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Edited Transcript of PNFP earnings conference call or presentation 16-Jan-19 2:30pm GMT

Q4 2018 Pinnacle Financial Partners Inc Earnings Call

Nashville Jan 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Pinnacle Financial Partners Inc earnings conference call or presentation Wednesday, January 16, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Harold R. Carpenter

Pinnacle Financial Partners, Inc. - Executive VP & CFO

* Michael Terry Turner

Pinnacle Financial Partners, Inc. - President, CEO & Director

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Conference Call Participants

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* Brett D. Rabatin

Piper Jaffray Companies, Research Division - Senior Research Analyst

* Brian Joseph Martin

FIG Partners, LLC, Research Division - VP & Research Analyst

* Brocker Clinton Vandervliet

UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap

* Jared David Wesley Shaw

Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst

* Jennifer Haskew Demba

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Michael Edward Rose

Raymond James & Associates, Inc., Research Division - MD of Equity Research

* Stephen Kendall Scouten

Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research

* Tyler Stafford

Stephens Inc., Research Division - MD

* William Davis Curtiss

Hovde Group, LLC, Research Division - Director

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Presentation

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Operator [1]

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Good morning, everyone, and welcome to the Pinnacle Financial Partners Fourth 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.pnfp.com. Today's call is being recorded and will be available for replay on Pinnacle's website for the next 90 days. (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 comparable GAAP measures will be available on Pinnacle Financial's 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.

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Michael Terry Turner, Pinnacle Financial Partners, Inc. - President, CEO & Director [2]

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Thank you, operator. Good morning. As we always do, I'll begin with this dashboard. It's particularly focused on revenue growth, earnings growth and asset quality because we have believed and we continue to believe that short-term themes like M&A or deposit betas and so forth will come and go, but over time, the 3 most highly correlated metrics for long-term shareholder return are revenue growth, earnings growth and asset quality.

So looking at these metrics, all presented on a GAAP basis, it seems to me we continue to be a reliable grower. Revenue growth, which is the primary interest of this firm as opposed to expense containment, it continues at a reliable and rapid pace. I don't want anyone to interpret my comments that we're cavalier about expenses, we're not. In fact, our expense-to-asset ratio is very low by industry standards. I simply mean that we don't object to outside expense growth so long as we grow revenue still faster. Harold will develop that idea a little further when he reviews the quarter in greater detail.

The revenue growth is primarily attributable to the fact that we continue to grow loans and deposits at a rapid and reliable basis. And asset quality continues to bounce along the bottom in terms of the level of problem loans or level of net charge-offs. And consequently, we continue to grow the fully diluted EPS at a rapid and reliable pace, which in turn grows the tangible book value and elevates ROTCE, now north of 18%.

Because of all the noise that is associated with BNC merger and the 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 revenue on the top left, since this is so critical in terms of the operating philosophy of this firm. I love the slope and reliability of this metric. Total revenues, adjusted for gains and losses on transactions in the investment portfolio, were up 13.8% over the fourth quarter of 2017. The much debated net interest income was up nearly 9% year-over-year, and the fee income was up 34% year-over-year.

Next, I want to focus on EPS net of merger-related expenses at $1.25 for the quarter, which is in the chart on the top row in the middle. Of course, 4Q '18 had no merger charges, so when adjusting for the merger-related charges in the previous periods, fully diluted EPS is up roughly 29% 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 roughly 5-year CAGR of 14.4%. Harold pointed out in our earnings release this quarter that since the BNC transaction in 2Q '17, our tangible book value per share has increased by more than 20% even after absorbing nearly $40 million in merger-related charges, $10.5 million in restructuring charges in the bond book and roughly $32 million in after-tax losses associated with revaluing our deferred tax assets in conjunction with the federal tax cut in the fourth quarter of last year. I think that's a really strong indicator of the success of that transaction as well as just generally how we manage the firm.

Immediately below the tangible book value chart, I want to highlight the ROTCE at 18.46% this quarter. As you review the trend line post-recession, you can see that it progressed nicely until the first and second quarter of 2017, which is 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 of '17, so you can see a very nice lift in ROTCE following the deal closing. Again, another strong indicator of the power of that acquisition.

And lastly, I want to highlight the core deposit growth in the middle chart on the second row. Core deposits grew at an annualized rate of growth of over 10% in the fourth quarter, exceeding the annualized rate of growth for loans during the quarter. Again, there's been some discussion about whether or not we can track core funding at a sufficient level to fund our rapid loan growth. Hopefully, we're demonstrating that we can.

So fourth quarter was a great quarter, with core deposit growth over 10% annualized; linked-quarter revenue growth of 14.6%, due in part to an expanding core margin; EPS growth of roughly 29% year-over-year; and adjusted ROAA of 1.56%; and adjusted ROTCE of 18.46%. All in all, a great fourth quarter and a great year for us.

Now here's what we want to get done today. Harold will review 4Q '18 financial performance in greater detail, and then I'll try to come back and put our 2018 performance in context and then comment on our outlook for 2019.

So Harold, let me turn it over to you to review the quarter.

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Harold R. Carpenter, Pinnacle Financial Partners, Inc. - Executive VP & CFO [3]

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Thanks, Terry. Revenues excluding gains and losses on the sale of securities for the quarter were up $8.9 million from the previous quarter at almost $250 million, an increase of approximately 14.6% linked-quarter annualized. Net interest income is up almost $800,000 from the third quarter of 2018. The fair value accretion negatively impacted the quarter's results as it decreased $3.9 million during the quarter to $13.2 million. We anticipate decreases in discount accretion in future quarters as the level of acquired loans in recent mergers becomes less impactful and post-merger prepayments slow. We're now forecasting around $38 million of discount accretion for 2019. More on that in a second.

The dark green line on the chart denotes our non-GAAP revenue per share. We reported $2.83 adjusted revenue per share in the fourth quarter of 2017, and we're reporting $3.22 this quarter, nearly a 14% growth. Obviously, that's the goal, to keep the revenue train moving north. We will continue to keep an eye on our profitability metrics, but as it stands today, we can afford to invest in our platform with robust hiring activity aimed primarily at C&I and private bankers.

As we noted last quarter, our targets were all designed to increase our earnings per share in a reliable and sustainable way and build tangible book value per share through the cycle.

This slide focuses on revenue per share growth. Using trailing 12 months as the basis for the amounts, we continue to experience double-digit revenue per share growth. Now this is during a time of significant internal focus around integration of the Bank of North Carolina. Let me assure you there's a great deal of energy in our franchise right now. We're definitely on offense in Tennessee, the Carolinas and Virginia. Our associates are engaged, focused and excited about our opportunities in 2019.

Secondly, the dotted line represents the peer group's year-over-year growth, which is cumulative last 12 months' revenue of our peer group divided by aggregate number of shares. As shown in the chart, we continue to and consistently outpace the peers in revenue per share growth through those time periods.

Concerning loans, as the chart indicates, average loans for the fourth quarter were $17.6 billion compared to $17.3 billion at the end of the third quarter. Plus, average loans increased by almost $371 million, resulting in an annualized growth rate of nearly 9%. This is on the heels of strong growth in the first, second quarters of 2018. Comparing 4Q '18 average loans to 4Q '17 average loans, our annualized growth is better than 13%. We continue to believe that our loan growth for 2019 will be low to middle double-digit loan growth, with growth being more spread out in comparison to 2018, which had significant growth in the first half of the year.

In the Carolinas and Virginia, their organic loan growth in 2018 over 2017 was more than 11%. Importantly, C&I and owner-occupied commercial real estate is up roughly 27% year-over-year.

We're seeing solid growth in C&I in all of our markets in the Carolinas and Virginia. Right now, they've grown their C&I and CRE owner-occupied book to greater than 20% of total loans. Creating a robust franchise is obviously key to our growth goals, as with the C&I platform comes core deposit and related fee growth.

Payoffs and paydowns were again heavier in 4Q over the previous quarters, primarily in construction and nonowner-occupied commercial real estate. Our internal records would indicate payoffs and paydowns in this segment's ramp from $460 million in the first quarter to $580 million in the second quarter, $765 million in the third quarter and finally $950 million in the fourth quarter. This will obviously be a headwind as we move forward into 2019. Our commercial real estate lenders are optimistic that as we approach the middle part of 2019, balances should begin to increase given our new projects that should begin to fund.

As the chart indicates and as expected, our loan yields increased to 5.22% from 5.15% last quarter, a 7 basis point increase linked quarter. We're forecasting 2 increases in Fed funds rates this year.

The blue bars on the slide detail annualized quarterly loan growth rates as adjusted to remove acquired loans in comparison to peer medians. As shown, our loan growth continues to outperform our peer group quarter-after-quarter without sacrificing credit quality or accepting undue concentration risk. Coupling our hiring strategies with the quality of our markets gives us much optimism that we should be able to outpace peers for the foreseeable future.

In the chart on the right, we've detailed the impact of discount accretion on net interest income. As you can see, discount accretion continues to be less impactful to our results at 7.4% of our net interest income in the fourth quarter, and will continue to be so in the future.

There's a lot of information here. We've discussed in recent quarters that we're targeting an allocation of 35% of our loan book to fixed-rate loans with maturities greater than 1 year. That level would be consistent with our allocation prior to the Bank of North Carolina merger and we believe matches up well against our funding profile. While we're making progress organically towards this goal, we've also executed $900 million in foreign interest rate swaps to help expedite this reallocation.

This strategy will increase our floating-rate allocation by a total of 5% over the term of the swaps, which approximates 2.5 years. The first $300 million tranche of these swaps started in the fourth quarter, with the remaining $600 million set to begin evenly over the first and second quarters of 2019. As of today, the average paid fixed rate on these swaps is only 14 basis points higher than the received variable component.

We've also disclosed rate index trends on this slide for the entire portfolio and also by loan type. As you can see, our LIBOR and prime rate index portfolios captured 97% and 95%, respectively, of the 2018 Fed funds rate hikes. That success has served our margin well as we look -- as we booked approximately 2/3 of our loans this year to those categories. The exceptional growth we're experiencing now in the C&I portfolio serves our -- as our primary catalyst in booking credits to these indexes because as you can see, that portfolio has over 65% allocation of variable and floating rates.

You can also see that our construction portfolio is also about 3/4 allocated to variable- and floating-rate structures, while our CRE portfolio carries a heavier slant towards fixed-rate terms. Keep in mind, though, that 40% of the fixed rate exposure in the CRE book is allocated to owner-occupied commercial real estate. These loans generate a tremendous number of transactional deposit accounts, many of which are noninterest-bearing and as we get into the full relationship with these business owners. So while there is largely a fixed-rate slant in the owner-occupied product, the interest rate risk is substantially offset by obtaining the full banking relationship.

Average deposit balances are up $255 million, while EOP balances are up $432 million. End-of-period core deposits increased $412 million during the quarter. Our deposit costs did increase 11 basis points in the fourth quarter from the third and currently stand at 1.08%. We compute a beta of 39% on deposit costs given those figures since the most recent rate cycle began in the fourth quarter of 2015.

As for 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, we'll 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. As noted, core deposits were up 14.6%, while loans were up 13.3%. You can also see the core deposit growth in Tennessee and the Carolinas at 15.7% and 16.3%, respectively.

We are driving our sales force efforts towards these depositors. We will play the customary shoe-leather game. We still believe we've got adequate room in our plans to fund our loan growth with a fair rate on deposits. Deposit betas are important. We do pay attention, but we also believe clients need to be acquired. And for 2018, it was a pretty good year for Pinnacle.

Again, a big quarter for deposit growth in the fourth quarter, with core deposit growth up more than $412 million and more than 9.5% annualized. Over the last 4 quarters, core deposit growth has funded 80% of our loan growth. In comparison to peers, we continue to have success with core deposit growth.

Also in the chart is the 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 fourth quarter results.

This is a new chart. And as many know, last -- late last year, we anticipated breaching the 100/300 ratios and stated our intention to bring those back in line in short order. We've worked diligently to reduce our CRE and construction balances in relation to total risk-based capital and have also experienced, like many bankers, additional paydowns and payoffs to assist in all of this.

These charts are intended to give you some additional insight into the granularity of our real estate portfolio as well as the metrics we seek out on our projects. I have to commend our lenders and credit administrators as it takes a lot more effort to work many smaller projects than a whale project, but that's our bread and butter, and we've managed to keep to our knitting and not be lured into the business of whale hunting.

Concerning the left chart, we aggregated by call code then by common [barrier] projects. The results of this effort are shown in the table. As you can see that while we have some larger, greater than $20 million credits, we also have a significantly larger number of projects that are below $10 million.

The chart on the right shows the top 10 projects within each segment for both construction and commercial real estate investment properties. We've also included the loan-to-value, loan-to-cost and debt service coverage ratios on these projects. So the top 10 projects in the 12 segments noted above account for $2.4 billion in balances, which is about 1/3 of all the loans in these call-code segments, and would calculate an average balance of around $20 million per project.

Now before I move to fees and expenses, just some additional words on credit. Obviously, market volatility over the last few months has been extraordinary, with many stating the signs are emerging that the credit cycle is beginning to turn. We consider the soundness of our loan book to be relatively stable with prior quarters. Credit is always at the forefront of our minds, so I hope we never appear lax or frivolous when we talk about credit. As you know, there's a lot of gray hair and, in some cases, no hair running around this place, and we've all experienced credit cycles. And although experience is a great teacher, it can also be a painful one.

For the fourth quarter, we saw improvement in classified asset ratios; a 1-tick increase in our net charge-offs; and as previously mentioned, reductions on our 100/300 exposures.

We also experienced an increase in nonperforming loans of about $10 million. This increase involves 2 credits. One is a storage unit facility where we're adequately collateralized but have informed the borrower to find another banker. The other is a specialty pharmacy that filed Chapter 11 bankruptcy in December, where we have a first mortgage owner-occupied building that is appraised at 3x the loan balance.

With market volatility over the last few weeks, this management team feels very accountable to shareholders. And I'd ask everyone to remember that this management team has been working this franchise for many years. And like the old story about breakfast and ham and eggs where the chicken is involved but the pig is committed, make no mistake, this management team is committed.

Now turning to fees. Fees amounted to greater than $57 million, up $5.8 million over last quarter. BHG had a great year in 2018. Their contribution was up $3.7 million in the fourth quarter. We had anticipated the net growth in Bankers Healthcare Group to be -- in 2018 would be in the 12% to 15% range. It actually ended up in excess of 35% for the year. We don't expect a repeat performance in 2019, so we're anticipating modest growth for BHG next year, call it 5% to 10%.

A few people asked about credit performance at Bankers Healthcare Group. Lately, credit at BHG has been the best it's been in many years. Substitution losses were flat in 2018 compared to 2017 with a significant increase in sold loans. They've been in the business for 18 years and have never lost money in any year. They stick to medical professionals who are likely the most creditworthy borrowers in the credit stack, and that has served them well.

Wealth management revenues were up slightly in the fourth quarter compared to the third. We've had several significant hires in both footprints that have contributed to our success in investment services. Insurance and trust remain relatively stable. Lending-related fee income was up slightly from last quarter. As we all know, the rate environment has not been helpful to residential mortgage for the past several months, but our folks continue to work to get their share of the deals.

SBA and our back-to-back customer swap program had strong fourth quarters. The government shutdown is having an effect on our SBA program. And even though this business line is really important to us, it's a fairly modest component of our total revenues.

Other income was bolstered by increased BOLI revenues and valuation of certain other assets.

Nonoperating leverage, our adjusted efficiency ratio of 48%, which was slightly more than the 47.3% we reported in the third. We expect our noninterest expense to be higher this quarter and we're hopeful we can afford increased incentive accruals as we headed into year-end.

Salary expense was up $5.6 million, largely attributable to increased incentives this quarter of $3.6 million and increased headcount. Since year-end, we're up about 165 FTEs, as we continue to hire revenue producers and other critical support functions.

We're also beginning to see positive trends in our retention ratios. This is critical to our service levels throughout our franchise and our relationship-based banking model. Terry will discuss associate engagement and its importance to our growth in a minute.

In the fourth quarter, we increased our incentive accrual to 100% of target award. You know that our corporate incentive targets are set at levels we believe would equate to top-quartile 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 where we paid more than target. We've had years where we paid nothing. The critical thing is that the associate base understands why we do it that way and the way we do it and that shareholders are informed.

Keep in mind that Terry, myself and the entire leadership of this firm are on the same incentive plan with everyone else. Incentives are important, and it's one of the things that makes us unique and different from other peer banks. Like I said, there's much energy in this workforce, and the associates at this firm appreciate the confidence that shareholders have placed in them.

Lastly, a brief word on the repurchase program. We announced a $100 million repurchase program on November 13. We stated that we would engage that program over the -- over all of 2019. Thus far, we've acquired a little more than 405,000 shares, almost $21 million in costs, which works out to be about a $51 per share price. The impact to 2018 was minimal, but we believe the impact to 2019 will be more impactful.

With that, I'll turn it back over to Terry.

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Michael Terry Turner, Pinnacle Financial Partners, Inc. - President, CEO & Director [4]

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Okay. Thanks, Harold. But I didn't want Harold to get ahead of me with the ham and eggs analogy, so I've got a quote from Ferdinand Foch, the supreme Allied commander at the conclusion of World War I. He once famously said, "My center is giving way, my right's retreating. Situation excellent, I'm attacking." For me, I think the 2018 battle felt something like that. Our share price gave way, our P/E and price-to-tangible book value retreated, but our position in the market was excellent, and we executed our plan well all year long.

I don't think it's news to anybody on this call that 2018 was a disastrous year for small-cap bank stocks. But it was particularly difficult for PNFP. You can see here on the left that despite the fact that our EPS outgrew peers and the consensus is that we'll continue to outgrow peers in 2019, our share price collapsed more than peers, and our price-to-tangible book value collapsed dramatically more than peers. On the right, you can see that post-recession, PNFP has generally traded well above peers until this year and now trades less than peers. And that with a 33% growth in EPS for 2018, which some believe may provide a unique opportunity for investors.

Generally, investors punished acquirers in 2018. Many feared the integration risk for us that was associated with our BNC merger. In fact, our original deal rationale was that we would protect BNC's high-growth CRE business, but then we've built out a high-growth C&I business that would have the impact of turbocharging total loan growth in the Carolinas and Virginia. In order to do that, we plan to hire 65 C&I and private bankers in the Carolinas and Virginia over a 5-year period of time. That would suggest by year-end 2018, we should have hired roughly 20. In fact, we've hired roughly 33, which puts us a full year ahead of schedule.

And for those who get concerned about that expense burden, keep in mind, 100% of that expense burden is already in our run rate, while a significantly smaller portion of the expected revenue is in our current run rate. I think that bodes well for future revenue and earnings growth, as Harold just pointed out.

And the key measures to the success with integration, from my perspective, have all been met. We did not meaningfully [deserve] BNC's very successful CRE business, producing 10.6% growth in CRE outstandings during the year in that footprint. And we did, in fact, transform the growth model to more of a C&I growth engine with a 27% growth in C&I and owner-occupied commercial real estate. And we were able to grow core deposits at nearly 14%, again, significantly transforming the growth model in that footprint. I can't tell you how proud I am of Rick Callicutt and his market presidents for their leadership in this transition.

CRE was another elevated concern regarding the industry throughout 2018. Of course, as Harold has already mentioned, we tipped above the 100% and 300% CRE guidelines in the first quarter, largely due to 2 factors: number one, our merger with BNC; and then number two, the revaluation or write-down of our deferred tax asset in conjunction with the tax cut in the fourth quarter of last year. We indicated we intended to retreat below those concentration guidelines in the second half of 2018, which we did. On the construction threshold, we're now at 85%, which approximates the premerger level. And on -- as Harold did add on the total CRE guideline, we're now down to 278% and expect further movement closer to the 260% range, which we operated in pre-BNC.

I think beyond the general concentration thresholds, some were concerned about true loss content in the CRE loan books. As you can see on the right, the performance of our CRE book has been outstanding, meaningfully better than peers, with our worst year at 20 basis points charge-offs and actually being net recovered 3 of the last 4 years. I believe the granularity of our CRE book, which Harold just talked about, versus peers is one of the reasons we continue to expect outperformance of our CRE book. As has already been discussed, during this period of reducing the CRE concentration levels, we were still able to grow total loans greater than 13% in 2018 and largely did that on the strength of the 20% growth rate for C&I and owner-occupied CRE firmwide.

Of course, the most discussed variable weighing on SMid-cap bank stocks all year was deposit betas. I think our view on that topic was that, number one, we would be a high deposit beta firm, but number two, that we would produce above-average growth in net interest income because by taking share and growing volumes, we would be able to run fast enough to outrun the margin compression. The chart on the left plots the net interest income per share for our peer group against the delta on deposit cost. The crosshairs are situated on the median performance. And the chart on the right is a similar comparison plotting net interest income per share for our peers against the deposit cost betas.

It seems to me that our thesis was right. It was indeed possible to produce outsized growth in net interest income despite increasing deposit costs and -- or high deposit betas. In fact, the peer with the highest deposit beta produced the highest growth in net interest income per share. And of course, PNFP performed well better than the peer median under either analysis.

Expectations for SMid-cap bank stocks seemed to diminish throughout 2018. Nevertheless, as you can see on the left, we generally performed in line or better than our targets for ROAA and each of the 4 components that are generally required to produce that ROAA. Similarly, we outperformed the consensus estimate for 2018 that was established immediately following the year-end 2017 results.

So one of the primary reasons that I believe Pinnacle was able to continue its rapid growth despite so many negative factors, including slowing loan demand, is that according to Greenwich Associates, we truly have a differentiated brand. The chart on the left plots the 5 large competitors in the Nashville market in terms of market share, and client satisfaction among businesses with sales between $1 million and $500 million, essentially the entire business market. As you can see, we're dominating this market on both variables. And interestingly, the 2018 trend for both of those variables remains positive.

Honestly, you can see why I'm so optimistic in terms of future growth in Nashville. When you look at where we are on this chart and compare that to the vulnerability of all 3 of our next most important competitors, it just doesn't get much better than that.

The chart on the right provides still more insight into client perceptions of our firm on important variables like ease of doing business, likelihood to recommend, our relationship managers, our branch offices and treasury management. Dark green indicates that we're the market leader. Light green would indicate that we're #2. As you can see, we're overwhelmingly dominating this market and have positive trends on virtually every single measure. When you see things like 92% of our clients would recommend us and the next best competitor in the market only has 80% of their clients willing to recommend, you begin to see the power of the differentiated franchise. Hopefully this provides a little more insight into not only how we have but why we expect to continue to produce growth and take market share.

And then finally, many have been concerned about the law of large numbers limiting our ability to continue to grow. Who knows, but most of you know my belief is that if we continue to execute and engage our associates, they will continue to provide a differentiated experience for our clients. We'll be able to capitalize on the vulnerability of those large banks that are competitors that we just discussed, and we can translate that into a rapid and reliable earnings growth stream.

As you can see, our size and market expansion has not diminished our ability to execute and engage our clients. In 2018 alone, we were ranked #22 in terms of the 100 Best Companies to Work For, #40 in terms of the Best Workplaces for Parents, #3 in terms of the Best Workplaces in Financial Services and Insurance, #16 Best Workplace among Banks in America, #12 Best Workplaces for Women, #24 Best Workplaces for Millennials. And then in addition to being in the Hall of Fame in the Nashville market, we've also been recognized as the Best Place to Work in both Memphis and Knoxville.

On the right, using the FDIC market share data, you can see that we did indeed translate that workforce engagement into share growth in virtually every market in which we operate.

So we remain committed to long-term shareholder value through growing the top line and the bottom line. I would expect our emphasis in 2019 to be fundamentally the same as 2018. First of all, you might think about the comments that Harold made, we set our targets to be a top-quartile performer in terms of EPS growth. We know what the peers are expected to produce and obviously set our targets to ensure that we'll be top quartile in the peer group in terms of EPS growth.

Secondly, we are projecting that we will continue to grow low and mid-double-digit annualized rate for loans. As has been mentioned several times in the call, the mechanism for this is not just asking our FAs to produce more, but it is the emphasis on hiring great bankers in our markets and asking them to move those books of business as the mechanism that lets us grow both quickly and with strong asset quality. And then like 2018 when the core deposit growth rate exceeded the double-digit loan growth rate, we'll continue to place a very heavy emphasis on core deposit in terms of the managerial emphasis.

So when you think about long-term shareholder value creation, I think Harold did a nice job to highlight that the focus here is that we hire these high-profile revenue producers. That enables us to grow our revenues faster than our expenses, and we focus keenly on translating that to tangible book value growth. And so that will be what we'll focus on again in 2019.

Operator, with that, I'll stop and take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jared Shaw with Wells Fargo Securities.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [2]

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Maybe if we could start with just a little discussion on the deposit side. It was great to see that the beta slowed. Do you think that that's sustainable? When you look at the -- on Slide 12, you have your rate chart -- or the rate sheet where the posted rates went down, negotiated rates went up, but beta slowed. Can you sort of talk to some of the dynamics there? What portion of those relationships are coming with negotiated rate versus the rate sheet? And do you think that we could see a continued slowdown or sustained lower beta as we go into 2019?

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Harold R. Carpenter, Pinnacle Financial Partners, Inc. - Executive VP & CFO [3]

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Yes. Jared, I think what we'll see, I'll start with the larger question first in that I think we will see slowing deposit cost increases. I think that's because the rate environment is becoming less -- doesn't require those kind of significant increases. I think that's because we've repriced a lot of our deposits to a much more competitive price previously. And I also believe we've got some higher-priced wholesale money that we're going to see leave the bank here in the first quarter. So we're cautiously optimistic that we'll see continued growth in our core margin here in the first quarter and into the second quarter. Did I get to all that?

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [4]

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Yes, I think that's good. And then sort of as a corollary to that, how is the progress going having the relationship managers go into the commercial customers and try to get a bigger market share of -- or wallet share of deposits? You were talking about that at the Investor Day. Is that showing good progress? Do you think there's still room for that to accelerate as you go into 2019?

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Harold R. Carpenter, Pinnacle Financial Partners, Inc. - Executive VP & CFO [5]

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Yes, thanks for that. Back in the summer, we asked our relationship managers to build lists of depositors that they were doing business with and find those deposits that were at other franchises. And we think that went well. It's like a lot of different tactics, you have to revisit it occasionally. You can't do it every week or every month. What you have to do is kind of pull that project to the front, let it work, and then 3 or 4 months later, let it -- do it again. But I think we saw -- the last part of the year, we saw core deposit growth that was in line with some of the best quarters we've ever had.

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Jared David Wesley Shaw, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [6]

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Okay, great. And then just about -- you mentioned that you see -- you expect to see some wholesale money leaving in the first quarter. How much -- what's the balance of that wholesale book that you think could leave?

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Harold R. Carpenter, Pinnacle Financial Partners, Inc. - Executive VP & CFO [7]

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It will be north of $300 million.

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Operator [8]

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Our next question comes from Stephen Scouten with Sandler O'Neill.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [9]

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Question for you, Terry, on the pace of new hires. Obviously, it's been phenomenal, and you guys are well ahead of schedule. Do you guys think about intentionally trying to slow that at all to kind of ladder in these new hires and their related production? Or do you kind of just let momentum run as long as you can bring new people in? How do you think about that and the pace of those hires?

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Michael Terry Turner, Pinnacle Financial Partners, Inc. - President, CEO & Director [10]

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Yes. I think generally, we would continue to let the momentum run. Generally, we -- as you have heard us talk about before, the thrust here is to target high-producing relationship managers. When you start looking at salary multiples on a high-producing relationship manager, you get numbers like 20 to 25x salary. And so the question to me is, why would I ever want to slow down hiring revenue producers that can produce that sort of salary multiple?

Now again, you got to hire the support that goes with it and so forth to get to a bottom line number. But again, I think you get the idea here. If you can hire a high-producing relationship manager, I've never understood why you wouldn't hire them. And so to that extent, we'll continue to let the momentum run and we'll seize the opportunity as long as we can.

Stephen, I might just hint at this, we talk so much about being ahead on the hiring plan in the Carolinas and Virginia, but we're still hiring at a dramatic place -- pace in Tennessee as well. And again, it just goes back to that idea of we have a continuous recruitment cycle for high-returning relationship managers.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [11]

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Yes, no, that's great. And as that pertains to loan growth, I mean, obviously, you're still guiding to the low to mid double digit. Does that -- to hit that range, do we need to see paydowns move back into that $400 million to $500 million a quarter that we saw in the first half of '18? Or is that loan growth, in you all's minds, really predicated on all these new hires delivering even in spite of heavy paydowns? How can we think about the likelihood of delivering on that number, I guess?

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Harold R. Carpenter, Pinnacle Financial Partners, Inc. - Executive VP & CFO [12]

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Yes. We've sent out all the financial plans for 2019 to all the market managers. And so they've all signed up for what they have to do, and they're all creating lists of potential clients to go get that business from. But I think it's going to take a little bit of both. We'll need some kind of a slowdown in these projects that are getting paid off. And a lot of it has to do with the timing of when these projects were signed up initially, and they were likely a year or more ago. And so we're hopeful that we'll see some retrenchment in these paydowns and payoffs as we go through 2019.

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Michael Terry Turner, Pinnacle Financial Partners, Inc. - President, CEO & Director [13]

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Stephen, I might add to Harold's comment just to maybe put it in perspective as it relates to CRE. As you know, when we projected that we would crest the 100/300 or really the 300 guideline there on CRE, we did tap the brakes internally. And then beyond that, we tapped the brakes in conjunction with some specific asset classes, like hospitality and multifamily in the core Nashville. And so those phenomenon are now playing through what the net loan growth is.

But I guess I want to reiterate, having come back inside our guidelines, we have commitments that would indicate we will outrun paydowns at a pretty meaningful pace for CRE. But it really turns into sort of a second, really third quarter item before that finds its way -- the fundings find their way onto our balance sheet.

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Stephen Kendall Scouten, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research [14]

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Okay. No, that makes a lot of sense. And maybe one last quick one, Harold, is, you said you were modeling in 2 rate hikes for 2019. As you model that out and say we didn't get either of those rate hikes, do you know what the kind of basis point impact would be or even directional impact would be to your NIM if we were not to get any rate hikes here in 2019?

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Harold R. Carpenter, Pinnacle Financial Partners, Inc. - Executive VP & CFO [15]

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Yes. I think if we hit our growth goals this year, it could be impactful. The -- I don't know what that number might be. If we're still growing the loan book and we have to go raise -- if we have to replicate 2018 into 2019 and have to go find a bunch of deposits to fund the loan growth, then it'll be more impactful. Here, currently, it doesn't appear that it's going to be. It looks like our deposit models are working and that we'll be able to grow these deposits to fund this loan growth. But if we have to go out and secure deposits to fund this loan growth at these elevated rates, then I think we'll have some pressure on our long-term sustainable business model on net interest margin.

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Operator [16]

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Our next question comes from Brett Rabatin with Piper Jaffray.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [17]

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Wanted to first ask just on BHG and the great year you had in '18, can you maybe just give a little more color around the fourth quarter and then what your assumptions are for that 5% to 10% growth in '19? What kind of market does that anticipate for those guys?

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Harold R. Carpenter, Pinnacle Financial Partners, Inc. - Executive VP & CFO [18]

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Yes, I'll try to answer that. They do have a lot of confidence in what their business model is producing right now. Al has been very adamant with me that his revenue streams that he's producing this year are 2018 revenues, that he's not pulling out loans that were booked in prior years and selling those or going into any kind of cookie jar. He's very excited about the advances they've made with respect to their marketing programs, with respect to their credit programs. He thinks those investments that they've made over the last 1, 2, 3 years have produced the results we're seeing today. He feels like that next year 2019, they will beat 2018. They've got -- they're going to focus some management attention on new products. This Patient Lending product that we think will become more relevant towards the end of 2019 will be helpful.

As far as near-term results and what we're looking at in the first and second quarters, I think we'd be looking at probably a consistent kind of -- maybe a little better in the first and second quarter than what they did in the first and second quarter of 2018 in relation to the total year, if that makes sense. So that may be more than you bargained for, but we're excited about this relationship and where it's headed.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [19]

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Okay, that's great color there. And then just want to make sure I understood, on the core deposit initiatives and thinking about '19, are you guys changing anything that you're doing in '19 to continue to fund the loans with core deposits? Are there new initiatives relative to '18 that you're looking to roll out?

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Michael Terry Turner, Pinnacle Financial Partners, Inc. - President, CEO & Director [20]

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Brett, I think I will describe it this way. I think the initiatives that we outlined for 2018 have been fruitful, and so we would expect a continuation of those same initiatives.

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Brett D. Rabatin, Piper Jaffray Companies, Research Division - Senior Research Analyst [21]

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Okay. And then maybe just one last one if I could sneak it in. CECL, any update on what you guys are thinking there? I know it's been kind of a meaningful potential increase in the reserve.

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Harold R. Carpenter, Pinnacle Financial Partners, Inc. - Executive VP & CFO [22]

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Yes. I don't think -- I think we're still working through our models to put a little finer point on those. But I think we're on plan to begin booking that day 1 entry on -- in the first quarter of next year.

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Operator [23]

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Our next question comes from Jennifer Demba with SunTrust.

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Jennifer Haskew Demba, SunTrust Robinson Humphrey, Inc., Research Division - MD [24]

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You mentioned earlier in the call that the credit performance continues to be stellar. Just curious as to what you're expecting in terms of charge-off levels in 2019 and where you see the most credit risk in terms of asset classes.

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Harold R. Carpenter, Pinnacle Financial Partners, Inc. - Executive VP & CFO [25]

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Yes. I think from an absolute perspective, we're not anticipating any kind of decrease in credit quality. Like everyone knows, credit quality over the last several years for the banking industry has been remarkable. And we're not seeing any kind of matter that would cause us to say, "Okay, we need to try to look at our budgets for 2019 and, say, increase our charge-off forecast." So as far as asset classes, Terry, you got any color? I don't.

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Michael Terry Turner, Pinnacle Financial Partners, Inc. - President, CEO & Director [26]

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Yes, no. Our view is that when you've sort of gone through the various industry analyses and so forth, that you've got movement around the edges. But Jennifer, we've talked about some of these asset classes like multifamily in Downtown Nashville. We've had a hard stop on that in the past. That's an area where I would say we have a caution flag now, which means it's better than we used to believe it was. And I think hospitality is an area that we would still look pretty hard at before we'd want to do another transaction there. But -- I think with those 2 modest exceptions there, but generally, we feel good about the risk in the loan book.

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Operator [27]

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Our next question comes from William Curtiss with Hovde Group.

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William Davis Curtiss, Hovde Group, LLC, Research Division - Director [28]

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Wanted to make sure -- I want to make sure I heard something correctly. It sounds like you guys might be -- maybe fairly active with buybacks this year. And if so, can you kind of give us a sense of how you're thinking about it and -- or maybe just some updated thoughts on buybacks?

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Harold R. Carpenter, Pinnacle Financial Partners, Inc. - Executive VP & CFO [29]

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Yes. Will, that one slide in there, I think 2019, we'll use all that money in buyback programs in all likelihood. I hope we don't, but we're hoping to be able to take it all. The share price obviously will have impact on our decisioning. But at the same point -- at the same time, we want to be able to have enough dry powder, so that we can use it throughout the year. Is that helpful?

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William Davis Curtiss, Hovde Group, LLC, Research Division - Director [30]

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Yes, it is. And then wanted to go back, you had mentioned, I think, the $38 million of accretion income that you expect for this year. Any sense for where that may go in 2020? Or is it still too early to put something out there?

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Harold R. Carpenter, Pinnacle Financial Partners, Inc. - Executive VP & CFO [31]

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I think it's early. For sure, we had -- it'll be a -- it was a significant decrease between 2018 and 2019. 2020 will not have that kind of decrease, but that component of our revenue stream will become less and less impactful over time, thankfully.

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William Davis Curtiss, Hovde Group, LLC, Research Division - Director [32]

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Got it, yes. And then just the last one for me, on the other fees, and I think you've called it out, I think, in your remarks and also in the release. But just curious if you can kind of help us size up the other fee income and maybe kind of size up what the appropriate base would be going forward. Because it sounds like there may have been some unusual items this quarter.

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Harold R. Carpenter, Pinnacle Financial Partners, Inc. - Executive VP & CFO [33]

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Yes. I mean, the increases -- the volatility, I guess, in that line item was primarily around valuation of some other assets, and there was like a $600,000 increase. We had a similar increase in the second quarter. We had a decrease in the third quarter and then an increase again in the fourth quarter. So it pops around quite a bit. So call it maybe $300,000 of run rate impact.

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Operator [34]

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Our next question comes from Tyler Stafford with Stephens.

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Tyler Stafford, Stephens Inc., Research Division - MD [35]

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Harold, I wanted to start on just the expenses this quarter and around the incentive comp. So obviously, you guys hit numbers, so not surprising that the incentive piece stepped up. I'm just curious if you could give any color for the magnitude that we should see that stepping down in the first quarter as we just kind of reset the bar on the accruals on the incentive comp.

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Harold R. Carpenter, Pinnacle Financial Partners, Inc. - Executive VP & CFO [36]

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Yes. I think -- well, we're up $3.5 million, $4 million in incentive costs in the fourth quarter, that won't get replicated. That will come down in the first quarter. There was a slide in the back that's got cash and equity incentives. I think we booked like $10 million in the first quarter of last year. It will be more than that, but it won't be a lot more.

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Tyler Stafford, Stephens Inc., Research Division - MD [37]

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Okay. And then I just wanted to maybe clarify one of your answers to Stephen's questions earlier just about the core NIM and the impact from rate hikes, but maybe thinking about it just in terms of NII. So you guys have the Slide 10, the graph just showing the core ex accretion NII growth you've seen. And obviously, despite the softer loan growth this quarter, you still put up mid-teens, 15%-plus core NII growth. If we were thinking about it just in terms of NII and we don't get the 2 rate hikes, can you just size up the magnitude of core NII growth you'd expect to see in 2019?

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Harold R. Carpenter, Pinnacle Financial Partners, Inc. - Executive VP & CFO [38]

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Yes. I mean, that -- our budgets would say that we would have consistent growth in net interest income next year. If we don't get the rate hikes, I'm not really as concerned about that today as I would have been, call it, 9 months ago because the rate hikes gave us some cover on rising deposit costs. I don't think -- if we don't get the rate hikes, I don't think we have as big a delta to overcome on deposit cost increases as we did in 2018. That's because I think we've rebooked -- we've already repriced a lot of our deposit book currently. And wholesale -- the wholesale market was what really kind of got to us in 2018. I mentioned a beta of 39%. If you parse that apart and say the wholesale beta was up around 70% or 80%, the client beta was around 20% to 25%. So I feel better about a no rate increase rate environment today than I did, call it, 6, 9 months ago.

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Tyler Stafford, Stephens Inc., Research Division - MD [39]

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Okay. Okay, all right, that helps. And then just last one for me...

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Harold R. Carpenter, Pinnacle Financial Partners, Inc. - Executive VP & CFO [40]

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Tyler?

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Tyler Stafford, Stephens Inc., Research Division - MD [41]

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Yes?

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Harold R. Carpenter, Pinnacle Financial Partners, Inc. - Executive VP & CFO [42]

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Tyler, let me just tack onto that one comment, too. And a lot of it has to do with the way we've repositioned this balance sheet. I know intuitively, you'd think, "Okay, they're putting more floating-rate assets on, so they want more rate increases. They're going to take advantage of that." But in reality, when these rate increases come and you're a growth bank, you got to go find that funding. And typically, you'll have to rely more on the wholesale market, and that's a more expensive proposition.

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Tyler Stafford, Stephens Inc., Research Division - MD [43]

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Yes. So maybe just simplistically, if your loan growth outlook is low to mid-double digits, there's not going to be that much asset rates up or down pressure on the margins, should kind of core NII at least be kind of 10%-type plus?

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Harold R. Carpenter, Pinnacle Financial Partners, Inc. - Executive VP & CFO [44]

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Yes. I think that's a better way -- you said it better than I did.

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Tyler Stafford, Stephens Inc., Research Division - MD [45]

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Okay. Okay, all right. And then just lastly, going back to the dry powder comment around the buyback for the year, how is M&A at this point kind of playing into your thinking from an executive level?

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Michael Terry Turner, Pinnacle Financial Partners, Inc. - President, CEO & Director [46]

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Tyler, I think we try to be candid about the markets we want to be in. We try to be candid about the kinds of targets that we would pursue in those markets, the kind of financial results we would expect those things to produce in order to be attractive. We've not really changed any of that guidance. And so you can sort of do the math. With the stock at these levels and these multiples, I wouldn't expect a lot of M&A to take place. But if you get the expansion and advantaged stock, again, we've pretty well spelled out what play we'd like to run.

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Operator [47]

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And our next question comes from Michael Rose with Raymond James.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [48]

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Just a couple of quick questions. Just wanted to talk about the expense growth if you guys continue to hire at a pretty elevated rate, which seems like that is in the cards. You guys have historically grown expenses at, at least a double-digit rate. It's obviously been stronger and skewed by some of the deal metrics here recently. But should that be the expectation going forward if you continue to outpace on the hiring side? And I guess that gets to my broader question. If reported NII is going to be under a bit of pressure from declining purchase accounting accretion -- and I don't know what the explicit expectations are for fee income, but do you think you can actually still generate positive operating leverage in 2019?

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Harold R. Carpenter, Pinnacle Financial Partners, Inc. - Executive VP & CFO [49]

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Yes, that would be the plan, Michael. We've -- we still believe we've got enough energy to generate these loan growth goals that we have. And with that comes the opportunity to hire people. Now when you want to focus directly on the expense base, I think it is important to understand how flexible we can be with our incentive accruals. And granted you take incentives away from associates, that's painful. But at the same time, that's the way our system works so that if Terry goes out and hires a bunch of people, we don't get a pass on that from an incentive perspective from our board.

So we've got to figure out a way to cover those costs even though we may ramp up hiring. I think also that operating leverage is critical to the shareholder base. They tend to like to talk about operating leverage. We may miss on revenues from time to time, but you shall be good operators. So it's a meaningful component of our internal discussions here as to how we can continually improve our operating leverage.

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Michael Edward Rose, Raymond James & Associates, Inc., Research Division - MD of Equity Research [50]

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Okay, that's helpful. And then maybe just one final question from me for Terry. Can you just talk about the general level of competition? It seems like there's been a lot of people that have gone after C&I, particularly in the Tennessee market. How does that translate into your ability to grow? I know a lot of your ability to grow is based on hiring lenders and then bringing over their books of business, but do you get to a point where you purposely begin to maybe slow down because the loans that are out there just don't make sense from a incremental return on investment point of view?

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Michael Terry Turner, Pinnacle Financial Partners, Inc. - President, CEO & Director [51]

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Michael, thank you for that question because that's a really important thing. When I talk to institutional investors, I detect in their questions a lot of times about, "Well, how are you getting this growth? I mean, you guys must be stretching on asset quality, you must be stretching on price, and you must be stretching on these things." And I believe that a lot of large companies, if they're producing outsized loan growth, they probably are doing that. But here, the growth is primarily driven by hiring people and moving market share. And I think it's important to get who it is that we're hiring, we don't hire people that circulate their resumes, we don't hire inexperienced people. We're looking for people that have at least 10 years experience. The average experience of the people that we hire is 24 years. And so when we're hiring these people that have been managing a book of business for 2.5 decades at a large regional bank and when they bring that book to us, you get 2 things: you get rapid growth, which is what we're talking about, but you also get outstanding asset quality. And that occurs for 2 reasons. Number one, because they know that book well, they're well familiar with what's going on in it. While it might be new to our balance sheet, it's not new to the lender. And then the second aspect of that is, to the extent they have any bad loans, they just leave them where they are. It's got an offset of an adverse selection problem here. We get kind of a turbocharged asset quality when you do that. And so again, I think your point's a great one. In this economic landscape, if I were out here trying to produce double-digit loan growth just by asking my existing sales force to run a step faster, that would be a bad idea in my judgment. And I wouldn't be interested in trying to grow the portfolio in that way. We're only interested in producing this growth by virtue of hiring experienced people and having them move well-performing loan books from their bank to us.

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Operator [52]

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And our next question comes from Brock Vandervliet with UBS.

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Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [53]

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Just going back to the Bankers Healthcare Group, I mean, the performance there has just been monstrous for 2018. The 2019 guide looks like a pretty hard step down. Is that partly conservatism? Or was there a meaningful pull forward in performance into '18? How should we think about that?

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Harold R. Carpenter, Pinnacle Financial Partners, Inc. - Executive VP & CFO [54]

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Well, I think there is conservatism in the forecast. Their -- they outperformed their plan meaningfully for 2018, and I guess there is just some degree of hesitancy to say they're going to repeat that in 2019. They've not outperformed a plan like that in the previous 2 years that we've been associated with them. But in 2018, they did quite well. I think they will also be trying to figure out how they can bring on these new business lines and trying to make those more meaningful to them.

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Michael Terry Turner, Pinnacle Financial Partners, Inc. - President, CEO & Director [55]

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But Harold, I might just add to your comment. I think if you were talking to the CEO of BHG, he -- again, I'm not -- we're not the owner of that company. We don't control everything there. We are a partial owner of the company. But I think were you talking to the CEO of that company, he would be very optimistic about what his revenue growth capabilities are in 2019.

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Brocker Clinton Vandervliet, UBS Investment Bank, Research Division - Executive Director & Senior Banks Analyst of Mid Cap [56]

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Got it, okay. And one thing you haven't talked too much about is loan pricing, particularly on the commercial real estate components. Are you seeing any ability to widen spreads there?

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Harold R. Carpenter, Pinnacle Financial Partners, Inc. - Executive VP & CFO [57]

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Yes. I think spreads have been fairly consistent. The chart kind of puts a 5-year treasury there to kind of gauge it throughout the year. I think -- what I think is important to me is that the absolute rate that we're getting on fixed-rate commercial lending -- commercial real estate lending has increased this year. And it's caused for the whole book to -- the average for the whole book -- the weighted average for the whole book to increase. So we're in better shape today than we were a year ago on that. And I think it's because a lot of our leaders in these markets are paying particular attention to how they price both investment and owner-occupied properties.

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Operator [58]

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And our final question comes from Brian Martin with FIG Partners.

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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [59]

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Just a couple of things, just follow-ups. Just on the loan growth, either one of you guys, it sounds like the first half growth -- I mean, Terry, I think you said or somebody did that the growth may be a little bit more even throughout the year as opposed to last year. But given your comments about the real estate being in the construction in the first half, it makes sense that the first half is maybe a little bit less than the second half in terms of loan growth? Or I'm misreading that?

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Michael Terry Turner, Pinnacle Financial Partners, Inc. - President, CEO & Director [60]

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I guess that's true, but I wouldn't put too much emphasis on that, Brian. My -- I think my point was that it -- we've had a meaningful contraction in CRE lending in the latter half of 2018. I think you ought to expect it to be similar in early 2019. And I guess the point that I was really making is we have made loans and commitments where that construction funding will -- is slated to take place later in the year, so the loans and books and so forth that will materialize there. But I think you know this, we're relying on C&I for -- to be the principal engine of growth for the company. We saw that at roughly 20% last year, and again, we have a similar outlook going into 2019.

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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [61]

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Okay, got you. And then just, Harold, just going back to the margin for a minute and the NII. I guess the margin, if you don't get the rate increases, it sounds as though, I guess, in general, your outlook on the margin would be -- the core margin would be for it to be relatively stable given where it was at this quarter. Is that -- does that seem kind of fair? Is that what you're suggesting given the less pressure on funding costs?

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Harold R. Carpenter, Pinnacle Financial Partners, Inc. - Executive VP & CFO [62]

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Yes, I think that would be an accurate assessment. If the rate increases don't occur and with the reduction in discount accretion, increasing the GAAP margin would be very difficult. But at the same time, we're believing that in a no rate increase environment, pressure on deposit funding will be less, so -- as far as pricing for deposits.

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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [63]

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Okay. So maintaining the core margin without that discount accretion, Harold, I guess, if you don't have the rate increases, it sounds as though it's pretty stable or maybe up a little bit if you're getting rid of some of these wholesale funding?

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Harold R. Carpenter, Pinnacle Financial Partners, Inc. - Executive VP & CFO [64]

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Yes, I think so because I don't sense that we'll have to be as aggressive on the wholesale side to fund loan growth.

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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [65]

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I got you. Okay, all right. And the wholesale, you said the wholesale funding that's leaving in the first quarter, the reduction is $300 million. Is that what it was?

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Harold R. Carpenter, Pinnacle Financial Partners, Inc. - Executive VP & CFO [66]

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Yes. We'll either reduce or we'll reallocate to another wholesale provider. But it'll be -- we're likely to pick up 100 basis points easy in that money.

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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [67]

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Okay, I got you. Okay, all right. And then just last one, Harold. On the fee income, I think you said there was -- it sounds like there was minimal that was nonrecurring in the quarter, kind of an unusual couple hundred thousand dollars. So this quarter's run rate of fees is pretty good way to think about how you go into 2019 first quarter?

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Harold R. Carpenter, Pinnacle Financial Partners, Inc. - Executive VP & CFO [68]

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Yes. I don't see if -- BHG had -- if you look at total fees, I think BHG had a big number that you need to contemplate. But otherwise, I'm not sensing any large adjustments that came in, in the fourth quarter in the fee category. There will be run-up in deposit service charges just because of seasonality. We'll pick up again some of that in January, but other than that, I don't know of any unusual adjustments.

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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [69]

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Okay. And at BHG, that seasonality that we saw play out this year, I mean, it should be similar to next year? I mean, if you're talking whether a 5% or 10% increase, each quarter will be up year-over-year. Is that the way to think about it? Or is it more if that seasonality continues? Is it fair enough?

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Harold R. Carpenter, Pinnacle Financial Partners, Inc. - Executive VP & CFO [70]

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I think that there's always going to be seasonality in their numbers. This year, it was accentuated because of some of these improvements. Particularly with respect to 2018, their substitution losses improved significantly towards the end of the year. So in the third and fourth quarter, they had fewer substitution losses, and they attribute that to the quality of their underwriting that they put in place over the last several years.

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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [71]

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Okay. So could the year-over-year increase in the first quarter, Harold, be greater because of that better performance you saw in the second half that wasn't in the first half of last year?

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Harold R. Carpenter, Pinnacle Financial Partners, Inc. - Executive VP & CFO [72]

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Yes, yes.

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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [73]

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Okay, all right. And last and just I think it's obvious, but if you've got the buyback in place, any updated thoughts on M&A? I guess just given where the stock price is at, is it obviously less attractive? Or just how are you thinking about M&A? Has anything changed on that front?

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Michael Terry Turner, Pinnacle Financial Partners, Inc. - President, CEO & Director [74]

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I would say nothing's changed, Brian. I think as I said before, we've sort of laid out where we'd like to go, what the criteria of the transactions would be. And I think at this share price and this multiple, it's hard to find many transactions that will work. But if we get multiple expansion and a more advantaged stock, again, we've sort of been clear on what we're interested in doing.

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Operator [75]

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Ladies and gentlemen, thank you for participating in the question-and-answer session of today's call as well as today's conference. This does conclude the program. You may all disconnect, and have a wonderful day.