Q1 2023 Pinnacle Financial Partners Inc Earnings Call
Good morning, everyone and welcome to the Pinnacle financial partners first quarter 2023 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.
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With that I'm now going to turn the presentation over to Mr. Terry Turner, Pinnacle's, President and CEO .
Thank you operator good morning.
As you've seen first quarter was a very strong quarter for P and M pay without solid loan and deposit growth even in a difficult economic environment, which I believe is.
Linked to our client centric approach to the market.
Much has been written and spoken I suppose within the last month or so about one of the regional banks like ours, good withstand the inevitable movement of deposits.
Deposits up to the money center banks. So I believe we have now answered that question.
We have begun every call for years with this snapshot of our quarterly performance, which is the four year quarterly format with intend to showcase in the long term liability of our performance on the metrics that we think matter through the cycle.
The bottom of the slide you can see that asset quality continues to be extremely strong with nonperforming assets classified assets and net charge offs.
Continuing to operate well beneath four year median which represents a period of exceptional asset quality.
Honestly hard to imagine how you can get any better than that.
TNMP has repeatedly been recognized by Greenwich Associates as having one of the best brands in the country. According to Greenwich P. N N P stands out in the areas of being number one trustworthy and number two is easy to do business with.
That's an incredibly powerful position to own in these turbulent times.
Has the number one net promoter score in our footprint among businesses with annual revenues from 1 million to 500 million raving fans are always invaluable, but never more than in times like these it's just hard to lever buying that you love and trust our ability to leverage the brand to attract the best most experienced bankers away from our long.
National and regional competitors in ever increasing numbers each of the last several years continues to contribute meaningfully to outsized growth. The primary source of the growth is market share movement. As these newer groups consolidate their loan and deposit volumes being up a decreasing our reliance on economic tailwind.
It looks like to me the first quarter 'twenty, three and was a dramatic demonstration of the power of a differentiated brand.
Evidenced by a 17% annualized loan growth, 14% annualized deposit growth, 17% year over year revenue growth, 30% year over year net interest income grow so with that as an introduction, let me turn it over to Harold for a more in depth review of the quarter.
Thanks, Terry and good morning, everybody I've got a few new slides. This morning, so I'll move quickly through the usual slides together.
Information.
We've elected to start with deposits reporting to linked quarter growth of 13% in the first quarter was a real positive for us obviously growing deposits at a reasonable price and 2023 of the key focus we continue to build out our deposit gathering franchise around HSA community housing associations, and nonprofits and others and we believe we are making headway with these.
Other special deposit initiatives.
Our cumulative deposit beta stands at 46% through March 31, the last two rate hikes have seen more cost increases in relation to the earlier write offs. We do have some confidence that our client base appreciates. The fact that we've been fairly consistent in our approach to deposit cost increases while competitors are in some cases just.
I'll begin to experience revenue increase in deposit costs.
This is one of our new slots, it's about addressing many of the hot topics that have come around them resolved with the Silicon Valley and signature bank failures.
Not be more proud of our relationship managers, our support units and how everyone have answered the call and all of a sudden we were having to defend our franchise like never before.
We arm, our people with timely and relevant information and I use that as well as years of relationship building to call a deposit base that was jolted by the payer or the two franchises as well as all the media attention that came with the failure of these two very unique franchise.
That's the uninsured deposits the chart on the top left is our trend for uninsured and uncollateralized deposits for the last few years going back to pre COVID-19.
That trend here as the drop of 6% in the first quarter. Most of that is attributable to an increased level of reciprocal deposits that we offer those sponsors that request increased FDIC coverage.
This is a product that we've offered for more than a decade.
Our firm is focused on providing several alternatives to support the positives that might require additional support.
All in we've traditionally been about a media performer on uninsured depositors to our peer group.
And then hand in hand, with our uninsured deposit position as our liquidity position. We currently calculate that we have enough liquidity available to us to provide about 155% coverage of our $18 8 billion or approximately $12 billion and uninsured deposits.
Also much interested given the FDIC insurance discussion about deposit account sizes, we were hovering around 80000 part of policy count for the last two years or so the table embedded we'll chart breaks out commercial versus consumer sizes and transport hubs during COVID-19 commercial balances increased meaningfully likely due to PPP.
Clause for attaining more dollars to Counterpiracy power risks the onboard as well as building cash balances due to a fairly strong economic environment at least for our client base.
As to deposit mix shift in the bottom right chart. We're seeing deposit has moved more noninterest bearing and lower yielding interest counts and the higher interest rate products since the second quarter of last year ran around 25% noninterest bearing to total deposits.
And I need to plan contemplates further decreases in the rest of 2023, but no one really knows where it will end up we likely won't be into the pre COVID-19 levels below 20% as noted on the chart before yearend.
Right. After the bank failures in mid March we began tracking are 200 largest uninsured depositors to determine how they manage their deposit balances going back to just prior to the Silicon Valley Feldner call at March the 10th.
The end of last week those.
Those 200 departures comprised about $3 billion in deposits as of March 10, with the smallest deposit account being around $9 million. We began contacting relationship managers to find out what changes were happening during this critical time.
We identified transactions of about 45 million with a brokerage account or a large cap bank under what appeared to be applied to safety and something that was not anticipated prior to March 10th.
As of the end of last week, those same depositors at about $3.9 billion in deposits.
Which was up slightly from the three nine.
5 billion that was there at March the 10th.
Lastly, we've been able to specifically identify about $200 million in inbound a pause from Silicon Valley and signature Bank. Obviously those are new accounts that we're not in the top 200 adds up margins.
Given our strong first quarter results on deposits, we believe our deposit base remains very very resilient and our deposit growth guidance. We offered last quarter remains intact at high single to low double digit growth for the year.
The first quarter was another strong loan growth quarter for us we are lowering our LOE guidance for this year slightly.
The low to mid teens growth from mid teens growth as.
As we noted in our release last night, we tightened the credit box for construction in certain CRE categories, plus adding the incremental weakening of the macro environment. We were often for the lower loan growth guidance. This trip.
We're also reporting our 6% average yield for the quarter and anticipate further increases as we are expecting more announced price increases and fixed rate loans are coming up for renewal with higher price targets. So we should see fixed rates expand as well.
Again affecting our net loan growth based on Cat Morris noted on the slide to help everyone better understand the source of our growth charters comparing all of 2020 to the first quarter of 'twenty three as many of you know our model requires significant experience greater than 10 years in the market to come to work here just to reiterate substantially all of this loan growth is not new.
<unk> shown that Pinnacle bank with a new idea to pitch the ball.
So that had extended relationships with our relationship managers over in many cases decades of working with each other.
This is just not true for Charlotte, Nashville, Charleston, and other legacy markets, but that back the plaza in Atlanta D C and our specialty lending units as well.
The top left chart reflects our GAAP NIM decreased 20 basis points more than we anticipated at the start in the quarter out of an abundance of caution we added approximately 165 billion in cash our balance sheet as a result of the recent bank point.
Thinking back we built liquidity in a similar way at the inception of Covid, but this trip we've tempered the absolute sizable according to build as well as the maturity of the resulting federal home loan bank balances would come up with an average like two years and a weighted average rate of about 4.5% with the additional liquidity we have on our balance sheet, our planning assumption that our name.
Likely be down for the remainder of the year by call It 10 basis.
That said our growth model should provide for increases in net interest income as we enter 'twenty. Three we believe net interest income guidance of mid teens percentage growth for 2023 over 'twenty two 2022 is reasonable at this time.
As credit where again presenting our traditional credit metrics and loan portfolio contains contingent performed very well as noted earlier, we continue to have a very limited appetite for new construction, we addressed the CRD appetite chart on the bottom right somewhat so that only a limited number of CRE types are now being considered by our credit off.
Additionally, during the quarter, our credit officers notify arlinda units that any new CRE loans that are pregnant residing on another bank's balance sheet will be more difficult to move to peanuts.
<unk> and.
In summary, our outlook for our loan portfolio from a credit perspective remains strong so a negative trends begin to develop we believe we remain advantaged.
My second whose lives of the day, it's about credit the.
Top left chart deal with trends in construction originations, we began reducing our appetite for construction last summer, which is consistent with the chart. Additionally, the chart would also indicate that our appetite is largely concentrated in warehouse multifamily and some residential secondly, much discussion about renewals of CRE and fixed.
Bank loans, which is the objective on the chart on the top right over the next several quarters and we will have approximately $100 million in fixed rate renewals and the average rate on these loans is currently around four 5% to 5% our yield target ever know it will be in the 60 plus range.
Two comments regarding this chart.
Absolute size of the fixed rate volumes coming up.
And it will appear as very manageable and that with property rental increases over the last three to five years and occupancy levels being stable, we have great confidence that our borrowers will continue to be able to afford the incremental interest expense.
Lots of noise around all of the CRE right now and given what we hear about some markets rightfully. So the bottom left shows about 92% of our office portfolio is in our markets.
The chart also details where we are not located we like our markets and our borrowers that said our appetite for any new office like zero.
The table on the bottom right details the granularity of the portfolio as well as select credit metrics, our credit officers feel very strongly about the quality of our office portfolio.
That said they are aware of the macro case and are on point with these borrowers and Lynn.
Now on the fees and as always I will speak to BHG in a few minutes.
Excluding BHG revenues were up more than eight $5 million all of that said, we're pleased with the effort of our fee generating units as we see as we saw somewhat of a rebound for mortgage a nice increase in service fees in wealth management. We also have a focus on increase in swap fees. This year given recent hires so far so good.
We continue to anticipate that the revenues excluding BHG at our other equity investments will come in at around the high single low teens growth rate for 'twenty three older tonnage too.
Linked quarter expenses were up primarily due to increased head count merit raises at the beginning of January at a target of around 6% beginning of calendar year adjustments for payroll taxes, and 401 plan match expenses increased FDIC insurance assessments and timing differences related to credits and franchise taxes.
<unk> posted in the prior quarter.
Additionally, we have taken a hard look at our anticipated results for the year and comparisons of our financial plan for 'twenty, three and offsetting the increase linked quarter expenses, we are reducing our anticipated incentive payouts to approximately 70% of partnered awards in the first quarter the reduced incentive accrual speaks to the variable cost nature.
<unk> of our expense base.
Along with the burn projects are slowing our hiring we feel like we have enough levers to throttle back on expenses should we need to overall, we have a bold plan for this year are fully in a job to seize the opportunities. We have in front of us that said, we have modified our growth plans for this year and have incorporated that into our updated outlook as it stands.
We have lowered our expense guidance and feel like our expense base should result in low to mid teens growth for 'twenty three over 2022.
As to capital tangible book value per common share increased to $46 75, a quarter and up 18% linked quarter annualized from last quarter, our capital ratios remained above well capitalized we lock our tangible common equity ratio, which stands at eight 3%. We believe the actions we've taken to preserve tangible book value and our tangible capital.
Ratio have served us well and have no plans currently to altra, our tier one capital stack, the any sort of comment I put forward an offer.
Couple of new things related to this slide the chart at the bottom of the slide tracks select capital ratios as of the end of December compared to peers, given the impact of losses associated with the HCM.
Portfolios, we are very pleased with the results given our capital appears to be able to withstand any sort of changes to the capital rules that might be coming our way from either the standard setters are the regulators.
Now a few comments about BHG before we look at the outlook for the rest of the year.
Yes.
As the slide indicates BHG had another great quarter in originations, even though originations did decrease from the prior quarter with BHG implementation of a tighter credit mark so fewer of the lower credit score loans were funded in the first quarter.
She believes last year's volumes production during 'twenty two would have been reduced by 18% at the same credit standards has been in place for all of last year versus credit standards that are in place now in 2023.
All of that is related to the significant reduction in a lower trough approvals, which now are at zero percent approval rates.
Friends did expand in the first quarter from the fourth quarter for loans sold in the Bank network first quarter spreads were nine 4% compared to eight point that in the prior quarter, coupled with a larger allocations by auction platform. This quarter gain on sale revenue was up 12, 7% in the first quarter compared to the fourth so that math works.
The accrual for loan substitution and prepayments increased five 8% as a more cautionary posture about BHG management has been effect in effect for the last few quarters.
<unk> accrual for loan substitution in prepayment sport sold loan portfolio increased from 314 billion to.
The 315 $350 million.
Call it $36 million increase as the blue bars in the bottom right chart shows recourse losses were stable at 4% basically consistent with last year.
This is a new slide focus on BHG on balance sheet lending strategy as you recall the gain on sale program is sourced from BHG Bank network as depicted on the previous slide.
On balance sheet strategy is a combination of several funding sources, including securitizations negotiation for blocks of loans to individual banks and other funders et cetera.
Top left chart shows the lungs BHG holds for investment versus held for sale to the community banks and thus off balance sheet, along with the associated allowance for loan losses, given the macro environment as we mentioned and as we mentioned last quarter <unk> increased its own balance sheet reserve for loan losses to $178 million.
Our $5 one 9% of its all on balance sheet loans from four.
9% last quarter or about $31 million in groups of course seasonal is still on the radar for adoption on October the burst. We continue to anticipate the estimated seasonal reserve to be in the 8% to 9% range.
Yes.
The bottom left chart shows loan yields for the last several quarters along with the average funding cost the yields consider average loan balances and include both <unk> and HFF and the denominator.
Barclays will include both borrowings collateralized by loans as well as the firm working lines of credit with.
With the securitization completed in March the borrowing rates increased five 6%, while the loan yields were at 15, 4%. So spreads were at around nine 8%, which is pretty strong in this environment and as usual the BHG balance sheet and P&L is included in the supplemental information.
Bottom right chart reflects net charge offs and as you can see first quarter shows increased charge offs at around four 4%.
Lastly, I'd mentioned BHG is successfully completed seven securitization durable during the week right after the Silicon Valley and signature bank failures.
Get that accomplished at a reasonable rate was indeed, a great successful BHG and reflects the significant appetite for their credit.
As mentioned earlier Beachy tightened the credit box, particularly with respect to lower charges Oh. Its borrowing base. This will have an impact on both production and spreads going forward.
BHG refreshes its credit score monthly always looking for indications of weakness in its borrowing base credit scores were up slightly from the previous quarter. So their borrowers have remained resilient during the cycle thus far.
In comparison to other consumer lenders, we believe BHG borrowers remain well compensated with average ball earnings would be more around $293000 gain.
Yeah.
Looking for some key points I'd like to reemphasize and several have been talking about for the last three to four quarters Hornsby.
<unk> has responded to the macro environment and a very real way because she is and will be increasingly reserves based on macroeconomic data at least over the next few quarters. Secondly, BHG had been modifying their credit models towards originating less risky assets production volumes were strong and we believe they have great momentum.
To maintain production levels equal to those in 2022 or 2023.
<unk>, new funding alternatives will broaden their already strong liquidity platform, which we believe is unmatched by their fingers.
BHG has one $4 billion in available liquidity to fund this franchise with more interesting inbound calls coming.
Lastly, BHG took steps to limit its head count with job eliminations.
And eliminating most open positions as well as other expense reductions.
For this quarter.
We are reducing our outlook for BHG from basically flat earnings growth. This year was somewhere around 190 million to two of them $10 million for the year.
We continue to have great confidence in our partners at bankers healthcare group to deliver strong results over the long term.
Quickly again, the usual slides detailing our current financial outlook outlook for 2023, and the interest of time I won't go through all of these again suffice to say, there's a lot of macro issues around right now we have put forth a business case on what we think the fed will be on rates, who knows what's going to happen.
We believe a recession is likely and how deep a severe we more than anyone else really knows what we do know is that our business model is resilient.
Relationship based in environments like we have today that matters a lot our management team is experienced and we have tackled economic downturns before.
We have great confidence of whatever curve balls get thrown at us, we can handle and performing a very outsized what.
And with that I will turn it back over here.
Thank you Errol.
I suppose it's always drove it but.
It seems to me that I was saying to notice it more in difficult economic environments that investors rightly look for the critical measure then lovelock, Nick and value in the current environment it might be a deposit cost beta it might be the average deposit accounts as might even be the excess.
The FDIC deposits and excess FDIC coverage limits and any and all of that is informative to be sure but at pinnacle.
We will simply continue to rely on what we always have and that's a differentiated brand as evidenced by our unusual ability to turn clients into raving fans and our most recent data from Greenwich. We continue to have the highest net promoter score in our markets among businesses with sales from $1 million to $500 million.
I am confident that has and should continue to enable us to retain and grow deposits even in a difficult economic environment.
<unk> magazine, just named US as the 24th Best workplace in America, and so we continue to be a magnet for talent. We attracted another 26 revenue producers during the first quarter 'twenty three and we expect a debate of an employer of choice for those client focused banks.
Or is that are continually frustrated by their inability to get their clients taking care at many of our larger competitors I think that most people understand that.
Understand our company they understand the linkage between the pace of our hiring in the face of our loan growth.
It's simply a matter of ourselves is consolidating their boats from where they were to us and because of their intimacy with granted xyrem all alluded to earlier.
Hum.
Asset quality continues to be strong for those credits that are being set.
Similarly, we leverage our brand and iron model, along with the train focus on execution to attract outside of core funding.
We are fully explained in the various specialty deposit initiatives that we've developed over the last several years like HSA like H O ways and property managers like captive insurance companies just as examples to continue to support outsized deposit growth our capital levels compared to peers, even aftermarket for <unk>.
The majority in a L C H.
Oh, so the losses are very strong in relation to those figures and honestly I think that.
That's tied to an experienced management team that has largely been entitled for 23 years through all the ups and downs. It was tempting for US just as good as it was tempted brothers to deploy excess liquidity in the bond book, but we just couldn't bring ourselves to load up on bonds. When rates were at are at or near all time lows.
And our first decade, we endured the dotcom bubble in 911 and still produced the second highest total shareholder return of all of the publicly traded banks in the United States.
Our second decade was in the aftermath of the great recession and included the pandemic again in the second decade, we produced the second highest total shareholder return of all of the publicly traded banks in the United States and I, Obviously don't know what the future holds but I believe that our differentiated brand and our intense focus on disciplined execution is likely to see.
He is in good stead in the third decade as well so operator, we'll stop there and take questions.
Thank you Mr. Turner, everyone. The floor is now opened for questions if you'd like to ask a question at this time. Please press star one on your Touchtone phone.
Analysts will be given preference during the Q&A.
Again, we do ask that when you ask a question. Please pickup your handset to provide optimum sound quality.
Your first question is coming from Steven Alexopoulos from J P. Morgan Your line is live.
Good morning, Terry Good morning, Harold.
Good morning Stacy.
So I wanted to start first on the comment that you retain substantially all of your clients. During this period I'm curious.
News of Silicon Valley Bank, a signature failing broke.
Behind the scenes what were the conversations with your large depositors, where they panic did you have to convince him to stay did they see pinnacle's being very different than those banks. Please provide some color with that.
Yes, that's a great question I think are knowable set aside the crisis, our normal operating mechanism mechanism here is that.
Every Monday morning, we are in touch with our entire sales force and so specifically what I'm, saying there is Rob Mccabe runs meeting for Tennessee, Alabama and Kentucky.
Rick Callicutt runs a meeting for North and South Carolina, and Virginia, and Rob Garcia runs a meeting for Atlanta, and so that's our normal mechanism debate around the sales force and we've talked to them about you know whatever the important initiatives or whatever the priorities are are we give them the sales information.
Trained relative to product knowledge all of those kinds of things so on that Monday, following the silicon and signature failures, we arm them with a variety of handouts, one of which basically took key metrics from silicone segment you're in.
Political and outlined things like you know, what's vintage assets allocated to the Securities book, What's the held to maturity loss.
As a percentage of uninsured deposits and a series of those important measures that were intended to demonstrate the soundness of our balance sheet and P&L versus those highlight the differences between.
Our deposit book and there is and so forth and so in addition to arm them with that kind of information that would also armed with.
Sort of refresh us on FDIC covered and what can be done in the ordinary course accounts styling all of those kinds of things to maximize FDIC covered and then also things like.
The reciprocal deposit arrangements that Harold alluded to.
And in his comments and so anyway, we armed them, we encourage them to be proactive to be in touch with our large depositors and so forth.
They.
I don't think they'd talked very many people that have zero concern.
Don't think they'd talked very many people that were extremely panicked, but clearly there was a concern but.
You know as you know our information is a powerful thing and so I think we were successful in a.
Sorta allaying concerns that they might have in highlighting the difference between our franchise in the tube sale failed banks, yeah, My hidden what Youre looking for yeah.
So it sounds like you gave your frontline staff the information they need to go out to your clients. It doesn't sound like there was a panic from your clients to move to larger banks or money market funds or something like that.
I'll give the number that of your largest clients who brought it sounds like some deposits back.
So if things now stabilized Terry is that how would you describe it.
But I would you know I think.
You know had a basketball coach it always Darden, we don't hand out awards at half time, you know I don't think the the contest is necessarily over but it does feel stable.
Less of a topic of conversation and I think if we.
Are able to get through without further high profile bank failures and so forth my belief is it will stabilize.
Okay.
That's helpful.
A question on the loan side. So you guys dialed down the loan growth expectations for this year, you're known for going against the grain.
Curious are you what are you seeing from peers are they tightening the credit box here too.
It's just not an opportunity for you guys.
To use this as an opportunity to take customers and share.
It just so uncertain that it's.
Time for you guys to be more cautious too.
Steve That's a great question I think.
In terms of credit tightening I would say, it's a I would say its mixed out there I do think most people probably are leaning toward a more conservative stance as it relates to credit Ah I don't like us Universal, but I do you know I do think you would find it in large measure out there I think in our case.
I appreciate the question goes I think as it relates to the approach to the C&I segment.
Including owner occupied real estate are those doors are wide open we haven't tightened there I think most of the tightening would center in the commercial real estate category.
Categories, both the construction and mortgage product and so I think that's really where the slow. It is so to your question about isn't this the time to take share I believe it is the time to take share and I believe we will take share but that is would be concentrated in the CNI.
On a segment with a particular focus on small businesses middle market companies. Okay.
That's helpful and if I could ask you one last one I'm curious big picture and actually I'd love to hear from both of you. So you guys watch what happened at Silicon Valley Bank, who basically washed or was in the process of losing 85% of their deposits in two days right. It illustrated the speed at which deposits can now leave the system would you.
Look at that.
The way you think about risk liquidity positioning.
I'm just curious what are your key lessons that you learned from that and how do you change the way you run the bank now because of it.
Yes, they vary a lot in that question for sure.
I think.
Bankers, we tend to focus on the left side of the balance sheet I think we've already focused back on the right side of the balance sheet.
Our sales force construction to the sales force for years was around deposit gathering.
We're now back at that and making sure that our deposit portfolio is as diverse as granular as our loan portfolio that we believe it is and so I think it's.
It's gotten.
A lot of our our relationship managers, the people who interact with deposits on a daily basis.
Back in the game with respect to how critical this deposit book, yes as to liquidity.
I think we're likely to run elevated liquidity at least for the next several quarters.
As you might expect we've.
We've had several conversations with regulators theyre all routine in nature.
But they are interested in what kind of things we may be looking at differently.
So with that I'll stop and let Terry kind of give you some comments, but at the end of the day.
What I believe this bank is getting re energized morale is deposit gathering and.
Yep.
History improves what's going to happen in the future.
I think we'll be very successful in some of these new initiatives and how our people approach their client base.
Yeah, Steve I think what Harold said is true I think there'll be an increased emphasis on the diversification within the deposit book.
Saying that is the case for you for me the principal risk.
Is it related to deposit granularity I had to do with it.
Balances in excess of FDIC coverage limits, it sort of doesn't matter what other concentrations might underlie that just the fact that it was out where they have the assay limit is what created that that flight safety and so again I think you'll see for us.
Sort of increased emphasis on deposit granularity and ability to put our clients in a position where they feel safe and secure Oh I'll switch gears I'll make two points number one.
The main what I said in our original presentation I think the power of having raving fans is incredible and again companies that fail had good fans too, but they did not have net promoter scores like we do in our commercial segment and I think that.
At as I say it is very hard to leave of buying that you Love and trust and so we'll continue to pound away on that I know, it's lost on a lot of people that have a preference for financial analyses, but at the Cobra I do think that was the principal mechanism that enabled us to keep our clients and keep them gone and so forth, but along those lines one last thing.
Different than some of the financial.
Things that Pedro mentioned I think you'll see an increased emphasis on our crisis communication plans again I think we're a great internal communicators I think we did extremely well.
Following those bank failures, but I do think that will.
To enhance our crisis communication mechanisms goes to your board man things move fast and you better have an ability to get your people armed with what they need when that comes up and so I think we'll do more work around crisis communications.
Perfect. Thanks for taking my questions.
Yeah.
Yes.
Thank you. Your next question is coming from Jared Shaw from Wells Fargo Securities. Your line is live.
Hey, good morning.
Good morning, Hey, Jerry Hey, maybe.
Maybe just shifting a little to choose the BHG side and then good color. There I guess you know when you look at the BHG charge offs descriptions, what's the what's the difference or why is the on balance sheet charge off level, so much higher than the losses on the AR on the sold loans.
Yeah, I don't really have a good answer for you there it's a great question.
They do not or have not.
<unk>.
They don't go through any kind of special process to say, we're going to keep these loans versus sale of these loans.
There's a it's more of a kind of a haphazard kind up.
Process, they go through to figure out, which which bucket the loan goes into.
I would Matt I would imagine that.
Some of the newer credits.
Call. It the 2021 and 2022 vintages may be more prevalent on.
The on balance sheet side than some of the loans that have been aged longer.
With the gain on sale platform could have something to do with it.
Okay. Okay, and then if we look at that 18% pullback that you're that you're referencing.
Compared to last year's origination.
Is that should we be thinking about that being higher risk over the next 18 months or so just just given the lower <unk>.
Standards compared to what you're putting on now.
Well I think they believe they're going to have.
Call it elevated charge offs from those NSF charges, probably through the next couple of quarters.
When they believe that most of them will have seasoned enough and I think they think anywhere from 24 to 36 months is the appropriate seasoning for those particular credits that the.
You know the proverbial.
Losses will get through the snake.
No.
That's what they believe anyway.
Okay, and then just the final one I'd I'd be issue. When you look at that slide 22, and look at the expectation for pre tax earnings.
Does that include.
The impact of Cecil in October .
Or would that be in addition to that are separate from that through through equity.
Well that would include the P&L impact of seasonal for the last three months of the year for sure.
Okay.
Okay, great. Thanks, very much that's my my questions.
Thank you thanks Darren.
Thank you. Your next question is coming from Catherine Mealor from K B W. Your line is live.
Thanks, Good morning, one follow up on BHG was.
It seems that that throughout the quarter. There is still a lot of appetite for banks on the auction platform firm Goodbye BHG paper have you seen any change in that.
Back half of the quarter or maybe in April so far and.
You know what is the risk that in an environment, where you're seeing banks were against London Man you know across the board.
No less inclined to buy DHT paper.
They see their management was.
Concerned about that in the earlier part of the quarter.
But every day they opened up the auction platform the bank's Kay.
And so that's that's true through today.
They don't have any reason to believe right now that they will see kind of a subtle similar placement number in the second quarter.
And I think that you know here for the rest of the year. They ought to have a fairly consistent growth curve here for the remaining three quarters of this year, which they'll only be able to achieve.
With the with the gain on sale auction platform. So I think they've got great confidence that the banks will continue to show up.
Here over the next several quarters.
Catherine I might just are coming quickly.
In simple terms.
First quarter was a record quarter for BHG in terms of placements and March was the highest month in the quarter in terms of placements. So it exceeded February .
You know on the heels of the bank failures and so forth. So again, that's a pretty good Testament as Harold said here in the early part of April it appears to be functioning exactly as it always has.
Great that's really encouraging.
For that and then maybe just switching over to credit.
I saw your your outlook that calls for the ACL to be flat in the second quarter over the third.
And your credit just remains as strong for you just curious.
What it takes from a macro perspective or what you're looking at maybe.
At your borrowers that could.
Maybe if your loss potential doesn't change dramatically, but just from a macro perspective.
It makes you decide you need to build that reserve a little bit more than what you've got and I'm, particularly curious about the CRE reserve, which is 66 basis points feels well, but I know that includes a lot of different type.
Type of CRE projects in there. So just kind of curious what you. How you think about how comfortable you are with that ACL in the outlook for that over time. Thanks.
Yes sure.
Well, we're going to we're obviously going to led.
The credit models around unemployment and GDP drop kind of.
What might be the change agent for what the reserve could do over the next several quarters.
Do have the ability to overlay so add qualitative.
Adjustments in there and we have done that if.
If we were to follow just a strict nature of the quantitative reserve it would be meaningfully lower.
So we are we are call it adding an incremental reserves as a result of the environment and the uncertainty around it.
But as long as.
Our conversations with our credit officers.
Continue to reflect a pretty benign credit environment.
We think where we are it's pretty good so.
We don't anticipate a big uptick in the reserve here in the second quarter, who knows what's going to happen in the third or fourth.
But as it sits today.
Our our credits are performing like we would we would expect them to do.
Great.
Yes.
That's all I'll jump out of queue. Thank you.
Thanks, Kevin Thank you.
And your next question is coming from Casey Haire from Jefferies. Your line is live.
Thanks, Good morning, guys.
Wanted to follow up on on the.
The NIM forecast just to clarify that.
Harold I think you said down 10 bps. So we end the year at 330, and then what kind of fed.
Forecast are you guys contemplating in the release you guys talk about potential fed cuts or the slide deck rather.
Yeah were ordered I think Bob on a quarter by the end of June and then getting down maybe one or two cuts in the last half of the year, which are pretty inconsequential to the to our forecast.
But that would be where are we what we think our case is for what the fed could do who knows what theyre going to do but as it sits right now not really sure that's going to have a significant impact on our call. It our nail our noninterest income once we get past.
Call It August or September .
Did I get your question Okay.
Yeah, no that's great.
So the down 10 bps. So by these by <unk>, and where you expect to run around $3 30.
Yeah.
That's where our planning assumption is is in that kind of a modest decrease in them.
Okay, Great and then what kind of deposit beta are you are you like where do we go from the 46%.
Well, we think our deposit well if you assume that the rate up environment is going to end by the end of June we're probably closer to 48%.
Gotcha Okay.
And then just one more follow up on BHG.
So if I'm if I take the midpoint of the guide.
It looks like in the remaining quarters, you guys are expecting a little bit of an uptick from the $19 million run rate in the first quarter.
And just looking at the slides just what's driving that.
That improvement is it the X the cost measures because it feels like you guys are building more reserves and the funding costs are pressuring just just some color on what's driving that that I think your first.
Casey I think your first assertion is right. They do believe they're going to see upticks.
Here for the rest of the year.
That could be because I think the reserve build in the first quarter was.
More significant than I think what it's going to be in the next few quarters. So it could be partially that but right now their production seems to be hanging in there, but I still believe they're going to be.
Near what the production levels were last year. So then they'll have the kind of the ability and the decision to send you know loans to the auction platform or keep them on balance sheet, they've got they've got some obligations here in the second quarter to fund more on balance sheet with some of the.
Call it.
Private equity funding sources.
But they think theyre going to be able to that they will do and still be able to send the loans to the auction platform.
To get their bottom line number moving north.
That was a lot of work in states with if I get through it okay. Yeah. No. That's great. Thanks last one for me just on the expense side of things.
In the release you guys make mention of potentially pursuing cost measures are given a tougher revenue outlook, just what would what would prompt you guys to to explore that further and is there like a profitability or efficiency ratio in mind that you guys would look to protect.
Yeah, I don't think we have any kind of hard goals of efficiency ratios.
But what we want to make sure everybody understands is that we do have a you know a.
Meaningful variable cost component in our plan.
And a lot of that evolves around our incentive accruals and nobody wants to see us hit that but.
In the past we have always when we've had more difficult.
I'll call it.
Earnings growth years to go at that incentive accrual and use it to help insulate our results.
Also got the ability to back off on hiring if we need to do that we've got several projects that are slated for the rest of the year now the projects probably wont result in a significant.
Kind of a cost savings measure for 2023.
But they could for next year.
So we've got we've got several options that we could go into if we needed to to help protect what we believe is a reasonable result for this year.
Great. Thank you.
Thank you. Your next question is coming from Brandon King from true Securities. Your line is live.
Hey, good morning.
Good morning.
So I understand the decision Hey, Hey, so I understand the decision to have a more conservative liquidity position going forward, but I wanted to know what you would need to see to it for that could change seem to feel more comfortable deploying or paying down some borrowings.
Yes.
You know.
We will see some of these federal home loan bank borrowings and they've got an average life of two years and a lot of them have lives of call. It one to six months.
Right now we don't intend to renew those so we'll let our own balance sheet cash probably drift down some.
When you look at our own balance sheet cash compared to peers, we're probably a little lighter.
Than say some of our peers. So we'll probably be looking at more of a median performer on all that so that could have.
That could that could find its way to you.
Our call it our second quarter or third quarter liquidity.
Okay.
And then also wanted to give more.
Color on the fixed rate loan pricing and wanted to get a sense of what those conversations are customers.
How are they navigating this environment and it seems like some customers may be preferring more variable rate loans, nowadays and I noticed that you know your swap fee income has increased so just some color on that and kind of what that means potentially for the balance sheet as far as variable rate loans versus fixed fixed rate mode.
And the assets could be of the balance sheet going forward.
Yeah, I don't think we will see a dramatic change in the composition of our balance sheet as far as room.
The allocation of fixed rate credit.
<unk>.
With the rate up cycle, we've got a lot more request for fixed rate lending.
Hopefully, we're not hopefully, but we've countered that with an active swap program.
Because we believe that there comes a point, where you just got to put up barriers around how much fixed rate lending product you want to allocate to the balance sheet and so we're about trying to create more of a variable rate loan portfolio.
Currently.
<unk>.
Yeah, I'll stop there Brandon see if ive got to your question.
Yeah Yeah.
I'm getting at is that you know we could get into February close later this year.
And next year. So just wanted to get a sense of how you plan on kind of protecting the net interest margin in that environment.
Yeah, We've got we've got some some.
Some floors that we've entered into over the last several months that will help protect it.
I think going back to the last down rate cycle, we were pretty aggressive on reducing deposit rates.
I think that makes sense in light of how aggressive we've been on raising deposit rates. So.
We will we will lean into our relationships.
And make sure that whatever pricing, we provide depositors as fair and reasonable, but we won't be hesitant to reduce deposit rates when we need it.
And just as my questions. Thank you.
Thanks, Brian .
Yeah.
Thank you. Your next question is coming from Michael Rose from Raymond James Your line is live.
Hey, guys just a just a few most of my questions been asked and answered just a few more parallel if you could just give some color on the non BHG fee guide and kind of what you would expect kind of by business unit.
Yeah. The growth guidance is pretty solid so I just wanted to get some color on the components.
Yeah, I think at the end of the day, Michael That's a great question, but at the end of the day. It has to do with some hiring we've done over the last two.
Two to three quarters, and our expectations that those those revenue producers are going to show up.
Primarily in wealth management and capital markets and capital markets. We included the swap programs among others.
So we expect them to show up with you.
Nice lift in our revenues for 2023.
Mortgage last year, it was down pretty significantly.
We like our markets, we like the pipeline is that Theyre looking at currently.
And so we expect mortgage to be.
Much more impactful in 2023.
Positively impactful in 2023, and then what happened in 2022.
Just off the cuff I I'd say those are the three or four areas that we're expecting big things well.
Great and then maybe just moving back to deposits I appreciate the color on the.
The different initiatives can you just kind of stratify, how much that kind of contributed to this quarter's growth and what we should expect from.
Contribution point of view for the various initiatives laid out as we kind of move through the back half of the year just trying to decide for impact.
I want to say the.
Especially initiatives.
Have grown and I saw a schedule the other day on that of about $400 million in deposits.
Since our call at the end of last year or the fourth quarter of last year.
Okay.
Helpful. And then maybe just one final one for me just going back to an earlier question around you guys being opportunistic.
Can I stick I mean, your efficiency ratios in the low fifties, yeah pretty good profitability here, even despite some BHG kind of headwinds I mean, why not ramp up.
A hiring efforts I would think that kind of across the industry.
Loan growth slows, there's going to be a lot of kind of idle lenders.
Sitting around and you guys have felt that some markets opportunistically over the years, most recently D C.
Perry if you can just give us kind of your holistic thoughts.
I know you've talked about some other markets in the past I want to put the cart before the horse, but yeah.
Anything kind of move more to focus just given what's going on in <unk>. Thanks.
Yeah. Thanks for the question Michael I think in the case of hiring I think we are moving forward at a pretty decent pace. There that mentioned I think 26 revenue producers in the first quarter that gets you north of 100 revenue producers hired for the year.
You know I think last year was a record at something near a 140, but you know north of a 100 would be one of our higher year for revenue producing higher. So I think you can see that were.
Intending to.
Continue the share play of hiring great people, having their books of business to us.
I think as it relates to market extensions.
You know, what we've said really isn't it won't be in all large high growth urban markets in the South east.
Excuse me.
And so the principal Boyd's I think for us are primarily in Florida.
And.
Particularly the markets like Tampa, Orlando, and Jacksonville would be particularly attracted to us and so the catalyst to go there is just really about the availability of people when I say that I'm not speaking of availability to hire some revenue producers that's easy.
But what we need before we go is to blame we can hire somebody who can hire a lot of people across multiple disciplines, including the wealth management businesses and so.
So forth and so.
I think youre on the right track I think the likelihood that some of those people are frustrated and want to.
They have a different opportunity as high if we find those people we would go and I think you've heard me say it before Michael that.
No I'd go this afternoon, if I had them all go next week or next year, whatever we believe we're gonna produced dramatic growth without doing it but if we believe we've got an opportunity to go to one of those large high growth markets in the southeast will definitely driving season.
Great guys. Thanks for taking my questions.
Thank you. Your next question is coming from Stephen Scouten from Piper Sandler Your line is live.
Hey, good morning, guys I appreciate it do you guys have any data on kind of what youre seeing currently on the marginal cost of deposits I'm not sure if I missed it any commentary there but in terms of.
You know new add on C. DS other other new pricing.
Yeah, well, our average deposit costs were up call. It 63 basis points I think are incremental accounts are coming in.
Call it in the mid threes somewhere like that.
For call it negotiated rates.
Okay got it and on the BHG.
Average income you guys gave I know I haven't looked at how far back you've given them and it was 293000 and I think that's what it was last quarter has that migrated significantly overtime to your knowledge or has that always kind of been.
In that range as they've been originating this portfolio.
Steve and I can't recite the numbers, but I don't think it's a significant migration.
Obviously most of them, but I don't think it's.
I don't think it's a meaningful movement in it it's always been a high disposable income segment that they loan too.
Yeah. It makes sense and then just last thing for me kind of a lot of color you guys gave on the office portfolio I appreciate that.
Do you have data I'm not sure if I missed it on like segmentation between class a b C.
Yeah.
I don't have it.
With me, but substantially all of our office.
B E.
To be most of it is suburban although we've got some of the larger projects are more call. It.
New York City Center.
Project.
Got it okay perfect everything else that was asked and answered so thanks for the time.
Thanks, Dave.
Thank you. Your next question is coming from Brett Robinson from Hub Group. Your line is live.
Hey, guys. Good morning, just two quick ones first on the expense guidance you guys approached 50 billion is there any cushion that you're putting in there related to approaching that number and have you had any conversations around what might be entailed with potential changes in regulatory oversight for that.
Number.
Yes, that's a great question no we've not.
You know I'll call it.
Been investing.
And areas to accomplish a $50 billion of kind of regulatory threshold what.
What we have been doing is traditionally the regulators will always.
Even though 50 billion might be a bright line in some respects and right now we don't know of any changes at that level.
But if history proves itself again.
They will begin coaching US you know immediately.
And we will have.
I'll call it.
Whatever you cut whatever time period call it two to three years.
To kind of get prepared so that when we get the start market 50 billion. There there are we're in good shape.
But today.
As far as our stress testing our crisis management.
We feel like we're in great shape with respect to our.
Call it regulatory compliance.
Okay helpful. And then I joined late so you may have talked about this but on the wealth management side I know you've hired some productive or bigger teams on that platform here in the recent quarter or to have those teams moved over the bulk of their relationships or is that still a.
Process that could lead to higher income related to that particular line.
But that would still be a meaningful part of the income growth that we would anticipate.
The.
The length of time for a lot of the wealth managers, particularly talking about.
Brokers and trust administrators.
I think in the case of the.
Brokers is generally a shorter cycle than say, a commercial relationship manager, which would take about four years to consolidate their boat, it's a little bit shorter for the.
Brokers, probably similar for the trust administrators, but yeah, we still have hired a bunch of people who are still in early stages of consolidating there.
Clients from where they were to us.
Okay. So Terry that number in terms of the.
The fee income related that that could continue to have sizable increases in the next few quarters, you think based on the recent hires.
I do.
Okay.
Great appreciate the color.
Thanks, Brett.
Thank you. Your next question is coming from Brody Preston from UBS. Your line is live.
Hey, good morning, everyone. Thanks, Thanks for allowing me to hop into queue. I did just have a couple a couple of questions Herald one of them was a clarification on the BHG financials could you clarify for me if the provisioning. The BHG does every quarter or is that just related to the on balance sheet.
Loans that they have or is that or is that related to any like first loss kind of position that they have from the loans they sell as well.
No that's all related to the all the loans that are on their balance sheet.
Okay. Yeah, I asked just because when you when you kind of back into it you know if you use the AA AAA all disclosure in the provision disclosure you can kind of back into the charge offs and the charge offs. The last couple of quarters at least from an annualized rate perspective or kind of in the mid teens levels and over the last four.
Quarters, they've averaged about 12 and a half and so one of the two part question on that is you know, what what's kind of causing the elevated charge off rate in a in a relatively strong economic environment.
Secondly, if it's 12, 5% as the Arrow average charge off rate over the last four quarters was an 8% to 9% kind of reserve ratio makes sense, just given how the seasonal accounting typically works.
Yeah, I don't know where I am.
I don't compute the 12%.
But they're elevated charge offs are those tranches from 2020 one that are coming for this year. That's why they believe that over the next couple of quarters.
We should see some relief.
Those charge offs.
Got it okay. Thank you.
Thank you. Your next question is coming from Brian Martin from Janney. Your line is live.
Hey, good morning, guys. Thanks for letting me jump in here just two things for me Harold just to clarify your outlook or just kind of a margin conversation 10 basis points does that include the reduction area. You know kind of how are you thinking about that.
The liquidity you put on I mean, the timing does that contemplate for reduction and that liquidity or I know you said you are going to keep it on for a bit so just trying to understand that.
Yeah as far as where we are today, we think about half of that will be gone by the end of the year.
Okay have we gone to the habits in this.
The guide this year and then Theres more to come next year, and then just kind of the end of period.
March margin inclusive of that.
Of that liquidity can you give a little bit of thought on we ended March versus the core around the margin.
Oh, the March margin was around I think 48 or something like that.
So a little bit below it okay, and then just yes, I think you talked about maybe I'm, if I heard it right that the continued migration on the deposit side, you know maybe being the noninterest bearing maybe being below 20% by the end of the year, just kind of in that kind of Texas. The specialty deposits that the initiatives you guys have in place.
Is that 20% what you Saturday just as accurate just if I heard it right and then just you know as far as how much contribution you expect in 'twenty three from the specialty initiatives relative to kind of if youre looking at 10% deposit growth how much of the specialty the new initiatives kind of contribute to that 10%.
This year.
Yeah, I think the target that we've handed the keys.
Oh, the leadership around those depart or are those special initiatives.
We're around call it $2 billion in growth this year, so we're hoping that with.
With where they are thus far.
They'll be able to get to that number.
As.
Brendan did that get to your question Yeah, Yeah, I think the only thing we just clarifying that 20% number Harold if that 20% DDA is kind of where you think youre trending towards by year end.
Who knows where we're going to end up but that's the planning assumption that we were building that were that were.
We're using okay gotcha.
Okay and then just the last one Harold just on the on the back of the margin for just a moment. The the outlook. If you do see rate cuts you know later in the year. It sounds like you have some floors in place. So I mean, probably not much of a change or just you know how does the margin outlook.
With with the potential rate cuts and I guess, that's what it sounds like you have kind of in the in kind of your planning assumption at the moment.
Yes.
We do sell too okay, I think I'm good thanks for that thanks for taking the questions.
Thank you Brian .
Thank you that completes our Q&A session.
Everyone. This concludes today's event you may disconnect at this time and have a wonderful day.
You for your participation.