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.