8-K: Pinnacle Financial Partners Reports Mixed Q4 Results Amidst Strategic Restructuring

Pinnacle Financial Partners reported a decrease in diluted EPS for Q4 2023, but saw strong growth in tangible book value and total shareholder return for the year.

Summary

• Pinnacle Financial Partners reported a diluted earnings per share (EPS) of $1.19 for the fourth quarter of 2023, a 32.4% decrease compared to $1.76 in the same quarter of 2022.
• Full year diluted EPS was $7.14, a slight decrease of 0.4% from $7.17 in 2022.
• Adjusted diluted EPS, excluding a FDIC special assessment and BOLI restructuring charges, was $1.68 for Q4 2023, compared to $1.76 in Q4 2022.
• The company restructured $740 million in bank-owned life insurance (BOLI) contracts, incurring $7.2 million in restructuring charges and $9.1 million in taxes and penalties, but expects a $10.5 million increase in non-taxable noninterest income in 2024.
• Pinnacle accrued $29 million for a special FDIC assessment, payable in eight quarterly installments starting June 2024.
• Total assets reached $48 billion, a 14.3% year-over-year increase.
• Loans grew by 12.5% year-over-year, and core deposits increased by 7.8%.
• Pre-tax, pre-provision net revenue (PPNR) decreased by 27.3% for the quarter but increased by 5.5% for the year.
• Net interest margin was 3.06% for the quarter, flat compared to the previous quarter but down from 3.60% in Q4 2022.
• The company's investment in BHG Financial saw a decrease in income, with BHG's loan originations decreasing to $786 million in Q4 2023.
• BHG increased its reserves for on-balance sheet loan losses to $302.6 million due to the adoption of CECL methodology.
• Noninterest expense increased by 24.3% year-over-year, impacted by the FDIC special assessment.
• Tangible book value per common share increased by 14.8% year-over-year to $51.38.
• The board declared a quarterly cash dividend of $0.22 per common share and a dividend on the Series B preferred stock.

Sentiment

Score: 6

Explanation: The document presents a mixed picture. While there are positives like strong growth in tangible book value and shareholder return, the significant decrease in EPS and PPNR, along with the impact of the FDIC assessment and BOLI restructuring, temper the overall sentiment. The company's future outlook is cautiously optimistic, but there are still risks and challenges to navigate.

Positives

• Pinnacle achieved a 14.8% year-over-year growth in tangible book value per common share.
• The company's total shareholder return for 2023 was a strong 20%.
• Pinnacle successfully grew loans by 12.5% and core deposits by 7.8% year-over-year.
• The restructuring of BOLI contracts is expected to increase non-taxable noninterest income by $10.5 million in 2024.
• Wealth management revenues saw a significant increase of 16.2% year-over-year.
• The net interest margin stabilized at 3.06% in the fourth quarter, showing no further decline from the previous quarter.
• The company hired 107 new revenue producers in 2023, demonstrating its ability to attract talent.
• Net charge-offs to average loans decreased to 0.17% in the fourth quarter from 0.23% in the prior quarter.

Negatives

• Diluted EPS decreased by 32.4% in Q4 2023 compared to Q4 2022.
• Net income per diluted common share for the year decreased slightly by 0.4% compared to 2022.
• Pre-tax, pre-provision net revenue (PPNR) decreased by 27.3% for the quarter.
• Noninterest expense increased by 24.3% year-over-year, primarily due to the FDIC special assessment.
• The company incurred $7.2 million in restructuring charges and $9.1 million in taxes and penalties related to the BOLI restructuring.
• Income from the firm's investment in BHG declined by 31.3% year-over-year.
• BHG's loan originations decreased to $786 million in Q4 2023 compared to $1.1 billion in Q4 2022.
• The company accrued $29 million for a special FDIC assessment.
• Net interest margin decreased to 3.18% for the year ended Dec. 31, 2023, compared to 3.29% for the year ended Dec. 31, 2022.

Risks

• The company faces risks related to deterioration in the financial condition of borrowers, which could lead to increased loan losses.
• Fluctuations in interest rates could negatively impact the company's net interest margin.
• The company may experience losses from the sale of investment securities before their value recovers.
• Adverse economic conditions in the national or local economies could impact the company's performance.
• The company's ability to maintain its historical growth rate of its loan portfolio is not guaranteed.
• There are risks associated with the company's investment in BHG, including BHG's ability to profitably grow its business.
• The company faces risks related to regulatory examinations and compliance costs.
• The company's network and online banking portals are vulnerable to security breaches.
• The company faces risks related to potential future acquisitions and integration of acquired businesses.
• The company is exposed to risks related to changes in state and federal legislation, regulations or policies.

Future Outlook

Pinnacle's management is optimistic about the macro environment in 2024, anticipating a 'soft landing', lower inflation, and a favorable direction of interest rates, which they believe will enable them to manage their balance sheet to produce stronger earnings in 2024 than in 2023. The increased yield from the BOLI restructuring is expected to be fully phased in by mid-year 2024.

Management Comments

• There is no doubt that 2023 presented a very difficult operating environment for banks, said M. Terry Turner, Pinnacle's president and chief executive officer.
• But 2023 was actually a great year for our firm resulting in year-over-year tangible book value growth of 14.8 percent and a total shareholder return of 20 percent.
• The challenging environment allowed us to showcase two critical drivers of our unique ability to create long-term shareholder value.
• With that in mind, we successfully recruited several experienced bankers in Jacksonville, Florida during the fourth quarter of 2023 building on the success we are experiencing in other market extensions like Atlanta and Washington, D.C.
• We grew loans 12.5 percent, core deposits 7.8 percent, and we hired 107 new revenue producers, showcasing our ability to reliably and responsibly grow during 2023, said Turner.
• With no further decline in the net interest margin in the fourth quarter, it appears we may be at or near the bottom for net interest margin.
• As we enter 2024, we find ourselves much more optimistic about the macro environment, particularly around the prospects of a 'soft landing', lower levels of inflation and the anticipated direction of interest rates, said Harold R. Carpenter, Pinnacle's chief financial officer.
• Even though many issues remain, including a stubborn inverted yield curve, we believe we will have the opportunity to manage our balance sheet to produce stronger earnings in 2024 than in 2023.
• We are obviously pleased that our net interest margin held at 3.06 percent during the fourth quarter of 2023 and was essentially flat with the third quarter, said Carpenter.
• Another positive for the quarter was the increase in tangible book value per common share, which was $51.38 at Dec. 31, 2023, an increase of 14.8 percent over the $44.74 at Dec. 31, 2022.

Industry Context

The report highlights the challenges faced by banks in 2023 due to a difficult operating environment, including rising interest rates and an inverted yield curve. Pinnacle's ability to grow its balance sheet and attract experienced bankers despite these challenges positions it as a strong competitor in the regional banking sector. The company's focus on market extensions and its differentiated service model are key factors in its success. The restructuring of BOLI contracts and the impact of the FDIC special assessment are also reflective of broader industry trends and regulatory pressures.

Comparison to Industry Standards

• Pinnacle's 14.8% year-over-year growth in tangible book value per common share is a strong result compared to many regional banks, which have struggled with profitability and asset quality in the current environment.
• The company's 20% total shareholder return for 2023 is also a positive outlier, as many banks have seen negative or flat returns.
• While the net interest margin of 3.06% is lower than some peers, the stabilization in Q4 suggests that Pinnacle may be better positioned to manage interest rate risk going forward.
• The increase in noninterest expense due to the FDIC special assessment is a common issue across the banking industry, but Pinnacle's ability to manage other expenses will be key to its future performance.
• The decline in BHG's loan originations and income is a concern, but the company's efforts to reduce operating expenses and increase reserves may help mitigate the impact.
• Compared to other regional banks like Truist Financial (TFC) and Regions Financial (RF), Pinnacle's growth in loans and deposits is relatively strong, indicating a competitive advantage in its markets.
• Pinnacle's focus on attracting experienced bankers and its differentiated service model are similar to strategies employed by successful community banks, such as First Republic Bank (FRC) before its collapse, but Pinnacle's risk management systems appear to be more robust.

Stakeholder Impact

• Shareholders will see a decrease in earnings per share for the quarter, but a strong increase in tangible book value and a 20% total shareholder return for the year.
• Employees may see continued investment in talent acquisition and development.
• Customers may benefit from the company's differentiated service model and continued growth in its markets.
• Suppliers and creditors may see continued stability and growth in the company's operations.

Next Steps

• The company will remit the FDIC special assessment in eight quarterly installments beginning in June 2024.
• The increased yield from the BOLI restructuring is expected to be fully phased in by mid-year 2024.
• Pinnacle will host a webcast and conference call on January 17, 2024, to discuss the fourth quarter results.

Key Dates

Keywords

financial results, earnings, EPS, net income, bank, Pinnacle Financial Partners, BOLI, FDIC, loan growth, deposits, net interest margin, BHG Financial, tangible book value, shareholder return