Q3 2022 Pinnacle Financial Partners Inc Earnings Call
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Good morning, everyone and welcome to the Pinnacle financial partners third quarter 2022 earnings Conference call.
Hosting the call today from Pinnacle financial partners is Mr. Terry Turner, Chief Executive Officer, Mr. Harold Carpenter, Chief Financial Officer.
Please note pinnacle's earnings release, and this morning's presentation are available on the Investor Relations page of their website at Www Dot P. M. S. P dot com.
Today's 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 pinnacle financial's ability to control or predict and listeners are cautioned not to put undue reliance on such forward looking statements.
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 31st 2021, and 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 of 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's website at Www Dot P. N F P dot com.
With that I am not going to turn the presentation over to Mr. Terry Turner.
Pinnacle's President and CEO .
Thank you Paul and thank you for joining us this morning for the third quarter earnings call as I am confident you've already seen third quarter was another fabulous quarter for us.
Last quarter in my introductory comments I tried to list a number of things that I believe are critical in order to not only understand the financial performance for the quarter, but really the better ascertain how the firm should perform going forward. Despite the varying operating environments, we might encounter as a Quaker minor those overarching themes that I mentioned last quarter.
Order in which I think you'll see are interwoven again in the quarter and this quarter's numbers.
Number one management's motivated and incentive to all drought gums, given various market conditions. As an example, we don't just accept the current asset sensitivity or we don't just accept what the current overall market growth rates, we set about altra outcomes based on our actions and initiatives a lot of people are Jason.
All kinds of interesting metrics like deposit cost betas, and I get it but specifically the outcomes that we're motivated and intended to optimize at pinnacle are the level of classified assets P. P and our ROE and EPS growth in the case of annual cash incentive plan and tangible book value accretion in our O T.
Z in the case of long term equity incentive plan and so understanding that will likely help you understand things like while we were crazy tangible book value in a year when many have not.
Two we enjoy a reputation for having a great culture, but our culture isn't just fun and soft up any number of studies have demonstrated statistically valid correlations between associate engagement and important outcomes like reduced associate turnover improved productivity improved profitability better sales outcome.
And total shareholder returns and nothing is more important in the war for talent and so I think that helps explain things like while we continue to hire record numbers of the best bankers in financial services professionals at a time many of our short staffed and suffering low associate engagement and high turnover number three.
<unk> success over the last several years is the single largest contributor to our balance sheet growth and ongoing momentum. It explains where so much of our loan and deposit growth come from and not only that because of the level of the experience of our new hires is equal to or greater than 20 years. We believe we can grow assets without sacrificing our commitment to <unk>.
Quality is much different than those that are trying to grow by increasing the frequency of their call program. In fact in Greenwich Research. We are we're at or near the top on virtually every sales and service metric because they typically viewed as important with one notable exception and thats prospect, calling where weird dead last.
That's just not how we get our business as opposed to forcing our hand to Mike prospect calls and our gaze long experienced bankers typically move longstanding relationships, which we believe over the long haul results in a meaningfully different credit profile a number bore BHG is not your typical fan day its ability to attract low.
<unk> from high quality borrowers with very high yields and get them funded through their proprietary bank auction platform or alternately securitizing them in the secondary market. When many cannot continues to result in the kind of income that lets us significantly invest in people to seize all the market opportunities that exist for us while continuing to put up.
Top quartile profitability I'm, not aware of anyone who's been able to invest in their business model to the extent that we have while remaining extremely profitable.
As I've already alluded, we believe metrics like asset quality revenue growth earnings per share and tangible book value create accretion result in long term shareholder returns. That's why our incentives are linked to them and that's why we show this dashboard quarter in and quarter out where you can see the relentless upward slope of things like news earnings per share in.
The balance sheet volumes that produce that grow on asset quality, we've been living in literally the best of times, we fully expect asset quality metrics to more normalized going forward, but you can see that NPA and classified assets continue to operate at extraordinary lows as the charge offs that just 16 basis points in fact, we've.
Been in the top quartile in terms of NPA is to tier one capital and classified assets to tier one capital for some time and given the continued reductions on those metrics this quarter I'd be shocked if we arent there again, when we're able to construct the peer metrics for the third quarter as most of you know given the very commercial nature of our loan book charge offs are generally long.
We had one of those this quarter, which I will talk more about in a moment, but again credit metrics continued to be extraordinary.
I won't spend much time on the non-GAAP measures are at least it's not not as much time as I, usually do cause idea is that virtually all of the important growth in earnings metrics are up into the right generally well exceeding market expectations and paint a picture of what's been a beat and raise story for quite some time.
As I just mentioned.
Now that we've added over the last several years results an extraordinary balance sheet momentum as we did last quarter, where again the <unk> net loan growth based on the category as noted on the slide to help everyone better understand the source of our growth.
We began categorized our growth in the four broader segments number one our peer asset generation plays like BHG advocate capital J Bnb leasing.
They are strategic market expansions, which are not only the geographies like Atlanta D C. Birmingham, and so forth, but also expansions into specialty lending grades like franchise and equipment lending see growth from our recruiting over the last two and a half years. So this is the growth of our newer or Ams that had been with.
As for only two and a half years or less and that are not included in our strategic expansion markets and then finally D. Our legacy markets and what they contributed from our Ams that had been with us more than two and a half years. So thus far through the first nine months, we've experienced 24, 5% E L. B.
One grow annualized between December 31, 2021, and September 32022, which is inclusive of PPP paydowns, which are denoted in red on the slide.
Almost 46% of our $4 $3 billion in net loan growth is from our legacy markets. While the rest is primarily from new markets, new initiatives and new people.
We've said that we said this countless times are we think we're in many of the best banking markets in the South East. Many of you know that for lenders to come to work for us. They have to have at least 10 years of experience in our markets and on average it's more like 20 years. So I would characterize all of this loan growth is new loans is a little bit of a stretch.
It is these borrowers have been working with our 10 year plus experienced lenders for years. The loans are just new to P and M P.
We get asked frequently about how the new markets and specialties are performing I simply want to get you. This information where you can see that we're have an extraordinary success moving talent and clients to the pinnacle platform, but those that struggle with the value of the emphasis we place on culture. Here is just one of the examples of where it pays off putting.
Associates in a position where they can serve their clients well is what enables us to attract the best associates as well as their clients.
Uh huh.
Now everyone is aware that the annual FDIC deposit market share information was released in the third quarter. Here you can see first of all we're in great markets as evidenced by the rise of deposit growth in the market and that'll be an important success variable going forward.
But more importantly, we've been able to grow our deposits faster than the market, which is just another way of saying we've had great success moving market share. Many are concerned with the shrink and M. Two and the impact that could have on funding.
And so I would say I don't think we could grow anywhere near the pace that we currently grow if we were unable to take deposit share from these larger more vulnerable banks in our market are Harold will comment further on our deposit growth in a minute.
A couple of slides, we used from time to time, what Youre looking at here is data from Greenwich Associates the.
The foremost provider commercial market research to large banks in the United States virtually all of the top 50 banks in the country purchase. This same data. So I would say, it's universally accepted by all our primary.
Competitors is based on client responses across our entire footprint, meaning businesses with annual sales from 1 million to $500 million in Tennessee, North Carolina, South Carolina Atlanta in Roanoke.
So let's focus on the Pinnacle line at the bottom of the small business net promoter chart, which is on the top left of the slide.
You see in the Navy Blue portion of the bar that 76% of the pinnacle clients surveyed rated us a nine or a 10 on the question how likely are you to recommend your lead provider to a friend or colleague using a scale of zero to 10, where zero means not likely at all and 10 means extremely likely in other words 70.
6% of our clients are highly engaged active promoters trust me that is an extremely unusual level of engagement.
Another 22% rated us seven or eight.
Not bad combining the 298% of our class rated a seven or better on a 10 point scale, but that 22%.
That go portion of the bar scorn us seven or eight are referred to as passive because while they generally range well, they're not really so fired up is to be vocal advocates for you in the market and then the last 2% the red portion of the bar are detractors, Maine, and directed you somewhere between zero and six.
And out beside the bar you see a 74, that's the net promoter score the number of promoters less the number detractors.
You can see that score is wildly differentiated from all our major competitors in our footprint and not only is that a fabulous net promoter score in the southeast. According to Greenwich is one of the best in the country and the story is the same only better among middle market businesses on the lower right of the slide.
You can see our net promoter score is 81 now you might look at the percentage of detractors for each of our major competitors that red portion on each of their bars and keep in mind. The banks are generally listed in market share order. So as you can see all of the top three banks in our footprint have enormous volumes of the track.
<unk> and that's the opportunity we have been seasoned for some time and expect to continue season.
So as you think about the speed and reliability of our growth, which is largely dependent on taken chair as opposed to economic loan demand. This explains why we've been so successful taken share over the last 20 years, while we grew loans, 29% on an annualized basis. This quarter, while we grew core deposits nine 8% on an annualized basis.
This quarter and why I believe we will continue to produce outsized growth for the foreseeable future.
Excuse me.
And it's not just that many of the banks with whom we compete have upset a great number of their clients a large percentage of their client expressly intend to move some or all of their business away from them in the next 12 months that group.
Percentage of their clients, who have expressly indicated their intent to move is represented by the Blue bar.
And happily more than to any of the major banks with whom we compete a large percentage of clients intend to increase their relationship with us meaningfully more.
My purpose in walking through this is really the tighten the linkage for you between our distinctive culture and the revenue.
And the EPS growth. So you don't have to just take a leap of faith that the distinctive culture. We've been building here over the last 22 years old mysteriously result in something good you can actually connect the dots with Greenwich data, reflecting the actual client feedback to better understand the quality and sustainability of our market share and revenue growth. So that's the third.
<unk> thousand foot view with that I'll turn it over to Harold for a more in depth review of the quarter.
Thanks, Terry good morning, everybody.
As usual, we will start with loans the third quarter was another strong loan growth quarter for us with almost 22% linked quarter annualized growth.
Our current pipeline of support low double digit loan growth going into the fourth quarter, which would yield low 20% growth for this year loan yields were up in the third quarter due primarily to rate hikes. We anticipate further escalation in loan yields with rate increases in November and December .
Our current planning assumption is for 75 basis points in November and 50 basis points in December .
Since there were 150 basis point hikes during the third quarter, we've not gotten the full effect of the third quarter average rates noted on the slide given that and more increases in the fourth quarter, we anticipate fourth quarter yields will be up 75 to 90 basis points or so as we sit here at the end.
September our loan yields are around 5%. We've also talked about loan floors over the last several quarters, but we're essentially through those so we should capture a larger share of rate increases moving forward.
The bottom left chart summarizes our loan betas for 2022.
We've tracked each rate hike and what the beta results were for each hike. The green bars are estimates as we don't have the full effect of the September rate hike, yet and we won't until we get to the November epilepsy meeting when we will put a stake in the ground and re measure. The September hike of course November December are based on our current planning.
But we feel somewhere around 60% loan beta is a reasonable target for us.
Now on to deposits really pleased to report call it 10% linked quarter annualized growth in deposits for the third quarter at present, our relationship managers are active deposit book protectors as well as outbound deposit seekers. So it's like we've always said is about shoe leather at pinnacle.
It's about being in the community and finding the funding at a reasonable price, we like others did experienced some mix shift during the quarter as E. L. P. DDA balances are down from prior quarter, but average DDA balances were actually up for the quarter we.
We will keep our fingers crossed that this will hold we are actively building out deposit gathering franchises around edge HSA community housing associations, and nonprofits and others, where we target specific types of organizations that are net providers of funding and we believe we're making strong headway with these special deposit initiatives.
More to come as these initiatives continue to grow.
Everybody wants to know about deposit betas the top right chart attempts to show what we're currently thinking. This chart is constructed similar to the loan chart shown previously our planning assumption is that we think we can hold with a 40% total deposit beta that we've been talking about since earlier in the year.
For the first 20 plus years of our existence, our number one objective was developing strategies and tactics around funding our growth.
We continue to like our chances given the significant investment we made in both our relationship managers and new markets over the last few years, we believe many other banks around the country are reassessing their beta assumption as liquidity has gotten more difficult.
As the Pinnacle, we have been steadily investing in our deposit book all year long I believe that our clients appreciate our pricing discipline that is more fair in an upright environment and comparative in comparison to what we hear from others.
Hopefully you will not hear this bank leadership ever talk about having too many deposits.
Positives are just as if not significantly more important than borrowers. Our belief is that we can and will fund our growth effectively and prudently maintaining the appropriate balance between profitability and growth something we believe we have a track record of accomplishing.
Now the liquidity our liquid assets decreased slightly this quarter, but we continue to believe we have ample liquidity to fund our near term growth as to investment securities our allocation to bonds is anticipated to be flattish in the fourth quarter.
As the top left chart reflects with the rate up cycle, our GAAP NIM increased by 30 basis points compared to 28 basis points last quarter. So we're pleased with this going into the fourth quarter.
Our planning assumption is that our NIM will likely top off in the first half of next year, assuming a rate hike stall or are minimal in the first half of next year.
In summary, our belief is that we should see another quarter of NIM expansion along with increased net interest income in the fourth quarter. Accordingly, we operate accordingly, we are upping our guidance for net interest income growth to the low 20 percentage growth for the full year 2022 over last year.
As to credit where again presenting our traditional credit metrics pinnacle's loan portfolio continues to perform very well as Terry mentioned earlier late in the quarter and into October we had one previously classified C&I credit weakened due primarily to an alleged failure of our suppliers defective part that had been installed in the.
Homes of our clients' customers. We don't believe this was the result of all the economic headwinds that we are all paying so much attention to.
We recorded a partial charge off of effective September 30 placed the loan on non accrual pending more credit work.
In spite of this one credit we're pleased with where our classified assets ended as evidenced by the almost three year downward trend in our classified loan totals as well as our past dues, which are again at very conservative levels at quarter end.
Our current ACL is 1.4%, which again compares to a pre seasonal pre COVID-19 reserve of 48 basis points at the end of 2019.
We previously thought we previously thought or ACL for the quarter would have been less than one point O four but given the events over the last month or so we believe keeping the ICL flattish for us is appropriate right now.
All of this culminates in a larger provision expense than we anticipated at 27 and a half million. We continue to have conversations with borrowers about supply chain labor inflation and how it's impacting their businesses. We have been and are all about sustainable credit diligence effort with the intent to actively identify any weaknesses in our borrowing base.
We get many questions about what changes we are implementing as a result of the inflationary economy.
Few things worth mentioning here, we have substantially limited our appetite for new construction, where whether it be residential or commercial we believe our book is very healthy with strong sponsors, but the macro environment gives us a pause as to increasing our asset allocations to this segment.
Our credit officers have increased our due diligence and stress testing, particularly around supply chain impact rates and profitability. We're also increasing our diligence around the traditional metrics of loan to value debt coverage, so on and so forth.
Now on the fees and expenses.
I won't spend a lot of time on these are expenses and as always I will speak to BHG in a few minutes.
Third quarter fees are coming off of a record second quarter. So the optics are difficult and as a reminder, we did note last quarter that we thought we would see decreases in fees in the third quarter. All that said, we're pleased with the effort of our fee generating units are putting forward service charges are impacted by a change in how we charge NSF and overdraft fees, which.
We announced in early July .
We have we have some reason to believe we will see a rebound in wealth management in the fourth quarter as a result of recent hires.
Excluding BHG and barring any additional downdraft from our other equity investments. We are believing that we are near floral fees this quarter and that we should see a stronger fourth quarter fee result, excluding BHG and the impact of these other equity investments. We continue to believe that high single digit growth for 2022 over 2000.
One is still in play.
As to expenses, we are increasing our overall total expense run rate to a high teens percentage growth in 2022. This increase was attributable to head count growth in the new markets market disruption across our markets, which was which has led to strong recruiting opportunities and the addition of Jay Bnb.
In addition, we continue to believe that we should achieve maximum payouts of 125% of target awards for our annual cash incentive plan, but it's all about recruiting and our success in attracting the best bankers to our franchise, which seems to be operating at peak capacity.
Our third quarter non compensation expense was fairly flat with the second quarter, and we believe that the fourth quarter won't be that different from the prior two quarters and.
In conclusion, we had a strong hiring quarter in the third quarter, which was the reason for the increased salary expense, we're anticipating another strong quarter of hiring in fourth quarter. Although we don't anticipate the increase will be as great in the fourth quarter as it was in the third quarter.
As to capital tangible book value increased to $42 44, <unk> at quarter end up slightly from last quarter, our capital ratios remain above well capitalized levels, we like our tangible common equity ratio that stands at eight 3% currently.
We are mindful of our tier two capital level levels, particularly at Pinnacle bank in light of our exceptional growth and we'll be monitoring these levels in the debt markets as we head into the fourth quarter and into 2023.
From that we believe the actions we've taken to preserve tangible book value and our tangible capital ratio have served us well and have no plans to alter our tier one capital stack.
Any sort of common or preferred offering.
Now a few comments about BHG before we look at the outlook for the rest of the year.
Yeah.
BHG had a great quarter in our opinion slightly better than we had anticipated we're booking more than $41 million in fee revenues this quarter and have increased our outlook for 2022 growth over 2021 to more than 25%.
From a projection of 15% last quarter.
As the slide indicates BHG had another record quarter on originations spreads had come in slightly lower than last quarter from nine 8% to nine 7% as the chart on the bottom left indicates.
That's more than the amounts BHG anticipated at the beginning of the quarter.
She does anticipate that auction platform spreads will come in slightly as rates on the short end continue to rise they anticipate that borrower rates should be approaching 17% by the end of the year with bank bar rates moving into the 7% range.
As a result, we anticipate that spreads will fluctuate within the historical ranges of 9% to 10% or so.
That said, we're really pleased with Bhg's third quarter as the third quarter quarter again highlights their flexibility as to how they can pivot between the bank network and securitization to fund their loan growth.
Formerly titled as the recourse obligation accrual this slide now titled the accrual for loans substitution and prepayments, which stood at 528% of BH is bhg's sold loan portfolio at September 30, which is more than the accrual at June quarter end.
<unk> increased this accrual from 235 million to 270 million at September 30.
As the blue bars on the bottom right chart show the credit loss portion of recourse losses for the second quarter remained at some of the lowest levels in the past 10 years.
Additionally, given the macro environment being she also increased its own balance sheet reserve for loan losses to $101 million or 353% of on balance sheet loans from 3% last quarter, given the macro environment. We believe BHG will likely increase reserves again going into the fourth quarter and into 2023.
The quality of Bhg's borrowing base in our opinion remains impressive and we believe one of them one of their strongest attributes BHG refreshes. His credit score monthly always looking for weaknesses in its borrowing base credit scores were at the consistent levels with previous scope with previous quarters. So theyre borrowers have remained resilient through the cycle thus far.
As to past due trends past dues greater than 30 days were at 1.52% at September 30, compared to $1 $3 seven at June 30, and $1 three nine from a year ago.
Dues were at 1.77 at the end of December 2020.
BHG is consistent monitoring of his portfolio allows it to adjust its origination approvals quickly they have over the past few months adjusted their commercial allocations away from non medical practices and all consumer which is about 20% of their business. They have adjusted their risk tolerance.
Higher credit score borrowers.
National and regional unemployment forecast, if BHG more confidence that their borrowers should be able to withstand forecasted inflationary increases in a way that allows BHG to better weather this environment than others in their space.
In comparison to other consumers, we believe bhg's borrowers are well paid with average borrower earnings being approximately $287000 annually. We are comfortable in their credit models and their credit experience bears this out.
Lastly, BHG had another great operating quarter in the third quarter as I mentioned during the two earnings calls this year to previous earnings calls. This year. We believe earnings in the first half of 2022 would likely be stronger than the second half as they set more loans to the bank auction platform and the first half of the year rather than whole loans on their balance sheet.
As you know the bank auction platform delivers immediate gain on sale income, while our securitization network delivers interest income over the life of the loans.
Additionally, BHG did accomplish during September of $412 million securitization of acceptable rate of 7% as it appears to us other fintech lenders are we're having to reevaluate their business models given the operating environment.
She was very pleased to be able to get the securitization done.
Just a side note <unk> has now re rated Bhg's first two issuances such that all charges for all six prior Securitizations are now investment grade and the senior class a tranche and all issuances is AAA rated.
We do want to highlight bhg's flexibility as to funding.
Securitization platform spreads have compressed in 2022 with the weighted average rate for the most recent issue that seven compared to five 5% in June and two five in the first quarter. This compression motivates BHG to reconsider selling more loans through this auction platform as it spreads have held up better this year.
Than anticipated.
The key point is that they have the flexibility to do it.
And then overall profitability and balance sheet soundness or they are the key drivers.
BHG.
As I mentioned earlier be she has updated their 2022 earnings guidance and now estimate about 25% earnings growth over 2021.
Again looking forward some key points I'd like to reemphasize.
Credit remains consistent with previous quarters with BHG is and will be increasing reserves based on macroeconomic data at least over the next few quarters.
BHG has been modifying their credit models towards originating less risky assets spread shrinkage may occur with more historical levels as we head into the fourth quarter and 2023.
Production volumes are very strong and we believe they will continue to have strong production going into the fourth quarter and 2023.
Of note is that <unk> anticipates at least two to four new funding alternatives to open up in the near term as they seek to broaden their already strong liquidity platform, which we also believe as one of their strongest attributes.
Quickly here as an outlook for the remainder of 2022.
For loans, we've increased our outlook to low 20% growth for 2022, we have adjusted our rate forecast and now consider a four 5% fed funds rate by year end. We like you will continue to monitor and modify as necessary, but we don't believe any reasonable changes to our current planning assumption will impact our current outlook.
For 2022 materially.
Given that we believe we should see continued improvement in net interest income this year, which should result in net interest income growth in the low 20 percentage range.
We still believe increases.
And hires and other factors should result in expense growth being in the high teens.
All of this is about 22 to 2022, we'll provide more information as to our 2023 outlook next quarter.
Last year at this time, our concerns were trying to figure out how to put together a 2022 plan just to grow earnings we were looking at low single digit earnings growth rate for 2022, and it got know better by the end of the year based on the sell side research at the top 80% of our peer group was anticipating negative EPS growth in 2000.
<unk> 22.
So we're pleased with our 2022 financial performance, thus far as we believe we will Sally beat our loan deposit revenue P PNR and earnings targets for this year.
Trust us as I'm, primarily speaking to them about pinnacle teammates who are listening in we have started building plans for next year and our goal remains the same top quartile earnings performance no matter what gets thrown at us.
Paul with that I'll stop and see if there are any questions.
Thank you Mr. Turner the floor is now open for your questions.
If you would like to take a question if you'd like to ask a question at this time. Please press star one on your Touchtone phone.
Analysts would be given preference during the Q&A again, we do ask when you ask your question that you'll take your hand set up to provide optimal sound quality.
And we did have some questions in queue. The first question is coming from Steven Alexopoulos from Jpmorgan.
Steven Your line is live.
Hey, good morning, everyone.
Good morning, Steve I wanted to start first on the noninterest bearing deposits right. These went from 24% of total before the pandemic, which is before QE.
33% today.
You think you can hold that mix at about that level or do you see it migrating back right where in Q T. Now do you see it migrating back as we continue to fund strong loan growth.
Well no. We don't think it's going to go back to pre COVID-19 levels.
We've had a lot of initiatives around operating accounts.
Gathered a lot of clients.
So we don't think we will get we will get back down there.
We did see the mix shift that we noted previously.
But so far in October not granted were only 18 days in.
We're feeling pretty good about where this deposit book is hanging in there on particularly on noninterest bearing.
So there's enough sources when you look at sources of funding and maybe we could hold the mix about where it is.
Yes, I think so we might drift down a couple of notches, but I don't think it's going to be that dramatic.
Okay.
And then as we can.
Think about expenses I appreciate next quarter, you'll give us 2023, but when we think about the ramp in hiring through 2022.
Could you just give us some framework about 2023, I mean should we at least be at a similar level of expense growth next year, just given the hiring that took place through 2022.
Well I'll give you some data points and then I'll, let Terry talked about momentum.
Uh huh.
I think we should see at least high teens mid to high teens kind of expense growth next year.
That's what we're kind of comp kind of looking at currently.
Terry.
Yes, Steve I think on hiring momentum as you saw third quarter.
<unk> was a record quarter for us.
I don't look forward to stay.
53 revenue producers a quarter, but I expect it to remain high going forward and so I think your idea is correct that the hiring more or less occurs on a straight line and I would expect it to continue for.
For the foreseeable future and so.
How that buyers on the expense growth is just exactly what you said I mean, it'll be elevated because we have hired throughout the year and frankly, we intend to continue hiring.
At a similar rate in 2023.
Okay. That's helpful.
And then finally there.
There are many investors on the sidelines and nervous to hold your stock here not because of pinnacle's credit quality, but theyre concerned on the credit outlook for most of the Fintech lenders out there, including BHG, particularly given that <unk> expanded these newer verticals could you just share with people on the sidelines. How worried are you on the credit outlook.
BHG given the macro environment just any additional color you can provide would be really helpful. Thanks.
<unk> you want to go first and I'll add some color after.
Sure.
We've had a lot of conversations with the leadership at bankers healthcare group.
Over the last several quarters about there.
Their confidence with their book their confidence and their credit models.
They think.
Are they believe currently.
That their models are sound.
If there is a significant kind of uptick and inflationary pressure.
No doubt there charge offs could tweak up.
But they are very confident with respect to.
Their ability to find the best borrowers in this environment and continue to monitor their book for.
Call it cracks or weaknesses.
I think Steve I might add just a couple of other things obviously for us as an investor I'm always have.
They have been since we started and continue to.
Try to understand.
Really what all of that credit risk is I think some things that give me great comfort or <unk>.
Number one the gut.
A huge group of people and analytics. They work on all kinds of variables you've heard us talk about that in the past, but the main variable the foremost variable obviously as their credit score and mechanism. We provide information to you on the FICO scores because that's a common thing that you and I and others can all.
Understand its way to level set, but they don't underwrite their credit off that FICO score they are using their own proprietary model, which they can demonstrate is 17% more predictive than the FICO score and so.
Again, these are not credit losses, they've been through it through a number of cycles. They went through the great recession without sustaining any losses, which.
Not many of the bikes they sell credit too could could say that and so again I think they started.
Or.
Our credit scorecard analytical group has broadened out but it still has their strength and so I love the.
The capability that they have the fact that their model is a little more rates than a FICO score, which is sort of the industry standard I think.
One thing that.
Give me a lot of confidence as I mentioned I think the second thing I would tell you is again these guys had been through.
Recessions in the past and their performance was extraordinarily.
Extraordinarily good it was better than our bank performance and better than most banks performance and so that's another item.
That gives me a great deal of confidence I think the third thing is when so much of it is consumer credit.
Even the business credit has a consumer underwriting orientation to it and so.
I guess.
They're familiar here is that the average borrower has income of $287000. When I think about various other fintech and I won't go through the <unk> model and what the credit products are and so forth I don't know any of them that are underwriting borrowers with $287000.
Annual income it's a different class bar. These are not people that are borrowing money for a washing machine or.
Small home improvement or something I mean, these are substantial people and so again I think the mix of their borrower is different than what most of their fintech.
Providers.
Other fintech providers are doing for their borrowers so anyway, I just rambled through those three things.
Yeah.
That's great color thanks for taking my questions.
Thank you and the next question is coming from Stephen Scouten from Piper Sandler Steven Your line is live.
Thank you good morning, everyone I guess I wanted to dig down into the beta expectations. You have you laid out in the presentation. Both on the on the loan and then especially on the deposit side.
2021 growth and kind of historical growth maybe.
Hello.
Dave are you there spread and where you are in today.
Yeah can you guys hear me.
Blanked out on me.
Okay, I guess I'm, just trying to think about where loan growth.
What kind of loan growth expectations, you have in 'twenty three relative to those deposit beta expectations, because it would seem.
With your expense guidance, if it's going to be high teens again, we might be looking for high teens growth again.
Sorry, but I think I got that.
Steve I think I got to just the question.
You kind of blanked out on me I'm not sure if the others on the call experienced the same thing or not.
I think going into next year and the.
Just looking at the net interest margin.
If it historically if it responds the way it has done in the past.
We're anticipating that as the fed stops raising rates.
That the left side of the balance sheets yields and rates will likely.
Start topping off.
And that the deposit lag will likely be in effect.
Through that time.
I was looking at our net interest margin performance over the last two years. It stayed fairly consistent at around at $2 95 to $3 five range for the last two years during a fairly flat rate environment. So we'd anticipate that kind of performance with respect to our at least our.
<unk>.
Once the fed settles down on their rate increases.
Is that helpful.
Yes that is helpful and it sounds like it might be having technology. She saw let somebody else hop on thanks a lot.
Thanks, Steve.
Thank you. The next question is coming from Michael Rose from Raymond James Michael Your line is nice.
Hey, Good morning, just you gave us a lot of color as usual on BHG very much appreciated on the one hand.
You continue to grow you feel comfortable with that growth, but on the other hand, the recourse reserves.
For the new terminology for it is expected to grow.
And a as well.
I hate to I know, it's really hard to kind of forecast that you had really good growth through the year in BHG better than expected.
Give us a stab at kind of the puts and takes of how we should think about.
2023, and the growth of that business, just going into a into a slowdown. Thanks.
Yeah.
Yeah, Steve we've had I mean, Michael we've had.
Some preliminary conversations with BHG about their next year's outlook.
They have they.
They do believe they're production platform will continue to deliver at a reasonable pace next year.
And they think they have opportunities to continue to up.
Kind of pivot between the securitization platform in the gain on sale and the bank auction platform.
I don't think it would be unreasonable to assume that next year's growth rate might be somewhere around a 15% number something like that.
I'm hesitant to get into too much details because.
We need to have some more conversations with Microsoft carrier.
Certainly understood and thanks, thanks for that.
Maybe just more broadly speaking you guys have been obviously very active on the hiring front and you've talked about dislocations may be getting.
Even more advantageous for you into next year, just given the market dislocation, but.
It's been a while I think since you've kind of entertainment thoughts of maybe doing a whole bank transaction and just wanted to see given the dislocations.
Banks are going to have in some of the credit issues that I think we're going to see.
Is that an avenue that you could potentially open up again as we think about.
The next couple of years. Thanks.
Michael I think on that front.
You heard my answer before and it's really no different our position I don't think has changed.
Never going to say never.
Absolutely we won't do it I don't want to say that but I do think it's fair to say you can see the hiring momentum that we have I expect it to continue as long as we can.
You know sort of continue.
Continue that market share play.
Sable future, which I think we can you would have to have a really compelling transaction to want to do it and so if we find one of those certainly we would consider it but again I would just like that.
The bias is more toward organic growth and continuing our market share play where really.
I think a luxurious position to.
<unk> built a preferred by standing for large bi.
<unk>, who want to exit their large bank and so.
Again, I expect that will be our principal lever.
I appreciate it and maybe just one final quick one just putting together some of the.
The expectations you've talked about initially for next year is the expectation that just given the rate outlook in beta assumptions in what you said on BHG and expenses that you could generate positive operating leverage next year is that going to be more challenging.
<unk> you want to take that.
Sure Yes.
I don't think is unreasonable where we're up.
I believe at our core sub 50% efficiency ratio kind of franchise.
And I believe that we've got all of the opportunities in the world to increase that hard to better that here in the near term.
Helpful. Thanks for taking my questions.
Thank you and the next question is coming from Jared Shaw from Wells Fargo Securities.
Jared Your line is nice.
Jared Your line is live please check you mute button you May go ahead with your question.
Hi, sorry about that.
Thanks for taking the question I guess going back to BHG could.
Could you give an update Harold on maybe some of the steps that they're taking to utilize more seasonal friendly disposition avenues.
And.
What a day one.
Potential estimate for BHG could look like right now.
Yeah sure.
Theres currently.
Several different options may be a couple that ill talk about one is within the guidance.
You can sell more of the cash flows.
And then avoid seasonal so call it similar to what they do with the gain on sale platform with the banks they can do that with institutional investors.
They can also sell part of the residual.
Cash flows maybe carve off carve out some of those future cash flows and sell those and then take those credits out of the seasonal.
Kind of domain.
So there's a variety of different tactics they can they can deploy.
To try to avoid Cecil.
Right now they're thinking there their reserves, which are currently at three 5% could get into the 9% to 10% range.
With day, one seasonal impacts.
So okay.
I don't know if that gets you all the way there.
But.
That's what that's what we've been talking about thus far.
Okay, and then any any update on how youre thinking about your ownership stake in that you know in the past you said that you would think you said you travel with the founders and then over the last few quarters. It sounded like maybe you could <unk> your own path how.
How should we be thinking about.
BHG as a percentage of.
The pinnacle balance sheet, our earnings stream going forward.
Terry I'll start and then let you.
<unk> finished but.
I don't think we got any real strong change.
With our.
No.
Prospective on our ownership of BHG, we're definitely not interested.
Owning.
Our bond a majority stake in the franchise.
I think.
Both <unk>.
<unk> and the two founders of the franchise, we're all on the same page.
I think if there were a liquidity event.
An opportunity for one I think.
The founders and ourselves we'd entertain it.
And see where it goes from there.
<unk>.
The market right now.
Is not real.
Supportive of any kind of transaction.
But.
I believe that.
Like I said.
<unk>.
We're all on the same page if there were something to come down the Pike.
Darrin I think I might add to Harold's comment what he said is accurate.
The case is that as you know the.
Valuation.
Whatever it is it bounces around.
And has moved rapidly if you look at what I would say the value of that company is or what it has been.
12 months ago nine months ago, six months ago, three months ago, it's pretty dramatically different over that time period, and so all those things influence what can in fact be done when you talk about.
Liquidity event, obviously, what you got to get down to as a willing buyer and a willing seller and so again there are people that are always circling and looking for valuations and so forth.
Thank the.
We as Eric said, we and the other two owners.
<unk> at this point at a really similar spot we'd be willing to write valuations reduce our stakes or.
Or sell the company and so again, it's just about how the market moves and where are you where you are.
On that willing buyer and a.
Willing seller I think I've indicated that nobody had to be happy, but I think.
Some reduction in our state and BHG if to the extent people want a minority interest in the company is a good idea I love. The income that it generates is provided extraordinary flexibility has been a tremendous strategic advantage in terms of funding.
Extraordinary growth.
And allowing us to maintain.
Very high profitability.
So I don't want to completely give that away to be candid, but became a lesser percent of our income.
That would probably I think add to investor perception.
P/e multiples all of those kinds of things so any rate.
It's impossible to say exactly what is going to happen but.
We'd be willing to consider a reduction.
Or a sale of the company and so if that comes about that'll be fine, but we're very comfortable to continue in the current situation as well.
Okay, alright, thanks, and I guess shifting over to loan growth and the outlook as we as we go into next year.
Certainly sounds like you have good momentum with all the hiring.
We're looking at a weaker maybe.
Economic backdrop, and I look at slide seven and the different avenues of where that growth has come from.
Do you think that you could see a shift.
With a bigger dependence on.
The expansion markets or having a bigger relative impact from the hiring or do you think that we'll see sort of a broad base equally diversified.
Platform of growth going into 'twenty three.
Yes.
Yes.
My own sense of it is that it also remain relatively similar.
<unk> is the new markets.
Tycho.
Their growth will be faster than in the legacy markets, but.
But I think generally that.
Is that the allocation of the growth is probably a pretty similar thing when you look at 12 months from now.
Alright, Thanks, a lot.
Thank you and the next question is coming from Katherine Miller from K B W. Catherine Your line is live.
Thanks, Good morning.
Hi, Catherine.
I wanted to go back to the margin.
Cumulative data through 'twenty, two I thought was really helpful with a 60% beta in the 40% cumulative deposit beta how do you think.
Into next year.
Again, not giving next year guidance.
Kind of generally in direct lending from a team how do you think the key trend next year and is that 60% cumulative loan data is that a good number for next year are there dynamics with this kind of pricing of new loans and all of that but no.
It seems that after you work on a full cycle.
Yeah I think.
Well first of all I want to make sure that we emphasize more about where the margin is versus where the betas go we provide the bait information to kind of help people get through it but we're more interested in what we think the margin is going to do.
Given where the rate cycle is and like I was mentioned earlier, we think the margin.
What's the rate once the fed begins to kind of stop for Aes are just just stall.
That the margin will probably.
Flattened out.
And if with the <unk>.
Posit competition competition, we'd probably see.
Some more.
Increases in our deposit rates, but.
As far as our beta question itself.
In all likelihood.
The loan beta would probably once it stalls would probably come down as with competitive pressure, but we think the lag on deposits would probably be more be more influential on the longer term margin.
Got it and on that how are you thinking I mean the margin.
Substantial extension this quarter I expect.
We'll see it again next quarter any.
Kind of.
Any near term thoughts on where you think some arguments shake out next quarter.
Quarter.
Yes, we're not currently planning for another 30 basis point uptick.
But it ought to be.
Somewhere half, maybe a little more than half.
Going into the fourth quarter.
Half of the increase we saw this quarter.
That's right.
Got it okay.
And so you probably peak early 'twenty, three and then catch it.
Flatten out to come down as you move through the rest of the year. Our planning assumption is next year that we ought to see 225 basis point.
Our rate decreases in the last half of the year and so the margin pretty much flattens out in the second quarter.
Got it.
And then on the.
Composition of deposit growth just the balance growth was great to see.
Hey, Gary just big picture, how are you basically thinking about the composition of where that growth will come I know you mentioned you still expect to grow.
Non interest bearing.
How much do you think comes from non core versus core and then also you talked about some different specialty deposit strategies that you've got it.
You kind of talk about how you think that factors into the deposit growth outlook.
Okay.
Terry I'll start and let you.
Go from there.
Traditionally.
R R.
Client base.
We'll provide $80 to 90% of the core funding.
That we need to fund our loan growth and so we've always had to go to the wholesale market is called a brokered or federal home loan bank to try to fund the gap.
With respect.
To try to fund the gap so.
Here over the last couple of years, we've not had that problem.
We've not had to go to the wholesale markets much at all.
To get our liquidity to fund loan growth. So we do have capacity internally to go to the wholesale markets to fund loan growth, but there will be a stop gap.
Before we had kind of a 20% wholesale funding kind of limitation I don't see us getting anywhere near that.
But.
We will do it to fund some loan growth but are like.
Like I said earlier, our belief is that our franchise a lot a lot of value of our franchise is built in our deposit book.
And so we've got to make sure that we're looking under rocks.
Core deposits and.
I think our our relationship managers are doing just that today.
I think where this new deposit growth is going to come from is from our new hires and our new markets Teri.
Yes, I think I would add to that Harold commented I think when he went over the slide we have.
Over the last year or two been building some specialty deposit funding around.
<unk> around community associations, which is.
Inclusive of homeowners associations and property managers.
Some.
Nonprofit specialties and so forth then those had been built through breakeven.
Are having success and we believe will be a meaningful part of the funding.
As we get out through here as well so in addition to new.
<unk> people in new markets I think the new product specialties are important to us in terms of low cost funding.
Great.
Thank you so much below that.
Alright.
Thank you. The next question is coming from Brian Martin from Janney Montgomery, Brian . Your line is nice Hey, good morning, guys. Thanks for taking the question just maybe circling back Harold just one clarification on the comments or questions on expense growth earlier, I know youre, not giving guidance, but just when you were talking about kind of that.
The high teens expense growth was that more from the people you've already hired was that really talking about the salary line or are you talking about total expenses there.
Clarity.
Mid teens mid to high teens would be for total expenses.
Again, we're going through all of our.
Planning for 2023 currently.
We're pretty much.
Maybe at the first few steps of many step journey.
But that's probably where it's going to shake out at the end of the day.
But that said as Terry alluded to earlier in the call.
Our our hiring plan when you put it in effect are you start executing it.
Well, we're going to do is we're going to hire the people whenever we get an opportunity we're going to be opportunistic hires.
And so we may put in the plan that we're going to it may be higher 125 revenue producers next year, our 130 or whatever the number might be but if we have a chance to double that.
We might.
Might just go after it.
Gotcha, Okay, no it makes sense.
How about just shifting gears to the <unk>.
<unk> I think.
I guess third quarters, obviously down, but strong Harold I guess fourth quarter as it shapes up right now.
Is the expectation that it should drift a bit lower at BHG today.
Yeah.
Okay.
I don't know if I caught all your Brian say that question go.
Go back through that one more time, yes, just the outlook for BHG in <unk>, I mean relative to third quarter third quarter was strong but down but fourth quarter is also expected to be a bit lower given kind of your comments about women.
Yes, I think so what could what could change our current perspective as if they send more loans to.
To the auction platform, which is what they did this this quarter. So right now they believe theyre going to warehouse more loans on their balance sheet.
Which could tamped down earnings in the fourth quarter.
Got you, Okay, and then just the maybe just looking at one line item on fee income and that was just the I guess the gain or loss on sale of other equity investments kind of.
Significant drop this quarter as you guys have talked about kind of that volatility there, but just as we think about that number going forward I guess, just kind of take an average of the past quarters or just what's the best way to think about that given given this quarters mark relative to last quarters.
Yeah, we're not we're not anticipating much move but in that year to date number.
Here today, we'll get more information through the quarter on all of our own all of those investments.
And see where it shakes out but right now we're not planning on any kind of up or down movement with respect to the.
Anything in the fourth quarter.
Gotcha, Okay, and then new loan yields held where where are they coming on today I guess.
The month of September just kind of whatever the most recent data you have where are they where you are putting on new loans today.
I can flip down to the back of the into the supplemental information and look at that number.
But at the end of September we were at 5% so.
That would imply that work.
It's in the slides here I'll grab and I missed that if I did so no problem on that.
Alright, okay. Thanks for taking the questions guys.
Thanks, Brian .
Thank you and the next question is coming from Jennifer Dunbar from Truest Securities Jennifer Your line is live.
Thank you good morning.
Jennifer.
I'm glad I Wonder if you could give us your thoughts on.
The performance since your expansion markets, and especially commercial lending.
Just looking at slide eight.
I'm just if you could just talk about where how things have gone in each market versus your expectations. Thank you.
Yes.
I'll try to.
Just.
The address and what you're interested in.
Redirect me.
I would say that the Atlanta market is almost exactly on target for.
We would have hoped we are probably a little ahead on hiring I think volumes are generally right, where we would expect.
And so we're excited.
What's going on here in Atlanta.
Thanks.
In the case of Alabama, both hospital in Birmingham, I would say they have outperformed what our expectations were both in terms of hiring and in terms of the balance sheet volumes.
It is early.
On both sides of the balance sheet loan and deposit volumes have been really attractive and so I think we're going to do better in those markets.
And then what we had said and then in the case of D. C. I would say.
As for me Firstly, that's probably the market I am most excited about as you can see by the months in existence, we're still.
In the early stages, but their pipelines are building pretty dramatically you can see they've had great success.
Hiring people.
Again, both sides of the balance sheet for them, what's in the pipeline and what we expect them over the next two quarters.
They will do better than what our original pro forma was.
As well so.
Anyway, that's all.
Look at those big markets.
Not addressed what you're interested in please redirect.
That's great color. Thank you so much and just question a lot of analysts and investors have asked about normalizing credit and I just wonder what you think normally as is normal somewhere between.
Where we have been historically.
Prickly low losses and problem asset levels.
And and the historical median or is it for us.
Is it the historical median what do you think normal is.
Well.
When you started using the term like normal.
That obviously has to apply over of over a period of time to me sort of through the cycle, you get ups and downs and so I don't think there is any.
Basis under which I would expect.
Operator.
Me.
The levels of classified assets nonperforming assets and so forth.
That we are currently at through through an entire cycle. So at any rate I think.
Those median numbers are.
They're a reasonable way to.
Think about what ought to happen through the whole cycle again.
Partially like we're a ways away from that but.
Again, I think we're not for me to say, we expect things to normalize I just won't take my understand I don't think we're going to be operating at the level of classified assets nonperforming assets that we've been at over the last handful of quarters.
Four.
For the foreseeable future surely you'll have to go up.
To some extent.
Again, maybe the median number is a good planning assumption.
Thanks, Tom.
Okay.
Thank you and we had Catherine mealor from <unk> coming with a follow up Catherine Your line is live.
Thanks, I just had a follow up on expenses.
Thank you Jackie.
Performed since the call started when you when you mentioned.
High teens expense growth rate and so I just wanted to circle back.
Does that comment and maybe provide you the opportunity to remind us how nimble you can be on the expense side.
<unk> growth is not going to come in as expected.
The loan growth slow or the margin.
With an expected.
How nimble can you be pulling back that high teens.
Okay.
However, you want to go first yeah I'll go first thanks, Katherine for the follow up.
We've always got you.
The ability to two.
Take money out of the out of the expense book.
The big thing that we can.
But we always do around here is our incentive plans are all tied to earnings growth.
And so if the earnings growth doesn't.
Come around then we've got opportunities to take quite a large sum of money out of our incentive plan to kind of fortify our P&L and <unk>.
Make sure R. R.
Earnings growth.
As reasonable.
Under the circumstances.
The other thing and we did this back during the financial crisis.
We can always pull back on hiring.
That will impact our longer term growth.
So we're not really anxious to do that.
But there's a lot of variability in our in our expense book that we that we can go after.
When it's absolutely necessary.
Terry I'll stop there.
Catherine I guess I had two things I mean, Harold said it but just in case there are people who don't get it.
And soon as we have sacrificed 100% of our incentives.
If we don't produce our earnings targets and earnings targets are set to be top quartile performance.
So thats the biggest expense lever that you have we don't get paid unless shareholders do get paid and I don't think there is a company that I'm familiar with that will do that and protect shareholders to that extent I think the second thing is.
The way on this.
For a reason.
<unk> field successfully getting people to understand that the hiring that we do.
The.
Because we do it on a straight line, it's a huge part of the expense base in basin. So we're paying expenses today for revenues that are yet to come and so mildly message and that is there is an immense amount of <unk>.
Profitability that comes when we quit hiring people.
All of the revenue continues to roll in and the expenses to grow and so there is huge profit leverage in just that single idea right. There when you think about having.
Howard.
Three revenue producers this quarter.
That revenue will come in and so then if we have difficulties we quit.
Hiring people and so the expenses stopped growing but the revenue continues to grow so anyway. That's my own view, that's the way we've operated over an extended period of time and I'm not sure everybody understands.
How that works, but you can quit hiring and it does produce earnings growth, even though it impacts the longer term balance sheet and earnings growth in the short run it accelerates earnings growth.
Got it that's helpful. Thanks for the follow up.
If youre going to put a high teens expense growth rate out. There then it's just fair to assume that the revenue growth rate is going to be about that just given you're correct.
Correct no doubt no doubt.
Awesome. Thank you okay.
Thanks, Ken.
Thank you ladies and gentlemen, this does conclude today's conference you may disconnect. Your lines at this time and have a wonderful day. Thank you for your participation.
Okay.
Thank you.