Pinnacle Financial Partners Inc (PNFP) 2021 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Pinnacle Financial Partners Fourth Quarter 2021 Earnings Conference Call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer; and Mr. Harold Carpenter, Chief Financial Officer. Please note, Pinnacle's earnings release and this morning's presentation are available on the Investor Relations page of their website at www.pnfp.com. Today's call is being recorded and will be available for replay on Pinnacle's website for the next 90 days. (Operator Instructions)

During this presentation, we may make comments, which may constitute forward-looking statements. All forward-looking statements are subject to risks, uncertainties and other facts that may cause the actual results performance or achievements of Pinnacle Financial to differ materially from any results expressed or implied by such forward-looking statements.

Many of such factors are beyond Pinnacle Financial's ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks is contained in Pinnacle Financial's annual report on Form 10-K for the year ended December 31, 2020, and its subsequently filed quarterly reports.

Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to the comparable GAAP measures will be available on Pinnacle Financial's website at www.pnfp.com.

With that, I am now going to turn the presentation over to Mr. Terry Turner, Pinnacle's President and CEO.

Okay. Thank you, Gigi. We'll start in just a minute as we always do with the dashboard. Dashboard is intended to provide you the best insight possible as to what we at Pinnacle view to be important, what we're managing to. And the fact that we begin every quarter with the same dashboard at a minimum should showcase our relentless focus on these critical variables.

In short, we're tightly focused on EPS growth and tangible book value per share accretion, revenue growth and asset quality. That's what we set aggressive targets for, that's what we've persistently talked about in our organization. That's how both our short and long-term incentives are built. Simply said, thinking about those critical variables that we focus on. Fourth quarter was another fabulous quarter for our firm with very strong core loan growth, core deposit growth net interest income growth, fee income growth, year-over-year pre-provision net revenue growth, tangible book value per share accretion and asset quality metrics.

Beginning with the GAAP metrics, I might focus your attention, particularly on the asset quality metrics at the bottom of the slide. The green bars show the median quarterly performance over the last 5 years. And as you can see, our asset quality over the last 5 years has been very strong. But for all 3 measures, even with very strong performance over the last 5 years, profit loan metrics continue to trend down and our decade-long loads.

Moving now to the non-GAAP measures on which I most focus. You can see across the top row, the extraordinary growth in revenue and earnings. On the second row, the extraordinary balance sheet growth, which of course for our firms, our primary mechanism for growing revenue and earnings going forward. And on the far right of that second row, you can see the reliability of the tangible book value per share accretion. So for me, 30,000 feet, the conclusion is that we're continuing to execute at a very high level on virtually every critical success measure for our firm.

Now I'm going to turn it over to Harold to talk in more depth about our 4Q performance. Then I'll come back and try to do a little context setting in terms of where we've been and where we're headed. Harold?

Thanks, Terry. Good morning, everybody. As usual, we will start with loans and again in the fourth quarter was another great loan growth quarter for us and provided us with strong momentum as we enter 2022. Excluding PPP, average loans were up 12.6% annualized between the third and fourth quarter. Overall, loan rates were down in the fourth quarter due to reduced inflows of PPP on our loan yields. We recognized $15.5 million in PPP revenues in the fourth quarter, down from $21.2 million in the third quarter. Due to PPP balances decreasing to approximately $371 million at the end of the fourth quarter, we anticipate PPP revenues will range between $15 million and $20 million in 2022 compared to approximately $86 million in 2021.

We begin a lot of questions about loan floors and their impact on our yields in a rising rate environment. I'm not about to apologize for our loan floors because we enjoyed the ongoing benefit of these floors for quite some time, but they will cause us to experience some lag on realizing the full benefit of rate hikes in the near term. As the bottom left chart indicates, 62% of our daily float loans will realize the full benefit of rate increases on day 1. That number increases to almost 8% after the first 50 basis points in rate hikes.

Like I said, our relationship managers have done a great job in securing loan floors over the past several years and has paid handsome dividends to us. Lastly, our market leaders are excited about our loan growth prospects and about a 10% to 15% growth rate in end-of-period loans, inclusive of the remaining PPP forgiveness for 2022 is a reasonable objective for our firm at this time. In 2021, our new markets, including Atlanta and our new special lending units provided approximately $530 million in loan growth. Our view for 2022 is that these markets including Washington, D.C. and the specialty units, should contribute 2 to 3x that amount in the coming years.

Now on to deposits. We had yet another big deposit growth quarter. Core deposits were up almost $2.1 billion in the fourth quarter. We experienced significant growth in noninterest-bearing deposits, ending up at $10.5 billion at quarter end, up 41.5% since the end of last year. Our average deposit rates were 14 basis points, while end-of-period deposit rates were slightly less at 13 basis points. Given the current rate outlook, we are likely approaching floors on deposit rates with our primary opportunities in near-term CD renewals. Helping us will be $1.7 billion in maturing CDs in 2022 with an average rate of approximately 48 basis points. As to volumes and the projected growth for deposits, the macro environment is shifting, and thus, we have to believe that deposit growth will eventually find its way back to our traditional growth strategy with reliance on attracting the best bankers and having them bring their best clients to our firm.

We've never abandoned our long-term view that core deposit growth is a key strategic objective. And even though the last few years have provided us an ample supply of funding Initially, we will need to get back to a more intense focus on funding our balance sheet growth with core deposits. That said, we like our chances given the significant investment we've made in relationship managers and new markets over the last few years. We continue to look at ways to create increased earnings momentum through deployment of excess liquidity into higher-yielding assets and the elimination of wholesale funding sources. We are optimistic that loan growth in 2022 should help to reduce our overall liquidity by reducing our liquidity to a more normalized level, we believe, will be a multiyear effort. Our objective here is to find ways to put money to work in a rising rate environment without placing too much pressure on tangible book value growth.

During the fourth quarter, our investment securities increased by approximately $446 million, almost 8%. A little over 80% of our purchases in the fourth quarter were bonds on the short end of the curve, say, less than 3 years, with an average rate of approximately 1.15%. We also increased our investment in a collateralized repo investment by $500 million, which yields approximately 35 basis points. We are not currently pursuing a formalized strategy to deploy our excess liquidity, which is approximately $3 billion into longer-term investments even though the 10-year is pricing at around 185 currently.

We will pick our spots and invest along the curve in a proven manner. We do believe we have some opportunities on the short end of the curve to put some money to work at slightly higher yield, but this will be a modest response, saying additional $500 million in deployment in the first quarter. As the gray bars on the top left chart reflects, I believe we've done a remarkable job defending our margins over the last 2 years. We tend to hover in the 3.25 range and we'll work harder within our margins going forward. Obviously, we, like everyone else, look forward to a robust upgrading environment in 2022 as we think we will win with a rising yield curve. But even if that doesn't materialize, our track record would indicate that we are very capable of managing our balance sheet regardless of the rate environment.

As to credit, we are again presenting the 4 big traditional credit metrics of net charge-offs, classified, nonperformers and past due accruing loans. Pinnacle's loan portfolio continues to perform very well. And again, these are some of the best credit metrics ratios we've experienced in our history. Modifications made pursuant to Section 413 -- 40-13 of the CARES Act continued to decrease from $817 million at June 30 to $791 million at September 30 and now stand at $713 at December 31.

Importantly, and as noted in the highlights on the slide, we do anticipate further declines in our allowance for credit losses to total loans ratio over the next several quarters given continued improvement in our credit metrics as well as macroeconomic factors.

Now (inaudible). Again, lots of good news here. And over the course of 2021, we spent quite a bit of time on our various fee categories. While the fourth quarter fee revenues were up more than 20% over the same quarter last year. As for run rates for 2022, we are anticipating high single to low double-digit increases in fee revenues this year, inclusive of BHG, which were estimated estimating approximately 20% growth, and we'll speak to that in a few minutes. Also included in our planning assertion is that we are not anticipating a repeat of $20 million in income we've experienced in '21 from valuation adjustments for several of our joint venture investments. We are planning for revenues from these investments to be significantly less in 2022. Other than that, our wealth management, mortgage and other fee-based business lines believe they are ready for a breakout year in 2022.

As to expenses, I was not going to spend a great deal of time on expenses. But given last time write-up, I feel I need to pause here and provide some more color, particularly around our expense plan for 2022. I think everyone is familiar with the impact of incentive cost to our expense base and the direct correlation to corporate results more on that in just a second.

2021 was a great year for our associates and to say we are pleased to deliver an outsized incentive to our associates for their 2021 effort in a profound understatement. We are elated at being able to provide this to them and thank our Board for supporting us in this effort. As to our overall total expense run rate, we anticipate low double-digit percentage growth in 2022, which is primarily attributable to headcount growth in the new markets. We also are aiming for a recruiting year in 2022 that will be even more prolific than what we experienced in 2021. Terry will discuss more on that in a few minutes.

As to incentives, our current plan is that our incentives will increase by 2% to 3% in 2022 should we achieve our performance targets. That's right. We hope to desire our incentives to go up in 2022. The increase is based on headcount adds in 2021 and our planned recruiting in 2022. We are reducing our target pay in our annual bonus plan from the outsized amount of 160% target back to the traditional 125% of target, but we are also providing more cost to our equity plans for our leadership as well as our associates who will all receive some form of stock compensation.

So why should shareholders be okay with all this? Substantially, all of our said costs are performance based. Our annual bonus plan which is about 2/3 of our annual expense, is a (inaudible) performance base. That performance is not based on individual results, but on corporate earnings, PPNR and (inaudible) targets. Our thesis, our secret sauce is that the right combination for achievement of top quartile earnings growth and (inaudible) will result in higher multiples on our shares over time.

This time last year, PNFP Street estimates for 2021 were $4.50 a share. After first quarter 2021 earnings, that number increased to around $5.20 a share. Internally, we knew those targets would not give us the share performance we desire. So our targets were higher, which is basically what we do practically every year. We finished 2021 at $6.73. So our targets are set to achieve top quartile performance over the long term. If we don't achieve our targets, then the bonus pools are reduced and in many years, that number has resulted in 0% payout.

Thus, every year, there is a cushion. And for 2022, it is meaning. We are finalizing our incentive plans for 2022 currently, but nothing of substance will change. Our incentives will be performance-based, and we will target quartile performance, my best guess is that given the environment today and the uncertainties that are still prevalent, we have another meaningful stretch goals in front of us for 2022.

Quickly, some comments on capital. the Board approved an increase of our dividend per common share to $0.22 from $0.18 yesterday, a 20% increase. During 2021, we redeemed $250 million of sub-debt issuances from available cash. We get calls consistently about issuing new sub-debt given interest rates that some of our peers have been obtained, but we like our capital stock, our capital stacked currently.

That said, we will continue to monitor the debt markets and access them and that appears to be advantageous to us. And as I've mentioned several times before, and I want to just reinforce the point we've intensified our focus on tangible book value growth by adding a peer relative component in our leadership's equity compensation plan. We are currently calculating an annualized increase of 14.2% in our tangible book value per share at year-end 2021 compared to 2020.

Our equity program plan is designed such that our leadership lands If our tangible book value per share growth, our return on tangible common equity and our total shareholder return outperforms in relation to our peers. As I alluded to earlier, we believe our incentive programs are objective, not subjective and to be candid, very unique in design, and we believe aligns our management with shareholders to incent rapid shareholder value creation.

This slide is a summary of our outlook for 2022. We won't go into this slide in depth as we've covered much of this previously. 2021 was a great year for us, and we had significant momentum going into 2022 that excites us about our growth prospects. Several 2021 matters require a quick highlight as we look forward to 2022.

Margins. We've been very successful on both sides of the balance sheet and keeping our prices definitive and maintaining margin. Our rising yield curve will be beneficial to us over time. PPP has been a significant contributor to our success both from a client service perspective as well as a financial perspective, but thankfully, it is heading to the rearview mirror. Replacing the financial impact of PPP is not easy, but we are confident that we have the loan growth prospects to overcome the reduction in PPP revenues in 2022.

Credit has continued to outperform. And given where our loan portfolio is currently positioned and the macro environment, we believe we have reason to be optimistic for 2022. BHG grew by 46% in 2021. We fully anticipate BHG to have another outstanding year of outperformance at a pace which should approximate 20% annualized growth.

Recruiting. We fully anticipate another great year of building our core franchise through organic growth by recruiting the best bankers in our markets to our firm. We will lean into our organic growth model even more in 2022 as we develop our end markets, our specialty lending businesses and continue to build and grow market share of our legacy franchise.

Now to BHG. BHG had another great quarter and one that was better than we anticipated as they wrapped up a 46% growth year. Another quarter of record originations was spread widely through the pandemic on the gain on sale platform. The bottom right chart details the almost 1,400 banks in BHG's network and over 700 individual banks acquired BHG loans last year. Coupled with the securitization success this continues to be one of, if not the strongest funding platform for a gain on sale model in the country. As credit, BHG has sold to their network of community and other banks just over $4.1 billion in credit through their networks. As noted, the recourse obligation is reserved for potential future loss absorption. BHG decreased the recourse reserves to approximately $207 million at the end of the fourth quarter as a percentage of loan, it was down by approximately 67 basis points, almost to pre-COVID levels.

As noted on the chart at the bottom right, the trailing 2021 losses landed at 4.64%. This chart splits the actual credit losses from losses BHG absorb from reimbursement banks for the unamortized premium, the acquired bank paid to get the loan. The increase for the prepayment loss is primarily attributable to the fact that the actual premium pay for BHG credit has gotten larger. Consumer credit trends tend to have a higher prepayment track record and loans being paid off earlier as rates have decreased. As shown, 2.51% in credit losses is very respectable in comparison to prior years.

As the loss of charge by Vintage on the right-hand chart, losses continue to level out in earlier months since origination, thus pointing to a lower loss percentage over the life of the underlying loans. The quality of the borrowing base, in our opinion, is very impressive and remains much better than just from a few years ago. BHG had another great operating quarter in the fourth quarter and exceeded our expectations again. 2021 produced outsized growth in relation to 2020 at 46%. We're also revising our growth factor for 2022 down to approximately 20% and BHG believes that by investing more into the on-balance sheet model and creating a more predictable revenue stream should benefit the long-term franchise value creation of BHG.

Originations, as noted in the previous chart for 2021 approximated $2.8 billion, up meaningfully from 2020. BHG believes they will continue to grow originations in 2022 and have not reduced their target originations for this year. Roughly, they're looking at 25% to 30% growth in originations. They just decided to send more to the balance sheet. They executed 2 securitizations in 2021, looking for another one here in the first quarter, and I wouldn't be surprised if they don't execute free here in 2022. As the slide indicates, they've got more ideas that are in some stage of develop, which, if successful, should foster continued growth over the next several years.

BHG continues to review their business from both a critical perspective, how can they perform better as well as a strategic perspective, how can they exploit their strengths to grow the franchise. Their track record is impressive. So wrapping up as to loan growth and loan pricing for Pinnacle in 2022, it will take work, but we are optimistic. The deposit growth has been remarkable and likely will slow as macro factors begin to reflect change. Deposit pricing continues to decrease, but is nearing a floor. Our fee outlook is likely aggressive, but we believe we have the horsepower in place to deliver outsized growth in 2022. We Lastly, we will continue to incent our leadership based on top quartile performance and believe we have the momentum going into 2022 to do so.

With that, I'll turn it back over to Terry.

Okay. Thank you, Harold. We started this call with a look at our past performance over the last 5 years on all the critical performance variables that we believe are required to grow shareholder value. We believe our advantaged markets, our long-standing model for attracting talent, our demonstrable ability to wow our clients. And most importantly, our willingness to spend the money necessary to seize this extraordinary opportunity should yield best-in-class growth and has positioned us for the continued share graph that should be available given the stressed client loyalty for our largest competitors. I think anyone that's followed our story for any length of time understands that our most important competency here is that we can attract many of the best bankers from the larger banks and enable and empower them to move their client base to Pinnacle, based on the distinctive service and advice that we're able to offer.

We're what I frequently refer to as a Goldilocks solution for great bankers. We're just right for the great bankers at larger banks that are frustrated by the bureaucracy and inability to serve their clients well. We're small enough to be nimble and responsive to make decisions close to the client, yet big enough to meet the credit needs of even larger middle market clients and to provide sophisticated treasury management, wealth management and the like.

2021 was no exception. We set a record for attracting and hiring experienced revenue producers away from those larger, more vulnerable institutions in our market. And honestly, as Harold has already indicated, I expect that we'll set another record in 2022. In a number of our earnings calls, I'll try to spend some time helping investors understand the power of our culture, our differentiated model. And I do that because without understanding that, it's nearly impossible to understand the pace and reliability of our growth on those key performance variables like EPS, revenue and tangible book value.

Last quarter, I used a similar chart to this one in order to demonstrate at the firm-wide level, the linkage between our obsession with the work environment to our obsession with wowing our clients, to the creation of extraordinary shareholder value. As I hope you know, it's our intent to continue to produce outsized growth. So I thought this quarter, I'll spend a minute looking at our ability to grow and expand rapidly, largely because of our culture, not at the expense of our culture.

Many of you will remember our announcement to acquire BNC, which had operations across the Carolinas and Virginia. At the time, it looked to us to be a faceless acquisition with both tangible book value accretion and double-digit EPS accretion. And it enabled us to extend to some of the most attractive markets in the Southeast like Charlotte, Raleigh, North Carolina and Charleston and Greenville, South Carolina. For those of you that were around the end, you'll remember that we described the deal strategy is, number one, to hold on to the growing commercial real estate business that BNC was so good at. While number two, using our distinctive culture and our C&I focus to bolt-on a large C&I business in order to turbo charge the overall growth rate.

So this slide is intended to illustrate the power of our culture to extend markets and produce high growth. It all begins with getting the associates fired up and engaged. As you can see here in 2021, just 4 years later, we won Best Place to Work awards in Charlotte, in Raleigh and in the Triad in North Carolina and for the whole state of South Carolina. And according to Greenwich, we have had the highest Net Promoter store in North Carolina. So we're able to leverage that obsession with associate engagement in order to create a distinctive client experience and then look at the loan growth, particularly the C&I growth.

The remission of the deposit book based on growth in transaction and MMDA accounts, the fee income growth, which has been turbocharged by the introduction of wealth management products and the like. And our ability to our revenue producers from some of the largest and best banks in those markets. In fact, we have been able to protect the fabulous CRE business that Rick Callicutt and his team and Bill while transforming the growth engine to the C&I business. I can't say enough by what Rick and his team have accomplished. And while that's past performance, we expect the same cultural trust to produce outsized growth in our more recent market extensions like Atlanta, Birmingham, Huntsville, in Washington, D.C.

So 2021 was a pages year for us. Our associate engagement is measured through the top box ratings in our annual work environment survey actually increased in 2021 despite a very difficult year in terms of COVID, social unrest and so forth. Our Net Promoter Scores reflected improvement in both Tennessee and North Carolina to our already strong client engagement, again, despite COVID and all its ability to diminish service quality. Most importantly, again, this year, we produced top 4 total shareholder returns with underlying rapid growth in loans, deposits, fees, EPS and tangible book value.

We've invested meaningfully to position the firm to continuous rapid growth with de novo starts in Atlanta, now with 46 associates in 2 offices, and we're in the process of building out a third office in North Fulton County in that market. We're in Birmingham, Huntsville and most recently, into Washington, D.C. And with all that investment in future growth, we continue to balance that with an appropriate spending as evidenced by a noninterest expense to asset ratio of just 1.85% in 2021 and which is just another indicator to me in addition to our sub-50% efficiency ratio that we're rightly investing in growth.

In terms of our execution priorities for this year, Harold has already given you the numbers, but let me sort of give you what's behind it. Number one, we're continuing to invest meaningfully and exciting and engage in every single associate. As you know, we already have extraordinary associate engagement. We have it not only across the entire associate base but across key minority segments, including racial and gender minorities. But that said, nothing is more important to us than engaging every single associate such that they give us their discretionary effort. That's what accounts for the extraordinary performance that we've had over the last 21 years, but we believe we can do even better. We have a number of initiatives specifically focused on diversity and inclusion during 2022 to ensure that we're engaging every single associate, which is the fuel that drives this engine.

Number two, our second priority is a combined effort, not only to drive up our service levels, our Net Promoter Scores, if you will, but to get paid for it. Somebody might say, you already have the second is Net Promoter Scores in the nation, why would you list it as your #2 priority to improve them? And the reason is because, in my opinion, service has suffered dramatically almost universally in almost every industry. Many explain the service to management due to COVID, some blame supply chain issues, in my opinion, 1 excuse is as good as another.

So at Pinnacle, we'll be doubling that on service quality. We believe now is the time that we can capitalize on culture and produce even greater differentiation between us and our competitors. And it is my belief that earning a premium based on distinctive service will be particularly critical in this elevated rate environment. In previous cycles, deposit betas were generally indicative of the pace of earnings growth. And so using our premium service to minimize the deposit base as rates rise, should enable us to widen our margins.

Number three, we think about seizing our market share hold in 3 dimensions: number one, continuing to hire great bankers in our existing markets; number two, extended to new markets where there are bankers capable of building us a bank of consequence, as you know, we've recently gone to Atlanta, Birmingham, Huntsville, Washington, D.C., frankly, I'd be surprised if we don't find our way to more of those kinds of opportunities in 2022; and then thirdly, at tracking industry specialists. We use this approach to support our geographic market managers with a higher level of industry expertise and an ability to attract larger clients that may defer specialized knowledge versus local contacts. We've recently added specialists in the area of equipment lending, franchise lending and solar lending to name a few.

So as I mentioned earlier, we expect all those previous actions to yield outsized growth, and we expect to set another record in 2022 for recruiting and hiring revenue producers from our larger more vulnerable competitors. Four, when Harold reviewed our fee growth, you saw that we're currently producing outsized fee growth in a good number of fee categories. like brokerage, like trust, like interchange and so forth. That's what we're talking about, making sure we meet every need that our clients have. We are specifically not product pushers. But it is our desire to know our clients needs well, so that we meet them all, which is a huge fee income opportunity. It's already yielding outsized growth, as you've seen, in which we expect to continue for the foreseeable future.

And then fifth, of course, even though our asset quality metrics are extremely strong, nothing can demolish earnings like credit losses. And so as we grow the firm, we continue to invest in credit infrastructure, including senior credit officers, credit analysts, system support and so forth.

As you can probably tell, I'm on fire about the opportunities that I see for our firm is on the fire as I've ever been. We've built a differentiated model that should continue to produce outsized share growth for an extended period of time. And honestly, the competitor vulnerability that currently exists should continue to expand in a consolidating industry. That's just an accelerant for our growth. The banks that have most of the market share in many of our markets also possess the greatest vulnerability so what could be better.

And so the question is, how do we best see this opportunity? Number one, continuity of senior leadership. Of course, no one knows the future, but I fully expect all the NEOs will stay in at least 3 more years, some more. I believe some will stay longer. For me, (inaudible) is currently mined in to stay at least 5 more years. We can evaluate after that. Over that period of time, it's my intent to put the Board in the best possible position to optimize the shareholder value of this firm. If that's been done by avoiding consolidation, and it's my intent to continue to work to identify and develop the next generation of leaders for the firm. If it's best optimized by combining forces with another financial institution, hopefully, we'll have built one of the most valuable and attractive franchises around. And the way we do that is to seize this opportunity that I've tried to crystallize for you this morning to build the dominant Southeastern banking franchise.

Operator, we'll stop there and take questions.

(Operator Instructions) Our first question comes from the line of Jared Shaw from Wells Fargo Securities.

Just a few things. I guess on BHG, a couple of questions. Harold, you'd said the fee income growth to Pinnacle in that 20% range. But could you reiterate what you think the originations at BHG could be, did you say that's 25% to 30% growth off of '21 level?

Yes, that's right, Jared. They're thinking they're going to still maintain the same kind of origination momentum going into 2022 that they thought they've had now for the last few quarters. What they've decided to do is allocate more to the balance sheet and build the balance sheet, create a more sustainable revenue platform through interest income. So they completed 2 securitizations in '21, one in 2020. And I think they'll complete 2 or 3 this year. So -- and I think they'll be larger than what they've completed in the past. So they continue to be on a role. They continue to find new clients. And so the business model itself is running really well, and they've also got these opportunities with these new, call it, verticals that they're also exploring as well. So we're still as primed as we can be about BHG and think they'll have another great year for us.

And then when we look at that different or the originations versus placements chart, should we assume that the placements are still, call it, around that $400 million level that they're still going to keep that demand satisfied there with the growth coming beyond that?

Yes. I think they'll continue kind of a similar ratio to what they did in the fourth quarter. So as they scale out 2022, they'll manage their results towards that 20% growth factor.

Okay. I guess shifting to the broader loan growth, Terry, that was great, great that on the $530 million of growth in the new markets. When you add in D.C., like you said for '22 and looking to see that expand, do you think that the DC operation can ramp up maybe faster than that typical -- I guess, what did you say in the past is about 3 years to get a book of business over. Do you think that, that could ramp faster than what you've seen for other team hires?

I do for two reasons. I think that the thrust there will have an even more commercial orientation than our other market extensions. And so it takes less people to produce more loan volume than what would be typical. And so not only the size of growth dynamics of the market, but particularly the group of people that we've hired. I mean, my guess is that we could do somewhere between $50 million and $100 million, our first quarter out of the gate. And so again, you can see you get that done in the first quarter, the momentum builds as you go, we could do something really special there.

And I might -- you didn't ask about Atlanta, but I might just comment on Atlanta. I think in round numbers, they finished this year with about $900 million in loan commitments, about $500 million in loan outstandings. They've got 46 associates, as I mentioned, they're going into their third office. And so that thing is traveling really fast as well. So I do love for Atlanta and D.C. to produce really outsized growth. And then I always want to make sure people get in these markets that we're in, like Charlotte and Raleigh, while the asset bases that we have there are meaningful to us. There are not compared to the market capacity and what I expect to grow there. Just -- again, I mentioned all the hiring has done and the movement toward the C&I mix over there. We expect Charlotte and Raleigh to really produce some extraordinary growth as well. So anyway, that's a little more gas, but...

That's great color. And then I guess just finally, I mean with all the success you've had in hiring and how quickly they're able to come in and all the benefits you talked about, do you really even need to consider M&A at this point in terms of being the acquired to get into these markets? Or do you think you've you sort of cracked the code here and can just do hiring is really the whole way to expand the potential.

Yes. Jared, as you know, I have worked hard to try to make sure people get it. I'm not going to take M&A off the table because there could be a great transaction that I'd be willing to do. But that said, if you want my honest opinion, you're on the right track. It's sort of like, why would I go do some acquisitions when you can produce kind of growth in Atlanta and D.C., in Birmingham. And again, I think we'll have other opportunities like those. That's easily my preferred play.

Our next question comes from the line of Steven Alexopoulos from JPMorgan.

I wanted to start, so to go back to BHG for a minute and the reduction in the fee income growth of 30% down to 20%. Can you give us a little more context what drove their decision? And maybe was it a change in the rate outlook and maybe that they're expecting maybe that gain on sale margin to compress a bit.

Well, I think the rate outlook did have something to do with it. But I really think that the CTO strongly believes that the on-balance sheet model will result in a greater franchise value for him. So I think as he begins to look over the next 2, 3 or 4 years. And we agree with Al on that point. As it looks over the next 2 or 3, 4 years, I think he's going to be extremely focused on how to build the franchise value of that firm. And I think this is one of his kind of core beliefs. He felt like going into '21 that they were going to have a great year which they achieved. They felt like that 2022 would get a spillover of that at a 30% kind of clip. But I think here over the last quarter or so, he's reevaluated that, call it, that allocation between balance sheet and gain on sale and just kind of move it around a little bit. I think is kind of the perspective that he shared with us.

Okay. Okay. That's helpful. Terry, in terms of new hires, so you guys hired 119 revenue producers in 2021. And last quarter, I thought you indicated you thought you might be $110 million, $120 million for 2022. Are you still in that range? Like how are you thinking and what's embedded in the expense guidance?

I would say in terms of the hires, I think we'll do more than that. That's a reasonable range, but I think we'll do more than that. And again, my optimism is really fueled by what is happening in Atlanta. I've talked about that a little bit. honestly, I believe they have 3 commitment letters for meaningful revenue producers that are signed and are waiting their bonus before they come across. And so again, I expect to come out of the gate a little quicker in Atlanta. And I think the same thing will happen in D.C. So a little more optimistic and I'm not trying to take the guidance up meaningfully, but I expect we'll hire more than what I previously said.

Harold, do you want to talk about how that's taking into account and the expense guidance?

Yes. We've loaded everything into the expense book for 2022. We've got less of a turnover factor I'll say it that way. So we expect our headcount to increase more in 2022 than in 2021. The hiring -- just sheer hires, we believe, will increase. I think the numbers like 10% or 15%, Steve.

Okay. Got it. And maybe a final, just drilling down about, Harold, how much of the bump up? I know it's fairly modest, but the bump up in expense outlook, how much is that tied to this wage pressure that we're hearing is basically everywhere.

We believe -- well, first of all, the standard rates for our firm was about 3%. I think we ended up close to 4 with all the merit raises that will go into play this year. So it's -- we're feeling it, but I don't think it's going to derail this plan I think congratulations to the Fed for realizing there is inflation, though.

Our next question comes from the line of Jennifer Demba from Truist Securities.

Harold, you guys had strong sequential growth in service charges, investment services, trust fees. Are those fourth quarter run rate? Are those good run rates going forward, do you think in those areas? And was there anything in particular driving that growth?

Yes. We think -- well, first of all, there's likely some seasonality around interchange because of December. But we don't think we'll see any significant pullback in any of those areas going into next year. A lot of the wealth management is due to what's going on in the overall or the broader markets. But I don't think there's any big pullbacks that we're looking at going into the first quarter other than, like I mentioned, probably in the service charge and interchange areas where there's just probably less volume going into the first quarter.

Jennifer, If I could just say that you're getting extraordinary growth in these wealth management businesses, particularly the brokerage business, the trust business and so forth. And so much of that is tied to this revenue producer thing that we talk about and try to be clear, it's not just relationship managers. It is the wealth managers and brokers and those kinds of people. And so we have hired a great number of those kinds of folks, particularly in our Carolina's markets. And so that's really fueling a lot of that growth there.

Terry, when can we expect Pinnacle to enter the Sunshine state?

We're already here.

I thought we were in quarter in Sunshine state. I don't know the answer to that, and you know this. We don't set target saying, hey, I've got to get to this market by this day. It's all about the opportunity. But I can -- I don't mind to say we bang around with some groups. We ultimately decided we didn't think they were the right teams for us. And as you know, they would have been good salespeople, but we didn't believe they could build a consequential bank for us. So anyway, just indicating that we're interested in some of those markets, and I would be shocked if we don't find our way there over the reasonably near future. But again, I don't have a specific date or a specific target to get there. It's just about when we find the right group.

Our next question comes from the line of Brock Vandervliet from UBS.

Harold, as I look at your deposit growth, it's not too much different than many of the banks in the sector where it's up roughly 1/3 or so since COVID started. As you kind of get out the telescope and think about deposit betas and such, how should we start to think about the stickiness, I guess, for lack of a more technical term of those deposit balances as rates begin to move.

Yes, it's a great question, Brock. We've been looking at growth in deposits, particularly large deposit balances for quite some time, trying to anticipate what could happen in an uprate environment. That said, the relationship managers that we talk to about those depositors believe they're sticky. There will there are some -- there is some money in all of that where they're waiting on an event to occur or something like that. But that just happens in the day-to-day running of this bank. So we believe they're sticky at the betas and what we're projecting, we're looking at somewhere in the numbers around 40%. That was similar to the last cycle, 40% to 60%, depending on whether or not you're talking total deposits or interest-bearing deposits, but it's -- we're looking forward to that occurring.

We're coaching the sales force on an uprate environment now. I think Rob McKay, Rick Callicutt, Rob Garcia in Atlanta. They're all getting ready for uprate environments and talking to their, call it, their relationship managers that work with large depositors on how we're going to respond to that. So we're just hopeful. We believe that more sooner than later, rate increase from the Fed is going to be helpful to all of us.

Got it. Okay. And flipping over to the other side of the balance sheet, on securities, I think you added $446 million this quarter. It's been pretty steady. It doesn't -- and I think you mentioned $500 million for Q1. It doesn't sound like you're likely to accelerate that just given that rates are up and you can earn more on that. The book value focus seems to be playing into that. I just want to make sure I've got that correct.

Yes, I think you've got that correct. We'll pick our spots. If I had to say we had a target yield bogey with the bond book, our new purchases is probably in the 250 range, maybe a little bit north of that with the same kind of products that we customarily acquired. So that's probably where we're headed. We're likely to put some more work -- more money to work on the shorter end of the curve. We've got a couple of products that we're looking at, that we think we're going to be able to execute on here in the first quarter and through the second quarter. But like you might imagine, they won't move the needle a lot.

Our next question comes from the line of Catherine Mealor from KBW.

Maybe just sticking with the balance sheet composition as a follow-up to Brock's question. So as we think about the maybe the size of the securities book, it feels like we're not going to see a big change, 17% of average earning assets today, maybe up a little bit to 18 to 90%, but my gut is that the stays kind of below 20% of the balance sheet. And then as a follow-on to that, on the liquidity side, which -- as you think about this mid-double-digit growth in your GAAP NII, what kind of -- how much of deployment from this $4 billion in cash are you assuming kind of come -- goes away and is deployed into loans and the securities book? Just trying to think of the kind of size of the balance sheet within that GAAP NII guide.

Yes. As far as -- right now, we believe we've got about $3 billion in cash. That's just that we wish was deployed in a higher-yielding asset, but hesitant to pull the trigger on because of the way the right market is responding currently, so on and so forth. I think you're accurate in your 18%, 20% kind of range. I don't think -- we're not going to execute any big Gulf kind of strategy to divest to reduce the liquidity profile into more longer-term bond assets. But we will monitor what's going on every day. The 10 years kind of spiked up, not sure what it's going to do today, but it does make things more interesting. We kind of like bonds that call them 5, 7, 8 years in maturity that we can get, call it, 250 or more in yield. If we can find those bonds, then we'll tap into the market in a very measured and modest way. But you're right, there's not like any kind of ultimate them put on my group to say go, let's go push all this money out into the bottom market. That's not happening.

Great. And then really, this $3 billion in cash is going to be mostly going into the loan book. So to your point, and that is the multiyear effort, maybe at the most $1 billion of that is deployed kind of comes out this year, just really depending on how deposit growth was?

That's right. And deposit growth is probably 1 of the more -- the biggest uncertainties as to what happens with the macro environment changing like it's going to change. And how all that flows down to banks like us.

Got it. Okay. And then maybe a follow-up on your fee guide. To clarify, is your high single-digit to low double-digit fee guide inclusive of the 20% BHG or exclusive of that?

That's inclusive.

Including. So total operating fees all-in are up high single digit to low double digit.

That's right. I think BHG may move that number like 150 basis points or something like that.

Okay. All right. And then one last just on BHG. And you touched on this a little bit earlier, but how does a higher rate environment impact the way BHG thinks about their on sale margin?

Well, they probably -- I mean they would tell you that they're not going to shrink, but they've widened throughout the pandemic. So we've been in this low rate environment now for several years and spreads have widened. So I'm not sure they're going to get any wider when we get to an uprate environment. So -- but where they might be like 10% kind of spreads, they might go to it's not going to be a big change if rates move north quickly.

Our next question comes from the line of Stephen Scouten from Piper Sandler.

I'm just curious, just maybe continue on the BHG path there. It looked like in the third quarter, you guys put on about $75 million on your own balance sheet of BHG loans and I think that's about $263 million now in total. So just kind of wondering what -- if you have the fourth quarter number or kind of how much is baked into the growth expectations for '22 in terms of how much of that you guys will hold yourselves on balance sheet?

I think we're kind of in a $50 million range in the fourth quarter. And for the year, I think our planning assumption is that we're -- we'll be less in 2022 than 2021, call it around $150 million to $200 million. One more thing and a follow-up on Catherine's question about spreads. The one thing that I think is an advantage to BHG is the funding platform through that auction network for that spread to shrink, the BHG loans have to compete with a more accelerating lending platform at some of these smaller call it, community banks.

And so right now, BHG represents to the smaller community banks an opportunity to grow their loan platform that they don't otherwise have. So for spreads to shrink their loan growth outlook has to improve, and it may improve, but we don't think it's going to improve significantly to a point that spreads are going to be impacted materially. How about that?

Yes, that's good color. Okay. And then maybe thinking about the interchange fees for a second. I know you had some vendor incentives last quarter that maybe that was going to come out, but then obviously, you still had a big quarter here. I guess I'm wondering, was there anything unusual that led other than you mentioned in the month of December being active. But anything unusual that led that number higher? And then we've seen with some of the larger regional banks that pushback on overdraft fees. Are you guys experiencing any of that in your size bank? Or do you think that will be a pressure point for you guys here in the quarters ahead?

Yes. I don't know of anything unusual in the fourth quarter interchange numbers. we're not feeling the pressure on overdrafts. We had a lot of labors during COVID. We pulled back on some of that post COVID. And so we believe we're at somewhat of a standard run rate. We monitor what's going on with the large caps and what they're doing with overdraft waivers, so on and so forth. We'll just have to see how all that plays out, and how it works its way down to us over the coming quarters and years.

Got it. Okay. And then maybe last thing for me. I'm just kind of curious around asset sensitivity, I mean it's increased modestly, I guess, over the last 4 quarters. Harold, you noted the floors, and it does have been a great benefit to you guys. But I mean, is there anything you guys are thinking about strategically to increase the rate sensitivity more materially. And then the 68% deposit beta, I think you mentioned in the presentation and 40% overall, why wouldn't it be lower this cycle given all the liquidity we have, you kind of give me your thoughts there?

Yes, that would be absolutely where we're headed. And that's what brings in this whole coaching thing that Rob and Rick are doing with their sales force and getting them prepared for a rising rate environment. So we hope we can beat the betas that we've kind of set out there and believe we have a great opportunity to do it precisely because we have liquidity out in the system, and so does everybody else. So I don't think from the large caps in the mid-caps, you'll see a significant boost in deposit rates from right out of the gate. So we will try to manage that accordingly.

As to boosting asset sensitivity kind of here in the near term, I think it's going to be through our loan book. I think loan fundings traditionally come to us with a heavier weight on floating rate assets. I think we'll still have some deposit gathering going on here that will likely go into cash. So I think we've got a great opportunity here in the near term to still boost our asset sensitivity levels by some amount. That said, over the long term, I think it's important to get on the table. Our goal is to be neutral with some bias one way or the other based on what we think the near-term prospects are, but we will not bet heavily one way or the other with our balance sheet.

Congrats on another great year guys.

Our next question comes from the line of Michael Rose from Raymond James.

Just wanted to go back to BHG again. another big recourse reserve release this quarter. I think you had said on the last call that you expected it to end the year around 5.25, you're at 5%. I talked about getting down to $475 million to $485 million this year. Any updates there? And then if you can comment on the expense trajectory there because it did look like another big ramp in expense growth there? And just maybe if that incorporates any new verticals that were talked about at the Investor Day.

Yes. I think there is probably some room -- more room and recourse reserve release here in 2022. I'm not sure if they'll tap into it, but I think that $475 million number is still kind of reasonable. I don't know if it will get that low, but that's kind of what their current thoughts are. Their expense growth, they are adding quite a bit of headcount with -- particularly in their analytical groups. They believe that's kind of the -- what drives the engine. So they are seeing quite a bit of that as well. But we still believe, at the end of the day, we're looking at 20% growth for us.

Okay. That's helpful. And then maybe just back to market expansions you guys have had a very successful track record, I have no doubt that you will be successful in the D.C. market as well. Florida was brought up earlier. But as you look throughout the Southeast and then the Southwest, Texas is obviously a market that would seem to kind of fit the profile that you guys have historically sought. Would that be an option at some point? And maybe if you can just remind us on where the geographic limitations might be in the kind of the short to intermediate term.

Yes. I think what our geographic thrust is, we call it the Southeast. Basically, what we've tried to say is Memphis draw a line up to D.C. and down to the southern tip of Florida, that's sort of the target. Again, we have -- we now have SEC participants from Texas. So I guess somebody might call Texas a Southeastern state. But right now, our thrust is there. Candidly, the reason that our thrust is there is we know bankers and the bankers that we've hired no bankers in those markets, and that's really what we do is try to cultivate our non-bankers, we know less in Texas and therefore, the opportunities are smaller for us. I think you're on the right point. It wouldn't surprise me if we draw the math at some point to include Texas, but right now, the opportunities are so rich in the Southeastern markets, that's our first preference.

All right. Well, maybe at some point, Harold can start up the L.A. office, too. That you guys...

Our next question comes from the line of David Bishop from Seaport Research.

Quick question, Terry and Harold. I noticed a nice improvement, nice growth on the C&I, commercial and industrial segment there. Just curious maybe what you're seeing and hearing on that front. Are you seeing any sort of better line utilization up there? And obviously, the Omicron is virus has dominated the news, but I note as a narrative in terms of the credit cost. Sounds like you're expecting a further reduction in the allowance here. Is that sort of informing your view on the positive economic outlook?

Yes. I think in terms of C&I loan demand, I honestly believe C&I loan demand is fairly tepid. We don't see a meaningful increase in line utilization at this point. And I think again, we deal with owner-managed businesses, lower middle market businesses, I think a lot of people are just sort of looking at the landscapes that there are a lot of unknowns here. And typically, they don't do a lot of borrowing when there are so many unknowns. So I think if we can get a more solid footing for both the economy and the political landscape and all those kinds of things that influence optimism among business owners that will be helpful and additive it will produce greater loan demand. But I do think C&I loan demand is not very strong. The growth that we achieved there, I think, is largely dependent on our hiring model and the number of new hires that we've made in moving their books of business and so forth.

Got it. And then just maybe a follow-up on the asset sensitivity and net interest margin. I think last quarter, you said the core NIM outlook a little lower in the near term, not materially down, flat to a few basis points, which came to fruition this quarter it was down [10] basis points. Looking in your crystal ball, the first quarter of 2022 with the what are you thinking now about in terms of core margin direction?

I think we'll still experience some dilution in our margins. But again, I don't think it's going to be a big thing. I think it'll it will come down maybe a few basis points, but nothing significant.

Our next question comes from the line of Brian Martin from Janney Montgomery.

Harold, maybe just 1 follow-up on the last question on margin with regard to your guide on NII. The core margin, when your outlook -- when you kind of look at the core margin, what do you consider the core margin today? I guess knowing with the liquidity levels, PPP. I'm just wondering what you pull out of there when you're thinking about the core margin.

Yes. I think you're right. I mean, that's a valid question. But we're still analyze the impact of this liquidity build. That's -- it has very little impact on net interest income, but a meaningful impact on net interest margin. So I think it's important to understand that. As to the PPP program, we think the PPD program is effectively in the rear view mirror, and so it will be less impactful for sure, we'll have to probably keep looking at it as well. for comparison purposes to the last couple of years. And as far as discount accretion on mergers, that number has come down quite a bit. And so the GAAP margin and our core margin, the biggest difference is basically going to be with respect to the liquidity number.

This concludes today's conference call. Thank you for participating. You may now disconnect.