2Q23 annualized linked-quarter, end-of-period loans grew 11.3%, while deposits grew 17.1%

Pinnacle Financial Partners, Inc. (Nasdaq/NGS: PNFP) reported net income per diluted common share of $2.54 for the quarter ended June 30, 2023, compared to net income per diluted common share of $1.86 for the quarter ended June 30, 2022, an increase of 36.6 percent. Net income per diluted common share was $4.30 for the six months ended June 30, 2023, compared to $3.51 for the six months ended June 30, 2022, an increase of approximately 22.5 percent.

Excluding losses on the sale of investment securities, other real estate (ORE) expense and gains on the sale of fixed assets associated with the firm's sale-leaseback transaction for the three months ended June 30, 2023 and 2022, net income per diluted common share was $1.79 for the three months ended June 30, 2023, compared to $1.86 for the three months ended June 30, 2022, a decrease of 3.8 percent. Excluding losses on the sale of investment securities, other real estate (ORE) expense and gains on the sale of fixed assets associated with our sale-leaseback transaction for the six months ended June 30, 2023 and 2022, net income per diluted common share was $3.55 for the six months ended June 30, 2023, compared to $3.51 for the six months ended June 30, 2022, an increase of 1.1 percent.

"This proved to be another sound operating quarter especially given the results of several critical performance metrics such as asset quality, net interest income growth and tangible book value accretion," said M. Terry Turner, Pinnacle's president and chief executive officer. "Second quarter results continue to reflect our longstanding and ongoing ability to leverage our award-winning work environment and market-leading net promoter scores to take market share from our large national and regional competitors. The second quarter of 2023 also saw us increase our thrust and focus on gathering client funding, which is the 'raw material' that we need to support our outsized loan and earnings growth over time. Consequently, our relationship managers attracted client funding from across our footprint, which resulted in deposit growth of over $1.5 billion this quarter. Loan growth during the second quarter of 2023 was $855 million, or 11.3% linked-quarter annualized. This amount is consistent with the outlook we provided in connection with our first quarter results and is reflective of our deliberate efforts to moderate loan growth by constraining certain asset classes and elevating loan pricing.

"We also added 20 revenue producers during the quarter. Despite all the uncertainty plaguing the industry, we continue to invest in our proven relationship banking model and believe, even during times such as these, that a consistent focus on attracting and retaining highly successful revenue producers and their clients will enable us to continue compounding earnings and accreting tangible book value more reliably than peers.

"Our second quarter diluted earnings per share includes the positive impact of $0.84 per diluted common share from a sale-leaseback transaction that was executed during the second quarter. The gain from the sale-leaseback transaction was partially offset by the realized net loss of approximately $0.10 per diluted common share from the sale of approximately $174.0 million in available-for-sale investment securities."

BALANCE SHEET GROWTH:

Total assets at June 30, 2023 were $46.9 billion, an increase of approximately $6.8 billion from June 30, 2022 and $1.8 billion from March 31, 2023, reflecting a year-over-year increase of 16.8 percent and a linked-quarter annualized increase of 15.6 percent, respectively. A further analysis of select balance sheet trends follows:

"End-of-period loans grew by $855.4 million over last quarter, and end-of-period deposits grew by $1.5 billion over the same period, reflecting an annualized linked-quarter growth rate of 11.3 percent and 17.1 percent, respectfully," Turner said. "We continued to experience a mix shift in our deposits as more deposits moved from noninterest-bearing accounts to interest-bearing accounts, albeit at a lesser pace than the previous quarters. We anticipate that the reduction in noninterest bearing balances will slow from the pace of previous quarters this year.

"Our cumulative deposit beta at June 30, 2023 increased to 48.0 percent, which is consistent with our expectations. We believe with more rate hikes in the forecast for 2023, our funding costs will increase just not at the same rate as the second quarter increase. Furthermore, we anticipate that the impact of our hiring and usual seasonal growth will enable us to continue to grow our deposits for the remainder of the year at levels that should support our current outlook of high single-digit percentage deposit growth for 2023 over 2022."

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

Pre-tax, pre-provision net revenues (PPNR) for the three and six months ended June 30, 2023 were $277.6 million and $467.6 million, respectively, inclusive of $85.7 million of gain on the sale of fixed assets as a result of the sale-leaseback transaction completed in the three months ended June 30, 2023, an increase of 43.1 percent and 32.0 percent, respectively, from the $194.0 million and $354.3 million, respectively, recognized in the three and six months ended June 30, 2022.

• Revenue per fully diluted common share was $6.43 for the second quarter of 2023, compared to $5.28 for the first quarter of 2023 and $5.14 for the second quarter of 2022, a 25.1 percent year-over-year growth rate. Excluding net losses on sales of investment securities, gain on the sale of fixed assets as a result of the sale-leaseback transaction and ORE expense, revenue per fully diluted share for the second quarter of 2023 was $5.43.
• Net interest income for the quarter ended June 30, 2023 was $315.4 million, compared to $312.2 million for the first quarter of 2023 and $264.6 million for the second quarter of 2022, a year-over-year growth rate of 19.2 percent.
  • Revenues from PPP loans approximated $34,000 in the second quarter of 2023, compared to $20,000 in the first quarter of 2023 and $4.1 million in the second quarter of 2022. At June 30, 2023, remaining unamortized fees for PPP loans were approximately $192,000.
  • Included in net interest income for the second quarter of 2023 was $776,000 of discount accretion associated with fair value adjustments, compared to $852,000 of discount accretion recognized in the first quarter of 2023 and $1.6 million in the second quarter of 2022. There remains $1.9 million of purchase accounting discount accretion as of June 30, 2023.
• Noninterest income for the quarter ended June 30, 2023 was $173.8 million, compared to $89.5 million for the first quarter of 2023 and $125.5 million for the second quarter of 2022, a year-over-year increase of 38.5 percent.
  • Gain on the sale of fixed assets was $85.7 million for the quarter ended June 30, 2023, compared to $135,000 and $65,000, respectively, for the quarters ended March 31, 2023 and June 30, 2022. The quarter ended June 30, 2023 included a gain on the sale of fixed assets as a result of the sale-leaseback transaction completed in the second quarter of 2023 of $85.7 million.
  • Net losses on the sale of investment securities were $10.0 million for the quarter ended June 30, 2023, compared to no gains or losses for the quarters ended March 31, 2023 and June 30, 2022.
  • Wealth management revenues, which include investment, trust and insurance services, were $24.1 million for the second quarter of 2023, compared to $22.5 million for the first quarter of 2023 and $21.8 million for the second quarter of 2022, a year-over-year increase of 10.2 percent.
  • During the second quarter of 2023, mortgage loans sold resulted in a $1.6 million net gain, compared to a $2.1 million net gain in the first quarter of 2023 and a $2.2 million net gain in the second quarter of 2022.
  • Income from the firm's investment in BHG was $26.9 million for the second quarter 2023, compared to $19.1 million for the first quarter of 2023 and $49.5 million for the second quarter of 2022, a year-over-year decline of 45.6 percent.
    • Loan originations increased to $1.1 billion in the second quarter of 2023 compared to $1.0 billion in the first quarter of 2023 and $1.1 billion in the second quarter of 2022.
    • Loans sold to BHG's community bank partners were approximately $523 million in the second quarter of 2023 compared to approximately $704 million in the first quarter of 2023 and $658 million in the second quarter of 2022. BHG also sold $557 million in loans to private investors during the second quarter of 2022.
    • BHG increased its reserves for on-balance sheet loan losses to $196 million, or 5.99 percent of loans held for investment at June 30, 2023, compared to 5.19 percent at March 31, 2023. BHG also increased its accrual for losses attributable to loan substitutions and prepayments for loans previously sold through its community bank auction platform to $369 million, or 5.87 percent of the loans that have been previously sold and were unpaid, at June 30, 2023 compared to 5.81 percent at March 31, 2023.
• Noninterest expense for the quarter ended June 30, 2023 was $211.6 million, compared to $211.7 million in the first quarter of 2023 and $196.0 million in the second quarter of 2022, reflecting a year-over-year increase of 8.0 percent.
  • Salaries and employee benefits were $132.4 million in the second quarter of 2023, compared to $135.7 million in the first quarter of 2023 and $126.6 million in the second quarter of 2022, reflecting a year-over-year increase of 4.6 percent.
    • Costs related to the firm's cash and equity incentive plans were $23.2 million in the second quarter of 2023, compared to $22.5 million in the first quarter of 2023 and $31.1 million in the second quarter of 2022.
    • The reduction in salaries and employee benefits expense was primarily due to the year-over-year decrease in the costs related to the firm's annual cash and equity incentive plans. Offsetting this decrease in part was the impact of full-time equivalent associates increasing to 3,309.0 at June 30, 2023, from 3,074.0 at June 30, 2022, a year-over-year increase in headcount of 7.6 percent.
  • Noninterest expense categories, other than salaries and employee benefits, were $79.2 million in the second quarter of 2023, compared to $76.0 million in the first quarter of 2023 and $69.4 million in the second quarter of 2022, reflecting a year-over-year increase of 14.1 percent.

"Our sale-leaseback transaction resulted in an $85.7 million gain on the sale of fixed assets during the second quarter of 2023," said Harold R. Carpenter, Pinnacle's chief financial officer. "We have reviewed the potential for a sale-leaseback transaction on several occasions over the years. In the fourth quarter of last year, as rates were increasing, it became much more opportunistic. After much diligence, we elected to execute the transaction during the second quarter of 2023.

"As to revenues for the second quarter, our net interest income for the second quarter was up by $3.2 million from the first quarter. Our current outlook is that growth in net interest income for fiscal year 2023 over 2022 should approximate a low-teens percentage increase. Net growth in fee income in the second quarter of 2023 compared to the first quarter was largely attributable to the gain on sale of fixed assets recognized in connection with the sale-leaseback transaction, offset by $10.0 million in net losses from the sale of investment securities. The second quarter sale of investment securities provided us the opportunity to increase our net interest income as the proceeds of the sale are now achieving a higher yield and thus serve to minimize the financial impact of higher lease occupancy costs from the sale-leaseback transaction. BHG revenues also increased $7.8 million from the first to the second quarter of 2023.

"Expenses were essentially flat when comparing second quarter to first quarter of 2023. Salaries and employee benefits expense decreased on a linked-quarter basis, as employee benefits were seasonally lower in the second quarter of 2023 from the first quarter. Occupancy expense increased this quarter as a result of the sale-leaseback transaction. We anticipate a similar dollar increase in occupancy costs next quarter given the sale-leaseback transaction was consummated in multiple transactions that occurred throughout the second quarter and thus will be fully integrated into our results in the third quarter. We will continue to monitor our expense burden in light of our anticipated revenue growth and adjust incentives and/or reduce other expenses through either reduced hiring, deferral of anticipated projects or implementation of other cost-saving measures as required."

PROFITABILITY, LIQUIDITY AND SOUNDNESS:

• Net interest margin was 3.20 percent for the second quarter of 2023, compared to 3.40 percent for the first quarter of 2023 and 3.17 percent for the second quarter of 2022.
• Provision for credit losses was $31.7 million in the second quarter of 2023, compared to $18.8 million in the first quarter of 2023 and $12.9 million in the second quarter of 2022. Net charge-offs were $9.8 million for the quarter ended June 30, 2023, compared to $7.3 million for the quarter ended March 31, 2023 and $877,000 for the quarter ended June 30, 2022. Annualized net charge-offs for the second quarter of 2023 were 0.13 percent.
• Nonperforming assets were $47.4 million at June 30, 2023, compared to $44.8 million at March 31, 2023 and $23.7 million at June 30, 2022, up 100.0 percent over the same quarter last year. The ratio of the allowance for credit losses to nonperforming loans at June 30, 2023 was 762.0 percent, compared to 848.5 percent at March 31, 2023 and 1,762.6 percent at June 30, 2022.
• Classified assets were $153.9 million at June 30, 2023, compared to $120.3 million at March 31, 2023 and $112.5 at June 30, 2022, up 36.8 percent over the same quarter last year.

"Our net interest margin declined on a linked-quarter basis by approximately 20 basis points," Carpenter said. "Increased deposit pricing and the continued reduction in our noninterest-bearing deposit account balances as a result of a shift in deposit mix were the primary contributors to our decreased net interest margin. Also contributing to the reduced net interest margin was an elevated level of on-balance sheet liquidity, which, as we noted last quarter, we acquired during mid-March given the heightened levels of uncertainty in the broader banking industry. The impact of this elevated liquidity should decrease over the remainder of 2023 as we seek to deploy some of this excess into both loan growth and the reduction of wholesale funding.

"We continue to experience reductions in our uninsured deposit base, as approximately $1.9 billion in deposits were added to a reciprocal deposit insurance funding network during the second quarter, contributing to a reduction in our uninsured/uncollateralized deposit base from approximately 33.2 percent at the end of the first quarter of 2023 to approximately 28.3 percent at the end of the second quarter of 2023.

"Our investment securities portfolio, including both the held-to-maturity and available-for-sale portfolios, continues to perform well for us though the value of these securities decreased by approximately $255.4 million in the second quarter from the first quarter, largely as a result of our decision to sell approximately $174.0 million in securities in the second quarter of 2023. Our tangible book value per share also increased to $48.85 at June 30, 2023 from $46.75 at March 31, 2023.

"Lastly, credit metrics have been largely consistent for an extended period of time, and we expect those metrics to remain consistent for the remainder of this year. We did record an increased provision this quarter in comparison to last quarter and, thus, increased the ratio of our allowance for credit losses to total loans to 1.08 percent."

BOARD OF DIRECTORS DECLARES DIVIDENDS

On July 18, 2023, Pinnacle Financial's Board of Directors approved a quarterly cash dividend of $0.22 per common share to be paid on Aug. 25, 2023 to common shareholders of record as of the close of business on Aug. 4, 2023. Additionally, the Board of Directors approved a quarterly cash 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, 2023 to shareholders of record at the close of business on Aug. 17, 2023. 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. CDT on July 19, 2023, to discuss second quarter 2023 results and other matters. To access the call for audio only, please call 1-877-209-7255. For the presentation and streaming audio, please access the webcast on the investor relations page of Pinnacle's website at 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 2022 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. Pinnacle was also listed in Fortune magazine as the second best company to work for in the U.S. for women. 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 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 $46.9 billion in assets as of June 30, 2023. As the second-largest bank holding company headquartered in Tennessee, Pinnacle operates in 17 primarily urban markets and their surrounding communities.

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) the sale of investment securities in a loss position before their value recovers, including as a result of asset liability management strategies or in response to liquidity needs; (iv) adverse conditions in the national or local economies including in Pinnacle Financial's markets throughout Tennessee, North Carolina, South Carolina, Georgia, Alabama, Virginia and Kentucky, particularly in commercial and residential real estate markets; (v) 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; (vi) 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 or uncertainty exists in the financial services sector; (vii) changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; (viii) effectiveness of Pinnacle Financial's asset management activities in improving, resolving or liquidating lower-quality assets; (ix) 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 the negative impact to net interest margin from rising deposit and other funding costs; (x) the results of regulatory examinations; (xi) Pinnacle Financial's ability to identify potential candidates for, consummate, and achieve synergies from, potential future acquisitions; (xii) difficulties and delays in integrating acquired businesses or fully realizing costs savings and other benefits from acquisitions; (xiii) BHG's ability to profitably grow its business and successfully execute on its business plans; (xiv) risks of expansion into new geographic or product markets; (xv) any matter that would cause Pinnacle Financial to conclude that there was impairment of any asset, including goodwill or other intangible assets; (xvi) the ineffectiveness of Pinnacle Bank's hedging strategies, or the unexpected counterparty failure or hedge failure of the underlying hedges; (xvii) 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; (xviii) deterioration in the valuation of other real estate owned and increased expenses associated therewith; (xix) 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; (xx) approval of the declaration of any dividend by Pinnacle Financial's board of directors; (xxi) 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; (xxii) 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; (xxiii) the risks associated with 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 Bank); (xxiv) changes in state and federal legislation, regulations or policies applicable to banks and other financial service providers, like BHG, including regulatory or legislative developments; (xxv) fluctuations in the valuations of Pinnacle Financial's equity investments and the ultimate success of such investments; (xxvi) the availability of and access to capital; (xxvii) 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; and (xxviii) 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, 2022, 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, total revenues, net income to common shareholders, earnings per diluted common share, revenue per diluted common share, PPNR, efficiency ratio, noninterest expense, noninterest income 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, gains associated with the sale-leaseback transaction completed in the second quarter of 2023 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 2023 versus certain periods in 2022 and to internally prepared projections.