Pinnacle Financial Partners Inc (PNFP) 2009 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Pinnacle Financial Partners fourth-quarter 2009 earnings results conference call. Hosting the call from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer. He is joined by Harold Carpenter, Chief Financial Officer, and Harvey White, Chief Credit Officer.

Today's call is being recorded and will be available for replay this afternoon by calling 888-203-1112 and using the pass code 872-4528. 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 opened for your questions following the presentation. (Operator Instructions)

Before we begin, Pinnacle does not provide earnings guidance or forecasts. During this presentation, we may ask comments or we may make comments which may constitute forward-looking statements. All forward-looking statements are subject to risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of Pinnacle Financial to differ materially from any results expressed or implied by such forward-looking statements.

Many of such factors are beyond Pinnacle Financial's ability to control or predict and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks is contained in Pinnacle Financial's most recent annual report on Form 10-K 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. Please go ahead, sir.

Okay, thank you, operator, and thank you for joining us here today. I am sure everyone is aware that we have released our results for the fourth quarter and for the year the loss per fully diluted share was $0.12 for the quarter and $1.46 for the year. I think you will see as we walk through the presentation a continuation of the two important themes that we talked about over the last quarter or two and I suspect we will be talking about over the next quarter or two.

Number one, focusing aggressively on dealing with the credit issues, and number two, continuing to build the core earnings capacity of the firm. I think we've got meaningful results on both of those fronts. I will talk first about aggressively dealing with credit issues. You've got a slide there I guess as I really think through the information, I start at the bottom of the slide.

One of the most important things our firm has got to do to get to the end of credit issues is to reduce the construction book. We've made I think great headway on that. The construction book is down $120 million since year-end '08, so we are making meaningful progress there. I will talk later about this initiative and remixing the portfolio to the C&I category, which has really been the wheelhouse of the Company. So that is an important area of aggressively dealing with credit issues.

During the quarter, we had $42 million of nonperforming asset resolutions. That is a pretty fast pace for us. You can see that the NPAs -- even with those resolutions, NPAs increased to 4.29%. I will tell you again my belief that number is a little higher than I had hoped that it would be, but I will tell you that I think we are pretty aggressive in how we handle these things. We literally have no commercial loans that are greater than 90 days that are still accruing interest, so pretty aggressive treatment there.

And during the quarter, we were stayed at the last minute by a couple of bankruptcy filings that are (inaudible) workouts that it will probably take us another 90 days or so to get relief from the stay but believe we will be able to work those things out. So some increase three in nonperformings during the quarter.

The annualized net charge-offs were 1.71%. Of course, I think everyone that participates here are generally familiar with the Silverton credit. We -- early in the year or near the time of the Silverton credit had thought we could contain net charge-offs at 1% for the year. Last quarter we talked about a range of 1.12% to 1.15% or something excluding the Silverton charge-off. So we are essentially on that number and in the fourth quarter, the net charge-offs annualized were 75 basis points. All that added together again felt like we were pretty aggressive there with our loan-loss allowance taking it up to 2.58%.

Switch now to building the core earnings capacity of the firm. Again, I think a lot of good news on this front. Our year-over-year loan growth was 6%. That is even after a reduction in loans of $45 million during the fourth quarter. I will say to you that that $45 million approximates slightly in excess of what the net charge-offs and transfers to OREO were during the quarter.

I also want to make this point. I think we've been signaling the last quarter or so that it is our intent to manage loan growth to a slower pace. I believe that you should expect loan growth to be -- equal to or less than 5% in 2010 and within that, we will continue to push hard on the C&D portfolio and drive that volume lower.

As you think about the loan growth, I would also say that it will probably be lower in the first half of the year than the second half of the year as we continue to pound away on credit issues.

The year-over-year core funding growth was 25%. That is a very strong performance. It has been a principal initiative of the Company. We've talked about it the last quarter or two and continue to make great progress there. The year-over-year net interest income growth was 24%. It was 7.2% between the third and fourth quarters. Again that is driven by the margin primarily.

We're going to talk about the margin in greater detail, but a 3.19 margin, pretty meaningful margin expansion during the fourth quarter. And in total, revenues year-over-year grew 19.2%. Again, Harold will break some of those numbers down for you in greater detail, but those are the two principal things that you see, again aggressively dealing with credit issues and driving up the core earnings capacity of the firm.

I have already kind of hit at and I guess over the last quarter or two hit at that I believe one of the most significant things we've got to do on the credit front to solidify the loan portfolio is really remix it. When I say that, really attempt to drive up the C&I, which has been the wheelhouse of the Company, while we're driving down the real estate particularly in the construction and development portfolio, which in large measure come through acquired portfolios.

Here we compare the broad portfolio components at 12/31 with where we were at year-end '08. As you can see on the topline there, we've significantly reduced the exposure in the most problematic category; construction, land development by $120 million, that is more than 19%.

Most of you know we generally look at the CRE owner-occupied category of C&I credit because we are financing the businesses build and securing it with the real estate but we're underwriting the cash flows of the business. So when you combine that line item with the C&I line item, you can see that we are achieving most of our growth in the C&I category. I think that shift away from construction land development back to C&I is probably the most constructive thing we can do to produce sustainable asset quality.

As we go to the next slide, I want to break down that $525 million in construction and development loans because I think we're making great headway within the subcategories there. Looking at that $525 million and where the most significant reductions have taken place, beginning at the top there you can see that we have reduced residential spec homes by $52.7 million, roughly 54% since year-end; the less risky category, residential custom homes by $10 million or 36%; condos by $10.4 million, that's 21.4% reduction since year-end. And then skipping one line there, the residential development down by $59.2 million or 24%.

Not only are we achieving the meaningful reductions in the construction development category, we are achieving the most significant reductions in the most problematic subcategories within that broad category construction and development.

While we are on this slide, I might also 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 they are loans with committed permanent takeouts, which we believe are generally significantly less risky category of real estate lending.

So as I look at that slide, I think the most important point here is that we are achieving meaningful and important mix shifts, which should result in improved and sustainable asset quality.

Here is a little more insight into our C&D portfolio. This slide is detailing the quarterly trends on just residential construction as we believe those are important in our pursuit and we'll continue to pursue I guess the commercial projects as we go forward.

At the beginning of 2009, we had approximately $418 million in these categories. It was 12.3% of the portfolio. Year-end 2009, we are at $285 million in these categories, about 8% of the loan portfolio. So again, a reduction of $134 million or 32% in these more credit sensitive categories.

In just a few minutes I'm going to talk about other real estate and you will see when we get there that $26 million of our OREO totals are also in these categories that we are dealing with here at year-end 2009.

Let me talk just a minute about the commercial real estate market in Nashville. I will start you out on the left side of this slide. You can see the market vacancy rates there. In general, we continue to believe Nashville is an average performer. In other words, there are a lot of markets that are better. There are a lot that are worse. I think as you look at these trends over a 12-month period you would say that the trend has been up. But as you can see on the quarter-to-quarter changes there, it looks like we are beginning to flatten out and view that to be a good sign.

As you look at our portfolio, as we have already discussed, almost half our CRE is owner-occupied. In my judgment that is the least risky category. And then beyond that we have a pretty balanced portfolio.

As you look at these components, I think it is important to focus on the kinds of clients that we do business with in each of these segments. I can say to you in looking at some of the other large regional presentations as they describe their commercial real estate portfolio, they will generally try to isolate a component that operates more like community banks because they view that to be a less risky category, commercial real estate. And again, I think that plays out in our portfolio as well.

In the case of retail we have no malls. We don't have any trophy projects. It is a fairly diversified portfolio with an average loan balance of slightly over $1 million. We generally finance things like central credit tenant properties that might be occupied by folks like Tractor Supply, CVS, Walgreen's, those sorts of credit tenants.

We do have a few small neighborhood type centers. In the case of office space, we don't have any downtown, literally zero downtown Class A office space. That category for us really consists of things like small single tenant buildings and maybe multi-tenant suburban buildings that have stabilized operating histories, relatively long lease maturities, and so forth.

In the case of warehouse, we really have very little in the way of bulk building type space. Generally we tend to finance office warehouses and small warehouse buildings in infill locations with stabilized operating histories.

I want to take a second here and look at the past dues and nonperforming loans. We'll break it down to each basic category. Most of you have seen us use this slide in the past. The three left most columns contain the 30 to 90 day past due information for Pinnacle this quarter and third quarter and then second quarter. And then that followed by the highlighted column in the center, which is 30 to 90 day past due percentages for our peers, and our peers are the greater than $3 billion banks for the third quarter UBPR. So that is the comparison that we are trying to make.

As you can see there, the total past dues between 30 and 90 days are better than peers and pretty nice numbers there for the fourth quarter.

If you look at the right half of the chart, it is a less handsome comparison. It's the same sort of comparison where we're comparing greater than 90 days past due in nonperforming loans for the fourth quarter. As I've already mentioned in our case that is essentially nonperforming loans. We don't have any commercial loans greater than 90 days that we continue to accrue interest on. As you can see the total for the numbers are slightly better than the peers but as with somewhat better performance on C&I and somewhat worse performance on the construction land development category and to some extent CRE.

Talk about nonperforming loans here just a minute, they total $125 million, basically 3.5% of loans. The pie chart on the right side of the slide contains the breakdown. As you can see, by far the largest components NPLs or land development and residential construction. I think that is old news there. The OREO totals $29.6 million, which of course brings total NPAs to $154 million, 4.29% of loans in OREO.

To give you some sense of the nonperforming loans, maybe give you some insight into the granularity that you see there, the first and largest credit that you see there is a retail shopping center. We are actively pursuing various remedies. We are currently optimistic that the remediation of this credit will occur fairly soon perhaps at the end of the first quarter but almost certainly during the first half of 2010. It may spill over into the second quarter to an inactive commercial area and again believe that we will get that situation resolved certainly by the first half.

The second largest NPL there is $11.3 million exposure to a downtown condo developer. This is one of those projects that is clearly not performing consistent with its original pro forma, but it does continue to be a viable project. We have received roughly $5 million in paydowns over the last three quarters. At my last report, they had sales contracts on three units currently and continue to expect future sales based on the current foot traffic, which has been pretty good. It is again slower than what was originally planned, but would be meaningful volume.

It looks like they are on a run rate of about three to five condos a month going into the spring selling season, which again is pretty good and I think this loan is an example of the tighter risk rating discipline that we've talked about for a number of quarters now, where the loan continues to pay as agreed but we do classify the loan as a nonperforming loan because the sales performance is slower than the original pro forma.

The third one there is a residential developer. I mentioned earlier in the conversation that we had a couple of things that where we were stayed by bankruptcy filings. This is one of those. We do anticipate being -- receiving relief from the stay probably within 90 days and being able to move forward there.

And then the fourth one is a $6.8 million condo development. It is not a downtown condo but similar to the other condo development, this project continues to have some activity. I would describe it as more of a high-end project than the other project that we talked about. The price points here would be greater than $500,000. But again, it continues to have progress.

In fact, I understand they received a sales contract just yesterday and the contracts that they are receiving are actually at values higher than the current appraisal that we have and the value that asset is based on.

After that you've got approximately 285 credits that make up the remaining nonperforming loan portfolio and I might comment all of these loans are in our primary market areas.

On this slide, there is some detail on the OREO book. I think the point of the slide here is that the OREO balances are probably covered 120% by generally current appraised real estate values. I think we had indicated at the last quarter that we expected OREO to be up here in the fourth quarter. We anticipate continued increases over the next few quarters as we are aggressively trying to power through these problem loans.

You can see some of the bullet points there on the slide. I also want to point out that we currently have roughly $7 million under contract and auctions scheduled on another roughly $2 million.

Five OREO projects comprise 47% of the OREO balances. Again just trying to give you some sense how this breaks down, four of the five were acquired in December, so again, this is sort of current stuff. Contract negotiations on two of the five we anticipate we'll get one of them resolved in the first quarter, the other one in the second quarter. I might also say four of the top five are residential subdivision developer projects. The fifth one is a commercial project.

We incurred about $8.4 million in OREO expenses during the quarter. I would break that down this way. Net losses on sales were $5.4 million. We had $1.3 million in write-downs due to continued declines in appraisals, and then about $1.7 million in maintenance taxes and so forth.

During the fourth quarter, we had $27.4 million in OREO reductions. Again that is moving at a pretty fast pace. I will point out and I think this is meaningful, about $10 million was sold via an Internet auction and bulk sale wholesale transactions. As you know on those types of sales, you generally realize less value. I think it is a reflection of really just trying to power through some of these numbers.

In that category, we did take 41% losses, but I would tell you generally on the negotiated contracts those -- where we are doing something other than an Internet auction or a bulk sale, those have had loss rates on disposition of 7% for 2009 and in the fourth quarter, we are at 9%. So when we're handling the transactions one-off, we tend to hold up pretty well.

I might also say in just trying to help you understand the aggressiveness with which we are approaching that in the OREO book, the average life of those projects there is 81 days. So again, this is pretty current stuff that we are working and we will continue to work.

The last thing before I turn it over to Harold, I would just try to give you some sense on what's going on in the net charge offs. During the fourth quarter, we had $6.7 million. Approximately $4.7 million of that was residential construction and development. These four credits shown on this slide make up approximately 42% of charge-offs and as you can see, they are all in the construction and development categories. And again, just I think it continues to emphasize the criticality of remixing our loan portfolio away from these real estate-oriented books and back into the C&I category.

Harold, I'm going to stop there and turn it over to you.

Thanks, Terry. I'm going to cover capital funding and some brief comments about our fourth-quarter P&L. First off, our capital ratios remain very strong as of the end of December. As you know, we received approximately $109 million from a common equity offering that was completed just before the end of the second quarter of 2009. We've also received $95 million in proceeds from the U.S. Treasury's capital purchase program in December of 2008.

As many of you are also aware, after the third quarter we elected to withdraw our application to redeem our preferred shares issued from the capital purchase program until we can see more of a sustainable economic recovery.

We realize there are some positives indicating that an economic recovery is underway, however on the other hand, residential home sales remain sluggish and it appears that industry will remain a buyers market for an extended period of time.

Residential development remains on a long-term hold and our C&I borrowers remain cautious as they continue to step nimbly and cautiously through this economic cycle.

Now concerning funding, similar to what is going on in the C&D book, we continue to be excited about the transitions we've made in our funding base over this past year as we continue to reduce our reliance on wholesale funding sources. In 2008 as rates dropped, we increased our reliance on wholesale funding in order to maintain both our growth and our margins. Even though competition for deposits remains intense in our market, our sales force has been very effective in gathering core funding.

As the chart indicates, our core funding is up 25% over last year. We believe we will continue to reduce our reliance on broker 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 new retail deposit growth initiative in some of our communities that we serve.

As the chart indicates, we have seen our relationship funding increase from 71% at year-end 2008 to 84% at year-end 2009 and we're working diligently to increase not only our relationship funding but also our core funding as we believe that will be the primary source to increase our margins over time.

Concerning margins, the chart details the quarterly trends of our net interest income and our net interest margin. We continue to manage certain action plans in order to mitigate our exposure to the current low rate environment.

As you can see, our linked-quarter net interest income between the fourth quarter and the third quarter increased by 7.3%. This is also during a period of increasing nonperforming assets. And as Terry mentioned, we are very focused on reducing our nonperforming asset base in order to return those assets to performing status.

We finished the quarter with a 3.19 margin, about what we had anticipated and our third straight quarter of net interest margin expansion. For your information in December our margin came in at the 3.30 range.

So we remain optimistic that we will continue to increase our margins in 2010 with increased emphasis on loan pricing and continued focus on growth in core funding.

Incorporated into our forecast for 2010 is that we are not projecting increased rate moves from the Federal Reserve until late 2010, thus we are forecasting a fairly consistent rate environment over the next few quarters.

As to specific items impacting our margins, our core funding emphasis has helped us drive lower funding costs, thus increasing our margins. Negatively impacting our margin this year is the increase in nonperforming loans. In the fourth quarter, we reversed about $800,000 in interest income due to nonperforming assets increase.

As the next two slides indicate, we will be working on increasing our spreads on variable rate loans as well as repricing our CD book.

This is a chart we have 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 10% of our loan portfolio will mature or renew within the next six months so we should be able to take loans that are currently priced in the high 3s and low 4s into the 5% range.

Our second significant margin improvement opportunity is our CD book and upcoming maturities. The $828 million represents about 50% of our CD book. As many of you know, our CD book has traditionally been fairly short with almost 90% maturing in less than a year.

We should be able to reduce our brokered rates from the high 1s and low 2s to approximately 1%. As to the client CDs, you can see mid-2s should price down into the low to high 1s. We will also continue to emphasize money market accounts in order to reduce our funding costs further and increase our core funding metrics.

This next chart is one way to look at how our provision expenses trended over the last few quarters. Net charge-offs obviously impact the absolute level of provisioning with $6.7 million in the fourth quarter of '09 detailed in the fourth quarter column on the table. Additionally with the increase in the allowance account during the fourth quarter to 2.58%, this translated into approximately $10.1 million in additional provision expense.

During the fourth quarter, we continued to experience downgrading of our loan portfolio as borrowers worked through this economic cycle. However, we did see our potential problem loans actually decrease slightly during the quarter. The increase in non-performers also impacted our allowance levels as we increased our allowance allocation to nonperforming loans from $12.5 million at September 30 to $19.4 million at December 31.

Also during the fourth quarter, we increased our coverage ratio to 73.7% from 68.2%. We believe this amount is consistent with most peer groups.

Lastly, this chart reflects the trends in our quarterly 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. As you can see, we've been steadily increasing our core earnings excluding credit costs this year, thus continuing to build the core earnings capacity of the firm.

With that, I will turn it back to Terry.

Thanks, Harold. I won't belabor the next two slides much, I just want to point out I have tried to indicate that as a firm we are tightly focused on profitability and managing the asset growth down to a lower number. That said, you can see that we have had a tremendous emphasis on core deposits and just offer these slides as a reminder.

The first one there, that the big -- large regional banks in our market continue to give up share. That is a good thing for us as we continue to try to grow our core deposits. And similarly, really the same story in Knoxville. The big banks continue to give up share there. So that should help us as we continue to focus on growing core deposits, although as I've indicated, we will manage the loan growth down to a number less than 5% for 2010.

I think in terms of final thoughts, the theme for us has been the same over three quarters now. I think you ought to expect it to be the same as we move into 2010. We're going to continually -- continue to aggressively address credit problems, might see modest reserve build in 2010. But we will aggressively attack the NPAs, as I mentioned.

We are already at the point where the average age of our OREO book is down to 81 days. We will continue to pursue aggressive resolutions there and we will continue to drive down our exposure in our construction and development book. You saw I think great progress during 2009. You ought to expect meaningful progress during the first half of 2010 on that front as well.

And then again, we've talked about responsibly growing the core earnings capacity. Loan growth at less than 5%, meaningful core funding growth. We expect net interest income growth going forward based on change in the funding mix and also based on driving the absolute margin up.

So I think, operator, I will stop there and we will open for questions.

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

Good morning, guys. A couple questions. I definitely understand that the OREO expense line was very elevated and you guys had seemed were being deliberately aggressive in trying to resolve this. Terry, you mentioned that you are going to continue to be aggressive on that front. How should we -- I'm just trying to gauge how aggressive that number is versus how aggressive you are going to be going forward.

Should we look at that number as kind of a run rate for the next few quarters or was that really above and beyond what you would be potentially doing over the next few quarters? I'm just trying to gauge the impact over the next few quarters from that line.

Kevin, this is Harold. We are not planning that level of loss going through this thing in 2010. As Terry said, we had some pretty significant bulk sales opportunities during the quarter and were able to get some older assets off the books fairly quickly. So no, I would not plan on that level of ORE expense as a quarterly run rate going down through here.

Okay, so it's reasonable to just -- it was -- you are still going to be historically elevated but maybe not to that extent that we saw last quarter?

I think that is fair, Kevin, and again, we've hit at this but when you are in -- it was important to me that we drive down the age of what is in the OREO book. For the most part you lose more the longer you keep it and so we were tightly focused on driving down the average age. As I mentioned it is now down to 81 days. We can probably drive that lower here in the first quarter.

But with a focus on that, you obviously get into the bulk sale, Internet sale type transactions and your experience there is not going to be good. You end up with a 40% loss as opposed to a 7% to 9% loss, which is what we typically take on OREO resolution. So --

Okay, just one quick follow-up. Harold, you mentioned margin, how it definitely bumped up even just in December. Should we look at that -- when you talk about the opportunities for the margin and potential expansion from there, is that something that kind of recedes over the course of the year or you see kind of steady opportunities over the course of 2010 and where are you guys would consider kind of a normalized level that you can get to?

Yes, this year, Kevin, I think at the low point, we were at like a 2.72, 2.75 and we got to 3.19 by the fourth quarter. I don't think we'll see that kind of increase this year, but we ought to still see some measure to increase here for the rest of 2010. We believe we are still somewhat liability sensitive, so if rates go up, we would have to work hard to cover that. The longer that occurs from now till then is beneficial to us so that we can try to cure more of the liability sensitivity of our balance sheet if that makes.

Yes, and at some point even before it changes you would probably have to start preparing the balance sheet for that?

Yes, that's right. I think that will kind of take the rate of increase in our margin down if that makes sense.

That does. Okay. Thank you, guys.

Brady Gailey, KBW.

Hi, guys, good morning. I just had a quick question. It sounds like the average mark that you took on actually liquidating OREO in the fourth quarter was around 9%. I was just wondering how that mark compared to the carrying value of the rest of your unsold OREO and your NPLs. So to put it another way, what is the average mark down of current NPAs?

Brady, ask it one more time. I'm not sure I know what you are asking.

Okay, if you look at your NPAs on the balance sheet right now, how much are those marked down on average? Is it 5%? Is it 10%?

Brady, I will tell you that on the ORE reserve, what we've got is a general reserve assigned to the book of about 10% to 15%, so that's what is on the assets that are there at the end of the year. As to the markdown on the nonperforming loans, we have got a reserve assigned to those of about 20% currently.

Okay, great. Finally, I just want to see if Terry, if you would update us on your thoughts regarding the eventual TARP repayment.

My thoughts are -- continue to be the same as they have been over the last quarter or two. We are not interested in repaying the TARP until we are confident that the economic landscape is on solid footing and heading north and that our loan portfolio and specifically our nonperforming or problem loan trends are also headed north. I would need to see several quarters of sustained improvement in those areas before I would want to return the TARP proceeds.

Okay, great. Thanks.

Matt Olney, Stephens, Inc.

Good morning, guys. Good mix shift in the loan portfolio. I think you mentioned the C&D book down $120 million during the year. Can you give us an idea of how much that could potentially be down in 2010?

Yes, this is Harvey White. We have been through that book pretty much line by line and tried to project out where we're going to get our reductions. And I would expect by midyear to be down -- it's at 525 now, probably 485, 490, something like that.

And then in terms of second half of the year, it will partly depend upon how things are trending and how the economy is doing and some of those things. I think we are going to have opportunities to have that book sort of level out at about that level. If things continue bad, I'm going to try to push it lower. But I would expect in the $475 million, $485 million range for the second half.

Okay. That's helpful, Harvey. Thank you. Secondly, maybe more of a Harold question. On the occupancy expense, you move into your new headquarters. You've got a few new branches up. Is that 4Q occupancy expense a pretty good run rate going forward?

No, I think you will see occupancy expense trend op. You know, I would imagine you will see our monthly -- our quarterly run rate go up anywhere from $0.5 million to $1 million with these new facilities.

That is from 4Q to 1Q, is that right?

That's right.

Great, thank you.

Mac Hodgson, SunTrust Robinson Humphrey.

Good morning. A couple other just expense questions. There was a decent uptick in the marketing and other business development expenses, about $600,000 increase in the third quarter. Was that an unusual item or is this a pretty good run rate for 2010?

Again, Mac, I think what you will -- there's some unusual items in there. Entertainment expense in the fourth quarter generally for us is going to go up. We've also got some initiatives on the retail front to gather more core deposits. Some of that includes some marketing costs and also we've got this new relationship with the Titans. And so some of that is all buried in there.

I don't think you will see that kind of run rate in 2010, although the fourth quarter may jump up again in 2010. But I think you will see kind of a similar kind of expense number that was in 2009 with some modest increases for some of these new things.

All right, just a couple of credit-related questions. You seemed to indicate you expect maybe just a modest reserve build in 2010. And when I look at charge offs, excluding the Silverton credit, while they were a lot higher for you guys for the year relative to historical standards, they were still relatively low. So should we expect charge offs increase in 2010 as reserve build slows as you start working through some of these credits?

Yes, just talking about the number, the 1.11% number, and we are not -- we are not that pessimistic about 2010 on the charge off front. We think if you take the second half of 2009 and just kind of push that forward, that may be a more -- that may be a better run rate for us.

Okay, great. And when I look at the increases to nonperforming loans in the table you provided, it looks like the residential construction development have slowed down as far as the inflow a lot over the last couple of quarters and there was a decent increase in other. I know you provided some color on the call, but can you give any more detail on where you are seeing the inflow into nonperforming loan categories?

Yes, this is Harvey White again. We are starting to see some of that come from the C&I book. We are certainly trying to look ahead and look at our CRE book and our C&I book. Quite frankly, yes, we are seeing some non-accrual increases under the C&I book. We are certainly hopeful that that is not an indication of more to come. We've tried to go through that book and get our loan officers to be sensitive to looking for early indications of '09 results. So we hope that is an example of that, where they are looking ahead and finding the ones that are going to be weak. And we continue to see some in the land and acquisition and development. So it is a mix, but anticipating a question, yes, we are seeing some C&I increase.

Okay, great. Just one last one. Terry, I would be curious if you could give some color on your expectations of just general business activity and loan demand. I know the Company is managing to less than 5% loan growth in 2010. Are you seeing any pickup in demand? I know Nashville just got approval for the convention center. What sort of other economic things are you seeking I guess in the marketplace in Nashville and Knoxville?

That's a great question. My own sense is if you were here, which I guess you probably have been and talked to people on the ground, you know, there's still a fair amount of pessimism. I don't think you see people that are really willing to jump out and do any sort of major plan expansion equipment purchases, those sorts of things. You don't see people that are particularly excited about adding back jobs. At this gap, I think there is still a nervousness among the general commercial segment.

Of course on the real estate side, that's still I would describe as virtually no activity there. So I think quality loan demand today in this market would be probably as soft as I have ever seen it.

Okay, great. Thanks.

Kevin Reynolds, Wunderlich Securities.

Good morning, gentlemen. Most of my questions have been answered, but sort of going back, Terry, to I think your comments or at least a slide that talked about modest reserve building should be expected in 2010. Is that sort of year-end to year-end or do you expect kind of a buildup in the first half and maybe a drift back down to the levels where we ended this year? And trying to sort of get the path of the allowance to loans over the course of the year.

Hi, Kevin, it's Herald. We are not projecting a big increase this year and so quarter-to-quarter, we are not expecting any kind of significant large basis point increase in our reserves this year at all. And we don't know the future. We can't tell the future, and all that sort of qualifiers to that answer.

But right now we think our loan grades are good. We think that our officers are focused on that and that we have got a pretty good understanding of where the credit quality of this book exists as of the end of the year. So I know we have talked about a modest increase in the reserves, but it is a pretty limited number.

Okay, thank you.

Jeff Davis, FTN Equity Capital Markets. Actually, he just dropped out of the queue. Our next question comes from Michael Rose, Raymond James.

Good morning, guys. How are you? Just switching gears a little bit, most of my questions have been answered. But can you give us any updated thoughts on Memphis and kind of what you think of the market at this point?

That's a good question, Michael. As you know, our thoughts about Memphis have always been opportunistic, meaning that we have never built a timeline to be there. It is all about when the right folks are available and so again, I would say that our outlook would continue to be optimistic. But I guess I want to be clear and say that the two principal things that we're working on here are aggressively dealing with this credit book and focusing on profitability in terms of driving up the core earnings of the Company. And so I guess I want to be clear to say that that's really where we are spending our energy right now, probably will for the foreseeable future.

Okay, fair enough. Secondarily, you all had pretty good, really strong growth in Knoxville on the loan side. You are obviously well ahead of expectations that you laid out a couple years ago. Is there any update to those kind of forecasts or estimates based on the dynamics of the market and kind of what you are seeing now?

You know, honestly I've not updated that stuff. I can update it. We probably ought to do that. I would say that like the firm as a whole, we will slow the growth down in Knoxville as well, albeit we won't slow it down the level there that we will for the Company as a whole. In other words, they are not having to shed construction and development loans and those kinds of things, so your net growth rate will be higher there than it would be for the Company. But again, I think I guess I want to be clear we are managing the loan growth down to a lower level.

Okay. Thanks, guys.

(Operator Instructions) Peyton Green, Sterne Agee.

Yes, good morning. I was just wondering if you could talk a little bit about the migration that you saw in the watch list on the C&I book. It seems like things were starting to slow down a little bit in terms of maybe some of the weakness you saw the past couple of quarters up until fourth quarter. Maybe if you could comment on that a little bit and the outlook in the provision.

Sure, this is Harvey White. Yes, so many people are expecting CRE migration and then C&I migration and I think one of the things I would say is we still have a basic belief that we are pretty good on the front-end at client selection and are choosing the right kind of management teams, the right kind of people that we want as clients.

Having said that, we think most companies this year are going to be somewhat stressed. We doubt there will be many that look better than they have before. But although we have had some move into nonaccrual I think I am encouraged by the year-end results of the past dues and those that are still able to pay through the fourth quarter.

I think we have had third and fourth quarter pretty strong emphasis on training and retraining about identifying problem loans and raising your hand early, those types of things. So I'm really hoping that a lot of what we are seeing (inaudible) into that in the fourth quarter really is a result of an increased emphasis by our lending officers on yes, I need to look at early identification of [problems].

So I am hoping it is sort of the first pass, if you will, and I am really not worried about repeating that. Now we are going to be going into the season where we start getting some year-end statements but we've tried to get ahead of that by emphasizing to officers to stay in touch with their clients and get ahead of that curve.

So I hope that sort of initial bulge is sort of a buildup of things that people at the back of their minds or in talking with clients have known that companies are souring or weakening and will not be representative of an increasing wave, if you will.

Peyton, I might just add, too, if I can -- I do reiterate Harvey's point there. You know, at a 0.46 past due and nothing greater than 90 days, that is a pretty encouraging place. For me that is a pretty encouraging place to be and I would also highlight I think I mentioned this earlier, I'm not sure, but pretty aggressive recognition of nonperforming loans, 18% of them are currently paying as agreed.

So I think again my point is that I believe that the current state of the portfolio would be expressed on a pretty conservative basis.

Okay, I guess to kind of separate from the C&D book, the C&D book would've largely been acquired and the C&I book is one that was largely the Legacy Bank. Is that still a fair way to think about it?

I think that is a reasonable way to think about it.

Okay, then just in terms of thinking about the deposit growth going forward, over the last couple quarters your kind of low-cost deposit cost has crept up a little bit. Is that a reflection of just what it takes to get people to move over from the larger super regional banks or --?

Peyton, this is Harold. I think that's true. I think we are willing to get those operating accounts. We may have to beef up the pricing just a little bit to get those moved across the street. So I think there may be some competitive pressure in that to move those accounts.

Okay, but is there any problem in getting the accounts over? Have the large super regional banks gotten any better about competing or are they still lights out?

I don't see any change in the competitive landscape. I think the competitive landscape continues to be good.

Great. Okay, thank you very much.

Bryce Rowe, Robert W. Baird.

Thanks. Good morning, guys. Just I guess a couple follow-ups. Harvey, you talked about I guess the C&D book declining to the $480 million, $485 million level at some point next year. I'm a little surprised to hear that that is not maybe a more aggressive decline than we would expect. Can you comment on that?

Well, obviously within that category we are trying to get out of as much land as we have. I think there's a slide in there that shows that breakdown. I think that the variation is going to be in some of the construction, that's commercial construction where we are the construction lender and may have a mini perm or it may be a build to suit. You know, there are fewer and fewer of those projects coming out of the ground, so I think you'll see some natural reduction in that part of that book.

I think we are going to continue to be pretty aggressive or as aggressive as we can in getting the land and land development book down as much as we can. That's a strong statement, but I would expect us over time to see that continue to shrink.

Okay, and as we think about that kind of in conjunction with the balance sheet growth beyond 2010, Terry, what are your expectations once we move out of this cycle?

Long-term I continue to be very optimistic about the markets that we serve, both Nashville and Knoxville. When I say that I think economically they will do better than the nation. You have heard me say a number of times my outlook about the economy is that I view job growth to be the principal thing that is required to get economic recovery and Nashville has for 20 years I think outperformed the nation. They do it largely on the strength of being a great spot for corporate relocations.

And so my belief is over time Nashville will continue to outperform, as will Knoxville what the nation can do from a job growth. And so again, the economic landscape ought to improve here. I think there was a recent Forbes rating of Nashville as one of the faster markets to recover.

So from an economic standpoint, I would be optimistic and then from the competitive landscape, those are really the two variables. You know, the competitive landscape continues to be attractive and our position in these markets continue to be attractive. I think in Nashville, we continue to be the largest locally owned bank in a market that's dominated by three regional banks, all of whom have negative share trends.

I think Peyton asked the question earlier, is it getting better? I don't think it is and Knoxville is really the same phenomenon. In two years we've moved into the top 10 from a market share standpoint there. We have targeted a top-five market share position.

And so not to ramble on too long, but over time I would expect that we will move back to a higher growth profile than where we are now, where we will be over the next year or two. But I would say that at this point in the maturity cycle there will be a greater emphasis on profitability than pure balance sheet growth than what we exhibited through the first 10 years.

Okay, then a couple questions for Harold. Harold, you mentioned the loan pricing moving up to the 5% plus range. Is that a function of employing floors into loan pricing or is it more of wider spreads?

Well, I think the biggest impact might be those floors, Brice. We are still able to get floors in the 5% range if not higher, but we are getting to be fairly successful on increasing spreads. And so that will be the point of emphasis to our salesforce for the rest of this year is to push on those spreads and get those as high as possible and probably end up reducing the amount of the floor so that we will offer borrowers maybe a lower floor but higher spread and try to entice them to go into the spread bucket so that when rates do begin to increase, we're able to benefit from that.

Okay, do you have any idea what -- I guess dollar amount of loans with -- that are currently at their floor is?

It is about $1 billion.

Then last question, you mentioned wanting to reduce wholesale borrowings, brokered deposits. Where do you think that level of dollar amount is at year-end 2010, whether it be FHLB advances plus broker deposits for either one?

Yes, the Federal Home Loan Bank advances will come down slightly. The brokered number will probably go -- I think we're at about a 9% level at the end of June -- at the end of December. We ought to be able to get that number down into the low 5s by the end of next year.

Okay. Thank you, guys. I appreciate it.

That does conclude our Q&A portion for today's call. I'd like to turn the call back over to Mr. Turner for any additional or closing marks.

Thanks. We appreciate you being involved with us on the call here this morning. I think just trying to think back through the call hopefully what we've got communicated is that we are aggressively working on these credit issues. We are seeking rapid resolution on problem assets and very importantly, we are remixing the portfolio, trying to reduce exposure in the largely acquired construction and development area and dial it more toward the organic growth and C&I, which has been the wheelhouse of the Company.

Specifically we are managing loan growth to a much lower level. I think you should anticipate 5% or less. On growing the core earnings capacity of the Company, we believe that we are making great headway on core deposit acquisition and specifically driving out the margin both using the loan pricing side as well as the cost of fund side to advance the margin. Those will continue to be important initiatives for us in 2010 and again, you ought to expect meaningful growth in net interest income during 2010 as we focus primarily on profitability as opposed to growth.

So hopefully we have been effective in getting that communicated. Thanks for joining us. Have a good day.

That does conclude today's call. Thank you for your participation.