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.pnfp.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 open for your questions following the presentation. During this presentation, we may make comments which may constitute forward-looking statements.

All forward-looking statements are subject to risks, uncertainties and other factors that may cause actual results, performance or achievements of Pinnacle Financial to differ materially from 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.

A more detailed description of these and other risks is contained in Pinnacle Financial's Annual Report on Form 10-K for the year ended December 31, 2020, and its 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. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G.

A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to the comparable GAAP measures will be available on Pinnacle Financial's website at www.pnfp.com. With that, I am now going to turn the presentation over to Mr. Terry Turner, Pinnacle's President and CEO..

Thank you, operator, and thanks to rest of you for being with us this morning. In my view, third quarter was an exceptional quarter with very strong loan growth, very strong core deposit growth, strong net interest income growth and strong non-interest income growth.

Asset quality is the sight of best numbers from most key asset quality metrics and importantly, our relentless focus on tangible book value accretion continued to yield strong results.

I believe what is evident is that our decade-long approach to attracting in exciting market best bankers and empowering and enabling them to create raving clients is in fact enriching shareholders and because of the sustained execution of that model, I expect that to continue to produce exceptional results for an extended period of time to come.

There have been various studies over the years on the key shareholder returns for banks will generally be about EPS growth rates, revenue growth rates 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 rates, which is why we focus intently on loan and deposit growth rates.

And so we begin every shareholder presentation with this dashboard which gives us a read on revenue and EPS growth, balance sheet growth and asset quality.

Of course, we always start with the GAAP measure, but I found for me personally, I focus on a number of non-GAAP measures that help me better ascertain how well we’re performing on the key variables that we’re trying to manage here at Pinnacle.

As you look across the top row, you can see remarkably consistent up into the right, growth in revenues, the EPS and adjusted pre-tax pre-provision net revenues. Similarly, across the second row, we produced net loan growth this quarter even with meaningful PPP paydowns and forgiveness.

Annualized organic loan growth, excluding the impacts of PPP was 15.3%. Core deposits, specifically, non-interest bearing deposits continued to soar in Q3. And all that resulted in a tangible book value per share CAGR of 12.7% since 2016. Along the bottom row, you can see our asset quality has performed exceptionally well even during COVID.

Net charge-offs were inside our targets and the other key private loan categories we monitor are at decade-long lows. I’d like to peel back the onion just a minute to provide better insight as to what causes the key growth metrics to be so consistently up into the right.

Actually, 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. We should produce outsized 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 as in other large urban markets in the Southeast where we’re likely to have additional market extending opportunities and the proven ability of these bankers to wow our clients in an environment where our largest competitors have so many angry and frustrated clients should yield meaningful outsized growth.

And I hasten to add, our formula of only hiring highly experienced revenue producers puts us in an unusual position of produce an outsized growth while maintaining attractive asset quality metrics since the market share movement occurs as a result of these experienced bankers moving their borrowers within they're well familiar and leaving problem credits behind, it's the only way I know to reliably produce such rapid growth on a sound basis.

It seems obvious from the dashboard slides 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 while I expect it to conveniently produce outsized growth.

While the model is radically simple as a concept, it’s our relentless execution over 21 years that differentiates us. As I have already said, our models are attracting excited market best bankers, empower and enable them to create raving plants, which will then translate to shareholder returns.

Our associate engagement is literally among the best employers in country, is longstanding, it’s across virtually every associate group 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, because we’ve got a value-based culture.

Our annual incentive model where a 100% of our associates win and lose together based on achieving corporate performance targets for things like asset quality and EPS growth rates, our long-term incentive model which makes shareholders out of every single associate and our leadership, management and accountability for how well they engage with their associates, just to name a few.

Over the years, I’ve heard many number of bankers saying they were running the Pinnacle model, but honestly, virtually none of them were doing any one of those things that I just mentioned. Building on that foundation, these excited associates are empowered to wow their clients, which creates rated banks.

Things like our focus on geographic decision making close to the client as both the centralized line of business structures, which we combined with our signature credit system which yields speed to response, a wow budget where every single associate is authorized to spend any amount they deem appropriate in order to wow clients, all of these are recognizably different than our primary competitors, which enables these highly experienced associates to wow their clients.

In the center arrow, we’re looking at a Net Promoter Score provided by Greenwich for businesses with annual sales from $1 million to $500 million.

Our Net Promoter Score is market-leading in both the State of Tennessee and North Carolina and extremely high ranking in every metropolitan market in which we have large enough share to produce this statistically valid sample. In fact, according to Greenwich, we have the second highest Net Promoter Score in the United States.

As indeed, an unusually engaged client base who recommend us to their peers and result in strong momentum, meaning they also indicate a high likelihood that they intend to do more business with us.

And on the far right, you see that we successfully translated that relentless focus on our associates and clients into shareholder value and 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 horizons.

So as you can see, the model has indeed yielded remarkably reliable and predictable outcomes. And then finally, as it relates to the sustainability of the growth, one of the things that has me so fired up about what our future growth is, is the pace at which we’re attracting these market-based revenue producers.

I don’t think it’s a secret that a number of the banks that are the largest market shareholders in our markets, which are in the Southeast are extraordinarily vulnerable and I would say hemorrhaging talent, some are vulnerable because they simply become so large and bureaucratic, some are what appear to be regulatory difficulty which invariably makes life of bankers miserable and some are inwardly focused as a result of merger and integration projects.

Pinnacle is widely recognized as an employer of choice for all the reasons we’ve already discussed this morning and the more bankers we hire from these large banks, the more bankers we’re able to hire from these large banks.

Much like our clients that are Net Promoters that recommend us to their friends and peers, we created associates that are Net Promoters, through advisor force and advisor peers from their former employers to join us at Pinnacle.

This created extraordinary opportunities to hire in the markets that we currently operate in, but it’s also created market extending opportunities like Atlanta, Georgia, Birmingham, Alabama, Huntsville, Alabama and I fully expect that we will encounter other similar opportunities in other large high growth markets around the 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 have been here less than two years. Think about that. 22% of our revenue producers have been here less than two years.

Our experience is that it generally takes relationship manager four to five years to fully move their book of business. So that will lead me 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 and revenue growth, but on earnings growth as well. And to the right, you are getting some sense of the power of the model.

When you attract so many experienced revenue producers from the banks who have the largest market share in these markets, you have an unusual opportunity to capitalize on their vulnerability and accelerate share gains.

So in short, in addition to highlighting the up into the right performance that we’ve had and continued this quarter on virtually all key metrics and including shareholder returns, I have tried to illustrate both why I believe it has happened and why I’m so personally excited about the ongoing growth opportunity as they confirm.

With that, I’ll turn it over to Harold for a more in-depth look at the quarter..

Thanks, Terry. 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 compared to June 30, we are up 15.3%.

Overall loan rates were up slightly from the second quarter as the third quarter was again assisted by PPP forgiveness. We believe we will see another meaningful quarter of PPP forgiveness in the fourth quarter so that PPP’s impact on 2022 hopefully will be minimal.

Due to accelerated forgiveness, third quarter yield on PPP loans rose to 8.54% 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 PPP revenues will range somewhere between $12 million and $15 million. Excluding PPP loans, our average loan yield approximated 3.93% compared to approximately 3.98% 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. I 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 in loans, slightly more in deposits and a great pipeline. Atlanta continues to roll with 18 revenue producers and $345 million in loans at September 30.

Our optimism for these markets as well as our new hires and 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 they will likely end up with low double-digit growth rate for 2021.

As to 2022, given current economic conditions and our optimism about our new markets and business lines, we believe the growth rate for loans inclusive of PPP pay-offs of low double digits is a reasonable objective for our firm. Now on to deposits, we had another big deposit quarter. Core deposits were up almost $1.3 billion in the third quarter.

We’ve experienced significant growth in noninterest-bearing deposits ending up at $9.8 billion at quarter end, up 32.4% since the end of last year. Our average deposit rates were 17 basis points while EOP deposit rates were at 15 basis points.

So we continue to see downward momentum for 2021 and look to see a few more basis points and reduced 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 57 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 multi-year effort. Our objective here is to find ways to put money to work in a rising rate environment without placing too much risk on 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, NPAs and past due accruing loans, Pinnacle’s loan portfolio continued 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 NPAs since 2Q ’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 investment services, trust and insurance had a great quarter in comparison to last year. We continue to be very active on the hiring front across our franchise, particularly as we continue to build wealth management in our newer markets.

Mortgage rebounded this quarter as its pipeline rebuilt towards the end of the third quarter. As to run rate issues for 4Q, we had another strong showing with respect to our equity investments, which exclude BHG.

Again, one of our investments finalized an equity raise during the quarter, the results of which provided us significant insight into an updated valuation of that investment and thus we booked $4.7 million from this one investment along with about almost $4 million from other valuation adjustments.

All in, we don’t expect a similar increase in the fourth quarter. We also received about $1.5 million in vendor incentives on checking accounts. As to BHG, I’ll talk about that in just a second.

As to expenses, specifically incentives, I think 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 an outsized incentive for 2021. However, there is no free lunch, increased incentives only occur if our earnings and PPNR growth support the incentive.

Additionally, we anticipate our max payout target going back to the traditional 125% in 2022.

As to our overall total expense run rate, we now believe that expenses for the fourth quarter should be flat to down from the amounts 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 entry into new markets and new business lines.

Quickly, some comments on capital. We intend to redeem $120 million in 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 adding a peer relative component in our leadership’s equity compensation plan.

We are currently calculating an annualized increase of 13.4% in 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 ROTCE and total shareholder return in determining the ultimate besting results for our leadership group.

Lastly, as to our outlook for the rest of 2021, I won’t go into this slide in depth as we’ve 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. Now to BHG. Many of you participated in a BHG investor call we had last month.

Al Crawford and Dan McSherry did a great job in updating everyone on BHG’s activities. Since there has not been any meaningful change since that time, I will spend less time on BHG this go around.

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.

The green bar represents loans on which gain on sale has been recorded as these loans are sold to downstream banks. Obviously, the gap between loan originations and loans sold found 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 buy rate, they fell to 3.4%, so net spreads remain in 10% range. The bottom right chart details now over 1,200 banks in BHG’s 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’s recourse obligation chart on the chart on the left.

The green bars detail loans that BHG has sold to their network of community and other banks, which currently amount to $4.1 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 5.67%, down approximately 75 basis points. As noted on the chart at the bottom right, the trailing 12 2021 losses landed at 4.73%.

This chart splits the actual credit losses from losses BHG absorbed from reimbursing banks for the 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.

In 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 more credit. For the loans sold to other banks, credit losses or substitution losses as noted in the previous slide for the first nine months of this year have amounted to 2.8% with third quarter substitution losses coming in at around 2.4%.

For loans on balance sheet, held for investment and potentially future securitization, year-to-date losses have amounted to approximately 1.3% with third quarter losses being approximately 1.4%. 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, they are in some stage of development, which if successful should bolster 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 own balance sheet loans will likely exceed the gain on sale model. How they proceed will obviously impact the timing for income recognition as gain on sale accelerates current income, while the old balance sheet model recognizes income over the life of the loan.

As to the other business opportunities 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 wrapping up, as to loan growth and loan pricing for Pinnacle in 2021, it will take a lot of work, but we are very optimistic.

Deposit growth has been remarkable, deposit pricing continues to decrease. Net interest income, we believe will be flattish for the fourth quarter. BHG had 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. Operator, with that, I'll turn it back over to you for questions..

Thank you, Mr. Turner. The floor is now open for your question. 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 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? Or are you guys seeing some actual economic -- positive economic growth trends as well?.

Yes. I would say that we have not seen a lot of what I would call pure economic growth. I don't -- it's probably something better than zero, but it wouldn't be robust by any means. If you look at things like line of credit, working capital lines, C&I lines, those kinds of things, we're not seeing increased funding there.

And so again, the 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 franchises, 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?.

Yes, we -- Steve, yes, I think we're like anybody else. We're going to look at it 12 different ways, trying to figure out what makes the most sense and what the truth is and all those kinds of things. So we certainly try to look at it that way. I think in the final analysis, what we most frequently land on is sort of a bottoms-up outlook.

What is it that the financial advisers believe they're going to produce? So what does the market leader believe they're going to produce based on the aggregation of what those guys are going to produce? And so any rate, it's some combination of all those things, but I personally put most confidence on market leaders and what they believe they're 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 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 plate full, no, we don't feel that way. We've got lots of opportunities and it's -- I mean, honestly, it's an exciting time for us. There are just lots of opportunities. When you think about our opportunities, again, Steve, everybody goes at it a different way.

So, I'd 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've hired so many people who say, "Hey, you need to go hire Stephen Scouten. You need to go hire this person." I work with them over there. They share our value and they can produce this, they can build this and so forth.

And so early in our company's existence, that was primarily just tied into hiring people in local geographic markets.

But because we have hired so many an expanding market, that word has gotten out which creates more opportunities in other markets where people from some of these banks like Wells or a Truist or those kinds of things where people are saying to their buddies, "I mean, can you help me get in over there? I might want to build a market in this building office 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 the people we've hired to hire people that are running specialty practices for some of our largest competitors. And so that's really what stimulated that.

So anyway, I've tried to give you some sense about how we think about it and get back to is primarily about talent acquisition, what's available and so forth and about to season the opportunities that we like within that.

And I guess the net of all that is, I do believe we'll have opportunities to go to other large urban Southeastern markets in a reasonably short-term. And I expect we'll have opportunity to build another or two specialty lending business..

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 you're thinking about that in terms of how much of that you'd want to put on balance sheet or if there's any sort of concentration limit you have in mind for that..

Harold, do you want to take that?.

Yes. Steve, I apologize, Terry 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 you guys. Congrats on a great quarter once again..

Thanks, Steve..

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

Hey, good morning, everybody. .

Hey, Jared..

Yes. Maybe sticking with the growth conversation.

Can you give us an update on how the conversion of new PPP customers is going? So the customers that you brought into the bank through PPP, how is the conversion of them going to sort of full-service customers and deposit relationships?.

Harold, if you have any detailed numbers, feel free to jump in. Jared, I don't have detailed numbers where I can say, okay, this is what it is, and this is what it is in this geographic market and so forth. My sense is that it is good.

My only basis for saying that is when you look at the Greenwich data, we have an extraordinarily high percentage of our clients that view us to be their primary bank. And the number moves around some, Jared, but I believe the number is 84% of the folks who have a relationship with us view us to be their primary bank.

And that's a really extraordinarily high penetration being the primary bank to the folks who have any banking relationship with. So again, I'm just saying the way our programs are built, the way the incentives are built. Everybody is focused on meeting all the needs of any plant that they have.

But specifically to be able to say to you, okay, this is what we've done on each PPP client, I couldn't do that..

Okay. That's good color..

Jared, 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 kind of an exception of that because it was a new market.

And I think the retention there has been strong relative to PPP, but we did not necessarily put PPP in a slot of being a business development kind of strategy. We felt like it was a limited resource. We felt like that the government -- that the money would fill up quickly, and we want to take care of individual clients, first and foremost.

I just wanted to add that point..

Yes. Got it. Great. Thank you.

And then when we look at the expense growth rate for '22, what's the underlying expectation for revenue producers being hired in there? Is that growing from what we've seen in '21? Or is it sort of stable in that 85 to 95 additional people?.

Yes. I think -- and Harold again, feel free to offer any color that you want. I think, Jared, that the expectation for 2021 will be higher than your number of 85 to 90. In other words, it will be -- kind of expected to be north of 100. I think fourth quarter will be a pretty big hiring quarter for us as well.

And so I think the annual number will be in the 110 to 120 range, and I would expect that to be replicated in the next year, 2022..

Jared, I'll just tag on here. Like all good CFOs, we've gotten our first look at the expense plan for next year, and it will choke a horse. But anyway, there's a lot of people these -- our folks are anticipating to hire. We'll 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 revenue producers is extraordinary right now. And I think we've got some good news coming over the next several quarters..

And then just finally for 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 an investment source? Or are you happy with the amount you put out there now?.

Yes. We fully anticipate continuing to invest in these other joint venture firms. All of them, we have some sort of relationship with or have had a history of business transactions with all of them. I know early in our -- early in Pinnacle's life, we invested in several here in Nashville because traditionally, we had known the principals.

We'd work 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 for a good business model for us, and that has held true here of recent times.

The fintechs we're focused on are the newer ones, are ones that have some kind of financial bank-related emphasis, and we'll continue to work that. I think I've got somewhere around $160 million of investments in these various fintech firms. There's probably, I don't know, just a wild guess, 40 of them that we've got some sort of commitment with.

And we fully expect that, that number will get bigger.

Did I get to your question, Jared?.

You did, yes. Yes. And then I guess, just finally, tying up on that.

When you said that you don't expect the same level of growth in realized gains in fourth quarter, does that mean that we should expect to see it drop back to more where it was first and second quarter? Or that it won't grow from here but could be sustainable at that level?.

Yes. I mean we fully expect that the value of these funds 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 booking $8.7 million, $8.9 million in the fourth quarter. But we think we'll have something, but it won't be that.

And just as soon as I say that, I'll get something in the mail next week..

Our next question comes from Jen Demba with Truist Securities. Your line is open..

Terry, you guys are having a tremendous amount of success right now.

And I'm just wondering, with all the consolidation that's occurring in the industry right now, is there any type of opportunity that would be compelling for you? And how do you think about opportunities like that with the backdrop of the buyers' stocks getting so punished most of the time these days?.

Well, Jennifer, as you know, that's like my least favorite question because every time I say something, it doesn't turn out to be the right thing to say. But I'll just do the best I can tell you what the truth is and let the car fall where they may. When -- you know this.

Going back, when our stock was getting hammered and growers were being punished, we traded down near tangible book value. And people kept asking about M&A and I kept saying, "Look, no way. Forget it. We're not going to do it." I just wouldn't deploy the stock when it was traded at in tangible book value.

As the multiples came back, I felt be able to put the market on notice. The answer is not, definitely no. The answer is, well, there's a possibility of it. And I've tried to work that and help people understand -- I need to say, it's possible because it is possible. We do have advantaged paper and all that sort of stuff.

But you know this, Jennifer, because you study and you run the screens and run the scans. You know what we're looking for. There are not a plethora of opportunities out there that would fit. And so when I say fit, I'm just talking about hit our earnings accretion targets, hit our cultural requirements, all those kind of things.

And so I have not believed that -- even though I've tried to say, look, this is a possibility, I haven't believed that it's very likely, and I continue to believe it's still not very likely. The organic growth opportunities that we're having right now are breathtaking.

And so as you know, all that does is, drive the attractive this threshold up for 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. Again, I refuse to rule it out. I want to be on record saying, yes, it's possible. We do have an advantaged stock.

If we -- my belief is, if we find something that meets the accretion targets, fits a cultural requirements and is more attractive than the organic growth opportunities we have, my guess is me and you and everybody else ought to be really excited. So anyway, it's a possibility, but I think I wouldn't put it in the extremely likely category..

Are there any companies that could meet the cultural hurdle for you? Because it seems like that hurdle is the one that's really the most difficult..

Well, I think that's true. I think the answer to that is yes.

In fact, I could catch it this way, Jennifer, I think if you look back at something like BNC, there are some people who kind of depend upon what you call culture and what you include in culture and those kinds of things are people who, no doubt, were skeptical of our ability to execute that transaction.

But the case was that Rick Callicutt has determined that 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 for that decision and that choice for him preceded are getting together and all those kinds of things.

And so, it allowed for a cultural integration because the CEO was wanting to and trying to travel down the path we were on, albeit different from the past he 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 those kinds of things, then you have a chance.

And I do honestly believe, we do have a growing number of people who, who are curious about, inquisitive, and I'll just use this word, I guess, respectful of our model and interested in it. So you're on the right track.

The cultural integration hurdle is difficult, and it does exclude lots of folks that might show up well and if you're just running a model. And -- but we end up walking away because of cultural integration as a bridge too far.

My guess is there would be precious view, but a few where like-minded CEOs might be able to do something but be precious to you..

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

Hi, everyone. This is Anthony Elian on for Steve. Terry, you were very active in hiring new talent in the third quarter in your newer markets of Atlanta, Birmingham and Huntsville.

Are these the areas where you're seeing the strongest pipelines for new hires compared with markets such as Tennessee and the Carolinas? Or is the strength in recruiting pipelines across your entire footprint?.

I think I would say, generally, the strength is across the entire footprint. Maybe 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 hiring 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 Huntsville. In the case of Nashville, we continue to make hires here. Some of the folks that we've hired here are put in the lending specialty category.

We talked about equipment finance and franchise lending, where we've been able to attract some top-tier talent out of large competitors. And so that's sort of been the thrust here in Nashville. But hopefully, that's helpful to think about.

We are seeing really strong hiring momentum in the largest, most rapidly growing markets that are dominated by Wells and Truist in particular. So, I think that -- hopefully, that tells you what you're looking for..

Yes. That's helpful. And then on BHG, you reiterated the 2022 guidance of growth normalizing back to 30%.

But how much upside or 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?.

Hi, Tony, it's Harold. I don't know if we can give you a number to increase the 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 wholesale to kind of warehouse for future years.

So, I'd be very hesitant increasing it over 30% right now..

Okay. Great. And then finally, on loan growth. So you're already doing low double-digit 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?.

Terry, I'll start that, and you can correct me. But Tony, make sure you understand that for 2022, I said inclusive of PPP paydowns. So we anticipate quite a bit of PPP paydowns next year. We started, call it, $700 million or so. So that loan growth target wouldn't be inclusive of that coming out of the run rate.

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

Does that make sense?.

Yes, got it. Thank you..

Our next question comes from Brett Rabatin with Hovde Group. Your line is open..

Wanted to circle back to loan growth and just -- from a line item perspective and talk maybe about construction and commercial construction, specifically in the Tennessee market.

Just curious, the growth there, has that been building and they finally came to having clients actually drawing lines of credit there? Can you talk maybe about the construction line and what you're seeing in that business?.

Yes.

Harold, you want me to take that?.

Yes. I'll just start with the -- 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, to add 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 loans -- where the paydowns are dramatic.

We've had loans where you're going to traditionally construction loans through a stabilization period. We've had permanent lenders taking us out before stabilization and even some before construction completed, I believe. And so again, you've got -- had extraordinary paydowns in there.

So some of it -- when you see the growth in a quarter or two, some of it just had to do what's the volume of paydowns that hit when that you're running against. And there is no doubt that we do have meaningful construction commitments, where there's significant equity in front of us that gets burned through before we get to the construction funding.

So the emphasis over the last 12, 18, 24 months would not have changed, but it is above the 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 paydowns is, which, in my judgment, has been extraordinary over the last year or so..

Brett, one more point on construction. I'm looking at some numbers that aren't in the deck, but construction and land development funding was 41.5% at June 30 and 42.4% at 9/30. We've got about, call it, $6.6 billion in exposure, of which $2.8 billion is funded. So there's quite a bit of headroom in that construction book..

Okay. That's very helpful. Appreciate that, Harold. And then I'm curious, just thinking about this whole fintech thing, and you've obviously made some investments.

Do you guys think about this as more passively in terms of do you think 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 fee income from those operations and maybe loans from lenders on your balance sheet?.

I think that the latter is less likely, Brett. I think the motivation for us has been -- going back to Harold's comments about how we got started, we were investing in funds where we knew people and it provided deal flow, deposit flow, all those sorts of things. It was important economic part of 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 and so forth. 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 game and know where stuff is and what's moving and those kinds of things. And so that was -- that's really the honey of what we were trying to get to. As I always say, we wouldn't do it just for that reason. In other words, we're not going to make a bad investment, so we can watch technology grow.

We're generally fortunate to have friends and partners that we're able to participate with that do it well, and it is helpful to us as we study technology.

And I guess, going back to your last point, we are finding some investments there where there are opportunities for us to utilize those products or for us to introduce some of those product capabilities to other folks that we're integrated with, as an example, like Raymond James, who -- as you know, that's our brokerage platform.

Retail brokerage platform is through Raymond James. And 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. We thought it was a bad idea, but principal motivation is to stay close to what's going on in fintech.

And yes, there are likely to be synergistic opportunities, but I don't think we're headed to a major line item for that sort of fee income..

Okay. That's helpful. And then last one, if I could.

Just looking at the slide, Slide 9, on the revenue producer ads, that dark blue piece, Other, would that mostly be other larger regional banks? Or would that be smaller community banks in that bucket?.

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

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

Just wanted to delve into the comments that I think you had, Terry, on the comfort with the liquidity that's come in and from the PPP program and things like that. It looks like securities to earning assets are about 17%. So I 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've guided -- that you've given, do you think ex-PPP fees, you have the ability to actually drive positive operating leverage?.

I'll start with the investment securities. As far as growth in securities, I don't believe we'll add a significant amount.

We are looking at can -- based on what rate curve, we're looking -- we're anticipating, if we were to invest over a period of time, and call it, say, a number of $500 million to $1 billion in securities, Michael, can -- will the rate curve respond in such a way that tangible book value doesn't get, for lack of a better word, creamed.

So we are thinking about that. I know some banks have put out there, if the 10-year gets to $1.75 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, 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 client base, these deposits that we've accumulated over the last year or so look to be hanging in there and will stick around for an extended period of time. I don't know if that's exactly what you were looking for, Michael. If it's not, let me know, and I'll try to give you some more, but that's what we think currently..

No. That's helpful.

And to 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?.

Yes. When you're talking to me, I think there's always going to be operating leverage opportunities. I believe there's significant potential to drive our efficiency ratio down. But if you talk to the CEO, what he believes is he's got a lot of opportunities out there to hire people.

And so I think where we're at is a 49% to 51% kind of number, somewhere in that range. And it's been kind of remarkably steady over time..

Okay. That's helpful. And maybe just as a follow-up, just going to BHG, you have another recourse reserve reduction this quarter. I think you talked about that getting to about 5.5% 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 reserve ratio actually grow from that level as those other verticals grow?.

Yes. I think they anticipate that recourse obligation continue to kind of be flat to down next year. It will probably get down into the 5.25% range here by the end of the year. I don't know if it will get that low. But they believe that they think it could get down in, call it, the 4.75-ish, 4.85-ish range by the end of next year..

And that's inclusive of the 30% guidance you've given?.

Yes..

Our next question comes from Catherine Mealor with KBW. Your line is open..

I wanted to circle back to the margin. We've talked a lot about growth but not a lot of the margin.

And wanted to just think about loan yields; and Harold, my question for you is how close do you think we are at a bottom for loan yields? I think loan yields ex PPP and accretable yields around 3.78% this quarter, and looks like new yields are coming on around 3.37%.

And so how do we think about where those two numbers converge? And how much more pressure we have on that?.

Yes. I think what I'll talk about is loan yields without PPP impact. I think we're getting closer and closer to that bottom. I don't know if we -- I don't think we're there yet. I think we'll 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 a couple of basis points here, a couple of basis points there. The new lines of business that we're operating in, they tend to be LIBOR pricing now going to SOFR pricing. So, we're not anticipating any big hits related to that as far as loan yields are concerned..

And then just a follow-up on the operating leverage question. So if -- would it be fair to think about 2022 as a year where we perhaps don't see positive operating leverage as we just -- you likely don't have a big increase in rates this year, and you've got continuing building of your teams and the expense growth.

But then as we enter 2023, that end the year where you really start to see the growth move off of all these hires than hopefully with a higher rate environment where it will be a lot stronger in 2023?.

Yes. I think that's a fair assessment. I don't see our operating leverage moving one way or the other here over the next four quarters. And I think this hiring pipeline that Terry talked about earlier has got a significant impact on that. I think we'll have some branch builds going on next year in some of these markets that we're new to.

And I think that will impact it as well. So you know from your history with us over the years, we manage our expenses, but 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 stable operating leverage near term and then we see expansion in '23, which I think -- that makes sense. That's all I got..

Thanks, Catherine..

Our next question comes from Matt Olney with Stephens. Your line is open..

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 $35 million in 2Q, 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. 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 in the 2Q and 3Q?.

Yes. I think it probably will be similar, but I'll have to follow up with Dan to find out. But 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're still hiring elevated number of new producers?.

Yes. Matt, I think our incentives were fully baked on incentives. And I think we'll have probably a little less incentive expense coming in here in the fourth quarter that will help kind of neutralize its impact to fourth quarter run rate..

Our next question comes from Brock Vandervliet with UBS. Your line is open..

Harold, just to follow up on BHG. You mentioned the reserve going down to about $475 million the next year.

On the back of that, and I think you mentioned this at the Investor Day, what's the impact as BHG transitions to CECL?.

Yes. That's a great question. CECL will come around in 2023, I believe, or 2024. And they're -- right now, what the experts have told them is, they don't necessarily need to worry about CECL for the loans sold through the pipeline to the auction platform. But they will need to adjust for CECL 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, $1.30 or $1.40 kind of charge-off rate that equates to somewhere around, call it, 5% to 8% reserves..

Got it. Okay. And I think going back to Slide 9 and the focus on the revenue producers.

What should we be thinking in terms of just basic math on per producer on average, what do they add in total or in total after three or four years? How do we kind of break that down, just a sort of rule of thumb?.

Harold, you want to take that one?.

Yes. Brock, we've looked at that, like Terry's expression earlier in the call, nine ways to Sunday. But typically a commercial lender on average, based on our hiring kind of metrics over the last, call it, three years, we're 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..

Got it.

And that is that within, say, three years? Or is that too tight a time frame?.

Harold? Brock, I don't know what happened to Harold's connection. The time line on that is a five-year number..

Five years. Okay. Great..

Our next question comes from Brian Martin with Janney Montgomery Scott. Your line is open..

I don't know if Harold is back on, Terry. But maybe just the reserve level, you guys have talked about that going lower. Can you just give us a sense for how -- where you think that could end up over time as the economy improves and....

Yes. Harold, are you there? You want to take it? You -- or if I don't....

Yes. I just -- I got dropped and now I'm back.

Brian, can you repeat the question?.

Yes. Harold, I was just wondering on the reserve, the allowance level, just how we think about where that trends to kind of over time..

Yes. We anticipate, provided everything kind of stays consistent here, that we'll 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've 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..

Brian Martin:.

1 20:.

I don't think we'll get down to day one reserves post CECL. We could, but I'm not -- we're not planning for that to happen. So 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 2022..

Got you. Okay. And how about just going back to your -- the margin, Harold, just kind of the core margin outlook. I mean if loan yields continue to drift a little bit lower and the funding isn't -- the funding costs are kind of approaching a bottom and then that core margin probably goes incrementally lower in the near term.

Is that how to think about that?.

Yes. 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..

Got you. Okay. And then maybe just the last two for me, Harold.

Just the -- with the stickiness of deposits, it sounds as though we think about the balance sheet is growing modestly from -- or is it growing from here, maybe not modestly, but growing from here? Is that how we think about things?.

Yes. We're hopeful we don't see $1.3 billion in deposit growth. I know that's not something CFOs like to talk about. But yes, I think we will see continued deposit growth, but I think it will be more like what maybe it was pre-pandemic..

Yes. Okay. And then just on the fee income, Harold, I mean, just kind of trying to put some kind of fence around these equity investments, I mean given they were $1 million all of last year and were almost $20 million year-to-date.

I mean that -- if the current level isn't sustainable, I mean there's a -- 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. We've got about $110 million in, call them, typical joint venture funds that -- where people are out there trying to make investments to hit a big lick.

And then we've got another $50-or-so million in CRE venture funds that have a kind of a different objective. So the yield -- the risk return on the CRE investments is not nearly as large as, say, the typical the $110 million.

So -- but we would have a reasonable return target on both segments of our joint venture fund investments with the typical non-CRE ones being, of course, bigger..

Yes. Got you. Okay. And then just last one on the PPP here.

The balances of PPP where you given kind of the forgiveness you're seeing now, I guess, where do you see the balances at -- PPP at year-end? And just the -- I think you said that was it the contribution from PPP revenue is around, you're thinking, $12 million for the fourth quarter?.

Yes. Some $12 million to $15 million We don't know exactly where forgiveness is going to go, but it's traditionally -- over the last several quarters, historically has been running about, call it, 40% down on balances. I'm talking about the balance sheet every quarter..

Okay. All right. In the revenue side, the $12 million to $15 million. So -- okay. That’s all I had. Thanks for taking the questions, guys..

Thank you. This concludes the Q&A session. Thank you for participating. This concludes today's conference call. You may now disconnect..