Thanks Terry and good morning everybody. We’ve been talking about this slide for several quarters. It details our revenue per share and revenue per share growth. We believe one of the best measurements of whether we are winning or losing is shown on the slide.
As you can see, we continue to experience double-digit revenue per share growth basically since the second quarter of last year.
Secondly, the dotted line represents the peer group's year-over-year growth.
As shown in the chart, we continue to outpace the peers on revenue per share by a wide margin. Keep in mind, this is during a time of significant internal focus around integration of the bank [indiscernible] always been a quite a bit of time on managing and strategizing around the inverted yield curves, our folks remained focused on gathering clients.
We’re very proud of our team's efforts in the Carolinas and Virginia. We believe by any objective measure, whether loans deposits and new hires, employee retention, tangible book value creation, earnings growth, we have significantly outperformed investor expectations, and likely those of our peers with respect to our interest into those markets. Obviously, BHG had a meaningful influence on our second quarter results.
How we're backing out BHG's contribution, we still grew revenue per share on the last 12 months by more than 9% consistent with the last quarter. There is a lot of positive energy in our franchise right now.
Our firm is on offense 24/7.
Our associates are engaged, focused and excited about our opportunities for the remainder of 2019.
Now, comparing second quarter 2019 average loans to second quarter 2018 average loans, our annualized growth was greater than 11%.
We continue to believe that our loan growth for 2019 will be low double digits in comparison to 2018, and in Carolinas and Virginia their organic loan growth in the first quarter of 2019 over the first quarter 2018 was a similar amount between 10% and 11%.
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 28% of total loans.
As we look to the third quarter, we anticipate loan growth to be low double digits for the remainder of the year based on current pipelines. The blue bars 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.
Excluding the fourth quarter 2018, our firm has traditionally outperformed peers with respect to loan growth quarter in and quarter out.
We also provide information with the small chart regarding 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 ticket sizes to get our growth goals. The chart on the right is somewhat busy, but it details the impact of discount accretion over net interest income.
As you can see by the gold line, discount accretion continues to be less entitled to our results at 4.7% of our net interest income in the second quarter, and will soon to be less impactful in the future.
We all knew that a big headwind to our GAAP revenue growth was the impact of less discount accretion and the primary way we're going to overcome it through balance sheet growth. Anyway, the 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 value to our shareholders. We very much anticipate continued growth for those blue bars for the remainder of 2019.
Now to deposits, the average deposit balance were up 1.9 million year-over-year. Year-over-year end period deposit balances were up 1.6 billion.
Our deposit cost did increase 5 basis points in the second quarter of 2018 from the first quarter and currently stand at 1.25%. The right slide gives that volume changes in the second quarter of 2019.
We are more of deposit growth, particularly low-cost core deposits.
We do believe that the rate of change in deposit pricing is slowing, but we will still need to fund loan growth, sourcing deposits, and developing strong deposit relationships is a key business activity that have to be job 1. We believe our markets are strong and have ample liquidity and then our associates are engaged.
We also believe we will find the deposits at a reasonable price fund loan growth. That said, we will work to fit our margins, but net interest income from margins at this point in the right size.
Next, an update on our loan portfolio composition by rate index.
We continue to believe an allocation of approximately 35% fixed rate loans with maturities greater than one year than optimum loan for us to manage interest rate risk over long-term. In light of the recent rapid shift and the interest rate environment and outlook, we have slowed the variable versus fixed-rate mix-shift with several structural initiatives, including unwinding of approximately 900 million in fixed [indiscernible] swaps and acquiring approximately 1.3 billion and interest rate forward for LIBOR based credit.
[Indiscernible] as the spread it does appear with respect to LIBOR and prime-based loans are spreads continue to hold in this volatile rate environment. LIBOR based loans did see some decrease in absolute pricing in the second quarter, but we believe the spread is consistent with the year ago, same thing on prime-based loan. If there is a winner in this rate environment, it's fixed-rate loan price.
If you use the 5-year treasury as the bench mark, our spreads have absolute lines over the last year.
As I mentioned previously, we have taken some steps to better position our balance sheet in case of a downrate cycle in fed funds [occurs].
We will continue to reposition wholesale and funding and work our volume book to optimize the performance of the wholesale bank and manager of interest rate risk. I mentioned earlier the unwinding of the fixed deposit rate swaps and the acquisition of loan floors. The key to all this will be the last bullet on the slide and the contribution our salesforce makes to neutralize the impact of a Fed funds cut.
We have met with the salesforce many times to get them into position to plan how they will communicate with clients to manage our deposit rates in a downrate cycle.
We will specifically target those clients that have negotiated rates with us over the last year or so. Many of you remember that last year, we were cited as a high-beta bank as rates were rising.
We also believe we can do a high-beta bank on the way down.
With the invert of yield curve in place now for several weeks and months, the speculation of a credit cycle change should recession occur has been on the investor's mind for quite some time.
We have no idea as to where the recession is likely, but what we get paid to do remains credit risk in both good times and bad. Right now, as far as risk is concerned, times are times are pretty good.
We have shown these charts before. I tend to provide further insight as to the granularity of our real estate book, as well as the measures we seek out for our underwriting. Hopefully this chart provides comfort that we're not looking into a very large CRE and construction projects. Credit remains at the forefront of our minds, well hopefully never appeared complacent when we talk about credit.
For the second quarter, we experienced relatively minor increases in our classified assets and net charge-offs while non-performers decreased.
So, credit in the second quarter will stay as she goes. We too will agree with other bankers that we are not seeing any systemic issues that will call us to be less optimistic about credit in 2019.
During the second quarter, we executed the bulk sale of our remaining nonprime auto credit with a loss of approximately 1.5 million.
If you go back a few years, we entered in that business as an experiment to see if it was a business, we'll be generating enhanced shareholder returns. We would likely have time to discuss business ventures and while we believe a good idea that intercepts these ventures.
As a nonprime auto credit, we have exited.
Now turning to fees. Fees total more than 70 million, up more than 47% over the second quarter of 2018.
As Terry mentioned, BHG had a phenomenal quarter. Their contribution was up 23 million or greater than 200% year-over-year with BHG strong second quarter we currently believe that their contribution for the first six months of 2019 would basically be replicated in the last half of the year, but more on BHG in second.
All of our war fee businesses are having a strong 2019 with resi mortgage leading the way.
As we all know the rate environment was not helpful to residential mortgage in 2018. They have had a great first half in 2019, correlating not only with drops in long term rates, but also with increases in the number of mortgage originators. Also, again credit markets are helpful with this line of business.
So, we anticipate a strong second half in mortgage.
Now, let’s spend a few minutes on digging the BHG.
The first question many might have is exactly what contributed the BHG substantial growth in the second quarter. The box on the left is attempting to answer that question. BHG has been working on several initiatives for several quarters.
First is the credit BHG is consistently refining their scorecards and have in recent quarters and the scorecards for other disciplines aimed at other licensed professionals.
However, the work they have done to enhance their marketing, closing, and lead distribution analytics has likely been the biggest contributor to their growth.
You can see the green bars on the bottom chart and how leap flow has increased significantly over the last few quarters. This has been directly related to better targeting analytics within the third-party databases that BHG acquires of the various credit reporting vendors.
BHG has been at this for 19 years, so they've amassed a great deal of data. They do acquire third-party data from the credit reporting agencies, but they also enhance this data with their own historical information, which has been accumulated since they started.
So, they don't depend totally on other people's information. In 2012, BHG had one person in the data analytics group.
Now, they have 33, of which five are Ph.D.’s and with a few of those individuals having multiple Ph.D. certifications. These professionals have developed more sophisticated tools and with these tools BHG can better anticipate closes.
Additionally, the BHG route the most profitable leads to their best sales personnel to enhance their hit ratios.
So, overall, as the top right chart indicates, the business model is working very well at Bankers Healthcare Group now.
Another question many might have is with all this volume as the BHG losing credit standards to allow for increased loan closes.
Our opinion is that no such loosening of credit have occurred at all.
From our perspective, it's about the number of add backs and the quality of those add backs. And the chart on the top left portion of the slide indicates over time the quality of the BHGs borrowers has improved steadily from their early years of the firm. The green line on the bottom right chart details recourse accrual they've recorded on their books for substitution, prepaid and other losses associated with ordering the substitution clause with banks that have purchased credit from BHG.
They've been taking the recourse accrual at about 4.5% over the last few years. The columns are the actual loss rates in relation to total volume of credit outstanding on the books of all banks doing business with the BHG.
As you can see, there is steady decline over the last few years. The columns include not only the credit loss, primarily substitution losses, but also the prepayment losses associated with reimbursement of the early pay off of these credits.
We've had a lot of conversation with BHG about their credit profiles. We believe that their business model is top shelf in identifying potential clients who have the credit profile to be a good borrower for the banks that buy BHG’s credit. Approximately 67% of Bankers Healthcare Group revenue base has historically been made up of being wholesale revenue.
However, BHG also generates interest income from loans that are primarily held on the BHG's balance sheet are being held on their balance sheet prior to being released on the auction platform for sale to downstream buyers. Since the second half of 2018 BHG has been building their balance sheet with on-balance sheet loans of approximately [$216 million] in loans currently held on balance sheet compared to approximately $900 million as of June 30, 2018.
They have been able to generate the cash required to be able to fund this loan growth.
Given what has already this sold this year, their on-balance sheet volume represents about 2 to 3 months of potential loan savings. Meanwhile, the green bars have ramped up with more loans being funded, which is a result of enhanced analytics and more sophisticated marketing platforms. The blue bars are the money bars. The blue bars have ramped up with more placements, either through auction or one-off sales. The blue bar drive gain on sale revenues.
As we look to the last half of 2019, BHG is anticipating increasing their balance sheet loans at a fairly steady pace for the remainder of 2019, potentially as high as $400 million to $500 million on balance sheet by year end. To accomplish this, BHG is working to secure incremental funding for various bankers, who will lend in their loan closing so that BHG can warehouse more credit but keep the flexibility is to go to auction should they determine the need to do so. This represents a great choice for BHG, as in that they will have the option to reduce their balance sheet in order to harvest gain on sale revenues, if they so choose.
For me, the auction platform is the most valuable component of BHG's unique business model. Currently, they now have more than a thousand banks in their network.
As you can see from the small text box on the chart, almost half of these banks acquired loans last year at rates and spreads that have not changed materially over the last 18 months. Their funding platform is alive and well. The BHG's management spends a great deal of time on making sure that this platform is raised to acquire better loans at a competitive price.
Lastly, on BHG, as you can see on the chart, BHG is expanding its product offering in products as SBA and Patient Lending. They are spending up a great deal of energy into these two new revenue streams. And we're excited to see what will come of these initiatives.
Additionally, Pinnacle has been involved with credit cards for many years, and we too are looking to expand that relationship, as the expansion in the largest accounts and other disciplines. Currently, those expanded lines represent less than 10% of BHG's business, but that number was effectively zero last year, so call me optimistic on that.
One last thought before I turn to the expenses, BHG now employs almost 400 people, which is almost double the number of people they had in 2015 when we acquired our first investment. They employ six head hunters, so they hired their own people as does Pinnacle.
Additionally, BHG has been cited in the best place to work on numerous occasions, so like Pinnacle they have a strong commitment to culture and that includes delivering results.
So, with that, let's talk a little bit about expense. In the press release last night we noted two items related to rationalization of our branch network.
Firstly, we absorbed the charge to accelerate the disposition of potential expansion sites we acquired with the Bank of North Carolina acquisition. And secondly, we announced that we're looking to consolidate approximately five branches. Two of those branches are in Middle Tennessee and three were in the Carolinas.
Our goal is that with these decisions we'll be able operate a leaner and more efficient price distribution systems.
As with these charges, expenses came in about where we thought with the run rate increase of 7%, compared to the first quarter 2019, with most of this increase related to personnel costs.
Our annual incentive accrual was up $5 million compared to last quarter because of increase in personnel.
We also are pleased to report that retention rates continue to decline with two important things for us.
Our clients can count on consistent service and employee turnover continues to shrink, and our workforce engagement initiatives are taking hold in our newer markets as those associates are leaning in and buying into our culture.
Finally, we're pleased to report that our efficiency ratio as adjusted for non-GAAP measures was 45.9% down from both the first quarter of 2019 and the second quarter of 2018. We've been talking about modifying our longer-term operating ranges for a few quarters.
Our previous metric we've put in place in 2012 and believe the granularity provided by those previous measurements has served its purpose.
We're opting to go with the higher-level guidance and thus we're offering operating ranges for ROA, ROTCE and tangible equity as our current guidance. Management met with Board in June at an annual strategic planning retreat [indiscernible] at that meet.
For ROA we are adjusting our operating range by 5 basis points with the new range of 145 to 165.
For the second quarter, we're operating above that range at 169, and BHG's second quarter performance was a big tailwind to our ROA in the second quarter. We anticipate, and I think I'm being somewhat conservative for the second half of the year, that BHG's contribution will be consistent with the first half, But the level of quarter contributions should be less in quarters three and four than in quarter two.
We're also introducing ROTCE and tangible equity ratio as two new measures that we'll highlight going forward.
As you can see, we're above the range of ROTCE and in the higher levels of the tangible equity ratio.
Our goal is to maintain these ratios in the top quartile of our peer group over time. We've been fortunate to have a long track record of top quartile performance and look for many years of similar performance.
Before I turn it over to Terry, I'll talk about EPS and tangible book value per share. We've shown these charts before.
We continue to believe that we are top quartile growers of EPS and tangible book value within our peer group. We're really focused on its rapid, reliable growth in EPS and tangible book value.
Our tangible book value is up by more than $5 a share in the last year, we're almost 20%. And as you know, our incentive systems are designed around the EPS growth.
As Terry mentioned, our belief that banks that can rapidly and reliably grow EPS and tangible book value over time will produce best shareholder returns.
As you can see on this chart growth figure is rapid and reliable.
And with that, I'll turn it back over to Terry to finish up.