Pinnacle Financial Partners Inc (PNFP) 2014 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Pinnacle Financial Partners' fourth-quarter 2014 earnings conference call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer; and Harold Carpenter, Chief Financial Officer.

Please note that Pinnacle's earnings release and this morning's presentation are available on the Investor Relations page of their website at www.pnfp.com. Today's call is being recorded and will be available for replay on Pinnacle's website for the next 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) Analysts will be given preference during the Q&A. (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 and uncertainties, and other facts that may cause 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's financial ability to control or predict, and listeners are cautioned not to put any undue reliance onto 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 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 reconciliation of the non-GAAP measures to 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. I am excited about our fourth-quarter performance. It was a great quarter for us, but I am even more excited about the momentum and the opportunity that we see going forward into 2015, as we -- coming off a quarter here, fourth-quarter, we set lots of new records. We crossed $6 billion in assets. We set a new record for quarterly noninterest income at greater than $14 million; a new ROAA record at 1.27%; a new record low on efficiency ratio at 53.2%; and, most importantly, a record for quarterly EPS at $0.53.

I want to start with the chart that we have been utilizing since January 2012 to highlight our growth versus target. It was our belief at that time that our existing relationship managers, plus several new sales associates that we intended to -- and indeed, did -- hire in 2012, 2013, and 2014 -- that they had the capacity to produce approximately $1.27 billion in net loan growth over the three-year period beginning in January 2012.

So we are plotting the actual production over the three-year cycle on the top bar against that three-year target that we outlined upfront on the bottom bar. And as you can see, we exceeded that target. As most of you know, our approach to improved operating leverage, increased profitability, and earnings growth, really have been one of rapid revenue growth as opposed to expense cutting. And so, achieving these loan growth targets was really the cornerstone of our three-year profit plan. And that's why I start with it.

At the same time that we began discussing loan growth targets, we laid out our sustainable business model, which at the time called for, say, a 1.20% ROAA, the midpoint of our targeted range. We broke down targets for the four critical components to produce that ROA -- the margin; the noninterest income to assets; the noninterest expense to assets; and the net charge-offs, which is really the primary influence on provision expense.

In mid-2014, in conjunction with our 2014 to 2016 strategic plan, we increased our ROAA target -- increased the target range by 10 basis points to a 1.20% to 1.40% range. And as you can see on the right side of that slide, in the fourth quarter of 2014, we are already approaching the midpoint of that range.

The only component measure not performing at least at the target range is expense to asset ratio. And while I wouldn't expect to bring it inside that range necessarily in the first quarter of 2015, I do expect that our continued loan growth will enable us to operate inside that range at some point during 2015. And it is my assumption that continued credit leverage should continue to more than offset for that gap until we get inside the range.

Our basic thesis for increasing share prices is that, over time, revenue growth, earnings growth, and asset quality are the three most important valuation drivers. Also, through good times and bad, companies that consistently grow book value per share grow share prices. And so, over the last several years, we have been providing a quarterly dashboard to highlight our progress on these key valuation drivers.

The top row of graphs shows real revenue and earnings growth, with double-digit organic revenue growth at 12.6% year-over-year in the face of pretty stiff volume and margin headwinds. Fully diluted EPS was up 20.4% year-over-year. Our return on assets, which is not on this slide, climbed to 1.27%. And our return on tangible capital has climbed to 13.52%, and that's with a very strong tangible capital position.

As you can see on the second row of graphs, we are getting outsized balance sheet growth in the form of end-of-period loans, up 10.8% in the fourth quarter of 2014 compared to the same quarter last year. You can also see that we've increased average transaction accounts by 16.1% during that same timeframe, so the transaction accounts now represent 44% -- 44.7% of total deposits.

And after having initiated a dividend payout in December of 2013, we have been accreting both regulatory and book capital, with tangible book value per share up 13.7% year-over-year, which, as I just mentioned, is generally highly correlated to share price increases. Consequently, our Board authorized a 50% increase in our quarterly dividend payable, which moves us closer to our targeted 20% payout ratio.

The third row provides information as to asset quality. Nonperforming assets decreased to 61 basis points of total loans plus OREO and classified assets -- excuse me, classified assets decreased to just 18.1% of Tier 1 capital plus allowance. The overall improvement in our credit metrics has provided meaningful credit leverage for our Firm over the last few years.

And as you can see, the slope of the decrease in the allowance is not as steep as the reduction in problem loans. So, as I mentioned earlier, we do anticipate that we will continue to have credit leverage throughout the remainder of 2015, as our loan portfolio continues to produce consistently strong asset quality metrics.

At this point, I am going to turn it over to Harold to review the quarterly results in greater detail.

Thanks, Terry. Although we have seen a significant increase in the fee line in relation to our total revenues, we remain a spread bank. And we are pleased to report net interest income continued to increase in the fourth quarter. As we expected and reported in the prior quarter, margin contracted a modest amount during the quarter but remained within our net interest margin targets of 3.7% to 3.8% for 2014. We expect to experience continued increase in net interest income as we grow our customer base in our markets.

Concerning loans specifically, as expected, we experienced a big push late in the quarter for loan bookings. And as the chart indicates, average loans were only $4.44 billion for the quarter, while EOP loans were approximately $154 million greater than the average balance, signaling that we expect to see average loan balances continue their quarter-to-quarter increases as we head into the first quarter of 2015. As to loan yields, our loan yield remained stable at 4.34% this quarter, and it basically held steady for the past four to five quarters.

As to deposits, again, here in the fourth quarter, we were able to continue lowering our funding cost. We have mentioned for several quarters that our pace of reduction will slow, and it has, in fact, done that, as the cost of funds decreased 1 basis point from the third quarter. However, it should be noted that the decrease of 1 basis point was achieved while we grew deposits by an annualized growth rate of approximately 12%, which speaks to the relationships our financial advisors have in the market.

As to deposit balances, we continue to emphasize noninterest-bearing deposit business, which we believe may be the most valuable product in our Bank, and that our business strategy continues to work, with year-over-year average noninterest-bearing demand deposit balances up 16.5%. These remain core operating accounts that we would expect to keep, regardless of the rate environment.

Switching now to noninterest income, noninterest income for the fourth quarter increased 15.2% over the same period prior-year. Our wealth management lines are all showing positive trends and remain a reliable earnings stream. Investment services experienced a $400,000 increase in the fourth quarter, with most of this attributable to a vendor incentive payment from Raymond James.

Items included in other noninterest income tend to be lumpy and include items such as gains on other investments, loan sales, as well as interchange fees. As we mentioned last time, we also have several tactical items aimed at debit, credit, and purchasing cards that we hope will further bolster our fee categories in 2015. As it sits right now, we feel pretty good about our run rate going into 2015, keeping in mind we are looking for our traditional first-quarter insurance contingency fee the end of first-quarter.

Now, as to operating leverage, our efficiency ratio of 53.2% represents a record for our Firm. We believe our efficiency ratio, as it stands today, compares favorably to most peer groups, and believe that we will be able to maintain and improve upon this level of efficiency in 2015, so that we may maintain our top-quartile peer performance.

Fourth-quarter expenses came in about where we anticipated. We did have a favorable ORE transaction that resulted in about a $1 million gain in our expense base. This was a commercial development in our MSA, which we foreclosed upon in mid-2013. And since that time, we have been working with local officials to get the property's interior roads converted to public use, which came through a few months before our fourth-quarter sale.

With that said, we also experienced an approximate $1.2 million increase in provision expense due to net loan growth for the fourth quarter. Thus, our P&L credit costs in the fourth quarter compared to the third quarter were essentially flat. Our core expense to asset ratio was 2.37% for the fourth quarter. As we have stated for the last two years, the primary strategy to ultimately achieve our long-term expense to asset ratio target is to grow the loan portfolio of this Firm with a corresponding increase in operating revenues and earnings.

As far as 2015 is concerned, and consistent with previous years, we likely will give up some ground on our efficiency ratio in the first quarter, with annual merit raises and other payroll tax-related charges. But we do remain committed to decreasing our efficiency ratio in 2015 as a result of increased operating leverage as well as careful and mindful attention to our expense base.

We are going to switch gears somewhat to discuss our balance sheet sensitivity. There is much discussion in the news about flattening yield curves and the resulting impact on bank stocks, due to the continued weakening of the European economy, volatility in the energy section, and probably 100 other factors that ultimately keep us mystified as to whether a Fed funds rate increase is indeed on the horizon. The end result is that bank stocks have been in the midst of a pullback. And all during this time, we at Pinnacle -- and I know other small-cap banks -- thought we were doing fairly well.

Given all that, we thought we would update you on our balance sheet and its preparedness for whatever rate curve may be in our future. I continue to like our balance sheet and where we are, given all of this volatility.

We introduced you to this slide last quarter, and it's basically the same information, only updated for current positioning, with a few new points. First, from a structural perspective, our balance sheet has progressed nicely to asset sensitivity on many fronts. As the chart indicates, we've experienced significant growth in our DDAs; our securities portfolio has become less impactful to our ongoing earnings stream; and fixed-rate loans are at 43% of total loans. All things considered, fairly consistent quarter-to-quarter on these matters.

As we announced last quarter, in July, we started the target removal of $350 million of existing interest rate floors over the next 12 or so months as these floors came up for renewal. This represents about 25% of our floored loan book. Through December 31, we have removed approximately $85 million of these targeted loans during 2014 -- a success rate of approximately 96% of those maturities to date.

Appreciate, then, in addition to transitioning these loans from a floor rate to a floating rate, our relationship managers are seeking, and have achieved, increases in the spread to index on these renewed loans. Thus far, our relationship managers have negotiated an increase of 34 basis points in the spread on the $85 million of floating rate loans, from which we have removed the floors.

So not only are we removing floors; we are about increasing the contract rate as well. Thus far, assuming the 73 basis point floor-to-contract-rate difference was the give-back, our relationship managers have earned back 47% of that amount. That said, and again, as we announced last quarter, in order to essentially pay for the removal of floors on the $350 million in loans, we swapped $110 million in LIBOR variable-rate loans, or only about 2% of our loans were fixed interest rates, with a weighted average spread pickup of 2.17%.

As we've stated in the past, we also have $200 million in forward-starting cash flow hedges, which effectively lock in $200 million in future long-term fixed-rate Federal Home Loan Bank funding. During the quarter, we did terminate $100 million of these hedges at a deferred gain of $64,000, and entered into new hedges of the same amounts but deferred the start dates for these to between October 2017 and July of 2018.

As one considers Pinnacle's balance sheet structure, one of the most critical assumptions has to be the betas associated with the change in deposit pricing -- particularly for us, money market and interest checking. For this rate cycle, we are contemplating higher betas on many products, with a likely average of more than 60 basis points. More to say on this in a minute.

Lastly, probably the most radical assumption is the when question. Our modeling remains a 3Q 2015 rise in Fed funds; but based on what we hear, this could get deferred again fairly quickly. We are also considering a flatter yield curve with the pullback of the 10-year. We like our balance sheet a lot when both short- and long-term rates rise. We like it less if it stays where it is today. If the long end stays where it is, we could see NIM dilution of up to 5 basis points from current levels, which is why we like a rising rate environment.

Let's discuss some of these factors in slightly more detail. First, let's discuss the overall status of our loan floors. We have been talking about this slide for quite some time. We are fortunate to have relationship managers that can garner loan floors, which is a great thing. As of December 31, we had approximately $1.08 billion of floating-rate loans with floors on our books, with an average difference between the floor rate and the contract rate of 73 basis points. This provides us approximately $8 million in annual revenue.

In 2014, we are pleased to report that we've experienced about $190 million in reduced floating-rate floored loans. This reduction is due to market forces, paydowns, payoffs, as well as the targeted removal of loan floors, which we just discussed.

While we have not discussed before, and have received many questions on in the past, is how much more will we target? As the chart indicates, we would like to operate with about $850 million to $950 million of loans with floors, or a further reduction of about $100 million to $200 million. Our program where we are targeting the removal of these floors will obviously help us achieve our goal. And, given our flexibility, we can terminate that program when we feel like it is best to do so.

This is a new slide and provides a reasonable snapshot of our balance sheet. I believe one of the better management tools in determining your interest rate sensitivity as of a point in time is the traditional rate shock analysis applied to a static balance sheet. It's a rough estimate of what happens to your balance sheet, specifically on the 12-month net interest income results, should a parallel increase or decrease in the entire Treasury curve occur.

Many banks discuss this in various forms and various filings, with the up-100 scenario receiving most of the attention lately. As you can see, over the course of 2014, we have become more and more asset-sensitive, with the up-100 calculation moving into asset-sensitivity territory at the end of third-quarter 2014. As to what happens on the first day of, say, a 25 basis point increase, let's look at the next slide.

This is what we have been working on for quite some time. The top left chart details two lines: the red line reflects the absolute volume of interest-bearing deposits that could be -- that would be a candidate for a rate increase, no matter how big or how small of an increase. As you can see, the red line did increase in the fourth quarter with a concurrent increase in our money market accounts.

This is why -- this is where the beta factor comes in and why it's so important to the assumption set. The red line has factored into it the beta assumptions -- the higher the beta, the more non-maturity deposits you have to consider in a rate increase. We have unique beta assumptions for future funding costs for every funding product and for every rate tranche; but when we consider all of those, the weighted average shakes out to be approximately 62 basis points for the first 100 basis points in rate change.

That said, we are modeling increased betas for higher rate changes. That is, as rates go up, we believe our beta will escalate as well.

Now back to the chart. The blue line represents our floating-rate assets -- no floors, no fixed; just the assets that should reprice with immediate rate increase. Our assumption is that LIBOR will adjust before or nearly after the Fed funds increase.

The blue line has been increasing all year. Effectively, this is the short-term-gap analysis with all of its shortcomings regarding convexity, optionality, the rest of the balance sheet, et cetera, et cetera. All of the Alco technicians are cringing about now, but it does point to a trend of a lessening gap in something we have been working on all of last year and we will continue to work on. Our gap now is about $200 million from about $500 million last year.

The bottom right graph, we believe, is also interesting. Of the $1.08 billion in floating-rate credit with the floor, approximately 26% will reprice within the first 25 basis points. Thus, along with the removal of the floors, we anticipate that the blue line in the previous charts can overtake the red line around the middle of this year.

I know that's a lot of detail, but feedback we get says that there are a lot of shareholders interested in these matters, so we thought we'd dedicate some additional time to it this morning. In the end, we don't know what rates are going to do, but our goal is to be modestly asset-sensitive at some point in the near future, regardless of the size of the rate increase or when it might happen. We will do this by continuing to reduce our loan floors and utilization of other tools, should the need arise.

With that, I will turn it over to Terry to wrap up.

Thanks, Harold. There is an old management axiom that I have always relied on, which is: expectations shape behavior. For those of you who have been following our proxy disclosures over the years, you know that, in addition to the asset quality threshold that must be achieved before the first dollar of incentive can be paid, our executive compensation is specifically linked to producing top-quartile performance within our peer group.

And, by the way, for most return metrics, our peer group outperforms the industry at large. So, one explanation for our persistent, ongoing top-quartile performance is, that's the performance expectation that we've established in the past. And looking forward, our Board continues to target top-quartile performance and links executive compensation to it.

Another management axiom is, you get what you incent. As I have already mentioned, our executive compensation is tied to actually achieving top-quartile performance. So that results in very high targets and dogged execution. Heretofore, management has developed detailed action plans to meet those expectations.

As you can see on the chart, 2014 was another year of top-quartile execution and performance, and I believe that approach to establishing ongoing performance targets is tightly linked to total shareholder returns. And speaking of total shareholder returns, here you see our one-, three-, and five-year total shareholder returns against our peers, way up in the top quartile.

And I just want to comment -- I don't spend time on the last two charts just because they are handsome charts; I spend time on them because I think they highlight one of the most distinctive characteristics of our Firm. So many firms target medium benchmarks, and frankly, that's what they get -- medium performance. But at Pinnacle, we target top-quartile returns, and we link executive compensation to the achievement of those results. And I think it makes a difference for our shareholders.

As we wrap up here today, I'd like to put a bow on 2014, provide a little color on our outlook for 2015, and then, frankly, just take a few minutes to talk about our longer-term outlook. 2014 was a whale of a year for our Firm. We continued our record for double-digit EPS growth, actually exceeding the $2.00 in earnings per share budget that we had going into 2014. In other words, our 2014 budget -- or the target represented a 20% growth in earnings per share, which I think says something about both our aspiration and our execution. We set big goals for our associates, but we develop action plans and execute them. As we all know, hope is not a strategy.

We exceeded the three-year loan growth target that was the cornerstone of our plan for improved profitability. And, in addition to overachieving our targeted AA -- return on average assets, we had hoped to drive all four components -- the margin, the noninterest income to assets, the noninterest income to expenses -- excuse me, the noninterest expense to asset ratio, and the net charge-offs inside the long-term target range by the fourth quarter of 2014.

We were there on three of the four; we didn't quite get there on the expense to asset ratio. But thankfully, our performance on fees to assets and net charge-offs more than offset the small shortfall on the expense to asset ratio.

We developed a plan to transition away from the loan floors and liability sensitivity that served us so well during low rates to a slightly asset-sensitive position, with little or no impact to earnings -- current earnings. And I don't think we'll ever be taking big bets on our balance sheet sensitivity, so I think we are exactly where we ought to be right now.

Operating leverage has been our theme for the last three years. We saw our efficiency ratio improve 250 basis points in 2014, almost exclusively based on sustainable, organic revenue growth. I have already spent some time on our Board's philosophy regarding targeting top-quartile performance. And as you saw in 2014, we did, in fact, have top-quartile profitability and top-quartile asset quality, which we believe did result in top-quartile total shareholder return. All in all, it was a great year.

Looking out to 2015, we generally expect more of the same. We continue to set aggressive EPS growth targets. We continue to target loan and core deposit growth in order to produce the lift in earnings and profitability. I will just comment quickly here -- as we measure the capacity or expected loan growth, I believe our current cadre of relationship managers have a comparable three-year net production capacity to that of the relationship managers back when we published our three-year capacity three years ago.

So we have not sopped up our capacity in hitting those three-year growth targets. In fact, we have as much capacity remaining as we did at the time.

We've already published our elevated profitability targets going forward, with an ROAA between 1.20% and 1.40%. Right now we intend to continue a modestly asset-sensitive balance sheet. We expect to pick up further advances in our efficiency ratio based on continuing operating leverage. And we continue to target and link executive compensation to top-quartile performance among our peers.

And then, longer-term, we remain optimistic about the tremendous opportunities that we see ahead. Number one, we have not really developed a CRE line of business. Of course, I mean for part of our CRE exposure is owner-occupied real estate. And we have relationships with many of our markets' key developers, but we've never really built out the business with any emphasis. And using the joint guidance or interagency guidance, real estate concentration guideline of 300%, we've got room to build a business -- a CRE business in excess of $500 million in assets without any excess or concentration.

We fully expect to launch that new business line during 2015, build it out over the next several years, targeting our markets' best developers. And so, this represents significant incremental capacity beyond that, that we see in the current capacity to hit our ongoing targets.

Number two, is geographic expansion. Chattanooga and Memphis have long been a targeted market for us. They are urban markets dominated by the same large regional banks with whom we compete in Nashville and Knoxville. We believe those two markets could represent $3 billion to $4 billion of assets. And while those targets for acquisition are very limited, there are some. And, as I have said many times before, we don't fear de novo buildout, particularly given our success with de novo buildouts in Nashville and Knoxville.

I would say it's hard for me to imagine that we wouldn't be in both of those markets in the foreseeable future -- certainly inside that five-year time horizon. We don't go just for the sake of going. We'll have to have the right acquisition or the right lift-out. But I can't imagine that we wouldn't get there over the next five-year time horizon.

I think -- I just want to comment here quickly. There's a lot of talk about folks going through the $10 billion asset threshold, and the impact of CFPB and other regulations -- the Durbin Amendment and so forth. We are still a good ways from crossing that $10 billion threshold, but you should know our goal is not to avoid it, but actually to get there and grow through it. And adding a CRE line of business and expanding those geographic markets are major asset opportunities that are likely to push us north of the $10 billion threshold.

Number three -- increase in fee businesses. While we are proud of the improvements in our fee to asset ratio, it appears to me that there's still plenty of running room for further expansion. Our elevated target for noninterest income to assets currently caps at 1%. And as you look at the sustainable business model, that would yield a very handsome ROAA.

But I want to comment that at September 30, 2014, we were at 89 basis points, which is 6 basis points below the median of our peers, and well below the 75th percentile, which was 116 basis points. So, as we move forward, we will seek to make investments in businesses that enable us to set a still higher noninterest income to asset ratio target, and further advance the profitability of the Firm.

As an example, in 2012, we made a $2.2 million investment in a new credit card technology provider that's aimed at banks and credit unions that are unlikely to build the necessary scale, but would like to offer their clients credit cards and own the outstanding balances. As part of our agreement, we would technically be the account issuer for those banks, selling them their outstanding balances, while earning account issuer fees and building depository balances for clearing. We believe, over the next couple of years, this will provide a meaningful accretion to our current noninterest income stream and noninterest income model.

Another example is that we've recently announced the hire of Roger Osborne, who will build a Capital Markets unit that is aimed at capital and M&A consulting to our clients, which, if you remember, generally own or manage businesses that aren't targeted by higher profile investment banks. Roger has had a long career as a financial services professional, including heading SunTrust Robinson Humphrey's Capital Markets Origination Group.

It will round out our advisory positioning with our clients. Frankly, we believe that we are missing derivative opportunities, especially interest rate swaps, for a number of our clients. And so adding this 20-year veteran with extensive capital markets experience will put us in a position to advise on non-bank debt and equity.

I will say this -- there will be no action as a principal. We will consult with clients and collect fees through a FINRA-registered broker/dealer that we are in the process of forming. I might just comment that that will not impact the dual brokerage arrangement that we have with Raymond James for our retail clients, but does put us in a position to collect the fees for consulting, as I say, on M&A, bank debt, equity, interest rate swaps, and the like.

I think, finally, I'd just comment that we continually are looking for incremental investments like the examples that I've given, particularly those that could significantly augment our fee income businesses and strategically reduce our dependence on the spread business.

So, we are very excited about 2014, to finish the 2014. We are excited about the momentum, the continuing opportunities for operating leverage, improvements and efficiencies, growth in earnings, and all those things, and feel like, as we look out even over a longer horizon, over a five-year time period, we are really blessed with extraordinary opportunities.

With that, operator, I will stop, and we will take questions.

Thank you, Mr. Turner. (Operator Instructions) Stephen Scouten, Sandler O'Neill.

Congrats on the quarter and the great year. Just wanted to touch base -- maybe a little bit more detail on the expected pace of continued growth heading into 2015, especially relative to the still-significant paydown activity. Any color you can give there, especially -- I know you mentioned maybe the run rate still looks like it did three years ago, potentially, but any color you can give there or expected new hires that would increase that run rate? Anything of that nature?

Yes, I might -- I'd just say this. If you go back three years ago, when we announced what that target was, we went through a process with all our financial advisors, generally referred to as relationship managers, and tried to outline exactly what each individual's capacity was. We backed it off for some target miss and published the number at $1.27 billion.

In that number, we included hires that we intended to make during 2012, but not during 2013 and 2014. In other words, that was the capacity that we would have at that time to produce that growth; and the idea being that we already had an expense base that would produce nearly $1.3 billion in asset growth.

We have recently been through that exercise again, and I don't want to get back exactly in the position that we've been in, in the past, where we are marching quarter-by-quarter and showing how we are growing against the target. But I don't mind to say that the capacity exercises that we have been through, as it relates to 2015, 2016, and 2017, looks at least as good as it did when we made that announcement back in 2012.

I'm just saying that we haven't sopped up our capacity. In fact, we have built capacity and hired meaningful numbers of revenue producers during 2012, 2013, and 2014. And that's one of the reasons we continue to have this great capacity.

I would say in terms of ongoing hires, we -- I mentioned the CRE business that we intend to build. That's one that could happen sooner as opposed to later, I think. We are in pretty late-stage negotiation with a couple of folks. You know, you never celebrate until you get them onboard.

We will find some and build that business somehow, someway. But honestly, I believe that we are likely to announce hires on that front quickly. And we are very actively recruiting and see good opportunities for continued hiring of relationship managers from our large regional competitors.

So again, the capacity exists today. I don't need to hire any people to sort of have the capacity -- the three-year loan growth capacity that we are talking about. But I will say I do expect that we will continue to add incremental capacity in each of the next three years.

Okay. That's helpful. And I guess in regards to the paydown front, you don't necessarily see any change in conditions that will allow that to trail off at all or even get back to 2012 levels, or anything of that nature?

You know, honestly, every year since 2012, I have assumed that it was going to get better, and it hasn't. And so our planning assumption is that it's not going to get better. I hope it does. It's possible that it does. And if it does, that will be gravy to us. That will be a clear boon to our net loan origination capabilities. But our planning assumption is more of the same.

Okay. And then one other question on the net interest margin. And first of all, thanks for all that incremental detail. That's pretty phenomenal detail. But the one thing I had a little confusion on was maybe the comment that if the current rate environment stays flat, there are might be 5 basis points of incremental compression.

So would that be basically that the low end of your targeted NIM range at 3.70%, there could be maybe 5 basis points of incremental downside there, assuming that the 10-year stays flat and maybe the Fed only increases 50 basis points? Or I guess what are the assumptions maybe there? A little extra detail.

Yes, I think it's from the current run rate, Stephen. It's -- we ought to stay within that 3.70% to 3.80% range. We are really optimistic and hopeful that this 10-year will rebound some, but I think that's what -- that's all it is, is hope at this point.

Right. So even on the downside, you think you should be able to stay in that 3.70% range?

Sure.

Okay. Great. All right, guys. Well, thanks for taking my questions. I'll let somebody else hop on.

Thanks, Stephen.

(Operator Instructions) David Feaster, Raymond James.

You spoke to the new producers that you might be looking to hire. Could you maybe speak to the expense build that you would expect with that? And maybe talk to where your current loan pipeline stands?

Yes. I think -- let me start on the expense side. Because, again, I think if you have followed our Company for an extended period of time, our basic thesis is that we have an expense base that's going to produce a disproportionate amount of revenue growth. In other words, our loan pipelines and the capacity that I mentioned are as large as they were three years ago, so we ought to expect similar asset growth given no increase, no build in the expense base.

Now, moving forward, I have said I do expect that we will have the increases in the expense base, because we will hire incremental capacity. But we have also said that we expect that we'll -- you'll see an improvement in our efficiency ratio during 2015. And I've also said that we expect that the growth on the asset side will be disproportionately higher than the growth in the expense base, such that the expense to asset ratio comes inside our target range of 2.10% to 2.30%.

So again, just to try to get clear, we don't need any incremental expenses to continue loan growth at the pace we pay it. We will add capacity, but we will add it in a way such that the efficiency ratio advances and such that the expense to asset ratio advances. Is that helpful?

Yes. Absolutely. Maybe where your pipeline is?

I would say -- I guess I would just characterize our pipelines as generally consistent with where they have been over the last several quarters. I think, traditionally, first-quarter is a relatively lighter production quarter than the other three. I don't know; we may see a little less loan production in the first quarter than fourth quarter, but I don't look for it -- as an example, I wouldn't look for it to be as modest a growth in 2015 as it was in 2014. So you know, again, I think our pipelines are very healthy.

Okay. Great. Last question from me. Maybe you could talk a little bit about your thoughts on M&A a little bit more? You're clearly focused on the Chattanooga and Memphis markets as areas for growth, but, you know, what size? And what are your thoughts on M&A as we look out to 2015?

Yes, I think -- I guess I would say that I believe, in general, there's more M&A chatter today than there has been in the recent past. And I would say for our Firm, we probably have preliminary discussions going with a number of banks on a number of fronts. I don't think you ought to read a lot into that, other than just there's incremental activity from where it's been.

I've mentioned that in both Chattanooga and Memphis, I think there are conceivable targets for acquisitions. And we just have to see where that goes. We -- one of the things that -- for our Company that I think is important here, we -- you know, we are not afraid of M&A. We have done it in the past. I can't imagine over a three-, four-, five-year period of time, we won't do more M&A.

But when you have the sort of organic growth capacity that our Company has, you have to acquire a pretty rapidly growing bank to make that an accretive transaction. So it gives you a pretty limited number of targets. And again, in both markets, we have active dialogue going on with potential targets. Again, I wouldn't overplay that, but just some level of dialogue with people aware of our interest and so forth. But we also have dialogue going on with various folks that might be able to produce a good lift-out for us in either of those markets.

And so, again, I guess I would just say -- I'd characterize it this way: we've got great organic growth capabilities. That limits the number of M&A targets that make sense to us. We are capable of and like de novo expansion and have dialogue going on, on those fronts. But if we found the right M&A opportunity, we would do it.

Great. Appreciate it, guys.

All right.

Kevin Fitzsimmons, Hovde Group.

Kevin Fitzsimmons, Hovde Group. Just one quick question -- most of mine have been asked and answered. Terry, over the years, you guys have -- you know, it's been a very consistent strategy that you go out and you try and get the good loan officers from some of the large regionals, and you have that capacity in mind to bring over, over a certain period of time. And that -- you can't argue with the numbers, that has played out.

But as you guys build your presence in Nashville over the years -- and it's no secret that Nashville is a good market, and I just continually hear other banks talking about and taking steps about going into Nashville -- are you starting to see pressure on you guys from the other end? In other words, people talking to and starting to take any of your own folks, that you guys, in a sense, become the target in that same game?

Do you see any of that? Or is that just -- it's more they go after the large regionals, just like you guys do?

Well, Kevin, I would say that your general thesis is right. I don't find it to be any -- I guess I'd just sort of give you a little color commentary on what is the level of people coming to Nashville. And I don't find it any more aggressive today than it's been, really, since we started coming out of the recession.

You know, we've got -- we have had new emphasis in this market by folks like JPMorgan Chase, new emphasis by folks like Wells Fargo. You've got U.S. Bank trying to do something here. You've got regional players coming in with LPOs -- City National, PNC. So, those are folks that have already made the decision to come here and are here, and have been here for a year, two years, three years, and so forth.

So I guess, again, I don't fear that 2015 is somehow going to cause it to be more. It might be more of the same, but it's not -- I can't imagine it will be any more aggressive in terms of people coming to the market. Again, I'm aware of other folks who say they want to come, and I do expect they will. But I guess I'm just trying to characterize it that I don't look for it to be more competitive in 2015 than, say, it was in 2014 and 2013, or something like that.

I think the second thing, on being a target -- I would say, I mean, my own feeling is, my own assumption is, that we are the number-one target of potential hirers and headhunters, and so forth. I happened to bump into a headhunter the other day who I had never met -- a name I had known for awhile, but a person I had never met. And his comment was, Terry, man, it's so nice to meet you. You and I have never chatted, but I've talked to probably everybody that works for you.

And I believe he was sincere. I think he had talked to everybody that has -- works at Pinnacle. And again, in his talks and discussions, he knew people way down in our organization and what they had built, and who was working on the professional banking -- professional doctor practices, and who was working in the middle market, and who came from which bank. And frankly indicated which banks he had been recruiting for and some banks that he'd recruited -- tried to hire this person or that person and so forth.

So, I just rambled through that to say -- I mean, I don't want to sort of overstate the position, Kevin, but I think most people would acknowledge we do have the largest and the best-known cadre of commercial bankers in Nashville and perhaps in Knoxville as well. And so, our folks are being hit by headhunters every day. And I don't look for it to be stiffer in 2015 than it was in 2014 or 2013.

Okay. Okay. That's helpful. (multiple speakers)

Kevin, if I could, I just thought of one more thing I might comment on. I think in our -- you know, 2015 is our 15-year anniversary here. And during that period, we have probably lost two revenue producers that I can think of, who left this Firm and went to work in another bank. I mean, it's an astounding thing. We just don't lose our revenue producers.

Oh, that puts it in perspective. Okay, great. Just one quick follow-up. It seems like when the discussion of M&A comes up, it seems that, incrementally, over the past, I don't know, five or six quarters, it has gradually become a little more of an open, possible avenue for you guys, in terms of how you're portraying it.

And you have been very open about the fact that, when you look back to pre-downturn, you guys did a few deals that, in hindsight, they were probably beefing up in construction and land at the wrong time. Right? I think you would say that.

Yes, that's true. That's true, yes.

So, as you --

You won't hurt my feelings. Go ahead, Kevin.

No. (Laughter) Theoretically, that is. And as you look out now, it's very understandable, especially with your organic loan growth engine, to be very careful and to be conservative looking at these deals. But as you are looking at them, and given the experience, are there any areas or certain types of banks that you just want to stay away from, that you are looking and saying, we don't want to -- we've got a great company and growth engine the way we have it, so we don't want to disrupt it or screw it up by adding the following kind of banks on? Are there any things like that, that you just want to stay away from?

Yes, I think your observation that we are more open to M&A today than we have been at various points in our past is probably accurate. And I think what makes that the case is that our stock is relatively advantaged, and really take-out multiples are more reasonable than they were at the peak of the market. And so the combination of our relative stock advantage and the more reasonable price of targets and those kinds of things makes it more likely as opposed to less likely.

Right.

Again, I don't want to overplay it. I mean, I don't -- I honestly don't care if I make an acquisition or not. Again, we can go at it either way. But I am just saying, that phenomenon makes it a little more likely than it might otherwise be.

I think in terms of the kinds of banks that we want to acquire -- and Kevin, I might just take this opportunity -- you and I have had lots of discussions about it over the years; I honestly am not sensitive about the acquisitions we've made. I believe we make great acquisitions.

I've got a number-one market share position -- I took losses on the residential real estate exposure that we had, but that was the flaw and not the acquisition or the target specifically. Just the fact that we accepted the concentration of residential real estate exposure.

Right.

But in those markets, man, I've got a number-one deposit market share position in one of the fastest growing counties in the United States. That's a cool thing. If you look at the $2.00 in EPS I make today, a significant portion of it comes from that acquisition.

And so I think, over time, we did get what we want, despite having been at the wrong place at the wrong time on the residential construction. So, I guess, again, I would put that in perspective. If I could do that deal again, I probably would like to have done it later in the cycle, where I got it at the low instead of the high. But it was a good acquisition.

Fair point. Fair point.

And so, again, I would, I guess, just say that the kinds of banks that we wouldn't want to target, the one thing that stands out -- we had tons of opportunities, Kevin, as you might guess, to acquire banks in the state of Tennessee; many of them in slow-growth/no-growth markets, many of them in rural markets, those kinds of things. We have no interest in the small, no-growth markets. We have no interest in rural markets, those kinds of things.

You know, our interest is in urban markets. That's where we do well; that's where we can bang on these large regional banks the best. And so that would be an area of concentration. And I think, generally, we are not aimed at companies that have a concentration of what you might call mass-market retail. We have a preference for folks who can succeed in the relationship-managed segments, primarily the commercial segment, and to a lesser extent, the private banking segment. So.

That's great, Terry. Very helpful. Thank you.

All right.

Brian Martin, FIG Partners.

Great quarter, great year.

Thank you, Brian.

Harold, you talked a little bit about the fee income being up this quarter and just kind of feeling good about this type of run rate. It sounds like there was vendor incentives and a couple other things that were in there. I guess, is that kind of the normalized level? Is that what you're suggesting, as you kind of get into second-quarter and beyond? Or is there -- or is any of that stuff kind of nonrecurring in nature on the fee income side?

Yes, well, I guess you could assume the Raymond James payment is nonrecurring, but we are also expecting a payment in the first quarter on our insurance contingency fees. And, hopefully, by that time, we will see some energy in some more of the core fee revenue categories. So we are optimistic that we are on a -- we're at a different run rate.

Okay. All right. And then just one follow-up on the M&A. It sounds like the two markets -- the Chattanooga and Memphis are targeted. I assume Nashville is still a focus as well, if there was an opportunity that came up there?

Yes, there's no doubt. I guess I might have been well-served to make that comment. I've made it so many times in the past, I guess.

Yes.

But, you know, Nashville would be an awesome opportunity for us. We love our distribution here. I think it's advantaged that, in terms of the number of offices that we have here -- I think it's 28 offices. And most of the large regional banks that have greater share than we do here probably have twice that many offices. And so, again, it's an advantaged distribution system, but I don't need any more. And so, if I could do an in-market deal, I ought to get an outsized cost take-out, and that'd be a great thing.

Okay. All right. Fair enough. And then just the last thing was the pricing, Terry, on kind of new business. It looked like the loan yields were relatively flat this quarter. I guess, how is pricing, you know, kind of the expectations -- with the growth expectations you have in 2015?

Brian, I'd love to tell you I think, man, everything is slick and so, we won't be under any pressure. But I don't believe that's the case. I think everybody in the market will be under pressure. I think we still operate in an environment that is a slow-growth environment at best. And I think the industry and our markets in particular are awash with liquidity.

And so there is just too much money chasing too few deals. I think there will be pressure on pricing. I don't think it's been so bad over the last two or three quarters, and I'm optimistic that will continue. But again, I think you have to assume there's going to be pricing pressure due to asset origination difficulty for the industry that's going to persist.

Okay. So some possible pressure on that loan yield number is kind of the way to think about it?

Yes. I think -- again, certainly, you'd have to say there is potential pressure on it. But again, I think we have said we believe we can hold our margin in the 3.70% to 3.80% range.

Yes. Okay. All right. I appreciate it. Thanks, guys.

Okay. Thank you, Brian.

Thank you. And I am showing no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Have a great day, everyone.