Thanks, Terry. Good morning, everybody. We’ve updated our revenue per share slide for third quarter results. 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 since the second quarter of last year.
Secondly, the red dotted line represents the peer group’s year-over-year growth.
As shown on the slide, we outpaced our peers on revenue per share growth by a wide margin.
Keeping in mind, this is during a time of significant internal focus around the integration of the Bank of North Carolina and more recently managing and strategizing around inverted yield curves. That said, our relationship managers have remained focused on gathering clients and generating incremental revenues for our firm. Obviously, BHG’s outsized performance has had a meaningful influence on these results.
We don’t apologize for that at all. It has afforded us opportunities to invest in our franchise by keeping the foot on the accelerator on hiring, accruing for enhanced incentives to motivate our workforce, as well as allowing us to better position our franchise for future growth.
Additionally, BHG has provided our outsized tangible book value accretion, all of which benefits our franchise and its shareholders. There remained a lot of positive energy in our franchise right now. We remain on offense 24/7. It’s all about winning.
Our associates are engaged, focused and excited about our opportunities for the remainder of this year and going into 2020.
Now comparing the third quarter of 2019 average loans to the third quarter of 2018 average loans, our annualized growth was more than a 11%.
We continue to believe that our loan growth in 2019 will be low double digits in comparison to 2018. At this time, we have no reason to believe that our loan growth outlook for 2020 will be any different.
We’re in the midst of constructing our 2020 plan and are managed to believe that low double digits is still a reasonable target. We can only make this statement because of the robustness of our hiring platform and the continued success we anticipate over the next several quarters. Impacting our volumes in the third quarter was the acquisition of Advocate Capital.
We’re excited about the opportunities that Advocate provides us, including access to a vast network of attorneys, where we can offer commercial banking products with emphasis initially on gathering deposits. Advocate has built their franchise on delivering great service and enjoys significant depth in their client relationships.
During the third quarter, Advocate added approximately $155 million in loan balances with a weighted average yield of 8%, plus other fees for the services they provide to their client base. I’ll speak to rates – loan rates in a second.
We’ve shown this chart for several quarters now.
We also provided information in the small chart regarding the granularity of our loan book by loan type. This small chart details the average commitment of our current loan book at origination compared to March 2015, the only outlier being construction. Construction has increased to an average commitment of almost $1.3 million, which we believe is very reasonable amount for that part of our portfolio. We offer this information, so that you can better appreciate that we’re not relying on extra large ticket sizes to hit our growth goals.
The chart on the right details impacted 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 5.7% of our net interest income in the third quarter and we believe we’ll continue to be less impactful in the future.
We all knew that headwinds to our GAAP revenue growth for 2019 was an impact of less and less discount accretion and the primary way we’re going to overcome it was through balance sheet growth.
Anyway, the blue bars on the chart on the right are obviously where our attention is. And growing those blue bars is key to our ability to deliver increased value to our shareholders. That said, hopefully, in the not too distant future, we can stop showing this chart once purchase accounting is even more so in the rearview mirror.
Next, here’s another slide we’ve been showing for several quarters. It’s an update on our loan portfolio by rate index.
Our loan mix averages approximately 50% to 55% LIBOR and Prime, which substantially all of LIBOR credit being tied to 30-day LIBOR and about 40% fixed rates, with commercial real estate being the primary contributor.
The quarter-over-quarter weighted average coupons for LIBOR and prime-based credits for loan book decreased by 24 basis points for LIBOR and 43 basis points for Prime, which is somewhat of a victory given we experienced 50 basis points in rate cuts.
So the spread in these categories actually widened compared to quarter-end to quarter-end after considering the rate decrease.
Of increased significance is a spread on fixed rate credit as a proxy for fixed rate spread performance and to keep it simple, we traditionally use the five-year treasury as the benchmark. The five-year treasury dropped 21 basis points during the quarter on an average – while our weighted average fixed rate loan rate dropped only 6 basis points. Keeping the coupon on fixed rate loans near these levels would be a nice win for us in an anticipated down rate environment.
Now to deposits. Perhaps the most anticipated slide in the deck today, average deposit balances were up $1.7 billion year-over-year, our average deposit costs remain the same in the third quarter of 2019 from the second quarter and currently stand at 1.25%
Let’s go back to wholesale bank assets. We don’t usually discuss the bond book or liquidity in our quarterly conference calls, but we’re today primarily, because it’s relevant to margin performance in the third quarter and going forward. These two areas probably have the biggest downside impact on our NIM performance in the quarter.
Bond yield decreased by 20 basis points linked-quarter, this is by no means unexpected. We don’t have the peer data yet, but we believe peer yields will see decrease in this quarter as well. About 50% of the decline was due to reinvested cash flows, while the other 50% was valuation of the book.
So as rate declined, the value of the book increased reducing the yield.
We anticipate additional yield contraction in 4Q. But as the middle chart indicates, we’ve added more fixed rate assets to the bond book, which will help stabilize our yield performance going into next year.
As to liquidity, we maintain more this quarter than any quarter in recent memory. Most of this was timing and that we just completed a $300 million sub-debt offering in the second quarter of September, which added to our cash balances and we acquired a large deposit from a longtime client of a similar amount.
Regarding the offering, $180 million was injected into the bank, while $90 million is earmarked for sub-debt reductions at the holding company in January. Most of the client deposit will find its way to our wealth management unit in the fourth quarter, while the remainder will be with us until early next year when that depositor pays their taxes. Liquidity will likely be back within a small range in the fourth quarter.
In any event, both of these matters pressured our third quarter margin performance. There is a point when NIM trumps net interest income and we will pay attention. Currently, we will work with our clients to create as much credit income as we can and grow net interest income.
As a wise buy-side investor once said, “There’s value in vendor customers, especially those that transition to relationship based on service and advice.” So as a result, we remain focused on growing our client base by hiring the best bankers in our markets.
Now to deposits. Most of our firm’s focus for the third quarter was on the table on the left, which looks at end-of-period rates.
Our relationship managers, we believe, did a bang-up job on managing our deposit cost in this rate environment. In negotiated rate bucket, we’ve achieved a 17 basis point decline.
At this point in the rate cycle, our target would be a 50 basis point beta or a 50% beta or a 25 basis point reduction, so we’re very much pleased on where we are, given the most recent rate decreases were late in the quarter. We do think we are getting close to the 25 basis point reduction here in mid-October in that particular rate category.
Our relationship manager is very much in tune with the rate environment and are prepared to have more discussions with our client base should rates decrease further.
Here is our challenge.
We have to reduce deposit rates, while at the same increasing our deposit book to fund loan growth and reduce our dependency on the more expensive wholesale funding.
Our ability to accomplish this rests primarily with our new hires and continue to gather deposits from their client base.
More on deposit rates. We don’t normally provide monthly information during our quarter conference calls, but I wanted to emphasize the positive work our relationship managers are accomplishing with respect to lowering rates on our interest-bearing transaction accounts.
Several may believe that this is merely pushing a button in our deposit systems. Granted we have those accounts, those are the rates you’d account on the previous slide, the 65% of our interest-bearing transaction accounts are negotiated, which means that the only person that can authorize or change that rate is the relationship manager. It is part of our brain.
All banks have rate sheet accounts and all banks have negotiated rate accounts. We believe our approach is much different and much more intentional. It’s really at the core of relationship banking, the bank’s treasury, namely me and a fewer other number of countries who would love to call up deposit ops and tell them to lower rates and the deed would be done.
At Pinnacle, these bean-counter types have to be able to convince the relationship manager or better said, their supervisors, by calling – to call their client to lower their rate and it’s not only a good idea, but a fair idea.
So far so good. Can’t tell you where we think we’ll be at the end of October, but we are optimistic that we will experience continued progress on reducing rates on our interest-bearing transaction accounts.
Our goal is a 50% beta for our interest-bearing deposit book.
So we’ve got a ways to go to achieve our targets, but we’re off to a great start. It will take us a while on CDs.
Our CD book is split about 60% customer and 40% wholesale. The wholesale CDs will roll down fairly quickly, giving us an average duration of slightly more than six months, while the customer book will take a little longer as this average duration is approximately 10 months.
When rates were rising, we took our fair share of criticism regarding increasing our deposit rates.
As we enter the front part of what could be an extended down rate cycle, we like our odds.
We will be proactive with our clients and not hide behind a curtain to surprise them. We sincerely appreciate our client base and we will leverage the depth of our relationships to accomplish our objectives.
With the inverted yield curve in place now for several months, the speculation of a credit cycle change should a recession occur has been on investors’ minds for quite sometime. We believe we’ve got the best relationship bankers in the business.
We also believe we have the best credit officers. This is not their first rodeo, they can sense when storm clouds are beginning to form..
Right now, as far as credit risk is concerned, based on our credit metrics and what Harvey White and his team tell me, accounts remain pretty darn good. We’ve shown these charts before, the chart provides us even more comfort that we’re not booking the very large commercial real estate projects. Credit remains at the forefront of our mind, so I hope we never appear complacent when we talk about credit.
For the third quarter, we experienced relatively small increase in our net charge-off ratio, while nonperforming assets and classified asset ratios decreased.
So we believe that as the credit in the third quarter were steady as she goes and agree with other bankers that were not seeing any systemic issues that will cause us to change our perspectives about credit in 2019 or into 2020.
Now concerning CECL. How much will our allowance increase? We’re in the final stages of validating the various models we will use to determine the allowance account each quarter. Preliminary, we believe that the allowance account could be in the range of 70 basis points to 80 basis points, up from the 48 current. This amount includes a meaningful amount of purchase credit impaired reserves, which will transfer into loan accounts – transfer from loan accounts into allowance account without an impact to capital. At September 30, that amount was about 6 – was slightly over $6 million, which approximates to 3 basis points of the loan portfolio.
Now turning to fees. Fees totaled more than $82.6 million, up more than 60% over the third quarter of 2018.
As Terry mentioned, BHG had another phenomenal quarter. Their contribution was up $18 million or greater than 126% year-over-year. More on BHG in a second.
Our fee businesses have – are having a strong 2019 with residential mortgage leading the way up approximately 80% annualized this year over last year. They’ve had a great first nine months of 2019, correlating not only with drops in long-term rates, but also with increases in the number of mortgage originators. Also, again, great markets are helpful with this line of business, so we anticipate mortgage to finish this year strong.
Additionally, deposit fees and wealth management are having mid double-digit growth figures, which we consider to be excellent.
Concerning BHG, during the third quarter, we participated in BHG’s Analyst Day in New York with several members of their executive team on hand to provide more detailed perspective on BHG’s business model. We feel that a lot of great information was provided during the session, so we won’t go through or repeat here. But if you like to hear what was said, I’ll direct you to our website www.pnfp.com, where a recording of that will be available for replay for, call it, another two months.
BHG is having a phenomenal year period. Originations are at an all-time high and the business model continues to outperform. That said, BHG will likely being to keep more of their credit on their balance sheet, thus realizing more interest income rather than realize significantly on gain on sale.
They believe the funding, which will allow them to warehouse this loan should be in place within the next few weeks.
So we expect fee revenues from BHG in the fourth quarter will be less than what has been reported in the second and third quarters, with it being more consistent with the amounts reported in the first quarter.
The green line on the chart on the right details the recourse accrual they record on their books for substitution prepayment and other losses associated with hiring and substitution cost for banks that have purchased credit from Bankers Healthcare Group. They’ve been keeping the resource accrual at about 4.5% of total credits outstanding over the last few years, the cost or the actual loss rates in relation to total volume of credit outstanding on the books of all the banks doing business with Bankers Healthcare Group. The column include not only the credit loss, primarily substitution losses, but also the prepayment loss associated with reimbursement of the early payoff of these credits.
We’ve had a lot of conversations with BHG about their credit profiles. Their credit models are sophisticated and subject to continued analysis by our analytics group. We believe that our business model is top shelf in identifying potential clients who have the credit profile to be a good borrower for BHG, where the BHG keeps the loan on its balance sheet or shelf loan into its network of community banks. Approximately 67% of Bankers Healthcare Group revenue base has historically been made up of gain on sale revenues..
However, BHG also generated interest income from loans that were either held on BHG’s balance sheet permanently or being held on the balance sheet prior to being released at auction platform. Since the second-half of 2018, BHG has been building their balance sheet with on balance sheet loans of approximately $307 million of loans currently held on balance sheet, compared to $146 million as of the end of September 2018. They’ve been able to generate the operating cash required to be able to fund this loan growth.
The green bars on the left chart represent originations and ramped up with more loans being funded, which is the result of enhanced analytics and more sophisticated marketing platforms. The blue bars are the loans on which gain on sale has been reported as these loans were placed with bankers with gain on sale revenues being generated. The blue bars have ramped up with more placements either through option or one-off sales. The gold bar represents the loans held by BHG on its balance sheet, which BHG will collect interest income.
As we’ve mentioned on the previous slide, BHG is anticipated to increasing their balance sheet loans.
We’re all in agreement that by balance sheeting loans, this will provide a more reliable income stream for BHG in the future through a more diverse business model. It will take many quarters for BHG to max the gain on sale revenue with interest income, but that said, we all believe it’s a good idea.
As to credit risk, given BHG has been honoring the substitution clause for sub-loans, any incremental credit risk associated with keeping more loans on its balance sheet should be minimal. Even with all this change, we still believe that BHG should see 10% growth in earnings in 2020 from what they anticipate realizing in 2019.
So now briefly to expenses, most significant run rate matters to discuss over on incentives.
As we mentioned in the press release, we increased our incentive accrual in the third quarter, but don’t expect our fourth quarter accruals to be nearly as large.
We’re also pleased to report that retention rates continue to increase certainly in 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 buying into our culture.
For the last two years, our expense to average asset ratio, excluding merger expenses, has been in the 1.9% range. We don’t see that changing materially as we head into 2020.
Lastly, yesterday, our Board of Directors approved an additional $100 million share repurchase authorization for open market purchases of our common stock. This authorization extends through December 2020 and begins upon the exhaustion of our current authorization, which has approximately $30 million of remaining funds available for common stock repurchases. We intend to use every bit of this authorization, but we will do it rationally over the next 15 months.
With that, I will turn it back over to Terry.