About Mac Johnston
Mac Johnston, Senior Economic & Market Analyst at Pinnacle Financial Partners, appeared on CNBC's "Money Movers" on September 17, 2024, alongside CEO Terry Turner. During the interview, Turner discussed the company's Q4 earnings and real estate loans, explaining that Pinnacle's incentive plan includes 100% of salary-based associates and is tied to hitting revenue and EPS targets. He noted that in 2023, a difficult year for banks, the company reduced incentives by 38%, which was harvested into the earnings stream. Turner stated that for regional banks, Pinnacle's commercial real estate exposure is "pretty well in line" with regulatory guidelines, and that the company is "well underneath" the 100% and 300% risk-based capital thresholds for construction and total commercial real estate, respectively.
Turner also addressed credit conditions, saying the company's internal main scenario is a "soft landing" rather than a serious recession. He emphasized the strength of the Southeastern markets, attributing it to population migration trends, and noted that three of four U.S. quadrants have negative net growth while the Southeast has positive growth. He contrasted the health of Pinnacle's commercial real estate portfolio in the Southeast with markets like San Francisco or New England, citing strong growth since 2020.
Source: AI-verified profile updated from Mac Johnston's recent appearances.
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Transcript (7 segments)
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Host0:04
Growth guidance for fiscal '24 and announcing plans to expand into Florida. Joining us now in a CNBC exclusive, CEO Terry Turner, who oversees roughly 150 locations across the Southeast U.S. Thank you, Terry, for being here. So it appears that it was the expense guidance in particular that spooked the markets a bit. Can you share some more color on your expectations there?
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Terry Turner0:29
Yeah, I think one of the things that's really hard for analysts that are less familiar with our country to understand is we run an incentive plan here that's different than every bank I know. Specifically, 100% of the salary-based associates are included in that incentive plan. So when we give guidance, we include that incentive payout. The way that gets paid is based on us hitting revenue targets and EPS targets. Otherwise, the incentive expense is reduced to bring earnings in line. Honestly, it seems like every year as we come out of the gates, we give the expense guidance, people will take and include 100% of a targeted incentive payout. That may account for less revenue growth and it's sometimes confusing to people. But generally, we prevail over the first quarter or two to get people to understand how that plan works.
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Host1:24
Is it possible to generate positive operating leverage given that dynamic?
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Terry Turner1:30
Yes, the plan would be to have positive operating leverage to grow EPS. It's our belief we will grow EPS. I think, again, one of the dynamics there, Leslie, is just to illustrate how it works. 2023 is a difficult year for banks. We reduced our incentives by 38% this year, and so that ends up being harvested into the earnings stream of the company. And so assuming we hit our targets next year, you have to get that lift from 62% up to 100%. All that said, the only way that incentive gets paid is if we've generated positive operating leverage, if we've hit our revenue targets and our EPS targets.
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Host2:17
Terry, when the analyst community starts parsing financials these days, a lot of it is about concentration of commercial real estate on the book. They argue that you have a little bit higher than some peers. Is that a fair argument?
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Terry Turner2:33
We have really, I think for regional banks, we're pretty well in line. Regulators use a guideline of 100% of risk-based capital for construction credit, 300% of risk-based capital for total commercial real estate. We're well underneath all of those guidelines. I think the more important thing is exactly what gets financed, where it's financed, and how it performs. All I mean by that is I watch commercial real estate reports all over the country. The markets that we operate here in the Southeast are significantly different than what I see in San Francisco or New England or some of these other markets. So I jokingly tell investors, you need to turn the television off and come to Charlotte, come to Jacksonville. Come to some of these other markets that we operate in. We've enjoyed really strong growth since 2020, which is a very different dynamic and plays out in the health of the commercial real estate portfolio.
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Host3:37
It's interesting that you mention that. Analysts at Piper says that your updated guidance implies no worsening of credit conditions. Is that a function of the conditions by which you're exposed to, or do you think that we have writ large avoided a severe economic scenario?
