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spk00: Good morning, everyone, and welcome to the Pinnacle Financial Partners third quarter 2023 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. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. If you wish to enter the queue to ask a question, please press star one on your phone at any time. During this presentation, we may make comments which constitute forward-looking statements. All forward-looking statements are subject to risks, uncertainties, and other factors 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, 2022, 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 non-GAAP measures at the comparable non-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.
spk14: Thank you, Paul, and thank you for joining us here this morning. Most of you have endured these calls before, and so you know we're going to begin every one of these calls with this shareholder value dashboard because these metrics are our north star. There are a lot of interesting things that can be talked about, but ultimately we're here to produce shareholder value, and this is how we think you do that. And, of course, I always hustle to these non-GAAP measures because this is how I really manage the business. At a glance, you can see that we continue to grow revenue in EPS more rapidly and reliably than peers, that we continue to grow our balance sheet volumes more rapidly and reliably than peers, and that we relentlessly focus on tangible book value. Also, our asset quality continues to be strong with problem asset metrics continuing to outperform peers. At 23 basis points, net charge-offs are excellent but a little lumpy. You can see that they jumped up just a little bit this quarter because of a large, much-publicized syndication we were in. But generally, our non-performers and classified assets have been peer-leading, with MPAs ranked number three among peers in Q2 and classified assets number two among peers. So from 30,000 feet, it's my opinion that we continue to deliver on all the key drivers of real long-term shareholder value creation. So with that, Harold, let's take a more in-depth look at the quarter.
spk12: Thanks, Terry. Good morning, everybody. We will again start with deposits, reporting linked quarter annualized average growth of almost 19% in the third quarter was again a real positive for us. The third quarter was yet another indication that obtaining deposits in an environment where competitors can be unpredictable is very much doable for this franchise. Early in the third quarter, competitive rate pressures remained fairly intense. As we approached the middle part of the quarter, it appeared that rate pressures did subside somewhat. The mixed shift of non-interest bearing to interest bearing slowed during the third quarter as we were down $112 million, much less than the prior quarters of this year. All-in deposit costs increased to 2.92%. I'd like to point out that we ended the quarter with a spot rate at quarter end of 2.97%, only five basis points higher than the average for the quarter.
spk07: That is the smallest difference we've seen between the average rate and the quarter
spk12: we can continue at a more deliberate pace for gathering deposits without leaning heavily on the rate component for our growth. As many of you know, our goal is to be the best organic deposit grower, and we feel like we are on our way. Terry will speak more to our deposit gathering capabilities in a minute. The third quarter was another strong loan growth quarter for us as we were reporting 8.4% leap quarter annualized average loan growth. Given that, we're maintaining our EOP loan votes for 2023 at low to mid-teens growth. As we've mentioned over the last several quarters, we're exhibiting much more discipline on fixed-rate loan pricing, which ended the quarter with average fixed-rate loan yields on new originations of 7.17%. Spread maintenance on floating and variable rate loans continues to be strong. We're pleased with yields on our originations and believe we can continue to maintain similar loan spreads as we enter the fourth quarter. As the top chart reflects, our NEM decreased 14 basis points, which is more than we anticipated at the start of the quarter. What we did anticipate was an increase in average cash as we have more cash on our balance sheets spill over at the end of the second quarter into the third quarter. During the third quarter, our cash balances did decrease modestly, as our liquidity did decrease during the quarter. So we're believing that liquidity will be less impactful on our margins in the fourth quarter. That said, with a backdrop of slowing deposit pricing and with fixed rate loan repricing at better spreads, we're growing more confident that our NIM has found a bottom or we at least are fairly close. We're anticipating our fourth quarter NIM to approximate our third quarter NIM or perhaps be slightly down. Obviously, should deposit pricing heat up in conjunction with competitors just becoming more aggressive, we might need to revisit that assertion. But as we sit here today, we feel like we are close. Our rate forecast, we believe, is consistent with most rate forecasts out there. Our planning assumption is that we're not going to see another Fed rate increase and future Fed rate decreases are not expected until the second half of next year. Call us a believer in the higher for longer rate environment. With that, we don't believe a near-term Fed rate increase will be that impactful to us either in the fourth quarter or as we enter 2024. As you know, the macro environment is volatile and very unpredictable right now, and given that, we will have a continued bias towards elevated interest rate risk management, guarding liquidity of our balance sheet, and modest capital accretion.
spk11: As for credit, we're again presenting our traditional credit metric.
spk12: Pinnacle's loan portfolio continued to perform well in the third quarter. Our belief is that credit should remain consistent for the remainder of the year. Our credit officers continue their routine, periodic credit reviews of the portfolio and bring resources to bear for borrowers exhibiting potential signs of weakness. The CRE appetite chart on the bottom right is largely unchanged from the prior quarter but does reflect perhaps a slightly more conservative appetite for multifamily and industrial from what we have shown over the last few quarters. Charge-offs did increase to 23 basis points during the quarter. During the quarter, there was a lot of information out there about a single syndicated credit out of Atlanta. We were a participant in the syndication for about $10 million. Not sure of any recovery opportunities at this point, but we will continue to work with the lead bank and the syndicate to recover whatever might be available. We have shown this slide before. The top left chart deals with trends in construction originations. we began dramatically reducing our appetite for construction last summer, which is consistent with the chart. The modest amount of new construction originations during the third quarter was primarily due to new home construction loans under existing officer guidance lines to our residential home builders. Secondly, much discussion about renewals of the commercial real estate fixed-rate loans, which is the objective of the chart on the top right. Over the next several quarters, we will have approximately $100 million in fixed-rate construction Commercial real estate renewals coming up for repricing, where the average rate on these loans is currently around 4.5%. Our current yield target for these loans at renewal will be in the 7.5% to 8% range. Altogether, we have about $6 billion in fixed-rate loans maturing over the next two years with a weighted average yield of 4.4%. Thus, we see real opportunity from a repricing perspective. Now on the fees, and as always, I'll speak to BHG in a few minutes. Excluding BHG, the impact of the gain on sale of fixed assets and the loss on the sale of investment securities fee revenues were up slightly from the second quarter. A couple of items to point out here, which we believe are noteworthy. During the quarter, we recognized 5.9 million revenues from a solar tax investment that we entered into in December of 2022. We received a third-party report as to the adjusted value of the investment during the third quarter, which provided us the support for the results we posted. We're excited about our solar business and what we believe it can and will accomplish. Starting last year, it's relatively new to us as we only have about $130 million in balances, but we have a staff with seasoned industry veterans from large-cap franchises, so we expect great things from this business line. Just like many of our other equity investments, Valuation gains and losses are difficult to predict, and thus the ongoing contribution to our fee revenues will always be choppy. As I mentioned, we'll go into BHG more in just a second, but wanted to emphasize that BHG continues to represent less of our pre-tax revenues this quarter than in previous quarters. As we noted in last night's press release, we believe BHG has decreased to a 9% contribution to this year's fully diluted EPS compared to approximately 20% last year. We anticipate that fee revenues, excluding BHG, the gain on the sale of fixed assets, and investment securities losses will come in at around a mid to high single-digit growth rate for 23 over 22. Not a lot to say here this time on expenses. Total expenses came in about where we thought. We did adjust our incentive rule downward to 65 percent of target this quarter based on where we believe our performance metrics will come in for all of 2023. Our outlook for expense growth for 2023 over 2022 remains in the high single, low double-digit range, same as last time. One quick comment on FDIC insurance. We are expecting a special assessment to replenish the bank insurance fund before year-end. Our understanding is that the industry will likely recognize that as a charge to the P&L when that amount is known. Just so you know, we expect that charge to be in the $25 to $30 million range, and this charge is not reflected and our outlook for 2023 expense growth. Our tangible book value per common share decreased to $48.78 at quarter end, down slightly from June 30. The decrease was primarily attributable to the rise in intermediate-term interest rates during the third quarter and the resulting impact of that on the market values of our AFS portfolio and, of course, AOCI. Our outlook for the fourth quarter is that our capital ratios will likely be flat to down next quarter, Contributing to this will be the usual fourth quarter P&L matters, fourth quarter loan growth, et cetera. Of note is that BHG will record their day one CECL adjustment in the fourth quarter, and this will serve to reduce our capital accounts by a modest amount. This day one non-cash adjustment will not impact our fourth quarter earnings. Repeat, it will not impact our fourth quarter earnings and should approximate a charge to capital of approximately $40 million. Subsequently, BHG will likely need to maintain their reserves at amounts approximating 9% of total balance sheet loans. The impact of maintaining loss reserves at those levels going forward has been considered in our fourth quarter outlook for BHG. We believe the actions we've taken to preserve tangible book value and our tangible capital ratio have served us well, and we have no plans currently to alter our Tier 1 capital stacks being any sort of common or preferred offering. The chart on the bottom left of the slide details several pro forma capital ratios as of the end of September. Although we don't anticipate significant changes to the capital rules, we're pleased with these results and believe they will likely compare favorably to other peer banks. Now a few comments about VHG. The top right chart is consistent with our previous quarterly earnings calls and details that production has been consistent over the last several quarters at about 1 to 1.2 billion per quarter. Placements to the bank network were less in the third quarter, while placements to the institutional investors were again at the highest level ever, and signal that demand for BHG paper by some of the most respected asset managers in the country continues to be really strong. As we look to the fourth quarter, BHG believes origination volumes will likely be less than Q3 as they continue to shrink their credit box, and they believe sales into the bank network could experience some decline over the next few quarters as that client base continues to wrestle with a more restricted funding environment, and we also believe BHG will likely want to build loan inventories in the fourth quarter as they head into 2024. That said, BHG's bank network, which we believe is very unique and we believe would be difficult to replicate by any BHG competitor, will continue to grow and provide ample liquidity to BHG. As to liquidity, we presented this slide last time in order to provide additional insight with regard to the significant liquidity channels available to BHG in placement of their loan production. BHG successfully negotiated two private whole loan sales of about $400 million during the third quarter. Importantly, these type sales are executed with no recourse to BHG. Lastly, BHG is anticipating their eighth capital markets transaction here in the fourth quarter. They are currently anticipating that the volume for the securitization will likely be in the $300 million range. All things considered, we believe BSG has assembled a very enviable liquidity platform that should serve them well for many years to come. This is the usual information we've shown in the past, detailing spread trends since the first quarter of 2021. The top chart represents the gain on sale of the off-balance sheet bank network, and the bottom chart is a blended chart of all on-balance sheet funding, which incorporates incorporates the historical buildup of balances. As anticipated, spreads for off-balance sheet loan placements have come in somewhat with higher rates and a tightening of BHG's credit box. During the third quarter, the blended spreads for on-balance sheet loans was slightly higher than the bank network, given the balance sheet loans reflect the buildup of balances over the last three years. As we head into the fourth quarter, BHG believes that spreads for both on- and off-balance sheet loans should be consistent with the third quarter. As we've noted in previous quarters, BHG has tightened its credit box over the last several quarters, particularly with respect to lower tranches of its borrowing base. Production values remain strong, even with tighter credit underwriting. BHG refreshes its credit score monthly, always looking for indications of weakness in its borrowing base. Credit scores are obviously up from previous years. The Venice chart on the right is helpful to understand how much underwriting has improved and thus impacted the lost content in the portfolio. At the top of the chart are the lines reflecting originations in 2012 through 2015. Lines begin to level out at cumulative loss rates of 10% to 12%. Vintages after 2015 begin to reflect improved performance with the lines leveling out within the 5% to 10% loss ranges. BHG continues to allocate resources to the post-COVID vintages of 2021 through the first half of 2022 as those vintages BHG believes were graded higher than the bar ultimately warranted and thus skewed the loss rates higher for those loans. This slide again provides more information on credit and detailed reserves and losses for both off-balance sheet and on-balance sheet loans. BHG is optimistic about credit at the end of the third quarter. Typically for BHG, approximately 70% of the loss is incurred within the first three years of origination. But with great inflation, as was mentioned about the 2021 and the first half of 2022 vintages, losses should and have come to light sooner. As a result, DSG has expended significant resources to bulk up collection activities and will be instituting in-person closings for new borrowers, which was suspended during COVID-19. Although higher than historical losses are likely for the near term, the credit performance of the portfolio does appear to be improving, pointing towards cautious optimism as we enter the fourth quarter and into 2024. BHG had another strong quarter with approximately a billion dollars in originations and are on track to achieve 3.8 to 4 billion originations this year, which is slightly less than last year, but consistent with our outlook from the last quarter. As we mentioned last quarter, BHG had a conservative bias going into the third quarter such that as they continually tighten their credit box, production in the last half of the year was expected to be lower than the first half. The current fourth quarter loan production forecast should approximate $600 to $800 million in order to fall within the 2023 full-year guidance, which is less than the quarterly production levels thus far this year. During the quarter, BHD records several one-time expenses related to the markdown of a building they anticipate selling, as well as markdowns of some software assets and other items that were related to some business lines that BHD has elected to not support any longer. These one-time charges amounted to approximately $10 million during the third quarter. These amounts have been incorporated in BHD's results and outlook for 2023. Net earnings for 2023 are forecasted at $175 to $185 million, inclusive of the one-time adjustments just mentioned, and is basically consistent with the range from last year's forecast. Quickly, the usual slide detailing our financial outlook for 2023. We have a bias currently toward a more cautious outlook when it comes to credit, interest rates, and capital. Our job is to manage the risks that face this franchise every day. What we know is that our business model remains relationship-based, nimble, and resilient. Our management team has significant experience and has tackled economic downturns before. We have great confidence that we'll be able to manage the high-quality banking franchise that our shareholders have come to expect from us and can currently handle whatever curveballs get thrown our way. And with that, I'll turn it back over to Terri.
spk14: Thanks, Harold. Warren Buffett and others have famously said, manage the fundamentals and tell the story, and the stock will take care of itself. I believe that. At Pinnacle, we are managing what we believe are the fundamentals, the critical variables to creating outside shareholder value. And so my goal here now is to tell the story, to crystallize the extraordinarily valuable deposit franchise we've built. As an industry, we've been in a war the last three quarters, and in the fog of war, it's easy to get confused about what's really important. We've all just witnessed three high-profile franchises go to zero, primarily because of two things. Number one, their enterprise-wide risk management. In my judgment, they all took extraordinary risk. And two, the stickiness of their deposits. And so the risk a management team is willing to take matters, and how they use their security book matters. and how they manage interest rate sensitivity matters, and how they manage concentrations matters, and then how they attract and retain their deposits matters. Personally, I wouldn't want to be long any bank our size that's stuck in the commodity trap. That means an undifferentiated franchise from a client's perspective, because in that case, there's no ability to reliably gather deposits at a pace sufficient to sustain outsized revenue and EPS growth, and no ability to retain deposits in difficult times, which again jeopardizes the reliability of their growth. But a bank that can attract talent by virtue of being an employer of choice, a bank that utilizes its client experience as the primary basis by which it attracts clients and retains clients, a bank that can rapidly and reliably grow net interest income, the largest component of EPS, that's a valuable deposit franchise. Anyone who's heard me tell the pinnacle story has heard me talk about the pinnacle philosophy, that excited associates produce engaged clients and nothing enriches shareholders like engaged clients, meaning raving fans that bring more business to you and refuse to leave you in times of uncertainty. Many times when I discuss that philosophy, I try to list the prove-its, the workplace awards we've won, the service and brand awards we've won, Outside shareholder returns we've produced over short, medium, and long-term timeframes. But today I want to show you the power of building a great workplace, of being an employer of choice. Happily, most of the banks that have leading market share positions in our footprint are hemorrhaging talent. And while I can't provide a metric to prove it, I do believe we're the employer of choice throughout our footprint. What bank do you know that's produced a compound annual growth rate of revenue producers of 7%? A 7% per annum increase in the number of experienced revenue producers while still producing top quartile profitability. That's a valuable deposit franchise. And by virtue of the associate engagement you're able to create, you provide clients an experience that lights them up, that engages them in such a way that they want to bring you more of their business, And they want their friends and colleagues to experience the same thing. Those are what the researchers refer to as promoters. At 57, according to J.D. Power, we have the second highest net promoter score of all the top 50 banks in the United States based on asset size. Number two in the country. That's pretty tall cotton. Of course, J.D. Power has more of a consumer slant, so we rely a little more on Coalition Greenwich, which is more focused on businesses. According to Greenwich, our ability to create an experience that results in raving fans, promoters, is literally one of the best in the nation. I know no competitor in our footprint is coming close to a 79 net promoter score, and I'd be surprised if any bank in the country is exceeding a 79 net promoter score. And, of course, that begins to explain our substantial outperformance in terms of deposit growth, shown here on the far right. Our net deposit growth, our ability to attract and retain deposits, is wildly better than peers, both prior to the bank failures and subsequent to the bank failures. And I'd say that's a valuable deposit franchise. Nashville is the best case study of how this all works. Using the FDIC summary of deposit market share data, you can see on the far left the market share leaders in Nashville in June of 2000, prior to Pinnacle opening in October of 2000. I included the 2022 data in the middle, not only so you can easily see the outstanding market share we took and who we took it from, but so you can see the most recent data on the far right that our model continues to grow, deposit market share in Nashville in 2023 at a very rapid pace, so much for the law of large numbers. What I hope I can bring to life for you is that while it is incredibly advantageous to be in large, high-growth markets, which we are, nothing, Literally nothing is more valuable than a differentiated experience that can reliably take share from the weaker competitors that dominate our markets. Think about that. Over 23 years in existence in Nashville, the top three banks gave up 27% share, and we took nearly 21% of the market from them. That's a valuable deposit franchise, and honestly, I'm not aware of a single bank in the country with that kind of deposit-building franchise. And while we've been at it the longest in Nashville, based on FDIC market share data for 2023, we're growing share in virtually every market that we're in. All of those listed here have positive share growth. And look at this. When you compare the deposit volumes we're now producing in markets like Atlanta and Washington, D.C., to our first three years in Nashville, where we now dominate, you have to be blown away by how that propels sustainable growth going forward. That's a valuable deposit franchise. As I've alluded to several times now, to be a valuable deposit franchise, in addition to your ability to attract deposits, it's critical that you can retain deposits in times of crisis. And we don't need to invent metrics that we hope might be predictive of how sticky a bank's deposits are. We can know, right? I would say the best test of a bank's ability to retain clients was how well they did in that period of time leading up to and immediately following the Silicon Valley bank failure. Think about it. It was the worst bank scare since the Great Depression, and it occurred in this time of frictionless transfers. It's never been easier to transfer bank balances than at this time, and really we saw three relatively large bank failures fail precisely for that reason. But at Pinnacle, in that extreme crisis, not one of our 200 largest depositors left us in the month following those failures, not one. And the balances of those 200 total $3.9 billion at the time of the SBB failure and $3.9 billion roughly a month after that failure. It's just hard to leave a bank you love and trust, and that's a valuable deposit franchise. A further proof of the power of the franchise is that according to Greenwich, Over the next six to 12 months, in our footprint, Pinnacle is the most likely bank to earn more business and the least at risk of losing business. The most likely bank to earn business and the least likely of losing business. For each of the three banks to dominate our footprint in terms of existing deposit client share, in other words, for each of the three market share leaders, between 17% and 22% of their clients indicate they're likely to lose business in the next six to 12 months. That's a huge opportunity for us to produce outsized growth, given our proven ability to take their share. And because our clients' engagement with us, nearly 40% of our clients indicate a likelihood that we'll earn more of their business. I would say that a franchise that's most likely to earn new business and least likely to lose business is a very valuable deposit franchise. And, of course, the ultimate goal of all that is to rapidly and reliably increase total shareholder returns, Over the last 10 years, our total shareholder returns have substantially outperformed all our peers. As we've grown in asset size, our PE multiple has contracted more than most of our peers, largely, I suspect, due to a fear of the law of large numbers. And so for us to produce outsized total shareholder returns as our PE contracts, we had to substantially outgrow peers in terms of EPS, which we did. But given that net interest income is by far the largest component of EPS, it'd be hard to substantially outgrow peers in terms of EPS over an extended period of time without growing them in terms of net interest income. And it'd be hard to outgrow peers over the long haul in terms of net interest income without outsized loan and deposit volume growth. So hopefully you'll agree that a bank that can attract talent by virtue of being an employer of choice A bank that utilizes its client experience as the primary basis by which it attracts clients and retains clients. A bank that can rapidly and reliably grow its net interest income, the largest component of EPS. That's a highly valuable deposit franchise. Paul, I'll stop there and we'll take questions.
spk00: Certainly. At this time, we will be conducting a question and answer session. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Once again, please press star 1 if you'd like to ask a question at this time. And please hold while we poll for questions. And the first question today is coming from Stephen Alexopoulos from JP Morgan. Stephen, your line is live.
spk17: Hey, good morning, everyone. Good morning. So I want to start on the deposit side and specifically a deposit mix. So you guys had very strong growth in the interest checking account, right? It was over half on the average balance, and that rate's now 377. Can you give some color? Is that where new customers are coming into the bank or see a migration from non-interest bearing into that account? And is that where we should expect to see outsized growth?
spk12: Yeah, I think we'll see more in the money market accounts, Interest checking accounts, I think a lot of the new strategies, the new verticals will point clients in that direction. Looking at our new account growth over the last, call it three months, Steve, about 10% to 15% of it is in non-interest bearing. So we're still attracting clients that need operating accounts, but I think a lot of the sales, of course, is aimed at more products that are more aimed towards those interest checking and money market accounts.
spk17: Got it. And Harold, you called out the spot rate on total deposits, but what about this account? Where are you pricing relative to that 377 right now?
spk12: Yeah, I don't have that right now, but I would imagine that new account growth is probably in the 377. Just a wild guess, Steve. I would think the spot rate is probably in the, call it the, probably pretty close to the 297, maybe a little north of that.
spk17: And then helping to offset that, earning asset yields are picking up a bit, you know, 21 pips quarter over quarter. Given where longer-term rates have moved, Harold, should we expect more of a lift in our earning asset yields coming in the fourth quarter? Is that picking up?
spk12: Yeah, we are. We're expecting some more lift primarily through the repricing of the fixed-rate loan renewals. We got, you know, like we mentioned, about $100 million in construction coming in, I think, altogether. We're looking at somewhere close to maybe call it $300 or $400 million in fixed rate renewals coming through this quarter.
spk17: Okay. So if we put those together, you think NIM is flat to down slightly in the fourth quarter. Is it safe to say that'll likely be the bottom of NENITRA's margin for this cycle?
spk12: Yeah, that's what we're hoping for, Steve. We're really hoping that it was this quarter that the bottom is when we hit, but We looked at the projections for the fourth quarter several different ways under several different scenarios, and it looks like we're really close. Okay.
spk17: And then on the expense side, I appreciate all the commentary that more of the expenses are now being directed at revenue producers versus support staff. But I balance the commentary that you're putting out, Terry, is that you're putting out the word to accelerate the pace of new hiring, right, just given the market opportunity. But there's less pressure on back office. When I put those together, how should we start to think about expense growth for next year? Could you give us just a rough range? Because I don't know how to put those two together.
spk12: Yeah, we're looking at the 2024 expense plan right now, and we've got to be the largest increase in expenses that we're hopeful to cover would be our incentive costs. We're accruing 65% so we'll add 35% into the plan for next year. We are introducing to our board and the comp committee several different ways that we think we can cover that additional cost and still produce the revenue growth that I think everybody expects us to produce. So we're obviously not going to introduce into our expense plan, any number that is going to cause our EPS to be unduly hit. So we're looking at what our projections are next year for us and our peers. We're likely to try to achieve some percentage growth and likely, well, we'll always be trying to get into the top four of that group. So I know that's a lot of word salad for you, Steve, but at the same time, we're not really ready to kind of talk about where we are on expenses. Terry's challenged us to look at our expense base with a lot more diligence here this quarter as we look into 2024. Right.
spk17: But, Harold, if we just put together new hiring with less back office, does that imply less pressure on expenses or more pressure on expenses because of that?
spk12: No, that will obviously produce better operating leverage on that particular notion for sure. We don't intend to hire as many in the support groups next year as we've done over the last two years. So that is an added benefit. What I want to make sure is that we get on the table that we're also planning to increase our expense base next year to more of a target payout on our incentive approval. So just don't let us forget. Don't forget about that.
spk14: Steve, I think on what you're chasing there on just the impact of the net hiring of revenue producers and non-revenue producers, that ought to be a net positive. And, again, I think what Errol's trying to do is make sure everybody gets it, that our incentives are tied to performance. And so we're hoping to produce a performance that warrants the target payout or above next year. And so that in and of itself is a big increase to the incentive line. But the item you're chasing on the net impact of hiring, it ought to be a net positive. Got it.
spk17: Got it. Okay, and maybe just lastly, just if I zoom out, right, we look at loan and deposit growth, just full year expectations for this year, you know, maybe for you, Terry, as you look at the strength of your markets, the pace of new hiring, do you see us exiting 2023 and entering 2024 with more momentum than what we saw in 2023, or is it about the same? Thanks.
spk14: I would think it'd be more momentum in 2024. The You know, this has been quite a year. You know, lots of concerns about interest rates when you head it in, lots of concerns about inflation quickly into the bank failures and boom, boom, boom. Boy, just a lot of opportunity for caution. But I would say, you know, Steve, you know better than I do what all the variables are out here to figure, but it feels a lot more stable now. as I look at what our business model is today than it did in early 23. Got it. Perfect.
spk17: Thanks for taking my questions.
spk00: Thank you. The next question is coming from Brett Rabaton from Hovde Group. Brett, your line is live.
spk03: Hey, guys. Good morning. Thanks for the questions. Wanted to talk about kind of the normalization of credit and just, you know, you obviously were in the one credit that quite a few regional banks were that, you know, raised net charge-offs a little bit this quarter. But wanted just to ask about the $65 million increase in classified assets, if there was anything that was, you know, sort of more... normal, or can you talk maybe just about that in general, and then just maybe we can talk about the SNCC book and how big that is and how you think about that?
spk12: Yeah, as far as charge-offs for this quarter, without the Mountain Express charge-off, I think we'd be somewhere consistent with the prior quarters. We think going into the fourth quarter, we don't see anything outsized currently that would warrant us thinking that charge-offs are going to increase significantly from that where we are today. Brett, did that get what you were talking about, or are you interested in more information on where we are?
spk03: Yeah, I know that one credit kind of impacted that charge-off, but just wanted to kind of hear about the increase in classified, if there was anything that was Underline there that had a commonality, and then just maybe if you could give any color on the SNCC book and just any characteristics of that portfolio, how much you lead, how you kind of run that portfolio.
spk12: Yeah, the classifieds did bump up on us. I think the credit officers are all over that one. It's a health care credit that we have banked for a while. And they just believe that their metrics are not looking where they are. They're not performing at where they need to be performing. And so they've downgraded it. That contributed to primarily the increase in classifieds this quarter with that one credit. So that was that. As far as the SNCC book is concerned, we're running about 7% of total loans in our shared national credits. So the way we approach that largely is we want in-market, the loans themselves, we want them to be in-market. We want them to be relevant to our business development such that we can bank the principles of the business. And we've traditionally done that here in Nashville and in other markets. The one credit that charged off this quarter was a little bit of an anomaly for us. I know there's been a lot of discussion about it being idiosyncratic and all of that. It was also kind of unusual for us because there was a bunch of banks in it and we were at the end of the line. And so with that, that's not something we normally like to do. So I don't think you'll see a similar event on both particular matters.
spk14: Hey, Brett, on that thing on the sort of normalization of credit metrics, I think you've probably heard me say they'll have to normalize. There's no chance we can operate at historic lows forever, and so they'll have to normalize. But, you know, when you sort of look in there, your non-performers are down during the quarter. Classifieds, my bet is even after that increase, will probably still be the third best in the peer group. And so, again, they're going to have to pick up normalized, but it still feels really good from my perspective.
spk03: Okay. That's helpful, guys. And then maybe I just wanted to make sure I understood on the guidance back on the margin in the fourth quarter. It kind of seems like you've got, you know, assuming the trend continues of slower upward trajectory of funding costs and quite a bit of assets for pricing in the fourth quarter, I'm not saying you're sandbagging in the margin guidance, but it just seems like the tenor would be a little bit better. Are you just being cautious on that relative to, you know, the deposit struggles for the industry this year and potentially an increase in competitiveness around deposit pricing? Or is there something else that I'm missing?
spk12: No, I don't think you're missing. We do believe that we're, you know, like we said, we're near a bottom if not at the bottom on our margins. We think we've got great opportunities on loan repricing like you talked about. We think the deposit book is behaving well. We will keep our fingers crossed as to whether or not we can move the margin up. But as we said today, you know, we think we are where we are, and we think we're going to be in pretty good shape as we go into 2024. Okay. Great.
spk03: Appreciate the color, guys.
spk11: Thanks, Brent.
spk00: Thank you. The next question is coming from Timur Brasiler from Wells Fargo. Timur, your line is live.
spk02: Hi, thanks for the question. Just keeping with that same line of comments, a lot of discussion around net interest margin. I'm just wondering about net interest income and how that acts in a higher for longer environment. Is the expectation here that as long as the Fed is higher for longer, NII is accelerating? the growth in NII is accelerating, or is there some offsetting dynamic that might keep that growth rate more limited?
spk12: Yes, that's a great question. I think from our perspective, the way our book typically behaves is we've got all these fixed rate loans that are going to reprice in this higher for longer kind of narrative. But if the Fed kind of keeps the lid on short-term rates, that's where most of our deposit pricing will likely go. be influenced by. So if you don't see any more rate increases, then the competitive pressures will be what drives kind of our deposit costs. And we believe that we're really competitive on deposit costs presently. So we don't think we've got a lot of, I mean, we'll obviously have some increases in deposits due to competitive rate pressures. But at the same time, we don't think we've got
spk11: nearly the hill to get over that we've already talked.
spk02: Okay. And then maybe one for Terry in the release, you mentioned a couple of times more vulnerable competitors and asking your line leaders to accelerate their efforts in recruiting. Can you maybe just talk through the competitive landscape? I know you've had good success and picking off talent and market share from some of the larger banks. Now there's some dislocation from regional banks in that space as well. Maybe just talk through the broader competitive landscape, and then if you could put some numbers around what an accelerating effort for recruiting might look like in 24.
spk14: Yeah, I think the... Thank you for that question. Give me a chance to clarify here a little bit. So I think from a competitive standpoint, You know who the market share leaders are in our southeastern footprint. Generally, in almost every major urban market, they're going to be dominated by three and to some extent maybe four banks. Truist, Wells Fargo, Bank of America, and Regions. And so that's the line of scrimmage for us tomorrow. You know, a lot of people over the years ask, how do you compete with this little bank or that little bank? Generally, I don't know the answer to it because the line of scrimmage is always those market share leaders. We are finding, and I think I mentioned in my comments, a lot of those banks that dominate our market are hemorrhaging talent, some due to integration issues, some due to, I think, regulatory pressures, all those sorts of things. But if you think about those banks I listed there, most of them have a difficult landscape, which brings pressure in their organization. A lot of them are cutting staff. A lot of them are losing staff because of the continued rollout of tightened policies and all those kinds of things. And so my belief is they're We've enjoyed vulnerability among those competitors really throughout our existence, but I would say that the vulnerabilities today seem higher, seem more than the vulnerabilities that we've enjoyed through our first 23 years. And so that's sort of the backdrop of what causes me to say, hey, we need to be seizing this opportunity. I don't mean to be dramatic, but I do honestly believe that it is a once-in-a-generation opportunity to build a big franchise on the shoulders of that disruption. In terms of what does that mean in terms of hiring people, I think you've followed us a while. You know that I think over the last three years, prior to 23, we set a record for the new volume of revenue producers that we hired. We won't do that this year. You know, maybe be down... say 30% this year from previous records of revenue hires, my belief is we'll take it back north to approach those previous records. So you might be able to hire 20% more revenue producers next year than this year.
spk02: Okay. That's great color. Thank you for that. And then just lastly for me, on BHG, I know in recent years there's been discussion on maybe lowering overall ownership or getting more creative in an effort to avoid some of that CECL impact. With the CECL impact now here already and embedded in kind of the capital position in the fourth quarter, does that change your longer-term view on partnership with BHG? Does that maybe entice you to stick with the current structure for a longer period of time, or is there still a want to maybe reduce some of the exposure?
spk12: Yes, Mayor. Thanks for the question. I don't believe CECL impacts our view of BHG, our relationship with BHG, and what our outlook is for BHG. We still have a great partnership with them. We meet with them routinely. We understand what their strategies are now going into 2024. We're optimistic about what they can accomplish, and we think they're building a very valuable franchise over the short and intermediate terms that could be valuable to anyone that might think that going into that market segment would be advantageous for them. We're proud of what they've been able to accomplish, and we're optimistic about what can be coming to us next year.
spk02: Great. Thank you.
spk00: Thank you. The next question is coming from Stephen Skouten from Piper Sandler. Stephen, your line is live.
spk16: Yeah, thanks. Appreciate the time. I guess it sounds like most of the growth is going to continue to come organically from the new hires. I assume that's a lot of D.C., Atlanta, some of these newer markets. I guess my question is, any newer markets for you guys that you might push into with these accelerated hiring plans and or with some of the dislocation and weakness of other banks, do you think about M&A opportunities any more intensely at this point?
spk14: Yeah, I think, let me take the last part first. I think as it relates to are we considering M&A more intensely than previously, I think the answer to that is no, we're not. I think as it relates to market extensions and so forth, Stephen, you heard us talk about this over a long haul. If you go to Memphis and draw a line there, Up to D.C. and down to South Florida, we want to be in all the large urban markets in that triangle there. The obvious void is Florida. Florida is attractive to us because it's dominated by those same players I just mentioned in response to Tamir's question. And so anyway, those are attractive markets. We do not, and I think you know this, we don't sit up here and say, okay, we need to find our way to Jacksonville, Florida. We need to find our way to Tampa, Florida, and set out some initiative to bring that about. It occurs the same way that all our other recruiting does. Generally, somebody in our organization will turn somebody up that says, hey, this group right here, these are my buddies. I've worked with them. They could build you a big bank. And so we'll pursue those and see if we can find something that's good for them and good for us. We don't feel like we have to go to do any market extensions to produce outsized growth. We think the current hiring methodology and the existing footprint will do that. But there's no doubt we do see opportunities. And, you know, if we find the right team that can build us a big bank, we'll go next week or next month or next year. If we don't find them, that's okay, too. We don't have to get there. We believe the current recruiting model and the existing footprint is going to produce outsized growth. So I hope I've hit it what you want. But if I have not, ask again.
spk16: Nope, 100%. That's very helpful, Terry. Appreciate that. And then maybe kind of hopping back to credit. I mean, I know, Terry, you said you obviously expect some normalization over time and you guys have been running the bank successfully for a while and gone through credit cycles. There seems to be a big disconnect between what people are expecting or what fears there are around credit and what banks are actually seeing. Can you tell us for you guys what gives you the most confidence that that normalization won't be you know, catastrophic or what have you or what some people seem to be expecting on the downside?
spk14: Yeah, I think the principal thing is how we develop our business. And so just a quick reminder, what we do is we target experienced bankers who somebody has seen be successful at that job before. The average experience of the people we hire is 26 years. And so when you're hiring people that have been at it for 26 years, handling a book of business for two and a half decades, it does produce rapid growth because generally if they handle that book that long, they can move the book quickly. But more importantly, it produces outsized asset quality because they leave the bad credits behind because they're well familiar with what's going on with those credits. and so forth. And so, again, my belief is that that has accounted for the outstanding credit performance that we've had, and I believe that it will continue to do that. You know, some people can go back and say, well, Terry, how'd you do in the Great Recession? Did you have outside losses? I think I'd say two things on that, Stephen, for whatever it's worth. It's a little more than you asked, but I don't mind a comment on it. When you look at, if you call the Great Recession the period from first quarter of 2008 to fourth quarter of 2012, in that period of time, we lost a little less than 5%. That's a horrible number. But all our major competitors, the banks that we've talked about here, Regions, First Horizon, Bank of America, SunTrust at the time, lost anywhere from two to three times that number. And so it was an outperformance, although it was a bad number. And so we said, well, what made it bad? We had just completed two acquisitions immediately prior to going into the Great Recession. Our natural model didn't produce much in the way of commercial real estate, but the acquisitions that we made left us with a concentration in residential real estate at the worst possible time to have one. We don't have that concentration today. And so the combination of the model and the differences in our company today versus prior cycles are the principal reasons I feel good about where we are.
spk16: Perfect. Helpful. And maybe one just last clarifying question here. You just mentioned consumer real estate, which you guys don't have a lot of this time around, which is great. But I did notice that you took the reserves up there to like 148 as a percentage of those loans from 127. Harold, is there anything... Meaningful there that drove that increase. I think there's recoveries in that portfolio year-to-date.
spk12: So we're just kind of surprised to see it tick up there Yeah, I think the Moody's model is what is driving that increase and outlook for those borrowers They may require that small percentage increase Got it, but nothing specific that you're seeing there right now that gives you any real outside the No, not really. I don't think we've seen anything of any consequence in that book. We certainly, I don't think we anticipate any losses in that book.
spk16: Great.
spk12: Thanks so much for the color, guys.
spk16: Appreciate the time.
spk14: All right. Thanks, David.
spk00: Thank you. The next question is coming from Brandon King from Truist Securities. Brandon, your line is live.
spk09: Hey, good morning.
spk11: Hey, Brandon.
spk09: Hi. So just wanted to get an idea of thoughts on the securities portfolio. I know there was some more restructuring in quarter. Just what are your plans there for how that should shrink going forward?
spk12: Yeah, I think we're about where we need to be on securities. We don't have any imminent plans to do any more. We will probably hold right here and see what happens with intermediate rates here. I think we've gotten the segments of the securities book that we were looking to get. So we're going to hang on right here and see how it goes from here.
spk09: Got it. And then, Terry, I just wanted to take another angle just through plans to accelerate hiring. Could you just talk more about the type of talent that's available and kind of how that compares to maybe a more normalized environment?
spk14: Yeah, I think the type of talent that's available are the biggest category of revenue producers for us is we use the term financial advisors. Most of the industry calls them relationship managers. But what we're speaking of are bankers who control a book of business, a book of clients. And the focus there would be what – wealth management advisors, small business advisors, and middle market advisors. So that's really where most of that hiring should occur. The other categories of revenue producers, we've been pretty successful in other wealth advisory. And when I say that, I'm speaking to both brokers, trust administrators, and so forth. So those are sort of secondary categories of revenue producers. But, you know, the largest segment is just what you might think of as an old-fashioned relationship manager that handles a large book of banking business. Am I answering what you're asking, Brandon?
spk09: Yeah, yeah. And I just want to get a sense of, you know, are you seeing kind of maybe – a higher level of talent that's more available now compared to a couple of years ago?
spk14: I think it would be hard for me to say that the talent itself would be at a higher level than the talent that we've hired. But I would say that we have an expectation that the volume that's available is more than it's been over the last 12 to 24 months.
spk09: Okay. No, that's fair. That's fair. And then just lastly, Harold, if you could give us a sense of what you're thinking about as far as the runoff of FHLB advances and runoff in broker deposits and wholesale funding.
spk12: Yeah, the FHLB advances, I think, have longer terms. I don't think they'll be running off very much here until next year. Broker deposits, I think we have some meaningful deposits that are coming up for renewal in the first quarter of next year, Brandon. And so right now we intend to just pay those off and rely on our core funding growth to replace it.
spk09: Got it, got it. And do you have the amount on hand of what's up for renewal in the first quarter?
spk12: I think it's about $300 million, something like that, $300 or $400. We reduced our wholesale deposit some this quarter, and we intend to do it some in the fourth quarter as well, but I think there's a meaningful number that comes up in the first quarter.
spk09: Got it. Thanks for taking my questions.
spk12: Thanks, Brandon.
spk11: Thanks, Brandon.
spk00: Thank you. The next question is coming from Matt Olney from Stevens. Matt, your line is live.
spk05: Hey, thanks. Good morning, everybody. On that last point, Harold, on the broker deposits coming up for renewal next year, any color on the cost of those deposits as compared to your more recent incremental cost of core deposits that you could potentially replace that with?
spk12: Yeah, I think those deposits were acquired right around the first quarter, right around Silicon Valley and Signature. I think they were probably in the, call it the mid-4s, somewhere in that.
spk05: And how does that compare to the incremental deposit cost for the bank?
spk12: Well, right now, new accounts are coming in at around 3.5 in a weighted average rate. So there ought to be some pickup there just based on that. So
spk05: Okay. And then you mentioned earlier about the pressure on the non-interest-bearing deposits has slowed quite a bit. Any other data points you can provide about what you saw maybe later in the quarter or the first few weeks of this quarter? And then as you talk to customers, what are your expectations for that balance from here?
spk12: Yeah, we think there's going to be some drift downward, but largely... But about the – call it the middle of July, the end of July, we started seeing stabilization in those numbers every day. So we've been hanging in there now for a while. And so hopefully that will continue through the end of the year. We typically get a buildup in balances in the fourth quarter. So we're keeping our fingers crossed on all that, Matt. So we may be planning for some decreases, but hopefully we're more flattish going into the fourth quarter.
spk05: Okay, that's helpful. And then just lastly, just to clean up on the BHG commentary, I think you mentioned some adjustments that were made. Mark, out of the building and from software, I think you said the impact was around $10 million. Did I get that right? And how much has been accrued for so far through the third quarter, and how much could we see in the fourth quarter?
spk12: Yeah, I think they're done with respect to those two issues. They They exited their, call it their NALU, which is their merchant financing business. They decided to get out of it. I think that was about a $4 million charge, and they rubbed down a building for about $6 million. So that was an accrual where they're putting that building on the market, hope to sell it here over the next couple of quarters. But for those two situations, they're done. they feel like they've got adequate reserves in place for those.
spk05: And with respect to BHG's repositioning, you know, examples like that, are there any more items where there could be additional impairments or events like what we just saw?
spk12: Yeah, I think BHG's taking a much more diligent review of all their products. I would imagine that going into 2024, there'll be keenly focused on their core lending products, the securitization network, and those two products because they've spent quite a bit of effort with some ancillary businesses that I think they're looking at whether or not they want to continue to invest in.
spk11: Okay.
spk00: Thank you, guys.
spk11: Thanks, Matt.
spk00: Thank you. The next question is coming from Catherine Mailer from KBW. Catherine, your line is live.
spk10: Thanks. One follow-up on BHG. I guess maybe just a big picture question on BHG is how are you thinking preliminarily about earnings growth in BHG into 24? It feels like we've got There are a lot of moving pieces, but it feels like we've got potentially credit costs improving once we get through the losses in this ENF tranche from the 21 vintages. But then you've got the impact of CECL and providing at 9%, and maybe a little bit of a software gain on sale margin. So is this a scenario where we can still see stable earnings into next year, or potentially could there be downsides?
spk12: Yeah, I think we'll be looking at probably – and I'm not trying to be cute here, a more boring BHG going into 2024. And I think part of that is because they're going to be focused on their core businesses and less on some of these ancillary businesses that they've been investing in over time. But you're right, there's a lot of puts and takes here. But I think their plan is to generate some growth next year into 2024 in spite of whatever headwinds they might have regarding CECL or you know, where the rate curve is, what have you.
spk10: And is the difference in the gain on sale margin between the placements to banks versus the placements to institutional investors, is that difference large enough to make a big difference in the revenue outlook?
spk12: I think they will plan on a stronger allocation to the bank network next year. Now, keep in mind, those spreads are all point-in-time spreads. So those transactions are occurring every day, and that's the spread they collect. The bank, the on-balance sheet spreads are a culmination of three years of buildup. So there's historical spreads built into that, which were higher two and three years ago than they are today. So there's a weighted average kind of process on those spreads. But I do think, as far as to your question on new production, they're likely to allocate more to the bank network where they get the gain on sale treatment.
spk10: Great. Okay, so your comment about that being less, that was more of just a fourth quarter comment versus a strategy into 24.
spk12: Yeah, I think so. I think what they want to do is try to build some inventories going into 2024 and then be in a position to kind of make sure 2024 comes out where they want it to come out.
spk10: Okay, great. And then circling back to the conversation of NII growth, it seems like you still have a fairly positive outlook for just balance sheet growth this year. And typically, you're able to hit EPS growth targets because you grow revenue so fast. And so as we think about this next year with revenue growth, still better than your peers, but probably moderating just given the rate environment we're in. Can you help us think about just the optionality you have with actually generating positive operating leverage, growing expenses at a slower pace than your revenue growth as a way to hit EPS targets. Is that something that you feel like you would be able to do in the scenario where revenue growth comes in lower than expected?
spk12: Yeah, I think we'll have a keener eye on operating leverage going into 2024. I think what we've got to do is position the firm in a spot to where revenue growth, whatever that number might be, that our expense growth is within that range. We'll have to sharpen our pencils pretty hard this year to see that that happens. But as of today, that's kind of where we're pre-positioning all the budgeters and the planners that are working. As a matter of fact, today, on how to get a good 2024 plan, as Terry said, that warrants an incentive, you know, an incentive accrual at 100% of target.
spk14: Catherine, I think you know this, but just to make sure everybody gets it, you know, the focus of our company has been and continues to be a top quartile performer. in terms of revenue and earnings growth, and so EPS growth. And so that hasn't changed at all. That will continue to be the case. And I think to Harold's point, it's our intent and our belief that we'll build a plan that does that, even in the face of a meaningful pickup to the incentive expense, because, as you know, we're currently accruing at 65%. and hopeful that we'll be accruing that 100% or north next year. So anyway, that gives you some sense of what our outlook and belief is.
spk10: Yeah. And I don't mean this to be a loaded question, but just kind of thinking about your peers and thinking about EPS growth in this year, you know, most of the street is forecasting for EPS to be down, you know, for most of your peers into next year. And so even if you're the top quartile, and that's flat EPS growth or even down EPS growth, still better than peers, but still flat to down, is that a scenario that you can still have a full payout of incentive comp? Or do you feel like you hold yourself to a higher standard where you might need to still kind of adjust to that to hit an EPS target that's appropriate for Pinnacle?
spk14: Yeah, thank you for that. That's a good question. I think what I would say is if we were to do what you just described there and just find our way to say, okay, all we got to do is get above 75% of peers, that wouldn't take much earnings growth. And that would be about three years of flat earnings growth, EPS growth for Pentacle, if that were to be the case. And you can be sure that is not my target. So, yeah. At any rate, I guess to answer your question, is that something that could happen? I suppose it could happen, but I don't think you ought to expect it will happen.
spk10: Okay, great. Thanks for the clarity. Appreciate it.
spk14: All right.
spk00: Thank you. The next question is coming from Brody Preston from UBS. Brody, your line is live.
spk06: Hey, good morning, everyone.
spk14: Hey, Brody.
spk06: Hey, Harold, I just wanted to follow up on the deposit costs. I think you said the blended rate is coming on at three and a half. That's inclusive of the non-interest bearing, correct?
spk12: Yes. Yeah, that would include non-interest bearing. Now, this is just new accounts. Right. So, that's right.
spk06: So, just based on the commentary, I think you said 10 to 15 percent is non-interest bearing earlier on the call. So, That implies about like an interest-bearing cost on new money at about four. Is that accurate?
spk12: Yeah, that's probably fair. CDs are built into that. So, yeah.
spk06: Okay. So is that, I guess, on the interest-bearing deposit cost slide, the spot rate, is that where we should expect that to trend maybe over the next couple of quarters?
spk12: I don't think it will get that high. I think new account growth, the volumes – are they're meaningful to us but they're not they're not what generates a lot of the bulk of the deposit growth so the net deposit growth uh i think core deposits was 826 million uh probably new account growth was maybe half of that something like that okay
spk06: All right, and also just on the loan side, I think you said you had about $300 million to $400 million come in due for fixed-rate loans next quarter. Is that a fairly consistent level that we should be thinking about on a quarterly basis through 2024?
spk12: Yeah, I was trying to do the math in my head because I've got about $6 billion coming up for renewal over the next two years, and it's pretty evenly dispersed, weighted more towards the near term. So whatever that number comes out to be, Uh, probably with, with the CRE renewals, you're, you're, yeah, it's probably 700, what is that? 750 million, something like that in the near term, in the, in the quarter.
spk06: Okay. Okay, cool. Um, and then just on the BHG, I've, Appreciate the commentary on some of the puts and the takes there. You mentioned that they had a building that they were planning on selling that they wrote down. I don't know if you got this granular with them or not, but do you happen to know kind of what percentage the write-down was? I'm assuming that that was like an office building or something that they no longer need.
spk12: Yeah, I think the number, I think they bought it for like $20-something billion. It's down in South Florida, so I think that's what the write-down equals.
spk06: You said they bought it for what?
spk12: About 20-something million. I want to say it was about a 24 number. Okay.
spk06: Okay. And I think you said you had 7% of the loans were SNICs. Do you happen to know of that what you're the lead underwriter on?
spk12: The SNICs that we're the lead underwriter on?
spk06: Yes, sir.
spk12: Those are all where the other bank is the lead underwriter on the SNICs. We've got about a billion foreign participations that we've sold, but none of those are in the SNIC category.
spk06: Okay. Okay. So the SNIC exposure is all, the 7% is just all SNICs that the other banks that are lead underwriters on.
spk12: That's right. And you know how all that works. In order for them to buy our loans, we've got to buy their loans. There's a lot of reciprocity in this process, and right now I'm running about $2.2 billion or $2.3 billion in acquired participations. I'll say that. Acquired SNPs.
spk06: Okay. Then I did just want to follow up, you know, or this isn't really a follow up for this call, but I think it's been asked before, you know, just in terms of the long term view on succession planning. And, you know, I think you guys have built a pretty unique, unique model, which, you know, is attractive, but also, you know, might be challenging for another bank to kind of maintain if they were to try to by you guys, especially, you know, just, just given the, the independent culture that you have. I mean, how do you, how do you think about, you know, long-term kind of the growth path for pinnacle succession planning and, you know, maybe partnering with another bank?
spk13: Yeah, I think, uh,
spk14: Our board understands and takes seriously its responsibility for succession planning. They review succession plans at least on an annual basis. I think our succession planning here would probably resemble most people's, when I say most people's, most banks' succession planning. first of all, you've got to plan on two axes. What do you do long-term succession, and what do you do in the event that our other key members get run over this afternoon? So kind of a long-term plan, an emergency plan, they have both. I think in the case of the long-term succession plans, they consider really three or four different variables for how you handle succession. Of course, the One that most people are interested in is internal candidates, and we have a number of high potential candidates that we continue to work with and give expanded responsibilities to and so forth to see how they develop and determine their capabilities over time. We have candidates that are outside the firm that we have talked to and continue to talk to from time to time that have probably both an interest and a capability to come in and work with us and move the company forward. And then, of course, we can and do consider a full range of companies that we could acquire to pick up talent and maybe more likely MOEs where there's a like-mindedness and suitable talent there. So You know, the board considers all those variables. And I think, Brody, I don't know, probably a year ago or more, we talked through some grants that were issued to, you know, ensure that existing management stays in place until succession plans expire. are uh set and so um you know my belief is the board's active and has any number of options for how the succession would would uh would work it's much like i was a basketball player you know on fast break you fill all the lanes and hit the open man i think that's really what the board view is they'll look at all the options and make the best play when it's time to make one
spk06: Got it. I really appreciate that answer, Terry. I guess maybe if I could just sneak one more in for Harold. I forgot to ask you, Harold. Do you happen to have what the reserve on the office portfolio is?
spk12: It's about 80 basis points, somewhere in that neighborhood. It didn't change much from the prior quarter. So that's where we are.
spk06: Awesome. Thank you very much. I appreciate it, everyone.
spk12: All right.
spk00: Thank you. And the next question is coming from Brian Martin from Janney. Brian, your line is live.
spk04: Hey, guys. Good morning. I'll make it short here. Just on the margin outlook, Harold, it sounds as though if we're at the bottom here, those loans you talked about, repricing the fixed rate loans and then just kind of the outlook on deposits remaining favorably, you know, you should see the margin trend. higher as we get into 2024, assuming this higher for longer environment? Is that in general how you're thinking about the margin here in the coming quarters?
spk12: Yeah, I think we've got a lot more bias towards probably a margin that's going to accrete up and feel the same kind of pressure to run down as we've had over the last couple of quarters for sure.
spk04: Gotcha. Okay. All right. And then just on the fee income, just As far as the, you know, kind of big picture, X the BHG commentary you've already given, just the, as far as the growth you're seeing this year, kind of that mid single digit, you know, mid to high single digit rate, does that feel like a sustainable level? I know you talked about the solar piece this quarter, you know, being kind of maybe not one time in nature, but you sounded pretty optimistic about that business going forward as well. So just trying to think about, you know, how fee income looks here, what's sustainable here.
spk12: Yeah, I mean, what we want to make sure is that people understand that's going to be a choppy line item, and it has been a choppy line item for the last several years. You know, it's kind of a recurring, non-recurring kind of thing. But we fully intend to support the solar business. I think we've got several projects that we're looking at currently. The The difficulty is trying to forecast when those projects close and when they get the necessary regulatory approval. So we're going to continue to invest in that product. Like I said, we've invested in several industry veterans there that came from some of the large-cap franchises, and we like our prospects. So that, along with our other equity investments that we've got, we still feel pretty good about the decisions we've made on all those fronts and what opportunities that they present us.
spk04: Okay. So kind of that core, I guess you're calling it kind of the core fee income inclusive of that, those equity gains, but exclusive of BHG is still, you know, sometimes including some of the benefits you expect to get from the solar that, you know, mid to high single digits still feels pretty sustainable as you look forward here, at least in the near term.
spk12: I think that's accurate, Ron.
spk04: Okay. And then just lastly, on the reserves, I guess is your outlook, maybe I don't know if you, Harold or Terry, just with the normalization in credit, if you do see charge-offs or NPAs tick up a bit here, is there any outlook for a change in building the reserves some, given what the outlook looks like? I know fourth quarter still sounds pretty strong, but just as you get into next year, should we be thinking about seeing some reserve build or is the current level we're at, you know, more likely sustainable.
spk12: Yeah, right now we don't anticipate any big buildup in the reserves coming into the fourth quarter. We think looking at the credit pipeline, it seems pretty solid at this point. Who knows what will happen going into 2024, but right now we feel pretty comfortable about where we are and what our charge-off experience has been here over the last few years.
spk04: Gotcha. Okay. Perfect. That's all for me. Thanks, guys. Thanks, Brian.
spk00: Thank you. There were no other questions in queue at this time, and this does conclude today's conference. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.
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