Terry Turner - President and Chief Executive Officer Harold Carpenter - Chief Financial Officer.

Tyler Stafford - Stephens Stephen Scouten - Sandler O'Neill David Feaster - Raymond James Jefferson Harralson - KBW Brian Martin - KBW Nancy Bush - NAB Research.

Good morning, everyone, and welcome to the Pinnacle Financial Partners’ Third Quarter 2015 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 earning release and this morning’s presentation are available on the Investor Relations page on 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 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 risk 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 on 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 Financials 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 always do, I’ll begin with the dashboard, it’s intended to give you a snapshot of our progress during the quarter, our basic thesis for consistently driving our share prices hires in over time revenue growth, earnings growth, and asset quality are the three most important valuation drivers.

Also, through good times and bad, companies that consistently grow book value per share generally grow share prices and so for quite some time, we’ve been providing this dashboard to highlight those key valuation drivers.

The top row graphs show real revenue and earnings growth with a 16.7% revenue growth rate year-over-year in the face of a pretty stiff volume and margin headwinds, net income up 40.2% year-over-year and core EPS at $0.66 was a record high, eighteenth consecutive quarter of increase in EPS, up 26.9% year-over-year.

As you can see on the second row graph, we’re getting outside of balance sheet growth with end of period legacy loans, up 13.2% in the third quarter 2015 compared to the same quarter last year that’s the rate of organic growth consistent with what we sustained over the last three or four years now and looking at the rightmost chart on that second row, even after having initiated the dividend payout in December 2013, we’ve continued to accrete capital with tangible book value per share up 13.9% year-over-year, which as I just mentioned is generally how they correlated the share price increases.

The third row provides information regarding our asset quality, non-performing assets. Total assets decreased to 41 basis points of total assets. Classified assets remain extraordinarily low at just 17.1% on Tier 1 capital plus allowance.

Overall improvement in our credit metrics since the great recession provided meaningful credit leverage over the last few years and it appears to me that our allowance continues to be in line with our peers even after the incorporation of the acquired loan portfolios, which are mark-to-marketing conjunction with purchase accounting.

I thought I’d speak for just a second about future growth initiatives, I’m asked from time to time by institutional investors, what do you think investors might not understand about your company and obviously investors understand the track record for growth that we’ve produced over an extended period of time, but they’re naturally skeptical that we can or will sustain that growth going forward.

For those of you who’ve been following our firm for a while you know that going into 2015, we outlined a number of initiatives that were intended to propel the future growth of the firm.

As a reminder, we’re attempting to build a $13 billion to $15 billion diversified financial services firm concentrated in the four urban markets of Tennessee, specifically we had said we were interested in getting through the Memphis and Chattanooga markets.

We announced acquisitions in April of CapitalMark in Chattanooga, Magna in Memphis, we completed the legal mergers of both those banks during the third quarter of 2015. So the results, in terms of the financial results that we are ahead of schedule in producing accretion there.

The technology conversions around schedule, the Magna conversion is targeted for November, so about a month away on that and then the CapitalMark conversion is targeted for March 2016.

We have focused intently on cultural integration, generally the systems integrations are easier than the cultural integration and we have conducted a three-day orientation and when I say we, I’m talking about myself and the key leaders in the firm or all of the CapitalMark and all of the Magna associates that will be coming on board with us and we believe that we’re building great value and great understanding and at least to date we’ve lost no key revenue producer and key people that we’re trying to keep.

We also have talked about in several of our calls the fact that we’ve launched a CRE initiative, which is intended to replicate in the CRE business what we have done in the C&I business, which is really to build the dominant bank in our market and that initiative is producing ahead of schedule, I’ll go over that a little bit later.

We’ve also talked about the fact that we intended to build a FINRA broker-dealer which would provide capital market support to the owner managed businesses and we have now received that approval.

I’ll give you an update on the progress there as well and then I think the core thing and really the foundation of our ability to grow our company really has to do with hiring the great revenue producers in our market from our competitors and have them move here.

It is how we have built this firm and we are aggressively hiring and are meaningfully ahead of our budgeted hires for 2015. I’ll give you a little more update on that in a few minutes, but with that as an overview, let me turn it over to Harold for a more detailed review of the quarter..

Thanks, Terry. Our third quarter 2015 net interest income was up approximately $10.3 million over second quarter, which was primarily due to expansion of average loan balances from CapitalMark and Magna, but also due to about a $175 million in organic loan growth from the legacy Pinnacle franchise, which we are obviously very proud of.

As for our margins, our margin increased this quarter to 3.66% with the increase attributable to the impact of the acquired franchises.

As you know, even though our margins may fluctuate, we focused our efforts on growing net interest income by growing our customer base and our markets, while at the same time maintaining appropriate profitability thresholds.

Concerning loans specifically, as this chart indicates, average legacy loans were $4.96 billion, which was year-over-year growth of 13.9%. 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 continued robust loan growth for the remainder of the year.

As noted, the impact of CapitalMark and Magna also added $727 million in average loan balances for the quarter as we expect continued growth from these two new franchises as well. As for loan yields, our loan yields increased to 4.33% this quarter. We anticipate pricing will remain very competitive in all of our markets going into the fourth quarter.

We are cautiously optimistic that our yields should remain fairly consistent in the fourth quarter. We’ve been talking about this slide for quite some time. As of December 31, we have approximately 1.08 billion of floating-rate loans with floors on our books with an average difference between the floor rate and a contract rate of 73 basis points.

We’ve seen meaningful and intentional decrease in the absolute level of floors at the legacy Pinnacle franchise such that we’re pleased to report that through September 30, 2015, we’ve experienced about $200 million in reduced floating rate loans in 2015.

There was a very little change in the Pinnacle legacy franchise and absolute level of floored loans during the third quarter. This obviously has impacted our loan yields and interest income, but we felt it was in the best interest of our balance sheet.

As the table indicates, the increase in forward loans in the third quarter is attributable to CapitalMark and Magna such that we’re now back at approximately $1.1 billion in forward loan balances with a 64 basis point spread. We believe that we’d like to operate with about $1 billion of loans with floors, so we’re very close to our target.

Our asset liability modeling will obviously improve once the technology conversions are completed and we gain a higher level of precision as for the interest rate sensitivity characteristics of the acquired portfolios. That said, our calculations indicate that we’re asset sensitive in the up 100 basis point rate bucket currently.

The legacy Pinnacle franchise we believe is neutral to asset sensitive on the first pick of a rate increase. Now, if we can just get on with raising rates. As for deposits, again, here in the third quarter, we were able to maintain our low funding costs.

The slight increase in deposit rates is attributable to the acquired deposits from CapitalMark and Magna and believe we have some measured opportunities there to reduce the cost of several non-core funding sources.

As for deposit balances, we had a great quarter for legacy Pinnacle deposit growth, we had average deposit growth of approximately $252 million during the quarter.

We are most pleased with the fact that our demand deposit growth has been really strong over the last several quarters with our third quarter 2015 legacy Pinnacle average DDA balances being up approximately 16.8% over last year’s third quarter. These remain core operating accounts that we would expect to keep regardless of the rate environment.

Switching now to non-interest income, excluding security gains, non-interest income for the third quarter increased 61% over the same period prior year driven largely by our 30% ownership interest in BHG which we announced and closed during the first week of February.

Our wealth management fees are up approximately 9.8% over the same quarter prior year and remain a reliable earnings stream. Our residential mortgage group had an outstanding quarter in terms of production with approximately $146 million in loan sales this quarter at a yield spread of about 2.19%.

Items included in the other non-interest income tend to be lumpy and include such items as gains on other investments as well as interchange fees. As noted above, interchange and other consumer is up approximately 64% from last year as we continue to aggressively market our credit, debit and purchasing cards to our clients.

We’ve also experienced meaningful increase in client back-to-back swap fees from last year. All things considered, approximately 94% of our third quarter fee revenues from the legacy Pinnacle franchise appreciated.

CapitalMark was in our numbers for only two months and Magna is in for only one month, so there are run rate increases we are expecting in the fourth quarter of about $1.5 million to $2 million between the two franchises. That said, we believe we have great fee opportunities in our two new markets that we intend to capitalize on quickly.

Wealth management is an area that we are actively recruiting in both Chattanooga and Memphis. Now as to operating leverage, our core efficiency ratio was 52.2% which we consider very strong for the quarter and compares favorably to most peer groups.

We continue to believe that we will be able to improve upon this level of efficiency for the combined franchise.

Approximately 86% of our expense base in the third quarter was attributable to the core PNFP franchise, so similar to fees there are some run rate increases that will occur in the fourth quarter which we currently estimate at around $5 million to $5.5 million excluding margin charges but including the amortization of core deposit intangible.

We are expecting that increased hires will drive our expense increases in the fourth quarter as we believe all other cost should be fairly stable.

I would like to highlight that our recruiting has been exceptional this year not only did we invest in a new Memphis platform which now has eight revenue producers, we’ve also hired 19 other revenue producers to our ranks in national Nashville all of whom we are very excited about. Terry will speak more to that in a moment.

Our core expense asset ratio was 2.3% for the third quarter of 2015. So we finally achieved our operating target this quarter and for that we are very excited as we’ve been chasing that number for the last three years.

As we have consistently stated, the primary strategy to hopefully achieve our long term expense to asset ratio target is to grow the loan portfolio of this firm with a corresponding increase in operating revenues and earnings. That will also be the strategy we will continue to deploy with CapitalMark and Magna.

Our synergy case for both acquisition remains in place which will eventually help us to create more operating leverage in future quarters, as we fully expect to achieve the targeted EPS accretion targets in 2016 that we spoke about on the acquisition conference calls. Terry will also speak for those matters in a few moments as well.

We do remain committed to increased operating leverage with careful and mindful attention to our expense base. That said, our focus remains on long-term shareholder value creation by growing our customer base. We believe the best way to grow our customer base is to hire the best financial professionals in our markets.

This year we enjoyed a meaningful uptick in our revenues and profitability metrics which has given us more latitude in hiring revenue producers in our markets.

Again, we are mindful of our expense base and we’ll pay close attention, but if the opportunity arises where high-quality relationship managers are available to us, we will continue to seize those opportunities. With that, I will turn it back over to Terry..

Thank you, Harold.

Earlier this month, The Wall Street Journal published an article with a pretty gloomy outlook for upcoming bank earnings reports for the third quarter, specifically the writer projected a very negative outlook for the banks that credit leverage has generally played out, that stubbornly low rates or net interest margins and that the margin compression with lead banks to attack expenses which further jeopardizes future earnings and many service levels which in turn jeopardize our value core deposits.

Mortgage revenues would slow and at oil prices with great week in credit particularly in the energy and related sectors. And in many cases, I think those forecasts have materialized for a number of banks but I think the Pinnacle story is different.

Our recent acquisitions enables us to actually improve our margin one-tick even as we continue to reposition for raising rates and perhaps most importantly, our markets support volume growth that facilitates net interest income growth despite margin compression both as a result of their economic vibrant and as a result comparative vulnerabilities.

Our recent acquisitions of CapitalMark and Magna and our investment in BHG all appears significantly accretive even prior to obtaining our cost takeout and before we’ve had any opportunities to produce revenue synergies which we believe we’ll ultimately get.

As just mentioned, we’ve successfully launched our CRE initiative which is aimed at our markets best real estate developers and owners.

I’ll talk more about the growth that we are seeing there in just a minute and we are way ahead of our hiring schedule through the first nine months as you just heard from Harold which means we are incurring significant cost today for revenues.

We expect to materialize over the next two to three years and despite that investment we still have top tier efficiency ratios, ROAs and expense to asset ratios. We are now positioned in all four of our targeted geographic markets with meaningful opportunities to take share and increase product penetration going forward.

So our growth outlook continues to be strong despite the headwinds that the industry faces. More than three years ago, we laid out our sustainable business model, which in turn call for a targeted range of 1.10% to 1.30% for ROAA.

We also broke down targets for the full 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 since in ordinary times charge-offs were the primary influence on provision expense.

In mid-2014, in conjunction with our 2014 to 2016 strategic plan, we increased our ROAA target range by 10 basis points to a range of 1.20% to 1.40%.

Now, in conjunction with our recently completed 2015 to 2017 strategic planning process, we decided to leave the ROAA target as is, another words target range of 1.20% to 1.40% and as it relates to the four individual components, we decided to increase the target range for the non-interest income to average assets by 10 basis points and decrease the target range for the net interest margin 10 basis points to reflect the current operating environment and again facilitate the continued targeting of 1.2% to 1.4% ROAA.

For quite some time, the only component measure not performing in or better than the target range has been the non-interest expense to asset ratio.

As you just heard Harold say, our approach is to rightsizing has really been to grow our earnings and our earning assets in the form of loans and so with the strong asset growth in the third quarter we are now at that target range and believe that we have continued operating leverage that will achieve as we move forward.

So overall, third quarter was another outstanding quarter, record EPS excluding merger related expenses and ROAA well north of the midpoint or well north in the target range.

I mentioned earlier that we’d try to give you an update on the mergers, so here is another slide with a lot of information on it that’s intended to flush out the impact of the two recent bank mergers.

What we thought we’d do is update you with respect to some of the more significant assumptions that we talked about when we announced the CapitalMark and Magna mergers.

As to total transaction cost, the CapitalMark transaction sold out higher than anticipated due to our run up in PNFP shares while Magna’s total transaction cost approximated the amount at the announcement date. The more significant purchase accounting adjustments are basically consistent with our estimates.

In the case of ORE, there is differences there that are really due to several transactions that were executed by both banks prior to the merger day.

As Harold indicated, we remain confident in expense size that we expect to achieve from both mergers and as to EPS accretion, we remain confident that the EPS accretion percentages we discussed as of the announcement date will certainly be achieved and believe that the two mergers collectively contributed about $0.02 in EPS during the third quarter.

As Harold mentioned that’s with two months impact for CapitalMark and one month impact for Magna. Again for the two mergers collectively we believe that the tangible book value dilution as of the merger date is negligible at less than 1%. So we remain very excited about these transactions.

Here is a little more information as it relates, try to give you some insight into our hiring and the pace of hiring and the impact that it has on us.

We pay close attention to our personal cost and that’s the largest expense component of our expense base, but it obviously represents our most valuable asset I commented earlier in the call, really the foundation of this company and its track record for growth is our ability to take the best revenue producer from our competitors having them come here and bring those books of business to us.

Basically the top set of numbers on this chart are revenue producers, we call them plan advisers or purposes of this morning’s discussion, our goal is to expand this group as opportunities present themselves. As Harold mentioned, we’re having a great year and anticipate having a good number of hires going forward.

As Harold mentioned because of the revenue, like extraordinary revenue year, that we’ve had this year has put us in a position to ramp up our recruiting efforts and garner some of the tremendously valuable players from other banks that are in our area this year.

So far we are on pace to hire more than 2x, our normal hiring when compared to the last few years, well again it is a pretty dramatic hiring pace.

I might also just add as in the slide, we’ve given you the support unit investment also and traditionally it’s sort of a 2:1 ratio and what is important about that is we are winning versus competitors based on distinctive service and the fact of advise and so we don’t just hire the revenue producer, we hire the necessary support to insure that we continue to be distinctive in terms of our service and advice.

Coming out of last year’s strategic planning process we disclosed our intent to increase our focus and discipline in CRE, we made a number of key hires during the first quarter 2015.

You can see the impact that the new emphasis is having on, in that chart that is on the bottom right of the slide, with roughly $206 million growth in the legacy pinnacle foot print and out standings in the second and third quarters, with meaningful increase in exposure, which should yield meaningful growth in outstandings in future periods.

I just comment as in the slide that there is also $436 million in growth attributable to the acquisitions.

We have discussed the attractiveness of the Magna acquisition not only because it gives us total hold in Memphis, but because of the significance our e-capabilities that that firm has and which we can lever across our entire foot print and in conjunctions with our effort to become the premier CRE bank in the State of Tennessee.

One of those capabilities is their exclusive brokerage arrangement with a number of insurance companies that mortgage can’t do it.

Those effectively give us a mortgage banking capability to place large long term commercial real estate loans with traditional providers for those products, which are not well suited in our balance sheet, of course we generate fee income in association with that brokerage.

We expect to produce a meaningful volume of those mortgage brokerage commissions throughout our full market foot print.

Additionally, Freddie Mac has a robust multi-family lending division and as a result of the Magna acquisition Pinnacle Bank has one of only 11 seller servers licenses issued in the United States to originate and service multi-family loans under the small balance loan program.

The small balance loan program was initiated in late 2014 by Freddie Mac to compliment their multi-family large loan program. The intent was to target loans from $1 million to $5 million to support small balance loan borrowers, which has been an underserved market by Freddie Mac.

Pinnacle Bank started marketing that program in June of 2015, expects to close about $25 million of loans this year, but the forecast for loans closed under the SBL program 2016 would be between $150 million and $200 million.

Basically Pinnacle Bank originates the small balance loans, they submit them to Freddie Mac for their review and approval and after closing the loan in the banks names we sell the loan to Freddie Mac typically within 30 days of the loan closing.

Of course, as I mentioned earlier we generate income from the Small Balance Loan program via the loan origination fees, servicing fees, securitization fees, spread income, and free escrow, so it’s a tremendously powerful program that we can leverage throughout our firm.

So, we’re tracking very well on our quest to replicate in the CRE business what we have achieved in the C&I business, which is the premier bank status.

Also in conjunction with last year’s strategic plan we disclosed that we’d build a capital market unit, which would focus on owner managed businesses to assist them and primarily in M&A and valuation work again we’re focused on smaller owner managed businesses that are generally under served by larger investment banking firms.

We made three key hires in January of this year. We’ve now completed all registrations and have been approved for as a fit, FINRA broker dealer and that’s what puts us in a position to get paid for this advisory work. We expect to sign our first engagement letter this week with a small owner managed business that is seeking an acquirer.

Also while we’ve been building that infrastructure the group has also had responsibility for client swaps, which are back to back swaps that we sold our clients as protection on their loans.

You can see on the chart at the lower right of the slide, year-to-date we produced approximately $1.5 million in swap fee income and that’s compared to just over a $100,000 for all of last year. So, again I think we are making great progress on another key growth initiative. So, to wrap to up, here it is.

We’re attempting to build a $13 billion to $15 billion bank, Tennessee’s four urban markets, and each market with most likely have to be one of the top three banks in terms of FDIC deposits.

Not only are we positioned in vibrant growing markets, but as has been the case since our founding we rely on our truly distinctive service and a fact of advice would take chair from the vulnerable large regional national franchises that have previously dominated those markets. So, operator with that we’ll stop and take questions..

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

Hi good morning Terry and Harold, how are you doing?.

Good, how are you doing Tyler?.

I’m well, thank you.

Hey, I wanted to start on expenses and Harold, I appreciate the color on the 4Q step-up and expenses, I just want to make sure I heard you correctly that you do expect a $5 million to $5.5 million increase in 4Q just from the prior two acquisitions that you closed this quarter and that does not include kind of the legacy expense growth..

That’s right Tyler. The only thing that we expect at our legacy Pinnacle is the result of any hiring expenses that we’ve got, so, but yeah $5 million to $5.5 million would also include the core deposit intangibles. .

Okay.

On BHG, obviously had another really strong quarter, any help on how to think about the growth out of that or the expectations for that business in 2016 and remind us, does that have any seasonality to it for any reason?.

I don’t know about seasonality, I think they are on a growth track not to dissimilar to us, so I would imagine that if you were to kind of model out what you believe their growth would be, I would, it would be fairly consistent with what you think Pinnacle’s growth rate would be. .

Got it, okay.

And then last one from me, on the small business loan program that Terry just touched on, any initial thoughts on what the gain on sale to Freddie Mac would be like if you are able to originate and sell that kind of $150 million to $200 million next year and just to be clear you said you would or would not continue to service those loans after you sell them.

.

Yeah, I think I would rather not get into each component of the revenue stream, but I mean it is obvious components where you do pickup a gain on sale, but you have the other revenue streams for originating fees and for serving Tyler, which is to say yes we would continue to service those loans. .

Got it. Okay, thanks guys and congrats on a good quarter..

Thanks, Tyler..

And our next question comes from the line of Stephen Scouten from Sandler O'Neill, your line is now open. .

Hi guys, good morning..

Hi Stephen..

Hi Stephen..

Question for you on the NIM if we don’t see hire rates, where do you think that will be able to shake out in 2016 or what do you think the past would be if we are not able to end up taking the rate environment?.

Yeah, I think our consistent response to that has been, if we don’t get an uptick in rates I think we’ll all experience NIM pressure as far as how much and how extensive I can’t really, I don’t really know that, but it is not too difficult to discern, we think we are all at pretty much bottoms on the deposit side and so if you don’t get a rate increase the asset side of balance sheet will continue to have a lot of competitive pressure.

.

Okay, I mean you said kind of in 4Q, while it is completive do you think yields will remain relatively flat there right?.

Yeah, I think 4Q we feel pretty good about where we are. We are not anticipating a rate increase in October, obviously, but we are still planning on one in December and I think that’s what most people have in their modeling.

What we are forced to have Stephen is markets that do allow us the ability to grow and so the pipelines, the loan pipelines remain really strong right now, so we are optimistic about Nashville and Knoxville, Memphis, and Chattanooga..

Okay, sounds good.

And as it pertains to the continual growth in new hires, I mean based on your commentary about kind of double the annualized rate that’s normal does that implies you are going to continue adding people here in 4Q and I guess within that are there any parts of the bank or parts of the production lines that these are concentrated in, is it additional CRE people or where are these new hires what business lines are they falling into..

That’s a great question, I think first of all as it relates to fourth quarter hiring, do we anticipate continuing to hire, yeah I would assume a straight line on the hiring curve and we were talking to a number of revenue producers that I’m hopeful will close the sale on during the fourth quarter.

In terms of product areas, I would say that we are not particularly focused on hiring in the CRE segment, we made significant hires early on in that to build that business and so we’re about harvesting that right now. I would say that the concentration hiring would be on C&I relationship managers, as well as other fee income businesses.

We’re hiring mortgage originators. We’re hiring trust administrators. We’re hiring brokers, investment brokers and so really across the gamut commercial relationship managers, private banking relationship managers and then those various fee income businesses..

Okay great.

Thanks for the color there and I don’t know if you guys can frame up the quarter-over-quarter incremental costs for those seven new people, but I mean I guess is there any detail you can give about we are going to see in that legacy cost increase quarter-over-quarter?.

Yeah. I don’t have that number in front of me, but we’re talking to folks that probably have salary requirements of $80,000 to $120,000 on average and then you got the benefit costs going top of that..

Perfect. That’s helpful, thanks Harold, thanks guys for taking my questions and congrats..

Okay. Thanks..

Thanks..

Our next question comes from the line of David Feaster from Raymond James, your line is now open..

Hey, good morning guys..

Hi, David..

Hi, David..

Hey, most of my questions have been answered but first one, let’s talk about the capital markets group, glad to see that you guys got FINRA approval and you got a couple employees in the group and have started ramping up revenues but could you maybe talk about your expectations for this group going forward in terms of the potential contribution?.

Yeah, I guess, let me give it to you as a long term target, say five to seven years, it’d be our belief that that could produce $7 million to $10 million income stream out at that pace, again it’s a little harder to figure out on a short-term straight-line how that works as you know we’re in the process at this point of going out and introducing the capability.

As I mentioned I believe we’ll find our first engagement letter this week on a relatively small sale transaction and you know how that works. That’s a spotty business or a lengthy business. It’s not something that really comes out on straight line..

Okay. Now, with post the close of CapitalMark and Magna, you’re sitting at 8.5 billion in assets and given the growth rate you all are growing organically, the 10 billion threshold is nearing likely in the next 24 months or so.

We’ve talked in the past about the impacts to crossing that threshold, but like to hear kind of your thoughts on how you expect to cross it, whether it’s organic or would you consider doing a larger M&A deal? I know you mentioned that you want to be a $13 billion, $15 billion Tennessee Bank, but would you ever even consider leaving the Tennessee market?.

Yeah, yes, let me try to hit at two or three components to a question there, I guess the first thing how we would cross it? I think I would say we will take the natural course to cross it.

So, what does that mean? What it means is that we are willing to just grow through it organically, or we’re willing to make an acquisition, but I think the thing I would want to emphasize is that we’re not going to go do some wildly different strategy for the sake of financial engineering as it relates to the Durbin Amendment.

And all I’m saying there is I know some people have said we’re going to get the 9 billion and then we’re going to acquire 9 billion and it’s not going to be an impact and so I just don’t think you ought to expect that kind of mindset from us, so maybe we would try to be candid that we think primarily about our company as an organic growth company, so if you size that for just a minute, think about that just take the historical growth rate that loan growth rate in our company and in the two banks that we have just acquired, you have something that nears a $1 billion in organic growth a year and so you’ve got a staggering implementation on when these things impact in, when [indiscernible] all those kinds of things, but when you have $1 billion organic growth capacity a year, you can afford organically grow through it, you might take a little hit on earnings but it wouldn’t be painful.

And then we have also tried to say and that we think ourselves primarily as an organic grower that we did have M&A opportunities.

There’s a lot of chatter out there, I would guess I mean I guess, I get paid to think this, I mean I think we are the preferred acquirer in the State of Tennessee and so if there’s a lot of chatter that means we got a lot of opportunities.

We probably decline more than we look at, but I would just say to you all that I believe that it would be unlikely we wouldn’t have an M&A transaction or two that would be at or near the time of crossing $10 billion.

And so, I know that sounds nebulous, but I guess the point of it is we’re not going to take any unnatural move in order to dance around the impacts of the Durbin Amendment. We have great organic growth opportunities and great M&A opportunities and we’ll take them as they fit our strategy, not as a financial engineering technique..

And, the last part of that question, would you ever consider leaving the Tennessee market or you’re solely focused there?.

Yeah, I think my father taught me never say never and I don’t say never, but I would say it is highly unlikely.

I mean I think we have said, I think for 15 years that our growth is operating in urban markets of Tennessee, the markets that we know and understand and my belief is if we build a $13 billion to $15 billion company that has 1.20% to 1.40% ROA that will be a handsome earnings for any prior shareholders and probably serve us better than getting out into markets that we know less about and understand less well..

Absolutely. Thanks a lot guys..

Okay. Thank you, Dave..

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

Hi, great. Thanks.

My first is a margin one, do you guys have a little tail-in coming from this full impact of both the deals? I think CapitalMark had 390 margins and did that helped the margin this quarter with the blunt into those two banks or the Magna poured down towards about events?.

Jefferson, you’re right. We fully expected some accretion to the margin number from CapitalMark and Magna. I think Magna’s margins were pretty similar to ours maybe a little bit north of ours but CapitalMark’s were like you were talking 20 basis points, 30 basis points..

So can we have a similar talent next quarter so that incorporate into your guidance or how do you think about that for next quarter? Should add accrual?.

Yes, we think we’ll have at least flat to maybe a rising margin next quarter..

Okay. Looking back at Bankers Healthcare Group and looking at the money they made this quarter and the way it’s growing, my math could be off here but has this deal turned out to be close to 20% accretive on the shares that existed at the time you did? This thing seems like making a lot more money than we thought..

Yes, we are obviously ahead of where we thought the initial accretion levels of 7% to 9%. I don’t think we’re going to get to 20% but they are having a really good year..

Okay.

And my last one is on the two times normal hiring, is there disproportionate Memphis or could you talk about that with respect to geographies?.

The TRX comment it really relates to legacy type hiring and so we’re speaking of that exclusive of the Memphis lift out..

Okay. Yes, exactly.

I was just wondering on the – was there additional Memphis hires that you decided to left out I guess [indiscernible]?.

Yes, I’m sorry. There have been additional hires of both revenue produced and its full personnel there.

Harold, help me, can you say what?.

Bankers has been a couple over and above the initial April lift out..

I think the April lift out, if I remember right, Jefferson, in that press release I think we announced eight hires and I think there are 13 folks there today I think..

All right. Gothca. Thanks guys..

And our next question comes from the line of Blayne Curtis [ph] from SunTrust Robinson. Your line is now open..

Hi guys. I’m offset, all my questions have been addressed. Thank you..

Okay. Thank you..

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

Hey guys..

Hi, Brian..

Just two quick things, can you just talk about – Terry, I think you talked about in the past the credit leverage that’s been continuing this quarter and I guess you talked about the reserve levels being in line with peer.

I guess kind of how are you guys thinking about that and then just anything – seems like credit is good as it can get and just wondering there is any pressure points you guys are seeing as you’re growing or a bit more mindful of as you look going forward?.

Brian, this is Harold. I’ll talk about the credit leverage question and I’ll let Terry cover what he is seeing as far as credit trends. We still believe we’ve got credit leverage in the legacy Pinnacle franchise.

Obviously the ratio of allowance to total loans dip down because of the merger but we still believe we got some more reductions I guess is the right word from our allowance for loan ratio because of the improving credit leverage in our legacy Pinnacle book particularly in C&I and commercial real estate..

Brian, I would say going forward in terms of pressure points I feel really good about the asset quality of the company. You could see this numbers that are generally predictable of the future problems things like criticized, classified asset levels, nonperforming asset levels, past dues.

All of those sort of things are generally predictable common credit problems and all of those metrics are I think really exceptional and we are at a point now where we all but eliminated OREO and so that was – all those things inspired confidence but our credit trends going forward.

I think if you look at what is going on inside those numbers, we are the largest asset class by far as the C&I book and then CRE and so forth our consumer books really small.

We have I think on back over the last two years or three years, we’ve dabbled around with a variety of consumer estimates are generally intended, try to be a better balance into our loan portfolio to find higher yielding asset class that we baked in for our balance sheet.

And so we said I think Brian, as I remember, I made two years ago, we said with 85% of our loan book allocated to a variety of these experiments with higher yield and loan categories. Some of those have worked well for us, some of them haven’t, we’ve taken some losses and loan portfolio book, but I believe that we pretty well resolved I think.

So again we discuss things that happen around the fringe with the core asset quality and the expectation for the asset quality trend continues to be very strong..

I think that’s helpful. And maybe, Harold, just a little bit on the funding cost.

It sounded like you had a little bit more opportunity on and they were up this quarter just with Magna I guess, is your fund to loan growth going forward I guess with primarily core deposits and just kind of the impact on core funding and the funding cost if you can give a little color?.

Yes, I think particularly CapitalMark had a really strong deposit growth quarter here in the third quarter that was a pleasant surprise for all of us. Where I think we have opportunities on deposit cost is in their wholesale books. We’ve already started working on some of those federal home loan bank borrowings.

We’ve already started working on some other non-core funding sources that both banks had in their funding book and we’ll probably get all of that wrapped up here within the next three months or so.

We’ve also repositioned a lot of the bond book at both banks here in the third quarter, so we think that worked hard advantage as well as we go into probably some – as we hopefully go into this raising rates..

Okay, perfect. Thanks, Harold. Thanks. Good quarter guys..

Thank you, Brian..

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

Good morning and thank you for taking my call. I have another question on this hiring what you had to say about hiring? What is your Alabama peers had a conference call a couple of days ago and made some similar commentary? I think they said that day they have had two calls from revenue producers one had to join them.

So I guess my question is, where are these people coming from? I mean are you seeing people coming to you from the large banks, from the community banks that might be targets.

If you could just give us real color I’d appreciate it?.

The specific answer to your question is, it would almost be [indiscernible] from the large regional and national franchises with whom we compete and it might just be worth developing to hiring model here.

Basically we don’t hire – we don’t take calls from head owner, we don’t hire people that are seeking placement by head owner and however we don’t hire people that are sending us [indiscernible] and we don’t I guess it’s enough.

I may just make a point that our basic philosophy is folks that are generally out looking for a job, they are looking job because they’re either unhappy or unsuccessful where they are and that’s just not we want to hire out. And so for the most part, I hire incomes from folks that we target.

We use a mechanism inside our firm to have our associates all of whom going from these large regional banks to tell us who the folks are, who share our values and who are reliable producers and we recruit them and chase them over an extended period of time and try to hire them.

So certainly it’s a fact that we aim at capitalizing on the vulnerabilities in these large regional banks but again I’d just try to make a distinction it’s not that we’re hiring people that are bailing out of these companies as much as we’re trying to hire people that we’re recruiting from these companies which is slightly different for us.

In terms of I guess trying to give you some color on how it works or why it works that way, I just think it’s a hard experience for high producing people in large regional companies. For the most part, they love looking after clouds and treat them well.

It bares on them, lays on them when they have to keep defending their company for countless errors and processing accounts and analysts charges, those kinds of things and then I think more importantly it’s hard form to loan money even if they have to get their loans approved by somebody that they don’t know very well in other city and that person doesn’t know their client well and it’s a difficult experience and the credit guy that they don’t know talks to them like a stupid and [indiscernible] (1:10) stuff going on and that’s the kind of stuff that we seize on.

I think that’s why people leave the large regional banks for companies like ours. I think again we are so well positioned.

There are a lot of smaller banks in our market who can hire some folks but they do not know higher people to handle up or middle market countries because they don’t have big lending limits nor do they have the products verification in terms of treasury management, wealth management and so forth to handle those kinds of clients.

And so for folks that leave these large regional banks, I come to a company like ours, generally they’ve got plenty of lending limit and they have all the products diversification so they’re not taking a step back on that when they come here..

Great. Thank you. And if I could ask just one follow-up and I think this would just require your perspective Terry. I’m old enough and have been in the business long enough to remember when CRE and Tennessee was not necessarily a winning proposition.

And I would ask your CRE initiative and on your build out in that business, how you see the business now as oppose to what we remember historically?.

Yes, I think for us there are two or three things. Let me just talk about the market and then let me talk about our approach to the market.

And so from a market perspective my belief is that Tennessee does extraordinarily well and I won’t side all of the accolades from site to election firms and economic [indiscernible] firms and so forth but Tennessee is a net migratory of jobs year-over-year and again I could give you a chamber commerce speech but if you got down to the bottom of it, it primarily has to do the fact that we are a no income tax state, a low business tax state, a business friendly write to works day and those kinds of thing.

So we are in a migratory jobs and that bodes well for the state of Tennessee and it particularly bodes well for the urban markets in Tennessee, which is where all our step is concentrated in. So again you’re right, the fact that they’re doing well today didn’t mean that they will always do well.

In fact they certainly won’t but again I do think Tennessee is in a net advantage position over a long period of time because of primarily the tax structure in business friendly environment in the state. So I think that is an important aspect what goes on the market.

And in terms our approach to the market what’s different? I think for us what we’re trying to do is and again I won’t bore you with all of this. I’m currently heard lot of this stuff over long period of time. We have built the pre-eminency in our bank in our market.

We have a Gordon Greenidge share lead bank share positions better than virtually all of the funds in our markets, our client satisfaction is better and we’ve easily been the fastest growing bank over an extended period of time even market share from these large regional banks.

We have never focused on the CRE segment like we did to see in our segment nice for several reasons. One, as you pointed out, there is some volatility there and my judgment is different than the C&I business. But more importantly as a small bank, we started this company several years.

Our house lending limit was $1.8 million and so you’re just not going be a player in the CRE segment with a limited capacity today for investment grade credits, you know we’d go up $40 million and so that puts us in a position to deal with the top tier real estate developers and owners in these urban market.

And so again what we’ve said out to do just like the C&I segment, it’s hired the best relationship managers in these markets and have them focus on the best owners and developers, and I believe quite selection is more important than project selection.

When you get down to difficult times and so I think if you go back again, you know our story well, you saw the fabulous credit performance for eight years and then recession so forth.

If you go back and look at and compare our performance through the cycle, though the difficult cycle against all of those big regional banks when we compete, regions are going to SunTrust, Bank of America first.

We outperformed the mining fleet because in my judgment, client selection enabled us to get through that turn quickly and loose last money than our competitor. Again, we might add as much in terms of Chris classified assets but we didn’t lose nearly as much money as a result of client selection and so that’s our approach to the CRE business.

That’s kind of a long way to answer but maybe help you understand how we think about it..

Okay. Thank you very much..

All right..

I’m showing no further questions. I’d like to turn the call back over to Mr. Turner..

All right. Thank you operator. Folks thanks for participating with us or how we’ve been able to provide you some color into our performance in the third quarter and give you some sense for our strategic direction and growth outlook going forward. Thanks for participating and feel free to get back with Harold or myself if you have questions..

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may now all disconnect. Everyone have a great day..