Earnings Call: Q3 2018

Oct 17, 2018

Good morning, everyone, and welcome to the Pinnacle Financial Partners Third Quarter 2018 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 dotpnfp.com. Today's call is being recorded and will also be available for replay on Pinnacle's website for the next 90 days. At this time, all participants have been placed in a listen only mode. The floor will be open for your questions following the presentation. 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 ks. Pinnacle Financial disclaims any obligation to update or revise any forward looking statements contained in this presentation, whether as a result of new information, future events or otherwise. In addition, these remarks may include certain non GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non GAAP financial measures to the comparable GAAP measures will be available on Pinnacle's financial website at www.pnfp.com. With that, I am now going to turn the presentation over to Mr. Terry Turner, Pinnacle's President and CEO. Thank you, operator. As we have every quarter for a number of years now, I'll begin with this dashboard, which is intended to give a quick snapshot of our performance during the quarter, highlighting not only the absolute level of performance during the quarter, but the trends as well. The dashboard particularly focused on revenue growth, earnings growth and asset quality, because we have believed and we continue to believe that short term themes will come and go, but over time, the 3 most highly correlated metrics with long term shareholder return are revenue growth, earnings growth and asset quality. Consequently, those 3, above all else, have been for an extended period of time and are currently the guidepost for how we run our business. Measures on this slide are all presented on a GAAP basis. Here, I particularly want to focus on revenue growth, one of our key themes for today's call. In the chart on the top left, you can see total revenues continue to set a new high each quarter, up 4.7% on a linked quarter basis or 18.5% in terms of the annualized rate of growth during the quarter. Harold will break down the revenue growth in greater detail in just a few minutes, but I do want to just point out that the largest component of revenue is net interest income, which was up at a mid double digit annualized rate of growth during the quarter, roughly 15%. Regarding our growth in balance sheet volumes, which for the most part is the best predictor of future revenue growth, Looking now just below the revenue chart at the loan chart, organic loan growth during the quarter was in excess of $421,000,000 which is an annualized growth rate for the quarter of nearly 10%. So much has been talked about relative to slowing loan demand and elevated payoffs, but here in the Q3, we effectively produced low double digit growth, which leads to year to date annualized growth of 15.7% in 2018, which is consistent with our long held belief that we would produce at least low to mid double digit growth in 2018. So to be clear, our loan and revenue growth outlook hadn't changed. I don't want to spend too much time on it right now, but I might just offer my own commentary around loan demand and loan growth. Even though the annualized rate of growth during the quarter was right at 10%, while that's consistent with our belief that we'll grow loans this year at a low to mid double digit pace, It is less than the prior two quarters. And what I want to point out, just so people can understand, we're not just trying to produce loan growth come hell or high water. If it's not there or payoffs are very high, we're not booking loans just to get the growth. But with that said, despite the fact that we expect that overall loan demand may be slow and CRE payoffs may remain high. Because of the extraordinary success that we've had and are continuing to have hiring highly experienced relationship managers away from our larger regional national competitors, we believe these experienced relationship managers will successfully move their books of business, allowing us to continue the low to mid double digit growth on a very sound basis. As far as I can tell, that's a truly differentiated strategy. So the Q3 was a fabulous quarter in terms of current revenue growth and outlook for future revenue growth as well. Now, switching to some non GAAP measures, because of all the noise associated with the BNC merger over the last year or so and restructurings in conjunction with the tax law change at the end of 2017. In some cases, non GAAP measures may better illustrate the relative performance of the firm. So on this chart, I'd like to focus first on EPS, net of merger related expenses at $1.21 which is in the chart on the top row in the middle. Of course, 3Q 'eighteen had no merger charges. So when adjusting for the merger related charges in the prior period, fully diluted EPS is up nearly 35 percent over the same quarter last year. And then immediately to the right on the first row is the tangible book value per share chart, which paints a nice picture of our ability to accrete capital and grow tangible book value on a rapid and reliable basis, with a 4.75 year CAGR of 14.2%. Harold pointed out in our earnings release this quarter that since the BNC transaction in 2Q 'seventeen, our tangible book value per share has increased by more than 16%, even after absorbing nearly $40,000,000 in merger related charges, a really strong indicator of the success of that transaction. Immediately below the tangible book value chart, I want to highlight the ROTCE chart at 18.44% this quarter. As you review the trend line post recession, you can see it progressed nicely until the 1st and second quarter of 2017. That's when we did the large capital raise in advance of and in order to make the BNC acquisition. As a reminder, the BNC deal closed at the end of the second quarter, so you can see the very nice lift in ROTCE falls into deal closing, another strong indicator of the power of that acquisition. Lastly, I want to highlight core deposit growth in the middle chart on the 2nd row. Core deposits grew at an annualized rate of over 17% in the 3rd quarter, substantially exceeding the annualized rate of growth for loans during the quarter. Again, there's been somewhat discussion about whether or not we could attract core funding at a sufficient level to fund our rapid loan growth. Hopefully, we're now demonstrating again this quarter that we can. So 3rd quarter was a great quarter with loan growth of nearly 10% annualized, core deposit growth of over 17% annualized, net interest income growth of over 15 percent annualized, revenue growth of more than 18% annualized, EPS growth of roughly 35% annualized, and ROAA of 1.54% and an ROTCE of 18.44. Now, here's what we want to get done today. Harold will review 3Q 'eighteen financial performance in greater detail. Following that, I'll provide an update on our success with the BNC integration. And then I want to deal again with several questions that are being asked about all banks, I guess, including us, believing that the answers for us are likely different than many of our peers. So Harold, with that, I'll let you begin the review of the Q3. Thanks, Terry. As Terry mentioned, revenues for the quarter were up $10,700,000 from the previous quarter at $241,000,000 an increase of more than 18.5 percent linked quarter. Annualized net interest income was up from the 2nd quarter by $7,200,000 reflecting an annualized growth rate of 15.6% for the quarter. Much of this was attributable to increased average earning asset balances and improved yields. The impact of fair value accretion increased $987,000 during the quarter to $17,100,000,000 We anticipate decreases in discount accretion in future quarters as the level of acquired loans in recent merger becomes less impactful and post merger prepayments slow. Best guess at this point is that fair value accretion is likely to remain around $60,000,000 total for all of 2018 and perhaps $14,000,000 to 15,000,000 in 4Q. We're still forecasting around $40,000,000 for 2019. The dark green line on the chart is that's our non GAAP revenue per share. We reported $2.80 adjusted revenue per share in the Q3 of 2017, and we're reporting $3.11 this quarter, a little over 11% growth. Obviously, that's the goal, to keep the revenue train moving north. We will keep an eye on our profitability metrics, but as it stands today, we can afford to gather clients as well as invest in our platform via ramped up hiring activity. Now we're all about increasing our earnings per share on a reliable and sustaining way and building tangible book value per share through the cycle. We talked about this slide last quarter. This slide focuses on revenue per share growth using trailing 12 month information, 2 things we'd like to communicate here. We continue to see double digit revenue per share growth. Now this is during the time of significant internal focus around Bank of North Carolina deal, systems conversions, not to mention cultural integration and getting folks aimed in the right direction. That's why we believe currently there's a great deal of energy in our franchise right now. We're playing offense in Tennessee, the Carolinas and Virginia. In some cases, it's 3 yards and a cloud of dust. In some cases, we catch a big fish, but in all cases, some 2,300 associates working to build something better today than yesterday. Secondly, the dotted line represents the peer group's year over year growth, which is the cumulative last 12 months revenue of our peer group divided by the aggregate number of shares. We've consistently outpaced the peers over the last 21 months and are widening the spread so far this year. We have all worked at places where the only way you were going to hit your bottom line number was through some expense initiative. We pay attention to expenses, but trust me, it's a whole lot more fun to work for a firm that's growing revenue. We've had this chart for a long time. Concerning loans, as the chart indicates, average loans for the Q3 were $17,300,000,000 compared to 16,800,000 at the end of the 2nd quarter. Thus, average loans increased by almost 529,000,000 and annualized growth rate of better than 12%. This is on the heels of a strong growth in the 1st and second quarters of 2018. Comparing 3Q average loans to 4Q 'seventeen average loans, our annualized growth is 15%. So we're going into the 4th quarter with roughly $200,000,000 more in EOP loan balances over the average for the 3rd quarter, which is another great head start as we head into the last quarter of the year. We continue to believe that our loan growth for 2018 will average low to middle double digits for the year. In the Carolinas and Virginia, their organic loan growth through the Q3 of 2018 was around 13% annualized. There's a chart in the back that shows what each market has achieved. Importantly, C and I and owner occupied commercial real estate is up roughly 33% annualized. We're seeing growth in C and I in all of our markets in the Carolinas and Virginia. Right now, their C and I owner occupied book approximates 28% of their total loans. If they keep growing at a 33% clip, they will create a very robust C and I platform in the Carolinas and Virginia much faster than we anticipated, creating this franchise is key to our growth goals, as with the C and I platform comes core deposit and related fee growth. Profits and pay downs were heavier in the Q3 over the previous quarters, primarily in construction and non owner occupied commercial real estate. Our internal records indicate final payoffs and paydowns in this segment were $460,000,000 in the first quarter compared to $580,000,000 in the second quarter and growing to $760,000,000 in the 3rd quarter. Don't get us wrong here. We want these payments to occur. They just are occurring earlier than we hoped. This will be another headwind as we go into Q4 and next year, but believe our scheduled construction payoffs will normalize in early 2019. As the chart indicates and as expected, our loan yields increased to 5.15 percent from 5.04% last quarter and 11 basis point increase linked quarter. Our modeling has 1 more rate increase in December and 3 rate increases in 2019. This chart reflects our quarterly loan growth for each quarter since Q3 2015. The blue bars on the slide have been adjusted to remove acquired loans. That said, these are the real quarterly annualized growth numbers, thus reflecting, we believe, the impact of growing our revenue producers. As shown, our loan growth continues to outperform our peer group quarter after quarter without sacrificing credit quality or accepting undue concentration risk. Keep in mind, we don't know what 3Q 'eighteen peer information is, but based on what we hear so far, it will be consistent with the 1st and second quarters of 2018. So another strong loan growth quarter for the Pinnacle in comparison to peers. The small chart in the middle of the slide is average account balances comparing early 2015 to 3Q 'eighteen. Our portfolio is not about a lot of large credits. We've got larger loans, we're talking average ticket sizes, commitments of just over $1,000,000 to $1,250,000 for CRE and Construction. That's all construction, commercial and residential. Concerning commercial constructions, specifically, our average commercial construction commitment is just over $2,400,000 through the Q3 of 2018. Again, we believe a very granular portfolio aimed at local builders and developers in our markets. Another fact about our credit metrics that we think is further indication of the type of lending we go after is that 90% of our collateral for construction, non owner occupied commercial real estate multifamily is located in the states of Tennessee, North Carolina, South Carolina and Virginia. The 2 hurricanes in recent weeks have impacted a lot of people and our thoughts and prayers go out to the families of those affected by these big storms. We've had some Pinnacle associates that have been significantly impacted as well. We did set aside a reserve of $2,500,000 for Hurricane Florence in the quarter after surveying our relationship managers who reviewed collateral maps in the impacted areas and talked to their clients. We think $2,500,000 is a good number. We've still got some work to do, but we've been in touch with the borrowers that we were most concerned about. Our bias today is that, that number is conservative. We're in early stage review with respect to Hurricane Michael. Most of our loans here are vacation properties in the Panhandle of Florida, so we're not as concerned about our aggregate loss exposure with that storm. No idea if we're in the 7th inning or the 8th inning or the 4th inning. What we do know is that credit continues to hold up nicely, so we're obviously proud of our client selection processes throughout the franchise. We're presenting the slide again. We're still targeting a 35% fixed rate loan book for our loan portfolio. We also executed a forward interest rate swap earlier this year and then added to it in the Q3 in order to accelerate our floating rate component by an additional 5%. The first four tranche of $150,000,000 started in October. As of today, the average paid fixed rate on those swaps is 40 basis points more than the received variable lag. The October tranche amounts to approximately 38 basis points of difference between the pay rate and the receive rate. Also, we've updated the slide with additional information on rates and various rate categories. For prime rate, we feel like we've captured substantially all the short term rate increases since September 2017. The LIBOR spread reduction that has occurred over the last few months has impacted us, but we feel like that spread, especially the spread between the 30 day and Fed funds, has likely normalized. Fixed rate loan yields have not moved much for the loan book yet, but it takes a lot of new loans to move the weighted average yield of the fixed rate portfolio. As the last two columns on the chart at the bottom indicate, we are seeing some lift in fixed rate pricing this year, so we should see the book yield begin to move north in a more noticeable way over the next several quarters. We've also worked on repositioning our bond book. As it sits today, more than onethree of our bond book is now on a variable rate, so we should see improvements in yields as rates increase. Average deposit balances were up $1,160,000,000 while ELT balances were up $550,000,000 End of the period, core deposits increased by $677,000,000 during the quarter. Our deposit costs did increase 19 basis points in the Q3 from the Q2 and currently stand at 97 basis points. We compute a beta of 36% on deposit costs given those figures since the most recent rate cycle began in the Q4 of 2015. As to the future, deposit costs will continue to increase for several factors. The 2 most prominent are general pressure for increased deposit rates in a rising rate environment, but also will need to fund the loan pipeline. Our relationship managers are out in the market selling our ability to serve commercial and affluent consumer depositors with a value equation we think is far superior to our competitors. We still believe we're in markets that have ample liquidity to match our loan growth expectations. Terry, Rob and Rick are driving our sales efforts towards depositors. We will play our customary shoe leather game. We still believe we've got adequate room in our plans to fund our loan growth with a fair rate paid on deposits. Don't get me wrong, deposit betas are important. We will pay attention, but right this minute, we're focused on gathering clients. Again, a big quarter for deposit growth in Q3 with quarter deposit growth up more than $675,000,000 and more than 17% annualized. Over the last 4 quarters, core deposit growth has funded 93% of our loan growth, which is more than the 85% we would typically roll out on our model to produce. We may sometimes hold our nose on the rate, but we ask our relationship managers to get the client. Also on the chart is loan to deposit ratio for us compared to our peers. As you might expect, our line bounces around, but it appears the peer line will nudge up closer to us after the Q3 results. These amounted to greater than $51,000,000 up $3,500,000 over last quarter. BHG had a great quarter and look to have another great quarter in the 4th quarter. Their contribution was up $4,800,000 in the 3rd quarter. We had anticipated the net growth of BHG in 2018 would be 12% to 15% for 2018. We now would be 12% to 15% for 2018. We now believe it will likely exceed 20% for the year. Residential mortgage income was up slightly from last quarter. As we know, the rate environment has not been helpful to this business line for the past several months, but our folks continue to hire mortgage originators and work hard to get their share of the deals. Wealth management revenues were essentially flat in Q3 and during the Q2. Keep in mind, we remain in Phase 1 of the build out of the investment services platform in the Carolinas. There was a solid base, but one of our key goals from the C and I build out is to ramp up investment efforts in that footprint meaningfully. We've had several significant hires in both footprints that have contributed to our success in Investment Services. Insurance revenues are steady and trust had a big Q2, which caused the decrease in the Q3. In other non interest income, we had a positive $2,000,000 pickup in the 2nd quarter from revaluation of our of certain of our joint venture investments, which did not repeat in the 3rd quarter. Now on operating leverage, our efficiency ratio was 47 which was slightly more than the adjusted 46.6% we reported in the 2nd quarter. We expect our non interest expense to be higher this quarter, and we're hopeful we can afford increased incentive accruals as we head into year end. Salary expenses up almost $2,000,000 this quarter, largely attributable to increased headcount throughout the franchise. Since year end, we are up 117 FT feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet Es this year as we continue to hire revenue producers and other critical support functions. Although we continue to accrue less than our target award for our corporate incentive plan, we did increase the accrual to 90% of the target. You know our corporate incentive targets are set at levels we believe would equate to core top performance within our peer group. As many of you know, we get paid to hit numbers. If we don't hit our numbers, we don't get our incentives. We've had years when we paid more than target. We've had years when we paid no incentives. The critical thing is that the associate base understands why we do it and the way we do it. Keep in mind that Terry, myself and the entire leadership team of this firm are on the same incentive plan with everyone else. Thus, if the CEO gets paid, we all get paid and vice versa. Incentives are important and it's one of the things that makes us unique. Excluding merger costs, other expenses were up $3,500,000 this quarter. Ad expenses associated with our deposit campaign in the Carolinas, lending expenses and technology costs all contributed to the increase. All in all, we believe about $1,500,000 to $2,000,000 of this was non recurring. So with that, I'll turn it back over to Terry to wrap up. All right. Thank you, Harold. Let me comment quickly on the return on average assets. We first published our targeted operating range for ROAA for the year 2012. Over the years, we've increased that targeted operating range 3 times before most recently, moving a range of 1.50 percent to 1.70 percent. As you can see in the Q3, we continued to operate in the targeted range for ROAA with a 1.54% ROAA in the 3rd quarter, same as last quarter. I might also point out that all four components that build to the overall ROAA target are either operating comfortably within the targeted range or better than the targeted range. Let me switch now to the BNC integration. As a reminder, since the beginning, when we discussed the deal rationale, we always talk about the fact that BNC had a double digit growth CRE platform and then our goal was to not disturb or diminish that in any way. But in addition to that, to bolt on a high growth C and I platform, which then has the impact of steepening at our already high growth rate. To that end, we've communicated our extent to hire roughly 65 C and I and private banking relationship managers in the Carolinas and Virginia over a 5 year period of time, beginning in July 2017. To be on that pace, we would need to have hired roughly 16 in the Carolinas and Virginia by September 2018. So you can see, having hired 26, we're roughly 62% ahead of schedule in terms of the number of C and I and private bankers in the new market or said another way, roughly 3 quarters ahead of schedule in terms of the timeline. I also want to comment that it's not just about the number higher, but qualitatively, Rick Callicut has done a fabulous job of seizing on market vulnerabilities and hire some of the best bankers in his market. While the sources for new hires have been broad, clearly, the majority of the new financial advisors are coming from those large regional national players with whom we like to compete. And impressively, the average experience level of these 26 commercial and private bankers is 22 years, which is consistent with Pinnacle's long term results of hiring experienced bankers. I don't want to overdo it, but I just want to make sure everyone understands the connectivity between hiring and loan and deposit growth. They go hand in hand. Because we've hired so many, we should grow faster than the market as a result of the market share movement. And because they're long tenured at the larger regional national player, we should produce that outside of growth on a sound basis. In my judgment, our ability to move existing loans that are currently performing and are well known to the lender that's moving them is a substantially safer play than banks are having to press for volumes late in the cycle when the market demand is weakening. And so how are we doing on the success criteria that we originally laid out? Year to date in 2018, it appears to be working like we drew it on the board. Through the 1st 3 quarters of 2018, in the Carolinas and Virginia, we saw continued double digit growth in the CRE platform and a meaningful acceleration in the C and I business. Couple that with outsized core deposit growth that we're getting, I think you'd have to agree this has been a fabulous transaction. I'm not aware of any recent transaction where they've been able to elevate the momentum nearly to the extent that Rick Callicut and his team in the Carolinas and Virginia has. In other words, we are accomplishing exactly what we set out as the original success criteria. Turning now to the 3 questions I highlighted in my introductory comments. Let me begin with a question regarding the likelihood that we can continue the pace of loan growth. Acknowledging that past success does not assure future outcomes, many would say the best predictor of future outcomes is the current results. Most of you will recall that we closed our merger with BNC in June of 2017. So these are the quarter end loan numbers for the entire firm following the close of that transaction. We've weathered the deal announcement, whatever loss momentum generally occurs in conjunction with that. We've weathered the brand change and whatever morning typically occurs with that. We've weathered the system conversions and all of the internal focus generally required for that. And through it all, quarter after quarter, we've consistently put a low to bid double digit loan growth. Honestly, as I said a minute ago, the reason that we've been able to grow the loans at a substantially outsized pace versus peers is because of the hiring success that we continue to have, not just in the Carolinas and Virginia, but throughout our entire footprint. So that hiring success not only explains how we have produced that size loan growth, it explains why we continue to expect the level of loan growth going forward. Regarding our ability to fund that growth, this is a very busy chart. It breaks our funding down to 3 broad categories: number 1, core funding number 2, additional funding from our clients, which is not considered core funding, things like repos and so forth. We call that relationship based funding And number 3, wholesale funding. We've got the funding makeup over the last year, a time of very rapid loan growth, as we've indicated several times on the call, 15.7% year to date. And as you can see, the percentage of core funding has remained essentially flat as our dependence as has our dependence on wholesale funding. You heard Harold say a minute ago that it's our intent to fund at least 85% of our loan growth with core deposits and we have well exceeded that over the course of the last year. So we have indeed gathered sufficient core funding. And so finally, let me address the third question regarding whether despite high deposit betas, we can produce rapid growth in net interest income and EPS, which to be clear, are the primary objectives of this firm. It seems to me the answer to that question is yes. We showed this same chart in the Q2 call with the comparison at that time based on Q1 results, which by the way led to a similar conclusion. We've now updated it for 2nd quarter results. Here you can see we've plotted our peers, some of whom are really low deposit beta companies, plotting the year over year increase in total deposit costs on the y axis and the year over year increase in net interest income per share on the x axis in order to normalize for acquisitions, etcetera. And our performance on net interest income growth in the first half of twenty eighteen was peer leading despite a relatively high beta. I believe that was the case because we were able to grow our client base by taking market share and consequently growing earning asset volumes at a pretty dramatic pace. I think that may be the most important difference between us and many of our peers. So in summary, let me say this, we're primarily focused on long term shareholder value. Q3 'eighteen was obviously a fabulous quarter, as evidenced by the low double digit loan growth, the core deposit growth greater than 17% annualized, net interest income growth of 15% annualized, revenue growth of more than 18 percent annualized, EPS growth of roughly 35% annualized, an ROAA of 1.54% and an ROTCE of 18.44%. But here's what really demonstrates our focus on long term shareholder value. We did all that while we increased our associates' incentive approval meaningfully, while we set aside special reserves for potential damage associated with Hurricane Florence and while hiring 23 revenue producers in the 3rd quarter, along with all the support staff necessary to support them. And just think about that, what company our size could be on pace to increase the number of revenue producers by more than 100 people this year, plus all the associated support personnel, which generally run-in a ratio of 2 support to 1 revenue producer and still grow earnings roughly 35% with a 1.54% ROAA and a 47% efficiency ratio. In other words, we had a great quarter in terms of quarterly financial results, but we continue to invest in infrastructure intended to let us continue doing this and reliably grow the tangible book value of our shares for quite some time to come. Operator, we'll stop there and take questions. Thank you, Mr. Turner. The floor is now open for your questions following the presentation. You. Our first question comes from Jared Shaw with Wells Fargo Securities. Your line is now open. Hi, good morning. Hi, Jared. Actually, just first quick question. Do you say accretion for 2019 should be $20,000,000 Is that the expectation? We think the discount accretion for 2019 will be probably around $40,000,000 So the decrease will be $20,000,000 Great. Okay. Thank you. And then in terms of the growth that you're seeing in the Carolinas, that's those are great trends. What's the vintage, I guess, of the loan officers that are creating that loan growth? How long is it taking them to actually start producing new customers for the bank after they've been hired? Darren, this is Terry. I'm not sure I can give you a crisp answer to that question. There's wide variability in how that works. As you would guess, some of the relationship managers that have been hired are constrained to some extent with non solicit agreements and things like that. But again, I would say that the some growth occurs through all of those relationship managers literally from the beginning. Our expectation continues to hold. We believe people will be successful moving roughly 80% of their book and they'll get that done over a 3 to say 4 year period of time. And in terms of that book coming over, you're still seeing good trends with the loans and the deposit relationships following? We are. Excellent. And then on BHG, that was great growth that we saw there as well. How is rising rates impacting the BHG business? Are they able to move continue to move rates up sort of in line with what we're seeing? And is that changing the end borrower's dynamic at all? Derek, they track that information probably well, the information we get over the last probably 3 or 4 years. And so far, they've not been impacted very much, if at all, based on what the yield curve has done because most of those loans are going to be priced off of, call it, 5 to 7 years. And so the top line rate that the borrower is paying has not moved much at all, probably 14.5%, 15%, while the buy rate that the bankers are requesting hasn't moved either. So the spread has stayed pretty consistent. And then on the target for fee income, so that 90 to 100 basis points of assets, is that still good for a long term target? And I guess with the increased BHG revenue, do you think we could get there earlier? Yes. Our current target is an 80 to 100, and we were at 85 with the enhanced BHG number this quarter. So yes, I think BHG will help pull us into that range. And our next question comes from Stephen Scouten with Sandler O'Neill. Hey, good morning guys. Hey, Stephen. I guess maybe continuing on BHG for a second. I was curious if the jump here in this quarter was just related to some of their sales activities, increased volumes or if any of the new product initiatives you talked about at the Investor Day, kind of SBA opportunities, patient lending, if any of those things had come online as of yet and increased the kind of optionality for revenue in that platform yet? Yes. I think the new products had some impact, but it wasn't that large. So I don't think it moved the needle significantly. I think what has happened in the Q3 and will likely go into the Q4 is credit metrics have improved. They've also, over time, have built out a, we call it a warehouse, but it's really just they kept some loans on their balance sheet. They've built up their balance sheet over time. They decided this quarter that they would take some of the 2018 production and sell it into the market or into the auction platform. So they've been, I guess, keeping this pool of loans on their balance sheet and they've started releasing some of that pool into the auction platform because the appetite for those loans has been pretty strong here over the course of the last well, it's been strong for the last year or so, but they finally decided that based on what the buy rates are, they let some of those loans go. Stephen, I might just add to Harold's comment, as we think about going forward, the appetite for their product increases as other loan demand slows. In other words, a lot of banks will have a greater appetite to use that as a filler for loan growth. So that's good for BHG. Okay. Yes, that makes sense. That makes sense. And maybe as it pertains to overall loan growth, I mean, obviously, year to date, your growth has still been far above what I would have expected at the beginning of the year. So congratulations there again. But was there any impact in the quarter from Hurricane Florence in terms of pushing any loans that might have closed this quarter into 4Q? I mean, would you expect even with payoffs in CRE and other impacts that you might see an uptick in Q4 without the hurricane effects? Stephen, I don't know. I would say there's no doubt that people get bogged down and all the people being out, clients being out, all that sort of stuff associated with the hurricane and sort of recovering from the hurricane. So I can't imagine that it had some impact. I guess what I want to reinforce is, look, we have believed and we continue to believe we're going to put up low to mid double digit loan growth over an extended period of time. We'll have some quarters that will be a little higher and quarters, it will be a little lower, but over an extended period of time, it will work that way. It is a little lumpy to your point. Sometimes, it doesn't take but a few deals in a quarter to take volumes down or up in a recognizable way. But again, just over time, that's what we expect to occur. And I want to reinforce, the reason we think it's going to occur that way is not so much to do with what the pure loan demand is. It has to do with the hiring methodology of hiring these people and having them move those books. So that's the principal determinant of where these loan growth numbers will go. It will be a function of our ability to hire the people and get them on track to move the business. Makes sense. Thanks, Terry. And one last kind of housekeeping question for me is just on the CD rates, I want to make sure I'm understanding this properly. It looks like on Slide 12, you're listing 183 as the current quoted CD rate, if I'm reading that properly. And your average CD rate is 176. So would it be fair to assume that the degree of pressure we've seen on time deposits over the last two quarters could slow pretty appreciably if that gap has narrowed so much between your average rate and what you're offering out there now? Yes. Now that rate that's on Slide 12 is the end of period rate. So that's the rate that the current book would average out. Now what Okay. Okay. Now there's a little bit and it's not much, Stephen, but there's a little bit of purchase accounting that impacts that $1.83 So it would be it might be 1 $0.81 something like that. We have some purchase accounting that comes into play out of that book. Got you. Well, I guess maybe along with that, can you tell us what kind of an average rate is that you're offering on new CD production maybe then, so I can think about how that might play in over the next coming quarters? Yes. I think our 12 month rate is somewhere around 2%, somewhere in that range. If it's different from that, I'll call you. Perfect. Thank you. And our next question comes from Jennifer Demba with SunTrust. Your line is now open. Thank you. Good morning. Good morning. Curious, a couple of questions. You had a big increase in your tax exempt securities yield. What drove that up sequentially? And what are the new reinvestment rates on that line item? Yes. The new reinvestment rates are going to be fairly consistent. I think we've got maybe about 2 to 3 basis points of increased yield in that book that we're forecasting for the Q4. So the buyout rates the new rates are coming in at about that same number. Now as far as what drove the increase between 3Q to 2Q is we did go out on the curve and we did acquire some additional municipal securities during the quarter. We had anticipated getting those securities towards the, call it, the end of the year, our 1st part of next year. But with the spike in loan paydowns, we went ahead and put that money to work in the Q3. And I think, Jennifer, one more added point there is that early in Q4, we've taken a lot of those securities that we acquired and we flipped them to floating rate securities. Okay. All right. And Harold, you said you had $1,000,000 or $2,000,000 of non recurring $1,500,000 to $2,000,000 of non recurring expenses on your run rate in 3rd quarter. Do you have any sense of kind of a range of expenses you're anticipating in the 4th quarter given the payout you're likely looking at at this point? Yes. I appreciate the difficulty in trying to kind of develop a run rate for us because the way that incentive accrual bounces around. We'd expect expenses to increase. If the revenue numbers come in, we would expect the expenses to increase slightly. I'll say it like that. Meaning low single digit? Yes, for sure. Yes, I'll just leave it at that. Okay. And Terry, can you just talk about deposit funding strategies? You guys talked about 4 or 5 different strategies you have at the Investor Day last summer. Can you just talk about where you're seeing maybe the most traction or the least amount of traction or what have you? Yes. I would just say that in terms of those trends that we laid out, one had to do with hiring. Of course, we're having good success. A lot of those people are moving to deposit books. We hire people that are focused on deposits. We've made several of those hires. And so I would say that's progressing nicely. I think underneath that, maybe more important than that, as you know, we're active communicators, we've got a really active communication with our sales force that occurs at least weekly, if not more frequently, about what we're looking for, what we need and those kinds of things. And so there's a lot of direction to the deposit side, aimed at folks and clients that have deposits and so forth, and I'd say that's working well. We talked about doing some product based advertising in the Carolinas and Virginia, if you'll recall. And Jeff, you know this, I mean, we don't normally advertise. We've never been an advertiser, but we decided that we would do that, use some rate based advertising in the Carolinas and Virginia, where we generally had low share positions and felt like we wouldn't be just cannibalizing a big deposit base to do some rate based promotion. So, you can feel that the rate that we've used is a 1.69 percent money market rate. So, it's a relatively attractive rate, but it's not a 2% rate, to Harold point earlier. So again, we feel like it's a good buy on money and we think it has worked well in that market. We've bought a fair amount of money. I would just say this, as we go into the Carolinas and Virginia, some people would say, my goodness, how are they going to do having to compete with those large regional national franchises to dominate those markets. And as you know, those large regional national franchises have no incentive or desire to take that sleepy deposit funding base up. And so we can step in there and buy money at a pretty attractive rate in that market. And so that has worked well for us also. How about the artist growth product that you invested in? Can you give us an update there? Yes. Artist growth, I think, is in what, I guess, what you'd call the last sort of pilot phase. It is live with a handful of clients. I think the receptivity has been great. And so our optimism about that continues to be the same. In terms of its specific impact, either on our balance sheet or P and L, it would be minimal at this point. But again, all the early returns on the folks that are on it would let us believe we'll do at least as well as we thought we would. Thank you. Thank you. And our next question comes from Brock Vandervliet with UBS. Your line is now open. Thanks for taking the question. Good morning. On the loan growth, I'm clear on the long term. Just Harold, in terms of the shorter term and looking at the average growth and especially the end of period growth, it looked like you're hit harder by payoffs. Can you talk about how that looks the next couple of quarters or the next quarter? Should we anticipate a pickup in loan growth or still too early to tell? Yes, Brock. I think the payoff that we're looking at in the 4th quarter should be fairly consistent with what we had in the Q3, which are I don't think we'll see a decrease in those payoffs likely until the Q1 of 2019. So we're anticipating kind of a similar kind of quarter in 4Q that we had in 3Q. Okay. And circling to the deposit dynamics, it looked like part of this CD growth may be part of an intentional strategy to reduce FHLB borrowings. Is that the way we should read this? Or was that kind of just an accidental thing in terms of how the rates shook out this quarter between the two products? Yes. I think we are getting some CD lift in the Carolinas just through the sales process in that market. There's more time deposit kind of depositors over there than over in Tennessee. But yes, we will flip based on what we think our balance sheet is requiring between brokered CDs and Federal Home Loan Bank borrowing. So there could be some intentionality around those two products. Okay. And incremental raising of money market and CDs, those are, say, 170% 2% right now? Yes. We have the 1.69% to 1.72%, something like that kind of rate offering in the Carolinas. The advertising to support that campaign has now been completed. But I think they're more on a kind of a hand to hand combat on that product in the Carolinas and continue to kind of sell it over there. Brock, if I could, I might just make this comment. It's not exactly what you're focused on, but again, just give you some sense of our mindset. As you know, we had tipped slightly above the 300 percent total risk based capital ratio there on commercial real estate. And so I think we have signaled to the market that we would drive that down, that we expected the combination of capital accretion and pay downs, payoffs in the CRE book to bring that in line. And so that's happened and we didn't spend a lot of time talking about that on the earnings call, but it is an important thing. And so it's sort of a mixed blessing when we think about the real estate pay downs. Most of that is for a good reason and matches what we're trying to get done from a risk management standpoint. Thank you. And our next question comes from Tyler Stafford with Stephens Incorporated. Your line is now open. Hey, good morning, guys. Hi, Tom. Hey, just a question around the core margin trajectory from here. Harold, with the core funding that you're seeing and the loan growth expectations you talked about for the Q4, just where do you see the core margin trending from 3rd quarter levels? Yes. We're always hopeful that we will see core margin kind of stabilization. I think it went down, call it, 3 to 4 basis points this quarter. I'm hopeful that we can keep it kind of flattish going into Q4. Okay. Got it. Following up on one of the earlier questions, which is about the incentive accruals and thinking about that toward into 2019, would you expect another sizable step down in the Q1 within incentive accruals or the incentive comp as you've seen the past few years? Yes, I think so. I think we've built it over the last 2 to 3 quarters, and so we'll get more on kind of a standard run rate in the Q1. Okay. And then just one more on BHG. I saw they acquired a 20 percent ownership interest in a healthcare tech company in the Q3. Did that drive any of the higher 3Q fee income growth? And then just any idea what the potential from that that ownership of that new business could be? Yes. They're really excited about all of that new business around healthcare lending, particularly around high deductible plans. So they're very excited about what they're up to. They're all over the place talking to hospital units and surgery centers and all those kind of folks that get signed up in that product. But I don't think it impacted Q3 that materially. And it's not likely to impact Q4. There will be a little bit of revenue from it, but it won't be much. Yes. So on the Q4, so you guys took up guidance to over 20% BHG for this year. The Q4 is typically seasonally the strongest, but even if you just kind of flat line 4Q or 3Q, I think that would be over right at 25% growth for the year. So can you just speak a little bit more specifically to 4Q expectations for BHG? Would you expect 4Q to be stronger than 3Q levels? We think 4Q will be as strong as 3Q. As strong, okay. And then just lastly for me, I know you guys don't focus on core NII or core EPS ex the accretion as much as we do from our side of the table. But if we were to exclude the accretion for next year, can you just talk about what pace of core NII growth and core earnings that would be reasonable for Pinnacle? Yes. I mean, Tyler, I think we're going to be down probably $20,000,000 next year with respect net interest income growth. So if we can hit our loan numbers that we're planning to hit, call it, in 2019, we think will still be low to mid double digit, we think we've got, call it, somewhere around that 10%, maybe 12% lift in In core NII? Yes. Well, that will be yes. Now what I'm talking about is GAAP NII as far as where we think we can go. I'm sorry. Can you just clarify that? The 10% to 12%, not to pin you down, but were you referring to core or GAAP NII? We're talking about trying to get to core NII of about, call it, 10%. Perfect. Thanks, Harold. All right. Thank you. And our next question comes from Brian Martin with FIG Partners. Your line is now open. Hey, guys. Hi, Brian. Hey, Harold. Just one bigger question on BHG and that's just the long term outlook. So when you look at 2019, just forgetting 2018 and this pool of loans and kind of that process they're going through, I mean, does the 20% or 20% plus growth you're seeing in 'eighteen, does that decline as you go to 'nineteen? It's more of a 12% to 15% type of rate. Is that how to think about BHG with some of the new initiatives they've got? Yeah. I need to kind of go back and revisit our 2019 targets in light of what's going on in the 3rd Q4 and figure out what's repeatable. But they are their standard response to me has always been 12% to 15%. Okay. So 12% to 15%, it could potentially be higher if some of these other things kick in that they're kind of expecting or kind of looking at recent events? That's right. Okay. And that expense, Harold, those one time items this quarter, I mean, were they in one particular line item or kind of spread around? Yes, they were all below salaries. So they were spread throughout equipment costs, other expenses, all those kind of things. And that slight increase potentially that you expect in 4Q, I guess, is that off of the actual base held or the core base, just to be clear on that? Well, in the Q3, everything core and actual were the same. So I'm not sure I follow your question, Brian. Yes. I guess I was assuming you said there was about $1,500,000 in nonrecurring expense in the Q4. So I'm just trying to understand, is it just the reported expense you would expect could potentially be slightly higher in the expense in Q4 could be slightly higher than the reported number in Yes, quarter over quarter actual. Actual. Okay. That's right. It on where that incentive accrual shakes out. Okay. Got you. Okay. But it was off of the actual number, not core is all I was trying to get at. So that's helpful. Okay. And then just the margin, Harold, I mean, I guess when you kind of look at your long term guide as far as where that band shakes out, if you see the accretion number decline, the $20,000,000 or so that you're anticipating next year, I mean, it seems like that margin number is going to fall outside of that range. I guess, am I thinking about that wrong or I guess is that how it probably shakes out? Yes. I think we're going to be at the low end of that range for sure. I don't know if I'm ready to say we need to adjust our target range just yet though. Okay. And just the puts and takes on the core margin change, I guess, Harold, when you look at Q4, if you hope to hold it or see it go a little bit lower, I mean, what are the puts and takes that move it up or down in the Q4, just in more near term? Well, I think as we get more floating rate assets on our books, that will be helpful to us. And I think as deposit pricing, if we can slow the beta on deposit pricing, that ought to be helpful. Okay. All right. And then just the last one for me, Harold, was just the tax rate. I mean, I guess, kind of this 21% level, is that a fair way to think about now that you've had a couple of quarters at that level is kind of the way to think about it, the effective rate going forward? Yes. We think our long term rate is going to be 20% to 22%. 20% to 22%. Okay. All right. That's all I had, guys. Thanks for taking the questions. A nice quarter. Thanks, Brad. Thank you. And our next question comes from Michael Rose with Raymond James. Your line is now open. Hey, guys. Thanks for taking my question. Not to beat a dead horse on the margin, but as we think about the incentive comp moving forward, if you guys aren't below that margin range, how does that translate into the incentives that you accrue for next year, particularly if you don't hit the efficiency target? Thanks. Yes. Michael, let me just remind you, our incentive targets is all for 1, 1 for all. In other words, we all win and lose together on that. It's one we either hit or miss or pay out at a constant percentage for everybody. The determinants of that are we have to clear an asset quality threshold, which is generally a function of criticized and classified assets. If we don't clear that, nobody gets any incentive and none is accrue. If we do clear that, then the rest is a function of how well we grow our earnings and how well we grow our revenue. The earnings would make up 80% of the weight. The revenue growth would make up 20% of the weight. And so what happens to all those other things makes no difference whatsoever as long as we grow, clear the asset quality number, hit the revenue growth numbers and hit the earnings growth numbers. Okay. And thank you for that. And I think if I heard earlier, you guys are modeling 3 rate hikes for next year. Can you just talk about what you would expect in terms of sensitivity and maybe what happens if we don't get 3? Yes. I think the rate hikes are becoming less impactful. I think if you were to do our sensitivity analysis around what the regulators require, we'd be still asset sensitive. But I think the way the real world works, as these rate increases go, we're going to need depositors to fund that loan growth. So I'm not really sure if the rate increases will impact our margins that much. Okay. Maybe just one final one for me. I think a lot of talk about BHG, but I just want to make sure I heard you correctly. Did you say that 12% to 15% for next year is a good target on top of the 25% or so this year? Yes. That's what they keep telling us. I've not been able to revisit with them about this 3rd and Q4 uptick to try to figure out how we gauge 2019, I'd be hesitant to kind of layer in a large kind of increase for 2019 off of this big kind of late second half twenty eighteen increase. Got it. Thanks for taking my questions, guys. Thanks, Michael. Thank you. And our next question comes from Catherine Mealor with KBW. Just a follow-up on the incentive comps. Did you give Harold earlier in the call the dollar amount of incentive comps this quarter? I don't think we did, but I think it's on that slide. Got it. Okay. I'll go back to check. Okay. So, and then, so outside of that, my next question is on buyback. So, you've on managing capital with the pay downs this quarter, we're now below 300%, which is great and I think earlier than I expected. Your stock has pulled back a lot. You're still growing a lot, but at this valuation would you a great question. And I guess the direct answer is I'm not sure. So let me kind of give you the color commentary on that. Over the years, we've been asked a lot of times about, well, what about a buyback? What about a buyback? It always seemed like an absurd idea to me. We've been such a high growth company. We've sort of delivered capital just in time. And it just it was never anything that I would even entertain looking at a model or any of those kinds of things. I would say at this point and at this price, I am studying and just began to look at and think about the strategies that would center around other capital management, specifically stock buybacks and so forth. It's is probably the first time in 18 years that I would ever have considered that alternative. I don't want to overplay that. I'm not saying we're going to do a stock buyback, but I am saying that we are studying and thinking and running models and so forth. So yes, it would be a consideration. And you don't have an authorization out there right now, correct? We do not. Okay. All right. All the other questions were asked. Thank you. All right. Thank you, Kevin. Thank you. And our next question comes from Brian Zabora with Hovde Group. Your line is now open. Yes, good morning. Just a question on that $2,500,000 reserve for the hurricane. How much is the loan exposure to the impacted area? That's a difficult question, Brian. We probably talked to around, call it, $250,000,000 to $350,000,000 in credit. We're not that exposed into the Eastern North Carolina kind of footprint, But the flooding that was the result of the hurricane is what we're more concerned about. Understood. And then I just think I know there's a lot of factors with the provision expense, but if I exclude that, it's your run rate or the level was around $6,000,000 this quarter. Is that anything else that was kind of positively impacting the provision expense or anything else we should think about going forward? Yes. I think what really does help us in this environment is the performance of the construction portfolio. I think we're net recovering on construction over the last, call it, three and a half years. And then the commercial real estate book, too, as the losses there are negligible. Thank you. And I am not showing any further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a wonderful day.