PNFP - Pinnacle Financial Partners: Q4 2023 Shows Encouraging Signs

2024-01-19 14:06:03 ET

Summary

• Pinnacle Financial Partners, Inc. is gradually regaining lost ground and management has expressed a positive vision for 2024.
• The loan portfolio continues to grow and the average yield has increased, but there may be a problem if the Fed Funds Rate falls too much.
• The securities portfolio has recovered unrealized losses and the bank's equity is of high quality. Deposits are increasing, but the cost is also rising.

Pinnacle Financial Partners, Inc. ( PNFP ) is still far from its all-time high, but in the past three months it has been gradually regaining lost ground. In its Q4 2023 presentation, management has expressed its vision for the whole of 2024, and all in all it looks positive. The NIM is expected to rise, and unrealized losses may reset to zero.

Loans and securities portfolio

For the umpteenth quarter in a row, PNFP's loan portfolio continued to grow and reached $32.37 billion. In addition, the average yield also increased again and reached 6.62%. Definitely impacted by the fact that 62% of the loan portfolio is exposed to a variable rate, which has resulted in increased profitability in the current macroeconomic environment. Anyway, while this factor has so far helped PNFP to keep the NIM from collapsing, on the other hand, it could prove to be a problem if the Fed Funds Rate falls. At that point, it would have been better to get fixed-rate loans and lock in the yield.

In Q4 2023 , only 19.20 percent of loans originated were fixed-rate, a number perhaps too low to reduce exposure to variable rate. Regardless, management does not seem concerned and expects growing demand for fixed rate this year:

I think what's in our plan for this year is that we will see continued increases in our fixed rate lending. That will provide somewhat of a tailwind here in 2024 for, call it, earning asset yields. I think we will have to be very aggressive, if there is a rate cut.

CFO Harold Carpenter .

In addition, management also laid out its guidance regarding the Fed's monetary policy for this year: as many as four cuts of 25 basis points each are expected, one at the end of Q2 2024 and the other three before the end of 2024. The yield curve should tend to flatten but remain inverted through 2024. In practice, management is discounting a soft landing in its estimates and does not believe hard landing is probable.

Turning to the securities portfolio, there is good news.

The most surprising aspect is the average securities yield above 4%, thus almost in line with current market rates; this means that PNFP does not have heavily devalued fixed-rate securities on its balance sheet .

In fact, comparing its average return with that of peers, there is a stark difference. The latter receive an average return that is as much as 151 basis points lower.

Yet, as we can see from this image, PNFP did not expose itself to excessively risky securities to get a good return: it simply chose the timing well. In addition, in Q4 2023 the fair value of the securities portfolio gained $301 million as Treasury rates fell.

This is consequently reflected in the steadily increasing TBV per share. This is not to be taken for granted, since many regional banks have been sunk by unrealized losses in their securities. These losses have to be accounted for in a negative equity reserve and consequently reduces the TBV per share. In the case of PNFP, the problem does not exist since the yield on its securities is more or less in line with current market rates.

A similar reasoning can be made with T1RBC net of unrealized losses of both AFS and HTM securities. Here, too, PNFP presents results in line with the top quartile. In other words, this bank's equity is of high quality and demonstrates soundness.

Deposits and net interest margin

Just as with loans, deposits continue to increase and have reached $38.51 billion. Compared to the previous quarter, the cost of the same is still increasing slightly and stands at 3.07%. Undoubtedly, weighing heavily on PNFP's profitability are CDs, about 12.60% of total deposits and costing 190 basis points more than last year. According to management's expectations, the upward pressure on the cost of deposits is likely to continue into early 2024.

Indexed deposits are the most expensive and most present, yet it should respond very quickly to the Fed's change in monetary policy. This means that should rates be cut quickly, the cost of these deposits will fall just as quickly. In a sense, in addition to originating fixed-rate loans, indexed deposits could be an additional driver of NIM growth if the Fed cuts interest rates in line with management's expectations.

Now, keep in mind that basically 27% of my deposit book is indexed. So I do have that head start probably more so than maybe some others. But our relationship managers will have to maintain constant contact, and we'll discuss this with their depositors over the course of 2024, so that we can respond very quickly with respect to rate cuts.

CFO Harold Carpenter.

With the deposit bracket closed, we now turn to NIM and NII.

Modest growth in the volume of earning assets and a stable NIM resulted in a slight increase in NII compared to the previous quarter. Ideally, management has set the target for the long-term NIM in the range of 3.40% to 3.60%, thus much higher than the current level. As already anticipated, a reduction in the cost of indexed deposits and an increase in fixed-rate loans should ensure growth in 2024.

I think we do see NIM increases this year. I don't know how fast you have it going up, but I think it will be fairly gradual. We might have kind of a down. The first quarter is going to be a challenging quarter. I think after that, we ought to see NIM progression that you all ought to be happy with.

CFO Harold Carpenter.

Conclusion

Pinnacle Financial Partners, Inc.'s Q4 2023 was positive overall, as NIM stabilized and management seems positive about its growth throughout 2024. The securities portfolio has almost fully recovered unrealized losses and capital ratios are better than those of peers. My only doubt concerns management's positivity about increases in fixed-rate loans: I believe that as long as rates are this high, demand will remain sluggish.

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