Pinnacle Financial Partners Inc
NASDAQ:PNFP
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Pinnacle Financial Partners Inc
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Good morning, everyone, and welcome to Pinnacle Financial Partners First Quarter 2021 Earnings Conference Call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer; Mr. Harold Carpenter, Chief Financial Officer; and Mr. Tim Huestis, Chief Credit 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. [Operator Instructions]
During the presentation, we may make comments, which may constitute forward-looking statements. All forward-looking statements are subject to risks, 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 statement. A more detailed description of these and other risks is contained in Pinnacle Financial’s Annual Report on Form 10-K for the year ended December 31, 2020 and in subsequently filed quarterly reports.
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 the 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 thank you for joining us this morning.
Q1 was an outstanding quarter in my view. Most of you have been following us know that during the pandemic, we transitioned quickly to [indiscernible] beginning last January if you believe that, not only to shore up asset quality, but we launched a number of initiatives that would continue to drive PPNR through 2020 and put us in a position to accelerate the impact of the pandemic veins. And so in Q1 we were able to get off to a really fast start and recognize some of that PPNR growth.
We begin every quarterly call with this dashboard reflecting our key performance metrics on a GAAP basis, but as we most always do, because there are so many adjustments required in order to focus on the variables that we're truly managing here at Pinnacle, I’ll move quickly to the chart reflecting the adjusted non-GAAP measures.
Part of our first quarter 2020 earnings call last April, I told you that my expectation was in the final analysis 2020 wouldn't be about 2020 earnings, but more about how well we positioned our firm to return to our previous earnings trajectory following the pandemic.
And as you can see here on the top row, the trajectories are all slopping up into the right with total revenues, fully diluted EPS and adjusted PPNR, all up meaningfully on a linked-quarter annualized basis. 2021 revenues were up roughly 14.7% annualized during the first quarter. Adjusted EPS was up 7.6% annualized during the first quarter and adjusted PPNR during the first quarter is up 8.4% annualized.
Along the second row you can see that loans are up 11.8% annualized during the first quarter inclusive of PPP, Harold will review in greater detail shortly and talk about expectations going forward. But generally, excluding PPP, we continue to believe we’ll produce long growth primarily based on our ability to take market share due to our prolific hiring.
We've hired 200 revenue producers in 2019-2020 in the first quarter of 2021 and that's more than 20% of our total revenue producers. That represent enormous market share movement potential which I expect differentiates our growth opportunity for many, if not most of our peers.
Core deposits continue to accelerate at a rapid pace during the first quarter. And in spite of the COVID challenges, we continue to have a track record for consistently growing tangible book value per share with 14.1% growth in tangible book value per share year-over-year.
Across the bottom row, you can see that asset quality held up really well in the first quarter with NPAs at just 36 basis points, that's the lowest level in the last decade. Classified assets also down this quarter to the lowest level in the last decade and annualized net charge-offs of just 20 basis points in the quarter.
I’m going to turn it over to Harold and Tim to review the results in much greater detail. As we go through the details, I find that there’s a lot to be encouraged about as it relates to revenue growth. First of all, regarding our net interest margin fundamentals particularly the trajectory of our cost of deposits. And secondly fee income, mortgage originations and sales continue to run at a record pace. They continue to accelerate during this pandemic and again in the first quarter continues to outperform expectations.
We talked about our transition to [indiscernible] as earlier in 2020 allocating a meaningful part of our human capital to reviewing our loan book borrower by borrower. Tim is going to update you on the work that he and his team accomplished here in Q1, as well as give insight of what we're seeing and learning from our clients particularly in these stressed segments. At least for me, our asset quality performance continues to inspire optimism.
So Harold, let me turn it over to you.
Thanks, Terry. Good morning, everybody.
Many of my slides I have shown for quite some time. So I'm going to hit the high points. We're pleased with our first quarter loan growth. Excluding PPP, average loans were up 7.2% between the first quarter and fourth quarter. Excluding PPP, inter-period loans at March 31 compared to December 31 were up 4.6% annualized. So call it a mid-single digit growth quarter.
As the loan yields in spite of the steep in the yield curve and as we mentioned last time loan yields will be to fight in 2021. We will lean into our relationships even harder to maintain our yields. There's a lot of equity out there. It sure feels like it's a borrowers market right now.
Our problem based credits only saw a slight decrease in yields while LIBOR was down 4 basis points and fixed rates down 7 basis points. Overall loan rates were down 9 basis points with PPP loans being down 13% and the biggest contributor to overall loan yield decline and likely to be the most difficult to model over the next few quarters but more on that in a second.
So where to from here. Our market leaders continue to believe that our in the period loan growth forecast excluding PPP in the high single digits for 2021 is a reasonable number for our firm. We built that estimate from the ground up based on continual dialog with our frontline lenders. As always we will lean on our new hires to take it - to give us an advantage on loan growth, coupled with our markets which we believe to be the best making markets with the best bankers in the Southeast, we're optimistic about our loan growth goals for 2021.
As to yields, we still have about 60% of our floating variable rate loan book on in the money floor so that will help shield some of the financial long rates continue to be under pressure. Hopefully we can get some traction from a steep in yield curve over time. Speaking of PPP and in the tons of work that's been accomplished here, we've funded around $3.4 billion between the two 2020 programs and the 2021 program.
We're just over $900 million in 2021 fundings, about where we thought we'd end up. New application volume is slowing, so we don't anticipate a great deal more. Here's what we're hearing and I'm definitely not on the frontline, but it seems to rain through. The 2021 program hit the mark and was primarily used to help smaller businesses at least from our perspective. The process has improved since last year and this has made life somewhat easier for us and our clients.
The FDA continues to move around, change the rules, but all in all it's in a better spot. No one is casting stones, as we can't imagine what the SBA has had to deal with over the last year to get these programs up and running. As to forgiveness, smaller clients are getting done, say loans less than $150,000 while loans say greater than $2 million appear to be on the SBA [indiscernible] and have been for quite some time.
During the quarter, a slow for some technical issues that the SBA was dealing with and then we ran into tax season with a lot of class working with their CBA. Our thoughts are that eventually substantially all of our clients, who have not repaid their loans will seek forgiveness. Not sure whether another round of PPP will come around, but if it does we will dive in and believe the appetite will be there but it will be limited.
After our PPP results for the same quarter, we are modeling decrease in total revenues somewhat consistent to the decrease between the fourth and first quarter. It all depends on the pace of forgiveness. Eventually the SBA will get at the greater than $2 million also that is coming to us. We just don't know when. We have about $360 million in loans awaiting forgiveness with the SBA currently and approximately $200 million where we are working with clients together necessary data to submit to the SBA for approval.
Now on to deposits, we had another big deposit. Core deposits were up almost $1.5 billion in the first quarter. We've experienced significant growth in non-interest-bearing deposits ending up at $8.1 billion at quarter end up 63% since last year. Obviously, we believe a significant part of that is government stimulus. Our average loans to average deposit ratio was down only 11 basis points to 82.7%.
So we consider that a small victory. Our average deposits were - our average deposit rates were 26 basis points while EOP deposit rates were at 22 basis points. So we continue to see downward momentum for 2021 and look to be around 50 basis points by the fourth quarter of 2021 assuming our short-term rate forecast remained consistent for the remainder of this year.
Liquidity bills for nearly all banks that are gain more attention. The steepening of the yield curve has gotten our attention, but we remain neutral on any sort of big bond deployment strategy at present. Our securities to assets ratio has been 13% to 14% for a long time. Our estimates are that peers are ran slightly more than that in the 15% to 20% range. We may deploy a modest amount of liquidity into bonds over the next few quarters, but it will be months.
We also allocated about $450 million late in the first quarter into a repo instrument which is secured by the counter parties investment securities portfolio. This is a floating rate instrument that yields around 40 basis points currently. So it'll be more impactful in the second quarter. We're looking at a somewhat similar product Carly, but it won't be as large.
I mentioned all of this to let you know, we are actively looking at prudent investments, where we can minimize or eliminate credit risk, while creating some earnings momentum. As a top charged in the case, we will again have an opportunity to reduce our wholesale funding book in the second quarter, which we fully anticipate. This almost $1 billion reduction is in our broker deposit books which we acquired as part of our intentional liquidity bill last year at the onset of the pandemic. This reduction should help reduce deposit costs and help our name slightly on the go-forward. Additionally we have about $900 million in federal home loan bank borrowings with the prepayment penalty remains such that the payback period on those is still four years to five years.
So we will hold tight for now, but monitor those borrowings continue. We believe our name after PPP and liquidity was approximately 3.29% in the same quarter, which compares to a similar calculation last quarter 3.27%. That's our adjusted NIM is now up four quarters in a row, also our GAAP NIM is now up three quarters in a row. We anticipate flat to up slightly for the rest of the year PPP forgiveness, we'll have a lot to do with that.
Now to fee income, I'll be brief these were $927 million for the quarter, for the quarter the revenues were more than 44% over the first quarter number of last year. Wealth management had a great quarter in comparison to last year. We continue to be very active on the hiring front across our franchise, particularly as we continue to build wealth management in the Carolinas and Atlanta. Mortgage beat expectations by a mile posting revenues of $13.7 million for the quarter up $1.3 million from last quarter.
Second quarter is looking strong as well. As we sit here today we are much more optimistic about mortgage origination in 2021 than we were three months ago as the right market does not appear to be moving away from us as quickly as we anticipated it might. Our markets remain strong and we have hired several key originators and several of our markets over the last few quarters. I'll talk more about BHG in a minute. But BHG continues to issue a great report cards quarter-after-quarter.
As per expenses specifically incentives, I think everyone is familiar with the impact of the incentive cost to our expense base and if our earnings are hitting our cards and soon as costs go up if not they go down.
2020 was very much a downer at least in terms of incentives for our associates. But we fully anticipate based on the current operating environment that 2021 will come back strong and hopefully our associates will recoup some of that lost incentive from 2020. We have provided that opportunity this year to our associates to earn an outsized incentive that says there's no free lunch, increase incentives only occur if our earnings growth supports the incentive.
Last year provision expense and CECL required an outside reserve bill which directly impacted our incentive plans probably more so than most. It only stands to reason that if we're able to recoup some of that prior year reserve bill this year there's some of that ship on its way to our associates.
This year our annual cash incentive is tied to the usual status and earnings growth numbers. We also maintain the PPNR component which we added during the middle of 2020. Additionally our board has also changed the way equity compensation works for the leadership of the firm. Rather than achieving absolute goals for our performance based equity awards our ultimate goal more investing advice on how we rank within a peer group.
Specifically targeting ROTCE and tangible book value growth over a three year period along with a modified based on total shareholder return. That change we believe is more show shareholder friendly over the long term. I probably have spent too much time on this. But those of you that have been around for a while you know our unique incentive culture, incentive structure is cultural. And it is definitely part of what drives the heartbeat of our firm for both the annual cash and equity incentive plans, the first quarter would indicate we're trending in the right direction.
As per expense run rate, we're anticipating personnel expense with all of our new hires coming off more with an inclusive of our increased incentives personnel expense should increase between 22% to 23% each quarter for the remainder of the year. Conversely, all of our other non-personnel costs which amounted to slightly more than $242 million last year should see a high single digit percentage decrease. That's right, a decrease in 2021.
As I stated before, the leadership of our firm is determined to not let a trend develop with the less than target paid out to our associates. That's a trend we will work hard to avoid in 2021. But to accomplish that we all are looking forward to meeting and exceeding our financial objectives this year.
Quickly some comments on capital, I'll be brief. We raise our dividend of $0.18 a share last quarter with the share price where it is. We've not acquired any shares and we don't anticipate buying any in the near term. We've been working to redeem a couple of subject issuances this year. And as I mentioned previously, we've intensified our focus on tangible book value growth by adding a component for it in our leadership's equity compensation points. As to our outlook, I’ll go on to the slide in depth as we've covered most of this previously. So this is really a summary for the model builders out there of what we think.
Obviously, we realize that we appear more optimistic than most. That said, we have great confidence in our piquing, our markets, and our clients and renewed optimism about where the Pinnacle is headed.
Now BHG. This is a slide that we've shown for several hours. The blue bars on the try to originate - on the chart are originations and we have ramped up with more loans being funded with records being set nearly every quarter for the past three quarters. First quarter was a record for both originations and place. The green bar represents loans on which gain-on-sale has been recorded as these loans are sold in downstream banks. This is the traditional BHG model with gain-on-sale revenues being generated.
Coupons have fluctuated somewhat over the last three years ending at 13.6% for the first quarter. As to bank buy rate, they fell to 4% in the first quarter so net spreads remain in the mid-9s which over time is up from previous years.
The bottom right chart now over 1,200 banks in BHG’s network and almost 700 individual banks acquired BHG loans last year. This has to be one of the strongest funding platforms for a gain-on-sale model in the country. This slide is probably the best slide that demonstrates growth potential of the BHG's model. [indiscernible] have improved significantly over the last few years and it is resulting in better hit rates and more loans meeting their fair standards.
As to credit, we've updated the BHG’s charge-offs and reserve bill chart. These are for loans that BHG has sold to their network of community banks. The green bar shows that currently they have just under $3.9 billion in credit with banks who have acquired the BHG loan. The orange line details the annual loss rate, while the blue line on the chart details the recourse accrual as a percentage of outstanding loans with these other banks.
Trailing 12 first quarter 2021 losses landed at 4.5% basically consistent with the last few years and during the year where who knew how COVID would impact loss rates. The risk - the recourse obligation reserve is used to reserve for future losses for the loans sold to other banks.
obligation reserve is used to reserve for future losses for the loans sold to other banks. With COVID, they increased the reserves by approximately $50 million in the first quarter. But as a percentage of loans, it was down slightly.
The top left chart we've shown on several occasions. The quality of BHG’s borrowers has improved steadily in the past and over the last few years, BHG continues to refine their scorecards and increased the quality of its borrowing base. Again the right chart and as I’ve said before may be the most powerful chart I have to offer related to BHG steadily improving credit quality.
Looking at losses by vintage, losses continue to level out in earlier month since originations thus pointing toward a lower loss percentage over the life of the underlying loans. Pandemic related events may cause these losses to move upward but the quality of the borrowing base in our opinion is very impressive and is much better than just from a few years ago.
Lastly, we said in last quarter and we’ll say it again 2020 was a big year for BHG and we anticipate big place in 2021. Last year BHG executing on the first $160 million securitization. This allowed BHG to continue to diversify its revenues and its funding sources. We're expecting another similar securitization at the BHG in the near future here in the second quarter of 2021. BHG’s earnings continue to ramp up.
BHG had a great operating quarter in the first quarter very much exceeded everyone expectations even there. We've upped our expectations for 2021 quarterly now expecting 2021 to produce outsized growth in relation to 2020 of 20% to 25% or more before we had anticipated high single digit growth.
So wrapping up, loan growth and loan pricing for Pinnacle in 2021, we'll take work but we are optimistic. Deposit growth has been remarkable. Deposit pricing is headed down. NIM should be flat to up. BHG had another great quarter and we continue to believe in them. Personnel costs will go up but correlated to increased earnings credit for both Pinnacle and BHG we believe is in very much great shape.
So with that I'll turn it over to Tim to talk more about growth.
Thank you, Harold. Good morning everyone.
Using the traditional credit metrics of net charge-offs, NPAs, classified assets and past due accruing loans, Pinnacle’s loan portfolio continues to perform very well. In the first quarter as in prior quarters during COVID our bankers and credit teams continue their thorough credit reviews, particular emphasis was placed on non-pass credit, our hotel portfolio and credits in our COVID specific low pass risk grade.
Our first quarter credit metrics are very encouraging. Our classified assets decreased again this quarter dropping by $17 million and our classified asset ratio declined to a very modest 7.3%, NPA has also decreased this quarter down to just 36 basis points and finally criticized loans decreased during the quarter by $85 million, similar to prior quarters in 2020 we conducted a four question survey during March of 405 C&I clients with loan balances totaling $931 million, the survey was specifically targeted to our low-pass risk grade clients in a wide variety of segments such as entertainment, restaurants, consumer services and healthcare, the questions inquired about revenue projections for the current quarter compared to the same period last year and months of liquidity, the survey results report more optimism than our fourth quarter 2020
The survey results recorded more optimism than our fourth quarter 2020 survey responses that we previously shared with you. Of particular note 87% versus 60% in December said first quarter 2021 revenue should be between 75% and 100% of first quarter 2020. 62% versus 53% in December have seven months of liquidity or greater.
This slide is to provide an update on Pinnacle's loans that were modified under Section 4013 of the CARES Act. Our Section 4013 modifications were negotiated with borrowers from the perspective of providing the client a longer term solution to help them bridge to the other side of COVID. Our approach was to improve Pinnacle’s position and simultaneously help the client.
With each modification, we collected very current borrower information as we sought to accurately rate risk grade loan and to contemplate the terms of our modification. A key distinction between deferrals offered first and second quarter of 2020 and these modifications executed in third and fourth quarter is the vast majority of our clients with Section 4013 modifications or at a minimum paying interest monthly.
With each Section 4013 modification for our hotel loans was negotiated to fit the borrower's specific circumstance. Our modifications generally consisted of changing the loan repayment terms to the interest only for 3 to 12 months in consideration for borrower concessions such as pay the accrued interest that accumulated during the earlier deferral period establish an interest reserve on deposit with Pinnacle and shorten the loan maturity.
As illustrated in our supplemental deck, Pinnacle’s hotel book has held up. Of particular note, our hotel portfolio occupancy has been stronger than the national average as reported by STR for eight of the last nine months. As an example, our average occupancy for the month of February was 50% versus the national average at that time of 45%.
On a very positive note, STR reported for the week ended April 10, national hotel occupancy was 59.7%. This is the highest level in the past 12 months. Given that 74% of our hotel loans are in the economy, limited service or extended stay segments, we believe this improving occupancy trend bodes well for our portfolio.
Many of our hotel clients in these particular segments can cover operating expenses and interest when occupancy is in the mid-40% range. As a testament to our conservative hotel underwriting prior to COVID we only have four loans totaling $6.6 million that are rated classified.
With the American rescue plan, the deadline for banks to complete Section 4013 modifications was extended from December 31, 2020 to January 1, 2022. As this table illustrates we've had very little change in our Section 4013 loan modifications after the original deadline.
This next slide is to provide a brief overview of our different credit delivery channels. While the structure of our different channels may not appear unique we believe it is our model of hiring experienced bankers in combination with the design of Pinnacle's loan underwriting channels that drives our results.
Several of our key tenants that help us play offense during the good times and also execute defense very effectively include for C&I and CRE loan request greater than a million we have credit teams in market working directly with our financial advisor. The credit teams have historically joined the banker on prospect or client calls. For loans greater than a million, we do not use remote centralized credit factories or hubs as many of our regional competitors do. At Pinnacle our FA partner and collaborate with credit very early in the loan request.
We believe this practice of quickly involving credit on loan requests is different than our competitors. Average years of experience for our senior credit officers is 29 years and the average years of experience for our credit analyst is 21 years.
We believe our credit teams of experience level has served us well and converting prospects to customers and serving our clients. And our special assets team is led by a 40 year industry veteran, his team of special assets advisors average 16 years of work at experience. Pinnacle’s financial advisers are encouraged to raise their hand early with any loan exhibiting early signs of distress.
Our culture of involving our special assets experts early has been a key driver in the positive trend in our classified assets and NPAs. Pinnacle’s credit metrics have held up well although we have shifted back to an offensive stance we will continue our thorough defensive work on clients in the impacted segment and in particular our hospitality book.
And now Terry I'll hand it back over to you.
Okay. Thanks, Tam.
On the one hand I think it's too early to spike the football as it relates to COVID. But it seems apparent to me that as a result of the progress on the vaccines along with all the stimulus has been poured into the economy, we're setting up for a strong second half of 2021. And it means that any number of times it's been our intent since last January to get a position to seize those opportunities that would inevitably exist in the Southeast as the economy begins to reignite.
As I mentioned in my introductory comments, in my view first quarter was an outstanding quarter with NPF 36 basis points classified assets down to 7.3% past two down and just nine basis points asset quality actually appears excellent, and many of the threats we once feared seem to subsided. Adjusted EPS was up 313% over the same quarter last year.
Importantly adjusted PPNR was up 25.2% over the same quarter last year and revenues were up roughly 20% over the same quarter last year. And now at a time when both fintech and asset generators are garnering enormous multiples we believe that BSG validated the power and their differentiated model as they continue to originate and sell record volumes of loans through their proprietary auction platform.
As Harold mentioned we expect that they'll do another securitization in Q2. And his Harold also is already mentioned even with the securitization they're now forecasting income growth of 20% to 25% this year. And so we believe all this sets up for a great 2021.
Building on that foundation and momentum as we live for the remainder of 2021, we're extremely bullish on our organic growth opportunities coming out of the pandemic Greenwich Associates is estimated based on their market research among business owners that roughly 20% of the revenues to banks is in motion. There is a high level of dissatisfaction with large banks responsiveness during COVID; contributing factors, including handling the payment deferrals early on, then PPP and then subsequent loan request.
Also based on business owner feedback, Greenwich has developed a crisis response index which ranks banks based on their response to the crisis by aggregating how clients write them on the most important criteria during the pandemic. Not surprisingly in their fourth quarter 2020 data, Pinnacle is one of the highest rated banks in the nation, making everyone of the best positioned banks in the country to capitalize on this money in motion as 20% of revenues available to the industry based on client dissatisfaction.
Beyond that, we’re one of the most ranked banks to work for in the country. We were just listed again in Fortune magazine as one of the top 100 places to work in the country, one of a limited number of banks on the list and that reputation is that it has enabled us to hire a record number of revenue producers in 2019, another record in 2020. And as the first quarter predicted, we should track another record number of revenue producers in 2021 which would suggest outsized organic growth.
And perhaps most importantly, we're located in markets where some of the best ebbs and growth dynamics in the country. Nashville continues to create jobs which will further accelerate its growth most recently with its announcement of Oracle Expansion International, 8,500 jobs in a $1.2 billion capital investment, also recent announcements by the partnership with [GM] and LNG on a $2.3 billion investments build a battery plant here in Middle Tennessee with 1,200 jobs.
Similarly Raleigh recently announced that North America's largest end-to-end biopharmaceutical manufacturing facility will be located in Wake County and create more than 725 jobs. And it will bring in an engineering hub with its many - probably have as many as a 1,000 jobs that add in all other successes in the triangle. And of course Atlanta continues to be the land of milk and honey. Georgia was recently named the top state business for the seventh consecutive year and I'm not exaggerating. The Metro Atlanta Chamber’s list of meaningful relocations and expansions for 2020 is a seven page document, unbelievable.
And finally I've already alluded to the importance we place on being in the largest and fastest growing markets in the Southeast. In the past we've published maps of the southeast, ex Florida to demonstrate our target markets and we filled out the majority of those markets with the acquisition of BNC in 2017. And de novo will start in Atlanta. At this point I can't name a franchise with a more attractive footprint or that's better situated.
Going forward I think the best illustration of our target markets is simply a list of the largest and fastest growing MSA in the southeast now including Florida. We're satisfied and believe that we've adequately demonstrated that our distinctive model is universally effective in the Southeast.
And as we've already pointed out we believe there’s great vulnerability in the large banks who dominate these markets. I would say we're seeing unprecedented opportunities to enter those markets in a few cases with potential strategic combinations, but in many cases on a de novo basis would we like a lot. Our firm has almost always been a high growth financial services firm.
Going forward we see extraordinary vulnerability at the large banks that dominate many of our markets. We expect to attract those bankers in both our existing and potentially attractive markets around the Southeast. We love the size and growth profile of the markets that are in our existing footprint. We expect to have opportunities to expand in other attractive southeastern markets. So again I think we are excited about the potential growth both short and long term.
Operator, I’m going to stop there and we’ll be glad to open the floor for questions.
Thank you, Mr. Turner. The floor is now open for your questions. [Operator Instructions] Our first question comes from Jared Shaw from Wells Fargo. Your line is now open.
Maybe if we start with BHG, I mean that's great trends that you're seeing there and with the securitization. Are they doing that just really to keep that that avenue open or should we expect as we go through the year that securitizations will be a bigger part of that? And I guess how big could the balance sheet at BHG get or how big would they be comfortable with that getting versus selling them?
Yes. I think they're pretty confident with growing their balance sheet. They will have a securitization accomplished here in the second quarter and we would not be surprised to see they will accomplish in another one before the end of this year. So they’ve not gone away from that diversification strategy here. And so we fully anticipate them to grow it. They think they can get their balance sheet up meaningfully here over the next couple or three years.
And then with that revenue coming in and then Terry's comments about the opportunities in these other markets including Florida; is there an opportunity for you all to be dramatically increasing the hiring pace of revenue producers in some of these new markets? And can you take this as an opportunity to really expand that Atlanta model into other markets. And if so does that included in your expense outlook or is that - would that be additional as those opportunities come up?
I’ll talk about the expense outlook and what's in it and what's not in and what Terry do in the hiring plan for the rest of this year and other markets. We do include a kind of call it a place holder for new revenue higher for the rest of the year. Traditionally I think we'd call that de minimus so that every market leader has at least some room in their plan for new hires. But it's in no way shape or form kind of the target that we're looking for out of these - out of these market leaders and what we expect from them in these markets. Does that make sense, Jared?
Yes. So if there's - so if there's a bigger opportunity then that would not be reflected in the budget at this point.
That's right. They get outside hiring going on and we'll fully support that.
Yes. Jared I guess I would add to Harold’s comments. I do believe that we are likely to have incremental opportunities and markets that we're not currently and we do have I think we do a great reputation and as you know there's a fair amount of turmoil around the southeast with some of the bigger companies and we found and we have people contacting us from various markets that are interested income and are moving the team and so forth and so we continue to evaluate those opportunities and bet those updates and so forth. But I do believe that we're very likely to have incremental hiring opportunities in markets that we're not currently in.
And then just finally for me I guess can you give an update on how the new hires that have been brought on over the last 18 months or so, how are they doing in terms of actual production versus the goal and obviously COVID through everyone for a loop but are they getting traction, are they are they able to start chopping some wood on that 20% of bank revenue that's in motion right now.
Yes. We think so Jared what we do is we track kind of our revenue producers based on how long they've been with us and obviously the ones that have been here the longest are the ones that are producing most of the continual revenues for us. But we track them based on 10 years of one year, three years, five years and then more than five years. And the newer I guess I'll call them hires are coming up the ranks. We're pleased with that. And we fully anticipate that they will be the ones that give us the momentum we need here over the next couple of years.
As Terry mentioned, I think it's something like 25%, 20% to 25% of our revenue producers have been hired during the last couple of years. We think that's an incredible opportunity for us here in the near-term.
Jared again I'll add to Harold's comments. I think your question is on the right track. COVID does impact and I would say it this way it lengthens the sales cycle both in terms of our ability to recruit people as well as their ability to recruit their clients to the firm. So it does lengthen in COVID where it's just more difficult to get in front of class and those kinds of things. But that said as Harold mentioned we are dragging in and we are seeing the progress grow. And we do believe that based on what pipeline are building that they will be able to deliver and as you say I get traction on this 20% of the share that’s in motion.
Okay. I guess just that then when you look at your loan optimism overall though is it a combination of being driven by new clients or better utilization or sort of equally both?
Well, I think it is about we see increased line of credit draw that's helpful. But we also see an extraordinarily high level of pay downs in commercial real estate. So they sort of balance each other and so when you work your way down to the net growth I think the biggest factor in our ability to produce that will be their ability these new hires ability to move that market share.
And our next question comes from Stephen Scouten from Piper Sandler. Your line is now open.
I apologize if I missed the first couple questions there. But I guess one of my questions for you Terry, just longer term as you think about BHG and obviously I know there's a lot of unknowns and if that ever creates a liquidation event. But how do you guys think about capital priorities if and when that were to occur and maybe specifically around M&A given you probably do have that advantage currency you have kind of sought in terms of M&A over time. I think you're about to tangible versus your peers at two times tangible today. So kind of just wondering how you think about that capital deployment in opportunity set there.
Yes. I think, as I have sort of alluded to in the prepared remarks there. It is obvious, we are stock is advantaged. I do think there's M&A opportunity that seems to be picking up again and not such a wild stream of announcements but it seems to me there are lots of - there's of dialogue going on, and so we continue to evaluate M&A opportunities really across the front. And so anyway, I think you know this Stephen that I think going back to last year somebody asked about M&A. And my response was what, I mean I wouldn't spend my currency trading slightly above tangible book value but 2.4%, that is a different equation.
And so we look to optimize both the opportunity and the advantage of the stock. And so anyway I guess I'll just characterize it that way. I don't want to overplay it or overbill it or oversell it. As there are thousands of circumstances that come together make it work, but certainly we're in a different position than we would have been even six months ago as it relates to M&A. I think on the - as it relates to BHG it is just so hard to - if we can ask questions a lot about what would you do what would you do. I mean, there's so many circumstances that are unknown.
What would the valuation be, what how much might be sold, how much they're just a thousand valuate thousand variables that would influence what choice we make when we get there. But I would say there - it's a really luxurious problem to having a position with so much money interested in what they do. So right we just have to cross that bridge when we get there.
Yes. Definitely a high class problem I suppose it's been a great investment. Does it make you want to think about other non-bank acquisitions I guess moving forward or is that something you're exploring more than just the traditional bank deals whether that be fintech type investments, I know you've done some of already or other line of business type acquisitions?
Yes. I think I would say that we are - we have and we continue to look at sort of alternative kinds of investments like BHG I think you're aware advocates of capital which is - it's a smaller scale deal, but it's a meaningful deal. We've got a small investment in our blazing gun. We've got some - our approach on these things is generally using [indiscernible] saying when you fire bullets not get involved as you know, and so we do like that, they find in both fintech asset generators that same differentiated.
And so you don't expect us to continue to look in that vein. It's not exactly like looking for a unicorn, but it's also there not just everywhere. So it takes a little more there - there might be a little more serendipity in that I think, but certainly we're interested in those kinds of things. I think on the lines of business, I'm not saying there aren't any, but I say less of those just to be candid. We've got a pretty well fully built out of product capability.
And when you look at some of these things that we would have an Interesting line take PNC insurance or something like that I mean Interesting line take PNC insurance or something like that I mean when you get down to brass tacks of it, you got all this roll-up going on with people buying extraordinary multiples and it creates too much goodwill for us. I mean when you get into some of those sort of wealth management lines are really are hard to acquire and feel like you're going to either make a good deal or you're going to be able retain the revenues as many of those things are personality dependent and so forth. So, I would be less excited about lots of business than I am about bank M&A or other sort of fintech asset generators.
And then maybe just last thing for me, I might need you to stop talking about Atlanta so much because there's people everywhere here and the traffic bad again. So, you can't highlight it too much, but I'm wondering kind of where you are on the progress front there in terms of how many lenders you have on the team now maybe the base of loans and then I know you mentioned specifically wealth management for Atlanta and North Carolina. And is that just building out the teams or is there a specific opportunity around wealth management in those environments that you're really seeing that's leading you to push into that space in particular.
Yes. I think, again David, I would characterize honestly I would characterize our opportunities in some of these North Carolina markets specifically, Charlotte and Raleigh is really similar to Atlanta, again of course Atlanta is the biggest most vibrant, but those other two markets are really handsome markets and we have such small chair positions that we sort of look at those much like we would the de novo start in Atlanta.
I think the hiring in generally has been pretty even. I can't recite the numbers in each of those markets, but we're hiring revenue producers in each of those markets, both what which you might call traditional financial advisors or relationship managers as well as the rest of the revenue producing categories like mortgage originators, brokers and trust administrators.
I think you ask about the opportunity, I do think that the large banks that we've been working on to hire relationship managers from have really high vulnerability in some of these wealth management businesses, trust administrators, portfolio managers, brokers and so forth. And so that's really the opportunity that we're trying to seize for the other revenue producers.
And our next question comes from Brock Vandervliet from UBS. Your line is now open.
On BHG, just to confirm so that’s a 20% to 25% net income growth guide for this year. Is that right, Harold?
Yes or more.
Okay. And where's that growth coming from, a couple quarters ago you had a lot of disclosure about new verticals. Is that been kind of sidestepped? And this is all the traditional more traditional growth areas or is it new verticals to play?
I think there's a list of things that they - we asked them the same question. I think the gang wholesale model is operating at pretty much peak efficiency. They've got better data. They're able to go out and send out more opportunities to do business with people so on and so forth. I think their resolution of substituting loans is better than they anticipated post COVID so they've got some breaks there.
I think with the improved credit outlook, you're likely to see some reduction in reserves for losses. I don't think, it'll be - it'll be like a big kind of cliff thing but I think it'll be steady for the rest of the year. So I think when you put all that into the blender, they're coming out thinking this year is going to be a great year for them. And so that's how we got to the 20%, 25% or more.
And shifting over to the funding side, I believe relative to our model part of this was just the reduction in some of your wholesale deposits. But it did kind of stand out to me as you're showing a decline in the rate of deposit growth it seems. Could you speak to that, are you seeing any peaking there.
Well, we hope we're seeing some peaking there but I can't really give you any kind of comfort that we're going to see core deposit growth lessen. We're active in several different initiatives to kind of grow lower cost, smaller account balance deposits. But we will see more runoff in the wholesale book. We've got, like we've miss, we’ve got a $1 billion coming out this quarter, but hopefully that will be enough so that we don't grow the funding book like we did here in the first quarter.
And our next question comes from Stephen Alexopoulos from JPMorgan. Your line is now open.
I want to start on the loan outlook. I appreciate the improved optimism on loan growth. But given the industry is up to its eyeballs on liquidity particularly your larger competitors, can you talk about the competitive environment today for lending and could that impact your ability to get that high-single-digit growth?
Yes. That's a great question. I think Harold alluded to in his comments in fact it sort of feels like a borrowers market. There's a handful of reasons for that. But clearly one of them is limited loan demand which drives pricing lower and those kinds of things. So what your own is a correct theme and a right theme I believe. We believe that we have taken that into account in our forecast. Nobody knows the future I guess.
But what we believe is that if you just sort of look at the loan demand in our footprint if you will economic loan demand is still very low. We expect it will pick up in the latter half of the year, but it will be muted by all the liquidity in the system. And so where we believe we get the growth is from really incremental hires move in market share from where they were to us. And so that's the principal assumption about where the growth comes from. It's less dependent upon economic demand than it is market share movement.
And then if we look at the COVID-19 impacted segments hotel restaurant etcetera, how are you looking at those exposures from a long-term view and do you have any plans to reduce those exposures over time.
Certainly in hospitality where we have no appetite, we haven't generated a new hotel loan since the first quarter of last year, I would tell you that our underwriting for CRE retail certainly has changed, we've really shifted that to single tenant, credit tenant exposures and grocery anchored. So I think part of the answer is just shifting the appetite within CRE, restaurants certainly more conservative you know we have some franchise concepts that we're still tracking well but I would tell you with restaurants you know it's guardedly optimistic and strict underwriting. So hopefully that might help answer your question.
And then my last question Terry. Given the comment - the earlier commentary about the improved valuation and maybe you're looking at M&A opportunities a bit differently is the flip side of that that you're not looking as active on the buyback side, I know you have $125 million plan out there but how are you thinking about that given the valuation of the stocks? Thanks.
Yes I think Steven I'll answer your question directly on the buyback. But just to be clear you know I think I used the phrase and talking about that I don't want to oversell it, overbill it. I'm not saying we're going to make an acquisition, I'm just saying we're in a different position and there are lots of discussions going on and opportunities to consider those kinds of things.
So I don't know I'm just trying to get that shaped up where somebody understands that we do have a high valuation that does create some opportunity but I don't want to overplay the likelihood that we're going to run out here in and make much acquisitions, because I don't think we're going to make much acquisitions.
So any way, let me, hopefully they’ll better frame that economy and then as it relates to the buyback yields, I think you're right, I don't think you ought to have an expectation right now that we would - that we would wait back in and buy shares primarily - you say as a function of the valuation, we just - we look at that differently, we like having an authorization, we'll watch it over time, but I don't think we have an intent to buy shares at this price.
And our next question comes from Brett Rabatin from Hovde Group. Your line is now open.
First Harold, I was curious maybe what’s your crystal ball might be telling you on liquidity, I know you thought that might start to drain at some point and it’s obviously extended out for yourselves as well as the industry. Can you maybe give us some color on how you see that liquidity being deployed over time? And how much of that might happen and how much of it just kind of drains naturally with people using cash?
Yes, that is a crystal ball, it’s kind of question Brett, we likely will, a modest amount of bonds will likely go into the market here over the next two to three quarters. We might build our percentage up from a 13.5% up to a 14.5% or something like that. It will be a big number that we've got in all likelihood, you know I don’t know a $5 billion or so PPP loans that we anticipate coming to us here over the next four quarters. So we're - they'll provide additional liquidity to offset redeeming some of these wholesale funds. It's going to be a fight. It'll be a war to try to drain some of this liquidity. We're - we remain optimistic about loan growth targets.
We remain optimistic about reducing deposit rates. And we particularly got some larger depositors that are more rate sensitive and they fully appreciate how the value equation works. And if they can find a better number at another financial institution, they’ll move that money. And right now we're okay with it. We don't think it damages our relationship with our client at all. So there's a lot of things that are - that are in play to try to get some of those liquidity off our balance sheet.
Appreciate the color there. And then the other thing I was curious about was in the guidance for expenses you talk about requiring increased infrastructure support. But you're obviously giving guidance for non-personnel expenses to be lower this year. Can you talk maybe about the increased infrastructure support what that all entails? Are you guys doing anything on investing or infrastructurally that might change the dynamic outside of the personnel one?
Yes, not really. I don't think we're doing anything as far as bricks and mortar. We've got a couple of branches I guess in play here this year but there's nothing big as far as buildings or technology that would cause you to be called a blip on the radar. Most of our infrastructure build comes around personnel and it'll be you know call it from one resident producer we end up hiring two to three other people, in support of that revenue per institute. So that's the infrastructure that we refer to in those comments.
Okay. And then if I could sneak in one last one around the change to the equity compensation you know just the tangible book value per share growth being added to that, does that change how you might view M&A in terms of thinking about payback periods or change the book dilution.
Well it certainly is impactful. So we would - it would be something we would need to consider traditionally our board has been willing to work with us on significant events and how that might impact longer term incentive plans.
And our next question comes from Matt Olney from Stephens. Your line is now open.
I want to ask about the bank's sensitivity to interest rates on slide 52 you gave us some good disclosures and it looks like the bank continues to move to a liability since the position but when I read some of the comments on that slide it sounds like you've got some levers to pull to offset this over the next year or two. Should we be assuming by the time, rates do increase on the short and whether it's next year 2023 or whenever that Pinnacle will at least be in a rate neutral position if not asset sensitive just trying to appreciate kind of what the what the strategy is? Thanks.
Yes, that's a great question Matt and you're right. We've got some levers, we've got $1.5 billion in loan for that are a gain right now that we can unwind today and that'll free up will be inside and floating rate assets to move us to more of an asset sensitive position. So we've got some - we've got some levers like that that we can pull out to alleviate whatever that slide is indicating currently.
So yes, I we're not panicked about our balance sheet or anything like that. We think we've got a great opportunity when rates begin to move. Most of my liability sensitivity is tied around loan floors. So it's all about that. Once we can get a better view of where our rates move we can always start moving around on loan floors and cure the problem.
And then circling back on the loan growth and the outlook, definitely appreciate the guidance. It's kind of a bottom up review with all the lenders in the bank, curious how to see now utilizations will rates look today compared to levels a few years ago. Just kind of appreciate if that does rebound how much incremental benefit we could see from loan balances at the bank. Thanks.
Yes. Utilization I think is at 43% now from 46% something like that. So those would be loans that are currently on our books. Not anticipating a big growth in utilization. So all of our growth we think is going to have to come from loans that are currently not all of it. But most of our growth is going to have to come from loans that are currently on somebody else's balance sheet moving it from us.
And our question comes from Catherine Mealor from KBW. Your line is now open.
Wanted to just a follow up on the GAAP NII. How much PPP do you expect to come through in 2021 within that guide?
Yes, that's a great question. And we see each other up and probably we're trying to anticipate how much PPP, I've got - you can calculate the interest income with where - pay down to, but it's all about the forgiveness. And we've got about $63 million in additional accretion that come to us. We think a lot of that’s going to come this year. It's probably more than 50% of what we likely will realize this year maybe upwards of 70% of it.
Okay, great. And then as we think about…
Catherine, I think the big news we got out of a - when we talked to our relationship managers is they're not hearing anybody say they're not going to go for forgiveness. So I think most if not all of that $2.2 billion this hanging out there on our balance sheet. We'll likely find its way to forgiveness. And I would imagine it's going to be more sooner than later, because I do believe sometime in the near future the lows last year where they're going to get into principal pay down here soon.
And then as you think about the big picture PPNR growth I know aside a couple quarters ago where we looked at PPNR per share kind of ex-BHG, ex the excess liquidity and ex the PPP do you think this is a year where that where PPNR ex those three variables can grow, or is it more BHG is kind of helping you fund this expense growth this year, and maybe that’s more of a kind of a next year thing?
Well, there's no question - there is no question BHG is helpful but also reserve release and provision expense is also helpful to help fund some of that incentive growth. So that dynamic is very much front of the CPNR growth for all banks is relatively benign this year and in most cases it's negative. So we've challenged our folks. We think with a fair target it'll be positive. And hopefully we can work our way through it to see at least some incremental growth and be top quartile of the bearded.
Okay. And then if I get you one more just for Tim, Tim, what's the path to moving loans of criticized?
Yes. Catherine, good question. As you know the vast majority of that is our hospitality book. We go through every hotel loans when I say we that’s myself, our special assets manager and our credit officers every quarter every single loan $5 million and greater. And I've been thinking about that in particular with the hospitality book. We may have some moving off to criticize this quarter, second quarter. We'll have some I think more third quarter and more fourth quarter but they're still Catherine may be part of that book that will take until early 2022. So I think you'll start to see it accelerate in terms of positive migration out of criticize back into past. You'll see that start this quarter and accelerate third and fourth quarter.
And our next question comes from Michael Rose from Raymond James. Your line is now open.
Just wanted to touch on the fact that BHG is significantly adding to their staff this year and this reports that they may look into point of sale ending at their home improvement stores. Can you guys just clarify what - what the plans are there and where that stands? Thanks.
You know Michael I think what they think their hiring plans will be similar to last year for 2021 and then they got similar hiring plans for the next few years. I think they - they added 100 or 110 people in 2020. So they anticipate a similar number this year. The point of sale they are looking at all kinds of new product verticals and that's one of them. So yes they are definitely looking at it and they are building plans to go after that market.
Okay. I thought they had an employee kind of about 800 and they were going to add about 650 this year. What you're saying sounds a little bit different I guess. Was the article that I read about wrong or just where does that stand?
Yes, I think as we talked before that article was written off of an Internet-based thing that talked to the marketing. I think they'll get to the 650 over the next few years. But as it stands right now I think the number for this year is somewhere around 100 to 125 employers.
And then maybe just back to the NII guide this year it does seem like the PPP fees will be higher and then kind of the core will be low when - can you reconcile sort of versus 90 days ago and then are we at a point where ex-PPP that the NII will grow up from here is that the expectation?
Well we're very hopeful, of course the net interest expense ex-PPP will grow with core loan growth for sure. Right now, we're going to stick with our forecast that NII growth will be high single digits for this year.
And our next question comes from Jennifer Demba from Truist Securities. Your line is now open.
Thank you, can I circle back to the M&A topic Terry just curious you said that the higher currency now makes M&A a little bit more attractive. Can you talk about what kind of properties would be of interest to you right now from a size, geographic standpoint, we know you're kind of biased towards more commercially oriented properties?
Yes I appreciate that, they’re always making [indiscernible] about the topic, so it’s a very [indiscernible] to get why I think people understand what I'm trying to say. So anyway I appreciate the question.
I think on M&A - it is just obvious that if you have a stock to trade, the tangible book value is not much of an option to strike people going forward advantage versus fear that creates the opportunity to consider. To your question about what kinds of things would be considered, I think you know you got your whole range of options that I think everybody in the industry is considering own M&A which would include strategic combinations that involve ways, acquisition, billions of these.
So you got the whole realm of things that could be looked at there, I think when you get down into make an acquisition to make an acquisitions my own sense Jennifer is that I'm not interested in doing a lot of acquisitions that wouldn't produce something close to double digit accretion and earnings accretion.
And so you can make your own assumption zone so what does that mean. But just sort of back of the envelope math I think it means you've got to buy at least a $7.5 billion organization to create that kind of impact. And so you know the list as well as I do not like their 40 on math, they're going where that threshold of as you say being in a major urban market having a commercial orientation then producing that level of accretion. So hopefully that would shape what our considerations are.
And our next question comes from Brian Martin from Janney Montgomery. Your line is now open.
Thanks for taking the question. Most of my stuff has been answered. Just one or two things, Harold. Just on the going back to the expense guide for a minute. If you look at last quarter just kind of how you're thinking about it versus kind of hey laid it out this quarter. And the bottom line impact is there much change I think last quarter was a high single digit growth off of last year's base of around 5.70%, 5.80% and now this quarter you kind of tweaked it to be a 2% to 3% on the comp and then a decrease elsewhere. But just can you - when you get kind of a net number where you're thinking about is it still a similar spot to that 6.25% type of range, is that how it still shapes out with the new guide?
Yes. I think so Brian. I don't like it's moved much between at the end of last year and currently.
Okay. Similar guide. Okay. And then just one of the questions kind of give this Harold I mean is the loan forgiveness the PPP occurs. I mean it's most of that coming back in the cash and until you can redeploy it or how is it changing the size of the balance sheet, I guess is, is it occurs is it different now than it was previously.
Yes. I don't think so Brian. I think as those loans paid out, we'll try to deploy that cash into new loans some way somehow. Is that what your question was about?
Yes. Just kind of the average earning assets, I mean, I guess the loans get forgiven and it comes back to cash. They're coming back to cash right now until you can redeploy. That's kind of what's continuing to occur.
Yes. I think so. There's no doubt that we'll have additional liquidity from the PPP credits and hopefully we can get the loan engine moving and be able to get that money redeployed quickly.
Got you. Okay. All right. And then just one last one for Terry. Just on that last question on the M&A period, I understand what you're saying. Just geographically it's still I mean I guess is there more focus or more interest in - I know it's a limited number of targets, but would you be more interesting in adding to your existing footprint or I guess is it more likely that you would have to go to likely go to a different market than you're currently in. Given how you've talked about how much opportunity there is within your existing footprint.
Yes. I would say it's I guess again Brian to go back and think about the size of the acquisitions that we have to make, those things are and so forth. I think you have to draw a conclusion that you most likely go to different markets in existing markets, but again I'm not ruling that out. I'm just saying - it seems like you find more opportunities in additional markets than you do in existing markets that would meet that criteria.
Thank you. I am showing no further questions. This concludes today's conference call. Thank you for participating. You all may now disconnect.