Pinnacle Financial Partners, Inc.

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 .pnfp.com. Today's call is being recorded and will be available for replay on Pinnacle Financial'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 your questions following the presentation. If you'd like to ask a question at that time, please press star 1 on your touch tone phone. Analysts will be given preference during the Q&A. We do ask that you please pick up your handset to allow optimal sound quality. During this presentation we may make comments which may constitute forward looking statements. 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 its subsequently filed quarterly reports. Pinnacle Financial disclaims any obligation to update or revise any forward looking statements contained in this presentation whether as a result of new information, future events or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to the comparable GAAP measures will be available on Pinnacle Financial's website at .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% link quarter annualized, earning assets up 12% link 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 three 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 three critical measures and the double digit five-year CAGRs for all three. Double digit five-year CAGRs for the three most highly correlated metrics for total shareholder return. Obviously I'm proud of the long-term consistent trajectory of those three 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 small large numbers is going to overtake us, or 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 we review those results in detail, I want to take a minute and make sure everybody understands exactly how that growth comes about and why 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 in the shrinking 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 four urban markets over the last decade. We're blessed to do business in markets where we consistently take share from vulnerable competitors who've dominated the market here to four. 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 had successfully competed in Tennessee. So you can see here that the share is concentrated among those same vulnerable banks and that for the most part they've established a track record of consistently giving 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 that share climb 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 this same playbook across the state of Tennessee, first with a novel start in Nashville back in 2007, followed by acquisitions in Chattanooga and Memphis both in 2015. You can see the remarkably similar growth in all three markets. In 2015, following our acquisition in Memphis, we were number 13 on the FDIC chart. In the most recently released FDIC data, we climbed to number three. In Chattanooga, we were in the fourth position in terms of FDIC share following our acquisition in 2015. Today, we're number two, rapidly closing on number one. And in Nashville, from the novel start of 2007, we're now number four on the FDIC chart, a similar position to where we were at the same tenure in Nashville. And like Nashville, we're number one 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 kegger and a 14% deposit kegger since the acquisition. Importantly, on the right, you can see the growth in commercial deposits when we have applied Pinnacle Simple, Consistent, and Repeatable model. Just like the urban markets of Tennessee, we're executing the same playbook across the Carolinas and Virginia. And in 2019, we began a number of the NOVO market extension and 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 startup period in Nashville. And even some of the smaller markets on the right, using this simple, consistent, repeatable model, it appears we're replicating our startup 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 -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 noncommissioned associate in our firm, using our -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 incentives 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 one 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 in 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 most 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 eight-state footprint rate our relationship managers and how they relate those vulnerable banks with the largest share in these Southeastern markets. We literally have amassed the best talent in the Southeast from a business client's perspective according to Greenwich. As you would expect, highly valued relationship managers produce better financial outcomes over the long term. On the right, you can see how our associates compare to our primary Southeastern competitors in terms of PP&R 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 five, 10, 15, and 20-year timeframes. And if you look at the EBS growth across the bottom of that chart, our earnings growth has substantially outpaced peers for a decade, and nobody's close. And so to put a bow on all that, in this one chart, you see our unusual ability to consistently attract and retain market best talent and their ability over time to consolidate their clients and associated loan and positive 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 five 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 five-year consolidation startup period. And on the right, you see the extraordinary loan and deposit volumes that we've labeled land on our balance sheet just in 25 and 26 if these cohorts or relationship managers continue the consolidation of their books over the next two 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 walks 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, not diminish. And that this persistent growth model is not dependent upon me or other key leaders. It's not dependent on a change of administrations. It's not even meaningfully dependent on a more vibrant economy, although a vibrant economy with strong loan demand would very likely enhance our growth. Our remarkably persistent growth, even in difficult times, is the result of this very simple, consistent, and repeatable model. So Harold, walk us through the quarter in greater detail.

Thanks, Jerry. Good morning, everyone. We will start with loans, which increased by 539 million during the quarter of .4% link quarter annualized. When we consider just C&I and owner-optified commercial real estate, our loan growth in these two critical segments was approximately 706 million or 17% link quarter annualized. We are 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 brings entrepreneurs back to the borrowing table. As to our end of period rates, particularly so for base loans, end of period rates are beginning to reflect with that decrease by quarter in. 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 are expecting about a billion dollars in cash flows for 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 reasonable as these cash flows come to us during the fourth quarter. Our competitive advantage is approximately 22% of our revenue producers have been with us less than two years, all of whom are ready to continue to move market share, which bodes well for us as we begin our planning processes for 2025. We will continue to lean 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 Brokert, we increased deposits by $887 million in the third quarter. We're also pleased with non-interest 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 deposit is in the market. 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 two 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 loan and deposit pricing has performed over the last few weeks as our relationship managers have been diligent in making sure that we're able to reprice our deposits as quickly as we can to offset the impact of a lower rate environment on our earning assets. So far, our deposit beta has outperformed our loan beta 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 NEM expansion and are pleased with the .22% we posted this quarter. Our outlook for the fourth quarter is that we believe our NEM will re-flash 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 perform better with the traditional yield curve and I believe all of us are optimistic that the risks of the existing inverted curve continuing are in fact decreasing. A traditional curve, commercial class coming back with increased energy to borrow again and national elections in the rearview mirror we believe all point to a better operating environment for a growth bank. We're again presenting our traditional credit metrics. We mentioned one nine million dollar charge off of a CNI credit in the press release last night. We performed an in-depth review of that credit during the quarter collecting to charge off a portion of the credit in place to remain your own non-cruel. 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're 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 loans 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 the Mokolti family, industrial, and all of us. As we noted in the press release we have now successfully dropped the lower part of 70 percent for construction loans to total risk-based capital at September 30th which was sooner than we thought last quarter. Our appetite has changed mostly now that we are below the 70 percent threshold. That said, and let me stress, any new commitments to this space continue to prioritize strategic compliant relationships only and then we will proceed cautiously. We anticipate that our construction concentration will fall further over the next several quarters into the 50 percent range and we don't expect to see any incremental lift in the concentration until mid to late 2025. Beyond all that we are currently tracking to achieve our 225 percent target for total non-owner occupied commercial real estate multifamily and construction in mid 2025. Handedly 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 sales securities in the second quarter, fee revenues were up 8.3 percent 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 dollars from the sale of fixed assets and approximately 3 million dollars 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 percent to a range of 23 to 26 percent growth over last year which seems reasonable given the performance of several of our primary business funds 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 percent 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 language 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 six months of the year. Going into the fourth quarter our recruiting pipelines remain strong across the franchise. Lending related expenses are up quarter of a quarter primarily due to a 2.1 million dollar new recurring charge related to the loss protection fee from the credit default swap we executed in the second quarter. As we look to the fourth quarter we currently estimate our totalized 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 one billion dollars. 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 trend in 12 months and the number of banks eligible to purchase loans from BHG continues to grow. As the spreads auction platform spreads increase to 9.2 percent in the third quarter. Balance sheet spreads have remained fairly consistent with the prior order. All in BHG believe spreads are holding in what has been a higher rate environment. BHG believes as rates decrease that would be good news for them from both a volume and a rate perspective. Off balance sheet substitution losses amounted to 4.2 percent 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 percent. The good 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 percent in three quid from two quid. Again even though the percentage of on balance sheet losses increased in the third quarter the actual dollar amount for on balance sheet losses decreased. A similar circumstance has occurred in the prior two 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 their 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 pin tack bottles 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 goals 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 gain more confidence and start borrowing in for growth I'm confident 2025 will be another strong year for Peno. 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 operated 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 they 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 associate as brand awareness has already found its way into our markets in an outside of the way. Our best place to work and potential recruits and that translates to a very successful client experience and hopefully to our shareholders. In the end we are focused on earnings growth, revenue growth, and tangible book value growth. Top core top performance is the goal 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 that with that we will open up for Q&A.

Certainly everyone the floor is now open for questions. If you'd like to ask a question at this time please press star one on your touchtone phone. Analysts will be given preference during the Q&A. Again we do ask that when you ask your question please pick up your handset to provide optimal sound quality. Your first question is coming from Brett Rabaton from Hovd Group. Your line is live. Hey guys good

morning. 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 for pricing in 4Q I'm a little surprised the 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 tied loans performing in 4Q?

Yeah sure I'll try to get at it this way. As to the margin itself we think that'll 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 take to come into play but that won't occur until we get like past 100 basis points. So we're still got some heavy lifting to do with our 75 basis points 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 them to kind of be flattish from here.

Okay that's helpful Harold and then just thinking about you know 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 percent you know 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 you know in a quarter or two but just thinking about timing maybe versus liability sensitive versus asset sensitive is it fair that the margin could be lower in a quarter or two from here or do you can outrun maybe some of the loaner pricing 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 two 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 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 speak on one last one just around DDA you know impressive end of period growth versus average any seasonality in the DDA this quarter and just you know maybe comments around your efforts to grow that that bucket which you know the whole industry is focused on?

Yeah we think there is seasonality we don't think that's all the story for the third quarter and we don't think it'll be all the story for the fourth quarter. In order to attract those deposit accounts those non-interest bearing you got to get you 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 in not only Atlanta but also D.C. and Jacksonville.

Brett I might just add you know if you look at Greenwich data I would say you know 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 shares so from 30 000 feet that's the biggest thing that we're doing relative to growing the data is thank you market share.

Okay great you certainly taking a lot of market share over the years thanks for all the color guys.

Thank you your next question is coming from Russell Gunther from Stevens your line is live.

Hey good morning guys you spent some time in prepared remarks in this slide 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?

Yeah that's right I mean we spent some time on the deck going through help the success you've had there and then the next slide taking organic share from there is that part of the strategy going forward? Yeah I think what I

would say

is

it's unlikely you know I never say never but I think it is very unlikely that we'll be acquiring banks and I think as you purposefully said Paul the reason for that is our ability to hire so many people our ability to do market extensions and 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 it the pace of that organic growth was substantially beyond what those companies were doing when we acquired them so they were 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 here is a really reliable growth mechanism so because of all that I don't think you ought to have much expectation we'll be acquiring banks.

Understood okay appreciate your thoughts there guys and then just one more for me switching gears if we could to BHG 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 dues 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?

Yeah Russell I'll try to work my way around that question we really don't want to give out too much 20 25 numbers but we've had conversations with VCS to their expectations for next year I would 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.

Got it okay guys thank you very much for taking my question.

All right thank you Russell.

Thank you your next question is coming from Jared Shaw from Barclays your line is live.

Hi this is John Row I'm for Jared. John 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 pre-payments looks like that's still trending up I guess why wouldn't these be moving in the same direction and I guess is there any any color on where that liability for substitution and pre-payment could be headed at a good level here.

Yeah I'll give you a couple of things to think about one is the substitution the loans are better that have been sold out the community bank network or 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 balance sheets. 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 timely.

Okay thanks that's really helpful so I guess maybe we could think of the the on balance sheet credit trends as some more the believing indicator of the off balance sheet credit trends.

Yeah we believe so we believe initially the off balance sheet will replicate with the on balance sheet now the reserves associated with them are are calculated in two different ways one is a Cecil based reserve and the other is a is a 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 higher ring it sounds like 2025 so it's going to be a pretty big year for bringing on new hires. As you kind of deepen your presence in the some of the expansion markets can we still expect the the new hires to ramp up in terms of bringing on loans and deposits at the same pace as the some of the initial hires or is there sort of a diminishing return that we should expect as you kind of add to the total number of RMs in the

Yeah my my belief is that the assumptions that we used in that illustration are good assumptions on a go-forward basis and the 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 know you can see the build up from when people have been here one year when they've been here two when they've been here three when they've been here four and so forth and those are the current those that 234 associates or relationship managers those are the 234 today at whatever late stage of consolidation they're in and so yeah we believe that for them to move forward at the average run rate is a good assumption.

Am I answering what you asked? Yeah

that was exactly it. Thank you so much.

Thank you. Your next question is coming from Steven Scoughton from Piper Sandler. Your line is live.

Hey good morning. Just a clarifying question around the the move and 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're doing we're doing it with individual clients taking them out of a negotiated rate bucket into the index rate bucket. You know I don't think there's any increased risk as for clients to leave us based on rate. We would lower the rates in the do 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 not seeing a lot of outflows there. Hey Steven 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 you know inside the company there's great understanding by our relationship managers which as you know is the whole key to both how we get business and how we keep business is 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's much risk of attrition.

Fantastic that's helpful and 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 you know large regional banks that you've kind of taken a lot of 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 in 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?

Yeah I think that's a great question so first of all I think start with the culture everybody's said you've been around watched a long time even before you showed up people were saying Terry you can't propel that culture you know as you get big but the truth is if you we do an internal work environment survey here we have 93 percent of our associates fill it out if you're not familiar with those instruments I don't think you're going to find anybody that 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 always above 70 percent in the top box rating in other words as they rate 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 just I don't mean to go on and on about it but I just want to say that the culture you know there's no doubt that I and others have an important influence over it you could screw it up if you wanted to but it does more or less propel itself you know once it has the power once it's rooted in 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 these marketing extension opportunities and we can take care of 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 uh Stephen to your question they're skeptical I man the law lords and I'm just gonna get 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 leave those banks and come over here and bring their clients with them man I wish I had some really sophisticated thing that we've thought up some high tech fin tech 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 and 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 large number is going to get us I'm not saying it won't get you you know five 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 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 thanks for the comprehensive answer that's fantastic and congrats on all continued success

thank you for calling comprehensive

thank you your next question is coming from Ben Gurleger from city your line is live

hey good morning everyone good morning how you doing doing well appreciate it uh also really appreciate slide 21 I know you touched on it quite a bit I think it's really just illustrative of kind of the the DNA you guys have like when you look at it roughly one sixth of the bank isn't there yet like you have the people but you don't have the loan so it's kind of just shows that like even if you stop hiring you should still ramp up pretty materially it kind of leads into my next question is when you think about like most things manage both sides of the balance and right with rates where you guys you have so much growth potential I think it's much more of the kind of the calculus is what are you putting on rates and deposits that come on so it's more so kind of curious of the people you've hired I'm sure it's more cni oriented but when you think about the clients 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

yeah Ben that's that's a great question I think we do emphasize cni and private bankers I think we have a general belief that commercial real estate lenders we've got those we're well-heeled there with our capacity there so we are interested in private bankers and cni lenders and I think they bring just a general mix depending on what market they're in if 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 than say if you're a cni lender in Atlanta or 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 you know go get them

Ben I might just add to that I think you know as I've said my comments averages are always dangerous because nobody's average everybody's above or below but you know on average it's a pretty self-funded book you know it's about 65 million dollars on both sides of the balance sheet over a five-year period of time that these relationship managers bring and the Harold's point there that includes some private bankers it includes some commercial bankers some 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 riddle 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 you know that that thing is more than two to one self-funded and so at any rate I'm just rambling to say generally people are consolidating their whole relationship and that includes both sides of the balance sheet.

Gotcha, that's helpful. Also kind of just dovetailing off of that like with the additional hires and then you gave guidance that this flywheel isn't stopping if anything it's speeding up is it fair to kind of assume double digit hires equals double digits expense growth next year or is there any sort of initiatives behind the scene or synergies that obviously some of the things that we're doing are just being done by the company and we're just being introduced by scale but anything kind of lever pulling on your guys' side of the table or we could kind of mitigate some of the expense growth?

Yeah 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 you know 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 we will load the expense target for next year the expense growth number at target and that'll be the biggest influencer of how much growth we'll have next year or at least at the first part of the year.

Hey Ben if I could say this and you know obviously uh somebody's going to take this comment the wrong way but I'll just say this we generally take the great pride in if you look at our non-interest expense growth over a decade over two decades over the last five years whatever it's a double digit expense growth rate we just grow the revenues faster and so again to the point you hit at which is really important to me is like you look at all those 234 people that have yet to consolidate their whole books 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 they're going to continue to move those books of business which I do then you don't fear uh elevated non-interest expense growth rate we're more concerned about revenue growth and EPS growth.

Yeah that makes sense I appreciate it paying your bankers because doing a great job is a high class problem to have. I appreciate it. Thank you.

Thank you your next question is coming from Anthony Elien from JP Morgan. Your line is live.

Hi good morning in 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're you know this as well as I do there's a life just gets harder with an inverted curve it has been hard over the last couple of years in dealing with that and trying to manage a spread target you know over the last couple of years. We think we're we're we're advantaged because of our 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 you know we can always be hopeful and it looks like that we've got some reason to be hopeful that at some point in you know 2025 and when we talk about an inverted curve just to be candid we're talking about from the overnight rate to probably around five years so if we can get a traditional slope curve there we think that's that's good news for us and probably a lot of bankers as well.

Thank you and then my follow-up on slide just going back to slide 21 the cumulative growth capacity that you highlight in deposits and loans for 2025 and 2026 do the numbers you have on the bars the 59 and the 56 for loans represent the the blue sky scenario that you expect to come on to the balance sheet over the next two years or is that just an average basis of what you expect could be recognized on the balance sheet? Thank you.

I think it's more indicative of an average. We're not prepared yet to kind of give you any sort of

talk about in the prepared remarks. Thank you.

Thank you. Your next question is coming from Katherine Miller from ABW. Your line is live.

Thanks. Good morning. One follow-up on just the NII outlook. I mean if you have the ability to grow 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 is 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 you know in 2024?

Yeah Katherine for us there's strong correlation to loan growth percentage growth as well as NII percentage growth probably because the way our margin performs and how tight it is. But I think if you look at look out over you know the last several years they would be closely correlated. So we're not ready to put out you know kind of a long 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 guide for 24. Can you talk a little bit about especially I've noticed these service charges are coming in higher and 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 was in this quarter or maybe I can even say like in the back half of 24's 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?

Yeah 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 we're not planning on that kind of that kind of those numbers repeating. Going into 2025 we think the businesses ought to grow at a reasonable rate next year whether it be wealth management or mortgage or you know what have you. We will be we will have a full year of bully 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 we have the devil's 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 that use a lot of treasury management to make sure that that we're getting paid a fair price for what we deliver.

Great all right thank you for the commentary great quarter.

Thank you your next question is coming from Sam Varga from UBS your line is live.

Hey good morning I just wanted to switch 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 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 you know if some of that is impacted by private banker hires or just talk about that business over the next couple years even.

Yeah it's very much impacted by hiring and the ability of those recent hires to bring their books of business to tentacle. We run a dual platform with Raymond James so they're the backbones to that but it's getting you know 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 Samuel? Sam your line is live. I'm 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 control the relationship and then we hire brokers and we hire trust administrators that both are involved in product specialties that you know 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 percent 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 seven 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 dollars in assets and so again just 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 thanks for the clarification and just my last one really quickly on the on the bond book Harold I guess can you can you comment on seems like you have more variable right 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 backer end of the yield curve?

Well I think we're 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 fixed when we acquired a lot of those 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 where rates go if rates continue to fall we've got 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 if you can follow that that sounded like a lot of word selling 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

got it

thank you Harold I appreciate it thank you your next question is coming from Brian Martin from Jenny Montgomery your line is live

hey good morning guys couple couple quick ones for me just Harold on the margin just on the on the loans that reprice immediately with rates can you remind us what that is

the loans that say that again the loans that reprice immediately

with with rate cuts you know what what will move immediately is 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 because the variable rate loan percentage

yeah all the prime rates credit will reprice immediately and that's about uh are you looking at that variable rates beta

um yes

so that would be probably about 30 percent of the variable rate loans it's about 14 percent of total loans

14 percent they reprice

daily

daily got you okay perfect and then just one 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 you know uh 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 seems like it would include a bit more from your comments earlier Harold that you know CRE maybe the back half of next year of 25 or just how we should be thinking about that in terms of your comments also about you know maybe looking for a little bit better loan growth next year than this year

yeah I think so I we don't expect to see any kind of big uptick in construction or commercial real estate investment property likely until you know 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 was very strong this quarter just you know was can you just was any part of that you know 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 the business model that we put forth with those verticals where we've got experts in those industries that are that are across the footprint helping relationship managers garner those deposits

gotcha okay okay and last two for me just housekeeping herald just the tax rate how to think about that and I think you said on the fee income side the only two really non-recurring you know or non-sustainable numbers to think about are that you know the the securities the equity investments and the you know that the gains this quarter that you know about the two million dollars in gains this quarter everything else is pretty repeatable

yeah we feel we feel pretty good we we've kind of dug into that e-base pretty hard to try to figure out what the run rate may look like and and those are the two items that kind of came to the top

okay and then the tax rate how to think about the tax rate going forward

yeah we ought to be a 20 percent kind of etr kind of

firm perfect okay thanks for the questions in great quarter guys thanks brian

thank you your next question is coming from tim mitchell from raymond james your line is live

hi good morning everyone this is tim and for michael just one question on deposits mcdonough just talked a lot about the index portion of the portfolio but on the cd portion let's hope you could you know shed some color on the maturity schedule kind of the roll off rate the renewal as we move into next year

yeah the

the generally about 80 of our of our cd book is one year or less and about 50 of our of our cd book is three months or less so that's how i kind of close year in and year out sometimes broker 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 hustle and flow of that time deposit book will be half of it will be three months and about another call it 30 to 40 percent will be maturing over the next nine months after that

understood thank you and then just one more on the target rate for loan renewals so you've taken that down a bit from the from the previous range i assume that's an large part of product of expectation for lower rates but also maybe some competition just hoping you could kind of shed some light on what those conversations with borrowers are like and how you would expect that to trend as rates presumably continue moving lower

yeah 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 profit 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 some long growth because our relationship managers were hesitant to try to negotiate with borrowers when we were you know when we were about above that far above you know others

great appreciate the color thanks for taking my questions

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