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PNFP > SEC Filings for PNFP > Form 10-Q on 1-Aug-2014All Recent SEC Filings

Show all filings for PINNACLE FINANCIAL PARTNERS INC

Form 10-Q for PINNACLE FINANCIAL PARTNERS INC


1-Aug-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 June 30, 2014 and December 31, 2013 and our results of operations for the three and six months ended June 30, 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 and six months ended June 30, 2014 was $0.49 and $0.96 compared to $0.42 and $0.81 for the same periods in 2013. At June 30, 2014, loans had increased to $4.315 billion, as compared to $4.144 billion at December 31, 2013, and total deposits increased to $4.652 billion at June 30, 2014 from $4.533 billion at December 31, 2013.

Results of Operations. Our net interest income increased $3.6 million to $47.2 million for the second quarter of 2014 compared to $43.6 million for the second quarter of 2013. Our net interest income increased $6.8 million to $93.1 million for the six months ended June 30, 2014 compared to $86.4 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, 2014 was 3.71% and 3.73% compared to 3.77% and 3.83% for the same periods in 2013.
Our provision for loan losses was $254,000 and $742,000 for the three and six months ended June 30, 2014 compared to $2.8 million and $4.9 million for the same periods 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 $890,000 and $1.8 million for the three and six months ended June 30, 2014, compared to $3.5 million and $5.7 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 1.55% at June 30, 2014, as a result of improving credit metrics within our loan portfolio.
Noninterest income increased by $1.3 million and $2.1 million during the three and six months ended June 30, 2014, compared to the same periods in the prior year. We have experienced increases for the three and six months periods ended June 30, 2014, in each of our wealth management lines of business (trust, insurance agency and investment services) as compared to the same periods in 2013. These increases were offset by a reduction in income related to gains on residential mortgage loans sold largely due to the reduction in mortgage refinancing activity in 2014 as compared to 2013. Other noninterest income includes 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 commercial loans that occur from time to time.
Noninterest expense increased by $3.0 million and $4.2 million during the three and six months ended June 30, 2014, as compared to the three and six months ended June 30, 2013, primarily as a result of increased salaries and employment benefits resulting from annual merit increases awarded in the first quarter of 2014. Costs associated with the disposal and maintenance of other real estate owned (OREO) decreased by $1.2 million for both the three and six months ended June 30, 2014, when compared to the same periods in 2013. The reduction in OREO expense is the result of the normalization of property valuations as well as reduction of OREO inflows.
During the three and six months ended June 30, 2014, Pinnacle Financial recorded income tax expense of $8.5 million and $16.6 million, respectively, compared to $7.0 million and $13.6 million for the three and six months ended June 30, 2013. Pinnacle Financial's effective tax rate for the six months ended June 30, 2014 and 2013 of 33.2% and 32.8%, respectively, and 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 a limitation related to deductibility of meals and entertainment expense and executive compensation.
Our efficiency ratio (the ratio of noninterest expense to the sum of net interest income and noninterest income) was 56.7% and 57.0%, respectively, for the three and six months ended June 30, 2014, compared to 56.2% and 57.8% for the same periods in 2013. Net income for the three and six months ended June 30, 2014 was $17.2 million and $33.5 million, respectively, compared to $14.3 million and $27.8 million for the same periods in 2013.


Financial Condition. Net loans increased $172.1 million, or 4.2% during the six months ended June 30, 2014. Total deposits were $4.652 billion at June 30, 2014, compared to $4.533 billion at December 31, 2013, an increase of $119.0 million, or 2.6%. At June 30, 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 (Pinnacle Bank). 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          Six months ended            2014-2013
                                June 30,               Percent               June 30,                Percent
                                                      Increase                                       Increase
                           2014          2013        (Decrease)          2014          2013         (Decrease)
Interest income         $   50,564     $  47,544             6.4 %    $  99,855     $  94,700                5.4 %
Interest expense             3,338         3,945           (15.4 %)       6,721         8,343              (19.4 %)
Net interest income         47,226        43,599             8.3 %       93,134        86,357                7.8 %
Provision for loan
losses                         254         2,774           (90.8 %)         742         4,946              (85.0 %)
Net interest income
after provision for
loan losses                 46,972        40,825            15.1 %       92,392        81,411               13.5 %
Noninterest income          12,597        11,326            11.2 %       25,330        23,228                9.0 %
Noninterest expense         33,902        30,862             9.9 %       67,548        63,302                6.7 %
Net income before
income taxes                25,667        21,289            20.6 %       50,174        41,337               21.4 %
Income tax expense           8,498         6,978            21.8 %       16,637        13,578               22.5 %
  Net income            $   17,169     $  14,311            20.0 %    $  33,537     $  27,759               20.8 %

Basic net income per
common share            $     0.49     $    0.42            16.7 %    $   $0.97     $   $0.81               19.8 %

Diluted net income
per common share        $     0.49     $    0.42            16.7 %    $   $0.96     $   $0.81               18.5 %

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 $47.2 million and $93.1 million for the three and six months ended June 30, 2014, an increase of $3.6 million and $6.8 million, respectively, from the levels recorded in the same periods of 2013. We were able to increase net interest income during the six months ended June 30, 2014 compared to the same period in 2013 due primarily to our focus on growing our loan portfolio as average loans for the six months ended June 30, 2014 were 11.4% 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 and six months ended June 30, 2014 and 2013 (dollars in thousands):


                                       Three months ended                                  Three months ended
                                          June 30, 2014                                       June 30, 2013
                           Average                                             Average
                           Balances        Interest       Rates/ Yields        Balances        Interest       Rates/ Yields
Interest-earning
assets:
Loans (1)                $  4,251,900     $   45,090                4.27 %   $  3,845,476     $   42,149                4.41 %
Securities:
Taxable                       609,884          3,628                2.39 %        575,611          3,651                2.54 %
Tax-exempt (2)                172,552          1,563                4.85 %        170,358          1,484                4.66 %
Federal funds sold and
other                         153,253            283                0.87 %        119,089            260                1.04 %
Total interest-earning
assets                   $  5,187,589     $   50,564                3.97 %   $  4,710,534     $   47,544                4.10 %
Nonearning assets
Intangible assets             247,081                                             248,439
Other nonearning
assets                        238,945                                             251,627
Total assets             $  5,673,615                                        $  5,210,600

Interest-bearing
liabilities:
Interest-bearing
deposits:
Interest checking        $    911,878     $      391                0.17 %   $    790,043     $      536                0.27 %
Savings and money
market                      1,913,453          1,392                0.29 %      1,581,868          1,381                0.35 %
Time                          490,892            699                0.57 %        578,764          1,039                0.72 %
Total interest-bearing
deposits                    3,316,223          2,482                0.30 %      2,950,675          2,956                0.40 %
Securities sold under
agreements to
repurchase                     59,888             31                0.21 %        129,550             71                0.22 %
Federal Home Loan Bank
advances                      224,432            187                0.33 %        293,581            223                0.31 %
Subordinated debt and
other borrowings               99,015            638                2.58 %        102,573            695                2.72 %
Total interest-bearing
liabilities                 3,699,558          3,338                0.36 %      3,476,379          3,945                0.46 %
Noninterest-bearing
deposits                    1,202,740              -                   -        1,012,718              -                   -
Total deposits and
interest-bearing
liabilities               $ 4,902,298     $    3,338                0.27 %    $ 4,489,097     $    3,945                0.35 %
Other liabilities              14,228                                              21,944
Stockholders' equity          757,089                                             699,559
Total liabilities and
stockholders' equity     $  5,673,615                                        $  5,210,600
Net interest income                       $   47,226                                          $   43,599
Net interest spread
(3)                                                                 3.61 %                                              3.64 %
Net interest margin
(4)                                                                 3.71 %                                              3.77 %

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, 2014 would have been 3.69% compared to a net interest spread of 3.75% for the three months ended June 30, 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.


                                       Six months ended                                   Six months ended
                                        June 30, 2014                                      June 30, 2013
                          Average                                            Average
                         Balances        Interest       Rates/ Yields       Balances        Interest       Rates/ Yields
Interest-earning
assets:
Loans (1)               $ 4,191,430     $   88,785                4.28 %   $ 3,764,033     $   83,663                4.49 %
Securities:
Taxable                     591,708          7,349                2.50 %       556,885          7,322                2.65 %
Tax-exempt (2)              173,873          3,161                4.90 %       173,240          3,140                4.88 %
Federal funds sold
and other                   149,082            560                0.90 %       118,290            575                1.14 %
Total
interest-earning
assets                  $ 5,106,093     $   99,855                3.99 %   $ 4,612,448     $   94,700                4.19 %
Nonearning assets
Intangible assets           247,220                                            248,688
Other nonearning
assets                      240,951                                            240,787
Total assets            $ 5,594,264                                        $ 5,101,923

Interest-bearing
liabilities:
Interest-bearing
deposits:
Interest checking       $   916,431     $      821                0.17 %   $   782,631     $    1,142                0.29 %
Savings and money
market                    1,932,514          2,819                0.29 %     1,607,151          3,005                0.38 %
Time                        499,364          1,437                0.57 %       583,873          2,221                0.77 %
Total
interest-bearing
deposits                  3,348,309          5,077                0.30 %     2,973,655          6,368                0.43 %
Securities sold under
agreements to
repurchase                   61,187             62                0.21 %       130,141            149                0.23 %
Federal Home Loan
Bank advances               154,498            310                0.33 %       196,822            414                0.42 %
Subordinated debt and
other borrowings             98,834          1,272                2.58 %       104,663          1,412                2.72 %
Total
interest-bearing
liabilities               3,662,828          6,721                0.36 %     3,405,281          8,343                0.49 %
Noninterest-bearing
deposits                  1,165,946              -                0.00 %       982,951              -                   -
Total deposits and
interest-bearing
liabilities             $ 4,828,774     $    6,721                0.27 %   $ 4,388,232     $    8,343                0.38 %
Other liabilities            16,533                                             19,759
Stockholders' equity        748,957                                            693,932
Total liabilities and
stockholders' equity    $ 5,594,264                                        $ 5,101,923
Net interest income                     $   93,134                                         $   86,357
Net interest spread
(3)                                                               3.63 %                                             3.70 %
Net interest margin
(4)                                                               3.73 %                                             3.83 %

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, 2014 would have been 3.72% compared to a net interest spread of 3.81% for the six months ended June 30, 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 June 30, 2014 and 2013, our net interest margin was 3.71% and 3.77%, respectively. For the six months ended June 30, 2014 and 2013, our net interest margin was 3.73% and 3.83%, respectively. A reduction in loan yields between the second quarter of 2013 and the second quarter of 2014 was the primary reason for the decline in the margin. During the three and six months ended June 30, 2014, total funding rates were less than those rates for the same period in the prior year by 8 and 10 basis points, respectively. 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 and six months ended June 30, 2014 when compared to the same periods in 2013. Average nonaccrual loans were $15.9 million and $16.1 million for the three and six months ended June 30, 2014, which was a decrease from $22.3 million and $22.1 million of average nonaccrual loans for the three and six months ended June 30, 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 due to an increase in average earning asset volumes, primarily loans. We anticipate funding these increased earning assets primarily by growing our core deposits, with limited wholesale funding 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 1.55% at June 30, 2014. Our allowance for loan losses as a percentage of our nonaccrual loans has increased from 373.8% at December 31, 2013 to 426.6% at June 30, 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 June 30, 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 $254,000 and $742,000 for the three and six months ended June 30, 2014 and 2013, respectively, and $2.8 million and $4.9 million for the three and six months ended June 30, 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 and six months ended June 30, 2014 and 2013 (dollars in thousands):

                                     Three months ended      2014-2013         Six months ended       2014-2013
                                          June 30,            Percent              June 30,           Percent
                                                             Increase                                 Increase
                                      2014         2013     (Decrease)           2014       2013     (Decrease)
Noninterest income:
Service charges on deposit
accounts                           $     2,966   $  2,541          16.7 %    $   5,757   $  5,021          14.65 %
Investment services                      2,164      1,895          14.2 %        4,292      3,688          16.38 %
Insurance sales commissions              1,145      1,108           3.4 %        2,530      2,501           1.15 %
Gains on mortgage loans sold, net        1,669      1,949         (14.4 %)       2,903      3,804         (23.67 %)
Gain (loss) on sale of investment
securities, net                              -        (25 )       100.0 %            -        (25 )      (100.00 %)
Trust fees                               1,072        880          21.8 %        2,218      1,825          21.54 %
Other noninterest income:
ATM and other consumer fees              1,856      1,888          (1.7 %)       4,081      3,695          10.45 %
Bank-owned life insurance                  620        701         (11.6 %)       1,235        971          27.19 %
Loan swap fees                              89        (77 )       215.6 %          118        397         (70.28 %)
Other equity investments                   (38 )        1         100.0 %           92        168         (45.24 %)
Other noninterest income                 1,055        465         126.3 %        2,104      1,183          77.75 %
Total other noninterest income           3,582      2,978          20.3 %        7,630      6,414          18.95 %
Total noninterest income           $    12,598   $ 11,326          11.2 %    $  25,330   $ 23,228           9.04 %

The increase in service charges on deposit accounts in the first six months of 2014 compared to the first six 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 and six months ended June 30, 2014, commissions and fees from investment services at our financial advisory unit, Pinnacle Asset Management, a division of Pinnacle Bank, increased by $269,000 and $604,000 as compared to the three and six months ended June 30, 2013. At June 30, 2014, Pinnacle Asset Management was receiving commissions and fees in connection with approximately $1.7 billion in brokerage assets held with Raymond James Financial Services, Inc. compared to $1.4 billion at June 30, 2013. Insurance commissions were approximately $1.1 million and $2.5 million, respectively, for both the three and six months ended June 30, 2014 and 2013. Included in insurance income for the first six months of 2014 was $243,000 of contingent income received based on 2013 sales production compared to $334,000 recorded in the first six months of 2013. Additionally, at June 30, 2014, our trust department was receiving fees on approximately $1.6 billion of managed and custodied assets compared to $1.4 billion at June 30, 2013, resulting in an increase of 21.5% 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 $1.7 million and $2.9 million for the three and six months ended June 30, 2014 as compared to $1.9 million and $3.8 million for the same periods in the prior year as a result of decreased demand in the market.


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 rise, we anticipate that our mortgage originations will continue to 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 other items. Other noninterest income included changes in the . . .

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