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Pinnacle Financial Partners Inc (PNFP) Q2 2019 Earnings Call Transcript

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Pinnacle Financial Partners Inc (NASDAQ: PNFP)
Q2 2019 Earnings Call
Jul 17, 2019, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Harold R. Carpenter -- Chief Financial Officer

[Starts Abruptly] We offer this information, so that you can better appreciate that we're not reliant on the extra-large ticket sizes to hit our growth goals. The chart on the right is somewhat busy, but it details the impact of discount accretion on net interest income. As you can see how the gold line, discount accretion continues to be less impactful to our results at 4.7% of our net interest income in the second quarter and will continue to be less impactful in the future.

We all knew that a big headwind to our GAAP revenue growth was the impact of less and less discount accretion in a primary way. We're going to overcome it through balance sheet growth. Anyway, the blue bars on this particular chart are obviously where our attention is and growing those blue bars is key to our ability to deliver increased value to our shareholders. We very much anticipate continued growth for those blue bars for the remainder of 2019.

Now, the deposits. Average deposit balances were up $1.9 billion year-over-year. Year-over-year, end of period deposit balances were up $1.6 billion. Our deposit costs did increase 5 basis points in the second quarter of 2019 from the first quarter and currently stand at 1.25%.

The right side gives the volume changes in the second quarter 2019, we are at war on deposit growth, particularly low-cost core deposits.

We do believe that the rate of change in deposit pricing is slowing, but we will still need to fund loan growth, sourcing deposits and developing strong depositor relationships is a key business activity that has to be job one. We believe our markets are strong and have ample liquidity and that our associates are engaged. We also believe we will find the deposits at a reasonable price to fund loan growth. That said, we'll work within our margins, but net interest income will tromp margins at this point in the rate cycle.

Next, an update on our loan portfolio composition by rate index. We continue to believe an allocation of approximately from 35% fixed-rate loans with maturities greater than 1 year an optimal loans for us to manage interest rate risk over the long term. In light of the recent rapid shift in the interest rate environment and outlook, we have slowed the variable versus fixed-rate mix shift with several structural initiatives, including unwinding a product of $900 million in fixed-to-floating rate swaps and acquiring approximately $1.3 billion in interest rate floors for LIBOR-based credit.

More on interest rate risk in a second. As for spreads, it does appear with respect to LIBOR and Prime based loans, our spreads continue to hold in this volatile rate in market. LIBOR based loans did see some decrease in absolute pricing in the second quarter, but we believe the spread is consistent with a year ago, same thing on Prime based credit. If there is a winner in this rate environment, is fixed-rate loan pricing. If you use a five-year Treasury as the benchmark, our spreads have actually widened over the last years.

As I mentioned previously, we've taken some steps to better position our balance sheet in case of a downrate cycle if Fed funds occurs. We will continue to reposition wholesale funding and work our bond book optimize the performance of the wholesale bank and manage our interest rate risk. I mentioned earlier the unwinding of the fixed-deposit rate swaps and the acquisition loan floors. The key to all this will be the last bullet on the slide and the contribution our sales force makes to neutralize the impact of the Fed funds cut. We met the sales force many times to get them in position to plan how they would communicate with clients to manage our deposit rates in the downrate cycle. We will specifically target those clients that have negotiated rates with us over the last year or so. Many of you remember that last year we were excited to have a beta [Phonetic] bank as rates were rising. We also believe we continue to have beta bank on the way down.

With the inverted yield curve in place now for several weeks and months, the speculation of a credit cycle change should a recession occur has been on investors minds for quite some time. We have no idea as to whether a recession is likely, but what we get paid to manage credit risk in both good times and bad. Right now, as far as credit is concerned, times are pretty darn good. We've shown these charts before, attempting to provide further insight as with granularity of our real estate book as well as the metrics we seek out for our underwriting. Hopefully this chart provides comfort that we're not booking these very large the CRE in construction projects. Credit remains at the forefront of our minds, so I hope we never appear complacent when we talk about credit. For the second quarter, we experienced relatively moderate increases in our classified assets in that chart, while non-performers decreased. So, credit in the second quarter will stay steady as the year goes. We too will agree with other bankers that we're not seeing any systemic issues that would cause us to be less optimistic about credit in 2019.

During the second quarter, we executed a bulk sale of our remaining non-prime auto credit with a loss of approximately $1.5 million. If you just go back a few years, we entered in that business as an experiment to see if it was a business that would be generating enhanced shareholder returns. We will likely from time-to-time discuss new business ventures, and while we believe it's a good idea to intercept ventures, as a non-prime auto credit, we have exited.

Now, turning to fees. Fees totaled more than $70 million up more than 47% of the second quarter 2018. As Terry mentioned, BHG had a phenomenal quarter. Their contribution was up $23 million or greater than 200% year-over-year, with BHG's strong second quarter, we kind of believe that their contribution for the first six months of 2019 will basically be replicated in the last half of the year.

But more on BHG in a second. All of our fee businesses are having a strong 2019 with residential mortgage leading the way. As we all know, the rate environment was not helpful to residential mortgage in 2018. They've had a great first half of 2019 correlating not only with drops in long-term rates, but also with increases in the number of mortgage originators. Also, again, rate markets were helpful with this line of business, so we anticipate a strong second half in mortgage.

Now, I'll spend a few minutes digging into BHG. The first question many might have is exactly what contributed to BHG's substantial growth in the second quarter? The box on the left is attempting to answer that question. BHG has been working on several initiatives for several quarters. First as to credit, BHG is consistently applying their scorecards and have in recent quarters and scorecards for other discounts aimed at other licensed professionals.

However, the work they've done to enhance their marketing, closing and lead distribution analytics has likely been the biggest contributor to their growth. You can see the green bars on the bottom chart and how the lead flow has increased significantly over the last few quarters. This has been directly related to better targeting analytics within the third-party databases of the BHG acquires from the various credit reporting vendors. BHG has been at this for 19 years, so they've amassed a great deal of data.

They do acquire third-party data from the credit reporting agencies, but they also enhance this data with their own historical information, which has been accumulated since they started. So they don't depend totally on other people's information. In 2012, BHG had one person in the data analytics group. Now they have 33 of which five are Ph.Ds and with a few of those individuals having multiple Ph.D certifications. These professionals have developed more sophisticated tools and with these tools BHG can better anticipate closes.

Additionally, the BHG route the most profitable leads to their best sales personnel to enhance their hit ratios. So overall, as the top right chart indicates, the business model is working very well at Bankers Healthcare Group now. Another question many might have is with all this volume as the BHG losing credit standards to allow for increased loan closes. Our opinion is that no such loosening of credit have occurred at all. From our perspective, it's about the number of add backs and the quality of those add backs. And the chart on the top left portion of the slide indicates over time the quality of the BHGs borrowers has improved steadily from the early years of the firm.

The green line on the bottom right chart details recourse accrual they've recorded on their books for substitution, prepaid and other losses associated with ordering the substitution clause with banks that have purchased credit from BHG. They've been taking the recourse accrual at about 4.5% over the last few years. The columns are the actual loss rates in relation to total volume of credit outstanding on the books of all banks doing business with the BHG.

As you can see, there is steady decline over the last few years. The columns include not only the credit loss, primarily substitution losses, but also the prepayment losses associated with reimbursement of the early pay off of these credits. We've had a lot of conversation with BHG about their credit profiles. We believe that their business model is top shelf in identifying potential clients who have the credit profile to be a good borrower for the banks that buy BHG credit. Approximately 67% of Bankers Healthcare Group revenue base has historically been made up of being wholesale revenue. However, BHG also generates interest income from loans that are primarily held on the BHG's balance sheet are being held on their balance sheet prior to being released on the auction platform for sale to downstream buyers. So, since the second half of 2018 BHG has been building their balance sheet with on-balance sheet loans of approximately $216 [Phonetic] million in loans currently held on balance sheet compared to approximately $900 million as of June 30, 2018. They have been able to generate the cash required to be able to fund this loan growth.

Given what has already this sold this year, their on balance sheet volume represents about 2 to 3 months of potential loans. Meanwhile, the green bars have ramped up with more loans being funded, which is a result of enhanced analytics and more sophisticated marketing platforms. The blue bars are the money bars. The blue bars have ramped up with more placements, either through auction or one-off sales. The blue bar drive gain on sale revenues. As we look to the last half of 2019, BHG is anticipating increasing their balance sheet loans at a fairly steady pace for the remainder of 2019, potentially as high as $400 million to $500 million on balance sheet by year end.

To accomplish this, the BHG is working to secure incremental funding for various bankers, who will lend in their loan closing so that BHG can warehouse more credit but keep the flexibility is to go to auction should they determine the need to do so. This represents a great choice for BHG, as in that they will have the option to reduce their balance sheet in order to harvest gain on sale revenues, if they so choose. For me, the auction platform is the most valuable component of BHG's unique business model. Currently, they now have more than a thousand banks in their network. As you can see from the small text box on the chart, almost half of these banks acquired loans last year at rates and spreads that have not changed materially over the last 18 months.

Their funding platform is alive and well. The BHG's management spends a great deal of time on making sure that this platform is raised to acquire better loans at a competitive price.

Lastly, on BHG, as you can see on the chart, BHG is expanding its product offering in products as SBA and Patient Lending. They are spending up a great deal of energy into these two new revenue streams. And we're excited to see what will come of these initiatives. Additionally, Pinnacle has been involved with credit cards for many years, and we too are looking to expand that relationship, as the expansion in the largest accounts and other disciplines. Currently, those expanded lines represent less than 10% of BHG's business, but that number was effectively zero last year, so call me optimistic on that.

One last thought before I turn to the expenses, BHG now employs almost 400 people, which is almost double the number of people they had in 2015 when we acquired our first investment. They employ six head hunters, so they hired their own people as does Pinnacle. Additionally, BHG has been cited in the best place to work on numerous occasions, so like Pinnacle they have a strong commitment to culture and that includes delivering results.

So with that, let's talk a little bit about expense. In the press release last night we noted two items related to rationalization of our branch network. Firstly, we absorbed the charge to accelerate the disposition of potential expansion sites we acquired with the Bank of North Carolina acquisition. And secondly, we announced that we're looking to consolidate approximately five branches. Two of those branches are in Middle Tennessee and three were in the Carolinas.

Our goal is that with these decisions we'll be able operate a leaner and more efficient price distribution systems. As with these charges, expenses came in about where we thought with the run rate increase of 7% compared to the first quarter 2019, with most of this increase related to personnel costs. Our annual incentive accrual was up $5 million compared to last quarter because of increase in personnel. We also are pleased to report that retention rates continue to decline with two important things for us. Our clients can count on consistent service and employee turnover continues to shrink, and our workforce engagement initiatives are taking hold in our newer markets as those associates are leaning in and buying into our culture.

Finally, we're pleased to report that our efficiency ratio as adjusted for non-GAAP measures was 45.9% down from both the first quarter of 2019 and the second quarter of 2018. We've been talking about modifying our longer term operating ranges for a few quarters. Our previous metric we've put in place in 2012 and believe the granularity provided by those previous measurements has served its purpose. We're opting to go with the higher level guidance and thus we're offering operating ranges for ROA, ROTCE and tangible equity as our current guidance. Management met with Board in June at a annual strategic planning retreat [Indecipherable] at that meet. For ROA we are adjusting our operating range by 5 basis points with the new range of 145 to 165.

For the second quarter, we're operating above that range at 169, and BHG's second quarter performance was a big tailwind to our ROA in the second quarter. We anticipate, and I think I'm being somewhat conservative for the second half of the year, that BHG's contribution will be consistent with the first half, But the level of quarter contributions should be less in quarters three and four than in quarter two. We're also introducing ROTCE and tangible equity ratio as two measures that we'll highlight going forward. As you can see, we're above the range of ROTCE and in the higher levels of the tangible equity ratio. Our goal is to maintain these ratios in the top quartile of our peer group over time. We've been fortunate to have a long track record of top quartile performance and look for many years of similar performance.

Before I turn it over to Terry, I'll talk about EPS and tangible book value per share. We've shown these charts before, we continue to believe that we are top quartile growers of EPS and tangible book value within our peer group. We're really focused its rapid, reliable growth in EPS and tangible book value. Our tangible book value is up by more than $5 a share in the last year, we're almost 20%, and as you know, our incentive systems are designed around the EPS growth. As Terry mentioned, our belief that banks that can rapidly and reliably grow EPS and tangible book value over time will produce best shareholder returns. As you can see on this chart growth figure is rapid and reliable.

And with that, I'll turn it back over to Terry to finish up

M. Terry Turner -- President and Chief Executive Officer

Okay. Thank you, Harold. I think really, to sum it up, I would start here just saying nothing really changed. We -- this slide that you're looking at is saying flat. I used to close the first quarter earnings call, trying to set expectations for 2019. You can see here that we're producing double-digit loan growth. We've had a great deal of energy and focus on deposit growth. Our core EPS growth is in fact, top quartile. We're having extraordinary success hiring and revenue producers. We continue to be optimistic about that hiring landscape as we go forward.

And as Harold just discussed, we continue to grow tangible book value at a rapid pace. So JJ we'll stop there and take questions.

Questions and Answers:

Operator

Thank you, Mr. Turner. The floor is now open for your questions. [Operator Instructions] And our first question is from Steven Stone from Sandler O'Neill. Your line is now open.

Stephen Kendall Scouten -- Sandler O'Neill -- Analyst

Hey, guys, good morning.

M. Terry Turner -- President and Chief Executive Officer

Good morning.

Stephen Kendall Scouten -- Sandler O'Neill -- Analyst

Hey, I just appreciate all the color on BHG, I think a lot of that makes sense moving forward. I'm just curious if you guys have maybe concerns or bothered all by the size of that business relative to earnings now? I mean, I think of it is around 20% EPS this quarter versus 8% last quarter. So, I mean, how do you think about that and normalizing maybe the contribution of that business relative to the bank as a whole?

M. Terry Turner -- President and Chief Executive Officer

You know Stephen that's a great question. You know, that's one of those things where it's difficult to go to them saying you'll need to slow this down and we're not going to do that. We think we're going to continue to work with BHG to try to enhance the partnership. We think they've got a strong business model and that they will continue to grow. Here in this quarter, they've outgrown us. So hopefully in future quarters we'll level that playing field a little bit and potentially get that number back below that 20% threshold. We don't anticipate it'll be 20% for 2019, but it likely will be pretty close.

Unidentified Participant

Okay, that's helpful. And then just I might have missed some of your commentary there on the NIM. And obviously you've done a lot to reduce the asset sensitivity this quarter. Do you have any further plans to kind of continue to reduce some of that rate sensitivity in the coming quarters or as you get most of that done? And will you be putting out a new kind of NIM target moving forward or is that not in the cards?

Harold R. Carpenter -- Chief Financial Officer

Yeah, I don't think we'll be putting out any more NIM targets. I think the key to our ability to hold our core margins will be whether or not we can get our sales force to get those rate decreases that we anticipate will occur. Right now, we feel like that's going to happen. We feel like they're in contact with their clients currently and we should be able to accomplish it whether it's 25 or 50 basis points. We're optimistic about that. We'll aim at those negotiated rates that have been escalating over the last call it two years.

Stephen Kendall Scouten -- Sandler O'Neill -- Analyst

Yes, it makes sense. And I would think that really strong C&I growth you had this quarter should help some of that core deposit growth normalize moving forward. Is that fair to assume?

M. Terry Turner -- President and Chief Executive Officer

Yes, I think traditionally, especially in Tennessee, our deposit flows are such that we will create growth in our core deposits over the last half of the year. In comparison, the first half the year. So our thoughts are that we'll get that money.

Stephen Kendall Scouten -- Sandler O'Neill -- Analyst

Okay, nice and one just last kind of clarifying question. I've noticed -- looks like Memphis and Chattanooga, have been really strong contributors to loan growth year-over-year. But then I noticed Memphis seem to have kind of an outflow from a deposit perspective year-over-year. Is there anything worth noting there? Can you give any color as to what kind of is driving those numbers and the direction of those combined?

M. Terry Turner -- President and Chief Executive Officer

Yeah, Memphis, I don't know if you remember last quarter we talked about some strategic moves we made with respect to a particular depositor or two. One of those depositors was a Memphis depositor, and I think it was a $250 million deposit that we eventually thought was too high and moved that money off our balance sheet.

Stephen Kendall Scouten -- Sandler O'Neill -- Analyst

Perfect, perfect. Very helpful. Thanks, guys. Congrats on a great quarter.

M. Terry Turner -- President and Chief Executive Officer

Thanks Steve.

Operator

Thank you. Our next question is from Brett Rabatin from Piper Jaffray. Your line is now open.

Brett D. Rabatin -- Piper Jaffray -- Analyst

Hey, guys. Good morning.

Harold R. Carpenter -- Chief Financial Officer

Hi, Brett. Good morning Brett.

Brett D. Rabatin -- Piper Jaffray -- Analyst

I wanted to first just -- I guess, go back to BHG and think about their products set and talk about is that fully built out here? And then if so, are the numbers sort of in there in terms of they've developed all that and it's already operating through, could you have additional leverage from what they've been doing with products set?

Harold R. Carpenter -- Chief Financial Officer

Yeah. They're looking at other disciplines to go after to expand the product set. But I think what they're going to focus on or these new disciplines around lawyers, accountants, engineers, insurance guys, all that -- all those new disciplines they're going to try to kind of figure out ways to get more mailed to those particular disciplines and try to expand those first before I think they go into other type disciplines. Does that makes sense?

Brett D. Rabatin -- Piper Jaffray -- Analyst

It does. And then the other thing I was curious about, I thought you guys might decide to update your revenue producer goal, but you're obviously getting close to being where you wanted to be by 2022. Was just curious if you might update that slide and how you're thinking about net adds from here?

M. Terry Turner -- President and Chief Executive Officer

Yeah, Brett, just to be clear always try to create a clarification. We talk about two sorts of targets, one is revenue producers in general, which is all men or revenue producer, relationship managers, brokers, insurance agents, mortgage originators and so forth. We talk about that. The side that we've used over the last period of time is tied specifically to the C&I and private banking relationship managers that we targeted in the Carolinas and Virginia in order to transition BNC from CRE platform to C&I platform. And som if you hit there, I think what I'd rather say going through that slide was that we'll exceed that target two-fold, but I don't think that technically change the number, but there's no intent to source out and now we've hired our 65 and we're done. I think the expectation is that we'll continue to hire at a similar pace for the foreseeable future.

Our outlook about hiring particularly in the Carolinas and Virginia is, we're very optimistic. There is, I guess, a high degree of vulnerability, most of those large banks up there, there are a lot of people moving around. And, you know, the principal contributors in that market thus far, the number one contributor to us has been Wells Fargo, and we expect that to continue for quite some time.

Brett D. Rabatin -- Piper Jaffray -- Analyst

Okay, great. Thanks for the color and congrats on the quarter.

M. Terry Turner -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is from Jared Shaw from Wells Fargo Securities. Your line is now open.

Tim -- Wells Fargo Securities -- Analyst

Good morning. This is Tim [Indecipherable] filling in for Jared. -- Hey, guys, maybe the first one on expenses. Just wondering what percentage of the incentive accruals are now baked into numbers. Are we nearing 100% or is there additional?

Harold R. Carpenter -- Chief Financial Officer

You know, we're nearing 100%. Right now, we're counting around 85% to 90% of the target. And so, at the end of the first quarter, around 75%. So there were some catch up in the second quarter.

Tim -- Wells Fargo Securities -- Analyst

Okay. And then looking at the linked-quarter growth in time deposits, any color around that, it's pretty big number is that shorter term that you're going to be looking to replace or I guess any color on the growth in time deposits?

M. Terry Turner -- President and Chief Executive Officer

Yeah, not any kind of meaningful color. There obviously are more depositors coming in and want to keep money for a longer period of time. And most of that occur in the Carolinas and Virginia. So it's not a significant move for us, but it is, I think, kind of consistent with what others are experiencing with kind of these consumer books.

Tim -- Wells Fargo Securities -- Analyst

Okay. And if I can just ask one more on the BHG, the -- you know, the charts are all showing up until the right, and I think you guys mentioned that as part of their ongoing strategy, they're going to be portfolioing [Phonetic] more of the loans that they originate. Does that change the risk profile at all or I guess for them growing their balance sheet? How does that make you guys think about the risk profile of that institution?

Harold R. Carpenter -- Chief Financial Officer

Yeah, I don't think it changes the risk profile at all. They -- they have been honoring the move out calls and substitutions. And so now just move over. us on balance sheet loss. So we're not thinking there's a significant change we expect to their credit profile

Tim -- Wells Fargo Securities -- Analyst

Okay. Any color you can provide on the one partner's exit?

Harold R. Carpenter -- Chief Financial Officer

I'll just say yes. I think Bobby just came to a point where, you know, he was he had expended a lot of energy in the BHG and that he was ready to go into the next step of his life. And there was no animosity or anything like that. It was just, he was ready to go and Al and Eric and Bobby all worked to transaction and Pinnacle considers it a fabulous thing where our two partners bought out the third partner. And so I think from an operating perspective, BHG is as healthy as it's ever been.

Tim -- Wells Fargo Securities -- Analyst

Great. Thank you.

Operator

Thank you. Our next question is from Brocker Vandervliet from UBS. Your line is now open.

Brocker Vandervliet -- UBS -- Analyst

Great, good morning. Hi Vandervliet.

Harold R. Carpenter -- Chief Financial Officer

Hi Vandervliet.

Brocker Vandervliet -- UBS -- Analyst

Hi. Just follow up on that deposit, The CD question, most of that growth coming from Carolinas and Virginia. It sounded in your prepared remarks, Harold, that we should expect better core deposit growth in the second half. I just wanted to sort of triangulate that with the strength in CDs?

Harold R. Carpenter -- Chief Financial Officer

Yes, I think we should see stronger client core deposit growth in the second half and we've laid on the Tennessee footprint primarily for that. That's been kind of the traditional year-in and year-out move for our depositors in this footprint is that during the first half of the year deposits will either dilute away or be slow and then in the second half of the year when they build balances for incentives and taxes and those kind of things.

Brocker Vandervliet -- UBS -- Analyst

Okay. It's more importantly, just looking at that Slide 14 in your asset sensitivity and one of the few institutions that teams that is beaten and repositioned this quarter. Could you walk through some of those repositioning moves you made, the cost of them and whether you're done at this point?

Harold R. Carpenter -- Chief Financial Officer

I think for all practical purposes, the wholesale bank has pretty much gotten through all it's going to do. There are still some bond transactions that are closing here in the early part of the third quarter. But I think -- and when we speak in terms of the wholesale bank, we're talking about the bond book and wholesale funding. The unwinding of the $900 million fixed-to-floating rate swaps, I think that cost was around 33 basis points and that'll be amortized off over the life of the underlying loans.

The floors that we acquired were, I think somewhere around 35 basis points and I think that's a two-and-a-half year product. So those are kind of the nitty-gritties about that. Again, I can't overemphasize the key to all of it will be our sales force's ability to lower those client deposit rates.

Brocker Vandervliet -- UBS -- Analyst

Got it. Okay. Thanks for the color.

Harold R. Carpenter -- Chief Financial Officer

Thanks, Rob.

Operator

Thank you. Our next question is from Michael Rose from Raymond James. Your line is now open.

Michael Rose -- Raymond James -- Analyst

Hey, guys, just wanted to go back to BHG again. So if I take your comments, Terry, about the second half of the year kind of replicating the first half of the year, that puts you at somewhere over $90 million in BHG income, perhaps a little higher. As we move forward into 2020 and given the fact that you've or they've expanded the customer base, so to speak. I wanted to get a sense for A) is there any differences in the different product categories that they're going after? Because if memory serves correct, the loans to doctors and dentists were somewhere in the mid-teens in terms of yields. Just wanted to see A) if there was any differences between the different sets of clients and B) if you actually think you can build upon that $90 million or so revenues, you move into 2020?

M. Terry Turner -- President and Chief Executive Officer

Yes, Mike. I'll take it. I don't know of any meaningful differences and what the top-line rate charge those borrowers may be for those different disciplines. I don't think there was any kind of initial kind of rate special they offered, any count of lawyers or accountants or anything like that. I'm not aware of that, but I'm not totally into the details with respect to that particular issue. As far as looking into 2020, I'm imagining that we're talking about $90 million for this year. For them, that's $180 million. I'm sure, Al will be targeting at least 10% for 2020.

Michael Rose -- Raymond James -- Analyst

Okay, that's helpful. And then, as it relates to the additional hires that, Terry, that you mentioned, I think perhaps a two-fold increase above your original guidance. How should we think of it in terms of expense, leverage and efficiency from here? Clearly it's one of the best quarters from an efficiency perspective that we've seen from you guys, if not ever. Obviously, by the BHG quarter, but how should we think about the ability to operate an efficiency at least close to this, or is it -- or should we expect it to move higher just given the projected lending hires? Thanks.

M. Terry Turner -- President and Chief Executive Officer

Yeah, well, it is. I think you all have expectation that if it's not producing operating leverage we'll stop it. I think we believe that it will continue to produce operating leverage. That's really been our history, as you know going back to 2000. You know, going back to 2000, our approach to hiring begins with hiring revenue producers. There is a great profit leveraging those. In round terms we generally have to hire to support people either direct or indirect for every revenue producer we hire, so that tail follows, and the operating leverage that comes from that model, right there has been positive since the get-go, since we announced the hiring 65 people and sort of ran twice as fast we said we would. You have seen that we've continued to have a declining efficiency rate or better efficiency ratio during that period. And so my expectation is that we'll continue to produce operating leverage with the hires.

Michael Rose -- Raymond James -- Analyst

Okay. Maybe one final one for me. So you guys purchased a little bit of stock here. Looks like you've got somewhere in the order of 42 million or so remaining under your current plan. Would the expectation be to use that, and given that you're targeting capital ratio is higher than -- currently it's higher than where your target is? Could we expect to see another share repurchase program announced when this one finishes out? Thanks.

Harold R. Carpenter -- Chief Financial Officer

Yeah, I think we're likely to kind of keep one on the shelf. I don't know if we'll be as aggressive with share repurchase going into 2020 or not, but I think it would probably be a good idea for us to make sure that we got the authority to go back to the market and buy shares next year.

Michael Rose -- Raymond James -- Analyst

Okay. Thanks for taking my questions.

Harold R. Carpenter -- Chief Financial Officer

Thanks Mike.

Operator

Thank you. Our next question is from Jennifer Demba from SunTrust. Your line is now open.

Jennifer Demba -- SunTrust -- Analyst

Thank you. Good morning.

M. Terry Turner -- President and Chief Executive Officer

Hi, Jennifer.

Jennifer Demba -- SunTrust -- Analyst

Question on the increase in classified assets, was that related to any certain loan or industry? And Harold, I just wonder if you have any updated CECL guidance, I know you gave some preliminary thought last quarter, I'm wondering if that's changed at all?

Harold R. Carpenter -- Chief Financial Officer

As far as classified assets, I don't think there were -- there's not any kind of industry or group of credits -- group of unrelated credits that's causing that increase. So I can't really I can't think -- there's no indication there that, a segment of our portfolio is beginning to weaken as for CECL the way is kind of counting out now is, you know, it's probably going to call it 70 to 80 basis points maybe somewhere in that range. Now, some of that is that accounting entry where we're beefing up loans and beefing up the accrual for purchased credit and hire and so that's additive to that ratio. So, Jennifer, I don't know if that's helpful to you or not.

Jennifer Demba -- SunTrust -- Analyst

So, just to clarify increasing the loan loss reserves by 70 to 80 basis points?

Harold R. Carpenter -- Chief Financial Officer

270 to 70 to that number. But as part of that, there's the transfer of the reserve on the PTI loans that goes into the allowance account. So that does impact equity.

Jennifer Demba -- SunTrust -- Analyst

Okay, thank you so much.

Harold R. Carpenter -- Chief Financial Officer

All right, Jenny. Thank you.

Operator

Thank you. Our next question is from Tyler Stafford from Stephens. Your line is now open.

Andrew Terrell -- Stephens Inc. -- Analyst

Hey. This is actually Andrew Terrell on for Tyler this morning. Good morning.

M. Terry Turner -- President and Chief Executive Officer

Hi, Andrew.

Unidentified Participant

Maybe just to go back to BHG, just given the discussion around the liquidity event earlier, what was the valuation that the two remaining owners purchased Mr Castro's 17% stake out.

M. Terry Turner -- President and Chief Executive Officer

The valuation that was used was a $1 billion. And I think if you were talking to the acquiring parties, they would be quick to say that's based on 2018 revenues and so they believe that they've made a very good deal for that additional 17% interest.

Andrew Terrell -- Stephens Inc. -- Analyst

Great. That was $1 billion for the entire business or just the 17%?

M. Terry Turner -- President and Chief Executive Officer

No. That's $1 billion for the -- that's franchise value that was used.

Andrew Terrell -- Stephens Inc. -- Analyst

Got it. Okay. Thank you. And then maybe just going back to the comments about BHG adding funding sources. So that they can balance sheet more loans. Will Pinnacle be one of the potential banks that provide funding for BHG just to allow them to keep those loans on the balance sheet?

M. Terry Turner -- President and Chief Executive Officer

No. That will not be out intent.

Andrew Terrell -- Stephens Inc. -- Analyst

Okay, then maybe lastly for me. Looking at the ROA guidance, what was the driver to lowering this guidance by five basis points, given the strength in BHG. Does it now assume any Fed rate cuts? And if so, how many and when?

Harold R. Carpenter -- Chief Financial Officer

Yeah, I think the lowering the guidance was -- there were several factors involved in that. And first of all, really lowered it five basis points and I think generally that's still going to be a top-quartile or near top-quartile kind of number. But the BHG had a phenomenal second quarter, so that was never was a strong tailwind or ROA number. We're not anticipating replicating the second quarter into the third quarter. We're thinking that's going to back up probably, I don't know $8 million to $10 million to $12 million here in the third quarter. So that will impact ROA. Now, if the rate cuts we're still anticipating, a 25 basis point rate cut in July and then another one toward the end of the year. So we believe that it will take us some period of time to absorb that rate cut with our depositors and with our sales force contacting those depositors. So we're trying to hedge our bets a little bit. We think over time we'll be able to bring that ROA back. But in a down cycle like that, it'll you know, we'll have to -- we'll have to spend some time to get that pricing back to where we want.

Andrew Terrell -- Stephens Inc. -- Analyst

Understood. Thanks for taking my questions and congrats for the quarter.

Harold R. Carpenter -- Chief Financial Officer

Thanks Andrew.

Operator

Thank you. Our next question is from Catherine Mealor from KBW. Your line is now open.

Catherine Mealor -- KBW. -- Analyst

Thanks. One more question on the margin. Harold, Is it fair to say that -- well, here's the question. Would you say that this quarter could be the bottom in the margin, given all of the moves that you've made to kind of protect yourself if rates could go lower? Or do you feel like if rates are cut we've got a couple of quarters where to your point, you're going to take some time to get your sales force to reduce the deposit cost. And so, maybe you have a couple of quarters where you see some more downside and then things kind of stabilize at a lower level from here?

Unidentified Speaker

Yes, Catherine....

Catherine Mealor -- KBW. -- Analyst

Can I try and keep directionally from this lower level, where we have this quarter where we're now?

Harold R. Carpenter -- Chief Financial Officer

We're limited in some comments on this. But many people are counting that quarter margin, which would be without discount accretion around call it 339, 331. So we think that's pretty close to a bottom number. We can run different scenarios that show it going less and we can run different scenarios that show we're going up, but we ought to be getting pretty close to that bottom. Now, that said, with a rate decrease and depending on the significance of the rate decrease, you know, that margin could suffer over a period of time as we work to get those deposit rates lower. So part of our modelling and I think this is true for every bank. Is that in a rate down environment you're going to depend on some -- some decrease in deposit rates over and above what sheet rate deposits might do for you? So, there's obviously our ability to go into our systems and a lower deposit rates on a wide variety of clients. But a lot of our clients have negotiated rates where we've developed relationships with those clients and we'll honor those relationships with a conversation.

Catherine Mealor -- KBW. -- Analyst

Got it. And then can I just go back to -- thinking about just core spread growth, the take out the movement in incredible yield. Historically, you have been able to grow your core spread at a double-digit pace, even when your margin was under pressure, when rates were moving higher, I feel like the growth was a little bit higher than it is today. And you were still able to grow core spread by double-digit. The first couple of quarters of this year, the core spread growth has moved more to mid-single-digit range, it was 2%, last quarter 7% this quarter.

Are we in a period time where core spread growth is more in the single-digit range, or do you feel like you have the business model where that can improve back to the double-digit range at some point in time?

Harold R. Carpenter -- Chief Financial Officer

Well, we think the business model is still intact and we think we can continue to grow the spread revenue. It's -- going back to some discussions we had last year, we had loan growth, this quarter was we had a strong loan growth. And with that, we've funded probably with higher priced deposits, then we think we will fund over a longer period of time. So, we still think that spread revenues -- of course, spread revenues can grow in that low double-digit or mirror what we think our loan growth goal should be.

We're not seeing any kind of issue or new item that would come to the forefront, that would say that that would challenge our business model to the point where we need to back off of what we think the resulting margin should be for us.

Catherine Mealor -- KBW. -- Analyst

Got it. Okay. That's helpful. Thank you.

Operator

Thank you. Our next question is from Brian Martin from Janney Montgomery. Your line is now open.

Brian Martin -- Janney Montgomery -- Analyst

Hey, guys.

Harold R. Carpenter -- Chief Financial Officer

Hey, Brian.

Brian Martin -- Janney Montgomery -- Analyst

Hi Harold. Just a last -- just following up on the margin, your outlook going forward. I mean, what's the scenario where the margin -- you talked about some kind of bottoming here, but maybe a little upside or downside, the potential to have it go up from here, even if it's modestly. I mean, is it just your comments about these negotiated rates? I mean, what percentage of the deposits are currently negotiated with clients as opposed to kind of a sheet wave tied to an index?

Harold R. Carpenter -- Chief Financial Officer

Well, yes, it's a large number that are negotiated. It's about 34%. Something like that. We'll have to kind of go out with -- what I'm trying to think is in our planning assumption in these rate down scenarios is that our beta target for these clients is somewhere around 50%. So we don't necessarily need to get 25 basis points out of these negotiated rate clients. We need to get half of that, and that's what we're coaching our sales people

Brian Martin -- Janney Montgomery -- Analyst

Okay. And I guess as far as the success. I mean, I guess are you seeing success in that so far, I mean, obviously with the change in rate outlook here, I guess I don't know how long you've been at it, but just kind of early indications of how that's progressing. I mean, maybe it won't all be in there, obviously, in third quarter. But I guess the you'd expect to see some -- I guess how much you expect to see of that improvement or potential improvement in 3Q versus maybe all of it in 4Q is that how you're thinking about it here?

Harold R. Carpenter -- Chief Financial Officer

Yes. Well, we're optimistic if we get a rate decrease and in July that we can get all of those clients -- all of those accounts managed down before the end of the quarter. Now it'll take, you know, the average -- the averages won't work out just right. But hopefully by the period third quarter, we would -- we would have that challenge met and achieved.

Brian Martin -- Janney Montgomery -- Analyst

Okay. And then just going back to the kind of expenses and efficiency. Just kind of how you guys are thinking about that going forward. I think you said expenses were kind of as you expected this quarter. I mean, just thinking about, you know, it's a full-year efficiency and how you're thinking about that relative to your last year, it sounds like you still expect full-year ]19 core efficiency to be below -- full-year '19 to be below '18. And then that still seems kind of the outlook. That's a fair outlook at this point?

Harold R. Carpenter -- Chief Financial Officer

Yes. I think so, Brian, I think we still have room to improve that efficiency ratio this year. [Indecipherable ] is very helpful to that. But the rest of the year we ought to beat last year.

Brian Martin -- Janney Montgomery -- Analyst

Okay. All right. I think that's it from me. I appreciate. Thanks, guys.

Harold R. Carpenter -- Chief Financial Officer

Thank you, Brian.

Operator

Thank you. Our next question is from Brett Rabati, from Piper Jaffray. Your line is now open.

Brett D. Rabatin -- Piper Jaffray -- Analyst

Hey, guys, I just had one follow up. I wanted to ask, I'm thinking about different line segments and I know you've in the past said maybe you don't want to do more hotels. I'm just curious if you're looking out at the risk spectrum. Is there an asset class that you view is something you don't want to do more of today and is there anything out there that you're seeing in any of your markets that give you any pause?

Harold R. Carpenter -- Chief Financial Officer

Yes, Brett. This is Harold. Talking to Harvey and our credit guys. Right now. I don't think there is a particular asset class that we've looked at and said we'll shy away from the deal. We are cool on hotels. So it's not that we think that asset class has weakened from a credit perspective, it's just our concentrations at the point where we're not -- we can't put any more hotel loans on the books without hotel loans paying off. So -- and we'll do that as those pay offs occur. Multifamily, I think we're still interested in garden apartments out in the suburbs and good school districts, we're less interested in the high-rise projects that are maybe in city centers or urban centers. Those kind of things. So, I can't really say there is a specific asset class that Harvey and our credit administrators point to say, you know, we're out of them.

Brett D. Rabatin -- Piper Jaffray -- Analyst

Okay. And then maybe one other quick one just, you guys have always had a really strong growth outlook and I think you've got the runway for the next few years. And you talked about Atlanta in the past. Maybe, is there any updates you can give us on sort of things you might have in the works or what your preference would be as you continue to expand the franchise?

M. Terry Turner -- President and Chief Executive Officer

Yeah, Brad, I think, we have -- we sort of published a map that gives the geographic markets we have an interest in. I think, as it relates to M&A our approach is one of trying to identify who the targets are that may not meet the criterion. And I'm happy to walk those criteria with you, if you like, but we published them in terms of, urban, rural and commercial not retail and brief lapse in earnings accretion. If it's a small deal, 8 bps accretion it's big deal. So we try to figure out who those targets are and those people will cultivate relationships and get in a position in those banks desire to be acquired to be the acquirer in a negotiated transaction. That's really what our strategy is. And so, it's difficult to say, OK, well, we've got this plan and we're marching now. We're going to get to this market through acquisition, that market, through acquisition, so forth because it's really -- we've worked every day, we've ever done that, a negotiated transaction with somebody who want to sell us their bank. And so anyway, as you say, we've sort of published our guidance. I think that all remains consistent. I think beyond that, we've always said we could do market expansions either by acquisition or de novo and so I think de novo has lot of appeal, particularly given that such great volatility or great vulnerability of these large regional banks in some markets that we want to get to. And so I think in that vein, we've identified -- Atlanta has been on our list for a long time. But I think the merger activity down there has created more vulnerability and therefore enhanced the likelihood we find our way to Atlanta. So anyway, I don't know if that's helpful to you?

Brett D. Rabatin -- Piper Jaffray -- Analyst

Yeah, that's very helpful. I appreciate the color.

M. Terry Turner -- President and Chief Executive Officer

Okay.

Operator

Thank you. Our next question is from Nancy Bush from NAB Research. Your line is now open.

Nancy Bush -- NAB Research -- Analyst

Good morning, gentlemen.

M. Terry Turner -- President and Chief Executive Officer

Hi, Nancy.

Nancy Bush -- NAB Research -- Analyst

Two questions for you. The first on this issue of renegotiating rates. I appreciate that you've got a very dynamic sales force and, they're going to go out to their clients and tell them or talk to them about the need to give something up in bad times. But I guess if I were one of those clients, my question would be, OK, what do I get for doing this?

So if you're going to get a lesser rate, are you going to have to give up something in fees, is there going to be some kind of a offset here?

M. Terry Turner -- President and Chief Executive Officer

Yeah. Nancy, I think I understand the question and it has a good basis. But let me see if I can characterize how would envision the process working. So, as Harold already indicated 34% of our deposits are negotiated rates. I don't know what other banks percentage would be, but I guess we're price [Indecipherable] most of our figures on that sort of measure. In other words, the percentage of negotiated rates would be higher here. And it has those banks that are client base is such a relationship managed strategy as opposed to a mass market strategy where you price and operate sheet and those kinds of things. And so, I think if you go back and look at our history, we had -- we marked the rates die on in previous periods.

We moved them up as rates have gone up. We then characterized as high deposits by the bank and it gives back to every -- for that 34% no rate is going to change until somebody stop in somebody's own phone saying, hey, here's what we need to do. But my belief is I'm not saying nobody would say, would you just say a name? I'm sure somebody would. But I don't think that's going to be the prevailing discussion. I think he's going to be, hey, let's work together on this and what seems fair.

And so, to Harold's point, you're looking for a 50% by that you're not looking to get at all. You're looking to work it down. And there'll be some people you get it all from and some people you won't get any from and you just have to work through that. But again, our experience in both the downrate cycle and uprate cycles we've been pretty effective with managing those rates by this technique. And yes, just to help you get it, somebody asked a question earlier about -- I think it was Brian Martin asked a question earlier about how is it going thus far. We're not negotiating rates down today. Well, what we have done is put the list in front of everybody. And we've begun the discussion through the sales management chains on, hey, what about this plan? What do you think the right target is here?

Those guys kind of things, so there's sort of a pre-determined agreement about what the right targets are, and that effort will begin when you get a movement in rates. So anyway, I guess what I'm to say is I'm certain there'll be a conversation exactly like the one you've illustrated, but I don't believe that'll be the preponderance of the conversation to give. I just think it'll be more negotiation back and forth here on how low can we move the rate?

Nancy Bush -- NAB Research -- Analyst

So you don't believe that non-interest income will suffer any meaningful impact as a result?

M. Terry Turner -- President and Chief Executive Officer

I do not.

Nancy Bush -- NAB Research -- Analyst

Okay. Secondly, I mean, there's been a lot of talk about BHG this morning. And obviously, the percentage of your income that's coming from BHG is, something that gets discussed a lot in the investment community, et cetera, et cetera. And, as you said there may be periods when you go over 20%, and particularly if BHG is successful with this new products set, new distribution strategies, et cetera, et cetera.

Is there any philosophical or structural reason, let's say you've got an out year here where they're doing very well, but the banking business is slowing but you say, OK, we will, let BHG contribute 20% to the bottom-line and anything over that we'll pay out and a special dividend? Would that alleviate some of the concerns about BHG?

Harold R. Carpenter -- Chief Financial Officer

Yes. [Indecipherable] I don't know what we're trying to do this morning is make sure that A) people are informed, and B) people understand that Pinnacle Bank is excited about this partnership and where it's headed. How it impacts our strategic positioning or tactical initiatives or how we go about capital returns and all that, we will obviously consider all that information. But right now, what we want to do is try to get people to start thinking about the BHG as a core component of our growth and not some extension or something that's ancillary to us that we're going to work this partnership even harder on the go-forward, and we're excited about what opportunities presents for us and they're excited about the opportunities that presents for them.

Nancy Bush -- NAB Research -- Analyst

All right. Thank you.

Unidentified Speaker

Thank you.

Operator

Thank you. [Operator Instructions}.

Duration: 57 minutes

Call participants:

Harold R. Carpenter -- Chief Financial Officer

M. Terry Turner -- President and Chief Executive Officer

Unidentified Speaker

Stephen Kendall Scouten -- Sandler O'Neill -- Analyst

Unidentified Participant

Brett D. Rabatin -- Piper Jaffray -- Analyst

Tim -- Wells Fargo Securities -- Analyst

Brocker Vandervliet -- UBS -- Analyst

Michael Rose -- Raymond James -- Analyst

Jennifer Demba -- SunTrust -- Analyst

Andrew Terrell -- Stephens Inc. -- Analyst

Catherine Mealor -- KBW. -- Analyst

Brian Martin -- Janney Montgomery -- Analyst

Nancy Bush -- NAB Research -- Analyst


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