Good morning, everyone, and welcome to the Pinnacle Financial Partners’ Second Quarter 2015 Earnings Conference Call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer; and Mr. Harold Carpenter, Chief Financial Officer. Please note, Pinnacle’s earnings release and this morning’s presentation are available on the Investor Relations page of their website 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. At this time, all participants have been placed in a listen-only mode. The floor will be opened for questions following the presentation. [Operator Instructions] Before we begin, Pinnacle does not provide earnings guidance or forecasts. During this presentation, we may make comments which may constitute forward-looking statements. All forward-looking statements are subject to risks, uncertainties and other facts that may cause the actual results, performance or achievements of Pinnacle Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond Pinnacle Financial’s ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks is contained in Pinnacle Financial’s most recent Annual Report on Form 10-K. Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to the comparable GAAP measures will be available on Pinnacle Financial’s website at www.pnfp.com. With that, I am now going to turn the presentation over to Mr. Terry Turner, Pinnacle’s President and CEO.

Thank you, operator. Good morning. As we have for a good number of quarters now, I want to begin here with a dashboard of the key valuation drivers. Our basic thesis for consistently driving our share price higher is that over time revenue growth, earnings growth and asset quality are the three most important valuation drivers. Also through good times bad companies that consistently grow book value per share grow share prices and so for quite some time we’ve been providing quarterly dashboard to highlight our progress on these key valuation drivers. The top row of graphs shows real revenue and earnings growth with a 19.2% revenue growth rate year-over-year in the face of pretty stiff volume and margin headwinds. Core earnings at $0.64 was a record high, it’s the 17th consecutive quarter of increasing EPS, which was up 30.6% year-over-year. And from a profitability perspective our return on average assets, which is not on the slide, was 1.44%, and our return on tangible capital which is on the slide is at 15.39%. I’ll expand further on our profitability and our sustainable business model in just a minute; but obviously revenue growth, earnings growth and profitability continue to be very strong. As you can see on the second row of graphs, we’re getting outsized balance sheet growth with end of period loans up 11.9% for the second quarter of 2015 compared to the same quarter last year. That’s a rate of organic growth consistent with what we’ve sustained over the last three to four years now. You can also see that we’ve increased average transaction accounts by 18.8%, using that same year-over-year comparison, so the transaction accounts now represent 51.4% of total deposits. While it’s not on the slide, I just might comment that during the second quarter of 2015,…

Thanks, Terry. Our second quarter 2015 net interest income was up approximately $562,000 over the first quarter. This was primarily due to expansion of our average loan balances. As to our margin, our margin declined this quarter to 3.65% with a decrease in several factors. First, we continue to reduce our floored loan portfolio, which we will speak to in just a minute. This year we have also experienced a meaningful increase in client back-to-back interest rate swap activity, where the client will agree to a fixed rate loan, and we record through a counterparty of floating-rate credit. Substantially, all of these credits were LIBOR-based credits and as a result helps our asset sensitivity goals, but does lower current period yields. Regarding the bond book and cash balances, as the cash proceeds from our investment portfolio are received, as well as the need to increase our bond book to support our public fund deposit base, we continue to invest in shorter, lower yielding instruments. We have begun to reevaluate this position somewhat as we look at various economic forecasts and intermediate-term rates. We also managed to hold slightly more cash and Fed funds this quarter and last quarter, which tended to dilute the second quarter margin. Even though our margins may fluctuate, we focused our efforts on growing net interest income by growing our customer base in our market, while at the same time maintaining appropriate profitability thresholds. Concerning loans specifically, as the chart indicates, the average loans were $4.7 billion, which was year-over-year growth of 11.9%. EOP loan balances are higher than average balances and our sales pipelines remain strong for the remainder of 2015, and at this point, we expect strong loan growth for the remainder of the year. As to loan yields, our loan yield decreased 4%…

Thank you, Harold. We’ve had a lot going on over the last several quarters. So I want to conclude by taking us back to the big picture. First of all, we’re simply executing a long-term growth plan, I think it’s been discussed pretty openly for quite some time. Number one, we’ve launched a higher-profile CRE line of business. Of course, we’ve always been in the CRE business, but a meaningful part of our CRE exposure is owner-occupied, which is really more of a C&I risk. And we’ve also had relationships with many of our markets’ key developers for quite some time. We’ve never emphasized the commercial real estate segment to the extent that we have the C&I segments. So that’s really what we’re talking about here is escalating our CRE business to match the thrust and position that we established in the C&I business. We’ve made four critical hires necessary to build out a sophisticated CRE capability over the next several years, targeting our markets’ best developers. Although, our guys have contacts all over the Southeast, is really our intent to dominate this business among Tennessee’s best developers. Additionally, we have reenergized and refocused our residential lending capability with several key hires there as well. And so we’re having great success building a dominant position in the CRE business just as we built the C&I business. We’ve hired high-profile bankers that are quickly consolidating their developers and their builders to Pinnacle. Number two, geographic expansion, you know that Chattanooga and Memphis have long been targeted markets for us. They’re urban markets dominated by the same large regions with whom we compete, Nashville and Knoxville. We believe those two markets could represent $3 billion to $5 billion of assets for us. We’ve made our play in both markets and once both…

Thank you, Mr. Turner. The floor is now open for your questions. [Operator Instructions] Our first question comes from David Feaster of Raymond James. Your line is open.

Hey, good morning, guys.

Hey, David.

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

Yes, David. I’ll speak to that in two ways. First of all, with Magna and CapitalMark, we think that from a ratio perspective we will see some uptick in the expense to asset ratio and the efficiency ratio, but it won’t be significant. As to the core bank, we don’t really expect to see any meaningful increase in other expenses. We’ll probably see some increase in ORE expense going into the third quarter, but other than that we should be fairly stable with respect to all other expenses other than the compensation line. We expect compensation will increase. We think it will increase ratably over the remainder of the year, as these new hires come onboard.

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

David, I couldn’t quite get all that questions, but if I understand, you want us to comment on how the integration is going and the progress that we’re making with the lift-out, is that it?

Yes, that and the new hires.

Yes. Okay, well, I would say quickly that, we’re excited about the progress in both the banks. Let me start with what’s going on with them. I think CapitalMark in particular had a whale of a second quarter. And it would appear to us as a really outsized balance sheet growth than would lead us to believe that our synergy case is – I would say, they’re performing at a pace that would indicate, it’s probably better than what we assumed as we built our regional synergy case. Magna is also performing better than the budget for balance sheet and earnings growth, which we used in forming our – developing our synergy case. So we’re excited. I think, we commented in the press release specifically that we think it is a great tribute to the folks in those banks that they’re continuing to outperform their original projections at a time that where they’re going through a transition. We’ve begun integration process. We’re holding orientation sessions for all the associates. I don’t know, I’d say, we’re 35% to 40% of the way through that process. And I think we’re building great excitement in both companies. I think in terms of the lift-out in Memphis, if you’ll remember, we announced that acquisition, I mean that – not acquisition, but that lift-out, whatever it is, 90 days ago or so. During that period of time, we’ve located office space; we’ve leased it; we’ve filled it with furniture; we’ve trained people; we’ve oriented people; we’ve made application to operate our loan production office, as well as the deposit taking office; we built all the procedures to do that; we got systems up and running. They are, in fact, opening accounts both on the loan and deposit side in those offices, and the pipelines are building rapidly. And so we’re excited about the progress of the lift-out team as well.

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

Yes. There are several points in there. They’re having an outstanding sales year. Their volumes are up meaningfully over last year. So, I think, that’s why we think we’re going to be on the high-end, if not, exceed our high-end – or the high-end of our forecast. So it’s all about volumes and they’re really churning a lot of good product this year. As to revenue synergies, we continue to position our credit card book through that distribution channel. Those volumes are also growing. So that’s been a really good thing for Pinnacle as well. Future revenue synergies are likely or what we’re looking at is around deposit products and trying to understand what we might be able to position with their client base with our deposit. And so that’s an ongoing process. A lot of people are involved in thinking about that and how to best do it, so that we can try to get some return off of that. But that would be kind of the – that’s kind of what’s at the top of the list of trying to get accomplished as far as future revenue synergies.

Okay, great. Thanks, guys.

Thanks, Dave.

Thank you. Our next question comes from Andy Stapp with Hilliard Lyons. Your line is open.

Good morning.

Hi, Andy.

Hi, Andy.

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

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

Right.

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

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

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

Okay.

Does that makes sense?

Yes. And what are your debit card fees, I don’t know if you have this, including CapitalMark and Magna?

You want total?

Yes.

Okay. Hold on just a second. This year so far it’s been about $3 million, that’s without Magna and CapitalMark.

Right.

So we’re anticipating with CapitalMark and Magna, and looking forward the next to three years of getting over the $10 billion threshold that we’re looking at probably a $4 million to $5 million hit on debit card, if that’s what you’re alluding to.

Yes, yes, yes. Exactly, okay. And last question hop back in the queue. What’s the head count for the capital markets group?

Capital markets group currently has two people.

Okay. All right, thanks.

Thanks, Andy.

Thanks, Andy.

Thank you. [Operator Instructions] Our next question comes from Tyler Stafford of Stephens. Your line is open.

Hey, good morning, guys.

Hey, Tyler.

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

Yes, Tyler, this is Harold. We’re kind of in the throes of trying to understand – to say, we think we’ve vetted all the issues associated with being a $10 billion bank would be a real overstatement. We’re not – we’re going into this, trying to not be naive about it. We’ve talked to a handful of software vendors related to the topic. As you might expect, we’re getting – we’re fielding a lot of calls from boutique consultants to help us get over the $10 billion threshold. But we think we’re two to three years away from it. And so we’re not in the near-term about to engage a consultant that is wanting to try to get us through the first phase or the second phase or whatever. I think, I’ve read quite a bit of commentary from some others that are in a similar position as us. I think we’ll probably respond similarly as the other banks are responding. We will continue to learn and educate ourselves. We’re looking, as I said, we’ll probably go ahead and sign some contracts related to software vendors. And so we’ll see some marginal uptick in technology costs. But we’re not about to go out there and start trying to accomplish the – all the DFAST stress-testing requirements until we’ve had a lot of conversation in both internally and with regulators as to what they’re going to require. Our hope is and maybe that’s all I can say is our hope is that overtime, the cost of compliance will come down, as will the requirements of what the regulators are looking for from a bank that just steps over the $10 billion threshold. We know that the requirements of $40 billion bank aren’t nearly the requirements that they have for $10 billion bank, if that makes sense, so…

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

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

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

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

Okay. Thanks, guys. I’ll hop out.

Thanks, Tyler.

Thank you. Our next question comes from Brian Martin of FIG Partners. Your line is open.

Hey, guys.

Hey, Brian.

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

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

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

So I don’t think there’s any changes. I’m hopeful that we’ll be in that 9% or closer to that 9% number.

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

Yeah, once you apply the accounting rules, we’re probably looking at reserve of somewhere around 105 to 110. That said, we still believe that the core bank has credit leverage left to harvest at least over the next say one, two years.

Okay. All right, and then, maybe just one last housekeeping. The increase, Harold, in the other fee income lines this quarter, is there anything that’s kind of non-recurring in that or is it just things are going to be volatile quarter-to-quarter, and it’s not necessarily a good run-rate, but just any thoughts there would be helpful?

Now, are you looking at the investment gains, Brian, or…?

No, just the kind of the other line that, in that fee income.

Yeah, I don’t think there is anything unusual. I’m not aware of anything unusual, I’ll say that.

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

Thanks, Brian.

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