Good morning, everyone, and welcome to the Pinnacle Financial Partners First Quarter 2014 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 that Pinnacle's earnings release and this morning's presentation are available on the Investors Relation 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 forecast. During this presentation, we may make comments, which 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 the reconciliation of the non-GAAP measures to the comparable GAAP measures will be available on Pinnacle's website at www.pnfp.com. With that, I would now like to turn the presentation over to Mr. Terry Turner, Pinnacle's President and CEO.

Good morning. Quite some time, we've been discussing our strategic approach to growth and profitability, essentially that we would grow our balance sheet and informal loans at a double-digit pace for a period of 3 years while containing noninterest expenses, which should result in dramatically improved profitability as a result of the operating leverage that would provide. So again, this morning, I thought I'd start with a dashboard to provide the simple snapshot of how that strategy has worked through the first quarter of 2014. As you can see on the first row of graphs, we're getting outsized balance sheet growth in the form of average loans, up 10.9% in the first quarter of 2014 compared to the same quarter last year. You can also see that we've increased average transaction accounts by 18.7% during that same time frame. And frankly, the thing that I am most proud of within the deposit category is the growth in low-cost core funding, with core deposits up roughly 15.5% year-over-year, all through organic growth. And we've been accreting capital, most notably tangible book value per share, which of course is highly correlated to share price increases. On the second row of graphs, you can see further evidence that we've been able to translate that balance sheet growth into real earnings growth with organic revenue growth of just over 7% in the face of pretty stiff volume and margin headwinds, and fully diluted EPS was up 20.5% year-over-year. I would add that net income is up 21.7% year-over-year. Our return on assets hit a 1.20%. That's a record for our firm. And return on tangible capital was 13.47%, also a record for the firm. As you can see on the third row of graphs, the dramatic improvement in asset quality over the last several…

Thanks, Terry, and good morning, everyone. We've been providing information on this slide for several quarters, albeit in various formats. On our last quarter conference call, we noted that we anticipate a modest first quarter in terms of net loan growth. As Terry mentioned, we still believe our 3-year target is within reach by year end 2014 and remain confident that our relationship managers will produce another big loan growth quarter, just like they have done over the last 2 years. We've said it many times, net loan growth will be lumpy between quarters and that we will not achieve our loan growth targets on a straight line. That said, we remain very pleased with the energy of our sales force as new loan originations during the first quarter equated to almost $300 million, which beats the first quarter of the last 2 years, thus providing the source of our optimism as we move forward into 2014. As for the red bars, we expected and incurred significant levels of payoffs during the first quarter. This has been the most significant headwind for us toward our achievement of outsized net loan growth. As we've mentioned previously, it is the one thing that we underestimated when we charted out our anticipated growth prospects in the latter part of 2011. We're hopeful that we are not experiencing a new normal, but with intermediate rates beginning to creep upward ever so slightly, we are also optimistic that these payoffs and paydowns will reduce at some point in the not-too-distant future. To sum it all up, based on discussions with our relationship managers and their line leadership, we're looking forward to having another strong quarter of loan production during the second quarter of this year. On last quarter's conference call, we mentioned that we would…

Thanks, Harold. I thought I'd close today with some comments about valuation. They're consistent with what we discussed last quarter, but I believe bear repeating. Occasionally, someone will comment they think the stock is expense given the multiple expansion for small-cap banks has been unbelievable. But I want to offer my views on the relative attractiveness of our shares going forward. I'm not necessarily a Warren Buffet groupie, but I agree with his philosophy. To manage the fundamentals, tell the story and let the share price take care of itself. That's exactly what we're trying to do at Pinnacle, so my purpose here is not to debate the markets but to simply put forth why I personally like PNFP as an investment, which makes up essentially 100% of my liquid net worth and consequently requires me to think like a shareholder continuously. Number one, we continue to set high goals. Few set multiyear, double-digit, organic balance sheet growth targets, but we set them, published them and we're fundamentally on target. The relationship managers and leadership have executed with precision. And because of that, we're now operating inside or better than the targeted ranges for ROAA, net interest margin, noninterest income and net charge-offs. We grew the balance sheet and earnings at a double-digit pace. And in terms of our track record for shareholders, our share has appreciated 72% during 2013 and are now up another 7% since year end even after the most recent pullback. And so had we not executed on the fundamentals, it's my thesis that our shares would not have performed like they have performed. I recognize and appreciate that there are other banks that still -- have still higher multiples, and I genuinely applaud their accomplishments because that gives us something to shoot for in the…

[Operator Instructions] And our first question comes from Michael Rose from Raymond James.

I just wanted to get a sense here on the press release. You noted that you expect to expand the expense base and continue to hire relationship managers. Several banks have more recently come into Nashville, specifically maybe with more targeted strategies. But what's the climate like for hiring additional lenders? And I would expect that with the performance that you put up, it's probably being used as a recruiting tool and probably getting maybe a little bit easier to recruit lenders from other institutions. Can you just give some color and context there and kind of what you expect in terms of hiring for this year and maybe what you added last year?

Yes. Let me start with the growth -- I guess, the growth and the hiring profile of the company. And what we're really trying to do in 2014 is fundamentally the same thing that we did in 2013 and 2012. We talked about the $1.27 billion in loan growth. I think as Harold pointed out in his slide, we did $432 million and $420 million in 2013 and 2012, and so we need to do about that -- just a hair less than that this year to hit the $1.27 billion. So that sort of what our outlook is and what we believe should take place. In terms of the hiring that supports that, when we announced those targets, I think we said we would hire 12 people, might of said 11, and came back later and updated it to 12. I don't remember, but it -- we basically had a target that we would hire about 12 people in 2012, which we did. We hired roughly that number in 2013. And my expectation is and our budget calls for is to hire a number of roughly that in 2014. In terms of hiring, Michael, I think you probably know this. The big hiring months for us and I think a lot of banks is really the second and third quarter of the year. In the first quarter, people are waiting to get paid their incentives, so they're not likely to move at that point. And in the fourth quarter, generally most people can sort of smell pay dirt. In other words, they're far enough through their performance year they feel like they're going to earn big incentives and so it's hard to get them out. So first and fourth quarter are generally slow-hiring quarters. But again, we would expect to hit a hiring number similar to what we did in 2012 and 2013. In terms of the environment, you mentioned the competitiveness of recruiting. There's no doubt that Nashville is tremendously attractive. It's drawing all kinds of people and there are a lot of folks that are banging around trying to hire bankers, so I think that that's true and would be reflective of a difficult recruiting environment. The other side of that is what you said. Our reputation in this market is so strong as the largest locally owned bank and a reputation for being a great place to work. And quite honestly, success breeds success. By that, I mean we have hired the best bankers in the market, which makes it easier to go hire the remaining best bankers in the market. And so again, I would say there -- it is competitive, and there are a lot of people banging around, but I don't find it to be meaningfully more difficult than it's ever been to either keep our people or hire new people. So hopefully, that's helpful.

Yes, it is. And as a follow-up, you mentioned in the press release as well that loan yields have maybe stabilized here. How does that dovetail with the increased competitiveness in Nashville? And then are you seeing anything on the pricing and structure side that maybe gives you a chance for worry? I mean, you're clearly below your charge-off targets at this point, but things are good until they're not, obviously. And we did see a little tick-up in the classified asset ratio this quarter. So anything to kind of read into that.

Yes. I think on the -- let me start with loan yields and I guess, I'll hit it -- asset quality. I think on the loan yields, Harold's comments, I believe, were accurate. What he said is it has been our belief for a while that bankers have been trying to find the bottom. I mean, the overarching themes here, there's too much liquidity in the system, too much money chasing too few deals at the competitive landscape and has put pressure on pricing. But we have felt a slowing down of that pricing pressure over the last few quarters, which I think is a good sign. I can't guarantee that it'll be that way. But again, it -- I think we had said last quarter we felt like they would stabilize. They did stabilize. Our outlook is we may bounce around here kind of where they are, maybe up a few ticks, down a few ticks, but it feels like we've sort of got the bottom here on loan yields. I think on the asset quality thing, Michael, you know our numbers pretty well. Because of the commercial nature of the portfolio, some of the things -- or some of the ratios are lumpy in terms of their movements. You get one payoff that you think is going to come in -- or you're looking for one payoff on a classified loan in the last week of the quarter and it didn't come in until the second week of the next quarter. I mean, it will cause the ratio to be choppy, but it didn't mean anything in the grand scheme of things. And so I don't see anything going on that gives me concern relative to classified assets. I believe that we'll continue, frankly, to advance and I would guess that we'll have lower NPAs and classified assets as we exit 2014 than we did when we entered 2014. So again, I expect continued improvement in asset quality, but we may find quarters where you get one big loan move to an NPA or one big loan not pay off that you thought that may cause the ratio to bounce around, but I'd be surprised if we don't see continued forward progress quarterly through 2014. Before the next question, on that whole idea about some credit leverage and some credit ratios moving a little bit north on us, we went through a lot of that at the end of the quarter. We still think we got credit leverage on our P&L. We saw the reserve come down about 3 ticks this quarter. We saw probably one of our best charge-off quarters in recent memory, I guess, at the end of the first quarter. So I think in terms of soundness of our firm and our loan book, we're really optimistic that we'll continue to see additional credit leverage come into our P&L over the rest of this year.

Our next question comes from Jefferson Harralson from KBW.

I might just follow up with that credit leverage question. You had a $0.5 million provision this quarter, but you also said you expect the net charge-offs to be -- remain low and stable. So are you -- and -- but a huge reserve relative to your NPAs -- sorry. It sounds like you're sort of saying that you expect this provision to be in this range or lower when you make that comment. Is that what you're thinking?

Yes. I think the provision is going to bounce around with loan growth. This quarter, we had a -- net loan growth was around $37 million, which was modest at best. So we believe over the next 3 quarters we'll experience a lot higher in loan growth, and that will drive some of this provisioning. So with that, and the low charge-offs and some credit leverage, you should see bigger provisioning going forward, Jefferson, but it's only because of a function of loan growth.

Got you. Got you, all right. On the asset sensitivity, the liability sensitivity, it looks like some of your durations came down this quarter, securities portfolio. But can you talk about -- are you -- you had mentioned before your -- you think your reliability senses over some period of time. Are your liability sensitive in the first 50, the first 75, in the first 100 basis points, or where does that click over to be asset sensitive you think?

After 100. Right now, the floors are still about 85 basis points above the contract rates, so we need about 100 basis points we think to manage it. But given the comments from the Fed, we think we've got time to work on that to maybe reduce that exposure over the next year or so. We've got some tactical things that we're exploring currently that we could also implement. And you're right, the durations of our investable did come down in the first quarter primarily because we've been buying a lot shorter on the curve. And Jefferson, I want to go back on your question. I think this was clear, but I just want to make sure. I think the 2 major factors that influence the provision really are what's the level of allowances required to support the loan portfolio, and then how much growth are you adding, how much incremental allowance needs to be added to support the new growth. And so those are opposite trends. You would expect continued downward pressure on the general percentage of loans that need to be set aside for the loan portfolio, and then you got growth that cuts back against that. But the net of those ought to be continued credit leverage for us.

Do you have a rule of thumb for what amount of reserve you need to set aside for a new loan?

We do not. I think just -- the point is that we run a pretty sophisticated reserve methodology. And so you're going through every loan in the portfolio, every risk rating. You're looking at all the migration trends and there's some pretty sophisticated algebra that actually produces what the loan-loss allowance has to be. If you were just asking, as the CEO of the company, how do I plan and how do I think about it, sort of back of the envelope, what I believe is that I'm on -- generally, I'm on -- if I've got an allowance at a 1.61% in total, I theoretically assume, I'm going to put up 1.61% of the new loan growth.

[Operator Instructions] The next question comes from Matt Olney from Stephens.

This is actually Tyler Stafford in for Matt. My first question is on fee income. And I think you may have touched on this a bit in your prepared remarks, but service charges were up, call it, 13% year-over-year. I'm just wondering, what's your thoughts on what was driving this growth?

Tyler, this is Harold. We've been looking at several tactical items in service charges primarily around our analysis charges, and we implemented some of that during the first quarter. So I think that helped it. But I think, overall, what really drove the increase was just the number of accounts and the growth in balances. So I think it correlated fairly closely with that.

Okay. And then on mortgage, I was wondering if you had the new purchase first refi breakdown within your mortgage volumes handy for 1Q.

I don't have it at my disposal this morning, but I would imagine that it's going to be probably 60% to 70% purchased, and the rest would be obviously refi.

And the next question comes from Peyton Green from Sterne Agee.

Terry, I was wondering maybe if you could comment a little bit on customer behavior, just maybe changes you're seeing. I think there was a slide in the deck that referenced that about 36% of your business in the first quarter, which is, you have noted, is a slow quarter for you historically -- was due to new client takeaway. And I was just wondering, on the existing clients, I mean, what are you hearing from your customers? I mean, are they moving forward on the economy different than they were 6 months ago or a year ago?

I think that's a great question. I don't think they're moving forward differently than 6 months or a year ago. And by that, I mean, I think that again, just -- I'm not basing this on data, I'm basing it on just discussions with lots of business owners over the last 6 to 12 months. I think business owners are comfortable with where the economy is, meaning they're not panicked. They don't feel like they're in a difficult position. On the other hand, they're not optimistic. They are concerned about economic stability, they're concerned about rates, they're concerned about health care and they have lots of those kinds of things that weigh on them. And so what -- I think what you see is that the economy is moving forward at a very slow pace. I don't think it -- I can't -- it's hard for me to detect anything in sentiment that says, "Hey, this thing's really going to get hot." Specifically, I look at other data. If you look at things like our utilization -- line utilization, our line utilization's as low as it was at the trough of the recession, which would suggest that the working capital cycle is not moving forward. The sales cycle is not moving forward at a very dramatic pace. I think some of it can be masked by the liquidity that Corporate America stored up, but I really think that the sales cycle is just not moving forward at a very rapid pace. We don't talk to people. We don't have substantial demand for, what I'd call, true expansion. The equipment-type lending that we do is generally deferred capital expenditures. We're not seeing people that are saying, "I'd like to add a new plan or add a new shift or do any bona fide expansion." So I don't know if that's helpful. It's all sort of based on sentiment, but I would say that I would describe the business owners that we deal with as generally comfortable, but not confident enough to do -- take any meaningful risk going forward.

Okay. Tell me, is it fair to think that there's probably more commercial real estate activity over the next couple of quarters unless something changes in that sales cycle?

I think that's true.

Okay. And then just a comment maybe on -- this is more corporate-wide, but in terms of cash dividend. I mean, I know you all just instituted a couple of quarters ago. Just wondering what you think the right payout ratio is with the improvement in the ROAA and ROE and then you all are in a position where you're really building capital. What would you expect the range to do over time?

Yes, Peyton, thanks. A couple of points on that. One is that when we originally started setting up the dividend, the 20% payout ratio was kind of the general consensus of our board as to what they thought was reasonable at the time. Now obviously, with growth and earnings, that number is going to come down some. So to get to my second point, we'll be going through our strategic planning effort here over the summer. Capital and capital utilization and deployment will obviously be a point that we'll discuss quite diligently with our board, and then we'll see -- that will give us kind of the tone in terms of how we'll talk about capital after that.

Okay, and then last question. Terry, maybe you can comment. You referenced that -- I guess, in a slight way. But I mean, what is the M&A opportunity? I think we still see more of an episodic kind of life cycle throughout the space. I was just wondering if you're seeing any change.

I think I would be. When you say see any change, I guess, change compared to what or when, but I do think there are probably more small banks that are, I guess, I would use the word contemplating, what their long-term strategy is. There's a lot of sentiment, a lot of talk about the difficulty of the environment, the cost of regulation, the difficulty of producing returns. And so I think you do have a lot of what I might refer to as downstream banks for us that are more seriously considering their alternatives. But that said, my own view is that the gap between the bid and ask is still pretty wide, and so I don't look for -- I think your word episodic is probably good, maybe sporadic. I think you're going to find deals will materialize because of some of the discussions that are going on. But I don't look for it to be dramatically better than, say, 2013, probably be a little better, but not dramatically better in terms of whole-bank transactions in 2014. I think as it relates to us, we've always said it's a pretty short list of acquisition opportunities just because of the unique nature of our culture and brand and what we do for a living and the fact that we only want to operate in the urban markets and those kinds of things. So that's a pretty limited list, and I wouldn't characterize it any differently today than I have in the past.

And our next question comes from Brian Martin from FIG Partners.

Peyton got -- has got my question. The other one I had was just on -- maybe Harold, just as it relates to kind of fee income, just kind of talking through to some of the algebra, you make your profitability targets work and the fee income will continue to be strong in the next couple quarters. I mean, is it -- I guess, do you guys look at it as doable to put up double-digit growth in fee income in 2014 even with the decline in mortgage and kind of -- if so what are the real catalysts to achieving kind of a double-digit type of growth in fee income this year? Is there anything that will not -- that we're not seeing currently that you're anticipating?

Brian, I really don't think there's anything there other than what we've talked about. There are several tactical initiatives. I mentioned interchange. I mentioned increasing referrals. All of that is just blocking and tackling and making sure that the sales force is focused on their fee businesses. We want to try to help our mortgage originators. We want to help our insurance guys. We want to help our broker guys and our trust guys to help them maximize their capacity that they have in their businesses. So I don't think there's anything new and different that we may be tackling other than just trying to ramp up the volume and the intensity.

Okay. And the double-digit growth is achievable, I guess, is your expectation?

Yes, we think so. We think so, for sure.

And our next question comes from Mikhail Goberman from Portales Partners.

If I could piggyback on a prior question about the credit leverage. Do you have a sort of -- where do you think the reserve ratio could -- where -- how low do you think you can push it down basically?

Well, Mikhail, that's probably the $64 million question that we can't answer, although we try to. So we think there's continued improvement in our loan book. We ought to see some reductions -- continued reductions in our allowance over the course of this year, at least.

Okay. And changing subjects. This quarter, you guys sort all had a shift, really good growth in CRE loans -- period and CRE loans, while C&I kind of ticked down a little bit. Do you see that trend sort of continuing the next few quarters, or different?

Well, I think that we -- I'd break it apart. I mean, I think the trend for CRE is I think there will be continued growth opportunities there. I would not expect our C&I loans to shrink. In fact, I would expect them to expand pretty meaningfully. We've, I guess, tried to study and highlight what is going on in the commercial payoff. And I don't want to spend too much time rehashing old things, but I will just say that the payoffs are higher than I remember. One of the big factors in those payoffs is the fact that we deal with owner-managed businesses. Owners were unable to find exits, so a lot of these baby boomers were looking for exits. But over the last 4, 5 years, they just weren't to able exit. There was no market. And the takeouts, if they existed, were not at acceptable prices. And so you have a lot of pent-up demand for owner managers to exit, and that's occurring. At the same time, there is an unbelievable amount of money, private equity money in particular, that are looking for transactions. And so we've just seen an extraordinary volume of paydowns where private equity firms are coming in and taking out some of these owner-managed businesses. We win in some of those transactions to the extent we deal with a number of the local PE firms, but we sometimes lose in those transactions when you're dealing with larger out-of-market PE firms. Because generally, when they come to the table, they come with their bank, not us. And so that's resulted in a lot of paydowns. So again, I don't want to ramble on too long, but it just happens that the first quarter saw a large volume of those kinds of transactions, which we -- which is not our expectation for the second quarter. Again, you'll never know what could happen, but what we're aware of looks like we'll have reduced payouts and we're familiar with less with those kinds of transactions in front of us than behind us. So it's a long winded way to say, I think CRE should grow, but I think C&I should grow meaningfully in the second quarter.

And I'm showing no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day.