Pinnacle Financial Reports Diluted Earnings Per Share of $0.71 For 3Q 2016

  • Tuesday, October 18, 2016

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.”

·    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.” 

·       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.

o   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.

o   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.”

o   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 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,” Mr. 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.”

 

o   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,” Mr. 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.”

On Tuesday, 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.

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