Pinnacle Financial Stock: A Rate-Agnostic or M&A Banking Growth Story (PNFP)

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If you like organic growth stories based on competitive execution and aren’t so convinced that the US is about to see a significant rate-tightening cycle, you might want to throw in an eye to Pinnacle Financial Partners (PNFP). In fact, however you feel about rates, it’s probably a name you should know if you’re interested in organic growth stories in banking.

Pinnacle continues to build on its proven strategy of establishing and expanding, targeting attractive growth markets by hiring established bankers, then providing strong customer service to gain credit and deposit share in attractive markets. . These stocks have done well since my last update, and this performance comes at a time when “growth banks” haven’t fared as well. With potential for double-digit core earnings growth, I think Pinnacle stock should trade closer to $110 than the current price of around $90.

Reapply an established pattern

In my opinion, Pinnacle’s growth strategy is essentially based on two pillars: providing excellent customer service and hiring proven and motivated bankers among established competitors to open doors in attractive new markets.

Pinnacle increased 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 exceptional Net Promoter Score in Tennessee (87, leading the state), with a score of 92 in Nashville. Although it’s still early days, Pinnacle’s NPS of 68 (also #1) is encouraging, and the company has gained market share in markets like Charlotte, Raleigh and Winston-Salem, although performance in Burlington , Durham and Greensboro were more mixed.

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

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

The proposition for bankers is quite simple: Pinnacle avoids bureaucracy, emphasizes a positive culture and compensates on an “everyone wins/loses together” basis. While that last point might not be as appealing to the more aggressive bankers who are looking more for 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 is sure to grow anytime soon. The company already has a presence in growing markets like Atlanta and Charlotte and will look to grow those businesses over time through customer service and possibly periodic hires.

Washington, however, is a new opportunity and the 6and– the largest metropolitan area in the country. Baltimore would be a logical step beyond DC, and I would expect to see the company move to Florida within the next two years. I’ll be curious to see if the company is targeting markets like Gulfport, MS, and New Orleans on its way west, or if it’ll ignore them and seek to enter Texas markets like Houston and Dallas directly.

Fares won’t be much help

Unlike many banks I’ve written about, Pinnacle won’t get much higher rates. Due to factors such as the use of rate floors and a relatively high deposit beta, Pinnacle has below-average sensitivity, with a rate change of 100 basis points only expected to increase net income by interest only around 3% (the average is now closer to 5% to 6%, with many banks at or above 10%).

While management has been working to improve deposit beta over this next cycle, the rate benefits will come later for Pinnacle than for other banks. Similarly, you could argue that this is a hedge – while many banks’ growth over the next couple of years hinges on their rate sensitivity, Pinnacle may grow if rates don’t rise as much provided that.

Loan growth will therefore be the main driver. Pinnacle’s overall adjusted loan growth of 3% in the fourth quarter was not outstanding, but the 9% adjusted commercial loan (C&I) growth was a strong number, and it apparently happened without much improvement in the use of commercial lines – something other banks have already started to see.

Management is looking for 10-15% loan growth in 2022, and I think that’s an achievable target unless soaring input prices and declining business confidence following the invasion of Ukraine by Russia would have a greater impact on the economy. Growth is expected to be driven by growth in end-market loan demand (to support business expansion, etc.), market share gains and growth in special loan categories that were still experiencing headwinds on the market in 2021. In addition to this, the company Bankers Health Group (or BHG) is changing its model to retain more loans, which should also contribute to loan growth.

Perspectives

I haven’t listened to any conference calls or presentations that management has made, so I can’t be certain that the mention of the CEO’s continued tenure at the bank hasn’t been discussed before, but that’s not not a common topic. In any case, Terry Turner said he plans to stay in the role for at least five years. Although mergers and acquisitions are not a priority, largely due to concerns about finding good matches with corporate culture, a merger of equals is apparently something that would be considered later if circumstances warrant. .

Pinnacle has done well lately, and while 2022 won’t be a bumper year for pre-provision earnings growth (likely 5%-7%) or core revenue growth (likely flat or slightly up), I see acceleration in 2023 and beyond, with double-digit base growth over the next five and ten years.

The essential

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

I don’t see the need to be greedy or ambitious today, though. I believe in Pinnacle’s culture and customer service-driven growth strategy, and banks that prioritize these elements 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 it’s still a name worth considering.

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