Earnings Call: Q1 2018

Apr 17, 2018

Good morning, everyone, and welcome to the Pinnacle Financial Partners First Quarter 2018 Earnings Conference Call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer and Mr. Harold Carpenter, Chief Financial Officer. Please note Pinnacle's earnings release and this morning's presentation are available on the Investor Relations page of their website at www.pnfp.com. Today's call is being recorded and will be available for replay on Pinnacle's website for the next 90 days. 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 factors 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 ks. 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 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. Thank you, operator. As we do each quarterly earnings call, I'll begin with this dashboard, which is intended to give the investor a quick snapshot of our performance during the quarter, highlighting not only the absolute level of performance during the quarter, but the trends which are so important to a growth company like ours. These measures on this slide are all presented on a GAAP basis. I believe it's been demonstrated that the measure is most tightly correlated with share price performance over time are revenue growth, earnings growth and asset quality. So on this slide, I think we want to focus on revenue growth and asset quality. In the chart on the top left, you can see total revenues continue to set a new high each quarter, up 3.5% on a linked quarter basis. Netting out securities gains and losses, some revenues were flattish compared to 4Q 2017. Unfortunately, there's a lot of noise in our numbers as a result of things like the BNC merger, restructurings in conjunction with the tax law change and so forth. But when Harold reviews the quarter in greater detail, I think you'll see that there's a lot to be excited about in terms of the revenue growth like 9 basis points of expansion in the core margin and exceptional growth in volumes. Regarding volume growth, looking now just below the revenue chart at the loan chart, organic loan growth during the quarter was nearly $700,000,000 which is an annualized growth rate for the quarter of 18%. And then immediately below the loan chart is a row of 3 charts, which indicate in my judgment that asset quality remains pristine. All these measures generally operating within or better than their historical ranges in the case of NPAs and classified assets are better than targeted operating range in the case of net charge offs. Because all the noise I mentioned a minute ago, in some cases, the non GAAP measures may better illustrate the relative performance of the firm. So on this chart, I'd like to focus on EPS, net of merger related expenses at $1.13 in the chart on the top row in the middle. It's up roughly 36% over the same quarter last year. Again, Harold will review this in greater detail in a few minutes, but the thing I want to highlight is that I believe the consensus estimate for our firm in 2018 is for fully diluted EPS to be up roughly 32%. So, to be up 36% year over year in the quarter lends credibility to a 32% consensus estimate for EPS growth this year and makes the PE ratio look like there's plenty of room for expansion. Immediately to the right on the first row, I want to highlight ROTCE almost reaching 19% this quarter. If you review the trend line post recession, you can see that it progressed nicely until the 1st and second quarter of 2017, which is when we did the large capital raise in advance of and in order to make the BNC acquisition. As a reminder, that deal closed at the end of the second quarter, so you can see the very rapid growth in ROTCE since closing that deal. I might also say that a 19% ROTCE should provide room for our tangible book value multiple to expand as well. And then immediately below the ROTCE chart is the tangible book value per share chart, which I think paints a nice picture of our ability to accrete GAAP capital and grow book value on a rapid and reliable basis. Moving on now to the ROA. We first published our targeted operating range for ROAA for the year 2012. We've increased that targeted operating range twice before, most recently a target range of 1.5% to 1.7%, which is where we've operated over the last year or 2. We're now increasing that target to a target range of 1.5% to 1.7%. We've held the targeted ranges for the 4 component parts that lead to that ROA steady. So, we tend to capitalize on the bulk of the tax savings associated with recently enacted tax act in order to drive shareholder returns higher. As you can see, adjusted for gains and losses on securities, merger related charges and ORE expense, in the Q1, we're squarely in the middle of the new targeted range with an ROAA of 1.6%. Switching gears now to the BNC integration. From my vantage point, it's been highly successful. I'd say that now that we've completed the core system conversion and finalized the cost synergies associated with integration, honestly, those first two bullet points were less risky initiatives in my opinion, by comparison to a speedy achievement of the cultural integration. So for me, the bigger risk was how quickly we can inculcate our high associate engagement culture. I think the answer to that is that we have advanced further and faster even than I might have guessed. First of all, last year, Fortune Magazine, a great place to work institute, recognized Pinnacle as the 34th best workplace in America. This quarter, they released the 2018 list and we actually climbed 12 spots and we're ranked the 22nd best workplace in America, even if we had all the change and hard work required to complete the first two bullet points. Perhaps more telling than that is the incredible volume of new hiring we've been able to do during this time of transition. I cannot imagine any way we can track so many great bankers in this time frame without extraordinary excitement and endorsement by our existing associates. And then a final measure of success is that the loan growth in the Carolinas and Virginia was very strong in the Q1. The pre deal annual loan growth target was roughly $500,000,000 in loan growth. They did just north of $190,000,000 in the Q1. Since the deal announcement, I've repetitively tried to define the nature of success for this transaction. Specifically, I said BNC has a high growth CRE lending practice that we expect to continue at its previous pace. However, the key to realizing our full potential in the Carolinas and Virginia to build out or to bolt on a large C and I platform, which really is the thing I think we do best. To that end, Rick Callicut and his team in the Carolinas and Virginia grew total CRE loans at an annualized growth rate of 15.7 percent in the Q1. They hired 5 C and I financial advisors and 2 private bankers as well as 2 brokers and 2 mortgage originators for a total of 11 revenue producers during the Q1. In my judgment, there's really no better evidence of the success of our integration efforts than this hiring success. And then there at the bottom, as you can see, based on the annualized growth, the C and I loans at 26.6%, We are moving forward on all the key measures of success for the transaction at a pretty rapid pace. I mentioned just a minute ago the improvement in associate excitement engagement in this period of intense integration effort. On this slide, you can see that not only did we advance from the 34th to the 22nd best company to work for in America, but we moved from the 7th best workplace in financial services in the country to the 3rd best. Again, that's quite an achievement during the largest merger integration we've undertaken to date and I think it speaks to our success in cultural integration. Sometimes I worry that people view our comments about all the workplace awards as unnecessary chest pounding. But let me be clear, in my view, if you fail to understand the power of our brand and our culture, you'll always underestimate our ability to hire bankers and therefore our ability to grow our balance sheet and earnings and ultimately to produce shareholder returns. To that end, I've included this slide on the research by FTSE Russell analyzing the cumulative stock market returns of publicly traded Fortune 100 best companies to work for. In the period from 1998 to 2015, had you invested in these companies, invested in stock in companies that were no longer on the list and invested in the companies that were added to the list, your returns would be nearly 3x that of the general market. So it's a pretty compelling case. Similarly, 2013 study by Luigi Guizot found that companies were employed reported that their leaders act with integrity, a number of competitive advantages occurred including number 1, increased profitability and 2, greater attraction of top job applicants. I think in virtually every one of our investor presentations, we talk about our consistent top 4 top performance on profitability measures like ROAA and ROTCE. We also have our ability to hire the best bankers in the market. And so, I hope that here you can begin to catch the linkage between our HITRUST culture and our outperformance on important metrics like profitability, hiring and shareholder returns. Speaking of attracting the best bankers in the market, as we've tried articulate the deal rationale, we've always talked about maintaining the high growth CRE practice that BNC developed, while bolting on a high growth C and I business, which has the impact of turbocharging BNC's already high growth rate. In fact, you can see that taking shape back on slide 8. To that end, we've communicated our intent to hire roughly 65 C and I and private banking relationship managers in the Carolinas and Virginia over a 5 year period of time. Actually, we originally communicated the target was 64, but to make math easy going forward, I've modified the target number for C and I and private bankers to 65 to be hired over the 5 year period beginning in July 2017. And so that makes a nice round 13 per year. To be on that page, we need to hire 13 in the Carolinas and Virginia by July 2018. So you can see we're comfortably ahead of schedule in terms of hiring C and I and private bankers in the new market having already hired 13. Now, to help you think about the profit leverage in this hiring strategy, in general, the first 13 relationship managers, the revenue producers and their direct support associates are effectively in our current expense rate. Let's just take the 7 relationship managers there. You ought to assume that I think it's a fair assumption to assume they ought to produce at least $80,000,000 average loan books per relationship manager over a 4 year period of time. And so that $560,000,000 in incremental loan growth should come in over that 4 year period with no additional compensation expense burden associated with that volume since the expenses are already in our run rate. As you can see, that's a pretty powerful profit leverage. And then we intend to ladder in the class at least 13 relationship managers per year over the now remaining 4 years. Hopefully, that gives you some insight into how the model works and why I'm so excited about where we are on this transaction. At this point, let me turn it over to Harold to review the quarter in greater detail. Thanks, Terry. Revenues excluding security gains and losses for the quarter were essentially flat with the Q4 at $219,000,000 which was a similar occurrence for the legacy Pinnacle franchise last year as Q1 2017 revenues were essentially flat with the Q4 2016 revenues at 119,000,000 dollars An interesting statistic here is that quarterly revenues have increased almost $100,000,000 in the Q1 of this year over last year, most but not all is attributable to the BNC acquisition. This management team is always mindful of the trust our shareholders place in us, so we hope the shareholder base is pleased that with this meaningful growth in revenues, we also experienced a decrease in our efficiency ratio from 51% to 47.5%. We take our historical reputation of being good operators very seriously around here. Total spread income was flat at 174 $500,000 comparing Q1 to Q4. The impact of fair value accretion decreased $3,700,000 during the quarter to 15,400,000 dollars which is about where we expected to land in the Q1. We anticipate further 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 be $11,000,000 to $14,000,000 in the second quarter. We expect this accretion will continue to decelerate over time. At the end of March, we've got about $149,000,000 in loan discount accretion remaining on our balance sheet. Our operating thesis is that we will continue to increase our earning asset base as we did this quarter such that we more than offset the ongoing reduction in quarterly discount accretion. We just have to be operating in markets where that thesis can be achieved without having to compromise on credit. The dark green line on the chart, the notes revenue per share, we reported $2.83 adjusted revenue per share in the 4th quarter and are reporting $2.83 this quarter, excluding investment security loss. Again, not an unusual occurrence as last year Q1 rev share was down meaningfully due to the stock issuance, but even when you pull out the impact of the stock issuance, RevShare in the Q1 of last year was flat at $2.58 per share. So we've grown revenue per share by roughly 10% year over year. Obviously, our goal is to continually increase this measurement. As you all know, it's a lot easier to grow earnings per share if you grow revenue per share, which is what we expect to do as we move through 2018 with a growing balance sheet. Concerning loans, as the chart indicates, average loans for the Q4 were $16,000,000,000 compared to $15,500,000,000 at the end of the 4th quarter as average loans increased by $437,000,000 thus an annualized growth rate of better than 11%. We believe it was a very strong Q1 for us as end of period loans increased approximately $693,000,000 after a somewhat sluggish 4th quarter growth of $373,000,000 So we're going into the 2nd quarter with roughly $369,000,000 more in end of period loan balances over the average for the Q1, which is a great head start for 2Q. Also, there was a Fed fund rate increase in late March and from late February through quarter end, 30 day LIBOR popped by 20 basis points or so. In the Carolines and Virginia, their organic loan growth was $195,000,000 in the Q1 compared to $66,000,000 in the 4th quarter compared to $61,000,000 in the Q3 of last year. This obviously excites us as we go into 2018 as a combined firm, pressing forward to grow the franchise. As the chart indicates and as expected, our loan yields increased 4.91% from 4.87% last quarter and about the same as the Q3. Excluding the impact of purchase accounting, core loan yields were up 4 point up to 4.5 percent, up from 4.37% last quarter. With the December rate increase, we had expected core yields to increase 5 to 10 basis points, so getting 13 is outstanding. And with the March debt funds increase and the LIBOR tailwind, we're optimistic about 2Q loan units. Here's a new slide that we've not shown before. We felt it was important to get this on the table as we integrate assets and liabilities from the Bank of North Carolina into the legacy principal balance sheet. We've been discussing the composition of our loan portfolio from a pricing perspective for years, but our balance sheet changed significantly with BNC, so we thought we'd update you on our progress. With BNC, our longer term fixed rate loan book amounted to almost 43% of total loans last summer. Since then, we've seen some dilution as our fixed rate loan book has decreased by 2% since last summer when the merger occurred. Last week, we also executed a forward interest rate swap in order to accelerate our floating rate component by an additional 3%. We'd like to be at around 35% on the long term fixed rate loan book by the middle of next middle of 2019, which would be near the operating position Pinnacle was at pre merger. So our goal is to get the blue portion of the pie chart to approximate the red line on the chart. Over the years, that seems to be an optimal spot for us to operate our business model from a risk return perspective. Concerning the interest rate swap, this was another step in the process to manage the interest rate risk in our balance sheet. Last quarter, we discussed an interest rate swap in the bond book, moving about 7% of our bond book to floating since the end of September of last year. This new trade involves the fixed rate loan portfolio and uses forward starts with the earliest set to start in October 2018. So we feel we're in pretty good shape given the high probability for future rate increases. Our goal here is not to time the market on rate increases, but to put our balance sheet in a position to respond well in whatever interest rate market we find ourselves. Also on the slide is additional information on our loan rates for various rate categories. For LIBOR and Prime rate, we feel like we've captured substantially all of the short term rate increases. So our loan beta results, we feel are consistent with much of what we hear from other mid cap banks. One side note is that most of our LIBOR book reprices on the 1st day of the month. So with the lift in rates in late March, the LIBOR book should see rate lift in April. Now about fixed rates. Fixed rate loan yields have not moved with market forces. Some of this is due to loans recorded in prior years when rates were at various levels, but also competitive pressures were significant as we continue to see a lot of price competition for fixed rate products, particularly newly originated owner occupied commercial real estate. Most of our fixed rate credit is concentrated in 5 year and 7 year maturities. Even though the 5 year treasury has seen a 99 basis point increase in September, we're not seeing that play through on our fixed rate portfolio with at least some increases in the fixed rate book. Then again, the 5 year was operating in a much lower range for many years when a lot of this fixed rate loan book was created. Over time, as older loans pre price and with continued emphasis on increasing our loan yields, we should see some escalation in the fixed rate loan book. New fixed rate loans have averaged about 4.65% over the last 3 months or so. As to deposits, again, here in the Q1, we were able to grow our funding base while maintaining low funding costs. Our aggregate funding costs did increase 8 basis points in the Q1 from the Q4 and currently stand at 81 basis points for the Q1. As to the 8 basis point increase, wholesale funding did drive a lot of the increase, while deposit costs are up 7 basis points. Many would compute a beta of 28% on deposit costs given those figures. Historically and as the chart would indicate above, we were approximately 25 basis points in deposit costs in 3Q 'fifteen just before Fed funds started to increase. Since then, Fed funds have increased 150 basis points, while deposit costs have increased 35% or a beta of 23%. For a commercial franchise without a broad retail network, I'm personally very proud of what our relationship managers have accomplished here. As to the future, deposit costs will continue to increase in a measured pace for several factors. The 2 most prominent are general pressure for increased deposit rates in a rising rate environment, but also we'll need to fund a significant loan pipeline. Our relationship managers are out in our markets, selling our ability to serve commercial and affluent consumer depositors with a value equation we think is far superior to our competitors. More about that in a second. Concerning the small box in the middle of the slide, we've talked about how we approach deposit pricing on many occasions, so this reflects some of the details. Rate sheet deposits are just that. There's a rate sheet for our entire franchise and a pricing committee determines those rates. Some of our most valuable deposits are priced pursuant to our rate sheet. Beyond that, we've got about 29% of our deposits where rates are negotiated 1 on 1 with a client. This is more about our relationship banking culture. Many of these depositors will be in some way tied to a commercial relationship. There are typically higher balance accounts where relationship managers doing just that, managing perhaps numerous products for a particular client. Lastly, we've got 7% that are indexed to some source, most likely Fed funds. Lastly, we've got 16% in time deposits. My bet is this number gets bigger as we're going after some of our traditional seeking depositors with more push today than say 3 to 6 months ago. We spent a lot of time focusing on depositors, particularly our negotiated rate clients, trying to make sure we stay in constant dialogue and understand their expectations as these are some of our most valuable client relationships. Additionally, many of these clients source deposits at many institutions, so we have opportunities to pursue these deposits provided we meet client expectations. I'm confident that our relationship managers know where to find the money when called on to find it. We're in markets that have ample liquidity to match our loan growth expectations. For instance, Nashville is $57,000,000,000 deposit market. We've got 12.5%. So there's $45,000,000,000 out there on somebody else's balance sheet. We just need our fair share. Terry, Rod and Rick are driving our sales efforts towards depositors in all of our markets. Yes, we have to aim at specific depositors, no billboards on the interstates, no $100 if you open an account with us, no $25 incentive to book a new depositor, no fine print. Yes, our private bankers are calling on affluent clients. Yes, our commercial bankers are looking for commercial operating accounts. Yes, deposit rates will increase to fund our loan growth. We will play our customary shoe leather game. If you believe that growing deposits is all about pricing, clever ad campaigns and paying your workforce a little extra to do something, then you're likely not going to get our model. Where we win as a service, it's about talking to a live person who can fix a problem, who can make sure that late payroll gets transmitted on time, when a wire has to go within the next 5 minutes, or a child is overseas and needs a new debit card. That's what we do. That's how we do it. That's what we're good at. That said, we're not seeing deposit rates increase significantly. We still believe we've got adequate room in our plans to fund our home growth with a fair rate paid on deposits. Don't get me wrong deposit betas are important. We pay attention, but right now we're focused on gathering clients. Switching now to non interest income fees amounted to $44,000,000 about the same as last quarter. Our last year Q1 was essentially flat from the 4th quarter. Our residential mortgage group had a good quarter in terms of production with approximately $238,000,000 in loan sales this quarter. Residential mortgage income was essentially flat last quarter. Rate increases have not been helpful to this group over the last few months. Mortgage is hiring, particularly in the Carolinas. One of our objectives was for mortgage to integrate into the bank and be less of a standalone entity in the Carolinas. This is critical to how we run our mortgage business and optimize the penetration among bank loans. That's required some change in personnel in the Carolinas. It's now more integrated into the core banks, so the referrals are much more common. We are optimistic about the Q2 of Believe Mortgage. Will see solid growth in the 2nd quarter. As expected, BSG's contribution was down from a big 4th quarter number reporting in at $9,400,000 reflecting year over year growth of around 20% from the Q1 of last year. We continue to anticipate the net growth of BHG in 2018 should be in the 12% to 15% range. Our partnership with BHG is as strong as ever. If we could find a few more BHGs out there, we'd do it in a hard Services grew income by almost $400,000 this quarter over last quarter. Keep in mind, we're in Phase 1 of a build out of an investment services platform in the Carolinas. There was a solid base to start with over there, but one of our key goals with the C and I build out is to ramp up investment sales in that footprint meaningfully. We've had several significant hires in both footprints that have contributed to our renewed success in investment services. In insurance, in the Q1, we had approximately $1,000,000 in additional revenues from insurance companies due to Clay's experience, but still insurance is doing quite well. Trust keeps growing several key hires and trust in Tennessee and the Carolinas had pushed their revenue contribution to where it is today. We say well done wealth management. We still believe that getting to our longer term operating range of 90 to 110 basis points of average assets is achievable within the next call it 3 to 5 quarters. Based on current average assets, we need about a 10% lift in current fees to get there, so we're still believers. We need a little more push in all of our fee categories to make it happen. Now operating leverage. Our efficiency ratio on a GAAP basis was 49.7 percent of our core efficiency ratio excluding merger related charges and ORE was 47.6%, percent, which will essentially flat with the 4th quarter. We expect our non interest expense to be a little higher this quarter and I'll get to incentives in just a second. As I mentioned earlier, our efficiency ratio was almost 3.7% better this quarter than the same quarter last year and there's been a whole bunch of changes between last year and this year. We're not about to fly a mission accomplished banner, but because there's always a lot of work to do, but we think we are operating in a much larger franchise today more efficiently. After a lot of work, we're in the target environment in the form of BNC footprint. This was accomplished only after 14 months after we announced the merger and 10 months since the merger date. The leadership of this firm commends our support group in operations, IT, finance, HR, risk management all over the franchise for a ton of high quality work over the last few months. With that, I need to let you know and our associates know that our expenses were less than we anticipated, primarily due to incentives being less than what we planned for. We are accruing less than our target award for our corporate incentive plan at the end of the Q1 of 2018. A similar thing happened at the Q1 of last year as well as the Q1 the year before. This amounted to almost $2,000,000 in expense reduction for the Q1 had we been accruing at the target payout. Many of you are familiar with how we do things. You know that our corporate incentive targets are set such that we continually perform in the top quartile of our peer group. It's no slouch peer group either, just check the proxy. At some banks, different groups have different incentives and supposedly they're all aligned, so that's good for the overall bank. As an example, executives have a plan, private bankers have a plan, retail hotshots have a plan, car sales have a plan and most likely, the other people who do the actual work don't have a plan. In reality, there's a lot of intramurals as groups compete for clients, there's constant reorganization of bank personnel causing clients to get shuffled from one group to another. And in reality, in some years, some groups win and some groups lose no matter what happens to the bank. At Pinnacle, the bottom line is the bottom line. We get paid to hit numbers. We don't hit our numbers. We don't get paid. Now some of you might say that it's a short term fix. Don't disagree with that. Over the long term, you need to pay these incentives. We've had years where we paid more than target. We maxed out at 125% of targets. We've had years when we paid a Busey. The critical thing is that the associate base understands why we do it the way we do it. Keep in mind that Terry, myself and the internal leadership of this firm is only a statement centered plan with everyone else. Thus, as the CEO gets paid, we all get paid and vice versa. I'd venture to say that there are not many conference calls where a firm is spending a lot of time talking about their incentive accrual at the end of the Q1. Incentives are important, it's one of the things that makes us unique. Our shareholders have to have the confidence in this firm to do the right thing. Accruing it less than target kind of gets juices going around here, just watch and see. With that, I'll turn it back over to Terry. All right. Thank you, Harold. Let me say by way of conclusion, we try to be as clear and explicit as we can be about our growth intentions. My belief is that this quarter's results demonstrate our ability to continue the current model for number 1, outside of organic growth and number 2, outside profitability. We've also outlined the high growth markets around the Southeast that have appealed to us. And along with that, we've outlined the merger criteria, one of which is minimum earnings accretion of 3% to 5%. In answer to the question, how should we think about the timing of any future acquisitions, I'd just make these points. First of all, I honestly don't care if we make any acquisitions at all because of the outsized organic growth opportunities that I feel we have. That said, I'm relatively confident we'll have opportunities to do meaningfully accretive transactions in targeted desirable markets. So thirdly, I'm not trying to make any deals right this minute, but I believe banks are sold and not bought, which is just another way of saying that you have to buy them when they're for sale. And so while I'm not necessarily trying to make a deal right this minute, if a targeted transaction were to come up and it could be done on a meaningfully accretive basis, I feel comfortable moving forward on that. So I guess finally, I think one of the objectives of these calls is for you to gain some insight into my perspective of our performance during the quarter and where I think we are in the firm. So, my own assessment is that we have a firm that's growing earnings 36% year over year, is having extraordinary success attracting the top talent, is growing earning assets at a record level, which of course is our primary method for growing future earnings. We expanded core margin 9 basis points in the quarter. We increased our profitability target for ROAA to a new range of 1.50 percent to 1.70 percent and we're operating squarely in the middle of that range with an ROA of 1.60 percent. And we've elevated our ROTCE to nearly 19%, which suggests to me that our current price tagable book value multiple has plenty of room to expand. So operator, we'll stop there and take questions. Thank you, Mr. Turner. The floor is now open for your questions following the presentation. Our first question comes from Jared Shaw with Wells Fargo. Hi, good morning. Good morning, Jared. Maybe just spend a little time on the deposit discussion. I appreciated the color you gave there. But as you're seeing the strong loan growth, as we're waiting for that to as we're waiting for the deposit growth to come in behind it, I guess how willing are you to continue to put on higher levels of borrowings? And do you have an upper limit in terms of a loan to deposit ratio you'd be comfortable with as we're growing out those deposits? Yes, Drew. This is Harold. We get a lot of questions about do we have a policy around loan to deposit ratio. We don't. We've got guidelines around 100 percent. We're at 98%. So yes, we understand the task at hand, and we don't like operating above 100. I don't know if we'll approach that or get over that, but we will be employing a lot of tactics to stay below it. And then as you look at the growth opportunity on the deposit side, is it more consumer focused at this point or commercial? And is it more Tennessee versus the newer markets? Or I guess maybe a little more detail on how that sort of works out over the next few quarters? Yeah. I think I would say it's a pretty balanced approach, perhaps a little more commercially oriented than consumer. In our commercial marketing themes inside the company, we always talk about we're aimed at businesses, their owners and their employees. And so that's principally where the consumer trust comes as in some of our offerings like group banking to employees and our private banking efforts to business owners and so forth. So the real important thrust of the company is commercial. In terms of how we see that playing out, again, I think if you sort of think through the linkage here, we hire bankers, have big books of business, they move their clients, which means they move their deposit books with them. And many times the loan come first, they'll bring that the entire relationship with them. And then from that, you drive down into the rest of the business owner and the employees. I would expect that to be a balanced approach throughout the footprint, meaning not only in Tennessee, but in the Carolinas and Virginia. I would say in the Carolinas and Virginia, you'll have a little more consumer opportunity there than in the Tennessee footprint. And our folks are visibly about mobilizing those folks as well. But I think when you get down to what you do in the short range, again, we believe because our relationship managers know our clients so well, they know where the money is. In many cases, money is scattered around, not just at Pinnacle, but at other banks. And so they know where the money is and how to round it up. So that's the way it will work. Okay. Thanks. And then on BHG, as we look out over the year, you said a 12% to 15 percent growth rate. Is that full year over full year? And if so, should we expect to see the seasonality, I guess, mimic what we saw last year, but maybe just the overall growth rate quarter or year over year slowdown from here? Yes, Jared. I think that's consistent with my expectations for sure this year. We have a lot of conversations with BHT. Matter of fact, there's a Board meeting tomorrow. So we'll get an update tomorrow with those guys. But yes, we're still expecting the seasonality in their numbers in 2018 just like 2017. Great. Thank you. Our next question comes from Stephen Scouten with Sandler O'Neill. Yes, guys. Good morning. Thanks for taking my question. Yes. How are you doing? So wanted to get an idea on the composition of that growth for North Carolina, that $195,000,000 I'm assuming that was still pretty heavily weighted towards CRE and that most of the strong C and I growth came from Tennessee just as you're ramping up the hiring. But just wanted to get some confirmation on that and kind of think about when you think that actual C and I growth from those new hires will begin to deliver. Is that more back half twenty eighteen or flowing into 2019 more so? Well, yes, look on Slide 8 in the presentation, Steve, basically, you're right. In there, in the $195,000,000 it would be a higher growth volume associated with CRE than C and I. But if you look at the percentage growth rates, you can see that we grew the CRE business roughly 15%. We grew their C and I business roughly 26%. So we think that we're turning corner at a pretty rapid pace. But I do think as we continue to make the C and I hires that that growth rate will accelerate in the latter half of the year. And what would that be like on a ballpark dollar basis just on that $195,000,000 Is that $20,000,000 $30,000,000 on the C and I side? I'm not sure what base we're starting off of. Stephen, I can't tell you the number off the top of my head. Okay. No problem. Okay. Okay. And then maybe thinking a little bit more about the deposit costs moving forward. I guess, first, are you guys seeing competition from the biggest banks yet? Is that still or do you think that could still be a driver of further increase here? And then specifically on the non interest bearing deposits anything unusual that caused the end of period decline there in the quarter? Yes. I don't think there's anything unusual with non interest bearing. I think we had a big year last year in non interest bearing. So we're still going to try to drive operating account growth for the franchise. I don't think we're seeing any more intense competition coming out of the large regional franchises, occasionally on a one off basis. With some of those negotiated rate clients, we'll see something. But I think by and large, I think you'll see kind of a slow and steady consistent increase. Okay, great. And then maybe lastly for me, just kind of thinking about incentive comp. But I guess, 2 things maybe. Can you tell us where you guys actually fell short of your corporate targets? Because obviously, you had a really good quarter. So I'm just curious where that lag was there. And do you think you'll based on what you saw in 1Q that you'd expect some sort of a catch up in the coming quarter? Yes. I'll just be I'll be open candidly. The fee revenues numbers for the Q1 were less than we had hoped. There was probably a slight negative variance in the margin, but most of that was probably in fees. Hey, Steve, this is Terry. If I could, I might just say this. Harold has been pretty explicit there on the incentive accrual and all that sort of stuff. I'll just tell you, Harold is accruing at a rate higher this year than it was last year at the same point. We ultimately paid out greater than 100% for the year. So I'll just put that in perspective. Yes. No, that's really helpful, Terry. Thank you. Okay, guys. Congrats on a really nice quarter and getting that growth come on board. It should do great things for the rest of 2018. So appreciate the color. All right. Thank you. Our next question comes from Tyler Stafford with Stephens. Hey, good morning guys. Hey Tyler. Hey, I want to start on loan growth. So I think one of the big bear cases out on the stock right now is just the slowing growth from the remix of the B and C portfolio. So obviously as Stephen just said, it was nice to see that 18% loan growth this quarter. So on the back of that strength and the hiring success you've had, can you just clear the air for us on your loan growth expectations are for this year and what you could expect to see the next couple of years? Well, let me think what we've communicated here. I guess, Harold, I don't think we've communicated loan growth targets in any way, have we? Well, what we keep talking about is low double digit loan growth is kind of where we think our we should be consistently performing. So that will put you I mean, if you apply dollars to that, Tyler, you're talking about $2,000,000,000 plus kind of numbers. We still think our franchise can produce that kind of number here today. Got it. Okay. If I could, I think your question was what about for the remainder of this year and what about next year? I mean, we would expect that growth rate to continue next year as well. So even with the larger balance sheet size with BNC, a double digit growth expectation for the next foreseeable future is still pretty reasonable? Yes. Great. Thank you. And then just Harold, you mentioned that the 5 to 10 basis points of core loan yield expansion that you would thought you would see following the December hike. So obviously you guys came in better than that this quarter. Is the 5 to 10 expansion of the core loan yields from the March hike, is that still the right way to think about it? Yes, I think so. Obviously, we're hopeful that we'll be able to replicate Q1 and Q2. We think we've got a couple of things going for us. One is we get an extra day in the calendar. That's always helpful. But we'll also probably have less accretion income. So the core may go up. The GAAP number is going to get hit by the fair value number. But so all things considered, all the oddities, we ought to cancel each other out. So then we get to like what the rate environment is doing. I think we'll pick up a lot of that Fed funds increase in our prime book portfolio. I think we'll pick up a lot of the LIBOR increase in the LIBOR book. I don't see any kind of indication that we're going to reduce spreads in at least 50%, call it 55% of the loan book. Okay. Very good. And then I just wanted to make sure I understood one of your prior comments to Stephen's question. So you did have a slight negative variance from the incentive comp related to the margin expansion this quarter. Is that what you said Harold? Yes. So you had previously expected maybe stronger than 9 basis points of core margin expansion in your model? I think what we expected was a little more net interest income. I can't recall where we ended up on margin specifically, but yes. So going back to last quarter, I believe you said in your margin outlook for the year, you were modeling in I believe 50% deposit betas. Is that right? Yes. Okay. So that would have been in that expectation. Got it. And then just last one for me. Tell Spencer you did a nice job with the bond repositioning this quarter. Just curious if we're all done on that or if there's more repositioning to come? No, I think we're done on all that. He got all that basically accomplished by the end of February. So we've got some dollar pickup coming here in the 2nd quarter from all that. Got it. Okay. Very nice quarter, guys. Thanks. Thanks, Tyler. Our next question comes from Jennifer Demba with SunTrust. Terry, you said about 29% of your deposits are negotiated rates mostly with commercial customers. Do you know what the beta on that has been since the Fed started raising rates? Jennifer, this is Harold. I really don't have that number. That's probably an interesting number to go grab, but I wish I could tell you what it is. Okay. But it was I would imagine it's a higher beta. Well, I would know. I would be pretty certain. It's a higher beta than what's going on, on the sheet rates. Okay. All right. And I think go ahead. I'm sorry. And I think most of that's due to the size of the depositors, the focus on those numbers. The interest income they get on their P and L is more meaningful. So it's all those kind of circumstances. Okay. And you had a bit of an NPA increase this quarter. Was there any one in that increase? Yes. I do know there was 1 call it a $9,000,000 credit that they put on non accrual towards the last half of March. What industry would that be in? Oh, geez. I don't even know. It's food processing. Okay. All right. Thanks so much. All right. Our next question comes from Will Curtis with Piper Jaffray. Good morning, guys. Hi, Will. Hi, Will. Maybe just quickly going back to the discussion about the securities restructurings. How much of this quarter's core NIM expansion was related to the securities restructuring? Yes. We think probably about 5 basis points was that. So of the 13, we probably got 5 of it out of the securities book. Okay. And then in terms of maybe just as we look out over the course of the year, I mean, is the expectations for the core NIM to hold to be relatively flat? Or do you think we it's possible we might see a little bit of a modest lift as we continue through the year? Well, we're hopeful we're going to see a modest lift. We don't think the GAAP margin is going to decrease very much. So in order for that to happen, we got to see lift in the core margin. So we're hopeful that we'll be able to continue this for the rest of the year in spite of the fact we're going to raise deposits. Got it. Okay. And then you guys mentioned, had some commentary on mortgage banking. I mean, you still feel good about year over year growth this year. And then also, I think you guys had talked about leveraging your mortgage across the rest of the franchise? And just curious if there's any updates on how that progress has been? Yes. I think we're still projecting growth year over year in mortgage. The Q2 will be a real important quarter for them because they're going into the spring buying season and all that. But yes, our mortgage the leadership in mortgage has been about hiring people in the Carolinas, kind of remixing over there. We think we've got a lot of good people in the right markets, in the right seats. So but that's still a work in progress. Okay. And then last one for me. I know there's obviously a lot of attention on the newer markets, but maybe Terry if you can talk about Nashville trends and the competitive environment anything that you guys are watching closely? I think in the national market, I wouldn't say there's any difference in this quarter than in the previous quarter. I think sometimes I get asked about where are you on certain commercial real estate categories like hospitality and multifamily particularly in the core Nashville. And so we've been relatively cautious on those two categories and continue to be. But the growth continues to be strong in Nashville as a market and our position in the market seems to me to be extraordinary. I just make this comment from it's sort of anecdotal, but the growth that we're seeing in Nashville, say in the last two quarters, we're moving large marquee accounts that have been long time relationships with some of the large regional banks and multi generation relationships with some of these other banks that we've really been able to pick up in the last two quarters. And so again, the market has momentum, but our position in the market also has momentum. Okay. Thank you very much. Our next question comes from Michael Rose with Raymond James. Hey, guys. Good morning. Hi, Michael. Michael, how are you doing? Good. Just a question on the loan growth. You got for low double digits this year and then maybe into next year. Obviously, the Q1 was a great start, but it implies just from a straight math point of view, the growth would slow from here. But it seems like hiring is ahead of schedule. Those producers will start to ramp as the year moves on. Can you help me reconcile why you wouldn't be closer to mid single digits or just kind of what the push and the pull factors are? Thanks. Yes. I think you're just maybe a little conservative on my part. I'm sure Terry would have a bigger number than me. That's just the way the things operate around here. But I think we can hit our numbers with low double digit loan growth. That's not to say that Terry is going to put the clutch in or anything. But you're right, particularly in the Carolinas, we've been really pleasantly surprised with how that hiring platform is shaping up over there. Maybe just a follow-up too on the types of hires that you're making. Historically, Pinnacle in Tennessee is hired from the biggest banks. But clearly, in the Carolinas, there's been a lot of upheaval with this significant amount of mergers in the past year, 1.5 years. Are you still hiring primarily from the larger guys? Or are you picking apart maybe some of your closer to equal size competitors? Or is it a blend of both? And then finally, Tara, you've talked historically about the capacity of the hires that you brought on. I wouldn't expect you to do that today. But is that something we could expect you to again provide us some guidance on as we as the hiring plays out over the next couple of years? Let me get clear on the last question first, Michael. What are you asking about relative to the capacity of the lenders? Yes. I mean, a couple of years ago, you guys brought on, I don't remember the number, it might have been 10 or 15. And you gave what you thought they could produce over a period of time. And obviously, 65 is a big number over the next couple of years from what you hired previously. I just want to know if we move forward, can we expect you to provide some sort of capacity of what those hires could generate in terms of loans? Yes. I think so. I mean, and again, I don't mind saying that I view a conservative estimate of the mature loan book for the hires that are being made there to be $80,000,000 per relationship manager. So if you have 7 of those, 5 C and I and 2 private bankers, then that production over a 4 year period of time would likely be $560,000,000 And again, what's important is to understand that, that expense burden is already on our books for that group of 7 that I just mentioned there. And so that we did 52 in the 2nd quarter. The quarter before that, we did 6. So again, you begin to see the pace of hiring there. Again, if it's 13 people at $80,000,000 that'd be a little more than $1,000,000,000 in production. So I don't know if that helps you, if I'm talking about what you're interested in, but that's sort of how we see the numbers. And again, you get the profit leverage is pretty dramatic out of those 13 guys that have already been hired, $80,000,000 in a loan book would be a reasonable assumption over a 4 year period of time. So a $1,000,000,000 or whatever that math is. On the other question, Michael, what were you looking for on that one? Just the types of lenders that you're hiring historically from the bigger banks. Yes. Yes. That's a really good question because you're right. I think over the years in the Tennessee footprint, I would guess and it is a guess, but I would guess 90 percent of our hires have come out of the larger regional banks that have sort of traditionally dominated the markets that we were in. And it might it could even be higher than 90%, I would say. I think when we launched in the Carolinas and Virginia, we would have a similar assumption, meaning that we would hire primarily from those large banks that we view to be vulnerable. And we have had good success hiring out of those banks that dominate the North Carolina market. But you make a great point. We have also made a reasonable number of hires that have been dissatisfied in the transitions that are going on over there with sort of similar sized companies also going through integration efforts and so forth. So that's sort of been a boon to our ability to hire people. That's very helpful. Maybe I'm sorry if I missed this, but maybe one more for Harold. You guys put out some swaps this quarter. If rates were to move higher a couple of times, would there be more to do there? Or is this kind of it? Yes. I think I don't know if this is it or not. We've taken advantage of a somewhat flatter yield curve with this transaction. So I'm not going to say we won't do anymore, but we might. We'll just have to see, Michael, where our model kind of when we go through all of our interest rate sensitivity testing, where it all comes out to see if we're where we need to be. So is it fair to say if the curve further flattens that you would put on some more swaps? We could. We could for sure. Okay. Hey guys, thanks for taking my questions. All right. Thank you, Mike. Our next question comes from Catherine Mealor with KBW. Thanks. Good morning. Hey, Catherine. All right. So most of my have been asked and answered, but I thought I'd circle back to the deposit growth team just real quickly. So as we think about deposit growth will presumably pick up as we move through the year. Can you just help us think about the composition of that deposit growth? And Harold, you mentioned that you think CD growth is going to pick up this year probably. And then also how should we think about the C and I ramp and the treasury management platform building in the Carolinas and Virginia and how that should ultimately impact the composition of deposit growth as we move through the year? Yes, Catherine. First of all, let's talk about that CD comment. We are actively pursuing some, call it, traditional CD depositors. You've got depositors and that's just kind of their mode. They want to go a CD ladder. And particularly in the Carolinas, and I think Rick and his team are about calling those folks and making sure that if they move money away from us, what we've got to do to bring it back to us, because I think we had comments or we talked about this last quarter when the signs were being transitioned over in the Carolinas that gave everybody kind of an opportunity to revisit deposit rates and so on and so forth. But Rick has got his folks actively calling some of those traditional CD depositors to try to get that money back to the bank. And I think you'll be really successful there. As far as growing the rest of the deposit base, I think it's going to be shoe leather. I think we're going to have to get our commercial lenders, our private bankers out in the market and they're going to have to go find that money as Terry was talking about and try to get it moved over here. And Catherine, what was the second part of your question? That was it. It was just it was more just the timing of as you build out the Carolinas and Virginia and overlay the treasury management platform. As I mean, because my gut would be that maybe early part of this year you see maybe more in CD growth, but as you continue to build out your treasury management and your C and I platform in the Carolinas in Virginia, we should see more non interest bearing kind of core non CD growth in the back half of the year. Would that be an appropriate way to think about it? Yes. I think well, that's what we're thinking about. And I think as this hiring we bring in all these C and I lenders that will absolutely take place. And then one follow-up on expenses. You've got $2,000,000 from incentive comps that presumably if you kind of hit numbers better next quarter then maybe you get that back. And it feels like we're through all of the cost savings from B&C and so maybe we're at a kind of good run rate this quarter. So is there a way to think about a core expense growth rate just given your hiring expectations for this year? Yes, sure. Let me see if I can help you out. We probably were $2,000,000 to call it $3,000,000 under what wouldn't be a normal kind of run rate. There were a few people that left the firm during the quarter that were part of the synergy case. Traditionally, and you can go back and test me on this, our expense base doesn't ramp up all that much through the year other than for hiring and increased incentives. So you can kind of project what the expense load is going to be for the rest of the year once you get the good start point in the Q1. Got it. Okay. That makes sense. All right. Thank you. Great quarter, guys. Thank you. Our next question comes from Andy Stath with Hilliard Lyons. Good morning. Most of my questions have been answered. Just had a couple of ticky tack like questions. One of which would be, just wondering how much did prepayment penalties benefit to Q1 net interest margin versus Q4? Yes. Andy, I don't have that number in front of me. Call it, the scheduled fair value accretion was probably in the $12,000,000 to $13,000,000 range and we ended up in $15,000,000 So it's probably about a $3,000,000 number. I'd have to go dig around and find out what that number actually was. And when talking so much purchase accounting, just loan prepayment penalties from loan payoffs. Oh, I thought you were talking about prepayments on fair value. Yes, I don't have any idea on the prepayment It's I'd be interested to say it's a small number. Okay. And Wealth Management revenues were up nicely despite unfavorable market conditions. Could you talk about the drivers of the outperformance? Yes, sure. It's all people. We had a very nice hiring. We hired a group of people in the late, call it, Q3 last year, and they're building their book. They're moving quite a few clients from their former employer. And so we've got the benefit of that here in the Q1. We looked at our team late last year that had $600,000,000 in assets under management. So that's a big opportunity. There are other hires in there too, but that would be meaningful. Okay. And lastly, to what extent have loan paydowns moderated? Yes. I think loan paydowns have slowed. A lot of that has to do with rising rate environment and all that stuff. But we're not seeing quite the volumes and loan paydowns here in the Q1 and are not likely to see it in the Q2 that we might have experienced, call it, 2nd, 3rd and Q4 last year. Yes. Okay. Great. That's it for me. Thank you. Our next question comes from Brock Vandervliet with UBS. Good morning. Thanks for taking my question. Just to confirm, Harold, you'd mentioned the expense growth rate was $2,000,000 to $3,000,000 under what would be a normal run rate. Is that correct? Yes. I think so, Brock. I think that's a fair number for the Q1. Okay. On the FHLB advances, what is the base rate there that that's linked to that we should look toward? Yes. Most of that is short term kind of numbers, probably 90 days to 180 day kind of borrowings. Hopefully, we'll get this deposit engine cranked up here in the Q2 and we'll get some of that paid off. I know we've paid off some of it already, but we'll be focused to try to get that $1,900,000,000 down to something less. Okay. And broken record on the deposit topic, is deposit generation or and deposit retention, is that an explicit part of loan officer compensation? No. No, Brock. Everybody's paid off the same incentive plan. It's all based on revenue growth and earnings growth. What we do is we aim our private bankers and aim our commercial bankers at, call it, deposit rich segments and get them to go after that money. It's just how we operate around here. Would you consider making that change or you're happy with your plan as is? Yes. Brock, we're happy with the plan as is. As I say, it has served us well for 20 years. I wouldn't think we're going to modify it now. Yeah. As recently as 2 weeks ago, I was talking to regulators about it, not about deposit growth per se, but about our incentive systems and how they work and why we like how they work. And what we have around here are people the hiring model would have you'd have to have 10 years experience to come to work here. Granted with mergers, you don't always get that, but at the end of the day, that's where we're headed. And so with that comes people who know where clients are. I think that's different than what goes on at call a regional franchise or a large national franchise where they're looking for people where there's a strong, strong sales culture. And when you get the sales culture embedded in your franchise, what you get into is widget dynamics, where it's about doing this for that, doing this for this incentive or doing whatever for whatever incentive. And we think that doesn't play well over the long way over the long term because what we're trying to do is accomplish a service culture. And we think that one of the biggest deterrents to service in the financial services industry is turnover. And so what we want are people that have a lot of experience that know where clients are that like to serve clients and don't need kind of an incentive system that's based off of this program or that program. Does that make sense? Yes. It's a philosophical difference. Yes. I think it's important. And lastly, going back to Jennifer's question on the NPA, was that a B and C credit or a Pinnacle? It was a Pinnacle credit. Okay. Got it. All right. Thank you. Thank you. Our next question comes from Nancy Bush with NAB Research. Good morning, gentlemen. Couple of regulatory questions. Can you just give us your view of the proposed changes to Dodd Frank? And do they help hurt, do nothing as it regards to Pinnacle? Well, it would certainly be help to us. I think there are several benefits, but I think the one that stands out is the reduced need for stress testing and all those sorts of things. So it would be a help to us if that bill were to ultimately pass. Do you have a quantifiable amount that you'd get from that? No, I don't think so. Okay. No, I think I'll just tag on here. I know we're running long. But what really, Todd Frank and DFAST and all that, where it occupies a lot of time and attention is with people who aren't necessarily directly related to that particular task. So call it, alco managers and liquidity managers and audit managers and all those kind of folks. It's a very significant time burden on those people. And so that's where the real, I think the real cost the hidden cost in all of that really is. Okay. And secondly, just as you guys move into sort of a different segment of Community Bank, I mean, obviously, you've gone beyond the $10,000,000,000 well beyond the $10,000,000,000 sort of moving toward the $50,000,000,000 And you're not the only one in the Southeast, although you've done it more quickly than some of your competitors. But are the regulators looking at you in any kind of a different way? Do you get a different regulator, a different quality of regulation? I mean, is there a recognition that this new class of banks is being created? Well, I wouldn't want to presume to speak for the regulators about their recognition. But I would say that certainly, of course, our primary regulators, the FDIC and we obviously regulate the whole company by the Federal Reserve. And I would say both those groups do use the $10,000,000,000 threshold as sort of a line of demarcation there on when you move into a larger regional group. And so we have passed into that group and did back when we crossed 10 $1,000,000,000 And so the conversations are maybe slightly different. But Harold, I wouldn't view them to be meaningfully different than the conversations that we've had here before. No, I don't think so. Yes. Okay. Thank you. Thank you, Nick. All right. Our next question comes from Brian Martin with FIG Partners. Hey, guys. I'll be short. I know it's getting long. So just a couple of last minute things. Just going back to the deposits just for 1 minute, it sounds like what we said earlier, I don't know if it was Terry or Harold, but just the some of the lack of deposit growth this quarter was the strength last quarter, but also the timing issues on these new producers, the loans come maybe a little bit earlier than deposits. Is that seems fair as far as how we're thinking about things and as it plays out over the balance of the year? I think it is true that loans typically will precede deposits. I think that's accurate. Okay. All right. And Terry, you talked about just the M and A. You kind of addressed that in your prepared remarks. But just as far as it sounds like you're at least in a position to do a deal if something came along like you said banks are sold. How would you characterize the opportunities today? It seems like there's been a little bit of a slowdown in some bank M and A year to date, but just the opportunities that you're seeing out there, how would you characterize those today? Yeah. I would say that there are still a meaningful number of people that are at least in a mode to consider. You know how it works. Ultimately, it's going to get down to price and multiples and all those kinds of things. But just maybe to give you something to think about, Harold, I'm not sure, but I think probably from the time that we announced the BNC transaction, we would have had either 3 or 4 opportunities to sign an NDA had we wanted to pursue a transaction with somebody. And so again, that's a pretty meaningful volume of opportunities. In my judgment, again wasn't the right time for us. But anyway, is that helpful to you? Yes. And I guess just from a multiple standpoint, there's nothing that would prevent you. I mean, I guess from where your multiples at today to considering a deal or making something work, I guess it seems I guess would you say the stock has to be meaningfully higher before you'd likely think something could work out? Yeah. I don't put it in terms of what my stock has to be. I put it in terms of what the earnings accretion has to be. And so it's a bunch of my stock and their stock. And so if the earnings accretion is what we're looking for, then that we'd be willing to consider a transaction. Okay. That's helpful. Thanks, Terry. And just the last 2 was just Harold, just on the expenses, so I'm clear. The under incentive this quarter, the lack of incentive, I guess the $2,000,000 or $3,000,000 number you're, I guess mentioning, is that an annualized number? So it's really only $500,000 to $750,000,000 this quarter. So I mean had you had the full accrual into this quarter, would the I guess what I'm asking is, would the expenses have been $106,000,000 or $106,000,000 or would have been closer to 104.5? 106, 107. Okay. 106 or 107. The 2,000,000 is definitely a quarterly number. Quarterly number. Okay, fair enough. Got it. And then just the last thing was on the you guys talked about maybe the miss or I guess the underperformance of the fee income. When you look at the quarter, I guess was it really a mortgage issue that was hurting the fee income outlook? I mean, the other components seem there's some seasonality with service charges, but I guess the other where also will we be looking as far as the future performance that should kick up a little bit on the fee income side? Well, I think mortgage will come back to us. I think it's they'll find their way. I think also VHG will find a way to get to 12% to 15% earnings growth for the year. So 9.5% might have been less than we anticipated in the Q1, but I think they're well on their way. Okay. All right. I think that's all I had, guys. I appreciate the color. Thank you. All right. Thank you. Our next question comes from Brian Zabora with Hovde Group. Thanks. Good morning. Hi, Brian. How are you? Good. Just a question on average earning asset growth. On an average basis, it looks like securities are down a little bit and you had cash down a little bit. Can I just I'd like to get your thoughts about kind of growth of average earning assets is going to track closer to loan growth, maybe with some deposit increase or just could you use some of those other categories to fund loan growth? I'll answer this way. We're at about 13% securities to total assets at the end of the Q1. We don't see that number going up very much at all. In fact, it will probably come down. So the move from, call it, short term liquid assets to securities this quarter was fairly meaningful. It's doubtful you'll see that the rest of the year. We'll see some average balance increase in the Q2 because of just timing in the Q1. But yes, we won't see quite the same kind of escalation in the Q2 that we saw in the Q1. Understood. And just lastly a question on CRE concentrations. As you expected, it came up a little bit above that 300 threshold. Just want to get your updated thoughts. Do you expect still to be kind of temporary above that that 300 threshold? Or could you operate for a longer period above that level? Yes. We still believe that the $300,000,000 level will stay will be above that first half of the year and then will drop down. On construction, construction jumped up on the 100. We didn't breach the 100. We don't anticipate breaching the 100, but we'll likely to see construction begin to come down here in the Q2 and go down from here as a percentage of total risk based capital. Great. Right. That's all I had. Thanks for taking my questions. And there are no further questions at this time. I'd like to turn the call back over to our host. All right. Well, we appreciate you being involved with us on the call today and look forward to next quarter. Thank you. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.