Timur Braziler: 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?
Harold Carpenter: Well, I think most of our commercial real estate loans are probably on a three to five year kind of term. Most of the — both owner occupied and non-owner occupied loans are on a fixed rate. So I think by and large most are ready for rate increases. I think the last number I saw was that they’ve seen some 20% to 30% increase in rentals over the last three to four years. So we feel like they’ve got the cash flow to support the increased interest rates.
Operator: Thank you. Your next question is coming from Steven Alexopoulos from JPMorgan. Your line is live.
Steven Alexopoulos: Hey. Good morning, everyone.
Terry Turner: Hi, Steve.
Harold Carpenter: Hi, Steve.
Steven Alexopoulos: I’ll just start guys with 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 being 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, you know, there’s this pretend and extend mentality that you guys are just extending these and they’re not renewed.
Can you share with us what’s happening? How much of the values changed? Are you able to just renew these without any impact on credit? And as you look at 1Q ’24, 2Q ’24, 3, the ability to turn those including office without seeing a material negative impact on credit.
Harold Carpenter: Yeah, 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 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 now for a long time or 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 there.
Terry Turner: Yeah. I think I would hit two or three things as it relates to commercial real estate in whole, in particular as it relates to the office portfolio. I think one thing, Steve, that amazes people, you know, 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 has held up so well so far. I think one of the reasons that it has is two things. One, as we underwrote 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, you know, most of the loans on the books would have been underwritten assuming a mortgage constant in 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. You know, I like you, I mean, I’ve got CNBC on and I watch these disaster stories from markets like San Francisco, you know, up east and so forth. But in these southeastern markets, we use the map. We’ve talked about the growth going on in those markets, but the rent growth over the last three or four 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 right size the credit, but if they have to right size it, they have to right size it. I mean, we’re not just rolling it and hoping for the best. They need to do whatever it takes to right size that credit. So, anyway, as I say, I don’t want to overemphasize past performance, but it is a comforting thing to me.
Steven Alexopoulos: Yeah. That’s helpful color. I want to pivot to the margin. So, Harold, I think you said you’re assuming four cuts in the guidance. Is that right?
Harold Carpenter: That’s right.
Steven Alexopoulos: Okay. So if I look at your margin before the pandemic, right, you guys were pretty routinely in a 3.5% to 3.8% range, which is way above where you are now. If we think about even four rate cuts or five rate cuts, we’ll see what the number looks like, but the yield curve is 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?
Harold Carpenter: 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 3.40% to 3.60% range. And we get there by based on what our current spreads 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 a 3.40% to 3.60%. 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.
