Pinnacle Financial Partners, Inc.

Good morning, everyone, and welcome to the Pinnacle Financial Partners third quarter 2024 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 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 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 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, 2023, 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 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, Matthew, and thanks to all of you for joining us this morning. I expect most of you know that I'm going to begin every earnings call with this shareholder value dashboard. Gap measures first, but quickly go to the non-gap measures because personally I find that the non-gap measures provide a clearer picture of the job we're doing for shareholders. You can see third quarter was a fabulous quarter. Balance sheet volumes all grew nicely with loans up 6% linked quarter annualized. Earning assets up 12% linked quarter annualized, and core deposits up 9% annualized. Asset quality remains very strong, and because they've historically been the most highly correlated with long-term total shareholder returns, the three most important metrics for me are revenue growth, EPS growth, and tangible book value accretion all up nicely again this quarter. Let me point out the persistent growth in those three critical measures and the double-digit five-year CAGRs for all three. Double-digit five-year CAGRs for the three most highly correlated metrics for total shareholder return. Obviously, I'm proud of the long-term consistent trajectory of those three measures, but I know that even after 24 years of sustained outsized growth, there are always some that remain fearful that somehow we won't be able to propel the culture as we grow. that the law of large numbers is going to overtake us, or that somehow those results are primarily dependent upon me or on my partner, Rob McCabe, or some key man that won't always be here, as opposed to a simple, consistent, repeatable model. Third quarter was another great quarter of outsized growth for our firm. But before we review those results in detail, I want to take a minute and make sure everybody understands exactly how that growth comes about and why we've been able to consistently deliver it Obviously, the fact that we serve major markets in the southeast is huge. Census Bureau numbers paint a vivid picture of the tailwind that exists for banks in the southeast. It'll be very hard for banks in the shrinking northeast, west, and midwest markets to match our growth. But more important than the size and growth dynamics is the competitive landscape. Here we're plotting the share gains and losses. for us and the other market share leaders in Tennessee's four urban markets over the last decade. We're blessed to do business in markets where we consistently take share from vulnerable competitors who've dominated the market here before. We entered the North Carolina, South Carolina, and Virginia markets in 2017 with our acquisition of BNC. We specifically targeted the Carolina and Virginia markets to some extent because of the size and growth dynamics But more importantly, because we wanted to compete against those same vulnerable competitors with whom we had successfully competed in Tennessee. So you can see here that the share is concentrated among those same vulnerable banks, and that for the most part, they've established a track record of consistently giving it up, which is why the competitive landscape is the most important contributor to our ongoing growth, even more than such impressive size and growth dynamics. Here's what that share climb looked like in our first market, Nashville, Tennessee, according to the FDIC deposit share statistics. Now, firm-wide, assets are over $50 billion, and you can see that we have a lead share position in Nashville with roughly 50% more shares than our next closest competitor, an astounding position. As both of you know, we're a commercially-focused bank, so this is the commercial market share data according to Greenwich for businesses with sales from $1 million to $500 million in Nashville. There in the middle, you can see that we have a 30% lead bank share, more than 4x our next closest competitor. We've been executing this same playbook across the state of Tennessee, first with a Novo start in Knoxville back in 2007, followed by acquisitions in Chattanooga and Memphis, both in 2015. you can see the remarkably similar growth in all three markets. In 2015, following our acquisition in Memphis, we were number 13 on the FDIC chart. In the most recently released FDIC data, we climbed to number three. In Chattanooga, we were in the fourth position in terms of FDIC share following our acquisition in 2015. Today, we're number two, rapidly closing on number one. And in Knoxville, From the start of 2007, we're now number four on the FDIC chart, a similar position to where we were at the same tenure in Nashville. And like Nashville, we're number one in terms of the commercial market share as measured by Greenwich. As I mentioned a minute ago, we acquired BNC in 2017. Here you can see the dramatic transition we made in the Carolinas and Virginia with a 10% loan CAGR and a 14% deposit CAGR since the acquisition. Importantly, on the right, you can see the growth in commercial deposits when we apply a pinnacle simple, consistent, and repeatable model. Just like the urban markets of Tennessee, we're executing the same playbook across the Carolinas and Virginia. And in 2019, we began a number of de novo market extensions in the large southeastern markets like Atlanta, D.C., and Jacksonville, Florida. all with similar growth dynamics and a competitive landscape to that in Nashville. I've already demonstrated the trajectory that we had in Nashville over our 24-year history there, where we are still taking share, by the way. You can see the largest markets on the left, that the deposit growth is even more rapid than it was in the startup period in Nashville. And even some of the smaller markets on the right, using this simple, consistent, repeatable model, it appears we're replicating our startup pace in Nashville there as well. So yes, we have the added benefit of operating in some of the best markets in the U.S. Frankly, it's even more important that the shareholders in those strong southeastern markets are vulnerable, offering us a once-in-a-generation opportunity. But the hedgehog strategy here is to attract and retain the best bankers in the market, leveraging our award-winning work environment, using our differentiated recruitment model. We create a laser-like focus on revenue and EPS growth for every single non-commissioned associate in our firm using our win-together-lose-together incentive plan. And then for roughly 24 years, virtually every year, we've targeted top quartile revenue and EPS growth in order for management and associates to earn their incentive at Target. Think about that, an ability to continually attract the best bankers in the market and aligning nearly all roughly 3,500 associates to produce top quartile revenue and EPS growth with one simple annual cash incentive plan. It's simple, consistent, and repeatable, not luck or happenstance. This nationally recognized culture continues to propel itself, with Pinnacle just listed last quarter as Fortune's third best place to work in America among finance and insurance firms, and it's pervasive. In most markets, we are perennially the best place to work, with Memphis and Knoxville repeating again just last quarter. As investors, I know most bankers will try to convince you that their people are the best, that their people are their most valuable asset. So I'm not going to try to convince you that. I'm going to let our clients do that. On the left, this is how business clients in our eight-state footprint rate our relationship managers. and how they relate those vulnerable banks with the largest share in these southeastern markets. We literally have amassed the best talent in the southeast from a business client's perspective, according to Greenwich. As you would expect, highly valued relationship managers produce better financial outcomes over the long term. On the right, you can see how our associates compared our primary southeastern competitors in terms of PPNR per associate, a critical test of effectiveness. Attracting the best talent has enabled us to build a national reputation for an unmatched client experience, both among consumers and businesses, both in terms of people and systems, which has resulted in peer-leading long-term value creation. It's about our ability to consistently and repeatedly grow earnings. You can see on the top right, TSR leadership is not a new phenomenon. It's true across 5, 10, 15, and 20-year timeframes. And if you look at the EPS growth across the bottom of that chart, Our earnings growth has substantially outpaced peers for a decade and nobody's close. And so to put a bow on all that, in this one chart, you see our unusual ability to consistently attract and retain market best talent and their ability over time to consolidate their clients and associated loan and deposit volumes. We validated this model any number of times over the years. Averages are dangerous because nobody's average. Everyone's above or below average. But on average, it takes relationship managers about five years to consolidate their books. It generally comes in on a roughly straight line basis. And when consolidated, it's roughly a self-funded book in the $65 million range on both sides of the balance sheet. You can see on the left that we currently have a total of 235 relationship managers that are at various stages of consolidation within that five-year consolidation startup period. And on the right, you see the extraordinary loan and deposit volumes that we believe we can land on our balance sheet just in 25 and 26 if these cohorts and relationship managers continue the consolidation of their books over the next two years at the average pace. And I've already told you it's our expectation that we'll layer in another large cohort next year and the year after that and so on, producing incrementally laddered volumes. It's a simple, consistent, repeatable model. And so as Harold walks you through our third quarter results, hopefully you'll be able to see these factors that underlie not only our historical success, but our third quarter success and our ongoing success for that matter. That our culture continues to strengthen as we grow, not diminish. And that this persistent growth model is not dependent upon me or other key leaders. It's not dependent on a change of administrations. It's not even meaningfully dependent on a more vibrant economy, although a vibrant economy with strong loan demand would very likely enhance our growth. Our remarkably persistent growth, even in difficult times, is the result of this very simple, consistent, and repeatable model. So, Harold, walk us through the quarter in greater detail.

Thanks, Terry. Good morning, everyone. We will start with loans, which increased by $539 million during the quarter, a 6.4% length quarter annualized. When we consider just C&I and owner-occupied commercial real estate, our loan growth in these two critical segments was approximately $706 million, or 17% late quarter annualized. We were modifying our growth expectations for 2024 to now reflect a range of 7% to 8% growth. We were obviously pleased with loan growth this year. It's been an uncertain environment all year long, and there is quite a bit of uncertainty currently. But with the election coming up and what appears to be the initiation of a down rate cycle, both of these matters tend to point to somewhat less uncertainty in the near future, which hopefully creates confidence and brings entrepreneurs back to the borrowing table. As to our end-of-period rates, particularly SOFR-based loans, end-of-period rates are beginning to reflect with that decrease by quarter end. More on loan and deposit betas in just a second. One of the keys to our financial plan all year long has been increasing pricing on the renewal of fixed rate loans. As the top right slide indicates, we're expecting about a billion dollars in cash flows for our fixed rate loan portfolio during the fourth quarter of this year, with an average yield of around 5.1%. We believe yield lift of nearly 200 basis points is reasonable as these cash flows come to us during the fourth quarter. Our competitive advantage is that approximately 22% of our revenue producers have been with us less than two years, all of whom are ready to continue to move market share, which bodes well for us as we begin our planning processes for 2025. We will continue to lean on our new lenders as we enter the fourth quarter and head into 2025. Deposit growth has been a real bright spot for us all year. Excluding brokerage, we increased deposits by $887 million in the third quarter. We're also pleased with non-interest-bearing deposits and their performance in the third quarter, again, signaling that we are finally beginning to see volume growth for DDA accounts. Given our third quarter deposit growth, we are maintaining our deposit volume forecast with somewhat more specificity around a 7% to 9% growth estimate. We continue to move deposits into the indexed deposit product categories. Almost 50% of our deposits are now indexed to Fed Funds, As we prepare for a downrange environment, this should be helpful. As we have said before, we continue to like our competitive position as to deposit rates and believe it gives us more flexibility should our current rate forecast materialize, which includes two additional 25 basis point rate cuts in the fourth quarter. We've included some information on betas thus far for loans and deposits. We are very pleased with how loan and deposit pricing has performed over the last few weeks, as our relationship managers have been diligent and making sure that we're able to reprice our deposits as quickly as we can to offset the impact of a lower rate environment on our earning assets. So far, our deposit beta has outperformed our loan beta, and we remain optimistic that we can continue to mitigate the impact of rate cuts by the Fed to both our net interest margin and, more importantly, our net interest income as we move through the next several quarters. As expected, with the investment security restructuring late last quarter, We did anticipate NIM expansion and are pleased with the 3.22% we posted this quarter. Our outlook for the fourth quarter is that we believe our NIM will reflash after we consider the incremental rate cuts. We are modifying our outlook for net interest income growth for 2024 to some 8% growth for 2024. We know everyone is thinking about 2025, net interest income as we are. The yield curve will have a significant influence on how all that plays out next year, so we are running a lot of rate scenarios currently. We believe all banks perform better with a traditional yield curve, and I believe all of us are optimistic that the risks of the existing inverted curve continuing are, in fact, decreasing. A traditional curve, commercial clients coming back with increased energy to borrow again, and national elections in the rearview mirror, we believe all point to a better operating environment for a growth bank like ours. We're again presenting our traditional credit metrics. We mentioned one $9 million charge-off of a C&I credit in the press release last night. We performed an in-depth review of that credit during the quarter, electing to charge off a portion of the credit and place the remainder on non-accrual. Resolution we hope will occur next year as the company seeks a permanent takeout partner. As to our outlook for charge-offs, we're narrowing our guidance to a range of 21 to 23 basis points for 2024, We are also narrowing our guidance around provisioning in relation to average loans to a range of 32 to 35 basis points. No real change in how we feel about credit as we head into the fourth quarter or 2025 for that matter. Our charts for past dues, classified loans, and potential problem loans indicate we are performing near historic lows, which should be a meaningful indicator as to where we believe credit is currently. We have no reason to believe this won't continue to perform well as we head into the fourth quarter as well as into 2025. More about commercial real estate, and again, in the supplementals, is more information on commercial real estate primarily from multifamily, industrial, and all of us. As we noted in the press release, we have now successfully dropped the lower target of 70% for construction loans to total risk-based capital at September 30th, which was sooner than we thought last quarter. Our appetite has changed modestly now that we are below the 70% threshold. That said, and let me stress, any new commitments to this space continue to prioritize strategic compliant relationships only, and that we will proceed cautiously. We anticipate that our construction concentration will fall further over the next several quarters into the 50% range, and we don't expect to see any incremental lift in the concentration until mid to late 2025. Beyond all that, we are currently tracking to achieve our 225% target for total non-owner-occupied commercial real estate multifamily and construction in mid-2025. Candidly, we have always admired our commercial real estate book. The last couple of years have been a rollercoaster of negative media attention around CRE and the impact on regional banks. I know many of you know this, for Pinnacle, our house limits are very modest, we pride ourselves on a granular book, Our largest ticket sizes for our bank are conservative in comparison to what we hear from other franchises. Thus far for Pinnacle, our commercial real estate portfolio continues to perform very well, and we expect that to continue. Now to fees. And as always, I'll speak to BSG in a few minutes. Excluding the loss on the sales securities in the second quarter, fee revenues were up 8.3% between 3Q and 2Q. Our wealth management units have had a strong year and fully expect the efforts of our wealth management professionals will continue into the fourth quarter and into 2025. The fees associated with deposits are also doing quite well with commercial account analysis leading the way. As to run rates in comparison to the second quarter, during 3Q, we realized an increase of about $1.5 million from the sale of fixed assets and approximately $3 million and increased fair value adjustments from several of our other equity investments. As to our outlook for 2024, we're again raising guidance for our fee revenues, excluding BSG, from 14 to 17 percent to a range of 23 to 26 percent growth over last year, which seems reasonable given the performance of several of our primary business lines this year. Expenses came in slightly more than where we thought they would be as of the end of the second quarter. Importantly, we are increasing our incentive target to a 90% target payout for fiscal year 2024. Again, we're raising our target, which points to our belief 2024 will be better than we thought as of the end of the last quarter. As you know, direct linkage between our financial performance and our incentive plans are correlated, and thus we can't raise one without believing the other will move up as well. Additionally, our hiring was really strong in the third quarter with 37 new revenue producers compared to 89 for the first six months of the year. Going into the fourth quarter, our recruiting pipelines remain strong across the franchise. Lending related expenses are up quarter of a quarter primarily due to a $2.1 million new recurring charge related to the loss protection fee from the credit default swap we executed in the second quarter. As we look to the fourth quarter, we currently estimate our totalized expense level for 4Q should approximate the third quarter level. Now to BHG, and we will be quick. As the slide indicates, originations picked up again in the third quarter with originations approaching $1 billion. As to the fourth quarter, BHG production should be somewhat consistent with the third quarter. As to placements, total placements were less than originations, which was consistent with the second quarter. BHG continues to build inventory in order to fill larger orders in the fourth quarter and as we enter 2025. Also, there remains great demand for BHG paper, both from the auction platform and the institutional buyers. More than 600 unique bank buyers acquired loans over the 12 months, and the number of banks eligible to purchase loans from BHG continues to grow. As to spreads, auction platform spreads increased to 9.2% in the third quarter. Balance sheet spreads have remained fairly consistent with the prior quarter. All in, BHG believes spreads are holding in what has been a higher rate environment. DSG believes as rates decrease, that would be good news for them from both a volume and a rate perspective. Off-balance sheet substitution losses amounted to 4.2% in the third quarter, up from 3.4% in the second. As a result, DSG increased reserves for off-balance sheet losses to 6.2%. The good news is that past dues are trending in the right direction, which hopefully is a sign of a better credit experience in the not-so-distant future. On-balance sheet losses were up modestly to 7.4% in 3Q from 2Q. Again, even though the percentage of on-balance sheet losses increased in the third quarter, the actual dollar amount for on-balance sheet losses decreased. A similar circumstance has occurred in the prior two quarters, as balances fell faster than actual losses, which is why the percentage loss was higher. Our BHG fees amounted to approximately $16.4 million in the third quarter, and we expect the fourth quarter to approximate that amount. Our concluding thoughts on BHG this time around are that their management is focused on building a sustainable franchise, and as such, pushing as much product through the pipe is not as important as maintaining and building an even stronger balance sheet. We believe BHG remains one of the most profitable and dynamic fintech models in the country, And with an even stronger balance sheet, BHE should be an even stronger competitor in the future. Now to our outlook for the remainder of 2024. Again, we've raised our expectations in some cases and lowered our expectations in others. In the end, we feel more confident about our 2024 outlook given our strong performance in the third quarter. All of this should be a good sign for 2025. We've started our annual planning effort for next year. Our financial goals will be the same, top quartile revenue and top quartile earnings growth. The investments we've made in our new markets and our hiring success are the building blocks we will lean into as we build our 2025 plan. As I mentioned earlier, if we can get beyond an inverted yield curve and our owner-manager clients gain more confidence and start borrowing again for growth, I'm confident 2025 will be another strong year for Pentium. We've been through a lot of information, so I don't want to spend a whole lot of time wrapping up as we move into Q&A. We are very fortunate that we operate in what we believe are the best banking markets in the United States and in markets where we believe our large-cap competitors are vulnerable and giving up market share as they shy away from relationship-based banking and the impact that has on delivering a differentiated level of service. We have also, over the years, become an employer of choice. Our recruiting efforts have helped tremendously by the success of our brand in all of our markets. No longer do our market leaders have to spend hours introducing our brand to a prospective associate, as brand awareness has already found its way into our markets in an outside of the way. Our best place to work and work environment results resonate among not only our associates, but also potential recruits, and that translates to a very successful client experience and ultimately to our shareholders. In the end, we are focused on earnings growth, revenue growth, and tangible book value growth. Top core, top performance is the goal year in and year out. We believe if we consistently hit these financial goals, as well as our strategic goals, our shareholders will be rewarded. And Matt, with that, we will open up for Q&A.