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PNFP > SEC Filings for PNFP > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for PINNACLE FINANCIAL PARTNERS INC


3-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of our financial condition at March 31, 2013 and December 31, 2012 and our results of operations for the three months ended March 31, 2013 and 2012. The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from the consolidated financial statements. The following discussion and analysis should be read along with our consolidated financial statements and the related notes included elsewhere herein.

Overview

General. Our diluted net income per common share available to common stockholders for the three months ended March 31, 2013 was $0.39 compared to $0.21 for the same periods in 2012. At March 31, 2013, loans had increased to $3.772 billion, as compared to $3.712 billion at December 31, 2012, and total deposits decreased to $3.903 billion at March 31, 2013 from $4.015 billion at December 31, 2012.

Results of Operations. Our net interest income increased $3.3 million to $42.8 million for the first quarter of 2013 compared to $39.5 million for the first quarter of 2012. The net interest margin (the ratio of net interest income to average earning assets) for the three months ended March 31, 2013 was 3.90% compared to 3.74% for the same period in 2012.

Our provision for loan losses was $2.2 million for the three month period ended March 31, 2013 compared to $1.0 million for the same period in 2012. The increase in our provisioning expense correlates with the growth in our net loans. Net charge-offs were $2.2 million for the three month period ended March 31, 2013, compared to $3.6 million for the same period in the prior year. Our allowance for loan losses as a percentage of total loans decreased from 1.87% at December 31, 2012 to 1.84% at March 31, 2013, as a result of improving credit metrics within our loan portfolio.

Noninterest income increased by $2.0 million during the three months ended March 31, 2013, compared to the same period in the prior year. This increase is primarily attributable to continued growth in our fee businesses as well as increases in other noninterest income. Included in other noninterest income are miscellaneous consumer fees, such as ATM revenues, other consumer fees (primarily interchange) and interest rate swap fee transactions for commercial borrowers.

Noninterest expense decreased by $3.4 million during the three months ended March 31, 2013, as compared to the three month period ended March 31, 2012. Costs associated with the disposal and maintenance of other real estate owned decreased by $4.0 million during the three months ended March 31, 2013, when compared to the same periods in 2012. However, costs associated with other noninterest expense increased by $823,000 during the three months ended March 31, 2013, when compared to the same periods in 2012. The additional noninterest expense was largely attributable to costs incurred as part of our restructuring our FHLB advances.

During the three months ended March 31, 2013, Pinnacle Financial recorded income tax expense of $6.6 million. Pinnacle Financial's effective tax rate for the three months ended March 31, 2013 and 2012 of 32.9% and 33.6%, respectively, differs from the combined federal and state income tax statutory rate primarily due to investments in bank qualified municipal securities, our real estate investment trust, and bank owned life insurance offset in part by meals and entertainment expense and executive compensation, portions of which are non-deductible.

Our efficiency ratio (the ratio of noninterest expense to the sum of net interest income and noninterest income) was 59.4% for the three month period ended March 31, 2013, compared to 72.4% for the same period in 2012.

Net income available to common stockholders for the three months ended March 31, 2013 was $13.4 million compared to net income available to common stockholders of $7.2 million for the same period in 2012. As a result of the redemption of all of the remaining preferred shares originally issued to the Treasury during the second quarter of 2012, net income available to common stockholders for the three months ended March 31, 2013 did not reflect any charge related to preferred stock dividends and accretion of the preferred stock discount related to our participation in the CPP compared to the charge of $1.2 million for the same prior year period.

Financial Condition. Net loans increased $60.2 million during the first three months of 2013. Total deposits were $3.903 billion at March 31, 2013, compared to $4.015 billion at December 31, 2012, a decrease of $112.3 million, or 2.8%. However, average deposit balances increased by $352.5 million for the first quarter of 2013 as compared to the first quarter of 2012.

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Capital and Liquidity. At March 31, 2013, our capital ratios, including our bank's capital ratios, exceeded regulatory minimum capital requirements. From time to time we may be required to support the capital needs of our bank. At March 31, 2013, we had approximately $15.5 million of cash at the holding company which could be used to support our bank. Although we do not anticipate our bank needing any additional capital from us currently, we believe we have various capital raising techniques available to us to provide for the capital needs of our bank, if necessary.

Critical Accounting Estimates

The accounting principles we follow and our methods of applying these principles conform with U.S. GAAP and with general practices within the banking industry. There have been no significant changes to our Critical Accounting Policies as described in our Annual Report on Form 10-K for the year ended December 31, 2012.

Results of Operations

The following is a summary of our results of operations (in thousands):
                                                 Three months ended         2013-2012
                                                      March 31               Percent
                                                                            Increase
                                                 2013          2012        (Decrease)
Interest income                               $   47,156     $  45,824             2.9 %
Interest expense                                   4,398         6,320           (30.4 %)
Net interest income                               42,758        39,504             8.2 %
Provision for loan losses                          2,172         1,034           110.1 %
Net interest income after provision for
loan losses                                       40,586        38,470             5.5 %
Noninterest income                                11,902         9,949            19.6 %
Noninterest expense                               32,440        35,820            (9.4 %)
Net income before income taxes                    20,048        12,599            59.1 %
Income tax expense                                 6,600         4,234            55.9 %
Net income                                        13,448         8,365            60.8 %
Preferred dividends and discount accretion             -         1,159          (100.0 %)
Net income available to common stockholders   $   13,448     $   7,206            86.6 %
Basic net income per common share available
to common stockholders                        $     0.40     $    0.21            90.5 %
Diluted net income per common share
available to common stockholders              $     0.39     $    0.21            85.7 %

Net Interest Income. Net interest income represents the amount by which interest earned on various earning assets exceeds interest paid on deposits and other interest bearing liabilities and is the most significant component of our revenues. Net interest income totaled $40.6 million for the three months ended March 31, 2013, an increase of $2.1 million from the levels recorded in the same period of 2012. We were able to increase net interest income for the first quarter of 2013 compared to the same period in 2012 due primarily to our focus on growing our loan portfolio and reducing our funding costs.

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The following tables set forth the amount of our average balances, interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest rate for interest-earning assets and interest-bearing liabilities, net interest spread and net interest margin for the three and nine months ended March 31, 2013 and 2012 (in thousands):

                                                 Three months ended                                       Three months ended
                                                   March 31, 2013                                           March 31, 2012
                                                                                             Average
                                Average Balances        Interest        Rates/ Yields       Balances         Interest        Rates/ Yields
Interest-earning assets:
Loans (1)                      $        3,681,686     $     41,514                4.58 %   $ 3,280,030     $     38,638                4.74 %
Securities:
Taxable                                   537,951            3,671                2.77 %       688,645            4,929                2.88 %
Tax-exempt (2)                            176,153            1,656                5.09 %       186,864            1,703                4.90 %
Federal funds sold and other              117,483              315                1.25 %       161,434              554                1.50 %
Total interest-earning
assets                                  4,513,273     $     47,156                4.30 %     4,316,973     $     45,824                4.33 %
Nonearning assets
Intangible assets                         248,940                                              251,668
Other nonearning assets                   229,805                                              252,310
Total assets                   $        4,992,018                                          $ 4,820,951

Interest-bearing
liabilities:
Interest bearing deposits:
Interest checking              $          775,136     $        606                0.32 %   $   664,869     $        824                0.50 %
Savings and money market                1,632,715            1,624                0.40 %     1,541,559            2,142                0.56 %
Time                                      589,038            1,182                0.81 %       689,083            1,861                1.09 %
Total interest-bearing
deposits                                2,996,889            3,412                0.46 %     2,895,511            4,827                0.67 %
Securities sold under
agreements to repurchase                  130,740               78                0.24 %       129,892              156                0.48 %
Federal Home Loan Bank
advances                                   98,989              191                0.78 %       238,578              610                1.03 %
Subordinated debt and other
borrowings                                106,777              717                2.72 %        97,476              727                3.00 %
Total interest-bearing
liabilities                             3,333,395            4,398                0.54 %     3,361,457            6,320                1.29 %
Noninterest-bearing deposits              952,853                -                   -         701,760                -                   -
Total deposits and
interest-bearing liabilities            4,286,248     $      4,398                0.42 %     4,063,217     $      6,320                0.63 %
Other liabilities                          17,529                                               37,946
Stockholders' equity                      688,241                                              719,788
Total liabilities and
stockholders' equity           $        4,992,018                                          $ 4,820,951
Net interest income                                   $     42,758                                         $     39,504
Net interest spread (3)                                                           3.76 %                                               3.58 %
Net interest margin (4)                                                           3.90 %                                               3.74 %



(1) Average balances of nonaccrual loans are included in the above amounts.

(2) Yields based on the carrying value of those tax exempt instruments are shown on a fully tax equivalent basis.

(3) Yields realized on interest-bearing assets less the rates paid on interest-bearing liabilities. The net interest spread calculation excludes the impact of demand deposits. Had the impact of demand deposits been included, the net interest spread for the three months ended March 31, 2013 would have been 3.88% compared to a net interest spread of 3.71% for the three months ended March 31, 2012.

(4) Net interest margin is the result of annualized net interest income calculated on a tax-equivalent basis divided by average interest-earning assets for the period.

For the three month periods ended March 31, 2013 and 2012, our net interest spread was 3.76% and 3.58%, respectively, while the net interest margin was 3.90% and 3.74%, respectively. The improving net interest margin reflected management's efforts to maximize earnings by focusing on loan growth and reduced deposit pricing. During the three month period ended March 31, 2013, total funding rates were less than those rates for the same periods in the prior year by 21 basis points. The net decrease was largely impacted by the continued shift in our deposit mix, as we increased our checking accounts (both interest bearing and non-interest bearing) and concurrently reduced balances of higher-cost time deposits and higher-cost wholesale funding. We will continue to seek opportunities to reduce the cost of specific deposit accounts where we believe the amount we are currently paying for those funds exceeds market pricing. Additionally, we also anticipate growing deposits to fund our loan growth this year. As a result, we believe future decreases in our funding costs will become more difficult.

Lower levels of nonaccrual loans positively impacted our net interest margin during the three months ended March 31, 2013 when compared to the same periods in 2012. Average nonaccrual loans were $22.3 million for the three months ended March 31, 2013, which was a decrease from $45.4 million for the three months ended March 31, 2012.

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We continue to deploy various asset liability management strategies to manage our risk to interest rate fluctuations. We currently believe that short term rates will remain low for an extended period of time. We believe margin expansion over both the short and the long term will be challenging due to continued pressure on earning asset yields during this extended period of low interest rates. Loan pricing for creditworthy borrowers is very competitive in our markets and has limited our ability to increase pricing on new and renewed loans over the last several quarters and we anticipate that this challenging competitive environment will continue in 2013. As a result, we anticipate loan yields will continue to contract in 2013.

However, we believe our net interest income should increase throughout 2013 compared to 2012 primarily due to an increase in average earning asset volumes, primarily loans.

Provision for Loan Losses. The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in management's evaluation, should be adequate to provide coverage for the inherent losses on outstanding loans. Based upon management's assessment of the loan portfolio, we adjust our allowance for loan losses to an amount deemed appropriate to adequately cover probable losses inherent in the loan portfolio. Our allowance for loan losses as a percentage of total loans decreased from 1.87% at December 31, 2012 to 1.84% at March 31, 2013. Our allowance for loan losses as a percentage of our nonaccrual loans has increased from 304.2% at December 31, 2012 to 317.9% at March 31, 2013. Based upon our evaluation of the loan portfolio, we believe the allowance for loan losses to be adequate to absorb our estimate of probable losses existing in the loan portfolio at March 31, 2013. While our policies and procedures used to estimate the allowance for loan losses, as well as the resultant provision for loan losses charged to operations, are considered adequate by management, they are necessarily approximate and imprecise. There are factors beyond our control, such as conditions in the local and national economy, local real estate market, or particular industry or borrower-specific conditions, which may materially negatively impact our asset quality and the adequacy of our allowance for loan losses and, thus, the resulting provision for loan losses.

The provision for loan losses amounted to $2.2 million and $1.0 million for the three months ended March 31, 2013 and 2012, respectively. Provision expense for the three month period ended March 31, 2013 has increased as compared to the same period in 2012, primarily due to increased loan growth.

Noninterest Income. Our noninterest income is composed of several components, some of which vary significantly between quarterly and annual periods. Service charges on deposit accounts and other noninterest income generally reflect customer growth trends, while fees from our wealth management departments, the origination of mortgage loans and gains and losses on the sale of securities will often reflect market conditions and fluctuate from period to period.

The following is a summary of our noninterest income for the three months ended March 31, 2013 and 2012 (in thousands):

                                               Three months ended         2013-2012
                                                    March 31,              Percent
                                                                          Increase
                                                2013          2012       (Decrease)
Noninterest income:
Service charges on deposit accounts          $     2,480     $ 2,324             6.7 %
Investment services                                1,793       1,647             8.9 %
Insurance sales commissions                        1,393       1,288             8.2 %
Gains on mortgage loans sold, net                  1,814       1,494            21.4 %
Gain on sale of investment securities, net             -         114          (100.0 %)
Trust fees                                           944         795            18.7 %
Other noninterest income:
ATM and other consumer fees                        1,807       1,465            23.3 %
Bank-owned life insurance                            270         252             7.1 %
Other noninterest income                           1,401         570           145.8 %
Total other noninterest income                     3,478       2,287            52.1 %
Total noninterest income                     $    11,902     $ 9,949            19.6 %

The increase in service charges on deposit accounts in 2013 compared to the first three months of 2012 is primarily related to increased analysis fees due to an increase in the volume and number of commercial checking accounts.

Income from our wealth management groups (investments, insurance and trust) are also included in noninterest income. For the three months ended March 31, 2013 and 2012, commissions and fees from investment services at our financial advisory unit, Pinnacle Asset Management, a division of Pinnacle Bank, totaled $1.8 million and $1.7 million, respectively. At March 31, 2013, Pinnacle Asset Management was receiving commissions and fees in connection with approximately $1.3 billion in brokerage assets held with Raymond James Financial Services, Inc. compared to $1.2 billion at March 31, 2012. Insurance commissions were approximately $1.4 million for the three months ended March 31, 2013 compared to approximately $1.3 million for the three months ended March 31, 2012. Substantially all of our insurance revenue is attributable to our insurance subsidiary, Miller Loughry Beach. Included in insurance income for the first three months of 2013 was $333,000 of contingent income received based on 2012 sales production compared to $287,000 recorded in the same period in 2012. Additionally, at March 31, 2013, our trust department was receiving fees on approximately $516.0 million of managed assets compared to $461.7 million at March 31, 2012. Accordingly, trust fees increased by 18.7% between the two periods presented.

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Gains on mortgage loans sold, net consists of fees from the origination and sale of mortgage loans. These mortgage fees are for loans originated in both the Middle Tennessee and Knoxville markets that are subsequently sold to third-party investors. All of these loan sales transfer servicing rights to the buyer. Generally, mortgage origination fees increase in lower interest rate environments and more robust housing markets and decrease in rising interest rate environments and more challenging housing markets. As a result, mortgage origination fees may fluctuate greatly in different rate or housing environments. Over the last several quarters, the interest rate environment has provided home owners the opportunity to refinance their existing mortgages at low rates. Gains on mortgage loans sold, net, were $1.8 million for the three month period ended March 31, 2013 as compared to $1.5 million and for the same period in the prior year.

Included in other noninterest income are miscellaneous consumer fees, such as ATM and other consumer fees, swap fees earned for the facilitation of derivative transactions for our clients and changes in the fair value of our alternative investments. ATM revenues and other consumer fees realized in the first three months of 2013 increased $343,000 as compared to the same period in the prior year. While we are exempt from the cap on debit interchange fees imposed under the Dodd-Frank Act because of our current asset size, we believe that there is the potential for downward pressure on interchange fees as debit networks compete for transaction volume. We believe that this potential reduction in interchange fees will likely happen gradually over an extended period of time. Included in other noninterest income for the first quarter of 2013 was approximately $474,000 of swap fees compared to approximately $82,000 for the same period in the prior year. Also, during the first quarter of 2013 we recognized approximately $167,000 in gains in the market value of our alternative investments compared to a loss of $74,000 in the prior year's comparable quarter.

Additionally, noninterest income from increases in the cash surrender value of bank-owned life insurance was $270,000 for the three months ended March 31, 2013 compared to $252,000 for the three months ended March 31, 2012. During the first quarter of 2013, Pinnacle Financial purchased approximately $30 million of bank-owned life insurance with terms similar to our existing policies. The assets that support these policies are administered by the life insurance carriers and the income we receive (i.e., increases or decreases in the cash surrender value of the policies) on these policies is dependent upon the returns the insurance carriers are able to earn on the underlying investments that support the policies. Earnings on these policies generally are not taxable.

Noninterest Expense. Noninterest expense consists of salaries and employee benefits, equipment and occupancy expenses, other real estate expenses, and other operating expenses. The following is a summary of our noninterest expense for the three months ended March 31, 2013 and 2012 (in thousands):

                                              Three months ended         2013-2012
                                                   March 31,              Percent
                                                                         Increase
                                               2013          2012       (Decrease)
Noninterest expense:
Salaries and employee benefits:
Salaries                                    $   11,228     $ 11,397            (1.5 %)
Commissions                                      1,120          995            12.6 %
Cash incentives and related payroll taxes        2,850        2,031            40.3 %
Employee benefits and other                      4,374        5,370           (18.5 %)
Total salaries and employee benefits            19,572       19,793            (1.1 %)
Equipment and occupancy                          5,113        5,009             2.1 %
Other real estate expense                          721        4,676           (84.6 %)
Marketing and business development                 791          785             0.8 %
Postage and supplies                               592          563             5.2 %
Amortization of intangibles                        521          686           (24.1 %)
Other noninterest expense                        5,130        4,308            19.1 %
Total noninterest expense                   $   32,440     $ 35,820            (9.4 %)

Total salaries and employee benefits expenses decreased approximately 1.1% over the same period prior year. The decrease is attributable to a reduction in the number of full time equivalent associates from 743.5 at March 31, 2012 to 720.5 at March 31, 2013 offset by annual merit increases effective January 1, 2013.

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We believe that cash and equity incentives are a valuable tool in motivating an employee base that is focused on providing our clients effective financial advice and increasing shareholder value. As a result, and unlike many other financial institutions, all of our non-commissioned associates participate in our annual cash incentive plan and all of our associates participate in our equity compensation plan. As compared to prior year, cash incentives and related payroll taxes increased by $819,000 to $2.8 million for the quarter ended March 31, 2013.

Under the annual cash incentive plan, the targeted level of incentive payments requires achievement of a certain soundness threshold, a revenue component and a targeted level of earnings (subject to certain adjustments). To the extent that the soundness threshold is met and revenues and earnings are above or below the targeted amount, the aggregate incentive payments are increased or decreased. Historically, we have paid between 0% and 120% of our targeted bonus. We currently believe that our performance for fiscal 2013 will exceed our targets and we are currently accruing incentive costs in 2013 above target levels.

Employee benefits includes items such as payroll taxes, health insurance, and employer match for the 401(k) program. Additionally, included in employee benefits and other expense for the three months ended March 31, 2013, were approximately $963,000 of compensation expenses related to stock options and restricted share awards compared to $1.0 million for the three months ended March 31, 2012. We provide a broad-based equity incentive plan for all associates. We believe that equity incentives provide an excellent vehicle for . . .

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