Earnings Call Transcript
Pinnacle Financial Partners, Inc. (PNFP)
Earnings Call Transcript - PNFP Q1 2025
Operator, Operator
Good morning, everyone, and welcome to the Pinnacle Financial Partners Quarter 2025 Earnings Conference Call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer; and Mr. Harold Carpenter, Chief Financial Officer. Please note, Pinnacle's earnings release and this morning's presentation are available on the Investor Relations page of their website at www.pnfp.com. Today's call is being recorded and will be available for replay on Pinnacle Financial's website for the next 90 days. At this time, all participants have been placed on a listen-only mode. The floor will be open for your questions following the presentation. During this presentation, we may make comments that 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, 2024, 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 made available on Pinnacle Financial's website at www.pnfp.com. With that, I'm now going to turn the presentation over to Mr. Terry Turner, Pinnacle's President and CEO.
Terry Turner, CEO
Thank you, Matt. Good morning. Well, I know it's not news to anyone on this call this morning that we're living at a time of unusual volatility and periods of volatility generally have the impact of slowing economic growth and damaging bank performance. But irrespective of the environment, as most of you know, at Pinnacle, we've got a relentless focus on producing shareholder value. It's why we begin every call with this shareholder value dashboard, GAAP measures first, then quickly to the adjusted numbers to give you the best insight into how we see the numbers and how we manage the firm. Anyone that has ever listened to these calls knows and expects that I'm going to particularly highlight revenue growth, EPS growth and tangible book value per share growth, the three metrics that we believe are most highly correlated with long-term shareholder returns. As you can see here regarding revenue growth, first quarter '25 was another great quarter, continuing the double-digit trajectory, not only have we had a 10.1% CAGR over the last four years, but a 14.2% growth rate, first quarter '25 over first quarter '24. The industry had a two-year downdraft on EPS for a number of reasons, including limited loan demand and a downward slope yield curve. Despite that difficult operating environment, you can see here that our adjusted EPS grew 24.2% first quarter '25 over first quarter '24. And lastly, through it all, we've compounded tangible book value per share at a 10.3% rate over the last four years and 10.6% first quarter '25 over first quarter '24. So I think at least three questions come to mind about our unusual ability to grow these metrics that I believe are most highly correlated with shareholder returns, almost irrespective of the economic landscape. Number one, how do we grow so reliably when the industry appears to not? Number two, is it a high-risk strategy? And number three, is it sustainable? The answer to all three of those is centered in our hedgehog strategy, which is to continuously attract the best bankers in the market and to enable them to consolidate their books of business from where they were to Pinnacle. We run a continuous recruitment cycle for revenue producers, which is different from most competitors and peers, who generally constrain the hiring of revenue producers in an attempt to constrain non-interest expense growth. We are always recruiting and hiring the best bankers in our market, not just when we have an opening. And why wouldn't you, the profit leverage on even an average producer is extraordinary. Another critical distinction in our model is that we don't hire these revenue producers if they're circulating a resume or they come in to fill out an application. Our assumption is that they're either unhappy or unsuccessful and therefore, not a target for us. We don't use headhunters to hire these revenue producers. They tend to produce talent that hops from job to job for the next best offer. In general, the only way a revenue producer will be hired at Pinnacle is that a current Pinnacle associate says, first of all, 'I've worked with them before and they're good at what they do.' And secondly, that they share our values and will fit. This distinct recruitment model provides insight into both how we're able to hire so many, and how we consistently get outsized performance from those that we hire. I've used this call in the past to highlight how all of this bears on growth. And so I don't want to go into detail on this call. But as a quick reminder, at a very high level, you might think about it this way. We hire a large number of highly experienced revenue producers every year. On average, it takes them roughly four years to consolidate their clients to Pinnacle, and the growth comes in on a roughly straight-line basis. This is a market share takeaway strategy that's not meaningfully reliant on economic growth. As new RMs consolidate their long-standing clients to Pinnacle over that roughly four year period, it forms an embedded level of growth in clients and balance sheet volumes, which are almost entirely removed from economic growth rates. As you can see here, that ability to attract revenue producers has been successful in our legacy footprint, in our areas of specialization that we've added over the years and in de novo market extensions. Last year, we set a new firm record for the number of highly experienced revenue producers that joined our firm, and we're on a similar track for this year, 37 revenue producers in first quarter of '24 versus 33 in first quarter of '25. Revenue producers that have been with our firm less than three years accounted for all of our growth in the first quarter of '25. The same was true for all of '24. It only makes sense to me that in periods of lower loan demand, relationship managers with large books will be lucky to originate enough volume to just cover their amortization. Generally, the bigger the book, the bigger the headwind. Additionally, in our case, specifically, we made a strategic choice roughly two years ago to lower our concentration in commercial real estate, which has also served as a drag on the legacy markets. But net-net, this ability to continuously attract highly experienced lenders and enable them to consolidate the clients to Pinnacle answers the question, how do we grow so reliably. Is it safe? We believe our track record demonstrates that it is; the average years of experience for the associates when we hire them is 18 years. So if you think about it, when you hire revenue producers that may have been handling clients for nearly two decades, two things happen. Number one, you get rapid growth. You'd fully expect that the rate at which they bring loan volumes will be substantially faster than RMs that you give a Dun & Brad list of prospects to and ask them to go meet someone to loan money. And in general, number two, you get great loan quality. It's the opposite of adverse selection. They're bringing their clients with whom they’re well familiar. They leave criticized and classified loans behind, bringing only their best clients, again, substantially less risky than giving someone a Dun & Brad list of prospects, which is what most banks do. So this model not only produces rapid and remarkably reliable growth, but high-quality growth as well. These charts serve as further demonstration of the reliability of our growth, almost irrespective of the economic environment. On the left, from the Great Recession through 2022, our growth in total loans was nearly three times that of U.S. commercial banks and was more than two times that of our peers; a remarkable difference in a period that included such catastrophes as the COVID pandemic. And on the right, you can see the quarterly year-over-year growth comparisons for total loans from first quarter '23 through fourth quarter '24, which included a liquidity crisis that literally caused some of our peers to fail. For me, this is a great illustration of how the continuous attraction of highly experienced relationship managers who consolidate their clients to Pinnacle has provided something of an underlying floor for loan growth even during periods of virtually no economic loan demand. I also want to point out the chart on the right that we added a line for C&I loan growth as well. As I've already mentioned, total loans have actually endured a downdraft as we shrink our concentration in commercial real estate. So the C&I growth may be an even better illustration of the rapid and reliable growth produced by this model. And as it relates to sustainability, of course, one of the keys to talent attraction is our unique work environment. Just in the last couple of weeks, we were listed by Fortune Magazine as the ninth-best workplace in America, up from number eleven last year. Many have conjectured that as we grow, we'll no longer be able to propel our culture and work environment, causing a reversion to the mean for our growth rates. This year's ranking is our best yet, as was the case last year, which pretty well debunked the thesis that we cannot maintain our special sauce as we grow. And of course, while the power of our ability to attract the best talent accounts for a great deal of the success that we've had, the truth is that an equally important key to our success is the differentiated service level that we offer clients compared to client satisfaction with our competitors. According to Coalition Greenwich, there are 21 drivers of client satisfaction among businesses with annual sales from $1 million to $500 million. In our eight-state footprint, we lead on all 21 of those drivers, every single one of them. The experience is overwhelmingly differentiated, and that feels like a sustainable competitive advantage. So, without a doubt, my preference would be for a less volatile environment, as I'm sure is the case for everyone on this call. But that said, even in this more volatile environment, given how we grow, we continue to expect client and balance sheet growth for 2025, consistent with our prior guidance. With that, let me turn it over to Harold for a more detailed look at the quarter.
Harold Carpenter, CFO
Thanks, Terry. Good morning, everybody. As you may have already concluded, we've reduced the number of slides in the prepared remarks portion of the deck this morning. All of the slides I've traditionally discussed during the supplemental portion of the deck, our goal is to quicken the pace and point out the highlights and get to your questions. We'll start with loans. End-of-period loans increased 7.3% linked quarter annualized; that was about what we thought at the beginning of the quarter. As Terry mentioned, we continue to lean on our new markets and our recruits to provide the punch in loan growth for us. Again, our loan growth is not so much dependent on economic tailwinds. It's all about these great bankers we've hired and the movement of their prior relationships to us. There is a ton of uncertainty right now in the broader economy, and we've had many conversations with our relationship managers about pipeline development over the course of the next few quarters. Our clients have a lot of the same uncertainties that the rest of us are wrestling with, but appear to remain generally confident about the future, and that eventually, all of this will translate into a stronger, more resilient economy for all of us. When that will happen is certainly something folks are debating intensely. Given first-quarter impact in our pipeline, we'll stay with our estimated outlook at 8% to 11% growth this year. The yield curve bounced around a lot in the first quarter and continues to do so as we begin the second quarter. But in the end, we're pleased with how our loan rates performed through the quarter. Although, the lift from fixed-rate repricing is not as opportunistic as it once was, we still anticipate continued lift in fixed-rate loan rates throughout this year. Deposit growth was again a real bright spot for us in the first quarter as we increased deposits by $1.6 billion in the first quarter. This is after a $1.9 billion increase last quarter. Contributing to outsized growth were our investments in our deposit verticals as well as the work of our new associates in several of our newer markets. As of 2025, we're maintaining our estimated growth rate for total deposits at 7% to 10% for 2025. We believe this is reasonable given our performance in the first quarter. We don't anticipate similar growth in the second quarter as the second quarter may be our toughest deposit growth quarter given that we believe some run-up occurred on March 31 for taxes. We're also very pleased with how deposit pricing has performed thus far this year and how both our deposit and loan betas have performed thus far through the cycle. The chart on the top right of the slide shows that during the upward cycle from the end of '21 to the end of June '24, our loan rates increased with a 59% beta, while over the last six months or so, as rates have come down, our loan rates have decreased with a 42% beta. All the while, our deposit beta is at 56%, which is the same as what transpired during the upward cycle. So far, so good for both loans and deposits. As expected, we're pleased that our NIM was flattish at 3.21%. Our outlook for the second quarter of 2025 is that we believe our NIM will remain flattish with some upward bias. As to net interest income, we are estimating a welcome lift in the second quarter given we have an additional day, but also increased volumes, which should support our estimate for more revenues. As to 2025, we believe our net interest income growth outlook will continue to approximate a range of 11% to 13%, and again, the slope of the yield curve will have significant influence on how all this plays out for the remainder of this year. So what's up with rate cuts? We've modeled out many scenarios and feel we're in pretty good shape to manage through most rate forecasts that are out there in the markets today. We have constructed our base case outlook around two rate cuts for this year. If there are more rate cuts, we feel enough flexibility to modify our game plan, given rates are still elevated from just a few years ago. The ability to match off the impact from lower asset yields with similar actions in our funding base. A quick word on credit. Our net charge-offs dropped to 16 basis points in the second quarter from 24 basis points in the fourth quarter. For 2025, the current view of our charge-off outlook remains that net charge-offs for 2025 should come in around 16 to 20 basis points. So no change there from last quarter. We did downgrade an apartment loan in Atlanta with around 90% to 95% occupancy, which was the reason our NPAs ticked up this quarter; that project is in the process of being marketed, and we feel like we're in good shape with this $35 million loan with an anticipated loss already accounted for in the reserve. Our belief is that resolution should occur over the next couple of quarters. Our reserve did decrease 1 basis point, which we thought was possible given our position at the end of the fourth quarter and have credit continued to perform well. We still believe our reserves will remain at or near these levels for the remainder of 2025 if the economic conditions don't materially deteriorate from those we are anticipating. That said, we don't want to appear tone-deaf. Our credit officers are working their portfolios, trying to understand what tariffs or a protracted trade war could do to our portfolio. We have our eye on several portfolios, trying to appreciate which ones may feel more stressed perhaps more sooner than others. Our outlook for our provision to average loans remains at 24 to 27 basis points for this year. We are assuming here that we don't find our way to accommodate a significant increase in forecasted unemployment like we did during COVID, only to see the impact of that reverse the next year, which could drive this range up. We do believe a modest increase in unemployment is manageable given our sensitivity analysis. As for BHG, all of the usual slides are in the supplementals for your reference. BHG had a strong quarter, providing fee revenues to us of over $20 million, which more than offset the $12.1 million in the fourth quarter and more than we have previously estimated would be the case. BHG closed its tenth ABS issuance in the first quarter for approximately $400 million. Spreads on this issuance were 12.6%, which was the strongest of any issuance for BHG. Wall Street continues to acquire BHG credit with increased appetite for its volumes. Production was strong in the first quarter. Credit was better than anticipated with past dues continuing to improve. Vintage loss curves also seem to signal better days ahead. We and BHG are both comfortable in raising our earnings estimates for 2025 from 10% growth to 20% growth over 2024. Several factors are contributing to this decision, including lower operating costs this year, better credit performance, and stronger production lead flow along with better hit rates, all pointing to what could be a much stronger year for BHG. Lastly, as to our guide for 2024, we've talked about much of the information on this slide previously. Again, the investments we've made in our new markets and our hiring success are the building blocks we will lean on as we target top quartile results amongst our peers, which we believe this guide should point toward. Other than BHG, we might spend a lot of time this morning discussing the fees or expenses thus far. As to highlights, we continue to be pleased with our fee line. Banking fees and wealth management are performing well. We're keeping a cautious eye on wealth management, given the market performance and how that might impact our revenue targets this year, but feel like currently, the range provided is reasonable. As the chart indicates, we remain comfortable with an 8% to 10% growth rate in fees inclusive of BHG's increase to a 20% growth this year. We also restructured about $189 million of our investment securities at a loss of approximately $12.5 million. This trade met our criteria of an expected three-year payback. Thus, we anticipate the restructuring should add approximately $1 million of spread revenues to us per quarter. As to expenses, our outlook does reflect the target award for our associates. And as always, should our performance warrant, we will increase the award if our earnings support any additional incentive costs. We remain at $1.3 million to $1.15 million as estimated expenses for this year. As the tariff discussion plays out, as the recession discussion plays out, and as the yield curve and rate cut discussions play out, we are hopeful that more clarity will come forth. But as it sits today, we remain optimistic about our prospects for this year and are confident that 2025 should be another strong year for Pinnacle. With that, I will send it back to Matt for Q&A.
Operator, Operator
Thank you, Mr. Turner. Everyone, the floor is now open for your questions. Your first question is coming from Jared Shaw from Barclays Capital. Your line is live.
Jared Shaw, Analyst
Hey. Good morning, guys.
Terry Turner, CEO
Good morning.
Harold Carpenter, CFO
Hi, Jared.
Jared Shaw, Analyst
So maybe just the first, I appreciate the discussion around the uncertainty here. Did you change the baseline assumption under CECL for calculating the reserves, if you go to an adverse scenario or are you just keeping it unchanged?
Harold Carpenter, CFO
We kept it unchanged, but we used the adverse scenario to influence many of our qualitative assumptions. However, we did maintain the baseline as it was.
Jared Shaw, Analyst
Okay. Regarding BHG, it was a strong quarter with the securitization. It seems that the securitization market is somewhat restricted at the moment. Is the projected growth or higher target reliant on ongoing securitizations, or is there some flexibility for them to retain more through other channels, such as bank sales?
Harold Carpenter, CFO
Well, I think they have plenty of room through the bank channel. I think they do believe that there's another ABS issuance towards the end of the year that they're planning for. But at the end of the day, they've got capacity and liquidity in the bank channel to place their credits.
Jared Shaw, Analyst
Okay. And then just on the other fees, sort of, where are we seeing the most offset to that higher BHG target, is that in sort of the other or other equity investments or where...
Harold Carpenter, CFO
I think the other equity investments have given us some pause that traditionally, we’ve gotten quite a bit of punch out of there that we probably need to back off on for the rest of the year, and I think BHG is going to help us offset that.
Jared Shaw, Analyst
Okay. Great. Thanks a lot. I’ll step back.
Harold Carpenter, CFO
Thanks, Jared.
Operator, Operator
Thank you. Your next question is coming from Ben Gerlinger from Citi. Your line is live.
Ben Gerlinger, Analyst
Hi. good morning, guys.
Terry Turner, CEO
Good morning, Ben.
Harold Carpenter, CFO
Hi, Ben.
Ben Gerlinger, Analyst
So when you guys move into the full year guide unchanged for loan and deposits, well, first, congrats on a strong start to the year. I think, Harold, you said that deposits could slow a little bit here in 2Q. I think you said you cited tax reasons. I'm just trying to think of like 1Q had really strong loan growth and even stronger deposit growth. Do you think that will flip in 2Q or just kind of a seasonality or is it pricing you're willing to let some walk away? I get the loan side is strong because of bankers added over time and the flywheel you guys created over 20 years. So that makes sense to me. I'm just trying to think like fits and starts, you're expecting on the deposit side.
Harold Carpenter, CFO
Traditionally, April has been challenging for deposit growth, even for a commercial firm like ours. We're being cautious from that perspective. We believe we have an advantage in deposit pricing due to the growth over the past two quarters, which allows us not to prioritize growth as much in the second quarter. Regarding loans, we see enough potential to achieve similar growth in the second quarter, if not slightly more. We hope that this will happen. Did I address your question adequately, Ben?
Ben Gerlinger, Analyst
That was helpful. I’ve been thinking about loans and their pricing in relation to potential payoffs, especially considering how volatile the yield curve has been this month. I don’t see a lot of payoff potential at the moment. However, if we see some movement in the middle part of the curve, like with five-year rates, do you anticipate potential headwinds for payoffs in commercial real estate, and do you still feel confident with the current range in that situation? I'm trying to understand your recent focus on commercial and industrial growth to reset the industry, but legacy products are also maturing, which might attract bidders if refinance opportunities arise.
Harold Carpenter, CFO
Yeah. First off, you're right. If the five year does come in or the three-year, that's where most of these loans are. So true, we could see some prepayments coming back to us. But hopefully, these clients will give us the opportunity to meet or at least stay in the game with them. So we're not as concerned about the volume aspect of it as perhaps maybe the pricing aspect of it.
Ben Gerlinger, Analyst
Got you. And if I could sneak one more in. BHG, it seems like it's an improvement relative to what it might have been 90 days ago. Has the family or are you guys changed any thoughts on the stake of ownership?
Harold Carpenter, CFO
No, I think we're still in the same position we've been in as far as our 49%. Our partnership is strong with Al and Eric and his senior management group. So we're in good shape with BHG right now. There's a lot of optimism around that firm. And I think they believe that what's transpired with the '21 and '22 vintages is hopefully in the rearview mirror.
Ben Gerlinger, Analyst
Appreciate it. Thanks, guys.
Harold Carpenter, CFO
All right.
Terry Turner, CEO
Thanks, Ben.
Operator, Operator
Thank you. Your next question is coming from Catherine Mealor from KBW. Your line is live.
Catherine Mealor, Analyst
Thanks. Good morning.
Terry Turner, CEO
Good morning, Catherine.
Catherine Mealor, Analyst
Apologies if you addressed this in your prepared remarks, but I just was curious if you could talk a little bit about Slide 20, which is the lines of credit that you give per loan type and just how you would expect those to move as we move through the year?
Harold Carpenter, CFO
I'll begin, and then Terry can add some thoughts. Our clients typically approach lines of credit in a certain way, and we observed a significant increase in lines of credit during the first quarter. Primarily in commercial and industrial sectors, as well as non-owner occupied commercial real estate, clients aim to maintain around a 50% usage rate, which they prefer. If a business plans to expand, they are likely to return to us for an increase in their line instead of just raising the usage on their current line. With construction reopening, we anticipate further increases in lines of credit, assuming rates stay at acceptable levels, especially regarding the five-year and ten-year terms.
Catherine Mealor, Analyst
Great. So the growth outlook you have doesn't seem to indicate any change in your perspective on lines of credit. It's still about acquiring new customers, expanding into new markets, and generating new revenue sources, and overall it remains fundamentally a matter of market share and not a significant shift in baseline credit.
Terry Turner, CEO
Yeah. I think that's accurate. To Harold's point, the biggest component, you sort of got two components that work a little differently on CRE, and he talked about that the other C&I. Generally on C&I financing your financing working assets. And so, what has to happen there is you have to start driving up the revenues and increase in inventories and receivables and those kinds of things. And so for me, at this point, it would be hard to say, okay, well, I feel like there's something I can identify here where that's going to be a lot better or a lot worse. And so again, Harold made the point. We'll be watching all these variables as we go forward. We'll get more information. But today, our belief about our growth, and really, I think what's an important thing that I want to get communicated was, look, what we're going to do is move market share and add clients, which ought to get us into the range of the growth that we said if we get other economic growth, we'll do better.
Catherine Mealor, Analyst
Got it. That makes sense. And then, on the margin outlook, I know originally, you had talked about the margin being a little bit more stable in the first half of the year and then expanding in the second half of the year as we get some cuts. Can you just talk a little bit about kind of sensitivity to that with the rate environment? It feels like you're a little bit more neutral today than you have been and cost your ability to lower deposit costs has been really great. But just kind of curious if there's a little bit more risk to that back half of the year, expansion in the margin.
Harold Carpenter, CFO
Yeah. I think there's more risk primarily because just we don't know what's going to happen, so give us that. But the way our sensitivity works out as long as we're, call it, two rate cuts, give me a range of one to four, we're in really good shape for '25, and we think we can manage it in '26 as well. We still got elevation in deposit rates that we can work through to kind of recapture what we're going to lose on the earning asset side. But what's more important to us is just the yield curve itself and just trying to figure out how to get to a flattish to maybe a slightly steepening yield curve. If we go back to an inverted curve that say was around for the last two to three years, then that’s a more difficult assertion for us.
Catherine Mealor, Analyst
Makes sense. Okay. Great. Thanks. Great quarter.
Terry Turner, CEO
Thanks, Catherine.
Operator, Operator
Thank you. Your next question is coming from Timur Braziler from Wells Fargo. Your line is live.
Timur Braziler, Analyst
Hi. Good morning.
Terry Turner, CEO
Good morning. Hi, Timur.
Timur Braziler, Analyst
Rounding out the growth conversation, I guess, in what type of an environment might the RM consolidation story not play out or in what type of environment might you not want to take on those loans? And I guess just from where you're seeing today versus just a couple of months ago, what are you seeing from the borrower side? And what is the internal appetite to continue growing the balance sheet to some of this uncertainty?
Terry Turner, CEO
Yeah. Timur, I think, the way I would go at this is, I use that phrase, hedgehog strategy. This is what we do. This is what we've done for 25 years is go attract the best bankers in the market, get them to consolidate their book of business from where it is to us, that's a wildly different approach than just hiring people and giving them a Dun and Brad list. It's a wildly different approach in hiring trainees. It's a wildly different approach than using headhunters to hire people you don't know. We're hiring people that, for the most part, somebody in this company has said, 'I worked with them before, they're good and they share our values.' And so that's what gives us such a high execution rate on having these successful people move their books of business. My own belief is that any time you're growing as rapidly as we are, I think Dick Kovacevich well said, 'Hey, if it's growing like a weed, it is one.' And so, you have to get down to, so how do you produce this growth and not worry so much about the asset quality. And the way that works is when you're hiring people who have 18 years' experience, they move a book of business they're well familiar with. They leave criticized and classified assets behind and they move only their best clients. And so my belief is that is a substantially less risky approach than what many banks are doing that are producing 2%, 3% growth rates because whatever growth they're getting, they’re getting it by sending people out calling on folks that don't know, trying to meet somebody to loan money to and so forth, which I think is a substantially higher risk. So all that said, I'll just try to give you the case for why we continue to be bullish on our ability to attract people and why we believe that we can grow assets at that rate and do it in a safe way. So I guess the bottom line all that is, it's hard for me to imagine a time, when we wouldn't want to hire a high producing relationship manager; that's what we've done for 25 years.
Timur Braziler, Analyst
Great. Thanks. Maybe switching to BHG. I know it's only been 15 days in the new quarter, but a lot has changed. I'm just wondering what the demand is for that paper for the partner banks? Has there been a marked kind of stepping away from some of that demand subsequent liberation day, or is the origination activity that we saw in 1Q pretty indicative for the type of activity you're expecting here more so in the near term?
Harold Carpenter, CFO
Based on my last conversations with them, which was probably a week ago on that topic. Their deal flow is still strong. The banks are anxious to buy paper from BHG and they have to be creative, I'll use that word, on making sure that they meet the bank's demands as well as the demands for some of their institutional buyers, so call it, Main Street and Wall Street. But right now, they're not having any issues placing their debt through the bank channel. And they've got plenty of volume requests from the Wall Street channel as well. Now that's not the ABS Wall Street, that's just some of the large institutional buyers just showing up saying, 'Hey, I want $100 million.'
Timur Braziler, Analyst
Yeah. Okay. And then just last for me, the timing of the bond restructure.
Harold Carpenter, CFO
It was in the last two weeks of the quarter.
Timur Braziler, Analyst
Great.
Harold Carpenter, CFO
Yeah. It's very little impact to the first quarter, Timur. Thank you.
Timur Braziler, Analyst
Thanks.
Operator, Operator
Thank you. Your next question is coming from Michael Rose from Raymond James. Your line is live.
Michael Rose, Analyst
Hey. Good morning, guys. Thanks for taking my questions. Just wanted to start on, I think, in the prepared remarks, you talked about some portfolios you'd be doing some work on to kind of assess the impacts of the tariffs. Sorry, if I missed it, but can you just describe what are the first areas of focus for you guys and how encompassing this review would be? Thanks.
Harold Carpenter, CFO
We have been receiving numerous inquiries from credit officers and relationship managers regarding tariffs and trade wars. Currently, the credit officers are concentrating on sectors like trucking, multi-family housing, and leveraged lending. They are assessing clients in these areas to ensure we are well-positioned. It seems that trucking companies may be facing the greatest stress due to supply chain issues. So far, our experience with banking those trucking firms has been positive, but we are keeping a close watch on the situation.
Michael Rose, Analyst
Okay. And then if there's any sort of, the longer this goes on, right, the more pressure there would be. So there could be potentially some reserve build perhaps related to that, if things continue, I would assume?
Harold Carpenter, CFO
Yeah. I'm sure that will all translate into unemployment and GDP, and that will require us to build reserves for sure. And keep in mind, like, what happened in COVID, that will mean we'll have to probably reassess our incentive payouts and all of that as well to help counter some of that.
Michael Rose, Analyst
Thank you for the information on the betas shown on Slide 10 regarding loans and deposits. I understand you mentioned the potential to lower costs. Could you provide more details on how much you expect to decrease them? I might have missed it in the slides, but can you share what's set to renew this year? With the CD percentage at around 10%, is there a possibility for that to decrease? Any additional insights on beta expectations moving forward would be appreciated, especially with the fourth curve changing frequently. Thank you.
Harold Carpenter, CFO
Most of our CD book will mature within 12 months. We have some broker deposits with longer terms that we manage for interest rate risk, but nearly all will be within that one-year timeframe. Additionally, over 50% of my other deposit categories are linked to the Fed funds rate. We are committed to matching any rate cuts dollar for dollar. As we anticipate a rate cut, we'll start informing our relationship managers to ensure they understand it's on the way, and we need to be ready to lower these rates for our depositors.
Michael Rose, Analyst
Great. Just one final question from me. In the release, you mentioned the possibility of pursuing other regions for expansion. I know you've successfully entered Atlanta, Jacksonville, and the D.C. market. It seemed like there could be more options in the near term, but I'd like to hear your thoughts on this. You've previously discussed Florida; are there any other markets that interest you? Do you plan to be opportunistic in these markets? Thanks.
Terry Turner, CEO
Yeah. I think, Michael, you've heard this so many times. I think our target market is in the Southeast. We want to be in all the large urban markets. The voids that exist today are primarily in Florida; we're in Jacksonville, but south of Jacksonville, we’re not. And then as you head up the East Coast, there are some other markets that sort of would be attractive to us, albeit less attractive than some markets like Atlanta and D.C. and the ones that you mentioned. Those would include places like Columbia, South Carolina, which is Capital South Carolina; it's a little less large and a little less growth than some, but it would be an attractive market for Richmond, Virginia; Tidewater Area Virginia; those are all places that we have opportunities. The catalyst for when we go is only when we have a team that we think can build us a large bank. We're not going somewhere because we've studied census tracks or demographics or psychographics or any of that stuff; we simply go to those markets that you and I know are attractive when we have a group of people that we believe can build us a large bank. And that means they have the stature to hire a large number of people and hire across multiple disciplines and all those kinds of things. So if those people came available today, we would go if they come available in six months, we'll go then; two years, we'll go then. If they never come available, that's okay. We intend to produce outsized growth in our existing footprint. So the opportunity is really when the talent becomes available.
Michael Rose, Analyst
Appreciate it, guys. Thanks for taking the question.
Terry Turner, CEO
Thank you.
Operator, Operator
Thank you. Your next question is coming from Casey Haire from Autonomous. Your line is live.
Casey Haire, Analyst
Great. Thanks. Good morning, guys. Follow-up on the NIM sort of loan yields. Just wondering, I know you guys have some Fed cuts, what you're expecting, but ex those have loan yields bottomed at this, call it, low 6% level, given the fixed rate repricing opportunities and new money yields coming on in the 6s?
Harold Carpenter, CFO
Our forecast suggests that over the next two quarters, we expect to see additional rate cuts. Therefore, I don't believe loan rates have reached their lowest point yet. We're hopeful that the yield curve will improve, allowing fixed-rate repricing to provide the impact we desire. It seems likely that loan yields will decrease once the rate cuts occur, with the first one projected for June.
Casey Haire, Analyst
Right. Yeah. Okay. I mean, I was thinking more along the lines of ex cuts, like, the June cut probably in factor much into the second quarter, but okay. Understood.
Harold Carpenter, CFO
I thought you were referring to the entire year. I apologize, Casey. We don't anticipate that loan rates will change significantly in the second quarter.
Casey Haire, Analyst
Okay. So regarding expenses, you are hiring at a strong pace similar to last year, which was a record. How is the hiring pipeline looking for the rest of the year, and does this expense guidance accommodate that level of hiring?
Terry Turner, CEO
I think the pipeline is shaping up well. Our guidance going into the year was that we would hire a similar number of people in 2025 as we did in 2024, that's still the best estimate that I have. I believe that we hired a number like 13 thus far in the second quarter. So we'll continue to move forward just as we have said we would. And the expense guide does contemplate the hiring.
Casey Haire, Analyst
Okay. Great. And just lastly on the capital front. The CET1 ratio, assume that would bleed a little bit lower given the growth outlook that you have? Just how comfortable, where would you no longer feel comfortable? What's like a floor for the CET1?
Harold Carpenter, CFO
We've never really established a minimum in the market. This quarter, it did decrease by 10 basis points, and I'm not particularly happy about that. I believe we can implement some strategies to enhance stability in that number to prevent further decline. Generally, for our growth this year, around $900 million in loan growth, possibly slightly more, should keep our risk-based capital ratios relatively stable.
Casey Haire, Analyst
Got you. Thank you.
Harold Carpenter, CFO
That's kind of the market, we’re using.
Operator, Operator
Thank you. Your next question is coming from Steve Scouten from Piper Sandler. Your line is live.
Stephen Scouten, Analyst
Yeah. Good morning. Thanks, guys. So thinking about kind of deposit growth a little bit. I think to me, you guys have always grown loans fantastically, but the strength of deposit growth has really been the welcome part of the story that's been so exemplary. The 7% to 10% deposit growth I mean, I guess, is more of that weighted towards the newer markets, maybe the first part of that? And secondarily, the strength on the betas on the way down that you've had on deposits relative to loans. Do you think that's sustainable or could we have a little bit of a catch-up there just as we move further down this path?
Harold Carpenter, CFO
Regarding the loan beta, there may be some potential for acceleration with steeper rate cuts, but we don’t see that happening this year. We are satisfied with our pricing metrics on the left side of the balance sheet. We plan to be just as aggressive with deposit cuts in the next two reductions as we have been in the past. Your insight is valid; if we experience too many rate cuts, particularly if we approach a range of 150 to 200 basis points, it could become challenging to achieve a higher beta on our deposit book. However, a few years back, we managed a 3.20% margin despite Fed funds being at 25 basis points when we accounted for excess liquidity on our balance sheet. We’re not deterred by the prospect of deeper rate cuts, but we would prefer to avoid an inverted curve again.
Terry Turner, CEO
Steve, regarding the growth in new markets, it's been variable. We've had some markets perform exceptionally well, like Washington, D.C., which has exceeded $2 billion in deposits in a relatively short time—it's a real success story. However, we also have markets where loan growth is more about net usage of funds rather than providing funds, making it a mixed situation overall. The major driver of deposit growth has been the specialty verticals we've developed. We've talked about these before, including areas like escrow accounting, captive insurance companies, and health and benefits. We have around eight specializations in total, and they've significantly contributed to our growth, which we anticipate will continue in the near future.
Stephen Scouten, Analyst
Got it. That's great insight. Your C&I loan growth has consistently been impressive, and while M&A has contributed, there's been some CRE included as well. With current concerns about tariffs, the economy, and uncertainty, I'm curious about your thoughts on C&I lending as people become more cautious. Are you taking any precautions or considering increasing reserves for small lending, based on what you're observing in the current landscape?
Harold Carpenter, CFO
Steve, you kind of broke up there at the end.
Terry Turner, CEO
I'm not sure if that's you or us, but we're not able to hear your question.
Operator, Operator
Steve, your line is coming through clearly. Steve, once again, please restate your question. Thank you. Your next question is coming from Brett Rabatin from Hovde Group. Your line is live.
Brett Rabatin, Analyst
Hey, guys. Good morning.
Terry Turner, CEO
Hi, Brett. How are you doing?
Brett Rabatin, Analyst
I wanted to ask about Slide 44 regarding BHG. I'm noticing that the 30-day past due trends on the consumer side look really positive. I'm curious if this is primarily due to your underwriting standards or if there are other factors contributing to this favorable trend in consumer past due rates for BHG.
Harold Carpenter, CFO
BHG is closely monitoring credit trends. Currently, they are quite optimistic compared to the previous two years, as they don't see significant weaknesses in their borrower base like they did two or three years ago. They believe the new accounts being generated are considerably stronger than those prior to COVID. They are excited about the future but will remain vigilant about near-term defaults, specifically focusing on borrowers who might miss payments shortly after taking out loans, a trend that was noticeable in the 2021 and 2022 cohorts.
Brett Rabatin, Analyst
Okay. I'm surprised that no one has asked about a pivot. Terry, you often mention that you'll grow during recessions. In the press release, you mentioned being nimble. If we were to enter a recession, what does being nimble mean for Pinnacle in terms of your operations and the strategies you might employ regarding the balance sheet or expansion?
Terry Turner, CEO
I think we all understand that this situation is unpredictable, with trends fluctuating throughout the day. Our strategy is to stay close to our clients, listen to them, and respond accordingly. I don't want to suggest that we have developed extensive contingency plans or that we're planning to dramatically change our strategy. Over the years, we have slowed down hiring occasionally, but we've never entirely halted it. Our incentives play a critical role in cushioning us if revenues fall short, and it's important for revenues and earnings to materialize to support those incentives. As Harold mentioned, we are evaluating our loan portfolio to understand how it is affected by tariffs and similar issues. However, I want to clarify that we have not yet started developing any contingency plans.
Brett Rabatin, Analyst
Okay. And then if I can do one last quick one. I was a little surprised you guys started out the year at 100% incentive PAT ratio that you just mentioned, Terry, just given the uncertainty. Just wanted to maybe hear if that was a function of anything in particular.
Harold Carpenter, CFO
Brett, no, not really. We think we're pretty much on plan as of the end of the quarter. So hopefully, we can continue that going through the rest of the year and be able to deliver it. But obviously, there are a lot of uncertainties right now that hopefully will play out with some degree of clarity in the second quarter.
Brett Rabatin, Analyst
Okay. Great. Appreciate all the color, guys.
Harold Carpenter, CFO
All right. Thanks, Brett.
Operator, Operator
Thank you. Your next question is coming from Anthony Elian from JPMorgan. Your line is live.
Anthony Elian, Analyst
Hi, everyone. Just a follow-up to the previous question on the loan portfolios you're watching. Harold, could you size up for us the trucking portfolio in terms of outstanding balances, just given that may be the most stress right now?
Harold Carpenter, CFO
I believe the transportation figure is around $700 million. This estimate encompasses more than just trucking, but I think it’s approximately $700 million.
Anthony Elian, Analyst
Okay. Got it. And then my follow-up, just one on loan growth. So outstanding quarter again in the first quarter for loan growth, but that was before the tariffs were fully announced. I know you still expect a strong second quarter for loan growth, but can you just dive a bit deeper anecdotally on what you've heard over the past two weeks from your customers in terms of CapEx, other investments they may be thinking about in their pipeline? And if they're making any adjustments now given the elevated uncertainty around tariffs? Thank you.
Terry Turner, CEO
Yeah. Tony, my sense of it is that economic loan demand would be near zero today. I think everybody would put the clutch in and say, boy, I just need to see more variables. I don't think you're going to see people wait out and do a lot of deferred capital expenditures. And I don't think anybody believes that you're going to get the growth in working assets here that requires a lot of financing either. And so again, I think it's everybody is just watching to see how it plays through. So again, if I were dependent in any way on what the economic loan demand is to produce the 8% to 11% loan growth, I'd be really nervous; I'd probably be taking that down. But really, that's the reason we spent so much time just talking about, look, we get growth from our new hires, and our new hires are getting it because they're consolidating their balances. It's not really dependent upon new loans as much as it is just moving pre-existing loans from where they were to us. And so anyway, I think most people are viewing this to be a time of extreme uncertainty. I had a person tell me yesterday he never remember a time with more uncertainty in it. And so anyway, I think that's going to be the order of the day until we can find a landing spot on tariffs.
Anthony Elian, Analyst
Right, Terry. And just a follow-up to that. So do you feel like your footprint across the Southeast, which is one of the fastest-growing markets in the country, gives you more insulation relative to other parts of the country in terms of eventually seeing economic loan demand come back and what that could mean for your overall loan growth outlook potentially above the guidance that you have?
Terry Turner, CEO
Yeah. I do believe that if you could get certainty, I mean, I do think there is an expectation that you're going to reshore, you're going to have increased manufacturing and so forth. The question is when is that going to get here. But I do believe whenever it shows up, our footprint is extraordinarily advantaged. We have been a major end migrator of jobs all over the Southeast and would have an expectation that, that phenomenon is going to continue almost irrespective of total growth. We still have folks that are in the pipeline to relocate businesses to the Southeast in these urban markets and so forth. So anyway, yeah, when we get beyond the uncertainty, my expectation is that we're going to get outside job growth here, which will translate into increased financing opportunities.
Operator, Operator
Thank you. Your next question is coming from Brian Martin from Janney. Your line is live.
Brian Martin, Analyst
Hey. Good morning, guys.
Terry Turner, CEO
Good morning.
Brian Martin, Analyst
Just wondering if your sense today given hiring appears on track that if going to a new market appears more likely, given kind of the pipelines you have in terms of recruiting or is that again, is that some of the other question maybe reading more into it? It just feels like mentioning it suggests that maybe it's getting more likely as some of these other markets are gaining traction in terms of hiring.
Terry Turner, CEO
Let me clarify that. It's important for me to communicate that we are continuing with our established model from the past 25 years, which emphasizes hiring talented individuals when opportunities arise. You should expect us to do this, as it's crucial for our growth. This model allows us to achieve consistent, rapid, and high-quality growth. Regarding whether it feels more or less likely for us to expand into new markets compared to the beginning of the year, I would say it feels about the same. I may have misjudged by bringing it up, but I wanted to be transparent. While many of my peers are reducing staff and cutting costs, we will continue to hire. That’s the essence of my statement. I just want to make it clear that my comments shouldn't imply a change in likelihood compared to earlier in the year.
Brian Martin, Analyst
Thank you for clarifying that, Terry. I understand that exploring new markets has been your strategy all along. I have a couple more questions. Regarding loan growth, Harold, I believe you mentioned that construction has started to open up a bit. The C&I growth you highlighted in your slide has been strong. Should we anticipate that other segments, like multifamily, non-owner occupied, and construction, will begin to grow and contribute to your loan growth expectations for this year?
Harold Carpenter, CFO
I believe we won't see a significant increase in construction volume until early next year. Projects typically take about six months to secure funding, and we are just starting to open that process again. It will take some time before volumes from new projects start impacting our figures, but we will continue to see funding for current projects in the meantime. We've had numerous discussions with relationship managers, especially in construction, and they are optimistic about our existing construction borrowers. They have the necessary materials ready to proceed and complete their projects, and they are not overly worried about potential issues with steel, concrete, or other raw materials. We are hopeful that things will develop as we anticipate.
Terry Turner, CEO
Brian, I think when Harold mentioned CRE opening up, I think the point he was trying to make. As you know, we've been really trying to reduce our concentration in CRE both construction and the total CRE bucket. And so we are inside the target for full construction, and we're close to the target for total CRE. The glide path will take us below those targets before they begin to fund up. And so I think to Harold's point, it's probably late this year before that thing begins to be north because of the length of time it takes for a project to launch and get to burn through the equity to get into the bank financing. So anyway, hopefully, that's helpful.
Brian Martin, Analyst
Yeah. No, perfect. And last one, just modeling, Harold, in terms of the tax rate, how should we think about the tax rate here in the coming quarters?
Harold Carpenter, CFO
Yeah. I think the rate in the first quarter is going to be indicative of what we think for the rest of the year. I don't see any significant increases in the tax rate from here on out. I think we're pretty good. I may put 100 basis points in there just to keep it conservative.
Brian Martin, Analyst
Okay. So around 18% or so seems fair. Okay. I appreciate. Thanks, guys.
Harold Carpenter, CFO
Thank you, Brian.
Operator, Operator
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.