Good morning, everyone and welcome to Pinnacle Financial Partners' second quarter 2016 earnings conference call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer and Mr. Harold Carpenter, Chief Financial Officer. Please note, Pinnacle's earnings release and this morning's presentation are available on the Investor Relations page of their website at www.pnfp.com. Today's call is being recorded and will be available for replay on Pinnacle's website for the next 90 days. At this time, all participants have been placed in a listen-only mode. The floor will be open for your 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 factors that may cause the actual results, performance, or achievements of Pinnacle Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond Pinnacle Financial's ability to control or predict and listeners are cautioned to not 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. We appreciate you joining us here this morning. For several years now, I have tried to begin every earnings call with a dashboard which is intended be a quick look at earnings growth, revenue growth and asset quality, the three metrics that we believe are the most highly correlated with share price over time. This quarter we are starting with the GAAP results and we will talk about results excluding merger-related charges and other items that we have excluded for the last several quarters here in just a minute. Those of you been following our firm for any length of time know that one of our primary objectives has been to grow the core earnings capacity of the firm and so for that reason to eliminate things like gains and losses on security sales and merger-related expense is really a better way for me to gauge how well we are building that core earnings capacity than just a simplistic review of the GAAP measures. So as you see here, we are blessed again with another great quarter. Topline growth continues to be excellent. In second quarter, revenues excluding securities, gains and losses were up 51.1% year-over-year and up roughly 8% on a linked quarter basis. Bottomline, our fully diluted EPS, net of merger-related charges, was $0.75, up 17.2% year-over-year and excluding merger-related charges, earnings as a function of tangible common equity were 15.64%. That's consistent with last quarter and up from the 15.44% in the same quarter last year. Moving to the second row of charge, generally focusing on balance sheet growth which for companies like ours is the primary basis for our future revenue and earnings growth. Loans were up $263.5 million in the quarter. That's an annualized growth rate of 16.8%. Core deposits…

Thanks, Terry. For those of you that have followed us over the years, you know that we pay attention to expenses but we focus on revenues and how to grow our topline as it's our belief that topline revenue growers that can leverage growth with increased earnings will be rewarded with outsized multiples by the markets. This chart gets at that in some detail. 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 and tangible book value per share is obviously much more difficult if this line will flat or down. Our trailing four quarter revenue per share is around $9.55, which is up 26% from the previous trailing four quarter period. Excluding margin charges, our trailing four quarter fully diluted EPS is approximately $2.81 a share, up almost 22% from the previous trailing four quarters. So we believe our firm has performed admirably and transferred revenue growth to bottomline results. That said, this organization has undergoing 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 and manageable change. Avenue recorded approximately $9 million in net interest income and $1.1 million in fee revenue in the second quarter. A very simple pro forma analysis would be that Avenue generated $2.70 in revenue per share in the second quarter of 2016, based on the approximately 3.76 million PNFP shares we distributed to their shareholders on July 1. Thus Avenue should be helpful to our revenue per share metric going forward. Concerning loans specifically, as the chart indicates, average loans for the quarter were almost $7 billion. Second quarter ELP June 30 loan balances are…

Okay. Thanks Harold. So here it is. We have been attempting to build a $15 billion bank in Tennessee's four urban markets. To do that in each market, we will most likely be one of the top three banks in terms of FDIC deposits and we continue to believe that we can do that. But I just want to say that we have now, with Avenue, crossed the $10 billion threshold and we are the midst of our annual strategic planning effort which we hope to conclude before our next earnings call. During this process, I think you should expect our Board and management to review all our accomplishments, explore our opportunities, particularly areas where we believe we have got an advantage. We will be looking at our tactics for continued long-term organic growth, our long-term operating metrics which we established several years ago, our expansion plans in Tennessee and evaluate expansion into other high-growth markets in the Southeast. So again we will look forward to concluding that planning process between now and next quarter-end. I just want to focus for a second strategically on our sustainable business model. We, I guess, published that more than three years ago in addition to express an ROA target, we have broke down targets for the full critical components that are required to produce a satisfactory ROA. In other words, the margin, the noninterest income to assets, noninterest expense to asset and net charge-offs. We have adjusted target ranges for several of the components a couple of times, generally to maintain or increase ROA objective. As you can see, we are currently operating in the high-end of the ROA target range of 1.36% and as Harold hit at earlier, I do think it's an important distinction for our company that what's driving that…

Thank you, Mr. Turner. The floor is now open for your questions following the presentation. [Operator Instructions]. Our first question comes from the line of Stephen Scouten with Sandler O'Neill. Your line is now open.

Hi. Good morning, guys. How are you doing?

Good. How are you, Stephen?

Doing well. Thanks. I just wanted to follow up with one quick question on the indirect auto subprime portfolio there. It sounds like you wouldn't expect any more elevated charge-offs like we have seen in the last two quarters, but I was kind of that viewpoint last quarter as well. I think Harold, you had mentioned last quarter there was about $1 million in 90-day delinquent loans at the end of the quarter, yet we saw about $4.1 million in charge-offs. So I guess how can we think about future charge-offs from that remaining $43 million and what that might look like in the next couple quarters?

Yes. I think what we are modeling, Stephen, is that the charge-off rate on that book ought to come down maybe as much as half for the rest of the year, maybe 60% of what we have seen here in the first part of the year. We have changed some policies with respect to charge-offs and got more aggressive on some of that paper that we had acquired. And so again, I think we are going to looking at 50% to 60% of what we have seen in the first of the year being charged off in the second half of the year.

Okay. That's helpful. And Terry, I know you said you felt pretty good about getting to that to 2.30% expense to average asset threshold maybe as soon as next quarter. Can you give me a thought on expenses? And what's really going to drive that? Obviously because the Avenue cost saves aren't really going to show up till 4Q. So is that just growing revenues faster than expenses? Or could salaries actually come down since you had the cash bonuses here in the current quarter?

Yes. To be clear, let me go back on the cash bonuses, just to make sure you get that. That accrual is a function of what our projections are versus targets that are set before the year begins. And so we accrue that incentive over the course of the year in order to be in a position to pay it out in January. And so in the case of the first quarter, our forecast was that we would be below that targets that were set for 100% payout on that plan which might tell you something about the level of those targets. But in the second quarter, we believe that we are in a position to hit the targeted payouts. And so what you have there in the second quarter is not only a 25% increment to the incentive accrual for the quarter, but also the catch-up for the first quarter. And so you got outsized growth there on that expense line item, which would likely more resemble the targeted payout in the third and fourth quarter. So again just trying to get clear with you on how that expense grew works on incentives. I think as it relates to what causes the expense to asset ratio to come back in line, as you know and we have tried hit at all the time, we have a fabulous expense run rate here. As a company, we operate at 2.20% or so, 2.30%, call it 2.35% versus peers. That's a very effective expense ratio, but our focus isn't to manage the expenses, it is to drive the topline which would drive the topline largely through balance sheet growth. And so again, just to try to get into what causes that to come back in line, is primarily the speed of the asset growth and the revenue growth associated with that. And again you might think of it in terms of an efficiency ratio, even though the expense ratio to asset was high, the efficiency ratio continued to decline which again I think is indicative that we have operating leverage and grow the revenues faster than the expenses.

Yes. Absolutely. That makes sense. And maybe one last one for me. One of your industry peers, I guess, had a call just before you, is talking down there growth. You seem to be pretty confident in your release about the rate of growth that you can consistently deliver. Any pushback from regulators, given your CRE exposure and maybe C&D exposure in particular which has been growing over the last few quarters? Any comments or clarity you can give there?

Well, I might just go at it this way, Stephen. As you know, we are not permitted to talk about whatever conversations we have regulators specifically, but I will just say this. The two principal threshold that people look at are the 100% threshold and the 300% threshold for construction and for total CRE. And as you know, we are inside those parameters today and I think broadly, you should expect that we will continue to operate around those thresholds. I do not want say that there will never be a day when we tick above that. But just fundamentally, we intend to operate near the 100% and 300% guidelines. That said, I think you know this, those are not regulatory caps or guidelines and what regulators expect is if you exceed those guidelines that you have some elevated level of risk management, some elevated level and ability to monitor and stress test cash flows, vacancies and those kinds of things in those books. And I believe that we have elevated risk management procedures that would be satisfactory, were we operate above the 100% to 300% threshold. But again, I think you ought to just expect over time we will operate right there in that range.

Perfect. Thanks for all the color and congrats on another good hiring quarter as well.

All right. Thanks Stephen.

And our next question comes from the line of Jennifer Demba with SunTrust. Your line is now open.

Thank you. Good morning. Two questions. On the hiring you did in the second quarter, can you give us a little more detail on how many and what types of hires they were? And then my second question relates to BHG. Just, Terry, wondering if you could elaborate on the growth opportunities you in different product areas that could possibly be pursued in the future.

Okay. I will comment quickly on the hiring. Jennifer, I don't have a breakdown here in front of me, so I will just give you a broad color without specifics here. We are hiring across all key revenue producers, meaning that in the quarter, the largest concentration of hires would have been financial advisors or maybe the term you would use is relationship managers and within that category, probably concentrated in middle market commercial relationship managers. In addition to that, we continue to hire mortgage originators. We have hired folks in the wealth management lines for trust and brokerage. And so, it's pretty broad-based hiring and we are having success in each of the four markets. But I would say, generally we are having our greatest success in Nashville right now.

Jennifer, I will just follow up with Terry on that. What we talk about are the revenue producers which were the 29 folks. There is probably another 40 or so that are in nonrevenue positions that have also been hired in the first half of the year. So I just want to make sure everybody understands that we try to go in there and just talk about or disclose those guys and those women that are going to be bringing revenues to the firm.

Jennifer, I hope that gets and you can feel free to follow-up, ask further questions, but that's the color on the hiring success in the second quarter. In the case of ongoing opportunities with BHG and I think you know this, we currently have an arrangement with them where they distribute our credit card as an affinity card to their clientset. I want to say that over the last 12 to 15 months, they have generated something on order of $150 million in commitments and $60 million to $65 million, I think, in outstanding balances. And so that's an example of the kind of thing we are talking about where we can take some product that's useful and helpful to their clientset, push it down through their sales distribution and be the direct beneficiaries which we are in the case of the credit cards or the indirect beneficiaries as we are in the case of the other loans that they generate produce gain on sale and we share in that revenue stream. In terms of the other kinds of things that we talk about, we believe we have opportunities to perhaps distribute insurance products down to the doctors' practices. That again, I am not telling you we are going to do that, I am just trying to give you some sense of the kinds of things that are being talked about and that we are researching. So we believe there might be an opportunity there. And then the thing that's most exciting to me personally is if we can figure out how to distribute operating accounts. In other words, controlled checking accounts, operating accounts to doctors' practices across the 44 state franchise. That would be a powerful thing as well. So we are having dialogue about that kind of thing too. So again, Jennifer, I want to be clear. We are not trying to oversell the future capabilities. I love what we have. If it continues like this, it will be a fabulous investment but I do get excited about the incremental opportunities that we hopefully can produce.

Thanks very much.

And our next question comes from the line of Tyler Stafford with Stephens Inc. Your line is now open.

Hi. Good morning guys.

Hi Tyler.

I wanted to start on BHG coming at it from a credit perspective. Harold, I know in the past, you have talked about these loan being nonrecourse, but can you talk about the put back risks to BHG from the purchasing banks and walk through any kind of hurdles that have to be met in order for them to put those loans back to BHG?

Sure. Well, first and foremost, management of BHG and the Board of BHG has to approve any kind of substitution that may go on there, but basically let me to just start at the top, the documents are real clear. BHG sells those loans without recourse. But what they do in order to create a good business with the funding side of these community bank network is they will substitute a loan for a loan that may look to be deteriorating in credit quality. And BHG has certain processes and procedures they follow with respect to that. And if the community bank follows those procedures then BHG, if they believe that community bank is in good stead with BHG, they will go through the substitution process. I think in May or June, I can't remember the month, there was about $1 million in substitution. I think in one month, there was maybe $600,000 that I saw. But all of those have to be approved by the Board. And again the bank that is asking for the substitution has to follow procedures with respect to is it within five days or be it 90-days past due and all those sort of thing. So BHG does that only because they want to keep that community bank funding network active. So I don't know if that gets at it, Tyler, but yes.

Yes. No, that's helpful. What are the typical reserves that BHG has on those credits and remind us what the loss rates were prior cycle?

Well I will just say this, thus far this year, they are running at about 2% loss rate. They keep about 3% in reserves, while there is a 3% cash reserve that they maintain for every loan that's sold to a community bank and then there is another allowance for loan loss reserve they keep on their own balance sheet to cover any losses as a result of the substitution process. They also have other products with various banks where they share the credit risk on some, but that's probably about 5% to 10% of their business volume. So it's not a big component.

Got it. Okay. And then maybe just for BHG for the quarter. Do you have what those origination were and any material change in their gain on sale margins?

I know the spread is still running about 8% to 10% of the business flows and I have got it somewhere, Tyler. I will get it to you. But last year they did $450 million some-odd in originated credit. If they hit their numbers this year, they will see a nice little increase in that number. So, so far so good this year. It looks to be they will outpace last year.

Okay. And then last one from me, just on the margin. Can you hit the accretion impacts this quarter and last quarter? And then just high level, are you still thinking two to five bips margin dilution from Avenue next quarter? And I will hop out. Thanks.

Yes. I think for Avenue, it is probably going to be that. We don't have all the purchase accounting issues wrapped up on Avenue yet. So we still think there is going to be two to five basis point dilution to the margin. First quarter, we had 20 basis points or so in purchase accounting accretion on the margin. Same thing in the second quarter. So with CapitalMark and Magna's numbers coming down, those numbers will come down too. We have still got, I think about $18 million worth of purchase discounts with respect to Magna and CapitalMark, of which about $15 million of that is accretable into the yield. So there is still quite a bit left to go with respect to CapitalMark and Magna. We think Avenue is going to end up being $10 million to $12 million in purchase accounting adjustments as well.

Maybe one more then. Do you have how much you have recognized so far from CapitalMark and Magna?

It's been about $10 million.

Okay. Great. Thanks guys. Very helpful.

All right.

And our next question comes from the line of Jefferson Harralson with KBW. Your line is now open.

Hi guys. Thanks. I will ask a bit of the issue on as well. We saw a lot of buildup throughout the year of seasonality in BHG, but we had such a big increase 1Q to 2Q this year. Should we see a similar seasonal increase as we go throughout the year? Should we expect those originations and sales to increase throughout the year?

Yes. We are not expecting them to throw a third quarter at us at the same growth rate 2Q over 1Q. I think they are going to be pretty steady here out for the rest of the year. We think they will outgrow us in 2016 compared to 2015. I think their pipelines look good. I think they have hired some people on the front line. So it's going to be a good year for BHG.

Okay. So I hear from that maybe higher, but the same growth rate, most likely.

No. You won't see the same growth rate between 2Q and 1Q.

Great. Okay. All right. Thanks a lot.

And I am showing no further questions at this time. Thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.

Hold on.

I am sorry. I do see another question in queue. We now have Tyler Agee with Hilliard Lyons. Your line is now open.

Hi. Good morning, guys.

Hi Tyler.

Sorry about getting there at the end. I just had some question on the linked quarter decline in securities yield and given the flattening of the yield curve, what are your thoughts regarding purchase of securities?

Yes. We are only going to maintain that bond book, Tyler, just to kind of keep up with collateral for public fund deposits. You should not expect us to grow our bond book at all.

Okay.

We will have some incremental impact because of Avenue. They will come on, those bonds will come on ours, but I think we are in the process today of doing several transactions to restructure and get their bonds or the portfolio look a lot like ours today. So there's some things we can do to enhance yields from that.

Okay. All right. That's all I had.

And our next question comes from the line of Brian Martin with FIG Partners. Your line is now open.

Hi guys.

Hi Brian.

Just one follow-up, Harold and then a separate question. Just on the accretion income this quarter, just the dollar amount of the accretion income, I think last quarter you had said it was about to $2.5 million, this quarter was at a similar amount or just could you quantify that amount? I kind of missed that.

This quarter, it was about $4 million.

Okay. So this quarter it was $4 million. Okay. And then just the other fees in the quarter, when you look at the fee income in total and you just drill down to the other line item, the catchall, that was pretty significant on a linked quarter basis. So just could you guys cover what was in there? Was there anything unusual? Is it pretty sustainable? I know you talked about the swap fees, but just the other line item in particular.

I think there is about $1 million in there that's kind of, you might call it in a recurring nonrecurring bucket. So a couple of transactions hit in there that were helpful.

Okay. And then just maybe the last thing was just maybe, if Terry can just give a little color about just kind of the Nashville market in general as far as the commercial real estate, just the kind of the temperature that market? Is it getting overheated? Is it still at a pretty nice level? Or just any commentary just in general about the Nashville market would be helpful.

Yes. I don't think there is any doubt that Nashville has been a hot market for some period of time and there continues to be a lot going on in the market. I think if you sort of begin to break down categories and think about what drives the growth and so it is credible that it still have legs and for my own judgment would be that the market still a pretty good leg. And here is why, one a broad category of CRE is hospitality. We are adding a lot of hospitality rooms and so you might look at a glance and say, my goodness, they are bringing on a lot of rooms. What we call that is that going to work overtime. The reason for that is or the catalyst that is that we have a new convention center here, which has been extraordinarily successful and frankly has only been limited by the unavailability of hotel rooms and so tourism is running at a record pace here. And so again, obviously for me, hospitality would be an area within commercial real estate that would require the greatest caution any day any time. But again, I am just trying to say that there is a catalyst that underlies that incremental capacity and it seems to make sense. And again I think, folks who have been into this market to specifically evaluate that have generally left with same feeling I am describing. In other words, it's rational expansion. Then we start looking at the other broad categories there. When you are talking about office space or warehouse space, any of those kinds of things, the vacancy rates here in Nashville for office are 5.5% or something like that. So there is room for more there. And so again, you…

Okay. I appreciate the color. Thanks, Terry and nice quarter guys.

All right. Thanks Brian.

I am showing no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day. End of Q&A