Pinnacle Financial Partners Inc (PNFP) 2017 Q3 法說會逐字稿

Good morning, everyone, and welcome to the Pinnacle Financial Partners Third Quarter 2017 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 made 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 factors 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 looking forward 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 reconciliation of the non-GAAP measures to the comparable GAAP measures will be made available on Pinnacle Financial's website at www.pnfp.com.

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

Thank you, Victor. Good morning, we appreciate you being on the call with us this morning. We always begin our quarterly earnings call with this dashboard. We do that because it quickly highlights performance and momentum on virtually all the measures that we use to drive our business.

We've always believed that revenue growth, earnings growth and asset quality are the 3 metrics most tightly correlated with the share price performance. Companies that grow tangible book value typically grow share price. Companies that consistently produce well above median ROTCEs typically trade well above medium P/E multiples. And for companies like ours, where spread income represents roughly 80% of the total income, balance sheet growth is the key to earnings growth. And you can see all of that on this slide.

This particular slide's focused on GAAP measures. I expect most know, we closed our acquisition of BNC on June 16 of this year, and so all the financials are impacted by that transaction. So for the third quarter, we continued to grow the revenue and earnings capacity of the firm. We continued to organically grow the balance sheet at a very substantial pace, which as I just mentioned, we believe is predictive of future revenue and earnings growth. And our asset quality remains very strong. As I say each quarter, at least for me, given all the transition and merger integration going on in the company, the non-GAAP measures adjusting for merger-related expenses actually provide greater insight into the core run rates on these important metrics, so let's move on to those.

Looking at now at the non-GAAP measures. Adjusting primarily for merger-related expenses, since the arrows are all nicely sloped in the right direction, I won't walk through each metric. I'll just highlight 2. Let's look first at the ROTCE on the first row. As you'll recall, in conjunction with the BNC acquisition and to support the future growth needs of the firm, we issued 3.2 million shares on January 27, 2017, totaling $192 million in net proceeds. So we had a partial quarter impact of those additional shares in Q1 and a full quarter impact in Q2. Nevertheless, we're thrilled to have the growth prospects that warrant the additional capital, and I promise that we'll be diligent in both protecting it and leveraging it through growth in order to optimize the returns. As you can see, it's escalating quickly already back to a 15.43% ROTCE.

Secondly, just below the ROTCE chart, the tangible book value chart. As I've already commented on this call, the correlation between growing tangible book value and growing the share price is pretty obvious. We take it seriously. And as you can see in conjunction with our acquisition, we've protected it and in fact, have continued to grow it over the last 2 quarters.

Those of you that have followed our firm for any length of time know that coming out of the recession back in 2011, we published our profit model and associated performance targets. After having achieved the originally targeted levels, we've actually increased the return on average assets target range twice now to its current level of 1.3% to 1.5%.

In conjunction with that return on average asset target, we continue to publish the targets for the key component measures that lead to that overall level of profitability, specifically the margin, the expenses to assets, the fees to assets and the net charge-offs. As you can see on this slide reflecting the GAAP measurements, third quarter 2017 was another good quarter with a return on average assets of 1.21%. And in general, the component measures are all performing pretty well against the targets. As I mentioned a moment ago, since these targets do not contemplate merger-related expenses, I find the performance metrics adjusted for merger-related expenses to be more instructive, which is on the next slide.

So here are the same measures adjusted for the merger-related expenses. I might start with a quick discussion of the target range for each measure. As most of you know, we conduct a strategic planning process each year in the third quarter. This year's plan focused on the remainder of 2017 through 2020. In this year's 3-year plan, we didn't alter the overall target range for ROA (sic) [ROAA]. It remains at 1.30% to 1.50%. However, as a result of the business mix changes associated with our BNC acquisition, we adjusted the targeted range for margin up to a range of 3.60% to 3.80%; expenses to assets, down to a range of 1.80% to 2.0%; and the fees to assets down to a range of 0.9% to 1.10%.

As you can see, adjusted for merger-related expenses, we're currently operating inside or better than our target range for ROA in each component measure except the fees to assets. For those that have followed our firm for a long period of time, you'll recall that several years ago, we had an expense to asset target range of 2.10% to 2.30%, and it took 6 to 8 quarters for us to work inside that range. I'd expect to march toward the midpoint of our new fees to asset target range as we build a stronger C&I platform in the BNC footprint, and as we implement our full set of treasury management and wealth management products there. As we approach the range of that component measure, we'd expect to operate in the high end of the overall profitability target, near the 1.5% ROA range.

One of the things that I think distinguishes Pinnacle from many of our peers is our continuous and relentless focus on building additional infrastructure in the current period in order to continually propel the firm forward in terms of revenue and earnings growth. This slide is intended to give you a snapshot of how that went for the third quarter. Of course, in 2017, the BNC acquisition is the most significant investment toward future earnings. We continue to march down through our implementation time line. Since I've been over this time line on previous calls, I won't review it in great detail, but let me highlight several items quickly. Beginning with the end in mind, let's go to the last bullet point under number one. The $40 million case synergy case that we targeted in our due diligence should be fully deployed very early in 2018. That should be the case because, as you can see in the next to last bullet point, we'll convert Pinnacle to the Jack Henry SilverLake System on Veteran's Day weekend, which is the key to the final job eliminations contemplated in the original synergy case.

Moving on up the chart and perhaps to crystallize how we've already mitigated so much of the risk associated with this conversion. During September, we contemplated -- that we completed the transition to the Pinnacle brand in the Carolinas and Virginia. In other words, BNC clients are currently utilizing Pinnacle signed offices, Pinnacle products with Pinnacle pricing, Pinnacle ATMs, et cetera. And all of that transition has occurred with essentially no client issue. They should encounter no further change in that regard.

And then moving on up one more bullet point to August 21, Pinnacle began doing the core processing on the Jack Henry SilverLake System for BNC. So again, clients in the Carolinas and Virginia should encounter no further change in that regard. All that remains is the conversion of the legacy Pinnacle clients to the same system we've been processing for BNC since August. So I'm extremely proud of our associates and the precision with which they've planned our work and worked our plan in order to produce the nearly 10% earnings accretion we targeted in conjunction with the BNC merger.

The second largest investment for future growth is the hiring of additional revenue producers. As you can see, year-to-date, we've hired 54 in total, 19 of which were added by Rick Callicutt and his team in the Carolinas and Virginia. We've been asked a number of times if the M&A -- all the M&A activity in North Carolina might afford us additional hiring opportunities. And I would say at this point, the answer to that is yes.

Let me see if I can paint a better picture where we're going in this regard. Generally, I have preferred to talk about revenue producers, which include relationship managers, brokers, mortgage originators, trust administrators and so forth. The reason for that is, I think above anything else, we are a revenue growth company. Some manage expenses. We grow revenues. And so adding revenue producers is the key to our revenue growth. But in the case of the Carolinas and Virginia, I think the key to realizing our potential there is to build out a large C&I capability. And so to that end, we intend to hire at least 64 C&I and private banking relationship managers over a 5-year period of time. Obviously, the total number of revenue producers, when you include brokers, mortgage originators and so forth, will be substantially greater than that. I think skeptics may say, "Well, that sounds like that's going to be expensive." But for those of you that watched us over the years and our performance against the profitability targets I just reviewed with you, you understand we're expecting to get that hiring done inside the expense-to-asset target of 1.80% to 2.0%. To me, that's what we're talking about when we say we're investing in the current period in order to propel the firm forward in terms of continued revenue and earnings growth. And then finally, our net organic loan growth during third quarter at a 13.6% linked-quarter annualized growth rate was extremely strong, really incredible during this period of merger and integration.

So with that, let me turn it over to Harold for a more in-depth review of the quarter

Thanks, Terry. Revenues for the quarter increased from $142 million in the second quarter to $216 million in the third quarter, with a substantial amount of that increase attributable to our new markets in the Carolinas and Virginia. Total spread income increased $66.6 million between the second and third quarters, as shown on the blue bars on the chart. Discount accretion represented $12 million of the increase. The dark green line on the chart denotes revenue per share impacting our revenue per share in the first quarter with the capital raise, which we believe diluted our first quarter revenue per share by $0.12 per share. We reported $2.64 revenue per share in Q2 and are reporting revenue per share of $2.80 this quarter, an annualized growth rate of 24% between the 2 quarters. Obviously, our goal is to continually increase our revenue per share over time. As you all know, it's a lot easier to grow earnings per share when revenue per share is growing.

As we look forward to the fourth quarter, our pipeline remains strong throughout the footprint. This applies both to our client pipelines as well as our recruiting pipelines. As to purchase accounting, it will be impactful but should gradually lessen its impact on our results over time. We have approximately $182.4 million in loan discount accretion, of which a significant amount is expected to amortize in income over the next 2 to 3 years. We recognized $18.9 million in the third quarter and anticipate at least $14 million to $16 million in loan discount accretion in the fourth quarter.

Concerning loans, as the chart indicates, average loans for 3Q of $15.02 billion compared to $9.82 billion at the end of the second quarter, or an increase of $5.2 billion in average loan balances. We believe it was a strong third quarter for us, particularly in our Tennessee footprint, which increased approximately $440 million compared to $478 million in the second quarter.

In the Carolinas and Virginia, their organic loan growth was approximately $61 million in the third quarter compared to $190 million in the second quarter. Thus far, in 2017, including the $330 million of net organic loan growth Bank of North Carolina posted prior to our merger, the 2 firms have produced net loan growth in excess of $1.5 billion thus far in 2017. This obviously excites us as we go into the fourth quarter with the combined firm, pressing forward to grow the franchise.

As the chart indicates, our loan yields increased to 4.91% this quarter compared to 4.66% last quarter. Impacting our loan yields this quarter was purchase accounting accretion, which positively impacted yields by 50 basis points compared to 26 basis points in the prior quarter. Excluding the impact of purchase accounting, core loan yields increased slightly from 4.4% in the second quarter of 2016 compared to 4.41% in the third quarter of 2017. The Fed funds rate increase in late June did help our core loan yields. However, loan yields from Bank of North Carolina were 40 basis points lower than that of the Tennessee footprint, so we're pleased that our core yields ended at 4.41%.

As to deposits, again, here in the third quarter, we're able to grow our funding base while maintaining low funding costs. Our aggregate funding cost did increase 5 basis points in the third quarter from the second quarter and currently stand at 66 basis points for the third quarter. As to the 5 basis point increase, impacting the change were 2 matters that basically negate each other. Those 2 items were a reduction in funding costs due to purchase accounting and a full quarter of Bank of North Carolina deposit pricing, which increased our overall cost of funds. These 2 items work out to be a plus and a minus of 2 basis points to overall funding cost. Thus, at the end of the day, backing out the aforementioned items, it appears the actual increase in funding cost due to rate increase is about -- is around 5 basis points. So we believe our beta is a 5 basis point increase over the 25 basis point Fed funds rate increase in late June, or call it 20%.

As to the future, deposit costs will continue to increase in a measured pace for several factors. The 2 most prominent are general pressure for increased deposit rates in a rising rate environment, but also we'll need to fund a significant loan pipeline. Our relationship managers are out in our markets selling our ability to serve commercial and affluent consumer depositors with a value equation we think is far superior to our competitors. We typically experience deposit volume increases in the fourth quarter and have no reason to believe that won't occur this year.

Funding our growth has and will remain a key focus at our firm. In the supplementals, there is an articulate chart on funding. We experienced a $367 million increase in core deposit growth in the quarter end point to end point.

With Bank of North Carolina, we've about completed our balance sheet restructuring strategies. There was significant work in both the securities book as well as wholesale funding, which involved reduction in broker deposits, which includes reciprocal deposit accounts and utilization of Federal Home Loan Bank advances to both create more asset sensitivity as well as liquidity in earnings.

As to the impact of all these on the overall margin, we'll likely see some reduction in our NIM due to reduced impact from purchase accounting, which we will work hard -- but we will work hard to maintain the core margin over the next several quarters. We still believe we remain asset sensitive, and with a growing balance sheet, we should experience consistent net interest income growth.

Switching now to noninterest income. Fees amounted to $43 million compared to $35 million in the second quarter. Our residential mortgage group had another outstanding quarter in terms of production with approximately $300 million in loan sales this quarter at a yield spread of 3.02%.

We are reporting Bankers Healthcare Group revenues of $8.94 million this quarter, up $462,000 from the third quarter of 2016. We continue to anticipate that net growth for BHG in '17 should be in the 10% to 15% range, which equates to 20%-plus for PNFP given the larger ownership percentage in 2017, and given we increased that ownership in early 2016. We believe their fourth quarter will be exceptional and be the best performance quarter of the year by far. Their loan pipelines are very strong at this point, and they are optimistic that their credit experience will also improve meaningfully in the fourth quarter.

Interchange revenues were impacted by the Durbin Amendment, which started for us on July 1 of this year. We estimate the Durbin Amendment impacted third quarter fees by $1.8 million to $2 million in the third quarter. Offsetting the interchange reduction were increases in other consumer fee, most of which is attributable to the Carolinas and Virginia.

We experienced an increase in other noninterest income in the third quarter. SBA loan sales were up $421,000 this quarter over the last quarter, with again the Carolinas and Virginia contributing the bulk of that amount. Capital market advisory fees were also up $326,000 this quarter over last quarter.

Now to operating leverage. Our efficiency ratio on a GAAP basis was 50.8%, while our core efficiency ratio, excluding merger-related charges and ORE expense, was 46.4%. Our third quarter total noninterest expense increase amounted to $37.9 million with a significant amount of the increase attributable to the Carolinas and Virginia.

First, concerning personnel costs, we've got approximately 2,200 FTEs at September quarter end, of which almost 950 are in the Carolinas and Virginia. Salary costs are up $20.6 million over the second quarter of 2017, which was attributable to the Carolina and Virginia footprint, increased headcount and incentive expenses. We project our annual incentive cost for the full year to begin accruing to that amount proportionally each quarter.

Those of you that have followed our story for many years know how our one incentive plan system works, and it's based on corporate results not based on individual sales goals. We're still accruing at a less-than-targeted ORE for 2017. You also know we set big targets around here, so we'll continually work hard to get back those reduced incentives, but we'll only get it back if we hit our numbers.

Just to emphasize the point, incentive expense and earnings are directly linked. If we hit our revenues and earnings targets, our incentive cost will increase. If we don't, incentive accruals get reduced.

Obviously, one of the keys to anticipating our expense run rate going forward is how quickly the synergy case will be deployed. A critical component of the synergy case is the technology conversion, which will occur in mid-November. As a result, we think our synergy case will largely be fully deployed in the first quarter of 2018 with some still lesser amounts not being realized until later in the year.

Of the $40 million annual synergy target, we think we've gotten out a portion of those expenses currently, but the bulk is yet to find their way into our P&L and won't until 2018. My best guess is that from a run rate perspective, we will have harvested about 25% of our synergy case by year-end 2017. Excluding merger costs, the fourth quarter expense run rate will hopefully be slightly higher in the third quarter, depending on where we end up on our incentive cost, which, as you know, I just spoke about and whether we can afford those additional costs. Additionally impacting the fourth quarter expense base will be the impact of several meaningful hires we've made over the last few months.

And to merger cost, our best guess is that we have incurred about 75% to 85% of the $100 million in pretax onetime charges we anticipated on the merger call back in January. Most, if not all of that will, -- or the remainder will work its way through our P&L over the next 2 quarters.

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

Okay. Thank you, Harold. As we begin to focus on the extraordinary growth opportunity we have going forward, here's a chart intended to help you get a grip on the actual growth we've been able to create with the previous market-extending acquisitions we've done, specifically Memphis and Chattanooga, both of which were done in 2015. I think this is instructive as it relates to our opportunity in the Carolinas and Virginia.

Starting at the bottom of the slide, you see we first overlay our hiring philosophy and methodologies, which have generally been very successful, against our larger national and regional competitors that dominate those markets. Again, having entered both markets in 2015, look at the growth in revenue producers in 2016 and year-to-date in 2017, you can see that the hiring momentum has been extremely strong and that it continues.

And then as you move up the slide, you can see dramatic core deposit growth and dramatic loan growth. You can see that our combination of distinctive client expense and the ability to attract so many of the best bankers, brokers and mortgage originators in the market is having the desired result. Our growth trajectory in these relative newly acquired markets is extremely strong.

So now let me move on to BNC and our progress there. I spent a fair amount of time discussing the cultural integration on the last quarter's call, so I won't go back to it, other than to reiterate that we have been systematic and purposeful about inculcating the Pinnacle culture in the Carolinas and Virginia and have created great excitement among the associates there, I believe. I think we're in a position to get roughly $40 million in deal synergies, as Harold just pointed out, in 2018, despite the fact that we won't harvest 100% of the cost takeout until mid-first quarter 2018. And while we didn't contemplate new revenue synergies in order to hit the earnings accretion we announced, we believe there should be substantial revenue synergies. Specifically, we currently expect to realize meaningful synergies with our treasury management platform, which is more robust, including things like business credit cards and purchasing cards that BNC had previously not offered; back-to-back client swaps, a product BNC had heretofore not been able to sell to help clients convert fixed to floating or floating to fixed; permanent commercial mortgage brokerage, a capability BNC has not had heretofore despite the concentration of commercial real estate loans on their book; and then the residential mortgage origination process, converting BNC from best efforts to a mandatory delivery basis, which should widen the yield spread premium by roughly 40 basis points on all their residential mortgage production, which is forecast to be $450 million in 2017. That's just to name a few.

My guess right now is that it may take 6 to 8 quarters for us to build into the fees to asset target range that I talked about earlier on the call. And then, of course, as we've already discussed, we contemplate building out a meaningful C&I business. The hiring momentum's already been established. I discussed the magnitude of that opportunity earlier on the call, specifically 64 C&I relationship managers over a 5-year period of time.

Now in an effort to translate all that into financials, much like in 2011, when we felt like the market didn't really understand the earnings potential of our firm, we've already given you the ROA target of 1.30% to 1.50% and our road maps to the high end of that range. And so here's the organic asset growth we intend to produce through 2020 in the new, combined existing footprint.

Let me just say right now, it won't grow on a straight line. First quarter's growth will almost certainly be less than second quarter and third quarter. The ROA won't be exactly on the midpoint of the range every quarter. My guess is some quarters will be higher and some quarters will be lower. But with the asset target and the ROA targets, you begin to get some sense of our current expectation for future earnings growth with no additional M&A or no new markets.

So all we've talked about thus far is organic growth in our existing footprint, which as you can see, we expect to be substantial. But as you know, we have highlighted other high-growth markets in the Southeast that we've targeted. Obviously, we don't have to do anything. As you just saw, our growth trajectory is fabulous if we don't do another thing. But my guess is we'll be afforded additional opportunities to layer on still more growth. I don't intend to rehash this slide today because I've discussed it pretty fully on previous earnings calls, but I just want to make sure that you know I do expect that we will have other opportunities beyond the organic growth that we've already discussed and sized for you.

Let me say, as we wrap it up, much of what I've talked about in the latter half of this call have been focused on crystallizing the earnings growth potential as we move forward. I want to conclude with this idea: What we're really focused on is the long-term shareholder value. To that end, we continue to focus on taking advantage of both large high-growth markets in which we currently operate and the meaningful vulnerabilities of the large regional national franchises that dominate these markets, as we seek to produce outsized organic growth in our existing footprint. The hiring growth model that's proven so successful in our 2 most recent market extensions in Memphis and Chattanooga is a model we're deploying in our new markets in the Carolinas and Virginia, as we aggressively build out our C&I platform in those markets.

As I just mentioned, that's an extraordinary opportunity. Frankly, it's enough. But my guess is, as we finish the successful integration of BNC, we'll have other high-value opportunities to do accretive market extensions or fill in M&As in our existing footprint. And so we're in a really luxurious position of having a lot of incremental opportunities, but not being pressed in any way to do anything other than what's truly in the long-term best interest of the shareholders.

So Victor, I'll stop there, and we'll open it for questions.

(Operator Instructions) And our first question comes from the line of Catherine Mealor from KBW.

First, on expenses. So Terry, you mentioned that you're still accruing -- or Harold, you mentioned you're still accruing below your incentive award target. But specifically, quarter-over-quarter, did that incentive and comp expense increase or stay at the same levels that we saw in the second quarter?

No, it was up this quarter, Catherine. I think we were accruing at a 75% target at the end of the second quarter. And we've raised it up to around 90%, 92%, something like that here in the third quarter.

Okay. Great. That's helpful. And then a bigger-picture question for you, Terry. So you're talking about the 1.3% to 1.5% ROA goal, and you put that on a $28 billion balance sheet. We can get to the out-year earnings for your company. But as you think about capital with those 2 goals, do you think that you'll accrete enough capital over time to hit that target without needing to raise more capital? Or do you expect you're going to need to raise capital at some point to support this level of really strong growth? And that's kind of thinking about it outside of any additional M&A activity. I know a deal could change that formula.

Catherine, this is Harold. The way our models are working right now, we don't need to -- we're probably not going to do any kind of capital raise. I'm not saying we won't -- may need to go to the debt markets a time or 2 to get some subdebt over time. I'm not going to take that out. But right now, I don't think we're into any kind of common raises. We think we'll be able to accrete capital. We diluted capital just a little bit this quarter but I had about $8 million in merger cost that impacted that. So anyway, yes, I think we'll be okay.

Okay. That's helpful. I'm just trying to get to an EPS. And then maybe lastly, the commentary on the BHG revenue, it was a little bit light linked quarter. Usually, we see a bit of a bigger ramp in the third and fourth quarter from BHG. Can you give any commentary on that in terms of whether it was credit related or related to maybe Hurricane Irma given that they're down in Florida?

Yes, there were some impact to the hurricane in Florida. But I think what's happened is they've worked their way through some collection issues that have been down there now for probably 3 or 4 quarters. And so they're really optimistic that they're going to be able to post a pretty strong third -- fourth quarter here.

And our next question comes from the line of Stephen Scouten from Sandler O'Neill.

So just following up on Catherine's question there. Harold, with BHG, I mean, assuming you'll still hit that 20%, which you seem to intimate, I mean, is it fair to say, I mean, that's a pretty appreciable jump you'd need to see in fourth quarter, near $12 million. I mean, is that -- am I kind of in the right ballpark there of what you think they can deliver?

I think you're close, yes.

Okay. Okay. And on the mortgage side, also within fees, it was obviously a really good quarter there, and the gains were nice. But on a combined basis, given how strong BNCN's mortgage footprint is as well, I would've expected a little bit higher number. Can you give me any color as to -- I mean, I guess, maybe how that fell relative your expectations, or if I'm thinking about the combined mortgage units in an incorrect fashion?

No. I think -- I'm not sure where the pipelines are today on the mortgage group, but they did have some rate increases during the quarter that impacted their business flows. I think Ross and his group are active in the Carolinas and Virginia right now. They're looking to recruit some additional mortgage brokers. So I don't think your assumption there about -- when you pull the 2 firms together, would we expect to see more than $300 million in production in the quarter I think is more environmental, I guess, Stephen.

Okay. That's fair. That's fair. And then maybe on overall loan growth, obviously, growth in the Tennessee market seems just extremely strong, which is impressive. But the $61 million in the Carolinas was maybe a little lighter than what I would've expected. So anything going on there that's of note? Or is that just kind of adapting to a new platform? Changing up business mix? I mean, what's kind of driving that move from 2Q to 3Q growth for the Carolinas and Virginia?

Stephen, this is Terry. I think there are a couple of things that impacted. Obviously, you've got a lot of change going on in there, and I can't imagine that, that wouldn't have some impact. I think the bigger impact, quite honestly, is their concentration in CRE. And as a result of that, they saw extraordinarily high paydowns during the period that really had to do with people going to permanent markets and actually, a good number of their projects being sold. So again, I think they had some headwind really tied up in their CRE paydowns. We expect that they'll -- I think, for the next quarter or 2, we're likely to see meaningful paydowns. But again, I think you all can count on us to continue to be a double-digit loan grower.

Yes. No, that's really helpful. Okay, and one last one for me. Just on the hiring front, obviously, you guys give the revenue producer number for Memphis and Chattanooga, and then look like 5 incremental people in Carolinas, 19 year-to-date. So if I do that math, is it correct to say that you guys have lost some people net-net in Nashville? And if that's the case, how do you think about your lending personnel in Nashville? I mean, obviously, you guys have been there for what, 17 years now, and you've always hired more experienced lenders. So will we see a turnover effect maybe as some of those folks begin to phase out in their careers and you bring along younger staff? Or how should I think about that transition?

Stephen, I think -- I'm just trying to think back through turnover. I can think of 3 revenue producers that came in through the Avenue acquisition that subsequently left. And so you might find 1 or 2 there. I can't think of anything other than a retirement or 2 on normal producers in the legacy Pinnacle footprint. So you're on an interesting theme. We do have an aging workforce here. But we have pretty specific transition plans, really down to the relationship level and don't fear our ability to continue to add people. I think Harold alluded to the fact that we made some meaningful hires. We actually had a pretty good-sized lift out in the brokerage business, basically, a total of 6 people. Again, that's support and brokers, but about $650 million in assets under management was the size of their book. And so we just made that lift out since quarter end. And so again, I'd just -- that just gives you that as an anecdote to say my belief is our capability to continue to hire people here in Nashville is strong.

And our next line comes from Jennifer Demba.

Terry, I just wonder if you could elaborate on your M&A interest in Atlanta. There's not many targets here. Just wondering what your thoughts are and if you really feel it's necessary to have a presence here. And then secondly, just wondering -- I have a follow-up. Just want to know how many C&I lenders you now have in the BNC footprint?

Well, let me take the second one first. Unfortunately, I guess, the answer to that is I don't know. I can't -- I don't have any information in front of me that's going to let me give you a very good answer for that. It was a pretty modest group to start with, and we've made a handful of hires but -- so it's not monumental versus what we believe we're going to do on a go-forward basis. But I couldn't tell you the exact number that we have over there now. I think on the question on Atlanta. I think, of course, you know that market better than I do. I would say Atlanta's an attractive market to us. It's attractive to us because it's a grand commercial market. And you -- so the size and growth dynamics there are great. And it resembles other markets that we compete in, in terms of the competitive landscape. So I think we've tried not to be secretive at all about our desire to make it to the Atlanta market. When I talk about market expansions, as you know, I always talk about it in 2 veins: What would an M&A transaction looks like? And what would a de novo expansion look like? And so I think both those opportunities might exist for us in Atlanta. I do agree with you that the number of targets for us is limited. And I think, it's probably fair to say, Jen, if we were just hell-bent to make an acquisition, we probably could have done that. But we've tried to say, "Hey, look, we're going to concentrate on doing BNC before we do anything else." And we're nearing the end of that, as I've talked about on the call. But I guess I'm just trying to clarify, number one, I like the Atlanta market. And why I like it is because of the size and growth dynamics and because of the competitive landscape. If we come there, we might come there by M&A or we might come by de novo expansion. But again, I guess I want to keep trying to hammer home this point because I get a lot of questions about the pace at which we might do M&A or grow and so forth. My genuine desire is to do what's in the best interest of our long-term shareholders. And so even though I think we could have found a way to get to Atlanta in the last 12 months, either by de novo or by acquisition, it just hasn't been the right time to do that. But it doesn't concern me if I never make it to Atlanta. Again, you can see we put up pretty substantial growth for the foreseeable future in the real estate that we currently have, in the markets we currently serve. And so again, we're just not going to go for the sport of it. We're not going to buy a bank that doesn't fit with us. We're not going to get out here and overpay. We're not going to undertake it while we're trying to do BNC, those kinds of things. But again, I'm hopeful we make it there, either by acquisition or de novo.

And our next question comes from the line of Brian Martin with FIG Partners.

Just a couple of things, maybe a couple for Harold. Harold, just on the margin, just kind of -- if you can walk back through the core margin outlook over the next couple of quarters. Can you just talk about the benefits? I guess, what do you have included in kind of your thoughts on rates? And just how you're thinking about the core margin over the coming quarters?

Yes, I think, Brian, what we'll be able to do is defend the margin pretty well. We're not seeing significant increases in funding costs. We think we've got some opportunities remaining there with -- back in North Carolina. Although there's not as much as we had. But I'm not thinking we'll see a significant decrease in the core margins.

Okay, and if we get an increase in December, how are you thinking about first quarter? I guess, is there a positive impact in that? Or is it still muted and more flattish as you go in deep?

No, we think we already done -- given we've already absorbed the assets and liabilities from the Carolinas and Virginia.

Yes.

A rate increase should be beneficial to us.

Okay, fair enough. And then in your outlook, is -- well, and just going back to expenses, Harold, I think you gave some color. Maybe I missed it. But just can you talk about the -- I guess, you talked about a few hires you've made recently and just kind of the impact on fourth quarter, kind of the puts and takes with -- I think you talked about some incentive comp. Maybe I just kind of missed that. But if you can give a little bit of background on that -- on the expenses in the fourth quarter and then the hires you've made. I guess I'm assuming none of that is in third quarter numbers, or very little of it is in third quarter numbers.

Yes, I mean, we've made some pretty nice hires here over the third quarter. And into the fourth quarter, they'll find their way into the fourth quarter run rate. I think it'll just be a steady increase. I don't think we're going to see a substantial increase in core expenses in the fourth quarter, but they're -- it's less -- it will be at least as much as the third quarter, if not, slightly higher.

Okay, on an absolute basis.

For sure.

Right. Okay. All right. And then I think you talked about just the fee income kind of to get to -- did I hear it right, that to kind of get your -- to your target, Terry, of the -- inside the new target range in the fee income, that it's maybe kind of the end of -- late '18 is kind of where you'd expect to be? Or maybe into early '19 is when you kind of expect to be in that -- within that type of range?

Yes, I think that's fair. I think what I specifically said was 6 to 8 quarter, but that's generally accurate.

And our next question comes from the line of Tyler Stafford from Stephens.

Harold, I want to start on the Durbin impact this quarter. I was expecting, call it, $11 million to $12 million annualized hit, but it looks like you guys only had a little north of $7 million. So is there another delayed step-down from Durbin for some reason? Or was the Durbin hit just not to the extent you expected and you're able to offset some of that?

Well, there was less on the legacy franchise than we thought it would probably be. There was a deferral on the bank of North Carolina accounts, so we'll pick it up in the coming quarters after the conversion. So that will happen in the first quarter of next year. So we'll see some additional hits. It won't be nearly the $1.8 million to $2 million that we saw, but it'll be -- I think we were factoring $0.5 million to $750,000.

The $0.5 million to $750,000, that will be the incremental hit from BNC in 1Q, you're saying.

Yes, I think so.

All right. Got it. On expenses, the new expense to average asset range of 1.90% to 2.10%, that does imply a fairly large increase in operating expenses to be within that range. So Harold, I guess, my question is after the cost savings are fully realized from BNC, is there an opportunity for that long-term range to improve lower again? Or do you think all the hiring that you're talking about, the 64 hires and just the normal operating growth, operating expense growth that you would see will actually keep you within that range of 1.90% to 2.10%?

Yes. I think, we'll -- well, it's 1.80% to 2%. 1.80% to 2% is the new number. So what really is the, I guess, accelerates is the synergy cases on acquisitions. But we ought to be able to operate within that 1.80% to 2% over a longer term. So far, over our history, we've been able to add people at a measured pace and still be able to kind of see our -- both our efficiency ratio and our expense to average asset ratio come down. So I kind of give the credit to our operational folks on their ability to manage increased volumes with these new hires. But at the same time, we're not adding a lot of significant, call it, high-end help in a lot of our units that would bring in an extra expense burden. So I think we've got managers in place that we don't need to kind of go out -- we don't need to go out and hire new executive management, I guess. Does that make sense, Tyler?

Yes. No, it does. Looking at the Slide, I guess, 7, I was reading that to be 1.90% to 2.10%, but that clears it up that it's 1.80% to 2%, so that helps. Maybe just on the margin, the expectations for the FHLB advances in 4Q, that does -- it's spike at quarter end, would you expect still 1 6, $1.6 billion or so for 4Q?

I'm sorry, can you go back to that again, Tyler?

Yes, sorry, so the -- just a question around the margin and the FHLB advances you had in the third quarter. There were -- they spiked at year-end relative to average, I'm just wondering for go forward and the near term, if that kind of $1.6 billion on a -- from the end of period perspective in 3Q should be there going forward?

Yes, I don't think you'll see us do any more leveraging with the Federal Home Loan Bank. I think we got most of that accomplished in the third quarter. We should see increase, core deposit growth in the fourth quarter just based on our histories.

Okay. And then just last for me, just on the asset sensitivity here. Now with BNC, I couldn't find the new disclosures in the second quarter 10-Q and didn't see the normal asset sensitivity slide in the 3Q deck. Any color on your asset sensitivity profile right now?

Yes, it's difficult for us to give you with a high degree of confidence those kind of detailed numbers that we were used to giving, the -- our preliminary calculations are that we remain asset sensitive, and I think in the 10-Q, we'll disclose that we're asset sensitive. But in the past, we've been able to kind of give a lot more color on where we are, and that's primarily because we just don't have the 2 data files merged. So when the 2 data files get merged, everybody's on the same system, all the assumptions are right, are consistent, then we're -- then we'll be able to do that and then we'll go back to those same disclosures.

And our next question comes from the line of Nancy Bush with NAB Research.

Terry, I've got a question for you. Sort of past deals versus future deals. In the past, as you well know, when community banks sold themselves, generally, there is an expectation on the part of the sellers that they were going to get not only an initial premium, but that somewhere down the line, there would be a double dip. And for you guys now, I think it's going to be, unless capital regulations change or something, it's going to be difficult for anybody to buy you, especially as your growth goes forward here. So have those expectations changed on the part of sellers? Or is this just something that's going to take a while to die?

I'm not sure I know the answer as a generalization. I mean, I would expect there are a lot of banks out there that would still subscribe to that methodology. They were there looking for a donation premium and then a double dip on the sale of the acquired bank. But I'll be honest with you, that kind of thing has not entered into any of the discussions that we've had with our recent acquisitions, meaning the last 4 of them with CapitalMark, Magna, Avenue and BNC. I don't think that's really been a part of the mindset at all. And so I think what has driven it is, I believe -- and I don't -- I'm not trying to blow smoke. I believe we're viewed to be an attractive acquirer for 2 reasons: One, because the performance of our stock has been so strong and consistent over a long period of time, people believe they're going to get accretion in their new stock that they own. And secondarily, I think we have earned a reputation as an acquirer-friendly -- I mean, an acquiree-friendly bank. In other words, if you look at the deal that we've done, because of the way we go at them, we're looking for management continuity, so we're not going in there hacking out all the management. We're working hard to -- we have a reputation as a great place to work. And quite honestly, I think in every deal we've done, Nancy, we've have a negative synergy associated with our incentive plans, which include both the annual cash incentive plan and the equity plan, which just means those people are trading up pretty meaningfully in terms of the comp plans as they come in with us, and those kinds of things. And so I think all that stuff has really served as the catalyst more than it has, I believe I'm going to get a double dip. But again, I'm certain there are a ton of people out there that would continue to have that same mindset that you're speaking of.

Okay. And if I could just ask a quick second question. The hires that you've done in the BNC footprint or in the BNC infrastructure, have they come primarily from competitor community banks? or are you still drawing from some of the majors?

I would say its mixed, Nancy. We have hired from some of the obvious major banks in that footprint, but we have been able to make a number of hires from our peers, I guess, you might say over there in that market. We're not hiring from really small community banks, but we have hired a few that have big company experience that are in some of the other banks that have been recently acquired there.

And our next question comes from the line of Stephen Scouten from Sandler O'Neill.

I just had one follow-up question. I know Tyler was asking on the FHLB borrowings, but I wasn't sure if you could give more color on some of the restructuring efforts you mentioned in the press release around them, the BNCN balance sheet. I noticed some of the broker deposit categories were down. And can you just talk about what you guys have done already or still trying to do as you remix that balance sheet?

Yes, I'll just -- I'll talk about 1 issue -- well, 2 issues. One was on the funding side, there was a meaningful amount of broker deposits that were priced off LIBOR. And so they were floating rate deposits. We transitioned those into Federal Home Loan advances over 1 and 2 years. So that created some -- at least 1 and 2 year asset sensitivity for us. And then also, on their bond book, they had really done well in their bond book over the years, had acquired quite a few municipal securities that had really strong yields to them. When we started pricing those through our purchase accounting scenarios, a lot of that yield was going to disappear. And so we shortened a lot of that book as a -- because of the impact of purchase accounting and brought in new municipal securities and other bonds. So a couple of things like that. Those were 2 that come to mind right now that we've done to try to create more asset sensitive or more asset sensitivity out of that balance sheet.

Thank you. And ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may now disconnect. Everyone, have a great day.