Q2 2021 Pinnacle Financial Partners Inc Earnings Call
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Ladies and gentlemen, please standby your conference will begin momentarily again, please standby your conference will begin momentarily. Thank you.
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Yes.
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Good morning, everyone and welcome to the Pinnacle financial partners second quarter 2021 earnings conference call hosting the call today from Pinnacle Financial partners is Mr. Terry Turner, Chief Executive Officer, and Mr. Harold Carpenter, Chief Financial Officer.
Please note B Nicola pinnacles earnings release, and this morning's presentation are available on the Investor Relations page I'll say website at Www dot the N F. B Dot com today's call is being recorded and will be available for replay on pinnacle's website for the next 90.
Days.
At this time all participants have been placed in a listen only mode. The floor will be opened for your questions. Following the presentation. If you would like to ask a question at that time. Please press star on your Touchtone phone.
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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 and uncertainties and other facts that may cause the actual results for 4 months or achievements of pinnacle financial to differ materially from and our results expressed or implied by such.
Forward looking statements many of such factors are beyond clinical financial and ability to control or predict and listeners are cautioned not to put undue reliance on such forward looking statements and.
More detailed description of that and are there risks is contained and the pinnacle financials and we'll report on form 10-K for the year ended December 31st 'twenty 'twenty and then subsequently filed quarterly reports.
Pinnacle financial disclaims any obligation to update or revise any forward looking statements contained in this presentation, whether as a result of new information future events or otherwise and addition, that's remarks may include certain non-GAAP financial measures as defined by S. C C. A regulation G.
A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measure due to comparable GAAP measures will be available on pinnacle financial website at Www Dot P. N F P dot com.
With that I am now turning the call over to Mr. Terry Turner, Pinnacle's, President and CEO.
Thank you operator, and thanks for joining us this morning.
And it was an outstanding quarter and might be.
And most.
And then.
And we took a number of actions and the early stages and David.
And our incentives to focus on.
And our growth.
<unk> and 'twenty to ensure that we'd be on.
And to quickly return to our pre pandemic growth trajectory and independent David Wang.
First 2 quarters of 2000.
And 1 was just we've been largely successful on that.
When you get on every quarterly call and this dashboard and flagged and our key performance metrics on GAAP basis.
But as we most I'll, let David go there's so many adjustments required in order to focus on the variables that we're truly man engineered pinnacle.
This charge, reflecting the adjusted non-GAAP measures.
And you can say and the second quarter was enough another fabulous quarter horse linked quarter annualized loan growth ex PPP was 12, 6% linked quarter annualized core deposit growth was 14, 2% linked quarter annualized revenue growth was 21% and already strong asset quality got even better.
On a lot of these earnings calls and that drives revenue.
And are on all of our sample and the key metrics that are on this chart, but today I want to focus more on the big picture and that's really the speed and the reliability of the growth over an extended the extended period of time and look at the CAGR for virtually every reported growth metrics I think that demonstrates the speed and reliability of our growth even.
And despite the various headwinds we have encountered over time, thank EPS as an example.
And 8% CAGR.
Got it and they have been <unk> 20, and associated with the Covid triggered reserve bill, but other net the gross extremely reliable.
The revenue CAGR.
Gallagher and deposit CAGR Oliver.
Oh very low.
And now we can does a 3 day orientation program for every single news therapy to this partner and conducted by me and other key leaders here, we invest and to help associates understand this culture and why I D.
And is what it is and what and when it makes a difference.
And it tended to inspire and high level of associate excitement and engagement 1 of the topics that we covered in great detail is how we produce and shareholder value that our long sessions conducted by Harold and its intended to have everything and associates personalised, specifically, what they do individually the increase the shareholder value.
And it guys and things I might say.
Destroy shareholder value, but the principal takeaway, we expect every single associate to get.
Things are required for us to produce SaaS shareholder returns number 1 stated growth and number 2 reliability of growth. So high that we produce such fast and reliable growth.
And then to continue rapid and reliable growth going forward.
Excuse me, even as many of our peers are being overwhelmed by the current headwinds.
Black loan demand and head and paid out.
First of all we position ourselves as bad as markets with extraordinary side the growth dynamics and most of that as you've heard me talk about our outlook and markets like Nashville, Charlotte and Raleigh, North Carolina, Greenville, and Charleston, South Carolina, and Atlanta, 1 of the biggest and best markets and the country and of course, those out and the growth dynamics are critical to growth.
It's just hard to have a large high growth volume without large high growth markets on last quarter's call I talked about the fact that I expect it to continue hiring revenue producers and our existing footprint and rapid pace and it would likely have opportunities to expand to other southeastern markets due to the high level of M&A activity and all the associated vulnerabilities and debt.
And so you can see here, primarily as a result of integration terminal we were the most desirable alternative for a good number of high profile revenue producers and Birmingham, the southeast 13th largest market and hospital the southeast 13th fastest growing market in terms of the GDP I don't want you to Miss and our reputation.
The highly successful challenger brands and those large regional national franchises and causes frustrated teams to seek us out and I'm not trying to foreshadow anything in particular here, but I'd be shocked if we don't have more of those hiring opportunities going forward and M&A appears to be picking up and the bureaucratic Brian and many of our larger competitors continues to weigh on there.
So the markets. We currently serve and the markets that are likely available to us over time would suggest and ability to grow rapidly on an organic basis and even at a time when many of them struggle to grow revenue and earnings organically.
And my judgment more imported even and the size and growth dynamics of our market and the fact that this firms and built to create raving fans and <unk>.
And then work with every bank you listen to and we'll talk about service and I know not 1 offs ever said, we're trying to give poor service and bad advice, but trust me. Many do so let me spend a minute on just had differentiated and our servicing and advisory is from every other bank and our footprint what youre looking at and here is data from Greenwich Associates, the foremost provider.
Market research, the large banks and the United States.
And based on client responses across our entire footprint.
<unk> businesses with annual sales from 1 million to $500 million, and Tennessee, North Carolina, South Carolina, Atlanta, and Rona So low.
This focus on on the Pinnacle line at the bottom of the chart you see the Navy Blue portion a bar that 80% of the Pinnacle client survey rate. It does on 9 or a 10 on the question how likely are you direct major lead provider to a friend or colleague and using the scale of zero to 10, where zero means not and I'll likely in tea and made extremely likely.
And so in other words, 80% of our clients are highly engaged active promoters Trust me, that's an extremely unusual level of engagement and.
On a 19% rate it is a 7 rate that's not bad combined and the 299% of our clients ready to 7 or better on a 10 point scale, but that 19% debt go portion of the bar scored us 7 or 8 or they're referred to as passive go well it generally rate dwell theyre not so fired up is to be vocal advocate.
It's for you and the market and then that last 1% the red portion of the bar are detractors, mainly and they are ready to do somewhere between zero and 6.
Our beside that Blue bar outside our bar there you can see.
79.
It's the net promoter score and the number of promoters less the number of detractors and you can see that score is wildly differentiated from all our major competitors and our footprint and not only is that the fact that net promoter score and and South East Gordon Greenidge.
Second best net promoter score and the country.
Now if you bear with me just another minute here on this slide is not just that our net promoter scores high and it's also the most clients to lose have very low net promoter scores with lots of detractors. When you look at the gold boxes at the top of the slide you see the top 5 banks in terms of market share.
On average net promoter score of 42% and the top tier banks in terms of market share and have an average net promoter score of 51, 1 on the top banks and our footprint from a market share perspective has a net promoter score of 6 and 36% of their class are actively attract and from their.
So the banks and they had the most share are extraordinarily vulnerable the differential between their client perception of their service versus our where we have and net promoter score of 79 is really what our differentiated as I say I've already talked about the size and growth dynamics of our market and how they bear on growth but more.
And our very attractive footprint the banks, who currently have the Shirley are extraordinarily volatile. So as you think about the speed and the reliability of growth, which is largely dependent on taking share as opposed to economic loan demand. This explains why we've been so successful taking share over the last 20 years, while we grew loans ex PPP.
The $12.6 and on annualized basis, this quarter and why I believe we will continue to produce.
Growth for the foreseeable future.
I don't know for some net promoter scores and much more abstract and Harald <unk> and efficiency ratio. So let me say 2 minutes and see if I can make it a little more tangible for you maybe on you might be familiar with and have called next door and have that loud neighbors to seek and give tips to each other here and the gray box at the top left and <unk>.
<unk> someone's looking for a new buying the blue dialog boxes on the right are a sample of the tier provided by neighbors you can see pinnacle clients raving about pinnacle, obviously clients had been wildfire service. These are promoters and last check there were 125 comments recommendations on this request pinnacle.
C 34, the next most frequently mentioned tip received 8.
On a multiply that across our entire footprint and thats what promoters do for you.
We've achieved that kind of differentiate and declining because this wowing appliance permeates everything we do and this firm let me take a second deal strength at works over the last year or so we've had ample opportunity to talk about our approach to the pandemic.
It began with an office of outreach to our clients and the very early stages of the pandemic seats and they needed that deferral. Some banks focused on short term asset quality metrics and were slow to defer payments, we focused on helping our clients about whom we're passionate and as an aside our asset quality performed extremely well, but more importantly climb.
And it's ready.
Chart shows on a relative outperformance versus the large banks with whom we compete here were just compare and each bank percentage of national loans outstanding versus the percentage of National PPP loans originated breached by most banks were less successful on PPP and the size of the loan book would have suggested and you can see on.
And all of a large banks with whom we compete under form, but we outperformed and I believe it's because it was a matter of urgency for us to take care and Mark glass, who were struggling and it was a cost libre and this firm to get our clients taken care of I don't take the time of day to develop it fully and with Greenwich developed the crisis response index to measure how.
Oil clients perceive their bank's response during the pandemic and and the fourth quarter of 2020 Pinnacle had the highest price is for thoughts index of gratitude and entire.
Coverage universe.
And the most recent round of PPP, there has been a great deal rent and about how many applications didn't get processed how many apps and Scott left the station. There was recently a syndicated article and many of the nation's business journals like the national bids and Jeremy as an example, where our competitors talked about their distant lesion with the SBA for cut and the program.
Ill leave it and with so many and process applications. Those comments are listed on the right hand.
Side of this slide my view is that many of them just slight ignorant and were often excuses as to why they didn't get their clients taken care of.
And the last round of PPP, we took 9000 and 790 applications, yes, I mean, he didn't get submitted to the SBA.
Just 71 this.
The entire firm worked feverishly reallocating to viable resources, no and if we were competing for a limited pool of funding and we got them all done but 71. So we got 99, 3% of our clients taken care off and so on the right side you can see what our client set about those.
Those are promoters.
As far as I know there is no chance to create and is that kind of the client experience without a great and highly engaging associate experience. We measure our associate experience primarily video work environment Survey and also sees we hold each later accountable for receive and 70% top box ratings from their associates and <unk>.
And the word for each statement that associate draft rate their level of agreement later should have created an environment, where there are associates right and strongly agree 70% of the time I'm not aware of any firms and set that kind of target are achieved and kind of result, but even in a disastrous year like 2020 handling difficult process and procedural change.
And just quarantines reduced cash incentives and so forth, we still hit the 70% top box target.
And that's an engaged workforce 1 of the reasons that we've created such a high level of trust with our associates and we operate with a win together lose together philosophy.
And if we R&R incentives.
But if were diminished incentives, we all learned diminishing incentives if we failed R&R and soon and we all failed R&R and soon we win together and we lose together not only has that been a powerful team builder throughout our 20 year history, but it puts us and great stead at a time like this when there is increased.
And the emphasis on equity and 2020, 99% and by our employees of color and feel that management chose a sincere interest in them and as a person versus an industry benchmark, 80% 96, and if they may have always bill they receive a fair share of profits versus the benchmark, 75%, 91% of female employees build and <unk>.
Managers are all in play and favorites, 93% of female oilfield that promotions go to those who deserve the best.
90% of employees and skull and feel that they are paid fairly for the work that they do and that's margin as a benchmark of 72% and so theres alignment that we've created results and extraordinary and retention of all our associates, which means 2 things that barrel and growth number 1 since associate turnover is the number 1 and turn to give them great service associate.
Engagement continues to create promoters, which leads to more organic growth and number 2 since associate turnover leads to client turnover generally this level of associate retention and minimize as client attrition, which god fires on net growth.
And what I've tried to do is bring into focus for you this quarter the speed and the reliability of our growth over time as well as the structural reasons wed expect outsized growth to continue for the foreseeable future. So higher let me turn it over to you for more detailed review of the quarter.
Thanks, Terry and good morning, everybody.
We're obviously pleased with our second quarter loan growth results, excluding PPP average loans were up 9% between the first and second quarters.
Excluding PPP and a period loans at June 30, compared to March 31 were up 12, 6% annualized.
As to loan yields the yield curve remained volatile during the second quarter and as we've mentioned for at least the last 2 conference calls on loan yields will be applied and 2021, we will lean into our relationships even harder to maintain our yields overall low rates were basically flat with the first quarter, but that was assisted by a big quarter and likely a high watermark for <unk>.
PPP forgiveness, PPP forgiveness boosted the second quarter yield on PPP loans to 547% from 451, and the first quarter. It will continue to be difficult to model loan yields for the next few quarters, given the impact of PPP, excluding PPP loans, our average loan yield approximated 3.
9.8% compared to approximately 4 O 7 and the first quarter, so where to from here.
Our market leaders continue to believe that our loan growth forecast, excluding PPP and the high single digits for 2021 and be a reasonable growth target for our firm as always we will lean on our newer cruise to give us an advantage of loan growth coupled with our markets, which we believe really some of the best banking markets with many of the best bankers and the southeast where opt.
Mystic about our loan growth goals. This year, we also recently announced our expansion and the Huntsville, and Birmingham was set on our relationship managers and total we and.
They are both very excited about our opportunities and these 2 markets.
A low volumes, we're modeling around $150 million and loan growth. This year from those 2 markets on expecting P&L breakeven from our new associates and late 2022.
S yields we have some reasonably optimistic that our core yields are stabilizing so additional dilution of our loan yields excluding PPP will likely occur but should slow obviously the yield curve does impact all of and so hopefully we get some stabilization and help curtail the decrease in loan yields as the PPP yield it's anybody's guess.
And even though we will continue to work our borrowers proactively we don't believe we will see quite the pace, so forgive us and <unk> that we experienced and to keep that said since the start of PPP, we recorded a $125 million and fees associated with the program of which we recognized 60% of those.
Thus far.
So we still have $48 million and unrecognized fees, which we believe will help bolster long yields.
At least over the near term.
Now on to deposits, we had another big deposit quarter, but not quite as large as several of our previous quarter's core deposits were up almost $900 million and the second quarter, we've experienced significant growth in non interest bearing deposits ending up at 8 point on 1 billion at quarter end up 29, 5% since the end of last year, our average levels.
Average deposit ratio was up slightly and the second quarter to 82, 7%. So we consider that a small victory and this is the first increase on our low composite ratio since the first quarter of last year. Our average deposit rates were 20 basis points, while youll see deposit rates. We're at 18 basis points. So we continue to see downward momentum for 2021.
And it looks to be around 10 to 15 basis points by the fourth quarter of 2021, assuming our short term rate forecast plays out for the remainder of this year.
<unk> us get there will be about $1 billion or so and maturing Cds over the next 2 quarters that have an average rate of approximately 70 basis points currently.
Liquidity continues to gain attention from all day the yield curve remains on everyone's mind, we did put some excess liquidity to work this quarter approximately $650 million and additional investment securities. We don't currently anticipate any more big security purchases. This.
Year.
And so the interest rate risk manage but we do have a balance sheet bus today of rates being neutral to up slightly over the next year or 2 so before all the bond experts for deploying money and the fixed rate bonds and the second quarter, we did execute and interest rate swap on the front and cash flow of about 50% of those bonds.
Large swap and the cash flows from fixed to variable. So our interest so our asset sensitivity position is essentially the same before and after the bond transaction, but we did pick up say 100 basis points and yields over what we're seeing and all the cash part of purposes.
Our security debt to assets ratio increased to 15% and <unk> and we expect that to hold for the foreseeable future. Our estimates that peers say banks, 20% to 60 billion of assets are running a good bit more than that sales of 25% rate.
We continue to look at ways to create increased earnings momentum through deployment of excess liquidity and the higher yielding assets or elimination of wholesale funding sources. All those lives and in addition to the and.
In addition to the bond purchases, we made and the second quarter, we increased our repo instrument, we acquired and the first quarter from 450 million to $500 million and the second quarter as I mentioned last time, this repo instrument and secured by the Counterparties investment securities portfolio and yield around 40 basis points.
Looking at another somewhat similar refill product, but it will likely be somewhat less and balances and a repo we have on our balance sheet currently.
We also reduced our wholesale funding book on our second quarter by almost $1 billion.
Many of you might recall that would bolster our liquidity and start with pandemic with additional brokers and other funds by more than $2.4 billion. At this time, a significant amount of that has been redeemed we have about $250 million left remaining this year and $4 million and 'twenty, 2 and 'twenty 3.
Additionally, we have about $900 million and federal home loan bank borrowings that cost us and annual rate of 2%. We continue to explore prepaying those FHL the borrowings, but the prepay withheld and remains too rich for us right now.
Lastly, we do fully anticipate redeeming, a $130 million and bank level sub debt and a few weighted using available cash.
Sub debt instruments called 8 was during the pandemic last year, but we elected to hold off on capital at that time and they'll feel the current environment provides us enough confidence to eliminate this funding which is costing us about 3.3% annually and has also begun to lose some of its favorable capital treatment.
And the supplemental information, we've updated our interest rate sensitivity, which with all the initiatives, we accomplished and the second quarter points toward increased asset.
Sensitivity and the up 100 scenario.
As it stands currently.
And we like where our balance sheet is positioned with no big moves.
Planned on our current agenda.
And the chart at the top left on the slide illustrates our net interest margin after PPP and liquidity was approximately $3.2 5% and the second quarter, which compares to a similar calculation and last quarter at $3.2 net.
Thus, our adjusted NIM after being up for 4 quarters in a row retreated slightly but it has held steady over the last year or so.
As to credit obviously channel is not here, but rest easy and on the job doing what he does best working both on our relationship managers and Clos and making sure. We continue our focus on being a well run and very sound financial institution.
Using the big the 4 big traditional credit metrics on net charge offs and classified assets Npa's and path to approval.
Gross loan portfolio continues to perform very well and in many cases. These are the best credit metrics, we've experienced in quite some time and the second quarter as low as the case in prior quarters during Covid and our bankers and credit teams continued their diligence around conducting thorough credit and the credit reviews with particular emphasis placed on non pass credits or Ho.
<unk> portfolio and credits and the Covid specific low pass risk rate categories.
Our second quarter credit metrics remain very encouraging.
As noted on slide on net charge offs are running on a respectable 17 basis points, our classified asset ratio of the clubs on a very strong 6.8%.
<unk> also decreased this quarter down to 27 basis points and past dues were down to just 7 basis points, which collectively points to the great effort of our relationship managers and credit officers across are keeping a strong focus on sales.
Many of US appreciate that and in order to obtain these sort of credit trends and it takes discipline and active management during the second quarter, our relationship managers and credit officers not only experienced an uptick and credit requests and loan growth. They also work to see all 4 of the major credit metrics improve as well great work everybody.
Our credit team continues to bounce back and forth between offense and defense as I worked diligently to assist our relationship managers and structuring new loans appropriately as well as maintaining and alertness toward the existing portfolio and looking for any trends pointing towards incremental deterioration tactic.
Tactically during the second quarter of a credit team essentially accomplished the detailed credit reviews and hotels and non pass exposure for.
For the second half of the year on their attention will remain on the Covid segments particular hotels again, it's a good report on hotel occupancy and revenue per room average daily rate all trending in the right direction as to occupancy we continue to run about 5% higher than natural rate with our hotel portfolio seeing 65% occupancy through the first 2.
2 months of the second quarter.
We expect June occupancy to be even higher and that national occupancy rate has trended up in June as well. If you recall, we downgraded all our hotels to criticize last spring at the onset of the pandemic is now tied to review what has transpired and begin to look to establish upgrade targets over the next few quarters or.
Our credit officers have initiated a hotel upgrade plan for our criticize hotels as such the credit officers will be looking at guarantor support operating trends over the last 12 months and the ability to meet minimum on P&L.
Debt service coverage ratios hopefully we will have another good report for you on hotels at our next call in October.
As noted on the slide we expect continued reductions and our allowance to total loss ratio over the next several quarters as the overall economic outlook continues to improve and our COVID-19 impacted loans segments continued to trend positive.
All in all Pinnacle's credit metrics have held up really well and even though we have shifted back to a more offensive stance. We will continue our thorough defensive work, particularly on the Covid impacted segments.
Now on a fee income.
Lots of good news here for the quarter fee revenues were up more than 34% over the same quarter number of last year and wealth management, which is investment services Trust and insurance had a great quarter and comparison to last year up more than 35%. We continue to be very active on the hiring front across our franchise, particularly as we continue to build build wealth.
And the Carolina, and Atlanta, and eventually Birmingham and Huntsville.
And think that we were disappointed in our mortgage results for the second quarter quite the contrary mortgage has had a phenomenal last 4 or so quarters at $6.7 million for the second quarter. We are pleased and believe they have and excellent chance on hold on that run rate for the rest of the year, assuming the rate environment holds.
Also on sales had a great quarter and we're optimistic that this business should hold for the remaining 2 quarters of this year.
We also had a great quarter with respect to our equity investments excluding BHG 1 of our investments completed a follow on equity raise during the quarter. The results of which provided a significant insight into and updated valuation of that investment and thus we booked a $2 million increase for this 1 investment.
I'll talk more about BHG and just a second.
And so expenses, specifically incentives I think everyone is familiar with the impact of incentive costs, our expense base and if our earnings hit our targeted cost go up if not Costco day.
Last year, we did not hit our targets does and incentives were significantly below expectations with our eventual payout equating to 65% of our targets and we get.
And fully anticipate based on the current operating environment that 2021 will come back strong and hopefully our associates will recoup some of the lost incentives from 2020.
Along those line, we've provided an opportunity in 2021 for our associates and outside of incentives as much as a 160% of target.
However, and as we've said repeatedly there is no free lunch increased incentives only occur if our earnings growth supports the incentive.
Italy, we anticipate Max payout retreating back to the traditional 125% target in 2022.
All in incentive costs are higher than anticipated this quarter as we began accruing at the maximum award for 2021, thus we experienced a catch up from the first quarter. We believe the incentive costs for third and fourth quarter will be slightly less than the second quarter as to our overall total expense run rate. We now believe that expenses for the third and fourth quarter should be flat to down from there.
Myles, we booked and the second quarter.
And quickly some comments on capital I mentioned and the sub debt redemption earlier, we also intend to redeem and the other $120 million and sub debt issuance. Later this year. So we will work with our regulators on that matter. After the next over the next few months.
And as I mentioned last time on on what to get just reinforce the point, we've intensified our focus on tangible book value growth by adding a peer relative component to our leadership's equity compensation plan.
We're currently calculating and annualized increase of 13, 5% and our tangible book value per share and thus far this year, our plan and design that we will compare our tangible book value per share growth with debt of our peers, along with relative return on tangible common equity and relative total shareholder return and.
Determining the best and results for our rate of acquire leadership.
As to our outlook for the rest of 2021 I won't go into the slot and depth as we covered much of this previously. So this again is really a summary of the for the model builders of what we currently believe obviously, we realize that we appear more optimistic than most.
We have great confidence and our people our markets and our clients and renewed optimism about where the pinnacle is headed now BHG.
This is a slide that we've shown for several quarters the blue bar on the chart, our originations with record demand set for the past 4 quarters and fact, they've almost doubled on originations over that time period.
<unk> would also tell you that their market share is less than 1%. So we believe much room for growth and.
And their research would indicate that the personal small and mid sized business lending home improvement and patient and <unk> businesses are collectively on $925 billion annual loan origination business and DHT intends to be competitive and also the green bar represents loans on which Daniel sale has been reported.
These loans are sold and downstream banks. This is a traditional <unk> model, which generates revenues associated with our gain on sale model.
As to the bottom left chart Barbara coupons have fluctuated only slightly over the last few years ending at 13, 4% for the second quarter.
Buy rate fell to new records at just under 4% and the second quarter. So net spreads remain and the midnight, which overtime is up from previous years.
As noted on the text on the slide BHG executed on their second securitization and the second quarter last year, but purpose securitization was approximately $177 million. This year securitization of approximately 375.
Also we're looking to conduct another similar style securitization before the end of 2021 doing this allows them to take advantage of some of the very attractive funding rates as well as diversify both our revenue strength and funding sources.
We consider the diversification strategy and good idea, even though the gain on sale model results and more near term earnings for BHG.
Of note is the issue of rapidly approaching a 50.50 revenue split between the gain on sale and on balance sheet models and believe in 2023 and they could in fact be there.
Much sooner than we anticipated the bottom right chart now shows over 1200 banks and the HTS network and almost 700 individual banks acquired BHG loans over the last 12 months.
And 1 of the strongest funding platforms for a gain on sale model and the United States.
As credit we've updated and Bhg's recourse obligation chart on the chart on the left the green bars detail loans that <unk> sold and a network of immediately and other banks, which currently amounts to just over $4 billion and credit sold through their network. The Blue line on on the chart details the recourse accrual as a percentage of outstanding low.
And with deep.
Other banks as noted the recourse obligation as a reserve for future loss absorption as noted on the chart. During 2020 BHG increase their reserves in anticipation of potential losses from the pandemic with the reserve standing at 765% of outstanding loans at year end 2020 during the second quarter of 2000 and.
'twenty, 1 and as a result of a better outlook DHT decrease the pandemic related reserves and the second quarter as a percentage of level. It was down approximately 100 basis points.
As noted on the chart at the bottom right. The trailing 12 months losses landed at 4.5% basically consistent with the last few years and.
During the year, where who knew how COVID-19 would impact loss rate.
And this chart has also been updated from our previous presentations to better split the actual credit loss from losses BHG absorbed from Reimbursable banks for the unamortized premium and the acquiring bank paid to get below.
As the chart indicates the prepayment portion has gotten somewhat larger over the last few years.
Keep in mind and prepayment losses are for good loans and Theyre just paid off prior to maturity.
Could be attributable to several several reasons, but primarily the actual premium pay for BHG credit has gotten somewhat larger consumer credit, which is occupying more bhg's business tends to have a higher prepayment track record and loans are being paid off earlier as rates have decreased.
We began updated these 2 charts the quality of Bhg's borrowers has improved steadily in the past and over the last few years DHT and continue to refine their scorecards and increase the quality of its borrowing base again, the right chart and as I've said before maybe the most powerful chart I have to offer related to DHT steadily improving credit quality.
And at losses by vintage losses continue to level out and earlier months from originations are pointing toward a lower loss percentage over the life of the underlying loan.
The quality of the borrowing base and our opinion is very impressive and much better than just from a few years ago.
Lastly, BHG had another great had another great operating quarter, and the second quarter and exceeded everyone's expectations, yet again, we've upped our expectations for 2021, and now expect and 2020.1 to produce outsized growth in relation to 2020 of approximately 40% compared to our prior estimate of 20% and 25%.
And or more we're.
And we're also adding a growth factor for 2022 of approximately 30%.
No rest for BHG as they continue to build a strong and more revenue and diverse franchise and <unk>.
Slide indicates they've got more ideas are and some still some phase of development, which should foster continued growth over the next several years.
All in and we believe <unk> had a fabulous quarter.
And 1 that continues to give us much confidence that our franchise and as people are poised for outsized growth for the foreseeable future.
With that operator, we'll open it up for any questions.
Thank you Sir the floor is now open for questions. If you would like to ask a question at this time. Please press star 1 on your Touchtone phone and Alex will be given preference during the Q&A again, and we do ask <expletive> Weil you pose your question that you pick up your handset to provide optimal sound.
Quality.
Our first question is from Steven Alexopoulos from Jpmorgan. Your line is open.
Good morning, everyone.
Understood.
Oh does start so the pace of hiring seems to have picked up pretty nice rate 36 revenue producers and in the quarter.
As a function of you guys, having more of an appetite to increase hiring here or are you just seeing more opportunities from other banks.
Yeah, I think that's a great question on the short answer is we are seeing more opportunities from other banks I think.
You've probably heard us talk about this.
And our approach to hiring revenue producers that sort of the top of the waterfall for us and we have.
And said all along and we've got an unlimited upside if we have experienced people that were come in and can move large books of business.
As many of those as we come across and if any of those we have opportunities to hire.
But the case is that we are.
Finding greater opportunities to hire people and.
As I said, there and a comment Steve I think.
A lot of that's tied to <unk>.
M&A activity.
Just the frustration that go along with being acquired and it might be and gave some of the moh just in your market you have to be on the.
Wrong and of the state there if you will and so that's great and a lot of opportunity and I think a couple of the big banks are just and a difficult spot, whether it's with regulators or whatever but the bureaucratic ground is really working on their people and so theres a lot of vulnerability that comes out of that okay.
That's helpful. That's good color.
I'm curious if we look at the 216 revenue producers that you on boarded over the past 2 and half years, given that we've basically been independent that Mike for about half the time they've been on your bank as the economy now more fully reopens rate people are getting back to in person meetings are you starting to see an acceleration in terms of that group being able to move the relationships.
Over to pinnacle.
I can't give you a definite answer on that statement and I have and I don't have the data.
And just yet to say that for sure but that is my intuition and I think a lot of the growth is coming from.
New hires moving their books to us that's a large part of what the growth and I do think it's a true statement debt during the pandemic.
People were they were able to move business, but it definitely had a longer sales cycle and and took them longer to get it done and so that growth was somewhat retarded your and.
During the pandemic and so our expectation is and it should pick up okay.
And thanks, and just finally on BHG with quarterly originations as Harold pointed out running at 2 times the pre pandemic level, what would explain that and is it sustainable.
Yes.
I've had quite a few conversations with BHG about that they believe it's very sustainable.
They attribute the growth rate to better analytics.
They it's higher and more people and there are analogs group I think they are going after a market with much more pinpoint precision and believe that there is plenty of business out there for them to go try to target. So.
Relying on what they what they told US and then looking at what they are asserting for the rest of this year and next year.
We're pretty excited about what they've got in front of them.
Okay.
Great. Thanks for all the color.
Right.
Your next question is from Stephen Scouten from Piper Sandler Your line is open.
Hey, good morning, everyone.
So I wanted to dig down into loan growth a little bit it looked like the C&I growth was particularly strong which has always been 1 of you on strong states, but im wondering if theres been any changes as the bank has grown and have you had to.
And look at larger loan sizes or the balance sheet, becoming any less granular overtime and then also the growth and consumer real estate looks like a lot of that from Nashville, and so if you could just dig down into.
And what Youre seeing on the loan growth side, a little bit more.
Yes.
I think there were 1 or 2 larger credit is call. It <unk>.
And $30.40 million and the first quarter that can't Romania, and the second quarter.
And that were booked that help bolster loan volumes.
But I wouldn't think debt debt, that's any different than.
Call it over the last several quarters, there's always been some larger credits mixed up in there.
As the consumer real estate.
We are seeing and some increased traffic with respect to that product.
We're seeing.
With with where the market is right now.
And Nashville, particularly I think is unique in some respects with a lot of <unk>.
Smaller businesses and.
And also with.
Call It sons and daughters of clients that are looking to get into the house and get their first home acquired or otherwise bought the house that they may not want to go through the traditional mortgage market with.
And so we accommodate and them as do I think a lot of other banks.
With particular products designed to meet that need.
And so I think that's what's causing some of the increase particularly in Nash.
Steve I might add.
<unk>.
2 that did things and.
We've not increased our.
House limits in years and so.
So again there is not.
Tangible and intent to drive credit size is large larger and we're.
And we're always cautious about that game because obviously.
Particularly if you're talking about upper middle market credits.
Credit generally the lower the rate and.
And so forth. So anyway I would just say, we've not increased our house limits or done anything that would cause us to focus on higher tickets and.
And in particular.
Great.
And I might add to that state and whatever its worth I think.
And our north and South Carolina footprint, and let's call. It the whole B and C footprint. Their growth was very strong I think Rick Callicutt might tell you that it was the best loan growth quarter, and the history of run and that organization there and.
You can see that it is more skewed towards C&I, which was what our thesis is don't screw up their CRE business, but.
Bolster on C&I business, and so we did and increased activity and C&I sector there.
Got it Okay, and then it looked like commercial construction picked up a good bit and the quarter as well and I'm just kind of wondering what you guys are seeing in terms of new projects coming on line, if you've seen a material pick up there and kind of your customer sentiment and new investments and some of these on some of these projects.
Yes, I don't know.
Any <unk>.
Significant new projects, we are seeing some come across but I think a lot of the construction funding.
And the second quarter were projects that had worked through their equity base.
And now there and are there into.
What are they using bank money to fund debt.
And the additional construction requirements so.
I'm not maybe Terry has got some updated information on that but I don't we don't see.
There is obviously.
And.
So.
Incoming traffic with respect to multifamily.
And warehouse.
We're not seeing a whole lot of additional requests for <unk>.
Call It hospitality are.
Spec office.
Okay, Great and then maybe last 1 for me just kind of thinking about the fees for a minute and I think you guys said you would expect mortgage to kind of be similar to this quarter and the back half of the year.
But if im looking at your slide I guess, it's slide 16, it looks like production and.
And even gain on sale margins are still fairly well elevated to 2019 levels.
And I'm just kind of wondering why that revenue would kind of declined more to our sustaining and a more 2019 sort of level and thats. The case, well, we think there's a lot of things going on and mortgage right now.
They've had they've had a great last year or so they produce a lot of revenues for us.
But the housing markets.
I think and our most vibrant.
Markets call, It Nashville, Raleigh, Charlotte and Atlanta.
The inventory is really getting depleted.
And then they're finding a lot of cash buyers and so.
The mortgage tickets are either non existent or reducing and.
So we're trying to kind of anticipate that a little bit.
And here going into the last part of the year, which typically.
And would be slower.
And you see the I think the other aspect of that is.
And.
Compared to 2019 were in markets that we werent in like Atlanta, Birmingham, and Huntsville, and if you looked at the <unk>.
Number of mortgage originators and incremental head count versus 2019, so we've added origination capability.
Yes, that's a great point okay.
Well, that's great and then maybe 1 last tack on just the SBA run rate it looked like it jumped.
Pretty significantly on a quarter is that is that sustainable or is that more kind of a 1 time increase on some some built up production on balance sheet that you sold on.
Yes.
Runs through Rick Callicutt, and had a couple of conversational Rick about that he believes is sustainable he believes well there'll be a big.
Kind of a congressional.
Proposal here over the next month or so right now and we can sell up and 90% of all.
From 75, and we believe and the next month or so we're hopeful Congress will renew that and extend it. So we're hopeful for that and because that would play into that assertion.
Maintaining that same volume here over the next couple of quarters.
Perfect. Thanks, so much for the color guys and congrats on all the continued progress.
Thanks, Steve.
Our next question is from Jennifer Dambra from tourists Securities. Your line is open.
Hi, good morning.
Hi, Jeff how are you on.
Great how are you.
Greg Great question on <unk>.
And you hired some.
Revenue producers and Birmingham, and Huntsville could we see more hires and what are currently non.
Pinnacle markets in the coming months and quarters and you guys.
And you indicated before I guess, you've seen more proactive.
And coming calls.
On sequel interest didn't work and clean.
Yes.
I think the answer to that is yes Jennifer.
Yeah.
We are seeing there and the comment I'm not I don't want to necessarily foreshadow that we will go to.
Additional markets, but on the other and I'd be shocked if.
If we don't have other opportunities going forward, thank you or tell.
<unk> on our sentiment is that.
Right.
There is increased vulnerability and we are having.
More people reach out to us and.
And so forth so.
<unk>.
I don't have a market that we are ready to announce but I'd be surprised over the next 12 months, if we didn't add wanted to.
And those auctions stretch out.
Over to Texas or other markets, we might not necessarily thank Doug for pinnacle.
I don't think so Jennifer I'm and I don't want to rule.
<unk> is that because it's a fabulous market and there might be a day and time, we wanted to go there, but I'll just say most of the thrust and most of the energy right now I would classify as in the southeast and so.
Again I think it's.
Markets East of Us and south on us and so forth.
Okay, and when Youre hiring how much wage pressure are you seeing right now.
I would say we are seeing a little.
Wage pressure, but.
At this point I don't see there is overwhelming and the hiring part of the equation, but I think youre on the right track and that we have to work hard and theres sort of 2 aspects to it 1 is offense and 1 defense. So we're constantly on offense trying to iron net favorable also constantly on DFAST trying to protect ourselves.
And so we do see some pressure as people come after and target on our associates, we don't let them.
We're not likely to let good associates get away and so you do see some.
Price pressure there.
Okay. Thank you.
Your next question is from Jared Shaw from Wells Fargo Securities. Your line is open.
Hey, guys good morning.
Thank you Eric.
And I guess, maybe sticking to the theme Jennifer brought up and you look at slide 8.
There's a lot of Florida markets and the southeast.
And if you think that as you go forward over the next few years you can you can sort of pick off those markets individually with.
And with the same strategy you did and in Atlanta or is that a is that an area, where you really need to start thinking about potentially doing some type of a deal to get into those markets and.
Hit more of them it at 1 time.
Yeah.
Let me.
Let me say if I can.
And the clear on that 1 is we like the top 25 markets in the southeast period, which as you say a good number on and are included in Florida and so.
Those are attractive markets to us.
And I think the second thing I would say as I've tried to be clear, although evidently was not clear and our last call that I think.
M&A is on the table and it was.
Proud to say to people is that the only reason I say, it's on the table is because I've said before it wasn't on the table and so I'm really just try and as I look I've said, we wouldn't do it and I'm, sorry, and we might do it but all of that and say that is not the most likely path for us, but most likely pay and I love de Novo starts and I think the arc.
34 de Novo start our price better now than I ever remember them and.
And so you know to Jennifer's question, we are having people that are reaching out to us and the more people that reach out to us and that we hire the more of that creates a dialog that opens opportunities for other markets and those kinds of things. So I guess jarrett and trying to be as direct as I can be.
I don't want to ROE M&A out, but I wouldn't view as debate and most likely the most likely as we would extend.
On a de novo basis, and I do believe we're likely to have some opportunities over the next few years and.
Most of those top 25 markets.
And so that's great color, Thanks, and then <unk>.
Shifting limited to BHG.
And as BHG sort of expands their mandate and growth beyond <unk>.
First the medical professional and some of the licensed professionals into these newer areas or the bank buyers through the bank buyers have the same appetite for that new form of customer or do you expect that that paper and it's going to be what really.
Fuel's future Securitizations.
Yes, well I think Phil.
Pes are left right left right through Securitizations and gain on sale.
No.
Carefully.
And I will speak into the individual that runs their outplacement.
Group.
The person that positions loans with other banks and.
And he told me I guess this was 4.5 months ago that he could put the 3 X through that pipeline. So there's plenty of appetite that's available to BHG to run to run loans through that gain on sale model.
But that said I think they still believe net revenue diversification and funding source diversification.
Is where they want to go I think a 50.50 split maybe where they think they'll they'll end up and start.
Maybe with.
Less frequency going to the balance sheet model just to kind of just because I think at that time.
And bill, but they'll be pushing more loans for gain on sales so.
<unk>.
<unk>.
Great point and all of this is that they have the option.
They can always.
Reduced their appetite for the balance sheet model and run and more loans through gain on sale.
And thus generate more near term profit if they so desire.
But as it sits right now they're trying to get to that 50.50 split.
Okay, Alright, Thanks, and then just finally for me.
Harold you talked about the maturing Cds coming due over the next 2 quarters should we expect that you just sort of let those run off and.
And CD balances decline and potentially cash balances go down or will most likely be renewed into a lower well I think there is there is.
There's 3 or 400 million on that that's in the wholesale group. So those will get redeemed, but the rest of our client Cds and we fully intend to renew those.
And so they will probably get renewed down into the call. It the 25 basis point category somewhere along that line.
Great. Thank you.
Your next question is from Brett Robinson from Hovde Group. Your line is open.
Hey, good morning, everyone.
Hey, Brett.
Wanted just to talk about the guidance for a second on NII and I realized that the PPP income and is likely to impact the margin negatively and the back half of the year and.
Hard to predict what that income will be but it would seem like your and your guidance around NII.
<unk> and the first half of the year it could be conservative just kind of given the growth and essentially implies that the margin pressure could be like 10 basis points.
A little more and maybe just.
Walk through how you're giving that guidance and the components on it.
Yes sure.
Yes.
But.
Well first of all Youre right on your point about PPP.
We don't anticipate nearly the revenue traffic or revenue flow and and we got on the second quarter and the third and fourth quarters.
On the round 2 loans are the ones that will have most of the forgiveness opportunities here over the next call it 3 or 4 quarters, they have and extended tail their 5 year credit its all that kind of stuff but.
We will work with those borrowers borrowers and try to accelerate given as best we can.
But that said.
I've got.
Currently at 18 basis point kind of deposit rate right now.
On my deposit book I think.
It's going to be.
Slower more methodical a down draft on that to get to 10 to 15 basis points over the next quarter.
Quarter or 2.
So I don't have I don't have the same opportunity that I had and the earlier part of the year.
To get any kind of additional low middle of the out of the pot of interest expenses.
Loan yields.
They're going to hold and we hope they are going to hold there is probably some more downdraft there, but all things considered Brett we just believe that the second half of the year by and a number ought to be fairly close to what.
The first half of the year.
And Mike was.
Okay.
Makes sense.
Yeah, Yeah, I know and there's a lot of moving pieces to it so minor.
And I understand the guidance.
And the other thing I wanted to ask was just you've had questions around BHG and sustainability.
The recent trend and production <unk> is actually typically their strongest quarter was there any inkling that maybe <unk> pull forward some volume from <unk> or can you talk maybe about just.
Thinking about obviously really strong numbers, but it would seem like <unk> is typically where you really have to price.
Any thoughts around seasonality.
And that 1.
I've got no feedback from them on that point I don't think there was any pull.
Through our <unk> volume into <unk> I don't think there was any kind of acceleration there.
On.
So we believe that.
And that gave us a 40% pretax growth number this year so.
Just on what we're seeing.
That's very doable.
Okay great.
Great.
Congrats on the quarter and thanks for the color.
Alright, and I think Britt.
Your next question is from Katherine Miller from DB. Your line is open.
Thanks, Good morning, everyone.
That effort.
Maybe 1 question on credit and Theres a lot of conversation today about.
Reserve levels kind of heading back toward the day, 1 and diesel.
Number, which I think for you is about 67 basis points, how do you think Harold about.
Do you think that feels low do you feel like you'll get that low or where do you feel like.
Your guidance that does present a ratio in may.
Yes, I don't know I don't think we will get that low kathryn to be candid.
When we are and that that area our reserve levels were.
At the low end of the peer group, so we're not targeting anywhere near that number.
But we do think we've got some more room to go with respect to our allowance.
And we've been able to margin down.
So far and we.
We think we're going to be able to margin downhole.
But I don't think we will I don't think we will see that 70 basis point and numbers you were talking about.
Okay.
And then that Covid.
A question on the NII guide and the back half of the year is there.
Any change to excess liquidity incorporated into that guidance or how should we think about the size of the balance sheet outside of outside of just the high single digit low growth.
Yes, I think I'll think about balance sheet will come up some.
Over the next 2 quarters.
We've got some opportunities to get some more wholesale funding off our balance sheet, so that'll be that'll come into it.
But.
We're not looking to sell.
And do another.
Big investment Securities.
On a transaction.
And the second half we will just try to maintain what we had.
Got it just still core.
NII should still be.
It's just really lower PPP debt that is.
I think the second half of the year to day kind of equal to the first half of the year Yeah. That's it.
Okay got it.
And then 1 last 1 if I could any updated thoughts on how BHP and thinking about and a liquidity event.
And what are their kind of pros and cons and thinking about the timing of that for this year.
I think.
Like we've said all along.
They continue to study and our markets.
And like we've said, they're having followed what they're not doing it for fun.
They've increased their sophistication around.
And whether it would be hedge funds or our specs are ipos or whatever so there'll be a liquidity event.
Sure when it's going to be.
But both of the 2 founders that remain and the company that have significant.
And they believe equity tied up and the company will want to see a liquidity event at some point and and it's hard you just can't blame them for that.
We just don't know when it's going to occur.
They it's their.
And their company they get they get to kind of make those.
Big decisions.
We speak with them about it periodically and.
But so far so good.
The runway for growth for them appears to be.
Pretty low.
Great. That's helpful. Congrats on a great quarter.
Thanks, Kevin.
Our next question is from Brock Vandervliet from UBS. Your line is open.
Hey, guys it could be about Abraham for Brock just a follow up on C&I and utilization. What are you guys seeing now relative to pre pandemic levels has there been.
Any kind of balance there and what are your assumptions in terms of the <unk>.
High single digit loan guide as far as that goes.
Yeah.
It's a good question, we're not seeing any kind of increase utilization from commercial lines.
It's still pretty flattish over the last 2 quarters.
So and we're not anticipating net moving significantly over the next 2 quarters. So.
And I don't know what you might be hearing from other from other banks, but for us it's.
It's kind of a non event right now.
Okay, and then just beneath the surface on debt CRE portfolio is it still pay off their debt.
Driving some of the pressure and just the competitive dynamics overall and your commentary there.
We had another.
Got it.
Big quarter for pay offs.
And the second quarter, we just have to have enough new business to overcome it but it was it did accelerate some and the second quarter and commercial real estate was part of it.
So.
And I think the commercial real estate guys would tell you that.
They are seeing increased pay off traffic.
And with projects go on Department of Finance a lot sooner.
And.
I think thats, just kind of the environment, we're in and we are on a sustaining it.
Terry I don't know if you've got any.
Yes, I think that's right there is and <unk>.
<unk> the amount of money available for permanent financing and so generally.
Most of our bank borrowers.
Are here on a recourse basis like to get and into the long term.
On a product without recourse and so there's a ton of that money available right now.
Okay and.
1 more on on deposit growth pretty sharp contrast, and non interest bearing deposit.
Growth versus.
Non interest bearing.
And then just outside of the.
On the CD pay downs is that is there anything special going on there that we should be aware of in terms of that divergence.
I don't think Theres anything we typically have towards the end of the quarter some.
Some larger deposits come into the bank, but I'm not aware of any big ones this quarter.
And that I can kind of think about that come to mind right now.
Okay. Thanks, guys.
Thank you.
Our next question is from Michael Rose from Raymond James Your line is open.
Hey, good morning, guys how are you.
Good how are you.
Good Hey, just following up on the captains BHG question and the liquidity event and is there any reason you guys have spent a lot of time with this business you've watched <unk> grow and Florida. It's been a great contributor for you I mean, if there were to be a liquidity event at some point and the future would you guys consider just buying the whole thing just given all the positive.
But as Franz it seems like it would be a good fit just given your investment and what it's done for the company.
Yes, I think.
On that Michael.
And I always hate these questions would you ever goes when you get him and say Oh, I'd never do something and that's not a good spot and so I don't want on sale, we would never do it.
This or motivations of always been as we've had discussions about that topic in the past as debt.
There are 2 things that have been important to us in terms of how we.
And have liked our current ownership interest banned list and a majority interest and 1 is we like those guys have and more states and us and it's a good spot because they are really good at it but we want to make sure theyre as interested as we are and its ongoing success and.
2 honestly, we like the equity method accounting treatment and.
And so were we to buy more or all of that would change at all and so forth. So anyway, I don't mean to give a co and so those are the reasons that we've structured it the way we have they seem to continue to make sense to me, but I wouldn't want to rule out and so we.
It would never consider that.
Okay. That's helpful and maybe just as a follow up back to loan.
The loan growth, obviously, great momentum this quarter, you've made a bunch of hires you reiterated the high single digit growth for this year and I understand obviously this higher it's going to take time to ramp and.
And everything like that but any reason to think that that outlook wouldn't be conservative and as we get into next year and hopefully the economy continues to strengthen that you wouldn't be above that.
Yes.
Obviously, where the economy, the strength and an economic loan demand pick up that would be a boost to what we think we could produce.
And we rely on on modest economic loan demand and primarily market share movement right now the market share moving components Shouldnt change drastically, but if the economic loan demand portion.
And that would increase the like.
Loan growth.
Okay. Thanks for taking my questions.
Alright and Cmos.
Our next question is from David Bishop from Fig Partners Partners. Your line is open.
Yes, good morning, gentlemen.
No.
Hey, real quick question I wasn't sure if I heard this right, but and the preamble.
Hear that.
What are the equity investments.
<unk> had a valuation.
Gain on our appreciation and this quarter gave you a little bit of and insight and update the BH devaluation of so.
That rate could you any color you can provide around that number yes.
And yes, we have.
We were on I don't know how many we have maybe 30 or 40.
Kind of investments and venture funds and other kind of side investments. In addition to BHG Bac has by far and away the.
Most significant and largest so but we have others that.
We've invested and overtime.
And 1 of those funds.
Had a had a company a portfolio company that develop a product.
And on the result of that product has been a hit and.
And as a result of that and they did a follow on offering.
And that'll evaluation for that portfolio company.
Went up to X basically and we got to participate in that and so that was the $2.4 million.
I think we've mentioned.
3.3 years sort of like that and our press release, because there were other companies.
And then also had.
And enhanced valuations and so the $2.4 was just the biggest 1 of that.
That 3 point, whatever it was and the press release.
But David if I understood. Your question and I think you saw that apparel was indicating that that gain further insight into the BHG valuation and other assets correct I don't but I don't think Thats no days.
That's not the case 2 separate okay got it.
Got it okay I misheard.
And then turning to to loan yields just curious within your various markets here.
And if you're seeing any opportunities for better or EBIT.
Firstly are you seeing more competitive pricing just curious on pricing shaping across your various markets.
Yeah, I'll start with Terry and kind of finish but.
Loan yields are applied and have been for the last couple of quarters.
We can't get a yield curve that kind of <unk>.
That stays stable for.
And for fixed rate credit so.
We need that to occur but other than that.
It's just we're negotiating as hard as we can.
And to keep those loan yields where they are.
Yes, I don't think there is.
And I don't think there is a lot I can add to that and I think apparel.
<unk> sort of said, we're pushing hard and trying to keep the accountability and pressure and the system. Good best we can.
And then on pricing, but it's <unk>.
Slugfest I think for the remainder of the year Theres a lot of money, Jason and a limited number of deals so.
Got it and then 1 final question.
And I realize you don't pay offs and there can be some.
On <unk>.
Gross granularity here, but I noticed the Memphis has been down here in the past couple of quarters, and obviously, there's a lot of M&A and the background with that market just curious.
Any color you can provide to that market and how you view that market holistically overall thanks.
David I Couldnt quite understand the first part of that question are you are you asking for color commentary on the Memphis market.
Correct.
Yes.
Well.
And we like the Memphis market I think we believe we have and can continue to produce outsized growth there and we're making really good headway, we've done well on the CRE segment for some time, but we're making really good headway and the C&I segment and.
And.
And so we've hired a good number of.
Relationship managers financial advisers, as we call them and that market like we have most markets and we expect that and continue to produce our SaaS growth.
Got it appreciate the color.
Alright.
Our next question is from Brian Martin from Janney Montgomery Your line is open.
Hey, good morning, guys.
Hi, Brian.
Just 1 follow up Harold on that balance sheet question earlier, I guess could you say it was your expectation was that it was up the balance sheet would be up slightly and downsizing and was down slightly.
Up slightly over the next 2 quarters.
Okay and what are you.
We're trying to limit that as much as we can.
So we will try to.
Get rid of our wholesale deposits that come due.
And we will work with other depositors.
And try and get breaks down as fast as we can.
Yeah, Okay, and then just to be clear on the PPP.
I appreciate the comments on being less next couple of quarters, but your expectation would be that the majority of that $48 million or so.
Likely collected in back half of the year I think some of it bleeds into next year, but the bulk of it and expecting.
Our expectation and you hope to get it this year, we should get most of the $48 million.
Left and the next 2 quarters, but that will be.
As you scheduled it out and it will be less and what we've collected and the second quarter or the third and fourth quarter will be less and flips and the second quarter Gotcha. Okay. And then you talked about the plan on the hotel upgrades and I guess it sounds like there's some pretty good opportunity for upgrades and.
Yes. The next couple of quarters I guess, if that plays out is that how you think about it and I guess and return the classifieds and criticized and kind of baked into.
And the reserve release continuing.
Yes, I think yes that will have something to do with the reserve release.
But we should expect some upgrades this quarter, but I think most of the upgrades will likely be and the fourth quarter and the first quarter of next year.
Because some of those hotel loans went through a modification process and I think the due dates for that on maturity dates on those loans are coming up here and the fourth quarter and the first of all day.
Okay, Brian mechanics, and another thing that might be important.
Bayer is.
Very few of those loans are classified assets vast majority.
Our criticized assets and.
So we're expecting the migration from criticized to pass.
Got you Okay I appreciate that Terry and then maybe Harold just outside of the NII Guide and just the core margin if you strip out.
And get the drags on the PPP, but just kind of a core NIM ex PPP.
PPP I guess, how are you thinking about that.
The next couple of quarters.
And the sub debt and some other items on the cost of funds moving modestly lower.
Slower down down and that downdraft here now and we're just going on.
We don't see it going up.
We're going to try to keep it flat.
And I don't have as much room on deposit cost to pick up any kind of additional.
Increase in margins from that so it will all depend on how well we do on loan pricing over the next couple of quarters.
Got you Okay perfect I appreciate the color and nice quarter guys.
Thanks, Brian.
I am showing no further questions at this time. Thank you very much presenters ladies and gentlemen. This concludes today's conference call. Thank you for your participation and have a wonderful day you may all disconnect.
Okay.
Net.
Gross profit.
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Yes.
And then.
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