Pinnacle Financial Partners, Inc. -- Moody's assigns first-time A1/Prime-1 deposit ratings to Pinnacle Bank; outlook stable

Rating Action: Moody's assigns first-time A1/Prime-1 deposit ratings to Pinnacle Bank; outlook stableGlobal Credit Research - 18 Jan 2022New York, January 18, 2022 -- Moody's Investors Service ("Moody's") has assigned first-time ratings to Nashville, Tennessee-based Pinnacle Financial Partners, Inc. (Pinnacle), and its lead bank Pinnacle Bank. Moody's has assigned Pinnacle Bank an issuer rating of Baa1 and long- and short-term deposit ratings of A1/Prime-1, together with a standalone Baseline Credit Assessment (BCA) of a3. Moody's has also assigned long- and short-term Counterparty Risk Assessments of A2(cr)/Prime-1(cr) and long- and short-term Counterparty Risk Ratings of A3/Prime-2 to the bank. Moody's has also assigned a Baa1 issuer rating to the holding company, Pinnacle. The rating outlooks for Pinnacle and Pinnacle Bank are stable.Assignments:..Issuer: Pinnacle Bank.... Adjusted Baseline Credit Assessment, Assigned a3.... Baseline Credit Assessment, Assigned a3.... LT Counterparty Risk Assessment, Assigned A2(cr).... ST Counterparty Risk Assessment, Assigned P-1(cr).... LT Counterparty Risk Rating (Foreign Currency), Assigned A3.... LT Counterparty Risk Rating (Local Currency), Assigned A3.... ST Counterparty Risk Rating (Foreign Currency), Assigned P-2.... ST Counterparty Risk Rating (Local Currency), Assigned P-2.... LT Issuer Rating (Local Currency), Assigned Baa1, Stable.... ST Deposit Rating (Local Currency), Assigned P-1.... LT Deposit Rating (Local Currency), Assigned A1, Stable..Issuer: Pinnacle Financial Partners, Inc..... LT Issuer Rating (Local Currency), Assigned Baa1, Stable Outlook Actions: ..Issuer: Pinnacle Bank ....Outlook, Assigned Stable ..Issuer: Pinnacle Financial Partners, Inc.....Outlook, Assigned StableRATINGS RATIONALEPinnacle Bank's a3 BCA and ratings reflect the benefits to creditors from the firm's consistent strategy, strong operating efficiency, management stability, good credit performance, solid capitalization and high liquidity. The BCA also incorporates the credit challenges from Pinnacle's large commercial real estate (CRE) concentration, including a sizable construction component, which Moody's considers to be riskier than other CRE subsectors.In addition, the newly-assigned BCA and ratings incorporate Pinnacle's comparative lack of portfolio diversification relative to many rated peers, and its somewhat more moderate level of core profitability, adjusted for the earnings contribution from its 49% ownership interest in Bankers' Healthcare Group (BHG) and recent reserve releases. In sum, Moody's assessment of Pinnacle's credit fundamentals results in its bank-level BCA being positioned equal to the current a3 median BCA of Moody's rated US bank universe.Pinnacle's credit loss history is strong. In particular, Pinnacle's annual net charge-off percentage of average loans has consistently been below the average for all FDIC-insured banks throughout the economic cycle. Pinnacle's favorable credit loss history is somewhat offset, in Moody's view, by the risks stemming from its business concentration in commercial lending, which limits portfolio diversification when compared with many higher-rated peers.Specifically, notwithstanding Pinnacle's strong track record, its CRE book, including multi-family and construction, was about 2.8x Moody's-calculated tangible common equity (TCE) at 30 September 2021, a comparatively high level. Construction alone, including 1-4 family residential construction, is roughly equal to TCE, which is among the highest of rated US banks.A unique feature of Pinnacle is its ownership interest in BHG, a national unsecured lender focused on healthcare professionals. Accounted for under the equity method, BHG contributed about 19% of Pinnacle's total pre-tax income for the first nine months of 2021, a sizable proportion. Although BHG faces its own set of asset risks, Moody's believes Pinnacle's creditors are better off with its ownership interest in BHG than without it because it can be sold in the event the bank encounters problems elsewhere and generate incremental capital. Ultimately, despite Pinnacle's investment in BHG being a financial success, Moody's considers it to have limited impact on Pinnacle's overall credit standing.Pinnacle's capitalization is solid and in excess of regulatory requirements, providing good cushion against unexpected losses. Moreover, Pinnacle's capital profile has been stable in recent years and the assigned BCA and ratings assume continued relative stability in Pinnacle's capitalization.Pinnacle's profitability metrics, including measures of its operating efficiency and overall net income, are robust. Its cost-to-income ratio, around 50%, is superior to that of most rated US banks, which partly reflects its branch-lite business model, as well as the contribution from BHG. Even on an adjusted basis, Pinnacle's operating efficiency is healthy.Pinnacle's funding and liquidity profile provides significant rating support in Moody's view. Pinnacle is core funded with deposits, although its commercial orientation results in a deposit base that is less granular than banks with more balance between retail and commercial deposits. Still, in assessing Pinnacle's liquidity, Moody's recognizes that Pinnacle's current holdings of liquid assets are above pre-pandemic levels and that a moderate amount of excess liquidity will eventually runoff.Pinnacle's exposure to environmental and social risks is low and moderate, respectively, consistent with Moody's general assessment for the global banking sector. With respect to governance, it is a key aspect of our rating analysis because any weaknesses in this area can lead to deterioration in a bank's credit quality, while any governance strengths can benefit a bank's credit profile. Governance risks are largely internal rather than externally driven. Somewhat uniquely amongst rated US banks, Pinnacle is led by its founding CEO, who was been in his role for 21 years. Moody's expects that the board and management has succession plans in place.The stable outlook is a reflection of Moody's view that Pinnacle Bank's credit profile will remain stable over the next 12-18 months.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSA reduced CRE concentration, greater loan portfolio and deposit diversity and/or stronger capitalization could result in upward pressure on Pinnacle's BCA, all else being equal. A higher BCA would likely lead to higher deposit and debt ratings.Unanticipated weakness in credit quality could lead to a lower BCA, as could a significant downturn in core profitability. A lower BCA would likely lead to lower deposit and debt ratings.The principal methodology used in these ratings was Banks Methodology published in July 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1269625. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Allen Tischler Senior Vice President Financial Institutions Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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