Annualized linked-quarter loan growth of 29.9% for 2Q2022, 31.9% exclusive of PPP paydowns

Pinnacle Financial Partners, Inc. (Nasdaq/NGS: PNFP) reported net income per diluted common share of $1.86 for the quarter ended June 30, 2022, compared to net income per diluted common share of $1.69 for the quarter ended June 30, 2021, an increase of approximately 10.1 percent. Net income per diluted common share was $3.51 for the six months ended June 30, 2022, compared to $3.30 for the six months ended June 30, 2021, an increase of approximately 6.4 percent.

Paycheck Protection Program (PPP) net interest income for the three months ended June 30, 2022 and 2021 was $4.1 million and $24.6 million, respectively. PPP net interest income for the six months ended June 30, 2022 and 2021 was $14.7 million and $45.5 million, respectively. PPP net interest income contributed $0.04 and $0.14 to diluted earnings per common share for the three and six months ended June 30, 2022, respectively, compared to contributions of $0.24 and $0.44 for the three and six months ended June 30, 2021, respectively.

“As we noted last quarter, inflation is anything but transitory, now prompting urgent action by the Fed and increasing the likelihood of recession,” said M. Terry Turner, Pinnacle’s president and chief executive officer. “But even with the changing economic outlook and all the uncertainty, our ability to attract and retain clients continues to fuel our outsized growth.

“During the second quarter, we experienced outsized loan growth as a result of our recent market extensions and our continued focus on recruiting experienced relationship managers. Our new markets contributed almost 25 percent of our loan growth this quarter and our relationship managers that have been in our legacy markets less than 2.5 years contributed an incremental 21 percent of this quarter’s growth. Our prolific hiring continued during the second quarter with 37 additional revenue producers, so we are well on pace to surpass our hiring successes of the past two years,” Turner said. “As to revenues, we were able to convert the recent short-term rate increases into significant growth in net interest income. And in addition to the growth in net interest income, we saw double-digit growth in many core fee categories, which coupled with BHG’s outstanding performance in the second quarter, resulted in second quarter fee revenues being the best we’ve ever experienced. Even though we enter the second half of the year fully expecting a more difficult economic landscape, we believe our second quarter results showcase why we believe we can outperform even through a more challenging operating environment.”

BALANCE SHEET GROWTH:

Total assets at June 30, 2022 were $40.1 billion, an increase of approximately $4.7 billion from June 30, 2021, reflecting a year-over-year increase of 13.3 percent. A further analysis of select balance sheet trends follows:

“During the second quarter, loan growth approximated a linked-quarter annualized rate of 29.9 percent when compared to balances at March 31, 2022. Excluding the impact of PPP loans in each period, loans increased at a linked-quarter annualized rate of 31.9 percent,” Turner said. “Deposits for the second quarter increased by 3.7 percent linked-quarter annualized, while average deposits decreased by 0.7 percent linked-quarter annualized, which we believe is consistent with national trends. Much of the deposit outflows during the second quarter occurred in the early stages of the quarter, likely due to tax payments, which again, we believe is consistent with national trends. We are encouraged that end-of-period and average balances of our noninterest-bearing deposit accounts actually increased during the quarter.”

PRE-TAX, PRE-PROVISION NET REVENUES (PPNR):

Pre-tax, pre-provision net revenues (PPNR) for the quarter ended June 30, 2022 were $194.0 million an increase of 17.4 percent from the $165.3 million recognized in the quarter ended June 30, 2021.

• Revenue per fully diluted common share was $5.14 for the three months ended June 30, 2022, compared to $4.52 for the first quarter of 2022 and $4.37 for the second quarter of 2021, a 17.6 percent year-over-year growth rate.
• Net interest income for the quarter ended June 30, 2022 was $264.6 million, compared to $239.5 million for the first quarter of 2022 and $233.2 million for the second quarter of 2021, a year-over-year growth rate of 13.4 percent.
  • Revenues from PPP loans approximated $4.1 million in the second quarter of 2022, compared to $10.7 million in the first quarter of 2022 and $24.6 million in the second quarter of 2021. At June 30, 2022, remaining unamortized fees for PPP loans were approximately $1.1 million.
  • Included in net interest income for the second quarter of 2022 was $1.6 million of discount accretion associated with fair value adjustments, compared to $1.7 million of discount accretion recognized in the first quarter of 2022 and $3.3 million in the second quarter of 2021. There remains $5.6 million of purchase accounting discount accretion as of June 30, 2022.

• Noninterest income for the quarter ended June 30, 2022 was $125.5 million, compared to $103.5 million for the quarter ended March 31, 2022, a linked-quarter annualized increase of 85.1 percent. Compared to $98.2 million for the second quarter of 2021, noninterest income grew 27.8 percent year-over-year.
  • Wealth management revenues, which include investment, trust and insurance services, were $21.8 million for the second quarter of 2022, compared to $20.7 million for the first quarter of 2022, a linked-quarter annualized increase of 21.7 percent. Wealth management revenues were up 32.5 percent year-over-year compared to $16.5 million reported in the second quarter of 2021.
  • Service charges on deposit accounts were $11.6 million for the quarter ended June 30, 2022, compared to $11.0 million for the quarter ended March 31, 2022 and $8.9 million for the quarter ended June 30, 2021. Future service charge revenues will be impacted by changes in the firm's insufficient funds and overdraft programs announced earlier this month. The firm believes that the impact of these changes could amount to approximately $2.9 million in reduced service charge revenue annually, or approximately $700,000 on a quarterly basis.
  • Income from the firm's investment in BHG was a record $49.5 million for the quarter ended June 30, 2022, up from $33.7 million for the quarter ended March 31, 2022 and $32.1 million for the quarter ended June 30, 2021. During the second quarter of 2022, BHG placed approximately $505 million in loans with community banks through its auction platform compared to approximately $323 million in the first quarter of 2022. Additionally, BHG completed its fifth securitization during the second quarter of 2022 for approximately $300 million in funding secured by previously funded loans. This was the second securitization completed in 2022 and BHG anticipates that it may complete more securitizations in the second half of the year.
  • Other noninterest income was $40.4 million for the quarter ended June 30, 2022, compared to $34.1 million for the quarter ended March 31, 2022 and $33.7 million for the quarter ended June 30, 2021, a linked-quarter annualized increase of 74.4 percent and year-over-year growth of 20.0 percent, respectively.
    • Second quarter 2022 gains from market valuation adjustments in investments in joint ventures and other funds were $6.7 million, compared to $1.7 million in the first quarter of 2022 and $7.0 million in the second quarter of 2021.
    • As previously announced, on March 1, 2022, Pinnacle Bank acquired the remaining equity of JB&B Capital, LLC (“JB&B”), a commercial equipment financing business headquartered in Knoxville, TN, in a cash transaction. Pinnacle had previously acquired 20 percent of JB&B's equity in 2017. For the six months ended June 30, 2022, net income per diluted common share was favorably impacted by $0.04 per share as a result of the acquisition of JB&B, which includes approximately $5.5 million of gains resulting from remeasurement of Pinnacle's previous 20 percent investment in JB&B offset in part by approximately $1.0 million of provision for credit losses recorded in accordance with CECL for the loans and leases at JB&B outstanding at the closing. Loan and lease balances attributable to the JB&B acquisition approximated $109.7 million at June 30, 2022 compared to $60.7 million at March 31, 2022.

• Noninterest expense for the quarter ended June 30, 2022 was $196.0 million, compared to $182.7 million in the first quarter of 2022 and $166.1 million in the second quarter of 2021, reflecting a linked-quarter annualized growth rate of 29.3 percent and a year-over-year increase of 18.0 percent.
  • Salaries and employee benefits were $126.6 million in the second quarter of 2022, compared to $121.9 million in the first quarter of 2022 and $110.8 million in the second quarter of 2021, reflecting a linked-quarter annualized growth rate of 15.6 percent and a year-over-year increase of 14.2 percent.
    • Total full-time equivalent associates amounted to 3,074.0 associates at June 30, 2022, compared to 2,706.0 full-time equivalent associates at June 30, 2021, an increase of 13.6 percent.
    • Costs related to the firm's incentive plans increased to $31.8 million in the second quarter of 2022 compared to $25.9 million in the first quarter of 2022 due to increased personnel as well as increased earnings and PPNR which are primary factors in determining the costs of the firm's incentive compensation awards.
  • Noninterest expense categories, other than salaries and employee benefits, were $69.4 million in the second quarter of 2022, compared to $60.8 million in the first quarter of 2022 and $55.3 million in the second quarter of 2021, reflecting a linked-quarter annualized growth rate of 56.7 percent and a year-over-year increase of 25.5 percent. The second quarter 2022 increase was the result of additional equipment and occupancy expenses, marketing and business development expenses as well as increased expenses related to our credit card programs.

“We continue to highlight PPNR and our efforts to grow PPNR regardless of the economic cycle,” said Harold R. Carpenter, Pinnacle’s chief financial officer. “Our PPNR results were outstanding in the second quarter. We continue to be successful in battling the revenue headwinds from reduced PPP, declines in residential mortgage lending and, of course, inflation. Loan growth, as well as the impact of the rising short-term rate environment, contributed to an increase of $25.1 million in net interest income in the second quarter of 2022 as compared to the first quarter of 2022, or $31.7 million when excluding the impact of a net reduction in PPP net interest income of $6.6 million. Also, BHG had another phenomenal quarter. We anticipated a strong second quarter from BHG but are not expecting similar performance in the second half of 2022 as BHG's decision to place more loans into their auction platform in the second quarter than they would have otherwise anticipated is likely to negatively impact BHG's results in the second half of 2022.

“As to expenses, compensation costs increased approximately 14 percent over the same quarter last year, due primarily to increased headcount, annual merit raises and higher incentive accruals. We are optimistic that our hiring model will continue to provide us even more opportunities to add revenue producers this year. As a result, including the impact of inflation and the acquisition of JB&B in the first quarter of this year, we continue to believe our total 2022 noninterest expense should approximate a mid-teens percentage increase over that of 2021.”

PROFITABILITY:

• Net interest margin was 3.17 percent for the second quarter of 2022, compared to 2.89 percent for the first quarter of 2022 and 3.08 percent for the second quarter of 2021. Net interest margin for the six months ended June 30, 2022 was 3.03 percent compared to 3.05 percent for the six months ended June 30, 2021.
  • Impacting the firm’s net interest margin in the first and second quarters of 2022 and second quarter of 2021 was the impact of PPP loans, while the firm’s decision early in the pandemic to maintain additional on-balance sheet liquidity also impacted net interest margin in 2021. The firm estimates its first and second quarter 2022 net interest margin was negatively impacted by approximately 29 and 12 basis points, respectively, compared to approximately 17 basis points for the second quarter 2021 as a result of these factors.

“We are very excited about our profitability metrics in the second quarter,” Carpenter said. "With the rate environment being very much in a state of transition after several years of rates holding fairly steady, there was much discussion about how our balance sheet would respond. We still believe our balance sheet is positioned more conservatively than most from an interest rate risk perspective but now that we are essentially through our loan floors, we believe we have significant opportunities to continue margin expansion going into the third quarter. Thus far, our on-the-spot interest rates from our data systems indicate that our loan yields have increased by approximately 68 basis points from the mid-March 2022 rate increase through last night while deposit spot rates have increased by approximately 34 basis points for the same period. We are pleased with how our relationship managers are working with their clients and setting expectations for the next several quarters. We believe further margin expansion in the third quarter is likely. The key to all of this is our rapid loan growth and the impact it has on our revenue base.

“Additionally, the impact of increased rates on tangible book value has also garnered attention. We are pleased to report that our tangible book value per share increased this quarter, in spite of the impact of rising rates on accumulated other comprehensive income.”

MAINTAINING A STRONG BALANCE SHEET:

• Provision for credit losses was $12.9 million in the second quarter of 2022 compared to $2.7 million in the first quarter of 2022 and $2.8 million in the second quarter of 2021. Net charge-offs were $877,000 for the quarter ended June 30, 2022, compared to $3.0 million for the quarter ended March 31, 2022 and $10.0 million for the quarter ended June 30, 2021.
• Nonperforming assets were $23.7 million at June 30, 2022, compared to $35.1 million at March 31, 2022 and $62.7 million at June 30, 2021. The ratio of the allowance for credit losses to nonperforming loans at June 30, 2022 was 1,762.6 percent, compared to 982.9 percent at March 31, 2022 and 515.5 percent at June 30, 2021.
• Classified assets were $112.5 million at June 30, 2022, compared to $137.0 million at March 31, 2022 and $233.8 million at June 30, 2021.

“Our credit performance has been strong for many years, and thus far 2022 is no exception,” Carpenter said. “Several of our loan credit metrics remain at the lowest point they have been at in many years. Our allowance for credit losses to total loans (ACL) decreased from 1.07 percent at March 31, 2022 to 1.03 percent at June 30, 2022. These ratios are higher than our ACL as reflected on Jan. 1, 2020 of 0.67 percent immediately following our adoption of CECL.

“Over the last few months, our credit officers have been very active in portfolio reviews and making sure we understand how inflation is impacting those borrowers that have outsized exposure to rapidly rising energy and labor costs. To that end, our emphasis has been on stress testing for all commercial borrowers and updated segment guidance for CRE. The good news thus far is that demand for our borrowers' products and services remains strong across our footprint and thus far our borrowers have continued to successfully combat the impact of inflation.”

BOARD OF DIRECTORS DECLARES DIVIDENDS

On July 19, 2022, Pinnacle Financial's Board of Directors approved a quarterly cash dividend of $0.22 per common share to be paid on Aug. 26, 2022 to common shareholders of record as of the close of business on Aug. 5, 2022. Additionally, the Board of Directors approved a quarterly dividend of approximately $3.8 million, or $16.88 per share (or $0.422 per depositary share), on Pinnacle Financial's 6.75 percent Series B Non-Cumulative Perpetual Preferred Stock payable on Sept. 1, 2022 to shareholders of record at the close of business on Aug. 17, 2022. The amount and timing of any future dividend payments to both preferred and common shareholders will be subject to the approval of Pinnacle's Board of Directors.

WEBCAST AND CONFERENCE CALL INFORMATION

Pinnacle will host a webcast and conference call at 8:30 a.m. CT on July 20, 2022, to discuss second quarter 2022 results and other matters. For those who plan to watch and listen only without asking questions, please access the presentation and streaming audio on the investor relations page of Pinnacle’s website at www.pnfp.com.

For those who plan to watch, listen and ask questions, please register using this link. Once registered, you will receive an email with instructions for accessing the audio portion of the call only. To watch the presentation, as well, click the link on the investor relations page of www.pnfp.com.

For those unable to participate in the webcast, it will be archived on the investor relations page of Pinnacle's website at www.pnfp.com for 90 days following the presentation.

Pinnacle Financial Partners provides a full range of banking, investment, trust, mortgage and insurance products and services designed for businesses and their owners and individuals interested in a comprehensive relationship with their financial institution. The firm is the No. 1 bank in the Nashville-Murfreesboro-Franklin MSA, according to 2021 deposit data from the FDIC, is listed by Forbes among the top 25 banks in the nation and earned a spot on the 2022 list of 100 Best Companies to Work For® in the U.S., its sixth consecutive appearance. American Banker recognized Pinnacle as one of America’s Best Banks to Work For nine years in a row and No. 1 among banks with more than $11 billion in assets in 2021.

Pinnacle owns a 49 percent interest in Bankers Healthcare Group (BHG), which provides innovative, hassle-free financial solutions to healthcare practitioners and other licensed professionals. Great Place to Work and FORTUNE ranked BHG No. 4 on its 2021 list of Best Workplaces in New York State in the small/medium business category.

The firm began operations in a single location in downtown Nashville, TN in October 2000 and has since grown to approximately $40.1 billion in assets as of June 30, 2022. As the second-largest bank holding company headquartered in Tennessee, Pinnacle operates in 15 primarily urban markets across the Southeast.

Additional information concerning Pinnacle, which is included in the Nasdaq Financial-100 Index, can be accessed at www.pnfp.com.

Forward-Looking Statements

All statements, other than statements of historical fact, included in this press release, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words "expect," "anticipate," "intend," "may," "should," "plan," "believe," "seek," "estimate" and similar expressions are intended to identify such forward-looking statements, but other statements not based on historical information may also be considered forward-looking statements. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from the statements, including, but not limited to: (i) deterioration in the financial condition of borrowers of Pinnacle Bank and its subsidiaries or BHG, including as a result of the negative impact of inflationary pressures on our and BHG's customers and their businesses resulting in significant increases in loan losses and provisions for those losses and, in the case of BHG, substitutions; (ii) fluctuations or differences in interest rates on loans or deposits from those that Pinnacle Financial is modeling or anticipating, including as a result of Pinnacle Bank's inability to better match deposit rates with the changes in the short-term rate environment, or that affect the yield curve; (iii) adverse conditions in the national or local economies including in Pinnacle Financial's markets throughout Tennessee, North Carolina, South Carolina, Georgia, Alabama and Virginia, particularly in commercial and residential real estate markets; (iv) the inability of Pinnacle Financial, or entities in which it has significant investments, like BHG, to maintain the long-term historical growth rate of its, or such entities', loan portfolio; (v) the ability to grow and retain low-cost core deposits and retain large, uninsured deposits, including during times when Pinnacle Bank is seeking to limit the rates it pays on deposits; (vi) changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; (vii) effectiveness of Pinnacle Financial's asset management activities in improving, resolving or liquidating lower-quality assets; (viii) the impact of competition with other financial institutions, including pricing pressures and the resulting impact on Pinnacle Financial’s results, including as a result of compression to net interest margin; (ix) the effects of new outbreaks of COVID-19, including actions taken by governmental officials to curb the spread of the virus, and the resulting impact on general economic and financial market conditions and on Pinnacle Financial's and its customers' business, results of operations, asset quality and financial condition; (x) further public acceptance of the booster shots of the vaccines that were developed against the virus as well as the decisions of governmental agencies with respect to vaccines including recommendations related to booster shots and requirements that seek to mandate that individuals receive or employers require that their employees receive the vaccine; (xi) those vaccines' efficacy against the virus, including new variants; (xii) the results of regulatory examinations; (xiii) Pinnacle Financial's ability to identify potential candidates for, consummate, and achieve synergies from, potential future acquisitions; (xiv) difficulties and delays in integrating acquired businesses or fully realizing costs savings and other benefits from acquisitions; (xv) BHG's ability to profitably grow its business and successfully execute on its business plans; (xvi) risks of expansion into new geographic or product markets; (xvii) any matter that would cause Pinnacle Financial to conclude that there was impairment of any asset, including goodwill or other intangible assets; (xviii) the ineffectiveness of Pinnacle Bank's hedging strategies, or the unexpected counterparty failure or hedge failure of the underlying hedges; (xix) reduced ability to attract additional financial advisors (or failure of such advisors to cause their clients to switch to Pinnacle Bank), to retain financial advisors (including as a result of the competitive environment for associates) or otherwise to attract customers from other financial institutions; (xx) deterioration in the valuation of other real estate owned and increased expenses associated therewith; (xxi) inability to comply with regulatory capital requirements, including those resulting from changes to capital calculation methodologies, required capital maintenance levels or regulatory requests or directives, particularly if Pinnacle Bank's level of applicable commercial real estate loans were to exceed percentage levels of total capital in guidelines recommended by its regulators; (xxii) approval of the declaration of any dividend by Pinnacle Financial's board of directors; (xxiii) the vulnerability of Pinnacle Bank's network and online banking portals, and the systems of parties with whom Pinnacle Bank contracts, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches; (xxiv) the possibility of increased compliance and operational costs as a result of increased regulatory oversight (including by the Consumer Financial Protection Bureau), including oversight of companies in which Pinnacle Financial or Pinnacle Bank have significant investments, like BHG, and the development of additional banking products for Pinnacle Bank's corporate and consumer clients; (xxv) the risks associated with Pinnacle Financial and Pinnacle Bank being a minority investor in BHG, including the risk that the owners of a majority of the equity interests in BHG decide to sell the company or all or a portion of their ownership interests in BHG (triggering a similar sale by Pinnacle Financial and Pinnacle Bank) if not prohibited from doing so by Pinnacle Financial or Pinnacle Bank; (xxvi) changes in state and federal legislation, regulations or policies applicable to banks and other financial service providers, like BHG, including regulatory or legislative developments; (xxvii) fluctuations in the valuations of Pinnacle Financial's equity investments and the ultimate success of such investments; (xxviii) the availability of and access to capital; (xxix) adverse results (including costs, fines, reputational harm, inability to obtain necessary approvals and/or other negative effects) from current or future litigation, regulatory examinations or other legal and/or regulatory actions, including as a result of Pinnacle Bank's participation in and execution of government programs related to the COVID-19 pandemic; and (xxx) general competitive, economic, political and market conditions. Additional factors which could affect the forward looking statements can be found in Pinnacle Financial's Annual Report on Form 10-K for the year ended December 31, 2021, and subsequently filed Quarterly Reports on Form 10-Q and Current Reports on Form 8-K filed with the SEC and available on the SEC's website at http://www.sec.gov. Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this press release, which speak only as of the date hereof, whether as a result of new information, future events or otherwise.

Non-GAAP Financial Matters

This release contains certain non-GAAP financial measures, including, without limitation, earnings per diluted common share, PPNR, efficiency ratio and the ratio of noninterest expense to average assets, excluding in certain instances the impact of expenses related to other real estate owned, gains or losses on sale of investment securities, FHLB restructuring charges, hedge termination charges and other matters for the accounting periods presented. This release also includes non-GAAP financial measures which exclude the impact of loans originated and forgiven and repaid under the PPP. This release may also contain certain other non-GAAP capital ratios and performance measures that exclude the impact of goodwill and core deposit intangibles associated with Pinnacle Financial's acquisitions of BNC, Avenue Bank, Magna Bank, CapitalMark Bank & Trust, Mid-America Bancshares, Inc., Cavalry Bancorp, Inc. and other acquisitions which collectively are less material to the non-GAAP measure as well as the impact of Pinnacle Financial's Series B Preferred Stock. The presentation of the non-GAAP financial information is not intended to be considered in isolation or as a substitute for any measure prepared in accordance with GAAP. Because non-GAAP financial measures presented in this release are not measurements determined in accordance with GAAP and are susceptible to varying calculations, these non-GAAP financial measures, as presented, may not be comparable to other similarly titled measures presented by other companies. 

Pinnacle Financial believes that these non-GAAP financial measures facilitate making period-to-period comparisons and are meaningful indications of its operating performance. In addition, because intangible assets such as goodwill and the core deposit intangible, and the other items excluded each vary extensively from company to company, Pinnacle Financial believes that the presentation of this information allows investors to more easily compare Pinnacle Financial's results to the results of other companies. Pinnacle Financial's management utilizes this non-GAAP financial information to compare Pinnacle Financial's operating performance for 2022 versus certain periods in 2021 and to internally prepared projections.