PNFP Pinnacle Financial Partners

Terry Turner Chief Executive Officer
Harold Carpenter Chief Financial Officer
Tim Huestis Chief Credit Officer
Jennifer Demba SunTrust
Jared Shaw Wells Fargo Securities
Stephen Scouten Piper Sandler
Tyler Stafford Stephens
Catherine Mealor KBW
Anthony Elian JPMorgan
Call transcript

Good morning everyone and welcome to the Pinnacle Financial Partners First Quarter 2020 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 on their website at 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. [Operator Instructions]

Before we begin, Pinnacle does not provide earnings guidance or forecasts.

During this presentation, we may make comments, which may constitute forward-looking statements. All forward-looking statements are subject to risks, uncertainties, and other facts that may cause the 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 Financials 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’s Financials annual report on Form 10-K for the year-ended December 31, 2019. 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 website at

With that, I’m now going to turn the presentation over to Mr. Terry Turner, Pinnacle’s President and CEO.

Terry Turner

Thank you.

For those of you that have previewed today, you can see we’ve got a lot of information to cover today, envision the topics we’ve ordinarily cover on the call. We’ve got a lot of information on the COVID-19 pandemic impact and our response to it, which I believe has been bold and aggressive. We’ve got color commentary on our adoption of CECL and assessment of reserve build during the quarter. A much more in-depth look at the makeup of the segments of loan portfolio that are likely more impacted by the pandemic, including a deep dive into BHG and how we expect it to whether the storm, and an update on our entry into the Atlanta market which we remain excited about.

So, we’ll try to move quickly.

We’ve begun every quarterly call for a good number of years with our financial dashboard, primarily because it gives a view of our long-term focus and our ability to execute. I recognize that this quarter many are focused on immediate impact of the COVID-19 pandemic and their responses to it, which are obviously the most newsworthy items and honesty in our first draft of this presentation we led with the impacts of the pandemic.

The truth is, we’ve been in dialogue with investors over the last number of years regarding items like our ability to attract revenue producers gathering low cost core deposits, lowering cost of funds, and growing fee income, those items did produce long-term shareholder value and so, while we’ll cover the COVID-19 pandemic in great detail, I just felt like it will be beneficial to begin where we left off and try to offer brief insides into underlying financial performance despite the impacts of COVID.

As we go through the material, hopefully you will be able to see that our decisions and actions have been both bold and aggressive. It’s inconceivable to me that on a partial basis I guess that when 2020 is over that it will have been about earnings in 2020. I suspect that it will ultimately have been about the original earnings run rate for 2021 and so it’s our intent to execute on the fund mills that produced long-term shareholder value, while adopting a more defensive posture in early stages of pandemic in order to best position our sales for a return to more normal run rates as we head in 2021.

So, for a full disclosure, we always start with the GAAP measures, but today I want to move quickly to the non-GAAP measure because honesty for the most part these are the things that we are managing against. Total revenues were up for the quarter and up 10.8% year-over-year.

I think that’s consistent with the large volume of revenue producer we’ve been adding over the last several years, the model works.

Of course fully diluted EPS for the quarter was $0.39, primarily impacted by the elevated provision in the response to the COVID pandemic.

We will review that in detail in just a few minutes and then thanks to the EPS chart you can see pre-provision net revenue grew 2.8% linked quarter, north of 11% on an annualized basis and that’s a really important measure when considering first of all our ability to whether the storm, but secondly our ability to elevate our earnings run rate as we head into 2021.

Loan and deposit volume growth meaningfully turned the quarter and again the core deposits it was our largest growth quarter ever, which I believe is primarily attributable to the internal emphasis that we placed on gathering low cost core deposits over the last six to nine months. No doubt both loans and deposits were aided by clients building liquidity late in the quarter, but in our numbers would have suggested that loan volume would have been slightly better than what we had anticipated and in the case of deposits they would have been very strong and way ahead of our planned expectations.

In general, I thought asset quality was strong, both NPA and classified assets were flattish. Net charge-off jumped up for just a little bit in the quarter.

As most of you know that has followed us for a length of time.

Our charge-offs are generally lumpy, looking at the chart there you can see that since the last 17 quarters have been 20 basis points or higher.

We will review that in greater detail shortly, but that number was highly impacted by a partial charge-off which we are going to cover later on in the call.

So that’s the 30,000 foot summary of the quarter.

I think great performance on the fundamentals come with impressive reserve bill, primarily in response to the uncertainty surrounding the COVID pandemic.

Let me turn it over to Harold to provide a little more color commentary on the quarter before we begin to examine the impacts of the pandemic.

Harold Carpenter

Thank you, Terry and good morning everybody. Loan growth was solid for the quarter. End of period loans increased by 608 million during the quarter with about 250 million attributable to commercial loan growth with most of those we believe in response to the pandemic of our commercial borrowers.

As a result, organic loan growth we believe was in the $350 million range for the quarter with results in about 7% annualized loan growth which we believe is admirable given the environment.

Now to deposits, as Terry mentioned it was a big deposit quarter for us. End of period deposit is up almost 23%, our core deposits where 22% over December 31. To the point, as many of you know we modified our annual cash incentive plan incorporated core deposit growth and rate deployment.

First quarter was a great quarter for core deposit growth, so as we sit today we thank our modification is working well. More on incentives later when I talk about expenses.

Next is the usual update to our loan pricing loan spreads held up really well in the first quarter, so we are pleased to see that and hopeful spreads will continue to hold in the second quarter. Impacting first quarter LIBOR loan yields with absolute spread of LIBOR to Fed Funds, LIBOR spent a lot of time in the first quarter pricing below Fed Funds and at the beginning of March LIBOR was around 40 basis points less than Fed Funds.

Since substantially all of our LIBOR loans reprice on the first of the month. March was negatively impacted.

Now, going into the second quarter, we finished March at 3.8% on LIBOR loans with LIBOR well above Fed Funds, we’re anticipating that LIBOR will work its way south towards Fed Funds so we will see absolutely yield compression and LIBOR credits on the second quarter by modest amount. It just depends on how quickly and how far LIBOR moves during the second quarter.

It seems like it’s been a long time since we talked about deposit betas. We do believe our relationship managers did a bang-up job on managing our deposit cost in this rate environment. In the negotiated rate bucket, we’ve achieved our 117 basis point decline since June of 2019.

Our relationship managers were very much in tune with the right environment and are prepared to have more discussions with our client needs about rate decreases, and a minimum which should experience decreases in CD rates for the next couple of quarters as reprising occurs, all things considered, overall deposit rates should be down in the second quarter.

A busy slide, but some important information as we head into the second quarter. The NIM chart on the top left goes back to 2007 and tracks our NIM in relation to Fed Funds target range. We all know we’ve operated in a zero rate environment before so this is nothing really that new. The chart reflects that the longer the zero rate environment lasts, the better our NIM perform. Substantially all of this felt we were headed to a zero rate environment and the pandemic put a lot of winds in those sales and certainly increased the speed it took to get there.

Looking forward, we’ve got several issues impacting first quarter NIM and that also will impact second quarter NIM. Impacting the GAAP NIM is obviously purchase accounting which is shown in the chart at the top right. We recognized approximately 7.4 million of discount accretion in the first quarter. Who knows where it will end up for the full year, my bet that it will be less than the 23 million we are projecting given payment deferrals and the low rate environment. That said we believe we had a solid quarter for NIM performance after concerning the impact of purchase accounting.

The bottom charts detailed the impacts of our hedges, as well as hedge unwind and our recent liquidity bill. Covering the shrinkage in LIBOR spreads that I mentioned earlier will be an increase in revenues from a LIBOR loan core we still have on the balance sheet. This core will last for about another 4.5 years.

As the chart indicates floor increases in value as LIBOR continues to fall.

Additionally we have about 1.2 billion in client floors that are currently in the money and will also become more value should LIBOR continue to fall. We’ve also added quite a bit of liquidity to our balance sheet and intend to add more in the second quarter as we currently evaluate the depth of the pandemic. We’ve got ample sources of liquidity to fund our franchise, but we believe it was prudent to take on this additional liquidity.

The liquidity bill will likely result in more net interest income in the second quarter, but will also result in some NIM compression. We always have the option to reduce this liquidity during 2020 as the potential recovery becomes more in view.

As Terry will cover more in detail in minute, our significance is to impact of the PPP lending program. PPP was an incredible three or four weeks around here.

Significant resource allocation on lot of blood, sweat, and tears but some very dedicated Pinnacle associates, but if it happens like it's supposed to happen, it'll definitely soften the financial blow of the pandemic.

We’re also developing a strategy around the mainstream program currently to identify those borrowers that might be well suited for, but the mainstream is now PPP.

Now to fee income, I’ll be really brief. These were more than $70 million for the quarter, up more than 3% of the same quarter in 2019, BSG contributed approximately 15.5 million, which was slightly less than we anticipated, but more on bankers healthcare group in a second.

Our other fee businesses had a strong first quarter, with residential mortgage leading the way of approximately 76% year-over-year.

Mortgage had a great first quarter correlating not only with drops in long term rates, but also with increases in the number of mortgage originated. Again, great markets are very helpful with this line of business, but national residential mortgage market has gone through some strategic issues at present, so it's difficult to speculate on where all this is headed and how it might impact us.

We just believe we have the best mortgage originators in the markets and our various health plans get through with current uncertainties. Wealth management had a big quarter in brokerage as they operate in much the quarter with record market highs and we maybe one of the first, or one of the few financial institutions in the country that consider trust to be a growth engine. All in all a super nice big quarter for us.

So, now briefly on expenses. Salary is up largely due to the increased personnel this quarter compared to the last quarter.

As the slide indicates, we are throttling back our hiring focus, to focus on Atlanta, which Terry will discuss in a second, critical revenue and hires around the franchise, as well as critical support personal we produced, as we produced our RA plan about 40% in 2020.

Our incentive accrual is at [50%] at quarter-end, as I mentioned previously the deposits kind of worked well for us in the first quarter.

We will continue to attract the EPS component to see what happens to the rest of the year. We concluded that 50% was fair right now, but suffice to say given first quarter results many things will have to break our way for that hole.

Last quarter I mentioned that our 2020 expense run rate should approximate a mid-single digit increase over FORTUNE 2019’s results, slight modification with our belief that our expense run rate should now be less than mid-single digits for 2020. I will go into this more on the next slide. We’ve incurred in the first quarter of 5.2 million lending related costs related to our billing of our off-balance sheet reserves as a result of adopting season.

So, we are now expecting the other amount to repeat next quarter, granted the absolute level of our unfunded commitment both with determine absolute length and depth of the pandemic to play a critical part of where we are at the end of the second quarter and the length at the end of the second quarter.

Now, CECL. I’ve got a lot to say here, so hopefully we can reduce what we have to say about CECL in the future as now we are all weary of this topic. At the top of the slide is our rendition of a table that we’ve seen in several presentations so far this earnings season.

Our day one allowance ended up at 67 basis points, which we believe is consistent and with the guidance we have been giving for several quarter.

We have slightly more than $10 million in charge-offs during the quarter due in large part to the partial charge-off for the C&I credit that was criticized going into the pandemic and with the pandemic, finds itself in need of equity support sooner than anticipated, which is working on in our specialized asset folks have a reasonable degree of confidence it will eventually receive.

One of the first things our internal special assets group did in line of the pandemic was spend more than a week as a group going back through every specialized credit and to specifically address the impact of the pandemic of our criticized and classified loans. I take great comfort in the judgment of our special assets team. This is not their first rodeo.

Later Tim will also discuss how we dug in the hotels, restaurants, etcetera and other segments of our loan portfolio.

For the quarter, charge-offs ended at 20 basis points and other real estate increased to 2.4 million.

As provision run rate, there is obviously much judgment involved in all of this, but all other conditions being equal our provision would have been, as the table indicates in the $14 million range.

Again, you have to assume our net charge-offs would have been the same had the pandemic not occurred, so there is lot of guess work. Allowance for loan losses on an apples-to-apples basis we think would have been in the 69 basis point range at quarter-end.

Now as with COVID related provision. Based on model inputs, we feel like we’ve been like conservative here.

We’ve taken in a lot of relevant inputs and observations into few allowance that takes into consideration a wide variety of bankers. We do use a third party source for our economic projection, which uses national level forecasting metrics. It’s the same third party we used for asset liability modeling, so hopefully there is some synergy advantage by using the same forward metrics.

There are four economic scenarios in our model ranging from optimistic to baseline the pessimistic to severe, probably not too dissimilar to the more familiar adverse and severely adverse nomenclature that we’ve heard about in conference calls thus far. In comparison to previous relations about other banks this quarter we’ve also waited the various scenarios with the most adverse scenario with the most adverse scenario having a wait of 25% and the optimistic being only 6%.

The difference is allocated basically evenly between baseline and pessimist.

As to economic projections, anticipated unemployment seems to get a lot of attention with our severe scenario ramping up to more than 20% in the fourth quarter of this year and averaging almost 19% for all of 2021 with 4% unemployment returning five years from now in 2024.

As to GDP, our severe model dropped GDP by 25% in the third quarter of this year with a rebound that current GDP in 2022.

I assume all of this points to a U-Shaped recovery.

Our reasonable and supportable opinion is around 18 months.

So, our calculations are waited to a time period and incorporates the bottom view and then incorporates the front-end of the recovery by another [indiscernible] of initial return to some degree [indiscernible].

Back to the top chart on the slide. Off balance sheet results are not something that anyone routinely talks about. In my opinion, I believe it’s accounting on steroids.

We are at 16 million at quarter-end and providing $5 million of expense this quarter, significantly higher than what we’ve booked in our history, that amount represents the anticipated loss content of the unfunded loan portfolio should a loan eventually be funded that results in a loss.

Most of the loans that contributed to this reserve are C&I lines of credit, which are very short in maturities. All things continue with 109 for their allowance at the end of the quarter plus the $16 million and the off balance sheet reserve, so our allowance for credit losses are around 1.17%.

Just a quick note, CECL has been in development at Pinnacle for over three years, more money to vendors that our [indiscernible] significantly more expenses because of thousands of hours spent by 10 or 15 key leaders of our firm in getting this standard adopted.

As an extensive accounting standard and [indiscernible] but I want to thank them for hanging in there to get us to this point. I wish I could give them – I probably going to tell them their work is done, but we all know there is always more work coming.

The big question asked thus far in this earnings season that no self respecting CFO will answer is we will have more provision at the end of the second quarter. There are blooming assumptions in play here, but obviously our [indiscernible] we will get updated economic projections and we will take the pulse from borrowers throughout and at quarter end.

Organic loan growth, the impact of the CARES Act and other government programs will also have to be considered. Many factors are [indiscernible] such as the development of anti-virus, government imposed restrictions on trade and travel, and the information as they come to light with increased [indiscernible]. There is obviously a lot to think about this year.

Our best [play] right now is to use our models [indiscernible] largely around economic projections so [indiscernible]. Like I said, I think we've been conservative here. A $100 million provision is a significant investment for Pinnacle into this – into a period of this much uncertainty. There's more than 20 times our usual provision run rate and results in our allowance of more than two times where we were at year end.

Post the Great Recession, the term green shoots became popular. There's a lot of discussion today about restarting the economy. The PPP, the other programs that make up the CARES Act and whatever comes next has to have a positive impact, so we remain optimistic not only about the markets where we operate, but in our business model and the 2,500 associates that work with Pinnacle.

As Terry mentioned, this management team has taken the operating position to get COVID behind us quickly in an effort to gain as much clarity as we can about our run rate going into the second half of 2020 and into 2021.

Now, some comments on capital.

First, we did redeem about $80 million of sub-debt early in the quarter that were [holdover] issuances from previous mergers.

We also acquired about 1 million shares of PNFP earlier in the quarter. We've now suspended our buyback program until we’re getting more clarity as to the length and depth of the pandemic.

We're not likely to regain approximately $130 million of bank sub-debt that was previously planned by us for redemption in the summer.

Additionally, we currently anticipate maintaining our dividend for the foreseeable future.

Lastly, we did experience tangible book value accretion during the quarter as our management remains focused on this metric.

Capital ratios did experience some dilution by 20 basis points to 30 basis points this quarter back to levels more consistent with about a year ago.

Our [100/300] ratios were basically flat with the fourth quarter.

Our participation in the PPP program shouldn't impact regulatory ratios once those funds are fully funded in the second quarter. Holding company cash is sufficient to carry about [indiscernible] quarters of dividends and debt service. Basically, we feel good about our capital.

Obviously, credit will be the driving force behind any changes to our previous statements. Like probably every investment banker listening to this call, we too have been conducting stress testing and burn down analysis using multiple scenarios. We've incorporated Great Recession loss rates, [indiscernible] loss rates, historical charge-off rates and other scenarios. It’s way too early in this crisis to conclude that our CECL and stress testing algorithm is accurate, but we walk away from our stress testing, feeling that – very strongly that our capital is strong and we will need to deliver to common shareholders as a result of the pandemic.

This slide is new, but not inconsistent with what other bankers are talking about on conference calls. The PPP program will be significantly impactful in the second quarter and Terry will discuss that in just a few seconds. All in all, it's steady as she goes right now. The last few weeks have presented us, as well as all bankers, significant challenges.

We couldn’t be proud of our – couldn't be prouder of our 2,500 Pinnacle associates.

Our goal today is to support our clients, particularly our borrowers, all the while making sure that we are making prudent credit decisions.

We are here to provide our clients the capital they need to weather the storm so that they initially are able to thrive in short order.

With that, I will turn it back over to Terry.

Terry Turner

Okay. Thanks, Harold. In my view, isolating out the inputs of the pandemic, Q1 was an excellent quarter for us in terms of operating fundamentals, but obviously, by the end of the quarter, we were consumed with protection, protecting our associates, our clients, our communities and our shareholders.

I can't tell you how proud I am with the leadership and the aggressiveness of our response.

As you can see on this timeline, we actually activated our pandemic response team on January 30; it’s just 10 days after the first known case in the U.S. and the same day that the World Health Organization declared a global health emergency.

We had already begun ordering supplies like hand sanitizer before we had the first cases of community spread in the U.S. In early March, we began restricting business travel, [inventorying to] personal travel plans of our associates as we headed into the spring break season and communicating with associates and clients about health safety prior to the World Health Organization declaring the pandemic.

On March 12, we limited meetings and events to less than 15. That was three days before the CDC suggested limiting groups no more than 50 and well before subsequent safer-at-home ordered by a number of governors and our footprint suggested limiting gatherings to less than 10, which of course, we complied with.

On March 18, I believe we were one of the first in our footprint to convert all offices to drive-through-only-service and we already had greater than 50% of our back office associates working from home. And on March 20, we rolled out a relatively aggressive loan deferral program to assist impacted borrowers; I’ll talk more about that here in just a few minutes.

I don't want to rattle down through each of these actions since so many of them by now are commonplace. But it does appear to me that our team was very bold in its decision making and on the front-end of virtually all these issues and all these things that impacted the associates and clients have worked well and we believe our clients and our associates are been well-protected.

In fact, to-date we have only three confirmed cases firm-wide, two in Nashville, one in Memphis.

As it relates to protecting our clients, I would say, we aggressively reached out to clients to make them aware of our payment deferral program. In general, our deferrals are structured for 90 days with an ability to deferral a second 90 days should the borrower needed with no further documentation.

As you see on the left of this slide, total deferred balances were roughly 16%, and not surprisingly, we’re concentrated in hotels, restaurants and entertainment.

As I listen to other banks discuss their loan deferral on utilization, some have sought to use it as sparingly as possible. I'm not being critical of that approach at all.

In fact, I see some merit to it, but they won’t be clear, our approach has been the opposite. It's been our intent to help our clients build as much liquidity as possible, not knowing the depth and duration of the pull back.

And of course, Harold mentioned a minute ago the most impactful for clients and the most consuming effort for our firm over the last three weeks has been the Payroll Protection Program. We received roughly $2.5 billion in [apps] and we’re ultimately able to gain SBA approval for $1.8 billion. In other words, we were able to distribute roughly 72% of the requested funds.

Another way to look at it is based on the asset size of our firm compared to commercial banking assets in Nashville and assuming an even distribution of the $349 billion in funding, we would've been expecting to distribute about $490 million, which means we have roughly 3.5 to 4 times our share. And while I'm incredibly proud of that and all the associates of this firm, many of whom work literally night and day, it killed me to think that any of our clients who deserve funding were unable to receive it.

And so, as you might guess, we've been [lobbying] Congress to do the right thing and refund the program by at least another $250 billion and the event they do is our desire to see every one of our eligible clients get the funding they need and we'll dedicate ourselves to that effort regardless of the time and effort required to do it.

Just a couple of observations on PPP, obviously, the largest number alone comes from – come from the smallest businesses, almost 31 times more smaller loans approved than in SBA. In other words, in the SBA’s lowest tier, less than $350,000, we had 31 times more of those than the ones that were in its highest tier, greater than $2 million.

The fee income associated with all that volume of loans that were part of SBA’s first $349 billion allocation, translates to roughly $50 million in fees we’re expecting to be recognized over the short life of those loans. It's a meaningful down payment on the special loan loss provision we made this quarter. It's our intent to be the successful on a second round assuming Congress doesn’t indeed refund the program.

We have as many applications yet to be processed as we processed in the first phase.

Let me say that Payroll Protection Program, recall it was significantly underfunded in terms of demand put most banks across the country in a position of under serving clients. Very few base consents were able to get all [the apps] that they received process before funding ran out. And of course, if you’re one of those businesses and didn't get funded then you might feel like you're [indiscernible] let you down regardless of how herculean your effort was to get you approved by the SBA.

But we took just under 13,000 applications, as I mentioned, totaling $2.5 billion, we were able to get $1.8 billion of that approved.

Our associates, I think, you know, in addition to the funding, we had to get our client prepared beforehand on very short notice. We had people working night and day to get the position to advise and help clients prepare to apply one staff were permitted by the SBA on April 3.

It was our genuine desire to get all our clients to the front of the queue recognizing that the banks would like to be fighting for a scarce resource. It's hard to believe that we had to stand up two new systems in a matter of days to process all of that volume understanding the clients that didn't get funded or frustrated and we are too – honestly our associative have continued to work all week, you know, in trying to ensure that those unfunded [apps] are in a position to launch in the event the Congress does what it should and authorizes additional funding.

Despite frustration by those who didn’t get funded, for the most part, our work to advice and look after our clients stood out versus our competitors and has been widely praised among our clients and in the local press.

As obvious by now, there are probably no borrows that won't be impacted in some way by COVID-19, but clearly there are segments like restaurants, hotels, retail and entertainment that will be most impacted.

So, I’ll ask Tim Huestis, our Chief Credit Officer, to provide a deeper dive into those segments of our portfolio.

Tim Huestis

Thank you, Carrie. Good morning, everyone. From a credit perspective, first quarter 2020 was a continuation of our solid performance for metrics such as past due, non-performing assets, classified assets and net charge offs.

As Terry mentioned earlier, we did experience an increase in net charge-offs from 10 basis points to 20 basis points. This spike was a result of the single credit that was directly impacted by COVID-19. Absent this credit, our net charge-offs would have been in line with prior quarters, little more color on that credit later.

Before I get into the following slides, first, a few overarching comments. What we don't know with certainty is when economic conditions will stabilize. It largely depends on flattening of the pandemic curve, how high unemployment ultimately gets and whether the rebound is a V-shaped or a U-shaped curve. What we are focused on today are those things we can do to help our borrowers and minimize loan defaults.

Our strategy is the best offense is a good defense.

You've all heard Terry say many times over, we hire experienced bankers who know their clients. The same principle has always held true as we've grown our credit team. We only hire very experienced senior credit officers. We currently have 24 senior credit officers and their average tenure is 28 years or years of experience.

We have our senior credit officers paired with our financial advisors in virtually every one of our markets. Credit officers go on client and prospect calls with the financial adviser.

Further rounding our credit discipline is our credit analyst team of 96 employees.

Our credit analysts have an average of 20 years of experience. We believe our largely unique line of credit model of partnering experienced credit talent right next to the banker will serve us well during these difficult times.

Here's what Pinnacle is doing to address COVID-19 challenge. Payment Deferral Program, we provided deferrals for real estate, C&I loans and consumers approximately of $3.2 billion. We proactively reached out to clients in the most impacted areas of our loan book with a streamlined 90 plus 90 payment deferral.

For commercial and CRE clients requesting a second 90 day extension, we built a survey tool to help us collect and quickly aggregate client responses to targeted questions. We believe payment deferrals are a proven step to help our client’s bridge to the other side of COVID-19.

Second, Paycheck Protection Program Loans, as you just heard Terry discuss, Pinnacle received approximately 13,000 applications totaling roughly $2.5 billion and obtained the SBA approval on just north of 6,000 applications totaling roughly $1.8 billion. We believe the additional dollars to our clients will help them better endure this difficult time.

Third, enhanced monitoring strategies to produce more real time data on severely impacted segments.

In the next few slides, we’ll briefly cover several of the segments most obviously impacted by COVID, but to take it a step further to understand COVID’s impact we partnered with an industry research firm, IBISWorld. IBIS and a team from Pinnacle, worked to stratify the risk in our C&I book.

We took IBIS’s time proven historical quantitative metrics of industry risk level and trend of risk, and combined a qualitative overlay for impact of social distancing. The product results in the stratification of our C&I book into categories of highest risk, high risk, medium, low, and lowest.

We will use this stratification to target time and energy where the risk levels are highest.

Pinnacle has continued its approach of building a well balanced and granular portfolio. We've maintained our discipline regarding conservative house limits for CRE segments, as well as for CNI sub-segments. The pie chart on the right provides a quick glance of these segments that have both been most impacted by COIVD and their relative size to our loan book.

Here's an attempt to be as transparent as possible regarding our loans to the hospitality industry. Pinnacle's approach of lending to hotel sponsors that are well capitalized and have a long history of successfully operating hotels has served us well.

As of March 31, we only had one non-performing hotel loan of $3 million. This was an SBA loan that was originated by a bank that Bank of North Carolina had acquired years ago.

A few items on the page to draw your attention to include, weighted average LTV of 50%.

We have provided payment deferrals for 74% to provide them flexibility. Hospitality projects are financed largely in our geographic footprint. Many of our hotel sponsors are also very large depositors with Pinnacle.

The second slide on our hotel book will provide detail about our 10 largest hotel loans.

Some noteworthy details to point out include, 81% of our exposure is in the Hilton, Marriott, Holiday Inn, and Hyatt. We believe this brand identity will better position us or position our portfolio.

As you can see in the chart, a conservative LTV provision on these 10 largest. Most of our hotel exposure is limited service, no luxury or resort brands. Only 18% of our hospitality book has loan maturities in 2021 and 2022. Hopefully by these dates, the impact of COVID will have subsided.

This next slide provides details of our restaurant book. It groups together exposure to commercial real estate developers who lease the restaurants, as well as loans directly to restaurant operators.

Some noteworthy points include, this segment is less than 3% of our loan book. The Top two exposures are to well-known public companies who operate restaurants.

These two relationships represent 30% of our loans to restaurant operators. The listing on the far right illustrates approximately 25% of our total retail book is being repaid from revenues of seven well-known restaurant brands.

As of April 15, 44% of our book is executed payment deferrals.

This slide will provide details of our retail loan book. It groups together exposure to commercial real estate developers who lease to retail stores, as well as clients that operate a retail business. Together, they represent 11% of our loan book.

Some noteworthy details include no mall exposure.

For our CRE term loans, only 22 are greater than $10 million. Of these 22, 12 are the grocery anchored centers.

31% of our single tenant – 31% are single tenant averaging just $1 million to tenants like Dollar General, Tractor Supply, 7-Eleven and Bojangles’, these are open. It's a very granular book with over 800 loans averaging just 1.5 million.

For our CRE construction loans, only six loans greater than $10 million. Of these six, two are grocery income. 39% of our construction loans are built to suit.

This slide will provide some details into our entertainment and music loan book.

We have one financial advisor that specializes in lending to the music publishing industry, very experienced with a strong contact throughout the industry. Most of our loans are in the music publishing space to finance the acquisition of song catalogs. Each catalog is made up of thousands of well-seasoned, diversified songs that are stable from an earnings standpoint. Average LTV is under 50%.

Revenue from the catalog is generated primarily from terrestrial radio and streaming. To a lesser degree, sync revenues generated from songs in catalogues used in film, TV commercials and general licensing. Only a limited amount of COIVD pressure to revenue is anticipated. People will continue to stream their music, but fewer bars and restaurants playing songs may impact sync revenue. All loans have appropriate loan covenants that permit close monitoring. Notably, Pinnacle had only one loan to a concert promoter. It was a $2 million line with very modest usage.

As we discussed on the call, we had one partial charge-off in the first quarter of 2020. The music team had just one talent agency borrowing client. Due to cash liquidity reasons, this relationship was transferred to our special assets team during late fourth quarter, 2019. Significant equity was injected into the company in early 2020, thus curing the liquidity issue. Then COVID hit and revenues completely stopped. We do not anticipate any further loss on this credit.

Now, let me turn it over to Harold to provide some similar analysis for BHG and our belief about how they will weather the storm.

Harold Carpenter

Thanks, Tim. I've got several charts here on BHG, but I want to move pretty quickly.

So, in the top left chart on this slide, we've shown on several occasions.

Our opinion is that there has been no loosening, but actual tightening of credit standards at BHG, and through all of that, volume growth has been exceptional. The quality of BHG’s borrowers has improved steadily from the early years of the firm. They continue to refine their scorecards and increase quality of the borrowing base.

As you know, there’s ramped up sophistication of the credit process as they continue to aim at segments that have high quality borrowers.

Perhaps the bottom right chart may be the most powerful chart I have to offer related to BHG’s steadily improving credit quality.

As you look at the losses by vintage, losses continue to level out in earlier months since origination, thus pointing towards a lower loss percentage over the life of a borrowing base. Recent pandemic related deaths will likely cause these lives to point upward, but the quality of the borrowing base, in our opinion, is much higher than the borrowing base from just a few years ago.

Now more on historical charge-offs and reserve bills. These are for loans that they sold to their network of community banks. The green bar shows that currently, they've got about $2.8 billion in credit with banks who acquired their loans. The orange line shows their annual loss rate while the blue line on the chart details the recourse accrual as a percentage of outstanding loans with these other banks. They've been keeping the recourse reserve for substitution losses in the mid-to-high 4s over the last few years, basically constant with annual losses.

As many of you know, BHG has been billing their balance sheet, thus maintaining more loans on their books with the eventual goal of issuing debt securities collateralized by these balance sheet loans. Two positives from the strategy in our view, the issue is creating a more diversified revenue stream and as well as creating another funding source with the securitization technique.

That said, during the first quarter, BHG elected to pull back on this trading and sell more loans to the auction platform, thus generating more revenue during the first quarter. By doing this, they are generating enough revenue, significantly increased their recourse reserved for substitutions as we all enter into this period of uncertainty. Their business flows have provided them the ability to increase these reserves and strengthen their balance sheet accordingly.

Additionally, BHG has taken a slightly more conservative position with their outbound sales and marketing. They are purposefully electing to aim for higher FICO scores origination and have backed away from adding any new professional classifications to their portfolio at this time. They will continue to evaluate this decision for the foreseeable future.

Agreed, this is some fairly granular data, but I feel it's really important. We're not going to go through it in detail, but in our opinion, point to a well-diversified loan portfolio and might – maybe help to eliminate some frequency notions that BHG has just prevented. Dentists are absolutely important to their franchise accounting for 11% of the outstandings. At the bottom of the chart details the non-medical book that is growing faster than the medical book and represents approximately14% of total outstanding.

As of April 5, total deferrals represented about 10% of the total book. That number is currently running at about 13%; so it slowed somewhat. These deferrals require the cooperation of the purchasing banks, so BHG has been working with not only the borrowers but the banks to help the borrowers get through the impact of a pandemic.

Quick stop for comment about after talking to our friends at Bankers’ Healthcare Group, dentists leads the group as expected with a 35% deferral rate base.

As BHG talks to these dentists, they have learned that dentists are Halim Bill emergency only and rescheduling non-emergency procedures into the summer.

As a result, dentists will need to start working six days a week upon restart to keep up with the demand. I don't know about you, but going to the dentist is not my idea of fun, but given the current economic climate, I'm going to look forward to seeing my dentist on a Saturday in the very near future.

We've shown this slide before. The green bars on the left chart represent originations and have wrapped up with more loans being funded, which is the result of enhanced analytics and more sophisticated marketing platforms.

With the tailwind of pushing more to the auction platform, the first quarter was a great quarter for originations, but also business flows are strong and should help us hit as we head into the second quarter.

The blue bars are the loans on which the annual sale has been recorded as these loans are placed with bankers with gain on sale revenues being generated. The blue bars increased in the first quarter as a result of their decision to send more loans off balance sheet and build reserves, a live play from the Pinnacle’s perspective.

The gold bars represent the loans held by BHG on its balance sheet for which BHG will collect interest income. Once some idea of restart occurs and the credit markets appear more liquid then the off balance sheet strategy will be back on the radar.

For me, the auction platform is probably the most valuable component of BHG’s unique gain on sale model. Currently, they have more than a thousand banks in their network. Their funding platform is alive and well and very liquid. Spreads during the first quarter were some of the best in the history of the BHG.

As you know, BHG’s management spends a great deal of time on making sure that this platform has ample liquidity and is ready to acquire their loans at a competitive price.

Lastly, for Bankers’ Healthcare Group, they have pulled back their estimates by a modest amount for 2020. Who knows where all this is going to end up with so much uncertainty? As it stands currently, their business flows going into the second quarter are strong as there are borrowers out there needing their product. Their marketing engine is aimed right at higher quality borrowers in the traditional segments that BHG has significant experience underwriting. Their auction platform is liquid and spreads has been a positive for Bankers’ Healthcare Group. Pinnacle remains excited about our investment and looks forward to watching our friends at BHG step up during this time.

With that, I'll turn it back over to Terry to wrap up.

Terry Turner

Thanks, Harold. Quickly, as Harold mirrored earlier, in concert, we generally adopted a more defensive stance. We're substantially slow in our recruitment efforts for the foreseeable future, along with the associated expense bill with the exception of Atlanta.

We continue to believe that the opportunity at Atlanta is a once in a generation opportunity and that the timing is perfect. Indirect impacts of COIVD like social distancing may slower our efforts to some extent, but our early associate client recruiting success brings confidence that we should stress ahead.

And here’s why we see so much opportunity in Atlanta. This is greatest data from both the national and Atlanta markets. It covered businesses with annual revenues from $100 million to $500 million in each. The Cross Hairs represent the main performance across each market.

And so, above average performers are above the horizontal line and to the right of the vertical line. It seems to me as the goal for any institution would be to get to the Northeast corner as quickly as possible.

As you can see, what we’ve done in Nashville is just that.

We have capitalized on relatively poor client satisfaction among clients in the largest banks in the market. Those that had the most share had the greatest vulnerability. Clearly in Nashville, we were at the right place at the right time.

Now looking at this chart on the right, Atlanta, I want to make two observations.

First of all, you’ll notice that the Cross Hairs in Atlanta would suggest that the average satisfaction among clients with the banks in Atlanta is generally less strong than in Nashville. In other words, Atlanta is less competitive in terms of client satisfaction. And more importantly, all of these banks who possess the vast majority of all the business clients in Atlanta, suffer from below average percentage of their service quality, and are therefore, extremely vulnerable. It is really an unusual opportunity.

As a reminder, this is the slide we covered last time, painted picture of our aspirations there. I'm not going to review this again since nothing has really changed. And as you can see here, we've been extremely busy over the last 12 weeks to 13 weeks and pretty well hired our complete initial team.

As mentioned earlier, I do expect things like social business may slow our recruiting timeline down just a little bit, but at this point, we're extremely encouraged by the response of bankers that we're talking to there.

So, in an effort to summarize our plan from moving forward in this pandemic in general, it's our intent to move from offense to defense to slow our investment and grow until the storm had been weathered and environment once again consists to our unusual ability to take share from the larger, unwieldy banks. That said, I believe our aggressive vision of revenue producers over the last two years, who are still in the earlier stages of consolidating their client base, should result in ongoing growth, albeit at a slower pace, and hopefully put us in a position to elevate 2021 earnings run rate faster than figures.

We'll continue to manage those things that produce long-term shareholder value and will remain in a more defensive posture until we more clearly see the depth and duration of the pandemic and its impacts.

Specifically, we've increased liquidity and we'll continue to do so in Q2. We’ve elevated our loan loss allowance meaningfully, and although we don't tend to cut our dividends at this time, we're still in a capital preservation mode, suspending our share buyback and retaining sub-debt we had previously intended to retain.

For the first time since the Great Recession, we're slow in our recruitment and hiring in an effort to avoid the expense bill that goes with it and to enable us to maximize pre-provision net revenue as an important aspect of our defensive posture.

Operator, we’ll stop there and take questions.


Thank you, Mr. Turner. The floor is now open for your questions. [Operator Instructions] And our first question comes from Jennifer Demba with SunTrust. Please go ahead.

Jennifer Demba

Thank you. Good morning.

Terry Turner

Good morning, Jennifer.

Jennifer Demba

You mentioned several higher [Technical Difficulty] detail on all those, as well as BHG. [Technical Difficulty] 44% of your restaurant borrowers have requested deferrals to-date, can you talk about [Technical Difficulty]?

Tim Huestis

Jennifer, this is Tim Huestis.

Your question was breaking out. Was the question we had 44% of payment deferrals from restaurants, are you asking what the deferral rates on the other segments have been?

Jennifer Demba

Yes, exactly.

Tim Huestis

Okay. Well, I don't have all the different segments with deferral rates. We did include the deferral rates for these key categories, but I don't have at my fingertips for the different segments.

Terry Turner

Jennifer, if you can see there, the deferral rates are concentrated in those segments given that you've got an overall 60% deferral rate as opposed to very elevated deferral rate in those highly impacted segments.

Jennifer Demba

Okay. Can you just talk about what your expectation is in terms of reopening throughout your footprint? I know the Tennessee Governor has already [Technical Difficulty]?

Terry Turner

Yes, that's a great question. Thank you.

I think we're encouraged by an offensive posture. It looks like in the State of Tennessee, the State of Georgia, and the State of South Carolina, and those are, you know, principle operating areas for our firm. [Rob McKay] is the Chairman and my partner here, is active on the Governor of Tennessee's taskforce to figure out how to reopen the economy as well as the city of Nashville.

And so, it looks to me that you're going to get an aggressive restart, and as I said, Tennessee, Georgia and Florida, excuse me, South Carolina.

I think, when you think that – so what does that mean to us? I think that you ought to anticipate that we’ll work not dissimilar to the President's guidelines. In other words, he sort of got a phased reopening and it’s based on watching the decline in cases and then stepping back in and escalating the progress from there.

I think you will see the same thing in the State.

I know in the State of Tennessee that will be the case, rapid opening in some places, slower opening in the more urban markets like Davidson County, Shelby County, Hamilton County, Knox County and Sullivan County, which is up in Tri-Cities.

So again, Pinnacle would then be a function of that and we will do the same thing. We sort of expect phase reopening.

As you know, we kept all our branch offices – fundamentally our branch offices open with drive-through service.

So there's not a huge service degradation, but we'll stagger it and we've already begun building the re-opening kits and we'll use shields for towers – protective shields, not dissimilar to what you're seeing in some of the grocery stores. There are a variety of things that are included in the supply kits. We're building to actually reopen on a full service basis.

Jennifer Demba

Okay, thank you very much.

Terry Turner




Our next question comes from Jared Shaw with Wells Fargo Securities. Please go ahead, Jared.

Jared Shaw

Hi, good morning, everybody. Thanks for all the great detail. Really appreciate [indiscernible] you broke out in slide deck. I guess maybe the question on the provision, you know, what we have seen so far in April, is there any expectation for changing the weightings of your different scenarios? Or is that too early to tell for [indiscernible]?

Harold Carpenter

Yes, Jared, this is Harold.

You know I don't think we’ll be changing the weightings just right now. We'll probably be getting new economic projections in short order and then we'll likely get some more before the end of the quarter.

So, we'll just have to see what those look like, but, you know, as it sits right now, we're not planning on changing those weightings.

Jared Shaw

Okay. And does the provision fully impact incentive comps doing as we see higher provisions? Is that fully flowing through the incentive comp? Or is there some type [Technical Difficulty] provision?

Harold Carpenter

Yes, I'm not sure I got all your question, we're having a bad connection today, but I think you were trying to ask a question around our provision and how it correlates with incentives. Is that correct?

Jared Shaw

That’s correct, yes.

Harold Carpenter

Alright. Yes, currently, the way the incentive program would work is we don't have any kind of exception for provision expense.

So that would be included in our – you know however, we ultimately end up with respect to the incentive plan.

Jared Shaw

Okay. And then, on BHG, when we look at the recourse obligation that's on Slide 33, should we think of that it’s similar to a provision? Is that forward looking and based on our expectations or [Technical Difficulty] already been through?

Harold Carpenter

Yes, I think so. Excuse me, the recourse accrual is bigger for eventual substitution risks that may exist in the portfolio that's been sold to community banks.

And so, it is forward looking and it is an attempt to kind of cover whatever that future loss rate may be as of March 31.

Jared Shaw

Okay. And then, do BHG loans that are in deferral? Do those qualify [indiscernible] or does there need to be additional deterioration besides just accrual based deferral?

Harold Carpenter

Now, BHG is not subject to CECL.

So, a lot – those community bank loans would be included, you know, with a kind of a similar thought process as the loans that are on BHG’s balance sheet.

So, the way BHG looks at the loans off balance sheet is the way they look at it for loans on balance sheet. There's substitution risk and that's just merely in lieu of credit risk for the loans that are on the balance sheet. Did I answer your question Jared?

Terry Turner

Jared I think…

Jared Shaw

Absolutely, but…

Terry Turner

Jared, this is Terry.

I think if I understand the question, the loans that are on bank’s balance sheets, and therefore, subject to the substitution, will be treated like any other buying asset, meaning that the deferral is looked at differently for those loans and it would have been in the past as it relates to TDRs. And therefore, substation put back and all those kinds of things.

Jared Shaw

Alright. Thank you. That was exactly what I was looking for. Thanks.


Okay. And our next question comes from Stephen Scouten with Piper Sandler. Please go ahead, Stephen.

Stephen Scouten

Hi, guys, good morning.

Terry Turner

Good morning.

Harold Carpenter

Good morning.

Stephen Scouten


Terry Turner

Yes, it is. Yes, I'm not sure.

Stephen Scouten


Terry Turner

Everybody's questions are breaking up.

So, it's not you, it's something between you and us, so.

Stephen Scouten

Okay, I'll try to keep it shorter then. Can you talk about how much an additional time [indiscernible]?

Terry Turner


I think that number is somewhere in the $2 billion range as far as what's left to draw, but Harold…

Harold Carpenter

But I think, as it relates to land utilization, it goes up and down. And today, the land utilization would be at a lower level than it was at quarter-end.

Terry Turner

Yes. In April, it’s – the $250 million has come back to like $180.

Harold Carpenter

Is that what you're asking, Stephen.

Stephen Scouten

That is. Thank you.

Harold Carpenter


Stephen Scouten

Moving back to BHG, I know you gave the recourse reserve, do you have a level of reserve, or is that what would be the equity on balance sheet?

Terry Turner

Yes, that reserve is about, I think, 2%.

Stephen Scouten

Okay. And I guess why would that be so much lower than the [indiscernible]?

Terry Turner

It’s about 3%.

While would it be less than the reserve for the…

Stephen Scouten


Terry Turner

[Indiscernible] of the community bank loans? Is that a question?

Stephen Scouten


Terry Turner


I think what they're doing is they're looking at it – first of all, there's prepayment losses in the off-balance sheet book.

So, if a loan prepays, they reimburse the bank for that. And with the loans on balance sheet, they haven't recognized any prepayment gain.

So that runs about a 1.5%.

Stephen Scouten


Terry Turner

So, that’s how…

Stephen Scouten

Okay. And last thing for me, I believe [Technical Difficulty] extent that, I know you gave a lot of detail how you think the reserve is justified, but with your exposure to C&I, can you talk a little bit about just kind of lost expectations in C&I, the 130 basis points in the presentation, kind of maybe could you frame it up to where that was flat cycle, or what the assumptions are in the loss given fall potentially, just to frame up the reserve that might explain a little bit lower than peers on a percentage basis?

Terry Turner

Alright. Well, I've been looking at several disclosures regarding CECL and the allocation of reserves.

I think by and large, the credit card books are getting closer to 9% and 10%. I'm not seeing many disclosures yet on what the C&I and the CRE books may be allocated for our peers, but as it sits right now, the way our models work, that the allocation for C&I, I think you mentioned 1.3 seems to be reasonable.

Stephen Scouten

Okay. Thanks for the color. I appreciate it.


Thank you.

Our next question is from the line of Tyler Stafford with Stephens. Please go ahead, Tyler.

Tyler Stafford

Hi, good morning, guys. Can you hear me, okay?

Terry Turner

Yes, we can hear you.

Harold Carpenter

Yes, we can hear you as you loud and clear Tyler.

Tyler Stafford

Perfect. I've got a couple more on BHG, if I can. And I guess, first, thanks for all the details in the slide deck last night.

I think that was extremely helpful and much appreciated. I appreciate the earlier comment around spreads around BHG in the first quarter remaining strong and the demand there still being, I think, record levels. But I guess, later on in the quarter and even so far into the second quarter, have you seen any decline in the willingness of those thousand or so downstream banks to buy BHG paper more recently?

Terry Turner

Tyler, we got an e-mail this morning from Al Crawford, the CEO of BHG, I think, he believe and is April will be as strong as it's ever been. Their paper is still in strong demand.

And so it looks like the one in the second quarter thus far of BHG will hold.

If I could – if I can follow back up on the Steve Scouten’s question regarding the reserve between allowance and recourse obligations. The allowance also includes joint venture loans, where they share the credit risk with the bank.

And so that does dilute the old balance sheet reserves.

So anyway, I know I kind of mixed you up there with a couple of responses, but did I get to your question, Tyler?

Tyler Stafford


I think so. I guess I'm just trying to understand how the dynamic with BHG and the purchasing banks are going to play out this year. I mean, if default rates do begin to accelerate, what happens to the demand from those purchasing banks? And conversely, I guess, BHG’s willingness to make those banks whole with losses?

Harold Carpenter


I think what they'll do is, they'll continually modify their scoring models. They – they've told us that they’ve tweaked those models a little bit. They're aimed at higher FICO scores currently and is what – and they're not getting into any kind of new disciplines.

So, they won’t have to introduce new disciplines to the banks and their track record has always been to substitute.

So, I don't think they really feel that they'll have that much difficulty getting a BHG loan that's gone through the approval process downstream into the banks.

I think what BHG is going to have to do that might be a little more of a challenge for them this year is find those higher caliber borrowers to satisfy their business flows.

And so thus far, that seems to be working just fine.

Terry Turner

Hey, Tyler, let me give you a comment on this.

As you know, I think might be your answers are – I mean, your questions are notable might be, so I'm not trying to say I know, this is how it's going to play out. But my belief is that if you go back to what the way that model works, what they're doing is generating a high-quality asset that a lot of banks in this country serve markets that don't produce that high-quality and asset nor at any acceptable volume.

And so my belief is a lot of those smaller community banks will continue to buy that paper, because it's the best asset alternatives they have. And their experience, as you know, is having gone through 19 years here, no bank has ever taken $1 loss on those credits. They're highly regarded credits by these smaller banks and smaller markets.

So, I don't know the answer and I came here and see what's going to happen, but my bet is that bank network will hold up very well.

Tyler Stafford

Yes. No, I appreciate that, Terry. And I guess, what we're just all trying to figure out is, if – as we enter a recessionary environment and losses out of that paper potentially accelerate dramatically, does the liquidity dry up in these banks stop buying the paper, or does BHG continue to make those banks whole as they historically have to keep that high-quality aspect of that paper, but take on significantly more losses and less profitability to do so? And again, I hear you loud and clear that you may not know that answer and how it's all going to play out.

I think that's just what we're trying to figure out.

So maybe just lastly for me then, given that said in terms of Harold’s comment about how April is trending so far, what's the underlying, I guess, drag on BHG’s net earnings growth this year? Is it less gain on sale margins? Is it assumption for higher put back risk or losses? What's ultimately driving that that lower net earnings growth?

Harold Carpenter


I think it might be all that, but primarily, I think, what they're trying to do is get prepared for maybe additional recourse builds, as well as maybe some pull back on business flows.

I think they reduced their guidance to us on where they think their loans will end up for the year.

So, I think it's a little bit of all of that, but I still think they'll be – they'll weather this storm pretty well.

Tyler Stafford

Okay. And then just lastly, for me on expenses, just a clarification question. The earnings release talked about low to mid single-digit expense growth relative to 2019. The slide deck talks about low to mid single digit expense growth relative to 4Q 2019 annualized. It's about a $20 million so difference.

So, I'm just curious what the baseline that we should be thinking about if it is 4Q 2019 annualized, which is $522 million of baseline expenses to grow on top of us?

Terry Turner

It’s 4Q 2019.

Tyler Stafford

Okay. Alright. Thanks again, guys. I appreciate all the color.

Terry Turner

Thanks, Tyler.


Thank you. [Operator Instructions] And our next question is from Catherine Mealor with KBW. Please go ahead.

Catherine Mealor

Thanks. Good morning. Can you hear me?

Harold Carpenter

Yes, we can.

Terry Turner

Yes, we can. Thank you.

Catherine Mealor

Alright. Question on the PPP program, great to see how active you work. Can you help us think about how to model that $50 million in fees? I'm assuming we'll see most of it in the second quarter, assuming that most of it turns into a grant. At – the one on geography, do you expect to come in the margin or in fees? And then also, how are you thinking about how much of that will come in the second quarter versus trail off over the life of the loan? Thanks.

Terry Turner

Yes, that's a great question. I wish I knew all the answers to it. But what we're modeling is the revenue to come in some in the late second quarter and some into the late early third quarter, and about 75% of the loans being, call it, forgivable and then recognition of the fees of the remaining 20% to 25% over the next, call it, year-and-a-half after that.

Now, we've asked a lot of people about how they're modeling it. And we can't really get a strong consensus one way or the other, but that's kind of where we – we've taken a first stab on collection of that revenue.

As far as…

Catherine Mealor

And so your….

Terry Turner

Go ahead.

Catherine Mealor

Go ahead, go ahead.

Terry Turner

As far as fees or margin, I think right now we're leaning towards a fee recognition, but we'll wait to see what the accountants say about that. It may be a margin thing.

I think, I'm not really sure right now to be totally positive, Catherine.

Catherine Mealor

Okay. But – so your margin and your fee guidance does not include anything from the PPP program then?

Terry Turner

That's right.

Catherine Mealor

Okay, perfect. And then on your reserve bill, is there any way to think about how much of your reserve bills came from the higher-risk categories that you work out? You gave – now I guess it’s about 20% of your book is in the retail CRE hotel restaurant? Can we think about how much of the incremental provision we saw this quarter came from just as portfolios or that’s just simple of a number to pull?

Terry Turner

Yes. I don't think we know – when we ran the models, it was against the – the way the modeling works is against, call it, four categories.

And so we don't have it allocated within the models to the various NIAT codes like that.

Catherine Mealor


Okay. Thank you for all of the disclosure last night. Super helpful.

Terry Turner

Thank you.


Thank you.

Our next question comes from Steven Alexopoulos with JPMorgan. Please go ahead.

Anthony Elian

Hi, guys, good morning. This is Anthony Elian on for Steve. [Technical Difficulty] the willingness of these small community banks to purchase BHG [Technical Difficulty] payment deferrals going on [Technical Difficulty].

Terry Turner

I don’t – can you go back through that one more time? It was like…

Harold Carpenter

It was a great one to know as the BHG – demand for BHG [indiscernible] from corresponding banks diminished as a result of deferral activity.

Anthony Elian


Terry Turner

No, they're still able to flex every loan that they send the auction to all of these community banks are still high demand with respect to the auction platform.

And so there's a lot of bid traffic on the website for it.

So, they don’t believe they’re seeing any diminishment in the appetite for that credit.

Anthony Elian

Got it. And then on the 20% high-risk loans that you called out, which was most impacted by pandemic. Do you have the reserve against the loans for each of the four segments that you called out?

Harold Carpenter

Yes. We don't have that degree of specificity. The CECL models are built around call report categories.

And so we don't have it broken down into the individual NIACS. And what we tried to do on the slide deck this morning was aggregate exposure through various products.

So, we've got a C&I exposure, CRE exposure, all considered within those individual slides.

So, we can't really differentiate or allocate the loss exposure assigned to those.

Anthony Elian

Okay. And then finally for me, on deferrals, so it looks like eight of your top 10 borrowers in hotels have requested some sort of deferral.

You mentioned about 34% of the restaurant book is deferrals. What are you hearing from these borrowers when talking to them about the likelihood of deferrals under payment once the deferral period ends? Thanks.

Tim Huestis

How I could understand that.

Terry Turner

I think the question had to do with all the deferrals that we're having, what we hearing from our borrowers about their ultimate ability to make payment.

Anthony Elian


Tim Huestis

This is Tim Huestis. I'd say that it's still early.

I think our conversations with the clients about payment deferrals will pick up in earnest in early May, as they start approaching the 60-day with any of the clients that want another 90-day deferral will be asking for a fair amount of information from them with the purpose of trying to determine, how much of a portfolio may not make it versus those that are simply wounded. But as of this moment, we don't really have feedback from clients on deferrals when they might be able to make payments.

Anthony Elian

Great. Thank you.


Thank you.

Terry Turner

Operator, are there any more questions? Hello, operator? Are there any more questions?


No one is on the queue. I guess, no one is pressing.

Terry Turner

Alright. Well, let me offer my apologies. We've had a difficult time on the line being able to hearing, and we're a little uncertain as to where we are right now, but we're not hearing any questions.

And so, I would just thank you for joining us. Again, our view is that, we had a really solid quarter, operating well on fundamentals and we think we've been aggressive and bold in our responses to the COVID pandemic, including our loan loss allowance bill.

So, thank you very much. I appreciate you being here.


Ladies and gentlemen, thank you for participating in today’s conference. We apologize for the technical difficulties.

You may now disconnect.