Pinnacle Financial Partners Inc (PNFP) 2015 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Pinnacle Financial Partners second-quarter 2015 earnings conference call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer; and Mr. 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 yet www.PNFP.com. Today's call is being recorded and will be available for replay on Pinnacle's website for the next 90 days. (Operator Instructions).

Before we begin, Pinnacle does not provide earnings guidance or forecasts.

During this presentation, we may make comments which constitute forward-looking statements. All forward-looking statements are subject to risks, uncertainties, and other facts (sic) 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 the non-GAAP measures to the comparable GAAP measures will be available on Pinnacle Financial's website at www.PNFP.com.

With that, I'm now going to turn the presentation over to Mr. Terry Turner, Pinnacle's President and CEO.

Thank you, operator. Good morning. As we have for as good number of quarters now, I want to begin here with a dashboard of the key valuation drivers. Our basic thesis for consistently driving our share price higher 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 for quite some time we've 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 a 19.2% revenue growth rate year-over-year in the face of pretty stiff volume and margin headwinds. Core earnings, at $0.64, was a record high. It's the 17th consecutive quarter of increasing EPS, and it's up 30.6% year-over-year.

And from a profitability perspective, our return on average assets, which is not on the slide, was 1.44%, and our return on tangible capital, which is on the slide, is at 15.39%. I will expand further on our profitability and our sustainable business model in just a minute. But obviously revenue growth, earnings growth, and profitability continue to be very strong.

As you can see on the second row of graphs, we're getting outsized balance sheet growth with end-of-period loans up 11.9% in the second quarter of 2015 compared to the same quarter last year. That's a rate of organic growth consistent with what we've sustained over the last 3 to 4 years now. You can also see that we've increased average transaction accounts by 18.8%, using that same year-over-year comparison, so the transaction accounts now represent 51.4% of total deposits.

And while it's not on the slide, I just might comment that during the second quarter of 2015 we grew loans roughly $185 million, and we grew core deposits $196 million, covering every dollar of loan growth with $1.06 in core deposit growth.

And then looking at the rightmost chart on the second row, even after having initiated a dividend payout in December of 2013, we have continued to accrete capital, with tangible book value per share up 13% year-over-year, which, as I just mentioned, we believe is highly correlated to share price increases.

The third row provides information regarding our asset quality. Nonperforming assets decreased to just 50 basis points of total loans, plus OREO. Classified assets remain extraordinarily low at just 19% of Tier 1 capital, plus allowance. The overall improvement in our credit metrics since the Great Recession provided meaningful credit leverage over the last few years. It appears to me that our allowance continues to be high versus peers, which might suggest continuing credit leverage going forward.

As I alluded to on the last slide, more than three years ago we laid out our sustainable business model, which at the time called for, say, a 1.20% ROAA, the midpoint of our target range, which was 1.10% to 1.30%. We also broke down targets for full critical components that were required to produce that ROAA: the margin; the non-interest income to assets; the noninterest expense to assets; and net charge-offs, since in ordinary times charge-offs are the primary influence on provision expense.

In mid-2014, in conjunction with the 2014 to 2016 strategic plan, we increased our ROA target by 10 basis points to a range of 1.20% to 1.40%. And as you can see on the right of the slide, at both the first and second quarters of 2015 we have exceeded the top end of that range with an ROAA of 1.45% and 1.44%, respectively. So we will reevaluate that target in conjunction with our 2015 to 2018 strategic plan, which will be developed this fall; and, of course, take into account our two mergers and our investment in BHG.

For quite some time, the only component not performing in or better than the target range has been the noninterest expense to asset ratio. For those of you who have followed our firm for any length of time, you know our approach to rightsizing our expense base has really been to grow our earning assets, primarily in the form of loans. So, with the strong asset growth in the second quarter, we are now all but in the target range for the expense to asset ratio.

2Q 2015 was the first quarter that our NIM has fallen outside the target range, primarily as the result of declining asset yields. The declining asset yields were the result of pricing competition, loan mix, and most importantly the ongoing process of repositioning the balance sheet for rising rates. Harold is going to expand on the margin and repositioning the balance sheet in just a minute.

So, overall, second quarter was another whale of a quarter, with record EPS and a ROAA meaningfully above our target range. The NIM has shrunk just a bit as we have repositioned the balance sheet for rising rates. But given the expense is rightsized and the dramatic outperformance on fees and asset quality have, and should continue to, carry the day.

With that high-level summary, let me turn it over to Harold to review the quarter in greater detail.

Thanks, Terry. Our same-quarter 2015 net interest income was up approximately $562,000 over the first quarter. This was primarily due to expansion of our average loan balances. As for our margin, our margin declined this quarter to 3.65%, with the decrease attributable to several factors. First, we continue to reduce our floored loan portfolio, which we will speak to in just a minute. This year we have also experienced a meaningful increase in client back-to-back interest rate swap activity, where the client will agree to a fixed rate loan and we record, through a counterparty, a floating-rate credit. Substantially all of these credits are LIBOR-based credits; and, as a result, helps our asset sensitivity goals but does lower current-period yields.

Regarding the bond book and cash balances, as the cash proceeds from our investment portfolio are received as well as the need to increase our bond book to support our public fund deposit base, we continue to invest in shorter, lower yielding instruments. We have begun to reevaluate this position somewhat as we look at various economic forecasts and intermediate-term rates.

We also managed to hold slightly more cash in Fed funds this quarter than last quarter, which tended to dilute the second-quarter margin. Even though our margins may fluctuate, we focused our efforts on growing net interest income by growing our customer base and our market, while at the same time maintaining appropriate profitability thresholds.

Concerning loans specifically, as the chart indicates, average loans were $4.7 billion, which was year-over-year growth of 11.9%. EOP loan balances are higher than average balances, and our sales pipelines remain strong for the remainder of 2015. And at this point, we expect strong loan growth for the remainder of the year.

As to loan yields, our loan yields decreased to 4.27% this quarter, after having held steady for the past 5 to 6 quarters. We anticipate pricing will remain very competitive in all of our markets going into the third quarter. There's a lot of lending activity in our markets; more than we've seen in quite some time. This increase is attributable not only to the health of our markets but also to the fact that we have more relationship managers out in those markets meeting the needs of their clients.

Our pricing philosophy will remain consistent in that we will evaluate each transaction on its own merits, and meet or beat the competition whenever we feel it's in the best interest of the Bank.

Concerning the progress we are making on reducing our exposure to floors, on our floating-rate credit we continue to see reduction in loan floors, which obviously will put some pressure on loan yields, which I will get to next.

We've been talking about this slide for quite some time. As of December 31, we have approximately $1.08 billion of floating-rate loans with floors in our loan portfolio, with an average difference between the floor rate and the contract rate of 73 basis points. We're pleased to report that through June 30, we've experienced about $202 million in reduced floating-rate loans in 2015, along with a reduction in the spread difference to 64 basis points.

This reduction is due to market forces, paydowns or payoffs, and most importantly the targeted removal of loan floors. As I mentioned previously, this obviously impacts our loan yields and loan interest income. But our plan was to manage the reduction in order to prepare for an increase in short-term rates. Our modeling contemplates the first rate increase in late 3Q or early 4Q. We'd like to operate with about $800 million to $900 million of loans with floors, a range in which we are currently operating.

As to deposits, here in the second quarter we were able to maintain our low funding cost. As to deposit balances, we did see our average deposit balances increase by approximately $93 million during the quarter. We were most pleased with the fact that our demand deposit growth has been really strong over the last several quarters, with our second-quarter 2015 average balance being up approximately 8.1% over last year's second quarter. These remain core operating accounts that we expect to keep regardless of the rate environment. Core deposit growth remains a critical strategic objective of our firm, and we intend to keep it front and center as we approach the last half of the year with a very strong loan pipeline.

We introduced this slide to you last time. The top left chart has two lines. The red line details the absolute volume of interest-bearing liabilities that would be a candidate for repricing within the first 30 days following a rate increase, no matter how big or how small of an increase. The blue line represents our floating-rate assets; no floors, no fixed, just the assets that should reprice within 30 days following a rate increase. The blue line has been increasing since the first quarter of last year. In summary, it's about the trend. And we like where we are, as we are hopefully nearing this forecasted rate increase.

The bottom right graph we believe is also interesting. Of the $880 million of floating-rate credit with a floor, approximately 36% will reprice within the first 25 basis points. This, along with the removal of the floors, has resulted in the blue line in the top chart overtaking the red line.

So we believe our core franchise is ready for rising rates. It has taken some sacrifice to current-period results; but, nonetheless, we think the tactics that we have deployed over the last few years have gotten us to the point we need to be.

Looking forward, and considering the addition of the two new franchises in Memphis and Chattanooga to the mix, we don't have the algebra to speak as competently about the balance sheet and interest rate position. But our initial assessment remains consistent, in that we consider the additions to be modestly liability-sensitive, and that we believe we have many alternatives available to us to modify those positions fairly quickly without significant sacrifice to either net interest income or net interest margin.

In summary, we obviously expect a meaningful interest in net interest income in the last half of the year due to the addition of CapitalMark and Magna, but we aren't expecting any meaningful dilution to our margins at this point. In fact, our current forecast would reflect fairly stable margins for the remainder of the year.

Switching now to noninterest income. Excluding security gains, noninterest income for the second quarter increased 54.4% over the same period prior-year, driven largely by our 30% ownership interest in Bankers Healthcare Group, which we announced and closed during the first week of February.

Our wealth management fees are up approximately 8.1% over the same prior-year period, and remain a reliable earnings stream. Quarterly insurance revenues were down from the prior quarter due to incentive payments from insurance carriers that are received each year in the first quarter.

Our residential mortgage group had an outstanding quarter in terms of production, with approximately $113 million in loan sales this quarter, at a yield spread of 2.72%. Revenues are down from last quarter due to an overall decrease in the mortgage pipeline at the end of the second quarter, after a significant rise in the pipeline at the end of the first quarter.

Items included in other noninterest income tend to be lumpy and include items such as gains on other investments and loan sales, as well as interchange fees. As noted above, interchange and other consumer is up approximately 29% from last year as we continue to aggressively market our credit, debit, and purchasing cards to our clients. We've also experienced a meaningful increase in client back-to-back swap fees from last year, as we discussed previously.

In summary, as to fees, BHG has become a remarkable investment for our firm. And we believed at the time of the acquisition that we'd likely experience 7% to 9% accretion as a result. We now anticipate that we'll be on the high side of at least 9%, with some likelihood we will beat that original estimate. We continue to explore other ways to partner with BHG so that both firms can take advantage of each other's strengths.

Lastly, we are reporting fees to average assets of approximately 1.24% for the second quarter. With Magna and CapitalMark, we expect some minimal dilution to that metric by only 2 to 4 basis points presently.

Now as to operating leverage, our efficiency ratio of 51.1% represents a record for our firm. We believe our efficiency ratio as it stands today compares favorably to most peer groups, but we continue to believe that we will be able to improve upon this level of efficiency for the core franchise.

As to run rates, linked quarter, compensation expense was up approximately $240,000. We're expecting that increased hires will drive our expense increases this year, as we believe all other costs should be fairly stable.

I would like to highlight that our recruiting has been exceptional this year. Not only did we invest in a new Memphis platform, which now has 11 bankers, we've hired 12 other revenue producers to our ranks in Nashville and Knoxville, all of whom we are very excited about. In other words, in addition to the 11 bankers we've hired in Memphis, we've already hired as many revenue producers year-to-date in Nashville and Knoxville, as we have typically been hiring on a full-year's basis over the last 3 to 4 years.

Our core expense to asset ratio was 2.31% for the same quarter of 2015. As we have stated for many years, the primary strategies to ultimately achieve our long-term expense to asset ratio target of 2.30% is to grow the loan portfolio of this firm with a corresponding increase in operating revenues and earnings. That will also be the strategy we will deploy with CapitalMark and Magna as well.

We expect to see a slight rise in both our expense to average asset ratio and efficiency ratio in the third quarter with the addition of the two new banks, but the rise will be modest at best, perhaps 8 to 10 basis points on our expense to average asset ratio, with our efficiency ratio rising but remaining in the low 50s as of today.

That said, our synergy case for both acquisitions remains in place and will eventually help us create more operating leverage in future quarters as we fully expect to achieve the targeted EPS accretion targets in 2016 that we spoke about on the acquisition conference calls.

As far as the remainder of 2015 is concerned, we do remain committed to increased operating leverage with careful and mindful attention to our core expense base.

That said, our focus remains on long-term shareholder value creation by growing our customer base. We believe the best way to grow our customer base is to hire the best financial professionals in our markets. As I said, we are mindful of our expense base and we'll pay close attention, but if the opportunity arises where high-quality relationship managers are available to us, we will seize those opportunities.

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

Thank you, Harold. We've had a lot going on over the last several quarters, so I want to conclude by taking us back to the big picture. First of all, we're simply executing a long-term growth plan that I think has been discussed pretty openly for quite some time.

Number one, we've launched a higher-profile CRE line of business. Of course, we've always been in the CRE business, but a meaningful part of our CRE exposure is owner-occupied, which is really more of a C&I risk. And we've also had relationships with many of our markets' key developers for quite some time, but we've never emphasized the commercial real estate segment to the extent that we have the C&I segment. So that's really what we're talking about here is escalating our CRE business to match the thrust and position that we've established in the C&I business.

We've made four critical hires necessary to build out a sophisticated CRE capability over the next several years, targeting our markets' best developers. Although our guys have contacts all over the Southeast, it's really our intent to dominate this business among Tennessee's best developers.

Additionally, we have reenergized and refocused our residential lending capability with several key hires there, as well. And so we're having great success building a dominant position in the CRE business just as we built the C&I business. We've hired high-profile bankers that are quickly consolidating their developers and their builders to Pinnacle.

Number two, geographic expansion: you know that Chattanooga and Memphis have long been targeted markets for us. They are urban markets, dominated by the same larger regionals with whom we compete in Nashville and Knoxville. We believe those two markets could represent $3 billion to $5 billion of assets for us. We've made our play in both markets, and once both mergers are consummated, we'll be focused on exactly the same approach to organic growth in those markets as we and they have focused on for some time.

I might point out that the hiring has really continued. When we announced the lift out in Memphis it was a team of eight, and you can see there we've added three more to the team in the last 2 to 3 months. And our hiring pipelines lead us to believe we will continue to make great hires in that market.

Number three, asset growth to greater than $10 billion. With these acquisitions we will add approximately $1.7 billion in assets to our roughly $6.5 billion, which gets us closer to the $10 billion threshold. And that brings the question and concerns about the CFPB, other regulations, and the Durbin Amendment; with the Durbin Amendment likely being the most costly and impactful.

Our compliance and finance folks are continuing to dig in on all of the requirements of being a $10 billion franchise, so that we'll be ready long before we get there. So to be clear, and as I think we've communicated many times in the past, we want to make sure you know that our goal is not to avoid the $10 billion threshold, but to get there and grow through it. Our DNA is all about capturing the large organic growth opportunity that continues to exist in our targeted markets due to the vulnerabilities at the larger regional banks.

Number four, increasing fee businesses: our BHG investment has really blown away our long-term fee targets. And I imagine we'll need to revisit a few of our targets with our Board in conjunction with the 2015 to 2018 strategic planning process, which is coming up shortly.

BHG provided approximately $0.07 in fully diluted EPS to our second-quarter results. We had originally advertised BHG as being 7% to 9% accretive. As you can see on this chart, we're now confident the investment will be at least 9% accretive. You heard Harold speak about that a minute ago. And our focus is not just on collecting the benefits of the investment, but to try to find additional ways to leverage our relationship with this very sophisticated marketing enterprise to better both firms. I'll be disappointed if we don't find more revenue potential here.

We've also hired Roger Osborne, who will build out a capital markets unit aimed at capital raising and M&A consulting for our clients, which are generally owner-managed businesses not targeted by higher-profile investment banks. As some of you know, Roger has had a long career as a financial services professional, including SunTrust Robinson Humphrey's capital markets origination group. We believe we can push that unit through breakeven this year and begin a meaningful incremental contribution in 2016.

And finally, number five, continued focus on bottom-line results. As we've already talked, second quarter was another significant quarter for us with record revenues, record earnings, pristine asset quality, elevated profitability, and ongoing profit leverage.

And that leads me to the concluding slide, which honestly is my favorite slide, and I think probably the most important slide in the deck this morning. Stephen Covey is famous for his statement: the main thing is to keep the main thing the main thing. For us, the main thing is to grow and earnings stream by offering clients better service and financial advice than is otherwise available in the marketplace. And despite the fact that we've got a number of large initiatives underway that are intended to fuel the future growth of the Company, this is an extraordinary time of focus on and execution of the main thing.

This is the latest independent research from Greenwich Associates, looking at market share and client satisfaction among businesses with sales from $5 million to $500 million, in our two primary markets: Knoxville and Nashville, Tennessee. As you can see, we're opening up quite a competitive advantage over all the national and large regional banks with whom we compete, with a number-one market share position, now north of 25%, and client satisfaction that would indicate that we are in fact achieving distinction for our service and advice.

That not only bodes well for us as we move into Chattanooga and Memphis, where we'll compete with the same national and large regional banks with whom we're competing in Nashville and Knoxville; but also when you look at the very low levels of client satisfaction among the business clients that most of those large national and regional banks, it bodes well for our ability to continue moving market share in Nashville in Knoxville, and that our ability to do that should be sustainable for quite some time.

So, operator, we'll stop there and open for questions.

(Operator Instructions). David Feaster, Raymond James.

Can we talk about costs? You guys have exhibited pretty impressive cost control, and efficiencies continue to improve. Could you maybe just give us your thoughts on your expenses going forward, and maybe what we could expect as a run rate with the acquisitions?

Yes, David. I'll speak to that in two ways. First of all, with Magna and CapitalMark, we think that from a ratio perspective we'll see some uptick in the expense average ratio and the efficiency ratio, but it won't be significant.

As to the core bank, we don't really expect to see any meaningful increase in other expenses. We'll probably see some increase in ORE expense going into the third quarter. But other than that, we should be fairly stable with respect to all other expenses, other than the compensation line. We expect compensation will increase. We think it will increase ratably over the remainder of the year as these new hires come on board.

Okay. Since we're talking about new hires, could you maybe talk about how the integration is faring, and maybe their contribution to the new hires, and then even the Memphis lift out?

David, I couldn't quite get all of that question. But if I understand, you want us to comment on how the integration is going, and the progress that we're making with the lift out. Is that it?

Yes, that and the new hires.

Yes, okay. Well, I would say quickly that we're excited about the progress in both the banks. Let me start with what's going on with them. I think CapitalMark in particular had a whale of a second quarter. And it would appear to us has really outsized balance sheet growth, and would lead us to believe that our synergy case is -- I would say they are performing at a pace that would indicate that it's probably better than what we assumed as we built our original synergy case.

Magna is also performing better than the budget for balance sheet and earnings growth, which we used in developing our synergy case. So we're excited. I think we commented in the press release specifically that we think it is a great tribute to the folks at those banks that they are continuing to outperform their original projections at a time that where they're going through a transition.

We've begun integration process. We're holding orientation sessions for all of the associates. I don't know, I'd say we're 35% or 40% of the way through that process. And I think we're building great excitement in both companies.

I think, in terms of the lift out in Memphis, if you'll remember, we announced that acquisition -- not acquisition, but that lift out -- whatever it is, 90 days ago or so. During that period of time we've located office space; we've leased it; we've filled it with furniture. We've trained people; we've oriented people; we've made application to operate a loan production office as well as a deposit taking office. We've built all the procedures to do that. We've got systems up and running. They are, in fact, opening accounts, both on the loan and deposit side in those offices. And the pipelines are building rapidly. So we're excited about the progress of the lift out team as well.

Okay, great. Last question from me. I want to talk about the Bankers Healthcare Group. It's obviously trending better than even you guys expected. What's driving the strength? And where are you in the cross-selling opportunities, and even other revenue synergies that you've talked about before? Are you still in the early innings of realizing those? And what could this opportunity -- you think really -- what do you think the opportunity could be?

Yes, there's several points in there. They are having an outstanding sales year. Their volumes are up meaningfully over last year. So I think that's why we think we're going to be on the high end, if not exceed the high end of our forecast. So, it's all about volumes, and they're really churning a lot of good product this year.

As to revenue synergies, we continue to position our credit card book through that distribution channel. Those volumes are also growing, so that's been a really good thing for Pinnacle as well. Future revenue synergies are likely; are what we're looking at is around deposit products and trying to understand what we might be able to position with their client base with our deposits.

And so, that's an ongoing process. A lot of people are involved in thinking about that, and how to best do it so that we can try to get some return off of that. But that would be kind of the -- that's what's at the top of the list of trying to get accomplished as far as future revenue synergies.

Okay. Great. Thanks, guys.

Andy Stapp, Hilliard Lyons.

What does your model project regarding the impact of rising interest rates on net interest income during the second year following the rate hikes? Just trying to get a sense of your longer-term asset sensitivity.

Yes, Andy, I think what the charts would indicate is that we will see some 2% to 3% interest -- increase in net interest income with our current rate forecast.

Right.

We currently have 25 bps or so at the end of this year, and then another 25 bps next year. So we don't have a real significant rate increase built into our forecast.

Okay, okay. Is my understanding correct -- the decline in the gains and sales of mortgage loans was just a function of a strong Q1?

Yes, I think that's right. We had a mortgage pipeline of about $24 million at the end of the year. That mortgage pipeline ballooned up to the mid-50s by the end of the first quarter. And so we put a rate lock on all those -- we put a rate lock hedge on all of that -- on that increase. So that contributed significantly to the first-quarter revenues. The volumes in the second quarter didn't increase, or increase meaningfully, so the value of the rate lock hedge didn't increase very much, if that makes sense.

Okay, yes. And what are your debit card fees -- I don't know if you have this -- including CapitalMark and Magna?

Do you want the total?

Yes.

Okay, hold on just a second. This year, so far it's been about $3 million. That's without Magna and CapitalMark.

Right.

So, we're anticipating, with CapitalMark and Magna, and looking forward the next 2 to 3 years of getting over the $10 billion threshold, that we're looking at probably a $4 million to $5 million hit on debit cards. If that's what you are alluding to.

Yes, yes, yes, exactly. Okay. And last question and I'll hop back in the queue. What's the headcount for the capital markets group?

Capital markets group currently has two people.

Okay. All right. Thanks.

(Operator Instructions). Tyler Stafford, Stephens.

I wanted to follow up on an earlier question on expense topic. Terry, I know you touched on this in your closing comments. But given that we are bumping up close to the $10 billion threshold, can you talk more about the investments that you either have been doing or need to be doing to cross that? And I guess specifically, where we could be seeing the investments coming down the pike?

Yes, Tyler, this is Harold. We are kind of in the throes of trying to understand -- to say we think we've vetted all the issues associated with being a $10 billion bank would be a real overstatement. We're not -- we're going into this trying to not be naive about it. We've talked to a handful of software vendors related to the topic. As you might expect, we're getting -- we're fielding a lot of calls from boutique consultants to help us get over the $10 billion threshold, but we think we are 2 to 3 years away from it. And so we're not in the near-term about to engage a consultant that is wanting to try to get us through the first phase or the second phase or whatever.

I think I've read quite a bit of commentary from some others that are in a similar position as us. I think we'll probably respond similarly as the other banks are responding. We will continue to learn and educate ourselves. We're looking -- as I said, we'll probably go ahead and sign some contracts related to software vendors, so we'll see some marginal uptick in technology costs. But we're not about to go out there and start trying to accomplish all the DFAST stress-testing requirements until we've had a lot of conversation, both internally and with the regulators, as to what they're going to require.

Our hope is -- and maybe that's all I can say, is our hope -- is that over time of the cost of compliance will come down, as will the requirements of what the regulators are looking for from a bank that just steps over the $10 billion threshold. We know that the requirements of a $40 billion bank aren't nearly the requirements that they have for a $10 billion bank, if that makes sense.

Okay. Good color. Thank you, Harold. So switching gears over to the margin, I guess specifically the loan yield of this quarter. The last several quarters, you guys have been able to hang on to those yields. They obviously compressed in Q2 a bit. Was there a change in the pricing dynamic from your borrowers this quarter? Or was it just more competition, coupled with the loan floor repositioning you did this quarter?

Yes, I think pricing has gotten really competitive here, and it has been competitive. But we're seeing a lot of LIBOR-based credit partially due to the commercial real estate initiatives that we have, and partially due to the fact that we want more floating-rate credit. So, I think those are the two largest impactors to why the loan yields went down to 4.27%.

Okay. And then last one for me. Harold, I apologize if I missed this in your prepared remarks. But in outlook or comments on the impact of the pending deals to the margin once we get those closed for 3Q and 4Q?

Yes, we don't expect any meaningful dilution to the margin at all. Our forecasts would say that the margin stays pretty stable for the rest of the year, with the inclusion of CapitalMark and Magna.

Okay. Thanks, guys. I'll hop out.

Brian Martin, FIG Partners.

Harold, can you just talk a little bit about, post the transactions, when the first quarter of a clean expense run rate, when you get some of these cost savings out of it, that based on when the integrations occur and whatnot?

Yes, we think on the Memphis franchise, their technology conversion is scheduled for mid-November. So you're probably looking at a run rate on expenses starting in January of next year; so, say, first quarter. On CapitalMark, their technology conversion is scheduled for the middle of March, so you're probably not going to see an expense run rate until maybe May or June.

Okay. And then just any update on the capital for the tangible common equity, post-transaction? Still kind of that 8.5% type of range, or is there any thought on any changes there?

No, I don't think there's any changes. I'm hopeful that we'll be in that 9% -- or closer to that 9% number.

Okay, post-transaction. And then just as far as maybe just additional credit levers, how are you guys thinking about that with the growth and then the additional assets from the two acquisitions?

Yes, once you apply all the accounting rules, we're probably looking at a reserve of somewhere around 105 to 110. That said, we still believe that the core bank has credit leverage left to harvest, at least over the next, say, 1 to 2 years.

Okay. All right. And then maybe just one last housekeeping. The increase, Harold, in the other fee income line this quarter, is there anything that's nonrecurring in that? Or is it just things that are going to be volatile quarter-to-quarter? And it's not necessarily a good run rate, but just any thoughts there would be helpful.

Now are you looking at the investment gains, Brian?

No, just the other line in net fee income.

Yes, I don't think there's anything unusual. I'm not aware of anything unusual in there. I'll say that.

Okay. All right. Thanks for taking the questions; and great quarter, guys.

Thanks, Brian.

Thank you. This concludes our question-and-answer session. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.