Q4 2024 Pinnacle Financial Partners Inc Earnings Call
Speaker Change: Thank you for holding. We look forward to talking with you soon. Please hold the line and we'll be right back with you.
Speaker Change: Good morning everyone and welcome to the Pinnacle Financial Partners fourth quarter 2024 earnings conference 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: At this time, all participants have been placed in a listen-only mode. The floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star 1 on your touchtone phone.
Speaker Change: Analysts will be given preference during the Q&A. We ask that you please pick up your handset to allow optimal sound quality. During this presentation, we may make comments which may constitute forward-looking statements.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: A more detailed description of these and other risks is contained in Pinnacle Financial's annual report on Form 10-K for the year ended December 31, 2023.
Speaker Change: In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G.
Speaker Change: With that, I am now going to turn the presentation over to Mr. Terry Turner, Pinnacles President and CEO.
Terry Turner: Thank you, Paul. Good morning. We'll begin where we always do, the Shareholder Value Dashboard, on a gap basis first.
Terry Turner: And the balance sheet has to grow reliably. Between 70% and 80% of our earnings will always be derived from the margin on our balance sheet volumes.
Terry Turner: Obviously, the things that we can and do work on to protect and enhance our margin percentage, but in the end, without sustainable loan and deposit growth, it'll be difficult to reliably grow revenue, EPS, and tangible book value. The only three metrics I'm familiar with to deliver elevated shareholder returns.
Terry Turner: And so in this firm, we measure an immense number of performance variables, variables like net promoter scores, associate retention rates, deposit cost betas, loan yield betas, net interest margin percentages, efficiency ratios, ROAs, and the like.
Speaker Change: But as far as I know, none of those financial metrics are very highly correlated with share price performance.
Speaker Change: And so that's why I work so hard to not be distracted by all kinds of interesting but extraneous measures. And at least as it relates to PNFP, why I try to keep investors from being distracted by them either.
Speaker Change: The goal here is to crystallize for you our performance on those specific measures that I believe truly result in elevated total shareholder returns.
Speaker Change: Fourth quarter was a whale of a quarter for us, in my opinion. Adjusted revenue growth was strong, adjusted fully diluted EPS growth was strong, and tangible book value per share growth was strong, all with double-digit five-year CAGRs.
Speaker Change: Harold is going to review in detail the quarterly financials in just a minute, including betas and efficiency ratios and so forth. He'll provide our 2025 outlook, which calls for double-digit revenue growth, but my objective here is to help investors focus on how we deliver.
Speaker Change: How we're executing on our hedgehog strategy, which is our simple, repeatable formula for delivering on those variables that we believe result in outsized shareholder returns.
It all begins with attracting talent.
Speaker Change: We target the best revenue producers in our markets, those that have large and loyal client followings.
Speaker Change: I believe this is likely Pinnacle's greatest core confidence. This has been our primary confidence for nearly 25 years now, but we set a new record in 2024 for the number of highly experienced revenue producers we were able to attract.
Speaker Change: Not only is this at the core of our strategy to grow revenue, EPS, and tangible book value per share in general, but the fact that we set a new record for hiring revenue producers in 2024 is primarily what fuels our optimism for 2025.
Speaker Change: Everyone, including me, is hoping for a better operating environment for banks in 2025. But as you can see here, with this kind of long-standing and ongoing market share moving momentum, we have a lot more than just hope to rely on.
Speaker Change: As an example, new specialties like franchise lending and equipment lending, to name a couple, along with market extensions to large, high-growth markets like D.C. and Jacksonville, Florida, and so forth.
Speaker Change: And of course, we continue to leverage our reputation as a great place to work in order to successfully recruit and hire in our legacy markets.
Speaker Change: But the combination of revenue producers that we hired over the last three years in both our strategic initiatives and in our legacy markets accounted for more than 100% of our loan growth for 2024.
Speaker Change: So you can see the power of our continuous recruitment of revenue producers, again, given that we set a record for revenue producer hires in 2024 and are targeting similar results for 2025, it's easy to understand our cause for optimism regarding ongoing growth in 2025.
and beyond.
Speaker Change: But in the final analysis, going back to the shareholder value dashboard, the end game has to be growth in revenue, growth in EPS, and growth in tangible book value per share. So look at this. This is our ongoing track record for delivering net interest income, far and away the largest component of our revenue in EPS.
Speaker Change: Our 10-year CAGR for net interest income is a peer-leading 12.7%.
Speaker Change: The number of times in the last 40 quarters that we've been able to deliver year-over-year growth and net interest income is a peer-leading one quarter.
Speaker Change: Only one quarter in the last 40 did we fail to grow net income year over year.
Speaker Change: That compares to a peer median of 11 failures out of the 40 quarters to grow net interest income on a year-over-year basis, a peer average of 11.
Speaker Change: And so, we've produced positive net interest income growth during each of the three up or down rate cycles since quarter three of 2015.
Speaker Change: So that's how we deliver outsized total shareholder returns year in and year out. We focus on revenue growth.
Speaker Change: Fully diluted EPS growth and tangible book value for share growth.
Speaker Change: It all begins with our unique ability to attract revenue producers with large and loyal client followings.
Speaker Change: which produced reliable and outsized balance sheet growth that yields strong and reliable net interest income growth quarter in and quarter out. So with that as a backdrop, Harold, why don't you walk us through the fourth quarter in greater detail and how that sets us up for further growth in 2025.
Harold Carpenter: Thanks, Terry. Good morning, everybody. We will start with loans. End of period loans increased by 13.7% late quarter annualized. This is better than we thought at the beginning of the quarter and provides us a strong running start going into 2025.
Harold Carpenter: We're introducing our loan growth expectations for 2025 with a range of 8% to 11% end-of-period growth.
Harold Carpenter: It remains an uncertain environment as to race, but with the yield curve trending more positive and the election now decided, our belief is that we enter 2025 with even more optimism than we've had in several years and that our clients are gaining more confidence about growth.
Harold Carpenter: As to our end-of-period rates, SOFR and PRIME rates are reflected by the Fed decreases. But as you know, one of the keys to our financial plan all year long has been increasing pricing on the renewal of fixed-rate credit.
As the top right slide indicates, we're expecting slightly...
Harold Carpenter: Less than $1 billion in cash flows from our fixed rate loan portfolio coming to us in the first quarter of 2025 with an average yield of around 5.06.
Harold Carpenter: We believe the yield left on these volumes of nearly 150 to 200 basis points is a reasonable assumption and is a key component to our near-term net interest growth.
Harold Carpenter: Deposit growth was again a real bright spot for us in the fourth quarter as we increased deposits by $1.9 billion in the fourth quarter, one of the strongest growth quarters we've ever experienced.
Harold Carpenter: There was some seasonality in our fourth quarter growth, but as Terry mentioned, also contributing to the outsized growth were our investments and deposit verticals, as well as the work of our new associates in several of our newer markets.
Harold Carpenter: As of 2025, we're introducing a growth rate for total deposits of 7-10% for 2025 over 2024. We believe this is reasonable as we balance wallet deposit growth with a keen eye on pricing.
Harold Carpenter: We are very pleased with how deposit pricing has performed over the last few months as our relationship managers have been diligent in making sure that we're able to reprice our deposits as quickly as we can to offset the impact of a lower rate environment to our earning assets.
So far, our deposit beta has outperformed our loan beta.
Harold Carpenter: The chart on the top right of the slide shows that during the uprate cycle from the end of 2021 to the end of June 2024, our loan rates increased with a 59% beta, while over the last six months or so, as rates have come down, our loan rates have decreased with a 45% beta.
Harold Carpenter: Our fixed rate loans have a negative beta, which obviously helps slow the pace of these loan rate decreases. This is where the yield curve is critical. If it steepens, those fixed rate renewals become even more helpful. That said, what I believe most are interested in is deposit pricing.
Harold Carpenter: We are on pace at present to match our upgrade deposit data as we are pacing at around 58% so far. We believe we can continue to manage our deposit rates down over the next several months, even if we have not experienced any near-term rate decreases.
Harold Carpenter: We will continue to pursue reduced rates on accounts where we believe rates are out of market and look to improve our deposit mix given our liquidity posture which we believe is very strong at present.
Harold Carpenter: As expected, we're pleased that our NIM held at 3.22%. Our outlook for the first quarter of 2025 is that we believe our NIM and national income will be flattest after we consider the impact of fewer calendar days in the first quarter of 2025.
Harold Carpenter: As of 2025, we believe our net interest income growth will approximate a range of 11% to 13%.
Harold Carpenter: The Yule Curve will have significant influence on how all that plays out in 2025, but so far, call us optimistic about our prospects.
So what if there's more rape guts?
Harold Carpenter: We think that's probably good for our NIL and our net interest income results.
Harold Carpenter: With the national elections now determined and assuming the macro environment can maintain a more traditional yield curve, and commercial clients come back with increased energy to grow, we believe all point to a better operating environment for a bank like ours.
Harold Carpenter: For 2025, the current view of our loan portfolio is that net charge-offs for 2025 should come in between 16 and 20 basis points. That's based on recent scrubs of our non-performance classified and weaker consumer credits by all of our credit teams.
Harold Carpenter: All in, no real change in how we feel about credit as we head into the first quarter of 2025.
Harold Carpenter: Now to fees, which has been a real bright spot in 2024 with adjusted fees up 15% year-over-year. Excluding the impact of BHG, fee revenues were basically flat quarter-over-quarter. Our wealth management units have had a strong year and fully expect the efforts of our wealth management professionals will have a strong year in 2025.
Harold Carpenter: The fees associated with our other core banking activities are also strong as we head into the new year.
Harold Carpenter: As to our outlook for 2025, including VHG, we believe a reasonable feed growth guide for our farm is around 8-10% this year.
Harold Carpenter: Expensive came in slightly more than where we thought, primarily due to incentive costs. Given we are reporting stronger earnings here in the fourth quarter, this impacted our incentive plans. As to the math, we increased our incentive accrual by about $3 million in the fourth quarter to get to an approximate 98% of target award.
Harold Carpenter: We had anticipated a 90% target award last quarter. With our fourth quarter fully diluted EPS coming in better than anticipated, by about six to seven cents, the tiering structure of our plan required us to allocate more to the incentive accrual.
Harold Carpenter: Additionally our hiring was again robust in the fourth quarter with 35 new revenue producers for a total of 161 added for the full year. Going in the first quarter our recruiting pipeline continues to be strong across the franchise.
Harold Carpenter: We are introducing our 2025 Expense Guide at a low of $1.13 billion to a high of $1.15 billion.
Harold Carpenter: Our incentives will always influence our ultimate expense result. We are anticipating a target payout currently in 2025.
Harold Carpenter: So, as usual, if we are not achieving our plan, then our incentive costs, as noted, will be lower. If we are overachieving our plan, then our expense burden will need to be more, but so will EPS.
Harold Carpenter: Assuming hiring is consistent throughout 2025, and given we are awarding an almost 4% merit raise to our current associate base, our quarterly run rate for expenses should run fairly consistent with our expense run rates from 2024.
Now to BHG.
Harold Carpenter: As the slide indicates, originations picked up again in the fourth quarter with originations at 1.16 billion, more than anticipated from last quarter. As to placements, total placements were less than originations, which was consistent with the previous two quarters.
Harold Carpenter: BHC continues to build inventory in order to execute another ABS transaction either during the latter part of the first quarter of 2025 or in the early part of the second quarter.
Harold Carpenter: There remains great demand for VHG paper both on the Community Bank Network and Wall Street.
Harold Carpenter: As to production, we need to emphasize BHG has not expanded its credit box at all. It began restricting its credit appetite in late 22 and early 23 and has not adjusted its credit box for consumer or commercial credit since that time.
As the recent production growth increases,
Harold Carpenter: They have continued to refine their marketing platform to better target potential borrowers and expanded their footprint with business relationships with other FinTech financial firms that supply VHG with better lead generation, which produces more borrowers than meet VHG's credit standards.
Harold Carpenter: Strategically, BHG has a strong belief that the future of consumer lending will be through the digital channel like theirs, and they are working hard to be the firm to capitalize on a growing digital channel.
That's the spread.
Harold Carpenter: With the lower short end of the curve, auction platform spreads increased to 9.7% in the fourth quarter. Concurrently, balance sheet loan spreads increased to 10.2%.
Harold Carpenter: All NPHE leaf spreads are improving as we have transitioned from a higher rate environment to lower rates on the short end of the curve.
Harold Carpenter: It should be noted that BHG began executing ABS platforms in 2020 and have issued 10 transactions over the last few years, and as they did in the fourth quarter, have transacted numerous one-off deals with institutional firms along the way.
Harold Carpenter: There has been a this has been a highly successful strategy as Wall Street keeps coming back for more We believe the Wall Street firms that have acquired VHG paper are sophisticated buyers of financial paper What VHG has been able to accomplish
Harold Carpenter: Over the last few years has been remarkable, and what we believe is as important is that BHG has also broadened their brand up and down Wall Street exponentially.
Now to credit.
Harold Carpenter: Of note is that prepayment losses increased to 1.7% in the fourth quarter. Prepayment losses are not credit related. These losses are to reimburse the purchasing banks for the premiums they paid on loans acquired from VHG.
Harold Carpenter: Pre-payment losses will likely increase modestly in 2025, as with lower rates, pre-payments are likely to increase, especially as more consumer credit is issued.
Harold Carpenter: On balance sheet loan losses decreased slightly to 7.3% in the fourth quarter, while the CECL reserve increased to 9.3%, essentially the same percentage as of the end of last year.
Harold Carpenter: The good news is that past dues for both consumer and commercial are trending in the right direction.
Harold Carpenter: which hopefully is a sign of better credit experience in the not-too-distant future. Where to from here? Our belief is that similar off-balance sheet loss percentages will likely continue for the next few quarters, while on-balance sheet percentages should continue to improve.
Harold Carpenter: Our concluding thoughts on BHT have not changed. BHT management is focused on building a sustainable franchise with an even stronger balance sheet. We enter 2025 with a reasonable growth prospect at 10% from their 2024 effort.
Harold Carpenter: Lastly, we believe BSU remains one of the most unique, profitable, and dynamic FinTech models in the country, and with an even stronger balance sheet, BSU should be an even stronger competitor in the FinTech space in the future.
Harold Carpenter: Lastly, ask our guide for 2025. We talked about much of the information on this slide previously.
Harold Carpenter: The investments we've made in our new markets and our hiring success are the building blocks we will lean into as we attempt to deliver a top quartile result amongst our peers, which this guide should point toward.
So, a question we...
Harold Carpenter: sometimes get is do we believe we will generate positive operating leverage in 2025?
Terry Turner: Maybe, possibly, but as Terry alluded to at the start of the call, that will not be what we're focused on.
Speaker Change: Expense cutting works fine for a lot of firms, but we certainly don't believe now is the time for that, especially for us.
Speaker Change: Our DNA is about growing revenues and hiring people that know how to do just that.
Terry Turner: We target top quartile performance for growing EPS and in order to grow capital to support that growth We target increasing tangible book value per share and as Terry emphasized earlier all with a stellar credit backdrop
Terry Turner: That is what we believe it takes to win as we grow this firm, carefully managing investments in people and places currently, all the while planning for strong results in both the near term and long term.
Terry Turner: There have been some remarkable micro-events over the last 45 years.
Terry Turner: No doubt there will be more, but as it stood today, we have no reason not to be optimistic as we enter 2025.
Terry Turner: As I mentioned earlier, if the yield curve continues to trend more favorable and our owner-manager clients continue to gain more confidence and start borrowing again for growth, I'm confident 2025 should be a strong year for Penta.
Terry Turner: The best may yet truly be truly by come. With that, I will send it back to Paul for Q&A.
Paul: Thank you Mr. Turner. The floor is now open for questions. If you would like to ask a question at this time, please press star 1 on your touchtone phone. Analysts will be given preference during the Q&A. Again, we do ask that when you ask your question, you pick up your handset to provide optimum sound quality.
Speaker Change: And the first question today is coming from Ben Gerlinger from Citi. Ben, your line is live.
Hey, good morning, guys.
Good morning, my friend.
Speaker Change: I just want to touch base on expenses a little bit. I know that a large contributing factor is going to be the success of both hires and funding of their loan book.
Harold Carpenter: But what do you think about just kind of the new ones between the high end and the low end? Isn't it largely just that? Are there any flex you might have, Harold, to pull levers or potentially do something outside just the personal related cost?
Harold Carpenter: engagement and those kind of things, but those are all in the personnel line. Outside of that, I'm not really sure with non-personnel costs if it's not already pretty much done. We could delay probably any build-out on branches.
Harold Carpenter: those kind of things, but as it is today, I don't know if there would be a material thing we could do with non-personnel costs.
Harold Carpenter: But where we do have a lot of variability in our expense base, like you know, is around that incentive accrual, as well as, you know, we have in the past delayed hiring.
Harold Carpenter: and adjusted kind of our focus on where we want to grow the firm from a headcount perspective. Those sort of things.
Speaker Change: Gotcha. Well, don't delay any hiring. If people are upset on the expenses, they can deal with it from the franchise value. When you think...
Speaker Change: I don't know, just the cadence of margin or NII throughout the year, I mean, repricing on the funding side has been pretty solid. Do you think that there's a little bit of a back book still left to go there that could drive it for the second half of the year, or is it really just kind of getting...
Speaker Change: kind of fixed asset repricing on the left-hand side higher that drives the kind of the latter three and four Q this year.
Speaker Change: Well, I think there's two things on the funding side that we can work on. First of all, we do have some outsized...
Pricing on some deposits, and we're working on that currently.
Speaker Change: to try to bring those accounts back in line with the rest of the group.
Speaker Change: Also, I think we're going to have a significant push on growing operating accounts this year, whether they be commercial or consumer, and attempt to increase our percentage back to, as far as DDA percentage, back to what we had pre-COVID.
Speaker Change: Hey Ben, I might add to Harold's comments there. I think in his comment about lowering high deposit rates
Speaker Change: We believe we've got some room there that's not really tied to the Fed movement. So, you know, again, we'll work hard on the beta as the Fed moves, but we'll drive some of those costs down irrespective of whether there's a Fed move.
Speaker Change: Yeah, so yeah, I appreciate that. I just wanted to double check, you can drive lower in the next six months or is this kind of looking over the next 12 plus?
Speaker Change: I think this is a current initiative we've got going on and we're looking at all kinds of data and trying to point the troops in the right direction there so it's a current event.
Speaker Change: We had a belief here over the last month or so that a near-term fed rate decrease was not going to be...
But, you know what's up.
Speaker Change: as what we would say is we didn't think it was likely to happen and so consequently we got to figure a way to get some more cost out of that funding book and so we started working on it then.
Okay, sounds good. I appreciate you guys.
Speaker Change: Thank you. The next question will be from Jared Shaw from Barclays. Jared, your line is live.
Hey, good morning, guys.
Good morning.
Speaker Change: Sticking with the variable expense, you said you're targeting a full payout for the incentive comp. What does that assume for NII in revenues? Is that assuming the higher end of the range or even beyond the range?
Speaker Change: What does the revenue picture look like, too? Yeah, that's a great question. As far as the target payout, I think if you were to assume a midpoint in there, you're going to be really close.
So, I don't know if that answers your question, but...
Speaker Change: Yeah, that's OK, that's good color and I'm just looking, you know, you look at the slide that Terry pointed out earlier, just with the 10 year trend in NII.
come in higher than the range.
Speaker Change: It feels like you're talking about some good trends and continued growth, continued hiring, the benefit of potentially being able to reprice some of those deposits. What would have to happen to come in higher than the range?
Speaker Change: Yeah, I think, well, obviously, if we're at the higher end on the loan growth number, I think we can do that. Also, if our pricing and our margin assumption holds for this year, I think we can do that as well.
Speaker Change: We feel as confident as I think we ever have on our Net Interest Income Guide.
Um...
Speaker Change: This will be and we've got some more work we can do with some other the bond book and stuff like that that we can work on as it presents itself but as it sits today as we look at 2025 and our revenue picture we feel pretty strongly that it'll be a solid year for this firm.
Speaker Change: I might just add to Harold's comments, as you're looking for what would create upside. I think the principal thing that would create upside is to the extent the economy heats up and loan demand outpaces what we've...
Speaker Change: plan for. Again, you know most of our growth and as we, as I talked at the beginning, essentially all our loan growth came from new revenue producer hires, which is just another way of saying it's all market share movement.
Speaker Change: And so, to the extent you really get a pickup in economic loan demand, I think that's your opportunity for upside.
Speaker Change: Okay. Alright, that's a good call. Thanks. And just finally for me, maybe...
Speaker Change: Any updated strategic expectations for BHG as we look at them continuing to grow the reserve for the off-balance sheet loans, does that continue to sort of be the biggest...
Speaker Change: So that somebody may not be able to criticize it quite as strongly. I'll say it like that. The other thing they're working on is this production platform.
Okay, thanks a lot.
Speaker Change: Thank you. The next question will be from Michael Rose from Raymond James. Michael, your line is live.
Good morning, guys. Thanks for taking my questions.
Speaker Change: Just as it relates to slide 21, which I thought was really interesting.
Speaker Change: Can you just help us frame that, and just given what you're expecting to bring on in terms of hires, which I think you said would be similar this year as opposed to last year, could we expect those kind of...
Speaker Change: capacity numbers to actually, you know, continue to grow from here so that, you know, as we move into 2027, those numbers would move higher. Just trying to get a better sense of how we should, you know, kind of use and kind of think about this slide. Thanks, guys.
Speaker Change: Let's see, Michael, if I understand, you're interested in what's the likelihood that we outpace our revenue for our revenue hiring.
Speaker Change: Well, just as it relates to slide 21, you give the $5.9 billion and the $5.6 billion in loans. But I assume that's based on what you have in terms of lenders today, but you are going to continue to hire, right? So is it a fair assumption that those numbers would move higher over time as you hire lenders or RMs?
Speaker Change: There is likelihood of that for sure. I think, again, what
Speaker Change: Michael, you've followed us a long time. Here's the way it generally works. You hire revenue producers. They generally consolidate their books over a five-year period of time. It more or less comes in on a straight line basis.
Speaker Change: And so, you know, the first year as you're hiring people, you don't get 12 months' worth of revenue, growth, and so forth.
Speaker Change: The timing, the pace, all those things provide an opportunity for us to outrun this number. But, again, you've got to drive a stake in the ground and say, hey, let's just get it on a...
Speaker Change: sort of steady state here. What do we think we're going to do? And as you know, we're generally pretty opportunistic as we hire people. And when we find opportunities, we wait in and get them hired. So to the extent we outrun those numbers, it'll produce more.
Speaker Change: balance sheet growth, both in the current period and in the future periods.
Speaker Change: Yeah, I think what I was just trying to drive at is that it does seem like you guys can
Speaker Change: can run at these levels or even higher over the next couple of years in terms of growth, at least in dollars.
Terry Turner: That's I believe that's true Michael to hire. Yes. Okay, perfect And then maybe Terry just given that the change in the administration and what we have so far which you know Maybe not a lot but a lot of expectations
Speaker Change: You know out there. Does it change your kind of worldview on M&A? I mean you guys do have a really nice, you know currency. I know you guys are growing Organically, but is there any change in thought as relates to M&A potential as we move forward? Thanks
Speaker Change: Yeah, I don't think so. Honestly, you know, when we can hire at the pace we hire, when we can...
Speaker Change: We like where we are. Again, I just go back to, you know, over a decade here we've thrown up pretty extraordinary net interest income growth using this model and so I'm inclined to stick with it and
Speaker Change: Again, I don't rule it out. You're correct. Our currency is strong, and if there were something that were unusually attractive, perhaps we could be lured into that. But fundamentally, we're going to run straight ahead, running this same bottle we've been running for a long time.
Perfect, thanks for taking my questions [inaudible]
Speaker Change: Thank you. The next question will be from Catherine Mailer from KBW. Catherine, your line is live.
Thanks. Good morning.
Hey, good morning.
Speaker Change: I wanted to ask about the fee growth guide of eight to ten percent. We've seen a higher level of fee growth in 2024 and so just curious if there's just conservatism in that eight to ten percent range or if there's just why would that not be kind of similar to the levels that we've seen over the past couple of quarters?
Speaker Change: Well, I think what we'd like to say is that the guy off and down that page has got a level of conservatism to it.
Speaker Change: We're going to push for higher numbers because, as I said, this points to a target payout.
Speaker Change: We're looking at 98% this year, and our folks want to try to get their maximum payout, which would imply a much—we will head toward—we will try to steer this firm to a much stronger result.
Speaker Change: But we felt like for this call, we needed to kind of present some conservatism in our numbers.
Speaker Change: As to fees specifically, there were a number of things that happened this year, particularly with regard to
Speaker Change: called these other equity investments and some other things that happened that were kind of one-off.
Speaker Change: that we think there will be one-off things in 2025 as well, so call it recurring, non-recurring.
Speaker Change: But we don't plan for that at nearly the same growth rate that we do for the core banking strategies.
Speaker Change: And I think that's really what's the important part, is how we believe about, what we believe about wealth management, what we believe about mortgage, and what we believe about all these other lines of businesses.
Speaker Change: that we've invested in over the last two or three years, and we fully intend for those units to perform towards the upper end of that range, and for us to get paid at the higher level for our incentives, they need to exceed these ranges.
So, that's where we're going to aim.
Catherine Mailer: I don't know if I got to all of your questions, Catherine. I gave you a lot.
Catherine Mailer: You can be sure that's not what my personal objective is. My personal objective is to get that incentive paid at a higher level, which means I've got to produce a lot more growth and a lot more EPS growth than what it takes to hit the target.
Catherine Mailer: Yes, that's fair. And maybe on the fees, it's probably maybe just a lot, the income from other equity investments, because that was about $14 million this quarter, and that can be so lumpy and hard to model. So maybe you...
Catherine Mailer: just can kind of conceptually start that at a lot lower and then you could see some surprises there which could lead to upside. Is that a fair way to think about it?
Yeah, for sure, on that particular line item.
Catherine Mailer: You know, there's other places where we have one-offs this year That we we kind of take a more conservative posture with too, but that's exactly right
Catherine Mailer: Okay, that makes sense. And then also on the NII growth...
Speaker Change: You talked a little bit about the margin expectations for next quarter, but is there the assumption that we should see NIM expansion throughout the year as a way to hit that 11% to 13% NII growth?
Speaker Change: Yeah, that's absolutely right. We should see NIM expansion. The way the yield curve is shaping up for us, if it continues to improve, then we fully anticipate that our NIM should also expand concurrently with that. So, yes.
Great. Okay. Thank you so much. Appreciate it.
Thanks, Catherine.
Speaker Change: Thank you. The next question will be from Anthony Ellion from J.P. Morgan. Anthony, your line is live.
Anthony Ellion: Hi everyone. Can you give more color on the very strong loan and deposit growth you saw in the fourth quarter? Was there anything specific in the quarter that contributed to 4Q being one of your strongest ever growth quarters, particularly on the loan side?
Speaker Change: I'd go at it this way, any quarter you've got some things that land in the quarter that you thought might come in a future quarter on both sides, both the growth and the paydowns, and so I think we probably
Speaker Change: had good timing on both sides of that, but it was really pretty fundamental growth across the board, meaning across the geographies as well as across product lines. Harold, do you want to add to that?
Harold Carpenter: Add somewhat of an intangible to it Tony, you know, I'll talk to 15 to 20 relationship managers over the course of the quarter
Harold Carpenter: And the way they put it to me is, I'm a lot busier today than I was six months ago.
Harold Carpenter: And so there are inbound calls from their client base looking at trying to acquire capital to grow their franchises. And so that's a really strong indication for me that
People are taking a different perspective going into 2025.
Speaker Change: Thank you. And then my follow-up, in the press release you noted that BHG exited the SBA loan program. Is there anything else BHG has in the pipeline or they're thinking about in terms of optimization and focusing back on the core business? Thank you.
There are some others. We'll see if they...
Get to those.
Speaker Change: One that they did exit, in addition to SBA, was this Buy Now Pay Later business that they had invested in over the last several years. That's now, and I think at the end of the day, I believe there's about 200 heads that have come out of BHG because of that.
Speaker Change: and so we count all that. We like to believe that as BHG heads back towards that more core business profile that, you know, that will enhance not only their earning stream but also the franchise value.
Thank you.
Speaker Change: Thank you. The next question will be from Nick Holoco from UBS. Nick, your line is live.
Hi, good morning.
Good morning.
Speaker Change: I think on slide 10 you noted that the origination yields that you were experiencing in the quarter were impacted by some rate volatility and competition.
Yeah, I'm not...
Speaker Change: If we don't get any more cuts, it's not that impactful to our net interest income for 2025, our guide. I'd say that. As to whether or not competitive pressure
You know, whether it increases or decreases.
where they are today.
I don't think so.
I think what has really got borrowers
Speaker Change: excited is about where they think about what they think their future risk look like
Speaker Change: Rates have come down now about 100 basis points. If rates come down another 100 basis points, I think that would impact probably a lot more.
lending activities.
Speaker Change: As of today, we're pretty optimistic about what 2025 could do for us.
Is that where you were headed, Nick?
Yes, that's perfect. Thank you.
Speaker Change: And then maybe just as a follow-up, you know, the outlook, your outlook on credit calls for a nice improvement in charge-off experience and provisioning for 2025.
Speaker Change: I think the bulk of the increase you saw in 2024 was more on the CNI side, but you have some maturities coming up on CRE in 2025. So can you just talk a little bit about where you expect to see the improvement in the year ahead? Thank you.
Speaker Change: Yeah, we don't expect CRE to do any kind of drastic...
Speaker Change: If there's any drastic loss content in commercial real estate, where we tend to find our lumpiness in net charge offices in the C&I book, and we don't anticipate that to change.
Thanks for taking my questions.
Thank you. Thank you.
Speaker Change: Thank you. The next question will be from Brian Martin from Janney, Montgomery. Brian, your line is live.
Hey, good morning, guys.
Brian Martin: Good morning. Hey, Harold, I was wondering if you could comment just a little bit on the margin outlook. I guess if we do get a steepening in the curve here, what is the margin trend kind of throughout the year and kind of going into 2026 here, I guess in terms of longer term, just kind of how should we be thinking about that in the new kind of environment? And then, yeah, I guess...
Brian Martin: Secondly, I guess if we don't see the cuts you're expecting, I guess maybe your recent comment just sounds like it doesn't change much with your NIM or NII guide, but the first part more on just kind of where the margin trends with a better environment here.
Brian Martin: Well, steeper is better, granted there's guardrails on that, but at the same time a steeper curve is good for us.
As we sit today, we think...
Brian Martin: I don't, I think we can see the margin improvement over the course of the year, maybe 10 to 20 basis points. Just depends on how the curve responds. But with the current guide, we're looking at calling it a 10 to 20 basis point improvement.
Speaker Change: Gotcha. Okay. And as far as the, I think just on the fee income, just one...
Speaker Change: I guess, more specific question. Just on the non-recurring items or volatile items, however you want to frame them, Harold, outside of the equity gains in the other line, but there was a one-time gain of, or not a one-time gain, but there was an unusual gain. Is that, I guess, or I think you mentioned it some comments in there or maybe earlier, what was in that other line that was maybe somewhat lumpy?
Speaker Change: Well, we had a gain on the lease termination. That was, I think, probably around $750,000.
Speaker Change: And then there were a couple others that might have added up to about a million-five or so.
Speaker Change: Okay so really only about a million five was was kind of in the in the lumpy range in terms of in that in that other line.
Speaker Change: I think so. Somewhere in that neighborhood. Call it two million dollars. Yeah, okay. Okay, and then if we, I guess my other comment about if we don't get any more cuts, it sounds like you're still optimistic about the margin here given, you know, actions you started to take or are taking.
Speaker Change: Yeah, I probably used the word optimism too much today, but...
Speaker Change: I mean, just thinking from a CFO's perspective, you've been in an inverted curve now for a long time. And to have the prospects of a traditional curve in 2025 and something that you can really latch into, and you can't help but be excited about what's coming down the pike.
Gotcha. And as far as the...
Speaker Change: The deposit outlook, you know, given, you know, the the initiatives you guys have had, it sounds like the momentum there.
Speaker Change: still going to continue? Is there any area specific on the deposit front? I think you said some more on the DDA side, kind of what you expect there, and just kind of initiatives to, I guess, to sustain this great deposit growth.
Speaker Change: Yeah, Brian, I think you've heard us talk. We began, I guess, probably three years ago developing a number of deposit verticals aimed at large pockets of money. Things like community associations.
Speaker Change: tend to produce large pools of money. And so we continue to grow in our maturity and ability to execute those using our specialists to support the relationship managers in the field. And so again, my belief is, number one, that
Speaker Change: you're still in the steep part of the growth curve from those initiatives generally. And my suspicion is we'll add another or two over the course of the year.
Speaker Change: I think beyond that, at the core, what we do is hire people that move relationships to us. We rely on our treasury management function. You saw the fee growth in treasury management last year was really strong as iodine, but that's the principal mechanism by which we grow operating.
Speaker Change: And so at any rate, those are sort of the two thrusts, I think. The verticals and the treasure management focus on operating accounts.
Speaker Change: In terms of the people you are recruiting this year, are there areas of the business or geographies where you are more focused or see more optimism in terms of your ability to bring people over?
or you expect to bring people over.
Speaker Change: Yeah, I think I would say there's not wild differences across the footprint as you know we operate in all
Speaker Change: All our markets are large metropolitan areas in the southeast, dominated by the same set of banks. And so, you know, we have...
Speaker Change: I guess I would call it near universal success. But that said, there's no doubt in the new markets we're able to add people at a more dramatic pace than the existing markets. We still add people in Nashville where, you know, we have a really dominant market share position.
Speaker Change: We still have people, but we don't add at the same pace we do in Jacksonville, Florida, Washington, D.C., Atlanta, Georgia, and so forth. So, the only thing I would highlight is just the newer markets yield a higher percentage growth rate.
Speaker Change: Got you. Okay, thanks for taking the questions and congrats on a great quarter.
Thanks, Ivor.
Speaker Change: Thank you. The next question will be from Russell Gunther from Stevens. Russell, your line is live.
Russell Gunther: Hey, good morning guys. I just had one follow-up question Harold Morning, how you alluded to some potential work you guys could do on the bond book and I wanted to just better Understand how you're thinking about that if that's something that would be
Russell Gunther: a lever that if pulled would be purely gravy to that NII guide or something you'd only look to do if that NII guide became more challenging over the course of the year.
Russell Gunther: Yeah, thanks for asking that question, Russell. No, that's not in our guide.
Russell Gunther: But we might have something we're looking at here over the course of the year, but it won't be nearly as, call it, influential to our results as that one was.
Okay, great. Understood. Hey, thanks for taking my question, guys.
Thanks for having me.
Speaker Change: Thank you. There were no other questions and this does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.
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