Pinnacle Financial Partners Inc (PNFPP) 2016 Q1 法說會逐字稿

Good morning, everyone, and welcome to the Pinnacle Financial Partners first-quarter 2016 earnings conference call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer, and Mr. Harold Carpenter, Chief Financial Officer.

Please note Pinnacle's earnings release and this morning's presentation are available on the investor relations page of their website at www.pnfp.com. Today's call is being recorded and will be available on Pinnacle's website for the next 90 days. (Operator Instructions)

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

Many of such factors are beyond Pinnacle Financial's ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks is contained in Pinnacle Financial's most recent annual report on Form 10-K. Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events, or otherwise.

In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to the comparable GAAP measures will be available on Pinnacle Financial's website at www.pnfp.com.

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

Thank you, Bridget. Good morning. As I've done every quarter for the last couple years, I'll begin with this snapshot of the quarter, which hopefully gives a broader context of our Firm's philosophy, strategy, and execution over time.

As I try to remind you each time, our basic thesis for consistently driving our share price higher is that the three most important valuation drivers are number one: revenue growth, which for this Firm is largely influenced by balance sheet growth; number two: EPS growth, which for this Firm is largely influenced by the revenue growth; and then number three: asset quality. And so we focus intensely on those variables. Also, through good times and bad, the companies that consistently grow book value per share tend to grow share prices.

The top-row graph shows real top-line and bottom-line growth, with a 43% revenue growth rate year over year and a 14.5% annualized growth rate in EPS, which at $0.71 was a record high. And it's the 23rd consecutive quarter of double-digit year-over-year EPS growth, excluding extraordinary items.

From a profitability perspective, excluding merger charges, our return on average assets, which is not on the chart, was 1.32%, right in the center of our target range. And our ROTCE, which is shown there, was 15.64%, top-quartile performance among an extremely high performing peer group. So 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 17.4% annualized linked quarter between the first quarter of 2016 and the fourth quarter of 2015. That's a rate of organic growth slightly in excess of what we've sustained over the last three to four years. And we're successfully funding virtually all of that loan growth with core deposit growth when you look at the year-over-year comparisons of loans and core deposits.

And looking at the rightmost chart on that second row, even after having initiated a dividend payout in December of 2013 and having raised it for the fourth time since then just last quarter, we have continued to accrete capital, with tangible book value per share up 16.3% year over year.

The third row provides information regarding our asset quality. In my judgment, asset quality continues to be very strong. Nevertheless, on a quarter-over-quarter basis, each of these three metrics jumped up not exclusively, but primarily as a result of our consumer loan portfolio, particularly the auto portfolio.

Nonperforming assets were up a little this quarter at 70 basis points in total loans plus OREO. While that's a little higher than normal, I'd point out that for our Firm, movement in these numbers is lumpy, and as you can see there on the chart, we have actually been above that level twice in the last two years. We generally try to operate in the 50-basis-points to 75-basis-point range. So even though it ticked up a little bit quarter over quarter, we are still in a great spot overall.

Similarly, classified assets remain low, at just 24.2% of Tier 1 capital plus allowance. We typically try to operate in the 20% to 35% range. And in the case of net charge-offs, this quarter was obviously higher than normal and actually outside our target range of 20 basis points to 35 basis points, which again was meaningfully impacted by our consumer automobile portfolio.

So let me digress just a minute to flesh that out. A few years ago, we announced we were entering in a measured way the indirect auto lending business as one of several initiatives that were intended to find some suitable higher-yielding assets.

Within that business, we have a traditional paper-buying function, buying A paper from mainline dealers. Honestly, I'd say the asset quality in that book is very good. However, frankly, it is not turned out to be a particularly high-yielding asset.

We've also acquired some higher-risk, higher-yielding paper from used car dealers over the last few years. We currently own around $60 million of this higher-risk, higher-yielding car paper. Thus, it's a pretty small portfolio.

During the first quarter, we recorded $3.65 million in charge-offs in these accounts, which is very much beyond our risk appetite. We are evaluating the remaining high-yield portfolio and continue to believe we have adequate reserves against future losses. That said, we are definitely managing the volume and the risk of this portfolio down and focusing our attention on other products.

As you might expect, we are constantly searching for opportunities to enhance our business. Some involve buying a business or acquiring a bank or partnering in some new venture, and we will occasionally take on these ideas when it appears the risk/reward parameters are balanced. We will also let you know when we decide to move on, as we are here.

Examples of some of the more successful initiatives over the last few years that are like this are our original purchases that we made in loans originated by BHG, which turned out to be extraordinarily successful, both in terms of the roughly $70 million in generally higher-yielding loans that are currently on our books as well as our ultimate acquisition of 49% of that company. Another is our entree into the credit card business, where we now have generated approximately $70 million in credit card outstandings and have dramatically grown our interchange income.

I think it was Jim Collins in one of his books said winners fire bullets, not cannonballs. And that's exactly what we've done here as it relates to the used car paper. It was a measured risk to improve asset yields that at the end of the day wasn't consistent with our risk appetite.

But even with this issue, overall asset quality remains very strong. As an example, excluding the charge-offs in our auto loan portfolio, our charge-off rate for the remaining portfolio was just 21 basis points in the first quarter. So our client selection process remains very strong.

Because investors are always trying to understand the likelihood that our earnings growth can continue, the last couple of years, in addition to trying to crystallize the power of our organic growth model, which is pretty broadly understood, we've laid out other key and important growth initiatives that we would undertake, longer-term initiatives to be undertaken during a five-year time horizon, all of which were intended to sustain the rapid growth in earnings that the Firm has enjoyed over the last number of years.

So by way of update on these various growth initiatives, the hiring momentum is as strong as I ever remember. We had a fabulous fourth quarter of 2015, if you remember. In the first quarter of 2016, we've hired 14 revenue-producing associates, again a pace similar to what we did in the fourth quarter of 2015. That's 17% more in the first quarter than our previous annual hiring pace in 2012, 2013, and 2014.

In other words, prior to 2015, we were generally trying to hire around 12 revenue producers per year, and in the first quarter of 2016 alone, we hired 14. And so that factor, more than any other, excites me about the organic growth going forward.

In terms of the other initiatives, 2015 was a fabulous year of execution. We indicated last year that we would expand to Tennessee's other two urban markets, Chattanooga and Memphis. We announced acquisitions in both markets during the second quarter of 2015; closed them both in the third quarter of 2015, roughly 90 days following announcement.

We completed the system integration for Magna during 2015 and CapitalMark in the first quarter of this year. That puts us in a position to realize the remaining costs energies in 2Q 2016.

I think we've lost just two relationship managers in Memphis and none in Chattanooga. So really, we've 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 the announcement. So those mergers and integrations are well ahead of schedule.

BHG has turned out to be a fabulous investment for our Firm. We completed an additional investment for 19% of the company during the first quarter, bringing our total ownership to 49% of BHG, which had a record year in 2015 and looks to be on track for another record year in 2016.

So as I think about the performance of our Firm against the high but sustainable profit targets that we have established several years back, the tremendous momentum in organic road, and the operating leverage that I expect going forward, I am as optimistic as I've been in quite some time.

With that, let me turn it over to Harold for a more in-depth review of the first quarter.

Thanks, Terry. For those of you that have followed us over the years, you know that we pay attention to expenses, but we spent most of our time and energy developing tactics to grow revenues organically. It's our belief that top-line revenue growers that can leverage that type of growth with increased earnings will be rewarded with outsized multiples by the markets. So far, so good.

This chart gets at that in some detail. The green bars are fees, while the blue bars represent spread income. The dark line on the chart is the critical one, as it denotes revenue per share. Growing EPS or tangible book value per share is obviously much more difficult if this line is flat or down.

Our trailing four-quarter revenue per share is around $9, which is up 23.5% from the previous trailing four-quarter period. Excluding merger charges, our trailing four-quarter fully diluted EPS is approximately $2.76, up 27.2% from the previous trailing four quarters. So we believe our Firm has performed admirably and transferred a reasonable amount of our revenue growth to bottom-line results.

That said, this organization has undergone a lot of change in the last 12 months and there is more change coming. But as it impacts this slide, we believe it's all positive change. Our belief is that the Avenue merger will also be positive to revenue-per-share growth, and after seeing their first-quarter loan growth, we believe it is not only a leading indicator to this future positive, but is near-term validation as to why the combination of Pinnacle and Avenue makes so much sense.

Concerning loans specifically, as the chart indicates, average loans for the quarter were $6.74 billion. First-quarter EOP March 31 loan balances are higher than average balances, and our sales pipelines remain strong going into the second quarter of 2016. And at this point, we expect continued double-digit loan growth throughout 2016.

As mentioned previously, Avenue's loan growth in the first quarter was exceptional, at roughly 28% over last year's EOP balances. We reported in the press release last night that we acquired $169 million in loans during the quarter in connection with the hiring of three commercial lenders in the Memphis market. Excluding those loans from our first-quarter growth, we grew loans $115 million in the first order, which is traditionally our slowest growth quarter, or an annualized linked-quarter pace of greater than 7% over 4Q 2015 average balances.

Collectively, Avenue's linked-quarter and Pinnacle's linked-quarter loan growth amounted to 11.5% over fourth-quarter balances. So yes, we like the way this year is shaping up.

As to loan yields, our loan yields increased to 4.49% this quarter. Impacting our loan yields this quarter was approximately $2.6 million in purchase accounting accretion, which positively impacted yields by about 15 basis points. Not considering Avenue, we will have this continued benefit to our loan yields, although in lesser amounts, for the next several quarters.

As to asset sensitivity, we continue to forecast a Fed funds increase in June and in December. Our balance sheet, we believe, is in a solid asset-sensitive position upon the first tick of a rate increase. Our annualized beta factors remain conservative on deposit increases at around 60% of rate increase being used for additional interest costs, even though after the December 2015 rate increase, the realized increase in funding cost was negligible.

We have worked our floating rate loans with floors down to approximately $650 million as of March 31, slightly less than 10% of our loan balances. Additionally, almost 50% of our loan book will participate in the next rate hike, if and when it occurs. Coincidentally, Avenue's loan book is fairly close to ours, with about $128 million of their $962 million in loans with floors and 43% of their loan balances set to participate in the next rate hike.

As to deposits, again here in the first quarter, we were able to maintain our low funding costs with only a slight increase in cost. As to deposit balances, we had a solid quarter of deposit growth, with deposits up $109 million in the first quarter. Our average loan-to-deposit ratio has remained fairly consistent for more than a year now at 95% to 96%. Avenue's average loan-to-deposit ratio was in the 92% range in the first quarter.

As we mentioned on the January 29 conference call concerning the Avenue merger, our balance sheets are very similar, so we don't anticipate any significant balance sheet restructurings to take place.

We are also pleased that our demand deposits have been very strong over the last several quarters, with our first-quarter 2016 average balance continuing to comprise about 28% of our total deposit base, while Avenue's is only slightly less, at approximately 25%. That says we are jazzed up that Avenue's average demand deposits for the first quarter of 2016 are up 18% over last year's first quarter.

These demand deposit accounts are core operating accounts that we and Avenue 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 as we approach the last nine months of the year with our anticipated strong loan pipelines.

Switching now to non-interest income, excluding securities gains, non-interest income for the first quarter increased almost 40% over the same period prior year, driven largely by our ownership interest in Bankers Healthcare Group. During the first quarter of 2016, we increased our ownership in BHG from 30% to 49%. We believe that EPS accretion as a result of the 19% ownership stake increase for this year should be around 4% and next year 4% as well.

We've 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.

Our residential mortgage group had another outstanding quarter in terms of production and yield, with approximately $164 million in loan sales this quarter at a yield spread of 3.31%. Yields were increased as a result of the [forward lockheads] that was applied to the Magna portfolio for the first time.

Wealth management was up 4.8% linked quarter, driven primarily by insurance commissions, which were up in the first quarter due to the annual incentive payments received from various carriers. 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. As noted on the slide, interchange and other consumer is up approximately 53% from last year as we continue to aggressively market our credit, debit, and purchasing cards to our clients.

Now as to operating leverage, our core efficiency ratio was 52.2%, which is good for us and compares favorably to peer groups. We believe that we'll be able to improve upon these levels of efficiency throughout 2016.

Our annual merit raise increase occurs in January of each year, and with payroll tax resets, the first quarter is typically when personnel costs increase, although this year was larger than normal due to increased headcount. We continue to expect that increased hires will drive our expense increases throughout this year, as we currently believe all other costs should be fairly stable.

I would like to highlight again that our recruiting has been exceptional this year. With all that and all of the other activity that occurred in 2015 with our franchise, we were able to recruit 14 revenue-producing relationship managers to our Firm in the first quarter, and our recruiting pipelines remain very strong across the franchise in all four markets. Our recruiting effort is very active, intentional, and we are on offense in all four markets.

As we look to the remainder of 2016, we continue to anticipate a new branch opening in Chattanooga and another in Knoxville later this year as we seek to further emphasize core deposit growth in these markets.

Our core expense-to-asset ratio was 2.37% for the first quarter of 2016, up slightly from the fourth quarter. So we obviously are operating above our operating target this quarter. The synergy case for our mergers remain in place, which will eventually help us create more operating leverage in future quarters as we fully expect to achieve the targeted EPS accretion targets in 2016 that we spoke about on the various merger conference calls.

As you may know, the technology conversion for capital market was completed in the first quarter, and we have approximately 25 positions that are set to roll off our payrolls by the end of this month. We continue to forecast the penalty for exceeding $10 billion in assets to be around $3.5 million to $4.5 million negative impact in 2017, most of which is in the last half of 2017 as a result of reduced interchange fees for the Durbin amendment, and a $8 million to $9 million impact in 2018 once the Durbin penalty is fully absorbed.

We've considered these charges when we announced the Avenue merger and continue to believe that the Avenue merger will be approximately 2% accretive in 2016 and 4% accretive in 2017, inclusive of the $10 billion threshold charges. We continue to believe the Avenue merger will occur in the late second quarter or early third quarter, once we obtain the required regulatory and shareholder approvals. To be clear, we filed this S-4 on Friday of last week, so we are anxiously awaiting the SEC's approval of the S-4.

We think we have earned a reputation for balancing investment and future growth with current-period operating efficiencies. We believe we have meaningful hiring opportunities for our franchise. But at the same time, we will guard the reputation we have built for being good operators with diligence.

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

Okay, thanks, Harold. And so I want to go back to 30,000 feet here for just a minute and talk about the strategic outlook for Pinnacle. I get asked all the time: what about going out of state.

And so I want to be clear. We believe we are going to build a $13 billion to $15 billion bank in Tennessee's four urban markets. In each market, we expect to be one of the top three banks in terms of FDIC deposits. And so you might say the Firm's strategy is to be a foot wide and 2 yards deep.

As has been the case since our founding, we rely on distinctive service and effective advice to take share from vulnerable large regional and national franchises that have previously dominated our markets, which, as you can see on the slide, are essentially the same competitors in each of the four markets.

So moving from the asset target to the return on asset target, we are currently targeting a 1.2% to 1.4% ROA. More than three years ago, we laid out our sustainable business model, which at the time called for a targeted range of 1.10% to 1.30% for ROAA. We also broke down targets for the four critical components required to produce that ROA: the margin, the non-interest income to assets, the non-interest expense to assets, and net charge-offs. And then in mid-2014, in conjunction with the 2014 to 2016 strategic plan, we increased that ROE target by 10 basis points to a range of 1.20% to 1.40%, which is where we now are.

In conjunction with the 2015 to 2017 strategic planning process, we decided to leave the ROA target as it is. But as it related to the four individual components, we decided to increase the non-interest income to average assets by 10 basis points and decrease the target range for the net interest margin 10 points to reflect the current operating environment.

So overall, the first quarter was another great quarter, at a 1.32% ROA excluding merger costs. We are right in the center of the target. And that's even with the seasonal spike in expenses that Harold has talked about and the elevated credit costs in the first quarter.

The key, of course, ultimately gets back to execution. So let me put that in perspective for you, if I can. Easily the most important aspect of execution is the organic growth model that we have been executing for roughly 15 years now.

We are hiring revenue producers at a record pace in first quarter of 2016. Our recruiting pipelines remain very robust for the remainder of 2016. We are producing double-digit organic balance sheet and core fee growth rates, and all that results in double-digit EPS growth rates.

In terms of CapitalMark and Magna, we have been -- had highly successful system and brand integrations for both those banks. They are now complete. We expect to pick up the remaining cost synergies to be realized beginning in the second quarter of 2016. I think Harold mentioned 25 headcount reductions here in the quarter.

And then we will begin harvesting revenue synergies, which we think are impactful. They weren't included in our case to make the acquisition, but we do continue to believe that we have a number of meaningful revenue synergies in both those acquisitions.

In the case of BHG, we purchased an additional 19% stake there to take our combined ownership to 49%. We anticipate at least 4% EPS accretion in 2016, and we also believe that we have got a number of opportunities to continue to expand the synergies between Pinnacle and BHG.

And then finally, in the case of Avenue, we announced that transaction in January. Harold has been through the accretion numbers there and indicated that we expect to close that transaction either late second quarter or early third quarter. And then we will have the technology conversion, which is slated for the fourth quarter of 2016.

So again, just trying to put all that in a summary format here, I would say that we have truly established a competitive distinction among bankers, which is evidenced by our recruiting success, and among clients, which is evidenced by our balance sheet growth. We have consistently produced and expect to continue double-digit organic asset growth. I mentioned the $13 billion to $15 billion asset level that we believe we can build in our four markets.

At a 1.20% to 1.40% ROA target, I would say our target is high and we consistently perform there. Similarly, for the last 23 quarters, adjusting for extraordinary items, we have had double-digit EPS growth, and we expect that to continue. At a 15.64% level, we continue to produce top-quartile ROTCE, and that's in a very high-performing peer group.

And I think the last point, which I believe is really important here, is that we've got an advantaged stock that is rationally deployed. We are fundamentally organic growers at heart. That's what we think about; that's what we love to do.

But we do have an advantaged stock. That puts us in the position to create even more operating leverage and even more EPS growth. I think Harold did a nice job talking about the growth in revenue per share and growth in EPS per share that we have been able to create.

And even though we are not out here aggressively or recklessly deploying our shares, I'm confident we will have a number of other opportunities over time similar to the opportunities that we've had over the last year or two to create even more shareholder value and turbocharge our growth rate. So I think, in simple terms, that is really how I think about our organic growth and growth in EPS and shareholder value over time.

Bridget, I'll stop there and be glad to take questions.

(Operator Instructions) Kevin Fitzsimmons, The Hovde Group.

You've mentioned a few times and emphasized it, Terry, on the call about the pace of recruiting has been as strong as you can remember and how high you expect it to continue to be. I'm just curious: can you -- how much of why it's so strong right now is deliberate?

In other words, I'm guessing maybe it's because you are new to Chattanooga and to Memphis and so that has maybe accelerated your pace for that. Or is it something about what the competitors are doing and it's leaving an opportunity open for you? If you can just give us a sense for what is driving that recruiting to be so strong right at this moment.

Kevin, that's a great question. And you hit at two things, both of which I think are impactful. There's no doubt that we have more hunting ground by virtue of being in two additional markets. And so that increases our volume of hiring.

But honestly, I would say that it's probably more about the competitive landscape than it is the new territory. And all I mean by that -- Kevin, you've followed our Company a long time and I think you understand this. I meet every Monday morning with my direct reports. So we review the Company performance in detail every Monday morning. We spent as much time on our recruiting pipelines as we do on our business development pipelines.

And so I think that's unusual versus most of our peers. I'm just trying to communicate that for a very long time, we focus on a weekly basis on the hiring pipeline, who the targeted hires are, where we are with them, what the next steps are, and so forth.

And I would say that we are having more success -- I think we have been successful at it all along. But I'd say we're having more success right now then we have versus some of the large regional banks. I do think their frustration levels are very high in several of those companies. And so I think that has turbocharged the recruiting success as well.

Terry, what is it specifically, though? I know you guys have always focused on organic growth. But some of those larger regional banks that traditionally have been easier targets for the recruiting -- it seems like just from our vantage point that they are getting more on the offensive and they are focused a little more organically. And they are healthier; they have healthier balance sheets.

So one would think that maybe the recruiting effort is a little tougher on that sense. But maybe I'm wrong. If you can just shed a little light on that?

Yes. I think part of your assertion is true, which is that the large regional banks have a better financial performance, a better asset quality level, and so forth today than they had going back two, three, four years ago. So there's no doubt there's improvement from that regard.

But again, I would just say to you I don't think the thesis changes at all because they are financially healthier. And again, I don't say this, Kevin, to disparage the large regional banks. I've been in one. It's hard to do in a large regional bank.

But, boy, there's just a lot of disengagement. The way they pay incentives, the timeliness of paying them, just how they communicate with their people, how they excite and engage them. I guess I'm really speaking to just the softer aspects of what's it like to work in a large regional bank. I suppose it might be a tick better from the perspective that the financial performance is better.

But those other things which are so important, just what's it like to work in that company, I would say they are no better today than they have been since we started the Company.

Got it, okay. Thank you. One quick follow-up on credit. I know you mentioned that the review of the auto book has driven the increase in net charge-offs. And on NPAs, specifically non-accruals, even though it's at a fairly low base, it was a pretty healthy linked-quarter increase. Just curious if you can give us a little color on what was driving that. Was it a few big lumpy things, or was it several things that were spread out?

Yes, I would say generally, Kevin, there is a concentration in a couple of bigger-ticket items. And again, I think you know and have seen this happen in the past. Literally, you can have $20 million, $30 million fall into or outside a quarter by a week or two.

And so I think in this case, we had some upgrades that we thought might be made that probably spill over into second quarter and some downgrades that we were hopeful wouldn't occur, but actually spilled into the first quarter. So again, it's a few transactions, kind of lumpy in there. But again, it doesn't feel alarming to me at all.

And nothing at all tied to energy or direct or indirect on that front?

No, nothing energy-related at all.

Okay. All right, thanks, guys.

Tyler Stafford, Stephens Inc.

I wanted to start on BHG. I know you increased the 2016 accretion guidance this quarter. But can you talk about what happened with BHG this quarter? My understanding was that there wasn't a large seasonal dynamic at play with BHG.

So was there something else? Was there some other aspect to it, I guess? And then as a follow-up, can you tell us what the originations and gain on sales were out of BHG this quarter?

I don't think there was anything significant or meaningful that would distort the timeliness of the recognition of the BHG income. I don't have all of their production statistics with me yet, so I don't know the answer to that second part of that question, either. But we weren't anticipating the seasonality, either, but it does occur.

So we were down there last week talking to the BHG people. I'll just tell you they are as optimistic as they have ever been about their business model and what kind of business flow that they've got going through their pipelines right now.

Do you happen to have the pipelines that you referenced in the press release, what they are at today? And I guess give a sense for what they were heading into 1Q or last quarter.

I'll just -- I'll say they are up, meaningfully.

Okay. And maybe just a couple questions on the auto portfolio as a follow-up. Can you give us the total size of that book at this point, what the mix between prime, subprime, new and used. And then I guess current delinquencies right now as well. Any kind of characteristics of the auto book as we stand at quarter end?

Yes. We have got about $50 million left of this used car paper remaining on our ledgers right now. I think there's about another $50 million in more traditional indirect paper that's coming from the new car dealers.

As far as delinquencies are concerned, I think we've got something like everything over 120 days has been charged off. I've probably got about $1 million over 90 right now. So they are actively working that $1 million. All that $1 million, I believe, is in that subprime group. I say subprime; it's more of the used car paper.

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

Michael Rose, Raymond James.

I wanted to look at slide 30 in the slide deck. And if I look at substandard commercial loans, can you just help us reconcile what the large increase is quarter to quarter?

Yes. I know there's a couple of pretty significant ones in that increase. I think there's one that was about $14 million and another one that's about $5 million that make up most of that increase. There may be another couple of big ones in there as well, but that's where most of that increase is.

Now, are any of those from the banks you acquired? Or are they legacy Pinnacle?

The two I spoke of are legacy Pinnacle.

Okay. And any -- because when I look at -- obviously, the statistics around Nashville and Knoxville are still very strong. So can you give us kind of a little color as to what happened there or if there's any sort of trend that you are seeing that would cause that increase?

No, I don't think there's any trends at all. I think they are just -- as Terry mentioned, it's just lumpiness coming around.

Okay. And then if I can just touch on the margin this quarter, I think in the press release, you mentioned there was some purchase accounting accretion. What was the margin next to the purchase accounting accretion this quarter?

It would have been probably about 15 basis points less, maybe 10 basis points. It impacted loan yields by 15 basis points.

Okay. And then I haven't opened up the S-4. But what are the pro forma impacts on a margin basis for the Avenue deal? [At this point].

The Avenue deal will be dilutive to the margin by a couple of ticks.

Okay. And then maybe one more from me, for Terry. You talked about the 14 people that you brought on this quarter. And historically, you talked about the pipeline. Have you sized the business that those 14 folks that you brought on could bring in over time?

Yes. Michael. I'm not sure I can tell you the number. Each one is evaluated independently. And again, I think you know enough about our hiring model; each person we hire, we have an agreement with them about what we think they will bring in year one, two, and three.

And so we expect these hires to produce similar leverage. We manage our relationship managers based on a salary multiple that they can produce when they are mature. And so we believe that all these people will hit the salary multiples that we produce out of our existing employee base.

Okay. So it sounds like maybe you've done the math. You are just not willing to tell us.

Yes, I think that's right. (laughter)

Fair enough. Thanks for taking my questions, guys.

Jefferson Harralson, KBW.

On the auto book, is there some catch-up on this, where now it's a change, we are going to charge off everything over 120 days? Or is it a lot of this deterioration happened this quarter?

Yes, I think a lot of deterioration did happen this quarter. There has been a focused effort on cleaning up that book now for, call it, nine to 12 months. And so I think we are actively reviewing that book and hopefully we've gotten at the majority of the issues.

All right. You mentioned the accretable yield was $2.6 million this quarter, I think? Is that right?

That's right.

Does that include all the principal and interest from those acquired loans or just the amount of would be excess of what you would normally bring in on those loans?

It's the excess on those loans.

All right. And how much was that last quarter? Was that zero last quarter?

No, it was about $1.6 million, I think is the number.

Okay. And I'll finish up on BHG. Can you comment on the gain on sale trends there and the pricing that's happening at BHG?

I think their pricing is pretty stable quarter to quarter. It's just a volume issue fourth quarter to first quarter. And so like I mentioned earlier, we were down there last week. They are pretty excited about what 2016 is shaping up to be.

Okay. And this might be a Terry one on the -- you mentioned your advantaged stock, but you are now in most of the markets you want to be in in Tennessee. So is it time to expand outside Tennessee? Or are you thinking fill-ins?

Yes, I think -- Jefferson, you and I have had this discussion a lot of times. I think what I would say is that I'll never say never. I can imagine there might be some day, some time when we might want to go outside the state.

But I would say this is not that time. If you look at the opportunity that we have in front of us, you've got a tremendous growth trajectory. You can grow organically at $1 billion a year in these four markets that we know well, that we have mass in, that we perform well, and in which we have operating leverage, in which we are able to hire people at a dramatic pace. So it just doesn't feel like the time I want to figure out how to go to Virginia or Georgia or North Carolina or whatever it is.

So I don't want to say that we'd just never do it; I can imagine there might be a day and a time. But I wouldn't want you to exit this call thinking, hey, those guys are trying to work something out to enter other markets besides Tennessee, because we are not working on that right now.

Got you. All right, thanks, guys.

(Operator Instructions) Andy Stapp, Hilliard Lyons.

If I adjust BHG's 1Q 2015 results by adjusting for a full quarter and your increased ownership, it looks like their earnings were down year over year. Is that the case? Or do I need to take another look at my math?

Well, I think we ought to take another look at the math. They ought to be fairly close to flat. We acquired BHG in the first part of February last year and then we acquired the 19% in the first part of March of this year.

Right.

So it ought to be fairly close to flat.

Okay. And could you provide some color on the linked-quarter increase in gains on sale of loans as well as the growth prospects for this line item?

Yes. That's all mortgage, residential mortgage. They had a great quarter again with production, and I think it was fairly balanced between new purchases as well as refi business.

Okay. What type of growth should we think of going forward in that line item?

Well, I think as long as rates are where they are, particularly on the 10-year, then they will have a steady flow of business. I know that our mortgage guys are hiring people in Memphis and Knoxville and Chattanooga right now, so we've got some volume increases we will expect out of these new hires.

Andy, I think generally, as you would guess, that's a pretty cyclical thing.

Right.

And principal selling activities pick up in the second and third quarter and tail off in the fourth and first quarters. So again, we'd be optimistic on the outlook of that business going forward.

Okay. And were there any unusual items in other noninterest income and other noninterest expense? Are these line items good run rates?

I would say they are probably pretty good run rates. There's a variety of things going on in there, but I don't think there's anything that's of significance or consequence.

Okay. And you have been guiding for the past several quarters for low double-digit loan growth. With the success you've had in attracting revenue producers, might this be conservative, you think?

Well, I don't know. I think we ought to just stick with the guidance that we have. We will produce low double-digit loan growth for the foreseeable future.

Okay, great. Thank you.

Stephen Scouten, Sandler O'Neill.

I had a couple maybe tie-up questions on some of the things that have already been asked. Maybe following up on that loan growth question from Andy, the $1 billion for the year -- is that still a number you think you can hit? And as you use your basis for that number, would it be the $115 million of organic growth or what it kind of be the net -- the $248 million including the purchases?

Well, let me talk about the $115 million in net growth during the quarter. If you go back and look at last first quarter, I think we did $55 million in net loan growth. So we did 2X that run rate. If you go back and look at the first quarter of 2014, I think we did $37 million.

So, while I know to you, you are looking at it and saying, okay, linked-quarter average to average, it looks like 7%. Man, I am looking at it and say it's a whale of a first quarter; it's 2 to 3 times what I've done the last few first quarters. And so that, again, would cause me to be extremely optimistic.

I think the $1 billion in growth -- I'm not necessarily tying that to the, okay, I did $115 million in the first quarter, therefore here's the math. What I would say is that is what our planned growth rate is and we are running ahead of plan.

Okay. Yes, that's great. I appreciate that. And then another thing on the balance sheet here -- it looked like there was a pretty big jump in your securities balances in the quarter and also a really nice increase in the yield on taxable securities. So anything unique there or any kind of change in strategy or extending duration? Or what's going on there?

Yes. I don't think there's any kind of change in strategy on the municipal book. The jump in the bond book was primarily attributable to public funds and those balances coming in towards the end of the year, so we had to get them collateralized with securities.

Makes sense. Okay, and then maybe jumping back to BHG for second, I know there has been a lot of questions around trying to figure out what the potential of that group can be. But with no major seasonality and the increased investment, can you frame up a run rate at all of what you think that might be?

Is it $9 million to $10 million kind of a quarter revenue opportunity? Obviously, it was kind of lumpy in 2015 and there's some partial quarters in there. So anything you can do that would give us an idea of what you think this can be on a dollar basis?

Well, I think if you go back and look at the fourth-quarter call, and I think we reported something like $70 million in pre-tax or something like that for them, they think they are well into that range this year. And think they will be able to beat that number.

Okay. That's helpful, thank you. And then maybe one last one from me is just thinking about your exposure to construction lending and these new HVCRE guidelines and you guys screen relatively high on that scale, especially with some of the impact to the acquisitions.

So any regulatory impact there with these HVCRE guidelines and anything that you are going to do differently as it pertains to growing that portion of the loan portfolio?

Yes. That's a great question. We've obviously had a lot of discussions with our regulators over the last six, nine months. But I don't think there's any strategic change in what we're going to do with respect to that.

Harvey White, you know, has done an admirable job in making sure that we are hitting on all the points with those new regulations. So I think it's steady as she goes and we are still going to focus on that commercial real estate book.

Okay, great. Well, thanks for taking my question, guys. And congrats on the great quarter and all the new hires.

Brian Martin, FIG Partners.

Just a couple last things here as well. Just going back to BHG, Harold, anything on just with the first-quarter seasonality, just as far as the remainder of the year, is it more flattish by quarter, if we think about it? Or is it will you still see some seasonality with increases in the second and third? Or just any thought on that as far as going back to seasonality.

Yes, I think what will happen is, like I said, they posted like $70 million in pre-tax last year. They are pretty confident they will be able to beat that number pretty good this year. And they've ramped up on the sales side, so they have got more people in chairs. They feel like the brand is getting a lot better recognition around. So I think if I were in your shoes, I would be counting on an increase in that $70 million this year and just plan for it accordingly.

Okay. And then just on the expenses, I know you talked about all the new hires. Not sure how many of them were in there for what part of the quarter. But you are also getting the synergies at the 25-person headcount.

So still the thought would be that expenses are higher second quarter versus first quarter on the salary line, just maybe not as much of an increase with the new hires, given the headcount reduction?

Yes, there ought to be an offset with the integration of the CapitalMark synergy case coming online at the end of April, for sure. Also, the payroll tax reset was probably about an $800,000 number here in the first quarter. So that ought to go away here fairly quickly.

So yes, we are not counting on any big upticks in expenses, other than when these new hires come onboard as we bring them in the second, third, and fourth quarters.

I got you. Okay, all right. And then just last two -- just as it relates to NIM and Avenue, the guidance range -- can you remind us again what the guidance range is on NIM? And just -- it sounds like -- is it 3.70% to 3.90% or do have that wrong as far as what your target range is?

Yes, we think this year we ought to be in the 3.70% to 3.90% when Avenue comes onboard. You are probably looking at anywhere from 2 basis points to 5 basis points in dilution.

Okay. All right. And then just lastly was just on the credit leverage, just given the somewhat of a drawdown in the reserve this quarter. Just any thought as far as additional credit leverage going forward or just how you are thinking about that?

Yes, we still believe there's credit leverage in our reserve accounts. This quarter was obviously one where we had to think about that car, the automobile loan portfolio. But we still believe there's additional credit leverage that we can harvest over the rest of this year.

Okay. All right. That's all from me, guys. Thanks and nice quarter.

Jefferson Harralson, KBW.

I meant to ask you the first time on the loan purchase. It sounded unusual, where you are hiring lenders and then also purchasing loans, presumably from the institution where they were. So was it that the lenders came over and then you went to the bank and offered to buy them? Or how does it -- it seems unusual. How did this come about?

I think you know we hired a group from Cadence. Cadence had a commercially oriented group there. We hired that group. And I think -- and Cadence probably has a desire to leave the Memphis market. I'm not their spokesperson. But again, you could check with them on their rationale. But again, I think they would want to exit the market. So we were able to, after lifting out the lenders, just go ahead and buy the book as opposed to wait in there and try to take it over time.

Got you. All right, thanks, guys.

I'm not showing any further questions. This does conclude the Q&A portion of the call as well as the conference call. Ladies and gentlemen, thank you for joining. You may now disconnect. And everyone have a great day.