Q4 2019 Earnings Call
Good morning, everyone and welcome to the Pinnacle financial partners fourth quarter 2019 earnings Conference call.
Hosting the call today from Pinnacle financial partners Mr., Terry turning Chief Executive Officer, Mr., Harold Carpenter, Chief Financial Officer.
Please note pinnacle's earnings release, and this mornings presentation are available on the Investor Relations page on their website at Www Dot P and S.P. Dotcom today's call is being recorded and will be available for replay on pinnacle's website for the next 90 days.
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Before we begin pinnacle does not provide earnings guidance or forecast. During this presentation. We may make comments, which may constitute forward looking statement.
All forward looking statements are subject to risks uncertainties and other factors that may cause <unk> actual results performance or achievements of pinnacle financial to differ materially from any results expressed or implied by such forward looking statement.
Many of such factors are be on pinnacles 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 Thirtyth 2019.
Cynical 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 FCC 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 I'm pinnacle's financial website at Www Dot P.N.S.P. dotcom with that I am now want to turn the presentation over to Mr., Terry Turner, Pinnacle's, President and CEO .
Thank you Gerry good morning, and we always.
It's dashboard.
We focused on revenue grow earnings grow and asset quality.
Any blade that there are three most highly correlated metrics to long term shareholder returns.
Oh I'm.
We continue to have strong balance sheet growth already great asset quality got even better and despite some contraction in revenue.
Yes.
And to represent year over year, gross revenue and 2.4% growth year over year growth and easy yes.
Oh gosh, primarily in previous periods in many cases, the non-GAAP measures maybe better right.
Farm.
As a reminder, yes, each quarterly earnings call. The data going back five years is called as you can see irrespective of the M&A impact.
Outside the pre pay offs or any other hot buttons and come and go our balance sheet growth and until this quarter our growth in revenues they'd be hasn't been remarkably rapid and reliable.
And for a few 19, we continued our share taking balance sheet growth.
As I mentioned on last slide despite being up year over year, both revenue and fully diluted EPS declined on a sequential quarter basis.
That's not a surprise anyone I've laid with adequately signal to the market last quarter that conveyed to gauge largely as a result of two key reasons number one bids jayson process converting a greater volume and their originations hold on their balance sheet as opposed to sell their auction platform for me gain.
30000 feet, we agree that integration spread business should result, more by 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 revenues advance wed RP, though in the fourth quarter.
29 pain origination for Big Gee were at an all time high and that's where the value created in that from so we continue to expect that line item to be a page, 12% or so for 2020 over 29. They arent covered this in greater detail in just a minute of course the second.
Majoring in fact came from contraction net interest margin. Despite contraction and then we made great headway on cost of funds in Fourq, you 19, and expect further headway in first quarter of 20, leaving we may find floor for our margins sooner than we had anticipated parallel 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 labor or not so still further and bring our already strong asset quality metrics in fourq, you with meaningful reductions in nonperforming assets and net charge offs during the quarter.
I hope I know everybody familiar with the business cases, we made for the B and C acquisition. As you recall plan was to continue the high growth CRT platform B and C is bill and bolt on to that of see an outlet warm which is the principal shrink buyer from the critical path to make that happen most lever our own.
So on recruitment confidence in order to attract and retain the best saying that in private bankers and Mark.
Basically we had said we'd higher 65 of them over a five year period of time, you can see rig count good and his team pass the hiring targets at this point in the plan by more than two follow the environment for hiring great bankers in the Carolinas in Virginia has only gotten better since we launched our transaction there.
One of the reason that Joe to continue the Allied is in fourth quarter is it demonstrates just how vulnerable those banks are that nominated Carolinas in Virginia.
And Atlanta, and consequently that bears on our belief that magnitude of the opportunity that we see in Atlanta.
Later, I'll discuss our target markets, the rationale form and more specifically our focus on Atlanta, but element at least highlight magnitudes opportunity, we see in our existing footprint by virtue of our overlap throughs, 91.5% of our existing offices are within three miles of a true. This location. So we believe works.
Frankly, well position to capitalize on any vulnerability counted as result of that merger. So our outlook remains extremely optimistic.
30000 feet, let me turn it over to hire on to review the quarter in greater detail.
Thanks, Jerry 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 groups year over year growth, we outpaced our peers all revenue per share consistently Bob.
Mark.
Our relationship managers have remained focused on gathering clubs and generating incremental revenues for our.
Obviously be Hds performance has had a meaningful influence on these results as we've mentioned before we own apologize for that at all we continue to expect 8% to 12% revenue growth from Big HKG in 2020, even though she was down in the fourth quarter be achievable, we back in the coming quarters.
As you know BSG have 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 with nearly 12% at this time, we have no reasonably 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 reasonably we want to 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 president markets and the energy that comes to our franchise from Atlanta.
Next is an update to our loan pricing our loan mix averages approximately 50% to 55% LIBOR or prime will substantially all of a lot more credit being tied to 30 day LIBOR in about 40% fixed rate with CRT being the primary contribute very.
During 2019, the weighted average coupon for LIBOR and Prime based credits for the loan book decreased by 57 basis points reliable or and 70 basis point.
Which is somewhat of a victory given we experienced 75 basis points right.
So the spreads in these categories actually widened in 2019 inclusive of a rate cuts.
Significance of the spread on fixed rate credit as a proxy for fixed rate spread performance and keep it simple we traditionally used the five year treasury as the best for 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 pubs.
Average deposit balances are up 1.7 billion year over year, our average deposit costs were down 15 basis points in the fourth quarter 29 team from the third quarter and stood at 1.1% for the quarter.
Our charges continue to reduce deposit rates, while at the same time, increasing our deposit volumes to fund loan growth and reduced 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 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 would 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're optimistic about this change and how our associates will respond to accomplish this new incentive targets.
Moral deposit rates our relationship managers, we believed in a bang up job on managing our deposit costs in this rate environment.
Negotiated rate bucket, we've achieved a 32 basis point decline since June of 29 team our relationship manager who are very much in tune with the rate environment I'm prepared to have more discussions with our client base about rate decreases at a minimum wisher experienced decreases in CD rates for the next couple of quarters at repricing occurred.
For what it's worth our modeling is still suggesting a rate decrease in July and another in November our goal is a 50% bagel for interest bearing deposit book. So we've got a ways to go to achieve our targets, but we are off to a great start.
It will take us a few more quarters on Cds are CD book is split about 60% customer and 40% wholesale the wholesale Cds will roll down fairly quickly given us an average duration of slightly more than six months, while the customer book will take a little longer as this duration is less than 12 months.
As the chart on the right detailed through the month of December excluding Cds, we've experienced 30 basis points of rate declines with 75 basis points at that funds decreases our beta of 40%.
If you include Cds, our beta is 32%, but again the CD beta should increase over the next couple of quarters Stds reprice.
All things considered we believe overall deposit rate should be down in the first quarter, we do expect downward momentum at rates to be offset by our usual mix change in first quarter as noninterest bearing deposit growth is pressured by clogs, reducing our 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're getting very close to an inflection point related to margin compression.
The speculation of credits like change should a recession occur has been on investor demand for quite some time.
Right now as far as credit risk of concern based on our credit metrics and what Hardy and his team tell us top remain pretty darn good.
We've shown this chart for the chart provides us even more comfort that were not booking very large the very large CRT credits credit remains at the forefront of our mine. So I hope we never a peer 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.
Third quarter and many of the best Mark we've posted in several years.
So we agree with other bankers that we're not seeing any systemic issues that will cause us to change our perspectives about credit going into 2020.
Concerning seasonal.
At a few fourth quarter conference call transcripts on seasonal impacts and day, one end date to and all that seasonal is important and we borrowed a lot of time and quite frankly EPS over the last two years getting ready for the January Onest adoption day.
Beyond I'd, rather be talking about market share gains in growth and share the excitement we'd have for this franchise that said we're in the final stages validating the various models we were used to determine the allowance account each quarter preliminarily. We believe the allowance accounts should be less than 70 basis points as of January the first 2020.
So as we think about provision expense for 2020, obviously, many factors go into projecting provision, including economic forecast as well as our loan mix in 2019, excluding charge offs. If you were to advice to our provision expense by average net loan growth that provision expense was approximately 57 basis point.
Thanks for the year.
We're anticipating that we'll 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 right, which as I mentioned perjure is projected to be less than 70 basis points again, many assumptions touch, but if that works out simplistically the into.
Actually so we'll have to our 2020 female.
Served to reduce our EPS by one to three cents in 2020, when comparing the seasonal methodology for the inherent last month.
Now, let's get back to talking about revenues.
These total more than $263 million in 2019 up more than 31% over 2018.
We issued contribution was up nearly 40 million are nearly 76% year over year.
More on BHP and the second our other fee businesses had a strong 2019 with residential mortgage leading the way up approximately 67% year over year mortgage had a great 2019 core lightning not only with drops and long term rates, but also with increases in the number of mortgage originators again, great markets are very helpful. With this line of business sell.
Great mortgage continue with strong growth in 2020.
We have no reason to believe we won't see low double digit fee growth in 2020.
Concerning BSG Assaf say that DSG had a phenomenal year and we feel really good about their prospects going into 2020.
Originations were at all time highs and expect stronger performance going into next year as intent as anticipated DSD began to purposefully keep more of their loans on our balance sheet that 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.
Mr loans, thus far about $175 million in loans are in these two vehicles.
As a result, and as anticipated DSG revenues were down from third quarter due to more of their loan 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 ranges for growth for 2020 in all of these various areas that BSG is in currently contemplating. So there is no slowing down BSG is at peak performance and it tends to stay there.
Lastly concerning the chart the bottom right the network of banks by 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 asked earnings earnings growth BSG was tremendous in 2019 and have a lot to do with better analytics, better marketing better scorecard branching into new verticals and hiring more sales professionals.
All of this hit a new stride in the second quarter of 2019.
We believe a fair earnings growth rate for 2020 is 8% to 12% as to quarterly growth 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 BSG works the balance sheet strategy.
And our traditional gain on sale model at the same time.
The chart on the right is that the core of many questions we'd get about makers healthier group with the shift to more of a balance sheet model you can see that they will not abandoned gain on sale, but believe that can produce impact and thus diversified be issued revenue strength, 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 the 35% over the next two three years will be a tremendous accomplishment.
So now briefly on expenses.
As we note here salaries up largely due to increased personnel and increased toward levels in the incentive plan in 2019 versus 2018 equipment in oxy are up year over year due to increased technology cost in the branch rationalization project that we began and completed in 2019.
As to our run rate moving forward.
He's in 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 are Expensed average assets, excluding merger has been in the 1.9% right. 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 we granularity provided by those previous measurement served its purpose. So we're now opting to go with a higher level guidance with operating ranges for ROI ROTC.
The intangible equity as our current guidepost.
For oral aka we're targeting 145 to 165 for the fourth quarter, we're operating slightly outside that range of 139, but anticipate getting back in within the range fairly quickly with BHP strategy change, becoming less impactful to linked quarter results and its Atlanta builds out.
ROTC should also responded with similar fashion, we're up and we're also operating in the high end of the Rachel tangible equity ratio.
Just to remind everyone. We've operated outside our publish ranges and put in previous years, albeit they were than previous targets. I think it took us two plus years to get to are not extra expense target in the early days same is true today, although we're thinking they will take on 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 quarter to tear you talk about our outlook for the Atlanta market.
Okay. Thanks, Harold most of you know, we've generally targeted the largest fastest growing urban markets in the southeast for some time, we view this map to illustrate our desire geographies. There 15 urban markets that were originally targeted in this triangle permit this the DC 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 produced 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 pretty enviable position to be to bill.
Our market presence that should yield double digit growth.
In general we've been operating right the core there's 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, Virginia, Richmond, Virginia in Washington, DC to the note in my judgment easily the most attracted to those remaining targeted market.
Isn't Atlanta.
Obviously, we've totally southeastern markets because of their size in growth dynamics. They support our aspirations to build the large high growth by and Weve turned them because they're familiar to us we understand how business is done and them frankly, I love our model, but I'm not completely sure if it would be as a big the man.
Say, new England as an example.
Beyond our familiarity with them we've chosen these market 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 bone vulnerable competitors that currently dominate all of these markets.
So in short from a strategic standpoint, we target large high growth urban markets that are dominated by Wells Fargo Suntrust Bank American regions. That's why I say in my judgment Atlanta. These are the most attractive markets, which we can extend it's the largest fast growing market and is dominated by truest Might've American Wells Fargo.
All of them Zemin credibly vulnerable at this time honestly I view this as a once in a generation opportunity to grow Big bank in one of the nation's most attractive market, perhaps even more exciting and the opportunity we saw end of season in Nashville.
I don't really want to spend a lot of time selling the Atlanta market Act Fig, most everyone familiar with it size and growth dynamics, but quickly it's the ninth largest them as they in the country by population. It's the number one moving destination in the nation for the ninth consecutive year. It's median household income is concerned.
Recently more than 50% higher than the southeast him as a median more than 50% higher and it's an extremely rich market for businesses, which is thrust of our from their 26 Fortune 1000 companies headquartered there 16, fortune 500 companies and 200 or the nation's fastest growing private company.
These specifically they are nearly 24000 businesses will sales from 1 million to 500 million, which is our target market and where we excel.
Not only or the size and drove dynamics of the Atlanta market overwhelmingly attractive frankly, the more compelling attribute is the competitive landscape. It's a market in a dramatic say the turmoil and diminished brand loyalty across the board 60% of the top 20 banks in 2009 are no longer in the market for.
40% of today's top 20, or they are by way of acquisition in many still exhibit vulnerability typically associated with merger and integration.
Not only that but I am in possession of the Greenwich research on client satisfaction with banks in the Atlanta market. It would suggest that even prior to the announcement with Suntrust BBSI merger the client satisfaction that those big banks to dominate the Atlanta market is even worse there than it is form in Nashville, where we've been so success.
We'll take in their share so the opportunity is right.
So instead of Weston lot of time building engage with lobbyists the attractiveness of Atlanta market I'd really part has been more time on our vision for Atlanta, what we intend to build and how we intend to do.
The best illustration 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, our spreads as ramps out back in 2000, when we started pinnacle loan de Novo basis. Many of you will recall that the catalyst prior forming pinnacle was the sale of first American Corporation $20 billion Bank holding.
We're in Nashville, and the last large locally owned bank to be rolled up by the state headquartered banks in that case amps out.
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 never forget non Kennedy of getting the resin gun money coming in and out in our first check in account in our first line of credit that was it on October 27, 2001 client in other words, we had nothing when we set our sights on those three banks. So this jar paying pretty bid to think through 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 continue at the top the FDIC deposit share chart. When we bid for few years now and my goal is not the blood about our success with disparage, our competitors, but I need to make sure unclear about the magnitude of the market share takeaway because it buyers on the success we are targeting in Atlanta.
Due to the embedded vulnerabilities, we just discussed.
You can see on FDIC jar today regions as Russ roughly 12% of the deposit market in Nashville regions. Today represent the combination of what was once regions Union planners and I am style, which on a combined basis at north of 30% market share in Nashville, whom we started in 2000.
So that's an 18% market share give up by regions than its predecessor, since we started and I'm not going go through and allied each competitor, but suffice it to say virtually all the big makes the dominated market from pinnacle started from scratch and national have given market share from which we have subsidiary.
We grown.
More importantly look at the Greenwich Associates data on the top right of the slide.
First of all this is data regarding businesses manual sales from one to 500 million what flooded here is Lee make share for the five banks with the largest business share in Nashville, and the level of satisfaction that their clients expressive bottom.
Let me start with elite share position as you can see today, we're going to parse position at top of the chart and not bilive by a lot roughly 26% of the businesses in Nashville Pinnacle is their lead bank. Our next causes competitor has just 10% share.
That's a pretty commanding lead for haven't started at zero and then focusing on what our clients like about the differentiated level of service, we provide them roughly 90% give us a top box rate, while some of our competitors receive a percentage tough Bob store from their clients down in the Fiftys range, which is a phenomenon that suggests to me rugs.
Regardless of already dominant position, there still meaningful ongoing market share take away opportunity in Nashville, which will develop further just meant.
Now as the bottom left of slide we focus on how we take so much share from these large loan vulnerable competitors.
Jordan Granix that'd be down the lift that charter the things that are most valued by business clients. As you can see from the key the dark green the box more dominant youre versus competitors on those items of matter most businesses and the bright red the box a more vulnerable yard to competitors on those same items that you.
Can see we dominate Nashville business market in terms of hot easy we are to do business with.
Basically we are able to demonstrate that we may long term relationships. The net promoter score, which is generally the measure with clients desire and willingness to recommend as to their peers.
And our overall digital experience.
I don't want to get too far from central message here, but there is one I can't resist pilot highlighting thats, our clients view of our digital channel offerings.
As a business both as bank I love, our number one position than that and the natural market as it relates to our business class overall regard for our digital channel offering versus how the business clients through this bank of America and Wells Fargo regard their digital gem offering.
Hi, this is up that setting aside that as you continue on down the charging 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 the larger regional and national franchises.
Looking now at the lower right that jar.
I will walk you through each aspect of our execution in the market, but you can see that businesses, who are currently our client hold was in extremely high regard, which speaks is ongoing share tight with potential I mentioned, a minute ago and our existing clients favor us with more business.
Then the class of our competitors favor them with their business.
As I mentioned.
Couple of times now appears to me that Spider dominant position, we still have meaningful market share takeaway opportunity in Nashville, our ability to seize vulnerabilities. These large banks is still picking up speed as you can see our lead bank cheer Nashville grew 3% last year, 3% lead bank share.
Just last year this model hiring the best bankers in the market away from those large global competitors and then getting into move their book of business by enabling them to focus on what clients value. Most continues to be a win in play against the banks use to dominate Nashville and currently dominate Atlanta.
So this is our aspiration in Atlanta and the next five years, we expect to aggressively recruit and higher the best bankers in the market from the large vulnerable regional national competitors more specifically not dissimilar to the hiring approach we took to build and are seeing our focus in the Carolinas in Virginia, We expect our at least can relate.
And just managers a year or 50 over a five year period of time, we intend to our mostly the same treasury management wealth management and differentiated backed off the service levels that have been so back to begin to those banks that dominated the Atlanta market, specifically that would entail iron roughly 15 to 20 additional revenue producers over the five.
Year period, as Treasury management consultants wealth manager brokers mortgage originators, it's been a loan originators in line.
We'd expect in general the opened an office a year in the business rich trade areas of Atlanta Places like East Cobb County, bulk head North Fulton County, just to name a few.
We think we can build out of $3 billion bank in Atlanta market over the five year period, we expected invest three to four cents an EPS during 2020 and cross breakeven in the third quarter of 21 about an 18 month break even period.
After a lot of dialog with the number of candidates, we selected Rob Garcia to build out our bias there over the years as I've discussed Atlanta opportunity of always indicated that our goal one just to build an LP O or just higher small sales thing, but our management there was capable of operating across all banking disciplines.
And it was capable of building a $2 billion to $3 billion buying.
Rob has demonstrated an ability to do that these alone then and banker in the Atlanta market.
He has been the Atlanta market President for Synovus, where he was running roughly $5 million bank prior to doing its novus by way of acquisition, Rob was instrumental in starting Riverside Bank. The notable start up there. So those numbers in 2005. So Rob is uniquely qualified from our perspective is well known dependent.
With National base, Chief Credit Officer based on their previous working relationship in Atlanta. These worked in a larger regional bank environment, which gives in fluid Z and all the sophisticated product provided by pinnacle and those large regional national franchises, but.
But he has a thorough understanding of the community banking miles at 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 see an eye lender, one private banker and one CRT lender along with their key support personnel and higher.
I think pipelines appear to be feeling pretty rapidly. So we're off to a fast start and excited about incremental growth opportunity that Atlanta market provides us as I said earlier, we view this as a once in a generation opportunity and we entered into making necessary investments season.
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 and core deposits. While we continue to bid our cost of funds down and low double digit feet fee growth longer term, we intend to capitalize.
On the economic and competitive landscape in our target markets, which is fabulous continue higher in revenue producers throughout the footprint and Additionally in Atlanta, that's always been our revenue growth engine and honestly, it's never look better and finally to continue to grow tangible.
Book value because my belief that companies that can compound tangible book value grow their share price meaningfully so.
Sure rate with that will stop and take questions.
Thank you Mr. Turner. Please now open for your questions. If you would like to ask a question at this time. Please press Star then one and you touched on some analysts will be given preference during the queuing again, we do ask that while you pose your question that you pick up in handsets because that optimal sound.
My first question comes from Jennifer Demba with Suntrust.
Good morning.
Hi, John by Jim.
Theory.
The Atlanta expansion makes a 10 cents for you guys.
Do you see potential other de novo effort.
For Pinnacle in the next few years, if opportunity should arise or do you think you'll try just focusing on Atlanta b.
Yes and took separately.
That's a great question.
Yeah that you know.
Hello to make comments, but we're always going to this we're never going to do that are those guys think those opportunities James landscape change all those got thing. So I don't put myself in a position design Oh, we just wouldn't do another denovo expansion, but having said that and funding context to be honest with you said.
They are right now my thrust is Atlanta, it's an unbelievable opportunity. It's what we want to work on you know market better than I do but it's.
It is so large in high grow and the competitive landscape is so right and what we do is so well suited to the opportunity just become sort of the top model lives to what I want to work on and so as a company, that's where will dedicate a lot of resource and quite honestly, that's where.
Personally.
But as a meaningful amount.
Okay.
Good.
Can you talk about Harold you mentioned something about the growth rate for BHP in the first quarter of 20, and I think I understood. It could you repeat that.
Yes.
Trying to build out the fourth quarter of last up 29 team, but also compared to the first quarter of 20 of 19.
We think the growth rate for the first quarter of this year will at least a 12% over the first quarter of last year.
Okay.
And.
Any thoughts on the tax rate for 2020.
Yeah, we don't anticipate the tax rate to change very much and 2020.
It ought to be the MTR ought to be pretty similar.
Great.
Thanks, good quarter.
Thank you. Thank you.
Thank you. Our next question comes from Steven Alexopoulos with JP Morgan.
Hi, good morning, everyone.
Hey, Steven.
To start first on the margin how that 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 as a first quarter, yeah, we think it'll be it'll be it won't be down much. If it goes down. So we're hopefully we're close to that inflection point here within the first half of the year.
And then stabilize beyond one key money, but yes that would mean that that's our current planning assumption.
Steven we've still got a July rate cut in there whether or not that happens or not not sure.
We did a lot of.
Colin initiatives last year to kind of reduce our asset sensitivity.
And that has basically neutralized our balance sheet with respect to rate cuts.
Yeah.
Okay, and then on the Atlanta expansion I'm curious how many relationship managers do you expect to added 2020, how did you come up with 50 as the rate overall number.
Yes the.
Yes. The thrust is soda have baskin, you hire an assembly people and so I think.
Again in working with Throb Garcia Who's our market later, there is felt comfortable face us to higher.
In relationship managers.
And thank you might think about it this way Stephen they'd be.
Maybe a number like six.
See in our bankers and the team and maybe a number like three private bankers and the team and maybe a number like one pretty banker.
In the 10, and so that seem like a comfortable build out base.
For us and so it's just simple math from there to any year five years is 50.
Thats not to say we wouldn't are both we have the opportunity with we may well have.
But.
But thats sort of the co or what were trying to do build to say in our platform.
Also indicated that will build out the other fee business professionals as well, which would include Treasury management.
Consultants wealth managers, primarily brokers.
Mortgage originators and SBK 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 add to that.
Okay.
That's helpful. Then just one final question. So looking at the loan growth guidance for 2020, you included high single digit in the range are you just being conservative or do 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.
That is.
You know 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 you're going into 2020.
Okay. Thanks for all the color thanks for taking my questions or an exclusive.
Thank you. Our next question comes from Catherine Mealor with KBW.
Thanks, Good morning.
Hi, good morning.
It's a holding your earlier remarks, you talked about how will your incentive plan realize that EPS growth versus.
Compared to peer group and so as we think about what we're seeing across maybe consensus.
Across metabank, either generally flat to maybe even Darling EPS growth.
For most of your peers.
How do we think about what 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 2018 to get a full earn incentive compensation Paul.
Tier.
Yeah, I think Thats, a fair assertion theres, there's quantitative and qualitative factors going on your right. When you lot of 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 well, it's kind of like stepping over you know a rock or something to get.
Top quartile.
But.
At the end of the day when you lot. It all up and you start thinking about okay. How are you going to propel the shares you know what what's going to make these shares move what what kind of catalyst might be there and so.
We use that incentive plan to help create that energy.
And so you should assume there's got to be outsize growth and I think it if you lot of our payer as you can you can probably see.
What kind of targets we're shooting for.
Sorry.
Well I got here I don't know if I got to your question, but that would be.
Yeah.
Response, neither I think Thats right I think I would assume that there's the model Dps growth.
For you to get a full full payout, but just wanted to kind of confirm that makes sense and then maybe focusing on just thinking about the extent build out and if we take your three to four Cdps investment currently enter yeah, that's about called three and a half million.
Which is it which is a very small piece of the overall expense growth. This year. If you can't get in a dollar basis, So where is the rest of the expense growth coming from or is there some better revenue compared with feeling that three to four cents.
Okay.
Well there are definitely as a revenue component so.
Terry has not been bashful with Robin assigning growth rates and all that sort of stuff. So he's he's he's got himself.
No up a full time job I'll say like that.
So there is revenue growth in that number for Atlanta, they expense growth.
We've got a significant hiring plan coming up on us and.
The.
That comes with an additional incentive costs and all that but that also gives us flexibility with some respect so.
The easiest thing we can get cut a quick returns off of with respect to our plan is to throttle back on expenses are otherwise use that incentive plan so 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 do today and our comments is a fairly significant hiring plan.
That we've got going into next year.
Hi, guys ROM I'd, just add the Harold's comments there.
Jennifer Demba ask the 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 plans to focus on the markets that ran plus Atlanta, but I wouldn't.
Hey by lose sight of we're still building out a lot of revenue capability in markets like Charlotte and Raleigh, and Greenville, and Charleston, and thank you probably saw in the fourth quarter. I think we added 18 revenue producers in the fourth quarter alone last quarter for.
Fourth quarter of 29 day, and so we're still.
Believing that this competitive landscape is rise up our alley and were still finding great opportunity the higher bites largely from these large banks.
We view based so vulnerable so anyway I just give you that his color on the expense.
That's helpful. Great. Thank you so much.
Thanks, Jeff.
Thank you. My next question comes from Stephen Scouten with Piper Sandler.
Hey, guys good morning.
Thanks, Dave.
I'm curious I think you said on diesel maybe it was a one to three to kind of drag.
Into your 2020 expectation.
So does that imply you think credit credit trends should kind of continue at the their current pace than I am I guess provisioning would be in the $30 million to $35 million kind of range based on that Matt.
Yeah, I don't think thats too far off where we.
We spent a lot of time with a credit administrators trying to figure out what kind of charge off forecast they might have for 2020 and 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, and then kind of digging further into.
To sum accountants questioning there just you guys noted a little bit below the ROI target here in the 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 you know NIM headwinds.
Mid mid single digit expense growth.
And maybe a dip into the high single digits on the loan growth front, how I guess comp in it are you around that ability to to grow EPS year over year. Apart from maybe you know reduction in incentive comp.
Okay.
Yes, I think I think is going to be a hard here obviously the yield curves not helpful. Our has.
Improve some over the last.
Short term period here, but.
The confidence we have up is it goes back to the quarter. It's it's about what market your operating yen.
And what kind of.
Objectives, you lay out on these people to say, Okay, you know as well settles land that without of without an objective any path will get you there are some of.
You just got to kind of lay out these goals I think there was a question earlier about how do we get the 50 people.
Well a lot of that is just sitting now going out of our people and say Hey, you know you got to do this for us to get to the numbers, we need to get too. So we laid that out there and say, okay, you need to harvest when you think.
Wow.
That's the way we've operated this from now for almost 20 years.
And we think that at the end of the day, our folks will deliver.
What weve tasked them to deliver.
So.
It's not that difficult actually as to how we operate this burke.
Say that I might add the arrows Gov is just the.
But whatever is where are you know there's nobody knows future include me and I don't know what all the market conditions are going to do and how they might change and what the impact of.
The.
Political discourse in the countries no value or what the impacts by.
Though north Korea, Iran, or yellow, although sort of thing, but if you're talking about an environment that look very much like the environment that we're in today I can't imagine there's got to be is not going produce earning share growth earnings per share growth.
Okay, Great and then just maybe last thing I'm curious.
You guys still have a pretty sizeable authorization on the share buyback 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 in the share repurchases in particular.
Yeah, we're still we're still plan on using the rest of our allocation.
We're likely to use it.
You know here over the next three quarters, so will our four quarters, we intend to use.
Okay, great. Thanks for the color guys.
Alright. Thanks.
Thank you. Our next question comes from Jared Shaw with Wells Fargo Securities.
Just looking at the BHP with the color and first quarter should we expect and that the rest of the year that growth is sort of a steady ramp from there.
Or or will be a little lumpy.
Yeah, Jerry we've had a lot of Congress hyper BSG over the years about lumpiness.
I think.
I think the way, it's kind of planned out this year or what their what their shooting for is that you will see a ramp up from the fourth quarter ended 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.
So it's been somewhat of a bell curve.
For a few years.
And so I think this year, they're planning on up kind of a ramp up in one two in Twoq you in that kind of flattish in the last half of the year.
And do they do those two funding facilities is that provide enough funding for them to meet their goals or is there an expectation that they're going to get.
Additional funding as we as we go through the year.
Yeah. The plan for them is to fund up here fairly quickly.
And then what they'll do is they'll securitize.
I've got a 200 million dollar facility Bell securitize that facility and then.
In effect, Philadelphia investors not not the asset just the funding part they'll borrow money to set up a security.
And then they'll receive reload the warehouse.
Okay great.
Then.
On the large and what's your expectation for July cut there. If we don't see a July cut is that incrementally positive to margin in the second half for.
Are you running thrown up now were.
It should be should be relatively neutral overall.
Well I think it will be positive I.
I don't think it'll be a big positive, but I think it will be positive.
Great. Thanks very much.
Next year.
Thank you. Our next question comes from Frank So you get sleep with European.
Hi, Good morning. Thanks for the question just to follow up on those so if I understand this ph cheese funding is now is now set between what they've they've got organically in terms of the balance sheet runway plus the securitization strategy is there any missing piece.
That that's left here or they are they set.
I think they're pretty much set I think they're still working through documents on the securitization piece.
But I can't tell the and the second quarter to kind of do that first issuance.
And did did pinnacle expand its its financing of BH GE or was that unchanged.
I don't think it has changed.
Okay. Okay.
And Harold I think you've done a good job in terms of orchestrating this.
Shift we see in funding.
I'm running down some of the the Cds how much more can you go on the wholesale CD front remind us how large that portfolio.
Is.
Yes, Hello give me a second I'll try to dig the numbers I appreciate the complement frontier, yes, that's good [laughter].
Yes, it rock I was kind of hoping for one.
Good one that'd be good.
[laughter].
Our work on it.
[laughter].
That the CD book.
We're probably talking about.
Oh heck.
Three $400 million.
Okay.
One.
110.
Our im sorry.
No way I'm, sorry, I'm talking to the wrong.
Probably about two $2 billion in Cds.
And how much that's wholesale.
I think basically two buildings about wholesale.
At 1.7, and brokered and about 800 call. It noncore retail about 800 million in that.
Okay.
That will be that's kind of them up wholesale book.
Okay.
And Terry I'm not sure this as a complement but you're you're obviously no stranger to acquisitions as you looked at the Atlanta market clearly you've got Oh of course, there you found.
With a leader, but how did you evaluate that versus a possible acquisition.
Well I think.
I'd say, there's three things that are important to me though.
Go one is to get to the market you know Weve sorta added as a target for a long time, but the vulnerability really accelerated in Atlanta over the last 12 months in the competitive landscape and so it's it just got important to maybe get there.
Not insincere, when I say it might be a big opportunity as long we seized in Nashville.
So then underneath that obviously, we had discussions about M&A and about a de novo model.
I think I've said, all along I be prepared to go either way.
And you know I've still side Thats that would.
You know reflect my mindset I would have been willing to go either way it gets back to.
Guinyard somebody how big a book and they build and then if you do an M&A transaction you know water all the ongoing implications, let what surprised you won't be what's the accretion going be you know all those kinds of things and so you know.
At least at this moment the Denovo Starkville best.
Yes.
Got it okay. Thanks for taking my questions are on.
Thank you. Our next question comes from Tyler Stafford with Stephen.
Hey, good morning, guys.
Hey, just two more for me I just wanted to follow up on on the inclusion of the core deposit growth wouldn't it within the incentive plan how much waiting does that carry in the plan this year.
It will be a similar waiting to the revenue share that we've had in prior years.
So it will be around 20% or so okay.
And 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 ROI and ROTC target range over the next couple of quarters with that July in November cut assumption.
I think so I think the Aro a target will be a little.
It'll be a little easier than ROTC target, but we still think that our modeling shows of we'll get back within.
Okay.
It should there be any much balance sheet.
The difference between kind of loan growth, an overall balance sheet growth would that would that differ much.
Or total balance sheet growth should still be kind of high single digits low double digits, Yeah, I think I think balance sheet growth and and.
Loan growth will run kind of similar growth rates okay.
All right. Thanks Harold.
Alright, thanks out.
Thank you. Our next question comes from Brian Martin with Janney Montgomery County.
Hey, guys good morning.
Brian Harold just one thing back to the margin I mean, if you get the two cuts if you don't get the two cuts that you expect I guess is there upside to the margin is that how we should think about it given kind of the plans you've outlined.
Like stable big stable with the cuts and then maybe some upside if you don't get the cuts I think it is that way I think theres going to be a slight positive to us to no cut environment are 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 then I think he said on the on the expense outlook. That's a mid single digit growth rate is that off at 19 and does that include the the Atlanta Atlanta buildup.
For that.
Yes, I think it's off of the fourth quarter run rate.
Okay.
And it's got a component than therefore Atlanta.
Okay, Alright, and then lastly on the clarification on BHP I think the revenues in I thought your comment was that the revenues they'd be HCR up 8% to 12% in 20 versus 19 is in in 2019 was like a $90 million number is that the right map, how we're thinking about that.
Yep.
Okay.
All right that's all I have thanks, so much.
All right. Thanks, Brian .
Speakers I'm showing no further questions in the queue at this time I would now like turn the call back over to you for any further mine.
All right I.
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 run it exactly the same program with the addition of the high profile Latam.
Market, thanks for joining us.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.