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The Exchange Club of Nashville
A Banker’s Perspective
on Financial Markets
M. Terry Turner
President & CEO
Pinnacle Financial Partners
July 29, 2008
A Banker’s Perspective
1. Banking Industry Trends
2. Economic and Interest Rate Outlook
3. Legal and Regulatory Environment
4. Bank Stocks
5. Implications for you
Banking Industry Trends
U.S. Banking Industry Trends
15,000 14,496
14,000
14,417
14,210
13,723
Number of FDIC Insured Institutions
13,137
12,715
13,000
1984 – 2007: - 50%
12,347
11,927
12,000
11,467
10,961
11,000
10,453
9,943
9,530
9,144
10,000
8,777
8,582
9,000
8,315
8,082
7,8887,770
7,6317,526
8,000
7,401
7,000
1984
1986
1988
1990
1992
1994
1966
1998
2000
2002
2004
2006
7,283
U.S. Banking Industry Trends
Number of FDIC Insured Branch Offices
78,867
76,459
80,000
1984 – 2007: 84%
70,000
60,000
50,000
60,921
58,334
55,065 56,856
52,026
50,858 52,336
52,931
46,807
44,864
48,434
42,681
45,824
43,739
73,441
70,842
68,215
66,635 66,902
64,288
64,859
62,615
40,000
30,000
20,000
10,000
0
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
Tennessee Banking Industry Trends
300
Number of Tennessee FDIC-Insured Institutions at year-end
281
275
265
262
1994-2007: -35% change
256
250
229
226
225
221
213
213
209
208
199
200
189
184
2006
2007
175
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Number of Tennessee Branches at year-end
2,400
2,300
2,338
1994-2007: +30% change
2,224
2,200
2,100
2,000
1,900
1,800
1,794
1,805
1,832
1994
1995
1996
1,866
1,981
1,976
2,005
2,009
2,029
1999
2000
2001
2002
2003
2,094
2,113
2004
2005
1,914
1,700
Source: FDIC.
1997
1998
2006
2007
Tennessee Banking Industry Trends
De Novo Start-Up Activity Has Been Brisk in Tennessee
10
De Novo Tennessee Institutions Opened by Year
8
8
7
6
6
5
2
5
4
4
3
6
5
4
3
3
1
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: SNL Securities
Nashville Banking Industry Trends
Banks expand in Nashville; branches continue to proliferate
60
50
41
43
1999
2000
47
50
51
53
49
2003
2004
2005
58
59
40
30
20
10
0
2001
2002
600
500
407
406
414
415
415
452
469
2006
2007
505
540
400
300
200
100
0
Source: FDIC
1999
2000
2001
2002
2003
2004
2005
2006
2007
Nashville Banking Industry Trends
De Novo Start-up Activity has been Brisk in Nashville
6
5
46% of TN Start-ups
4
4
3
3
2
2
1
0
1
0
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Tennessee Bankers Association
Nashville’s Competitive Landscape
Market Share – Nashville MSA – June 2007
Total
Deposits
($000)
Institution
Rank
1
Regions / AmSouth
2
Total
Share
(%)
07-06
Organic
Share
Diff (%)
$ 5,934,844
19.48%
(3.36)%
Bank of America
4,524,911
14.85%
(0.73)%
3
Suntrust
4,347,575
14.27%
(1.47)%
4
Pinnacle Financial Partners
2,672,521
8.78%
0.78%
5
First Tennessee
1,873,967
6.15%
0.40%
6
Fifth Third Bank
1,370,665
4.50%
0.54%
7
Wilson Bank and Trust
1,064,196
3.50%
0.30%
Source: FDIC
NOTE: Pinnacle in proforma including Mid-America acquisition
Economic and Interest
Rate Outlook
Economic Health
The Dynamics of Our
Current Economic Cycle
We are
here
2002


2003
Economy repairing from
dot com correction
Weakness in corporate
earnings

Equity valuations low

Interest rates low

Bank M&A activity low
and at a valley in pricing
multiples
Source: Hovde
2004






2005
2006
Economy begins
recovery
Corporate earnings
strengthen due to low
interest rates

Asset & housing
valuations rise
Creative financing
reaches many sub-prime
home buyers
Interest rates begin to
rise
Bank M&A activity
accelerates, pricing
increases




2007
2008
2009
Near-term Projections
Economy is fueled by
strong corporate earnings
and excess liquidity
Bank earnings at historic
levels of profitability

The housing weakness will slow
economic growth

Asset quality at pristine
levels until 2Q07 sub-prime
woes
Housing market will continue to
decline in 2008 and possibly through
2009

Bank M&A activity has softened
dramatically during 2008
Yield curve flattens and
eventually inverts

Bank M&A activity is
robust and a “sellers’
market” at a peak in pricing
Elevated fuel cost will hamper
transportation companies and
ultimately consumer prices

Economy has been dragged into a
recession as the declining housing
market affects the American consumer
U.S. Economic Overview
Data Series
Jan
2008
Feb
2008
Mar
2008
Apr
2008
May
2008
Jun
2008
Unemployment rate
4.9
4.8
5.1
5.0
5.5
5.5
Consumer Price Index
0.4
0.0
0.3
0.2
0.6
1.1
Producer Price Index
1.2
0.3
1.0
0.2
1.4
1.8
US Import Price Index
1.5
0.2
3.1
2.8
2.6
2.6
Source: US Bureau of Labor Statistics
U.S. Economic Overview
Federal Reserve “Beige Book
•
Consumer spending “mixed, weak or slowing”
•
Costs of inputs are increasing (fuel, metal, etc.)
•
Manufacturing weakened in most regions
•
Housing market conditions deteriorating
•
Home foreclosures increasing
U.S. Economic Outlook
•
Currently slowing GDP growth
•
In or approaching recession
•
Trough could bottom in second half of 2008
•
Fed / prime rates have probably bottomed
•
Long-term rates are likely to rise with inflation fears
Tennessee Economic Overview
Data Series
Employment
Unemployment
Unemployment Rate
Jan
2008
Feb
2008
Mar
2008
2,911.6
2,891.3
2,885.9
148.5
162.9
169.5
164.6
195.6
196.9
4.9
5.3
5.5
5.4
6.4
6.5
Source: US Bureau of Labor Statistics
Apr
2008
May
2008
2,903.8 2,866.9
Jun
2008
2,847.2
Nashville Long-Term Job Growth
Nashville Chamber of Commerce
Nashville Economic Overview
Data Series
Jan
2008
Feb
2008
Mar
2008
Apr
2008
May
2008
Employment
753.8
748.9
752.3
759.9
753.9
Unemployment
34.1
37.3
38.4
34.2
40.8
Unemployment Rate
4.3
4.7
4.9
4.3
5.1
Source: US Bureau of Labor Statistics
$250,000
$150,000
$100,000
$0
Source: Single Family Home Sales, GNAR
2,000
1,500
1,000
$50,000
500
0
Closings
Ja
n
Fe - 06
bM 06
ar
A -0 6
p
M r- 0
ay 6
Ju - 06
nJu 0 6
A l-0
ug 6
S - 06
ep
O -06
c
N t -0
ov 6
D -06
ec
Ja -06
n
Fe - 07
bM 07
ar
A -0 7
p
M r- 0
ay 7
Ju - 07
n
Ju -0 7
A l-07
ug
S -0
ep 7
O -07
c
N t -07
ov
D -0
ec 7
Ja -07
n
Fe - 08
bM 08
ar
A -0 8
p
M r- 0
ay 8
Ju - 08
n08
Median Home Prices
Nashville Single Family
January 2006 thru June 2008
3,500
3,000
$200,000
2,500
Nashville Single Family
January 2006 thru June 2008
18,000
12
16,000
10
14,000
Inventory
8
10,000
6
8,000
6,000
4
4,000
2
2,000
0
06 0 6 0 6 06 06 0 6 06 06 06 06 06 06 07 0 7 0 7 07 07 0 7 07 07 07 07 07 07 08 0 8 0 8 08 08 0 8
n- eb- ar- pr- ay- un- ul- ug- ep- ct - ov - e c- a n- eb- ar- pr- ay- un- ul- ug- ep- ct - ov - e c- a n- eb- ar- pr- ay- una
J A S O N D J F M A M J
J A S O N D J F M A M J
J F M A M J
Source: Single Family Inventory, GNAR
0
Months of Inventory
12,000
Nashville Commercial Real Estate Market
Commercial Vacancy Rates
12
10.46
10.92
10.75
10.51
10.97
9.74
10
8
5.72
5.55
4.04
4.1
12/2006
6/2007
6
6.67
5.83
5.74
3.53
4.06
9/2007
12/2007
7.86
4
2
0
CB Richard Ellis
Office
Industrial
3/2008
Retail
6/2008
Nashville Growth Trends
Projected Population Growth (2007-2012) for Major Southeast Metropolitan Markets (%)
20.0
United States:
6.3%
15.0
10.0
Birmingham
Louisville
Charlotte
va Beach
Richmond
Tampa
Miami
Orlando
Jacksonville
Chattanooga
Memphis
Knoxville
0.0
Nashville
5.0
Atlanta
2006 - 2011 Projected Population Growth Rate (%)
The Nashville MSA is one of the fastest-growing
markets in the booming Southeast
Nashville Economic Outlook
•
Job growth holds the key
•
Residential real estate should bottom in 2008
•
Commercial real estate is relatively solid
•
Nashville should outperform the national
economy
Interest Rate Outlook
Fed Funds Futures – 8/08
93.18%
100.00%
90.00%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
6.93%
0.0%
0.0%
0.0%
1.25
1.50
1.75
1.1%
0.00%
Bloomberg
2.00
2.25
2.5
Fed Funds Futures – 10/08
45.00%
40.6%
40.00%
35.00%
30.00%
23.2%
25.00%
20.00%
15.9%
15.00%
10.00%
5.00%
5.7%
0.0%
0.0%
1.25
1.50
0.00%
Bloomberg
1.75
2.00
2.25
2.5
30 Year Treasury Yields for 2008
6
5.5
5.35 5.35 5.35
5.05
5
4.7 4.75
4.52
4.5 4.3
4
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09
Morgan Stanley
Legal and Regulatory
Environment
Legal and Regulatory Environment
• Proliferation of questionable mortgage product
• Declining real estate values
• Record level of home foreclosures
• Concern regarding mortgage guaranties (Fannie,
Freddie)
Legal and Regulatory Environment
Housing Bill
Costs
• Fund for low income housing
$ 5.3
• Tax credits for first-time buyers
4.6
• Grants to purchase foreclosures
3.9
• FHA insurance for $300 billion in mortgages
.7
• Military support and relief
.1
• Increased loan limits for various programs
• New regulator for Freddie and Fannie
• Treasury loans and equity purchases in Freddie, Fannie
Increase limit on federal debt from $9.8T to $10.6T
Legal and Regulatory Environment
Banks Pushed Too Hard for Real Estate Loan Growth
During 2005 thru 2007
% of Total $ Loan Growth from Category
Total Loan
Growth
All Banks
Large-Cap Rated
Banks
Mid-Cap Rated
Banks
Small-Cap Rated
Banks
Residential
Mortgage
Commercial
Real Estate
14%
*
Construction Total Real
Real Estate
Estate
17%
62%
10%
Home Equity
13%
10%
16%
16%
7%
9%
48%
9%
6%
26%
24%
26%
82%
11%
8%
19%
30%
36%
92%
18%
* From 12/31/04 to 09/30/07 annualized.
Source: FDIC, Company reports, and SNL DataSource
A heavy handed regulatory response will result in credit tightening
Source: Hovde
Bank Stocks
Performance of Bank Stocks
July 2007 thru July 2008
KBW Regional Bank Index fund – Down 35% in last year, almost 50% in
Mid-July compared to Dow which is down 18% in last year.
Investor Sentiment
Bank investors began retreating more than a year ago
Bank Stock
Regions
YTD %Ch
-61.1%
1 Yr %Ch
-71.6%
B of A
Suntrust
Pinnacle
-28.3%
-38.7%
1.6%
-38.3%
-52.9%
.16%
First TN
Fifth Third
-49.6%
-45.4%
-73.0%
-64.1%
Yahoo – 7/25/08
Investor Sentiment
Investors remain cautious due to three prevailing “headwinds”
• Increasing loan losses
• Shrinking net interest margins
• Slowing demand for loans
Investing in Bank Stocks
• Earnings valuation multiples are below 20 year average
• 1990 is precedence for still lower multiples
• 1990 bottom occurred:
• 3 months prior to peak “non-performing” loans
• 5 months prior to peak net charge-offs
Source: Robert W. Baird & Co.
Summary
Implications
A Banker’s Perspective
Implications for You
Industry Trends
• Slower bank consolidation
• Continued influx of capital
Improving client service
Improved leverage for pricing,
terms, convenience
Economic and Interest Rate Outlook
• Slow growth and inflationary pressure
Shrinking profit margins
Short-term rates will escalate at the
first sign of growth (or sooner)
Legal and Regulatory Environment
• Increasing problem loans;
regulatory pressure
• Increasing government oversight
Outlook for bank stocks
• Slowing asset growth
• Compressing margins
• Growing loan losses
Tightening credit availability
Higher taxes
Short-term: no catalyst for upward
movement
Improving valuations as losses peak