Pinnacle Financial Partners Inc. in Nashville said Wednesday that it lost $27.8 million in the second quarter after reducing the value of some deferred tax assets.
These assets are essentially a tax benefit — held on the balance sheet as capital — that a company may use when it has lost money. But after three straight years of losses, auditors often question the value of these assets.
Jefferson Harralson, an analyst at KBW Inc.'s Keefe Bruyette & Woods Inc., said few banking companies have done what is called a "valuation allowance," trimming the value of these assets.
But many have faced three years of losses, he said, and Pinnacle's announcement could cause them to worry that their auditors will start requiring valuation allowances as well.
"There are a lot of banks sitting out there that are exposed, if every auditor takes the same path that Pinnacle's did," Harralson said.
Peyton Green, an analyst at Sterne Agee & Leach, agreed, saying that auditors are becoming more conservative in their interpretations and views on accounting issues.
"Frankly, it's probably a bit of a surprise that we haven't seen more of this happen," he said.
The $5 billion-asset Pinnacle reduced its valuation of the tax assets by $17.4 million, or 53 cents a share; the company's total quarterly loss was 85 cents a share.
"The quarter was very significantly" affected by the reduction, the company's chief executive, M. Terry Turner, said on a conference call Wednesday.
Pinnacle narrowed its overall loss from $31.7 million a year earlier. The loss in the most recent quarter stemmed from larger-than-anticipated net chargeoffs, which Turner said reflected the bank's strategy of resolving problem loans as quickly as possible. Chargeoffs more than doubled from the first quarter, to $33.5 million.
Because deferred tax assets are counted as capital, reducing their value also shrank Pinnacle's capital ratios. It caused the tangible common equity ratio to decline by 34 basis points, to 7.1%. The total risk-based capital ratio was 14.8%. And Harralson said this reduced the amount of the company's tangible capital by 4%.
Turner said the holding company injected $25 million into its bank subsidiary to bolster capital ratios.
Despite the tax expense, capital levels remained strong, Harralson said, and the bank is already fairly far through the credit cycle. "It's not going to change the business model, but it puts a little pressure on Pinnacle to get profitable sooner," he said.