Q3 2020 Pinnacle Financial Partners Inc Earnings Call
[music].
Hosting the call today from Pinnacle financial partners is Mr., Terry Turner, Chief Executive Officer, and Mr., Harold Carpenter, Chief Financial Officer. Please.
Please note pinnacles earnings release, and this morning's presentation are available on the Investor Relations page and her website at Www Dot Pan S.P. Dot com todays.
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<unk> annual report on form 10-K for the year ended December 31st 2019, and it sets subsequently filed quarterly reports.
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Presentation of the most directly comparable GAAP financial measures a reconciliation of the non-GAAP measures to the comparable GAAP measures will be available on pinnacle Financial's website at www Dot P.N.S.D. dot com, but that I will now turn the presentation over to Mr., Terry Turner, Pinnacle's, President and CEO.
[noise], Thank you operator and George.
Joining us let's get started.
It's Darren here I think the third quarter was an outstanding quarter drug cases, like asset quality core deposit growth they grow very big and that revenue growth tangible book value creation were all very strong during the quarter.
Well again every quarterly call with this dashboard, reflecting our GAAP measures, but honestly there are so many adjustments required in order to focus on the variables that we're currently managing to hear it benefits that are going to move quickly to the job of like in the adjusted non-GAAP measure.
As you can see here total revenues only the loonie the acid adjusted PPNR all that may weigh on linked quarter basis revenues are up roughly 7% year over year and time when many of them for days and banks cannot earn 21 with Aaron denied claim we're proud that fully loaded atheists is already back to doing it.
Only thing level for the third quarter of 2020, and most importantly, they paid me an already become our primary focus during this pandemic and for the remainder 2020 adjusted they'd be an hour is up nearly 7% over the same quarter last year and roughly 23% on a linked quarter annualized base.
His long drove 60.2% year over year for the third quarter they were flattish ever.
Average loans were up a big deal be long, we're down to take on a linked quarter basis.
In our view that in greater detail shortly to talk about our expectation going forward, but generally.
We continue to believe we'll produce the loan growth primarily based on our ability to take market share do our prolific hiring we have 73 relationship manager managers with 10 years less than two years, that's 22% of our am and that represents.
Enormous market share movement.
Core deposits continue that so right at a rapid pace during the quarter of course, the year over year growth of 3.4 million includes roughly one and a half million from our PPP borrower, but majority of that growth is not that they see and I'm more likely as a function of a they increased liquidity among our business was.
And the.
Low cost deposit initiatives that we have put in place. This year, what I think it's been a really challenging year here. We continue to have a track record for consistently grow and tangible book value of nearly 13% year over year for paying a higher percent on linked quarter end.
ER basis.
Across the bottom row, you can see that asset quality held up really well in the third quarter will then be I'm, just 40 basis point classified ads is actually down this quarter to the lowest level in the last five years and annualized net charge off just 23 basis points in the quarter.
I'm going to turn it over to Harold and Tim to review the resolved in much greater detail.
And go through the details I find that there is a lot to be encouraged by regarding our net interest margin fundamentals, particularly the trajectory of our cost of deposits fee income.
The income was an all time high this quarter, we've talked for sometime about bad Daddys differentiated model and that is in fact, probably going to be extraordinarily resilient producing record loan originations at an average interest rate to the borrower, 14.4% record loan sale correspondent banks with.
Record low in the cycle of 4.9% average interest rate, which bikes are buying that paper.
None and I have said spread demonstrate both the value that borrower flights on the convenience Big G offers and the demand Big G correspondent Bank network has or that type of a they also had a highly rated securitization their loans during the quarter further validating the quality of the product and their origination and have about 12%.
I think just three loans three loans are owner borough. So asset quality is holding up very well. We've said for some time that our expectation was a big deal and prove out the differentiated nature of their model during this cycle.
Seems to me that they're doing that in Spain. So Aaron will review that in some detail and you know weve I'm talking about our transition to a deep and very good you're allocating a meaningful part of our human capital to review in our loan book borrower by borrower that.
That work was completed in the in the third quarter and so tim's going to update you on all that work.
Give me inside what we're seeing in learning, but my.
But my expectation is that it is likely the grid optimism. Despite the fact they are still unknown is relative to the timing of the banks. They decide in nature of the stimulus package and the full reopening of the economy. So Errol let me turn it over to you.
Thanks, Terry good.
Good morning, everybody I'm going to get through these next few slides quickly many of them. We've shown for quite some time at third quarter results are basically consistent with what we anticipated for last time. So I don't believe there are any shocking revelations.
As anticipated loan growth for the third quarter was essentially flat.
Andro dropped again, 49% at quarter end, which is the lowest that I can ever remember one positive note with that but during the quarter new loan bookings increased consistently each month after bottoming in July were.
We're not going to declare that a trend just yet but it is a positive signal our annual loan growth forecast, excluding DPP remains in the low to mid single digits and I'll cover both loan yields and PPP and just a second.
Now the deposits we had another big deposit quarter, we lower rights, we get more deposits, we have experienced significant growth in non interest bearing deposits ending at 7.1 billion at quarter end up 47% since year end.
The number of checking accounts is up almost 9% since year end. So if I could do a court will I be doing one right now.
We're estimating that the PPD program provided about 1.5 billion of our deposit growth year to date, that's a rough.
That's a rough estimate because it's basically impossible to determine a precise number that number is simply the net growth and TPP borrowers deposits between March 31, and September 30 last.
Last quarter, we mentioned that we expected those funds to evaporate over the next few quarters.
My thoughts now that we could be holding all of that money for an extended period of time.
More on deposit rates and just a second.
Next is our usual update to our loan pricing given the circumstances. This is absolutely great news, obviously year over year loan yields are significantly impacted by yield curve adjustments, particularly loud or whatever the tables at the bottom of the slide show our relationship managers hail loan pricing in the third quarter, we don't talk about properties credit much but weighted average loan.
It has not changed the basis point in six months.
Keep in mind the chart excludes PPP money. So this is blocking and tackling kind of transactions with our client won't.
Well bores, absolutely, we're helping if we can keep that going our rail game plan for 2021, we'll get a shot in the arm.
I'm not going to spend a great deal of time discussing deposit pricing. This is obviously not a new chart nobody is asking about deposit betas anymore. Because we're so close to the bottom there's only so much more deposit money, yes, we.
We continue to target a range of less than 25 to 30 basis points for our deposit cost by year end.
Our relationship managers have their client list and are working with them aimed at the partners who have outsized deposit pricing.
We have approximately 1.65 billion at wholesale funding maturities over the next few quarters that will likely allow to roll off without renewing those alleviating some of the liquidity build and some of the pressure on our net interest margin.
Bringing this information forward from last quarter. The top left chart on investment Securities as new we've been at an absolute level of investment securities of 13% to 14% of assets for a while now.
Not looking to change that.
We're starting to get a few questions about deploying excess liquidity into bonds, it's really hard to get excited about any incremental leverage strategy at this point.
There's just a ton of uncertainty right now and the best at the long into the curve is going to stay where it is for the next several years, we believe curious too much interest rate risk right now.
There are obviously products out there that we can we can where we can get a few basis points, but for the next year or so but credit risk begins to interpret conversation. We've always taken the position that credit risk is reserved for the loan portfolio. So.
So we need to reduce our wholesale funding book over the next several quarters because and this is not rocket science eventually and hopefully the PPP monies go turn into cash.
So this liquidity issue and not a two to three quarter issue is likely to be a one to two year issue.
Along those lines, we're showing that we're a 34 billion dollar bank at September 30.
I'd say and I believe we are more like about 29 to 30 billion dollar bank because we've got about two and a half a billion of TPP money as well have a little more a little more in excess liquidity. So that's about four to 5 billion dollar weighed on profitability measurements like any other Norway.
I said at least the PPD program is properly profitable our proposal liquidity Bill is not.
In adults in the us around $1 million to $2 million per quarter, we will share the liquidity at some point.
Slower than we'd like but that said, we don't have a vaccine yet either so the additional insurance is still there out of an abundance of caution.
We believe the boat PPP at our excess liquidity negatively impacted our third quarter NIM.
Got 40 basis points.
There's a slide in the supplemental information that shows how we calculated that number.
Now here's some good news and all that out we believe our NIM after PPP liquidity of approximately 3.22%. This compares to a similar calculation last quarter of 3.19.
No that's only three basis points of learning as an improvement, but that three basis points about $9 million and net interest income over the next 12 months.
No Dan call I'll be really brief.
These were more than $91 million for the quarter, an all time record.
Everyone knows the 2020 of a power up kind of year for mortgage it's unbelievable.
I'll talk about B as you in a few minutes, but BSG as they say is killing it.
As anticipated wealth management rebounded based on biographies for investment services, where fee revenues are received in the year arrears.
And are based on market performance.
So now to expenses.
Personnel costs as we stated in the press release increased due to incentive accruals.
As we discussed on this call last quarter, our board did modify our annual cash plans such that we are providing an increased opportunity to our associates. So that we can earn up to 50% of their annual award with this modification.
Has the board not elected to do so our incentive accrual would have been around 25% of our associates target Award.
We believe this will keep our associate base hollinger job and motivated to ramp up the operating performance of the firm going into next year.
This additional incentive opportunities based on hitting a PPNR growth rate over 2019 exclusive of PPP, the liquidity build and BSG.
This is our attempt to quantify the blocking and tackling of what our associates do every day without the distracts distractions of TPP liquidity RPX GE also given us PPNR pandemics impact on our credit book is excluded so our credit officers can work with these borrowers that might have been impacted barcode and such.
The credit officers can do what I believe is best for the bank without impacting the goals of this incremental incentive opportunity, which is the motivate these 2500 people to ramp into 2020 more.
Briefly concerning sleep will eventually the slot will lose its prominence and be permanently relocated to the supplemental part of the slide there are.
Our reserve without PPP loans increased only two basis points to 1.43%. We also increased our off balance sheet reserve slight.
As the slide knows our unemployment forecast improved slightly this quarter. So that was flat as loan growth contributed to the modest reserve build.
The PPD program is back in the news not going to go through the entire slide, but weve split out the smaller loan balances in the top right.
We're unsure as to how the SDK will manage the simplified approval process or the timing for reimbursement, but suffice to say they carved out the smaller loans to make it easier to get repaid.
We won't characterize the rigor of the figure of this process is similar to the initial funding process, but we are not optimistic.
The larger loans or.
Our lot will likely it will likely be a choppier process at least that's what we think for now.
So were expecting some net interest income lift in the fourth quarter due to the PPP forgiveness.
But expect first quarter 0.2, <unk> first quarter 2021, we'll see greater lift.
This is a new slide on the scuffle as I've discussed on the expense line regarding incentive this serves as a foundation for what we're trying to do as we ramp into 2021 with increased momentum.
It was a great quarter for us as PPNR per share increased about $2 for the quarter to $2 an eight cents per share. Our goal is to try to ramp in the 20.1 with a high mid to high single digit PPNR per share growth, which we believe will compare very favorably to peers.
Adding our PPNR growth this year as reduced incentives so increasing our expense load for 2021 with target payout will be a big headwind for 2021. So.
So for 2021, we are discussing how best to manage that as we close in on our targets for next year.
A lot to do with that is where we see the pandemic evolving over the next few months.
Not going to go through this slide in depth, obviously, we have some idea about credit costs for the fourth quarter, but we continue to withhold.
But suffice it to say we are optimistic about our shorter term prospects and wants Cobiz is over we love our longer term prospects.
Now briefly about tangible equity.
These are high quality assets that will there are high quality excess assets that will eventually exit our balance sheet. We believe we will manage back into the high and low ninetys by year end or in the first quarter of next year.
Quickly some comments on capital we are hearing some banks are getting back into the back into or initiating buyback program.
That's obviously on our agenda as well.
Likely not a focus for us for the next couple of quarters, we intend to seek reauthorization of our buyback program soon and then evaluate whether we should restart the program.
Well, we are a part of that works on many things we're focused on growing earnings per share in an outsized way, but we are also intentional about growing tangible book value per share.
We've accomplished a lot of things since year end 2016, our balance sheet was 11.2 billion in assets at 2016 year end.
One thing we are proud of is that since that time, we have increased our tangible book value per share by 72%.
We're second totaling one other farm in our peer group during that same time period. The 70, Fiveth percentile the peer groups at 37% roughly half of our growth rate.
To say I'm pleased with how this quarter ended up is understood.
Yes, the executional various taxes tactics I think it was one of the best quarter. We've had is deferred.
It's difficult to relay the significant effort that our colleagues are putting forth everyday working with clubs and solving their problems through this pandemic.
It truly is remarkable.
We all know it's a difficult operating environment loan growth is sluggish at best and the yield curve is no brand of any bank plus as the yield curve that we believe will have to do that we will have to live through for an extended period of time.
Politics are also very distracting intend to Rob us of our optimism.
However, the bright spots for pinnacle cannot be over emphasized this time deposits continue to trust us and borrowers are figuring out how to manage their businesses through the SAR discipline has never been more important we don't.
We don't know how the pandemic will play out over the next few quarters, but we do like our franchise and where we do business and with whom we do business. We believe migration patterns are favoring more people and commercial businesses moving into Tennessee, the Carolinas and Georgia.
We like our competitive prospects, we are as Terry will discuss shortly we are a force in Tennessee as well as in several markets and the Carolinas deposit share data would indicate that we are getting there in Charlotte Raleigh, Charleston, and believe me, we will score in Atlanta.
Now the BHP.
We've shown a similar slide before it is intended to give you a snapshot at BSG business flows over time and more importantly, how theyre holding up during the pandemic blue bars on the chart originations and have ramped up with more loans being funded so business flows remained strong the green bar represents loans on which gang wholesale has been recorded as these loans were sold to downstream banks.
This is the traditional BHP model with gain on sale revenues being generated as you can see both bars are at record levels in the third quarter.
Coupon that fluctuated over the last three years, but there's no discernible trend up or down it seems like a mid 14% is the ticket as.
As to buy buy rates.
They fell to below 5% in the third quarter lowest I can recall since we became involved with bankers healthcare group.
One thing we have not emphasize enough in the small chart at the bottom right over a thousand banks are now in BSG is network and almost 600 acquired DHS loans this year.
That seems to be one of the strongest funding platforms for gain on sale model on the planet.
There are firms out there trying to replicate this but they got to get real busy real fast about the funding platform like BSG is taking 20 years, but it belongs to the HKG they own it they developed and lake capital level. So from 30000 feet business flows remain incredibly healthy loan originations remain strong loan sales right.
Record levels.
And the funding platform is ready to take the agency's inventory.
The top left chart Weve shown several occasion the quality of these borrowers has improved steadily over the last few years, but particularly in 2020.
Continue to refine our scorecard to increase the quality of the borrowing base. The right chart again is the most for powerful chart I think I can offer related to BSG is improving credit quality looking at losses by vintage losses continue to level out earlier months since origination that point toward a lower loss percentage over the life of the underlying loans pandemic real.
Vince will likely call. These lives to move up but the quality of the borrowing base in our opinion is very impressive.
As Terry mentioned concerning the firms as of June 30 last quarter total deferrals represented about 15% of the total book.
Dennis led the group with a 35% deferral rate.
Yes, you communicated with these borrowers frequently and work to decrease the numbers meaningfully in the third quarters as deferrals are essentially nodding nonexistent at the end of the third quarter now.
95% of the deferred loans are current and pain.
Oh, the 5% that arent currently about.
About 25% of those are all payment plan and paying as agreed the remaining 75% or 3% to 4% of the deferral base is in early stage delinquencies. So losses from these could materialize over the next two to three months, but that.
But that said this has been crazy good.
We've updated charge offs and reserve builds these are for.
These are prolonged abuse you sold to their network of community banks. The Green bar shows that currently they've got more than 3.4 billion in credit with banks have acquired there alone. The art last show the annual loss rate, while the blew out on the chart detailed the recourse accrual as a percentage out starting wells with these other banks for the nine months of 2020 losses are running at four point.
2% basically consistent with the last few years.
Lastly, we said that last quarter, we'll see it again, that's been a big year for BSG, and we anticipate big things for the fourth quarter during the third quarter. The credit markets improved allowed the HD the opportunity to execute execute on their first securitization.
Appreciate that so your securitization went out and investment grade ratings. This allows BSG to continue to diversify its revenue stream away from getting wholesale with more interest income as well as provide another very competitive pricing priced funding source. So.
So wrapping up loan pricing is holding.
Deposit growth is remarkable deposit deposit pricing is headed down.
BSG is make that another great year and credit credit is very much man, so with that I'll turn it over time to talk about credit.
Thank you Carol good morning, everyone.
From a traditional credit metrics in the past is net charge offs npls and classified assets Pinnacle's loan portfolio continues to hold up well that said, we understand we may not yet have experienced covance full impact on our loan portfolio before.
Before I discuss our credit slides first a few comments about our defensive credit work completed during prior quarters during this.
During the second quarter, we rebranded all loans greater than a million that had a payment deferral.
We also re grading all from Tailwinds in all cream retail loans greater than a million regardless of the deferral stance.
During the third quarter, our focus broadened to include the remaining sections Mark portfolio that we did not run rate during the second quarter.
This extensive underwriting effort included our pass grade loans with exposures greater than 2 million.
The only risk rates, we did not react right, where our top two grades for our very best loans generally loan secured by cash and marketable securities.
For our watch list criticized classified loans are reviewed ratio was much lower and just 500000 or.
Re grading exercise was a tremendous amount of work for our lenders and credit staff, but we believe the benefit of quickly identifying any credits materially impacted my CFO that will help us in the long run.
During the third quarter, we reviewed about 2500 loans totaling approximately 10 billion and exposure.
Our work during the third quarter consisted of collecting current borrower monthly financial statements.
Conducting a survey questionnaire remarks, cnine clients collecting data points in our creed loans.
The results of our third quarter credit work is encouraging and.
And the completion of re grading work the newly identified classified loans in the quarter was only $33.6 million.
But even more positive is that the net change in classified loans for the third quarter was a decrease of 27 million.
Our criticized assets at a very modest increase from the second quarter to third quarter of 70 million.
A few comments about our hotel book Youre.
You will recall during the second quarter, we moved approximately 78% of our hotel balances into a criticized risk rain.
On a very positive note since the second quarter many of our hotel borrowers have reported improving occupancy levels.
Similar to the second quarter, we conducted a Fourq question survey of Cnine clients in mid September.
The survey population was 262 clients with total loan balances of 852 million. This.
This time, we see nice survey was targeted to our lowest has great credits in a variety of segments like entertainment restaurants physicians three.
Three of our questions, we're asking the borrowers estimate of revenue for third and fourth quarter 2020 in first quarter 2021 compared to the same period in the prior year before.
The fourth question was regarding months of liquidity on hand to cover operating expenses. The results were 68% said third quarter revenue would be between 75% to 100% of third quarter of 2019.
74% said fourth quarter 2020 revenue would be between 75 and 100% of fourth quarter 2019.
76% said first quarter 2021 revenues will be between 75% to 100% of first quarter 2021, and finally, 62% reported having seven more seven months or greater liquidity to cover operating expenses.
Pinnacle continues its approach of a well balanced and granular loan portfolio given the extent in coverage of pinnacle's defensive work during the second and third quarters. We believe we have identified those borrowers that's been extensively impacted by coated.
Race grade migration during the third quarter was modest.
Due to the efforts of our early problem identification and a very strong special assets team chemicals classified assets decreased during the third quarter NP eight increased just three basis points from the second quarter and net charge offs increased modestly from 10 to 23 basis points.
In March Pinnacle began proactively reaching out to clients with loan payment deferrals. We believe many of our clients accepted the offer of a payment deferral in March and April simply because the impact of code was unknown to them.
The table on this page illustrates that our loans with a payment deferral has dramatically decreased from 18.7% of loans as of June 30 to just 3.1 by end of third quarter by mid October our deferrals had decreased further to just 1.8% until the ones.
A few comments about our 40 13 loan modification.
By September 30, we had executed on just a handful of 40 13 loan modifications totaling approximately 49 million.
Our 40 13 loan modifications are not a one size fits all modifications are tailored to fit the circumstances at the London the borrower.
Illustration purposes, I'll offer a couple of examples of modification discussions with hotel clients.
My first example, we met with the borrower and agreed to an interest only period to June 32021 conditioned upon the establishment of an escrow reserve of nine months of interest payments with Pinnacle. We also.
We also implemented a lot more floor of 75 basis points. This was a good solution for us though.
The second example was a long term client with several hotel loans that had a deferral of principal plus interest.
The bar were requested a longer interest only period. We were applied we are open to a modification provided we institute a interest rate floor.
The customer declined our offer due to the rate floor paid all deferred interest and agreed to resume regular PNR payments.
Thoughtful negotiation resulted in avoiding 40 13 loan modification Nash.
Actually there are many more variations in these two examples but our intent with modifications is to help the client bridge to the other side of Kobin.
But also explore ways to improve the bank's position.
[noise] Pinnacle's approached hospitality sector has always been a disciplined conservative approach a banking hotel sponsors who are well capitalized and have a long successful track record of operation.
You attribute scale this greater conservative hotel underwriting wait.
Weighted average LTV of just 55% weight.
Weighted average 2019 debt service coverage was 2.1 for stabilized properties.
91% have personal guarantees all.
All of our hotels are open for business.
Prior to code that we only had one nonperforming SP a hotel on the guest Threemillion that we discussed last quarter during the third quarter. We move just three hotel loans into a classified risk rating the collected balance on these three newly identified hotel loans.
Just $5.3 million that can.
The combined LTV for the three is just 40%.
Business Center Resort High end airport properties are under the Grace managed stress our exposure in these categories is limited to a few in the business center in our airport categories.
This page contains data for our hotel loans.
Approximately 74% of our hotel loans are in the extended stay economy and limited service sectors. Many of these types of hotels can cover operating expense and interest expense with occupancy in the 45% to 55% range.
As illustrated by the three graphs on this page are limited service full service and extended stay borrowers have reported improving trends in occupancy since the low point recorded in April.
This slide provides details of our loans in the restaurant sector groups together exposures to real estate developers, who leads to restaurants as well as loans directly to restaurant operators.
Our restaurant exposure is just 3% of our loan book.
And it goes very successful PDP program provided $179 million in cushion to our clients loan.
Lung deferrals to our restaurant clients have decreased from 21% of the portfolio at second quarter to a modest 3.6%.
Of our 20 largest non owner occupied CRE loan leased restaurants, none have a payment deferral.
Our quick service segment is made up of names like Taco Bell Sonic Wendy's and KFC.
This slide provides into our insight into our retail portfolio consist of both retail store operators in commercial real estate loans lead to retail operators.
Loans with deferrals have decreased from 18% at second quarter to only half of 1%.
Andacollo successful PDP program provided $189 million of cushion to our clients.
Approximately 23% of our Creed term loans are single tenant properties with tenants like tractor supply dollar General O'reilly auto parts 711 in Walgreens.
And local bank has always maintained a very limited appetite for power retail centers, we only have six our retail centers in our entire portfolio. The primary tenants for these properties are names like Walmart Harris, Peter hobby lobby and Dick's sporting goods.
For our Creed retail construction book, 65% are built to suit single tenant names like tractor supply dollar general and 711.
Our retail strip center construction loans have an average loan size from approximately $44 million and have 75% of the space pre lease.
This slide will provide some insight into the composition of our Cnine retail book and the owner occupied real estate secured retail book So.
Similar to our cream retail book it is very granular.
This slide provides some insight into our entertainment portfolio.
Nichols' Entertainment portfolio was approximately 3% of total loans over.
Over 50% of our entertainment exposure is in the music publishing space to finance the acquisition of song catalogs. Each cataloguing 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 using screening fees paid from firms like spot of fine Apple Amazon and terrestrial radio.
Hi, Nicole is very successful PBP program provided $54 million is pushing to our clients.
Summarizing the present status of our loan portfolio was that of tempered optimism given panic.
Pinnacle's comprehensive loan review and re grading during the second and third quarter.
Net charge offs continue to remain in an acceptable range.
Our level of classified assets is stable.
Loan deferrals had declined to just 1.8% by mid October.
On September 30, and loan delinquencies was just 11 basis points while.
Well, we take a measure of comfort in these metrics, we acknowledge that the duration of co bid and no second fiscal stimulus package could alter these metrics in the coming quarters.
Errol now back to you.
Okay, Tim I'll take it from there as part of our Q1 earnings call I'll talk to you about moving our farm from an offensive to a defensive posture that include things like building a huge liquidity position on our balance sheet, adding a quarter of a billion dollars in tier one capital nearly tripling our.
Loan loss allowance since year end and scarring, our loan book aggressively gathered financial information from borrowers to ascertain risk and respond appropriately.
It also included things like deemphasizing, our continuous improvement in revenue producers never mind that the previous momentum in our recruitment pipelines resulted in bringing on 56 revenue producer here today. So.
So all that defensive work has been completed and I'm not telling you that theres no part of the need to be defensive but I.
But I am telling you that the human resources that we utilize those deep sense of efforts.
That grew in borrower by borrower assessment as an example.
We now take that resource and use it on more offensive sorts of initiatives. So as we move forward number one of course is that we'll continue to be in active dialogue with our existing borrowers to aggressively respond to changing risk profiles number two herald.
As already discussed the upcoming maturities and our wholesale deposit book that will facilitate the unwinding of.
Our excess liquidity is the pandemic sunset subside.
Thirdly during the course of this year, we have specifically long before broad initiatives intended to accelerate our PPNR. They include one.
Proactively and aggressively lowering the cost of our existing deposit book, we intend to drive in below 25 basis points by year end.
So the gathering additional low cost deposits, we have built and launched a number of deposit products with enormous potential destruction to alter our deposit mix over time.
These include value added products like HIV assays tighter to count for property managers space.
Specialized expertise in captive insurance accounts as well as expertise ran in large nonprofits number three obtaining floors on loans as you heard from Merrill we've made great progress and.
That area really obtained in Florida on roughly 98% of.
New and renewed loans, and then number four folks and all the tremendous share wallet opportunities that we have to provide additional financial services to our existing clients that are currently purchasing from someone else.
Currently have making traction on all four of the switch should produce significant growth in PPNR, our ABS for some time to come and finally, because all of that heavy lift and that's behind US, We're now and Tim Im season, what we expect to be a once in a generation market share movement.
Specifically Greenwich research indicates nearly a third of mid market businesses intend to switch not they're frustrated that they intend to switch.
No that primarily to the responsiveness or lack of responsiveness and our larger competitors, which just reinforces the power of our client friendly approach to deferrals and our nimbleness own PPP and so it's our intent to aggressively pursue this opportunity.
Got it both of you know our strategic approach as a challenger brand were purposeful about creating a work environment that excite our associates blayne in that if were successful layer that will create and engaging experience for our clients and of course, if we're successful. There. The end result is the shareholders are in rig so let me start with eggs.
Siding.
Not really exciting our associates just in the last 12 months.
We've been recognized by American Bankers 13, Best Bank in America to work for that includes a lot of small privately held banks and the category the bank's greater than 10 billion in assets. We are the single Best Bank in America to work for according to the Great place to work Institute and Fortune magazine, we are the fourth best financial services firm and.
American to work more behind some Giants like American Express.
Same group would have us as the fourth best place to work for women, that's a powerful spot for us to be where the fourth best place for millennials in the country to work, where the 12 best place for parents were winning best place to work towards in Memphis, Chattanooga, Nocs, All the tried and North Carolina Rone.
Virginia, Charlotte and the state of South Carolina and so.
And so the charge that you're looking at here demonstrate that we have in fact benign will translate that excitement among our associates a truly differentiated client experience. These are the major Tennessee, and North Carolina markets. The data for businesses with sales from one to 500 million.
Further to the right you are the better your client experiences and the higher on the chart. You are the more market share you have so let's start with the top left with Nashville, where we Denovo 20 years ago next week.
As you can see our client satisfaction is the farther to the right, indicating a differentiated experience and our market share is the hottest indicating that experience has resulted in a number one share position. We're about replicating that phenomenon in every major market, we serve and as you can see we want access.
And our client satisfaction among major competitors is the best in the market and so it seems obvious to me that we are in the best position to grow share of all the major competitors in our market.
As further evidence that our distinctive service model yield market share.
Pickup you're looking at the recently leased deposit share data from FDIC for each market do you have a listing of the top banks showing their market share I think their year over year growth right and how that growth rate ranks in the market.
So again you started the top left with Nashville, we're in a number one share position and we're.
And we're still the second fastest growing bank in that market I'd like a lot of people have been concerned the law of large numbers would get us to that you can see even in a number one share position. The flywheel is spent in pretty rapidly you scoot across the page in Knoxville, We didn't know there in 2007 with climbed into the number for shareholders.
Nation, and we're the fastest growing bank in that market in China.
In Chattanooga, we bought Capitalmark Bank and trust.
Which was a de novo from the 2008 time period.
He bought it in 2015 with MATLAB into the number four share position, there and the fastest growing bank in that market.
In Memphis, we bought Magna bank that was a de novo in year 2000 or so.
Weve substantially moved up in the market share chart, we moved up to more slots. This year up to the six position where the fastest growing bank in that bar market looking at Charlotte North Carolina, We've moved up three slots there into the seventh position, where the second fastest growing bank in that market.
In Greensboro, we're in that number for share position Raleigh, where in the 13th position, but we're the second fastest growing bank in that market that is a fabulous market opportunities that we're working hard to see Charleston, South Carolina, where an eight position, but the third fastest growing Roanoke, Virginia, where in the third market share position.
And the fastest growing bank in that market. So it seems evident to me first of all that there is a once in a generation market share opportunity come in and secondly, where are the same yearly best positioned to be a winner with record results and outsized earnings growth overtime, and perhaps further substantiation of why we expect outsized growth.
As we begin to exit this recession is our track record the bars on the left represent annualized growth from 2001 2007 post 911, admittedly we were a smaller bank coming off a smaller base, but seven times the industry through that extended period is meaningful and on the.
Right on a larger base from 2011 to 2019, both great recession, we grew six times the industry and so to sum up what we've talked about here today. The visibility we now have on asset quality as a result with extensive re grading work that we've done is very.
Charging.
Yes, PPNR in revenues are all exhibiting strong growth quarter over quarter BSG is showcasing its distinctive model and highlighting what makes it different mall as comparisons and lastly, having completed the bulk of the defensive work that we set out to accomplish over the last two quarters. We believe we're uniquely positioned.
Asian to pick up meaningful market share on a sound basis, which we believe will result in outsized earnings growth. So operator, I'll stop there will be glad to take questions.
Thank you Mr. Turner the floor.
Please now open for your questions and you and I asked the question at this time. Please press star one on your Touchtone phone.
Well be given conference during the Q1 <unk>.
The asset light Toaster question take your handset provide optimal sound quality.
First question comes from Stephen Scouten of Piper Sandler Your line is now open.
Hey, good morning, everyone.
Good morning, guys David.
So Terry you gave a lot of good color about the market share takeaway opportunity. Obviously, you guys have a great track record there I'm wondering specifically when you think that really ramps up from a talent acquisition standpoint, again and is that the primary.
Medium for which you think that will occur or do you start thinking more about M&A in some of these markets as well to kind of capitalize on all that opportunity.
Thanks.
Steve we have always and we continue to view ourselves to be primarily organic growers. You can look at those historical charge and say we have mixed in acquisition and I think done it successfully I wouldn't be surprised if we did that but I just want to be clear, we primarily think about organic growth or your question is a great one the market share.
A movement to be honest with you I wouldn't be for good long drawn out here and going out and trying to make a bunch of people have some aggressive calling program, all but done and Brad last run an AD campaign sale promotions all that we don't do any of that stuff.
It's all dependent on getting.
Relationship managers experienced relationship managers from other banks have then move those books of business to us and so that would continue to be that broke out.
I think there are two things that are important about that phenomenon. There number one I think got indicated early on that 22% of our existing asset values have been here for less than two years, that's the enormous market share taking capacity.
We as I mentioned, I mean, I'm switching term don't hear about go back to revenue producers instead of relationship managers, which is a broader term include mortgage originators and brokers then.
Brokers and other sorts of revenue producers, but among those revenue producers, even trying to shut down or tamp down the hiring we've added 56 revenue producers this year and so all all of that hiring that has already occurred and is still in relatively early stage maturation represents enormous.
Sure take an opportunity the second aspect to that idea here is we are finding much more vulnerability today in the market that we would have over the last several quarters, particularly at some of these larger banks that continue to struggle.
With the regulatory issues merger and integration issues and so forth and so we feel like we've got a number of folks that we had at some stage of recruitment as I mentioned, we did tap down slow and I have a lot of those bugs are beginning to contact us and say they want to reconsider and so I don't want to go on and on but you get the idea is primary.
About organic growth is primarily about market share movement by relationship managers and we've got a big you have folks that are in early stage maturation already on the books and we're optimistic about our ability to hire more.
Perfect very helpful. And then can you maybe talk little bit about what you're seeing on the market demand side, there seems to be a view that the metro areas. They are going to be in a bad spot for the years to come but you guys are in kind of non mature I must say that are maybe smaller mid sized much warmer clothes, where I think we still see Glenn Mcdowell. Please so can you maybe touch on what you're seeing.
There and maybe especially in Nashville, where there really seems to be that the view that the Nashville, just music and tourism.
Yeah, well. Thank you for that question I think.
[music].
Let's talk about loan demand current loan demand I did think loan demand is near zero or maybe it's a little better than that but not as much as it's pretty tight here right now, but if you think about it. The reason I think for that is obvious one you've got a lot of people are saying well right now I don't feel like taking a big risk number two I got tons of liquidity on my balance sheet.
I've got a bunch of the money I mean, there are a lot of reasons why loan demand would be just a little resolve and likely to be the over a few quarters, which is the criticality for us of this market share take why that's the case for why we why we think will grow but if you're asking about the view over any.
Stated period of time for a market like Nashville.
I think.
We had a had an analysts that actually conducted.
Sort of an Investor day, if you will or best recall, where the chamber of Commerce and I think they gave away.
I don't know, but where's that amount, but I think again, what very encouraged and excited about the potential what's in the business development pipeline as you know what drives growth in this market has been corporate relocations and what drives corporate relocations is primarily tax rates and so my belief is that phenomenon going continue for instance.
That period of time.
Steve I know travel is no doubt limited tourism is definitely down.
But I'll tell you this if.
If you could make international you would still see a large number of grains that scares some people, but it doesn't particularly scare me because it we believe that this market is going to continue to grow at an outside outside base I'll spare you the chamber of Commerce, B, but I promise you that.
Probably should the tax rate and tax implications are likely to expand that benefit to markets like Nashville, not the track.
Perfect Perfect and maybe one last real quick one for me on.
The loan loss reserve percentage I'm wondering.
Obviously this is probably a near term event, but as net charge offs probably flow through a little bit from the pandemic can we.
We see credit normalize over the next two notes three four or five quarters, where could we see that loan loss reserve kind of normalizing opposed pizza world. It is the kind of 109 level. We saw one Q 20 is that the right way to think about it as things normalize.
Yes, Steve I'm, not sure where that where it's going to end up what we're doing is trying to keep it where it is right now we don't.
We don't think it's a good time to try to see it go down.
But eventually we think as charge offs materialize then and.
I got to hand, it off to Tim's group I Gotta handed off to the centralized underwriting groups.
Their dig it up under all kinds of Iraq's trying to find out where that what the quality of the loss content. This book is.
And so we anticipate that we'll see some charge off materialize not that we've identified any of them yet we haven't but we just think thats come in and then towards the end of next year, we likely will see this reserve kind of.
No.
I need to get some really now a lot of thats dependent on what unemployment forecast look like.
But we're not seeing the loss content materialize in the loan book like we would've otherwise thought it was going to materialize back in March.
Got it perfect. Thanks, so much really help guys and congrats on a really good quarter.
Thank you.
Thank you and our next question comes from Jennifer as she was Securities. Your line is now open.
Thank you good morning.
Hey, good morning.
Congratulations on your almost 20 year anniversary I believe.
I think we're getting now.
[laughter] older.
[laughter].
You mentioned the market share gain opportunity Kerry do you think one of those opportunities would be specific to personal friends and North Carolina.
Your distracted with the CIA key partnership.
Over the next two or three years.
That's my first question. My second question is can you give us an update on what you're seeing in your lap.
Huh.
Yeah.
That's a great question.
I do think theres likely to be some opportunity in the transaction at this point you know I'm not.
I guess my bad characterize it this way my excitement about that opportunity would be less than the excitement I have about the terminal in companies like wells and through his and those sorts of companies that that the vulnerability there is things larger and savings of more timely.
And those kind of thing you know.
You know this invariably when you get involved in integration work there will be an internal focus of great. Some vulnerability, we'll certainly try to seize on it but I view those other opportunities to be still better I guess is maybe the way to to characterize that.
I believe in the Atlanta market.
That we're doing well.
Mine to drop sort of use round numbers I don't have exactly the numbers in front of me, but my guess.
My guess is today there is about.
$70 million in Outstandings, there's probably north of.
Probably north of $100 million in commitments that are out some of those are.
Think you know construction got things in my fund up over time, so it's not all immediate stuff, but that pipeline of commitments that exists that will have fundings is a pretty large and I think if a rob Garcia we're talking to you about the rest of his pipeline in other words deals that he has in the five that he believes that don't.
Close that he doesn't yet have they would say that momentum is building as well and of course, the real measure or the real catalyst I guess might be a better word for our success has to do with hiring and so I think Rob again would tell you that is a hiring pipeline is full.
Again, though all me exactly this will be about right you've got about 17 associates down there today, a think about four which might be classified as retail branch based associates.
Others would be either.
So financial advisors or credit an analyst or you know something this important revenue stream there and again it looks like to me that pipeline is really swell, we're likely to have an announcement or two in the next week or two of that I think will be a really.
I put in a high profile higher.
On a go or so.
Yeah, and I think we're very encouraged and.
Continues like Rob so great job on things the results are materializing.
If I could follow up one question.
He.
That performance, obviously has been really terrific what.
Vince strip bar words.
The BHP on sub segment.
Good day.
This or what are you seeing among among borrowers.
Yeah, I think the dentist are still probably.
The most stress.
But as it sits today I'm not sure of any market, where they've got loans that are not permitting elective surgery. So I think all the dentist roping up like all the surgeons are open.
The optometrist were a little stress that in the second quarter, but I think by and large.
Their business flows are coming back.
I can dig a little that some more for you Jennifer but right now I'm not sure that I can say.
So far in any particular segment based on the reports I get from BSG to.
With.
There's one this more stress than another.
Thanks, I will say I will say the nonmedical book you know there have you know call. It the engineers and architects and those folks that they branched into over the last two or three years.
That book is is performing better than the call. It the medical book So.
So that's.
That's been a real pleasing thing.
Thanks, Tim.
Okay.
Thank you and our next question comes from Jared Shaw of Wells Fargo Securities. Your line is now open.
Hi, good morning.
Hi, Jared were how you doing.
Hi, Thanks, good thanks, congratulations on the strong quarter.
Hi, just following up you know turn.
Sure. You said this is this could be a once a generation opportunity to take market share and just given the success you've had hiring people and using Atlanta. As an example, you should we really expect to think maybe you go on the offensive now and target. Some additional geography is obviously.
Some of the big bigger competitors, you mentioned two business in more than just Atlanta go are there opportunities for you to expand into new geographies and you take that.
Not hiring model, an accelerated a little faster and would not turning to potentially.
A different expense level for for 2021 in the near term all that's building out.
Oh Dear that's a fabulous question then it honestly.
I guess I might characterize it this way we might be tempted by that.
And we can be opportunistic in that regard, but the truth is the play that we most Mona money is to harvest the opportunity in markets like Charlotte North Carolina, Raleigh, North Carolina, Raleigh, North Carolina was just highlighted.
Just highlighted is the hottest real estate market in the United States is a fabulous market whatever metric you want to look at but you can see we're in a 13 share position, but we're the fastest growing bike and so my objective is is to gin up was evident in Charlotte, what's happening in Raleigh, what's happening in China.
Charleston in particular, those three markets, that's where we really want to invest that's where we want to grow and so forth. So I don't mean to say I can't do anything else, if I'm doing that but I do want to say that that's the most important thing for us to do is see that opportunity that as a grand a growth opportunity and again I know some.
People are not as interested in things like the distinctive service experience, but that's it and powerful and important but we spent time getting that service equation right and it's now time to harvest that and those high growth markets.
Okay, and then I saw it goes back to the 22% of hires that have been there are less than two years give a lot of those markets. So you feel that they can start to.
To really a mixed bag.
I do believe that and also thing.
Mentioned it.
Again, just trying to be candid about where the opportunity is a thing hiring opportunities are particularly strong at wells and two maybe a slightly lesser grade lesser degree, but I think picking up at Tru is.
Truth is and so again those Carolina markets of course are filled with wells in some form of BB into your son throws bikers.
Okay, great. Thanks, and then.
Shifting a little bit just to be H.G. and looking at the growth that they've had in recourse or the.
Are they are they subject to seasonal do they need to build that recourse or the same way that you're building out an allowance or side is that not necessarily.
Reflective of what they are.
Expectations for full losses are at this point in time, maybe a little more flexibility yeah. There's no doubt that this is helping them get towards a seasonal number at some point sixtyl for them I think is a 2024 issue.
And they are going down the path now try to analyze and quantifying billable models to to get to a seasonal comply.
Credit loss reserve, but I'm not sure where that number is going to actually end up.
Okay. So we shouldnt, we shouldn't necessarily look at the at the recourse being significantly higher than the losses at this point as.
As a direct tie ins, where they think the total loss content is today.
Jared I think if I understand your question Rod I think you're right.
Okay, we should not honored yep.
Okay got it and then on <unk>.
I'd be achieved with the success of having that securitization do you think that 2021, you'll see that strategy shift back more towards.
Yeah, beginning to emphasize securitization and and maybe some on balance sheet opportunities more so than straight gain on sale or will it be a continued to be a good mix. Yeah. I think bill I think they'll continue a good mix I think they believe that they will be back at the securitization game early next year.
Ah so they're they're ramping up to probably do another issuance call in January February.
Great. Thanks, a lot.
Alright, thank Peter.
Thank you and our next call.
Question comes from Brett and your fleet of VBS. Your line is now open.
Hi, Thanks.
Just a.
Just just following on the questions on BHP in terms of the revenue profile.
Somewhat longer term guidance about BSG in the past and as we kind of emerge from Cove. It.
Seems like BHP is going very strongly.
The mix of securitization and versus traditional placements is kind of what it is what do you.
What should we be thinking about in terms of the.
<unk> revenue earnings profile there.
Yeah, I think what we're looking at for next year is probably a high single digit low double digit kind of number for them next year.
We believe a they've got momentum to deliver that.
So that would be what our current thinking is brock.
Okay.
And Harold I heard the guide on on funding costs I guess on the <unk>.
Sit side, where do you see.
Securities yields trending over time and within that Securities book, We've seen a number of other banks really look to ramp that up whether it's now or possibly waiting until after the election and hoping for a steeper curve, but should we look for.
Really.
Sharply higher balance there given that loan growth is.
Muted right now.
Yeah, I don't think I don't think were going to be focused on building. The loan book are executing on any kind of levers strategy to take some of this liquidity build the securities book, Oh, I'm, sorry build the Securities book, that's what I meant to say the wrong word a bill in the securities book to execute on the leverage strategy.
Bond yields right now look to be pretty good we've done a lot of municipal acquisitions, we think a lot of that will hang with us.
But you know.
To say that we're going to develop a strategy to kind of ramp up the bond book by 20% or even 10% I don't but I just don't see that.
Okay, and those yields you have a sense of where they could drift assuming rates stay where they are where they are right. Now I think our municipal book will help us hold yields yes, but you know I can't help to believe that we're going to see some deterioration in bond yield.
Yes.
Probably over the next several quarters.
But I don't think its going to be that significant.
Okay. Thank you.
Thank you and our next question comes from Steven Alexopoulos Jpmorgan. Your line is now open.
Hey, good morning, everyone.
Hi, good morning.
To start on the new incentive could you can you give more color on exactly what that new incentive is it is it a poor Q 20 incentive or is that a full year 20 terms of results.
Yes, it's for the whole year, we implemented it and I think the comp committee approved at late July.
So what we try to do was determined what a reasonable growth rate and PPNR would be for 2020 over 2019.
And then try to figure out how to hit that number and so it gives us some consistent messaging with none.
Not only revenue producers, but the holding it.
You know all 2500 people and it keeps people in the game because obviously with the first quarter Reserve Bill and then again in the second quarter.
80% of our incentive will target EPS growth and so that effectively knocked us out of the game.
For any kind of cash bonus this year. So we were trying to create something all.
Although not give them all the way back to you know the start line just trying to get us at least 50% target level develop some plant that will help us not only this year, but more importantly, 2021.
And Harold what growth rate do you need to maximize that incentive well.
What we did and we'll talk about it in the proxy.
What we did is we we looked at where the peers, our peers work and try to consider.
You know the anomalies within the peer group and said, Okay. What does it take to get in the top quartile that peer group.
Got you Okay got you that's helpful and.
And then just following up on all the commentaries around the market share gain.
Terry I think I've asked you this before but what exactly was it that the larger banks had done with the PPP program to upset so many customers did they just turned down people for the loans. They weren't available can you give more color what's created this opportunity.
Yes again.
I want to.
Side, what I hear from Greenwich, and then I'll give you my own personal.
Commentary, which might be less valuable I don't know, but grades would say that.
The big banks were unresponsive many of them were slow to get their systems up there was very little communication between the bank and the borrowers are all that led the mass confusion.
As the money ran out it led to mass frustration.
And I think just sort of the in personal nature of how that process works at the big companies versus the more personalized approach that smaller banks typically used where as an example for us I can't recite now how many webinars, we held but we had.
Thousands of borrowers obtained in our Webinars, many of whom weren't even our customers, but go that became the place you go to get information about how the applied for this how does the application work you know what what are the issues to think through what kind of documentation do I need it. So if you're not imply that information your create.
Lots of apprehension, among your borrowers and their platelet underserved and so again I think this phenomenon.
The PPP process. The deferral processes is the same as we've talked before.
If you go to two into this the spectrum on how to handle the deferral and I promise you I'm not acting like either one off items really bad or really good I'll. Just tell you what we did and why we did it and why I think it benefits us a one is that the spectrum you could say look this world gone ahead and handbags.
You won't Afirma, you combating that Brian made a bunch of financial information and give me some more guarantee to put up gas reserves up all of them will give you a deferral and that's not an irresponsible thing to do I mean, you know if your grid person, you're thinking about brave and your borrowing base and trying to minimize losses and so for that would be.
You did today, our view was to give somebody a deferral for 90 days in the middle of the time, where nobody knew what it was didn't substantially increase our credit risk and.
And it made our borrowers love us and so that was the reason that we went in that direction and so again I'm just sort of rambling about two or three things that are sort of different in the approach, but if you had to get it down to a word on one side is a more personalized service that puts borrowers. It even makes you feel like you're looking after them and a less personalized content service.
It creates apprehension, among borrowers which leads to frustration irritation, and so forth and so that'd be my characterization of okay. Yeah. That's helpful color, maybe just one final one on BG given the deferral trends I was surprised that the recourse reserve ratio increased to me it was modest but the reserves up $200 million.
Quarter, the ratios up why would that have gone.
Higher given these really impressive deferral trends. Thanks, alright, so keep in mind, there is still a private company.
Yeah, there's a lot more a qualitative assessments going all them with.
Perhaps a seasonal model like we have to develop I'd have to roll out that's more or less subjective. So I think they went bad. She is doing is they're they're just anticipating.
Probably doing some conservative analyzing and build in a reserve.
Okay. That's helpful. Thanks for all the color [laughter] about all I can give you can [laughter].
Thanks, Kim and our next question comes from Catherine Mealor of KBW. Your line is now open.
Thanks, Good morning.
Hi, guys good morning.
Oh, that's willing to follow up on your PPNR commentary and outlook. So clearly you talked about wanting to grow the PPNR I think well.
Well I don't want to see if you can mention that you why it has taken this mid single digit growth rate in 2021 off of 2020, but you're at least looking at growth keeping our as you move into next year and so how should we think about that as.
As we think about TPP rolling off and mortgage have normalized.
I don't think even with those headwinds PPNR can still grow next year or is it more.
Keeping our per share can grow because it's an active buyback activity.
Yes first of all let's make sure we understand Oh, when or what I talked about during the slide was that we've excluded.
PPP and be a Gi and the liquidity bill.
So we're kind of quantifying that up those numbers and excluding that from the calculation of PPNR growth.
So you're right how does one anticipate what PDP is going to do to our numbers this year or next year and so.
And so we Didnt think it was fair.
Do you know.
So put that into an incentive target.
And then all of a sudden something happened would this be a they make it more onerous, which we think they will and the big fee revenues not materialize. So we go through a process to eliminate that.
So what we're trying to do is get down a blocking and tackling.
And that's how we that's how we come up with our anticipated.
PPNR growth rate.
Now we should.
We shoot for.
For top performance, it's a lot more difficult to get that out of the peers.
So that is not exactly apples and apples when we start compared to the peers, but.
We would believe that the revenue contribution that were getting from BPP is greater promote then a lot of our peers are going to get so that's probably a little bit of a headwind when you start talking about peer rankings for us.
That makes sense, so, but it does but it does just making sure your commentary on single digit growth PPR was more around the incentive plan for this year not as maybe an outlook for what you can do in 21 and a well that is true single to high mid the same mid to high single digit growth.
And looking at what the peers are doing next year, it's likely to be a similar number for next year.
Great any that includes PPP, BSG and liquidity that excludes BPP BSG and liquidity for us.
Great that makes sense.
And then also on the expense side, Steve you've guided for expenses to be flat to down is that inclusive of the incentive comp catch up this quarter. So just look at bottom line expenses and that's the number that's kind of.
Flat to down next quarter, yeah, the third quarter incentive and had to catch us up to 75% of the whole year.
So we don't have as far to go in the fourth quarter with the incentive accrual.
Got it okay, but still here soon what scenario our expenses flat in Fourq you another 90 million.
I'm, sorry, I'm looking at the it's actually based on another.
<unk> hundred 44 million.
Yeah, I think well I think what's going to drive it primarily that incentive accrual because.
You know the the PPNR incentive is call. It you know.
You know $15 million and I have.
And I had to get 75% of that in the third quarter number at all we have to get 25% of that into the fourth quarter.
Got it okay got it.
So really expenses should be down next quarter, yes.
Thank you.
The flat does well the autonomy all right great and then just one last question on just do you have the updated criticized that you say you can't classified in the press release do you have what criticized doubling quarter.
It went up.
Catherine 70 million from last quarter, I don't have that number right in front of me as a percentage.
Okay, but up 71, what drove that increase what kind of credit or anything like that.
Turning to credit that it was.
Mostly hotels we.
We had a further count of hotels in July that went into a risk grade 70.
Right, Okay, great. Thank you great quarter.
Thank you.
Thank you and this does conclude our question and answer session, Ladies and gentlemen. This concludes today's conference call. Thank you for participating and you may now disconnect.
[music].