Pinnacle Financial Partners Inc (PNFPP) 2009 Q1 法說會逐字稿

Welcome to Pinnacle Financial Partners first-quarter earnings conference call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer. He is joined by Harold Carpenter, Chief Financial Officer.

Today's call is being recorded and will be available for replay beginning at 12 o'clock PM Eastern standard Time. The dial-in number is 800-322-9079 and enter PIN number 90428666. The webcast will be available on Pinnacle's website at www.PNFP.com/events for the next 90 days.

At this time, all participants have been placed in a listen-only mode, and 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. 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.

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 may be available on our Web site at www.PNFP.com.

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

Okay, thank you so much for joining us this morning. This is our first time to actually conduct a quarterly conference call. We decided, in 2009, given the size of the Firm and the growing number of analysts that were covering the stock, we would begin to utilize a quarterly conference call methodology. I will say I've questioned Harold a time or two about why we weren't doing this when the news was a little better.

I would say that this morning we have set aside about 45 minutes for this. We will try to run through the presentation quickly and leave plenty of time for questions and answers. We are a little pressed for time in that we've got an annual shareholder meeting this morning as well.

I expect that everyone has had time to review our press release. I think it's apparent from that that we are seeing continued economic deterioration, particularly in real estate, and that those conditions are beginning to weigh on some of our borrowers. We believe that we are aggressively and effectively dealing with these credit issues.

Specifically, we have significantly increased our reserve to a 1.30 total loans. That's up from 1.09 at year end. We have reassigned problem credits to our most experienced workout specialists. While credit issues have escalated, they continue to generally outperform the industry.

Importantly, we continue to rapidly grow the balance sheet, topline revenues and pretax, pre-provisioned capacity of the Firm.

In the first quarter, net income was $643,000 compared to $6 million the same quarter last year. That translates to $0.03 in fully diluted EPS compared to $0.26 in the first quarter of '08. I also want to point out that $0.03 in fully diluted EPS includes $1.450 million of preferred stock charges associated with the TARP.

Our client acquisition balance sheet growth opportunities remain very strong. Loans were up $119 million, which is an annualized growth rate of about 14%. Our pipelines remain very strong for the second quarter as well.

As I mentioned at the outset, we are seeing some slippage in credit-quality metrics from our traditional levels but, by comparison to peers, credit quality metrics remain really do remain relatively good. Non-performing assets are at 1.54%. Annualized net charge-offs are at 56 basis points. The allowance has increased to 130, which covers nonperforming loans by approximately 134%.

Our capital ratios remain strong as of the end of March. As you may know, we received $95 million in proceeds from the U.S. Treasury's capital purchase program in December of last year. During the first quarter, we recorded $1.045 million in charges related to the capital purchase program which negatively impacted EPS during the quarter.

We continue to explore repayment of the TARP funds to the treasury. As we've stated previously, our position on repayment is to gain more clarity on the length of the current credit cycle so that we can make a more informed decision on repayment of these funds. A most likely scenario, should we choose to submit for approval to repay the funds and be granted approval, we would, in conjunction with the repayment, need to supplement our capital base in some way, most likely through an offering of common stock of some amount up to but not likely more than $95 million.

Of note is that our parent company still has a lot of liquidity on its balance sheet with approximately $85 million in cash as of the end of March.

During the first quarter, we entered into several transactions where we sold approximately $250 million of investments in basically all investment classifications. This $250 million sale resulted in a net realized gain on the sale of these securities of approximately $4.3 million during the first quarter. At March 31, the unrealized gain in our AFS portfolio remained at approximately $14 million.

As you might expect, we are experiencing significant paydowns on our mortgage-backed securities. In March, these paydowns provided approximately $20 million in cash flow.

As to 2009, and given this diluted effect of the TARP funds, we will likely continue to build our bond book modestly for the remainder of the year in order to continue to neutralize the dilution of the TARP.

Moving now to loans, let me make one quick comment on the asset classes that we've avoided, which include subprime mortgages, indirect auto, credit cards, student lending, and for the most part SBA loans. We are thankful not to have participated in those asset classes.

Now, let me spend just a minute on the diversification in the portfolio. I will start you out with the orange section on the left of the pie. C&I remains our largest class. In my judgment, it can be combined with the owner-occupied CRE since, for those loans, we are underwriting the cash flows of a business, not a rental or lease income stream. Looked at that way, the C&I risk totals almost 40% of loans.

Continuing to move counterclockwise, you can see that income-producing commercial real estate comprises 16%, consumer real estate 20%. Finally, the all-important construction, development and land portfolio makes up roughly 19%.

This chart is intended to show you the movement in outstandings in loan categories from quarter to quarter. Generally, there was not too much change in the percent of the portfolio that the various categories make up. But the biggest change was in owner-occupied commercial real estate, which as we've just discussed we view to be effectively a C&I risk. That said, however, we did see increases in most of the broader real estate categories. The most important category that I think is worthy of more color commentary is the increase in the C&D and land.

But before we go to the next chart to get a further breakdown, I also want to make the point that what you are looking at here are outstandings, not commitments. In the case of construction, land development and acquisition category, while outstandings did increase during the quarter, the commitments actually declined quarter to quarter.

Now, breaking the outstandings in construction, development and land down further, looking at the changes from quarter to quarter, you can see that we shrank our outstandings in both speculative and custom residential construction, as well as residential land development, which are the categories that we view to be the most difficult right now.

In the case of the residential condos, that growth is in existing projects, not new loans. In other words, there were no new loans in that category, so we feel like we are successfully trimming exposure to residential real estate.

The growth categories are commercial construction and commercial development. That growth is primarily accounted for by the fact that, over the last year or so, we've hired one of the best commercial real estate lenders in Nashville and one of the best in Knoxville, so as our strategy has been there largely consolidating their key clients to Pinnacle.

Hopefully, that will give you some insight into the diversification and trends within the various categories.

Now, I'd like to switch gears and focus a little more on our asset quality metrics. On this chart, the lightly shaded columns are the 12-08 numbers for our greater than $3 billion peers per the UBPR.

Let me start you out at the bottom of the chart. At the end of the first quarter of '09, Pinnacle had 30 to 90 day past dues of 1.02% versus the peers' 30 to 90 day past dues at year end of 1.45%. Pinnacle had NPLs and greater than 90 day past dues of 1.09% at the end of the first quarter versus the peers' NPLs and greater than 90 day past dues of over 2.28%, more than twice as much.

Moving up the chart, you can see that Pinnacle's C&I category at the end of the first quarter is performing significantly better than peers' at year-end for both 30 to 90 day past dues and the NPLs and greater than 90-day delinquencies. The same would be true for the total real estate line. Breaking that down to its components, CRE loans are performing extremely well. Then at the top of the chart, you can see that our delinquency issues are primarily in the construction/land development category but still markedly better than where the peers were at the year end.

Most of you know that, as a national bank, the OCC is our primary regulator. During 2008, the OCC conducted a large number of focused real estate exams. They conducted one at Pinnacle during the third quarter of '08 based on the 6-30 numbers. In their guidance to us, they asked us to make modifications to our real estate lending policies that had not been suggested heretofore. So during the fourth quarter of '08 and into the first quarter of '09, we made a number of changes in our policies that affect how we treat real estate loans. Those changes require builders and developers to begin amortization of any loan at renewal that is not performing consistent with its original pro forma.

Specifically, for vertical construction, 20-year amortization is required, for land a 10-year amortization is required. Since many builders and developers don't have significant recurring cash flows -- in other words their cash flows are the result of asset sales -- while they might be able to meet their original interest-only requirements of the note, many cannot meet the annual curtailment requirements.

Those changes resulted in the acceleration of risk-rating downgrades in the first quarter of '09 for builder and developer loans, placing more of these loans on a nonperforming status. Of course, an additional requirement for these nonperforming loans is updated appraisals, which at this time might be considered "worst-case" appraisals, given the modifications to cap rates and absorption rates. I probably should say it is likely that this approach could result in similar downgrades during the second quarter.

So, during the first quarter, non-accrual loans grew to $33.9 million, and OREO to $19.8 million. That brings the total NPAs to $53.7 million or 1.54% of total loans and OREO. The largest category by far in nonperforming loans is commercial, construction and land development, making up approximately half.

Try to help you think through the granularity of the non-accruing loans, the three largest NPL's are, number one, a $9.5 million builder/developer relationship; number two, three development loans totaling $4.8 million to a single developer; and number three, a $4.5 million loan to a real estate investor and industrial office park. By the way, all three of those were added during the first quarter. Based on current appraisals, we have reserves of $5.2 million against the nonperforming loan book of roughly $33 million.

Now, moving on to OREO and breaking down that $19 million book, this chart is intended to show you the volume by category and compare that to the aggregate collateral value based on current appraisals. In the right-most column, we've given you the average age of the appraisal in months, again indicating the currentness, if you will, of the valuations. All of these properties are in Midland, East Tennessee. Seven of them would be between $1 million and $2 million with the largest being $2 million.

As in some of the other peer comparisons here, we are comparing Pinnacle's net charge-offs by category to the greater than $3 billion peer group for the UBPR are at year-end. Interestingly, for the first quarter, we substantially outperformed the peer group in total and in every category but C&I, which is traditionally our strong suit. In this case, we had one large C&I charge-off of $1.8 million to a real estate contractor and excavator who derived his principle income from leasing of heavy equipment. So consequently it is a C&I risk that has been impacted by the real estate slowdown.

Switching to the income statement and concerning our margins, this chart details the quarterly trends of our net interest income and our net interest margin. As we've said repeatedly, we are asset-sensitive and have been asset-sensitive for basically our entire existence. We continue to manage certain action plans in order to mitigate our exposure to the current loan rate environment.

As you can see, we finished the quarter at a 2.72 margin. Over the years, we believe we've been great at generating loan growth, and our pipelines continue to be strong. However, the significant amount of commercial floating and variable rate loans on our balance sheet are the single biggest contributor to our low-margin during this rate environment. Approximately 40% of our loans are on daily float and another 25% are subject to variable rate pricing at March 31.

We do believe there is good news at hand. We believe our funding side has performed well during this period of low rates.

Impacting our margin during the first quarter was the obvious increase in nonperforming loans. We are estimating increased NPLs for the balance of this year, so these increases will weigh on our margin for the remainder of 2009 until we get resolution of these underperforming assets.

Our NPAs were approximately 154 basis points at March 31. We are modeling increased NPAs during 2009 and hopefully we will see this number decrease before year-end.

Also impacting our margin this year is that we are anticipating lower yields on our bond portfolio as principled pay-downs on our mortgage-backed are reinvested in lower yields. However, as I said earlier, we are optimistic about our margin. We have a significant investment in 30-day LIBOR-based loans of approximately $550 million; that represents about 16% of our loan book. Many of these loans were priced before the current credit cycle at traditional spreads for high-quality borrowers. As you can imagine, these traditional spreads are very unrealistic today. We continue to experience some pricing leverage with our borrowers and anticipate that, as these loans renew, we will be able to gain better pricing.

During the first quarter, 30-day LIBOR stabilized at around 50 basis points. With the help of loan floors on these loans, we believe we expanded our spreads on these loans from about 140 basis points six quarters ago to more than 200 basis points today, and we believe that number will increase as LIBOR-based loans continue to renew.

As to floors, we've been commenting on loan floors for a few months now. As you can see, over the last six months, we've increased our reliance on floors from almost $400 million in loans to approximately $900 million today. You can see, in relation to prime rates, that our spreads have widened by approximately 150 basis points during that time period.

As to other opportunities, the table on this slide indicates future maturities of variable and floating-rate loans and their current interest rates. Our goal would be to make sure that a substantial number of these renewals will have established floors in at least the 4.5% range for the best borrowers and higher for those borrowers with higher-risk ratings.

Concerning the liability side of the balance sheet, we believe we have really one real candidate for margin improvement; that would be our CD books, specifically our brokered CDs and our branch-originated time posits. The rates on our public fund CD book do not appear to present a significant opportunity to us at this time as these CDs are currently priced fairly short-term and fairly low. We believe we have harvested whatever margin improvement opportunities out of our interest checking and money-market accounts, as we believe those products can go no lower on rates.

Over the next six months, we have about $875 million in brokered and branch CDs repricing at the rates indicated. This represents about 40% of our total time deposit book. Based on current rates, our target rates would be in the sub-2% range, depending obviously on maturity of these deposits.

Concerning provision expense, this chart is one way to look at how our provisioning expense has trended over the last few quarters. As many of you know, we've been great at loan generation and because of that, this impacts our allowance for loss assessment as there are inherent risks for losses in any loan you book, including new loans.

Net charge-offs also impact the absolute level of provisioning with the $4.8 million in the first quarter detailed in the first-quarter column on the table. Additionally, with the significant increase in the allowance account during the first quarter, this equated to approximately $7.3 million in additional provisioning expense for the first quarter of 2009.

In our 10-K we filed in February and in our press release yesterday, we discuss the significant financial institution relationship that we had downgraded to criticized status during the fourth quarter of 2008. During the first quarter, this credit was downgraded further to a classified loan. We are in continual dialogue with this borrower concerning the status of their action plans they're undertaking to resolve their business issues. Their problems are very much real estate-related. The loan was originated at PrimeTrust, one of Mid-America's subsidiaries, and at that time, this borrower had an excellent reputation and credit status, and we at Pinnacle were fully aware of this particular loan.

Our position is to be paid in full on this credit as soon as possible. We are encouraged by recent events with respect to this borrower, but there is much work to be done here. Our goal this morning is to provide you information concerning this credit, but please appreciate we cannot speak much more about it. It's our only financial institution borrower; it is a relationship that carries with it increased risk in this current credit cycle.

At the end of the day, the allowance account assessment dictates the absolute amount of your provision expense. We are forecasting modest increases in our allowance account for the balance of the year. As you can see, we are currently projecting charge-offs to range between 50 and 70 basis points this year, exclusive of the relationship we just spoke about.

As to fee income, the table details the quarterly trends in fee revenues and the obvious increase in the first quarter of '09 for the sale in the investment securities we spoke of earlier. Regarding our run rate on fees, overall we expect modest increase in fee revenues this year. We should benefit from increased hires in investments, insurance trust and mortgage business lines.

We expect our service charge revenues to remain flattish to slightly up for the remainder of the years. Investment-services revenues are very much impacted by market activity. We have, however, been very successful in attracting several new brokers to our firm, which will have a positive impact on our investment-services revenues going forward. At year end, we had 12 licensed brokers and today at the end of March, we have 16.

Insurance commissions for the first quarter were impacted by a contingency payment from insurance carriers. Keeping in mind the Beach & Gentry acquisition in July of last year, we should return to more normal run rates in the second quarter.

Gain on loan sales are driven in large part by mortgage originations, which as you know is in the midst of a significant refi boom. We believe the second quarter will be another good quarter for us and then, as the number of refis subside, our mortgage revenues will return to being more dependent upon home sales. Should that not transpire, to counter that, we have been successful in adding new originators with 24 today and are anticipating 3 to 4 new hires in the immediate future.

As to trust revenues, trust revenues are impacted by increased hires in this area, which occurred throughout 2008 and into 2009. Their business-development efforts have offset the negative impact of the markets.

Concerning expenses, our run rates are fairly consistent with the exception of compensation. You'll note that we no longer have any merger costs to report and do not anticipate any during the remainder of the year.

Concerning run rates, many of you remember that, in the fourth quarter, we reversed approximately $2.5 million in previously accrued incentive costs. We've also accrued approximately $1.5 million in incentives in the first quarter.

At March 31, we were accruing our cash bonus plan at an approximate 60% of target payout. Appreciate that given the TARP rules, we are accruing no cash bonuses for the named executive officers.

Other increases in compensation are primarily seasonal in nature, including our annual raises that are effective on January 1 and we've increased payroll taxes in the first part of every year.

As to headcount, we hired 29 net new associates during the first quarter and anticipate an increase in our associate base of another 45 for the remainder of the year. We also are in the process of constructing four new branches, two in Knoxville and two in Nashville. All of these branches are scheduled to open during the fourth quarter of this year. Please note that, in Nashville, we are also consolidating two branches into one of the new ones that we are constructing. As a result, we do not anticipate the net number of Nashville offices to increase this year.

We are anticipating a $3.5 million one-time assessment from the FDIC in the second quarter. We currently are not planning on any other one-time assessments this year.

As to ORE charges, slightly more than half the charges are the result of maintenance of ORE properties, including taxes and insurance. The remainder of the expense is related to net losses on the sale of properties during the year -- during the quarter, and general write-downs of the properties based on new appraisal valuations.

Before I turn it back over to Terry, I will comment briefly on goodwill. Like everyone else, our usual formal valuation of goodwill occurs once a year, and for us it is in September. But we do review for indications of impairment at each quarterly reporting date.

As you know, a key component of determining whether any entity has intangible impairment is the price of stock and what causes the price of stock to fluctuate through the filing date. We do anticipate filing our 10-Q within the next couple of weeks. Thus, we will continue to monitor our share price through that time.

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

Okay. I will comment quickly here on the general health of the national and Knoxville markets that we serve.

In the case of non-farm employment, you can see the Nashville has experienced roughly a 3% decline in the number of jobs compared to last year, and Knoxville has incurred roughly a 2% decline year-over-year.

In terms of unemployment, obviously the rates of unemployment are traveling in the same direction as the nation as a whole but are performing a little better in absolute terms.

This is a chart that we continue to update and use to show what's going on in the national real estate market. As you can see, the median home price continues a slight slide and has not yet found a solid bottom. Median home prices are generally off about 4.5% year-over-year, March to March.

Inventories are expressed in terms of months of sales. That's a volatile number in March. Using the March sales annualized, the number of months of inventory was approximately 11 months, which is not a great number but, again, better than many markets.

Knoxville continues to do extraordinarily well. These are the original multi-year targets that we laid out at the time of our announcement of the de novo expansion. The targets are in white; the actuals are in gold. Of course, the 2009 targets are where we projected to be by the end of 2009, and the 2009 actuals are where we were at the end of the first quarter. So you've got three quarters left to hit the 2009 target.

As you can see, hiring and office expansion are largely on schedule. Loan growth is way ahead of schedule, and deposit growth is just a little behind. But all in all, we've set aggressive targets and are accomplishing what we set out to do there. Many of you heard me say and it continues to be the case that we are actually growing faster in the Knoxville market than we did in the Nashville market at the same point of maturity.

While we are not giving earnings guidance, we are trying to get you enough information to construct your models. As it relates to loan quality, our client selection has been good and has enabled us to sustain lower levels of nonperforming and charge-offs than the industry at large. But you should expect continued deterioration during the first half of 2009 largely in the construction, land acquisition and development book.

Net charge-offs and NPLs will go a little higher before they regress. Assuming no further degradation in the large financial institution credit that Harold discussed, net charge-offs should run in the 50 to 70 basis point range for the year.

We continue to be extremely well capitalized and in a position to absorb both the growth and expected loan losses. We will continue to monitor the TARP alternatives.

In the case of net interest margin, for the first time in a long time, we are optimistic. Absent any unforeseen competitive pressures or economic events, we believe that the continued stabilization of LIBOR rates, increased balances in new loans with interest rate floors and repricing of our time deposits over the next few months should result in modest increases in our net interest margin for the balance of 2009.

Frankly, I'm very disappointed with our results this quarter. I've tried to be clear that we expect some further deterioration in our credit-quality metrics, particularly in the construction, land acq and development book, and particularly in the first half of 2009.

We've highlighted the potential risks associated with one large loan to a financial institution, but that said, we've got a reliable track record for growth that we expect to continue throughout 2009. Our opportunities remain significant; our balance sheet remains very healthy. The two primary markets we serve, despite some weakening, are healthier than the nation as a whole. The competitive landscape is as attractive for us as it has ever been. So our focus will be twofold. Number one, aggressively manage the risk in the real estate loan book, and number two, continue to rapidly grow the pretax, pre-provision capacity of this firm.

We will stop there. Operator, we will be glad to take questions.

Thank you. The floor is now open for questions. (Operator Instructions). Jeff Davis, Howe Barnes.

Harold, I inadvertently hung up right as you were going over the financial institution credit. You may have covered it, so if you did, just tell me and I'll read it in the transcripts. But in terms of the credit, one, are you secured by the stock -- is it a loan to the bank holding company and are you secured by the stock of the subsidiary bank? Secondly, looking forward, if the situation got worse enough -- I'm assume that we don't get that far but if it did, is it a type of situation where it might work out where you are willing to come, in effect, foreclose on the collateral and take the bank? Or I'm asking too much for a conference call that you could comment on?

Jim, I think I will leave the latter question alone. I think it would probably be inappropriate for me to get into that.

But as it relates to the first part of the question, it is to a bank holding company, and we are secured by stock in the bank that the holding company holds.

Okay, thank you. Last, just a follow-up question then, Terry, is it a middle-Tennessee institution?

I need to stay away from the (multiple speakers).

Okay, that's fine. Thank you.

Mac Hodgson, SunTrust Robinson Humphrey.

Good morning. When you were talking about the reserve expecting a modest increase for the remainder of the year, I just wanted to clarify. That was excluding this financial institution credit?

Yes, Mac, that is correct.

So obviously, if things went south, then you would expect a more aggressive buildup in the reserve?

That is true.

Then on the margin, Harold, you gave a lot of drivers there. I believe the press release mentioned expectations of kind of a modest increase throughout the remainder of the year. Would you expect it to get back to the fourth-quarter level?

Yes, Mac, we are expecting to get back to something, if not close to a three handle, then in that three range before the end of the year.

Okay, great. Thanks.

Michael Rowe, Raymond James.

Good morning, guys. Do you have any other credits that are similar in size or structure to this financial institutions credit?

If you were to look at -- let me answer the question about similar to the financial institution credit, and the answer to that is no. We have one such loan, and I think, as Harold indicated, that was originated by PrimeTrust Bank, which is one of the banks that we acquired from Mid-America. So we don't have any other bank holding company exposure in the Company.

I think, so relative to that industry or relative to that structure, the loan offset (inaudible) nothing similar.

I think, in terms of size, if you were look, say, down the top ten borrowers in the Company, by the time you got to number 10, you would probably be in the $17 million or $18 million size credit range.

Okay, thanks. Secondarily, you mentioned the loan pipelines are still pretty strong, but you know, when I look at Knoxville from quarter to quarter, your loans were only up about $12 million. Can you just talk about what you expect this year in Knoxville?

Yes, you know, if you -- let me get my numbers in front of me here. You know, we had projected that we would be at $375 million in loans by the end of 2009. I would project that we will most likely exceed that number; we will be above that.

I would say, in the case of deposits, we had projected that we would be at $280 million. I would say we will be close on that. We may be a little short, as we were a little short in 2008. But you know, we will be within striking range of what we said we would do on the deposit side.

Okay. Just finally if I could, back to your nonperforming loans, do you have a breakout by what is legacy Pinnacle versus PrimeTrust in terms of a percentage?

Michael, I don't have that but I can do that if you'd like. I can send that to you after the call.

Okay, great. Thank you.

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

Good morning, guys.

I'm just wondering. I'm just trying to reconcile, Terry. It seems like you guys are paying a lot of attention to the construction side and definitely that seems warranted. But it seems like you are still optimistic and sticking to the plan in terms of loan growth. How do you get comfortable with -- in terms of the chance that the credit issues we are talking about in construction really start migrating over to more traditional commercial real estate, commercial construction, C&I and other areas in the coming quarters? How do you get comfortable that, in terms of sticking with the plan versus maybe hitting the brakes a little bit on the growth?

Then secondly, if you could just -- I know you guys mentioned, in theory, you would love to repay TARP and that would probably require some kind of share offering. What kind of timing are you thinking in terms of that? Do you think it is realistic that you've got to wait a few quarters through this to weather the storm, or is it something you think could be pretty near term? Thanks.

Yes, Kevin, let me talk about the loan growth question first. You know, if you think about what we have done and what we've built, the way we've built this company, it is largely based on hiring great bankers and having them move their books of business across the street. That organic approach I think has and continues to serve us very well because they are bringing in relationships that they know very well. They are leaving problem credits behind when they come here. So, the growth that we are experiencing is coming from really two fronts -- the folks that have been hired over the last couple of years who are still in some stage of consolidating their best clients to Pinnacle, and folks that are new hires to us who are just beginning the process of consolidating their new relationships and obviously leaving bad credits behind. So my belief is that approach will continue to produce good asset quality.

We are not cavalier at all about the market and the likelihood that the residential construction issues could spill into commercial or even into other C&I categories. We are not cavalier about that but again, I think that approach of having our relationship managers consolidate their best clients to us will prove satisfactory.

A lot of the credit exposure that we have is in, as you pointed out, in the construction category, and much of that construction category has come to us through our acquisitions of Cavalry in 2006 and Mid-America in 2007. Again, I am not trying to escape responsibility for those portfolios but simply to point out that they were acquired as opposed to gotten through our traditional organic growth approach. So hopefully, that is helpful on how we look at and balance the continued growth opportunity versus the asset quality concerns.

Harold, on the TARP, do you want to comment on that?

Yes, Kevin, you asked about whether or not we think clarity is going to occur over the next couple of quarters. It is hard to pin down that. I will say that, in the second quarter, we are going to have a significant number of land and construction loans will be coming back to the table for renewal, so on and so forth.

The weakness that we are experiencing is primarily in that category. I know we had a meaningful charge-off number in C&I, but basically that charge-off number was caused by a contractor that does basically all of their work for land and development clients. So I think it is pretty much real estate-related. So, that's how I would answer that.

You know, I think, here in the next quarter, we will get a lot of information regarding the health of this land and development book and how that impacts our ability to consider repayment of the TARP fund.

Andy Stapp, B. Riley & Co.

Good morning. All of my questions have been answered except for one. Just going back to the troubled financial institution, could you give us some idea how tight their regulatory capital ratios are?

Andy, I am trying to come up with the best way to give you an answer here. I guess the best thing I could say is that they are clearly in a position where they need to raise capital. They need to conduct a recapitalization.

Right. Can you say whether they are below well-capitalized guidelines?

I don't think I can answer that question for you.

Okay, understood.

Thank you.

Jefferson Harralson, KBW.

I wanted to ask you a question on the change of the regulatory rules on amortization of construction C&D loans. You talked about a 20-year AMO now for vertical and a 10-year AMO for land. Is that basically setting aside any interest reserve? There's no more interest reserve for these sorts of loans? Or is it only on loans that have come off interest reserve, and is it -- do you think this is permanent and this is for everybody, or just you guys?

Well, let me say, first of all, I don't know the conversations that the OCC has with other people, but my suspicion is that approach has been broadly mandated over the course of the last year. I am familiar with other banks that would've received similar advice, as I mentioned during our conversation, the presentation. I believe the OCC did a large number of focused real estate exams last year, and I think their purpose was to communicate how they wanted banks to treat (inaudible). So I think it's a broad thing but again, I couldn't certify exactly how they have talked with other banks.

I think, as it relates to how it works, Jefferson, let me go at it this way. I think that the issue -- we are really talking about project-related lending, and most project-related loans have a period for the development or construction and then a brief marketing period obviously designed to allow them to sell an asset which is a source of repayment for the loan.

The issue then becomes, at its maturity, if it has not performed consistent with its pro forma, then we would require a curtailment at the levels that we talked about. And we would not be adding an interest reserve or capitalizing interest or those sorts of things. So it would be -- so the builder would have to or the developer would basically have to not only come up with the curtailment but would have to demonstrate the capacity to continue to curtail the loan as well as carry the interest, to carry that in some way other than a classified asset.

This could happen as early as the beginning of the marketing period, or it would be kind of at the end of marketing period when you would have expected it to be relatively sold out?

Yes, obviously we can change the risk rating on a credit at any time we want to, but the outside limit would be at the end of the marketing period.

Thanks a lot, guys.

Matt Olney, Stephens Inc.

Good morning, guys. First off, it sounds like your prepared remarks are based off a presentation, and I can't find this presentation. Is this on your Web site somewhere?

Yes, it is supposed to be out there, Matt. I hadn't checked, but we will check right after this to make sure it is out there.

Well, I'm sure a lot of my questions will be answered on that presentation, but as far as the loan to the bank, did you provision for this at all in the first quarter, and what is the allocated reserve just to that specific credit?

Well, the loan was obviously considered in our allowance assessment for the quarter. We are not going to get into how much reserves we've set up for this credit and so on and so forth. But we considered it. We had a healthy dialogue, both internally and with our audit committee about it. So we've opted for the disclosures that we've got.

Since the loan was downgraded from classified to criticized, can you give us an example of something that could have or must have happened that would trigger a downgrade like that. With that being specific to this credit, maybe just a general overall hypothetical example of what would have to happen for a downgrade like that?

I think, Matt, the language that we are using there is the language that is typically associated with regulatory classifications, so specifically what we, did based on the 12-31 Q was great that as a criticized asset, which has verbage to the effect that there is a potential weakness in the credit that, if not corrected, could lead to an inability to collect all of the proceeds of the loan. Then we, in this quarter, downgraded it to a classified, which means that there is a bona fide weakness that needs to be corrected in that loan.

As you might imagine with a financial institution who is dealing with a regulator and in a position that they need to raise capital, there are literally changing events every day with an on-site regulator that might build pressure on a financial institution and change, conceivably change the collectibility of a loan. So, I think, in that case, that would be what's going on.

Okay. All right. Lastly, is there a personal guarantee on that large loan?

There is no personal guarantee on that loan. That is -- again, it is a bank holding company that would be broadly held.

All right, thank you very much.

Kevin Reynolds, Wunderlich Securities.

Sort of going about the reserve calculation, Harold, I think I heard you say earlier that obviously the reserve calculation is reserved by the provision -- I'm sorry by charge-offs as you go forward. 50 to 70 basis points of charge-off for the year, and then you said, if I recall, modestly higher or somewhat higher reserve levels as you go forward, so covering our charge-offs.

Is there a range of reserve? I know you don't necessarily do it this way, but is there a range of reserve to total loans where you would say, we are sort of shooting for that level? Or to be more comfortable, given the evolution of the credit cycle? Or, are we at a point right now where we are comfortable with the level, plus or minus a few basis points, and we are just paying as we go on charge-offs?

Right now, we are comfortable with where we are. Kevin, what we do is we go in and we model different reserve assessments based on how many loans are coming due over the next several quarters, what potential downgrades we've got coming at us, all of that kind of stuff. And we just kind of come up with ranges. So I can't really tell you that we've got a target in mind, but what we sense is that, with what's coming down the pike, you'll likely see some incremental reserving for the rest of this year. I know that doesn't give you the specific number you were looking for, but I think that's about the best I can do right now.

One good thing, I will say -- I will comment. There is some good things going on with respect to valuations of ORE properties and development properties and residential construction. I think I heard the term yesterday -- the freefall that was in effect on these recurring appraisals seems to be subsiding somewhat, so we are encouraged by that here going forward over the rest of the year.

Okay. Then in your foreclosed properties, what sort of cumulative or average mark do you have on that book right now?

I think we are at about a 110 or something like that as far as the fair value to book.

Okay. All right, thanks.

Danielle Williams, Independence Investments.

I had a question on Knoxville with your deposit growth. You didn't hit your deposit growth targets last year and didn't see much growth in the first quarter of 2009 and have pretty aggressive targets for the full year. I was wondering if you could talk about what you are seeing, why was this low in the first quarter, and why you expect to still be close to your targets this year.

Just not to beat a dead horse here but again, if you just think about how we gather our businesses, it is not a retail franchise. In other words, we are not running ads and driving people into branches and so forth as you are generally gathering this one client at a time. You know, it is really impossible to predict with certainty exactly what the timing is going to be for somebody consolidating their deposit relationship. It is not uncommon for a relationship to begin by opening an account but they will leave deposits, due to treasury management considerations and so forth, at an existing bank for an extended period of time. So again, we are not exactly in control of the timing that those things move.

But you know, if you talk about missing in 2008, you know we missed it by 3% or a number like that, and my guess is we will be, over the course of the year or over a course of a two-year period of time, we will be ahead of the number and behind on the number just based on the timing of when deposits show up. But again, the client acquisition is really working as designed and I believe the deposits will materialize, again plus or minus a quarter or so.

Okay, so your existing client relationship should be able to meet your targets?

That is correct.

Okay, great. Thank you.

Michael Rowe, Raymond James.

Guys, just one follow-up -- do you see any opportunities in the next couple of quarters to do further bond-portfolio restructuring?

Michael, right now, we are set with where we are. You know, we are obviously studying that. A lot of smart people call us up and a lot of smart people are here at the bank talking about it, but we are not interested in that right now.

Okay, great. Thank you.

Ladies and gentlemen, this does conclude the Q&A portion of our conference call. I will now turn the floor back over to Mr. Terry Turner for any additional or closing comments.

I really don't have a lot to add. Again, I guess I would just go back and reinforce that we are disappointed with the results this quarter. But that said, we continue to believe that we can reliably grow the balance sheet and do that -- and doing it with our organic approach. We can get that done while we deliver strong asset quality at the same time. We continue to have a strong balance sheet and so we expect that, given the markets that we serve and the competitive landscape that we have, as I said earlier, we will aggressively manage the risk in the real estate loan portfolio first of all and then, secondarily, believe that we're going to continue to grow the pretax, pre-provision capacity of the Firm.

Thanks so much for joining us. See you, guys.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.