Pinnacle Financial Partners Inc (PNFP) 2019 Q1 法說會逐字稿

Good morning, everyone, and welcome to the Pinnacle Financial Partners First Quarter 2019 Earnings Conference Call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer; and Mr. Harold Carpenter, Chief Financial Officer.

Please note, Pinnacle's earnings release and this morning's presentation are available on the Investor Relations page on their website at www.pnfp.com. Today's call is being recorded and will be available for replay on Pinnacle's website for the next 90 days. (Operator Instructions)

Before we begin, Pinnacle does not provide earnings guidance or forecast. During the presentation, we may make comments which may constitute forward-looking statements. All forward-looking statements are subject to risks and uncertainties and other factors that may cause the actual results, performance or achievements of Pinnacle Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of much factors are beyond Pinnacle Financial's ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks is contained in Pinnacle Financial's most recent annual report on Form 10-K. Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise.

In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and reconciliation of the non-GAAP measures to the comparable GAAP measures will be available on Pinnacle Financial's website at www.pnfp.com.

With that, I am now going to turn the presentation over to Mr. Terry Turner, Pinnacle's President and CEO.

Thank you, operator. Good morning. As we always do, I'll begin with this dashboard. As a reminder, it's particularly focused on revenue growth, earnings growth and asset quality because we believe and I believe for a long time that short-term things like M&A or deposit betas, those kinds of things would come and go. But over time, the 3 most highly correlated metrics for long-term shareholder returns are revenue growth, earnings growth and asset quality.

Because all the noise that's associated with the BNC merger, in any case, these non-GAAP measures better illustrate the relative performance of the firm. So on this chart, I'd like to focus first on revenue, which is on the top left. Total revenues, adjusted for gains and losses on transactions in the investment portfolio and merger-related charges, were up 9% over the first quarter of 2018. The much-debated net interest income was up nearly 8% year-over-year despite a large reduction in purchase accounting accretion, which Harold will discuss in greater detail shortly. And the fee income was up 15.6% year-over-year.

Next, I want to focus on the EPS at $1.24 for the quarter, which is in the chart on the top row in the middle. Of course, 1Q '19 had no merger charges, but adjusting for the merger-related chargers in the previous periods and gains and losses on securities transactions, fully diluted EPS was up roughly 10% over the same quarter last year.

And then immediately to the right on the first row is the tangible book value per chart, which paints a nice picture of our ability to create capital and grow tangible book value on a rapid and reliable basis with a roughly 5-year CAGR of 12.7% through 1Q '19.

Immediately below the tangible book value chart, I will highlight ROTCE at 17.87% this quarter. As you review the trend line post-recession, you can see that it progressed nicely until the first and second quarter of 2017, which is when we did the large capital raise in advance of and in order to make the BNC acquisition. As a reminder, the BNC deal closed at the end of the second quarter of '17, so you can see that we were able to meaningfully alter the return on tangible common equity following the deal close. And again, another strong indicator of the power of that acquisition.

And last, I want to highlight core deposit growth in the middle chart on the second row. Core deposits grew at a rate of almost 11% in the first quarter of 2019 when compared to the first quarter of 2018. So first quarter was a great quarter with a year-over-year core deposit growth rate near 11%, year-over-year revenue growth of 9%, year-over-year EPS growth of roughly 10% and adjusted ROTCE of 17.87%. All in all, a great quarter for us.

Now Harold will review 1Q '19 financial performance in greater detail. As he does that, I believe you'll be able to see this overarching thesis. First, Peter Drucker once said, "culture eats strategy for lunch." I think he was right. At Pinnacle, we continue to harness our stated goal to create a differentiated client experience, which we continue to translate into dramatic growth and profitability.

Next, perhaps our most important core competence is our ability to attract and retain the best bankers in our market. We target only highly successful, long-tenured bankers with large books of business. This results not only in rapid growth but strong asset quality, and the profit leverage on a highly successful revenue producer can be extraordinary.

Thirdly, we are not an inch shy about targeting top quartile profitability. We've long published not only the target, but model for how we produce it. And we continue to hit the targets quarter-after-quarter, year-after-year.

And lastly, while we've been able to produce outsized balance sheet growth and profitability, the truth is they're just means to the end. What we care about is rapid growth in EPS and tangible book value because we believe they're the keys to long-term sustainable shareholder returns.

So Harold, walk us through the first quarter if you will.

Thanks, Terry, and good morning, everybody. We've been talking about revenue per share growth for several years. As many of you know, we pay attention to expenses while we focus on revenue growth. We believe one of the best measurements of whether we are winning or losing is revenue per share growth. You see here the growth of earnings per share and revenue per share is heading north, plus it's more fun than worrying about expense initiatives.

The trailing 12 months are the basis for the slide. As you can see, we continue to experience double-digit revenue per share growth. Secondly, the guideline represents the peer group's year-over-year growth. As shown on the chart, we've continued to consistently outpace the peers on the revenue per share. Keep in mind, this is during a time of significant internal focus around integration of the Bank of North Carolina. I know many of our peers assert that recent mergers are working well, and they couldn't be more pleased with the outcomes.

Let me say this about Pinnacle. We are really proud of our team's efforts in the Carolinas and Virginia. We believe by any objective measure, whether it's loans, deposits, new hires, employee retention, tangible book value creation, earnings growth, et cetera, we believe we've significantly outperformed investor expectations and likely those of our peers with respect to our entry into those markets.

That said, we've got a great deal of runway left not only in the Carolinas and Virginia, but in Tennessee as well, and we have a lot of positive energy in our franchise right now. Our earnings is on offense 24/7. Our associates are engaged, focused and excited about our opportunities for the remainder of 2019. Hopefully, those blue bars just get taller and taller.

Now comparing first quarter '19 average loans to first quarter '18 average loans, our annualized growth approximated 12.4%. We continue to believe that our loan growth for 2019 will be low to mid double digits in comparison to 2018. In the Carolinas and Virginia, their organic loan growth in the first quarter of 2019 over the first quarter of 2018 was nearly 10%.

Importantly, C&I and owner-occupied commercial real estate is up more than 21% year-over-year. Currently, they've grown their C&I and CRE owner-occupied book to greater than 25% of total loans. Creating a robust C&I franchise is obviously key to our growth goals. As in our experience, growth in the C&I platform should produce core deposit and related fee growth.

These things seem to be working from our perspective. We expect loan growth to be fairly consistent in the second quarter. We're seeing some nice things happening thus far. We're still anticipating increases in construction funding for the back half of the year as projects work through their equity components and start growing on bank lines.

Additionally, as the chart indicates, our loan yields increased to 5.28% from 5.22% last quarter, a 6 basis point increase linked quarter. More on rates and the yield in a second.

Again, we've shown this chart on several occasions. There's a lot of information here. The blue bar on the large graph details annualized organic loan growth rates adjusted to remove acquired loans, so it's all organic growth. The green bars are pure medians for each quarter. Except in the fourth quarter of 2018 where we experienced significant paydowns, our firm traditionally outperformed peers with respect to loan growth quarter in and quarter out.

We also provided information in the small chart regarding the granularity of our loan book by loan type. We offer this information so that you can better appreciate that we are not relying on the extra-large ticket sizes to get our loan growth goals.

The chart on the right is somewhat busy, but it's where we've detailed the impact of discount accretion on net interest income. As you can see by the gold line, discount accretion continues to be less impactful to our results at 5.2% of our net interest income in the first quarter of 2019 and will continue to be less impactful in the future.

We all know that a big headwind to our GAAP revenue growth was the impact of less and less discount accretion, and the primary way we're going to overcome it was through balance sheet growth. Anyway, the blue bars on this particular chart are obviously where our attention is, and growing those blue bars is key to our ability to deliver increased earnings to our shareholders.

Another slide we've been discussing for quite some time now. We've discussed in recent quarters that we believe an allocation of approximately 35% of our loan book to fixed-rate loans with maturities greater than 1 year is an optimal range for us in order to be better prepared for any future interest rate environment. We've made significant progress in that end and now stand at 38%. This is the approximate level with our allocation prior to the Bank of North Carolina merger. And as you can see, it's also relatively consistent with our originations in the first quarter, which saw roughly 2/3 and 1/3 split between variable and fixed-rate loans.

We believe the natural evolution of our growth without any additional intentional management, our wholesale bank then should get us to 35% in a reasonable amount of time.

Additional rate hikes from the Fed appear to be at a minimum all pause and may be off the table altogether at least for 2019. The Fed funds futures market is now predicting that rates may even be cut later in 2019 and into 2020. Rest assured, we are aware of these possibilities and are working to position the balance sheet so that in addition to minimizing our interest rate risk in the current flat interest rate environment, our net interest margin and capital positions are not impacted significantly either up or down.

We have numerous levers to pull to manage interest rate risk, including the reposition of our securities and wholesale funding portfolios, layering in additional or unwinding balance sheet derivatives as well as managing our own balance sheet liquidity position. We'd all like to see it prepared if that doesn't appear at the end of the cards, given what's going on with the macro environment. So the wholesale bank team is looking at various strategies to put this firm in the best position to win regardless of the interest rate market we are operating in.

As many of you know, we've been saying that our goal was to reduce our firm's exposure to commercial real estate, investment and construction. We work diligently to reduce our exposure in these portfolios in relation to our total risk-based capital over the last 2 years. At quarter end, we were at 283% and 84%, respectively. These charts are intended to give you some additional insights into the granularity of our real estate portfolio as well as the metrics we seek out for our underwriting, and this chart does give us comfort that we are not after the whale projects.

As to our peers, larger projects are likely well underwritten, but they are not our bread and butter. They take up a lot of capital and businesses from our local builders and developers.

As to the left chart, you can see detailed there are the aggregate volume of portfolio by the approximate -- by the ticket sizes. While we have some larger, greater than $20 million credits, we also have a significantly larger number of products -- projects that are below $10 million.

The chart on the right does show the top 10 projects within each segment for both construction and commercial real estate. We've also included the loan value, loan to cost, debt service coverage ratios to fully support the quality of these projects.

Now just a few additional comments on credit. Credit is always at the forefront of our mind, so I hope we never appear complacent or frivolous when we talk about credit. For the first quarter, we experienced relatively minor increases in our classified asset and nonperforming asset ratios along with a decrease in net charge-offs.

So credit in the first quarter continues to chug along. Like the few management teams that have commented thus far on first quarter 2019 credit results, we too will agree that we aren't seeing any systemic issues with respect to our book that would cause us not to be optimistic about credit in 2019. Obviously, there's macro issues, and we will pay attention and anticipate how those might impact specific borrowers.

That said, one positive macro event related to the recently announced Fed pause is that the pause may actually contribute to a further extension of the current credit cycle.

Now to deposits. Average deposit balances are up $2.1 billion year-over-year. The year-over-year in-the-period deposit balances were up $2 billion. Concurrently, core deposits increased $1.6 billion or about 80% of total deposits, which is right on our target of being 80% core funded. Our deposit cost did increase 12 basis points in the first quarter of 2019 from the fourth quarter and currently stand at 1.2%.

The next slide gives the volume changes in the first quarter of 2019, so I'll work through that in a second. What I'd like to point out here is that even though our deposit rate increased 1.2% for the quarter, our end-of-period deposit rate was only up 1 basis point at 1.21%. This compares to the fourth quarter average rate of 1.08%, but the EOP rate at December 31 was 1.16%.

As we've been stating with the Fed pause, we aren't seeing a dramatic increase in deposit rates currently. We feel pretty good after only being a few weeks into the second quarter. We are obviously balancing our interests for the sales force between the need for core deposit volumes as well as keeping our deposit rates in check.

We still believe we're in markets that have ample liquidity to match our loan growth expectations. As noted, year-over-year core deposits are up 10.8%, while loans were up 11.3%. You can also see the year-over-year core deposit growth in the Tennessee and the Carolinas at 13% and 9.3%, respectively.

We mentioned on the fourth quarter earnings call that we were likely to modify our funding profile in the first quarter with some changes that would impact specific depositors as well as types of funding. Basically, during the first quarter, we experienced a net decrease in deposits from end-of-period 4Q '18 to 1Q '19 with some decisions of our wholesale bank team contributing to the decrease.

I'd like to highlight 2 events tied to rate management and then one that we call one-off transaction of a sizable amount that drove this decrease from the end of 2018 to the end of March.

As to rate management, we have a $250 million indexed money market account to a corporate depositor that left the bank in the first quarter. This deposit have been with us through the rate cycle and was very attractive to us a few years ago. But with increased rates, we can find cheaper funding elsewhere. Another rate play is with respect to the net decrease in broker deposits where we could also find cheaper money at the Federal Home Loan Bank. Collectively, these amounted to almost $500 million in deposit reductions.

Additionally, and we classify this as not exactly what we wanted, but it's the way things work. During the quarter, a depositor that have invested in portfolio companies restructured their balance sheet. We had several loans to several of the investor portfolio companies secured by many things but also secured by the investor's cash balances. During the quarter, that investor elected to restructure, which resulted in loans being reduced by $62 million and deposits being reduced by $67 million.

We are highlighting this transaction as unusual given we don't see cash secured loans of this size very often. And so when these several loans are paid off, it was meaningful to us. Additionally, as it occurred in the fourth quarter of last year with an approximate $200 million deposit, we occasionally experience depositors who sell their companies and eventually, we see those deposits leave our firm. Fortunately, there were no such noteworthy events like that this quarter.

The chart on the right details our highly liquid cash balances. As you can see here in the first quarter, we were able to reduce those balances by approximately $175 million. Some of this money was deployed into the bond book from $30,000 fee. We were able to use some of our own balance sheet liquidity in such a way that it took some pressure off the need to match price on some of the deposit losses which I noted previously.

Now turning to fees. Fees amounted to greater than $51 million, up $6.9 million over the first quarter of 2018. BHG had another great quarter. Their contribution was up $3.9 million or 42% year-over-year. We continue to anticipate 10% to 12% growth for BHG for this year compared to last year.

Wealth management revenues were up slightly in the first quarter of 2019 compared to the first quarter of 2018. We've had several significant hires in both footprints that have contributed to our success in investment services, insurance and trust. Deposit-related fees remained relatively stable. Lending and related fee income, which is primarily mortgage, was up meaningfully from last year.

As to 4Q and 1Q run rates, we had a lot of positive events in the fourth quarter that contributed to the overall decrease this quarter. As you remember, BHG hit a home run in the fourth quarter of last year and is looking at another great year this year. Wealth management was up slightly from the fourth quarter, primarily due to the usual contingency revenues we get from our insurance subsidiaries.

As we all know, the rate environment was not helpful to residential mortgage in 2018, but our team continues to work to get their share of the deals. We've seen a lot of activity related to mortgage by various banks in recent years, mostly exiting the space or are exiting at least some of the space. We like our position in residential mortgage. They had a great first quarter, correlating not only with the drops in long-term rates, but also with increases in the number of mortgage originators as well as more affected mortgage originators.

SBA and our back-to-back customer swap program had a strong fourth quarter, so revenues were down in the first quarter. The government shutdown had an effect on our SBA program. And even though this business line is really important to us, it is a fairly modest component of our -- smaller component of our total revenues. Other income was also bolstered by increased BOLI revenues this year.

Now to expenses. Expenses came in about where we thought with the run rate decrease in fourth quarter being largely attributable to incentive accruals, offset by our typical increase in salaries due to merit increases which approximated 4%. We booked a large incentive accrual at year-end 2018, which was not replicated during the first quarter. Other than that, it was a fairly boring quarter on expenses. Expenses will increase with additional hires and hopefully larger accruals for incentives. We hope recent merger announcements will contribute to our hiring plan this year.

We're also pleased to report that retention rates continue to decline signaling 2 important things for us. Our clients can get on consistent service as employee turnover continues to shrink and our workforce engagement initiatives are working in our newer markets as those associates are leaning in and appreciating the Pinnacle culture.

Wrapping up on expenses, we're pleased to report that our efficiency ratio has adjusted for investment gains and losses, merger-related expenses and ORE was at 47.4%, down from December 31 and March 31 of last year.

With that, I'll turn it back over to Terry to finish.

Okay. Thanks, Harold. I hope the key tenets of this thesis that I mentioned at the outset were evident in the financial metrics Harold just reviewed with you. But I want to take just another minute or 2 to provide a little more color.

My belief is that the more we engage our associates, the more they'll continue to provide a differentiated experience for our clients. And the more we create a differentiated experience for our clients, the more we'll be able to capitalize on the vulnerability of those large banks that dominate our markets.

And as you can see, our size and market expansion really has not diminished our ability to execute and engage our associates. In 2018 alone, we were ranked #22 in terms of the 100 Best Companies to Work for in America, #40 in terms of Best Workplaces for Parents, #16 Best Workplace Among Banks in America, #12 Best Workplace for Women and #20 Best Workplace for Millennials. In addition to all those honors and being in the Hall of Fame here in Nashville, we've also been recognized as the Best Place to Work in both Memphis and Knoxville. You can see, we've got a highlighted item there. During the first quarter of this year, we were recognized by Fortune Magazine as the second Best Workplace in the country in Finance and Insurance.

You might recall, we announced what many refer to as a transformative deal when we agreed to merge with BNC Bancorp in January of 2017. We completed the merger in June of 2017 and went through the brand conversion in September of 2017, and then the system conversion in November of 2017. So in August of 2017, right in the thick and all that, 69% of our associates in the Carolinas and Virginia agreed that our firm's culture is special and 75% agreed that this was a company where people want to work. So that's not bad. But a year later, following the conversion and integration, we have successfully leveraged the Pinnacle culture such that 94% of our associates in the Carolinas and Virginia agreed that our firm's culture is special and that this was a great company where people want to work.

Along those same lines, as I just mentioned a minute ago, largely based on how our associates responded to The Great Place to Work Institute on their surveys, when the BNC merger was announced, we were recognized in Fortune Magazine as the seventh Best Place to Work in the Country in Finance and Insurance. In 2018, during all the merger and integration effort, we find we're the third Best Place to Work in Finance and Insurance. And by the first quarter of this year, we had climbed again to the second Best Place to Work in Finance and Insurance. So you begin to see the power of the Pinnacle culture.

As I said earlier, we're able to leverage that culture along with our recruiting confidence to attract and retain the best experienced bankers in our market, which leads to outsized growth. Experienced bankers are able to move their books of business quickly. Generally, they're able to move the entire relationship, which is critical to our funding and fee strategies, and they seek to bring only the good credits then leave the bad credits behind, which should produce strong asset quality. As far as I know, that's the only way to produce outsized growth with strong asset quality over an extended period of time.

First quarter results are just another reminder of the power of that model with double-digit loan growth, double-digit core deposit growth, double-digit fee growth, excellent charge-off and loan volume metrics and improving operating leverage. I know we have lots of questions. Many worry about whether direct hiring will estrange efficiency. But in truth, the profit leverage of an experienced, successful banker is extraordinary. We hired 107 revenue producers in 2018. We hired another 27 in the first quarter of 2019, and the adjustment efficiency ratio improved 21 basis points year-over-year.

Most of you remember that when we announced the BNC merger, the communicated plan was to maintain their double-digit CRE growth platform and then turbocharge that growth by building both known and new C&I platform. In order to do that, we said we'd hire 65 C&I and private bankers in the Carolinas and Virginia over a 5-year period of time. That would suggest by the end of the first quarter of 2019, we should hire roughly 23. In fact, we've hired roughly 49, which puts us more than a year ahead of schedule.

And for those who get concerned about that expense burden, keep in mind, 100% of that expense burden is already in our run rate with the obvious assumption that a significant or smaller portion of the expected revenue is in our current run rate. I think that bodes well for future revenue and earnings growth. And as Harold mentioned earlier, the key measures of success with integration, at least from my expectations, have all been met. We did maintain BNC's very successful CRE business, producing 9.2% growth in CRE outstanding year-over-year in that footprint.

And we did in fact transform the growth model to more of a C&I growth engine with 21.5% growth in C&I and owner-occupied commercial real estate year-over-year. We were able to grow core deposits at nearly 13% year-over-year in that footprint. Again, we've significantly transformed the growth model. And I think I say this every time, but I can't tell you how proud I am of Rick Callicutt and his market presence with their leadership during this transition.

In conjunction with our ability to attract and retain the best experienced bankers in our market and our ability to leverage our powerful culture created a state of client experience, we target top quartile profitability. We've been publishing our ROAA target since 2012 along with a specific model for how we achieve it. As you can see, first quarter was more of the same with ROAA and each necessary component operating inside or better than the targeted range.

And as you can see on the right, not only did we produce a top quartile return on assets, but we produced a top quartile ROTCE as well. As I said a few minutes ago, all of that really is just a means to an end. What we're really focused on is rapid, reliable growth in EPS and tangible book value because it's our belief that banks that can rapidly and reliably grow EPS and tangible book value over time will produce the best shareholder returns.

So this is the first quarter of 2019. The 5-year CAGR for EPS is 20.3%. And for tangible book value per share, it's 12.7%. As you can see on these charts, the growth is both rapid and reliable.

So to wrap up, in our earnings call last quarter, I used this slide to communicate our outlook and expectations for 2019. Now through the first quarter, we're off to a great start. We had an 11.3% year-over-year loan growth, 10.8% year-over-year core deposit growth, 9.7% year-over-year EPS growth. Additionally, we hired 27 revenue producers. We've continued to grow revenues meaningfully faster than expenses and grow tangible book value at a rapid pace.

So operator, I'll stop there, and we'll open the lines for questions.

(Operator Instructions) Our first question is from the line of Stephen Scouten of Sandler O'Neill.

So one of the things, Terry, that I love that you talked about is just how you guys continue to have this level of hiring activity and what an advantage that is, and I think that's true. I'm curious, how long you think you can maintain that culture? I know that's hard to say, but as you guys continue to grow bigger and bigger, at what point do you think you face some of the same impediments that these larger banks face today, the bureaucracy and so forth, that's allowed you to take advantage of them for so many years?

Stephen, that's a great question. I'll just say this to you, I don't think you were around back in 2002 and 2003, but that was the same question they were asking me in because we were a high-growth bank, albeit less than $1 billion at that time. It's always been a high-growth bank all through. And I think each time we sort of get a leg up through an acquisition or some stairs to job, everybody begins to question, how you continue that culture. And so that's really one of the reasons. I wanted to walk through those slides and show the fact that before we announced the BNC transaction, we were rated as the seventh Best Place to Work in terms of finance and insurance in the country, which is to me a monumental achievement. I'd be proud of that as we were able to sustain that. But as we went through the merger, the brand transition, the system conversion, all that integration, we advanced up to the third best last year and then this year up to the second best. And you can see the level of the engagement there with 94% saying how this is a great place to work, probably a great culture with the distinctive [mother] company.

So again, I just say that to say that, I do think we have a strong culture which feeds on itself. I do think we're intentional about how we integrate it. Both with new hires and with new acquisitions, there's immense amount of effort that goes into maintaining it.

I think to your point on the bureaucracy and so forth, I think that's really a fabulous question. And I do believe at some point there'll be a time where it will just be impossible to sustain it because you'll get regulatory pressures and other things that will force you to operate more like those banks. But I believe that we're a long way from that. I would just use as an example, Stephen, BB&T. They ran for decades really using a community bank model, a geographic-based model and all those kinds of things. And I can't tell you what size they were, but they were probably 3 to 4x our size when they really had to go away from that, which would just suggest there's a lot of running room between here and there before we turn into one of those bigger, more bureaucratic organizations.

That's helpful, Terry. And then maybe thinking about the NIM a little bit here. I know obviously last quarter I think the expectation was maybe 2 rate hikes and you spoke to the fact of what the forward curve is saying today. But what does that -- does that change -- I mean, you haven't changed the NIM guidance here, 3.55% to 3.75%. But I mean, should we expect to be at the lower end of that range? And maybe within that, what drove the decline in accretion, expected accretion from the $38 million last quarter to $31 million this quarter?

Yes, Stephen, this is Harold. Let me talk about the accretion first. I think last year we had more kind of paydowns/payoffs, probably more payoff than we did in the first quarter. Everything kind of stayed relatively calm on the paydown/payoff front here in the first quarter. So a lot of kind of that where we take the discount accretion from kind of a meaningful loan leaving our balance sheet didn't occur here in the first quarter. As to NIM guidance, I don't think we'll see a whole lot of contraction in the NIM this year. I think it will stay relatively at the low end of the range for the bulk of this year or at least that's kind of where our planning around the NIM is currently.

Okay. And Harold, you mentioned payoffs. I think last quarter, you guys had like $950 million in payoffs, a pretty high number. Can you give us an idea of where that was this quarter? Just bring that up.

Yeah, that number, it was -- it was -- I don't know and I can't recall the $950 million number, but it was about $400 million or $500 million less than what happened in the fourth quarter.

Okay. Great. I'll let somebody else jump in. Thanks, guys, and congrats on a great quarter.

Our next question comes from the line of Jared Shaw of Wells Fargo Securities.

Maybe just starting with the deposit side. Thanks for providing the color on some of those outflows there. As we look at that $195 million client growth this quarter, is that a good level that you think is sustainable as you're going into second quarter? And then I know in the past, you've been speaking about refocusing the relationship managers on getting the deposit flow coming in from the existing C&I customers. How is that going? Can you give us a progress update on that?

Yes. I think so far this quarter we're seeing a nice balance in deposits. Today is the day after tax day so we'll probably see some checks clear here over the next few days. But so far this quarter, we're optimistic about our deposit expectations here in the second quarter. There are various initiatives kind of working around. It's all primarily at the relationship manager level where we're generating all kinds of information that help them go out and find deposits from their own customer base. So we still believe that we can fund this bank at 80% core deposits. We think that loan growth in the first part of the year will be kind of low double-digit kind of numbers. And so we don't anticipate having to go lean back into the Federal Home Loan Bank here in the second quarter like we did in the first quarter.

Okay. And then what's the pricing looking like on new deposits coming in? Are you having to -- is that a mix of sort of an incentive price to get those core operating accounts or are those 2 separate conversations?

Yes. I think it's all over the map. I'm not hearing of any significant requirements from depositors. The phone is not ringing like it did in 2018, but we're not planning on seeing any reductions in deposit cost this year. I think we'll still see some increase in deposit rates for the next, call it, 2 to 3 quarters. But without the tailwind from the Fed increases, it's given us quite a bit of -- it's lowered our expectations on what deposit rates are going to do.

Okay. That's great color. And then on the hiring front, it's great to see the progress you've made there with the SunTrust-BB&T deal. Do you think that the -- are you going to limit yourself to the 65 hires or is that going to create an additional opportunity where maybe you lean into that and increase your target goals?

Yes. I guess I would say it this way. We're really not changing the target goals and we're really not changing the tactics that we'll deploy. Which is to say, I think you know this, really, our goal is we aim at hiring high-quality relationship managers all year every year. And so to the extent that there's vulnerability created in the, say, BB&T-SunTrust transaction or other deals yet to come, my guess is that will advance our hiring. We'll probably hire more people, but we're not going to change our tactics and we're not going to necessarily increase the target. But my guess is the more of those transactions take place, the more vulnerability exists, the more that will drive up the number of people we actually hire.

Okay. Great. And then just finally for me on capital management, you were able to buy a significant amount of stock this quarter. How do you feel about buybacks here sort of given the capital levels? You're continuing to grow capital. But with the recovery in the stock price, should we think that you'll still be active in the market here?

Yes. I think our intentions are still the same that we'll deploy that remaining allocation over the next 3 quarters. We did acquire quite a few shares here in the first quarter. We'll probably be tailing that down here in the second quarter, the third quarter and the fourth quarter, but our intention is to deploy the entire $100 million allocation.

Our next question is from the line of Michael Rose of Raymond James.

Just wanted to kind of reconcile some of the revenue and expense components. I guess when I step back and look at it, you got $7 million less of accretion this year, no rate hikes. GAAP NIM at the low end of the range, but the offset is maybe a little bit better in mortgage, maybe a little bit better in trust and certainly better in BHG revenue. With the expense outlook kind of boring, as Harold described earlier, is the expectation that you can still actually generate positive operating leverage against the less PAA expectation this year?

Yes. Michael, we still believe that we will be able to take the efficiency ratio down a little bit more. We're not talking about leaps and bounds, but we are talking about a steady kind of decrease there. Now that said, Terry has got kind of an open checkbook on hiring. And so we just have to manage through that. But other than that, we don't see any kind of big surprises with respect to expenses this year.

Okay. That's helpful. Maybe just going into BHG. I think last quarter you said 5% to 10% up. I think you just said earlier, 10% to 12%. Clearly, a stronger first quarter on top of a very strong fourth quarter. Is there any change outside of that? Like I know BHG, for instance, is now offering loans to financial advisers. Seems like they're broadening out their book of business and their client base. Just any commentary there on what the longer-term expectations from that investment are?

Yes. They have expanded into some other kind of career disciplines, call it, lawyers and CPAs and others where they're testing the market there. Their bread-and-butter is still going to be doctors, dentists, veterinarians, so on and so forth. But I think what's really improved is their analytics and their ability to capture or transition the potential customer into a hot lead into a loan. So they've invested in that technology here over the last 2 or 3 years and it seems to be paying off for them. The other thing that they're experiencing too is their credit analytics are much improved. And so their substitution rates have come down quite a bit.

Okay. That's helpful. Maybe one more for me. Some of the larger banks that have reported have given initial expectations for the Day 1 impact of CECL. You're one of the first smaller banks to report. Any sort of thoughts on at least the parallel run that you've done this quarter and any sort of thoughts around Day 1 impact?

We've got our Day 1 impact, we've got initial kind of quantification. We've shared that with our Board. We could say that we're probably -- we're going to be -- we'll have increased reserves. That number will likely be anywhere from, call it, 20% to 60%, somewhere in that range. I'll give you a range you can drive a truck through, but it will be more.

Okay. That is a pretty wide range. And I would say that relative to some of the larger banks, that does seem perhaps a little bit higher especially on the upper end of the range -- on the lower end of the range, very similar to what some of the larger banks have kind of positive.

Our next question comes from the line of Catherine Mealor of KBW.

One follow-up on Slide 13, the deposit change chart that you put in here was really helpful. Can you talk a little bit about the difference in pricing within all of these different buckets and the pricing of some of the strategic runoff and the brokered versus the pricing of the net client growth and then some of the FHLB you put on this quarter?

Yes. On the strategic runoff, the brokered money, all of that was in the high 2s and we replaced that in the low 2s.

Got it. You're saying the low 2s is the -- that's the net client piece?

Yes. We went from the $500 million that left the bank was in the 280, 290 range. And the money that we replaced it with came in, in the low 2s.

Okay. Great. Okay. That's helpful. And then just on the other side of the balance sheet with loan yields. Can you give any color on loan pricing and your thoughts on your ability to increase loan yields with the curve and rate outlook as it is today?

Yes. In this quarter, we saw some increased yields in our fixed-rate book that was very helpful to us. I think as we go through the year and particularly with the increase in construction funding, those ought to positively impact our loan yields. So we're hopeful that we can continue to at least keep loan yields flat, if not increment up here over the rest of the year. Now granted we're still working through the purchase accounting issue, but that would be what we're thinking right now.

Okay. So outside of purchase accounting accretion runoff which is understood, you're saying there's still the ability to increase loan yields from the lag from fixed-rate pricing continuing to come forward and then just from construction funding coming in the back half of the year? Maybe not the same level we saw the past couple of quarters but still an upward bias, is that fair?

Yes. I think that's fair. I think our bias is to see an uptick in loan yields primarily based on what construction is going to do and we're seeing a little bit of a breakthrough on fixed-rate originations.

And our next question is from the line of Jennifer Demba of SunTrust.

Terry, could you just talk about your interest in expanding to the Atlanta market given the upcoming change in the competitive dynamic there?

Yes. I'll be glad to. I think just to level set, we said for a long time that we've had an interest in the Atlanta market. As you know, we always believe that we build market extension either by acquisition or on a de novo basis. We have felt like Atlanta might be a good opportunity for a de novo start for some time. But certainly given the transition with SunTrust and BB&T and all the associated vulnerability there, that would increase our optimism about coming there on a de novo basis. Jennifer, I always want to comment because I know some people when we talk about it tend to think about it each time I go down there and open an LPO or something like that. That won't be our approach. We've never liked that idea. And so the idea would be that if we could find the management team that we felt like could build a $2 billion, $3 billion bank in a reasonably short period of time, that would be the play we would like to make. So it really is a function of finding the management team that can work across all the bank disciplines and attract high-profile bankers in the market and all that kind of stuff which I think is different than just hiring some salespeople, lifting out a team or 2 and start an LPO. So hopefully that's helpful in terms of what our thinking is.

Our next question is from the line of Brett Rabatin of Piper Jaffray.

Wanted to, I guess, first go back to BHG and just thinking about expectations for this year and typically results kind of build throughout the year and you talked a little bit about the new products. Can you just give us maybe some color? I know it's hard quarter-to-quarter to predict. But year-over-year, that's been growing faster than the overall bank. Can you talk maybe just about the pace of that growth from here? Does it slow somewhat or is '19 going to be another year like '18 in terms of growth?

Yes. We don't think '19 will replicate '18. '18 had a significant growth number. So 10% to 12% in '19 is a little less, but I think it will be a flatter kind of curve. Last year was, as the budget guys tend to call it, a hockey stick. This year, I think it's going to be a more flatter kind of predictable curve than last year.

Okay. And then just thinking about the markets. Are there markets -- you're obviously in some newer markets that have been helping out with growth. Are any of the markets in particular been better opportunities for you to grow in terms of particularly the commercial real estate portfolio?

Yes. I think we see excellent growth in Raleigh in particular, Charlotte as well. And then also I would say in the Triad in North Carolina is also good from a CRE perspective.

And our next question is from the line of Brock Vandervliet of UBS.

Longer term, I know the near-term objective is 80% core funded. Do you think given the increasing success you seem to have in being able to hire loan officers and generate more core deposits, do you think you could fund more of the bank longer term on a core basis?

My sense is that's possible. And certainly, we work in that direction, but I don't see a substantive enough change that I would want to change the target. In other words, I think for planning purposes that's probably the best way for those of you outside the company to think about it. And again, internally, we'll work to do better than that, but I'd stick with that planning assumption.

Got it. Okay. And just strategically with Bankers Healthcare Group and given the success that they've shown, is there any sense there within their organization that they may want to monetize that success in some way? Is that something we should begin to consider or is this steady as she goes, great business, stable ownership structure?

Yes. I think from our conversations with the principals, I think it's all hands on deck. They're operating that company for a longer-term horizon. But we also need to understand that they're entrepreneurial and they watch the market closely and have no doubt that at some point there's probably going to be a liquidity event. But as it sits right now, I think our partnership with them is very strong. We're very engaged with them. They're very engaged with us. And I think at least for the foreseeable future, and I'd call that maybe a year, 2, 3 years, they're going to operate that company as a going concern and try to maximize the revenue because I think like all entrepreneurs they understand that whatever liquidity event might exist out in the future, that number gets maximized when they're on the up-slope of a curve. So that's what they're trying to do. They're trying to grow it effectively and responsibly, but they're also trying to grow it profitably in order to one day probably maximize that return.

Brock, I might just to add to Harold's comment. I think our view for a long time is that's an entrepreneurial company and there's probably a liquidity event in there at some point just because of the nature of the 3 principals of that business. But I think if you were to talk to the CEO of BHG, I would say he's as energetic and on fire and focused on both revenue and earnings generation today as he's ever been. And I think he's at least on a personal basis, his belief is that he's still in early-stage growth. And so anyway, again, I think the question is a good one because I do suspect at some point there'll be a liquidity event. But I think individually, the leader of that company believes he's got a long runway yet.

Our next question is from the line of Tyler Stafford of Stephens.

This is Gordon McGuire on for Tyler. So going back to the $500 million in deposit repositioning. Just trying to figure out if there might be any carryover benefit into 2Q? What was the timing on those, that repositioning intra-quarter?

Yes, Gordon. Those all occurred -- well, the corporate depositor that was the $250 million, that happened fairly early in the quarter. The broker deposit change happened throughout the quarter, but there was a meaningful component of that, that happened, call it, in the last part of January that was the primary contributor. So from your question, I'd say most of it, probably 75% of it occurred before the end of January.

Got it. And is there any more opportunity to reposition or does kind of your 98% loan to deposit ratio put a check on that in the near term?

Yes. I think we'll be continually trying to reposition it. We've got some ideas working through the wholesale bank. I mentioned some of those in my comments, fairly high level comments understandably. But we're going to try to figure out how to balance short term, long term, 2019, 2020 and try to see what we can do to squeeze some more juice out of this orange, so to speak.

Got it. And then lastly, Harold, you mentioned the repositioning in the investment portfolio. I saw those yields were up 15 basis points this quarter. Can you talk about what you're doing, what you're buying and whether what kind of strategy you implemented this quarter?

Yes. We're buying. There was a lot of municipals that we're getting our hands on. We like the credit metrics. We're getting out of a lot of the lower, call it, investment grade bonds. We're also getting out of the CLOs. We've still got some more of that to go. The bond book was a little elevated at the end of the quarter. I think we've got probably $75 million to $100 million in bonds that we will probably sell in the second quarter related to CLOs. But the wholesale bank team, they're working on a lot of different strategies and tactics and talking to a lot of people about how to get a little more earnings out of that side of our balance sheet.

And our next question is from the line of Brian Martin of FIG Partners.

Most things were covered, Harold, but just maybe one question on the funding side. It sounds like you expect the cost of deposits to continue to increase from, I guess, from where it's at but the rate of increase should slow. Is that kind of what you're suggesting based on the Fed with the Fed on pause? So 12 basis points in the quarter...

Yes. I think that's right, Brian. We're not -- and granted this is not some kind of scientific study here. But our relationship managers out in the field are really good about calling in to say, hey, we're looking at this and we're looking at that. What do you all think about this or what do you think about that? And those calls have dropped dramatically. So we feel pretty good about where deposit pricing is right now. Obviously, we're in a competitive market. There's a lot of people trying to grab deposits. But we feel pretty good that our relationship managers are on top of it and the messaging coming for both Rob McCabe and Rick Callicutt is to try to get the deposit but get it at the lowest price possible.

Okay. And when you talked about in the first question today, Harold, about the margin not seeing a lot of contraction. I mean, when you look at the core margin, so ex the purchase accounting, sounds like you expect the core loan yields will still go higher but the funding cost will continue to tick up as well. So the core margin should also be flat is kind of what you're kind of at least suggesting based on with the Fed on pause.

I think the core margin is going to hang in there. We're not anticipating any big kind of falling off the cliff kind of numbers here at least in the second quarter for sure. We're looking at loan growth in the third and the fourth quarter. If loan growth begins to escalate then we will have to figure out how to fund it because we don't anticipate core funding catching up even though as we march through the calendar year, our funding profile tends to improve in the second, third and fourth quarters from the first quarter.

Okay. And the FHLB advances, Harold, that level they're at today, do you expect them to hold there or do you expect them to decline as you...

Yes. Right now, we're not anticipating a big increase in Federal Home Loan Bank borrowings. Usually, the first quarter is where we end up tapping into and then hopefully over the course of the year, we'll be paying them down.

Okay. All right. And then just the last one was on the hiring momentum. And with some of the disruption in the market caused by recent deals, I mean, I guess, Terry, do you expect -- I mean, I guess are you seeing momentum on the hiring front pickup? I mean last year you hired, you talked about 108 people. First quarter is kind of at that level annualized. But I mean, are you seeing any sense of pickup in the discussions you're having with some of the disruption or is that not here to say today?

I don't think I would say it that way, Brian. But just to make sure I just communicated what the case is, we aggressively recruit people. We run a continuous recruitment cycle. So we're always chasing the best bankers in the market irrespective of whether there's merger vulnerability, irrespective of what the hiring plan calls for. There's sort of no limits to chasing high producing revenue producers. If you take the average commercial FA here in Nashville would have $100 million loan book and an $85 million deposit book. And so you can do the math on that. I mean if you're paying that guy $300,000, $400,000 a year, the salary multiple is just extraordinary. I don't understand why you wouldn't hire everyone you can hire as frequently as you can hire them. And so I guess what I'd rather put in perspective, we don't speed up or slow down on our recruitment exercise. The variable I think that you're chasing is, so would you expect that vulnerability at large national or regional players would help us? And I think the answer to that is yes, but it doesn't alter what tactic we're deploying. We just sort of run straight ahead.

Yes. Understood. It seems like the vulnerability has increased with this, and that's kind of what I was getting at. I know you guys run your model, but seems like there's more opportunity or could be more opportunity with what's transpired in the market. So that I think you answered it, Terry. I appreciate it.

All right. Thank you, Brian.

Thank you. And ladies and gentlemen, this does conclude our program for today. Thank you for your participation. You may now disconnect. Everyone, have a great day.