Terry Turner - CEO Harold Carpenter - CFO.

Stephen Scouten - Sandler O’Neill Catherine Mealor - KBW Jennifer Demba - SunTrust Robinson Tyler Stafford - Stephens Nancy Bush - NAB Research Tyler Agee - Hilliard Lyons Brock Vandervliet - UBS Brian Martin - FIG Partners.

Good morning, everyone and welcome to the Pinnacle Financial Partners Second Quarter 2017 Earnings Conference Call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer; and Mr. Harold Carpenter, Chief Financial Officer.

Please note, Pinnacle’s earnings release and this morning’s presentation are available on Investor Relations page of their website at www.pnfp.com. Today’s call is being recorded and will be available for replay on Pinnacle’s website for the next 90 days. At this time, all participants have been placed in a listen-only mode.

The floor will be open to your questions following the presentation. [Operator Instructions] Before we begin, Pinnacle does not provide earnings guidance or forecasts. During this presentation, we may make comments, which may constitute forward-looking statements.

All forward-looking statements are subject to risks, uncertainties and other facts that may cause the actual results, performances, or achievements of Pinnacle Financial to differ materially from any results expressed or implied by such forward-looking statements.

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

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

A presentation of the most directly compared GAAP financial measures and a reconciliation of non-GAAP measures are to the comparable GAAP measures and will be available on Pinnacle Financial’s website 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. We always begin our quarterly earnings calls with this dashboard to allow you to quickly assess how we are performing on all of the critical financial metrics. This particular slide is focused on the GAAP measures.

I expect, most of you know, we closed our acquisition of BNC on June the 16th, less than five months from announcement. And so, all the financials are impacted by that transaction and two weeks of post-merger performance. So for the second quarter, we continued to grow the revenue and earnings capacity of the firm.

We continued to grow the balance sheet at a very substantial pace, both organically and through M&A which we believe is predictive of future revenue and earnings growth, and then also shows that our asset quality is very strong.

As I say each quarter, at least for me, given all the transition and merger, integration going on in the Company, the non-GAAP measures actually provide greater insight into the core run-rates on these important metrics. So, we will move on to those. Looking at the non-GAAP measures, those are all nicely sloped in the right direction.

I won’t walk through each metric. I will just highlight two that we’ll get a little more discussion as Harold reviews the quarter in greater detail in just a few minutes. So, let’s look first at ROTCE on the first row and the reductions there over the last two quarters.

As you will recall in conjunction with the BNC acquisition and to support the future growth needs of the firm, we issued 3.2 million shares on January 27, 2017, totaling $192 million in net proceeds. So, we had a partial quarter impact of those additional shares in Q1 and a full quarter impact in Q2.

Nevertheless, we’re thrilled to have growth prospects and warrant additional capital. And I promise you this, we’ll be diligent in both protecting it and in leveraging it through growth to optimize the returns. Secondly, just below the ROTCE chart is the tangible book value chart.

I have commented a number of times on these earnings calls regarding the correlation between growing tangible book value and growing the share price. We take it seriously; in fact, we have been talking about it. And as you can see, in conjunction with our acquisition, we have protected it, and in fact grew it over the last two quarters.

As I mentioned, Harold will review that in greater detail shortly.

Those of you that followed our firm for any length of time, know that coming out of the recession back in 2011, we published our profit model and associated performance target, after having achieved the originally targeted levels; we’ve actually increased the return on average assets target range twice, now to its current level of 1.30% to 1.50%.

In conjunction with that return on average asset target, we continue to publish targets for the key performance measures that lead to that overall level of profitability, specifically the margin, the fees to assets, the expenses to assets, and net charge-offs.

As you can see on this slide, reflecting the GAAP measurements, second quarter 2017 was another good quarter with a return on average assets of 1.30%, just inside the new target; and in general, the component measures are all performing pretty well against their targets.

As I’ve already said, these are the meaningful impact, the merger related charges. I personally tend to focus more on the profitability metrics, adjusted for those merger related charges. On that basis, you can really get a picture of our operating momentum here.

The second quarter return on average assets is well within our new target range, in 1.35%; net interest margin was 3.68%; and net charge-offs were just 17 basis points, both better than the top end of the range. Expenses compared to assets are very low in the target range, even with very little in the way of our BNC cost savings.

And fees-to-assets has actually slipped below the target range in the second quarter, primarily as result of the BNC acquisition. But, I promise you, we view that as upside in the revenue synergies we intend to produce there, which I’ll talk in greater detail about later in the call.

One of the things that I think distinguishes Pinnacle from many is our continuous focus on building additional infrastructure in the current period in order to continue propelling the firm forward in terms of revenue and earnings growth in the future periods. This slide continues to give you a snapshot of how that went here in the second quarter.

Of course in this quarter, the BNC acquisition is the most significant investment. We continue to march down through our implementation timeline. Since I’ve been over this on previous calls, I won’t review it in detail. I’ll just highlight the next bullet point.

We now intend to merge Pinnacle’s Jack Henry files with BNC’s Jack Henry files at year-end, which is two-month acceleration in the timetable and therefore, two-month acceleration in the completing the cost takeout. And so, in short, we still expect to realize our original target of $40 million in cost saves in 2018.

The second largest investment future growth is the hiring of additional revenue producers. As you can see, year-to-date we’ve added 33 in total, 14 of which were added by Rick Callicutt and his team. We’ve been asked a number of times if the M&A activity in North Carolina would afford us additional opportunities and I think the answer to that is yes.

And then finally, our organic loan growth during 2Q was extremely strong, both in the legacy Pinnacle footprint and the legacy BNC footprint, which is really incredible during this period of merger integration. So, now, with that overview, I’m going to turn it over to Harold for a more detailed review of the quarter..

Thanks, Terry. Revenues for the quarter increased from $119 million in the first quarter to $142 million in the second quarter or about $23 million quarter over quarter. Revenues from BNC contributed $14.1 million to the quarter for the half month of this operation’s post-merger.

As a result, we believe the legacy Pinnacle franchise experienced 29% annualized linked quarter growth in revenues between the second quarter and the first quarter due to increased yields on earning assets as well as strong fee growth in a number of areas, more on that in a moment.

Total spread income increased $18 million between second and first quarter, as shown on the blue bars on the chart; discount accretion represented $1.4 million of the increase, so less than 10%. The dark green line on the chart denotes revenue per share.

Impacting our revenue per share in the first quarter was the capital raise, which we believe diluted our first quarter revenue per share by $0.12, which is the reason for the decrease in the chart in the first quarter. We reported $2.46 revenue per share in Q1 with the capital raise and reporting revenue per share at $2.64 this quarter.

We believe revenue per share will increase in the third quarter as the capital raise in the early part of the year has already been fully absorbed in our second quarter run rate, while the BNC revenue impact and the corresponding share issuance were included in our results for only two weeks.

Thus, BNC will have a larger impact in the coming quarters. We believe the BNC revenue per share in the last two weeks would have capped out at slightly more than $3 per weighted average share, post-merger. As we look forward to the third quarter purchase accounting related to our mergers with Avenue CapitalMark and Magna, should continue to decrease.

However, with the BNC acquisition, we should experience a significant increase in discount accretion in the third quarter. In the aggregate, we have around $196 million in loan discount accretion of which a significant amount is expected to amortize in the income over the next few years. Now, a little more on loans and deposits.

Concerning loans, as the chart indicates, the average loans for the second quarter of $9.82 billion compared to $8.56 billion or an increase of $1.26 billion in average loan balances of which the BNC footprint contributed $923 million.

We believe there was a strong second quarter for us concerning loan growth, which in Tennessee was up $478 million compared to $192 million in the first quarter, BNC’s organic loan growth increased to $190 million in the second quarter compared to $165 million in the first quarter.

Obviously, $668 million in second quarter organic loan growth has us all pretty excited. As the chart indicates, our loan yields increased to 4.66 this quarter compared to 4.60, last quarter.

Impacting our loan yields this quarter was purchase accounting accretion which positively impacted yields by 26 basis points compared to 23 basis points in the prior quarter.

Excluding the impact of purchase accounting, core loan yields have increased from 4.23 in the fourth quarter of 2016 to 4.26 in the first quarter of 2017 and up 14 basis points to 4.4% in the second quarter of 2017.

As to deposit, again, here in the second quarter, we were able to grow our funding base, while deposit costs increased from 25 basis points to 32 basis points. We continue to anticipate increases in deposit rates as rate hikes continue but we don’t expect anything dramatic in the short-term.

Average deposit balances were up $1.3 billion of which BNC contributed a $1 billion to that amount. We preliminarily assigned a core deposit intangible of $48 million to the BNC core deposits of which 316 was amortized in the last two weeks of the quarter.

Switching now to noninterest income, we’re affording $35.1 million in fees up more than 60% linked quarter annualized. We also had a record fee quarter this quarter for the Tennessee footprint. Fees for the Tennessee footprint amounted to $33.4 million compared to $30.1 million in the first quarter.

Our residential mortgage group had another outstanding quarter in terms of production with approximately $262 million in loan sales this quarter at a yield spread of 2.81%. We feel very positive regarding our mortgage pipeline as we head into the third quarter.

Income related to insurance commissions decreased quarter-over-quarter due to the annual incentive payment we received in the first quarter from carriers for positive claims experience. We’re reporting BHG revenues of $8.75 million this quarter, up $932,000 from the first quarter.

We expected a meaningful uptick in BHG revenues in the second quarter compared to the first quarter and we continue to anticipate that net growth for BHG revenues will be up approximately 20% for Pinnacle in 2017. We also believe that third quarter and fourth quarters will see strong growth.

Interchange revenues continue to show positive traction as we approach the impact to us from Durbin amendment on July 1st of this year. Had the Durbin amendment been effect in the second quarter, our interchange revenues would have been approximately $1.8 million less.

We believe the Durbin amendment will impact third quarter fees by approximately $2.5 million with a full quarter of BNC interchange revenues in our operations. We experienced some meaningful uptick in other non-interest income in the second quarter.

FBA loan sales were up $333,000 this quarter over the last quarter with BNC contributing a $170,000 to that amount. Gains on the sales of both commercial and residential loans were $854,000 in the second quarter compared to $217,000 in the first quarter.

Now to operating leverage, our efficiency ratio on a GAAP basis was 50.7% while our core efficiency ratio excluding merger-related charges was 48.4%. First, concerning personnel costs, we’ve got 2,200 FTEs at June quarter-end, of which almost a 1,000 were from the Bank of North Carolina.

Salary costs were up $6 million, which was attributable to the BNC footprint, increased headcount and increased incentive expenses.

We project our annual incentive costs for the full year and then begin accruing to that amount proportionally each quarter, those of you that have followed us for many years, know our one incentive plan system works and that is based on corporate results and not based on the individual sales goals.

We are still accruing at less than target award for 2017. You also know we set big targets around here, so we will be working hard to get back to these reduced incentives but we only get it back if we get our numbers. Just to emphasize the point, incentive expense and earnings are not indirectly linked but directly linked.

If we hit our revenues and earnings targets, our incentive costs will obviously increase; if we don’t, our incentive accruals will get reduced.

This is a new slide and probably the last time we’ll show it, but we wanted to get on the table, our position that when we announced the BNC merger, we felt our tangible book value would not be diluted inclusive of our capital raise. Now there are blue million things that go on to get from then to now.

But all things considered, we are confident then as well as now. The two charts on the top are the charts from a previous slide that Terry went over discussing our accretion of tangible book value over the last two years.

The table at the bottom rows, forward our equity accounts in a summary fashion so that we can detail a quick calculation of our tangible book value.

Appreciate that we are reporting $1.60-plusish in GAAP earnings for the first six months of 2017, less about $0.28 per share in dividends to shareholders about, so rough numbers; you’d expect tangible book value accretion for those two components to accrued capital by call it $1.30. Our tangible book value is up $2.50-plus.

So, an incremental $1.20 is due to many factors, but mostly due to the impact of our January equity raise and the BNC transaction. This is a slide we showed on the merger call back in 2017.

We anticipated a tangible book value accretion of approximately 5% now and feel like we are all over that number -- we anticipated tangible book value accretion of approximately 5% then, and feel like we are all over that number now.

Looking at the capital ratios, we are also pleased that we’re within what we believe are acceptable tolerances for sure. We are higher on the 100, 300 due to more loan growth at both footprints that we anticipated but we have ample room to fund CRE lending going forward based on current pipelines.

So, what’s left for us to accomplish with respect to what we told you all in January is obviously the accretion target of approximately 10% in 2018. We feel really good about our synergy case. We feel really good about our earnings momentum in our new markets in the Carolinas and Virginia.

We are also working on long list of potential revenue synergies which were not contemplated in the merger model in January, and are optimistic about those, particularly around C&I and wealth management. With that, I will turn it over to Terry to wrap up..

Thanks, Harold. Okay. After a pretty thorough review of where we’ve been and where we are, I wanted to focus now on the growth potential that we see going forward.

And so, to get behind the growth potential that we have going forward, I think it’s really critical to get behind and understand the growth model that we’ve successfully deployed over the last 17 years. In my opinion, Shakespeare guided right, “what’s past is prologue”.

Many of you remember in the years, maybe following the recession, frankly the time when we felt our share evaluation didn’t really reflect the balance sheet and earnings growth we intended to produce, we published the three-year organic loan growth targets and ROA target to make it more clear to investors as to our expectations for earnings growth.

And so in that period from 2012 to 2014, we consistently produced double-digit loan growth and exceeded our published target while at the same time muscle building [indiscernible] to hit target, at the time when not many banks were able to do either.

What you’re looking at there is Greenwich Associates Research as it pretends to businesses with annual revenues from $1 million to $500 million which is effectively the entire business market and Nashville, Knoxville, Memphis and Chattanooga.

For each market, banks are plotted left to right based on the percentage of their clients who rate their satisfaction as excellent.

As you can see by the fact that Pinnacle for the most part is the right most plot point on each chart, we have clearly built the distinctive client experience when compared to the large regional national franchises with whom we compete.

Banks are plotted north and south based on their market penetration of businesses with sales between $1 million and $500 million. And so, conclusion for me is that we have been able to build a client experience that’s so distinctive versus these larger regional national franchises that we’ve successfully taken their clients away at a very rapid pace.

In Nashville as an example, we’ve grown from 0% to approximately 26% share and opened up a pretty largely lead over all the three banks who’ve previously dominated the Nashville marketplace and who continue to show the great vulnerability. In Knoxville, we started on a de novo basis there seven years later, but you see fundamentally the same story.

In just 10 years now, we’ve already built a $1.4 billion bank, if you will and unseated one of the three previous market leaders and are on the dance floor with other two. In Chattanooga, we entered by way of acquisition. CapitalMark Bank and Trust was a 2007 de novo that we acquired in 2015. It’s virtually an identical story to Knoxville.

And Memphis, and Magna Bank, the bank we also acquired in 2015 would not have even appeared on the chart and then you can see that we’re taking share based on a distinctive client experience with tons of upside versus highly vulnerable competition.

Here is the chart intended to move beyond the competitive vulnerabilities and the client experience in order to help you get a grip on the actual growth, we’ve been able to create with the market extending acquisitions we’ve done, specifically in Memphis and Chattanooga, both of which were done in 2015.

Starting at the bottom that slide, you see in addition to creating a great client experience, we overlay our hiring philosophy and methodologies, which have generally been very successful against those larger national and regional competitors.

Again, having entered both markets in 2015, look at the growth and revenue producers in 2016 and year to date in 2017, you can see that the hiring momentum has been strong and frankly that it continues to be strong.

As you move up the slide, look at the core deposit growth and the loan growth, you can see that this combination of distinctive client experience and the ability to attract so many of the best bankers and brokers and mortgage originators in the market is having desired results.

Our growth trajectory in these relatively newly acquired markets is extremely strong. So, with that as a foundation, I want to show you why we believe the Carolinas and Virginia and most particularly North Carolina, why they’re so attractive to us and why BNCN is the perfect platform from which to launch.

Identical to the other charts we’ve been looking at, this is Greenwich Research on businesses with annual sales from $1 million to $500 million in the state of North Carolina. In my opinion, the same two broad observation apply here as to the Tennessee markets we just looked at.

Number one, the large regional national players in North Carolina appear extremely vulnerable based on their levels of client satisfaction. And number two, BNCN indeed already possesses a distinctive client experience versus these large regional national banks.

So, like in Tennessee when you overlay Pinnacle’s larger lending limits and advantaged treasury management platform and our hiring philosophy and methodologies which Rick Callicutt and his team are already successfully deploying, we expect to see similar balance sheet and big growth in North Carolina to that that we’ve seen in our recent acquisitions in Chattanooga and Memphis which as you saw have been extraordinary.

One last observation on this chart. In addition to the larger regional national franchises in North Carolina that we typically target, I’ve also left two of the smaller more recently acquired franchises in North Carolina because I currently believe that they will represent great opportunities for us in addition to those banks we typically target.

This slide is similar to the previous slide. But, I clearly just have to peel the onion back on the vulnerability that we intend to attack.

Again, this is Greenwich Research on businesses in the State of North Carolina with sales from $1 million to $500 million comparing BNCN’s current reputation to the two large national franchises and the two large regional franchises that are headquartered in North Carolina.

You see each banks ranked on overall satisfaction, each bank’s ranked on each of the key drivers of overall satisfaction and each bank’s ranked on the willingness of their clients to recommend them.

And so, when you look at those key drivers of client satisfaction like being trustworthy, being easy to do business with and value and long-term relationships, it doesn’t seems to me that these are gaps that our competitors can close quickly.

So, now, with all that data, I hope you begin to see why we’re so excited about the incredible organic growth opportunity that the BNCN acquisition affords us. So, now with the strategic opportunity established, the primary equation remains can we execute. To that end, I want to spend just a minute on the cultural integration.

My guess is many have wondered what this has to do with anything. Frankly, I agree with Peter Drucker when he said culture each strategy for launch. We’ve got a good strategy but we’ve got a great culture, and honestly nothing could be more important in terms of both our short-term and our long-term success.

So, those of you know our Company, well know the thoughtfulness and intentionality with which we’ve built the culture of this firm. And the primary foundational method for inculcating that culture with new associates is a three-day orientation; it’s largely conducted by me and other key leaders of our firm.

Among other things, these sessions are intended to be build buying [ph] to our mission, to our vision, to our value; every associate in our firm’s been through it. We have already conducted four of these three-day sessions and have taken about 234 BNCN associates through the process. We’ll do seven more of these before year-end.

In fact, Harold and I are in North Carolina this morning taking time out from one of those sessions to conduct this call. We will get roughly 80% of our new BNCN associates through this exercise by year-end and then finish up in the first quarter of 2018.

The third day of orientation is primarily team building exercises, which are intended to demonstrate import of Pinnacle values; the day culminates with everyone going over a 12-foot wall which is intended to paint a picture. What we do at Pinnacle is accomplish the seemingly impossible by all working together.

In this picture, about half way up the wall, you can see Rick Callicutt, BNCN, CEO laying over the wall, cheering teammates on as one by one each associate makes it over.

In terms of how well the orientation is being received at BNCN, we are getting 85% top box ratings on their evaluation, which is extraordinarily high and comparable to what we get among our new recruits in the legacy Pinnacle footprint, which to me perhaps one of the best indicators about buying and cultural compatibility.

These are verbatim comments from a number of those evaluations that have been completed by associates after having gone through the orientation. As you can see the comments illustrate the level of excitement, associate engagement we are achieving. I might just point you to that last comment.

“Exactly what I needed to understand, exactly where we want to go and how we will get there”. When associates already know where we are going and how we are going to get there and excited to do it, we are more than half way home. So, as we have just discussed all important cultural integrations well underway.

Indicated earlier, we currently contemplate merging the BNCN and PNFP Jack Henry files together at year-end versus February 2018, which we’d previously published, which should put us in a position to get roughly $40 million in cost takeouts in 2018, despite the fact that we won’t harvest a 100% of cost takeout until mid first quarter 2018.

Guys, as you think about earnings growth, it’s pretty easy to calculate the earnings associated with $40 million in cost savings. While we don’t need any revenue synergies to hit the earnings accretion that we have projected, we believe there should be substantial revenue synergies. Perhaps the most obvious is associated with incremental loan volumes.

Our regional case contemplated $500 million in net new loans from BNCN during 2017; through June 30, 2017, they are up roughly $300 million, which on a straight line should translate to $600 million for the year, $100 million ahead of target, which adds even a 2% spread, $2 million of spread income.

And then on the fee side, we currently expect to realize meaningful synergies with our treasury management platform, which is more robust, including things like business credit cards and purchasing cards at BNCN. It was not operate in the past; swaps, client swaps, back-to-back client swaps.

Product BNCN is here to forward, not been able to sell the health clients, convert fixed to floating and floating to fixed.

Permanent commercial mortgage brokerage, capability, BNCN has not had here to forward despite the concentration of commercial real estate loans The residential mortgage origination process, converting BNCN from a best efforts basis to a mandatory delivery basis, which should widen the yield spread premium by roughly 40 basis points on all their residential mortgage production which is forecast to be approximately $450 million in 2017, just to name a few.

Alright guys, if we’re successful, just moving back to the low-end of our previous fee to asset target, that’s a pickup of 5 basis points or roughly $10 million in incremental fees. My guess right now is it may take up to two years to build all the way back to that level but will pick up meaningfully in 2018.

And then of course, we’ve already discussed that we contemplate building out a meaningful C&I business. The hiring momentum has already been established.

When you layer that on to the $40 million in cost stakeouts, the above planned loan growth year to date perhaps as much as $10 million in fee synergies which weren’t contemplated in our regional business case, the balance sheet and EPS growth trajectory is truly exciting.

Now in an effort to translate all of that into financials, much like in 2011 when we felt the market didn’t really understand earnings potential of our firm. We’ve already given you the ROA target of 1.30% to 1.50%. And so here is the organic asset growth we intend to produce through 2020 in the new combined existing footprint.

Let me just say right now, it won’t grow in a straight line, first quarter growth will almost always be less than second and third quarter. The ROAA won’t be exactly on the midpoint of the range every quarter; my guess is, some quarters it will be higher and some it will lower.

But with the ROA target and with the asset target which is reliant on no additional M&A, you begin to get some sense of our current expectation for future earnings growth. Now, all we’ve talked about thus far is organic growth and our existing footprint. But as you know, we’ve highlighted other high growth markets in the Southeast that we’ve targeted.

Obviously we don’t have to do anything. As you just saw, our growth trajectory is fabulous if we don’t do another thing. But my guess is, we will be afforded additional opportunities to layer more growth. I don’t intend to rehash this slide today, since I’ve discussed it pretty fully on previous earnings calls.

But I will point out one change as it relates to M&A opportunities. When we were smaller company, we targeted something greater than 5% earnings accretion. Given our larger size and share count, we’ve modified that target to 3% to 5% earnings accretion.

But we have no interest in doing deals that provide de minimis and no earnings accretion, and we’ve never done deals that meaningfully diluted our tangible book value.

So, let me say this, as we wrap it up, much of what I’ve talked about in the latter half of this call has been focused on crystallizing our earnings growth potential as we move forward. But I won’t conclude with this idea. What we’re really focused on is long-term shareholder value.

To that end, we will continue to focus on taking advantage of both large high growth markets and the meaningful vulnerabilities in those large and regional franchises that dominate those markets. And we will do that in order to produce outsized organic growth in our existing footprint.

As I just mentioned, that’s an extraordinary opportunity; frankly, it’s enough. But my guess is we will have other higher valuable opportunities to do pretty good market extensions or fill in M&A in our existing footprint.

And so, we’re in the luxurious position having a lot of incremental opportunities, but not been impressed in any way to do anything other than what’s in the long-term best interest of the shareholders. Operator, I’ll stop there and we will open it up for questions..

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

Hey, guys. Good morning. Congrats on a great quarter here. Question for you, the loan growth especially within the Tennessee legacy footprint was extremely strong.

Can you give any additional color there on kind of segment to that growth, where it came from either geographically or type of loan? And if you think we should be thinking about a faster rate of growth than maybe the legacy 10%, to 12%, 13% that you guys have traditionally put up?.

Steve, that’s a great question. I think in terms of the growth during the second quarter, I guess to give you a little color commentary I would say in terms of industry segment it’s pretty broad in its distribution. So, it’s not like you’re doing it all in health career or name another sector there. It’s a broad and diversified in the growth.

I think the thing I would comment is and this is just a back of the envelope estimate. But, it looked like to me about 40% of that growth came from market share takeaway, which seems important to me. Again, I think there’s been a lot of talk about limited C&I our loan demand and those kinds of things.

We are getting some growth from our existing client set and I’m sure some of that has to do with this idea of hiring folks and their consolidating books of business. And so, even among existing clients loans continue to fund and move and those kinds of things.

But to have 40% come in through market share movement is a big, I guess, boon to the growth rate. Steve, I think over the long-term, I mean we’ll have quarters -- I mean, my guess is that the third quarter is likely to resemble the second quarter in terms of growth.

But I think just over an extended period of time, I sort of like low to mid double-digit growth rate for the loan category. So, I don’t know if that’s helpful but that’s who I see it..

Yes. No, that’s very helpful. And then, maybe on the NIM, nice moves there, especially on the core NIM.

Harold, can you give any color into what drove that? I mean is that predominantly from the March hike and the effect there or is that new loan yields coming on a bit higher? What’s I guess kind of puts and takes between those two dynamics within that core NIM?.

Yes, Steve. What we’ve kind of come down on or what we’ve concluded is that of the 14 basis-point increase in the core, probably about 8 basis points was attributable to the March rate hike. So, yes, probably about half of it..

Okay, great. That’s really helpful. And then, maybe one last kind of more high level question is, I mean obviously things look like they’re going great. I think there is a ton of potential in the North Carolina and Virginia markets from BNCN and I think that’s pretty clear.

What do you feel like could trip you guys up? What do you worry about a little bit? I mean last quarter we were are talking more about healthcare loans and exposure there and some people are focused on retail now and credit for a bank obviously can always be the easiest way to trip up.

But what is it that you guys are really focused on as you think about what could derail the kind of trajectory you have today?.

Yes. I think I just gave you some random thoughts, Steve. I think for me, I’m always interested in containing CRE exposure. Many folks remember we took meaningful losses going through the last recession, one of the things we committed to as concentration limit.

And we’ve got a number of sub limits but just 30,000 fee, the two most familiar limits are the 100% construction, 300% total CRE exposure. And we intend to stay inside of that.

I do think in terms of our guidance to lenders, we have put a caution flag and really told commercial real estate lenders that if you are doing many firms or loans with either actual maturities in the three to five or seven-year time frame or rate maturities of 10 years, you are almost certainly going to intersect with the cycle here on commercial real estate.

So, our guidance has really been in our red flags but what we said is we are going to do deals, it needs to be on our terms and our price or -- and we are in a position to miss deals. Again, I don’t want you to interpret that we are on the panic button; I’m not on the panic button. I just think we are later in the cycle than we once were.

And so, now is a time for little more caution there. I think that’s probably the biggest area I guess, if you trying to highlight things like credit that would stop us..

Thank you. Our next question will come from the line of Catherine Mealor with KBW. Please proceed..

I want to follow up on the margin. Can you talk about your outlook for the margin when we layer in a fourth quarter BNCN, both with and without the accretion? And then, kind of follow-up to that is, as you think about the BNCN, naturally not as asset sensitive as you are because already you probably have more risk to the flat-end of the curve.

So, can you talk about how you think about that incremental margin in a higher but flatter yield curve at BNCN? Thanks..

Yes. Catherine, what we have been talking about probably for the last, I guess since January is that we really believe that our core margins will stay relatively stable. We are not seeing any kind of big upticks in funding cost just yet, but we think that will eventually happen of course. But, the core margins ought to be pretty flat.

There is a lot of discount accretion that’s going to be coming to us in the short end. So, we have always talked about there is going to be accretion with respect to I will call it the GAAP margin.

So, once that -- we’ve got a $192 million, we allocated about $170 million of that to Bank of North Carolina, so a lot of that money will be coming in here in the next, call it four to eight to 12 quarters..

And would you say that and if that’s going to start ramping, I mean it’s going to start higher and then trail off as we get into the out years….

That’s for sure..

A larger portion of that $170 million is going to really start hitting next quarter?.

That’s right..

And the life of that, do you think it’s going -- is the life of that $170 million -- it’s got to be longer than eight quarters. So, what’s your….

Yes. The life of it won’t -- the consultants have it going out as far as eight to 10 years..

I got it. But just a large percentage of it over the eight next quarters..

Yes. It’s definitely an accelerated kind of accretion..

Thank you. Our next question will come from the line of Jennifer Demba with SunTrust Robinson. Please proceed..

Good morning. Back to the loan growth in the quarter.

Terry, do you have a guesstimate of how much of that came from new hires that were made this year? And can you give us any detail on those hires, where they came from or what types of banks they came from, if you don’t want to give specific?.

Let me say, I don’t know the number but I have a perception about it and I’ll be glad to share that. There is no doubt that the growth is concentrated in recent hires. And so, I guess, Jenifer, your question had to do with hires his year.

I’d probably rather expand that to hires over the last 12 to 18 months might be a better way to think about where the growth comes from.

But, if you’re growing at a double digit pace, say you growing at 12% to 14% on a normalized basis, the way that typically breaks down is, among your legacy guys who are running $200 million and $300 million loan books, you’re growing at 4% to 6% and among your new guys, you are growing at 40% and 45% and so forth.

So, the growth dramatically comes from the new hires..

Okay.

And any color on where these hires have come from, particularly in the BNCN footprint?.

I would say that in the Tennessee footprint, it’s the same large region from whom we’ve been taking people. And I would think that over the last 12 to 18 months, SunTrust might be the largest contributor there. And then -- and the BNCN footprint, it’s scattered out a little bit among larger regional banks.

I probably would rather see that thing material a little bit more, we’ve got a big pipeline of people that we’re recruiting and I’d probably rather see a little bit more before I start talking about; here is what the big contributors are going to be. But it is primarily from the larger regional banks..

Okay. And if I could ask one follow-up question, your Bankers Healthcare Group fees, you’re up obviously sequentially but down year-over-year.

Can you just talk about that -- the color behind that?.

Yes. Jennifer, they had a big quarter and the second quarter of last year, the largest quarter they have ever had. So, we’ve -- that was -- their business flows were significantly -- call it first half of last year. They have been working it back over the last say four quarters. They changed some of their disciplines within some of their internal areas.

And I think the way it’s shaping it for rest of the year; we’re really excited about what’s going to happen in the third and fourth quarters of this year. So, we’re still thinking that we will experience closer to 20% growth in that line item in our P&L once all has been done for 2017..

Thank you. Our next question will come from the line of Tyler Stafford with Stephens. Please go ahead. .

Harold, maybe just to start, would there be any major balance sheet repositioning from BNC that we should expect to see or potentially could see in the third quarter?.

We’re still working through the bond book. David Spencer is running through that for us. I think we will continue to see some repositioning there over the next, call it one to two quarters. I think what you will likely see is more in the loan portfolio as these C&I lenders get hired.

So, that’s what we were probably most -- that’s what we’re most excited about as far as where the balance sheet might go. I think you’ll see a shift from longer term fixed rate commercial real estate into the shorter term C&I..

Okay, got it. And maybe on the reserve, clearly that took a hit with the fair value impact from BNC down to 42 bps at quarter-end. And I realize you got the 190 million of discount.

But any thoughts Harold on the GAAP reserve and where that should trend, if you plan to rebuild that from here, obviously assuming no change in the credit environment?.

Yes. I don’t think -- it’s going to be difficult to reduce that reserve from this point forward. I think you’ll continue to see that the provision will exceed charge-offs. And Harvey and I talk frequently about the credit environment and where he’s seeing weakness.

And right now, we feel like where we are with credit is really good and that we’re not going to see any kind of big surprises here, at least in the short-term..

So, that ratio would be stable to maybe increasing slightly going forward?.

Yes. I don’t think you’ll see that number going down very much from here if at all..

Okay, got it. And just last one for me on the $170 million of discount from BNC.

Is that purely the fair value interest mark or does that also include their credit mark that you took?.

That’s everything..

That’s everything? Okay. .

Both interest rate and the credit. .

Okay. Congratulations again, guys. Thanks..

Thank you. Our next question will come from the line of Nancy Bush with NAB Research. Please proceed..

Good morning. Two questions for you.

Number one, 14 producers that you acquired with BNC, can you just kind of give us the distribution across markets?.

Nancy, I don’t have notes in front of me, but I’m familiar where the good number of those are, firstly. So, I would just say that there have been hires made in Raleigh, several hires made in Raleigh. There have been hires made in Charlotte. There have -- there is a big hire in Roanoke.

There are a number of mortgage originators and there are also that would be scattered around in towards the large urban markets..

Okay. Raleigh I hope that’s helpful..

Yes, it is. Thank you. And secondly, when I talk to people about the BNC deal, one of the comments that comes up consistently is what about the rural markets, because they did have more in rural markets than you have. Your strategy has been an urban strategy.

I guess the question is sort of what do you do with rural markets, what is the strategy?.

Well, I’d just say this. I think to be clear Nancy, as you highlight, we focus on urban areas, that’s really where we try to grow. But as we’ve done acquisitions all the years, even in Tennessee, we have some markets that might be described as rural market. Just as an example Shelbyville in Bedford county.

That’s handsome h office there that draws up handsome cash flow and so we got no desire to eliminate that market. We do well in that market, they are just fine. But in terms of receiving incremental investment, we channel all the incremental investment into the large urban markets. And so, I think that really will extend into the BNC footprint.

I mean, we have markets that, again something we might describe as more rural that do well for us and provide great fund and we’ll continue to operate those offices to the extent they meet our performance standards.

But we will channel all the incremental investment, I think you ought to expect the incremental investment for us to be in key markets, specifically Raleigh and Charlotte and also in Greenville, South Carolina and probably in Charleston..

And doing one of these deals, Terry, do you get the regulatory flexibility to exit markets or to sell places that don’t make sense for you? Is that something that you would think about?.

Sure. I think that we said when we announced the deal that we would go through a branch rationalization. And not driven so much, Nancy, by the fact that whether it’s rural or urban but just driven by the fact that BNC has been a rapid acquirer, and I think have done deals since 2012.

Anytime you do that, there is some branch rationalization opportunity. And so that’s been an intent all along. And so, we are moving forward with that analytical construct. And I believe that there will be some opportunity in there.

But again, I don’t want to characterize it as rural versus urban as much as just achieving our performance targets versus not achieving our performance targets..

Thank you. Our next question will come from the line of Tyler Agee with Hilliard Lyons. Please proceed..

Going back to your asset sensitivity, could you provide some color regarding what your simulation model is showing increase in interest rates of say of 100 or 200 basis points?.

Yes. I think in the past, we have talked about anywhere from 3% to 4% on the first 100; it won’t be nearly that high going forward..

Okay..

That’s for two reasons. One is we’ve got Bank of North Carolina in our numbers now; and two, we have already experienced over the last, call it six, seven months, 75 basis points of uptick. We still believe we are asset sensitive on the short-end of the curve but it won’t be nearly that large..

Okay.

And then you happen to have a breakout of merger related expenses by each line item that we’re going to have?.

No, I don’t have that with me. It would be largely compensation related here in the second quarter and probably more than half of it is. But, we will talk about that more as we go through the next couple of quarters..

Okay.

And then, lastly, do you have a good run rate for the effective tax rate for the rest of the year?.

Yes. The tax rate this year -- this quarter was impacted by the change in the accounting rules for equity comp that was about a call it $780,000 adjustment; it won’t be nearly as large in third or fourth quarter. And then, we should have a fairly meaningful credit in the first quarter of next year.

So, the first quarter will have the largest -- will be the largest beneficiary of the change in the accounting rules; second quarter will be second and then the third and fourth will be much less..

Thank you. Our next question will come from line of Brock Vandervliet with UBS. Please proceed..

Thanks for taking my question. Just a little bit of a different take on the prior one regarding your asset sensitivity. Clearly that’s been the right approach in the most recent quarters. It sounds like that’s getting less as a result of the merger integration now.

But what’s your view on rates in general and may you rack in that sensitivity here in the next coming quarters?.

Yes. Brock, I guess if the question is what are we modeling currently, then I’d tell you that we’re modeling a 25 basis-point increase in December and then two or three next year, both around the first quarter and midyear -- first quarter midyear and then one towards the end of next year. So that’s what we’re putting in our modeling currently..

Got it. Okay. And separately on mortgage banking, the purchase component of that alone was up very materially.

Was that simply the impact of plugging in the BNC portion into the pipe or something more that play there?.

Yes. I think I would probably characterize it as principally seasonality, in the high selling season, generally second and third quarters where you take the volumes. And so, I would say that was a principal contributor.

Although we did have two-week worth for the production from BNC that would have been included in the hedge and sold on a mandatory basis. So, there is a little bit of pick-up in that. But it would just primarily be the seasonal growth volumes..

Thank you. Our next question will come from line of Brian Martin with FIG Partners. Please proceed. .

Maybe just one question, Harold, back to the margin. We kind of talked about maybe the core margin being kind of flattish going forward.

I mean this quarter it was up maybe 5 basis points or so with the yield benefit I guess in your expectations and rates still going higher, at least kind of as you guys are thinking about, I mean not much change in the funding costs.

I mean that core margin ought to -- I guess your take that being flat versus up is -- am I not understanding what you’re saying? I guess what’s the outlook on that core margin, as you look forward? Is it kind of flattish at the current level or is that what you’re suggesting?.

Yes. I think it will be flattish, will probably pick up a little -- a few basis points based on the increase in rates. But BNC’s core margin was a little less than ours. So, we will have that fully weighted in, in the third quarter. So, our estimates are that the core will likely be right around where it is, it might be a few ticks up.

I think where you will see the biggest increase though is in the GAAP margin..

In your comments, Harold, in the past and the deals you guys have done, kind of talking about that accretion income, what’s kind of done and like you are in the year one period, how much of that accretion has typically come in, is it kind of in that 30% to 40% type of range, is it that kind of out ballpark..

Yes. We’re not planning that kind of number in the first four quarters. It’s pretty meaningfully less than that. So, that’s the way we look at it. .

And then just from a -- going back to Terry’s comment about M&A. I guess given kind of as you kind work through getting the BNCN kind of integration and all that done kind being the near term priority but still looking at the opportunities that are out there, Terry.

I guess, is there any indication time-wise? If you look at opportunities today, I guess how quickly could you or would you be willing to step into another potentially, another opportunity, if it came up? I guess are you ready currently or would it be a little bit?.

Yes. I guess, I might go this way. You’re question is what would you do, and that’s not necessarily same as what you could do. My sense is on the what could you do, I don’t think I would make a large acquisition right at this minute. I probably won’t finish the system integration and those kinds of things.

I’ve generally tried to indicate that if things go as we intend for them o go so forth, the next year you’d probably in a position where you could consider taking on another meaningful M&A. But, we get most questions about M&A and I believe there are some of those opportunities.

But I also believe there may be some de novo opportunity in there is well. And at least for me that’s a significantly different integration challenge and honestly not much different than the volume of hiring we would normally do on a quarterly basis.

So, if you say would you do de novo, I probably would if I had the right opportunity and the right group of people and so forth; that would be certainly I’d be willing to do. Again, I don’t want you to walk away and say, he said he’s getting ready to do a de novo start here. I’m not telling you that.

I’m just sort of trying to answer your question, what would you do. I’d be willing to do de novo start. I probably wouldn’t be willing to do a really large acquisition, needs a little more time for that.

But again, I do hope that the message comes through that we -- this is a luxurious position to be in where -- we’re going though of really outside of earnings growth for a period of time, it feels to me and without taking on these other projects.

And so, that’s kind of my outlook is if it fits and it’s good for long-term shareholder value, based on what we do, but we’re not compelled to anytime somebody will say, what’s your timeline to get to Atlanta or something like that. There is no timeline. I don’t care if I ever get there.

I bet we do, but I don’t care if we get there, we’ve got a great hand at play, just like it is..

Okay. That’s helpful. And then maybe just one more for Harold just on the -- you talk about some of the items on the fee side, as you kind of look forward.

I guess, was there anything that’s unusual Harold that was not sustainable from the current level, maybe kind of in those other areas that as you look forward or is there -- I know you highlighted a couple of things in that other line item.

But anything that’s really not sustainable going forward?.

I don’t think there is anything in there that we’d classify as an outlier. All the gains that we had on those loans were from businesses that we are currently involved in and we’ve devoted resources to. So, there is not like a one-off deal in any of that..

Thank you. Ladies and gentlemen, this concludes our question-and-answer session today. We’d like to thank you for your participation on today’s conference. And this does conclude the program. You may all disconnect. Everybody, have a wonderful day..