Q3 2021 Pinnacle Financial Partners Inc Earnings Call

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Once again today's conference is scheduled to begin shortly please continue to standby and thank you for your patience.

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Yes.

Yeah.

Yeah.

Yeah.

Yeah.

Good morning, everyone and welcome to the Pinnacle financial partners third 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 Pinnacle's earnings release, and this morning's presentation are available on the Investor Relations page of their website at www dot cheating.

C N F P dot com.

Today's call is being recorded and will be available for replay on pinnacle's website for the next 90 days at.

At this time, all participants have been placed in listen only mode.

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During this puts and takes you we may make comments, which may constitute forward looking statements. All forward looking statements are subject to risks uncertainties and other factors cause actual gold.

I'm sort of treatment of pinnacle financial to differ materially from any results expressed or implied by such forward looking statements. Many of such factors are beyond pinnacle financial's ability to control or predict and listeners are cautioned not to put undue reliance on such forward looking statements.

More detailed description of these and other person.

Is contained in Pinnacle Financial's annual report on Form 10-K for the year ended December 31, 2020 and has subsequently filed quarterly reports.

Pinnacle financial disclaims any obligation to update or revise any forward looking that's contained in this presentation, whether as a result of new information future events or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by the SEC regulation G. A 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 F. P dot com with that I am now going to turn the presentation over to Mr. Terry Turner, Pinnacle's, President and CEO.

Thank you operator.

Like the rest of it being with US this morning.

In my view third quarter wasn't exceptional or with very strong loan growth very strong core deposit growth.

Income growth and strong non interest income growth.

The quality of the cycle last number for most key asset quality metrics and importantly are.

We're laser focused on tangible book value accretion continued to yield strong results I believe what is evident is that our decade long approach to attracting an exciting market best bankers and empowering and enabling them to create raving class is in fact in written shareholders in Mcdonald's the sustained execution of that.

That model I expect that to continue to produce exceptional results for an extended period of time.

There have been various studies over here on the key shareholder returns for our bikes will generally be about EPS growth rates revenue growth rate and asset quality.

Our business model is generally a roughly 80% spread business, which means an ability to consistently take share and grow the balance sheet is the key to revenue and EPS growth rate, which is why we focus intently on loan and deposit growth rates and so we began every shareholder presentation with this dashboard, which gives us read on revenue.

And then EPS growth balance sheet growth and asset quality.

Of course, we always start with the GAAP measures, but I found for me personally I felt it was all a number of non-GAAP measures have any better ascertain how well we're performing on the key variables that we're trying to manage your patents and you look across the top row, you can see remarkably consistent up into the right growth in revenues EPS and adjusted <unk>.

Pre provision net revenues.

Generally across the second row, we produced net loan growth this quarter, even with maybe more PPP pay downs and forgiveness annualized organic loan growth excluding the impact should they be paid was 15, 3%.

Core deposits, specifically noninterest bearing deposits continued so far in Q3 and all of that resulted in a tangible book value per share CAGR of 12, 7% since 2016.

Well the bottom row, you can see our asset quality is formed exceptionally well even during COVID-19 net charge offs are inside our targets and the other key problem loan categories, we monitor or a decade long lows.

Peel back again.

Just a minute to provide better insight as to what causes the key growth metrics, so consistently up into the right.

Hadley, we're positioned in some of the best markets in this country for growth, which of course is the simplest part of our growth formula where she plays outside of growth simply because the markets in which we operate are expected to continue to outgrow the nation, but beyond that as a result of our ability to attract the market best bankers both in the markets in.

Which we currently operate as well than other large urban markets in the southeast where we're likely to have additional market expanding opportunities.

And the proven ability of these bankers to why our clients in an environment, where our largest competitors have so many angry and frustrated class should yield meaningful outsized growth and I hasten to add our formula only hiring highly experienced revenue producers, but to say that.

Unusual position of producing outsized growth, while maintaining an attractive asset quality metrics since the market share movement occurs as a result of these experienced bankers moving their borrowers.

They're well familiar and labor problem credits behind its the only way I know to reliably produce such rapid growth on a sound basis.

It seems obvious from the dashboard flagged that we began with this model has in fact produced rapid reliable growth over an extended period of time, but I want to spend a minute focusing on our model and why I expect it to continue to produce outsized growth.

If my model is radically simple as a concept is our relentless execution over 21 years that differentiates us as I've already said, our bond with the Dragons excise market best bankers empower and enable them to create raving class, which will then drive like shareholder returns our associate engagement.

Literally among the best employers in the country.

Is long standing.

Across virtually every associate green light.

Like being one of the best workplaces for women for millennials for parents.

And it's across our entire footprint in virtually every major market.

It works that way because we've got a unique hiring model.

We've got a values based culture, our annual incentive model, where 100% of ourselves is when they lose together based on achieving corporate performance targets for things like asset quality and EPS growth rates, our long term incentive models, which makes shareholders out of every single associate and our leadership management and accountability.

For how well they engage their associates just to name a few over the years I've heard a number of bankers, saying that they were running the pinnacle model, but honestly virtually none of them were doing any one of those things that I just mentioned building.

Building on that foundation. Besides associates are empowered while their clients, which creates right advance things like our focus on geographic decision, making close to the client as opposed to centralize a lot of business structures, which when combined with our signature credit system would you know speed of response, Oh Wow budget.

Every single subject is authorized to spend any amount they deem appropriate in order to wildfires.

All of these have recognizably different than our primary competitors, which enables these highly experienced associates to while they are flat.

In the center ore, we're looking at our net promoter score provided by Greenwich for businesses with annual sales from a million to $500 million. Our net promoter score is markedly.

Both the state of Tennessee, and North Carolina, and extremely high rate high ranking in every metropolitan market in which we have large enough share to produce statistically valid sample in fact, according to Greenwich, We have the second highest net promoter score in the United States S. Indeed, an unusually light gauge client base.

Recommend us to their peers and results and strong momentum maybe they also indicate a high likelihood that they intend to do more business with us and all of them.

The far right you can see that we successively successfully translated that relentless focus on our associates and clients into shareholder value shareholder returns have been outsized I might even say astoundingly outsized from the beginning and over the prior 10 year five year three year and one year time horizon.

So as you can see the model has indeed yielded remarkably reliable and predictable outcomes and then finally as it relates to the sign of the sustainability of the growth one of the things that has at least so far to about what our future growth is is the pace at which we're attracting these market best friend.

New producers I don't think it's a secret that a number of the bikes.

That are the largest market shareholder in our markets, which are in the south east are extraordinarily vulnerable and I would say enbridge in Dallas some are vulnerable.

It simply becomes a large bureaucratic.

Or in what appears to be regulatory difficulties, which invariably makes life bikers medical and some are in and we're really focused as a result of merger and integration projects.

But it was widely recognized as an employer of choice for all the reasons. We've already discussed this morning, and the more bankers we hired from these large banks the more bankers, we're able to hire from these large banks much like our haven't created class their net promoters that recommend us to their friends and peers. We've created associates that are net.

Others who've asked for an adviser fears from the former employees employers to join us at Pinnacle.

This has created extraordinary opportunities to hire in the markets that we currently operate in but its also created market extending opportunities like Atlanta, Georgia, Birmingham, Alabama, Huntsville, Alabama, and I fully expect that we'll encounter other similar opportunities in other large high growth markets around southeast.

As you can see on the left we've attracted a very large number of revenue producers over the last few years in fact, roughly 22% of our revenue producers had been here less than two years thinking about the 23% of our revenue producers have been here less than two years. Our experience is that it generally takes relationship.

Manage a four to five years to fully move their book of business. So that would leave me to believe we're currently incurring 100% of the expenses that are associated with substantial revenue production, which should materialize over the next two to three years you can see the power of that not only on balance sheet revenue growth, but on earnings growth as well.

So the right. He gained some sense of the power of the model when you attract so many experienced revenue producers from the banks that have the largest market share in these markets youre in an unusual opportunity to capitalize on their vulnerability and accelerate share gains. So in short in addition to the highlighting the up.

And to the right performance that we've had and continued this quarter on virtually all key metrics within fluid shareholder returns I tried to illustrate both why I believe it has happened and why I'm. So personally excited about the ongoing growth opportunity yesterday for the firm with that I'll turn it over to Harold for a more in depth look at the quarter.

Thanks, Terry and good morning, everybody. We're again pleased with our third quarter loan growth results. Excluding PPP average loans were up 14, 2% between the third and second quarters.

And as to end of period loans at September 30, as compared to June 30, we're up 15, 3% overall loan rates were up slightly from the second quarter as of third quarter was again assisted by a P. P. P forgiveness.

We believe we will see another meaningful quarter of PPP forgiveness in the fourth quarter. So that P. P. Pes impact on 2022, hopefully will be minimal.

Due to accelerated forgiveness third quarter yield of PPP loans rose to eight 4% from 5.47% in the second quarter, we recognized $21 million of PPP revenues in the third quarter down from $26 million in the second quarter due to PPP balances now dropping to approximately 700 million.

At the end of the third quarter, we anticipate fourth quarter P. P. P revenues will range somewhere between $27 million.

Excluding PPP loans, our average loan yield approximated, 393% compared to approximately $3 nine 8% in the second quarter, we've been stating for quite some time that maintaining loan yields will be a difficult chore, but with some tailwind on rising rates, we can be hopeful that increasing loan yields are just around the corner.

Commend our sales force for what they've been able to accomplish so far this year.

Our new markets in Huntsville, and Birmingham have recruited seven revenue producers from a standing start and after only a few weeks of operations have approximately $40 million slightly more than deposits.

Great pipeline.

Atlanta continues to roll with 18 revenue producers and 345 million of loans at September 30, our optimism for these markets as well as our new hires in equipment finance and franchise lending give us reason to be even more optimistic about our loan growth targets for next year.

Previously we've been talking about high single digit growth for this year.

Our market leaders are even more optimistic about our loan growth and that will likely end up with low double digit growth rate for 2021.

That's a 2022 given current economic conditions, and our optimism about our new markets and business lines, we believe a growth rate for Lowe's.

Inclusive of PPP pay offs of low double digits as a reasonable objective for our firm.

Now on to deposits, we had another big deposit quarter core deposits were up almost $4.0 billion in the third quarter, we experienced significant growth in non interest bearing deposits ended up at not ending up at $17.0 billion at quarter end up 32, 4% since the end of last year, our average deposit rates were seven.

Seven basis points, while El P deposit rates. We're at 15. So we continue to see downward momentum for 2021 and look to see a few more basis points and reduce deposit costs by year end, helping us get there will be about $691 million in maturing Cds in the fourth quarter, which have an average rate of approximately 50%.

Seven basis points.

As to liquidity, we continue to look at ways to create increased earnings momentum through deployment of excess liquidity into higher yielding assets as well as elimination of wholesale funding sources, where we are getting close to accomplishing that we are optimistic that loan volume growth in 2022 should help to reduce our overall liquidity next year.

But this will be a multiyear effort. Our objective here is to find ways to put money to work in a rising rate environment without placing too much risk while tangible book value growth more to come on this as this will be a topic for several quarters, but suffice it to say that we are all gaining more confidence as to the stickiness of.

All of this deposit growth that has occurred over the last year and a half.

As to credit the four big traditional credit metrics of net charge offs classified assets NPA and past due accruing loans pinnacle's loan portfolio continues to perform very well and in many cases. These are some of the best credit metric ratios, we've experienced in our history.

For example, the trend lines for classified assets and NPA says <unk> 19, that's pre Covid then through Covid until today is a testament to the great work of our bankers and credit officers.

Additionally, we anticipate further declines in our allowance for loan loss to total loans ratio over the next several quarters given continued improvement in these factors as well as macroeconomic factors.

Now to fee income again lots of good news here for the quarter fee revenues were up more than 25% over the third quarter of last year wealth management, which includes industrial services Trust and insurance had a great quarter in comparison to last year, we continue to be very active on the hiring across our franchise, particularly.

As we continue to build wealth management in our newer markets mortgage rebounded this quarter as this pipeline rebuilt towards the end of the third quarter as a run rate issues for <unk>, we had another strong showing with respect to our equity investments.

Which exclude BHG.

Again, one of our investments finalize an equity raise during the quarter the results of which provided a significant insight into an updated valuation of that investment and thus we booked $11.0 million from this one investment along with about almost $4 million from other valuation adjustments I'll handle we don't expect a similar increase in.

In the fourth quarter.

We also received about 1 million and a half in vendor incentives or checking accounts as to BHG I'll talk about that in just a second.

As to expenses specifically incentives.

Thank you everyone is familiar with the impact of incentive cost to our expense base. So I won't go into all of that this quarter. We continue to anticipate in Alsace incentive for 2021. However, there is no free lunch increased incentives only occur if our earnings of <unk> growth support the incentive. Additionally, we anticipate our Max payout target.

Going back to the traditional 125% in 2022.

Our overall total expense run rate, we now believe that expenses for the fourth quarter should be flat to down from the amount we experienced in both the second and third quarters and anticipate 8% to 11% growth in 2022, which is primarily attributable to head count growth as well as our entering into new markets and new business lines.

Quickly some comments on capital, we intend to redeem a $120 million of sub debt in mid November and as I mentioned last time and I want to just reinforce the point, we've intensified our focus on tangible book value growth by having a peer relative component and our leadership's equity compensation plan, we're currently calculating and Ann.

Realized increase of 13, 4% and tangible book value per share thus far in 2021, which we believe is pretty good relative to other peers. Our plan is designed such that we will compare our tangible book value per share growth with that of our peers, along with relative Aro TCE at total shareholder return and the <unk>.

During the ultimate vesting results for our leadership groups.

Lastly, as to our outlook for the rest of 2021 I won't go into the slide in depth as we covered much of this previously. So this again is really a summary for the model builders out there of what we think about the fourth quarter of this year.

That'll BHG.

Many of you participated in a BHG investor call. We had last month al Crawford and Dan Mcsherry did a great job and updating everyone on BHG as activities.

There has not been any meaningful change since that time I will spend less time on BHG. This go around our.

I will highlight that BHG did close their third securitization since the conference call and look to have another probably in the first quarter of next year.

The blue bars on the top left chart details originations with records being set nearly every quarter for the past three quarters.

Green bar represents loans or with gain on sale has been recorded as these loans are sold into downstream banks.

Obviously, the gap between loan originations and loan sold on their way onto Bhg's balance sheet for either a downstream sale in a later quarter or perhaps becoming part of a future securitization.

Loan yields ended at 13, 9% for the third quarter as to the bank by rate fell to three 4%. So net spreads remain in 10% range.

The bottom right chart details now over 1200 banks in BHG is network and almost 700 individual banks acquired BHG loans last year.

Coupled with the securitization process BHG remains one of the strongest funding platforms in the country.

As to credit we've updated BHG is recourse obligation chart on the chart on the left the green bars detail loans, a phe is sold to their network of community and other banks, which currently amounts to $5.0 billion in credit sold through their network. The Blue line details the recourse accrual as a percentage of outstanding loans with these banks.

BHG decreased the pandemic related recourse reserves again this quarter to approximately $230 million at the end of the quarter.

As a percentage of loans it was 567% down approximately 75 basis points.

As noted on the chart at the bottom right. The trailing 12, 2021 losses landed at 473%. This chart splits the actual credit losses from losses BHG absorbed for Reimbursing bank clothing, unamortized premium the acquiring bank paid to get the loan.

The increase for prepayment losses is partially attributable to actual premiums paid for BHG credit has gotten larger consumer credit tends to have a higher prepayment track record and loans being paid off earlier as rates have decreased.

The top left chart, we've shown on several occasions, the quality of Bhg's borrowers has improved steadily in the past and over the last few years BHG continues to refine their scorecards and increase the quality of its borrowing base looking at losses by vintage losses continue to level out in earlier months, thus pointing toward a lower loss percentage over the life of the underlying loans.

Pandemic related events may cause these losses to move upward, but the quality of the borrowing base in our opinion is very impressive and is much better than just from a few years ago, just a tad moral credit with a low sold other banks credit losses are substitution losses as noted in the previous slide for the first nine months of this year have amounted to two 8% with third.

Quarter substitution losses coming in at around two 4%.

For loans on balance sheet held for investment and potentially future securitization.

Year to date losses have amounted to approximately one 3% with third quarter losses being approximately one 4%.

BHG had another great quarter in the third quarter and exceeded our expectations yet again.

We've kept our expectations for 2021 at approximately 40% growth. We're also sticking with a growth factor for 2022 of approximately 30%.

As the slide indicates they've got more ideas that are in some stage of development, which if successful ship Foster continued growth over the next several quarters.

BHG is in the process of planning their growth for the next several years. They believe that over the next few years interest income from our own balance sheet loans will likely exceed the gain on sale model.

How they proceed will obviously impact the timing for income recognition of gain on sale accelerates current income while the all balance sheet model recognizes income over the life of the loan.

As to the other business.

Business opportunity as noted on the slide they are analyzing all of these to further develop their financial plans as they aim to continue their outsized growth. So.

So loan growth and loan pricing for pinnacle in 2021, it will take a lot of work, but we are very optimistic.

<unk> growth has been remarkable deposit pricing continues to decrease.

Net interest income, we believe will be flattish for the fourth quarter.

She has another great quarter, and we continue to believe in that franchise expenses should be flat to down again in the fourth quarter with that of the third quarter.

Operator with that I'll turn it back over to you for questions.

Thank you Mr. <unk>. The floor is now open for your question.

To ask a question at this time, please press star one on your Touchtone phone.

We'll be given preference trying to Q&A again, we do ask that while you pose your question that you pick up your handset optimal sound quality.

Our first question is from Stephen Scouten with Piper Sandler Your line is open.

Hey, good morning, everyone.

Good morning.

Terry you did a really good job of kind of talking through the hiring strategy and how it's benefited you over these 21 years I was wondering if you could go even a little deeper into that and talk about what you're seeing on the kind of economic growth front versus the <unk>.

Takeaway hiring growth front and kind of how you think about that within your forward growth guidance is that still primarily in anticipation of growth from your hires are you guys seeing some actual.

Economic positive economic growth trends as well.

Yeah, I would say that we.

We have not seen a lot of what I would go pure economic growth I know, it's probably something better than zero, but it wouldn't be rover.

Our robust by any means if you look at things like line of credit working capital lines.

Ni lines those kinds of things, we're not seeing increased funding there.

And so again.

Economic growth is greater than zero, but it's not.

Very large it is more about.

Our.

New hires that are producing volumes.

Okay, and when you guys think about trying to forecast growth for your franchise I mean, how do you think about that is it hey, if we got 5% economic growth, we could actually grow 15% or do you guys break it down in that kind of fashion as you think about forecasting.

We.

Steve I think we're like anybody else, we're going to look at it different ways you know drive.

I'm trying to figure out what makes most sense in what the truth is in all of those kinds of things. So we certainly try to look at it that way I think in the final analysis.

We most frequently land down as sort of a bottoms up outlook what is it.

Our financial advisers believe theyre going to produce.

What is the market later believe theyre going to produce based on the aggregation of what those guys are going to produce and so at a rate at some combination of all those things but.

Partially but most confidence on market leaders in what they believe theyre going to be able to produce.

Okay, Great and then I'm wondering if you kind of talked about Birmingham, Huntsville, Atlanta, and some new product expansions that you guys have moved into obviously are there other.

I guess near term expansions on the horizon that you see whether it be new product verticals that you all would like to get into from a lending perspective or other new msas that you could highlight or do you feel like you've got your plate pretty full with what's going on now.

Well I guess the answer to the last question there do we feel like we have our playful.

No we don't feel that way so we've got lots of opportunities and it's honestly to the exciting time for us there.

Lots of opportunity when you think about our opportunities again, Steve everybody goes that a different way. So I'll just sort of tell you. How we go at it mainly what we think about is talent acquisition, mainly the way that occurs is we hired so many people who say hey, you need to go higher Sea Scout you need to go.

This person you know I worked with him over there they share our values and then they can produce it like you build this and so forth and so early in our company is a business that was primarily.

Just tied into hiring people and local geographic markets, but because we have hired so many in expanding market that word has gotten out would create more opportunities in other markets where people from some of the bank.

Like a wells are accruing to those kinds of things where people are saying that their bodies. I mean can you help me get it over there I won't build market and this will not in this market those kinds of things and it would be the same idea on some of the specialty lending areas again, we have opportunities because of big we've hired to hire people that are.

<unk> specialty practices for.

Some of our largest competitors.

And so that's really what stimulus.

Try to give you some sense about how we think about and get back to is primarily about talent acquisition whats available and so forth about seizing the opportunities that we like within that.

I guess the net of all that is I do believe we will have opportunities to go to other large urban southeastern markets.

Yeah.

Reasonably short term and I expect we will have opportunity to build.

Other <unk>.

<unk> specialty lending businesses.

Okay, Great very helpful. Maybe just last thing for me I'm curious if you have a number for how much you guys added on balance sheet of BHG loans, this quarter and kind of how youre thinking about that in terms of how.

How much of that you'd want to put on balance sheet or if theres any sort of concentration limit you have in mind for that.

<unk> you want to yes.

Yes, Steve I apologize Tara and I are in separate rooms, because of social distancing. This morning.

Yes, I think the number was like $50 million, but I'll follow up with you on that number.

Okay, Great I appreciate it guys and congrats on a great quarter once again.

Thanks, Dave.

Our next question comes from Jared Shaw with Wells Fargo Securities. Your line is open.

Hey, good morning, everybody.

Hey, Darren.

Maybe sticking with the with the growth conversation.

Can you give us an update on how the conversion of new PPP customers is going.

The customers that you brought into the bank to PPP, how is the conversion of them going to sort of full service customers and deposit relationships.

Harold if you have any detail number feel free to jump in Jared I don't have I.

Don't have detail numbers, where I can say okay. This is what it is and this is what it is that geographic market and so forth.

My sense is that it is good not my only.

As for saying that is when you look at the Greenwich.

Data.

We.

We have an extraordinarily high percentage of our clients that view us to be their primary bank and the number moves around so Jerry but I believe the number is 84% of the folks who have a relationship with us view us as their primary bank and that's a really extraordinary extraordinarily high.

Duration of being the primary bank to the folks you have 80 banking relationship with so again I'm, just saying the way our programs are built with incentives or bill.

Everybody's focused on.

Meeting all the needs of any glad that they have but specifically to be able to say okay. This is what we've done on each PPP I couldnt do that.

Okay.

Good color there at all yes.

I'll just follow up on one point on that quickly.

I think if you go back to the start of the PPP program, we specifically told our sales force to target our own clients and not use PPP. So much as a business development tool. So we did give atlanta.

The exception to that because it was a new market.

Thank God.

The retention there has been strong relative to PPP, but we did not necessarily put PPP.

And our slot of being a business development kind of strategy.

Felt like it was.

Limited resource, we felt like that the government that the money would fill up quickly and we wanted to take care of individual clients first and foremost I just wanted to add that point.

Got it great. Thank you and then when we look at the expense growth rate for.

For 'twenty two what's the underlying expectation for revenue producers being hired in there is that is that growing from what we've seen in 'twenty, one or is it sort of stable on that.

85 to 95.

Sure.

Additional people.

Yes, I think Harold again feel free to offer any color that you wont I think that the expectation for 2020 one.

<unk> will be higher than your number of 85 to 90 in other words. It expect it to be north of 100, I think fourth quarter will be a pretty big.

During the quarter for us as well and so I think the annual number will be in the 110.

120 range, and we expect that to be replicated.

The next year 2022.

Jared I'll just I'll just tag on here like all good Cfos.

And our first look at the expense plan for next year.

And it'll choke a horse, but anyway, there's a lot of people. These are folks are anticipating higher.

We will get that to a point, where that 8% to 11% growth. We believe traditionally is the right number for us.

But Terry is absolutely right I think our momentum on on revenue producers is extraordinary right now.

And.

We've got some good news coming.

Over the next several quarters.

Thanks, and then just finally from me looking at those other investments those other equity investments Besides BHG.

Can you give us an update on how much money have you invested in that program and what do you expect do you expect to continue to grow that as a as an investment source or are you happy with.

The amount you put out there now.

Yes.

Fully anticipate continuing to invest in these other joint venture firms.

All of them, we have some sort of a relationship with RF had.

Our history of business transactions with all of them I know early in our <unk>.

Early in Pinnacle's life.

We invested in several here in Nashville, because traditionally we had known the principles, we'd worked with them over an extended period of time and I think to a large extent that has continued.

These venture funds bring us deposits, they bring us lending opportunities through their portfolio companies and so it makes it makes.

For a good business model for us and that that has held true here of recent time.

<unk>.

The Fintech we're focused on are the newer ones are ones that have some core of financial bank related.

Emphasis.

And we will continue to work that.

I think I've got somewhere around $160 million.

Investments in these various fintech firms.

Probably.

I don't know just allow guests 40 of them.

We've got some sort of commitment with.

And we fully expect that that number will get bigger.

Did I get to your question Jerry.

You did yes, yes, thanks very much and then just I guess, just finally tying up on that when you said that you don't expect the same level of growth in.

And realized gains in the fourth quarter does that mean that we should expect to see it drop back to you.

More where it was first and second quarter or that it will grow from here, but could be sustainable at that level.

I mean, we fully expect that the value of these bonds will appreciate at a reasonable rate.

Over time.

But we've caught kind of.

Lightning in a bottle here over the last couple of quarters.

With these investments and we don't anticipate.

Book, an eight point.

$717.0 million in the fourth quarter.

But we think we will have something but it won't be that.

Got it thanks, very much and just as soon as things just as soon as I say that all get something in the mail next week.

Thank you. Our next question comes from Zimbabwe Choice Securities. Your line is open.

Thanks.

Thank you good morning.

Bedroom.

Terry you guys are having a.

Yes, that's right.

Hmm.

And I'm, just wondering with all the consolidation.

And the industry right now.

Sure.

Type of opportunities.

Thank you.

Do you think about opportunities like that.

With the backdrop of the buyers.

Getting punished.

Most of.

Okay. Thanks.

Yes.

Well.

Jennifer as you know that's like my least favorite question because they're done.

It doesn't turn out to be the right thing to say, but.

The best I can tell you what the truth.

Where they might you know.

When you know theres going back.

When our stock was getting hammered and growers who are being punished.

We tried it down near tangible book value, if they could get by asking about M&A and I kept saying no way forget it we're not going to do I just wouldn't deploy the stock when it was dragged down in book value as the multiples came back.

But mark I don't know the answer is not definitely no. The answer is well there is a possibility.

And I've tried to work that and help people understand.

I'd say its possible cause it is possible.

We didn't have the advantage paper and all that sort of stuff, but you know there's Jennifer. It goes you study and you run the screens and run scans you know what we're looking for they're not.

Plethora of opportunities out there that would fit in.

So when I say fit I'm, just talking about in our earnings accretion targets in our cultural requirements all of those kind of things.

I have not believed that even though I've tried to say look this is a possibility and I havent believes it is very likely and I continue to believe it is still not very likely the organic growth opportunities that we're having right now our breath.

And so as you know all that does is drive this drive.

Attractive this threshold.

We're doing an M&A transaction and so it doesn't get it more likely I think it gets less likely because of all the organic growth opportunities that we have.

And I refused to rule it out I want to be on record, saying.

Yes, it's possible to have an advantaged docket.

My belief is if we find something that meets.

<unk> targeted sculptor requirement.

Yes.

As more attractive than the organic growth opportunities. We have my guess it made you and everybody else ought to be really excited so anyway, that's a possibility, but I think I wouldn't put it in the extremely likely category.

Thanks Terry.

Are there any company.

That could meet the cultural hurdle for you because it seems like that hurdle.

Really.

Uh huh.

Well I think that's true I think.

I think the answer to that is yes, and if I could guess at this way Jennifer I think if you look back at something like B and C.

There are some people who kind.

It depends upon what you call go through would you include in culture, and those kinds of things or people, who no doubt were skeptical.

Our ability to execute that transaction, but the case was that Rick callicutt.

Determined he needed to move away from the model that he was running and wanted to move toward a model like we were running and that really decision that jaws for hand preceded iron getting together.

All of those kinds of things and so it allowed for a cultural integration, we're going to see I was wanting to try to travel than in the past we were one, albeit different from the past. It had originally been on so anyway I'm just trying to say I think when you find those kinds of situations where management teams are like minded about where to go and all of those guys.

The thing.

Then you have a chance and I do honestly believe we do have.

Growing number of people who.

We were curious about inquisitive and I'll just use this word I guess respectful of our model and interested in it so.

Youre on the right track the cultural integration hurdle is difficult and it does exclude lots of folks that might show up well and if youre just running the model.

But we ended up walking away. It goes the cultural integration is a bridge too far my.

My guess is they would be precious view, but a few where like minded CEO might be able to do something really big brokerage fee.

Thanks for the commentary.

Our next question comes from Steven Alexopoulos with JP Morgan Your line is open.

Hi, everyone. This is Anthony Elian on for Steve.

Sorry, you were very active in hiring new talent in the third quarter in your newer markets of Atlanta burn Langham and Huntsville, but these are the areas, where you're seeing the strongest pipelines for new hires compared with markets, such as Tennessee, and the Carolinas or strengthen recruiting pipelines across your entire footprint.

I would say Jed.

Generally the street is.

Across the entire footprint might be just a little color behind that.

We have had a great hiring year in Raleigh, North Carolina, we've had a great hiring year in Charlotte North Carolina.

Atlanta is a fabulous.

Hearing market with lots of upside in it as well and then to your point I think we believe we're going to make more hires in Birmingham and in hospital.

In the case of Nashville.

The engine to make hires here some of the folks that we've hired here or I would put into the lending specialty category, we talked about equipment finance and franchise lending, where we've been able to attract some.

Clear channel and not a large competitors and so thats sort of in the throes here in Nashville, but.

Hopefully that's helpful to think about we are seeing really strong hiring momentum is the largest most rapidly grow in markets that are dominated by well and through us.

In particular so.

I think that hopefully that.

It tells you what you're looking for.

Yes, that's helpful.

And then on BHG, you reiterated the 2020 guidance of growth normalizing back to 30%, but how much upside potential upside is there from the new initiatives from BHG, including targeting skilled professions.

And eventually rolling out a potential point of sale lending product.

Hey, Tony as Harold I don't know if we can give you a number to increase to 30% right now we feel like 30% is probably a good number to kind of use.

For your modeling.

If what they could do as an alternative is increase their own balance sheet lending focus.

And pull back on gain on sale.

To kind of a warehouse.

For future years so.

I've been very has been increasing at over 30% right now.

Okay, Great and then finally on loan growth, so you're already doing low double digits loan growth in the current environment, but given all the hiring you've done pipeline remaining strong and potentially adding a few new specialty lending segments.

Why wouldn't you be able to exceed the low double digit loan growth guidance you provided for 2022. Thank you.

Terry I'll start that and you can correct me.

Sure.

But.

Tony.

Make sure you understand that for 2022 outset inclusive of PPP paydowns.

We anticipate quite a quite a bit of PPP Paydowns next year, we started.

Call it $700 million.

So.

So that loan growth target would be inclusive of that coming out of the run rate.

So if you include if you exclude PPP then you're more into a low single mid double digit kind of growth rate.

Does that makes sense, yeah got it thank you.

Our next question comes from Brett.

Okay.

Hey, good morning.

Brett.

Wanted to see.

Circle back to loan growth.

From a line item perspective, and talk maybe about construction and commercial construction specifically in the Tennessee markets. Just curious the growth there is that <unk> been building and they finally came to.

Two.

Having clients.

Actually draw on lines of credit there can you talk maybe about the construction.

Line, and what Youre seeing in that business.

Yes, Eric do you want me to take that.

Yes, I'll just I'll just.

Start with that.

That generally lines of credit, we're not seeing a significant increase in lines of credit.

But construction is obviously beefing up some.

I think Brett.

I had to Harold's comments there.

I do think.

It's an interesting line item with high volatility in it.

When you get underneath what's going on so what I mean by that is.

This is a market where we've had loan paydowns are dramatic we've had loans, where youre going to traditionally funded construction loans through the stabilization period, we've had permanent lenders, taking us out before stabilization and even some before construction completed I believe.

So.

Again, you've got had extraordinary pay downs in there. So some of it when you see the growth in a quarter or two some of it does that what's the volume of pay downs that headwind that you are running against and there is no doubt that we do have meaningful construction commitments were.

There is significant equity in front of us that gives burn through before we get to the construction funding. So the emphasis over the last 12.18 24 months would not a change but it is a volatile market. Both in terms of what projects are being done how much equity.

Is in front of the construction funding and what the volume of early pay downs.

Which in my judgment has been extraordinary over the last year or so.

Okay.

I appreciate the color there.

Q1, Brian one more point on construction I'm looking at some numbers that arent in the deck, but.

Construction and land development funding.

Bonding was 41, 5%.

At June 30, and $42 four at 930.

We've got about.

Call it $12.0 billion in exposure.

Which two eight is funded.

There's quite a bit of headroom in that construction book.

Okay.

It's very helpful. I appreciate that.

And then I am curious just thinking about this whole this whole fintech.

And you've obviously made some investments.

Do you guys think about this more.

Possibly in terms of.

These things are great to invest in and they might help you from an expertise perspective, or a tech perspective or might you get more active in terms of actually building out like your own banking as a service platform and actually possibly putting.

The income from those operations.

Maybe loans from lenders on your balance sheet.

I think.

That the latter is less likely Brent I think you know the.

The motivation for us.

It has been.

Going back to Harold's comments about how we got started.

We're investing in bonds, where we knew people and it provided deal flow deposits low all those sorts of things that was important economic forward. How we built the business I think over the years, our strategy has always been to be a fast follower.

From a technological standpoint here just in terms of what our business model is and how we deliver service in some form but as you know over the last decade. The pace of that thing has stepped up significantly and so to be a fast follower you got to be in the guy, even though where stuff is was moving at those kinds of things and so that was that's really the hanmi.

What we're trying to get to.

We say we wouldn't do it just for that reason other word went out and make a bad investment so what technology grow generally fortunately.

Our friends and partners that we're able to.

Right.

That do it well and it is helpful to us.

<unk> studied technology.

I guess going back to your last point, we are finding some investments there were.

There are opportunities for us to utilize those products are for us to introduce some of those product capabilities to other folks that were integrated with as an example, like a Raymond James.

As you know that's our.

Brokerage platform retail brokerage platform as the Raymond James So we have opportunities to match them up on things too. So anyway, just a long winded way to say.

We wouldn't do it without it was a bad idea, but principal motivation is to stay close to what's going on in visit and yes. They are likely to be synergistic opportunities, but I don't think were headed to a major line items for that sort of fee income.

Okay.

That's helpful and then.

Last one if I could just looking at the slides slide nine on the revenue producer adds that.

The dark blue piece other would that mostly be other larger regional banks or would that be smaller community banks in that bucket.

Some of it is some of everything but I would think the preponderance would be other large banks.

Okay.

Great, which had all the color.

Thanks, Brett.

Our next question comes from Michael Rowe Raymond James Your line is open.

Hey, good morning, guys. Thanks for the Shout out just before.

Just wanted to delve into the comments that I think you had terry on the comfort with that.

Liquidity that has come in.

And from the PPP program and things like that you know it looks like securities to earning assets or about 17%. So just wanted to get a sense of how much the securities portfolio could continue to grow from here just given that comfort and then as we think about next year in light of the expense guidance.

And the loan growth that you have.

But you've given you think ex PPP fees, you have the ability to actually drive positive operating leverage thanks.

I'll start with that the investment securities.

As far as growth in securities.

Don't believe will add a significant amount we are looking at.

Can based on what rate curve, we're looking we're anticipating.

If we weren't invest over a period of time.

And call it <unk>.

A number of $500 million to $1 billion in securities Michael.

Ken will the rate curve respond in such a way that tangible book value doesn't get.

The lack of a better word claim so.

We are we are thinking about that I know some banks have put out there.

If the 10 year gets to above 75, or some number like that we don't necessarily have a number like that in mind.

But we are studying it and looking at various alternatives because I think at the core to this whole discussion is.

Whether or not we think these deposits are going to stick around and right. Now we think these deposits are sticky.

There was a lot of discussion over the last several quarters about surge deposits.

But it looks like for our for our client base.

These deposits that we've accumulated over the last year or so look to be hanging in there and we will stick around for an extended period of time.

Don't know if thats exactly what youre looking for.

Michael if it's not.

Let me know and I'll try to try to give you some more.

But.

That's what we think curve.

No that's helpful.

So the second part of the question just about operating leverage ex PPP fees.

Do you think that's a possibility just in light of the loan growth and the expense outlook for next year. Thanks.

When you're talking to me I think there's always going to be operator operating leverage opportunities.

I believe there is significant potential to drive.

The efficiency ratio down.

But if you talk to the CEO.

What he believes is and he's got a lot of opportunities out there to hire people and so.

I think where we're at as a 49%, 51% kind of number somewhere in that range.

And it's been kind of remarkably steady over.

Tom.

Okay. That's helpful and maybe just as a follow up just go into BHG.

Another recourse reserve reduction this quarter I think you had talked about that getting to about 5.25% by the end of the year is that still the plan and then as we think about next year. Some of these other verticals grow could that.

The reserve ratio actually growth from that from that level with those other verticals growth. Thanks.

Yes, I think they anticipate that recourse obligation continue to kind of be flat to down next year.

Okay.

It will probably get down into the five and a quarter range.

By the end of the year I don't know if it will get that low.

But.

But they believe that they think it could get down on call. It the.

475 ish 485 ish range by the end of next year.

And that's inclusive of the 30%.

Guidance, you've given yes.

Yes.

Okay great.

Question.

Yes.

Thank you. Our next question comes from Kevin Miller with <unk>.

Thanks, Good morning.

Good morning.

I wanted to circle back to the margin we've talked a lot about growth.

The margin and wanted to.

Okay think about loan yield.

Hello. My question for you is how do you think we are at a bottom.

Millennials ex PPP in Accretable yield around 378, this quarter and it looks like new yields are coming on around $40.0, and so how do we think about where the Q numbers converge and how much more pressure we have on that.

Yes.

Yes, I think what I'll talk about is loan yields without PPP impact.

I think we're getting closer and closer to that.

Right.

That bottom.

I don't know if were I don't think we're there yet I think we will still see loan yield dilution here over the next several quarters, but I don't think it will be dramatic Catherine I think it's.

Couple of basis points here.

A couple of basis points there.

The new.

Lots of business that we're operating in.

They tend to be.

LIBOR pricing now go onto the sofa pricing. So we're not anticipating any big hit related to that as far as loan yields are concerned.

And then just a follow up on the operating leverage question.

Would it be fair to think about.

Q as a year, where we perhaps don't see positive operating leverage as we can.

You likely don't have a big increase in rates this year.

Got.

Continuing.

Building off of your teams in the expense correct.

And then as we enter 2023 that Tom here.

Where you really start to see the growth.

All of these hires and hopefully the higher rate environment, where there'll be a lot stronger in 2023.

Yes, I think Thats, a fair assessment I don't see our operating leverage move.

Moving one way or the other here over the next four quarters.

And.

I think this hiring pipeline that Terry talked about earlier.

Not a significant impact on that.

I think we will have.

Some branch builds going on next year.

And some of these markets that were.

Where.

We're new to.

And.

I think that will impact us as well so.

You know from your history with us over the years.

We manage our expenses.

We focus on revenues and we've been fortunate through our history that.

Our operating leverage has been fairly stable.

Even with these big investments.

Great. Okay. That's great. So maybe just kind of.

Cable operating leverage near term.

Ken.

And 'twenty three.

That makes sense.

Alright, Thats all I got.

Thank you so much.

Thanks Ted.

Our next question comes from Matt Olney with.

Steven Your line is open.

Thanks, Good morning, I want to go back to Michael's question on BHG around that recourse adjustment what was the dollar amount of the adjustment in the third quarter I think it was around 30.

<unk> 35 in <unk>, but I don't see anything specific in the third quarter.

Yes.

I'll talk to Dan Mcsherry about that earlier today. It was about $35 million again here in the second quarter, I mean third quarter.

Okay.

Thanks for that and it sounds like you expect another adjustment in the fourth quarter would you expect it to be at a similar level as you saw on the <unk> and <unk>.

Yes, I think it probably will be similar.

Bob.

But.

I'll have to follow up with Dan to find out, but I think I think you should probably count on it being similar.

Okay.

Got it.

And just to clarify the outlook for the operating expenses, obviously, you mentioned, the 8% to 11% growth next year.

Any more color on why operating expenses could be flat to down in the fourth quarter. While you are still paramount elevated number of new producers.

Yes, Matt I think our incentives were fully baked on incentives.

And I think we will have probably a little less expensive incentive expense coming in here in the fourth quarter that will help kind of neutralize its impact.

Fourth quarter run rate.

Okay. Thank you.

Our next question comes from Roxanne.

Your line is open.

Hey, good morning.

Thanks for the thanks for the question here is just to follow up on BHG.

Reserve.

Going down to 475 billion next year.

On the back of that and I think you've mentioned this at the Investor day.

But the impact is.

He transitions to Seattle.

Yes.

That's a great question seasonal will come around and 2023 I believe our 2024.

And right now what the experts have told them is they don't necessarily need to worry about seasonal for the loans sold through the pipeline.

Through the auction platform.

But they will need to adjust for seasonal here in the on balance sheet credit.

They're going through modeling on what that means to them and their business model.

But suffice to say these loans have an average life of about four years.

And with call it up.

But 30 or above 40 kind of.

Charge off rate that equates to somewhere around call. It <unk>.

8% reserves.

Yes.

Got it okay.

No.

Going back to slide nine let's focus on the revenue producers.

What should we be thinking in terms of just basic basic math on.

Per producer on average.

What did they add.

In total or in total after three or four years how.

How do we how do we kind of break that down.

Is there a rule of thumb.

However, you want to take.

Yes, Brian what you've looked at that.

I'm curious expression earlier in the call it non ways to Sunday.

That typically a commercial lender on average based on our hiring kind of metrics over the last.

Call It three years.

Looking at about a $60 million loan get from a commercial lender and then somewhere close to that on deposits.

So that's kind of what we use for modeling when we start talking about.

These new hires that are coming to us from all over the franchise.

Of late the hires that we've had in equipment finance.

And franchise lending we fully anticipate.

Bigger balances from them.

Okay.

Yes.

Yes.

Is that within say three years and you're set to two type time frame.

Carl.

Oh.

He might be on mute.

Brock I don't know what happened to Harold's connection.

The timeline on that is a five year number.

Five years, Okay, great. Thanks for the commentary Okay you bet.

Our next question comes from Brian Martin.

Scott Your line is open hey.

Good morning, Hey, I don't know if apparel back on Teri maybe just.

The reserve level, you guys have talked about that going lower can you just give a sense for how we think that could end up over time as the economy improves.

Yes, Harold are you there wont a tiger you are.

Yes.

I got dropped in Ambac, Brian can you repeat the question Yeah. I was just wondering on the on the reserve.

Allowance level, just kind of how we think about where that trends to kind of overtime.

Yeah, we anticipate.

And everything kind of stays consistent here there.

We will continue to see.

Decreases here over the next several quarters.

I don't anticipate any significant change with respect to the absolute change net change quarterly change.

So I think we probably got.

More to go.

Call it through next year.

And it's just the way our modeling works.

So.

It's a slow and steady kind of.

Operating mode.

Okay Yeah.

That 120 level, you're at this quarter, Harold I guess thats kind of always getting where do you expect to how low could that get to if we look to where it was pre pandemic or I guess when you think the next couple of quarters or next 12 months whatever timeframe, you're thinking about I don't think we will get down to a day one reserves.

Post Cecil Okay.

We could but.

We're not planning for that to happen.

I think we're looking at all kinds of different.

Scenarios.

But right now we believe that we've got more reserve release coming.

Probably through the <unk>.

2022.

Got you, Okay, and how about just going back to here.

The margin Harold just kind of the core margin outlook I mean, it is loan yields continue to drift a little bit lower in the funding isn't.

The funding costs are kind of approaching a bottom in that core margin probably goes incrementally lower in the near term is that how to think about that.

I think I think that's probably an accurate assessment, but again like I was mentioning to Catherine.

I don't think we're talking about significant bumps.

I think we're probably flat to a few basis points.

Gotcha, Okay, and then maybe just the last two from me held at just the with the stickiness of deposits. It sounds as though we think about the balance sheet is it's growing modestly from areas of growing from here and maybe not modestly but growing growing from here or is that how we think about things.

We're hopeful we don't see $4.0 billion in deposit growth I know that's not.

Southern CFO I'd like to talk about.

But yes.

Yes, I think I think we will see continued deposit growth.

But I think it'll be more like what maybe it was pre pandemic yes.

Yeah, Okay, and then just on the fee income held giving just kind of trying to put some kind of sense around these equity investments and given they were $1 million last year and were almost $20 million year to date.

<unk>.

Current level is sustainable I mean, there is a I.

I guess you're probably.

Somewhere in between a little bit lower than $8 million a quarter, but some healthy level is sustainable as we go forward today absent any big adjustments like you saw this quarter.

Yes, I mean.

We fully anticipate making money off these venture fund investments.

Just to give you a little more detail on it Brian.

Got about $110 million.

<unk>.

Column typical joint venture funds that where people are out there trying to make investments to hit a big lift.

And then we've got another 50, or so million and CRA venture funds that have kind of a different objectives.

The yield the risk return on the CRA investments is not nearly as large.

SA the typical $110 million so but.

We would have.

Sure.

A reasonable return target.

On both.

<unk> of our joint venture fund investments with.

The typical.

Non CRE ones being.

Of course bigger.

Got you, Okay, and then just last one on the PPP or the.

The balance of the PPP, where you've given kind of forgiveness youre seeing now I guess, what do you see the balances at a PPP at year end and just the I think you said that the contribution from PPP revenue is around your thinking $12 million for the fourth quarter.

Yes, 12 to 15.

Right.

We don't know exactly where forgiveness is going to go.

But it's traditionally over the last several quarters.

Historically, it's been running about.

At 40% down on balances.

I'm talking about the balance sheet every quarter.

Okay, Alright, and the revenue side, the $12 million to $15 million. Okay. Thats, all I had thanks for taking the questions guys.

Thanks, Brian.

Thank you. This concludes the Q&A session.

Thank you for participating this concludes today's conference call you may now disconnect.

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