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PNFP > SEC Filings for PNFP > Form 10-Q on 2-May-2014All Recent SEC Filings

Show all filings for PINNACLE FINANCIAL PARTNERS INC

Form 10-Q for PINNACLE FINANCIAL PARTNERS INC


2-May-2014

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, 2014 and December 31, 2013 and our results of operations for the three months ended March 31, 2014 and 2013. 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

Our diluted net income per common share for the three months ended March 31, 2014 was $0.47 and $0.39 for the same period in 2013. At March 31, 2014, loans had increased to $4.182 billion, as compared to $4.144 billion at December 31, 2013, and total deposits decreased to $4.501 billion at March 31, 2014 from $4.533 billion at December 31, 2013.

Results of Operations. Our net interest income increased $3.1 million to $45.9 million for the first quarter of 2014 compared to $42.8 million for the first quarter of 2013. The net interest margin (the ratio of net interest income to average earning assets) for the three months ended March 31, 2014 was 3.76% compared to 3.90% for the same period in 2013.

Our provision for loan losses was $488,000 for the three months ended March 31, 2014 compared to $2.2 million for the same period in 2013. Our provision expense correlates with the growth in our net loans offset by an overall reduction in the amount of our allowance for loan losses as a result of improvements in our loan portfolio. Net charge-offs were $934,000 for the three months ended March 31, 2014, compared to $2.2 million in the prior year. Our allowance for loan losses as a percentage of total loans decreased from 1.64% at December 31, 2013 to 1.61% at March 31, 2014, as a result of improving credit metrics within our loan portfolio.
Noninterest income increased by $834,000 during the three months ended March 31, 2014, compared to the same period in the prior year. These increases are primarily attributable to continued growth in our wealth management businesses as well as increases in other noninterest income. These increases were offset by a reduction in income related to mortgage loans sold. 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 increased by $1.2 million during the three months ended March 31, 2014, as compared to the three months ended March 31, 2013, primarily as a result of increased salaries and employment benefits. Costs associated with the disposal and maintenance of other real estate owned decreased by $70,000 during the three months ended March 31, 2014, when compared to the same period in 2013.
During the three months ended March 31, 2014, Pinnacle Financial recorded income tax expense of $8.1 million. Pinnacle Financial's effective tax rate for the three months ended March 31, 2014 and 2013 of 33.2% and 32.9%, 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 57.4% for the three months ended March 31, 2014, compared to 59.4% for the same period in 2013. Net income for the three months ended March 31, 2014 was $16.4 million compared to $13.4 million for the same period in 2013.
Financial Condition. Net loans increased $37.6 million, or 0.9% during the three months ended March 31, 2014. Total deposits were $4.501 billion at March 31, 2014, compared to $4.533 billion at December 31, 2013, a decrease of $32.9 million, or 0.7%.


At March 31, 2014, 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 March 31, 2014, we had approximately $23.1 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, 2013.
Results of Operations

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

                                                         Three months ended          2014-2013
                                                              March 31               Percent
                                                                                    Increase
                                                         2014          2013        (Decrease)
Interest income                                       $   49,291     $  47,156             4.5 %
Interest expense                                           3,383         4,398           (23.1 )%
Net interest income                                       45,908        42,758             7.4 %
Provision for loan losses                                    488         2,172           (77.6 )%
Net interest income after provision for loan losses       45,420        40,585            11.9 %
Noninterest income                                        12,736        11,902             7.0 %
Noninterest expense                                       33,650        32,440             3.7 %
Net income before income taxes                            24,507        20,048            22.2 %
Income tax expense                                         8,140         6,600            23.3 %
  Net Income                                          $   16,367     $  13,448            21.7 %

Basic net income per common share                     $     0.47     $    0.40            17.5 %

Diluted net income per common share                   $     0.47     $    0.39            20.5 %

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 $45.9 million for the three months ended March 31, 2014, an increase of $3.1 million from the levels recorded in the same period of 2013. We were able to increase net interest income during the three months ended March 31, 2014 compared to the same period in 2013 due primarily to our focus on growing our loan portfolio as average loans for the three months ended March 31, 2014 were 12.2% greater than average balances for the same period in 2013 and reducing our funding costs between the two periods.


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 months ended March 31, 2014 and 2013 (dollars in thousands):

                                      Three months ended                                  Three months ended
                                        March 31, 2014                                      March 31, 2013
                          Average                                             Average
                          Balances        Interest       Rates/ Yields       Balances        Interest       Rates/ Yields
Interest-earning
assets:
Loans (1)               $  4,130,289     $   43,696                4.30 %   $ 3,681,686     $   41,514                4.58 %
Securities:
Taxable                      573,330          3,720                2.63 %       537,951          3,671                2.77 %
Tax-exempt (2)               175,209          1,598                4.94 %       176,153          1,656                5.09 %
Federal funds sold
and other                    144,864            277                0.92 %       117,483            315                1.25 %
Total
interest-earning
assets                     5,023,692     $   49,291                4.04 %     4,513,273     $   47,156                4.30 %
Nonearning assets
Intangible assets            247,360                                            248,940
Other nonearning
assets                       242,979                                            229,805
Total assets            $  5,514,031                                        $ 4,992,018

Interest-bearing
liabilities:
Interest bearing
deposits:
Interest checking       $    921,034     $      429                0.19 %   $   775,136     $      606                0.32 %
Savings and money
market                     1,951,787          1,427                0.30 %     1,632,715          1,624                0.40 %
Time                         507,929            739                0.59 %       589,038          1,182                0.81 %
Total
interest-bearing
deposits                   3,380,750          2,595                0.31 %     2,996,889          3,412                0.46 %
Securities sold under
agreements to
repurchase                    62,500             31                0.20 %       130,740             78                0.24 %
Federal Home Loan
Bank advances                 83,787            123                0.59 %        98,989            191                0.78 %
Subordinated debt and
other borrowings              98,651            634                2.61 %       106,777            717                2.72 %
Total
interest-bearing
liabilities                3,625,688          3,383                0.38 %     3,333,395          4,398                0.54 %
Noninterest-bearing
deposits                   1,128,743              -                   -         952,853              -                   -
Total deposits and
interest-bearing
liabilities                4,754,431     $    3,383                0.29 %     4,286,248     $    4,398                0.42 %
Other liabilities             18,857                                             17,529
Stockholders' equity         740,743                                            688,241
Total liabilities and
stockholders' equity    $  5,514,031                                        $ 4,992,018
Net interest income                      $   45,908                                         $   42,758
Net interest spread
(3)                                                                3.66 %                                             3.76 %
Net interest margin
(4)                                                                3.76 %                                             3.90 %

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, 2014 would have been 3.75% compared to a net interest spread of 3.88% for the three months ended March 31, 2013.

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 March 31, 2014 and 2013, our net interest spread was 3.66% and 3.76%, respectively, while the net interest margin was 3.76% and 3.90%, respectively. A reduction in loan yields between the first quarter of 2014 and the first quarter of 2013 was the primary reason for the decline in the margin and spread. During the three months ended March 31, 2014, total funding rates were less than those rates for the same period in the prior year by 13 basis points. The net decrease was largely caused 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 months ended March 31, 2014 when compared to the same period in 2013. Average nonaccrual loans were $16.1 million for the three months ended March 31, 2014, which was a decrease from $22.3 million of average nonaccrual loans for the three months ended March 31, 2013.

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 2014.

We continue to believe our net interest income should increase throughout 2014 compared to 2013 primarily due to an increase in average earning asset volumes, primarily loans. We anticipate funding these increased earning assets by growing our core deposits and with wholesale funding limited to that required to fund the shortfall, if any.

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 1.64% at December 31, 2013 to 1.61% at March 31, 2014. Our allowance for loan losses as a percentage of our nonaccrual loans has increased from 373.8% at December 31, 2013 to 432.7% at March 31, 2014.

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, 2014. 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 $488,000 and $2.2 million for the three months ended March 31, 2014 and 2013, respectively. Provision expense is impacted by the absolute level of loans, loan growth, the credit quality of the loan portfolio and the amount of net charge-offs.


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, 2014 and 2013 (dollars in thousands):

                                        Three months ended          2014-2013
                                             March 31,              Percent
                                                                   Increase
                                         2014          2013       (Decrease)
Noninterest income:
Service charges on deposit accounts   $    2,791     $  2,480            12.5 %
Investment services                        2,128        1,793            18.7 %
Insurance sales commissions                1,385        1,393            (0.6 )%
Gains on mortgage loans sold, net            952        1,813           (47.5 )%
Trust fees                                 1,146          944            21.3 %
Other noninterest income:
ATM and other consumer fees                2,225        1,807            23.1 %
Bank-owned life insurance                    616          270           128.1 %
Loan swap fees                                28          473           (94.1 %)
Other equity investments                     131          167           (21.6 %)
Other noninterest income                   1,334          761            75.3 %
Total other noninterest income             4,334        3,478            24.6 %
Total noninterest income              $   12,736     $ 11,902             7.0 %

The increase in service charges on deposit accounts in the first quarter of 2014 compared to the first three months of 2013 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, 2014 and 2013, commissions and fees from investment services at our financial advisory unit, Pinnacle Asset Management, a division of Pinnacle Bank, totaled $2.1 million and $1.8 million, respectively. At March 31, 2014, Pinnacle Asset Management was receiving commissions and fees in connection with approximately $1.6 billion in brokerage assets held with Raymond James Financial Services, Inc. compared to $1.3 billion at March 31, 2013. Insurance commissions were approximately $1.4 million for the three months ended each of March 31, 2014 and March 31, 2013. Included in insurance income for the first quarter of 2014 was $243,000 of contingent income received based on 2013 sales production compared to $334,000 recorded in the first quarter of 2013. Additionally, at March 31, 2014, our trust department was receiving fees on approximately $613.4 million of managed assets compared to $516.0 million at March 31, 2013. Accordingly, trust fees increased by 21.3% 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 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. Mortgage origination fees will fluctuate from quarter to quarter as the rate environment changes. Gains on mortgage loans sold, net, were $952,200 for the three months ended March 31, 2014 as compared to $1.8 million for the same periods in the prior year.


Over the last several years, the reduced interest rates have provided home owners the opportunity to refinance their existing mortgages at low rates; however, as interest rates begin to rise, we anticipate that our mortgage originations will decrease from those levels realized in recent years. The fees from the origination and sale of mortgage loans have been netted against the commission expense associated with these originations.

Included in other noninterest income are ATM and other consumer fees, gains from bank-owned life insurance, swap fees earned for the facilitation of derivative transactions for our clients, changes in the fair value of our other equity investments and gains from loan sales. ATM revenues and other consumer fees realized in the first quarter of 2014 increased approximately $418,000 as compared to the same period in the prior year because of expansion of our card penetration rate and usage between 2013 and 2014.

Additionally, noninterest income included changes in the cash surrender value of bank-owned life insurance which was $616,000 for the three months ended March 31, 2014 compared to $270,000 for the three months ended March 31, 2013. The increase in earnings on these bank-owned life insurance policies resulted primarily from the 2013 purchase of approximately $38 million in additional 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.

Also, during the first quarter of 2014 we recognized approximately $131,000 in gains in the market value of our other equity investments compared to $167,000 in the prior year's comparable period.

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, 2014 and 2013 (in thousands):

                                         Three months ended          2014-2013
                                              March 31,              Percent
                                                                    Increase
                                          2014          2013       (Decrease)
Noninterest expense:
Salaries and employee benefits:
Salaries                               $   12,455     $ 11,444             8.8 %
Commissions                                 1,337        1,119            19.5 %
Cash incentives                             3,375        2,850            18.4 %
Employee benefits and other                 4,583        4,159            10.2 %
Total salaries and employee benefits       21,750       19,572            11.1 %
Equipment and occupancy                     5,709        5,113            11.7 %
Other real estate expense                     651          721            (9.7 )%
Marketing and business development            909          791            15.0 %
Postage and supplies                          561          591            (5.2 )%
Amortization of intangibles                   238          521           (54.4 )%
Other noninterest expense                   3,832        5,130           (25.3 )%
Total noninterest expense              $   33,650     $ 32,440             3.7 %

Total salaries and employee benefits expenses increased approximately 11.1% for the first quarter of 2014 over the same period in 2013. The increase in salaries is the result of our annual merit increases being effective January 1 as well as the overall increase in our associate base. At March 31, 2014, our associate base had expanded to 744.0 full-time equivalent associates as compared to 720.5 at March 31, 2013.


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 plans. As compared to 2013, cash incentives increased by $525,000 to $3.4 million for the three months ended March 31, 2014. 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 125% of our targeted bonus. We currently believe that our performance for fiscal 2014 will exceed our targets and we are currently accruing incentive costs for the cash incentive plan in 2014 above target levels at the maximum award level, which is 125% of targeted awards.

Employee benefits include 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, 2014, were approximately $1.2 million of compensation expenses related to restricted share awards and performance unit awards compared to $950,000 for the three months ended March 31, 2013. We provide a broad-based equity incentive plan for all associates. We believe that equity incentives provide an excellent vehicle for all associates to become meaningful stockholders of Pinnacle Financial over an extended period of time and create a stockholder-centric culture throughout our organization.

Equipment and occupancy expenses for the three months ended March 31, 2014, increased $596,000 as compared to the same period in the prior year. We expanded our retail operations in the second quarter of 2013 in the Knoxville market with the opening of our Cedar Bluff location and also increased our leased space at our corporate headquarters in downtown Nashville, Tennessee, in the first quarter of 2014. In future periods, these expansions may lead to higher equipment and occupancy expenses as well as related increases in salaries and benefits expense.

At March 31, 2014, we had $15.0 million in OREO assets compared to $15.2 million at December 31, 2013. Other real estate expense was $651,000 for the three months ended March 31, 2014, compared to $721,000 for the same period in the prior year. Approximately $143,000 of the other real estate expense incurred during the three months ended March 31, 2014, was realized losses on dispositions and holding losses due to reduced valuations of OREO properties compared to $665,000 for the same period in the prior year. The remaining other real estate expense consisted of carrying costs to maintain or improve the properties.

The decrease in intangible amortization expense between the three months ended March 31, 2014 as compared to the same periods in March 31, 2013 was . . .

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