Good morning, everyone, and welcome to the Pinnacle Financial Partners Second 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 on 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 its quarterly report on Form 10-Q for the quarter ended March 31, 2020. Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to the comparable GAAP measures will be available on Pinnacle Financial’s website at www.pnfp.com. With that, I'm now going to turn the presentation over to Mr. Terry Turner, Pinnacle's President and CEO.

Thank you, Jimmy. The conclusion of our Q1 conference call, I tried to provide some guidance for what our focus would be going forward. I indicated that we continue to manage those things that produce long-term shareholder value but would remain in a more defensive posture until we can see more clearly the depth and duration of the pandemic and its impacts. Specifically, I indicated that we had increased liquidity in Q1, and we continue to do so in Q2, which we did. Harold will review in detail the substantial liquidity build from both wholesale and client funding, all obtained simply out of an abundance of caution, given the uncertainty surrounding the pandemic. I indicated that you should expect us to continue building loan loss reserves in Q2, which we did, not to the extent we did in the first quarter, but still a meaningful increase. Our allowance has moved from 0.48% at year-end now to 1.27% at June 30. And excluding our PPP loans, the allowance would be 1.41%. In regards to capital, I indicated that while we did not intend to cut our dividend at this time, we were still in a mode to increase capital, which we did. Beyond suspending our share buyback and retaining the sub debt we had previously intended to redeem. We sold preferred shares totaling approximately $225 million, increasing or topping off Tier 1 capital. I also indicated that for the first time since the Great Recession, we were slowing our planned levels of recruitment and hiring in an effort to avoid the expense build that goes with it, which we've done. Our noninterest expense to asset ratio, as we adjusted, was 1.54%, which is the lowest I can recall in the history of the firm. As I mentioned last quarter, its inconceivable…

Thanks, Terry, and good morning, everybody. I'm going to talk more about PPP this quarter. I think it's important, so you can better understand how we believe our second quarter results were impacted. Excluding PPP from our EOP balances results in a $99 million reduction in our loans for the quarter. As Terry mentioned, last quarter, we had about $250 million in commercial line draw increases. This quarter, line draws were down by $380 million. Line draws were at 50.7%, which is the lowest I can remember in recent memory. Loans are coming in at a slower pace, but there are opportunities. We still believe based on discussions with our market leaders and commercial lenders that annualized loan growth will land in the low to mid-single digits for this year, of course, after excluding the impact of PPP. As to looking forward, we're not anticipating any reduction in PPP loan balances in the third quarter. That may be conservative, but we don't have good forgiveness rules yet. So that's the decision we've made for the third quarter. The SBA told Congress that they hope to have their forgiveness portal up and running by August, we'll just have to see. Average balances for PPP loans was $1.7 billion in the second quarter. Our third quarter forecast for average PPP loans is slightly more than $2.2 billion. Our yield on PPP loans was 2.89% in the second quarter. So the third quarter should be fairly consistent based on our note paydown assumptions. We're forecasting principal reductions in PPP loans in the fourth quarter. Our internal forecast anticipate that 13% of our $72 million in PPP fees will amortize into income in the third quarter and then 37% in the fourth quarter, given our guests that we will likely get meaningful PPP forgiveness…

Thank you, Harold. Good morning, everyone. From a credit perspective, second quarter was a continuation of prior quarters for metrics such as past due loans, nonperforming assets, classified assets and net charge-offs, we acknowledge COVID's full impact on the economy and our clients is still unfolding, but these standard measures of loan quality continue to hold up well. Before I go into our credit slides, I wanted to outline our loan regrading work during the second quarter because our in-depth credit reviews may be more than many of our peers. During the second quarter, we re-risk graded all loans greater than $1 million with a payment deferral in every hotel loan, in every pre-retail loan greater than $1 billion. Our regrading effort was done at the loan level, not from a top of the house portfolio approach. Our method was interaction with each borrower, one borrower at that time. We regraded approximately 1,280 loans. Our regrading process entailed collecting current monthly borrower financial statements or monthly property operating statements, current personal financial statements, liquidity verification, contingent liability statements on our guarantors. We believe collecting interim financial statements throughout 2020 will provide us with a baseline, given that borrower 2019 year-end financial statements may not be indicative in assessing their current financial health. For C&I loans, we deployed a survey questionnaire to gather feedback regarding key variables such as revenue forecast for second, third and fourth quarter compared to the same period in 2019. Client ability to resume regular payments by the second, third and fourth quarter 2020, a question regarding months of operating liquidity on hand and finally, supply line disruption. Our bankers will discuss each question with our clients and then record the client response using an online tool that enables easy data aggregation. Our goal during the second…

Okay. Thanks, Tim. In last quarter's call, it was my objective to get everybody on notice that moving forward in this pandemic, it was our intent to move from offense to defense, to slow our investment and grow until the storm has been weathered and the environment is once again conducive to our unusual ability to attract talent and to take share. Defense will continue to be our number one focus as we move into the second half 2020. We've elevated liquidity meaningfully. We've taken actions to preserve and increase capital. We've built our allowance for credit losses substantially in the first two quarters, and Harold has already indicated a bias toward further elevation in the second half of this year. As you've already heard from Tim, we allocated enormous resource to the re-risk grading of more difficult loans in our portfolio during the second quarter. And it's our intent to finish re-risk grading the rest of the graded loan portfolio during the third quarter. That said, I believe our aggressive addition of revenue producers over the last two years, who were still in the early stages of consolidating their client base from where they were before to us, should result in ongoing growth, albeit at a slower pace than what we would have been producing pre-COVID. As we've already discussed, while we won't hire nearly as many as we had planned this year in order to contain expense growth, we will continue to make important hires. The truth is, from a client perspective, these are the times that firms like ours are able to clearly differentiate ourselves from our competitors in terms of how we value clients and consequently, we expect to pick up important market share that fuels earnings growth as we come out the other side of…

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

Good morning. Thanks for all the detail here this morning.

Thanks, Steve.

I'm curious on the guidance around BHG. It seems like it was intimated that 3Q revenue could be similar to 2Q. But then looking at the one slide, it also notes that year-over-year earnings growth should be up. So I'm wondering if that implies an extremely large 4Q? And if so, is that driven by the securitization or something altogether?

Yes. I think 3Q will be similar to 2Q, we’re not sure about 4Q right now. But – and I'm trying to find that slide.

I think it was Slide 22, where it shows just BHG net earnings going up in 2020?

Yes. I think that's a range of earnings between like $110 million to maybe going up above.

Okay. Got it. That makes sense. Okay, thank you. And then kind of thinking about the NIM moving forward, I mean, obviously, you noted the 32 basis points of drag from liquidity and PPP loans. But I'm wondering where you think whenever liquidity does normalize, let's call it, sometime early 2021 for argument's sake, where do you think the NIM could normalize at that point in time? Is that kind of back north of 3%?

We think so. We think that the NIM will begin to increase back into the low 3s, call it, second quarter of next year. At the same time, the accretion from the BNC loans that we acquired will be trailing off to pretty much insignificant amount.

Great. Okay. And maybe just last thing for me. Obviously, you guys noted that you will continue hiring a slow. I'm just wondering if you could give some color as to where you are in the pace of the Atlanta plans relative to 50 RM target longer-term. And then you guys have never really been the bank that puts on cutting expenses on a net basis, more about investing for future growth. But is there any likelihood in this environment, we could see some sort of expense initiatives? Thanks.

The – in the case of Atlanta, I believe these numbers are roughly correct. I think we ended the first quarter with about $40 million in loan outstandings and nearly $30 million in core deposits. I would view that to be successful and ahead of plan for what was effectively in the first quarter operation there. So we continue to be excited both about the recruiting pipeline of associates as well as the recruitment of clients. It looks like major pipelines are solid for another good quarter here in the third quarter. I think as it relates to the expense initiatives, I think your assumption is basically right. Our approach on expense initiatives, I would characterize more about trying to drive PPNR up now because that's how we fund a lot of the stuff we've got to fund in this – at this time where we need to be on defense. But I don't think you ought to expect us to have real meaningful expense initiatives where we're going in and making structural changes to the business.

Okay. That’s very helpful. Thanks for the color guys.

Yes.

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

Hi, good morning.

Good morning, Jared.

Sticking with the margin and NII side. As you talked about the liquidity drawdown. So that $1.4 million, should we assume sort of that $1.4 billion of wholesale coming off, call it, $400 million a quarter? Or is it not quite that linear?

Well, it’s definitely not linear, Jared, but we're anticipating about, call it, $700 million between now and the end of the year. Now granted, that's about half of it between now and the next four quarters, but it's not exactly on a straight line.

Okay. And then on the floors that you're putting in, can you give a little more detail around – I mean, is that actually – should we expect to see some loan yield pickup on those? Are those floors sort of above where we are here? Or is that just more protection for the future?

Yes. We're optimistic that we will get loan floors, call it with – in the mid-3s or on the LIBOR rate-based credit. So we're hopeful to get some accretion in yield on those particular loans, but we're also doing things with some borrowers to protect against negative rates. So there's some of that going on as well.

Okay. And then just finally for me, it was great color that Tim gave on credit. Can you give an update on how the non-graded credits are looking, that small business pool? What are you doing to reach out to those customers and how you're trying to evaluate those pools of loans?

Yes, thanks. We did reach out to those clients. Trying to find my exact note here. I think we reached out and touched 1,379 of our small business loans and the results were very encouraging. I mean, I realize it's preliminary, but out of those 1,379 small business loans and a response rate of 85% and we only identified $80 million that we would call elevated risk. So that continues to be an area of focus for us, but our survey results, and this was done mid-June came back quite positive.

Great. Thank you very much.

Welcome, Jared.

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

Thanks, good morning.

Good morning.

Good morning.

One more on credit. Just to dig into the deferrals a little bit, the reduction was really encouraging to see. Is there also a way to dissect that to look at what dollar number have asked for a second round of deferrals? And then maybe the dollar math that you expect to come up for to come off deferral over the next, call it, couple of months, just so we can kind of – the decline was great, but just kind of think about how much of that is just from running off and how much is actually renewing into a Phase II?

Jennifer, I would tell you – I mean, Catherine, I'm sorry. That decline was as of yesterday, we all know we were doing deferrals in April, mid-April, late April, early May, and that window will come open soon. And talking with our FAs, we believe the declines will continue. It's hard for me to give you a hard number, but I think that they will continue to decline, based on conversations that our FAs have had with clients about deferrals that hit that 90 day window, early August, mid-August, late August.

Okay. And what – how does the Phase II look like? What are you doing differently with those modifications?

We – when we rolled out our program, it was a 90 plus 90, Catherine. So we would talk to that client before the first 90 day period. And if we felt and credit qualified, then we would extend that second 90 days using that same initial document that was executed. I will tell you, with any of the new deferrals, and we've had just an inconsequential number since the 1st of June, they've just dropped off, we are now asking for all the financial statements upfront before we make a decision so we can grade that credit right then on the spot.

Okay, great. And then on – switching to BHG, is there any color you can give on what gain on sale margins have gone this quarter versus last year? Are they still staying steady? Or have you seen those pull back?

Now, they were pretty steady for most of the quarter. I think in June, they pulled back about 0.5% or so. But I don't think – they're not anticipating to see any kind of trend line lower than what they've experienced for the first, call it, five months of the year.

Okay. Great, great to hear. Okay, thank you.

Thanks, Catherine.

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

Thanks. Sticking with BHG, I think the loss rate slide that you cover on the – loss rate stats covered on Slide 21, it's very helpful. Where does that – what are you thinking in terms of where that peaks and when? I know that's probably the hardest question, but what's your read on where things peak?

Yes, Brock, I think it is a great question, and you're right. It's an impossible one to answer. But – and I'm assuming you're talking about the orange line specifically. So they believe that it's probably going to be in this 6% kind of range, somewhere in that neighborhood. It could be more, it could be less. But right now, the way – they grade the book every month. So they're still hanging in there. Obviously, the deferral results will be very insightful on that. But currently, they're not anticipating like a 2x kind of number. They're thinking it's more like another 50 basis points or – I'm sorry, another, call it, 100 basis points to 100 basis points.

Okay. And on the securitization, I mean, it looks like very bold timing here. I would have thought you would get better execution if you'd waited. But at the same time, very reassuring that you think you can get this done with BHG. And is this going to be kind of a niche financing vehicle? Or is this really the wave of the future and how BHG finances itself going forward longer-term?

Yes. I think they will use it as part of their financing package. Last year, when they had the Analyst Day, I think they mentioned somewhere around a 50-50 revenue split between gain on sale and interest income. So it will take a few years to get to that. But they intend to approach the markets in a really active way, and I would guess that might be 3 times a year probably, something like that. So they want to get some experience with it and use that as kind of a permanent tool in their toolbox.

Okay. That’s exciting. Lastly on the expenses, if I'm doing the math right, I would think the 2020 expense base is around $550 million annualizing the Q4 2019. Is that kind of the in the striking essence there, Harold?

2020?

Yes, the 2020 total expenses, I think the guide was based on mid-single-digit increase annualizing the Q4 2019?

Yes. And I mentioned on the call that we may include another incentive component, so your number, we ought to come in within that number even with that additional incentive number. So I'm not seeing us but – getting above $550 million.

Got it. Okay. Thanks very much.

Thank you. Our next question comes from Jennifer Demba with SunTrust. Your line is now open.

Thank you very much. Good morning. Terry, I wonder if you could talk about national tourism and how that's gone amid this pandemic. And what kind of impact that has on the total national economy when it's – when rent is really good or when it may be struggling? Thanks.

Yes. I would – Jennifer, I would tell you just anecdotally, the count of people has rebounded some. Obviously, I'll see them on the streets in the evening when I leave, but it's nowhere what it was pre-COVID. I think the spike in cases and the drop in tourism has been very noticeable and pronounced. But I've been surprised, Jennifer, at the number of people that have returned. So I don't really have specific percentages or dollars for you, just more perception of working downtown. It is off and likely will remain so for a while.

Jennifer, I might add to that, that, of course, a lot of what drives tourism is music city Center, and they don't have any conventions and don't anticipate any into 2021. So that's a pretty meaningful indicator. I think in terms of downtown hotels, many are open, but there are still a few that are closed or operating with limited service and so forth. So clearly there's an impact. I think to Tim's point, I'm not sure whether to describe it as fortunate or unfortunate, but I do encounter more Pedal Taverns these days than I did over the last few months. And so to Tim's point, I think some of the tourism is rebounding. But I'd classify it in early stage, I wouldn't think we would even be a midpoint of the return on tourism in Nashville. Obviously, that has an impact. I think if you look at sort of the reopenings, Jennifer, in Nashville, like every city and every state, there's sort of a phased reopening plan with maybe four stages of reopening. We were hoped by now we'd be in the third phase, but we've really backed up into the second phase of reopening because the coronavirus cases have spiked, like a lot of other cities that are reopening. And my belief is what we're seeing there is the same thing we're seeing in other markets where it's concentrated in young people who are perhaps more fearless than a 65 year olds. But anyway, I don't know if that's helpful to you, but…

And have you heard any anecdotes on corporate relocation pipeline for Nashville? Or do you think that's come to a bit of a halt here with the crisis?

My sense is that the corporate relocation pipeline is still full. I don't recall any major announcement of late, but I do believe that Amazon announced in addition to their opening of their jobs that they were bringing in. They're adding another, I don't know how many 1,000 jobs, but it was a big deal. There's a recent announcement out in Henderson. Bill, do you remember what that was – I don't. I can't remember. But Jennifer, it seems like to me that the development pipeline continues to be strong.

Thanks so much.

All right.

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

Hey, good morning everybody.

Hi, Steven. Good morning.

First, regarding the additional potential incentive this year, maybe to set up a stronger 2021, can you give more color on this and maybe what options you're looking at?

Yes. I think we're looking at probably a corporate PPNR measurement, maybe trying to understand what we think 2021 looks like if we can get a nominal amount of loan growth, continue to see strong deposit inflows, what our fee business are doing, what can we think will happen in 2021? And what do we need to do today to ramp into it? So it will be along those kind of thought processes. Steven, I don't know if that's helpful or not. But we’ll probably likely exclude credit from it. Because it's difficult to incent people around credit, particularly in this. We definitely want to be early in and early out. So we want to get our loss content recognized as soon as possible. And when you marry that up with some kind of incentive plan, it becomes sometimes a little difficult.

Steve, I might add to Harold's comments, I mean, the key actions to be successful, I think, for us on the PPNR are really driving the cost of funds lower, faster and picking up rate floors at a higher penetration, those kinds of actions are the things that we're trying to stimulate here.

Okay. And what’s the timing that you think something like this could be rolled out?

So we think probably over the next couple of months. We talked to our Board about it. I think we received favorable responses from them. They – I think they understand the concept and the benefit that it could drive for shareholders. So I think probably over the next couple of months.

Okay. That’s helpful. And then on credit, it was nice to see that classified loans come down in the quarter. What was the trend you saw in criticized and watch list in 2Q?

We – on criticized, we moved the bulk of the hotel book into the criticized category. That was about $750 million. So obviously, the percentage of our loans for criticized this quarter have gone up significantly. We did have some in our C&I book and some in the CRE retail, but it was largely driven by our recognition of the distress of the hospitality sector.

Okay. That’s helpful. And then finally, for Terry, you mentioned there's a good opportunity to take customers, and it depends how peers handle deferrals, PPP, et cetera. Curious, what are you seeing from regional bank peers? Are they struggling to offer PPP in these different programs? And maybe if they are, why? Is it technology or work from home or something else? Thanks.

Yes. I think what – I guess, Steve, I'd go ahead just in terms of our personal experience, and then I'll go back to the Greenwich. So I think in terms of our personal experience, most of the big – I shouldn't say most, a number of the big banks within we compete, they were not able to get their system up early. It took them – they were late days, to get PPP system up to even accept applications. I think they were very slow, which, of course, everybody was slow, but I think their ability to communicate with clients and keep them up to speed on where they were in the process and all those kinds of things was really deficient. And so that was the experience that we saw. And then to some – maybe a little more reliable than just my own observation there, I think in the case of Greenwich, they've seen that there is significant angst throughout the system that's tied to both deferrals and PPP, where – so much of it is how you deal with the client. As an example, I think about what we're doing to go out here and gather all this information, conduct these surveys. If you go out there with a heavy handed approach, like a lot of those companies are prone to do, you might achieve the same result, but we're out there trying to do it in a way that inspires confidence and make sure that they understand that this review is helpful to them and to us, Not only does it help us understand the risk, but it puts us in a position to better take care of them, if we're in a position to document what their path forward is as the economy reopened and so forth. So anyway, anecdotally, we certainly saw it. And it was tied to some measure to their ability to get their systems up, and it was tied in some measure to just how they interface with clients and their inability to talk to clients and tell them where they were in the process and so forth.

Okay. Thanks for all the color. Thanks for taking my questions.

Yes.

Thank you. Our next question comes from Brian Martin with Janney Montgomery. Your line is now open.

Hey, good morning, guys.

Hey, good morning, Brian.

Hey, just one question back to the deferrals, maybe for Tim. Just with the progress you guys have made already, I guess, Tim, what do you anticipate the deferrals and, I guess, October, December, kind of as you get through working through more of these and do more of the risk regrading? And I guess is it a significantly lower level than more at today? Is that – and then maybe who might be looking at the most at the request for second deferrals?

The second deferrals have been hospitality. And I see us doing a lot of regrading, restructuring of the hospitality loans. We'll probably – we've got a playbook written out for that so that everybody knows what we're doing. But I would see us restructuring many of the hospitality loans in the third quarter, asking the client for help with perhaps collateral guarantees for cash. And under the CARES 4013 Act, we'll restructure the loan and try and bridge them until the property stabilizes in 2021.

Okay. And how about – I guess, that's helpful. And then just maybe one for Harold. Just on the expenses – or Terry, just the recruiting that you guys have scaled back this year. I guess, do you anticipate that getting back to kind of a normal level as you look to next year?

It's hard to know, Brian. I don't mean to hedge on the question, but I guess, you'd have to tell me where we're going to be on a vaccine, where we're going to be on reopening the economy, all those kinds of things before I could give you an answer to the question. I think we believe that by being semi-active, which, as you know, we're still talking to prospects and so forth, that we'll be able to turn that switch pretty quickly. But it's more about finding a more certain footing, and when we do, then we'll be ready to go.

Yes, okay. All right. And then just last one. I think you guys gave some color or detail on the PPP forgiveness, but just the percentage of loans you guys would expect to be forgiven today? And just kind of, I guess, what were you anticipating in the fourth quarter on that component?

Yes, Brian, it's somewhere around 25%

Yes, forgiven in the fourth quarter. And then total, Harold, I guess, your expectation is what percent of it gets forgiven?

As far as the whole thing over the next – yes, I think we have about 10% that goes out the full two years.

Okay. So 90% total. Okay. That’s all I had guys. Thanks so much.

All right.

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

Hey, thanks for taking the call. Just following up on the hotel deferrals. So should we assume then that by the end of the year, any of the more to troubled properties have been restructured and ultimately come off of deferral? Or should we assume that some of those more troubled ones could be in deferral for a much longer period of time that's allowed under the CARES Act?

Yes. What we will do in the third, and it might – some of them might spill into early fourth quarter is modified alone, not a deferral. We'll be looking at collateral guarantees so forth and asking their cooperation, maybe their putting up cash for part of the deferral. And with that modification under the CARES Act 4013, we don't have to flag it as a TDR. So our goal will be to get all of the hotel loans that are showing signs of recovery modified. It may be a modification that extends an interest-only period into 2021, and then resume amortization mid-to-later-2021, but we'll be working that with each borrower one-by-one based upon how their property is recovering.

Okay. So the – so it's current by the end of the year, just maybe current under a new structure as opposed to deferring under the old structure?

Correct. We will modify the loan before year-end with the new repayment term.

Great. Thank you.

Thank you. And I'm showing no further questions in the queue at this time. Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program, and you may now disconnect.