Pinnacle Financial Partners Inc (PNFPP) 2012 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Pinnacle Financial Partners third-quarter 2012 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.

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 will be available for 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 to your questions following the presentation. (Operator Instructions) Analysts will be given preference during the Q&A.

Before we begin, Pinnacle does not provide earnings guidance or forecasts. During this presentation we may make comments which constitute as 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 revise any forward-looking statements contained in this presentation, whether as a result of new information, future events, or otherwise.

In addition, these remarks may include certain non-GAAP financial measures as defined by SEC regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of non-GAAP financial 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 President and CEO. Please go ahead.

Thanks, Mary. Good morning. For today's conference call we will briefly review the third-quarter performance, we will look at our future outlook in some detail, and then we will end with ample time for Q&A.

I want to point out that many of the slides we've covered in previous conference calls may not be discussed here today unless you have specific questions about them, but are updated and included in the supplemental information section of the slides.

I thought we would begin by a simple comparison of our third-quarter results to the guidance that we provided at the conclusion of last quarter's call. Our asset quality metrics continued to improve with an annualized net charge-off ratio for the quarter of just 22 basis points and NPAs dipping to 1.65% of loans in OREO for the first time in quite some time. We also experienced meaningful decreases in classified loans during the third quarter.

And we remain optimistic that the strong pace of the rehabilitation of our balance sheet will continue in the fourth quarter and early into next year as we move toward the completion of that rehabilitation.

Loans grew during the quarter by more than $80 million, which equates to an annualized growth rate of around 9.4%. Core deposits grew $52 million, an annualized growth rate of 6%. Cost of funds continued to decline down another 4 basis points on a linked-quarter basis to 53 basis points.

Net interest income was up $747,000 during the quarter. Year-to-date net interest income is up 7.5%.

Of course, the most important metric is EPS. Fully diluted EPS for the third quarter was $0.33 compared to last quarter's $0.23. You may remember that in the second quarter we included the impact of an accelerated depreciation of the remaining preferred stock discount in conjunction with the TARP redemption. So excluding the impact of the nonrecurring charge, fully diluted EPS approximated $0.27 in the second quarter compared to this quarter's $0.33, a linked-quarter increase of 22%.

Let me summarize the asset quality improvements and specifically the reductions in problem loans. As you can see, we have continued to make meaningful progress reducing virtually every important problem asset category this quarter, year over year, and consecutive sequential quarters for the last two to two-and-a-half years.

Net charge-offs were roughly $1.9 million for the quarter. That is down approximately $0.5 million from the prior quarter. OREO expenses of $2.4 million were also down from $3.1 million from the prior quarter. So combining those two our total credit losses were down more than 21% in the third quarter, almost 60% year over year and down for the ninth consecutive quarter.

Nonperforming loans shrank by roughly $4.3 million during the quarter from $41 million to $37 million. That is a linked quarter reduction of 10.4%. That is the 10th consecutive quarterly reduction there, down nearly 33% from last September.

Non-performing assets, and that is defined as NPLs plus OREO, were down $7.9 million during the quarter. That is roughly an 11.9% decline.

Classified loans shrank by roughly $17 million during the third quarter, a linked-quarter reduction of nearly 9.7%. That is also the ninth consecutive quarterly reduction there, down 21.8% from last year. Potential problem loans shrank by approximately $10 million during the quarter and $22.5 million year over year. That is roughly 8.3% versus the second quarter and a 16.9% year over year.

I wanted to introduce a couple of charts detailing the significant progress we've made on credit costs to help frame your thinking about loan-loss reserves. As you can see on the left, our NPAs are now at just $58.4 million, down from the $132.4 million at the first of last year. More importantly, we experienced inflows of only $4.6 million in new NPAs this quarter. That is the lowest number in a very long time.

Year-to-date dispositions of NPAs stand at just over $60 million. We had previously given guidance for dispositions of somewhere between $75 million and $100 million this year compared to the $131 million in dispositions in 2011, and we currently project it will fall in the low end of that range.

As to the allowance coverage ratio on the right, it has now risen to almost 189% of nonperforming loans, which we believe will continue to compare favorably to the median of most peer groups. So absent any meaningful change in the trajectory of our rehabilitation and absent the introduction of any new regulatory guidance that has not currently been received, I'd expect a similar level of reserve releases for the next several quarters.

A quick snapshot of the quarter also shows meaningful continued core earnings momentum over the last two years. The two most significant levers have been accelerating loan volumes, particularly C&I volumes, and expanding the margin.

Despite significant headwinds we have still managed to grow end-of-period loans $80 million on a linked-quarter basis and C&I plus owner-occupied real estate loans $53 million on linked-quarter basis. That translates to roughly an 11.9% annualized rate of growth.

I highlight that C&I growth because most of you know that is the primary thrust of our firm. I also want to highlight that we did experience a significant headwind in loan growth during the quarter that I've heard other banks discuss also, which was an unprecedented level of early payoffs. Harold is going to talk about that further in just a minute, but when you consider the roughly 9.4% linked-quarter annualized growth rate of the loan portfolio along with a previously unencountered level of payoffs, it really highlights the success our relationship managers are having generating loan volumes.

Another demonstration of our ability to grow volumes is that average non-interest-bearing DDA accounts continue to grow at a significant pace, and as you can see the year-over-year comparison is very strong, up more than 18%. So you can see we are growing loans at a dramatic pace.

We are adding business clients as evidenced by DDA accounts at a dramatic pace. And we are doing that at a time when there is limited economic demand for loan growth and, in fact, significant pay down and pay off headwinds. So I continue to be optimistic about the future rate of our loan growth, particularly when the economy begins to gain some traction, when working capital line utilizations return to a more normalized level, and businesses gain a little more confidence to invest and borrow again.

Our net interest margin expanded slightly from 3.76% last quarter to 3.78% this quarter. Harold will address that in further detail in the presentation. Noninterest income, exclusive of security gains, was up 7.2% while total revenues were up 7% on a year-over-year basis.

I believe all of these are really solid improvements. I think the good news is that we still have meaningful room to further improve core earnings as we continue to rid ourselves of problem assets and grow our balance sheet. But as you can see, by almost any measure the third quarter was a great quarter in terms of increasing the core earnings capacity of our franchise.

Let me turn it over to Harold for a more in-depth review of the third quarter.

Thanks, Terry. We've shown this slide for several quarters of the detail of the quarterly trends of our net interest income and our net interest margin. We are obviously pleased about the steady progress we've made on both these measures.

As we mentioned in last night's press release, we are anticipating continued loan growth for the remainder of 2012. Additionally, we are also gaining confidence that that loan growth will replace reduced funding costs as a primary engine for our net interest income growth in the coming quarters. We will look at our margin results in somewhat more detail over the next few slides.

Again, we've shown this slide from many quarters and it highlights the excellent job our relationship managers have done with respect to deposit pricing. As the green line indicates, we've experienced a meaningful decrease in cost deposits over the last seven quarters. We remain optimistic that a further reduction, albeit at a slower pace, in cost of cut funds will occur during the remainder of 2012 and into 2013 as we focus on reducing the cost of specific accounts.

We've also seen significant growth in core funding. Contributing to our growth in the core deposits has been the absolute growth in noninterest-bearing checking accounts, which we will discuss on the next slide.

Given the outlook for a slow or no growth economy, to hit our volume targets we have to gain market share and to hit our margin targets growing demand deposit accounts is a critical tactic. This slide details the strong and generally consistent growth we've experienced in average noninterest-bearing DDAs.

Since the third quarter of last year we've seen DDA balances grow by 16.8% and the net number of accounts increased by 16.4%. Generally speaking, if you gather checking accounts you gain market share. If you gain market share, you grow volumes.

As you can see by the blue bars, our business model focuses significantly on attracting commercial businesses to our franchise. When you compare our current DDA balances to DDA accounts at December 31, 2010, we've gathered approximately $240 million in new DDA accounts.

During this time, far and away we've experienced the greatest growth in the number of DDA accounts with balances less than $250,000, which compose about 47% of the new account growth. These balances should be unaffected by any changes to the transaction account guarantee, or TAG program.

As to newer DDA account balances greater than $250,000, these represent about 53% of the new balances. Theoretically, these are the accounts that would be at risk should the TAG program go away. We've surveyed our relationship managers and have specifically reviewed accounts greater than $1 million, which make up about $60 million in these new account balances. As a result of our procedures, we have believe we have a relatively insignificant risk to DDA account run-off should the TAG program be eliminated.

Furthermore, we, like you, are anxious to see our representatives in Washington take up the extension of the TAG program, but our understanding is that such legislation won't be addressed until December of this year just a few weeks before the end of the program. We, like our state regulators, support extension of the program because, as a community bank, it puts us on a more level playing field with the too-big-to-fail banks should customers believe the additional insurance is important.

However, and as I've mentioned previously, based on the work we've done to date, we don't believe our bank will be significantly impacted one way or the other regardless of whether the TAG program is extended.

We introduced this slide to you last quarter. As to loan growth, we are pleased where the blue bars are headed. As Terry mentioned, end-of-period loans are up an annualized rate of 9.4% linked quarter. We remain optimistic given our pipelines that loan growth will continue for the remainder of 2012. As you all know, loan yields, which are depicted by the green line, however, remain a challenge for our industry.

Our relationship managers have been well-versed on loan pricing, particularly risk-based pricing, and have been providing various tools to help them get the appropriate yield for their loans where we've got room to do better. Obviously reductions in nonperforming loans will continue to positively impact our future loan yields. That said, loan pricing remains very competitive in national (inaudible) for quality borrowers, and as noted in last night's press release our relationship managers have done a good job given we only sacrificed 3 basis points in loan yield during the third quarter.

Our position has been and will continue to be that in those instances where we believe we are a customer's primary bank, we will do everything in our power to not lose those particular accounts based on price.

As Terry alluded to earlier, we did experience high levels of early payoffs, which is obviously a headwind to loan growth. During the third quarter we've identified payoffs of more than $138 million, which we believe is about $18 million more than the second quarter of this year.

Now these payoffs don't include normal and recurring amortization. We believe that acceleration in loan payoffs is largely tied to three events. One, the availability of long-term fixed rates with non-recourse for income producing real estate that has been offered by non-bank providers like insurance companies and REITs, as well as similar aggressive lending structures proposed by the larger national and regional banking franchises.

Two, the fact that corporate America is now willing to part with some of the cash they've been storing up in order to reduce indebtedness, particularly given the relatively low value they received for that cash. And three, liquidity events for businesses whereby their owners have decided to cash out because of an unwillingness to risk another business downturn or because of capital gains taxes and the risks that their tax bill will be significantly higher if they have a liquidity event next year.

Based on client notifications that we've attained through our relationship managers, we anticipate more payoffs going into the fourth quarter but not at the levels of the last two quarters. Net-net, we continue to bring our new loan pipelines will produce continued growth in the fourth quarter of this year.

Now concerning line utilization, we've included in the supplemental information a chart on commercial line utilization. That chart reflects that our commercial borrowers' line utilization has not fluctuated very much over the last several quarters, ranging between 55% and 59% line utilization. We now have approximately $824 million in available commercial lines, up approximately 4% from the amount of the prior quarter and hopefully pointing towards future fundings.

Our belief would be that if confidence hopefully is restored at least some of those commitments will turn into funded borrowings. So as Terry mentioned earlier, when you consider the roughly 9.4% linked quarter annualized growth rate of the loan portfolio along with the previously unencountered level of payoffs, it really highlights the success our relationship managers are having growing their loan books and realizing their capacity.

I also want to address the bond book as it has also been an influencer of our margin. We've not shown this slide before, but I think it's helpful to understand our balance sheet repositioning strategy at least on the left side of the balance sheet.

As noted on the slide, at the beginning of last year we had greater than $1 billion in our bond book. We had purposefully managed the bond book to now below $800 million and anticipate continued contraction as we deploy most of the bond book's cash flows into quality lending opportunities. We are grateful to have loan growth as a viable option for bond book cash flows.

For the type of bonds we generally acquire, which are five-year average life type securities, yields are raging at approximately 2% or less on those new acquisitions which makes us think we like quality loans much better. Bonds represent approximately 15% of our asset base at the third quarter end. We think that number could be in the 14%s by the end of this year.

Now moving down the P&L path to margin and into credit costs, as Terry noted, total credit costs continue to trend down. We traditionally define total credit costs for our firm as a sum of net loan charge-offs and ORE expense. This bar graph shows that the sum of net charge-offs and ORE expense has been decreasing and decreasing steadily for the past seven quarters.

As to charge-offs, we recorded a $1.9 million in the third quarter of 2012, down from $2.4 million in the second quarter. Provision expense for the third quarter was $1.4 million, up from the $634,000 in the second quarter, due primarily to our reserve release being only 6 basis points this quarter compared to 12 basis points last quarter. The level of the reserve at quarter end is obviously a significant influencer of our quarterly provision expense.

At this time, barring any international or national events that may cause us to think otherwise, we believe that reserve release will continue at least for the next few quarters consistent with any improvement in the credit quality of our loan book. But these releases will be at a measured pace in amounts not too different from prior quarters.

In summary, credit quality improvement will continue to impact the absolute level of our loan-loss reserves and our provision expense, but our provision expense will be offset by our second belief that we should experience loan growth for the remainder of this year.

Concerning ORE, we continue to remain in an aggressive troubled asset disposition mode. Last year we mentioned that we believed our non-performing asset disposition result would range between $75 million and $100 million for 2012 compared to $131 million last year. Year-to-date we are at $60 million-plus in dispositions, so we feel that we should fall within the lower end of the range of our early disposition projection for 2012.

As Terry mentioned, NPL inflows dropped from $12 million to $4 million this quarter, which was great news and further validated our belief that NPLs will continue to trend downward.

Our ORE book stands at $21.8 million at quarter end, the lowest level since the third quarter of 2009. Based on our review of potential fourth-quarter foreclosures, our ORE portfolio should approximate between $20 million and $25 million of the end of next quarter.

That said we believe our anticipated reduction in NPLs should produce a net negative number for NPAs in the fourth quarter. Expenses associated with managing and disposing of these properties should also trend downward. As a result, we continue to anticipate a meaningful decrease in ORE expense this year compared to last year's $17.4 million.

Moving down the P&L into fee revenues, our mortgage business continues to outperform with significant increase in net revenues this quarter when compared to prior quarters. As many of you know, as it relates to qualifying mortgage sold into the secondary market, we are not engaged in the mortgage servicing business as all of our loans are sold to an investor prior to closing the loan.

So in other words, we don't close the loan unless an investor has reviewed the file and agreed to buy it, because our business model is designed to meet the loan investment guidelines and requirements of the purchaser. As a result, our buy back experience has been essentially nonexistent.

As to the future, we are working toward developing more fee opportunities for our franchise and hope to have some new ways to expand our operating revenues in coming quarters.

As to expenses, as you can see with this slide, our efficiency ratio is at 60.7% excluding ORE expense. One of our long-term profitability measures that Terry will discuss in a moment is the ratio of expenses to average assets. That number, again excluding ORE expense, was 2.55% for the third quarter. Still more than our long-term target, but we believe a favorable comparison to the medium value of most peer groups.

That said we remain focused on eliminating any unnecessary expense, and as we enter the budget season for next year, our senior leaders are looking to find ways to increase the operating leverage of our firm.

As to expense run rates, our 2012 expense run rate increased slightly this year, primarily due to increased compensation expenses associated with merit raises which started in January. I believe our expense run rate will remain fairly consistent for the remainder of this year, absent any increase due to adding of any new relationship managers which could occur throughout 2012 and into next year.

As many of you know, we've largely completed our branch build out in Nashville, but continue to believe we need to increase our presence in Knoxville. We are penciling in a new branch location in Knoxville in the first part of next year, which will have an impact on our expenses in 2013.

Finally, our adjusted pretax, pre-provision increase from $17.5 million in the third quarter of 2011 to $20.2 million in the third quarter of 2012, a year-over-year increase of 15.9%.

With that I will turn it back over to Terry to talk about our future outlook.

Okay, thanks Harold. As we've discussed before, I believe PNFP is at an inflection point where we are now transitioning from balance sheet rehabilitation to high-performing profitability and returns.

We are indeed seizing the rapid organic growth opportunities that we continue to believe exist for us, primarily as a result of two things. Number one, the lending capacities of lenders that are currently on our payroll, but that are still relatively early in the consolidation of their books of business. And two, the ongoing vulnerabilities of the large national and regional competitors in our market who, according to Greenwich Research, continue to give up commercial market share to us.

On this slide are several key strategic targets that we've been discussing with you the last several quarters -- an ROA of between 1.10% and 1.30%, a NIM of 3.70% to 3.90%, net charge-offs of 20 to 35 basis points, non-interest fees to total average assets of 70 to 90 basis points, and expenses to total average assets of 2.10% to 2.30%. As you can see, we made meaningful progress on each component and ROA in total during the third quarter.

In the interest of time, I don't think I'll spend any time at all on the NIM, on net charge-offs, and on fees since, as you can see, we are already operating inside those ranges very close to or better than the mid-point.

The one item on the chart that deserves further discussion is expenses, which look a long way from the target. But let me say that the 2.10% to 2.30% range is indeed the normalized run rate for this firm. In fact, our non-interest expense to average assets fell within that range from 2003 to 2008, and even in 2009 it was just 2.31%, one tick away.

So knowing that we have consistently operated there for seven consecutive years, the next question is how do we return. Let me remind you, first of all, we do have some modest opportunities to cut normal operating expenses and, secondly, we expect the substantially elevated expenses associated with the credit environment we've been through to normalize within the next 12 months.

In addition to the reduction in OREO expenses, which are itemized on the face of the P&L, that entails two major components. Number one, elevated lending-related expenses including things like legal fees, appraisal fees, etc., that will no doubt reduce when the credit rehabilitation is complete. And number two, staffing levels that are associated with managing problem assets. That will also reduce as we near the end of the rehabilitation.

I don't want you to miss that a huge contributor to the ratio escalating is not just the fact that expenses went up, but the fact that assets came down. Assets peaked at $5.1 billion in Q4 2009. As a part of the asset rehabilitation focus that we've had, assets declined by $300 million.

Not only did we make a strategic choice not to cut the expenses associated with the revenue generation as assets dropped during the rehabilitation, which by the way I believe now serves us very well as we make the transition, but we've actually increased our cadre of relationship managers by an additional 10% in the last 12 months.

We believe that the strategic choices that we've made enable us to capture the market share we believe is available to us. We've talked before and we'll talk more in just a minute about the $1.3 billion in loan growth capacity that our existing relationship managers have. But the point I want to make clear is in broad terms $1.3 billion of incremental loans on this expense base transforms the profitability in the non-interest expense to asset ratio substantially.

Now in terms of the ROA, where we would hit the midpoint for each of the components listed above that should produce 1.20% ROAA right at the midpoint of the target range. As I just mentioned, one of the critical tactics to achieve long-term performance targets is to seize the growth in market share movement opportunities that are probably unique to our competitive landscape.

Several quarters ago I highlighted my belief that our existing relationship managers plus an additional 11 relationship managers that we intended to hire had the capacity to produce approximately $1.3 billion in net loan growth over roughly a three-year period of time. In previous calls I've walked through the algebra that has forced that capacity, so I won't rehash that. I've also previously reported that all 11 of those relationship managers that we intended to hire have, in fact, been hired and are on board.

In this chart we are plotting actual production in 2012 against the capacity. Round numbers let's say we grew $50 million in Q1, $105 million in Q2, and $80 million in Q3. That is a year-to-date growth rate of roughly 9.5%.

The required cumulative annual growth rate for loans required to hit that $1.3 billion target is 11.5%. As I just mentioned, 2012 year-to-date annualized growth rate is 9.5%, so we are pretty close to the required rate of growth and we are just in the early stages of traction from our recent hires. So far this year they've produced $135 million in loan growth and so we continue to expect their production and, therefore, the Bank's production to escalate to a level that enables us to realize our capacity inside the targeted timeframe.

We made significant progress on our net interest margin from its low of 2.72% in March of 2009 to 3.78% last quarter. That is the eighth consecutive quarterly expansion. We have discussed our margin opportunities with you for a number of quarters now. We have tried to be transparent about our opportunities and our threats.

Obviously, we believe we continue to have some opportunities to increase our margins based on the strength of our current loan pipeline and ongoing reductions in our cost of funds and so forth. However, we anticipate that much, if not all, these margin gains will be required to offset the general market trends on loan and bond yields.

For that reason I think further margin expansion at these absolute interest rate levels appear challenging. However, I think it is really important to point out that we expect the rapid loan growth will continue to facilitate increased growth in core revenues over the next several quarters and more than offset the impact of the anticipated lower loan and bond yields.

So now when you dial it all the way back to the fourth quarter of 2012, it seems to me the path is pretty simple. It's my expectation that we will continue to make meaningful reductions in credit costs and problem loan levels, and beyond that I expect the principal profit improvement lever to be loan growth. And so those two things continue to be the principal priorities of our firm.

Mary, with that I will stop and we will respond to any questions there might be.

(Operator Instructions) Michael Rose, Raymond James.

Just wanted to get some context kind of balancing your shorter-term margin target with your longer-term margin target. Over the past couple quarters you have kind of bumped down that range a little bit here. Kind of what is your nearer-term outlook, and then could it actually dip below that longer-term range for a period of time? Thanks.

Michael, thanks. I think the way these interest rates are behaving it is going to be difficult for us to grow the margin from where we are today in the short term. The absolute level of the bond book, which we are reducing, will have a less influence of our margin activity.

But I think we were pleased that we only had a three basis point dilution in loan yields in the third quarter. We are hopeful we can maintain that kind of pace, if not improve it a little bit, but I think from this point today 3.78% will be a great goal for us to achieve in the fourth quarter.

I think, Michael, I might just add context to that. Anytime you start focusing these targets people are likely to latch onto one thing or another and use that as a litmus test. I think specifically I agree with Harold's comments that we are trying to make clear that you got meaningful headwinds here. Bond yields, loan yields all those sorts of things work against us.

We do believe we've got opportunity to get the cost of funds down so we get some protection. But as Harold said, I think in the next quarter or so a 3.75% to 3.78% I would view that to be okay.

Now I guess a thing I want to hit at here is don't miss that if you -- over the cycles we will be inside those ranges at various points relative to the mid-point, high or low. But even if you are off 5 basis points on the margin, you are up 5 basis points on fees, you are up 5 basis points on net charge-offs. And so, again, I would view that to be a more rudimentary model than having to hit each thing at the mid-point all the time.

Okay, that's helpful. And if I could ask one other question. As I kind of look at your expenses to total average assets, obviously that is being somewhat driven by the recent hires and probably will impact you getting closer to that range over the next couple quarters. How should we think about future lending hires and commercial market share in both national Nashville and Knoxville? Thanks.

I think -- let me start with the impact of the current hires that we have. Again, all those people are on the payroll so you are incurring 100% of their expenses. As I have tried to indicate, I am very satisfied with the progress that we are making. But always in that process it takes time to build out the book and generate the revenue streams to match off against the expenses. And we are still in the early stages of that.

And so I think as we have laid it out that continues to be my expectation that they will grow into those volumes and, therefore, that our company will grow into that expense ratio.

I think as it relates to does that mean we will or won't make future hires, it is inconceivable to me that we wouldn't make any future hires. But I guess I want to be clear; I am not working a specific plan, nor do I have a specific target at this point for hires that I am trying to make. I would put us back in a category -- Michael, you are familiar with the early stages of the Company, but for an extended period of time we ran a continuous recruitment cycle.

We were always able to hire people. We hired them when we could and didn't hire them when they weren't available. So I guess I'm just saying there will be variability to it, but I can't imagine that we won't continue to make some hires over this three-year planning cycle.

I think as it relates to market share, again my belief is I don't feel any different this quarter than I have for some time. It is my expectation we will continue to take commercial market share at a pretty meaningful pace.

I think we are now at least a quarter dated on the market share information, but the last information that we had showed that we were attracting share at a very rapid pace and all major competitors were losing share at a pretty rapid pace. And I can't imagine that that is any different or that it's going to be much different over the next several quarters. So I hope I've addressed all your questions there.

You did. Thanks for taking my questions.

Kevin Fitzsimmons, Sandler O'Neill.

Just a few questions. On your guidance or your expectations on the margin and on loan growth. I take it that you still feel very confident you will be able to grow spread revenues. So, in other words, even if the margin comes under a little pressure you expect the loan growth to be more than enough to offset that, right?

Harold Carpenter Yes, I mean as we sit today, Kevin, I think that's right. We are looking at a lot of different things to put some insurance around that, but right now the loan pipeline would indicate that we've got opportunities to continue to grow spread.

Okay, great. Just to follow up and I apologize if you guys covered this at the start of the call. The loan growth is very impressive and you guys cite the C&I and owner occupied in the release, but it looks like construction is a bucket that also contributed at least some of the growth. We just don't hear a whole lot of banks in the Southeast talking about jumping back into that.

If you could just talk about maybe it's market specific or give us a sense for why you feel comfortable on that. Thanks.

I think it's a good question. We have tried to indicate, I guess over the last several quarters, as we were working down our exposure to the C&D book we tried to indicate we are going to get down here to a bottom and it ought to quit being a headwind and perhaps be additive to the growth. I think we projected that a couple of quarters ago. It has indeed worked like that.

We've also tried to say within that C&D book that we are trying to remix, continue to remix what is in there away from residential toward commercial. So I think if you look behind the numbers that is, in fact, what is going on. The increase is in commercial construction as opposed to residential and so forth. So, again, I think it tracks with what we have tried to indicate was going to happen.

I think the category -- and again we could talk a long time about each individual loan and so forth. But if I were looking for a characterization of the type of loan that is enabling us to increase commercial construction, most of it is what I'd call build to suit with credit tenants.

We do business with lots of folks who develop centers, stores, locations, and so forth for credit tenants like Targets, Publix, Walmarts, some medical facilities and so forth. And so generally my view is that is a great risk for this company is to do commercial construction where you've got a credit tenant that backstops the credit. So, Kevin, I hope that's helpful.

That is. And this one last thing. Terry, it has always been a big part of the strategy in taking market share and getting lenders. Is it getting -- you mentioned a minute or two ago about how you still feel real confident in ability to take that share, but as some of the larger competitors compared to a year or two ago they are more healthy, they are on better footing from a capital profitability standpoint, their credit is getting better.

Is it tougher to get those people because their institutions are more healthy and they are getting back on the offensive? Thanks.

That's a good question. I always hate having to give answers that have to be applied universally or broadly, because I think it varies from day to day, lender to lender, company to company. So there is some variability.

But, again, trying to get down to generalizations, I'm not sure it is more difficult to hire people than it was in the past. As you know, I think we said four quarters ago we would hire 11 in four quarters and we did that. Again, the profile of these folks that we've hired are some of the finest, best-known bankers in our market.

So, again, it would be hard for me to make a judgment that it's more difficult to hire today than in the past. Again, I could probably find a situation where that was the case on one borrower or one bank, but broadly that would not be the case.

I think the truth is just from a generalization standpoint what happens is there it is great vulnerability that comes about at the end of the credit cycle. Meaning that lenders have had to stay put because they didn't have opportunities to move, but they've been beat up and so forth.

They've been beat up internally in their companies. They have been trapped in difficult situations with borrowers and so a lot of people have a preference to find a new home as they get to the end of the cycle. So I think that is a factor that probably works to our benefit.

Okay, great. Thank you, guys.

Peyton Green, Sterne, Agee.

Good morning. A question for Harold. What is the absolute bare-bones minimum that you would run the bond portfolio down to in terms of your liquidity needs over the next year?

That's a good question, Peyton. We've gotten down pretty slim right now. The bond book for us we use it primarily to collateralize deposits, so that is why we have to have it.

If we were going to -- because we've got a lot of operating accounts from some municipalities around this area. We don't do a lot of bid money from the municipals, but we do have quite a few townships. And you are from around here and I could name them and you would know them.

I think we are getting pretty close to the bottom. I think we are going to have to probably invest in some bonds. There are some products out there that will give the municipalities some collateral without us having to go to the bond market. We are exploring that. We are trying to size the cost of it and so on and so forth. But all that said, I think we are getting pretty close.

Okay. And then in terms of the operating expense measures that you could take and kind of the roll off of the non-OREO credit-related expenses, what is a reasonable time frame for that to be at a full run rate on a quarterly basis?

You are saying the runoff of the non-ORE related credit expenses like appraisal, legal, that sort of thing, right?

Yes, and I think Terry mentioned that there was some personnel.

Yes, we've still got some personnel work in special assets that I think we will reduce the headcount, the absolute headcount there and transition those folks into other areas of the bank. I would give it probably another three to four quarters.

Okay, great. Then for Terry. Terry, how do you feel about just being in Knoxville and Nashville? Any thoughts about broadening the footprint?

Well, in terms of how I feel about being in just Nashville and Knoxville, I can't think of two markets that really have more appeal to me than those two. We are doing well in them and well-positioned and so forth.

I've always said that Chattanooga and Memphis markets are markets that have some appeal to us. I always, I guess, want to characterize that that it is simply opportunistic. I'm not going to set out a specific initiative or a target date that says I'm going to be in Chattanooga or I'm going to be in Memphis by some deadline.

I'm going to go there whenever I can lift out a large group of people that can help me build a big bank. If I find them next week, we will go then; if I find them next year, we will go then.

Okay, great. Thank you.

Kevin Reynolds, Wunderlich.

Great quarter. You may have already addressed these; I've been sort of off and on on different calls this morning.

Could you talk about, I guess, just sort of the nature of the competitive landscape? I know you talked about recruiting people and putting them on board and having them bring their loans over and that hasn't changed for you. But has the competition started to figure it out and try to hold on any tighter or do a better job?

And if so, is there any changes? Sort of bigger banks realizing that you are just clocking them every day, or are the small banks? Is there any change out there or any adjustments going on in the competitive environment?

Kevin, honestly, it is hard for me to isolate a changed environment. It is true that the demand for loans is or the requirement of banks for loans is excessive and so that drives a little more competitive landscape. It does create a little more attention around how do we keep our clients, how do we keep our loans, how do we price new credit -- all those kinds of things.

Again, I wouldn't want to paint a picture that there is no escalation in the competitive environment. There is from that perspective. But we are not finding it more difficult to move clients to this company and we are not finding it more difficult to hire relationship managers.

And so I don't know, it is sort of on both sides. Yes, it's fiercely competitive on pricing and underwriting and so forth, and it's more competitive now than it used to be. But I still don't find it to be different in terms of, literally, hiring people or once the people are here in their ability to move their loans.

Okay, and then I had another question. Again, I apologize if you have already addressed this in some detail. But I heard on another call this morning that -- just talking about borrowers being on hold with the uncertainty with the presidential election, fiscal cliff, etc., and the questions came up there and I think is a valid one.

If borrowers are uncertain in and on hold, are they waiting for clarity or are they waiting for a specific outcome with respect to the presidential election and the congressional elections? What do you think happens as we go into year-end and into the early part of 2013?

I think there is clearly a mindset of why would I take a lot of risk right now? Let me see the next card before I figure out which way I want to play it. So I do think that is seems valid and I think I would hear it broadly throughout the market.

I think that there are just a lot of different factors in here as it relates to loan demand I think. I don't want to get too far off into the political debate. I think business owners would be more satisfied, would run faster were you to have a Romney elected as opposed to Obama, but I don't think it is an overwhelming thing where you are going to find some major difference in growth rates in 2013 either way.

I think we've got a difficult economy and it will take time for it to move forward. I think, again, one of the things we hit at; we did talk a little bit about some of the headwinds that we have seen from payoffs. And, again, I think we will see some more of that, albeit not quite as high in the fourth quarter as the third quarter is.

There are a lot of people running for cover as it relates to the capital gains and tax treatments and so forth. So you got transactions that are really being crammed through where people are saying I want to sell this business and delever and take advantage of current capital gains treatments and so forth. So I think, again, that will weigh on loan outstandings between now and year end. Again, I think once you cross the year-end threshold that motivation goes away.

All right. Well, great quarter and thanks for taking my questions.

Okay. Thank you, Kevin.

Brian Martin, FIG Partners.

Just two questions. You talked about the fee income or maybe it was Harold that mentioned them and just maybe a little bit more focused there going forward. Maybe just if you can give a little context there.

And then just maybe as it pertains to the mortgage side of the business just being up this quarter, is that a focus as well going forward? Can you give a little color on that?

Brian, as far as mortgage, we are looking at that pretty consistently. Every quarter we've gone into the -- every quarter that we've gone into for about the last three quarters we've always concluded there is no way they will do as much as they did the last quarter. But they seem to be keep on producing volumes with these lower interest rates.

We've hired a few more people into those areas. We've shored up some processors to make sure that we can get them closed as quickly as possible, but to say that we're going to match what they did last quarter I think would be overstepping. But I will tell you they are as busy today as they were last quarter so it is hard to assume they can keep that pace up.

As to new initiatives and all that, I think we are looking at all the things that other bankers are looking at. We are trying to figure out what we can do on check card and interchange. We are trying to figure out what we can do with respect to maybe purchasing some businesses that have meaningful presences in those kind of lines.

So Terry has challenged us to look all over the landscape, particularly here in middle Tennessee, and see what might be out there that we could use or we could acquire to enhance our business.

And maybe just one second question. When you talk about some of the long-term targets you guys have, when you look historically what level of charge-offs you guys ran with and then kind of look at where the targets are today, is that just a conservative number?

Is there something to think about the business today versus what it was when you were bringing over business before. I thought that the long-term average was kind of closer to maybe 5 to sub-10 basis points versus a range today and the credits you are booking. So if you have any thoughts on that and that's all I had.

I think that's a great question. I guess we are all impacted by our most recent past, and I think the specific answer to your question is do I view the business differently today such that it's going to produce a higher net charge-off rate than previously. No, I don't find anything different in our loan mix that ought to create a higher level of charge-offs.

I just feel in terms of trying to put together a profit model it wouldn't be wise for us to vet our profit model on 5 basis points of net charge-offs. We would probably need to concentrate on expense levels and revenue levels and hope we do better on net charge-offs. As you can see, to your point we are already even with elevated levels of problem loans running charge-off rates well better than the midpoint of the range that we've given. And it wouldn't surprise me if we did that.

But just rambling to say it wouldn't seem responsible to me to bet our profit model on 5 basis points, even though I can't highlight why it's going to be different than the first eight years of the Company.

I got you. Thanks, Terry. Great quarter, you guys.

Mac Hodgson, SunTrust Robinson.

This is Michael Young actually in format. Terry or Harold, I was just curious, what sort of pricing did you see in loans throughout the quarter and then how did that change into kind of late September?

It has bounced all over the place, Michael. We are still pretty successful with loan floors. We can still get that on most of our accounts.

We are seeing particularly strong pricing, I would call it into the middle-market range where loans of, say, $500,000 to $1.5 million. That pricing is good. We've also seen good pricing -- we've seen a little bit of an increase in our construction book this year, this quarter particularly the commercial construction. So we think we are getting good value there.

Where the pricing is really challenging is when you get on the upper [end in the well]. Those borrowers that have a lot of opportunities to know a lot of banks. They can just about command the price they want. So those big-ticket items are where the pricing is particularly competitive.

And then any change in that later in the quarter, or has it been pretty consistent?

I'm sorry, Michael. No, I don't think we've seen much change in that kind of -- what I just talked about over the last, say, three or four quarters really.

Okay. Then the only other question was just what you see for the tax rate going forward. It was a little bit lower this quarter. Just curious if there was any volatility there.

We don't foresee any significant change in the tax rate going into the fourth quarter. That could get impacted by -- there are various tax saving opportunities that we can get from the state of Tennessee if we go out -- if there is a loan that is maybe a Housing Development Authority loan or something like that where we might can save some money on taxes.

But that's the only thing I could see that could happen in the fourth quarter that could modify the tax rate going forward.

All right. Thank you very much.

Bill Dezellem, Tieton Capital Management.

Two questions. First of all, relative to deposits, would it be a correct perception that over the past few quarters you have been more focused on reducing the existing deposit costs rather than growing total deposits? And I recognize you have been growing them and that has been important, but that a bigger focus has been on reducing them, reducing the costs.

If that is the case, now that your bond portfolio is kind of moving towards the bottom end, does that imply that you are now at a point where you are going to have even more focus on expanding the deposits to fund your loan growth?

I would say that is a great question, and it is an accurate assumption that we have had a most elevated emphasis on reducing our cost of funds. So I think that point is accurate.

I think that your point about what we have been doing is we have really focused on remixing toward core deposits and away from non-core funding. Because, again, given the relatively low need for funding given what's going on on the asset side of the balance sheet, that has been a great opportunity for us to drive down our cost of funds.

But I think, again, your next assumption is do we need an increased focus on deposit acquisition. I don't really think we do because we are getting great traction in the low-cost funding categories, which is where we have to win. If we had to mix with some category of neither non-core funding or other funding in our market, you would have an opportunity to do that I think without expending costs.

So, again, the fact that we've had such good traction in the low-cost categories would say to me that we don't need elevated emphasis there.

Bill, I'll just add on that we, like everybody else, goes out and we do rate shots and all that kind of stuff with our competitors here locally. We still think we are very competitive on deposit pricing. We are not at the bottom; we're not at the top, so we think we've still got room to lower some deposit pricing.

Your question, you were headed towards, okay, are they going to have to raise deposit pricing to fund loan growth. And we are not there yet.

That's very helpful. Then shifting to the loan side of the business, it sounds like your pipeline of new loans is substantially stronger than it was one year ago.

And I guess one of the things I don't feel like we have a good grasp of is why. Whether that is specific to your initiatives with hiring lenders and shifting the lenders from handholding your accounts to actually trying to build the business, or whether there is actually economic activity that is taking place in your markets that is really a driver behind this that maybe isn't taking place in other parts of the country.

Bill, I guess just try to give you my sense of it. I think, first of all, we are fortunate that we only serve two markets, Nashville and Knoxville. If you look at the pace of recovery in those markets versus the national recovery, it seems to me to be running about twice as fast.

When I say that all I'm saying is that if you look at the peak to trough job declines 2007 to 2010, the nation has added back about half at the pace that we've added back in Nashville and Knoxville. And that then plays through to the health of the real estate markets.

If you look at things like median home prices, we've got forward progress on median home prices in Nashville, which was a difficult market. We've got -- we are down to less than six months inventory in terms of residential inventory. I don't remember the last time it was less than six month's inventory.

And so, again, I would say we are fortunate to be in two good markets that do have some economic health. It's probably different than the nation as a whole.

Having said that I would not want you to walk away and say, boy, those guys are in red-hot markets. I don't think any markets are red hot. Ours are just relatively better than the nation as a whole or, say, than the state of Tennessee as a whole.

I think it is true that for a period of three years in terms of the management of this company that there was no emphasis on producing loans. The idea of producing loans was never mentioned by me one single time over a two- or three-year period until about 12 months ago. So there is a different management emphasis in the Company as it relates to gathering market share and those sorts of things. So I think that is an influencer of consequence.

Then I do think the third thing is the fact that we didn't reduce our revenue producing staff in the downturn and we, in fact, increased it by 10% at the end of the downturn would account for why you have volumes flowing through the system that maybe some other people do not.

Thank you both for the answers.

Peyton Green, Sterne, Agee.

On the mortgage question, sales of homes in Middle Tennessee have been up about 25% to 30% year-to-date. How much of your volume was refi versus purchase in the mortgage business, if you know?

I think right now, based on what the mortgage group is telling me, it is about 65% to 70% refi.

Okay, great. Thank you.

Ross Haberman, Haberman Management Corporation.

I show no further questions in the queue and would like to turn the conference back to the speakers for closing remarks.

All right, I don't think we really have any comments by way of closure. Our view is that it is a good quarter for us, largely accomplishing what we set out to do. We do continue to grow our loans, which is the most important initiative as we expand our profits going forward, and we continue to expect to improve our asset quality metrics as well. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect at this time.