Pinnacle Financial Gains Balance Sheet, Earnings Momentum In 4Q12

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:

(in thousands)			Balances Sept. 30, 2012				Payments, Sales and Reductions					Foreclosures					Inflows				Balances Dec. 31, 2012
Troubled debt restructurings:
Commercial real estate – mortgage			$	16,631			$	(4,103	)			$	-				$	7,736			$	20,264
Consumer real estate – mortgage				6,031				(208	)				-					488				6,311
Construction and land development				372				(302	)				-					-				70
Commercial and industrial				935				(249	)				-					-				686
Consumer and other				121				(2	)				-					-				119
Totals				24,090				(4,864	)				-					8,224				27,450
Nonperforming loans:
Commercial real estate – mortgage				14,983				(8,447	)				-					2,754				9,290
Consumer real estate – mortgage				10,548				(5,642	)				(333	)				1,333				5,906
Construction and land development				5,857				(1,467	)				(28	)				147				4,509
Commercial and industrial				4,896				(3,329	)				-					1,471				3,038
Consumer and other				287				(168	)				(202	)				163				80
Totals				36,571				(19,053	)				(563	)				5,868				22,823
Other real estate:
Residential construction and development				7,680				(2,243	)				28					-				5,465
Commercial construction and development				9,931				(615	)				-					-				9,316
Other				4,206				(942	)				535					-				3,799
Totals				21,817				(3,800	)				563					-				18,580
Total nonperforming assets and troubled debt restructurings			$	82,478			$	(27,717	)			$	-				$	14,092			$	68,853

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.

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