8-K: Pinnacle Financial Partners Reports Strong 3Q24 Earnings, Driven by Loan and Deposit Growth

Pinnacle Financial Partners announced a 10.1 percent increase in diluted earnings per share for the third quarter of 2024, reaching $1.86, alongside significant growth in earning assets and core deposits.

Summary

• Pinnacle Financial Partners reported a net income per diluted common share of $1.86 for the third quarter of 2024, up from $1.69 in the same quarter of 2023, representing a 10.1 percent increase.
• For the first nine months of 2024, diluted earnings per share were $4.08, a decrease of 31.9 percent compared to $5.99 for the same period in 2023.
• Adjusted diluted earnings per share for the third quarter were $1.86, compared to $1.79 in 2023 and $1.63 in the second quarter of 2024, showing a 56.4 percent annualized linked-quarter growth rate.
• Total assets reached $50.7 billion as of September 30, 2024, a $1.3 billion increase from June 30, 2024, and a $3.2 billion increase from September 30, 2023.
• The company experienced a 10.8 percent linked-quarter annualized increase and a 6.7 percent year-over-year increase in total assets.
• Loan growth was approximately $539.2 million in the third quarter, with C&I and owner-occupied commercial real estate loans growing by $705.6 million, while non-owner occupied commercial real estate decreased by $186.9 million.
• Core deposits increased by more than $2.0 billion year-to-date, with noninterest-bearing deposits up $296.5 million over the previous quarter, a 15.0 percent linked-quarter annualized growth rate.
• Pre-tax, pre-provision net revenues (PPNR) for the third quarter of 2024 were $207.4 million, a 6.5 percent increase from $194.8 million in the same quarter of 2023.
• Net interest margin was 3.22 percent for the third quarter of 2024, compared to 3.14 percent for the second quarter of 2024 and 3.06 percent for the third quarter of 2023.
• Wealth management revenues were $29.5 million for the third quarter of 2024, a 29.7 percent year-over-year increase.
• Income from the firm's investment in Banker's Healthcare Group (BHG) was $16.4 million for the third quarter of 2024, a 34.4 percent year-over-year decline.
• Noninterest expense for the third quarter of 2024 was $259.3 million, compared to $213.2 million for the third quarter of 2023, with salaries and employee benefits increasing by 22.9 percent year-over-year.
• The company's book value per common share increased to $79.33, an 11.3 percent annualized linked-quarter increase, and tangible book value per common share increased to $55.12, a 16.6 percent annualized linked-quarter increase.
• The Board of Directors declared a quarterly cash dividend of $0.22 per common share, payable on November 29, 2024.

Sentiment

Score: 7

Explanation: The document presents a generally positive outlook with strong growth in key areas like earnings, assets, and deposits. However, there are some concerns regarding the decline in year-to-date earnings and the performance of BHG, which temper the overall sentiment. The company's forward-looking statements are optimistic, but the risks mentioned are also significant.

Positives

• The company achieved double-digit linked-quarter annualized growth in earning assets.
• Core deposit growth was nearly double-digit on a linked-quarter annualized basis.
• The net interest margin expanded during the quarter.
• Pinnacle continues to gain market share across its footprint, according to FDIC deposit rankings.
• Client satisfaction scores continue to outperform larger competitors.
• The firm was ranked the third best place to work among financial services and insurance firms in the United States by Forbes.
• The company is well-positioned to capitalize on a declining interest rate environment.
• Loan growth was approximately $539.2 million in the third quarter.
• The company's exposure to construction and land development loans decreased to 68.2 percent of total risk-based capital, below the target of 70 percent.
• The company is reducing its exposure to non-owner occupied commercial real estate, multifamily and construction and land development loans.
• The company has invested in 16 new office locations, representing a 13.3 percent increase in outlets.
• Net interest income for the third quarter of 2024 was $351.5 million, a year-over-year growth rate of 10.8 percent.
• Noninterest income for the third quarter of 2024 was $115.2 million, compared to $90.8 million for the third quarter of 2023.
• The company's common equity Tier one risk-based capital ratio increased to 10.8 percent at Sept. 30, 2024 from 10.3 percent at Dec. 31, 2023.

Negatives

• Net income per diluted common share for the nine months ended September 30, 2024, decreased by approximately 31.9 percent compared to the same period in 2023.
• Pre-tax, pre-provision net revenues (PPNR) for the nine months ended September 30, 2024, decreased by 26.3 percent compared to the same period in 2023.
• Income from the firm's investment in Banker's Healthcare Group (BHG) declined by 34.4 percent year-over-year.
• Noninterest expense increased by 21.6 percent year-over-year.
• Salaries and employee benefits increased by 22.9 percent year-over-year.
• BHG's loan originations were $989 million in the third quarter of 2024, compared to $1.0 billion in the third quarter of 2023.
• BHG reserves for on-balance sheet loan losses were $237 million, or 9.1 percent of loans held for investment at Sept. 30, 2024, compared to 6.4 percent at Sept. 30, 2023.
• BHG increased its accrual for estimated losses attributable to loan substitutions and prepayments to $454 million, or 6.2 percent of the unpaid balances on loans that were previously purchased by BHG's community bank network, at Sept. 30, 2024, compared to $350.3 million, or 5.5 percent, at Sept. 30, 2023.
• Net charge-offs in the third quarter included a partial charge-off of a commercial and industrial loan of approximately $9.0 million.

Risks

• Deterioration in the financial condition of borrowers could lead to increased loan losses.
• Fluctuations in interest rates could negatively impact the company's net interest margin.
• The sale of investment securities in a loss position could affect profitability.
• Adverse conditions in the national or local economies could impact the company's performance.
• The company's ability to maintain its historical loan portfolio growth rate is uncertain.
• The company faces competition from other financial institutions, which could lead to pricing pressures.
• Regulatory examinations could result in adverse findings.
• BHG's ability to profitably grow its business is subject to risks.
• Expansion into new markets could pose challenges.
• The company's network and online banking portals are vulnerable to security breaches.
• Increased regulatory oversight could lead to higher compliance and operational costs.
• The company's ability to identify and integrate potential acquisitions is subject to risks.
• The company is a minority investor in BHG, which carries risks.
• Changes in state and federal legislation could impact the company's operations.
• Fluctuations in the valuations of the company's equity investments could affect its financial results.
• The availability of and access to capital is subject to market conditions.
• Adverse results from current or future litigation could negatively impact the company.

Future Outlook

The company expects continued loan and core deposit growth in the fourth quarter of 2024 and anticipates double-digit growth in 2025. They believe they are well-positioned to capitalize on a declining interest rate environment and a more favorable yield curve could result in an even better 2025 revenue outlook.

Management Comments

• The third quarter was another outstanding quarter for our firm, highlighted by double-digit linked-quarter annualized growth in earning assets, nearly double-digit linked-quarter annualized core deposit growth, and an expanding net interest margin, said M. Terry Turner, Pinnacle's President and Chief Executive Officer.
• Not only am I excited that we grew diluted earnings per share to $1.86 in the quarter, but this growth has also been largely built on our longstanding ability to leverage our differentiated service levels to take market share in our advantaged Southeastern markets.
• Our robust hiring continues, as we have added 126 new revenue producers thus far this year.
• I also believe we are well positioned to capitalize on what appears to be a declining interest rate environment.
• Loan growth was approximately $539.2 million in the third quarter, said Turner.
• We continue to be optimistic that we will see increases in the pace of loan growth as we close out 2024 and enter 2025.
• A real highlight for 2024 has been our focus on growing core deposits.
• We anticipated margin expansion in the third quarter, due primarily to the securities portfolio restructuring initiatives we executed during the second quarter, said Harold R. Carpenter, Pinnacle's Chief Financial Officer.
• Also during the third quarter, our relationship managers focused on mitigating the impact of the recent reduction in the Federal funds rate.
• We are pleased to report that our deposit pricing was well contained throughout the quarter, aided by the stability of our noninterest bearing deposit balances.
• We are again very excited about our core fee performance during the third quarter.
• Our expense results for the third quarter came in slightly higher than we originally anticipated at the beginning of the quarter, with most of this attributable to personnel costs.
• Net charge-offs to average loans for the third quarter of 2024 were 0.21 percent, down from 0.27 percent in the prior quarter, Carpenter said.
• In summary, from a credit perspective, thus far this year, we believe our credit performance has remained strong all year long.

Industry Context

Pinnacle's performance reflects a broader trend in the banking sector where institutions are focusing on growing core deposits and managing net interest margins in a changing interest rate environment. The company's emphasis on wealth management and strategic market expansions aligns with industry efforts to diversify revenue streams. The reduction in exposure to non-owner occupied commercial real estate also reflects a cautious approach to risk management in the current economic climate.

Comparison to Industry Standards

• Pinnacle's 10.1% increase in diluted EPS for the quarter is strong compared to some regional banks, but it is important to note that the nine-month EPS is down 31.9% year-over-year, which is a significant drop.
• The net interest margin of 3.22% is solid, but it is important to compare this to peers such as Truist Financial (TFC) and Regions Financial (RF), which may have different margin profiles due to their asset mix and funding strategies.
• The loan growth of $539.2 million is a positive sign, but it is important to compare this to the loan growth of other regional banks like First Horizon (FHN) and Fifth Third Bancorp (FITB) to see how Pinnacle is performing relative to its peers.
• The core deposit growth of over $2 billion year-to-date is impressive and indicates a strong focus on funding, which is a key metric for banks.
• The wealth management revenue growth of 29.7% is a strong performance and shows that Pinnacle is successfully diversifying its revenue streams, which is a trend seen in other banks like Northern Trust (NTRS) and State Street (STT).
• The decline in BHG income by 34.4% is a concern and needs to be monitored closely, as it is a significant contributor to Pinnacle's overall earnings. This is a unique aspect of Pinnacle's business model and does not have a direct comparison to other banks.
• The increase in noninterest expense by 21.6% is a concern and needs to be compared to the expense management of other banks like KeyCorp (KEY) and Comerica (CMA) to see if Pinnacle is managing its expenses effectively.
• The increase in book value per share by 11.3% and tangible book value per share by 16.6% is a positive sign and shows that Pinnacle is creating value for its shareholders, which is a key metric for investors.

Stakeholder Impact

• Shareholders will benefit from the increased earnings per share and the declared dividend.
• Employees will benefit from the company's continued growth and strong performance.
• Customers will benefit from the company's expanded services and market presence.
• Creditors will benefit from the company's strong financial position and asset growth.
• Suppliers will benefit from the company's continued operations and growth.

Next Steps

• The company will continue to focus on growing core deposits and managing its loan portfolio.
• Pinnacle will host a webcast and conference call on October 16, 2024, to discuss third quarter results.
• The company intends to continue reducing its exposure to non-owner occupied commercial real estate, multifamily and construction and land development loans.
• The company will continue to monitor the performance of its investment in BHG.
• The company will continue to evaluate potential acquisition opportunities.

Key Dates

Keywords

earnings, net interest margin, loan growth, core deposits, wealth management, financial results, banking, PNFP, Pinnacle Financial Partners, BHG