Pinnacle Financial Partners, Inc. has reported net income per diluted common share of $0.80 for the quarter ended June 30, compared to net income per diluted common share of $0.73 for the quarter ended June 30, 2016, an increase of 9.6 percent. Net income per diluted common share was $1.62 for the six months ended June 30, compared to net income per diluted common share of $1.42 for the six months ended June 30, 2016, an increase of 14.1 percent.
Excluding pre-tax merger-related charges of $3.2 million and $3.9 million for the three and six months ended June 30, net income per diluted common share was $0.84 and $1.67, respectively, compared to $0.75 and $1.46 for the three and six months ended June 30, 2016, excluding merger-related charges, or an increase of 12.0 percent and 14.4 percent, respectively.
"Second quarter results continued to show very strong growth momentum," said M. Terry Turner, Pinnacle's president and chief executive officer. "Obviously, the most significant event impacting current and ongoing growth potential was the closing of our merger with BNC Bancorp on June 16. We are well underway in executing our integration process in terms of brand, technology and, more importantly, culture.
"Additionally, even in the midst of our merger and integration effort, during the second quarter we experienced significant organic loan growth in the legacy Tennessee franchise as well as the BNC franchise. In the Tennessee franchise, net loans increased $478 million during the second quarter, representing an annualized linked-quarter organic growth rate of 22.1 percent. Excluding the impact of fair value accounting, in the former BNC footprint net loans increased $190 million, representing an annualized organic growth rate of 16.4 percent."
GROWING THE CORE EARNINGS CAPACITY OF THE FIRM:
Revenues for the quarter ended June 30, 2017 were $141.7 million, an increase of $33.9 million, or 31.5 percent, from the quarter ended June 30, 2016.
Loans at June 30 were a record $14.76 billion, an increase of $6.12 billion from March 31 and $7.67 billion from June 30, 2016, reflecting year-over-year growth of 108.1 percent. Net loan growth included $5.64 billion attributable to the BNC acquisition, net of preliminary fair value accounting.
Deposits at June 30 were a record $15.76 billion, an increase of $6.48 billion from March 31 and $8.47 billion from June 30, 2016, reflecting year-over-year growth of 116.1 percent. Deposit growth included $6.14 billion attributable to the BNC acquisition. Excluding the acquired BNC deposits, annualized linked-quarter deposit growth for the legacy Pinnacle franchise approximated 14.0 percent when comparing balances as of June 30 to balances as of March 31.
"We are very proud of our associates who have continued to take market share in both the legacy Pinnacle and BNC footprints, contributing to our outstanding organic loan growth of approximately $668 million in the second quarter of 2017," Mr. Turner said. "We continue to hire revenue producers throughout the franchise, but importantly we are off to a great start in terms of hiring in the Carolinas and Virginia. Even with much organizational change, Rick Callicutt and his team added 14 revenue producers to their ranks during the first six months of 2017 and have many exciting recruiting opportunities on the horizon. Execution of our hiring plan has long been our principal strategic advantage and should be the key to our future growth plans as we build out our C&I platform in these very attractive banking markets in the Carolinas and Virginia."
FOCUSING ON PROFITABILITY:
Revenue per fully-diluted share was a record $2.64 for the quarter ended June 30, compared to $2.46 for the first quarter of 2017 and $2.57 for the second quarter of 2016.
Net interest margin was 3.68 percent for the second quarter of 2017, compared to 3.60 percent for the first quarter of 2017 and 3.72 percent for the same quarter last year.
Excluding the accretion from the application of fair value accounting for net loans acquired in previous mergers, the net interest margin in each respective period would have approximated 3.45 percent for the second quarter of 2017, compared to 3.39 percent and 3.50 percent for the first quarter of 2017 and the second quarter of 2016, respectively.
Return on average assets was 1.30 percent for the second quarter of 2017, compared to 1.41 percent for the first quarter of 2017 and 1.33 percent for the same quarter last year. Second quarter 2017 return on average tangible assets amounted to 1.38 percent, compared to 1.47 percent for the first quarter of 2017 and 1.39 percent for the same quarter last year.
Excluding merger-related charges in each respective period, return on average assets was 1.35 percent for the second quarter of 2017, compared to 1.42 percent for the first quarter of 2017 and 1.36 percent the second quarter of 2016, respectively. Excluding merger-related charges in each respective period, return on average tangible assets was 1.44 percent for the second quarter of 2017, compared to 1.48 percent for the first quarter of 2017 and 1.42 percent the second quarter of 2016, respectively.
Return on average equity for the second quarter of 2017 amounted to 8.40 percent, compared to 9.70 percent for the first quarter of 2017 and 9.92 percent for the same quarter last year. Second quarter 2017 return on average tangible equity amounted to 13.58 percent, compared to 14.74 percent for the first quarter of 2017 and 15.34 percent for the same quarter last year.
Excluding merger-related charges in each respective period, return on average tangible equity amounted to 14.19 percent for the second quarter of 2017, compared to 14.89 percent for the first quarter of 2017 and 15.64 percent for the second quarter of 2016.
"We continue to operate our firm at a high level of profitability and are pleased with our second quarter metrics," said Harold R. Carpenter, Pinnacle's chief financial officer. "With recent rate hikes and continued outsized loan growth, we are pleased that our core net interest margin experienced a 6 basis point increase over the last quarter. During the second quarter of 2017, accretion from fair value adjustments contributed approximately $6.4 million to our net interest income, compared to $5.0 million during the first quarter of 2017. Approximately $2.8 million of our accretion income was attributable to the BNC acquisition. At June 30, 2017, we had an estimated $172.7 million of remaining discount for the acquired BNC loans and $23.5 million of remaining discount related to the acquired loans from previous mergers.
"We believe that as our integration plans are achieved and with the full deployment of our merger synergy case, our profitability metrics will continue to improve over the next several quarters."
OTHER HIGHLIGHTS:
Revenues
Net interest income for the quarter ended June 30, 2017 was $106.6 million, compared to $88.8 million for the first quarter of 2017 and $75.0 million for the second quarter of 2016. Included in the second quarter 2017 net interest income was $12.4 million generated by the BNC franchise following the closing of the merger. Excluding that amount, the legacy Pinnacle franchise experienced a $5.5 million increase in net interest income between the first and second quarters of 2017, or 24.6 percent linked-quarter annualized growth.
Noninterest income for the quarter ended June 30, 2017 was $35.1 million, compared to $30.4 million for the first quarter of 2017 and $32.7 million for the second quarter of 2016. Included in the second quarter 2017 noninterest income was $1.7 million generated by BNC. Excluding that amount, the legacy Pinnacle franchise experienced a 38.8 percent annualized linked-quarter increase in noninterest income between the first and second quarters of 2017.
Net gains from the sale of residential mortgage loans were $4.7 million for the quarter ended June 30, compared to $4.2 million for both the first quarter of 2017 and the quarter ended June 30, 2016, resulting in a year-over-year growth rate of 10.6 percent.
Wealth management revenues, which include investment, trust and insurance services, were $6.2 million for the quarter ended June 30, 2017, compared to $6.4 million for the first quarter of 2017 and $5.2 million for the quarter ended June 30, 2016, resulting in a year-over-year growth rate of 20.5 percent.
Income from the firm's investment in Bankers Healthcare Group, Inc. was $8.75 million for the quarter ended June 30, compared to $7.82 million for the quarter ended March 31 and $9.64 million for the second quarter last year.
"The second quarter of 2017 was a strong revenue quarter for our firm," Mr. Carpenter said. "Not only did we experience the impact of the mid-June merger with BNC, but we also began to experience lift in net interest income attributable to recent rate increases. Loan yields amounted to 4.66 percent during the second quarter, which was inclusive of 26 basis points of accretion income. This compares to loan yields of 4.49 percent in the first quarter of 2017, which included 23 basis points of accretion income.
"Income from our equity method investment in BHG resulted in revenues increasing by $932,000 between the first and second quarter of 2017, or 47.7 percent annualized linked-quarter growth. Second quarter 2017 revenues from BHG represent the second highest revenue quarter we’ve experienced since our partnership with BHG began in the first quarter of 2015. We remain very optimistic about BHG and anticipate continued growth for the remainder of this year."
Noninterest expense
Noninterest expense for the quarter ended June 30 was $71.8 million, compared to $62.1 million in the first quarter of 2017 and $55.9 million in the second quarter last year. Included in second quarter noninterest expense was $6.7 million of noninterest expense attributable to the BNC franchise's operations following the closing of the merger. The legacy Pinnacle franchise experienced a $3.0 million increase in noninterest expense between the first and second quarter of 2017, including $822,000 of increased merger-related charges.
Salaries and employee benefits were $43.7 million in the second quarter of 2017, compared to $38.4 million in the first quarter of 2017 and $34.3 million in the second quarter of last year, reflecting a year-over-year increase of 27.5 percent.
The efficiency ratio for the second quarter of 2017 decreased to 50.7 percent, compared to 52.1 percent for the first quarter of 2017. The ratio of noninterest expenses to average assets decreased to 2.16 percent for the second quarter of 2017 from 2.20 percent in the first quarter of 2017.
Excluding merger-related charges and other real estate owned expense, the efficiency ratio was 48.4 percent for the second quarter of 2017, compared to 51.3 percent for the first quarter of 2017, and the ratio of noninterest expense to average assets was 2.06 percent, compared to 2.17 percent between the second quarter of 2017 and the first quarter of 2017, respectively.
"Due to our recent mergers as well as our continued rapid organic growth, we continue to believe that we have enhanced operating leverage available to us over the next several quarters," Mr. Carpenter said. "Excluding merger-related charges, we believe we will be able to maintain our 0.expense base within or better than our current long-term targeted range. Our technology conversion plan is to convert the legacy Pinnacle systems to the BNC platform in November 2017, followed by combining the legacy BNC and PNFP data files in early first quarter 2018, which we believe will contribute to realization of our synergy case in early 2018. Our original target of annualized expense reduction in 2018 of slightly more than $40.0 million for the former BNC franchise appears intact at this time."
Asset quality
Nonperforming assets increased to 0.44 percent of total loans and ORE at June 30, 2017, compared to 0.36 percent at March 31 and 0.55 percent at June 30, 2016. Nonperforming assets increased to $65.4 million at June 30 compared to $31.3 million at March 31 and $39.0 million at June 30, 2016. Approximately $37.3 million of nonperforming assets were added in conjunction with the BNC merger.
The allowance for loan losses represented 0.42 percent of total loans at June 30, compared to 0.68 percent at March 31, and 0.87 percent at June 30, 2016. The impact of the application of purchase accounting to BNC'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 0.25 percent as of June 30, 2016.
The ratio of the allowance for loan losses to nonperforming loans was 154.0 percent at June 30, compared to 232.9 percent at March 31, and 181.8 percent at June 30, 2016.
Net charge-offs were $7.5 million for the quarter ended June 30, compared to $4.3 million for the quarter ended March 31, and $6.1 million for the quarter ended June 30, 2016. Annualized net charge-offs as a percentage of average loans for the quarter ended June 30 were 0.17 percent, compared to 0.20 percent for the first quarter of 2017 and 0.35 percent for the second quarter of 2016.
Provision for loan losses was $6.8 million in the second quarter of 2017, compared to $3.7 million in the first quarter of 2017 and $5.3 million in the second quarter of 2016.
"Overall, asset quality for our firm remains exceptional," Mr. Carpenter said. "During the second quarter, we continued to reduce our investment in non-prime consumer auto loans. Net charge-offs from the non-prime consumer auto portfolio were $1.9 million during the second quarter of 2017, compared to $2.2 million of net charge-offs in the first quarter of 2017. We have reduced portfolio balances in this portfolio from $66.9 million at Dec. 31, 2015 to $18.0 million at June 30, 2017 and anticipate continued reductions in this portfolio as we exit this business over the next several quarters."
Other Highlights
The firm incurred pre-tax merger-related charges of $3.2 million during the second quarter of 2017, primarily attributable to settlement of employment contracts, workforce engagement charges and other matters related to the merger with BNC. The firm expects to continue to incur charges associated with the BNC acquisition for the next several quarters.
On Jan. 1, Pinnacle adopted FASB Accounting Standards Update 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 second quarter 2017 tax expense of $789,000, compared to a reduction in tax expense of $3.8 million in the first quarter of 2017.
BOARD OF DIRECTORS DECLARES DIVIDEND
Pinnacle’s Board of Directors on Tuesday approved a quarterly cash dividend of $0.14 per common share to be paid on Aug. 25 to common shareholders of record as of the close of business on Aug. 4. The amount and timing of any future dividend payments to common shareholders will be subject to the discretion of Pinnacle’s Board of Directors.