Pinnacle Financial Partners Reports Diluted Earnings Per Share For First Quarter

  • Monday, April 17, 2017

Pinnacle Financial Partners, Inc. reported net income per diluted common share of $0.82 for the quarter ended March 31, compared to net income per diluted common share of $0.68 for the quarter ended March 31, 2016, an increase of 20.6 percent. Excluding pre-tax merger-related charges of $672,000 and $1.8 million for the three months ended March 31, 2017 and 2016, respectively, net income per diluted common share was $0.83 and $0.71, respectively, an increase of 16.9 percent. 

“The first quarter of 2017 was a busy quarter for our firm, and one that will serve as the foundation for continued growth for many years to come,” said M. Terry Turner, Pinnacle’s president and chief executive officer. “In January, we announced the proposed merger of our firm with BNC Bancorp (BNC), expanding our presence into the Carolinas and Virginia. We are excited to have already obtained the bank regulatory approvals to merge our two firms and are now focused on securing the required shareholder approvals. We continue to anticipate a late second quarter or early third quarter 2017 merger of our two firms. Additionally, soon after the announcement of the proposed merger, we issued 3.2 million common shares in a public offering, which reduced earnings per share for the quarter but positions the combined firm for many years of future growth. Both we and BNC have experienced positive reaction from our clients in response to our proposed merger, and once the transaction is consummated, our firm will be doing business in many of the Southeast’s most admired banking markets.” 

GROWING THE CORE EARNINGS CAPACITY OF THE FIRM: 

Revenues for the quarter ended March 31 were $119.1 million, an increase of $19.4 million, or 19.4 percent, from the quarter ended March 31, 2016. 

Loans at March 31 were a record $8.642 billion, an increase of $192.1 million from Dec. 31, 2016 and $1.814 billion from March 31, 2016, reflecting year-over-year growth of 26.6 percent. Annualized linked-quarter loan growth approximated 9.1 percent when comparing balances as of March 31 to balances as of Dec. 31, 2016. 

Average deposit balances for the quarter ended March 31 were a record $9.099 billion, an increase of $308.3 million from Dec. 31, 2016 and $2.062 billion from March 31, 2016, reflecting year-over-year growth of 29.3 percent. 

“In the first quarter of 2016, our net loan growth was approximately $284.7 million, $169.2 million of which was acquired from another financial institution in connection with the hiring of several commercial lenders in Memphis,” Mr. Turner said. “This resulted in net organic loan growth of $115.5 million in the first quarter of last year, compared to $192.1 million in the first quarter of 2017, an increase of 66.3 percent. Also, deposits increased by $521.3 million in the first quarter of 2017, making the first quarter of 2017 an exceptional quarter for deposit growth for our firm. Earlier today, BNC also reported strong linked-quarter loan and deposit growth during the first quarter of 2017. Client retention as well as client growth remains strong in both franchises, and we could not be more excited about the future opportunities for our combined firm.” 

FOCUSING ON PROFITABILITY: 

Return on average assets was 1.41 percent for the first quarter of 2017, compared to 1.30 percent for the fourth quarter of 2016 and 1.27 percent for the same quarter last year. 

Excluding merger-related charges in each respective period, return on average assets was 1.42 percent for the first quarter of 2017 compared to 1.37 percent and 1.32 percent for the fourth quarter of 2016 and the first quarter of 2016, respectively. 

First quarter 2017 return on average common equity amounted to 9.70 percent, compared to 9.61 percent for the fourth quarter of 2016 and 9.47 percent for the same quarter last year. First quarter 2017 return on average tangible common equity amounted to 14.74 percent, compared to 15.49 percent for the fourth quarter of 2016 and 15.04 percent for the same quarter last year.  

Excluding merger-related charges in each respective period, return on average tangible common equity amounted to 14.89 percent for the first quarter of 2017, compared to 16.34 percent for the fourth quarter of 2016 and 15.64 percent for the first quarter of 2016. 

“We continue to operate our firm at a high level of profitability and are pleased with our first quarter metrics,” said Harold R. Carpenter, Pinnacle’s chief financial officer. “The first quarter is usually a slower growth quarter for our firm, given we traditionally grant merit raises to our associates early in the year and because there are fewer days in the quarter, which negatively impacts our net interest income and several fee category run rates. 

“BNC’s results will obviously impact our profitability metrics once the merger occurs. That said, once the technology conversions are accomplished we will begin to realize the full earnings potential of the combined firm. During the first quarter of 2017, our technology professionals, working with BNC, modified our technology conversion plan for the transaction. Our plan is to convert Pinnacle’s client accounts to BNC’s core system during the fourth quarter of 2017 and then combine BNC’s client data with Pinnacle’s client data in the first quarter of 2018. Our belief is that this conversion plan significantly reduces integration risk and is a prudent way to balance near term expense with longer term benefits as our technology platform should serve the combined firm for many years of future growth.” 

OTHER HIGHLIGHTS:
Revenues
Revenue per fully-diluted share was $2.46 for the quarter ended March 31, compared to $2.61 for the fourth quarter of 2016 and $2.44 for the first quarter of 2016. The aforementioned capital raise negatively impacted revenue per fully-diluted share by approximately $0.12 for the quarter ended March 31. 

Net interest income for the quarter ended March 31 was $88.8 million, compared to $89.4 million for the fourth quarter of 2016 and $73.9 million for the first quarter of 2016.  

The firm’s net interest margin was 3.60 percent for the quarter ended March 31 compared to 3.72 percent last quarter and 3.78 percent for the quarter ended March 31, 2016. 

Noninterest income for the quarter ended March 31 was $30.4 million, compared to $30.7 million for the fourth quarter of 2016 and $25.9 million for the first quarter of 2016. 

Net gains from the sale of mortgage loans were $4.2 million for the quarter ended March 31 compared to $2.9 million for the fourth quarter of 2016 and $3.6 million for the quarter ended March
31, 2016, resulting in a year-over-year growth rate of 16.5 percent. 

Wealth management revenues, which include investment, trust and insurance services, were $6.4 million for the quarter ended March 31 compared to $6.2 million for the fourth quarter of 2016 and $5.6 million for the quarter ended March 31, 2016, resulting in a year-over-year growth rate of 13.4 percent. 

Income from the firm’s investment in Bankers Healthcare Group, Inc. (BHG) was $7.8 million for the quarter ended March 31, compared to $8.1 million for the quarter ended Dec. 31, 2016 and $5.1 million for the first quarter last year. 

“Our net interest margin decreased from 3.72 percent during the fourth quarter of 2016 to 3.60 percent in the first quarter of 2017,” Mr. Carpenter said. “During the first quarter of 2017, loan discount accretion for fair value adjustments required by purchase accounting contributed approximately $5.0 million to our net interest income, compared to $7.8 million during the fourth quarter of 2016. We anticipate that purchase accounting will contribute between 0.10 percent to 0.20 percent to our net interest margin in the second quarter of 2017, exclusive of any impact of
BNC’s fair value adjustments. 

“The December 2016 and March 2017 Fed funds increases had a positive impact on our results in the first quarter of 2017 and partially offset the headwinds from reduced levels of discount accretion. Our balance sheet remains in a solid asset sensitive position with the March 2017 rate increase potentially providing an additional $1.8 million in net interest income in the second quarter of 2017. As to fee income, BHG posted a solid quarter, and we remain confident  that they will achieve 12 to 15 percent growth in 2017, which translates to 20 percent growth in our noninterest income from BHG in 2017.” 

Noninterest expense
Noninterest expense for the quarter ended March 31 was $62.1 million, compared to $62.8 million in the fourth quarter of 2016 and $54.1 million in the first quarter last year. 

Salaries and employee benefits were $38.4 million in the first quarter of 2017, compared to $38.0 million in the fourth quarter of 2016 and $32.5 million in the first quarter of last year, reflecting a year-overyear increase of 17.9 percent, largely driven by an increase of 143 FTEs as well as annual merit raises awarded in the first quarter of 2017. 

Pre-tax merger-related charges were approximately $672,000 during the quarter ended March 31 compared to $1.8 million for the quarter ended March 31, 2016. Pre-tax merger related charges
during the first quarter of 2017 included costs associated with our proposed merger with BNC. 

The efficiency ratio for the first quarter of 2017 decreased to 52.1 percent for the first quarter of 2017, compared to 52.2 percent for the fourth quarter of 2016. The ratio of noninterest expenses to
average assets decreased to 2.20 percent for the first quarter of 2017 from 2.26 percent in the fourth quarter of 2016. 

Excluding merger-related charges and other real estate owned (ORE) expense, the efficiency ratio was 51.3 percent for the first quarter of 2017 compared to 49.6 percent for the fourth quarter of 2016, and the ratio of noninterest expense to average assets was 2.17 percent compared to 2.14 percent between the first quarter of 2017 and the fourth quarter of 2016, respectively. 

“Our noninterest expense to average assets ratio for the first quarter of 2017 is within our stated long-term goals of 2.10 percent and 2.30 percent,” Carpenter said. “Excluding mergerrelated charges, we believe we will be able to maintain our expense base within those goals.
That’s due primarily to the operating leverage that has been created by both our rapid organic growth and high-quality investments and acquisitions.” 

Asset quality
Nonperforming assets decreased to 0.36 percent of total loans and ORE at March 31 compared to 0.40 percent at Dec. 31, 2016 and 0.70 percent at March 31, 2016. Nonperforming assets decreased to $31.3 million at March 31 compared to $33.7 million at Dec. 31, 2016 and $47.9 million at March 31, 2016. 

The allowance for loan losses represented 0.68 percent of total loans at March 31 compared to 0.70 percent at Dec. 31, 2016 and 0.91 percent at March 31, 2016. 

The ratio of the allowance for loan losses to nonperforming loans was 232.9 percent at March 31 compared to 213.9 percent at Dec. 31, 2016 and 146.4 percent at March 31, 2016. 

Net charge-offs were $4.3 million for each of the quarters ended March 31 and Dec. 31, 2016, compared to $7.1 million for the quarter ended March 31, 2016. Annualized net charge-offs as a percentage of average loans for the quarter ended March 31 were 0.20 percent, compared to 0.21 percent for the fourth quarter of 2016 and 0.42 percent for the first quarter of 2016. 

Provision for loan losses was $3.7 million in the first quarter of 2017, compared to $3.0 million in the fourth quarter of 2016 and $3.9 million in the first quarter of 2016. 

“Overall, asset quality for our firm remains strong,” Carpenter said. “During the first quarter, we continued to reduce our investment in non-prime consumer auto loans. Net charge-offs from the non-prime consumer auto portfolio were $2.2 million during the first quarter of 2017, compared to $3.6 million of net charge-offs in the fourth quarter of 2016. We have reduced  portfolio balances in this portfolio from $66.9 million at Dec. 31, 2015 to $22.9 million at March 31, 2017 and anticipate continued reductions in this portfolio over the next several quarters.”

Other Highlights
In addition to the aforementioned pre-tax merger-related charges of $672,000 incurred during the first quarter of 2017, two other significant matters impacted the comparability of first quarter 2017 results to previous periods. 

In January 2017, the firm issued 3.2 million shares of common stock. Cash proceeds were approximately $192.1 million from the issuance, net of offering costs. 

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 first quarter 2017 tax expense of $3.8 million. 

“To increase our capital levels in connection with the anticipated merger with BNC, we issued 3.2 million common shares in late January,” Mr. Carpenter said. “We were very pleased with market demand for the shares, which we believe is an indicator of the market’s positive reaction to this transaction and the confidence the market has in the combined franchise to deliver continued growth in the years to come. The additional shares did increase our share count, thus negatively impacting our fully-diluted earnings per share results for the first quarter of 2017 by approximately $0.04. 

“In addition, our results for the quarter were impacted by the tax impact associated with equity compensation vesting. Previously these amounts were a component of our firm’s paid in capital. With the required adoption of the new accounting standard, the tax impact of these activities is reflected in tax expense during the quarter when the underlying equity compensation vests or the stock option is exercised. Much of our equity compensation vesting  usually occurs in the first quarter. Should our share price continue to trade within recent ranges, we believe the tax benefit for restricted stock lapses and stock options expiring in 2017 will approximate $1.0 million for the remaining nine months of the year, which should offset our anticipated effective tax rate of 33 percent for this year.” 

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