Pinnacle Financial Partners Inc (PNFP) 2010 Q1 法說會逐字稿

Good morning, everyone, and welcome to the Pinnacle Financial Partners' first-quarter 2010 earnings conference call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer. He is joined by Mr. Harold Carpenter, Chief Financial Officer, and Mr. 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 66330391. Please note, Pinnacle's earnings release and this morning's presentation is available on the investor relations page on their website at www.PNFPcom. This webcast will be available on Pinnacle's website for the next 120 days.

At this time, all participants have been placed on 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 factors that may cause 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 to not put undue reliance on such forward-looking statements.

A more detailed description of these and other risks is contained in Pinnacle Financial's most recent annual report on Form 10-K. Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events, or otherwise.

In addition, these were 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 reconciliation of the non-GAAP measures to comparable GAAP measures will be available on Pinnacle Financial's website at www.PNFP.com.

With that, I am now turning the presentation over to Mr. Terry Turner, Pinnacle's President and CEO.

Thank you, operator. Good morning. As you know, we released quarterly earnings last night after the market closed reflecting a net loss of $0.16 per share. As we walk through the presentation, to help you understand what we're focused on, I think you will see the same two important themes that we have highlighted the last several quarters. Number one, we continue to aggressively deal with credit issues; and number two, we are successfully building the core earnings capacity of the firm.

As it relates to aggressively dealing with the credit issues, I think one of the most critical initiatives has been the intentional reduction in our construction portfolio. It is down $38 million this quarter, and down $159 million or almost 25% since year-end 2008.

In the first quarter, we did increase our allowance from 2.58% million in the fourth quarter to 2.59% in the first quarter. I would expect continual increases in our allowance account for the better part of the year. That conclusion is based solely on our anticipation that the economic recovery will be slow and will impact our borrowers for a good part of the year.

First quarter's net charge-offs on an annualized basis amounted to 1.74%. That is consistent with last year's amounts and frankly more than I had anticipated for the first quarter.

Our current internal charge-off projection is that this year we should experience approximately 1% to 1.25% in charge-offs. That again is based solely on internal modeling with a good number of assumptions built into it. So obviously, our goal or objective is to minimize that number.

I want to point out that including accruing restructured loans, we actually saw a decrease from $181.5 million at year-end to $166 million at March 31. We also reported NPAs, exclusive of restructured loans, increase from 4.29% in the fourth quarter to 4.45% in the first quarter. In dollars, NPAs exclusive of restructured loans are up about $1.8 million, roughly 1% on a linked-quarter basis.

We continue to see meaningful resolutions of NPAs. During the first quarter they amounted to approximately $33 million.

The second major theme is that we continue to focus on increasing the core earnings capacity of the firm. The two major sub-themes, if you will, are growing core deposits and expanding the net interest margin.

We continue to grow core deposits at a dramatic pace. The year-over-year core funding growth rate was 44% annualized during the first quarter at 14%.

Consistent with our focus on growing core deposits, we continue to invest in the future growth of the firm. Four new branches; 33 FTEs in customer contact roles.

Our year-over-year net interest income growth was 27% from first quarter last year. We continue to see margin expansion. This is now our fourth consecutive quarter of margin expansion, which we would expect to continue for the remainder of 2010.

Loan balances are about flat from last year. We believe loan growth will remain flat to down this year. There are really three primary influencers there.

Number one is our focus on problem resolution, of course. That is impactful in that not only are we moving loans out of the banks or collecting difficult credits, but we also have a huge resource allocation to resolving those issues.

Number two is the intentional reductions in our construction and development portfolio.

And number three is weakness in loan demand in general. I would say that loan demand is as weak as I remember. Harold will break some of that down further in just a minute, but let me focus on asset quality first.

As we have mentioned in previous earnings calls, one of the most significant initiatives 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.

Here we are comparing the broad portfolio components at 3/31 with those at year-end '09 and year-end '08. As you can see on the top line, we have significantly reduced exposure in the most problematic category, construction and land development, by $159 million -- as I mentioned a minute ago, more than 25%. I believe that shift away from construction and land development back to C&I is one of the most constructive things we can do to produce sustainable asset quality.

Regarding C&I, you can see a decrease of roughly $38 million there during the first quarter. The influences I just mentioned are generally in play, meaning that potential problem resolutions and weak demand are impacting that line item. Our line utilization continues to shrink there.

I might also comment, most of you know we generally look at CRE owner-occupied as really a C&I credit. We are financing the business's building and securing it with real estate; but we are actually underwriting the cash flows of the business. As you can see we had roughly an 8% annualized growth rate in our owner-occupied commercial real estate during the first quarter.

Let me talk just a minute about the commercial real estate market in Nashville. I will start you out on the top of the slide. Here are the market vacancy rates. In general, we continue to believe Nashville is an average performer. There are a lot of markets that are better and a lot that are worse.

I think it is fair to say that the vacancy trend would continue to be up in all four categories. But we still don't believe the vacancy rates are particularly problematic, especially when you compare those to the US vacancy rates. Nashville continues to outperform there.

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

In a number of these presentations I've walked through the typical credit extensions that we make in each of these CRE categories, so I won't do that again. But just a quick reminder that our income-producing CRE is a typical community bank portfolio. In other words, we don't have any high-rise downtown office buildings, no malls or trophy retail projects, and so forth.

Looking at the past dues and nonperforming loans for each of the basic loan categories, the three leftmost columns contain the 30- to 90-day past-due information for Pinnacle this quarter, fourth-quarter '09, and third-quarter '09; followed by the highlighted column in the center, which is the 30- to 90-day past-due percentages for our peers. We are using the peer group for greater than $3 billion banks in the fourth-quarter UBPR, which is the most current information.

On the right half of the chart, you got a similar comparison of the greater than 90-day past-dues and nonperforming loans for our first-quarter 2010, the fourth quarter of '09, and then the third quarter of '09; followed by the 90-day past-due and NPLs for our peers at year-end.

As you can see, our past dues increased here in the first quarter. We have two or three large construction and development credits where we have in place various resolution plans that are intended to come to fruition during the second quarter.

As an example, one large developer has several stalled projects but has sales contracts on two of them. So if the contracts ultimately close as planned, we will have resolution. If they don't close as planned, it will be a more difficult workout.

So I guess in the best case, these borrowers will perform consistent with plan and make meaningful paydowns during the second quarter. Of course, the worst case is we see increases in EPL and have to begin the foreclosure process on those projects.

At 3/31, nonperforming loans totaled $131 million. That is 3.78% of loans.

The pie chart on the right of the slide there contains a breakdown of NPLs. As you can see, by far the largest components of NPLs are land development and residential construction.

Our OREO totals $24.7 million. That brings the NPAs to $156 million or 4.45% of loans and OREO.

On this chart we try to give you some sense of the granularity. It is a fairly detailed breakdown of our largest NPLs. I hope the color information is helpful.

Number one on the list is an $11.7 million retail shopping center where we are actively pursuing various remedies. We are currently optimistic that at least partial remediation of this credit could occur fairly soon. This is one that has been on the list for several quarters.

Frankly, this is one where our borrower has a sales contract. The purchaser has been approved for financing; there have been some delays associated with some required zoning changes. But again, we are optimistic that that will work through to a successful conclusion probably during the second quarter. Could slip to the third quarter, but my expectation is second quarter.

The second-largest NPL is a $10.9 million exposure to a downtown condo developer here in Nashville. This is one of those projects that is not performing consistent with its original pro forma. However, it does continue to be a viable project.

We have received nearly $6 million in paydowns over the last year. At my last report they had sales contracts on three units and continue to expect future sales based on relatively high current foot traffic, even though that project is moving slower than originally planned.

Number three on the list is new to the list. It is a builder developer. We are frankly likely to begin the foreclosure process during the second quarter to remediate this problem.

Number four is a residential developer. It has been on the list. The borrower had filed for bankruptcy protection. We petitioned for and received release from the stay just last week. So we will be moving forward with foreclosure in the next month or so on that one.

Number five is a $6.8 million condo developer here in Nashville. It is similar to the other condo development in that it continues to have activity, albeit slow.

Then once you get beyond that, there are really 275 accounts that make up the remaining nonperforming loans.

On this slide, there is some detail on the OREO book. The point of the slide is that the OREO balances are broadly covered 114% by generally current appraised real estate values. We anticipate continued increases in OREO over the next few quarters.

You can see some of the bullet points at the bottom of the slide, so I won't read those to you. But I do want to point out that we currently have under contract about $5 million of the $24 million or roughly 20%. So we look for progress there.

Five OREO projects comprise 40% of the OREO balances. Four of the five were acquired during December, so these are current events. Four of the top five are residential subdivision development projects; the other is a residential home. So you see that we continue to have difficulty with the residential real estate category.

During the first quarter, we only had about $11.4 million in OREO dispositions. That is down from previous periods, primarily as a result of borrowers filing for bankruptcy protection.

The loss rate on the sales was approximately 10%, 10.5%. So generally our marks have been decent, and we anticipate increased dispositions in the coming quarters.

On this slide I want to talk about net charge-offs. We experience $15.1 million in net charge-offs during the first quarter, approximately $6.9 million of that in residential construction and development. These five credits shown on the slide make up approximately 43% of the quarterly charge-offs.

You can see there the first one was a developer. I will tell you that it is our policy for collateral-dependent loans and OREO that we seek to have appraisals that are updated at least within nine months. So we had a number of appraisals that we collected during the first quarter, several of which resulted in writedowns.

That is the case for that first line item there. It was really a mark to a current appraisal.

You can see the second line item there is a residential development, again where we sought a current appraisal and marked to market there.

The third line item (technical difficulty) Chapter 11 bankruptcy which has been started; it'd literally just been filed in the last week or so. So we're early in that resolution.

The fourth line item there is a C&I credit. It is a retailer of fitness equipment. There are a number of issues with that borrower, so we have written that to the current collateral value.

Then the last item there is a commercial development where again we are marking to a current appraisal. So this phenomenon of gathering current appraisals and seeing marks to decrease valuations is very impactful here.

Harold, I think I will stop there and turn it over to you.

Thanks, Terry. I will briefly cover capital funding and some brief comments about our first-quarter margin. As you can see by this chart, our capital ratios remain strong as of the end of March. With the reduction in loan balances we saw our ratios actually increase linked quarter.

As to funding sources, I know this is a lot of information but there are some real positives in this. Similar to what is going on in our construction and development book, we continue to be excited about the transitions we have made in our funding base over this year as we continue to reduce our reliance on wholesale funding sources. Even though competition for our deposits remains intense in our markets, our sales force has been very effective in gathering core funding.

As the chart indicates, core funding is up $89 million since the end of last year. We believe we will continue to reduce our reliance on wholesale funding, particularly broker deposits and Federal Home Loan Bank borrowings, in a meaningful way. We have also initiated several new core deposit growth initiatives including the enhancement of our treasury management services and some limited new retail deposit growth initiatives in some of our communities that we serve.

Concerning margins, the chart details the quarterly trends of our net interest income and our net interest margin. As you can see, our linked-quarter net interest income between the fourth quarter and the first quarter was down by approximately $0.5 million. Substantially all of this was to do to the reduced loan volumes.

This is also during a period of elevated non-performing assets; and as Terry mentioned, we remain focused on reducing our nonperforming asset base in order to return to those assets to performing status.

As an FYI, during the first quarter we reversed $475,000 in accrued interest related to new nonperformers, compared to $800,000 in the fourth quarter of last year. So that would be a positive development.

We finished the quarter with a 3.25% margin, slightly less than we had anticipated, but what is now our fourth straight quarter of net interest margin expansion.

Now just to summarize, our core funding emphasis has helped us drive lower funding costs, thus increasing our margins. NPAs will impact our margins throughout 2010. And lastly, and as the last two slides will indicate, we will be working on variable rate loan pricing opportunities and continued repricing of 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 we have about $525 million in loan balances that will mature or renew within the next six months that are currently priced at below 5.25%. Obviously, our objective would be to take these loans currently priced in the high 3s and low 4s into more than 5.25%, primarily by getting the appropriate floors on loans and increasing the spread to index on variable rate credit.

As to the CD book, our second margin improvement opportunity continues to be with the upcoming maturities in CDs. The $467 million represents about 30% of our CD book. And as to client CDs noted above, you can see mid-2s would reprice 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.

Lastly, this chart signifies the progress we've made on core funding. As you can see, we have had steady quarterly growth in core funding since the second quarter of last year, while at the same time we have seen meaningful reduction in our funding costs.

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

Thanks, Harold. I think really just to put a bow on what we have talked about, we are continuing to aggressively address problem credits. It is our expectation that there will be modest (technical difficulty) building throughout 2010.

We continue to pursue meaningful NPA resolutions and are making good progress on that front. You should expect continued reductions in our exposure to construction and development.

We are fortunate to serve very attractive markets. We are seeing some signs of economic stabilization and recovery in both Nashville and Knoxville. We continue to find great opportunities in terms of competitive vulnerabilities.

We are particularly focused on growing the core earnings capacity of the Company. And I think within that, specifically on continued core funding growth, which we believe will continue at a double-digit pace through 2010 and continued margin expansion and throughout 2010.

Operator, I will stop there and we will take questions.

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

Guys, just a quick question or two. First, Terry, if you could just clarify what you said about net charge-offs outlook. I think you said 1% to 1.25%. Is that for the full year? Is that over the balance of the year?

Then secondly, if you can just walk me through the change that occurred linked quarter in nonperforming assets. It looks like there was a big decline in restructured accruing loans.

I was just curious. Did that decline reflect them moving into non-accrual or were some of the sales or dispositions related to those loans? Thanks.

Kevin, on the net charge-offs, we're talking about a full year net charge-off rate. In other words, for the year of 2010 we would expect net charge-offs to be in the 1% to 1.25% range.

Okay, thanks.

Kevin, this is Herald. On the restructured accruing credits, I don't know of any that moved into nonperformers when I looked at that list. Most of those credits are performing according to the restructured terms and have been doing that now for probably five to 10 months as far as those credits.

So they have been moved out of the restructured bucket into the performing bucket, if that makes sense.

Okay. Maybe I just want to -- let me ask it a different way. Like the restructured accruing loans, if they are already accruing do they still get labeled as restructured even though -- ? Because I know nonaccruing restructured loans, if they perform for six months, can return to accrual. But if they are already restructured accruing loans, I am just trying to get behind what the decline was.

Did those loans go away? They were part of the sales? Or do they no longer get considered as restructured after a certain period of time? Just curious on that.

That's exactly right. They are no longer considered restructured.

Due to a certain period of performance?

That's exactly right.

Okay, all right. Thank you.

Steve Moss, Janney Montgomery.

Good morning, guys. I want to start off -- just what was the source of the increase of potential problem loans here quarter-over-quarter? If you gave a little color on the mix of such problem loans.

Hold on, Steve. I am pulling out my list.

Okay.

Steve, while he is looking for the detail notes, I can tell you from 30,000 feet that the growth in that category is largely land and lots.

Okay.

That is where the -- we continue to struggle with that part of the portfolio.

The one other thing to ask about, with regard to OREO expense, was that mainly from dispositions or just more writedowns during the quarter?

That expense would have been a little more skewed to appraisal write-downs than loss on disposition.

Was it just from one or two loans? Or was it fairly across the board in terms of severity?

I think the answer to the question on that, Steve, in terms of the large writedowns is it was largely in a couple of loans. I think during the quarter we received 33 updated appraisals, again trying to remain inside our policy guidelines of refreshed appraisals every nine months. So I think we saw 33 appraisals, if my memory is right.

So of the writedown there, the largest was in a couple, although a good number of loans had very modest writedowns. I mean in some cases you're talking $10,000 and $15,000. So a good number of loans had writedowns, but only two what have had what I would describe as meaningful writedowns.

Okay. All right. Thank you very much.

Jefferson Harralson, KBW.

Thanks, good morning, guys. I want to ask you about the appraisal writedowns. Do you think that land values have stopped going down in Nashville? If so, when?

And how does that relate to the next upcoming quarters and what we should expect from the impact of updated appraisals?

Jefferson, as you know too, it's hard to see when you are there or in advance of when you are there that you have seen the stoppage in appraisal value decrease. But I would say that if you listened to what I was just talking about there, if you had -- you collected 32 appraisals there and you had two that had meaningful writedowns, that is a dramatically different pace of writedown than we would've been experiencing 12 months ago.

So from that perspective I would say that it is better. Of course, you know how this works. Obviously, it is a function of discount rates going up, absorption rates going down. I don't think we ought to look for anything too dramatic from where we are currently seeing discount rates and absorption rates.

But it wouldn't shock me to have some volume of that. Again, I don't look for a dramatic volume of it, but I would say there would probably be some volume of it.

I think when you think about the second quarter I would expect it to be meaningfully less in that the number of borrowers for whom we need to extract current appraisals is dramatically less than it was during the first quarter.

All right. I want to ask you a question about capital. I guess like almost every bank, the regulators are asking you to keep 200 basis points over the well-capitalized minimums of the bank's sub.

Did the bank's sub stay over those levels this quarter? Did you downstream some capital to the bank sub? And does that I guess regulator action change your capital plan at all?

I think relative to the first quarter, we were above all those thresholds and required no downstream in the capital. I think relative to the ongoing capital plan of the Company, we continue to believe that we have lots of capital.

Of course, a portion of that is in the TARP. It is our desire to repay the TARP when we can.

I think, Jefferson, you and probably most people have heard me say what I want to see before we seek to repay that is stabilization. Several quarters of stabilization in the economy. Several quarters of stabilization or really downtrend in our NPAs.

But we continue to have the bulk of those proceeds available to repay TARP in the event that we can get that improvement in economic trends and nonperforming asset trends.

Right. All right, thanks. My final is, was the bank sub profitable this quarter?

No. It is going to report a loss here in the first quarter. The capital ratios though, Jefferson, just to tie that all up, they did accrete during the first quarter. I think the Tier 1 leverage for the bank is going to be around an 8.65% number. And the total risk-based capital for the bank will be about a 12.55% number.

All right. So they increased?

Yes.

All right. Thank you.

Kevin Reynolds, Wunderlich.

Good morning, gentlemen. Hey, a couple of quick questions for you on two separate topics here. On your loan and deposit repricing slides, Harold, I think you addressed those. What sort of retention rate do you expect as you reprice these? Because -- as you move those prices higher on loans and down on deposits.

How would that kind of retention rate that you might expect compare to what you have seen in the last few quarters? Or would that be exactly the same, just taking past performance and moving it forward?

Kevin, I will take that one. I think there is probably greater variability on the deposit side than on the loan side. Generally in the case of loans, you've got an FA who is in there, face-to-face. When I say FA I mean a Financial Advisory or a relationship manager face to face with a decision-maker, negotiating rates and so forth.

I would say, just to be honest, Kevin, there was probably a time we wouldn't let a bank take a credit away from us based on nothing but price. In other words, if we wanted it we would take it and we would match price if we had to. Today, we don't exactly do that.

I would say we probably will lose bids on -- I don't know; this is just a guess, Kevin. I would say it would be 5% or less. But there would be some attrition of loans that get moved because of price.

Of course in the case of the CD pricing, we have really tried to walk away from jumbo CDs, nonrelationship CDs, all those sorts of things. We are having success really easily meeting the funding needs of the Company and swapping out nonrelationship CDs for relationship CDs. I would say we will retain nearly all of the relationship-based CDs.

Okay. Another question I guess on another topic. On expenses, the salaries line, I was trying to keep up with you in the call; I apologize if you already addressed this. The salaries line was up pretty significantly sequentially. I know there is some degree of seasonality and there's probably some degree of run rate in that.

Can you break out that number and tell us what ought to be expected as run rate as we go forward versus the seasonal items that might hit in the first quarter?

Yes, I think as far as the seasonal items, the only thing that is in there that will decrease over the next few quarters is obviously payroll taxes. Probably on a run-rate number that is anywhere from $200,000 to $400,000.

You will see a big decrease in the first quarter in payroll taxes because of unemployment obviously. But after that the run rate ought to stabilize.

Okay. I guess if I can one last question. You may or may not be able to answer this one.

We have been sitting here with a minus sign in front of the number for a few quarters. Based on your expectations for charge-offs in the 1%, 1.25% range and I would assume modest reserve building -- so if you work your way through that you should make quarterly progress towards the breakeven level.

But in this economy the way it sits right now, with no magical improvements, how far away do you think you are? We have had some of our banks with credit challenges talk about this. How far away do you think you are from being able to post that breakeven quarter that leads you to believe that you are on the other side and that is a sustainable breakeven kind of number?

Well, Kevin, I am not sure what I can say on that. We've got models that show what we think our credit costs are going to be this year. Terry has talked about the 100 to 125 basis points in charge-offs. We were at 174 in the first quarter, so obviously we are telling you that for the remainder of the year we don't think that number is going to be quite as large.

As to breakeven, I can tell you that we are still accruing for an incentive at the end of the quarter, and largely our incentives are based on EPS targets. So I will tell you that we think it's going to happen this year.

Okay. Going back to the TARP question, Terry, you said when you feel comfortable given the developments in the economy and with your own numbers. Would you consider a TARP repayment shortly after you get to that point? Or would you need several quarters of being on the other side of the Mendoza Line to do something?

Yes, I think what I have tried to say -- I wouldn't do it just because I had an increase in median home price one quarter and my NPAs went down 3 basis points. I mean again, I would want to see two or three quarters where there are things that -- such as median home price; more importantly, volume of home sales, those sorts of things are -- you have positive traction in.

And as I said, the most important indicator to me would be my own nonperforming asset trend. So I would say two to three quarters, Kevin.

Okay. Thanks a lot.

Andy Stapp, B. Riley.

Touching on Kevin's questions about salary and benefits cost, with regard to loan workout personnel, do you think you are fully staffed there to handle the issues you foresee?

Yes, Andy, I think we've added -- this time last year we probably had 10 people in that group. This time now we've got almost 30.

We think we're fully staffed. We think we are okay as far as capacity in that group right now.

Okay. Can you provide some color on what you are seeing in the local economy? I know Nashville unemployment wait just a few months ago was well below the nation. But it has risen substantially, and in February is in line.

Yes, I guess there are two or three things I think that go on and have caused that to be a little more volatile. I think we have mentioned this before, Andy.

In Nashville, since the last recession we do have a meaningful presence of auto manufacturing. There is a Nissan plant in the MSA. There is a Saturn plant in the MSA that was actually producing a GM SUV that is now not in production. They're actually making parts there, but not making cars there.

So that phenomenon, along with the attendant car suppliers has been a meaningful impact here in the market and I think caused some volatility. Frankly, more volatility than Nashville has typically seen. But I am not sure I could give you any other color commentary.

Okay. Does the bulk of your asset quality continue to relate to credits inherited in acquisitions? Or have you also seen some meaningful deterioration here in your legacy portfolio?

Yes, I would say that the vast majority of the losses that we continue to take have continued to come from acquired portfolios.

Okay. You have a long-term goal in mind that you are targeting for your net interest margin?

Andy, we have got several metrics that we are targeting, including net interest margin. But we do believe -- what I can tell you is we believe we will still be able to accrete this margin over the course of the year.

We were expecting a larger increase in the first quarter, but we ended up at 3.25%. So we are hopeful that we can get some improvement for the course of this year.

In each quarter.

Okay. Thank you.

Mac Hodgson, SunTrust Robinson.

Good morning. The tax benefit in the quarter was a little less than I would have thought. Was there anything going on in the tax line?

Well, Mac -- and I know you know this -- but the rules say that we are supposed to accrue to an effective rate for the whole year, regardless if it is an income or a loss. So the 12% to 13% is how that math all kind of came together for us.

Okay.

You know, the statutory rate for us is about 39%. What you have are all these tax deductions that we get tax credit for that reduced that rate here in the first quarter.

Okay, got you. Terry, you made a comment during the presentation that you expect continued increases in the allowance account for the rest of the year. I know the actual dollar amount of the reserve declined slightly.

So are you speaking about the ratio increase and are actually building reserve for the rest of the year?

Well, I am actually -- I guess technically when I said that I was speaking that we would build the ratio of the allowance to loans. But I would say candidly you will build the dollar volume. I don't think it will be a dramatic build in the dollar volume; but it would technically be higher by year-end.

Then following up a little bit on Jefferson's question, I know you mentioned you didn't downstream any cash from the Holding Company to the bank. Remind us what the cash level was at the parent Company?

At the end of last year it was about to $99 million. At the end of the first quarter it is a little higher than that, just because of some tax refunds that we will end up owing the bank.

So I think right now, after it is all said and done we ought to be at around a $90 million to $92 million level at the Holding Company.

$90 million to $92 million?

Yes.

Okay, got you. I know you talked about this a bit. Just on the margin again. I know the margin was [3 30] in December. I know you mentioned that the margin wasn't quite as high -- strong as you guys thought it would be this quarter.

I guess, was that just a factor of some increasing nonaccruals and the shift in the earning asset mix? Would you expect maybe a similar rate of increase in the margin for the remaining quarters this year?

Yes, think we will get margin accretion. I don't think it will be a lot, but I think you are probably hitting on it as far as the rate of increase that we are looking for.

Okay, great. Thanks a lot.

Michael Rose, Raymond James.

Hi, good morning, guys. Just a quick question. I notice that the loan balances in Knoxville had declined a little bit. Could you extrapolate that a little bit?

And then how does that play into your outlook for the year in terms of loan growth to be flat to down?

In the case of Knoxville, I believe that -- you obviously have line paydowns and credit movement. But I don't think there is anything extraordinary going on there relative to paydowns.

And I would expect us to continue to have pretty dramatic growth in Knoxville. In fact faster than the franchise as a whole.

Okay, that's helpful. Thank you. Most of my other questions have been answered.

Bryce Rowe, Robert W. Baird.

Thanks, good morning. I think most of the guys hit my questions. I've just got a quick one for Harold. Harold, did you say what the bonus accrual was for the first quarter?

No, I didn't; and I am not really anxious to tell you what that number is. But there is some amount of money set aside for bonus accruals.

Last year we didn't pay any incentives. So we have got some more -- we've got an incentive pool that we are starting to restore now. I appreciate the TARP rules won't allow the named executive officers any cash bonuses; but we are in fact accruing some amount of money this year.

Okay. Then the 30 people within that loan workout group, when we move to the other side of this credit cycle, do you anticipate those folks moving to other capacities, other functions within Pinnacle? Or would you expect them to move away from the Company, if you will?

Bryce, I would say out of that pool of roughly 30 people that are working there in special assets, I would say two-thirds of those people are former line lenders, so their move back would be pretty easy.

Okay.

A number of those people are longtime, long-term workout specialists. So you will have to find a way for them to continue in the workout field.

Right. Okay. Thanks, guys.

Carter Bundy, Stifel Nicolaus.

Good morning, everyone. Most of my questions have been answered, but I have a couple quick few questions here, if you all are still there.

Terry, I heard you say that two relationships drove the past-due increase in the quarter and was wondering if you could provide the balances on those two relationships.

The largest one is roughly $15 million; and the second-largest one would be roughly $10 million.

Okay. Then, Harold, a question on the other non-interest expense line item. It looked like it was meaningfully up linked-quarter and year-over-year. I was just trying to get an idea from a run-rate perspective. Longer-term, how much of that line item could we assume is environmental right now?

I'm sorry, Carter. Go back and tell me which line item you are looking at.

The other noninterest expense came in at $6.2 million in the quarter.

Yes, I think you are probably on a pretty good run rate. Or we think we are on a pretty good run rate at that line.

A lot of meaningful credit-related costs are in there, legal and appraisal and all that stuff. We think that is still going to pour in here.

Okay. So a decent amount then would be environmental-driven right now?

Yes, that's right.

Okay. Then on the -- I guess a last question would be, what was the gross loan production in the quarter?

I'm not sure I know that number. I am looking at a sheet of paper now that tells me that we booked $91 million in new loans. I am sure that that has got a lot of renewals in it and some other things. But that is what I have on kind of a roll forward.

Okay. Then, Terry, last question. If you could talk just a little bit about what you're seeing with cap rates in the commercial real estate market in Nashville and Knoxville, it would be wonderful.

If it's okay, I'm going to let Harvey White, our Chief Credit Officer, comment on that.

In both markets I would say what we're seeing in the appraisals is cap rates being just up slightly for Class A; and we're seeing most of the increase in the lesser, the B and C type of space. So really in the Class A space it really only slightly increases.

Okay. Thank you all very much. Appreciate it.

Ben Harvey, Stephens.

Good morning, guys. Actually all my questions have already been answered. Thank you.

I am not showing any further questions. I would now like to turn the program over to Mr. Turner.

All right. Thank you, operator. I guess really I would just reiterate here you ought to expect from us going forward a continuation of those two principal themes. We will be pounding away on credit issues and believe that we'll see an acceleration on dealing with some of the nonperforming assets through the OREO cycle here in the second quarter.

And you ought to expect that we will continue to expand the core earnings capacity of the Company. We look for strong growth in core deposits and continued expansion in the net interest margin. Thanks so much.

Ladies and gentlemen, this does conclude today's program. You may now disconnect and have a wonderful day.