Pinnacle Financial Partners (NASDAQ:PNFP) Q1 2022 Earnings Conference Call April 19, 2022 9:30 AM ET
Company Participants
Terry Turner – President, Chief Executive Officer
Harold Carpenter – Chief Financial Officer
Conference Call Participants
John Rowe – Wells Fargo
Brock Vandervliet – UBS
Steven Alexopoulos – JPMorgan
Michael Rose – Raymond James
Matt Olney – Stephens Inc.
Jennifer Demba – Truist Securities
Stephen Scouten – Piper Sandler
Catherine Mealor – KBW
Brian Martin – Janney Montgomery Scott
Operator
Good morning everyone, and welcome to the Pinnacle Financial Partners First Quarter 2022 Earnings Conference Call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer, and Mr. Harold Carpenter, Chief Financial Officer. Please note Pinnacle’s earnings release and this morning’s presentation are available on the Investor Relations page of their website at www.pnfp.com.
Today’s call is being recorded and will be available for replay on Pinnacle’s website for the next 90 days. At this time, all participants have been placed in a listen-only mode before we’ll be open for your questions following the presentation. [Operator Instructions]
Analysts will be given preference during the Q&A. We ask that you please pick up your handset to allow optimal sound quality. During the presentation, we may make comments which may constitute forward-looking statements. All forward-looking statements are subject to risk, uncertainties, and other facts, that may cause the actual results of Pinnacle Financial to differ materially from any results expressed, or implied in such forward-looking statements. Many of such factors are beyond Pinnacle Financial’s ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements.
A more detailed description of these and other risks is contained in Pinnacle Financial’s Annual Report on Form 10-K for the year ended December 31, 2021, and its subsequently filed quarterly reports. Pinnacle Financial disclaims, any obligation to update or revise any forward-looking statements, contained in this presentation, whether as a result of new information, future events, or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measure and a reconciliation of the non-GAAP measures to the comparable GAAP measures will be available on Pinnacle Financial website at www.pnfp.com.
With that, I am now going to turn the presentation over to Mr. Terry Turner, Pinnacle’s President and CEO.
Terry Turner
Thank you, operator and thank you for joining us this morning. But what a introduction I would say that first quarter 2022 was another outstanding quarter for us. Thanks to the power of our ability to try the best and experienced bankers in our markets both in the legacy markets and in the market extensions and translate that powering into outsized high quality growth with unfold to play again this quarter.
In addition to all the macro issues that have created very – of economic uncertainty then she also had a number of other headwinds like around the laws of PPP revenues, loan pay offs like substantial reduction in mortgage loan originations during the right movements pretty well eliminated the robust mortgage refinance market we’ve enjoyed several years just to name a few.
Our blades has been that our ability to overcome those headwinds with the ability to predict outsized balance sheet growth and so I think that’s the most important story land for us here in the first quarter. We’ve begun every quarterly conference call with the dashboard for years beginning with the GAAP measures I will focus you first on the credit metrics along the bottom row.
The median bars show our quarterly performance over the last five years and as you can see our asset quality over the last five years has been very strong. But even so again this quarter all three measures problem loan metrics continue to trend down in our decade long loads. Our five year median for NPAs the loans and OREO is 46 basis points Q1they were just 14 basis points.
Our five year median for classified asset ratio just 12%, Q1 it was 3.6%. Our five year median annualized net charge-off ratio is 10 basis points. Q1 it was 5 basis points and honestly started here much better than that.
Moving now to the non-GAAP measures, so which is one that I generally most focus on, let us look at the top row charts first. As you can see, revenues and fully diluted EPS continued their upward slope. Adjusted pre-tax pre-provision net income was actually flattish down just a tick. We weren’t quite able to outrun the impacts of reduced PPP revenue and mortgage origination fees in this quarter. And as I mentioned few moments ago I just take outrun those headwinds this year based on our outlook for loan growth going forward more on that later.
Now looking at the second row as I’ve already outlined, loan and deposit volumes continued to grow at a double-digit pace. PLP loans were up 18.5% annualized and 22.5% annualized excludes an impact of PPP. Core deposits were up 14.8% and I would say that growth is direct which adds to the growth in non-interest expense we’ve invested over the last year or two.
As the tangible book value per share, we actually saw our first reduction in more than five years with interest rates rising we saw a decrease of 2.1% this quarter primarily due to the impacts on accumulated and other comprehensive income. On a peer relative basis I believe our conservative balance sheet that was in relatively good state there.
Along those lines, already in the quarter, we transferred approximately $1.1 billion of available sale of securities to held for maturity in order to help counter the impacts of rising rates on tangible equity. I don’t talk more about that in just a minute also.
So in summary, based on our previous investment in revenue producers we are continuing to grow our balance sheet at an outsized pace. We are translating that into revenue and earnings growth and our asset quality is blemish free.
So, with that I will turn it over to Harold for a more detailed look this quarter.
Harold Carpenter
Thanks, Terry. Good morning everybody. As usual, we will start with loans, in the first quarter it was likely one of the strongest loan growth quarters for us in our history and with our current pipelines provides us with much confidence as we enter the second quarter.
Even inclusive of PPP paydowns average loans were up 14.7% annualized between the first and fourth quarters. And as we mentioned in the press release last night, upping our guidance to at least mid-teens percentage growth for this year is reasonable for us.
Loan rates were down in the first quarter due to reduced impacts of PPP on our loan yields. We recognized $10.8 million in PPP revenues in the first quarter, down from $15.5 million in the fourth quarter.
PPP balances decreased to approximately $157 million in the first quarter, and consistent with what we discussed last quarter we believe the 2022 PPP revenues will likely range between $15 million and $20 million, compared to approximately $86 million in 2021. We are down about $25 million in PPP loan volumes so far in the same quarter, so not much left to go related to PPP.
That said, PPP was a huge program for this base and a big thank you to all those that were connected with getting PPP up and running because from a client service perspective and our borrowings to gather client for life PPP very much enhanced our standing with our client base.
Also, we did see some uptick in commercial loan utilization this quarter. First time that’s happened in quite a while and we have some reason to believe that increases to continue this year as borrowers look to lock in inventory at current price levels. We also anticipate increases in construction funding due to spring and summer. More on borrowers were on fixed credits in a few minutes.
We’ve responded to a lot of question about one force over the past year or so and their impacts on our yields in a rising rate environment. Again, we do not apologize for our loan force with this which realized the ongoing [Indiscernible] for quite some time. During the first quarter, given the impact from recent 25 basis point increase in short-term rates partly – in $24 million in loans of state force and are now priced based on their original loan scripts.
As the bottom left chart on the slide indicates, we have about $2.2 billion of our floating rate loans that should push through forward pricing with the net 50 basis point raise which we anticipate will occur next month. Linear focused on deposit beta but this may growth was focused on the loan beta and make sure we achieve the strong foot in loan yields as possible as rates increase.
As we mentioned in the press release, we are pleased to see approximately a six basis point lift in aggregate loan yields after only four weeks post delays that then increased. As the top chart indicates, we experienced strong yields in the 5.2% range back in 2019. That was a much different time and we don’t expect achieving those levels this year but we could make a strong dent in the current delta between where yields are now in those far levels.
Lastly, asset loan our market leaders are excited about our loan growth prospects and about a mid 10 percent growth which is inclusive of PPP paydowns. Additionally in 2021, our new markets including Atlanta and our new specialty lending units provided approximately $530 million in loan growth. For the first quarter and including 30 days, they incremented our loan growth by $386 million or 35% of our 1Q 2022 ELP loan growth and we expect strong participations from our new markets in the second quarter as well.
Now on to deposits, we get yet another big deposit growth quarter. Deposits were up almost $1.1 billion in the first quarter. We don’t anticipate that sort of growth in the second quarter with tax payments and with some projected deposit outflows by some relatively large depositors but still believe that high-single-digit growth in core deposits remains a reasonable target for us for this year. So no change there.
Our average deposit rates decreased by 13 basis points while in the period deposit rates were slightly higher than average at 14 basis points. Since the last FOMC meeting, our deposit rates are up almost two basis points. So we are pleased with the effort of our relationship managers thus far. We’ve never abandoned our view that core deposit growth is a key long-term strategic objective.
For the first ten years of our existence, our number one go was developing strategies and tactics around funding our growth. We continue to like our chances given the significant investment we’ve made in both relationship managers and new markets over the last few years. We also like our start point on deposit cost as we enter an up rate cycle. We continue to forecast an aggregate 40% beta on pull deposit through the cycle, we will keep an eye on what our competitors are doing given they are advertising much less betas which we believe gives us some breathing room at least initially.
Now to liquidity performance. We continue to look at ways to create increased earnings momentum through deployment of excess liquidity into higher yielding assets. Our liquid assets actually increased this quarter corresponding with strong core deposit growth and the impact of PPP paydowns. We are optimistic that loan growth in 2022 should serve to reduce our overall liquidity but in our view, this will be a multi-year effort.
Again our objective here is to find ways to put money to work in a rising rate environment without placing unreasonable pressure of our tangible book value. During the first quarter, our investment securities increased in total by approximately 1% as we continue to reinvest cash flows from the bond book back into the bond book.
The increase in balances actually represented a decrease in our bonds to total asset ratio which was 15.6% at March 31. We do believe we have some opportunities on the shorting of the curve put some money to work at slightly higher yields and did some of that in the first quarter. We will continue to have a modest measured response in how we like the liquidity to work in this rate environment.
We did execute a transfer of about $1.1 billion in securities from IFS to ICM. Doing so did help supports tangible book value by almost $0.73 per share in the first quarter. As the grey bars on the top left chart reflects, I believe we’ve done a remarkable job defending our core margins over the last few years. We tend to hover in the 3.2 to 3.25 range and we will work hard to lift our margins going forward.
Given the operating environment, we have confidence that we should see some margin expansion along with increased net interest income this year. We are upping our guidance for net interest income to low double-digit growth for 2022 over last year. As to credits, we are again presenting our traditional credit metrics. Pinnacle’s loan portfolio continues to perform very well and again these are some of the best credit metric ratios we have experienced ever.
Modifications made pursuant to Section 4013 of the CARES Act continue to decrease and was a $616 million at March 31 2022. Importantly, over 91% of our 4013 credits are mostly principal paydowns like we have similar amortizations of pre-COVID and only 1% of the 4013 loans are in classified risk category.
Importantly, and as noted on the highlights in the slide, we do anticipate further declines in our allowance for credit losses to total loans ratio over the next several quarters given continued improvement in our credit metrics as well as macro-economic factors. We’ve had a lot of conversations with borrowers over the last few months about inflation and how it’s impacting their businesses.
So far so good, our truckers, our hospitality borrowers, apartment owners et cetera are thus far able to pass loan price increases to their customers. The biggest issue that most all point to is labor and finding enough labor to grow their businesses. Backlog for – are some of the highest levels than ever. Obviously, we all think inflation to slowdown supply chain to be less of an issue. We can only hope that over the next few quarters we will all get our arms around some of these issues.
Now on to page that for run rate for 2022 and for BHG, we are maintaining our estimate of approximately 20% growth and will speak to that in a few minutes. Also included in our planning assertions is that we are not anticipating a repeat of $20 million in income we experienced in 2021 from valuation adjustments for several of our joint venture investments.
Thus we are planning for revenues from these investments to be much less than 2022. Other than that, our wealth management and several other fee-based business lines will [Indiscernible] for a break out year in 2022 and believe that an annual 79% increase in all of our other remaining key categories is reasonable for us for this year.
A lot of interest in our mortgage forecast for 2022 with lower expectations for this year and allowances as rates were increasing but having stock in our markets are at levels that home sales are being impacted and along with that the price of housing has increased significantly with some major stories were still seeking above list prices has become fairly common.
Additionally, there are large percentage of cash borrowers acquiring homes in our markets as our markets continuing to drag up and people from other states where housing costs have been much higher for many years.
As to expenses, we are increasing our overall total expense run rate from low double-digit percentage growth in 2022 to mid-teen percentage growth. This increase is primarily attributable to headcount growth in the new markets, market disruption initiatives across our markets, the addition of JP&D and I believe that we should likely approach max pay outs for cash incentives this year.
As a reminder, as we met you last time, our current plan is that our incentives will increase in 2022 should we achieve some fairly aggressive performance targets. The increase is based on headcount adds in 2021 and our planned recruiting adds for this year. Offsetting the increase is that we are reducing our target pay out and our annual cash bonus plan from an outsize from now of a 160% target last year to the traditional 125% target this year. We are also providing more cost for equity plans for our leadership.
Lots of discussion currently about expense growth, particularly in the large cap space. Not sure why their costs are escalating but our expense increases are primarily attributable to the successful recruitment of new bankers who help drive our growth over the next several years. Terry will discuss more on that point in a few minutes.
We believe that our organic growth model and we’ll continue to lean into it as the opportunities to hire established revenue producers in our markets has never been better. As capital we did see 2% pull back on tangible book value per share with the impact of increased rates on AOTI and tangible book value per share.
Just to reiterate pulling our leadership’s equity compensation plans are designed to perform upon how we rank with our tangible book value growth. So, our leadership is focused on growing tangible book value over the longer term. Our strategy and tactics are focused on building franchise value using their organic growth model over the long-term. That includes the focus on earnings growth, revenue growth funds and tangible book value per share.
Quickly, that’s an update on our outlook for 2022, as the loans with increased our outlook to mid-teens growth for 2022 and are optimistic about the second quarter is shaping up. We are adjusting our rate forecast to six rate increases from three last time and above that we could increase that assumption in the end here shortly.
Given that, we believe we should see improvement this year which should result in net interest income growth of low double-digits. We’ve also increased our expense outlook for increased hires and other factors from mid-teens percentage growth. We are very optimistic that hiring will ramp up here in the near term. All in we are thinking that we are going to have a really strong year.
Obviously, inflation and macro improvements how this hopefully turns out that as for our group, we will work the balance for risk or whatever comes our way with an intense focus on growing the franchise value thus far.
Now quickly to BHG and other core record originations. The gap between origination and sold loans is one as BHG has been holding more loans on its balance sheet. We anticipate that BHG makes solid sales into their bank network as capital market interest rates have been volatile while our new platform continues to be super reliable which is obviously one of their competitive benefits as BHG can quickly pivot between the bank network and the securitization network during times such as these.
Once BHG can better and start of the impact of rising rates on its securitization platform, they will likely go back to it. More on that in a second. Spreads continue to expand in the first quarter some of the large spreads in their history with raised pricing spreads might increases some but at these margins BHG has the capacity to execute its business model with a great deal of confidence regardless of some shrinkage in spreads.
The bottom lines are details, the 1400 plus banks in BHG’s network in just over 600 unit buyers in the last 12 months. As you know, we considered one of the strongest – we considered the strongest funding platform in the country for companies in their phasing and the third – significant hunger for more products.
As many of you know, the recourse obligation has reversed for potential loss absorption for the sold loan portfolio. At the end of the first quarter, recourses were up slightly at approximately $208 million while the ratio of sold loans decreased modestly to 4.82%. As the blue bars in the bottom right chart show, the credit portion of recourse losses for 1Q 2022 are at some of the lowest levels in the past ten years.
The quality of BHG’s borrowing base in our opinion remains impressive and is much stronger than just a few years ago. BHG refreshed its credit score of monthly always looking for some of the weakness. Past dues and credit scores were at consistent levels and of course they appears to be as strong as it’s ever been.
National and regional unemployment gives them confidence that BHG borrowers should be able to withstand forecasted inflationary increases. They and we believe in their credit models and their spirit gives them reason to do so.
BHG had another great operating quarter in the first quarter. We still believe BHG’s earnings growth for 2022 over 2021 will be at least 20% which is consistent with our discussion from last quarter. Originations as noted in the bottom right chart are anticipated to grow at least 30% this year, which is also consistent with our last quarter’s discussion.
With $855 million in originations in the first quarter, they are at this pace to achieve that growth. As I mentioned earlier with the volatile [Indiscernible] BHG believes revenues in their earlier quarters of 2022 will likely be stronger as they likely assume more loans to the bank office platform revenue hold loans on their balance sheet until they can better understand how the securitization markets are and will be baiting.
They are hopeful that as the year plays out BHG will pivot back in retaining more loans on its balance sheet. As to the balance sheet model and as the slide indicates, BHG closed their fourth securitization in the first quarter. It amounted to $492 million with a weighted average funding rate of 2.79%. Loans are securitized that have a weighted average of 14.1%.
So with that, I will turn it back over to Terry to wrap up.
Terry Turner
All right. Thank you, Harold. In our view, the economic landscape remains fragile ruckus in Beijing and Ukraine and the various economic sanctions enacted in the France are likely to continue to weigh on our economy for some time. The full impact that onboards the issues, the inflation, inverted yield curve, and a potential recession aren’t yet known, but our funds thus far as Harold has already mentioned is really been safe to protect our tangible book value that had a number of targeted loan portfolio reviews including our COVID impact and commercial real estate portfolios and heightened our diligence on cyber security and fraud detection.
But despite the uncertain economic environment, we are extremely pleased with our first quarter performance and remain optimistic for 2022. As a result of our prolific hiring over the last few years not only are we realizing outsized growth in our legacy Tennessee, Carolina and Virginia markets, but we are also assessing our market extensions to Atlanta, Washington DC, Birmingham and Hinesville.
The prolific hiring continued during the first quarter with 28 additional revenue producers. The loan growth we experienced during the first quarter along with our current home pipelines and our continued ability attract middle southeast and – that we should meet or exceed mid-teen percentage loan growth for this year.
Not only that, but there is tremendous market disruption in our markets we believe we are uniquely suited to capitalize on that. We fully expect to see this opportunity by continuing to hire the best most experienced bankers in our markets and consolidate their books. This copy was home work for the purpose of capitalizing on market disruptions due to the consolidation 22 years ago. This is who we are and as I look at our current environment, this tells me like the best market opportunity that we’ve ever had.
I want to thank you anyone in market integration for those banks that are involved, system integrations that are extraordinarily difficult, culture generally commence and persist invariably there will be winners and losers in those organizations and a great deal of brand new laws is associates and clients get frustrated in late. Happily these are the current integrations going on in the markets that we serve.
Here is a great way to think about magnitudes of vulnerability that that creates and on which we are focused. This is as they are seeing positive market share data, obviously these are the measures, but this is a pretty good proxy for the potential vulnerabilities in the markets we serve as a result of consolidation or in the case of other ongoing issues.
Taking these 12 markets as a whole, I would say the $325 billion is vulnerable. And these are discussing with take advantage as the same kind of merger related turmoil consolidation of 90s, frankly I have never in my life seeing competitors vulnerability at this level. We should certainly edge forward at what we started in actual by de novo market extensions as well as via M&A and fit sometime demonstrating the success of B&C merger over quarters ago.
So today I want to highlight our most recent market extensions. Merger related turmoil really catalyzed our entry in the four day markets and two new states with lending practices, equipment finance and franchise lending. And this is franchise of our progress which I think you’ll agree is rapid and last we successfully hired 42 associates, 24 of them revenue producers.
At quarter end, they had $1 billion in loan commitments, nearly $600 million in loan outstandings and as you can see, they are already through breakeven, Parksville in Birmingham, Alabama and now been with us for just three quarters. In Hinesville, we hired 12 associates, six of them revenue producers. We still got a great hiring pipeline in front of us. Loan production is not bad, but deposit production is off the chart. There are most breakeven in just three quarters.
Birmingham as it relates to loan and deposit volumes is sort of off the story, similar hiring levels, fabulous loan production and in DC, we’ve just been there four months. They had great initial hiring success with a continuing large pipeline for hires. Balance sheet wise very best service yet, but the pipeline looks massive to me.
I cannot tell you how excited I am about what I believe we are going to be able to layer. If I know mention two new specialists for equipment finance franchise lending both less than a year, you can see that like the other markets, we’ve had strong hiring and really rapid loan growth. So all in last quarter, the EPS drag was about $0.03, because we are growing core volumes so rapidly we can absorb that drag in still our growth peers in terms of earnings and you can see the pace with we are continuing to build out.
We’ve been talking for quite some time about the number of revenue producers that we are hiring because honestly that’s a principal theme for the success we’ve enjoyed for a good number of years now. Revenue producers include financial advisors, many of you would refer them as relationship managers, but it also includes other revenue producers like mortgage originators, brokers, trust administrators and alike. But just for one moment, I want to drag you to just the number of balance sheet loan and deposit producers, as a subset of the revenue producers in order to provide a sample illustration of how we convert mid hires to sound balance sheet volumes would translate into revenue growth.
We hire all kinds of experienced loan and deposit producers, not trainees, not rookies, but producers with at least ten years experience with their own book of business. Small business FAs, private banking FAs, commercial middle market FAs, corporate FAs and so forth and the volumes associated with each type of those net base vary. But if you took the average since 2018 for all types of FAs, our new hires generally consolidate their book over five years. Volumes continue to build post five years, but per day we just want to concentrate on first five years. On average, loans build $8 million in balances in year one $28 million in year two, $30 million in year three, $4 million in year four, $56 million in year five.
Deposit growth is noted on the chart on the top right, but with these charts on the top are intended to illustrate how we go about our plans. It gives a lot of numbers but essentially intended to illustrate our planning assumptions for balance sheet growth associated with new hires and the market share consolidation over the last four plus years.
I want to you to get this because this is an incredibly powerful growth engine to they have already built. The typo at the bottom aggregates the volumes for the same 176 financial advisors that we hired, what our planning assumption is for net volume growth for 2022 and future periods. Again based on historical averages and for 2022 thus far, we expect these same individuals to generate $6.4 billion in loan volumes.
That number is about $2.2 billion in growth over the previous year and that’s how it works. And always talked about here is just the balance sheet growth that the remaining for fee revenues that go with as well. So the obvious point is as a shareholder given these volumes making this investment in these experienced producers as hard to be.
Here is another way to think about our ability to grow the revenues. This is a chart that’s really important to me, normally it gets relegated to the fact that we haven’t addressed it on the call for a few years, but the reason it’s important to me is because, first and foremost, we are an earnings per share focused company and our path to produce that earnings growth is through revenue per share, sustainable revenue per share through franchise creation, not expense cutting.
The blue bars, what our revenue per share growth in the first quarter of 2018, you can see it’s a pretty steep and reliable slope. The green dash line is the year-over-year percentage growth in revenues per share. The red dash line is the same of peers and so, I’ll point out a couple things. Number one, we grow revenue per share quarter in and quarter out. Two, we almost always grow it faster than peers and by level, by a lot.
And during 2021, the gap to figures in terms of the rate of growth and revenue per share has widened every quarter. So that’s what track records are successfully investing in growth. Our advanced thoughts with the French general in world war one, so no [Indiscernible] quote before, but that fails somewhat the same way. The currently it’s volatile to invest in to last it works. There is significant headwinds associated with things like PPP paydowns in the disappearance of mortgage rate finance margins, but our situation is excellent. The competitive landscape is still in our way. We are attracting talent of clients at dramatic pace and we expect to continue top quartile EPS growth based on top quartile revenue growth.
Operator, we will be glad to stop there and take questions.
Question-And-Answer Session
Operator
[Operator Instructions] First question comes from [Indiscernible]
Unidentified Analyst
Hey guys. Good morning.
Terry Turner
Good morning, Brett.
Harold Carpenter
Hey, Brett.
Unidentified Analyst
Congrats on early strong quarter and that’s some impressive loan growth. Wanted to first start with BHG and usually I want to have a conversation about you guys, it’s within the first starting socket that BHG comes up and so I think it’s a big focus. Wanted to get an update on any thoughts on that investment and their thoughts on what they might do to even monetize on what to capitalize on the strength and wanted to see what you thought the margin details, talk about spreads, how much spread compression do you think that business might be seeing in the next few quarters?
Harold Carpenter
Yes, Brett. I’ll answer the second question first. The – they will face the spread until be that great here in the near term. They have been successful with coupon rates north of 15%, 16% in the past. So, they feel like they can move rates up with borrowers. They do think that they surpass or the option platforms that they’ll have to probably be a little more aggressive because those rate is up a little bit. But say perhaps some spread compression of maybe 1% or maybe 2%, something like that. But they all think it’s going to be – put that beam a dip into their business model.
Over the years, we’ve had all kinds of conversations about liquidity events and when the markets rise and when the markets not rise. I think currently the market is not shaping up to their advantage currently. They think they’ve got a lot of growth and a lot of runway in front of them. So they will likely be focused on growing revenues of this – of their firm because they believe that as they grow their revenues, they too will see increased franchise value at some point whenever that occurs and there is a liquidity event. I think Al and Eric and – we are all on the same page. We have a great partnership. We communicate frequently.
That said, I do believe that Al and Eric are at a point personally that they think that they keep their eyes open and layer of what’s going on in the various fin tech lending markets and what kind of appetite there might be for their firms is they believe is very profitable and they are very, very proud of it. So, I don’t know if anything is likely evolving, I don’t know – the buy siders get tired of me saying this, but it’s still the truth. We all know if there is a liquidity event this year, next year or five years from now, but we know there is like to be more. And when that occurs, we hope to enjoy a very nice gain and we hope to be able to look at a variety of options of how we execute on that game. So, with that, I’ll stop, see if Terry has got any additional comments or whatever, so.
Terry Turner
No, I wouldn’t add anything.
Unidentified Analyst
Okay. Efficient color on BHG. Wanted to ask about the margin as well, just when I look at your filings, it seems like that they would suggest that you are being some more conservative with your assumptions for 100 to 200 basis points rises in rates, just given the liquidity that you still have on the balance sheet. Can you talk about the assumptions that go into your upside for NII and then just talk about what reprices in the first 70 days on a loan portfolio following a rate hike?
Terry Turner
Yes, well, I think the advantage we got here in the near term is that we anticipate a 50 basis point increase in rates from the Fed and so that’s going to take little over $2 billion in loans out from their floor and put them back on what’s in other coupon is that. What we do is we are talking to our market leaders. We are trying to anticipate what they think their growth is going to be over the next several quarters and then we just fashioned out on out. We also look at what our pricing has traditionally been and used that as a forward – on the forward curve. So, it’s not something that I say, it’s not right. So there are already blooming in assumptions that go into this forecast. I guess, just to get on my box just for a second, because I don’t have time – time to preface. The disclosure is that we include regarding our asset sensitivity in the back are primarily weighted towards what the regulators generally require. And so, it’s a stable balance sheet or – and a parallel shift in the curve and all those got assumptions that go into it and it really lacks a lot of creativity and a lot of ingenuity that we are always thinking about around here to improve both the earnings content of our firm as well as what we think our growth is going to be. So, we’ve got several lever feeders that we can pull periodically that helps us either in the near term, in the short term and the long-term, and that’s what we will do. And so, what we try to do is provide that information that’s in that asset sensitivity table, but at the same time kind of get you to a real world kind of growth perspective that we think is going to is more likely.
Unidentified Analyst
Okay. Fair enough for the color. Congrats on the quarter.
Terry Turner
Thanks, Brett.
Operator
Our next question comes from Jared Shaw with Wells Fargo.
John Rowe
Hi, this is John Rowe on for Jared.
Terry Turner
Hey, John.
John Rowe
I just wanted to go back to the comment earlier in the prepared remarks about line utilization or is there a benefit this quarter? I was hoping you could just clarify how much that increased from the fourth quarter and what the dollar impact that that was and I guess if there is any further for that to go as we move through the year?
Harold Carpenter
Yes, John, I am looking for the Slide 35, you know that, I’ll tell you generally what we view that information, so I am a – think of commercial real estate lines went up. The active balances on commercial real estate went up 370, 322 on C&I. So, the utilization went up 0.5% on commercial real estate and point and you are seeing that.
Terry Turner
And John, this is my color commentary in addition to that slide and Harold’s comments. I think you have to – we see an opportunity for that to pick up. So, I think the answer to that is, yes. I mean, you know, there is sort of two components to it. One is the sort of inevitable funds up of construction loans. So, that utilization will take up and then, secondly, in the case of C&I, my belief is that if you – if the economy moves forward it seems the sales cycle and that results in receivable and inventory financing, land utilization and alike. So, [Indiscernible] but the answer is, it seems that economy is going to find a good footing and you always set land utilization to pick up.
John Rowe
Okay. Thanks. That’s very helpful. And then just on the rate hike assumptions does the faster assumption and increases in short term rates impacts your beta assumptions at all like looking to your 50 basis point hike in May versus kind of spread out throughout the year. Does that kind of the ramp up how quickly you have to pass through that on the depositors.
Harold Carpenter
Yes, our planning would be that initially our banker will be relatively small. And that’s over the course of the rate cycle we increase the beta meaningfully.
John Rowe
Okay. But so the pace of hikes does – is factored into that now?
Harold Carpenter
For sure.
John Rowe
Okay. Good. Thank you. And then I have just one last from me. On the prepared remarks you are talking about six rate hikes being assumed in the guidance. But on the slides I am seeing six additional hikes throughout the rest of the year. I am just wondering if the actual guidance assume six or seven total for the year.
Harold Carpenter
Yes, we are thinking six more for the rest of this year.
John Rowe
Okay. Good. So seven total.
Harold Carpenter
Okay. Thank you. Thank you very much. That’s all for me. Thanks for answering my questions.
Terry Turner
Thanks, John.
Operator
Our next question comes from Brock Vandervliet with UBS.
Brock Vandervliet
Hey good morning. Just going back to BHG and just awesome loan growth guide for this year. Just wondering as you have been talking to them and some of the macro clouds has darkened materially year-to-date or at least gotten more uncertain, how much discussion has there been internally in terms of, okay, we are less comfortable with the environment what would need to happen? Do we need to narrow the credit box drop, drop guidance on loan growth, boos reserves? Like, how much of those discussions have been happening behind the curtain?
Harold Carpenter
Yes, the only large exposure to BHG is further Board meetings and we have access to their – obviously to their credit people. I am not sure how much increased diligence. I can’t really put a measurement on that other than that they are looking at their portfolio statistics. They’ve added people into their credit units and so on and so forth. So, they like us have an enterprise-wide risk group that is trying to look out and around the corners. I don’t know if that’s exactly going to – what you are going but that’s where I am headed.
Brock Vandervliet
Okay. That’s close enough. And separately how just on your Pinnacle’s – your reserve guidance, we’ve repeatedly estimated way to high side and provisioning, it sounds like we should be expecting to this neighborhood of provisioning near to intermediate term as that reserve continues to trend down. Is that – am I on target there?
Harold Carpenter
Yes, I think though, we don’t – we have a stronger charge-off forecast for this year in our numbers, but I think that just have caution. When I talk to the credit officers, they are really excited about where the book is. We have now a string of probably four quarters where provisioning has been a lot less than even we anticipated. So there maybe some elevation towards the back end of the year.
Brock Vandervliet
Okay. Thank you.
Operator
Our next question comes from Steven Alexopoulos with JPMorgan.
Steven Alexopoulos
Hey. Good morning everybody.
Harold Carpenter
Good morning.
Steven Alexopoulos
I want to just start, Terry, on Slide 23, you have quite a few markets left for strides and has really strong market shares. I am curious based on your experience in these local markets, do you see this is a similar opportunity to what happened with Truist or do you think this could be even better from a talent acquisition perspective? What’s your take there?
Terry Turner
I would say, comparable to be honest with you Steven I think you know this. I would say if you and I am saying all the time, hey that’s go get numbers present for what I believe there is if you looked at over the last five years SunTrust would have been the principal manufacture to us in terms of new hires. I think when you make it a more recent time period over the last two or three years that evolve to Wells being the biggest manufacturer for us. And so, today, I think sort of moving back to Truist, there is lots of vulnerability there. And so, I don’t know, I won’t say about this first for us and – don’t be as comparable thing for us.
Steven Alexopoulos
Okay. That’s helpful. And then, on the next slide, Terry, we break out this once in a generation opportunities, different markets, from a big picture view, where do you see revenue producers moving to in these markets. So now a different exact number, but is this the start of these other markets moving towards Atlanta and Atlanta continuing to move forward?
Terry Turner
Well, I think, so, their size, I know the markets and so Atlanta and Tennessee are the grand markets just in terms of the total size and growth dynamics. And so, when we go into those, when we hire leadership in those markets part of our states is centered around how they are thinking three days on our bank over a five year period of time or something. And so, that’s – would be indicative of what we set out in those big markets. Knoxville and Birmingham are mainly smaller markets and so, but the penetration should be similar in those markets, maybe a little better, but the growth opportunity and the number of revenue producers that we hire in those markets will be less. Yes, but just in the near days see I love what’s going on in Atlanta. [Indiscernible] if we don’t run faster in DC than even in Atlanta. I don’t know, let’s see. But I am so encouraged by what’s going on there.
Steven Alexopoulos
Okay. That’s good color. And then, finally, I’ll get Harold into the next. On deposit rates, so the end of period deposit rates were up modestly. Maybe Harold, what’s going on behind the scenes? You have many customers now, asking for a higher rate. How are the RMs handling that? And maybe what are you seeing from competitor banks on that front? Thanks.
Harold Carpenter
Yes. I mean, we are – but first of all, we are not seeing anything from competitor banks. So, I don’t think competitor rates are – competitors are increasing rates of any counterparts at all. We are getting phone calls from various plus the – focused on their rates and we are working with those plans as you might expect us to do. And they are primarily the ones, but now we do have several class that are on an index, deposit rates pricing scales. So they obviously got increased rates. But there is a lot of our client base out there, the not for profits, and the churches and those kind of businesses where they pay attention to every last nickel. And so we expect them to talk and you should expect us to work with them. So, that’s what’s really going on. We are not – a lot of the operating companies that are around fewer calling, but most of the operating companies are more concerned about where they are going to get their next person to put on the line to drive the trust to do those sort of things.
Steven Alexopoulos
Okay. And based upon, Harold, what you expected, right, from an exception pricing, is it about a mind what you have seen so far in terms of the number of requests could be in for exception pricing?
Harold Carpenter
Well, I think we are doing a little better than I would have thought. I would have thought with that 25 basis point rise that we would see more increase on our deposit cost, because we look at it every day and we particularly took interest when the fair increase rate is 25 basis points. So we have some information as to what rates would do given the indexed accounts. But I think, I really do and I am in that and the comment is that our my hats off to my relationship managers because I think they are doing a great job and it’s placed our class where we are in this rate cycle.
Steven Alexopoulos
Okay. Great. Thanks for taking my questions.
Harold Carpenter
Thank you.
Operator
Our next question comes from Michael Rose with Raymond James.
Michael Rose
Hey. Good morning. Thanks for taking my questions. I just wanted to get an update on how many – or how much loans you guys are adding from BHG each quarter and if that would be expected to increase? I know that you did securitization in February and it could be a little tougher given the environments. I just want to get a sense for how much of this quarter’s growth and maybe expectations for adding BHG loans are kind of built into the guidance for the year? Thanks.
Harold Carpenter
Yes, Michael, I don’t think we added any loans in the first quarter from BHG. If we added any, it was about $25 million. And I think what we’ve communicated between us and them is that we may look to add $150 million or so this year. But I am not sure if we added any here in the first quarter.
Michael Rose
Okay. Great. And then maybe just switching to credit quality. Obviously, things are really good, but clearly some potential clouds on the horizon. If I look at host day – I mean it’s definitely lower than where the reserve is down, we talk about by going down. Can you just kind of talk about the kind of early forces there in terms of improving credit metrics versus kind of what could happen on the horizon and what that could mean for provisions and reserves? Thanks.
Harold Carpenter
Yes, I think that the influence to see for us would be that the migration period in the past is gradually moving forward and credit metrics are improving with that. So, that will put downward pressure on it and at the same thing is this with respect to the forward outlook. There is less near term kind of macroecnomic pressure on reserves build. So those – I think those two things will, in combination, give us more confidence that the reserve will likely go down than us here over the next – at least the next couple of quarters. Now we don’t expect it to get down into the kind of the day CECL [Indiscernible] We don’t think that will happen. But we do think we’ve got some more room here like I said over the next couple quarters.
Michael Rose
Okay. Great. Thanks for taking my questions.
Operator
Our next question comes from Matt Olney with Stephens Inc.
Matt Olney
Hey. Thanks. Good morning. And I want to go back to the discussion of the impact of higher rates on the bank. And my question is really on new loan spreads and on Page 33, you gave us a good summary. But with higher rates, I know you are hoping to see the flow into the new loan originations. I am curious of the expectations are for this year. It seems like the markets, just assuming that many of your competitors also have really strong liquidity like Pinnacle does, like really slow down the lift of the new spreads. But curious kind of what your expectations are this year?
Harold Carpenter
Matt, this is Harold. I think, for new loan originations, we hope to get kind of similar spreads to the – what the both years currently. Our planning assumption is that we likely won’t that in order to bring a new borrower across the street, we probably won’t get the 100% loan beta that we anticipate, that we’d like to get of our current book. So there is some caution built into what pricing is going to be on the new credit that we are booking.
Matt Olney
Okay. And then I guess, just taking a step back and thinking about Pinnacle rate sensitivity more broadly throughout the cycle. It seems like a last rate cycle, that the bank performed pretty well the first half this cycle, but then deposit cost accelerated in the back half. So, I guess, what are the expectations for this cycle? I mean, it sounds like you think that deposit betas could be lower given the higher levels of liquidity. But what else should we think about in terms of how the bank’s balance sheet has changed since a few years ago.
Harold Carpenter
I don’t know if there is a whole lot of significant change in how our balance sheet is built. As far as on the left side, I think our bond book is probably maybe a half a percentage points bigger than what it was back in the last up rate cycle. Obviously, this liquidity has influenced how our balance sheet has moved since the last time. So, and I think that gives us some comfort that maybe the deposit beta won’t be as significant this time as it was last time.
Terry Turner
Matt, I think, beyond the structure to balance sheet, I think just the macro environment here where there is massive liquidity and modest loan demand is a pretty different phenomenon and what we base before. So, I think that will have more impact perhaps in just changes to the structured balance sheet.
Matt Olney
Okay. Okay. That’s all for me. Thanks guys.
Operator
The next question comes from Jennifer Demba with Truist Securities.
Jennifer Demba
Thank you. Good morning.
Terry Turner
Hey, Jennifer.
Jennifer Demba
Terry, could you kind of elaborate on your commentary on your optimism for the greater Washington DC market? And then my second question is on Pinnacle’s buyback appetite rate now? Thanks.
Terry Turner
Okay. Yes, I think in the case of Washington DC, Jennifer, so it starts with a large market with high growth. As you know, beyond that, for us, the whole story is about people and who are the people that you hire and where they come from and who else can they hire and what business can they move and all those sorts of things. And so, I’ve just – it’s still hard to say is that you saw on slide there the balance sheet volumes have barely scratched the surface there in the first four months. But the pipeline is very large and again you gain some right that you get both. But my belief is that this is circle and getting both and there are also really rapid pace on hiring and their pipeline for hiring is also large. And so, the combination of people that are there, long pipelines that they’ve generated and the hiring pipelines that also are building is basis from our optimism.
Jennifer Demba
Okay. And the appetite for buybacks at this point?
Harold Carpenter
Jennifer, this is Harold. I am not really – I don’t think we are at a point to execute on any kind of buybacks right now. One thing that we do consider in buybacks is what our loan growth forecast looks like. And so, currently it looks like our loan growth is going to be fairly significant and we’ll look at that in relation to capital. So, right now, I think we are probably on a hold, but obviously if we see more pressure on the stock then we might start weighing in trying to spin the stock with a little more effort.
Jennifer Demba
Great. Thank you so much.
Terry Turner
Thank you.
Operator
Our next question comes from Stephen Scouten with Piper Sandler.
Stephen Scouten
Hey, good morning guys. Appreciate the time. Terry I am curious just how you are thinking about loan growth from a market expansion standpoint. But if I do the math on the slide you laid out, the new hires it looks like maybe that’s about 10% growth just on their potential. So I am guessing in the next amount to get to the up teens and more market expansion. Is that a fair way to think about it and how do you see the prospects shaking out from a market expansion standpoint currently?
Terry Turner
Yes, Stephen, I think I might go the other way which is, so, we don’t have specifically market extensions baked into the forecast, but when you start compartment wise in that growth, you get growth from new hires and you get growth from existing bankers and footprint. And so, that’s where that mid-teen growth would come from is that may add the people that we have hired and the people that are sort of legacy lenders here. In terms of market extension, I think it is a good question. We tried to – it comes us to say as you know when we – there is always a question about M&A and so all the time I look when our opportunity in the markets that we are in is so strong. I don’t – it’s hard to figure out. It has been overwhelming transactions for M&A. Same thing for market extensions and then we will hire more market extension opportunities. We have that discussions in a number of markets and just to remind you for us, it’s not about hiring sales teams, it’s about hiring we think you build a big bank in that market. And so, when we find those, we’ll move and so, when you think about where might we move Stephen, we keep going back to this, trying to let me go to Memphis and draw a line up to DC, and down the State of Florida, the big major urban markets are the markets we’d like to be in. And so, as we find people, we think you build the bank will pull the trigger. But that’s not included in sort of a growth projection.
Stephen Scouten
Okay. Perfect. Yes, that’s really helpful. [Indiscernible] is that economic retention, not margin stands, but that’s a great answer, Terry. Appreciate that. And then, if I am thinking about BHG, the Atlanta expansion, I think that was noted in the presentation. Was that about any extension in their product set or is that just more about them being able to tap a new market for talent to run that platform?
Terry Turner
I think it’s a little of both. I think a lot of the people that are part of some of their new products are in Atlanta. And so, they decided to establish kind of a foothold there in Atlanta and I think that gives them opportunities to introduce their brands to some more potential employees that have the talents that they are looking forward.
Stephen Scouten
Got it. That’s helpful. And then, just one more question maybe around BHG and kind of credit outlook as a whole. I know you said something is up to change in the back half of the year, but with BHG, how do you combat maybe some of the investor push backs at this – betas that’s more unsecured consumer type of lending I think what we might be worried about if we had a discussion. How do you maybe combat that sort of ideology as you think about that book and their business and then if the Moody’s modeling were to start to shift, would that also have an impact on your near term where your provisioning could go?
Terry Turner
Yes, I think it’s obviously, it’s mainly toward a change your position on what are I think GDP, unemployment does that could be entitled everybody. As to BHG and their credit systems, and their borrowers, granted they’ve gotten into the shelf, into the pool, on point of sale, but as far as their traditional business lines, their lending to consumers on average ticket size of $50,000. So, these are not loan ticket kind of credits. These are credits that are established. They believe in their credit scoring system and so these are folks that have legitimate credit histories that they can lean into with confidence. So, I wouldn’t classify as a traditional consumer book based on what I understand traditional consumer book should look like. These are folks that are focused on different things with respect to use proceeds so on and so forth.
Stephen Scouten
Got it. Makes sense. Well, congrats on a great quarter guys and appreciate a lot of the new slides in the deck. Very helpful, so.
Terry Turner
Thank you, Stephen.
Operator
Our next question comes from Catherine Mealor with KBW.
Catherine Mealor
Thanks. Good morning.
Terry Turner
Hi, Catherine.
Catherine Mealor
One follow-up on just the balance sheet and the margins. The cash is sitting at 14% of average earning assets today. How do you think about where that ratio moves to through the back half of the year and how that goes into your GAAP NII guide?
Harold Carpenter
Yes, I mean, we do have some reduction in that, but not a lot. We think it’s going to be fairly stable for the rest of the year. We are looking at a couple of near term products that will give us some exposure on the shorter end of the curve with employment rates kind of instruments, that will maybe give us a little bit of an extra little punch. But for all – is that will be just another tax item that’s making a little more money. I think, technically it will be in the bond book, but it will be a shorter term security.
Catherine Mealor
Okay. Great. And maybe just big picture on credit, I mean, credit is so good you are in the 14, charge-off is low and NPA has declined and resources coming down, I feel this connects between what we are seeing from the banks and just concerns that we have with investors. Any commentary on what you can do today to prepare for any potential increase in credit cost, pass through credits you are looking more closely, are you staying away from parts of your book that you think are at relatively higher risk today and things you can get prepare yourself will be helpful. Thank you.
Harold Carpenter
Well, like I mentioned before, I spend a lot of time with the credit officers, the credit officer on what kind of diligence they are about doing today given what forecast looks like regarding inflations and so on and so forth. We got it and I think one of the things that gave me some comfort from what Terry was talking about for me is that they are going back into that COVID book that we looked at over the last two years where reducing those credits, particularly around hotels because probably the first exposure will be to discretionary spending, so on so forth. So right now, they believe that our cost selection processors are sound that we feel. Those type credits that are more subject to discretionary spending are looked to be in good shape. Now, past that, then you look at all the field consumers, call it truckers and concrete companies and – and right now all of them are passing that cost laws. How long that’s going to be able to do that? Not sure. But right now, everybody is up to their next end business opportunities. The biggest issue like we talked about is can they find workers?
Catherine Mealor
Okay. Great. That’s helpful. Thank you so much. Great quarter.
Terry Turner
Thank you.
Operator
The next question comes from Steven Alexopoulos with JPMorgan.
Harold Carpenter
Steve, are you there? He must have dropped.
Operator
Okay. I’ll move on to the next one. Our next question comes from Brian Martin with Janney Montgomery Scott.
Brian Martin
Hey, good morning guys. Can you hear? I joined a little bit late, but just maybe the last question, you talked a little bit about the liquidity. It sounds that is the last quarter, you kind of expected that liquidity to drop a little bit and picked up in terms of loan growth. Is your stand be different this quarter based on your – just your comments to last question, so that maybe it’s not going to change all that much?
Harold Carpenter
Yes. I think it will come down. But I don’t think it’s going to change a lot. I character that as 14% in light of the 12%, something like that. I don’t think it’s going to jump, it will jump out that much.
Brian Martin
Got you. Okay. Alright. And then, just if you gave it here, is it just the timing of your rate increase expectations, you said 15 next meeting in meeting in May, beyond that is it just kind of one May meeting or what?
Harold Carpenter
I think that’s right, Brian.
Brian Martin
Okay. Alright. And then just the deals on new loans that you guys are getting, maybe you talked about spreads but just new loan yields today on the commercial side in general, can you give any thoughts on those relative to what’s coming off the books – or what’s on the books?
Harold Carpenter
Well, I don’t think there is a whole lot of big delta between the new loans and the former loans. Right now, we are hopeful that we can get some increased rates on the fixed rate credit. I think we’ve been kind of – I don’t know. We just need to probably do a little better on fixed rate lending and what kind of rates we are getting on those. But other than that I think our spreads are hanging in there. The other issues that’s out there that our folks, I think are doing a really good job on is this whole LIBOR cessation thing. I think our rates that we are gathering on – that the spreads are hanging there is not increasing a little bit. So, we feel pretty good about that.
Brian Martin
Got you. Okay. That’s all I had guys. I appreciate. Thanks and a great quarter.
Terry Turner
Thanks, Brian.
Operator
I am not showing any further questions at this time. So this does conclude today’s presentation. You may now disconnect and have a wonderful day.
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