Pinnacle Financial Partners, Inc.

Good morning, everyone, and welcome to the Pinnacle Financial Partners fourth 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'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 that time, please press star 1 on your touchtone phone. Analysts will be given preference during the Q&A. We 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 31st, 2023, and its subsequent 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 am now going to turn the presentation over to Mr. Terry Turner, Pinnacle's President and CEO.

Thank you, Paul. Good morning. We'll begin where we always do, the shareholder value dashboard on a GAAP basis first, then the non-GAAP measures by which we actually run the business. I expect most people on this call are well familiar with the strong correlation between share price performance and three key performance metrics, revenue growth, fully diluted EPS growth, and tangible book value per share accretion. But when I think about how a firm like ours delivers on those three key performance metrics, asset quality is a really critical measure that has to be sustained. Nothing will be more damaging to EPS and tangible book value per share growth than outsized loan losses. And the balance sheet has to grow reliably. Between 70% and 80% of our earnings will always be derived from the margin on our balance sheet volumes. Obviously, there are things that we can and do work on to protect and enhance our margin percentage, but in the end, Without sustainable loan and deposit growth, it'll be difficult to reliably grow revenue, EPS, and tangible book value. The only three metrics I'm familiar with to deliver elevated shareholder returns. And so in this firm, we measure an immense number of performance variables. Variables like net promoter scores, associate retention rates, deposit cost betas, loan yield betas, net interest margin percentages, efficiency ratios, ROAs, and the like. But as far as I know, none of those financial metrics are very highly correlated with share price performance. And so that's why I work so hard to not be distracted by all kinds of interesting but extraneous measures, and at least as it relates to PNFP, why I try to keep investors from being distracted by them either. The goal here is to crystallize for you our performance on those specific measures that I believe truly result in elevated total shareholder returns. Fourth quarter was a whale of a quarter for us, in my opinion. Adjusted revenue growth was strong, adjusted fully diluted EPS growth was strong, and tangible book value per share growth was strong, all with double-digit five-year CAGRs. Asset quality remained strong, and balance sheet growth was extraordinarily strong, which, as I just alluded to, tends to pretend strong ongoing growth in revenue, EPS, and tangible book value. Harold's going to review in detail the quarterly financials in just a minute, including betas and efficiency ratios and so forth. He'll provide our 2025 outlook, which calls for double-digit revenue growth. But my objective here is to help investors focus on how we deliver, how we're executing on our hedgehog strategy, which is our simple, repeatable formula for delivering on those variables that we believe result in outsized shareholder returns. It all begins with attracting talent. We target the best revenue producers in our markets, those that have large and loyal client followings. I believe this is likely Pinnacle's greatest core competence. This has been our primary competence for nearly 25 years now, but we set a new record in 2024 for the number of highly experienced revenue producers we were able to attract. Not only is this at the core of our strategy to grow revenue, EPS and tangible value per share in general, But the fact that we set a new record for hiring revenue producers in 2024 is primarily what fuels our optimism for 2025. Everyone, including me, is hoping for a better operating environment for banks in 2025. But as you can see here, with this kind of longstanding and ongoing market share moving momentum, we have a lot more than just hope to rely on. Here's how it worked for 2024. You can see here that we were able to grow our loans $2.8 billion, or 8.6%, well beyond peers and well beyond what the market would have yielded had we simply relied on economic and market growth trends for the year. But at Pinnacle, we relentlessly build strategic growth initiatives. As an example, new specialties like franchise lending and equipment lending, to name a couple, along with market extensions to large high growth markets like DC and Jacksonville, Florida, and so forth. And of course, we continue to leverage our reputation as a great place to work in order to successfully recruit and hire in our legacy markets. But the combination of revenue producers that we hired over the last three years in both our strategic initiatives and in our legacy markets accounted for more than 100% of our loan growth in 2024. So you can see the power of our continuous recruitment of revenue producers. Again, given that we set a record for revenue producer hires in 2024 and are targeting similar results for 2025, it's easy to understand our calls for optimism regarding ongoing growth in 2025 and beyond. But in the final analysis, going back to the shareholder value dashboard, the end game has to be growth in revenue, growth in EPS, and growth in tangible book value per share. So look at this. This is our ongoing track record for delivering net interest income, far and away the largest component of our revenue in EPS. Our 10-year CAGR for net interest income is a peer-leading 12.7%. The number of times in the last 40 quarters that we failed to deliver year-over-year growth in net interest income is a peer-leading one quarter. Only one quarter in the last 40 that we failed to grow net interest income year-over-year. That compares to a peer median of 11 failures out of 40 quarters to grow net interest income on a year-over-year basis, a peer average of 11. And so we produce positive net interest income growth during each of the three up or down rate cycles since quarter three of 2015. So that's how we deliver outsized total shareholder returns year in and year out. We focus on revenue growth. fully diluted EPS growth, and tangible book value for share growth. It all begins with our unique ability to attract revenue producers with large and loyal client followings, which produce reliable and outsized balance sheet growth that yields strong and reliable net interest income growth quarter in and quarter out. So with that as a backdrop, Harold, why don't you walk us through the fourth quarter in greater detail and how that sets us up for further growth in 2025. Thanks, Terry. Good morning, everybody. We will start with loans. End of period loans increased by 13.7% late quarter annualized. This was better than we thought at the beginning of the quarter and provides us a strong running start going into 2025. We're introducing our loan growth expectations for 2025 with a range of 8% to 11% end of period growth. It remains an uncertain environment as to rates, but with the yield curve trending more positive and the election now decided, Our belief is that we enter 2025 with even more optimism than we've had in several years and that our clients are gaining more confidence about growth. As to our end of period rates, SOFR and prime rates are reflective of the Fed decreases. But as you know, one of the keys to our financial plan all year long has been increasing pricing on the renewal of fixed rate credit. As the top right slide indicates, we're expecting slightly less than $1 billion in cash flows from our fixed-rate loan portfolio coming to us in the first quarter of 2025 with an average yield of around 5.06. We believe the yield left on these volumes of nearly 150 to 200 basis points is a reasonable assumption and is a key component to our near-term net interest growth. Deposit growth was again a real bright spot for us in the fourth quarter. as we increased deposits by $1.9 billion in the fourth quarter, one of the strongest growth quarters we've ever experienced. There was some seasonality in our fourth quarter growth, but as Terry mentioned, also contributing to the outside growth were our investments and deposit verticals, as well as the work of our new associates in several of our newer markets. Another bright spot is that core deposits are up year-over-year by 13%, while non-core deposits are essentially flat from last December. As to 2025, we're introducing a growth rate for total deposits of 7% to 10% for 2025 over 2024. We believe this is reasonable as we balance all of deposit growth with a keen eye on pricing. We are very pleased with how deposit pricing has performed over the last few months as our relationship managers have been diligent in making sure that we're able to reprice our deposit as quickly as we can to offset the impact of a lower rate environment to our earning assets. So far, our deposit beta has outperformed our loan beta. The chart on the top right of the slide shows that during the upgrade cycle from the end of 2021 to the end of June 2024, our loan rates increased with a 59% beta, while over the last six months or so, as rates have come down, our loan rates have decreased with a 45% beta. Our fixed rate loans have a negative beta, which obviously helps slow the pace of these loan rate decreases. This is where the yield curve is critical. If it steepens, those fixed rate renewals become even more helpful. That said, what I believe most are interested in is deposit pricing. We are on pace at present to match our upgrade deposit beta as we are pacing at around 58% so far. We believe we can continue to manage our deposit rates down over the next several months, even if we should not experience any near-term rate decreases. We will continue to pursue reduced rates on accounts where We believe rates are out of market and look to improve our deposit rates given our liquidity posture, which we believe is very strong at present. As expected, we're pleased that our NEM held at 3.22%. Our outlook for the first quarter of 2025 is that we believe our NEM and net interest income will be flattish after we consider the impact of fewer calendar days in the first quarter of 2025. As to 2025, we believe our net interest income growth We'll approximate a range of 11% to 13%. The yield curve will have significant influence on how all that plays out in 2025, but so far call us optimistic about our prospects. So what if there's more rate cuts? We think that's probably good for our NIL and our net interest income results. But in summary, as Terry discussed earlier, we have enormous market share momentum that should result in net interest income growth. With the national elections now determined and assuming the macro environment can maintain a more traditional yield curve and commercial clients come back with increased energy to grow, we believe all point to a better operating environment for a bank like ours. We're again presenting our traditional credit metrics. Our net charge-offs were consistent with 3Q and brought our net charge-offs to around 23 basis points for the year. For 2025, The current view of our loan portfolio is that net charge-offs for 2025 should come in between 16 and 20 basis points. That's based on recent scrubs of our non-performers classified and weaker consumer credits by all of our credit teams. All in, no real change in how we feel about credit as we head into the first quarter of 2025. Now, fees, which has been a real bright spot in 2024, with adjusted fees up 15% year-over-year. Excluding the impact of BHG, fee revenues were basically flat quarter over quarter. Our wealth management units have had a strong year and fully expect the efforts of our wealth management professionals will have a strong year in 2025. The fees associated with our other core banking activities are also strong as we head into the new year. As to our outlook for 2025, including BHG, we believe a reasonable fee growth guide for our firm is around 8% to 10% this year. Expenses came in slightly more than where we thought, primarily due to incentive costs. Given we are reporting stronger earnings here in the fourth quarter, this impacted our incentive plans. As to the math, we increased our incentive accrual by about $3 million in the fourth quarter to get to an approximate 98% of target award. We had anticipated a 90% target award last quarter. With our fourth quarter fully diluted EPS coming in better than anticipated, By about six to seven cents, the tiering structure of our plan required us to allocate more to the incentive accrual. Additionally, our hiring was again robust in the fourth quarter with 35 new revenue producers for a total of 161 added for the full year. Going into the first quarter, our recruiting pipeline continues to be strong across the franchise. We are introducing our 2025 expense guide at a low of $1.13 billion to a high of $1.15 billion. Our incentives will always influence our ultimate expense result. We are anticipating a target payout currently in 2025. So as usual, if we are not achieving our plan, then our incentive cost, as noted, will be lower. If we are overachieving our plan, then our expense burden will need to be more, but so will EPS. Assuming hiring is consistent throughout 2025, And given we are awarding an almost 4% merit raise to our current associate base, our quarterly run rate for expenses should run fairly consistent with our expense run rates from 2024.

Now to BHG.