Good morning, everyone, and welcome to the Pinnacle Financial Partners Third Quarter 2017 Earnings Conference Call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer; and Mr. Harold Carpenter, Chief Financial Officer. Please note, Pinnacle’s earnings release and this morning’s presentation are available on the Investor Relations page of their website at www.pnfp.com. Today’s call is being recorded and will be made available for replay on Pinnacle’s website for the next 90 days. At this time, all participants have been placed in a listen-only mode. The floor will be opened 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 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 reconciliation of the non-GAAP measures to the comparable GAAP measures will be made available on Pinnacle Financial’s website at www.pnfp.com. With that, I’m now going to turn the call – the presentation over to Mr. Terry Turner, Pinnacle’s President and CEO.

Thank you, Victor. Good morning. We appreciate you being on the call with us this morning. We always begin our quarterly earnings call with this dashboard. We do that, because it quickly highlights performance and momentum on virtually all the metrics that we use to drive our business. We’ve always believed that revenue growth, earnings growth and asset quality are the three metrics most tightly correlated with the share price performance Companies that grow tangible book value typically grow share price, companies that consistently produce well above median ROTCEs typically trade at well above medium PE multiples and for companies like ours, where spread income represents roughly 80% of total income, balance sheet growth is the key to earnings growth, and you can see all of that on this slide. This particular slide is focused on GAAP measures. I expect that most know, we closed our acquisition of BNC on June 16th of this year. And so, all the financials are impacted by that transaction. So for the third quarter, we continue to grow the revenue and earnings capacity of the firm. We continue to organically grow the balance sheet in a very substantial pace, which as I just mentioned, we believe is predictive of future revenue and earnings growth and our asset quality remains very strong. As I say each quarter, at least for me, given all the transition and merger integration going on in the company, the non-GAAP measures adjusting for merger-related expenses actually provide greater insight into the core run rate on these important metrics, so let’s move on to those. Looking at now the non-GAAP measures, adjusting primarily for merger-related expenses, since the arrows are all nicely sloped in the right direction, I won’t walk through each metric, I will just highlight two. Let’s look first…

Thanks, Terry. Revenues for the quarter increased from $142 million in the second quarter to $216 million in the third quarter with a substantial amount of debt increase attributable to our new markets in the Carolinas and Virginia. Total spread income increased $66.6 million between the second and third quarter, as shown on the blue bars on the chart; discount accretion represented $12 million of the increase. The dark green line on the chart denotes revenue per share impacting our revenue per share in the first quarter with the capital raise, which we believe diluted, our first quarter revenue per share by $0.12 per share. We reported $2.64 revenue per share in Q2, and our reporting revenue per share of $2.80 this quarter and annualized growth rate of 24% between the two quarters. Obviously, our goal is to continually increase our revenue per share over time. As you all know, it’s a lot easier to grow earnings per share when revenue per share is growing. As we look forward to the fourth quarter, our pipelines remains strong throughout the footprint. This applies both to our client pipelines, as well as our recruiting pipelines. As to purchase accounting, it will be impactful, but should gradually lessen its impact on our results over time. We have approximately $182.4 million in loan discount accretion of which a significant amount is expected to amortize in income over the next two to three years. We recognized $18.9 million in the third quarter and anticipate, at least, $14 million to $16 million in loan discount accretion in the fourth quarter. Concerning loans, as the chart indicates, the average loans for 3Q of $15.02 billion compared to $9.82 billion at the end of the second quarter, or an increase of $5.2 billion in average loan balances. We…

Okay. Thank you, Harold. As we begin to focus on the extraordinary growth opportunity we have going forward, here is a chart intended to help you get a grip on the actual growth we’ve been able to create with the previous market extending acquisitions we’ve done, specifically Memphis and Chattanooga, both of which were done in 2015. I think this is instructive as it relates to our opportunity in the Carolinas and Virginia. Starting at the bottom of the slide you see, we first overlay our hiring philosophy and methodologies, which have generally been very successful against our larger national and regional competitors that dominate those markets. Again, having entered both markets in 2015, look at the growth in revenue producers in 2016 and year-to-date in 2017, you can see that the hiring momentum has been extremely strong and that it continues. And then as you move up the slide, you see dramatic core deposit growth and dramatic loan growth. You can see that our combination of distinctive client experience and ability to track so many of the best bankers, brokers and mortgage originators in the market is having the desired result. Our growth trajectory in these relatively newly acquired markets is extremely strong. So now let me move on to BNC and our progress there. I spent a fair amount of time discussing the cultural integration on the last quarter’s call, so I won’t go back to this other than to reiterate that we have been systematic and purposeful about inculcating the Pinnacle culture in the Carolinas and Virginia and have created a great excitement among the associates there, I believe. I think, we’re in a position to get roughly $40 million in deal synergies, as Harold just pointed out in 2018, despite the fact that we won’t harvest…

Thank you, Mr. Turner. The floor is now open for questions following the presentation. [Operator Instructions] And our first question comes from the line of Catherine Mealor from KBW. Your line is now open.

Thanks. Good morning.

Good morning.

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

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

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

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

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

Yes, there was some impact to the Hurricane in Florida. But I think what happened is, they’ve worked their way through some collection issues that have been down there now for probably three or four quarters. And so they’re really optimistic that they’re going to be able to post a pretty strong third – fourth quarter here.

Okay. All right, great. Thank you.

Thank you. And our next question comes from the line of Stephen Scouten from Sandler O’Neill. You may begin.

Hey, guys, good morning. How are you doing?

Doing good.

Good. How are you?

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

I think you’re close, yes.

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

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

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

Stephen, this is Terry. I think there are a couple of things that impacted obviously got a lot of change going on in there. And I can’t imagine that wouldn’t have some impact. I think the bigger impact quite honestly is their concentration in CRE. And as a result of that, they saw extraordinarily high pay downs during the period that really had to do with people going to permanent markets and actually a good number of their projects being sold. So again, I think they had some headwind really side up in their CRE pay downs.

Okay.

We expect that they’ll, I think, for the next quarter or two, we’ll likely to see meaningful pay downs. But again, I think, you all can count on us to continue to be a double-digit loan growth, as you know.

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

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

Perfect. Thanks, guys. Congrats on another really good quarter.

All right. Thank you, Stephen.

Thank you. And our next line comes from Jennifer Demba. Your line is now open.

Thank you. Good morning.

Hi, Jennifer.

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

Well, let me take the second one first. Unfortunately, I guess, the answer to that is I don’t know. I can’t – I don’t have any information in front of me that’s going to let me give you a very good answer for that. It was a pretty modest great start with and we’ve made a handful of hires but – so it’s not monumental versus what we believe we are going to do on a go-forward basis. But I couldn’t tell you the exact number that we have over there now. I think on the question on Atlanta, I think, of course, you know that market better than I do. I would say Atlanta is an attractive market to us. It’s attractive to us, because it’s a grand commercial market. And you saw the size and growth dynamics there are great. And it resembles other markets that we compete in, in terms of the competitive landscape. So I think we try not to be secretive at all about our desire to make it to the Atlanta market. When I talk about market expansion as you know, I always talk about it in two veins, what would an M&A transaction look like and what would a de novo expansion look like. So I think both of those opportunities might exists for us in Atlanta. I do agree with you that the number of targets for us is limited. And I think, it’s probably fair to say, Jen, if we were just hell-bent to make an acquisitions we probably could have done that. But we try to say, hey, look, we’re going to concentrate on doing BNC before we do anything else. And we’re nearing the end of that as I talked about on the call. But I guess, I’m just…

Thanks, Terry.

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

Hi, guys.

Hi, Brian, how are you doing.

Hi, Brian.

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

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

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

No, we think we’re – given we’ve already absorbed the assets and liabilities from the Carolinas and Virginia?

Yes.

A rate increase should be beneficial to us.

Okay, fair enough. And then in your outlook, well and just going back to expenses, Harold, I think you gave some color, maybe I missed it. But just – can you talk about the – I guess, you talked about few hires you paid recently and just kind of the impact on the fourth quarter, kind of the puts and takes with, I think you talked about some incentive comp, maybe I just kind of missed that. But if you can give a little bit of background on that on the expenses in the fourth quarter and then the hires you’ve made, I guess, I’m assuming number that is in third quarter numbers are very little of it is in third quarter numbers?

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

Okay, on an absolute basis.

For sure.

All right. Okay. All right. And then I think you talked about just the fee income kind of you get to – did I hear right to kind of get your to your target Terry of the inside the new target range and the fee income that it’s maybe – it’s kind of the end of late 2018, it’s kind of where you would expect to be, or maybe into early 2019 is when we kind of expect to be within that type of range?

Yes, I think, what I specifically said was six to eight quarters, but that’s generally accurate.

Yes. Okay, all right. That’s all I had, guys. Thanks so much.

All right. Thanks, Brian.

Thank you. And our next question comes from the line of Tyler Stafford from Stephens. You may begin.

Hey, good morning, guys.

Hi, Tyler.

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

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

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

Yes, I think so.

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

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

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

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

Yes, sorry. So the – just the question on the margin and the FHLB advances you had in the third quarter. There were – the spike that you’re in relative to average I’m just wondering for go-forward in the near-term if that’s kind of $1.6 billion on a – from the end of period perspective in 3Q should be there going forward?

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

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

Yes, it’s difficult for us to give you the high degree of confidence those kind of detailed numbers that we were used to giving. The – our preliminary calculations are that we remain asset sensitive. And I think in the 10-Q we’ll disclose that we’re asset sensitive. But in the past, we’ve been able to kind of give a lot more color on where we are on this primarily, because we just don’t have the two data files merged.

Okay.

So when the two data files get merged, so everybody’s on the same system all the assumptions are right or consistent then we’re – then we’ll be able to do that and we’ll go back to those same disclosures.

Got it. That make sense. Okay, thanks, Harold and Terry.

All right.

Thank you. And our next question comes from the line of Nancy Bush with NAB Research. Your line is now open.

Good morning, gentlemen, how are you?

Good, Nancy.

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

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

Okay.

But again, I’m certain there are kind of the people out there that would continue to have that same mindset that you’re speaking off.

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

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

All right. Thank you.

Okay.

Thank you. And our next question comes from the line of Stephen Scouten from Sandler O’Neill. You may begin.

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

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

Great, thanks. That was really helpful. I appreciate it.

Thank you. And 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.