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PNFP > SEC Filings for PNFP > Form 10-Q on 1-Nov-2013All Recent SEC Filings

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Form 10-Q for PINNACLE FINANCIAL PARTNERS INC


1-Nov-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 September 30, 2013 and December 31, 2012 and our results of operations for the three and nine months ended September 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 nine months ended September 30, 2013 was $0.42 and $1.23 compared to $0.33 and $0.76 for the same periods in 2012. At September 30, 2013, loans had increased to $3.969 billion, as compared to $3.712 billion at December 31, 2012, and total deposits increased to $4.334 billion at September 30, 2013 from $4.015 billion at December 31, 2012.

Results of Operations. Our net interest income increased $3.6 million to $44.6 million for the third quarter of 2013 compared to $40.9 million for the third quarter of 2012. Our net interest income increased $10.3 million to $130.9 million for the nine months ended September 30, 2013 compared to $120.6 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 nine months ended September 30, 2013 was 3.72% and 3.80%, respectively, compared to 3.78% and 3.76% for the same periods in 2012.
Our provision for loan losses was $0.7 million and $5.6 million for the three and nine months ended September 30, 2013 compared to $1.4 million and $3.1 million for the same periods in 2012. 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 $2.1 million and $7.8 million for the three and nine months ended September 30, 2013, compared to $1.9 million and $8.0 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 1.70% at September 30, 2013, as a result of improving credit metrics within our loan portfolio.
Noninterest income increased by $1.0 million and $4.3 million during the three and nine months ended September 30, 2013, compared to the same periods in the prior year. These increases are 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), interest rate swap fee transactions for commercial borrowers and gains from the sale of loans that occur from time to time.
Noninterest expense decreased by $0.3 million and $6.7 million during the three and nine months ended September 30, 2013, as compared to the three and nine months ended September 30, 2012. Costs associated with the disposal and maintenance of other real estate owned decreased by $1.7 million and $7.4 million during the three and nine months ended September 30, 2013, when compared to the same periods in 2012.
During the three and nine months ended September 30, 2013, Pinnacle Financial recorded income tax expense of $7.3 million and $20.9 million, respectively.
Pinnacle Financial's effective tax rate for the nine months ended September 30, 2013 and 2012 of 33.0% and 32.3%, 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 59.5% and 58.4% for the three and nine months ended September 30, 2013, compared to 65.4% and 68.5% for the same periods in 2012.
Net income available to common stockholders for the three and nine months ended September 30, 2013 was $14.6 million and $42.4 million compared to $11.3 million and $26.3 million for the same periods in 2012. Net income available to common stockholders for the nine months ended September 30, 2012 included charges related to preferred stock dividends and accretion of the preferred stock discount related to our participation in the TARP Capital Purchase Program of $3.8 million.
Financial Condition. Net loans increased $259.3 million, or 6.9% during the nine months ended September 30, 2013. Total deposits were $4.334 billion at September 30, 2013, compared to $4.015 billion at December 31, 2012, an increase of $318.4 million, or 7.9%.
Capital and Liquidity. At September 30, 2013, our capital ratios, including our bank's capital ratios, exceeded those levels necessary to be considered well-capitalized under applicable regulatory guidelines. From time to time we may be required to support the capital needs of our bank. At September 30, 2013, we had approximately $16.8 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.
On October 15, 2013, our board of directors approved the initiation of a quarterly cash dividend. The initial dividend of $0.08 per share will be paid on December 20, 2013 to shareholders of record at the close of business on November 26, 2013. The amount and timing of all future dividend payments is subject to the discretion of Pinnacle Financial's board of directors and will depend on Pinnacle Financial's earnings, capital position, financial condition and other factors, including new regulatory capital requirement, as they become known to us.
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 (dollars in thousands,
except per share data):

                           Three months ended          2013-2012         Nine months ended           2013-2012
                              September 30             Percent             September 30             Percent
                                                      Increase                                      Increase
                           2013          2012        (Decrease)            2013          2012      (Decrease)
Interest income         $   48,177     $  46,441             3.7 %    $ 142,878     $ 138,218              3.4 %
Interest expense             3,604         5,509           (34.6 )%      11,948        17,597            (32.1 )%
Net interest income         44,573        40,932             8.9 %      130,930       120,621              8.5 %
Provision for loan
losses                         685         1,413           (51.5 )%       5,631         3,080             82.8 %
Net interest income
after provision for
loan losses                 43,888        39,519            11.1 %      125,299       117,541              6.6 %
Noninterest income          11,387        10,430             9.2 %       34,615        30,289             14.3 %
Noninterest expense         33,323        33,579            (0.8 )%      96,625       103,314             (6.5 )%
Net income before
income taxes                21,952        16,370            34.1 %       63,289        44,516             42.2 %
Income tax expense           7,305         5,022            45.5 %       20,884        14,362             45.4 %
Net income                  14,647        11,348            29.1 %       42,405        30,154             40.6 %
Preferred dividends
and discount
accretion                        -             -               -              -         3,814           (100.0 )%
  Net income
available to common
stockholders            $   14,647     $  11,348            29.1 %    $  42,405     $  26,340             61.0 %

Basic net income  per
common share
available tocommon
stockholders            $     0.43     $    0.33            30.3 %    $    1.24     $    0.78             59.0 %
Diluted net income
 per common share
available
Diluted net income
per common share
available to common
stockholders            $     0.42     $    0.33            27.3 %    $    1.23     $    0.76             61.8 %

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 $44.6 million and $130.9 million for the three and nine months ended September 30, 2013, an increase of $3.6 million and $10.3 million from the levels recorded in the same periods of 2012. We were able to increase net interest income during the nine months ended September 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 nine months ended September 30, 2013 and 2012 (dollars in thousands):

                                      Three months ended                                  Three months ended
                                      September 30, 2013                                  September 30, 2012
                          Average                                             Average
                          Balances        Interest       Rates/ Yields       Balances        Interest       Rates/ Yields
Interest-earning
assets:
Loans (1)               $  3,932,218     $   42,778                4.33 %   $ 3,488,736     $   40,405                4.62 %
Securities:
Taxable                      571,985          3,538                2.45 %       585,782          3,974                2.70 %
Tax-exempt (2)               167,640          1,601                5.06 %       180,765          1,622                4.77 %
Federal funds sold
and other                    153,709            260                0.80 %       124,459            440                1.55 %
Total
interest-earning
assets                     4,825,552     $   48,177                4.02 %     4,379,742     $   46,441                4.28 %
Nonearning assets
Intangible assets            248,095                                            250,274
Other nonearning
assets                       239,356                                            230,378
Total assets            $  5,313,003                                        $ 4,860,394

Interest-bearing
liabilities:
Interest bearing
deposits:
Interest checking       $    783,623     $      400                0.20 %   $   672,057     $      637                0.38 %
Savings and money
market                     1,755,037          1,370                0.31 %     1,606,189          1,959                0.49 %
Time                         559,587            938                0.66 %       627,918          1,390                0.88 %
Total
interest-bearing
deposits                   3,098,247          2,708                0.35 %     2,906,164          3,986                0.55 %
Securities sold under
agreements to
repurchase                   110,123             56                0.20 %       136,918             99                0.29 %
Federal Home Loan
Bank advances                181,392            173                0.38 %       214,271            621                1.15 %
Subordinated debt
 and other borrowings        100,995            667                2.62 %       112,406            802                2.84 %
Total
interest-bearing
liabilities                3,490,757          3,604                0.41 %     3,369,759          5,508                0.65 %
Noninterest-bearing
deposits                   1,100,532              -                0.00 %       799,508              -                0.00 %
Total deposits and
interest-bearing
liabilities                4,591,289     $    3,604                0.31 %     4,169,267     $    5,508                0.53 %
Other liabilities             16,439                                             21,454
Stockholders' equity         705,275                                            669,673
Total liabilities and
stockholders' equity    $  5,313,003                                        $ 4,860,394
Net interest income                      $   44,573                                         $   40,933
Net interest spread
(3)                                                                3.61 %                                             3.63 %
Net interest margin
(4)                                                                3.72 %                                             3.78 %

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 September 30, 2013 would have been 3.71% compared to a net interest spread of 3.76% for the three months ended September 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.


                                      Nine months ended                                  Nine months ended
                                      September 30, 2013                                September 30, 2012
                          Average                                            Average
                          Balances       Interest       Rates/ Yields       Balances       Interest       Rates/ Yields
Interest-earning
assets:
Loans (1)               $  3,820,711     $ 126,442                4.44 %   $ 3,390,838     $ 118,330                4.67 %
Securities:
Taxable                      561,974        10,860                2.58 %       636,516        13,357                2.80 %
Tax-exempt (2)               171,352         4,741                4.94 %       183,572         4,973                4.83 %
Federal funds sold
and other                    130,226           835                1.01 %       143,311         1,558                1.58 %
Total
interest-earning
assets                     4,684,263     $ 142,878                4.14 %     4,354,237     $ 138,218                4.30 %
Nonearning assets
Intangible assets            248,488                                           250,969
Other nonearning
assets                       240,305                                           237,805
Total assets            $  5,173,056                                       $ 4,843,011

Interest-bearing
liabilities:
Interest bearing
deposits:
Interest checking       $    782,965     $   1,537                0.26 %   $   674,086     $   2,243                0.44 %
Savings and money
market                     1,656,988         4,381                0.35 %     1,562,930         6,068                0.52 %
Time                         575,689         3,159                0.73 %       657,073         4,802                0.98 %
Total
interest-bearing
deposits                   3,015,642         9,077                0.40 %     2,894,089        13,113                0.61 %
Securities sold under
agreements to
repurchase                   123,395           204                0.22 %       132,523           370                0.37 %
Federal Home Loan
Bank advances                191,622           587                0.41 %       228,378         1,847                1.08 %
Subordinated debt
 and other borrowings        103,427         2,079                2.69 %       104,003         2,267                2.91 %
Total
interest-bearing
liabilities                3,434,086        11,948                0.46 %     3,358,993        17,597                0.70 %
Noninterest-bearing
deposits                   1,022,576             -                0.00 %       752,491             -                0.00 %
Total deposits and
interest-bearing
liabilities                4,456,662     $  11,948                0.36 %     4,111,484     $  17,597                0.57 %
Other liabilities             18,639                                            28,881
Stockholders' equity         697,755                                           702,646
Total liabilities and
stockholders' equity    $  5,173,056                                       $ 4,843,011
Net interest income                      $ 130,930                                         $ 120,621
Net interest spread
(3)                                                               3.67 %                                            3.60 %
Net interest margin
(4)                                                               3.80 %                                            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 nine months ended September 30, 2013 would have been 3.78% compared to a net interest spread of 3.73% for the nine months ended September 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 September 30, 2013 and 2012, our net interest spread was 3.61% and 3.63%, respectively, while the net interest margin was 3.72% and 3.78%, respectively. A reduction in loan yields between the third quarter of 2013 and the third quarter of 2012 was the primary reason for the decline in the margin and spread. For the nine months ended September 30, 2013 and 2012 our net interest spread was 3.67% and 3.60%, respectively, while the net interest margin was 3.80% and 3.76%, respectively. The improving net interest margin when comparing the nine months ended September 30, 2013 to the comparable period in 2012 reflected management's efforts to maximize earnings by focusing on loan growth and reduced deposit pricing. During the three and nine months ended September 30, 2013, total funding rates were less than those rates for the same periods in the prior year for both the three and nine 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. 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 nine months ended September 30, 2013 when compared to the same periods in 2012. Average nonaccrual loans were $21.0 million for the nine months ended September 30, 2013, which was a decrease from $40.1 million of average nonaccrual loans for the nine months ended September 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.

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 1.70% at September 30, 2013. Our allowance for loan losses as a percentage of our nonaccrual loans has increased from 304.2% at December 31, 2012 to 336.6% at September 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 September 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 $0.7 million and $1.4 million for the three months ended September 30, 2013 and 2012, respectively, and $5.6 million and $3.1 million for the nine months ended September 30, 2013 and 2012, respectively. Provision expense is impacted by the absolute level of loans, loan growth, by the credit quality of the loan portfolio and the 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 nine months ended September 30, 2013 and 2012 (dollars in thousands):

                           Three months ended          2013-2012         Nine months ended            2013-2012
                             September 30,             Percent             September 30,             Percent
                                                      Increase                                       Increase
                           2013          2012        (Decrease)             2013          2012      (Decrease)
Noninterest income:
Service charges on
deposit accounts        $    2,797     $   2,532            10.5 %    $    7,818     $   7,295              7.2 %
Investment services          1,956         1,677            16.6 %         5,644         4,934             14.4 %
Insurance sales
commissions                  1,021           987             3.5 %         3,522         3,416              3.1 %
Gains on mortgage
loans sold, net              1,326         1,979           (33.0 )%        5,130         4,930              4.1 %
Gain (loss) on sale
of investment
securities, net of
OTTI                        (1,441 )         (50 )       2,795.0 %        (1,466 )         163         (1,001.2 )%
Trust fees                     932           767            21.4 %         2,756         2,333             18.2 %
Other noninterest
income:
ATM and other
consumer fees                1,976         1,657            19.3 %         5,671         4,517             25.6 %
Bank-owned life
insurance                      568           242           134.7 %         1,539           723            112.9 %
Loan swap fees                 268            20         1,240.0 %           665           130            411.5 %
Alternative
investments                    (46 )         (49 )          (6.1 %)          122          (118 )         (203.4 %)
Other noninterest
income                       2,030           668           204.0 %         3,214         1,966             63.5 %
Total other
noninterest income           4,796         2,538            89.0 %        11,211         7,218             55.3 %
Total noninterest
income                  $   11,387     $  10,430             9.2 %    $   34,615     $  30,289             14.3 %

The increase in service charges on deposit accounts in 2013 compared to the first nine 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 nine months ended September 30, 2013 and 2012, commissions and fees from investment services at our financial advisory unit, Pinnacle Asset Management, a division of Pinnacle Bank, totaled $5.6 million and $4.9 million, respectively. At September 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 September 30, 2012. Insurance commissions were approximately $1.0 million and $3.5 million for the three and nine months ended September 30, 2013 compared to approximately $1.0 million and $3.4 million for the three and nine months ended September 30, 2012. Substantially all of our insurance revenue is attributable to our insurance subsidiary, Miller Loughry Beach. Included in insurance income for the first nine 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 September 30, 2013, our trust department was receiving fees on approximately $576.2 million of managed assets compared to $466.0 million at September 30, 2012. Accordingly, trust fees increased by 18.2% between the 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 . . .

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