Pinnacle Financial Partners Inc (PNFPP) 2022 Q4 法說會逐字稿

Good morning, everyone and welcome to the Pinnacle Financial Partners Fourth 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.

(Operator Instructions)

During this presentation, we may make comments, which may constitute forward-looking statements. All forward-looking statements are subject to risks, uncertainties and other facts that may cause the actual results, performance or achievements of Pinnacle Financial to differ materially from any results expressed or implied by such forward-looking statements. Many 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 measures and a reconciliation of the non-GAAP measures to the comparable GAAP measures will be available on Pinnacle Financial's website at www.pnfp.com.

With that, I am now going to turn the presentation over to Mr. Terry Turner, Pinnacle's President and CEO.

Good morning. Thank you for joining us for our fourth quarter earnings call. Looking at the performance in the fourth quarter, key success measures like net interest income growth, tangible book value accretion, core loan growth, core deposit growth, asset quality, all continue to be strong. There is a fair amount of noise in our fourth quarter numbers. So we're going to move quickly to the performance detail for the fourth quarter to try to create clarity there. Then of the outlook for 2023 to help the model builders and finally, I'll spend some time detailing why I believe we have a unique ability to continue producing outsized shareholder value.

As you likely know, we believe asset quality revenue growth, earnings per share growth and tangible book value accretion result in long-term shareholder returns. That's why our incentives are linked to them, and that's why we show this dashboard every single quarter where you can see the relentless upward slow on those metrics, most closely tied to the shareholder returns.

GAAP measures first, followed by the non-GAAP measures, which I'm personally most focused on. And if you believe that asset quality revenue growth, earnings per share growth and tangible book value accretion, most influent shareholder returns, which I do then you have to appreciate the persistent excellent performance against those variables year in and year out.

As I mentioned a minute ago, there is considerable noise in our fourth quarter financials. So we're anxious to get on those details. The most impact of those items with BHG's election to fund roughly $500 million in originations on their balance sheet, thereby deferring the income on those loans over the life of loans as opposed to direct them into their auction platform which would have resulted in taking the gain on sale upfront, significantly increasing their and our earnings during the fourth quarter. Nevertheless, I believe you should be able to look through and see that the core banking business continues to have great momentum. So Harold, let's move on and let's walk through the quarter.

Thanks, Terry. Good morning, everybody. As usual, we'll start with loans. The fourth quarter was another strong loan growth quarter for us, and we believe annualized mid-teens loan growth going into 2023 is reasonable for us. As we anticipate loan growth -- loan yield growth in the fourth quarter, and we anticipate further escalation in loan yields in the first quarter. Along with that, we are forecasting increases of 25 basis points in February and 25 basis points in March. Our modeling indicates that loan yields will be up 40 to 50 basis points or so in the first quarter.

The talent we've added over the last several years results in extraordinary balance sheet momentum, as we've done over the past few quarters, we're again dissecting net loan growth based on the categories (inaudible) to help everyone better understand the source of our growth. It's been a huge year for us as far as loan growth is concerned, and it works out with the new markets and the new hires contributed to more than half of our growth. That said, that represents more than just an annuity stream for interest income, those are new clients with now new opportunities for our firm in all types of major products. We are definitely in a broader footprint with new markets, but also a much deeper footprint given our model.

Now deposits, really pleased to report the growth in deposits for the fourth quarter, growing deposits at a reasonable price in 2023 is a key focus for our current environment. We are actively built out deposit gathering franchise around HSA, Community Housing Associations, nonprofits and others, and we believe we are making headway with these and other special deposit initiatives. Our average deposit cost came in heavier at 74 basis point increase over the third quarter.

Although we believe we remain inside of our total deposit data guidance of 40% through the end of 2022, we experienced an acceleration in deposit cost in the fourth quarter above our expectations by about 15 basis points. Competitive pressure around deposit costs are significant. So we fully anticipate that increases and Fed rates will continue to add a tailwind for increased deposit costs in 2023. Average deposit cost, we believe, may approach 1.5% to 2% in the first quarter of this year.

As for mix, we are seeing the positive move more noninterest-bearing and lower-yielding interest accounts in the [higher-mix] products and time deposits. Our average noninterest-bearing deposits were down approximately $440 million in the quarter of 3Q averages and even more based on end-of-period balances. Our plan will contemplate this decrease to continue at a lesser pace in the first half of '23. About 90% of our noninterest-bearing balances are commercial with a vertical of 25% of that number being annualized.

Over the last year, annualized commercial has dropped from around $425,000 per account to around $350,000, while non-annualized commercial has dropped from $35,000 to $30,000. Pre-COVID levels will be around $300,000 per annualized and a little less than $25,000 for non-annualized. So average account size is still 10% or so higher than pre-COVID levels.

Our #1 objective remains 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. Hopefully, you'll not hear this bank's leadership ever talk about having too many deposits. Our belief is that we have and will fund our deposit growth effectively and prudently maintain the appropriate balance between profitability and growth.

Now liquidity, we believe we have ample liquidity to fund our near-term growth. As investment secures our allocation to bonds was flattish in the quarter, we don't anticipate any significant growth in bonds this year. As the top left chart reflects our GAAP NIM increased by 13 basis points compared to 28 to 30 basis points in the previous 2 quarters. As we mentioned last time, a decrease in our NIM expansion was not unexpected, although we felt like the NIM would expand in the fourth quarter by a few more basis points than it did.

Our planning assumption is our NIM will likely to be flat to down next year and likely down in the first quarter -- during the first quarter is burdened by a fewer days. That said, our growth model should provide for increases in net interest income. As we enter 2023, we believe net interest income guidance of the high teens percentage growth for 2023 over 2022 is reasonable at this time.

As for credit, we're again presenting our traditional credit metrics, Pinnacle's loan portfolio continues to perform very well. Our current ACL is 1.04%, while, which again compares the pre-CECL pre-COVID reserves of 48 basis points at the end of 2019. We did modify our CECL modeling this quarter with a more pessimistic assumption set with a baseline at 20% stagflation at 30% and the pessimistic scenario at 50%. We continue to have conversations with borrowers about supply chain, inflation and how it's impacting their businesses. We've been all about sustainable credit diligence efforts with the intent to actively identify any weaknesses in our borrowings.

We continue to have a very limited appetite of new construction, whether it be residential or commercial. Thus, the growth of our construction portfolio is linked to funding previously approved commitments with no new projects being added at least through the first quarter of 2023. We also remain attentive to our concentration limits in all areas of our portfolio, particularly in CRE and the table on the bottom right of the slide details. No changes regarding our CRE appetite from last quarter.

In summary, our outlook for credit remains strong as we entered 2023 from a position of strength. So if negative trends begin to develop, we believe we're advantaged.

Now on the fees, and as always, I'll speak to BHG in a few minutes. Excluding BHG, the revenues were flat for the third quarter. All that said, we're pleased with the effort of our free debt generating units are putting forward that several units are negatively impacted by the current operating environment in a meaningful way. Obviously, residential mortgage volumes were down this year. Mortgage does see their pipelines building back modestly in the first quarter as rates hopefully will be less volatile in the spring home-buying season begin.

Gains on SBA loan sales are also down significantly from the third quarter as their business was impacted by the elimination of incentive from the CARES Act, which drove more business to SBA lenders in the previous quarter. We've gotten a few questions on earnings credit rates and the impact on deposit fees. So here's a (inaudible) of that. We have approximately $2.5 billion in annualized commercial noninterest-bearing accounts. Our current ECR is around 35 basis points, which we feel is competitive. At the moment, our run rate on analysis fees with labors is about $4.5 million per quarter.

For every 25 basis points, we raised the ECR that reduces our analysis fee about $400,000 to $500,000 each quarter. Our goal is to stay in the middle of our competition peer group on our credit rates, so we have to release some lift in the ECR is coming, but it will come in small bites. We had anticipated 2022 to return a high single-digit growth in fees over 2021, excluding BHG and other non-equity investments, we believe 5% growth -- we achieved 5% growth for the year.

We think mortgage should recover modestly in 2023, and we've also added some strong revenue producers in Wealth Management late in 2022. Excluding BHG and the impact of other investments, we believe that high single-digit to low-teens growth in '23 over '22 is reasonable. Expenses came in about where we thought for the quarter. We've seen non-compensation expense decline from 4Q -- in 4Q from 3Q but attributable to the reversal of franchise tax accruals with some of that being added to the tax line over a reclassification between franchise tax expense and in nontax expense. All in, we are anticipating an effective tax rate of approximately 20% in 2023.

Our incentive costs also decreased in 4Q and 3Q, this was primarily the result of the impact of 4Q '22 PPNR results on a cash plan, which came in below target and overall performance metrics on the performance-based equity incentive awards which stand in below our expectations. All of this is a segment in a few comments about variable cost nature of our expense base.

We feel like our expense base should result in mid-teens growth of '23 over '22 as to how we can manage expenses, as I mentioned, we've reduced our '22 payouts due to firm not achieving selected incentive targets, particularly on our quarterly PPNR targets and various other measurements when it comes to equity compensation which is, by the way, primarily impacts senior leadership. That's how it works. Our cash incentive plans always sign the EPS growth targets and for 2022 was also time of PPNR target for each quarter.

We missed our fourth quarter PPNR target thus incentives were reduced. Our leadership equity plans are [tied] results in relation to our peers, some are return-on-tangible common equity, some are tangible book value accretion, some are PE and tangible book value models. So it's all based on ranking in relation to our peers on metrics that we think are directly linked to shareholder value. The higher the peer ranking, the better we do. We believe we have a very shareholder-friendly compensation system that is objective not subjective, which is a meaningful variable cost component.

The other element that brings the variable cost attribute to our expense growth is our hiring level. We can always back down or all on approving and have done that a few times in our history. I can recall once during the financial crisis and the other at the start of COVID. Both times, we slowed the recruiting until we better understood the depth of the macro environment. Lastly, and as we mentioned in the press release, we've got the ability to modify or cancel, postpone various advancing projects with the absolute will should our targets be in jeopardy of not being achieved.

On the capital, tangible book value per common share increased to $44.74, a quarter and up slightly from last quarter. Our capital ratios remain above well-capitalized levels. Like our tangible common equity ratio stands at 8.5% currently. We are mindful of our Tier 2 capital levels, particularly at Pinnacle Bank. We'll be monitoring our capital levels as we get into '23.

We will actually take the preserve tangible book value and our tangible capital ratio have served us well and have no plans currently to alter our PNFP Tier 1 capital set means any sort of (inaudible).

Now a few comments about BHG before we look at the outlook for the rest of the year. As slide indicates, BHG had another great quarter on originations, second best in its history. Originations did decrease from the prior quarter with BHG's implementation of a tighter credit box so fewer of the lower credit score loans, which are typically more profitable or funded in the fourth quarter. As a result, spreads did come in from the last quarter from 9.7% to 8.9% as the chart on the bottom left indicates, that's more spread shrinking than originally planned, but as the chart indicate for several quarters in 2020, current spreads remained above or near historical norms.

The accrual for loan substitutions and prepayments increased to 5.66% and 5.28% last quarter as a result of a more precautionary posture on BHG (inaudible). BHG's accrual for loan substitutions for our sole loan portfolio increased $270 million at September 30 to $314 million at December 31. As the blue bars in the bottom right chart show resource losses fell slightly from 4% to 3.96% at year-end.

Additionally, given the macro environment and as we mentioned last quarter, BHG also increased on balance sheet reserve for loan losses to $147 million or 4.9% of its on-balance sheet loans from 3.53% last quarter. Core CECL is still on the radar for adoption on October 1, 2023. We continue to anticipate the CECL reserve to be 8% to 9%, but that certainly is an estimate at this point.

The following of BHG's borrowing base in our opinion remains impressive. As mentioned earlier, BHG's modified its credit box, particularly with respect to lower tranches of its borrowing base. This will have an impact on both production and spreads going forward. BHG refreshes its credits for monthly, always looking for indications that weakness in this borrowing base. Credit scores were at a consistent level in the previous quarters so that borrowers have remained resilient during the cycle thus far.

In comparison to other consumer lenders, we believe BHG remains well comped -- BHG borrowers remain well compensated with average borrower earnings being around $293,000 annually. BHG's trailing 12-month churn off ratio has increased from 1.9% to 2.94%. Similarly, its delinquency ratio has increased from 1.22% to 1.78%. All those lease ratios are in line with early 2021 ratios. BHG recognizes the macro environment to lead to further deterioration of similar credits.

In an effort to keep performance near historical levels, BHG has made a number of credit cuts to both their marketing and underwriting models. We believe that BHG's management team has taken a proactive approach to managing credit as it [reaches] 2023.

Last, BHG had another great year in 2022. As I mentioned during our earnings calls this year, we have always believed BHG's earnings in the first half of 2022 would likely be stronger than the second half as they set more loans to the bank auction platform in the first half of the year rather than whole loans on our balance sheet. As you know, the bank offered (inaudible) on sale, while loans that retain on the balance sheet and fund through various funding options deliver interest income over the life of the loan.

BHG accomplished 3 securitization this year aggregating almost $1.3 billion in volume. During the last quarter of December, they added $550 million in new facilities with Goldman and Truist. This represents incremental funding available to BHG in 2023.

Our third facility for $500 million was closed in late December as well, closing on this facility required more loans to remain on balance sheet than which otherwise had been expected. This facility was fully funded at year-end 2022.

So here's a simple example, $100 million issuance through the bank auction platform could generate anywhere from $30 million to $40 million in gains and easily while most of the securitization platform had an 8% spread would yield approximately $7 million to $8 million in net interest income annually.

In the fourth quarter, BHG sent order balance sheet than a reply anticipated with the (inaudible) sold through the GMS model. Again, looking forward, some key points I'd like to reemphasize, which are basically the same comments I mentioned for year, 3 months ago. BHG management is responding to the macro environment in a very real way. BHG is and will be increasing reserves based on macro account that at least over the next few quarters, BHG has been modifying their credit models force originating less risky assets with that spread shrinkage may occur as we head into 2023.

Production volumes are strong, and we believe they will maintain production levels going into 2023. BHG's new funding alternatives will roll their already strong liquidity platform, which we also believe is unmatched by their peers.

Lastly a few weeks ago, BHG took steps to limit its headcount with job eliminations of most open positions as well as other expense reductions, which shield -- which should yield a 10% reduction in its expense burn in 2023 from 2022. For all those reasons, we have great confidence in our partners at Bankers Healthcare Group to deliver strong results over the long term.

Quickly, here's our final initial outlook for 2023, along with a comparison of our comments on 2022, the third quarter conference call in October. We expect mid-teens growth in loans, low to mid-teens growth in deposits. This correlates to a similar outlook for net interest income, which should result (inaudible) growth in net interest income. Our plan to 2023 contemplates our NIM being flat to down for the year, which will obviously be a challenge and we need to be nimble with respect to product, especially on the (inaudible). These revenues may be our biggest challenge as many fee units are facing more than their fair share of economic headwind, but we've had some key hires in several of these areas and are optimistic that we should see a lift from those new associates.

We believe BHG's are -- will be flat to slightly up for 2023. We've reduced our expense growth outlook to mid-teens. Our senior leaders are still committed to a strong recruiting year, especially as it pertains to revenue hires. Asset quality, we believe is in great shape currently, and we believe we are hearing the year from a position of strength, which should be a great bank -- negative trends begin to develop.

We are putting the final touches on our strategic and financial plans for 2023 with just as many unknowns now as they were last year, but our goal remains the same. Top quartile earnings performance of our revenue grow with us.

With that, I will turn it back over to Terry.

All right. Thank you, Harold. There's 2 things that I hate, and I know most of you do as well. One is noise in the numbers. In my opinion, no one is just forcing the discussion to be around trying to create clarity about the noise and take the focus off the underlying ability to produce outsized shareholder returns, where I think the focus should be.

The second thing I hate is economic uncertainty, some frequently enforces investors on the sideline regardless of the potential for shareholder value creation. And so I will take just a minute to ensure understanding how we intend to produce outsized shareholder returns regardless of whether BHG's balance sheet more loans regardless of the economic uncertainties that persist, come what may.

It's not lost on anyone on this call that there's a broad sentiment that we're headed into a difficult economic landscape. Greenwich's long survey commercial executives as to their view of the direction of the economy going forward. Their optimism index is simply a net score of deposit is less for negative. And as you can see here, commercial executive has not been so pessimistic since the Great Recession. The economic headwinds bearing on commercial banks are widely known and include the shrink in money supply, which means a shrinking deposit pool, increased rate-based competition for deposits and inverted yield curve, inflation and ultimately a recession, just to name a few.

And there's no doubt that the banking business is subject to the economic environment. But our growth model is more a function of our ability to take both talent and market share, and therefore, is substantially less dependent on short-term interest rate movements, inflation ups and downs and those kinds of things. And we literally have been pursuing this model for 23 years. So frankly, it's just hard for me to understand our competitors who've not been building this differentiation can either catch up or defend against it. It is the classic sustainable advantage.

Beginning with the far right objecting the total shareholder returns. Here you can see the dramatic outperformance over the last 10 years. Generally, that would be true if you look at our first 10 years of existence, true, if you looked at our second 10 years of existence, true, if you looked at our first 20 years of existence, and while past results are no guarantee of future performance, I believe it will be true over the next 10 years because this model is intended to produce value through thick and thin over the long term.

The reason I say that is because we built a demonstrably different client experience. Every bank has a great service. In our case, it's our clients who say that. And they tell that to the independent researchers that prepare to have, not only for Pinnacle, but for virtually all of our competitors. You can see in the center of the chart that our clients' engagement with this firm is literally unparalleled.

And as the risk oversimplified and then differentiated service is largely contingent on our ability to excite and engage our associates. I'm not going to read to the list and said simply, in 2022, we've been rated as the best place to work in virtually every market we operate in. And on a national scale, we've been ranked as the second best workplace for women and the seventh best workplace for millennials in the country. We excite and engage our associates. So it's just hard for me to imagine that competitors who've not been building this over an extended period of time will be very successful, either taking our associates and clients are stopping us from taking theirs.

Moving on to the advantaged markets using the United Van Lines Movers study in Southeast continues to attract people from all over the country. Our challenge is to find a bank with a more advantaged footprint than ours in terms of population migration and growth.

And then as it relates to our chosen footprint, we operate in the vast, vast majority of the large high-growth urban markets. So we're located in the most advantaged region of the country. And within that region, we're generally located in the largest and fastest-growing cities. Moving beyond incredibly attractive size and growth dynamics of our markets. Frankly, the more important attraction is the competitive landscape.

Given the Net Promoter Score is the best indicator of bank's ability to protect or expand market share, beginning on the left, according to Greenwich's national study, despite all their investments in technology, you can see scores are horribly low for the national franchise, slightly better by declining in the super regionals and not surprisingly better by declining in community banks.

Moving to the right, you can see the Pinnacle stores are unmatched and getting better. I fully expect that gap to widen as the industry adopts a work-from-home platform, while we operate a work-from-office platform primarily for the purpose of further differentiating our service level. (inaudible) that's what we'll do.

Keep in mind that Net Promoter Score measured clients' willingness to recommend. So that's how you continue to grow safely in the face of a declining economy. And speaking of the competitive vulnerability, never in our existence, I remember a time when the banks that have the bulk of the share in our markets were more likely to get it up than now.

Here's a smattering of recent headlines in our markets regarding our competitors. My goal here is not to spare them but simply criticalize the sustainability of our ongoing market share taking for both associates and clients. And here's further demonstration of our winning war for talent. I believe we've become the employer of choice for bankers that are frustrated with the large bank employers in our markets. It seems like every year, we set a new record for hiring many of the most experienced and successful revenue producers in our markets from those banks that still have the largest market shares.

And when they work in a company that despite of bureaucracy and is universally focused on [winning] clients, these revenue producers create literally the best experience in the market. Not to the labor point, but the 3 banks on the left of that chart are the market share leaders. So how could you expect anything from us but rapid growth over the long term, complete diagnostic economic conditions when you recognize that those banks are where most of our revenue producers come from, and you see the differentiated service that they're now able to provide?

Here's another way to visualize that opportunity based above across (inaudible) have share dominance, thanks to the length of the crosshairs are least successful engaging their clients. They're vulnerable. Of course, thanks to the rise of the crosshairs are most successful in engaging their clients and best positioned to capitalize on those competitive vulnerabilities, PNFP being the most advantaged against the market share leaders, all of them look vulnerable. Most has been written about the competitive advantage is being created by the tech spend as the nation's largest bank, an ingenious study of the national franchise, you can see sure enough, there is a strong correlation between clients' perceptions of bank's digital capabilities and a client's willingness to add them as a bank provider.

But according to Greenwich, in our markets, the best overall digital experience is being provided by Pinnacle, the best product capabilities, the best service professional, the best overall experience.

Thinking about long-term shareholder value creation, Greenwich research is long-isolated the 3 pillars on which client's loyalty is built, number one, value long-term relationship; number two, ease of doing business; number three, the banks you can trust. Over the last couple of years, they've actually expanded to a fourth pillar, which is data and analytics-driven insights, a key area of investment, again, for those largest competitors. But again, in our markets, we dominate all 4 of those metrics, further indication that our net growth of clients is likely to continue.

And now I'm trying to connect the dots. I recognize many associate engagement, client service, they have little-or-no bearing on earnings and shareholder returns. Some of those things as expenses to be cut, but hopefully, this slide can connect the dots for you on why we believe our growth should be insulated from economic conditions, because the people we hire and the service we give, very few clients would consider leaving and a great [venue] intend to add us as a provider on their next product meeting.

As you scan up and down those net momentum percentages for the banks in our market in respect to the economic conditions, our net momentum is huge. In the case of small businesses more than twice as much as the next best competitor. And in the case of the middle market, total dominance, particularly when you compare it to the market share leaders, the top 3 banks on both of those charts.

Without understanding our unique product to penetrate the market, largely by hiring experienced bankers, enabling them to be easy-to-do business with doesn't fall by draw completion that if it's growing like a weed, it is one. So many of our competitors are out prospecting for new clients by circulating [dozen] brand list or some other prospect list, trying to be the prospect for our money. I would say, even slow growers, that typically has done and you can see here, according to Greenwich, we did last in prospect calling. As previously discussed, we're not out trying to meet growth loan money to, we're simply supporting our relationship managers and calling on the clients that they've known him by many times for decades. We believe that strategy provides us with better protection than our peers and even credit terms.

So Q4 was a noteworthy quarter. Economic uncertainties are bound. My encouragement is to keep the imposes on the right to level as it relates to BHG, the fundamentals remain strong. Originations were the second highest in their history. They've rescored their loan book and score has not deteriorated again, and gained strength in the loan book. They continue to add liquidity sources and utilized those liquidity sources many -- from some of the most sophisticated investors in the market. And at the end of the day, nearly $300 million in pretax earnings, 22% growth over prior year, it's an incredible story and continues to be a handsome asset.

Beyond that, and I think this is most important to me. We run a core banking franchise that continues to dominate and continues to have momentum regardless of what the circumstances are. We compete in the Advantage Southeastern footprint. We have a cultural focus that results in a differentiated client experience, and there is no more sustainable advantage than that. Our organic growth model, we're having proven successes that resonate throughout our markets, one of the best loan growth stories in the U.S., one of the best tangible book value growers in the country from a credit perspective, we're top quartile in terms of NPAs to loans and OREO, clearly, the place you want to start a credit does return.

And then lastly, I'll just hit on the side there. Harold has talked about it a little bit, but I think an important consideration as people begin to focus on how we get to 2023 estimate set has to do with our compensation systems, [high-low goal] percent, particularly as it relates to the leadership compensation. Specifically, those incentive plans focused on tangible book value generation, making some insight to wire date, the book value grew at the pace it did versus periods in 2022. We do a peer relative target setting. So we have to outrun the peers. As Harold has indicated, we're looking for top quartile performance on things like EPS and revenue growth in 2023.

As many of you trying to develop those 2023 estimates, maybe you can go to still a little bit on 2022. And all I mean by that is if you think back to 2022, generally, the outlook for the industry as a whole was that there would be negative earnings -- negative earnings growth in 2022. It was because most believe that the industry didn't have sufficient momentum to outrun the loss of PPP income. But I will say this, obviously, this information ends up in our proxy but regardless of what those industry expect there, we still targeted top quartile growth which was not negative, and we met mines in apparel incentive and the incentives of the roughly 3,000 salary-based employees of this company on that idea. That's been our methodology from the start that continues to be our methodology. And so if you think through that, you get some insight into our belief about the momentum in the core banking franchise in order to get that done.

So I'll stop there, and we'll be glad to take questions.

(Operator Instructions)

And the first question is coming from Jared Shaw from Wells Fargo Securities.

Maybe just starting on margin in the guidance. Harold, when you're saying it's down, should we assume that's down from fourth quarter to 60 or the full year over full year should be slightly down?

Yes. We believe that it will be flat to down from the fourth quarter. We think the first quarter is going to be probably penalized more because it just has a fewer number of days. But we believe it could be 3 to 5 basis points, something like that.

Okay. And then when we look at the asset sensitivity disclosure, it looks like you became more asset-sensitive in the fourth quarter. So is this just you anticipate increased acceleration of deposit funding pressure, I'm assuming here?

Yes. I mean we are planning to still see rates increase here in the near term. We think our deposit beta might level off to somewhere around 45% by midyear, maybe a little more than that midyear. Yes.

Okay. All right. And then on BHG, what are some of the assumptions you have for provision in '23 with the weakening credit backdrop? And how sensitive is your BHG outlook to the provision?

Yes, that's a great question. They plan on not nearly as significant of increases in their provisioning or their reserves going forward. So I think they've gotten the bulk of it done here this quarter, but they'll just have to monitor what past dues are looking like, what charge-offs are looking like to see if they can stay within that guidance.

Okay. And then just can you give us an update on the estimate for that Tier 1 -- I'm sorry, that day 1 CECL impact in October for Pinnacle?

For Pinnacle?

Yes, the Pinnacle portion.

Well, the number I've seen from BHG would be about $190 million. So we'd be 49% of that, that would run through our equity.

The next question is coming from Stephen Scouten from Piper Sandler.

I think Terry and Harold, you guys have said you spend NII, you don't spend the NIM, but obviously, some of the optics around the deposit betas can be tough. You guys laid out a really good slide, I think, in the second quarter, kind of showing -- you guys have traditionally had higher beta, but also higher NII growth. Is there anything today within the balance sheet that makes you think moving forward will be any different, whether that be funding mix, the reduction in noninterest-bearing deposits, the scale of funding pressures? Or do you think that's a story that will continue to play out that yes, we'll have higher betas, but we'll also have this better NII growth resulting in better earnings over time?

Yes, for sure. We're talking about high teens growth in net interest income this year and with a margin that could be flat to down. So that thesis is how we operate. So several years ago, I remember on a call that somebody asked a question about how we're going to deal with this thrift-like margin? And that was back when it was down around 250 or so. So there is a point where our pricing and our margins get too low for us to live with and we have to adjust. But as we sit right now, our growth engine appears more than capable of providing significant net interest income growth with this, some might say, a higher deposit base.

Okay. Great. And within that composition, Harold, you mentioned some other niche kind of verticals. And I noticed it appeared in the slide deck that index deposits jumped maybe to 17.2% of deposits from like 11.3%. Was there any meaningful changes there in terms of products or verticals there that drove that increase?

Yes. I think most of that would be public funds. We've attracted some public fund class here locally as well and as well as in Washington. And I think some -- most of those are tied to some kind of in depth.

Okay. And then just last thing for me, just on the share repurchase, the $125 million plan as well as you noted a potential sub debt raise. Can you give us an idea about how you're thinking about that into '23, how aggressive you might plan to be and what the size of a potential sub debt raise might look like?

Yes. I mean we've modeled out a couple of hundred million to $300 million. Right now, we think we can step through the year without any kind of need to go out and raise sub debt, but we'll just have to see how that plans out, how loan growth performs, all that.

And the next question is coming from Steven Alexopoulos from JPMorgan.

I want to start on expenses. So if the revenue environment proves to be worse than expected, can you walk us through which levers would you expect to pull early on, right? What's like first to go, last to go? And how quickly could you throttle down expense levels if needed?

Yes. There are several things that we can respond to fairly quickly. One is that Terry believes the kind of the revenue number appears to be kind of -- will be consistent for the year then like we've done in the past, we can always reduce our hiring profile or our hiring plans for the year. We also anticipate what the payout is going to be on the incentive plan. So those accruals would also come down.

And then we've got plans for various events throughout the year that could get on the table for complete elimination or reduction or whatever. So this year, I think given what's going on here today and what we reported in earnings, I think there's going to be an intense focus on not only expenses, but revenue growth, pricing, all of that by this management group to make sure that we achieve our targets this year. Terry has allocated time in his senior level we to review those kind of things. And so I think our firm or particularly our senior leadership is committed to hitting our targets and doing whatever we need to do to accomplish that.

Steven, I might just tag on there a little bit, maybe not exactly what you asked, but I think some color related to that topic. As you know, in terms of annual cash incentive plan, generally have a clear soundness threshold. We can't make bad loans and win. So we clear that, most of our existence, the 2 variables that determine the payout were earnings per share growth and revenue growth that was required to hit that earnings per share growth.

And last year, we looked at PPNR. And I guess, for a year or 2 during a difficult period where allowances are being built, and those kinds of things, we relied on PPNR more than revenue. Our Board has not technically approved the comp plan. They'll do that here in the next few weeks in a February meeting. But the anticipation is that they'll go back to the performance variables being earnings per share growth and revenue growth.

And so anyway, I just put that in perspective, I get it, you're asking about expenses, but it does create a great focus on getting the revenue generated, which drives up the house of success there. And secondarily, if the earnings -- if we're not hitting that revenue growth, there's plenty of focus on it. We will get in here and start working in a different way on the expenses.

Got it. Okay. That's helpful. If I could change to the margin to follow up on your answer to Jared's question and all the commentary you gave about the competitive environment for deposits. Harold, how should we think about the trajectory for NIM? How are you thinking about it here? I think you said down 3 to 5 basis points in the first quarter, but do you think it's slow and steady declines through the year? Do you think we bottom out in the first half recover in the second half, how are you thinking about that?

Yes. Well, as far as the rate increases and our impact on our margins, we think they will have kind of -- that will drive some of the reduction in our margins. So in all likelihood, see, the margin is probably going to just kind of rotate around this 3.55%, call it, 3.60% number, we believe, all year long. Yes. If funding pressures and we're not able within our deposit targets, then obviously, that's going to impact that assertion. But as it sits right now, we believe we're just going to be kind of be in that 3.55% to 3.60% there.

Okay. That's helpful. And then finally, on BHG, if we look at the prior expectations for 2023 versus what you're coming out with now, right, it's a reduced outlook for the contribution. It doesn't sound like that's related to you're anticipating higher provisions at BHG. Is this all related to them just holding more production in portfolio? Is that really what's driving this? Or is there something else?

Well, I think there will be year-over-year more credit costs related to provisioning of some, call it, 10% to 20%. But they intend to probably back off some of their balance sheet and send more money through the auction platform this year. They think they're going to have to do that with the elimination of these lower tiers, these higher credits -- I mean, lower credit scored accounts in order to hit their revenue numbers for this year. So I think they'll send more to the auction platform. And I think they will also be still adding more money to the reserves, but not at the same pace that they did in the fourth quarter.

And the next question is coming from Michael Rose from Raymond James.

Harold, I think last quarter, you talked about a cumulative deposit beta somewhere in the 60% range and you kind of estimated 40% by the end of this year, which you kind of add. Any changes to that just given the competitive pressure for that longer-term cumulative beta? And if the Fed does stay higher for longer, does that impact that?

Yes. I don't know. I've not really thought about or put any kind of math to what deposit costs could look like at the end of '23 as far as data calculations and into 2024, we've kind of talked about beta through the middle of the year of somewhere between 45% and 50% given the 2 rate hikes here in the near term. So I'm not really going out and kind of looked at what the longer-term deposit beta, but we fully expect that once the Fed stops raising rates that you're likely to see deposit rate creep just due to competitive pressure. So I don't know how long we're going to talk about the (inaudible) is, but I think when you get into the latter part of the year, and like you said, like assuming the Fed, we're in a higher rate environment for a longer period of time that we fully anticipate that deposit rates will continue to pre-normal in kind of a flat rate environment.

Okay. And maybe just 1 separate follow-up question. Just wanted to kind of revisit where you guys are in terms of the BHG investment. Obviously, it's done a lot of great things for you all over the years. I know you've kind of maybe hinted at maybe reducing the stake at some point in the future. But I just wanted to -- just given where the earnings contribution is and expected to be over the next year, it's obviously going to be lower than it has in the past. Any sort of strategic thought as we kind of move over the next short-to-intermediate term and how you guys view that business and what the longer-term strategic rationale of the investment is for you?

Yes, I'll start and Terry can add just on this. First of all, I want to say that the partnership between us and BHG is strong. Matter of fact, I'll have a Board meeting with the BHG folks here at about a couple of hours. But the valuation of Bankers Healthcare Group, we understand, we realize, we believe, is kind of part of the bear case on our shares and trying to figure out what that number is, is important. But absent an arm's link transaction is difficult to discern.

That said, I think we and BHG are on the same page. There have been opportunities to reduce our stake, but right now, the pricing is just not -- we believe, at a point where that makes it worthwhile for us. We think it's a valuable asset. We think it has created quite a bit of earnings momentum for us. We think BHG on another day could be worth quite a bit of money.

All that said the -- our opinion about BHG is that a lesser ownership interest by ourselves probably wouldn't be that bad. And we should consider any kind of worthwhile transaction that does that carefully.

Yes. I think, Michael, maybe just to echo Harold's comments. You started with the right assumption. I think what I tried to say is that if nobody had to be happy, we would like to reduce our dependence on BHG as a function of our earnings stream, not because we're not bullish on the company and not because any reason other than, it just has become where investor conversations, investor outlooks and so forth, it's just hard to keep telling the story that so many people either disagree with or don't understand.

And so again, at least for me, from a strategic standpoint, I'd like to have less dependence on BHG as a function of my earnings stream. I think to Harold point, I think we've been good with that. I think BHG would be good to that. I think there are -- there always are -- always are a number of people who have the interest to pursue ownership interest in BHG. And so then the question just comes down to what's the price. And so if we find the right price in there, I think we would have an expressed preference to lighten our load sum. If you don't find the right price, you'd love the investment and what it does for our company and how it fuels our ongoing growth. And so again, it's -- the worst case is a good case. But again, just to be clear, at the right price, we would certainly lighten our exposure to BHG is a function by our earnings stream.

And the next question is coming from Casey Haire from Jefferies.

Yes. A question on the fee guys ex BHG, I was just wondering what are the drivers? Because just to get to the low end of the guide implies kind of a mid-teens growth from the current run rate on average to hit to the low end of that guide in '23. Just wondering what the drivers are.

Yes. I think mortgage is going to be impactful. They had a big hit in the fourth quarter because of valuation of the hedge. Their pipeline is down at the lowest level it's been at and I don't know, 7 or 8 years case. So the size -- the absolute size of the pipeline drives the valuation of that hedge. And so we think we're going to get at least have that tailwind going into the, call it, the early part of 2023 into the spring. We've also hired a meaningful number of wealth management. And we're particularly interested in a few that have been at this for decades. Their client base is broad, well supported so we anticipate some pretty significant revenue bump from that.

As we've also mentioned, we are targeting quite a bit of commercial accounts. And so with that, we believe we've got both annualized fees and ongoing fees, non-annualized fees that we come to. So that's kind of where that high single-digit number comes from primarily in those areas.

Okay. Understood. And then just digging in a little more on BHG. The -- just wondering what kind of spread you guys are assuming just given the bank buy rate has increased, and that spread has kind of come in. Does the guide for '23 assume that, that spread holds? Or is there a little bit of deterioration in there?

Spread that I'm looking at for them for next year is 8.5% to 9%, something like that.

Okay. Very good. And then just last 1 for me. I know it's tricky, but the noninterest-bearing deposits settling down to 28%. Any sense as to how much more attrition is possible or before you start getting into like core working capital and you hit a floor there?

Yes. That's a great question, and you need kind of a crystal ball to figure it out. But the best data that we have that we've looked at is when we start looking at average account sizes and what they were pre-COVID to what they are now. And so it could be anywhere from, call it, 5% or so to maybe something north of that. But our planning assumption is somewhere around that.

And the next question is coming from Matt Olney from Stephens Inc.

First question for Harold, with Michael Rose's earlier question, you mentioned a flat rate environment and what this means for the margin. But what if the Fed starts to cut its Fed funds rate, what are some incremental leverage you guys could pull to help protect the margin in that NII?

Yes. Well, we have entered into a couple of swap transactions for about -- well, there's actually 4 of them that we've entered into for about $2 billion in coverage of the loan book at somewhere around, call it, quarter 4. So we do have that. I think the biggest thing we've got is, first of all, we've mentioned we've got an increase in index accounts. So those will come down, but the other thing we've got is a relationship-based business where we think we've been pretty good at being fair with clients. And so what happened last time in a rate-down environment is we were also pretty fair on the way down.

So that takes a lot of communication with clients, but that's -- we've been doing that now for all 2022 and if we get into a rate-down environment, we fully anticipate our relationship managers will begin to pull those deposit prices down quickly.

Matt, I might add to Harold's comments, there is a lot of energy in the company on loan floors. And as you know, going into this cycle, we had a lot of protection from the loan floor that we were able to successfully negotiate with our relationship. So that's also (inaudible).

Yes. Okay. Good points. And I guess, shifting over towards the loan growth, the mid-teens guidance. Just trying to get a better idea of assumptions behind this. I know the bank always does kind of a bottoms-up analysis for each of its producers. Any other commentary you can share with us about the process for 2023, especially in light of the slide in the deck you guys put out there on '23, where you include that the optimism index of commercial executives is at very low levels?

Yes. If I understand the question, Matt, you're trying to get at what's our assumption on how we grow in the face of declining economy. Is that -- am I getting?

Yes, that's it, Terry. I guess -- I know you did do the bottoms-up analysis with each producer, but I'm trying to appreciate if there were any more adjustments at the end of that than you typically do each year with your preliminary guidance.

Well, I guess if I -- and get what you're looking for, we went through the same process this year that we always do, which is both the top down and the bottoms up, the deal. So again, we -- as you expect that thing, we go through every relationship manager, where they are, what their expected production is, their targets, as you would guess, add up to meaningfully more than what our target at the top of the house is. And so many of those targets are large because of the hiring ladder that we have, where we've hired so many people over the last 3 years, so many people over the last 2 years, so many people over the last 1 year that still allow us the bulk of their book movement and so forth. So there is a level of detail that can be done to the relationship manager. And those expectations would exceed what we believe will do or what we're communicating we'll do at the top of the house.

And the next question is coming from Catherine Mealor from KBW.

Just 1 more question, kind of following up on BHG and expenses. So if I just think back to the past few years, BHG has been really instrumental in really paying for the build that you've had in the hiring process and building the core bank. So at a point in time we were seeing the BHG contribution stabilizing, maybe at risk of pulling back a little bit. I guess, what does it take for you to feel the need to adjust the expense outlook a little bit more than this mid-15% range? Is it -- is there a level of profitability that you feel like you shouldn't go below and that might trigger more expense initiatives? Or is it all just about making sure revenue growth is higher than expense growth and kind of growing EPS that way, a bit less about maybe with the ROA? Any kind of color on that would be super helpful.

Yes, the ROA probably not at the top of our list. We do have our own ROTCE and all that. But at the end of the day, Catherine, what we've got are earnings targets, revenue targets per share. And BHG is a component in that. And so we're going to try to get to that bottom-line number in the most effective way that we can. If that means we need to cut cost, we'll cut costs, if that means we need to go try to figure out how to grow revenues in some way, that's not in the plan, we'll do that.

BHG in the past, has provided us some tailwind with respect to growth. And so they typically outgrown our number year in and year out, and that's provided us a little extra resource to go after and support our hiring platform. This year, it looks like their growth is going to be fairly flat to slightly up. And so that may -- you might imply from that, that we may need to back off of hiring in order to kind of meet our EPS targets.

So I don't know if I'm getting at all your question, Catherine. But we're going to eventually nail down what we think top quartile growth needs to be for this firm and a simpler plan that is the most likely to achieve it. And that would include Bankers Healthcare Group in that. And we'll use the latest and greatest information we have from them to do it.

Catherine, if I can, just maybe make a slightly different point. I don't know if it will be helpful to you or not, it's intended to at least give you some insight into what our mindset is, but what we're trying to do here. I made a comment during the presentation about how the incentive plans work here and really just trying to clarify for people that I don't think anybody thought that banks were going to grow earnings in 2022, given the loss of PPP income, but we believe that we had momentum in the core banking franchise and an ability to do that our incentives, we're bet on that, and we did that.

In fact, we outperformed the number. Of course, we've got the benefit of rate increases that were beyond expectation, all those kinds of things. But I guess I just want to be clear, we believe that, that going in that we had more momentum in the banking franchise, which we carry today and outrun the loss of PPP income. I think that's different than what I hear when I talk to most of my peers. That same phenomena exists this year. And for me, one of the reasons I want to go through the momentum, the core momentum just how you get class and how much business momentum exists and it's going to occur regardless of the economic conditions and so forth is to try to help people get that even in a year when we're projecting BHG to not be a major part of the earnings growth story that we believe we have such momentum in the core banking franchise, which just goes back to the story that we've been talking about for a long time, all the people that we've hired, all the business that they're moving, all the (inaudible) they're having penetrating these large banks that are given -- giving up share that we can outrun that.

And so again, I'm going to guess that's a different story. And so I know it's frustrating because most people will easily go to, hey, it's difficult, why don't we cut expenses, we'll do that if that's what's required, but it's just not a game plan. I believe we have momentum that's going to produce outsized revenue growth, and that's the play that we want to make. And as I say, better not only mine and Harold, but really all the associates this firm on that idea.

Got it. That makes sense. So you're saying in a moment where BHG revenue is less than expected, the core bank is better. And so that's why you don't have to tap into expenses. But from here, revenue becomes more challenging or BHG falls more than expected, that's when you can start to flex the expense level.

That's exactly it. Catherine, I've got about $125 million in cash bonuses in this plan. So that's all subject to hitting or getting EPS growth target.

Great. Okay. That's super helpful. And then this is really a small knit, but just wanted to do it for modeling purposes. The FTE adjustment typically, and I've looked historically, typically pops up a little bit in the fourth quarter then normalizes. Should we expect -- you saw that linked quarter increase this quarter, again, should we expect to see that kind of normalize back down the first quarter like we've seen historically?

Yes, I think so.

And the next question is coming from Jennifer Demba from Truist Securities.

Harold, let's beat a dead horse a little more. You gave a pretty tight net interest margin guidance. Would you -- would it be fair to say that the margin is probably the most-at-risk element of the fundamental guidance that you guys laid out for '23?

Yes, I think so. Deposit pricing will be key to it. We feel pretty good about where the loan pricing is, and we feel pretty good about our fixed rate loan pricing is definitely improving and we've been beating on that drone for several quarters now, and I think it's finally getting some traction. So the loan yields, we think will hang in there. And I think we've got support from Rob and Rick and Rob around the franchise on that. It's -- the competition for deposit pricing for us extends beyond what Truist is paying, what Regions is paying, what some of these other franchises is paying around our competitive peers. It extends into what the money market accounts are doing, what the savings accounts are doing, what the brokers are trying to do with folks, all that as well.

And so -- that point is that there is a limit to how much these deposit costs will go. We don't think we have to go all the way up to those levels for sure. But we have told our sales force that we will not lose a deposit because of price. And so their marching orders are to go out there and make sure that whenever they've got a chance to defend their deposit portfolio, they do it. And we're not letting those deposits go.

Secondly, there was an earlier question about DDAs and where those are headed. There's also a strong emphasis on that and protecting those deposits as best we can. We did see kind of an initial [thrust] during the quarter that a lot of that DDA movement occurred around November and the November rate increases. We didn't see nearly that kind of reduction in December. And so we're hopeful that a lot of that -- although we anticipate more curve, we just -- we are hopeful that it will occur at the same kind of levels that has occurred here in the fourth quarter.

So the -- 1 more thing on as far as margin protection that we're doing tactically, Jennifer, as far as the loan guidance and all of that, we are actively selling to our sales force of the notion of prepayment pillars on all fixed rate credits. And I think we've been working on that too for the last 2 or 3 quarters, and we're getting traction there. So we're hopeful that if rates do come down for us at least in the near term, we've got some -- or at least in the longer term, we've got some protection today.

Okay. And the deposit growth that you're projecting for this year would be very strong. Do you think -- is this the permanent shift for Pinnacle in terms of just focus -- putting a more intense focus on deposit growth overall?

Jennifer, I think I answered that question is, yes, not all, I mean by -- I think that yes is I think we have since the founding of the company had an intense focus on deposit acquisition, as you know, if you have a mature company, you've got a mature retail deposit book, and you can sort of milk and ride that. In our case, we got to fund it as we go. And so there's a different energy and emphasis around that always and has been there since the beginning. But clearly, during the pandemic and all the influx of liquidity, we didn't -- we didn't concentrate so much on the defense of our deposits.

We didn't have to do that and those kinds of things. So it is a different day is the money supply collapses, deposit pool assets collapses, it does require a different level of energy. (inaudible) during that pandemic period, we built 3 or 4 specialty deposit businesses that all have some level of traction in them. I won't guess, Jennifer, that in 2022, those 4 specialties probably produce. I don't know $800 million to $900 million in deposits for us. We expect that growth to be still bigger as we go forward. We're in the early stages with still positive momentum in all 4 of those specialties. And so that's the reason I say, okay, yes, I think if there is a structural difference in our ability to do it, which in addition to all the energy and emphasis of the relationship managers, we do have some product specialties that are pretty meaningful in terms of how they're bolstering our deposit growth.

And the next question is coming from Brian Martin from Janney Montgomery.

I'll be brief. Just, Harold, Terry, just the hiring outlook for this year. I mean I think you talked last quarter about where you thought it might be, but given fourth quarter is wrapped up and some of the commentary earlier, how are you thinking about hiring in '23 relative to '22?

Yes. I think one of the things that's important, Brian, when we talk about hiring most of the time, when we're talking with investors, we really talk primarily about hiring revenue producers, because that's really the thrust of our company has been all along. What we're trying to do is grow our revenues, grow our top line in order to grow our bottom line, all that sort of stuff. But again, just a sort of maybe make a point that's obvious that sometimes forgotten. Those revenue producers are generally going to be support 2:1 by nonrevenue producers. And so the total number of people that have to be hired in a year, I think that increases were in the 400-person range. Don't know the exact number, but be in that range for total associates hired whereas the revenue producers were down closer to 125, I think for the year.

So what -- the point I'm really trying to get to with you is, I think we'll -- we expect a similar year on revenue producers. We'll expect a less -- we would expect higher less is for personnel in 2023 than in 2022, primarily because a lot of that support personnel been in controlled infrastructure and so forth, which generally, in my view, a stair step kind of expense, you got to build the capacity for -- as you pick compliance monitoring, BSA risk, long review, all those kinds of things, you invest in people in a stair-step mode. I think we've made significant investments in the controlled infrastructure. So it's a long way to say, look, I think revenue hires might be a little less in 2023 than 2022, but it ought to be comparable. Total number hires ought to be less in 2023 than 2022, but causes their step nature of some of those control expenditure.

Got you. No, that's helpful. And maybe 1 for Harold, just on the reserve level, Harold, you talked about maybe being a little bit more pessimistic on -- or Terry did on the kind of the outlook. Just how should we think about the reserve level as you kind of go through the next several quarters given your outlook?

Yes. I met with the credit officers quite a bit. Right now, they are still having the same posture that our credit book is strong. We're not seeing any kind of systemic kind of weakness in it. And so our planning assumption today is that our reserves probably will be fairly flat here now. We'll obviously monitor that. So if we start seeing some weakness and adjust accordingly. But right now, we think credit is in check as best we know today.

Got you. Okay. And then just going back to your comment, Harold, about the fee income. I mean I guess the -- you highlighted the wealth. I mean, when you think about the mortgage and the SBA piece in there, are those expected, I guess, kind of your big-picture planning to rebound a fair amount. I guess just kind of getting to this number you talked about on the fee income side, the high single-digit or low double-digit growth in fee income ex those kind of more volatile numbers. It just seems like there's more to it, I guess, on some of those other items that you're not calling out. So like the -- for instance, the mortgage and SBA. Do you expect SBA was down this quarter, same as mortgage a pretty meaningful rebound in those coming in the next couple of quarters?

Yes, for sure, and mortgage, I don't know about SBA. SBA has got some other headwinds. But no, mortgage should have a better year this year than last year, and this whole wealth management investment that we've made should produce tangible results. We've also -- we've also hired some very tangible individuals in our capital markets area that all help us. They have a long resume of success. So we're planning on that being implementing well.

Got you. Okay. And last one, Harold. I'll let you go is the margin outlook you talked about, that kind of assumes your 2 rate hikes. If you see the Fed lower rates at all, does that -- how does that change the margin outlook, I guess, particularly as you get later in the year into next year, I guess, does that -- if it's not material, declines? Is it not much changed from what your forecast is today or kind of your outlook?

Yes. We actually have some rate decreases in November and December in our forecast right now, but they're pretty much in consequent.

Thank you, and that does conclude today's conference. You may disconnect your lines and have a wonderful day. Thank you for your participation.