Q4 2021 Pinnacle Financial Partners Inc Earnings Call
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[music].
Yes.
Good morning, everyone and welcome to the Pinnacle financial partners fourth quarter 2021 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.
<unk> earnings release, and this morning's presentation are available on the Investor Relations.
Relations page of their website at Www Dot P. M S P dot com.
<unk> call is being recorded and will be available for replay on pinnacle's website for the next 90 days.
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During this 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 clinical 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 annual report on Form 10-K for the year ended December 31.
2020, and it subsequently filed quarterly reports.
Pinnacle financial disclaims any obligation to update or revise any forward looking statements contained in this presentation, whether as a result of new information future events or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC regulation G. A presentation.
The most directly comparable GAAP financial measures and a reconciliation of the non-GAAP .
Measures to the comparable GAAP measures will be available on pinnacle.
Financial website at Www Dot T N F P dot com.
With that I am now going to turn the presentation over to Mr. Terry Turner, Pinnacle's, President and CEO .
Okay. Thank you Gigi will start just a minute.
The dashboard.
Therefore, it is intended to provide you the best insight as possible as to what we had clinical view of what.
What we're managing to and in fact, we begin every quarter with the same dashboard at a minimum.
Guys I remind must focus on these growth verticals.
We are tightly focused on EPS growth in tangible book value per share accretion.
Revenue growth and asset quality.
That's what we set aggressive targets for that's what we persistently talk about our organization. That's how both our short and long term incentives are bill simply said thinking about the variables that we focus on fourth quarter was another factor this quarter for our firm with very strong core loan growth deposit growth net interest income growth.
And grow year over year pre provision net revenue grow tangible book value per share accretion and asset quality metrics, beginning with the GAAP metrics.
Has your attention, particularly on the asset quality metrics at the bottom of the slide.
Green bars show the medium median quarterly performance over the last five years and as you can see our asset quality over the last five years has been very strong but for all three measures even with a very strong performance over the last five years, probably all metrics continue to trend down and our decade long lows.
Moving now to the non-GAAP measures on which.
You can see across the top row, the extraordinary growth in revenue and earnings on the second row, the extraordinary balance sheet growth, which forced prior firms our primary mechanism for growing revenue and earnings going forward.
And the follow on to that second row, you can see the reliability of the tangible book value per share accretion.
Well for me.
<unk>.
At the conclusion is that we're continuing to execute at a very high level of virtually every critical SaaS measure for our firm.
Now im going to turn it over to Harold and talk in more depth about our four key performance then I'll come back and try to do a little context.
In terms of where we've been and where we're headed.
Thanks, Larry Good morning, everybody as usual, we will start with loans and again in the fourth quarter was another great loan growth quarter for us and provides us with strong momentum as we enter 2022, excluding CCT average loans were up 12, 6% annualized between third and fourth quarter overall loan rates were down.
In the fourth quarter due to reduced inflows of PVC on our loan yields.
We recognized $15 million in DTC revenues in the fourth quarter down from $41 2 million in the third quarter.
Due to the DDA balances decreasing to approximately 371 billion at the end of the fourth quarter, we anticipate PTP revenues will range between $15 million to $20 million in 2022 compared to approximately $86 million in 2021.
We've been getting a lot of questions about loan floors and their impact on yields in a rising rate environment.
I'm not about to apologize for a loan cohort because we enjoyed the ongoing benefit of the sports for quite some time, but they will cause us to experience some lag on realizing the full benefit of rate hikes in the near term.
At the bottom left chart indicates 62% of our daily float logo will realize the full benefit of rate increases on day, one that number increases to almost 8%. After the first 50 basis points in remarks, like I said, our relationship managers have done a great job in securing low towards over the past several years.
Has pay handsome dividends to us.
Lastly, our market leaders are excited about our loan growth prospects in the 10% to 15% growth rate in end of period loans inclusive of the remaining PPP forgiveness for 2022 is a reasonable objective for our firm at this time in 2021 are new markets, including Atlanta, and our new specialty lending units provided a proxy.
$530 million of loan growth our view for 2022 is that these markets, including Washington D C and the specialty units should contribute two to three times that amount in the coming years.
Now on to deposits, we had yet another big deposit growth quarter core deposits were up almost $2 1 billion in the fourth quarter, we experienced significant growth in noninterest bearing deposits ending up at $10 5 billion at quarter end up 41, 5% since the end of last year, our average deposit rates were 14 basis points in the period.
The rates were slightly less at 13 basis points.
Given the current rate outlook, we are likely approaching floors on deposit rates because our primary opportunities in near term CD renewals, helping us will be $1 7 billion in maturing Cds in 2022, with an average rate of approximately 48 basis points.
The volumes of the projected growth for deposits the macro environment is shifting and thus we have to believe that deposit growth will eventually find its way back to our traditional growth strategy with reliance on attracting the best bankers and haven't been buying our best clients to our firm.
We've never abandoned our long term views at core deposit growth is a key strategic objective and even though the last few years have provided us an ample supply of funding.
We will need to get back to a more intense focus on putting our balance sheet growth with core deposits.
That said, we like our chances given the significant investments we've made in relationship managers and new markets over the last few years.
We continue to look at ways to create increased earnings momentum through deployment of excess liquidity into higher yielding assets and the elimination of wholesale funding sources. We are optimistic that loan growth in 2022 should help to reduce our overall liquidity, but reducing our liquidity to a more normalized level, we believe will be a multiyear effort.
Our objective here is to find ways to put money to work in a rising rate environment, not placing too much pressure on tangible book value growth.
During the fourth quarter, our investment securities increased by approximately $446 million almost 8% a little over 80% of our purchases in the fourth quarter were bonds on the short end of the curve slightly less than three years with an average rate of approximately $1. One 5%. While we also increased our investment in a collateralized repo investment by <unk>.
<unk> hundred million, which yields approximately 35 basis points.
We are not currently pursuing a formalized strategy to deploy our excess liquidity, which is approximately $3 billion.
All of our term investments, even though the 10 year is pricing at around 185 currently.
We'll pick our spots in industrial with curve in a prudent manner. We do believe we have some opportunities on the short end occurred to put some money to work at slightly higher yield, but this will be a modest response, saying that.
Municipal bond Vermillion and deployment in the first quarter.
As the gray bars on the top left chart reflect I believe we've done a remarkable job defending our margins over the last two years, we tend to hover in the three to four range and will work hard to defend our margins going forward. Obviously, we like everyone else. We look forward to a robust operating environment in 2022, as we think we will win with a lot of the yield curve.
But even if that doesn't materialize our track record would indicate that we are very capable of managing our balance sheet, regardless of the rate of growth.
As credit we are again, presenting the four big traditional credit metrics with net charge offs classified non performers and path to accruing loans Pinnacle's loan portfolio continues to perform very well and again. These are some of the best credit metrics ratios, we've experienced in our history modifications made pursuant to section 4000.
<unk> 40, <unk> 13 of the cares Act continued to decrease from $817 million at June 32, 791 million at September 30, and now stand at $7 13 at December 31, importantly, and as noted in the highlights on the slide we do anticipate further declines in our allowance for credit losses to <unk>.
Total loan ratio over the next several quarters given the continued improvement of our credit metrics as well as macroeconomic factors.
Yes.
The other thing until again lots of good news here and over the course of 2021, we spent quite a bit of time on our various fee categories for the fourth quarter fee revenues were up more than 20% over the same quarter last year as a run rate for 2022, we are anticipating high single to low double digit increases in fee revenues this year inclusive of DHT.
Which were estimated estimating approximately 20% growth and we'll speak to that in a few minutes also included in our planning assertion is that we are not anticipating a repeat of $20 million in income we've experienced in 'twenty one from valuation adjustments for several of our joint venture investments. We are planning for revenues from these investments to be significantly less.
In 2022 other than that our wealth management mortgage and other fee based business lines. They are ready for a breakout year in 2022.
As to expenses I would Michael has been a great deal of time on expenses, but given last cycle.
On the policy year and provide some more color, particularly around our expense plan for 2022.
I think everyone is familiar with the impact of incentive cost to our expense base in the direct correlation to corporate results more on that in just a second 2021 was a great year for our associates and to say we were pleased to deliver an outsized to our associates for their 2021 effort is a profound understatement.
<unk> is being able to provide this to them and thank our board for supporting us in this effort.
As to our overall total expense run rate, we anticipate low double digit percentage growth in 2022, which is primarily attributable to head count growth in the new markets.
We also are aiming for a recruiting year in 2022 that will be even more prolific than what we experienced in 2021, Terry will discuss more on that in a few minutes as to incentives. Our current players that are incentives will increase by 2% to 3% in 2022 should we achieve our performance targets.
Right, we hope and as our incentives to go up in 2022. The increase is based on head count adds in 2021, and our planned recruiting in 2022.
We are reducing our target pay in our annual bonus plan from the outsized amount of 160% of target back to the traditional 125% of target, but we are also providing more cost to our equity plans for our leadership as well as our associates, who all received some form of stock compensation.
So why should shareholders be okay with all those substantially all of our incentive costs or performance based our annual bonus plan, which is about two thirds of our annual expense is entirely performance based.
For us it's not based on individual results, but on corporate earnings <unk> soundness targets. Our thesis our secret sauce is that the right combination for achievement of top quartile earnings growth and sound. This will result in higher multiples on our shares over time.
This time last year PNM Street estimates for 2021 worth $4 50 a share.
After our first quarter 2021 earnings that number increased to around $5 20, a share internally we knew those targets would not give us the share reports we desire. So our targets were higher which is basically what we do practically every year.
2021 at $6 73.
So our targets are set to achieve top quartile performance over the long term, if we don't achieve our targets and the bonus pools are reduced in the many years that number has resulted in zero percent per year.
Thus every year there is a cushion.
For 2022. It is mean, we are finalizing our incentive plans for 2022 currently but nothing of substance will change our incentives will be performance based and we will target top quartile performance. Our best guess is that given the environment today and the uncertainties that are still prevalent we have another meaningful stretch goal in front.
All of Us for 2022.
Quickly some comments on capital the board approved an increase of our dividends per common share to <unk> 22 from <unk> 18 cents yesterday, a 20% increase during 2021, we redeemed $250 million of sub debt issuances from from available cash.
We get calls consistently about issuing this Sunday is given interest rates that some of our peers have been attained obtained but we like our capital stock our capital stack. Currently that said, we will continue to monitor the debt markets and access to them as it appears to be advantageous to us.
And as I've mentioned several times before and I want to just reinforce the point, we've intensified our focus on tangible book value growth by adding a peer relative to <unk> and our leadership's equity compensation plan.
We are currently calculated an annualized increase of 14, 2% and our tangible book value per share at year end 2021 compared to 2020.
Our equity program plan is designed such that our leadership wins, if our tangible book value per share growth. Our return on tangible common equity and our total shareholder return outperforms in relation to our peers as I alluded to earlier, we believe our incentive programs are objective not subjective and to be candid very unique.
Design and we believe allows our management with shareholders, who have sent rapid shareholder value creation.
This slide is a summary of our outlook for 2022, we won't go into the slide in depth as we covered much of this previously 2021 was.
Right year for us and we have significant momentum going into 2022 that excites us about our growth prospects. Several 2021 matters require a quick highlight as we look forward to 2022 margins. We've been very successful in both sides of the balance sheet and.
In keeping our pricing competitive and maintaining margins.
Horizon yield curve will be beneficial to us over time.
<unk> has been a significant contributor to our success both from a client service perspective, as well as a financial perspective, but thankfully. It is heading through the rearview mirror, replacing the financial impacts of PTC is not easy, but we are confident that we have the loan growth prospects to overcome the reduction in PPP revenues in 2022.
Credit has continued to outperform and given where our loan portfolio is currently positioned in the macro environment. We believe we have reason to be optimistic for 2022.
BHG grew about 46% in 2021, we fully anticipate DSD to have another outstanding year of outperformance at a pace, which should approximate 20% annualized growth recruiting we fully anticipate another great year of building our core franchise through organic growth by recruiting the best bankers in our markets to our.
We will lean into our organic growth model, even more in 2022 as we develop our end markets, our specialty lending businesses and continued to build and grow market share of our legacy franchise.
Now to BHG.
<unk> had another great quarter, and one that was better than we anticipated as a rest of the 46% growth year in <unk>.
Other quarter of record originations with spreads widening through the pandemic on the gale and wholesale platform.
The bottom right chart details the almost 1400 banks in Dht's network and over 700 individual banks acquired BHG loans last year, coupled with the securitization success. This continues to be one of if not the strongest funding platform for gain on sale model and the Payor.
As to credit BHG has sold to their network of community and other banks just over $4 1 billion in credit through their networks.
As noted the recourse obligation as a reserve for potential future loss absorption BHG decreased the recourse reserve to approximately $207 million at the end of the fourth quarter fourth quarter as a percentage of loan it was down by approximately 67 basis points all of those to pre COVID-19 levels.
As noted on the chart at the bottom right. The trailing 2021 losses landed at 464%. This chart splits the actual credit losses from losses, BHG absorbs from reimbursement or the unamortized premium the acquiring bank paid to get the loan the increase for the pre tax loss was primarily attributable to the fact that.
Actual premium pay for BHG credit has gotten larger consumer credit trends tend to have a higher prepayment track record and loans being paid off earlier as rates have decreased.
As shown to five 1% in credit losses is very respectful in comparison to prior years.
As the losses by vintage on the right hand chart losses continue to level out in the earlier months since origination thus pointing to a lower loss percentage over the life of the underlying loans the quality of the borrowing base in our opinion is very impressive and remains but much better than just from a few years ago.
BSG had another great operating quarter in the fourth quarter and exceeded our expectations in year 2021 produce outsized growth in relation to 2020 or 46%. We're also revising our growth factors of 24 2022 down to approximately 20% Beach BHG believes that by investing more.
And to the on balance sheet model and creating a more predictable revenue stream should benefit the long term franchise value creation of BHG originations.
Originations as noted on the previous chart for 2021 approximated $2 8 billion up meaningfully from 2020.
BHG believes they will continue to grow originations in 2022 and have not reduced third party originations for this year.
Roughly they are looking at 25% to 30% growth in originations.
They just are they just decided to send more to the balance sheet. They executed two securitizations in 2021 looking for another one here in the first quarter and I wouldn't be surprised if they don't execute three here in 2022.
As the slide indicates they've got more ideas that are in some stage of development, which if successful should foster continued growth over the next several years.
<unk> continues to review their business from both a critical perspective, how can they perform better as well as the strategic perspective, how can they export their strengths to grow the franchise. Their track record is impressed so wrapping up at the loan growth and loan pricing for political in 2022. It will take work, but we are optimistic that the.
Deposit growth has been remarkable and likely will slow as macro factors begin to reflect change deposit pricing continues to decrease but is nearing a floor. Our fee outlook is likely aggressive, but we believe we have the horsepower in place to deliver outsized growth in 2022.
Lastly, we will continue to set our leadership base on top quartile performance and believe we have.
The momentum going into 2022 to do so with that I'll turn it back over to Terry.
Okay. Thank you Harold.
This call with a look at our past performance over the last five years.
Performance variables that we believe are required to grow shareholder value.
We believe our advantaged markets, our long standing model for attracting talent are demonstrable ability to while our clients and most importantly, our willingness to spend the money necessary to see this extraordinary opportunity.
Best in class growth and has positioned us for the continued share grab that should be available given the strength client loyalty for our largest competitors.
The one that's following our stores for any length of time understands that our most important competency here is if we can attract many of the best bankers from the larger banks and enable and empower them to move their client base to pinnacle based on the distinctive service and advice that we're able to offer.
Where what are frequently referred to as a goldilocks solution for great bankers.
Just dry for the great bankers in larger banks that are frustrated by the bureaucracy and inability to serve their clients well, we're small enough to be nimble and responsive to make decisions closer to the client you get big enough to meet the credit needs of even larger middle market clients and to provide sophisticated treasury management wealth management and alike.
'twenty one was no exception, we set a record for attracting and hiring experienced revenue producers away from those larger more vulnerable institutions in our market and honestly as <unk> already indicated I expect that will set another record in 2022.
And a number of our earnings calls I've tried to spend some time.
Helping investors understand the power of our culture, our differentiated model and do that because without understanding that it's nearly impossible to understand the pace and reliability of our growth in most key performance variable like EPS revenue and tangible book value.
Last quarter I used a similar chart to this one in order to demonstrate at the firm wide level the linkage between our obsession with the market environment.
Our obsession with our clients to the creation of extraordinary shareholder value as I Hope you know, it's our intent to continue to produce outsized growth. So I thought this quarter I'll spend a minute looking at our ability to grow and expand rapidly largely because of our culture not at the expense of our culture.
You will remember our announcement to acquire a b and C, which had operations across the Carolinas and Virginia.
At the time it looked to us to be a fabulous acquisition was both tangible book value accretion and double digit EPS accretion and it enabled us to extend some of the most attractive markets in the southeast like Charlotte and Raleigh, North Carolina, and Charleston, and Greenville, South Carolina.
Obviously that were around and you'll remember that we described the deal strategy is number one to hold on to the growing commercial real estate business is b and C was so good that while number to use in our distinctive culture in our C&I focus to bolt on a large C&I business in order to turbocharge. The overall growth rate. So this slide is intended to illustrate.
The power of our culture to extend markets and produce high growth. It all begins with getting the associates fired up and engaged as you can see here in 2021, just four years later, we won best place to work awards in Charlotte and Raleigh, and then try it in North Carolina and for the whole state of South Carolina.
And according to Greenwich.
We've had the highest net promoter score in North Carolina, So we're able to leverage adaptations associate engagement in order to create a distinctive client experience.
Then look at the loan growth.
Particularly the C&I growth.
The remixing of the deposit book based on growth in transaction and NMDA accounts the fee income growth.
We've just been turbocharged by the.
Of wealth management products in the line and our ability to hire revenue producers from some of the largest banks in those markets. In fact, we have been able to protect the value of the CRM business as Rick Callicutt and his team has built while transforming the growth engines of the C&I business.
So enough about what Rick and his team have accomplished and while that's past performance. We expect the same cultural for us to produce outsized growth in our more recent market extensions like Atlanta, Birmingham Hospital, and Washington DC.
So 2021 was a fabulous year for us our associate engagement as measured through the top box right writings in our annual work environment Survey actually increased in 2021, despite a very difficult year in terms of COVID-19 , social unrest and so forth our net promoter scores reflected improvement in both Tennessee and North Carolina.
So our already strong client engagement again, despite COVID-19 and all its ability to diminish service quality.
Importantly, again this year, we produced top quartile total shareholder returns with underlying revenue growth in loans deposits fee EPS and tangible book value.
Invest meaningfully.
The physician environment to continue its rapid growth with de Novo starts in Atlanta, now with 46 associates into losses and we're in the process of building up a third office in North Fulton County in that market, We're in Birmingham Hospital, and most recently into Washington DC.
And with all of that investment in future growth, we continue to balance that with an appropriate spending as evidenced by our noninterest expense to asset ratio of just 185% in 2021, which is just another indicator to me. In addition to these are sub 50 efficiency ratio that we're rightly investing.
And growth.
In terms of our execution priorities for this year <unk> already given you the numbers, but let me sort of gave you was behind that number one we're continuing to invest meaningfully and exciting and engaging every single associate as you know we already have extraordinary associate engagement, we haven't not only across the entire associate base, but across key minority segment.
Clothing racial and gender minorities, but that said nothing is more important to us and engage in every single subject is such that they give us their discretionary.
That's what accounts for the extraordinary performance that we've had over the last 21 years, but we believe we can do it even better we have a number of initiatives specifically focused on diversity and inclusion here in 2022 to ensure that we're engaged in every single associate which is the fuel that drives this engine number two our second priority is.
Behind the effort not only to drive up our service levels. Our net promoter scores. If you will but to get paid for somebody might say have you already had the second highest net promoter score in the nation why would you listed as your number two priority to improve them and the reason is because in my opinion services suffered dramatically almost university.
Universally in almost every industry, mainly explain the service to management due to Covid some blame supply chain issues in my opinion, one excuse is as good as another so at pinnacle will be doubling down on service quality. We believe now is the time that we can capitalize on culture and produce even greater differentiation.
Between us and our competitors and then its my belief that arent in a premium based on distinctive service will be particularly critical in this elevated rate environment in previous cycles deposit betas were generally indicative of the pace of earnings growth and so using our premium service to minimize the deposit betas as rates rise should enable us to widen our March.
<unk>.
Number three we think about season, our market share well in three dimensions number one continuing to hire great bankers in our existing markets number two extend into new markets, where they are bankers capable of building up a bank of conflicts as you know we've recently gone into Atlanta, Birmingham, Huntsville, Washington, DC, frankly, I'd be surprised if we don't find our way to.
More of those kinds of opportunities in 2022.
And then thirdly attract an industry specialist we use this approach to support our geographic market managers with a higher level of industry expertise and an ability to attract larger classes that Mike first baseline knowledge versus local context.
Our recently added statements in the area of equipment lending franchise lending in some of our lending to name a few so as I mentioned earlier, we expect all of those previous actions to yield outsized growth and we expect to set another record in 2022 for recruiting hiring revenue producers from our larger more vulnerable competitor.
For when I reviewed our fee growth you saw that we're currently producing outsized fee growth and a good number of fee categories.
Brokerage like trust like interchange and so forth that's what we're talking about making sure. We meet every need that our clients have we are specifically not closures, but it is our desire and our clients need so well that we've made a model which is a huge fee income opportunities is already yielding outsized.
As you've seen and which we expect to continue for the foreseeable future and then of course, even though our asset quality metrics are extremely strong nothing in the mileage earnings like credit losses, and so as we grow the environment, we continue to invest in credit infrastructure, including senior credit officers credit analysts system support and so forth.
As you can probably tell I'm on fire about the opportunities that I see for our firm is on fire as I've ever been we built a differentiated model that should continue to produce outsized share growth for an extended period of time.
And honestly the competitive vulnerability that currently exist should continue to expand in a consolidating industry.
It's just an accelerant for our growth the banks that have most of the market share in many of our markets also possess the greatest vulnerability so what could be better.
So the question is how do we see this opportunity number one continuity of senior leadership.
Of course, no one knows the future, but I fully expect all the Ineos will stay in the area at least three more years. Some more I believe some will stay longer for me lowered well and is currently my intent to stay at least five more years, we can evaluate after that over that period of time. It is my intent to put the board in the best possible position to optimize.
The shareholder value of this firm.
Done by avoiding consolidation is my intent to continue to work identify and develop the next generation of lasers for the firm it is best optimized Bakken.
Combining forces with another management institution of the mill about one of the most valuable and attractive franchises around and why do we do that is to seize this opportunity that I've tried to chris' last for you. This morning to build the dominant southeastern banking franchise, operator, we will stop there and take questions.
Thank you Mr. Turner the floor is now open for your questions.
We would like to ask a question at this time Please press star.
One on your Touchtone phone analysts will be given preference during the Q&A again, we do ask that while you pose your question. Thank you pick up your handset to provide optimal sound quality. Our first question comes from the line of Gary Jared Shaw from Wells Fargo Securities. Your line is now.
<unk>.
Hey, everybody good morning.
Good morning.
It's a few things I guess on BHG.
Couple of questions Harold you had said.
The fee income.
Growth to pinnacle in that 20% range, but could you reiterate what you think the originations of BHG can be did you say, that's 25% to 30% growth off of 'twenty one's level.
Yes, that's right Gary.
Thinking theyre going to still maintain the same kind of origination momentum going into 2022.
That they felt they had now for the last few quarters.
What they've decided to do is allocate more to the balance sheet.
Build the balance sheet create them create a more sustainable revenue platform through interest income.
So they've completed.
We completed two securitizations in 'twenty, one one in 2020, and then I think they'll complete.
Two or three this year.
So and I think there'll be larger than what they've completed in the past so.
They continue to be able to roll they continue to find new clients and so the business model itself is.
Running really well and I've also got these opportunities with these new.
Call it verticals.
They're also exploring as well so we're still as prime as we can be about BHG and think they will have another great year for us.
And then when we look at that.
Yes different or that the originations versus placements chart.
Should we assume that the placements are still call it around that $400 million level that theres still going to.
Keep that.
Demand satisfied there with the growth coming beyond that yes, I think I think they'll continue kind of a similar ratio to what they did in the fourth quarter.
So.
As they scale out 2022, they'll manage their results towards that 20% growth factor.
Okay.
I guess shifting to to the broader loan growth.
Terry you know that was great great down on the $530 million of growth into new markets.
When you add in D. C. Like you said, we're trying to and looking to see that expand do you think that the DC operation can ramp up maybe faster than that typical I guess, what did you say in the past takes about three years to get a book of business or do you think that that could ramp faster than what you've seen for other team hires.
Due for two reasons.
I see that.
The the thrust there will have an even more commercial orientation than our other market extensions.
And so it takes less people to produce more loan volume than what would be typical and so not only the size and growth dynamics of the market, but particularly the group of people that we've hired I mean, my guess is that we could do.
We're doing 500 million, our first quarter out of the gate and so again, you're seeking to get that done in the first quarter. The momentum builds as you go we could do something really special here.
You didn't ask about Atlanta, but I might just comment on Atlanta.
In round numbers.
Finished this year with about $900 million in loan commitments about 500 million.
Loan Outstandings I've got 46 associates as I mentioned, they're going into their third office and so.
Thanks, traveling really fast as well so I do look for Atlanta in D. C that produce really outsized growth and then.
Always.
Want to make sure people get it these markets that we're in like Charlotte Raleigh.
While the asset bases that we have there are meaningful to us there and that compared to the market capacity, what I expect growth. There just again I've mentioned all the iron that is done and the movement toward the C&I makes over there.
Charlotte and Raleigh to really produce some extraordinary growth as well so anyway, that's a little more gas but.
No that's great color. Thanks, and then I guess just finally.
With all the success you've had in hiring and how how quickly they're able to come in and all the all the benefits you've talked about do you really even need to consider M&A at this point in terms of being the being the priority to get into these markets or are you thinking.
Sort of cracked the code here and.
Can you just do.
Do hiring as the sole way to expand the VNS.
<unk> potential.
Yes.
Jeremy as you know.
<unk>.
I have worked hard to try to make sure people get it I'm not going to take M&A off the table because there could be a great transaction that I'd be willing to do but that said if you want my honest opinion youre on the right track as sort of like why would I go do some acquisition when you can produce the kind of growth in Atlanta.
In Birmingham, and again I think we will have other opportunities like those.
That easily my preferred play.
Great. Thanks for taking my questions Alright.
Thank you. Our next question comes from the line of Steven Alex Polak from Jpmorgan. Your line is now open.
Hey, good morning, everyone.
I wanted to start so to go back to be cheap for a minute in the reduction.
The fee income growth of 30% down to 20 can you give us a little more context, what what drove their decision and maybe was it a change.
And the rate outlook, and maybe that theyre expecting maybe that.
On sale margin to compress a bit.
Well I think the rate outlook did have something to do with it.
But I really think that the.
<unk> strongly believes that the on balance sheet model will result in a greater franchise value for him.
So I think as he begins to look.
Over the next two or three or four years, and we agree with all of that point as he looks over the next two or three four years.
I think he is going to be extremely focused on how to build the franchise value of that firm.
And I think this is one of the peers kind of core beliefs.
He felt like going into 'twenty, one that they were going to have a great year.
Which they achieved.
They felt like that.
2022 would get a spillover of that at a 30% clip.
But I think here over the last quarter or so he is reevaluated that that call at that allocation between balance sheet and gain on sale and just kind of.
Kind of moved it around a little bit I think that's kind of the.
The perspective there.
<unk> shared with us.
Yeah.
Okay.
It's helpful.
Terry in terms of new hires. So you guys hired 119 revenue producers in 2021 and last quarter. You indicated you thought it might be 110 122022.
Are you still in that range like how are we thinking and what's embedded in the expense guidance.
All right.
I would say in terms of the hires.
We will do more than that Thats, a reasonable range, but I think we will do more.
More than that.
Again, my optimism is really fueled by what.
Is happening in Atlanta, I've talked about that a little bit honestly I believe they have three commitment letters for meaningful revenue producers that are signed and are waiting their bonus before they come across.
So again I expect to come out to get a little quicker in Atlanta, and I think the same thing will happen in D. C. So a little more optimistic and I'm not trying to take the guidance up meaningfully, but I expect we will hire more than what I. Previously said Harold do you want to talk about how thats taken into account in the expense guide.
We've loaded everything into the expense book for 2022.
We've got.
Less of a turnover factor I'll say it that way so we expect our head count.
To increase more in 2022, then in 2021.
The hiring.
Just sheer harvest, we believe will increase I think the numbers like 10 or 15%.
Okay got it.
And maybe final just drilling down a bit Harold how much of a bump up I know, it's fairly modest but the bump up in expense outlook, how much of that tied to this wage pressure that were hearing is basically everywhere.
Thanks.
<unk>.
We believe well first of all the standard rates for our firm was about 3% I think we ended up close to four.
With all of the Merit raises that will go into play this year.
So it's.
We're feeling it.
But I don't think its Gov derail this plan.
I think congratulations to the fed for realizing there is inflation, though.
Okay. Thanks for taking my questions.
Thank you. Our next question comes from the line of Jennifer <unk> from <unk> Securities. Your line is now open.
Good morning.
Hey, Jim.
Harold you guys had strong sequential growth in service charges investment services fee or.
Are those fourth quarter run rate.
Yes.
Are those good run rates going forward you think.
Is there anything in particular driving that growth.
Yes, we think well first of all there's likely some seasonality around interchange because of December .
But we don't think well see any significant pull.
Pullback in any of those areas going into next year.
A lot of the wealth management is due to what's going on in the overall or the broader markets.
But I don't think theres any any big pullbacks that we're looking at going into the first quarter.
Other than like I mentioned, probably in the service charge and interchange areas, where theyre, just probably less volume going into the first quarter.
Okay.
Slightly differently.
I guess, if I could just say that.
You get an extraordinary growth in these wealth management businesses, particularly the brokerage business the trust business and so forth and so much of that is tied to this revenue producer thing that we talk about.
Try to be clear, it's not just relationship managers it is.
Wealth managers and the brokers in those kinds of people and so we have hired a great number of those kinds of folks, particularly in our Carolinas markets.
And so that's really fueling a lot of that growth there.
Yes.
Terry when can we expect political to enter the Sunshine state.
We're already here.
Yes.
I thought we were a quarter that is China.
No.
<unk>.
Yeah.
Don't know the answer to that.
We don't set targets, saying I've got to get to this market by this day.
It's all about the opportunity.
But I can I.
I don't want to say, we bind around with some groups. We ultimately decided we didn't think they were the right.
<unk> for us and as you know they would have been good salespeople, but we didnt believe they could build a consequent you're buying for us so.
We're just indicating that we're interested in some of those markets.
I'd be shocked if we don't find our way there.
Over the reasonably near future, but again I don't have a specific date or a specific target to get there. It's just about when we find the right group.
Thank you very much.
Thank you. Our next question comes from the line of Brock Vandervliet from UBS. Your line is now open.
Hey, good morning, Thanks for the question.
How does that is that what you're.
Deposit growth thats, not too too much different than many of the banks in the sector, where it's up.
Roughly a third or so since COVID-19 started.
You kind of get out the telescope and think about deposit betas and so.
Such.
How should we.
Part to think about.
<unk>.
Sure.
Stickiness I guess for lack of a more technical term of the deposit balances as rates begin to move.
Yes, that's a great question, Brian we've been looking at.
Growth in deposits, particularly large deposit balances.
For quite some time trying to anticipate what could happen in an operating environment.
That said.
Our relationship managers that we talked to about those depositors believe they are sticky.
There are some very some money and all of that we're waiting on an event to occur or something like that but that just happens in the day to day running of this bank.
So we believe they are sticky as the betas and what we're projecting.
We're looking at somewhere in our numbers around 40% that was similar to the last cycle of 40% to 60%, depending on whether or not youre talking.
Total deposits our interest bearing deposits.
Got it.
We're looking forward to that occurring we're coaching the salesforce hold an up rate environment now.
I think Rob Mackay brick Calicut, Rob Garcia in Atlanta, Theyre, all getting ready for upgrade environments and talking to their call.
Call it their relationship managers that work with large depositors on how we're going to respond to that so.
Were just hopeful we believe a more sooner than later.
Rate increase from the fed is going to be helpful to all of those.
Got it okay, and just flipping over to the other side of the balance sheet and securities.
I think you added $446 million this quarter, it's been pretty steady.
It doesn't it.
You mentioned 500 for Q1, it doesn't sound like Youre likely to accelerate that just given that rates are up and you can earn earn more on that.
The book value focus seems to be playing into that I just want to make sure I got that correct, yes, I think <unk> got that correct, we'll pick our spots.
If I had to say, we had a target yield bogey with the bond book or new purchases.
And the $2 50 range might be a little bit north of that but the same kind of products that we customarily acquired.
So that's probably where we're headed we are likely to put some more work more money to work on the shorter end of the curve. We've got a couple of products that we're looking at that we think we're going to be able to execute all out here.
In the first quarter and through the second quarter, but.
Like you might imagine they won't move the needle a lot.
Got it okay. Thanks for the questions.
Thank you. Our next question comes from the line of Catherine Mealor from K B W. Your line is now open.
Thanks, Good morning.
Morning.
And maybe just sticking with the balance sheet composition as a follow up to <unk> question. So as we think about this.
The size of the securities bucket feels like we're not going to see a big change.
17% of average earning assets maybe.
Up a little bit.
90 days my guess is that it does.
They've kind of below 20% of the balance sheet.
And then.
Follow on to that on the liquidity side.
As you think about this mid double digit growth in your GAAP NII, what kind of how.
How much of deployment from this $4 billion in cash are you assuming.
Kind of come kind of the way and it's the point into one again, it's Karen.
So I think of the kind of size of the balance within that GAAP NII guide.
Yes, as far as right now we believe we've got about $3 billion in cash. That's just that we wish was deployed into higher yielding asset, but it hasnt to pull the trigger on.
The way the rate markets responding currently so and so forth.
I think you're accurate in your 18%, 20% kind of range I don't think we're not going to execute any big Gulf kind of strategy.
Divest or to reduce the liquidity profile into more longer term bond assets.
<unk>.
But we will monitor.
What's going on every day.
The 10 years kind of spiked up I'm not sure what it's going to do today, but it.
It does make things more interesting.
We've got a like.
Bonds that.
Column.
578 years in maturity that we can get call it $2 50 or more at yields if we can find those bonds that will that will tap into the market in a very measured and modest way.
But youre right theres not like.
Any kind of ultimatum.
Our buy groups. They go let's go push all these all this money out into the bottom line.
<unk>.
Great and then really the $3 billion.
In cash, it's going to be mostly going into the into the loan book So to your point.
And that's just a multiyear effort maybe.
Maybe at the most 1 billion of that is the point kind of comes out this year really depending on how deposit growth plan.
That's right and deposit growth is probably.
One of the more.
The biggest uncertainties.
As to what happens with the macro environment changing life is going to change.
And how all of that flows down to the bank like us.
Got it okay.
And then maybe a follow up on your fee guidance.
To clarify is your high single digit to low double digit EBIT inclusive of the 20% BHG or exclusive of that.
That's inclusive.
So when he hit total total operating fees all in are up high single digit to low double digit thats right.
Good morning.
Yes.
So I think.
Thanks.
I think BHG may move that number like 150 basis points or something like that.
Okay.
Alright.
And then one last just on BHG and you touched on this a little bit earlier.
How does a higher rate environment impact.
Hi, there.
Margin.
Well, probably I mean, I would tell you that they're not going to shrink, but they widen throughout the pandemic. So we've been in this low rate environment now for several years and spreads have widened so I'm not sure they're going to they're going to get any wider.
We get to enough uprate environment. So.
But.
Where they might be like 10% kind of spreads they might go to nine.
It's not going to be a big change.
If rates move more quickly.
Great. Okay. Thank you so much.
Thank you. Our next question comes from the line of Steven <unk> from Piper Sandler. Your line is now open.
Hey, good morning, guys.
Good.
I'm just curious just continuing on the BHG past there looks like.
Third quarter, you guys put on about $75 million on your own balance sheet to BHG loans and I think that's about $263 million now in total so just kind of wondering what.
The fourth quarter number or kind of how much is baked into the growth expectations for 'twenty two in terms of how much of that you guys will hold.
Yourselves on balance sheet.
I think we I think we are in kind of about $50 million range in the fourth quarter.
And for the year.
Our planning assumption is that we're we will be less in 2022% in 2021.
Call it around $150 million to $200 million.
Okay, Great that's helpful.
Yes.
Please can I follow up on Catherine's question about spreads.
The one thing that I think is.
As an advantage to BHG is the funding platform through that auction that work.
So that spread to shrink the BHG loans have to compete with with our more accelerating lending platform at some of these smaller.
Call It community banks.
So right now BHG represents to the smaller community banks and opportunity to grow their loan platform that they don't otherwise have so.
For spreads to shrink there.
Our loan growth outlook has to improve and it may improve but we don't think it's going to improve significantly to a point that spreads are going to be impacted materially how about that.
Yes, that's good color okay. Thanks.
And then maybe thinking about.
The interchange fees for a second I know you had some vendor incentives last quarter.
That was going to come out, but then obviously you still had a big quarter here I guess I'm wondering was there anything unusual that led other than you mentioned in the month of December being active but anything unusual that led that number higher and then we've seen with some of the larger regional bank or pushback on overdraft fees are you guys experiencing any of that.
Your size bank or do you think that will be a pressure point for you guys here in the quarters ahead.
Yes, I don't know of anything unusual in the fourth quarter interchange numbers.
We're not feeling the pressure on overdrafts.
We had a lot of waivers during COVID-19 .
We pulled back on some of that post COVID-19 .
And so we believe we're at somewhat of a standard run rate, we monitor what's going on with the large caps and what theyre doing with overdraft waiver and so on and so forth. We will just have to see how all that plays out and how it works its way down to us over the coming quarters and years.
Got it Okay, and then maybe last thing for me I'm, just kind of curious around asset sensitivity.
Increased modestly I guess over the last four quarters Heralds you noted that the <unk>.
Floors and it does have been a great benefit to you guys, but I mean is there anything you guys are thinking about strategically to increase the rate sensitivity more materially and then the 58% deposit beta I think you mentioned in the presentation.
And 40% overall why wouldn't it be lower this cycle given all the liquidity, we have and kind of give me your thoughts there, yes that would be absolutely where we're headed.
And that's what brings in this whole coaching thing that Rob and Rob and.
Rick are doing with their sales force.
Getting them prepared for a rising rate environment. So we hope we can beat the betas that we've kind of set out there and believe we have a great opportunity to do it precisely because we have the liquidity.
Out in the system and so does everybody else. So I don't think.
From the large caps in the mid caps youll see a significant boost in deposit rates from right out of the gate.
So we will we will try to manage manage that accordingly, as the boosting asset sensitivity kind of here in the near term I think it's going to be through our loan book.
Thank loan fundings traditionally come to us with a heavier weight on floating rate assets. I think we will still have some deposit gathering going on here that are likely going to cash. So I think we've got I think we've got a great opportunity here in the near term to still boost our asset sensitivity levels by several mail.
That said over the long term I think it's important to get on the table. Our goal is to be as is to be neutral.
With some bias one way or the other based on what we think the near term prospects of our but we will not bet heavily one way or the other with our balance sheet.
Got it thanks for all the color and congrats on another great year guys.
Thanks, Dave.
Thank you. Our next question comes from the line of Michael Rose from Raymond James Your line is now open.
Hey, good morning, guys. Thanks for taking my questions just wanted to go back to BHG again.
Another big recourse reserve release this quarter I think you had said on the last call that you expected it to end the year at 525 year at 5% I talked about getting down to $4 75 to 485.
This year any updates there and then if you can comment on the expense trajectory there because it did look like.
Another big ramp in expense.
And expense growth there and just maybe if that incorporates any new verticals that we're talking about it.
At the Investor day. Thanks.
Yes, I think there is probably some room or room and recourse reserve release here in 2022, I'm not sure it felt tap into it but I think that $4 75 number is still kind of.
Reasonable I don't know if it will get that low.
But that's kind of what their thoughts are.
Their expense growth they are adding.
Quite a bit of head count.
Particularly in our analytical groups.
They believe that's kind of the.
What drives the inkjet.
So they are they are seeing quite a bit of that as well.
But we still believe at the end of the day, we're looking at 20% growth for us.
Okay.
That's helpful. And then maybe just back to market expansions you guys have had a very.
Our successful track record have no doubt that you will be successful.
And the D C market as well, Florida was brought up earlier, but as you look throughout the southeast and the southwest Texas is obviously a market.
It would seem to kind of fit the profile that you guys have historically sought.
Would that be an option at some point and maybe if you can just remind us on where the geographic limitations might be in that kind of a short to intermediate term.
Yes, I think.
Our geographic thrust is.
We.
We go into the southeast.
Basically what we've tried to say is Memphis draw a lineup of D C and down to the southern tip of Florida that sort of the target.
Again, we have we now have.
As the participants from Texas, So I guess somebody might call, Texas southeastern state.
But right now our thrust is there candidly the reason that our thrust is there is we know bankers and the bankers that we've hired bankers in those markets.
That's really what we do is try to calculate our <unk>.
Known bankers, we know less indexes and therefore the opportunities.
Are smaller for us I think youre on the right point.
<unk>.
We draw the math at some point to include Texas, but.
Right now the opportunities are so rich in the southeastern market.
Our first preference.
Alright, well, maybe at some point Harold can startup the La office to you guys. Thanks for taking my questions.
Thanks, a lot.
Thank you. Our next question comes from the line of David Bishop from Seaport Research. Your line is now open.
Hey, good morning, gentlemen.
Good morning.
Hey, a quick question.
And Harold noticed a nice improvement nice growth on the C&I commercial and industrial segment. There just curious maybe what youre seeing and hearing on that front are you seeing any sort of better line utilization up there.
Obviously, the old crop buyers has dominated the news but.
I know the narrative in terms of the credit cost it sounds like you're expecting a further reduction in the allowance here, that's sort of informing your view on the positive economic outlook.
Yeah.
Yes.
Yes, I think in terms of.
C&I loan demand.
I honestly believe C&I loan demand is fairly tepid, we don't see.
A meaningful increase in land utilization at this point.
And.
Yeah.
I think again.
Owner managed businesses lower middle market businesses that like a lot of people are just sort of looking at the land.
Landscape there are a lot.
<unk> announced.
And typically they don't do a lot of borrowing when there are so many unknowns.
So I'd say.
We can get a more solid footing for both the economy and the political landscape and all those kind of things that influence optimism amongst business owners that will be.
Helpful as additive and will produce greater loan demand, but I do think C&I loan demand is not very strong the growth that we've achieved there.
Is largely dependent on.
Our hiring model and the number of new hires that we've made in moving their books of business and social.
Got it and then just maybe a follow up on the asset sensitivity and net interest margin.
Last quarter, you said the core NIM outlook, a little lower in the near term not materially down flat to two basis points, which came to fruition of course, it was down a basis point.
Looking at your Crystal ball in the first quarter 2022.
What are you thinking now about the in terms of core margin direction.
Yes, I think we will still experience some dilution in our margins.
But again I don't think its going to be a big thing I think it will.
It'll come down maybe a few basis points, but nothing significant.
Got it thank you.
Thank you. Our next question comes from the line of Brian Martin from Janney Montgomery. Your line is now open.
Hey, good morning, guys. Thanks for taking the questions.
Hey, Harold maybe just one follow up on the last question on margin with regard to your guide in NII.
Margin when your outlook when you kind of look at the core margin what do you consider the core margin today, I guess, knowing what the liquidity levels PPP I'm just wondering what you pull out of there when you're thinking about the core margin.
Yes, I think.
Youre right I mean, thats a van.
Good question.
We're still.
Analyze the impact of this liquidity build.
It has very little impact on net interest income, but a maintenance will impact on net interest margin. So I think it's important to understand that.
As for the PPP program, we think the PPD program as effectively in the rearview mirror and so it will be less impactful for sure. We will have to probably keep keep looking at it as well.
For comparison purposes.
The last couple of years.
And as far as discount accretion on mergers.
That number has come down quite a bit and so the GAAP margin and our core margin. The biggest the biggest difference is basically going to be with respect to liquidity, but no.
This concludes today's conference call. Thank you for participating you may now disconnect.
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