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PNFP > SEC Filings for PNFP > Form 10-Q on 31-Jul-2013All Recent SEC Filings

Show all filings for PINNACLE FINANCIAL PARTNERS INC

Form 10-Q for PINNACLE FINANCIAL PARTNERS INC


31-Jul-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 June 30, 2013 and December 31, 2012 and our results of operations for the three and six months ended June 30, 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 and six months ended June 30, 2013 was $0.42 and $0.81 compared to $0.23 and $0.44 for the same periods in 2012. At June 30, 2013, loans had increased to $3.925 billion, as compared to $3.712 billion at December 31, 2012, and total deposits increased to $4.097 billion at June 30, 2013 from $4.015 billion at December 31, 2012.

Results of Operations. Our net interest income increased $3.4 million to $43.6 million for the second quarter of 2013 compared to $40.2 million for the second quarter of 2012. Our net interest income increased $6.7 million to $81.4 million for the six months ended June 30, 2013 compared to $78.0 million for the same period in the prior year. The net interest margin (the ratio of net interest income to average earning assets) for the three and six months ended June 30, 2013 was 3.77% and 3.83%, respectively, compared to 3.76% and 3.75% for the same periods in 2012.
Our provision for loan losses was $2.8 million and $4.9 million for the three and six months ended June 30, 2013 compared to $0.6 million and $1.7 million for the same periods in 2012. The increase in our provisioning expense correlates with the growth in our net loans and the costs for continued resolution of our nonperforming assets. Net charge-offs were $3.5 million and $5.7 million for the three and six months ended June 30, 2013, compared to $2.4 million and $6.0 million for the same periods in the prior year. Our allowance for loan losses as a percentage of total loans decreased from 1.87% at December 31, 2012 to 1.75 % at June 30, 2013, as a result of improving credit metrics within our loan portfolio.
Noninterest income increased by $1.4 million and $3.4 million during the three and six months ended June 30, 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 $3.1 million and $6.4 million during the three and six months ended June 30, 2013, as compared to the three and six months ended June 30, 2012. Costs associated with the disposal and maintenance of other real estate owned decreased by $1.7 million and $5.7 million during the three and six months ended June 30, 2013, when compared to the same periods in 2012. Also during the second quarter of 2013, we reversed a $2.0 million allowance for off-balance sheet exposures that was specifically related to a letter of credit. During the second quarter of 2013, this letter of credit was funded and accordingly, the allowance for off balance sheet exposure was reduced. Concurrently, we recorded a specific allowance in our allowance for loan losses related to this funded loan.
During the three and six months ended June 30, 2013, Pinnacle Financial recorded income tax expense of $7.0 million and $13.6 million, respectively. Pinnacle Financial's effective tax rate for the six months ended June 30, 2013 and 2012 of 32.9% and 33.2%, 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 56.2% and 57.8% for the three and six months ended June 30, 2013, compared to 67.7% and 70.1% for the same periods in 2012.
Net income available to common stockholders for the three and six months ended June 30, 2013 was $14.3 million and $27.8 million compared to net income available to common stockholders of $7.8 million and $15.0 million for the same periods 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 and six months ended June 30, 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 charges of $2.7 million and $3.8 million for the same prior year periods.
Financial Condition. Net loans increased $213.9 million during the six months ended June 30, 2013. Total deposits were $4.097 billion at June 30, 2013, compared to $4.015 billion at December 31, 2012, an increase of $81.4 million, or 2.0%.
Capital and Liquidity. At June 30, 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 June 30, 2013, we had approximately $11.2 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.

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Table of Contents
Results of Operations

The following is a summary of our results of operations (dollars in thousands,
except per share data):

                           Three months ended         2013-2012          Six months ended          2013-2012
                                June 30                Percent                June 30               Percent
                                                      Increase                                     Increase
                           2013          2012        (Decrease)            2013          2012     (Decrease)
Interest income         $   47,544     $  45,954             3.5 %    $  94,700     $  91,778             3.2 %
Interest expense             3,945         5,768           (31.6 )%       8,343        12,089           (31.0 )%
Net interest income         43,599        40,186             8.5 %       86,357        79,689             8.4 %
Provision for loan
losses                       2,774           634           337.5 %        4,946         1,668           196.5 %
Net interest income
after provision for
loan losses                 40,825        39,552             3.2 %       81,411        78,021             4.3 %
Noninterest income          11,326         9,910            14.3 %       23,228        19,859            17.0 %
Noninterest expense         30,862        33,917            (9.0 )%      63,302        69,735            (9.2 )%
Net income before
income taxes                21,289        15,545            36.9 %       41,337        28,145            46.9 %
Income tax expense           6,978         5,106            36.7 %       13,578         9,340            45.4 %
Net income                  14,311        10,440            37.1 %       27,759        18,805            47.6 %
Preferred dividends
and discount
accretion                        -         2,655          (100.0 )%           -         3,814          (100.0 )%
  Net income
available to common
stockholders            $   14,311     $   7,785            83.8 %    $  27,759     $  14,991            85.2 %
Basic net income  per
common share
available to
common stockholders     $     0.42     $    0.23            82.6 %    $    0.81     $    0.44            84.1 %
Diluted net income
 per common share
available
  to common
stockholders            $     0.42     $    0.23            82.6 %    $    0.81     $    0.44            84.1 %

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 $43.6 million and $86.4 million for the three and six months ended June 30, 2013, an increase of $3.4 million and $6.7 million from the levels recorded in the same periods of 2012. We were able to increase net interest income during the six months ended June 30, 2013 compared to the same period in 2012 due primarily to our focus on growing our loan portfolio and reducing our funding costs.

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 six months ended June 30, 2013 and 2012 (dollars in thousands):

                                      Three months ended                                  Three months ended
                                         June 30, 2013                                      June 30, 2012
                          Average                                             Average
                          Balances        Interest       Rates/ Yields       Balances        Interest       Rates/ Yields
Interest-earning
assets:
Loans (1)               $  3,845,476     $   42,149                4.41 %   $ 3,402,671     $   39,288                4.65 %
Securities:
Taxable                      575,611          3,651                2.54 %       635,678          4,454                2.82 %
Tax-exempt (2)               170,358          1,484                4.66 %       183,117          1,648                4.83 %
Federal funds sold
and other                    119,089            260                1.04 %       144,249            564                1.70 %
Total
interest-earning
assets                     4,710,534     $   47,544                4.10 %     4,365,715     $   45,954                4.29 %
Nonearning assets
Intangible assets            248,439                                            250,974
Other nonearning
assets                       251,627                                            230,894
Total assets            $  5,210,600                                        $ 4,847,583

Interest-bearing
liabilities:
Interest bearing
deposits:
Interest checking       $    790,043     $      536                0.27 %   $   685,353     $      781                0.46 %
Savings and money
market                     1,581,868          1,381                0.35 %     1,540,755          1,967                0.51 %
Time                         578,764          1,039                0.72 %       654,538          1,551                0.95 %
Total
interest-bearing
deposits                   2,950,675          2,956                0.40 %     2,880,646          4,299                0.60 %
Securities sold under
agreements to
repurchase                   129,550             71                0.22 %       130,711            115                0.36 %
Federal Home Loan
Bank advances                293,581            223                0.31 %       232,606            616                1.07 %
Subordinated debt
 and other borrowings        102,573            695                2.72 %       101,872            738                2.91 %
Total
interest-bearing
liabilities                3,476,379          3,945                0.46 %     3,345,835          5,768                1.27 %
Noninterest-bearing
deposits                   1,012,718              0                0.00 %       755,594              0                0.00 %
Total deposits and
interest-bearing
liabilities                4,489,097     $    3,945                0.35 %     4,101,429     $    5,768                0.57 %
Other liabilities             21,944                                             27,313
Stockholders' equity         699,559                                            718,841
Total liabilities and
stockholders' equity    $  5,210,600                                        $ 4,847,583
Net interest income                      $   43,599                                         $   40,186
Net interest spread
(3)                                                                3.65 %                                             3.60 %
Net interest margin
(4)                                                                3.77 %                                             3.76 %

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 June 30, 2013 would have been 3.75% compared to a net interest spread of 3.73% for the three months ended June 30, 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.

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Six months ended Six months ended
June 30, 2013 June 30, 2012
Average Average
Balances Interest Rates/ Yields Balances Interest Rates/ Yields
Interest-earning
assets:
Loans (1) $ 3,764,033 $ 83,663 4.49 % $ 3,341,350 $ 77,927 4.70 % Securities:
Taxable 556,885 7,322 2.65 % 662,162 9,383 2.85 % Tax-exempt (2) 173,240 3,140 4.88 % 184,990 3,351 4.86 % Federal funds sold
and other 118,290 575 1.14 % 152,840 1,117 1.59 % Total
interest-earning
assets 4,612,448 $ 94,700 4.19 % 4,341,342 $ 91,778 4.31 % Nonearning assets
Intangible assets 248,688 251,321 Other nonearning
assets 240,787 241,558 Total assets $ 5,101,923 $ 4,834,221

Interest-bearing
liabilities:
Interest bearing
deposits:
Interest checking $ 782,631 $ 1,142 0.29 % $ 675,111 $ 1,606 0.48 % Savings and money
market 1,607,151 3,005 0.38 % 1,541,063 4,109 0.54 % Time 583,873 2,221 0.77 % 671,810 3,412 1.02 % Total
interest-bearing
deposits 2,973,655 6,368 0.43 % 2,887,984 9,127 0.64 % Securities sold under
agreements to
repurchase 130,141 149 0.23 % 130,301 271 0.42 % Federal Home Loan
Bank advances 196,822 414 0.42 % 235,591 1,226 1.05 % Subordinated debt
and other borrowings 104,663 1,412 2.72 % 99,674 1,465 2.96 % Total
interest-bearing
liabilities 3,405,281 8,343 0.49 % 3,353,550 12,089 1.28 % Noninterest-bearing
deposits 982,951 0 0.00 % 728,724 0 0.00 % Total deposits and
interest-bearing
liabilities 4,388,232 $ 8,343 0.38 % 4,082,274 $ 12,089 0.60 % Other liabilities 19,759 32,633 Stockholders' equity 693,932 719,314 Total liabilities and
stockholders' equity $ 5,101,923 $ 4,834,221 Net interest income $ 86,357 $ 79,689 Net interest spread
(3) 3.70 % 3.59 % Net interest margin
(4) 3.83 % 3.75 %

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 six months ended June 30, 2013 would have been 3.81% compared to a net interest spread of 3.72% for the six months ended June 30, 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 months ended June 30, 2013 and 2012, our net interest spread was 3.65% and 3.60%, respectively, while the net interest margin was 3.77% and 3.76%, respectively. For the six months ended June 30 , 2013 and 2012 our net interest spread was 3.70% and 3.59%, respectively, while the net interest margin was 3.83% and 3.75%, 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 and six months ended June 30, 2013, total funding rates were less than those rates for the same periods in the prior year for both the three and six month periods by 22 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. However, we believe future decreases in our funding costs will become more limited compared to recent periods.

Additionally, lower levels of nonaccrual loans positively impacted our net interest margin during the three and six months ended June 30, 2013 when compared to the same periods in 2012. Average nonaccrual loans were $22.3 million for the six months ended June 30, 2013, which was a decrease from $43.8 million for the six months ended June 30, 2012.

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 throughout the remainder of 2013 and into 2014. As a result, we anticipate loan yields will continue to remain depressed in 2013 and into 2014.

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

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Table of Contents

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 1.75 % at June 30, 2013. Our allowance for loan losses as a percentage of our nonaccrual loans has increased from 304.2% at December 31, 2012 to 334.1% at June 30, 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 June 30, 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 $2.8 million and $0.6 million for the three months ended June 30, 2013 and 2012, respectively, and $4.9 million and $1.7 million for the six months ended June 30, 2013 and 2012, respectively. Provision expense for the three and six months ended June 30, 2013 has increased as compared to the same period in 2012, primarily due to increased loan growth and costs for continued resolution of troubled assets.

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 and six months ended June 30, 2013 and 2012 (in thousands):

                           Three months ended          2013-2012          Six months ended          2013-2012
                                June 30,                Percent               June 30,               Percent
                                                       Increase                                     Increase
                           2013           2012        (Decrease)            2013          2012     (Decrease)
Noninterest income:
Service charges on
deposit accounts        $     2,541     $   2,439             4.2 %    $   5,021     $   4,763             5.4 %
Investment services           1,895         1,611            17.7 %        3,688         3,258            13.2 %
Insurance sales
commissions                   1,108         1,141            (2.9 )%       2,501         2,428             3.0 %
Gains on mortgage
loans sold, net               1,949         1,457            33.8 %        3,804         2,951            28.9 %
Gain (loss) on sale
of investment
securities, net                 (25 )          99          (125.5 )%         (25 )         213          (111.9 )%
Trust fees                      880           770            14.3 %        1,824         1,566            16.5 %
Other noninterest
income:
ATM and other
consumer fees                 1,888         1,395            35.3 %        3,695         2,860            29.2 %
Bank-owned life
insurance                       701           229           206.1 %          971           481           101.9 %
Other noninterest
income                          389           769           (49.4 )%       1,749         1,340            30.5 %
Total other
noninterest income            2,978         2,393            24.5 %        6,415         4,679            37.1 %
Total noninterest
income                  $    11,326     $   9,910            14.3 %    $  23,228     $  19,859            17.0 %

The increase in service charges on deposit accounts in 2013 compared to the first six 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 six months ended June 30, 2013 and 2012, commissions and fees from investment services at our financial advisory unit, Pinnacle Asset Management, a division of Pinnacle Bank, totaled $3.7 million and $3.3 million, respectively. At June 30, 2013, Pinnacle Asset Management was receiving commissions and fees in connection with approximately $1.4 billion in brokerage assets held with Raymond James Financial Services, Inc. compared to $1.2 billion at June 30, 2012. Insurance commissions were approximately $1.1 million and $2.5 million for the three and six months ended June 30, 2013 compared to approximately $1.1 million and $2.4 million for the three and six months ended June 30, 2012. Substantially all of our insurance revenue is attributable to our insurance subsidiary, Miller Loughry Beach. Included in insurance income for the first six months of 2013 was $333,000 of contingent income received in the first quarter of 2013 based on 2012 sales production compared to $287,000 recorded in the first quarter in 2012. Additionally, at June 30, 2013, our trust department was receiving fees on approximately $630.3 million of managed assets compared to $462.5 million at June 30, 2012. Accordingly, trust fees increased by 16.5% between the two year-to-date periods presented.

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 $1.9 million and $3.8 million for the three and six months ended June 30, 2013 as compared to $1.5 million and $3.0 million for the same period in the prior year.

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