Terry Turner - President and CEO Harold Carpenter - CFO.

Jennifer Demba - SunTrust Robinson Humphrey Tyler Stafford - Stephens Inc. Stephen Scouten - Sandler O'Neill & Partners Nancy Bush - NAB Research, LLC Tyler Agee - Hilliard Lyons Brian Martin - FIG Partners Peyton Green - Piper Jaffray.

Good morning, everyone and welcome to the Pinnacle Financial Partners' Fourth 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 Web site at www.pnfp.com. Today's call is being recorded and will be available for replay on Pinnacle's Web site 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 factors that may cause the actual results, performance, or achievements of Pinnacle Financial to differ materially from any respect -- from any results expressed or implied by such forward-looking statements.

Many of such factors are beyond Pinnacle Financial's ability to control or predict and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks is contained in Pinnacle Financial's most recent Annual Report on Form 10-K.

Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G.

A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to the comparable GAAP measures will be available on Pinnacle Financial's Web site at www.pnfp.com. With that, I’m now going to turn the presentation over to Mr. Terry Turner, Pinnacle's President and CEO..

Thank you Operator. Good morning. We appreciate you being on the call with us this morning. I will begin where we always do. For a number of years now we’ve begun our quarterly earnings call with the dashboard to allow you to quickly assess how we’re performing on all the critical financial metrics.

This particular slide is focused on the GAAP measures and as you can see we continue to grow the revenue and earnings capacity of the firm. We continue to grow the balance sheet, which we believe is predictive of future revenue and earnings growth and our asset quality is in great shape.

But frankly, at least for me, given all the transition and merger integration going on in the Company, I believe the non-GAAP measures actually provide the best insight. So reviewing the key performance metrics, a number which are non-GAAP.

I think that the overarching conclusion is that our momentum continues to be very strong and asset quality is pristine. We’ve been through an interesting time in the market where there has been extraordinary inflow to financials. Some would argue on almost an indiscriminate basis.

So, for those that are looking for some distinction, I believe this chart tells our story very well. Number one, we're rapid growers. I believe this is the 24th consecutive quarter that we reported double-digit year-over-year earnings growth. Number two, we're reliable growers.

I believe that virtually all of those quarters we met or exceeded consensus expectations. And number three, we’re profitable growers not many peer published their profitability target, but we publish targets to operate as a top quartile company with an ROA between 1.20% and 1.40% and we now operate high in that range.

Beginning at the top left of the slide, our top line revenue growth continues to be excellent in the fourth quarter revenues. Excluding securities gains and losses, we’re up 22.5% year-over-year. Bottom line our fully diluted EPS net of merger related charges was $0.83.

That’s up 20.3% year-over-year and excluding merger related charges the ROTCE was 16.23%, up from 16.01% last quarter and from 15.81% in the same quarter last year. All three of those measures are now at record levels.

Let's move now to the second row of charts that generally focused on balance sheet growth, which for companies like ours is primary basis for future revenue and earnings growth. Loans were up $208.9 million in the quarter. That's an annualized growth rate of 10.1%. Core deposits were up $120.4 million in the quarter.

That's an annualized growth rate of 6.2%. And lastly even with the general target of roughly 20% for a dividend payout ratio we're still growing tangible book value per share excluding merger related charges at 14.9% year-over-year. Switching now to asset quality on the bottom row of charts, you can see that our asset quality is pristine.

The NPAs and the classified assets are currently in the low part of our historical operating range, and net charge-offs are very low in the target range that we established in conjunction with our long-term profitability target.

So all in, 4Q 2016 was a fabulous quarter for us with year-over-year revenue growth of 22%, year-over-year core earnings growth of 20.3% and key asset quality indicators all in great shape.

Those of you that followed our firm for any length of time know that coming out of recession back in 2011 we published our profit model and associated performance targets that I just mentioned on the previous slide.

Since then, we’ve not only muscle built the Firm to originally targeted levels, we’ve actually increased the ROA target range up to its current level of 1.2% to 1.40%.

In conjunction with that return on average asset target, we continue to publish targets for key performance measures that would result in that overall level of profitability, specifically I’m talking about the margin, fees to assets, expenses to assets, and net charge-offs.

And so as you can see on this slide, this reflect in the GAAP measurements, fourth quarter was another outstanding quarter with a return on average assets of 1.30% and the comp -- and the component measures all performing well against the target.

As I’ve already said, due to the meaningful impact with the merger related charges, I tend to focus more on profitability metrics, adjusted for those merger related charges. On that basis, you can really get a picture of our operating momentum here. The fourth quarter ROAA is nearing the top end of the range at 1.37%.

Net interest margins up meaningfully over prior quarter and actually above the targeted range and fees to assets, expenses to assets, and net charge-offs were all operating inside the targeted ranges.

As a quick aside, I was laughing with a friend who told a story about someone, looking at charts like these and commenting, hey you guys are doing a great job on forecasting and of course he went on to explain it doesn’t really have much to do with forecasting, it's more about execution. I believe that’s one of the key distinctions of our firm.

I’m proud of the fact that we charted this course coming out of the recession, but honestly are more proud of the execution by roughly 1,200 associates in our Firm. They’ve executed quarter in and quarter out. I made that point not so much for those of you who follow the story for long time, but again for folks who might be new to the story.

We have been and we continue to be dogged about not just growing the earnings, but about growing the ongoing earnings capacity of the firm. We always have a number of initiatives that are aimed at perpetuating or accelerating our growth.

I think over time the single most impactful growth strategy we’ve executed is aggressively hiring the best bankers, brokers, and mortgage originators in our markets. That’s our primary core competence. We've established a reputation as being a great place to work.

Since the American banker began publishing the best banks in America to work for, we've always been at least in the top six banks in the country. We’re able to leverage that to source and recruit and hire and onboard and retain a large number, the best and most productive revenue producers in our market.

2015 was a record year for onboarding revenue producers and we were able to substantially outperform 2015 in 2016. For me, that’s the best way to propel our organic growth going forward. People sometimes ask what is it you think investors might not understand about your Company, I think this is it.

To be in a position to afford to add this much incremental production capacity and pay for it and still deliver the earnings and profitability that we did in 2016 is a great spot in which to be. Secondly, over the last 18 months or so we've also been able to effectively deploy our highly-valued stock to accelerate growth through acquisitions.

We've acquired some of the most attractive high-growth banks in the urban markets of Tennessee in terms of profitability and fit with our Firm. We've now completed our system integrations for Magna, CapitalMark, and Avenue. As I mentioned, we believe the system integrations have been near flawless.

We kept all of the management teams and we kept virtually all the key revenue producers in conjunction with CapitalMark, Magna, and Avenue transactions, excluding merger related charges, revenue per share is up, earnings per share is up, and our efficiency ratio was below 50%.

So in my judgment, not only have the acquisitions accelerated growth, but they have created meaningful operating leverage as well. Again, trying to help folks that are new to the story, it's my expectation that in addition to the capacity for future revenue and earnings growth that we already built through hiring in 2016.

I’d expect incremental opportunities to deploy our stock in accretive transactions as we move forward. I want to make one more summary comment pertaining to the fourth quarter.

I think it's easy to look at these charts where everything is supposed to go up is going up, and everything that’s supposed to go down is going down and miss what it is that really makes it work that way. I’ve already mentioned our perennial rankings as a great place to work and how we’re able to leverage that, the hire and retain great bankers.

But beyond that, we built a truly competitive distinction versus the large regionals with whom we compete in terms of what the client experience is. Greenwich Associates, the foremost provider in market research to commercial banks recently awarded Pinnacle the best brand for trustworthiness and for ease of doing business.

Keep in mind, this firm does research for virtually all of the top 50 banks in the United States, virtually all our major competitors, plus roughly 700 more financial institutions.

I will just say to you there is no position, I’d rather own today versus the large regionals with whom we compete than being trustworthy and being easy to do business with. That happens to be the number one bank selection criteria among business owners.

So honestly, that's the single most important thing and inspires confidence for me, that we will be able to continue to produce outsized growth going forward based on our ability to continue talking share from the large regionals. So from 30,000 feet, fourth quarter was a great quarter.

I want to turn it over to Harold now and let him review the quarter in greater detail..

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 top line revenue at an accelerated rate. We believe the top line revenue growers that can leverage growth with increased earnings will be supported with outsized multiples by investors.

This chart shows that in some detail. The dark green line on the chart denotes revenue per share. Growing EPS and tangible book value per share is much easier to do if the green line is increasing. Our 2016 revenue per share is around $10.20, which is up 20% from 2015.

On a GAAP basis, our 2016 fully diluted EPS is approximately $2.91, up more than 15% from 2015. Excluding merger related charges, our 2016 fully diluted EPS is approximately $3.07 a share, up over 17% from 2016. So we believe our Firm has performed exceptionally well and transferred revenue growth to bottom line results.

Over the last 24 months, we've experienced a lot of change at Pinnacle. Integration of three very handsome franchises into our Firm, as well as the acquisition of a 49% interest in BHG.

Through all of that, our associates have maintained a key focus of running our franchise very effectively and produce we believe outstanding results for our shareholders. Concerning loans, specifically, as the chart indicates, average loans for the quarter were $8.36 billion.

Fourth quarter EOP December 31 loan balances are roughly $90 million higher than the average balances. So this should help us to increased average loan balances in the first quarter of 2017. At the end of 2016, we achieved linked quarter loan growth of 10.1% annualized.

As we mentioned in our press release last night, loans grew about $208.9 million in the fourth quarter. So we continue to believe we can generate earning assets organically at an outsized rate. As to loan yields, our loan yields increased to 4.6% this quarter compared to 4.43% in the third quarter.

Impacting our loan yields this quarter was purchase accounting accretion, which positively impacted loan yields by 37 basis points compared to 23 basis points in the prior quarter. Excluding purchase accounting, core loan yields increased from 4.2% to 4.23%.

The last six months, the contract rate on loans -- on new loans and renewed loans has found, we believe a bottom and in November and December even before the Fed funds rate increased, we began to see loan rates edge upwards.

The rate increase obviously helped our loan yields and given substantially all of us is expect to see more rate increases in coming quarters and given approximately 50% of our loan balances will respond practically immediately to a short-term rate increase either through Fed fund increases or 30 day LIBOR increases.

We are optimistic, the rate environment in 2017 more -- much more so than we were this time last year. More on asset sensitivity in a second. As to deposits, again here in the fourth quarter, we were able to maintain our low funding costs with only a slight increase in costs.

As to deposit balances, we had a good quarter for deposit growth, with average deposits up $336.1 million in the fourth quarter over the prior quarter or our linked quarter annualized rate of 16%.Our average loan to deposit ratio decreased to 95.1%.

Even though our average deposit volumes increased by 16% linked quarter annualized, our deposit costs increased by only two basis points as our deposit costs approximated 33 basis points for the fourth quarter compared to 31 basis points for the third quarter.

Deposit costs were up 6 basis points over the last year compared to earning asset yields that have increased 10 basis points, given we anticipate more increases in the short end of the curve over the next year, thus creating more opportunities to widen spreads going forward.

Concerning our margin and asset sensitivity, the top slide shows trends in core margin versus the impact of purchase accounting. As you can see our GAAP margins have remained fairly consistent, while core margins with purchase -- without purchase accounting have seen downward trend since early 2015.

There's been a few acquisitions and a few sub debt raises during that time, which influences all of this, but we continue to grow our net interest income and revenue per share through it all which we believe is much more important.

We are projecting 15 to 25 basis points of purchase accounting in the first quarter of 2017, but gradually should not be that influential over the next, call it one to two years. The bottom chart is our current calculation on a 12-month ramp rate curve at the 100 and 200 basis point level.

We believe the recent Fed funds rate increase benefited us by more than $500,000 to our monthly run rates. So we are hopeful for more of these. Our giveback on the deposit side thus far has been negligible. So we believe we’re in a very solid asset sensitive position and our business mix will likely create increased asset sensitivity.

We also know that remaining in the asset sensitive position for an extended period waiting for rate increases. It does hinder short-term results, so we’re always looking for creative ways to balance the need for short-term results, while being prepared for anticipated rate increases in the future.

Our rate forecast is a 25 basis point Fed funds rate increase in mid-year 2017 and another 25 in late '17. Several of you that have followed our story for many years know that at one point we had over $1.3 billion in loan floors on our books that contributed to a liability sensitive position.

We've reduced our loan -- our floating rate loans with floors down to approximately $469 million as of December 31, 2016, slightly less than 6% of our loan balances with an average spread between the contract rate and the floor rate now at 69 basis points.

With our margin increasing to 3.72% in fourth quarter with purchase accounting, our core margin increased slightly to 3.4% and this was with only two weeks of a rate hike, so we’re optimistic about this whole concept of finding support for increasing asset yields for the first time since 2013. Switching now to non-interest income.

Excluding securities gains and losses, non-interest income for the fourth quarter increased 22.1% over the same period prior year, driven largely by our ownership interest in bankers healthcare group.

BHG linked-quarter contribution is down slightly from the third quarter due to reduced operating flows in the fourth quarter after strong second and third quarters. We are reporting BHG revenues of $8.1 million this quarter, down about $339,000 from the third quarter.

We expected a bigger fourth quarter, but that does not dampen our optimism about this partnership. We expect a meaningful uptick in BHG revenues in the first quarter over the first quarter of 2016 due to increased business flows and our increased ownership interest, which we acquired, if you recall in March of 2016.

Additionally, we anticipate that net growth for BHG in 2017 should be in the 10% to 15% range, which equates to more than 20% for Pinnacle with our larger ownership percentage.

Our residential mortgage group had another outstanding quarter in terms of production and yield, with approximately $221 million in loan sales this quarter at a yield spread of almost 3%.

However, the quarter-over-quarter decrease in net gains on mortgage loan sold can be primarily attributed to seasonal fluctuations and business flows measured as of the last day of the quarter, as well as an increasing rate environment.

One of the components of our quarterly results is the quarter end fair value of our hedging activities for borrow rate-locks. So the reduction in gain on mortgage loan sold in the fourth quarter was influenced by less mortgage loan rate-lock volume at year end when compared to September 30.

Additionally, income related to our investment services increased quarter-over-quarter due to the annual incentive payment received from Raymond James based on 2017 production levels. The incentive payment for 2016 increased 27% over 2015 due to a better trading year and more producers.

Income related to trust fees increased 16% over 2016 due to an almost 25% growth in trust assets. Other income was up meaningfully for the quarter, due primarily to gains recognized on the sale of certain residential loan pools, as well as increases in SBA loan activity.

Now to operating leverage, our efficiency ratio on a GAAP basis was 52.2%, while our core efficiency ratio, excluding merger related charges was 49.6%. We are very proud of our non-core efficiency ratio. Our expense growth this quarter is concentrated in salaries and marketing. Salary increases are due primarily to incentive costs.

As many of you know, at each quarter end, we project our annual incentive costs for the full-year and then begin accruing to that amount proportionally each quarter. For 2017, our incentive accrual will result in a less than target payout pursuant to our plan.

The fourth quarter did see an increase in incentive expense over that of the third quarter, so we did finish better than we anticipated, but all things considered, we will be awarding our associates, an amount less than their target award.

Those of you that have followed our story for many years know how our one incentive plan system works and it's based on corporate results, not based on individual sales goals.

You also know that we set big targets around here and in spite of earnings growth of 17% and significant growth in the share price, we came close, but did not hit our incentive target for the year. That should give you some sense of the size of our goals.

Now going back to some prior comments on the margin, just to set the algebra straight, our purchase accounting adjustment was more than we anticipated, but to place it in context, we're also able to increase our incentive payout and hit elevated, as well as hit elevated earnings targets for the fourth quarter.

Had the purchase accounting not been advantageous, we'd have to reduce our incentive payout for the year and thus so on and so forth we would have still hit our earnings target, just wanted to make sure everyone got that linkage.

During the fourth quarter, we had a meaningful quarterly increase in marketing expense due to the sponsorships of various organizations throughout the footprint, most specifically due to our relationship with the Memphis Grizzlies, which we entered into in August of 2016.

Other expenses were down in the fourth quarter, primary due to a reduction in various areas with the largest decrease in franchise tax expense called by increased funding for several of our tax-advantaged housing loans where the state of Tennessee incents us by reducing our annual tax burden.

We continue to forecast the penalty for exceeding $10 billion to be around $3 million to $4 million in 2017, most of which is in the last half of 2017, as a result of reduced interchange fees for the Durbin amendment and $79 million in 2018 once the Durbin amendment is fully absorbed. Now I will turn that back over to Terry to wrap up..

Okay. Thanks, Harold. As a part of wrapping up, I wanted to try to provide some long-term strategic context. We currently operate in all four Tennessee's urban markets. The model that we built and perfected in Nashville going back to the year 2000 has been successfully exported to the other three urban markets in Tennessee.

We've now been successful with both de novo starts in market extending acquisitions, and so we believe our current platform should produce a $15 billion bank in these four markets by 2020 through organic growth. We see similar growth opportunities in other high-growth southeastern markets. This is who we are.

We are an urban community bank, which just means we target the urban markets and we compete with the community bank level of service. That's what we set out to build from the beginning. This is what we do.

We compete aggressively and win against the large bureaucratic regionals in those urban markets based on service and advice, which includes access to local decision makers. Keep in mind, we're nationally recognized as having established a brand for trust and ease of doing business.

There are a number of attractive high-growth markets scattered around the Southeast that are dominated by generally the same cast of regional banks with whom we compete in Tennessee.

And so, in addition to building out a $15 billion bank in Tennessee by 2020, our three-year strategic plan contemplates our exploration of opportunities in some of the most attractive southeastern markets, including Atlanta, Charlotte, Raleigh, Charleston and Richmond.

Year end 2016 is a good time to sort of backup, let's say it's how we’re doing overall. We are very excited about the growth that we're experiencing in both Chattanooga and Memphis, our newest market extensions.

Both of these acquisitions were completed in 2015 and in the case of CapitalMark and Chattanooga their system conversion was not completed until March of 2016. We didn't lose one member of management. We didn’t lose one revenue producer. We literally lost one client, which seems unheard of to me.

We produced double-digit loan and deposit growth and as you can see our hiring methodologies are taking hold, having increased the number of revenue producers by 20% in 2016, which likely accounts for the fullness of their pipeline going into 2017. Also as you can see there in the case of Memphis, loan and deposit momentum is substantial.

Much of that is the result of substantial increase in the C&I focus of the bank, enabling them to attract well-known commercial bankers and be successful on much larger loan and deposit relationships.

I might also comment, we didn’t get it to the slide, but my own back of the envelope estimate is that we produced about $2.8 million in revenue synergies that were not built into our model, just in three product categories, brokerage, trust, and mortgage.

And so we believe 2016 demonstrated that the approach we perfected in Nashville, number one, focusing on businesses in the affluent consumers. Number two, hiring and retaining a cadre of proven professionals in competing with improved levels of service and advice versus the larger regionals that dominate our market is indeed an exportable strategy.

As I mentioned a moment ago, our Firm was founded on a de novo basis and we’ve now done market extensions both on a de novo basis and via acquisition. We're in Nashville and Knoxville, by de novo and Memphis and Chattanooga by acquisition.

I would say we would be prepared to take either approach to enter these additional high-growth markets, depending upon the best opportunity available. To help you think about a de novo start, our experience in Nashville and Knoxville was that cumulative losses through breakeven were roughly $2 million over a 12 to 18 month period.

For us, that's about $0.032 in EPS prior to earnings accretion and that would appear to me to be a completely reasonable investment. Should we take that tack like we've done in other markets, with only proceed with local management that we believe is capable of building and running a $2 billion to $2.5 billion bank over time in that market.

Specifically we would never consider just hiring a few lenders in an LPO. As a market extension technique, in my view and experience that approach just makes you the lender of last resort. We intend to continue with our philosophy of preferring to be a foot wide and a yard as opposed to have an inconsequential share in a lot of spread out markets.

I would expect the first phase of hiring in any of these major markets to be at least 15 to 20 associates. So should we go by way de novo expansion, that ought to give you a little color about that. On the other side, should attractive merger opportunities present themselves, we would certainly be willing to consider those.

In general, the most attracted candidates for us, as I've tried to communicate before, we would have more than $1 billion in assets that have a commercial thrust as opposed to a consumer thrust, that would have capable, like-minded local management that want to stay on and run their local markets.

I might comment quickly that in all three of the acquisitions that we've done in the last 18 to 24 months, those management teams were founding managements of those banks and continue on with us in the markets that they serve. We would expect the target to have sustainable profitability.

We have no desire to buy fixer uppers, and we would target something greater than 5% EPS accretion in the first full-year.

So now I think in addition to our long time target of building a $15 billion bank in Tennessee's four urban markets, with a 1.20% to 1.40% core ROAA, we are attracted to additional high-growth southeastern markets like Atlanta, Charlotte, Raleigh, Charleston, and Richmond and we will explore these market extensions on either a de novo basis or M&A basis either which should be attractive investments for our shareholders.

So just trying to pull all this into the summary, I’d say we truly established a competitive distinction among the bankers in our markets, which is evidenced by our ongoing recruiting success.

We think we have a competitive distinction with our clients, which is evidenced by our balance sheet growth, our market share gains, and national recognition from Greenwich Research for the brand that we built to -- for businesses in terms of being easy to do business with and being untrustworthy.

We’ve consistently produced and expect to continue to produce low to mid double-digit organic asset growth in Tennessee's urban markets, specifically to a $15 billion asset bank in 2020 that we believe can continue to produce a 120 to 140 core ROAA, that's where we perform now, that's where we intend to perform going forward.

Similarly, for the last 24 quarters, as I mentioned early in the call, when you adjust for extraordinary items, we’ve had double-digit EPS growth and we expect that to continue. And I think importantly a 16.34% level excluding extraordinary items at that level we continue to produce top quartile ROTCE and that's in a very high performing peer group.

I think the last point which I believe is really important here is that we have an advantage stock, that’s been rationally deployed. We are fundamentally organic growers at heart, that's what we think about, that’s what we love to do.

But we do have an advantage stock that puts us in a position to create even more operating leverage and even more EPS growth, which we believe we've done with CaptilMark, with Magna, with Avenue and with BHG. So I think in simple terms, you should expect a two-prong strategy from us going forward.

Number one, continuation of the current high-growth, high-profit plan in Tennessee. And number two, expiration of expansion to other high-growth southeastern markets. Operator, I'll stop there and we will be glad to take questions..

Thank you, Mr. Turner. [Operator Instructions] And our first question comes from Jennifer Demba of SunTrust. Your line is now open..

Thank you. It looks like your loan growth during the quarter was pretty back end loaded. Can you just give us some color there? And then I’ve a follow-up question as well..

Yes, I think that’s accurate, Jennifer. As you know, our thrust is commercial. The tickets are large, both on payoffs and new loans. I think while I look at our loan growth over a very extended period of time, it seems to me to be almost on a straight line slope from quarter-to-quarter.

Sometimes transactions fall in or out of the quarter, sometimes they fall early and late in the quarter which sort of impact how the averages in any given quarter work, but again my belief is that the loan growth was very solid at a 10% period-over-period number.

And again I believe our pipelines and our activity going into first quarter 2017 are very strong..

Yes, Jennifer, I will just tack on there and I don’t have any kind of factual references here, but I believe in October, November, everybody kind of slow down a little bit waiting on the election and then after the election I think some of the activity kind of got reenergized.

So, I think that could have contributed to the more of the funding coming in later in the day..

Okay.

And how much of the loan growth approximately came from outside of Nashville?.

40%, 50%, something like that. I don’t have that number specifically in front of me, but I would say it was probably half..

Okay..

Yes, they were all within Memphis, Chattanooga, and Knoxville..

And secondly, another topic, M&A, have you seen an increase in discussion levels in the last couple of months, Terry? Any change there in kind of pipeline?.

I believe there -- I guess, I would stick to it this way, Jennifer. I would say there is a lot more chatter, for sure. We visit with both bankers, investment bankers and commercial bankers and here I guess like you, lots of rumors, lots of deals that are at some stage of discussion out there. So, I do believe there is elevated activity right now..

Okay. Thanks so much..

Thank you. And our next question comes from Tyler Stafford of Stephens. Your line is now open..

Hi. Good morning, guys..

Hi, Tyler..

Hey, Harold, can you go over again what happened this quarter with BHG? Just given the backdrop, it's normally a seasonally stronger -- a quarter from those guys in 4Q.

And just to clarify that the 10% to 15% growth you expect in BHG this year, is that relative to the $31 million of revenue you recognized in '16?.

No, I think it will be bigger than what we booked, because we only owned 30% of it in the first couple of months of 2016. So we will have that pickup for sure. But they’re talking 10% to 15% of their bottom line earnings should happen this year.

So that will equate to something north of 20%, I think by the time, you know call it a 15% run rate for them, it ought to be north of 20% for us..

Okay.

And then your comments about activity slowing down at the -- in the mid -- mid-November [technical difficulty] December and then picking back up, do you think that's applicable here to BHG and what drove a lot of the softness this quarter?.

Yes, I don’t know if I can speak for them on that. I do not -- I didn’t ask them that question, but I'm not sure if you’re getting that same information out of others as you get through these conference calls. But I would add too that we had a couple large fundings towards the end of the year.

One was a tax-advantaged credit that we got over in Memphis that was really helpful..

Okay. And then, I guess, the bigger picture on fees.

You guys are within or better than every long-term target that you put out there, but with the interchange falling out back up this year and continue in the first half of '18, do you think you can make that up and remain within the 1.10 to 1.30 fee income to asset range over the next year or two?.

Yes, I do..

Okay, great. I will hop out. Thanks..

Thank you. And our next question comes from Stephen Scouten of Sandler O'Neill. Your line is now open..

Hey, guys. Good morning..

Good morning.

How are you doing?.

Doing well. Thanks. Just one maybe follow-up question on the fee line items there after Tyler's question.

With the mortgage change quarter-over-quarter, do you guys have handy what the effect of that fair value mark on the pipeline was relative to that overall gain on sale number?.

I think it was about a $1.5 million. I know the volumes at the end of the quarter that have been rate-locked went from 135 in September, now to 90 something at the end of December. And so we're expecting first quarter -- some first quarter rebuild coming out here in the first quarter..

Okay.

And I guess, yes, that kind of falls into my next question with that, it's in terms of overall activity everything still looked pretty strong in the fourth quarter, but given where rates have kind of trended, you think you can build that pipeline backup or do we think we'll see further 15% to 20% kind of weakness into '17, like some of these MBA forecasts are predicting?.

Well, I think we will all have to battle a larger rate increase or rates going up from mortgage loans. But one thing that we've been able to do through the years is hire more producers and so I think we will get larger volumes as we -- in 2017 with increased headcounts..

Okay..

Stephen, I might just comment, we talk about the hiring momentum and we talk about revenue producers and clearly the most important aspect of that is growing relationship managers, banking relationship managers.

But we hire rapidly on the mortgage origination front and so we’ve hired a large number of people in 2016 and believe that we will hire a large number of people in 2017 and so that's really the thing that closes the gap.

I don't think there is any doubt that, as you say, the Mortgage Bankers Association would forecast and likely be right that there will be softening volumes, but our belief is and the way we try to outrun that is through this hiring model and we do have a large number of incremental mortgage producers on our payroll today..

Okay, great. That’s helpful. And then just maybe hopping back to BHG within those fee line items and you said obviously it was a little weaker than you guys would have expected. Two questions within that and I think you were saying -- targeting a pace of about 550 million in originations for them for the full-year.

I wonder where that’s kind of panned out? And then secondarily, the amount of the substitutions or replacements that they saw this quarter, if you have that kind of ballpark at all?.

Yes, I don’t have that information with me, but I will grab it..

Okay. No worries. And then maybe lastly, just on the NIM expectations, you guys sound obviously a little more positive given the rate hike we already had, the move in LIBOR and whatnot. But last quarter you had intimated that we would see a quarter or two more of compression.

Do you think that's probably not the case now given the move we've seen into that core NIM can stay, maybe flattish, not accounting for the purchase accounting effect?.

Yes, I think so. It's -- we've got here in the last call at 60 days or maybe 90 days seeing some real kind of firmness in loan yields or the contract rate so on new and renewed credit. So we're hopeful that we would be able to kind of keep that going..

Okay. Sounds good. I appreciate it, guys and Harold thanks for the clarity on the incentive accruals versus the purchase accounting adjustment. That was very helpful..

Thank you..

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

Good morning, guys. Terry, a question for you. You mentioned that the outset this inflow into the financial stocks and I think you said the inflows were without discrimination and everybody is basing these inflows on stronger growth, steeper yield curve, lessened regulation etcetera.

Could you just give your view of what you think within that scenario is going to pan out and what is not?.

I don't mind to give you an opinion. It is worth exactly what it calls, which is nothing. I think my belief is that the big players that should pan out, I do think you're going to get a reduction in the tax rate and that's a meaningful impact to earnings.

I do believe you'll have an impact on the regulatory landscape although, I view that to be longer term and not an immediate impact. But again, I do expect some improvement there.

I think the thing that I would highlight the most, Nancy, is I think you have -- if you look at your measures of business owner confidence, all those sorts of things, the -- if you look at all those sorts of measures, I think what you see is that business owners for the first time in quite some time are optimistic and more willing to increase their investment.

And that’s the play where we win the best. I mean, we bank owner managed businesses, we’ve suffered for an extended period of time with limited confidence among business owners and so to the extent that they jump in and make investment to propel the economy, that would be the biggest win for us.

Nancy, I might also just sort of clarify my comment, I really was just sort of parroting what I hear from lots of students of the investment market.

And my comment about being indiscriminate was just that the funds have had the flow in a rapid way to sort of financials in general ETFs, I mean all those sorts of things as opposed to people being more discriminate about who has sustainable advantage and those kinds of things. So that was really the point of my comment..

Okay. One of the things that I hear consistently is that seems to be almost sure to happen is that the asset size limitation on what is and is not a community bank will get lifted and perhaps lifted significantly. And with that the need to forgo Durbin revenues etcetera, etcetera.

I mean, are you counting on that as the long-term development, short-term development, not at all development or how do you look at that?.

I don’t count on it again. I’m not saying it won't happen. Certainly hope it does happen, but again I don't count on that. Again, I would be more certain about tax rate decreases and so forth, then I would be about something like the Durbin amendment..

Okay..

But I certainly hope to happen, but it's certainly not built into my plan..

Okay. Secondly, I would just ask about Avenue. At the time you guys did the Avenue merger, it was interesting because a number of your regional and community competitors suddenly started up music/entertainment lines of business and I think probably with the thought that they would be able to snag producers or clients.

Can you just tell us how that business has proceeded to grow since the deal?.

Yes, I would just say, I can express it in terms of loan volume, I would say that the music group which was previously Avenue's music group, now Pinnacle had its biggest quarter ever in terms of loan volume in the fourth quarter of 2016. So again, we feel good about our ability to compete in that sector..

All right. Thank you..

Thank you. And our next question comes from Tyler Agee of Hilliard Lyons. Your line is now open..

Hey, good morning..

Good morning..

You'll mentioned you had 25% growth in trust assets.

Could you provide some color on the linked quarter surge in investment services?.

Yes, I think most of that investment services increase is the contingency payment we get from Raymond James every year..

Okay..

They based that of off trading activity for the last year and so we get a little bonus here in the fourth quarter..

Okay..

That's what most of it was..

Okay..

But there was other, I think trading activity for our brokers was also up in the fourth quarter as well..

Okay. And then also a big piece of your story is bringing over revenue producers.

Could you speak to the pipeline currently?.

Yes, I would say there is not a dramatic change in the pipeline. I guess which is a way to say that we have continue to hire people in the fourth quarter, and I believe we will continue to hire people in the first quarter..

Okay.

And then moving on, could you provide some color on a target for loan growth in 2017?.

I would say our expectation would be low to mid double-digit growth..

Okay. And then lastly you mentioned tax reform.

Where do you all expect the effective tax rate in 2017 to be absent that?.

It will probably be somewhere between 33 and 33.5..

Okay. That’s all I got. Thank you..

All right. Thank you..

Thank you. [Operator Instructions] And our next question comes from Brian Martin of FIG Partners. Your line is now open..

Hey, guys..

Hi, Brian..

Hey, two things for Harold on the fee income side just to make sure, I’m clear, the BHG part I think you said you kind of gave 10% and 20%, so the 20% is on your work earnings in, Pinnacle contributions in ;16 is $31,000.

So the 20% growth on top of that would be the outlook?.

Yes, that’s true. And that two pieces one is their business flow growth and then they were picking up two months of increased ownership..

Yup, got you. Okay.

And then just secondly on the mortgage side, I guess you talked about the rate-locks and then Terry talked about just kind of the incremental hires you expect in mortgage producers in '17? When you look at the net earnings with flow-through mortgage, I guess is your outlook that the mortgage origination revenue should be greater in '17 versus 16..

Yes, I will just say, the guy that runs that department for us, or that group, he has got a big challenge this year, because yes, he is supposed to produce increased revenues this year over and above what he did in 2016..

Okay. And I guess, just a last couple of things. I think you said, just maybe going to Terry on M&A for a minute. You talked about looking at these other southeastern markets.

Can you just talk about, are there still opportunities to do in market deal in your existing footprint or I guess, is the focus more out of market at this point?.

There are a few, but I think it's pretty limited in terms of the bona fide in market acquisition potentials. Again it's not zero, but it's not very large, and so they think looking to the east is very attractive to us..

Okay. I got you. Okay and then, just on the last two things, just the revenue producers that you guys hired in '15 was strong, '16 was stronger.

Is your outlook just in general that the number of revenue producers you hire in '17 will be greater than '16? I guess, is that a kind of the high watermark as far as how many folks you brought abroad?.

I will think we would hire at least as many people in '17 as '16..

Okay. All right. And then, just the last one was just on the margin.

I think Harold, you gave some -- you quantified somehow the recent 25 basis point increase, the impact to margin, I guess, could you give some color regarding there or maybe I missed it or just misheard what you had to say, but the recent increase that occurred late December, how much benefit did that have -- I guess, would you expect that to have to the margin based on your current asset sensitivity?.

Yes, we think that the 25 basis points that occurred in mid December and given that we’ve not had to adjust deposit rates hardly at all, that’s probably more than $0.5 million a month increase to our run rate..

Okay. Perfect. That’s all I had. Thanks, guys. Nice quarter..

Thank you..

Thank you. And our next question comes from Peyton Green of Piper Jaffray. Your line is now open..

Yes, Terry, I was wondering if you could give maybe a little color on the low of mid double-digit loan growth for '17 with the hiring that certainly was very active in 2015 and even more active in '16? Maybe what’s missing in terms to understanding kind of the loan growth might pick up in '17 is the seasoning of that capacity and the -- and then the amount of capacity that exists in those revenue producers?.

Peyton, ask me the question again. I’m not sure I got it..

Yes.

I guess, in terms of the number of revenue producers increasing in '15 and '16, maybe the mix of revenue producers, I mean, how much of them are more lending oriented versus mortgage? And does that make you more optimistic about loan growth in '17 versus '16?.

Well, I think maybe just to get out into the basic numbers, if the question is do we expect to grow our loan volumes more in 2017 than we did in 2016? The answer to that would be yes.

And it is largely influenced by the increased hiring of what I’m going to call relationship managers, commercial bankers as you know, Peyton, we call them financial advisors. And so that’s the principal driver on the loan volume.

Of course the mortgage volume as you know we sell in the secondary market and so we have hired a good number of mortgage originators. We’ve also hired trust sales people and brokers, Series 7 licensed brokers in -- among those revenue producers and so we expect growth in -- outsized growth in each of those categories as well.

Again, I think to your point of milking out the revenue, we’re incurring the expense today and so we milk out the revenue in 2017..

Okay.

And then, Harold, as you grow loans, each dollar of loan growth, will you add securities at the margin going forward if deposit growth remains stronger than loan growth or continue to pay borrowings?.

No, no., we will -- I think as long as our capital is in good shape and as long as -- I don’t think we will see the ratio of securities to assets go down much further. I think we’re pretty comfortable where it is, we like the way it shapes up, but you’re right we’re largely carrying a bond book to secure public fund deposits..

Okay.

And then, do you still feel good about deposit growth going forward, Terry?.

I do. I do..

Okay. All right, good enough. Thank you for taking my questions..

Thank you, Peyton..

Thank you. And our next question comes from Tyler Stafford of Stephens. Your line is now open..

Hey, I just had one follow-up question to Peyton's last point about the bond book. Can you talk about the changes you made there this quarter? It looks like you took duration up a bit and yields were much stronger at quarter end than they were on average.

Just any color on what you’re buying now and what are the new yields there?.

Yes, I think the -- those were quarter end yields. I don’t think there has been any significant change in what we’re buying or anything like that. I know we’ve kind of dipped our toe into some banks sub debt issuances.

I think I might have $10 million of that, that occurred this quarter, but there is -- I think it might have just been just a general increase in rates, but I don’t sense any big changes in how we’re going about constructing that book..

Okay. And then maybe one more, if I could sneak it in on the reserve ratio, just any thoughts on where that reserve ratio bottoms out or how we should be thinking about it for next year? I’m talking about the 70 bps GAAP reserve..

Yes, I think Tyler, you’re right. We are getting close to where it's going to be at an embedded floor. We still -- my charge-off ratio for the quarter was influenced by high yield.

I think charge-offs if you take high yield out were like 4 basis points this quarter, so we still have, we believe credit leverage there, but not nearly as much this time this year as we had this time last year. And I think that’s primarily just due to optics. We will continue to look at it.

We probably have some more reserve release coming, but you're right, it's not going to be nearly to the extent we had in 2016..

Okay. Thanks, Harold. I appreciate it..

Thank you. And I’m showing no further questions at this time. Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may all disconnect. Have a great day everyone..