KBRA Releases Surveillance Report for Pinnacle Financial Partners, Inc.

On May 26, 2023, KBRA affirmed the senior unsecured debt rating of A-, the subordinated debt rating of BBB+, the preferred shares 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 affirmed 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.

The ratings are supported by Pinnacle’s regionally diverse, commercially-oriented banking franchise, complemented an by an attractive retail presence, which has been fueled by a talent acquisition strategy focused on hiring experienced and productive bankers. Recently focused principally on organic expansion, Pinnacle has cultivated an attractive operating footprint stemming from its Nashville hub that extends to high-density markets in the southeast, where the company has secured defensible market share, while also diversifying the loan portfolio and augmenting revenue channels. Not unlike peers, PNFP’s deposit composition experienced a negative mix shift in 1Q23, which, for Pinnacle, included an 8% decline in noninterest-bearing accounts as depositors gravitated toward higher rate products amid a competitive rate environment while the company also increased its utilization of reciprocals to reduce the level of uninsured, uncollateralized deposits to 33% as of 1Q23. While the cost of deposits has increased significantly over recent quarters, to 2.03% as of 1Q23, deposit betas are expected to slow in 2H23 following a strategy to move on rates early in the cycle to help manage future deposit cost increases. At quarter-end, PNFP had on-balance sheet liquidity of $1.7 billion and ample access to secondary sources. A measured risk appetite and focus on credit discipline have supported healthy asset quality performance, including low NPAs and limited NCOs (below 20 bps for a multi-quarter trend), while multi-year benign credit conditions have also been beneficial. Loan book granularity, strong underwriting, and comprehensive portfolio management are factors which we believe will support PNFP’s through the cycle credit performance. While moderately below peer, core capital (CET1 ratio of 9.9% at 1Q23) has been appropriately managed historically and is expected to demonstrate a stable to improving trend through the medium term. PNFP’s reasonably diverse revenue profile produces solid returns (ranging from 1.3%-1.5% in recent quarters), and includes more stable fee income from wealth management and insurance divisions, though recognizing some increasingly challenging elements of the operating environment. Equity method investment income attributable to the bank’s 49% ownership interest in Bankers Healthcare Group has grown significantly in recent years ($438 million investment as of 1Q23) 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 have also been a meaningful, though more volatile, contributor. While mindful of Pinnacle’s above peer portfolio growth trends, expansion has been thoughtful and well executed under the leadership of a veteran management team. Portfolio growth is expected to moderate near-term as management scales more selectively in view of a potential downturn.

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