Thanks, Terry and good morning, everybody. We've been talking about revenue per share growth for several years.
As many of you know, we pay attention to expenses, while we focus on revenue growth. We believe one of the best measurements of whether we are winning or losing is revenue per share growth. It is easier to grow earnings per share if revenue per share is headed north plus there is more fun and [indiscernible] about expense initiatives.
For the trailing 12 months, our basis was slower, as you can see, we continue to experience double digit revenue per share growth.
Secondly, the dotted line represents the peer group’s year-over-year growth.
As shown in the chart, we have continued to consistently outpace the peers on revenue per share. Keep in mind this is during a time of significant internal focus around integration with the Bank of North Carolina. I know many of our peers assert that recent mergers are working well and they couldn't be more pleased with the outcomes.
Let me say this about Pinnacle.
We are really proud of our team's efforts in the Carolinas and Virginia. We believe by any objective measure, whether it's loans, deposits, new hires, employer retention, tangible book value creation, earnings growth, et cetera, we believe we’ve significantly stronger investor expectations and likely those of our peers with respect to our entry into those markets. That said, we've got a great deal of runway left, not only in the Carolinas and Virginia, but in Tennessee as well and we have a lot of positive energy in our franchise right now.
Our firm is on offense 24x7, our associates are engaged, focused and excited about our opportunities for the remainder of 2019. Hopefully, those blue bars just get taller and taller.
Now, comparing first quarter ‘19 average loans to first quarter ‘18 average loans, our annualized growth approximated 12.4%.
We continue to believe that our loan growth for 2019 will be low to mid-double digits in comparison to 2018. In the Carolinas and Virginia, their organic loan growth in the first quarter of 2019 over the first quarter of 2018 was nearly 10%.
Importantly, C&I and owner occupied commercial real estate is up more than 21% year-over-year. Currently, they've grown their C&I and CRE owner occupied book to greater than 25% of total loans. Creating a robust C&I franchise is obviously key to our growth goals as and our experienced growth in the C&I platform should produce core deposit and related fee growth. These things seem to be working from our perspective.
We expect loan growth to be fairly consistent in the second quarter, we're seeing some nice things happen this quarter.
We are still anticipating increases in construction funding for the back half of the year, as projects work through their equity components, and start drawing on bank loans.
Additionally, as the chart indicates, our loan yields increased to 5.28% from 5.22% last quarter, a 6 basis point increase linked quarter, more on rates and yields in a second. Again, we've shown this chart on several occasions, there is a lot of information here. The blue bar on the large graph details annualized organic loan growth rates adjusted to remove acquired loans, so it's all organic growth. The green bars are pure medians each quarter. Except in the fourth quarter of 2018, where we experienced significant paydowns, our firm traditionally outperformed peers with respect to loan growth quarter in and quarter out.
We also provided information in the small chart regarding the granularity of our loan book by loan type. We offer this information, so that you can better appreciate that we are not relied on the extra large tickets on this to hit our loan growth goals. The chart on the right is somewhat busy, but it's where we’ve detailed the impact of discount accretion on net interest income.
As you can see by the gold line, discount accretion continues to be less impactful to our results at 5.2% of our net interest income in the first quarter of 2019 and will continue to be less entitled in the future. We all know that a big headwind to our GAAP revenue growth was the impact of less and less discount accretion and the primary way we're going to overcome it was through balance sheet growth. Anyways, blue bars on this particular chart are obviously where our attention is and growing those blue bars is key to our ability to deliver increased earnings to our shareholders.
Another slide we've been discussing for quite some time now. We've discussed in recent quarters that we believe an allocation of approximately 35% of our loan book to fixed rate loans with maturities greater than one year is an optimal range for us in order to be better prepared for any future interest rate environment. We've made significant progress in that end and now stand at 38%. This is the approximate level with our allocation prior to Bank of North Carolina merger and as you can see, is also relative consistent with our originations in the first quarter, was roughly a two-third, one-third split between variable and fixed rate loans. We believe the natural evolution of our growth without any additional intentional management by our wholesale bank teams should get us to 35% in a reasonable amount of time.
Additional rate hikes from the Fed appear to be at a minimum on pause and might be off the table altogether at least for 2019. The fed fund’s futures market is now predicting that rates may even be cut later in 2019 and in to 2020. Rest assured we're aware of these possibilities and are working to position the balance sheet so that in addition to minimizing our interest rate risk in the current flat interest rate environment, our net interest margin and capital positions are not impacted significantly either up or down.
We have numerous levers to pull to manage interest rate risk, including the reposition of our securities and wholesale funding portfolios, layering in additional or unwinding balance sheet derivatives as well as managing our own balance sheet liquidity position. We all [indiscernible] given what's going on in the macro environment, so the wholesale bank team is looking at various strategies to put this firm in the best position to win, regardless of the interest rate market we are operating in.
As maybe known, we've been saying that our goal was to reduce our firm’s exposure to commercial real estate investment and construction.
We have worked diligently to reduce our exposure in these portfolios in relation to our total risk based capital over the last two years. At quarter end, we were at 283% and 84% respectively. These charts are intended to give you some insight into the granularity of our real estate portfolio as well as the metrics we seek out for our underwriting and this chart does give us comfort that we're not after the wiggle projects.
As to our peers’ larger projects are likely well known, but they are not our brand book.
I think that a lot of capital and businesses from our local builders and developers.
As to the left chart, you can see detail there.
Our -- the aggregate volume of portfolio by the approximate -- about the ticket sizes.
While we have some larger, greater than $20 million credits, we also have a significantly larger number of projects that are below 10 million. The chart on the right does show the top 10 projects from this segment for both construction and commercial real estate. We've also included the loan value, loan to cost, debt service coverage ratios to firmly support the quality of these projects.
Now, just a few additional comments on credit, credit is always at the forefront of our minds, so I hope we never appear complacent or frivolous when we talk about credit.
For the first quarter, we experienced relatively minor increases in our classified asset and non-performing asset ratios along with the decrease in net charge-offs.
So, credit in the first quarter continues to chug along. Like the few management teams that have commented thus far on first quarter 2019 credit results, we too will agree that we aren't seeing any systemic issues with respect to our book that would call us not to be optimistic about credit in 2019. Obviously, there's macro issues and we will pay attention and anticipate how those might impact specific borrowers. That said, one positive macro event related to the recently announced debt pause is that the pause may actually contribute to a further extension of the current credit cycle.
Now, deposits. Average deposits balances are up 2.1 billion year-over-year. Year-over-year end of period deposit balances were up 2 billion. Concurrently, core deposits increased 1.6 billion or about 80% of total deposits, which is right on our target of being 80% core funded.
Our deposit costs did increase 12 basis points in the first quarter of 2019 from the fourth quarter and currently stand at 1.2%. The next slide gets at volume changes in the first quarter 2019, so I'll work through that in a second. What I’d like to point out here is that even though our deposit rates increased 1.2% for the quarter, our end of period deposit rate was only up 1 basis point at 1.21%. This compares to the fourth quarter average rate of 1.08%. But the ELP upgrade at December 31 was 1.16.
As we've been stating, with the Fed vols, we aren’t seeing a dramatic increase in deposit rates currently. We feel pretty good after only being a few weeks into the second quarter. We're obviously balancing our emphasis with the salesforce between the need for core deposit volumes as well as keeping our deposit rates in check. We still believe we're in markets that have ample liquidity to match our loan growth expectations.
As noted, year-over-year core deposits are up 10.8, while loans are up 11.3%.
You can also see the year-over-year core deposit growth in the Tennessee and the Carolinas at 13% and 9.3% respectively. We mentioned on the fourth quarter earnings call that we were likely to modify our funding profile protocol in the first quarter with some changes that would impact specific depositors as well as types of funding. Basically, during the first quarter, we experienced a net decrease in deposits from end of period 4Q18 to 1Q19 with some decisions by our wholesale bank team contributing to the decrease. I'd like to highlight two events tied to rate management and that one, we call a one-off transaction of a sizable amount that drove this decrease from the end of 2018 to the end of March.
As to rate management, we had a $250 million index money market account to a corporate depositor that left the bank in the first quarter. This depositor has been with us through the rate cycle and was very attracted to us a few years ago, but with increased rates, we can find cheaper funding elsewhere.
Another rate play is with respect to the net decrease in broker deposits, where we could also find cheaper money at the federal home loan bank. Collectively, these amounted to almost $500 million in deposit reductions.
Additionally, and we classify this as not exactly what we wanted, but it's the way things work.
During the quarter, depositors at investment portfolio companies restructured their balance sheet. We had several loans to several of the investor portfolio companies secured by many things, but also secured by the investors’ cash balances.
During the quarterly, that investor elected to restructure, which resulted in loans being reduced by 52 million and deposits being reduced by 67 million. We're highlighting this transaction as unusual, given we don't see cash secured loans of this size very often.
And so when these several loans were paid off, it was meaningful to us.
Additionally, as it occurred in the fourth quarter of last year was an approximate $200 million closure, we occasionally experienced depositors who sell their companies and additionally, we see those depositors leave our firm.
Fortunately, there were no such noteworthy events like that this quarter. The chart on the right details our highly liquid cash balances as you can see here in the first quarter, we were able to reduce those balances by approximately 175 million.
Some of this money was employed into the bond book, from 30,000, we were able to use some of our own balance sheet liquidity in such a way that it took some pressure ultimately to match price on some of the deposit losses, which I noted previously.
Now, turning to fees, fees amounted to greater than $51 million, up 6.9 million over the first quarter 2018. BHG had another great quarter. Their contribution was up 3.9 million or 42% year-over-year.
We continue to anticipate 10% to 12% growth for BHG for this year, compared to last year. Wealth Management revenues were up slightly in the first quarter of 2019 compared to the first quarter of 2018. We've had several significant hires in both footprints that have contributed to our success in investment services, insurance and trust. Deposit related fees remained relatively stable, lending and related fee income, which was primarily mortgage, was up meaningfully from last year.
As to 4Q and 1Q run rates, we had a lot of positive events in the fourth quarter that contributed to the overall decrease this quarter.
As you remember, BHG hit a home run in the fourth quarter of last year and is looking at another great year this year. Wealth management is up slightly from the fourth quarter, primarily due to the usual contingency revenues we get from our insurance subsidiaries.
As we all know, the rate environment was not helpful to residential mortgage in 2018, but our team continues to work to get their share of the deals. We've seen a lot of activity related to mortgage by various banks in recent years, mostly exiting the space or exiting at least some of the space. We like our position in residential mortgage. They had a great first quarter. Core lending not only with drops in long term rates, but also with increases in the number of mortgage originators as well as more effective mortgage originators. SBA and our back to back customer swap program had a strong fourth quarter, so revenues were down in the first quarter. The government shutdown had an effect on our SBA program and even though this business line is really important to us, it is a fairly modest component of our -- smaller component of our total revenues. Other income was also bolstered by increased BOLI revenues this year.
Now to expenses, expenses came in about where we thought with the run rate decrease in fourth quarter being largely attributable to incentive accruals, offset by our typical increase in salaries due to merit increases which approximated 4%. We’ve booked a large incentive accrual at year end 2018, which was not replicated during the first quarter. Other than that, it was a fairly boring quarter on expenses. Expenses will increase with additional hires and hopefully larger accruals for incentives. We hope recent merger announcements will contribute to our hiring plan this year. We're also pleased to report that retention rates continue to decline, signaling two important things for us.
Our client can count on consistent services, employee turnover continues to shrink. And our workforce engagement initiatives are working in our newer markets as those associates are leaning in and appreciating the Pinnacle culture. Wrapping up on expenses, we’re pleased to report that our efficiency ratio, as adjusted for investment gains and losses, merger related expenses and ORE was at 47.4%, down from December 31 and March 31 of last year. With that, I'll turn it back over to Terry to finish.