Thanks, Terry. Good morning, everybody. We're obviously pleased with our second quarter loan growth results.
Excluding PPP, average loans were up 9% between the first and second quarters.
Excluding PPP, end of period loans at June 30 compared to March 31 were up 12.6% annualized.
As to loan yields, the yield curve remained volatile during the second quarter and we have mentioned for at least the last two conference calls, loan yields will be a fight in 2021.
We will lean into our relationships even harder to maintain our yields. Overall loan rates were basically flat with the first quarter, but that was assisted by a big quarter and likely a high watermark for PPP forgiveness. PPP forgiveness boosted the second quarter yield on PPP loans to 5.47% from 4.51% in the first quarter. It will continue to be difficult to model loan yields for the next few quarters, given the impact of PPP.
Excluding PPP loans, our average loan yield approximated 3.98% compared to approximately 4.07% in the first quarter.
So where to from here? Our market leaders continue to believe that a loan growth forecast, excluding PPP in the high single-digits for 2021 to be a reasonable growth target for our firm.
As always, we will lean on our new recruits to give us an advantage on loan growth coupled with our markets, which we believe to be some of the best banking markets with many of the best bankers in the Southeast, we're optimistic about our loan growth goals this year.
We also recently announced our expansion in the Huntsville and Birmingham with seven relationship managers in total. We and they are both very excited about our opportunities in these two markets.
As the loan volumes were modeled around $150 million in loan growth this year, from those two markets, I'm expecting P&L breakeven from our new associates in late 2022.
As to yields, we have some reason to be optimistic that our core yields are stabilizing, so additional dilution of our loan yields, excluding PPP will likely occur, but should slow. Obviously the yield curve does impact all of this, so hopefully we get some stabilization to help curtail the decrease in loan yields.
As to PPP yield, it's anybody's guess. And even though we will continue to work our borrowers proactively, we don't believe we will see quite the pace of forgiveness in 3Q that we experienced in 2Q. That said, since the start of PPP, we recorded $125 million in fees associated with the program, of which we've recognized 60% of those fees thus far.
So we still have $48 million in unrecognized fees, which we believe will help bolster loan yields at least over the near term.
Now on deposits, we had another big deposit quarter but not quite as large as several of our previous quarters. Core deposits were up almost $900 million in the second quarter. We had experienced significant growth in non-interest bearing deposits ending up at $8.9 billion at quarter end, up 29.5% since the end of last year.
Our average loans to average deposit ratio was up slightly in the second quarter at 82.7%.
So we consider that a small victory and this is the first increase in our loan to deposit ratio since the first quarter of last year.
Our average deposit rates were 20 basis points, while EOP deposit rates were at 18 basis points, so we continue to see downward momentum for 2021 and look to be around 10 to 15 basis points by the fourth quarter of 2021, assuming our short-term rate forecast plays out for the remainder of this year. Helping us get there will be about a $1 billion or so in maturing CDs over the next few quarters that have an average rate of approximately 70 basis points curve. Liquidity continues to gain attention from all banks. The yield curve remains on everyone's mind. We did put some excess liquidity to work this quarter, approximately $650 million in additional investment securities. We don't currently anticipate any more big security purchases this year.
As to the interest rate risk management, we do have a balance sheet bias today of rates being neutral to up slightly over the next year or two.
So before all the bond experts beat me up for deploying money in the fixed rate bonds in the second quarter, we did execute an interest rate swap on the front-end cash flows of about 50% of those bonds we acquired swapping the cash flows from fixed to variable, so our interest – so our asset sensitivity position is essentially the same before and after the bond transaction, but we did pick up, say, 100 basis points in yields over what we received on the cash purchases.
Our securities to assets ratio an increase of 15% in 2Q and we expect that the hold for the foreseeable future.
Our estimate is that peers, say the banks $20 billion to $60 billion assets are running a good bit more than that, say, in the 25% range.
We continue to look at ways to create increased momentum through deployment of excess liquidity in the higher yielding assets or elimination of wholesale funding sources. All those lines, and in addition to the – in addition to bond purchases we made in the second quarter, we increased our repo instrument we acquired in the first quarter from $450 million to $500 million in the second quarter.
As I mentioned last time, this repo instrument is secured by the counterparties investment securities portfolio in yields around 40 basis points. We're looking at another somewhat similar repo product, but it will likely be somewhat less in balances than the repo we have on our balance sheet curve.
We also reduced our wholesale funding book in the second quarter by almost $1 billion. Many of you might recall that we bolstered our liquidity in the historic pandemic with additional broker and other funds by more than $2.4 billion. At this time, a significant amount of that has been redeemed.
We have about $250 million left for redeeming this year and $400 million in 2022 and 2023.
Additionally, we have about $900 million is Federal Home Loan Bank borrowings that cost us an annual rate of 2%.
We continue to explore prepaying of those FHLB borrowings, but the prepayment penalty remains too rich for us right now.
Lastly, we do fully anticipate redeeming $130 million in bank level sub-debt in a few weeks using available cash. The sub-debt instruments holiday was during the pandemic last year, but we elected the whole loan of capital at that time and now feel the current environment provides us enough confidence to eliminate this funding, which is costing us about 3.3% annually and as all that's going to lose some of its favorable capital treatment. In the supplemental information, we've updated our interest rate sensitivity, which with all these initiatives we accomplished in the second quarter points toward an increased asset sensitivity in the up-100 scenario.
As it stands currently, we like where our balance sheet is positioned with no big moves planned on our current agenda.
As the chart at the top left of the slide illustrates our net interest margin after PPP and liquidity was approximately 3.25% in the second quarter, which compares to a similar calculation last quarter at 3.29%. Thus our adjusted NIM after being up for four quarters in a row retreated slightly, but has held steady over the last year or so.
As to credit, obviously Tim is not here, but rest easy, he's on the job, doing what he does best, working both our relationship managers and clients and making sure we continue on our focus on being a well-run and very sound financial institution. Using the big – the four big traditional credit metrics, the net charge-offs, classified assets, NPAs, and past due accruing loans, Pinnacle's loan portfolio continues to perform very well and in many cases, these are the best credit metrics we've experienced in quite some time. In the second quarter as was the case in prior quarters, during COVID our bankers and credit teams continued their diligence around conducting thorough credit reviews with particular emphasis placed on non-pass credits, our hotel portfolio and credits in the COVID specific low pass risk grade categories.
Our second quarter credit metrics remain very encouraging.
As noted on the slide, net charge-offs are running at a respectable 17 basis points, our classified asset ratio declines with a very strong 6.8%. NPA has also decreased this quarter down to 27 basis points and pass risk were down to just 7 basis points, which collectively points to the great effort of our relationship managers and credit officers across our firm keeping a strong focus on soundness. Many of us appreciate that in order to obtain these sort of credit trends, it takes discipline and active management.
During the second quarter our relationship managers and credit officers not only experienced an uptick in credit request and loan growth, they also work to see all four of the major credit metrics improve as well. Great work, everybody.
Our credit team continues to bounce back and forth between offense and defense, as they worked diligently to assist our relationship managers and structuring new loans appropriately as well as maintain an alertness toward the existing portfolio and looking for any trends pointing toward incremental deterioration. Tactically, during the second quarter, the credit team essentially accomplished the detailed credit reviews like hotels and non-pass exposures.
For the second half of the year, our attention will remain on the COVID segments, particularly hotels. Again, it's a good report on hotel occupancy, revenue per room, average daily rate, all trending in the right direction.
As to occupancy, we continue to run about 5% higher than natural rates with our hotel portfolio saying 65% occupancy through the first two months of the same quarter.
We expect June occupancy to be even higher as the national occupancy rates trended up in June as well.
If you recall, we downgraded all our hotels to criticize last spring at the onset of the pandemic, it's now time to review what has transpired and begin to look to establish upgrade targets over the next few quarters.
Our credit officers have initiated a hotel upgrade plan for our criticized hotels loans, as such the credit officers will be looking at year ago support, operating trends over the last 12 months, and the ability to meet – PNFP debt service coverage ratios. Hopefully we will have another report for you on hotels at our next call in October.
As noted on the slide, we expect continued reductions in our allowance to total loss ratio over the next several quarters, as the overall economic outlook continues to improve and our COVID impact at loan segments continue to trend positive. All in all Pinnacle’s credit metrics have held up really well, and even though we have shifted back to a more offensive stance, we will continue our thorough defensive work, particularly in the COVID impact, et cetera.
Now to fee income.
While lots of good news here, for the quarter, fee revenues were up more than 34% over the same quarter number of last year wealth management, which is investment services, trust and insurance had a great in comparison to last year, up more than 35%.
We continue to be very active on the hiring front across our franchise, particularly as we continue to build wealth management in the Carolinas and Atlanta and eventually Birmingham and Huntsville.
You might think that we were disappointed in our mortgage results for the second quarter, quite contrary, mortgage has had a phenomenal last four or so quarters at $6.7 million for the second quarter, we are pleased and believe they have an excellent chance in holding that run rate for the rest of the year assuming the rate environment holds. SBA loan sales had a great quarter and we're optimistic that this business should hold for the remaining two quarters of this year.
We also had a great quarter with respect to our equity investments, excluding BHG, one of our investments completed a fall on equity raise during the quarter, the results of which provided a significant insight into an updated valuation of that investment and thus we booked a two point million dollar increase for this one investment. I'll talk more about BHG in just a second.
As expenses specifically incentives, I think everyone is familiar with the impact of incentive costs, our expense base and if our earnings hit our targets costs go up, if not costs go down. Last year, we did not hit our targets thus incentives were significantly below expectations with our eventual payout equating to 65% of our targets. We again fully anticipate based the current operating environment that 2021 will come back strong, and hopefully our associates will recoup some of the lost incentive from 2020. Along those lines, we provided an opportunity in 2021 for our associates to earn and outside of incentive as much as 160% of target.
However, and as we've said repeatedly, there is no free lunch, increased incentives, only occur if our earnings growth supports the incentive.
Additionally, we anticipate max payout retreating back to the traditional 125% of target in 2022. All-in incentive costs are higher than anticipated this quarter, as we began accruing at the maximum award for 2021, thus we experienced a catch up from the first quarter, we believe the incentive calls for third and fourth quarter will be slightly less than the second quarter.
As to our overall total expense run rate, we now believe that expenses for the third and fourth quarter should be flat to down from the amounts we booked in the second quarter. Quickly some comments on capital. I mentioned the sub-debt retention earlier, we also intend to redeem another $120 million in sub-debt issues. Later this year, we'll work with our regulators on that matter after the next – over the next few months. And as I mentioned last time, and I want to just reinforce the point, we've intensified our focus on tangible book value growth by adding a peer relative component to our leadership's equity compensation plan. We're currently calculating an annualized increase for 13.5% in our tangible book value per share thus far this year.
Our plan is designed that we will compare our tangible book value per share growth with that of our figures along with relative return on tangible common equity and relative total shareholder return and determine the best in results for our leadership.
As our outlook for the rest of 2021, I won't go into this slide in depth as we've covered much of this previously.
So this, again is really a summary for the model builders of what we currently believe. Obviously, we realize that we appear more optimistic than most, that said, we have great confidence in our people, our markets and our class and renewed optimism about where the Pinnacle is headed.
Now BHG. This is a slide that we've shown for several quarters. The blue bars on the chart are originations with record demand sets for the past four quarters.
In fact, they've almost doubled loan originations over that time period. BHG would also tell you that their market share is less than 1%, so we believe much room for growth.
As their research would indicate that the personal, small and mid-size business lending, home improvement and patient finance businesses are collectively of $925 billion annual loan origination business and BHG intends to be competitive in all. The green bar represents loans on which gain-on-sale has been recorded as these loans are sold to downstream banks. This is the traditional BHG model, which generates revenues associated with our gain-on-sale model.
As to the bottom left chart, borrower coupons have fluctuated only slightly over the last few years ending at 13.4% for the second quarter. Bank borrowings failed to new records at just under 4% in the second quarter, so net spread remained in the mid-9%, which overtime is up from previous years.
As noted on the slide, BHG executed on their securitization in the second quarter last year, the first securitization was approximately $177 million, this year securitization approximate $375 million. They also are looking to conduct another similar style securitization before the end of 2021. Doing this allows them to take advantage of some of the very attractive funding rates, as well as diversify both the revenue strength and funding sources. We consider the diversification strategy a good idea, even though the gang wholesale model results in more near-term earnings for BHG. Of note, is that BHG is rapidly approaching a 50-50 revenue split between the gang wholesale and all balance sheet models and believe in 2023, they could in fact be there, much sooner than we anticipate. The bottom right chart now shows over 1,200 banks in BHG’s network and almost 700 individual banks acquired BHG loans over the last 12 months. Again, one of the strongest funding platforms for a gang wholesale model in the United States.
As credit we've updated BHG’s recourse obligation chart, on the chart on the left, the green bars detail loans that BHG has sold and their network of – and other banks which currently amounts to just over $4 billion in credits sold through their network. The blue line on the chart detailed the recourse of growth as a percentage of outstanding loans with these other banks.
As noted the recourse obligation is a reserve for future loss absorption.
As noted on the chart during 2020, BHG increased their reserves in anticipation of potential losses from the pandemic with the reserve standing at 7.65% of outstanding loans at year end 2020.
During the second quarter of 2021, the result of a better outlook BHG decreased the pandemic related reserves in the second quarter, as a percentage of loan, it was down approximately 100 basis points.
As noted on the chart at the bottom, right, the trailing 12 month loss has landed at 4.5%, basically consistent with the last few years and during the year where who knew how COVID would impact loss rates. This chart has also been updated from our previous presentations to better split the actual credit loss from losses BHG absorbed from reimbursing banks for the unamortized premium the acquiring bank paid to get the loan.
As the chart indicates the prepayment portion has gotten somewhat larger over the last few years. Keep in mind, prepayment losses are for good loans, they're just paid off prior to maturity. This could be a – for the several reasons, but primarily the actual premium type for BHG credit has gotten somewhat lower. Consumer credit, which is occupying more of BHG’s business, tends to have a higher prepayment track record and loans are being paid off earlier as rates have decreased.
We have again updated these two charts, the quality of BHG’s borrowers has improved steadily in the past and over the last few years. BHG continues to refine their scorecard and they increased the quality of its borrowing base. Again the right chart and as I've said before may be the most powerful chart I have to offer related to BHG steadily improving credit quality.
Looking at losses by vintage, losses continue to level out in earlier months from originations thus pointing toward a lower loss percentage over the life of the underlying loan. The quality of the borrowing base in our opinion is very impressive and much better than just from a few years ago.
Lastly, BHG had another great operating quarter in the same quarter and exceeded everyone's expectations yet again. We've upped our expectations for 2021, now expecting 2021 to produce outsized growth in relation to 2020 of approximately 40% compared to our prior estimate of 20% to 25% or more. We were also adding a growth factor for 2022 of approximately 30%, thus no rest for BHG, as they continue to build a strong and more revenue diverse franchise.
As the slide indicates, they've got more ideas or in some phase of development, which should foster continued growth over the next several years. All the – and we believe PNFP had a fabulous quarter and our one that continues to give us much confidence that our franchise and as people are poised for outside of growth for the foreseeable future. With that operator, we'll open it up for any questions.