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Pinnacle Financial Partners Inc  (NASDAQ:PNFP)
Q3 2018 Earnings Conference Call
Oct. 17, 2018, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, everyone, and welcome to the Pinnacle Financial Partners Third Quarter 2018 Earnings Conference Call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer; and Mr. Harold Carpenter, Chief Financial Officer.

Please note, Pinnacle's earnings release and this morning's presentation are available on the Investor Relations page of their website at www.pnfp.com. Today's call is being recorded and will also be available for replay on Pinnacle's website for the next 90 days. At this time, all participants have been placed in a listen-only mode. The floor will be open for your questions, following the presentation. (Operator Instructions)

Before we begin, Pinnacle does not provide earnings guidance or forecast. 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 a reconciliation of the non-GAAP financial measures to the comparable GAAP measures will be available on Pinnacle Financial's website at www.pnfp.com.

With that, I'm now going to turn the presentation over to Mr. Terry Turner, Pinnacle's President and CEO.

Michael Terry Turner -- President and Chief Executive Officer

Thank you, operator. As we have every quarter for a number of years now, came up with this dashboard, which is intended to give a quick snapshot of our performance during the quarter, outlining not only the absolute level performance during the quarter, but the trends as well. The dashboard particularly focused on revenue growth, earnings growth and asset quality, because we have believed and will continue to believe the short-term themes will come and go, but overtime, the three most highly correlated metrics with long-term shareholder return on revenue growth, earnings growth and asset quality.

Consequently, those three above all else have been for an extended period of time and are currently the guide for us for how we run our business. Measures on this slide are all represented on a GAAP basis. Here, I particularly want to focus on revenue growth, one of our key themes for today's call. In the chart on the top left, you can see total revenues continue to set a new high each quarter, up 4.7% on a linked quarter basis or 18.5% in terms of annualized rate of growth during the quarter. Harold will break down the revenue growth in greater detail in just a few minutes, but I do want to just point out that the largest component in revenue is net interest income, which was up in mid-double digit annualized rate of growth during the quarter, roughly 15%.

Regarding our growth in balance sheet volumes, which for the most part is best predictor of future revenue growth. Looking now at just below the revenue chart, at the loan chart, organic loan growth during the quarter was in excess of $421 million, which is an annualized growth rate for the quarter of nearly 10%. So much have been talked about, relative to this slower loan demand and elevated payoffs, but here in the third quarter, we think we produced low double-digit growth, which leads to year-to-date annualized growth of 15.7% in 2018, which is consistent with our long lead [ph] belief that we will produce at least low to mid double-digit growth in 2018. So to be clear, our long lead revenue growth outlook hadn't changed.

I don't want to spend too much time on it right now, but I might just offer my own commentary around loan demand and loan growth, even though the annualized rate of growth during the quarter was right at 10%, and while that's consistent with our belief that we'll grow loans this year to low-to-mid double-digit pace, it is less than prior two quarters. And what I want to point out just so people can understand, we're not just trying to produce loan growth, come hell or high water, if it's not there (inaudible) also very high, we're not booking loans just to get the growth.

Well, that said, despite the fact that we expected overall loan demand may be slow and CRE pay always may remain higher, because the extraordinary success that we've had and are continuing to have, hiring highly experienced relationship managers away from our larger regional and national competitors, we believe these experienced relationship managers will successfully move our books of business, allowing us to continue the low-to-mid double-digit growth on a very sound basis. As far as I can tell, that's a totally differentiated strategy. So the third quarter was a fabulous quarter in terms of current revenue growth and outlook for future revenue growth as well.

Now, switching to these non-GAAP measures, recall all the noise associated with the B and C merger over the last year or so and the restructurings in conjunction with the tax law changes into 2017. In some cases, non-GAAP measures might better illustrate the relative performance of the firm. So on this chart, I'd like to focus first on EPS, net of merger-related expenses at $1.21, which is in the chart on the top row in the middle. Of course, 3Q '18 had no merger charges. So when adjusting for the merger related charges in the prior period, fully diluted EPS is up nearly 35% 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 create capital and grow tangible book value on a rapid and reliable basis, with the four and three quarter year CAGR of 14.2%. Harold pointed out in our earnings release this quarter that since B and C transaction in 2Q '17, our tangible book value per share has increased by more than 16% even after absorbing nearly $40 million in merger related charges, a really strong indicator of the success of that transaction. Immediately below the tangible book value chart, I want to outline the ROTCE chart at 18.44% this quarter. As you review the trend line post-recession, you can see it progressed nicely until the first and second quarter of 2017, that's when we did the large capital raise in advance of and in order to make the BNC acquisition. As a reminder, the BNC deal closed at the end of the second quarter, so you can see the very nice lift in ROTCE following the deal closing, another strong indicator of the power of that acquisition.

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 over 17% in third quarter, substantially exceeding the annualized rate of growth for loans during the quarter. Again, there's been so much discussion about whether or not we could attract core funding at the sufficient level to fund our loan growth, hopefully we're now demonstrating it again this quarter than we can.

So third quarter was a great quarter, with loan growth of nearly 10% annualized, core deposit growth of over 17% annualized, net interest income growth of over 15% annualized, revenue growth of more than 18% annualized, EPS growth of roughly 35% annualized and ROAA of 1.54% and an ROTCE of 18.44%.

Now here's what we want to get done today. Harold will review 3Q '18 financial performance in greater detail. Following that, I'll provide an update on our success with the BNC integration. And then I want to deal again with several questions that are being asked about all banks, I guess including us believe in this, I answered for us or likely different than many of our peers.

So Harold with that, I'll let you begin the review of the third quarter.

Harold Carpenter -- Executive Vice President and Chief Financial Officer

Thanks, Terry. As Terry mentioned, revenues for the quarter were up $10.7 million from the previous quarter at $241 million, an increase of more than 18.5% linked quarter annualized. Net interest income was up from the second quarter by $7.2 million, reflecting an annualized growth rate of 15.6% for the quarter. Much of this was attributable to increased average earning asset balances and improved yields. The impact of fair value accretion increased 987,000 during the quarter to $17.1 million. We anticipate decreases in discount accretion in future quarters as the level of acquired loans and recent mergers becomes less impactful and post-merger prepayments slow. Best guess at this point is that fair value accretion is likely to remain around $60 million total for all of 2018 and perhaps $14 million to $15 million in 4Q third quarter. We're still forecasting around $40 million for 2019.

The dark green line on the chart denotes our non-GAAP revenue per share. We reported $2.80 adjusted revenue per share in the third quarter of 2017 and we're reporting $3.11 this quarter, a little over 11% growth. Obviously that's the goal to keep the revenue train moving north. We will keep an eye on our profitability metrics, but as it stands today, we can afford to get our clients as well as invest in our platform, be a ramp up hiring activity. Now we're all about increasing our earnings per share on a reliable and sustaining way and building tangible book value per share through the cycle.

We talked about this slide last quarter, this slide focuses on revenue per share growth using trailing 12 month information, two things we'd like to mutate here. We continue to see double-digit revenue per share growth. Now this is during a time of significant internal focus around the Bank of North Carolina deal and systems conversions, not to mention cultural integration and getting folks aimed in the right direction. That's why we believe currently, there's a great deal of energy in our franchise right now. We're playing (inaudible) in Tennessee, with Carolinas and Virginia. In some cases, it's three yards and a cloud of dust, in some cases, we catch a big fish, but in all cases, so 2,300 associates working to build something better today than yesterday.

Secondly, the dotted line represents the peer groups' year-over-year growth, which is a cumulative last 12-month revenue of our peer group divided by the aggregate number of shares. We've consistently outpaced the peers over the last 21 months and are widening the spread so far this year. We have all worked at places where the only way you're going to hit your bottom line number was through some expense initiative. We pay attention to expenses, but trust me, it's a whole lot more fun to work for a firm with growing revenues.

We've had this chart for a long time. Concerning loans, as the chart indicates, the average loans for the third quarter were $17.3 billion compared to $16.8 billion at the end of the second quarter, plus average loans increased by almost $529 million, meaning while the growth rate of better than 12%. This is on the heels of a strong growth in the first and second quarters of 2018, comparing 3Q average loans to 4Q '17 average loans, our annualized growth is 15%.

So we're going into the fourth quarter with roughly $200 million more on EOP loan balances over the average for the third quarter, which is another great head start, as we head into the last quarter of the year. We continue to believe that our loan growth for 2018 will average low to middle double digits for the year. In the Carolinas and Virginia, their organic loan growth through to third quarter of 2018 was around 13% annualized. There's a chart at the back that shows what each market has achieved, importantly C&I and owner-occupied commercial real estate is up roughly 33% annualized. We're seeing growth in C&I and all of our markets in the Carolinas and Virginia. Right now, their C&I owner-occupied book approximates 28% of their total loans. If they keep growing at a 33% clip, they will create a very robust C&I platform in the Carolinas and Virginia much faster than we anticipated, creating this franchise as key to our growth roles, as with the C&I platform comes, core deposit and related fee growth.

Profits and paydowns were heavier in the third quarter over the previous quarters, primarily in construction and non-owner occupied commercial real estate. Our internal records indicate final payoffs and paydowns in this segment of $460 million in the first quarter compared to $580 million in the second quarter and growing to $760 million during the third quarter. Don't get it wrong here, we want these payments to occur, they just are occurring earlier than we had hoped. This will be another headwind as we go into the fourth quarter of next year, but believe our scheduled construction payoffs will normalize in early 2019. As the chart indicates and as expected, our loan yields increased to 5.15% from 5.04% last quarter, an 11 basis point increase linked quarter. Our modeling had one more rate increase in December and three rate increases in 2018.

This chart reflects our quarterly loan growth for each quarter since Q3, 2015. The blue bars on the slide have been adjusted to remove acquired loans. Let's say as these were the real quarterly annualized growth numbers, thus reflecting, we believe, the impact of growing our revenue producers. As shown, our loan growth continues to outperform our peer group quarter-after-quarter, without sacrificing credit quality or accepting undue concentration risks. Keep in mind, we don't know what 3Q '18 peer information is, but based on what we hear so far, it will be consistent with the first and second quarters of 2018, so another strong loan growth quarter for the Pinnacle in comparison to peers.

The small chart in the middle of the slide is average account balances comparing early 2015 to 3Q '18. Our portfolio is not about a lot of large credits. We got larger loans, but we're talking average ticker sizes, commitments of just over $1 million to $1.25 million for CRE and construction, that's all construction, commercial and residential. Concerning commercial constructions, specifically our average commercial construction commitment is just over $2.4 million through the third quarter 2018. Again, we believe a very granular portfolio aimed at local builders and developers in our markets.

Another fact about our credit metrics that we think is a further indication of the type of lending we go after that 90% of our collateral for construction, and non-owner-occupied commercial real estate multifamily is located in the states of Tennessee, North Carolina, South Carolina and Virginia.

The two hurricanes in recent weeks have impacted a lot of people and our thoughts and prayers go out to the families of those affected by these big storms. We've had some Pinnacle associates that have been significantly impacted as well. We did set aside a reserve of $2.5 million for Hurricane Florence in the quarter after surveying our relationship managers, who review collateral maps in the impacted areas and talk with their clients. We think $2.5 million is a good number. We've still got some work to do, but we've been in touch with the borrowers that we were most concerned about. Our bias today is that number is conservative.

We are in early stage review with respect to Hurricane Michael. Most of our loans here are vacation properties in the Panhandle of Florida, so we are not as concerned about our aggregate loss exposure with that storm. No idea if we're in the seventh inning or the eighth inning or the fourth inning. What we do know is that credit continues to hold up nicely. So we are ultimately proud of our client selection processes throughout the franchise.

We are presenting this slide again. We are still targeting a 35% fixed rate loan book for our loan portfolio. We also executed a forward interest rate swap earlier this year and then added to it in the third quarter in order to accelerate our floating rate component by an additional 5%. The first forward trial is over $150 million started in October. As of today, the average pay fixed rate on those swaps is 40 basis points more than the received variable rate. The October trial come out to approximately 38 basis points difference between the pay rate and the received rate.

Also, we have updated this slide with additional information on rates in various rate categories for prime rate, we feel like we've captured substantially all of the short-term rate increases since September 2017. The LIBOR spread reduction that has occurred over the last few months has impacted us, but we feel like that spread, especially the spread between the 30-day in Fed funds has likely normalized. Fixed-rate loan yields have not moved much for the loan book yet, but it takes a long new (inaudible) to move away with average yield of the fixed rate portfolio.

As the last two columns on the chart at the bottom indicate, we are seeing some lift in fixed rate pricing this year, so we should see the book yield begin to move north in a more noticeable way over the next several quarters. We've also worked on repositioning our bond book. As I said today, more than a third of our bond book is now on a variable rate, so we should see improvements in yields as rates increase.

Average deposit balances were up $1.16 billion, while our EOP balances were up $550 million. In the period, core deposits increased by $677 million during the quarter. Our deposit cost did increase 19 basis points in the third quarter from the second quarter and currently stand at 97 basis points. We compute a beta of 36% on deposit cost given those figures since the most recent rate cycle began in the fourth quarter of 2015. As to the future, deposit costs will continue to increase for several factors, the two most prominent are general pressure for increased deposit rates in a rising rate environment, but also, we'll need to fund a loan pipeline. Our relationship managers are out in the markets 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 are in markets that have ample liquidity to match our loan growth expectations. Terry, Rob and Rick are driving our sales efforts toward depositors. We will play our customary sheet lever gain. We still believe we've got adequate room in our plans to fund our loan growth with a fair rate paid on deposits. Don't get me wrong, deposit betas are important. We will pay attention, but right this minute, we are focused on gathering clients.

Again, a big quarter for deposit growth in the third quarter, with core deposit growth not more than $675 million and more than 17% annualized. Over the last four quarters, core deposit growth has funded 93% of our loan growth, which is more than the 85% we would typically roll off on our model to produce. We may sometime hold our nerves on the rate, but we have to have relationship managers to get the clients. Also on the chart is loan-to-deposit ratio for us compared to our peers. As you might expect, our line bounces around, but a peer-to-peer line will nudge up closer to us after third quarter results.

Fees amounted to greater than $51 million, up $3.5 million over last quarter. BHG had a great quarter and look to have another great quarter in the fourth quarter. Their contribution was up $4.8 million in the third quarter. We had anticipated a net growth of BHG in 2018, would be 12% to 15% for 2018. We now believe we will likely see 20% for the year. Residential mortgage income was up slightly from last quarter. Of note, the rate environment has not been helpful to this business line for the past several months, but our folks continue to hire mortgage originators and work hard to get their share of the deals.

Wealth management revenues were essentially flat in the third quarter compared to the second quarter. Keep in mind that we remain in Phase I of the build-out of investment services platform in the Carolinas. There was a solid base, but one of our key goals from the C&I build-out is to ramp up investment efforts in that footprint meaningfully. We've had several significant hires in both footprints that have contributed to our success in investment services. Insurance revenues were steady and (inaudible) had a very exciting quarter, which drove the decrease in the third quarter. In other noninterest income, we have positive $2 million pickup in the second quarter from revaluation of our -- of certain of our joint venture investments, which did not repeat in the third quarter.

Non-operating leverage, our efficiency ratio was 47%, which was slightly more than the adjusted 46.6 we reported in the second quarter. We expect our non-interest expense to be higher this quarter and we are hopeful we could afford increase in incentive accruals as we head into year-end. Salary expenses up almost $2 million this quarter, largely attributable to increased headcount throughout the franchise. Since year-end, we are up 117 FTEs this year as we continue to hire revenue producers and other critical support functions.

Although we continue to accrue less than our target award for our corporate incentive plan, we did increase the accrual to 90% of the target. You know that our corporate incentive targets were set at levels we believe will 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 have had years where we paid more the target. We have had years where we paid no incentives. The critical thing is the associate base understands why we do it and the way we do it. Keep in mind that Terry and myself and the entire leadership team of this firm are on the same incentive plan with everyone else. Thus, if the CEO gets paid, we all get paid and vice versa. Incentives are important and it's one of the things that makes us unique.

Excluding market costs, other expenses were up $3.5 million this quarter. Ad expenses associated with our deposit campaign in the Carolinas, lending expenses and technology costs, all contributed to the increase. All-in-all, we believe about a $1.5 million to $2.0 million of this was non-recurring.

So with that, I'll turn it back over the call to Terry to wrap up.

Michael Terry Turner -- President and Chief Executive Officer

All right. Thank you, Harold. Let me comment quickly on the return on average assets. We published our target operating range for ROAA for the year 2012. Over the years, we've increased that targeted operating range three times in four months, recently moving to a range of 1.50% to 1.70%. As you can see in the third quarter, we continue to operate in the targeted range for ROAA with a 1.54% ROAA in the third quarter, same as last quarter. And I'd also point out that all four components that built to the overall ROAA target are either operating comfortably within the targeted range or better than the targeted range.

Which leads now to the BNC integration. As a reminder, since the beginning, when we discussed their rationale, we've always talked about the fact that BNC had a double digit growth CRE platform, and then our goal was to not disturb or diminish that in anyway. But in addition to that, to vote on a high-growth C&I platform, which then have the impact of steepening the already high growth rate. To that end, we communicated our abstain to hire roughly 65 C&I and private banking relationship managers in the Carolinas and Virginia over a five-year period of time, beginning in July 2017. To be on that pace, we would need to have hired roughly 16 in the Carolinas and Virginia by September of 2018. So you can see, having hired 26, we are roughly 52% ahead of schedule in terms of the number of C&I and private bankers in the new market or said another way, roughly three-quarters ahead of schedule in terms of the timeline. I also want to comment that it's not just about the number however, but qualitatively, Rick Callicutt has done a fabulous job of seizing on market vulnerabilities, hire some of the best bankers in this market, while the sources for new hires have been broad,

clearly, as the majority of the new financial advisors are coming from those large regional national players with whom we like to compete. And impressively, the average experience level of these 26 commercial and private bankers is 22 years, which is consistent with Pinnacle's long-term results of hiring experienced bankers.

I don't want to overdo this but I just want to make sure everyone understands the connectivity between hiring a loan and deposit growth. They go hand in hand. Because we've hired so many, we should grow faster than the market as a result of the market share movement and because they're long-tenured as the larger regional and national players, we should produce that outside of growth on a sound basis. In my judgment, our ability to move existing loans that are currently performing and are well known to the lender of this movement, is substantially is able to play than banks are having to press for volumes late in the cycle when the market demand is weakening.

And so, how we're doing on the success criteria that we originally laid out year-to-date in 2018 and in the periods we are working like we build on the board, though the first three quarters of 2018 in the Carolinas and Virginia, we saw continued double-digit growth in the CRE platform and a meaningful acceleration in the C&I business. Couple that with the upside of core deposit growth that we're getting, I think you have to agree this has been a fabulous transaction. I'm not aware of recent transaction where they've been able to elevate momentum nearly to the extent that Rick Callicutt and his team in Carolinas and Virginia has. In other words, we are confident exactly what we set out as original success criteria.

Turning now to the three questions I highlighted in my introductory comments, let me begin with the question regarding the likelihood that we can continue the pace of loan growth. Acknowledging that past says does not ensure future outcomes, many would say the best predictor of future outcomes is the current result. Most of you will recall that we closed our merger with BNC in June of 2017, so these are the quarter-end loan numbers for the entire firm following the close of that transaction. We weathered the deal announcement and whatever laws of momentum generally occurs in conjunction with that. We weathered the brand change and whatever mourning typically occurs with that. We weathered the system conversions and all the internal focus that's generally required for that. And through it all, quarter after quarter, we've consistently put up low to mid double-digit loan growth.

Honestly, as I said a minute ago, the reason we've been able to grow the loans at a substantially outsized pace versus peers is because of the hiring success that we continue to have, not just in the Carolinas and Virginia, but throughout our entire footprint. So that hiring success not only explains how we have produced outsized loan growth, it explains why we continue to expect the level of loan growth going forward.

Regarding our ability to fund that growth, this is a very busy chart breaks our funnel down to three broad categories: number one, core funding; number two, additional funding from our clients, which is not considered core funding, things like repos and so forth, we call that relationship-based funding; and number three, wholesale funding. We bought the funding makeup over the last year, a time of very rapid loan growth, as we indicated several times on the call 15.7% year-to-date. And as you can see, the percentage of core funding has remained essentially flat, as our dependents -- as with our dependence on wholesale funding, you heard Harold say a minute ago that, it's harder to (inaudible) fund at least 85% of our loan growth with core deposits and we have well exceeded that over the course of the last year. So we have indeed gathered sufficient core funding.

And so finally, let me address the third question regarding whether despite had deposit betas, we can produce rapid growth in net interest income and EPS, which to be clear are the primary objectives of this firm. It seems to me, the answer to that question is yes. We showed this same chart in the second quarter call with a comparison at that time based on first quarter results, which by the way led to a similar conclusion. We've now updated it for second quarter results. Here you can see, we brought in our peers, some of whom are really low deposit beta companies, bought in the year-over-year increase in total deposit cost on the Y-axis and the year-over-year increase in net interest income per share on the X-axis, in order to normalize for acquisitions et cetera. And our performance on net interest income growth in the first half of 2018 was peer leading, despite a relatively high beta. I believe that was the case because we were able to grow our client base by taking market share and consequently growing earning asset volumes at pretty dramatic pace. I think that may be the most important difference between us and many of our peers.

So in summary, let me say this, we are primarily focused on long-term shareholder value. Third quarter '18 was obviously a fabulous quarter, as evidenced by the low-double digit loan growth, the core deposit growth greater than 17% annualized, net interest income growth of 15% annualized, revenue growth of more than 18% annualized, EPS growth of roughly 35% annualized and ROAA of 1.54% and an ROTCE of 18.44%. But here is what really demonstrates our focus on long-term shareholder value. We did all that, while we increased our associates' incentive accrual meaningfully, what we said is that substantial reserves for potential damages associated with Hurricane Florence and while hiring 23 revenue producers in the third quarter along with all the support staff necessary to support them and it's just how -- just think about that, what a company of our size to be on pace to increase the number of revenue producers not more than 100 people this year, plus all these folks that are associated support personnel, we generally run in a ratio of two support for one revenue producer and still grow our earnings roughly 35% with a 1.54% ROAA and 47% efficiency ratio. In other words, we had a great quarter in terms of quarterly financial results, but we continue to invest in the infrastructure intended to let us continue doing this and reliably grow the tangible book value of our shares for quite some time to come.

Operator, we'll stop there and take questions.

Questions and Answers:

Operator

Thank you, Mr. Turner. The floor is now open for your questions following the presentation. (Operator Instructions) Our first question comes from Jared Shaw with Wells Fargo Securities. Your line is now open.

Jared Shaw -- Wells Fargo Securities -- Analyst

Actually just the first, quick question. Did you say accretion for 2019 should be $20 million, is that the expectation?

Harold Carpenter -- Executive Vice President and Chief Financial Officer

We think the discount accretion for 2019 will be probably around $40 million. So the decrease will be $20 million.

Jared Shaw -- Wells Fargo Securities -- Analyst

And then in terms of the growth that you're seeing in the Carolinas, that's a -- those are great trends. What's the vintage, I guess of the -- of the loan officers that are creating that loan growth? How long is it taking them to actually start producing new customers for the bank after they have been hired?

Michael Terry Turner -- President and Chief Executive Officer

Jared, this is Terry. I'm not sure, I can, you know, give you a crisp answer to that question, there's wide variability and how that works. As you would guess some of the relationship managers that have been hired are constrained and to some extent, with the non solicit agreements and things like that. But again, I would say that the -- some growth occurs through all of those relationship managers literally from the beginning. Our expectation continues to how we believe people will be successful moving roughly 80% of their book, and they will get that done over a three to say, four year period of time.

Jared Shaw -- Wells Fargo Securities -- Analyst

And in terms of -- in terms of that book coming over, you're still seeing good trends with the loans and the deposit relationships following?

Michael Terry Turner -- President and Chief Executive Officer

We are.

Jared Shaw -- Wells Fargo Securities -- Analyst

Thanks and then on BGH, that was a great growth that we saw there as well. How is rising rates impacting the BHG business, so they are able to move -- continue to move rates up sort of in line with what we're seeing and is that changing the end borrowers' dynamic at all?

Michael Terry Turner -- President and Chief Executive Officer

Jared, like track that information probably -- well, the information we get over the last probably three years or four years and so far, they've not been impacted very much, if at all based on what the yield curve is done because most of those loans are going to be priced off of, call it five years to seven years. And so that the top line rate that the borrowers are paying has not moved much at all probably 14.5%, 15%, while the borrow rate that the bankers are requesting hasn't moved either. So the spread has stayed pretty consistent.

Jared Shaw -- Wells Fargo Securities -- Analyst

And then on the target for fee income still that 90 basis points to 100 basis points of assets, is that so good for a long-term target and I guess, with the increased BHG revenue, do you think we could get there earlier?

Michael Terry Turner -- President and Chief Executive Officer

Yeah. Our current target is 80 to 100 and we were at 85 with the enhanced BHG number this quarter. So yeah, I think BHG will help pull us into that range.

Operator

Thank you. And our next question comes from Stephen Scouten with Sandler O'Neill. Your line is now open.

Stephen Scouten -- Sandler O'Neill -- Analyst

I guess may be continuing on the BHG for a second. I was curious if the jump here in this quarter was just related to some of their sales activities, increased volumes or if any of the new product initiatives you talked about the Investor Day kind of SBA opportunities, patient lending, if any of those things had come online as of yet and increased the kind of optionality for revenue in that platform yet?

Harold Carpenter -- Executive Vice President and Chief Financial Officer

Yeah, I think the new products had some impact, but it wasn't that -- that one that large. So I don't think it moved the needle significantly. I think what has happened in the third quarter and will likely go into the fourth quarter is credit metrics have improved. They've also over time had built out a, we call it a warehouse, but it's really just, they kept some loans on their balance sheet, they've built up their balance sheet over time. They decided this quarter that they would take some of the 2018 production and sell it into the market, or into the auction platform. So they've been I guess, keeping this pool of loans on their balance sheet and they started releasing some of that pool into the option [ph] platform because the appetite for those loans has been pretty strong here over the course of the last, you know, well, it's been strong for the -- over the last year or so, but they finally decided that based on what the borrow rates are, they left some of those loans go.

Michael Terry Turner -- President and Chief Executive Officer

Stephen, I might just add to Harold's comment, as we think about going forward, the appetite for their product increases, as other loan demand slows, lowers -- banks will have a greater appetite to use that filler for loan growth. So that's good for BHG.

Stephen Scouten -- Sandler O'Neill -- Analyst

Okay. Yeah, that makes sense -- that makes sense. And may be as it pertains to overall loan growth, I mean, obviously year-to-date your growth is still been far above what I would have expected beginning of the year. So congratulations there again, but was there any impact in the quarter from Hurricane Florence in terms of pushing any loans that might have closed this quarter, end of 4Q. I mean, would you expect even with payoffs in CRE and other impacts that you might see an uptick in fourth quarter without the hurricane effects?

Michael Terry Turner -- President and Chief Executive Officer

Stephen, I don't know, I would say there is no doubt that people get bogged down in the -- all the people being out, clients being out, all that sort of stuff associated with the hurricane and sort of recovering from hurricane. So I can't imagine that it had some impact. I guess, what I want to reinforce is look, we have believed and we continue to believe, we are going to put up low to mid double digit loan growth over an extended period of time, we'll have some quarters, it will be a little higher in some quarters, it will be a little lower. But over an extended period of time to work that way, it is a little lumpy to your point, sometimes that then take a few deals in a quarter to you know, take volumes down or up and recognize the way.

But again, just over time that's what we expect to occur and I want to reinforce the reason we think it's going to occur that way is not so much to do with what the peer loan demand is, it has to do with the hiring methodology of hiring these people and having them moved those books. So that's the principle to determine, where these loan growth numbers will go, it will be a function of our ability to hire the people and get them on track and move the business.

Stephen Scouten -- Sandler O'Neill -- Analyst

Makes sense. Thanks, Terry. And one last kind of housekeeping question from me is just on the CD rates, I want to make sure, I understand this properly, it looks like on slide 12, you are listing 1.83 is the current quoted CD rate, if I'm reading that properly and your average CD rate is 1.76. So would it be fair to assume that the degree of pressure, we've seen on time deposits over the last two quarters could slow pretty appreciably, if that gap has narrowed so much between your average rate and what you're offering out there now?

Michael Terry Turner -- President and Chief Executive Officer

Yeah now, that rate is on slide 12 is the end of period rate. So that's the rate that the current book would average out.

Stephen Scouten -- Sandler O'Neill -- Analyst

Okay.

Harold Carpenter -- Executive Vice President and Chief Financial Officer

Now, there's a little bit and it's just not much, Steven, but there's a little bit of purchase accounting that impact that $1.83, so it would be -- it might be $1.81 something like that.

Stephen Scouten -- Sandler O'Neill -- Analyst

Okay.

Harold Carpenter -- Executive Vice President and Chief Financial Officer

We have some purchase accounting that comes into play out of that book.

Stephen Scouten -- Sandler O'Neill -- Analyst

Got you. Well, I guess may be along with that, can you tell us what kind of an average rate is that you're offering on new CD production may be then, so I can think about how that might play in over the next coming quarters?

Harold Carpenter -- Executive Vice President and Chief Financial Officer

Yes, I think our 12-month rate is somewhere around two, somewhere in that range.

Stephen Scouten -- Sandler O'Neill -- Analyst

Yeah. Great. All right, guys. Thanks so much. Congrats on a nice quarter.

Harold Carpenter -- Executive Vice President and Chief Financial Officer

If it's different from that, I'll call you.

Operator

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

Jennifer Demba -- SunTrust Robinson Humphrey, Inc. -- Analyst

Curious couple of questions. You have had a big increase in your tax exempt securities yield. What drove that up sequentially, and what are the new reinvestment rates on that line item?

Harold Carpenter -- Executive Vice President and Chief Financial Officer

Yeah, the new reimbursement rates are going to be fairly consistent. I think we got may be about 2 to 3 basis points of increased yield in that book that we're forecasting for the fourth quarter. So the battle [ph] rates -- the new rates are coming in at about that same number. Now as far as what drove the increase between 3Q to 2Q is, we did go out on the curve and we did acquire some additional municipal securities during the quarter. We had anticipated giving those securities toward the, call it, the end of the year or first part of next year, but with the spike in loan pay-downs, we went ahead and put that money to work in the third quarter. And I think Jennifer one more added point there is that early in the fourth quarter, we've taken a lot of those securities that we acquired and we flipped them to floating rate securities.

Jennifer Demba -- SunTrust Robinson Humphrey, Inc. -- Analyst

And Harold, you said you had $1 million or $2 million of non-recurring $1.5, $2 million of non-recurring expenses in your run rate and -- in the third quarter, do you have any sense of kind of a range of expenses you're anticipating in the fourth quarter given the payout you're likely looking at, at this point?

Harold Carpenter -- Executive Vice President and Chief Financial Officer

Yeah. It's a -- I appreciate the difficulty in trying to kind of develop a run rate for us because the way that incentive accrual bounces around, we'd expect expenses to increase -- if the revenue number is coming and we would expect the expenses to increase slightly, I'll say it like that.

Jennifer Demba -- SunTrust Robinson Humphrey, Inc. -- Analyst

Meaning low -- meaning low single digit.

Harold Carpenter -- Executive Vice President and Chief Financial Officer

Yeah. For sure. Yeah, I'll just leave it at that.

Jennifer Demba -- SunTrust Robinson Humphrey, Inc. -- Analyst

Okay. And Terry, can you just talk about deposit funding strategies, you guys talked about four or five different strategies you have at the Investor Day last summer. Can you just talk about where you're seeing may be the most traction or the least amount of traction or what have you?

Michael Terry Turner -- President and Chief Executive Officer

Yeah. I would just say that in terms of the strategy that we laid out, one had to do with hiring, of course, we're having a good success and a lot of those people are moving deposit books. We hired people that are focused on deposits. We've made several of those hires and so I would say that's progressing nicely. I think underneath that may be more important than that is, we're active communicators. We got a really active communication with our sales force that occurs at least weekly, if not more frequently about what we're looking for, what we need and those kinds of things. And so there's a lot of direction to the deposit side, aimed at folks and clients have deposits and so forth and I'd say that's working well.

We talked about doing some product nice advertising in the Carolinas and Virginia, if you'll recall and if you know, there is something, we don't normally advertise. We've never been an advertiser, but we decided that we would do that, use some rate base to advertising in the Carolinas and Virginia, where we -- here we have low share positions and felt like, we wouldn't be just cannibalizing a big deposit base to do some rate-based promotion. So you can feel that the rate that we've used is a 1.69% money market rate. So it's a relatively attractive rate, but is the -- it's not a 2% rate, to Harold's point earlier. So again, we feel like it's good a buck of money and we think it worked -- it has worked well. In that market, we've bought a fair amount of money. We'd just say this, as we go into the Carolinas and Virginia, some people would say, my goodness how they are going to do, having to compete with those large regional and national franchises, dominate those markets, and as you know, those large regional and national franchises, they have no incentive or desire to take that sleeping deposit funding base up and so we can step in there and borrow money at a pretty attractive rate in that market and so that has -- that has worked well for us also.

Jennifer Demba -- SunTrust Robinson Humphrey, Inc. -- Analyst

How about the Artist Growth product that you invested in? Can you give us an update there?

Michael Terry Turner -- President and Chief Executive Officer

Yeah. Artist Growth, I think it's -- it's in, what I guess, what you'd call the last sort of pilot phase. It is live with a handful of clients. I think the recent [ph] activity has been great. And so our optimism about that continues to be the same in terms of this specific impact, either on our balance sheet or P&L, it would be minimal at this point. But again although early returns on the folks that are on it would let us to believe we'll do at least as well as we thought we would.

Operator

Thank you. And our next question comes from Brock Vandervliet with UBS. Your line is now open.

Brocker Vandervliet -- UBS Investment Bank -- Analyst

On the loan growth, I'm clear on the long term, just Harold, in terms of the shorter term and looking at the average growth and especially the end-of-period growth, it looked like you're hit harder by pay-offs. Can you talk about how that looks the next -- the next couple of quarters, so the next quarter, should we anticipate a pick-up in loan growth or still too early to tell?

Harold Carpenter -- Executive Vice President and Chief Financial Officer

Yes, Brock. I think the pay-off that we're looking at in the fourth quarter should be fairly consistent with what we had in the third quarter, which would -- I don't think we'll see a decrease in those payoffs likely until the first quarter of 2019. So we're anticipating kind of a similar kind of quarter in 4Q than we had in 3Q.

Brocker Vandervliet -- UBS Investment Bank -- Analyst

Okay. And circling to the deposit dynamics, it looked like part of this -- part of the CD growth may be part of an intentional strategy to reduce FHLB borrowings, is that the way we should read this, or is that kind of just an accidental thing in terms of how the rate shook out this quarter between the two products?

Harold Carpenter -- Executive Vice President and Chief Financial Officer

Yes, I think we are getting some CD lift and the Carolinas just through the sales process in that market, there's more time deposit, time and depositors over there than over in Tennessee. But yes, we will flit up based on what the -- what we think our balance sheet is requiring between brokered CDs and Federal Home Loan Bank borrowings. So there could be some intentionality around those two products.

Brocker Vandervliet -- UBS Investment Bank -- Analyst

Okay. And incremental raising of money market in CDs, those are, say 1.70% and 2% right now?

Harold Carpenter -- Executive Vice President and Chief Financial Officer

Yeah. The -- we have the 1.69 and the 1.72 something like that kind of rate offering in the Carolinas. The advertising to support that campaign has now been completed. But I think they're more on a kind of a hand-to-hand combat on that front in the Carolinas and continue to kind of sell it over there.

Michael Terry Turner -- President and Chief Executive Officer

Hey Brock -- Brock, if I could I might just make this comment is not exactly what you're focused on, but again, just give you some sense of our mindset. As you know we had tipped slightly above the 300% total risk-based capital ratio there on commercial real estate. And so I think, we've signaled to the market that we would rather down that we expected the combination of capital accretion and pay downs -- payoffs in the CRE book to bring that in line and so that's happened and we didn't spend a lot of time talking about that on the earnings call, but it is an important thing. And so it's sort of a mixed blessing when we think about the real estate pay downs, most of that is for a good reason and matches what we're trying to get done from a risk management standpoint.

Operator

Thank you. And our next question comes from Tyler Stafford with Stephens Incorporated. Your line is now open.

Tyler Stafford -- Stephens, Inc -- Analyst

Hey, just a question around the core margin trajectory from here. Harold, with the -- with the core funding that you're seeing and the loan growth expectations you talked about for the fourth quarter, just where do you see the core margin trending from third quarter levels?

Harold Carpenter -- Executive Vice President and Chief Financial Officer

Yeah. We're always hopeful that we will see core margin kind of stabilization, I think it went down, call it 3 basis points to 4 basis points this quarter. I'm hopeful that we can keep it kind of flattish going into fourth quarter.

Tyler Stafford -- Stephens, Inc -- Analyst

Okay. Got it. Following up on -- on one of the earlier questions, which was about the incentive accruals and thinking about that and toward -- into 2019, would you expect another sizable step down in the first quarter within incentive accruals or the incentive comp, as you've seen in the past few years?

Harold Carpenter -- Executive Vice President and Chief Financial Officer

Yes, I think so. I think we've built it over the last two to three quarters, and so we'll get more on kind of a standard run rate in the first quarter.

Tyler Stafford -- Stephens, Inc -- Analyst

Okay and then just one more on BHG. I saw they acquired a 20% ownership interest in a healthcare tech company in the third quarter. Did that drive any of the higher 3Q fee income growth and then just any idea what the potential from that ownership of that new business could be?

Harold Carpenter -- Executive Vice President and Chief Financial Officer

Yes, they are really excited about all of that new business around healthcare lending, particularly around high deductible plans. So they're very excited about what they're up to. They're all over the place talking to hospital units and surgery centers and all those kind of folks to get signed up in that product. But I don't think it impacted third quarter that materially. And it's not likely to impact fourth quarter, there will be a little bit of revenue from it, but it won't be much.

Tyler Stafford -- Stephens, Inc -- Analyst

Yes. So on the fourth quarter, so you guys took up guidance to over 20% BHG for this year. The fourth quarter is typically seasonally the strongest, but even if you just kind of flat line 4Q with 3Q, I think that would be over -- right at 25% growth for the year. So can you just speak a little bit more specifically to 4Q expectations for BHG? Would you expect 4Q to be stronger than 3Q levels?

Harold Carpenter -- Executive Vice President and Chief Financial Officer

We think 4Q will be as strong as 3Q.

Tyler Stafford -- Stephens, Inc -- Analyst

As strong, OK. And then just lastly from me, I know you guys don't focus on core NII or core EPS ex-the accretion as much as we do from our side of the table. But if we were to exclude the accretion for next year, can you just talk about what pace of core NII growth and core earnings that would be reasonable for Pinnacle?

Harold Carpenter -- Executive Vice President and Chief Financial Officer

Yeah, I mean, Tyler, I think we're going to be down probably $20 million next year with respect to net interest income growth. So if we can hit our loan numbers that we're planning to hit, call it in 2019, which we think will still be low to mid double digits. We think we've got -- call it somewhere around that 10%, may be 12% lift in NII.

Tyler Stafford -- Stephens, Inc -- Analyst

In core NII?

Harold Carpenter -- Executive Vice President and Chief Financial Officer

Yes. Well, that will be, yes.

Tyler Stafford -- Stephens, Inc -- Analyst

Yes.

Harold Carpenter -- Executive Vice President and Chief Financial Officer

Now, what I'm talking about is GAAP NII, as far as where we think we can go.

Tyler Stafford -- Stephens, Inc -- Analyst

I'm sorry, can you just clarify that? The 10 to 12, not to pin you down, but were you referring to core or GAAP NII?

Harold Carpenter -- Executive Vice President and Chief Financial Officer

We're talking about trying to get to core NII of about, call it, 10%.

Operator

Thank you. Our next question comes from Brian Martin with FIG Partners. Your line is now open.

Brian Martin -- FIG Partners -- Analyst

Hey, Harold, just one bigger question on BHG and that's just the long-term outlook. So when you look at '19, just forgetting '18 and this pool of loans and kind of that process they're going through, I mean there is a run -- the 20% or 20% plus growth you're seeing in '18, does that decline as you go to '19, it's more of a 12% to 15% type of rate, is that how to think about BHG with some of the new initiatives they've got?

Harold Carpenter -- Executive Vice President and Chief Financial Officer

Yeah, I need to kind of go back and revisit our 2019 targets in line with what's going on with the third and fourth quarters and figure out what's repeatable, but they are -- their standard response for me has always been 12% to 15%.

Brian Martin -- FIG Partners -- Analyst

Okay. So 12% to 15%, it could potentially be higher if some of these other things kick in that they're kind of expecting or kind of looking at recent events?

Harold Carpenter -- Executive Vice President and Chief Financial Officer

That's right.

Brian Martin -- FIG Partners -- Analyst

Okay. And that, that expense Harold, those one-time items this quarter, I mean, were they in one particular line item or kind of spread around?

Harold Carpenter -- Executive Vice President and Chief Financial Officer

Yeah, they were all below salaries, so they were spread throughout equipment costs, other expenses, all those kind of things.

Michael Terry Turner -- President and Chief Executive Officer

Advertisers.

Brian Martin -- FIG Partners -- Analyst

Okay. Advertisers. And in that slight increase potentially that you expect in 4Q, I guess is that off of the actual base Harold to the core base, just to be clear on that?

Harold Carpenter -- Executive Vice President and Chief Financial Officer

Well, in the third quarter, everything core and actual were the same. So I'm not sure, I follow your question, Brian.

Brian Martin -- FIG Partners -- Analyst

Yeah, I guess, I was assuming, you said it was about $1.5 million in non-recurring expense in the fourth quarter. So I'm just trying to understand, is it just the reported expense you would expect could potentially be slightly higher in -- the expense in fourth quarter could be slightly higher than the reported number in --

Harold Carpenter -- Executive Vice President and Chief Financial Officer

Yeah quarter-over-quarter, actual.

Brian Martin -- FIG Partners -- Analyst

Actual, OK, there is no --

Harold Carpenter -- Executive Vice President and Chief Financial Officer

No, it all depends on -- it all depends on where that incentive accrual shakes out.

Brian Martin -- FIG Partners -- Analyst

Okay. Got you. Okay. Those off of the actual number, not core is all I was trying to get at. So that's helpful. Okay. And then just the margin Harold, I mean, I guess when you kind of look at your long-term guide, as far as where that band shakes out, if you see the accretion number decline, the $20 million or so that you're anticipating next year, I mean, it seems like that margin number is going to fall outside of that range, I guess, am I thinking about that wrong or I guess is that how -- how it probably shakes out?

Harold Carpenter -- Executive Vice President and Chief Financial Officer

Yeah, I think we're going to be at the low end of that range for sure. I don't know if I'm ready to say we need to adjust our target range just yet though.

Brian Martin -- FIG Partners -- Analyst

Okay. And just -- the puts and the takes on the core margin change, I guess, Harold then you look at fourth quarter, if you hope to hold there, see it go a little bit lower, I mean what are the puts and takes that move it up or down in the fourth quarter, just more near-term?

Harold Carpenter -- Executive Vice President and Chief Financial Officer

Well, I think as we get more floating rate assets on our books, that would be helpful to us.

Brian Martin -- FIG Partners -- Analyst

Yeah.

Harold Carpenter -- Executive Vice President and Chief Financial Officer

And I think as deposit pricing, if we can slow the beta on deposit pricing, that all be help.

Brian Martin -- FIG Partners -- Analyst

Okay. All right. And then just last one for me, Harold, which is the tax rate, I guess, kind of this 21% level, Is that a fair way to think about, now that you had a couple of quarters at that level, is kind of the way to think about it the effective rate going forward?

Harold Carpenter -- Executive Vice President and Chief Financial Officer

We think that our long-term rate is going to be 20% to 22%.

Brian Martin -- FIG Partners -- Analyst

20%, 22%. Okay, all right. That's all I had guys. Thanks for taking the questions and nice quarter.

Michael Terry Turner -- President and Chief Executive Officer

Thanks, Brian.

Operator

Thank you. And our next question comes from Michael Rose with Raymond James. Your line is now open.

Michael Rose -- Raymond James -- Analyst

Hey guys, thanks for taking my question. Not to beat a dead horse in the margin, but as we think about the incentive comp moving forward, if you guys are below that margin range, how does that translate into the incentives that you accrue for next year, particularly if you don't hit the efficiency target? Thanks.

Michael Terry Turner -- President and Chief Executive Officer

Yes, Michael, let me just remind you, our incentive target is all for one and one for all, in other words, we all win and lose together on that. It's one, we either hit or miss or play out of the comp percentage for everybody. The determinants to that, all we had to clear and asset quality threshold, which is generally a function of credit size in classified assets. If we don't clear that, nobody gets any incentive and none of the crew. If we do clear that, then the rest is a function of how well we grow our earnings and how well we grow our revenues. The earnings would make up 80% of the way, the revenue growth will make up 20% of the way. And so what happens to all those other things makes no difference whatsoever as long as we grow, hit to clear the asset quality number, hit the revenue growth numbers and hit the earnings growth numbers.

Michael Rose -- Raymond James -- Analyst

Okay. Thank you for that. And I think if I heard earlier, you guys are modeling three rate hikes for next year. Can you just talk about what you would expect in terms of sensitivity and may be what happens if we don't get three? Thanks.

Michael Terry Turner -- President and Chief Executive Officer

Yes, I think the rate hikes are becoming less impactful. I think if you were to do our sensitivity analysis around what the regulators require, we'd be still asset-sensitive, but I think the way the real world works as these rate increases go, we're going to need depositors to fund that loan growth. So I'm not really sure if the rate increases will impact our margins that much.

Michael Rose -- Raymond James -- Analyst

Okay. May be just one final one for me. I think a lot of talk about BHG, but I just want to make sure I heard you correctly. Did you say that 12% to 15% for next year is a good target on top of the 25% or so this year?

Harold Carpenter -- Executive Vice President and Chief Financial Officer

Yes. That's what they keep telling us. I have not been able to visit with them about this third and fourth quarter uptick to trying to figure out how we gauge 2019. I'd be hesitant to kind of layer in a large kind of increase for 2019 off of this big kind of late second half 2018 incurs.

Operator

Thank you. And our next question comes from Catherine Mealor with KBW. Your line is now open.

Catherine Mealor -- Keefe, Bruyette, & Woods, Inc. -- Analyst

I just have a follow up on the incentive comp, did you give, Harold, earlier in the call the dollar amount of incentive comps this quarter?

Harold Carpenter -- Executive Vice President and Chief Financial Officer

I don't think we did, but I think it's on that -- it's on that slide.

Catherine Mealor -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Got it. Okay. I'll go back and check. Okay. So -- and it's also that my next question is on buyback. So, you've -- on managing capital, with the pay downs this quarter, we are now below 300%, which is great and I think, earlier than I expected. Your stock has pulled back a lot. You're still growing a lot, but at this valuation, would you consider a buyback or is growth still a better place to put your capital? Thanks.

Michael Terry Turner -- President and Chief Executive Officer

Catherine, that's a great question. And I guess the direct answer is, I'm not sure. So, let me kind of give you the color commentary on that. The -- over the years, we've been asked a lot of times about, what about buyback, what about buyback, it always seemed like an absurd idea to me, we've been such a high growth company, we've sort of delivered capital just in time, and it just -- it was never anything that I would even entertain looking at our model or any of those kinds of things.

I would say at this point and at this price, I'm studying and just began to look at and think about the strategies it would center around other capital management specifically stock buybacks and so forth. It's probably the first time in 18 years that we had ever had considered an alternative. I don't want to overplay that. I'm not saying we're going to do a stock buyback, but I'm saying that we are studying and thinking on running models and so forth. So yes, it would be a consideration.

Catherine Mealor -- Keefe, Bruyette, & Woods, Inc. -- Analyst

And you don't have an authorization out there right now, correct.

Michael Terry Turner -- President and Chief Executive Officer

We do not.

Operator

Thank you. And our next question comes from Brian Zabora with Hovde Group. Your line is now open.

Brian Zabora -- Hovde Group -- Analyst

Yes, good morning. Just a question on that $2.5 million reserve for the hurricane. How much is the loan exposure to the impacted area?

Harold Carpenter -- Executive Vice President and Chief Financial Officer

That's a difficult question, Brian. We probably talked to around call it $250 million to $350 million in credit, you know that we're -- we're not that exposed into the Eastern North Carolina kind of footprint. But the flooding that was the result of the hurricane is what we're more concerned about.

Brian Zabora -- Hovde Group -- Analyst

Understood. There I'd just take a -- I know there's a lot of factors with the provision expense, but if I exclude that, it's your run rate or the level was around $6 million this quarter. Is that anything else was kind of positively impacting the provision expense or anything else we should think about going forward?

Harold Carpenter -- Executive Vice President and Chief Financial Officer

Yeah, I think what really does help us in this environment is the performance of the construction portfolio. I think we're net recovering around construction over the last, call it 3.5 years and in the commercial real estate book too is -- the losses there are negligible.

Operator

Thank you. And I'm not showing any further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone have a wonderful day.

Duration: 65 minutes

Call participants:

Michael Terry Turner -- President and Chief Executive Officer

Harold Carpenter -- Executive Vice President and Chief Financial Officer

Jared Shaw -- Wells Fargo Securities -- Analyst

Stephen Scouten -- Sandler O'Neill -- Analyst

Jennifer Demba -- SunTrust Robinson Humphrey, Inc. -- Analyst

Brocker Vandervliet -- UBS Investment Bank -- Analyst

Tyler Stafford -- Stephens, Inc -- Analyst

Brian Martin -- FIG Partners -- Analyst

Michael Rose -- Raymond James -- Analyst

Catherine Mealor -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Brian Zabora -- Hovde Group -- Analyst

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