Q4 2023 Pinnacle Financial Partners Inc Earnings Call
Good morning, ladies and gentlemen, and thank you for your patience. Your conference will begin shortly once again. Thank you for your patience the conference will begin shortly.
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Okay.
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Good morning, everyone and welcome to the Pinnacle financial partners fourth quarter 2023 earnings call.
Speaker Change: Hosting the call today from Pinnacle financial partners is Mr. Terry Turner, Chief Executive Officer, and Mr. Harold Carpenter, Chief Financial Officer.
Speaker Change: 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. N S. P dot com.
Speaker Change: Today's call is being recorded and will be available for replay on pinnacle Financial's website for the next 90 days.
Speaker Change: At this time, all participants have been placed on a listen only mode. The floor will be open for your questions. Following the presentation.
Speaker Change: If you'd like to ask a question at that time. Please press star one on your Touchtone phone.
Speaker Change: Analysts will be giving preference during the Q&A.
Speaker Change: We ask that you. Please pick up your pet head and said if you have to allow optimal sound quality.
Speaker Change: During the presentation, we may make comments, which may constitute forward looking statements. All forward looking statements are subject to risks uncertainties and other facts that may cause actual results performance or achievements of pinnacle financial to differ materially from any results expressed or implied by such forward looking statements.
Speaker Change: Many of such factors are beyond pinnacle financial's ability to control or predict and listeners are cautioned to not put undue reliance on such forward looking statements more detailed.
Speaker Change: Description of these and other risk contained in Pinnacle Financial's annual report on Form 10-K for the year ended December 31, 2022, and that's subsequently filed quarterly reports.
Speaker Change: 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.
Speaker Change: In addition, these remarks may include certain non-GAAP financial measures as defined by SEC regulation G.
Speaker Change: A presentation of the most directly comparable GAAP financial measures and a reconciliation of 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.
Speaker Change: With that I'm now going to turn the presentation over to Mr. Terry Turner, Pinnacle's, President and CEO.
Terry Turner: Thank you Matthew good morning.
Thanks for joining us this morning for the fourth quarter 2023 earnings call.
Obviously, we will focus on performance in the fourth quarter of 23.
Terry Turner: Outlook for 2024, both of which I think are very good.
Terry Turner: We always start with the shareholder value dashboard on a GAAP basis.
Terry Turner: And then as adjusted which is really what I focus on and drive to manage the firm. There's no doubt 2023 presented one of the most difficult operating environments for buying since the great recession.
Terry Turner: I expect that many banks were able to completely outrun the rate environment and its impact on our revenue and earnings growth in 2023.
Terry Turner: Despite the difficult operating environment, we grew our tangible book value.
Terry Turner: One 8% in 2023 and produce a 20% total shareholder return or unusual approach of investing in our business, particularly in terms of acquiring new talent.
Even during difficult times is one of the primary reasons, we've been able to continue to take share and grown balance sheet volumes.
Which of course is accounting for our rapid reliable growth in revenue and earnings, which we believe Cal fire extraordinary total shareholder return over nearly two and a half decades now.
Terry Turner: For some time that is our expectation that credit metrics have to normalize it.
Terry Turner: And Bob Bob right over time at the very low level of problem loans that we've enjoyed over the last two years, we saw a little bit of that in the fourth quarter, but the NPA and classified assets still remain below our five year median which is itself very low net charge offs during the quarter with just 17 basis points.
Terry Turner: Oh fourth quarter, a 23 was an excellent quarter for us, particularly on those metrics as both future shareholder value creation, and so with that let me turn it over to Harold or more.
Harold R. Carpenter: At the core.
Harold R. Carpenter: Thanks, Barry Good morning, everybody will will again start with deposits reporting linked quarter annualized average growth of four 6% in the fourth quarter.
Barry: Which we believe was a real positive for US we did see some in view of deposit outflows that old R. E. L. P balances and are hopeful to see those balances returned this quarter.
Barry: L. P deposit rates were up only seven basis points, the smallest increase quite some time, we felt like the rate of increase for deposit rates would slow as we entered the fourth quarter. So we're pleased with where we ended up.
Barry: Deposit.
Barry: Well, there are quite a bit with fluctuations in our overall rates driven somewhat by mix shift as several larger more expensive depositors built balances at year end, we will remain disciplined as to the relationship between pricing and growth of deposits will continue at a more deliberate pace for gathering deposits without leaning heavily on the rate component.
Barry: Our group.
Barry: That's below the fourth quarter was another strong loan growth quarter for us as we are reporting a 10.7% linked quarter annualized average loan growth for the fourth quarter.
Barry: As we've mentioned over the last several quarters, we were pleased with our results on fixed rate loan project, which ended the quarter with average fixed rate loan yields on new alright originations of 7.33%.
Barry: Red Lake, that's all floating and variable rate loans continues to be strong with coupons in the high sevens low eights on new loans.
Barry: This slide segments, our net loan growth based on several categories to help everyone better understand the source of our.
Barry: Our expansion into D C Atlanta, Birmingham, Birmingham et cetera was the source of much of our loan growth in 2023. That's why we're so excited about our announced entry into Jacksonville, We are experienced bankers in these new markets and give them the tools and resources to build a large local franchise much.
Barry: Much of our loan growth is not new the new bar is not to new borrowers showing that that pinnacle bank with a new idea to pitch our borrowers have extended relationships with relationship managers over in many cases decades of working with each other.
Barry: This is not just true for Charlotte Nashville, charcoal, Charleston, and other legacy markets, but that applies to Atlanta D C. Birmingham.
Barry: As well as Jacksonville.
As the top chart reflects our NIM.
Barry: Was flat quarter over quarter.
Barry: We hope to see a modest increase and continue to believe we have great opportunity to see NIM expansion in 2024, as we entered the fourth quarter. We felt like we were fairly close to par.
Barry: All of our margin and have some confidence that we have more importantly, we feel we should see a stronger net interest income as we move into 2024.
Barry: Our interest rate forecast, we believe is consistent with most right forecasts out there our planning assumption is that future fed rate decreases began in May and then we see three more before the end of the year.
Barry: Accordingly, our yield curve shift is that it will that it will be lessened burdened by year end.
Barry: As for credit, where again presenting our traditional credit metrics pinnacle's loan portfolio continued to perform very well in the fourth quarter. Our belief is that credit should continue to perform well as we move into 2024.
Barry: Absent a couple of large charge offs in 'twenty two 'twenty three 2023 was a good year as to losses realized from our portfolio.
We mentioned one nonperforming credit in the press release last night debated on whether to call it out or not at all or not.
Barry: And for all of our M. P. A's is 27 basis points, which is very respectable in comparison to prior quarters, but given the changed from prior quarter, we decided to talk about that one credit.
Barry: We feel that particular credit is well down the road of being rehabilitated and expect no loss currently.
Barry: Similarly, there was an isolated incidents and both classifieds and past dues, we downgraded the Chattanooga credit class by late in the fourth quarter and one credit also okay substantially all the net change in past dues for.
So that credit the borrower did pay interest current before year end, but we were past maturity and waiting on the bar to sell a few matters matters before granting the renewal, which we anticipate in the next week or so.
Barry: Concerning commercial real estate again, some select information.
Barry: As to the top left chart construction originations are very selective in reserve for projects, where we have a strategic reason to participate.
For those that follow regulatory ratios are 100% drug concentration ratio was at 84% at year in roughly the same as the prior quarter.
Barry: Our goal is to reduce that ratio.
Barry: 70% open.
Appetite for construction lending will remain limited at this time.
Barry: Secondly, much discussion about renewals of commercial real estate fixed rate loans, which is the objective of the chart on the top right over the next four quarters, we will have approximately $500 million in fixed rate commercial real.
Barry: Stay really coming up for repricing, where the average rate on these loans is currently around four 5% our current yield target for these loans that renewal will be in the 7% to 8% range altogether, we have about $6 billion of fixed rate loans maturing over the next two years with a weighted average yield of 4.8% thus.
Barry: Thus, we see real opportunity from a repricing perspective for these loans.
Barry: I Wonder if these and as always I'll speak to BHG in a few minutes, excluding b S G and various other non.
Barry: The revenues are up 1% to 2% linked quarter.
Barry: We are very pleased to report that our wealth management units had a strong 2023, and we fully expect the effort of our wealth management professionals will continue into 2020 board as.
Barry: As we noted in last nights press release, we accomplished significant boley restructuring program during the quarter as we saw the increase yields all about $740 million in bold contracts with various carriers and then they feel like the payback period on the approximately $16 million in charges, we incurred during the quarter as array.
Barry: A year and a half.
Barry: We believe the anticipated tax equivalent cash yield on our entire portfolio as a result of all this will approximate four and a half upset in 'twenty 'twenty, four and 5.5% in 2020 five this compares to approximately a 3.4% yield currently.
Barry: Now expenses fourth quarter expenses came in about where we thought as we noted in the third quarter, we expect full assessment from the FERC in the fourth quarter.
Barry: A $29 million FDIC special assessment was recorded in the fourth quarter, which we will pay to the FERC over eight quarters beginning in June of 'twenty 'twenty four.
Barry: Our incentive costs for the fourth quarter include the final calculations for 2023 cash bonus awards.
Total calls for 'twenty, 'twenty, three or slightly over $46 million in comparison to a target pay out playing would've required about $30 million more in cost. So our 2023 earnings include $30 million of incentive savings, which is exactly how the plan is supposed to work. If we forget participants are eligible for targa.
Ward. If we don't then we are I will speak more about our outlook for expenses in 2024 in a few minutes.
Barry: Capital, our tangible book value per common share increased to $51 38 at quarter end up 14, 8% year over year.
Barry: <unk>.
Barry: Book value generation has been a big positive for our firm and has we believe benefited our firm meaningfully growing tangible book value has been top of mind. The leadership over the last several years and has impacted decisioning as management has not been willing to risk significant tangible book value dilution, Bob perhaps building a large <unk>.
Barry: Investment portfolio, if we had we'd get up to a tangible book value generation at risk and.
Impacting capital raise in the fourth quarter were several matters that we discuss in the press release last night. In addition to the restructuring and the FDIC Special assessment, we incurred a $35 million capital charge.
Barry: BHG is adoption of Cecil on October one 2023, which was consistent with expectations for the last year or so.
Barry: Again, this amount did not impact fourth quarter earnings, but didn't impact our capital and our capital ratios. The chart on the bottom left of the slide detailed several pro forma capital ratios at the end of this.
Barry: How we compare to peers all these ratios as of the end of September although we don't anticipate significant changes to the capital. We were pleased with Eagle's volt and believe they will continue to compare favorably to other bikes and speaks to our efforts to manage tangible book value Affectively Natalie.
Barry: That'd be H D.
Barry: As we look at fourth quarter originations and as we mentioned last quarter fourth quarter origination volume or less in the third quarter as they continue to shrink the credit box.
Barry: And I'd like to emphasize that point B H D estimates that 25% of their borrowers in 2021 and the first half of 2022 we're not far off off or a BHG loan today, we are very supportive of the efforts by our BHG partners with respect to credit disciplined client selection. We're also very pleased to see that sales into the <unk>.
Barry: <unk> network during the fourth quarter were basically consistent with the third quarter. The bikes continue to have a strong appetite for VA Street credit with original.
Barry: Fourth quarter placements to institutional buyers were about $200 million less than the third quarter.
Barry: We actually did increase held for sell in but always honest batch by $170 million in the fourth quarter, which provides a nice runway going into 2024.
Barry: As to liquidity not a lot of change here from last time, they seek liquidity platform array is exceptionally strong.
Barry: During the fourth quarter and again as we mentioned at the end of the third quarter ph D to place about $300 million in loans as a result of our second ABS transaction for 2023.
Barry: She also successfully negotiated a $50 million private whole levels fell during the fourth quarter. Importantly, these private sale transactions were executed with no recourse the BHG with many of these clubs coming back to BHG routinely and planning on being back in 2024 as well.
Barry: As the spreads. This is the usual information we've shown in the past the Italian spread trend since the first quarter of 'twenty.
Barry: On the bottom chart the spreads for all balance sheet loan placements have expanded as lower coupon loans originated more than two to three years ago pay off so the borrower coupons for the on balance sheet continue to increase.
Barry: Again, as we've mentioned for several quarters the spreads on the chart for on balance sheet loans represents the buildup of the book over the last few years.
Barry: <unk> believes that should the fed begin to reduce rates in midyear 2020 for such a move would likely result.
Barry: For BHG for both the bike and institutional platforms.
Barry: Now to be able to do credit as we've noticed in every way as we've noted in previous quarters.
Barry: She has tightened the credit box over the last several quarters, particularly with respect to lower charges.
Barry: Its borrowing base average FICO for 'twenty twenty-three has improved to 745 from 732 in 2022.
Barry: The chart on the right details originations in 2012 through 2015.
Barry: Lot level out cumulative loss rates of 10% to 12%, whereas vintages. After 2015 began to reflect improved performance with the lives leveling out within about 10% ranges.
Barry: On the reserves again, the usual trends on loss reserves for both on and off balance sheet loans as expected the adoption of seasonal in October 1st, but they're all balance sheet loans resulted in about 300 basis point increase in reserves for a 12 month losses for on balance sheet amounted to six 5% in the fourth quarter.
Barry: If you just look at the fourth quarter losses were seven 6% for all balance sheet loans.
Barry: BHG has been anticipating that credit losses will begin to trend back after the fourth quarter right now BHG believes they have a great shot at seeing reduced credit losses in the first quarter and with a much greater degree of confidence, we'll reduce losses by the second quarter of 2024.
Barry: Now about the against these earnings and production last quarter, we anticipated that fourth quarter loan production, yeah, approximate 600 to 800 million and it came in at the high end of that range impacting earnings and also as we mentioned last time they used to be recorded several one time expenses that approximated $10 million in the third quarter.
Barry: Impacting our fourth quarter results was approximately $4 million in severance and other nonrecurring costs.
Barry: A lot of work has been done by the HD to get ready for 2024 with a tighter credit box base do you anticipate flattish production comparing 'twenty border.
Barry: That said the bank network from institutional platform, both remained very liquid for ADHD.
Barry: Also as the post COVID-19 credit issues fade into the background, along with a potentially better yield curve all of those could add up to make 2020 for a much more accommodating year for BHG in 'twenty two 'twenty three.
Speaker Change: With that I'll turn it back over to Terry.
Speaker Change: Okay.
Terry Turner: Alright, Thank you Harold well as Harold mentioned earlier in the fourth quarter of 2023, we hired our leadership team for our marketing extension to Jacksonville, Florida.
Terry Turner: Earlier, when I was discussing the 2023 performance I highlighted the fact that we continue to invest in our business even during the difficult times, which in my judgment has been the gain and the extraordinary total shareholder return we continue to produce one of the good things about 2023 was that it showcased our enterprise wide.
Terry Turner: This system, which provides the necessary guardrails to protect this one a numbers tumble, but more importantly put us in a position to sign the kors. While many are trying to restructure their business model with major expansion initiatives, which by any short term earnings but have a devastating impact on long term shareholder value creation, Arkansas.
Terry Turner: Chairman approached a credit liquidity and interest rates.
Terry Turner: You know put us in a great position as we continue investing in our business the risk management system, not only affected us but again.
Terry Turner: Our capital base and ability to continue to grow which is what we intend to do.
Terry Turner: Most of you know that our target market has been all the large urban markets in the southeast linger some advantage.
Terry Turner: Florida has been our principal Boeing.
Terry Turner: Most of you heard me talk about this for a long time the catalysts for when we decided to extend to a new market is when we have the availability of leadership that we believe can build a $3 million buying over a five year period of time in any of those large markets.
Terry Turner: Last quarter I used this slide are built on the fact that Havent started out as a novel basis back in 2000, and Nashville are waiting.
Terry Turner: Now dominate the Nashville market by almost any measure, including things like FDIC deposit share and we're actually running faster in the relatively recent startups in Atlanta, and Washington D. C than we did as we built out the Atlanta market.
Terry Turner: As you can see here Jacksonville, Florida is on par with our other large high growth markets extraordinarily healthy and rapidly growing.
Terry Turner: And it's a daily exposure does problem with respect to the competitive landscape is.
Terry Turner: It's dominated by the same exact competitors the women face off with for now 23 years I always try to help people understand this the size and growth dynamics are really important in terms of the success in the markets.
Terry Turner: That we've been in but more important than the size and growth dynamics.
Terry Turner: With the competitive landscape, it's important to have our competitors from I mean, you can take market share.
Terry Turner: As I've already said talent availability is one controls the timing.
Terry Turner: As you can see our leadership team in Jacksonville is uniquely prepared to.
Speaker Change: To build a big Bang there Scott.
Scott key pivotal run that market for US is a 34 year veteran in that market. He was a former regional president for North, Florida, and truest and he led an 1100 employee.
Serving 100000 clients in that market are enjoyed by Debbie Buckland.
Speaker Change: It's 27 years of local experience and was the former market president in Jacksonville, and truest and prior to that Suntrust.
Speaker Change: They're also joined by Brian Tyler.
Speaker Change: And then it was 21 years experience in the BB&T through this franchise as well he most recently led north Florida.
Speaker Change: The middle market effort and through all of North Florida. So.
Speaker Change: I think it's evident why Jacksonville, and Oh Wow now so with that I think I'll turn it over to Harold and we'll walk you say the 'twenty 'twenty four outlook.
Speaker Change: Yes.
Harold R. Carpenter: Thanks, Terry quickly, we'll go through the 'twenty 'twenty four financial outlook.
Terry Turner: I'd like to do is convince all the information on the slide down to five key points.
Terry Turner: First as deposits, we have to maintain consistent reliable growth in our deposit book at a reasonable price. That's what makes all of the initiatives that we've invested in to gather new Pas is so critical.
Terry Turner: I believe we've made great headway I think we have got great tools in place.
Terry Turner: We've hired experienced professional promote and allegiant these deposit gathering initiatives, so high single to low double digit growth same grateful.
Terry Turner: We don't anticipate to have a great year, we do expect modest growth mid single.
Terry Turner: That comes basically.
Terry Turner: From a new firm one that has the ability to achieve sustainable growth with an intense focus on growing core businesses.
Terry Turner: We've had a great partnership with BHP and we believe that the partnership is as strong as ever.
Terry Turner: We believe the leadership at BHG is focused on the franchise and novel pushing more widgets through the pipe.
Terry Turner: Credit can get back to its usual run rate by the second half of this year.
Terry Turner: So you could have a great day.
Terry Turner: Loans and loan pricing.
Terry Turner: Primarily fixed rate loan pricing, we've done well to get fixed rate loan pricing to their current levels in comparison to peers, we did quite well, but we can be better. We will continue to focus on that as I think that will be absolutely critical to our ability to grow net interest income high single to low double digits in 2024.
Terry Turner: Sure.
Terry Turner: Now I'd like to talk about expenses.
Terry Turner: It seems like our expense growth rates are always a topic of great discussion.
Terry Turner: 'twenty three we harvested at least $30 million out of our incentive plan to help support our EPS results for 2023.
Terry Turner: In order to support our people in 2024, we need to have a plan that accommodates upwards of $40 million to $50 million in additional incentive expense as always we absolutely have to hit numbers. If we don't hit numbers, we won't pay we've averaged about 80% of targeted pay out in my 23 years here at Pinnacle.
Terry Turner: We are not bashful about using the incentive pool to help support our earnings results.
Terry Turner: I do think a raise more expense target at this point for 2024, probably about between 960 and $985 million. So as you put them together your models that range that range seems Bayer for today.
Terry Turner: Lastly earnings.
Terry Turner: This management group understands to get the share price moving up you've got to grow core EPS.
Terry Turner: We believe 2023 was $6.
Speaker Change: Yeah, So we're aiming north of that week.
Speaker Change: We've looked at peers and have stack ranked earnings growth rate projections for 2024, our plan will be comfortably in the top quartile of earnings growth, we have to grow earnings in 2024, so our targets reflect that.
Speaker Change: Be successful, we can't let expense growth outpaced revenues, it's that simple hopefully we can achieve our planning assumptions such that all of our associates earn that incentive while same time the share price reflects all the hard work they become.
Speaker Change: And with that Matt I'll turn it back over to you for Q&A.
Matt: Thank you everyone on the floor is now open for questions if you'd like to ask a question at this time. Please press star one on your Touchtone phone annulled.
Matt: Analysts will be giving preference during the Q&A.
Matt: Again, we do ask that while you ask your question. Please pickup your handset to provide optimal sound quality.
Speaker Change: Your first question is coming from Ben Garlinger from Citi. Your line is live.
Ben Garlinger: Hi, good morning, guys.
Ben Garlinger: Hi, good morning.
Ben Garlinger: I was curious just kind of touch base on the expenses are Arab have good clarity on just a second.
Ben Garlinger: So when you think about just expenses overall.
This entirely going to our majority going to lenders or is there some technology or back office spending that needs to be done.
Ben Garlinger: I mean, it just seems like pinnacle.
Ben Garlinger: Pinnacle is getting back to legacy pinnacle of kind of low double digit growth is good but it could put some pressure on P. P. NR over 'twenty 'twenty four I, just kind of clarity on where that expense might be going.
Speaker Change: Yeah, I'll start and I'll, let Terry kind of add his comments as well on this whole path okay.
Terry Turner: Our non personnel expense base for next year is barely reasonable.
Speaker Change: Thank you.
Speaker Change: Last night, we talked about in the press release that or if you exclude incentive growth rates, probably in the low double digit range.
Speaker Change: I think that's pretty conservative.
Speaker Change: With the colder than the 860 to 885 kind of target for this year I think we're more of a high single digit kind of grower with respected to exclude any incentives.
Speaker Change: Our our I T.
Speaker Change: Team has gone through what they believe theyre going to need to do this year, we spent a lot of extra time.
Speaker Change: On operational expenses and information technology expenses for 'twenty 'twenty four we think we've got a good plan. We think we've got a plan that they can accomplish and at the same time not overboard on kind of the expense burden.
Speaker Change: That I'll stop and let David kind of thing.
David: Yeah Ben.
Thank you.
David: To your point, we continue to invest I think it would be oh already not to invest in our tech.
David: Technology, I mean, you've got all the digital progression I all those sorts of things. So we're not a do nothing company, we continue to invest.
David: Invest in technology and staying current I think you know about our firm we're not trying to innovate anything we're not trying to do something particularly new and different ideas to be a fast follower and so to do that we have thicker so certainly their expenditures other than our incentive type expenditures, but.
David: Well one of the things that I guess I would offer more clarity in this company.
David: Your question with phrase around is it all going to lenders are so in this company, 100% of our salaried employees just by annual cash incentive plan and honored per cent of us earn our incentive based on.
Hitting our revenue growth targets, our earnings growth targets and keep an asset quality strong. So 3400 people are aimed at that outcome and that's what it gets paid and so having only paid 62% level. This year you wouldn't expect most of our associates' desire to buy.
David: 100%, therefore, we have to run fast enough to produce enough revenue and earnings growth to satisfy.
David: The shareholder returns, but get ourselves is paid and I think we can do that.
Speaker Change: Sure no that's good color.
Speaker Change: Just philosophically hitting commissioning targets.
As parents is a good thing because it.
Speaker Change: And literally means you've hit your upside targets.
Speaker Change: Good.
Speaker Change: Kind of just parse through here a little bit. So when you when you think about adding additional lenders and just revenue.
Speaker Change: More lenders specifically the missed revenue producers.
Speaker Change: How are they incentivize or how much flexibility do you give them on gathering deposits in this environment I mean, given your pretty rapid pace of growth.
Speaker Change: Are you, giving them a little bit more slack together deposits cause I'm sure. There's other scorecard as well kind of tangentially to that.
Speaker Change: Does that kind of put a lid on the margin overall I get the back book repricing will produce a higher margin by the end of the year.
Speaker Change: Kind of curious on how you guys are structuring their incentive on gathering deposits any flexibility on a rate they might have.
Speaker Change: Yeah, Dan Let me just reinforce the point I made earlier you know most people have a hard time understanding the incentive systems here at Pinnacle. Most people are used to structure plans where relationship managers get paid on one basis and you know branch managers might be paid on different bases and so forth.
Speaker Change: That's not what happens here, 100% of our salary bodies associates, which would include lenders financial advisors.
Speaker Change: You know office leaders every category of salaried person.
Speaker Change: Their incentive is tied to this company didn't its revenue and its earnings targets.
Speaker Change: And so that's a really important thing that I think a lot of people don't get that direct connection and so when you ask about the incentives for the.
Speaker Change: The lenders if you will to gather deposits and so forth. They have an incentive which is we're gonna have to hit the revenue and earnings growth targets and to get that done. We've got a produced allow volumes to get that done and we have to produce satisfactory deposit volumes and so that's the mindset inside this company 3400 people are aimed at hidden.
Speaker Change: That revenue target for the company and the earnings target for the company, it's not an individual.
Speaker Change: But individually based incentive plan you know I don't mind decided they don't want to go.
Speaker Change: Too far afield from what you're asking but you know that idea is really important in every quarter. We meet with all of those houses in the farm and we talk to them about hey, Here's where we are on or more months, all revenues and where we are on earnings and how that impacts incentives and these are the things we need to do but it is really easy to crystallize for every single person as an example.
Speaker Change: Simple if we're not hidden if we're not reprice and fixed rate loans at a satisfactory margin man every board are you, saying in Arizona Gotta look here's what the target is here's what we did here is what that cost us in terms of revenue and earnings in May and everybody can see through clearly do exactly what has happened and what needs to happen in order to hit the TARP.
Speaker Change: So I don't want to go on too much about it and I hope that's helpful.
Speaker Change: Yeah. It is I was just more so I'm curious like how much flexibility are you, giving them on rates in order to gather those deposits.
Speaker Change:
Our again.
Speaker Change: We're getting went out into the philosophy here, but as you know we hired experienced people. The average experience that they've looked at March 26 years fundamentally what we do is try to make sure. They know what our targets are and then give them plenty of freedom to execute generally the relationship manager has the flexibility to decide what the price is.
Speaker Change: For the deposits and what surprises for the loans what happens is in fact because of this out there and I know we have to hit the targets are not inclined over pay on deposits are you undermine our own loans and so forth and of course, we have a time management system, where every month.
Speaker Change: Going down through everybody's performance with key performance indicators talking about what's the reason for that is why are you doing this this price needs to come down all those kinds of things. So it takes an active management, but generally we are handling that are in arrears and empowering our client facing people to.
Speaker Change: So being able to handle client needs without a lot of bureaucracy.
Speaker Change: Got you I appreciate it that's helpful color. Thanks, guys.
Speaker Change: Alright, Thank you Ben.
Speaker Change: Thank you. Your next question is coming from Brett Roberston from Hovde Group. Your line is live.
Brett D. Rabatin: Hey, guys good morning.
Brett D. Rabatin: Hi, Brett.
Wanted to start with a V H G and just try and understand a little better the confidence on the reduced losses by <unk> can you just walk us through your thought process on on BHG and and you know the obviously, it's the guidance is for <unk>.
Brett D. Rabatin: Fairly minimal growth and contribution this year, but it sounds like youre thinking it could be a lot better if certain things play out right with credit and perhaps growth.
Speaker Change: Yeah, that's a great question.
For us it's we get we have conversations with the H D quite frequently and they still believe that the first half of 2022 into 'twenty 'twenty. One loans were aware of these outsized losses are originating.
Barge they will see substantially all of their losses within call. It the first 30 months of origination.
Speaker Change: And given the.
Speaker Change: Great inflation, a lot of those loans have come to come to us.
Speaker Change: Kind of Nahla.
Speaker Change: Knowledge that there won't.
Speaker Change: Won't be good loans fairly quickly.
Speaker Change: So they believe that.
Speaker Change: They are today at the call at the end of 'twenty, two pretty that a lot of the 2021 credits.
Speaker Change: Already gone through this proverbial pig through the Python.
And so they're still looking at some of the 'twenty two credits and <unk>.
Watching those but they they believe that they're substantially through the bulk of the problems.
Speaker Change: Okay.
Speaker Change: And then just thinking about fintech.
Speaker Change: I'm sorry, Jerry.
Jerry: Right I was just going to say I think you know, saying simply they're watching their migration analysis and arrows point the losses are.
Jerry: Our largest part of the losses occur in the first 30 months. So when you look at those migrations I really have just a few more months to go before they will have completed that 30 month cycle for that period, where the great inflation occurs and so again I think <unk> tried to isolate out the ongoing FICO scores and so forth.
Jerry: More recently originating credits and so it's just a matter as he said in getting that pig through the Python, which is literally just several months away.
Jerry: Okay.
Speaker Change: Helpful. And then just around you know BHG conceptually you know the IPO market for Fintech was was fairly minimal last year and this year it could be better.
Speaker Change: Is there a potential for you guys to maybe sell a portion of V H gees ownership to potentially.
Speaker Change: Increased capital ratios or how do you how do you think about BHG ownership from here and you know how they obviously at one point where.
Speaker Change: It would appear to have been thinking about an IPO can you maybe just walk through your ownership of them from here.
Speaker Change: Yeah, Brad I think I would say this is really just a reinforcement I think oh, but what I'm, saying for some time.
So we still enjoy a fabulous partnership with B H G. I continue to love that business as I've tried to say you know if I don't understand a vehicle out in one on 100% of BHG and we'd focus on gain on sale transaction, but it doesn't work that way and so I think we've come to the conclusion that.
Speaker Change: The volatility and the difficulty in getting bank investors to understand the model.
Speaker Change: You know at some point, it's just not worth continuing to battle and so we have decided whenever the time is right that we would like to reduce our ownership interest in BHG in whole or in part.
Speaker Change: Not to be dry, but I'm more of a you know Paolo so a guy and so it's not an ideal time to liquidate our position where cup whether they provides a great source of income to us and so we will continue in the current arrangement, but Oh, you know whenever the market is good too.
Speaker Change: Boy, where you know you can enjoy it.
Speaker Change: A higher price, we would be willing to sell some or all of our position in N V. A S. G.
Speaker Change: Thank you and once again, we do ask that participants. Please ask one question and one follow up then reenter the queue. Your next question is coming from Tomorrow Pressler from Wells Fargo. Your line is live.
Speaker Change: Okay.
Tomorrow Pressler: Hi, good morning.
Tomorrow Pressler: But maybe talk through.
Tomorrow Pressler: Can we maybe talk through the expectation for net interest margin cadence throughout the course of the year with the expectation for it to be relatively flat in the first quarter and then for your outlook with three rate cuts. It seems like there maybe isn't that much NIM upside and I'm, just wondering kind of what your expectation is for NIM cadence throughout the year given.
The broader NII guidance.
Tomorrow Pressler: Okay.
Yeah Tomorrow.
Tomorrow Pressler: What's in our plan for this year.
Tomorrow Pressler: Is that we will see continued increases in our fixed rate lending.
Tomorrow Pressler: That'll provide somewhat of a tailwind here in 2024 four.
Tomorrow Pressler: Call it earning asset yields.
Tomorrow Pressler: I think we will have to be very aggressive if there is a rate growth rate cut.
Tomorrow Pressler: Now keep in mind that basically 27% of our deposit book is indexed so I do have that head start.
Tomorrow Pressler: Probably more subtle than maybe some others.
Tomorrow Pressler: But our relationship managers will have to maintain constant contact.
Tomorrow Pressler: With.
Tomorrow Pressler: With their depositors.
Tomorrow Pressler: Over the course of 2024, so that we can respond very quickly with respect to rate cuts.
Tomorrow Pressler: Appreciate that other banks can go into their systems and punch, a button and lower deposit rates.
Tomorrow Pressler: We can do that too for some portion of our of our deposit book, but what is going to call. It what is going to.
Tomorrow Pressler: Do for Us, though what we're gonna have to do is be in touch with our clients in a way.
Tomorrow Pressler: That we've probably not been in.
Speaker Change: Uh huh.
Speaker Change: Hey.
Speaker Change: Because we're gonna be taking money away from them basically.
Speaker Change: Okay got it and then just looking at the 'twenty 'twenty four commercial real estate maturities can you talk through what years those loans were originated and I'm just wondering for the 2019 and prior vintages just how different are there.
Speaker Change: Those credits given just how different the world is today compared to pre pandemic.
Speaker Change: Well I think most of our commercial real estate loans or.
Speaker Change: Probably on a three to five year kind of a term most of the.
Speaker Change:
Speaker Change: Both owner occupied and non owner occupied.
Speaker Change: Loans were at a fixed rate so.
Speaker Change: I think by and large most are ready for rack races. I think the last number I saw was that they've seen some 20% to 30% increase in rentals.
Speaker Change: Over the last three to four years, so we feel like they've got the cash flow to support.
Speaker Change: The increased interest rates.
Speaker Change: Thank you. Your next question is coming from Steven Alexopoulos from J P. Morgan Your line is live.
Steven A. Alexopoulos: Good morning, everyone.
Steven A. Alexopoulos: Great place.
Hey, guys.
Steven A. Alexopoulos: Guys with following up on that so when I look at Slide 12, you guys are pretty excited about these renewal rates coming in much higher.
Steven A. Alexopoulos: On your commercial real estate portfolio, but that same phenomenon just keeping many investors out of the banks, particularly the regional banks and all of the regionals or even painted with the same brush no matter, where your markets are so I have two questions. One is for the commercial real estate loans that were reset in the fourth quarter excluding <unk>.
Steven A. Alexopoulos: Office I know you don't have a large office portfolio could you just share with the investor community, what's happening with these loans.
Steven A. Alexopoulos: This pretend and extend mentality that you guys are just extending these and they're not really can you share with us what's happening.
Steven A. Alexopoulos: Much of the values changed are you able to just renew these without any impact on credit and as you look at you know <unk> 24 to 24 three.
Steven A. Alexopoulos: The ability to turn those including office without seeing a material negative impact on credit.
Steven A. Alexopoulos: I believe almost all of our first Greg.
Greg: Yeah, I'll start and let Terry clean me up here.
Terry Turner: I'm not hearing from the credit officers that are having any kind of particularly on a risk time with respect to getting renewals accomplish.
Terry Turner: Our having to sacrifice concessions or whatever to get these to get these new loans booked.
Terry Turner: I think what we do enjoy and you've mentioned you've kind of you kind of mentioned it is that we are in great markets and we're seeing.
Terry Turner:
Terry Turner: You know rent increases, we're not seeing any kind of.
Terry Turner: Reductions and occupancy rates.
Terry Turner: We think Oh, our commercial real estate book by and large is probably one of the best performing segments of our portfolio.
Terry Turner: And so we're pleased with where he has.
Terry Turner: A lot of these developers builders borrowers have been with pinnacle now for a long time or with the with their relationship managers for a long time. So we feel pretty strongly that our client selection processes have been stripped had been good.
Terry Turner: And so we don't feel necessarily the need.
Terry Turner: To be to be overly concerned that said our credit officers are looking under rocks.
Terry Turner: Everything they can to be prepared should something.
Terry Turner: Come up that we didn't expect and they're having conversations with clients accordingly.
Terry Turner: Periodically.
Terry Turner: So familiar.
Terry Turner: I think I would hit a two or three.
Terry Turner: Things as it relates to commercial real estate, and hull and particularly as it relates to the office.
Terry Turner: Portfolio I think the one thing Steve that Amazes people you know if you go through our 40 largest.
Terry Turner: Loans that are being handled by our special assets people people that work are difficult credits I think there are two loans in that top 40 that would be CRA related and so again I just say that you know you know the phrase the past four months doesn't ensure future performance, but it certainly is a strong indicator to me that that portfolio has held up.
Terry Turner: So well so far I think one of the reasons that it has is two things one as we underwrote those loans when they went on the books to begin with in the construction phase and so forth, we always underwrite where the mortgage constant that projects our future Costa.
Terry Turner: Oh, Oh, what a permanent would take you out of that and I would say you know most of the loans on the books would have been underwritten assignment of mortgage costs and then the six 9% or 7% range. So granted that might be a dig below the renewal range, but it's not substantially below the renewal rights. It was underwritten to perform at that level.
Terry Turner: I think the other thing and this might be the most important aspect you know I like you I mean, I've got CNBC, one and I watched these disaster stores for markets like San Francisco or you know are based in and so forth, but you know in these south eastern markets. We used might have we talked about the growth going on in those.
Terry Turner: Markets, but the rent growth.
Terry Turner: Over the last three or four years, it's really been extraordinary and so that rent growth. Obviously is what enables those borrowers to absorb.
Terry Turner: The elevated fixed rates and puts us in a good position I think on the idea of the extend and pretend every now and then we do as we renew we have people that have to rightsize for granted but I have to rightsize that they'd have to rightsize them and we're not just a rolling and hoping for the best they need to do it every time.
Terry Turner: To rightsize that credit so anyway.
Terry Turner: As I say I don't want to overemphasize basketball illness, but it is a comforting thing to me.
Speaker Change: That's helpful color.
Speaker Change: I want to pivot to the margin.
Speaker Change: So Harold I think you said you were assuming for cuts and the guidance is that right.
Harold R. Carpenter: That's right. Okay. So if I look at your margin before.
Harold R. Carpenter: The pandemic right you guys are pretty routinely and a three and a half to three eight range, which is way above where you are now if we think about.
Harold R. Carpenter: You know even for rate cuts or five rate cuts, we'll see what the number looks like but the yield curve started to steepen.
Harold R. Carpenter: From a structural view is there any reason your margin with a more normal curve at this level of rates, which is normal wont go back eventually into that range and it will take time, but as these renewals play out you cut deposit costs is there any reason to think over time, we're not somewhere back in that range.
Speaker Change: I think that's a great question and we debate that quite a bit as to what we think our long term net interest margin is and we believe it's somewhere in the 340 to 60 range and we get there Bob based on what our current spreads on.
Speaker Change: On our floating rate credits and then you know what we think our depositors will will need to pay in relation to fed funds. So.
Speaker Change: We think we're a 340 to $3 60 were I'm not hinting at there we'll get to that this year.
Speaker Change: But at the same time, we do believe our margin is in great shape right now we think our balance sheets in good shape. We think we can we can definitely take advantage.
Speaker Change: Of what.
Speaker Change: We will present to us this year provided we can see some.
Speaker Change: Call it less steepening in the yield curve.
Speaker Change: Thank you.
Speaker Change: Finishing version.
Speaker Change: Thank you. Your next question is coming from Casey Haire from Jefferies. Your line is live.
Casey Haire: Yeah. Thanks, good morning, everyone. Okay. Okay.
Casey Haire: One I wanted to just follow up again on unexpected. So just just to clarify this the base I'm assuming that that's off the 922, which includes the FDIC assessment and then just what is the what are some of the factors given it's a wide range you know about five percentage points between the high low.
Casey Haire: Like what are some of the factors that gets you to the high end of that range versus the low end.
Speaker Change: So Casey just to be clear, what you said on 922.
Speaker Change: Yes.
Casey Haire: Oh, sorry, whenever you when I'm, sorry, whatever GAAP expenses were in in 'twenty two.
Casey Haire: Basically your guide is based on.
Casey Haire: 23 expenses, which includes the FDIC assessment correct, Yeah, what's all know what's on the slide when it would not include the FDIC insurance special assessment so the.
Casey Haire: With the mid to high double digit you need to take out that special assessment.
Speaker Change: Okay Gotcha.
Speaker Change: Alright, and then and then just what are the you know some of the factors that gets you to the high end versus the low end.
Speaker Change: I think it if we can hit our revenue targets and the way we work.
Speaker Change: We can.
Speaker Change: I think that'll drive our incentive costs up.
Speaker Change: And that will drive our expense base. So I think our if we have.
Speaker Change: A strong year in <unk>.
Speaker Change: Our hiring.
Speaker Change:
Speaker Change: That'll also.
Speaker Change: That will also trend our expenses up our expense guidance does include Jacksonville.
Speaker Change: So we've embedded that as well in there and we've got.
Speaker Change: We've got.
Speaker Change: High aspirations for what we believe.
Speaker Change: The leisure required in that market can accomplish.
Speaker Change: Thank you.
Speaker Change: I think that's it.
Speaker Change: Okay.
Thank you. Your next question is coming from Michael Rose from Raymond James Your line is live.
Michael Rose: Hey, good morning, Thanks for taking my questions just a follow up on BHG in the press release, you mentioned that they exited some businesses can you just discuss what those are and what the.
Michael Rose: The impact was to there you know kind of origination guidance as we think about 2024.
Michael Rose: Yeah.
Michael Rose: They had that bond and I'll tell you later franchise that they were developing.
Michael Rose: Hum.
Michael Rose: Last year, they originated like $50 million.
Michael Rose: Production something like that so that they were winning all of that.
Michael Rose: They've always experimented with this patient lending franchise, I think they've decided to abandon that as well. There's a couple of others that are also on the list that I'm aware of I'm not sure where they are with discussions with the people that work in those units.
Michael Rose: I think they've had discussions with them, but I'm just not sure Michael.
Michael Rose: But that is embedded in that that production got they have for this year.
Speaker Change: Okay. That's helpful. And then just as my follow up back to the margin I think if I'm doing my math right. It implies a pretty steep ramp in NIM progression as we move beyond kind of fourth quarter, even against your expectations for a rate cut just just wanted to kind of put a finer point on just that progression or.
Speaker Change: Earning asset growth, but if you could thanks.
Speaker Change: Yeah, well I think we do see NIM increases this year.
Speaker Change: I don't know what how fast do you have it going up but I think it'll be fairly gradual we might have kind of a down.
Speaker Change: But first quarter is gonna be a challenging home I think after that we ought to see we ought to see NIM progression.
Speaker Change:
That you all ought to be happy with.
Speaker Change: Alright, thanks for taking my questions.
Speaker Change: Thanks Martin.
Speaker Change: Thank you. Your next question is coming from Brendan Carrig from true Securities. Your line is live.
Martin: Hey, good morning, Thanks for taking my questions.
Brendan Carrig: Hi, Brian.
Brendan Carrig: So I notice, Hey, hey, so I noticed that the spot rate for deposits was lower at the end of the year compared to the average for the quarter. So is it fair to say that deposit costs have already peaked.
Speaker Change: Well I think until we get a rate cut formerly there will be some deposit creep, but it won't be nearly at the pace. We saw in all of 2022.
Speaker Change: Okay, Okay, and then on the mix side of things how are you thinking about how the mix shift will trend this year.
Speaker Change: And how does that kind of flow into your assumptions on deposit costs.
Speaker Change: Yeah, that's a great question as far as the mix shift out of BDA into higher yielding deposit products.
Speaker Change: We still plan to see some more of that.
Speaker Change: But again not like we saw earlier in 2023.
But we do believe there will be some more attrition out of.
Speaker Change: Yeah.
Speaker Change: Noninterest bearing into interest bearing products.
Speaker Change: Not at the same pace.
Speaker Change: Thank you. Your next question is coming from Matt Olney from Stephens. Your line is live.
Matt Olney: Hey, Thanks, Good morning, everybody I'm, just wanted to go back and revisit the 24 outlook.
Matt Olney: And what this implies for the year over year P P and Arbroath.
It feels like you're trying to say that there will be modest year over year people you know our growth even with the higher expense guidance, but just looking for any clarification around that.
Speaker Change: Yeah, I think our planning assumption is that we will.
Speaker Change: Hum.
Speaker Change: It will be.
Speaker Change: If you look at what the peers are looking at for next year.
Speaker Change: It's a modest at best kind of year for 'twenty 'twenty four.
Speaker Change: But we fully intend to outperform the peer group.
Speaker Change: They probably won't be consistent with call it.
Speaker Change: Years prior.
Speaker Change: But at the same time, we fully expect to see P. P N R and net earnings.
Accretion in 2024.
Speaker Change: Okay I appreciate the clarification and then just to follow up on <unk>.
Speaker Change: H D. I guess I appreciate the I think the guidance you gave us there it sounds like cost cutting will be a driver of the positive modest positive fee growth there any more cover them moving parts how much how much do you expect the BHG revenues should decline year over year, and then for you to hit that kind of guidance you put out there.
Speaker Change: How much do we need to see expenses decline. Thanks.
Speaker Change: Yeah. They they had a pretty significant decrease in the fourth quarter from the third quarter I don't think they'll have that.
Speaker Change: That much more here.
Speaker Change: Here in the next year.
Speaker Change: But they they will see call. It some reduction in 'twenty 'twenty four expenses in comparison to 2023.
Speaker Change: Are they have a cost cutting exercise in the fourth quarter.
Speaker Change: That'll be the primary contributor to that Ah I think their revenues.
Speaker Change: Should shape up to be.
Speaker Change: <unk>, maybe next year.
Speaker Change: I think they're optimistic with respect to growth there but.
Speaker Change: The whole idea is to rightsize the franchise and then get it more focused on their core products.
Speaker Change: And then get into call it a sustainable growth rate.
Speaker Change: The 24 hotels.
Speaker Change: Okay.
Speaker Change: Thank you. Your next question is coming from Stephen Scouten from Piper Sandler Your line is live.
Stephen Scouten: Yeah. Thanks.
Stephen Scouten: I guess my first question is just around the Jacksonville expansion I may have missed it but it is the belief that this can be a 1 billion to 2 billion in asset bank in that we'd do you also have Louisville noted on the map and I'm wondering if that's just the construct of the map or if that's intentional.
Stephen Scouten: Okay.
Speaker Change: Two things are staying and I think in the case of Louisville, We have started at Novo operation. There I guess, Harold help me three or four quarters ago or something like that so it's an early stage build out using the same model that we have market leadership.
Speaker Change: With a long career.
Speaker Change:
Speaker Change: Wells Fargo, that's leading our effort there.
Speaker Change: In the case of Jacksonville, Yes, we do believe you I think you used the number one to 2 billion are generally our target is a $3 billion by Encana five year period of time.
Speaker Change: As you May know generally or these build out the we are cross breakeven anywhere from four to seven quarters.
Speaker Change: Depending upon how steep or what the trajectory is there, but we're expecting a pretty rapid build out in Jacksonville that would likely resemble what we've done in D. C.
Speaker Change: Okay, Great and then just my follow up is around net charge off expectations. I think it was 16 basis points. This year and you said 'twenty 'twenty four should be consistent with that what's kind of embedded within those expectations in terms of overall economic scenario. I mean are we thinking about a soft landing and if things get worse over all that could be it.
Speaker Change: It could be worse as well or is that just a function of yours book itself and the strength of your internal book.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Go ahead Gerry.
Speaker Change: No go ahead.
Speaker Change: I think I'll say, yes to all of that.
Speaker Change: I think.
Speaker Change: You know before we really start to have some conversations with the special asset people, we have conversations with the credit officers.
Speaker Change: I feel pretty good about where the book sits today.
Speaker Change: I feel pretty good about what borrowers are doing and how they're cooperating with us for those that might be under some some kind of a special considerations. So we don't we don't sense.
Speaker Change: That.
Speaker Change: Nor do we sense that.
Speaker Change: He is presenting huge challenges for Oh the portfolio at large.
Speaker Change: So we think that was really healthy here this time going into 'twenty 'twenty four and we believe also that many of the uncertainties.
Speaker Change: That we're all around this time last year are not nearly as uncertain. Appreciate that we could have a recession that could be a soft landing them and I believe our assertion as to where we think charge offs being 2024.
Speaker Change: He is under Carnival salt landing those recession kind of scenario.
Speaker Change: Who knows what happens if we get into a hard landing, but anyway I would say, yes to all of the items that you talked about stable.
Speaker Change: David I don't know, if it's additive and yeah I think our assumption is that where we are most likely to have a soft landing, perhaps a modest recession in and given the health and strength and current performance of the portfolio, but a guy that's all to hold up.
Speaker Change: The hurdles, but once you have a great recession I don't think you ought to assume we're going to have 16 basis points of net charge offs.
Speaker Change: Thank you. Your next question is coming from Catherine Mealor from K B W. Your line is live.
Catherine Mealor: Thanks, Good morning.
Catherine Mealor: Okay. Okay.
Catherine Mealor: A follow up on D C and just thinking about how to model the revenue for ph D and next year you know we.
Catherine Mealor: If you look back at the size of the balance sheet and everybody has it stayed on therapy, you see that gorilla like throughout 2020, and 22 are kind of shifting from the gain on sale strategy more on balance sheet and of course that all this year and the balance sheet was basically flat in 'twenty three just given the rate environment.
Catherine Mealor: Do you think about how that works I think Mr. 24, just as we kind of think about how much of origination stay on balance sheet versus down Mexico out in Canada.
Catherine Mealor: Okay.
Speaker Change: Good morning.
Speaker Change: Or move off balance sheet in a private sale.
Speaker Change: <unk>.
Speaker Change: Yeah, I think they what's going to happen. This year is I believe based on conversations I've had with her CFO.
Speaker Change: You should see more headed into the bank network. This.
Speaker Change: This year than last year, I think it was fairly close to an even split in 2023, I think they'll they'll try to lean into the bank network a little more this year than last I think still our planning one or two.
Speaker Change: A b S issuances.
Speaker Change: Here in 2024.
Speaker Change: They were able to get one accomplished in the fourth quarter, which we think was great news for them.
Speaker Change: But.
Speaker Change: Yeah, I think I think they will they will use the bank network with a little more intensity in 2024.
Speaker Change: Yeah.
Speaker Change: Okay great.
Speaker Change: And then on just the big picture kind of.
Speaker Change: 24 outlook I'm, just thinking that E. P. S cracking and now you've kind of answered this in different ways, but I mean.
Speaker Change: Your your target first phone.
Speaker Change: Question. One is what is the incentive comp and 24 versus 23 I think it started out the year at 125 last year I'm curious what that looks like for this year.
Speaker Change: Being a full pay out and then maybe within that I'm, assuming that even with a full payout that is assuming you're going to corral EPS year over year kind of off of that.
Speaker Change: Call. It a seven dollar number in 2023.
Speaker Change: So.
Speaker Change: Again, just wanted to reiterate.
Speaker Change: There isn't a scenario where you can have that kind of mid capitalization expense credit PE.
Speaker Change: Anne has declining.
Speaker Change: Decline in EPS or has.
Mid single digit revenue growth and just wanted to kind of clarify how you were thinking about how best to pair together and ultimately what you think is an appropriate EPS growth rate to having 24 kick out of Poland.
Speaker Change: Yeah, as we put together kind of the earnings number and we have tried.
Speaker Change: To do this in the past, but I think there's probably beneficial to do that we're talking low to mid single digit kind of earnings growth for this year.
Speaker Change:
Speaker Change: And so with that what we have to do is build a plan that that will get our associates are.
Speaker Change: Their incentive we're starting with.
Speaker Change: Call it 120% of target.
Speaker Change: And then will tear it upward.
Speaker Change: Upwards to where we think our earnings number needs to be for the year.
Speaker Change:
Speaker Change: And it'll go all the way down to zero.
Speaker Change:
Speaker Change: As far as payout.
Speaker Change:
Speaker Change: Last year, you were you're right. We started at 125, we ended at 62, so basically.
Speaker Change: From what our associates, we're looking at.
Speaker Change: At the beginning of last year to work with.
Speaker Change: Got it basically in half.
Speaker Change:
Speaker Change: For this for 'twenty 'twenty four we're starting with like a call it a 120% pay out.
Speaker Change: And.
Speaker Change: That number is somewhere in the $100 million range.
Speaker Change: If we can afford it.
Speaker Change: The but you're right the earnings have to show up.
And if they don't show up at $100 million gets.
Speaker Change:
Speaker Change: Yeah.
Speaker Change: You know begins to get less.
Speaker Change: Fairly quickly.
Speaker Change: Hi, Catherine I might jump in and add to Harold's comments and I know you know this but I get questions over time, which make me believe some people don't understand this.
Speaker Change: But that earnings target that gets set there we've never said it to be less in the top quartile as you know this year top quartile is not all that high but again, we are projecting earnings growth here.
Speaker Change: It will be top quartile and that earnings growth that we're projecting contemplates the full payout of the annual cash incentive plan.
Speaker Change: And in the event that aren't that the revenues don't materialize to produce the earnings at the targeted level. The why are you paying for that as you trim the incentive expense and so again I think I know there are a lot of companies that have all kinds of incentive plans, where if they make some then they pay out all this other stuff.
Speaker Change: That's not the way it worked for US the incentive is built into the earnings projection when the earnings show up we pay it out in the event they don't.
Speaker Change: We retrieve that or harvest that to fuel earnings to the shareholders. So I don't know if that's a helpful explanation or not but.
Speaker Change: No it isn't it certainly what we found in past year and it just kept in a year, where the rest of it to your point peers in general are forecasting a decline in EPS year over year and top quartile.
Speaker Change: It may look really good but if you maybe have top quartile debt you still may be kind of flat EPS growth I was just trying to kind of think about how youre thinking about EPS grass.
Speaker Change: And marry that with a full pay out to make sure we're thinking about it and you can't turn it appropriately.
Speaker Change: Yeah, I think Harold gave it to you didn't he.
Speaker Change: If you didn't get.
Speaker Change: Okay helpful. Thank you.
Speaker Change: I've got Suckered.
Speaker Change: [laughter].
Speaker Change: Yeah.
Speaker Change: Your next question is coming from Brody Preston from UBS. Your line is live.
Brody Preston: Hey, good morning, everyone.
Brody Preston: I broke Harold.
Brody Preston: I'm, sorry to beat a dead horse on expenses I, just wanted to put a pretty fine point on it so.
Brody Preston: Excluding the FDIC surcharge, you're at $858 8 million of expenses for the year you know if I look at the if I look at the guidance Slide you know I I take kind of mid to high teens to imply 14, and 19% kind of range. So that the midpoint of that would imply a billion dollar number off of your <unk> 58.8.
Speaker Change: Versus the 960 to 985, you gave which is about 972 and a half. So it's about a 3% difference there and I was just wondering what's driving the delta between what you said on the call versus what's implied in that in the deck last night.
Speaker Change: Yeah.
Speaker Change: I think Barry that's a great question I think our numbers more like 13 to 18 burst.
Speaker Change: So we call that mid to high.
Speaker Change:
Speaker Change: I think the delta is around 120% pay out versus a 100% payout.
Speaker Change: And some other things that I'm aware of in our plan, where I think we have some cushion.
Speaker Change: So.
Speaker Change: That's what got me Tonight, the 962 985 number I talked about earlier.
Speaker Change: Got it that's very helpful color I appreciate it and then I did just wanted to ask on an NII a couple of questions. In one here. Harold can you you said in May I think for the first cut are you know first part of the question is could you clarify are within your within your NII guidance when the other three cuts.
Speaker Change: You have occurring are and then secondly, just when I look at the loan growth guidance are you now and compare it on an average basis it implies about 11.
Speaker Change: 11, plus percent average loan growth and so I guess I'm.
Speaker Change: I'm wondering you know is there is there the opportunity where you know you guys could kind of outperformed even the high end of the guidance.
Speaker Change: Range that you'd given just just given the you know low double digit average loan growth, you're expecting combined with pretty significant fixed rate repricing throughout the year.
Speaker Change: Yeah, I think on first of all on the rate cuts.
Speaker Change: And.
Speaker Change: Don't hold me to this but I had that question for some people here yesterday I think it was I think we've got embedded July September and November.
Speaker Change:
Speaker Change: Don't hold me to that I think those are kind of split in the dark plot.
Speaker Change: But.
Speaker Change: Anyway, I'll go with that it's just a steady decrease.
Speaker Change: I think along with that you should assume a high beta on our deposits.
Speaker Change: Costs are we at a high beta going up we think we will have a high beta going down. So we will try to recoup as much of those rate decreases as we can from our deposit book.
Speaker Change: I've tried to get as close to 100 per cent as we can.
Speaker Change: As far as loan growth and I'll, let Terry also talk to this as well.
Terry Turner: I think that the guard rails, we have own loans are related to capital and related to that.
Terry Turner: Client deposit growth.
Terry Turner: We can't let loans.
Terry Turner: Loans, just outgrow deposits.
Terry Turner: And it and in the fourth quarter, we were like 700 million to 200 million something like that.
Terry Turner: Oh, we need to push deposit growth up.
Terry Turner: At the same time, we've been steadily are creating capital over the last year or two.
Terry Turner: We think that's healthy we think that we will continue to do that but we can absolutely baked the loan growth target that we in the in the on the outlook slot.
Speaker Change: Got it can I ask just one quick follow up I just wanted to follow up on Brandon's question that he had on the spot rate on interest bearing deposits being below the average for the quarter. So if we don't see any I know you said to expect further creep, but I'm just trying to think mathematically if you guys aren't.
Terry Turner: Brazing.
Terry Turner: Rates at this point what drives the average up.
Terry Turner: The spot rate is below.
Terry Turner: You know where it was for the fourth quarter.
Speaker Change: Yeah, I think the what could contribute to increase deposit rates there just did what channels.
Speaker Change: New clients trying to move money across the street from somebody else.
Speaker Change:
Speaker Change: I think that would be one of the primary contributors. Additionally.
Speaker Change: Our mix shift could occur primarily around our public fund deposits are.
Speaker Change: We think the.
Speaker Change: We believe the bulk of our public fund deposits have already built their balances up but we could see some increase in their balances.
Speaker Change: Most of those accounts are indexed.
Speaker Change: And so consequently, as they collect property taxes and whatnot that money finds its way to our body.
Speaker Change: Yeah.
Speaker Change: Thank you. Your next question is coming from Brian Martin from Janney Montgomery Your line is live.
Brian Martin: Hey, good morning, guys.
Brian Martin: Hey, Brian.
Brian Martin: Couple of easy thing Terry just the hiring outlook I think last quarter, you talked about it maybe being a little bit better in 'twenty. Four 'twenty three is that still your expectation or just kind of especially with Jacksonville, how you're thinking about hiring and 24.
Brian Martin: I think you know we had a little bit of a reduction in the hiring pace in 2023 from 'twenty to 'twenty, two I think we're likely to migrate bag.
Brian Martin: Somewhere closer to the 2022 level of hiring and to your point Jacksonville will be a big contributor to that hiring.
Speaker Change: Gotcha, Okay, and I think you guys talked to in the five slides about deposit initiatives. You know just to your last point Harold about getting the deposit growth you need to pay the loan growth are there any new initiatives you have in place or is just the ones you've talked about in the past.
Harold R. Carpenter: Yeah, it's the ones, we're talking about that Terry why don't you take the rest of it.
Terry Turner: I would say that you know.
Terry Turner: Our name right or talked about four in the past.
Terry Turner: We introduced three more.
Terry Turner: Towards the tail of 2023, and my expectation is we'll probably introduce two or three more over the course of 'twenty 'twenty four I think the three additional specialties are probably the one that holds the most.
Terry Turner: <unk> opportunity for US is focused on all manner of escrow accounts, whether it be a.
Terry Turner: 10, 31 exchanges mortgage S grows you know our attorney firms all of those kinds of things, but we believe that we have a an advantaged.
Terry Turner: Software capability for people that are running.
Terry Turner: Ancient Oh escrow money, we think we've got some advantage software that's helpful. There and look for that to be the biggest of these most recent three product specialties that we've introduced and so I think what's important about it Brian is two things one the size of the market.
Terry Turner: These huge we have an advantage brought up which I'd, let us penetrate it well, but the second thing. That's really important is most of that money is either no cost or low cost money and so that's a powerful specials that we have.
Speaker Change: Gotcha, Okay. That's helpful and just the last one for me guys was just held back on the margin. It sounds like first quarter is flattish or stable and then up from there the biggest drivers of that.
Speaker Change: Cadence of increase throughout the year as it is it outside of the fixed rate repricing is there something else in there you know I guess, that's the key driver is that it I know you're getting liquidity dropped a little bit this quarter. So just trying to understand the you know that.
Speaker Change: The benefits there going forward.
Speaker Change: Yeah, we do have.
Speaker Change: So.
Liquidity shrinkage over the course of the year that will be a contributor to the margin primarily not necessarily net interest income.
Speaker Change: But with different tend to be very aggressive on.
Speaker Change: Reducing our deposit costs.
Speaker Change: I think we we determined that based on what happened there in the liquidity crisis last year that.
Speaker Change: And our ability and the fact that we've raised rates so aggressively.
Speaker Change: That we've got the ability to lower and I believe a lot of the large gas we're talking about that they're still trying to catch up on deposit rates, we think we're pretty much already there. So.
Speaker Change: Gotcha.
Speaker Change: We fully intend to take advantage of rate cuts.
Speaker Change: On our deposit book.
Speaker Change: Okay perfect. That's all for me guys. Thank you.
Speaker Change: Thanks, Brian Thanks Brennan.
Speaker Change: Okay.
Speaker Change: Thank you that completes our Q&A session everyone. This concludes today's event you may disconnect at this time and have a wonderful day.
Speaker Change #100: You for your participation.
Speaker Change #100: Oh.