KBRA Affirms Ratings for Pinnacle Bancorp, Inc.

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Omaha, Nebraska-based Pinnacle Bancorp, Inc. (“Pinnacle” or “the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for Pinnacle’s largest subsidiary bank, Pinnacle Bank (NE). KBRA also affirms the deposit and senior unsecured debt ratings of A- and the short-term deposit and debt ratings of K2 for Pinnacle’s other subsidiary banks, Bank of Colorado, Pinnacle Bank (TX), and Pinnacle Bank - Wyoming. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

Pinnacle’s ratings are supported by a favorable, long-term performance track record that has benefited most from very low credit costs over time, as well as a robust core deposit base. With that said, Pinnacle’s returns have declined steadily and meaningfully in recent periods, principally stemming from deposit cost increases and related NIM pressure, though not to a degree that is dissimilar to that reflected by some peers. In this regard, Pinnacle’s total average cost of deposits was up to 2.1% in 4Q23 from 0.60% in 4Q22 (and considerably lower cost levels in prior periods), with total deposits increasing 5% during the year (but, with core up less than 1%). While Pinnacle’s average loan yields were also up 72 bps from 4Q22, a consistently lower yielding securities portfolio has not benefited NIM trends at all, leaving a 70 bps Y-O-Y compression (to 2.24% in 4Q23). Modest growth in core noninterest expenses, and still very low credit costs, left Pinnacle’s CY23 ROA at ~0.7%, with 4Q23 the lowest sequentially at ~0.6%. While 1Q24 performance was similar, deposit pricing pressure has alleviated somewhat, and together with upward repricing of loans, has facilitated a modest reversal of the NIM trend. Having reflected a relatively competitive cost base (mid-50% core efficiency measures) through much of its modern history, particularly given a ‘high touch’ business model that includes select non-spread business lines (core fees tracking at ~14% of total revenues), recent NIM compression/revenue pressures have resulted in elevated relative costs (scaled to revenues). With that said, Pinnacle’s fairly consistent, recent 1.8%-2.0% ratio of noninterest expenses to average assets offers support to the thesis that efficiency ratio deterioration exhibited by the company is more of a “revenue” than operating expense issue. Positively, Pinnacle’s creditor profile continues to benefit from a strong core capital base that had pre-pandemic TCE and CET1 ratios tracking in the 9% and 12% range, respectively. Since then, while TCE has been impacted by negative AOCI impacts stemming from AFS securities, CET1 has remained solid, tracking in the mid-12% range since the company’s December 2022 acquisition of San Antonio (TX)-based, Crockett National Bank (~$570 million of assets). Considered over a longer horizon, it is noteworthy that Pinnacle’s annual returns during the GFC never fell below 1% ROA, unsurprisingly benefiting from superior credit quality that saw a “peak” annual NCO ratio of 0.74% for CY07. Since then, asset quality metrics have been pristine, with NCO ratios <10 bps since 2013, including through the pandemic.

Rating Sensitivities

Further development of existing or diversification into other fee revenue sources would be viewed favorably. Continued conservative financial management would remain supportive of ratings as well. An unexpected change in asset quality or material change in capital management could affect ratings. Continued NIM compression / core earnings slippage would be viewed unfavorably.

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Methodologies