Pinnacle Financial Partners Q4 2024 Earnings Call Transcript

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Provided by Quartr
January 22, 2025
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Operator

Good morning, everyone, and welcome to the Pinnacle Financial Partners' 4th Quarter 2024 Earnings Conference Call. Hosting the call today from Pinnacle Financial Partners is Mr. Terry Turner, Chief Executive Officer and Mr. Harold Carpenter, Chief Financial Officer. Please note Pinnacle's earnings release and this morning's presentation are available on the Investor Relations page of their website at www.pnfp.com.

Operator

Today's call is being recorded and will be available for replay on Pinnacle's website for the next 90 days. At this time, all participants have been placed in a listen only mode. The floor will be open for your questions following the presentation. Call. During this presentation, we may make comments which may constitute forward looking statements.

Operator

All forward looking statements are subject to risks, uncertainties and other facts that may cause the actual results, performance or achievements of Pinnacle Financial to differ materially from any results expressed or implied by such forward looking statements. Many of such factors are beyond Pinnacle Financial's ability to control or predict, and listeners are cautioned not to put undue reliance on such forward looking statements. A more detailed description of these and other risks is contained in Pinnacle Financial's annual report on Form 10 ks for the year ended December 31, 2023, and at subsequent filed quarterly reports. Pinnacle Financial disclaims any obligation to update or revise any forward looking statements, disclaims any obligation to update or revise any forward looking statements contained in this presentation, whether as a result of new information, future events or otherwise. In addition, these remarks may include certain non GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non GAAP measures to the comparable GAAP measures will be available on Pinnacle Financial's website at www.pnfp.com. With that, I am now going to turn the presentation over to Mr. Terry Turner, Pinnacle's President and CEO.

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

Thank you, Paul. Good morning. We'll begin where we always do, the shareholder value dashboard on a GAAP basis first, then the non GAAP measures by which we actually run the business. I expect most people on this call are well familiar with the strong correlation between share price performance and 3 key performance metrics: revenue growth, fully diluted EPS growth and tangible book value per share accretion. But when I think about how a firm like ours delivers on those 3 key performance metrics, Asset quality is a really critical measure that has to be sustained.

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

Nothing will be more damaging to EPS and tangible book value per share growth and outsized loan losses. And the balance sheet has to grow reliably. Between 70% 80% of our earnings will always be derived from the margin on our balance sheet volumes. Obviously, the things that we can and do work on to protect and enhance our margin percentage, but in the end, without sustainable loan and deposit growth, it will be difficult to reliably grow revenue, EPS and tangible book value, the only three metrics I'm familiar with to deliver elevated shareholder returns. And so in this firm, we measure an immense number of performance variables, variables like net promoter scores, associate retention rates, deposit cost betas, loan yield betas, net interest margin percentages, efficiency ratios, ROAs and the like.

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

But as far as I know, none of those financial metrics are very highly correlated with share price performance. And so that's why I work so hard to not be distracted by all kinds of interesting but extraneous measures and at least as it relates to PNFP, why I try to keep investors from being distracted by them either. The goal here is to crystallize for you our performance on those specific measures that I believe truly result in elevated total shareholder returns. 4th quarter was a whale of a quarter for us in my opinion. Adjusted revenue growth was strong, adjusted fully diluted EPS growth was strong and tangible book value per share growth was strong, all with double digit 5 year CAGRs.

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

Asset quality remained strong and balance sheet growth was extraordinarily strong, which as I just alluded to, tends to pretend strong ongoing growth in revenue, EPS and tangible book value. Harold is going to review in detail the quarterly financials in just a minute, including betas and efficiency ratios and so forth. He'll provide our 2025 outlook, which calls for double digit revenue growth. But my objective here is to help investors to focus on how we deliver, how we're executing on our hedgehog strategy, which is our simple, repeatable formula for delivering on those variables that we believe result in outsized shareholder returns. It all begins with attracting talent.

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

We target the best revenue producers in our markets, those that have large and loyal client follows. I believe this is likely Pinnacle's greatest core competence. This has been our primary competence for nearly 25 years now, but we set a new record in 2024 for the number of highly experienced revenue producers we were able to attract. Not only is this at the core of our strategy to grow revenue, EPS and tangible book value per share in general, but the fact that we set a new record for hiring revenue producers in 2024 is primarily what fuels our optimism for 2025. Everyone including me is hoping for a better operating environment for banks in 2025.

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

But as you can see here with this kind of long standing and ongoing market share moving momentum, we have a lot more than just hope to rely on. Here's how it worked for 2024. You can see here that we were able to grow our loans $2,800,000,000 or 8.6 percent, well beyond peers and well beyond what the market would have yielded had we simply relied on economic and market growth trends for the year. But at Pinnacle, we relentlessly build strategic growth initiatives. As an example, new specialties like franchise lending and equipment lending to name a couple along with market extensions to large high growth markets like DC and Jacksonville, Florida and so forth.

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

And of course, we continue to leverage our reputation as a great place to work in order to successfully recruit and hire in our legacy markets. But the combination of revenue producers that we hired over the last 3 years in both our strategic initiatives and in our legacy markets accounted for more than 100 percent of our loan growth in 2024. So you can see the power of our continuous recruitment of revenue producers. Again, given that we set a record for revenue producer hires in 2024 and are targeting similar results for 2025, it's easy to understand our calls for optimism regarding ongoing growth in 2025 and beyond. But in the final analysis, going back to the shareholder value dashboard, the end game has to be growth in revenue, growth in EPS and growth in tangible book value per share.

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

So look at this. This is our ongoing track record for delivering net interest income, far and away the largest component of our revenue and EPS. Our 10 year CAGR for net interest income is a peer leading 12.7%. The number of times in the last 40 quarters that we failed to deliver year over year growth in net interest income is a peer leading 1 quarter. Only 1 quarter in the last 40 did we fail to grow net interest income year over year.

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

That compares to a peer median of 11 failures out of 40 quarters to grow net interest income on a year over year basis, a peer average of 11. And so we produced positive net interest income growth during each of the 3 up or down rate cycles since Q3 of 2015. So that's how we deliver outsized total shareholder returns year in and year out. We focus on revenue growth, fully diluted EPS growth and tangible book value per share growth. It all begins with our unique ability to attract revenue producers with large and loyal client followings, which produce reliable and outsized balance sheet growth that yields strong and reliable net interest income growth quarter in and quarter out.

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

So with that as a backdrop, Harold, why don't you walk us through the Q4 in greater detail on how that sets us up for the growth in 2025?

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Thanks, Terry. Good morning, everybody. We will start with loans. End of period loans increased by 13.7% linked quarter annualized. This is better than we thought at the beginning of the quarter and provides us a strong running start going into 2025.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

We're introducing our loan growth expectations for 2025 with a range of 8% to 11% end of period growth. It remains an uncertain environment as to rates, but with the yield curve trending more positive and the election now decided, our belief is that we enter 2025 with even more optimism than we've had in several years and that our clients are gaining more confidence about growth. As to our end of period rates, SOFR and prime rates are reflective of the Fed decreases. But as you know, one of the keys to our financial plan all year long has been increasing pricing on the renewal of fixed rate credit. As the top right slide indicates, we're expecting slightly less than $1,000,000,000 in cash flows from our fixed rate loan portfolio coming to us in the Q1 of 2025 with an average yield of around 5.06.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

We believe the yield left on these volumes of nearly 150 to 200 basis points is a reasonable assumption and is a key component to our near term net interest growth. Deposit growth was again a real bright spot for us in the 4th quarter as we increased deposits by $1,900,000,000 in the 4th quarter, one of the strongest growth quarters we've ever experienced. There was some seasonality in our 4th quarter growth, but as Terry mentioned, also contributing to outsized growth were our investments and deposit verticals as well as the work of our new associates in several of our newer markets. Another price spot is that core deposits are up year over year by 13%, while non core deposits are essentially flat from last December. As to 2025, we're introducing a growth rate for total deposits of 7% to 10% for 2025 over 2024.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

We believe this is reasonable as we balance wallet deposit growth with a keen eye on pricing. We are very pleased with how deposit pricing has performed over the last few months as our relationship managers have been diligent and making sure that we're able to reprice our deposits as quickly as we can to offset the impact of a lower rate environment to our earning assets. So far, our deposit beta has outperformed our loan beta. The chart on the top right of the slide shows that during the upgrade cycle from the end of 2021 to the end of June 2024, our loan rates increased with a 59% beta, while over the last 6 months or so as rates have come down, our loan rates have decreased with a 45% beta. Our fixed rate loans have a negative beta, which obviously helps slow the pace of these loan rate decreases.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

This is where the yield curve is critical. If it steepens, those fixed rate renewals become even more helpful. That said, what I believe most are interested in is deposit pricing. We are on pace and present to match our upgrade deposit beta as we are pacing at around 58 percent so far. We believe we can continue to manage our deposit rates down over the next several months even if we should we've not experienced any near term rate decreases.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

We will continue to pursue reduced rates on accounts where we believe rates are out of market and look to improve our deposit mix given our liquidity posture, which we believe is very strong net present. As expected, we're pleased that our NIM held at 3.22%. Our outlook for the Q1 of 2025 is that we believe our NIM and net interest income will be flattish after we consider the impact of fewer calendar days in the Q1 of 2025. As to 2025, we believe our net interest income growth will approximate a range of 11% to 13%. The yield curve will have significant influence on how all that plays out in 2025, but so far call us optimistic about our prospects.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

So what if there's more rate cuts? We think that's probably good for our NIM and our net interest income results. But in summary, as Terry discussed earlier, we have enormous market share momentum that should result in net interest income growth. With the national actions now determined and assuming the macro environment can maintain a more traditional yield curve and commercial clients come back with increased energy to grow, we believe all point to a better operating environment for a bank like ours. We're again presenting our traditional credit metrics.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Our net charge offs were consistent with 3Q and brought our net charge offs to around 23 basis points for the year. For 2025, the current view of our own portfolio is that net charge offs for 2025 should come in 2016 20 basis points. That's based on recent scrubs of our non performance classified and weaker consumer credits by all of our credit teams. All in, no real change in how we feel about credit as we head into the Q1 of 2025. Now fees, which has been a real bright spot in 2024 with adjusted fees up 15% year over year.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Excluding the impact of BHG, fee revenues were basically flat quarter over quarter. Our wealth management units have had a strong year and fully expect the efforts of our wealth management professionals will have a strong year in 2025. The fees associated with our other core banking activities are also strong as we head into the New Year. As for our outlook for 2025, including BSG, we believe a reasonable fee growth guide for our firm is around 8% to 10% this year. Expenses came in slightly more than where we thought, primarily due to incentive costs.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Given we are reporting stronger earnings here in the Q4, this impacted our incentive plans. As to the math, we increased our incentive accrual by about $3,000,000 in the 4th quarter to get to an approximate 98% of target award. We had anticipated a 90% target award last quarter with our Q4 fully diluted EPS coming in better than anticipated by about 0 point 0 $0.06 to 0 point 0 $0.07 the tiering structure of our plan required us to allocate more to the incentive accrual. Additionally, our hiring was again robust in the Q4 with 35 new revenue producers for a total of 161 added for the full year. Going into the Q1, our recruiting pipeline continues to be strong across the franchise.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

We are introducing our 2025 expense guide at a low of $1,130,000,000 to a high of $1,150,000,000 Our incentives will always influence our ultimate expense result. We are anticipating a target payout currently in 2025. So as usual, if we are not achieving our plan, then our incentive costs as noted will be lower. If we are overachieving our plan, then our expense burden will need to be more like will need to be more, but some will EPS. Assuming hiring is consistent throughout 2025 and given we are awarding an almost 4% merit raise to our current associate base, our quarterly run rate for expenses should run fairly consistent with our expense run rates from 2024.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Now to BHG. As the slide indicates, originations picked up again in the 4th quarter with originations at $1,160,000,000 more than anticipated from last quarter. As to placements, total placements were less than originations, which was consistent with the previous 2 quarters. BHG continues to build inventory in order to execute another ABS transaction either during the latter part of the Q1 of 2025 or in the early part of the Q2. There remains great demand for BHG Fiber, both from the Community Bank Network and Wall Street.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

As to production, we need to emphasize BHG has not expanded its credit box at all. It began restricting its credit appetite in late 2022 early 2023 and has not adjusted its credit box for consumer or commercial credit since that time. As to recent production growth increases, they continue to refine their marketing platform to better target potential borrowers and expanded their footprint with business relationships with other Fintech Financial Firms that supply BHG with better lead generation, which produces more borrowers than meet BHG's credit standards. Strategically, BHG has a strong belief that the future of consumer lending will be through the digital channel like theirs and they are working hard to be the firm to capitalize on a growing digital channel. As to spreads, with the lower short end of the curve, auction platform spreads increased to 9.7% in the 4th quarter.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Concurrently, balance sheet loan spreads increased to 10.2%. All in, BHG believes spreads are improving as we have transitioned from a higher rate environment to lower rates on the short end of the curve. It should be noted that BHG began executing the ABS platforms in 2020 and have issued 10 transactions over the last few years and as they did in the Q4 have transacted numerous one off deals with institutional firms along the way. There has been a this has been a highly successful strategy as Wall Street keeps coming back for more. We believe the Wall Street firms that have acquired BHG Paper are sophisticated buyers of financial paper.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

What BHG has been able to accomplish over the last few years has been remarkable and what we believe is as important is that BHG has also broadened their brand up and down Wall Street exponentially. Now to credit. Off balance sheet substitution losses amounted to 4.9% in the 4th quarter, up from 4.2% in the 3rd. As a result, BHT increased reserves for off balance sheet losses to 7.1%. Of note is that prepayment losses increased to 1.7 percent in the Q4.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Prepayment losses are not credit related. These losses are reimbursed to purchasing banks for the premiums they pay on loans acquired from BHG. Prepayment losses will likely increase modestly in 2025 as with lower rates, prepayments are likely to increase especially as more consumer credit is issued. On balance sheet loan losses decreased slightly to 7.3% in the 4th quarter, while the CECL reserve increased to 9.3%, essentially the same percentage as of the end of last year. The good news is that past dues for both consumer and commercial are trending in the right direction, which hopefully is a sign of better credit experience in the not too distant future.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Where to from here? Our belief is that similar off balance sheet loss percentages will likely continue for the next few quarters, while on balance sheet percentages should continue to improve. Our BHG fees amounted to approximately $12,100,000 in the 4th quarter, less than we had anticipated at the beginning of the quarter. For all of 2024, our calculations indicate that BHG contributed about 6% of our consolidated earnings compared to about 9% in 2023. Our concluding thoughts on BHG have not changed.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

BHG management is focused on building a sustainable franchise with an even stronger balance sheet. We entered 2025 with a reasonable growth prospect at 10% from their 2024 effort. Lastly, we believe BHGE remains one of the most unique, profitable and dynamic fintech models in the country and with an even stronger balance sheet, BHGE should be an even stronger competitor in the FinTech space in the future. Lastly, as to our guide for 2025, we've talked about much of the information on this slide previously. The investments we've made in our new markets and our hiring success are the building blocks we will lean into as we attempt to deliver a top quartile result amongst our peers, which this guide should point toward.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

So a question we sometimes get is do we believe we will generate positive operating leverage in 2025? Maybe possibly, but as Terry alluded to at the start of the call, that will not be what we're focused on. Expense cutting works fine for a lot of firms, but we certainly don't believe now is the time for that, especially for us. Our DNA is about growing revenues and hiring people to know how to do just that. We target top quartile performance for growing EPS and in order to grow capital to support that growth we target increasing tangible book value per share and as Terry emphasized earlier all with a stellar credit backdrop.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

That is what we believe it takes to win as we grow this firm, carefully managing investments in people and places currently, all the while planning for strong results in both the near term and long term. There have been some remarkable macro events over the last 4 to 5 years. No doubt there will be more, but as it sits today, we have no reason not to be optimistic as we enter 2025. As I mentioned earlier, if the yield curve continues to trend more favorable and our under management clients continue to gain more confidence and start borrowing again for growth, I'm confident 2025 should be a strong year for Pinnacle. The best may yet truly be done.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

With that, I will send it back to Paul for Q and A.

Operator

Thank you. Mr. Turner, the floor is now open for questions. And the first question today is coming from Ben Gurlinger from Citi. Ben, your line is live.

Ben Gerlinger
Ben Gerlinger
Vice President of Equity Research at Citigroup

Hey, good morning guys.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Good morning. Hi Ben.

Ben Gerlinger
Ben Gerlinger
Vice President of Equity Research at Citigroup

Just wanted to touch base on expenses a little bit. I know that it's a large contributing factor is going to be the success of both hires and funding up their loan book. But when you think about just kind of the nuance between the high end and the low end, is it largely just that or is there any flex you might have, Harold, to pull levers or potentially do something outside of just the personnel related cost?

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Yes. I don't know if there's a whole lot we can do. There's obviously some expenses that we do around engagement and those kind of things that but those are all in the personnel line. Outside of that, I'm not really sure with non personnel costs if it's not already pretty much done. We could delay probably any build out on branches, those kind of things.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

But as it sits today, I don't know if there would be a material thing we could do with non personnel costs. But where we do have a lot of variability in our expense base, like you know, is around that incentive accrual as well as we have in the past delayed hiring and adjusted kind of our focus on where we want to grow the firm from a headcount perspective, those sort of things.

Ben Gerlinger
Ben Gerlinger
Vice President of Equity Research at Citigroup

Got you. Well, don't delay any hiring. People are upset on the expenses. They can deal with it for the franchise value. When you think, I don't know, just the cadence of margin or NII throughout the year, I mean, repricing on the funding side has been pretty solid.

Ben Gerlinger
Ben Gerlinger
Vice President of Equity Research at Citigroup

Do you think that there's a little bit of a back book still up to go there that could drive it for the second half of the year? Or is it really just kind of getting kind of fixed asset repricing on the left hand side higher that drives the kind of the latter 3Q and 4Q this year?

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Well, I think there's 2 things on the funding side that we can work on. First of all, we do have some outsized pricing on some deposits and we're working on that currently to try to bring those accounts back in line with the rest of the group. Also, I think we're going to have a significant push on growing operating accounts this year, whether they be commercial or consumer and attempt to increase our percentage back to as far as DDA percentage back to what we had pre COVID.

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

Hi, Ben. I might add to Harold's comments there. I think in his comment about lower and high deposit rates, we believe we've got some room there that's not really tied to the Fed movement. So again, we'll work hard on the beta as the Fed moves, but we'll drive some of those costs down irrespective of whether there's a Fed move.

Ben Gerlinger
Ben Gerlinger
Vice President of Equity Research at Citigroup

Got you. Yes, I appreciate that. I just wanted to double check, but you can drive them lower in the next 6 months or just kind of looking over the next 12 plus?

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

So I think this is a current initiative we've got going on and we're looking at all kinds of data and trying to point the troops in the right direction there. So it's a current event. We had a belief here over the last month or so that a near term Fed rate decrease was not going to be was not as what we would say is we didn't think it was likely to happen. And so consequently, we got to figure a way to get some more cost out of that funding book. And so we started working on it then.

Ben Gerlinger
Ben Gerlinger
Vice President of Equity Research at Citigroup

Okay. Sounds good. Appreciate it, guys.

Operator

Thank you. The next question will be from Jared Shaw from Barclays. Jared, your line is live.

Jared Shaw
Jared Shaw
Managing Director at Barclays Capital

Hey, good morning guys.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Good morning.

Jared Shaw
Jared Shaw
Managing Director at Barclays Capital

Yes, just maybe sticking with the variable expense, you said you're targeting sort of a full payout for the incentive comp. What does that assume for NII in revenues? Is that assuming sort of the higher end of the range or even beyond the range? Or what does the revenue picture look like to Yes.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

That's a great question. As far as the target payout, I think if you were to assume a midpoint in there, you're going to be really close. So I don't know if that answers your question, but

Jared Shaw
Jared Shaw
Managing Director at Barclays Capital

Yes. That's okay. That's good color. And just looking you look at the slide that Terry pointed out earlier just with the 10 year trend in NII being above basically call it at the high end of this range, what would have to happen to see NII come in higher than the range? It feels like you're talking about some good trends and continued growth, continued hiring, the benefit of potentially being able to reprice some of those deposits.

Jared Shaw
Jared Shaw
Managing Director at Barclays Capital

What would have to happen to sort of come in higher than the range?

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Yes. I think well, obviously, if we are at the higher end of the loan growth number, I think we can do that. Also, if our pricing and our margin assumption holds for this year, I think we can do that as well. So we feel as confident as I think we ever have on our net interest income guide. This will be and we've got some more work we can do with some other the bond book and stuff like that that we can work on as it presents itself.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

But as it's just today, as we look at 2025 and our revenue picture, we feel pretty strongly that it will be a solid year for this firm.

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

Jared, I think, again, I might just add to Harold's comments as you're looking for what would create upside. I think the principal thing that would create upside is to the extent the economy heats up and loan demand outpaces what we've planned for. Again, most of our growth and as we as I talked at the beginning, essentially all our loan growth came from new revenue producer hires, which is just another way of saying it's all market share movement. And so to the extent you really get a pickup in economic loan demand, I think that's your opportunity for upside.

Jared Shaw
Jared Shaw
Managing Director at Barclays Capital

Okay. All right. That's good color. Thanks.

Jared Shaw
Jared Shaw
Managing Director at Barclays Capital

And just finally for me, maybe any updated strategic expectations for BHG as we look at them continuing to grow the reserve for the off balance sheet loans? Is that continue to sort of be the biggest area they're trying to backfill right now?

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Well, I think that's one big thing they're going to be focused on this year for sure is building a balance sheet that is probably well, it'll be stronger, but the deal is so that somebody may not be able to criticize it quite as strongly. I'll say it like that. The other thing they're working on is this production platform. And I would say they're really excited about some opportunities that they've got that they're working on to drive production here for the next several years really.

Jared Shaw
Jared Shaw
Managing Director at Barclays Capital

Okay. Thanks a lot.

Operator

The next question will be from Michael Rose from Raymond James. Michael, your line is live.

Michael Rose
Michael Rose
Managing Director - Equity Research at Raymond James Financial

Hey, good morning guys. Thanks for taking my questions. Just as it relates to Slide 21, which I thought was really interesting, can you just help us frame that? And just given what you're expecting to bring on in terms of hires, which I think you said would be similar this year as opposed to last year, could we expect those kind of capacity numbers to actually continue to grow from here so that as we move into 2027, those numbers would move higher? Just trying to get a better sense of how we should kind of use and kind of think about the slide. Thanks, guys.

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

Let's see, Michael, if I understand you're interested in what's the likelihood that we outpace our revenue hiring?

Michael Rose
Michael Rose
Managing Director - Equity Research at Raymond James Financial

Well, just as it relates to Slide 21, you give the $5,900,000,000 and the $5,600,000,000 in loans, but I assume that's based on what you have in terms of lenders today, but you are going to continue to hire, right? So is it a fair assumption that those numbers would move higher over time as you hire lenders or RMs?

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

There is likelihood of that for sure. I think again what Michael, you've followed us a long time. Here's the way it generally works. You hire revenue producers. They generally consolidate their books over a 5 year period of time.

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

It more or less comes in on a straight line basis. And so the 1st year as you're hiring people, you don't get 12 months worth of the revenue growth and so forth. So the timing, the pace, all those things provide opportunity for us to outrun this number. But again, you got to drive a stake in the ground and say, hey, let's just get it on a sort of steady state here, what do we think we're going to do. And as you know, we're generally pretty opportunistic as we hire people.

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

And when we find opportunities, we wait in and get them hired. So to the extent we outrun those numbers, it will produce more balance sheet growth both in the current period and in the future periods.

Michael Rose
Michael Rose
Managing Director - Equity Research at Raymond James Financial

Yes. I think what I was just trying to drive at is it does seem like you guys can run at these levels or even higher over the next couple of years in terms of growth, at least in dollars. So

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

that's a I believe that's true, Michael.

Michael Rose
Michael Rose
Managing Director - Equity Research at Raymond James Financial

Yes. Okay, perfect. And then maybe, Terry, just given the change in the administration and what we know so far, which maybe not a lot, but a lot of expectations out there. Does it change your kind of worldview on M and A? I mean, you guys do have a really nice currency.

Michael Rose
Michael Rose
Managing Director - Equity Research at Raymond James Financial

I know you guys are growing organically, but is there any change in thought as it relates to M and A potential as we move forward? Thanks.

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

Yes. I don't think so. Honestly, when we can hire at the pace we hire, when we can sort of produce double digit growth without taking on the risk of acquisition, the premium, the integration risk, all those kinds of things. We like where we are. Again, I just go back to over a decade here, we've thrown a pretty extraordinary net interest income growth using this model.

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

And so I'm inclined to stick with it. And again, I don't rule it out. You're correct. Our currency is strong. And if there were something that were unusually attractive, perhaps we could be lured into that.

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

But fundamentally, we're going to run straight ahead running the same model we've been running for a long time.

Michael Rose
Michael Rose
Managing Director - Equity Research at Raymond James Financial

Perfect. Thanks for taking my questions.

Operator

Thank you. The next question will be from Catherine Mealor from KBW. Catherine, your line is live.

Catherine Mealor
Managing Director at Keefe, Bruyette & Woods (KBW)

Thanks. Good morning.

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

Hi, good morning.

Catherine Mealor
Managing Director at Keefe, Bruyette & Woods (KBW)

I wanted to ask about the fee growth guide of 8% to 10%. We've seen a higher level of fee growth in 2024. And so just curious if there's just conservatism in that 8% to 10% range or if there's just why would that not be kind of similar to the levels that we've seen over the past couple of quarters?

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Well, I think what we'd like to say is that the guide off the down end of that page has got a level of conservatism to it. We're going to push for higher numbers because as I said, this points to a target payout and we're looking at 98% this year and our folks want to try to get their maximum payout, which would imply a much we will head toward we will try to steer this firm to a much stronger result. But we felt like for this call, we needed to kind of be present some conservatism in our numbers. As to fees specifically, there were a number of things that happened this year, particularly with regard to, call these other equity investments and some other things that happened that were kind of one off that we think there will be one off things in 2025 as well, so call it recurring, nonrecurring. But we don't plan for that at nearly the same growth rate that we do for the core banking strategies.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

And I think that's really what's the important part is how we believe about what we believe about wealth management, what we believe about mortgage and what we believe about all these other lines of businesses that we've invested in over the last 2 or 3 years. And we fully intend for those units to perform towards the upper end of that range. And for us to get paid at the higher level for our incentives, they need to exceed these ranges. So that's where we're going to aim. I don't know if I got to all of your questions, Catherine. I gave you a lot.

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

Catherine,

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

I'm just going to sort of make it simple here on the incentive. What Harold just said to you is this level of production warrants targeted incentives. You can be sure that's not what my personal objective is. My personal objective is to get that incentive paid at a higher level, which means I got to produce a lot more growth and a lot more EPS growth than what it takes to hit the target.

Catherine Mealor
Managing Director at Keefe, Bruyette & Woods (KBW)

Yes, that's fair. And maybe on the fee, it's probably maybe just a lot of the income from other equity investments, investments because that was about $14,000,000 this quarter and that can be so lumpy and hard to model. So maybe you just can kind of conceptually start that as at a lot lower and then you could see some surprises there which was to lead to upside. Is that a fair way to think about it?

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Yes, for sure. On that particular line item, there's other places where we have one offs this year that we kind of take a more conservative posture with too. But that's exactly right.

Catherine Mealor
Managing Director at Keefe, Bruyette & Woods (KBW)

Yes. Okay. That makes sense. And then also on the NII growth, I know you talked a little bit about the margin expectations for next quarter. But is there the assumption that we should see NIM expansion throughout the year as a way to hit that 11% to 13% NII growth?

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Yes, that's absolutely right. We should see NIM expansion. The way the yield curve is shaping up for us, if it continues to improve, then we fully anticipate that our NIM should also expand concurrently with that. So yes.

Catherine Mealor
Managing Director at Keefe, Bruyette & Woods (KBW)

Great. Okay. Thank you so much. Appreciate it.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Thanks, Catherine.

Operator

Thank you. The next question will be from Anthony Eleon from JPMorgan. Anthony, your line is live.

Anthony Elian
Anthony Elian
Equity Research Analyst at JP Morgan

Hi, everyone. Can you give more color on the very strong loan and deposit growth you saw in the Q4? Was there anything specific in the quarter that contributed to 4Q being one of your strongest ever growth quarters, particularly on the loan side?

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

I think on the loan side, Tony, the I'd go at it this way. Any quarter, you got some things that land in the quarter that you thought might come in a future quarter on both sides, both the growth and the pay downs. And so I think we probably had good timing on both sides of that. But it was really pretty fundamental growth across the board in terms across the board, meaning across the geographies as well as across product lines. But Harold, you want to add to that?

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Yes. I think I'll just add somewhat of an intangible to it, Tony. I'll talk to 15 to 20 relationship managers over the course of the quarter. And the way they put it to me is, I'm a lot busier today than I was 6 months ago. And so there are inbound calls from their client base looking at trying to acquire capital to grow their franchises.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

And so that's a really strong indication for me that people are taking a different perspective going into 2025.

Anthony Elian
Anthony Elian
Equity Research Analyst at JP Morgan

Thank you. And then my follow-up in the press release you noted that BHG exited the SBA loan program. Is there anything else BHG has in the pipeline or they're thinking about in terms of optimization and focusing back on the core business? Thank you.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

There are some others. We'll see if they get to those. One that they did exit in addition to SBA was this buy now pay later business that they had invested in over the last several years. That's now and I think at the end of the day, I believe there's about 200 heads that have come out of BHG because of that. And so we count all that.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

We like to believe that as BHG heads back towards that more core business profile that that will enhance not only their earnings stream but also the franchise bank.

Operator

Bank. The next question will be from Nick Calico from UBS.

Nicholas Holowko
Nicholas Holowko
Director at UBS Group

I think on Slide 10, you noted that the origination yields that you were experiencing in the quarter were impacted by some rate volatility and competition. Was there anything worth standing out that you experienced during the quarter on the competition front? And if we don't get any more cuts and the yield curve kind of maintains its current shape, could we expect some improvements in the origination yields going forward?

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Yes. I'm not if we don't get any more cuts, I'm not it's not that impactful to our net interest income for 2025, our guide, I'd say that. As to whether or not competitive pressure, whether it increases or decreases, where they are today, I don't think so. I think what has really got borrowers excited is about where they think about what they think their future risk look like perhaps under the new administration and what their business opportunity may look like. So I think the yield curve is impactful to that.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Rates have come down now about 100 basis points. If rates come down another 100 basis points, I think that would impact probably a lot more. Lending activities, but as it sits today, we're pretty optimistic about what 2025 could do for us. Is that where you were headed, Nick?

Nicholas Holowko
Nicholas Holowko
Director at UBS Group

Yes, that's perfect. Thank you. And then maybe just as a follow-up, the outlook your outlook on credit calls for a nice improvement in charge off experience and provisioning for 2025. I think the bulk of the increase you saw in 2024 was more on the C and I side, but you have some maturities coming up on CRE in 2025. So can you just talk a little bit about where you expect to see the improvement in the year ahead? Thank you.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Yes. We don't expect CRE to do any kind of drastic if there's any drastic loss content in commercial real estate, where we tend to find our lumpiness in net charge offs is in the C and I book, and we don't anticipate that to change.

Nicholas Holowko
Nicholas Holowko
Director at UBS Group

Thanks for taking my questions.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Sure, Nick.

Operator

Thank you. The next question will be from Brian Martin from Janney Montgomery. Brian, your line is live.

Brian Martin
Director - Banks & Thrifts at Janney Montgomery Scott

Hey, good morning, guys.

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Good morning.

Brian Martin
Director - Banks & Thrifts at Janney Montgomery Scott

Hey, Harold. I was wondering if you could comment just a little bit on the margin outlook. I guess if we do get a steepening in the curve here, kind of what is the margin trend kind of throughout the year and kind of going into 26% here? I guess in terms of longer term, just kind of how should we be thinking about that in the new kind of environment? And then, I guess secondly, I guess if we don't see the cuts you're expecting, I guess, maybe your recent comment just sounds like it doesn't change much with your NIM or NII guide, but the first part more on just kind of where the margin trends with a better environment here?

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Well, steeper is better. Granted, there's always there's guardrails on that, but at the same time, a steeper curve is good for us. As we sit today, we think I don't I think we can see the margin improve over the course of the year, maybe 10 to 20 basis points, just depends on how the curve responds. But with the current guide, we're looking at call it a 10 basis points to 20 basis points improvement.

Brian Martin
Director - Banks & Thrifts at Janney Montgomery Scott

Got you. Okay. And as far as the I think just on the fee income, just one specific I guess more specific question, just on the non recurring items or volatile items, however you want to frame them, Harold, outside of the equity gains in the other line that there was a one time gain of not a one time gain, but there was an unusual gain. Is that I guess, I think you mentioned it some comments in there or maybe earlier. What was in that other line that was maybe somewhat lumpy?

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Well, we had a gain on the lease termination. That was I think probably around $750,000 and then there were a couple of other that might have added up to about $1,500,000 or so.

Brian Martin
Director - Banks & Thrifts at Janney Montgomery Scott

Okay. So really only about $1,500,000 was kind of in the lumpy range in terms of in that other line?

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

I think so. Somewhere in that neighborhood, call it $2,000,000

Brian Martin
Director - Banks & Thrifts at Janney Montgomery Scott

Yes. Okay. Okay. And then if we I guess, my other comment about if we don't get any more cuts, it sounds like you're still optimistic about the margin here given actions you started to take or are taking?

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Yes. We're yes, I probably use the word optimism too much today. But I mean just thinking from a CFO's perspective, you've been in an inverted curve now for a long time. And to be to have the prospects of a traditional curve in 2025 and something that you can really latch into, and you can't help but be excited about what's coming down the pipe.

Brian Martin
Director - Banks & Thrifts at Janney Montgomery Scott

Got you. And as far as the deposit outlook, given the initiatives you guys have had, it sounds like the momentum there is still going to continue. Is there any area specific on the deposit front? I think you said some more on the DDA side kind of what you expect there and just kind of initiatives to I guess to sustain this great deposit growth?

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

Yes. Brian, I think you've heard us talk. We began, I guess, probably 3 years ago developing a number of deposit verticals aimed at large pockets of money, things like community associations, title attorneys, a variety of verticals there that tend to produce large pools of money. And so we continue to grow in our maturity and ability to execute those using our specialists to support the relationship managers in the field. And so again, my belief is, number 1, that you're still in the steep part of the growth curve from those initiatives generally.

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

And my suspicion is we'll add another or 2 over the course of the year. Again, to some extent, they're opportunistic, but we'll continue to look for and add specialties where we offer some value add to client base and a product area that yields lots of deposits. I think beyond that, one of the at the core, what we do is hire people that move relationships to us. We rely on our treasury management function. And as you saw the fee growth in treasury management last year was really strong as a high dime, but that's the principal mechanism by which we grow operating accounts.

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

And so at any rate, those are sort of the 2 thrust. I think the verticals and the treasury management focus on operating accounts.

Brian Martin
Director - Banks & Thrifts at Janney Montgomery Scott

Got you. And just the last one for me. In terms of the people you the recruiting this year, are there areas of the business or geographies where you're more focused or see more optimism in terms of your ability to bring people over or you expect to bring people over?

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

Yes. I think I would say there's not wild differences across the footprint. As you know, we operate in all all our markets are large metropolitan areas in the Southeast dominated by the same set of banks. And so we have, I guess, I would call it near universal success. But that said, there's no doubt in the new markets, we're able to add people at a more dramatic pace than existing markets.

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

We still add people in Nashville, where we have a really dominant market share position. We still add people, but we don't add at the same pace we do in Jacksonville, Florida, Washington, D.

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

C, Atlanta, Georgia and so forth. Bill, Florida, Washington, D. C, Atlanta, Georgia and so forth. So the only thing I would highlight is just the newer markets yield a higher percentage growth rate.

Brian Martin
Director - Banks & Thrifts at Janney Montgomery Scott

Got you.

Brian Martin
Director - Banks & Thrifts at Janney Montgomery Scott

Okay. Thanks for taking the questions and congrats on a great quarter.

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

Thanks, Ramin.

Operator

Thank you. The next question will be from Russell Gunther from Stephens. Russell, your line is live.

Russell Gunther
Managing Director at Stephens Inc

Hey, good morning, guys. I just had one follow-up question. Harold, you alluded to some potential work you guys could do on the bond book, and I wanted to just better understand how you're thinking about that. Is that something that would be a lever that if pulled would be purely gravy to that NII guide or something you'd only look to do if that NII guide became more challenging over the course of the year?

Harold Carpenter
Harold Carpenter
CFO at Pinnacle Financial Partners

Thanks for asking that question, Russell. No, that's not in our guide. We've got some tactics at the margin that we can work on there to kind of help improve our investment income over the course of the year. We did a pretty we did a strong restructuring in the Q2 of 2024, but we might have some we might have something we're looking at here over the course of the year, but it will be it won't be nearly as, call it influential to our results as that one was.

Russell Gunther
Managing Director at Stephens Inc

Okay, great. Understood. Hey, thanks for taking my question, guys.

Terry Turner
Terry Turner
President & CEO at Pinnacle Financial Partners

Thanks, Russ.

Operator

Thank you. There were no other questions. And this does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

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Key Takeaways

  • Pinnacle delivered double-digit growth in adjusted revenue, fully diluted EPS, and tangible book value per share in Q4, underpinned by strong asset quality and robust balance sheet expansion.
  • The firm’s “hedgehog” strategy focuses on three metrics—revenue growth, EPS growth, and tangible book value accretion—by recruiting top revenue producers with large, loyal client followings.
  • In Q4, end-of-period loans rose 8.6% year-over-year ($2.8 billion) and deposits grew by $1.9 billion, driven by market-share gains, specialty lending initiatives, and expanded treasury management efforts.
  • For 2025, Pinnacle guides to 8–11% loan growth, 7–10% deposit growth, 11–13% net interest income growth, 8–10% fee revenue growth, $1.13–1.15 billion in expenses, and net charge-offs of 16–20 bps.
  • The bank has achieved a peer-leading 12.7% ten-year CAGR in net interest income and grown NII in 39 of the last 40 quarters, highlighting the consistency of its margin-driven model.
AI Generated. May Contain Errors.
Earnings Conference Call
Pinnacle Financial Partners Q4 2024
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