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Pinnacle Financial Partners Inc
Earnings Call Analysis
Q4-2023 Analysis
Pinnacle Financial Partners Inc
The company has taken strategic steps to enhance yield on approximately $740 million of BOLI contracts. They incurred around $16 million in charges for this initiative but anticipate a favorable payback period of about 1.5 years. An increase in the tax-equivalent cash yield on their entire BOLI portfolio to approximately 4.5% in 2024 and 5.5% in 2025 is expected as a result of these actions.
Strict cost management led to savings on 2023 cash bonus awards, amounting to $30 million less than the target payout plan. This has contributed to the enhancement of the tangible book value per common share, which saw a substantial growth of 14.8% year-over-year to $51.38. The company prides itself on its solid and consistent book value generation, having avoided significant risks that could dilute tangible book values, like building a large investment portfolio. In spite of adopting the Current Expected Credit Losses (CECL) standard, which required a $35 million capital charge and affected capital ratios, management does not foresee significant alterations to capital rules.
There's an improvement in borrowers' credit quality, with the average FICO score increasing to 745 in 2023 from 732 in 2022. The adoption of CECL brought about a 300 basis point increase in reserves, indicating prudence in loss provisioning. While on-balance sheet loan losses were 7.6% in the fourth quarter, it is anticipated that credit losses will start to trend downward following this period.
Loan production is expected to be consistent when comparing 2024 to 2023, with prospects for a more favorable year due to liquid bank networks, improved yield curves, and diminishing post-COVID credit issues. The company is targeting reliable deposit book growth, aiming for high single to low double-digit expansion, which underscores the importance of new deposit gathering initiatives. Modest growth expectations are set for BHG with mid-single-digit growth projected. The leadership's focus on the company's long-term health alongside credit recovery by the latter half of the year bodes well for the partnership.
The company has traditionally managed payouts effectively, achieving approximately 80% of the targeted payout over the last 23 years. For 2024, a reasonable expense target is estimated to be between $960 million and $985 million. As for earnings, after considering 2023 a $6 indiscernible year, aims are set to surpass this benchmark. The exclusion of incentives suggests a conservative low double-digit growth rate, with a target range of $860 million to $885 million for the year, positioning the company as a high single-digit grower when excluding incentives.
The executive team has affirmed the strength of their partnership with BHG. There is, however, a recognition of the complexity for bank investors to grasp the business model, which has resulted in discussions about reducing ownership interests in BHG when market conditions are favorable. It's clear that the company prefers to sell high, reiterating their contentment with the current income BHG generates despite considering a potential future sale of some or all of their stake in the fintech firm.
With a rate cut on the horizon, the company acknowledges the need for an assertive response. Interaction with depositors will be critical to manage any quick shifts in rate cuts effectively. Given that 27% of the deposit book is indexed, this could provide a head start over competitors. Moving forward, the company demonstrates confidence in supporting increased interest rates, especially as commercial real estate loans, mostly fixed-rate, are supported by rental income increases of 20% to 30% in recent years.
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Good morning, everyone, and welcome to the Pinnacle Financial Partners Fourth Quarter 2023 Earnings Call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer, and Mr. Harold Carpenter, Chief Financial Officer.
Please note, Pinnacle's earnings release and this morning's presentation are available on the Investor Relations page of their website at www.pnfp.com. Today's call is being recorded and will be available for replay on Pinnacle Financial's website for the next 90 days. [Operator Instructions]
During the 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 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 and [indiscernible] are cautioned to not to put undue reliance on such forward-looking statements. The more detailed description of these and other risks contained in Pinnacle Financial's annual report on Form 10-K for the year ended December 31, 2022, and its subsequently filed quarterly reports. Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise.
In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of non-GAAP measures to the comparable GAAP measures will be available on Pinnacle Financial's website at www.pnfp.com.
With that, I'm now going to turn the presentation over to Mr. Terry Turner, Pinnacle's President and CEO.
Thank you, Matthew. Good morning. Thank you for joining us this morning for the fourth quarter 2023 Earnings Call. Obviously, we'll focus on performance in the fourth quarter of '23 and our outlook for 2024, both of which I think are very good.
We always start with the shareholder value dashboard on a GAAP basis. And then as adjusted, which is really what I focus on in trying to manage the firm. There's no doubt 2023 presented one of the most difficult operating environments for banks since the Great Recession. I expect few if any banks were able to completely outrun the rate environment, its impact on revenue and earnings growth in 2023.
But despite the difficult operating environment, we grew our tangible book value 14.8% in 2023 and produce a 20% total shareholder return. Our unusual approach of investing in our business, particularly in terms of acquiring new talent, even during difficult times is one of the primary reasons we've been able to continue to take share and grow balance sheet volumes which, of course, is accounted for a rapid and reliable growth in revenue and earnings, which we believe counts for our extraordinary total shareholder return over nearly 2.5 decades now.
We've said for some time that it's our expectation that credit metrics have to normalize. It's impossible to operate over time at the very low level of problem loans that we've enjoyed over the last 2 years. We saw a little bit of that in the fourth quarter. But NPAs and classified assets still remain below our 5-year median, which is itself very low. And net charge-offs during the quarter were just 17 basis points. So fourth quarter of '23 was an excellent quarter for us, particularly on those metrics that point to future shareholder value creation.
And so with that in mind, let me turn it over to Harold for a more in-depth look at the quarter.
Thanks, Terry. Good morning, everybody. We will again start with deposits, reporting linked quarter annualized average growth of 4.6% in the fourth quarter, which we believe was a real positive for us. We did see some end-of-year deposit outflows that lowered our EOP balances and are hopeful to see those balances return this quarter. EOP deposit rates were up only 7 basis points, the smallest increase in quite some time. We felt like the rate of increase for deposit rates was slow as we entered the fourth quarter, so we're pleased with where we ended up. Deposit profit [indiscernible] down quite a bit with fluctuations in our overall rates driven somewhat by mix shift as several larger, more expensive depositors build balances at year-end.
We remain disciplined as to the relationship between pricing and growth of deposits. We will continue at a more deliberate pace for gathering deposits without leaning heavily on the rate component for our growth. As to loans, the fourth quarter was another strong loan growth quarter for us as we are reporting a 10.7% linked quarter annualized average loan growth for the fourth quarter. As we've mentioned over the last several quarters, we are pleased with our results on fixed-rate loan pricing, which ended the quarter with average fixed rate loan yields on new rate originations of 7.33%.
Spread maintenance on floating and variable rate loans continues to be strong with coupons in the high 7s and low 8s on new loans. This slide segments our net loan growth based on several categories to help everyone better understand the source of our -- our expansion into D.C., Atlanta, Birmingham, et cetera, was a source of much of our loan growth in 2023. That's why we're so excited about our announced entry into Jacksonville. We hire experienced bankers in these new markets and give them the tools and resources to build a large local franchise.
Much of our loan growth is not new and new borrow -- is not to new borrowers showing up at Pinnacle Bank with a new idea of a pitch, our borrowers have extended relationships with relationship managers over in many cases, decades of working with each other. This is not just true for Charlotte, Nashville, Charleston and other legacy markets, but that applies to Atlanta, D.C., Birmingham as well as Jacksonville. As the top chart reflects our NIM was flat quarter-over-quarter. We hope to see a modest increase and continue to believe we have great opportunity to see NIM expansion in 2024.
As we entered the fourth quarter, we felt like we were fairly close to -- modeled our margin and have some confidence that we have. More importantly, we feel we should see a stronger net interest income as we move into 2024. Our interest rate forecast, we believe, is consistent with most great forecasts out there. Our planning assumption is that future Fed rate decreases begin in May, and then we see three more before the end of the year. Importantly, our yield curve shift is that it will be less inverted by year-end. As for credit, we're again presenting our traditional credit metrics. Pinnacle's loan portfolio continued to perform very well in the fourth quarter.
Our belief is that credit should continue to perform well as we move into 2024. Absent a couple of large charge-offs in 2023, 2023 was a good year as to losses realized from our portfolio. We mentioned one nonperforming credit in the press release last night. Debated on whether to call it out or not as the [indiscernible] for all of our NPAs is 27 basis points, which is very respectable in comparison to prior quarters. But given the change from prior quarter, we decided to talk about that one credit.
We feel that particular credit is well down the road of being rehabilitated and expect no loss currently. Similarly, there was an isolated incidence in both classified and past dues. We've downgraded the challenge of credit to classified late in the fourth quarter and one credit also accounted for substantially all the net change in past dues. For that credit, the borrower did pay interest current before year-end, but we were past maturity and waiting on the bar to settle a few matters before granting the renewal, which we anticipate in the next week or so.
Concerning commercial real estate, again, some select information. As to the top left chart, construction originations are very selective and reserved for projects where we have a strategic reason to participate.
For those that follow regulatory ratios, our 100% concentration ratio was at 84% at year-end, roughly the same as the prior quarter. Our goal is to reduce that ratio of approximately 70% of the [indiscernible] appetite for construction lending will remain limited at this time. Secondly, much discussion about renewals of commercial real estate fixed rate loans, which is the objective of the chart on the top right.
Over the next 4 quarters, we will have approximately $500 million in fixed rate commercial real estate coming up for repricing where the average rate on these loans is currently around 4.5%. Our current yield target for these loans at renewal will be in the 7.5% to 8% range. Altogether, we have about $6 billion of fixed rate loans maturing over the next 2 years with a weighted average yield of 4.8%. Thus, we see little opportunity from a repricing perspective for these loans. Now on the fees, and as always, I'll speak to BHG in a few minutes. Excluding BHG and various other non-recurring [indiscernible], fee revenues are up 1% to 2% linked quarter. We are very pleased to report that our wealth management units had a strong 2023, and we fully expect the effort of our wealth management professionals will continue into 2024.
As we noted in last [indiscernible] press release, we accomplished a significant BOLI restructuring program during the quarter as we sought to increase yields on about $740 million in BOLI contracts with various carriers. In the end, we feel like the payback period on the approximately $16 million in charges we incurred during the quarter is around 1.5 years. We believe the anticipated tax equivalent cash yield on our entire BOLI portfolio as a result of all this will approximate 4.5% in 2024 and 5.5% in 2025. This compares to approximately a 3.4% yield currently.
Now expenses. Fourth quarter expenses came in about where we thought. As we noted in the third quarter, we expect [indiscernible] an assessment from the FDIC in the fourth quarter. A $29 million FDIC special assessment was recorded in the fourth quarter, which we will pay to the FDIC over 8 quarters beginning in June of 2024. Our incentive costs for the fourth quarter include the final calculations for our 2023 cash bonus awards. The total cost for 2023 were slightly over $46 million. In comparison to our target payout plan would have required about $30 million more in cost. So our 2023 earnings include $30 million of incentive savings, which is exactly how the plan is supposed to work. If we hit our targets, participants are eligible for target awards. If we don't, then we aren't. I will speak more about our outlook for expenses in 2024 in a few minutes.
Capital. Our tangible book value per common share increased to $51.38 at quarter end, up 14.8% year-over-year. Our [indiscernible] book value generation has been a big positive for our firm and has, we believe, benefited our firm meaningfully. Growing tangible book value has been top of mind to leadership over the last several years and has impacted decisioning as management has not been willing to risk significant tangible book value dilution by perhaps building a large investment portfolio.
If we had, we could have put tangible book value generation at risk. Impacting capital [ratio] in the fourth quarter were several matters that we discussed in the press release last night. In addition to the BOLI restructuring and the FDIC special assessment, we incurred a $35 million capital charge for our [indiscernible] of BHG's adoption of CECL on October 1, 2023, which was consistent with expectations for the last year or so. Again, this amount did not impact fourth quarter earnings but did impact our capital and our capital ratios. The chart on the bottom left of the slide details several pro forma capital ratios at the end of this [indiscernible] and how we compare to peers on these ratios as of the end of September, although we don't anticipate significant changes to the capital rules, we are pleased with these results and believe they will continue to compare favelas to other banks and speaks to our efforts to manage tangible book value effectively.
Now to BHG. As we look at fourth quarter originations, and as we mentioned last quarter, fourth quarter origination volumes were less than the third quarter as they continue to shrink their credit box, and I'd like to emphasize that point. BHG estimates that 25% of their borrowers in 2021 and the first half of 2022 was not caught offer a BHG loan today. We are very supportive of the efforts by our BHG partners with respect to credit discipline and client selection. We are also very pleased to see that sales into the bank network during the fourth quarter were basically consistent with the third quarter. The banks continue to have a strong appetite for BHG credit. With original [indiscernible] sales fourth quarter placements to institutional buyers were about $200 million less than the third quarter. BHG did increase held-for-sale inventories on its batch by $170 million in the fourth quarter, which provides a nice runway going into 2024. As to liquidity, not a lot of change here from last time. BHG's liquidity platform remains exceptionally strong.
During the fourth quarter, and again, as we mentioned at the end of the third quarter, BHG place about $300 million in loans as a result of their second ABS transaction for 2023. BHG also successfully negotiated a $50 million private whole [ loans ] during the fourth quarter. Importantly, these private sale transactions are executed with no recourse of BHG with many of these clients coming back to BHG routinely, and planning on being back in 2024 as well. As to spreads, this is the usual information we've shown in the past detailing spread trends since the first quarter [indiscernible].
On the bottom chart, the spreads for all balance sheet loan placements have expanded as lower coupon loans originated more than 2 to 3 years ago pay off for the borrower coupons for the on-balance sheet continue to increase. Again, as we've mentioned for several quarters, the spreads on the chart for on balance sheet loans represents the buildup of the book over the last few years. These you believe that should the Fed begin to reduce rates in midyear 2024, such a move would result [indiscernible] for BHG for both the bank and institutional platforms. Not a BHG credit. As we've noticed -- as we've noted in previous quarters, BHG has tightened its credit box over the last several quarters, particularly with respect to lower tranches of its borrowing base.
Average FICA for 2023 has improved to 745 from 732 in 2022. The chart on the right details originations in 2012 through 2015 [indiscernible] in level out cumulative loss rates of 10% to 12%, whereas vintages after 2015 began to reflect improved performance with the lines lowing out within the 5% to 10% range.
On the reserves, again, the usual trends on loss reserves for both on and off balance sheet loans. As expected, the adoption of CECL on October 1 for the on-balance sheet loans resulting in about a 300-basis point increase in reserves. Trailing 12-month losses for on balance sheet amounted to 6.5% in the fourth quarter. If you just look at the fourth quarter, losses were 7.6% for on-balance sheet loans. BHG has been anticipating that credit losses will begin to trend down after the fourth quarter. Right now, BHG believes they have a great shot at seeing reduced credit losses in the first quarter and with a much greater degree of confidence for reduced losses by the second quarter of 2024.
Now about BHG's earnings and production. Last quarter, we anticipated that fourth quarter loan production [indiscernible] are approximate $600 million to $800 million, and it came in at the high end of that range. Impacting earnings and also, as we mentioned last time, BHG recorded several onetime expenses at approximated $10 million in the third quarter, impacting our fourth quarter results was approximately $4 million in severance and other nonrecurring costs. A lot of work has been done by BHG to get ready for 2024. With a tighter credit box, BHG anticipates flattish production comparing '24 to '23. That said, the bank network and institutional platform both remain very liquid for BHG. Also, as the post-COVID credit issues paid into the background, along with a potentially better yield curve, all of this could add up to make 2024 a much more accommodating year for BHG in 2023.
With that, I'll turn it back over to Terry.
All right. Thank you, Harold. Well, Harold mentioned earlier in the fourth quarter of 2023. We hired our leadership team for our market extension to Jacksonville, Florida. Earlier, when I was discussing the 2023 performance, I highlighted the fact that we continue to invest in our business even during the difficult times, which, in my judgment, has been the key to the extraordinary total shareholder return we continue to produce.
One of the good things about 2023 was that it showcased our enterprise-wide risk management system, which provides the necessary guardrails to protect this when a number stumbled, but more importantly, put us in a position to stay the course while many are trying to restructure their business model with major expense initiatives, which may [have] any short-term earnings but have a devastating impact on long-term shareholder value creation.
Our conservative approach to credit liquidity and interest rates put us in a great position as we continue investing in our business. The risk management system not only protected this, but again, lapped us a capital base and an ability to continue to grow, which is what we intend to do. Most of you know that our target market has been all the large urban markets in the Southeast, which are some advantaged where Florida has been our principal board. Most of you heard me talk about this for a long time, the catalyst for when we decided to extend to a new market is when we have the availability of leadership that we believe can build a $3 billion bank over a 5-year period of time in any of those large markets.
Last quarter, I used this slide to build on the fact that having started on a de novo basis back in 2000 in Nashville, we now dominate the Nashville market by almost any measure, including things like FDIC deposit share. And we're actually running faster in the relatively recent start-ups in Atlanta and Washington, D.C. than we did as we built out the Atlanta market. As you can see here, Jacksonville, Florida is on par with our other large high-growth markets, extraordinarily healthy and rapidly growing. And it's ideally suited us from the perspective of the competitive landscape.
It's dominated by the same exact competitors that we've been facing off with for now 23 years, I always try to help people understand this. The size and growth dynamics are really important in terms of the success in the markets that we've been in. But more important than the size and growth dynamics would be the competitive landscape. It's important to have competitors from whom you can take market share. As I've already said, talent availability is what controls the timing. As you can see, our leadership team in Jacksonville is uniquely prepared to build a big bank there. Scott Keith, who will run that market for us is a 34-year veteran in that market.
He was the former Regional President for North Florida at Truist. And he led an 1,100-employee group, serving 100,000 clients in that market. He's joined by Debbie Buckland, who has 27 years of local experience and was the former market president in Jacksonville at Truist and prior to that SunTrust. And they are also joined by Brian Taylor, who has 21 years' experience in the BB&T Truist franchise as well. He most recently led North Florida, the middle market efforts and through all of North Florida. So I think it's evident why Jacksonville and why now? So with that, I think I'll turn it over to Harold, and we'll walk you through the 2024 outlook.
Thanks, Terry. Quickly, we'll go through the 2024 financial outlook. What I'd like to do is convince all the information on the slide down to five key points. First is deposits. We have to maintain just a reliable growth in our deposit book at a reasonable price. That's what makes all of the initiatives that we've invested in to gather new deposits so critical. I believe we've made great headway. I think we have got great tools in place.
I think we've hired experienced professionals promote and leading these deposit gathering initiatives. So high single to low double-digit growth seems reasonable. Secondly, BHG. We don't anticipate BHG to have a great year. We do expect modest growth, mid-single digit. I think that comes basically from a new firm, one that has the ability to achieve sustainable growth with an intense focus on growing core businesses. We've had a great partnership with BHG, and we believe that the partnership is as strong as ever.
We believe the leadership at BHG is focused on the franchise and not on pushing more widgets through the pipe. The credit can get back to its usual run rate by the second half of this year, BHG could have a great year. Loans and loan pricing, primarily fixed-rate loan pricing. We've done well to get fixed rate loans pricing to their current levels. In comparison to peers, we do quite well, but we can be better. We will continue to focus on that as I think that will be absolutely critical to our ability to grow net interest income, high single to low double digits in 2024. Now I'd like to talk about expenses. It seems like our expense growth rates are always a topic of great discussion. '23, we harvested at least $30 million out of our incentive plan to help support our EPS results for 2023.
In order to support our people in 2024, we need to have a plan that accommodates upwards of $40 million to $50 million in additional incentive expense. As always, we absolutely have to hit numbers. If we don't hit numbers, we won't pay. We've averaged about 80% of targeted payout in my 23 years here at Pinnacle. We are not bashful about using the incentive pool to help support our earnings results.
I do think a reasonable expense target at this point for 2024, probably is a range of between $960 million and $985 million. So as you're putting together your models, that range seems fair for today. Lastly, earnings. This management group understands to get the share price moving up, you've got to grow core EPS. We believe 2023 was a $6 [indiscernible] year. So we're aiming north of that. We've looked at peers and have stack-ranked earnings growth rate projections for 2024. Our plan will be comfortably in the top quartile of earnings growth. We have to grow earnings in 2024, so our targets reflect that. To be successful, we can't let expense growth outpace revenues. It's that simple. Hopefully, we can achieve our planning assumptions such that all of our associates earn their incentive while some time the share price reflects all the hard work they've accomplished.
And with that, Matt, I'll turn it back over to you for Q&A.
[Operator Instructions]
Your first question is coming from Ben Gerlinger from Citi.
Curious if we just kind of touch base on the expenses, Harold, it's good clarity just a second ago. So when you think about just expenses overall, is this entirely going to -- or a majority going to lenders? Or is there some technology or back office spending that needs to be done? I mean, it just seems like Pinnacle getting back to legacy Pinnacle of kind of low double-digit growth is good, but it could put some pressure on PPNR over 2024. Just kind of clarity on where that expense might be going.
Yes, Ben, I'll start and I'll let Terry kind of add his comments as we're on this whole topic. Our nonproportional expense base for next year is fairly reasonable. I think last night, we talked about in the press release that our -- if you exclude incentives, growth rate is probably in the low double-digit range. I think that's pretty conservative -- with, call it, an 860 to 885 kind of target for this year, I think we're more of a high single-digit kind of grower with respect to excluding incentives. Our IT team has gone through what they believe they're going to need to do this year. We spend a lot of extra time on operational expenses and information technology expenses for 2024. We think we've got a good plan. We think we've got a plan that they can accomplish and at the same time, not overboard on kind of the expense burden. With that, I'll stop and let Terry kind of finish.
Yes, Ben, I think, to your point, we continue to invest. I think it would be foolhardy not to invest in technology. I mean, you got all the digital progression, AI, all those sorts of things. So we're not a do-nothing company. We continue to invest in technology and stay current. I think you know about our firm, we're not trying to innovate anything. We're not trying to do something particularly new and different.
Our idea is to be a fast follower. And so to do that, we have to stay current. So certainly, there are expenditures other than incentive type expenditures. But one of the things that I guess I would offer for clarity in this company, your question was phrased around, is it all going to lenders? So in this company, 100% of our salaried employees participate in annual cash incentive plan and 100% of us get -- earn our incentive based on hitting our revenue growth targets, our earnings growth targets and keeping asset quality strong.
So 3,400 people are aimed at that outcome and that gets paid. And so having only paid at a 62% level this year, you would expect most of our associates desire to make 100% therefore, we have to run fast enough to produce enough revenue and earnings growth to satisfy the shareholder returns, but get our associates paid, and I think we can do that.
Sure. That's good color. I think just philosophically hitting commission targets and bonus payouts is a good thing really means you hit your upside targets. If you could kind of just parse through here a little bit. So when you think about adding additional lenders and just revenue -- more lender specific than just revenue producers, how are they incentivized? Or how much flexibility do you give them on gathering deposits in this environment? I mean given your pretty rapid pace of growth, are you giving them a little bit more slack together deposits? Because I'm sure that's all the scorecard as well and kind of [conventionally] do that. Do that kind of put a lid on the margin overall? I get the back book repricing will produce a higher margin by the end of the year. I'm just kind of curious on how you guys are structuring their incentive on gathering deposits and any flexibility on rate they might have?
Yes. Ben, let me just reinforce the point I made earlier. Most people have a hard time understanding the incentive systems here at Pinnacle. Most people are used to structure plans where relationship managers get paid on one basis and branch managers might be paid on a different basis and so forth. That's not what happens here. 100% of our salary-based associates, which would include lenders, financial advisers, office leaders, every category of salary person, their incentive is tied to this company hitting its revenue and its earnings targets. And so that's a really important thing that I think a lot of people don't get that direct connection. And so when you ask about the incentives for the lenders, if you will, to gather deposits and so forth, they have an incentive, which is we're going to have to hit the revenue and earnings growth targets. And to get that done, we've got to produce the low volumes, to get that done, we have to produce satisfactory deposit volumes. And so that's the mindset inside this company, 3,400 people are aimed at hitting that revenue target for the company and the earnings target for the company, it's not an individual -- individually based incentive plan.
I don't mind to say to you, I don't want to go -- get too far afield from what you're asking. But that idea is really important. Every quarter, we meet with all the associates of the firm, and we talked to them about [indiscernible] years where we are on our performance on revenue and where we are on earnings and how that impacts incentives. And these are the things we need to do. But it is really easy to crystallize for every single person. As an example, if we're not hitting -- if we're not repricing fixed rate loans at a satisfactory margin, Matt, every quarter, you can stand in here and say, okay, look, here's what the target is. Here's what we did. Here's what that cost us in terms of revenue and earnings and man, everybody can see through clearly to exactly what has happened and what needs to happen in order to hit the target. So I don't mean to go on too much about it. I hope that's helpful.
Yes, it is. I was just more so curious like how much flexibility are you giving them on in order to gather those deposits?
The -- our -- again, we're getting way down into the philosophy here. But as you know, we hire experienced people, the average experience of the people that we've hired to 26 years. Fundamentally, what we do is try to make sure they know what our targets are and then give them plenty of freedom to execute. Generally, the relationship manager has the flexibility to decide what the price is for the deposits and what the price is for the loans.
What happens is, in fact, because of this idea, they know we have to hit the targets. They're not inclined to overpay on deposits or get underpaid on loans and so forth. And of course, we have a tight management system where every month, we're going down through everybody's performance with key performance indicators, talking about -- what's the reason for this? Why are you doing this? This price needs to come down, all those kinds of things. So it takes an active management, but generally, we are handling that in arrears and empowering our client-facing people to be able to handle client needs without a lot of bureaucracy.
Your next question is coming from Brett Rabatin from Hovde Group.
Wanted to start with BHG and just try and understand a little better the confidence on the reduced losses by 2Q. Can you just walk us through your thought process on BHG and obviously, it's -- the guidance is for fairly minimal growth in contribution this year, but it sounds like you're thinking it could be a lot better if certain things play out right with credit and perhaps growth?
Yes, that's a great question. For us, it's -- we have conversations with BHG quite frequently. And they still believe that the first half of 2022 and the [ 2022-'21 ] loans were where these outsized losses are originating [indiscernible], they will see substantially all their losses within, call it, the first 30 months of origination. And given the great inflation, a lot of those loans have come to kind of knowledge that they're not -- they won't be good loans fairly quickly. So they believe that where they are today at the, call it, the end of 2023 that a lot of the 2021 credits have already gone through this proverbial pig through the python. And so they're still looking at some of the '22 credits and watching those, but they believe that they're substantially through the bulk of the problems.
Okay. And then in about fintech -- Terry?
Brett, I'm just going to say, I think said simply, they're watching their migration analysis to Harold's point -- the losses -- the largest part of the losses occurring in the first 30 months. So when you look at those migrations, they really have just a few more months to go before they will have completed that 30-month cycle for that period where the grade inflation occurred. And so again, I think Harold rather isolate out the ongoing FICA scores and so forth more recently originated credits. And so it's just a matter, as he said, on getting that pig through the python, which is literally just several months away.
Okay. That's helpful. And then just around BHG conceptually, the IPO market for fintech was fairly minimal last year and this year, it could be better? Is there a potential for you guys to maybe sell a portion of BHG's ownership to potentially increased capital ratios? Or how do you think about BHG ownership from here? And how they obviously at one point where it would appear to have been thinking about an IPO. Can you maybe just walk through your ownership of them from here?
Yes, Brett, I think I would say this. It's really just a reinforcement, I think [I hope], what I've said for some time -- so we still enjoy a fabulous partnership with BHG. I continue to love that business as I've tried to say, if I own 100% of Pinnacle, I want to own 100% of BHG and we would focus on gain on sale transactions, but it doesn't work that way. And so I think we've come to the conclusion that the volatility and the difficulty in getting bank investors to understand the model at some point, it's just not worth continuing the battle. And so we have decided whenever the time is right that we would like to reduce our ownership interest at BHG in whole or in part, not to be dry, but I'm more of a buy-low, sell-high guy.
So it's not an ideal time to liquidate our position with -- we're comfortable with. It provides a great source of income to us. And so we'll continue in the current arrangement. But whenever the markets get to a point where you could enjoy higher price, we would be willing to sell some or all of our position in BHG.
[Operator Instructions]
Your next question is coming from Timur Braziler from Wells Fargo.
Maybe talk through -- can you maybe talk through the expectation for net interest margin cadence throughout the course of the year with the expectation for it to be relatively flat in the first quarter and then for your outlook with 3 rate cuts, it seems like there maybe isn't that much NIM upside. I'm just wondering kind of what your expectation is for NIM cadence throughout the year given broader NII guidance.
Yes, Timur, what's in our plan for this year is that we will see continued increases in our fixed rate lending. So that will provide somewhat of a tailwind here in 2024 for call it, earning asset yields. I think we will have to be very aggressive if there is a rate cut. Now keep in mind that basically 27% of my deposit book is indexed -- so I do have that head start, probably more so than maybe some others.
But our relationship managers will have to maintain constant contact and we'll test this with their depositors over the course of 2024, so that we can respond very quickly with respect to rate cuts. I appreciate that other banks can go into their systems and punch a button and lower deposit rates. We can do that, too, for some portion of our deposit book. But what it's going to do for us, or what we're going to have to do is be in touch with our clients [indiscernible] and that we're probably not been in play because we're going to be taking money away from them, basically.
Okay. Got it. And then just looking at the 2024 commercial real estate maturities, can you talk through what years those loans were originated -- and I'm just wondering for the 2019 and prior vintages, just how different are those credits given just how different the world is today compared to pre-pandemic?
Well, I think most of our commercial real estate loans are probably on a 3- to 5-year kind of term. Most of the both owner-occupied and nonowner-occupied loans are on a fixed rate. So I think, by and large, most are ready for [indiscernible] increases. I think the last number I saw was that they've seen some 20% to 30% increase in rentals over the last 3 to 4 years. So we feel like they've got the cash flow to support the increased interest rates.
Your next question is coming from Steven Alexopoulos from JPMorgan.
Just start -- following up on that. So when I look at Slide 12, you guys are pretty excited about these renewal rates coming in much higher on your commercial real estate portfolio. But that same phenomenon is keeping many investors out of the banks, particularly the regional banks. And all of the regionals are really painted with the same brush, no matter where your markets are.
So I have two questions. One is for the commercial real estate loans that were reset in the fourth quarter, including office, I know you don't have a large office portfolio. Could you just share with the investor community, what's happening with these loans? This pretend and extend mentality that you guys are just extending these and they're not -- Can you share with us what's happening? How much of the value has changed? Are you able to just renew these without any impact on credit. And as you look at 1Q '24, 2Q '24 (sic) '23, the ability to turn those, including office without seeing a material negative impact on credit.
Yes, I'll start and let Terry clean me up here. I'm not hearing from the credit officers. They're having any kind of particularly onerous time with respect to getting renewals accomplished or having to sacrifice concessions or whatever to get these new loans booked. I think what we do enjoy and you missed -- you kind of mentioned it, is that we are in great markets, and we're seeing rent increases. We're not seeing any kind of reductions in occupancy rates.
We think our commercial real estate book, by and large, is probably one of the best performing segments of our portfolio. So we're pleased with where it is. A lot of these developers, builders, borrowers have been with Pinnacle for a long time, with their relationship managers for a long time. So we feel pretty strongly that our client selection processes have been good. And so we don't feel necessarily the need to be overly concerned. That said, our credit officers are looking under rocks -- everything they can to be prepared. Should something come up that we didn't expect, and they're having conversations with clients accordingly. Terry, I'll let you go from here.
Yes. I think I would hit two, three things as it relates to commercial real estate in whole, and particularly as it relates to the office portfolio. I think one thing, Steve, that amazes people if you go through our 40 largest loans that are being handled by special assets people, people that work difficult credits. I think there are two loans in that top 40 that would be CRE related.
And so again, I just say that. You know the phrase, the past performance doesn't ensure future performance, but it certainly is a strong indicator to me that, that portfolio was held up so well, so far. I think one of the reasons that it has is two things. One, as we under rope those loans when they went on the books to begin with in the construction phase and so forth, we always underwrite with a mortgage constant that projects a future constant on what the permanent would take you out at. And I would say most of the loans on the books would have been underwritten assuming the mortgage cost and then the 6.5% or 7% range.
So granted that might be a tick below the renewal rates, but it's not substantially below the renewal rates, it was underwritten to perform at that level. I think the other thing, this might be the most important aspect, I like you. I mean I've got CNBC on it, I want to see disaster stories from markets like San Francisco or up east and so forth. But in these southeastern markets, we use the math, we talked about the growth going on in those markets, but the rent growth over the last 3, 4 years has really been extraordinary. And so that rent growth, obviously, is what enables those borrowers to absorb the elevated fixed rates and puts us in a good position.
I think on the idea of the extend and pretend, every now and then we do as we renew, we have people that have to rightsize the credit. But if they have to rightsize it, they have to rightsize it. I mean we're not just rolling it and open for the best, they need to do whatever it takes to rightsize their credit. So anyway, as I say, I don't want to overemphasize past performance, but it is a comforting thing to me.
Yes. That's helpful color. I want to pivot to the margin. So Harold, I think you said you're assuming 4 cuts in the guidance. Is that right?
That's right.
Okay. So if I look at your margin before the pandemic, right, you guys are pretty routinely at a 3.5 to 3.8 range, which is way above where you are now. If we think about even 4 rate cuts or 5 rate cuts, we'll see what the number looks like, but the yield curve starting to steepen. From a structural view, is there any reason your margin with a more normal curve at this level of rates, which is normal won't go back eventually into that range. I know it will take time, but as these renewals play out, you cut deposit costs. Is there any reason to think over time, we're not somewhere back in that range?
I think that's a great question, and we debate that quite a bit as to what we think our long-term net interest margin is. And we believe it's somewhere in the 340 to 360 range, and we get there by based on what our current spread on our floating rate credits and then what we think our depositors will need to pay in relation to Fed funds.
So we think we're at 340 to 360. I'm not hinting at that we'll get to that this year. But at the same time, we do believe our margin is in great shape right now. We think our balance sheet is in good shape. We think we can definitely take advantage of what the market will present us this year provided we can see some, call it, less steepening in the yield curve.
Your next question is coming from Casey Haire from Jefferies.
Wanted to just follow up again on expenses. So just to clarify, the base, I'm assuming that, that's off to [ 922 ], which includes the FDIC assessment, and then just what is the -- what are some of the factors given it's a wide range, about 5 percentage points between the high low? Like what are some of the factors that get you to the high end of that range versus the low end?
So Casey, just to be clear, what you said a [ 922 ].
Yes. sorry, whatever your -- sorry, whatever GAAP expenses were in '22? Basically, your guide is based on '23 expenses, which includes the FDIC assessment, correct?
Yes. What's on the slide, it would not include the FDIC insurance special assessment. So the, with the mid- to high double digit, you need to take out that special assessment.
Okay. Got you. All right. And then just what are the -- some of the factors that get you to the high end versus the low end?
I think if we can hit our revenue targets and the way we think we can, I think that will drive our incentive costs up and that will drive our expense back. I think if we have a strong year in our hiring, that will also trend our expenses up. Our expense guidance does include Jacksonville. So we've embedded that as well in there. And we've got -- we've got high aspirations for what believe -- the leader we hired in that market can accomplish.
Your next question is coming from Michael Rose from Raymond James.
Just a follow-up on BHG in the press release you mentioned that they exited some businesses. Can you just discuss what those are and what the kind of the impact was to their kind of origination guidance as we think about 2024?
Yes. They had that [indiscernible] pay later franchise that they were developing. I think last year, they originated like $50 million in production, something like that. So that, they were winging off that. They've always experimented with this patient lending franchise. I think they've decided to abandon that as well. There's a couple of others that are also on the list that I'm aware of. I'm not sure where they are with discussions with the people that work in those units.
I think they've had discussions with them. I'm just not sure, Michael. But that is embedded in the production guidance they have for this year.
Okay. That's helpful. And then just as my follow-up, back to the margin. I think if I'm doing my math right, it implies a pretty steep ramp in NIM progression as we move beyond kind of the fourth quarter even against your expectations for rate cut. Just wanted to kind of put a finer point on just that progression or earning asset growth, if you could.
Yes. I think we do see NIM increases this year. I don't know what -- how fast you had it going up, but I think it will be fairly gradual. We might have kind of a down -- the first quarter is going to be a challenging quarter. I think after that, we see -- we obviously see NIM progression that you all ought to be happy with.
Your next question is coming from Brandon King from Truist Securities.
So I noticed -- so I noticed that the spot rate for deposits was lower at the end of the year compared to the average for the quarter. So is it fair to say that deposit costs have already peaked?
Well, I think until we get a rate cut formally, there will be some deposit creep, but it won't be nearly at the pace we saw in all of 2022.
Okay. Okay. And on the mix side of things, how are you thinking about how the mix shift will trend this year -- and how does that kind of flow into your assumptions on deposit costs?
Yes, that's a great question. As far as the mix shift out of DDA into higher-yielding deposit products, we still plan to see some more of that. But again, not like we saw earlier in 2023, but we do believe there will be some more attrition out of noninterest-bearing into interest-bearing products, but again, not at the same pace.
Your next question is coming from Matt Olney from Stephens.
Just wanted to go back and revisit the '24 outlook -- and what this implies for the year-over-year PPNR growth? It feels like you're trying to say that there will be modest year-over-year PPNR growth, even with the higher expense guidance, but do you look for any clarification around that?
Yes. I think our planning assumption is that we will. I think it will be -- if you look at what the peers are looking at for next year, it's a modest at best kind of year for 2024, but we fully intend to outperform the peer group. It probably won't be consistent with, call it, years prior. But at the same time, we fully expect to see PPNR and net earnings accretion in 2024.
Okay. Appreciate the clarification. And then just a follow-up on BHG. I guess I appreciate the guidance you gave us there. It sounds like cost cutting will be a driver of the positive -- modest positive fee growth there. Any more color on moving parts? How much -- how much do you expect the BHG revenues to decline year-over-year? And then for you to hit that kind of guidance you put out there, how much do we need to see expenses decline?
Yes, they had a pretty significant decrease in the fourth quarter from the third quarter. I don't think they'll have that much more here in the next year. But they will see -- call it, some reduction in 2024 expenses in comparison to 2023. They had a cost-cutting exercise in the fourth quarter. That will be the primary contributor to that. I think their revenues should shape up to be flattish, maybe next year. I think they're optimistic with respect to growth there. But -- the whole idea is to rightsize the franchise and get it more focused on their core products and then get into kind of a sustainable growth rate going into 2025.
Your next question is coming from Stephen Scouten from Piper Sandler.
I guess my first question is just around the Jacksonville expansion. I may have missed this, but is the belief that this can be $1 billion to $2 billion in asset bank and then with the -- you also have Louisville noted on the map, and I'm wondering if that's just the construct of the map or if that's intentional?
Two things. Stephen, I think in the case of Louisville, we have started a de novo operation there, I guess, Harold, help me 3 or 4 quarters ago or something like that. So it's an early stage build out using the same model that we have of market leadership with a long career at Wells Fargo that's leading our effort there. In the case of Jacksonboo, yes, we do, I believe -- I think you used the number $1 billion to $2 billion. Generally, our target is a $3 billion bank in a 5-year period of time. As you may know, generally, for these buildouts, we cross breakeven anywhere from 4 to 7 quarters, depending upon how steep or what the trajectory is there. But we're expecting a pretty rapid build-out in Jacksonville that would likely resemble what we've done in D.C.
Okay. Great. And then just my follow-up is around net charge-off expectations. I think it was 16 basis points this year, and you said 2024 should be consistent with that. What's kind of embedded within those expectations in terms of overall economic scenario? I mean, are we thinking about a soft landing? And if things get worse overall, that could be worse as well? Or is that just a function of you all book itself and the strength of your internal book?
Yes, Steve -- yes. Go ahead, Terry.
No, go ahead.
I think I'll say yes to all of that. I think before we release earnings, we have some conversations with the special asset people, we have conversations with the credit officers -- they feel pretty good about where the book sits today.
They feel pretty good about what borrowers are doing and how they're cooperating with us for those that might be under some kind of special considerations. So we don't sense that -- in order we sense I mean is presenting huge challenges for the portfolio at large. So we think [indiscernible] was really healthy here this time going into 2024. And we believe also that many of the uncertainties that were around this time last year are not nearly as uncertain. Appreciate that we could have a recession. It could be a soft landing. And I believe our assertion as to where we think charge-offs will be in 2024 -- is under kind of a soft landing, no-recession kind of a scenario. Who knows what happens if we get into a hard landing. But anyway, I would say yes to all the items that you talked about, Stephen.
Steve, is [indiscernible]. But yes, I think our assumption is that we are most likely to have a soft landing, perhaps a modest recession. And given the health and strength in current performance of the portfolio that guidance ought to hold up.
I think to Harold's point, if you have a great recession, I don't think you all assume we're going to have 16 basis points in net charge-offs.
Your next question is coming from Catherine Mealor from KBW.
A follow-up on BHG and just thinking about how to model the revenue for BHG next year. If you look back at the size of the balance sheet and the loans that stayed on [indiscernible] BHG, that grew a lot throughout 2020 and '22 as they are kind of shifting from the gain-on-sale strategy to more on balance sheet. And of course, that goal this year and the balance sheet was basically flat in '23, just given the rate environment. How do you think about how that looks, as we move through '24, just as we kind of think about how much of originations stay on balance sheet versus how much go out into the banking network -- or move off balance sheet in the private on-sales transaction.
Yes. I think what's going to happen this year is, I believe, based on conversations I've had with our CFO, you should see more headed into the bank network this year than last year. I think it was fairly close to an even split in 2023. I think they'll try to lean into the bank network a little more this year than last. I think still are planning 1 or 2 ABS issuances here in 2024. They were able to get one accomplished in the fourth quarter, which we think was great news for them. But yes, I think they will use the bank network with a little more intensity in 2024.
Okay. Great. And then on just the big picture kind of '24 outlook and just thinking about EPS growth. I know you've kind of answered this in different ways. But I mean, your target for full -- maybe question 1 is what is the incentive comp in '24 versus '23? I think it started out the year [ 125 ] last year. So curious what that looks like for this year, assuming a full payout. And then maybe within that, I'm assuming that even with the full payout, that is assuming you're going to grow EPS year-over-year, kind of off of a, let's call it, a $7 number in 2023. And so again, I just want to reiterate, there isn't a scenario where you're going to have this kind of mid double-digit expense growth pace and have decline in EPS or have mid-single-digit revenue growth. And just want to kind of clarify how you're thinking about how those two pair together. And ultimately, what you think is an appropriate EPS growth rate to have in '24 to get a full incentive comp a.
Yes. As we put together kind of the earnings number, and we've headed to do this in the past, but I think it's probably beneficial to do it. We're talking low to mid-single-digit kind of earnings growth for this year. And so with that, what we have to do is build a plan that will get our associates their incentive. We're starting at, call it, 120% of target. And then we'll tier it upwards to where we think our earnings number needs to be for the year. And it will go all the way down to zero, as far as payout.
Last year, where you're right, we started at 125, we ended at 62. So basically, from what our associates were looking at, at the beginning of last year to work but we cut it basically in half. For this -- for 2024, we're starting with, like, call it, 120% payout, and that number is somewhere in the $100 million range, if we can afford it. The -- but you're right, the earnings have to show up. And if they don't show up that $100 million -- begins to get less, fairly quickly.
Catherine, I might jump in and add to Harold's comments, and I know you know this, but I get questions over time, which make me believe some people don't understand this. But that earnings target that gets set there. We've never said it to be less than the top quartile. As you know, this year, top quartile is not all that high. But again, we are projecting earnings growth here it will be top quartile. And that earnings growth that we're projecting contemplates the full payout of the annual cash incentive plan.
And in the event that the revenues don't materialize to produce the earnings at the targeted level, the way you pay for that is you trim the incentive expense. And so again, I think I know there are a lot of companies that have all kinds of incentive plans where they make some, then they pay out all this other stuff. I mean, that's not the way it works for us. The incentive is built into the earnings projection when the earnings show up, we pay it out. In the event they don't, we retrieve that or harvest that to fuel earnings to the shareholders. So I don't know if that's a helpful explanation or not, but...
No, it is. It's certainly what we saw this past year. And it's just tough in a year where the rest of -- to your point, peers in general, are forecasting a decline in EPS year-over-year. And so top quartile may look really good, but you may be a top quartile, but you still may be kind of flat EPS growth. So I was just trying to kind of think about how you're thinking about EPS growth and marry that with the full payout to make sure we're thinking about an EPS target appropriately.
Yes. I think Harold gave it to you, didn't he?
Yeah, he did. I'm good.
Your next question is coming from Brody Preston from UBS.
I'm sorry to beat a dead horse on expenses, but I just wanted to put a pretty fine point on it. So excluding the FDIC surcharge, you're at $858.8 million of expenses for the year. If I look at the guidance slide, I take kind of mid- to- high teens to imply 14% to 19% kind of range. So the midpoint of that would imply a $1 billion number off of your $858.8 million versus the $960 million to $985 million you gave versus about $972.5 million. So it's about a 3% difference there. And I was just wondering what's driving the delta between what you said on the call, versus what's implied in the deck last night.
Yes. Thanks, Brody. That's a great question. I think our number is more like 13 to 18, first. So we call that mid- to [half]. The -- I think the delta is around 120% payout versus 100% payout. And some other things that I'm aware of in our plan where I think we have some cushion. So that's what got me [today], to the $960 million to $985 number I talked about earlier.
Got it. That's very helpful color. I appreciate it. And then I did just want to ask on NII a couple questions and one here. Harold, you said in May, I think, for the first cut. First part of the question is, could you clarify within your NII guidance when the other 3 cuts you have occurring are? And then secondly, just when I look at the loan growth guidance, compare it on an average basis, it implies about 11-plus percent average loan growth. And so I guess I'm wondering, is there the opportunity where you guys could kind of outperform even the high end of the guidance range that you've given, just given the low double-digit average loan growth you're expecting combined with pretty significant fixed rate repricing throughout the year?
Yes. I think on -- first of all, on the rate cuts and don't hold me to this, but I had that question for some people here yesterday. I think it was -- I think we've got embedded July, September and November. Maybe -- don't hold me to that. I think those are kind of split in the dock block. But anyway, I'll go with that. It's just a steady decrease. I think along with that, you should assume a high beta on our deposit costs.
We had a high beta going up. We think we'll have a high beta going down. So we will try to recoup as much of those rate decreases as we can from our deposit book or try to get as close to 100% as we can. As far as loan growth, and I'll let Terry also talk to this as well, I think the guardrails we have on loans are related to capital and related to client deposit growth. We can't let loans just outgrow deposits extended. In the fourth quarter, we were like $700 million to $200 million, something like that. We need to push deposit growth up -- at the same time, we've been steadily accreting capital over the last year or 2. We think that's healthy. We think that we will continue to do that. But we can absolutely beat the loan growth target that we in -- on the outlook slide.
Got it. Could I ask just one quick follow-up. I just wanted to follow up on Brandon's question that you had on the spot rate on the interest-bearing deposits being below the average for the quarter. So if we don't see any -- I know you said to expect further creep, but I'm just trying to think mathematically, if you guys aren't raising rates at this point, what drives the average up if the spot rate is below where it was for the fourth quarter?
Yes. I think what could contribute to increased deposit rates at just new accounts, new clients trying to move money across the street from somebody else. I think that would be one of the primary contributors. Additionally, mix shift could occur primarily around our public fund deposits. We think the -- we believe the bulk of our public fund depositors have already built their balances up, but we could see some increase in their balances. Most of those accounts are indexed. And so consequently, as they collect property taxes and whatnot that money finds its way to our bank.
Your next question is coming from Brian Martin from Janney Montgomery.
Just a couple of easy things. Terry, just the hiring outlook. I think last quarter, you talked about it maybe being a little bit better in '24 than '23. Is that still your expectation? Or just kind of especially with Jacksonville how are you thinking about hiring in '24?
I think we had a little bit of a reduction in the hiring pace in '23 from 2022. I think we're likely to migrate back somewhere closer to the 2022 level of hiring and to your point, Jacksonville will be a big contributor to that hiring.
Got you. Okay. And I think you guys talked in the slide -- slides about some deposit initiatives. Just to your last point, Harold, about getting the deposit growth you need for the loan growth. Are there any new initiatives you have in place? Or is just the ones you talked about in the past?
Yes. It's the ones... Terry, why don't you take the rest of it?
I would say that we've enumerated or talked about 4 in the past, we introduced 3 more towards the tail of 2023, and my expectation is we'll probably introduce 2 or 3 more over the course of 2024. I think those three additional specialties, probably the one that holds the most opportunity for us is focused on all matter of escrow accounts, whether it be 1031 exchanges, mortgage escrows attorney firms, all those kinds of things. But we believe that we have an advantaged software capability for people that are running as agent on escrow money. We think we've got some advantaged software that's helpful there and look for that to be the biggest of these most recent three product specialties that we've introduced.
And so I think what's important about it, Brian, is two things. One, the size of the market is huge. We have an advantaged product, which [all] let us penetrate it well. But the second thing that's really important is most of that money is either no cost or low-cost money. And so that's a powerful specialty that we have.
Got you. Okay. That's helpful. And just the last one for me, guys. I was just Harold, back on the margin. It sounds like first quarter is flattish or stable and then up from there. The biggest drivers of that cadence have increased throughout the year.
Is it outside of the fixed rate repricing? Is there something else in there? I guess that's the key driver? Is that it? I know you had liquidity drop a little bit this quarter. So just trying to understand the benefits there going forward.
Yes. We do have some liquidity shrinkage over the course of the year. That will be a contributor to the margin primarily, not necessarily net interest income. But we do intend to be very aggressive on reducing our deposit costs. I think we determined that based on what happened during the liquidity crisis last year that and our -- and the fact that we've raised rates so aggressively that we've got the ability to [indiscernible] here. And I believe a lot of the large caps we're talking about that they're still trying to catch up on deposit rates. Well, we think we're pretty much already there. So the way we fully intend to take advantage of rate cuts on our deposit growth.
That completes our Q&A session. Everyone, this concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.