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 fourth 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 of their website at www.pnfp.com. Today’s call is being recorded and will be available for replay on Pinnacle’s website for the next 90 days.
At this time, all participants have been placed in a listen-only mode. The floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star, one on your touchtone phone. Analysts will be given preference during the Q&A. We ask that you please pick up your handset to allow optimal sound quality.
Before we begin, Pinnacle does not provide earnings guidance or forecasts. During this presentation, we may make comments which may constitute forward-looking statements. All forward-looking statements are subject to risks, uncertainties and other facts that may cause the actual results, performance or achievements of Pinnacle Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond Pinnacle’s financial 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’s financial quarterly report for the quarter ended June 30, 2019. 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 reconciliation of the non-GAAP measures to the comparable GAAP measures will be available on Pinnacle’s financial website at www.pnfp.com.
With that, I am now going to turn the presentation over to Mr. Terry Turner, Pinnacle’s President and CEO.
Thank you Sherree. Good morning. As we always do, I’ll begin with this dashboard. As a reminder, it’s typically focused on revenue growth, earnings growth, and asset quality because we continue to believe that they are the three most highly correlated metrics to long-term shareholder returns.
Q4 was a good quarter for our firm. We continued to have strong balance sheet growth, already great asset quality got even better, and despite a little contraction in revenue and fully diluted EPS sequentially, we still had 2.5% year-over-year growth in revenue and 2.4% year-over-year growth in EPS.
Due to all the noise and adjustments primarily in previous periods, in many cases the non-GAAP measures may better illustrate the relative performance of the firm. As a reminder, the reason we begin each quarterly earnings call with that, it goes back five years is because as you can see, irrespective of M&A impact, deposit betas, outsized pre-pay offs, or any of the other hot buttons that have come and gone, our balance sheet grows, and until this quarter our growth in revenue and EPS have been remarkably rapid and reliable.
In 4Q19, we continued our share-taking balance sheet growth; however, as I mentioned on the last slide, despite being up year-over-year, both revenue and fully diluted EPS declined almost on a sequential quarter basis. My hope is that that’s not a surprise to anyone. I believe we had adequately signaled to the market last quarter that would be the case largely as a result of two key reasons.
Number one, BHG is in the process of converting a greater volume of their originations to hold on their balance sheet as opposed to selling them through their auction platform for immediate gain. From 30,000 feet, we agree that an increase in spread business should result in a more valuable franchise, so we’re supportive of that. I’m also happy to report that regardless of the increase in production for their balance sheet and the associated reduction in gain on sale revenue that found its way to our P&L in the fourth quarter, 2019 originations for BHG were at an all-time high, and that’s where the value is created in that firm, so we continue to expect that line item to be up 8% to 12% or so for 2020 over 2019. Harold will cover this in greater detail in just a minute.
Of course, the second major impact came from contraction in the net interest margin. Despite the contraction in NIM, we’ve made great headway on cost of funds in 4Q19 and expect further headway in first quarter of ’20, believing we may find the floor for our margins sooner than we had anticipated. Harold will also comment further on this momentarily.
As it relates to asset quality, virtually every quarter we report that there’s only one direction for asset quality to move, but believe it or not, we saw still further improvement in our already strong asset quality metrics in 4Q with meaningful reductions in non-performing assets and net charge-offs during the quarter.
I know by now everybody is familiar with the business case that we’ve made for the BNC acquisition. As you recall, the plan was to continue the high growth CRE platform that BNC has built and bolt on to a C&I platform which is the principal strength of our firm. The critical path to make that happen was to lever our ongoing recruitment confidence in order to attract and retain the best C&I and private bankers in the market. Specifically, we had said we’d hire 65 of them over a five-year period of time. As you can see, Rick Callicutt and his team surpassed the hiring target at this point in the plan by more than twofold. The environment for hiring great bankers in the Carolinas and Virginia has only gotten better since we launched our transaction there.
One of the reasons that I chose to continue to highlight this in fourth quarter is that it demonstrates just how vulnerable those banks are that dominate Carolinas and Virginia and Atlanta, and consequently that bears on our belief about the magnitude of the opportunity that we see in Atlanta.
Later, I’ll discuss our target markets, the rationale for them, and more specifically our focus on Atlanta, but I want to at least highlight the magnitude of the opportunity we see in our existing footprint by virtue of our overlap with Truist. 91.5% of our existing offices are within two miles of a Truist location, so we believe we’re extremely well positioned to capitalize on any vulnerability encountered as a result of that merger, so our outlook remains extremely optimistic.
That’s it from 30,000 feet. Let me turn it over to Harold to review the quarter in greater detail.
Thanks Terry. Good morning everybody. We’ve updated this revenue per share slide for fourth quarter results. As you can see, we continue to experience year-over-year double-digit revenue per share growth. The red dotted line represents the peer group’s year-over-year growth. We outpaced our peers on revenue per share consistently by a wide margin.
Our relationship managers have remained focused on gathering clients and generating incremental revenues for our firm. Obviously BHG’s performance has had a meaningful influence on these results. As we had mentioned before, we don’t apologize for that at all. We continue to expect 8% to 12% revenue growth from BHG in 2020. Even though BHG was down in the fourth quarter, BHG will be back in the coming quarters.
As you know, BHG has afforded us opportunities to invest in our franchise as well as provide significant tangible book value accretion. We’re also excited about de novo expansion into Atlanta and what that will do to our revenue per share growth over the next few years.
Now comparing the fourth quarter 2019 average loans to fourth quarter 2018, our growth was nearly 12%. At this time, we have no reason to believe that our loan growth outlook for 2020 will be any less than the high-single-digit to low-double-digit growth. As you know, we booked about $2.1 billion in loan growth in 2019. We have no reason to believe we won’t exceed that in 2020. We make that statement because of the success of our hiring over the last few years, the continued success we anticipate in hiring in our present markets, and the energy that comes to our franchise from Atlanta.
Next is an update to our loan pricing. Our loan mix average is approximately 50% to 55% LIBOR prime with substantially all the LIBOR credit being tied to 30-day LIBOR and about 40% fixed rate, with CRE being the primary contributor. Here in 2019, the weighted average coupon for LIBOR and prime-based credits for the loan book decreased by 57 basis points for LIBOR and 70 basis points for prime, which is somewhat of a victory given we experienced 75 basis points in rate cuts. The spreads from these categories actually widened in 2019 inclusive of the rate cuts.
Of significance to the spread on fixed rate credit, as a proxy for fixed rate spread performance and to keep it simple, we’ve traditionally used the five-year treasury as the benchmark. The five-year treasury decreased 82 basis points during the year while our average fixed rate loan book actually increased two basis points.
Now to deposits. Average deposit balances were up $1.7 billion year over year. Our average deposit costs were down 15 basis points in the fourth quarter of 2019 from the third quarter and stood at 1.1% for the quarter. Our charges continued to reduce deposit rates while at the same time increasing our deposit volumes to fund loan growth and reduce our dependency on the more expensive wholesale funding. To that point and as we mentioned in the press release last night, we’re modifying our annual incentive plan to include a deposit component aimed at growing low-cost core deposits.
Similar to prior years, the annual cash plan will still be based on corporate EPS targets which yield a top quartile earnings per share growth rate within our peer group. We felt like we needed to incorporate into the plan a deposit volume and cost component to energize our entire workforce around accumulating more low cost core deposits. We are optimistic about this change and how our associates will respond to accomplish this new incentive target.
More on deposit rates, our relationship managers, we believe, did a bang-up job on managing our deposit costs in this rate environment. In the negotiated rate bucket, we’ve achieved a 32 basis point decline since June of 2019. Our relationship managers are very much in tune with the rate environment and are prepared to have more discussions with our client base about rate decreases. At a minimum, we should experience decreases in CV rates for the next couple of quarters as repricing occurs.
For what it’s worth, our modeling is still suggesting a rate decrease in July and another in November. Our goal is a 50% beta for our interest-bearing deposit book, so we’ve got a way to go to achieve our targets, but we are off to a great start. It will take us a few more quarters on CDs. Our CD book is split about 60% customer and 40% wholesale. The wholesale CDs will roll down fairly quickly, giving us an average duration of slightly more than six months, while the customer book will take a little longer as its duration is less than 12 months.
As the chart on the right details, through the month of December and excluding CDs, we’ve experienced 30 basis points of rate declines with 75 basis points, and Fed funds decreases are a beta of 40%. If you include CDs, our beta is 32%; but again, the CD beta should increase over the next couple of quarters as CDs reprice.
All things considered, we believe overall deposit rates should be down in the first quarter. We do expect downward momentum in rates to be offset by our usual mix change in the first quarter as non-interest bearing deposit growth is pressured by clients reducing their balances for taxes and other payments that normally occur in the first quarter of each year.
As we enter 2020, we’re anticipating that our first quarter 2020 margin may be flat to down slightly. We believe we are getting very close to an inflection point related to margin compression.
The speculation of a credit cycle change should a recession occur has been on investors’ minds for quite some time. Right now as far as credit risk is concerned, based on our credit metrics and what Harvey and his team tell us, times remain pretty darn good. We’ve shown these charts before. The chart provides us even more comfort that we’re not booking the very large CRE credits. Credit remains at the forefront of our minds, so I hope we never appear complacent when we talk about credit. For the fourth quarter, we experienced probably our best credit quarter in quite some time with most of our credit-related ratios seeing better results in the fourth quarter and meeting the best mark we’ve posted in several years. We agree with other bankers that we’re not seeing any systemic issues that would cause us to change our perspectives about credit going into 2020.
Concerning CECL, I’ve read a few fourth quarter conference call transcripts on CECL impacts and day one and day two, and all that. CECL is important and we’ve burned a lot of time and, quite frankly, EPS over the last two years getting ready for the January 1 adoption date. To be honest, I’d rather be talking about market share gains and growth and share the excitement we have for this franchise.
That said, we’re in the final stages of validating the various models we would use to determine the allowance account each quarter. Preliminarily, we believe the allowance account should be less than 70 basis points as of January 1, 2020.
As we think about provision expense for 2020, obviously many factors go into projecting provision, including economic forecasts as well as our loan mix. In 2019, excluding charge-offs, if you were to divide our provision expense by average net loan growth, that provision expense was approximately 57 basis points for the year. We’re anticipating that we will be providing on net new loan growth in 2020 at a rate that falls between the rate of 57 basis points and the day one implementation rate, which as I mentioned, is projected to be less than 70 basis points.
Again, many assumptions [indiscernible], but if that works out, simplistically the impact CECL will have to our 2002 P&L should serve to reduce our EPS by $0.01 to $0.03 in 2020 when comparing the CECL methodology to the inherent loss model.
Now let’s get back to talking about revenues. These totaled more than $263 million in 2019, up more than 31% over 2018. BHG’s contribution was up nearly $40 million or nearly 76% year-over-year. More on BHG in a second. Our other fee businesses have a strong 2019 with residential mortgage leading the way, up approximately 67% year-over-year. Mortgage had a great 2019, correlating not only with drops in long-term rates but also with increases in the number of mortgage originators. Again, great markets are very helpful with this line of business, so we anticipate mortgage continuing with strong growth in 2020. We have no reason to believe we won’t see low double-digit fee growth in 2020.
Concerning BHG, it’s safe to say that BHG had a phenomenal year and we feel really good about their prospects going into 2020. Originations are at all-time highs and I expect stronger performance going into next year. As anticipated, BHG began to purposefully keep more of their loans on their balance sheet, thus realizing more interest income rather than relying as heavily on gain on sale as their primary revenue source. They have secured two separate funding sources which will allow them to warehouse their loans. Thus far, about $175 million in loans are in these two vehicles. As a result and as anticipated, BHG’s revenues were down from third quarter due to more of their loans being held on balance sheet.
A quick review on 2019. Originations increased $570 million during 2019, of which $350 million resulted in increases on balance sheet loan balances. You can see on the chart the ranges for growth for 2020 in all of these various areas that BHG is currently contemplating, so there’s no slowing down. BHG is at peak performance and intends to stay there.
Lastly concerning the chart at the bottom right, the network of banks buying their credit remains very active. They continue to increase the number of banks in their network, and you can see with little changes to yields and spreads.
Specifically as to earnings, earnings growth at BSG was tremendous in 2019 and it had a lot to do with better analytics, better marketing, better scorecards, branching into new verticals, and hiring more sales professionals. All of this hit on stride in the second quarter of 2019. BHG believes a fair earnings growth rate for 2020 is 8% to 12%. As to quarterly growth in Bankers’ Healthcare Group, we expect first quarter to be very much at the high end of their growth rate when compared to last year’s first quarter. We then expect quarterly results to be more or less flattened out for the rest of the year as BHG works the balance sheet strategy and their traditional gain on sale model at the same time.
The chart on the right is at the core of many questions we get about Bankers’ Healthcare Group. With the shift to more of a balance sheet model, you can see that they will not abandon gain on sale but believe they can reduce [indiscernible] and thus diversity BHG’s revenue stream, which is at the heart of the strategy, diversification of the revenue stream as well as diversification of their funding sources. They are targeting a longer term target of interest income as a percentage of total revenues of more than 40% to 50%, but suffice to say to get to 35% over the next two to three years will be a tremendous accomplishment.
Now briefly on expenses, as we note here, salary is up largely due to increased personnel and increased award levels in the incentive plan in 2019 versus 2018. Equipment and occupancy were up year-over-year due to increased technology costs and the branch rationalization project that we began and completed in 2019. As to our run rate moving forward, using the fourth quarter as a base, we’re anticipating expenses to increase in the mid single digit range in 2020. We’ve got a big hiring plan this year inclusive of Atlanta, which Terry will go into more detail in a few minutes. For the last few years, our expense to average assets excluding merger has been in the 1.9% range. We don’t see that changing much at all in 2020.
As I discussed on last quarter’s call, we’ve modified our longer term operating ranges. Our previous metrics were in place since 2012. We believe the granularity provided by those previous measurements served its purpose, so we’re now opting to go with a higher level of guidance with operating ranges for ROAA, ROTC, and tangible equity as our current guideposts.
For ROAA, we’re targeting 145 to 165 for the fourth quarter. We’re operating slightly outside that range at 139 but anticipate getting back within the range fairly quickly with BHG’s strategy change becoming less impactful to linked quarter results and as Atlanta builds out . ROTC should also respond in a similar fashion, and we are also operating in the high end of the range on tangible equity ratio.
Just to remind everyone, we’ve operated outside our published ranges in previous years, albeit they were the previous targets. I think it took us two-plus years to get to our non-interesting expense target in the early days. Same is true today, although we’re thinking it will take only a few quarters. The communication objective here is that we will find our way back to these ranges quickly.
With that, I’ll turn it back over to Terry to talk about our outlook for the Atlanta market.
Okay, thanks Harold. As most of you know, we’ve generally targeted the largest, fastest growing urban markets in the southeast. For some time, we’ve used this map to illustrate our desired geographies. There are 15 urban markets that were originally targeted in this triangle, from Memphis to D.C., and from Memphis to Charleston, South Carolina. Today, we’re operating in 10 of the 15 and it’s our expectation that we can generally produce double digit loan growth with no further market extension; in other words, we expect double digit growth from the 10 blue markets in which we currently operate. That’s a pretty enviable position, to have built a current market presence that should yield double digit growth.
In general, we’ve been operating right through the core of this triangle but not at the fringes, so the remaining targets include Atlanta, Georgia and Columbia, South Carolina to the south and the Hampton Roads area of Virginia, Richmond, Virginia, and Washington D.C. to the north. In my judgment, easily the most attractive of those remaining targeted markets is Atlanta.
Obviously we’ve chosen these southeastern markets because of their size and growth dynamics. They support our aspirations to build a large high growth bank, and we’ve chosen them because they’re familiar to us. We understand how business is done in them. Frankly, I love our model but I’m not completely sure if it would be as effective in, say, New England as an example.
Beyond our familiarity with them, we’ve chosen these markets because of our confidence in our ability to attract the best bankers and provide distinctive service to their clients, and that yields huge market share takeaway specifically from those large vulnerable competitors that currently dominate all these markets.
In short, from a strategic standpoint, we target large high growth urban markets that are dominated by Wells Fargo, SunTrust, Bank of America and Regions. That’s why I say in my judgment, Atlanta is easily the most attractive market to which we can extend. It’s the largest fast-growing market and is dominated by Truist, Bank of America, and Wells Fargo. All of them seem incredibly vulnerable at this time. Honestly, I view this as a once-in-a-generation opportunity to grow a big bank in one of the nation’s most attractive markets, perhaps even more exciting than the opportunity we saw and have seized in Nashville.
I don’t really want to spend a lot of time selling the Atlanta market - I expect most everyone is familiar with its size and growth dynamics; but quickly, it’s the ninth largest MSA in the country by population, it’s the number one moving destination in the nation for the ninth consecutive year, its median household income is consistently more than 50% higher than the southeast MSA median - more than 50% higher, and it’s an extremely rich market for businesses, which is the thrust of our firm. There are 26 Fortune 1000 companies headquartered there, 16 Fortune 500 companies, and 200 of the nation’s fastest growing private companies. Specifically, there are nearly 24,000 businesses with sales from $1 million to $500 million, which is our target market and where we excel.
Not only are the size and growth dynamics of the Atlanta market overwhelmingly attractive, frankly the more compelling attribute is the competitive landscape. It’s a market in a dramatic state of turmoil and diminished brand loyalty across the board. Sixty percent of the top 20 banks in 2009 are no longer in the market. Forty percent of today’s top 20 are there by way of acquisition, and many still exhibit the vulnerability typically associated with merger and integration.
Not only that, but I’m in possession of the Greenwich research on client satisfaction with banks in the Atlanta market. It would suggest that even prior to the announcement of the SunTrust-BB&T merger, the client satisfaction at those big banks that dominate the Atlanta market is even worse there than it is for them in Nashville, where we’ve been so successful taking their share, so the opportunity is ripe.
Instead of wasting a lot of time building a case for the obvious, the attractiveness of the Atlanta market, I’d really prefer to spend more time on our vision for Atlanta, what we intend to build and how we intend to do it. The best illustration of that is what we’ve already actually done in Nashville, another relatively large high growth market absolutely dominated by Bank of America, SunTrust, and Regions or its predecessor, AmSouth back in 2000 when we started Pinnacle on a de novo basis. Many of you will recall that the catalyst for our forming Pinnacle was the sale of First American Corporation, a $20 billion bank holding company headquartered in Nashville and the last large locally owned bank to be rolled up by out-of-state headquartered banks, in that case AmSouth.
It seems to me the parallel to Atlanta is obvious. Bank of America, SunTrust and Regions each had 15% to 22% deposit market share in Nashville when we started. I personally will never forget Don Kennedy of Kennedy Roofing Company coming in and opening our first checking account and our first line of credit. That was it on October 27, 2000 - one client. In other words, we had nothing when we set our sights on those three dominant banks, so this chart paints a pretty vivid picture of what we’ve been able to do since that time and how we’ve done it.
In terms of what we’ve done, at June 30, 2019 we continued to top the FDIC deposit share chart, where we’ve been for a few years now. My goal is not to gloat about our success or disparage our competitors, but I need to make sure I’m clear about the magnitude of the market share takeaway because it bears on the success we’re targeting in Atlanta due to competitive vulnerabilities we just discussed.
As you can see on the FDIC chart, today Regions has roughly 12% of deposit market in Nashville. Regions today represents the combination of what was once Regions, Union Planners and AmSouth, which on a combined basis had north of 30% market share in Nashville when we started in 2000, so that’s an 18% market share give-up by Regions and its predecessors since we started. I’m not going to go through and highlight each competitor, but suffice it to say virtually all the big banks that dominated the market when Pinnacle started from scratch in Nashville have given up market share, from which we have successfully grown.
More importantly, look at the Greenwich Associate data on the top right of the slide. First of all, this is data regarding businesses with annual sales from $1 million to $500 million. What’s plotted here is lead bank share for the five banks, with the largest business share in Nashville and the level of satisfaction that their clients express about them.
Let me start with the lead share position. As you can see, today we’re in a first position at the top of the chart and not by a little, by a lot. Roughly 26% of the businesses in Nashville view Pinnacle as their lead bank. Our next closest competitor has just 10% share. That’s a pretty amazing lead for having started at zero.
Then focusing on what our clients think about the differentiated level of service we provide them, roughly 90% give us a top box rating while some of our competitors are seeing the percentage of top box scores from their clients down in the 50s range, which is a phenomenon that suggests to me, regardless of our already dominant position, there is still meaningful ongoing market share takeaway opportunity in Nashville, which I’ll develop further in just a minute.
Now at the bottom left of the slide, we focus on how we take so much share from these large vulnerable competitors. According to Greenwich, the attributes down the left side of the chart are the things that are most valued by business clients. As you can see from the key, the darker green the box, the more dominant you are versus competitors on those items that matter most to businesses, and the brighter red the box, the more vulnerable you are to competitors on those same items. As you can see, we dominate the Nashville business market in terms of how easy we are to do business with, how effectively we’re able to demonstrate that we value long-term relationships, the net promoter score which is generally the measure of a client’s desire and willingness to recommend us to their peers, and our overall digital experience.
I don’t want to get too far from my central message here, but there’s one I can’t resist highlighting - that’s our clients’ view of our digital channel offering. As a business-focused bank, I love our number one position in the Nashville market as it relates to our business clients’ overall regard for our digital channel offering versus how the business clients at Truist, Bank of America and Wells Fargo regard their digital channel offerings.
All right, that’s enough of that.
Setting aside that, as you continue on down the chart, you can see the power of our unique hiring model as our relationship managers dominate, and then finally our treasury management systems also dominate the national market against these larger regional and national franchises.
Looking now to the lower right of that chart, I won’t walk you through each aspect of our execution in the market, but you can see that businesses who aren’t currently our clients hold us in extremely high regard, which speaks to the ongoing share takeaway potential I mentioned a minute ago, and our existing clients favor us with more business than the clients of our competitors favor them with their business. As I mentioned a couple of times now, it appears to me that despite our dominant position, we still have meaningful market share takeaway opportunity in Nashville. Our ability to seize vulnerabilities of these large banks is still picking up speed.
As you can see, our lead banks here in Nashville grew 3% last year - 3% lead bank share just last year. This model of hiring the best bankers in the market away from those large vulnerable competitors and then getting them to move their book of business by enabling them to focus on what clients value most continues to be a winning play against the banks that used to dominate Nashville and currently dominate Atlanta.
This is our aspiration in Atlanta in the next five years. We expect to aggressively recruit and hire the best bankers in the market from the large vulnerable regional and national competitors. More specifically, not dissimilar to the hiring approach we took to building our C&I focus in the Carolinas and Virginia, we expect to hire at least 10 relationship managers a year or 50 over a five-year period of time. We intend to arm them with the same treasury management, wealth management, and differentiated back office service levels that have been so effective against those banks that dominate the Atlanta market. Specifically, that would entail hiring roughly 15 to 20 additional revenue producers over the five-year period as treasury management consultants, wealth managers, brokers, mortgage originators, SBA loan originators, and the like.
We expect in general to open an office a year in the business-rich trade areas of Atlanta, places like East Cobb County, Buckhead, north Fulton County, just to name a few. We think we can build out a $3 billion bank in the Atlanta market over the five-year period. We expect to invest $0.03 to $0.40 in EPS during 2020 and cross breakeven in the third quarter of ’21, about an 18-month breakeven period.
After a lot of dialog with a number of candidates, we’ve selected Rob Garcia to build out our bank there. Over the years, as I’ve discussed the Atlanta opportunity, I’ve always indicated our goal wasn’t just to build an LPO or to just hire a small sales team, but to hire management that’s capable of operating across all banking disciplines and is capable of building a $2 billion to $3 billion bank. Rob has demonstrated an ability to do that. He’s a longstanding banker in the Atlanta market. He has been the Atlanta market president for Synovus, where he was running a roughly $5 billion bank. Prior to joining Synovus, by way of acquisition Rob was instrumental in starting Riverside Bank, a notable start-up there that was sold to Synovus in 2005, so Rob is uniquely qualified from our perspective. He’s well known to Pinnacle’s national base chief credit officer based on their previous work and relationship in Atlanta. He’s worked in a larger regional bank environment, which gives him fluency in all the sophisticated products provided by Pinnacle and those large regional and national franchises, but he has a thorough understanding of the community banking model that Pinnacle uses to differentiate itself from those larger banks.
Since joining us in late December, he’s already hired three highly successful relationship managers - one C&I lender, one private banker, and one CRE lender, along with their key support personnel, and the hiring pipelines appear to be filling up pretty rapidly, so we’re off to a fast start and excited about the incremental growth opportunity the Atlanta market provides us. As I said earlier, we view this as a once-in-a-generation opportunity and we intend to make the necessary investments to seize it.
So we’re extremely excited about our prospects in 2020. Here’s what we’re targeting: continued double digit loan growth, similar double digit growth in core deposits while we continue to bid our cost of funds down, and low double digit fee growth. Longer term, we intend to capitalize on the economic and competitive landscape in our target markets, which is fabulous; continue hiring revenue producers throughout the footprint and additionally in Atlanta - that’s always been our revenue growth engine and, honestly, it’s never looked better; and finally, to continue to grow tangible book value because it’s my belief that companies that can compound tangible book value grow their share price meaningfully.
Sherree, with that, we’ll stop and take questions.
[Operator instructions]
Our first question comes from Jennifer Demba with SunTrust.
Good morning.
Hi Jen.
Terry, the Atlanta expansion makes a ton of sense for you guys. Do you see a potential other de novo effort for Pinnacle in the next few years if opportunities should arise, or do you think you’ll try and just focus in on Atlanta and be--yeah, and focus in on Atlanta?
That’s a great question. Jen, as you know, I’m hesitant to make comments about we’re always going to do this or we’re never going to do that or those kinds of things, because the opportunities change, landscapes change, all those kinds of things, so I don’t want to put myself in a position to say, we just wouldn’t do another de novo expansion.
But having said that and to put it in context, to be honest with you and sitting here right now, my thrust is Atlanta. It’s an unbelievable opportunity. It’s what we want to work on. You know the market better than I do, but it is so large and high growing, and the competitive landscape is so ripe, and what we do is so well suited to the opportunity, and it just becomes sort of the top of my list of what I want to work on. So, as a company, that’s where we’ll dedicate a lot of resources, and quite honestly, that’s where I’ll personally invest a meaningful amount of time.
Okay. Harold, you mentioned something about the growth rate for BHG in the first quarter of ’20, and I don’t think I understood it. Could you repeat that?
Yes. Trying to build off the fourth quarter of 2019 but also comparing it to the first quarter of ’19, we think the growth rate for the first quarter of this year will at least be 12% over the first quarter of last year.
Okay. Any thoughts on a tax rate for 2020?
Yes, we don’t anticipate the tax rate to change very much in 2020. It ought to be -- the ETR ought to be pretty similar.
Great, thanks a lot. Good quarter.
Thank you.
Thank you. Our next question comes from Steven Alexopoulos with JP Morgan.
Hi, good morning everyone.
Hi Steven.
I wanted to start first on the margin. Harold, I thought you said the NIM would be flat to down in 2020. How do you think about the NIM over the near term?
Yes, that would be for the first quarter.
So that is the first quarter?
Yes, we think it will be--it won’t be down much if it goes down, so hopefully we’re close to that inflection point here within the first half of the year.
Got you, and then stabilize beyond 1Q’20?
That’s our current planning assumption, Steven. We’ve still got a July rate cut in there. Whether or not that happens or not, I’m not sure; but we did a lot of, call it initiatives last year to kind of reduce our asset sensitivity, and that has basically neutralized our balance sheet with respect to rate cuts.
Got you, okay. Then on the Atlanta expansion, I’m curious how many relationship managers do you expect to add in 2020, and how did you come up with 50 as the right overall number?
Yes, I guess the thrust is sort of how fast can you hire and assimilate people, and so I think again in working with Rob Garcia, who is our market leader there, it felt a comfortable pace to us to hire 10 relationship managers, and I think you might think about it this way, Steven, that it’d be maybe a number like six, C&I bankers in the 10, maybe a number like 3 private bankers in the 10, and maybe a number like 1 CRE banker in the 10. And so, that seemed liked a comfortable build-out pace for us, and so it’s just simple math from there - 10 a year, five years is 50. That’s not to say we wouldn’t hire more if we had an opportunity, which we may well have, but that’s sort of the core of what we’re trying to do as we build the C&I platform.
I also indicated that we’ll build out the other fee business professionals as well, which would include treasury management consultants, wealth managers, primarily brokers, mortgage originators, and SBA loan originators and so forth, and so compared to the 50 over five years, that’s probably another 15 to 20 revenue producers that would be added to that.
Okay, that’s helpful. Just one final question. Looking at the loan growth guidance for 2020, you included high-single digit in the range. Are you just being conservative, or do you see something that could cause loan growth to slow this year? Thanks.
Yes, I think we’re being more about--it’s more about being conservative than it is any kind of statement regarding what kind of energy we have within the franchise. We did $2.1 billion, we ought to at least do that here going into 2020.
Okay. Thanks for all the color, and thanks for taking my questions.
All right, thanks Steven.
Thank you. Our next question comes from Catherine Mealor with KBW.
Thanks, good morning.
Morning.
Harold, in your earlier remarks, you talked about how your incentive plan relies on EPS growth versus as you compare it to peer EPS growth, and so as we think about what we’re seeing across maybe consensus, across midcap banks, there’s generally flat to maybe even down EPS growth for most of your peers. How do we think about what--and I know you’re not going to give us your goal, but just conceptually, is it fair to assume that there is some level of EPS growth in 2020 over 2019 to get a full incentive compensation payout this year?
Yes, I think that’s a fair assertion. There’s quantitative and qualitative factors going on. You’re right - when you line up our peer group, there’s probably half of them that are now with estimates out there for negative earnings growth in 2020 over 2019, so you might say it’s kind of like stepping over a rock or something to get to top quartile. But at the end of the day when you line it all up and you start thinking about, okay, how are you going to propel these shares, what’s going to make these shares move, what kind of catalyst might be there, so we use that incentive plan to help create that energy, so you should assume that there’s going to be outsized growth. I think if you line up our peers, you can probably see what kind of targets we’re shooting for.
Great, that’s [indiscernible].
I don’t know if I got to your question, but that would be my response.
I think that’s right. I would assume that there’s some level of EPS growth for you to get a full payout, so just wanted to kind of confirm that. That makes sense.
Then maybe a follow-up on that and just thinking about the expense build-out. If we take your $0.03 to $0.04 EPS investment for Atlanta, that’s about, call it $3.5 million, which is a very small piece of the overall expense growth this year, if you kind of do it on a dollar basis. Where is the rest of the expense growth coming from, or is there some kind of revenue component also in that $0.03 to $0.04 investment?
There definitely is a revenue component. Terry’s not been bashful with Rob in assigning growth rates and all that sort of stuff, so he’s got himself a full-time job, I’ll say it like that. There is revenue growth in that number for Atlanta.
The expense growth, we’ve got a significant hiring plan coming up on us, and that comes with an additional incentive cost and all that; but that also gives us flexibility with some respects. The easiest thing we can get quick returns off of with respect to our plan is to throttle back on expenses or otherwise use that incentive plan to help us perhaps offset revenue shortfalls, and we’ve done that in the past so 2020 will be no different. But what we’re speaking to today in our comments is a fairly significant hiring plan that we’ve got going into next year.
Catherine, I might just add to Harold’s comments there, Jennifer Demba asked a great question really about okay, so would you take on other de novo opportunities in addition to Atlanta, and again that’s not in our plan. Our plan is to focus on the markets that we’re in, plus Atlanta. But I wouldn’t want anybody to lose sight of we’re still building out a lot of revenue capability in markets like Charlotte and Raleigh and Greenville and Charleston, and I think you probably saw in the fourth quarter, I think we added 18 revenue producers in the fourth quarter alone last quarter, fourth quarter of 2019, so we’re still believing that this competitive landscape is right up our alley and we’re still finding great opportunity to hire banks largely from these large banks that we view to be so vulnerable.
Anyway, I’d just give you as color on the expense build.
That’s helpful. Great, thank you so much.
Thanks Catherine.
Thank you. Our next question comes from Stephen Scouten with Piper Sandler.
Hey guys, good morning. I’m curious, I think you said on CECL, maybe it was a $0.01 to $0.03 drag into your 2020 expectations, so does that imply you think credit trends should kind of continue at their current pace and I guess provisioning would be in the $30 million to $35 million range, based on that math?
Yes, I don’t think that’s too far off. We spent a lot of time with the credit administrators trying to figure out what kind of charge-off forecast they might have for 2020, and we’re just not seeing anything that would alarm us that we’re going to see increased provisioning related to the charge-offs for 2020.
Got it, okay. Digging further into some of Catherine’s questioning there, you guys noted a little bit below the ROA target here in the fourth quarter, but obviously not for the full year. You did a great job on the full year relative to that target, but it seems like it will be difficult really to deliver EPS growth year-over-year given NIM headwinds, mid-single digit expense growth, and maybe a dip into the high single digits on the loan growth front. How confident are you around that ability to grow EPS year-over-year apart from maybe a reduction in incentive comp?
I think it’s going to be a hard year. Obviously the yield curve is not helpful. It’s improved some over the last short term period here, but--. The confidence we have goes back to the core - it’s about what markets you’re operating in and what kind of objectives you lay out on these people, to say okay, what’s that old saying, without an objective, any path will get you there, or something? You’ve just got to kind of lay out these goals.
I think there was a question earlier about how do we get to 50 people? Well, a lot of that is just sitting down and going eyeball to eyeball with people and saying, hey, you’ve got to do this for us to get to the numbers we need to get to, so we laid that out and say, okay, you need to hire this many people. That’s the way we’ve operated this firm now for almost 20 years, and we think that at the end of the day, our folks will deliver what we’ve tasked them to deliver. It’s not that difficult, actually, as to how we operate this firm.
Stephen, I might add to Harold’s comments, just for whatever it’s worth. You know this - nobody knows the future, including me, and I don’t know what all the market conditions are going to do, how they might change and what the impact of the political discourse in the country is going to be, or what the impacts by North Korea, Iran, all those sorts of things. But if you’re talking about an environment that looks very much like the environment that we’re in today, I can’t imagine this company is not going to produce earnings per share growth.
Okay, great. Then just maybe last thing, I’m curious, you guys still have a pretty sizeable authorization on the share buybacks, a little less active this quarter. When you’re modeling and you’re thinking about the company for next year, how are you thinking about capital planning and the share repurchases in particular?
Yes, we’re still planning on using the rest of our allocation. We’re likely to use it here over the next three quarters, or four quarters. We intend to use it.
Okay, great. Thanks for the color, guys.
Thank Stephen.
Thank you. Our next question comes from Jared Shaw with Wells Fargo Securities.
Just looking at the BHG with the color on first quarter, should we expect then that the rest of the year, the growth is sort of a steady ramp from here, or will it be a little lumpy?
Yes Jared, we’ve had a lot of conversation with BHG over the years about lumpiness. I think the way it’s planned out this of what they’re shooting for is that you’ll see a ramp-up from the fourth quarter into the first quarter, and then a ramp-up into the second quarter, and then that growth rate will basically be flattish to slightly up for the rest of the year. It’s been somewhat of a bell curve for a few years, so I think this year they’re planning on kind of a ramp-up in 1Q and 2Q and then kind of flattish into the last half of the year.
Do those two funding facilities, does that provide enough funding for them to meet their goals, or is there an expectation that they’re going to have to get additional funding as we go through the year?
Yes, the plan for them is to fund up here fairly quickly and then what they’ll do is they’ll securitize--they’ve got a $200 million facility, they’ll securitize that facility and then in effect sell it off to investors, not the asset, just the funding part. They’ll borrow money to set up a security and then they’ll reload the warehouse.
Got it, great. Then on the margin, with your expectation for a July cut there, if we don’t see a July cut, is that incrementally positive to margin in the second half or are you running neutral enough now where it should be relatively neutral overall?
Oh, I think it will be positive. I don’t think it will be a big positive, but I think it will be positive.
Great, thanks very much.
Thank you. Our next question comes from Brock Vandervliet with UBS.
Good morning, thanks for the questions. Just to follow up on those, if I understand this, BHG’s funding is now set between what they’ve got organically in terms of the balance sheet runway plus the securitization strategy. Is there any missing piece that’s left here, or are they set?
I think they’re pretty much set. I think they’re still working through documents on the securitization piece, but they intend in the second quarter to kind of do that first issuance.
Did Pinnacle expand its financing of BHG, or was that unchanged?
I don’t think it has changed.
Okay. Harold, I think you’ve done a good job in terms of orchestrating this shift we see in funding, running down some of the CDs. How much more can you go on the wholesale CD front? Remind us how large that portfolio is.
Yes, hold on. Give me a second. I’ll try to give you the numbers. I appreciate the compliment in front of Terry - that’s good.
Yes Brock, I was kind of hoping for one too, so I could get one, that’d be good.
I’ll work on it.
The CD book, we’re probably talking about--oh heck, $300 million, $400 million.
Okay.
About 100--or I’m sorry--no wait, I’m sorry, I’m talking to you wrong. Probably about $2 billion in CDs.
And how much of that is wholesale?
I think basically about $2 billion is about wholesale. I’ve got $1.7 billion in brokered and about, call it non-core retail, about $800 million in that. That’s kind of my wholesale book.
Okay. Terry, I’m not sure this is a compliment, but you’re obviously no stranger to acquisitions. As you looked at the Atlanta market, clearly you’ve got a horse there you’ve found with a leader, but how did you evaluate that versus a possible acquisition?
Well, I think there’s two or three things that are important to me. Goal one is to get to the market. We’ve sort of had it as a target for a long time, but the vulnerability really accelerated in Atlanta over the last 12 months in the competitive landscape, so it just got important to me to get there. I’m not insincere when I say it may be as big an opportunity as the one we seized in Nashville. Then underneath that, obviously we had discussions about M&A and about the de novo model. I think I’ve said all along I’d be prepared to go either way, and I still say that would reflect that my mindset. I would have been willing to go either way. It gets back to can you hire somebody and how big a book can they build, and then if you do an M&A transaction, what are the ongoing implications of that, what’s the price going to be, what’s the accretion going to be, all those kinds of things. So at least at this moment, the de novo start felt best to us.
Got it, okay. Thanks for taking my questions.
All right.
Thank you. Our next question comes from Tyler Stafford with Stephens.
Hey, good morning guys. Just two more for me. I just wanted to follow up on the inclusion of the core deposit growth within the incentive plan. How much weighting does that carry in the plan this year?
It will be a similar weighting to the revenue share that we’ve had in prior years, so it will be around 20% or so.
Okay. Then I just wanted to clarify, as you guys pencil out the 2020 year with the guidance and outlook you’ve laid out, you do think that you can get back within your ROA and ROTC target range over the next couple quarters with that July and November cut assumption?
Yes, I think so. I think the ROAA target will be a little--I mean, it’ll be a little easier than the ROTC target, but we still think that our modeling shows that we’ll get back within it.
Okay. Should there be much balance sheet--the difference between loan growth and overall balance sheet growth, will that differ much, or total balance sheet growth should still be kind of high single digits, low double digits?
Yes, I think balance sheet growth and loan growth will run kind of similar growth rates.
Okay. All right, thanks Harold.
Thank you. Our next question comes from Brian Martin with Janney Montgomery.
Hey guys, good morning. Harold, just one thing, back to the margin. If you don’t get the two cuts that you expect, is there upside to the margin? Is that how we should think about it given the plans you’ve outlined? It sounds like stable with the cuts, and then maybe some upside if you don’t get the cuts.
I think it is that way. I think there’s going to be a slight positive to a no-cut environment or a flat Fed funds rate for the year. We did a lot of work last year to, like I said, remove asset sensitivity, so I think we’re much more neutral with respect to interest rate risk management this year.
Okay, perfect. I think you said on the expense outlook that it’s a mid single digit growth rate. Is that of off ’19, and does that include the Atlanta build-out, the cost for that?
Yes, it’s off of the fourth quarter run rate, and it’s got a component in there for Atlanta.
Okay. Last thing on the clarification on BHG, I think the revenue’s in--I thought your comment was that the revenues in BHG are up 8% to 12% in ’20 versus ’19, and 2019 was a $90 million number. Is that the right math, how we’re thinking about that?
Yes.
All right, that’s all I had. Thanks so much.
All right, thanks Brian.
Speakers, I’m showing no further questions in the queue at this time. I would now like to turn the call back over to you for any further remarks.
All right, I would just say that our view was fourth quarter was a good quarter for us. It’s really highlighted by the improvement in cost of deposits, continued balance sheet growth, and continued hiring, and our outlook for 2020 continues to be strong running exactly the same program with the addition of the high profile Atlanta market.
Thanks for joining us.
Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.