Pinnacle Financial Partners : PNFP Reports Diluted Earnings Per Share of $0.83 for 3Q 2017

Pinnacle Financial Partners, Inc. (Nasdaq/NGS: PNFP) reported net income per diluted common share of $0.83 for the quarter ended Sept. 30, 2017, compared to net income per diluted common share of $0.71 for the quarter ended Sept. 30, 2016, an increase of 16.9 percent. Net income per diluted common share was $2.46 for the nine months ended Sept. 30, 2017, compared to net income per diluted common share of $2.12 for the nine months ended Sept. 30, 2016, an increase of 16.0 percent.

Excluding pre-tax merger-related charges of $8.8 million and $12.7 million for the three and nine months ended Sept. 30, 2017, net income per diluted common share was $0.90 and $2.57, respectively, compared to $0.78 and $2.24 for the three and nine months ended Sept. 30, 2016, excluding pre-tax merger-related charges of $5.7 million and $8.5 million, respectively, or an increase of 15.4 percent and 14.7 percent, respectively.

"I am very pleased not only with the earnings growth our firm experienced during the third quarter but, more importantly, the momentum for future earnings growth," said M. Terry Turner, Pinnacle's president and chief executive officer. "The third quarter includes the first full quarter of results from our recent merger with BNC Bancorp (BNC). I believe it was an excellent quarter for our firm in terms of earnings growth, balance sheet growth and operating leverage.

"The execution of our integration with BNC remains on an accelerated path. We have now successfully completed the brand integration in the Carolinas and Virginia and are deep into our cultural integration process. The last major step toward realization of our deal synergies is the upcoming technology conversion. Given the fact that we have been performing the core processing for BNC since late August of this year, we expect the conversion to have no incremental impact on our clients in the Carolinas and Virginia and very little impact on our Tennessee client base. The progress we’ve made thus far has validated the power we believed was possible from combining our two firms."

GROWING THE CORE EARNINGS CAPACITY OF THE FIRM:

• Revenues for the quarter ended Sept. 30, 2017 were $216.2 million, an increase of $97.8 million, or 82.7 percent, from the quarter ended Sept. 30, 2016.
• Loans at Sept. 30, 2017 were a record $15.26 billion, an increase of $501.0 million from June 30, 2017 and $7.02 billion from Sept. 30, 2016, reflecting year-over-year growth of 85.2 percent.
• Deposits at Sept. 30, 2017 were a record $15.79 billion, an increase of $32.1 million from June 30, 2017 and $7.12 billion from Sept. 30, 2016, reflecting year-over-year growth of 82.1 percent.

"Any significant merger integration like BNC requires a great deal of focus and energy," Turner said. "Despite that intense attention on the merger and integration, third quarter results also reflect significant focus on growing our client base as evidenced by our third quarter organic loan growth, which was exceptional. Concurrently, we also delivered strong earnings growth and enviable profitability metrics. We’ve also added 54 revenue producers to our ranks in 2017, with 19 of these in the Carolinas and Virginia. I remain excited that we are positioning our firm to be the employer of choice in all of our markets, which we believe will create still more opportunities to hire the best bankers in these markets over the next several quarters."

FOCUSING ON PROFITABILITY:

• Revenue per fully-diluted share was a record $2.80 for the quarter ended Sept. 30, 2017, compared to $2.64 for the second quarter of 2017 and $2.58 for the third quarter of 2016.
• Net interest margin was 3.87 percent for the third quarter of 2017, compared to 3.68 percent for the second quarter of 2017 and 3.60 percent for the same quarter last year.
  • Excluding the accretion from the application of fair value accounting for net loans and deposits acquired in previous mergers, the net interest margin in each respective period would have approximated 3.42 percent for the third quarter of 2017, compared to 3.45 percent and 3.39 percent for the second quarter of 2017 and the third quarter of 2016, respectively.
• Return on average assets was 1.21 percent for the third quarter of 2017, compared to 1.30 percent for the second quarter of 2017 and 1.18 percent for the same quarter last year. Third quarter 2017 return on average tangible assets amounted to 1.32 percent, compared to 1.38 percent for the second quarter of 2017 and 1.26 percent for the same quarter last year.
  • Excluding merger-related charges in each respective period, return on average assets was 1.31 percent for the third quarter of 2017, compared to 1.35 percent for the second quarter of 2017 and 1.31 percent for the third quarter of 2016, respectively. Excluding merger-related charges in each respective period, return on average tangible assets was 1.43 percent for the third quarter of 2017, compared to 1.44 percent for the second quarter of 2017 and 1.39 percent for the third quarter of 2016, respectively.

• Return on average equity for the third quarter of 2017 amounted to 6.99 percent, compared to 8.40 percent for the second quarter of 2017 and 8.93 percent for the same quarter last year. Third quarter 2017 return on average tangible equity amounted to 14.25 percent, compared to 13.58 percent for the second quarter of 2017 and 14.47 percent for the same quarter last year.
  • Excluding merger-related charges in each respective period, return on average tangible equity amounted to 15.43 percent for the third quarter of 2017, compared to 14.19 percent for the second quarter of 2017 and 16.01 percent for the third quarter of 2016.

"As we expected, the third quarter reflects outstanding profitability metrics," said Harold R. Carpenter, Pinnacle's chief financial officer. "Our core margin decreased by approximately three basis points between the second and third quarter primarily due to the completion of the restructuring of the legacy BNC balance sheet, where we invested in initiatives to build more asset sensitivity. During the third quarter of 2017, accretion from fair value adjustments contributed approximately $18.9 million to our net interest income, compared to $6.4 million during the second quarter of 2017. At Sept. 30, 2017, we had an estimated $182.4 million of remaining discount from loans we have acquired from our previous mergers."

OTHER HIGHLIGHTS:

• Revenues
  • Net interest income for the quarter ended Sept. 30, 2017 was $173.2 million, compared to $106.6 million for the second quarter of 2017 and $86.6 million for the third quarter of 2016. Annualized linked-quarter revenue growth approximated 210.3 percent when comparing revenue for the quarter ended Sept. 30, 2017 to revenue for the quarter ended June 30, 2017.
  • Noninterest income for the quarter ended Sept. 30, 2017 was $43.0 million, compared to $35.1 million for the second quarter of 2017 and $31.7 million for the third quarter of 2016. Annualized linked-quarter growth in noninterest income approximated 90.0 percent when comparing noninterest income as of Sept. 30, 2017 to noninterest income as of June 30, 2017.
    • Net gains from the sale of residential mortgage loans were $6.0 million for the quarter ended Sept. 30, 2017, compared to $4.7 million for the second quarter of 2017 and $5.1 million for the quarter ended Sept. 30, 2016, resulting in a year-over-year growth rate of 17.0 percent.
    • Wealth management revenues, which include investment, trust and insurance services, were $8.4 million for the quarter ended Sept. 30, 2017, compared to $6.2 million for the second quarter of 2017 and $5.3 million for the quarter ended Sept. 30, 2016, resulting in a year-over-year growth rate of 57.4 percent.
    • Income from the firm's investment in Bankers Healthcare Group, Inc. (BHG) was $8.9 million for the quarter ended Sept. 30, 2017, compared to $8.8 million for the quarter ended June 30, 2017 and $8.5 million for the third quarter last year.

"The third quarter of 2017 was another strong revenue quarter for our firm," Carpenter said. "I’m particularly excited about the significant organic loan growth this year. Through the first nine months of this year, we are reporting approximately $1.21 billion of organic loan growth, which excludes the loan growth that BNC experienced prior to the completion of our merger. This balance sheet momentum will obviously help us grow our earnings in future periods.

"Growing share in the commercial and industrial segment and growing our fee revenues in the Carolinas and Virginia has received intense focus and will continue over the next several quarters. We are particularly interested in increasing the number of commercial and industrial relationship managers as well as replicating our wealth management business is in our new markets and developing more opportunities for our residential mortgage origination business. Income from our equity method investment in BHG has resulted in a net contribution of $25.5 million thus far this year. We remain very optimistic about BHG and anticipate exceptional results in the fourth quarter of this year."

• Noninterest expense
  • Noninterest expense for the quarter ended Sept. 30, 2017 was $109.7 million, compared to $71.8 million in the second quarter of 2017 and $63.5 million in the third quarter last year, reflecting a year-over-year increase of 72.8 percent.
    • Salaries and employee benefits were $64.3 million in the third quarter of 2017, compared to $43.7 million in the second quarter of 2017 and $36.1 million in the third quarter of last year, reflecting a year-over-year increase of 78.3 percent.
    • The efficiency ratio for the third quarter of 2017 increased to 50.8 percent, compared to 50.7 percent for the second quarter of 2017. The ratio of noninterest expenses to average assets decreased to 2.05 percent for the third quarter of 2017 from 2.16 percent in the second quarter of 2017.
      • Excluding merger-related charges and other real estate owned (ORE) expense, the efficiency ratio was 46.4 percent for the third quarter of 2017, compared to 48.4 percent for the second quarter of 2017, and the ratio of noninterest expense to average assets was 1.88 percent for the third quarter of 2017, compared to 2.06 percent for the second quarter of 2017.

"Going into the third quarter, we expected improved operating leverage from the BNC merger," Carpenter said. "Excluding merger-related charges and ORE expense, we are reporting an efficiency ratio of 46.4 percent, which we believe will continue to improve over the next several quarters once the integration of the BNC synergy case is fully deployed. Our technology conversion plan involves converting the legacy Pinnacle systems in November 2017. Thus, we believe our synergy case will be largely realized in early first quarter of 2018."

• Asset quality
  • Nonperforming assets increased to 0.51 percent of total loans and ORE at Sept. 30, 2017, compared to 0.44 percent at June 30, 2017 and 0.41 percent at Sept. 30, 2016. Nonperforming assets increased to $78.1 million at Sept. 30, 2017, compared to $65.4 million at June 30, 2017 and $34.1 million at Sept. 30, 2016.
  • The allowance for loan losses represented 0.43 percent of total loans at Sept. 30, 2017, compared to 0.42 percent at June 30, 2017 and 0.73 percent at Sept. 30, 2016.
    • The ratio of the allowance for loan losses to nonperforming loans was 122.0 percent at Sept. 30, 2017, compared to 154.0 percent at June 30, 2017 and 211.5 percent at Sept. 30, 2016.
    • Net charge-offs were $3.7 million for the quarter ended Sept. 30, 2017, compared to $7.5 million for the quarter ended June 30, 2017 and $7.3 million for the quarter ended Sept. 30, 2016. Annualized net charge-offs as a percentage of average loans for the quarter ended Sept. 30, 2017 were 0.14 percent, compared to 0.17 percent for the second quarter of 2017 and 0.35 percent for the third quarter of 2016.
    • Provision for loan losses was $6.9 million in the third quarter of 2017, compared to $6.8 million in the second quarter of 2017 and $6.1 million in the third quarter of 2016.

"Overall, asset quality for our firm remains exceptional," Carpenter said. "Our credit administrators throughout the firm have made significant progress toward the development of one credit culture across our franchise. The soundness of our firm is something all of our associates take great pride in. Thus far, the conclusions we reached during the BNC due diligence process regarding the high quality of the BNC portfolio are being reconfirmed every day."

• Other Highlights

• The firm incurred pre-tax merger-related charges of $8.8 million during the third quarter of 2017, primarily attributable to the continued cultural and technology integration and associate retention awards.

• 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 third quarter 2017 tax expense of $59,000, compared to a reduction in tax expense of $789,000 and $3.8 million in the second and first quarters of 2017, respectively.

BOARD OF DIRECTORS DECLARES DIVIDEND

On Oct. 17, 2017, Pinnacle’s Board of Directors approved a quarterly cash dividend of $0.14 per common share to be paid on Nov. 24, 2017 to common shareholders of record as of the close of business on Nov. 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. (CDT) on Oct. 18, 2017 to discuss third 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 the 100 Best Companies to Work For in the U.S., and American Banker recognized Pinnacle as the sixth best bank to work for in the country in 2016.

The firm began operations in a single location in downtown Nashville, TN in October 2000 and has since grown to approximately $21.8 billion in assets as of Sept. 30, 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) increased competition with other financial institutions; (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) rapid fluctuations or unanticipated changes in interest rates on loans or deposits; (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 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 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; and (xxx) 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 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.