PNFP Reports Diluted Earnings Per Share of $0.73 for 2Q 2016

PNFP Reports Diluted Earnings Per Share of $0.73 for 2Q 2016

Excluding merger-related charges, diluted EPS was $0.75 for 2Q 2016

Pinnacle Financial Partners, Inc. (Nasdaq/NGS: PNFP) reported net income per diluted common share of $0.73 for the quarter ended June 30, 2016, 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, 2016, 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. (Avenue) transaction on July 1, five months after announcement, and increased our ownership of Bankers Healthcare Group (BHG) 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 2 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.”

GROWING THE CORE EARNINGS CAPACITY OF THE FIRM:

• Revenues for the quarter ended June 30, 2016 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, 2016 were a record $7.091 billion, an increase of $263.5 million from March 31, 2016 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, 2016 were a record $7.093 billion, an increase of $56.3 million from March 31, 2016 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,” 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.”

FOCUSING ON PROFITABILITY:

• The firm’s net interest margin was 3.72 percent for the quarter ended June 30, 2016, 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.”

OTHER SECOND QUARTER 2016 HIGHLIGHTS:

• Revenue growth
  • Net interest income for the quarter ended June 30, 2016 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, 2016 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, 2016, compared to $5.1 million for the quarter ended March 31, 2016 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, 2016, 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,” 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, 2016 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, 2016 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, 2016, down from 1,075 FTE’s at March 31, 2016, 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,” 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, 2016, compared to 0.70 percent at March 31, 2016 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, 2016 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, 2016, compared to 0.91 percent at March 31, 2016 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, 2016, compared to 146.4 percent at March 31, 2016 and 373.6 percent at June 30, 2015.
    • Net charge-offs were $6.1 million for the quarter ended June 30, 2016, 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, 2016 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,” 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, 2016 to $43.5 million at June 30, 2016 and believe the underlying quality of the remaining portfolio appears to be stabilizing.”

AVENUE FINANCIAL HOLDINGS 2Q16 HIGHLIGHTS

The merger of Pinnacle Financial Partners, Inc. and Avenue Financial Holdings, Inc. became effective on July 1, 2016. A summary of Avenue’s results for the second quarter of 2016 follows:

• Avenue’s loans at June 30, 2016 were a record $982.1 million, an increase of $20.1 million from March 31, 2016 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, 2016, compared to 1.14 percent at March 31, 2016 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, 2016 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:

• 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, 2016, 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, 2016, compared to 0.07 percent at March 31, 2016 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.

BOARD OF DIRECTORS DECLARES DIVIDEND

On July 19, 2016, Pinnacle’s Board of Directors increased the quarterly cash dividend to $0.14 per common share to be paid on Aug. 26, 2016 to common shareholders of record as of the close of business on Aug. 5, 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.

WEBCAST AND CONFERENCE CALL INFORMATION

Pinnacle will host a webcast and conference call at 8:30 a.m. (CDT) on July 20, 2016 to discuss second 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 third best bank to work for in the country in 2015.

The firm began operations in a single downtown Nashville location in October 2000 and has since grown to approximately $9.7 billion in assets at June 30, 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 Bankers Healthcare Group (“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, 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, 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, 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 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.