Pinnacle Financial Partners, Inc. (PNFP) Earnings Call Transcript & Summary

Well, thanks, everybody. We're going to continue the mid-cap bank track with Pinnacle Financial Partners. We're happy to have Kevin Blair, the President and CEO with us and Jamie Gregory, the CFO. So thanks very much, guys, for joining us.

Thanks for having us.

Maybe just starting off, we're now roughly 6 months beyond the merger close. When you think about what's gone better than expected, what's required more work than expected and what surprised you the most? How would you assess where integration stands today?

Well, look, Jared, I go back to the questions that we received post deal announcement. And whether that was in July last year or whether that was in -- on January 1 this year, there's a great deal of skepticism around 3 things. Number one, will we be able to continue to grow at an elevated pace. Number two, will you be able to attract and retain top talent. And number three, were the clients like this merger. And look, the skeptics are not wrong. When you look at other MOEs that have occurred in recent years, there's been a lot of challenges. So what gets me super excited is I think we've answered those levels of skepticism with real data points that say, yes, we not only can do it, we've actually accelerated some of the performance in those areas. Number one, we've grown loans 12% year-to-date, we've grown deposits 6% year-to-date, both of those ahead of our internal projections. We've grown earnings per share of 26%. So the merger itself is a distraction, but it has not slowed down our frontline team members. It has not slowed down their ability to generate growth. Number two, people were concerned about the ability to attract talent. We have added 124 revenue producers through June. We said we had another 34 in July. Those numbers are up 13% year-over-year versus what the combined companies would have done last year. So it's showing that this model is so attractive that even with a little uncertainty around a merger, we're able to attract talent in to turn over we look back at legacy company history. And last year, it was about 7%, this year, we're running 6%. So we're tracking at a faster pace, and we're retaining at even a better clip than we would in previous years. So I would tell you that should silent the skeptics. The third was on clients. We look at our Net Promoter Scores, and we just look at the Greenwich data on the commercial side. We have the #1 Net Promoter Score in the Southeast. We got the first quarter results back and our Net Promoter Score declined about 3 points, which is as expected. Greenwich just told us any company that's going through a merger generally sees a 15% to 20% decline in their Net Promoter Scores. We saw a 3-point decline. It still puts us as #1. So it shows us that our clients are still dealing with the same people every day, which gives them confidence. What has been more difficult, it's what you guys want to talk about. It's bringing 2 companies together and unifying an operating model and a culture. And that's not easy, but we've been very successful at being able to do that. And it requires paying attention to the little things that people talk about when no one is around how you hire, how you talk about things, how you decision. And all of the leadership team, all of our leadership team has spent a disproportionate amount of their time dealing with that so that we can unify our culture and then build upon it. And then what's been most surprising, I would just say it's been the momentum. It's been the ability to maintain the growth to have the legacy Synovus team begin to hire at a pace that's similar to the legacy Pinnacle team. What's been exciting is when you look at the growth of the firm it's been so diversified across all of our geographies and all of our specialties. So I think we're out of the gates. I give ourselves an A. But if Terry Turner over here today, what he would say is this high school basketball coach told him there were no trophies handed out at halftime. So we're not giving ourselves any trophies yet.

Yes. I guess maybe drilling into some of those teams a little bit before the merger. As you said, a lot of people were questioning whether the Pinnacle model could really scale across a much larger organization. Maybe just spend a little time drilling into what's given you that confidence that the culture and incentive structure and sort of decentralized operating model can work effectively at this size? And I guess, how big could that potentially scale up to with keeping that model.

Yes. The #1 question we get. And when I talk with Terry, he says #1 question he got for 26 years. Everybody kept saying, well, will you be able to do it next year? Will you be able to do it next year. And I think the track record has been pretty successful at being able to do it each and every year. It goes -- to me, it's the hiring model itself, right? Our hiring model is very specific where we're looking for high-performing team members that have a great deal of experience, 10-plus years of experience. And it's an invitation-only type hiring model, where we are selectively looking for individuals that fit that but you have to be validated by someone that has worked with you in the past. And I think that's the incredible important part of the hiring model is that we want people to fit not only from a skill set perspective, but from a cultural perspective. And so when you hire someone from a firm and they're able to identify that there are others that look like them that should join our firm, it makes it a whole lot easier. Number two, this centralized model. A lot of banks run a decentralized model. It's not the hierarchy of decentralization. It's the war on bureaucracy and it's the desire to want to take out all of those administrative tasks that make our job less fun than it needs to be. And so we spend a lot of time and energy even as we're bringing our companies together, looking at every process, whether it's a loan approval process or how to get a wire execute it all the way down to understanding how can we take out steps that make people's lives easier. And we ensure that we're putting resources as close to the action as possible. The servicing platform is all local. The credit people are all local. And that's really the collaborative nature of the model that people love because you're in a team that's winning together and losing together. And your third point was on the incentive plan. The incentive plan at the end of the day is an incentive plan where we -- it's all for one and one for all. the company hits its target, everyone gets paid. I think we -- if you haven't lived in that model, you would underestimate the power of that incentive plan to make people work together and to not point the finger on the other side and that you get in the boat, you're rowing in the same direction, focused on a shared ambition, a common goal. And that helps back office to front office. It helps between our specialty units. And that, at the end of the day, is a secret sauce that brings these teams together and makes it a fun place to work. And when you have the level of team member engagement that we have, we just did a survey, again, in the middle of the merger, and we have an 85% team member engagement number. Most companies would like that outside of a merger. So it makes people give you discretionary effort. And when people love what they do, it's kind of like raving client fans. This is a raving team member fan that goes out and tells others, this is the model you want to work on. Now your last question, and I'll stop answering them in 12 minutes. Is it scalable? Of course, it's scalable because the model, every time you hire someone, the Rolodex expands. That person knows 5 people. And so I look out, we're doing our 3- to 5-year strategic plan today, and we look at the markets that we're in. There, if you look at the hiring year-to-date, the numbers that we've hired this year may surprise you that they've largely come out of Tennessee and Georgia and South Florida where we've been. We have a tremendous opportunity to add density in the markets we're already in. Then you add on top of that some of our expansionary markets, the National Capital Region, Richmond, Virginia, where we just opened our first office in August, expanding down. We hired a new team in Mobile, Alabama that's adding our North Florida, Jacksonville, Orlando market is expanding. When you start looking at where we have opportunities to hire the opportunities in front of us. There's not a shortage of talent. Now one thing that I've been saying this morning, and I think maybe it's been a little bit of a misnomer. When we talk about 124 revenue producers year-to-date, that's not all commercial bankers. That includes our private wealth area. That includes our brokerage area, our Pinnacle Asset Management. It includes fiduciary and it also includes branch managers. So I think some people get fixated on the number and say they're all commercial relationship managers or financial advisers. It's all revenue producers, including our treasury sales area. So when you start breaking it down by group, it becomes much more bite size. It's not an order of magnitude that's hard to replicate. And as you've seen in our documents, we've said this year is $250 million next year is $275 million, and you can follow the trajectory in doing that. We think that's very attainable.

We're still waiting on the systems conversion, a lot of work in the background to prepare for that. How -- give us an update on how that's going and where you see sort of some of the near-term milestones for that.

Well, I hope our team members took a minute out of their busy day that are working on that to listen in to our conversation today because I want to thank them. There has been a lot of work ongoing to ensure that we're in a place on March 15 to be able to convert the core system. But we're not waiting until March 15 to get through conversions this month. We'll convert our mortgage platform, our HR platform. We previously converted our imaging platform. So there are lots of things happening prior to the core conversion. And what I would tell you is we're on track. If you compare our conversion to some of the others that have occurred more recently, you can see that we're taking a little more time. And why is that? Early on, we wanted to go through and do full business requirements. And when we said we were going to choose the best of both companies, we wanted to evaluate the solutions on blades. And although we may not have chosen a legacy solution, we understood when there was functionality or capabilities that existed on that solution that would not be on the end-state solution. We've spent these last several months making sure that, that capability or functionality gets built into the end-state solution. I'll give you an example of our consumer digital portal that we're going to didn't have a couple functionalities that existed on the other platform. We've already incorporated built them and we've done a release last month that put 2 of those functionalities out there. So we are on schedule to be able to deliver. And I would tell you the technical conversion is one part of it. We have the brand conversion, which will also occur that weekend. And that sounds almost like a tactical aspect of the merger. But in many cases, our clients have forgotten that we're merging. It's not until that new sign goes up, that they're like, what's going on here. So the real work between now and then outside of the technical conversion is change management. We need to make sure that every team member is fully prepared to administer the new products, service under the new platforms, execute under the new processes. We need to make sure that they can answer the clients' questions. And so there's a lot of job aids and work going on around that. Number two, we have to educate our clients. It's not just about new logins, it's new products, it's new processes, things that will happen. We'll have to do that as well. And as you know, the timing on that is so important. If we start training someone today for something that's going to happen in March, they're likely to forget it by that point. So we're planning seeds and doing things today that will ultimately put us on the glide path to be in a position in March that we think we will successfully be able to execute on it. And in the case that something were to go wrong, we have already started to play out contingency plan. So our Head of -- our Chief Operating Officer has already added 140 call center agents to make sure that if something were to go wrong, those -- we believe we hope that those people may be sitting around tilling their thumbs on March 17. But if not, people aren't going to wait in the queue. They're going to be extra staff there to answer the calls and so that people aren't sitting in the queue for 4 hours, wondering what's going on. So not only are we preparing for conversion, we're going to have robust contingency plans that mitigate and remediate any issues that come out of it.

If you look at what you all had done with Synovus over the prior few years really building out a lot of capacity on fee income lines on the CIB and treasury management. Are you able to -- I know that the synergies weren't really built into the deal metrics, but are you able to expand some of those offerings right now at the legacy Pinnacle or do you really have to wait until the conversion?

On both sides, Jared. We said this year a very modest target of $20 million in revenue synergies. I think we're at about $10 million. And you'll see where we've been able to do that, it's on those things that don't require us to be on the same platform, things like our capital markets platform, where you can take things through our syndication or derivatives platform where we have USDA capabilities where the other side didn't have it where Legacy Pinnacle had equipment finance capabilities that we didn't have. That's about $1 million in revenue that's just been sold into the legacy Synovus footprint. I just was on a call the other day about the Homeowners Association, our Community Association Group has had tremendous success in some of our legacy Synovus marketplaces. So $10 million revenue synergies year-to-date, we think will achieve our $20 million. And if you go back to our longer-term goal of $100 million to $130 million, we believe that we'll be able to execute on those. But to your point, it becomes a whole lot easier or on the common platforms post March.

Yes. You operate in some of the fastest-growing markets in the country, but also some of the most competitive, how would you characterize competition today? And where do you think the combined franchise has become stronger winning new business?

So you're getting me today, I'm a little squirrely. So I'm going to talk we always get these questions on competition. And I don't know that's the right question because we have 4,500 banks competing with us. That number has been shrinking, obviously, but it doesn't get any easier every day. I think the question is generally built around what does that mean to loan spreads, what does it mean to deposit pricing, right? That's going to remain competitive. I don't know that I'll ever sit in front of you and say, like, it's just easy. But I think what the real question is, is how are you winning? How are in this competitive landscape if you're saying price is not the most important factor, how are you winning? And that's where the Pinnacle model is one where you provide distinctive service and effective advice and you build real trusted relationships. That doesn't mean you don't have to pay a competitive rate on deposits or give someone a great yield on their loans. But we're winning market share consistently because we're hiring great talent, and we're consolidating relationships under a model that creates loyal clients. And so as we look down the road, I was telling Jamie earlier today, Jamie can talk about the margin and the potential impact of any margin compression that comes from this environment, but that will not prevent us from continuing to grow the top line. It will not prevent us from continuing to grow EPS. And I think that maybe the way that we win is built on trust, and that is harder to compete away than is price. And so I think that it's a competitive landscape, but our model allows us to continue to take market share. Being a bigger bank, the term that I've used is called scale with a soul and I think it resonates with me. It's resonated with our 8,500 team members. The scale portion is we're now $125 billion bank. So we have a bigger balance sheet. We have additional investment dollars to deploy on functionality capabilities, technology, products, tools. We need to make sure we're doing that. And we have a wider breadth of services, whether that's specialty units, whether that's a bigger geographic unit. All of those things should serve as a better competitive advantage versus our competition because it allows us to generate revenue and meet the needs of our clients. But what's lost in this often is as you get larger, you forget what got you there. You forget the competitive advantage. And that's the sole portion. What allows us to win is not having a bigger balance sheet or having those products. We've been winning the whole time without the scale, that we can keep the culture, which we will, if we can keep this model that empowers people to serve their clients in a way that's second to none, we will win, and we will do that. And then when you add scale on top of it, it just opens up a new segment of clients you haven't been able to touch or it allows you to deepen the wallet share of the clients you already have. So I look at the scale as an accelerant, but the soul is what allows us to continue to win every day.

You and Terry before you often talked about sort of the embedded future growth from the people that are already on board from the hiring that you brought on board? How should we think about the earnings power that's already sitting inside the franchise from bankers hired over the past several years that haven't fully matured.

That number, we've talked about previously being around $20 billion of embedded growth that's talent sitting in our firm today that have not fully consolidated their book of business to where -- what they believe they can do. So that exists today. I think that is a very powerful element that allows us not just to grow, but it allows us to remain on what I call this treadmill of hiring. I think people look at the embedded growth and say, that's great. I look at the embedded growth and say that allows us to continue to invest each year in new revenue producers. I think where this model to your first point, starts to break down is if you get into a year where you can add talent because that means at some point in the future, you're going to have a down year in terms of growth. And Jamie and I have talked a lot about what we think it's going to take to rerate our stock. And it's simply consistent execution. I think people have seen our first 2 quarters. They feel very good about what we're doing, but they want to see more of. They want to see future quarters of growth. And the #1 way to do that is the embedded growth that's already here and that, in turn, allows us to continue to add. At any point, when we stop growing or stop adding people, there's going to be some skeptics that says, okay, now they're not running the model. So that embedded growth is going to give us growth in the balance sheet and the P&L for years to come, and it gives us the embedded expense of revenue to be able to incur the expense to continue to hire at an accelerated pace.

Loan growth has remained exceptionally strong despite the merger, and it's been broad-based across markets, specialties and business lines. As you look across the footprint today, where are you seeing the strongest opportunities and what are clients telling you about demand?

Well, look, it's all -- our growth is predominantly C&I and client sentiment has remained very strong. Pipelines have remained strong. We are in a great footprint, which is helpful. But as I mentioned earlier, part of that growth is the hiring that we made this year in previous years. I love looking at it by geography. If you look at it on an absolute growth, our 2 biggest growth markets are Tennessee and Georgia are the areas where we have the most density. If you look at it on a percentage basis, our fastest growing is the National Capital Region and Greater Florida, that North Florida. There are smaller market shares today, but present a tremendous amount of growth. And then when you go down in our specialty banking units, whether it's equipment finance, whether it's restaurant services, alternative energy, structured lending, ABL or our music, sports and entertainment business. all of those are growing double digit. So it goes back to your lead-in tremendously diversified, not concentrated and it means as we look at pipelines going forward, I think you're going to see a sustainable level of growth because you're getting it across the board. Number two, your question was about -- what was the second part of the question I missed.

Just what are the clients saying...

Yes, I'm sorry -- we just see -- jog my memory. We just finished our third quarter survey from clients. And ironically, with all of the geopolitical risk that we've dealt with this year, the uncertainty around inflation and rates, our clients remain tremendously resilient. 80% of our clients believe over the next 12 months, their business will either stay the same or grow. That's incredible, given some of the uncertainties that we face. And that number has not changed for the last 3 quarters. So about 18% to 20% of our clients believe their business shrink over the next 12 months. But the other side of that is 80% believe it will stay the same or grow. And that, to me, is encouraging that clients can continue to remain fairly resilient despite some of the uncertainty. So one question, Mark, and maybe the biggest concern does remain inflation. And this quarter, they reiterate what they said last quarter, the concern is input prices continue to go up. They can't pass on the increase to their clients, which means their margins to compress. So I think we should assume that's going to happen. But it doesn't mean that they're going to become insolvent. It doesn't mean that their business model doesn't work. It just means they're going to be a little less profitable.

Yes. I think this sort of ties into discretion where Yes, I think one of the more impressive aspects of second quarter was that growth remained strong, even while maintaining that pricing discipline. As you look out, how are you balancing growth and profitability? And I guess where are you willing to say no.

Yes. We've had a lot of discussions this morning about that with investors. Spreads have remained pretty good. When you look at what our loan yield is for new production and where deposits have been 370-ish right, 360, 370. Our goal is to invest all of our capital that we can with our clients. We think that's the best return for shareholders. We think that's the best thing for our firm. What we're managing to is a phenomenon now that some are worried that the next loan that you generate is having to be wholesale funded. Well, I had our team run a normal loan through a wholesale funding model to say what's the profitability of that stand-alone loan? Well, it's about 15% return on capital. So if we're just doing a loan, wholesale funded, not great returns, not horrible. So that just shows that if you do that loan, and even if it's wholesale funded, if you bring over a deposit relationship, if you bring over some level of ancillary fee, you're back above a 20% return on capital. So we believe that next dollar of capital, that next loan, if we're following our model, we're not a transactional bank. We'll do a loan for someone when it comes to a relationship. And even though that loan may have to be wholesale funded, that individual loan you can still get a more than adequate return if you're getting the full relationship.