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. If you would like to ask a question at the time, please press star one on your touchtone telephone. Analysts will be given preference during the Q&A. We ask that you please pick your handset to allow optimal sound quality.
During this presentation, we may make comments which may constitute forward-looking statements. All forward-looking statements are subject to risks, uncertainties, and other factors that may cause 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, 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 31st, 2019, and in its subsequently filed quarterly reports. Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events, or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G.
A presentation of most directly comparable GAAP financial measures, 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 this presentation over to Mr. Terry Turner, Pinnacle's President and CEO.
Thank you, operator, and thank you for joining us. As we get started here, I think the 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. Honestly, there are so many adjustments required in order to focus on the variables that we're truly managing to 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 linked-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. 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 a linked-quarter basis. Harold will review that in greater detail shortly and talk about our expectations going forward. 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, that represents enormous market share movement potential. Core deposits continued 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. 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. For what I think has been a really challenging year here, we continue to have a track record for consistently growing tangible book value, it's up 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 NPAs 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's a lot to be encouraged by 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's differentiated model, and it has in fact proven to be extraordinarily resilient, producing record loan originations at an average interest rate to the borrower of 14.4%.
Record loan sales to corresponding banks with a record low in the cycle of 4.9% average interest rate, at 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. As of October 16th, just three loans are on a deferral. Asset quality is holding up very well. We said for some time that our expectation was that BHG would prove out the differentiated nature of their model during this cycle. It seems to me that they're doing that in spades. Harold will review that in some detail.
As you know, 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. Tim's going to update you on that work and give you insight to what we're seeing and learning. My expectation is it is likely to create optimism despite the fact that there's still unknowns relative to the timing of the vaccine, the size and nature of the stimulus package, and the full reopening of the economy. Harold, let me turn it over to you.
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 a 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 to deposits. We had another big deposit quarter.
We lower rates, we get more deposits. We've experienced significant growth in non-interest bearing deposits, ending at $7.1 billion at quarter end, up 47% since year end. The number of checking accounts is up almost 9% since year end. 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 30th. 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 onto that money for an extended period of time. More on deposit rates in just a second. Next is our usual update to our loan pricing.
Given the circumstances, this is absolutely great news. Obviously, year-over-year loan yields are significantly impacted by yield curve adjustments, particularly LIBOR. 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, weighted average loan rates have not changed a basis point in six months. Keep in mind, the chart excludes PPP money, 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 betas anymore because we're so close to the bottom that there's only so much more deposit money you can get. We continue to target a range of less than 25-30 basis points for our deposit cost by year end. Our relationship managers have their client lists and are working with them aimed at depositors who have outsized deposit pricing. We have approximately $1.65 billion in wholesale funding maturities over the next two quarters that we'll likely allow to roll off without renewing, thus alleviating some of the liquidity build and some of the pressure on our net interest margin. Bringing this information forward from last quarter, the top left chart on investment securities is new. We've been at an absolute level of investment securities of 13%-14% of assets for a while. Not looking to change that.
We're starting to get a few questions about deploying excess liquidity into bonds. It's really hard to get excited about any incremental leverage strategy at this point. There's just a ton of uncertainty right now. The bet that the long end of the curve is going to 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 where we can get a few basis points for the next year or so, but credit risk begins to enter the conversation. We've always taken the position that credit risk is reserved for the loan portfolio. We need to reduce our wholesale funding book over the next several quarters because, this is not rocket science, eventually and hopefully, the PPP money is going to turn into cash.
This liquidity issue is not a two to three quarter issue, it's likely to be a one-to-two-year issue. Along those lines, we're showing that we're a $34 billion bank at September 30. I'd say, and I believe, we are more like about a $29 billion-$30 billion bank, as we've got about $2.5 billion in PPP money, as well as a little more in excess liquidity. That's about $4 billion-$5 billion weighing on profitability measurements like NIM and ROA. That said, at least the PPP program is profitable. Our proposed liquidity build is not, and is costing us around $1 million-$2 million a quarter. We will shed the liquidity at some point, slower than we'd like. 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. Here's some good news in all that algebra. 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 three basis points of earning asset improvement, that three basis point's about $9 million in net interest income over the next 12 months. To fee income, I'll be really brief. Fees were more than $91 million for the quarter, an all-time record. Everyone knows that 2020 is a power dump kind of year for mortgage. It's unbelievable. I'll talk about BHG in a few minutes, BHG, as they say, is killing it.
Wealth management rebounded based on boundary fees for investment services, where fee revenues are received in arrears and are based on market performance. Now to expenses. Personnel costs, as we stated in the press release, increased due to incentive accruals. We discussed on this call last quarter, our board did modify our annual cash plans 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. Had the board not elected to do so, our incentive accrual would have been around 25% of our associates' targeted 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. Given it's PPNR, the pandemic's 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 reserve slightly. As the slide notes, our unemployment forecast improved slightly this quarter. That, plus flattish loan growth contributed to the modest reserve build. The PPP program is back in the news. Not going to go through the entire slide, we 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, 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, we are not optimistic that the larger loans, it will likely be a choppier process, at least that's what we think for now.
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 new slide as I discussed on the expense slide 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 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.
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. Suffice it to say, we are optimistic about our shorter-term prospects, and once COVID is over, we love our longer-term prospects. Briefly about tangible equity. There are high-quality assets that will eventually exit our balance sheet. We believe we will manage back into the high eights and low nines by year-end or 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 way, 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 to only one other firm in our peer group during that same time period. The 75th percentile of the peer group is at 37%, roughly half of our growth rate.
To say I'm pleased with how this quarter ended up is an understatement. As to execution on 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 that we will have to live through for an extended period of time. Politics are also very distracting and tend to rob us 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. 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 are, 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. To BHG. We've shown a similar slide before. 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. Business flows remain strong. The green bar represents loans on which gain on sale has been recorded as these loans are 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. Coupon has fluctuated over the last three years, but there is no discernible trend up or down. Seems like a mid 14% is the tick. As to buy rates, they fell to below 5% in the third quarter, lowest I can recall since we became involved with the [Bankers Healthcare Group] . One thing we have not emphasized enough is the small chart at the bottom right.
Over 1,000 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 BHG's. It's taken 20 years, but it belongs to BHG. They own it, they developed it, and they capitalize on it. 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 base.
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 upward, but the quality of the borrowing base, in our opinion, is very impressive. As Terry mentioned, concerning deferrals, as of June 30, the last quarter, total deferrals represented about 15% of the total book. dentists led the group with a 35% deferral rate. BHG communicated with these borrowers frequently and worked to decrease the numbers meaningfully in the third quarter, as deferrals are essentially non-existent 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%-4% of the deferral base, is in early stage delinquency, losses from these could materialize over the next two to three months. That said, this has been crazy good. We've updated charge-offs and reserve builds. These are for loans that BHG has 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've acquired their loans. The orange line 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.
Lastly, we've said it last quarter and we'll say 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 at 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. Wrapping up, loan pricing is holding, deposit growth is remarkable, deposit pricing is headed down. BHG is making it another great year, and credit is very much manageable. With that, I'll turn it over to Tim to talk about credit.
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 and all CRE 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 pass grade loans with exposures greater than $2 million.
The only risk grades we did not re-underwrite were our top two grades for our very best loans, generally loans secured by cash or 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 exposure. 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 on 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.
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 grade. 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, physicians.
Three of our questions were 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%-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%-100% of first quarter 2021. 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 and a very strong special assets team, Pinnacle's classified assets decreased during the third quarter. NPAs increased just three 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 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'll 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 an 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 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 grade. The collective balance on these three newly identified hotel loans totaled just $5.3 million. The combined LTV for the three 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 and airport categories. This page contains data for our hotel loans. Approximately 74% of our hotel loans are in the extended stay, economy, and limited service sectors. Many of these types of hotels can cover operating expense and interest expense with occupancy in the 45%-55% range.
As illustrated by the three graphs on this page, our limited service, full service, and extended stay borrowers have reported improving trends in 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 to 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 CRE loans leased to 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 clients. 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 Teeter, 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 have 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 is 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 regrading 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 30th, loan delinquencies was 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.
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 a quarter of a billion dollars in Tier 1 capital, nearly tripling our loan loss allowance since year-end, and scouring our loan book aggressively, gathering financial information from borrowers to ascertain risk and respond appropriately. It also included things like de-emphasizing our continuous recruitment of revenue producers. Never mind that the previous momentum in our recruitment pipelines resulted in bringing on 56 revenue producers year to date.
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 defensive efforts, that grueling borrower by borrower assessment, as an example, we can now take that resource and use it on more offensive sorts of initiatives. 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's already discussed the upcoming maturities in our wholesale deposit book that'll facilitate the unwinding of our excess liquidity as the pandemic subsides. 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. 2, 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 in 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 on roughly 98% of [new to renewed] loans. 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.
Finally, because all of that heavy lifting that's behind us, we're now intent on seizing what we expect to be a once-in-a-generation market share movement. Specifically, Greenwich Associates indicates nearly a third of middle-market businesses intend to switch. Not that they're frustrated, but they intend to switch. They tie 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. It's our intent to aggressively pursue this opportunity. Guys, most of you know our strategic approach as a challenger brand. We're purposeful about creating a work environment that excites our associates, believing that if we're successful there, they'll create an engaging experience for our clients. Of course, if we're successful there, the end result is the shareholders are enriched. 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 of 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. That'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're winning Best Place to Work awards in Memphis, Chattanooga, Knoxville, the Triad of North Carolina, Roanoke, Virginia, Charlotte, and the state of South Carolina.
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 are for businesses with sales from one 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. Let us start with the top left with Nashville, where we de novo'd 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.
As you can see, with one exception, our client satisfaction among major competitors is the best in the market. 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 distinctive service model yields market share pickup, you're looking at the recently released deposit share data from FDIC. For each market, you have a listing of the top banks showing their market share rank, their year-over-year growth rate, and how that growth rate ranks in the market. You start 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 spinning pretty rapidly. As you scoot across the page, in Knoxville, we de novo'd 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 CapitalMark 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. We're 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 the eighth position, but the third fastest-growing. Roanoke, Virginia, we're in the third market share position and the fastest-growing bank in that market. It seems evident to me, first of all, that there's a once-in-a-generation market share opportunity coming, and secondly, we're the singularly best positioned to be a winner, which of course, results in outsized earnings growth over time.
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 7 times the industry through that extended period is meaningful. On the right, on a larger base from 2011 to 2019, post-Great Recession, we grew six times the industry. 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 its comparisons.
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. Operator, I'll stop there. We'll be glad to take questions.
Thank you, Mr. Turner. The floor is now open for your questions if you would like to ask question at this time, please press star one on your touchpad telephone. Analysts will be given preference during the Q&A. Again, we do ask that while you pose your question, that you pick your handset to provide optimal sound quality. Our first question comes from Stephen Scouten of Piper Sandler. Your line is now open.
Hey, good morning, everyone.
Morning, Stephen.
Terry, you gave a lot of good color there 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?
I think, Stephen, we have always, and we continue to view ourselves to be primarily organic growers. You can look at those historical charts and see 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 of here and going out and trying to meet a bunch of people, have some aggressive calling program off of Dun & Bradstreet lists, 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. 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. 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. Among those revenue producers, even trying to shut down or tamp down the hiring, we've added 56 revenue producers this year. All of that hiring that has already occurred and 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, merger and integration issues, and so forth. 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 say they want to reconsider. 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. We've got a big queue of folks that are in early stage maturation already on the books. We're optimistic about our ability to hire more.
Perfect. Very helpful. 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 non-metro MSAs that are maybe smaller, mid-size metro MSAs, where I think we'd still see growth in the Southeast. Can you maybe touch on what you're seeing there? Maybe especially in Nashville, where there always seems to be this view that Nashville is just music and tourism.
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. It's a little better than that, but not much. It's pretty tight here right now. If you think about it, the reason I think for that is obvious. One, you got a lot of people who 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." You just got a bunch of PPP money. 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.
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, I think they came away, I don't want to put words in their mouth, 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, what drives corporate relocations is primarily tax rates. My belief is that phenomenon is going to continue for an extended period of time. Stephen, I know travel is no doubt limited. Tourism is definitely down. I'll tell you this, if you could make it to Nashville, you would still see a large number of cranes.
That scares some people, but it doesn't particularly scare me because we believe that this market's going to continue to grow at an outsized pace. I'll spare you the Chamber of Commerce fee, but I promise you the tax rate and tax implications are likely to expand that benefit to markets like Nashville, not detract.
Perfect. 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 normalize over the next, who knows, three, four, five quarters, where can we see that loan loss reserve kind of normalize 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 normalize?
Yeah, Steven, 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. Eventually we think as charge-offs materialize and I got to hand it off to Tim's group. I got to hand it off to the centralized underwriting groups. They're digging up under all kinds of rocks trying to find out what the quality and the loss content of this book is. We anticipate that we'll see some charge-offs materialize. Not that we've identified any of them yet, we haven't, but we just think that's coming. Towards the end of next year, we likely will see this reserve kind of need to get some relief.
A lot of that's dependent on what unemployment forecasts look like, but we're not seeing the loss content materialize in the loan book like we would have otherwise thought it was going to materialize back in March.
Got it. Perfect. Thanks so much for the help, guys, and congrats on a really good quarter.
Thank you.
Thank you. Our next question comes from Jennifer Demba of Truist Securities. Your line is now open.
Thank you. Good morning.
Hey, Jennifer. Good morning.
Congratulations on your almost 20-year anniversary. I can't believe it.
I know. We're getting old. Oh, no.
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 CIT 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.
Yeah. That's a great question. I do think there's likely to be some opportunity in that transaction. At this point, 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 Truist and those sorts of companies. The vulnerability there seems larger and seems more timely and those kinds of things. You know this, invariably, when you get involved in integration work, there'll be an internal focus that'll create some vulnerability, and we'll certainly try to seize on it. 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 outstandings. There's probably north of $100 million in commitments that are out. Some of those are construction kinds of things that might fund up over time, it's not all immediate stuff. That pipeline of commitments that exist that will have fundings is pretty large. 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. Of course, the real measure or the real catalyst, I guess, might be a better word for our success, has to do with hiring.
I think Rob, again, would tell you that his hiring pipeline is full. Don't hold me exactly to this. This will be about right. He's got about 17 associates down there today, I think, about four of 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. 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 hire category. I think we're very encouraged and, continue to think Rob's doing a great job. I think the results are materializing.
If I could follow up one question on BHG. That performance obviously has been really terrific. Who are the most stressed borrowers in the BHG sub-segment today? Are they still dentists, or what are you seeing among their group of borrowers? Thanks.
Yeah. I think the dentists are still probably the most stressed. As it sits today, I'm not sure of any market where they've got loans that are not permitting elective surgery. I think all the dentists are open. I think all the surgeons are open. The optometrists were a little stressed in the second quarter. 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's one that's more stressed than another.
Thanks so much.
I will say the non-medical book, call it the engineers and the architects and those folks that they branched into over the last two or three years, that book is performing better than the, call it the medical book. That's been a real pleasing thing.
Thanks, Terry.
Thank you. Our next question comes from Jared Shaw of Wells Fargo Securities. Your line is now open.
Hi. Good morning.
Hi, Jared. How you doing?
Good, thanks. Congratulations on a strong quarter. Hey, just following up, Terry, you'd said this could be a once in a generation opportunity to take market share. 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 hiring model and accelerate it a little faster? Would that turn into potentially, a different expense level for 2021 in the near term while that's building out?
Jared, that's a fabulous question. Honestly, I guess I might characterize it this way. We might be tempted by that. We can be opportunistic in that regard. 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 as the hottest real estate market in the U.S. 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. My objective is to gin up what's 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.
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, to seize that opportunity. That is a grand growth opportunity. Again, I know sometimes people are not as interested in things like the distinctive service experience, but that's a powerful and important point. We spent time getting that service equation right, and it's now time to harvest that in those high-growth markets.
Okay. That sort of goes back to the 22% of hires that have been there less than two years, you have a lot in those markets. You feel that they can start to really make some hay?
I do believe that. I also think, as I mentioned, 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. Again, those South Carolina markets, of course, are filled with Wells and some form of BB&T or SunTrust bankers.
Okay. Great. Thanks. 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? 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.
Yeah, there's no doubt that this is helping them get towards a CECL number at some point. CECL for them, I think, is a 2024 issue. 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 reserve. I'm not sure where that number is going to actually end up.
Okay. 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.
Jared, if I understand your question right, I think you're right.
Okay.
We should not consider that. Yeah.
Okay. Got it. On BHG, with the success of having that securitization, do you think that 2021, you'll see that strategy shift back more towards beginning to emphasize securitization, and maybe some on-balance sheet opportunities more so than straight gain on sale? Will it continue to be a good mix?
Yeah, I think they'll continue a good mix. I think they believe that they will be back at the securitization game early next year. They're ramping up to probably do another issuance, call it January, February.
Great. Thanks a lot.
All right. Thanks, Jared.
Thank you. Our next question comes from Brock Vandervliet of UBS. Your line is now open.
Hello. 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. 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?
Yeah, 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. That would be what our current thinking is, Brock.
Okay. Harold, I heard the guide on funding costs. I guess on the opposite side, where do you see securities yields trending over time? 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. Should we look for really sharply higher balance there given that loan growth is kind of muted right now?
Yeah, 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. Building the securities book. Oh, I'm sorry. Building the securities book. That's what I meant. 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.
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.
Okay. Those yields, do you have a sense of where they could drift, assuming rates stick where they are?
Where they are right now, I think our municipal book will help us hold yields.
Yep.
I can't help to believe that we're going to see some deterioration in bond yields, probably over the next several quarters. I don't think it's going to be that significant.
Okay. Thank you.
Thank you. Our next question comes from Steven Alexopoulos of JPMorgan. Your line is now open.
Hey, good morning, everyone.
Good morning.
To start on the new incentive, can you give more color on exactly what the new incentive is? Is it a 4Q20 incentive, or is it a full year 2020, in terms of results?
Yes. It's for the whole year. We implemented it in, I think the comps committee approved it late July. What we tried to do was determine what a reasonable growth rate in PPNR would be for 2020 over 2019, and then try to figure out how to hit that number. It gives us some consistent messaging with not only revenue producers, but all 2,500 people. It keeps people in the game because obviously with the first quarter reserve build, and then again in the second quarter, 80% of our incentive was tied to EPS growth. That effectively knocked us out of the game, for any kind of cash bonus this year.
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'll help us not only this year, but more importantly, 2021.
Harold, what growth rate do you need to maximize that incentive?
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, "Okay, what does it take to get into the top quartile of that peer group?
Got you. Okay. Got you. That's helpful. 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 on what's created this opportunity?
Yeah. Again, I want to cite what I hear from Greenwich, and then I'll give you my own personal commentary, which may be less valuable, I don't know. Greenwich 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.
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 recite now how many webinars we held, but we had thousands of borrowers attending our webinars, many of whom 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? If you're not supplying that information, you're creating lots of apprehension among your borrowers, and they're feeling underserved.
Again, I think this phenomenon of the PPP process, the deferral process is, Steve, we've talked before, if you go to the two ends of the spectrum on how to handle the deferral, I promise you, I'm not acting like either one of them is really bad or really good. I'll just tell you what we did and why we did it and why I think it benefits us. On one end of the spectrum, you could say, "Look, this world's gone to heck in a handbasket. You want a deferral, you come down here and bring me a bunch of financial information and give me some more guarantee and put up cash reserve and so forth, and I'm going to give you a deferral." That's not an irresponsible thing to do.
If you're a credit person, you're thinking about improving your borrowing base and trying to minimize losses and so forth. That would be a tack you could take. Our view was to give somebody a deferral for 90 days in the middle of a time where nobody knew what it was, didn't substantially increase our credit risk. It made our borrowers love us. That was the reason that we went in that direction. Again, I'm just sort of rambling about two or three things that are sort of different in the approach. 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.
That'd be my characterization of it.
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 reserves up $200 million in the quarter, the ratio's up. Why would that have gone? Higher given these really impressive deferral trends? Thanks.
All right. Keep in mind, they're still a private company, and there's a lot more qualitative assessments going on than with perhaps a CECL model like we have to develop and have to roll out that's less subjective. I think what BHG is doing is they're just anticipating, probably doing some conservative analyzing, and building a reserve.
Okay. That's helpful. Thanks for all the color.
I know. That's about all I can give you, Steve.
Thank you. Our next question comes from Catherine Mealor of KBW. Your line is now open.
Thanks. Good morning.
Hi, Kat. Good morning.
I just wanted to follow up on your PPNR commentary and outlook. Harold, you talked about wanting to grow the PPNR. I don't know if you mentioned that you wanted to stick in 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. 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? Is it more PPNR per share can grow because of some active buyback activity?
Yeah. First of all, let's make sure we understand that what I talked about during the slide was that we've excluded PPP and BHG and the liquidity build. We're kind of quantifying those numbers and excluding that from the calculation of PPNR growth. You're right. How does one anticipate what PPP's going to do to our numbers this year or next year? 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's not materialized. We go through a process to eliminate that. What we're trying to do is get down to blocking and tackling. 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. 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 than a lot of our peers are going to get. That's probably a little bit of a headwind when you start talking about peer rankings for us. Does that make sense?
It does. I was just making sure, your commentary on a single-digit growth PPNR was more around the incentive plan for this year, not as much.
Yes
an outlook for what you can do in 2021.
Well, that is true. 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.
Great. That includes PPP, BHG, and liquidity?
That excludes PPP, BHG, and liquidity for us.
Great. Okay. That makes sense. Also on the expense side, you've guided for expenses to be flat to down. Is that inclusive of the incentive comp catch-up this quarter? Just look at bottom-line expenses, and that's the number that's kind of flat to down?
Yeah
next quarter?
The third quarter incentive had to catch us up to 75% of the whole year. We don't have as far to go in the fourth quarter with the incentive accrual.
Got it. Okay. Still, in what scenario are expenses flat in 4Q at another $90 million? I'm sorry. I'm looking at these. Sorry, excuse me. Another $144 million.
Yeah. Well, I think what's going to drive it primarily is that incentive accrual because the PPNR incentive is, call it $15 million, I had to get 75% of that into the third quarter number, I only have to get 25% of that into the fourth quarter.
Got it. Okay. Got it. Really, expenses should be down next quarter.
Yep.
See, thinking that. Okay. It was the flat that was what was throwing me off. Okay. All right, great. Then maybe just one last question on just, do you have the updated criticized metrics? I know you gave classified in the press release, do you have what criticized did late quarter?
It went up, Catherine, $70 million from last quarter. I don't have that number right in front of me as a percentage.
Okay. Up 70. What drove that increase? What kind of credits are you seeing-
Catherine
for more in criticized?
It was mostly hotels. We had a further count of hotels in July that went into risk grade 70.
Great. Okay. Great. Thank you. Great quarter.
Thank you.
Thank you. This does conclude our question- and- answer session. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.