Pinnacle Financial Partners Inc
NASDAQ:PNFP
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
70.96
126.78
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Pinnacle Financial Partners Inc
Earnings Call Analysis
Q3-2024 Analysis
Pinnacle Financial Partners Inc
Pinnacle Financial Partners reported robust growth in its third quarter performance, with loans increasing by 6.4% linked quarter annualized, and earning assets up by 12%. Core deposits rose 9%, indicating a healthy influx of funds as the company attracts deposits amid favorable market conditions.
The firm has modified its forecasts for 2024, projecting loan growth in the range of 7% to 8% and net interest income (NII) to increase by 7% to 8%. There’s a positive sentiment around an expected down rate cycle, which could further stimulate borrowing confidence among entrepreneurs. Additionally, expenses are anticipated to align with the target of approximately 90% for incentives, reflecting management's confidence in continued financial performance.
Management is emphasizing building a sustainable franchise over merely pushing product volume. They believe this strategy will enhance the franchise's competitiveness moving forward. The total noninterest expense for the fourth quarter is expected to remain on par with the third quarter, indicative of careful expense management.
Hiring was notably strong in the third quarter, with 37 new revenue producers joining, compared to 89 new hires in the earlier half of the year. This growth in talent is expected to fuel further expansion and market share gains, underpinning the firm’s aspirations for enhanced operational capacity going forward.
The company has maintained a consistent commitment to enhancing shareholder value, with EPS growth reported alongside tangible book value accretion, both of which are correlated to the long-term total returns for shareholders. The firm is proud of maintaining double-digit growth rates in these key metrics over the past five years.
Despite some increase in charge-offs and loss reserves, credit quality remains strong, with metrics indicating performance near historical lows for past dues and classified loans. Management is optimistic about maintaining this trajectory as they navigate any economic uncertainty.
As rates are anticipated to decrease, management highlighted the potential growth in both volume and rates, tapped into their competitive edge with nearly 50% of deposits indexed to Fed funds. This strategic position could mitigate the impacts of rate cuts on net interest margins.
Looking ahead to 2025, the firm is optimistic about returning to growth patterns seen in the past despite acknowledging potential challenges from an inverted yield curve. They aim to position themselves strategically to capture growth opportunities, especially if a more favorable yield curve develops.
The focus remains steadfast on achieving top quartile performance in revenue and earnings growth while enhancing tangible book value. Management believes this consistency will ultimately reward shareholders.
Revenues from various fee-generating services are also expected to grow significantly, with targets raised for non-BHG fee revenues from 14%-17% to 23%-26% over last year’s performance. This diversification is seen as a valuable contributor to overall financial health.
Pinnacle Financial operates in highly competitive Southeastern markets where they have consistently taken market share from vulnerable competitors. Their proactive approach and strong relationships within local markets underline their growth strategy and position.
You don't have any saved screeners yet
Good morning, everyone, and welcome to the Pinnacle Financial Partners Third Quarter 2024 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 Financial'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, 2023, and it subsequently filed quarterly reports. Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation 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'm now going to turn the presentation over to Mr. Terry Turner, Pinnacle's President and CEO.
Thank you, Matthew, and thanks to all of you for joining us this morning. I expect most of you know that I'm going to begin every earnings call with this shareholder value dashboard. GAAP measures first, but quickly go to the non-GAAP measures because, personally, I find that the non-GAAP measures provide a clearer picture of the job we're doing for shareholders. You can see third quarter was a fabulous quarter. Balance sheet volumes all grew nicely, with loans up 6% linked quarter annualized. Earning assets up 12% linked quarter annualized and core deposits up 9% annualized.
Asset quality remains very strong and because they've historically been the most highly correlated with long-term total shareholder returns, the 3 most important metrics for me are revenue growth, EPS growth and tangible book value accretion, all up nicely again this quarter. Let me point out the persistent growth in those 3 critical measures and the double-digit 5-year CAGRs for all 3. Double-digit 5-year CAGRs for the 3 most highly correlated metrics for total shareholder return. Obviously, I'm proud of the long term, consistent trajectory of those 3 measures, but I know that even after 24 years of sustained outsized growth, there are always some that remain fearful that somehow we won't be able to propel the culture as we grow that the law of large numbers is going to overtake us.
So that somehow those results are primarily dependent upon me or on my partner, Rob McCabe or some key man that won't always be here as opposed to a simple, consistent, repeatable model. Third quarter was another great quarter of outsized growth for our firm. But before I review those results in detail, I want to take a minute and make sure everybody understands exactly how that growth comes about. And while we've been able to consistently deliver it over time. Obviously, the fact that we serve major markets in the Southeast is huge. Census Bureau numbers paint a vivid picture of the tailwind that exists for banks in the Southeast. It will be very hard for banks and shrink in Northeast, West and Midwest markets to match our growth.
But more important than the size and growth dynamics is the competitive landscape. Here, we're plotting the share gains and losses for us and the other market share leaders in Tennessee's 4 urban markets over the last decade. We're blessed to do business in markets where we consistently take share from vulnerable competitors who have dominated the market here before. We entered the North Carolina, South Carolina and Virginia markets in 2017 with our acquisition of BNC. We specifically targeted the Carolina and Virginia markets to some extent because of the size and growth dynamics but more importantly, because we wanted to compete against those same vulnerable competitors with whom we have successfully competed in Tennessee.
So you can see here that the share is concentrated among those same vulnerable banks and then for the most part, they've established a track record of consistently given it up, which is why the competitive landscape is the most important contributor to our ongoing growth even more than such impressive size and growth dynamics. Here's what the share plan looked like in our first market, Nashville, Tennessee, according to the FDIC deposit share statistics. Now firm-wide assets are over $50 billion. And you can see that we have a lead share position in Nashville with roughly 50% more share than our next closest competitor, an astounding position.
As most of you know, we're a commercially focused bank. So this is the commercial market share data according to Greenwich for businesses with sales from $1 million to $500 million in Nashville. There in the middle, you can see that we have a 30% lead bank share more than 4x our next closest competitor. We've been executing the same playbook across the state of Tennessee. First, with a de novo start in Knoxville back in 2007, followed by acquisitions in Chattanooga and Memphis, both in 2015, you can see the remarkably similar growth in all 3 markets.
In 2015, following our acquisition in Memphis, we were #13 on the FDIC chart and the most recently released FDIC data, we climbed to #3. In Chattanooga, we were in the fourth position in terms of FDIC share following our acquisition in 2015. Today, we're #2, rapidly closing on #1. And in Knoxville, from the de novo start of 2007, we're now #4 on the FDIC chart, a similar position to where we were at the same tenure in Nashville. And like Nashville, we're #1 in terms of the commercial market share as measured by Greenwich.
As I mentioned a minute ago, we acquired BNC in 2017. Here, you can see the dramatic transition we made in the Carolinas and Virginia, with a 10% loan CAGR and a 14% deposit CAGR since the acquisition. Importantly, on the right, you can see the growth in commercial deposits when we apply Pinnacle's simple, consistent and repeatable model. Just like the urban markets in Tennessee, we're executing the same playbook across the Carolinas and Virginia. And in 2019, we began a number of de novo market extensions in the large Southeastern markets like Atlanta, D.C. and Jacksonville, Florida, all with similar growth dynamics and a competitive landscape to that in Nashville.
I've already demonstrated the trajectory that we had in Nashville over our 24-year history there, where we are still taking share, by the way. You can see the largest markets on the left that the deposit growth is even more rapid than it was in the start-up period in Nashville. And even some of the smaller markets on the right, using this simple, consistent, repayable model, it appears we're replicating our start-up pace in Nashville there as well. So yes, we have the added benefit of operating in some of the best markets in the U.S. Frankly, it's even more important that the share leaders in those strong Southeastern markets are vulnerable, offering us a once-in-a-generation opportunity. But the hedgehog strategy here is to attract and retain the best bankers in the market leveraging our award-winning work environment using our differentiated recruitment model.
We create a laser-like focus on revenue and EPS growth for every single noncommission associated in our firm using our win together, lose together incentive plan. And then for roughly 24 years, virtually every year, we've targeted top quartile revenue and EPS growth in order for management and associates to earn their incentive at target. Think about that, an ability to continually attract the best bankers in the market and aligning nearly all roughly 3,500 associates to produce top quartile revenue and EPS growth with 1 simple annual cash incentive plan, it's simple, consistent and repeatable, not luck or happenstance. This nationally recognized culture continues to propel itself with Pinnacle just listed last quarter as Fortune's third Best Place to Work America among finance and insurance firms and it's pervasive. In most markets, we are perennially the Best Place to Work with Memphis and Knoxville repeating again just last quarter.
As investors, I know those bankers will try to convince you that their people are the best, that their people are their most valuable asset. So I'm not going to try to convince you that. I'm going to let our clients do that. On the left, this is how business clients in our 8-state footprint rate our relationship managers and how they relate to those multiple banks with the largest share in those -- in these southeastern markets. We literally have amassed the best talent in the Southeast from a business clients perspective according to Greenwich. And as you would expect, highly valued relationship managers produce better financial outcomes over the long term.
On the right, you can see higher associates compared to our primary Southeastern competitors in terms of PPNR per associate, a critical test of effectiveness. Attracting the best talent has enabled us to build a national reputation for an unmatched client experience, both among consumers and businesses, both in terms of people and systems, which has resulted in peer-leading long-term value creation. It's about our ability to consistently and repeatedly grow earnings. You can see on the top right, TSR leadership is not a new phenomenon. It's true across 5, 10, 15 and 20-year time frames. And if you look at the EPS growth across the bottom of that chart, our earnings growth has substantially outpaced peers for a decade and nobody is close.
And so to put a bow on all that, in this 1 chart, you see our unusual ability to consistently attract and retain market best talent and their ability over time to consolidate their clients and so on associated loan and deposit volumes. We validated this model any number of times over the years. Averages are dangerous because nobody's average. Everyone's above or below average. But on average, it takes relationship managers about 5 years to consolidate their books. It generally comes in on a roughly straight-line basis. And when consolidated, it's roughly a self-funded book in the $65 million range on both sides of the balance sheet. You can see on the left that we currently have a total of 235 relationship managers that are at various stages of consolidation within that 5-year consolidation start-up period.
And on the right, you see the extraordinary loan and deposit volumes that we labeling land on our balance sheet just in '25 and '26, if these cohorts and relationship managers continue the consolidation of their books over the next 2 years at the average pace. And I've already told you, it's our expectation that we'll layer in another large cohort next year and the year after that and so on. producing incrementally laddered volumes. It's a simple, consistent, repeatable model. And so as Harold walked you through our third quarter results, hopefully, you'll be able to see these factors that underlie not only our historical success, but our third quarter success and our ongoing success for that matter that our culture continues to strengthen as we grow and not diminish.
And that this persistent growth model is not dependent upon me or other key leaders. It's not dependent on the change of administrations. It's not even meaningfully dependent on a more vibrant economy, although the vibrant economy with strong loan demand would very likely enhance our growth. Our remarkably persistent growth even in difficult times as a result of this very simple, consistent and repeatable model.
So Harold will walk us through the quarter in greater detail.
Thanks, Terry. Good morning, everyone. We will start with loans, which increased by $539 million during the quarter, a 6.4% linked quarter annualized. When we consider just C&I and owner-occupied quarter for real estate, our loan growth in these 2 critical segments was approximately $706 million or 17% linked quarter annualized. We're modifying our growth expectations for 2024 to now reflect a range of 7% to 8% growth. We are obviously pleased with loan growth this year. It's been an uncertain environment all year long, and there is quite a bit of uncertainty currently.
But with the election coming up and what appears to be the initiation of a down rate cycle, both of these matters tend to point to somewhat less uncertainty in the near future, which hopefully creates confidence and bring entrepreneurs back to the borrowing take. As to our end-of-period rates, particularly SOFR-based loans, end-of-period rates are beginning to reflect the Fed decrease by quarter end. More on loan and deposit betas in just a second. One of the keys to our financial plan all year long has been increasing pricing on the renewal of fixed rate loans. As the top right slide indicates, we're expecting about $1 billion in cash flows from our fixed-rate loan portfolio during the fourth quarter of this year with an average yield of around 5.1%. We believe yield lift of nearly 200 basis points is a reasonable as these cash flows come to us during the fourth quarter.
Our competitive advantage is that approximately 22% of our revenue producers have been with us less than 2 years. All of them are ready to continue to move market share, which bodes well for us and we begin our planning processes for 2025. We will continue to win on our new lenders as we enter with the fourth quarter and head into 2025.
Deposit growth has been a real bright spot for us all year. Excluding brokered we increased deposits by $887 million in the third quarter. We're also pleased with noninterest-bearing deposits and their performance in the third quarter, again, signaling that we are finally beginning to see volume growth for DDA accounts. Given our third quarter deposit growth, we are maintaining our deposit volume forecast with somewhat more specificity around a 7% to 9% growth estimate. We continue to move deposits into the index deposit product categories. Almost 50% of our deposits are now indexed to Fed funds as we prepare for a downing environment, this should be helpful.
As we have said before, we continue to like our competitive position as to deposit rates and believe it gives us more flexibility should our current rate forecast materialize, which includes 2 additional 25 basis point rate cuts in the fourth quarter. We've included some information on betas thus far for loans and deposits. We are very pleased with how the loan and deposit pricing has performed over the last few weeks as our relationship managers have been diligent and making sure that we're able to reprice our deposits as quickly as we can to offset the impact of a lower rate environment on our earning assets.
So far, our deposit beta has outperformed our loan data and we remain optimistic that we can continue to mitigate the impact of rate cuts by the Fed to both our net interest margin and more importantly, our net interest income as we move through the next several quarters. As expected, with the investment security restructuring late last quarter, we did anticipate NIM expansion and are pleased with the 3.22% we posted this quarter. Our outlook for the fourth quarter is that we believe our NIM will be flattish after we consider the incremental rate cuts.
We are modifying our outlook for net interest income growth for 2024 to 7% to 8% growth for 2024. We know everyone is thinking about 2025, net interest income as we are. The yield curve will have a significant influence on how all that plays out next year, so we are running a lot of rate scenarios currently. We believe all banks performed better with the traditional yield curve and I believe all of us are optimistic that the risk of the existing inverted curve continuing or impact decreasing. A traditional curve, commercial clients coming back with increased energy to borrowing and national elections in the rearview mirror we believe to a better operating environment for our growth like ours.
We're again presenting our traditional credit metrics. We mentioned one $9 million charge-off of a C&I credit in the press release last night. We performed an in-depth review of that credit during the quarter, elected to charge off a portion of the credit in place the remainder on nonaccrual. Resolution, we hope will occur next year as the company seeks a permanent takeout partner. As to our outlook for charge-offs, we're narrowing our guidance to a range of 21 to 23 basis points for 2024. We are also narrowing our guidance around provisioning in relation to average loans to a range of 32 to 35 basis points. No real change in how we feel about credit as we head into the fourth quarter or 2025 for that matter. Our charts for past dues, classified loans and potential problem loans indicate we are performing near historic lows, which should be a meaningful indicator as to what we believe credit is currently.
We have no reason to believe this won't continue to perform well as we head into the fourth quarter as well as into 2025. More about commercial real estate and again, in the supplementals is more information on commercial real estate, primarily from multi-family, industrial and office. As we noted in the press release, we have now successfully dropped below our target of 70% for construction loans to total risk-based capital at September 30, which was sooner than we thought last quarter. Our appetite has changed modestly now that we are below the 70% threshold. That said, and let me stress, any new commitments to this space continue to prioritize strategic client relationships only and that we will proceed cautiously.
We anticipate that our construction concentration will fall further over the next several quarters into the 50% range, and we don't expect to see any incremental in the concentration until mid- to late 2025. Beyond all that, we are currently tracking to achieve our 25% target for total nonowner-occupied commercial real estate multifamily and construction in mid-2025. Candidly, we have always admired our commercial real estate book. The last couple of years have been a roller coaster of negative media attention around CRE and the impact on regional banks. I know many of you know this for Pinnacle, our house limits are very modest. We pride ourselves on a granular book. Our largest ticket sizes for our bank are conservative in comparison to what we hear from other franchises. Thus far for Pinnacle, our commercial real estate portfolio continues to perform very well, and we expect that to continue.
Now to fees. And as always, I'll speak to BHG in a few minutes. Excluding the loss on the sale of securities in the second quarter, fee revenues were up 8.3% between 3Q and 2Q. Our wealth management units have had a strong year and fully expect the efforts of our wealth management professionals will continue into the fourth quarter and into 2025. The fees associated with deposits are also doing quite well with commercial account analysis leading the way. As to run rates in comparison to the second quarter, during 3Q, we realized an increase of about $1.5 million from the sale of fixed assets and approximately $3 million in increased fair value adjustments from several of our other equity investments.
As to our outlook for 2024, we're again raising guidance for our fee revenues, excluding BHG, from 14% to 17% to a range of 23% to 26% growth over last year, which seems reasonable given the performance of several of our primary business lines this year. Expenses came in slightly more than where we thought they would be as of the end of the second quarter. Importantly, we are increasing our incentive target to a 90% target payout for fiscal year 2024. Again, we're raising our target which points to our belief 2024 will be better than we thought as of the end of the last quarter. As you know, direct linkage between our financial performance and our incentive plans are correlated and thus, we can't raise one without believing the other will move up as well.
Additionally, our hiring was really strong in the third quarter with 37 new revenue producers compared to 89 for the first 6 months of the year. Going into the fourth quarter, our recruitment pipeline remains strong across the franchise. Lending related expenses are up quarter-over-quarter primarily due to a $2.1 million new recurring charge related to the loss protection fee from the credit deposit swaps we executed in the second quarter. As we look to the fourth quarter, we currently estimate our total noninterest expense level for 4Q should approximate the third quarter level.
Now to BHG, and we will be quick. As the slide indicates, originations picked up again in the third quarter with originations approaching $1 billion. As to the fourth quarter BHG production should be somewhat consistent with the third quarter. As to placements, total placements were less than originations, which was consistent with the second quarter. BHG continues to build inventory in order to fill larger orders in the fourth quarter and as we enter 2025.
Also, there remains great demand for BHG paper, both from the auction platform and the institutional buyers. More than 600 unique bank buyers acquired loans over the trailing 12 months and the number of banks eligible to purchase loans from BHG continues to grow. As the spreads, auction platform spreads increased to 9.2% in the third quarter. Balance sheet spreads have remained fairly consistent with the prior quarter. All in BHG believes spreads are holding in what has been a higher rate environment. BHG believes as rates decrease, that will be good news for them from both a volume and a rate perspective.
Off-balance sheet substitution losses amounted to 4.2% in the third quarter, up from 3.4% in the second. As a result, BHG increased reserves for off-balance sheet losses to 6.2%. The good news is that past dues are trending in the right direction, which hopefully is a sign of a better credit experience in the not-so-distant future. On balance sheet losses were up modestly to 7.4% in 3Q from 2Q. Again, even though the percentage of on-balance sheet losses increased in the third quarter, the actual dollar amount or on balance sheet losses decreased. A similar circumstance has occurred in the prior 2 quarters, as balances fell faster than actual losses, which is why the percentage loss was higher. Our BHG fees amounted to approximately $16.4 million in the third quarter, and we expect the fourth quarter to approximate that amount.
Our concluding thoughts on BHG this time around are that the management is focused on building a sustainable franchise and as such, pushing as much product through the pipe is not as important as maintaining and building an even stronger balance sheet. We believe BHG remains one of the most profitable and dynamic fintech models in the country and with an even stronger balance sheet, BHG should be an even stronger competitor in the future.
Now to our outlook for the remainder of 2024. Again, we've raised our expectations in some cases and lowered our expectations in others. In the end, we feel more confident about our 2024 outlook given our strong performance in the third quarter. All of this should be a good sign for 2025. We've started our annual planning effort for next year. Our financial bills will be the same: top quartile revenue and top quartile earnings growth. The investments we've made in our new markets and our hiring success are the building blocks we will lean into as we build our 2025 plan.
As I mentioned earlier, if we can get beyond an inverted yield curve and our owner manager clients getting more confidence and start borrowing again for growth, I'm confident 2025 will be another strong year for Pinnacle. We've been through a lot of information, so I don't want to spend a whole lot of time wrapping up as we move into Q&A. We are very fortunate that we operate in what we believe the best banking markets in the United States and in markets where we believe our large cap competitors are vulnerable and giving up market share as a shy away from relationship-based banking and the impact that has on delivering differentiated level of service.
We have also, over the years, become an employer of choice. Our recruiting efforts have helped tremendously by the success of our brand in all of our markets. No longer do our market leaders have to spend hours introducing our brand to a prospective associates as brand awareness has already found its way into our markets in and outside of the way. Our best place to work and work environment results resonate among not only our associates but also potential recruits and that translates to a very successful client experience and ultimately to our shareholders. In the end, we are focused on earnings growth, revenue growth and tangible book value growth. Top quartile performance is gold year in and year out. We believe if we consistently hit these financial goals, as well as our strategic goals, our shareholders will be rewarded.
And Matt, with that, we will open up for Q&A.
[Operator Instructions] Your first question is coming from Brett Rabatin from Hovde Group.
I wanted to start with Slide 23 and just talking about the flattish margin expectations for 4Q. Given the beta performance that you've seen so far with loans and deposits and the fixed rate loans repricing in 4Q, I'm a little surprised some margin expectations aren't a little better for at least the fourth quarter. Can we just walk through again kind of your expectations for the fourth quarter betas on loans and deposits and maybe how you see some of those SOFR tied loans performing in 4Q?
Yes, sure. I'll try to get at it this way. As to the margin itself, we think that will be fair -- will be flattish. I think as we get deeper into rate cuts, we'll have better opportunities for some balance sheet hedges to come into play, but that won't occur until we get to like past 100 basis points. So we've still got some heavy lifting to do with our client base over the next, call it, 50 basis points, 75 basis points in rate cuts, if that makes sense.
So we'll have to still work on depositors pretty hard here over the next few months just to get to a point to where some of these balance sheet hedges kick in and we get some kind of a, call it, a mini calvary shows up. As to net interest income, we still expect to see some growth next quarter, and so we don't expect that to be flattish, but we do expect the NIM to kind of be flattish for the year.
Okay. That's helpful, Harold. And then just thinking about one of the pushbacks I tend to get is like, hey, you guys have obviously done a great job moving a lot of deposits to being indexed but the loan portfolio is fairly variable with over 60% through pricing fairly quickly. Do you guys think the margin -- I know you got a lot of things to think about, and it's maybe not fair to ask until we know what the yield curve. Looks like in a quarter or 2, but just thinking about timing maybe versus liability sensitive versus asset sensitive, is it fair that the margin to be lower in a quarter or 2 from here? Or do you think you can outrun maybe some of the loan repricing as betas matriculate through that SOFR portfolio in particular?
Well, we do believe we've got the opportunity to kind of keep the margin where it is. There's obviously going to be some risk that the margin does go down, but it won't be a lot. It might be a basis point or 2. But again, what we're going to have to do is rely on our relationship managers to continue to communicate with their clients to be able to reduce these lower -- into these lower rate categories. And that's what we're going to do. By pushing a lot of deposits into the 50% index, that's obviously a tailwind for that. So I guess I'll stop there.
Okay. And then if I could sneak in one last one, just around DDA. Impressive in your period growth versus average. Any seasonality in the DDA this quarter? And just maybe any comments around your efforts to grow that bucket, which the whole industry is focused on?
Yes. We think there is seasonality. We don't think that's all the story for the third quarter, and we don't think it will be all the story for the fourth quarter. In order to attract those deposit accounts of noninterest-bearing, you've got to get the entire client relationship. And we've been successful in a lot of our newer markets and attracting that and pulling that critical product across the street. And so that's why we think we're going to get some lift as we move forward and not only Atlanta, but also D.C. and Jacksonville.
Brett, I might just add, if you look at Greenwich data, I would say our lead bank penetration is extraordinarily high versus all our competitors, which is a way to say that the clients -- business clients view us to be their lead bank, which means we got their operating accounts. And so again, we're adding clients at a pretty dramatic pace taking share. So from 30,000 feet, that's the biggest thing that we're doing relative to growing DDAs is taking market share.
Your next question is coming from Russell Gunther from Stephens.
You spent some time in the prepared remarks and the slides discussing how successful you've been in terms of M&A and then organically taking share from there into the Carolinas into Memphis. Is that a strategy today that still makes sense or is of interest to you? Could you just touch on your thoughts there?
Let me clarify the question. You're asking, do we have an appetite for M&A?
Yes, that's right. I mean we spent some time on the deck going through how the success you've had there. And then the next slide taking organic share from there? Is that part of the strategy going forward?
Yes. I think what I would say is it's unlikely, I never say never, but I think it is very unlikely that we'll be acquiring banks. And I think you've heard me say before, the reason for that is our ability to hire so many people our ability to do these market extensions to grow so rapidly with a significantly lower risk profile than doing an acquisition because of that, I don't think it's likely we will make acquisitions. Russell, I think one of the points I'd hope to make is, okay, we entered some of these markets by way of acquisition, but the organic growth that we put on the pace of that organic growth was substantially beyond what those companies were doing when we acquired them. So we're really just trying to illustrate the power of this simple model of hiring the best bankers in the market, having them consolidate their books of business from where they were to hear is a really reliable growth mechanism. So because of all that, I don't think you're going to have much expectation we'll be acquiring banks.
Understood. Okay. I appreciate your thoughts there, guys. And then just one more for me, switching gears, if we could, to BHG, I appreciate the thoughts on the 4Q trend. But as we think about to comment that lower rates should be better from a volume and rate perspective and past due is trending in the right direction. Is it reasonable to think that, that revenue could grow in '25? Or are there big picture takes you could share in terms of the revenue trajectory going forward?
Yes, Russell, I'll try to work my way around that question. We really don't want to give out too much 2025 numbers. But we've had conversations with BHG as to their expectations for next year. I would imagine that it's probably going to be a mid-single to high single-digit kind of number when we finally get to it. But we've got more work to do there. We've got some -- we've got a lot of kind of work to do around what their expense base is going to look like, so on and so forth for next year.
Your next question is coming from Jared Shaw from Barclays.
This is Jon Rau on for Jared. I guess just sticking to BHG for a second. The reserve for on-balance sheet losses has been coming down, I guess, the last few quarters, but the liability for substitution and prepayments looks like that's still trending up. I guess why wouldn't those be moving in the same direction? And I guess, is there any color on where that liability for substitution and prepayment could be headed? Is it at a good level here?
Yes, I'll give you a couple of things to think about. One is the substitution -- the loans that are, that have been sold out for the Community Bank network are the responsibility of the Community Bank. So BHG, there is some lag in how those losses come to them versus the loans they have on their own balance sheet. Secondly, those loans are likely have longer tenure. So the losses related to the on balance sheet loans are newer and I typically see most of the loss content within the first 30 months. So this tail that's going on with the off-balance sheet has to do with some of these losses are for loans that have been around for quite a while as well as the community banks submitting them not nearly as time.
Okay. That's really helpful. So I guess maybe we could think of the on-balance sheet credit trends is more of a leading indicator of the off-balance sheet credit terms?
Yes, we believe so. We believe eventually, the off-balance sheet will replicate with the on balance sheet. Now the reserves associated with them are calculated in 2 different ways. One is a CECL-based reserve and the other is a trailing loss content with emphasis on the trailing 12.
Okay. Great. That's really good color. And then I guess just one other one for me. Moving over to the hiring. It sounds like 2025 is still going to be a pretty big year for bringing on new hires. As you kind of deepen your presence in some of the expansion markets, can we still expect the new hires to ramp up in terms of bringing on loans and deposits at the same pace as some of the initial hires? Or is there sort of a diminishing return that we should expect as you kind of and to the total number of RMs in the market?
Yes. My belief is that the assumptions that we used in that illustration are good assumptions on a go-forward basis. And the reason I say that is, you might guess, we've tested this model a lot of different times, and it almost always comes back to numbers that resemble what we're showing you there in terms of -- you can see the buildup from when people have been here 1 year when they've been here 2, when they've been here 3, when they've been here 4 and so forth. And those are the current -- those that 234 associates or relationship managers, those are the 234 today at whatever stage of consolidation there in. And so yes, we believe that for them to move forward at the average run rate is a good assumption.
Am I answering what you asked?
Yes, that was exactly it.
Your next question is coming from Stephen Scouten from Paper Sandler.
Just a clarifying question around the move in index deposits. I know, Harold, you touched on this a little bit last quarter as well. But how exactly are you getting those customers to move from negotiated to index? And do you think that this creates any sort of pressure on potential outflows as rates presumably move lower in the future?
Well, it's -- I think what we we're doing with individual clients taking them out of a negotiated rate bucket into the index rate bucket. I don't think there's any increased real schedules for clients to leave us based on rate, but we will lower the rate in that did not change bucket anyway. So I think what we've got to do is lean into this relationship that these -- that our folks have with these clients. And I think we've got great confidence around there not seeing a lot of outflows there.
Stephen, one of the things, if you remember some of the conversations that we had back when it seemed apparent we were headed into a down rate cycle. I think we gave indications that we had already begun prepping both our associates, particularly our associates and also our clients for how we would respond in the down rate environment. And so inside the company, there's a great understanding by our relationship managers, which as you know, is the whole key to both how we get business and how we keep businesses, that's the relationship they have with those clients. And so as Harold said, those are one-off negotiations. We're not sneaking up on somebody any of those kinds of things. So it would not seem to me that there is much risk of attrition.
Fantastic. That's helpful. And Terry, I mean, you guys added in a lot of great slides in the deck this quarter. And clearly, like you showed, you crossed 10 and nothing changed, you crossed 50, nothing changed. The growth profile is still what it is. But as you continue to look more and more like one of the large regional banks that you've kind of taken a lot of the personnel from through the years. How do you continue to outperform them so significantly? Or how do you keep yourself from starting to look like a large regional bank? Is it really just the incentives and the culture? Or is there anything in particular that keeps you from I don't know, centralizing in the ways that they have that becomes an impediment?
Yes. I think that's a great question. So first of all, I think start with the culture, everybody's said that you've been around watching a long time even before you showed up, people are saying, tire, you can't propel that culture as you get big. But the truth is if you -- we do an internal work environment survey here. We have 93% of our associates filled out. If you're not familiar with those instruments, I don't think you're going to find anybody that would have that kind of engagement with their associates so that they would give you the feedback.
And beyond that, the answers that they give are in the -- always above 70% in the top box rating, in other words as they raise their level of agreement. Those numbers have been consistent over a long time. They're not getting worse, any of those kinds of things. Specifically, we're moving up the chart on things like Best Place to Work among Millennials, Best Place to Work Among Women. And as I said in the presentation there, Best Place to Work among Financial services, third best behind American Express and Synchrony, those things are getting better, not worse.
And so I do -- I don't mean to go on and on about it, but I just want to say that the culture, there's no doubt that I and others have an important influence of it, you could screw it up if you wanted to. But it does more or less propel itself. Once it has the power, once it's rooted in and so forth, it propels itself. So I think the culture will continue to help us. I think our geographic focus will continue to help us. I've got peers that are smaller than me that have gone to line of business organizations and so forth. I get it. That's how all the big companies do it. And so if your goal is I want to be a big company, then you do that. That's not really our goal. What we're trying to do is be the best. We're trying to offer a distinctive client experience and that's the motivation to keep it geographic. It will get bigger in my opinion, because we got all these market extension opportunities and we can take share from these people and so forth. But my belief is that we ought to continue to take share.
One of the things I was trying to get across because so many people saying to your question there are skeptical, I mean, the law of large number is going to get to those guys. They can't keep growing that thing at that pace. You know we do keep growing at that pace, and it's just a really simple thing. We're able to attract bankers from other banks who lead those banks and come over here, bring their clients with them. Man, I wish I had some really sophisticated things that we've thought of some high-tech, fintech, cool thing, we ain't got it. What we do is we just have a great place to work that people want to leave those big companies that come here and bring their clients.
And so you can see we're hiring people at a dramatic pace. That's not slowing down. It's picking up speed. And so again, not to ramble on too much, but just my whole communication is at least as I see it, I don't think the law of large number is going to get us. I'm not saying it won't get you 5 years, 10 years, 20 years down the road, I don't know about that. But as far as I can see, it doesn't look like the law of large numbers is going to get us. It doesn't look like the culture is going to dissipate all those kinds of things.
Perfect, Terry. That's fantastic and congrats on all the continued success.
Your next question is coming from Ben Gerlinger from Citi.
I appreciate it. Also, I really appreciate Slide 21. I know you touched on it quite a bit. I think it's really just illustrative of kind of the DNA you guys have, like when you look at it roughly 1/6 of the bank isn't there yet. Like you have the people, but you don't have the loan, so it kind of just shows that like even if you stopped hiring, you should still ramp up pretty materially.
It kind of leads into my next question is, when you think about like most banks manageable side of the balance sheet, left and right with rates. Were you guys -- you have so much growth potential, I think it's much more of the kind of the calculus. What are you putting on rates and deposits that's come on?
So I was more so kind of curious, of the people you've hired, I'm sure it's more C&I oriented. But when you think about the claims that they're bringing over, is there a general mix of deposits or what we should kind of expect for the relationships coming over between loans and deposits? I'm sure they're obviously franchise additive, but that's a huge part of the margin outlook going forward.
Yes, Ben, that's a great question. I think we do emphasize C&I and private bankers. I think we have a general belief that commercial real estate lenders, we've got those. We're well healed there with our capacity there. So we are interested in private bankers and C&I lenders. And I think they bring just a general mix depending on what market they're in, if you're in a market like Huntsville or Bowling Green or Louisville, so on and so forth, then you're going to have a broader client base, let's say, if you're a C&I lender in Atlanta or Jacksonville are D.C., say.
So I think it just all depends. But the calculus that we use is pretty much consistent that we're looking for that person to bring a significant amount of their book from their former employer over to our bank and to do that within a reasonable time period. So we keep up with that. We try to make sure if somebody needs help. We give them the help to do that. Otherwise, we're saying, go get them.
Ben, I might just add to that. I think as I've said in my comments, averages are always dangerous because nobody's average, everybody is above or below. But on average, it's a pretty self-funded book. It's about $65 million on both sides of the balance sheet over a 5-year period of time that these relationships had to bring. And to Harold's point, that includes some private bankers that include some commercial bankers and large business bankers, small business bankers and so forth. But that's sort of how the average works it is a self-funded book.
And there's -- you do have to provide energy and emphasis around deposits. To your point, the biggest rental for a company like ours is always how do you fund the balance sheet when you can produce assets at the pace we can. But if you take a look at something like DC, which is a really large high-growth market that we're building 90 miles an hour, that thing is more than 2:1 self-funded. And so any rate, I'm just rambling to say generally, people are consolidating their whole relationship, and that includes both sides of the balance sheet.
Got you. No, that's helpful. Also kind of just dovetailing off of that, like with the additional hires? And then you gave guidance but this flywheel isn't stopping. If anything, it's speeding up. Is it fair to kind of assume double-digit higher equal to double-digit expense growth next year? Or is there any sort of initiatives behind the scene or synergies, obviously, some synergies just by scale. But anything kind of lever pulling on you guys side of the table where we could kind of mitigate some of the expense growth?
Yes, we can always do things to slow down the hiring. I don't think we'll do that. The biggest impact that we will have to our expense growth next year will be where we end up in the incentive pool this year and how much more will take us to get back to target next year because we will load the expense target for next year, the expense growth number at target. And that will be the biggest influencer of how much growth we'll have next year or at least at the first part of the year.
Ben, if I could say this, and obviously, somebody is going to take this comment the wrong way, but I'll just say this, we generally take great pride. And if you look at our noninterest expense growth over a decade, over 2 decades, over the last 5 years, whatever, it's a double-digit expense growth rate. We just grow the revenues faster. And so again, to the point you hit it, which is really important to me is like you look at all those 234 people that have yet to consolidate their whole book here, I've got 100% of that expense run rate with the revenue coming. And so again, as long as we believe we're going to continue to hire people, and they're going to continue to move those books business, which I do then you don't fear an elevated noninterest expense growth rate. We're more concerned about revenue growth and EPS growth.
Yes, that makes sense. I appreciate paying your bankers because they're doing a great job is a high-class problem to have. I appreciate it.
Your next question is coming from Anthony Elian from JPMorgan.
In the prepared remarks, you commented that if the yield curve slopes more favorably in the coming quarters, that could lead to a better 2025 revenue outlook? But if the yield curve doesn't become more positively sloped than it currently is, for example, if long rates continue to decline, to what degree would that impact the optimism you have for next year's revenue outlook?
Tony, thanks for the question. I think you're getting at why we want to try to pursue as neutral a balance sheet as we can. And you know this as well as there's a blue million assumptions that go into that. But life just gets harder with an inverted curve and has been hard over the last couple of years in dealing with that and trying to manage a spread target over the last couple of years. We think we're advantaged because of the neutrality of our balance sheet. We think we can manage through it if the inverted curve continues to just kind of lag along during 2025. But we can always be hopeful.
And it looks like that we've got some reason to be hopeful that at some point in 2025. And when we talk about an inverted curve, just to be candid, we're talking about from the overnight rate to probably around 5 years. So if we can get a traditional slope curve there, we think that's good news for us and probably a lot of bankers as well.
And then my follow-up on slide, just going back to Slide 21. The cumulative growth capacity that you highlighted in deposits and loans for 2025 and 2026, do the numbers you have on the bar, the 5.9% and the 5.6% for loans represent the blue sky scenario that you expect to come on to the balance sheet over the next 2 years? Or is that just an average basis of what you expect could be recognized on the balance sheet?
I think it's more indicative of an average. We're not prepared yet to kind of give you any sort of outlook on 2025 other than what we've talked about in the prepared remarks.
Your next question is coming from Catherine Mealor from KBW.
One follow-up on just the NII outlook. I mean if you have the ability to grow the balance sheet at a double-digit pace into next year, is there any reason -- and I know it's all maybe dependent on the yield curve. But as -- I mean, is there any reason to believe that we can't grow NII at a double-digit pace as we move into next year? Or is it safer to kind of do this high single-digit level that we saw in 2024?
Yes, Catherine. For us, there's a strong correlation to loan growth percentage growth as well as in a high percentage growth, probably because of the way our margin performs and how tight it is. But I think if you look out over the last several years, they would be closely correlated. So we're not ready to put out kind of a loan growth target for next year, but we are optimistic that we should do better than what we're doing this year.
Okay. That's great. And then on fees, that was a really great beat this quarter and kind of higher guide for '24. Can you talk a little bit about -- especially I've noticed the service charges are coming in higher. I'm assuming this is just account growth, but just any kind of commentary there? And then maybe your outlook for growth in service charges and with -- and in this quarter or maybe I could even say like in the back half of '24 fee run rate. Is there anything that feels elevated that we need to be aware of to kind of pull back as we model '25.
Yes. I think -- well, we touched on it a little bit in the comments around some fair value adjustments for other equity investments and some gain on sale of fixed assets that are in the third quarter that we don't know what the fourth quarter is going to show up as, but we're not planning on that kind of -- those numbers repeating.
Going into 2025, we think the core business is going to grow at a reasonable rate next year, whether it be wealth management or mortgage or what have you, we will be -- we will have a full year of BOLI revenues next year as well. So we're optimistic about where fees could be next year. As far as deposit service charges, a lot of it was related to our commercial analysis accounts. And if you've been around banking a long time like we have the devils in the details and it's going back through that file and making sure that you're getting paid the right fees for the right service levels. And we've done a lot of that over the course of the year, negotiating with clients, they use a lot of treasury management to make sure that we're getting paid a fair price for what we deliver.
Your next question is coming from Sam Varga from UBS.
I just wanted to put fees for a second and specifically the investment services line item. And I just wanted to I guess, ask for some commentary on what you think the run rate is here. It seems like based on just the AUM numbers you're getting better at monetizing that again? And so I wanted to see if some of that is impacted by private banker hires or just talk about that business over the next couple of years even?
Yes, it's very much impacted by hiring and the ability of those recent hires to bring your books of business to Pinnacle. We run a dual platform with Raymond James. So they're the backbone for that, but it's getting -- they've transferred to our platform and particularly like in Jacksonville, we've had great success in Jacksonville with recent hires. And so we fully intend to see that line item continue to grow. Is that what you were after, Sam?
Sorry, I might have been on mute there. So as you bring the private bankers over, I guess how quickly do the brokerage accounts come over as well?
So let me make sure I clarify. So we have private bankers that typically -- most typically control the relationship. And then we hire brokers and we hire trust administrators that both are involved in product specialties that are generally paid as a function of whatever the assets under management are. And so we're hiring across all those fronts, the private bankers, the brokers and the trust administrators. I think on that investment services line, that's primarily about commissions, which 90% of that commission income is an advisory fee. It's not transaction commissions. It's an advisory fee.
And so again, we've been extraordinarily successful with the brokers that we've hired the Series 7 licensed brokers consolidating books. And to Harold's point, I think in Jacksonville, where we've been less than 12 months, they have brought a number like $600 million in assets. And so again, just to give you some sense, man, you can drive revenues up pretty quickly when you're making those kinds of hires. And so we're hiring like that all over the footprint.
Got it. And just my last 1 really quickly on the bond book. Harold, I guess, can you comment on -- it seems like you have more variable rate now? Are you hoping to keep that bond book shorter? Are you hoping to extend it out a little bit to capture sort of the back end of the yield curve?
Well, I think we like where it is currently, Samuel. I don't see us growing it. I don't see us -- I don't see the duration extending on it. We are picking up quite a bit of yield out of it where it is. I think we -- when we looked at variable versus things when we acquired a lot of those hedges to convert it more to variable, we've got a lot of running room in front of us before, particularly with respect to where rates go. If rates continue to fall. We've got still quite a bit of yield that we can pick up before rates fall to a level to where the fixed rate decision would have been a better decision, if you can follow that. That's sounding like a lot of words, Sam. But at the end of the day, we're picking up quite a bit of yield out of that variable rate bond book, and we'll continue to pick up that yield until rates fall quite a bit.
Your next question is coming from Brian Martin from Janney Montgomery.
A couple of quick ones for me. Just, Harold, on the margin, just on the loans that reprice immediately with rates. Can you remind us what that is?
The loans that -- say that again, Brian, the loans that reprice immediately with?
With rate cuts, what will move immediately as rates cut on the loan side? I know you talked about the fixed rates that are going to continue to move higher. But just in terms of rates declining on the variable rate loans kind of the variable rate loan percentage.
Yes, all the prime rates credit will reprice immediately, and that's about -- are you looking at that variable rates beta?
Yes.
So that would be probably about 30% of the variable rate loans. It's about 14% of total loans. They were priced daily.
14%, okay. Daily. Got you. Okay. Perfect. And then just 1 question. I know you're not commenting a lot about the loan growth outlook. But just in terms of '25, just in terms of the mix, like this year, we've seen that the focus on reducing the CRE exposure. As we look to next year, does the mix of loan growth look similar? Or should it -- I guess, it seems like it would include a bit more from your comments earlier, Harold, that CRE, maybe at the back half of next year of '25? Or just how we should be thinking about that in terms of your comments also about maybe looking for a little bit better loan growth next year than this year.
Yes, I think so. We don't expect to see any kind of big uptick in construction or commercial real estate investment property likely until, call it, the last half of the year, as you say.
For next year, okay. Got you. Okay. And then just the deposit growth was very strong this quarter. Just -- can you just -- was any part of that? I know you guys have been focused on the deposit verticals. Was some of that driven by those verticals? Or was there anything outsized in terms of contributing to that growth this quarter?
No, I think it's largely in those verticals and the business model that we put forth with those verticals where we've got experts in those industries that are across the footprint, helping relationship managers garner those deposits.
Got you. Okay. Okay. And last 2 for me, just housekeeping, Harold. Just the tax rate, how to think about that. And I think you said on the fee income side, the only 2 really nonrecurring, nonsustainable numbers to think about are that the securities -- the equity investments and the gains this quarter, about the $2 million in gains this quarter, everything else is pretty repeatable .
Yes. We feel pretty good. We've kind of dug into that fee base pretty hard to try to figure out what the run rate may look like and those are the 2 items that kind of came to the top.
Okay. And then the tax rate, how to think about the tax rate going forward?
Yes. We ought to be a 20% kind of ETR kind of firm.
Your next question is coming from Tim Mitchell from Raymond James.
This is Tim on for Michael. Just 1 question on deposits. Because we talked a lot about the index portion of the portfolio. But on the CD portion, I was hoping you could shed some color on the maturity schedule, kind of the roll-off rates, the renewal rates as we move into next year?
Yes. The -- generally, about 80% of our CD book is 1 year or less. And about 50% of our CD book is 3 months or less. So that's how it kind of flows year in and year out. Sometimes brokered deposits, we will extend it out with brokered money just to kind of get some fixed rate liabilities on the books. But just kind of the normal hustling flow that time deposit book will be -- half of it will be 3 months and about another, call it, 30% to 40% will be maturing over the next 9 months after that.
Understood. And then just one more on the target rate for loan renewals. So you've taken that down a bit from the previous range. I assume that's a large product of expectations for lower rates, but also maybe some competition. Just hoping you could kind of shed some light what those conversations with borrowers are like and how you would expect that to trend as rates presumably continue moving lower?
Yes, you're absolutely right on that. We did lower the target rates into something that we think is more competitive. We're also seeing a lot more inbound traffic for, call it, private wealth mortgages and the like. And we think with these target ranges, our relationship managers will be more inclined to negotiate with borrowers and try to secure some of that business for us. In the past, our target ranges were probably on the high end of the market, and we felt like we were missing out on some loan growth because our relationship managers were hesitant to try to negotiate with borrowers when we were at above -- that far above others.
Thank you. That completes our Q&A session. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.