Investing.com -- Moody’s Ratings has affirmed the ratings of Pinnacle Financial Partners (NASDAQ: PNFP ), Inc. and its subsidiary, Pinnacle Bank. The long-term local currency issuer rating for the holding company was confirmed at Baa2. For Pinnacle Bank, the long-term local currency bank deposits and issuer ratings were affirmed at A2 and Baa2, respectively. The bank’s long-term Counterparty Risk Assessment was confirmed at A3(cr), its short-term Counterparty Risk Assessment at Prime-2(cr), and its Baseline Credit Assessment (BCA) and Adjusted BCA at baa1. The bank’s long-term local and foreign currency Counterparty Risk Ratings were affirmed at Baa1, and the short-term local and foreign currency Counterparty Risk Ratings were confirmed at Prime-2. The bank’s short-term local currency bank deposits rating was affirmed at Prime-1. The outlooks for Pinnacle’s long-term issuer rating and Pinnacle Bank’s long-term deposit and issuer ratings were upgraded to stable from negative.

The affirmation of Pinnacle’s ratings and the change in outlook to stable are due to its improving capitalization and decreasing exposure to commercial real estate (CRE) construction lending. Pinnacle’s capitalization increased to 10.75% at December 31, 2024, up from 9.8% at December 31, 2022, as measured by its Moody’s-adjusted tangible common equity (TCE) to risk-weighted assets (RWA) ratio. Furthermore, Pinnacle has limited unrealized losses on its available for sale (AFS) and held-to-maturity (HTM) securities, which represents unrealized economic losses. These unrealized losses amount to about 9.8% of its TCE, which is relatively benign compared with some peers.

The affirmation and stable outlook also reflect strong asset quality performance and improvements in lowering Pinnacle’s concentration in CRE, particularly in construction lending. As of December 31, 2024, Pinnacle’s CRE loans were 2.6 times its Moody’s Ratings TCE on a Moody’s-adjusted basis, down from 2.8 times one year earlier. At the same time, the bank reduced its construction exposure to 83% of its TCE, down from 99% over the same period. Pinnacle’s allowance for credit losses has been relatively stable over the past year at slightly over 1.16% of total loans, several times its recent net charge-off experience, which in 2024 were 0.22% of average loans.

However, Pinnacle’s higher-cost deposit franchise and modest liquidity levels remain as challenges. The bank’s use of brokered deposits and those indexed to market rates results in higher deposit costs. As a result, the yield on total interest-bearing deposits increased to 3.77% in 2024 from 3.47% in 2023. Even though Pinnacle increased its liquidity, as measured by liquid banking assets to total banking assets, to 19.3% as of December 31, 2024, from 15.3% as of December 31, 2022, it still lags behind similarly rated peers.

The stable outlook is based on the expectation that Pinnacle will continue to reduce its CRE concentration, improve its capitalization, and maintain adequate liquidity. A significant decrease in CRE concentration, higher liquidity and significantly stronger capitalization could lead to an upgrade in Pinnacle’s BCA. On the other hand, a sustained decline in capitalization below 10.5% or liquidity, or an unexpected deterioration in credit quality such as a reversal in trend toward lowering its CRE exposure or a significant downturn in core profitability, could lead to a downgrade.

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