Nashville, Tennessee, lost its last major locally owned bank in 1999, when a larger out-of-state rival acquired First American Corp. The deal would have marked the end of an era for the city once known as the Wall Street of the South, but for the efforts of three former First American executives.
A year after First American's sale, Terry Turner, Rob McCabe, and Hugh Queener teamed up to open Pinnacle Financial Partners (NASDAQ:PNFP). They did so to compete against large regional banks like the one that bought their former employer. It was an audacious goal, as economies of scale are much more than just a theoretical construct in the bank industry, but their strategy has proven to be on target.
Following its recent acquisition of BNC Bancorp, Pinnacle Financial will have amassed $20 billion in assets in only 17 years. It's an impressive accomplishment by any measure. Unlike other fast-growing banks, moreover, its rapid ascent hasn't come at the expense of shareholder value. Just one other publicly traded bank has generated a higher return for investors over the same span.
How did Pinnacle Financial pull this off? That's what I sought to find out from Turner, who has served as CEO since its founding. What follows is a transcript of our conversation, edited for organization and flow.
The Motley Fool: Tell me the story behind the founding of Pinnacle Financial.
Terry Turner: Before founding Pinnacle, I was an executive at First American, a $20 billion bank headquartered here in Nashville, Tennessee. It was a six-state franchise that ran on a diagonal from Roanoke, Virginia, to Shreveport, Louisiana. My role in that company was to run the general bank, which included retail customers as well as owner-managed businesses with annual sales up to $10 million. It was the main slice of the banking business.
My longtime running mate in all of this is Rob McCabe. Rob was also a named executive officer at First American and held major roles there, including running the general bank before I did. He had also run the corporate bank and the non-bank businesses and so forth. So we gained a broad base of experience there.
The other partner in the founding of this company is Hugh Queener. He's our chief administrative officer. He's built and had responsibility for all the banking operations, systems, and all those sorts of things.
We've been working together since the late 1970s, when the three of us met at a small bank in Knoxville, Tennessee, called Park National Bank. First American acquired that company in 1983 so we all ended up migrating from Knoxville to Nashville as a part of that acquisition and then rose through the ranks at First American.
The catalyst for forming Pinnacle Financial was the acquisition of First American by AmSouth Bank in 1999, both of which were later rolled into Regions Financial (NYSE:RF).
We had seen at the time and had data supporting the fact that client satisfaction went down as the bank industry consolidated. And when client satisfaction goes down, market share can move. So we had market share data over an extended period of time that showed that small, locally owned banks were taking share from large regional banks, which were tied up in consolidation and dealing with all the difficulties that go with that.
This company was formed specifically for the purpose of competing against large regional banks in the commercial sector. For us at the time that was AmSouth (i.e., Regions Financial), SunTrust Banks (NYSE:STI), and Bank of America (NYSE:BAC). They had virtually all the clients and virtually all the vulnerability.
The Motley Fool: How did you, Rob, and Hugh make the jump from being executives at First American/AmSouth to founding Pinnacle?
Turner: Rob and I left First American in October 1999, Hugh stayed a little longer. From when the deal was announced until when we left, we had assignments that we needed to complete. During that period, being ongoing employees of AmSouth, we couldn't take any overt competitive actions. But we were free to think about what we wanted to do and conceptualize that.
Rob and I were involved in early-stage discussions about whether to sell First American to AmSouth. At that point, your mind begins to run about what type of opportunities that may present. The two of us and Hugh thought through various combinations and permutations for a month or two -- to go run a bank for somebody else, to gain control of another locally owned bank, what have you.
We ultimately decided that we'd be best starting with a clean sheet of paper. The reason we chose to start a bank as opposed to those other alternatives is that we were very intentional about the culture we wanted to build. And if you're intentional about culture, it's easier to build what you want than it is to take something different than what you want and then moving and shaping it into something that you do want.
Though, if I had to boil it down to one thing, it really just related to the competitive opportunity. First American was an acquisitive company. So we were familiar with how banks get integrated, what the implications are, and how local banks take share from those banks. All that made us believe that there was a great opportunity because First American was the last large, locally owned bank in Nashville. It dominated this market on almost any market share metric you would look at, whether it's small-business share, corporate share, FDIC deposit share, whatever. So when it was sold to an out-of-state bank, it just presented an overwhelming opportunity.
We also believed that Nashville would be heartbroken by the loss of its last large locally owned bank. As late as the mid-1980s, Nashville billed itself as a regional financial center. We had major banks headquartered here, insurance companies, and so forth. But by the end of the 1990s all these were gone. This isn't just emotional, it's a practical concern. If you look at the role First American played here, the chairman and CEO at the time, Dennis Bottorff, was as important as anyone in the process of relocating the Titans to Tennessee.
Another example is Hugh McColl. At one time in Charlotte, if you wanted to be a vendor to Bank of America, you needed to lease space in downtown Charlotte, North Carolina. Just think about the power and significance of that to a market like Charlotte, given the vast number of vendors that would want to do business with Bank of America.
So, we understood the criticality of a locally owned bank. That was important to us, and we believed it was important to Nashville, and therefore we would engender strong support there.
The Motley Fool: What was the original idea for Pinnacle's business model?
Turner: We were focused on competing against large regional banks, particularly in the commercial middle-market segment. We felt like the way to do that was to have a distinctive service equation, which involved being an effective advisor.
So then you start asking questions about how do you do that? The No. 1 inhibitor if you want to compete on service quality is employee turnover. So what we said is: How do you retain 95% of your people? And the answer is that you need to hire the right type of people.
Part of our idea was that we wouldn't hire anyone with less than 10 years' worth of experience in a company for any job. We determined that we wouldn't hire people who applied for jobs, or anyone that was circulating a resume. That group of people, we believed, were either unhappy or unsuccessful where they were, and we'd just as soon let them stay there. We wanted to hire people who were happy and successful. That sounds trite, but it's an important building block in what we've done here.
The way you get to work at Pinnacle is that someone here will say: "Hey, I worked with this person before, and they're good and they share our values." So we set about recruiting those people. Most of them are happy where they are, so it can take a long time to recruit them. We have people here that we chased for seven years because we knew they were high-performing people and that they met all of our criteria. So the experience level was not only important in terms of how we matched up against competitors, but also for how it drove turnover out of the system, which was part of the original design.
The second thing that's worth talking about is that this approach was important to us from the start because it's the only way I know how to create outsized growth with strong asset quality. If you take our revenue-producing people, they have an average of 33 years of experience.
When you hire people with three decades of experience, a large book of business, and who know their clients extremely well, they're able to move that book business from where they are to us, which creates rapid growth. But it also creates great asset quality at the same time, for two reasons. One, these are people they've banked for a long time and know what's going on with them. And two, if they do have any bad credits, they leave them behind, which is sort of the opposite of adverse selection.
Dick Kovacevich who ran Norwest and then Wells Fargo (NYSE:WFC) was famous for his saying: "If it's growing like a weed, it is one." It's common knowledge that a bank that's outgrowing its market substantially is likely taking on more risk than other competitors in the market. But when you deploy this strategy -- hiring experienced bankers who move an existing book of business to you and leaving bad credits behind -- that's the only way I know of to produce outsized growth in a safe and sound way.
The Motley Fool: How do you convince high-performing bankers to leave where they are and come to Pinnacle?
Turner: There are several things. Generally, the main sales person is someone here who referred that person to us. That's a really powerful thing. The principal selling mechanism is that the associates that work here love it and advocate for us, and so they generally open the doors.
Also, to be a client-facing person in a large regional bank is a difficult experience. It's particularly difficult if you're in an outpost market far from the headquarters. It's a bureaucratic deal. You have to get your credits approved by someone outside the market. Those people don't know you, they don't know your clients, and they're not involved in any sort of strategic decisions. So it's disempowering and disengaging for a generally prideful group of people who know how to take care of clients and who want to participate in the firm.
The Motley Fool: What specifically is it about the daily life of a banker at Pinnacle that's different from at a large regional bank?
Turner: There are several pieces to that. One is that the credit approval process isn't burdened with bureaucracy. If you're hiring people who have 30 years of experience, you can build a different control infrastructure. That's much more freeing and much more attractive to people with that much experience.
We run a signature system as opposed to a committee system. I've believed from the founding of this company that when something is everybody's job, it's nobody's job.
The idea of a signature system is that a lender and their manager can do $1 million credits. And then two of them and a senior credit officer can generally do $10 million. That group of three is always proximate to each other, so they can reach a decision in short order for a $10 million credit, which covers the vast majority of transactions we do. That speed is important.
I don't find the committee system to be particularly good for credit approval. If it looks like the person who chairs that committee likes a credit, then you like it, and if it looks like he doesn't like it, then you don't like it. There's really no value to the committee. All it does is burden and slow down the process.
Flexibility is also important. Again, because of our experienced workforce, we're able to make appropriate exceptions. If you're in a big company, you have to lay down bright-line rules that people need to follow. We do surveys where we ask employees to tell us what they like, what they don't like, and anything else. The most frequent answer in terms of what they like is that there isn't micromanagement.
If you're at a regional bank, they're typically running some type of call program, expecting you to make a certain number of calls a month. You have to call on so many A clients, B clients, so many prospects, you have to work on a product cross-sell ratio. Here we don't do that. We turn people lose to go get their clients, know them well, and meet their needs.
For years when I talked with institutional investors, a lot of them would say: Tell me about your sales culture. Well we don't have one. And they'd look at me like: "This poor bumpkin from Tennessee doesn't really get it." What we have instead is a service culture.
If you called up every relationship manager in this company, not one of them could tell you what their product cross-sale ratio is. I don't know what it is for any individual, either. But if you look at the data, we have the highest cross-sale ratio among the banks we compete against. And the reason is that we're just trying to know our clients and take care of their needs, which results in an extraordinary amount of revenue.
The Motley Fool: You've made six acquisitions since founding Pinnacle, yet you don't follow the traditional strategy that's worked so well for, say, M&T Bank (NYSE:MTB) of buying banks cheap during a downturn in the credit cycle. Why is this?
Turner: So much of the energy in this company is about advancing the ball, moving forward. We want people to be excited and engaged about where we're going. We believe that the success that we've had will continue to breed more success. And so there's a real positive momentum and energy in this company.
Buying fixer-uppers is a different game. It's not a bad game. And let me be clear here, Robert Wilmers at M&T Bank is the world champion. I mean, he's done it over a long period of time and he's fabulous at it.
But our strategy is different. We're not bump-and-grind operators. It's just like our approach isn't to cut expenses, it's to grow the asset base, the revenue base, taking clients, moving share. That's just a different mindset than saying: "How do I take this thing that's broken and convince all these people that we're going to turn it around?" It's just a game that we don't want to play. Others like M&T Bank are great at it, but it just doesn't match our cultural strategy.
The thing that's always important for me is the linkage here between the associate experience that we create and our results. When I talk to most analysts and institutional investors about this, their eyes glaze over and they want me to get to the real stuff. But that is the real stuff. We've bet the whole farm on this strategy of hiring the best people in our markets and moving their books of business over. And so if we're successful at that, we create a distinctive client experience.
But all of that has to produce a great shareholder return. I talk to a lot of banks that say, "Hey, we're creating this great work environment, but the shareholder return is nothing." We're trying to measure ourselves on three things: What we're doing in terms of the client and associate experiences, and what impact that has on returns.
The Motley Fool: Why are you confident that you can spread this model of attracting high-performing bankers into banks you acquire, and into BNC Bancorp specifically, given that it's your latest and biggest deal?
Turner: BNC has been a commercially focused company, but its focus has been on commercial real estate (CRE) loans, not commercial and industrial (C&I) loans like us. Its CEO Rick Callicutt and his team recognized several years ago that this would be a limiting factor for two reasons.
First, because it leaves you with a huge concentration in real estate, which makes getting deals approved and all those things difficult, because regulators are focused on banks that have more than 100% of risk-based capital in construction exposure and 300% in commercial real estate exposure. And second, it's hard to fund your balance sheet with that model, because commercial real estate developers are heavy users of funds, but seldom if ever providers of funds.
So they set out to build a strategy around C&I loans. They had success in beginning, but then ran into three basic objections that from C&I bankers that they tried to recruit from bigger, more established C&I lenders. Some would say, "I'm a C&I guy through and through. You guys are just getting started with this and I don't know if you know enough about it or if you're even going to stay in the business. I don't know if I want to bet my career on coming to work with a bunch of CRE guys that are trying to experiment with a new product."
The second objection was that BNC had a treasury management suite that was OK, but it wasn't good enough to attract clients out of Bank of America, Wells Fargo, and BB&T (NYSE:BBT). The third objection was that BNC, at $7.4 billion in assets, couldn't do big enough deals to bring clients over from those banks.
Our acquisition remedied all three of those objections. Rick has hired six C&I people since we announced this deal. That's an extraordinary thing. I don't know many banks that are able to make meaningful hires while they're changing the flag. It's indicative of what our opportunity is and what we can do over there. If people who are capable and don't like working in these large regional banks have a good alternative, which we are, they'll have a preference to work here as opposed to there. They'll move their books of business, creating rapid growth with strong asset quality.
I get asked by institutional investors all the time: "How do you compete with this little bank or that little bank?" And my response is: "I don't know. That's just not where the line of scrimmage is for us." Our company is engineered to compete with Regions Financial, SunTrust Banks, Bank of America, and Wells Fargo. That's where we draw the line of scrimmage.
We don't have to compete against local banks. That resonates with people. Once that light comes on, and you develop confidence that you can bring those people over to a less micromanaged environment, and bring their books of business and so forth, it just creates a different target for who they're hiring and how they do so that's pretty powerful.
The Motley Fool: You approach efficiency the same way U.S. Bancorp (NYSE:USB) does, by driving it through revenue growth not expense cuts. This has proved to be very effective at both Pinnacle and U.S. Bancorp. What led you to this approach?
Turner: The temptation is to improve the efficiency ratio by cutting expenses. You don't have to be good to do that. So that's the lever most people pull on because it's the most obvious and easy to control.
But the truth is, if you go back to this idea that we're trying to create a great workplace that allows us to hire the best bankers and keep them engaged and excited about working here, it's hard to do that in an expense-cutting mode. It breaks down trust between people, which cuts against everything we're trying to do here.
So we've always gone about it in a different way. When we came out of the crisis, all the numbers were messed up, people wanted to see what expenses you could cut, because that's where they thought your profit lever would come from. We said, "That isn't us. We're going to create a great efficiency ratio. We're going to drive our expense-to-asset ratio down, but the way we're going to do that is we're going to grow the asset base of this company.
People enjoy playing offense, which is about revenue production. People here love it that we're growing and taking share. It creates a mentality that feeds on itself inside the company in exactly the same way that expense cutting does in reverse, which unwinds morale and momentum. A revenue-focused approach drives that momentum and becomes a self-fulfilling prophecy.