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Pinnacle Financial Partners Inc (NASDAQ:PNFP)
Q3 2019 Earnings Call
Oct 16, 2019, 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 2019 Earnings Conference Call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer; and Mr. Harold Carpenter, Chief Financial Officer.

Please note Pinnacle's earnings release and this morning's presentation are available on the Investor Relations page of their website at www.pnfp.com. Today's call is being recorded and will be available for replay on Pinnacle's website for the next 90 days. [Operator Instructions]

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

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

M. Terry Turner -- President, Chief Executive Officer and Director

Thanks, Joelle. Good morning. As we always do, I'll begin with this dashboard. As a reminder, it's focused on revenue growth, earnings growth and asset quality because we believe that they're the three most highly correlated metrics to long-term shareholder return. Consequently, that's what we focus on quarter in and quarter out.

As you can see, Q3 was an extraordinary quarter for our firm with 15.6% year-over-year growth in revenue, 19% year-over-year growth in EPS, and outstanding asset quality metrics. Due to all the noise and adjustments primarily in previous period, in many cases, the non-GAAP measures better illustrate the relative performance of our firm.

As a reminder, the reason we begin each quarterly earnings call with that as it goes back to the 1Q '14 is because, as you can see, any impact from M&A, high deposit betas, outsized CRE payoffs or any number of other hot buttons that have come and gone over the last five years, our balance sheet growth and, more importantly, our growth in revenue and EPS has been remarkably rapid and reliable.

And Q3 '19 is a continuation of the same. When you look at the slope on any of those growth metrics there, we've got a 34% five-year CAGR for revenues, 22% five-year CAGR for EPS, a 16% five-year CAGR for tangible book value, a 34% five-year CAGR for loans, a 36% five-year CAGR for deposits, and ROTCE now north of 18%, and pristine asset quality metrics quarter in and quarter out.

One of Peter Drucker's more famous quotes that I've used a number of times on these calls is the Culture Eats Strategy for Lunch. The folks at Gallup and the Great Place to Work Institute subsequently developed the empirical data that proves exactly that, specifically the companies that have higher levels of employee engagement produce better sales results, lower employee turnover, which frankly is or should be a critical success criterion for almost everybody, better productivity and better profitability. So, in my opinion, our obsession with culture is the explanation for the reliable slope on all those charts we just looked at on the previous slide.

On this slide, you see a list of the workplace recognitions that we've received just in the last 12 months. And the ones in green, the green shaded areas there are the ones that we received during the third quarter. We had two major sides. Number one, we moved into Memphis in 2015 and quickly were recognized as the best place to work among small or mid-sized companies in that market. Now, we're recognized as literally the best place to work among the largest employers in Memphis. And number two, last year, immediately following our system conversion associated with BNC integration, we were still ranked as the 19th best bank in America to work for and the only bank in the top 50 anywhere near our size. This year, we climbed another three spots up to number 16.

So why is this important? It appears to me that we're headed into a sloppy operating environment. There's an old saying that you can't tell who's swimming until the time goes out. Having such highly engaged workforce not only produces better outcomes during the good times, it's even more critical to performance in the difficult times.

I know by now everyone is familiar with the business case that we made for the BNC acquisition. The plan was to continue the high-growth CRE platforms BNC had and bolt on to that the C&I platform, which is the principal strength of our firm. The critical path to make that happen was to lever our ongoing recruitment competence in order to attract and retain the best C&I and private bankers in the market.

Specifically, when we announced the merger, we said we would hire 65 C&I and private bankers over a five-year period of time. As you can see, Rick Callicutt and his team surpassed the hiring target for C&I and private bankers in less than half that time. The environment for looking at great bankers in the Carolinas and Virginia has only gotten better since we lost our transaction there. And so, we expect to see continue to hire at a rapid pace there.

Why is this making a difference? Number one, it's an indication that we're diligent about hitting our targets. But more importantly, number two, given all the turmoil in the industry, and particularly in the southeastern markets that we target, there's an unprecedented opportunity to acquire talent from larger, more vulnerable banks, and we're arguably best-positioned to seize it. And number three, it should allay fears that our rapid hiring will destroy our efficiency. At the time we announced this deal, our efficiency ratio as adjusted was 49.65%. And today, we're at 47.58%, a meaningful improvement during the period when we have been doing the rapid hiring.

With that backdrop, I'm going to turn it over to Harold to review the quarter in greater detail.

Harold R. Carpenter -- Chief Financial Officer

Thanks, Terry. Good morning, everybody. We've updated our revenue per share slide for the third quarter results. We believe one of the best measurements whether we are winning or losing is shown on the slide. As you can see, we continue to experience double-digit revenue per share growth since the second quarter of last year. Secondly, the red dotted line represents the peer group's year-over-year growth. As shown on the slide, we outpaced our peers on revenue per share growth by a wide margin. Keeping in mind this is during the time of significant internal focus around the integration of the bank in North Carolina, and more recently managing and strategizing around inverted yield curves.

With that said, our relationship managers have remained focused on gathering plans and generating incremental revenues for our firms. Obviously, BHG's outsized performance has had a meaningful influence on these results. We don't apologize for that at all. It has afforded us opportunities to invest in our franchise and keeping the foot on the accelerator on hire accruing for enhanced incentives to motivate our workforce as well as allowing us to better position our franchise for future growth.

Additionally, BHG has provided for outsized tangible book value accretion, all of which benefits our franchise and its shareholders. There remains a lot of positive energy in our franchise. Right now, we've remained on offence 24/7, it's all about winning. Our associates are engaged focused and excited about our opportunities for the remainder of this year and going into 2020.

Now, comparing the third quarter of 2019 average loans to the third quarter of 2018 average loans, our annualized growth was more than 11%. We continue to believe that our loan growth for 2019 will be low-double digits in comparison to 2018. At this time, we have no reason to believe that our loan growth outlook for 2020 will be any different. We're in the midst of constructing our 2020 plan and our managers believe that low-double digits is still a reasonable target.

We can only make the statement because of the robustness of our hiring platform and the continued success we anticipate over the next several quarters. Impacting our volumes in the third quarter was the acquisition of Advocate Capital. We are excited about the opportunities that Advocate provides us, including access to a vast network of attorneys, where we can offer commercial banking products with the emphasis initially on gathering the products. Advocate have built their franchise on delivering great service and enjoy significant depth in their client relationships. During the third quarter, Advocate added approximately $155 million in loan balances with a weighted average yield of 8%, plus other fees for the services they provide their client base. I'll speak to rates -- loan rates in a second.

We've shown this chart for several quarter now. We also provide information in the small chart regarding the granularity of our loan book by loan type.The small chart details the average commitment of our current loan book at origination compared to March 2015, the only outlier being construction. Construction has increased to an average commitment of almost $1.3 million, which we believe is very reasonable for that part of our portfolio. We offer this information so that you can better appreciate that we're not relying on extra-large ticket sizes to hit our growth goals. The chart on the right details the impact of discount accretion on net interest income.

As you can see by the gold line, discount accretion continues to be less impactful to our results at 5.7% of our net interest income in the third quarter and we believe will continue to be less impactful in the future. We all knew that headwinds to our GAAP revenue growth for 2019 was an impact of less and less discount accretion. And the primary way we're going to overcome it was through balance sheet growth.

Anyway, the blue bars on the chart on the right are obviously where our attention is. And growing those blue bars is key to our ability to deliver increased value to our shareholders. That said, hopefully in the not-too-distant future, we can stop showing this chart once purchase accounting is even more so in the rearview mirror.

Next, here's another slide we've been showing for several quarters. It's an update on our loan portfolio by rate index. Our loan index averages approximately 50% to 55% LIBOR and Prime with substantially all of the LIBOR credit being tied to 30-day LIBOR and about 40% fixed rate with commercial real estate being the primary contributor. The quarter-over-quarter weighted average coupon for LIBOR and Prime-based credit for the loan book decreased by 24 basis points for LIBOR and 43 basis points for Prime, which is somewhat a victory given we experience 50 basis points in rate cuts.

So, the spreads in these categories actually one compared to quarter-end to quarter-end after considering a rate decrease. The increased significance of the spread on fixed rate credit as a proxy for fixed rate spread performance in the key [Indecipherable] we traditionally use the five-year treasury as the benchmark. The five-year treasury dropped 21 basis points during the quarter on an average -- while our weighted average fixed rate loan rate dropped only 6 basis points. Keeping the coupon on fixed rate loans near these levels will be a nice win for us in anticipated general rate environment.

Now to deposits, perhaps the most anticipated slide in the deck today. Average deposit balances were up $1.7 billion year-over-year. Our average deposit costs remain the same in the third quarter of 2019 from the second quarter and currently stand at 1.25%.

Let's go back to wholesale bank assets. We don't usually discuss the bond book liquidity in our quarterly conference calls, but we're today primarily because it's relevant to margin performance in the third quarter and going forward. These two areas probably have the biggest downside impact on our NIM performance in the quarter.

Bond yield decreased by 20 basis points linked quarter. This is by no means unexpected. We don't have a period added yet, but we believe period yields will see decreases this quarter as well. About 50% decline was due to reinvested cash flows while the other 50% was valuation of the book. So, when rates declined, the value of the book increased reducing the yield. We anticipate additional yield contraction in 4Q. But as the middle chart indicates, we've added more fixed rate assets to bond book, which will help stabilize our yield performance going into next year.

As to liquidity, we maintained more this quarter than any quarter in recent memory. Most of this was timing that we just completed a $300 million sub-debt offering in the second quarter of September, which added to our cash balances, and we acquired a large deposit from a longtime client of a similar amount.

Regarding the offering, $180 million was injected into the bank while $90 million is earmarked for sub-debt reductions at the holding company in January. Most of the client deposit will find its way to our wealth management unit in the fourth quarter, while the remainder will be with us until early next year when that depositor pays their taxes. Liquidity will likely be back in the smaller [Phonetic] range in the fourth quarter.

In any event, both of these matters pressured our third quarter margin performance. There is a point when NIM trumps net interest income and we will pay attention. Currently, we will work through our clients to create as much credit income as we can and grow net interest income. As a wise buy-side investor once said, there's value in vendor customers, especially those that transition to relationship based on service and advice. So, as a result, we remain focused on growing our client base by hiring the best bankers in our markets.

Now, to deposits. Most of our firm's focus for the third quarter was on the table on the left, which looks at end-of-period rates. Our relationship managers, we believe, did a bang-up job on managing our deposit cost in this rate environment. In negotiated rate bucket, we've achieved a 17-basis point decline. At this point in the rate cycle, our target would be a 50-basis point beta or a 50% beta or a 25 basis point reduction, so we're very much pleased on where we are, given the most recent rate decreases were late in the quarter. We do think we are getting close to the 25 basis point reduction here in mid-October in that particular rate category.

Our relationship managers were very much in tune with the rate environment and are prepared to have more discussions with our client base should rates decrease further. Here's our challenge. We have to reduce deposit rates while at the same increasing our deposit book to fund loan growth and reduce our dependency on the more expensive wholesale funding. Our ability to count this was primarily with our new hires and continue to gather deposits from their client base.

More on deposit rates. We don't normally provide monthly information during our quarter conference calls, but I wanted to emphasize the positive work our relationship managers were accomplishing with respect to lowering rates on our interest-bearing transaction accounts. Several may believe that this is merely pushing a button in our deposit systems. Granted we have those accounts, those are the rates you'd account on the previous slide, the 65% of our interest-bearing transaction accounts are negotiated, which means that the only person that can authorize or change that rate is the relationship manager.

It is part of our brand [Phonetic]. All banks have rate sheet accounts and all banks have negotiated rate accounts. We believe our approach is much different and much more intentional. It's really at the core of relationship banking, the bank's treasury, namely me and a fewer number-crunchers who would love to call up deposit ops and tell them to lower rates, and the deed would be done.

At Pinnacle, these bean counter types have to be able to convince their relationship manager, or better said, their supervisors, to call their client to lower their rate and it's not only a good idea but a fair idea. So far so good. Can't tell you where we think we'll be at the end of October, but we were optimistic that we will experience continued progress on reducing rates on our interest-bearing transaction accounts.

Our goal is a 50% beta for our interest-bearing deposit book. So we've got a ways to go to achieve our targets, but we're off to a great start. It will take us a while on CDs. Our CD book is split about 60% customer and 40% wholesale. The wholesale CDs will roll down fairly quickly, giving us an average duration of slightly more than six months, while the customer book will take a little longer as this average duration is approximately 10 months.

When rates were rising, we took our fair share of criticism regarding increasing our deposit rates. As we enter the front part of what could be an extended downrate cycle, we like our odds. We will be proactive with our clients and not have to hang a curtain to surprise them. We sincerely appreciate our client base and we will leverage the depth of our relationships to accomplish our objectives.

With the inverted yield curve in place now for several months, speculation of a credit cycle change should a recession occur has been on investors' minds for quite some time. We believe we've got the best relationship bankers in the business. We also believe we have the best credit officers. This is not their first rodeo, they can sense when storm clouds are moving in the fore. Right now, as far as credit risk is concerned, based on our credit metrics and what Harvey White and his team tell me, remain pretty darn good.

We've shown these charts before, the chart provides us even more comfort that we're not booking the very large commercial real estate projects. Credit remains at the forefront of our mind, so I hope we never appear complacent when we talk about credit.

For the third quarter, we experienced relatively small increase in our net charge-off ratio, while non-performing assets and classified asset ratios decreased. So we believe that as the credit in the third quarter were steady as she goes and agree with other bankers that were not seeing any systemic issues that will cause us to change our perspectives about credit in 2019 or into 2020.

Now, concerning CECL, how much will our allowance increase? We're in the final stages of validating the various models we will use to determine the allowance account each quarter. Preliminarily, we believe that the allowance account could be in the range of 70 basis points to 80 basis points, up from the 48 current. This amount includes a meaningful amount of purchase credit impaired reserves, which will transfer into loan accounts -- transfer from loan accounts into allowance account without an impact to capital. At September 30th, that amount was about -- was slightly over $6 million, which approximates to 3 basis points to the loan portfolio.

Now turning to fees. Fees totaled more than $82.6 million, up more than 60% over the third quarter of 2018. As Terry mentioned, BHG had another phenomenal quarter. Their contribution was up $18 million or greater than 126% year-over-year. More on BHG in a second.

Our fee businesses are having a strong 2019 with residential mortgage leading the way up approximately 80% annualized this year over last year. They've had a great first nine months of 2019, correlating not only with drops in long-term rates but also with increases in the number of mortgage originators. Also again, great markets are helpful with this line of business, so we anticipate mortgage to finish this year strong. Additionally, deposit fees and wealth management are having mid-double-digit growth figures, which we consider to be excellent.

Concerning BHG, during the third quarter, we participated in BHG's Analyst Day in New York with several members of their executive team on hand to provide more detailed perspective on BHG's business model. We feel that a lot of great information was provided during the session, so we won't go through or repeat here. But if you like to hear what was said, I'll direct you to our website www.pnfp.com, where a recording of that will be available for replay for, call it, another two months.

BHG is having a phenomenal year period. Originations are at an all-time high, and the business model continues to outperform. That said, BHG will likely being to keep more of their credit on their balance sheet, thus realizing more interest income rather than realize significantly on gain on sale. They believe the funding which will allow them to warehouse this loan should be in place within the next few weeks. So we expect the revenues from BHG in the fourth quarter will be less than what has been reported in the second and third quarters, with being more consistent with the amounts reported in the first quarter.

The green line on the chart on the right details the recourse accrual they record on their books for substitution prepayment and other losses associated with hiring and substitution cost for banks that have purchased credit from Bankers Healthcare Group. They've been keeping the resource accrual at about 4.5% of total credits outstanding over the last few years. The cost or the actual loss rates in relation to total volume of credit outstanding on the books of all the banks doing business with Bankers Healthcare Group. The column include not only the credit loss, primarily substitution losses, but also the prepayment loss associated with reimbursement of the early pay-offs of these credits.

We've had a lot of conversations with BHG about their credit profiles. Their credit models are sophisticated and subject to continued analysis by our analytics group. We believe that our business model is top-shelf and identifying potential clients who have the credit profile will be a good borrower for BHG, where the BHG keeps the loan on its balance sheet or shelf loan into its network of community banks. Approximately 67% of Bankers Healthcare Group revenue base has historically been made up of gain on sale revenues. However, BHG also generated interest income from loans that were either BHG's balance sheet permanently or being held on the balance sheet prior to being released at auction platform.

Since the second half of 2018, BHG has been building their balance sheet with own balance sheet loans with approximately $307 million of loans currently held on balance sheet compared to $146 million as of the end of September 2018. They've been able to generate the operating cash required to be able to fund this loan growth.

The green bars on the left chart represent originations and ramped up with more loans being funded, which is the result of enhanced analytics and more sophisticated marketing platforms. The blue bars are the loans on which gain on sale has been reported as these loans were placed with bankers with gain on sale revenues being generated. The blue bars have ramped up with more placements either through option or one-off sales.

The gold bars represent the loans held by BHG on its balance sheet, which BHG will collect interest income. As we've mentioned on the previous slide, BHG is anticipated to increasing their balance sheet loans. We're all in agreement that by balance sheeting loans, this will provide a more reliable income stream for BHG in the future through a more diverse business model. It will take many quarters for BHG to max the gain on sale revenue with interest income, but that said, we all believe it's a good idea.

As to credit risk, given BHG has been honoring the substitution clause for sub-loans, any incremental credit risk associated with keeping more loans on its balance sheet should be minimal. Even with all this change, we still believe that BHG should see 10% growth in earnings in 2020 from what they anticipate realizing in 2019.

So, now briefly to expenses, most significant run rate matters to discuss over on incentives. As we mentioned in the press release, we increased our incentive accrual in the third quarter but don't expect our fourth quarter accruals to be nearly as large. We're also pleased to report that retention rates continue to increase and the [Phonetic] two important things for us. Our clients can count on consistent service and employee turnover continues to shrink and our workforce engagement initiatives are taking hold in our newer markets as those associates are banging into our culture.

For the last two years, our expense to average asset ratio, excluding merger expenses, has been in the 1.9% range. We don't see that changing materially as we head into 2020.

Lastly, yesterday, our Board of Directors approved an additional $100 million share repurchase authorization for open market purchases of our common stock. This authorization extends through December 2020 and begins upon the exhaustion of our current authorization, which has approximately $30 million of remaining funds available for common stock repurchases. We intend to use every bit of this authorization, but we will do it rationally over the next 15 months.

With that, I will turn it back over to Terry.

M. Terry Turner -- President, Chief Executive Officer and Director

Thanks, Harold. As Harold discussed on last quarter's call, we modified our longer-term operating ranges. Our previous metrics put in place in 2012 and we believe the granularity that were provided by those previous measurements were important at that time and has served its purpose. But now, we often go with a higher level of guidance with operating ranges for ROAA, ROTCE and tangible equity as our current [Indecipherable].

For ROAA, we're targeting a 145% to 165% range. As you can see from the third quarter, we're operating high in that range at 1.62%. We've also introduced ROTCE and tangible equity ratio, these two new measures that we will continue to highlight for you going forward. And you can see, we're in the range on ROTCE and it's at higher levels with the tangible equity ratio. Our goal is to maintain these ratios in the top quartile of our peer group over time.

And finally, we've shown this chart before, we continue to believe that we're in top quartile grower of EPS and tangible book value within our peer group. We're laser-focused on rapid, reliable growth in EPS and tangible book value. Our tangible book value is up by more than $5 a share in the last year, or slightly over 20%. And as you know, our incentive systems are designed to take every person and focus them tightly on EPS growth. As I've mentioned a number of times before, I believe the banks that can rapidly and reliably grow EPS and tangible book value over time will produce best shareholder returns. As you can see on this chart, growth here has been both rapid and reliable.

The slide that you're looking at here is the same slide that I used to close the quarterly earnings call in January and use it to try to set expectations for 2019. In the third quarter, I think we hit the bull's eye. To the first bullet point, we had a 14.5% linked quarter annualized rate of growth for core deposits and took our cost of deposits down 11 basis points during the quarter.

To the second bullet point, we had an 11.3% linked quarter annualized rate of growth for loans. To the third bullet point, we had year-over-year growth rate for adjusted EPS of 19.8%. To the fourth bullet point, we've exceeded our aggressive hiring plan of C&I and private bankers in conjunction with BNC merger.

We've also had several success across the entire footprint, and considering all types of revenue producers, including not only the relationship managers but other revenue producers like brokers, mortgage originators, insurance agents and so forth. We're hired 67 year-to-date, while not damaging the EPS growth rate or the efficiency ratio. That speaks to the fifth bullet point as well. And to the last bullet point, we continue to grow tangible book value up 20.6% year-over-year.

So, Joelle, we'll stop there and take questions.

Questions and Answers:

Operator

Thank you, Mr Turner. The floor is now open for your questions. [Operator Instructions] Your first question comes from Jared Shaw with Wells Fargo Securities. Your line is now open.

Jared Shaw -- Wells Fargo Securities -- Analyst

Hi. Good morning, guys.

M. Terry Turner -- President, Chief Executive Officer and Director

Hi, Jared.

Harold R. Carpenter -- Chief Financial Officer

Hi, Jared.

Jared Shaw -- Wells Fargo Securities -- Analyst

So, maybe if I could start with on the deposit side, another quarter where you're able to see deposit growth outpace loan growth. Do you think that we've turned the corner now? And if we look at whether it's year-over-year average deposit growth or quarterly deposit growth outpacing loan growth, should we expect to start to see that loan-to-deposit ratio come down and do you feel like you've gotten to a permanent traction there or is there still going to be some more quarterly fluctuation?

Harold R. Carpenter -- Chief Financial Officer

Yeah. I don't think we'll see the loan-to-deposit ratio go down. We should expect to see deposit growth through natural swell in the fourth quarter. I know I've got something like -- we're talking about on the call, I've got that one large depositor whose balances will come down some in the fourth quarter, he's transferring much of that deposit into our wealth management unit. So, we'll have those kind of fluctuations.

But as far as -- will we see deposits outstrip loans in the fourth quarter? I can't really speak to that. I think we've got a lot of energy around deposit growth. I think our folks are focused on it. So, we anticipate fourth quarter having a swell though.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay. And then, on BHG, that's great color, and obviously was good color on the Investor Day as well. Can you remind us as we look into 2020 with the -- with portfolio more on the balance sheet, I guess, a couple of questions. One, where do you think that reserve, and I know they don't necessarily call it the reserve, but their recourse accrual, where does that ultimately go as they build out that balance sheet as they say in that 4.5% range or should we expect to see that grow? And then, where does the revenue split between gain on sale and net interest income sort of flow by the end of 2021 so -- also those funding lines are in place?

M. Terry Turner -- President, Chief Executive Officer and Director

Yeah. I think, for gain on sale, the match interest income is going to take at least all of 2020 and probably into 2021 before we get like a 50/50 split that I think I was talking about on the Analyst Day. As to the recourse accrual -- recourse obligation at 4.5%, some of that amount is tied up in prepayment losses. So, I doubt -- the own balance sheet numbers you don't necessarily need to create a reserve for prepayments because those revenues haven't been recognized yet. So, they're 4.5%. I don't know for the own balance sheet loans whether or not they will need to be that elevated. Does that make sense?

Jared Shaw -- Wells Fargo Securities -- Analyst

Yeah. Yeah, OK. That sounds good color. Thanks. And then, just finally on the -- for me on the incentive comp, so are you close to accruing at sort of 100% based on goals or could we continue to see that drift up as we go through the end of the year?

Harold R. Carpenter -- Chief Financial Officer

Yeah. We're at 115% of our target at the end of September. We think we've got a good shot at maintaining that number during the fourth quarter. As far as what the fourth quarter accrual looks like, it'll look a lot like what we accrued in the second quarter going into the fourth quarter, we believe, right now.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay, great. Thanks. Thanks for the questions.

Operator

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

Jennifer Demba -- SunTrust -- Analyst

Thank you. Good morning.

M. Terry Turner -- President, Chief Executive Officer and Director

Hi, Jennifer.

Jennifer Demba -- SunTrust -- Analyst

Hi. A couple of questions. Harold, you had a pretty steep increase in other fee income from second quarter, third quarter. Anything unusual in there? And is that a good run rate going forward or is it more like second quarter?

Harold R. Carpenter -- Chief Financial Officer

I think it'll be a decent run rate going forward. We have some swap revenues that we've booked this quarter over the second quarter. So, I'm not anticipating a big drop going into the fourth quarter.

Jennifer Demba -- SunTrust -- Analyst

Okay. And Terry, could you talk about the rationale for acquiring Advocate Capital and what you like about the business model and your interest in other types of specialty lending company? Thanks.

M. Terry Turner -- President, Chief Executive Officer and Director

Yeah. So, Advocate Capital, that has a targeted financier [Phonetic] for client attorneys. It is a great business and great business model. You could see they originate high quality loans at higher yields, not dissimilar to the way BHG does it, it's a value-added approach. In their case, the value-add is that they provide accounting software that enables finest attorneys to recapture the interest expense in the settlement proceeds. And ,so that's the thing that requires a specialized accounting mechanism to get done. That's the value that they add. And so, as a result of doing that, they're able to capture the financing, specifically for cases, however, they have blanket liens on all the receivables of the firm. So, again, it's a value-added approach to produce a higher yield from a high quality borrower.

We -- as you know, we'd like those kinds of businesses. The deal is that it's a business we understand. We know and underwrite those loans, not that we're the experts, they are. But again, it's just a business that we understand, and our approach is always to make sure you get some value-add, not compete on price. And so that's what this business does.

I think, part of the honey for us on this transaction is, they've only been providing -- lending products, but we believe that we can perhaps enhance some of their lending products. But more important that we sell the full suite of treasury services, and we've got issues under way right now to initiate gathering deposits through that client set. So, on a stand-alone basis, we feel like it's asset [Phonetic] transaction, and then when you add revenue synergies that we were able to get out of it, it's a very excellent transaction.

Jennifer Demba -- SunTrust -- Analyst

Will the leadership team stay in place there, Terry, and are they locked up for a certain period of time?

M. Terry Turner -- President, Chief Executive Officer and Director

Yes, the leadership team does stay in place and they are locked up, Harold, I believe, for three years.

Harold R. Carpenter -- Chief Financial Officer

Three years, Jennifer.

Jennifer Demba -- SunTrust -- Analyst

Thank you very much.

Operator

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

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

Hey. Good morning, guys.

M. Terry Turner -- President, Chief Executive Officer and Director

Hey, Steve.

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

Nice quarter. Nice quarter as usual, it seems. I'm curious what you're seeing in terms of growth trends in your markets. I know, to hit your targets, you don't really depend on the underlying growth of the markets; you depend more on your hiring activities. But I'm curious kind of how that dynamic will play out in terms of if you're expecting to see or are seeing still overall market growth or more of your growth is truly dependent today on the new hires?

M. Terry Turner -- President, Chief Executive Officer and Director

Yeah. Steve, let me make sure I'm clear. I don't have detailed information where I can say, OK, here's the percentage, here's how it breaks down and so forth. But I don't mind to give you what my gut feel is for how that works.

I think, over time, always the biggest portion of our loan-to-deposit generation is a function of market share takeaway. And so that is tied to higher-grade bankers having to move their books of business. As you know that our belief is that it takes probably four years' time on average for them to consolidate that book of business. And so, again, the people that have been hired, say, over the last four years are still in the process of consolidating their books, taking market share, and that would be the biggest part of the growth both of loan and deposit by far.

I think, if you're looking for what is just the market condition, I think our relationship managers would say that just the volume growth is probably slower today than it would have been several quarters ago. I don't think it's dramatically slower, but I do think it would be modestly slower than three quarters ago, just in terms of pure economic loan growth -- pure economic demand.

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

Okay, perfect. Very helpful. Thanks. And then, maybe Harold, if we're looking at the core NIM, it looks like that was helped slightly obviously by Advocate Capital but may have been down maybe in the 10 basis point sort of range ex that. And with the detail you gave on the slide deck around new loan yields, it looks like those were pressured down maybe 35 basis points or so quarter-over-quarter on new yields. So, how much downside, I guess, do you think we have from here in that core NIM based on what you're seeing on new loan yields and continued expectations for Fed cuts?

Harold R. Carpenter -- Chief Financial Officer

Yeah. Assuming we've got one Fed cut built in our model for December, we believe that our margin -- the GAAP margin is pretty close to being stabilized. There is probably some more dilution to go here in the fourth quarter, but I think bond yields will stabilize. If we get two more rate cuts next year, then we'll probably have some lags, but we think that we'll be able to drag these deposits down to help offset that. So, assume one rate cut in December, we've probably got anywhere from, call it, 10 to 15 basis points of NIM contraction at a GAAP level. And with that, our purchase accounting will obviously be less impacted.

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

Okay. And are you -- I know you've got that $38 million estimate for 2019 accretion. Are you discussing at all yet what you expect to see in 2020 from an accretion standpoint?

Harold R. Carpenter -- Chief Financial Officer

Yeah, we haven't gotten that yet. It'll probably be coming out pretty quickly. We went from $64 million down to $39 million, so there will be another probably meaningful job, you can kind of guess where that might hit.

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

Okay. And one last clarifying question, if I could. On the expense run rate, I mean, you were more like a $133 million or so this quarter. If we took out the 7.5% of where you think the accrual rate will revert back to 2Q levels. Is it fair to assume you think expenses will be in that kind of mid to high $120 million level in 4Q?

Harold R. Carpenter -- Chief Financial Officer

Yeah, I think that's a fair number.

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

Great. Well, thanks for the time, guys. Appreciate it.

Operator

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

Brett D. Rabatin -- Piper Jaffray -- Analyst

Hey, guys. Good morning.

M. Terry Turner -- President, Chief Executive Officer and Director

Hey, Brett.

Harold R. Carpenter -- Chief Financial Officer

Hey, Brett.

Brett D. Rabatin -- Piper Jaffray -- Analyst

I wanted to go back to deposits and just talk about the piece of lowering the deposit costs and -- I know the CD book part of it's wholesale. Can you just talk about with the pace in the fourth quarter, be 5 or 6 basis points on interest-bearing cost basis, and then possibly higher as we go into the first quarter. Can you just give us an idea of the magnitude as you roll the CD book and grow the core deposits as well kind of what you're expecting on that?

Harold R. Carpenter -- Chief Financial Officer

Yeah. I think we should realize some -- a meaningful decrease in average deposit rates going into the fourth quarter -- our fourth quarter, we were at $125 million in the third quarter in average deposit rates. We'll probably will be -- maybe as much as, call it, 10 to 12 basis points for that -- for the fourth quarter. And then that will extend into the first quarter of next year. So, we're thinking we've got anywhere from 15 to 25 basis points of deposit cost reduction here over the next, call it, six months.

Brett D. Rabatin -- Piper Jaffray -- Analyst

Okay. That's good color. And then, the other question I had was just, Terry, you talked early in the call about the sloppy environment. I'm just curious if there are things that you're straying away from or you think is brisk in the environment. And as we think about 2020 in particular, do we see balanced growth in CRE and C&I or can you give us maybe a color on what -- some color on what you're more emphasizing given the current environment?

M. Terry Turner -- President, Chief Executive Officer and Director

Yeah. I think, I would say that if you just -- if you were at the Monday morning meetings where we meet with all of our sales force, the messages that you would hear would primarily be around deposit acquisition and lowering the cost of funds on the existing book. So, that's where most of the energy and emphasis is.

When you think about the credit risk and so forth in there, I think we communicated in the past broad areas of concerns, which would be hospitality in particular and, to a lesser extent, multi-family and urban core. But, again, we don't have a hard stop on anything with the exception of hospitality. And that, I would say, is primarily just because we're at, we've got all that we want. It's not because we think the credits were necessarily difficult but just from a portfolio management standpoint, we are at or above our concentration guidelines. So, that's the only thing that's got a hard stop on it.

Again, I think, if you -- just to maybe help you with mid-sized for us, just go back to the way we grow our loan book is to hire people and so people are moving their books, and that's where the loan growth comes from. And so, it's -- there certainly are times when we're saying, OK, we're not taking any more of this asset class or that asset class, but it's really more driven by the books that the various relationship managers that we hire control.

Brett D. Rabatin -- Piper Jaffray -- Analyst

Okay. Appreciate all the color.

M. Terry Turner -- President, Chief Executive Officer and Director

All right. Thanks, Brett.

Operator

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

Tyler Stafford -- Stephens -- Analyst

Hey. Good morning, guys.

M. Terry Turner -- President, Chief Executive Officer and Director

Good morning.

Tyler Stafford -- Stephens -- Analyst

Hey, I wanted to circle back on, I think, Jared's earlier question just around the incentive comp. Did you say you're currently accruing at 115% or 150%? 150% or 115%?

Harold R. Carpenter -- Chief Financial Officer

115%.

Tyler Stafford -- Stephens -- Analyst

Okay. So...

Harold R. Carpenter -- Chief Financial Officer

We have a $1 for -- for just for your information, we have a cap at $1.25, so we can't go any higher than that.

Tyler Stafford -- Stephens -- Analyst

Okay. So, I guess, that would put you guys at around, kind of a $41 million expense -- incentive comp expense at the baseline. And then just trying to think about 2020, what that number could look like, is that -- should that kind of grow in the mid-teens kind of range off of a 100% accrual, just given a higher...

Harold R. Carpenter -- Chief Financial Officer

I think so.

Tyler Stafford -- Stephens -- Analyst

Okay.

Harold R. Carpenter -- Chief Financial Officer

I think your math is good. So, that's probably not a bad number.

Tyler Stafford -- Stephens -- Analyst

Okay. Perfect. I appreciate the spot deposit cost at the end of the quarter, $117 million. I'm just wondering, Harold, if you'd be willing to share the spot margin at the end of the quarter at 9.30%?

Harold R. Carpenter -- Chief Financial Officer

Yeah, I wish I could. I don't know -- necessarily know if I've got it. I can probably calculate up -- calculate a spread, but we still believe going into the fourth quarter, we've got some dilution in the margin coming. So, I'll just leave you at that.

Tyler Stafford -- Stephens -- Analyst

Okay. That's fair. Maybe just a minor one within the margin. Just geographically, where are the market index deposits located? My assumption was that it was all in the CDs for some reason, but I'm just curious if you could share where those are, or just across the deposit product types, where those are at?

Harold R. Carpenter -- Chief Financial Officer

Yeah. I think they're all over the place. I think they're in interest bank checking accounts. I think they're in money market accounts. I don't think there's -- they're not -- they're larger depositors by and large. I'm not [Indecipherable] smaller deposits in there but they're primarily bigger to the larger depositors.

Tyler Stafford -- Stephens -- Analyst

Okay. Thanks. And just lastly, just given the transition of BHG over the next several quarters from the gain on sale balance sheet, do you think you can maintain your profitability targets within that range over the near-term as you kind of digest that transition at BHG?

Harold R. Carpenter -- Chief Financial Officer

Say that one more time, Tyler.

Tyler Stafford -- Stephens -- Analyst

So, I'm just wondering with the transition of BHG and the revenue outlook you gave there with the step down coming in the fourth quarter, and then the year-over-year 10% growth 2020 versus 2019, I'm just wondering if you can still maintain the ROA and ROE within the range that you've given just over the near-term as you digest that transition.

Harold R. Carpenter -- Chief Financial Officer

Yeah. I'm not going to running those calculations for them specifically, but it seems like the profitability metrics will be more difficult given the size of the balance sheet. The ROE number is probably not so much, they'll probably be fairly consistent. But with the ROA numbers, I'm not sure.

Tyler Stafford -- Stephens -- Analyst

Okay. All right. Thanks, Harold.

Operator

Thank you. And your next question comes from Steven Alexopoulos for JPMorgan. Your line is now open.

Anthony Elian -- JPMorgan -- Analyst

Hey, guys. This is Anthony Elian on for Steve.

M. Terry Turner -- President, Chief Executive Officer and Director

Hey, Anthony.

Harold R. Carpenter -- Chief Financial Officer

Hey, Tony.

Anthony Elian -- JPMorgan -- Analyst

Hello. So, just a follow-up for me on CECL. So, appreciate the color you provided for the allowance account on a go forward basis. Have you calculated what your estimate is for the day one impact to your reserve levels?

Harold R. Carpenter -- Chief Financial Officer

Yeah. I think, the day one impact will be that, call it, is into that 70 to 80 basis point threshold. So, we'll probably be somewhere close to where we are at the end of the third quarter as of the end of the fourth quarter borrowing any unforeseen challenges the fourth quarter possess. But it's looking like that day one adjustment will be the delta between the 48 that we're at and, call it, 70 to 80 basis points we'll be in.

Anthony Elian -- JPMorgan -- Analyst

Got it.

Harold R. Carpenter -- Chief Financial Officer

Yeah, after tax.

Anthony Elian -- JPMorgan -- Analyst

After tax, yeah. And next for me on expenses. So, came in a little bit high because of the incentives this quarter. Would you still expect to improve the efficiency ratio for full year '19 versus '18, inclusive of the incentives in the third quarter?

Harold R. Carpenter -- Chief Financial Officer

Yeah, give me a sec. I think you -- there are probably -- what we're looking at now going into 2020 is, we don't plan for an outsize incentive accrual. So, we'll have that savings in the plant we're looking at. We still think we've got some operating leverage to create a lower efficiency ratio, but it won't -- I don't think it will be meaningful. I don't think it will be a head-turner. I'll just put it like that.

Anthony Elian -- JPMorgan -- Analyst

Got it. And finally for me, your expectation for GAAP NIM to decline 10 to 15 basis points for the December rate cut, is that a decline for the fourth quarter specifically or is that the full impact from the December rate cut, so sometime in early 2020?

Harold R. Carpenter -- Chief Financial Officer

That would be for the December rate cut in the fourth quarter. I don't -- we're not planning on absent any rate cuts in 2020 and we've just got done the sensitivity analysis around additional rate cuts in 2020. But going into that once -- we think the fourth quarter will be fairly close to the bottom on our margin -- on our GAAP margin. If we get more rate cuts in 2020, which is I'm not naive, I think there's strong likelihood to that, then we'll have to go through and recap where we think our margins will go with those. We just haven't gone through that sensitivity analysis or we have, I'm just not ready to talk about it too much right now.

Anthony Elian -- JPMorgan -- Analyst

Okay, thank you.

Operator

Thank you. Your next question comes from Stuart Lotz with KBW. Your line is now open.

Stuart Lotz -- KBW -- Analyst

Hey, guys. Good morning. How's it going?

M. Terry Turner -- President, Chief Executive Officer and Director

Hi, Stuart.

Stuart Lotz -- KBW -- Analyst

Most of my questions have been answered already, but I guess just one follow-up on the expenses. I appreciate the color on the incentive comp and kind of where you see that run rate going forward. But just looking at this quarter, occupancy expenses were down about $3.5 million. Anything one-time in there and is that kind of the run rate we can expect going into 4Q?

Harold R. Carpenter -- Chief Financial Officer

Now, we have the write-off in the second quarter of those -- we have some branch assets, some other assets that we charge off in the second quarter, so that was primarily the reason for the reduction.

Stuart Lotz -- KBW -- Analyst

Okay. Got it. Appreciate the color. And then, just one, in terms of capital, now with the increased buyback authorization, you got $30 million left before year-end, do you expect to eat through that before we get to the $100 million in 2020? And in terms of -- do you have a plan in place, is that kind of -- how should we kind of model that utilizing that buyback for 2020?

Harold R. Carpenter -- Chief Financial Officer

Yeah. I think you should probably and not a big perk, just assume that we've got $130 million left and I've got five quarters to spend it, and I fully intend to spend it.

Stuart Lotz -- KBW -- Analyst

So, that $30 million, does that expire at year-end?

Harold R. Carpenter -- Chief Financial Officer

The $30 million expires in the first quarter of next year.

Stuart Lotz -- KBW -- Analyst

Okay.

Harold R. Carpenter -- Chief Financial Officer

Well, the share price will dictate a lot of that.

Stuart Lotz -- KBW -- Analyst

Yeah.

Harold R. Carpenter -- Chief Financial Officer

And a lot of people ask these questions about what those share prices might be for us to do the buyback. And to be honest with you, we'll -- I think the overriding statement here is that we're going to spend the money.

Stuart Lotz -- KBW -- Analyst

Got it. I will take that at least value [Phonetic]. All right. That's it for me. Thanks for the color..

Unidentified Speaker

All right.

Operator

Thank you. And your final question comes from Brian Martin with Janney Montgomery. Your line is now open.

Brian Martin -- Janney Montgomery -- Analyst

Hey, guys.

M. Terry Turner -- President, Chief Executive Officer and Director

Hi, Brian.

Brian Martin -- Janney Montgomery -- Analyst

Hey, Harold. Just a few clarifying points. The comment on BHG with the step-down in 4Q to a more normalized level. If you go back to a first quarter level and you're kind of in the low-90%s, your expectation when you were talking earlier is that we have looked at that full-year number and 10%-plus growth in 2020 is how to think about BHC even with this transition in the model. Is that correct?

M. Terry Turner -- President, Chief Executive Officer and Director

I think so. I think that's right.

Brian Martin -- Janney Montgomery -- Analyst

Okay. I just want to make sure I heard what you said. And then, just as it relates, I think you made comments about the GAAP margin. And given that accretion was a little bit higher this quarter, when you look at fourth quarter and the core margin and your impact, I guess how you think about the core margin which was what, maybe kind of the mid-320s this quarter, how do you see the core margin in the fourth quarter playing out with the rate cuts in your outlook for one more in December?

Harold R. Carpenter -- Chief Financial Officer

Well, if I get -- if I get 10 to 15 basis points in contraction in my GAAP margin, just call it, as we sit here today, that -- the core margin shouldn't contract that much because we're not anticipating as large of a purchase accounting hit to our contribution in the fourth quarter. We were at $11 million here in the third quarter. We were at $8 million in the second quarter. So, we just -- we think the fourth quarter is going to be less than that $8 million.

Brian Martin -- Janney Montgomery -- Analyst

Okay. From an accretion standpoint?

Harold R. Carpenter -- Chief Financial Officer

Right.

Brian Martin -- Janney Montgomery -- Analyst

I got you. Okay. And the impact from each -- when you guys look at it today based on what you've seen with your relationship managers, I mean, your expectation, Harold, from a -- for each 25 basis point rate cut, I guess, what do you see as the impact to the margin as you look forward, I guess, if we look to 2020 and potentially seeing more rate decreases out there?

Harold R. Carpenter -- Chief Financial Officer

Yeah. I think, as we see more rate decreases out there, we will get closer to what we were doing back, call it, two years ago. We'll find our way back to deposit rates that were significantly lower than where they are today.

Brian Martin -- Janney Montgomery -- Analyst

I got you. Okay. And then, just your last comment or your earlier comment about the efficiency ratio. I guess I just want to make sure that was -- you're talking about 2020 versus 2019 as far as kind of maybe holding its own or staying flattish full year to full year. Right? Okay. All right. And then, just a final thing for me was just on M&A. I guess, you guys have talked about this in the past, Terry, you've outlined it. Any changes in kind of what you're seeing on the M&A front today or following the addition of Advocate here, any other non-bank things you're looking at or is it more bank-specific today?

M. Terry Turner -- President, Chief Executive Officer and Director

I would say, so let me just sort of recap was, I think, what I hope we've said before I think as what the record would show, which is we've sort of communicated the markets we want to be in, we've communicated kind of what our M&A criteria are. We have said there are not very many deals that would meet that threshold. And so, as we -- and I think that particularly exacerbated by relatively low share prices. Our currency is not as strong as it has been in other periods of acquisition. We've said we'll go to these expanded markets, which have changed, either by acquisition or de novo basis. And I think we've said on the de novo basis, it probably has more people today than in any time in our history because of just the tremendous volume of people and talent that are in play. And so, that's sort of what we think about bank M&A, wouldn't just give you a heart stop, no never. But again, I just think the level of expansion might be the best route for our company today.

I think, in terms of non-bank deals, to be very honest with you, those are a little more opportunistic, given the case of Advocate Capital that's a company that we now own over a very long period of time. We participated in their credit over an extended period of time. And so, again, when we could find companies that have some value-add in terms of financial services declines, those are the ones that have appeal to us and, again, with an emphasis on their ability to grow at a rate commensurate with us.

Brian Martin -- Janney Montgomery -- Analyst

Okay. That's helpful. I appreciate it, Terry. Thanks.

M. Terry Turner -- President, Chief Executive Officer and Director

All right.

Operator

Thank you. Your next question is a follow-up question from Stuart Lotz of KBW. Your line is now open.

Stuart Lotz -- KBW -- Analyst

I'm actually good. Sorry about that, I guess.

M. Terry Turner -- President, Chief Executive Officer and Director

All right. Thanks, Stuart.

Operator

Thank you. And your next question is a follow-up question from Tyler Stafford with Stephens. Your line is now open.

Tyler Stafford -- Stephens -- Analyst

Hey, sorry about this guys. Thanks for taking the follow up. I just want to make sure I'm understanding the cadence of the margin expectations. Harold, I'm not trying to pin you down, but just, I guess, thinking about it out loud, so the margins should have -- be lower following the September cut. Then you've got the 10 to 15 basis points hit from the December cut that you kind of expected to see, and then there are some accretion headwinds in 2020. I'm just trying to put that to the expectation that the margin should bottom in the fourth quarter. Can you just -- am I understanding that correctly? Can you walk through just the cadence of that?

Harold R. Carpenter -- Chief Financial Officer

Yeah. I think that's right. I think we believe right now, borrowing any additional rate cuts in 2020, we think the margin will kind of flatten out. In the fourth quarter, that's going to be -- we're going to have to get serious on -- more serious on deposit cost reduction. So I think we can do that. And we think our fixed rate loans will likely not see further, call it, reduction in their loan yields. So, right now, that's how -- that's where we're modeled.

Tyler Stafford -- Stephens -- Analyst

Okay. The 10% to 15%, that is from the December cut. Is that right? In terms of what you're assuming internally.

Harold R. Carpenter -- Chief Financial Officer

So, I think. most of the 10% to 15% come from the September cut, and we think we'll be able to cover a lot of the rate cuts from December going into 2020.

Tyler Stafford -- Stephens -- Analyst

Got it. Okay. That clears it up. Thank you so much. I appreciate it.

Harold R. Carpenter -- Chief Financial Officer

All right. Thank you.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

M. Terry Turner -- President, Chief Executive Officer and Director

Harold R. Carpenter -- Chief Financial Officer

Unidentified Speaker

Jared Shaw -- Wells Fargo Securities -- Analyst

Jennifer Demba -- SunTrust -- Analyst

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

Brett D. Rabatin -- Piper Jaffray -- Analyst

Tyler Stafford -- Stephens -- Analyst

Anthony Elian -- JPMorgan -- Analyst

Stuart Lotz -- KBW -- Analyst

Brian Martin -- Janney Montgomery -- Analyst

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