Q1 2021 Pinnacle Financial Partners Inc Earnings Call

Thursday Thursday, Thursday, Thursday Thursday

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Good morning, everyone and welcome to Pinnacle Financial Partners first quarter 2021 earnings conference call posting the call today for Pinnacle Financial Partners is the mr. Terry Turner chief executive officer Mister Harold Carpenter Chief Financial Officer, and mr. Tim huestis Chief credit officer. Please note Pinnacles earnings release, and this morning's presentation are available on the investors relation page of their website at ww.w. Thursday. Today's call is being recorded and will be available for replay on pinnacle's website for the next ninety days at this time. All participants. Just placed in a listen-only mode. The floor will be open for questions following the presentation. If you would like to ask a question at the time, please press star one on your touch-tone telephone. Yep.

Will be given preference during the Q&A. We ask that you please pick up your handset to allow optimal sound quality during the presentation. We may make comments which made constitute forward-looking statements. All forward-looking statements are subject to risk uncertainties and other facts that may cause the actual results performance or achievements Pinnacle Financial to differ materially from any results expressed or implied by such forward-looking statements many as such factors are Beyond Pinnacle Financial ability to control or predict wage 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 Annual Report Form 10-K for the year ending December 31st, 2020, and it subsequently filed quarterly reports.

Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation? Whether as a result of new information future events, or or wise in addition, these remarks may include non-gaap Financial measures as defined by the SEC regulation Gene a presentation of the most directly comparable gaap Financial measures and Reconciliation of the non-gaap measures to the comparable gaap measures will be available on Pinnacle Financial website at ww.w Volpe NFP with that. I am now going to turn the presentation over to mr. Terry Turner Pinnacle as president and C.

Thank you operator and thank you for joining us. This morning was an outstanding quarter in my view. Both of you been following us know that you're in the pandemic Thursday, we transition quickly to defense beginning last January. If you can believe that not only does show a facet quality, but we launched a number of initiatives that would continue to drive in June twenty put us in a position to accelerate as impact of the pandemic Duane's and so we were able to get all to really fast start and recognize some of that ppnr off again every quarterly call with this dashboard replacing our key performance metrics Telangana phases, but if we most always do because there's so many adjustments required in order to focus on the variables that we're truly managing here at Pinnacle Automotive quickly to the charge reflected the adjusted non-gaap measures as part of our first quarter 2020 earnings call last April birth.

my expectation was

In the final analysis twenty-twenty wouldn't be about 20 22 earnings, but more about how well we position our firm to return to our previous earnings trajectory following the living wage. You can see here on the top Road. The trajectories are also open up into the right with total revenues fully diluted EPs and adjusted ppnr all up meaningfully on a link or dead basis 2021 revenues were up roughly 14.7% annualized during the first quarter adjusted EPS was up to 7.6% annualized here in the first place and adjusted ppnr during the first quarter is 8.4% Annualized a lot on the second row. You can see that lungs are up 11.8% annualized during the first quarter includes the PPP herald-review in Greater detail shortly and talked about expectations going forward, but generally excluding PPP we continue to believe will produce long growth and primarily page.

Ammar ability to take market share that are prolific hiring. We've hired 200 Revenue producers in 2019-2020 in the first quarter of Twenty-One. And that's month of our total revenue producers that represent an enormous market share movement potential which I expect differentiates our growth opportunity for many. If not, most of our peers quarterback has continued to accelerate at a rapid Pace during the first quarter and in spite of the coding challenges, we continue to have a track record for consistently growing tangible book value per share with 14.1 wage growth and table book value per share year-over-year across the bottom row, you can see that asset quality really well in the first quarter with mpaa's it just 36 basis points off as the lowest level in the last decade classified as it's also down this quarter to the lowest level in the last decade and analyze net charge-offs and just twenty basis points in the quarter dead.

I'm going to turn it over to Harold and tend to review the results and much greater detail as we go through the detail. I find there's a lot to be encouraged about as it relates to revenue growth. First of all, I heard that interest margin fundamentals particular that trajectory of our cost is positive and secondly be income mortgage originations and sales continue to run into record paise bhj continue to accelerate here in this pandemic. And again in the first quarter continues to outperform expectations. We talked about our transition to defense earlier in 2020 allocating a meaningful part of our human life to review in our Longboat bar by bar. He's going to update you on the work that he and his team to accomplish here in q1 as well as give insight to what we're seeing and learning from our clients particularly in these segments at least familiar asset quality performance continues to inspire optimism. So Harold, let me turn it over to you. Thanks. Good morning. Everybody many of my slides off.

Jon for quite some time. So I'm going to hit the high points. We're pleased with our first quarter long drove, excluding ptpp average loans were up 7.2% in lot between the first quarter and fourth quarter and a. Loans at March Thirty One compared to December Thirty One or up 4.6% annualized so cause a mid single-digit growth quarter.

Testimonials in spite of the state and he'll curve and as we mentioned last time loan yields will be to fight in 2021. We will lean into our relationships even harder to maintain our yields. There's a guy out there. It sure feels like it's a borrower's market right now. Our Prime base credits only saw a slight decrease in yield while Libor was down for basis points and fixed rates down seven basis points overall loan rates are down 9 basis points with PPP Louis being down 13 and the biggest contributor the overall loan will Decline and likely to be the most difficult to model the next few quarters, but more on that in a second.

So where do from here are Market leaders continue to believe that our end up. Loan growth forecasts, excluding ptpp in the high single digits for 20 21 is a reasonable number for our firm. We took it from the ground up based on continuing dialogue with our front-line letters. As always. We will lean on our new hires to take to give us an advantage on loan growth coupled with our Market wage. We believe to be the best banking markets with the best Bankers in the Southeast. We're optimistic of our loan growth goals were twenty Twenty-One as to yield. We still have about 60% of our floating Barrel. Old Book on an in-the-money floor. So that will help Shield some of the paint shipping rates continue to be under pressure. Hopefully we can get some traction from a steeping yield curve over time.

Speaking of GDP in the tons of work that's been accomplished here. We funded around three point four billion between the two hundred twenty programs and the 21-month. All right. We're just over nine hundred million and twenty Twenty-One findings about where we call we end up new application volume is slowing. So we don't anticipate a great deal more. Here's what we're not on the front line, but it seems to ring true the 2021 program hit the mark and was primarily used to help smaller businesses, at least from our perspective. The process has improved since last year and it's just make life somewhat easier for us and our clients.

FDA continues to move around change the rules but all in all it's in a better spot. No one is casting Souls as we can't imagine what the SDS had to deal with over the last year to get these programs up and running. I asked her forgiveness smaller class are getting it done. So he loans less than a hundred fifty thousand mile own sake rather than two million appear to be on the back burner and have them for quite some time during the quarter. It's slow for some technical issues that the FDA was dealing with and then we rented the tax season with a lot of class working with their CBA our thoughts are that eventually substantially all of our life to have not repaid their loans will seek forgiveness. Not sure whether another round of PPP will come around. But if it does we will dive in and believe the appetite will be there, but it will be limited.

PPP results for the same quarter where Mama a decrease in total revenues somewhat consistent to the decrease between 1/4 and first quarter. It all depends on the pace of forgiveness. Eventually the S8 will get at the greater than 2 million dollars. So that is coming to us. We just don't know when we have about three hundred sixty million dollars in loans awaiting forgiveness with the SBA currently and approximately eight million where we are working with clients to gather necessary data to submit that the FDA approval.

No.

The deposits we had another big deposit quarter for deposits were up almost 1 and 1/2 billion in the first quarter. We've experienced significant growth and non interest-bearing deposit ending up at eight point 1 billion at quarter end up 63% since last year. Obviously, we believe a significant part of that and government steals. Our average lowest average deposit ratio was down only eleven basis points the 82.7% So it's just a small victory are average deposits were twenty our average deposit rates were twenty six basis points while GOP deposit rates were at 22 basis points. So we continue to see down for 20 21 be around 15 basis points by the fourth quarter of 2021, assuming our short-term rate forecast remain consistent for the remainder of this year.

What did he bills for nearly? All banks is gaining more attention. The statement of the yield curve has gotten our attention, but we remain neutral on any sort of big Bond deployment strategy at present off our Securities to assets ratio have been thirteen to fourteen percent for a long time are estimates are the repairs are running slightly more than that in the 15 to 20% range. We may deploy upon amount when we put it into bonds over the next few quarters, but it will be modest. We also allocated about 450 million dollars late in the first quarter into a refill instrument, which is secured by the counterparties investment Securities portfolio. This is a floating-rate instrument that yields round 40 basis points currently, so it'll be more impactful in the second quarter. We're looking at a somewhat similar product currently, but it won't be as large.

I mentioned all of this to you let you know we are actively looking at proving Investments where we can minimize or eliminate credit risk while creating some earnings momentum.

At the top chart indicates, we will again have an opportunity to reduce our wholesale funding book in the second quarter, which we fully anticipate this almost 1 billion dollar reduction is in our broker deposit books, which we took it as part of our intention liquidity Bill last year at the onset of the pandemic this production should help reduce the product costs and help her name slightly on the go forward. Additionally we have about $9,000 in federal Home Loan Bank borrowings with the prepaid ability remains such that the payback period on those is still forty-five years, so we'll hold tight for now, but monitor those borrowings continually.

We Believe are now after ptpp liquidity with approximately 3.29% from the same quarter which compares to a similar calculation last quarter of 3.27% plus our adjusted name is in a row also our Gap nail is now up 340 we anticipate flat to up slightly for the rest of the year ptpp forgiveness will have a lot to do with that wage.

No, it's the Intel I'll be brief. These were ninety three point seven million for the quarter with a quarter fee revenues were more than 44% over the first order number of last year's wealth management had a great comparison to last year. We continually very active on the hiring private across our franchise particularly as we continue to build Wealth Management in the Carolinas and Atlanta Mortgage be our expectations about hosting revenues of 13.7 billion for the quarter up 1.3 million from last quarter. Second quarter is looking strong as well as we sit here today. We are much more optimistic about more often than 20 21 that we were three months ago at the right Market does not appear to be moving away from this as quickly as we anticipated. It might our markets remain strong and we have hired several key Originators instead of our markets are the last few quarters.

I'll talk more about.

But the actually continues to issue great report cards quarter after 4.

As extensive specifically incentives. I think everyone is familiar with the impact in the Senate calls to our expense base. And if our earnings are hitting our cards and send them call you as well. If not, they go down twenty twenty was very much a down at least in terms of the sentence for our Associates, but we fully anticipate based on the current operating environment that 2021 will come back strong and hopefully our Associates will recoup some of that Lawson's in it from 20,000. We are providing an opportunity this year to our Associates to earn an outside of incentive that said there's no free lunch increase incentives only occur. If our age groups, of course the incentive

Last year provision expense and Cecil required an outsize Reserve bill, which directly impacted our sales plans probably more so than most it only stands to reason that if we're able to recoup some of that prior-year Reserve bill this year that some of that should buy this way to our Associates this year. Our annual cash incentive is tied to the usual salvus and earnings growth number that we also maintain the ppnr component which we added there in the middle of twenty-twenty additionally. Our board has also changed the way Equity compensation works for the leadership of the firm rather not cheating absolute goals for a performance-based equity towards our ultimate or more decimal values on how we rank within a peer group.

Specifically targeting rotce and tangible Book value drove over a three-year period along with a modifier based on total shareholder return that change we believe is moisture Cheryl over a long-term. I probably have spent too much time on as soon as but those of you that have been around for a while, you know are unique instead of culture. It says structure is cultural and it is definitely part of what Drew you to our parts for both the annual cash and Equity incentive plans. The first quarter would indicate we were trending in the right direction.

Ask expense run rate. We're going to explain personal experience with all of our new hires coming on board and inclusive of our increased incentives Personnel expenses should increase between two or 3% off for the remainder of the Year conversely all of our other non Personnel costs, which amounted to slightly more than $242 billion last year. So that should see a high single-digit percentage increase that's right a decrease in 20 21, as I stated before the leadership of our firm is determined to not let a trend developed with the less than Target pay out to our Associates Thursday. We will work hard to avoid and twenty Twenty-One, but to accomplish that we all are looking forward to meeting and exceeding our financial objectives this year.

Quickly some comments on Capitol. I'll be brief. We raised our dividend to $0.18 a share the last quarter with the share price where it is. We've not acquired a shares and we don't anticipate a requiring any Engineers will be working to redeem a couple of sub debt issuance has this year and as I mentioned previously we've intensified our focus on tangible Book value growth by adding a component for it in our leadership second compensation, please ask who are not going through the slot in-depth if we've covered most of this previously. So this is really a summary for the model Builders out there of what wage obviously we realized that we appear more optimistic than most that said we have great confidence in our people our markets and our clients and renewed optimism about where the Pinnacle is headed.

Now bhg.

The blue bar is on the trade originated on the chart or origination and we have ramped up with more loans being flooded with records being set nearly every month was the past three fourths first quarter was a record for both origination and places the green bar represents loan from which Gail cell has been recorded as these loans are sold to download ring backs. This is not predictable. The HD model with game old sale revenues being generated coupons and fluctuated somewhat over the last three years ending at 13.6% for the first quarter as to bank by race, they fell down in the first course. So in that spreads remain in the mid-90s switch over time is up from previous years.

The bottom right chart nail over 1,200 Banks and phds network and almost seven hundred individual Banks require bhg Lounge last year. This has to be one of the strongest black platforms for a wholesale model in the country. This slide is probably the best slide to demonstrate the growth potential of the agencies model. The LX have proved have improved significantly over the last few years and it is resulting in better hit rate and more levels leading their credit standards as the credit. We've updated phds charge off and Reserve Bill chart. These are off the vehicle is sold or network of comedian Banks the green bar shows that currently they have just under three point nine billion dollars in credit with banks who have acquired PhD level to Orange Line details of birth rate while the blue line on the chart details to Resource a cruel as a percentage of outstanding well with these other Banks trailing twelve first quarter Twenty One Loss has landed at 4 and half percent basically consistent with the birth.

New Year's and during the year where who knew how cold is it would impact loss rates. The reason the recourse obligation Reserve is used to reserve for future losses for the lone soldier Outer Banks with Cotija increase the reserve by approximately 15 million in the first quarter, but as a percentage of loans, it was down slightly.

The top left chart we've shown on several occasions the quality of these she's borrowers has improved steadily in the past and over the last few years the issue continues to refine their scorecards and increase the quality of it off again the right chart and the Civic or maybe the most powerful chart. I have to offer related to bhg steadily improving credit quality looking at losses by the image lawsuits continue to level off earlier about since origination says pointing toward a lower loss percentage over the light of the underlying loan pandemic related events make all these lines to move upward, but the quality of the bar remains open, it is very impressive and it's much better than just from a few years ago.

Lastly we said it last order and will say it again 2020 with a big year for bhg and we anticipate big things in 2021 last year bhg executed on that first $160 securitization allows you to continue to diversify revenues and its funding sources. We're expecting another similar series security station at bhg in the near future here in the second quarter of 2021 SRX continue to ramp up these she had a great operating quote in the first quarter very much exceeded everyone expect expectations. Even there's we left our expectations for 20 21 off early know expecting 2021 Spruce outside Road in relation to twenty twenty of twenty to twenty 5% or more before we had anticipated high single-digit growth. So, yep.

loan the loan products

Mechanical at 2021 will take work, but we are optimistic deposit growth has been remarkable deposit pricing is headed down them should be flat to us bhg off another great quarter and we continue to believe in them. The Personnel costs will go up but correlated to increase earnings credit for both chemical and bhg. We believe is in very much. So with that I'll turn it over to Tim to talk more about correct. Thank you Harold. Good morning. Everyone using the traditional credit metrics of net charge-offs. Npl classified as test and passed due accruing loans tentacles loan portfolio continues to perform very well in the first quarter as in Prior quarters during COVID-19 our faith and credit teams continued their thorough client Credit reviews particular emphasis was placed on non past credits.

Our hotel portfolio and credits in our COVID-19 specific low-pass risk rate. Our first quarter credit metrics are very encouraging our classifieds assets decrease again, this quarter dropping by 17 million and are classified asset ratio declined to a very modest 7.3% Npa's also took a priest this quarter down to just 36 basis points. Finally criticize lungs decrease during the quarter by $85 million.

Similar to private quarters in 2020. We conducted a four-question survey during March of warranty cni clients with loan balances totally 931 million off. The survey was specifically targeted to our low pass risk, right clients in a wide variety of segments such as entertainment restaurants consumer services and Health Care off the questions inquired about Revenue projections for the current quarter compared to the same period last year and months of liquidity the survey results report more optimism than our fourth quarter 2020 survey responses that we previously shared with you of particular note 87% versus 60% in December said first-quarter 2021. Revenue should be between seventy-five and one hundred percent of first quarter 2020.

62% vs. 53% in December have seven months of liquidity or greater.

This line is to provide an update on tentacles loans that were modified under Section 4013 of the cares act are 4013 modifications were negotiated with borrowers off from the perspective of providing the client a longer-term solution to help them bridge to the other side of COVID-19. Our approach was to improve tentacles position and sucking easily help the client with each modification. We collected very current borrower information as we sought to accurately re risk raise alone and to contemplate the term back to our modification a key distinction between deferrals offered first and second quarter of 2020 as these modifications executed in third and fourth quarter is the vast majority of our clients with 4013 modifications are at a minimum paying interest monthly.

with each forty

4013 modification for our hotel loans was negotiated to fit the borrower specific circumstance are modifications generally consisted of changing the loan repayment off the interest only for 3 to 12 months and consideration for borrower concessions such as paid the approved interests that accumulated during the earlier deferral establish an interest reserve on deposit with Pinnacle.

and shorten the loan maturity

As Illustrated in our supplemental deck Pentacles Hotel book has held up of particular note. Our hotel portfolio occupancy has been a stronger than the national average as reported by Str for eight of the last nine months as an example. Our average occupancy for the month of February was 15% versus the national average at that time of 45%

On a very positive note SDR reported for the week ended April 10th National Hotel occupancy was 59.7% This is Jeff highest level in the past. 12 months given that 74% of our hotel loans are in the economy limited service or Extended space segments. We believed improving occupancy. Try and bodes well for our portfolio.

Many of our hotel clients in these particular segments can cover operating expenses and interests when occupancy is in the mid forty percent range.

As a testament to our conservative Hotel underwriting prior to Cohen, we only have four loans totaling 6.6 million that are rated classified.

With the American Rescue plan that deadline for banks to complete 4013 modifications was extended from December 31st, 2020 to January 12th, 2022 as this table illustrates. We've had very little change in our forty Thirty forty thirteen low modifications after the original deadline.

This next slide is to provide a brief overview of our different credit delivery channels. All the structure of our different channels may not appear unique. We believe in a model of hiring experienced Bankers in combination with the design of Pentacles loan underwriting channels that drives our results.

Seven one of our key tenants to help us play offense during the good times and also executes defense very effectively include for cni and cream on requesting a greater than a million. We have credit teams in Market working directly with our financial advisor. The credit teams have historically joined the banker on Prospect org calls for loans greater than 1000000. We do not use remote centralized credit factories or hubs as many of our regional competitors do Thursday at Pentacle or essays partner and collaborate with credit very early in the loan request. We believe this practice of quickly involving credit on loan requests home is different than our competitors.

Years of experience for a senior credit officers is 29 years and the average years of experience for our credit. Analysts is Twenty-One years. We believe our credit teams experience level has served as well and converting prospects to customers and serving our clients and our special assets team is led by a 40-year industry veteran. His team of choice is advisors average sixteen years of work at experience chemicals financial advisors are encouraged to raise their hands early with any loan exhibit early signs of distress our culture of involving our special assets experts early has been a key driver in the positive trend in our classified assets and empty a.m.

Animals credit metrics have held up. Well, although we have shifted back to an offensive stance. We will continue or thorough defensive work on a client's in the impacted segments and in particular our Hospitality book and now Terry all handed back over to you. Okay. Thanks. Am on the one hand. I think it's just the football as it relates to Coleman, but it seems apparent to me that as a result of the progress on the vaccines along with all the stimulus has been poured into the economy. We're setting up for a strong. I have a 2021 and we said any number of times. It's been our intent since last January to get the position to seize those opportunities that would inevitably inevitably exist in the same as the economy begins to reignite.

As I mentioned in my introductory comments, my view first quarter was an outstanding quarter was 36 basis points classified assets down to 7.3% past two down to just nine months as equality actually appears, excellent, excellent and many of the threats. We once feared seem to have subsided adjusted EPS was up 313% off of the same quarter last year importantly adjusted ppnr was up 25.2% off the same quarter last year and revenues were up roughly 20% over the same quarter last year. And now the time when both been tax and asset generators or gardening and Norma's multiples and we'd leave the village Jesus validated the power and they're differentiated models as they continue to originate and sell volumes of loans through their proprietary auction platform is Harold mentioned. We expect that they'll do another securitization in Q2 and is Harold also as already mentioned even with the security job.

Nation are now forecasting income growth and twenty to twenty 5% this year. And so we believe all this stuff for a grade twenty Twenty-One building on that foundation in my life as a reminder in 20 21. We're extremely bullish on our organic growth opportunities coming out of the pandemic Greenwich Associates is estimated based on their market research among business owners that roughly 20% of the revenues to bank is in motion due to the high level of dissatisfaction with large Banks responsiveness gearing COVID-19 contributing factors, including handling the payment deferral early on then ptpp and then subsequent loan request also based on business owner feedback Greenwich has developed a crisis-response index which ranks back based on their response to the prices aggregating how clients rate among the most important criteria during the pandemic not surprisingly in their fourth quarter 2020 died up pinnacle.

highest rated banks in the

Meeting that we're one of the best position banks in the country to capitalize on this money in motion is 20% of revenues available for the industry based on client dissatisfaction. Yeah, that was most attractive Banks to work for in the country. We were just listed again and Fortune Magazine as one of the top 100 places to work in the country one of the limited number of banks on the list and that application has enabled us to hire a record number of Revenue producers in 2019 another record in 2020. And then if the first quarter is predicted, we should attract another phone number Revenue producers and twenty Twenty-One, which would suggest outside organic growth and perhaps most importantly we're located in markets with some of the best size and growth Dynamics in the country Nashville continue to create jobs, which will further accelerate its growth most recently with its announcement of oracle's expansion into Nashville, 8,500 jobs and wage.

1.2 days of dollars of capital investment also recent Announcement by the partnership of GM and LG on a 2.3 billion dollar investment to build a back-up plan here in Middle, Tennessee with 1,200 Jobs severally Raleigh recently announced that North America's largest end-to-end bio bio pharmaceutical manufacturing facility will be located in White County and I'll create more than seven hundred twenty-five jobs. And then Google is bringing an engineering up with it's uh, many private many of the thousands of that added all the other successes in the triangle. And of course Atlanta continues to be the land of milk and honey. Georgia was recently named the top states to do a business for the seventh consecutive years and I'm not exaggerating the Metro Atlanta Chambers list of meaningful relocations and expansions for 2020 is a seven-page document unbelievable.

And finally, I've already alluded to the importance we place on being in the largest and fastest growing markets in the Southeast in the past. We've published maps of the Southeast Texas, Florida to demonstrate our job markets and we filled out the majority of those markets with the acquisition of being see in 2017 and denovo start in Atlanta at this point. I can't name a franchise with a more attractive footprint or Thursday is better situated going forward. I think the best illustration of our Target markets is simply a list of the largest and fastest-growing msa's in the Southeast now including Florida, we're satisfied. I believe that we've adequately demonstrated that are distinctive model is universally effective in the Southeast and if we've already pointed out we believe there's great vulnerability as the large Banks and dominate these markets. I would not seeing unprecedented opportunities to enter those markets and a few cases with potential strategic combinations, but in many cases on it to Novo basis, which we like a lot dead.

our farm is almost always been a high growth and

Adam Services firm going forward we see the extraordinary vulnerability at the large Banks and I made many of our markets. We expect to attract the best Bankers in both our existing and potential markets around the southeast. We love the size and growth profile of the markets that are in our existing footprint. We expect to have opportunities to expand into other attractive South Asian markets. So again, I think we are excited about the potential growth both short and long-term operator on a stop there and we'll be glad to open the floor for questions. Thank you, Mr. Turner the floor is now open for your questions. If you would like to ask a question at this time, please press star one on your touch-tone telephone and ones will be given preference during the Q&A again. We do ask that while you pose your question that you pick up your handset to provide optimal sound quality and our first question.

Comes from Jared Shaw from Wells Fargo. Your line is now open.

Hey, good morning, everybody.

Maybe if we start with sorry bhg, I mean that's that's great that you're seeing there. And with the securitization are they are they doing that just really to keep that that page open or should we expect as we go through the year that your decisions will be a bigger a bigger part of that and I guess how big could the you know the balance sheet at bhg get or helping with a life without getting versus selling them. I think they're pretty confident with growing their balance sheet. They will have a securitization accomplished here in a second thoughts and we would not be surprised to see they'll accomplish another one before the end of this year. So they've not gone away from that diversification strategy here. So so we fully anticipate them to grow it. They think they can get their balance sheet up a meaningfully hero the next couple of three years.

Okay, and then you know with that with that Revenue coming in, you know and then Terry's comments about the you know, the the opportunities and these other markets including Florida. Is there an opportunity for you all to be dramatically increasing the the the hiring base of of Revenue producers in some of these new markets and can you take this as an opportunity to really expand that Atlanta model into into other markets and if so does not included in your your expense Outlook or is that what that be additional as those opportunities come come up with?

Well, I'll talk about the expense Outlook and what's in and what's not in it. Go in the you know, the the hiring plan for the rest of this year in other markets month. We do include a kind of a colored a placeholder or new Revenue higher for the rest of the year traditionally. I think we've called that de minimis wage so that every market leader has at least some room and their plan for new hires, but it's in no way shape or form kind of the Target that we're looking for out of choice out of these moral leaders than what we expect from them in these markets.

Does that make sense?

Yeah, so if there's so if there's a bigger opportunity than that would that would not be reflected in in the budget at this point. That's right. Get outside hiring going on will fully support that long. Did your I guess I would have had to Harold's comments. I do believe that we are likely to have incremental opportunities and markets that we're not current month. And we do have I think we enjoy a great reputation and as you know, there's a fair amount of turmoil around the southeast at some of the bigger companies and we find that we have people contacting us from various markets that are interested in, they're moving a team and so forth. And so, you know, we we continue to evaluate those opportunities and bet those opportunities, but I do believe that we're very likely to have incremental hiring opportunities and markets that we're not currently in

Okay, great. And then just finally for me I guess can you give an update on how how the new hires that have been brought on over the last 18 months or so, how are they? How are they doing in terms of actual production has the goal and obviously COVID-19 through everyone for a loop but are they getting traction are they are they able to start chopping some wood on that 20% of Bank Revenue? That's that's in motion right now, Yeah, we think so. You're what we do is we track kind of our Revenue producers based on how long they've been with us. And obviously the ones that have been here the longest are the ones that are producing most of the continual revenues for us, but

We track them based on ten years of one year three years five years and then more than 5 years and the the newer the newer I guess I'll call them higher wages are coming up the ranks We're pleased with that and we fully anticipate that they will be the ones that get us the momentum. We need here in the next couple of years as Terry mention. I think it's something like twenty-five percent twenty to twenty-five percent of our Revenue producers have been hired in the last couple of years. We think that's a that's an incredible opportunity for us here in the in the near-term.

Jared again, I'll add to Harold's come in. So I think if your question is on the right track called me does impact and I would say this way and lengthens the same thing. I go both in terms of our ability to recruit people as well as their ability to recruit their clients to the firm. So it does lengthening COVID-19 where you know, just more difficult to get in front of clients and those kinds of things but with that said as as Harold mentioned we are dragging it. We are seeing the progress grow and we do believe that you know, based on the way the pipelines are built in. But that they'll be able to deliver and as you say get traction on this 20% of the shares that's in motion.

Okay.

It's just then then when you look at your loan optimism overall though, is it a combination of you know, being driven by new clients or better utilization or or sort of people both? Well think it is both with the increased line of credit draws. That's helpful. But we also see an extraordinary extraordinarily high level of life in commercial real estate. So there's order to you know, balance each other. And so when you work your way down to the net growth, I think the biggest factor in our ability to produce that will be their ability to these cars ability to move that market share.

Great. Thanks.

And thank you. And our next question comes from Steven Skelton from Piper Sandler. Your line is not open. Hey, good morning everyone. How you doing? I'm doing well. Thank you. And I apologize if I missed the first couple of questions there, but I guess one of my questions for you. Just longer-term is you think about you know, bhg. And obviously I know there's a lot of unknowns and if that ever creates a liquidation event, but how do you guys think about Capital priorities if and when that were to occur and maybe specific around m&a given you probably do have that Advantage currency you have, you know kind of sought in terms of m&a overtime. I think you're at about 2:14 jable vs. Your peers at two times teams will today so kind of choice in how you think about that Capital deployment and an opportunity set there?

Yeah, I think is sort of alluded to in the in the prepared remarks there. I do it Thursday. We are stock is Advantage. I do think there's even a opportunity that seems to be picking up again. Not such a wild stream of announcement, but it seems to me a lot so there's lots of dialogue going on. And so we continue to evaluate even a opportunities really across the front and so much. Anyway, I think you know, they're stating that I think going back to last year. Somebody asked about him and I and you know, my response was what I mean, I wouldn't spend my currency that strange, you know slightly above tangle Book value, but the 2.4 that is a different equation. And so we look to optimize both the opportunity and advantage of the stock off.

And so anyway, I guess I've just characterized that way I don't want to overplay it over bill it over sell it as you know, there are thousands of circumstances have to come together to make it work but certainly took a different position than we would have been even six months ago as it relates to m&a I think on the as it relates to bhg, you know, it is just so hard to forget to ask questions a lot about what you do with this. What would you do if that man? There's so many circumstances that are running on what what with the valuation be what you know, how much might be solved. I'm you know, there's just a thousand valuable thousand variables that would influence what choice we make when we get there but I would say this it's a really luxurious problem to to have them in a position with uh so much money interested in what they do. So idiot, right? We just have to cross that bridge when we get there.

Yeah, yeah.

No, definitely a high-class problem. I suppose it's been a great investment. Does it make you want to think about other non-bank Acquisitions? I guess moving forward or is that you know something you're exploring more than the Traditional Bank deals whether that be syntax type investment. I know you've done some of already or other line of business type acquisitions.

Yeah, I think I would say that we we have and we continue to look at you know, sort of alternative kinds of Investments like bhg. I think you're aware of advocate Capital which is you know to smaller scale deal. But it it's a meaningful deal. We've got money invested in a leasing company. We've got some you know our approach on these things and generally using Collins theme of you fire bullets not Cannonball, you know, and so we do like the idea of finding both fintech has that generators that seemed differentiated and so you ought to expect us to age you to look in that vein that you know, it's not exactly like looking for a unicorn but it's also they're not just everywhere, you know, so, you know takes their little more there may be a little more serious

Liberty and that I think but but certainly we're interested in in those kinds of things I think on the lines of business. I'm not saying there aren't any but I see less I was just a big handed, you know, we've got a pretty well full build out a product capability and you know, when you look at some of these things that we would have a ninja in line, you know take P&C insurance or something like that. I mean the the when you get out of the brass taxes of it, you got all this rolling up going on people paying extraordinary multiples. It creates too much good with us and maybe you know when you get into some of those sort of wealth management lines are really hard to hard to acquire and feel like you're going to either make a good deal or you're going to be able to do the revenues many of those things with personality dependent and so forth. So I'd be less excited about lines of business. Then I am about bank m&a or dead.

other sort of fintech asset generators

Got it. That's helpful. And then maybe just last thing for me. I might need you to talk talking about Atlanta so much cuz there's people everywhere here and the traffic bad again to highlight it too much. But that's kind of where you are on the progress front there in terms of how many lenders you have on the team now, maybe the base of loans and then I know you mentioned specifically wealth management for Atlanta in North Carolina. And is that just building out the teams or is there a specific opportunity around wealth management and those environments that you really see in that's leading you to to push into that space in particular?

Yeah, I think again.

I would characterize honestly, I would characterize our opportunities and some of these North Carolina market specifically Charlotte and Raleigh is really similar to Atlanta again, of course Atlanta the biggest most vibrant of those other two markets are really have some markets and you know, we have such small shared positions that that we sort of look at those much like we would get the number of starting Atlanta. I think the higher engineering they've been pretty even I can't recite the numbers in each of those markets, but we're hiring Revenue producers in each of those markets both which might cost additional financial advisors or relationship managers as well as the rest of the revenue-producing categories like mortgage Originators Brokers and trusted million Riders. I think you asked about the opportunity. I do think that the large banks that we've been working on to higher relationship ma'am.

From have really high vulnerability in some of these West management businesses trust administrators portfolio managers Brokers and so forth. And so that's really need the updated that we're trying to seize for the other Revenue producers.

Got it makes sense. Thanks for the time and congrats on a great quarter.

Thank you. And our next question comes from Rock vandervliet from UPS. Your line is not open.

Bhg just to confirm so that's a 20 to 25% income growth guide for this year. Is that right Harold? Yes, they are or okay, and where's that growth coming from a couple of quarters ago? You had a lot of disclosure about new verticals is that been kind of choice sidestepped in this is all the traditional more traditional growth areas, or is it new verticals to yeah, I think I think there's there's a list of things that off cuz we asked him the same question.

I think the gate wholesale model is operating at pretty much Peak efficiency. They've they've got a better data they're able to go out and send out more opportunities to do business with people. So on and so forth. I think they're resolution of substituted loans is better than they anticipated postcode so they got some break their I think with the improved credit Outlook, you're likely to see some reduction in reserves for losses. I don't think it'll be it'll be like a a big kind of clip thing, but I think it'll be steady for the rest of the month. So I think when when you put all that into the blender, they're coming out thinking this year was going to be a great year for them. And so that's how long

You have to the twenty 25% or more.

Got it and shifting over to the the funding side. I I believe relative to our model part of this was just the reduction in some of your wholesale it it did kind of stand out to me. As you know, you're you're showing a decline in the rate of deposit growth. It seems could you could you speak to that? I'm seeing any any piquing their but I can't really give you any kind of comfort that we may see core deposit growth lesson. We're active in several different initiatives to kind of grow lower costs smaller account develops deposits, but we will see more runoff in the wholesale book. We've got like a like we missed we've got a billion dollars coming out this quarter.

But hopefully that'll be enough so that we don't grow the funding book like we did here in the first place.

Okay. Thank you.

Say thank you. And our next question comes from Steve and Alexa polis from JPMorgan. Your line is not open on a good morning everyone in the industry off on the quiddity particularly your larger competitors if you talk about the competitive environment today for Lending and could that impact your ability to get that high single-digit growth?

Yeah, that's a great question. I think you know Harold alluded to in his comments fact that it sort of feels like a borrower's market, you know, there's a handful of reasons for that. But you know, clearly one of them is limited loan demand which drives pricing lower and those kinds of things. So what your life is a is a correct thing even right theme, I believe we believe that we have taken that into account in our forecast off, you know, nobody knows future I guess but where what we believe is that if you just sort of look at the loan demand in our footprint if you will suck on demand is still very low we expect that will pick up in the latter half of the year, but it'll be muted by all the liquidity in the system and so yep.

We believe we get the Grove is from really big mental higher and move in market share from where they were to us. And so that's that's the principal assumption about where the growth comes from is less dependent upon economic loans man than it is more mature movement. Okay, that's helpful. But if we look at the COVID-19 impacted segments Hotel restaurant Etc. How are you looking at those exposures from a long-term View? And do you have any plans to reduce those exposure time certainly in Hospitality where we have no appetite we haven't generated a new hotel loan since first quarter of last year. I would tell you that our underwriting for cray retail certainly is changed. We've really shifted that to age.

single-tenant credit tenant exposed

Yours and grocery-anchored. So I think part of the answer is just shifting the appetite within the great restaurants. Certainly War concerns, you know, we're uh, we have some in franchise Concepts that we're still tracking well, but I would tell you with restaurants. It's dead, you know guardedly optimistic and strict underwriting.

So hopefully that might have helped answered your question. Okay. Thanks. And then my last question Teri given the comment earlier commentary about evaluation and maybe you're looking at m&a opportunities a bit differently is the flip side of that that you're not looking as active on the buy back side. I know you have the $125 plan out wage, but how are you? How are you thinking about that given the valuation of the stocks? Thanks. Yeah, I think Steven answer your question directly on the buyback, but just to be dead, you know, uh, I think I used the phrase and talking about that. I don't want to oversell it over bill it I'm not saying we're going to make an acquisition. I'm just saying we're in a different position and there are lots of discussions going on and off to consider and I was kind of thing. So I don't know. I'm just trying to get that shaped up for somebody who understands how we do have a high valuation. It does create some opportunity, but I don't want to overplay the likelihood that we're going to run a game.

Mike Munchak position cuz I don't think we're going to make a bunch Acquisitions. So any right let me hopefully that'll better frame that, Matt long as it relates to the buyback. Yes. I think you're right. I don't think you ought to have an expectation right now that we would that we would way back in and buy shares primarily you say as a function of the valuation. We just we look at that differently. We like having the authorization will watch it over time, but I don't think we have an intent to buy shares at this price. Okay, great. Thanks for the clarification and thanks for taking my questions.

A n thank you. And our next question comes from from home group. Your line is not open.

Hey guys. Good morning. How are you? I'm good. Thanks. First Harold was curious. Maybe what your crystal ball might be telling you on the quiddity wage. I know you thought that might start to drain at some point and it's obviously extend it out for yourself as well as the industry. Can you maybe give us some car on? You know how you see that liquidity being deployed over time how much of that might happen and how much of it just kind of drains naturally with with people using cash. Yeah, that is kind of question would be likely will um, you know, a modest amount of bonds. We're likely going to the market here over the next two or three quarters. We might build our Prestige from a 13.5 up to a fourteen point five or something like that. It won't it won't be a big number.

We've got in all likelihood.

No, I don't know if billion 5 or so a PVP loan that we anticipate coming to us here over the next four quarters. So we're you know that will help them additional liquidity to offset redeemed in some of these wholesale funds it's going to be a pipe. It'll be a war to try to drain some of this liquidity off remain optimistic about loan growth targets. We remain optimistic about reducing deposit rates. And you know, we particularly got some large depositors that are more weight sensitive and they fully appreciate how the value equation works and if they can find a better number at another financial institution, they'll move. Money and right now we're okay with it and we don't think it damages our relationship with that client at all.

So there's a lot of things that are that are in place to try to get some of those macquiddy on our balance sheet.

Okay, I appreciate the call over there. And then the other thing I was curious about was, you know in the in the guidance for expenses you talk about requiring increased infrastructure wage war, but you're obviously giving guidance for non-personal expenses to be lower this year. Can you talk maybe about the increased infrastructure support what that all entails long? Are you guys doing anything on on investing in infrastructure lie that that might change that Dynamic outside of the person alone? Yeah. Not really. I don't think we're doing anything as far as bricks. In fact, we've got a couple branches I guess in play here this year. Um, uh, but there's nothing big as far as buildings or off Sala G that would cause you know, you'd be called a blip on the radar most of our infrastructure Bill comes around personnel.

And it'll be you know, call it 4-1 Revenue Cruiser we end up hiring two to three other people in support of that Revenue Cruiser so that that's the infrastructure that we referred me to, you know, the comments.

Okay, then if I could sneak in one last one around the the change to the equity compensation, you know just the tangible tangible book value per share growth being added to that oil change how you might do m&a in terms of thinking about payback periods or change a book dilution

You're willing certainly is impactful. So we would it would be something we would need to consider traditionally. Our board has been willing to work with us on a significant events and how that might impact longer-term into things.

Okay fair enough. Thanks for the color.

And thank you. And our next question comes from that alone E from Stevens. Your line is not open. Hey, great. Thanks. Good morning. I want to ask about the banks sensitivity to interest rates on slide fifty-two. You give us some good disclosures and it looks like the bank continues to move to a a liability since the position, but I read some of the comments on that slide. It sounds like you've got some leverage to pull off set this over the next year or two. Should we be assuming but by the time rates do increase wage on the shore and whether it's next year or 2023 or whenever that Pinnacle will at least be in a rate neutral position. If not asset-sensitive. Just trying to appreciate kind of what the what the strategy is dead. Yeah. That's a great question Matt and you're right. We've got the levers. I've got one point five billion dollars in loan floors that are to gain right now that we could unwind today and that'll free up a billion five dead.

Motive right to move us to more of an asset sensitive position. So we've got some we've got some levers like that that we can pull the help alleviate, you know, the wage whatever that slides indicating currently. So yes, we're not we're not panicked about our balance sheet or anything like that. We think we've got a great opportunity with a guy in the move. Most of my liability sensitivity is tied around alone floors. So it's all about that. Once once we can get our better view on where range we can always start moving around on loan floors and cure the problem.

Got it. Okay, and then so can back on the loan growth and the Outlook definitely appreciate the guidance. It's kind of a bottom-up review with all the lenders in the bank curious. How do see now utilization will rates look today compared to levels of few years ago. Just trying to appreciate it that does Rebound how much incremental benefit we we could see from loan balances to the Banks Banks. Yeah. We're at 43% or 46% something like that off.

So those are the those would be loans that are currently on our books not anticipating a big group and you relation. So all of our growth we think is going to have to come from moms are currently not all of it. But most of our Grill's going to have to come from Lowe's that are currently on somebody else's balance sheet mood hazard.

Got it. Thank you.

Thank you. And our next question comes from Catherine mealor from KBW your line is now open. Thanks. Good morning. Good morning. What is to start with a follow up on the Gap? And how much do you expect to come through and twenty Twenty-One within that guy?

Yes.

A great question and and we beat each other up on trying to anticipate how much PP I've got. You can calculate the interest income with where that's might pay down but it's all about the forgiveness and we've got about sixty three million dollars and additional appreciation to come to us, you know, we think a lot of that's going to suck this year. It's probably more than 50% of it. We'd likely will realize this year maybe upwards to 70% of it.

Okay, great. And then what do you think about what when we talk to our relationship manager is dead or not hearing anybody say they're not going to go for forgiveness. So I think

most if not, all that 2.2 billion is hanging out there on our balance sheet will likely find his way to forgiveness and I would imagine it's going to be more sooner than later because I do believe sometime in the near future allows last year where they're going to get into principle pay download here.

You know sir. It okay, that's helpful. And then as you think about the big picture ppnr growth, there's a side a couple quarters ago. I looked at ppnr per share kind of EX GX the excess liquidity and the PPP. Do you think this is a year where that or ppnr of those three variables can grow or is it more bhg is kind of helping you fund this expense growth this year and you know, maybe that's more of a next year thing.

What is also helpful to help fund some of that incentive group, So that Dynamic is very much present.

the

ppnr growth we're all banks is relatively benign this year and in most cases it's negative. So we've challenged our folks. We think with a fair Target long it'll be positive and hopefully we can we can work our way through it to see at least some incremental growth and big top four tiles on.

And if I could do one more just for Tim Tim. What's the path to moving loans off criticized?

Loan when I say we've it's myself or special assets manager and our Creek Credit officers every quarter every single lone five million in greater, and I've been thinking about that information with the hospitality book. We may have some moving off the criticize this quarter second quarter. We'll have some I think more third quarter and more fourth quarter, but they're still cap and maybe a part of that book that will take until early 2022.

So I think you'll start to see it accelerate in terms of positive migration out of criticized back into past. You'll see that start this quarter and accelerate third fourth quarter.

Okay, that sounds great. Thanks and great order.

Thank you.

And thank you. And our next question comes from Michael Rose from Raymond James. Your line is not open. Hey, good morning. Thanks for taking my questions. Just wanted to touch on the fact that bhg is significantly adding to their their staff is here and there's reports that they may look into point-of-sale lending at home improvement stores. Can you guys just took clarify what what the plans are there and and and where that stands? Thanks.

Michael I think what they think they're hiring plans will be similar to last year for twenty Twenty-One and then they've got similar hiring plans for the next few years. I think they added a hundred or a hundred and ten people in 2020. So they anticipate a similar number of this year.

Point-of-sale they are looking at all kinds of new product models. And that's one of them. Oh, yeah, they are definitely looking at it and they your building plans to it to go after that market.

Okay, I thought they had a employee kind of about eight hundred and they were going to add about six hundred fifty this year what you're saying sounds a little bit different I guess was the article that I read the wrong or just wage. Where where does that stand? I think as we talking for that article was written off of an internet-based thing that talked to the marketing guy. I think they'll get to the 650 over the next few years, but as it stands right now, I think the number for this year is somewhere around 100 to 125 employee guests.

Okay helpful, and then maybe just back to the the nii guide, you know, the sheer does seem like the ppp's will be higher and then kind of core will be lower wage. Yeah, can you reconcile that to us versus you know 90 days ago. And then are we at a point where you know PPP the then I will grow from here. Is that the expectation?

We're we're very helpful with court and interesting comments PPT will grow with coral growth for sure right now. We're going to stick with our forecast that am I gross will be high single-digits for this year.

Okay. Thanks for taking my questions.

Thank you. And our next question comes from Jennifer Demba true is security your line is now open.

Thank you. Can you Circle back to the m&a topic Terry just curious you said that the the higher current email makes m&a a little bit more attractive. Can you talk about wage of properties would be of interest to you right now from a size Geographic standpoint. We know you're kind of biased towards more commercially oriented properties. I appreciate that always makes all about the topic of the very but I never get it said who I think people understand what I'm trying to say to them. So anyway, I appreciate the question. I think I am and I it's just obvious that if you have a stock and trade in the book value, that's not much of an option if it's straightening 2.4 which is Banning vs. That creates opportunity to consider to your question about what kinds of things would be considered. I think you know, you got your whole range of options that I think everybody in the industry is considering on Thursday.

Human language would include strategic combinations in my Acquisitions billions. I mean so you got the whole

Realm of things that could be looked at their I think when you get down into making Acquisitions, my own sense Jennifer is that you know, I'm not interested in doing a lot of a Caucasian that wouldn't produce something close to double-digit creation and earnings creation. And so, you know, you can make your own assumptions on someone's life, but just sort of back-of-the-envelope math. I think it means you got to buy at least a seven and a half billion dollar organization to you know to create some kind of impact and so, you know the lives as well as I do not like they're forty of them out there. They're going you know, where that that threshold of did you say being in a major Urban Market? I'm having a commercial orientation and producing that level of accretion. So hopefully that

would shape what are considerations are

thank you. And our next question comes from Brian Martin from Jenny Montgomery. Your line is not open.

Hey guys. Thanks for taking the question. Most of my stuff's been answered. Just one one of the few things Harold just on the going back to the expense guide for a minute. If you look at last quarter just kind of how you were thinking about it versus kind of wait it out this quarter off in in the bottom line impact is there much change. I think last quarter was, you know, a high single-digit growth off of the last year's base of around five seventy-five eighty. And now this quarter you kind of tweaked it to be, you know the to 3% on on the comp and and then a decrease elsewhere, but just can you can you get kind of the net number of where you're thinking about? Is it still a similar spot to that? You know with 625 pepper range. Is that how it's still shapes out with the new guide? Yeah, I think so. I don't think it's moved much between the end of last year and currently off.

Okay, so similar guys, okay, and then just one other questions telling forgiveness Harold I mean is the loan forgiveness is the PPP occurs. I mean, it's most of that coming back into cash and check if you can redeploy it or how is that changing the size of the balance sheet I guess is is that occurs as a different now than it was previously.

Yeah, I don't think so. I think as those loans paid out will you know will try to deploy that cash in the new One's Choice don't have is that what your question was about? Yeah, just kind of the average earning assets. I mean, I guess it's the loans get forgiven and it comes back to cash. They're they're coming back to cash right now until you can you know redeployed wage, you know, what's what's continuing to occur? Yeah, I think so. There's no doubt that we'll have additional liquidity from the credits and hopefully we can get them Engine moving and be able to get that money redeployed quickly. Got you. Okay. All right. And then just one last one for Terry just on that last question on the m&a. I understand what you're saying geographically. It's still I mean, I guess is there more Focus or more interest in I know it's a limited number of targets, but would you be more interested in in adding to your existing footprint or I guess is it off?

Likely that you would have to go to, you know, like to go to a different Market than you're currently in given how you've talked about how much opportunity there is within your existing footprint.

Yeah, I would say it's I guess again Brian to go back and think about the size of the Acquisitions that would have to make those things are and so forth. I think you would have to draw the conclusion that you most likely go to different markets an existing markets. But again, I'm not ruling that out. I'm just saying yeah seems like, you know you find more opportunities than additional money then you do an existing markets. That wouldn't meet that criteria. Yep. Got you. Okay, I appreciate. Thanks a great quarter guys. Thanks, bro.

Thank you, and I am showing no further questions. This concludes today's conference call. Thank you for participating you all may not disconnect.

Ross dead dead dead dead.

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Thursday Thursday Thursday

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Jake