Pinnacle Financial Partners Inc (PNFPP) 2011 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Pinnacle Financial Partners second-quarter 2011 earnings conference call. Hosting the call today from Pinnacle Financial Partners is Mister Terry Turner, Chief Executive Officer. He is joined by Mister Harold Carpenter, Chief Financial Officer, and Harvey White, Chief Credit Officer.

Please note Pinnacle's earnings release and this morning's presentation are available on the investor relations page of their website at www.pnfp.com. Today's call is being recorded and will be available for replay on Pinnacle's website for the next 120 days. At this time all participants have been placed in a listen-only mode. (Operator Instructions).

Before we begin, Pinnacle does not provide earnings guidance or forecast. 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. Pinnacle Financial disclaims any obligation to update or advise 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. Presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to the comparable GAAP measures will be available on Pinnacle's website at www.pnfp.com.

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

Thank you, Mary. Good morning. We will begin this call where we have the last five or six. Throughout 2010, the first half of 2011, we focused on two primary priorities. Number one is aggressively dealing with credit issues. Number two is building the core earnings capacity of the firm. So as usual, we will address our progress on both of these fronts this morning.

As I have said a number of times before, it is my hope that we begin to sound a little like a broken record as we continue to make significant and consistent progress. It is my intent to continue the same reporting format for the next quarter or two when I believe the resolution of credit issues will no longer require top billing and we can focus our dialogue almost exclusively on expanding the core earnings of the firm.

So, this morning after we have had a chance to thoroughly discuss our progress on both these priorities, I will spend a few minutes highlighting some of the opportunities that we see going forward and then we will conclude with the Q&A.

Let me begin with priority number one, aggressively dealing with credit issues. Many of you will recall the second quarter of last year was a peak for many of our problem credit metrics. As you can see, we have continued to make meaningful progress, reducing virtually every important problem asset category this quarter and year-over-year. Net charge-offs were roughly $8.6 million for the quarter down from the previous quarter. OREO expenses of $3.8 million were down from $4.3 million the prior quarter and so combining those two, our total credit losses were down 11.6% in the second quarter and for the fourth consecutive quarter.

Nonperforming loans shrank by roughly $17 million during the quarter, $76 million to $60 million, a linked quarter reduction of 21.8% and that is the fourth consecutive quarterly reduction there down nearly 50% from last June. Nonperforming assets and that is defined as NPLs plus OREO were down $20.2 million during the quarter. That is more than 15%. Nonperforming loan inflows continued to slow during the quarter. Classified loans shrank by roughly $45 million during the second quarter, a linked quarter reduction of 17.3%. That is also the fourth consecutive quarterly reduction down 52% from last year.

Potential problem loans shrank approximately $22 million during the quarter. That is roughly 13% and 53% year-over-year which represents a very large reduction to the risk in our loan portfolio. Restructured loans which really only make up about $13 million of the loan book were down approximately $3.4 million during the quarter and we continue to reduce exposure in the construction and development portfolio that has plagued us over the last two years, down 31.4% since last June and nearly 60% from its peak in March of 2009.

Now in terms of expanding the core earnings capacity of the firm, clearly the two most significant levers will be accelerating loan volumes, particularly C&I volumes, and expanding the margin. As you can see here, year-over-year, despite anemic on demand and very significant headwinds created by our rapid disposition of problem loans, we still managed to grow our C&I book 4.6% year-over-year, albeit just barely on a linked quarter basis.

Of course, due to the general anemic loan demand, significant problem loan resolution, we continue to run down the Land Act Construction and Development portfolio. Total net loan growth for the quarter was a negative $8.3 million. I would say that that is really my only disappointment in the quarterly results, the fact that we didn't produce quarterly loan growth of total loans.

But in addition to the $8.6 million in charge-offs, the $11.6 million in foreclosures, the $42 million in what I would call ordinary quarterly amortization and payoff, we had roughly $30 million in extraordinary or unusual payoffs, generally as a result of capital injections to borrowers that I don't expect to reoccur, nor do I believe reflects slowing loan demand or an ability to grow and retain clients.

When I say capital injections, I am really speaking of events like common stock offerings, structured reconnection, injections by private equity groups or M&A activity. So though it didn't happen this quarter, absent the extraordinary payoffs I described, we had had pretty decent loan growth and in the second quarter, and it continues to be my expectation that we'll be successful in producing net loan growth going forward.

A further point as it relates to our ability to grow market share, non-interesting-bearing deposits grew at 8.8% on a linked quarter basis almost 25% over the same quarter last year. I highlight that, not only because of the impact it can have on net interest margin, but because generally DDA growth is the single best indicator of a bank's ability to gather primary clients.

As credit costs subside, in my opinion, the real winners will be those that can reliably grow primary banking relationships, which it certainly appears we can.

The net interest margin expanded nicely from 3.40% last to 3.55% this quarter, primarily aided by decreases in cost of funds quarter to quarter. That represents meaningful progress on a linked quarter basis and year-over-year and it lends credence to the guidance that we provided last quarter that we would be able to operate our margin in a range of 3.60% to 3.73% over the next several quarters.

Further evidence of the marketing traction that we are getting is our non-interest income growth, exclusive of security gains and losses, up 8.4%. That is for the quarter; 10.7% over the same quarter last year. And of course, with growth in both net interest income and non-interest income, revenues excluding securities gains and losses were up 5.6% for the quarter and 6.8% over the same quarter last year.

So overall, we have still got room to reduce problem loans. We have still got lots of room to improve earnings but as you can see from a very high level, the second quarter was a great quarter in terms of execution against our two primary priorities.

What I'd like to do now is turn it over to Harvey, Chief Credit Officer, let him review the first priority in greater detail. He will be followed by Harold Carpenter, CFO. He will review the second priority in greater detail and then, at the conclusion, I'll talk a little more about the opportunities as we move through the remainder of 2011 and into 2012.

So, Harvey, let me turn it over to you.

Thank you, Terry. Let me start with the actual loss experience for the quarter. As you know, charging down a loan and charging down our other role real estate owned through OREO expense are essentially the same thing. So we believe that OREO expense and charge-offs should be looked at together.

This bar graph shows that the sum of these two numbers has been decreasing for the past few quarters. You'll also note that in 2009 and 2010, we had larger than normal credit losses in the second quarter of each of those years. In large part, this was driven by the fact that the second quarter of each year is when we usually receive most of the financial statements or audits for our clients who have December 31 as their fiscal year end, which is most of them.

You'll note that we did not have elevated credit losses in the second quarter of 2011. In fact, many of our clients had 2010 results that were better than 2009, usually through disciplined expense control.

In any event, we are very pleased that the second quarter of 2011 broke the pattern of the last two years with respect to the second quarter charge-offs.

Past due loans are a primary leading indicator of developing credit problems. I would point to three numbers on this chart.

The top line represents our nonaccrual laws which are past due. As an aside, and not on this slide, at June 30 almost 40% of our nonaccruing laws were in fact not past due, but were being handled in accordance where there are contractual terms. This is essentially the same percentage as was true at March 31.

As noted on this slide those nonaccruals that are a past due make up 1.10% of total loans. Clearly these loans are already identified as problems and are handled by our special assets work out officers.

Next, about halfway down, you'll see that 27 basis points of our loans are past due but have already been identified as problems and are being handled in the special assets group. And that leaves the final number to look at and that is the bottom line where it shows that only 13 basis points of our loans are past due 30 days or more, and are still past credits handled in the normal -- with the normal line officers.

This is extremely clean for any portfolio and indicates to me that we do not have many credits that are still in these past categories who are having trouble keeping current.

The next slide is, I think, very powerful. They are really two things at work here. The first is that there is a significant decrease in the volume of credits that are moving from a pass risk rating to a fail risk rating and failed is either criticized, classified, or doubtful. That number is represented by the blue bars in this chart and, again, since the second quarter of 2009, you'll see a good and very significant decrease in these that move from pass to fail.

And then the second thing to notice is the red bars. Starting in the first quarter of 2010 and continuing since then, we have -- we begin to have more credits that are moving from a fail risk rating to a pass category. This is sometimes due to improving customer results, sometimes due to structural train -- changes we are able to negotiate.

But in any event, we are glad to see more and more move from pass to fail categories. In fact, in the second quarter of 2011 and for the second consecutive quarter, the upgrades exceeded the downgrades.

You'll also note that the second quarter of 2011 did see an increase in both the pass to fail and fail to pass. As I mentioned a moment ago, many of our clients have fiscal year ends of 1231, so it is usually the second quarter of each year when we receive their financial statements or audits on which we base downgrade or upgrade decisions. So you'll see movement both ways or more movement in risk ratings in the second quarter.

But again, it is good to note that upgrades exceeded downgrades for the second quarter just as they did last quarter.

Potential problems are classified loans that are still healthy enough that we are accruing interest on them. This is the category of loans most likely to have migration into more severe problem status. Obviously, having this category shrink is a good thing. Having to go from 9.3% a year ago to less than half that level or 4.62% at 6/30/11 is something we consider to be an impressive accomplishment.

On slide 10, we look at 90 day past dues and nonperforming loans for each of the basic loan categories. In the peer comparison, our peers are banks that are over $3 billion in assets for the most recent Uniform Bank Performance Report, which is the first quarter of 2011. As you see, our numbers are better than peers in all categories; and this is true where you look at our June 11 numbers versus the March 11 peers or you look at our March 11 numbers versus March 11 peers.

In both cases, our metrics are better than peers in all categories.

The top line, the most troubled category, of course, is construction and land development. That 10.46% is very high for us. But again, it is better than peers and it continues to improve each quarter. In fact, all categories have improved for us since December of 2010.

Slide 11 shows two different but very related data points. On an earlier slide, we showed where potential problem loans had decreased every quarter since the second quarter of 2010. This slide shows a similar trend for nonperforming loans, which are represented by the green bars. They peaked in the first quarter of 2010 and have decreased every quarter since.

In addition, the line on this chart is our allowance for loan losses expressed as a percentage of nonperforming loans. This has been increasing or improving ever since the first quarter of 2010. It is now well above 100%, which is at the high end of our peer group. This ratio actually has improved dramatically, essentially doubling between its low of 65.9% at 6/30/09 to 128.9% at 6/30/11.

The next slide is about nonperforming asset disposition activity. You may remember the high second-quarter 2010 number is in large part due to our charging off almost half of that $68.8 million. The good -- one of the good news -- part of the good news of this slide is that in each of the last four quarters, dispositions were in the $30 million to $45 million range. The charge-offs in each of these quarters were less than $10 million.

So obviously, most of the nonperforming asset disposition was getting accomplished by selling NPAs or selling off properties, rather than charging them off.

We sometimes talk about the progression from nonperforming loans to OREO and then to final resolution via sale of the property. But I will point out that not all of the nonperforming loans take this route. Of our nonperforming loans, roughly $59.7 million and our current thoughts that are about 40% of those are expected to go through foreclosure. And in fact, 70% of that 40% have foreclosures already scheduled for the third quarter. Approximately 41% of our non-performing loans are contractually performing. Payments continue to be made on a timely basis and we anticipate satisfactory resolution over time of those credits.

And then the remaining 19% of our nonperforming loans will be long-term workouts with periodic productions through structured liquidation strategies, where we feel foreclosure and repossession is not our best option at this time.

Our OREO disposition strategy goes hand-in-hand with our strategy to dispose of all of our nonperforming assets. We have had six consecutive quarters of NPA disposition activity including OREO sales, such that NPA dispositions range in the $30 million to $45 million per quarter.

We anticipate this pace of NPA disposition to continue in the future as we stick to our plan, which calls for consistent disposition of these problem assets. Now our OREO disposition strategy begins with our planned nonperforming loan migration.

Approximately 41% of our non-performing loans are contractually performing and are not delinquent, which I've said before. We anticipate 40% of our nonperforming loans to be moving to foreclosure and in fact, again, most of those are scheduled for foreclosure in the next three months. These foreclosure actions could be delayed if borrowers elect bankruptcy protection.

We continue to obtain independent third-party appraisals every nine months on both OREO and on nonperforming loans. Assets are appropriately marked down upon receipt of these valuations. As we will discuss later, our OREO Mark approximates our historic loss rate. In fact, in our most recent quarter, we experienced loss rates in OREO sales of approximately 5.2% on a little over $15 million in dispositions.

Our current OREO book is between seven and eight months in average age. We will continue to monitor this statistic to keep the age of the book in a reasonable range. As assets increase in age, we will place more emphasis on these assets for disposition. Again, OREO comprises 47% of our nonperforming assets, and we expect this percentage to increase as we continue to take aggressive strategic action in the procurement and sale of those problem assets.

We continue to believe that our current strategy of disposing of OREO in individually negotiated transactions is the best way to go. You should not expect us to participate in any large bulk sales of these properties at the present time.

Again, we plan to manage nonperforming loans aggressively. I just mentioned that about 40% of our nonperforming loans we expect will go through foreclosure. Once we determine that this is the right course of action, we proceed with haste, mark the OREO down to current appraisals, and dispose of it in an appropriate timeframe.

The next slide speaks to some of the detail of our other real estate owned and the point of this slide is that OREO balances are broadly covered 122.8% by generally current appraisals of OREO. You will note that the average age is essentially 4 1/2 months of their appraisals.

We believe our OREO violations are good and expect minimal losses on disposition. We anticipate continued high level of OREO over the next few quarters as we continue to move troubled loans through OREO to ultimate resolution. Again, the fact that 47% of our nonperforming assets were OREO indicates that we are being aggressive in pushing these assets through the process.

We have a few large properties scheduled for foreclosure in the third quarter which could result in flat to slightly higher OREO balances at September 30. This could be and probably will be impacted somewhat by the possibility that some of our borrowers will declare bankruptcy in order to avoid foreclosure, which obviously slows the movement through the process to have ultimate resolution.

In going through the segments on this slide, the $7.5 million is new single-family residence construction and residential condos. These properties continue to move at an acceptable pace in both disposition and price. All of our condo projects are realizing sales at absorption rates and pricing consistent with recent appraisals.

Now the middle two categories, the developed lots and the undeveloped land, totaled $33.7 million. Although this detail is not on the slide, I will tell you that of this $33.7 million, $10 million are properties we expect to sell within a three- to six-month timeframe. In fact, these properties either have hard contracts, letters of intent, or we are in some stage of contract negotiations on this $10 million.

Of the $33.7 million, $18 million are multi-parcel projects where we have ongoing lot sales. Because we continue to have success with this retail disposition strategy, these projects will remain in our OREO and will reduce over time as lot sales occur. That leaves of the $33.7 million in the developed lots and undeveloped land, leaves $5.2 million of land with limited activity.

These stale projects are markdowns that we have 123% collateral coverage with an average appraisal age on those properties of three months.

Finally, on this slide the $11 million consists of $7.3 million of commercial real estate that is either currently producing income or has the potential to produce income and $3.7 million of that $11 million are single family residence that are not new construction. Again both of those 10 are continuing to move out at an acceptable pace and price.

The next slide is intended to convey again that we believe we have our other real estate owned marked appropriately. The first column shows for all OREO dispositions for the first half of 2011 the original loan amount less five payments and that is the 100% number. Then it shows the charge offs prior to foreclosure, the 25.4% number. Losses while in OREO, the 10% number, that's typically from the reappraisals we receive while they are in OREO. And then the loss on disposition of 1.7%.

So that we net realize -- the 6.8% (see slides) shows how much we realized from the original loan after client payments.

The right column uses the same methodology, but it is for the properties that we still have in OREO as of June 30. It shows that we have already written down the loans to 62.3% of the original loan amount less payments. So since we have already written down the remaining OREO down essentially to what our year-to-date loss experience has been, we do not anticipate significant additional losses when we dispose of this real estate.

With that, I will turn it over to Harold Carpenter.

Thanks, Harvey. As Terry mentioned, we continue to focus on building the core earnings capacity of our firm. We are pleased with the margin performance at 3.55% during the second quarter along with continued increase in C&I loans.

We also continue to maintain high pulse of core funding. With that, we are particularly pleased with the growth of non-interest-bearing deposit balances during the second quarter. Average DDA balances were up 25% between the second quarter of 2011 compared to the second quarter last year.

Our relationship managers continue to manage their deposit clients with the emphasis on reducing our funding costs, particularly those accounts where we believe deposit rates are above market in price. We believe we can reduce funding costs even more in the third quarter, which I will speak to in just a minute.

Enhanced referral programs have aided increases in our wealth management fees the first half of this year. We believe this will continue to pay dividends for us in the future. The pipeline for mortgage fees has improved of late, helping to generate a stronger run rate for overall fee revenues.

As we mentioned in the last quarter, we anticipate our expense run rate to increase with the reintroduction of incentive accruals in our 2011 run rates. Our belief is that our expense run rate, absent any unusual fluctuations in ORE costs, should be fairly flat for the remainder of this year.

This is some additional information on the good work our relationship managers have done on growing core deposits. As the blue bars indicate, we have seen core deposits increase by 23% from the fourth quarter of 2009 while at the same time reducing our client cost of funds from 1.45% to now 0.90% basis points. We are optimistic that continued reduction in cost of funds will occur for the remainder of 2011.

This slide details the growth we are experiencing in DDA accounts since the second quarter of 2009. We believe these green bars provide further validation of the local market acceptance of our firm and our business model. The year-over-year growth in dollars is approximately 25%. Our average DDA account is almost $18,000 currently, compared to $15,600 a year ago, an increase of 15.5%, while at the same time the absolute number of accounts is up almost 10%.

Concerning margins, this slide details the quarterly trends of our net interest income and our net interest margin. As you can see, our link quarter net interest income between the first quarter and second quarter increased by $1.8 million, our first meaningful increase in net interest income in several quarters. This increase occurred during a quarter went nonperforming assets decreased meaningfully, thus helping to expand our margin along with the aforementioned reduction in funding cost from 1.09% last quarter to now 98 basis points this quarter.

Also, during the second quarter we reversed $225,000 in accrued interest related to new nonperformers compared to $481,000 in the first quarter. Another positive development. We can recall in prior conference calls reporting amounts of those type in the $800,000 range. We finished the quarter with a 3.55% margin, our 4th straight quarter of net interest margin expansion.

We have shown this graph at numerous times. We believe it is a good reflection of the margin trends within our balance sheet. The red line represents the customer margin. This is the net interest income from loans funded by customer deposits. You can see it's ramped up nicely over the last few quarters and continues to show positive trend now approaching a 4% margin. The blue line or the treasury margin is much more volatile and has had a negative trend prior to the first quarter of 2011. The treasury margin represents primarily net interest income from the bond book as funded by wholesale deposits. It is also impacted by the absolute level of liquidity we maintain.

Impacting our treasury margin during the first half of this year was slowing in prepayments on our Bond book. As with that slowing, amortization expense for the premium on those bonds have also slowed. Obviously by keeping both loans moving upwards, the green line should respond likewise.

As to margin enhancement opportunities, a consistent margin improvement opportunity continues to be within our upcoming maturities on CDs. The $215 million represents about 24% of our CD book and as you can see, these CDs are currently priced at approximately 1.5% and our target is to reprice them at less than 1%. Our average maturity of our CD book continues to be eight to nine months, so we have not seen a significant shortening of that book while these rates have been going down.

On this slide, some of the good work we have done on CDs, our sales force has done a remarkable job managing client interest costs on our money market accounts. We believe we have approximately $586 million in money market accounts where we need to continue to negotiate with these clients to get a fair rate in this interest rate environment.

We believe a 10 to 15 basis point improvement in money market account rates is not unrealistic.

Lastly, looking at our P&L trends, our pretax pre-provision increased to $13.5 million the second quarter from $9.6 million in the first quarter, a 37% increase. At the bottom of the chart, we have highlighted a few items which impact our run rates including incentive costs and ORE expenses.

Over time, as our ORE book begins to trend downward, expenses associated with managing and disposing of these properties should trend likewise. Also, our annual cash incentive plan expenses increased during the second quarter as we increased our accrual to a full payout for eligible participants, which would include all associates except commission-based associates and the named executive officers which are ineligible for cash incentives under the TARP rules. We believe our incentive costs for the last half of the year should be consistent with expenses for the first half of the year.

Although our second-quarter growth in pretax pre-provision represents some great growth for one quarter, we are focused on increasing our returns to our shareholders and believe we have several opportunities to bring additional value to the bottom line.

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

Okay. Thanks, Harold. Well, as you can see in terms of executing on the two primary parties of the firm, the second quarter of 2011 was a great quarter. We expect the momentum to continue building in terms of both credit issue resolution and core earnings.

So let me take just a few minutes now to give you my outlook over the next 12 to 18 months for loan growth, margin expansion, and TARP repayment.

As it relates to loan growth going forward, in order to be successful, due to a decreased reliance on CRE, I suspect it will be critical to be successful in growing non real estate categories and particularly C&I. Nobody in our market is better positioned to do that than we are.

According to Greenwich Research, we have got the number one market share for lead bank relationships among businesses with sales from $1 million to $500 million. Not only that, according to Greenwich Research, even through this economic crisis, we have maintained our reputation among both clients and prospects as the most willing to lend among the top 10 banks in the state.

In Knoxville, according to FDIC deposit share data, we have been the fastest-growing bank in that market since our de novo start in late 2007. And just this quarter, we crossed $500 million in loan outstandings. Still on track with our original loan growth projections, despite a significantly more difficult economic landscape than in our original planning assumptions. We expect that pace of growth to continue for the foreseeable future.

Fortunately, we serve great markets. We expect both Nashville and Knoxville to produce outsized C&I opportunities. Over the last decade, Nashville was a national leader in job creation, largely based on its ability to attract and retain businesses.

Recently, both markets have been touted for their ability to create jobs with the most recent and notable mentioned by Forbes as number 3 on their next big boomtown list.

And finally, if anything, we have proven our ability to hire and retain the best, most experienced bankers in our market. There have been many years we attracted more than 10 financial advisors, but we curtailed our recruitment and hiring over the last 18 months.

We have recently rekindled those recruitment and hiring efforts. Our average middle-market financial advisor maintains a loan portfolio of roughly $85 million. So should we be successful in recruiting and hiring 10 middle-market FAs comparable to our previous hires, we would expect that to yield roughly $850 million in market share movement over the next three years.

So, the combination of the markets we serve, our position in them, and our intent and ability to hire more experienced bankers should facilitate outsized debt loan growth, particularly C&I growth.

This slide is really intended to substantiate the previous comments about the strength of the Nashville market. On the left you see job creation through corporate relocation and expansions. As you can see, the combination of Nashville's ability to retain its existing businesses and successfully recruit corporate relocations, in 2010 Nashville returned to record performance on job creation. 2011 is especially promising, with big job announcements by Nissan, BNY Mellon, believe it or not, the IRS, General Motors, to name a few.

All of this is consistent with Forbes' recent rating of Nashville as number 3 on their list of the next big boomtowns, which was based primarily on job creation and demographics. It's quite an honor to be ahead of markets like San Antonio, Houston, and Dallas over the next decade.

We've made significant progress on our net interest margin from its slow of 2.72% in March of 2009 to 3.55% last quarter. We expect continued margin expansion. You may recall we used a similar slide last quarter to size our ongoing margin expansion opportunity.

Last quarter, we provided a range of 3.60% to 3.73%. Based on the progress here in the second quarter and current estimates, we believe the future margin of 3.72% to 3.82% is achievable.

To help you think about sizing that ongoing market expansion opportunity, let me start with a reduction in nonperforming assets. As we reduce the level of NPAs and as we replace nonperforming assets with performing loans, that lift in loan yield represents a significant margin expansion opportunity.

Assuming that we move from the second quarter NPA to total loans in OREO ratio of 3.45%, just move that down to 1.50% and reinvest in performing assets. That would improve the margin 2 to 5 basis points.

Harold highlighted the cost of funds reduction's opportunity just a few minutes ago. Over time we expect that to translate to 12 to 16 basis points in margin and, over the last year or so, we have chosen to maintain excess liquidity on our balance sheet. As we begin to replace the liquidity with loan growth, we expect that to add another 3 to 6 basis points in net interest margin.

So you can see over time, we believe that we still have pretty good opportunity to grow our NIM safe from the 3.55% current level to something in the range of 3.72% to 3.82%.

Talk about capital here just a minute. As you can see, we have a strong capital position. We are currently accreting capital. We expect to continue to accrete capital for the foreseeable future.

Of course, that capital position is enhanced by $95 million in TARP proceeds. Which begs the question, what are your plans as it relates to TARP?

In the past, we have indicated a general desire to repay TARP with proceeds from the SBLF. As you know, we do have an informal agreement with the Fed and it requires their approval prior to paying TARP or any other dividends from the holding company. Of course, we routinely obtain that approval for all required dividends.

Nevertheless, the Treasury has recently issued guidance that we will need that restrictions lifted prior to August 1 in order to be eligible to participate in SBLF. So we are in active discussions with both the Fed and Treasury to determine if or how we might qualify for participation. But at this point, I'm less optimistic about the likelihood of participation.

Given that uncertainty, let me comment on my thoughts about TARP repayment absent participation in SBLF. For the last four quarters I have tried to communicate our desire to be patient as it relates to TARP repayment. In an effort to allow things to stabilize, both from an economic standpoint and from an asset quality standpoint, and ultimately to minimize or avoid common share dilution.

At this point, absent SBLF participation, that would still be my view of the course we should take. We have not applied to repay 100% of TARP, nor do I know what the Fed would require of us to repay 100% of TARP. But based on our analysis of those who have redeemed 100% of TARP through March 31 of 2011, keeping in mind that we have roughly $60 million of cash in the holding company, recovering our DTA plus an additional $30 million in earnings would put us well above the median on Tier 1 leverage ratios based on analysis of 80 TARP redeemers.

To be clear, I am comparing to the current capital positions of all those who have repaid TARP, regardless of when they repaid TARP, and that would be after any common raises or subsequent earnings to what our Tier 1 leverage ratio would be post-TARP repayment.

So if we were in fact ineligible for SBLF, given the very low cost of capital that TARP represents, I remain inclined to continue asset quality improvements and capital accretion through earnings for several more quarters in an effort to qualify for TARP repayment with little or no common dilution.

Now specifically, as it relates to third quarter, lending opportunities from both clients and prospects appear to be increasing at this point. So absent the extraordinary payoff scenario we encountered this quarter, due to various capital injections for our borrowers, we would expect continuing momentum in net loan growth, particularly C&I.

You heard Harold size the volume of CDs to be repriced in third quarter at roughly $215 million. That's about 24% of the book and the rate pickup should approximate 50 to 75 basis points there. That, in conjunction with the slowing prepayment speeds in the bond book, the reinvestment in nonperforming assets, it should lead to continued margin expansion in the third quarter.

As it relates to NPL and NPA resolution, we expect the pace to continue in the third quarter. Specifically recall that we have roughly $60 million in NPLs. As Harvey said, roughly $24 million of those are contractually performing, leaving only about $36 million in some stage of delinquency or default. We have already scheduled foreclosures in the range of $20 million during the quarter. As Harvey cautioned, potential bankruptcy filings could slow that pace, but again you can see we are moving rapidly through the nonperforming loans.

As it relates to fee income, we have got a major emphasis with our sales force on referrals to various fee businesses. Particularly investments, trust and insurance where actually we are making very nice progress. We would expect total non-interest income to be up slightly next quarter and on expenses, ex OREO expenses, will generally hold the second-quarter run rates and I think finally you should expect the impact of tax expenses to be minimal until we reverse the DTA.

So I guess it is very much the same summary as the last several quarters. We continue to be very aggressive in our problem asset resolution. Specifically, we continue to pursue NPA resolutions. We are making great progress on that front. You should expect continued reductions in problem loans and in our exposure to the construction and development lending book.

I would say we are fortunate to serve attractive markets. Of course, job creation is critical to achieve economic stabilization. Nashville's ability to attract new jobs is now returning to peak levels and we continue to find great opportunity in terms of competitive vulnerabilities and I think, really, that is probably the single most important point as it relates to growth profile of our firm going forward.

We are particularly focused on growing the core earnings capacity of the Company. The two principal levers for achieving that are loan growth and expanding margins. Our expectation for both of those levers is very good. We expect further quarterly progress on both of them throughout the remainder of 2011 and into 2012.

Mary, with that, I'll stop and we'll take questions.

(Operator Instructions). Jefferson Harralson from KBW.

Good morning. Your current efficiency ratio is about 73%, but if you take out the OREO costs, net in the margin expansion, you get to about 63%. And Harold talked about several opportunities to bring additional value to the firm.

I was just wondering if those are efficiency ratio affecting and if that -- if you are going to try to get that ratio back into the high 50s or low 60s or if that is a goal of yours?

Yes, the goal is for sure to be in the high 50s over time. I think there is a combination of things we are looking at. I think if you see -- if you look at our headcount here this quarter, we are down. So we do have some efficiency going on with respect to salary cost. We have looked at a number of things on the expense side of the ledger related to professional fees and other things that we do here.

But obviously we believe we can grow the revenue side of this firm. We think Nashville is a great place to be and that loan growth will certainly present itself at some point in the future.

Alright and the follow-up would be for Terry on the TARP repay. You laid out a case to kind of weigh time and build capital and possibly pay back TARP with a little or no capital raise.

Within your assumptions there, were you looking at a key ratio? I guess one of the key regulatory ratios where you wanted to be above is at the Tier 1 common. What ratio is that?

And finally you mentioned $60 million of cash to the holding company. I guess, what cash would you need to keep there as a buffer? What is your ongoing cash need to hold at the holding company?

The ratio that we analyzed, that we focused on in the presentation was the Tier 1 leverage. And I think generally, what most banks are, the median for the 80 TARP redeemers as of the end of March was somewhere around 9.5%. Maybe it was 9.40%.

So we went through a calculation that said, okay, we get rid of the TARP. We get back the DTA, we get --. We earn about $30 million and we would be probably in the 9.8%, 9.9% range, which we thought presented a handsome case for TARP prepayment whatever that were to present itself to us.

All right and just to check my math on something. My Tier 1 leverage, I have it at 9.35% right now ex TARP. Is that the ballpark?

Yes, I'm not getting 9.35% now ex TARP, I'm getting like about a 9.10%. This was in March. So, but I will go back and check my math.

All right. I will too. Thank you, guys.

As far as the cash balances at the holding company, $60 million, we run about a cash need of a $2 million a quarter for TARP and for trust preferred. So that is how much cash bleed we have coming out of that account.

All right. Thank you.

Kevin Fitzsimmons from Sandler O'Neill.

Good morning. Just a few questions. First for Terry, just to piggyback on what Jefferson was asking on capital. You mentioned, Terry, that getting the DTA back is something you build in to that analysis. Just if you could give us any kind of update on what your thoughts are on the timing of that. I'm sure you are having ongoing discussions with the accountants and the -- just the evolving thought process and how many quarters of profitability does it take to get that back? And what kind of things they're looking at?

And then just as a follow-up for Harvey, you spent a lot of time on OREO and the OREO disposition. I was just interested in what you would -- how you would characterize OREO costs going forward. Are we --? If disposition is going up or is speeding up, are we going back to the kind of pace of OREO costs of the second, third, and fourth quarter of 2010? Or do you think this is kind of a run rate on that line item?

Okay. On the DTA, as you know, the accounting literature is not completely clear in my judgment on when the DTA evaluation reserve goes up and similarly on when it comes off. And so, I just give you that, say, I don't know the specific answer to your question.

I would tell you that my own planning assumption is that we would recapture the DTA reserve this year. I don't know if that will be next quarter or the fourth quarter, but that would be my own planning assumption.

Okay, that's helpful. Thanks.

And on the OREO expense, no, we would expect it to be relatively stable, relative to the first and second quarter of this year. You know our strategy is to continue to be consistent in knocking out $30 million to $45 million and the wash ends have slowed, what is coming into that has slowed. So we think we can hold in that range.

So, Harvey, what you were saying with those properties that are going to be moving into OREO, OREO balances may be flat to up just because some things you foreclosed on, the borrowers are going the bankruptcy route and that is slowing down the disposition of those?

Well, I mean, if they take bankruptcy before the foreclosure that just pushes the foreclosure out into the future. So it slows that property getting into OREO in the first place. You know, once it is in OREO it's ours and we can go ahead and move it out as we feel is most appropriate from maximizing value out of it. I mean, is that --?

Okay, but is that the driver or is that -- is it just something different the element of those few large properties that are could cause a higher OREO balance in the third quarter?

Well, we have two big properties that would be a total in about the $10 million range. And those are the ones that depending upon whether they were to try to seek bankruptcy protection or not could be a swing factor for what we see in the third quarter going into OREO.

I think, if I understand the question and what you're trying to understand, I think the reason that the OREO balance will be likely higher in the third quarter than the second is because the volume of foreclosures in the third quarter will be higher than the volume of foreclosures in the second quarter. And so, it will take some time to get it in there and move it out. So I think that is really the phenomenon that would cause the balance to go up. It has to do with volume of foreclosures in the third quarter.

And I think the caution that Harvey was trying to give is that we might not get everything foreclosed that we are aimed at foreclosing, because somebody could file bankruptcy. And the impact of that would be a lower OREO balance, not a higher OREO balance.

Right. Okay. All right. That's helpful. Thanks.

Mac Hodgson from SunTrust Robinson.

Good morning, everyone. This is [David Grayson] in for Mac. Thanks for taking the questions. Question, I guess, for Harold on deposit repricing opportunities, maybe a little more color there.

On the CD side, it looks like the magnitude or the dollar amount of CDs that to reprice this more quarter is kind of similar to last quarter. So if you could touch on your experience from what repriced last quarter and how we should be thinking about that going forward as opposed to the opportunity set? And I guess maybe to put a finer point on the question would be to -- you said a target rate for where the CDs could go to, but to the extent that some of those rates maybe didn't get quite to that lower level given the need to maintain the relationship and keep the funding or whatnot. So how should we be thinking about that in actuality as opposed to the potential which has been sized up in the presentation?

I believe we have been pretty successful in hitting those target rates. The trends have been coming down. I think, last quarter, I believe the chart shows about a [104] or something kind of average run rate. So I think our number is good. When we go through and we present these numbers on these slides, we put in a fudge factor so that we have got some room there to maneuver. But I believe we have got opportunities to get another [200 million or 225 million CDs] priced down below 1%.

I would say that the environment here on deposit pricing is fairly competitive, I think. But basically I think all the regional banks and our sales were all in the same kind of range on deposit pricing. The more competitive banks are out on the fringe in the perimeter where we might see some unusual pricing on the liability side of the balance sheet.

But I believe by far and away the most competitive pricing that is going on right now is with credit. And on the loan side.

Okay, and then I guess as a follow-up, a similar question on the money market side. I hadn't seen banks present a money market repricing opportunity too frequently. Given that this is presumably relationship-based funding and you know there's not a hard maturity date like with a CD, can you speak to how aggressive, how successful you can be with moving that money market rate down?

Yes we have been real successful. We have been working on this for about nine months to a year of identifying specific accounts within our money market account book that we need to target for reduction. And as rates have come down, we have gone back to some clients two and three times to reduce these money market accounts. And as they consider the impact on their own internal budgets, we have been very successful in getting these down. And we think we will continue to be.

Like I said, we are not -- most of the deposit competition is not so much with the regionals in the market, although they certainly are competitive. It is when we start competing with the banks out on the perimeter where we end up seeing some unusual pricing.

Okay. And if I may, just one real quick follow-up. You've mentioned competition on the loan side. What are you seeing out there? Any irrational actors on the loan side in terms of credit structures right out?

Not so much in credit structures. Every now and then you'll see a structural issue, but it is more in pricing and more really at these sort of the upper end of the quality spectrum. And most of the ones I am thinking are the same ones we talked about last quarter. So no -- second quarter I haven't seen new stuff that has shocked me from either pricing or a structure. But it is very competitive, particularly in the higher quality end of the middle market.

Okay, that's all I had. Gentlemen, thank you for taking my questions.

Kevin Reynolds from Wunderlich Securities.

Terry, you talked about TARP in all of your comments. I've got two questions for you actually, but TARP first. You talked about sort of looking at 100% or full repayment of TARP and comparing yourself to peers.

Any thoughts about as you continue to make progress and profitability improves, looking at paying back TARP and partially in installments over the next several quarters? That is my first question.

Second question, I wanted to talk about your outlook for loan demand.

Yes, I think, as it relates to consideration of partial repayment, we probably would consider that.

And is there any --? How is that trickier than just applying for a full repayment?

I don't think it would be trickier. I'm not sure I know the answer to the question, but I don't think it would be trickier. The only requirements with which I'm familiar are that you have to pay it in at least 25% increments. So, the smallest portion you could repay would be 25% of the total.

But, again, I don't think that is tricky in any way.

Okay. Next question, you sound pretty -- once you sort of adjusted all the -- what you would consider the one-time items with respect to the loan portfolio, loan growth that or shrinkage this quarter, you sound like you are pretty optimistic and that job growth is picking up in relocations and those sorts of things.

Does that mean that we think we are going to have, not just slight loan growth, but maybe an improving trend of loan growth, particularly in the commercial space for the rest of this year? Or are we going to -- this whole soft patch discussion that was out there, is that something that where we ought to maybe pull that back a little bit in terms of expectations?

Yes, I think I would describe -- I still -- I would continue to describe the economic state as fragile and I think there are a lot of potential borrowers who frankly have the clutch in right now. There is tons of uncertainty. And not to be dramatic, but just over issues like the debt limit and budget deficits and I mean all those kinds of things. That puts, I think, people on Main Street in neutral until they can get some certainty.

So I think that is going to weigh on loan demand, I guess, is the point that I am trying to get to.

I think Nashville appears to be relatively better than a lot of other markets, because of their relocation, job relocation strength, which appears to be sort of back in full swing. So I think that bodes well.

But, I guess, I would say I am reasonably optimistic that we will be able to produce total loan growth going forward. I think it will build, and I think it will be concentrated in C&I. But I think it will continue to be more about market share movement than it will be about economic growth.

Thanks a lot. Good quarter.

Michael Rose from Raymond James.

Good morning, guys. Just a follow-up on kind of a longer term margin guidance. It looks like in the slide deck you are laying out a case for 3.66% to 3.77%, but I think Terry mentioned 3.72% to 3.82% --

I misspoke on that.

-- factored in increased price competition on the C&I side and maybe if you could just walk through some of the other drivers on the asset side of the balance sheet.

Yes, first of all, on the -- I think we misspoke on the guidance on the call. So the slide is accurate. As to other balance sheet opportunities, obviously the biggest ones are CDs and money market accounts on the deposit side and we say that primarily because of the competition we are seeing on the loan pricing side. It is just it's very -- it's unusual. There is a lot of volatility when we go into pricing certain credits and we look at the guys across the desk.

So we don't -- we haven't really wanted to quantify that given the volatility there. Loan growth is still anemic. So we are hesitant there. We are seeing increased bond yields, just primarily due to slower prepayment rates. So I don't know if I got all of your question answered, but that --.

Are you still liability-sensitive at this point?

Well, we are. We are slightly liability-sensitive, so obviously an [up rate] environment would be would hurt us in the short-term. Primarily because of the loan floors. We still have a meaningful amount of loan floors on our book. But we think that with any kind of reasonable rate increase we can become asset-sensitive fairly quickly.

And then, just on the DTA recapture, how quickly do you think you could fully recapture that? You know I have heard some banks say it would happen over quarter or two, some say that the recapture will take place over a pair so of several quarters beyond that. I mean, do you have any thoughts there or any guidance from your accountants?

Well, we have had that conversation on numerous occasions. I think where we are and what's likely for Pinnacle is that it would be a complete recapture. We have gone through some of the theory behind a partial recapture and all of that. And I think at the end of the day we think when it occurs, it will be a complete recapture as of that quarter end.

Okay, that's helpful. Thanks.

Peyton Green from Sterne, Agee.

Good morning. Congratulations on a good quarter. I was wondering if you could kind of differentiate between the momentum you have got in Knoxville and maybe certainly from a credit perspective how the two markets differ? And do you see may be separate from that, what was the origination before you take into account payoffs in terms of the loan production? How did that compare to the previous quarter a year ago? Thank you.

Let me talk about Knoxville first, I guess. I think that the loan growth opportunities, the pace of growth there in terms of net growth or better than Nashville, but that is largely because they don't have the headwinds that are created by running down a C&D portfolio or a problem asset resolution and those sorts of things. I think in terms of gross loan production, they are pretty similar markets. I couldn't detect a difference in the vibrance or loan opportunity.

Harvey, before I go on to the next part of it, you might want to comment on that.

Yes, I would say one thing you need to realize is that we have only been in Knoxville 3, 3 1/2 years, something like that. So we still have the benefit of the business model that is Pinnacle; and that is hire good people, and expect them to bring a lot of their existing book of business. And so we are still having the benefit of that more so than here in Nashville where we have been here longer.

So I think that is driving a good bit of Knoxville's growth. And particularly in a time, as Terry said, most of the loan opportunities out there are opportunities to move market share, not truly new economic activities.

So since we are in that phase in Knoxville, I think the two markets are different from that perspective, just by the time in market.

Okay, and then a follow-up. With regard to the C&D, where do you think the bottom is in that category? Because the payoffs certainly have been gaining momentum in the past several quarters. The balances are down over a couple hundred million year over year or over the last five quarters rather.

Does it get to a point where it starts to stabilize?

Oh, I think so. I mean, I'm not sure exactly where the bottom is. I mean it sort of depends upon how fast Nashville comes back and what's out there gets absorbed. I mean, at some point in the future, there will need to be lots and developed and so forth and so on, but I think that's a good -- that's years down the road.

So I expect to see ours continue to go on down. I just don't see new projects coming out of the ground or new [indy] projects coming out of the ground for some years, quite frankly.

But, Harvey, I think it -- depends upon what component of the portfolio you are talking about. If you are talking about the total land at construction development portfolio, I do think we are getting near a bottom for the total of that category. I think the residential portion of that will continue to run down, but I expect there would be a floor and probably some upward movement toward commercial construction and development where -- so you get some growth in that category to offset some of the runoff that you are getting in their residential.

Yes, in fact, I was speaking to the residential. Yes, we are already seeing in the CRE, the income producing some projects that are coming out of the ground and that we are working with developers on, both here and in Knoxville. So, yes, we are starting to see some of that come back.

And aren't you seeing any signs of a pickup in terms of lots getting houses built on them compared to, say, maybe a year ago where that really wasn't happening?

Well, we are. I will say that if you look at the overall national numbers in terms of home sales, May was not a good month, but yes we are seeing some building activity picking up out there.

Hey, Peyton, one of the things I think you had asked in the first question was to try to get some bead on origination, absent whatever all the other headwinds are. We are clearly building in momentum. I don't have handy what the gross originations would have been same quarter last year, but I am confident this quarter would have been substantially higher than then. And by comparison to the first quarter, first-quarter gross loan originations were about $90 million and second-quarter gross originations were about $120 million.

Okay. Last question. Over what time frame would you hope to hire 10 more high-quality C&I bankers?

Probably six months.

Great. Thank you.

Steve Moss from Janney Montgomery Scott.

Good morning. Good to see the improvement on asset quality here this quarter. Just following up with Peyton here. I've seen some of the data suggesting that sales for properties are slowing in the Nashville area. Just wondering how your borrowers are holding up, in particular the ones on the land development side?

Well, we look at that, as I said before, I think that we, not today but in previous calls, that we are looking at that space. We have been through the numbers which is already either in special assets or that we have identified as having trouble and are dealing with us appropriately and trying to get them all moved through OREO and on out. And I think what we said about the rest of it is that, in fact, we continue to look at those, look at their absorptions, look at their liquidity, and do a pretty thorough analysis on those that are still in the past categories every six months. And which is a process we are just now completing sort of for this -- for the first half.

And so, we feel that we are staying on top of the liquidity and the absorption that is out there on our past credits and are staying on top of that and being honest with ourselves. And if they -- if we see people that are going to hit the wall next year, we go ahead and try to get them on into special assets.

So I'm feeling pretty good about our process in terms of trying to stay ahead of deterioration of the sponsors of those projects that we still consider to be past credits.

Okay. Thank you very much.

Bryce Rowe from Robert W. Baird.

Thanks. Terry, just to follow up on Kevin Reynolds' question, have you in fact, applied for partial repayment of TARP?

That whole process, we are not going to tell you whether or not we have applied or not. It's we can't -- we can't get into that with -- the regulators require us to keep it to ourselves. So if and when we do, we will keep it confidential and then, hopefully, we will get a thumbs up from the regulators and then we'll tell you about it.

Okay. Thank you.

Brian Martin from FIG Partners.

Nice quarter. Can you talk about the -- your assumptions, Terry, for growth in the loan book, is that contingent upon hiring new lenders or is that just baked in with what you have got now and that would be extra?

That -- with the market share movement that we talked about there is a quantification of new hires. But I believe that we would grow loans, albeit at a slower pace without additional hires.

So you would still expect positive growth even without -- positive net growth even without the addition of new lenders?

That's true.

And just the -- maybe Harold, or Harvey, just the NPA inflows in the quarter, what was -- can you give any color on what those were and just maybe a little bit of color on the size and what categories you are still seeing the inflows on?

Yes. For the most part, the big numbers have been in the -- continue to be in the residential and commercial construction and development.

Okay. All right. Then maybe just one last question. Last quarter on the charge-offs the -- I guess ex the fraud, they were somewhere just south of $4 million. This quarter they are back north of $8 million. I mean, what was the linked quarter change? I realized last quarter [$3.7 million] was low, relative to the previous quarters, but just the bounce back up this quarter and I guess can you talk a little bit about that change?

Brian, you are going to have to repeat the question. I'm not sure we got it.

Just the charge-offs this quarter were up around $8 million or north of $8 million. Last quarter link you back out the fraud they were closer to $4 million. Just trying to get a little bit of clarity on what the increase in charge-offs I guess kind of the ex the loan fraud word this quarter and if this quarter was last quarter just an unusually low number in your thinking?

Right. Well again, there are several things going on. There is the timing of receipts of appraisals and therefore charging off errors. The fact that again in second quarter is a high quarter for getting statements and recognizing either problems that are significant enough to cause risk rating changes or, in the extreme, severe enough that would cause us to reevaluate and take some markdowns based on those fiscal year end results.

Okay. All right. Thanks, Harvey.

All right. Well, that's all the questions we've got in the queue. So just to kind of put a bow on our quarter, I think we continue to work on both fronts in proven problem loan categories, making good headway there and expanding the core earnings capacity of the firm, making good headway on the pretax pre-provision and expect forward progress on both of those priorities in the third quarter. Thanks for being with us.

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