Pinnacle Financial Partners Inc (PNFP) 2018 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Pinnacle Financial Partners Second 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. (Operator Instructions)

Before we begin, Pinnacle does not provide earnings guidance or forecast. During this presentation, we may make comments which maybe constitute forward-looking statements. All forward-looking statements are subject to risks, uncertainties and other facts that may cause the actual results, performance or achievements of Pinnacle Financial to differ materially from any results expressed or implied by such forward-looking statements.

Many of such factors are beyond Pinnacle Financial's ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks is contained in Pinnacle Financial's most recent annual report on Form 10-K.

Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise.

In addition, these remarks may include certain non-GAAP financial measures, as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP 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, Daniel. As done in each quarterly earnings call for several years now, again, with this dashboard, which is intended to give a quick snapshot of our performance during the quarter, and it outlines 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 are all presented on a GAAP basis.

On this slide, I think we want to focus on revenue growth, that's one of our key themes for today's call. In the chart on the top left, you can see total revenues continue to set a new high each quarter, up 5.2% on a linked quarter basis or 21% in terms of annualized rate of growth during the quarter.

Regarding our growth in balance sheet volumes, which is generally the best predictor of future revenue growth, looking now at just below the revenue chart, at the loan chart, organic loan growth during the quarter was an excess of $700 million, which is an annualized growth rate for the quarter of roughly 18%. So the second quarter was a fabulous quarter in terms of current revenue growth and outlook for future revenue growth.

Because of all the noise associated with the BNC merger, restructurings in conjunction with the tax law change in the fourth quarter and so forth, in some cases, the non-GAAP measure is much better to illustrate the relative performance of the firm. So on this chart, I'd like to focus first on EPS net of merger-related expenses. That was $1.15, which is in the chart on the top row in the middle. It's up roughly 37% over the same quarter last year. And then immediately to the right, on the first row, the tangible book value per share chart, which paints a nice picture of our ability to [repeat the cap loan growth] tangible book value on a [rapid] and reliable basis with a 4.5-year CAGR of 14.5%.

Immediately below the tangible book value chart, I want to highlight ROTCE at 18.45% this quarter. As 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, so you'd see the very nice lift in ROTCE following that deal closing.

Next, I want to highlight the core deposit growth in the middle chart on the second row. Core deposits grew at an annualized rate of roughly 18% in the second quarter, essentially matching the annualized growth rate for loans here in the quarter. And lastly, on the bottom row, you can see that the asset quality is essentially blemish-free.

So after market charges, second quarter was a great quarter: loan growth, 18% annualized; core deposit growth, 18% annualized; revenue growth of 21% annualized; EPS growth of 37% annualized; ROA of 1.54%; and ROTCE of 18.45%.

Now here's what we want to get done today. Harold will review 2Q '18 financial performance in greater detail. And following our strategic planning for [trades in our board], while there's no change to our overall ROAA target, it'll update some of the target ranges for the 4 components that leads to that overall ROAA target. I'll then provide an update on our success with the BNC integration, attempt to create more clarity on our M&A stance. And then I want to deal with several questions that are intended to demonstrate the power of the differentiated model we run and we believe make us different from our peers.

Number one, we continue to organically grow loans at a mid-double-digit pace. In a related question, how long does it take to build out the C&I program in Carolinas and Virginia? Number two, can we get a relationship-based funding to support the loan growth? And number three, despite high deposit betas, can rapid balance sheet growth produce rapid net interest income and EPS growth?

So with that, I'll turn it over to Harold for a more detailed review of the quarter.

Thanks, Terry. Revenues for the quarter were up $11.5 million from the previous quarter, ending at $232 million (sic) [$230.2 million]. While we grew those revenues, we also again experienced a decrease in our quarter-over-quarter efficiency ratio, which is again our thesis on how we create operating leverage around here.

Net interest income is up from the previous quarter of 2 -- about $7.8 million, reflecting an annualized growth rate of 18%. Much of this was attributable to increased average loan balances and also improved loan yields resulting from the recent interest rate hikes. The impact of fair value accretion increased $700,000 during the quarter to $16.1 million, which is above where we expect it to land in Q2. We anticipate decreases in discount accretion in future quarters as the level of acquired loans and recent mergers becomes less impactful and post-merger prepayments slow. Best guess at this point is that fair value accretion is likely to remain around $55 million for 2018 and perhaps $13 million to $15 million in the third quarter.

At the end of June, we've got about $130 million in total loan discounts remaining on our balance sheet. The dark green line on the chart denotes our non-GAAP revenue per share. We reported $2.64 adjusted revenue per share in the second quarter of 2017 and are reporting $2.97 this quarter, so we've grown adjusted revenue per share by roughly 12.5% 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're growing revenue per share as we expect and continue to do so as we move through 2018 when we're growing balance sheet.

This is a new slide, but again focusing on revenue per share growth using trailing 12-month as the basis for the amounts. 2 things we'd like to communicate here. First is that we have experienced an accelerating green line over the last few quarters. Now this is during a time of significant internal focus around the Bank of North Carolina deal closing and systems conversions, not to mention cultural integration and getting folks aimed in the right direction. Additionally, we still were deploying the synergy case in the first quarter, so we've only been at the target environment for essentially 3 to 4 months. I can't help but be excited about where we are as a combined firm and where we're headed in all of our markets.

Secondly, the dotted line represent the peer groups' year-over-year growth, which is a cumulative last 12-month revenue of our peer group divided by the active number of shares. We consistently outpaced these amounts over the last 18 months and gaining traction.

I've worked at places where the only way you're going to hit your bottom line number was through some expense initiative. It's a whole lot more fun to work for a firm with growing revenues. We've had this chart for a long time now. Concerning loans, as the chart indicates, average loans for the quarter were $16.8 billion compared to $16 billion at the end of the first quarter as average loans increased by almost $800 million, thus hitting on its growth rate of better than 19%. This is on the heels of the strong growth in the first quarter as well. So we're going into the third quarter with roughly $300 million more in ELP loan balances over the average for the second quarter, which is a great head start for the second half of 2018.

In the Carolinas and Virginia, their organic loan growth for the first half of the year has been around 14% annualized. There's a chart in the back that shows what each market has achieved. Importantly, C&I and owner-occupied is up almost 22% annualized. Right now, they've grown their C&I owner-occupied book to 26% of total loans, CRE and construction remains around 50%. In Tennessee, C&I is 50-plus percent. If they keep growing at a 22% clip in C&I, they will create the C&I platform in the Carolinas and Virginia much faster than most would have imagined.

As the chart indicates and as expected, our loan yields increased to 5.04% from 4.91% last quarter, a 13 basis point increase linked quarter. Our modeling has one more rate increase for September, and then only 2 rate increases next year. Our advice is that we may begin modeling at least 1 more rate increase most likely next year, given the recent economic news, which we believe is helpful to our outlook.

We presented this slide last year, so it's -- last quarter, so it's back by popular demand. We're still targeting 35% fixed rate loan book for our loan portfolio. We've also executed the forward interest rate swap early in the second quarter in order to accelerate our floating rate component by an additional 3%. We may execute another forward swap to further accelerate our floating rate asset book.

Also, we've updated the slide with additional information on rates on various rate categories for LIBOR and prime rate. We feel like we've captured substantially all of the short-term rate increases. Fixed rate loan yields have not moved much for the loan book. But given the yield curve, it takes a lot of new loans to move the weighted average yield of the fixed rate portfolio.

As the last 2 columns on the chart at the bottom indicate, we are seeing some lift in fixed rate pricing this year, so we should see the book yield begin to move north eventually. New loan yields from prime base credits were fairly flat quarter-to-quarter. This was because we booked some really nice higher-yielding prime-based credits earlier this year.

We had this chart for our Investor Day a few weeks ago. The chart reflects our quarterly average loan growth for each quarter since Q3 2015. The blue bars on the slide is adjusted to remove acquired loans. That said, these are the real quarterly annualized growth numbers, thus showing the impact of growing our revenue producers. As shown, our loan growth continues to outperform our peer group quarter after quarter without sacrificing credit quality or accepting undue concentration risk. Keep in mind, we don't know what 2Q '18 peer information is, but based on what we hear so far, it will be consistent with the first quarter. So another strong loan growth quarter for the Pinnacle in comparison to peers.

The small chart in the middle of the slide is average account balances comparing early 2015 to the second quarter of 2018. We need to make this a bigger deal. Our portfolio is not about a whole lot of whale-type loans, to say it's [granular] may even be an understatement.

We've got a few large loans, but we're talking average ticket size [to hit us at] just over $1 million to $1.25 million for commercial real estate and construction. That's all commercial and residential. Our average commercial and construction commitment is just over $2.4 million for the first 6 months of 2018. Again, we believe a very granular portfolio aimed at small and middle-market builders and developers in our markets.

Again, the blue bar could not be where they are without hiring new revenue producers, hiring revenue producers, gathering clients and doing it over and over again.

Average deposit balances were up $670 million while EOP balances are up $1.35 billion. Most of our average balance increase was attributable to core deposit increases. Late in the quarter, we restructured some funding to move in Federal Home Loan Bank balances into wholesale CDs to save a little spread income. Even without that, we think we had a great deposit growth quarter. Our deposit cost did increase 18 basis points for the second quarter from the first quarter and currently stand at 78 basis points.

We can see a beta of 31% on deposit cost given those figures since 4Q '15, more on that in a minute. As to the future, we expect deposit cost 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 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.

We still believe we are in markets that have ample liquidity to match our loan growth expectations. Terry, Rob and Rick are driving our sales efforts towards depositors. Yes, we continue to aim at specific depositors. Yes, our private bankers are calling on affluent clients. Yes, our commercial bankers are looking for commercial operating accounts. Yes, our deposit rates will increase to fund our loan growth. We will play our customary sheet lever gain. We still believe we've got adequate room in our plans to fund our loan growth with a fair rate paid on deposits. We planned on a 50% beta this year. Don't get me wrong, deposit betas are important, we pay attention, but right now, we are focused on gathering more clients and growing revenue and earnings.

Here's another chart we showed at Investor Day. Again, a big quarter for deposit growth in 2Q. And I know many of you will say that we have a large wholesale component, but more than half of our growth was core deposits. And a meaningful portion of the noncore was public funds, most of which was in the Carolinas. I tell you that because our folks have gotten the message. Go get the clients, get their deposits. We may sometimes hold our note on the rate but get the client. The bank that can gather clients wins.

Also on the chart is the loan-to-deposit ratio for us compared to peers. As you might expect, our line bounces around, but a peer-to-peer line will nudge up closer to us after 2Q results are announced.

This is a new chart, deposit betas versus earning asset betas. At the end of the first quarter, our deposit beta was 10% more than the peers, but our earning asset beta was 19%. We are focused on managing both sides of our balance sheet. Net interest income will trough net interest margin to a point. But as many of you know, we are EPS and revenue focused around here. You may or may not like how a particular metric responds from time to time. But at the end of the day, it's setting big targets, creating strategies to hit them and managing the curveballs that folks in the economy throw at you. We believe we have a differentiated model. We believe that model is transportable and we believe it's working.

Fees amounted to $48 million, up $3.8 million from -- since last quarter. Our residential mortgage group had a good quarter in terms of production with approximately $265 million in loan sales this quarter. Resi mortgage income was up from last quarter. Rate increases have not been helpful to this group over the last few months. Mortgage is hiring, particularly in the Carolinas. As we mentioned to you before, we're going through a significant change in mortgage driven to Carolinas, and the news is good as we've secured several new hires in that area this year.

As expected, BHG's contribution was up slightly from the first quarter reporting, in at $9.7 million, reflecting year-over-year growth of around 11% from the second quarter. We continue to anticipate the net growth from BHG this year should be in the 12% to 15% range.

Investment services income remained flat in the second quarter compared to the first quarter. Keep in mind, we remain in the Phase I of a build-out program of our platform in the Carolinas. There was a solid base in one of our key goals in the C&I build-out just to ramp up our investment efforts and net footprint [needed].

We've had several significant hires in both footprints that have contributed to our success in investment services. In insurance, in the first quarter, we had our -- we have approximately $1 million in revenues from insurance companies due to claims experienced, but still, insurance is doing quite well. Trust keeps on growing. Several key hires in trust in Tennessee and the Carolinas had pushed their revenue contribution to where it is today. And in other noninterest income, we have positive $2 million of our tick-up from the revaluation of our certain of our joint venture investments.

Non-operating leverage. Our efficiency ratio on a GAAP basis was 48% of our core efficiency ratio. Excluding merger charges was 46%, which was better than the first quarter. We expected our noninterest 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 2% better this quarter than the same quarter last year. And there's been a whole bunch of change between last year and this year.

We continue to accrue less than our targeted award for our corporate incentive plan at the end of the second quarter of 2018. Many of you are familiar with how we do things. You know that our corporate incentive targets (inaudible) we believe, we equate to the top quartile performers within our peer group. As many of you know, we get paid to hit numbers. If we don't hit numbers, we don't get paid.

Now some of you might say that is a short-term fix, don't disagree. Over the long term, you need to pay these incentives. We've had years where we paid more than target, we've had years when we paid a goose egg. The critical thing is that our associate base understands why we do it the way we do it. Keep in mind that Terry and myself and the entire leadership team of this firm are on the same incentive plan with everyone else. Thus, if the CEO gets paid, we all get paid and vice versa. Incentives are important and it's one of those things that makes us unique.

Other expenses were up this quarter. We believe about $1 million of that is nonrecurring due to various charges we incurred this quarter from various losses, which included elevated fraud losses, credit card, ATM and other areas.

Lastly, as many of you know, last January, we increased ROA targets to a range of 1.50% to 1.70%. For our strategic targets, we left our other targets unchanged. We promised that we would update those targets after our strategic planning retreat, which was held last month. Currently, we are modifying our net interest margin, noninterest income average assets and net charge-off ratio to the amounts noted on the slide. Given the changes, we don't think these modifications will result in any change to our ROA outlook going forward. We fully intend to operate within this guidance over the next several quarters.

With that, I'll turn it back over to Terry to wrap up.

Okay. Thanks, Harold. As a reminder, since the beginning, when we described the deal rationale, we've always talked about the fact that BNC had a double-digit growth CRE platform, and then our goal was to not disturb or diminish that in any way. But as addition to that, both known to that high-growth C&I platform, which then has the impact of steepening their already high growth rate.

To that end, we communicated our intent to hire roughly 65 C&I and private banking relationship managers in the Carolinas and Virginia over a 5-year period of time, beginning in July of 2017. To be on that pace, we would need to have hired 13 in the Carolinas and Virginia by July of 2018. So you can see, having hired 19, we're roughly 46% ahead of schedule in terms of hiring C&I and private bankers in the new market.

I want to comment that it's not just about the number hired, but qualitatively, Rick Callicutt and his team have done a fabulous job of seizing on market vulnerabilities to hire some of the best bankers in their markets, while the sources for new hires have been broad, meaning that we've hired from a good number of different banks.

Clearly, as the majority of the new financial advisers are coming from those large retail national players with whom we like to compete. And impressively, the average experience level of these 19 commercial and private bankers is 24 years, which is consistent with Pinnacle's long-term results of hiring experienced bankers with large client followings.

And so how are we doing on the success criteria we recently laid out? Year-to-date, in 2018, it appears to be working like we're drew it on the board. In the first half of 2018, we saw continued double-digit growth in the CRE platform and meaningful acceleration in the C&I business, which Harold has already discussed. In other words, we are accomplishing exactly what we set out as the original success criteria.

And not only are we switching the loan base towards C&I in the Carolinas and Virginia, but total loan and total deposit growth during this period of transition is impressive by any standards. Frankly, in terms of hiring experienced bankers and then moving their clients up, it's hard for me to imagine how the BNC integration could be going much better.

Now I'd like to switch gears and discuss our current stance on M&A. I'm going to spend some time discussing our long-range plan, but before I do, let me be as clear as I know how to be. Regardless of our long-range plans, from a practical standpoint, based on what I know right now, I just wouldn't expect us being an acquirer during the remainder of 2018 and the first part of 2019. So with that out of the way, let me quickly review our long-range plan.

In general, 4 states we desire to operate in are Tennessee, North Carolina, South Carolina and Virginia. In the specific, M&A evaluation criteria we used has been a matter of public information for quite some time. The BNC transaction was a bull's eye versus the previously communicated guidelines.

There have been subsequent M&A opportunities on which we chose to pass. Of course, in the early going, it would have been imprudent to take on another transaction while we were integrating BNC. But of late, we passed on discussions with banks that met some, but not all of the criteria we've laid out. In other words, despite there being a number of acquisitions in some of our targeted markets, we've not missed on any transactions we wanted to do.

As you think about our disciplined approach to M&A, I want to highlight the first 2 criteria, which are, number one, we only do negotiated transactions; and number two, with management teams that want to stay and continue to leverage our size to continue building what they started and protect the revenue streams that we're buying. Out of the 6 deals we've done in our nearly 18 years of existence, we have never bought a bank at auction, never, and we have only bought banks from like-minded individuals that we know and trust.

This updated chart that we've been using for quite some time, as you can see, we're amassing and have largely already amassed most advantaged markets in the Southeast. It's been updated to specifically note the addition of 2 markets, which we did not originally notate as target markets and in which we do not currently operate but are in the previously delineated 4-state area, with Washington, D.C. and Columbia, South Carolina. And so [over now] in the list, with Richmond, Virginia, the Tidewater area of Virginia and Atlanta, Georgia, in terms of Southeastern markets, where we believe our model would work extremely well. But please, please, do not take the addition of those market as a signal we expect to do anything in the near term. These are very simply updates to our long-range strategic plan.

And so now, let me clarify our near-term stance on M&A regardless of our long-term plans, which I just discussed. Number one, we expect double-digit growth in our existing footprint for several years, so we don't need any M&A to hit our growth and profitability targets. Number two, strategically, we desire to compete in the large urban markets dominated by Regions, SunTrust, Bank of America and Wells Fargo or similar organizations.

Number three, as we just discussed, we've targeted the largest, fastest-growing markets in the Southeast. Number four, previously, we successfully deployed both de novo start-ups and M&A to extend to new markets, and we're equally comfortable using either technique as opportunities present themselves. We do not need to make an acquisition to extend to the targeted markets.

Number five, strategic M&A criteria include, it will have to be urban and not rural, it will have to be commercial and not retail, smaller deals will need to produce 3% to 5% EPS accretion and larger deals need to produce 8% to 10% earnings accretion, and that we will limit the tangible book value dilution. We simply don't consider transactions that fail to meet any of these criteria. We continue to cultivate relationships with limited M&A targets to position negotiated transactions with like-minded partners.

We would extend -- number seven, we would extend by [de novo start] or M&A only when satisfactory opportunities are available given the criteria we've been talking about. And so as I just said a moment ago, it's just hard for me to imagine how anything could occur in the remainder of 2018 or early 2019.

Simply said, in terms of our near-term stance, for those of you who want us to do another transaction quickly, that's probably not likely. For those of you who are concerned we're likely to announce something immediately, don't be. That's about as clear as I can make it.

Now there are several important questions that I want to deal with honestly because we hope we bring to life things that I think differentiated us from most of our peers and consequently should bear on anyone's investment thesis for our stock.

Number one, if PNFP continue to grow loans in a mid-double-digit pace, and as I said earlier, a related question is how long does it take to build out C&I programs in the Carolinas and Virginia, I think Harold has done a nice job of giving you the background on that, but I'll address it a little further. Number two, can PNFP gather relationship-based funding to fund the loan growth. And number three, despite high deposit betas, can rapid balance sheet growth produce rapid net interest income growth and EPS growth, which are really important to us.

So beginning with the pace of loan growth. While [our past says that] ensure future outcomes, many would say the best predictor of future outcomes is its previous result. Most of you will recall we closed our merger with BNCN in June of 2017, so these are the quarter-end loan numbers following the close of that transaction. We weathered the deal announcement and whatever laws of momentum generally occurs in conjunction with that. We weathered the brand change and whatever mourning typically occurs with that. We weathered the system conversion and all the internal focus that's generally required for that. And through it all, quarter after quarter, we've consistently put up outsized loan growth.

One of the keys of our incredibly successful organic growth model for almost 2 decades now is that we really do provide differentiated level of service that not only attract clients in terms and then [raising fans] that advocate for us in the market. This is Greenwich data.

We've plotted the level of market penetration on the y-axis and the Net Promoter Score on the x-axis for each of our Tennessee markets. While there's a very technical definition of a Net Promoter Score, for our purposes here this morning, in layman's terms, the Net Promoter Score generally measures the percentage of clients that are so fired up about your brand, they look for opportunities to recommend another bank with it.

As you can see here, in each market, regardless of how mature our market penetration is, we created an extraordinarily high percentage of [rates in advance]. We do have a differentiated brand. And as you can see also, we are able to translate that into meaningful market share gain, a differentiated brand should produce outsized growth.

In addition, now in a differentiated level of service with clients, we have a differentiated brand with bankers, which we're able to leverage to attract the best, most experienced bankers in the market. This is the secret sauce. Because we generally can recruit and hire relationship managers with more than 2 decades experience in our markets, 3 things happen as a result. Number one, they produce outsized loan growth because they're able to move clients more quickly than a less experienced person who'll have to rely on the long-term client cultivation, calling off a [Dun & Brad] list or the like. Number two, they produce outsized asset quality because they've been handling these clients over a long period of time that we just talk generally more than 2 decades and they're intimately familiar with their creditworthiness. Additionally, they leave any of their bank credits behind both in terms of loan quality, funding and relationship quality.

Number three, not only do they grow loans quickly, they grow deposit and fees quickly too. They harvest the entire client relationship. This model has them move their long-tenured clients, is about the only way I know to produce outsized growth, get it funded and have reasonable asset quality.

So here's a visual to how it really works. Looking at the 2 market extensions we did prior to BNC, Chattanooga and Memphis. We bought 2 great banks, both during 2015, but then overlaid our hiring models and culture of engagement. So in the case of Chattanooga, we started with 23 revenue producers and in the case of Memphis, 40 revenue producers. You can see the rapid build-out of revenue producers, which then led to extraordinary loan growth and extraordinary deposit growth. You see the huge CAGRs on all 3 variables there: revenue producers, loans and deposits. And I think Memphis may be the most instructive in terms of continuing the double-digit growth for some time from the perspective that it was largely a CRE bank on which we bolted the C&I platform. It's essentially the same play we're running in the Carolinas and Virginia.

One of the related questions concerning our ability to continue the double-digit loan growth is what's the impact of building out the C&I platform in the Carolinas and Virginia, how long does it take and so forth. This is not intended to be longer deposit growth guidance. It's simply an illustration of the potential volumes. [General] illustrative assumptions are: number one, hiring occurs in a straight line over the course of the year; number two, production occurs in a straight line from the point of hiring; and number three, mature FAs produce $80 million in loans over a 5-year period of time with 85% relationship fund in it. In a minute, I'll talk about the material relationship managers in Nashville, but they average $99 million in loans with 85% relationship funding.

So an initiative like this, as we originally laid it out, would entail hiring 13 commercial and private bankers in year 1. So you might think about it as you look across the line called year 1 clients. Using the assumption I just reviewed, you would expect the year 1 clients to manage the books, averaging $836 million in total in year 5. And if you had concluded year 1, which we have, the compensation expenses required to achieve not only the $836 million in average loans, but the $710 million in average deposits would already be in your run rate.

And so you can see now, each year's class will be additive, so it's -- over the 5-year period, where you're successful in hiring 65 C&Is and private bankers who produce volumes consistent with the assumptions we just laid out, the loan and deposit growth in previously unavailable sources would do 2 things: number one, is steepen the annual rate of growth; and number two, provide a more diversified loan book in which we would force to constrain CRE loan growth in conjunction with macro factors, like the number of banks that have been discussed. So this got incremental growth initiative to provide some comfort that our mid-double-digit growth in loans should be attainable for some time.

So switching gears, let me see if I can provide more color on how we approach the funding challenge. First of all, our model calls for core funding in the 75% to 85% range. In general, we build our goal-setting methodology from the Salesforce to self-fund 85% of the loan growth. However, at the macro level, from an outcome level, we can comfortably operate with a 25% dependence on noncore funding.

Secondly, I've already discussed the hiring model and our approach to [moving] clients, home clients, loans, deposit and fees, not just loans. In other words, we harvest an entire client relationship. The Nashville planned advisory group, as I alluded to a minute ago, is the model for how we attempt to build these C&I practices in other markets. So the Nashville planned advisory group has filled 29 C&I and private bankers, from material relationship managers in that unit, which we consider those that have been there at least 5 years. The average loan book is $99 million and the average deposit book is $84 million. So you can see, a mature C&I platform operates just inside our core funding requirements, at 85%. Again, the key is to harvest the entire client relationship, not just make loans.

Much has been discussed regarding our approach to relationship banking on the commercial side, but it applies with our retail business as well. This is data from Infusion Marketing Group based on our retail households, which we have about 141,000 of, and it covers our entire footprint in Tennessee to Carolinas and Virginia for the period beginning March 1, 2017, immediately following our BNC deal announcement for 1 year.

During that period of time, which included the brand change in the Carolinas and Virginia as well as the system conversion affecting the entire firm, we added households 30% faster than the norm for banks, and the average household deposits were nearly double the norm for banks. We added households 30% faster than the norm with deposit balances nearly twice the norm. And to highlight what I mean by relationship selling, during that period of time, we never ran an ad, there's no promotion, we didn't have a sales contests, we didn't offer any incremental incentives for sales, we just focused on relationship-based selling.

So can we get our relationship funding to support loan growth? I think the answer to that is yes. But we recognize that it doesn't always occur on a straight line. And since it doesn't occur on a straight line, I think most of you are familiar we've had quarters where loans grew faster than deposits and quarters where deposits grew faster than loans.

But there's always been a great deal of intentionality around deposit acquisition. We definitely have a number of initiatives that are specifically focused on deposit acquisition in order to augment the natural relationship management that typically occur. They include things like this: number one, recruiting and hiring associates that over the years have built client portfolio among clients who were primarily depositors. Many private bank and RMs would fit this category. Number two, taking our existing RMs and focusing them on sectors or clients that are meaningfully net providers of funds, things like bankruptcy trustees, title companies, property managers, HSA processors and the like.

Number three, we augment branch distribution with a courier deposit pickup capability. Specifically, we send a courier to the client location to pick up the deposits. Our Chattanooga market has been the poster child of this technique. Number four, leverage a full suite of electronic banking tools like remote deposit capture for businesses and mobile check deposit for consumers.

Number five, traditionally, we've done 0 mass marketing, but now we have an opportunity to experiment with that in Carolinas and Virginia, where we typically have more branches and lower share positions. In fact, we just completed running a money market campaign in the Carolinas and Virginia for a money market account at 1.69%, a relatively high rate, but not 2.3%, so a successful campaign there.

And then lastly, in the past, we made investments in a number of nonbanks that provided great returns and fit our balance sheet or P&L needs. Of course, BHC is the biggest example of that. Another example of that, several years ago, in an effort to increase higher-yielding assets, we made an investment in a firm to build a credit card platform with correspondent banks that put us in a position to build out more than $120 million credit card portfolio and what is normally the scale business that just wouldn't otherwise have been feasible for us to do. We also made a modest investment in a cybersecurity firm. It specializes in cybersecurity for banks, which we view as a rapidly growing market, but it also puts us in a position to have state-of-the-art cybersecurity at an affordable price.

We recently made an investment in a firm called Artist Growth, which we discussed and made a showcase on Investor Day, which in addition to offering a handsome return on the investment puts us in a position to control huge sources of deposit funding for music artists and their tours. And so over time, we're hopeful we'll be able to find similar opportunities with those corner large blocks of funding.

So finally, there's been so much discussion about deposit betas that some, in my opinion, may have lost sight of revenue and earnings growth, which is the primary objective of this firm. And so it's whether relatively high deposit beta firm can be a rapid grower of net interest income, and therefore, rapid grower of revenues and therefore, rapid grower of EPS. It seems to me the answer to that question is yes. Here, you can see that we plotted our peers, some of whom are really low deposit beta companies, plotting the year-over-year increase in total deposit costs on the y-axis and the year-over-year increase and net interest income per share on the x-axis in order to normalize for acquisition, et cetera. And our performance on net interest income growth in the first quarter was pure lien despite a relatively high beta. I believe this was the case because we were able to grow our client base by taking market share, and consequently, growing earning asset volumes at a dramatic pace. And I think that may be the most important difference between us and many of our peers.

And so here's our focus. We've seen these to be very different than most of the management presentations I hear these days from other banks. Given our very high level of profitability and the very unusual opportunity we have to produce outsized organic growth in all our markets, we're tightly focused on growing revenue and EPS. If we have a 1% ROA bank, we might not be able to make that play if we did have a differentiated model, where we can gather clients at a dramatic pace, we might not be able to make that play, but happily, we are in a position to make that play.

Again, we do it by taking market share. Accordingly, we're willing to accept the higher level of volatility on measures like cost of funds in the time when we're advancing our operating leverage and improving our efficiency ratio. Specifically, it's our intent to continue adding revenue producers at a rapid pace, pricing competitively, growing earning assets at a mid-double-digit pace and produce an outsized growth in earnings per share.

So I'll stop there, Dan, and we'll take questions.

(Operator Instructions)

Our first question comes from Jared Shaw with Wells Fargo Securities.

Maybe you could just start maybe on the funding side, great color around that. When we look at the reduction in borrowings this quarter, did that entire $400 million -- was that just shifted over to the wholesale CD side? Or was that something less than the growth in CDs?

Jared, can you repeat the question? I'm sorry.

Sure, yes. When you look at the borrowings, the FHLB borrowing decline, the $400 million there, was that replaced entirely by sort of that noncore CD line you talked about with the munis? Or was it less than the $400 million in that transition?

Yes, I think it was a little bit less than the $400 million but not a lot less, Jared. But if you look at the average balances on the Federal Home Loan Bank borrowings, they stayed pretty flat for the quarter. So that transaction happened at the end of the quarter. Does that make sense?

Yes. Yes, absolutely. And then what's the rate differential between the new CDs versus what you paid off on the FHLB, do you expect it to be a little bit of a boost?

It was about 11 basis points.

Okay, great. And then on the fee income side, I guess, first in the quarter, you had a nice little jump there in other fee income. Anything there that we should be aware of? Or is that a good base going forward? And then sort of corollary to that, longer term I see on Slide 17, you brought down the target for fee income, but longer term, should we expect in out-years that, that fee income goes back to the level where we saw it sort of pre-BNC?

Yes. I mean, well, that's effectively the goal, was to try to get the C&I platform built in the Carolinas and Virginia. And that comes with its deposit fees and investment fees and all the other ancillary services. Yes, we did have in the second quarter, a reevaluation of some joint venture investments. And that contributed about $2 million to that other noninterest income number.

And our next question comes from Stephen Scouten with Sandler O'Neill.

Terry, great color on kind of your expectations for a continued double-digit loan growth. I do have a question relative to the kind of 18 percentage growth we've seen year-to-date versus maybe what's historically been more like 12% to 13%. Has there been any sort of composition change to date, now that you guys are a larger bank. Are you doing larger loans? Or is this really just a manifestation of all that impressive hiring activity over the last few years? And can you kind of reconcile where you really think we might fall within that kind of historical range versus what we've seen year-to-date?

Yes. Stephen, I don't think there's any change in the personality of the lending, meaning our company continues to be focused on being a C&I lender. We're not doing [hog sharing] credits. I think Harold's already reviewed the really granular nature of the loan portfolio, the average ticket sizes that we're doing and so forth. As you well know, I mean, every ticket's not what the average is, but if you've got an average that low, you're not doing large and hog sharing credits. So I don't think there's any personality change from that perspective. I do think that it is a fair representation that the principal driver has been the rapid success of hiring great bankers, who had large books business and moved those loans more quickly than others can do. So I hope I'm answering your question.

Yes, and that does. That does, I mean, I guess, do you think this above a 15% rate is sustainable? Or are you guys just still comfortable with the kind of double-digit messaging?

Stephen, let me say this. We work hard to try to deliver whatever we say. I feel comfortable talking about mid-double-digit range. That sounds right to me, if you want to know the truth. If you were -- I would say that we'd be at mid-double-digit range from say 14% to 17% or something. I mean that sounds like mid-double-digit to me, and so I like a mid-double-digit guidance range. I do think there's some prospect that we can do better than that. But again, I'd rather just stick with the guidance that we've given.

Perfect. Perfect. Okay. And then one other one from me really is, any color, maybe Harold, that you can give around the deposit betas you've seen on the nice core deposit growth you had versus maybe the noncore stuff? Is that a number you have at all? I was just trying to decipher how much of that 23 basis point move was kind of core versus noncore? And how we can think about that quarter-over-quarter moving forward? Does that 23 bps we saw in 2Q is likely the pace we'll see moving forward or if some of that was pulled forward into this quarter?

Yes, the beta on the wholesale deposits is significantly higher than the core deposits. I'm looking for my information on that, but I think it's somewhere around, call it, 17-kind-of percent on the core book versus, call it, I don't know, 60% on the wholesale book. I'm trying to figure -- I'm trying to gather my thoughts on what I'm looking at cycle-to-date or quarter-to-date. The quarter-to-date numbers are much higher, but that would probably be kind of the relationship between the core and the wholesale book, Steve.

Okay. And I guess, as a follow-up to that, maybe, with the big deposit growth you put up this quarter, I mean, do you think you can mitigate some of that pressure in the subsequent quarters and kind of keep the core NIM flattish from here? Or could we see more downside pressure?

I think we'll see some downside pressure in the core NIM. I don't think we'll see what we saw this quarter. But you're right, we had a great -- we had a great growth quarter in deposits. So I'm not going to say we don't feel like we can -- I'm not going to say -- I'm almost like, Trump-like, I don't know. I'm not going to say that we are going to take the foot off the pedal on deposit growth with the sales force. They're still going to be focused on growing deposits, but the growth spurt we had in the second quarter does give us some degree of flexibility as we go into the third quarter and looking at deposit growth, if that makes sense. The other thing I'll add to it is, I think we found where the pressure point is on pricing. I mentioned this to our board yesterday. It doesn't appear like there's been this kind of unlimited appetite by depositors that require an ever-escalating deposit price. I think, to our benefit, the large caps have kept their deposit pricing lower, which gives us an opportunity to secure deposits from some of their depositors at an obviously a little bit higher price but that price is not escalating dramatically. Does that make sense, Steph?

And our next question comes from Catherine Mealor with KBW.

Just one clarifying question on the way you talk about deposit betas, Harold. So when you say you think you have a 50% deposit betas so far this year, you're thinking about that on a cumulative basis or on a basis just for this year?

I think that's a basis for this year, and we're looking at effective Fed funds rate when we talk about that Catherine. So yes, it was for this year.

Okay. And so that, to Stephen's point, which I would suggest that the beta assuming we get another -- assuming you get the full benefit for June and we get another one, let's just say in September, then the actual beta should decline from this quarter -- from the level that we saw this quarter. So linked quarter we may not see over 20 bps increase in interest-bearing deposit cost like we saw this quarter. Was that -- is that a fair assumption?

Yes, we're not expecting another large increase in deposit costs like we experienced this quarter, but I'll tell you that in context, that if that's what we need to support loan growth and support this pipeline, we will have that kind of deposit cost increase. But we're not expecting it. I'll say it that way.

Our next question comes from David Feaster with Raymond James.

C&I growth has been tremendous. And competition has picked up and this is a testament to your -- you've executed exactly as you would have thought and more than we had given you credit for. Can you just give us a pulse of what you're seeing in the C&I space? What segments you're seeing the most opportunity? And maybe, is there any irrationality in certain segments given increased competition?

Well, I tell you that's a great question, but I think the answer is, we continue, particularly in the C&I book, to have a well-diversified portfolio. You can look back there in the past earnings call slides, where we break down all the portfolio components and so forth. And so it's an extraordinarily well-diversified book. I don't think we find that we're growing a C&I category because there's something inherently going on in that sector that's creating that growth. Again, I would just take you back to your opening comment, where that growth comes from is, it comes from the relationship manager. And so if a relationship manager is a private banker, who is concentrated on doctors in terms of building a deposit book, then that's what shows up on our balance sheet. It's not some macroeconomic thing that's causing deposits from doctors to occur. It is if we hired a banker who has a concentration among doctors. And so I've said same thing would apply as we hire C&I bankers, some are specialties -- the specialist in franchised lending or different things. And so you'll see some pickup in whatever category they're moving. But again, it's not -- I don't -- we don't see it tied to any particular economic factor that's causing the surge in one category versus another.

Okay, great. And then you talked about that you're probably on the sidelines for M&A near term and highlighted the success that you've had on the de novo front. Can you just talk about your appetite for de novo expansion near term? And whether Atlanta is still a market that you'd be interested in? I know you've talked about that in the past, but maybe given the M&A activity there, it's more competitive? Or maybe there's some dislocation opportunity that you could capitalize on? Just your thoughts there?

Well, I would say that as I mentioned walking out and see those target markets, we're still interested in all of those markets. I would say that just in terms of attractiveness, the way we would evaluate the attractiveness of the Atlanta market, given what you just said is not that it's more competitive, but that there's more opportunity there. There's more vulnerability there. Generally, what happens when there's M&A consequential transactions and when there are several of those transactions, they create a lot of vulnerability for banks and their ties to their people, which as you know is what we try to seize on. And so I would say just from a general attractiveness standpoint, Atlanta would be highly attractive from that perspective. But again, I just -- I want to be realistic. My bet is, is if we're talking 3 or 4 years from now, you're going to see that we've done a lot of stuff that looked exactly like what we just told you we're going to do. And my bet is if we're talking 9 months from now, 12 months from now, something like that, we probably won't have done a lot of those things. I'm just trying to give you the basic practicality as to where we are in discussions and all those kinds of things. It just seems unlikely there'll be a lot of that kind of activity in the next 9 to 12 months.

And our next question comes from Jennifer Demba with SunTrust.

Question, we've seen a couple of banks have some health care loan issues this quarter. Wondering if you guys could clarify the size of your health care portfolio? And give us some color on the components, whether it be corporate loans, hospital loans, doctors' practices, et cetera.

Yes, I think, maybe go at it this way, I mean, we have a lot of exposure to health care and pharmaceuticals. I think in that group that would be a little short in that $100 million in total outstandings. But when you peel back and get underneath of what's in there, the largest subsectors are doctors, dentists and other practitioners, which make up more than 1/3 of that whole book, and so that is an extremely granular book. And I think that's true across the whole portfolio. We do have credits to favorite companies buyers like HCA and LifePoint and KDM. Those are companies that are important to us and that we think highly of. And so I would just say we participate in those sorts of credit and -- but again, I think even among those big credits, the largest that I can see is probably around $40 million. Am I hitting what you want to know, Jennifer?

Yes, I think so. I think so, I mean, do you have any just hospitals? Or I mean, would you put -- you wouldn't put, obviously, assisted living and stuff like that, senior housing in that. Would you put that in that bucket too?

Jennifer, I don't think we've got that level of detail with us today. We'll have to pull that out. I know we have a few independent hospitals in middle Tennessee. I'm not sure about what's going on in Carolinas or Virginia. But it's, I think, Terry's already mentioned, we've got some loans to some of the larger hospital chains here in town. And we go through the regular SNC reviews and look at what their S&Ps and all that might be before we do those things. So right now, we don't have any issues with the health care book.

And our next question comes from Will Curtiss with Piper Jaffray.

I wanted to see, Harold, maybe can you help us out on the expense side and kind of how we should think about the third quarter, just given the hires that you made during the quarter? And I would assume it's not fully reflected in the current base, so just given the timing, but just curious your thoughts on the expense base going forward?

Yes, the expense base, I think we've got a preview of run rate going on. It all depends on -- our intention is to hit our numbers this year, so if we can hit our numbers and also continue to fund the incentive plan, that will be what causes the expense base to elevate. So absent that, the expense base ought to be fairly flat going forward. We've booked about $7 million in incentive expense this quarter. That's up from about $5.7 million in the first quarter. So -- and again, we increased our kind of our target range from 75% to 80%. So as we go through the year, hopefully, we can increase that number even more. But again, that will be a burden to the expense line.

Got it. Okay. And then maybe going back to the fee income discussion and kind of the outlook for BHG. I think you still expect 12% to 15% annual growth, if that's correct, which I guess would imply kind of a decent ramp here in the next couple of quarters. So just how should we think about the growth trend for the rest of the year? Does it look sort of like you did last year where you had a big jump in the fourth quarter?

Yes, I think we're not anticipating anything different this year. They run a bunch of sales campaigns in the fourth quarter. We have a feeling they'll do likewise this year. Their business flows were good. They've got a lot of banks who want to buy their credit. They're warehousing a lot of loans on their balance sheet that they intend to release periodically. So yes, we're still anticipating 12% to 15% growth and it will probably be more so in the fourth quarter than the third.

Okay, great. And then just real quick, do you have what the core loan yield was this quarter? I think last quarter, it was 4.50%.

I do not have it with me. I've got it upstairs. And I'll get that for you.

And our next question comes from Tyler Stafford with Stephens.

So my question is on Slide 34. So that bullet point 3 mentions growing both loans and NII at a mid-double-digit pace. So I just want to clarify if you believe you can organically grow NII at a mid-double-digit pace annually despite those accretion headwinds and the funding pressures?

Yes, and I think we've got a plan in place to do that. It takes a lot of loan growth to do that, but I think we've got opportunities.

And our next question comes from Brock Vandervliet with UBS.

I just wanted to talk about loan growth. First of all, loan growth this quarter was excellent, above 20% annualized. It seemed like in the Investor Day, you talked about growth being this strong in the second quarter but tailing off somewhat in the second half. Is that still the case? Or do you expect this level to continue into Q3 and 4?

As far as absolute dollars, it's probably -- our plan is that right now, the pipelines look like that we ought to be able to be close to what we booked in the first and second quarters in the third and fourth quarter. We generally have a strong third quarter. And then the fourth quarter is kind of a crapshoot on -- sometimes this is the best quarter of the year and sometimes it's not. But I guess, we've been very pleased with the first and second quarter loan growth to sit here and say, okay, we ought to be able to replicate that in the third and fourth quarter. We're just kind of hedging our bets a little bit.

Got it. Okay. And separately, on the NIM guide, 3.55% to 3.75%, and your NIM this quarter was 3.69% above kind of the center point of that range. Do we look at that as a -- as guidance really for the remainder of the year? Or do you look at that as longer term?

I think it's a longer-term number. We've just gotten through our strategic planning effort. We do that for the next, call it, 3.5 years. So and the way that kind of goes, Brock, is we set targets and we try to figure out how to hit those targets. And we try to rationalize what those results look like. And it seems like a 3.55% to 3.75% is a reasonable target for us over the next, call it, 3.5 years.

And our next question comes from Brian Zabora with Hovde Group.

Just a question on CRE. Can you just talk about the current environment? Some other banks have talked about higher paydowns. Obviously, you generated strong growth, but did you see kind of the same industry dynamic? And could you just talk about pricing and structure of those credits?

I think, I guess, in terms of market dynamics; number one, paydowns, we do see relatively high level of paydowns and we do expect that to continue before the perceived future the -- what I'll call alternative financing, long-term financing markets are wide open and generally attractive so that people are able to take projects and put them in permanent facilities at very low rates with no recourse. And so I think we and others in the industry are likely to see a heavy level of paydowns over an extended period of time in the CRE book. I think in terms of pricing and underwriting guidelines, again, we're -- I won't say we're not on the panic button about that, but it's important to get this about the book that we have. Harold talked about the granularity of the CRE book and when you look at the construction book and take residential right out of the commercial construction book with less than a $2.5 million average ticket size, you can see here we're dealing with the largely relationship-based clients that are in our market, we're not dealing with large national providers and we are not dealing with 40-story buildings and downtown urban markets and those kinds of things. And so the clients that we serve and the product base that we provide them, I think, works a little differently. And so we, again, I would say it is more competitive from a product standpoint. I do see, from time to time, some underwriting slippage but we don't see that as being an overwhelming trend, again, in the segment that we serve.

That's very helpful. And then just a question on deposit pricing. Is there any different dynamics in the Carolinas and Virginia versus Tennessee?

Brian, we're -- we've been kind of surprised with that. There's not a real big difference. I think the prices or the rates that are being offered in both markets are fairly consistent. We've got a bigger noninterest-bearing deposit book in Tennessee than we do in the Carolinas, and that's one of Rick's objectives is to build that operating account flow over there. But for interest-bearing accounts, they're pretty consistent.

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

Just one question, just Harold, that restructuring you did on the FHLB and the time deposits, I guess, that's a -- that should -- that impact was not in the margin in second quarter, so it's a favorable impact in third quarter. Is that -- as I understand when the timing that happened?

Yes. It'll be helpful to the margin in the third quarter. You're right.

Okay. So I guess, a modest positive is, when you think about it given the size of it? I guess that's quite fair?

Yes, I think so. I think it is a modest positive. The way we're looking at rates, and for sure as I tell you this, I'm going to tell it to you backwards, but generally, the Federal Home Loan Bank is advantageous on the shorter end of curve, probably 2 years in the end, and the wholesale market was more advantageous on the longer end of the curve. So it was just one of those blink.

I got you. And then you talked about maybe doing another forward interest rate swap. I guess, what's the -- I guess, can you just talk about why you would think about doing that? Or I guess, it was the timing of when that could occur?

It could occur as early as the end of this week, first part of next week. We're talking about somewhere around $300 million or $400 million tranche with a forward start into 2019.

Okay. And the other question I have, I guess, you answered, the expense number, I guess, just think about it with the incentive comp being the driver, I mean, those sounds like most of the salaries or a lot of that's already kind of in the numbers based on, I think, you said there was about $1 million excess this quarter that was kind of nonrecurring.

Yes. And we also had kind of a little bit of a heavier ORE (sic) [ROE] expense number this quarter so, but -- and I think we had -- there's probably some more expenses scattered around in the technology accounts that is a little heavier than what we normally see.

Okay, so the $1 million you quoted, Harold, that was kind of excess, does that include the ROE? Or that does not include the ROE? Just so I'm clear on what was...

It does not.

It does not. Okay. All right. Understood. And then just the last thing for me was the mortgage number in the quarter. I guess, can you just -- I know there's a lot of changes you guys kind of alluded to on the call, just kind of think how you -- can you just give a little color on how you're thinking about mortgages going forward? Given like you said, the rates have obviously impacted their performance to some degree. So...

Yes. We've lowered our expectations for mortgage in 2018. They've got a budget gap, I guess, I can tell you that. They don't -- we don't anticipate them filling that gap, but I think there's building momentum in the Carolinas and Virginia. I think our mortgage guys here in Tennessee have partnered with the guys in Tennessee and Carolinas. And I think it will create some momentum over there, particularly going into 2019, that probably wasn't there or wasn't as strong as it was going into 2018.

And our next question comes from Nancy Bush with NAB Research.

Two questions for you. Terry, you operate in states that have a higher than the national average emphasis on manufacturing, particularly auto manufacturing. And I'm wondering, are you starting to hear any kind of talk about tariffs? What the impact may be? Pushback? How it may impact growth, et cetera?

Yes, Nancy. I think it would be fair to say that it's a topic of discussion. But I think, in terms of clarity and people changing forecast and doing those kinds of things, I've not heard of any of that. Again, it's just cocktail chatter at this point, I think.

Is it anything that you think you'll have to incorporate into your thought process, growth process, et cetera, any time in the very near future?

I really don't, Nancy. I think, again, I just go back and reiterate, and it is one of the things that I love about the model that we run. What we're doing is hiring bankers and having them move their books of business to because that's where the growth comes from. And if we were simply reliant on the pure macroeconomics of the situation, well, we'd be subject to lots of volatility on our ability to grow because things would contract and things would expand and that would be the defining basis of our growth. But the defining basis of our growth is really hiring people that have large books of business. And so I don't expect -- the question is that do you expect that to contain growth or tamp it down or those kinds of things, I think the answer to that is, no, I really don't.

Okay. Secondly, this is kind of multidimensional question. I mean, I've listened to your presentation this morning. And I think we're all totally in accord with your growth and your methods and the mindset that you have in your culture there, but that's not being reflected in your stock right now. And as you know, your stock is flat-to-down year-over-year. And down what, about 9% year-to-date. Very cheap based on a P/E basis, much cheaper than it used to be based on a tangible book value basis. What are your thoughts about this? Is this -- and I sensed a certain amount of frustration in your commentary this morning, and I'm wondering if that's frustration that's directed at stock price?

Well, I hope, I hope that was Harold that sounded frustrated, not me. I'm just kidding, Nancy. Yes, I think it's fair to say, I am frustrated from the perspective that we've laid out a plan, which I think and continue to believe irrespective of what's going on with the short-term share price, is the right thing to do for our shareholders, and it's going to produce extraordinary long-term shareholder value and that's what I care about and that's what we're working for. So I'm not concerned about that. Nancy, it's interesting, somebody asked me in one of the investor conferences and said, "Well, Terry, what are you going to do differently?" And I said, look, Warren Buffet said there's 2 things. One, you manage the fundamentals of the business and two, you tell the story. And the stock will ultimately take care of itself. So I'm making that bet in terms of what we're doing differently. I think you can see we're not doing a dadgum thing differently than we've done in the past. We're running straight ahead. We're hiring revenue producers. We're growing as an outside base. We're doing it on a sound basis. We're getting it funded, all those kinds of things. So we're going to continue to manage the fundamental. Maybe, I can come up with a better way to tell the story, so if I could do that and produce some improvement in share price going to the short run, I would love to figure that out. If you have ideas on what we ought to be communicating that we're not, please feel free to let us know.

Okay. And I would ask, I mean, if this sort of cheap stock valuation continues, I mean, would you think about your dividend, and I get it, you've got other opportunities for growth than plowing capital into a dividend, but I mean, would you think about being a little bit more competitive and sharing a little more capital on the dividend side?

Well, I guess, the answer is we'll think about anything and we'll think about everything. But if you say, Terry, tell me the truth, are you really want to lean in and trade the dividend higher, not meaningfully. I'm not saying we wouldn't consider. We've had increases in dividends. They've always been modest, and I think that mindset will continue to be the case. I can't imagine that if we can grow our earnings at the rate we grow earnings at, that we would want to instead slow the growth and pay out dividend. That wouldn't make sense to me to do that. So anyway, I'm sincere when I say, I mean, we talk about it. We debate it. As you can imagine, some people say, "Man, you ought to be considering this alternative, that alternative and so forth." But again, right now, I know this sounds contrary to what you hear in most of the calls, we're excited about the growth prospects of this company. I've never seen an opportunity to gather mainline clients at a pace that we're gathering them. We've produced the volumes and earnings over time. So again, I -- we're going to keep going down that path and my guess is there'll be a day where that's appreciated.

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