8-K: Pinnacle Financial Partners Reports Mixed Q1 2024 Results Amidst Economic Uncertainty

Pinnacle Financial Partners reported a decrease in diluted earnings per share for Q1 2024, alongside revenue growth and increased credit loss provisions.

Summary

• Pinnacle Financial Partners reported a net income per diluted common share of $1.57 for the first quarter of 2024, a 10.8 percent decrease compared to $1.76 in the same quarter of 2023.
• Total revenues increased by 6.6 percent year-over-year and 32.1 percent linked-quarter annualized.
• The company's allowance for credit losses increased to 1.12 percent of total loans, up from 1.08 percent at the end of 2023.
• A mortgage servicing asset of approximately $11.8 million was recognized, impacting noninterest income.
• The firm increased its other noninterest expense by $7.3 million for an FDIC special assessment, in addition to $29.0 million recognized in Q4 2023.
• Total assets reached $48.9 billion, an increase of $934.3 million from the previous quarter and $3.8 billion year-over-year.
• Noninterest-bearing deposits increased 2.6 percent on a linked-quarter annualized basis, but decreased 11.8 percent year-over-year.
• Pre-tax, pre-provision net revenues (PPNR) decreased by 2.2 percent year-over-year to $185.8 million.
• Net interest margin was 3.04 percent for the quarter, down from 3.40 percent in the same quarter of 2023.
• The company expects 8 to 10 percent growth in net interest income for the year and 10 to 14 percent growth in fee revenues, excluding the impact of BHG and certain one-off items.
• Net charge-offs are estimated to be between 0.20 percent and 0.25 percent of average loans for 2024.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative. While there are positive aspects like revenue and asset growth, the decrease in earnings per share, increased credit loss provisions, and reduced net interest margin temper the overall outlook. The company is facing headwinds but is taking steps to manage them.

Positives

• Total revenues increased by 6.6 percent year-over-year and 32.1 percent linked-quarter annualized.
• Total assets grew to $48.9 billion, an 8.4 percent year-over-year increase.
• Noninterest-bearing deposits increased 2.6 percent linked-quarter annualized.
• The company recruited 37 new revenue producers during the quarter, including 14 in newer markets.
• Pinnacle was ranked 11th on the Fortune 100 Best Companies to Work For list, their highest ranking to date.
• The company expects 10 to 14 percent growth in fee revenues, excluding the impact of BHG and certain one-off items.
• On-balance sheet liquidity remained strong at $7.6 billion as of March 31, 2024.

Negatives

• Net income per diluted common share decreased by 10.8 percent year-over-year to $1.57.
• The allowance for credit losses increased to 1.12 percent of total loans.
• The company incurred a $7.3 million FDIC special assessment.
• Pre-tax, pre-provision net revenues (PPNR) decreased by 2.2 percent year-over-year to $185.8 million.
• Net interest margin decreased to 3.04 percent.
• Noninterest bearing deposits decreased by 11.8 percent year-over-year.

Risks

• The company increased its allowance for credit losses due to a previously disclosed problem borrower and to navigate the credit implications of a higher-for-longer interest rate environment.
• The firm's net interest margin decreased from 3.40 percent to 3.04 percent year-over-year.
• The company is facing increased noninterest expenses, including a $7.3 million FDIC special assessment.
• BHG's loan originations decreased to $692 million in the first quarter of 2024, compared to $1.0 billion in the first quarter of 2023.
• The company has adjusted its forecast for Fed funds rate decreases from four to two, which may impact net interest income.
• The company estimates net charge-offs for the firm may range between 0.20 percent and 0.25 percent of average loans for 2024.

Future Outlook

The company anticipates 8 to 10 percent growth in net interest income for the year and 10 to 14 percent growth in fee revenues, excluding the impact of BHG and certain one-off items. Net charge-offs are estimated to be between 0.20 percent and 0.25 percent of average loans for 2024.

Management Comments

• 'Inflation appears to be more difficult to tame than the Fed had predicted,' said M. Terry Turner, Pinnacle's President and Chief Executive Officer.
• 'Regardless of the economic landscape, our focus continues to be on strengthening our balance sheet and growing our earnings and tangible book value, while continuing to take steps that we believe will position our firm for long-term growth.'
• 'We are particularly pleased with our strong deposit growth during the first quarter, which grew $862.2 million in the quarter, a 9.0 percent linked-quarter annualized growth rate,' said Turner.
• 'We believe our growth in fee revenues should approximate 10 to 14 percent in 2024 over 2023,' said Harold R. Carpenter, Pinnacle's Chief Financial Officer.
• 'We now estimate net charge-offs for the firm may range between 0.20 percent and 0.25 percent of average loans for 2024,' said Carpenter.

Industry Context

The results reflect the challenges faced by the banking industry due to the current economic volatility, including higher interest rates and inflation. The increase in credit loss provisions and the decrease in net interest margin are common trends in the industry as banks navigate these conditions. The company's focus on deposit growth and hiring revenue producers is a strategy to maintain market share and profitability.

Comparison to Industry Standards

• Pinnacle's net interest margin of 3.04% is lower than the 3.40% reported in the same quarter last year, indicating a squeeze on profitability due to rising funding costs, a trend seen across the banking sector.
• The increase in the allowance for credit losses to 1.12% reflects a cautious approach to lending, similar to actions taken by other regional banks like Truist and Regions Financial, who have also increased their reserves in response to economic uncertainty.
• Pinnacle's loan growth of 6.0% annualized is slightly below their expectations for 2024, which is a common trend among banks that are tightening lending standards due to economic uncertainty. This is similar to what has been reported by banks like First Horizon and Synovus.
• The company's efficiency ratio of 56.61% is higher than the 52.70% reported in the same quarter last year, indicating increased operating costs. This is a common trend in the industry as banks invest in technology and personnel.
• Pinnacle's return on average tangible common equity (TCE) of 12.11% is lower than the 15.43% reported in the same quarter last year, reflecting the impact of increased credit loss provisions and lower net interest margins. This is a common trend among banks that are facing increased economic headwinds.

Stakeholder Impact

• Shareholders may be concerned about the decrease in earnings per share and the increased credit loss provisions.
• Employees may be encouraged by the company's recognition as a top workplace and the continued hiring of revenue producers.
• Customers may benefit from the company's focus on deposit growth and its strong on-balance sheet liquidity.
• Creditors may be reassured by the company's strong asset base and its focus on strengthening its balance sheet.

Next Steps

• Pinnacle will host a webcast and conference call on April 23, 2024, to discuss first quarter 2024 results.
• The company will continue to focus on strengthening its balance sheet and growing earnings and tangible book value.
• The company will continue to emphasize commercial and industrial and owner-occupied commercial real estate loan categories.

Key Dates

Keywords

financial results, earnings, net income, revenue, credit losses, FDIC assessment, loan growth, deposit growth, net interest margin, Pinnacle Financial Partners, PNFP, banking