Terry Turner - President and CEO Harold Carpenter - EVP and CFO.

Jefferson Harralson - Keefe, Bruyette & Woods Michael Rose - Raymond James & Associates Matt Olney - Stephens Inc.

Andrew Stapp - Hilliard Lyons Kevin Reynolds - Wunderlich Securities Stephen Scouten - Sandler O'Neill Brian Martin - FIG Partners Operator Good morning everyone and welcome to the Pinnacle Financial Partners’ First Quarter 2015 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 that Pinnacle’s earnings release and this morning’s presentation are available on the Investor Relations page of their Web site at www.pnfp.com.

Today’s call is being recorded and will be available for replay on Pinnacle’s Web site for the next 90 days. At this time all participants have been placed in a listen-only mode. The floor will be opened for your questions following the presentation. [Operator Instructions] Before we begin, Pinnacle does not provide earnings guidance or forecasts.

During this presentation, we may make comments which may constitute forward-looking statements.

All forward-looking statements are subject to risks, uncertainties and other facts that may cause the actual results, performance or achievements of Pinnacle Financial to differ materially from any results expressed or implied by such forward-looking statements.

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

Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G.

A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to the comparable GAAP measures will be available on Pinnacle Financial’s Web site 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, and thanks to everyone who is on the line. We sincerely appreciate your interest in our firm. I’m very excited about our first quarter results. We had lot going on in first quarter and look forward to more of the same as we move through the remainder of this year.

This morning, I thought I’d start where I finished last quarter and that’s with our longer term outlook and discuss the progress that we made during the first quarter. Number one, we launched a higher profile CRE line of business.

Of course we’ve always been in the CRE business, but a meaningful part of our CRE exposure is owner occupied and we also have relationships with many of our markets key developers, but we never emphasize the commercial real estate segment to the extend that we have the C&I segment.

So now we made all four critical hires that are necessary to build it out over the next several years targeting our markets best developers, several others that targeted New York, LA, Dallas and the like for CRE growth with LPOs and so forth.

Although our guys have contacts all over the Southeast, it’s really our intent to dominate this business among Tennessee’s best developers. Number two, geographic expansion. We are obviously very excited about our CapitalMark acquisition and we will discuss it later in the call.

You know that Chattanooga and Memphis have long been targeted markets for us. Their urban markets dominated by the same large regionals with whom we compete in Nashville and Knoxville. We believe those two markets could represent $3 billion to $5 billion of assets.

We made our play in Chattanooga and once the CapitalMark merger is consummated, we will be focused on the same approach to organic growth there that we and they have focused on for sometime. As to Memphis, it’s hard for me to imagine that we won’t be in that market in the foreseeable future.

I’ve always answered that question saying it’s all about the opportunity. We can be patient. We don’t have to do anything, but if we found the right opportunity, we’d go next week.

Number three, with the capital market -- CapitalMark acquisition, we will add approximately $1.2 billion in assets to our firm which gets us closer to the $10 billion threshold and that brings the questions and concerns about CFPB, other regulations, the Durbin Amendment -- with the Durbin Amendment likely being the most impactful.

But even after CapitalMark, we’re still a good way away from $10 billion and our compliance in finance folks continue to dig in on the various requirements of being a $10 billion franchise. So we will be ready long before we get there.

So just to be clear and as we’ve mentioned many times, you should know our goal is not to avoid it, but to get there and grow through it. Our DNA is all about focusing on organic growth opportunities in our target markets. Number four, increasing fee businesses.

Our BHG investment has blown away our long-term fee targets and I imagine we will need to revisit a few of our targets with our Board in conjunction with the 2015 to 2017 strategic planning process, that’s coming up shortly. BHG provided approximately $0.05 in fully diluted EPS to our first quarter results.

However, our focus is not just don’t collecting the benefits of the investment, but really trying to find ways to leverage our relationship of this very sophisticated marketing enterprise to better both firms. I will be disappointed if we don’t find additional revenue potential here over time.

We’ve also hired Roger Osborne, who will build a capital markets unit aimed at capital raising and M&A consulting to our clients which are generally owner managed businesses, not targeted by higher profile investment banks.

As some of you know Roger’s had long career as a financial services professional, including heading SunTrust Robinson Humphrey’s capital markets origination group. We believe we can push that unit through breakeven in 2015 and begin a meaningful incremental contribution in 2016.

And finally number five, first quarter was a significant quarter for us with several records of performance. We built a great platform to launch from in Nashville and Knoxville. So with that as a backdrop, let's move to the first quarter.

Our basic thesis for increasing our share price is that over time revenue growth, earnings growth and asset quality are the three most important valuation drivers.

Also through good times and bad, companies that consistently grow book value per share grow share prices and so for quite sometime we have been providing a quarterly dashboard to highlight our progress on these key valuation drivers. The top row of graphs shows real revenue and earnings growth, nearly 20% organic revenue growth year-over-year.

That's in the face of pretty stiff volume and margin headwinds. Fully diluted EPS was up 31.9% year-over-year. Our return on average assets which is not on the slide, climb to 1.45% and return on tangible capital which is on the slide has climbed to 15.56%.

As you can see on the second row of graphs, we’re getting outsized balance sheet growth in the form of end of period loans, up 11.1% in the first quarter of 2015 compared to the same quarter last year. That’s a rate of organic growth consistent with what we’ve sustained over the last three years.

In fact, first quarter is traditionally a slower growth quarter. We are encouraged by the fact that this first quarter’s growth was nearly 2x last quarter’s first quarter growth.

You can also see that we have increased average transaction accounts by 15.7%, using that same year-over-year comparison, so the transaction accounts now represent 56.4% of total deposits.

And even after having initiated dividend and payout in December 2013, we have been accreting capital with tangible book value per share of 14% year-over-year, which is I just mentioned is generally highly correlated to share price increases. The third row provides information regarding our asset quality.

Non-performing assets decreased to 0.54% of total loan plus OREO. Classified assets ticked up linked quarter, but remain extraordinarily low at just 20.3% of Tier 1 capital plus allowance. The overall improvement in our credit metrics has provided meaningful credit leverage over the last few years.

I guess it simply, it appears to me that our allowance continues to be high versus peers and so consistent with our message for quite sometime we anticipate that we will continue to have credit leverage throughout the remainder of 2015 as our loan portfolio continues to produce consistently strong asset quality metrics.

More than three years ago, we laid out our sustainable business model, which at the time called for say a 1.20% ROAA, the midpoint of our targeted range.

We broke down targets for the full critical components to produce that ROA, the margin, the non-interest income to assets, the non-interest expense to assets, and net charge-offs since in ordinary times, charge-offs of the primary influence on provision expense.

In mid 2014, in conjunction with our 2014 to 2016 strategic plan, we increased our ROAA target range by 10 basis points to 1.20% to 1.40% and as you can see on the right of the slide in the first quarter of 2015, we now exceeded the top end of that range with an ROAA of 1.45%.

So as I just mentioned, we will reevaluate that target in conjunction with our 2015 to 2017 strategic plan, which will be developed this spring and summer. The only component measure not performing at least at the target range is the expense to asset ratio.

For those of you who followed our firm for any length of time, you know that our approach to right sizing our expense base is primarily to grow earning assets in the form of loans.

So at $331 million we were about $310 million in loan growth away from operating inside the target range for non-interest expense to assets, roughly two to three quarters loan growth. So first quarter was a whale of a quarter, meaningfully above our targeted ROAA with non-interest income and asset quality providing most of the lift.

With that high-level summary, let me turn it over to Harold, to review the quarter in greater detail..

Thanks, Terry and good morning, everyone. Our first quarter net interest income was up approximately $1 million over fourth quarter, or almost 8% annualized. Our growth in net interest income for the first quarter was primarily due to expansion of average loan balance as well as continued stabilization of our loan yields.

As to margins, we did experience a slight uptick in margin this quarter to 3.78% of which some of the increase was attributable to the usual first quarter impact of having fewer days. Even though our margins may fluctuate, we continue to expect increases in net interest income in future quarters as we grow our customer base in our markets.

Concerning loans specifically, as the chart indicates, average loans were $4.62 billion, which was up approximately 17% linked quarter annualized, one of the higher growth rates in average loan balances in recent memory and primarily attributable to a late 2014 push in loan bookings which we discussed last quarter.

EOP loan balances are higher than average balances for the first quarter, although we did overcome quite a few pay downs during the quarter, which somewhat muted our endpoint-to-endpoint growth.

EOP loan growth was a net $55 million, which is consistent, if not slightly more than last year's first quarter, but it's not what we expect as a run rate for the remainder of 2015. Our sales pipelines remain strong for the second quarter and at this point we expect relatively strong loan growth quarter.

As to loan yields, our loan yield remains stable at 4.35% this quarter and it basically held steady for the past five to six quarters. We are very pleased with loan yields as we continue to see reductions in loan force, which obviously will put some pressure on loan yields which I’ll get to momentarily.

As to deposits, again here in the first quarter, we were able to maintain our low funding costs. We did see our deposit rates increased by one basis points quarter-over-quarter, which is the first time we’ve seen an uptick in deposit costs in several quarters.

As to deposit balances, we did see our average deposit balances increased by approximately $34 million during the quarter. What we’re most excited about are that our demand deposit growth has been really strong over the last several quarters with our first quarter 2015 average balance being up approximately 19% over the last year’s first quarter.

Linked quarter average DDA balances are down slightly, but again consistent with typical first quarter norms. Switching now to non-interest income, non-interest income for the first quarter increased 48.4% over the same period prior year.

Included in non-interest income for the first time is the fee income related to our 30% ownership interest in Bankers Healthcare Group, which we announced in close during the first week of February. I’ll discuss the BHG acquisition more fully in a moment.

Our wealth management lines are all showing positive trends over the same prior year period and remain a reliable earnings stream. First quarter insurance revenues were up due primarily to incentive payments from insurance carriers that are received each year in the first quarter.

Items included in other non-interest income tend to be lumpy and include items such as gain on sale of other investments, loan sales, as well as interchange fees. As we mentioned last time, we also have several tactical items aimed at debit, credit, and purchasing cards that we hope will further bolster service charge income.

As you know we reported $0.05 of additional fully diluted EPS attributable to our investment in BHG of which approximately a penny was due to one-time revenues from the firm. As many of you’re aware, during early February we announced a $75 million investment representing a 30% ownership interest in BHG.

For those not aware, BHG has been in the business of issuing commercial loans to medical professionals since 2001 and funding those loans through a sophisticated and effective community bank network located throughout the United States.

We at Pinnacle believe BHG has a very talented team of approximately 200 professionals focused on delivering efficient, and responsive customer service to their clients.

Using primarily direct mail internet and telemarketing as well as focusing on affiliations with various trade groups and associations, BHG has done an outstanding job of increasing brand awareness, which has resulted in their ability to grow their business rapidly.

We believe our BHG investments should be 7.5% accretive to our earnings this year with increased optimism that we may end up being on the higher end of the range. We also believe that cross sell opportunities exist as we continue to market our credit card product through their platform.

As we develop more business between the two franchises that should represent significant new revenue opportunities for both organizations. Now as to operating leverage, our efficiency ratio of 52.8% represents a record for our firm.

We believe our efficiency ratio as it stands today compares favorably to most peer groups, but we continue to believe that we will be able to improve upon this level of efficiency through the remainder of 2015, so that we may maintain our top quartile peer performance.

As to run rate, our compensation expense was up approximately $500,000 on increased headcount and merit raises. Increased hires will drive our expense increases this year as we believe all other expenses should be fairly stable.

We did see an increase in other expenses quarter due primarily to continued expense growth associated with various loan and deposit products as well as several year-end accrual adjustments that occurred last quarter. All in all, other expense run rate should remain stable for the rest of the year.

That said, we will explore opportunities to reduce the impact of this line-item going forward. Our core expense to asset ratio was 2.42% for the first quarter of 2015.

As we’ve stated for the last several years, the primary strategy to ultimately achieve our long-term expense to asset ratio target is to grow the loan portfolio of this firm while maintaining a tight reign on expense growth.

As far as the remainder of 2015 is concerned, we do remain committed to decreasing our efficiency ratio through increased operating leverage as well as careful and mindful attention to our expense base. That said, our focus remains on long-term shareholder value creation by growing our customer base.

We believe the best way to grow our customer base is to hire the best financial professionals in our markets. As I said, we are mindful of our expense base and we will play -- we will pay close attention, but if the opportunity arises where high quality relationship managers are available to us, we will take advantage of those opportunities.

Now an update on asset sensitivity. We’ve been discussing the repositioning of our balance sheet for several quarters with the key variable being the impact our loan force have on our progress. We have been talking about this slide for quite sometime, we are fortunate to have relationship managers that can garner loan floors, which is a great thing.

As of December 31, we had approximately $1.08 billion of floating rate loans with floors on our books with an average difference between the floor rate and the contract rate of 73 basis points.

We are pleased to report that as of March 31, we’ve experienced about a $120 million in reduced floating-rate forward loans along with the reduction in the spread difference to about 67 basis points. This reduction is due to market forces pay downs or pay off as well as targeted removal of loan floors.

As I mentioned previously, this obviously impacts our loan yields and loan interest income, but our plan is to manage the reduction in order to prepare for an ultimate increase in short-term rates. Our modeling currently contemplates the first rate increase in late third quarter, which we pushed back recently from late second quarter.

As the chart indicates, we would like to operate with about $850 million to $950 million in loans with floors. The range we are approaching quickly and expect to be operating within by mid 2015.

As I mentioned last time, I believe one of the better measurement tools in determining interest-rate sensitivity as of a point of time is the traditional rate shock analysis applied to a static balance sheet. It's a rough estimate of what happens to your balance sheet should a parallel increase or decrease in the entire treasury curve occur.

Many banks discuss this in various forms, in various filings with up 100 scenario receiving most of the attention. As you can see over the course of the previous two years, we’ve transitioned from being a liability sensitivity to a moderate level of asset sensitivity in the up 100 basis point scenario.

One side note on beta assumptions, you will see that we’ve increased our deposit betas as rates increased. To put it simply, we’ve increased our anticipated deposit pricing proportionally higher with the increased rates. So wrapping up, the top left chart has two lines.

The red line details the absolute volume of interest bearing liabilities that would be a candidate for repricing within the first 30 days following a rate increase no matter how big or how small of an increase. This is where the beta factor comes in and why it’s so important to the assumption set. The red line has factored into to our beta assumption.

We’ve unique beta assumptions for future funding costs for every funding products and for every rate tranche, but when we consider all of those the weighted average shakes out to be approximately 62 basis points for the first 100 basis points in rate change.

That said, and as I’ve noted in the previous slide, we’re modeling an increased beta with a higher rate changes. The blue line represents our assets that should reprice within 30 days following a rate increase. The blue line has been increasing since the first quarter of 2014.

Effectively this is a short-term gap analysis with all of its shortcomings regarding convexity, optionality et cetera, et cetera. But it is about the trend and we like where we’re as we hopefully near this forecasted rate increase. The bottom right graph, we believe is also interesting.

Of the $950 million in floating rate credit on the floor approximately 35% were repriced within the first 25 basis points. That’s along with the removal of floors; we anticipate that the blue line and the top chart can overtake the red line in mid 2015.

In the end, we don’t know what rates are going to do, but our goal is to remain modestly asset sensitive regardless of when it might happen. We will do this by continuing to reduce our loan floors and utilization of other tools should the need arise. With that, I'll turn it back over to Terry to wrap up..

All right. Thank you, Harold. In terms of wrapping up, I want to deal with a couple of big picture items, specifically M&A. We have publicly discussed for a long time now our desire to operate in four urban markets of Tennessee, Nashville, Knoxville, Chattanooga and Memphis.

So the recently announced proposed acquisition of CapitalMark Bank & Trust in Chattanooga is really a very important puzzle piece for us. It gives us the third urban market in between Nashville and Knoxville. Now only Memphis remains.

I want to review our upcoming transaction with CapitalMark in just a minute, but before I do, since we get so many questions about it, I want to try to crystallize the role of M&A at Pinnacle. First of all, nothing has changed. I continue to view our firm primarily as an organic grower.

But for a very long time now, I have indicated our desire to do business in the four urban markets of Tennessee. We desire those markets because they’re generally dominated by the same set of large vulnerable regional banks.

We have a pretty well established track record for getting up underneath them and moving their best associates and clients to our firm. Also for a very long time now I have indicated that we could extend into the remaining two markets, previously Chattanooga and Memphis either on a de novo basis as in the case of Nashville and Knoxville.

By acquisition, if we went by acquisition, the go would be to obtain a platform that accelerates our attack on those large regionals. In other words, one it would enable us to continue an organic growth strategy, seizing the vulnerabilities at the large regionals, ultimately becoming number one, two, or three in each of our target markets.

And that’s a really important point to me. We have an advantaged currency, well suited to M&A, but you should not expect this to do anything other than seek to become one of the top three banks that dominate each of Tennessee’s four urban markets. We have never had a taste for failed banks or fixer uppers.

We would always target successful franchises that immediately add new sources of revenue that are culturally consistent. But most importantly enable us to continue our rapid organic growth going forward and they just aren’t too many of those. I have also said for quite some time that we will consider end market deals in both Nashville and Knoxville.

In the case of Nashville, we’re satisfied with our distribution. So the goal would be outsized synergy based on large cost take outs. And in the case of Knoxville, we're currently adding an office a year. If we found something that accelerated our deposit acquisition, that would also be attractive to us.

And lastly, we frequently discuss the idea that we're in a number of wealth management businesses that are critical to our ability to move targeted clients from large regions, but they’re only modestly profitable due to the scale requirements of those businesses.

So if we found opportunities to add volumes to existing overhead or if we could find additional fee businesses to augment our sources of fee income like BHG, we’d consider acquisitions there as well.

A lot of you heard me say over the years, I think I’ve just said a minute ago that what we do at Pinnacle’s get up underneath large regional banks and large urban markets and take their best people and best clients.

In Chattanooga we face essentially the same cast of competitors against whom we have a -- we have proven highly effective in both Nashville and Knoxville.

Just like Pinnacle and Nashville, CapitalMark has been the fastest growing bank in Chattanooga and it’s now positioned as the largest local alternative just behind First Tennessee, SunTrust and Regions. CapitalMark has been the fastest growing banks in Chattanooga since its inception with a very strong balance sheet CAGRS.

But the thing that's really important to me is that they figured out the riddle as it relates to both growth and profitability with a 1% ROAA and a 59% efficiency ratio. As I mentioned, they’re positioned in the market behind First Tennessee, SunTrust and Regions, two of whom have lost shares since CapitalMark’s inception in 2007.

CapitalMark has been executing a strategy that looks virtually identical to Pinnacle’s. They’re very commercially focused and compete based on the experience and quality of their relationship managers. And most importantly it's an attractive financial opportunity for our firm.

It's immediately accretive to earnings with approximately 5% long-term accretion to EPS. It's less than 2% dilutive to day one tangible book value with less than a 2.5 year earn back period and it represents roughly a 20% IRR. So this is a great opportunity for our firm.

I don’t want to spend a lot of time on this slide, but you can see that CapitalMark has been producing Pinnacle like organic growth since its inception in 2007. First quarter results included loans up 24% over prior year.

DDA is up 31% year-over-year and as you'd expect these are important numbers to me, because it's difficult to find firms that have the potential to actually accelerate pinnacles growth rate. Here you can see excellent earnings growth. A strong net interest margin, which is -- was actually 3.85% in the first quarter of 2015.

An ROAA that’s now climbed to roughly 1% in the last two quarters and a firm that’s exhibiting the same kind of operating leverage that we focused on at pinnacle in the last three years with an efficiency ratio now in the high 50% range. So to tell this together, this is the same slide we previously used to talk about our long-term plan.

I think it provides great context. Over the long-term, it’s our desire to build a $13 billion to $15 billion bank, operating in the four urban markets of Tennessee.

We aim at the number one, two, or three position in each of those markets and we publish a sustainable business model with targeted profitability targets that we review with you on a quarterly basis. In the first quarter of 2015, we put in place several critical building blocks.

We made all the necessary hires to establish Pinnacle is the lead CRE bank in our markets just like we have previously done with the C&I segment.

Shortly after the quarter ended, we signed a definitive agreement with CapitalMark Bank & Trust, a remarkably similar firm to Pinnacle in terms of growth and focus to facilitate our entrance into the Chattanooga market.

We made an extraordinary investment in BHG which is immediately transformative to our sustainable business model targets in terms of fee income, ROAA in the like, but more than that, holds great promise in terms of future revenue synergies.

And the earnings momentum in operating leverage in our firm continued to be very strong with a 1.45% ROAA, a 15.56% ROATE, a 52.8% efficiency ratio and record earnings this quarter well in excess of consensus. Operator, we will stop there and open for questions..

Thank you, Mr. Turner. The floor is now open for your questions following the presentation. [Operator Instructions] Our first question comes from Jefferson Harralson with KBW. Your line is now open..

Hey, thanks guys. I wanted to open it up with a question on Banker Healthcare Group. Its two things really. It seems like it’s more accretive at least from the early stages in the 7% to 9% you’re talking about. Even if you take that penny off, that you call non-recurring about $0.04 on $0.53 of last quarter, it was like a 11% accretive.

So is it actually 7% to 9%, because Bankers Healthcare Group is going to grow more slowly throughout the year or is there chance of saying its going to beat your top end of your guidance?.

Jefferson, I understand your math completely. I’m not going to step out there and say we’re going to beat our 7% to 9%. This is a pretty new relationship. We are getting used to what their seasonal flows look like. But we’re excited about what the opportunity looks like for us..

All right.

And just kind of -- if you dig down a little bit on the new revenue opportunities, can you talk about maybe some of the things they do and you do or is there a -- there is so much alternative lending going on out there right now, is there -- I’d just be interested to see in which direction you’re thinking about as far as potential things you guys can combine on?.

Jefferson, I think we’ve mentioned in the past that great example of what we like is we have a partnership where they distribute our credit card as an affinity card through their sales distribution channel.

And kind of like Harold said on the earnings accretion, at this point I don't want to jump out and say boy it's -- it provide some huge number, but I would say the early returns are better than forecast on their ability to push our credit card through their distribution system.

And so we are like minded in pursuing other financial service products that we can push down through that channel, and frankly the ones I’m most excited about and interested in trying to pursue are what you might call liability products.

In other words, operating accounts for physicians practices to adding with treasury management and those kinds of things. There are lots of hurdles that will have -- they will have to get over before we get in a position to do that.

The selling cycle is different than their current selling cycle, but again that would be the Holy Grail, if you pick up distribution for operating accounts to physician practices in 40 some odd states. So that would be an example of how we might find other revenue synergies..

All right. Thanks guys, I’ll let some other people ask some questions..

Thanks, Jefferson..

Our next question comes from Michael Rose with Raymond James. Your line is now open..

Hey, good morning guys.

How are you?.

Good.

How are you doing, Michael?.

Good. Hey, I just wanted to circle back to the acquisition. What would -- you guys talked about your interest rate sensitivity.

What does the addition of capital mark due to kind of your interest rate sensitivity as we move forward?.

Yes, I think if you took capital mark in and of itself they would probably, they would not be as asset sensitive as we are today. So, I think we’d have some work.

Now that said, when you go through all the purchase accounting machinations and all of the stuff between now and then, we think we’ve got opportunities to get them to where our balance sheet and their balance sheet will look fairly similar at the date of acquisition..

Okay, that’s helpful. And then just following up on some of your targets, if I look at your expenses to average asset, the one that’s still out of the range, what do you need to see to get you there. Is it the acquisition that gets you there? Is it higher interest rates or is it a combination of the two? Thanks..

Well capital mark will definitely help -- we will pick up a few basis points as a result of that. But I think when you look at the first quarter; the first quarter for us is typically an expense growth quarter. I think we’ll grow expenses for the remainder of the year with new hires, but the first quarter is also kind of a low asset growth quarter.

So, I think we have meaningful opportunities to get within our range here over the next say three to four to five quarters..

Okay, great. Thanks for taking my question guys..

Yes, I might just add to that, that when you’re an asset grower in $200 million to $300 million in asset growth with the level expense base would get you there..

And Michael also probably what will end up happening is we will get there and then Terry will move it down further..

I’m sure he will. Thank you, guys..

Our next question comes from Matt Olney with Stephens. Your line is now open..

Hey, thanks guys. Good morning.

How are you?.

Hey, Matt..

How are you doing, Matt?.

I’m doing well. Hey, I want to focus on the margin and in particular the loan yields. This continues to stabilize on the loan yield front.

As you think about the mix shift of the loan portfolio the next few quarters, do you think you could actually see some loan yield expansion the next few quarters excluding any impact of higher rates?.

Yes, Matt. I really don’t think so. I believe our loan yields will be stable. I think there will be maybe even some downward pressure. What we really need this rating, I think all banks needs this rate increase to take hold here fairly quickly in order to see any kind of uptick in loan yields..

And what about on the deposit side, Harold. You mentioned the cost of phones picked up a little bit this quarter.

Could we see more of that the next few quarters before we see higher rates?.

I think our deposit yields will probably fluctuate upward slightly. I don’t think we’ll see significant upticks. But like this quarter they’re up one basis point. But I also believe that over the course of the year you’ll see our DDA balances rebuild.

We had about a 30 somewhat million dollar reduction in average balances in DDA in the first quarter which is not that -- which is typical. So I think as you see that rebuild you’ll see that help to contain any kind of increase in deposit cost..

Okay. And then lastly as far as capital, I believe the pro forma total risk based capital with capital marks around 11.5%.

Remind me where you want to be kind of longer term in terms of your risk base capital?.

Yes, we like -- as far as total capital, we like 11.5% that’s a -- that would be a good number for us to operate in. I think tangible we’re down into the -- if we can operate tangible capital with an eight handle we’d be pleased with that too..

Okay. All right, very good. Thank you..

Our next question comes from Andy Stapp with Hilliard Lyons. Your line is now open..

Good morning. Nice quarter..

Hi, Andy..

What was driving the increase in the gain on sale of loans, was it refi activity?.

Yes, we had a really -- our mortgage has been really busy over the last say four months and they continue to stay busy. Their pipelines at the end of the quarter were relatively high. So that’s really what's driving it..

Andrew Stapp:.

refi:.

Yes, I think this quarter purchase money actually probably was higher..

Okay.

And what was driving the linked quarter increase in other non-interest expense?.

I think there were several loan items in there, that’s where we put a lot of variable cost components in there. So, some interchange expenses so on and so forth. We have also started over on our franchise tax accrual, so that also contributed. That will be one loan item we look at for the remainder of the year.

Tennessee has got a very active affordable housing program that really insist banks like us to participate and get some reduced tax as a result. So, I think we’ve got some opportunities there this year to help stifle the growth to that other expense line item..

Okay.

And, so that should be -- that’s a fairly good run rate then going forward?.

Yes, I think the run rate for expenses is good. When I look at the second quarter you’ll get some brake on payroll taxes and some other things. But we also got a pretty strong hiring platform going so far this year. I expect us to have a pretty -- a really strong year as far as recruiting concern..

But the other non-interest expense line item that’s the Q1 level is a good run rate?.

Yes, sir. I think so..

Okay.

And any color that you can provide on the capital markets initiative?.

Yes, I think really at this point we’re still in the early stages. As you know it takes time to actually get all the paper work done, applications filed before you’re authorized.

You’ve got to have all policies and procedures bill -- published in place and so forth and so we’re going through that exercise and expect to be in a revenue production mode in the third quarter..

Okay, great. I’ll hop off for now. Thanks..

Thanks, Andy..

Thanks, Andy..

[Operator Instructions] Our next question comes from Kevin Reynolds with Wunderlich Securities. Your line is now open..

Good morning, everyone..

Hi, Kevin..

Hi, Kevin..

I guess, I got to work on the speed of my trigger finger so I can be earlier in the call. So, great quarter and I know we talked about a lot of different line items here. I wanted to sort of step back and think conceptually with the Chattanooga acquisition; obviously it makes a lot of sense Terry.

You talk about Memphis and have talked about that for years. And I was sort of stepping back and thinking about where your franchise might be, middle Tennessee is fantastic.

A; I wanted to get your thoughts on the level of activity on the ground in Middle Tennessee and the share moving opportunity and so how do you feel about it today as the economy is strong and strengthening or do you see it slowing down at all with the all the concerns in the national macro economy? That’s question one.

And the second question is, moving beyond that, how do you envision the relative contribution of the different urban markets in Tennessee once you get to that $10 billion and maybe down the line $15 billion size.

How big -- how big might Middle Tennessee be as a part of the whole versus say Chattanooga or Memphis? What's the opportunity in those market places?.

Well, let’s talk about the economic strength in Middle Tennessee first. I would say that it continues to get stronger and stronger. I think on the positive side of the ledger Kevin you and I have had this conversation a lot.

My belief is job growth really fuels economic growth and so if you get jobs everything else works and as you know Middle Tennessee specifically Nashville just continues to land jobs, done an extraordinary job in my opinion not only recruiting new businesses that are relocating to Middle Tennessee but actually businesses that are here like Bridgestone and others that are adding more jobs have previously been somewhere else.

And so, job growth continues to be strong and I believe that is and will continue to fuel economic growth. I think that said, I don’t want to overplay that because again it’s clearly stronger Middle Tennessee than it is anywhere else.

But I would say that still when I look at things like land utilization which has always been a great barometer of the work in asset cycle and in economy this moving forward and so forth, we still don’t get any increase in land utilization as a percentage, and so it just tells maybe that there’s still some sluggishness in the real growth cycle.

So its sort of a two sided coin, it’s more positive than negative. But again I would say we’re up and down the state of Fairmount, Middle Tennessee feels big or strong by comparison.

I think in terms our order of magnitude, we have said that we believe that we can build and would like to build a $13 billion to $15 billion company in these four urban markets.

And so, if you think about expectations we’re trying to get to number three position over a long period of time, I’d say number three at least number three get in the top three in each of those markets of course in Chattanooga, they’re number four. If you look at FDIC share in Nashville, we’re number four.

I think generally speaking what we talk to people about in Knoxville and Chattanooga and the folks that we chat with in Memphis we always talk in terms of building a $2 billion to $2.5 billion bank in each of those markets.

So you can say if you are a $15 billion company you would probably get $7 billion or so outside of Nashville and roughly a similar amount inside of Nashville..

Okay. Thanks a lot. That’s very helpful, and those are all the questions I had today. Good quarter..

Thank you, Kevin..

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

Hey, guys. Good morning and congrats on a really strong quarter..

Thanks, Steve..

I wanted to see if you could give any more color about the CRE initiative.

Obviously you’ve spoken to the four critical hires, but any additional detail or insights you could give in terms of the expected pace of potential growth and kind of how you see that coming online over the next year or so?.

Yes, I think in terms of trying to size it for people, we’ve really tried to use the inner agency guidelines that are published as it relates to concentration and at what point you need stepped up monitoring systems and so fort and specifically I’m speaking of the 100% construction and 300% total CRE guidelines that had been published.

If you use those that would suggest we’d have the capacity to build out an additional $500 million, to $600 million in assets in a steady state, in other words without growing the company and so forth. And so, again might that give you some sense of the size, call it $600 million in asset growth, my guess is that’s probably a three year build-out..

Okay.

And would you say, I mean are they kind of fully up and running at this point and you would expect to see contribution -- noticeable contribution in the coming quarters?.

Yes, if you’re thinking of contribution in terms of loan growth, my answer to that is yes. I would think that assets began to grow in this quarter..

Okay, great. And then, maybe just a lot of my questions are already asked and answered. But maybe a couple of house keeping kind of issues.

Harold, I know you have talked about the movements in the expenses, but particularly as it relates to the salaries line item, those four critical hires in particular were they fully baked into this quarter or could we see some residual impact of them and then the anticipated additional new hires as well in 2Q?.

Yes, they’re not altogether fully baked in the quarter, so there’s going to be a ramp up for the four hires and we also had late in the quarter a couple of other relationship managers that came onboard and well one of those actually came here in the last few days. So there’s going to be a ramp up in comp for these hiring’s..

Okay, great. Well congrats on that.

And then, just the tax rate lastly, was there anything unusual this quarter or is that kind of a function of the BHG addition or where should that fall out moving forward?.

Yes, I don’t think there was anything kind of unusual. I think we put out a 33% tax rate. So I think we’re good..

Okay. My math might be off on that. Okay, thanks guys. I appreciate it..

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

Good morning, guys..

Hi, Brian..

Hey, just one question Harold. Just on the new hires, just I know you don’t want to give a lot of color.

But I mean, the folks you’re looking at bringing on board, it sounds like its high a little bit more in ’15 than it was in ’14, maybe just is there certain areas you guys are more focused and was it more the new market in Chattanooga, is it more of the CRE lenders or is it one area you’re looking to add more folks in?.

Yes, I’ll start and Terry can wrap up. But I don’t think there is any particular area we’re more focused than any other area. We obviously had the CRE initiative that we were intent on staffing. But also C&I, we’re seeing some activity there. We’ve got a few good folks already on board and expect to see more over the course of this year..

Yes, I think that’s accurate. As Harold said we specifically a hiring initiative aimed to CRE but beyond that it’s really our traditional approach to hiring, and I think we’re having really good success recruiting right now in our traditional segments specifically C&I and wealth managers, private bankers and so forth..

Okay, perfect.

And Harold maybe I just, to clarify that part on the expenses, it sounds like salaries are going up but you’ve got other areas to look at specifically that otherwise you maybe just kind of offset it was the run rate similar to what we’re seeing today?.

Yes, that’s accurate Brian. We don’t expect to see those other expense categories to jump up significantly during the course of the year..

Okay.

And you guys mentioned the potential seasonality with BHG, is that just something -- is there a seasonality that you guys know or where you expect it to be relatively similar quarter-over-quarter?.

Yes, I think we’re pretty early on in that relationship and so I don’t expect there’s a lot of seasonality in their business flows. But I’m going to have to reserve that for now..

Yes, okay. Fair enough.

And then, the last thing was just the payoffs and the total loan payoffs, were they similar to what they were last quarter kind of a year ago or were they somewhat maybe or up a little bit this quarter?.

Yes, I think they were -- we had some fairly large accounts that paid off this quarter. So I would say they were a little higher than what they were last year..

Okay. All right, I appreciate it guys, thanks. Great quarter..

Thanks, Brian. End of Q&A.

I’m showing no further questions. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day..