Pinnacle Financial Partners Inc (PNFPP) 2009 Q2 法說會逐字稿

Welcome to the Pinnacle Financial Partners second-quarter earnings 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.

Today's call is being recorded and will be available for replay beginning at 12.00 p.m. Eastern time. The dial-in number is 800-642-1687 and enter PIN number 18967259. The webcast will be available on Pinnacle's website at www.PNFP.com/ under investor relations 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. If you would like to ask a question at that time, (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 are 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 the SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and reconciliation of non-GAAP measures to the comparable GAAP measures will be available on our website at www.PNFP.com.

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

Thank you, Melissa. Good morning. Thank you for joining us this morning. We are generally available until about 9.30, at which point we'll have to break for another meeting. My expectation is it will take us 20 to 30 minutes to walk through the slide presentation, which should leave a half an hour or so for Q&A. So that is the way that we will walk through it.

I start with an assumption that everybody has been through the press release. From a bottom-line standpoint, you should be aware that we reported fully diluted earnings loss per share of $1.33 for the second quarter, which translates to roughly $33.2 million in net loss.

There is lots of noise in these numbers. I'm sure you have seen a great deal of it, elevated net charge-offs, elevated provisioning, elevated OREO expenses, one-time FDIC assessments, security gains, write off of another investment. So there are a lot of things and as we go through the presentation, we will try to point those things out and highlight those items for you in an effort to help you get to what the core capacity of the Company is.

But I think as we go through these things, it seems to me you will discover two important things. The first one is that this Company is aggressively dealing with credit issues, very aggressively dealing with credit issues. And secondarily, we are continuing to build the pre-provision capacity of the firm. I think you'll see that we have done that this quarter and we will be able to talk about what makes us think we'll continue to do that. I think again, you will see that reflected in the numbers.

We talk about aggressively dealing with credit issues. I will tell you that we have been through a very aggressive problem identification process. You saw our net charge-offs move from 56 basis points at [3.31%] to 2.81% in the second quarter. Nonperformers moved from a 1.54% up to a 3.34%. We've increased the allowance to loan losses from a 1.30% to a 1.86% We've resolved $32 million in nonperforming assets. You will see that due to a lot of those heavy actions, past dues and NPLs still generally continue to outperform peers using the BPR industry $3 billion analysis.

What I think as I look up and down those numbers, the thing that frankly bothers me the most is the allowance to loan-loss percentage at a 1.86%. We had believed given our best estimate that we would finish the second quarter with a 1.40 to 1.60 allowance for long loss. When we gave that guidance, I think we also talked about the significant maturities that we would be encountering in our real estate loan portfolio. More specifically, I think we said we would encounter about 30% of the portfolio as maturing items that would be subjected to more stringent underwriting requirements then had been utilized in the past, which will bring the total for the year at June 30 up to 50%.

As I mentioned, we did a more expansive review than that. We focused on -- depending upon the area of the Company -- all credits greater than $1 million in areas that generally produce large ticket items, all credits greater than $500,000 and areas that produce smaller credits. And so in this focused process, we created coverage and rerisk assessment on 83% of that book. So the point is we covered significantly more with these stringent newer and more stringent underwriting requirements than what we had originally believed that we would cover.

As we went through that review process, I think really two things were encountered. One thing is generally things were -- to some extent worse than expected and importantly things were changing very rapidly.

And just as an example when I talk about that, you go out and you deal with a condo developer. They have got a contract. They've got three or four sales they're negotiating. They're confident they're going to have four or five sales in a 30-day period. Two weeks later the contract has dissipated. The other sales didn't materialize. New sales didn't follow in and so literally in a week or two period, you find somebody moving from a performing basis to somebody moving to a nonaccrual and a mark-to-market. So things are changing very rapidly at this time.

I would tell you that the more expansive review was motivated by doing everything in my power to deal with every problem that we possibly could during the second quarter. And I do my best to make sure that this is sort of a one and done thing. And so again, we have been very expansive and as I say, I think aggressive in trying to ensure that we are dealing with every possible problem that we can here in the second quarter.

I think on the -- the other important thing that you'll see once you get beyond credit costs, credit issues and so forth is that we do continue to build a pre-provision capacity of the firm. Looking at the year-over-year comparisons, loan growth at 17%, core funding growth and basically I'm talking about deposits, all deposit categories other than deposits greater than $100,000, core funding growth year-over-year at 14%; net interest income growth 10%; non-interest income growth roughly 5% exclusive of extraordinary items, gains and the like. And so from a year-over-year basis, we continue to have strong growth.

I would point out also that on a linked-quarter basis the loan growth when it's adjusted for charge-offs which were significant during the quarter really is a linked-quarter annualized growth rate of 13%. Core funding during the second quarter annualized growth rate of 27%. We are getting meaningful net interest income growth during the second quarter on a linked-quarter basis. We had 3 basis points of improvement in the net interest margin and that in the face of $1.3 million in interest reversals during the first quarter as things went to nonaccrual.

So year-over-year comparisons, linked-quarter comparisons would suggest that we are continuing to move the Company forward in terms of this capacity to produce earnings in the future.

On the capital base, they remained very strong at the end of June. I am sure you are aware that we received approximately $109 million from a common equity offering that we recently completed. We also received $95 million in proceeds from the Treasury's capital purchase program back in December of 2008. So here in the first and second quarters, we've recorded approximately $2.9 million in charges that are related to the capital purchase program in terms of dividends and so forth, which negatively impacted our fully diluted EPS during both of those quarters.

You can see here that we provided updated regulatory ratios should we be able to redeem the TARP preferred. I will tell you that on that front at this point I don't have any indications either positive or negative from the regulators. And I am assured that the application that we have filed to redeem the TARP is being processed in the ordinary course. And so we are hopeful to hear on that very soon.

I think it is of note here that at the holding company we still have a tremendous amount of liquidity on the balance sheet, approximately $160 million in cash that will support the ongoing growth of the bank as well as provide enough liquidity to redeem the TARP.

On the bond book, I would say our bond book has traditionally represented a very conservative risk posture for our balance sheet. The composition of our bond portfolio might be described as ho-hum and continues to reflect the strong reliance on passthrough MBSs.

Looking at the loan portfolio just again a slide that we typically use to start the discussion on the loan portfolio and let you kind of visualize the diversification of it, I won't walk through those items that we have listed there that we have avoided. We've talked about those in the past. I do every time we look at this pie chart, I always feel compelled to point out a couple of things.

The first thing is the largest asset class there is C&I loans and we frankly in our mind or in our philosophy would combine that with the commercial real estate that is owner-occupied given the fact that you are underwriting cash flows of the business just as you do on the rest of the C&I portfolio. And when you combine those two things together, you get a better sense that the C&I business is really the wheelhouse of this Company and it's the biggest asset allocation and frankly the thing we focus on the most and the thing that we do best.

Also like to point out that in the case of consumer real estate, a meaningful portion of that consumer real estate is a function of making business loans where we are taking personal guarantees and secured either the loan or the guarantee with the home of the business owner. So that makes up the main part of what you see there in consumer real estate.

On this slide, you have got two columns there that are focused on the second quarter of '09. That's really a replay of the pie chart that you just looked at. But then to the right, you've got a comparison to the fourth quarter '08 amounts. And so you have a chance to get some sense of movement and direction of the diversification in the portfolio.

A couple of things I are worth highlighting there. You can see in the case of the C&D and land, we are getting meaningful contraction in that book of business, which is important. And we will walk you through a breakdown -- further breakdown of that here in just a minute, which get down to the CRE owner-occupied and comment on that, two things going on in that movement.

First of all, we in scrubbing and studying and working the portfolio have reclassed about $100 million of loans that would've been characterized as CRE investment to owner-occupied, which is the more appropriate classification. So that's about $100 million of that change. But you can see beyond that we are having growth in that category and again, we view that to be a C&I risk and in the wheelhouse of the Company.

Going down near the bottom of the chart in the case of other loans, pretty good growth there. There are a variety of things that go in that area which would range from leases to cash secured loans and a number of different things. But the largest component of growth in that category would be leases, again typically a C&I type risk.

As I mentioned, I want to give you little further breakdown on the construction and land categories. Obviously that's the category that is most difficult, most troublesome, and this chart is laid out exactly as the other is really comparing the second quarter to the fourth quarter and try to give you some sense of the movement, both expansion and contraction. You can see since the overall category is down almost every category there is down.

The one category that is up is commercial land development. As we've talked about with -- in I guess these presentations over the last quarter or two, we going back into last year did hire two meaningful commercial real estate lenders, one in Nashville, one in Knoxville, and so those guys are generally in the business of consolidating their books, much like we do in the rest of our loan portfolio. So that's really where that growth is coming from.

I want to talk for just a second about past dues and nonperforming loans. This chart is laid out where the three less/most columns are looking at the 30- to 90-day past dues. The first one is giving you the second quarter 30- to 90-day past dues. We are comparing that next to the first quarter 30- to 90-day past dues and then we are comparing that to the first-quarter UBPR for 30- to 90-day past dues and of course that's the most current information available. We don't know what the second-quarter numbers would be obviously, but it would be hard to imagine that they would be better than the first quarter.

And so if you go down to the bottom of the chart and start looking at that, you can see our total 30- to 90-day past due loans, which is a great indicator of where we are in the current portfolio, at 52 basis points down from the first quarter and well beneath the peer group, again, we're looking at the UBPR peer group of greater than $3 billion in assets here.

Again, you can see the C&I awfully strong performance quarter-over-quarter as well as compared to the peers. In the case of total real estate, the same comments could be made. The CRE continues to perform extremely well with negligible past dues and of course, the only hickey there being the construction and land development.

Then out to the right, the three right most columns are looking at the NPLs and loans greater than 90 days. I think the truth is we don't have any loans greater than 90 days past due that are still accruing going back to the sort of aggressive handling of the problem credits that I mentioned at the outset. But on that comparison again starting at the bottom in total, the NPLs greater than 90 days about 96% of the peer average, the C&I with very strong performance. In the case of real estate of course the CRE is doing extremely well versus peers and again, the real hickey in the construction and land development portfolio.

Harold, I'm going to stop there and let you talk through the asset quality metrics.

Sure. Thanks, Terry. We are going to spend a little more time on nonperforming, but we're going to have to hustle through this.

Looking a little bit harder at nonperforming, you can see the largest component of our nonperforming loans remain land development, residential construction, making up about 75% of the $100 million. As Terry noted, our NPA ratio is at 3.34% at the end of June and that's up from the 1.54% at the end of March.

In the press release, we continue to provide our usual roll forward of our nonperforming assets. We are actively about working those non-earning assets with several associates assigned the specific tasks of remediating those assets for us.

On the next slide, we frequently get questions about what is in the nonperforming book. This slide provides some detail on that. Basically there is a seven loans that compose about half of it. You can see that they are all real estate-related in our properties located in the counties in the Nashville MSA.

On the next slide, a little more about ORE. We decreased ORE properties during the quarter by about $1 million. You can see the bullet points on the slide. I just want to point out there that we do have under contract as of today $7.6 million of those properties for disposition here in the third quarter. However, you should expect in the third quarter that you will see our ORE balances escalate as we are likely to take in some additional projects here in the third quarter.

Concerning net charge offs, they are obviously high for the quarter. You can see credit costs associated with construction and land development at 5.5%. The C&I loss includes the bank holding company loan, which if you were to exclude that, the charge-off rate would be in the 1.3% range. And most of that charge-off there is related to a residential construction contractor and other people that work in that line of business.

All right, now concerning margins and run rates, the chart details the quarterly trends of our net interest income/net interest margin. We continue to manage certain action plans in order to mitigate our exposure to the low rate environment and enhance our margins. We are generally pleased with our linked-quarter net interest income increasing by about 6.3%. Impacting that was NPAs and I will talk about that in just a second.

We finished the quarter with a 2.75% margin, suddenly higher than our first-quarter margin. Our loan growth is solid and our pipelines remain strong and we remain excited about our growth opportunities for the last six months of this year.

A little bit more on margin. Loan floors continue to have a positive impact on our margins, as do increased core funding. Concerning nonperforming assets impacting our margin during the quarter was the obvious increase in those nonperforming loans. With the increase in nonperforming loans, our margin was negatively impacted by about $1.3 million or approximately 10 basis points. The absolute level of NPLs will impact our margins going forward, but we shouldn't see that sort of hit to our net interest income run rate in the second half of '09.

We do have reason to be optimistic. Loan floors continue to be popular to our customers and our bottom line as you can see over the last nine months, we've increased our reliance on floors. You can see in relation to prime rates that we have widened by about 150 basis points and we now have almost $1.2 billion in loan floors on our balance sheet.

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 rates.

As to the liability side of the balance sheet, we believe we have only one real candidate for margin improvement and that would be our CD book, specifically our brokered and branch CDs. Over the next six months, we have about $860 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 will be in the mid 1% for brokered money and mid 2% for branch CDs depending obviously on maturity.

As for provision expense, this chart is one way to look at how our provision expense has trended over the last few quarters. For us, net charge-offs have impacted the absolute level of provisioning with the $44.6 million in net charge-offs in the second quarter. Obviously the $21.5 million of that number was attributable to the one bank holding company loan we charged off in early May.

Additionally with the significant increase in the allowance account during the second quarter, this equated to approximately about $19.4 million in additional provision expense to get to the 1.86% allowance ratio.

As to provision for the remainder of 2009, at the end of the day the allowance account assessment will dictate the absolute amount of the provision expense. As you can see, we are currently projecting charge-offs to approximate 100 basis points this year exclusive of the bank holding company loan noted previously.

This table details our quarterly trends and fee revenues regarding our run rates on fees. We expect modest increase in fee revenues this year. We should continue to benefit from increased hires and investments, insurance trust and mortgage. As to 2009, we expect service charge revenues to remain flattish to slightly up for the remainder of the year. Investment services revenues are very much impacted by market activity. However, we've 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 2008, we had 12 licensed brokers and today we have 17. We will continue to recruit new brokers and trust professionals on an opportunistic basis.

Gain on loan sales are driven in large part by mortgage originations, which as you know in the first half of 2009, there was a significant refi boon, which we believe will subside in the second half of this year.

As to expenses, our run rates are fairly consistent with the exception of compensation, ORE, and FDIC insurance. You will note that we no longer have merchant costs to report and do not anticipate any during the remainder of the year.

Turning to 2009, many of you may remember that in the first quarter we accrued approximately $1 million in incentives and due to the losses incurred in the second quarter, we have reversed that amount. At June 30, we accruing our cash bonus plan and a 0% target payout.

We are also 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 in Nashville, we are consolidating two existing branches into the one new branch and as a result, we don't anticipate the net number of national offices to increase this year.

We like everyone else incurred a one-time assessment from the FDIC in the second quarter. For us, it was about $2.3 million. We are currently not planning on any other special assessments this year in our forecast.

As to ORE charges, approximately $3 million of the expense was related to net losses on sales and general write-downs of existing properties. The remaining amount was due to maintenance charges. Our intent is to keep the pace of disposition of ORE properties at a very high level.

Now before I turn it over to Terry, I will comment briefly on goodwill. Our usual formal evaluation of goodwill occurs in September. But we do review our indications of impairment at each quarterly reporting date. As you know, a key component of determining whether any industry has intangible impairment is the price of its stock and what caused the price of stock to fluctuate through the filing date. We 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.

All right, thank you, Harold. I guess one of the things mentioned at the outset, two things. One is the aggressive work on identifying credit issues and dealing with them. The second thing is the growth opportunity. We believe that it continues to persist in our marketplace.

I think there are really two things that may make us different than other banks. One is the extremely attractive nature of the competitive landscape that we are in, large regional banks continue to give up significant market share. And the second item is our hiring philosophy and I won't walk through that. Most of the folks on the line understand our hiring philosophy.

But again, we believe that the experienced relationship managers that we've hired at this Company who are still in the process of consolidating their previous clients book to the bank would generate about $1 billion in asset growth over a 2.5 year period of time and so we are not reliant on economic activity to produce that growth, which is what really gives us some confidence we can continue to grow even in a difficult economic environment.

In the case of the charts you are looking at there, you can see the actual performance for the quarter continued a steep slope on loans. In the case of total deposits, it's up but it's a little flattish. We perhaps would have been advantaged to talk about core funding. Again, when I use that term, I'm really speaking of deposits. All deposit categories except CDs greater than $100,000, round numbers 14% year-over-year growth, 27% linked-quarter growth.

And so again, I think it does highlight this -- the nature of our competitive environment and the structure of our Company and why we ought to be able to continue to grow. When you think about that competitive landscape, I'll just remind you there's some overlap between Nashville and Knoxville, but in those two markets basically we have to compete with Regions, SunTrust, First Tennessee and Bank of America. And so we continue to believe we ought to have good opportunities there.

In the case of Knoxville, I'll just comment quickly. As a reminder, the target numbers that you're looking at by year go back to the period when we announced that we were going to Knoxville. And so the targets are the year-end targets, where we expected to be by the end of 2007, 2008, and 2009. And then you can see actual numbers listed underneath that.

We're making great progress on the hiring front, having hired nine people since year-end and on track to hit the 51 associates by year-end facilities. We are generally on track. I think we will finish 2009 with three full-service locations and the fourth one will spill over into 2010.

In the case of loans, you can see that we are about one quarter away from hitting the year-end target for loan growth. So again, would anticipate being at the year-end target by the end of the third quarter. And in the case of deposits, a little slow in the first half of the year, but our business development pipelines are strong. We continue to believe that we will be very near the annual target by the time we get there.

I think just to wrap up here, obviously we are disappointed in the second-quarter results, but I do think it is important to hit at again the idea that we have literally done our best to make sure every problem can be identified and dealt with in the second quarter. We performed a significantly more extensive review than we had originally planned and than we had originally communicated that we would. We've done the heavy reserve building. We are continuing to get significant nonperforming asset resolution.

Harold mentioned in his comments the volume of real estate that we have under contract already that will be resolved during the third quarter. And the point we tried to make is obviously at some point we will have these credit costs off our back and we should have been able to responsibly grow the pre-provision earnings capacity of the firm. We are getting -- continue to have meaningful growth year-over-year and a linked-quarter basis on key revenue items and believe that that bodes well for the future share value creation, shareholder value once we get these credit costs off of us.

Harold, I will stop there.

I think we're going to turn it over to the operator.

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

Good morning, guys. I was wondering if you could give a little color on what you are seeing in terms of C&I and commercial real estate. I know this extensive review you did this quarter was mainly on resi construction and land. But we have heard from a few companies this earnings season already that they are seeing some problems starting to migrate into C&I and commercial real estate.

So just wondering what -- a, what you are seeing? And b, what you expect to see in the next quarter or two given the slowdown in the economy and unemployment going up?

And then just secondly, Terry, I was wondering if you can just -- I know I've asked you about this in the past, but just given -- does this quarterly experience give you any pause in continuing to grow the balance sheet at such a pace? And I think what -- you've made the point before that your model of hiring the loan officers gives you kind of a selective process in picking what loans to bring over. But given what you have seen in resi construction and land, the fact that you made that -- you made about I think conditions changing so rapidly and things being worse than you thought, does it give you a little pause in plowing ahead and growing the balance sheet? Thanks.

Yes, Kevin, let me talk about the first part of the question which really had to do with the C&I and other CRE. Let me give you a point verification on the review. In addition to creating the 83% coverage in that construction land development book, that review also created about a 65% coverage for the remainder of risk-rated assets -- in other words, C&I, CRE, and so forth. So we have done a pretty extensive job albeit a little less extensive than the real estate at re-risk raising what's in the C&I portfolio. And again my sense is it continues to hold up well.

I think to be clear, things that have association with -- things that are in the C&I portfolio but have an association or dependence upon the residential real estate market, clearly continue to struggle. And when I say that, there are a variety of trades and furniture manufacturers or retailers, those kinds of people that we are seeing some struggle there.

Kevin, I want to be clear with you. I have not -- I don't remember seeing a financial statement on a business or an individual who had a better 2008 than 2009. And again, I think quarterly numbers would continue to reflect that. So I don't want to act like there's no softening. There certainly is -- the strength of that market, C&I and CRE would be less good than 12 months ago. But I guess again I do think that the strength of that portfolio continues to hold up and it has been subjected to a pretty rigorous test as well.

And the principal areas where you would find some weakness of -- would likely be in things that are associated with real estate and maybe to a lesser extent in the trucking industry.

So I hope I'm answering what you are looking for relative to kind of what we expect to see in the C&I and CRE. It's difficult for me to imagine that those portfolios would be able to exhibit the sort of phenomenon that we are seeing in the residential real estate portfolio.

I think relative to the growth, Kevin, in your question you sort of hit at it two ways. Hey, I heard you say your hiring philosophy and therefore you think you can continue to grow, but things are changing rapidly and aren't you concerned you might pick up things similar to what you have encountered in the residential real estate market among builders, developers, and the like?

I guess the first point to make is there ought to be an expectation that we would add any builder or developer in the portfolio. Again try to demonstrate we are shrinking those portfolios and we are not hiring individuals in that area and we are not consolidating books of business in that area. We're not doing anything that would result in growth of the residential area.

Again, the growth area for us would be in the C&I portfolio. And I would again say, you know, while it's true things are rapidly changing, the biggest part of the issues that we -- the credit issues that we continue to deal with would be concentrated in acquired customer sense. When I say that, the issue is not trying to put a blame on somebody else, we bought the assets and so forth, but the point is that those assets were not generated using the model that I've described and the model that we continue to use.

And so the truth is that in that portfolio that was developed using that model, the outperformance of that portfolio versus our competitors, versus the industry and so forth is even more dramatic than the numbers that we're talking about here.

So I guess again I do feel comfortable with -- you know, I want to be clear also, Kevin, our loan growth will be less this year than last year, so I don't want to act like we will necessarily grow at exactly the same pace. But we will likely be in a double-digit growth sort of zone for asset growth, concentrated among affluent consumers and C&I.

Okay. So if I heard you right, Terry, that's a good point I think you made that the biggest part of your problems today in that land development area are more through acquisitions as opposed to a three-year hiring model. Is that kind of what you said?

That is what I said. Kevin, I think if you go back and look at Pinnacle preacquisition -- and I don't have these numbers in front of me -- you can look at them and see but I think these will be close. We probably had 3% of the loan book invested in residential construction and development. Of course at this juncture, we are out here just shy of 20% -- 18%, 19%.

So again, I want to be clear that it's not about blaming somebody else. We made acquisitions, we accepted the concentration risk, but again, the only point being those assets were not generated with the same model.

Great. That's very helpful. Thank you.

Michael Rose, Raymond James.

Good morning. Can you talk a little bit about the competitive landscape and kind of what you are seeing here and the new hires that you picked up and the ones that you expect to hire in the back half of the year, are they coming out of the larger institutions still? I know in Knoxville you hired a bunch of people from SunTrust.

Yes, that is true. You know, Mike, in my comments earlier when you think about the competitive landscape I really think about Regions, SunTrust, Bank of America, and First Tennessee. We compete with Regions and SunTrust largely in Nashville and Knoxville. We compete with Bank of America more in Nashville and First Tennessee more in Knoxville. So those are really the large banks that we aim at.

And I would say from a hiring standpoint clearly in the hiring mix over in Knoxville, I think everybody has either come from a large regional bank, they -- I think probably have one or two hires that they picked up from smaller banks who had recently left a large regional bank looking for a smaller bank experience. When they got in that bank they recognized that that particular community bank didn't really have the capacity to meet all their clients' needs, whether you are talking about treasury management capabilities or wealth management capabilities and the like.

So we probably hired a few people that would come to us having traveled from a large regional bank to a small regional bank or a smaller community bank for a short period of time.

But -- so the answer to the question is yes, fundamentally we are hiring out of the large regional banks, those four banks primarily that I just mentioned. In SunTrust -- I mean in Knoxville, SunTrust has been the largest contributor, but Regions and First Tennessee have also been meaningful contributors in terms of where we have hired that group, that staff from.

And in Nashville, I would say today on the margin that we probably have hired more from SunTrust than others, but we again are continuing to hire from First Tennessee here, from Regions here, and probably to a lesser extent, Bank of America.

Okay, and Harold, I think you mentioned that you said you had about $160 million in cash at the holding company. Is that correct?

That's true.

And that's up from about I believe it was 80 at the end of the first quarter?

Yes, well the stock offering, Michael, contributed about $109 million to that. So add that money to the first-quarter number, and then that's how we are at the $160 million.

Okay, and how are you all thinking about potential acquisitions? I don't know if there's any failed bank acquisitions that may interest you or management lift-outs. I know for a long time you've talked about moving into Memphis. Has there been any change there in the thought process?

Michael, I think in the case of -- let me talk about acquisitions first and then talk about -- maybe address Memphis more specifically. In the case of acquisitions, we I think have generally tried to communicate that we are not particularly interested in FDIC workouts. We -- so I'll just stop with that. We're not particularly interested in FDIC workouts. I think in the case of either Nashville or Knoxville, if a large regional bank, a very large regional bank, had a more modest presence in those markets and decided to exit, you know, those kinds of things would have more appeal to us; where it would be a typical deal where you would pick up large centers due to branch overlap and those kinds of things. That is something that would have more appeal to us than an FDIC-assisted transaction.

But when I say that, we're not looking at those transactions -- I'm not looking at any of those transactions right now. But just as you think and plan, that kind of transaction would have more appeal than an FDIC transaction.

You know, in the case of Memphis we continue to be interested in Memphis because it's exactly how we succeed. It's a large urban market dominated by large regional banks who are struggling with service quality and keeping their people, and that's what we do best. That's what we like to do is get up underneath that and hire the best people and move the best clients.

So from that perspective, Memphis is an attractive market. There have been times along the way I thought we would get a deal put together. We've negotiated with different groups. In some cases, we couldn't make it work for them or couldn't make it work for us.

As I look at it today, I find less targets to hire out of the large regional banks. Of course, First Tennessee is the largest by far in that market, but there's been a pretty meaningful outflow of key market talent to other banks. So the opportunity I guess is getting more fragmented to me than it would've been, say, 12 months ago and so forth.

So again, I don't know if that's helpful. I try to give you the benefit of how we're looking at it and thinking of it. We still have an interest in Memphis, but honestly as I look at our ability to hire large lift-outs, that talent is getting pretty fragmented at this point.

That's helpful, thank you very much.

Kevin Reynolds, Wunderlich Securities.

Good morning, Terry.

Hey, Kevin, how are you?

I'm doing all right. I'm glad you didn't dump all over Memphis there.

I like Memphis.

Well, I'm glad somebody does. A quick question, though, I guess talking about the local markets. You talk about your portfolio and looking at each credit and how you've taken this aggressive stance. And we see a lot of noise, hear a lot of different viewpoints on the national economy. But what are your guys saying to you, guys and girls saying, as they go out there and talk to their customers and potentially new customers every single day? Are they feeling better today, or is it same as last quarter?

And then kind of how do you view it? What keeps you up at night right now? Are you really worried that we've got this second leg down out there, or does it look like we may be stabilizing here?

That's a great question. I would say that -- let me break the comments apart between real estate-oriented business and true commercial business. I would say in the case of real estate, the sentiment would be awful. In other words, you wouldn't find any optimism among builders, among developers, among folks that loan to them. I can't think of any -- again, there are some people that are moving houses or moving lots.

There's some activity, but again, you couldn't translate that to optimism. I would say those people are very concerned about where they are and so forth. So that continues to be, in terms of sentiment, very poor.

I would say once you get into the commercial segment, it's spotty. You know, there is I think -- I haven't talked to anybody that said, boy, I'm having a great 2009. You know, interim statements wouldn't reflect that people are having great 2009s, but there are a lot of people that are having acceptable 2009s. You know, they generate satisfactory revenue and cash flow to sort of live for a better market. But again, it would be hard for me to find other than spotty optimism among the C&I-oriented segment.

I think if you try to get down to, well, what's going on in the economy and what does the data tell you? You know, we go back and forth on the national front with whether we've got green shoots or whether they're turning brown and all that stuff.

I continue to think there are some legitimate green shoots here, specifically if you look at June's median home price, I think it was $183,000 or $185,000, something like that. It was 3% less than June a year ago. It was higher than May. That's good.

You know, if you look at sales, we sold 2000 units in Nashville. We hadn't done that since last September. You know, the residential inventory expressed in terms of months, June was at eight months. That's down from a peak of 17 months.

So again, I honestly believe those are green shoots and I'm beginning to feel like, okay, maybe we've got a bottom here. I don't think I could certify that to you, but again, I am seeing points that cause me to think, okay, we may have found a bottom.

I would say, Kevin, to add to that, I think in some of the current activity in special assets where we're dealing with foreclosed property and the like, our current sales are generally within 5% of the recent appraisals. That is a new phenomenon. As you know over the last year, you just -- even with current appraisals, the markets continue to move down on you and you're selling well under carrying costs. But our most recent activity is beginning to resemble the carrying cost, which again would sort of tell me maybe you are at a bottom here.

Okay. I guess with that in mind, if you could -- and I may have missed this because there's obviously a lot that's been going on this morning. But what is your -- when you talk about 5% under the carrying costs, what kind of carrying costs are we talking here, in general terms?

Well, let me see. I think I've got a number here in this presentation. Let's see if I can get back to it.

We can get to that offline if you need to.

Let me do that. I'm scrambling through trying to find my slide here. There's a slide in the presentation, I think it would be the 15th slide, that will give you some sense of what we are carrying OREO balances at, what the appraised values are. And the short answer is the appraised values are 139% of the balances that we are carrying them at. Again, that's an average number. You know how that works. And those appraisals are about five months old, so I don't know if that gets what you want to know or not.

Yes, we can get there. Thanks.

Andy Stapp, B. Riley & Co.

Good morning. I couldn't find your presentation on your website. Do you happen to have handy what 30 to 89 delinquencies were dollar amount wise at quarter-end?

30 to 89 was at 52 basis points, Andy.

Okay. Could you help me reconcile, if your study or review indicated asset quality as worse than expected and deteriorating rapidly, why do you think you can still -- the overall net charge-offs excluding Silverton will be at around 1%?

Andy, we've been going through that forecast pretty diligently over the last several weeks, and so far that number is still holding up based on where we are today. So we think it's still a good number. I think our recent guidance was 80 to 100 basis points. We've taken that to the high end of that range, obviously, so that's what we know today.

Okay. And especially with regard to reviewing raw land in your study, did you get new appraisals on raw land or was that --? You mentioned some of them are like five months old. Just some color there, did you write it down to current appraisal value to allow for any continued deterioration in the values of raw land?

The answer to that is yes. Generally, you are using a current appraisal, which would be defined as six months or more current. So if you are outside that guideline, you're getting current appraisals. Inside that you could use or assume that's a current appraisal. And generally, we are taking a mark for selling costs and value degradation. The assumption is 25 -- generally 25% or so less than appraised value.

Okay. What are you seeing there in raw land, in terms of of values sliding?

The 25%. That's really the basis for why we're marking it that way.

Okay, thank you.

Peyton Green, Sterne, Agee.

Good morning, a couple questions. I was wondering if you could talk about kind of the growth perspective going forward. Certainly I understand taking the market share, but is there any opportunity to call from the acquisitions that you made and kind of getting back to the discipline that got Pinnacle going? Would there be any shrinkage from the two acquisitions going forward?

Then separately, the margin at 2.75% is not very bank-like. What would be your goal over the next year in terms of margin expansion? If I heard it right, are you paying 2.5% at the margin for local CDs and then also 4.5% floors? Thank you.

Yes, I think I will talk about the margin, Peyton. Right now, those branch CDs are in the mid-3's. We think we'll get them down into the mid-2's. It may go lower than that. We will shoot for that, obviously. And the floors, right now the stated default floor is at 5%. We're more likely getting something in the 4.5% to 5% on those floors, and higher on riskier borrowers.

I think, Peyton, if I could, I'm trying to remember all the aspects of the question. But relative to the growth profile of the business and do we expect some shrinkage in the acquired portfolios, I think what we expect, what we have in fact seen is more growth that would be similar to Pinnacle's growth; in other words, an increased focus on C&I. And I think we've tried to be candid that we have specific targets for shrinking the residential construction and land acquisition development portfolio.

So again, that will be net negative to your growth. But again, even with that shrinkage, we continue to believe the model of growing in the commercial industrial and affluent consumer segments through targeted calling on decision makers that that will work in legacy as well as acquired footprints.

Peyton, did we get your questions answered?

Yes, except for -- what do you think is a realistic margin for Pinnacle? I mean, 2.75% is just not very bank-like.

Yes, and we agree with that. We've got to get that number up. And right now, our modeling indicates we can get up (technical difficulty) line by the end of the year, so that's where we're headed.

Great, thank you.

Matt Olney, Stephens Inc.

Good morning, guys. Pinnacle is the best indicator investors have when trying to isolate credit quality in just the national market. My question is, do you think Pinnacle's credit quality is indicative of the overall national market, and if not, do you think it's better or worse?

That's a great question. My belief is that our credit quality is better than the national market. My case for that or what causes me to say that is other operators in this market have been taking significant losses over an extended period of time. We've got operators that have been taking losses in this market going back for seven quarters, and have pretty well continuously through that time period. So we are later getting to the table.

I think I've tried to say all along that length of time of the recession is an important thing, in that the weakest borrowers go down first and the strongest borrowers go down last. But if it goes on long enough, everybody goes down.

So, as I say, in this market we're now seven quarters (technical difficulty) when people were taking large losses, and billing it as Nashville based losses, and again largely in the residential construction land acquisition development portfolio. So the fact that we are just now hearing hopefully can get these credit costs off of us pretty quickly. I would say that our asset quality is better than peers.

Thanks, Terry.

Thank you, Matt. All right, I think we're at the end as we said at the outset. In fact, we're a little bit over our 9:30 target here. Thank you for your participation. I would reiterate that we are obviously disappointed with where we are at this juncture here in the second quarter, but we are optimistic that we have been aggressive in dealing with our credit issues.

And we continue to be optimistic that we will grow the preprovision capacity of the company such that once we get the credit cost off of us, we will be in great shape. Thank you for participating with us today.

Thank you. This does conclude today's conference call. This call will be recorded and available for replay beginning at 12:00 p.m. Eastern Time today. The dial-in number for the replay is 1-800-642-1687 and enter PIN number 18967259. Please disconnect your lines at this time and have a wonderful day.