Q4 2020 Pinnacle Financial Partners Inc Earnings Call
Good morning, everyone and welcome to the Pinnacle financial partners fourth quarter 2020 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 Dot P. N F. P. Dot 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 on listen only mode.
Floor will be opened for your questions. Following the presentation.
If you'd like to ask a question at that time. Please press star one on your Touchtone phone.
Analyst will be given preference during the Q&A, we ask that you. Please pick up your handset to allow optimal sound quality.
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 financial's ability to control or predict and listeners are cautioned not to put undue reliance on such forward looking statements.
A more detailed description of these and other risks is contained in Pinnacle Financial's annual report on form 10-K for the year ended December 31, 2019, and subsequently filed quarterly reports.
Financial disclaims any obligation to update or revise any forward looking statements contained in this presentation, whether as a result of new information future events or otherwise.
In addition, these remarks may include certain non-GAAP financial measures as defined by SEC regulation G.
A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to the comparable GAAP measures will be available on pinnacle's website at www Dot P. N F P dot com.
With that I'm now going to turn the presentation over to Mr. Terry Turner, Pinnacle's, President and CEO.
Okay.
Alright.
Thank you operator.
Thank you for joining us this morning I know.
Everyone's familiar with the fact that we're coming to you from Nashville, Tennessee home with Vanderbilt University, there's an accounting faster at Vanderbilt that in years past has used pinnacle is a case for his accounting class from the students.
I have to decipher our financials, our footnotes fall all our S. D C filings listened to earnings calls and so forth and so in the class immediately following the assignment to listen to our earnings call.
Tell me that he opened it with just on opening question the store to get there over arching reaction to the call and he said that they had two overarching reactions. He said one those guys sure sound optimistic and two they sure sounds southern and so my guess is that fall on our.
Called the day you might have the same reaction fourth quarter was an outstanding quarter Force a weird key success measures like asset quality core deposit growth fee income growth pre provision net revenue growth in tangible book value accretion all very strong during the quarter.
We began every quarterly call with this dashboard reflect on our key performance metrics on a GAAP basis, but honestly, there's so many adjustments required in order to focus on the variables that we're truly managing here at pinnacle that I want to move quickly to the dart reflect in the <unk>.
Adjusted non-GAAP measures.
As you can see here on the top row total revenues fully diluted EPS and adjusted P. P N or are all up meaningfully on a quarterly basis 2020 revenues are up roughly 9% year over year at a time when many have been predicting banks cannot earn in 'twenty 'twenty one what they earned in 2019.
We are very proud that our second half 2020 fully diluted EPS exceeded 2019 by 28% adjusted P. PNR for 'twenty 'twenty is up nearly 9.4% over 2019, while P. P and our per share is up 11.4% along on the stack.
ROE you can see that loans are up 13, 3% year end 2020 compared to last year, Harold will review in greater detail shortly and talk about our expectations going forward, but generally we continue to believe will produce loan growth primarily based on our ability to take market share.
Due to our prolific hiring we've hired 175 revenue producers over the last two years and that's more than 20 percentage of our total revenue producers that represents enormous market share movement potential, which I expect differentiates our growth opportunity.
From many if not most of our peers.
Core deposits continue to accelerate at a rapid pace during the quarter and for the entire year and in spite of the Covid challenges. We continue to have a track record from consistently grow on tangible book value per share with nearly 15% growth in tangible book value per share in 2020.
Across the bottom row, you can see that asset quality held up really well on the fourth quarter with M. P. Just 38 basis points classified assets actually down this quarter to the lowest level in the last five years and annualized net charge offs of just 19 basis points in the quarter.
I'm going to turn it over to Harold and Tam to review the results in much greater detail as we go through the details I find that Theres a lot to be encouraged about regarding our net interest margin fundamentals, particularly the trajectory of our cost of deposits.
Fee income was solid this quarter mortgage had a great year in BHG report card during.
During this pandemic continues to outperform expectations our revenue per share for 2020 was $15.05. That's up nearly 11, 4% from this time last year and significantly better than the median peer comparisons we talked about our transition to day.
Since earlier in 2020 are allocating a meaningful part of our human capital to reviewing our loan book borrower by borrower.
Tim is going to update you on the work that he and his team accomplished in Q4 as well as giving insight to what we're seeing and learning from our clients.
Familiar asset quality performance inspires optimism, though as we all know there are still on unknowns relative to vaccine rollout and the full reopening of the economy. So let me turn it over to you.
Thanks, Terry good morning, everybody and many of our slides we've shown for quite some time in the fourth quarter results were basically consistent with what we've anticipated from last time.
So I don't believe there is a ton on new information. So I'll hit the highlights we did experience a welcome loan growth for the fourth quarter, excluding PPP were up almost 8% annualized between third quarter and fourth quarter. We don't have a trend just yet but it was a positive signal we will lean on our new hires over the last few years to give us an advantage on.
Loan growth.
As you know we are in great markets, we don't apologize for any market, where we do business. So we think that too will help us outperform when entrepreneur as we begin to see the fog lifts and we see loan growth reemerge in a more predictable way.
As said our market leaders believe that loan growth forecast exclude PPP of high single digit growth in 2021 is a reasonable number for our firm.
The loan yield ex PPP loan yields were pretty flat keeping loan yields will be a fight in 2021, we will lean into our relationships even harder to maintain our yields.
The steepening curve should be helpful to us, but there's a lot of liquidity out there. So finding borrowers is more difficult plus you've got a lot of banks out there using pricing as leverage because I don't know a bank that doesn't have a considerable well of on balance sheet liquidity.
The PPP program is back in the news and we're excited about deploying the next round of funding are hopeful we can place a meaningful amount during the first half of 2021, although we don't expect to have similar level of PPP volumes in the second round of the birth. We do believe we are ready to be just as successful in the second round as a birth and also believe this.
Be incredibly beneficial for those small businesses in our market that continue to be impacted by the pandemic.
Over the last few weeks for those clients that are interested in the second round.
Pre loaded data files to expedite the process. So we've surveyed these clients and are contacting them currently to explain the new program engage their interest.
As of close of business yesterday, we received approximately 4000 applications totaling almost $600 million. So we're off to a pretty rapid start.
After the first rounds forgiveness process it remains rigorous but our team is working through with our clients. We expect net interest income lift we expected net interest income lift in the fourth quarter due to PPP forgiveness and expect more lift in the first half of 2021.
Now on to deposits, we had another big deposit quarter, we've experienced significant growth in noninterest bearing deposits ending at seven 4 billion at quarter end up 54% since last year. The number of commercial checking accounts is up almost 12% since year end.
Our average loans to average deposits was at its lowest level than I can ever remember at 83%, we expect to reverse that trend at some point in 2021.
We're at 33 basis points on average deposits.
At year end and debt.
29 basis points for ERP rates, we are intentional about getting those numbers down to less than 25 basis points very quickly.
We're getting a few questions about deploying excess liquidity, we're beginning to get interested in various ways to leverage some of this cash flow given the steepening of the yield curve, but we'll be very cautious on whatever new opportunities, we see to deploy excess cash.
So we will have an opportunity to reduce our wholesale funding book over the next several quarters, which we fully anticipate doing this reduction should help reduce funding costs across the board and help our Neal <unk>.
Similar to what some other banks announced during the quarter, although our opportunity wasn't nearly as large as others. We did redeem $200 million of federal home loan bank borrowings prior to maturity incurred a $10 $3 million prepayment building.
We also underway on the cash flow hedge that to start on January 2021 that we've been carrying for a few years.
Combined loss of around $15 million between the two but should be paid back within two years we.
We have other opportunities with federal home loan borrowings that we will evaluate prospectively, but the payback period is too long currently for us to get excited about those right now.
And so the cash flow hedge due to the liquidity as well, we no longer need to carry the wholesale funding that was hedged by the swap.
Therefore, we recognize the previous unrealized loss once we canceled the funding.
Paying off the federal home loan bank advance early and unwind in the cash flow hedge we should stay close to $7 million in interest expense in 2021.
Our liquidity to be able cost us approximately $2 million a quarter, we will share this excess liquidity at some point likely more slower than we'd like.
We believe that both PPP and our excess liquidity negatively impact our fourth quarter NIM by 30 basis points, which is down from 40 basis points in the third quarter.
We believe our Neal after PPP and liquidity.
Is approximately three 7%. This compares to a similar calculation last quarter of $3 two 2%. So we're up five basis points from the previous quarter.
Thus, our adjusted NIM was up two quarters in a row, we call that a trend seriously. This will be a big focus of our bank going into 2021.
Now on a fee income I'll be brief these were more than $83 million for the quarter for the year fee revenues grew 40% in 2020, which we believe was remarkable.
No that 2020 was on power year from mortgage we don't expect to repeat in 2021, but then again mortgage doesn't get opacity.
Talk more about BHG in a few minutes, but BHG continues to issue a great report card every quarter wealth management had a big year as their fees were up 17, 5% year over year. We expect they will have a great year in 2021 as they have made several key hires in the latter part of 2020 across our markets.
As to expenses as we've stated in the press release <unk> <unk> expenses were higher than anticipated due to a discretionary bonus award approved by our board last week as we've stated in the past our annual cash incentive is tied directly to results.
The Covid, we failed to hit our EPS targets. This year due primarily to the required increase provision as a result of seasonal adoption.
During the year and as I mentioned last quarter, we modified our cash incentive plan to incorporate our PNR component.
All in our plan would have calculated a 50% target opportunities based on a modified structure of the plant.
Our <unk> results will help us ramp into 2021 with a lot of momentum.
The board elected to increase the increment the award for participating associates modestly to 65% of target given the impact of Covid to our 2020 results.
Just so you know missing our target payout on incentives resulted in $25 million on savings to our results coupled with a similar issue for equity for equity incentive compensation that was another $6 million in savings in 2020.
That approximate <unk> 31 per share that found its way to our bottom line and into tangible capital in 2020.
Speaking for the employees of our firm we're hopeful those savings aren't repeated in 2021.
All of US obviously are pleased with the board's decision on what the additional 15% means of some 2200 plan participants that said we missed this year and the focus for 2021 will be to overachieve.
So our 2021 plan design will still target top quartile performance within our peer group and still incorporate both EPS and PPE and our targets.
The leadership of our firm is determined to not let a trend develop a less than target pay out to our associates.
So that is a trend we will work hard to avoid it to do it we will look forward to meeting and exceeding our financial objectives in 2020.
Quickly some comments on capital our board approved authorization of $125 million buyback program. The previous program expired at year end 2020.
We will begin to consider deployment of those funds soon but are not likely to see any material impact from the authorization in the first quarter of 2021.
We also have a couple of sub debt issuance that are up for renewal. This year. So we will consider redemption and our refinance in due course.
Our board increased the quarterly dividend yesterday, so given all of R. R.
Our shareholder.
We're grateful for that as well.
We are a firm that works on many things we are focused on growing earnings per share in <unk> in an outsized way and we are also intentional about growing tangible book value per share.
We've accomplished a lot of things since year end 2016.
One thing we are particularly proud of is that since that time, we've increased our tangible book value per share by <unk>, 85%. We will continue our focus on tangible book value per share growth.
Not going through this slide in depth as we have covered most of this previously.
Obviously, we appear more optimistic than most.
That said, we have a great confidence in our people our markets on our clients and renewed optimism around reopening of our local economies.
Now to BHG. This is a familiar slide to most and provides a snapshot of bhg's business flows over time and more importantly, how theyre holding up during the pandemic.
The blue bars on the on the chart, our originations that ramped up with more loans being funded with records being set nearly every quarter for the past three years.
Business flows are strong in their model is hitting on all cylinders. The green bars represent loans on which gain on sale has been recorded as these loans are sold downstream by.
This is the traditional.
GE model with gain on sale revenues being generated as you can see the green bars are fairly flat not necessarily because of the appetite for their loans has decreased but because of the building of balance sheet loans and diverse diversifying their business model with interest income.
Coupons have fluctuated over the last three years ending down at 13, 8% for the fourth quarter.
As the bank borrowings. They also fell to four 3% in the fourth quarter. The good news is that net spreads remain in the mid nines, which overtime has been up from previous years.
The bottom right chart details now over 200 banks and Phds network and almost 700 individual banks acquire bhg's loans in 2020.
This has to be one of the strongest funding platforms for a gain on sale model in the country.
There are firms out there trying to replicate this but they've got to get real busy real fast to find the funding platform like BHG.
Like I said last time, it's taken 20 years, but it belongs to BHG they own it they developed it and they capitalize on.
The top left chart, we've shown on several occasions the.
The quality of Bhg's borrowers has improved steadily in the past on over the last few years, but particularly in 2020.
They continue to refine their scorecards and increase the quality of the borrowing base.
Again, the right chart and as I've said before may be the most powerful chart I have to offer related to bhg's steadily improving credit quality looking at losses above vintage losses continue to level out in earlier months since origination thus pointing toward a lower loss percentage over the life of the underlying loans pandemic related events will likely cause these lots of moving upward.
But the quality of the borrowing base on our opinion is very impressive and is much higher than the bars from just a few years ago.
We've updated the AC charge offs and reserve build chart.
These are for loans that BHG is sold through a network of community banks. The Green bar shows that currently they have more than three $6 billion in credit with banks, who are acquired BHG loan.
Orange line details the annual loss rate, while the Blue line on the chart details the recourse accrual as a percentage of outstanding loans with these with these other banks 2020 losses landed at 4% to 6% basically consistent with the last few years on during the year, where who knew how COVID-19 would impact loss rates.
The recourse obligation reserve is used to reserve for future losses for the loans sold to other banks with Covid. They increase the reserve in the first quarter and incremented a slightly.
One note that may be as important interest to some inc.
Included in the 4% to 6% is also prepayment losses related to early payoffs.
So good borrowers that pay off early.
BHG reimburses the bank for unpaid premium.
Just so you know that makes up about 30% of the 2020, a year to day loss rates we.
We don't anticipate any significant lift and recourse reserves in 2021.
Lastly, we said it last quarter and we'll say it again, it's been a big year for BHG, and we anticipate big things in 2021.
During the third quarter of 2020.
Credit markets improve which allow BHG has an opportunity to execute on their first $160 million series securitization.
Appreciate that secured debt securitization went out with investment grade ratings.
This allows <unk> to continue to diversify our revenue stream not so much away from gain on sale, but with incrementally more interest income as well as provide another competitively priced funding source to its business model.
We're expecting another similar securitization at BHG in early 2021.
The chart on the top right is a little new.
It shows the trends related to the more important line items on Bhg's balance sheet.
As noted it at year end 2020, Bac held over $200 million on cash is slightly over $1 billion on loans.
Funded by almost $650 million on borrowings.
The Red bar up on both interesting and comforting.
<unk> has over 500 million.
In reserves and capital, it's a healthy franchise sales franchise.
So wrapping up loan growth for Pinnacle in 2021 will take work, but we are optimistic on pricing in the fourth quarter Hill deposit growth has been remarkable deposit pricing is headed down.
BHG had another great year on credit for both Pinnacle and BHG is very much management.
I'm pleased with how this quarter and year ended up is again an understatement. It's.
It's difficult to really the significant effort that my colleagues are putting forth every day working with clients on solving their problems through this weird.
We all know it's a difficult operating environment loan demand is sluggish at best and who knows where the yield curve is headed.
However, the bright spots for pinnacle or MIT deposits deposits continue to trust us and borrowers seem to have figured out how to manage their businesses through this cycle. Our operating leverage also remains top quartile, we do have the best clients and discipline remains very important. Additionally.
Additionally, on hopefully COVID-19 finds its way to a rearview mirror last quarter, we had hope for an effective vaccine. This.
This quarter, we have a vaccine in fact, we have many vaccines.
Hope as interest has transitioned the tangible optimism.
Our recruiting platform is scoring all over the franchise, we do like our franchise and where we do business and with whom we do business.
Migration patterns continue to favor, Tennessee, the Carolinas and Georgia we.
We like our competitive prospects will remain a force in Tennessee as well as in several markets in the Carolinas.
We are winning in Charlotte Raleigh, Charleston, and as I've said before we think we can score big in Atlanta.
So with that I'll turn it over to Tim to talk about growth.
Thank you Harold.
Using the traditional credit metrics of net charge offs NPA classified assets and past due loans pinnacle's loan portfolio continues to hold up very well.
He acknowledged debt for some of our clients in the first half of 2021 may prove challenging, but we remain optimistic given the combination of the new stimulus package additional PPP loans for our clients and the Covid vaccine.
As in the prior two quarters, our bankers and credit teams completed thorough client credit reviews by collecting monthly financial statements <unk> rent rolls to reevaluating, our borrowers assigned risk grade.
Take your emphasis was placed on on non pass credits and on the loans that we had right at a low pass risk grade due to COVID-19.
The results for our fourth quarter work, we're encouraging our classified assets decreased $46 million.
For criticized loan category, we had a modest net increase of $100 million.
This minor increase was in part attributed to three hotel construction loans that construction had just been completed during the fourth quarter we.
We move these hotel loans into a criticized rating to be consistent with our conservative hospitality grading methodology applied in prior quarters.
Balance was made up of small loans and an assortment of property types or industries.
Similar to the second and third quarters. During the last two weeks of December we conducted a four question survey of 258, C&I clients with loan balances totaling $653 million.
The survey was targeted at our low pass grade clients in a wide variety of segments, such as entertainment restaurants and consumer services.
Three of the questions, we're asking the borrowers estimates.
Revenue from fourth quarter 2020.
Compared to fourth quarter 2019.
First quarter revenue in 2021, the first quarter of 2020.
Full year revenue for 2021 compared to full year 2020.
And the last question was regarding months of liquidity on hand to cover operating expenses.
The responses remain guardedly optimistic.
50% said fourth quarter 2020 revenue would be between 75% to 100% of fourth quarter 2019.
72% estimated first quarter 2021 revenue would be between 75% to 100% of first quarter 2020.
90% estimated full year revenue for 2021 to be between 75% to 100% for year end 'twenty.
53% reported seven months of liquidity or greater.
During the first and second quarters of 2020, when Covid economic impact was largely unknown.
Pinnacle proactively reached out to clients to offered loan payment deferrals are payment deferrals range from 90 to 180 day.
And were administered with minimal credit qualification.
Given the obvious challenges at that time, we did not attempt to re underwrite and assigned new borrower risk rate.
We approach the deferrals as a short term solution or band day to help clients in a period of uncertainty with very little incremental risk to us in our view.
Yeah.
Pinnacle's philosophy regarding 40 13 loan modifications is much different on <unk>.
Modifications were negotiated from the framework.
Longer term solution to help our clients bridge to the other side of Covid.
Our philosophy west to improve the bank's position and to simultaneously help our clients.
With each modification, we collected very current borrower financial information in our efforts to accurately re risk rated borrower.
And to contemplate the terms of our modification.
A key distinction between our deferrals and 40 13 modification is that the vast majority of our clients with a 40 13 modification our pan interest monthly.
As illustrated in the table, our hotel loans make up 63% of our total 40 13 modifications.
52% of our hotel loans are 40 13 modification.
While each individual hotel loan modification was negotiated.
If the borrower specific circumstances are modifications generally consisted of changing the loan repayment terms to interest only for three to 12 months in consideration for borrower concessions such as <unk>.
Paid the accrued interest that accumulated during the earlier deferral period.
Establish an interest reserve on deposit with pinnacle.
And shortened the loan maturity.
As illustrated in our supplemental deck, our hotel book is held up.
Our hotel portfolio occupancy was for November.
<unk> was 48, 7% compared to Str's national occupancy average of 43%.
We attribute this to our history of conservative hospitality underwriting in our books composition of limited service economy and extended stay hotels.
This slide is to provide detail around the segments of our loan portfolio that we deemed <unk>.
Covid high impact.
As this slide exemplifies even within the segments. The performance is tell debt we.
We believe a few of the contributing factors for this performance include climb.
Client selection.
We hire experienced bankers they bring their best clients with them.
Pinnacle's very successful PPP program for our clients.
And finally excellent early problem loan detection, coupled with a very experienced special assets team.
Pinnacle's credit metrics have held up well.
We will continue our client by client defensive work throughout 2021.
As Harold indicated we will be working with our clients in the next few weeks to again deliver an outside PPP loan program to provide them an added security.
And now I'll hand, it back to Terry to talk about moving forward in this pandemic.
Okay. Thanks, Tim as part of our first quarter 2020 earnings call last April I told you that my expectation was in the final analysis 2020 wouldn't be about 2000, Twenty's earnings, but more about how well we can position our firm to return to our previous earnings trajectory following the pandemic apparel.
On Tim have done a great job on highlighting the various moves to shore up liquidity and asset quality and loss taking capacity in the form of incremental capital and loan loss reserves.
Our board was equally nimble to provide incentive for us to focus on building <unk>, which as you can see is exactly what we did in the last half of 2020 and in addition to that even in this pandemic. We hired 90 revenue producers in 2020 more than any other year in our history, which I believe has served us well.
As we're beginning to transition back to a more offensive footing and position this firm to capitalize on what some believe will be extraordinary market share taking opportunity following the pandemic.
As mentioned in my introductory comments in my view for quarter was an outstanding quarter with NPA is at 38 basis points classified assets down to eight 1% and past dues of 19 basis points asset quality appears excellent.
Adjusted EPS was up 24% over the same quarter last year adjusted <unk> was up 27% over the same quarter last year and revenues were up 20% over the same quarter last year.
We believe that BHG has validated the power of their differentiated model as they've continued to originate and sell record volumes alone through their proprietary auction platform and have also substantially securitized loans and what was the first commercial or consumer loan transaction to be rated double a by crow on its inaugural issue.
Another testament to the quality and value of the assets they generate.
All of this during the period some predicted might be disastrous.
And as we've already pointed out even with the dramatic EPS in <unk> growth in 2020, we still figured out how to force.
To hire 90 revenue producers in 2020, and so as well as our goal we find ourselves well positioned to move back to offense as the pandemic subsides and the economy reopens happily my guidance as we move into first quarter 2021 is that you should expect us to continue folks.
And on the same items, we've been focused on over the last several quarters on.
Operator, I'll stop there and we'll be glad to take questions.
Thank you Mr. Turner the floor is now open for your questions if you'd like to ask a question at this time. Please press star one on your Touchtone phone.
Analysts will begin preference during the Q&A.
Again, we do ask that while you pose your question you pick up your handset to provide optimal sound quality.
Our first question comes from Stephen Scouten with Piper Sandler.
Hey, good morning, everyone.
Good morning, David.
So Terry I guess I'll follow up on your last statement. There that you are back kind of.
On the more aggressive side of things from a hiring perspective, if im doing the math right. It looks like you hired maybe.
For new revenue, yes, Steve we got to we got some kind of weird connection.
I really can't understand what the question is.
I'll hop back into queue, if you could repeat it.
I can just hop back in the queue. Let me make sure my technology is working on sorry about that guys.
Our next question comes from the line of Jennifer <unk> with <unk> Securities.
Yes.
Thank you operator.
Operator, we're having a little technical channels will give us significantly dreams it sounds great.
Hello can you hear me.
Given to debt.
Okay.
Okay.
Steven.
This is Terry on back in I mean on a new room, we're active in.
I can hear you now so would you repeat the question.
I don't I think Stephen Might've hopped off this is Jennifer.
Okay. Jennifer go ahead.
Okay.
Morning, guys.
So two questions for you number one Terry you said you on.
On a more aggressive now again with hiring.
But you also have a premium currency again I'm wondering what's your interest in M&A now.
Versus your interest in more hiring in 'twenty, one and 'twenty two.
That's a great question so.
As a reminder.
Viewed today as my view has always been is that we are primarily an organic grower.
And our principal mechanism.
Sure.
Core capability to get that done as our ability to attract and hire great bankers in the markets and as you know we're in some really attractive markets with relatively low share positions and so I think you.
You ought to expect that were going on and continue to push on our organic growth model our hiring.
We believe will be good and so that will be the principal thrust of our continent.
Jennifer It's a great question. There is no doubt I guess over time I've been asked the last few years about EBITDA and so forth.
My own view was that our stock was unfairly treated.
And I believe that.
<unk> traded at a premium as people start investing in bank stock based on book values causes.
My stock compress more than others. That's my view others may have a different one but anyway. The net all of that is they would cause me to say why wouldn't they has been trying to deploy my stock as a currency when it is so significantly disadvantaged.
I don't think I would characterize M&A as my principal growth as I said on my principle for us will be to grow organically, but I think it does open up.
Additional possibilities that can be considered and looked at and evaluated so far we're trying to make sure we're making whatever the next next best Smart play he is but again I guess I don't want that to get over weighted in my commentary there. The principal mechanism, we intend to deploy as organic growth primarily through higher on paper.
Okay.
Second question, if I could.
What.
What changes in your strategy do you envision post pandemic.
Whether it be you know less.
Less need for corporate real estate or branches or.
Hi, you meet with clients and prospects and do business.
Or travel can you just talk about how you think that could change the clinical strategy over the long line.
Yes.
I'm confident there'll be changes, but honestly Jennifer for us I believe that there will be modest.
So just to recap on I believe that.
As you know, we're principally on a <unk>.
Commercial banks or branch strategy has been built around.
That of course, <unk> had a little different model a little heavier in terms of branch distribution in some of their markets, but in the great growth markets that we desire to win in line Charlotte like Raleigh.
And then of course, Atlanta, where we've de Novo to me were in a distribution disadvantage. So we're not like a lot of companies that have this legacy branch distribution network that needs to get shed or trend back or whatever.
Likely on the other end of that.
So to put that in context for you Jennifer I think since we did the <unk> deal, we announced that 2017 I think we've closed about 20 offices in our footprint.
With concentrated in and the B and C footprint. So we think we've sort of rightsize or optimize.
Distribution that we have again I just want to make sure you get the figure our position is that we're investing in Charlotte we are investing in Raleigh.
Investing in Charleston.
Charleston, South Carolina, and we are investing in Atlanta, and so we could use more distribution in those markets again I think on.
<unk> talked about on travel on some of those variables again, our strategies of geographic strategy. So were.
Generally call on in local markets.
There is no doubt.
<unk> is a lot of clients disciplined you call them on the phone is come see him, but that's not a meaningful dip in our travel budget.
And my expectation is that from a strategic standpoint, the investment that we're trying to make in technology I would say is focused on two things the things that we consider are generally focused on trying to.
Keep us as a fast follower in terms of commercial capabilities, we're focused on the pain points of our clients not just we're not trying to have the snake is with buying we're just trying to focus on on what is it in real terms that clients need and then I guess the additional aspect of that is we're trying to put our.
As our financial advisers are client facing people in a position to be more effective and more productive and all of that.
We're trying to gather more information.
In a way that they can use that in this environment.
Your line.
And so forth so thats really.
Okay.
Paul environment over the net.
Yes.
So.
Okay.
Yes.
Yeah.
Pretty much.
Thanks Terry.
The next question comes from the line of Stephen Scouten with Piper Sandler Your line is now open.
Okay.
Got it.
Can you hear me this summer.
Thank you.
Okay, sorry about that.
So I'm curious I know you touched on this but jennifer's question, but just the pace of new hires in particular I mean net.
Net you ended up being pretty flat.
For both on the last two years, but it looked like about 34, new revenue producers here in fourth quarter. So.
Do you think interest on a relative basis 2021 could be.
Significantly more active in the last two years on a hiring basis standpoint.
Standpoint.
I think it will be more active I think the variable Stephen as you know.
Vaccine.
As much slower coming out of those kind of things that could slow the process because the sales.
The length of the sales cycle, whether you're recruiting fees were moving businesses lengthened in a COVID-19 environment, so that would weigh to the negative side.
But I think on the positive side.
Reputation is really strong in the markets that we're trying to grow in and the vulnerability is really how many of the large bank competitors with whom we compete.
Lots of turnover going on in several of those organizations and to your point.
The hiring was actually really strong in the fourth quarter and my expectation is that if its one way or another it ought to be stronger in 2021 and 2020.
Got it.
Joining us on the loan growth side of things I know Harold kind of overall demand still looks luggage. Obviously you guys have benefited more from the new hires and continue on kind of hiring plan that occurred over time, but I'm wondering, especially in fourth quarter what.
You know what kind of change to the upside it seems like growth was maybe better than even you all would have anticipated say on this at this time last quarter on the call and so just kind of curious what transpired in the quarter that it came out better than you would've expected on what you see apart from the new higher growth as you look into 2021.
Yes, Stephen this is Harold I wish I could put my finger directly on it but I think in large part I believe.
There were some construction projects that began to fund up I think also we saw some.
On a year and C&I borrowings coming in all lines of credit.
And I'm hopeful I can't put my finger on exactly but im hopeful theres some optimism with some borrowers so maybe that will continue into the first quarter.
First quarter loan growth is going to be fairly sluggish, but I'm hopeful that people will begin to see.
So on a renewed optimism and willing to take some risks.
Got it got it that makes sense and then maybe just last thing from me following up maybe a little bit on on.
Jenny the M&A question would be just.
Where would the size of a potential deal needs to be at this point on your lifecycle to really makes sense from you guys to pursue it or move the needle.
It's a lot different from from when you would've dynamic pretty for.
Four years ago. So I'm just curious what your views on in terms of maybe assets, either where someone needs to be for it to.
Be relevant.
Yes.
We focus on it more from the EPS accretion standpoint than we do anything else with being sort of backend on assets that would yield.
Thats sort of on our earnings accretion, but.
Generally we're looking for something that's going to produce double digit earnings accretion.
It would be hard growth get interested in doing something that didnt do that and.
And so that said I mean, you know you probably got to get.
On out there to a $5 billion bank or north.
Began to produce that produced a net total earnings accretion.
Got it very helpful. Thank you guys and congrats on a on a very good quarter appreciate it.
Thank you Steve.
Our next question comes from Steven Alexopoulos with J P. Morgan.
Hey, good morning, everyone.
Good morning.
Maybe just start from.
Harold.
Regarding the high single digit guidance for expenses for 2021 is that off the base of adjusted expenses of $548 million or is that off total $5 77.
I think you should use the $5 70 surfacing on based on what we think on hiring and the recoupment of that incentive accrual.
That will probably be the number that debt that you should use okay. That's helpful and then on BHG.
We're seeing the banking industry rate start to release reserves.
More so this quarter do you see it likely that BHG starts to release reserves here over the near term.
And maybe that in the high single digit guidance that you're giving in terms of earnings growth.
No.
I'll say it this way based on what I've seen regarding our plans for next year I don't there is no planned reserve release.
So, but obviously there'll be monitoring that and if it looks like there should be some level. They will probably consider that in next year's results, but we're not thinking that in our high single digit number.
Okay got you, but if we look at where their net charge offs came out for the year relative to where the reserve is now it would appear there.
Fairly dramatically over reserve would you agree with that.
I would agree with that I think they've built a very healthy balance sheet.
Like I said, we're comforted by that balance sheet.
I would not.
Be surprised to see some reserve release next year Okay.
And then thank you and then finally, so if I look at the fee income outlook. Obviously, you guys like everybody else will have this mortgage fee headwind to work through and I think you are calling for strong fee income growth in 2021 could you help us think about I'm not sure what you mean by strong.
Can you help with that.
Yes.
I'll try to talk around it.
Mortgage we're not anticipating a repeat by any stretch.
Most of the other business units, we are anticipating or expecting might be a better word.
<unk> fee growth out of the other mortgage out of the non mortgages.
That said.
It's probably going to be somewhere around mid single digit kind of numbers. We're looking at currently is hopefully we can get to that.
Okay. That's very helpful. Thanks for taking my questions.
Alright, Thank you Susan.
Our next question comes from Brett Robinson with have day group.
Hey, good morning, guys.
Hey, good afternoon.
I wanted to first.
Just go back to talking about.
Core deposits Youre looking for I think slower deposit growth going forward, but you obviously had really strong.
Core deposit growth in the fourth quarter can you maybe just talk about the.
And I think you had 12% growth in deposit accounts. So obviously really strong can you just talk about the pace is slowing from here, what's driving the growth in fourth quarter versus the anticipation of a slower.
<unk> growth profile going forward.
I think there are several things going on in there Brad I think number one.
Let me.
Let me back up here to try to put it in a broad perspective going back over the last couple of years, we have said about and I've used this.
Term internally as we talk.
With ourselves that we're about changing the personality of our firm I think reputation they would be viewed to be right asset generators.
Not been viewed.
<unk> is.
Strong in terms of core deposit generators some of that tied into the <unk>.
Commercial for us the franchise on those kinds of things, but irrespective, we have said about Chinese personality environment. Okay. So what does that mean, what that means is we in 2020, we altered our incentive plan, we've always focused on.
Earnings primarily secondarily on revenue growth in 2020, we switch that provide instead of the revenue to focus on the <unk>.
All of that growth, both volume and cost.
That was an important thing to help us.
Based on changed mindset. So force I think that has meaningful implications as to what paperwork on there.
Diligence on gathering deposits and so forth I think beyond that we also launched a number of different initiatives, some which have some pretty long lead time, but.
Bill.
<unk> platform for HSA A's as an example, which we believe is a phenomenal market opportunity for US we've also built capability.
<unk>.
Property managers homeowners associations.
Those sorts of organizations with sort of a value added accounting support.
Moving to pay dividends paid dividends in 2020 for us.
We've focused on qualified settlement funds.
Various other products we've got.
A product that is focused on captive insurance for middle market businesses.
<unk> mid market businesses have and so we're.
Find has strong growth there. So I don't maybe go on and just give you a filibuster, but I want to put in perspective Theres a lot of things going on that are structural and change in the personality of our firm to be a better deposit gathering there is some product capabilities that are beginning to pay dividends and I expect to pay dividends going forward now.
Where we already know there is tons of liquidity on our balance sheet that has to do with nothing but PPP and.
In other words, a bunch of money got put on or.
Class balance sheet as a result of that and then in addition to that in a lot of those business clients.
And this kind of environment build their own liquidity whatever remains mechanisms I have beyond PPP and so all of that go on on some of it is a function of what's going on right now tied into Covid. Some of its function to the stroke from changes that were trying to make so I've rambled through all of that to get down to debt.
We ought to see a diminishment in this liquidity build our cases, we think that we have.
Economy will begin to reopen in the latter half of this year.
You ought to have some day management and liquidity, that's associated with PPP and other corporate liquidity that weighs on slows the growth.
Should diminish but we do also have these initiatives that we think are going to continue to pay dividends.
So again I'm just trying to give you the puts and takes there.
Yes.
That's great color Terry.
And then the other thing I was curious about.
It was just the buybacks do you see.
Do you anticipate being active on the buyback this year or are you more of a re up on.
On your stock's, obviously, a lot higher than it was on intra gross going to be there than maybe you don't get to use it.
Yes, I think right now the planning assumption is that we will use probably 80% of it this year.
Our end of the first quarter of next year.
We will obviously use it to defend the stock when we need to.
And.
The impact on earnings is.
Not nearly as significant as it would have been otherwise given where the share price is but.
I think we will spend.
A significant portion of that money at some point during the year.
Okay.
Great very helpful. Thanks.
Thanks, Brett.
Our next question comes from Jared Shaw with Wells Fargo Securities.
Hey, good morning, guys.
Good morning.
Yes, I'm just looking at the the second round of PPP you guys are so successful with it on the first round can you give us some help I guess just thinking about the potential size.
Of the second round and then as you are going out and working with your customers on that are you. How successful are you I guess targeting those.
Maybe this unrated commercial customers that you are more concerned about earlier on and getting them on a second round.
Yes, let me let me just update you both on this morning.
We're at about almost $600 million in application flow on the second right now.
More than 90% of that or borrow orders that were involved in the burst on the BBC last year. So.
If you remember last year, we did 14000 15000 loans in 232 4 billion in balances.
We don't anticipate nearly that kind of level, we're somewhere thinking based on the surveys we did over the last couple of weeks.
With the prior borrowers that we're probably going to be somewhere around maybe almost $1 billion. If we can get to that number.
So that's kind of where we're thinking we're going to end up at with respect to the second program.
Is that what you were looking.
Yes, Yeah. That's that's great and then when you look at where that 1 billion is going.
Yes.
And you overlay that with your debt.
The credits are still more concerned about how much penetration do you think youre going to get with those COVID-19 sensitive industries are those borrowers that still.
We're struggling a little bit more.
Yes, I think a lot of those will be go to hotels retail and restaurants and entertainment for sure.
But I think at this time, there will be fewer big dollar total loans I think it will be largely to smaller businesses.
<unk>.
Debt are trying to get through this debt.
Through these next few months.
Okay. That's good color and then.
Looking at those 90 higher as you did in the in the in the year are you seeing or do you anticipate.
On a longer period of time for them to sort of breakeven or be able to ramp up and get their customers and based on COVID-19 and when should we think that that really starts contributing to the bottom line.
That's a great question I think generally what are just from 30000 feet. What our planning assumption has always been on the revenue producers that were higher than generally arent big books of business and so forth and so it dependent upon whether you're talking about a mid market bank or private banker or broker mortgage originator and so forth.
Sure.
There are some different dynamics in terms of how people get their books move, but generally we expect them to consolidate the vast majority of their book over a three to four year period of time call. It four years, our belief is that generally ought to work that way.
We generally believe that theyre going to get to breakeven in the first 12 months.
There may be some slowness in there, but it is not a lot you know in.
In other words.
It does take us as I mentioned already it does take us a little longer to recruit somebody and get them in the boat.
David without Covid.
Take them a little longer to get their book move then.
Then I think it did.
Pre COVID-19, but I don't mean, it like strength of elongated through the year, I think getting elongated or a month or two kind of things. So.
We don't have dramatically different planning assumptions about how quickly the cross breakeven or how quickly the consolidator.
Okay, great. Thanks.
Our next.
Western comes from Brock Vandervliet with UBS. Your line is now open.
Hi, good morning, guys.
I Wonder if we could just start with BHG.
I was curious.
Bad debt reserve level.
Did they adopt cecil or not yet.
No. They have not adopted seasonal I think there are two years out from having to formally adopt Cecil.
So.
No they don't have they're not seasonal complot yet.
Got it so they might have more flex in.
And managing that level okay.
Yes.
On the bank by right I appreciate that disclosure.
If there was.
Potentially an issue with BHG you might see the bank pull away as soon as Covid broke and obviously that didn't happen.
I was wondering if you had any color about the tick down in the bank by right here in the fourth quarter.
Yes, I think.
When I've talked to the BHG folks on what we get an update here on a couple of days.
The auction platform is very competitive.
They've seen numbers, where bank deals are getting down into the high threes.
Because that papers is so attractive to them so.
So yes.
It's a very solid.
That kind of restricted to flow into the auction platform with the buildup on the balance sheet trying to get ready for this next securitization.
But.
Right now Theres a lot of volume after that paper.
Okay, I'll follow up more on that offline.
You mentioned.
Sticking to credit.
A couple of construction loans were moved to criticized that had just been <unk>.
<unk>.
What's the.
What's the outlook for that was there was just and have now considered.
Stabilized financing or are you waiting for a third party take out there.
Not waiting for a third party takeout, we did have a few of our construction loans that were modified where we provided a longer interest only period.
On.
I would say, we moved them into that risk grade category purely just debt.
Consistent with prior quarters, we felt like the hospitality industry with such where it was just prudent to move them into criticized.
But for a loan that was formerly construction you had no.
There is no issue with it.
Gaining on balance sheet. It just just remains there probably reasonably attractive terms correct correct.
Think there were a couple of those that we.
As a modification established an interest reserve that they wouldn't put on to deposit with pinnacle to kind of help them whether through COVID-19 until.
Travel and hotel occupancy rates increased.
Okay got it alright, thanks for the color.
Thanks, Rob.
Our next question comes from Michael Rose with Raymond James.
Hey, good morning, guys.
Most of my questions have been answered, but I am wondering if some clarification.
Harold on the NII guidance is that inclusive of.
TPP I think you had like $56 million.
In 2020, just just trying to figure out what the what the bases and then does that include any of the round two day Youre talking about if you can just kind of help us on the <unk>.
Starting point.
Yes. Thank you.
It does include forgiveness.
I think I've got $40 million in accretion coming.
From the PPP program most of that will happen in 2021.
But it does not include any kind of.
And from any kind of income from the second line.
Okay. So it is inclusive of PPP okay.
That's helpful and then just.
Think about the average loan and deposit growth targets that you laid out is that also the full year average for both of those because if I if I look at the average deposit growth.
Implied.
Pretty big reduction in deposits year on year from looking at the full year average.
Now normally on loan and deposit growth were talking about the ERP growth.
So.
Let me know if you have any more.
We're on that.
Okay, Yes, I can I can follow up offline. Okay. That's all I had thanks.
The next question comes from the line of Catherine Mealor with J B W.
Thanks, Good morning.
Good morning, how are you.
Good.
Well, you've given a lot of keeping our guidance, which I think is helpful.
Clearly showed some upside from where.
Sensus is sitting today and so that leaves the provision, which I know is a big unknown for everybody.
Hard to predict but I wanted to see if you could just.
As you sit here today, and you and Youre thinking about how your borrowers are behaving and what youre seeing in your markets what would be your best.
Guide as to the sense of timing of when we'll start to see losses flow in.
And perhaps I'll say your expectation for when we may start to see.
More I mean, we had a little bit of reserve released this quarter, but maybe more active reserve releases from windows to things that come together.
Kevin I'll speak to a reserve release.
We're kind of thinking about and then I'll, let Tim talk about lost out Janet.
Sure.
Yes, we think there is probably I will highlight the hood of reserve release. This year, we did a little bit in the first quarter.
Our planning assumption is that we'll have some this year not a lot, but it's also a pretty.
I mean, you can probably get to a more significant reserve release pretty quickly depending on the successful rollout and what that does unemployment.
And by the end of the year. So I guess, what we've been talking about over the last couple of quarters has been you'd see a reserve build we felt the reserve will be fairly flat here in the fourth quarter. It actually went down a little bit we thought we could see kind of a flattish reserve for the first half of 2021, and then start seeing loss.
Content emerge.
Towards the end of the end of the second quarter into the third quarter and then looking at a bigger reserve really at the end of the year, but it looks like.
On the reserve release on that.
It may be happening a little a little quicker than we had originally called.
That makes sense.
Hey, guys.
And as unemployment the biggest piece thats driving that or how much of it is also being driven by your specific credits.
As far as the ratio of allowance to loans not the absolute level of the allowance.
Charge off experience.
Which has been relatively minor.
So far.
As well as any kind of nonperforming past dues non performers charge offs all in gross reserve, but youre right. The biggest influencer thats in basically every model every credit model that we're using for seasonal.
As.
The biggest macro influencer would be unemployment.
The forecasts.
Okay.
And then just on timing of losses.
Catherine This is Tim.
Okay.
I would tell you that.
Sure.
Certainly the <unk>.
Roll out of the vaccine in the fiscal stimulus will help I think to debt.
The extent that we've got a very successful PPP loan program again that will serve as a net again.
My intuition and anecdotal since the losses going into 2021 will be similar probably a little bit higher first and second quarter.
Not a dramatic change but.
Maybe a slight uptick.
Great. Thank you.
Alright.
Our next question comes from Brian Martin with Janney Montgomery. Your line is now open.
Hey, good morning, guys.
Hey, Brian how are you doing.
Good day, Harold just back to your question on the last question on the reserve I mean, just can you kind of put a range around.
Kind of get through and get more comfortable with credit continue to see that happen kind of more of that post post Covid reserve Hello, and I guess, if you look at the reserve to loan ratio kind of might range, two or maybe a range of where you think of that ends up.
Well, we're not thinking anything around the terms of where it was pre COVID-19. So we were down into that 40, 50 60 basis points in that number.
I really don't know how the EBIT can go.
It's very difficult to forecast these credit models.
Into the future.
I'd like to try to peg what are what are number might be at the end of this year, given a certain unemployment forecast.
So theres a whole lot of guess work going on it just seems like the trends are with respect to loss content non performers and the like that we will see some decrease.
Sidebar in $4 will get you on a cup of coffee at Starbucks.
I think it'll be an interesting conversation over the course of the year for not only us, but all banks as we start seeing reserve releases and when and when the regulator show up.
Guarding that so.
I don't think Youll see us GAAP.
Net.
Get us anywhere near what we had pre COVID-19.
But we should see some meaningful reductions.
And our reserves because we had significant build.
Over the course of last year, and we really don't think we will see that loss content material.
Got you. Okay. That's helpful held in just the can you kind of comment a little bit on the pace of reduction on the wholesale fundings and kind of the size of the balance sheet as you go forward here.
Timing of that and then maybe just kind of the influence on.
On the on the margin on the kind of the core margin.
Yes, we've got I think there is a slide on the deck on.
Sure.
Talks about like $2 billion on wholesale funding on most of that's in broker deposits that we fully intend to redeem.
The average yield on those things that are right on those things is somewhere around 50 or 60 basis points.
So that will have a positive influence on our margins our deposit pricing so on and so forth.
In the third and fourth quarter, we don't have a whole lot of opportunity for wholesale reductions I'll say that.
Bob.
Optimistically by the time, we get to that part of the year.
Perhaps from prepayment penalties related to federal home loan bank borrowings.
They will come down and so we may reevaluate prepayments on federal home loan Bank borrowings I've got about $1 billion of that lift from our balance sheet.
As I said earlier the prepayment penalties on that today is just a little bit rich for our appetite.
So, but we may reevaluate that towards the end of the year.
Gotcha, Okay, and then maybe just one for Tim.
Tim just Tim I guess I know you said the criticized maybe went up a touch this quarter I guess I guess would your anticipation be that were at a peak on the criticized levels now based on kind of the outlook for credit.
I do I think there could be a little bit more migration, but I do.
On a lot of our criticized as you know is the hotel book and we pour over that every quarter and I described that criticized level.
As very stable.
We think it will take some time to.
Migrate back into past, Greg just given the depth of.
What happened in the hospitality industry, but my own intuition or got based on these.
In depth quarterly reviews, I feel like that's about Pete.
Gotcha Okay.
Thanks for taking the question guys nice quarter.
Thanks, Brian.
That concludes today's question and answer session.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].
Yes.
[music].
Yes.
Yes.
[music].