Pinnacle Financial Partners, Inc. reported net income per diluted common share of $0.73 for the quarter ended June 30, compared to net income per diluted common share of $0.64 for the quarter ended June 30, 2015, an increase of 14.1 percent. Net income per diluted common share was $1.42 for the six months ended June 30, 2016, compared to net income per diluted common share of $1.25 for the six months ended June 30, 2015, an increase of 13.6 percent.
Excluding pre-tax merger-related charges of $980,000 and $2.8 million for the three and six months ended June 30, net income per diluted common share was $0.75 and $1.46, respectively, compared to $0.64 and $1.26 for the three and six months ended June 30, 2015, excluding merger related charges, or an increase of 17.2 percent and 15.9 percent, respectively, over the same periods last year.
“We are very pleased to announce our 23rd consecutive quarter of increased core earnings,” said M. Terry Turner, Pinnacle’s president and chief executive officer. “Thus far, 2016 has been a very eventful year for our firm. In terms of our mergers and acquisitions, we successfully closed the Avenue Financial Holdings, Inc. transaction on July 1, five months after announcement, and increased our ownership of Bankers Healthcare Group from 30 percent to 49 percent on March 1. Both are excellent acquisitions that enhance the growth profile of our firm in a substantial way.
"BHG had a great quarter and is on track to meet our original accretion estimates of more than two percent in 2016. Avenue Bank has a great reputation and further increases our stature and position in Nashville, a banking market that many believe to be one of the best in the country. In addition to our successful merger and integration activities, we also continue to ramp up our recruiting efforts. So far we have attracted 29 revenue producers to our firm this year, compared to 36 hired in all of 2015, which is a substantial increase in growth capacity.”
Revenues for the quarter ended June 30 were a record $107.8 million, an increase of $8.0 million from the first quarter of 2016. Revenues increased 50.0 percent over the same quarter last year.
Loans at June 30 were a record $7.091 billion, an increase of $263.5 million from March 31 and $2.261 billion from June 30, 2015, reflecting a current year annualized growth rate of 16.8 percent and year-over-year growth of 46.8 percent.
Average deposit balances for the quarter ended June 30 were a record $7.093 billion, an increase of $56.3 million from March 31 and $2.209 billion from June 30, 2015, reflecting a current year annualized growth rate of 9.0 percent and year-over-year growth of 45.2 percent.
“Net loan growth of $263.5 million during the second quarter represented a 46.8 percent increase over the same quarter last year,” Mr. Turner said. “We continue to believe low to mid double-digit percentage year-over-year organic loan growth is a reasonable expectation for the remainder of 2016 and 2017. We continue to make progress in our relatively new Chattanooga and Memphis markets. Net loans in Chattanooga have increased 5.9 percent since the CapitalMark acquisition closed in July 2015, and net loans in Memphis have increased 41.4 percent since the Magna acquisition closed in September 2015. We’ve also increased our investment in both markets, having added nine revenue producers in Chattanooga and 17 in Memphis since the respective acquisition dates.”
The firm’s net interest margin was 3.72 percent for the quarter ended June 30, compared to 3.78 percent last quarter and 3.65 percent for the quarter ended June 30, 2015.
Return on average assets was 1.33 percent for the second quarter of 2016, compared to 1.27 percent for the first quarter of 2016 and 1.44 percent for the same quarter last year. Excluding merger-related charges, return on average assets was 1.36 percent for the second quarter of 2016, compared to 1.32 percent for the first quarter of 2016 and 1.44 percent for the same quarter last year.
Second quarter 2016 return on average equity amounted to 9.92 percent, compared to 9.47 percent for the first quarter of 2016 and 10.86 percent for the same quarter last year. Second quarter 2016 return on average tangible equity amounted to 15.34 percent, compared to 15.04 percent for the first quarter of 2016 and 15.39 percent for the same quarter last year. Excluding merger-related charges, return on average tangible equity amounted to 15.64 percent for the second and first quarters of 2016, compared to 15.44 percent and 15.56 percent for the same quarters last year, respectively.
“The second quarter represented another strong quarter of profitability for our firm,” said Harold R. Carpenter, Pinnacle’s chief financial officer. “We anticipated a slight dilution in our net interest margin this quarter as the impact of the loan marks from the CapitalMark and Magna acquisitions declines. Purchase accounting has contributed approximately 0.20 percent to our net interest margin in the first half of 2016. We anticipate the integration of Avenue’s results into Pinnacle’s results to have a slightly dilutive effect to several of our profitability metrics going forward. However, as we highlighted in our announcement of the merger this past January, we still anticipate that we will experience accretion of 1 to 2 percent in diluted earnings per share in 2016 as a result of the Avenue merger and 3 to 4 percent accretion in 2017, in each case excluding the effect of merger-related charges, even after incurring the negative impacts associated with crossing the $10 billion asset threshold.”
Revenue growth:
Net interest income for the quarter ended June 30 increased to $75.0 million, compared to $73.9 million for the first quarter of 2016 and $51.8 million for the second quarter of 2015.
Noninterest income for the quarter ended June 30 increased to $32.7 million, compared to $25.9 million for the first quarter of 2016 and $20.0 million for the same quarter last year.
Income from the firm’s investment in BHG was $9.6 million for the quarter ended June 30, compared to $5.1 million for the quarter ended March 31 and $4.3 million for the second quarter last year. The firm’s investment in BHG contributed slightly less than $0.11 in diluted earnings per share in the second quarter of 2016, compared to $0.06 in the first quarter of 2016 and $0.07 for the second quarter last year.
Net gains from the sale of mortgage loans were $4.2 million for the quarter ended June 30, compared to $3.6 million for the first quarter of 2016 and $1.7 million for the quarter ended June 30, 2015. The year-over-year growth rate was 155.5 percent, which 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 68.7 percent of the firm’s net gain on mortgage loan sale volumes in the second quarter of 2016.
Wealth management revenues, which include investment, trust and insurance services, were $5.2 million for the quarter ended June 30, 2016, compared to $5.6 million for the first quarter of 2016 and $4.7 million for the quarter ended June 30, 2015, resulting in a year-over-year growth rate of 9.5 percent.
"With our significant loan growth, net interest income in the second quarter of 2016 increased over the first quarter of 2016 despite the slight dilution in our net interest margin,” Mr. Carpenter said. “BHG’s contribution in the second quarter was a record for us, reflecting a full quarter of our increased ownership as well as their pipelines rebuilding and their business model gaining increased momentum. Mortgage revenues were also a record for us this quarter, as we now have 43 mortgage originators in our four primary markets, compared to 20 this time last year in just Nashville and Knoxville. Lastly, we believe the integration of Avenue in our revenue base will serve to increase our quarterly revenue run rates going forward, providing us further opportunities to increase operating leverage in future periods.”
Noninterest expense:
Noninterest expense for the quarter ended June 30 was $55.9 million, compared to $54.1 million in the first quarter of 2016 and $36.7 million in the second quarter last year.
Salaries and employee benefits were $34.3 million in the second quarter of 2016, compared to $32.5 million in the first quarter of 2016 and $23.8 million in the second quarter last year, reflecting a year-over-year increase of 44.1 percent due to the impact of both the CapitalMark and Magna mergers, as well as continued increases in recruiting in our primary markets. Additionally, costs associated with the firm’s annual cash incentive plan amounted to $5.3 million in the second quarter of 2016, compared to $3.6 million in the second quarter of 2015 and $3.2 million in the first quarter of 2016.
Pre-tax merger-related charges were approximately $980,000 during the quarter ended June 30, compared to $59,000 in the second quarter of 2015. The firm will continue to incur merger-related charges as it completes the Avenue integration later this year.
The efficiency ratio for the second quarter of 2016 decreased to 51.9 percent from 54.2 percent in the first quarter of 2016, and the ratio of noninterest expenses to average assets decreased to 2.42 percent from 2.46 percent in the first quarter of 2016. Excluding merger-related charges and ORE expense, the efficiency ratio decreased from 52.2 percent to 50.8 percent between the first and second quarters of 2016, while the ratio of noninterest expenses to average assets remained at 2.37 percent for both periods.
The firm’s headcount decreased to 1,061 FTE’s at June 30, down from 1,075 FTE’s at March 31, but was up from 800.5 FTE’s at June 30, 2015.
“Our expense run rates will obviously increase with the integration of the Avenue acquisition,” Mr. Carpenter said. “Because the technology conversion for Avenue is currently scheduled for late in the third quarter, we should begin to realize additional cost savings from the Avenue merger in the fourth quarter of 2016. Currently, we do not believe that our core expense run rates will increase meaningfully this year, other than from the Avenue acquisition and the impact of our hiring initiatives.”
Asset quality:
Nonperforming assets decreased to 0.55 percent of total loans and ORE at June 30, compared to 0.70 percent at March 31 and increased slightly from 0.53 percent at June 30, 2015. Nonperforming assets decreased to $39.0 million at June 30, 2016, compared to $47.9 million at March 31 and increased from $25.8 million at June 30, 2015.
The allowance for loan losses represented 0.87 percent of total loans at June 30, compared to 0.91 percent at March 31 and 1.36 percent at June 30, 2015.
The ratio of the allowance for loan losses to nonperforming loans was 181.8 percent at June 30, compared to 146.4 percent at March 31 and 373.6 percent at June 30, 2015.
Net charge-offs were $6.1 million for the quarter ended June 30, compared to $7.1 million for the first quarter of 2016 and $1.9 million for the quarter ended June 30, 2015. Annualized net charge-offs as a percentage of average loans for the quarter ended June 30 were 0.35 percent, compared to 0.16 percent for the quarter ended June 30, 2015 and 0.42 percent for the first quarter of 2016.
Provision for loan losses increased to $5.3 million in the second quarter of 2016 from $3.9 million in the first quarter of 2016 and $1.2 million in the second quarter of 2015.
“Last quarter we reported increased net charge-offs driven largely by our consumer auto portfolio,” Mr. Carpenter said. “The non-prime consumer auto portfolio continues to underperform with $4.1 million of net charge-offs in the second quarter of 2016. We anticipate improvement in the future performance of this portfolio going forward, since we have reduced portfolio balances in our non-prime portfolio from $56.9 million at March 31 to $43.5 million at June 30 and believe the underlying quality of the remaining portfolio appears to be stabilizing.”
The merger of Pinnacle Financial Partners, Inc. and Avenue Financial Holdings, Inc. became effective on July 1. A summary of Avenue’s results for the second quarter of 2016 follows:
Avenue’s loans at June 30 were a record $982.1 million, an increase of $20.1 million from March 31 and $182.3 million from June 30, 2015, reflecting year-over-year growth of 22.8 percent. Avenue’s ratio of allowance for loan losses to total loans was 1.15 percent at June 30, compared to 1.14 percent at March 31 and 1.20 percent at June 30, 2015.
Average deposit balances were $953.5 million in the second quarter of 2016, compared to $963.2 million during the quarter ended March 31 and $821.6 million for the quarter ended June 30, 2015, reflecting year-over-year growth of 16.1 percent. Average demand deposit balances were $299.0 million in the second quarter of 2016 and represented approximately 31.4 percent of total average deposit balances for the quarter. Second quarter 2016 average noninterest-bearing deposits increased 12.6 percent over the same quarter last year.
A summary of Avenue’s results for the second quarter of 2016 compared to the first quarter of 2016 and the second quarter of 2015 follows:
|
(unaudited, dollars in thousands)
|
Three months ended,
|
|
|
June 30, 2016
|
March 31, 2016
|
June 30, 2015
|
|
Net interest income
|
$ 9,041
|
$ 9,011
|
$ 8,015
|
|
Provision for loan losses
|
234
|
774
|
855
|
|
Noninterest income (excl. gains)
|
1,122
|
1,681
|
1,660
|
|
Gains on sales of securities
|
40
|
228
|
215
|
|
Noninterest expense (excl. merger)
|
6,788
|
7,206
|
6,758
|
|
Merger-related charges
|
545
|
801
|
-
|
|
Net income before tax
|
2,636
|
2,139
|
2,277
|
|
Income tax expense
|
788
|
726
|
696
|
|
Net income
|
$ 1,848
|
$ 1,413
|
$ 1,581
|
Avenue’s return on average assets was 0.62 percent for the second quarter of 2016, compared to 0.47 percent for the first quarter of 2016 and 0.56 percent for the same quarter last year. Avenue’s net interest margin was 3.26 percent for the quarter ended June 30, compared to 3.28 percent last quarter and 3.23 percent for the quarter ended June 30, 2015. Avenue’s efficiency ratio for the second quarter of 2016, was 72.2 percent, compared to 74.9 percent for the first quarter of 2016 and 73.4 percent in the second quarter of 2015.
Nonperforming assets were 0.04 percent of total loans and ORE at June 30, compared to 0.07 percent at March 31 and 0.45 percent at June 30, 2015. Avenue recorded no charge-offs during the three months ended June 30, 2016, compared to net recoveries of 0.02 percent for the first quarter of 2016. Net charge-offs amounted to 0.12 percent during the second quarter of 2015.
Pinnacle’s Board of Directors increased the quarterly cash dividend to $0.14 per common share on July 19 to be paid on Aug. 26 to common shareholders of record as of the close of business on Aug. 5. The amount and timing of any future dividend payments to common shareholders will be subject to the discretion of Pinnacle’s Board of Directors.