Why Pinnacle Financial Partners Is a Better Financial Bet Than Bank of America Corp or Citigroup Inc

Pinnacle Financial Partners convinces on a variety of metrics including loan, book value and net interest income growth.

Kingkarn Amjaroen
Kingkarn Amjaroen
Jul 17, 2014 at 6:00AM

Source: Company

Pinnacle Financial Partners (NASDAQ:PNFP) keeps on producing solid returns for shareholders with no seeming end in sight. In fact, Pinnacle Financial Partners could be singled out as a poster child of banking institutions:

Rising book values per share, rising loan volumes, rising deposits and profitability measures show, that the bank makes an interesting value proposition and might even be a better alternative than high-profile banks such as Bank of America (NYSE:BAC) or Citigroup (NYSE:C).

All important metrics are moving upward for Pinnacle Financial Partners, a $1.4 billion Southeastern community bank headquartered and operating in Tennessee. The community banks currently has 33 bank offices in the state and is certainly a small community bank with total assets of $5.8 billion as of the end of June 2014.

Probably the most distinguishing characteristic of Pinnacle Financial Partners is its relative short operating history.

While many community banks were established at the beginning of the twentieth century to accommodate a boom in business and an influx of immigrants from around the world, Pinnacle Financial Partners was established in 2000 by a group of business men seeking to create a locally owned community bank.

Despite the comparatively short operating history, Pinnacle Financial Partners is a community bank player that investors should take seriously amid its fantastic business results over the last couple of quarters.

Loan, deposit and net interest income growth
The relationship between loan growth and net interest income growth is as straightforward as it is simple.

The more loans a bank originates, the higher its interest income from the underlying loan pool. Assuming that the bank is not earning interest income growth at the expense of later charge-offs, Pinnacle Financial Partners actually has been quite a loan machine: Average loans increased from $3.2 billion in the first quarter of 2011 to $4.1 billion in the first quarter of 2014 reflecting an annual compound growth rate of 9%.

Average outstanding loans have increased another 3% in  the most recent second quarter to $4.3 billion.

Given Pinnacle Financial Partners' loan growth trend, it is easy to see why its net interest income skyrocketed over the same time: Its net interest income increased from just $36 million in Q1 2011 to more than $47 million in Q2 2014.

Source: Pinnacle Financial Partners Second Quarter 2014 Investor Presentation, July 16, 2014

Over the same time, Pinnacle Financial Partners has stayed true to its community banking model and has grown its deposit base by 20% from $3.8 billion to $4.5 billion.

High profitability
Pinnacle Financial Partners has historically achieved double-digit returns on equity which to some extent speaks to the superiority of the community bank business model compared to Wall Street's model of chasing earnings wherever they occur.

Source: Pinnacle Financial Partners Second Quarter 2014 Investor Presentation, July 16, 2014

I am a big fan of community banks, because they manage to stay largely unaffected by the excitement and exuberance of Wall Street. Many Wall Street banks gave in to the promise of high profits during the latest expansion in the U.S. economy and didn't even recognize when the music stopped playing.

Community banks like Pinnacle Financial Partners, on the other hand, do not engage in this kind of casino capitalism and take on ever increasing amounts of incremental balance sheet risk.

Pinnacle Financial Partners achieved solid returns on tangible common equity over the last six quarter with an average of 12.81% per quarter.

Return and valuation
Whereas large-cap institutions generally exhibit a more volatile earnings profile due to their reliance on investment banking, Pinnacle Financial Partners concentrates primarily on its core business: Deposits and loans.

This focus has allowed the community bank to gradually increase its tangible book value by 13.7% year-over-year to $14.53 per share outpacing Citigroup's growth rate of 7% in the same metric.

Solid operating performance and an absence of an ugly mortgage mess also has led to Pinnacle Financial Partners' outperformance of Bank of America and Citigroup over the last twelve months.

The Foolish Bottom Line
Pinnacle Financial Partners is an interesting and well-run community bank alternative to other large-cap banks in the sector, that usually get all the attention of investors.

Though much smaller in size, Pinnacle Financial Partners actually casts a large shadow due to its impressive performance in loan, deposit, interest income and book value growth which seems to bode well for Pinnacle Financial Partners' future.