Pinnacle Financial Partners : PNFP Reports Diluted Earnings Per Share of $0.35 for 4Q 2017

Pinnacle Financial Partners, Inc. (Nasdaq/NGS: PNFP) reported net income per diluted common share of $0.35 for the quarter ended Dec. 31, 2017, compared to net income per diluted common share of $0.78 for the quarter ended Dec. 31, 2016, a decrease of 55.1 percent. Net income per diluted common share was $2.70 for the year ended Dec. 31, 2017, compared to net income per diluted common share of $2.91 for the year ended Dec. 31, 2016, a decrease of 7.2 percent.

There were several items negatively impacting the firm's most recent quarterly and annual results for 2017 including:

• Pre-tax merger-related charges of $19.1 million and $31.8 million for the three months and year ended Dec. 31, 2017,
• Pre-tax investment securities losses of $8.3 million for the three months and year ended Dec. 31, 2017 and
• After-tax charges related to the revaluation of the firm’s deferred tax assets of $31.5 million for the three months and year ended Dec. 31, 2017.

Excluding the above items, net income per diluted common share was $0.97 and $3.57 for the three months and year ended Dec. 31, 2017, respectively, compared to net income per diluted common share of $0.83 and $3.07 for the three months and year ended Dec. 31, 2016, excluding pre-tax merger-related charges of $3.3 million and $11.7 million, respectively. As a result, net income per diluted common share excluding the above items increased:

• 16.9 percent in the three months ended Dec. 31, 2017, compared to the three months ended Dec. 31, 2016 and,
• 16.3 percent for the year ended Dec. 31, 2017, compared to the year ended Dec. 31, 2016.

"With asset growth of 98.4 percent, revenue growth of 54.3 percent, adjusted fully-diluted earnings per share growth of 16.3 percent and tangible book value per share growth of 18.2 percent, 2017 was likely our best year yet," said M. Terry Turner, Pinnacle's president and chief executive officer. "During 2017, we announced and closed our merger with BNC Bancorp (BNC), that expanded our high-growth franchise to what we believe are the best banking markets in the Carolinas. I could not be prouder of our associates for their tireless efforts to create what I believe is one of the country’s most dynamic regional banking franchises.

"I am particularly excited about our continued growth prospects heading into 2018," Turner said. "We have now completed the BNC brand and technology integrations and are well on our way to a common culture across our four-state footprint. BNC was a double-digit asset grower and remains very strong in the commercial real estate segment. Our strategy has been to continue to support BNC’s high growth commercial real estate practice while further accelerating overall growth rates with the build out of a large commercial and industrial lending practice. In addition to our ongoing hiring in our Tennessee footprint, we have previously disclosed our intent to hire 64 financial advisors in the Carolinas and Virginia over a five-year period. We are excited that hiring has been on that pace, even during this period of transition."

GROWING THE CORE EARNINGS CAPACITY OF THE FIRM:

• Revenues for the quarter ended Dec. 31, 2017 were $211.2 million, an increase of $91.1 million, or 75.8 percent, from the quarter ended Dec. 31, 2016 and a decrease of $5.0 million from the $216.2 million recognized in the third quarter of 2017. Excluding investment securities losses, revenues for the quarter ended Dec. 31, 2017 were $219.5 million.
  • Revenue per fully-diluted share was $2.73 for the three months ended Dec. 31, 2017, compared to $2.80 for the third quarter of 2017 and $2.61 for the fourth quarter of 2016. Excluding investment securities losses, revenue per fully-diluted share was $2.83 for the three months ended Dec. 31, 2017.

• Loans at Dec. 31, 2017 were a record $15.63 billion, an increase of $373.3 million from Sept. 30, 2017 and $7.18 billion from Dec. 31, 2016, reflecting year-over-year growth of 85.0 percent.
• Deposits at Dec. 31, 2017 were a record $16.45 billion, an increase of $662.1 million from Sept. 30, 2017 and $7.69 billion from Dec. 31, 2016, reflecting year-over-year growth of 87.8 percent.

"We are excited to report $373.3 million in organic loan growth during the fourth quarter of 2017, or a 9.7 percent annualized rate of growth," Turner said. "Including net loan growth for BNC in 2017 prior to our merger, organic loan growth for our combined franchise amounted to $1.73 billion for 2017, representing approximately 12.4 percent growth for this year. Concurrently, we delivered strong earnings growth and impressive profitability metrics. We also added 77 revenue producers to our ranks in 2017, with 27 of these in the Carolinas and Virginia, including 13 hired since we closed our merger with BNC. We spend a lot of time talking about the Carolinas and Virginia, but our Tennessee associates produced record levels of loan and deposit growth in 2017. Loans grew $1.42 billion, or 16.8 percent, while core deposits grew $1.68 billion, or 21.5 percent, in our Tennessee markets in 2017, reflecting tremendous marketing momentum even during a period of significant transition."

FOCUSING ON PROFITABILITY:

• Return on average assets was 0.48 percent for the fourth quarter of 2017, compared to 1.21 percent for the third quarter of 2017 and 1.30 percent for the fourth quarter last year. Fourth quarter 2017 return on average tangible assets amounted to 0.53 percent, compared to 1.32 percent for the third quarter of 2017 and 1.36 percent for the same quarter last year.
  • Excluding the aforementioned merger-related charges, investment securities losses and the revaluation of deferred tax assets, return on average assets was 1.36 percent for the fourth quarter of 2017, compared to 1.31 percent for the third quarter of 2017 and 1.36 percent for the fourth quarter of 2016.
  • Additionally, excluding the aforementioned merger-related charges, investment securities losses and the revaluation of deferred tax assets, return on average tangible assets was 1.48 percent for the fourth quarter of 2017, compared to 1.43 percent for the third quarter of 2017 and 1.44 percent for the fourth quarter of 2016, respectively.

• Return on average equity for the fourth quarter of 2017 amounted to 2.87 percent, compared to 6.99 percent for the third quarter of 2017 and 9.61 percent for the same quarter last year. Fourth quarter 2017 return on average tangible equity amounted to 5.76 percent, compared to 14.25 percent for the third quarter of 2017 and 15.49 percent for the same quarter last year.
  • Excluding the aforementioned merger-related charges, investment securities losses and the revaluation of deferred tax assets, return on average tangible equity amounted to 16.11 percent for the fourth quarter of 2017, compared to 15.43 percent for the third quarter of 2017 and 16.24 percent for the fourth quarter of 2016.

"Several years ago we announced profitability targets that we believed would produce top quartile performance for our shareholders over an extended period of time," said Harold R. Carpenter, Pinnacle's chief financial officer. "Outsized returns are critical to rapid tangible book value accretion and, ultimately, the creation of long-term shareholder value. At Dec. 31, 2017, our tangible book value per share was $23.71 per share, compared to $20.06 per share at Dec. 31, 2016, an increase of 18.2 percent despite the impact of a transformational merger and the immediate impact of a meaningful tax law change."

OTHER HIGHLIGHTS:

• Revenues
  • Net interest income for the quarter ended Dec. 31, 2017 was $174.7 million, compared to $173.2 million for the third quarter of 2017 and $89.4 million for the fourth quarter of 2016.
    • Net interest margin was 3.76 percent for the fourth quarter of 2017, compared to 3.87 percent for the third quarter of 2017 and 3.72 for the fourth quarter last year. Excluding the accretion from the application of fair value accounting for net loans and deposits acquired in our completed mergers, the net interest margin in each respective period would have approximated 3.33 percent for the fourth quarter of 2017, compared to 3.42 percent for the third quarter of 2017 and 3.40 percent the fourth quarter of 2016.
  • Noninterest income for the quarter ended Dec. 31, 2017 was $36.5 million, compared to $43.0 million for the third quarter of 2017 and $30.7 million for the fourth quarter of 2016. Excluding investment securities losses, noninterest income for the three months ended Dec. 31, 2017, amounted to $44.8 million.
    • Net gains from the sale of residential mortgage loans were $3.8 million for the quarter ended Dec. 31, 2017, compared to $6.0 million for the third quarter of 2017 and $2.9 million for the quarter ended Dec. 31, 2016. For the year ended Dec. 31, 2017 net gains on the sale of residential mortgage loans increased 18.2 percent over the year ended Dec. 31, 2016.
    • Wealth management revenues, which include investment, trust and insurance services, were $9.3 million for the quarter ended Dec. 31, 2017, compared to $8.4 million for the third quarter of 2017 and $6.2 million for the quarter ended Dec. 31, 2016. For the year ended Dec. 31, 2017, wealth management revenues increased 35.7 percent over the year ended Dec. 31, 2016.
    • Income from the firm's investment in Bankers Healthcare Group, Inc. (BHG) was $12.4 million for the quarter ended Dec. 31, 2017, compared to $8.9 million for the quarter ended Sept. 30, 2017 and $8.1 million for the fourth quarter last year. Income from the firm's investment in BHG grew 20.9 percent for the year ended Dec. 31, 2017 compared to the year ended Dec. 31, 2016.

"With the tax law change, the fourth quarter of 2017 is obviously noisy in comparison to previous periods," Carpenter said. "During the fourth quarter, we were able to better position our balance sheet going into 2018. Late in the fourth quarter, we recognized a pre-tax loss of $8.3 million in order to reposition approximately $300 million of investment securities to take advantage of increased tax deductions in 2017 and provide our balance sheet more protection from a potentially flatter yield curve in the future. We expect to fully recoup the losses from these transactions during 2018.

"Also, during the fourth quarter of 2017, accretion from fair value adjustments contributed approximately $19.1 million to our net interest income, compared to $20.5 million during the third quarter of 2017. At Dec. 31, 2017, an estimated $163.5 million discount from loans from past acquisitions remains on our balance sheet.

"We fully expect the biggest driver of incremental revenue growth in 2018 to be the balance sheet growth associated with our hiring success. Our focus will remain on growing share in the commercial and industrial segment, particularly in the Carolinas and Virginia. Recent hires in Tennessee and in the Carolinas and Virginia, combined with our ongoing hiring pipelines, put us in a great position to enhance core revenues over the next several quarters."

• Noninterest expense
  • Noninterest expense for the quarter ended Dec. 31, 2017 was $123.0 million, compared to $109.7 million in the third quarter of 2017 and $62.8 million in the fourth quarter last year, reflecting a year-over-year increase of 95.9 percent.
    • Salaries and employee benefits were $63.3 million in the fourth quarter of 2017, compared to $64.3 million in the third quarter of 2017 and $38.0 million in the fourth quarter of last year, reflecting a year-over-year increase of 66.7 percent.
      • Included in salaries and employee benefits are costs related to the firm’s 2017 cash incentive plan. Incentive costs for this plan amounted to $6.8 million in the fourth quarter of 2017, compared to $6.9 million in the third quarter of 2017 and $4.9 million in the fourth quarter of last year.
    • The efficiency ratio for the fourth quarter of 2017 increased to 58.2 percent, compared to 50.8 percent for the third quarter of 2017. The ratio of noninterest expenses to average assets increased to 2.22 percent for the fourth quarter of 2017 from 2.05 percent in the third quarter of 2017.
      • Excluding investment securities losses, merger-related charges and other real estate owned (ORE) expense, the efficiency ratio was 47.2 percent for the fourth quarter of 2017, compared to 46.4 percent for the third quarter of 2017, and the ratio of noninterest expense to average assets was 1.87 percent for the fourth quarter of 2017, compared to 1.88 percent for the third quarter of 2017.

"Our synergy case for the BNC merger is substantially complete," Carpenter said. "BNC cost reductions and merger expenses will continue through the first quarter of 2018, albeit at a reduced pace."

• Asset quality
  • Nonperforming assets increased to 0.55 percent of total loans and ORE at Dec. 31, 2017, compared to 0.51 percent at Sept. 30, 2017 and 0.40 percent at Dec. 31, 2016. Nonperforming assets increased to $85.5 million at Dec. 31, 2017, compared to $78.1 million at Sept. 30, 2017 and $33.7 million at Dec. 31, 2016.
  • The allowance for loan losses represented 0.43 percent of total loans at Dec. 31, 2017, compared to 0.43 percent at Sept. 30, 2017 and 0.70 percent at Dec. 31, 2016.
    • The ratio of the allowance for loan losses to nonperforming loans was 117.0 percent at Dec. 31, 2017, compared to 122.0 percent at Sept. 30, 2017 and 213.9 percent at Dec. 31, 2016.
    • Net charge-offs were $4.2 million for the quarter ended Dec. 31, 2017, compared to $3.7 million for the quarter ended Sept. 30, 2017 and $4.3 million for the quarter ended Dec. 31, 2016. Annualized net charge-offs as a percentage of average loans for the quarter ended Dec. 31, 2017 were 0.13 percent, compared to 0.14 percent for the third quarter of 2017 and 0.21 percent for the fourth quarter of 2016.
    • Provision for loan losses was $6.3 million in the fourth quarter of 2017, compared to $6.9 million in the third quarter of 2017 and $3.0 million in the fourth quarter of 2016.

"Overall, asset quality for our firm remains exceptional," Carpenter said. "Our relationship managers and credit administrators have had another tremendous year in keeping credit losses in check. Our commercial real estate to total risk-based capital ratio increased during the fourth quarter of 2017, and amounts to 297 percent at year end 2017. Obviously, the previously unplanned deferred tax revaluation, the loss on the sale of our securities portfolio and merger-related charges reduced our capital positions at year end. Consequently, we believe this ratio may temporarily exceed 300% of total capital as commercial real estate fundings increase during the first half of 2018 before falling back within our long-term operating range of less than 300 percent of total capital during the last half of 2018."

• Other Highlights
  • On Jan. 1, 2017, Pinnacle adopted FASB Accounting Standards Update (ASU) 2016-09, Stock Compensation Improvements to Employee Share-Based Payment Activity, which represented a change in accounting for the tax effects related to vesting of common shares and the exercise of stock options previously granted to the firm's employees through its various equity compensation plans. This change resulted in a reduction in fourth quarter 2017 tax expense of $758,000 and a $5.4 million reduction in tax expense for the 2017 fiscal year.
  • Pursuant to the Tax Cuts and Jobs Act signed by President Trump on Dec. 22, 2017, Pinnacle recorded a non-cash charge of $31.5 million related to the revaluation of net deferred tax assets due to the statutory federal income tax rate for corporate entities decreasing from 35 percent to 21 percent for 2018 and the future.

"We are pleased with the new tax law and believe it will be great for our shareholders over the long-term," Turner said. "It is our intent to fully recoup the late 2017 deferred tax revaluation during 2018, even after investing in a number of initiatives aimed at attracting and retaining associates, attracting and retaining clients and improving infrastructure compatible with operating a large and rapidly growing firm. Ultimately, the bulk of the savings should result in increased earnings for our firm."

BOARD OF DIRECTORS DECLARES DIVIDEND

On Jan. 16, 2018, Pinnacle’s Board of Directors approved a quarterly cash dividend of $0.14 per common share to be paid on Feb. 23, 2018 to common shareholders of record as of the close of business on Feb. 2, 2018. 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. (CST) on Jan. 17, 2018 to discuss fourth quarter 2017 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 firm earned a place on Fortune’s 2017 list of 100 Best Companies to Work For in the U.S., and American Banker recognized Pinnacle as the sixth-best bank to work for in 2017.

The firm began operations in a single location in downtown Nashville, TN in October 2000 and has since grown to approximately $22.2 billion in assets as of Dec. 31, 2017. As the second-largest bank holding company headquartered in Tennessee, Pinnacle operates in 11 primarily urban markets in Tennessee, the Carolinas and Virginia.

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

Forward-Looking Statements

All statements, other than statements of historical fact, included in this press release, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Exchange Act. The words "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and similar expressions are intended to identify such forward-looking statements, but other statements not based on historical information may also be considered forward-looking statements. 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: (i) deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses; (ii) continuation of the historically low short-term interest rate environment; (iii) 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; (iv) changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; (v) effectiveness of Pinnacle Financial's asset management activities in improving, resolving or liquidating lower-quality assets; (vi) the impact of competition with other financial institutions, including pricing pressures (including those resulting from the Tax Cuts and Jobs Act) and the resulting impact on Pinnacle Financial’s results, including as a result of compression to net interest margin; (vii) greater than anticipated adverse conditions in the national or local economies including in Pinnacle Financial's markets throughout Tennessee, North Carolina, South Carolina and Virginia, particularly in commercial and residential real estate markets; (viii) fluctuations or unanticipated changes in interest rates on loans or deposits or that affect the yield curve; (ix) the results of regulatory examinations; (x) the ability to retain large, uninsured deposits; (xi) a merger or acquisition, like Pinnacle Financial's merger with BNC; (xii) risks of expansion into new geographic or product markets; (xiii) any matter that would cause Pinnacle Financial to conclude that there was impairment of any asset, including intangible assets; (xiv) 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 (including as a result of the competitive environment resulting from the Tax Cuts and Jobs Act) or otherwise to attract customers from other financial institutions; (xv) further deterioration in the valuation of other real estate owned and increased expenses associated therewith; (xvi) inability to comply with regulatory capital requirements, including those resulting from changes to capital calculation methodologies and required capital maintenance levels; (xvii) risks associated with litigation, including the applicability of insurance coverage; (xviii) the risk of successful integration of the businesses Pinnacle Financial has recently acquired with its business; (xix) approval of the declaration of any dividend by Pinnacle Financial's board of directors; (xx) the vulnerability of Pinnacle Bank's network and online banking portals, and the systems of parties with whom Pinnacle Financial contracts, to unauthorized access, computer viruses, phishing schemes, spam attacks, human error, natural disasters, power loss and other security breaches; (xxi) 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, like BHG, and the development of additional banking products for Pinnacle Bank's corporate and consumer clients; (xxii) 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; (xxii) changes in state and federal legislation, regulations or policies applicable to banks and other financial service providers, like BHG, including regulatory or legislative developments; (xxiv) the risk that the cost savings and any revenue synergies from Pinnacle Financial's merger with BNC may not be realized or take longer than anticipated to be realized; (xxv) disruption from Pinnacle Financial's merger with BNC with customers, suppliers, employee or other business partners relationships; (xxvi) the risk of successful integration of Pinnacle Financial's and BNC's businesses; (xxvii) the amount of the costs, fees, expenses and charges related to Pinnacle Financial's merger with BNC; (xxviii) reputational risk and the reaction of the parties' customers, suppliers, employees or other business partners to Pinnacle Financial's merger with BNC; (xxix) the risk that the integration of Pinnacle Financial's and BNC's operations will be materially delayed or will be more costly or difficult than expected; (xxx) the availability and access to capital; (xxxi) adverse results (including costs, fines, reputational harm and/or other negative effects) from current or future litigation, regulatory examinations or other legal and/or regulatory actions; and (xxxii) general competitive, economic, political and market conditions. 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 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 press 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, earnings per diluted share, efficiency ratio, core net interest margin, 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, the revaluation of Pinnacle Financial’s deferred tax assets 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, Avenue Financial Holdings, Inc. and BNC, 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 acquisitions of BNC, Avenue, Magna Bank, CapitalMark Bank & Trust, Mid-America Bancshares, Inc., Cavalry Bancorp, Inc. 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 2017 versus certain periods in 2016 and to internally prepared projections.