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Pinnacle Financial Partners Inc (NASDAQ:PNFP)
Q3 2020 Earnings Call
Oct 21, 2020, 9:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, everyone, and welcome to the Pinnacle Financial Partners Third 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 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. [Operator Instructions] During this presentation, we may make comments which may constitute forward-looking statements. All forward-looking statements are subject to risks and uncertainties and other facts that may cause the actual results, 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, 2019 and subsequently filed quarterly report. 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 measure, 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 will now turn the presentation over to Mr. Terry Turner, Pinnacle's President and CEO.

M. Terry Turner -- President and Chief Executive Officer

Thank you, operator, and thank you for joining us. As we get started here, I think third quarter was an outstanding quarter for us, with key success measures like asset quality, core deposit growth, fee growth, pre-provision net revenue growth and tangible book value accretion were all very strong during the quarter. We begin every quarterly call with this dashboard, reflecting our GAAP measures, but honestly there are so many adjustments required in order to focus on the variables that we're truly managing through here at Pinnacle that I want to move quickly to the chart reflecting the adjusted non-GAAP measures. As you can see here, total revenues, fully diluted EPS and adjusted PPNR are all up meaningfully on a late quarter basis. Revenues are up roughly 7% year-over-year at a time when many have been predicting banks cannot earn in 2021 what they earned in 2019, we're proud that fully diluted EPS is already back to the 2019 level for the third quarter of 2020. And most importantly, since PPNR has become our primary focus during this pandemic and for the remainder of 2020. Adjusted PPNR is up nearly 7.5% over the same quarter last year and roughly 23% on a linked quarter annualized basis.

Loans are up 16.2% year-over-year for the third quarter. They were flattish. Average loans were up a tick, EOP loans were down a tick on the linked quarterbacks. Harold will review that in greater detail shortly and talk about our expectations going forward, but generally, we continue to believe we'll produce loan growth, primarily based on our ability to take market share. Due to our prolific hiring, we have 73 relationship managers with tenures less than two years, that's 22% of our RMs and that represents enormous market share movement potential. Core deposits continue to accelerate at a rapid pace during the quarter. Of course, year-over-year growth of $3.4 billion includes roughly $1.5 billion from our PPP borrowers, but the majority of that growth is not tied to PPP and more likely is a function of the increased liquidity among our business clients and the low-cost deposit initiatives that we have put in place this year. What I think has been a really challenging year here, we continue to have a track record for consistently growing tangible book value. So nearly 13% year-over-year, 14.5% on a linked quarter annualized basis. Across the bottom row, you can see that asset quality held up really well in the third quarter with EPS at just 40 basis points. Classified assets, actually down this quarter to the lowest level in the last five years and annualized net charge offs just 23 basis points in the quarter.

I'm going to turn it over to Harold and Tim to review the results in much greater detail. As we go through the details, I find that there is a lot to be encouraged about regarding our net interest margin fundamentals, particularly, the trajectory of our cost of deposits. Fee income was at an all-time high this quarter. We've talked for some time about BHG differentiated model and it is in fact proven to be extraordinarily resilient producing record loan originations at an average interest rate to the borrower 14.4%, record loan sales correspondent banks with a record low in the cycle of 4.9% average interest rate, which banks are buying that paper that's a 9.5% spread and demonstrates both the value that borrowers place on the convenience BHG offers and the demand BHG's correspondent bank network has for that paper. They also had a highly rated securitization of their loans during the quarter, further validating the quality of the product that they're originating, and as of October 16 just three loans -- three loans are on a deferral. So asset quality is holding up very well.

We've said for some time that our expectation was the BHG would prove out the differentiated nature of their model during this cycle. It seems to me that they're doing that in spades. So Harold will review that in some detail, and we've talked about our transition to defense earlier this year allocating a meaningful part of our human capital to reviewing our loan book borrower by borrower. That work was completed in the third quarter and so Tim is going to update you on that work and give you insight into what we're seeing and learning, but my expectation is it is likely to create optimism despite the fact that there is still unknowns relative to the timing of the vaccine, the size and nature of the stimulus package and the full reopening of the economy.

So Harold, let me turn it over to you.

Harold R. Carpenter -- Chief Financial Officer

Thanks, Terry. Good morning, everybody. I'm going to get through these next few slides quickly. Many of them we've shown for quite some time and third quarter results are basically consistent with what we anticipated from last time. So I don't believe there are any shocking revelations. As anticipated loan growth for the third quarter was essentially flat. Line draws dropped again to 49% at quarter end, which is the lowest that I can ever remember. One positive note was that during the quarter new loan bookings increased consistently each month after bottoming in July. We're not going to declare that trend just yet, but it is a positive signal. Our annual loan growth forecast excluding PPP remains in the low to mid single-digits and I'll cover both loan yields and PPP in just a second. Now on deposits. We had another big deposit quarter with lower rates we get more deposits. We've experienced significant growth in non-interest bearing deposits ending at $7.1 billion at quarter end of 47% since year end. The number of checking accounts is up almost 9% since year end. So if I could do a cartwheel, I'd be doing one right now.

We're estimating that the PPP program provided about $1.5 billion of our deposit growth year-to-date. That's a rough estimate because it's basically impossible to determine a precise number that number is simply the net growth in PPP borrowers deposits between March 31 and September 30. Last quarter, we mentioned that we expected those funds to evaporate over the next few quarters. My thoughts now are that we could be holding all of that money for an extended period of time. More on deposit rates in just a second. Next is our usual update to our loan price and giving the circumstances. This is absolutely great news. Obviously, year-over-year loan yields are significantly impacted by yield curve adjustments, particularly, LIBOR but as the tables at the bottom of the slide show our relationship managers held loan pricing in the third quarter. We don't talk about prime-based credit much, but weighted average loan rates have not changed a basis point in six months. Keep in mind, the chart excludes PPP money so this is blocking and tackling kind of transactions with our clients. Loan floors absolutely are helping. If we can keep this going our ramp game plan for 2021 will get a shot in the arm. I'm not going to spend a great deal of time discussing deposit pricing. This is obviously not a new chart nobody's asking about deposit base anymore because we're so close to the bottom that there is only so much more deposit data you can give. We continue to target a range of less than 25 to 30 basis points for our deposit cost by year end.

Our relationship managers have declined list and we are working with them aimed at depositors who have outsized deposit price. We have approximately $1.65 billion in wholesale funding maturities over the next two quarters that will likely allow roll off with our loans just elevating some of the liquid builds and some of the pressure on our net interest margins. Bringing this information forward from the last quarter, the top left chart on the securities is new. We've been at an absolute level of investment securities of 13% to 14% of assets for a while, not looking to change there. We're starting to get a few questions about deploying excess liquidity into box. It's really hard to get excited about any incremental leverage strategy at this point. There's just a ton of uncertainty right now and the best at the long end of the curve go stay where it is for the next several years, we believe carries too much interest rate risk right now. There are obviously products out there that we can we can -- where we can get a few basis points, but for the next year or so, but credit risk begins to enter the conversation. We've always taken a position that credit risk is reserved for the loan portfolio. So we need to reduce our wholesale funding book over the next several quarters because -- and this is not rocket science, eventually, and hopefully, the PPP money is going to turn into cash. So this liquidity issue is not a two to three quarter issue, it's likely to be a 1 to 2 year issue. Along those lines, we're showing that we're a $34 billion bank at September 30. I'd say, I believe we are more like about a $29 billion to $30 billion bank as we've got about $2.5 billion in PPP money, as well as a little more in excess liquidity. So that's about $4 billion to $5 billion plan on profitability measurements like NIM and ROA.

That said, at least the PPP program is profitable. Our proposed liquidity bill is not and is costing us around $1 million to $2 million a quarter. We will shed the liquidity at some point slower than we'd like. But that said, we don't have a vaccine yet either. So the additional insurance is still there out of an abundance of caution. We believe that both PPP and our excess liquidity negatively impacted our third quarter NIM by 40 basis points. There's a slide in the supplemental information that shows how we calculated that number. Now here's some good news in all that outgrow. We believe our NIM after PPP and liquidity is approximately 3.22%. This compares to a similar calculation last quarter of 3.19%. I know that's only 3 basis points of earning asset improvement, but that 3 basis points is about $9 million in net interest income over the next 12 months. Out of fee income, I'll be really brief. These were more than $91 million for the quarter and all-time rev. Everyone knows that 2020 is a power not kind of year for mortgage. It's unbelievable. I'll talk about BHG in a few minutes, but BHG, as they say, is killing it. As anticipated, wealth management rebound based on boundary fees for investment services, where fee revenues are received in the years, arrears and are based on market performance. So now to expenses. Personnel costs, as we stated in the press release, increased due to incentive accruals. As we discussed on this call last quarter, our Board did modify our annual cash plan such that we are providing an increased opportunity to our associates so that we can earn up to 50% of their annual award with this modification. Has the Board not elected to do so, our incentive accrual would have been around 25% of our associates target award. We believe this will keep our associate base highly energized and motivated to ramp up the operating performance of the firm going into next year.

This additional incentive opportunity is based on hitting a PPNR growth rate over 2019, exclusive of PPP, the liquidity build and BHG. This is our attempt to quantify the blocking and tackling of what our associates do every day without the distractions of PPP liquidity or BHG. Also given its PPNR, the pandemic impact on our credit book is excluded, so our credit officers can work with these borrowers that might have been impacted by COVID in such a way that the credit officers can do what they believe is best for the bank, without impacting the goals of this incremental incentive opportunity, which is to motivate these 2,500 people to ramp into 2021. Briefly concerning CECL. Eventually, this slide will lose its prominence and be permanently relocated to the supplemental part of the slide deck. Our reserve without PPP loans increased only 2 basis points to 1.43%. We also increased our off balance sheet reserves slightly. As the slide notes, our unemployment forecast improved slightly this quarter. So that, plus flattish loan growth contributed to the modest reserve bill. The PPP program is back in the news, not going to go through the entire slide, but we've split out the smaller loan balances in the top right table. We're unsure as to how the SBA will manage the simplified approval process or the timing for reimbursement, but suffice to say, they've carved out the smaller loans to make it easier to get repaid. We won't characterize the rigor of the forgiveness process as similar to the initial funding process, but we are not optimistic that the larger loans are -- it will likely be a choppier process, at least that's what we think for now. So we're expecting some net interest income lift in the fourth quarter due to PPP forgiveness, but expect first quarter of 2021, we'll see the greater lift.

This is a news line. As I've discussed on the expense line regarding incentives. This serves as a foundation for what we're trying to do as we ramp into 2021 with increased momentum. It was a great quarter for us as PPNR per share increased above $2 for the quarter to $2.08 per share. Our goal is to try to ramp into 2021 with a high -- mid to high single-digit PPNR per share growth, which we believe will compare very favorably to peers. Aiding our PPNR growth this year is reduced incentives, so increasing our expense load for 2021 with target payout will be a big headwind for 2021. So for 2021, we are discussing how best to manage that as we close in on our targets for next year. A lot to do with that is where we see the pandemic evolving over the next few months. Not going to go through this slide in depth. Obviously, we have some idea about credit costs for the fourth quarter, but we continue to withhold, but suffice it to say, we are optimistic about our shorter term prospects and once COVID is over we love our longer term prospects. Now briefly about tangible equity. These are high-quality assets that will -- there are high-quality assets that will eventually exit our balance sheet. We believe we will manage back into the high 8s and low 9s by yearend and into the first quarter of next year.

Quickly, some comments on capital. We are hearing some banks are getting back into or initiating buyback programs. That's obviously on our agenda as well. Likely, not a focus for us for the next couple of quarters, we intend to seek reauthorization of our buyback program soon and then evaluate whether we should restart the program. We are a firm that works on many things. We are focused on growing earnings per share in an outsized weight, but we are also intentional about growing tangible book value per share. We've accomplished a lot of things since year end 2016, our balance sheet was $11.2 billion in assets at 2016 year-end. One thing we are proud of is that since that time, we have increased our tangible book value per share by 72%. We are second tolling one other firm in our peer group during that same time period. The 75th percentile of the peer group's at 37%, roughly half of our growth rate. To say I'm pleased with how this quarter ended up, is an understatement. As the execution of various tactics, I think it was one of the best quarters we've had. It's difficult to relay the significant effort that my colleagues are putting forth every day working with clients and solving their problems through this pandemic. It truly is remarkable. We all know it's a difficult operating environment. Loan growth is sluggish at best and the yield curve is no friend of any bank, plus it's a yield curve that we believe will have to -- that we will have to live through for an extended period of time.

Politics are also very distracting and tender robust of our optimism. However, the bright spots for Pinnacle can't be overemphasized at this time. Depositors continue to trust us and borrowers are figuring out how to manage their businesses through this cycle. Discipline has never been more important. We don't know how the pandemic will play out over the next few quarters, but we do like our franchise and where we do business and with whom we do business. We believe migration patterns are favoring more people and commercial businesses moving into Tennessee, the Carolinas and Georgia. We like our competitive prospects. We're -- as Terry will discuss shortly, we're a force in Tennessee as well as in several markets in the Carolinas. Deposit share data would indicate that we are getting there in Charlotte, Raleigh, Charleston and believe me, we will score in Atlanta. Now to BHG. We've shown a similar slide before, and it's intended to give you a snapshot of BHG's business flows over time, and more importantly, how they're holding up during the pandemic. The blue bars on the chart are originations and have ramped up with more loans being funded. So business flows remain strong. The green bar represents loans on which gain on sale has been recorded as these longer sold to downstream banks. This is the traditional BHG model with gain on sale revenues being generated. As you can see, both bars are at record levels in the third quarter. Coupons have fluctuated over the last three years, but there is no discernible trend up or down, seems like a mid 14% is the tick. As the bank buy rates, they failed to below 5% in the third quarter lowest I can recall since we became involved with Banker's Healthcare Group.

One thing, we have not emphasized enough is a small chart at the bottom right over a thousand banks are now in BHG's network and almost 600 acquired BHG's loans this year. That seems to be one of the strongest funding platforms for a gain on sale model on the planet. There are firms out there trying to replicate this, but they've got to get real busy, real fast to find a funding platform like BHGs. It's taken 20 years, but it belongs to BHG. They own it. They developed it, and they capitalize on it. So from 30,000 feet business flows remain incredibly healthy. Loan originations remain strong. Loan sales are at record levels, and the funding platform is ready to take BHG's inventory. The top left chart, we've shown on several occasions, the quality of BHG's borrowers has improved steadily over the last few years, but particularly in 2020. They continue to refine their scorecards and increase the quality of the borrowing banks. The right chart again is the most powerful chart, I think I can offer related to BHG's improving credit quality. Looking at losses by vintage, losses continue to level out earlier months since origination, thus pointing toward a lower loss percentage over the life of the underlying loans. Pandemic related events will likely cause these lines to move up, but the quality of the borrowing base, in our opinion, is very impressive.

As Terry mentioned, concerning deferrals, as of June 30, last quarter, total deferrals represented about 15% of the total book. Dennis led the group with a 35% deferral rate. BHG communicated with these borrowers frequently and work to decrease the numbers meaningfully in the third quarters as deferrals are essentially non-existence at the end of the third quarter. 95% of the deferred loans are current and paying. Of the 5% that aren't current, about 25% of those are on a payment plan and paying as agreed. The remaining 75% or 3% to 4% of the deferral base is in early stage delinquency. So losses from these could materialize over the next two to three months. But that said, this has been crazy good. We've updated charge-offs and reserve bills. These are for loans that BHG is sold to their network of community banks. The green bar shows that currently, they've got more than $3.4 billion in credit with banks who have acquired their loans. The hard lines shows the annual loss rate, while the blue line on the chart details the recourse accrual as a percentage of outstanding loans with these other banks. For the nine months of 2020, losses are running at 4.2%, basically consistent with the last few years. Last, we said it last quarter, and we'll see it again. It's been a big year for BHG, and we anticipate big things for the fourth quarter. During the third quarter, the credit markets improved allowed BHG the opportunity to execute on their first securitization. Appreciate that securitization went out and investment-grade ratings. This allows BHG to continue to diversify its revenue stream away from gain on sale with more interest income, as well as provide another very competitive priced funding source. So wrapping up. Loan pricing is holding. Deposit growth is remarkable. The deposit pricing is headed down. BHG is make it another great year, and credit is very much management.

So with that, I'll turn it over to Tim to talk about credit.

Tim Huestis -- Chief Credit Officer

Thank you, Harold. Good morning, everyone. From a traditional credit metrics of past dues, net charge-offs, NPAs and classified assets, Pinnacle's loan portfolio continues to hold up well. That said, we understand we may not yet have experienced COVID's full impact on our loan portfolio. Before I discuss our credit slides, first, a few comments about our defensive credit work completed during prior quarters. During the second quarter, we regraded all loans greater than $1 million that had a payment deferral. We also regraded all hotel loans in all pre-retail loans greater than $1 million regardless of the deferral status. During the third quarter, our focus broadened to include the remaining sections of our portfolio that we did not regrade during the second quarter. This extensive underwriting effort included our past grade loans with exposures greater than $2 million. The only risk rates we did not reunderwrite were our top two grades for our very best loans, generally loans secured by cash for marketable securities. For our watch list, criticized classified loans, our review threshold was much lower at just $500,000. Our regrading exercise was a tremendous amount of work for our lenders and credit staff, but we believe the benefit of quickly identifying any credits materially impacted by COVID will help us in the long run.

During the third quarter, we reviewed about 2,500 loans totaling approximately $10 billion in exposures. Our work during the third quarter consisted of collecting current borrower monthly financial statements, conducting a survey questionnaire of our C&I clients, collecting data points in our CRE loans. The results of our third quarter credit work is encouraging. At the completion of regrading work, the newly identified classified loans in the quarter was only $33.6 million, but even more positive is that the net change in classified loans for the third quarter was a decrease of $27 million. Our criticized assets had a very modest increase from the second quarter to third quarter of $70 million. A few comments about our hotel book. You'll recall during the second quarter, we moved approximately 78% of our hotel balances into a criticized risk rate. On a very positive note since the second quarter, many of our hotel borrowers have reported improving occupancy levels. Similar to the second quarter, we conducted a four question survey of C&I clients in mid-September. The survey population was 262 clients with total loan balances of $852 million. This time the C&I survey was targeted to our lowest pass grade credits in a variety of segments like entertainment, restaurants positions. Three of our questions we're asking the borrower's estimate of revenue for third and fourth quarter 2020 and first quarter 2021 compared to the same period in the prior year. The fourth question was regarding months of liquidity on hand to cover operating expenses. The results were 68% said third quarter revenue would be between 75% to 100% of third quarter 2019. 74% said fourth quarter 2020 revenue would be between 75% and 100% of fourth quarter 2019. 76% said first quarter 2021 revenues will be between 75% to 100% of first quarter 2021 and finally, 62% reported having seven months or greater of liquidity to cover operating expenses.

Pinnacle continues its approach of a well-balanced and granular loan portfolio given the extent and coverage of Pinnacle's defensive work during the second and third quarters, we believe we have identified those borrowers that have been extensively impacted by COVID. Risk grade migration during the third quarter was modest through the efforts of our early problem identification in a very strong special asset team, Pinnacle classified assets decreased during the third quarter. NPAs increased just 3 basis points from the second quarter and net charge-offs increased modestly from 10 to 23 basis points. In March, Pinnacle began proactively reaching out to clients with loan payment deferrals. We believe many of our clients accepted the offer of a payment deferral in March and April, simply because the impact of COVID was unknown to them. The table on this page illustrates that our loans with a payment deferral have dramatically decreased from 18.7% of loans as of June 30 to just 3.1% by end of third quarter. By mid-October, our deferrals had decreased further to just 1.8% of total loans. A few comments about our 4013 loan modification. By September 30, we had executed just a handful of 4013 loan modifications totaling approximately $49 million. Our 4013 loan modifications are not a one-size-fits-all. Modifications are tailored to fit the circumstances of the loan and the borrower. For illustration purposes, I will offer a couple of examples of modification discussions with hotel clients. My first example we met with the borrower and agreed to an interest-only period to June 30, 2021 conditioned upon the establishment of an escrow reserve of nine months of interest payments with Pinnacle. We also implemented a LIBOR floor of 75 basis points. This was a good solution for us both.

My second example was a long-term client with several hotel loans that had a deferral of principal plus interest. The borrower requested a longer interest-only period. We replied we are open to a modification provided we institute a interest rate floor. The customer declined our offer due to the rate floor paid all deferred interest and agreed to resume regular P&I payments. Our thoughtful negotiation resulted in avoiding a 4013 loan modification. Naturally, there are many more variations of these two examples, but our intent with modifications is to help the client bridge to the other side of COVID, but also explore ways to improve the bank's position. Pinnacle's approach to the hospitality sector has always been a disciplined conservative approach of banking hotel sponsors who are well capitalized and have a long successful track record of operation. A few attributes to illustrate our conservative hotel underwriting. Weighted average LTV of just 55%. Weighted average 2019 debt service coverage was 2.1 for stabilized properties. 91% have personal guarantees. All of our hotels are open for business. Prior to COVID, we only had one non-performing SBA hotel loan of just $3 million that we discussed last quarter. During the third quarter, we moved just three hotel loans into a classified risk rate. The collective balance on these three newly identified hotel loans totaled just $5.3 million. The combined LTV for the free is just 40%. Business center, resort, high-end and airport properties are under the greatest amount of stress, our exposure in these categories is limited to a few in the business center in our airport categories. This page contains data for our hotel loans. Approximately 74% of our hotel loans are in the extended state, economy, and limited service sectors. Many of these types of hotels can cover operating expense and interest expense with occupancy in the 45% to 55% range.

As illustrated by the three graphs on this page, our limited service, full service, and extended state borrowers have reported improving trends and occupancy since the low point recorded in April. This slide provides details of our loans in the restaurant sector. It groups together exposures to real estate developers who lease the restaurants as well as loans directly to restaurant operators. Our restaurant exposure is just 3% of our loan book. Pinnacle's very successful PPP program provided $179 million in cushion to our clients. Loan deferrals to our restaurant clients have decreased from 21% of the portfolio at second quarter to a modest 3.6%. Of our 20 largest non-owner-occupied pre-loan lease for restaurants none have a payment deferral. Our quick service segment is made up of names like Taco Bell, Sonic, Wendy's, and KFC. This slide provides insight into our retail portfolio. It consists of both retail store operators and commercial real estate loans leased to retail operators. Loans with deferrals have decreased from 18% at second quarter to only half of 1%. Pinnacle's successful PPP program provided $189 million of cushion to our client. Approximately 23% of our CRE term loans are single tenant properties with tenants like Tractor Supply, Dollar General, O'Reilly Auto Parts, 7-Eleven, and Walgreens. Pinnacle Bank has always maintained a very limited appetite for power retail centers. We only have six power retail centers in our entire portfolio. The primary tenant, for these properties are names like Walmart, Harris Peter, Hobby Lobby and Dick's Sporting Goods. For our CRE retail construction book, 65% are built to suit, single-tenant to names like Tractor Supply, Dollar General and 7-Eleven.

Our Retail Strip Center construction loans at an average loan size of approximately $44 million and have 75% of the space pre-leased. This slide will provide some insight into the composition of our C&I retail book and the owner-occupied real estate secured retail book. Similar to our CRE retail book, it is very granular. This slide provides some insight into our entertainment portfolio. Pinnacle's entertainment portfolio was approximately 3% of total loans. Over 50% of our entertainment exposure is in the music publishing space to finance the acquisition of song catalogs. Each catalog of songs is made up of thousands of well-seasoned diversified songs that are stable from an earnings standpoint. Revenue from the catalog is generated primarily from music streaming fees paid from firms like Spotify, Apple, Amazon and Terrestrial Radio. Pinnacle's very successful PPP program provided $54 million of cushion to our clients. To summarize, the present status of our loan portfolio is that of tempered optimism, given Pinnacle's comprehensive loan review and rerating during the second and third quarter. Net charge-offs continue to remain in an acceptable range. Our level of classified assets is stable. Loan deferrals have declined to just 1.8% by mid-October. And September 30, loan delinquencies were just 11 basis points. While we take a measure of comfort in these metrics, we acknowledge that the duration of COVID and no second fiscal stimulus package could alter these metrics in the coming quarters.

Harold, now back to you.

Harold R. Carpenter -- Chief Financial Officer

Okay. Tim, I'll take it from here. As part of our Q1 earnings call, I talked to you about moving our firm from an offensive to a defensive posture. That included things like building a huge liquidity position on our balance sheet, adding $250 billion in Tier 1 capital, nearly tripling our loan loss allowance since year-end and scaring our loan book aggressively, gathering financial information from borrowers to ascertain risk and respond appropriately. It also includes things like deemphasizing our continuous recruitment of revenue producers, never mind that the previous momentum in our recruitment pipeline resulted in bringing on 56 revenue producers year-to-date. So, all that defensive work has been completed. And I'm not telling you that there's no further need to be defensive, but I am telling you that the human resources that were utilized on those deep end of efforts that grill and borrower-by-borrower assessment as an example. We can now take that resource and use it on more offensive sorts of initiatives. So, as we move forward, number one, of course, is that we'll continue to be in active dialogue with our existing borrowers to aggressively respond to changing risk profiles. Number two, Harold has already discussed, the upcoming majorities in our wholesale deposit book that will facilitate the unwinding of our excess liquidity is the pandemic subsided. Thirdly, during the course of this year, we have specifically launched four broad initiatives intended to accelerate our PPNR.

They include: one, proactively and aggressively lowering the cost of our existing deposit book. We intend to drive it below 25 basis points by year-end. Two, gathering additional low-cost deposits. We have built and launched a number of deposit products with enormous potential to structurally alter our deposit mix over time. These include value-added products like HSAs, tailored accounts for property managers, specialized expertise and captive insurance accounts as well as expertise surrounding large nonprofits. Number three, obtaining floors on loans. As you heard from Harold, we've made great progress in that area, really obtaining floors of roughly 98% of new or new loans, and then number four focusing on the tremendous share of wallet opportunities that we have to provide additional financial services to our existing clients that are currently purchasing from someone else. We currently have meaningful traction on all four of these, which should produce significant growth in PPNR or EPS for some time to come, and finally because all of that heavy lifting that's behind us, we're now intent on season what we expect to be a once in a generation market share movement. Specifically, green resurge indicates nearly one-third of middle market businesses intend to switch, not that they're frustrated, but they intend to switch. They tell that primarily to the responsiveness or lack of responsiveness at our larger competitors, which just reinforces the power of our client friendly approach to deferrals and our nimbleness on PPP. And so it's our intent to aggressively pursue this opportunity.

Guys, most of you know, our strategic approach is a challenger brand. We're purposeful about creating a work environment that excites our associates, believing that if we're successful there, they will create an engaging experience for our clients. And, of course, if we're successful there, the end result is the shareholders are in rig. So let me start with exciting our associates. Just in the last 12 months, we've been recognized by American Banker as the 13th Best Bank in America to work for, that includes a lot of small and privately held banks in the category, the banks greater than $10 billion in assets, we are the single best bank in America to work for. According to the Great Place To Work Institute and Fortune Magazine, we are the fourth best financial services firm in America to work for behind some giants like American Express. Same group would have us as the fourth best place to work for women. It's a powerful spot for us to be. We're the fourth best place for millennials in the country to work. We're the 12th best place for parents we went in Best Place to Work awards in Memphis, Chattanooga, Knoxville, the triad of north Carolina, Roanoke, Virginia, Charlotte and the state of South Carolina, and so the charts that you're looking at here demonstrate that we've in fact been able to translate that excitement among our associates to a truly differentiated client experience.

These are the major Tennessee and North Carolina markets. The data for businesses will sail from $100 million to $500 million. The further to the right you are, the better your client experience is. And the higher on the chart you are, the more market share you have. So let us start with the top left with Nashville, where we de novo 20 years ago next week. As you can see, our client satisfaction is the farthest to the right, indicating a differentiated experience. And our market share is the highest, indicating that experience has resulted in a number one share position. We're about replicating that phenomenon in every major market we serve. And as you can see, with one exception, our client satisfaction, among major competitors is the best in the market. And so it seems obvious to me that we're in the best position to grow share of all the major competitors in our market. As further evidence that our decision to service model yields, market share pick up, you're looking at the recently released deposit share data from FDIC for each market to have a listing of the top banks showing their market share rank, their year-over-year growth rate, and how their growth rate ranks in the market. So again started at the top left with Nashville, we're in a number one share position and we're still the second fastest-growing bank in that market. I think a lot of people have been concerned that the law of large numbers would get us. But you can see even in a number one share position, the flywheel is spending pretty rapidly as you stood across the page in Knoxville, we de novo there in 2007, we climbed into the number four share position, and we're the fastest-growing bank in that market.

In Chattanooga we bought Capital Market Bank & Trust, which was a de novo from the 2008 time period. We bought it in 2015. We've now climbed into the number four share position there and the fastest growing bank in that market. In Memphis, we bought Magna Bank. That was a de novo in the year 2000 or so. We've substantially moved up in the market share chart. We moved up two more slots this year up to the sixth position. We're the fastest-growing bank in that market. Looking at Charlotte, North Carolina, we've moved up three slots there into the seventh position with the second fastest growing bank in that market. In Greensboro, we're in the number four share position. Raleigh, we're in the 13th position, but we're the second fastest growing bank in that market. That is a fabulous market opportunity that we're working hard to seize. Charleston, South Carolina, we're in eighth position, but the third fast is growing. Roanoke, Virginia, we're in the third market share position and the fastest growing bank in that market. So it seems evident to me. First of all, that there is a once in a generation market share opportunity coming and secondly, we're the singularly best position to be a winner which of course results in outsized earnings growth over time and perhaps further substantiation of why we expect outsized growth as we begin to exit this recession is our track record.

The bars on the left represent annualized growth from 2001 to 2007 post 9/11, admittedly we were a smaller bank coming off a smaller base, but seven times the industry through that extended period is meaningful and on the right, on a larger base from 2011 to 2019 post-Great Recession, we grew six times the industry and so, to sum up what we've talked about here today, the visibility we now have on asset quality as a result of the extensive regrading work that we have done is very encouraging. EPS, PPNR and revenues are all exhibiting strong growth quarter over quarter. BHG is showcasing its distinctive model and highlighting what makes it different from all this comparisons and lastly, having completed the bulk of the defensive work that we set out to accomplish over the last two quarters, we believe we're uniquely positioned to pick up meaningful market share on a sound basis which we believe will result in outsized earnings growth.

So operator, I'll stop there. We will be glad to take questions.

Questions and Answers:

Operator

Thank you, Mr. Turner. The floor is now open for your questions. [Operator Instructions] Our first question comes from Stephen Scouten of Piper Sandler. Your line is now open.

Stephen Scouten -- Piper Sandler -- Analyst

Hey good morning everyone.

M. Terry Turner -- President and Chief Executive Officer

Good morning.

Stephen Scouten -- Piper Sandler -- Analyst

So Terry, you gave a lot of good color though about the market share takeaway opportunity and obviously, you guys have a great track record there. I'm wondering specifically, when you think that really ramps up from a talent acquisition standpoint again and is that the primary medium for which you think that will occur or do you start thinking more about M&A in some of these markets as well to kind of capitalize on all that opportunity?

M. Terry Turner -- President and Chief Executive Officer

I think Steve, we have always and we continue to view ourselves to be primarily organic growers. You can look at those historical charts and say, we have mixed in acquisition and I think done it successfully. I wouldn't be surprised if we did that, but I just want to be clear, we primarily think about organic growth. Your question is a great one, the market share movement -- to be honest with you, I wouldn't be for just launching out here and going out trying to meet a bunch of people have some aggressive calling program off of done in brad list, run an ad campaign, sales promotions all that. We don't do any of that stuff. It's all dependent on getting relationship managers, experienced relationship managers from other banks having them move those books of business to us and so that would continue to be the approach.

I think there are two things that are important about that phenomenon there. Number one, I think I indicated early on that 22% of our existing FAs have been here for less than two years. That's enormous market share taking capacity. We, as I mentioned, I'm switching terms on you here, but I'll go back to revenue producers instead of relationship managers which is a broader term including mortgage originators and brokers and other sorts of revenue producers, but among those revenue producers, even trying to shut down or tamp down the hiring, we've added 56 revenue producers this year and so all of that hiring that has already occurred it is still in relatively early stage maturation represents enormous share-taking opportunity. The second aspect of that idea here is, we are finding much more vulnerability today in the market than we would have over the last several quarters, particularly at some of these larger banks that continue to struggle with regulatory issues, merchant integration issues and so forth and so, we feel like we've got a number of folks that we had at some stage of recruitment.

As I mentioned, we did tamp it down slow it down but a lot of those folks are beginning to contact us and so they want to reconsider and so, I don't mean to go on and on but you get the idea. It's primarily about organic growth. It's primarily about market share movement by relationship managers and we've got a big queue of folks that are in early stage maturation already on the books and we're optimistic about our ability to hire more.

Stephen Scouten -- Piper Sandler -- Analyst

Perfect. Very helpful. And then can you maybe talk a little bit about what you're seeing on the market demand side? There seems to be a view that metro areas are going to be in a bad spot for the years to come but you guys are in kind of nine metro MSAs that are maybe smaller, mid-sized metronome stays, where I think we'd still see growth in the southeast. So can you really touch on what you're seeing there and maybe especially in Nashville, where there always seems to be this view that the Nashville is just music and tourism?

M. Terry Turner -- President and Chief Executive Officer

Yes. Well, thank you for that question. I think, let's talk about loan demand. Current loan demand, I do think loan demand is near zero, I mean it's a little better than that but not much. it's pretty tight here right now but if you think about it the reason I think for that is obvious, one, you got a lot of people are saying well right now, I don't feel like taking a big risk. Number two, I got tons of liquidity on my balance sheet. I just got a bunch of PPP money. I mean there are a lot of reasons why loan demand would be just a little soft and likely to be that over a few quarters, which is the criticality for us of this market share takeaway. That's the case for why we think we'll grow, but if you're asking about the view over any extended period of time for a market like Nashville. I think we had an analyst that actually conducted sort of an Investor Day, if you will or investor call with the chamber of commerce and I think they came away. I don't put words in their mouth but I think they came away very encouraged and excited about the potential what's in the business development pipeline.

As you know, what drives growth in this market has been corporate relocations and what drives corporate relocations is primarily tax rates and so my belief is that phenomenon's going to continue for an extended period of time. Steve I know travel is no doubt limited. Tourism is definitely down, but I'll tell you this, if you could make it to Nashville, you would still see a large number of cranes that scare some people but it doesn't particularly scare me because it we believe that this market is going to continue to grow at an outside space, I'll spare you the chamber of commerce speech but I promise you the tax rate and tax implications are likely to expand that benefit to markets like Nashville not the track.

Stephen Scouten -- Piper Sandler -- Analyst

Perfect. And maybe one last real quick one for me. On the loan loss reserve percentage, I'm wondering, obviously this isn't probably a near-term event but as net charge-offs probably flow through a little bit from the pandemic and we see credit normalized over the next who knows three, four, five quarters, where can we see that loan loss reserve kind of normalized in a post CECL world? Is the kind of 109 level we saw at 1Q, 2020 is that the right way to think about it as things normalized?

M. Terry Turner -- President and Chief Executive Officer

Yes, Steve, I'm not sure where that where it's going to end up, what we're doing is trying to keep it where it is right now. We don't think it's a good time to try to see it go down but eventually we think, as charge-offs materialize and I got to hand it off to Tim's group, I going to hand it off to the centralized underwriting groups, they're digging up under all kinds of rocks trying to find out where, what the quality and the loss content this book is and so we anticipate that we'll see some charge-off materialize, not that we've identified any of them yet, we haven't, but we just think that's coming and then toward the end of next year we likely will see this reserve kind of need to get some relief.

Now a lot of that's dependent on what unemployment forecasts look like but we're not seeing the loss content materialized in the loan book like we would have otherwise thought it was going to materialize back in March.

Stephen Scouten -- Piper Sandler -- Analyst

Got it. Perfect. Thanks so much for the help guys and congrats on a really good quarter.

M. Terry Turner -- President and Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from Jennifer Demba of Truist Securities. Your line is now open.

Jennifer Demba -- Truist Securities -- Analyst

Thank you. Good morning.

M. Terry Turner -- President and Chief Executive Officer

Hey, Jennifer, good morning.

Jennifer Demba -- Truist Securities -- Analyst

Congratulations on your almost 20-year anniversary. I can't believe it.

M. Terry Turner -- President and Chief Executive Officer

We're getting old, yes.

Harold R. Carpenter -- Chief Financial Officer

Older.

Jennifer Demba -- Truist Securities -- Analyst

You mentioned the market share gain opportunity Terry. Do you think one of those opportunities would be specific to first citizens in North Carolina as they are distracted with the CRT partnership over the next two or three years? That's my first question. My second question is can you give us an update on, what you're seeing in your Atlanta de novo? Thanks.

M. Terry Turner -- President and Chief Executive Officer

Yeah. That's a great question. I do think there is likely to be some opportunity in that transaction. At this point, I'm not, I guess maybe I'd characterize it this way, my excitement about that opportunity would be less than the excitement I have about the turmoil in companies like, Wells and Truvis and those sorts of companies, that the vulnerability there is seems larger and seems more timely and those kinds of things. This invariably when you get involved in integration work there will be an internal focus they'll create some vulnerability. And we'll certainly try to seize on it. But, I view those other opportunities to be still better, I guess is maybe the way to characterize that. I believe in the Atlanta market, that we're doing well. I don't mind to sort of give you some round numbers, I don't have exactly the numbers in front of me, but my guess is today there's about $70 million in outstanding there is probably north of $100 million in commitments that are out. Some of those are I think construction kinds of things that might fund up over time.

So it's not all immediate stuff. But that pipeline of commitments that exist that will have fundings is pretty large. And I think if Rob Garcia were talking to you about the rest of his pipeline, in other words deals that he has in the pipe that he believes he's going to close that he doesn't yet have. He would say that that momentum is building as well. And of course the real measure or the real catalyst I guess might be a better word for our success has to do with hiring. And so I think Rob again would tell you that his hiring pipeline is full. Again, don't owe me exactly. This will be about right. He's got about 17 associates down there today. I think about four which might be classified as retail branch-based associates. The others would be either financial advisors or credit analysts or something that's supporting a revenue stream there. And again it looks like to me that pipeline is really swell. We're likely to have an announcement or two in the next week or two that I think will be really I'd put in a high profile, higher category. So, again, I think we're very encouraged and continue to think Rob's doing a great job. I think the results are materializing.

Jennifer Demba -- Truist Securities -- Analyst

If I could follow up one question on BHG, so that performance obviously has been really terrific. Who are the most stressed borrowers in the BHG sub segmented? They are still dentists? Or what are you seeing among their group of borrowers? Thanks.

M. Terry Turner -- President and Chief Executive Officer

Yeah. I think the dentists are still probably the most stressed. But as it sits today, I'm not sure of any market, where they've got loans that are not permitting elective surgery. So I think all the dentists are open. I think all the surgeons are open. The optometrists were a little stressed in the second quarter. But I think by and large, their business flows are coming back. I can dig on that some more for you Jennifer. But right now I'm not sure, that I can discern any particular segment based on the reports I get from BHG that there is one that's more stressed than another.

Jennifer Demba -- Truist Securities -- Analyst

Thanks so much.

M. Terry Turner -- President and Chief Executive Officer

I will say that non-medical book. They're, call it, the engineers and the architects and those folks that they've branched into over the last two or three years, that book is performing better than the, call it the medical book. So that's been a real pleasing thing.

Jennifer Demba -- Truist Securities -- Analyst

Thank you.

Operator

Thank you. And our next question comes from Jared Shaw of Wells Fargo Securities. Your line is now open.

Jared Shaw -- Wells Fargo Securities -- Analyst

Hey guys. Good morning.

M. Terry Turner -- President and Chief Executive Officer

Hey Jared good morning. How are you doing?

Jared Shaw -- Wells Fargo Securities -- Analyst

Good. Thanks. Congratulations on a strong quarter. Hey, just following up, Terry, you had said this is -- this could be a once a generation opportunity to take market share. And just given the success you've had, hiring people and using Atlanta as an example, should we really expect to think maybe you go on the offensive now and target some additional geographies?

Obviously, some of the bigger competitors you mentioned do business in more than just Atlanta. Are there opportunities for you to expand into new geographies and really take that that hiring model and accelerated a little faster? And would that turn into potentially a different expense level for 2021 in the near-term while that's building out?

M. Terry Turner -- President and Chief Executive Officer

Jared, that's a fabulous question. And honestly, I guess, I might characterize it this way, we might be tempted by that. And we can be opportunistic in that regard. But the truth is the play that we most want to make is to harvest the opportunity in markets like Charlotte, North Carolina, Raleigh, North Carolina. I think Raleigh, North Carolina was just highlighted is the hottest real estate market in the United States. It's a fabulous market, whatever metric you want to look at. I think, you can see we're in a 13 share position, but we're the fastest-growing bank. And so my objective is to gin up to what's was happening in Charlotte, what's happening in Raleigh, what's happening in Charleston, in particular, those three markets, that's where we really want to invest, that's where we want to grow and so forth.

And so I don't mean to say, I can't do anything else if I'm doing that, but I do want to say that, that's the most important thing for us to do is see that opportunity. That is a grand growth opportunity. And again, I know sometimes people are not as interested in things like the distinctive service experience, but that's an powerful and important point. We've spent time getting that service equation right, and it's now time to harvest that in those high-growth markets.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay. And that sort of goes back to the 22% of hires that have been there less than two years, you have a line in those markets, so you feel that they can start to really make some head?

M. Terry Turner -- President and Chief Executive Officer

I do believe that. I also think, as I mentioned, if I -- again, just trying to be candid about where the opportunity is. I think, the hiring opportunities are particularly strong at Wells. And to maybe a slightly lesser degree, but I think picking up at Truist. And so again, those Carolina markets, of course, are filled with Wells and some form of BB&T or SunTrust bankers.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay, great. Thanks. And then, shifting a little bit to BHG and looking at the growth that they've had in recourse, are they subject to CECL? Do they need to build that recourse or the same way that you're building out an allowance? Or is that not necessarily reflective of what their expectations for full losses are at this point in time, they have maybe a little more flexibility?

M. Terry Turner -- President and Chief Executive Officer

Yeah. There's no doubt that this is helping them get toward a CECL number at some point. CECL for them, I think, is a 2024 issue. And they're going down the path now of trying to analyze and quantify and build the models to get to a CECL compliant, credit loss reserves. But I'm not sure where that number is going to actually end up.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay. But we shouldn't necessarily look at the recourse being significantly higher than the losses at this point as a direct tie in to where they think the total loss content is today?

M. Terry Turner -- President and Chief Executive Officer

Yeah, Jared, I think if I understand your question right, I think you're right. We should not consider it. Yeah.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay. Got it. And then on BHG with the success of having that securitization, do you think that 2021, you'll see that strategy shift back more toward beginning to emphasize securitization and maybe some on balance sheet opportunities more so than straight gain on sale? Or will it be -- continue to be a good mix?

M. Terry Turner -- President and Chief Executive Officer

Yeah. I think they'll continue a good mix. I think they believe that they will be back at the securitization gain early next year. So they're ramping up to probably do another issuance call it, January and February.

Jared Shaw -- Wells Fargo Securities -- Analyst

Great. Thanks a lot.

M. Terry Turner -- President and Chief Executive Officer

All right. Thanks Jared.

Operator

Thank you. And our next question comes from Brock Vandervliet of UBS. Your line is not open.

Brock Vandervliet -- UBS -- Analyst

Thanks. Just following on the questions on BHG, in terms of the revenue profile you've somewhat longer term guidance about BHG in the past and as we kind of emerge from COVID it seems like BHG is going very strongly. The mix of securitization versus traditional placements is kind of what it is. What should we be thinking about in terms of the revenue or earnings profile there?

M. Terry Turner -- President and Chief Executive Officer

Yes. I think what we're looking at for next year is probably a high single-digit, low double-digit kind of number for them next year. We believe they've got the momentum to deliver that. So that would be what our current thinking is Brock.

Brock Vandervliet -- UBS -- Analyst

Okay. And Harold, I heard the guide on funding costs. I guess on the opposite side, where do you see securities yields trending over time and within that securities book, we've seen a number of other banks really look to ramp that up whether it's now or possibly waiting until after the election and hoping for a steeper curve, but should we look for really sharply higher balance there given that loan growth is muted right now.

Harold R. Carpenter -- Chief Financial Officer

Yes. I don't think -- I don't think we're going to be focused on building the loan book or executing on any kind of leverage strategy to take some of this liquidity.

M. Terry Turner -- President and Chief Executive Officer

Building the securities book.

Harold R. Carpenter -- Chief Financial Officer

I'm sorry building the securities book. That's what I mean I just said the wrong word. Building the securities book to execute on a leverage strategy. Bond yields right now look to be pretty good. We've done a lot of municipal acquisitions. We think a lot of that will hang with us, but to say that we're going to develop a strategy to kind of ramp-up the bond book by 20% or even 10% I just don't see that.

Brock Vandervliet -- UBS -- Analyst

Okay. And those yields you have a sense of where they could drift assuming rates stick where they are?

Harold R. Carpenter -- Chief Financial Officer

Where they are right now, I think, our municipal book will help us hold yields..

Brock Vandervliet -- UBS -- Analyst

Yeah.

Harold R. Carpenter -- Chief Financial Officer

But I can't help believe that we're going to see some deterioration and bond yields probably over the next several quarters but I don't think it's going to be that significant.

Brock Vandervliet -- UBS -- Analyst

Okay. Thank you.

Operator

Thank you. And our next question comes from Steven Alexopoulos of JPMorgan. Your line is now open.

Steven Alexopoulos -- JPMorgan -- Analyst

Hey, good morning, everyone.

M. Terry Turner -- President and Chief Executive Officer

Hi, Steve. Good morning.

Steven Alexopoulos -- JPMorgan -- Analyst

To start on the new incentive, can you give more color on exactly what the new incentive is? Is it a 4Q, 2020 incentive or is it a full year 2020 in terms of results?

M. Terry Turner -- President and Chief Executive Officer

Yes. It's for the whole year. We implemented it and I think the comp committee approved it late July. So what we tried to do was determine what a reasonable growth rate and PPNR would be for 2020 over 2019 and then try to figure out how to hit that number and so it gives us some consistent messaging with not only revenue producers, but the whole all 2,500 people and it keeps people in the game because, obviously, with the first quarter reserve bill and then again in the second quarter 80% of our incentive was tied to EPS growth and so that effectively knocked us out of the game for any kind of cash bonus this year. So we were trying to create something although not get them all the way back to the start line just try to get us at least to a 50% target level, develop some plan that will help us not only this year, but more importantly 2021.

Steven Alexopoulos -- JPMorgan -- Analyst

And Harold what growth rate do you need to maximize that incentive?

Harold R. Carpenter -- Chief Financial Officer

What we did and we'll talk about it in the proxy what we did is we looked at where our peers were and tried to consider the anomalies within the peer group and said OK what does it take to get into the top quartile of that peer group.

Steven Alexopoulos -- JPMorgan -- Analyst

Got it. Okay. Got it. That's helpful. And then just following up on all the commentaries around the market share gain. Terry, I think, I've asked you this before, but what exactly was it that the larger banks had done with the PPP program to upset so many customers? Did they just turn down people for the loans they weren't available? Can you give more color what's created this opportunity?

M. Terry Turner -- President and Chief Executive Officer

Yeah. Again, I want to cite what I hear from Greenwich, and then I'll give you my own personal commentary, which might be less valuable, I don't know. But great, would say that the big banks were unresponsive. Many of them were slow to get their systems up. There was very little communication between the bank and the borrowers all that led to mass confusion.

As the money ran out, it led to mass frustration. And I think just sort of the impersonal nature of how that process worked at the big companies versus the more personalized approach that smaller banks typically used where as an example for us. I can't precise now how many webinars we held, but we had thousands of borrowers attending our webinars. Many of them weren't even our customers, because that became the place you go to get information about. How do you apply for this? How does the application work? What are the issues to think through, what kind of documentation do I need, and so if you're not supplying that information, you're creating a lot of apprehension among your borrowers, and they're feeling underserved.

And so again, I think this phenomenon of the PPP process, the deferral process is -- Steve, as we've talked before, if you go to two ends of the spectrum on how to handle the deferral, and I promise you, I'm not acting like either one of them is really bad or really good. I'd just tell you what we did and why we did it, and why I think it benefits us. One end of the spectrum, you could say, look, this world has gone to head and hand basket. You want deferral, you come down here and bring me a bunch of financial information and give me some more guarantee and put up the cash reserve, so forth, and I'm going to give you a deferral. And that's not an irresponsible thing to do. I mean, if you're a credit person, you're thinking about improving your borrowing base, trying to minimize the losses and so forth. That would be a tap you could take.

Our view was to give somebody a deferral for 90 days in the middle of the time, where nobody knew what it was, didn't substantially increase our credit risk, and it made our borrowers love us, and so that was the reason that we went in that direction. And so again, I'm just sort of rambling about two or three things that are sort of different in the approach, but if -- if you had to get it down to a word on one side, it's a more personalized service that puts borrowers at ease and makes them feel like you're looking after them and a less personalized kind of service that creates apprehension among borrowers, which leads to frustration, irritation and so forth. And so that would be my characterization of it.

Steven Alexopoulos -- JPMorgan -- Analyst

Okay. Yeah. That's helpful color. Maybe just one final one on BHG. Given the deferral trends, I was surprised that the recourse reserve ratio increased, I mean, it was modest, but the reserve is up $200 million in the quarter, the ratio is up. Why would that have gone higher given these really impressive deferral trends? Thanks.

Harold R. Carpenter -- Chief Financial Officer

All right. So keep in mind, they're still a private company, and there's a lot more qualitative assessments going on then with perhaps a CECL model like we have to develop and have to roll out that's more or less subjective. So I think what BHG is doing is they're just anticipating probably doing some conservative analyzing and building a reserve.

Steven Alexopoulos -- JPMorgan -- Analyst

Okay. That's helpful. Thanks for all the color.

M. Terry Turner -- President and Chief Executive Officer

That's all I can give you, Steve.

Operator

Thank you. And our next question comes from Catherine Mealor of KBW. Your line is now open.

Catherine Mealor -- KBW -- Analyst

Thanks. Good morning.

M. Terry Turner -- President and Chief Executive Officer

Hi, Catherine, good morning.

Catherine Mealor -- KBW -- Analyst

Actually to follow-up on your PPNR commentary and outlook. So Harold, you talked about wanting to grow the PPNR. I think well, I don't know if you kind of mentioned that you wanted to have taken this mid single-digit growth rate in 2021, off of 2020. But you're at least looking to grow PPNR as we move into next year. And so how should we think about that as we think about PPP rolling off and mortgage kind of normalizing, do you think even with those two headwinds, PPNR can still grow next year? Or is it more PPNR per share can grow because it's an active buyback activity?

Harold R. Carpenter -- Chief Financial Officer

Yeah. First of all, let's make sure we understand that for what I talked about during the slide was that we've excluded PPP and BHG and the liquidity bill. So we're kind of quantifying that of those numbers and excluding that from the calculation of PPNR growth.

So you're right, how does one anticipate what PPP is going to do to our numbers this year or next year and so we didn't think it was fair to put that into an incentive target and then all of a sudden something happened with the SBA. They make it more onerous, which we think they will and the PPP revenue is not materialized. So we go through a process to eliminate that. So what we're trying to do is get down to blocking and tackling and that's how we come up with our anticipated PPNR growth rate.

Now when we shoot for top quartile performance, it's a lot more difficult to get that out of the peers. So it's not exactly apples-and-apples when we start comparing to the peers, but we would believe that the revenue contribution that we're getting from PPP is greater from than a lot of our peers are going to get. So that's probably a little bit of a headwind when you start talking about peer rankings for us. Does that make sense?

Catherine Mealor -- KBW -- Analyst

It does, but so I'm just making sure your commentary on a single-digit growth PPNR was more around the incentive plan for this year not as much an outlook for what you can do in '21?

Harold R. Carpenter -- Chief Financial Officer

Well, that is true single to high, mid-to-high single-digit growth and looking at what the peers are doing next year, it's likely to be a similar number for next year.

Catherine Mealor -- KBW -- Analyst

Great. And if that includes PPP, BHG and liquidity?

Harold R. Carpenter -- Chief Financial Officer

That excludes PPP, BHG and liquidity for us.

Catherine Mealor -- KBW -- Analyst

Great. Okay. That makes sense. And then also on the expense side, so you've got it for expenses to be flat to down is that inclusive of the incentive comp catch up this quarter? So just look at bottom line expenses and that's the number that's kind of flattening down next quarter.

Harold R. Carpenter -- Chief Financial Officer

Yes. The third quarter incentive had to catch us up to 75% of the whole year. So we don't have as far to go in the fourth quarter with the incentive growth.

Catherine Mealor -- KBW -- Analyst

Got it. Okay. But still you're -- so in what scenario are expenses flat in 4Q and another $90 million? I'm sorry, I'm looking at -- excuse me, another $144 million?

Harold R. Carpenter -- Chief Financial Officer

Yes. I think well, I think what's going to drive it primarily is that incentive accrual. Because the PPNR incentive is, call it $15 million and I had to get 75% of that into the third quarter number and I'll only have to get 25% of that into the fourth quarter.

Catherine Mealor -- KBW -- Analyst

Got it. Okay. Got it. So the really expenses should be down next quarter?

Harold R. Carpenter -- Chief Financial Officer

Yes.

Catherine Mealor -- KBW -- Analyst

Thinking that. Okay. It was the flat that was what was throwing me off, OK. All right. Great. And then we just one last question on just, do you have the updated criticized metrics? I mean you gave classified in the press release. Do you have what criticized did linked quarter?

M. Terry Turner -- President and Chief Executive Officer

It went up Catherine, $70 million from last quarter. I don't have that number right in front of me as a percentage.

Catherine Mealor -- KBW -- Analyst

Okay. But up $70 million. And what drove that increase? What kind of credits are you seeing in criticized?

M. Terry Turner -- President and Chief Executive Officer

Catherine, it was mostly hotels. We had a further account of hotels in July that went into a risk rate $70 million.

Catherine Mealor -- KBW -- Analyst

Great. Okay. Great. Thank you. Great quarter.

M. Terry Turner -- President and Chief Executive Officer

Thank you.

Operator

[Operator Closing Remarks]

Duration: 79 minutes

Call participants:

M. Terry Turner -- President and Chief Executive Officer

Harold R. Carpenter -- Chief Financial Officer

Tim Huestis -- Chief Credit Officer

Stephen Scouten -- Piper Sandler -- Analyst

Jennifer Demba -- Truist Securities -- Analyst

Jared Shaw -- Wells Fargo Securities -- Analyst

Brock Vandervliet -- UBS -- Analyst

Steven Alexopoulos -- JPMorgan -- Analyst

Catherine Mealor -- KBW -- Analyst

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