Pinnacle Financial Partners Inc (PNFP) 2021 Q1 法說會逐字稿

Good morning, everyone, and welcome to Pinnacle Financial Partners First Quarter 2021 Earnings Conference Call. Hosting the call today for Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer; Mr. Harold Carpenter, Chief Financial Officer; and Mr. Tim Huestis, Chief Credit Officer.

Please note Pinnacle's earnings release and this morning's presentation are available on the Investor Relations page of 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)

During the presentation, we may make comments, which may constitute forward-looking statements. All forward-looking statements are subject to risks, uncertainties and other facts that may cause the actual results, performance or achievements of Pinnacle Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond Pinnacle Financial's ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks is contained in Pinnacle Financial annual report Form 10-K for the year ending December 31, 2020, and its subsequently filed quarterly reports.

Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation whether as a result of new information, future events or otherwise. In addition, these remarks may include non-GAAP financial measures as defined by the 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, and thank you for joining us this morning. Q1 was an outstanding quarter in my view. Most of you, who have been following us, know that during the pandemic, we transitioned quickly to defense beginning last January, if you believe that, not only to shore up asset quality but we launched a number of initiatives that would continue to drive PPNR through 2020 and put us in a position to accelerate as the impact of the pandemic wanes. And so in Q1, we were able to get off to a really fast start and recognize some of that PPNR growth.

We begin every quarterly call with this dashboard, replacing our key performance metrics on a GAAP basis. But as we most always do because there are so many adjustments required in order to focus on the variables that we're truly managing here at Pinnacle. I want to move quickly to the chart reflecting the adjusted non-GAAP measures.

As part of our first quarter 2020 earnings call, last April, I told you that my expectation was, in the final analysis, 2020 wouldn't be about 2020's earnings but more about how well we position our firm to return to our previous earning trajectory following the pandemic. And as you can see here on the top row, the trajectories are all sloping up into the right with total revenues, fully diluted EPS and adjusted PPNR all up meaningfully on a linked quarter annualized basis.

2021 revenues were up roughly 14.7% annualized during the first quarter. Adjusted EPS was up 7.6% annualized during the first quarter. And adjusted PPNR, during the first quarter, is up 8.4% annualized. While in the second row, you can see that loans are up 11.8% annualized during the first quarter, inclusive of PPP. Harold will review in greater detail shortly and talk about expectations going forward. But generally, excluding PPP, we continue to believe we'll produce loan growth, primarily based on our ability to take market share, due to our prolific hiring. We've hired 2 noted revenue producers in 2019, 2020 and the first quarter of '21, and that's more than 20% of our total revenue producers. That represents enormous market share movement potential, which I expect differentiates our growth opportunity for many, if not most of our peers. Core deposits continue to accelerate at a rapid pace during the first quarter. And in spite of the COVID challenges, we continue to have a track record for consistently growing tangible book value per share with 14.1% growth intangible book value per share year-over-year.

Across the bottom row, you can see that asset quality held up really well in the first quarter, with NPAs at just 36 basis points, that's the lowest level in the last decade. Classified assets also down this quarter to the lowest level in the last decade. And annualized net charge-off is just 20 basis points in the quarter.

I'm going to turn it over to Harold and Tim to review the results in much greater detail. As we go through the detail, I find there's a lot to be encouraged about as it relates to revenue growth. First of all, regarding our net interest margin fundamentals, particularly the trajectory of our cost of deposits; and secondly, fee income. Mortgage originations and sales continue to run into record pace. BHG continues to accelerate during this pandemic, and again, in the first quarter continues to outperform expectations.

We talked about our transition to defense earlier in 2020, allocating a meaningful part of our unit capital to reviewing our loan book borrower-by-borrower. Tim is going to update you on the work that he and his team accomplished here in Q1 as well as give insight to what we're seeing and learning from our clients particularly in these stressed segments. At least for me, our asset quality performance continues to inspire optimism.

So Harold, let me turn it over to you.

Thanks, Terry. Good morning, everybody. Many of my slides I've shown for quite some time, so I'm going to hit the high points. We were pleased with our first quarter loan growth. Excluding PPP, average loans were up 7.2% annualized between the first quarter and fourth quarter. Excluding PPP, end-of-period loans at March 31 compared to December 31 are up 4.6% annualized. So call it a mid-single-digit growth quarter. As to loan yields, in spite of the steepening yield curve and as we mentioned last time, loan yields will be a fight in 2021. We will lean into our relationships even harder to maintain our yields. There's a lot of liquidity out there. It sure feels like it's a borrower's market right now.

Our prime-based credits only saw a slight decrease in yields, while LIBOR was down 4 basis points, and fixed rates down 7 basis points. Overall, loan rates were down 9 basis points, with PPP loans being down 13% and the biggest contributor to overall loan yield decline and likely to be the most difficult to model over the next few quarters, but more on that in a second.

So where to from here? Our market leaders continue to believe that our end-of-period loan growth forecast, excluding PPP, in the high single digits for 2021 is a reasonable number for our part. We've built that estimate from the ground up, based on continual dialogue with our frontline lenders. As always, we will lean on our new hires to take -- to give us an advantage on loan growth. Coupled with our markets, which we believe to be the best banking markets with the best bankers in the southeast, we're optimistic of our loan growth goals for 2021.

As to yields, we still have about 60% of our floating variable rate loan book on an in-the-money floor, so that will help shield some of the pain should loan rates continue to be under pressure. Hopefully, we can get some traction from a steepening yield curve over time.

Speaking of PPP and the tons of work that's been accomplished here, we funded around $3.4 billion between the 2 2020 programs and the 2021 program. We're just over $900 million in 2021 fundings, about where we thought we'd end up. New application volume is slowing, so we don't anticipate a great deal more. Here's what we're hearing and I'm definitely not in the front line, but it seems to ring true. The 2021 program hit the mark and was primarily used to help smaller businesses at least from our perspective. The process has improved since last year, and this has made like somewhat easier for us and our clients. The FDA continues to move around, change the rules, but all in all, it's in a better spot. No one is casting stones as we can imagine what the SBAs had to deal with over the last year to get these programs up and running.

As to forgiveness, smaller clients are getting done, so loans less than $150,000. While loans, say, greater than $2 million appear to be on the SBA back burn and have been for quite some time. During the quarter, it slowed for some technical issues that the SBA was dealing with, and then we ran into tax season with a lot of clients working with their CPA. Our thoughts are that eventually substantially all of our clients who have not repaid their loans will seek forgiveness. Not sure whether another round of PPP will come around, but if it does, we will dive in and believe the appetite will be there but it will be limited.

As for our PPP results for the same quarter, we're modeling a decrease in total revenues somewhat consistent to the decrease between the fourth and first quarter. It all depends on the pace of forgiveness. Eventually, the SBA will get at the greater than $2 million loan, so that is coming to us; we just don't know when. We have about $360 million in loans awaiting forgiveness with the SBA currently and approximately $200 million where we are working with clients to gather the necessary guidance to submit to the FDA for approval.

Now on to deposits. We had another big deposit quarter. Core deposits were up almost $1.5 billion in the first quarter. We've experienced significant growth in noninterest-bearing deposits ending up at $8.1 billion at quarter end, up 63% since last year. Obviously, we believe a significant part of that is government stimulus. Our average loans to average deposit ratio was down only 11 basis points to 82.7%, so we consider that a small victory. Our average deposit rates were 26 basis points, while EOP deposit rates were at 22 basis points. So we continue to see downward only on for 2021 and look to be around 15 basis points by the fourth quarter of 2021, assuming our short-term rate forecast remains consistent for the remainder of this year.

Liquidity bills for nearly all banks is gaining more attention. The steepening of the yield curve has gotten our attention, but we remain neutral on any sort of big bond deployment strategy at present. Our securities to assets ratio has been 13% to 14% for a long time. Our estimates are that our peers are running slightly more than that in the 15% to 20% range. We may deploy a modest amount of liquidity into bonds over the next few quarters, but it will be modest. We also allocated about $450 million late in the first quarter into a repo instrument, which is secured by the counterparties investment securities portfolio. This is a floating rate instrument that yields around 40 basis points currently, so it will be more impactful in the second quarter. We're looking at a somewhat similar product currently, but it won't be as large. I'm mentioning all of this to you to let you know we are actively looking at prudent investments where we can minimize or eliminate credit risk while creating some earnings momentum.

As the top chart indicates, we will again have an opportunity to reduce our wholesale funding book in the second quarter, which we fully anticipate. This almost $1 billion reduction is in our broker deposit books, which we acquired as part of our intentional liquidity bill last year at the onset of the pandemic. This reduction should help reduce deposit costs and help our NIM slightly on the go forward. Additionally, we have about $900 million in Federal Home Loan Bank borrowings, but the prepay ability remains such that the payback period on those is still 4 to 5 years. So we will hold tight for now but monitor those borrowings continue.

We believe our NIM, after PPP and liquidity, was approximately 3.29% in the same quarter, which compares to a similar calculation last quarter of 3.27%. Thus, our adjusted NIM is now up 4 quarters in a row. Also, our GAAP NIM is now up 3 quarters in a row. We anticipate flat to up slightly for the rest of the year. PPP forgiveness will have a lot to do with that.

Now fee income. I'll be brief. Fees were $92.7 million for the quarter. For the quarter, fee revenues were more than 44% over the first quarter number of last year. Wealth management had a great quarter in comparison to last year. We continue to be very active on the hiring front across our franchise, particularly as we continue to build wealth management in the Carolinas and Atlanta. Mortgage beat our expectations by mile, posting revenues of $13.7 million for the quarter, up $1.3 million from last quarter. Second quarter is looking strong as well. As we sit here today, we are much more optimistic about mortgage origination in 2021 than we were 3 months ago, as the rate market does not appear to be moving away from us as quickly as we anticipated it might. Our markets remain strong, and we have hired several key originators in several of our markets over the last few quarters. I'll talk more about BHG in a minute, but BHG continues to issue great report cards quarter-after-quarter.

As to expenses. Specifically incentives, I think everyone is familiar with the impact of incentive cost to our expense base. And if our earnings are hitting our targets, incentive costs go up, if not, they go down. 2020 was very much a downer, at least in terms of incentives for our associates. But we fully anticipate based on the current operating environment that 2021 will come back strong, and hopefully, our associates will recoup some of that lost incentive for 2020. We have provided an opportunity this year to our associates to earn an outsized incentive. That said, there's no free lunch. Increased incentives only occur if our earnings growth supports the incentive.

Last year provision expense and CECL required an outsized reserve build, which directly impacted our incentive plans probably more so than most. It only stands to reason that if we're able to recoup some of that prior year reserve build this year that some of that should find its way to our associates. This year, our annual cash incentive is tied to the usual soundness in earnings growth numbers. We also maintained a PPNR component, which we added during the middle of 2020.

Additionally, our Board has also changed the way equity compensation works for the leadership of the firm. Rather than achieving absolute goals for our performance-based equity awards, our ultimate award investment will be based on how we rank within a peer group, specifically targeting ROTCE and tangible book value growth over a 3-year period, along with a modifier based on total shareholder return. That change, we believe, is more shareholder-friendly over the long term. I probably have spent too much time on incentives, but those of you that have been around for a while and you know our unique incentive culture -- incentive structure is cultural, and it is definitely part of what drives the heartbeat of our firm. For both the annual cash and equity incentive plan, the first quarter would indicate we are trending in the right direction.

As to expense run rate, we're anticipating personnel expense with all of our new hires coming on board. And inclusive of our increased incentives, personnel expense should increase between 2% to 3% each quarter for the remainder of the year. Conversely, all of our other nonpersonnel costs, which amounted to slightly more than $242 million last year, should see a high single-digit percentage decrease. That's right, a decrease in 2021. As I've stated before, the leadership of our firm is determined to not let a trend develop with a less than target payout to our associates. That's a trend we will work hard to avoid in 2021. But to accomplish that, we all are looking forward to meeting and exceeding our financial objectives this year.

Quickly, some comments on capital. I'll be brief. We raised our dividend to $0.18 a share last quarter. With the share price where it is, we've not acquired any shares, and we don't anticipate acquiring any in the near term. We've been working to redeem a couple of sub-debt issuances this year. And as I mentioned previously, we've intensified our focus on tangible book value growth by adding a component for it in our leadership's equity compensation plans.

As to our outlook, not going through this slide in depth, as we have covered most of this previously. So this is really a summary for the model builders out there on what we think. Obviously, we realize that we appear more optimistic than most. That said, we have great confidence in our people, our markets and our clients and renewed optimism about where the Pinnacle is headed.

Now BHG. These slides that we have shown for several quarters, the blue bars on the slide originate -- on the chart are originations, and we have ramped up with more loans being funded with records being set nearly every quarter for the past 3 quarters. First quarter was a record for both originations and places. The green bar represents loans on which gain on sale has been recorded as these loans are sold to downstream banks. This is the traditional BHG model with gain-on-sale revenues being generated. Coupons had fluctuated somewhat over the last 3 years, ending at 13.6% for the first quarter. As to bank buy rates, they fell 4% in the first quarter. So net spreads remain in the mid-9s, which over time is up from previous years.

The bottom right chart now. Over 1,200 banks in BHG's network and almost 700 individual banks acquired BHG loans last year. This has to be one of the strongest funding platforms for a gain-on-sale model in the country. This slide is probably the best slide to demonstrate the growth potential of BHG's model. Data analytics have improved significantly over the last few years, and it is resulting in better hit rates and more levels meeting their credit standards.

As to credit, we've updated BHG's charge-offs and reserve bill chart. These are for loans that BHG has sold in their network of community banks. The green bar shows that currently, they have just under $3.9 billion in credit with banks who have acquired BHG loan. The orange line details the annual loss rate, while the blue line on the chart details the recourse accrual as a percentage of outstanding loans with these other banks. Trailing 12 first quarter '21 losses landed at 4.5%, basically consistent with the last few years, and during the year, who knew how COVID would impact loss ratio. The recourse obligation reserve is used to reserve for future losses for the loans sold to other banks. With COVID, they increased the reserve by approximately $15 million in the first quarter. But as a percentage of loans, it was down slightly.

The top left chart, we've shown on several occasions. The quality of BHG's borrowers has improved steadily in the past, and over the last few years, BHG continues to refine their scorecards and increase the quality of its borrowing base. Again, the right chart, and as I've said before, maybe the most powerful chart I had to offer related to BHG's steadily improving credit quality.

Looking at losses by vintage, losses continue to level out in earlier months since originations, thus pointing toward a lower loss percentage over the life of the underlying loan. Pandemic-related events may cause these lines to move upward, but the quality of the borrowing base in our opinion is very impressive and is much better than just from a few years ago.

Lastly, we said it last quarter and we'll say it again, 2020 was a big year for BHG and we anticipate big things in 2021. Last year, BHG executed on our first $160 million securitization. This will allow BHG to continue to diversify its revenues and its funding sources. We're expecting another similar securitization at BHG in the near future here in the second quarter of 2021.

BHG's earnings continue to ramp up. BHG had a great operating quarter in the first quarter, very much exceeding everyone's expectations, even theirs. We've upped our expectations for 2021 quarterly, now expecting 2021 to produce outside growth in relation to 2020 of 20% to 25% or more before we had anticipated high single-digit growth.

So wrapping up, loan growth and loan pricing for Pinnacle in 2021 will take work but we are optimistic. Deposit growth has been remarkable. Deposit pricing is headed down. NIM should be flat to up. BHG had another great quarter, and we continue to believe in them. Personnel costs will go up but correlated to increased earnings. Credit for both Pinnacle and BHG, we believe, is in very much great shape.

So with that, I'll turn it over to Tim to talk more about credit.

Thank you, Harold. Good morning, everyone. Using the traditional credit metrics of net charge-offs, NPAs, classified assets and past due accruing loans, Pinnacle's loan portfolio continues to perform very well. In the first quarter, as in prior quarters during COVID, our bankers and credit teams continued their thorough client credit reviews. Particular instance was placed on nonpass credits, our hotel portfolio and credits in our COVID-specific low pass risk rate. Our first quarter credit metrics are very encouraging. Our classified assets decreased again this quarter, dropping by $17 million. And our classified asset ratio declined to a very modest 7.3%. NPAs also decreased this quarter down to just 36 basis points. And finally, criticized loans decreased during the quarter by $85 million.

Similar to prior quarters in 2020, we conducted a 4-question survey during March of 405 C&I clients with loan balances totaling $931 million. The survey was specifically targeted to our low pass risk rate clients in a wide variety of segments, such as entertainment, restaurants, consumer services and health care. The questions inquired about revenue projections for the current quarter compared to the same period last year and months of liquidity. The survey results reported more optimism than our fourth quarter 2020 survey responses that we previously shared with you. Of particular note, 87%, versus 60% in December, said first quarter 2021 revenue should be between 75% and 100% of first quarter 2020. 62%, versus 53% in December, have 7 months of liquidity or greater.

This slide is to provide an update on Pinnacle's loans that were modified under Section 4013 of the CARES Act. Our 4013 modifications were negotiated with borrowers from the perspective of providing the client a longer-term solution to help them bridge to the other side of COVID. Our approach was to improve Pinnacle's position and simultaneously help decline. With each modification, we collected very current borrower information as we sought to accurately rerisk rate the loan and to contemplate the terms of our modification. A key distinction between deferrals offered first and second quarter of 2020 as these modifications executed in the third and fourth quarter is the vast majority of our clients with 4013 modifications are at a minimum paying interest monthly.

With each 4013 modification for our hotel loans was negotiated to fit the borrowers' specific circumstance. Our modifications generally consisted of changing the loan repayment terms to interest-only for 3 to 12 months in consideration for borrower concessions such as pay the accrued interest that accumulated during the earlier deferral period, establish an interest reserve on deposit with Pinnacle and shorten the loan maturity.

As illustrated in our supplemental deck, Pinnacle's hotel book has held up. Of particular note, our hotel portfolio occupancy has been stronger than the national average as reported by STR for 8 of the last 9 months. As an example, our average occupancy for the month of February was 50% versus the national average at that time of 45%. On a very positive note, STR reported, for the week ended April 10, national hotel occupancy was 59.7%. This is the highest level in the past 12 months.

Given that 74% of our hotel loans are in the economy, limited service or extended space segments, we believe this improving occupancy trend bodes well for our portfolio. Many of our hotel clients in these particular segments can cover operating expenses and interest when occupancy is in the mid-40% range. As a testament to our conservative hotel underwriting prior to COVID, we only have 4 loans totaling $6.6 million that are rated classified. With the American Rescue Plan, the deadline for banks to complete 4013 modifications was extended from December 31, 2020 to January 1, 2022. As this table illustrates, we've had very little change in our 4013 loan modifications after the original deadline.

This next slide is to provide a brief overview of our different credit delivery channels. While the structure of our different channels may not appear unique, we believe it is our model of hiring experienced bankers in combination with the design of Pinnacle's loan underwriting channels that drives our results. Several of our key tenants that help us play offense during the good times and also execute defense very effectively include, for C&I and CRE loan request greater than $1 million, we have credit teams in market working directly with our financial adviser. The credit teams have historically joined the banker on prospect or client calls. For loans greater than $1 million, we do not use remote centralized credit factories or hubs as many of our regional competitors do. At Pinnacle, our FAs partner and collaborate with credit very early in the loan request. We believe this practice of quickly involving credit on loan requests is different than our competitors.

Average years of experience for our senior credit officers is 29 years, and the average years of experience for our credit analyst is 21 years. We believe our credit team's experience level has served us well in converting prospects to customers in serving our clients. And our special assets team is led by a 40-year industry veteran. His team of special asset advisers average 16 years of work at experience. Pinnacle's financial advisers are encouraged to raise their hand early with any loan exhibiting early signs of distress. Our culture of involving our special assets experts early has been a key driver in the positive trend in our classified assets and NPAs.

Pinnacle's credit metrics have held up well. Although we have shifted back to an offensive stance, we will continue our thorough defensive work on clients in the impacted segments, and in particular, our hospitality book.

And now, Terry, I'll hand it back over to you.

Okay. Thanks, Tim. On the one hand, I think it's too early despite football as it relates to COVID, but it seems apparent to me that as a result of the progress on the vaccine along with all the stimulus that's been forward into the economy, we're setting up for a strong second half of 2021. As we said many number of times, it's been our intent since last January to get the position to seize those opportunities that would inevitably exist in the southeast as the economy gains to reignite.

As I mentioned in my introductory comments, my view first quarter was an outstanding quarter with NPAs at 36 basis points, classified assets down to 7.3% and past dues down to just 9 basis points. Asset quality actually appears excellent. And many of the threats, we once feared, seemed to have subsided. Adjusted EPS was up 313% over the same quarter last year. Importantly, adjusted PPNR was up 25.2% over the same quarter last year, and revenues were up roughly 20% over the same quarter last year.

And now at a time when both fintech and asset generators regarding enormous multiples, we believe that BHG has validated the power of their differentiated model as they have continued to originate and sell record volumes of loans through their proprietary auction platform. As Harold mentioned, we expect that they will do another securitization in Q2. And as Harold also has already mentioned, even with the securitization, we're now forecasting income growth of 20% to 25% this year. And so we believe all this sets up for a great 2021.

Building on that foundation and momentum, as we move through the remainder of 2021, we're extremely bullish on our organic growth opportunities. Coming out of the pandemic, Greenwich Associates has estimated, based on their market research among business owners, that roughly 20% of the revenues to banks is in motion due to the high level of dissatisfaction with large banks responsiveness during COVID, contributing factors including handling the payment deferrals early on, then PPP and then subsequent loan requests.

Also, based on business owner feedback, Greenwich has developed a Crisis Response Index, which ranks banks, based on their response to the crisis, by aggregating how clients rated them on the most important criteria during the pandemic. Not surprisingly, in their fourth quarter 2020 data, Pinnacle is one of the highest rated banks in the nation, meaning that we're one of the best positioned banks in the country to capitalize on this money in motion, is 20% of revenues available for the industry based on client dissatisfaction.

Beyond that, we're one of the most attractive banks to work for in the country. We were just listed again in Fortune magazine as one of the top 100 places to work in the country, one of a limited number of banks on the list. And that reputation has enabled us to hire a record number of revenue producers in 2019, another record in 2020. And as the first quarter is predicted, we should attract another record number of revenue producers in 2021, which would suggest outsized organic growth. And perhaps most importantly, we're located in markets with some of the best size and growth dynamics in the country. Nashville continues to create jobs, which will further accelerate its growth, most recently with its announcement of Oracle's expansion into Nashville, 8,500 jobs and a $1.2 billion capital investment.

Also, a recent announcement by the partnership of GM and LG on a $2.3 billion investment to build a battery plant here in middle of Tennessee with 1,200 jobs. Similarly, Raleigh recently announced that North America's largest end-to-end biopharmaceutical manufacturing facility will be located in Wake County and will create more than 725 jobs. And then Google is bringing an engineering hub with its many -- probably as many as 1,000 jobs with that adding all the other successes in the triangle. And of course, Atlanta continues to be the land of milk and honey. Georgia was recently named the top state for doing business for the seventh consecutive year. And I'm not exaggerating the Metro Atlanta Chamber's list of meaningful relocations and expansions for 2020 is a 7-page document. It's unbelievable.

And finally, I've already alluded to the importance of plays on being in the largest and fastest-growing markets in the southeast. In the past, we published maps of the southeast, ex Florida, to demonstrate our target markets. And we filled out the majority of those markets with acquisition of BNC in 2017 and the de novo start in Atlanta. At this point, I can't name a franchise with a more attractive footprint or that's better situated. Going forward, I think the best illustration of our target markets is simply a list of the largest and fastest-growing MSAs in the southeast, now including Florida. We're satisfied and believe that we've adequately demonstrated that our distinctive model is universally effective in the southeast. As we've already pointed out, we believe there's great vulnerability at the large banks to dominate these markets. I would say, we're seeing unprecedented opportunities to enter those markets in a few cases with potential strategic combinations, but in many cases on a de novo basis, which we like a lot.

Our firm has almost always been a high-growth financial services firm. Going forward, we see extraordinary vulnerability at the large banks to dominate many of our markets. We expect to attract the best bankers in both our existing and potentially attractive markets around the southeast. We love the size and growth profile of the markets that are in our existing footprint. We expect to have opportunities to expand into other attractive southeastern markets. So again, I think we are excited about the potential growth, both short and long term.

Operator, I'm going to stop there, and we'll be glad to open the floor for questions.

(Operator Instructions) And our first question comes from Jared Shaw from Wells Fargo.

Maybe if we start with BHG, I mean, that's great trends that you're seeing there. And with the securitization, are they doing that just really to keep that avenue open? Or should we expect as we go through the year that securitizations will be a bigger part of that? And I guess how big could the balance sheet at BHG get? Or how big would they be comfortable without getting versus selling them?

Yes. I think they are pretty confident with growing their balance sheet. They will have a securitization accomplished here in the second quarter, and we would not be surprised to see them accomplishing those before the end of this year. So they have not gone away from that diversification strategy, Jared. So we fully anticipate them to grow it. They think they can get their balance sheet up meaningfully here over the next couple of 3 years.

Okay. And then with that revenue coming in and then Terry's comments about the opportunities in these other markets, including Florida, is there an opportunity for you all to be dramatically increasing the hiring pace of revenue producers in some of these new markets? And can you take this as an opportunity to really expand that Atlanta model into other markets? And if so, is that included in your expense outlook? Or is that -- would that be additional as those opportunities come up?

Well, I'll talk about the expense outlook and what's in it and what's not in it and let Terry go in the hiring plan for the rest of this year in other markets. We do include kind of, call it, a placeholder for new revenue hires for the rest of the year. Traditionally, I think we've called that de minimis so that every market leader has at least some room in their plan for new hires, but it's in no way, shape or form kind of the target that we're looking for out of these market leaders and what we expect from them in these markets. Does that make sense, Jared?

Yes. So if there's a bigger opportunity, then that would not be reflected in the budget at this point?

That's right. If they get outsized hiring going on, we'll fully support that.

Yes, Jared, I guess I'd add to Harold's comments. I do believe that we are likely to have incremental opportunities in markets that we're not currently in. We do have -- I think we enjoy a great reputation. And as you know, there's a fair amount of turmoil around the southeast with some of the bigger companies. And we find that we have people contacting us from various markets that are interested in coming or moving the teams and so forth. So we continue to evaluate those opportunities and vet those opportunities and so forth. But I do believe that we're very likely to have incremental hiring opportunities in markets that we're not currently in.

Okay. Great. And then just finally for me, I guess, can you give an update on how the new hires that have been brought on over the last 18 months or so, how are they doing in terms of actual production versus the goal? And obviously, COVID threw everyone for a loop, but are they getting traction? Are they able to start chopping some wood on that 20% of bank revenue that's in motion right now?

Yes. We think so, Jared. What we do is we track kind of our revenue producers based on how long they have been with us. And obviously, the ones that have been here the longest are the ones that are producing most of the continual revenues for us. But we track them based on tenures of 1 year, 3 years, 5 years and then more than 5 years. And the newer, I guess I'll call them hirees, are coming up the ranks. We're pleased with that, and we fully anticipate that they will be the ones that give us the momentum we need, here, over the next couple of years. As Terry mentioned, I think it's something like 25% -- 20% to 25% of our revenue producers have been hired here in the last couple of years. We think that's an incredible opportunity for us here in the near term.

Jared, again, I'll add to Harold's comments. I think your question is on the right track. COVID does impact. And I would say, in this way, it lengthen the sales cycle, both in terms of our ability to recruit people as well as their ability to recruit their clients to the firm. So it does lengthen in COVID where it's just more difficult to get in front of clients and those kinds of things. But that said, as Harold mentioned, we are dragging and we are seeing the progress grow. And we do believe that based on what the pipelines are building, that they will be able to deliver, and as you say, get traction on this 20% of the share that's in motion.

Okay. I guess that's it then. Then when you look at your loan optimism, overall, though, is it a combination of being driven by new clients or better utilization or sort of equally both?

Well, I think it is both. We see increased line of credit draws that's helpful. But we also see an extraordinarily high level of paydowns in commercial real estate. So they sort of balance each other. And so when you work your way down to the net growth, I think the biggest factor in our ability to produce that will be their ability of these new hires ability to move that market share.

And our next question comes from Stephen Scouten from Piper Sandler.

And I apologize if I missed the first couple of questions there. But I guess one of my questions for you, Terry, is just longer term, as you think about BHG, and obviously, I know there's a lot of unknowns and if that ever creates a liquidation event, but how do you guys think about capital priorities if and when that were to occur, and maybe specifically around M&A, given you probably do have that advantage currency, you have kind of sought in terms of M&A over time? I think you're at about 2.4 tangible versus your peers at 2x tangible today. So kind of just wondering how you think about that capital deployment and opportunity set there.

Yes. I think as I sort of alluded to in the prepared remarks there, I do -- it is obvious we -- our stock is advantaged. I do think there's M&A opportunity that seems to be picking up. Again, that's not such a wild stream of announcement, but it seems to me there's a lot of dialogue going on. And so we continue to evaluate M&A opportunities really across the front. And so -- anyway, I think -- you know, Stephen, that I think going back to last year, somebody asked about M&A and my response was, "What? I mean, I wouldn't spend my currency to trading slightly above the annual book value." But at 2.4, that is a different equation. And so we look to optimize both the opportunity and the advantage of the stock. And so anyway, I guess I'd just characterize that way. I don't want to overplay it or overbuild it or oversell it. As you know, there are thousands of circumstances that have to come together to make it work. But certainly, we're in different position than we would have been even 6 months ago as it relates to M&A.

I think on the -- as it relates to BHG, it is just so hard to -- we get asked questions a lot about what would you do if this, what would you do if that? Man, there's so many circumstances that are unknown: what would the valuation be, what -- how much might be sold, how much -- there's just a thousand variables that would influence what choice we make when we get there. But I would say this, it's a really luxurious problem to have them in a position with so much money interested in what they do. So anyway, we just have to cross that bridge when we get there.

Yes. Yes. No, definitely a high-class problem, I suppose. It's been a great investment. Does it make you want to think about other nonbank acquisitions, I guess, moving forward? Or is that something you're exploring more than just the traditional bank deals, whether that be fintech-type investments, which I know you've done some of already or other line of business-type acquisitions?

Yes. I think. I would say that we have and we continue to look at sort of alternative kinds of investments, like BHG. I think you're aware of advocate capital, which is -- it's a smaller scale deal, but it's a meaningful deal. We've got a small investment in a leasing company. We've got some -- our approach on these things is generally using Collins' theme, "When you fire bullets, it's not cannonballs." And so we do like the idea of finding both fintech asset generators that seem differentiated, and so you don't expect us to continue to look in that vein. It's not exactly like looking for a unicorn, but it's also -- they are not just everywhere. So it takes -- they are a little more -- there maybe a little more serendipity in that, I think. But certainly, we're interested in those kinds of things.

I think on the lines of business, I'm not saying there aren't any, but I say less of those, just to be candid. We've got a pretty well full built-out product capability. And when you look at some of these things that we would have an interest in, like, take P&C insurance or something like that, I mean, the -- when you get out of the brass tax of it, you got all this roll-up going on, people paying extraordinary multiples. It creates too much goodwill for us. I mean, when you get into some of those sort of wealth management lines, they are really hard to acquire and feel like you're going to either make a good deal or you're going to be able to retain the revenues. Many of those things are personality dependent and so forth. So I'd be less excited about lines of business than I am about bank M&A or other sort of fintech asset generators.

Got it. That's helpful. And then maybe just last thing for me. I might need you to stop talking about Atlanta so much because there's people everywhere here and the traffic is bad again, but I can't highlight as much. But I'm wondering kind of what -- where you are on the progress front there in terms of how many lenders you have on the team now, maybe the base of loans? And then I know you mentioned specifically wealth management for Atlanta and North Carolina. And is that just building out the teams? Or is there a specific opportunity around wealth management in those environments that you're really seeing that's leading you to push into that space in particular?

Yes. I think, again, Stephen, I would characterize -- so honestly, I would characterize our opportunities in some of these North Carolina markets, specifically Charlotte and Raleigh is really similar to Atlanta. Again, of course, Atlanta is the biggest and most vibrant, but those other 2 markets are really handsome markets. And we have such small share positions that we sort of look at those much like we would the de novo start in Atlanta.

I think the hirings generally have been pretty even. I can't recite the numbers in each of those markets, but we're hiring revenue producers in each of those markets, both what you might call traditional financial advisers or relationship managers as well as the rest of the revenue-producing categories, like mortgage originators, brokers, and trust administrators.

I think you asked about the opportunity. I do think that the large banks that we've been working on to hire relationship managers from have a really high vulnerability in some of these wealth management businesses, trust administrators, portfolio managers, brokers and so forth. And so that's really the opportunity that we're trying to seize for the other revenue producers.

And our next question comes from Brock Vandervliet from UBS.

On BHG, just to confirm, so that's a 20% to 25% net income growth guide for this year. Is that right, Harold?

Yes, or more.

Okay. And where is that growth coming from? A couple of quarters ago, you had a lot of disclosure about new verticals. Has that been kind of sidestepped and this is all the traditional -- more traditional growth areas? Or is it new verticals, too?

Yes. I think there's a list of things that they -- because we ask them the same question. I think the gain-on-sale model is operating at pretty much peak efficiency. They've got better data. They're able to go out and send out more opportunities to do business with people, so on and so forth. I think their resolution of substituted loans is better than they anticipated post COVID. So they've got some break there.

I think with the improved credit outlook, you're likely to see some reduction in reserves for losses. I don't think it will be like a big kind of cliff thing, but I think it will be steady for the rest of the year. So I think when you put all that into the blender, they are coming out thinking this year is going to be a great year for them, and so that's how we got to the 20%, 25% of norm.

Got it. And shifting over to the funding side. I believe relative to our model, part of this was just the reduction in some of your wholesale deposits, but it did kind of stand out to me as you're showing a decline in the rate of deposit growth, it seems. Could you speak to that? Are you seeing any peaking there?

Well, we hope we're seeing some peaking there, but I can't really give you any kind of comfort that we're going to see core deposit growth lessen. We're active in several different initiatives to kind of grow lower cost, smaller account balance deposits, but we will see more runoff in the wholesale book. We've got -- like we mentioned, we've got $1 billion coming out this quarter. But hopefully, that will be enough so that we don't grow the funding book like we did here in the first quarter.

And our next question comes from Steven Alexopoulos from JPMorgan.

I want to start on the loan outlook. I appreciate the improved optimism on loan growth. But given the industry is up to its eyeballs and liquidity, particularly your larger competitors, can you talk about the competitive environment today for lending? And could that impact your ability to get that high single-digit growth?

Yes. That's a great question. I think Harold alluded to in his comments back that it sort of feels like a borrower's market. There's a handful of reasons for that. But clearly, one of them is limited loan demand, which drives pricing lower and those kinds of things. So what you own is a correct theme and a right theme, I believe. We believe that we have taken that into account in our forecast. Nobody knows the future, I guess. But what we believe is that if you just sort of look at the loan demand in our footprint, if you will, economic loan demand is still very low. We expect it will pick up in the latter half of the year, but it will be muted by all the liquidity in the system. And so where we believe we get the growth is from really incremental hires moving market share from where they were to us. And so that's the principal assumption about where the growth comes from. It's less dependent upon economic loan demand than it is market share movement.

Okay. That's helpful. And then if we look at the COVID-19-impacted segments, hotel, restaurant, et cetera, how are you looking at those exposures from a long-term view? And do you have any plans to reduce those exposures over time?

Certainly, in hospitality where we have no appetite, we haven't generated a new hotel loan since first quarter of last year. I would tell you that our underwriting for CRE retail certainly has changed. We've really shifted that to single-tenant, credit-tenant exposures and grocery anchored. So I think part of the answer is just shifting the appetite within CRE. Restaurants, certainly, more conservative. We're -- we have some in franchise concepts that we're still tracking well. But I would tell you, with restaurants, it's guardedly optimistic and strict underwriting. So hopefully, that might have helped answered your question.

Okay. And then my last question, Terry, given the comment -- the earlier commentary about the improved valuation, and maybe you're looking at M&A opportunities a bit differently, is the flip side of that, that you're not looking as active on the buyback side? I know you have the $125 million plan out there, but how are you thinking about that given the valuation of the stocks?

Yes. I think, Steven, I'll answer your question directly on the buyback. But just to be clear, I think I used the phrase and talking about that, "Hey, I don't want to oversell it, overbill it." I'm not saying we're going to make an acquisition. I'm just saying we're in a different position, and there are lots of discussions going on and opportunities to consider those kinds of things. So I don't know, I'm just trying to get that shaped up for somebody to understand that we do have a high valuation that does create some opportunity, but I don't want to overplay the likelihood that we're going to run out here and make a bunch of acquisitions because I don't think we're going to make a bunch of acquisitions.

So anyway, let me -- hopefully, that will better frame that comment. And then as it relates to the buyback, yes, I think you're right. I don't think you ought to have an expectation right now that we would wade back in and buy shares primarily, as you say, is a function of the valuation. We just -- we look at that differently. We like having the authorization, but we will watch it over time. But I don't think we have an intent to buy shares at this price.

And our next question comes from Brett Rabatin from Hovde Group.

First, Harold, I was curious maybe what your crystal ball might be telling you on liquidity? I know you thought that might start to drain at some point, and it's obviously extended out for yourselves as well as the industry. Can you maybe give us some color on how you see that liquidity being deployed over time? How much of that might happen? And how much of it just kind of drains naturally with people using cash?

Yes. That crystal ball is kind of a question, Brett. We likely will -- a modest amount of bonds. We're likely going to the market here over the next 2 to 3 quarters. We might build our percentage up from a 13.5% up to a 14.5% or something like that. It won't be a big number. We've got, in all likelihood, I don't know, $1.5 billion or so of PPP loans that we anticipate coming to us here over the next 4 quarters. So we're -- that will provide additional liquidity to offset redeeming some of these wholesale funds.

It's going to be a fight. It will be a war to try to drain some of this liquidity. We remain optimistic about loan growth targets. We remain optimistic about reducing deposit rates. And we particularly got some larger depositors that are more rate-sensitive, and they fully appreciate how the value equation works. And if they can find a better number at another financial institution, they will move that money. And right now, we're okay with it, and we don't think it damages our relationship with our client at all. So there's a lot of things that are in play to try to get some of this liquidity off our balance sheet.

Okay. Appreciate the color there. And then the other thing I was curious about was in the guidance for expenses, you talk about requiring increased infrastructure support, but you're obviously giving guidance for nonpersonnel expenses to be lower this year. Can you talk maybe about the increased infrastructure support, what that all entails? Are you guys doing anything on investing "infrastructurally" that might change the dynamic outside of the personnel line?

Yes. Not really. I don't think we're doing anything as far as bricks and mortar. We've got a couple of branches, I guess, in play here this year. But there's nothing big as far as buildings or technology that would cause you to be, call it as a blip, on the radar. Most of our infrastructure build comes around personnel, and it will be, call it, from one revenue producer we end up hiring 2 to 3 other people in support of that revenue producer. So that's the infrastructure that we refer to in those comments.

Okay. Then if I could sneak in one last one around the change to the equity compensation, just the tangible book value per share growth being added to that. Does that change how you might view M&A in terms of thinking about payback periods or change of book dilution?

Well, it certainly is impactful. So we would -- it would be something we would need to consider. Traditionally, our Board has been willing to work with us on significant events and how that might impact longer-term incentive points.

And our next question comes from Matt Olney from Stephens.

I want to ask about the bank's sensitivity to interest rates. On Slide 52, you give us some good disclosures. It looks like the bank continues to move to a liability since the position. But when I read some of the comments on that slide, it sounds like you've got some levers to pull to offset this over the next year or 2. Should we be assuming, by the time rates do increase on the short end, whether it's next year or 2023 or whenever, that Pinnacle will at least be in a rate-neutral position, if not asset-sensitive? Just trying to appreciate kind of what the strategy is.

Yes, that's a great question, Matt. And you are right, we've got some levers. I've got $1.5 billion in loan floors that are a gain right now that we can unwind today and that will free up $1.5 billion in floating rate assets to move us to more of an asset-sensitive position. So we've got some levers like that, that we can pull to help alleviate the -- whatever that slide is indicating currently.

So yes, we're not panicked about our balance sheet or anything like that. We think we've got a great opportunity when rates begin to move. Most of my liability sensitivity is tied around loan floors. So it's all about that. Once we can get our better view on where rates move, we can always start moving around on loan floors and cure the problem.

Got it. Okay. And then circling back on the loan growth and the outlook, definitely appreciate the guidance, it's kind of a bottom-up review with all the lenders in the bank. Curious, how do C&I utilization rates look today compared to levels a few years ago? Just trying to appreciate if that does rebound, how much incremental benefit we could see from loan balances of the bank?

Yes. We -- utilization, I think, is at 43% down from 46% or something like that. So those would be loans that are currently in our books. Not anticipating a big growth in utilization. So all of our growth, we think, is going to have to come from loans that are currently, not all of it but most of our growth is going to have to come from loans that are currently on somebody else's balance sheet moving into ours.

And our next question comes from Catherine Mealor from KBW.

Want to start with a follow-up on the GAAP NII guide. How much PPP do you expect to come through in 2021 within that guide?

Yes. That's a great question, and we beat each other up on trying to anticipate how much PPP I've got. But you can calculate the interest income with where that might pay down to, but it's all about the forgiveness. And we've got about $63 million in additional accretion to come to us. We think a lot of that's going to come this year. It's probably more than 50% of it we likely will realize this year, maybe upwards to 70% of it.

Okay. Great. And then as we think about...

Catherine, I think the big news we've got out of a -- when we talk to our relationship managers is, they are not here to anybody say they are not going to go for forgiveness. So I think most, if not all, of that $2.2 billion that's hanging out there on our balance sheet will likely find its way to forgiveness. And I would imagine it's going to be more sooner than later because I do believe sometime in the near future, the loans of last year, they are going to get into principal paydown loan here soon.

Got it. Okay. That's helpful. And then as you think about big picture PPNR growth, there was a slide a couple of quarters ago where we looked at PPNR per share kind of ex BHG, ex the excess liquidity and ex the PPP, do you think this is a year where that -- where PPNR ex those 3 variables can grow? Or is it more BHG is kind of helping you fund this expense growth this year and maybe that's more of a kind of a next year thing?

Well, there's no question BHG is helpful, but also reserve release and provision expense is also helpful to help fund some of that incentive growth. So that dynamic is very much present. The PPNR growth for all banks is relatively benign this year. And in most cases, it's negative. So we've challenged our folks, we think, with a fair target. It will be positive. And hopefully, we can work our way through it to see at least some incremental growth and big top quartile in the period.

Okay. Great. And then if I get you one more, just for Tim. Tim, what's the path to moving loans off criticized?

Yes. Catherine, good question. As you know, the vast majority of that is our hospitality book. We go through every hotel loan--when I say we, that's myself, our special assets manager and our CRE credit officers--every quarter, every single loan, $5 million and greater. And I've been thinking about that in particular with the hospitality book. We may have some moving off the criticized this quarter, second quarter. We'll have some, I think, more third quarter and more fourth quarter, but there's still, Catherine, maybe a part of that book that will take until early 2022. So I think you will start to see it accelerate in terms of positive migration out of criticized back in the past. You will see that start this quarter and accelerate third and fourth quarter.

And our next question comes from Michael Rose from Raymond James.

Just wanted to touch on the fact that BHG is significantly adding to their staff this year. And there's reports that they may look into a point-of-sale lending at the home improvement stores. Can you guys just clarify what the plans are there and where that stands?

Michael, I think what they think their hiring plans will be similar to last year for 2021, and then they have got similar hiring plans for the next few years. I think they added 100 or 110 people in 2020. So they anticipate a similar number this year. The point of sale, they are looking at all kinds of new product verticals, and that's one of them. So yes, they are definitely looking at it, and they are building plans to go after that market.

Okay. I thought they had an employee kind of about 800, and they were going to add about 650 this year. What you are saying sounds a little bit different. I guess, was the article that I read was that wrong? Or just where does that stand?

Yes. I think as we talked before, that article was written off of an Internet-based thing that talked to the marketing guy. I think they will get to the 650 over the next few years. But as it stands right now, I think the number for this year is somewhere around 100 to 125 employee units.

Okay. Helpful. And then maybe just back to the NII guide. This year, it does seem like the PPP fees will be higher and then kind of a core will be lower. Can you reconcile that to us versus 90 days ago? And then are we at a point where ex PPP, the NII will grow from here? Is that the expectation?

Well, we're very hopeful that core net interest income ex PPP will grow with core loan growth, for sure. Right now, we're going to stick with our forecast that NII growth will be high single digits for this year.

And our next question comes from Jennifer Demba from Truist Securities.

Can we circle back to the M&A topic, Terry? Just curious, you said that the higher currency now makes M&A a little bit more attractive. Can you talk about what kind of properties would be of interest to you right now, from a size, geographic standpoint? We know you're kind of bias towards more commercially-oriented properties.

Yes. I appreciate that. I always hate talking about the topic because I'm very because I never get to say in the way I think people understand what I'm trying to say to them. So anyway, I appreciate the question. I think on M&A, it's just obvious that if you have a stock to trade at tangible book value, not much of an option if it's trending 2.4 forwards. It's an advantage for our peers that creates opportunity to consider. To your question about what kind of things would be considered, I think you got your whole range of options that I think everybody in the industry is considering on M&A, which would include strategic combinations, MOEs, acquisitions, fill-ins. I mean, so you got the whole realm of things that could be looked at there.

I think when you get down into making acquisitions, my own sense, Jennifer, is that I'm not interested in doing a lot of acquisitions that wouldn't produce something close to double-digit accretion and earnings accretion. And so you can make your own assumptions on, "So what does that mean?" But just sort of back of the envelope math, I think it means you got to buy at least a $7.5 billion organization to -- that creates that kind of impact. And so you know the list as well as I do. It's not like they are 40 of them out there that are going for that threshold of, as you say, being in a major urban market, having a commercial orientation and then producing that level of accretion. So hopefully, that would shape what our considerations are.

And our next question comes from Brian Martin from Janney Montgomery.

Most of my stuff has been answered, just 1 or 2 things. Harold, just on the -- going back to the expense guide for a minute. If you look at last quarter, just kind of how you're thinking about it versus kind of how you laid it out this quarter, in the bottom line impact, is there much change? I think last quarter was high single-digit growth off of last year's base of around 5.70%, 5.80%. And now this quarter, you kind of tweaked it to be the 2% to 3% on the comp and then a decrease elsewhere. But just kind of when you get to kind of the net number of where you're thinking about, is it still a similar spot to that 6.25% type of range? Is that how it still shapes out with the new guide?

Yes. I think so, Brian. I don't think it's moved much between the end of last year and currently.

Okay. So similar guide. Okay. And then just one other question, just on the forgiveness, Harold. I mean, if the loan forgiveness in the PPP occurs and it's most of that coming back into cash until you can redeploy it? Or how is that changing the size of the balance sheet, I guess, if that occurs? Is it different now than it was previously?

Yes. I don't think so, Brian. I think as those loans pay down, we'll try to deploy that cash into new loans, some way somehow. Is that what your question was about? .

Yes, just kind of the average earning assets. I mean, I guess, as the loans get forgiven and it comes back to cash -- they're coming back to cash right now until you can redeploy it. That's kind of what's continuing to occur.

Yes. I think so. It's no doubt that we will have additional liquidity from the PPP credits. And hopefully, we can get the loan engine moving and be able to get that money redeployed, quickly.

Got you. Okay. All right. And then just one last one for Terry. Just on that last question on the M&A part. I understand what you're saying. Just geographically, it's still -- I mean, I guess, is there more focus or more interest in -- I know it's a limited number of targets, but would there be more interest in adding to your existing footprint? Or I guess is it more likely that you would have to go to -- likely go to a different market than you're currently in, given how you've talked about how much opportunity there is within your existing footprint?

Yes. I would say it's -- I guess, again, Brian, to go back and think about the size and acquisitions that we have to make, who those things are and so forth, I think you would have to draw a conclusion that you most likely go to different markets than existing markets. But again, I'm not ruling that out. I'm just saying it seems like you find more opportunities than additional markets than you do in existing markets that would meet that criteria.

Thank you. I am showing no further questions. This concludes today's conference call. Thank you for participating. You all may now disconnect.