Pinnacle Financial Stock: Banking Growth Story Not Dependent On Rates Or M&A (PNFP)

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If you like organic growth stories predicated on out-executing the competition and you’re not as confident that the US is about to see a significant rate tightening cycle, you may want to take a look at Pinnacle Financial Partners (PNFP). Actually, whatever your feelings about rates, this is probably a name you should know if you’re interested in organic growth stories in the banking sector.

Pinnacle continues to build on its tested land-and-expand strategy, targeting attractive growth markets by hiring away established bankers and then following up with strong customer service to gain loan and deposit share in attractive markets. These shares have done okay since my last update, and that performance comes at a time when “growth banks” have not been performing as well. With double-digit core earnings growth potential, I believe Pinnacle shares should trade closer to $ 110 than the current price around $ 90.

Reapplying An Established Model

In my view there are basically two pillars to Pinnacle’s growth strategy – provide excellent customer service and hire proven, motivated bankers from established rivals to open doors in attractive new markets.

Pinnacle has grown its deposit share in Memphis and Nashville to 4.2% and 16.4%, respectively, from 1.7% and 10% in 2016, and Pinnacle enjoys an exception Net Promoter Score in Tennessee (87, leading the state), with a score of 92 in Nashville. While it’s still early, Pinnacle’s NPS of 68 (also # 1) is encouraging, and the company has been gaining share in markets like Charlotte, Raleigh, and Winston-Salem, though performance in Burlington, Durham, and Greensboro has been more mixed.

In recent years, Pinnacle has taken that show on the road, expanding not only into markets in North Carolina, but also attractive markets like Atlanta and more recently into Alabama (Birmingham and Huntsville) and Washington, DC

Targeting established banks remains a key part of the strategy, with Pinnacle building its efforts in Alabama at the expense of PNC (PNC) and Wells Fargo (WFC), while also aggressively targeting bankers at Truist (TFC), including hiring away a six-person team earlier this year to lead the company’s initial move into Washington, DC

The proposition for bankers is pretty simple – Pinnacle eschews bureaucracy, emphasizes a positive culture, and compensates on the basis of a “everyone wins / loses together”. While that latter point may not be as appealing to the most aggressive bankers seeking more of a “you eat what you kill” model, it seems to be working for Pinnacle in attracting the bankers they want. To that end, management made 119 new hires in 2021 and will likely meet or exceed that figure for 2022.

With a relatively concentrated footprint, Pinnacle will not be lacking for growth anytime soon. The company already has a presence in growth markets like Atlanta and Charlotte and will look to grow those businesses over time through customer service and possibly periodic competitive hires.

Washington, though, is a new opportunity and the 6th-largest metro area in the country. Baltimore would be a logical step beyond DC, and I would expect to see the company move into Florida in the next couple of years. I’ll be curious to see whether the company targets markets like Gulfport, MS and New Orleans on its path west, or whether it will skip over them and look to directly enter Texas markets like Houston and Dallas.

Rates Won’t Be Much Help

Unlike many banks that I’ve written about, Pinnacle is not going to get much of a boost from higher rates. Due to factors like the use of rate floors and a relatively high deposit beta, Pinnacle has below-average sensitivity, with a 100bp move in rates only expected to boost net interest income by around 3% (the average now is closer to 5% to 6%, with many banks at or above 10%).

While management has been working on efforts to drive a better deposit beta through this next cycle, rate benefits are going to come later for Pinnacle than for other banks. By the same token, you could argue that that is a hedge – while the growth story at many banks over the next couple of years is predicated on their rate sensitivity, Pinnacle can grow if rates do not go up as much as expected.

Loan growth, then, is going to be the primary driver. Pinnacle’s overall adjusted loan growth of 3% in the fourth quarter was not exceptional, but the 9% adjusted growth in commercial (C&I) loans was a strong number, and that apparently came without a big improvement in commercial line utilization – something other banks have already started seeing.

Management is looking for 10% to 15% loan growth in 2022, and I think that’s an achievable target unless spiking input prices and diminished business confidence in the wake of Russia’s invasion of Ukraine has a bigger impact on the economy. Growth should be driven by end-market loan demand growth (to support business expansion, et al), share gains, and growth in special lending categories that were still seeing market headwinds in 2021. On top of that, the company Bankers Healthcare Group (or BHG) is shifting its model to retain more loans, and that should also add to loan growth.

The Outlook

I have not listened to every call or conference presentation that management has made, so I can not be certain that the mention of the CEO’s ongoing tenure at the bank has not been discussed before, but it’s not a common subject. In any case, Terry Turner said he plans to stay in the role for at least another five years. While M&A is not a priority, largely due to concerns about finding good corporate culture matches, apparently a merger of equals is something that would be considered later down the road if circumstances warrant.

Pinnacle has been executing well of late, and while 2022 will not be an exceptional year for pre-provision profit growth (likely 5% to 7%) or core income growth (probably flat to up slightly), I do see acceleration in 2023 and beyond, with double-digit core growth over the next five and 10 years.

The Bottom Line

Between discounted cash flow and P / E, I believe Pinnacle is undervalued below $ 110 and priced for a solid double-digit annualized total return. AP / E of 14.5x on my ’23 EPS estimate supports a fair value of over $ 110, and while that P / E is inline with my forward P / E on fellow growth bank Signature (SBNY), you could argue for 17x or higher given what the market has paid for growth banking stories in the past.

I do not see the need to get greedy or ambitious today, though. I’m a believer in Pinnacle’s culture and customer service-driven growth strategy, and banks that prioritize those tend to do well (First Republic (FRC), Silicon Valley (SVB Financial Group (SIVB)), Signature). Given the growth potential I see and the current valuation, I think this is still a name worth considering.

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