Pinnacle Financial Partners, Inc.

Good morning, everyone, and welcome to the Pinnacle Financial Partners' second quarter 2025 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, 2024, 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, Matt. Everyone who's been on one of these calls with us over the last decade or more knows that we begin every one of them with our shareholder value dashboard. Gap measures first, then the non-gap measures, which are most reflective of how we manage this firm. And specifically, I'm always going to comment on revenue growth, EPS growth, and tangible book value for share growth, because our analysis is that these three measures are the most highly correlated with share price performance. I believe that our relentless focus on these three simple metrics accounts for the extraordinary total shareholder return we've produced over more than two decades now. Other metrics like net interest margin, cost of funds, deposit betas, efficiency ratios are all interesting, but in my opinion, they're not highly correlated with total shareholder returns. And so that's why we're so dogged in our pursuit of revenue, EPS, and tangible book value for share growth. Here you can see the extraordinary reliability by quarter over the last four and a half years with second quarter being more of the same. In 2Q25, revenue was up 15.1% over the same quarter last year. Adjusted EPS was up 22.7% over the same quarter last year. And tangible book value per share was up 10.9% over the same quarter last year. And as you can see on this slide, we've produced double-digit CAGRs over the last decade on those same three metrics, which is meaningfully outsized versus the peers. But to peel the onion back just a little on how we produce such reliable growth, since between 75 and 80% of our revenues are spread revenues, as far as I can see, you're going to have to figure out how to sustainably grow net interest income at a double-digit pace. which we've done over the long term, as you can see on the left. And our way of doing that is to reliably grow our earning assets at a double-digit pace, which we've done over the long term, as you can see in the center. And then the most important ingredient involved is to be able to sustainably grow core deposits fast enough to effectively fund that double-digit earning asset growth, which we've done over the long term, as you can see on the right. So having looked at it quarterly over the last four and a half years, and then looking at the CAGRs over the last decade, I thought it might also be instructive to look at it in the current very challenging rate cycle. Since 2Q23, we've lived through a disastrous rate environment with an inverted yield curve. And as you can see on the leftmost chart, peers have been unable to grow net interest income while we grew 7%. It's been a time of slow economic growth, leading to very limited loan growth over the last couple of years. And so you can see in the center chart, peers have been unable to grow their earning assets, while our model produced double-digit earning asset growth. And I think perhaps most impressively, despite the Fed shrinking the money supply, making it really difficult for peers to produce meaningful deposit growth, we produced 13% core deposit growth, roughly five times the peer median. Remember those two double-digit balance sheet growth metrics, 10% earning asset growth and 13% core deposit growth, even in a difficult operating environment when peers struggle to grow. Now, I'm always cautious when I'm telling the story about our ability to produce such rapid and reliable balance sheet growth. I'll never forget Dick Kovacevic, longtime CEO at Wells Fargo, saying, if it's growing like a weed, it is one. And so I want to peel back another layer of the onion for you to create clarity about how we do it, and not just how we do it, but why it's the safest way to grow that I'm aware of. Said simply, ours is a market share takeaway strategy. In general, we target the largest market share leaders in our footprint, which happily are the most vulnerable competitors in our footprint, and capitalize on the very difficult experience that they create for both their associates and their clients. In my opinion, we've become the employer choice for many of those revenue producers and our largest competitors. The recruiting mechanism is simply to rely on referrals from our existing associates to certify which candidates we should hire based on, number one, their personal knowledge that the candidate is really good at what they do, and number two, that they'll fit in here at our firm. The average experience of the associates we hire when we hire them is 18 years. So if you think through that idea right there, generally we're hiring revenue producers with nearly two decades of experience. And what that means is they can move their book quickly, which produces both rapid and reliable growth. And they intentionally leave their bad credits behind, which in my view produces outstanding asset quality. On the left, look at the rate at which we add these highly experienced revenue producers, a 12% CAGR. That sounds a lot like the earning asset and core deposit CAGRs we just looked at on the last slide. I'm working hard to connect those two dots for you, hiring revenue producers and both balance sheet and fee income growth. On the right slide, you can see the power of that ability to attract experienced talent from these larger competitors. The third quarter of 2024 was the last time I gave a more detailed look at how the balance sheet books bill on average. We've also included that information on slide 49 in the supplemental slides this quarter. But using those average production statistics for just our new relationship managers who produce balance sheet growth over an extended period, the relationship managers hired from 2020 through 2024 should yield an approximate $19 billion in organic asset growth through 2029. And that growth in general is not really dependent on economic growth or rate cycles, as you saw in the previous slides. It's simply the consolidation of the books of business held by those relationship managers that we have already onboarded through 2024 from their previous employer to Pinnacle. And don't miss, all of that growth is produced by folks who are already in our expense run rates. And so hopefully that creates a little more clarity around how we have historically produced reliable, sustainable, and outsized growth even when peers are struggling as a result of the difficult operating environment. If you can bear with me just one more minute, let me peel the onion back still one more layer on why and how the growth is so reliable and sustainable. It sounds pretty simple, right? Just go out and start hiring a bunch of revenue producers. But it's not as easy as just hiring people. It's critical to hire the right people, which sometimes can be tricky. But because we don't use headhunters, because we generally don't hire folks that are circulating resumes. And instead, we rely on our existing associates who make referrals for candidates that they've worked with at other banks. We're able to literally attract the best talent. I think, you know, when I think about that idea there, there's almost, I won't say no possibility, but a very minimal possibility of making a mistake when you use that hiring formula. So, on the left, you're looking at Greenwich data for businesses with sales from 1 million to 500 million in our eight-state footprint. Greenwich assesses relationship manager quality scores across seven metrics. In the, here in the blue bars, you're looking at the range of ratings for the top 10 banks in our market for each measure. The white line within each of those blue bars represents the median score for the 10 banks. And the orange dot is where Pinnacle ranks on each of those measures within the range. And so, as you can see, we haven't just hired people. We have literally hired the best. And now to the most important part of the whole formula. On the right, you can see that not only have we hired the best, but we've also done the really hard work to build and operate a service model that literally yields a banking experience second to none. Our belief has always been as long as you can routinely attract large volumes of the best talent, and then arm them with a differentiated service level that clients rave about, which ours do, as evidenced by our 83 net promoter score, then you can reliably and sustainably grow your revenue, your EPS, and your tangible book value per share. So, with that, let me turn it over to Harold to quickly highlight the key elements of our performance in the second quarter, which is just the natural extension of the long-term execution of this differentiated model.

Thanks, Terry. Good morning, everybody. We will again start with loans. End-of-period loans increased by 10.7% late quarter annualized, which was better than we thought at the beginning of the quarter. We continue to lean on our new markets and new relationship managers to provide the punch for our loan growth. Again, as we've said many times before, our loan growth is not so much dependent on economic tailwinds. It's about all these great bankers we've hired and the movement of their relationships to us. There was a lot of macro uncertainty last time, and there remains a lot this time around. Our pipelines continue to remain in great shape. Given second quarter results in our pipelines, we've adjusted the low end of our loan outlook range to consider now 9% to 11% growth this year. The yield curve continues to bounce around and continues to do so as we begin the third quarter. But in the end, we're pleased with how our loan rates performed during the second quarter. Our fixed rate loan repricing came in at 6.39% for the quarter, just shy of our targeted 6.5% to 7% range. Although the lift from fixed rate repricing is not as opportunistic as it once was, we still anticipate continued lift in fixed rate loan rates throughout this year. Absent a surprise rate decrease by the Fed, our loan yield estimate for the third quarter is that rates are flat to perhaps slightly up from here. Deposit growth came in at a 4.7% linked quarter annualized growth rate. This was less than we'd anticipated at the start of the quarter, but given the strength of our first quarter growth, and as we mentioned last time, the impact of second quarter tax payments, we are pleased with the result. We typically experience more deposit growth in the second half of the year than the first half, and with our new markets and new relationship managers, this should provide for another strong year of deposit growth for us. As a result, We're maintaining our estimated growth rate for total deposits at 7% to 10% for 2025. We're also very pleased with how deposit pricing has performed thus far and how both our deposit and loan betas have performed through the current rate cycle. For both loan and deposit pricing, we don't see a lot of change as we head into the third quarter. We anticipated a flat to slightly up NEM for the second quarter, so we're pleased that our NEM finished up two basis points at 3.23%. Our outlook for the third quarter of 2025 is the same, that our NEM will remain flattish with some upward bias. As to net interest income, we anticipated a nice bounce in the second quarter, so we're pleased with better than 16% linked quarter annualized growth. As to 2025, we have adjusted the lower end and thus tightened our estimated growth range for net interest income to now believing our net interest income growth Outlook will approximate a range of 12% to 13%. Any surprise rate cuts in the slope of the yield curve will have influence on how all this plays out for the remainder of the year, but we remain optimistic. As to rate cuts, we've modeled out many scenarios, and again, Phil, we're in pretty good shape to manage through most rate forecasts that are talked about in the markets today. We continue to delay rate cuts, now forecasting only one rate cut in October. We do believe more rate cuts are helpful than no cuts, But given the timing, we don't believe whatever happens will have a substantial impact on our 2025 results either way. As to credit, our net charge-offs increased to 20 basis points in the second quarter from 16 basis points in the first quarter with almost $7 million of the second quarter charge-offs arising from relationships where we had set aside reserves in prior quarters. For 2025, the current view of our charge off outlook is that net charge off for 2025 should come in around 18 to 20 basis points with the only change from our prior estimate being up two basis points on the lower end of the range and no change to the high end of the estimated range. With the charge offs of previously reserved for loans, our reserve did decrease two basis points this quarter. We still believe our reserves will remain at or near these levels for the remainder of 2025. if economic conditions don't materially deteriorate from here. We modified our estimated 2025 outlook for our provision to average loans to 24 to 25 basis points as we kept the low end of the range consistent but lowered the upper end of the range. This is considering use of a 70% baseline economic forecast and a 30% more pessimistic forecast going forward. Merely as a reference point, if we were to use 100% pessimistic we've estimated that we would have needed about $35 million in increased reserves. As to BHG, consistent with the last quarter, all of the usual slides are in the supplementals for your reference. BHG had a strong second quarter, providing fee revenues to us of over $26 million. Production was again strong in the second quarter, and loans sold in their community bank network were at the largest spread since 2022. Credit was consistent with the prior quarter, and vintage loss curves also seemed to mark continued improvement in the quality of the book. We and BHG are both comfortable in raising our earnings estimate for 2025 from 20% growth to now approximately 40% growth over the result reported in 2024. Several factors are contributing to this decision. Lower operating costs this year, better credit performance than anticipated, and a stronger production lead flow, all of which point to what should be a much stronger year for bankers' healthcare. Lastly, as to our guide for 2025, I've already mentioned much of the information on the slide previously. Again, the investments we've made in our new markets and our hiring success are the building blocks we will lean into in order to position us for top quartile results amongst our peers. As to our outlook for fees and expenses, we continue to be pleased in our fee line. Banking fees and wealth management are performing well. Along with strength in core banking fees and BHG's estimated growth this year, we are comfortable increasing our guidance from 8% to 10% growth to now 12% to 15% growth in fees this year. As to expenses, our prior outlook reflected a target award for our associates, which now, given our more positive outlook, we are increasing to an anticipated 115% of target payout as of June 30th. Obviously, our goal is to maximize our award and increase it to 125% max payout, but we can't do that unless we achieve the results required to warrant the maximum payout. And as always, we will decrease the incentive award if our earnings fail to support increased incentive costs. Through all of that, we are modifying our total expense outlook to now a range of $1.145 billion to $1.155 billion for estimated expenses for this year. As the tariff discussion plays out, as the yield curve and rate discussions play out, we are hopeful that more clarity will come forward. But as it sits today, we are more positive today and remain very optimistic about our prospects for this year and are confident that 2025 should be another strong year for Pinnacle. With that, I'll send it back to Matt for Q&A.