KBRA Affirms Ratings for Pinnacle Financial Partners, Inc.

KBRA affirms the senior unsecured debt rating of A-, the subordinated debt rating of BBB+, the preferred stock rating of BBB, and the short-term debt rating of K2 for Pinnacle Financial Partners, Inc. (NASDAQ: PNFP) (“Pinnacle” or “the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A, the subordinated debt rating of A-, and the short-term deposit and debt ratings of K1 for the subsidiary, Pinnacle Bank. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings are supported by Pinnacle’s consistently better than peer asset quality metrics, including low NPA levels and limited NCOs (<20 bps) over a multi-year period, supported by a measured risk appetite and credit discipline while extended benign credit conditions have certainly been beneficial. As credit conditions continue to normalize for the industry and select peers have experienced some deterioration with respect to negative credit migration and loss content, PNFP’s loan book has held up comparatively well thus far. Having increased lending selectivity in potentially higher risk segments going back to 3Q22, management further curtailed its appetite for investor CRE and C&D lending in early 2024, targeting concentrations of <225% and <70% of risk-based capital, respectively, over the next few quarters. While credit cost could rise in a downturn, management’s 2024 guidance for NCOs of 20-25 bps is a level we consider rather manageable, particularly in view of LLRs of 1.12% and adequate capital levels. Loan book granularity, strong underwriting, and comprehensive portfolio management are factors we believe will continue to support PNFP’s through-the-cycle credit performance. Pressure from the interest rate environment and market competition in the form of elevated deposit costs and related NIM compression has trickled down into PNFP’s bottom line, as many peers have experienced. In recent periods, PNFP has also leaned into brokered deposits, which, together with increased use of reciprocals, have contributed to elevated funding costs. At 1Q24, Pinnacle’s cost of deposits screens high relative to industry peers at 3.10% and represents a rating constraint. When analyzing the cost of deposits, we recognize PNFP’s commercially focused business model plays a role, with ~75% of the deposit base characterized by relatively higher rate, but generally more stable, commercial accounts. In addition, PNFP adjusted rates early in the cycle to help manage future deposit costs increases, which contributed to above peer deposit betas. While funding cost pressure is expected to persist, deposit mix shifting appears to have settled and management expects flat to incremental increases in deposit costs (+3 bps in 1Q24) for the remainder of the year. Also, ~$500 million fixed rate CRE loans repricing in 2024 bodes well for potential modest reversal of negative NIM trends, absent significant deposit remixing and in view of a neutral balance sheet. Core capital (CET1 ratio of 10.4% at 1Q24), while moderately below peer, has trended upward incrementally over the last year and management is targeting a CET1 ratio of 11% by YE24. Current ratings assume PNFP’s capital profile continues to trend toward stated targets. With a track record of above peer earnings power, PNFP benefits from its reasonably diverse revenue streams which include relatively stable fee income from wealth management and insurance divisions. Equity method investment income attributable to the bank’s 49% ownership interest in Bankers Healthcare Group has grown significantly over time (~$457 million investment as of 1Q24) and bolsters reported fee income; however, given the nature of the business – consumer lending to select, high credit quality borrowers for either flow sale or funded via securitization – is better characterized analytically as a lending business which generates either gain-on-sale or spread income. Mortgage banking revenues are a meaningful, more volatile, contributor as well.

Rating Sensitivities

Given that PNFP's ratings are at the upper end of KBRA’s rated bank universe, we do not currently anticipate positive rating momentum over the medium-term. Ratings assume continued build of CET1 capital toward management’s 11% target in 2024 as well as benign credit quality trends. Significant deterioration in earnings or asset quality metrics, or inability to build core capital in line with targets (namely the CET1 ratio) could pressure ratings. In addition, further deposit cost increases or negative shifts in funding composition or liquidity measures could adversely impact the ratings.

To access rating and relevant documents, click here.

Methodologies