Pinnacle Financial Partners, Inc. Q2 FY2024 earnings call

Management Statement and Operational Highlights

• Total Shareholder Return: Focus on GAAP and non-GAAP metrics, with non-GAAP measures providing more clarity. Treasury team repositioned securities book to improve ongoing performance.
• Balance Sheet Growth: Client deposits grew despite market challenges, and CRE loans were reduced. New markets like Atlanta showed strong loan growth and recruiting.
• Asset Quality: Net charge-offs ticked up to 27 basis points but guidance for 2024 remains 20-25 basis points. Provisioning guidance adjusted based on loan growth.
• Fees: Core fee revenues up 6.8% quarter-over-quarter, with wealth management and service charges performing well. Raising guidance for core fee revenues to 14-17%.
• Hiring: Strong recruiting in Q2 with 52 new revenue producers, and pipelines remain strong.

Segment Performance

• Loans: Loan growth was less than anticipated, with a revised full-year loan growth outlook to 79%. Fixed rate loan originations were lower in Q2, but efforts to increase repricing on renewals are ongoing. CRE loans contracted by $76 million during the quarter.
• Deposits: Excluding broker deposits, client deposits increased by over $700 million. About 40% of deposits are now indexed to Fed funds. Deposit growth forecast for 2024 is mid- to high-single digits, with reduced reliance on wholesale deposits.
• Securities Book: Treasury team repositioned the securities book, resulting in a loss on sale but improved ongoing revenue and earnings run rates.
• BHG (Business Banking Group): Originations picked up in Q2 but production targets for 2024 are lower due to higher for longer rates and tighter credit. Placements were less than originations, and reserves were adjusted.

Guidance

• Net Interest Income: Maintaining guidance despite lower loan growth, with benefit from balance sheet repositioning.
• Charge-offs: Maintaining 20-25 basis points guidance.
• Provision: Less than prior quarter due to lower loan production.
• Core Fee Income: Expected to expand, offsetting some reduction from BHG.
• Expenses: Slightly higher due to increased incentives and hiring success.
• 2025 Planning: Annual planning for 2025 with top quartile revenue and earnings growth goals.

Risks

• Interest Rate Fluctuations: Impact on deposit and loan rates, affecting margin and earnings.
• Credit Risk: Potential for higher charge-offs if economic conditions deteriorate.
• Market Volatility: Impact on securities book repositioning and overall financial performance.
• BHG Performance: Uncertainty in BHG's production and credit losses, affecting overall earnings.

Question and Answer

• Q: Brett Rabatin on legacy markets growth and deposit growth A: Harold Carpenter mentioned legacy markets growth slows as lenders stay longer, but new markets have higher expectations.
• Q: Steven Alexopoulos on loan growth slowdown A: Terry Turner said no slowdown in business movement, pipelines for Q3/Q4 are stronger.
• Q: Jared Shaw on deposit pricing in expansion markets A: Terry Turner and Harold Carpenter discussed similar pricing in legacy and expansion markets, with clients switching lead banks.
• Q: Brandon King on fixed rate lending challenges A: Harold Carpenter discussed sales emphasis to improve fixed rate loan yields.
• Q: Timur Braziler on margin guidance A: Harold Carpenter said margin expected to be flat to slightly up for the year.
• Q: Stephen Scouten on asset sensitivity and CRE concentration A: Harold Carpenter and Terry Turner discussed transition to index deposits and reevaluation of CRE allocation.
• Q: Russell Gunther on commercial loan portfolio RWA reduction A: Harold Carpenter provided limited details on enhanced control processes in a sensitive portfolio.
• Q: Zach Westerlind on non-interest bearing deposits A: Harold Carpenter said non-interest bearing deposits are flat with hope for growth.
• Q: Brian Martin on loan growth optimism and margin sensitivity A: Terry Turner and Harold Carpenter discussed pipeline strength and margin performance in down rate environments