Q2 2020 Pinnacle Financial Partners Inc Earnings Call
GAAP financial partners second quarter 2020 earnings conference call hosting the call, placing pinnacle financial partners as Mr., Terry Turner, Chief Executive Officer, Mr., Harold Carpenter, Chief Financial Officer. Please.
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During this presentation, we may make comments, which may constitute forward looking statements. All forward looking statements are subject to risks uncertainties and other factors that may cause actual results performance or achievements of pinnacle financial to differ materially from many results expressed or implied by such forward looking statement.
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A more detailed description of these and other risk as a contain the pinnacle financial's and it will report on form 10-K from your ended December 31st 2019 next quarterly report our form 10-Q for the quarter ended March 31st 2020.
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In addition, these remarks mean include certain non-GAAP financial measures as defined by FCC regulation G. a presentation at the most directly comparable GAAP financial measures and a reconciliation of non-GAAP measures to comparable GAAP measures will be available on pinnacle Financial's website at www Dot P. and ask Pete Dot com.
But that I'm not going to turn the presentation over to Mr., Terry Turner, Pinnacle's, President and CEO.
Thanks, Jamie.
Conclusion of our Q1 conference call at driving but God for what are they going forward.
I indicated that we continue to manage those things that for news long term shareholder value, but would remain at a more defensive posture until we can see more clearly the depth and duration of the pandemic and its impact.
Specifically I indicated that we had increased liquidity in Q1, and we continue to do so in Q2, which we did.
Let me review in detail decide where to bill from both wholesale and client funding all obtained.
Abundance of caution given the uncertainties ran back then.
I indicated that you should expect us to continue building loan loss reserves in Q2, which we did not to the extent we did in the first quarter was still make lake raised our allows it moved from 0.48% at year end now to 1.27% at June Thirtyth.
The next funding, our PDP bombs that well be 1.41%.
In regard to capital I indicated that while we did not intend got our dividend at this time, we were still on mode to increase capital, which we did.
Spend in our share buyback and repaying some that we had previously intended to redeem we saw merger totaling approximately $225 million.
Increasing your top no tier one capital.
I also indicated that for the first time, that's great recession, we were slowing our planned levels or improvement in hiring in an effort to avoid the expense bill to go with it which we've done our noninterest expense the asset ratio would we adjusted was 1.54% which is the lowest I can recall in the history.
The firm.
As I mentioned last quarter is inconceivable to me that in the final analysis 2020 would've been about what our earnings were in 2020 more likely ultimately to me about how nimble we were in a rapidly changing environment and how well we will run rates for earnings in 2021, and so well were taken these massive steps to.
Boulder capital and liquidity and were scar in the loan book were slow under agreement to avoid the expense Bill it's really our intent to execute on fundamentals, we control and does it produced long term shareholder value like lowering callable bonds, tying in Florida on loans and the various core deposit initiatives.
That we have launched in order to better position ourselves for return to more normal run rate.
We go into 2021 looking at those fundamentals the typically for those long term shareholder value Q2 was an outstanding quarter loans and deposits were up meaningfully largely all when the PBB. We saw improvement in virtually all of our primary asset quality metrics, although we recognize many lagging indicator.
Thank you and while lowering our cost of deposits and tying in right, Florida alone and the Salt Lake order growth in revenues pre provision net revenues spread income and fee income.
And always will review, our standardize board occasions as measured for upon I'll start with the GAAP measures for the quarter, but moved quickly to the non-GAAP measure gold honestly, the mother Barclays or what we managed to.
Total revenues rose, 5.4% year over year, and 14.7% linked quarter.
Of course is we adjusted fully diluted easy and for the quarter was 89 cents primarily impacted by the other night vision arrogant to me that and they don't just a few minutes and thanks to the chart you can see colibri pervasion that revenue.
I was.
50% linked quarter, and roughly 3% year over year, a really important measure when considering our ability to build the 2020 run rates as I just mentioned earlier, a loan and deposit volume grew up meaningfully during the quarter indicates a core deposits. It was our already strong quarter ever no doubt BBB Adam.
Andrew handbags on that.
But when we did again, we find that RPC sea borne deposit balances grew roughly 1.7 billion dollar during the quarter, which means absent that impact our core deposits really north of $1 billion largest quarterly organic growth in core deposits ever a as you'll recall, we placed in certain blendstar.
Emphasis on core deposit acquisition going back into 2019, and modifying our 2020 incentives, which I believe is also having an impact at this time.
For loan growth dramatically in the second quarter own almost exclusively to BBB.
Like a there were at least two matters note.
The first is I don't think pure economic loan demand among small and mid market businesses outside of the in the second quarter would have been near zero secondly, at our gay specifically, we saw meaningful pay downs in commercial lines of credit after draws its swelled in the previous quarter likely indicating less requirement.
This is now working assets and less urgent need to build an old liquidity.
That land pay down phenomenon loan growth would've been better than budgeted for us in the second quarter.
Asset quality was strong even after the significant rerisk writing effort during the quarter.
Both Npis and classified asset has moved lower and net charge offs were just 10 basis points.
And uses a review all that great detail. Shortly so that's a 30000 the summary of the quarter a growing balance sheet largely aided by BBP strong revenue growth well managed expenses and solid asset quality matters.
We turned over to our own provide a little more color commentary on or before 10 uses dig then lumber and loan portfolio review process, we undertook during the core.
Thank you very good morning, everybody I'm going to talk more about Pee paid this quarter I think it's important so you can better understand how we believe our second quarter results were impacted.
It's going PPP from our ERP balances results on a 9 million dollar reduction or alone.
For the quarter as Terry mentioned in the last quarter, we had about $250 million in commercial I'd draw increases this quarter line for all were down by 390 million.
Girls are at 50.7%, which was the lowest I can remember in recent memory.
Oh loans are coming in at a slower pace, but there are opportunities. We still believe based on discussions with our market leaders and commercial lenders that annualized loan growth will land in the low to mid single digit for this year.
Of course after excluding the impact of PDP.
At the looking forward, we're not anticipating any reduction of TPP loan balances in the third quarter that may be conservative, but we don't have good forgive us rules yet so that's the decision we blame we've made for the third quarter.
That's BA told Congress that they hope to have their forgiveness portal up and running by August we'll just have to see.
Average balances for PPP loans was 1.7 billion in the second quarter, our third quarter forecast for average BP loads, a slightly more than 2.2 billion.
Our yield or PB loans was 2.89% in second quarter, So third quarter should be fairly consistent by some of our assumptions based on our no pay down assumptions, we're forecasting houseware reductions in TPP loans in the fourth quarter, our internal for core forecast didn't I anticipate that 13% our son.
The two middle Gonna TPP fees will amortize into income in the third quarter.
And then 37% in the fourth quarter, given our yes, but we will likely get meaningful PPP forgiveness in the fourth pools.
Now to deposits as Terry mentioned it was a huge the public workforce and appeared deposits were up almost 26% <unk> core deposits are up 15% over March 31st significant growth in noninterest bearing deposits ending at 6.9 billion.
There was a chart in the supplemental information I categorize the second quarter growth for loans and deposits were estimating that the PPP program provided about 1.7 billion of our deposit growth for the core.
This is a rough estimate because it's practically impossible determine a precise no.
That number is simply the net broken TPP borrowers deposits between March 31 in June 3rd we do anticipate that a meaningful amount at least deposits will move off our balance sheet over the next few quarters as the PDP borrowers use those funds.
The rest of the second quarter growth was split a billion dollars in class growth and 1.4 billion at wholesale deposits wholesale deposits were acquired as part of our decision to amp up our liquidity as a result of code.
All likelihood we'll see some of these wholesale deposits decreased in the third and fourth quarters. So we intend to let our liquidity rough return to more traditional levels over the next 12 months. This is all contingent on <unk> and obviously project progress toward the back.
Next is the usual update to our loan pricing given the circumstances very pleased with how long spreads have held up when you consider the 30 day lot more averaged about 1.4% in the first quarter that fell to 35 basis points in the second Gore and will likely be 15 to 20 Bucks sports in the third quarter.
Our relationship managers are working with borrowers to increase LIBOR spreads and our findings et cetera.
As noted on slide our second quarter lot more rates for new wells were 3.15 per cent compared to 2.85% for the entire lot more portfolio.
Hi base credit just hanging tough basically try to keep beforehand alone. These credits getting more and more successfully achieving long forwards on the prime and LIBOR books. So we're excited to see that occurred moral that in a minute mix right lending is also hanging tough or given up some yield on new fixed rate loans as new loans tell me about around 4% and sorry.
The quarter with a total fixed rate book yield them around four party Bob.
Forecast and loan yields in this environment, it's pretty difficult right now given the uncertainty around PDP lows.
We should experience some long youre contraction of the third quarter, given the impact of PPP and where a lot more is however.
Offsetting these two items for us will be the success, we're having to onboard.
At June 30, we had 2.7 billion in shorter term variable rate credit with along for and that number is up from 2.1 billion at March 31.
We also have $800 million in shorter term variable rate credit.
I was up for renewal between now and the year end year end 2020 that doesn't have a loan floor yes.
One of the big opportunities, we have as we work our way through 20 point to use to below four floors into our prime and LIBOR loan books doing that we'll obviously help us as we ramped into 2021 in this lower for longer flatter yield curve.
I'm not going to spend a great deal tied to stuff in deposit pricing. This is obviously not a new chart and it seems like deposit betas are so last year.
That said the other thing we can do as we focus on building a ramp in the 2021 is managing our deposit in total funding cost. We see no reason, we should not be targeting a range of less than 25 to 30 basis points for deposit costs by urea.
Our relationship managers have their client last and are working now aimed at the posner's, who have higher deposit pricing.
We have approximately a billion dollars on CD renewals on the second half the year and will be gradually reducing our wholesale funding balances both of which will serve to reduce funding costs.
Oh, we're bringing this information for from last quarter knock I'll spend a lot of time this quarter as much of their question we've already covered.
The NIM chart on top left goes back to 2007 attracts our NIM and relationship on start rights. We all know we've operated in the zero at rate environment for so here. We go again hopefully it won't last for seven years like it did last time.
Obviously won't board are critical in this environment. So we were pleased with where we are with the information on the bottom left chart.
As we mentioned in our press release last night, we believe that both PTC and our excess liquidity negatively impacted our NIM by 32 basis points. There was a slot in the supplemental information the shows how we calculate that number but suffice to say, but these to advance has impacted our reported net interest margin may.
Looking to the third quarter, we're optimistic that the GAAP margin will hold fairly steady and be somewhat dependent on our third quarter. PPP results. We will also we'd have to counterparts reduction allow bore with a build in loan floors and reduce deposit pricing average liquidity hopefully we'll be down by a modest amount in the third quarter. So that two should be held.
[noise] no fee income I'll be really Murray fees were more than $72 million from core up slightly over the last quarter and the same quarter last year taken BSG out of the calculation of reflects significant growth as mortgage period. The day during the second quarter consistent with other financial institutions.
But a huge refinanced border in their pipelines are really strong currently but we are anticipating a repeat of Q2, but weve underestimated results from this group before.
Wealth management revenues were down this quarter from last quarter.
I'm really based on it bothered these for investment services, where fee revenues are receiving careers or based on market performance. We should see these revenues come back in the third quarter with a broader market rebound that has occurred.
BSG contributed approximately 17.2 million, which was slightly more than we anticipated, but more on BSG segment.
So now briefly how extensive personnel costs were down 7 million from the prior quarter due to reduced incentives and reduced benefit cost. We don't have an exact number for PPP overtime calls, but overtime is up about $300000. This quarter over the last four [noise].
As the benefit call several speculate that medical expenses are down to go elective procedures and sidelined for some portion of the quarter, maybe so consistent with prior years, the usual reduction in payroll and unemployment taxes also contributed to the release benefit costs.
As the coated related savings, we anticipate around 30 to 40 million incentive savings for both cash and equity incentives as earnings are not being achieved for this year.
We probably have another $3 million to $5 million in savings from travel entertainment expense reimbursement and other things that I really haven't thought about.
Our cash incentive accruals at 25% at quarter end. This resulted in four or 5 million dollar reduction in incentive costs. This year as many of you know our annual cash incentive is based on EPS targets. This year, we adopted deposit growth component into our incentive plan and that the poly component is driving the incentive accrual for ourselves.
Yes.
With the additional provisioning this year, our EPS and set a target is likely to be delayed absent some remarkable where between now and year end.
We're working with our board to provide some additional opportunity for our associates. So that we can keep them highly energized and motivated to wrap up the operating performances from going into 2021.
We're targeting an incremental 25% apart incentive so in total call it 50% of their annual incentive targets inclusive of the deposit component.
[noise], we spent a lot of time will cease the last quarter. So we'll be brief this time, we anticipated.
Last time that we would have another reserve build this quarter as Terry mentioned, our reserve without PPP loans is at 1.41% up from one on non last quarter.
We also increased our on balance sheet reserve as you probably know that 4.5 million is in our non interest expense line.
We did include some additional information regarding unemployment and GDP forecast as these are the two metrics that employees imports are seasonal model building clubs.
Unemployment being the most impactful you can see the weighted average on employment rates on the Green chart, comparing last quarter this quarter compared our rights that we used to at least one large cap on the public affairs recently, our two two twenties weighted average rates are slightly lower than theirs, but our one Q 20 weighted average rates are definitely car.
So apples to apples last quarter, we would have allocated more reserves as a result of unemployment rates on this quarter slightly less.
Over and above all that we added another 40 million to the reserves through a qualitative overlay just due to the uncertainty around the depth and duration of a pandemic that exists.
As a threeq you I think we're all in a weird spot.
Everybody is working their loan portfolio in an effort to gain more visibility as the lost out yet.
Or just a lot we don't know and it's difficult to predict two uncertainties are that the U.S. treasury will likely provide some amount of additional governmental assistance and loan liberal loan deferrals will gradually work themselves for.
Both of those we believe were positive the big negative is of course, the depth and duration of the pandemic.
At Pinnacle, we've learned a lot about our borrowers over the last quarter and feel better about our book today, but we obviously, we'll know more September part even with all the stuff stuff that sales groups is leading us through.
Our best guess right now and that we will continue to build reserves and the second half of the year until visibility improves.
Lastly, the slot addresses what we think going into third quarter no guarantees, but we're more optimistic about things and general than we were at the beginning of March.
That said loan growth is likely to be solved deposit growth is as strong as we've ever experienced.
It's an all full rate environment, we're optimistic that we can increase core bank loan spreads.
Lower deposit Gulf PDP will have a significant influence on our results for the next few quarters.
Steve we have great cognizant, DSG, which I will discuss summit.
Not anticipating mortgage to set another record, but they should have a solid third board.
Expenses should be relatively state still not willing to offer full year guidance to cope with and its impact on credit.
All things considered we feel confident PPNR will increase in the second half of the year.
Now briefly about tangible equity our ratio dropped this quarter with the additional liquidity build and the PV.
These are high quality assets that will eventually exit our balance sheet.
We believe we will manage back into the heights and alone.
Hi, urea and ended the first quarter of next year.
[noise] SBH GE, we've shown this slide before and its intended to give you a snapshot BSG business flows over time and more importantly, how they're holding up here in the pandemic green bars on the chart, our originations and have ramped up with more loans being funded so business slowed remains.
Strong second quarter volumes were down slightly from last quarter, but this is Paul and a record first quarter.
The Blue bar for belongs always gain on sale has been recorded as these loans are sold to downstream bites. This is the traditional BHP model would get wholesale revenues being generated.
The Blue Bar did hit a record placements in the second quarter as the auction platform remains in great shape and bankers remain excited to purchase BHP paper.
The gold bars represent loans held lobbyists, you want to balance sheet for which they did she would collect interest income.
They are warehousing more wells on our balance sheet than they ever happened with the first securitization about to occur go bar should backup some next quarter.
So from 30000, the business loan for my business flows remain incredibly healthy loan originations remain strong loan sales were at record levels and BSG is prepared to execute on his first securitization was the next few within the next few weeks.
The top left chart, we've shown on several occasions the quality of the biggest use borrowers have improved steadily in the person in the last few years, but particularly in 20 point I continue to refine their store cards increased the quality of the borrowing base again, the right chart and I reiterate maybe the most powerful chart I have the.
Related to BSG steadily improving credit quality.
Looking at losses about minutes losses continue to level out an earlier months since origination that pointing toward a lower loss percentage over the life of the underlying loan.
And David for what are your that's will likely calls these loves move upward, but the quality of the borrowing base in our opinion is very impressive and as much higher than the borrowers from just a few years ago and I believe that's helped investors better evaluate the opportunities with respect to participating in their upcoming securitizations.
Concerning the Berle as of June 30, total deferrals represented about 50% of the total book up from 13%. This time last quarter dentists continue to live group as expected with a 35% deferral rate.
The H. you communicate with these borrowers frequently and look to see these numbers decrease meaningfully in the third quarter as referral, whereas our essentially nonexistent herb.
We've updated historical charge off and reserve bills laser for loans at BSG sold in our network opinion, but green bar show that Harley they've got almost $3.2 billion in credit with banks, we have acquired alone.
Large lunch shows the annual loss rate, while the blue bottle and the chart detailed recourse accrual as a percentage of outstanding loans with these other banks.
For the first frame up the 2020 losses were running at about four to happen, so and picked up only slightly to 4.56%.
For the six months ended June 30.
They have increased their recourse accrual again from 6.4% last quarter, 7.25%. This quarter, we anticipate some additional building on this reserve.
Going into the second half 40 point.
Lastly, we believe it's been a big year for BHP, and we anticipate big things for the rest of this year.
During the quarter the credit markets improved allowed BHP the opportunity to execute on their first securitization.
We were six week medical was successful in an access in the credit markets with a $225 million preferred issuance in June.
We MBS you believe that they're securitization will be successful and we'll get them and goods and a good spot potentially execute on another securitization in the next six months or so.
This allows me Steve you continue to diversify revenue stream away from gain on sale in the interest income and provide another very competitively priced funding source.
More to come on as in the third quarter.
Lastly, as indicated on the slide four without BSD was like a best place to work in the state New York. They were number two last year. So it feels good to be number one.
Regulations to BSG on hitting that mark.
So here was a sleepy little upstate New York Company that three friends started 20 years ago. They turned it into a 600 plus associate driven from the now the best place to work and the State New York.
I suppose many have tried to replicate what they have built but there's a special salsa BSG.
We are phds biggest bands and are excited about the future of our partnership.
With that I'll turn it over to Tim to talk about correct.
Thank you Harold good morning, everyone.
From a credit perspective second quarter was a continuation in prior quarters for metrics such as past due loans nonperforming assets classified assets net charge offs, we acknowledge cobiz full impact on the economy in our clients is still unfold.
But the standard measures of loan quality continue to hold up well.
Before I go into our credit slides I wanted to outline our loan re grading work during the second quarter, because our intent credit reviews may be more than many of our peers.
During the second quarter, we replaced graded all loans greater than a million with a payment deferral in every hotel alone in every pre retail greater than a million.
Our rebranding effort was done at the loan level not from a top of the house portfolio approach. Our method was interaction with each borrower one borrower in that time.
We re graded approximately 1280 loans.
Our regretting process and tail to collect concurrent monthly borrower financial statements.
For monthly property operating statements part personal financial statements liquidity verification contingent liability statements are guarantors.
We believe collecting interim financial statements dropped 20 to one will provide us with the baseline given that bar work 2019 year end financial statements may not be indicative in assessing their current financial health.
For CN Islands, we deployed a survey questionnaire together feedback regarding key variables such as revenue forecast for second third and fourth quarter compared to the same period in 2019.
Klein ability to resume regular payments by the second third and fourth quarter 2020.
A question regarding months of operating liquidity on hand.
Finally supply mine disruption.
Our bankers will discuss each question with their clients and then record the client response, using an online tool that enables easy data aggregation.
Our goal during the second quarter west to identify and recognize those far worse warranted, a non past risk grade criticized or classified.
We didn't have an increase in the criticized race grade during second quarter net is largely attributed to our hospitality book.
We have moved approximately 78% of the hotel loan balances into the criticized risk grade category.
In our re grading work, we placed significant waiting on the hotel industry, given it's known challenges.
That said, Fortunately, 74% of our hotel answer in the economy.
Extended stay where limited service sector.
Hi, mid June many of our clients in these sectors had occupancy rates in the upper 40%.
Many of these clients can cover interest expense and a mid 50% occupancy.
But with the anticipated recovery period of hotel industry now less clear we believe this conservative risk grade stance is appropriate.
Pinnacle's risk rating process is fluid.
And should the hospitality sector improved later this year, we're into 2021, we will revisit the criticized classification of this portfolio.
Our second largest increasing criticized was cream retail, but its total was modest in only represented 4.4% of decree retail loan balances.
We acknowledge retailers in impacted sector.
But it will take time for the full impact of Cowen on retail can be understood.
The remaining increasing criticized loans was both modest and varied rain or.
Great across many different sectors.
On a very positive no after concluding our very thorough second quarter review of all deferrals greater than a million in reviewing all hotel loans in all presale Cree retail loans greater than a million.
Last find assets at June 30 decreased 12 million from first quarter.
Further our mph decreased by 13 million from March 31st at June Thirtyth.
For our Cnine clients with the loan payment deferral, we conducted a seven question survey during late May into June.
Our survey tool aided us isn't qualitative overlaying risk rating our clients.
We surveyed 443 businesses, representing approximately 1 billion in loan balances.
The results, we're guardedly optimistic.
Great quarters have declines responded by fourth quarter your topline revenue would be between 75 and a 100% of.
On the same quarter in 2019.
Three quarters and the clients respond to that my third quarter their cash flow would be sufficient to resume debt payments as originally agreed.
45% the declines reported seven months for more liquidity.
Our operating cost.
And only 6% recorded material supply chain disruption.
Pinnacle continues its approach of a well balanced in granular portfolio.
While our second quarter credit metrics like we don't yet evidence the full impact of cold and on our loan portfolio. We understand that is fiscal stimulus and PPP proceeds were extended.
Absent further stimulus we may see these credit metrics change.
His hair on his elaborated our provisioning is largely driven by economic forecast for unemployment in GDP.
And as such we have means we increased our credit loss reserve the last two quarters.
Pinnacle adopted a defensive strategy during the second quarter, and we will read grade most of the remaining portion of our loan portfolio at the loan level.
During the third quarter.
Interest this will continue to be on borrowers in highly impacted industries.
Our goal is to quickly identify those borrowers who had been meaningfully impacted and bring the appropriate resources of the bank resolution Wow, there is an opportunity to rehabilitate the credit.
Hsas and improve our collateral.
[noise] Pinnacle began proactively reaching out to clients with loan payment deferrals during the third week of March.
We believe many of our clients accepted our payment for will offer because the impact of co. We've done now.
This chart illustrates that our deferrals have dropped by 37% the peak.
This large decline was confirmed by our bankers talking to clients about your intention for a second deferral.
For our consumer loan portfolio with deferrals, we conducted a survey in June with 665 clients and the results were encouraging.
With a 78% response rate, we identified only 31 million in an elevated risk category and of these loans all before were secured by real estate.
Additionally, 93% of our consumer loans that received a deferral our secured by real estate.
Pinnacle's 2009, consumer net charge off was 1.15%.
For our small business loan portfolio, we conducted a similar survey in June.
For 1379 of our small business loans.
We gathered responses on 85% of the loans with deferrals and we identified only 18 million an elevated risk.
And that total 70% or secured by real estate.
Pinnacle's approach to the hospitality sector has been a disciplined conservative approach a banking hotel sponsors who are well capitalized and have a long track record is successful operation.
Many of these sponsors have been large clinical depositors.
A few attributes to illustrate our conservative hotel loan approach.
Weighted average loan to value 55%.
Weighted average 2019 debt service coverage of 2.1% for stabilized properties.
91% of our loans have personal guarantees.
Prior to Cobi.
We had only one nonperforming loan that just 3 million.
This lumpiness in SP, a loan originated by I think that make up North Carolina could acquire years ago.
Well in most markets hotel occupancy numbers have rebounded from the low seeing in March and April we believe it is too soon to discern is sustainable trend. We are optimistic based upon the data we are collecting.
The most important attribute of our hotel book is that 74% or exposure is comprised of extended stay economy and limited service, which are these segments that have experienced the greatest rebound in occupancy rate.
The conservative LTV of 55% of our hotels offers an opportunity to return to profitability at lower occupancy and HDR.
They do not have to return to 2019 levels to be profitable.
Pinnacle provided 42 million in PPP loans to our hotel clients.
We have 21 hotel rooms under construction of which 50% of the commitments have been funded today.
Limited extended stay economy.
Constituted 77% of our hotel construction loans.
During the second quarter read rating that.
We had just one loan of 2.6 million located in Myrtle Beach move into a classified loans stands.
The LTV on that love is 44%.
Out of Pinnacle's 116 hotels only one is closed.
Just small hotel loan of just 3 million in Durham North Carolina.
Business Center resort tie in and airport properties are under the greatest amount of stress.
Our exposure in these categories is limited to a few in that business Center and airport categories.
While the stress is not necessarily expected to be alleviate isn't the short run our borrowers have strong track records and the performance, we believe positions them well for a recovery.
Hotel deferrals decreased 14% from the Pete.
Local and state laws and pandemic conditions continue to have a disparate impact on hospitality performance.
Long term, we believe the states in which we have finance hotels, our growth markets that we'll see stronger recovery in the overall national economy.
88% of our hotels are within pinnacle's footprint.
This slide provides details on our ones in the restaurant sector.
The groups together exposure to real estate developers, who leased for restaurants as well as loans directly to restaurant operators.
Some noteworthy points include the segment is just 3% of our loan book.
Pinnacle's very successful PPP program provided $179 million in cushion to our clients in this segment.
Lungs, with deferrals decreased meaningfully from the peak.
Secondly, just 21% of our loan balances have a loan payment deferral.
Approximately half of our.
He is real estate secured with a conservative LTV of 56%.
87% of our exposure is within our footprint.
Our 10 largest non owner occupied Greenland leased restaurants.
None have a payment deferral.
Coupled with Conservative Ltd.
Our quick service segment is made up of names like Taco Bell Sonic Wendy's and KFC.
Our two largest restaurant operator exposures are well known public companies with very strong management teams.
We have only six restaurant operator exposure is greater than 10 million.
And for the six do not have payment terminals.
This slide provides some insight into our retail portfolio.
Consistent both retail store operators and commercial real estate loans leased to retail operations.
Pinnacle's very successful PDP program provided $187 million of cushion to our clients.
Loans with deferrals are now just 18% or the total portfolio balances.
As of June 30, our teams reviewed all loans over a million secured by existing retail property.
Each properties economics, where mark to market by underwriting current rent rolls identifying those tenants, which had received rent relief over a defined period.
Our Creek retail book is extremely Greenberg with over 700 loans, averaging just 1.7 million.
This slide provides more insight into our retail book.
It's a well diversified portfolio with only three of the top 10 loans with payment deferrals.
We have no regional malls.
16% of our retail portfolios grocery anchored shopping centers.
Approximately 31% of our pre loans are single tenant properties.
Very high percentage of those stores remain open as they generally housed in central 10.
Such as tractor supply company dollar General O'reilly auto parts 711 in Walgreens.
There's been a lot of news coverage regarding big name retailers like pier, one or bed Bath and beyond in other names that are struggling.
Pinnacle Bank is always maintained a very limited appetite for power retail centers.
We only had five our retail centers in our entire portfolio with primary tenants like Walmart.
Harris Teeter hobby lobby Dick's sporting goods.
In our retail construction, but only nine loans are greater than 5 million.
For our creep retail construction book, 50% are built to suit single tenant.
Of our strip center construction loan 75% of the space is free week.
Average strips in or is this small neighborhood center with a loan size and were approximately 4 million.
[noise] thislife provide some insight into where entertainment portfolio.
Over 50% of our entertainment exposure is in the music publishing space to finance the acquisition of some catalogs.
Pinnacle Bank has its financial advisor that specializes in this discipline.
His extensive experience in strong contacts at par light this niche into a national calling program.
Each catalog of songs is made up of thousands of wells season diversified songs that are stable from an earnings standpoint.
Revenue from the catalog is generated primarily from music streaming fees paid from firms like spot Fi Apple Amazon and terrestrial radio.
To a lesser degree sink revenue was generated from songs in the catalog Houston film TV commercials in general licensing.
Country music streaming is up 13% since the start of the pandemic.
And catalogs with season older songs are also up materially as well.
Sank has had some pressure, but digital revenues are up largely offsetting other declined.
This asset class is largely considered uncorrelated annuity.
And as such institutional investment in this space in recent years has been robust.
The loans have appropriate loan covenants that permit close monitoring average ltvs are under 50%.
Pinnacle's very successful PBP program provided $53 million of cushion to our clients.
Jerry now I'll turn it back over to you that talking about moving forward and this pandemic.
Okay. Thanks, Tim and last quarter's call. It was my objective begin everybody on notice that moving forward and this band they make it was our intent to move from offense to date bands to slow our investment in growth until the storm been weathered the environment. Once again can do cidara unusual ability to attract talent and take share.
This will continue as they are number one focus we move into the second half 2020, we've elevated liquidity meaningfully we've taken actions to preserve and increased capital. We've built our allowance for credit losses financially in the first two quarters in Iraq has already indicated a bias toward further elevation in the second half of this year.
As you already our Tam, we allocated enormous resource to the Rerisk, writing more difficult loans in our portfolio during the second quarter and it's our intent to finish Rerisk writing the rest of the great loan portfolio. During the third quarter that said I believe our aggressive addition revenue producers over the last two years.
We were still in the early stages of consolidated their client base from where they were before to US should result in ongoing growth, albeit at a slower pace than what we would have been producing brightcove. It.
Picked up important market share the fuel learnings growth that we've come out the other side of the economic slowdown.
Specifically, we intend to maintain elevated levels of liquidity into we'd find more certain economic footing right now as you heard arrow say, we intend to began reducing some liquidity over the third and fourth quarters, but ultimately will unwind institutional portion of that picked up that cost savings when it's appropriate.
Our $225 million preferred issuance, we feel like we're in great shape on capital and Consequently don't anticipate any further capital actions at this time as I've mentioned before although we don't intend to cut our dividend. This time, we're still in the capital preservation mode suspended our share buyback program and retained in the sub debt that we have.
Obviously intended to redeem so we'd expect that our primary mechanism for growing our capital cushion from this point forward just through retained earnings and hopefully our very strong pretax pre provision our away a 1.82% demonstrates that we'll have flexibility to do just that.
We slowed our recruitment in hiring in an effort to avoid the fifth bill and enable us to maximize brief raising net revenue is an important aspect of our defensive posture I want to be clear, we've not frozen hiring completely we've just slowed it and of course relative to our 2020 plan will harvest a significant amount of budgeted incentives.
That are tied the EPS targets, which offers a sprint expense run rate in 2020, maybe please.
So much of what we've been talking about is the plant, but one of the things that governs during that time like this is the value that we placed on our client relationships. Many of our competitors in the past been viewed as reactionary and heavy handed and consequently, they have meaningfully damage their reputation for value and long term relationships. It would you.
Brian if it were different than that this time, but following the great recession. According to Greenwich Associates medical it aren't the best reputation in our markets provide and long term plan relationships and that bond remains critical to is now.
On the Bar chart on the left you can see the this is the time that not only you can destroy client loyalty, but at the time you can make clients for like keep in mind I believe the green into doing research for virtually all of the top 50 banks in the country plus about 600 more among all those banks and all those markets.
They are already find in the differentiation that took place in the great recession isn't but taking place now.
How buying time in deferrals, thus far in the pandemic makes a difference how banks managed the DPP process makes a difference and based on their extensive research with bank class branches recognized eight out of the very large group bike riding. The research is standing out on those variables that are important to class and we're thrilled to be.
One of [noise].
When you combine the longstanding relationship that we built providing long term client relationships with the fact the greatest just found there has been much I think though were the BPC process, which is already around the bank loyalty among businesses in their owners that of course provides a once in a generation opportunity for market share takers like us to.
Harvest a great deal of market share.
Last quarter manage it already found that three in 10 companies with annual revenues of between five and $500 million intend to switch bangs, bringing team.
30% market share is already up for grabs that's between two to three times a normal level and it's still early in the crisis. So even at this point in the crisis, we Blake things like our handling the deferrals in the PPP process or barnish in our reputation providing clients and it would be one of the primary based beneficiaries of the market share.
Movement that will inevitably occur and benefit as we come out other side you have it will stop there and a big lets say questions.
Thank you Mr. Turner the floor is now open for your questions if you'd like to ask the question at this time. Please press star one on your touched on telephone I know this will be given preference during the Q1 day again, we do ask why you pose your question that you pick up your handset to provide optimal sound quality.
Our first question comes with Stephen Scouten with Piper Sandler Your line is now open.
Good morning, guys like pro the detail good morning.
Thanks.
I'm curious on the guidance around BHP seemed like it.
It was intimated that three key revenue can be similar to Q, but then looking at the one slide. It also note that year over year earnings growth should be so I'm wondering if that implies.
Extremely large fourq you in hips, though is that driven by the securitization or or.
And altogether.
Yeah, I'd like Threeq, you will be similar to Q.
We're not sure about for Q.
Right now but.
And I'm trying to find that slide.
I think it was I think it slide 22, where it shows its BHP net earnings going up in 2020.
Yeah, I think that's a range of earnings between like 100 tend to.
Maybe going up above.
Okay got it.
Okay. Thanks.
And then kind of thinking about the NIM moving forward I mean, obviously, you noted that 32 basis points, a drag from liquidity and TPP loan, but I'm wondering where you think you know.
Whenever liquidity does normalize let's call. It sometime early 21 for argument sake, where do you think.
The NIM could normalize at that point.
That kind of back north of 3%.
Yeah, we think so we think that now the now will begin the.
Increase.
Back into the low threes.
Call It second quarter next year.
At the same type of the accretion from the BNC loans that we acquired a will be trailing off to pretty much a insignificant amount.
Great, Okay, and maybe just last thing for me obviously.
You guys noted that you will continue hiring you load them. Just wondering if you could give some color as to where you are in the paper the Atlanta plans relative to the 50 are in target longer term and then if you guys have never really been Bob.
Thank the puts on cutting expenses on that basis more about investing for future growth, but is there any likelihood in this environment, we could see some sort of expense submission.
[noise] the.
In the case, but Atlanta.
I would believe these numbers are roughly Greg I think we ended the first quarter with about $40 million in loan outstandings, the nearly $30 million in core deposits.
I would be that to be a successful and ahead of plan for what was back lit first quarter of operation. There. So we continue to be excited.
Both about the recruiting pipeline of associates as well as the recruitment of class. It looks like it's made their pipelines are solid for another good quarter here in the third quarter I think as it relates to the expense initiatives I think your assumptions basically right you know our approach on the expense initiatives.
I would characterize more about trying to drive the Anoro now.
But go that's how we bought the love the stuff we've got an FID in this it this time, where we need to be on big bands, but I don't think you ought to expect us to have real meaningful expense initiatives, where we're going in and are making structural changes to the business.
Great. That's very helpful. Thanks for the color.
Okay.
Thank you. Our next question comes from Jared Shaw with Wells Fargo Securities. Your line is now open.
Hi, good morning.
All right there.
It's sticking with the the margin it and I side, you know as you talk about the liquidity dry down you know that 1.4 should we assume sort about 1.4 billion to pull sale coming off a cop 400 million a quarter or is it does not quite that linear.
Well, it's definitely not linear Jerry but whereas we're anticipating about a call it 700 million.
Between now and they ended the year.
Oh, no granted that's about half of it between now and the next four quarters, but it's not it's not exactly on straight line.
Okay, Okay, and then on the.
On the floors that you're putting in.
Can you give a little more detail or I mean is that actually you know should we expect to see some some loan yield pickup on those are those floors site you sort of above where we are here or is that just on more protection for the future.
Yeah, we're optimistic that we will get loan floors or call it with a.
You know in the mid threes are on a lot more rate base credit. So we're hopeful to get some accretion and yield on those particular loans.
But we're also doing things with some borrowers to protect against negative rates. So theres theres some of that going on as well.
Okay, and then just finally three areas great color that Tim gave on on credit can you give an update on how the non graded credits are looking you know that small business.
Pool, what what are you doing two to reach out to those customers and how you're trying to evaluate those those pools of loans.
Yeah.
Thanks, a we did reach out to those clients.
Trying to find my exact note here I think we reached out and touch.
1379 of our small business loans.
And the results were very encouraging I mean, I realize it's preliminary but out of those 1379 small business loans in a response rate of 85%. We only identified 18 billion that we would call elevated risk so.
That continues to be an area of focus for us, but our survey results and this was done in mid June came back quite positive.
Great. Thank you very much.
Well I wonder.
[noise]. Thank you. Our next question comes on Kathryn Miller with KBW. Your line is now open.
Thanks, Good morning.
Good morning, good morning.
One more on credit just to dig into the deferral is a little bit that the reduction was really encouraging to see if they were also weighed it.
Dissect that to look at.
<unk> dollar number has asking for a second round of deferral.
And then maybe the dollar nothing you expect to come up for.
Come off deferral over the next call. It a couple of months just given kind of it the decline with great, but just kind of think about how much of that is just from its running off and how much is actually we're doing it.
Thank you.
Jennifer I would tell you I mean cap and I'm sorry.
You know that decline was as of yesterday.
We we all know we were doing deferrals in April.
Mid April late April early May and that window will come open soon.
In talking with our asset base, we believe the declines will continue to hard for me to give you a hard number but I think that they will continue to decline based on conversations that are in face of had with clients about deferrals that get that 90 day window.
You know early August mid August late August.
And what how does that they kill look look like what are you doing differently with the how modification.
We.
When we rolled out our program it was a 90 plus 90.
Catherine So we would talk to that client before the first 90 day period, and if we felt and credit qualified than we would extend that second 90 days.
Using that same initial document that was executed I will tell you with any of the new deferrals and we've had.
Just an inconsequential number since the first of genome they've just dropped off we are now asking for all the financial statements upfront before we make a decision. So we can great that credit right then on spot.
Great Okay great.
Then.
Oh I'm, taking the beach key it is there any color you can get on what gain on sale margin as John this quarter versus first the blasts or the self game.
Study or anything does pullback.
Well they were they were pretty steady for most of the quarter I think in June they pulled back about a half a percent or so.
But I don't think they're not anticipating to see any kind of.
No trend a lot lower than what they've experienced for the first call. It by most of the year.
Okay, great. Thank you.
Alright, great. Thank you.
Thanks, Jeff.
Thank you. Our next question comes on Brock Vandervliet TBS Carolinas now open.
Oh thanks.
Sticking with <unk>.
She I didn't get the loss rate slide the cover on at a loss rates start to cover on slide 21, just very helpful.
Where does that.
What are you thinking in terms of where that peaks and when I know that's probably the the hardest question, but what's your what's your read on where the peak.
Yes, I think it is a great question, you're right, it's an impossible to answer, but and I'm, assuming you're talking about.
The Orange line.
Well if again.
So.
They believe that is probably going to be in this 6% kind of range somewhere in that neighborhood.
It could be more could be less but.
Oh right now the way they grade the book every month.
So there there's still hanging in there a the obviously the deferral.
Results will be.
The very insightful on that but.
Currently.
They're not anticipating like a two X kind of got a number there thinking is more like a one another 50 basis points or I'm, sorry, no other call it 100 basis points to 150 basis points.
Okay.
On the securitization I mean, it looks like very bold timing here.
You would get better execution, if you'd weighted but on the same time very reassuring that you think you can get this done with BHP.
It is this going to be a kind of a niche financing vehicle or is this really a wave of the future now BH chief finances itself going forward longer term.
Yeah, I think they will use it.
You know it as part of their financing package.
Last year when they had the analyst day, I think they mentioned somewhere around wanting a 50 50 revenue split between gain on sale and interest income so it'll take a few years to get to that.
But they intend to approach the markets in a really active way up and I would guess that might be three times, a year, probably something like that so.
I want to.
They want to have a get some experience with it and use that.
As a kind of a permanent tool in their toolbox.
Okay.
Right.
Lastly on.
<unk> expenses, if I'm doing the math right I would think the 2020 expense base is around 550 Annualizing the Q4 19.
That kind of in.
Striking distance their Harold.
[noise] 2020.
Yeah 2020 total expenses I think the guide was based on mid single digit.
Increase Annualizing Q4 19.
And.
I mentioned on the call that that we may.
Include another incentive component.
So your number we ought to come in within that number even without additional incentive number so.
I'm not saying.
But you know get above 50.
Got it okay. Thanks very much.
Thank you. Our next question comes from Jennifer Demba with Suntrust. Your line is open.
Thank you very much good morning clear I Wonder if you could talk about.
Nashville, tourism and how that's going on.
At this time down there and what kind of impact that has on the total national economy, when it's where rents really good or.
Maybe I'm struggling [laughter].
Yeah I wouldn't.
Jennifer I would tell you just.
Anecdotally count if people has rebounded some you know I've see them on the streets in the evening when I leave, but it's nowhere what it was pretty Cobi I think the spike in cases.
And the drop in tourism has been.
Very noticeable in pronounced but I've been surprised Jennifer at the number of people that have return so I don't really have specific.
Percentages or dollars for you just more perception of working downtown it is often likely will remain so for a while.
From I'd add to that you know.
There's a lot of what drives tourism is music City center and they don't have any conventions and don't anticipate any into 2021.
So you know that's a pretty meaningful indicator I think in terms of downtown hotels. Many are open but there's still a few that are closed.
Or operating with a limited service and so for so you know where there's an impact I think the dams boy I'm not sure whether the describe it as fortunate or unfortunate but.
Moving down or more pedal dive earns a these days than I did over the last few months and so.
Dan Boeing I think some of the tourism is a rebound, but I'd classified in early stage of I wouldn't think we would even be the midpoint of the return on tourism in Nashville, you know, obviously that and then back I think if you look at the sort of the Reopenings Jennifer in Nashville.
Like every city in every state Theres sort of a phased reopening plan would maybe four stages reopening.
You know we were helped by that we'd be in the third value, but would really backed up into the second phase reopening because the grown by our get virus cases have spike or like a lot other.
Cities.
That are reopening in my belief is what we're saying there's side, but I understand in other markets, where it is concentrated in young people too.
Or perhaps more fearless, then 65 year olds, but.
City, right, but I don't if that's helpful. The but.
That is have you heard any and it does on corporate relocation pipelines for Nash or.
Where do you think that come to a bit of a halt here what the crisis.
Oh my sense is the.
Corporate relocation pipeline is still full.
I don't recall any major announcement of late but I do believe that you know Amazon announced in addition to their off with the opening of their jobs that they will bring in there and another.
I don't know Imeight thousand job, but it was a big deal.
You know there's a.
There's one.
Theres a recent announcement.
Hendersonville do you remember what the war.
No I can't remember, but Jennifer it seems like maybe that the development pipeline continues to be strong.
Thanks, so much.
Alright.
Thank you and our next question comes to Steven Alexopoulos with JP Morgan. Your line is now open.
Hey, good morning, everybody. That's doing morning first regarding the additional potential incentive this year, maybe just set up a stronger 2021 can you give more color this and maybe what options you're looking at.
Yeah, Yeah, I think we're looking at probably a corporate PPNR measurement.
Or maybe trying to understand what we think 2021 looks like if we can get.
You know a novel metal on loan growth.
I continue to see a strong deposit inflows, what our fee business or Doug what what can we think will happen in 2021, and what do we need to do today to ramp into it.
So it'll be along those kind of thought processes, Steve I don't know, if that's helpful or not but we'll probably.
Likely exclude credit from it.
Because it's difficult to incent people around credit.
Particularly in this week, we definitely want to be you know early in at early out. So we want to get our loss content recognized as soon as possible and when you marry that up with some kind of incentive plan and become sometimes a little a difficult.
David I might add the arrows gum and so many of the key actions to be successful I think for us on the PV, an hour or really dropped in the Gulf funds lower faster.
And picking up right floors at a higher penetration those guys I actions are the things that we're trying to stimulate if.
And what's the timing so you think something like this could be rolled out.
So we think probably over the next couple of months, you know, where we talk to our board about it I think we received.
Favorable responses from them, but I think they understand the concept and the benefit that it could drop for shareholders.
So I think I think probably over the next couple much okay.
That's helpful and then on credit.
It was actually the classified loans come down in the quarter. What was the trend you saw in criticized and watch list.
Twoq.
That we on criticized we moved the bulk of the hotel book into the criticized category that was about $750 million. So obviously the percentage of our loans for criticized this quarter have going up significantly.
We did have some NRC an eye book in some in the crean retail, but it was largely driven by our recognition of the distress of the hospitality sector.
Okay.
That's helpful. And then finally for Terry you mentioned, there's a good opportunity to take customers and it depends how peers handle deferrals PPP et cetera curious what are you seeing.
From regional bank peers are they struggling to to offer PPP and these different programs.
Maybe if they are why is the technology or work from home or something else. Thanks.
I think.
What.
I guess.
Stephen I I'd go at it just in terms, our personal experience and then I'll go back to the Grand internally I think in terms our personal experience.
Most of the big shouldn't say most the number the big banks with them. We compete they were not able to get there.
System up early it took them you know they were late days to get big big be system up to even except applications. A they were very slow, which course, everybody was slow, but I think their ability to communicate with glass and keep them up speed on where they were brought that and all those guys.
Things was really deficient.
So that was the experience that we we saw and then you know to something maybe a little more reliable and just my own observation. There I think it gates grant. It's nice thing that there is significant I just throughout the system those that are tied the boat.
Deferrals and PPP, where.
Yeah. So my job is how you deal with the glad. This example, I think about what we're doing to go out here and gather all this information conduct the surveys if you go out there with a heavy handed approach like a lot of those the company's or from the do you might achieve the same result, but we're out there trying to.
Do it in a way that inspires confidence and make sure that I understand that this reviews helpful to them and does not only that help us understand the risk, but it puts us in a position to better take care of them. You know if we're in a position to document what their path forward is.
Is the economy reopens itself or so anyway anecdotally, we certainly saw it and.
And it was tied as to some measure to their ability to get their systems up and it was died and some measure to just have a interface with clients and or inability to top class and tell them, where they weren't process and so forth.
Okay. Thanks for all the color thanks for taking my questions Yep.
Thank you. Our next question comes up Brian Martin with Janney Montgomery. Your line is now open Hey, good morning, guys.
Hey whatsoever.
It just one question back to the deferrals, maybe for Tim just.
With the progress you guys. It made already I guess, Tim what do you anticipate the deferrals and you know I guess October December kind of as you get through working through more of these and do more of the risk rating I guess is it a significantly lower level than more wrap today is that and then maybe who might be looking at the most at the.
Request for a second deferrals.
The second deferrals have been hospitality and nice I see us doing a lot of rate grading.
Restructuring of the hospitality loans will probably a we got to play book written out for that so that everybody knows what we're doing but I would see us restructuring many many of the hospitality loans in the third quarter.
You know asking the client for help with ER.
Perhaps collateral guarantees for cash.
And now under the cares 40, thirteenx well restructured the alone and try embrace that until the property stabilizes in 2021.
Mhm.
Okay, and how about I guess that's helpful. Thank you and then just maybe one for a Harold just on expenses are Terry just the recruiting you guys. The scale back. This year I guess do you anticipate that getting back to kind of a normal level as you look to next year.
Oh, it's hard hard to know a Brian I don't made the hey, Joe and the question but.
I guess you'd have to tell me, where we go beyond bags thing, where we go bail reopening the economy all those kinds of things before I could give you an answer the question I think we believe that.
Bob then send me an active which as you know me, we're still talking to.
Prospects and so forth that you know, we'll be able to turn that switch pretty quickly.
But.
You know, it's more about fine at a more certain voting and when we do then we'll be ready to go.
Yeah, Okay, Alright, and then just last one I think you guys gave some color detail I on the PPP forgiveness, but justine the percentage of loan you guys would expect to be get beat for given today and just kind of I guess, what what are you anticipating the fourth quarter on that and that component.
Yeah, marotta somewhere around 25%.
Gets forget in fourth quarter, and then total Harold I guess your expectation is what percent of the of it gets forgiving.
Oh as far the whole thing over the next yeah, I think we have about 10% that goes out the full two years.
Okay. So 92, okay. That's all I had guys. Thanks, so much.
Alright.
Thank you and I last question couple Jared Shaw with Wells Fargo Securities. Your line is now open.
Hey, Thanks for taking the follow just just following up on the the hotel deferrals. So.
Yeah should we assume then up by the end of the year any of that the more trouble portfolio or troubled properties have been restructured and ultimately come off of deferral or should we assume that some of those more troubled ones could be a deferral for much longer period of time. That's you know allowed under the Carrots Act.
Well, we will do in the third and it might some of that might spill into early fourth quarter is modify the low not a deferral a week.
We'll be looking at collateral guarantee so forth ER and asking their cooperation maybe they're putting up cash for a part of the deferral.
And with that modification or under the cares Act 40, 13, we don't have to flag. It is a TDR. So our goal will be to get all of the hotel loans that are showing signs of recovery modified.
You know it may be a modification that extends an interest only period into 2021, and then resumed amortization you know mid to late or 2021, but won't be working that with each bar one one by one based upon how their properties recovering.
Okay. So they actually so its current I'd ended the year, just maybe current under a new structure as opposed to deferring under the old structure.
Correct, we will modify the long before year end with a new repayment term.
Great. Thank you.
Thank you and I'm showing no further questions in the queue at this time, ladies and gentlemen, Thank you for your participation on today's conference. This does concludes your program and you may now disconnect.
[music].