Pinnacle Financial Partners, Inc.

Good morning, everyone, and welcome to the Pinnacle Financial Partners first quarter 2023 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 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 Financial'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. If you'd like to ask a question at that time, please press star 1 on your touchtone phone. Analysts will be given preference during the Q&A. We do ask that you please pick up your handset to allow optimum 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 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, 2022, and 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 the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to 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, operator. Good morning. As you've seen, first quarter was a very strong quarter for PNFP with outsized loan and deposit growth, even in a difficult economic environment, which I believe is linked to our client-centric approach to the market. Much has been written and spoken, I suppose, within the last month or so. about whether regional banks like ours could withstand an inevitable movement of deposits up to the money center banks. So I believe we have now answered that question. We have begun every call for years with this snapshot of our quarterly performance. We choose the four-year quarterly format with intent of showcasing the long-term reliability of our performance on the metrics that we think matter through the cycle. At the bottom of the slide, you can see that asset quality continues to be extremely strong, with non-performing assets, classified assets, and net charge-offs continuing to operate well beneath the four-year median, which represents a period of exceptional asset quality. It's honestly hard to imagine how it could get any better than that. PNFP has repeatedly been recognized by Greenwich Associates as having one of the best brands in the country. According to Greenwich, PNFP stands out in the areas of being number one, trustworthy, and number two, easy to do business with. That's an incredibly powerful position to own in these turbulent times. PNFP has the number one net promoter score and a footprint among businesses with annual revenues from $1 million to $500 million. Raven fans are always invaluable, but never more than at times like these. It's just hard to leave a bank that you love and trust. Our ability to leverage the brand to attract the best and most experienced bankers away from our larger national and regional competitors in ever-increasing numbers each of the last several years continues to contribute meaningfully to outsized growth. The primary source of the growth is market share movement as these new recruits consolidate their loan and deposit volumes to PNFP, decreasing our reliance on economic tailwinds. It looks like to me that first quarter of 23 was a dramatic demonstration of the power of a differentiated brand as evidenced by a 17% annualized loan growth, 14% annualized deposit growth, 17% year-over-year revenue growth, 30% year-over-year net interest income growth. So with that as an introduction, let me turn it over to Harold for a more in-depth review of the quarter. Thank you, Terry.

Good morning, everybody. I've got a few new slides this morning, so I'll move quickly through the usual slides to give time for the new information. We've elected to start with deposits. Reporting the linked quarter growth of 13% in the first quarter was a real positive for us. Obviously, growing deposits at a reasonable price in 2023 is a key focus. We continue to build out our deposit gathering franchise around HSA, Community Housing Association, nonprofits, and others, and we believe we are making headway with these and other special deposit initiatives. Our cumulative deposit beta stands at 46% through March 31. The last two rate hikes have seen more cost increases in relation to the earlier rate hikes. We do have some confidence that our client base appreciates the fact that we've been fairly consistent in our approach to deposit cost increases while competitors are, in some cases, just now beginning to experience rapid increase in deposit costs. This is one of our new slides. It's about addressing many of the hot topics that have come around as a result of the Silicon Valley and signature bank failures. Could not be more proud of our relationship managers, our support units, and how everyone answered the call when all of a sudden we were having to defend our franchise like never before. We armed our people with timely and relevant information, and they used that as well as years of relationship building to calm a deposit base that was jolted by the failure of the two franchises as well as all of the media attention that came with the failure of these two very unique franchises. As to uninsured deposits, the chart at the top left is our trend for uninsured and uncollateralized deposits for the last few years, going back to pre-COVID. The important trend here is the drop of 6% in the first quarter. Most of that is attributable to increased level of reciprocal deposits that we offer those depositors that request increased FDIC coverage. This is a product that we've offered for more than a decade. Our firm is focused on providing several alternatives to support depositors that may require additional support. All in, we've traditionally been about a medium performer on uninsured depositors to our peer group. Hand in hand with our uninsured deposit position is our liquidity position. We currently calculate that we have enough liquidity available to us to provide about 155% coverage of our $18.8 billion deposit. for approximately $12 billion in uninsured deposits. There is also much interest given the FDIC insurance discussion about deposit account sizes. We were hovering around $80,000 per deposit account for the last two years or so. The table embedded in the chart breaks out commercial versus consumer sizes and trends for those. During COVID, commercial balances increased meaningfully, likely due to PPP, clients retaining more dollars to counter perceived higher risk going forward, as well as building cash balances due to a fairly strong economic environment, at least for our client base. As to deposit mix shift in the bottom right chart, we're seeing depositors move more non-interest bearing and lower yielding interest accounts into higher interest rate products since the second quarter of last year. We're at around 25% non-interest bearing to total deposits. Our financial plan contemplates further decreases through the rest of 2023, but no one really knows where it will end up. we likely will be into the pre-COVID levels below 20%, as noted on the chart, before year-end. Right after the bank failures in mid-March, we began tracking our 200 largest uninsured depositors to determine how they manage their deposit balances, going back to just prior to the Silicon Valley failure, call it March the 10th, through the end of last week. Those 200 depositors comprised about $3.9 billion in deposits, as of March 10th, with the smallest deposit count being around $9 million. We began contacting relationship managers to find out what changes were happening during this critical time. We identified transactions of about $45 million that went to brokerage account or a large-cap bank under what appeared to be a flight to safety and something that was not anticipated prior to March 10th. As of the end of last week, those same deposits had about $3.9 billion in deposits, which was up slightly from the $3.9 billion that was there at March the 10th. Lastly, we've been able to specifically identify about $200 million in inbound deposits from Silicon Valley and Signature Bank. Obviously, those are new accounts that were not in the top 200 as of March the 10th. Given our strong first quarter results on deposits, we believe our deposit base remains very resilient And our deposit growth guidance we offered last quarter remains intact at high single to low double-digit growth for the year. The first quarter was another strong loan growth quarter for us. We were lowering our loan guidance for this year slightly to low to mid-teens growth for mid-teens growth. As we noted in the release last night, we tightened the credit box for construction and certain CRE categories, plus adding the incremental weakening of the macro environment we were opting for the lower loan growth guidance this trip. We're also reporting a 6% average yield for the quarter and anticipate further increases as we're expecting more announced rate increases and fixed rate loans are coming up for renewal with higher price targets, so we should see fixed rates expand as well. We're again dissecting our net loan growth based on categories noted on the slide to help everyone better understand the source of our growth. The chart is comparing all of 2022 to the first quarter of 2023. As many of you know, our hiring model requires significant experience greater than 10 years in the market, to come to work here. Just to reiterate, substantially all of this loan growth is not to new borrowers showing up at Pinnacle Bank with a new idea to pitch, but borrowers that have extended relationships with our relationship managers over, in many cases, decades of working with each other. This is just not true for Charlotte, Nashville, Charleston, and other legacy markets, but that fact applies to Atlanta, D.C., and our special lending units as well. As the top left chart reflects, our gap now decreased 20 basis points, more than we anticipated at the start of the quarter. Out of an abundance of costs, we added approximately $1.65 billion cash to our balance sheet as a result of the recent bank failure. Thinking back, we built liquidity in a similar way at the inception of COVID, but this trip, we've tempered the absolute size of the liquidity build as well as the maturity of the resulting federal home loan bank balances, which come with an average life of two years and a weighted average rate of about 4.5%. With the additional liquidity we have on our balance sheet, our planning assumption that our NIL will likely be down for the remainder of the year by call it 10 basis points. That said, our growth models should provide for increases in net interest income. As we enter 2023, we believe net interest income guidance of the mid-teens percentage growth for 2023 over 2022 is reasonable at this time. As to credit, we're again presenting our traditional credit metrics. Tentacle's loan portfolio continues to perform very well. As noted earlier, we continue to have a very limited appetite for new construction. We adjusted the CRE appetite chart on the bottom right somewhat so that only a limited number of CRE types are now being considered by our credit officers. Additionally, during the quarter, our credit officers notify our lending units that any new CRE loans that are presently residing on another bank's balance sheet will be more difficult to move to PNFP for the time being. In summary, our outlook for our loan portfolio from a credit perspective remains strong. So if negative trends begin to develop, we believe we remain advantaged. My second new slide for today is about credit. The top left chart deals with trends and construction originations. We began reducing our appetite for construction last summer, which is consistent with the chart. Additionally, the chart would also indicate that our appetite is largely concentrated in warehouse, multifamily, and some residential. Secondly, much discussion about renewals of CRA fixed-rate loans, which is the objective of the chart on the top right. Over the next several quarters, we will have approximately $100 million in fixed-rate renewals, and the average rate on these loans is currently around 4.5% to 5%. Our yield target at renewal will be in the 6.5% plus range. Two comments regarding this chart. The absolute size of the fixed rate volumes coming up for renewal appears very manageable, and that with property rental increases over the last three to five years and occupancy levels being stable, we have great confidence that our borrowers will continue to be able to afford the incremental interest expense. Lots of noise around office CRE right now, and given what we hear about some markets, rightfully so. The bottom left shows about 92% of our office portfolio is in our markets. The chart also details where we are not located. We like our markets and our borrowers. That said, our appetite for any new office is like zero. The table on the bottom right details the granularity of the portfolio as well as select credit metrics. Our credit officers feel very strongly about the quality of our office portfolio. That said, they are aware of the macro case and are on point with these borrowers and lenders. Now on the fees, and as always, I'll speak to BHG in a few minutes. Excluding BHG, fee revenues were up more than $8.5 million. All that said, we're pleased with the effort of our fee-generating units as we saw somewhat of a rebound from mortgage, a nice increase in service fees, and wealth management. We also have focus on increasing swap fees this year given recent hires. So far, so good. We continue to anticipate that fee revenues excluding VHG and our other equity investments will come in at around a high single low-teens growth rate for 23 over 2022. Link quarter expenses were up primarily due to increased headcount. Merit raises at the beginning of January at a target of around 6%. Beginning of calendar year adjustments for payroll taxes and 401 plan match expenses increased FDIC insurance assessments, and timing differences related to credits and franchise taxes posted in the prior quarter. Additionally, we have taken a hard look at our anticipated results for the year in comparison to our financial plan for 2023, and offsetting the increased length quarter expenses, we are reducing our anticipated incentive payouts to approximately 70% of target awards in the first quarter. The reduced incentive accrual speaks to the variable cost nature of our expense base. Along with deferring projects or slowing our hiring, we feel like we have enough leverage to throttle back on expenses should we need to. Overall, we have a bold plan for this year and are fully energized to seize the opportunities we have in front of us. That said, we have modified our growth plans for this year and have incorporated that into our updated outlook. As it stands, we have lowered our expense guidance and feel like our expense base should result in low to mid-teens growth for 23 over 2022. As the capital tangible book value per common share increased to $46.75 at quarter end, up 18% late quarter annualized from the last quarter. Our capital ratios remain above well capitalized. We lack our tangible common equity ratio, which stands at 8.3%. We believe the actions we've taken to preserve tangible book value and our tangible capital ratio have served us well and have no plans currently to alter up our tier one capital stack via any sort of common or preferred offering. Couple of new things related to this slide. The chart at the bottom of the slide tracks select capital ratios as of the end of December compared to peers given the impact of losses associated with the HTM and ALCI portfolios. We are very pleased with the results given our capital peers to be able to withstand any sort of changes to the capital rules that may be coming our way from either the standard setters or the regulators. Now a few comments about BSE before we look at the outlook for the rest of the year. As the slide indicates, BSG had another great quarter in originations, even though originations did decrease from the prior quarter with BSG's implementation of a tighter credit mark, so fewer of the lower credit score loans were funded in the first quarter. BSG believes last year's bonds, production during 22, would have been reduced by 18% had the same credit standards been in place for all of last year versus credit standards that are in place now in 2023. All of that is related to the significant reduction in the lower tranche approvals, which now are at 0% approval rates. Spreads did expand in the first quarter from the fourth quarter for loans sold in the bank network. First quarter spreads were 9.4% compared to 8.9% in the prior quarter. Thus, coupled with a larger allocation to the auction platform this quarter, gain on sale revenue was up 12.7% in the first quarter compared to the fourth, so that math worked. The accrual for loan substitutions and prepayments increased 5.81% as a more precautionary posture by BHG management has been in effect for the last few quarters. BHG's accrual for loan substitutions and prepayments for its sole loan portfolio increased from $314 million to $350 million, call it a $36 million increase. As the blue bars in the bottom right chart show, recourse losses were stable at 4%, basically consistent with last year. This is a new slide focused on BHG's on-balance sheet lending strategy. As you recall, the Gain on Self program is sourced through BHG's bank network, as depicted on the previous slide. The on-balance sheet strategy is a combination of several funding sources, including securitizations negotiation for blocks of loans to individual banks and other funders, et cetera. The top left chart shows the loans BHG holds for investment versus held for sale to the community banks and thus off-balance sheet, along with the associated allowance for loan losses. Given the macro environment, as we mentioned last quarter, BHG increased its on-balance sheet reserve for loan losses to $178 million, or 5.19% of its own balance sheet loans from 4.59% last quarter, or about a $31 million increase. Of course, CECL is still on the radar for adoption on October 1st. We continue to anticipate the estimated CECL reserve to be in the 8% to 9% range. The bottom left chart shows loan yields for the last several quarters, along with the average funding cost. The yields consider average loan balances and include both HFI and HFS in the denominator. The borrowing rates would include both borrowings collateralized by loans as well as the firm's working lines of credit. With the securitization completed in March, the borrowing rates increased to 5.6% while the loan yields were at 15.4%. Just spreads were at around 9.8%, which is pretty strong in this environment. As usual, the BHG balance sheet and P&L is included in the supplemental information. The bottom right chart reflects net charge-offs, and as you can see, first quarter shows increased charge-offs at around 4.4%. Lastly, as mentioned, BHG did successfully complete its seventh securitization during the week right after the Silicon Valley and Signature Bank failures. To get that accomplished at a reasonable rate was indeed a great success for BHG and reflects the significant appetite for their credit. As mentioned earlier, BHG tightened its credit box, particularly with respect to lower charges of its borrowing base. This will have an impact on both production and spreads going forward. BHG refreshes its credit score monthly, always looking for indications of weakness in its borrowing base. Credit scores were up slightly from the previous quarter, so their borrowers have remained resilient during the cycle thus far. In comparison to other consumer lenders, we believe BAC borrowers remain well compensated, with average borrower earnings being around $293,000 annually. Looking forward, some key points I'd like to reemphasize on several we've been talking about for the last three to four quarters. First, BAC management has responded to the macro environment in a very real way. BSG is and will be increasing reserves based on macroeconomic data at least over the next few quarters. Secondly, BSG has been modifying their credit models towards originating less risky assets. Production volumes are strong, and we believe they have great momentum to maintain production levels equal to those in 2022 or 2023. BSG's new funding alternatives will broaden their already strong liquidity platform, which we believe is unmatched by their peers. Currently, BSG has $1.4 billion in available liquidity to fund this franchise, with more interested inbound calls coming. Lastly, BSG took steps to limit its headcount with job eliminations and eliminating most open positions, as well as other expense reductions. For this quarter, We are reducing our outlook for BSG from basically flat earnings growth this year to somewhere around $180 million to $210 million for the year. We continue to have great confidence in our partners at Bankers Healthcare Group to deliver strong results over the long term. Quickly, again, the usual slide detailing our current financial outlook for 2023. In the interest of time, I won't go through all these again. Suffice to say, there's a lot of macro issues swirling around right now. We have put forth a business case on what we think the Fed will do on rates. Who knows what is going to happen? We believe a recession is likely. How deep or severe, we nor anyone else really knows. What we do know is that our business model is resilient, relationship-based, and in environments like we have today, that matters a lot. Our management team is experienced, and we have tackled economic downturns before. We have great confidence that whatever curveballs get thrown at us, we can handle them and perform in a very outsized way. And with that, I will turn it back over to Terry.