Pinnacle Financial Partners, Inc. (Nasdaq/NGS: PNFP) reported net income per diluted common share of $2.54 for the quarter ended June 30, 2023, compared to net income per diluted common share of $1.86 for the quarter ended June 30, 2022, an increase of 36.6 percent. Net income per diluted common share was $4.30 for the six months ended June 30, 2023, compared to $3.51 for the six months ended June 30, 2022, an increase of approximately 22.5 percent.
Excluding losses on the sale of investment securities, other real estate (ORE) expense and gains on the sale of fixed assets associated with the firm's sale-leaseback transaction for the three months ended June 30, 2023 and 2022, net income per diluted common share was $1.79 for the three months ended June 30, 2023, compared to $1.86 for the three months ended June 30, 2022, a decrease of 3.8 percent. Excluding losses on the sale of investment securities, other real estate (ORE) expense and gains on the sale of fixed assets associated with our sale-leaseback transaction for the six months ended June 30, 2023 and 2022, net income per diluted common share was $3.55 for the six months ended June 30, 2023, compared to $3.51 for the six months ended June 30, 2022, an increase of 1.1 percent.
"This proved to be another sound operating quarter especially given the results of several critical performance metrics such as asset quality, net interest income growth and tangible book value accretion," said M. Terry Turner, Pinnacle's president and chief executive officer. "Second quarter results continue to reflect our longstanding and ongoing ability to leverage our award-winning work environment and market-leading net promoter scores to take market share from our large national and regional competitors. The second quarter of 2023 also saw us increase our thrust and focus on gathering client funding, which is the 'raw material' that we need to support our outsized loan and earnings growth over time. Consequently, our relationship managers attracted client funding from across our footprint, which resulted in deposit growth of over $1.5 billion this quarter. Loan growth during the second quarter of 2023 was $855 million, or 11.3% linked-quarter annualized. This amount is consistent with the outlook we provided in connection with our first quarter results and is reflective of our deliberate efforts to moderate loan growth by constraining certain asset classes and elevating loan pricing.
"We also added 20 revenue producers during the quarter. Despite all the uncertainty plaguing the industry, we continue to invest in our proven relationship banking model and believe, even during times such as these, that a consistent focus on attracting and retaining highly successful revenue producers and their clients will enable us to continue compounding earnings and accreting tangible book value more reliably than peers.
"Our second quarter diluted earnings per share includes the positive impact of $0.84 per diluted common share from a sale-leaseback transaction that was executed during the second quarter. The gain from the sale-leaseback transaction was partially offset by the realized net loss of approximately $0.10 per diluted common share from the sale of approximately $174.0 million in available-for-sale investment securities."
BALANCE SHEET GROWTH:
Total assets at June 30, 2023 were $46.9 billion, an increase of approximately $6.8 billion from June 30, 2022 and $1.8 billion from March 31, 2023, reflecting a year-over-year increase of 16.8 percent and a linked-quarter annualized increase of 15.6 percent, respectively. A further analysis of select balance sheet trends follows:
Balances at | Linked-
| Balances at | Year-over-Year
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(dollars in thousands) | June 30, 2023 | March 31, 2023 | June 30, 2022 | |||||||
Loans | $ | 31,153,290 | $ | 30,297,871 | 11.3 | % | $ | 26,333,096 | 18.3 | % |
Less: PPP loans | 4,650 | 6,382 | NM | 51,100 | (90.9 | )% | ||||
Loans excluding PPP loans | 31,148,640 | 30,291,489 | 11.3 | % | 26,281,996 | 18.5 | % | |||
Securities and other interest-earning assets | 10,625,301 | 10,080,769 | 21.6 | % | 9,342,543 | 13.7 | % | |||
Total interest-earning assets excluding PPP loans | $ | 41,773,941 | $ | 40,372,258 | 13.9 | % | $ | 35,624,539 | 17.3 | % |
Core deposits: | ||||||||||
Noninterest-bearing deposits | $ | 8,436,799 | $ | 9,018,439 | (25.8 | )% | $ | 11,058,198 | (23.7 | )% |
Interest-bearing core deposits(1) | 24,343,968 | 23,035,672 | 22.7 | % | 18,953,246 | 28.4 | % | |||
Noncore deposits and other funding(2) | 7,731,082 | 6,865,003 | 50.5 | % | 4,496,117 | 72.0 | % | |||
Total funding | $ | 40,511,849 | $ | 38,919,114 | 16.4 | % | $ | 34,507,561 | 17.4 | % |
(1): | Interest-bearing core deposits are interest-bearing deposits, money market accounts, time deposits less than $250,000 including certain reciprocating time and money market deposits issued through the IntraFi Network. |
(2): | Noncore deposits and other funding consists of time deposits greater than $250,000, securities sold under agreements to repurchase, public funds, brokered deposits, FHLB advances and subordinated debt. |
"End-of-period loans grew by $855.4 million over last quarter, and end-of-period deposits grew by $1.5 billion over the same period, reflecting an annualized linked-quarter growth rate of 11.3 percent and 17.1 percent, respectfully," Turner said. "We continued to experience a mix shift in our deposits as more deposits moved from noninterest-bearing accounts to interest-bearing accounts, albeit at a lesser pace than the previous quarters. We anticipate that the reduction in noninterest bearing balances will slow from the pace of previous quarters this year.
"Our cumulative deposit beta at June 30, 2023 increased to 48.0 percent, which is consistent with our expectations. We believe with more rate hikes in the forecast for 2023, our funding costs will increase just not at the same rate as the second quarter increase. Furthermore, we anticipate that the impact of our hiring and usual seasonal growth will enable us to continue to grow our deposits for the remainder of the year at levels that should support our current outlook of high single-digit percentage deposit growth for 2023 over 2022."
PRE-TAX, PRE-PROVISION NET REVENUE (PPNR) GROWTH:
Pre-tax, pre-provision net revenues (PPNR) for the three and six months ended June 30, 2023 were $277.6 million and $467.6 million, respectively, inclusive of $85.7 million of gain on the sale of fixed assets as a result of the sale-leaseback transaction completed in the three months ended June 30, 2023, an increase of 43.1 percent and 32.0 percent, respectively, from the $194.0 million and $354.3 million, respectively, recognized in the three and six months ended June 30, 2022.
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(dollars in thousands) | 2023 | 2022 | % change | 2023 | 2022 | % change | ||||||||
Revenues: | ||||||||||||||
Net interest income | $ | 315,393 | $ | 264,574 | 19.2 | % | $ | 627,624 | $ | 504,049 | 24.5 | % | ||
Noninterest income | 173,839 | 125,502 | 38.5 | % | 263,368 | 228,998 | 15.0 | % | ||||||
Total revenues | 489,232 | 390,076 | 25.4 | % | 890,992 | 733,047 | 21.5 | % | ||||||
Noninterest expense | 211,641 | 196,038 | 8.0 | % | 423,368 | 378,699 | 11.8 | % | ||||||
Pre-tax, pre-provision net revenue (PPNR) | 277,591 | 194,038 | 43.1 | % | 467,624 | 354,348 | 32.0 | % | ||||||
Adjustments: | ||||||||||||||
Investment losses on sales of securities, net | 9,961 | — | NM | 9,961 | 61 | NM | ||||||||
Gain on the sale of fixed assets as a result of sale leaseback | (85,692 | ) | — | NM | (85,692 | ) | — | NM | ||||||
ORE expense | 58 | 86 | (32.6 | )% | 157 | 191 | (17.8 | )% | ||||||
Adjusted PPNR | $ | 201,918 | $ | 194,124 | 4.0 | % | $ | 392,050 | $ | 354,600 | 10.6 | % | ||
- Revenue per fully diluted common share was $6.43 for the second quarter of 2023, compared to $5.28 for the first quarter of 2023 and $5.14 for the second quarter of 2022, a 25.1 percent year-over-year growth rate. Excluding net losses on sales of investment securities, gain on the sale of fixed assets as a result of the sale-leaseback transaction and ORE expense, revenue per fully diluted share for the second quarter of 2023 was $5.43.
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Net interest income for the quarter ended June 30, 2023 was $315.4 million, compared to $312.2 million for the first quarter of 2023 and $264.6 million for the second quarter of 2022, a year-over-year growth rate of 19.2 percent.
- Revenues from PPP loans approximated $34,000 in the second quarter of 2023, compared to $20,000 in the first quarter of 2023 and $4.1 million in the second quarter of 2022. At June 30, 2023, remaining unamortized fees for PPP loans were approximately $192,000.
- Included in net interest income for the second quarter of 2023 was $776,000 of discount accretion associated with fair value adjustments, compared to $852,000 of discount accretion recognized in the first quarter of 2023 and $1.6 million in the second quarter of 2022. There remains $1.9 million of purchase accounting discount accretion as of June 30, 2023.
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Noninterest income for the quarter ended June 30, 2023 was $173.8 million, compared to $89.5 million for the first quarter of 2023 and $125.5 million for the second quarter of 2022, a year-over-year increase of 38.5 percent.
- Gain on the sale of fixed assets was $85.7 million for the quarter ended June 30, 2023, compared to $135,000 and $65,000, respectively, for the quarters ended March 31, 2023 and June 30, 2022. The quarter ended June 30, 2023 included a gain on the sale of fixed assets as a result of the sale-leaseback transaction completed in the second quarter of 2023 of $85.7 million.
- Net losses on the sale of investment securities were $10.0 million for the quarter ended June 30, 2023, compared to no gains or losses for the quarters ended March 31, 2023 and June 30, 2022.
- Wealth management revenues, which include investment, trust and insurance services, were $24.1 million for the second quarter of 2023, compared to $22.5 million for the first quarter of 2023 and $21.8 million for the second quarter of 2022, a year-over-year increase of 10.2 percent.
- During the second quarter of 2023, mortgage loans sold resulted in a $1.6 million net gain, compared to a $2.1 million net gain in the first quarter of 2023 and a $2.2 million net gain in the second quarter of 2022.
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Income from the firm's investment in BHG was $26.9 million for the second quarter 2023, compared to $19.1 million for the first quarter of 2023 and $49.5 million for the second quarter of 2022, a year-over-year decline of 45.6 percent.
- Loan originations increased to $1.1 billion in the second quarter of 2023 compared to $1.0 billion in the first quarter of 2023 and $1.1 billion in the second quarter of 2022.
- Loans sold to BHG's community bank partners were approximately $523 million in the second quarter of 2023 compared to approximately $704 million in the first quarter of 2023 and $658 million in the second quarter of 2022. BHG also sold $557 million in loans to private investors during the second quarter of 2022.
- BHG increased its reserves for on-balance sheet loan losses to $196 million, or 5.99 percent of loans held for investment at June 30, 2023, compared to 5.19 percent at March 31, 2023. BHG also increased its accrual for losses attributable to loan substitutions and prepayments for loans previously sold through its community bank auction platform to $369 million, or 5.87 percent of the loans that have been previously sold and were unpaid, at June 30, 2023 compared to 5.81 percent at March 31, 2023.
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Noninterest expense for the quarter ended June 30, 2023 was $211.6 million, compared to $211.7 million in the first quarter of 2023 and $196.0 million in the second quarter of 2022, reflecting a year-over-year increase of 8.0 percent.
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Salaries and employee benefits were $132.4 million in the second quarter of 2023, compared to $135.7 million in the first quarter of 2023 and $126.6 million in the second quarter of 2022, reflecting a year-over-year increase of 4.6 percent.
- Costs related to the firm's cash and equity incentive plans were $23.2 million in the second quarter of 2023, compared to $22.5 million in the first quarter of 2023 and $31.1 million in the second quarter of 2022.
- The reduction in salaries and employee benefits expense was primarily due to the year-over-year decrease in the costs related to the firm's annual cash and equity incentive plans. Offsetting this decrease in part was the impact of full-time equivalent associates increasing to 3,309.0 at June 30, 2023, from 3,074.0 at June 30, 2022, a year-over-year increase in headcount of 7.6 percent.
- Noninterest expense categories, other than salaries and employee benefits, were $79.2 million in the second quarter of 2023, compared to $76.0 million in the first quarter of 2023 and $69.4 million in the second quarter of 2022, reflecting a year-over-year increase of 14.1 percent.
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Salaries and employee benefits were $132.4 million in the second quarter of 2023, compared to $135.7 million in the first quarter of 2023 and $126.6 million in the second quarter of 2022, reflecting a year-over-year increase of 4.6 percent.
"Our sale-leaseback transaction resulted in an $85.7 million gain on the sale of fixed assets during the second quarter of 2023," said Harold R. Carpenter, Pinnacle's chief financial officer. "We have reviewed the potential for a sale-leaseback transaction on several occasions over the years. In the fourth quarter of last year, as rates were increasing, it became much more opportunistic. After much diligence, we elected to execute the transaction during the second quarter of 2023.
"As to revenues for the second quarter, our net interest income for the second quarter was up by $3.2 million from the first quarter. Our current outlook is that growth in net interest income for fiscal year 2023 over 2022 should approximate a low-teens percentage increase. Net growth in fee income in the second quarter of 2023 compared to the first quarter was largely attributable to the gain on sale of fixed assets recognized in connection with the sale-leaseback transaction, offset by $10.0 million in net losses from the sale of investment securities. The second quarter sale of investment securities provided us the opportunity to increase our net interest income as the proceeds of the sale are now achieving a higher yield and thus serve to minimize the financial impact of higher lease occupancy costs from the sale-leaseback transaction. BHG revenues also increased $7.8 million from the first to the second quarter of 2023.
"Expenses were essentially flat when comparing second quarter to first quarter of 2023. Salaries and employee benefits expense decreased on a linked-quarter basis, as employee benefits were seasonally lower in the second quarter of 2023 from the first quarter. Occupancy expense increased this quarter as a result of the sale-leaseback transaction. We anticipate a similar dollar increase in occupancy costs next quarter given the sale-leaseback transaction was consummated in multiple transactions that occurred throughout the second quarter and thus will be fully integrated into our results in the third quarter. We will continue to monitor our expense burden in light of our anticipated revenue growth and adjust incentives and/or reduce other expenses through either reduced hiring, deferral of anticipated projects or implementation of other cost-saving measures as required."
PROFITABILITY, LIQUIDITY AND SOUNDNESS:
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Net interest margin | 3.20 | % | 3.40 | % | 3.17 | % | 3.30 | % | 3.03 | % | |
Efficiency ratio | 43.26 | % | 52.70 | % | 50.26 | % | 47.52 | % | 51.66 | % | |
Return on average assets | 1.71 | % | 1.26 | % | 1.46 | % | 1.49 | % | 1.39 | % | |
Return on average tangible common equity (TCE) | 21.06 | % | 15.43 | % | 17.62 | % | 18.33 | % | 16.63 | % | |
As of | ||||||||||
June 30, 2023 | March 31, 2023 | June 30, 2022 | ||||||||
Shareholders' equity to total assets | 12.5 | % | 12.6 | % | 13.2 | % | ||||
Average loan to deposit ratio | 84.94 | % | 83.97 | % | 80.67 | % | ||||
Uninsured/uncollateralized deposits to total deposits | 28.31 | % | 33.23 | % | 41.38 | % | ||||
Tangible common equity to tangible assets | 8.3 | % | 8.3 | % | 8.4 | % | ||||
Book value per common share | $ | 73.32 | $ | 71.24 | $ | 66.74 | ||||
Tangible book value per common share | $ | 48.85 | $ | 46.75 | $ | 42.08 | ||||
Annualized net loan charge-offs to avg. loans (1) | 0.13 | % | 0.10 | % | 0.01 | % | ||||
Nonperforming assets to total loans, ORE and other nonperforming assets (NPAs) | 0.15 | % | 0.15 | % | 0.09 | % | ||||
Classified asset ratio (Pinnacle Bank) (2) | 3.30 | % | 2.70 | % | ||||||
