Pinnacle Financial Partners Inc (PNFPP) 2011 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Pinnacle Financial Partners third-quarter 2011 earnings conference call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer. He is joined by Harold Carpenter, Chief Financial Officer, 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 will replay on Pinnacle's website for the next 90 days. At this time all participants have been placed in a listen-only mode. The floor will be open for your questions following the presentation. (Operator Instructions)

Before we begin, Pinnacle does not provide earnings guidance or forecasts. During this presentation we may make comments which may constitute forward-looking statements. All forward-looking statements are subject to risks, uncertainties and other 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 to not put undue reliance on such forward-looking statements. A more detailed description of these and other risks is contained in Pinnacle Financial's most recent annual report on Form 10-K. Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise.

In addition, these remarks include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to the comparable GAAP measures will be available on Pinnacle Financial's 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, operator. Good morning. Throughout 2010 and year to date in 2011, we focused on two primary priorities. One, building the core earnings capacity of the firm, the other aggressively dealing with credit issues. So as usual, we will address our substantial progress on both 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 consistent and significant progress. It is my intent to continue this same reporting format, at least through year-end, or until I believe the resolution of credit issues will no longer require such extensive review and we can focus our dialogue 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 of 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.

In terms of expanding the core earnings capacity of this firm, clearly the two most significant levers we have are accelerating loan volumes, particularly C&I volumes, and expanding the margin. Despite generally anemic loan demand and the very significant headwinds that are created by our rapid disposition of problem loans, we have still managed to grow period end loans 1.2% on a linked quarter basis. As I think most of you know over the last two years, we have meaningfully altered the mix of our loan portfolio away from residential real estate and toward C&I, which has long been the wheelhouse of this firm.

End of period C&I plus owner-occupied real estate loans were up 3.1% linked quarter and 9.2% year over year. That category, C&I plus owner-occupied real estate, now makes up roughly 56% of our loan book, while total construction, land act and development loans now make up just 9%. Largely this growth in the C&I sector is a result of our ability to move business clients from our large bank competitors in this market.

A further point as it relates to our ability to grow market share is that average non-interest-bearing deposits grew at 6.8% on a linked quarter basis and over 25% from 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 banking relationships, meaning real clients. As credit costs subside, in my opinion, the real winners will be those that can reliably grow primary banking relationships.

The net interest margin expanded nicely from 3.55% last quarter to 3.60% 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 two quarters ago that we have been 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 noninterest income growth. Exclusive of securities gains and losses, it is up 5.5% for the quarter, 12.9% 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 2.3% for the quarter, 7.6% over the same quarter last year.

Most importantly, we continue to make substantial progress on pretax pre-prevision earnings exclusive of securities sales and OREO expenses, up 6.1% for the quarter and 13.4% over the same quarter last year.

Let me focus just a minute on asset quality improvements and specifically on reductions in problem assets. As you can see, we have continued to make meaningful progress reducing virtually every important problem asset category this quarter, year over year, and consecutively for between 5 and 10 quarters.

Net charge-offs were roughly $5.7 million for the quarter. That is down 33% from the previous quarter. OREO expenses of $5.1 million were up from the $3.8 million the prior year, but combining those two our total credit losses were down 13% in the third quarter, 31.9% year over year, and for the fifth consecutive quarter.

Nonperforming loans shrank by roughly $5 million during the quarter from $60 million to $55 million, a linked quarter reduction of 8.5%. And that is the sixth consecutive quarterly reduction there, down nearly 47% from last September. Nonperforming assets -- and that is defined as NPLs plus OREO -- were down $12 million during the quarter. That is roughly 11%.

Nonperforming loan inflows continued to slow during the quarter. Classified loans shrank by roughly $16.8 million during the third quarter, a linked quarter reduction of nearly 8%. That is also the fifth consecutive quarterly reduction, down 46.7% from last year.

Potential problem loans shrank approximately $17.5 million during the quarter. That is roughly 12%, 51% year over year, which represents a very significant reduction to the risk in our loan portfolio. And we continue to reduce exposure in the construction and development portfolio. That is the portfolio that has plagued us over the last two years. It is down 22.5% since last September and nearly 60% from its peak back in March of 2009.

Despite the solid improvements, we still have room to improve core earnings as we continue to rid ourselves of problem assets. But as you can see, third quarter was a great quarter for us in terms of execution against our two primary objectives. And most importantly, all of this put us in a position to reverse our deferred tax asset valuation reserve.

So let me turn it over to Harold to review the financial performance in greater detail.

Thanks, Terry. I have several slides that follow that discuss the points mentioned on this slide. We are very pleased with the loan growth in the third quarter, and are optimistic about experiencing similar if not slightly more growth in the fourth quarter. DDA balances continue to show outsized growth with average balances now up 25.8% from the same quarter of last year.

We are pleased with the margin increasing for the fourth consecutive quarter to 3.60%, and believe we have opportunities to increase the margin going into the fourth quarter. We are also pleased with the manner in which our relationship managers have managed their deposit clients, with continuing 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 fourth quarter, which I will speak to in just a minute.

Aggressive referral programs have aided increases in our wealth management fees for the first nine months of 2011. We believe this will continue to pay dividends for us in the future. As we mentioned last quarter, we anticipated our expense run rate to be fairly consistent with that of the second quarter. Our belief is that our expense run rate absent any unusual fluctuations and ORE costs should be fairly stable for the remainder of this year.

This slide details the quarterly growth we have experienced in loans, particularly C&I and owner occupied CRE loans. Similar to our experiences earlier this year, during the third quarter we began to see our loan balances stabilize and ultimately show some momentum pointing toward growth. In fact, sustained loan growth appears more likely today than it did in the first quarter of this year when we were all believing that the economy was appearing to gain some traction.

It appears at this point, which is early in the fourth quarter, that our pipelines for the fourth quarter appear to be fairly robust, such that we are gaining confidence that we should experience similar if not slightly better growth in loans in the fourth quarter. Last quarter we experienced several large paydowns which negatively impacted our second-quarter C&I growth. Over the last few months we have added several new relationship managers and are actively recruiting several more positions currently, which also serves to support our organic loan growth forecast.

This slide details the growth we are experiencing in average DDA balances since the first quarter of 2010. We are particularly proud of the efforts of our sales force here. Year-over-year growth in dollars is approximately 25%. At September 30, 2011, our average DDA account is almost $18,000 compared to $15,600 a year ago, an increase of more than 15%; while at the same time, the absolute number of accounts is up almost 10%.

We have analyzed this growth in a number of ways to determine just how sticky these balances may be once the FDIC insurance is adjusted at the end of 2012, and the yield curve begins to escalate, making investing excess cash more valuable. Although accurately predicting an outcome is difficult and not without risk, what we do know is that we are winning accounts due to many quarters of focused selling efforts on middle-market established businesses in Nashville and Knoxville, which tend to keep meaningful demand account balances.

Additionally, we experienced an approximate 73% uptick in consumer transaction account openings in August and September from previous months this year, due to increased marketing efforts across a broad spectrum, but primarily owner-managed businesses, our partnering with the Tennessee Titans to increase the number of Titan debit card accounts and, of course, increased discontent by debit cardholders with larger regional banks.

In fact, we will be escalating a marketing campaign with the Titans through several new local cable TV spots aimed at regional bank debit cardholders who feel like they are taking a hit from the big banks. For those of you that have followed our company over the years, this represents a slight change in our marketing strategy, which relied almost exclusively on one-on-one marketing. But we feel like the debit card fee dissatisfaction among customers represents a great consumer deposit growth opportunity for us. We have seen consumer accounts that have been established at regional banks for 30 years now finding their way to Pinnacle.

Now shifting gears to the income statement, this slide details some additional information on the good work we have done in growing our margin. As the blue bars indicate, we have seen our margin increase from 3.25% in the first quarter of 2010 to now 3.60%. This is driven largely by meaningful decreases in cost of funds as the red line indicates.

Our interest cost at 77 basis points, we believe, continue to exceed most peers. And as a result, we remain optimistic that continued reduction in cost of funds will occur for the remainder of this year. As we have mentioned for several quarters, loan pricing is very competitive for quality borrowers. As a result, we don't anticipate seeing any uptick in loan yields at this time.

This slide details the quarterly trends of our net interest income and our net interest margin. As you can see, our linked quarter net interest income between the third quarter of 2010 and the third quarter of 2011 increased by $2.3 million. Helping our margin increase during the third quarter of 2011 was our nonperforming assets, again showing a decrease.

Just as an FYI, during the second quarter we reversed $225,000 in accrued interest related to nonperformers compared to $279,000 in the third quarter. But these numbers are significantly below amounts from previous quarters.

As to liquidity, our average cash position in the third quarter of 2011 was roughly $120 million, which was the same as the $122 million in the second quarter, compared to $230 million in the third quarter of last year. We will continue to manage cash prudently in an effort to further strengthen our margins.

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. Some may refer to this as the core margin. In any event, we continue to see expansion.

This is net interest income from loans funded by customer deposits. You can see it has ramped up nicely over the last few quarters and continues to show a positive trend now with a 4% margin, which we believe is very powerful. 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 that is 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 the year was a slowing in prepayments on our bond portfolio. Over the last few months, prepayments on our mortgage backed securities have increased meaningfully, thus causing our premium amortization to increase, resulting in reduced bond yields. We believe this will continue over the next several months as the mortgage refinance business is very active at present.

As to margin enhancement opportunities, a consistent margin improvement opportunity continues to be within our upcoming maturities on CDs. The $160 million represents almost 19% of our CD book. As you can see, the CDs are currently priced at approximately 1.5%, and our target to reprice these CDs is in the 75 basis point range. We should note that during this entire time, the average maturity of our CD book has remained at approximately eight to nine months.

Additionally and similar to the good work we have done on CDs, our sales force has done a remarkable job managing client expectations on our money market accounts. We believe we have more than $200 million in money market accounts where we will continue to negotiate with these clients to achieve what we believe to be a fairer rate in this interest rate environment.

Last quarter this slide detailed a number of approximately $580 million in above-market pricing on money market accounts. So you can see our sales force has managed these numbers quite well over the last quarter. From this point, we continue to believe a 10 to 15 basis point improvement in money market rates is achievable.

Before I briefly discuss capital, looking at our P&L trends, our adjusted pretax pre-provision increased from $14.1 million in the first quarter of this year to $17.5 million in the third quarter, a 23.5% increase over the last six months. As noted at the bottom of the chart, we have highlighted a few items which impact our run rates, including securities transactions and ORE expenses. Over time as our ORE book trends downward, expenses associated with managing and disposing of these properties should trend likewise.

As you can see, we continue to have a strong capital position. With the reversal of the DTA valuation allowance, we were able to realize approximately 65 basis points of additional tangible equity this quarter, and 40 basis points of risk-based capital. Of course, our capital position is enhanced by $95 million in TARP proceeds, which obviously begs the question, what are our current plans as it relates to TARP redemption, which Terry will address later in the call.

With that, I will turn it over to Harvey to discuss credit trends.

Thank you, Harold. Let me start with the actual loss experience for the quarter. As you know, charging off a loan and charging down other real estate owned through OREO expense are essentially the same thing. So we believe that these should be looked at together. This bargraph shows that the sum of these two numbers has been decreasing, and decreasing steadily for the past five quarters.

I will also point out that for 2011, our own internal loan review group is on track to review slightly over 70% of our portfolio. And in the third quarter of 2011, we had our annual OCC safety and soundness exam. Thus, these numbers that we are citing for the third quarter of 2011 and, in fact, for all of 2011 are after our portfolio has received review.

We have presented this slide for several quarters now, and it continues to tell the same story. The top segment, the top line, shows our non-accrual loans that are actually past due. As in the past, although this statistic is not on the slide, about 47% of our non-accrual loans are actually paying and not past due. But this first slide shows the non-accruals that truly are past due.

Then the middle section, middle three lines, show the past dues that are on the accruing loans that are in our special assets area and already identified as problem loans. And the point of this slide really is the bottom line. Our past rated credit still handled in the line had past dues of just 13 basis points this quarter. This number has been in the range of 8 basis points to about 20 basis points every quarter for at least the past year.

This is extremely clean and to us, this says that there are not many credits still on the line which are having difficulty paying us at this time. Potential problem loans are defined as classified loans that are healthy enough that we are still accruing interest on them. Of course, 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 it go from 9.3% a year ago to less than half that level or 4.04% at September 30, 2011, is something we consider to be an impressive accomplishment.

This next slide shows by loan category our nonperforming loans for the past four quarters, plus the nonperforming loans for our peer group banks for the second quarter of 2011, which is the last available data. The two things to note here are that our total nonperforming loans continue to decrease each quarter, which is the bottom line you can see, and that in all categories our nonperforming loans are better than our peers.

The bargraph -- this bargraph on this slide shows the same trend really as an earlier slide, that our nonperforming loans continue a trend of reducing each quarter. But in addition, the line on this chart shows that the ratio of allowance for loan losses to nonperforming loans has reached 137% as of September, up very significantly from all the 2010 levels and improving each quarter.

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

So, obviously, most of our nonperforming asset disposition during those quarters was getting accomplished by selling NPAs or selling off properties or resolving them, rather than just charging them off. Except for the extraordinary second quarter of 2010, we have now been in the $30 million to $45 million range for almost two years. And it is reasonable to assume that this is a range we feel comfortable with for the immediate future.

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, 120.3%, by current appraisals with an average age of a little over three months. We believe our OREO valuations are good and expect minimal losses on disposition. We anticipate continued high levels of OREO over the next few quarters, as we continue to move troubled loans through OREO to ultimate resolution.

Again, the fact that 45.4% of our nonperforming assets were OREO indicates that we are aggressive in pushing these assets through the process. We have a few large properties scheduled for foreclosure in the fourth quarter, which could result in flat to slightly higher OREO balances at December 31. This could be and probably will be impacted somewhat by the possibility that some of our borrowers will declare bankruptcy in order to avoid the foreclosure, which obviously slows the movement through the process to ultimate resolution.

The previous slide showed OREO balances relative to current appraisals. And this slide shows that we have already marked down our OREO in line with our actual experience on disposition. The left column starts with the loan balance prior to any markdowns, walks through the various level of markdowns, and shows that for the OREO that we have sold so far in 2011, we ended up getting 61.7% of the original loan.

The right column is similar, but is for the properties that we still have in OREO as of September 30. And the point of this is that we have already marked down this OREO to 60.2% of the original loan, slightly lower than what our actual year-to-date experience has been.

Our OREO disposition strategy goes hand-in-hand with our strategy to dispose of all of our nonperforming assets. We have had seven consecutive quarters of NPA disposition activity, including OREO sales, such that NPA dispositions are in the $30 million to $45 million per quarter range. We anticipate this pace should continue in the future as we stick to our plan, which calls for consistent disposition of these problem assets.

Our OREO disposition strategy really begins with our nonperforming loan migration, as approximately 47% of our NPLs are contractually performing and are not delinquent. We anticipate 40% of our NPLs to be moving to foreclosure and, in fact, again, most of these are scheduled for foreclosure in the next three to six months. Again, they could be delayed if the borrowers elect bankruptcy protection.

We continue to obtain updated and independent third-party appraisals every nine months on both our OREO and on nonperforming loans. In fact, our current average age of our OREO appraisals was less than four months. Assets are appropriately marked down upon receipt of these valuations, and as mentioned in the previous slide, our OREO marks approximate our historic loss rate.

Our current OREO book is about eight months in average age. We continue to monitor this statistic to keep the age of the book in a reasonable range. As assets increase in age in the OREO book, we will place more emphasis on the assets for disposition. Again, OREO comprises 45% of our NPAs, and we expect this percentage to increase as we continue to take aggressive strategic action for the procurement and sale of these problem assets.

We continue to believe that our current strategy of disposing of OREO and individually negotiated transactions is the best way to go. However, we will continue our ongoing evaluation of any potential bulk sale transaction that would make sense for us.

Again, we plan to manage NPLs aggressively. I just mentioned that about 40% of the NPLs worth almost $22 million we expect will go through foreclosure. Once we determine that that is the right course of action, we proceed with haste, mark down the OREO to current appraisals and dispose of it in an appropriate timeframe.

This is a new slide, although I think I have talked through the statistics contained in it verbally in past calls. But it breaks down -- it takes our $45.5 million of OREO and breaks it down by type of property. Then for each property type, it shows how much of that category is expected to be sold within the next three to six months.

And for this $17.8 million, almost $17.9 million, we have contracts or are in serious negotiations with most of that $17.9 million. Then in the next column we show how many of the OREOs are in active projects where sales activity continues, and we expect the total liquidation to take place within a two-year timeframe.

And then the final column, labeled Other Properties, is where we do not have sales activity that would indicate a near-term sale. The total of this slowly moving real estate is $6 million, essentially all of which is in undeveloped land. Clearly this is where our challenges are, but fortunately this is a relatively low number.

With that let me turn it back over to Terry.

Okay, thanks, Harvey. Throughout 2010 and first half of 2011 we really focused on the two primary objectives -- aggressively dealing with credit issues and building the core earnings capacity of the firm. But at this point I would add two additional priorities -- increase selling efforts and TARP redemption. Let me talk about increase selling efforts first.

As I have said for some time, I don't expect a robust economy anytime soon, so growth will likely only come to those who are capable of moving market share. Since our inception in 2000, we have built a great track record for hiring high-producing relationship managers, enabling them to move their long-term clients to us. We suspended our recruitment efforts over the last two years as we have focused more on problem asset resolution, but we have recently rekindled those recruitment efforts.

We are having good early-stage success. We have already made four meaningful hires. We are in late-stage negotiation with two others. The average experience in our market of all six of these high-producing relationship managers is well north of 20 years.

This is the same strategy we deployed so successfully during the first seven or eight years of our existence. It's the single best way to take market share and grow a bank without taking abnormal credit risk. These relationship managers move their long-standing relationships and leave any bad credits behind. You get relatively rapid growth with extraordinary asset quality.

You know, our experience was during the first eight years of our firm's existence deploying this strategy we only incurred approximately 8 basis points in net charge-offs. So, again, the idea is it's a relatively safe way to grow the balance sheet.

Another big market share moving opportunity is the fee imposed by all our large bank competitors on debit card users. In my career I have never encountered such customer resistance. Tom Brown, the noted bank stock analyst, has indicated he believes that annual volume of checking accounts opened by community banks in the US will double this year as a result of customers leaving big banks and moving to smaller ones.

As the official bank of the Tennessee Titans, we are partnering with them on a debit card campaign aimed at attracting customers who are looking for a no-fee debit card. The campaign includes significant in-stadium promotion, television ads, e-mail solicitations, and a social media campaign specifically using Facebook.

Thirdly, much has been said about our success in gathering business clients; however, embarrassingly, our penetration of business owners and employees is relatively low compared to peer banks. We are in the early-stage execution of an initiative to increase our penetration of those owners and employees, which we believe is a meaningful balance sheet growth opportunity.

You heard Harold describe earlier the fact that our account openings the last two months are up north of 70% from the previous year-to-date run rate. So we believe we are getting good early-stage success. These are tangible opportunities to increase market share, grow our balance sheet with relatively low risk.

Before I discuss the second additional priority, redeeming TARP, let me talk a little about the operating conditions that should allow us to continue to produce this growth through market share movement.

This slide is really intended to substantiate the relative strength of the Nashville and Knoxville markets. On the left you can see the change in employment beginning in 2010 through August of 2011. As you can see, our two markets are growing employment faster than most markets, in line with Austin, Texas, better than Raleigh-Durham. 2011 is especially promising with big job announcements by Nissan, Bank of New York Mellon, the IRS, and General Motors with a big job announcement here recently to name a few.

All of this is consistent with Forbes recent rating of Nashville as number three on their list of the next big boomtowns, based primarily on job creation and demographics. So it's quite an honor for us to be ahead of markets like San Antonio, Houston, and Dallas.

Here is another look at the job recovery in Nashville and Knoxville. The top left chart shows that since peak employment for the US in late 2007 the nation consistently lost jobs through mid-2010 and then began to create some jobs, such that now the number of jobs appears to be about 5% less than the peak employment at the end of the year 2007.

The key area of focus is from the bottom in mid-2010 the nation has only recovered about 20% of the lost jobs. Compare that trend to Nashville's and Knoxville's trends, which are in the charts on the right. Nashville and Knoxville have both recovered roughly 50% of the jobs lost from peak employment compared to the nation's recovering less than 20%. We believe that if our markets can continue this pace then lots of good things happen, including reduced unemployment and housing inventories.

Concerning housing, we have been showing these slides for a number of quarters. We believe Nashville's residential real estate market continues to improve. Perhaps the only blemish is the average median home price is down a little, roughly 2.4% year over year, but that is not too bad.

More importantly, residential inventory is down 13.3% compared to last September. Residential closings are up 16.7% over the same period and the months of inventory have declined from 11.4 last September to 8.5 this September.

In addition is the fact that our market should recover more quickly than the nation as a whole. Our position in our market should position us to successfully move market share and grow our balance sheet with relatively low risk strategies I mentioned a moment ago.

On this slide, this is Greenwich research. It addresses small and middle market businesses with sales from $1 million to $500 million in Nashville, Tennessee.

Let me describe the chart on the left first. The y-axis is the market share penetration, in other words the percentage of businesses who have some relationship with the Bank, and the x-axis is client satisfaction. The crosshair really represents the median of the top five banks in the state of Tennessee, and so the idea here is to get into the top right quadrant.

You would be an outperformer in terms of translating client satisfaction into market share were you in the top right quadrant. So again, this, in my judgment, lends credence to our ability to translate our service formula into market share movement.

As you can see, really in just 11 short years at 23% we are actually challenging 100-year-old franchises in terms of market share, and we are relatively unchallenged in terms of client satisfaction. So the marketplace really does appreciate what we are offering and, again, we have been highly successful at taking share from those larger regional banks.

Switching to the chart on the right, this chart gives you a chance to see the percentage of lead relationships. That is the volume of businesses that describe you as their most important bank. As you can see, Pinnacle has grown lead share as well and is now number one in our market among businesses with sales from $1 million to $500 million. So, again, the point is not only have we been, but we should continue to be successful aggregating small and mid-size business clients in our market.

Now to the TARP redemption priority. For the last four or five 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 and to minimize or avoid common share dilution if possible. At this point that would still be my view of the course we should take. That said, I believe our substantial progress this quarter, combined with our current outlook for the next several quarters, may accelerate our opportunity to do that.

First of all, and this is important, we don't know what the Fed would require of us to repay TARP. But based on our analysis of those who have redeemed 100% of TARP through June 30, 2011, if you consider our current Tier 1 leverage ratio and include a modest amount, say $25 million, of additional earnings or perhaps some other form of alternative capital, that result would put us well above the median on Tier 1 leverage ratios based on analysis of approximately 140 TARP redeemers.

For that matter, if you don't include the $25 million, our current position of 9.8% Tier 1 leverage would be right at the median of TARP redeemers. To be clear, I am comparing what our Tier 1 leverage would be post-TARP to the current capital positions of all those who have repaid TARP, regardless of when they repaid TARP, after any common raises or subsequent earnings.

As to total risk-based capital, our argument isn't quite as strong there, but total risk-based capital includes Tier 2 capital which can be accomplished in a number of non-dilutive -- with a number of non-dilutive alternatives. Again, and just emphasize, we need regulatory cooperation to accomplish any of these particular tactics.

Given the low cost of capital that TARP represents, I am still willing to continue asset quality improvements and capital accretion through earnings or some other alternative non-common capital instrument in an effort to qualify for TARP repayment and, hopefully, little or no common dilution.

I guess, looking forward, we have made significant progress on our net interest margin from its low at 2.72% in March of 2009 to 3.60% last quarter. We expect continued margin expansion in the fourth quarter of this year. You may recall we used a similar slide last quarter to size our ongoing margin expansion opportunity. To help you think about sizing that ongoing margin expansion opportunity, let me start with the reduction in non-performing assets.

As we reduce the level of NPAs and as we replace non-performing assets with performing loans that lift in loan volumes represents a significant margin expansion opportunity. Assuming that we have moved from the third quarter NPA to total assets, an ORE a ratio of 3.05% just down to 1.50%, and reinvest in performing assets that would improve the margin 2 to 4 basis points.

Harold highlighted the cost of funds reduction opportunity just a few minutes ago. Over time we would expect that to translate to 4 to 9 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 that liquidity with loan growth, we expect to add another 1 to 4 basis points in net interest margin. So you can see over time we believe that we still have a pretty good opportunity to grow our NIM, say, from the 3.60% current level to something in the range of 3.67% to 3.77%.

Specifically, as it relates to fourth quarter, lending opportunities from both clients and prospects appear to be increasing at this point, so we would expect continuing momentum in net loan growth, particularly C&I. You heard Harold size the volume of CDs to be repriced in the fourth quarter at roughly $160 million. The rate pick up should approximate 50 to 75 basis points there. That in conjunction with the reinvestment in non-performing assets should lead to continued margin expansion in the quarter.

As it relates to NPL and NPA resolution, we expect the pace to continue in the third quarter -- expect the pace of the third quarter to continue in the fourth. Specifically recall that we have roughly $55 million in NPLs. As Harvey said, roughly $25 million of those are contractually performing, leaving only about $30 million in some states of delinquency or default. We have already scheduled foreclosures for $10 million of those during the quarter and, of course, as Harvey noted, potential bankruptcy filings could slow that pace.

As it relates to fee income, we have got major emphasis with our sales force on referrals to various fee businesses, particularly investments, trusts, and insurance where actually we are making very nice progress. We would expect total non-interest income to be up slightly next quarter. On expenses, ex-OREO expenses we will generally hold the third-quarter run rate.

Operator, I will stop there and we will open the floor for questions.

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

Good morning, everyone. First question probably for Harold.

Harold, you mentioned how it seems like you expect the margin to expand some more in fourth quarter, but then in the release you said how it's probably going to be more challenging in 2012. But it seems like what we are hearing from most of the banks with this spread environment; is it not only going to be tougher to grow it but is it going to be tougher to keep it stable?

I know there is a lot of moving parts and you probably have some continued ability to ratchet down funding costs. But given what we are seeing and given that if you are going to go out and take market share I would suspect you are going to use price somewhat to do that, should we expect not only the margin to be stable in 2012 but maybe to compress a little? Thanks.

Yes, Kevin, I have been reading a lot of reports lately coming out of earnings for these other banks and you are on target there. We are all expecting the flat yield curve to be more difficult for us to maintain margins, particularly in the bond book.

I will offer a couple of things for you. One is our ability to get floors on loans remains pretty good. That is still a strong pricing opportunity for us and our interest at cost on deposits represents about 18% of our revenue. That is fairly high when I look across peer banks as far as what other banks have been able to do as far as capturing more savings on the funding side of the balance sheet.

We still think we have got room to run there to continue to lower funding costs and help our margin, but you are right, there is going to be headwinds coming in 2012. We are projecting that we will see continued deterioration in the bond book.

I will let Terry talk about the strategy as far as growing the loan book and not losing pricing.

Yes, I think, Kevin, the only thing I would really add to Harold's comments in terms of ability to work on the cost of funds side, you know I think the stats would show we -- if you look at core deposit growth, it has been very strong, outpaced all the banks in this market, which would tell me that we are taking share. As you know, that is different than FDIC deposit share which is looking at total deposits.

But the growth in core deposits, the growth in DDA that has occurred over the last 12 months we have clearly been taking share and we have done that at a time we are driving cost of funds lower and lower. And so my belief is that, particularly on the deposit side, you don't have to use price as the lever to move the business.

I think Harold's points are accurate. There is no doubt that there are too many banks chasing too few deals on the asset side. There will be pricing on the loan side, but thus far we have been able to continue to get our floors. I don't know, Harold, we are probably year-to-date down 15 to 20 basis points on loan yields, but have been able to move the cost of funds substantially further.

Just one follow-up, Terry. When you guys talk about improving the core earnings capacity of the Company, specifically the pretax, pre-credit capability, one item -- it seems like you all don't talk about it much, but every other bank is highlighting it because it's the one item truly in their control is attacking non-credit expenses.

It seems like you all -- that has kind of been going up quarterly, but recently stabilized. If it's going to be a tough revenue environment is that something you guys all have looked at or have plans in your back pocket to go after that and cut in areas if maybe the loan growth doesn't materialize like you think? Or is it simply that you guys are -- you feel so strongly about being able to take the market share that you are going to have higher comp expenses from bringing these people on? Is that the difference?

Yes, I mean that is a good question. Let me hit at two or three key points in there as it relates to these expense levels.

I believe that as a firm we have done good work on expenses. We have remixed the expense base during 2011. When I say that the principal area that has gone up is compensation expense, it has gone from an incentive payout of zero to an incentive payout this year that would be slightly above the target based on above-target performance.

We have fundamentally paid for all that incremental compensation expense by reducing other non-interest expense categories. So I don't want you to think that we are oblivious to non-interest expenses, but we have had to walk back in from zero expense for incentive compensation last year to $8.5 million or so in compensation expense this year. And we funded that through other expense cuts.

So that is one thing. Secondarily, I do think it is right; we do believe that we are going to grow market share and be able to grow our balance sheet. We do believe that we are going to grow our revenue streams, and, honestly, that is the preferred path.

My belief as I have watched some of these banks working on the expense side, conducting reductions in force, doing some of those things; my own belief is some of those folks are doing permanent damage to their franchise. It will be hard to cut their way all the way to prosperity.

And so the better tact, assuming it can be done for us, in my judgment, is to grow the revenue and that is why we spend time talking about that. I do think we have an unusual opportunity, perhaps a better opportunity that some other people, to grow revenue. So that is the preferred path.

All that said, I will say we are tightly focused on what our business model calls for. And so if we are unsuccessful at producing revenues then we certainly have a number of items where we can step in and cut expenses. But again, I would view that to be more an action of last resort than first resort.

Okay, thanks very much.

Jefferson Harralson, KBW.

Can you guys hear me?

Yes, now we can.

Sorry about that. I wanted to ask a couple of credit questions; maybe this is for Harvey. The $5.1 million in OREO cost seems large for a $52 million book last quarter going at [42]. Is that $5.1 million generated from the mark when they go into OREO or is it kind of an ongoing marks as they sit there? Is it a loss on the sale or is it maintenance?

I think that roughly $3.5 million of that was appraised for write-down as it went in and the rest would be ongoing.

Okay. And so should we expect -- it sounds like we should expect that same type of number as you have a lot of loans moving through towards OREO?

I am sorry, can you ask that again?

Yes, it sounds like we should expect that type of $5 million number for the next few quarters, as you have -- as you continue to work through the NPLs and they move through OREO?

You know, not necessarily. I mean the $3.5 million of appraisal write-downs, whether they went in or while they are in there, I mean it's going to depend upon how the appraisals come in going forward. And a good bit of that was on really two projects and, quite frankly, some of that $3.6 million we are expecting to get back.

Some of the -- and by that I mean some of the write-down that is in that $3.5 million number we have already worked through some of that with some recovery. So it's a little bit of a moving target, but again a large part of it's going to be what happens in this market and how effective we are at selling and what the appraisers think about the market.

And how about the $17.5 million of inflows, NPL inflows this quarter? Is that a number that is going to be fairly consistent or should that be improving?

Well, it should be improving.

All right. And lastly, I want to ask -- maybe this is a Harold question -- on the Durbin bill. I guess going into the Durbin there was some disagreement on whether less than $10 billion banks would still be able to keep their fees because the networks might not have the technology to differentiate between a smaller bank and a larger bank. I guess, what has been the experience a few days into Durbin for your debit fees?

Well, right now debit fees are holding okay Jefferson, but we are not anticipating that we will continue to keep that. We will probably have a longer tail on that money running out, and we are projecting over a two to three year period, but we are not seeing any kind of meaningful decrease currently.

So you are still getting your $0.44 average charge, and do you expect that $0.44 average swipe fee to continue?

No, we are not expecting the $0.44 -- we are not expecting it to continue at all, but you said as of September 30 debit card fees held up okay. But we are not anticipating it to hold up.

All right. And what would happen to make that not hold up? Would this be a change by the networks or --? What change would you expect for it not to hold up?

Yes, we just have this inherent belief that the folks at Walmart or Target or whomever are going to figure out a way to get their share.

Got you. All right, got you. Thank you. Thanks, guys.

Mac Hodgson, SunTrust Robinson.

Good morning, everyone. This is [David Grayson] in for Mac. Congrats on the good quarter and getting that DTA back. I know that is a big weight off your shoulders.

Wanted to ask one -- my first question is on the hiring environment. I think previously you had indicated a ballpark of about 10 new hires was the target. You said you have got four locked down, two are in negotiation now. Should we still be looking at maybe a net new four relationship managers coming over, or have you changed your target?

And how should we be thinking about the personnel line item like next year and going forward?

Well, first of all, I think you are right on the headcounts -- four onboard, two in late-stage negotiation, and four or so to go. It might be plus or minus two from there I guess, but I think fundamentally the numbers you laid out that we have talked about before are still where we are headed.

I do think you probably get some increase in compensation expense associated with those, but we have had -- if you look at our headcount over the last year or so, headcounts are down pretty meaningfully. That was a large part of how we paid for the increased incentive expense.

I would expect there will be other net reductions that come out of the system as a whole and partially fund -- say, 40% to 50% of these incremental heads will be funded by the elimination of other positions in the firm, so that you are getting a net growth in headcount but partially funded by existing headcount.

Okay, that is helpful. And then I guess a conceptual question really related to the TARP redemption subject.

Your method has been pretty consistent; I think we know what you are thinking, but as far as the other capital alternatives, as you have indicated on slide 31, just maybe, Terry, if you could discuss your appetite for various alternatives therein. I don't know that you want to tip too much.

And then I guess maybe a follow-up on that for Harold would be is there anything we are maybe not looking at or not seeing immediately from your numbers that opportunities to unlock value in the balance sheet to generate capital?

David, I will start off on the TARP. We have seen a lot of new stuff happen over the last few months. It seems like to us the regulators are allowing some banking franchises to redeem TARP without any or with minimal common dilution or without any common dilution.

We have seen some preferred issuances to help accomplish that. We have seen some public debt issuances to help accomplish that. So you know we will just have to start working with our regulators, talking to them, trying to understand what their appetites are, so on and so forth.

So as far as capital alternatives other than earnings, I think it's a pretty broad spectrum right now so we are just going to have to start talking to regulators. As far as other value that might be in our balance sheet, I will take any kind of suggestions you might have for that.

But I think we are looking under a lot of rocks, but our core strategy is to let these relationship managers, who have 20 years of experience in this market, do their thing. We are seeing a lot of regional bank discontent right now and so we think we are going to be the preferred choice for somebody that wants to switch banks.

Okay. Thanks so much everyone. Great quarter.

Kevin Reynolds, Wunderlich Securities.

Good morning, everybody. Great quarter, Terry.

I wanted to sort of ask a question. You talk about towards the end of your presentation about C&I opportunities accelerating. And I know you have been talking about share movement and all of that so we sort of get the sense of where it might be coming from or how you might be getting it.

Can you talk about -- I may have asked you this last quarter, but can you talk about the nature of the industries or the business borrower out there and sort of is there any specific place that you would say is stronger than others in the C&I segment?

And then a second question is since the volatility in the financial markets picked up over the last few months have you noticed any change in customer attitudes out there? Are they more or less nervous, or are they just sort of taking it in stride and kind of moving along with their business?

Let me take the second part of that question first, just the sentiment idea. Boy, I have honestly been amazed at how quickly what I will call the Main Street borrowers respond to headlines and what is going on in Washington and those kinds of things.

My sense was early in the year that you had a little more optimism that was beginning to develop. It felt like we were fixing to get to a point where you would have loan demand. Then we got into the debate in Washington on the debt ceiling and the budget deficit and so forth. You could see that suck the energy right out of the market, discussions sort of ceased on ideas for expansion and those kinds of things.

But, honestly, here in the last month or so I would say -- again, I am just speaking anecdotally, what do you hear at cocktail parties, those kinds of things -- more optimism is creeping back in. Again, don't interpret that to say, hey, we have got an optimistic group of business people. We don't. But I am just saying I am surprised at how responsive their attitudes and outlooks are to the headlines, particularly Washington or national economic type headlines.

So, again, today it's a little better than it would have been four weeks ago. I guess would be my description on sentiment.

I think in terms of the C&I sector, what is going on out there, I would say in addition to just general market share movement, what kinds of borrowing requests are out there, I think people that are heavy users of equipment -- truck fleets, those kinds of things -- they have been strung out on deferred capital expenditures. And so we are seeing people that are willing to wade in at this point and refurbish a fleet or those kinds of things. So you have that sort of activity broadly, people that are heavy users of plant and equipment.

Then I think if you were looking for a sector that seems to be energetic with lots of activity in it I would say healthcare is clearly one where there is a lot going on, both among existing business, new business models, and so forth. But there is, I would say, a lot of activity in healthcare.

Harvey, would you have any other observations?

No, those are exactly the sectors I would point out and those would come to mind my mind as well, Terry.

Okay, thanks a lot.

Matt Olney, Stephens Inc.

I want to ask about the reversal of that DTA allowance. I assume this capital went to the holding company. And if so, how much excess capital do you guys now hold at the holding company?

Matt, this is Harold. Most of that reversal was at the Bank, so the bank picked up nearly all of that as additional capital.

So, in other words, no change at the holding company in terms of the capital there?

No change in the parent-only, but through a consolidation the parent financial statements get to pick up that benefit.

Okay. And then as a follow-up, thinking about the balance sheet remix in 2012, it looks like loan growth should be good. I know it's difficult to project what the securities market will look like in 2012, but as it stands right now, what is your preference on the securities balance? Would you let that run-off as some of these securities are cash flowed in or would you want to see those balances relatively stable next year?

Yes, we are going to do two things with the securities book, I believe, over the next four quarters or so. One is we are going to continue to reduce the duration of the book. The other is that this loan growth initiative will help us reduce our security balances as a percentage of total assets and let that additional liquidity go into loans. So that is kind of the plan right now, Matt.

Okay, thank you.

Peyton Green, Sterne Agee.

Okay, great, thank you. A question on the OREO mix; has changed fairly dramatically over the past year and I was just wondering maybe, Harvey, if you could talk about the loss exposure. Because certainly as we went through the residential cycle the losses were just harder to keep up with, but now you have more of a mix of commercial real estate properties that are in the OREO and the NPL mix.

Can you comment on what you are seeing in terms of your early experience in terms of getting out of those in a timely manner in terms of the loss rates?

Well, I think that in terms of as we kick the stuff out of OREO, 18 months ago we were looking at sort of 15% to 25%, say, average 20% kind of losses and where it's more in the 5% to 7% range on stuff we have done recently. So I think that, again, we sort of marked it down and I think our recent experience would say that, yes, we feel more comfortable that we are not going to have additional losses on disposition as we move it on out of OREO.

Okay. And I guess the guidance about the fourth quarter, I mean would you expect, given kind of the movement over the past two or three quarters down in potential problem loans and certainly classified loans, I mean would you expect the OREO expense piece to move down significantly in 2012 versus 2011.

Yes, I think so. I think that is safe.

Okay. And then on the deposit side, certainly the non-interest-bearing growth has been very, very good. How could you characterize the consumer account growth? Because I know historically it has not really been a focus of yours. But what kind of things are you seeing that make you as optimistic that it can be a focal point now?

Peyton, I think you were talking about consumer account growth. Obviously, the debit card fee issue is big. I mean it has been shocking.

We saw our average accounts or just the new account growth in August -- normally we see a slight uptick in August over the last few years because of the Titan's banking relationship, but this year it was really strong. And it has continued into September and our preliminary are indications for October is that it's still continuing. So this may be one of those once-in-an-every-now-and-again kind of opportunities to really grab some strong, profitable consumer market share.

Okay. And then, I mean thinking about the --

Peyton, if I could hit at that just one second to add to Harold's comments, I think he is right. I do think this is a once-in-a-lifetime catalyst. There are more people in play. You know I cited Tom Brown's belief that you are going to double the number of account openings in the banking system as people flock out of large banks to smaller community banks in favor of no debit card fee.

In terms of the position of this firm, as you know today we have got 31 offices in Nashville, Tennessee. That is a pretty meaningful retail presence. It's an advantaged branches system, in my opinion, in terms of it's in the new and best markets. And so again I think the combination ought to let us seize that opportunity.

The other thing I wouldn't want to minimize is our opportunity to grow consumer accounts among our business owners and their employees. As I have mentioned in the comments, we are in early-stage execution here but my belief is that is a very meaningful opportunity.

You know the client sat scores for business owners of our company. The fact that we hadn't penetrated them personally I think I guess characterizes -- as best as I can characterize it is it's low-hanging fruit and we think that represents a huge opportunity on the consumer side as well.

Okay, great. And I guess your marginal cost on this is pretty close to zero, isn't it?

That is correct.

Okay, great. And then on the loan growth side, I mean it just seems that -- I mean to me at least -- the Nashville market seems to be still ebbing and flowing depending on the season and the month. But maybe -- I mean what are you seeing from the officers that you have picked up from other banks in the area here and in Knoxville in terms of the customer movement over?

Because I think we went through a couple year period where was very hard to get customers to move, and I think you referenced this, but it's now a lot easier. Maybe if you could just give some color on that.

Yes, I think that is true. It is -- I think it always works this way at the tail of a credit cycle. Relationships are bruised, whether you are talking about the lenders at their institution or whether you are talking about their borrowing customers, and so you always see a lot of market share in play as you come out of a credit cycle. And so I mean I think that is exactly what we are finding.

Our strategy requires, first of all, us to be able to [unseat] relationship managers with large books of business. As I mentioned, I think we are exactly on track with what we said we would do and I think their ability to move the clients is very strong.

Okay. And then this will be the last one, but I guess in your slide deck there was no pass to fail C&D activity in the third quarter. I think that is the first quarter, probably in a long time, that you all had that, but would you expect that to carry through into the fourth quarter?

Well, we hope so. I mean if you look at what is still in the -- I think there is a slide in there that talks about what is still in the past category and talks about past dues. I think if you look at that it would indicate that, man, there doesn't seem to be anybody in that space that is getting ready to hit the wall from a liquidity, inability to pay point of view.

Okay. And then overall the C&D book is down to about 8.5% of total loans. Where do you think it bottoms out?

That depends upon the mix. I mean I would like less raw land, but I would like -- we have had pretty good luck in other categories. Even in land it sort of depends upon where it is, but, yes, we are probably near the bottom.

Peyton, I would say to that that I think it was down 1.2% on a linked-quarter basis, so you can tell from that that the run-out is slowing. And I agree with Harvey, we are about where we need to be in terms of total land at construction and development. We still have some mix opportunity within that category for less residential and more commercial, and we are, in fact, accomplishing that right now.

Okay, great. Thank you. Congratulations on a solid quarter.

Michael Rose, Raymond James.

Good morning, guys; just had a quick question. I don't know if you mentioned line utilization on the C&I side, but has there been any material change there?

We did not mention it, but, no, there really hasn't. It was up slightly in third quarter versus second quarter, but almost statistically insignificantly.

And what is that number?

In the C&I side?

Yes, and then overall if you could provide that. Thanks.

C&I it's about 55%, 54% and overall about 60%.

Okay, that is helpful. Then if I look at your Knoxville expansion and I go back to your original targets, at least for loan growth, you had forecasted loans to be at about $600 million by the end of 2011. It seems like you have come a little bit short, but still not back given the environment.

What is kind of the outlook as we look over the next couple of years in Knoxville? I mean, do you feel like you have the number of lenders there that you want? Obviously, you have three branches there; that is a little short of your original target of five.

I mean do you feel like you have the coverage there, and is that where the real growth opportunities are going to come from here in the shorter term? Is this kind of the general outlook? Is it a little muted?

That is a good question. You are right, we will finish just a hair short on the total loan volume targets that we originally set, a little bit shorter on the deposit side. And I think that is primarily because we suspended the branch build out at three. We were supposed to have five built out by this time, which of course primarily impacts the deposit side.

But I am excited about our market position over there. We are in a number six market share position using the FDIC market share data, that is out of 44 banks, and I think probably finish this quarter with about, a little bit north of $530 million in loans in that four-year period. And it continues to be a net grower.

We will continue to add offices over there. I think we had said previously that we will build out an office in Knoxville in 2012 and another in 2013, so a little behind but we will reach the five branch build out. We will continue to focus our hiring on commercial middle-market there and believe we will have continued growth opportunities.

Okay. And one final question; any updated thoughts on potentially entering the Memphis market at some point?

I guess I always have said, going back to some of the original presentations when we capitalized the Company, that we like three urban markets in Tennessee -- Nashville, Knoxville and Memphis. And so I guess having de novoed into Nashville and Knoxville I can imagine someday we will do that in Memphis, but we don't look at that as something we need to make happen by some period of time. That is not our focus.

It's an opportunistic focus, which is a function of when we believe we can lift out a large group of people like we did in Nashville, like we did in Knoxville. So it's a market of interest to us. I don't have anything that I would classify as a high odds of implementation right now, but we will continue to stay close to the market. If we find an opportunity we will take it.

Great, thanks guys.

Brian Martin, FIG Partners.

Hey, guys, nice quarter. Say, just one question, Terry, just talking about rekindling the hiring efforts. You talked about kind of what takes place fourth quarter. Can you just talk about the non-interest- or the non-credit-related expenses and just your hiring plans for 2012? Is it going to continue or can you give some sense for what your expectations are?

Yes, I believe that during 2012 our net headcount should go up eight to 10 FTEs during the year. There will be about five of those associated with new branch hiring that I mentioned just a moment ago for Knoxville, another five or so in the relationship management category, and then another five or so that are in other positions.

So you get sort of a gross addition of 15. We would have five to 10 eliminations there that you would net against it so that you end up with an eight to 10 FTE headcount increase.

Okay. And then just two other things. You talked about the loan yields being down this quarter a little bit, I guess, but still getting some ability to put floors on. Is that a pretty good level, or do you expect that to compress much at all, if at all, as you build out the loans over the next four to six quarters?

Brian, we are forecasting some more deterioration in loan yields but it's not -- it's maybe 10 bps or something like that for next year. It's not a lot. Who knows where it's going to end up. We are going to be very competitive, particularly on our customers that have where we believe the complete relationship with.

And then just last, just Harold, where was the cash position at the parent at quarter-end?

A little over $61 million, Brian.

$61 million. Okay, thanks a lot.

Bryce Rowe, Robert W. Baird.

Sorry to prolong the call here. Just a question, a follow-up on Peyton's questions there. You talked about the construction book kind of coming to a bottom here.

Terry, could you kind of quantify what the loan growth opportunity is with the new lenders coming on board? And then if there are any offsets to that within the current portfolio, are there segments of the portfolio that you are de-emphasizing?

No, I think I would say that in terms of emphasis and de-emphasis we have, I think, neared conclusion of the remix between real estate and C&I. Within the real estate category I do expect we will continue to de-emphasize residential and emphasize commercial, and as I have mentioned earlier we are seeing that. But other than that phenomenon I would not look for any further remix or de-emphasis going on there in the loan book.

I think we have not -- we have steered away from trying to quantify exactly what the new hires mean in terms of volumes, but I would say in the group that we are talking about there the average loan portfolio size is $85 million. And I would say that -- I think I have said in the last call or two in terms of attractiveness generally I can do an attractive deal for people that have loan books that we believe they are going to produce a loan book here of $40 million to $50 million.

So if we can clear that threshold we feel good about the hire, but our actual experience is about $85 million per relationship manager.

Okay, that is perfect. Thank you.

Bill Dezellem, Tieton Capital.

Thank you. We have a couple of questions. The first one is relative to the increasing loan activity that you are seeing in the last while here do you believe that is specific to Pinnacle and things that you are doing, or is this something more tied to the overall market as you referenced in the cocktail parties just feeling better?

I believe that it is -- obviously the two work together, but I believe it is more about the fact that there is great frustration -- again this wouldn't be my anecdotal information. People like Greenwich would substantiate that the number of businesses who are willing to consider switching banks today is about twice the level that it normally runs. So again that is typical of the end of the credit cycle phenomenon there.

I believe that our company is best positioned to seize on that vulnerability in that we have a number one lead share position as market; our client satisfaction scores really are extraordinary. When you couple that with the hiring that we are doing, I think those things fit together to produce growth. But I don't think there would be net economic growth going on in the market.

Thank you. And then my last question is a bit convoluted. But to what degree are you sensing that on the TARP repayment front that the regulators were -- somewhere back in Washington that there is a desire to get the TARP -- the banks to repay the TARP so that it's just one more opportunity to reduce the deficit and as a result they are being a bit more lenient in their mindset on TARP repayment?

Yes, I would say -- first of all, in conversations with regulators -- I mean no regulator has indicated to me that they are anxious for us to pay TARP off or that they are going to be lenient. There have just been no conversations, no indications. I mean I wouldn't be able to substantiate the first part of your thesis based on any sense that we get from regulators.

I will say that I have heard some investment bankers talking about that potentiality, but again I don't think I would necessarily pick that up from tone or tenor with regulators.

I am not sure it will really work that way. I know -- I can imagine that Treasury would like the TARP proceeds returned sooner as opposed to later. I think regulators, though, bank regulators like capital, and so -- I know it sounds odd, particularly with somebody like the OCC being a function of Treasury, but they seem to operate independently to me.

Thank you.

Steve Moss, Janney.

Good morning, guys. Two questions. Just wanted to ask about with regard to the tax rate in the fourth quarter, why that is going to be nominal? And then the second question being I was just wondering what the status of the elevated capital requirements are now that you have gone through the latest OCC review?

On the tax deal, the way the rules work on reversing a deferred tax valuation allowance is you have to effectively, and I will just use the term warehouse, the amount of tax expense you expect for the remainder of the calendar year. And then as that -- as those additional quarter or quarters come to fruition, you are trying to project a 0% effective tax rate in those future quarters for the calendar year. Then next year you go back to just the normal effective tax rate that we had prior to the DTA valuation allowance issue.

Okay, that is helpful. And then with regard to the capital requirements, are those still in place?

Yes, we are still -- we still have eight and 12 at the bank with the OCC. As Harvey mentioned, we went through an exam here over the last quarter. I would say that we were well pleased with the results of that exam.

Okay, thank you very much.

Thank you. I would now like to turn the program back to Mr. Turner for any final remarks.

Thank you, operator. I think in an effort to put a bow on our conversation here today we have really tried to talk about the continuing improvements that occurred during the third quarter as it related to improving the core earnings capacity of the firm and aggressively dealing with credit issues. I think this time we have added to that list of priorities that we are increasing our selling efforts and focused on the most efficient and effective way to repay TARP.

And I think our guidance as we go to the fourth quarter is generally that we would expect balance sheet growth, margin expansion, and a modest increase in fee income. So thank you for joining us.

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