Pinnacle Financial Partners Inc (PNFP) 2016 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Pinnacle Financial Partners third-quarter 2016 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 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.

(Operator Instructions)

Before we begin, Pinnacle does not provide earnings guidance or forecasts. During this presentation, we may make comments which may constitute forward-looking statements. All forward-looking statements are subject to risks, uncertainties and other facts that may cause the actual results, performance or achievements of Pinnacle Financial to differ materially from any results expressed or implied by such forward-looking statements.

Many of such factors are beyond Pinnacle Financial's ability to control or predict, and listeners are cautioned 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. We appreciate you being on the call with us this morning. Obviously, the primary objective of our call this morning is to review third-quarter performance.

As we always do, I will make some summary comments and then Harold will walk through the quarter in greater detail. But the second objective of our call today is to make sure folks are updated both on where we are and where we are headed. So following Harold's review of the quarter, I will create seek to create clarity around our long-range plans.

With that said, this first slide is a dashboard that we've used for quite some time now to allow you to quickly assess how we are performing on the critical financial metrics. This particular slide is focused on the GAAP measures. Frankly for me, given all the transition and merger integration going on in the Company, the non-GAAP measures actually provide greater insight.

So reviewing the key performance metrics, a number of which are non-GAAP measures, beginning at the top left of the slide, our top line revenue growth continues to be excellent in the third quarter. Revenues, excluding securities gains and losses, were up 41.8% year over year and up roughly 9.8% on a linked-quarter basis.

Bottom line, our fully-diluted EPS, net of merger-related charges, was $0.78, up 18.2% year over year. And excluding merger-related charges, the ROTCE was 16.01%. And that's up from 15.64% last quarter, and from 15.31% in the same quarter last year. I think it's important to note that all three of those measures are now at record levels.

Let's move now to the second row of charts that generally focus on balance sheet growth. Which, for companies like ours, is the primary basis for our future revenue and earnings growth.

Loans were up $1.15 billion in the quarter, that's an annualized growth rate of 64.9%. Of course, $944 million of that growth was in conjunction with the Avenue merger. Excluding that impact, the organic growth during the quarter was $206 million, or an annualized growth rate of 10.3% during the quarter.

Core deposits were up $1.1 billion in the quarter, that's an annualized growth rate of 68.2%. Of course, $717 million of that was in conjunction with the Avenue merger. Exclusive of that impact, organic growth in core deposits during the quarter was $406 million, which represents a 22.2% annualized organic growth rate.

That's a fabulous quarter for core deposit growth. And lastly, even with the general target of roughly 20% for a dividend payout ratio, we're still growing tangible book value per share at 15.2% year over year.

Switching now to asset quality on the bottom row of charts, going back to the first quarter of 2016. We experienced an increase in several of the problem loan and asset quality indicators, but then the NPAs, the classified asset ratio, as well as net charge-offs, all came right back in line in the second quarter, albeit just barely in the case of NCOs where we target 20 to 35 basis points.

In the third quarter, NCOs again remained just inside our targeted level, and we made still further progress on underlying asset quality with extraordinarily low levels of NPAs and classified assets. So all in, third-quarter 2016 was a fabulous quarter for us with year-over-year core earnings growth of 18% and key asset quality indicators all in great shape.

Sticking with this theme of growing the core earnings capacity of the Firm, we always have a number of initiatives that are aimed at perpetuating or accelerating our growth. I think over time, the single most impactful growth strategy that we have executed is aggressively hiring the best bankers, brokers, mortgage originators in our markets. To borrow a term from Jim Collins, that's our hedgehog strategy, it's our primary core competence.

We've established a reputation of being a great place to work, and were able to leverage that to source, recruit, hire, on board and retain a large number of the best and most productive revenue producers in our markets. 2015 was a record year for onboarding revenue producers, and we are on pace to pretty substantially outperform 2015 in 2016. For me, that's the best way to propel our organic growth going forward.

For those of you that may be new to the stock, in my judgment, our ability to hire this volume of high-profile revenue producers tells you at least three things. Number one, our Firm obviously has a competitive distinction among bankers, brokers and mortgage originators that is truly powerful.

Number two, the true profitability of the Firm must be extremely high if you can add that expense burden and still produce an ROA in excess of 1.30% and a sub-50% efficiency ratio. And then number three, the Firm should be able to propel dramatic organic growth going forward based on all these new revenue producers.

Now over the last 18 months or so, we have also been able to effectively deploy our highly-valued stock to accelerate our growth through acquisitions. We've acquired some of the most attractive high-growth banks in the urban markets of Tennessee in terms of profitability and fit with our Firm.

We've now completed nearly flawless system integrations for Magna, CapitalMark and Avenue. Harold is going to talk more about it in a minute, but we're in a position to realize virtually all of the cost synergies going forward.

As I mentioned, we believe the system integrations have been near flawless. We kept all of the management teams, and we kept virtually all of the key revenue producers. In conjunction with CapitalMark, Magna and Avenue transactions, excluding merger-related charges, revenue per share is up, earnings per share is up and our efficiency ratio is now below 50%.

So in my judgment, not only have the acquisitions accelerated growth but they have created meaningful operating leverage as well. So from 30,000 feet, third quarter was a great quarter. I want to turn it over to Harold now to review the quarter in greater detail.

Thanks, Terry. For those of you that have followed us over the years, you know we pay attention to expenses when we focus on revenues and how to grow our top line revenue. It's our belief that top line revenue growers that can leverage growth with increased earnings will be supported with outsized multiples by investors.

This chart shows that in some detail. Green bars are fees, while the blue bars represent spread income. The dark line on the chart denotes revenue per share. Growing EPS and tangible book value per share is much easier to do if this green line is increasing.

Our trailing four-quarter revenue per share is around $9.98, which is up 25% from the previous trailing four-quarter period. On a GAAP basis, our trailing four-quarter fully diluted EPS is approximately $2.77 per share, up almost 15% from the previous trailing four quarters.

Excluding merger-related charges, our trailing four-quarter fully diluted EPS is approximately $2.93 a share, up almost 20%. So we believe our firm has performed exceptionally well and transferred revenue growth to bottom-line results.

Over the last 24 months, we've experienced a lot of change at Pinnacle. Hats off to our associates for guiding our Firm through a significant amount of both organic as well as acquired growth.

There's been a lot of inward focus around here over the last 24 months, which has allowed us to absorb all of this growth into our infrastructure in an exceptional way. We are in the late innings with all of this and very much excited about the future as we set new goals for our banking franchise, both in our four core markets in Tennessee as well as potentially beyond our state.

Now concerning loans specifically, as the chart indicates, average loans for the quarter were almost $8.2 billion. Third-quarter EOP September 30 loan balances, our higher than average balances and our sales pipelines remain strong going into the fourth quarter of 2016. And at this point, we continue to expect double-digit year-over-year loan growth for this year.

As we mentioned in our press release last night, loans grew by $1.15 billion in the third quarter, of which the Avenue acquisition accounted for about $944 million, or 85% of the quarterly growth. The remaining loan growth was achieved organically and represented an annualized growth rate of approximately 10.3%. So we continue to believe we can generate earning assets organically at an outsized rate.

As to loan yields, our loan yields decreased to 4.43% this quarter. Impacting our loan yields this quarter was purchase accounting accretion, which positively impacted yields by 23 basis points. As we look to the fourth quarter, we believe accretion income from purchase accounting for our three previous acquisitions will amount to approximately 15 to 20 basis points of our net interest margin. As to asset sensitivity, we continue to forecast 25 basis points debt funds rate increase in December of this year and another 25 to 50 basis points in fed funds in the second half of 2017.

Our balance sheet, we believe, is in a solid asset-sensitive position upon the first tick of a rate increase. We've reduced our floating-rate loans with floors down to approximately $642 million as of September 30, 2016, slightly less than 8% of our loan balances. Additionally, approximately 50% of our loan book will likely participate in the next rate hike if and when it occurs.

This is a new slide. We've been getting a lot of questions about commercial real estate exposure, which is obviously driven by multiple factors including recent regulatory attention to the 100%/300% guidelines. Just to level set for everyone on the call, the 100%/300% guidelines are just that, guidelines.

They are in relation to total risk-based capital. So simply put, the construction portfolio have a guideline of 100% of total risk-based capital, while total commercial real estate, excluding owner occupied but including the construction book, is 300% of total risk-based capital. There many other rules, but that's the 30,000 foot definition.

As you can see, we are below the guidelines on both measures, and intend to operate below on both measures. We believe we have a very effective commercial real estate platform with the best commercial real estate professionals in the state of Tennessee working for us, and they in turn work and support who we believe are the best commercial real estate developers in the state.

We do think we have the horsepower to operate well beyond these guidelines in a sound manner. That said, we believe there's risk in operating above these guidelines.

We understand that many small and mid-cap banks around the country operate well above these guidelines routinely. We are just choosing to stay within the guidelines, not because we've been instructed to do so, but because we think we have a different risk appetite in this area.

Many of you know we don't like the big commercial real estate construction projects, as they take up a significant amount of our dry powder and can take several years to complete. You also know that we have accomplished three significant bank mergers, as well as acquired a meaningful interest in BHG over the last 18 to 24 months. We did all of these transactions in a very timely manner, but could not have done so without regulatory approval.

We believe we have a lot of opportunity in front of us over the next few years to grow our Firm in a shareholder-focused manner. And importantly, we also believe we have ample loan growth opportunities in the various other loan segments of our portfolio. So for now, we intend to operate our Firm within the 100%/300% guidelines, and if we breach one or both, our intent is to find our way back below the guideline within a reasonable timeframe. It's a risk management decision, pure and simple.

As to deposits, again here in the third quarter, we were able to maintain our low funding costs with only a slight increase in costs. As to deposit balances, we had a good quarter for deposit growth, with deposits up $1.16 billion in the third quarter endpoint to endpoint.

Avenue accounted for $953 million of the growth, with the remaining organic growth approximating an annualized growth rate of 20.3%, which we are very pleased. Our average loan to deposit ratio decreased to 97.4%.

Our deposit costs approximated 31 basis points for the third quarter, compared to 29 basis points for the second quarter. We continue to believe that effective core deposit growth strategies will result in a lower cost funding platform, as well as be more appreciated by investors over that of a non-core funded platform. Our loan pipelines continue to represent strong organic growth, thus we will continue to challenge our revenue producers to seek out more core deposits for our franchise.

Switching now to non-interest income. Excluding securities gains and losses, non-interest income for the third quarter increased 48% over the same quarter prior year, driven largely by ownership interest in Bankers Healthcare Group.

BHG linked-quarter contribution is down from the second quarter due to reduced operating flows in the third quarter after a very strong second quarter. We currently anticipate a solid fourth quarter from Bankers Healthcare Group.

Our residential mortgage group had another outstanding quarter in terms of production and yield, with approximately $214 million in loan sales this quarter at a yield spread of 4.29%. Yields increased as a result of the forward rated-lock hedge as National, in particular, has a significant amount of residential mortgage activity going on at the present time. The change in fair value of the rate-lock hedge contributed almost $880,000 to our results.

Other income was down this quarter. The difference caused by last quarter we posted to the life insurance claim and a reduction in SBA loans sales in the second quarter.

Now as to operating leverage, our efficiency ratio on a GAAP basis was 53.7%, while our efficiency ratio, excluding merger-related charges, was 48.9%. We're obviously very proud of this quarter's non-core efficiency ratio.

Our expense growth this quarter is concentrated in the salaries, equipment and intangible amortization, all of which is very much caused by the Avenue acquisition. More on that in just a second.

We'd also like to update you on our incentive programs for the year. As many of you know, at each quarter end, we project our annual incentive costs for the full year and then begin accruing to that amount proportionally each quarter. For the third quarter, we've reduced our incentive accrual as we are currently forecasting a less-than-target payout pursuant to those plans.

Our run rate in the third quarter was approximately $2 million less, due to the adjustment from a target payout at the end of the second quarter to less than a target payout at the end of the third quarter. Obviously, our goal is to deliver a fourth quarter where we can afford to bring that incentive accrual back to target.

We continue to forecast the penalty for exceeding $10 billion in assets to be around $3.5 million to $4.5 million in 2017. Most of which is in the second half of 2017 as a result of reduced interchange fees for the Durbin amendment, and $8 million to $9 million in 2018 once the Durbin amendment is fully absorbed. We have considered these charges when we announced the Avenue merger earlier this year, and continue to believe that the Avenue merger will remain at least 2% accretive in 2016, 4% accretive in 2017, inclusive of the $10 billion threshold charges.

Now more information on the Avenue synergy case. When we announced the Avenue merger, we included in our modeling a 40% extent synergy case. As you might expect when you get this far into a merger, it becomes increasingly difficult to work through a precise accounting of where you are with respect to the original financial goals but we're going to try to at least give you some direction.

As of today, the original synergy case remains in place. We did make the decision to maintain one of the Avenue branch facilities that was originally planned to be consolidated.

Basically the slide indicates that if you were to assume the pre-merger second-quarter 2016 expenses of Avenue to be the base case, in order for us to achieve a 40% synergy, we would only carryover approximately $4.1 million in additional expense to our run rates. Our expenses increased only 2.9% in the third quarter, so we're below the $4.1 million. But there are many adjustments to our run rates that you have to consider in order to increase the level of precision with respect to that assertion.

As an example, the $2 million reduced incentives would be one of those, but there are others and I'm not going to get that deep into the weeds here. Our original goal is that during the fourth quarter, which would be the first full quarter after the conversion, we would achieve our target expense run rate with the Avenue acquisition. As the chart indicates, we closed three Avenue branches and went through the technology conversion in September.

So those costs should not replicate in the fourth quarter. We also eliminated 26 jobs in third quarter, and have another 8 jobs scheduled to be eliminated in the fourth quarter. We believe we are close if not better than the announced synergy case as we sit here today.

We're also excited about the growth we are experiencing in both Chattanooga and Memphis. As you know, both of these markets are new to our franchise but both are seeing strong core growth.

Their recruiting efforts are also paying off as demonstrated on the chart. We're also very much excited about the fourth-quarter pipelines for both markets, and expect to see continued market share movement to Pinnacle as we enter the fourth quarter and into 2017. Now I'll turn it back over to Terry to wrap up.

Thanks, Harold. I mentioned on last quarter's call that we'd be completing our three-year strategic planning process during the third quarter, and that during this process you should expect our Board and Management to review all our accomplishments, explore our opportunities, particularly in areas where we believe we have an advantage. I indicated that we'd be looking at our tactics for continued long-term organic growth, our long-term operating metrics, which we established several years ago, our expansion plans in Tennessee and that we'd be evaluating expansion into other high-growth markets in the Southeast.

So I want to take a few minutes to talk through the operating environment we see over the next several years and exactly what our response to those opportunities will be. First of all, let me remind you that back in the 2011 to 2012 timeframe we published targeted profitability and we published a financial model or operating metrics that would be required to achieve that profitability.

In conjunction with previous year's annual planning processes, we updated our profitability target back in 2014, increasing the level of return on assets that we were targeting. And while we've kept that targeted level of return on average assets constant since then, we have updated the targets for individual components of the model three different times to better reflect the environmental realities and still achieve the targeted return on average asset. For any of you that are unfamiliar with the model and our target ranges, generally, should we hit the mid-point for each component we would hit the mid-point for the ROAA.

So as a result of this year's planning process in terms of the profitability target, we expect to continue to operate this Firm at its current level of profitability for the foreseeable future. In other words, we continue to target an ROAA in the 1.20% to 1.40% range, excluding merger-related charges.

But frankly, we believe the lower, longer rate scenario we project in the near term will pressure margins. We expect it to be a headwind for the industry as a whole.

Consequently, we are lowering the margin target to a range of 3.40% to 3.60%. And at the same time, to some extent as a result of the operating leverage that we've created, we're able to lower the target range for the expensed asset ratio from a range between 2.10% to 2.30% to a range between 2.00% and 2.20%, excluding merger-related charges. And so with those two modifications to the margin and non-interest expenses, which better reflect current realities, we expect to continue to operate at the same overall level of profitability.

As it relates to our organic growth model, we've been busily building a $15 billion bank in Tennessee's four urban markets. Today, we are roughly $11 billion.

So to be clear, it's our belief that we can indeed build a $15 billion bank by 2020 in Tennessee's four urban markets with no further acquisitions. To do that in each of the four markets, we will most likely be one of the top three banks in terms of FDIC deposits and we continue to believe that we can do that. Interestingly, you may have seen that as of June 30, 2016, we've penetrated the top three in Nashville, taking into account the Avenue merger, overtaking one of those large regional banks that dominated the Nashville banking market for decades.

So the long and short of what I've tried to communicate thus far is that, after updating our strategic plan, we still anticipate building a $15 billion bank in Tennessee's four urban markets by 2020 with no requirement for further acquisitions. And we believe we can do that while producing an ROAA in the 1.20% to 1.40% range, excluding merger-related charges.

Switching gears to our view on long-term shareholder value. Over the last few years, I've heard a lot of arguments regarding the optimum size for a bank in terms of scale and profitability and valuation. So here's our take on that.

As most of you know, we have long targeted top quartile performance. Over the years, we have actually published top quartile targets for EPS growth and for ROAA, excluding merger-related charges, and we have generally operated in the top quartile on those key measures.

So for top quartile performers like the PNFP, it would appear to me that $15 billion to, say, $25 billion in assets appears to be an optimum size for achieving the highest profitability in share price multiples. This doesn't necessarily mandate that we get above $15 billion target, but it certainly indicates that done right, again assuming top quartile performance, $15 billion to $25 billion might be the level at which we optimize shareholder value.

And so to that end, in addition to building a $15 billion bank in Tennessee's four urban markets, we see similar growth opportunities in other high-growth southeastern markets. Number one, we are an urban community bank, which just means we target the urban markets and compete with a community bank level of service.

Number two, we compete aggressively and win against the large bureaucratic regionals in those urban markets based on service and advice, which includes access to local decision makers. And number three, there are a number of attractive high-growth markets scattered around the Southeast that are dominated by the same cast of regional banks with whom we compete in Tennessee. And so our three-year strategic plan contemplates our exploration of opportunities in some of the most attractive southeastern markets, including Atlanta, Charlotte, Raleigh, Charleston and Richmond.

I expect everyone is aware that we have experience in starting banks in urban markets, and competing with the large southeastern regionals for talent and clients. We began from scratch in Nashville in October of 2000 with a commercial focus.

In the chart on the left of the slide you can see that in 16 years for businesses with sales from $5 million to $500 million, we have surpassed all the regional and national franchises that have dominated the market for decades. Not only do we have a dominant share, we have the highest client satisfaction. And that client satisfaction, in concert with our current hiring momentum, would suggest that the shared gain momentum should continue for a number of years to come.

Switching to the chart on the right, we began on a de novo basis in Knoxville in September of 2007, again, primarily competing against those same large regional and national franchises that had been dominating that market for decades. As you can see, among businesses with sales from $5 million to $500 million, we're meeting with virtually the same success in Knoxville that we did in Nashville.

So in less than 10 years time, you can see that we are on the dance floor with the large banks that previously dominated, that we've created a great client experience and that the momentum is ours. In short, we have been highly successful with de novo starts in two of Tennessee's four urban markets.

In addition to the de novo starts, we've done market extensions in two more urban markets of Tennessee via acquisition. We've announced and closed three meaningful acquisitions in 18 months. For each acquisition, we're in a position to close the transaction the quarter after it was announced.

We have an engaging and inclusive management style that's made it possible for us to retain each of those bank's management teams. Which in my judgment is a large part of the success we've had in retaining the vast majority of their revenue producers.

Harold addressed the cost takeout for Avenue deal earlier, so we can now say we've achieved a big cost-takeout target for all three of the acquisitions. We believe the system integrations for all three have been nearly flawless, and the cultural integrations are working extremely well. 100% of the acquired associates have been through a three-day orientation, which is largely conducted by me and the Firm's key leaders.

Of course, the associate retention is one key evidence of our success on cultural integration. But beyond that, as most of you know, we conduct an annual associate work environment survey which is administered by an HR consulting firm called ModernThink.

You see on the slide a quote from Rich Boyer, who is their lead consultant and founding partner. Based on his findings after conducting this year's survey, which includes feedback from all the legacy Pinnacle associates as well as associates from CapitalMark, Magna and Avenue. You can see that Rich's comment is that the integration really has been nothing short of remarkable.

The data suggests that we have done an excellent job of capturing the hearts and minds of our new associates, as well as retaining the hearts and minds of those who have worked so tirelessly on these integrations. I might add to that, having only been in Memphis roughly 18 months, we've been listed by the Memphis Business Journal as one of their best places to work twice. And the Greater Memphis Chamber of Commerce just announced that Pinnacle was named to their 10 to Watch for 2017 list, all of whom are companies they believe are the most poised for great progress in 2017. So in addition to our success with the de novo starts, we've also been highly effective on acquisitions and integration as a tool for market extension.

As I've just discussed, our Firm was founded on a de novo basis. We've done market extensions, both on a de novo basis and via acquisition. And so we'd be prepared to take either approach as we consider going into new markets, depending upon what the best opportunity is.

To help you think about a de novo start, our experience in Nashville and Knoxville was that cumulative losses through breakeven were roughly $2 million over a 12 to 18 month period. For us, that's about $0.032 in EPS prior to earnings accretion. That would appear to be a completely reasonable investment to me to gain a new attractive market.

Should we take that tack like we done in other markets, we'd only proceed with local management which we believe is capable of building and running a $2 billion to $2.5 billion bank over time. Specifically, we would never consider a few lenders in an LPO as a market extension technique.

In my view and experience, that approach simply makes you the lender of last resort. We intend to continue with our philosophy, preferring to be a foot wide and a yard deep as opposed to having an inconsequential share in a lot of markets. I would expect the first phase of hiring in any of these major urban markets to be at least 15 to 20 associates, if we were to take the de novo tack.

On the other side, should attractive merger opportunities present themselves, we'd certainly be willing to consider those as well. In general, the most attractive candidates for us would have at least $1 billion in assets, have a commercial thrust, have capable like-minded local management that want to stay on and run their local markets as has been the case with CapitalMark and Magna, have sustainable profitability. I'll just say this, we have no desire for a fixer-upper, and we'd target something greater than 5% EPS accretion in the first full year.

So now, in addition to our long-time target of building a $15 billion bank in Tennessee's four urban markets with a 1.20% to 1.40% core ROAA, we are exploring additional high-growth southeastern markets like Atlanta, Charlotte, Raleigh, Charleston and Richmond. And we will explore these market extensions on either a de novo or M&A basis, either of which should be attractive investments for our shareholders.

So just trying to pull all this into a summary, I'd say we've truly established a competitive distinction among the bankers in our markets, which is evidenced by our ongoing recruiting success. We think we have a competitive distinction with our clients, which is evidenced by our balance sheet growth and market share gains.

We have consistently produced and expect to continue to produce low to mid double-digit organic asset growth in Tennessee's urban markets, specifically to a $15 billion asset bank by 2020 that we believe we can produce a 1.20% to 1.40% core ROAA. We consistently perform there now.

Similarly, for the last 23 quarters, when you adjust for extraordinary items, we've had double-digit EPS growth, and we expect that to continue. I think, importantly, at a 16.01% level, excluding extraordinary items, we continue to produce top quartile ROTCE, and that's in a very high-performing peer group.

I think the last point, which I believe is really important here is that we have got an advantaged stock and it has been rationally deployed. We're fundamentally organic growers at heart, that's what we think about and that's what we love to do. But we do have an advantaged stock, and that puts us in a position to create even more operating leverage and even more EPS growth, which we believe we've done with CapitalMark, with Magna, with Avenue and with BHG.

So in simple terms, I think you should expect a two-prong strategy from us going forward. Number one, continuation of our current high-growth, high-profit plan in Tennessee. And number two, to explore expansion to other high-growth southeastern markets. Operator, I think I'll stop there, and we will be glad to take questions.

(Operator Instructions)

Jennifer Demba, SunTrust.

Thank you. Good morning.

Good morning.

Terry, thanks for letting out on the criteria in terms of expansion. What are your thoughts on tangible book value dilution and your tolerance there? And then also, can you talk about what your pipeline is in terms of potential new hires outside Tennessee or M&A opportunities outside Tennessee?

Okay. Yes, I think on tangible book value dilution, we've not published a formal target on that. Our view has always been that we would not do anything that would have an earn-back greater than three years. I think in all the deals that we announced previously it was substantially shorter than that. That would be our ongoing model as well. I wouldn't necessarily want to say it will be zero but it certainly wouldn't have any extended earn-back period. It just wouldn't be attractive to us on that basis.

I think as it relates to hiring pipelines and so forth, our deal flow and so forth, I guess, let me see if I can get it in perspective for you. We are in the relatively early stage of exploration. We've had conversations with a number of people that I would characterize as casual or exploratory. We're not specifically down the hiring line or down the deal line.

But I do have a general belief that in at least one of the markets that we outlined there, there is a group of people who I think would be capable of a de novo start similar to what we've done in these other markets. Again, I'm not telling you we can or will hire them. I'm just saying I'm aware that there are people that are available that have that capacity.

And in the case of deal flow, I do think there's just more chatter than I have seen in a very long time. I don't want to digress too much but I've listened to people and their theories about consolidation and the pace of consolidation. If you go back two, three, four years ago, people talked about that, hey, we're about to enter a big wave of consolidation because some of the small banks couldn't earn their cost of capital, and so forth.

But again, my view of that has always been there could not be a meaningful acceleration in consolidation until the merger multiplies guide up to something more tolerable to the sellers. Because most of these banks are sold as opposed to bought. And so I think you're at a point of equilibrium here now where a lot of people are recognizing this environment's going to be hard.

The lower, longer rate scenario is tough on margins, the compliance expense burden gets heavier and heavier. And so you've got people that are more willing to capitulate. You probably got multiples at a point that are maybe over the minimum threshold from their view. And so again, I think there are a lot of opportunities out there.

It's a long-winded answer to your question. I would characterize it that we've had some discussions on both avenues of expansion but I wouldn't want to pitch it that we're way down the road on any of it. We're still in early stages of exploring those opportunities.

Okay. And can you give us some color around the hires you made during 3Q 2016?

Let's see. Harold, have you got a schedule or something there that I could talk from? Maybe I'll just take a second and, again, try to on the table with you how we look at hiring. What were talking about here in this hiring, in the slide presentation that we made of revenue-producing hires, I think you know, and we've talked about it, generally the hiring ratio generally turns out to be about 2 to 1. In other words, for each revenue producer you have to hire two support people that may either be direct or indirect support. And so what we're talking about are the revenue hires. We've also made meaningful hires of non-revenue producers as well.

On the revenue producers, most of the hiring continues to be from large regional banks. Occasionally if we hire from smaller banks it's because those folks worked at a large regional bank and went to a smaller bank and find our option to be a better option. Again, I think the hiring thesis is really the same. We are hiring folks from large regional banks.

And we are hiring on almost every front. We are hiring commercial, middle-market FAs. We are hiring small business. When I say FAs that's financial advisors, or you might use the term relationship managers. And so we are hiring middle-market relationship managers. We are hiring small business relationship managers. We are hiring wealth management professionals, both as brokers and then trust or asset management. And we are hiring mortgage originators. So, it's a pretty broad cross-section of revenue producers.

Thanks so much.

Stephen Scouten, Sandler O'Neill.

Hey, guys. Congratulations on a stellar quarter.

Thank you, Stephen.

I wanted to get some incremental detail on the NIM trajectory. I saw where you were bringing down your forward target by about 20 basis points for that range and it sounds like the NIM will be lower in 4Q with further effects from Avenue. But what beyond that are you seeing in terms of compression effect from a core yield basis? Are new loans yields coming lower still or is it still the gap between new loan yields and current yields on the books?

I think what's really impacting our loan yields for the last probably four quarters or even longer, is we're getting a lot of LIBOR-based credit, a lot of prime-based credit. So roughly 50%-some odd of our book has now gone to that kind of pricing. And particularly the LIBOR-based credit is much lower than we would otherwise get.

So the spreads on LIBOR have decreased some but it really feels like, Stephen, that the pace of the decrease is slowing and that just our natural business flow between the types of loans that we are getting is really consistent.

As you look to the fourth quarter, we talked about what the purchase accounting accretion would be in the fourth quarter. We are not expecting a big decrease in our margin in the fourth quarter but we do think it will come down some.

Okay. And then you guys also mentioned, obviously, the incentive accrual is down, which implies that relative to what you were expecting -- the targets you were expecting to hit at 2Q versus what you are expecting now have been pared off a little bit.

So what are you seeing there that makes you feel -- is it just growth looks a little slower? We're hearing from a lot of banks that maybe pay-downs are a lot higher into the permanent financing markets. Or what are the trends you are seeing across the board that's leading that trajectory, if you will?

I think it really plays into your first question. I think all banks are fighting this margin every day. We had built in our planning assumptions this year that we'd get a couple of rate increases. That has not transpired and so I think it's basically just trying to figure out how this margin is going to respond over the next 6 to 18 months.

As you know, on our incentive accruals we base it off of an annual target that's based off of EPS and revenue growth, or traditionally that's what we have done. And so as we look at each quarter end, we just evaluate where we think we are for the full year. That's what resulted in the approximate $2 million decrease in that accrual this quarter.

Stephen, I might just take a second, put that in perspective for you. Again, as a reminder for how the incentive targets get set, it's generally a function, as Harold said, of revenue growth and earnings, assuming we clear a soundness threshold. And so in the revenue and earnings plans for going into 2016, our forecast called for several fed fund increases, which would have been advantageous to us in terms of revenues and earnings, which didn't materialize.

I think our firm has done a fabulous job and we have been benefited by some of the M&A activity and particularly the BHG incremental investment that we made. And so we've covered what would be a pretty significant gap created the assumptions that were made at the beginning on fed fund increases.

And so again, in terms of what the folks in this Firm have done, it seems good to me. I think from an investor standpoint, the fact that, that incentive accrual represents that the shareholders get their money before the associates get theirs, is also a pretty strong signal.

Yes, definitely. And one last question from me. The offset to that has been you all's expense performance has been impressive and it seems as though you are ahead of schedule, as you said, on the Avenue expense targets and the 40% target there.

And I know, Harold, you said you didn't want to get too much in the weeds there, but as it pertains to that $4 million in cost saves, can you give us an idea of what percentage of those costs already came out? Is it 70% that already came out? Is it more like 30% or 40%? I don't know if you can frame that up at all relative to that $4 million in total.

Yes, Stephen, it wouldn't be 70%. It's probably more like 40% to 50%. There were Avenue -- anytime you have a merger announcement, a lot of the people that will be a part of the synergy case, they begin to look around pretty early. So we had a lot of people that left even before the acquisition date.

But here in the third quarter, we had 26 more come off the payroll and most of those came off the payroll in September. So I don't think that we have harvested 70% yet. I think it might be closer to maybe half.

Okay, great. But you do expect, though, the totality of that will be out in the fourth quarter, is that right?

I think there's a handful of jobs that are coming out in the fourth quarter but those are coming out relatively soon. So, yes, we believe a lot of the synergy case will be fully absorbed early fourth quarter.

That's great. Thanks for taking my questions. I appreciate it.

Thank you.

(Operator Instructions)

Tyler Stafford, Stephens.

Hey, good morning, guys

Hey, Tyler

To follow up on the expense topic, I was hoping to get some clarification around the long-term expense outlook. The press release said you can continue to operate in that long-term expensed average asset range of that 2.1% to 2.3% in 4Q and then throughout 2017. But then the presentation said you were altering and improving that long-term outlook down to 2% to 2.2%.

How should we be thinking about that in the near term, in 2017, it should be at the higher previous range? And then longer term, as you guys get greater scale, it will drop down to that lower 2% to 2.2% range?

We ought to be in the 2% to 2.2% range. The press release, we didn't want to get into changing these long-term strategic targets in the press release. It just gets kind of wordy. So, yes, we ought to be in that 2% to 2.2% range going forward.

Okay. So as early as 4Q and then 2017. That's what you are referencing?

Yes, sir.

All right, thanks. And a question around BHG revenues this quarter. And looking at the cost to fund BHG, that was up marginally in the quarter but then obviously the fee income that we see was down. So were the originations actually stronger than in 2Q? But you either sold less or the gain on sale margins were lower than last quarter? Any help on the puts and takes there?

I think the operating flows for BHG were consistent, maybe slightly down. I think the operating flows for BHG were down in the third quarter, Tyler, so I'm not sure I'm reference -- I'm not following your question completely. But they also had a higher substitution amount this quarter, so their credit losses also increased in the quarter. Their margins were squeezed, I guess, is the way to put it.

Yes, that's what I was getting at since the funding was still elevated. Wondering if it was more of an origination issue, which wouldn't match up with the higher funding costs if it was more of a margin gain on sale issue?

Yes, I think so. Yes, that's right. The funding costs that we put in the press release is an estimate of what we think the -- what we're having to fund that asset and so as that asset grows on our balance sheet, that means as our earnings exceed their dividends paid to us, that number is going to increase.

Okay. Got it.

Because the balance sheet asset is increasing.

Yes, okay. And then lastly for me on the loan growth topic, a couple other local competitors have recently gotten into the music and entertainment lending niche. Wondering if you're seeing any increased competition out of that, specifically now that Avenue is on?

That's an interesting question. I think there's a lot of -- I would say there's a lot of talk and hyperbole. I think in terms of the absolute level of competition, I would say, no.

Okay. Thanks, guys.

Tyler Agee, Hilliard Lyons.

Hey, good morning.

Good morning.

Staying on loan growth, clearly the annualized base of 10.3% is still strong but it was below your year-over-year pace of 15.2%. A lot of the banks we've talked to have seen a softening in C&I loan demand. I was just going to see what extent you've experienced this or whether there were other factors impacting that loan growth?

You know, my sense of it is that for us, you've got a commercial for us, you've got a lot of large tickets in there, and so literally the movement between quarter to quarter sometimes can be unusually influenced by a large paydown or two or a large transaction that falls inside the quarter or just outside the quarter, based on when it closes.

And so I would -- as we look at our pipelines, you might guess we run a pretty rigorous pipeline measurement on the loan volume we expect to produce over the next 90 days. And so right now our pipelines would suggest there's really no softening on the C&I front. But again, I would say the modestly lower growth in the third quarter relative to the previous 12-month period is just more related to timing than demand. Again, I would say the demand is strong. We would look for a strong fourth quarter in terms of loan growth.

Okay, thank you. And then moving on to the net interest margin. Do you have an idea of how much of that linked-quarter contraction was attributable to Avenue?

Yes, we have put some things on the back of the napkin, but it was probably closer to 3 to 5 basis points, was what Avenue contributed.

Okay. And then you mentioned asset sensitivity. Do you all run a simulation model to show what your increase in net income would be as interest rates come up, say, 100 basis points?

Well for sure we do that. I can tell you that we've got about $1.8 billion in assets, net of fundings, that would respond on the first basis points of a rate increase. Now that would include LIBOR-related credit so we are making an assumption that LIBOR would increase concurrently.

Okay. And then very quick lastly, what is the blended yield you are seeing for new investment securities as those roll forward?

We think, going forward, the securities that are rolling off will be around 2.25% and the securities that we're purchasing are going to be 1.75% to 2%. But we're not looking to grow that book, we're just going to maintain that book to collateralize public fund deposits.

Okay, thank you. That's all I had.

Brian Martin, FIG Partners.

Hey, guys

Hey, Brian

Most of mine were answered. Just a couple things. Harold, the accretion income remaining on the CapitalMark and Magna and then the Avenue. You gave some numbers last quarter. On the Avenue, was there any change to the, I think you said it was $10 million to $12 million, based on what you were expecting last quarter? Is that still a good number?

Right now, and I guess we will have this disclosed in the 10-Q, we've got about $36 million of purchase accounting accretion left to go through the loan book.

Okay, and that's in total for everything?

That's for everything.

Okay, perfect. And then, you gave the 50% of the loans, I think you said that, with floors that would move right away. That's all in with Avenue?

Yes. And that's LIBOR-based credit as well as prime-based credit.

Got you, okay. And then the last thing was on the gain-on-sale revenue in the quarter, is this a pretty -- from a run rate perspective, was there anything unusual this quarter? I guess this is a good run rate combined for the two Companies? I think Terry had said that there was some -- maybe it was you, Harold, that said there was some pickup or better activity in Nashville of late.

The mortgage business has been really strong for us, probably the last nine months, and so we have seen significant pick up in their volumes. We don't think that volume is going to continue into the fourth quarter. You're coming in on the tail end of the buying season for homes, so we don't expect that to increase.

So that will probably hurt us on fees going into the fourth quarter. We expect a solid quarter out of BHG in the fourth quarter. And we've also got some transactions related to a small business loans with Freddie Mac that are supposed to occur here in the fourth quarter, as well as some other things that are going to occur in the fourth quarter that should help support our fee number for the rest of the year.

Okay. And no change in the outlook for BHG as you look to 2017? I think you said a solid fourth quarter but still expect the growth rate of that to mirror the growth of the loans of the legacy Pinnacle.

We expect BHG to still outperform. I think their pipelines are really strong right now and they are entering the fourth quarter where a lot of sales programs come into more focus. I'm sure that the marketing engine and the sales engine of BHG are going to be running at full tilt in the fourth quarter.

Okay, all right. That's all I had, guys. Thanks.

Thanks, Brian.

Peyton Green, Piper Jaffray.

Yes, Harold, I was just wondering maybe if you can comment on the outlook for BHG, not just in the fourth quarter but beyond, into 2017? Are they seeing any change in competitive pressure that might change your view about what they can do?

Yes, we get a quarterly update on what they see about competition. They are not really experiencing any kind of big dents in their programs because of competitive pressure. They are still getting the yields that they've always gotten. The business flows are still strong.

What is key to their business is how many -- what their lead flow is. How many names and phone numbers they can get from the various sources that they acquire those lists from. I think their marketing folks are running pretty hard right now and I think they are generating a lot of leads. So it's all based on the top of the waterfall and how many leads they can generate will ultimately result in what kind of loan volumes they ultimately get to book and then ultimately sell.

Okay, great. And then in terms of your outlook for 2017, what do you expect or what do you have embedded in your margin outlook in terms of the Fed movement?

I think we have a 25 basis points movement in midyear and another 25 basis points towards the end of the year, which basically is inconsequential for our net interest income next year.

Anything in the fourth quarter?

Of this year?

Of this year.

Yes. We've got 25 basis points coming in, in December.

Peyton, what's your outlook for fed funds?

(laughter) It's been lower for longer for quite a while. Maybe they do a quarter but I don't know that there's much.

All right.

Thank you.

Sure.

Jefferson Harralson, KBW.

Hi, thanks. I wanted to ask you first about the expense line up and see if I heard what you said correctly, that we had about $56 million of expenses this quarter but with the reverse incentive accrual, or with the lack of incentive accruals we're at $58 million. But we still have $1 million to get from Avenue, so we are at $58 million which should be growing over time with $1 million left to get of Avenue. But am I thinking that correctly? Or is there some other unusual items in the quarter that we should think about?

No, I think that's directionally right. Like we talked about, we've got an incentive accrual out there that we hope to recapture in the fourth quarter. And then we've got some more synergies out of the Avenue acquisition that we will get in the fourth quarter.

Okay. Then with your mission of 15 to 20 basis points of 4Q margin coming from accretable yield, that's probably $4.5 million to $5 million. How should that line item look over 2017? Are we still early enough in the accretable yield flow that should be relatively stable or should that come down a little bit as we go through next year?

No, it will come down over time. I mentioned earlier we've got about $35 million left to go. It's probably going to be $4 million $5 million in the fourth quarter and then it'll get -- probably over the next two years. It's probably how that will all play out. Eventually it will become inconsequential

Yes, all right. And then lastly, you mentioned the higher substitution amount on BHG. Can you talk about the credit you saw this quarter, the credit you expect or anything that's going on there with credit that you can talk about?

I don't really have anything that's unusual. What they experienced was in September was probably about $750,000 to $1 million more in substitutions than they would have normally experienced. We will be looking at the fourth quarter to see if that continues. But so far they are running about, call it $1 million run rate on substitutions a month

Okay, all right. Thanks, guys.

Thank you and that concludes our conference call for today. We thank you for your participation and you may now disconnect. Everyone have a great day.