Pinnacle Financial Gains Balance Sheet, Earnings Momentum in 4Q12

Pinnacle Financial Gains Balance Sheet, Earnings Momentum in 4Q12

$421 million in loan growth represents a 12.8% increase over prior year

NASHVILLE, Tenn.--(BUSINESS WIRE)-- Pinnacle Financial Partners, Inc. (Nasdaq/NGS: PNFP) today reported that its net income per diluted common share available to common stockholders was $0.34 for the quarter ended Dec. 31, 2012, compared to net income per diluted common share available to common stockholders of $0.17 for the quarter ended Dec. 31, 2011. Included in fourth quarter 2012 results was a $2.1 million charge due to a Federal Home Loan Bank (FHLB) advance restructuring that was offset by $2.0 million in gains on the sale of securities. Net income per diluted common share available to common stockholders was $1.10 for the year ended Dec. 31, 2012, compared to net income per diluted common share available to common stockholders of $1.09 for the year ended Dec. 31, 2011.

Financial results for the year ended Dec. 31, 2012 include the impact of accelerated accretion of $1.7 million for the remaining preferred stock discount associated with the second quarter redemption of the remaining outstanding shares of TARP preferred stock which, if excluded, would result in net income per fully diluted share of $1.15 for 2012. Excluding the impact of an income tax benefit of $22.5 million as a result of last year's release of a valuation allowance for deferred tax assets, net income for the year ended Dec. 31, 2011 would have been $0.43 per fully diluted common share. As a result, excluding the impact of both the accelerated accretion of the preferred stock discount and the tax benefit from the release of the valuation allowance, net income per diluted common share available to common stockholders for the year ended Dec. 31, 2012, was approximately 167.4 percent over the same period in 2011.

"This past year was a remarkable one for our firm and associates," said M. Terry Turner, Pinnacle's president and chief executive officer. "We continued to experience dramatic improvement in asset quality. Nonperforming assets as a percentage of total loans and OREO decreased from 2.66 percent at Dec. 31, 2011, to 1.11 percent at Dec. 31, 2012, during a period when our net charge-offs were just 0.29 percent. Additionally, our organic growth model regained momentum as we experienced net loan growth of 12.8 percent in 2012 and 38.7 percent growth in average non-interest bearing demand deposits. We redeemed the remaining preferred shares issued in conjunction with the TARP program with no additional common shareholder dilution. We believe we have now substantially completed the rehabilitation of our balance sheet, and we again find ourselves optimistic about our growth and profitability prospects for the coming year."

Building the Core Earnings Capacity of the Firm

• Loans at Dec. 31, 2012, were $3.712 billion, an increase of $187.0 million from Sept. 30, 2012, and $420.8 million from Dec. 31, 2011, a year-over-year growth rate of 12.8 percent. Commercial and industrial loans plus owner-occupied commercial real estate loans were $2.041 billion at Dec. 31, 2012, an increase of $159.2 million, or 8.5 percent, from Sept. 30, 2012, and $313.3 million, or 18.1 percent, from Dec. 31, 2011.

• Since expanding to Knoxville in the summer of 2007, Pinnacle has continued its strong growth in that market. The Knoxville footprint reached $641.6 million in loans at the end of fiscal year 2012, up from $594.2 million at Sept. 30, 2012, and an increase of 16.4 percent from $551.1 million at Dec. 31, 2011.

• Average balances of noninterest bearing deposit accounts were $978.4 million in the fourth quarter of 2012, up 22.4 percent over third quarter of 2012 and 38.7 percent over the same quarter last year.

• Revenues for the quarter ended Dec. 31, 2012 were $55.4 million, compared to $49.0 million for the same quarter of last year. Excluding securities gains, revenues for the quarter ended Dec. 31, 2012 were $53.4 million, compared to $51.4 million for the third quarter of 2012 and $48.9 million for the same quarter of last year. Revenues for the quarter ended Dec. 31, 2012, excluding securities gains, were up 3.8 percent on a linked-quarter basis and 9.2 percent over the same quarter last year.

• Net interest margin increased for the ninth consecutive quarter to 3.80 percent for the quarter ended Dec. 31, 2012, up from 3.78 percent last quarter and from 3.65 percent for the quarter ended Dec. 31, 2011.

• The firm's efficiency ratio, excluding the $2.0 million of securities gains, $1.4 million in ORE expense and $2.1 million of charges related to the restructuring of $60.0 million of FHLB advances, was 58.8 percent for the fourth quarter of 2012.

• Pre-tax pre-provision income was $20.5 million for the quarter ended Dec. 31, 2012, up 15.3 percent over last quarter and 40.0 percent over the same quarter last year.

"Growing high quality loans in the commercial segments of our markets is the foundation for continued acceleration of operating leverage and profitability," Turner said. "During 2012, our relationship managers continued to penetrate our markets as evidenced by the 12.8 percent increase in loans this year. Also, the addition of several experienced commercial lenders in 2011 and 2012 bolstered our ability to grow organically and move market share in 2012 and should contribute significantly to our anticipated loan growth in 2013."

Aggressively Dealing with Credit Issues

• Nonperforming assets declined by $16.98 million from Sept. 30, 2012, a linked-quarter reduction of 29.1 percent and the 10th consecutive quarterly reduction.

  • Nonperforming assets were 1.11 percent of total loans plus other real estate at Dec. 31, 2012, compared to 1.65 percent at Sept. 30, 2012, and 2.66 percent at Dec. 31, 2011.

  • Nonperforming loans declined by $13.75 million during the fourth quarter of 2012, a linked-quarter reduction of 37.6 percent and the 11th consecutive quarterly reduction. Nonperforming loans are down 52.3 percent from Dec. 31, 2011.

  • Other real estate declined by 14.8 percent, or $3.24 million, during the fourth quarter of 2012 compared to the third quarter of 2012, inclusive of $0.6 million in property foreclosures.

• Net charge-offs were $2.16 million for the quarter ended Dec. 31, 2012, compared to $6.34 million for the quarter ended Dec. 31, 2011, and $1.94 million for the third quarter of 2012. Annualized net charge-offs for the three and 12 months ended Dec. 31, 2012, were 0.24 percent and 0.29 percent, respectively.

• Provision for loan losses expense decreased from $5.44 million for the fourth quarter of 2011 to $2.49 million for the fourth quarter of 2012. The results reflect a reduction in net charge-offs and a substantial improvement in the credit quality of the loan portfolio compared to the same period in 2011.

• The allowance for loan losses represented 1.87 percent of total loans at Dec. 31, 2012, compared to 1.96 percent at Sept. 30, 2012, and 2.25 percent at Dec. 31, 2011. The ratio of the allowance for loan losses to nonperforming loans increased to 304.2 percent at Dec. 31, 2012, from 188.9 percent at Sept. 30, 2012, and 154.6 percent at Dec. 31, 2011.

"Our priority for the last three years has been to aggressively deal with credit issues," Turner said. "With the ratio of nonperforming assets to total loans plus OREO of 1.11 percent and with the steady reduction in troubled asset inflows, we believe the rehabilitation of our balance sheet is substantially complete. We can now further intensify our focus and resources on growing our franchise in Middle and East Tennessee consistent with the competitive opportunities that exist for us in these two very attractive banking markets."

Pinnacle reported nonperforming loan inflows of $5.9 million for the fourth quarter of 2012 compared to $4.6 million in the third quarter of 2012, as well as nonperforming asset resolutions of $22.9 million in the fourth quarter of 2012, up from the third quarter of 2012 resolution amount of $12.5 million. Turner noted that during the fourth quarter of 2012, Pinnacle realized, through a bankruptcy settlement, a $5.6 million recovery of a loan previously charged-off in 2009. Concurrently, Pinnacle accelerated its disposition strategy with respect to certain troubled assets which included a bulk sale of approximately $9.0 million in nonperforming assets. Turner also noted that bulk sales are not a typical disposition strategy for Pinnacle, and he does not expect the firm to adopt bulk sales as a recurring strategy for the future disposition of troubled assets.

The following is a summary of the activity in various nonperforming asset and troubled debt restructuring categories for the quarter ended Dec. 31, 2012:

OTHER FOURTH QUARTER 2012 HIGHLIGHTS:

• Improving Balance Sheet Composition

  • Average balances for noninterest-bearing demand and interest checking made up 42.9 percent of average total deposits for the quarter ended Dec. 31, 2012, up from 35.4 percent for the quarter ended Dec. 31, 2011. Average core deposits were 88.8 percent of average total deposits for the quarter ended Dec. 31, 2012, up from 86.8 percent for the quarter ended Dec. 31, 2011.

  • The firm has steadily reduced the size of its investment portfolio by $190.1 million since the beginning of 2012. At Dec. 31, 2012, securities were just 14.0 percent of total assets, down from 18.4 percent at Dec. 31, 2011.

  • Total construction and development loans were $313.6 million at Dec. 31, 2012, down from a peak of $674.4 million or 19.41 percent of total loans at March 31, 2009. Total construction and development loans represented 8.45 percent of total loans at Dec. 31, 2012, compared to 8.87 percent at Sept. 30, 2012, and 8.33 percent at Dec. 31, 2011.

  • At Dec. 31, 2012, Pinnacle's ratio of tangible common stockholders' equity to tangible assets was 8.97 percent, compared to 9.15 percent at Sept. 30, 2012, and 8.44 percent at Dec. 31, 2011.

"We are very pleased with the effort of our relationship managers in the continued attraction of high quality borrowers," said Harold R. Carpenter, Pinnacle's chief financial officer. "Our loan portfolio has changed meaningfully over the last three years as we reduced problem assets and our exposure to residential construction. At the same time, we have been focusing on growing our commercial and commercial real estate portfolios, which have long been the primary focus of our firm. Additionally, our funding base has changed significantly, with core funding comprising 89.9 percent of our funding base at year-end 2012 compared to 58.7 percent at year-end 2009. All of this was accomplished by our relationship managers in an environment of increasing competition from the large regional banks headquartered outside our markets."

• Revenue growth

  • Net interest income for the quarter ended Dec. 31, 2012, was $42.2 million, compared to $40.9 million in the third quarter of 2012 and $39.3 million for the fourth quarter of 2011. Net interest income for the fourth quarter of 2012 was at its highest quarterly level since the firm's founding in 2000.

  • Noninterest income for the quarter ended Dec. 31, 2012, was $13.1 million, compared to $10.4 million for the third quarter of 2012 and $9.7 million for the same quarter last year. Excluding securities gains, noninterest income was up 6.11 percent on a linked-quarter basis and at its highest quarterly level since the firm's founding.

    • Gains on mortgage loans sold, net of commissions, were $1.77 million during the fourth quarter of 2012, compared to $1.98 million during the third quarter of 2012 and $1.46 million during the fourth quarter of 2011.

"We grew top line revenues by 8.9 percent in 2012," Carpenter said. "The revenue growth was largely based on incremental loan volumes and reduced funding costs. We believe net loan growth will be the primary contributor to our revenue growth objectives for 2013. As for fee revenues, we also anticipate decreased mortgage revenues in 2013 given the substantial refinance activity that has already occurred. To offset these headwinds, our relationship managers are focused on continuing our rapid balance sheet growth and seeking new fee opportunities with our clients."

• Noninterest and income tax expense

  • Noninterest expense for the quarter ended Dec. 31, 2012, was $34.9 million, compared to $33.6 million in the third quarter of 2012 and $34.4 million in the fourth quarter of 2011.

    • Salaries and employee benefits costs increased by 0.44 percent from the third quarter of 2012 and 3.13 percent from the same period last year.

    • Included in noninterest expense for the fourth quarter of 2012 was $1.36 million in other real estate expenses, compared to $2.40 million in the third quarter of 2012 and $4.19 million in the fourth quarter of 2011.

    • During the fourth quarter of 2012, the firm prepaid $60 million of FHLB advances from current liquidity and, therefore, incurred $2.1 million in prepayment penalties that were included in fourth quarter 2012 noninterest expense. These FHLB advances had an annual effective rate of 1.91 percent.

  • Income tax expense was $6.28 million for the fourth quarter of 2012, compared to $1.45 million in the fourth quarter of 2011 and $5.02 million in the third quarter of 2012. The firm ended the year with an effective tax rate of approximately 33.0 percent for 2012 compared to the substantial tax benefit last year attributable to the recapture of the valuation allowance for the firm's deferred tax assets.

Noninterest expense excluding the impact of OREO expenses was approximately $33.5 million in the fourth quarter of 2012, compared to $31.2 million in the third quarter of 2012 and $30.2 million in the fourth quarter of 2011.

WEBCAST AND CONFERENCE CALL INFORMATION

Pinnacle will host a webcast and conference call at 8:30 a.m. (CST) on Jan. 16, 2013, to discuss fourth quarter 2012 results and other matters. To access the call for audio only, please call 1-877-602-7944. For the presentation and streaming audio, please access the webcast on the investor relations page of Pinnacle's website at www.pnfp.com.

For those unable to participate in the webcast, it will be archived on the investor relations page of Pinnacle's website at www.pnfp.com for 90 days following the presentation.

Pinnacle Financial Partners provides a full range of banking, investment, mortgage and insurance products and services designed for small- to mid-sized businesses and their owners and individuals interested in a comprehensive relationship with their financial institution. Comprehensive wealth management services, such as financial planning and trust, help clients increase, protect and distribute their assets.

The firm began operations in a single downtown Nashville location in Oct. 2000 and has since grown to over $5.0 billion in assets at Dec. 31, 2012. At Dec. 31, 2012, Pinnacle is the second-largest bank holding company headquartered in Tennessee, with 29 offices in eight Middle Tennessee counties and three offices in Knoxville.

Additional information concerning Pinnacle can be accessed at www.pnfp.com.

Certain of the statements in this release may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words "expect," "anticipate," "goal," "objective," "intend," "plan," "believe," "should," "seek," "estimate" and similar expressions are intended to identify such forward-looking statements, but other statements not based on historical information may also be considered forward-looking. All forward-looking statements are subject to risks, uncertainties and other factors that may cause the actual results, performance or achievements of Pinnacle Financial to differ materially from any results expressed or implied by such forward-looking statements. Such risks include, without limitation, (i) deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses; (ii) continuation of the historically low short-term interest rate environment; (iii) the inability of Pinnacle Financial to grow its loan portfolio in the Nashville-Davidson-Murfreesboro-Franklin MSA and the Knoxville MSA; (iv) changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; (v) effectiveness of Pinnacle Financial's asset management activities in improving, resolving or liquidating lower-quality assets; (vi) increased competition with other financial institutions; (vii) greater than anticipated adverse conditions in the national or local economies including the Nashville-Davidson-Murfreesboro-Franklin MSA and the Knoxville MSA, particularly in commercial and residential real estate markets; (viii) rapid fluctuations or unanticipated changes in interest rates; (ix) the results of regulatory examinations; (x) the ability to retain large, uninsured deposits with the expiration of the FDIC's transaction account guarantee program (xi) the development of any new market other than Nashville or Knoxville; (xii) a merger or acquisition; (xiii) any matter that would cause Pinnacle Financial to conclude that there was impairment of any asset, including intangible assets; (xiv) the ability to attract additional financial advisors or to attract customers from other financial institutions; (xv) further deterioration in the valuation of other real estate owned and increased expenses associated therewith; (xvi) inability to comply with regulatory capital requirements, including those resulting from currently proposed changes to capital calculation methodologies and required capital maintenance levels; and, (xvii) changes in state and federal legislation, regulations or policies applicable to banks and other financial service providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy, including implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act. A more detailed description of these and other risks is contained in Pinnacle Financial's most recent annual report on Form 10-K filed with the Securities and Exchange Commission on March 2, 2012. Many of such factors are beyond Pinnacle Financial's ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this release, whether as a result of new information, future events or otherwise.