Pinnacle Financial Partners : PNFP Reports Diluted Earnings Per Share of $0.78 for 4Q 2016

Pinnacle Financial Partners, Inc. (Nasdaq/NGS: PNFP) reported net income per diluted common share of $0.78 for the quarter ended Dec. 31, 2016, compared to net income per diluted common share of $0.65 for the quarter ended Dec. 31, 2015, an increase of 20.0 percent. Net income per diluted common share was $2.91 for the year ended Dec. 31, 2016, compared to net income per diluted common share of $2.52 for the year ended Dec. 31, 2015, an increase of 15.5 percent.

Excluding pre-tax merger-related charges of $3.3 million and $11.7 million for the three months and year ended Dec. 31, 2016, respectively, net income per diluted common share was $0.83 and $3.07, respectively. Net income per diluted common share was $0.69 and $2.61 for the three months and year ended Dec. 31, 2015, excluding pre-tax merger-related charges of $2.5 million and $4.8 million, respectively. As a result, net income per diluted common share excluding merger-related charges increased 20.3 percent and 17.6 percent, respectively, over the same periods ending Dec. 31, 2015.

Pinnacle completed the acquisition of Avenue Financial Holdings, Inc. (Avenue) on July 1, 2016. The financial statements accompanying this press release and the financial condition and results of operations described herein reflect the impact of the Avenue acquisition beginning on July 1, 2016 and are subject to future refinements in the firm’s purchase accounting adjustments.

“2016 was a very eventful year,” said M. Terry Turner, Pinnacle’s president and chief executive officer. “In the first quarter of 2016, we announced the Avenue Bank acquisition in Nashville, followed by the technology conversion of the former CapitalMark Bank & Trust in Chattanooga and the Avenue technology conversion later in the year. We also acquired an additional 19 percent interest in Bankers Healthcare Group, LLC (BHG) early in 2016, increasing our ownership in BHG to 49 percent. These transactions occurred after a very busy year of acquisitions in 2015. Our effective acquisition and integration capabilities in concert with our continued ability to produce rapid organic growth are evident throughout the financial results. Excluding merger-related charges, we are reporting year-over-year earnings per share growth of 20.3 percent for the fourth quarter of 2016. Looking forward, we are optimistic about 2017, believing that our current momentum in the very strong urban markets of Tennessee puts us in a position to continue the outsized growth in revenue and earnings per share.”

GROWING THE CORE EARNINGS CAPACITY OF THE FIRM:

• Revenues for the quarter ended Dec. 31, 2016 were a record $120.2 million, an increase of $1.8 million from the third quarter of 2016. Revenues increased 22.5 percent over the same quarter last year.
• Loans at Dec. 31, 2016 were a record $8.450 billion, an increase of $208.9 million from Sept. 30, 2016 and $1.907 billion from Dec. 31, 2015, reflecting year-over-year growth of 29.1 percent. Annualized linked-quarter loan growth approximated 10.1 percent when comparing balances as of Dec. 31, 2016 to balances as of Sept. 30, 2016.
• Average deposit balances for the quarter ended Dec. 31, 2016 were a record $8.791 billion, an increase of $336.8 million from Sept. 30, 2016 and $2.004 billion from Dec. 31, 2015, reflecting year-over-year growth of 29.5 percent.

“We continue to believe that outsized organic growth through hiring the best bankers in our markets is the cornerstone of our firm,” Turner said. “Our loan and deposit growth rates for 2016 were very strong at 14.6 percent and 11.8 percent, respectively, exclusive of the $952 million in loans and the $967 million in deposits we acquired as a result of the Avenue merger. We are also pleased with the continued organic loan growth in our newly acquired markets, as Chattanooga’s loans increased by 13.0 percent during 2016, and Memphis’ loans were up 26.6 percent in 2016 excluding a $156.5 million loan purchase in the Memphis market in 2016.

“Relative to hiring the best bankers in our markets, during 2016 we also increased our associate base by 121 FTE’s including 81 revenue producers, of which 30 were attributable to the Avenue acquisition. These new associates provide capacity for continued rapid growth in the years to come.”

FOCUSING ON PROFITABILITY:

• Return on average assets was 1.30 percent for the fourth quarter of 2016, compared to 1.18 percent for the third quarter of 2016 and 1.24 percent for the same quarter last year. Return on average assets was 1.27 percent for 2016, compared to 1.34 percent for 2015.
  • Excluding merger-related charges in each respective period, return on average assets was 1.37 percent for the fourth quarter of 2016, compared to 1.31 percent for both the third quarter of 2016 and the fourth quarter of 2015. Excluding merger-related charges, return on average assets was 1.34 percent for 2016, compared to 1.38 percent for 2015.
• Fourth quarter 2016 return on average common equity amounted to 9.61 percent, compared to 8.93 percent for the third quarter of 2016 and 9.24 percent for the same quarter last year. Fourth quarter 2016 return on average tangible common equity amounted to 15.49 percent, compared to 14.47 percent for the third quarter of 2016 and 14.97 percent for the same quarter last year. Return on average tangible common equity was 15.26 percent for 2016, compared to 15.07 percent for 2015.
  • Excluding merger-related charges in each respective period, return on average tangible common equity amounted to 16.34 percent for the fourth quarter of 2016, compared to 16.01 percent for the third quarter of 2016 and 15.81 percent for the fourth quarter of 2015. Excluding merger-related charges, return on average tangible common equity was 16.11 percent for 2016, compared to 15.53 percent for 2015.

“We continue to operate our firm at a high level of profitability,” said Harold R. Carpenter, Pinnacle’s chief financial officer. “Even with significant investments in Avenue and BHG and in new revenue producing associates in 2016, our return on average assets and return on average tangible common equity after excluding merger-related charges remain very high versus peers. While we believe the profitability metrics are very important, the consistent growth of the core earnings capacity of our firm through attracting the best revenue producers in our markets will remain our primary focus.”

OTHER HIGHLIGHTS:

• Revenue growth
  • Revenue per fully-diluted share was $10.20 for 2016, compared to $8.51 in 2015, reflecting growth of 19.9 percent year-over-year. Revenue per fully-diluted share was $2.61 for the quarter ended Dec. 31, 2016, compared to $2.58 for the third quarter of 2016 and $2.39 for the fourth quarter of 2015.
  • Net interest income for the quarter ended Dec. 31, 2016 increased to $89.4 million, compared to $86.6 million for the third quarter of 2016 and $71.5 million for the fourth quarter of 2015.
    • The firm’s net interest margin was 3.72 percent for the quarter ended Dec. 31, 2016, compared to 3.60 percent last quarter and 3.73 percent for the quarter ended Dec. 31, 2015.
  • Noninterest income for the quarter ended Dec. 31, 2016 was $30.7 million, compared to $31.7 million for the third quarter of 2016 and $26.6 million for the fourth quarter of 2015.
    • Net gains from the sale of mortgage loans were $2.9 million for the quarter ended Dec. 31, 2016, compared to $5.1 million for the third quarter of 2016 and $2.2 million for the quarter ended Dec. 31, 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 57.0 percent of the firm’s net gain on mortgage loan sale volumes in the fourth quarter of 2016.
      • The linked-quarter decrease in net gains on mortgage loans sold was primarily attributable to seasonal fluctuations in business flows as well as an increased rate environment.
    • Wealth management revenues, which include investment, trust and insurance services, were $6.2 million for the quarter ended Dec. 31, 2016, compared to $5.3 million for the third quarter of 2016 and $5.4 million for the quarter ended Dec. 31, 2015, resulting in a year-over-year growth rate of 16.0 percent.
    • Income from the firm’s investment in BHG was $8.1 million for the quarter ended Dec. 31, 2016, compared to $8.5 million for the quarter ended Sept. 30, 2016 and $7.8 million for the fourth quarter last year. For the year ended Dec. 31, 2016, income from the firm’s investment in BHG was 52.5 percent more than the amount reported for the year ended Dec. 31, 2015.

“Our revenue producers grow their client base by ensuring they meet all of the financial service needs of their clients across our full set of commercial and wealth management products,” Carpenter said. “We believe that focusing on revenue growth as the primary lever, as opposed to expense cutting, is the better approach to producing consistent and rapid earnings growth. Focusing on revenue growth along with our disciplined approach to acquisitions and investments, has led to meaningful growth in revenue per share this year.”

“Our core margin increased from 3.39 percent during the third quarter of 2016 to 3.40 percent in the fourth quarter of 2016,” Carpenter said. “During the fourth quarter of 2016, discount accretion for fair value adjustments required by purchase accounting contributed approximately 0.32 percent to our net interest margin. We anticipate that purchase accounting will contribute between 0.15 percent to 0.25 percent to our net interest margin in the first quarter of 2017.”

• Noninterest expense
  • Noninterest expense for the quarter ended Dec. 31, 2016 was $62.8 million, compared to $63.5 million in the third quarter of 2016 and $52.2 million in the fourth quarter last year.
    • Salaries and employee benefits were $38.0 million in the fourth quarter of 2016, compared to $36.1 million in the third quarter of 2016 and $30.9 million in the fourth quarter of last year, reflecting a year-over-year increase of 23.0 percent primarily due to the impact of the Avenue merger, as well as continued increases in recruiting in our primary markets.
      • Costs associated with the firm’s annual cash incentive plan amounted to $4.9 million in the fourth quarter of 2016, compared to $3.9 million in the fourth quarter of 2015 and $2.8 million in the third quarter of 2016.
    • Pre-tax merger-related charges were approximately $3.3 million during the quarter ended Dec. 31, 2016, compared to $2.5 million for the quarter ended Dec. 31, 2015. Pre-tax merger related charges during the fourth quarter included increased costs associated with the integration of Avenue into Pinnacle.
    • The efficiency ratio for the fourth quarter of 2016 decreased to 52.2 percent from 53.7 percent in the third quarter of 2016, and the ratio of noninterest expenses to average assets decreased to 2.26 percent from 2.32 percent in the third quarter of 2016.
      • Excluding merger-related charges and other real estate owned (ORE) expense, the efficiency ratio increased from 48.9 percent for the third quarter of 2016 to 49.6 percent for the fourth quarter of 2016, and the ratio of noninterest expense to average assets increased from 2.11 percent to 2.14 percent between the third and fourth quarters of 2016.

“We are pleased to report that excluding merger-related charges, our core efficiency ratio remained below the 50 percent threshold for the fourth quarter of 2016,” Carpenter said. “Our belief has been that investors will reward those franchises that can demonstrate an ability to operate a rapidly growing franchise profitably and efficiently. Given the operating leverage that has been created by both our rapid organic growth and our effective investments,acquisitions and integrations, we believe we will be able to maintain our expense base within our stated long-term goals for noninterest expenses to average assets within a range of 2.10 percent and 2.30 percent excluding merger-related charges in 2017.”

• Asset quality
  • Nonperforming assets decreased to 0.40 percent of total loans and ORE at Dec. 31, 2016, compared to 0.41 percent at Sept. 30, 2016 and 0.55 percent at Dec. 31, 2015. Nonperforming assets decreased to $33.7 million at Dec. 31, 2016, compared to $34.1 million at Sept. 30, 2016 and $36.3 million at Dec. 31, 2015.
  • The allowance for loan losses represented 0.70 percent of total loans at Dec. 31, 2016, compared to 0.73 percent at Sept. 30, 2016 and 1.00 percent at Dec. 31, 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 0.08 percent as of Dec. 31, 2016.
    • The ratio of the allowance for loan losses to nonperforming loans was 213.9 percent at Dec. 31, 2016, compared to 211.5 percent at Sept. 30, 2016 and 222.9 percent at Dec. 31, 2015.
    • Net charge-offs were $4.3 million for the quarter ended Dec. 31, 2016, compared to $7.3 million for the third quarter of 2016 and $3.8 million for the quarter ended Dec. 31, 2015. Annualized net charge-offs as a percentage of average loans for the quarter ended Dec. 31, 2016 were 0.21 percent, compared to 0.35 percent for the third quarter of 2016 and 0.23 percent for the fourth quarter of 2015.
    • Provision for loan losses decreased to $3.0 million in the fourth quarter of 2016, from $6.1 million in the third quarter of 2016 and $5.5 million in the fourth quarter of 2015.

“Overall, asset quality during the fourth quarter was strong,” Carpenter said. “During the fourth quarter, we continued to reduce our investment in non-prime consumer auto loans. Net charge-offs from the non-prime consumer auto portfolio were $3.7 million during the fourth quarter of 2016, compared to $3.6 million of net charge-offs in the third quarter of 2016. We have reduced portfolio balances in this non-prime portfolio from $66.9 million at Dec. 31, 2015 to $30.0 million at Dec. 31, 2016 and anticipate continued reductions in this portfolio over the next several quarters.”

BOARD OF DIRECTORS DECLARES DIVIDEND

On Jan. 17, 2017, Pinnacle’s Board of Directors approved a quarterly cash dividend of $0.14 per common share to be paid on Feb. 24, 2017 to common shareholders of record as of the close of business on Feb. 3, 2017. 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. 18, 2017 to discuss fourth 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 $11.2 billion in assets at Dec. 31, 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, like BHG, 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, like BHG, 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, 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, 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.