Good morning, everyone, welcome to the Pinnacle Financial Partners second quarter 2018 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 Pinnacle's earnings release and this morning's presentation are available on the investor relations page of their website at www.pnfp.com. Today's call is being recorded and will be available for replay on Pinnacle's website for the next 90 days. At this time, all participants have been placed in a listen-only mode. The floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star one on your touchtone phone. Analysts will be given preference during the Q&A. We ask that you please pick up your handset to allow optimal sound quality.
Before we begin, Pinnacle does not provide earnings guidance or forecasts. During this presentation, we may make comments which maybe 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 website 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, Daniel. As we've done in each quarterly earnings call for several years now, I'll begin with this dashboard, which is intended to give a quick snapshot of our performance during the quarter, it highlights not only the absolute level of performance during the quarter, but the trends, which are so important to a growth company like ours. These measures are all presented on a GAAP basis. On this slide, I particularly want to focus on revenue growth. That's one of our key themes for today's call. In the chart on the top left, you can see total revenues continue to set a new high each quarter, up 5.2% on a linked quarter basis, or 21% in terms of the annualized rate of growth year in the quarter.
Regarding our growth in balance sheet volumes, which is generally the best predictor of future revenue growth, looking now just below the revenue chart at the loan chart, organic loan growth during the quarter was in excess of $700 million, which is an annualized growth rate for the quarter of roughly 18%. The second quarter was a fabulous quarter in terms of current revenue growth and the outlook for future revenue growth. Because of all the noise associated with the BNC merger, restructurings in conjunction with the tax law change in the fourth quarter and so forth, in some cases, the non-GAAP measures may better illustrate the relative performance of the firm. On this chart, I'd like to focus first on EPS, net of merger-related expenses. That was $1.15, which is in the chart on the top row in the middle.
It's up roughly 37% over the same quarter last year. Immediately to the right on the first row is the tangible book value per share chart, which paints a nice picture of our ability to accrete capital and grow tangible book value on a rapid and reliable basis with a four-and-a-half-year CAGR of 14.5%. Immediately below the tangible book value chart, I want to highlight the ROTCE at 18.45 this quarter. As you review the trend line post-recession, you can see that it progressed nicely until the first and second quarter of 2017, which is when we did the large capital raise in advance of, and in order to make the BNC acquisition. As a reminder, that deal closed at the end of the second quarter, you can see the very nice lift in ROTCE following that deal closing.
Next, I want to highlight the core deposit growth in the middle chart on the second row. Core deposits grew at an annualized rate of roughly 18% in the second quarter, essentially matching the annualized growth rate for loans year in the quarter. Lastly, on the bottom row, you can see that the asset quality is essentially blemish free. After merger charges, second quarter was a great quarter, with loan growth of 18% annualized, core deposit growth 18% annualized, revenue growth of 21% annualized, EPS growth of 37% annualized, ROA of 1.54, and an ROTC of 18.45. Here's what we want to get done today. Harold will review 2Q18 financial performance in greater detail.
Following our strategic planning retreat with our board, while there's no change to our overall ROAA target, he'll update some of the target ranges for the four components that lead to that overall ROAA target. I'll then provide an update on our success with the BNC integration, attempt to create more clarity on our M&A stance. I want to deal with several questions that are intended to demonstrate the power of the differentiated model we run, that we believe makes us different from our peers. Number one, can we continue to organically grow loans at a mid-double digit pace? A related question, how long does it take to build out the C&I program in Carolinas and Virginia? Number two, can we gather relationship-based funding to support the loan growth?
Number three, despite high deposit beta, can rapid balance sheet growth produce rapid net interest income and EPS growth? With that, I'll turn it over to Harold for a more detailed review of the quarter.
Thanks, Terry. Revenues for the quarter were up $11.5 million from the previous quarter, ending at $232 million. While we grew those revenues, we also again experienced a decrease in our quarter-over-quarter efficiency ratio, which is again our thesis on how we create operating leverage around here. Net interest income is up from the previous quarter by $7.8 million, reflecting an annualized growth rate of 18%. Much of this was attributable to increased average loan balances and also improved loan yields resulting from the recent interest rate hikes. The impact of fair value accretion increased $700,000 during the quarter to $16.1 million, which is above where we expected to land in Q2. We anticipate decreases in discount accretion in future quarters as the level of acquired loans and recent mergers becomes less impactful and post-merger prepayments slow.
Best guess at this point is that fair value accretion is likely to remain around $55 million for 2018 and perhaps $13 million-$15 million in the third quarter. At the end of June, we've got about $130 million in total loan discounts remaining on our balance sheet. The dark green line on the chart denotes our non-GAAP revenue per share. We reported $2.64 adjusted revenue per share in the second quarter of 2017 and are reporting $2.97 this quarter. We've grown adjusted revenue per share by roughly 12.5% year-over-year. Obviously, our goal is to continually increase this measurement. As you all know, it's a lot easier to grow earnings per share if you're growing revenue per share, as we expect to continue to do so as we move through 2018 with a growing balance sheet.
This is a new slide, but again, focusing on revenue per share growth using trailing 12 months as the basis for the amounts. Two things we'd like to communicate here. First is that we have experienced an accelerating green line over the last few quarters. Now, this is during a time of significant internal focus around the Bank of North Carolina deal closing and systems conversions, not to mention cultural integration and getting folks aimed in the right direction. Additionally, we still were deploying the synergy case in the first quarter, so we've only been at the target environment for essentially three to four months. I can't help but be excited about where we are as a combined firm and where we're headed in all of our markets.
Secondly, the dotted line represents the peer group's year-over-year growth, which is a cumulative last 12 months revenue of our peer group, divided by the aggregate number of shares. We consistently outpaced these amounts over the last 18 months and gaining traction. I've worked at places where the only way you were going to hit your bottom line number was through some expense initiative. It's a whole lot more fun to work for a firm that's growing revenues. We've had this chart for a long time now. Concerning loans, as the chart indicates, average loans for the quarter were $16.8 billion compared to $16 billion at the end of the first quarter, as average loans increased by almost $800 million. An annualized growth rate of better than 19%. This is on the heels of a strong growth in the first quarter as well.
We're going into the third quarter with roughly $300 million more in EOP loan balances over the average for the second quarter, which is a great head start for the second half of 2018. In the Carolinas and Virginia, their organic loan growth for the first half of the year has been around 14% annualized. There's a chart in the back that shows what each market has achieved. Importantly, C&I and owner-occupied is up almost 22% annualized. Right now, they've grown their C&I owner-occupied book to 26% of total loans. CRE and construction remains around 50%. In Tennessee, C&I is 50%+ percent. If they keep growing at a 22% clip in C&I, they will create the C&I platform in the Carolinas and Virginia much faster than most would have imagined.
As the chart indicated, and as expected, our loan yields increased to 5.04% from 4.91% last quarter, a 13 basis point increase when quarter. Our modeling has one more rate increase for September and then only two rate increases next year. Our bias is that we may begin modeling at least one more rate increase, most likely next year, given recent economic news, which we believe is helpful to our outlook. We presented this slide last quarter, so it's back by popular demand. We're still targeting 35% fixed rate loan book for our loan portfolio. We also executed a forward interest rate swap early in the second quarter in order to accelerate our floating rate component by an additional 3%. We may execute another forward swap to further accelerate our floating rate asset book. We've updated the slide with additional information on rates on various rate categories.
For LIBOR and prime rate, we feel like we've captured substantially all of the short-term rate increases. Fixed rate loan yields have not moved much for the loan book, but given the yield curve, it takes a lot of new loans to move the weighted average yield of the fixed rate portfolio. As the last two columns on the chart at the bottom indicate, we are seeing some lift in fixed rate pricing this year, so we should see the book yield begin to move north eventually. New loan yields for prime-based credits were fairly flat quarter to quarter. This was because we booked some really nice higher yielding prime-based credits earlier this year. We had this chart for our investor day a few weeks ago. The chart reflects our quarterly average loan growth for each quarter since Q3 2015.
The blue bars on the slide have been adjusted to remove acquired loans. That said, these are the real quarterly annualized growth numbers, thus showing the impact of growing our revenue producers. As shown, our loan growth continues to outperform our peer group quarter after quarter without sacrificing credit quality or accepting undue concentration risk. Keep in mind, we don't know what 2Q18 peer information is, but based on what we hear so far, it'll be consistent with the first quarter. Another strong loan growth quarter for the Pinnacle in comparison to peers. The small chart in the middle of the slide is average account balances comparing early 2015 to the second quarter of 2018. We need to make this a bigger deal. Our portfolio is not about a whole lot of whale-type loans. To say it's granular may even be an understatement.
We've got a few larger loans, but we're talking average ticket size commitments of just over $1 million-$1.25 million for commercial real estate and construction. That's all commercial and residential. Our average commercial construction commitment is just over $2.4 million for the first six months of 2018. Again, we believe a very granular portfolio aimed at small and middle-market builders and developers in our markets. Again, the blue bars would not be where they are without hiring new revenue producers. Hiring revenue producers, gathering clients, and doing it over and over again. Average deposit balances were up to $670 million, while EOP balances are up to $1.35 billion. Most of our average balance increase was attributable to core deposit increases. Late in the quarter, we restructured some funding, moving Federal Home Loan Bank balances into wholesale CDs to save a little spread income.
Even without that, we think we had a great deposit growth quarter. Our deposit costs did increase 18 basis points in the second quarter from the first quarter and currently stand at 78 basis points. We compute a beta of 31% on deposit costs given those figures since 4Q15. More on that in a minute. As to the future, we expect deposit costs will continue to increase in a measured pace for several factors. The two most prominent are general pressure for increased deposit rates in a rising rate environment, also we need to fund a significant loan pipeline. Our relationship managers are out in our markets selling our ability to serve commercial and affluent consumer depositors with a value equation we think is far superior to our competitors. We still believe we are in markets that have ample liquidity to match our loan growth expectations.
Terry, Rob, and Rick are driving our sales efforts towards depositors. Yes, we continue to aim at specific depositors. Yes, our private bankers are calling on the affluent clients. Yes, our commercial bankers are looking for commercial operating accounts. Yes, our deposit rates will increase to fund our loan growth. We will play our customary shoe leather game. We still believe we've got adequate room in our plans to fund our loan growth with a fair rate paid on deposits. We planned on a 50% beta this year. Don't get me wrong, deposit betas are important. We pay attention, right now we are focused on gathering more clients and growing revenue and earnings. Here's another chart we showed at Investor Day. Again, a big quarter for deposit growth in 2Q.
I know many of you will say that we had a large wholesale component, more than half of our growth was core deposits. A meaningful portion of the non-core was public funds, most of which was in the Carolinas. I tell you that because our folks have gotten the message. Go gather clients, get their deposits. We may sometimes hold our nose on the rate, get the client. The bank that can gather clients wins. Also on the chart is the loan deposit ratio for us compared to peers. As you might expect, our line bounces around, it appears the peer line will nudge up closer to us after 2Q results are announced. This is a new chart, deposit betas versus earning asset betas.
At the end of the first quarter, our deposit beta was 10% more than the peers, our earning asset beta was 19%. We are focused on managing both sides of our balance sheet. Net interest income will trump net interest margin to a point, as many of you know, we are EPS and revenue focused around here. You may or may not like how a particular metric responds from time to time, at the end of the day, it's setting big targets, creating strategies to hit them, and managing the curve balls that folks in the economy throw at you. We believe we have a differentiating model, we believe that model is transportable, and we believe it's working. Fees amounted to $48 million, up $3.8 million since last quarter.
Our residential mortgage group had a good quarter in terms of production, with approximately $265 million in loan sales this quarter. Resi mortgage income was up from last quarter. Rate increases have not been helpful to this group over the last few months. Mortgage is hiring, particularly in the Carolinas. As we mentioned to you before, we're going through a significant change in the mortgage group in the Carolinas, the news is good, as we've secured several new hires in that area this year. As expected, BHG's contribution was up slightly from the first quarter, reporting in at $9.7 million, reflecting year-over-year growth of around 11% from the second quarter. We continue to anticipate that NII growth from BHG this year should be in the 12%-15% range. Investment services income remained flat in the second quarter compared to the first quarter.
Keep in mind, we remain in a phase one of a build-out program of our platform in the Carolinas. There was a solid base, one of our key goals with the C&I build-out is to ramp up our investment efforts in that footprint meaningfully. We've had several significant hires in both footprints that have contributed to our success in investment services. In insurance in the first quarter, we had approximately $1 million in revenues from insurance companies due to claims experience, still insurance is doing quite well. Trust keeps on growing. Several key hires in trust in Tennessee and the Carolinas have pushed their revenue contribution to where it is today. In other non-interest income, we had a positive $2 million pickup from the revaluation of certain of our joint venture investments.
To operating leverage, our efficiency ratio on a GAAP basis was 48%, while our core efficiency ratio, excluding the merger charges, was 46%, which was better than the first quarter. We expected our non-interest expense to be a little higher this quarter, and I'll get to incentives in just a second. As I mentioned earlier, our efficiency ratio was almost 2% better this quarter than the same quarter last year, and there's been a whole bunch of change between last year and this year. We continue to accrue less than our targeted award for our corporate incentive plan at the end of the second quarter of 2018. Many of you are familiar with how we do things. You know that our corporate incentive targets are set at levels we believe would equate to a top quartile performance within our peer group.
As many of you know, We get paid to hit numbers. If we don't hit numbers, we don't get paid. Some of you might say that is a short-term fix. Don't disagree. Over the long term, you need to pay these incentives. We've had years where we paid more than target, we've had years when we paid a goose egg. The critical thing is that our associate base understands why we do it the way we do it. Keep in mind that Terry, myself, and the entire leadership team of this firm are on the same incentive plan with everyone else. Thus, if the CEO gets paid, we all get paid, and vice versa. Incentives are important, and it's one of those things that makes us unique. Other expenses were up this quarter.
We believe about $1 million of that is non-recurring due to various charges we incurred this quarter from various losses, which included elevated fraud losses, credit card, ATM, and other areas. Lastly, as many of you know, last January, we increased our ROA targets to a range of 150-170 for our strategic targets, but left our other targets unchanged. We promised that we would update those targets after our strategic planning retreat, which was held last month. Currently, we are modifying our net interest margin, non-interest income to average assets, and net charge-off ratio to the amounts noted on the slide. Given the changes, we don't think these modifications will result in any change to our ROA outlook going forward. We fully intend to operate within this guidance over the next several quarters. With that, I'll turn it back over to Terry to wrap up.
Okay. Thanks, Harold. As a reminder, since the beginning, when we described the deal rationale, we've always talked about the fact that BNC had a double-digit growth CRE platform, and that our goal was to not disturb or diminish that in any way. In addition to that, to bolt on to that, a high growth C&I platform, which then has the impact of steepening their already high growth rate. To that end, we communicated our intent to hire roughly 65 C&I and private banking relationship managers in the Carolinas and Virginia over a five-year period of time, beginning in July of 2017. To be on that pace, we would need to have hired 13 in the Carolinas and Virginia by July of 2018. You can see, having hired 19, we're roughly 46% ahead of schedule in terms of hiring C&I and private bankers in the new market.
I want to comment that it's not just about the number hired, but qualitatively, Rick Callicutt and his team have done a fabulous job of seizing on market vulnerabilities to hire some of the best bankers in their markets. While the sources for new hires have been broad, meaning that we've hired from a good number of different banks, clearly the majority of the new financial advisors are coming from those large regional national players with whom we like to compete. Impressively, the average experience level of these 19 commercial and private bankers is 24 years, which is consistent with Pinnacle's long-term results of hiring experienced bankers with large client followings. How are we doing on the success criteria we originally laid out? Year to date in 2018, it appears to be working like we drew it on the board.
In the first half of 2018, we saw continued double-digit growth in the CRE platform and meaningful acceleration in the C&I business, which Harold has already discussed. In other words, we are accomplishing exactly what we set out as the original success criteria. Not only are we switching the loan mix towards C&I in the Carolinas and Virginia, but total loan and total deposit growth during this period of transition is impressive by any standard. Frankly, in terms of hiring experienced bankers and them moving their clients to us, it's hard for me to imagine how the BNC integration could be going much better. I'd like to switch gears and discuss our current stance on M&A. I'm going to spend some time discussing our long-range plans, but before I do, let me be as clear as I know how to be.
Regardless of our long-range plans, from a practical standpoint, based on what I know right now, I just wouldn't expect us to be an acquirer through the remainder of 2018 or the first part of 2019. With that out of the way, let me quickly review our long-range plan. In general, the four states we desire to operate in are Tennessee, North Carolina, South Carolina, and Virginia, and the specific M&A evaluation criteria we use have been a matter of public information for quite some time. The BNC transaction was a bullseye versus the previously communicated guidelines. There have been subsequent M&A opportunities on which we chose to pass. Of course, in the early going, it would have been imprudent to take on another transaction while we were integrating BNC.
Of late, we've passed on discussions with banks that met some, but not all, of the criteria we've laid out. In other words, despite there being a number of acquisitions in some of our targeted markets, we've not missed on any transactions we wanted to do. As you think about our disciplined approach to M&A, I want to highlight the first two criteria, which are, number one, we only do negotiated transactions, and number two, with management teams that want to stay and continue to leverage our size to continue building what they started and protect the revenue streams that we're buying. Out of the six deals we've done in our nearly 18 years of existence, we have never bought a bank at auction. Never. We have only bought banks from like-minded individuals that we know and trust.
This updated chart that we've been using for quite some time, as you can see, we're amassing and have largely already amassed the most advantaged markets in the Southeast. It's been updated to specifically notate the addition of two markets, which we did not originally notate as target markets and in which we do not currently operate, but are in the previously delineated four-state area, which are Washington, D.C., and Columbia, South Carolina. Those are now on the list with Richmond, Virginia, the Tidewater area of Virginia, and Atlanta, Georgia, in terms of Southeastern markets where we believe our model would work extremely well. Please, please do not take the addition of those markets as a signal we expect to do anything in the near term. These are very simply updates to our long-range strategic plan.
Now let me clarify our near-term stance on M&A, regardless of our long-term plans, which I just discussed. Number one, we expect double-digit growth in our existing footprint for several years, so we don't need any M&A to hit our growth and profitability targets. Number two, strategically, we desire to compete in the large urban markets dominated by Regions, SunTrust, Bank of America, and Wells Fargo, or similar organizations. Number three, as we just discussed, we've targeted the largest, fastest-growing markets in the Southeast. Number four, previously we've successfully deployed both de novo startups and M&A to extend to new markets, and we're equally comfortable using either technique as opportunities present themselves. We do not need to make an acquisition to extend to the targeted markets. Number five, strategic M&A criteria include, it'll have to be urban and not rural, it'll have to be commercial and not retail.
Smaller deals will need to produce 3%-5% EPS accretion, and larger deals need to produce 8%-10% earnings accretion, and we will limit the tangible book value dilution. We simply don't consider transactions that fail to meet any of these criteria. We continue to cultivate relationships with limited M&A targets to position negotiated transactions with like-minded partners. Number seven, we would extend by de novo start or M&A only when satisfactory opportunities are available given the criteria we've been talking about. As I just said a moment ago, it's just hard for me to imagine how anything could occur in the remainder of 2018 or early 2019. Simply said, in terms of our near-term stance, for those of you that want us to do another transaction quickly, that's probably not likely.
For those of you who are concerned we're likely to announce something immediately, don't be. That's about as clear as I can make it. There are several important questions that I want to deal with honestly, because they hopefully bring to light things that I think differentiate us from most of our peers, and consequently, should bear on anyone's investment thesis for our stock. Number one, can PNFP continue to grow loans at a mid-double digit pace? As I said earlier, a related question is, how long does it take to build out the C&I program in the Carolinas and Virginia? I think Harold's done a nice job of giving you the background on that, but I'll address it a little further. Number two, can PNFP gather relationship-based funding to fund the loan growth?
Number three, despite high deposit rates, can rapid balance sheet growth produce rapid net interest income growth and EPS growth, which are really important to us. So, beginning with the pace of loan growth, while past success doesn't ensure future outcomes, many would say the best predictor of future outcomes is previous results. Most of you will recall we closed our merger with BNC in June of 2017, so these are the quarter-end loan numbers following the close of that transaction. We've weathered the deal announcement and whatever loss of momentum generally occurs in conjunction with that. We've weathered the brand change and whatever mourning typically occurs with that. We've weathered the system conversion and all the internal focus that's generally required for that. Through it all, quarter after quarter, we've consistently put up outsized loan growth.
One of the keys to our incredibly successful organic growth model for almost two decades now is that we really do provide a differentiated level of service that not only attracts clients, it turns them into raving fans that advocate for us in the market. This is Greenwich data, which plots the level of market penetration on the Y-axis and the Net Promoter Score on the X-axis for each of our Tennessee markets. While there's a very technical definition of a Net Promoter Score, for our purposes here this morning, in layman's terms, a Net Promoter Score generally measures the percentage of clients that are so fired up about your brand, they look for opportunities to recommend that others bank with you. As you can see here, in each market, regardless of how mature our market penetration is, we've created an extraordinarily high percentage of raving fans.
We do have a differentiated brand, and as you can see also, we're able to translate that into meaningful market share gains. A differentiated brand should produce outsized growth. In addition to having a differentiated level of service with clients, we have a differentiated brand with bankers, which we're able to leverage to attract the best, most experienced bankers in the market. This is the secret sauce, because we generally can recruit and hire relationship managers with more than two decades experience in our markets. Three things happen as a result. Number one, they produce outsized loan growth because they're able to move clients more quickly than a less experienced person who will have to rely on a long-term client cultivation, calling off a Dun & Brad list or the like. Number two, they produce outsized asset quality because they've been handling these clients over a long period of time.
We just talked, generally more than two decades, and they're intimately familiar with their creditworthiness. Additionally, they leave any of their bad credits behind, both in terms of loan quality, funding, and relationship quality. Number three, not only do they grow loans quickly, they grow deposits and fees quickly, too. They harvest the entire client relationship. This model of having them move their long-tenured clients is about the only way I know to produce outsized growth, get it funded, and have reasonable asset quality. So here's a visual of how it really works, looking at the two market extensions we did prior to BNC, Chattanooga, and Memphis. We bought two great banks, both during 2015, but then overlaid our hiring models and culture of engagement. So in the case of Chattanooga, we started with 23 revenue producers, and in the case of Memphis, 40 revenue producers.
You can see the rapid build out of revenue producers, which then led to extraordinary loan growth and extraordinary deposit growth. You see the huge CAGRs on all three variables there, revenue producers, loans, and deposits. I think Memphis may be the most instructive in terms of continuing the double-digit growth for some time from the perspective that it was largely a CRE bank on which we bolted a C&I platform. It's essentially the same play we're running in the Carolinas and Virginia. One of the related questions concerning our ability to continue the double-digit loan growth is what's the impact of building out the C&I platform in the Carolinas and Virginia? How long does it take, and so forth? This is not intended to be loan or deposit growth guidance. It's simply an illustration of the potential volumes.
Key illustrative assumptions are, number one, hiring occurs in a straight line over the course of the year. Number two, production occurs in a straight line from the point of hiring. Number three, mature FAs produce $80 million in loans over a five-year period of time with 85% relationship funded. In a minute, I'll talk about the mature relationship managers in Nashville, but they average $99 million in loans with 85% relationship funding. An initiative like this, as we originally laid it out, would entail hiring 13 commercial and private bankers in year one. You might think about it as you look across the line called year one class. Using the assumption I just reviewed, you'd expect the year one class to manage books averaging $836 million in total in year five.
If you had concluded year one, which we have, the compensation expenses required to achieve not only that $836 million in average loans, but the $710 million in average deposits would already be in your run rate. You can see how each year's class would be additive, such that over the five-year period, were you successful at hiring 65 C&I and private bankers who produce volumes consistent with the assumptions we just laid out, the loan and deposit growth from previously unavailable sources would do two things. Number one, it'd steepen the annual rate of growth. Number two, provide a more diversified loan book, which, if we were forced to constrain CRE loan growth in conjunction with macro factors, like a number of banks have been discussing.
This kind of incremental growth initiative provides some comfort that our mid-double-digit growth in loans should be attainable for some time. Switching gears, let me see if I can provide more color on how we approach the funding challenge. First of all, our model calls for core funding in the 75%-85% range. In general, we build our goal-setting methodology for the sales force to self-fund 85% of the loan growth. However, at the macro level, from an outgo level, we can comfortably operate with a 25% dependence on non-core funding. Secondly, I've already discussed the hiring model and our approach to moving clients, whole clients, loans, deposits, and fees, not just loans. In other words, we harvest the entire client relationship.
The Nashville Client Advisory Group, as I alluded to a minute ago, is the model for how we attempt to build these C&I practices in other markets. The Nashville Client Advisory Group is filled with 29 C&I and private bankers. For mature relationship managers in that unit, which we consider those that have been there at least five years, the average loan book is $99 million, and the average deposit book is $84 million. As you can see, a mature C&I platform operates just inside our core funding requirements of 85%. Again, the key is to harvest the entire client relationship, not just make loans. Much has been discussed regarding our approach to relationship banking on the commercial side, but it applies to our retail business as well. This is data from Infusion Marketing Group based on our retail households, which we have about 141,000 of.
It covers our entire footprint in Tennessee, the Carolinas, and Virginia for the period beginning March 1, 2017, immediately following our BNC deal announcement for one year. During that period of time, which included the brand change in the Carolinas and Virginia, as well as the system conversion affecting the entire firm, we added households 30% faster than the norm for banks, and the average household deposits were nearly double the norm for banks. We added households 30% faster than the norm, with deposit balances nearly twice the norm. To highlight what I mean by relationship selling, during that period of time, we never ran an ad. There was no promotion. We didn't have a sales contest. We didn't offer any incremental incentives for sales. We just focused on relationship-based selling. Can we gather relationship funding to support loan growth?
I think the answer to that is yes, but we recognize that it doesn't always occur on a straight line. Since it doesn't occur on a straight line, I think most of you are familiar, we've had quarters where loans grew faster than deposits and quarters where deposits grew faster than loans. There's always been a great deal of intentionality around deposit acquisition. We typically have a number of initiatives that are specifically focused on deposit acquisition in order to augment the natural relationship management that typically occurs. They include things like this. Number one, recruiting and hiring associates who over the years have built client portfolio among clients who are primarily depositors. Many private banking RMs would fit this category.
Number two, taking our existing RMs and focusing them on sectors or clients that are meaningfully net providers of funds, things like bankruptcy trustees, title escrow processors and the like. Number three, we augment branch distribution with a courier deposit pickup capability. Specifically, we send a courier to the client location to pick up the deposit. Our Chattanooga market has been the poster child for this technique. Number four, leverage a full suite of electronic banking tools like remote deposit capture for businesses and mobile check deposit for consumers. Number five, traditionally, we've done zero mass marketing, but now we have an opportunity to experiment with that in the Carolinas and Virginia, where we typically have more branches and lower share positions.
In fact, we just completed running a money market campaign in the Carolinas and Virginia for a money market account at 1.69%, a relatively high rate, but not 2.3%. A successful campaign there. Lastly, in the past, we've made investments in a number of non-banks that provided great returns and fit our balance sheet or P&L needs. Of course, BHG is the biggest example of that. Another example of that, several years ago, in an effort to increase higher yielding assets, we made an investment in a firm that built a credit card platform for correspondent banks that put us in a position to build out more than $120 million credit card portfolio in what is normally a scale business that just wouldn't otherwise have been feasible for us to do.
We also made a modest investment in a cybersecurity firm that specializes in cybersecurity for banks, which we view as a rapidly growing market, but also puts us in a position to have state-of-the-art cybersecurity at an affordable price. We recently made an investment in a firm called Artist Growth, which we discussed and maybe showcased on Investor Day, which in addition to offering a handsome return on the investment, puts us in a position to control huge sources of deposit funding from music artists and their tours. Over time, we're hopeful we'll be able to find similar opportunities that would let us corner large blocks of funding. Finally, there's been so much discussion about deposit betas that some, in my opinion, may have lost sight of revenue and earnings growth, which are the primary objectives of this firm.
As to whether a relatively high deposit beta firm can be a rapid grower of net interest income, and therefore a rapid grower of revenues, and therefore a rapid grower of EPS, it seems to me the answer to that question is yes. Here you can see that we plotted our peers, some of whom are really low deposit beta companies, plotting the year-over-year increase in total deposit costs on the Y-axis, and the year-over-year increase in net interest income per share on the X-axis, in order to normalize for acquisitions, et cetera. Our performance on net interest income growth in the first quarter was peer leading, despite a relatively high beta. I believe this was the case because we were able to grow our client base by taking market share, and consequently growing earning asset volumes at a dramatic pace.
I think that may be the most important difference between us and many of our peers. Here's our focus, which seems to me to be very different than most of the management presentations I hear these days from other banks. Given our very high level of profitability and the very unusual opportunity we have to produce outsized organic growth in all our markets, we're tightly focused on growing revenue and EPS. If we were a 1% ROA bank, we might not be able to make that play. If we didn't have a differentiated model where we can gather clients at a dramatic pace, we might not be able to make that play. Happily, we are in a position to make that play. Again, we do it by taking market share.
Accordingly, we're willing to accept a higher level of volatility on measures like cost of funds at a time when we're advancing our operating leverage and improving our efficiency ratio. Specifically, it's our intent to continue adding revenue producers at a rapid pace, pricing competitively, growing earning assets at a mid-double digit pace, and producing outsized growth in earnings per share. I'll stop there, Daniel, and we'll take questions.
Thank you, Mr. Turner. The floor is now open for your questions following the presentation. If you would like to ask a question at this time, please press * one on your touchtone phone. Analysts will be given preference during the Q&A. Again, we do ask that while you pose your question, that you pick up your handset to provide optimal sound quality. Our first question comes from Jared Shaw with Wells Fargo Securities. Your line is now open.
Hi, good morning.
Good morning.
If I could just start maybe on the funding side, get some color around that. When we look at the reduction in borrowings this quarter, did that entire $400 million, was that just shifted over to the wholesale CD side, or was that something less than the growth in CDs?
Jared, can you repeat the question? I'm sorry.
Sure, yeah. When you look at the borrowings, the FHLB borrowing decline, the $400 million there, was that replaced entirely by sort of that non-core CD line that you talked about with the munis, or was it less than the $400 million in that transition?
Yeah, I think it was a little bit less than the $400 million, but not a lot less, Jared. If you look at the average balances on the Federal Home Loan Bank borrowings, they stayed pretty flat for the quarter. That transaction happened at the end of the quarter. Does that make sense?
Yep. Yeah, absolutely. What's the rate differential between the new CDs versus what you paid off on the FHLB? Is that going to be a little bit of a boost?
It was about 11 basis points.
Okay, great. On the fee income side, I guess first in the quarter, you had a nice little jump there in other fee income. Anything there that we should be aware of, or is that a good base going forward? Sort of corollary to that, longer term, I see on slide 17, you brought down the target for fee income, longer term, should we expect in out years that fee income goes back to the level where we saw sort of pre-BNC?
Yeah. Well, that's effectively the goal is to try to get the C&I platform built in the Carolinas and Virginia, that comes with it deposit fees and investment fees and all the other ancillary services. We did have, in the second quarter, a revaluation of some joint venture investments, that contributed about $2 million to that other non-interest income number.
Great. Thank you very much.
Thanks, Jared.
Thank you. Our next question comes from Stephen Scouten with Sandler O'Neill. Your line is now open.
Hey, guys. Good morning.
Good morning.
Terry, great color on kind of your expectations for continued double-digit loan growth. I do have a question relative to the kind of 18%-ish growth we've seen year to date versus maybe what's historically been more like 12%-13%. Has there been any sort of composition change to date now that you guys are a larger bank? Are you doing larger loans, or is this really just a manifestation of all that impressive hiring activity over the last few years? Can you kind of reconcile where you really think we might fall within that kind of historical range versus what we've seen year to date?
Yeah. Stephen, I don't think there's any change in the personality of the lending, meaning our company continues to be focused on being a C&I lender. We're not doing hog share credits. I think Harold's already reviewed the really granular nature of the loan portfolio and the average ticket sizes that we're doing and so forth. As you well know, every ticket's not what the average is, but if you've got to average that loan out, we're not doing large and hog share credits. I don't think there's any personality change from that perspective. I do think that it is a fair representation that the principal driver has been the rapid success of hiring great bankers that have large books of business and move those loans more quickly than others can do. I hope I'm answering your question.
Yeah, no, that does. I guess, do you think that above a 15% rate is sustainable, or are you guys just still comfortable with the kind of double-digit messaging?
Stephen, let me say this. We work hard to try to deliver whatever we say. I feel comfortable talking about mid double-digit range. That sounds right to me, if you want to know the truth. I would say that we'd be a mid double-digit range from, say, 14%-17% or something. That sounds like mid double-digit to me. I like a mid double-digit guidance range. I do think there's some prospect that we can do better than that. Again, I'd rather just stick with the guidance that we've given.
Perfect. Okay. One other one for me really is any color, maybe Harold, that you can give around the deposit betas you've seen on the nice core deposit growth you had versus maybe the non-core stuff. Is that a number you have at all? Just trying to decipher how much of that 23 basis point move was kind of core versus non-core and how we can think about that quarter-over-quarter moving forward. If that 23 basis points we saw in 2Q is likely the pace we'll see moving forward, or if some of that was pulled forward into this quarter.
The beta on the wholesale deposits is significantly higher than the core deposits. I'm looking for my information on that. I think it's somewhere around, call it, 17% on the core book versus, call it, I don't know, 60% on the wholesale book. I'm trying to gather my thoughts on what I'm looking at cycle-to-date or quarter-to-date. The quarter-to-date numbers are much higher. That would probably be kind of the relationship between the core and the wholesale books, Stephen.
Okay. I guess as a follow-up to that, maybe with the big deposit growth you put up this quarter, do you think you can mitigate some of that pressure in the subsequent quarters and kind of keep the core NIM flattish from here, or could we see more downside pressure?
I think we'll see some downside pressure in the core NIM. I don't think we'll see what we saw this quarter, but you're right, we had a great growth quarter in deposits. I'm not going to say, I'm almost Trump-like, aren't I? I'm not going to say that we're going to take the foot off the pedal on deposit growth with the sales force. They're still going to be focused on growing deposits, but the growth quarter we had in the second quarter does give us some degree of flexibility as we go into the third quarter and looking at deposit growth, if that makes sense. The other thing I'll add to it is, I think we found where the pressure point is on pricing. I mentioned this to our Board yesterday.
It doesn't appear like there's been this unlimited appetite by depositors that require an ever-escalating deposit price. I think, to our benefit, the large caps have kept their deposit pricing lower, which gives us an opportunity to secure deposits from some of their depositors at an, obviously, a little bit higher price, but that price is not escalating dramatically. Does that make sense, Stephen?
Yeah, that's really helpful, Harold. Thanks so much. Guys, thanks for the color and congrats on a great quarter.
Thank you.
Thank you. Our next question comes from Catherine Mealor with KBW. Your line is now open.
Thanks. Could I just add one clarifying question on the way you talk about deposit betas, Harold? When you say you think you'll have a 50% deposit beta still for this year, are you thinking about that on a cumulative basis or on a basis just for this year?
I think that's a basis for this year, and we're looking at effective Fed funds rate when we talk about that, Catherine. Yeah, it was for this year.
Okay. That, to Stephen's point, would almost suggest that the beta, assuming you get the full benefit for June, and we get another one, let's just say in September, then the actual beta should decline from the level that we saw this quarter. Linked quarter, we may not see over 20 basis points increase in interest-bearing deposit costs like we saw this quarter. Is that a fair assumption?
Yeah, we're not expecting another large increase in deposit costs like we experienced this quarter. I'll tell you that in context, that if that's what we need to support loan growth and support this pipeline, we will have that kind of deposit cost increase. We're not expecting it. I'll say it that way.
Got it. Okay. That's helpful. Thank you.
Thank you. Our next question comes from David Feaster with Raymond James. Your line is now open.
Hey, good morning, guys.
Hi, David.
C&I growth has been tremendous. Competition has picked up, and this is a testament to you. You've executed exactly as you had thought and more than we had given you credit for. Could you just give us a pulse of what you're seeing in the C&I space, what segments you're seeing the most opportunity, and maybe is there any irrationality in certain segments given increased competition?
David, that's a great question, but I think the answer is, we continue, particularly in the C&I book, to have a well-diversified portfolio. You can look back there in the back earnings call slides where we break down all the portfolio components and so forth. It's an extraordinarily well-diversified book. I don't think we find that we're growing a C&I category because there's something inherently going on in that sector that's creating that growth. Again, I would just take you back to your opening comment. Where that growth comes from is it comes from the relationship manager. If a relationship manager is a private banker who's concentrated on doctors in terms of building a deposit book, then that's what shows up on our balance sheet. It's not some macroeconomic thing that's causing deposits from doctors to occur.
It is that we hired a banker who has a concentration among doctors. I would say the same thing would apply as we hire C&I bankers. Some are specialists in franchise lending or different things. You'll see some pickup in whatever category they're moving. Again, we don't see it tied to any particular economic factor that's causing a surge in one category versus another.
Okay, great. You talked about that you're probably on the sidelines for M&A near term and highlighted the success that you've had on the de novo front. Could you just talk about your appetite for de novo expansion near term and whether Atlanta is still a market that you'd be interested in? I know you've talked about that in the past, maybe given the M&A activity there, it's more competitive or maybe there's some dislocation opportunity that you could capitalize on. Just your thoughts there.
I would say that, as I mentioned, walking now through those target markets, we're still interested in all of those markets. I would say that just in terms of attractiveness, the way we would evaluate the attractiveness of the Atlanta market, given what you just said, is not that it's more competitive, but that there's more opportunity there's more vulnerability there. Generally, what happens when there's M&A consequential transactions, and when there are several of those transactions, that creates a lot of vulnerability for banks and their ties to their people, which as you know is what we try to seize on. I would say just from a general attractiveness standpoint, Atlanta would be highly attractive from that perspective. Again, I want to be realistic.
My bet is if we're talking three or four years from now, you're going to see that we've done a lot of stuff that looks exactly like what we just told you we were going to do. My bet is if we're talking nine months from now, 12 months from now, something like that, we probably won't have done a lot of those things. I'm just trying to give you the basic practicalities of where we are in discussions and all those kinds of things. It just seems unlikely there'll be a lot of that kind of activity in the next nine to 12 months.
Okay, great. Thank you.
Yep.
Thank you. Our next question comes from Jennifer Demba with SunTrust. Your line is now open.
Thank you. Question, we've seen a couple of banks have some healthcare loan issues this quarter. Wondering if you guys could clarify the size of your healthcare portfolio and give us some color on the components, whether it be corporate loans, hospital loans, doctors' practices, et cetera.
I think maybe go at it this way in pharmaceuticals. I think in that group, that would be a little short of $900 million in total outstandings. When you peel back and get underneath of what's in there, the largest sub-sector is doctors, dentists, and other practitioners, which make up more than a third of that whole book. That is an extremely granular book. I think that's true across the whole portfolio. We do have credits, too. Favorite companies of ours like HCA, LifePoint, and Acadia. Those are companies that are important to us and that we think highly of. I would just say we participate in those sorts of credits. Again, I think even among those big credits, the largest that I can see would probably be around $40 million.
Okay.
Am I hitting what you want to know, Jennifer?
Yeah, I think so. Do you have any just hospital? You wouldn't put, obviously, assisted living and stuff like that, senior housing and that. Would you put that in that bucket, too?
Let's see.
Jennifer, I don't think we've got that level of detail with us today. We'll have to pull that out. I know we have a few independent hospitals in Middle Tennessee. I'm not sure about what's going on in Carolinas or Virginia. I think Terry's already mentioned we've got some loans to some of the larger hospital chains here in town. We go through the regular SNC reviews and look at what their S&Ps and all that might be before we do those things.
Okay.
Right now, we don't have any issues with the healthcare book.
Great. Thank you. Nice quarter.
Thank you.
Thank you. Our next question comes from Will Curtiss with Piper Jaffray. Your line is now open.
Hey, good morning, guys.
Good morning.
Wanted to see, Harold, maybe can you help us out on the expense side and kind of how we should think about the third quarter, just given the hires that you made during the quarter. I would assume it's not fully reflected in the current base, just given the timing, but just curious your thoughts on the expense base going forward. Thanks.
The expense base, I think we've got a pretty good run rate going on. It all depends on our intention is to hit our numbers this year. If we can hit our numbers and also continue to fund the incentive plan, that'll be what causes the expense base to elevate. Absent that, the expense base ought to be fairly flat going forward. We booked about $7 million in incentive expense this quarter. That's up from about five, seven in the first quarter. We increased our target range from 75%-80%. As we go through the year, hopefully, we can increase that number even more. That'll be a burden to the expense line.
Got it. Then maybe going back to the fee income discussion and kind of the outlook for BHG, I think you still expect 12%-15% annual growth, if that's correct. Which I guess would imply kind of a decent ramp here in the next couple of quarters. Just how should we think about the growth trend for the rest of the year? Does it look sort of like it did last year where you had a big jump in the fourth quarter?
Yeah, I think we're not anticipating anything different this year. They run a bunch of sales campaigns in the fourth quarter. We got a feeling they'll do likewise this year. Their business flows are good. They've got a lot of banks wanting to buy their credit. They're warehousing a lot of loans on their balance sheet that they tend to release periodically. Yeah, we're still anticipating 12%-15% growth, and it'll probably be more so in the fourth quarter than the third.
Okay, great. Just real quick, do you have what the core loan yield was this quarter? I think last quarter it was 450.
I do not have it with me. I've got it upstairs.
Okay.
I'll get that to you.
All right. Thank you very much.
Thank you. Our next question comes from Tyler Stafford with Stephens. Your line is now open.
Hey, Terry. Hey, Harold.
Hey, Tyler.
My question is on slide 34. That bullet point three mentions growing both loans and NII at a mid-double digit pace. I just want to clarify if you believe you can organically grow NII at a mid-double digit pace annually despite those accretion headwinds and the funding pressures.
Yeah, I think we've got a plan in place to do that. It takes a lot of loan growth to do that, but I think we've got opportunities.
Thanks. That's my only question.
Thanks, Tyler.
Thank you. Our next question comes from Brock Vandervliet with UBS. Your line is now open.
Good morning. Thanks for taking the question. I just wanted to
Talk about loan growth, first of all. Loan growth this quarter was excellent, above 20% annualized. It seemed like in the Investor Day you talked about growth being this strong in the second quarter, but tailing off somewhat in the second half. Is that still the case, or do you expect this level to continue into Q3 and four?
As far as absolute dollars, our plan is that right now the pipelines look like that we ought to be able to be close to what we've booked in the first and second quarters, in the third and fourth quarter. We generally have a strong third quarter, then the fourth quarter is kind of a crapshoot on, sometimes it's the best quarter of the year and sometimes it's not. I guess we've been very pleased with the first and second quarter loan growth. To sit here and say, okay, we ought to be able to replicate that in the third and fourth quarter, we're just kind of hedging our bets a little bit.
Got it. Okay. Separately on the NIM guide, 355, 375, and your NIM this quarter was 369, above kind of the center point of that range. Do we look at that as guidance really for the remainder of the year, or do you look at that as longer term?
I think it's a longer-term number. We've just gotten through our strategic planning effort. We do that for the next, call it three and a half years. The way that kind of goes, Brock, is we set targets, and we try to figure out how to hit those targets. We try to rationalize what those results look like, and it seems like a 355-375 is a reasonable target for us over the next, call it three and a half years.
Okay. Thank you.
Thank you.
Thank you. Our next question comes from Brian Zabora with Hovde Group. Your line is now open.
Thanks. Good morning.
Hey, Brian.
Just a question on CRE. Could you just talk about the current environment? Some other banks have talked about higher pay downs. Obviously, you generate strong growth, but did you see kind of the same industry dynamic, and could you just talk about pricing and structure of those credits?
In terms of market dynamics, number one, pay downs, we do see a relatively high level of pay downs, and we do expect that to continue for the foreseeable future. What I would call alternative financing, long-term financing markets are wide open and generally attractive, so that people are able to take projects and put them in permanent facilities at very low rates with no recourse. I think we and others in the industry are likely to see a heavy level of pay downs over an extended period of time in the CRE book. I think in terms of pricing and underwriting guidelines, again, I would say we're not on the panic button about that, but it's important to get this about the book that we have.
Harold talked about the granularity of the CRE book, when you look at the construction book and take residential out of it, the commercial construction book with less than a $2.5 million average ticket size, you can see who we're dealing with are largely relationship-based clients that are in our market. We're not dealing with large national providers, and we're not dealing with 40-story buildings in downtown urban markets and those kinds of things. The client set that we serve and the product base that we provide them, I think works a little differently. Again, I would say it is more competitive from a pricing standpoint, and I do see from time to time some underwriting slippage. We don't see that to be an overwhelming trend, again, in the segment that we serve.
That's very helpful. Just a question on deposit pricing. Is there any different dynamics in the Carolinas and Virginia versus Tennessee?
Brian, we've been kind of surprised at that. There's not a real big difference. I think the prices or the rates that are being offered in both markets are fairly consistent.
Okay.
We've got a bigger non-interest bearing deposit book in Tennessee than we do in the Carolinas, that's one of Rick's objectives is to build that operating account flow over there. For interest bearing accounts, they're pretty consistent.
Great. Thanks for taking my questions.
Sure.
Thank you. Our next question comes from Brian Martin with FIG Partners. Your line is now open.
Hey, guys.
Hi, Brian.
Hey, just one question. Just, Harold, that restructuring you did on the FHLB and the time deposits, I guess that impact was not in the margin in second quarter, so it's a favorable impact in third quarter. Did I understand when the timing of that happens?
Yeah, it'll be helpful to the margin in the third quarter. You're right.
Okay. I guess a modest positive is the way to think about it, given the size of it. I guess that's probably fair.
Yeah, I think so. I think it is a modest positive. The way we're looking at rates, for sure, as I tell you this, I'm going to tell it to you backwards. They're advantageous on the short end of the curve, probably two years in the end, and the wholesale market was more advantageous on the longer end of the curve. It was just one of those plays.
I got you. Okay, then you talked about maybe doing another forward interest rate swap, I guess. Can you talk about why you would think about doing that? I guess, the timing of when that could occur?
It could occur as early as the end of this week, first part of next week. We're talking about somewhere around a $300 million or $400 million tranche with a forward start into 2019.
Okay. The other questions I had, I guess you answered. The expense number, I guess, just think about it with the incentive comp being the driver. It sounds like most of the salaries or a lot of that's already kind of in the numbers based on, I think you said there's about $1 million excess this quarter that was kind of non-recurring?
Yeah. We also had a kind of a little bit of a heavier ORE expense number this quarter. I think there's probably some more expenses scattered around in the technology accounts that is a little heavier than what we would normally see.
Okay. The $1 million you quoted, Harold, that was kind of excess, does that include the ORE, or that does not include the ORE?
Does not.
It does not. Okay. All right. Understood. Then just the last thing for me was the mortgage number in the quarter, I guess. I know there's a lot of changes you guys kind of alluded to on the call. Just give a little color on how you're thinking about mortgage going forward, given, like you said, the rates have obviously impacted their performance to some degree.
Yeah, we've lowered our expectations for mortgage in 2018. They've got a budget gap, I guess I can tell you that. We don't anticipate them filling that gap. I think there's building momentum in the Carolinas and Virginia. I think our mortgage guys here in Tennessee have partnered with the guys in Tennessee and Carolinas. I think we'll create some momentum over there, particularly going into 2019, that probably wasn't as strong as it was going into 2018.
Okay, that's helpful. I appreciate the call, guys. Thanks.
Thanks, Brian.
Thank you. Our next question comes from Nancy Bush with NAB Research. Your line is now open.
Good morning, gentlemen. Two questions for you. Terry, you operate in states that have a higher than the national average emphasis on manufacturing, particularly auto manufacturing. I'm wondering, are you starting to hear any kind of talk about tariffs, what the impact may be, pushback, how it may impact growth, et cetera?
Yeah, Nancy, I think it would be fair to say that it's a topic of discussion. I think in terms of clarity and people changing forecasts and doing those kinds of things, I've not heard of any of that. Again, it's just cocktail chatter at this point, I think.
Is it anything that you think you'll have to incorporate into your thought process, growth process, et cetera, anytime in the very near future?
I really don't, Nancy. I think, again, I just go back and reiterate, it is one of the things I love about the model that we run, what we're doing is hiring bankers and having them move their books of business to us. That's where the growth comes from. If we were simply reliant on the pure macroeconomics of the situation, boy, we'd be subject to lots of volatility in our ability to grow because things would contract, and things would expand, and that would be the defining basis of our growth. The defining basis of our growth is really hiring people that have large books of business. So I don't expect it. If the question is, do you expect that to contain growth or tamp it down or those kinds of things, I think the answer to that is no, I really don't.
Okay. Secondly, this is kind of a multidimensional question. I've listened to your presentation this morning, I think we're all totally in accord with your growth and your methods and the mindset that you have in your culture there, That's not being reflected in your stock right now. As you know, your stock is flat to down year-over-year and down, what, about 9% year-to-date. You're very cheap based on a P/E basis, much cheaper than it used to be based on a tangible book value basis. What are your thoughts about this? I sensed a certain amount of frustration in your commentary this morning, and I'm wondering if that's frustration that's directed at the stock price.
Well, I hope that was Harold that sounded frustrated and not me. Actually, I'm just kidding, Nancy. Yeah, I think it's fair to say, I am frustrated from the perspective that we've laid out a plan, which I think and continue to believe, irrespective of what's going on with the short-term share price, is the right thing to do for our shareholders, and it's going to produce extraordinary long-term shareholder value, and that's who I care about, and that's who we're working for. I'm not concerned about that. Nancy, it's interesting. Somebody asked me in one of the investor conferences and said, "Well, Terry, what are you going to do differently?" I said, "Look, Warren Buffett said there's two things. One, you manage the fundamentals of the business, and two, you tell the story, and the stock will ultimately take care of itself." I'm making that bet.
In terms of what we're doing differently, I think you can see we're not doing a dadgum thing differently than we've done in the past. We're running straight ahead. We're hiri ng revenue producers. We're growing at an outsized pace. We're doing it on a sound basis. We're getting it funded, all those kinds of things. We're going to continue to manage the fundamentals. Maybe I can come up with a better way to tell the story. If I could do that and produce some improvement in share price performance in the short run, I would love to figure that out. If you have ideas on what we ought to be communicating that we're not, please feel free to let us know.
Okay. I would ask, if this sort of cheap stock valuation continues, would you think about your dividend, I get it, you've got other opportunities for growth than plowing capital into a dividend, Would you think about being a little bit more competitive and sharing a little more capital on the dividend side?
I guess the answer is we'll think about anything, and we'll think about everything. If you said, "Terry, tell me the truth. Are you really wanting to lean in and trade the dividend higher?" Not meaningfully. I'm not saying we wouldn't consider. We've had increases in dividends. They've always been modest, and I think that mindset would continue to be the case. I can't imagine that if we can grow our earnings at the rate we grow earnings at, that we would want to instead slow the growth and pay out dividends. It wouldn't make sense to me to do that. Anyway, I'm sincere when I say, man, we talk about it, we debate it. As you can imagine, some people say, "Man, y'all ought to be considering this alternative, that alternative," and so forth.
Again, right now, I know this sounds contrary to what you hear on most of the calls, we're excited about the growth prospects of this company, and I've never seen an opportunity to gather mainline clients at a pace that we're gathering them, which produce the volumes and earnings over time. Again, we're going to keep going down that path, and my guess is there'll be a day where that's appreciated.
All right. Thank you.
All right.
Thank you. I am not showing any further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.