PNFP Reports 3Q23 Diluted EPS of $1.69, Diluted EPS of $1.79 Excluding Investment Losses

Pinnacle Financial Partners, Inc. (Nasdaq/NGS: PNFP) reported net income per diluted common share of $1.69 for the quarter ended Sept. 30, 2023, compared to net income per diluted common share of $1.91 for the quarter ended Sept. 30, 2022, a decrease of 11.5 percent. Net income per diluted common share was $5.99 for the nine months ended Sept. 30, 2023, compared to $5.42 for the nine months ended Sept. 30, 2022, an increase of approximately 10.5 percent.

After considering the adjustments noted in the table above for the three months ended Sept. 30, 2023 and 2022, net income per diluted common share was $1.79, compared to $1.91 for the three months ended Sept. 30, 2022. Net income per diluted common share adjusted for the items noted in the table above was $5.34 for the nine months ended Sept. 30, 2023, compared to $5.42 for the nine months ended Sept. 30, 2022.

"Despite a volatile economic backdrop, our firm continues to benefit from our unmatched ability to attract talent and create raving clients that refuse to leave us," said M. Terry Turner, Pinnacle's president and chief executive officer. "We continued to deliver outsized growth to our already strong client deposit base, with our core deposits increasing by 10.1 percent annualized this quarter. The 2023 FDIC summary of deposits reflects significant market share growth over 2022 in all our major markets, validating both the exportability of our model and the sustainability of our outsized growth by taking market share from our larger, more vulnerable competitors.

"Additionally, during the quarter we continued to avoid certain asset classes and reduced our exposure in loan segments with elevated risks and expect that to continue for the next few quarters. Against that backdrop, we are also pleased that overall loan growth during the third quarter of 2023 was $790 million, or 10.1 percent linked-quarter annualized.

"We also added 29 revenue producers during the third quarter. Going forward, I have asked our line leadership to accelerate their efforts to recruit the best relationship bankers in our markets in order to seize on the vulnerabilities that exist at many of our larger competitors. It is this ability to attract market-leading revenue producers that enables us to continue compounding earnings and growing tangible book value more reliably than peers, even in a very challenging operating environment. Historically, our operating leverage has compared favorably to our peers; however, given the outsized number of non-revenue support hires we have invested in over the last few years, I would now expect our focus on recruiting more revenue producers to yield an even stronger operating leverage advantage for us as we move into 2024."

BALANCE SHEET GROWTH AND LIQUIDITY:

Total assets at Sept. 30, 2023 were $47.5 billion, an increase of approximately $6.5 billion from Sept. 30, 2022 and $647.8 million from June 30, 2023, reflecting a year-over-year increase of 15.9 percent and a linked-quarter annualized increase of 5.5 percent, respectively. A further analysis of select balance sheet trends follows:

• Approximately 54 percent of third quarter 2023 loan growth was related to commercial and industrial and owner-occupied commercial real estate categories, two segments the firm intends to continue to emphasize for the remainder of 2023 and 2024.
• During the quarter ended Sept. 30, 2023, the firm acquired $583.6 million in floating rate US treasuries offset by the sale of $129.7 million in other investment securities, premium amortization and market value adjustments.
• On-balance sheet liquidity, defined as cash and cash equivalents plus unpledged securities, remained strong, totaling $7.4 billion as of Sept. 30, 2023, representing a $381 million decrease from the on-balance sheet liquidity level of $7.8 billion as of June 30, 2023.

"As we entered the third quarter, we expected three important deposit related trends to materialize for our firm," Turner said. "First, we believed that we would continue to grow our core deposit base more rapidly than peers. Our core deposits increased by 10.1 percent linked-quarter annualized in the third quarter, which we believe is exceptional in this environment. Second, we also believed the rate of decrease in noninterest bearing deposits should begin to subside, which it has. Demand deposit contraction in the third quarter was only $112.5 million, compared to $581.6 million and $794.3 million in the second and first quarters of 2023, respectively. And third, we expected the rate of increase in our overall deposit costs would lessen, which it did, having increased by 40 basis points in the third quarter, compared to 49 basis points and 63 basis points in the second and first quarters, respectively. We are pleased to see these three critical trends improve during the third quarter and are optimistic about continued improvement as we enter the fourth quarter of 2023."

PRE-TAX, PRE-PROVISION NET REVENUE (PPNR) GROWTH:

Pre-tax, pre-provision net revenues (PPNR) for the three and nine months ended Sept. 30, 2023 were $194.8 million and $662.4 million, respectively, a decrease of 7.8 percent and an increase of 17.1 percent, respectively, from the $211.3 million and $565.7 million, respectively, recognized in the three and nine months ended Sept. 30, 2022.

• Revenue per fully diluted common share was $5.35 for the third quarter of 2023, compared to $6.43 for the second quarter of 2023 and $5.40 for the third quarter of 2022, a decline of 0.9 percent year-over-year. Excluding net losses on sales of investment securities and ORE expense, revenue per fully diluted share for the third quarter of 2023 was $5.49.
• Net interest income for the quarter ended Sept. 30, 2023 was $317.2 million, compared to $315.4 million for the second quarter of 2023 and $305.8 million for the third quarter of 2022, a year-over-year growth rate of 3.7 percent.
• Noninterest income for the quarter ended Sept. 30, 2023 was $90.8 million, compared to $173.8 million for the second quarter of 2023 and $104.8 million for the third quarter of 2022, a year-over-year decrease of 13.4 percent.
  • Gain on the sale of fixed assets was $87,000 for the quarter ended Sept. 30, 2023, compared to $85.7 million and $227,000, respectively, for the quarters ended June 30, 2023 and Sept. 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 $9.7 million for the quarter ended Sept. 30, 2023, compared to $10.0 million in net losses for the quarter ended June 30, 2023 and $217,000 in net gains for the quarter ended Sept. 30, 2022.
  • Wealth management revenues, which include investment, trust and insurance services, were $22.8 million for the third quarter of 2023, compared to $24.1 million for the second quarter of 2023 and $19.4 million for the third quarter of 2022, a year-over-year increase of 17.3 percent.
  • During the third quarter of 2023, mortgage loans sold resulted in a $2.0 million net gain, compared to $1.6 million in the second quarter of 2023 and $1.1 million in the third quarter of 2022.
  • Income from the firm's investment in BHG was $25.0 million for the third quarter 2023, compared to $26.9 million for the second quarter of 2023 and $41.3 million for the third quarter of 2022, a year-over-year decline of 39.6 percent. The firm estimated that BHG's overall impact to Pinnacle's earnings for the first nine months of 2023 amounted to $0.52, down from $1.09 for the comparable period in 2022, in each case, after considering reasonable funding costs to support the investment. BHG's impact on Pinnacle's earnings declined from 20.2 percent of Pinnacle's 2022 total diluted earnings per common share to 8.6 percent of Pinnacle's 2023 total diluted earnings per share.
    • BHG's loan originations decreased to $1.0 billion in the third quarter 2023 compared to $1.1 billion in the second quarter of 2023 and $1.2 billion in the third quarter of 2022.
    • Loans sold to BHG's community bank partners were approximately $435 million in the third quarter 2023 compared to approximately $523 million in the second quarter of 2023 and $555 million in the third quarter of 2022. BHG also sold $564 million in loans to private investors during the third quarter of 2022 compared to $557 million in the second quarter of 2023 and $452 million in the third quarter of 2022.
    • BHG increased its reserves for on-balance sheet loan losses to $213.5 million, or 6.44 percent of loans held for investment at Sept. 30, 2023, compared to 5.99 percent at June 30, 2023. BHG decreased its accrual for losses attributable to loan substitutions and prepayments for loans previously sold through its community bank auction platform to $350.3 million, or 5.46 percent of the loans that have been previously sold and were unpaid, at Sept. 30, 2023 compared to 5.87 percent at June 30, 2023.
• Noninterest expense for the quarter ended Sept. 30, 2023 was $213.2 million, compared to $211.6 million in the second quarter of 2023 and $199.3 million in the third quarter of 2022, reflecting a year-over-year increase of 7.0 percent.
  • Salaries and employee benefits were $130.3 million in the third quarter of 2023, compared to $132.4 million in the second quarter of 2023 and $129.9 million in the third quarter of 2022, reflecting a slight year-over-year increase. The reduction in salaries and employee benefits expense on a linked-quarter basis 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 an increase in full-time equivalent associates, to 3,329.5 at Sept. 30, 2023 from 3,184.5 at Sept. 30, 2022, a year-over-year increase of 4.6 percent.
  • Equipment and occupancy costs were $36.9 million in the third quarter of 2023, compared to $33.7 million in the second quarter of 2023 and $27.9 million in the third quarter of 2022, reflecting a year-over-year increase of 32.3 percent. Contributing to the year-over-year increase is the impact of the sale leaseback transaction completed in the second quarter of 2023.
  • Noninterest expense categories, other than those specifically noted above, were $46.0 million in the third quarter of 2023, compared to $45.5 million in the second quarter of 2023 and $41.5 million in the third quarter of 2022, reflecting a year-over-year increase of 10.9 percent.

"To grow net interest income in this environment on a linked-quarter basis is a great achievement," said Harold R. Carpenter, Pinnacle's chief financial officer. "The net reduction in fee income in the third quarter of 2023 compared to the second quarter was largely attributable to the $85.7 million gain on sale of fixed assets recognized in connection with a sale-leaseback transaction during the prior quarter.

"BHG had a stronger quarter than we originally anticipated. Even though their pipelines remain strong and credit costs improved during the quarter, our 2023 outlook for BHG remains essentially unchanged at this time. Thus, we believe BHG's fourth quarter results will not be as strong as the last two quarters. Excluding the impact of BHG, the sale-leaseback transaction in the second quarter and the bond losses experienced in the second and third quarters, third quarter fee income increased slightly over the second quarter."

SOUNDNESS AND PROFITABILITY: