Good morning, everyone, 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. At this time, all participants have been placed on a listen-only mode. The floor will be open to your questions following the presentation. If you would like to ask a question at that time, please press star one on your touch-tone phone. Analysts will be given preference during the Q&A. We ask that you please pick up your handset to allow optimal sound quality.
Before we begin, Pinnacle does not provide earnings guidance or forecast. During this presentation, we 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, control, or prediction, 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.
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 measures most tightly correlated with share price performance over time are revenue growth, earnings growth, and asset quality. 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, total revenues were flattish compared to 4Q17.
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 Act change, and so forth. 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 nine 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 million, which is an annualized growth rate for the quarter of 18%. Immediately below the loan chart is a row of three charts, which indicate, in my judgment, that asset quality remains pristine, with all these measures generally operating within or better than their historical ranges.
In the case of NPAs and classified assets, or better than the target operating range in the case of net charge-offs. Because of all the noise I mentioned a minute ago, in some cases, the non-GAAP measures may better illustrate the relative performance of the firm. 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. Harold will review this in greater detail in a few minutes, 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%.
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 P/E ratio look like there is plenty of room for expansion. Immediately to the right on the first row, I want to highlight the ROTCE almost reaching 19% this quarter. If you review the trend line post-recession, you can see that it progressed nicely until the first 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, 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.
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 ROA for the year 2012. We've increased that targeted operating range twice before, most recently to a range of 1.3%-1.5%, which is where we've operated over the last year or two. We're now increasing that target to the target range of 1.5%-1.7%.
We've held the targeted ranges for the four component parts that lead to that ROA steady. We intend to capitalize on the bulk of the tax savings associated with the 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 first quarter, 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 say that now that we've completed the core system conversions 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.
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, the 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 amid 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 attract so many great bankers in this timeframe without extraordinary excitement and endorsement by our existing associates.
A final measure of success is that the loan growth in the Carolinas and Virginia was very strong in the first quarter. The pre-deal annual loan growth target was roughly $500 million in loan growth. They did just north of $190 million in the first quarter. Since the deal announcement, I've repetitively tried to define the nature of success for this transaction. Specifically, I've 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 is to build out or to bolt on a large C&I platform, which really is the thing I think we do best. To that end, Rick Callicutt and his team in the Carolinas and Virginia grew total CRE loans at an annualized growth rate of 15.7% in the first quarter.
They hired five C&I financial advisors and two private bankers, as well as two brokers and two mortgage originators for a total of 11 revenue producers during the first quarter. In my judgment, there's really no better evidence of the success of our integration efforts than this hiring success. There at the bottom, as you can see, based on the annualized growth of C&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 seventh best workplace in financial services in the country to the third best.
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-thumping. 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 the 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. It's a pretty compelling case. Similarly, a 2013 study by Luigi Guiso found that companies where employees reported that their leaders act with integrity, a number of competitive advantages occur, including, number one, increased profitability, and two, greater attraction of top job applicants. I think in virtually every one of our investor presentations, we talk about our consistent top quartile performance on profitability measures like ROAA and ROTCE. We also tout our ability to hire the best bankers in the market.
I hope that here you can begin to catch the linkage between our high trust culture and our outperformance on important metrics like profitability, hiring, and shareholder returns. Speaking of attracting the best bankers in the market, as we tried to 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&I business, which has the impact of turbocharging BNC's already high growth rate. In fact, you could see that taking shape back on slide eight. To that end, we've communicated our intent to hire roughly 65 C&I and private banking relationship managers in the Carolinas and Virginia over a five-year period of time.
Actually, we originally communicated the target was 64, to make the math easy going forward, I modified the target number for C&I private bankers to 65 to be hired over the five-year period beginning in July 2017. That makes a nice round 13 per year. To be on that pace, we need to have hired 13 in the Carolinas and Virginia by July of 2018. You can see we're comfortably ahead of schedule in terms of hiring C&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 or revenue producers and their direct support associates are effectively in our current expense rate. Let's just take the seven relationship managers there.
You ought to assume that. I think it's a fair assumption to assume they ought to produce at least $80 million average loan books per relationship manager over a four-year period of time. That $560 million in incremental loan growth should come in over that four-year period with no additional compensation expense burden associated with that volume since the expense is already in our run rate. You can see, that's a pretty powerful profit leverage. We intend to ladder in a class of at least 13 relationship managers per year over the now remaining four 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 fourth quarter at $219 million, which was a similar occurrence for the legacy Pinnacle franchise last year as first quarter 2017 revenues were essentially flat with the fourth quarter 2016 revenues at $119 million. An interesting statistic here is that quarterly revenues have increased almost $100 million in the first quarter 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. 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 $174.5 million comparing first quarter to fourth quarter. The impact of fair value accretion decreased $3.7 million during the quarter to $15.4 million, which is about where we expected to land in the first quarter. 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 million to $14 million in the second quarter. We expect this accretion will continue to decelerate over time. At the end of March, we've got about $149 million 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 denotes revenue per share. We reported $283 adjusted revenue per share in the fourth quarter and are reporting $283 this quarter, excluding investment security losses. Not an unusual occurrence as last year first quarter rev share was down meaningfully due to the stock issuance. Even when you pull out the impact of the stock issuance, rev share in the first quarter of last year was flat at $258 per share. We've grown revenue per share by roughly 10% year-over-year. 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 fourth quarter were $16 billion compared to $15.5 billion at the end of the fourth quarter, as average loans increased by $437 million, thus an annualized growth rate of better than 11%. We believe it was a very strong first quarter for us as end-of-period loans increased approximately $693 million after a somewhat sluggish fourth quarter growth of $373 million. We're going into the second quarter with roughly $369 million more in end-of-period loan balances over the average for the first quarter, which is a great head start for 2Q.
There was a Fed Funds rate increase in late March, and from late February through quarter end, 30-day LIBOR popped by 20 basis points or so. In the Carolinas and Virginia, their organic loan growth was approximately $195 million in the first quarter compared to $66 million in the fourth quarter, compared to $61 million in the third quarter 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 to 4.91% from 4.87% last quarter and about the same as the third quarter. Excluding the impact of purchase accounting, core loan yields were up to 4.5%, up from 4.37% last quarter. With the December rate increase, we had expected core yields to increase 5-10 basis points, so getting 13 is outstanding.
With the March Fed Funds increase and the LIBOR tailwind, we're optimistic about 2Q loan yields. 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 Pinnacle 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 2019, which would be near the operating position Pinnacle was at pre-merger. 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.
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 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, 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 first day of the month, with the lift in rates in late March, the LIBOR book should see rate lift in April. 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, 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 five-year and seven-year maturities. Even though the 5-year Treasury has seen a 99 basis point increase since September, we're not seeing that play through on our fixed rate portfolio with at least some increases in the fixed rate book. 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 reprice 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 three months or so. As to deposits, again, here in the first quarter, we were able to grow our funding base while maintaining low funding costs. Our aggregate funding cost did increase eight basis points in the first quarter from the fourth quarter and currently stand at 81 basis points for the first quarter. As to the eight basis point increase, wholesale funding did drive a lot of the increase while deposit costs are up seven 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 3Q15 just before Fed Funds started increasing.
Since then, Fed Funds have increased 150 basis points while deposit costs have increased 35 for 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 two most prominent are general pressure for increased deposit rates in a rising rate environment, 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, this reflects some of the details.
Rate sheet deposits are just that. There is 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 one-on-one 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. They are typically higher balance accounts where a relationship manager is 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 CD depositors with more push today than, say, three to six months ago.
We spend 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 a $57 billion deposit market. We've got 12.5%. There's $45 billion out there on somebody else's balance sheet. We just need our fair share. Terry, Rob, 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 up 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 is 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 five 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 loan 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 million, about the same as last quarter. Our last year first quarter was essentially flat from the fourth quarter. Our residential mortgage group had a good quarter in terms of production, with approximately $238 million in loan sales this quarter. Residential mortgage income was essentially flat with 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 of our bank loans. That's required some change in personnel in the Carolinas. It's now more integrated into the core bank, the referrals are much more common. We are optimistic about the second quarter and believe mortgage will see solid growth in the second quarter. As expected, BHG's contribution was down from a big fourth quarter number, reporting in at $9.4 million, reflecting year-over-year growth of around 20% from the first quarter of last year. We continue to anticipate the net growth of BHG in 2018 should be in the 12%-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 heartbeat. Wealth management is off to a great start in 2018. Investment 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, one of our key goals with the C&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 first quarter, we had approximately $1 million in additional revenues from insurance companies due to claims experience, still, insurance is doing quite well. Trust keeps growing.
Several key hires in trust in Tennessee and the Carolinas have 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 three to five quarters. Based on current average assets, we need about a 10% lift in current fees to get there, 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%, while our core efficiency ratio, excluding merger-related charges and ORE, was 47.6%, which was essentially flat with the fourth quarter. We expect our non-interest expense to be a little higher this quarter, 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, there's been a whole bunch of changes between last year and this year. We're not about to fly a mission accomplished banner, there's always a lot of work to do, we think we are operating a much larger franchise today more efficiently. After a lot of work, we're at the target environment in the former 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 first quarter of 2018. A similar thing happened at the first quarter of last year, as well as the first quarter the year before. This amounted to almost $2 million in expense reduction for the first quarter had we been accruing at the targeted 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 of a peer group either, just check the proxy.
At some banks, different groups have different incentives, supposedly they're all aligned so that it's good for the overall bank. As an example, executives have a plan, private bankers have a plan, retail hotshots have a plan, card sales have a plan, 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. 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 pittance. 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 entire leadership of this firm is on the same incentive plan with everyone else, thus if 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 first quarter. 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 at less than target kind of gets the 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 one, outside organic growth, and number two, outside profitability. We've also outlined the high-growth markets around the Southeast that have appeal to us, and along with that, we've outlined the merger criteria, one of which is minimum earnings accretion of 3%-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 outside 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. Thirdly, I'm not trying to make any deals right this minute, 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. 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'd feel comfortable moving forward on that. I guess finally, I think one of the objectives of these calls is for you to gain some insight into my perspectives of our performance during the quarter and where I think we are as a firm.
My own assessment is that we have a firm that's growing earnings 36% year-over-year, is having extraordinary success attracting 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%-1.70%, and we're operating squarely in the middle of that range with an ROAA of 1.60%. We've elevated our ROTCE to nearly 19% which suggests to me that our current price to tangible book value multiple has plenty of room to expand. Operator, we'll stop there and take questions.
Thank you, Mr. Turner. The floor is now open for your questions following the presentation. If you would like to ask a question at this time, please press star one on your touch-tone phone. Analysts will be given preference during the Q&A. Again, we do ask that while you pose your question, that you pick up your handset to provide optimal sound quality. 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. As you're seeing the strong loan growth, as we're waiting for the deposit growth to come in behind it, 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?
Yeah, Jared, 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%. We're at 98. Yeah, 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, we will be employing a lot of tactics to stay below it.
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 that's principally where the consumer thrust comes is in some of our offerings like group banking to employees and our private banking efforts to business owners and so forth. 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, our bankers have these books of business. They move their clients, which means they move their deposit books with them.
Many times, a loan will come first, but they'll bring 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. Our folks are busily about mobilizing those folks as well. I think when you get down to what do 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, the money's scattered around, not just at Pinnacle, but at other banks.
They know where the money is and how to round it up. That's the way it work.
Okay, thanks. On BHG, as we look out over the year, you said the 12%-15% growth rate. Is that full year over full year? If so, should we expect to see the seasonality, I guess, mimic what we saw last year, but maybe just the overall growth rate or year-over-year slow down from here?
Yeah, Jared, I think that's consistent with my expectations for sure this year. We have a lot of conversations with BHG. Matter of fact, there's a board meeting tomorrow, so we'll get an update tomorrow with those guys. Yeah, 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.
Hi. Yeah, guys, good morning. Thanks for taking my question.
Yeah. How are you doing?
Wanted to get an idea on the composition of that growth from North Carolina, that $195 million. I'm assuming that was still pretty heavily weighted towards CRE and that most of the strong C&I growth came from Tennessee, just as you're ramping up the hiring. Just wanted to get some confirmation on that and kind of think about when you think that actual C&I growth from those new hires will begin to deliver. Is that more back half 2018 or flowing into 2019 more so?
Well, yeah, if you look on slide eight in the presentation, Stephen, basically you're right. In the $195 million, it would be a higher growth volume associated with CRE than C&I. If you look at the percentage growth rates, you can see that we grew the CRE business roughly 15%. We grew their C&I business roughly 26%. We think that we're turning the corner at a pretty rapid pace, but I do think if we continue to make the C&I hires, that that growth rate will accelerate in the latter half of the year.
What would that be like on a ballpark dollar basis, just on that $195 million? Is that $20 million, $30 million on the C&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. 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? Or do you think that could still be a driver of further increases here? Then specifically on the non-interest bearing deposits, anything unusual that caused the end of period decline there in the quarter?
Yeah, 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. I think by and large, I think you'll see a slow and steady kind of consistent increase.
Okay, great. Maybe lastly from me, just kind of thinking about expenses as we head into 2Q 2018. Harold, I appreciate the color around the incentive comp. I guess two 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 just curious where that lag was there, and do you think based on what you saw in 1Q, that you'd expect some sort of a catch up in the coming quarter?
Yeah, I'll be open and candid with you. The fee revenues numbers for the first quarter were less than we had hoped. There was probably a slight negative variance in the margin. Most of that was probably in fees. Hey, Stephen, this is Terry. If I could, I might just say this. Harold's 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 he was last year at the same point, and we ultimately pay that greater than 100% for the year.
Gotcha.
I just put that in perspective.
Yeah, no, that's really helpful, Terry. Thank you. Okay guys. Congrats on a really nice quarter and getting that growth coming on board. It should do great things for the rest of 2018, 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. I think one of the big bear cases out on the stock right now is just the slowing growth from the remix of the BNC portfolio. Obviously, as Stephen just said, it was nice to see that 18% loan growth this quarter. 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 years?
Well, let me think what we've communicated here. 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 where we think we should be consistently performing. If you apply dollars to that, Tyler, you're talking about $2 billion 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? We would expect that growth rate to continue next year as well.
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. Harold, you mentioned that the 5-10 basis points of core loan yield expansion that you would thought you would see following the December hike. Obviously you guys came in better than that this quarter. Is the 5-10 expansion of the core loan yields from the March hike, is that still the right way to think about it?
Yeah, I think so. Obviously, we're hopeful that we'll be able to replicate first quarter in the second quarter. 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. We'll also probably have less accretion income. The core may go up, the GAAP number is going to get hit by the fair value number. All things considered, all the oddities, we ought to cancel each other out. We get to what the rate environment's 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. I just wanted to make sure I understood one of your prior comments to Stephen's question. You did have a slight negative variance from the incentive comp related to the margin expansion this quarter. Is that what you said, Harold?
Yep.
You had previously expected maybe stronger than nine 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.
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.
That would have been in that expectation. Got it. 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.
I think we're done on all that. He got all that basically accomplished by the end of February, we've got some dollar pickup coming here in the second quarter from all that.
Got it. Very nice quarter, guys. Thanks.
Thanks, Tyler.
Our next question comes from Jennifer Demba with SunTrust.
Thank you. Good morning.
Good morning.
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, I wish I could tell you what it is.
Okay.
I would imagine it's a higher beta. Well, I would know. I'll be pretty certain. It's a higher beta than what's going on the sheet rates.
Okay. All right.
I think.
Go ahead, I'm sorry.
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&L is more meaningful. It's all those kind of circumstances.
Okay. You had a bit of an NPA increase this quarter. Was there any one loan in that increase?
Yeah, I do know there was one, call it a $9 million 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 Curtiss with Piper Jaffray.
Good morning, guys.
Hey, 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?
Yeah. We think probably about five basis points was that. Of the 13, we probably got five of it out of the securities book.
Okay. In terms of maybe just as we look out over the course of the year, is the expectations for the core NIM to be relatively flat, or do you think it's possible we might see a little bit of a modest lift as we continue through the year?
Our hope is we're going to see a modest lift. We don't think the GAAP margin's going to decrease very much. In order for that to happen, we've got to see lift in the core margin. 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 have to raise deposits.
Got it. Okay. You guys mentioned, had some commentary on mortgage banking. You still feel good about year-over-year growth this year? Also, I think you guys had talked about leveraging the mortgage across the rest of the franchise. Just curious if there's any updates on how that progress has been.
I think we're still projecting growth year-over-year in mortgage. The second quarter will be a real important quarter for them, because they're going into the spring buying season and all that. 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, but that's still a work in progress.
Okay. 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 Nashville market, I wouldn't say there's any difference in this quarter than in the previous quarters. I think it's sometimes I get asked about where are you on certain commercial real estate categories like hospitality and multi-family, particularly in the core Nashville. We've been relatively cautious on those two categories and continue to be. 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 longtime relationships with some of the large regional banks, and multi-generational relationships at some of these other banks that we've really been able to pick up in the last two quarters.
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, guys, for low double digits this year and maybe into next year. Obviously, this first quarter was a great start, it implies just from a straight math point of view, the growth would slow from here. 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.
Yeah, I think you're just maybe a little conservatism on my part. I'm sure Terry would have a bigger number than me. That's just the way that things operate around here. I think we can hit our numbers with low double-digit loan growth. That's not to say that Terry's going to put the clutch in or anything. You're right. Particularly in the Carolinas, we've been really pleasantly surprised with how that hiring platform has shaken up over there.
All right. Maybe just a follow-up too on the types of hires that you're making. Historically, Pinnacle in Tennessee has 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 and a half. 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? Finally, Terry, you've talked historically about the capacity of the hires that you've 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 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?
Yeah. A couple of years ago, you guys have brought on, I don't remember the number. It might've 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 had 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?
Yeah, I think so. Again, I don't mind to say to you that I view a conservative estimate of the mature loan book for the hires that are being made there to be $80 million per relationship manager. If you have seven of those, five C&I and two private bankers, that production over a four-year period of time would likely be $560 million. Again, what's important is to understand that that expense burden is already on our books for that group of seven that I just mentioned there. That, we did five and two in the second quarter. The quarter before that, we did six. Again, you can begin to see the pace of hiring there. If it's 13 people at $80 million, that'd be a little more than $1 billion in production.
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. Again, you get the profit leverage is pretty dramatic out of those 13 guys that have already been hired. $80 million in a loan book would be a reasonable assumption over a four-year period of time, so $1 billion 40 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.
Oh, yeah.
from the bigger banks.
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% of our hires have come out of the larger regional banks that have sort of traditionally dominated the markets that we were in. 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. We have had good success hiring out of those banks that dominate the North Carolina market. 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 similarly sized companies also going through integration efforts and so forth. That's sort of been a boon to our ability to hire people.
That's very helpful. I'm sorry if I missed this, maybe one more for Harold. You guys put on some swaps this quarter. If rates were to move higher a couple times, would there be more to do there, or is this kind of it?
I don't know if this is it or not. We've taken advantage of a somewhat flatter yield curve with this transaction. I'm not going to say we won't do any more, but we might. We'll just have to see, Michael, 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.
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, Michael.
Thank you.
Our next question comes from Catherine Mealor with KBW.
Thanks. Good morning.
Hey, Catherine.
Most of mine have been asked and answered, I'd like to circle back to the deposit growth theme just real quickly. 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? I know, Harold, you mentioned that you think CD growth is going to pick up this year probably. How should we think about the C&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?
Yeah, 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 move. They want to go a CD ladder. Particularly in the Carolinas, I think Rick and his team are about calling those folks and making sure that if they've moved 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. Rick has got his folks actively calling some of those traditional CD depositors to try to get that money back to the bank. I think he'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, they're going to have to go find that money, as Terry was talking about, and try to get it moved over here. Catherine, what was the second part of your question?
That was it. It was more just the timing of as you build out the Carolinas and Virginia and overlay the treasury management platform. 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&I platform in the Carolinas and 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?
Yeah, well, that's what we're thinking about. I think, as this hiring, we bring in all these C&I lenders, that will absolutely take place
Then one follow-up on expenses. You've got $2 million from the incentive comps that presumably if you hit numbers better next quarter, then maybe you get that back. It feels like we're through all of the cost savings from BNC, so maybe we're at a good run rate this quarter. Is there a way to think about a core expense growth rate, just given your hiring expectations for this year?
Yeah, sure. Let me see if I can help you out. We probably were 2 to call it $3 million 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, 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. You can project what the expense load's going to be for the rest of the year once you get the good start point in the first quarter.
Got it. Okay. That makes sense. All right. Thank you. Great quarter, guys.
Thank you.
Our next question comes from Andy Stapp 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?
Yeah, Andy, I don't have that number in front of me. Call it the scheduled fair value accretion was probably in the $12 million-$13 million range, and we ended up in $15 million. It's probably about a $3 million number. I'd have to go dig around and find out what that number actually was, though.
I wasn't talking so much purchase accounting, just loans, the prepayment penalties from loan payoffs.
Oh. Oh, I thought you were talking about prepayments on fair value. Yeah, I don't have any idea on the prepayment penalties. I'd venture to say it's a small number.
Okay. Wealth management revenues were up nicely despite unfavorable market conditions. Could you talk about the drivers of the outperformance?
Yeah, sure. It's all people.
Yeah.
We had a very nice hiring. We hired a group of people in the late, call it third quarter last year. They're building their book. They're moving quite a few clients from their former employer. We've got the benefit of that here in the first quarter.
We lifted out a team late last year that had $600 million in assets under management. That's a big opportunity. There are other hires in there, too. That would be meaningful.
Okay. Lastly, to what extent have loan paydowns moderated?
Yeah, I think loan paydowns have slowed. A lot of that has to do with the rising rate environment and all that stuff.
Right.
We're not seeing quite the volumes in loan paydowns here in the first quarter and are not likely to see it in the second quarter that we might have experienced, call it second, third, and fourth quarter last year.
Yeah. 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 million-$3 million under what would be a normal run rate. Is that correct?
Yeah, I think so, Brock. I think that's a fair number for the first quarter.
Okay. On the FHLB advances, what is the base rate there that that's linked to that we should look toward?
Yeah, 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 second quarter, and we'll get some of that paid off. I know we've paid off some of it already. We'll be focused to try to get that $1.9 billion down to something less.
Okay. 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?
Yeah, 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 two weeks ago, I was talking to the regulators about it. Not about deposit growth per se, but about our incentive systems, and how they work and why we liked how they worked. What we have around here are people. The hiring model, 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. 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 sales culture.
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. We think that doesn't play well 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. 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 an incentive system that's based off of this program or that program. Does that make sense?
Yes.
It's a philosophical difference.
Yep. No, I think that's important. Lastly, going back to Jennifer's question on the NPA, was that a BNC credit or a Pinnacle?
That 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. A 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 Pinnacle?
It would certainly be a 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. 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, Nancy, I think I'll just tag on here. I know we're running long, but what really Dodd-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. 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. That's where I think the real cost, the hidden cost in all of that really is.
Okay. Secondly, just as you guys move into sort of a different segment of community bank, obviously you've gone beyond the $10 billion, well beyond the $10 billion, sort of moving toward the $50 billion, and you're not the only one in the Southeast, although you've done it more quickly than some of your competitors. Are the regulators looking at you in any kind of a different way? Do you get a different regulator, a different quality of regulation? 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 regulator is the FDIC, and we obviously are regulated as a holding company by the Federal Reserve. I would say both those groups do use the $10 billion threshold as sort of a line of demarcation there on when you move into a larger regional group. We have passed into that group and did back when we crossed $10 billion. The conversations are maybe slightly different, but Harold, I wouldn't view them to be meaningfully different than the conversations that we've had heretofore.
No, I don't think so. Yeah.
Okay. Thank you.
Thank you, Nancy. All right.
Our next question comes from Brian Martin with FIG Partners.
Hey, guys. I'll be short. I know it's getting long. Just a couple last-minute things. Just going back to the deposits just for one minute. It sounds like from what you said earlier, I don't know if it was Terry or Harold, but just 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. Does that seem 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. Terry, you talked about just the M&A, you kind of addressed that in your prepared remarks. 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&A year to date, but just the opportunities that you're seeing out there, how would you characterize those today?
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.
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've had either three or four opportunities to sign an NDA had we wanted to pursue a transaction with somebody. Again, that's a pretty meaningful volume of opportunities in my judgment. Again, it wasn't the right time for us. At any rate, is that helpful to you?
I guess, just from a multiple standpoint, there's nothing that would prevent you, I guess from where your multiple's 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. It's a function of my stock and their stock.
Yep.
If the earnings accretion is what we're looking for, we'd be willing to consider a transaction.
Okay. That's helpful. Thanks, Terry. Just the last two was, Harold, just on the expenses, so I'm clear, the under incentive this quarter or the lack of incentive, I guess the two or three million number you're, I guess, mentioning, is that an annualized number? It's really only $500,000-$750,000 this quarter. Had you had the full accrual into this quarter, I guess what I'm asking is, would the expenses have been $106 million-$107 million, or would it have been closer to $104.5 million?
$106 million, $107 million.
Okay. $106 million and $107 million.
The $2 million's definitely a quarterly number.
Quarterly number. Okay. Fair enough. Got it. 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? The other components seem, there's some seasonality with service charges, but I guess the other, where else would 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 they'll find their way. I think also BHG will find a way to get to 12%-15% earnings growth for the year. 9.5% might have been less than we anticipated in the first quarter, but I think they're well on their way.
Okay. All right. I think that's all I had, guys. I appreciate the call. 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. Like to get your thoughts about growth of average earning assets. Is it 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 it this way. We're at about 13% of securities to total assets at the end of the first quarter. We don't see that number going up very much at all. In fact, it'll probably come down.
Okay. Great.
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 second quarter because of just timing in the first quarter. Yeah, we won't see quite the same kind of escalation in the second quarter that we saw in the first quarter.
Understood. 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 300 threshold, or could you operate for a longer period above that level?
Yeah, we still believe that the 300 level will be above that the first half of the year, we'll drop down. On construction jumped up on the 100. We didn't breach the 100. We don't anticipate breaching the 100, we're likely to see construction begin to come down here in the second quarter and go down from here as a % of total risk-based capital.
Great. All right. That's all I had. Thanks for taking my questions.
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 concludes today's presentation. You may now disconnect, and have a wonderful day.