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

Catherine Mealor - Keefe, Bruyette & Woods, Inc. Stephen Scouten - Sandler O’Neill Jennifer Demba - SunTrust Robinson Brian Martin - FIG Partners Tyler Stafford - Stephens Nancy Bush - NAB Research.

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

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

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

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

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

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

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

Thank you, Victor. Good morning. We appreciate you being on the call with us this morning. We always begin our quarterly earnings call with this dashboard. We do that, because it quickly highlights performance and momentum on virtually all the metrics that we use to drive our business.

We’ve always believed that revenue growth, earnings growth and asset quality are the three metrics most tightly correlated with the share price performance Companies that grow tangible book value typically grow share price, companies that consistently produce well above median ROTCEs typically trade at well above medium PE multiples and for companies like ours, where spread income represents roughly 80% of total income, balance sheet growth is the key to earnings growth, and you can see all of that on this slide.

This particular slide is focused on GAAP measures. I expect that most know, we closed our acquisition of BNC on June 16th of this year. And so, all the financials are impacted by that transaction. So for the third quarter, we continue to grow the revenue and earnings capacity of the firm.

We continue to organically grow the balance sheet in a very substantial pace, which as I just mentioned, we believe is predictive of future revenue and earnings growth and our asset quality remains very strong.

As I say each quarter, at least for me, given all the transition and merger integration going on in the company, the non-GAAP measures adjusting for merger-related expenses actually provide greater insight into the core run rate on these important metrics, so let’s move on to those.

Looking at now the non-GAAP measures, adjusting primarily for merger-related expenses, since the arrows are all nicely sloped in the right direction, I won’t walk through each metric, I will just highlight two. Let’s look first at the ROTCE on the first row.

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 the growth prospects that warrant the additional capital. And I promise that, we’ll be diligent in both protecting it and leveraging it through growth in order to optimize the returns. As you can see, it’s escalating quickly already back to a 15.43 ROTCE.

Secondly, just below the ROTCE chart, the tangible book value chart, as I have commented on this call, the correlation between growing tangible book value and growing the share price is pretty obvious. We take it seriously.

And as you can see, in conjunction with our acquisition, we’ve protected it, and in fact, we’ve continued to grow at over the last two quarters.

Those of you that have 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, 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 1.3% to 1.5%.

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

As you can see on this slide, reflecting the GAAP measurements, third quarter 2017 was another good quarter with a return on average assets of 1.21%, and in general, the component measures are all performing pretty well against targets.

As I mentioned a moment ago, since these targets do not contemplate merger-related expenses, I find performance metrics adjusted for merger-related expenses to be more disruptive, which is on the next slide. So here are the same measures adjusted for the merger-related expenses.

I might start with a quick discussion of the target range for each measure. As most of you know, we conduct a strategic planning process each year in the third quarter. This year’s plan focused on the remainder of 2017 through 2020. And this year’s three-year plan, we didn’t alter the overall target range for ROA, it remains at 1.30% to 1.50%.

However, as a result of the business mix changes associated with our BNC acquisition, we adjusted the targeted range for margin up to a range of 3.60% to 3.80%; expenses to assets down to a range of 1.80% to 2.0%; and the fee to assets down to a range of 0.9% to 1.10%.

As you can see, adjusted for merger-related expenses, we’re currently operating inside or better than our target range for ROA in each component measure except the fees to assets.

For those that have followed our firm for a long period of time, you will recall that several years ago, we had an expense to assets target range of 2.10 to 2.30, and it took six to eight quarter for us to work inside that range.

I’d expect to march towards the midpoint of our new fees to asset target range as we build a stronger C&I platform in the BNC footprint. And as we implement our full set of treasury management and wealth management products there.

As we approach the range of that component measure, we’d expect to operate in the high-end of the overall profitability target near the 1.5% ROA range.

One of the things that I think distinguishes Pinnacle from many of our peers is our continuous and relentless focus on building additional infrastructure in the current period in order to continually propel the firm forward in terms of revenue and earnings growth. This slide continues to give you a snapshot of how that went for the third quarter.

Of course, in 2017, the BNC acquisition is the most significant investment towards future earnings. We continue to march down through our implementation timeline. Since I’ve been over this timeline on previous calls, I won’t review it in great detail. But let me highlight several items quickly.

Beginning with the end in mind, let’s go to the last bullet point under number one. The $40 million synergy case that we targeted in our due diligence should be fully deployed very early in 2018.

That should be the case, because as you can see in the next to last bullet point, we’ll convert Pinnacle to the Jack Henry Silverlake system on Veteran’s Day weekend, which is the key to the final job eliminations contemplated in the original synergy case.

Move on up the chart and perhaps crystallize how we’ve already mitigated so much of the risks associated with this conversion. During September, we contemplated that we completed the transition to the Pinnacle brand in the Carolinas and Virginia.

In other words, BNC clients are currently utilizing Pinnacle signed offices, Pinnacle products with Pinnacle pricing, Pinnacle ATMs, et cetera. And all of that transition has occurred with the essentially no client issue. They should encounter no further change in that regard.

And then moving on that one more bullet point to August 21, Pinnacle began during the core processing on the Jack Henry Silverlake system for BNC. So again, clients in the Carolinas and Virginia should encounter no further change in that regard.

All that remains is the conversion of the legacy Pinnacle clients to the same system we’ve been processing for BNC since August. So I’m extremely proud of our associates and the precision with which they plan our work and worked our plan in order to produce the nearly 10% earnings accretion we targeted in conjunction with the BNC merger.

The second largest investment in future growth is the hiring of additional revenue producers. As you can see, year-to-date we’ve hired 54 in total, 19 of which were added by Rick Callicutt and his team in the Carolinas and Virginia.

We’ve been asked a number of times, if the M&A act – all the M&A activity in North Carolina might afford us additional hiring opportunities? And I would say at this point, my answer to that is, yes. Let me see if I can paint a better picture where we’re going in this regard.

Generally, I have preferred to talk about revenue producers, which include relationship managers, brokers, mortgage originators, trust administrators and so forth. The reason to that is, I think, above anything else, we are a revenue growth company, so we manage expenses, we grow revenues.

And so adding revenue producers is the key to our revenue growth. But in the case of Carolina and Virginia, I think, the key to realizing our potential there is to build out a large C&I capability. And so to that end, we intend to hire, at least, 64 C&I and private banking relationship managers over a five-year period of time.

Obviously, the total number of revenue producers when you include brokers, mortgage originators and so forth will be substantially greater than that. I think skeptics may say, well, that sounds like that’s going to be expensive.

But for those of you that watched us over the years and our performance against the profitability targets I just reviewed with you, you understand we’re expecting to get that hiring done inside the expense to asset target of 1.80% to 2.0%.

To me that’s what we’re talking about when we say we’re investing in the current period in order to propel the firm forward in terms of continued revenue and earnings growth.

And then finally, our net organic loan growth during third quarter at a 13.6% linked quarter annualized growth rate was extremely strong, really incredible during this period of merger and integration. So with that, let me turn it over to Harold for a more in-depth review of the quarter..

Thanks, Terry. Revenues for the quarter increased from $142 million in the second quarter to $216 million in the third quarter with a substantial amount of debt increase attributable to our new markets in the Carolinas and Virginia.

Total spread income increased $66.6 million between the second and third quarter, as shown on the blue bars on the chart; discount accretion represented $12 million of the increase.

The dark green line on the chart denotes revenue per share impacting our revenue per share in the first quarter with the capital raise, which we believe diluted, our first quarter revenue per share by $0.12 per share.

We reported $2.64 revenue per share in Q2, and our reporting revenue per share of $2.80 this quarter and annualized growth rate of 24% between the two quarters. Obviously, our goal is to continually increase our revenue per share over time. As you all know, it’s a lot easier to grow earnings per share when revenue per share is growing.

As we look forward to the fourth quarter, our pipelines remains strong throughout the footprint. This applies both to our client pipelines, as well as our recruiting pipelines. As to purchase accounting, it will be impactful, but should gradually lessen its impact on our results over time.

We have approximately $182.4 million in loan discount accretion of which a significant amount is expected to amortize in income over the next two to three years. We recognized $18.9 million in the third quarter and anticipate, at least, $14 million to $16 million in loan discount accretion in the fourth quarter.

Concerning loans, as the chart indicates, the average loans for 3Q of $15.02 billion compared to $9.82 billion at the end of the second quarter, or an increase of $5.2 billion in average loan balances.

We believe, it was a strong third quarter for us, particularly in our Tennessee footprint, which increased approximately $440 million compared to $478 million in the second quarter. In the Carolinas and Virginia, their organic loan growth was approximately $61 million in the third quarter compared to $190 million in the second quarter.

Thus far, in 2017, including the $330 million of net organic loan growth, Bank of North Carolina posted prior to our merger, the two firms had produced net loan growth in excess of $1.5 billion thus far in 2017. This obviously excites us as we go into the fourth quarter with the combined firm pressing forward to grow the franchise.

As the chart indicates, our loan yields increased to 4.91% this quarter compared to 4.66% last quarter. Impacting our loan yields this quarter was purchase accounting accretion, which positively impacted yields by 50 basis points compared to 26 basis points in the prior quarter.

Excluding the impact of purchase accounting, core loan yields increased slightly from 4.4% in the second quarter of 2016 compared to 4.41% in the third quarter of 2017. The Fed funds rate increase in late June did help our core loan yields.

However, loan yields from Bank of North Carolina were 40 basis points lower than that of the Tennessee footprint, so we’re pleased that our core yields ended at 4.41%. As to deposits, again, here in the third quarter, we’re able to grow our funding base, while maintaining low funding costs.

Our aggregate funding costs did increase 5 basis points in the third quarter from the second quarter and currently stand at 66 basis points for the third quarter. As to the 5 basis point increase, impacting the change were two matters that basically negate each other.

Those two items were a reduction in funding costs due to purchase accounting and a full quarter of Bank of North Carolina deposit pricing, which increased our overall cost of funds. These two items workout to be a plus and a minus of 2 basis points overall funding costs.

Thus, at the end of the day, backing out the aforementioned items, it appears the actual increase in funding cost due to rate increase is about – is around 5 basis points. So we believe our beta is a 5 basis point increase over the 25 basis point Fed funds rate increase in late June, or call it 20%.

As to the future, deposit costs will continue to increase in a measured pace for several factors The two most prominent are general pressure for increased deposit rates in a rising rate environment, but also we’ll need to fund a significant loan pipeline.

Our relationship managers are out in our market selling our ability to serve commercial and affluent consumer depositors with a value equation we think is far superior to our competitors. We typically experience deposit volume increases in the fourth quarter and have no reason to believe that won’t occur this year.

Funding our growth has and will remain a key focus of our firm. In the supplementals, there’s an articulate chart on funding. We experienced a $367 million increase in core deposit growth in the quarter endpoint to endpoint. With Bank of North Caroline, we’ve about completed our balance sheet restructuring strategies.

There was significant work in both the security book as well as wholesale funding, which involved reduction in broker deposits, which includes reciprocal deposit accounts and utilization of federal home loan bank advances to both create more asset sensitivity, as well as liquidity and earnings.

As to the impact of all these on overall margin, we’ll likely see some reduction in our NIM due to reduced impact from purchase accounting, which we will work hard – but we will work hard to maintain the core margin over the next several quarters.

We still believe, we remain asset sensitive and with a growing balance sheet, we should experience consistent net interest income growth. Switching now to noninterest income, fees amounted to $43 million compared to $35 million in the second quarter.

Our residential mortgage group had another outstanding quarter in terms of production with approximately $300 million in loan sales this quarter at a yield spread of 3.02%. We’re reporting Bankers Healthcare Group revenues of $8.94 million this quarter, up $462,000 from third quarter of 2016.

We continue to anticipate that net growth for BHG in 2017 should in the 10% to 15% range, which equates to 20% plus for PNFP, given the larger ownership percentage in 2017, and given we increased that ownership in early 2016. We believe their fourth quarter will be exceptional and be the best performance quarter of the year by far.

Their loan pipelines are very strong at this point and they are optimistic that their credit experience will also improve meaningfully in the fourth quarter. Interchange revenues were impacted by the Durbin Amendment, which started for us on July 1st of this year.

We estimate the Durbin Amendment impacted third quarter fees by $1.8 million to $2 million in the third quarter. Offsetting the interchange reduction or increases in other consumer fees, most of which is attributable to the Carolinas and Virginia. We experienced an increase in other noninterest income in the third quarter.

SBA loan sales were up $421,000 this quarter over the last quarter, with again the Carolinas and Virginia contributing the bulk of that amount. Capital markets advisory fees were also up $326,000 this quarter over last quarter.

Now back to operating leverage, our efficiency ratio on a GAAP basis was 50.8%, while our core efficiency ratio excluding merger-related charges and ORE expense was 46.4%. Our third quarter total noninterest expense increase amounted to $37.9 million with a significant amount of the increase attributable to the Carolinas and Virginia.

First, concerning personnel costs, we’ve got approximately 2,200 FTEs at September quarter-end, of which almost 950 are in the Carolinas and Virginia. Salary costs were up $20.6 million over the second quarter of 2017, which was attributable to the Carolina and Virginia footprint, increased headcount and incentive expenses.

We project our annual incentive cost for the full-year to begin accruing to that amount proportionally each quarter. Those of you that have followed our story for many years know how our one incentive plan system works and that’s based on corporate results, not based on individual sales goals.

We are still accruing at a less than targeted ROE for 2017. You also know, we set big targets around here, so we’ll continually work hard to get back to those reduced incentives, but we’ll only get it back if we hit our numbers. Just to emphasize the point, incentive expense and earnings are indirectly linked.

If we hit our revenues and earnings targets, our incentive costs will increase. If we don’t, incentive accrual get reduced. Obviously, one of the keys to anticipating our expense run rate going forward is how quickly the synergy case will be deployed.

A critical component of the synergy case is the technology conversion, which will occur in mid-November. As a result, we think our synergy case will largely be fully deployed in the first quarter of 2018 with some still lesser amounts not being realized until later in the year.

Of the $40 million annual synergy target, we think we’ve got enough portion of those expenses currently, but the bulk is yet to find their way into our P&L and won’t until 2018. My best guess is that from a run rate perspective, we will have harvested about 25% of our synergy case by year-end 2017.

Excluding merger costs, the fourth quarter expense run rate will hopefully be slightly higher in the third quarter depending on where we end up on our incentive costs, which as you know, I just spoke about and whether we can afford those additional costs.

Additionally, impacting the fourth quarter expense base will be the impact of several meaningful hires we’ve made over the last few months. As to merger cost, our best guess is that we have incurred about 75% to 85% of the $100 million in pre-tax one-time charges we anticipated on the merger call back in January.

Most, if not all of that will or the remainder will work its way through our P&L over the next two quarters. With that, I’ll turn it back over to Terry to wrap up..

Okay. Thank you, Harold. As we begin to focus on the extraordinary growth opportunity we have going forward, here is a chart intended to help you get a grip on the actual growth we’ve been able to create with the previous market extending acquisitions we’ve done, specifically Memphis and Chattanooga, both of which were done in 2015.

I think this is instructive as it relates to our opportunity in the Carolinas and Virginia. Starting at the bottom of the slide you see, we first overlay our hiring philosophy and methodologies, which have generally been very successful against our larger national and regional competitors that dominate those markets.

Again, having entered both markets in 2015, look at the growth in revenue producers in 2016 and year-to-date in 2017, you can see that the hiring momentum has been extremely strong and that it continues. And then as you move up the slide, you see dramatic core deposit growth and dramatic loan growth.

You can see that our combination of distinctive client experience and ability to track so many of the best bankers, brokers and mortgage originators in the market is having the desired result. Our growth trajectory in these relatively newly acquired markets is extremely strong. So now let me move on to BNC and our progress there.

I spent a fair amount of time discussing the cultural integration on the last quarter’s call, so I won’t go back to this other than to reiterate that we have been systematic and purposeful about inculcating the Pinnacle culture in the Carolinas and Virginia and have created a great excitement among the associates there, I believe.

I think, we’re in a position to get roughly $40 million in deal synergies, as Harold just pointed out in 2018, despite the fact that we won’t harvest 100% of the cost stakeout until mid first quarter 2018.

And while we didn’t contemplate the revenue synergies in order to hit the earnings accretion we announced, we believe there should be substantial revenue synergies.

Specifically, 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 that BNC had previously not offered.

Back-to-back client swaps, a product BNC had heretofore not been able to sell to help clients convert fixed to floating or floating to fixed. Permanent commercial mortgage brokerage, a capability BNC has not had heretofore despite the concentration of commercial real estate loans on their book.

And then the residential mortgage origination process converting BNC from best efforts 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 forecasted to be $450 million in 2017, that’s just to name a few.

My guess right now is that, it might take six to eight quarters for us to build into the fees to asset target range that I talked about earlier on the call. And that, of course, as we’ve already discussed, we contemplate building out a meaningful C&I business, the hiring momentum has already been established.

I discussed the magnitude of that opportunity earlier on the call, specifically 64 C&I relationship managers over a five-year period of time.

Now in an effort to translate all that into financials, much like in 2011, when we felt like the market didn’t really understand the earnings potential of our firm, we’ve already given you the ROA target of 1.30% to 1.50% and our roadmaps to the high-end of that range.

And so here’s 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 on a straight line. First quarter’s growth will almost certainly be less than second quarter and third quarter, the ROA won’t be exactly on the midpoint of the range every quarter.

My guess is some quarters will be higher and some quarters will be lower. But with the asset target and the ROA target, you begin to get some sense of our current expectation for future earnings growth with no additional M&A or no new markets.

So always talk about as far as organic growth in our existing footprint, which as you can see, we expect to be substantial. But as you know, we have highlighted other high-growth markets in the southeast that we 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’ll be afforded additional opportunities to layer on still more growth. I don’t intend to rehash this slide today, because I discussed it pretty fully on previous earnings call – calls.

But I just want to make sure that you know, I do expect that we will have other opportunities beyond the organic growth that we’ve already discussed and sized for you.

Let me say, as we wrap it up, much of what was talked about in the latter half of this call has been focused on crystallizing the earnings growth potential as we move forward, I want to conclude with this idea. What we’re really focused on is the long-term shareholder value.

To that end, we continue to focus on taking advantage of both large high-growth markets in which we currently operate and the meaningful vulnerabilities of the large regional and national franchises that dominate these markets as we seek to produce outsized organic growth in our existing footprint.

The hiring growth model that’s proven so successful in our two most recent market experience into Memphis and Chattanooga is a model we’re deploying in our new markets in the Carolinas and Virginia as we aggressively build out our C&I platform in those markets. As I just mentioned, that’s an extraordinary opportunity, frankly, it’s enough.

But my guess is, as we finish the successful integration of BNC, we’ll have other high-value opportunities to do accretive market extensions or fill in M&As in our existing footprint.

And so we’re in a really luxurious position of having a lot of incremental opportunities, but not being pressed in any way to do anything other than what’s truly in the long-term best interest of the shareholders. So I think really I’ll stop there and we’ll open it for questions..

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

Thanks. Good morning..

Good morning..

First on expenses. So, Terry, you mentioned that you’re still accruing – or Harold, you mentioned that you’re still accruing below your incentive award target.

But specifically quarter-over-quarter, did that incentive in comp expense increase or stay at the same levels that we saw in the second quarter?.

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

Okay, great. Okay, that’s helpful. And then a bigger picture question for you, Terry. So you’re talking about the 1.3% to 1.5% ROA goal, and you put that on a $28 billion balance sheet, we can get to the out-year earning for your company.

But as you think about capital with those two goals, do you think that you will accrete enough capital over time to hit that target without needing to raise more capital, or do you expect you’re going to need to raise capital at some point to support this level of really strong growth? And that’s kind of thinking about it outside of any additional M&A activity, I know, a deal could change that formula?.

Catherine, this is Harold. The way our models are working right now, we don’t need to – we’re probably not going to do any kind of capital raise. I’m not saying, we won’t – may need to go to the debt markets a time or two to get some sub-debt over time, I’m not going to take that out. But right now, I don’t think we’re into any kind of common raises.

We think we’ll be able to accrete capital. We diluted capital just a little bit this quarter, but I had about $8 million in merger costs that impacted that. So anyway, yes, I think, we’ll be okay..

Okay, that’s helpful I was trying to get to an EPS. And then maybe lastly, the commentary on the BHG revenue was a little bit light linked quarter.

Usually we see a bit of bigger ramp in the third and fourth quarter from BHG? Can you give any commentary on that in terms of whether it was credit-related or related to maybe Hurricane Irma, given that they’re down in Florida?.

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

Okay. All right, great. Thank you..

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

Hey, guys, good morning.

How are you doing?.

Doing good..

Good.

How are you?.

Doing well, doing well. Hey, so just following up on Catherine’s question there, Harold, with BHG, I mean, assuming you’ll still hit that 20% which you seem to intimate. I mean, is it fair to say, I mean, that’s a pretty appreciable jump you’d need to see in fourth quarter near $12 million.

I mean, is that – am I kind of in the right ballpark there of what you think they can deliver?.

I think you’re close, yes..

Okay. And on the mortgage side also within fees, it was obviously a really good quarter there and the gains were nice. But on a combined basis, given how strong BNC and its mortgage footprint is as well, I would have expected a little bit higher number.

Can you give me any color as to, I mean, I guess, maybe how that fell relative to your expectations, or if I’m thinking about the combined mortgage units in an incorrect fashion?.

No, I think, I’m not sure where the pipelines are today on the mortgage group, but they do have some rate increases during the quarter that impacted their business flows. I think, Ross and his group are active in the Carolinas and Virginia right now. They’re looking to recruit some additional mortgage brokers.

So I don’t think, your assumption there about when you pull the two firms together, would we expect to see more than $300 million in production in the quarter, I think, it’s more environmental, I guess, Steve..

Okay, that’s fair. And then maybe on overall loan growth, obviously, growth in the Tennessee market seems just extremely strong, which is impressive. But the $61 million in the Carolinas was maybe a little lighter than I would have expected.

So anything going on there that’s of note, or is that just kind of adapting to a new platform, changing up business mix? I mean, what’s kind of driving that move from 2Q to 3Q growth for the Carolinas and Virginia?.

Stephen, this is Terry. I think there are a couple of things that impacted obviously got a lot of change going on in there. And I can’t imagine that wouldn’t have some impact. I think the bigger impact quite honestly is their concentration in CRE.

And as a result of that, they saw extraordinarily high pay downs during the period that really had to do with people going to permanent markets and actually a good number of their projects being sold. So again, I think they had some headwind really side up in their CRE pay downs..

Okay..

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

Yes. No, that’s really helpful. Okay. And one last one for me, just on the hiring front, obviously, you guys give the revenue producer number from Memphis and Chattanooga and then look like five incremental people in Carolina is 19 year-to-date.

So if I do that math, is it correct to say that you guys have lost some people net-net in Nashville? And if that’s the case, how do you think about your lending personnel in Nashville? I mean, obviously, you guys have been there for what 17 years now, and you’ve always hired more experienced lenders.

So we see a turnover affect maybe some of those folks begin to phase out in their careers and you bring along the younger staff, or how should I think about that transition?.

Stephen, I think that I’m just trying to think back through turnover. I can think of three revenue producers that came in through the revenue acquisition that subsequently left. And so you might find one or two there. I can’t think of anything other than a retirement or two on normal producers in the legacy Pinnacle footprint.

So you’re on an interesting theme. We do have an aging workforce here, but we have pretty specific transition plans, really down to the relationship level and don’t fear our ability to continue to add people. I think Harold alluded to the fact that we’ve made some meaningful hires.

We actually had a pretty good sized lift out in the brokerage business, basically, a total of six people, again, that’s support and brokers. But about $650 million in assets under management was the size of their book. And so we just made that lift out since quarter-end.

And so again, I just gave you that as an anecdote to say my belief is our capability to continue to hire people here in Nashville is strong..

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

All right. Thank you, Stephen..

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

Thank you. Good morning..

Hi, Jennifer..

Terry, I just wonder, if you could elaborate on your M&A interest in Atlanta and there’s not many targets here.

Just wondering what your thoughts are and if you really feel it’s necessary to have a presence here? And then secondly, just wondering, as a follow-up, just wondering how many C&I lenders you now have in the BNC footprint?.

Well, let me take the second one first. Unfortunately, I guess, the answer to that is I don’t know. I can’t – I don’t have any information in front of me that’s going to let me give you a very good answer for that.

It was a pretty modest great start with and we’ve made a handful of hires but – so it’s not monumental versus what we believe we are going to do on a go-forward basis. But I couldn’t tell you the exact number that we have over there now. I think on the question on Atlanta, I think, of course, you know that market better than I do.

I would say Atlanta is an attractive market to us. It’s attractive to us, because it’s a grand commercial market. And you saw the size and growth dynamics there are great. And it resembles other markets that we compete in, in terms of the competitive landscape.

So I think we try not to be secretive at all about our desire to make it to the Atlanta market. When I talk about market expansion as you know, I always talk about it in two veins, what would an M&A transaction look like and what would a de novo expansion look like. So I think both of those opportunities might exists for us in Atlanta.

I do agree with you that the number of targets for us is limited. And I think, it’s probably fair to say, Jen, if we were just hell-bent to make an acquisitions we probably could have done that. But we try to say, hey, look, we’re going to concentrate on doing BNC before we do anything else.

And we’re nearing the end of that as I talked about on the call. But I guess, I’m just trying to clarify, number one, I like the Atlanta market and why I like it is because of the size and growth dynamics and because of the competitive landscape. If we come there, we might come there by M&A or we might come by de novo expansion.

But again, I guess, I want to keep trying to hammer home this point because I get a lot of questions about the pace which we might do M&A or grow and so forth. My genuine desire is to do what’s in the best interest of our long-term shareholders.

And so even though I think we could have found a way to get to Atlanta in the last 12 months, even by de novo or by acquisition, it just haven’t been the right time for us to do that. But it doesn’t concern me if I never make it to Atlanta.

Again, you can see we can put a pretty substantial growth for the foreseeable future in the real estate that we currently have, in the markets we currently serve. And so again, we are just not going to go for the sport of it. We’re not going to buy banks that doesn’t fit with us.

We’re not going to get out here and overpay., we’re not going to undertake it while we’re trying to do BNC, those kinds of things. But again I’m hopeful we might get better either by acquisition or de novo..

Thanks, Terry..

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

Hi, guys..

Hi, Brian, how are you doing..

Hi, Brian..

Thanks. Just a couple of things, maybe a couple for Harold. Harold, just on the margin just kind of if you kind of walk back through the core margin outlook over the next couple of quarters.

Can you talk about the benefits, I guess, what do you have included in kind of your thoughts on rates and just how you’re thinking about the core margin over the coming quarters?.

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

Okay.

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

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

Yes..

A rate increase should be beneficial to us..

Okay, fair enough. And then in your outlook, well and just going back to expenses, Harold, I think you gave some color, maybe I missed it.

But just – can you talk about the – I guess, you talked about few hires you paid recently and just kind of the impact on the fourth quarter, kind of the puts and takes with, I think you talked about some incentive comp, maybe I just kind of missed that.

But if you can give a little bit of background on that on the expenses in the fourth quarter and then the hires you’ve made, I guess, I’m assuming number that is in third quarter numbers are very little of it is in third quarter numbers?.

Yes, I mean, we’ve made some pretty nice hires here over the third quarter. And into the fourth quarter, they’ll find their way into the fourth quarter run rate. I think, it will just be a steady increase. I don’t think we’re going to see a substantial increase in core expenses in the fourth quarter.

But there it’s less that it will be, at least, as much as the third quarter, if not slightly higher..

Okay, on an absolute basis..

For sure..

All right. Okay. All right.

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

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

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

All right. Thanks, Brian..

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

Hey, good morning, guys..

Hi, Tyler..

Hey, Harold, I want to start on the Durbin impact this quarter. I was expecting, call it, $11 million to $12 million annualized hit. But it looks like, you guys only had a little north of $7 million.

So is there another delayed step down from Durbin for some reason, or was the Durbin hit just not to the extent you’re expected and you are able to offset some of that?.

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

But it will be – I think, we were factoring $0.5 million to $750,000..

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

Yes, I think so..

All right, got it. On expenses, the new expense to average asset range of 1.90s to 2.10, that does imply a fairly large increase in operating expenses to be within that range.

So, Harold, I guess my question is, after the cost savings are fully realized from BNC, is there an opportunity for that long-term range to improve lower again, or do you think all the hiring that you’re talking about the 64 hires and just the normal operating growth, operating expense growth that you’d see will actually keep you within that range of 1.90 to 2.10?.

Yes, I think, well, it’s 1.80 to 2, 1.80 to 2 is the new number. So what really is the, I guess, accelerates is – the synergy case is on acquisitions. But we ought to be able to operate within that 1.80 to 2 over our longer term.

So far, over our history, we’ve been able to add people at a measured pace and still be able to kind of see our – both our efficiency ratio and our expense to average asset ratio come down. So I thought, I kind of give the credit to our operational folks on their ability to manage increased volumes with these new hires.

But at the same time, we’re not adding a lot of significant, call it, high-end help in a lot of our units that would bring in an extra expense burden. So I think we’re – we’ve got managers in place that we don’t need to kind of go out – we don’t need to go and hire new executive management, I guess.

Does that makes sense, Tyler?.

Yes. No, it does. Looking at the slide, I guess 7, I was reading that to be 1.90 to 2.10. But that clears it out that it’s 1.80 to 2, so that that helps.

Maybe just on the margin, the expectations for the FHLB advances in 4Q, that does it’s spike at quarter-end, would you expect still $1.6 billion or so for 4Q?.

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

Yes, sorry. So the – just the question on the margin and the FHLB advances you had in the third quarter.

There were – the spike that you’re in relative to average I’m just wondering for go-forward in the near-term if that’s kind of $1.6 billion on a – from the end of period perspective in 3Q should be there going forward?.

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

Okay. Thanks for that. And then just last for me just on the asset sensitivity here.

Now with BNC, I couldn’t find the new disclosures in the second quarter 10-Q and didn’t see the normal asset sensitivity slide in the 3Q deck, any color on your asset sensitivity profile right now?.

Yes, it’s difficult for us to give you the high degree of confidence those kind of detailed numbers that we were used to giving. The – our preliminary calculations are that we remain asset sensitive. And I think in the 10-Q we’ll disclose that we’re asset sensitive.

But in the past, we’ve been able to kind of give a lot more color on where we are on this primarily, because we just don’t have the two data files merged..

Okay..

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

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

All right..

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

Good morning, gentlemen, how are you?.

Good, Nancy..

Terry, I have got a question for you sort of past deals versus future deals. In the past, as you well know, when community banks sold themselves, generally, there’s an expectation on a part of the sellers that they were going to get not only an initial premium, but that somewhere down the line there will be a double dip.

And for you guys now, I think, it’s going to be unless the capital regulations change or something, it’s going to be difficult for anybody to buy you, especially as your growth goes forward here.

So have those expectations changed on the part of sellers or is this just something that’s going to take awhile to die?.

I’m not sure, I know the answer as a generalization, I mean, I would expect there are lot of banks out there that would still subscribe to that methodology. They were – they’re looking for donation premium and then a double dip on the sale of the acquired bank.

But I’ll be honest with you, that kind of the thing has not entered into any of the discussions that we’ve had with our recent acquisitions, meaning, the last four of them with CapitalMark, Magna, Avenue and BNC. I don’t think that’s really been a part of the mindset at all.

And so I think what has driven it is, I believe and I don’t – I’m not trying to blow smoke. I believe, we’re viewed to be an attractive acquirer for two reasons. One, because of the performance of our stock has been so strong and consistent over a long period of time, they can believe they’re going to get accretion in their new stock that they own.

And secondarily, I think, we have earned the reputation as an acquirer-friendly, I mean, an acquiree-friendly bank in other words. If you look at the deal that we’ve done because of what the way we go and we’re looking for management continuity, so we’re not going in there hacking out all the management.

We’re working hard to – we have a reputation, it’s a great place to work.

And quite honestly, I think, in every deal we’ve done, Nancy, we have a negative synergy associated with our incentive plans, which include both annual cash incentive plan and the equity plan, which just means hopefully we’re trading up pretty meaningfully in terms of the comp plans as they come in with us and those kind of things.

And so I think all that stuff is really served as the catalyst more than it has, I believe I’m going to get a double dip..

Okay..

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

Okay. And if I could just ask a quick second question.

The hires that you’ve done in the BNC footprint or in the BNC infrastructure, have they come primarily from competitor or community banks? Are you still drawing from some of the majors?.

I would say, it’s mixed, Nancy. We have hired from some of the obvious major banks in that footprint, but we have been able to make a number of hires from our peers, I guess, you might say over there in that market.

But we’re not hiring from really small community banks, but we have hired a few that have big company experience that are in some of the other banks that have been recently acquired there..

All right. Thank you..

Okay..

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

Hey, guys, I just had one follow-up question. I know Tyler was asking on the FHLB borrowings, but I wasn’t sure if you could give more color on some of the restructuring efforts you mentioned in the press release around them, the BNCN balance sheet. I noticed some of the broker deposit categories were down.

And can you just talk about what you guys are – have done already or still trying to do as you remix that balance sheet?.

Yes, I’ll just – I’ll talk about one issue, well, two issues. One was, on the funding side, there was a meaningful amount of broker deposits that were priced off LIBOR. And so they were floating rate deposits. We transitioned those into Federal home loan advances over one and two year.

So that created some, at least, one and two-year asset sensitivity for us. And then also on their bond book, they had really done well in their bond book, over the years had acquired quite a few municipal securities that had really strong yield still.

When we started pricing those through our purchase accounting scenarios, a lot of that yield was going to disappear. And so we shortened a lot of that book as or because of the impact of purchase accounting and brought a new municipal securities and other bond.

So a couple of things like that, those were two that come to mind right now that we’ve done to try to create more asset sensitive or more asset sensitivity out of that balance sheet..

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

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