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

All right. I think we are all set to begin. Good afternoon, everyone. I am here to introduce Pinnacle Financial, a $16 billion market cap, $130 billion asset bank that operates out of Nashville and Atlanta. Today's Pinnacle is the product of transformative merger vehicles that closed early this year -- beginning of this year, but Pinnacle, unquestionably the most successful startup in banking history over the past 50-plus years and storied Synovus. I have heard there's a point for this. I have heard there are troubles of more than one kind. Some come from ahead and some come from behind. But I've bought a big bet. I'm already you see, now my troubles are going to have troubles with me. So just running my thought of in thinking of Dr. Susan it's fitting because since announcing and closing the merger, investors have worried about culture, retention, hiring growth, disruption, loan spreads, deposit costs, banker pay plans, enhance the liquidity requirements, provisioning levels, ability to repurchase shares amongst others. And almost 1 year into the merger, Pinnacle has defied the skeptics. Thank you, Pinnacle, for joining us at [indiscernible]. Here with us this afternoon are President and CEO, Kevin Blair; and EVP and CFO, Jamie Gregory. I note again that we will have time -- plenty of time for questions. But thanks for being here.

Thank you for having us.

I don't know if you want any introductory remarks.

Well, I was not expecting a Dr. Su's quote to start off, but that just makes a little more levity for this. Look, what John said is spot on. Look, I get it. We've looked at a lot of mergers over time, and there is a level of skepticism and it's earned because there have been challenges in bringing companies together. I think what we've done differently as we've said from day 1 is we made a lot of the tough decisions upfront. We went through -- made the organizational decisions, made the operating decisions, and we aligned our teams around those decisions. The longer you kick the can, the more anxiety builds. And ultimately, that drives a wedge between your vision and your execution. We have delivered 11% loan growth in these first 3 quarters. We have delivered 9% core deposit growth, excluding public funds in these first 3 quarters. We have delivered 94% retention of team members below where it was last year. We have delivered 222 new revenue producers this year. The third quarter alone was up 57% over what we did last year. To your point, people were worried about growth. They're worried about talent. And we've been able to answer those questions. Our clients -- our clients gave us a Net Promoter or in the second quarter of 68. That's off 1 percentage point from where we started at 69%. And guess what? 69 is #1 in the Southeast. And that tells us what we're doing inside the 4 walls of the firm is translating into our clients. They still say we provide the best client experience, and they're ultimately very loyal. The final point on that is when we look at turnover. People say we heard this morning, [indiscernible] report came out that says mergers produce 2x the amount of attrition as non-mergers -- through this last quarter, our turnover amongst accounts and dollars are down 10% versus where they were last year. So John, I would tell you that we are delivering on our promises. But Jamie and I are here today to talk less about that and to talk about the fact that we're not at a finish line. We have to keep producing a quarter at a time, a banker at a time. And that's why we talk about building a pattern, a pattern of success that will continue. And yes, we recognize there's a conversion in front of us. We're going to get through that conversion in March 12 through 15 of next year. And I hope that's the last level of derisking we're going to have to talk about. So we can stop talking about the merger and we can continue to talk about the competitive advantage that we have at Pinnacle Financial Partners.

Early returns suggest legacy Synovus markets are adopting the hiring model with more than 50% of new hires coming from those markets. What is driving that success?

I'll start with Rob McCabe, our Chief Banking Officer. He's not with us today, but Rob has been Herculean in taking that Pinnacle hiring model and getting it adopted across both the legacy Pinnacle franchise which is -- he's run that for some time but now the legacy Synovus franchise. And I would tell you, it's not just as simple as saying, go out and hire. You've got to start running a process where you start building the pipeline of talent that you're trying to attract. And then you have to constantly go and recruit that talent, not just one call but multiple calls. It's courting the talent. Our team members took that to heart post the announcement back in July, they start to plan on running the Pinnacle model. We didn't wait until January 1. In the last 309 days, we started once the deal announcement occurred, starting to get our team members prepared to do it, and then they started to build their pipelines, and they started to be able to see some success. We've been fortunate that there's been some things happening in our marketplace with other mergers. And with other banks changing operating models that it's made that opportunity greater. But ultimately, it's a model that everybody wants to run. We want to grow. It's fun to grow. And so once the team members got a hold of it, they executed well

What are you doing to ensure that the -- these are quality hires given it's a new muscle at this scale?

Well, we've maintained the Pinnacle hiring model, which means you have to have 10 years' worth of experience to qualify for being a revenue producer at the bank. And we validate every new hire with someone that works with -- has worked with them in the past who currently works at the firm. We will not hire you unless we have a validation that somebody else has worked with you, and they can say that this person will be a cultural fit and ultimately, they will be able to bring over their book of business when they come. So that was a nonnegotiable from day 1. And I think that's what ensures that you get a high-quality team member joining. Number two, John, as you know, the model once you hire one person from that firm, the goal is for that person to give you a list of names of people that need to join. And that's what's helped both on the Pinnacle side and the Synovus side. We've been able to hire some wonderful people this year that have identified other individuals that needed to be part of the firm, and they've come with.

I guess everyone is now focused. I mean it is one measure on hiring and falls squarely on that as part of the growth strategy. How important is it to bring on new hires?

Super important. It's super important for the growth because, look, what you're going to invest in our stock for is the growth with strong profitability. So when you hire top talent, not only are you getting the growth, you're getting full share of wallet when you bring over the clients. So that's why we can produce double-digit growth and still put up an 18% return on tangible capital because we're not transactional. We're bringing over full relationships. That is the model. If you stop hiring, you lose the growth and you lose what makes us different. We've got so many questions over the last several days about the election about what the economy suggests for our pipelines. And I'm not telling you we're completely insulated from that. But our model is predicated on generating growth from hiring talent. So if the market's growing 3%, we're not sitting here telling you we're going to grow 3.5%, we're growing 9%, 10%, 11% because our hires that we've had over the last couple of years are producing growth because it takes time to consolidate their books. So for me, we're not going to stop the hiring, and we're going to continue to focus on finding high-quality folks. The challenge, John, and I'm sure you'll ask me the question, is making sure that when you bring over that talent, you're not just focused on generating new loan growth, but you're getting liquidity that comes with. And that's the importance of hiring the right quality of banker that brings over their entire book, which helps to self-fund the growth that they're bringing with them.

All right. Has anything -- I mean, interest rates have obviously moved. Does anything change with respect to the speed of new hires bringing over their books?

No. What we've seen in totality, we think that the pace is roughly the same -- and in some cases, maybe it's been slower to bring over accounts, but we brought over our bankers that have brought on bigger loans. They've moved up market and middle market. So when you look at it in aggregate, I don't think anything has changed most of the commercial loans we're bringing over are variable rate anyway. We're not doing on a fixed rate. So the refinancing risk of higher rates generally is not a cause not to move it over. But one thing for the hiring model that has changed over the years, most of the bankers are on nonsolicitation. So they cannot directly contact their clients or other team members. And I would submit to you that over time, that probably slows down some of the consolidation because the client has to contact us. And we're very clear with all the people that we hire that they follow by the letter of the law, the contract that they signed at their previous institution.

This migration of customers with their books is the behavior -- the customer base is similar legacy Synovus versus Pinnacle?

Well, again, we weren't hiring at the same pace. What we saw at legacy Synovus was the average book per banker was a little larger than we were able to acquire because we were focused more on specialty and middle market area. Where Pinnacle had a broader set of hiring across small business and community banking. But there's nothing we've seen, John. In the third quarter earnings call, I talked a little bit about a piece of work that our finance team worked on with our banking team. We looked at the different cohorts of hires into the bank, both in Synovus and Pinnacle over the last PAUSE really 10 years. That cohort less than 1 year today is earning about 0.88% PPNR to total cash compensation. So they're almost breakeven within the first year. Those cohorts between 1 and 3 years are now earning 4x the PPNR of their cash compensation. And those people that are 3 to 5 years in that cohort, they are 9x their cash compensation. That's the fact that we want to continue to monitor not just what's happening in year 1, but we've got to watch what's happening in year 2 and 3 and to ensure that we're getting that leverage of 4x plus on those new hires.

This one, I guess, a question kind of surprised me because Clinical was known to be a high-growth company. When you look at generic things like compensation to employees, PAUSE they weren't on the low end. And I guess people have been questioning migrating the incentive plan over to legacy Synovus. I guess how are they different? Can you talk about putback how do you get buying?

Yes. So the big difference is legacy Synovus had more of a traditional incentive plan structure. They were individual incentive plans. You were paid based on your production, your contribution to the firm. Legacy Pinnacle had an incentive plan that went together, we lose together. 94% of all team members in the firm are on the exact same incentive plan. That is, if the company achieves certain risk management parameters, which are gating criteria. We then focus on our revenue goal for the year and our EPS goal for the year. If we achieve those goals, we all get paid at the same percent of target. It is -- and we move to that model, John. We moved to that model because we believe it was incredibly important to have all of our team members collaborative in nature working together for a common share ambition, especially during a merger. But can you imagine, we had a town hall earlier this week and Jamie said it earlier, I get to get up on stage and tell everybody where we stay, where the company stands relative to its revenue goal and its EPS goal and how that translates into how every 1 of us are going to get paid in a similar fashion. That's incredibly enabling for our teams. Now you'd say, Kevin, you didn't run that model at Synovous. We ran an individual incentive plan. So the question was, can you take bankers who have been on an individual incentive plan and move them to this new incentive plan? Well, the answer is yes. You've seen our turnover numbers, people have not left. And what you said is it's not that Pinnacle pays their people less. What they do is they pay their people more in base compensation and they put less of their compensation at risk. So at the end of the day, we took our Synovus bankers and we said, move over to this incentive plan where we're going to put more in your base pay less at risk, but your total compensation doesn't change. And in many cases, it may even go up. And so what that does for that banker is it gives them a little bit of an insulation for a down year because if they're only other incentive plan, they are likely to see a bigger reduction. Number two, it made us play nicer in the sandbox. No one cares who gets credit for a deal. We've all worked -- I worked at a bank, Jamie's working at a bank. We've seen how people fight over who gets credit. Everybody gets a referral credit, everybody gets their hand in a cookie jar. It doesn't happen at Pinnacle because we win together, we lose together. And so -- the last part of the question is meritocracy. If you have somebody that performs really, really well and the bank doesn't make its target, what do you do? Well, we go back to that person, and we say, hey, we're going to increase your base pay. We may change your target percentage. We may give you additional equity. We still run a meritocracy within our firm, but ultimately, we love the concept of us winning together so that we can celebrate together. And when we're not performing well, we all circle the wagons and say, how do we work together to get the numbers closer to what we set for our targets?

And I think back to Signature Bank, which was also a growth company and as a shareholder at the time when they're small main portfolio started in floating and impacting provisioning and EPS. Most of the employees are still getting paid and shareholders and the ones losing

That's a fair point. Our interests are fully aligned with shareholders, not just in that center plan, but our long-term comp, Jamie has talked about this. We set our targets at the 75th percentile. So the equity that I'm granted, my performance has won't even pay out at 100% if we don't achieve the 75th percentile of performance. I don't know that you'll find many banks that set targets for themselves at target at 75th percentile. That's generally giving them maximum payouts. We set our targets to align with yours, John.

Okay. I don't know if this is a question for Jamie, but how are other revenue synergies progressing?

Revenue synergies have been a success for this year. I mean we were around $20 million year-to-date. It's a lot of capital market success. If you think about our fees like syndication fees or range fees, swaps. Those have all been positive. There's been a little bit of a tailwind from ability to do larger deals, but that's really not as material as what you see in capital markets. When you look forward, we're expecting 2027 to be even more material impact of revenue synergies. But in all Canada, what we get excited about is getting past conversion, having the legacy Pinnacle team have the new capabilities on the commercial treasury platform that they'll have starting at conversion. And we think that, that's going to be the long-term tailwind of getting more treasury fees from the legacy Pinnacle side. But that's not going to be immediate because we have to get through conversion. We have to get stabilized. And we want the clients to see the value of all the new capabilities they will have on the system.

Okay. And talking about your bankers, your the hiring clip has been nice. How do you -- what about the protecting the ones you already have? How is that playing out?

So when we talk about revenue producer retention, we're at 95%. When we talk about the overall bank, we're at 94%. And I think, again, another misnomer, myth is that we went and gave out so much retention to these bankers, and we talked about this 2-year cliff vesting of RSUs that as soon as that vest, all these bankers are going to leave. On average, on average, these bankers have about $30,000 of retention. That's it. So it's not the retention that's kept people here. It's the fact that the culture is aligning with what people want. The legacy Pinnacle side told us one thing. We want this to continue to be a great place to work. We want it to be an easy place to serve our clients. We want a war on bureaucracy where it doesn't feel like administrative burdens take over. And what they said they'd like to have is some better technology and better capabilities. So this merger is providing just that. We've kept what they love, and we're adding some new things that they wanted. On the legacy Synovus side, I've said this for 120 of the 138 years we've been in existence, we ran the Pinnacle model, a decentralized model that was predicated on geographic leadership. In many cases, our bankers are returning to their roots. John, I was at an orientation a couple of weeks ago. We do orientation where we take team members through a 2-day exercise, talking about strategy and culture and renew team building activities. We made the decision to take all 5,000 Synovus team members through orientation, and that's a commitment for all of us to do it. But a lady came up to me is she was getting ready to be thrown over this 12-foot wall, which is symbolic as we in the orientation and she was crying. She said, I feel like I'm back home again. This was the Synovus I signed up 4 years ago. So I'd tell you that when you create an environment that is constructive for what people want, both from a cultural standpoint and also to serve their clients. People want to talk about money and other things. That's not the most important thing. I think it was Hertzberg, Theory of Motivation that said monies like oxygen. If you have enough of it, you don't even think about it. And that's how I think about it. We got to pay people well. So it's like oxygen, and we make the work design, the work environment is so great that that's not the purpose for them wanting to stay.

What about switching to culture, client employee scores have held up so far? What's the risk between now and conversion in March and beyond?

The risk is the amount of effort that's going into change management. When I say change management means that every team member, all 8,700 team members at Pinnacle Financial Partners will have something that changes. An internal system that they use a process, a procedure. And then ultimately, our clients' products will change for half of our client set. The amount of work that goes into getting prepared for that is meaningful. And so we want to make sure that we're giving people the proper training, the work guides to be able to be prepared for when we get to conversion. And it takes sometimes it makes people work extra hours because you're having to do your day job and train for the new system, the new work environment. And so once we get through that, it's less about the conversion itself, the technical movement of accounts. It's going to be more so making sure that our bankers and our team members feel prepared to be able to execute on those.

And then thinking about scale and culture, I mean, is there a tipping point where the company has some employees were this model doesn't work or you can't be as connected to the new hires to the existing employees?

I don't -- I must say no because I do think the essence of your question is spot on. As banks get larger, PAUSE you start to rationalize the things you've done because you convince yourself you're too big to do that. Let me give you an example. Every Monday in our firm, if you join our firm, you show up in Nashville, Tennessee and welcome aboard for 1.5 days. Every team member, whether you're a call center agent, whether you're a financial specialist, whether you're a market executive, you show up there. And every Monday at 2:00, I greet those new team members. Now when Terry and Rob started that, I'm sure 26 years ago, they had 4 or 5 people in that room. This last week, we had 50 people. The week before that, it was 70 people, almost 70 folks. And we're going to maintain that. We're going to keep doing that. Within the first 6 months, those same individuals will go through a 2-day, 3-day orientation. We're going to maintain that because it's part of our culture. That's when we talk about this concept of scale with the soul, our soul can't change. Those are the things that drive the connectivity with the firm. What has to change as you get bigger is the scale portion? What's leverage a bigger balance sheet? Let's leverage better capabilities but don't change who you are. And unfortunately, whether it's in the banking industry or others as people get larger they rationalize the things that they can no longer do. And that's when you say you hear team members say, this isn't the company I want to work for. We're going to avoid that by keeping those things that are so important. And yes, it creates a lot of energy from leaders to have to do those things and a lot of resources and dollars -- last week, we spent 4 days doing anniversary parties, John, and I know this will surprise you, but Jamie and I were on a stage dancing and lip sinking on these things. And those are the type of things. I know you in the audience, you're laughing, too, you can't believe it. We can show you the video. It's important because we celebrate it, both firms anniversaries are during the same week. One, 26 years ago, the other 138 years ago. But together, we celebrated in 4 cities, celebrating the anniversary of both firms with a lot of fun. And that's important to Pinnacle. They started the anniversary parties. And I think our Synovus team members rallied around it.

Do you know that since the merger closed, George hasn't played Tennessee and football, they weren't on the schedule this year.