PNFP Reports Diluted Earnings Per Share of $0.71 for 3Q 2016

NASHVILLE, Tenn.--(BUSINESS WIRE)--Pinnacle Financial Partners, Inc. (Nasdaq/NGS: PNFP) reported net income per diluted common share of $0.71 for the quarter ended Sept. 30, 2016, compared to net income per diluted common share of $0.62 for the quarter ended Sept. 30, 2015, an increase of 14.5 percent. Net income per diluted common share was $2.12 for the nine months ended Sept. 30, 2016, compared to net income per diluted common share of $1.86 for the nine months ended Sept. 30, 2015, an increase of 14.0 percent.

Excluding pre-tax merger-related charges of $5.7 million and $8.5 million for the three and nine months ended Sept. 30, 2016, net income per diluted common share was $0.78 and $2.24, respectively, compared to $0.66 and $1.92 for the three and nine months ended Sept. 30, 2015, excluding pre-tax merger-related charges of $2.2 million and $2.3 million, respectively, or an increase of 18.2 percent and 16.7 percent, respectively, over the same periods last year.

“Third quarter financial results, including earnings per share, return on average assets, return on average tangible common equity and the efficiency ratio, when adjusted for merger-related expenses, are outstanding and simply validate two fundamental tenets of our operating philosophy for both organic and acquired growth. First, at the core of our firm is a distinctive client satisfaction model that continues to yield impressive market share gains. Second, we have been extremely disciplined about where and when to deploy our highly valued stock in acquisitions that ensure we are truly advancing our revenue and earnings capacity,” said M. Terry Turner, Pinnacle’s president and chief executive officer. “We continue to increase our market share position and were pleased that recent FDIC deposit data reflects that we have now achieved a No. 3 market share position in Nashville after consideration of our merger with Avenue Financial Holdings, Inc. (Avenue). It has long been our target to unseat the larger out-of-state banks that have dominated the Nashville banking market for decades. Additionally, during the third quarter of 2016, we successfully completed the technology conversion of Avenue’s data systems, which was the culmination of nearly 18 months of intense focus by our associates to integrate the operations of three meaningful financial institutions onto Pinnacle’s operational platform. Lastly, our focus on being a ‘Great Place to Work’ and our relentless recruiting efforts have enabled us to attract who we believe are the best revenue producers in our markets, as we have now increased our salesforce this year by 78 individuals, including 35 Avenue revenue producers who came on board in July 2016.”

GROWING THE CORE EARNINGS CAPACITY OF THE FIRM:

• Revenues for the quarter ended Sept. 30, 2016 were a record $118.3 million, an increase of $10.6 million from the second quarter of 2016. Revenues increased 41.8 percent over the same quarter last year.
• Loans at Sept. 30, 2016 were a record $8.241 billion, an increase of $1.150 billion from June 30, 2016 and $1.905 billion from Sept. 30, 2015. Included in the $1.150 billion in growth during the third quarter of 2016 was $944 million in balances as a result of the Avenue merger. The $206 million in remaining growth represents an annualized organic growth rate of 10.3 percent over the June 30, 2016 combined balances of Pinnacle and Avenue, after considering preliminary purchase accounting adjustments recorded on Avenue’s loan balances.
• Average deposit balances for the quarter ended Sept. 30, 2016 were a record $8.454 billion, an increase of $1.361 billion from June 30, 2016 and $2.556 billion from Sept. 30, 2015. Included in the $1.361 billion in average deposit growth during the third quarter of 2016 was Avenue’s second quarter average deposit balances of $953 million. The $408 million in remaining growth represents an annualized organic growth rate of 20.3 percent over the June 30, 2016 combined average deposit balances of Pinnacle and Avenue.

“The key to future earnings growth for our firm remains our ability to attract loans and deposits,” Turner said. “Our organic deposit growth rate for the third quarter was very strong at an annualized rate of 20.3 percent, exclusive of the $967 million in deposits we acquired as a result of the Avenue acquisition. During that same time period, our organic loan growth rate also remained in double digits.”

“We are also pleased with the continued organic loan growth in our newly acquired markets, as Chattanooga’s loans have increased at an annualized growth rate of 9.0 percent during the first nine months of 2016, a very strong growth rate during this period of transition and system conversion. Memphis loans are up 66.0 percent on an annualized basis in 2016, including the liftout of a commercial team from a local competitor and the commercial loans managed by that team that we completed in the first quarter of 2016.”

FOCUSING ON PROFITABILITY:

• The firm’s net interest margin was 3.60 percent for the quarter ended Sept. 30, 2016, compared to 3.72 percent last quarter and 3.66 percent for the quarter ended Sept. 30, 2015.
• Return on average assets was 1.18 percent for the third quarter of 2016, compared to 1.33 percent for the second quarter of 2016 and 1.27 percent for the same quarter last year.
  • Excluding merger-related charges in each period, return on average assets was 1.31 percent for the third quarter of 2016, compared to 1.36 percent for the second quarter of 2016 and 1.35 percent for the same quarter last year.
• Third quarter 2016 return on average common equity amounted to 8.93 percent, compared to 9.92 percent for the second quarter of 2016 and 9.71 percent for the same quarter last year. Third quarter 2016 return on average tangible common equity amounted to 14.47 percent, compared to 15.34 percent for the second quarter of 2016 and 14.49 percent for the same quarter last year.
  • Excluding merger-related charges in each period, return on average tangible equity amounted to 16.01 percent for the third quarter of 2016, compared to 15.64 percent for the second quarter of 2016 and 15.31 percent for the same quarter last year.

“The third quarter represented another strong quarter of profitability for our firm as we continue to operate in the high end of our targeted range for return on average assets excluding the impact of merger-related expenses,” said Harold R. Carpenter, Pinnacle’s chief financial officer. “We anticipated dilution of our net interest margin this quarter with the integration of Avenue’s results into Pinnacle’s results. We anticipate the fourth quarter will again experience some margin dilution; however we also expect growth in net interest income due to continued loan and deposit growth in each of our markets. During the quarter, discount accretion of the fair value adjustments required by purchase accounting contributed approximately 0.21 percent to our net interest margin. We anticipate that purchase accounting will contribute between 0.15 percent to 0.20 percent to our net interest margin in the fourth quarter of 2016.”

OTHER THIRD QUARTER 2016 HIGHLIGHTS:

• Revenue growth
  • Net interest income for the quarter ended Sept. 30, 2016 increased to $86.6 million, compared to $75.0 million for the second quarter of 2016 and $62.1 million for the third quarter of 2015.
  • Noninterest income for the quarter ended Sept. 30, 2016 was $31.7 million, compared to $32.7 million for the second quarter of 2016 and $21.4 million for the same quarter last year.
    • Net gains from the sale of mortgage loans were $5.1 million for the quarter ended Sept. 30, 2016, compared to $4.2 million for the second quarter of 2016 and $1.9 million for the quarter ended Sept. 30, 2015.
      • The year-over-year growth rate was attributable to both an increase in the number of mortgage originators as well as the positive impact of the low interest rate environment on mortgage production and the pipeline hedge. New home mortgage originations accounted for 63.8 percent of the firm’s net gain on mortgage loan sale volumes in the third quarter of 2016.
    • Wealth management revenues, which include investment, trust and insurance services, were $5.3 million for the quarter ended Sept. 30, 2016, compared to $5.2 million for the second quarter of 2016 and $5.1 million for the quarter ended Sept. 30, 2015, resulting in a year-over-year growth rate of 5.6 percent.
    • Income from the firm’s investment in Bankers Healthcare Group, LLC (BHG) was $8.5 million for the quarter ended Sept. 30, 2016, compared to $9.6 million for the quarter ended June 30, 2016 and $5.3 million for the third quarter last year.
    • Other noninterest income decreased from $10.2 million in the second quarter of 2016 to $9.0 million in the third quarter of 2016 due primarily to reduced revenues from client interest rate swap transactions.

“Mortgage revenues were another record for us this quarter, as our mortgage unit eclipsed the previous record posted last quarter,” Carpenter said. “Although BHG’s contribution was down linked quarter, we currently expect a solid fourth quarter from our partners at BHG. Our revenue per diluted share in the third quarter of 2016 increased slightly to $2.58 from the $2.57 per diluted share we reported in the second quarter of 2016.”

• Noninterest expense
  • Noninterest expense for the quarter ended Sept. 30, 2016 was $63.5 million, compared to $55.9 million in the second quarter of 2016 and $45.1 million in the third quarter last year.
    • Salaries and employee benefits were $36.1 million in the third quarter of 2016, compared to $34.3 million in the second quarter of 2016 and $27.7 million in the third quarter of last year, reflecting a year-over-year increase of 29.9 percent primarily due to the impact of the CapitalMark, Magna and Avenue mergers, as well as continued increases in recruiting in our primary markets.
      • Costs associated with the firm’s annual cash incentive plan amounted to $2.8 million in the third quarter of 2016, compared to $3.6 million in the third quarter of 2015 and $5.3 million in the second quarter of 2016.
    • Pre-tax merger-related charges were approximately $5.7 million during the quarter ended Sept. 30, 2016, compared to $2.2 million in the third quarter of 2015.
    • The efficiency ratio for the third quarter of 2016 increased to 53.7 percent from 51.9 percent in the second quarter of 2016, and the ratio of noninterest expenses to average assets decreased to 2.32 percent from 2.42 percent in the second quarter of 2016.
      • Excluding merger-related charges and other real estate owned (ORE) expense, the efficiency ratio decreased from 50.8 percent for the second quarter of 2016 to 48.9 percent for the third quarter of 2016, and the ratio of noninterest expense to average assets decreased from 2.37 percent to 2.11 percent between the second and third quarters of 2016.

“We are pleased to report that excluding merger-related charges, our core efficiency ratio was below the 50 percent threshold,” Carpenter said. “During the quarter, excluding merger-related charges, we maintained our expense base at the low end of our existing long-term financial target for expenses to average assets of between 2.10 percent and 2.30 percent. Given the operating leverage associated with our rapid organic and acquired growth, we believe we should be able to continue to maintain our expense base within these parameters excluding merger-related charges throughout the remainder of 2016 and for all of 2017.”

• Asset quality
  • Following the consummation of the Avenue merger, nonperforming assets decreased to 0.41 percent of total loans and ORE at Sept. 30, 2016, compared to 0.55 percent at June 30, 2016 and 0.57 percent Sept. 30, 2015. Nonperforming assets decreased to $34.1 million at Sept. 30, 2016, compared to $39.0 million at June 30, 2016 and $35.8 million at Sept. 30, 2015.
  • The allowance for loan losses represented 0.73 percent of total loans at Sept. 30, 2016, compared to 0.87 percent at June 30, 2016 and 1.01 percent at Sept. 30, 2015. The impact of the application of purchase accounting to Avenue’s loan balances, which were recorded at fair value upon acquisition, resulted in a year-over-year reduction to the firm’s ratio of allowance for loan losses to total loans of approximately 0.10 percent as of Sept. 30, 2016.
    • The ratio of the allowance for loan losses to nonperforming loans was 211.5 percent at Sept. 30, 2016, compared to 181.8 percent at June 30, 2016 and 212.2 percent at Sept. 30, 2015.
    • Net charge-offs were $7.3 million for the quarter ended Sept. 30, 2016, compared to $6.1 million for the second quarter of 2016 and $4.0 million for the quarter ended Sept. 30, 2015. Annualized net charge-offs as a percentage of average loans for each of the quarters ended Sept. 30, 2016 and June 30, 2016 were 0.35 percent, compared 0.28 percent for the third quarter of 2015.
    • Provision for loan losses increased to $6.1 million in the third quarter of 2016, from $5.3 million in the second quarter of 2016 and $2.2 million in the third quarter of 2015.

“We experienced continued improvement to our relatively low levels of nonperforming and classified assets,” Carpenter said. “We are also reporting reduced net charge-offs from our consumer auto portfolio this quarter. Net charge-offs from the non-prime consumer auto portfolio were $3.5 million during the third quarter of 2016, compared to $4.1 million of net charge-offs in the second quarter of 2016. We have reduced portfolio balances in this non-prime portfolio from $66.9 million at Dec. 31, 2015 to $40.2 million at Sept. 30, 2016 and anticipate continued reductions in this portfolio over the next several quarters.”

BOARD OF DIRECTORS DECLARES DIVIDEND

On Oct. 18, 2016, Pinnacle’s Board of Directors approved a quarterly cash dividend of $0.14 per common share to be paid on Nov. 25, 2016 to common shareholders of record as of the close of business on Nov. 4, 2016. The amount and timing of any future dividend payments to common shareholders will be subject to the discretion of Pinnacle’s Board of Directors.

WEBCAST AND CONFERENCE CALL INFORMATION

Pinnacle will host a webcast and conference call at 8:30 a.m. (CDT) on Oct. 19, 2016 to discuss third quarter 2016 results and other matters. To access the call for audio only, please call 1-877-602-7944. For the presentation and streaming audio, please access the webcast on the investor relations page of Pinnacle's website at www.pnfp.com.

For those unable to participate in the webcast, it will be archived on the investor relations page of Pinnacle's website at www.pnfp.com for 90 days following the presentation.

Pinnacle Financial Partners provides a full range of banking, investment, trust, mortgage and insurance products and services designed for businesses and their owners and individuals interested in a comprehensive relationship with their financial institution. The American Banker recognized Pinnacle as the sixth best bank to work for in the country in 2016.

The firm began operations in a single downtown Nashville location in October 2000 and has since grown to approximately $11.0 billion in assets at Sept. 30, 2016. As the second-largest bank holding company headquartered in Tennessee, Pinnacle operates in the state’s four largest markets, Nashville, Memphis, Knoxville and Chattanooga, as well as several surrounding counties.

Additional information concerning Pinnacle, which is included in the NASDAQ Financial-100 Index, can be accessed at www.pnfp.com.

FORWARD-LOOKING STATEMENTS

This release includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including those identified by the words “may,” “will,” “should,” “could,” “anticipate,” “believe,” “continue,” “estimate,” “expect,” “forecast,” “intend,” “plan,” “potential,” or “project” and similar expressions. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from the statements, including, but not limited to:

• deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses;
• continuation of the historically low short-term interest rate environment;
• the inability of Pinnacle Financial, or entities in which it has significant investments, like BHG, to maintain the historical growth rate of its, or such entities', loan portfolio;
• changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments;
• effectiveness of Pinnacle Financial’s asset management activities in improving, resolving or liquidating lower-quality assets;
• Increased competition with other financial institutions;
• greater than anticipated adverse conditions in the national or local economies including the Nashville-Davidson-Murfreesboro-Franklin MSA, the Knoxville MSA, the Chattanooga, TN-GA MSA and the Memphis, TN-MS-AR MSA, particularly in commercial and residential real estate markets;
• rapid fluctuations or unanticipated changes in interest rates on loans or deposits;
• the results of regulatory examinations;
• the ability to retain large, uninsured deposits;
• a merger or acquisition;
• risks of expansion into new geographic or product markets;
• any matter that would cause Pinnacle Financial to conclude that there was impairment of any asset, including intangible assets;
• reduced ability to attract additional financial advisors (or failure of such advisors to cause their clients to switch to Pinnacle Bank), to retain financial advisors or otherwise to attract customers from other financial institutions;
• further deterioration in the valuation of other real estate owned and increased expenses associated therewith;
• Inability to comply with regulatory capital requirements, including those resulting from changes to capital calculation methodologies and required capital maintenance levels;
• risks associated with litigation, including the applicability of insurance coverage;
• the risk that the cost savings and any revenue synergies from our recent mergers may not be realized or take longer than anticipated to be realized;
• disruption from the Avenue merger with customers, suppliers or employee relationships;
• the risk of successful integration of the businesses we have recently acquired with ours;
• the amount of the costs, fees, expenses and charges related to the Avenue merger;
• the risk of adverse reaction of Pinnacle Bank’s and Avenue's customers to the Avenue merger;
• the risk that the integration of the operations of the companies we have recently acquired with Pinnacle Bank’s will be materially delayed or will be more costly or difficult than expected;
• approval of the declaration of any dividend by Pinnacle Financial’s board of directors;
• the vulnerability of Pinnacle Bank’s network and online banking portals to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches;
• the possibility of increased compliance costs as a result of increased regulatory oversight, including oversight of companies in which Pinnacle Financial or Pinnacle Bank have significant investments, and the development of additional banking products for Pinnacle Bank’s corporate and consumer clients;
• the risks associated with Pinnacle Financial and Pinnacle Bank being a minority investor in BHG, including the risk that the owners of a majority of the equity interests in BHG decide to sell the company if not prohibited from doing so by the terms of our agreement with them;
• the possibility that the incremental cost and/or decreased revenues associated with exceeding $10 billion in assets will exceed current estimates; and
• changes in state and federal legislation, regulations or policies applicable to banks and other financial service providers, including regulatory or legislative developments.

Additional factors which could affect the forward looking statements can be found in Pinnacle Financial’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, filed with or furnished to the SEC and available on the SEC's website at http://www.sec.gov. Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this release which speak only as of the date hereof, whether as a result of new information, future events or otherwise.

Non-GAAP Financial Matters

This release contains certain non-GAAP financial measures, including, without limitation, net income, earnings per diluted share, efficiency ratio, noninterest expense and the ratio of noninterest expense to average assets and noninterest expense to the sum of net interest income and noninterest income, in each case excluding the impact of expenses related to other real estate owned, gains or losses on sale of investments, FHLB prepayments and other matters for the accounting periods presented. This release also includes non-GAAP financial measures which exclude expenses associated with Pinnacle Bank’s mergers with CapitalMark Bank & Trust, Magna Bank and Avenue as well as Pinnacle Financial’s and its bank subsidiary’s investments in BHG. This release may also contain certain other non-GAAP capital ratios and performance measures. These non-GAAP financial measures exclude the impact of goodwill and core deposit intangibles associated with Pinnacle Financial’s acquisition of Avenue, which Pinnacle Financial acquired on July 1, 2016, Magna Bank which Pinnacle Bank acquired on September 1, 2015, CapitalMark Bank & Trust which Pinnacle Bank acquired on July 31, 2015, Mid-America Bancshares, Inc. which Pinnacle Financial acquired on November 30, 2007, Cavalry Bancorp, Inc., which Pinnacle Financial acquired on March 15, 2006 and other acquisitions which collectively are less material to the non-GAAP measure. The presentation of the non-GAAP financial information is not intended to be considered in isolation or as a substitute for any measure prepared in accordance with GAAP. Because non-GAAP financial measures presented in this release are not measurements determined in accordance with GAAP and are susceptible to varying calculations, these non-GAAP financial measures, as presented, may not be comparable to other similarly titled measures presented by other companies. Pinnacle Financial believes that these non-GAAP financial measures facilitate making period-to-period comparisons and are meaningful indications of its operating performance. In addition, because intangible assets such as goodwill and the core deposit intangible, and the other items excluded each vary extensively from company to company, Pinnacle Financial believes that the presentation of this information allows investors to more easily compare Pinnacle Financial’s results to the results of other companies. Pinnacle Financial’s management utilizes this non-GAAP financial information to compare Pinnacle Financial’s operating performance for 2016 versus the comparable periods in 2015 and to internally prepared projections.