Pinnacle Financial Partners Inc (PNFPP) 2015 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Pinnacle Financial Partners fourth-quarter 2015 earnings conference call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer, and Mr. Harold Carpenter, Chief Financial Officer.

Please note Pinnacle's earnings release and this morning's presentation are available on the investor relations page of their website 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 and 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 the SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of non-GAAP measures to the comparable GAAP measures will be available on the Pinnacle Financial's website at www.PNFP.com.

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

Thank you, operator. Good morning. We've got a lot to talk about this morning.

I will begin with a two-slide overview. Harold will follow that with a deeper dive into the fourth quarter. Then I will try to summarize our performance for the quarter and the year. Then Harold will come back and talk about our incremental investment in BHG that we announced last night and then, finally, I will end with our outlook for 2016 and the five-year time horizon.

So with that, as I've done really every quarter for the last couple years, I will begin here because it's a great way to provide a snapshot of the quarter. But more than that, to provide some broader context to our firm's philosophy, strategy, and execution.

Our shares were up again in 2015 roughly 30%. We remain a top-quartile performer in terms of total shareholder return on a one-year, three-year, and five-year basis. Our basic thesis for consistently driving our share price higher is that, over time: number one, revenue or top-line growth; number two, earnings or bottom-line growth; and number three, asset quality are the three most important valuation drivers. And so we focus intentionally on those variables.

Also, through good times and bad, companies who consistently grow book value per share grow share price, and so for quite some time we have been providing a quarterly dashboard to highlight our progress on these key valuation drivers. Top row of graphs shows real top-line and bottom-line growth with a 31.6% revenue growth rate year over year; 35.5% growth rate in net income year over year. And core earnings for the quarter at $0.69 was a record high, the 19th consecutive quarter of increasing EPS, up 29.9% year over year.

And I might comment from a profitability perspective, excluding merger charges, our return on average assets and our return on tangible capital, which are not on the slide, were 1.31% and 15.81%, respectively. I will come back and expand further on our profitability in our sustainable business model in just a minute, but obviously revenue growth, earnings growth, and profitability continue to be very strong.

As you can see on the second row of graphs, we are getting outsized balance sheet growth with end-of-period loans up 13.1% annualized between the fourth and third quarters of 2015. That's a rate of organic growth consistent with what we have sustained over the last three to four years now. We are successfully funding all that loan growth with core deposits, up 44.6% year over year.

And looking at the right-most chart on that second row, even after having initiated a dividend payout in December of 2013 and having raised it for the third time since then just last night, we have continued to accrete capital with tangible book value per share up 11.9% year over year, which, as I just mentioned, we believe is generally highly correlated to share price increases.

The third row provides information regarding our asset quality. In my judgment, asset quality continues to be excellent. Nonperforming assets were down slightly at 55 basis points total loans plus OREO. Classified assets remained extraordinarily low at just 18.7% of Tier 1 capital plus allowance.

And the overall improvement in our credit metric since the recession provided meaningful credit leverage over the last few years. It appears to me that our allowance continues to be in line with our peers after the incorporation of acquired loan portfolios, which, of course, are marked to market in conjunction with purchase accounting. And so I continue to expect further credit leverage for the foreseeable future.

Much like I intend to do later on this call, at the conclusion of 2014, we laid out key and important growth initiatives that we had undertaken in 2015 and a number of long-term initiatives to be undertaken during a five-year time horizon. All of which were intended to sustain the rapid growth of the firm that we've enjoyed for a number of years now.

In my judgment, 2015 was a fabulous year in terms of execution against the plans. We indicated last year that we had expanded Tennessee's other two urban markets, Chattanooga and Memphis, within a five-year time horizon. We announced acquisitions in both markets during the second quarter of 2015. We closed them both in the third quarter of 2015, roughly 90 to 120 days following the announcement.

We've completed the system integration for Magna Bank in Memphis. We're on track for the system integration in Chattanooga in the first quarter of this year. We have not lost any revenue producers of consequence in either market.

And, most importantly, our actual earnings accretion was $0.06 to $0.08 during 2015 versus the earnings accretion of zero that we had projected for 2015 at the time of that announcement or at the time of those announcements. So the mergers and integrations are well ahead of schedule.

We also announced last year that we intended to launch a CRE initiative to the same thing in CRE that we have previously done as a firm in the C&I segment. And by that I mean just become the dominant bank in the geographic markets that we serve.

As is the case with the mergers I just discussed, this initiative is running well ahead of schedule also, roughly $100 million in net growth in outstanding balances in 2015 and roughly $250 million in unfunded construction loans, which should fund up over the next 12 to 18 months, which is a great reservoir for future loan growth.

Thirdly, we built a broker-dealer in 2015 that will be primarily focused on company valuations and M&A for owner-managed businesses that we serve. We obtained all the regulatory approvals and have now been engaged on our first sale arrangement.

To give you some sense of how this works, according to Greenwich Research there are approximately 6,500 businesses with sales from $10 million to $300 million in our four Tennessee urban markets. In other words, Nashville, Knoxville, Memphis, and Chattanooga. Our market share of those clients would range from a high of roughly 20% in Nashville to a low of something negligible in Memphis, but I would estimate roughly 750 of those businesses are our clients.

Also according to Greenwich, 35% to 50% of those owner-managed businesses are considering selling their company within the next five to seven years. So conservatively, if you assume the low end of the range, in other words, 35% of our clients sell their business in the next seven years. That is roughly 38 of our clients a year that will sell. And so again, conservatively I think, the low end of the range for fees on these types of transactions is probably $500,000.

If we just got 20% of our own clients to allow us to advise on the sale of their business, at the low end that's roughly $3.8 million a year in fees, or roughly $0.06 in EPS. Hopefully you can see this is a business we're extremely excited about and anxious to mature. And as I just mentioned, we've already received our first engagement. The pipeline looks very good at this stage.

I think most of you understand our organic growth engine. I think everybody that does knows that it's our ability to attract the best bankers in our market that is the fuel for that engine. And in 2015 we hired 36 revenue-producing associates; that's roughly 3 times our previous annual hiring pace. And so that factor, more than any other, excites me about the organic growth going forward.

As I think about the performance of our firm against the very high, but sustainable, profit targets that we established several years back, the tremendous momentum in organic growth, the credit and profit leverage that I expect going forward, I am as optimistic as I have been in quite some time.

Harold, I will turn it over to you and let you review the fourth quarter in greater detail.

Thanks, Terry. Our fourth-quarter 2015 net interest income was up approximately $9.5 million over the third quarter, obviously due to the expansion of average loan balances from Capital Mark and Magna, but also aided by approximately $190 million in loan growth from our legacy Pinnacle franchise.

As to margins, our margin increased this quarter to 3.73% with the increase attributable to the impact of the acquired franchises. We believe we can hold our margins through the first half of the year, while at the same time grow our net interest income as we build loan volumes. That said, it's pretty difficult right now to project margins given the uncertainty in the rate environment.

Concerning loans specifically, as the chart indicates, average loans were $6.46 billion for the fourth quarter. [ELP] loan balances are higher than average balances and our sales pipelines remain strong going into 2016. And at this point, we expect continued low double-digit growth loan growth in 2016.

Our Chattanooga and Memphis franchises ended the year at approximately $1.36 billion in loans, reflecting growth over their prior-year pre-merger balances of 15.5%. As to loan yields, our loan yields increased to 4.46% this quarter. We expect loan yields to be steady to down slightly in 2016. Holding loan yields will be largely dependent on two rate increases that we are currently forecasting, one midyear and another late year.

As to deposits, again here the third quarter we were able to maintain our low funding cost with slight increases attributable to acquired deposits. We believe we have opportunities there to reduce the cost of some non-core funding sources.

As to deposit balances, we had a great quarter for deposit growth with deposits up almost $371 million in the fourth quarter. We are most pleased with the fact that our demand deposit growth has been really strong over the last several quarters, with our fourth-quarter 2015 average balance continuing to comprise about 29% of our total deposit base. These remain core operating accounts that we would expect to keep regardless of the rate environment.

Core deposit growth remains a critical strategic objective of our firm and we intend to keep it front and center going into 2016.

As to balance sheet sensitivity, we've been talking about our progress for several quarters and I think we continue to be in a position of modest asset sensitivity. Our internal modeling tells us that we are about where we need to be in the up 100 and 200, as we have focused on three separate balance sheet initiatives over the last several years.

Reduction in loan floors. One of our steps included successfully targeting $350 million of floors for release during 2014 and 2015, while simultaneously increasing the rate spreads attached to those loans. These steps from management, combined with some level of natural attrition, has resulted in us decreasing the amount of loan floors in the money at its peak from $1.3 billion to a current level of $640 million. We believe our current floor position represents a balanced position of enhancing current earnings without hampering asset sensitivity.

Additionally, fixed-rate investments as a percentage of total assets has seen significant reduction to now less than 10% of total assets. We have been tremendously successful at gathering core deposits over the past several years, especially commercial operating accounts. This has resulted in our DDAs, as a percentage of total deposit ratio, from less than 20% at year-end 2011 to over 27% currently.

Obtaining those deposits were not only important to our ability to effectively manage our cost of funds over time, but they are also critical in achieving our asset sensitivity goals as they provide the best insurance against rising rates -- the best insurance that a financial institution can have.

To a lesser extent, we have also substantially increased the amount of back-to-back customer swap transactions performed in 2015 versus previous years. 2015 saw us transact $200 million notional of these swaps which represents a tenfold increase versus our 2014 production.

As we've mentioned in previous calls, the increased credit spread fee revenue from those transactions was an important benefit affecting our bottom line. However, we consider the boost these swaps provided to our asset sensitivity goals to be of even more importance.

Switching now to noninterest income. Excluding security gains, noninterest income for the same quarter increased 46.3% over the same period in the prior year, given largely -- driven largely by our 30% ownership interest in Bankers Healthcare Group, which we announced and closed during the first week of February last year.

As we noted last night in the BHG release, we are increasing our ownership in BSG from 30% to 49%. Accretion for this year should be around 2% and next year around 4%. Tangible book value dilution is around 1% with an earnback of less than one year.

We have got an excellent partnership with BHG. They run a remarkable company and we are obviously excited about not only the additional investment, but also continuing to explore opportunities to expand the partnership into more diverse revenue channels. More about BHG in a moment.

Our residential mortgage group had an outstanding quarter in terms of production with approximately $165 million in loan sales at a yield spread of 2.19%. Items included in other noninterest income tend to be lumpy and include items such as gains on other investments and loan sales as well as interchange fees.

As noted above, interchange and other consumer is approximately 55% from last year as we continue to aggressively market our credit, debit, and purchasing cards to our clients. As I mentioned earlier, we have also experienced a meaningful increase in client back-to-back swap fees from last year.

Looking to 2016, we will obviously place more emphasis on several fee areas. Obviously, with the increased investment in BHG, we should experience a meaningful increase in fee revenues, but also we have great aspirations for our capital markets unit as we continue -- as well as continuing emphasis on interchange, particularly credit card, which is out of the purview of the Durbin Amendment.

Now to operating leverage. Our core efficiency ratio was 50.6%, which we consider significant for us and compares favorably most peer groups. We continue to believe that we will be able to improve upon these levels of efficiency in 2016.

Fourth quarter was obviously impacted by Capital Mark and Magna as the third quarter included only two months of Capital Market and one month of Magna, so the fourth quarter is a full run rate. We're expecting that increased hires will drive expense increases this year as we believe all other costs should be fairly stable.

I would like to highlight that our recruiting has been exceptional in 2015. With all the activity that occurred in 2015 with our franchise, we were also able to recruit 36 new customer-facing, revenue-producing, highly-motivated, high-performing relationship managers to our firm in 2015 and our recruiting pipelines remain very strong across the franchise in all four markets.

As we look to 2016, we anticipate two new branches in Chattanooga and Knoxville later this year and then a relocation in Memphis, as we seek to emphasize core deposit growth in those markets. Our core expense-to-asset ratio was 2.3% for the fourth quarter of 2015, virtually no change from the third quarter. So we continue to operate within our target range.

As we have stated for many years, the primary strategy to remain in our long-term expense-to-asset target ratio is to grow the loan portfolio of this firm with corresponding increases in operating revenues and earnings. That will also be the strategy we will continue to deploy with Capital Mark and Magna.

Our synergy case for both acquisitions remains in place, which will eventually help us to create more operating leverage in future quarters as we fully expect to achieve the targeted EPS accretion targets that we spoke about on the acquisition conference calls. We expect the technology conversion to occur at Capital Mark in mid-March 2016, so the second quarter of 2016 should see the benefit of that event.

We think we have earned a reputation of balancing investment in future growth with current-period operating efficiencies. We believe we have meaningful hiring opportunities for our franchise, but at the same time, we will also guard the reputation that we have built for being sound operators.

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

Thank you, Harold. More than three years ago, we laid out our sustainable business model, which at the time called for a target range of 110 to 130 for ROAA. We also broke down targets for the four critical components that are required to produce that ROA: the margin, the noninterest income to assets, the noninterest expense to assets, and net charge-offs, since in ordinary times charge-offs are really the primary influence on provision expense.

In mid-2014, in conjunction with our 2014 to 2016 strategic plan, we increased our ROA target range by 10 basis points to a range of 1.20% to 1.40%. In conjunction with our recently completed 2015 to 2017 strategic planning process, we decided to leave the ROAA target as is. But as it related to the four individual components, we decided to increase the noninterest income to average assets by 10 basis points and decrease the target range for the net interest margin by 10 basis points, really to reflect the current operating environment.

I think, as Harold has already pointed out, for some time we have been operating in or better than all those target ranges for everything except for the expense-to-asset ratio. And really over the last couple of quarters with strong asset growth in the third and fourth quarters of 2015, adjusting for merger-related expenses, we are now inside the range for the expense-to-asset ratio as well.

So, overall, the fourth quarter was another great quarter with top-quartile profitability and efficiency and record EPS, excluding merger-related expenses.

Hopefully that provides a good look at the fourth quarter and 2015. Now I want to turn it back to Harold to talk a little more about our incremental investment in BHG.

Thanks, Terry. I won't spend a lot of time on the slide, but here are some key points with the incremental BHG investment we announced last night.

We expect the transaction to close in late February or early March. We are paying approximately $114 million for a 19% interest, compared to a $75 million payment for a 30% interest that we executed last year.

Obviously, the value of BHG has increased significantly in the last 12 months as they have seen significant growth in all key financial categories, which will talk about here in just a second. But BHG has also been the objective of a few interested suitors over the last several years. That said, the transaction price for the 19% we believe approximates 10 to 12 times after-tax net income, which we consider to be a reasonable price.

We also have four-year lockups, which both we and BHG believe are critical to our partnership. We can now invest time in investigating those new revenue channels for the benefit of both firms.

More details about BHG's growth, which was exceptional in 2015. As you can see they had great correlation between origination growth and revenue growth, but that growth was eclipsed by the growth in pretax net income at greater than 70% for 2015 and, plus, it's all organic growth. Going into 2016, their pipelines remain in great shape.

Lastly, this is some analysis of the various rate categories for their loan book. Just looking at the total line, FICO scores in the low 700s, $1.6 billion in balances with an average rate of 15.7%. It's obviously a niche business that is focused on certain market segments that require that they spend less time dealing with loan applications and lenders, along with a rapid response to their application and funding requirements.

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

Okay. As we wrap up, I would like to put a bow on 2015 and spend a few minutes on our longer-term outlook. 2015 was another whale of a year for our firm.

We continued our record for double-digit EPS growth. We actually exceeded a $2.40 per share earnings budget that we had going into 2015, so I really want to try to focus on this and bring this -- bring some clarity to it.

Our 2015 budget or target represented a 20% growth rate in earnings per share over 2014, which I think says something about both our -- about our aspiration. And then we exceeded that 20% growth target by roughly 50%, which says something about our execution. So I think we set big goals for our associates, but we develop the action plans and execute against them.

In addition to achieving our targeted ROA, all four components -- margin, noninterest income to assets, noninterest expense to assets, and net charge-offs -- all are inside the long-term target range. Here in 2015 we had planned a transition away from the loan floors and liability sensitivity that served us so well during low rates to a slightly asset-sensitive position. I don't think we'll ever be taking big bets on our balance sheet sensitivity, so I think we are exactly where I would like to be right now.

Operating leverage has been our theme for the last three years. We saw our efficiency ratio improve in 2015 to just 50.6%, adjusted for merger-related expenses, almost exclusively based on sustainable organic revenue growth.

I've already spent some time on our Board's philosophy regarding targeting top-quartile performance. We believe in 2015 we had top-quartile profitability, top-quartile asset quality, and we believe that resulted in top-quartile total shareholder returns. So all-in-all, it was a great year.

Looking out for the next five years, we generally expect more of the same, specifically to deepen our market penetration in all four Tennessee markets. We look to expand in our four urban Tennessee markets through rapid organic growth and potential end-market acquisitions.

We expect to continue the exploitation we have -- to exploit the opportunity that we have to dominate the CRE segment in our geographic markets. We expect to increase our asset size to roughly $13 billion to $15 billion; to find fee businesses like BHG, like our new broker-dealer that we can invest in and help us grow our core earnings capacity and diversify our revenue streams, which I think is particularly important in this kind of rate environment. And through it all, to focus on bottom-line results and continue to target and link our executive compensation top-quartile performance among our high-performing peer group.

I think, finally, a number have a relatively negative outlook for banks. That credit leverage is generally phased out and the Fed may move more slowly than originally thought and stubbornly low rates will weigh on net interest margins. And that margin compression will lead banks to attack expenses, which further jeopardizes future earnings and diminishes service levels to jeopardize high-value core deposits.

That mortgage revenues will slow and that oil prices will create weakening credit, particularly in the energy and related sectors, but might serve as a wet blanket, if you will, on the entire economy.

I just believe that the story of Pinnacle is very different than that. Perhaps most importantly, the markets we serve are vibrant enough to support volume growth that facilitates meaningful net interest income growth. Our recent acquisitions of Capital Market and Magna and our investment in BHG all appear to be significantly accretive, even prior to obtaining our cost takeouts and before we have had any opportunities to produce revenue synergies, which we believe we will get.

We have successfully launched our CRE initiative, which is aimed at our market's best real estate developers and owners. And we finished way ahead of our hiring schedule for 2015, which means we're incurring significant costs today for revenues we expect to materialize over the next two to three years while we're still putting up top-quartile profitability and productivity on a current basis. I think Jim Collins, who wrote Good to Great, would say our flywheel is really spinning.

We are now positioned in all four of our targeted geographic markets with meaningful opportunities to take share and increase product penetrations organically going forward, as well as to some end-market acquisitions that further increase our marketing mass and our profit leverage.

So, operator, I will stop there and we will open the floor for questions.

(Operator Instructions) Tyler Stafford, Stephens.

Good morning, guys. Just a question on BHG. It looks like they grew revenue and pretax income by almost 50% year over year, so clearly they've seen some pretty phenomenal growth in 2015. I was curious if you could give us any insight into how much growth you're assuming in your 2% and 4% accretion guidance in 2016 and 2017.

Tyler, it's Harold. Obviously, we are not expecting 70% earnings growth this next year or pretax growth; I think you ought to marshal that thing down. But it will be a number that they believe they will outgrow us. So it's still a pretty healthy number, but it won't be nearly that 70%.

Okay. Then moving over to the margin, I was hoping we could get some color on the higher loan yields this quarter. Can you size up how much of that 13 basis point increase quarter over quarter was due to accretion prepayment fees versus kind of the impacts from higher rates?

The higher rates didn't impact us that much in the fourth quarter, or the Fed move -- I will say that. We saw -- we did see -- January 1 we have about $0.5 billion in LIBOR-based loans that did reprice, so we're pretty optimistic about the impact going into 2016. I think we mentioned in the press release we've got about $2.1 million -- $2.1 billion that's repriced here since the rate increase.

I think what did happen in the fourth quarter is obviously the discount accretion, and that's probably contributing about 3 to 5 basis points to the margin. All the purchase accounting stuff is difficult to kind of get communicated and what we believe is that purchase accounting probably helped us out in 2015 by about $0.01.

So in your commentary for a -- to be able to hold the NIM flat in the first half of the year, does that assume a fairly equal level of accretion for the first couple quarters, from what you saw in the fourth quarter?

Yeah, that accretion number will come down over the year. The first quarter will see some modest decrease and then it will just keep on coming down.

All right. Thanks, guys.

Kevin Fitzsimmons, Hovde Group.

Good morning, guys. Harold, just wanted to touch on the margin outlook in a little more detail. I think what you said was you thought you could hold the margin in the first half of the year and -- but you said you forecasted a couple rate moves.

Assuming those come as expected, what are you guys thinking over the balance of the year and -- if they come? And then what if they don't come? Thanks.

I think if we get the rate increases we will be in good shape. I don't necessarily think we will see any kind of drop off in the margin. It may go down a couple, three ticks.

If we don't get the rate increases, we may see anywhere from $1 million to $4 million in net interest income dilution. So we are anxious to see what's going to happen there and try to figure out ways to overcome it if we feel like those rate increases won't happen.

Okay, thanks. One quick follow-up. Terry, on last quarter's call, I think the subject came up about crossing the $10 billion threshold and I believe what you said back then was you are comfortable with crossing it organically. And the size you are now and the clip you guys are growing, that seems like it's something that isn't too far out there.

Just curious if there's -- what your thoughts are on that between organic growth and M&A that comes up, because it seems like you're not really focused on large M&A to vault you over that. It's more like in-market, small M&A.

Then just as a side note, how you are thinking about Durbin. Because in your fee commentary it sounded like you guys are making some pretty deliberate moves to beef up certain areas, such as interchange, that aren't getting directly impacted by Durbin. Thanks.

Kevin, I think you basically have it right. From 30,000 feet, what I've tried to communicate is it does not make sense to me for us to go out and try to do some transformative acquisition to avoid the impact of Durbin.

When I say that I'm not acting like that wouldn't be a good idea, and if that happens, then that's fine. What I'm really trying to communicate is we're not going to get something like that control how we run our business.

We've got a pretty specific business model that works extraordinarily well. It produces organic growth at an outsized pace and so I am comfortable with that.

We have done considerable analysis on the impacts across the $10 billion. Kevin, as you know, there are three or four different variables that would affect your P&L, the largest component of which is the foregone revenue associated with the Durbin Amendment. But you've got incremental FDIC premiums; you've got costs associated with DFAS, and so all those different P&L impacts, as you know, come in at different times based on when you cross and the different measurement periods and all that.

I just rambled through that to say I think we have a good understanding of exactly what the P&L impact is against a variety of scenarios of how we would cross that threshold. So I don't know if I can be more clear than this. I don't object to just growing organically through it and I am not about to go out here and manufacture some transaction just to, say, out-slick the Durban Amendment.

On the other hand, I don't think it's unreasonable to expect that we can -- that we will do, as you pointed out, in-market transactions. And as we would analyze those, if something -- and as we have analyzed those, when we look at that we look at -- and net out the impact of the Durban Amendment and other costs associated with crossing $10 billion and still look for meaningful accretion on a net basis in those transactions.

I don't know if that's helpful to you. I think some people get frustrated with that answer, but I guess all I want to communicate is we're going straight ahead. I suspect we've got opportunities from an M&A perspective that will be useful to us as we cross that threshold.

But I do just want to communicate that as a company we don't run our company based on short-run phenomenon and those kinds of things. We've got a strategy that I think works extraordinarily well and we will run it straight ahead.

Okay, great. Very helpful. Thank you.

(Operator Instructions) Brian Martin, FIG Partners.

Harold, can you just comment -- I guess maybe I missed when you were talking about the cost of funds and deposits, just your outlook there just as it pertains to the earlier discussion on the margin.

We're not looking for any kind of meaningful increase in our deposit funding costs. We've experienced an increase primarily because of the acquired franchises.

But we think we've got some opportunities there to work with their depositors. Since the rate increase I think we've only had a few depositors where we've given some kind of marginal increase to, but it's really not impacting us currently. Now, granted, when we get another rate increase or even a third rate increase, those -- we are obviously going to have to increase some betas on that one.

I got you, okay. Then just the efficiency ratio and the expense outlook. It sounds as though the -- even though you're at kind of an all-time low here on the efficiency ratio, the expectation would be that that could be a bit lower from the current levels going forward if all things go according to plan.

That's exactly right. We think we've still got operating leverage here in 2016. A big event coming up is this Capital Mark technology conversion. That is scheduled for the middle of March; that will be helpful.

Plus we did -- we noted in the press release we hired 36 people last year. A lot of those people came on at the last part of the year. I don't know if we will get 36 this year. The pipelines remain very active, so I think we will get our fair share, but a lot of those people that we hired last year are now building their books. So the investment has been made; now we hope to reap the benefit of it.

Okay. Then just the loan growth in the quarter, fourth quarter, can you give some color by region where that came from? And then was one market stronger than another or pretty much strong across the board?

I think it will be, obviously, different for each market. I will say it this way: Nashville had a great year. Knoxville had a good year this year. Not like what they have had in previous years, but they had a really strong loan growth year.

Chattanooga had a phenomenal year and Memphis had -- they were up at the -- I think Memphis and Chattanooga were both up 15.5% over their prior-year balances. Chattanooga was more than that; Memphis was less. But we have now got a good, solid core group of people in Memphis in all areas -- C&I, private banking, and CRE -- so they are expecting big things over there.

I got you. Okay, that's all I had. Thanks, guys.

Nancy Bush, NAB Research.

Good morning. Could you just talk a little bit about the CRE initiative, what you --? If you could just sort of give us an idea of kind of the average loan that you're booking right now, if there is such a thing. Just give us a little bit of color about what you are seeing and whether you expect that's going to be changing over time as the initiative goes on.

I would say, Nancy, I think, as we have tried to indicate here -- some people ask questions of how you are expanding CRE. Aren't you late in the cycle doing that? Those kinds of things. And so I think it is important to communicate and be clear about exactly what our strategy is.

Think about what we've done in the C&I segment. What we did was basically line up and aim at the large regional banks and try to take the best clients in the market away from the large regional banks who had them all when we started the Company. And so we have become the lead bank to the leading owner-managed businesses in our market.

And so I just say that to say that's exactly what the strategy is in CRE. There are all kinds of ways to approach the CRE business and I am not being critical of any of them. Some people focus exclusively on projects; if they find projects they like, they will do them. All that kind of thing.

That is not what we do. What we do is focus on the best developers in our market. And as you know, with real estate developers, they generally have more than one bank and so it's not difficult for us to get in their bank group. And, frankly, it's not that hard for us to become their lead bank.

So that's what we're doing. My point about that is the top developers in the market came through the last recession and did just fine and they will do fine in the next recession. And so forth. Again, we think the game is about client selection and we think we are in a position better than the other large regional banks in our market to know and serve those large and successful developers.

Boy, it's hard when you say give me an average transaction. I'm not sure that would be insightful, because we've got stuff on the low end and stuff on the large end. I think if you said, Terry, tell me something you like to do; what are you doing a fair amount of? We do a fair amount of build-to-suit type transactions for large national -- that are for developers that work for large national firms.

In other words, they are build-to-suits for Walmarts and those kinds of things, Tractor Supplies and so forth where you've got a major credit tenant doing expansion. And so we finance the build-to-suit. If you said, tell me the single most frequent or like transaction you do, that would probably be it.

Okay, great. And just one other thing, Terry. You are in close touch with your clients and Nashville, along with I guess Greenville, Spartanburg, and Atlanta, is one of the markets in the Southeast that has a lot of international relationships and gets a little bit more impacted by international developments.

Are your clients scared right now? With all the stuff that has been going on early in the year, which seem surprising to everybody, is anybody pulling back from any deals or expressing any panic at this point?

I don't think so, Nancy. It's frequently talked about and I don't think anybody likes to see some of the pullbacks that we've seen. Of course, everybody is going to talk about pullback the stock market, they talk about pullback of oil prices and so forth, but I've not seen anybody act like, hey, I'm not moving forward on something I intended to do or I don't hear people that have a negative outlook about 2016. I think it is more of the same.

My belief about owner-managed businesses or let's just say my belief about owners' mindsets, really over the last four or five years -- and I will maybe just say since coming out of the recession -- when we got out of the recession, everybody got off the panic button and that's a good thing. And so that's a modestly optimistic outlook. But I've not thought owners were tremendously optimistic over the last four or five years. Meaning that they -- I guess best said, they are not on the panic button, but at the same time we have not seen them wanting to take extraordinary risk in terms of adding plants, adding shifts, all those kinds of things.

So I think 2016 feels like more of the same to me, even though some of the macro numbers are bouncing around in a sort of wild way.

Peyton Green, Piper Jaffray.

Yes, good morning. I was wondering maybe if you could talk a little bit, Harold, I just wanted to make sure. Did you mention that it was $1 million to $4 million in net interest income dilution from -- if the Fed did not hike interest?

Yes, that's where we think we might end up in 2016 against our plan, if there's not these rate increases in midyear. The one at the end of the year is really not impactful at all.

Right. Okay, so it's really just the June -- the potential June?

Yes.

And then of the $5.5 million in interchange and other noninterest income, how much of that is debit card interchange versus what might be credit card swipe?

The debit card interchange -- and I will just get to this quickly, because I think I know where you are headed with your question. The Durbin Amendment would probably impact us by $6 million to $7 million currently, so if we -- and that's losing about 85% of our revenue base.

Okay, $6 million to $7 million annually. Okay, all right, great.

If I could just carry on about that, Terry mentioned the $10 billion. Rightly or wrongly, the way to look at that is I think our Street estimates next year have us with about 20% earnings growth or somewhere in that neighborhood. If you consider all the $10 billion implications -- FDIC insurance, DFAS, all of those things -- we think we've got about an $8 million kind of number that we are dealing with. And that's about, to us, somewhere around $0.12 to $0.14 a share, so that would be about 7% to 8% earnings growth.

So the way we look at it is $10 billion is going to cost us about four months of earnings growth.

Got it, okay. All right, great. And then maybe, how -- I guess, Terry, you mentioned that the customer base feels pretty consistent with how they've felt about business opportunities. What would make you change your mind in terms of the balance sheet in terms of the asset sensitivity?

Do you feel like this is where you wanted to be all along and so this business is a good status quo from this point forward, or would you go more towards neutral? Or this really is neutral?

Honestly, I think the best description, Peyton, is that we are modestly, modestly asset sensitive. That's a good spot for a commercially-oriented bank. That's a natural spot for us to be in.

You know our numbers very well. We've basically deployed floors as the principal tool. We had several tools, but floors were the principal tool that we used to really switch the natural makeup of our balance sheet to a little more liability sensitivity in that down market.

And I think it served as well. I can't recite the numbers, but we made a lot of money on those floors. We basically have moved back to a comfortable spot, a spot we like to be in. It's modest asset sensitive.

And as I said in my earlier comments, again I think, Peyton, you've watched as a long time; we are not balance sheet bettors. We don't do a lot of that. We might lean a little to the left or a little to the right, but we are not ever going to make a big bet on asset sensitivity. I like the spot that we are in and I don't foresee any alteration to it in the foreseeable future.

Okay, great. Thank you very much for taking my questions.

Dan Furtado, Philadelphia Financial.

It's Jordan in for Danny actually. Can you talk about the loss provision in the quarter being up a little more? Is there any one-time thing in there or is that kind of the run rate going forward?

There was no big individual loss in the quarter, Jordan. It's -- I think the fourth quarter probably had some additional consumer credit in there that we took losses on. Also, and the way we look at it, there's all kinds of discussion about how you're supposed to look at this provisioning number.

The way we are trying to integrate Capital Mark and Magna is their loans are constantly renewing, so as those loans renew I am recognizing some accretion income from their loan book in the margin. But as those loans come on to my books and now I get to call them Pinnacle loans, for lack of a better term, we're going ahead and putting up some provision expense for those credits.

And so during 2015 my folks are telling me that number came in at about $3 million in additional provision costs because of the Capital Mark and Magna loans that we have now gone through a renewal period with. And now the accretion income is gone and so now we have got provision expense associated with it.

Anyway, that may be -- that may not be the right way to look at it, but that's the way we are looking at it.

So is that $3 million going to the next couple of quarters as well or is that just going to be some --?

I think we will continue to do that over the next few quarters, so I'm not sure that we will be at $5.5 million in provision expense in the first quarter. Right now it doesn't look like that.

Okay, thank you.

I'm showing no further questions at this time. Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day.