Pinnacle Financial Expands Profitability in Second Quarter 2011

NASHVILLE, Tenn.--(BUSINESS WIRE)--Pinnacle Financial Partners, Inc. (Nasdaq/NGS: PNFP) today reported that its net income per fully diluted common share available to common stockholders was $0.14 for the quarter ended June 30, 2011, compared to net loss per fully diluted common share available to common stockholders of $0.85 for the quarter ended June 30, 2010, and net income per fully diluted common share available to common shareholders of $0.06 for the quarter ended March 31, 2011.

Net income per fully diluted common share available to common stockholders was $0.20 for the six months ended June 30, 2011, compared to net loss per fully diluted common share available to common stockholders of $1.02 for the first six months of 2010.

“We are pleased with another quarter of progress on our two primary priorities of expanding the core earnings capacity of the firm and aggressively dealing with credit issues,” said M. Terry Turner, Pinnacle’s president and chief executive officer. “We intend to maintain continued and significant progress on key measures of credit quality and core earnings, which include capitalizing on the growth opportunities in the Nashville and Knoxville markets.”

Aggressively Dealing with Credit Issues

During the second quarter, Pinnacle reduced classified assets by $49.1 million, a linked-quarter reduction of 15.4 percent and the fifth consecutive quarter of net reductions. Classified assets are composed primarily of nonperforming assets and potential problem loans. Classified assets are down 43.7 percent from their peak at the end of June 2010.

• Nonperforming assets declined by $20.2 million, a linked-quarter reduction of 15.3 percent and the fourth consecutive quarterly reduction. Pinnacle resolved $38.7 million in nonperforming assets during the second quarter of 2011, compared to resolutions of $33.5 million during the first quarter of 2011.
• Nonperforming loans declined by $16.6 million during the second quarter of 2011, a linked-quarter reduction of 21.8 percent and the fifth consecutive quarterly reduction. Nonperforming loans are down 49.5 percent from a year ago. Additionally, nonperforming loan inflows decreased from $25.4 million during the first quarter of 2011 to $18.4 million in the second quarter of 2011.
• Potential problem loans also decreased from $170.6 million at March 31, 2011, to $148.5 million at June 30, 2011, a linked-quarter decrease of 13.0 percent and the fourth consecutive quarter of net reductions. Potential problem loans are down by 53.3 percent from their peak in June 2010.
• Exposure to construction and land development loans declined from $411.5 million at June 30, 2010, to $282.1 million at June 30, 2011, a decrease of 31.4 percent. Construction and land development loans are down 6.2 percent from $300.7 million at March 31, 2011. Residential land development loans declined from $142.3 million at June 30, 2010, to $84.8 million at June 30, 2011. Residential land development loans were $97.5 million at March 31, 2011.

Expanding the Core Earnings Capacity of the Firm

• Net interest margin increased to 3.55 percent for the quarter ended June 30, 2011, from 3.23 percent for the quarter ended June 30, 2010. Net interest margin for the quarter ended March 31, 2011, was 3.40 percent.
• Average balances of noninterest bearing deposit accounts were $629 million in the second quarter of 2011, an increase of 5.8 percent over first quarter 2011 average balances of $595 million and an increase of 24.7 percent over the same quarter last year.

• Loans at June 30, 2011, were $3.21 billion, a decrease of $10.3 million from $3.22 billion at March 31, 2011. Commercial and industrial loans combined with owner-occupied commercial real estate loans were $1.60 billion at June 30, 2011, an increase of $6.58 million from $1.59 billion at March 31, 2011, the third consecutive quarter of net growth.
• Revenue for the quarter ended June 30, 2011, amounted to $47.60 million, compared to $44.34 million for the first quarter of 2011 and $46.27 million for the same quarter of last year, a linked-quarter increase of 7.1 percent.
• Four years after expanding to the Knoxville market, Pinnacle’s operation in Knoxville reached over $500 million in loans at the end of the second quarter 2011.
• Income before income taxes and TARP expenses increased from $3.50 million for the quarter ended March 31, 2011, to $6.66 million for the quarter ended June 30, 2011, a 90.3 percent increase.

“Our second quarter net interest margin of 3.55 percent was achieved primarily by continued reductions in our funding costs as time deposits continue to reprice downward,” Turner said. “We are particularly pleased with the progress we made during the second quarter in resolution of troubled assets, which is also having a positive impact on our margin. As anticipated, we experienced continued reductions in troubled asset inflows and believe those trends will continue into the third quarter.”

Turner also noted that the firm continues to explore the availability of the U.S. Treasury’s Small Business Lending Fund.

“We continue to talk with our regulators about our potential participation in the SBLF,” Turner said. “Although the likelihood of participation is significantly diminished by recent guidance from the U.S. Treasury regarding SBLF eligibility for bank holding companies who, like us, are restricted in their ability to pay dividends without the prior approval of the Federal Reserve, we are encouraged by our second quarter results and remain hopeful that we can repay TARP with minimal dilution to our common shareholders regardless of SBLF participation.”

OTHER SECOND QUARTER 2011 HIGHLIGHTS:

• Core Deposits
  • Core deposits amounted to $3.18 billion at June 30, 2011, an increase of 14.4 percent from the $2.78 billion at June 30, 2010. Core deposits at March 31, 2011, were $3.11 billion.
• Operating results
  • Net income available to common stockholders for the second quarter of 2011 was $4.84 million, compared to the prior year’s second quarter net loss available to common stockholders of $27.87 million. First quarter 2011 net income available to common stockholders totaled $2.01 million.
  • Net interest income for the second quarter of 2011 was $37.80 million, compared to $36.02 million for the first quarter of 2011 and $35.70 million for the same quarter last year.
  • Noninterest income for the quarter ending June 30, 2011, was $9.8 million (including $0.6 million of net securities gains), compared to $8.3 million (net of $0.2 million of net securities losses) in the prior quarter and $10.6 million (including $2.3 million of net securities gains) the same quarter last year. Excluding the impact of net securities gains, noninterest income was up 8.4 percent on a linked-quarter basis and 10.7 percent over the same quarter last year.
  • Wealth management revenues, which include investment services, trust and insurance, were $3.41 million during the second quarter of 2011, an increase of 14.7 percent over the same period last year.

“In addition to our net interest margin increasing to 3.55 percent, our net interest income increased by approximately 4.93 percent from the first quarter results,” said Harold R. Carpenter, Pinnacle’s chief financial officer. “Contributing to this increase were reduced funding costs and the continued reduction in nonperforming assets.”

“We believe we will continue to have opportunities to expand margins in future quarters primarily by reducing the funding cost associated with the firm’s time deposit portfolio,” Carpenter said.

• Capital
  • At June 30, 2011, Pinnacle’s ratio of tangible common stockholders’ equity to tangible assets was 7.7 percent, compared to 7.1 percent at June 30, 2010, and 7.4 percent at March 31, 2011. At June 30, 2011, Pinnacle’s total risk-based capital ratio was 15.5 percent, compared to 14.8 percent at June 30, 2010, and 15.2 percent at March 31, 2011.
• Credit quality
  • Net charge-offs were $8.61 million for the quarter ended June 30, 2011, down from $33.46 million for the quarter ended June 30, 2010, and $9.73 million for the first quarter of 2011.
  • The allowance for loan losses represented 2.40 percent of total loans at June 30, 2011, compared to 2.46 percent at March 31, 2011, and 2.61 percent at June 30, 2010.
  • Nonperforming assets were 3.44 percent of total loans plus other real estate at June 30, 2011, compared to 4.04 percent at March 31, 2011, and 4.77 percent at June 30, 2010. The ratio of the allowance for loan losses to nonperforming loans increased to 128.9 percent at June 30, 2011, from 103.4 percent at March 31, 2011.
  • Past due loans over 30 days, excluding nonperforming loans, were 0.40 percent of total loans at June 30, 2011, compared to 0.36 percent at March 31, 2011, and 0.66 percent at June 30, 2010.

The following is a summary of the activity in various nonperforming asset and restructured accruing loan categories for the quarter ended June 30, 2011:

• Noninterest expense and taxes
  • Noninterest expense for the quarter ended June 30, 2011, was $34.36 million, compared to $36.49 million in the second quarter of 2010 and $34.70 million in the first quarter of 2011.
  • Compensation expense was $18.52 million during the second quarter of 2011, compared to $15.85 million during the second quarter of 2010 and $17.92 million during the first quarter of 2011.
  • Included in noninterest expense for the second quarter of 2011 was $3.83 million in other real estate expenses, compared to $7.41 million in the second quarter of 2010. First quarter 2011 other real estate expense was approximately $4.33 million.
  • Included in income tax expense for the second quarter of 2011 was $288,000 related to the resolution of a recently completed federal tax examination for fiscal years 2007-2009.

Carpenter noted that compensation costs for the second quarter of 2011 increased by 3.35 percent over the first quarter of 2011, driven largely by increased incentive accruals pursuant to the firm’s annual cash incentive plan.

“Given our performance so far this year on credit quality and earnings, the two primary influences on our annual cash incentive payments, we increased our incentive allocation to a potential full payout of our plan award to participating associates,” Carpenter said. “We expect compensation expense to level out for the remainder of the year except for modest increases related to several new relationship managers we are actively recruiting.”

Excluding the impact of OREO expenses, the second quarter of 2011 noninterest expense was approximately $30.53 million, compared to $30.37 million in the first quarter of 2011 and $29.08 million in the second quarter of 2010. Included in the other real estate expense for the quarter was $1.6 million of additional write downs of existing balances based on updated appraisals. The firm also recorded $796,000 in losses related to the disposition of $15.2 million of other real estate properties. Carpenter noted that the firm anticipates foreclosures of approximately $20 million in the third quarter of 2011 but that final resolution of several larger properties will affect other real estate balances for the third quarter.

“We made meaningful progress during the second quarter on our priorities of improving the core earnings capacity of the firm and aggressively dealing with credit issues, and we would expect continued progress on those priorities in the third quarter,” Carpenter said.

WEBCAST AND CONFERENCE CALL INFORMATION

Pinnacle will host a webcast and conference call at 8:30 a.m. (CDT) on Wednesday, July 20, 2011, to discuss second quarter 2011 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 $4.83 billion in assets at June 30, 2011. In 2007, Pinnacle launched an expansion into Knoxville, Tennessee. At June 30, 2011, Pinnacle is the second-largest bank holding company headquartered in Tennessee, with 31 offices in eight Middle Tennessee counties and three offices in Knoxville. The firm was also added to Standard & Poor’s SmallCap 600 index in 2009.

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 reduction of Pinnacle Financial’s loan balances, and conversely, the inability of Pinnacle Financial to ultimately 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 deterioration or lack of sustained growth 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 development of any new market other than Nashville or Knoxville; (xi) a merger or acquisition; (xii) any matter that would cause Pinnacle Financial to conclude that there was impairment of any asset, including intangible assets; (xiii) the impact of governmental restrictions on entities participating in the Capital Purchase Program, of the U.S. Department of the Treasury (the “Treasury”); (xiv) further deterioration in the valuation of other real estate owned; (xv) inability to comply with regulatory capital requirements and to secure any required regulatory approvals for capital actions; (xvi) 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; and (xvii) Pinnacle Financial recording a further valuation allowance related to its deferred tax asset. 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 February 23, 2011 and most recent quarterly report on Form 10-Q filed with the Securities and Exchange commission on May 5, 2011. 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.