Pinnacle Financial Partners Inc
NASDAQ:PNFP
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Pinnacle Financial Partners Inc
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Good morning, everyone, and welcome to the Pinnacle Financial Partners' First Quarter 2019 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 on 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. [Operator Instructions]
Before we begin, Pinnacle does not provide earnings guidance or forecast. During the presentation, we may make comments which may constitute forward-looking statements. All forward-looking statements are subject to risks and uncertainties and other factors 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'm now going to turn the presentation over to Mr. Terry Turner, Pinnacle's President and CEO.
Thank you, operator and good morning. As we always do, I’ll begin with this dashboard, as our management is particularly focused on revenue growth, earnings growth and asset quality, because we believe and have believed for a long time that short term things like M&A or deposit betas, those kinds of things will come and go but over time, the three most highly correlated metrics for long term shareholder returns are revenue growth, earnings growth and asset quality.
Because of all the noise that’s associated with the BNC merger, in many cases, non-GAAP measures better illustrate the relative performance of the firm, so on this chart, I’d like to focus first on revenue, which is on the top left. Total revenues, adjusted for gains and losses on transactions in the investment portfolio and merger related charges, were up 9% over the first quarter of 2018. The much debated net interest income was up nearly 8% year-over-year, despite a large reduction in purchase accounting accretion, which Harold will discuss in greater detail shortly. And the fee income was up 15.6% year-over-year.
Next, I want to focus on EPS at $1.24 for the quarter, which is in the chart on the top row in the middle. Of course, 1Q19 had no merger charges, but adjusting for the merger related charges in the previous periods and gains and losses on securities transactions, fully diluted EPS was up roughly 10% over the same quarter last year.
And then immediately to the right, on the first row is the tangible book value per share, which paints a nice picture of our ability to accrete capital and grow tangible book value on a rapid and reliable basis with a roughly five year CAGR of 12.7% through 1Q19. Immediately below the table book value chart, I want to highlight ROTCE at 17.87% 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 was when we did the large capital raise in advance of and in order to make BNC acquisition. As a reminder, the BNC deal closed at the end of the second quarter of ‘17. So, you can see that we were able to meaningfully alter the return on tangible common equity, following the deal close and again, another strong indicator of the power of that acquisition.
And lastly, I want to highlight the core deposit growth in the middle chart on the second row, core deposits grew at a rate of almost 11% in the first quarter of 2019 when compared to the first quarter of 2018. So, first quarter was a great quarter with the year-over-year core deposit growth right near 11%, year-over-year revenue growth at 9%, year-over-year EPS growth of roughly 10% and adjusted ROTCE of 17.87%. All in all, a great quarter for us.
Now, Harold will review 1Q19 financial performance in greater detail. [indiscernible], I believe you will be able to see this overarching thesis. First, Peter Drucker once said, culture eats strategy for lunch. I think he was right. In Pinnacle, we continue to harness our distinctive culture to create a differentiated client experience, which we continue to translate into dramatic growth and profitability.
Next, perhaps our most important core competence is our ability to attract and retain the best bankers in our market. We target only highly successful long tenure bankers with large books of business. As a result, it’s not only a rapid growth, the strong asset quality and the profit leverage on a highly successful revenue producer can be extraordinary. Thirdly, we [indiscernible] targeting top quartile profitability. We’ve long published not only the target, but the model for how we produce it. And we continue to hit the targets quarter after quarter, year after year. And lastly, while we've been able to produce outsized balance sheet growth and profitability, the truth is there just means to the end [ph]. What we care most about is growth in EPS and tangible book value, because we believe they are the keys to long term sustainable shareholder returns.
So, Harold will walk us through the first quarter, if you will.
Thanks, Terry and good morning, everybody. We've been talking about revenue per share growth for several years. As many of you know, we pay attention to expenses, while we focus on revenue growth. We believe one of the best measurements of whether we are winning or losing is revenue per share growth. It is easier to grow earnings per share if revenue per share is headed north plus there is more fun and [indiscernible] about expense initiatives. For the trailing 12 months, our basis was slower, as you can see, we continue to experience double digit revenue per share growth.
Secondly, the dotted line represents the peer group’s year-over-year growth. As shown in the chart, we have continued to consistently outpace the peers on revenue per share. Keep in mind this is during a time of significant internal focus around integration with the Bank of North Carolina. I know many of our peers assert that recent mergers are working well and they couldn't be more pleased with the outcomes.
Let me say this about Pinnacle. We are really proud of our team's efforts in the Carolinas and Virginia. We believe by any objective measure, whether it's loans, deposits, new hires, employer retention, tangible book value creation, earnings growth, et cetera, we believe we’ve significantly stronger investor expectations and likely those of our peers with respect to our entry into those markets. That said, we've got a great deal of runway left, not only in the Carolinas and Virginia, but in Tennessee as well and we have a lot of positive energy in our franchise right now.
Our firm is on offense 24x7, our associates are engaged, focused and excited about our opportunities for the remainder of 2019. Hopefully, those blue bars just get taller and taller.
Now, comparing first quarter ‘19 average loans to first quarter ‘18 average loans, our annualized growth approximated 12.4%. We continue to believe that our loan growth for 2019 will be low to mid-double digits in comparison to 2018. In the Carolinas and Virginia, their organic loan growth in the first quarter of 2019 over the first quarter of 2018 was nearly 10%.
Importantly, C&I and owner occupied commercial real estate is up more than 21% year-over-year. Currently, they've grown their C&I and CRE owner occupied book to greater than 25% of total loans. Creating a robust C&I franchise is obviously key to our growth goals as and our experienced growth in the C&I platform should produce core deposit and related fee growth. These things seem to be working from our perspective.
We expect loan growth to be fairly consistent in the second quarter, we're seeing some nice things happen this quarter. We are still anticipating increases in construction funding for the back half of the year, as projects work through their equity components, and start drawing on bank loans. Additionally, as the chart indicates, our loan yields increased to 5.28% from 5.22% last quarter, a 6 basis point increase linked quarter, more on rates and yields in a second.
Again, we've shown this chart on several occasions, there is a lot of information here. The blue bar on the large graph details annualized organic loan growth rates adjusted to remove acquired loans, so it's all organic growth. The green bars are pure medians each quarter. Except in the fourth quarter of 2018, where we experienced significant paydowns, our firm traditionally outperformed peers with respect to loan growth quarter in and quarter out.
We also provided information in the small chart regarding the granularity of our loan book by loan type. We offer this information, so that you can better appreciate that we are not relied on the extra large tickets on this to hit our loan growth goals. The chart on the right is somewhat busy, but it's where we’ve detailed the impact of discount accretion on net interest income.
As you can see by the gold line, discount accretion continues to be less impactful to our results at 5.2% of our net interest income in the first quarter of 2019 and will continue to be less entitled in the future. We all know that a big headwind to our GAAP revenue growth was the impact of less and less discount accretion and the primary way we're going to overcome it was through balance sheet growth.
Anyways, blue bars on this particular chart are obviously where our attention is and growing those blue bars is key to our ability to deliver increased earnings to our shareholders.
Another slide we've been discussing for quite some time now. We've discussed in recent quarters that we believe an allocation of approximately 35% of our loan book to fixed rate loans with maturities greater than one year is an optimal range for us in order to be better prepared for any future interest rate environment. We've made significant progress in that end and now stand at 38%. This is the approximate level with our allocation prior to Bank of North Carolina merger and as you can see, is also relative consistent with our originations in the first quarter, was roughly a two-third, one-third split between variable and fixed rate loans.
We believe the natural evolution of our growth without any additional intentional management by our wholesale bank teams should get us to 35% in a reasonable amount of time. Additional rate hikes from the Fed appear to be at a minimum on pause and might be off the table altogether at least for 2019. The fed fund’s futures market is now predicting that rates may even be cut later in 2019 and in to 2020. Rest assured we're aware of these possibilities and are working to position the balance sheet so that in addition to minimizing our interest rate risk in the current flat interest rate environment, our net interest margin and capital positions are not impacted significantly either up or down.
We have numerous levers to pull to manage interest rate risk, including the reposition of our securities and wholesale funding portfolios, layering in additional or unwinding balance sheet derivatives as well as managing our own balance sheet liquidity position. We all [indiscernible] given what's going on in the macro environment, so the wholesale bank team is looking at various strategies to put this firm in the best position to win, regardless of the interest rate market we are operating in.
As maybe known, we've been saying that our goal was to reduce our firm’s exposure to commercial real estate investment and construction. We have worked diligently to reduce our exposure in these portfolios in relation to our total risk based capital over the last two years. At quarter end, we were at 283% and 84% respectively. These charts are intended to give you some insight into the granularity of our real estate portfolio as well as the metrics we seek out for our underwriting and this chart does give us comfort that we're not after the wiggle projects.
As to our peers’ larger projects are likely well known, but they are not our brand book. I think that a lot of capital and businesses from our local builders and developers. As to the left chart, you can see detail there. Our -- the aggregate volume of portfolio by the approximate -- about the ticket sizes. While we have some larger, greater than $20 million credits, we also have a significantly larger number of projects that are below 10 million.
The chart on the right does show the top 10 projects from this segment for both construction and commercial real estate. We've also included the loan value, loan to cost, debt service coverage ratios to firmly support the quality of these projects.
Now, just a few additional comments on credit, credit is always at the forefront of our minds, so I hope we never appear complacent or frivolous when we talk about credit. For the first quarter, we experienced relatively minor increases in our classified asset and non-performing asset ratios along with the decrease in net charge-offs. So, credit in the first quarter continues to chug along.
Like the few management teams that have commented thus far on first quarter 2019 credit results, we too will agree that we aren't seeing any systemic issues with respect to our book that would call us not to be optimistic about credit in 2019. Obviously, there's macro issues and we will pay attention and anticipate how those might impact specific borrowers. That said, one positive macro event related to the recently announced debt pause is that the pause may actually contribute to a further extension of the current credit cycle.
Now, deposits. Average deposits balances are up 2.1 billion year-over-year. Year-over-year end of period deposit balances were up 2 billion. Concurrently, core deposits increased 1.6 billion or about 80% of total deposits, which is right on our target of being 80% core funded. Our deposit costs did increase 12 basis points in the first quarter of 2019 from the fourth quarter and currently stand at 1.2%.
The next slide gets at volume changes in the first quarter 2019, so I'll work through that in a second. What I’d like to point out here is that even though our deposit rates increased 1.2% for the quarter, our end of period deposit rate was only up 1 basis point at 1.21%. This compares to the fourth quarter average rate of 1.08%. But the ELP upgrade at December 31 was 1.16. As we've been stating, with the Fed vols, we aren’t seeing a dramatic increase in deposit rates currently. We feel pretty good after only being a few weeks into the second quarter.
We're obviously balancing our emphasis with the salesforce between the need for core deposit volumes as well as keeping our deposit rates in check. We still believe we're in markets that have ample liquidity to match our loan growth expectations. As noted, year-over-year core deposits are up 10.8, while loans are up 11.3%. You can also see the year-over-year core deposit growth in the Tennessee and the Carolinas at 13% and 9.3% respectively. We mentioned on the fourth quarter earnings call that we were likely to modify our funding profile protocol in the first quarter with some changes that would impact specific depositors as well as types of funding.
Basically, during the first quarter, we experienced a net decrease in deposits from end of period 4Q18 to 1Q19 with some decisions by our wholesale bank team contributing to the decrease. I'd like to highlight two events tied to rate management and that one, we call a one-off transaction of a sizable amount that drove this decrease from the end of 2018 to the end of March. As to rate management, we had a $250 million index money market account to a corporate depositor that left the bank in the first quarter. This depositor has been with us through the rate cycle and was very attracted to us a few years ago, but with increased rates, we can find cheaper funding elsewhere. Another rate play is with respect to the net decrease in broker deposits, where we could also find cheaper money at the federal home loan bank. Collectively, these amounted to almost $500 million in deposit reductions.
Additionally, and we classify this as not exactly what we wanted, but it's the way things work. During the quarter, depositors at investment portfolio companies restructured their balance sheet. We had several loans to several of the investor portfolio companies secured by many things, but also secured by the investors’ cash balances. During the quarterly, that investor elected to restructure, which resulted in loans being reduced by 52 million and deposits being reduced by 67 million. We're highlighting this transaction as unusual, given we don't see cash secured loans of this size very often. And so when these several loans were paid off, it was meaningful to us. Additionally, as it occurred in the fourth quarter of last year was an approximate $200 million closure, we occasionally experienced depositors who sell their companies and additionally, we see those depositors leave our firm. Fortunately, there were no such noteworthy events like that this quarter.
The chart on the right details our highly liquid cash balances as you can see here in the first quarter, we were able to reduce those balances by approximately 175 million. Some of this money was employed into the bond book, from 30,000, we were able to use some of our own balance sheet liquidity in such a way that it took some pressure ultimately to match price on some of the deposit losses, which I noted previously.
Now, turning to fees, fees amounted to greater than $51 million, up 6.9 million over the first quarter 2018. BHG had another great quarter. Their contribution was up 3.9 million or 42% year-over-year. We continue to anticipate 10% to 12% growth for BHG for this year, compared to last year. Wealth Management revenues were up slightly in the first quarter of 2019 compared to the first quarter of 2018. We've had several significant hires in both footprints that have contributed to our success in investment services, insurance and trust. Deposit related fees remained relatively stable, lending and related fee income, which was primarily mortgage, was up meaningfully from last year.
As to 4Q and 1Q run rates, we had a lot of positive events in the fourth quarter that contributed to the overall decrease this quarter. As you remember, BHG hit a home run in the fourth quarter of last year and is looking at another great year this year. Wealth management is up slightly from the fourth quarter, primarily due to the usual contingency revenues we get from our insurance subsidiaries.
As we all know, the rate environment was not helpful to residential mortgage in 2018, but our team continues to work to get their share of the deals. We've seen a lot of activity related to mortgage by various banks in recent years, mostly exiting the space or exiting at least some of the space. We like our position in residential mortgage. They had a great first quarter. Core lending not only with drops in long term rates, but also with increases in the number of mortgage originators as well as more effective mortgage originators.
SBA and our back to back customer swap program had a strong fourth quarter, so revenues were down in the first quarter. The government shutdown had an effect on our SBA program and even though this business line is really important to us, it is a fairly modest component of our -- smaller component of our total revenues. Other income was also bolstered by increased BOLI revenues this year.
Now to expenses, expenses came in about where we thought with the run rate decrease in fourth quarter being largely attributable to incentive accruals, offset by our typical increase in salaries due to merit increases which approximated 4%. We’ve booked a large incentive accrual at year end 2018, which was not replicated during the first quarter.
Other than that, it was a fairly boring quarter on expenses. Expenses will increase with additional hires and hopefully larger accruals for incentives. We hope recent merger announcements will contribute to our hiring plan this year.
We're also pleased to report that retention rates continue to decline, signaling two important things for us. Our client can count on consistent services, employee turnover continues to shrink. And our workforce engagement initiatives are working in our newer markets as those associates are leaning in and appreciating the Pinnacle culture. Wrapping up on expenses, we’re pleased to report that our efficiency ratio, as adjusted for investment gains and losses, merger related expenses and ORE was at 47.4%, down from December 31 and March 31 of last year.
With that, I'll turn it back over to Terry to finish.
Okay. Thanks, Harold. I hope the key tenets of this thesis that I mentioned at the outset were evident in the financial metrics Harold just reviewed with you, but I want to take just another minute or two to provide a little more color. My belief is that the more we engage our associates, the more they'll continue to provide a differentiated experience for our clients. And the more we create a differentiated experience for our clients, the more we will be able to capitalize on the vulnerability of those large banks to dominate our markets.
As you can see, our size and market expansion really has not diminished our ability to execute and engaging our associates. In 2018 alone, we were ranked number 22 in terms of the 100 Best Companies to Work for in America, number 40 in terms of the best workplaces for parents, number 16 best workplace among banks in America, number 12 best workplace for women and number 20 best workplace for millennials. In addition to all those honors and then in the Hall of Fame here in Nashville, we've also been recognized as the best place to work in both Memphis and Knoxville.
You can see we've got a highlighted item there, during the first quarter this year, we were recognized by Fortune magazine as the second best workplace in the country in finance and insurance. You might recall, we announced what many refer to as a transformative deal, when we agreed the merger of BNC Bancorp in January 2017. We completed the merger in June of 2017 and went through the brand conversion in September 2017 and then the system conversion in November 2017. So in August of 2017, right in the thick of all that, 69% of our associates in the Carolinas and Virginia agreed that our firm’s culture is special and 75% agreed that this is a company where people want to work. So that’s not bad. But a year later, following the conversion and integration, we have successfully leverage Pinnacle culture, such that 94% of our associates in the Carolinas and Virginia agree our firm’s culture is special and that this is a great company where people want to work.
Along those same lines, as I just mentioned a minute ago, largely based on how our associates responded to the great place to work institute on their survey, when the BNC merger was announced, we were recognized in Fortune magazine as the seventh best place to work in the country in finance and insurance. In 2018, during all the merger and integration effort, we were at the third best place to work in finance and insurance. About the first quarter of this year, we were at the second best place to work in finance and insurance, so you can begin to see the power of the Pinnacle culture.
As I said earlier, we're able to leverage that culture along with our recruiting competence to attract and retain the best experienced bankers in our market, which leads to outsized growth. Experienced bankers are able to move their books of business quickly. Generally, they're able to move the entire relationship, which is critical to our funding and fee strategies and they see to bring only the good credits, then leave the bad credits behind, which should product strong asset quality. As far as I know, that's the only way to produce outsized growth with strong asset quality over an extended period of time.
First quarter results are just another reminder of the power of that model with double digit loan growth, double digit core deposit growth, double digit fee growth, excellent charge-off and loan quality metrics and improving operating leverage. I know we get lots of questions, many worried about whether the rapid hiring will strain efficiency, but in truth, the profit leverage of an experienced successful banker is extraordinary. We hired 107 revenue producers in 2018. We hired another 27 in the first quarter of 2019 and the adjusted efficiency ratio improved 21 basis points year-over-year.
Most of you remember that when we announced the BNC merger, the communication plan was to maintain their double digit CRE growth platform. And then turbocharge that growth by building both owned and new C&I platform. In order to do that, we said we'd hire 65 C&I and private bankers in the Carolinas and Virginia over a five year period of time. That would suggest by the end of the first quarter of 2019, we should have hired roughly 23. In fact, we've hired roughly 49, which puts us more than a year ahead of schedule.
And for those that get concerned about that expense burden, keep in mind 100% of that expense burden is already in our run rate, with the obvious assumption they had a significant [indiscernible] current run rate. I think that bodes well for future revenue and earnings growth. And as Harold mentioned earlier, the key measures of success for the integration, at least from our perspective have all been met. We did maintain BNC’s very successful CRE business, producing 9.2% growth in CRE outstandings year-over-year in that footprint. And we did in fact transform the growth model to more of a C&I growth engine with 21.5% growth in C&I and owner occupied and commercial real estate year-over-year. We were able to grow core deposits at nearly 13% year-over-year in that footprint.
Again, we've significantly transformed the growth model. And I think I say this every time, but I can't tell you how proud I am or Rick Callicutt and his market presence with their leadership during this transition. In conjunction with our ability to attract and retain the best experienced bankers in our market, and our ability to leverage our powerful culture to create a stated client experience, we target top quartile profitability. We've been publishing our ROAA target since 2012 along with a specific model for how we achieve it.
As you can see, the first quarter was more of the same, with ROAA and each necessary component operating inside are better than the targeted range. And as you can see on the right, not only do we produce the top quartile return on assets, but we produce a top quartile ROTCE as well. As I said a few minutes ago, all that really is just a means to an end. What we're really focused on is rapid, reliable growth in EPS and tangible book value because it’s our belief that banks that can rapidly and reliably grow EPS and tangible book value over time will produce the best shareholder returns. So through the first quarter of 2019, the five year CAGR for EPS is 20.3% and for tangible book value per share is 12.7%. As you can see on these chart, the growth will be both rapid and reliable.
So to wrap up, in our earnings call last quarter, I used this slide to communicate our outlook and expectations for 2019. Now, through the first quarter, we're off to a great start with 11.3% year-over-year loan growth, 10.8% year-over-year core deposit growth, 9.7% year-over-year EPS growth. Additionally, we hired 27 revenue producers. We’ve continue to grow revenues meaningfully faster than expenses and to grow tangible book value at a rapid pace.
So operator, I’ll stop there and we'll open the lines for questions.
[Operator Instructions] Our first question is from the line of Stephen Scouten of Sandler O'Neill.
So one of the things Terry that I love that you talked about is just how you guys continue to have this level of hiring activity and what an advantage that is. And I think that's true. I'm curious, how long you think you can maintain that goal trend? I know that's hard to say. But as you guys continue to grow bigger and bigger, at what point, do you think you face some of the same impediments that these larger banks face today, the bureaucracy and so forth, that's allowed you to take advantage of them for so many years?
Stephen, that’s a great question. I just say that to you, I don't think you were around back in 2002 and 2003. But that was the same question they were asking then, because we were a high growth bank, albeit less than $1 billion at that point. We’ve always been a high growth bank all through and I think each time we sort of get a leg up to an acquisition or some job, everybody began to question, hi, can you continue that culture. And so that's really one of the reasons I wanted to walk through those slides and show the fact that, before we announced the BNC transaction, we were rated as the seventh best place to work in terms of finance and insurance in the country, which is a, to me, a monumental achievement.
I think perhaps, as we were able to sustain that, but as we went through the merger, the brand transition, the system conversion, all that integration, we advanced up to the third best last year and then this year, up to the second best. And you can see the level of engagement there was 94%. So, how it is a great place to work and probably a great culture [indiscernible]. So again, I just say that and say that I do think we have a strong culture, which feeds on itself. I do think we're intentional about how we integrate it, both with new hires and with new acquisitions, there is a big amount of effort that goes into maintaining it.
I think to your point on the bureaucracy and so forth, I think that's really a fabulous question. And I do believe at some point, there will be a time where it would just be impossible to sustain it, because you'll get regulatory pressures and other things that will force you to operate more like those banks. But I believe that we're a long way from that. I would just use it as an example, Stephen. BB&T, they ran for a decade, really using a community bank model, geographic based model and all those kinds of things. And I can't tell you what size they were, but they were probably three, four times our size when they really had to go away from that, which would just suggest there's a lot of running and running between here and there before we turned into one of those bigger, more bureaucratic organizations.
And then maybe thinking about the NIM a little bit here, I know obviously last quarter, I think the expectation was maybe two rate hikes and you spoke to the fact of what the forward curve is saying today, but what is that? Does that change? I mean, you haven't changed the NIM guidance here, 355 to 375, but I mean, should we expect to be at the lower end of that range? And maybe within that, what drove the decline in accretion, expected accretion from the 38 million last quarter to 31 million this quarter.
This is Harold. Let me talk about the accretion first. I think last year, we had more kind of pay downs, payoffs, probably more payoffs than we did in the first quarter, everything kind of stayed relatively calm on the paydown and payoff front, here in the first quarter, so a lot of kind of that, where we take the discount accretion from a kind of a meaningful loan, leaving our balance sheet, didn't occur here in the first quarter.
As to NIM guidance, I don't think we'll see a whole lot of contraction in the NIM this year. I think it'll stay relatively at the low end of the range for the bulk of this year, or at least that's kind of where our horizon is currently.
And Harold, you mentioned in the past, I think last quarter, you guys had like 950 million in payoffs, a pretty high number. Can you give us an idea where that was this quarter?
That number, it was, I don't know, I can't recall the 950 number, but it was about $400 million or $500 million less than what happened in the fourth quarter.
Our next question comes from the line of Jared Shaw of Wells Fargo Securities.
Maybe just starting with the deposit side, thanks for providing the color on the -- some of those outposts there. As we look at that $195 million client growth this quarter, is that a good level that you think is sustainable as we're going into second quarter and then, I know in the past, you've been speaking about refocusing the relationship managers on getting the deposit flow coming in from the existing C&I customers. How is that going? Can you give us a progress update on that?
Yeah, I think so far this quarter, we're seeing a nice balance in deposit side. Today is the day after tax day. So we'll probably see some checks cleared here over the next few days. But so far this quarter, we're optimistic about our deposit expectations here in the second quarter. There are various initiatives kind of working around. It's all primarily at the relationship manager level, where we're generating all kinds of information that help them go out and find deposits from their own customer base. So we still believe that we can fund this bank at 8% core deposits. We think that loan growth in the first part of the year will be kind of low double digit kind of numbers. And so we don't anticipate, having to go lean back into the Federal Home Loan Bank here in the second quarter like we did in the first one.
Okay, thanks. And what's the pricing looking like on new deposits coming in? Are you having to -- is that a mix of sort of an incentive price to get those core operating accounts? Or are those two separate conversations?
Yeah, I think it's all over the map. I'm not hearing of any significant requirements from depositors. The phones aren’t ringing like it did in 2018. But we're not planning on seeing any reductions in deposit costs this year. I think we'll still see some increase in deposit rates for the next, call it two or three quarters. But without the tailwind from the Fed increases, it’s given us quite a bit of – it’s lowered our expectations on what deposit rates are going to do.
And then on the hiring front, it's great to see the progress you've made there with the SunTrust BB&T deal. Do you think that the – are you going to limit yourself to the 65 hires? Or is that going to create an additional opportunity where maybe you lean into that and increase your target goals?
Yeah, I would, I guess I would say it this way, we're really not changing the target goals. And we're really not changing the tactics that we’ll deploy, which is to say, I think, you know this, really, our goal is, we aim at hiring high quality relationship managers all year, every year. And so to the extent that there's vulnerability created in the, so BB&T SunTrust transaction or other deals yet to come, that will advance our hiring, we’ll probably hire more people, but we're not going to change our tactics. And we're not going to necessarily increase the target. But my gift is, the more of those transactions take place, the more vulnerability exists, the more that will ramp up the number of people we actually hire.
And just finally for me on capital management, you were able to buy a significant amount of stock this quarter. How do you feel about buybacks here, sort of, given the capital levels, you're continuing to grow capital, but with the recovery in the stock price, should we think that you'll still be active in the market here.
Yeah, I think our intentions are still the same that we’ll deploy that remaining allocation over the next three quarters. We did acquire quite a few shares here in the first quarter. We will probably be tailing that down here in the second quarter, and third quarter, and fourth quarter. So, but our intention is to deploy the entire $100 million allocation.
Our next question is from the line of Michael Rose of Raymond James.
Hey, just wanted to kind of reconcile some of the revenue and expense components. I mean, I guess when I step back and look at it, you got 7 million less of accretion this year, no rate hikes, GAAP NIM at the low end of the, for the range, but the offset is maybe a little bit better in mortgage, maybe a little bit better in trust and certainly better in BHG revenue? With the expense outlook kind of boring as Harold described earlier, is the expectation that you can still actually generate positive operating leverage against the less PAA expectations this year?
Yeah, Michael, we still believe that we will be able to take the efficiency ratio down a little bit more. We're not talking about leaps and bounds, but we are talking about a steady kind of decrease there. Now that said, Terry's got kind of an open checkbook on hiring. And so we just have to manage through that. But other than that, we don't see any kind of big surprises with respect to expenses this year.
Maybe just going into BHG, I think last quarter, you said, 5% to 10% up? I think you just said earlier 10% to 12%. Clearly, a stronger first quarter on top of a very strong fourth quarter, is there any change outside of that, if I know, BHG, for instance, is now offering loans to financial advisors, it seems like they're broadening out their book of business and their client base, just any commentary there on what the longer term expectations from that investment are?
Yeah. They have expanded into some other kind of career disciplines, call it, lawyers and CPAs and others, where they're testing the market there. Their bread and butter is still going to be doctors, dentists, veterinarians, so on and so forth. But I think what's really improved is their analytics and their ability to capture our transition to potential customer into a hot lead into a loan. So, they've invested in that technology here over the last two or three years and it seems to be paying all form.
The other thing that they're experiencing too is their credit analytics are much improved and so their substitution rates have come down quite a bit.
Maybe one more for me, some of the larger banks that have reported have given initial expectations for the day one impact of CECL, you're one of the first smaller banks to report any sort of thoughts on, at least the parallel loan that you've done this quarter and any sort of thoughts around day one impact.
We've got, our day one impact, we've got initial kind of a quantification we've shared that with our board. We could say that we're probably -- we're going to be, we’ll have increased reserves. That number will likely be anywhere from, call it, 20% to 60%, somewhere in that range. I'll give you a range, you can drive a truck through, but it'll be more.
Okay, that is a pretty right range and I would say that relative to some of the larger banks, that does seem perhaps inline to a little bit higher, especially on the upper end of the range, then the lower end of the range, very similar to what some of the larger banks have kind of positive.
Our next question comes from the line of Catherine Mealor of KBW.
One follow up on slide 13, the deposit change chart that you put in here was really helpful. Can you talk a little bit about the difference in pricing within all of these different buckets and the pricing of some of the strategic runoff in the brokered versus the pricing of the net client growth and then some of the FHLB you’ve put on this quarter?
Yeah. The strategic run-off, the brokered money, all of that was in the high-2s and we replaced that in the low-2s.
You’re saying the low-2s is the – that’s the net client piece?
Yeah. We went from -- the 500 million that left the bank was in the 280, 290 range and the money that we replaced it with came in in the low-2s.
And then on the other side of the balance sheet with loan yields, can you give any color on loan pricing and your thoughts on your ability to increase loan yields with the curve and the outlook as it is today?
Yeah. In this quarter, we saw some increased yields in our fixed rate book that was very helpful to us. I think as we go through the year, and particularly with the increase in construction funding, we obviously -- those ought to positively impact our loan yields. So we're hopeful that we can continue to at least keep loan yields flat, if not increment up here over the rest of the year now, granted, we're still working through the first accounting issue, but that's what we're -- that would be what we're thinking right now.
Okay, so outside of purchase accounting accretion run-off, which is understood, you're saying there's still a lag -- there's still the ability to increase loan yields from the lag from fixed rate pricing continue to come forward. And then just from construction funding coming in the back half of the year, maybe not at the same level we saw the past couple of quarters, but still an upward bias, is that fair?
I think that's fair, I think our bias is to see an uptick in loan yields, primarily based on what construction is going to do, and we're seeing a little bit of a breakthrough on fixed rate originations.
And our next question is from the line of Jennifer Demba of SunTrust.
Terry, could you just talk about your interest in expanding to the Atlanta market, given the upcoming change in the competitive dynamic there?
Yeah. I’ll be glad to. I think just to level set, we said for a long time that we've had interest in the Atlanta market. As you know, we've always believed that we can go to, we do a market extension either by acquisition or on a de novo basis. We have felt like Atlanta might be a good opportunity for a de novo store for some time, but certainly given the transition with SunTrust and BB&T and all the associated vulnerability there, that would increase our optimism about counting their own on a de novo basis.
Jennifer, I’ll just want to comment, because I know some people, when we talk about it, tend to think about [indiscernible] or something like that. That will be our approach in all, we've never liked that idea. And so the idea would be that we could find the management team that we felt like is build to $3 billion bank in a reasonably short period of time, that would be the plight we would like to make. So it really is a function of the management team that can work across all the bank disciplines and attract high profile bankers in the market and all that kind of stuff, which I think is different than just hire some sales people in a team or two and start an LPO. So hopefully, that's helpful in terms of what I think it is.
Our next question is from the line of Brett Rabatin of Piper Jaffray.
Wanted to I guess first go back to be BHG and just thinking about expectations for this year and typically results kind of build throughout the year and you talked a little bit about the new products, can you just give us maybe some color and I know it's hard quarter-to-quarter to predict, but year over year, that's been growing faster than the overall bank. Can you talk maybe just about the pace of that growth from here, does it slow somewhat or is ‘19 going to be another year like ’18 in terms of growth?
Yeah, we don't think ‘19 will replicate ’18. ‘18 had a significant growth number. So 10% to 12% in ‘19 is a little less, but I think it will be a flattered kind of curve. Last year was, as the budget guys tend to call it, the hockey stick, this year, I think it's going to be a more flatter kind of predictable curve than last year.
Okay. And then just thinking about the markets, are there markets, you're obviously in some newer markets that have been helping out with growth, are any of the markets in particular been better opportunities for you to grow in terms of, particularly the commercial real estate portfolio?
Yeah, I think, we see excellent growth in Raleigh, in particular, Charlotte as well. And then also, I would say in the triad in North Carolina is also good from a CRE perspective.
And our next question is from the line of Brock Vandervliet of UBS.
Longer term, I know the near term objective is 80% core funded. Do you think, given the increasing success you seem to have and being able to hire loan officers and generate more core deposits, do you think you could fund more of the bank longer term on a core basis?
My sense is that’s possible and certainly we work in that direction, but I don't see a substantive enough change that I would want to change the target. In other words, I think for planning purposes, that's probably the best way for those of you outside the company to think about this and again, internally, we will work to do better than that. But I'd stick with that planning assumption.
And just strategically with Bankers Healthcare Group and given the success that they've shown, is there any sense there within their organization that they may want to monetize that success in some way? Is that something we should begin to consider? Or is this steady as she goes, great business, stable ownership structure?
Yeah, I think, from our conversations with the principles, I think it's all hands on deck, they're operating that company for a longer term horizon. But we also need to understand that they’re entrepreneurial and they watch the market closely. And, I'm in no doubt, that at some point, there's probably going to be a liquidity event. But as it sits right now, I think our partnership with them is very strong. We're very engaged with them. They are very engaged with us. And I think, at least for the foreseeable future, and I call it maybe a year, two, three years, they're going to operate that company as a growing concern and try to maximize the revenue because I think like all entrepreneurs, they understand that whatever liquidity event might exist out in the future, that number is maximized when they're on the upslope of a curve. So that's what they're trying to do. They're trying to make it as not only as -- they're trying to grow it effectively and responsibly, but they're also trying to grow it profitably in order to one day probably maximize that return.
Brock, I might, just to add to Harold’s comment, I think our view for a long time is that’s an entrepreneurial company and there's probably a liquidity event in there at some point, just because of the nature of the three principles of that business. But I think if you were to talk to the CEO of BHG, I would say he's as energetic and on fire and focused on about revenue and earnings generation today as he's ever been, and I think he's, at least on a personal basis, his belief is that he’s still in early stage growth and so anyway, again, I think, the question is a good one, because I do suspect at some point, there will be a liquidity event, but I think individually, the later that got, I believes he's got a long runway. Yeah.
Our next question is from the line of Tyler Stafford of Stephens.
This is Gordon McGuire on for Tyler. So going back to the $500 million in deposit repositioning, just trying to figure out if there might be any carryover benefit into 2Q, what was the timing on those -- that repositioning intraquarter?
Yeah, Gordon, those all occurred -- well, the corporate depositor that was a 250, that happened fairly early in the quarter. The broker deposit change happened throughout the quarter, but there was a meaningful component of that that happened, call it, in the last part of January that was the primary contributor. So, from your question, I'd say most of it, probably 75% of it occurred before the end of January.
And is there any more opportunity to reposition or does your kind of your 98% loan to deposit ratio put a check on that in the near term?
Yeah, I think we will continually try to reposition it. We’ve got some ideas working through the wholesale bank. I mentioned some of those in my comments, fairly high level comments understandably, but we're going to try to figure out how to balance short term, long term, 2019, 2020, and try to see what we can do to squeeze some more juice out of this orange so to speak.
And then lastly, Harold, you mentioned the repositioning in the investment portfolio. I saw those yields are up 15 basis points this quarter. Can you talk about what you're doing, what you're buying and whether, what kind of strategy you implement this quarter?
There was a lot of municipals that we're getting our hands on. We like the credit metrics. We're getting out of allowing the lower, call it, the investment grade bonds. We're also getting out of the CLOs, we've still got some more of that to go. The bond that was a little elevated at the end of the quarter. I think we've got probably 75 million to 100 million in orders and bonds that we will probably sell through in the second quarter, related to CLOs, but the wholesale bank team, they're working on a lot of different strategies and tactics and talking to a lot of people about how to get a little more earnings out of that side of our balance sheet.
And your next question is from the line of Brian Martin of FIG Partners.
Most things have been covered, Harold. But just maybe one question on the funding side, it sounds like you expect the cost of deposits to continue to increase from, I guess from where is it at, but the rate of increase is low. Is that kind of what you were suggesting based on the size with the Fed on pause? So 12 basis points.
Yeah. I think that's right, Brian. We're not, and granted, this is not some kind of scientific study here, but our relationship managers out in the field are really good about calling in to say, hey, we're looking at this and we're looking at that, what do you all think about this or what do you think about that, and those calls have dropped dramatically. So, we feel pretty good about where deposit pricing is right now. Obviously, we're in a competitive market. There's a lot of people trying to grab deposits. But we feel pretty good that our relationship managers are on top of it, and the messaging coming from both Rob McCabe and Rick Callicutt is to try to get the deposit, but get it at the lowest price possible.
Okay. And when you talked about in the first question today, Harold, about the margin, not seeing a lot of contraction, I mean when you look at the core margin, so ex the purchase accounting, sounds like you expect the core loan yields will still go higher, but the funding costs will continue to tick up as well. So the core margin should also be flat is kind of what you're kind of at least suggesting based on with the Fed on pause.
I think the core margin is going to hang in there. We’re not anticipating any big kind of falling off the cliff kind of numbers here at least in the second quarter for sure. We're looking at loan growth in the third and the fourth quarter, loan growth begins to escalate, then we will have to figure out how to fund it, because we don't anticipate core funding catching up, even though as we march through the calendar year, our funding profile tends to improve in the second, third and fourth quarters from the first quarter.
Okay. And the FHLB advances, Harold, that level they're at today, do you expect them to hold there or you expect them to decline, as you?
Yeah, we don't -- we're not -- right now, we're not anticipating the big increase in federal home loan bank borrowings. Usually, the first quarter is where we end up tapping into and then hopefully over the course of the year, we'll be paying on that.
Okay. All right. And then just the last one was on the hiring momentum, similar to disruption in the market caused by recent deals, I mean, I guess, Terry, do you expect, I mean, I guess, are you seeing momentum on the hiring front pick up? I mean, last year, you hired -- you talked about 108 people, first quarter is kind of at that level annualized, but I mean, are you seeing any sense of pickup in the discussions you're having with some of the disruption or is that not fair to say today?
I don't think I would say it that way, Brian, but just to make sure I get communicated what the case is, when you aggressively recruit people, we run a continuous recruitment cycle. So we're always chasing the best bankers in the market, irrespective of whether there's merger vulnerability, irrespective of what the hiring plan calls for, there's sort of no limits to chasing high producing revenue producers. If you take the average commercial FA here in Nashville, we would have $100 million loan book and an $85 million deposit book. And so, you can do the math on that, I mean, if you’re paying that guy $300,000, $400,000 a year, that multiple is just extraordinary. I don't understand why he wouldn't hire everyone, I mean hire frequently as you can hire them. And so I guess what I'm trying to put in perspective, we don't speed up or slow down on our recruitment exercise, the variable I think that you're chasing is, so would you expect that vulnerability at large Nashville or regional players would help us, I think the answer to that is yes, but it doesn’t alter what tax it were to ploy in. We’re just sort of running straight ahead.
Yeah. Understood. It seems like the vulnerability has increased with this and that’s kind of what I was getting at. I mean I know you guys run your model, but seems like there is more opportunity or could be more opportunity with what’s transpired in the market.
Thank you. And ladies and gentlemen, this does conclude our program for today. Thank you for your participation. You may now disconnect. Everyone have a great day.