side, what kind of margin are you getting to what kind of basis? And then are you still seeing your floor rates move up? Or are they holding around 5%?

Ask that question one more time. I'm sorry. I didn't understand it.

What kind of spread are you getting to LIBOR or prime in terms of the loans that you're renewing or new loans that are coming into the bank? And then what's the floor rate that you are seeing through the third quarter? And what's the recent direction of that? Is it still moving up? Or is it stabilizing? Or --?

I think generally on the floor, I would say it's around 5%. I would say that the margin to an index, if you're talking about a LIBOR index, I would say -- Harold, do you have the detailed numbers as opposed to me giving a guess on the spread over a LIBOR?

No, I don't have it either.

I don't have a detailed number. I would say -- again, this -- without a detailed number in front of me, I would say it's probably LIBOR plus 300 or something on that order. If you're looking at the spread over primes, prime or index there, it's probably prime plus 0.5 would be a margin that would be typical of what we are booking.

Great. And then in terms of the repricing going forward over the next six months, it seems like you have a lot of client CD repricing opportunity. I was wondering if you could kind of talk about where you put CDs on -- and where you reprice CDs -- in the third quarter from the client perspective versus the broker.

I'm assuming you're talking about the term?

Yes. Well, I mean more the rate. Like I think you have average of about 3.20 in client CDs that mature in the fourth quarter and 2.7 (multiple speakers)

We have -- yes -- I'm sorry. We've got them in the high 2's and low 3's. We ought to get down into the low 2's if not the high 1's on those. The terms on those CDs will probably be fairly consistent. We don't book a lot of long-term CDs.

Okay. And then in terms of the deposit growth, what really kick started it? Because I mean y'all I guess over the past year and change have had to rely more on wholesale borrowings and brokered CDs to kind of keep the funding balance right versus the loan growth. I mean, what change occurred to really bring about the strong noninterest-bearing and money market balance growth?

I would say that there are a couple of influences. As you know, in a company like this when you've got emphasis on loan funding and you move into deposit funding, that's not -- you call a meeting and declare that and get a shift. That takes an extended period of time. And really over the course of this year we have been pounding away internally to focus our financial advisors on clients that are net depositors as opposed to net borrowers and providing increased accountability for deposit acquisition in conjunction with pricing and so forth. So I believe that just the managerial emphasis and the way we've managed the sales force and so forth over the last nine months, probably, is a significant contributor to the increase.

I would say also my own belief is that consumer spending has slowed. You'll see that in all the transaction categories and fee businesses that are associated with transaction categories like merchant volumes and those kinds of things. And so I think when you get that slowing of spending and transaction activity, you get some elevation in balances, and I think we have benefited to some extent from that as well.

And then last question is with regard to the -- do you think that, I mean, there is more likely momentum over the next two or three quarters because of the shift in your associates' kind of focus? Or was this a lot of things coming at once?

I would be -- are you speaking as it relates to gathering low-cost core deposits?

Absolutely. Yes.

Yes. I do think there will be continuing momentum.

Great. And then the last question, on the potential problem loans, how much -- in terms of the loss content, when we saw the migration of potential problem loans a year ago, obviously it was more C&D related. And what is the nature of the increase between the third and second quarter? And then how would you characterize the potential loss content in that?

I would say that it's still -- I would not look at this point for a meaningful shift from what it's been in the past. It's still significantly skewed towards C&D. If you look at that, there's a chart in there on the NPL mix. Again, whether you're looking at charge-offs, nonperforming loans, OREO, it's all well skewed to C&D.

Okay. All right. Great. Thank you very much.

Mac Hodgson, SunTrust Robinson Humphrey.

Most of my questions have been answered. Just one question on capital. Harold, you mentioned downstreaming $65 million from the holding company down into the bank and maintaining a more -- robust capital levels at the bank level. What are you targeting for bank level capital ratios? If you can provide that.

Yes. Well, right now our tier 1 leverage is close to 9%, and our total capital ratio would be up in the high 12. I think we've had several conversations with our Board on that, and we believe that we ought to be able to keep that -- the bank's ratios at a -- probably an 8 and 11 kind of number going through here.

Great, that's all I had. Thanks.

Carter Bundy, Stifel Nicolaus.

This is sort of a follow-up to Peyton's question. But is the shift in the interest-bearing deposits more of a consumer preference result, or has there been any sort of change in either the company strategy or the incentive program with y'all's associates?

I would say -- well, let me answer the question that you asked there at the end. There has been no change to the employee incentive programs, and there have been no incremental product rollouts, so there are not structural changes. I would say it is a function principally of consumer preference, client preference.

Okay. Secondly, could you-all -- do you-all still feel confident in your charge-off forecast that y'all had alluded to in the prior quarter?

I think you are referring to like a 1% kind of number --

Right.

-- exclusive of Silverton number. That number -- we are looking at a lot of things right now. And one thing that will impact that is how aggressive we are on eliminating some of these nonaccruing assets from our balance sheet. We believe that the pricing we have and as far as the evaluations we have on those assets right now are good. We've got all the selling costs. But there are alternatives where we can accelerate those things coming off our balance sheet, and of course we'd have to absorb more loss.

We are studying all that. We have not made any kind of decisioning there. But that would influence my level of charge-offs here over the next couple or three quarters. That said, I think under a normal kind of run rate we are looking at a number in the 110 to 115 range, or maybe 105 -- give me 105 to 115 kind of range as far as the annual charge-offs without the Silverton credit.

That's really helpful. Thanks. And just a final question. Is your preference right now on the OREO disposition any differently going into the end of the year? Obviously y'all talked about a few of those credits you're moving to OREO, the land credits this quarter, but are y'all going to slow up on any sort of the residential properties until you sort of have a better selling season going into the spring? Or we also just continue to move forward with what you have?

I don't think we're going to slow down at all. I think we want to let -- we want our financials to reflect a pretty accelerated pace on disposition of these assets and going down through here.

Okay. Thank y'all very much.

I think that really concludes the Q&A period. We appreciate your involvement. I would say generally my own -- I'd express my own disappointment at the slippage there in nonperforming assets, having to build the reserve and so forth. But we do honestly continue to be optimistic about our opportunity to gather the best clients in this market and continue to grow the pre-provision capacity of the firm.

So thank you very much.

Everyone, that does conclude today's conference. Thank you all for your participation.