Earnings Call Transcript
Pinnacle Financial Partners, Inc. (PNFP)
Earnings Call Transcript - PNFP Q4 2021
Operator, Operator
Good morning everyone, and welcome to the Pinnacle Financial Partners, Fourth Quarter 2021 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 in this morning's presentation are available on the Investor Relations page of their website. 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 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, 2020, and its subsequently filed quarterly report. 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 website. With that, I am now going to turn the presentation over to Mr. Terry Turner, Pinnacle's President and CEO.
Terry Turner, CEO
Okay. Thanks. We'll start in just a minute as we always do with the dashboard. The dashboard continues to provide you with the best insight possible as to what we at Pinnacle view to be important, and what we're managing to do. In fact, we begin every quarter with the same dashboard at a minimum to showcase our relentless focus on these group variables. In short, we're tightly focused on EPS, growth and tangible book value per share accretion, revenue growth, and asset quality. That's what we set aggressive targets for, and that's what we've persistently talked about in our organization. That's how both our short and long-term incentives are built. Simply said, thinking about those critical variables that we focus on, the fourth quarter was another fabulous quarter for our firm with very strong core loan growth, core deposit growth, net interest income growth, real income growth, year-over-year pre-provision net revenue growth, tangible book value per share accretion, and asset quality metrics. Beginning with the GAAP metrics, I might focus your attention particularly on asset volume metrics at the bottom of the slide; the green bars show the median quarterly performance over the last five years, and as you can see, our asset quality over the last five years has been very strong. But for all three measures, even with a very strong performance over the last five years, total loan metrics continue to trend down in our decade-long lows. Moving out of the non-GAAP measures on which I most focus, you can see throughout the top row the extraordinary growth in revenue and earnings. On the second row, the extraordinary balance sheet growth, which goes for higher firms, is our primary mechanism for growing revenue and earnings going forward. And on the far right of that second row, you can see the reliability of the tangible book value per share accretion. So for me, 30,000 feet, the conclusion is that we're continuing to execute at a very high level on virtually every critical success measure for our firm. Now I'm going to turn it over to Harold to talk in more depth about our 4Q performance; then I'll come back and try to do a little context setting in terms of where we've been and where we're headed. Harold?
Harold Carpenter, CFO
Good morning, everybody. As usual, we will start with loans and again in the fourth quarter, there was another great loan growth quarter for us and provided us with strong momentum as we entered 2022. Excluding PPP, average loans were up 12.6% annualized between the third quarter and fourth quarter. Overall, loan rates were down in the fourth quarter due to the reduced inflows of PPP on our loan yields. We recognized $15.5 million on PPP revenues in the fourth quarter, down from $21.2 million in the third quarter. Due to PPP balances decreasing to approximately $371 million at the end of the fourth quarter, we anticipate PPP revenues will range between $15 million and $20 million in 2022, compared to approximately $86 million in 2021. We've been getting a lot of questions about loan demand and their impact on our yields in a rising rate environment. I'm not about to apologize for our loan demand because we enjoyed the ongoing benefit for quite some time, but they will cause us to experience some lag on realizing the full benefit of rate hikes in the near term. As the bottom left chart indicates, 62% of our daily float loans will realize the full benefit of rate increases on day one, that number increases to almost 80% after the first 50 basis points in rate hikes. Like I said, our relationship managers have done a great job in securing loan demand over the past several years, and it has paid a handsome dividend to us. Lastly, our market leaders are excited about our loan growth prospects and about 10% to 15% growth rate in end-of-period loans, inclusive of the remaining PPP forgiveness for 2022, is a reasonable objective for our firm at this time. In 2021, our new markets including Atlanta and our new specialty lending units provided approximately $530 million in loan growth. Our view for 2022 is that these markets, including Washington DC and the specialty units, should contribute 2 to 3 times that amount in the coming years. Now on to deposits; we had yet another big deposit growth quarter. Core deposits were up almost $2.1 billion in the fourth quarter where we experienced significant growth in non-interest bearing deposits ending up at $10.5 billion at quarter-end, up 41.5% since the end of last year. Our average deposit rates were 14 basis points while end-of-period deposit rates were slightly less at 13 basis points. Given the current rate outlook, we're likely approaching floors on deposit rates with our primary opportunities in near-term renewals. Helping us will be $1.7 billion in maturing CDs in 2022 with an average rate of approximately 48 basis points. As the volumes and the projected growth for deposits in the macro environment is shifting, we have to believe that deposit growth will eventually find its way back to our traditional growth strategy with reliance on attracting the best bankers and having them bring their best clients to our firm. We've never abandoned our long-term views; core deposit growth is a key strategic objective. And even though the last few years have provided us with an ample supply of funding, initially, we will need to get back to a more intense focus on building our balance sheet growth with core deposits. That said, we like our chances given the significant investments we've made in relationship managers and new markets over the last few years. We continue to look at ways to create increased earnings momentum through deployment of excess liquidity into higher yielding assets and the elimination of wholesale funding sources. We are optimistic that loan growth in 2022 should help to reduce our overall liquidity, but reducing our liquidity to a more normalized level, we believe will be a multi-year effort. Our objective here is to find ways to put money to work in a rising rate environment without placing too much pressure on tangible book value growth. During the fourth quarter, our investment securities increased by approximately $446 million, almost 80%. A little over 80% of our purchases in the fourth quarter were bonds on the short end of the curve, slightly less than three years, with an average rate of approximately 1.15%. We also increased our investment in collateralized repo investments by 500 million, which yields approximately 35 basis points. We're not currently pursuing a formalized strategy to deploy our excess liquidity, which is approximately $3 billion, into longer-term investments, even though the 10-year is pricing at around $185 currently. We will pick our spots and invest along the curve and approve them. We do believe we have some opportunities on the short end of the curve to put some money to work at a slightly higher yield, but this will be a modest response, say an additional $500 million in deployment in the first quarter. As the gray bars on the top left chart reflect, I believe we've done a remarkable job defending our margins over the last two years. We tend to hover in the three-and-a-quarter range, and we'll work hard to defend our margins going forward. Obviously, we like everyone else, look forward to a robust upgrade environment in 2022, as we think we will win with a rising yield curve, but even if that doesn't materialize, our track record would indicate that we're very capable of managing our balance sheet regardless of the market conditions. As credit, we are again presenting the four big traditional credit metrics of net charge-offs, classified, non-performers, and past-due accruing loans. Pinnacle's loan portfolio continues to perform very well, and again, these are some of the best credit metrics ratios we've experienced in our history. Modifications made pursuant to Section 4013 of the CARES Act continue to decrease from $817 million at June 30th to $791 million at September 30th, and now stands at $713 million at December 31. Importantly, and as noted in the highlights on 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 of our credit metrics as well as macroeconomic factors. That said, again, lots of good news here and then over the course of 2021, we spent quite a bit of time on our various revenue categories. Well, the fourth quarter fee revenues were up more than 20% over the same quarter last year. As for our run rate for 2022, we are anticipating high-single to low double-digit increases in fee revenues this year, inclusive of BHG which we're estimating approximately 20% growth, and we'll speak on that in a few minutes. Also included in our planning assertion is that we're not anticipating a repeat of $20 million in income we've experienced in '21 from valuation adjustments for several of our joint venture investments. We are planning for revenues from business as of today to be significantly less in 2022. Other than that, our wealth management, mortgage, and other fee-based business lines believe they're ready for a breakout year in 2022. As for expenses, I was not going to spend a great deal of time on expenses, but given last year, I feel I need to pause here and provide some more color, particularly around our expense plan for 2022. I think everyone is familiar with the impact of incentive costs on our expense base and the direct correlation to corporate results. More on that in just a second. 2021 was our great year for our associates. And to say we are pleased to deliver an outsized incentive to our associates for their 2021 effort is a profound understatement. We're elated at being able to provide this for them and thank our Board for supporting us in this effort. As for our overall total expense run rate, we anticipate low double-digit percentage growth in 2022, which is primarily attributable to headcount growth in the new markets. We are also aiming for a recruiting year in 2022 that will be even more prolific than what we experienced in 2021. Terry will discuss more on that in a few minutes. As for incentives, our current plan is that our incentives will increase by 2% to 3% in 2022 should we achieve our performance targets. That's right, we hope and desire for our incentives to go up in 2022. The increase is based on headcount additions in 2021 and our planned recruiting in 2022. We are reducing our target pay in our annual bonus plan from the outsized amount of 160% of target back to the traditional 125% of target. But we are also providing more costs for our equity plans for our leadership, as well as our associates who all received some form of stock compensation. So why should shareholders be okay with all this? Substantially all of our incentive costs are performance-based. Our annual bonus plan, which is about 2/3 of our annual expense, is entirely performance-based. That performance is not based on individual results, but on corporate earnings, pre-provision net revenue, and market share targets. Our lease structures are at the right combination for achievement of top quartile earnings growth, which will result in higher multiples on our shares over time. This time last year, PNFP street estimates for 2021 were $4.50 a share. After first quarter 2021 earnings, that number increased to around $5.20 a share. Internally, we knew those targets could not give us the share performance we deserve. So our targets were higher, which is basically what we do practically every year. We finished 2021 at $6.73. So our targets are set to achieve top quartile performance over the long term. If we don't achieve our targets, then bonus pools are reduced. And in many years that number has resulted in a 0% payout. Thus every year there is a cushion. And for 2022 it is mean. We are finalizing our incentive plans for 2022 currently, but nothing of substance will change. Our incentives will be performance-based, and we will target top quartile performance. Our best guess is that given the environment today and the uncertainties that were still prevalent, we have another meaningful stretch goal in front of us for 2022. Quickly, some comments on capital. The board approved an increase of our dividends per common share to $0.22 from $0.18 yesterday, a 20% increase. During 2021, we redeemed $250 million of subordinated debt issuances from available cash. We get calls consistently about issuing new subordinated debt given interest rates that some of our peers have been obtaining, but we like our capital stack currently. That said, we will continue to monitor the debt markets and access them as it appears to be advantageous to us. And as I have mentioned several times before, I want to reinforce the point that we've intensified our focus on tangible book value growth by adding a peer-relative opponent in our leadership's equity compensation plan. We are currently calculating an annualized increase of 14.2% in our tangible book value per share at year-end 2021 compared to 2020. Our equity program plan is designed such that our leadership wins if our tangible book value per share growth, our return on tangible common equity, and our total shareholder return outperform in relation to our peers. As I alluded to earlier, we believe our incentive programs are objective, not subjective and to be candid, very unique in design, and we believe aligns our management with shareholders to incentivize rapid shareholder value creation. This slide is a summary of our outlook for 2022. We won't go into this slide in depth as we've covered much of this previously. 2021 was a great year for us and we have significant momentum going into 2022 that excites us about our growth prospects. Several 2021 matters require quick highlights as we look forward to 2022. Margins. We've been very successful on both sides of the balance sheet in keeping our pricing competitive and maintaining margins. This yield curve will be beneficial to us over time. PPP has been a significant contributor to our success, both from a client service perspective, as well as a financial perspective, but thankfully, it is heading to the rearview mirror. Replacing the financial impacts of PPP is not easy, but we are confident that we have the loan growth prospects to overcome the reduction in PPP revenues in 2022. Credit has continued to outperform, and given where our loan portfolio is currently positioned, we believe we have reason to be optimistic for 2022. The BHG group grew 46% in 2021, and we fully anticipate this year to have another outstanding year of outperformance at a pace which should approximate 20% annualized growth. Recruiting, we fully anticipate another great year of building our core franchise through organic growth by recruiting the best bankers in our markets to our firm. We will lean into our organic growth models even more in 2022 as we develop our new markets, our specialty lending businesses, and continue to build and grow the market share of our legacy franchise. Now to BHG. BHG had another great quarter, one that was better than we anticipated, as they wrapped up a 46% growth year. Another quarter of record originations spread wildly through the pandemic on the BHG platform. The bottom right chart details these almost 1,400 banks in BHG's network and over 700 individual banks acquired BHG loans last year. Coupled with the securitization success, this continues to be one of, if not, the strongest funding platform for the gain on sale model in the country. As noted, the recourse obligation is reserved for potential future loss absorption, BHG decreased its reserve to approximately $207 million at the end of the fourth quarter. The fourth quarter as a percentage of loans was down by approximately 67 basis points all those to pre-COVID launch. As noted on the chart at the bottom right, the trailing 2021 losses landed at 4.64%. This chart splits the actual credit losses from losses BHG absorbed from reimbursing banks for the unamortized premium, via acquiring buying to get the loan. The increase for the free type at loss is primarily attributable to the actual premiums paid for BHG credit, which have gotten larger; consumer credit trends have tended to have a higher prepayment track record and loans being paid off earlier as rates have decreased. As shown, 2.51% in credit losses is very respectable in comparison to prior years. As the losses indicate on the right-hand chart, losses continue to level out in earlier months since origination to those points to a lower loss percentage over the life of the underlying loans. The quality of the borrowing base, in our opinion, is much better than just a few years ago. BHG had another great operating quarter in the fourth quarter and exceeded our expectations in the year. 2021 produced outsized growth in relation to 2020, at 46%. We're also reviving our growth factor for 2022 to approximately 20%. BHG believes that by investing more into the on-balance sheet model and creating a more predictable revenue stream should benefit the long-term franchise value creation of BHG. Originations, as noted in the previous chart for 2021, approximated $2.8 billion, up meaningfully from 2020; BHG believes they will continue to grow originations in 2022 and have not reduced their target originations for this year. Roughly, they're looking at 25% to 30% growth in originations. They have just decided to send more to the balance sheet. They executed two securitizations in 2021, looking for another one here in the first quarter, and I wouldn't be surprised if they don't execute three here in 2022. As the slide indicates, they've got more ideas that are in some stage of development, which, if successful, should bolster continued growth over the next several years. BHG continues to review their business from both a critical perspective, i.e., how can they perform better, and a strategic perspective, i.e., how can they export their strengths to grow the franchise? Their track record is impressive. So wrapping up as to loan growth and loan pricing for Pinnacle in 2022, it will take work but we are optimistic. Deposit growth has been remarkable and likely will slow as macro factors begin to reflect change; deposit pricing continues to decrease but is nearing the floor, and our fee outlook is likely aggressive but we believe we have the horsepower in place to deliver outsized growth in 2022. Lastly, we will continue to incentivize our leadership by some top quartile performance and believe we have the momentum going into 2022 to do so. With that, I'll turn it back over to Terry.
Terry Turner, CEO
Okay. Thank you, Harold. We started this call with a look at our past performance over the last five years, on all the critical performance variables that we believe are required to grow shareholder value. We believe our advantaged markets, our longstanding model for attracting talent, our demand's mobility to wow our clients, and most importantly, our willingness to spend the money necessary to seize this extraordinary opportunity should yield best-in-class growth and position us for continued market share gains that should be available, given the stress client loyalty of our largest competitors. I think anyone who follows our story for any length of time understands that our most important competency here is that we can attract millions of the best bankers from the larger banks and enable and empower them to move their client base to Pinnacle based on the distinctive service and advice that we're able to offer. We are frequently referred to as a Goldilocks solution for great bankers. We're just right for the great bankers at the larger banks that are frustrated by the bureaucracy and inability to serve their clients well. We're small enough to be nimble and responsive to make decisions close to the clients, yet big enough to meet the credit needs of even larger mid-market clients and to provide sophisticated treasury management, wealth management, and the like. 2021 was no exception. We set a record for attracting and hiring experienced revenue producers away from those larger, more vulnerable institutions in our market. And honestly, as Harold has already indicated, I expect that we'll set another record in 2022. In a number of our earnings calls, I've tried to spend some time helping investors understand the power of our culture and our differentiated model, and I do that because without understanding that, it's nearly impossible to grasp the pace and reliability of our growth on those key performance variables like EPS, revenue, and tangible book value. Last quarter, I used a similar chart position in order to demonstrate, at the firm-wide level, the linkage between our obsession with the work environment, to our obsession with wowing our clients, to the creation of extraordinary shareholder value. As I hope you know, it's our intent to continue to produce outsized growth, so I thought this quarter I'd spend a minute looking at our ability to grow and expand rapidly, largely because of our culture, not at the expense of our culture. Many of you will remember our announcement to acquire BNC, which had operations across the Carolinas and Virginia. At the time, it looked to us to be a fabulous acquisition with both tangible book value creation and double-digit EPS creation, and it enabled us to extend to some of the most attractive markets in the Southeast like Charlotte and Raleigh, North Carolina, and Charleston and Greenville in South Carolina. For those of you that were around then, you'll remember that we described the deal's strategy as number one to hold on to the growing commercial real estate businesses that BNC was so good at, while number two, using our distinctive culture in our focus on commercial and industrial lending to bolt on a large C&I business in order to turbocharge the overall growth rate. So this slide intends to illustrate the power of our culture to extend markets and produce high growth. It all begins with getting the associates fired up and engaged. As you can see here in 2021, just four years later, we won Best Place to Work awards in Charlotte, Raleigh, and in the whole state of South Carolina. According to Greenwich, we have had the highest Net Promoter Score in North Carolina, allowing us to leverage that obsession with associate engagement in order to create a distinct client experience. And then look at the loan growth, take with the C&I growth, the remixing of the deposit book based on growth and transaction in MMDA accounts, the fee income growth which has been turbocharged by the introduction of wealth management products and the like, and our ability to hire revenue producers from some of the largest and best banks in those markets. In fact, we have been able to protect the fabulous CRE businesses with Rick Callicutt and his team have built while transforming the growth engine to the C&I business. I can't say enough about what Rick and his team have accomplished. And while that's past performance, we expect the same cultural model to produce outsized growth in our more recent market extensions like Atlanta, Birmingham, Huntsville, and Washington DC. So 2021 was a fabulous year for us. Our associate engagement as measured through the top ratings at our annual work environment survey actually increased in 2021, despite a very difficult year in terms of COVID. Our Net Promoter Scores reflected improvement in both Tennessee and North Carolina to our already strong client engagement, again, despite COVID and all its challenges in managing service quality. Most importantly, again this year, we produced top quartile total shareholder return with underlying rapid growth in loans, deposits, fees, and tangible book value. We've invested meaningfully to position the firm to continue its rapid growth with the expansion in Atlanta, now with 46 associates in two offices, and we're in the process of building out the third office in North Walton County in that market. We're in Birmingham, Huntsville, and most recently into Washington DC. And with all that investment in future growth, we continue to balance that with appropriate spending, as evidenced by a non-interest expense to asset ratio of just 1.85% in 2021, which is just another indicator, along with our sub-50 efficiency ratio that we're rightly investing in growth. In terms of our execution priorities for this year, Harold's already given you the numbers, but let me give you what's behind it. Number one, we're continuing to invest meaningfully in exciting and engaging every single associate. As you know, we already have extraordinary associate engagement, not only across the entire associate base but across key minority segments. But that said, nothing is more important to us than engaging every single associate such that they give us their discretionary effort. That's what accounts for the extraordinary performance that we've had over the last 21 years. But we believe we can do even better. We have a number of initiatives specifically focused on diversity and inclusion during 2022 to ensure that we're engaging every single associate which is the view of the driving engine. Number two, our second priority is a combined effort not only to drive up our service levels, our Net Promoter Scores if you will, but to get paid for it. Somebody might say we already have the second highest Net Promoter Scores in the nation, why would you list it as your number 2 priority to improve them? The reason is that in my opinion, service has suffered dramatically, almost universally in almost every industry. Many blame the service management due to COVID, some blame supply-chain issues. In my opinion, one excuse is good as another. So we will be doubling down on service quality, and we believe now is the time that we can capitalize on our culture and produce even greater differentiation between us and our competitors. It's my belief that earning a premium based on distinctive service will make particularly critical in this elevating rate environment. In previous cycles, deposit basis were generally in negative correlation with the pace of earnings growth. So using our premium service to minimize the deposit basis as rates rise should enable us to widen our margins. Number three, we think about seizing our market share loan in three dimensions: number 1, continuing to hire great bankers in our existing markets; number 2, extend into new markets where there are bankers capable of building us a bank of consequence. Did you know we've recently gone to Atlanta, Birmingham, Huntsville, Washington DC? Frankly, I'd be surprised if we don't find our way to more of those types of opportunities in 2022. And then thirdly, attract industry specialists. We use this approach to support our geographic market managers with a higher level of industry expertise and ability to attract larger clients that might fit better with specialized knowledge versus local context. We've recently added expertise in the area of equipment lending, franchise lending, and commercial real estate lending to name a few. So as mentioned earlier, we expect all those previous actions to yield outsized growth, and we expect to set another record in 2022 for recruiting and hiring revenue producers from our larger, more vulnerable competitors. Finally, we expect that we will produce an outsized fee growth in a good number of fee categories like brokerage, trust, and interchange as we're expected to address all needs that our clients have. We are specifically not product pushers, but our desire is to know our clients’ needs so well that we can address them all, which presents a huge fee income opportunity. It's already yielding outsized growth as you've seen, in which we expect to continue for the foreseeable future. Of course, while our asset quality metrics are extremely strong, nothing can ruin earnings quite like credit losses. So as we grow the firm, we continue to invest in credit infrastructure, including senior credit officers, credit analysts, systems support, and so forth. As you can probably tell, I'm very excited about the opportunities that lie ahead for our firm, as excited as I've ever been. We built a differentiated model that should continue to produce outsized share growth for an extended period of time. And honestly, the competitive vulnerability that currently exists should continue to expand in a consolidating industry, and that's just an accelerant for our growth. The banks that hold the most market share in many of our markets also possess the greatest vulnerability. So what could be better? The question is, how do we best seize this opportunity? Number 1, continuity of senior leadership. Of course, no one knows the future, but I fully expect all the leadership here will stay at least three more years; some may stay longer. For me, it is my intent to stay at least five more years. We can evaluate after that. Over that period of time, it's my intent to put the board in the best possible position to optimize shareholder value for this firm. If it's been done by avoiding consolidation, it is my intent to continue to work to identify and develop the next generation of leaders for the firm. The best option often will be to combine forces with another financial institution, often with the most valuable franchises around. The way we do that is by seizing the opportunity that I've tried to crystallize for you this morning to build the dominant Southeastern banking franchise. Operator, we'll stop there and take questions.
Operator, Operator
Thank you, Mr. Turner. The floor is now open for your questions. If you would like to ask a question at this time, please follow the instructions provided. Analysts will be given preference during the Q&A. Again, we do ask that while you pose your question, that you pick up your handset to provide optimal sound quality. Our first question comes from the line of Jared Shaw from Wells Fargo Securities. Your line is now open.
Jared Shaw, Analyst
Hi everybody. Good morning.
Terry Turner, CEO
Good morning. Hi Jared.
Jared Shaw, Analyst
Just a few things on BHG. A couple of questions. Harold, you'd said the fee income growth to Pinnacle on that 20% range. But could you reiterate what you think the originations of BHG could be? Did you say that's 25% to 30% growth off of '21's level?
Harold Carpenter, CFO
Yeah, that's right, Jared. They're thinking they're going to still maintain the same kind of origination momentum going into 2022 that they've experienced over the last few quarters. What they've decided to do is allocate more to the balance sheet and build the balance sheet, creating a more sustainable revenue platform through interest income. So they completed two securitizations in '21, one in 2020, and then I think they'll complete 2 or 3 this year, and I think they will be larger than what they've completed in the past. They continue to be on a roll. They continue to find new clients. And so the business model itself is running really well and they also have these opportunities with these new verticals that they are exploring as well. So we're still as optimistic as we can be about BHG, and I think they'll have another great year for us.
Jared Shaw, Analyst
And then when we look at that different or the originations versus placements chart, should we assume that the placements are still, call it around that $400 million level that they're still going to keep up that demand satisfies there with the growth coming beyond that?
Harold Carpenter, CFO
Yeah. I think they'll continue a similar ratio to what they did in the fourth quarter. So as they scale out 2022, they'll manage their results towards that 20% growth factor.
Jared Shaw, Analyst
Okay. I guess shifting to the broader loan growth, Terry know, that was great. Create out on the $530 million of growth in the new markets. When you add in, do you see, like you said for '22 and looking to see that expand, do you think that the DC operation can ramp up maybe faster than that typical, where did you say in the past, about three years to get a book of business over? Do you think that that could ramp faster than we've seen for other team hires?
Terry Turner, CEO
Due for two reasons. I think that the trust there will have an even more commercial orientation than our other market extensions and so it takes less people to produce more loan volume than, what would be difficult. So not only the size and growth dynamics of the market, but particularly the group of people that we've hired. My guess is that we could do somewhere between $70 million to $100 million our first quarter out of the gate. Again, if we can see that done in the first quarter, the momentum builds as you go, we could do something really special there. And you didn't ask about Atlanta, but I may just comment on Atlanta. I think in round numbers, they finished this year with about $900 million in loan commitments, about $500 million in loan outstandings; they've got 46 associates, as I mentioned, and are going into the third office. So, man, that thing is traveling really fast as well. I do hope for Atlanta and DC to produce really outsized growth. And I always want to make sure people get it. The markets that we're in like Charlotte and Raleigh, while the asset basis we have there are meaningful to us, they are not compared to the market capacity of what I expect to grow there; again, I mentioned all hiring is done and the movement towards the C&I mix over there, we expect Charlotte and Raleigh to really produce some extraordinary growth as well. So anyway, that's a little more guess but.
Jared Shaw, Analyst
That's great colors, thanks. And then I guess just finally, with all the success you've had in hiring and how quickly they're able to come in and all the benefits you talked about. Do you really even need to consider M&A at this point in terms of being required already get into these markets, or do you think you've cracked the code here and can just do hiring as really the sole way to expand the potential?
Terry Turner, CEO
Jared, as you know, I have worked hard to try to make sure people get it. I'm not going to take M&A off the table because there could be a great transaction that I'd be willing to do. But that said, if you want my honest opinion, you're on the right track; you're sort of like why would I go do some acquisition when you can produce kind of growth in Atlanta and DC and Birmingham? Again, I think we will have other opportunities like those, that easily my preferred play.
Operator, Operator
Thank you. Our next question comes from the line of Steven Alexopoulos from JPMorgan. Your line is now open.
Steven Alexopoulos, Analyst
Hey. Good morning, everyone.
Harold Carpenter, CFO
Hey Steven.
Steven Alexopoulos, Analyst
I wanted to go back to BHG for a minute regarding the reduction in fee income growth from 30% to 20%. Can you provide more context on what influenced their decision? Was there a change in the rate outlook? Are they anticipating a slight compression in the gain on sale margin?
Harold Carpenter, CFO
Well, I think the rate outlook did have something to do with it. But I really think that the CEO strongly believes that the on-balance sheet model will result in a greater franchise value in the long-term. So I think as he begins to look over the next two, three, or four years, we agree with that point. As we looked over the next two, three, or four years, I think it's going to be extremely focused on how to build franchise value in that firm. I think this is one of his core beliefs. He felt like going into '21 that they were going to have a great year, which they achieved. They felt like that 2022 would get a spillover of that at a 30% clip. But I think here over the last quarter or so, he's reevaluated that allocation between balance sheet and gain on sale, and just moved it around a little bit. I think it's kind of the perspective that he shared with us.
Steven Alexopoulos, Analyst
Okay. That's helpful. Terry, in terms of new hires, so you guys had 119 revenue producers in 2021 and last quarter, I thought you indicated you thought you might be 110, 120 for 2022. Are you still in that range? How are you thinking, and what's embedded in the expense guidance?
Terry Turner, CEO
I will say in terms of the hires, I think we will do more than that. That's a reasonable range, but I think we will do more than that. And again, my optimism is really fueled by what is happening in Atlanta. I've talked about that a little bit. Honestly, I believe they have three commitment letters for many revenue producers that are signed and are waiting for their bonuses before they come across. And so again, I expect to come out and get it a little quicker in Atlanta and I think the same thing will happen in DC. So a little more optimistic. Again, I'm not trying to take the guidance up meaningfully, but I expect we'll hire more than what I previously said; Harold, do you want to talk about how that's taken into account and the expense guidance?
Harold Carpenter, CFO
Yes. We've loaded everything into the expense book for 2022. We got less of a turnover factor, I'll say it that way. So we expect our headcount to increase more in 2022 than in 2021. The hiring just sheer hires, we believe will increase the numbers 10% or 15%.
Steven Alexopoulos, Analyst
And maybe finally just drilling down a bit Harold, how much of the bump up? I know it's fairly modest, but the bump up in expense outlook, how much of that tied to this wage pressure that we're going against basically everywhere? Thanks.
Harold Carpenter, CFO
We believe the standard raise for our firm was about 3%. I think we ended up close to 4% with all the merit raises that will be implemented this year. We acknowledge the impact, but I don’t believe it will hinder our plans. Congratulations to the management for recognizing the inflation.
Operator, Operator
Thank you. Our next question comes from the line of Jennifer Demba from Truist Securities. Your line is now open.
Jennifer Demba, Analyst
Good morning.
Harold Carpenter, CFO
Hi, Jen.
Jennifer Demba, Analyst
Harold, you guys had strong sequential growth in service charges, investment services, trust fees. Are those fourth quarter run rates good run rates going forward, do you think, in those areas? And was there anything in particular driving that growth?
Harold Carpenter, CFO
We think there is likely some seasonality around interchange because of December. But we don't think we'll see any significant pullback in any of those areas going into next year. A lot of wealth management growth is due to what's going on in the broader markets. But I don't think there's any big pullbacks that we're looking at going into the first quarter, other than like I mentioned, probably in the service charge and interchange areas where there's probably less volume going into the first quarter.
Jennifer Demba, Analyst
Okay. And Terry.
Terry Turner, CEO
Jennifer, the fact is that you are getting extraordinary growth in these wealth management businesses, typically the brokerage business, the trust business, and so forth. So much of that is tied to the revenue producer thing that we talked about. And trying to be clear, it's not just relationship managers, it is the wealth managers and brokers and those kinds of people. And so we hired a great number of those kinds of folks, particularly in our Carolinas markets. And so that's really fueling a lot of that growth there.
Jennifer Demba, Analyst
Terry, when can we expect Pinnacle to enter the Sunshine State?
Terry Turner, CEO
I don’t know the answer to that. You know we don’t set targets, say, hey, I’ve got to get to this market by this day. It's all about the opportunity. But again, I don’t mind saying we’ve toyed around with some growth. We ultimately decided we didn’t think that those were the right targets for us. And as you know, that would have been good sales paper, but we didn't feel like we would have been able to execute sequential growth. So anyway, I'm just indicating that we're interested in some of those markets and I would be shocked if we don't find our way there over the reasonably near future. But again, I don’t have a specific target to get there; it's just about when we find the right group.
Operator, Operator
Thank you. Our next question comes from the line of Brock Vandervliet from UBS. Your line is now open.
Brock Vandervliet, Analyst
Hi, good morning. Thanks for the question. Harold, is that what your deposit growth that's not too much different than many of the banks in the sector where it's up roughly a third or so since COVID started? You kind of get out the telescope and think about deposit betas and stuff. How should we start to think about the stickiness, for lack of a more technical term, of those deposit balances as rates begin to move?
Harold Carpenter, CFO
Great question, Brock. We have been monitoring the growth of deposits, particularly large deposit balances, for a while, trying to anticipate potential changes in a rising rate environment. Our relationship managers who work with those depositors believe that the deposits are stable. While there is some money waiting for certain events, that situation is common in the daily operations of banks. We think these deposits are reliable, and based on our projections, we estimate a stability range of around 40%, similar to the previous cycle, varying between 40% to 60% depending on whether we are considering total deposits or interest-bearing deposits. We are optimistic about this trend. Currently, we are preparing our sales team for a rising rate environment, and our colleagues in Atlanta are gearing up for it as well, engaging with their relationship managers who support large depositors on our response strategies. We are hopeful that our rate increases will soon benefit everyone involved.
Brock Vandervliet, Analyst
Got it. Okay. You added $146 million this quarter on the other side of the balance sheet and securities, which has been pretty steady. You mentioned $500 for Q1, and it doesn't seem like you're likely to accelerate that, especially with rates up and the potential to earn more. The focus on book value appears to align with that, and I just want to confirm that I have that correct.
Harold Carpenter, CFO
Yeah, I think you've got that correct. We'll pick our spots. If I had to say we had a target yield bogey with the bond book, our new purchases are probably in the 250 range, a little bit north of that with the same kind of products that we've customarily acquired. So that's probably where we're headed. We're likely to put some more money to work on the shorter end of the curve. We've got a couple of products that we're looking at that we think we're going to be able to execute in the first quarter and through the second quarter. But like you might imagine, they won't lose that sense of urgency.
Brock Vandervliet, Analyst
Got it. Okay. Thanks for the questions.
Operator, Operator
Our next question comes from the line of Catherine Mealor from KBW. Your line is now open.
Catherine Mealor, Analyst
Thanks. Good morning.
Harold Carpenter, CFO
Hi. Morning.
Catherine Mealor, Analyst
I want to address the balance sheet composition in relation to Brock's question. Regarding the size of the securities book, I anticipate no significant changes, maintaining around 17% of average earning assets currently, possibly increasing to 18 or 19%. However, I believe that if it remains below 20% of the balance sheet, we should consider the liquidity aspect as well. With the projected mid double-digit growth in your GAAP and other metrics, how much of the $4 billion in cash do you expect to be utilized for loans and securities? I am trying to understand the projected size of the balance sheet in relation to the GAAP and other forecasts.
Harold Carpenter, CFO
Yes. As far as we’ve got about $3 billion in cash right now, and we wish was deployed in higher yielding assets. But we're hesitant to pull the trigger on because of the way the rate markets are responding currently. I think you're accurate with your 18%, 20% kind of range. I don’t think we're not going to execute any big gulp strategy to divest or to reduce the liquidity profile into longer-term bond assets. But we will monitor what's going on every day. The 10 years kind of spiked up. Not sure what it's going to do today, but it does make things more interesting. We've kind of like bonds that are 5, 7, or 8 years in maturity that we can get, call it $250 or more in yield. If we can find those bonds, then we'll tap into the market in a very measured and modest way. But you're right, there's not like any kind of ultimatum put on my group, saying, let's go push all this money out into the bond market. That's not happening.
Catherine Mealor, Analyst
Okay. And then really this $3 billion in cash, it's going to be mostly going into the loan book. So TierPoint, and that's a multi-year effort. Maybe at the most, a billion of that is deployed, comes out this year, just really depending on how deposit growth occurs.
Harold Carpenter, CFO
That's right. And deposit growth is probably one of the biggest uncertainties as to what happens with macro-environment changing like it's going to change and how all that flows down to banks like us.
Catherine Mealor, Analyst
Got it. Okay. And then maybe a follow-up on your fee guide. To clarify, is your high single-digit to low double-digit fee guide inclusive of the 20% BHG or exclusive of that?
Harold Carpenter, CFO
That's inclusive.
Catherine Mealor, Analyst
Including. So total operating fee is all-in or up-high single-digit to low double-digit?
Harold Carpenter, CFO
That's right.
Catherine Mealor, Analyst
Okay.
Harold Carpenter, CFO
So I think the BHG may move that number to 150 basis points or something like that.
Catherine Mealor, Analyst
And then one last just on BHG and because it's a little bit earlier. But how does a higher rate environment impact the way they issue things that they're gain on sale margin?
Harold Carpenter, CFO
They will say they aren't going to shrink, but their spreads widened during the pandemic. We've been in a low-rate environment for several years, and spreads have expanded. I'm uncertain if they will widen further when we enter a rising rate environment. They could be at a 10% spread or none at all. The change won't be significant if rates rise quickly.
Catherine Mealor, Analyst
Great. Thank you so much.
Operator, Operator
Thank you. Our next question comes from the line of Stephen Scouten from Piper Sandler. Your line is now open.
Stephen Scouten, Analyst
Hey. Good morning, guys.
Harold Carpenter, CFO
Hey, Stephen.
Stephen Scouten, Analyst
I'm curious if I may continue on the BHG path. It looks like in the third quarter, you have put about $75 million on your own balance sheet for BHG loans, bringing the total to about $263 million. I'm just wondering if you have the fourth quarter number and how much is included in the growth expectations for 2022 regarding how much of that you will hold on your balance sheet.
Harold Carpenter, CFO
I think we're in a $50 million range in the fourth quarter. And for the year, I think our planning assumption is that we'll be less in 2022 than 2021, call it around $150 to $200 million.
Stephen Scouten, Analyst
Okay. Great. That's helpful.
Harold Carpenter, CFO
And one more thing: I take a follow-up on Catherine's question about spreads. The one thing that I think is an advantage to BHG is the funding platform through that auction that works. For that spread to shrink, the BHG loans have to compete with a more accelerating lending platform at some of these smaller community banks. And so right now, BHG represents to the smaller community banks an opportunity to grow their loan platform that they don't otherwise have. For spreads to shrink, their loan growth outlook has to improve and it may improve, but we don't think it's going to improve significantly to a point that spreads are going to be impacted materially. How about that?
Stephen Scouten, Analyst
That's good color. Okay, thanks. And then thinking about the interchange fees for a second. I know you had some vendor incentives last quarter; that maybe that was going to come out. But then obviously, you still had a big quarter here. I'm wondering, was there anything unusual that led to those other than you mentioned the month of December being active, but anything unusual that led that number higher? And then we've seen, with some of the larger regional banks, are pushed back on overdraft fees. Are you guys experiencing any of that with your size bank, or do you think that will be a pressure point for you guys here in the quarters ahead?
Harold Carpenter, CFO
Yeah. I don't know of anything unusual in the fourth quarter interchange numbers. We're not feeling the pressure on overdrafts. We had a lot of waivers during COVID. We pulled back on some of that post-COVID. And so we believe we're at somewhat of a standard run rate. We monitor what's going on with the large caps and what they're doing with overdraft waivers, so we will just have to see how all that plays out and how it works its way down to us over the coming quarters and years.
Stephen Scouten, Analyst
Got it. And then maybe last thing for me, I'm just curious around asset sensitivity. It's increased modestly over the last four quarters. Harold, you noted that the floors and it does have been a great benefit to you guys. But is there anything you guys are thinking about strategically to increase the rate sensitivity more materially? And then the 58% deposit beta, I think you mentioned in the presentation, in 40% overall; why wouldn't it be lower this cycle, given all the liquidity we have? If you could give me your thoughts there.
Harold Carpenter, CFO
That would be absolutely where we're headed. And that's what brings in this whole coaching thing that Rob and Rick are doing with their sales force, and getting them prepared for a rising rate environment. So we hope we can beat the betas that we'd kind of set out there, and believe we have a great opportunity to do it precisely because we have the liquidity out in the system, and so does everybody else. So I don't think from the large caps in the mid-caps, you'll see a significant boost in deposit rates from right out the gate. So we will try to manage that accordingly. As to boosting asset sensitivity here in the near term, I think it's going to be through our loan book. I think loan fundings traditionally come to us with a heavier weight on floating rate assets. I think we'll still have some deposit gathering going on here that are likely going to cash. So I think we've got a great opportunity here in the near term to still boost our asset sensitivity levels considerably. That said, over the long term, I think it's important to state our goal, which is to be neutral with some bias one way or the other based on what we think the near-term prospects are, but we will not bet heavily one way or the other with our balance sheet.
Stephen Scouten, Analyst
Got it. Thanks for all the color and congrats on another great year, guys.
Harold Carpenter, CFO
Thanks, Stephen.
Operator, Operator
Our next question comes from the line of Michael Rose from Raymond James. Your line is now open.
Michael Rose, Analyst
Hey, good morning, guys. Thanks for taking my questions. Just wanted to go back to BHG again. Another big recourse reserve release this quarter. I think you had said, on the last call, that you expected it to end the year around $525; you're at 5% and talked about getting down to $475 to $485 this year. Any updates there? And then if you can comment on the expense trajectory there because it did look like another big ramp in expense growth there and just maybe if that incorporates any new verticals that were talked about at the Investor Day? Thanks.
Harold Carpenter, CFO
Yeah, I think there is probably some more room for a recourse reserve release here in 2022. I'm not sure if they'll tap into it, but I think that $475 number is still reasonable. I don't know if it will get that low, but that's kind of what their current thoughts are. There is expense growth; they are adding quite a bit of headcount, particularly in their analytical groups. They believe that's what drives the engine, so they are seeing quite a bit of that as well. But we still believe at the end of the day we're looking at 20% growth for us.
Michael Rose, Analyst
Okay. That's helpful. And then maybe just back to market expansions; you guys have had a very successful track record. I have no doubt that you will be successful in the DC market as well. Florida was brought up earlier, but as you look throughout the Southeast and then the Southwest, your taxes is obviously a market that would seem to fit the profile you guys have historically sought. Would that be an option at some point and maybe if you can just remind us on where the geographic limitations might be in the short intermediate term? Thanks.
Terry Turner, CEO
I think what our geographic coverage is, we covered the Southeast. Basically, what we're trying to say is from Memphis, draw a line up to DC and down to the southern tip of Florida; that's sort of the target. Again, we now have management participants from Texas. So we might go to Texas, a southeastern state, but right now our trust is there. Frankly, the reason that our trust is there is we know bankers, and the bankers that we've hired know bankers in those markets; and that's really what we do, just try to cultivate our non-bankers. We know less indexes, and therefore, the opportunities are a smaller force. I think you're on the right point; it wouldn't surprise me if we draw the map at some point to include Texas, but right now the updates are so range in the Southeastern markets. That's our first preference.
Michael Rose, Analyst
All right. Well, maybe at some point Harold can start up the LA office too as you guys grow. Thanks for taking my questions.
Terry Turner, CEO
All right.
Harold Carpenter, CFO
Thanks, Michael.
Operator, Operator
Thank you. Our next question comes from the line of David Bishop from Seaport Research. Your line is now open.
David Bishop, Analyst
Hey here. Good morning, gentlemen.
Terry Turner, CEO
Good morning.
David Bishop, Analyst
Hey, quick question Terry and Harold. I noticed a nice improvement, nice growth on the C&I, commercial industrial segment there. Just curious, maybe what you're seeing and hearing on that front. Are you seeing any sort of better line utilization up there? Obviously, we know there are a lot of macroeconomic uncertainties out there, but I noticed the narrative in terms of the credit costs; it sounds like you're expecting a further reduction in the allowance here. Is that informing your view on the positive economic outlook?
Terry Turner, CEO
Yes. In terms of C&I loan demand, I honestly believe C&I loan demand is fairly tepid. We don't see meaningful increases in line utilization at this point. I think, again, we manage businesses at the lower middle-market businesses that have a lot of fear or just sort of looking at the landscape up there; a lot of unknowns here. Typically, businesses don’t do a lot of borrowing when there are so many unknowns. If we can get a more solid footing for both the economy and political landscape, and all those things that influence optimism among business owners, that will be helpful additive and produce greater loan demand. But I think that C&I loan demand is not very strong. The growth that we achieved there, I think, is largely dependent on our hiring model and the number of new hires that we've made both in their books businesses and so forth.
David Bishop, Analyst
Got it. And then just maybe a follow-up on the asset sensitivity net interest margin. I think last quarter you said that the core NIM outlook was a little lower in the near term, not clearly down flat a few basis points, which came to fruition; core to your base point. Looking in your crystal ball in the first quarter of 2022, what are you thinking now about in terms of core margin direction?
Harold Carpenter, CFO
I believe we will still see some dilution in our margins. However, I don't expect it to be significant. It may decrease by a few basis points, but nothing major.
David Bishop, Analyst
Got it. Thank you.
Operator, Operator
Thank you. Our next question comes from the line of Brian Martin from Janney Montgomery. Your line is now open.
Brian Martin, Analyst
Good morning, everyone. I appreciate you taking my questions. Harold, I wanted to follow up on the last point regarding margins and your guidance. What do you believe the core margin is at this moment? Considering the liquidity levels and PPP, I'm curious about what aspects you would exclude when thinking about the core margin.
Harold Carpenter, CFO
Yeah, I think you're right. I mean, that's a valid question. But we're still analyzing the impact of this liquidity bill on our net interest income, which has very little impact on net interest income but a meaningful impact on net interest margin. So I think it's important to understand that. As for the PPP program, we think the PPP program is effectively in the rear-view mirror and so it will be less impactful. For sure, we'll have to probably keep looking at it as well for comparison purposes to the last couple of years.
Operator, Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.