Earnings Call Transcript - PNFP Q1 2022

Operator, Operator

Good morning everyone, and welcome to the Pinnacle Financial Partners First Quarter 2022 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 in a listen-only mode before we'll be open for your questions following the presentation. Analysts will be given preference during the Q&A. We ask that you please pick up your handset to allow optimal sound quality. During the presentation, we may make comments which may constitute forward-looking statements. All forward-looking statements are subject to risk, uncertainties, and other facts that may cause the actual results of Pinnacle Financial to differ materially from any results expressed or implied in 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, 2021, 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 measure and a reconciliation of the non-GAAP measures to the comparable GAAP measures will be available on Pinnacle Financial's website at www.pnfp.com. With that, I am now going to turn the presentation over to Mr. Terry Turner, Pinnacle's President and CEO.

Terry Turner, CEO

Thank you, operator, and thank you for joining us this morning. What an introduction! I would say that first quarter 2022 was another outstanding quarter for us. Thanks to the power of our ability to attract the best and most experienced bankers in our markets, both in the legacy markets and in the market extensions, we are translating that power into outsized, high-quality growth that will play again this quarter. In addition to all the macro issues that have created economic uncertainty, we faced several other headwinds, such as the loss of PPP revenues and substantial reductions in mortgage loan originations during interest rate movements, which have pretty much eliminated the robust mortgage refinance market we’ve enjoyed for several years, just to name a few. Our strength has been our ability to overcome those headwinds, predicting outsized balance sheet growth, and I think that’s the most important story for us here in the first quarter. We’ve begun every quarterly conference call with the dashboard for years, beginning with the GAAP measures. I will focus you first on the credit metrics along the bottom row. The median bars show our quarterly performance over the last five years, and as you can see, our asset quality over the past five years has been very strong. But even so, again this quarter, all three measures of problem loan metrics continue to trend down in our decade-long lows. Our five-year median for NPAs, loans, and OREO was 46 basis points; in Q1, it was just 14 basis points. Our five-year median for classified asset ratio was just 12%; in Q1 it was 3.6%. Our five-year median annualized net charge-off ratio was 10 basis points; in Q1 it was 5 basis points, and honestly, it started here much better than that. Moving now to the non-GAAP measures, so which is one that I generally focus on most, let us look at the top row charts first. As you can see, revenues and fully diluted EPS continued their upward slope. Adjusted pre-tax pre-provision net income was actually flattish, down just a tick. We weren’t quite able to outrun the impacts of reduced PPP revenue and mortgage origination fees in this quarter. And as I mentioned a few moments ago, I just need to outrun those headwinds this year based on our outlook for loan growth going forward - more on that later. Now looking at the second row, as I’ve already outlined, loan and deposit volumes continued to grow at a double-digit pace. PLP loans were up 18.5% annualized and 22.5% annualized excluding the impact of PPP. Core deposits were up 14.8%, and I would say that growth is direct which adds to the growth in non-interest expense we’ve invested over the last year or two. As for the tangible book value per share, we actually saw our first reduction in more than five years; with interest rates rising, we saw a decrease of 2.1% this quarter, primarily due to the impacts on accumulated and other comprehensive income. On a peer-relative basis, I believe our conservative balance sheet is in relatively good shape. Along those lines, already in the quarter, we transferred approximately $1.1 billion of available-for-sale securities to held-for-maturity in order to help counter the impacts of rising rates on tangible equity. I’ll talk more about that in just a minute. So, in summary, based on our previous investment in revenue producers, we are continuing to grow our balance sheet at an outsized pace. We are translating that into revenue and earnings growth, and our asset quality is blemish-free. So, with that, I will turn it over to Harold for a more detailed look at this quarter.

Harold Carpenter, CFO

Thanks, Terry. Good morning, everybody. As usual, we will start with loans. In the first quarter, it was likely one of the strongest loan growth quarters for us in our history, and our current pipelines provide us with much confidence as we enter the second quarter. Even inclusive of PPP paydowns, average loans were up 14.7% annualized between the first and fourth quarters. As we mentioned in the press release last night, we are upping our guidance to at least mid-teens percentage growth for this year. Loan rates were down in the first quarter due to reduced impacts of PPP on our loan yields. We recognized $10.8 million in PPP revenues in the first quarter, down from $15.5 million in the fourth quarter. PPP balances decreased to approximately $157 million in the first quarter, and consistent with what we discussed last quarter, we believe 2022 PPP revenues will likely range between $15 million and $20 million, compared to approximately $86 million in 2021. We are down about $25 million in PPP loan volumes so far this quarter, so not much left related to PPP. That said, PPP was a huge program for this base, and a big thank you to all those connected with getting PPP up and running; because from a client service perspective and our borrowings, PPP very much enhanced our standing with our client base. Also, we did see some uptick in commercial loan utilization this quarter; it's the first time that’s happened in quite a while, and we have some reason to believe that increases will continue this year as borrowers look to lock in inventory at current price levels. We also anticipate increases in construction funding due to spring and summer. More on borrowers on fixed credits in a few minutes. We’ve responded to a lot of questions about loan forces over the past year or so and their impacts on our yields in a rising rate environment. Again, we do not apologize for our loan force, which has realized the ongoing professional nature for quite some time. During the first quarter, given the impact from a recent 25 basis point increase in short-term rates, we are experiencing about $24 million in loans on state force that are now priced based on their original loan scripts. As the bottom left chart indicates, we have about $2.2 billion of our floating-rate loans that should push through forward pricing with the net 50 basis point rate increase that we anticipate will occur next month. Linear focused on deposit beta, but this growth was focused on the loan beta to ensure we achieve the strongest possible loan yields as rates increase. As we mentioned in the press release, we are pleased to see approximately a six basis point lift in aggregate loan yields after only four weeks post-rate increase. As the top chart indicates, we experienced strong yields in the 5.2% range back in 2019. That was a much different time, and we don’t expect to achieve those levels this year; however, we could make a strong impact on the current delta between where yields are now and those far-off levels. Lastly, our asset loan market leaders are excited about our loan growth prospects, and we are targeting mid-10 percent growth inclusive of PPP paydowns. Additionally, in 2021, our new markets, including Atlanta and our new specialty lending units, provided approximately $530 million in loan growth. For the first quarter, and including 30 days, they added $386 million or 35% of our Q1 2022 ELP loan growth, and we expect strong participation from our new markets in the second quarter as well. Now onto deposits: we saw yet another big deposit growth quarter. Deposits were up almost $1.1 billion in the first quarter. We don’t anticipate that sort of growth in the second quarter with tax payments and some projected deposit outflows by large depositors, but we still believe that high-single-digit growth in core deposits remains a reasonable target for us this year. So no change there. Our average deposit rates decreased by 13 basis points while the period deposit rates were slightly higher than average at 14 basis points. Since the last FOMC meeting, our deposit rates are up almost two basis points. We are pleased with the efforts of our relationship managers thus far. We’ve never abandoned our view that core deposit growth is a key long-term strategic objective. For the first ten years of our existence, our number one goal was developing strategies and tactics around funding our growth. We continue to like our chances given the significant investment we’ve made in both relationship managers and new markets over the last few years. We also like our start point on deposit costs as we enter an up-rate cycle. We continue to forecast an aggregate 40% beta on pull deposits through the cycle. We will keep an eye on what our competitors are doing, given they are advertising much lower betas, which we believe gives us some breathing room at least initially. Now to liquidity performance: we continue to look for ways to create increased earnings momentum through the deployment of excess liquidity into higher yielding assets. Our liquid assets actually increased this quarter corresponding with strong core deposit growth and the impact of PPP paydowns. We are optimistic that loan growth in 2022 should serve to reduce our overall liquidity, but in our view, this will be a multi-year effort. Again, our objective here is to find ways to put money to work in a rising rate environment without placing unreasonable pressure on our tangible book value. During the first quarter, our investment securities increased in total by approximately 1% as we continue to reinvest cash flows from the bond book back into the bond book. The increase in balances actually represented a decrease in our bonds-to-total asset ratio, which was 15.6% at March 31. We believe we have some opportunities on the short end of the curve to put money to work at slightly higher yields, and we did some of that in the first quarter. We will continue to have a modest, measured response in how we like liquidity to work in this rate environment. We executed a transfer of about $1.1 billion in securities from IFS to ICM. This did help support tangible book value by almost $0.73 per share in the first quarter. As the gray bars on the top left chart reflect, I believe we’ve done a remarkable job defending our core margins over the last few years. We tend to hover in the 3.2% to 3.25% range, and we will work hard to lift our margins going forward. Given the operating environment, we have confidence that we should see some margin expansion along with increased net interest income this year. We are adjusting our guidance for net interest income to low double-digit growth for 2022 over last year. Regarding credits, we are again presenting our traditional credit metrics. Pinnacle’s loan portfolio continues to perform very well, and again, these are some of the best credit metric ratios we have experienced ever. Modifications made pursuant to Section 4013 of the CARES Act continue to decrease, standing at $616 million at March 31, 2022. Importantly, over 91% of our 4013 credits are mostly principal paydowns, and we have similar amortizations to pre-COVID, with only 1% of the 4013 loans in the classified risk category. Importantly, as noted on the highlights in the slide, we do anticipate further declines in our allowance for credit losses to total loans ratio over the next several quarters, given continued improvement in our credit metrics as well as macroeconomic factors. We’ve had a lot of conversations with borrowers over the last few months about inflation and how it’s impacting their businesses. So far, so good. Our truckers, hospitality borrowers, apartment owners, etc. are thus far able to pass loan price increases to their customers. The biggest issue that most point to is labor and finding enough labor to grow their businesses. Backlog for various industries are at some of the highest levels ever. Obviously, we all think inflation may slow down and supply chain issues will be less of a problem. We can only hope that over the next few quarters we will all get our arms around some of these issues. Now onto our run rate for 2022 and for BHG: we are maintaining our estimate of approximately 20% growth and will speak to that in a few minutes. We are not anticipating a repeat of the $20 million in income we experienced in 2021 from valuation adjustments for several of our joint venture investments. Thus, we are planning for revenues from these investments to be much less in 2022. Other than that, our wealth management and several other fee-based business lines are set up for a breakout year in 2022, and we believe that an annual 79% increase in all of our other remaining key categories is reasonable for us this year. A lot of interest is shown in our mortgage forecast for 2022, with lower expectations for this year as rates increase but housing stocks in our markets are at levels that home sales are being impacted. Along with that, the price of housing has increased significantly, with some major stories still seeking above list prices becoming fairly common. Additionally, there is a large percentage of cash borrowers acquiring homes in our markets, as our markets continue to grow and attract individuals from other states where housing costs have been much higher for many years. As for expenses, we are increasing our overall total expense run rate from low double-digit percentage growth in 2022 to mid-teen percentage growth. This increase is primarily attributable to headcount growth in the new markets, market disruption initiatives across our markets, and the addition of JP&D. I believe that we should likely approach maximum payouts for cash incentives this year. Our current plan is that our incentives will increase in 2022 if we achieve some fairly aggressive performance targets. The increase is based on headcount adds in 2021 and our planned recruiting adds for this year. Offsetting the increase is that we are reducing our target payout in our annual cash bonus plan from an outsized 160% target last year to the traditional 125% target this year. We are also providing more costs for equity plans for our leadership. Lots of discussion is currently occurring about expense growth, particularly in the large-cap space. I am not sure why their costs are escalating, but our expense increases are primarily attributable to the successful recruitment of new bankers who will help drive our growth over the next several years. Terry will discuss more on that point in a few minutes. We believe that our organic growth model will continue to lean into it as the opportunities to hire established revenue producers in our markets have never been better. As capital, we saw a 2% pullback in tangible book value per share due to the impact of increased rates on AOCI and tangible book value per share. Just to reiterate, our leadership equity compensation plans are designed to perform based on how we rank with our tangible book value growth. So, our leadership is focused on growing tangible book value over the long term. Our strategy and tactics are focused on building franchise value using our organic growth model over the long term. That includes the focus on earnings growth, revenue growth, funds, and tangible book value per share. Quickly, that’s an update on our outlook for 2022: as to loans, we’ve increased our outlook to mid-teens growth for 2022 and are optimistic about how the second quarter is shaping up. We are adjusting our rate forecast to six rate increases from three last time and above that, we could increase that assumption in the near future. Given that, we believe we should see improvement this year, which should result in net interest income growth of low double-digits. We’ve also increased our expense outlook for increased hires and other factors from mid-teens percentage growth. We are very optimistic that hiring will ramp up here in the near term. Overall, we are thinking that we are going to have a really strong year. Obviously, inflation and macro improvements will affect this outlook depending on how things turn out; however, for our group, we will balance the risks that arise while maintaining an intense focus on growing the franchise value thus far. Now, quickly to BHG and other core record originations: the gap between origination and sold loans is one aspect as BHG has been holding more loans on its balance sheet. We anticipate that BHG will make solid sales into their bank network, as capital market interest rates have been volatile while our new platform continues to be reliable, which is one of their competitive advantages. As BHG can quickly pivot between the bank network and the securitization network during times like these, once they can better understand the impact of rising rates on their securitization platform, they will likely go back to it. More on that in a second. Spreads continue to expand in the first quarter; we are seeing some of the largest spreads in their history with increased pricing spreads. As previously stated, BHG has the capacity to execute its business model with great confidence regardless of some shrinkage in spreads. The bottom line details: the 1,400-plus banks in BHG’s network and just over 600 unit buyers in the last 12 months illustrate that we consider this one of the strongest funding platforms in the country for companies in their phase. The third sign we noted was the recourse obligation, which has reversed to provide potential loss absorption for the sold loan portfolio. At the end of the first quarter, recourses were up slightly at approximately $208 million, while the ratio of sold loans decreased modestly to 4.82%. The credit portion of recourse losses for Q1 2022 stood at some of the lowest levels in the past ten years. In our opinion, the quality of BHG’s borrowing base remains impressive and is much stronger than just a few years ago. BHG refreshed its credit score model, constantly looking for signs of weakness. Past dues and credit scores maintain consistent levels, and they appear to be as strong as ever. National and regional unemployment gives them the confidence that BHG borrowers should be able to withstand the forecasted inflationary increases. They believe in their credit models, and their strong performance lends credence to that. BHG had another great operating quarter in the first quarter, and we still believe that BHG’s earnings growth for 2022 over 2021 will be at least 20%, which is consistent with our discussion last quarter. As noted in the bottom right chart, originations are anticipated to grow at least 30% this year, which is also in line with our last quarter’s discussion. With $855 million in originations in the first quarter, they are on a pace to achieve that growth. As I mentioned earlier, with the volatile market, BHG believes revenues in their earlier quarters of 2022 will likely be stronger as they likely retain more loans on their balance sheet until they can better understand how the securitization markets are developing. They are hopeful that as the year progresses, BHG will pivot back to retaining more loans on their balance sheet. As for the balance sheet model, and as indicated on the slide, BHG closed their fourth securitization in the first quarter, amounting to $492 million with a weighted average funding rate of 2.79%. Loans are securitized at a weighted average of 14.1%. So, with that, I will turn it back over to Terry to wrap up.

Terry Turner, CEO

Alright. Thank you, Harold. In our view, the economic landscape remains fragile due to the disturbances in Beijing and Ukraine and the various economic sanctions enacted in response. These factors are likely to continue to weigh on our economy for some time. The full impact of various issues, including inflation, the inverted yield curve, and a potential recession, isn’t yet known; however, our performance thus far, as Harold has already mentioned, has really been safe in protecting our tangible book value that had a number of targeted loan portfolio reviews, including our COVID impacts and commercial real estate portfolios. We've heightened our diligence on cyber security and fraud detection. Despite the uncertain economic environment, we are extremely pleased with our first-quarter performance and remain optimistic for 2022. As a result of our prolific hiring over the last few years, not only are we realizing outsized growth in our legacy Tennessee, Carolina, and Virginia markets, but we are also assessing our market extensions in Atlanta, Washington DC, Birmingham, and Hinesville. The prolific hiring continued during the first quarter with 28 additional revenue producers. The loan growth we experienced during the first quarter, along with our current loan pipelines, and our continued ability to attract growth in the Southeast suggests to us that we should meet or exceed mid-teen percentage loan growth this year. Not only that, but there is tremendous market disruption in our markets that we believe we are uniquely suited to capitalize on. We fully expect to take advantage of these opportunities by continuing to hire the best, most experienced bankers in our markets and consolidating their books. This excerpt presented here is a prime opportunity for capitalizing on market disruptions due to consolidation 22 years ago. This is our identity, and in light of our current environment, this tells me that we are faced with the best market opportunity that we’ve ever had. I want to thank anyone involved in market integration for those banks that are concerned. System integrations can be extraordinarily difficult; culturally, they generate ongoing challenges and invariably create winners and losers within those organizations, leading to a degree of dissatisfaction among associates and clients alike. Happily, these are the integrations taking place in the markets we serve. Here is a means of understanding magnitudes of vulnerability that arise and on which we are focused. We are observing positive market share data. These measures are a good proxy for potential vulnerabilities in our served markets resulting from consolidation or other ongoing issues. Taking these 12 markets as a whole, I contend that $325 billion is vulnerable, and these discussions will capitalize on the turmoil caused by the same type of merger-related disruptions we experienced in the 90s. Ironically, I have never seen competitor vulnerabilities at this level. We should strongly pursue both organic and M&A opportunities, demonstrating the success of our recent B&C merger over the last few quarters. Today, I want to highlight our most recent market extensions. Merger-related turmoil has catalyzed our entry into four new markets in two new states, with a focus on lending practices, equipment finance, and franchise lending. This is our progress; rapid, in my belief, as we have successfully hired 42 associates, 24 of them as revenue producers. At quarter-end, they had $1 billion in loan commitments and nearly $600 million in loan outstandings, demonstrating their swift transition to breakeven. In Hinesville, we hired 12 associates, six of them revenue producers. Our hiring pipeline appears robust, with loan production on track and deposit production exceeding expectations. In Birmingham, similar hiring levels have yielded impressive loan production, whereas in DC, we’ve been operational for just four months, experiencing great initial hiring success and an ample pipeline for new hires. Balance sheet-wise, our services are improving, and the hiring pipeline looks massive to me. I cannot express how excited I am about our prospects. To recap the impacts: the EPS drag was about $0.03 in the last quarter because we are growing core volumes so rapidly; we can absorb that drag while still outpacing our growth peers in terms of earnings production. The number of revenue producers we are hiring continues to be a principal theme of our success. Revenue producers include financial advisors, often referred to as relationship managers. They also encompass additional revenue-generating roles like mortgage originators and trust administrators. For illustration, we want to highlight the subset of balance sheet loan and deposit producers among these hiring efforts. Experienced loan and deposit producers, not rookies, have been brought onboard to yield substantial returns. Since 2018, our new hires generally consolidate their books over five years, producing increasing volumes. On average, loans yield $8 million in balances in year one, $28 million in year two, $30 million in year three, and $56 million by year five. Deposit growth is also indicated on the chart, meant to inform our planning assumptions related to balance sheet growth tied to new hires and market share consolidation over the years. We believe this growth path serves as a powerful engine that we've built. As noted previously, our expectation is that these individuals will generate $6.4 billion in loan volumes for 2022, representing approximately $2.2 billion in growth compared to the previous year. That's how this process works. The correlation between balance sheet growth and fee revenues accompanies it. Importantly, we focus on earnings per share as our primary metric of success, wherein our path to achieving earnings growth hinges on revenue per share sustained through franchise creation rather than cost-cutting measures. The blue bars indicate our revenue per share growth in Q1 2018, revealing a consistent trend. The green dashed line points to year-over-year percentage growth in revenue per share, while the red dashed line illustrates peers' performance; we consistently outperform our peers in revenue growth and expect to maintain this trend moving forward. Despite significant headwinds due to factors like the decline in PPP loans and a reduction in mortgage refinancing margins, our situation remains strong. The competitive landscape remains favorable. We continue to attract both talent and clients at a remarkable pace, and we anticipate continued top-quartile EPS growth through top-quartile revenue growth. Operator, we will be glad to stop here and take questions.

Operator, Operator

First question comes from an unidentified analyst.

Unidentified Analyst, Analyst

Hey guys. Good morning.

Terry Turner, CEO

Good morning, Brett.

Harold Carpenter, CFO

Hey, Brett.

Unidentified Analyst, Analyst

Congrats on an early strong quarter, and that’s some impressive loan growth. I wanted to first start with BHG and usually I want to have a conversation about you guys. It’s the first thing that comes up in these calls, so I think it’s a big focus. Wanted to get an update on any thoughts on that investment and your thoughts on what they might do to monetize or capitalize on the strengths. I also wanted to see what you thought about the margin details and talk about spreads; how much spread compression do you think that business might be seeing in the next few quarters?

Harold Carpenter, CFO

Yes, Brett. I’ll answer the second question first. They will face some spread compression here in the near term. They have been successful with coupon rates north of 15% to 16% in the past, so they feel like they can move rates up with borrowers. They think, however, they may experience compression of maybe 1% to 2%. They believe it'll be manageable overall, but it does present some challenges to their business model. Over the years, we've had discussions about liquidity events and the fluctuations in the market. Currently, it doesn't seem to be shaping up in their favor. They feel they have significant growth potential and a vast runway in front of them, so they will likely focus on growing revenues for their firm because they believe that as they grow revenues, franchise value will increase over time, even if a liquidity event doesn’t happen immediately.

Terry Turner, CEO

No, I wouldn’t add anything.

Unidentified Analyst, Analyst

Okay. Efficient color on BHG. Wanted to ask about the margin as well; just looking at your filings, it seems like they suggest that you are being a bit more conservative with your assumptions for 100 to 200 basis points in rises in rates, just given the liquidity you still have on the balance sheet. Can you talk about the assumptions that go into your upside for NII and then just talk about what reprices in the first 70 days on a loan portfolio following a rate hike?

Terry Turner, CEO

Yes, well, I think the advantage we have here in the near term is that we anticipate a 50 basis point increase in rates from the Fed. That means that just over $2 billion in loans will move from their floor, returning to the original coupon rates. What we do is consult with our market leaders, anticipating what they think their growth will be over the next several quarters, then we formulate our forecasts based on those insights. We also examine past pricing structures and utilize that as a reference for our forward projections. While we include stable balance sheet disclosure in our forecasts, I must emphasize the need for creativity and ingenuity in our approach to enhance the earnings content of our firm. We have several levers we can pull periodically to help us with either near-term, short-term, and long-term growth—this is what we strive for. We try to share this asset sensitivity information in the back and make sense of real-world scenarios for what we believe is the likely course of action moving forward.

Unidentified Analyst, Analyst

Okay. Fair enough for the color given your strong quarter. Thanks.

Terry Turner, CEO

Thanks, Brett.

Operator, Operator

Our next question comes from Jared Shaw with Wells Fargo.

John Rowe, Analyst

Hi, this is John Rowe on for Jared.

Terry Turner, CEO

Hey, John.

John Rowe, Analyst

I just wanted to go back to the comment in the prepared remarks about line utilization; was there a benefit this quarter? I was hoping you could clarify how much that increased from the fourth quarter and what the dollar impact was, and if there is any further potential for that to go as we move through the year?

Harold Carpenter, CFO

Yes, John. I’m looking for Slide 35. You know how we view that information; commercial real estate lines went up. The active balances on commercial real estate increased by 370,322 on C&I. So, the utilization went up 0.5% on commercial real estate, which you are seeing.

Terry Turner, CEO

And John, this is my color commentary in addition to that slide and Harold’s comments. I think you have to see an opportunity for that to pick up. So, I think the answer is yes. I mean, you know, there are sort of two components to it. One is the inevitable funds associated with construction loans that will be utilized to increase growth. Secondly, in the case of C&I, my belief is that if the economy progresses, it will influence sales cycles and result in receivable and inventory financing, increasing utilization trends.

John Rowe, Analyst

Okay. Thanks. That’s very helpful. And then just on the rate hike assumptions; does the faster assumption of increases in short-term rates impact your beta assumptions at all? Looking at your 50 basis point hike in May versus one kind of spread out throughout the year, does that kind of ramp up how quickly you have to pass that through to your depositors?

Harold Carpenter, CFO

Yes, our planning indicates that our banker will initially have a relatively small beta. Over the course of the rate cycle, we plan to increase the beta meaningfully.

John Rowe, Analyst

Okay. But so the pace of hikes is factored into that now?

Harold Carpenter, CFO

For sure.

John Rowe, Analyst

Okay. Good. Thank you. And then I have just one last question: in the prepared remarks you discussed six rate hikes being assumed in the guidance, but on the slides, I’m seeing six additional hikes throughout the rest of the year. I am just wondering if the actual guidance assumes six or seven total for the year?

Harold Carpenter, CFO

Yes, we are expecting six more hikes for the rest of this year.

John Rowe, Analyst

Okay. Good. So seven total.

Harold Carpenter, CFO

Indeed. Thank you. That’s all for me. Thanks for answering my questions.

Terry Turner, CEO

Thanks, John.

Operator, Operator

Our next question comes from Brock Vandervliet with UBS.

Brock Vandervliet, Analyst

Hey, good morning. Just going back to BHG and just awesome loan growth guidance for this year. I'm wondering, as you have been talking to them and considering that some of the macro clouds have darkened materially year-to-date or at least become more uncertain, how much discussion has there been internally about what needs to happen? Do we need to narrow the credit box, drop guidance on loan growth, boost reserves? How much of those conversations have been happening behind the curtain?

Harold Carpenter, CFO

Yes, we have been having those discussions in our board meetings. We have access to their credit teams, and while I can’t place a specific measurement on increased diligence, they are certainly monitoring their portfolio statistics closely. They’ve added personnel to their credit units, as we have here, with an enterprise-wide risk group aiming to look out for potential red flags. While I cannot provide specific metrics, I can confirm that we are vigilant.

Brock Vandervliet, Analyst

Okay. That's close enough. And separately regarding Pinnacle’s reserve guidance: we’ve repeatedly estimated on the higher side for provisioning, suggesting that we should expect provisioning to trend near the lower end while the reserves continue to decline. Is that accurate?

Harold Carpenter, CFO

Yes, I think we have a stronger charge-off forecast for this year in our numbers, but I also want to exercise caution. When I talk to the credit officers, they are really enthusiastic about the quality of the book. We have had a string of probably four quarters where provisioning has been much lower than even we anticipated. So, there may be some uptick towards the year's end.

Brock Vandervliet, Analyst

Okay. Thank you.

Operator, Operator

Our next question comes from Steven Alexopoulos with JPMorgan.