PNFP 2nd Quarter 10 Q Body
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the
quarterly period ended June 30, 2006
Commission
File Number: 000-31225
,
Inc.
|
(Exact
Name of Registrant as Specified in Its
Charter)
|
Tennessee
|
|
62-1812853
|
(State
or other
jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
211
Commerce Street, Suite 300, Nashville, Tennessee
|
|
37201
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(615)
744-3700
|
(Registrant’s
telephone number, including area
code)
|
Not
Applicable
|
(Former
name, former address and former fiscal year if changes since last
report)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
Accelerated Filer o
|
Accelerated
Filer x
|
Non-accelerated
Filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
As
of
July 26, 2006 there were 15,370,916 shares of common stock, $1.00 par value
per
share, issued and outstanding.
Pinnacle
Financial Partners, Inc.
Report
on Form 10-Q
June
30, 2006
TABLE
OF CONTENTS
|
|
|
Page
No.
|
PART
I:
|
|
Item
1. Consolidated Financial Statements (Unaudited)
|
2
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
22
|
Item
3. Quantitative and Qualitative Disclosures about Market Risk
|
44
|
Item
4. Controls and Procedures
|
44
|
|
|
PART
II:
|
|
Item
1. Legal Proceedings
|
45
|
Item
1A. Risk Factors
|
45
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
45
|
Item
3. Defaults Upon Senior Securities
|
45
|
Item
4. Submission of Matters to a Vote of Security Holders
|
45
|
Item
5. Other Information
|
46
|
Item
6. Exhibits
|
46
|
Signatures
|
47
|
FORWARD-LOOKING
STATEMENTS
Pinnacle
Financial Partners, Inc. (“Pinnacle Financial”) may from time to time make
written or oral statements, including statements contained in this report which
may constitute forward-looking statements within the meaning of Section 21E
of
the Securities Exchange Act of 1934 (the “Exchange Act”). The words “expect”,
“anticipate”, “intend”, “consider”, “plan”, “believe”, “seek”, “should”,
“estimate”, and similar expressions are intended to identify such
forward-looking statements, but other statements may constitute forward-looking
statements. These statements should be considered subject to various risks
and
uncertainties. Such forward-looking statements are made based upon management's
belief as well as assumptions made by, and information currently available
to,
management pursuant to "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Pinnacle Financial’s actual results may differ
materially from the results anticipated in forward-looking statements due to
a
variety of factors. Such factors are described below and in Pinnacle Financial’s
Form 10-K and include, without limitation, (i) unanticipated deterioration
in
the financial condition of borrowers resulting in significant increases in
loan
losses and provisions for those losses, (ii) increased competition with other
financial institutions, (iii) lack of sustained growth in the economy in the
Nashville, Tennessee area, (iv) rapid fluctuations or unanticipated changes
in
interest rates, (v) the inability of our bank subsidiary, Pinnacle National
Bank, to satisfy regulatory requirements for its expansion plans, (vi) the
ability to successfully integrate Pinnacle Financial’s operations with the
former Cavalry Bancorp, Inc., (vii) the ability of Pinnacle Financial to grow
its loan portfolio at historic rates and (viii) changes in the legislative
and
regulatory environment, including compliance with the various provisions of
the
Sarbanes-Oxley Act of 2002. 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 does not intend
to update or reissue any forward-looking statements contained in this report
as
a result of new information or other circumstances that may become known to
Pinnacle Financial.
Item
1. Part
I. FINANCIAL INFORMATION
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
|
|
June
30,
2006
|
|
December
31,
2005
|
|
ASSETS
|
|
|
|
|
|
Cash
and noninterest-bearing due from banks
|
|
$
|
44,710,092
|
|
$
|
25,935,948
|
|
Interest-bearing
due from banks
|
|
|
1,159,620
|
|
|
839,960
|
|
Federal
funds sold
|
|
|
66,996,985
|
|
|
31,878,362
|
|
Cash
and cash equivalents
|
|
|
112,866,697
|
|
|
58,654,270
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale, at fair value
|
|
|
278,348,412
|
|
|
251,749,094
|
|
Securities
held-to-maturity (fair value of $26,068,344 and $26,546,297 at
June 30, 2006 and December 31, 2005, respectively)
|
|
|
27,294,377
|
|
|
27,331,251
|
|
Mortgage
loans held-for-sale
|
|
|
8,057,161
|
|
|
4,874,323
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
1,358,273,353
|
|
|
648,024,032
|
|
Less
allowance for loan losses
|
|
|
(14,686,365
|
)
|
|
(7,857,774
|
)
|
Loans,
net
|
|
|
1,343,586,988
|
|
|
640,166,258
|
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
35,905,221
|
|
|
12,915,595
|
|
Investments
in unconsolidated subsidiaries and other entities
|
|
|
10,576,326
|
|
|
6,622,645
|
|
Accrued
interest receivable
|
|
|
9,771,278
|
|
|
4,870,197
|
|
Goodwill
|
|
|
115,835,254
|
|
|
-
|
|
Core
deposit intangible
|
|
|
12,454,958
|
|
|
-
|
|
Other
assets
|
|
|
30,928,119
|
|
|
9,588,097
|
|
Total
assets
|
|
$
|
1,985,624,791
|
|
$
|
1,016,771,730
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
Noninterest-bearing
demand
|
|
$
|
312,708,770
|
|
$
|
155,811,214
|
|
Interest-bearing
demand
|
|
|
186,749,623
|
|
|
72,520,757
|
|
Savings
and money market accounts
|
|
|
456,054,946
|
|
|
304,161,625
|
|
Time
|
|
|
604,371,835
|
|
|
277,657,129
|
|
Total
deposits
|
|
|
1,559,885,174
|
|
|
810,150,725
|
|
Securities
sold under agreements to repurchase
|
|
|
104,379,910
|
|
|
65,834,232
|
|
Federal
Home Loan Bank advances
|
|
|
33,748,516
|
|
|
41,500,000
|
|
Subordinated
debt
|
|
|
30,929,000
|
|
|
30,929,000
|
|
Accrued
interest payable
|
|
|
3,842,153
|
|
|
1,884,596
|
|
Other
liabilities
|
|
|
14,101,519
|
|
|
3,036,752
|
|
Total
liabilities
|
|
|
1,746,886,272
|
|
|
953,335,305
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Preferred
stock, no par value; 10,000,000 shares authorized; no shares issued
and
outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock, par value $1.00; 90,000,000 shares authorized; 15,370,916
issued
and outstanding at June 30, 2006 and 8,426,551 issued and outstanding
at
December 31, 2005
|
|
|
15,370,916
|
|
|
8,426,551
|
|
Additional
paid-in capital
|
|
|
210,106,788
|
|
|
44,890,912
|
|
Unearned
compensation
|
|
|
-
|
|
|
(169,689
|
)
|
Retained
earnings
|
|
|
20,108,848
|
|
|
13,182,291
|
|
Accumulated
other comprehensive loss, net
|
|
|
(6,848,033
|
)
|
|
(2,893,640
|
)
|
Stockholders’
equity
|
|
|
238,738,519
|
|
|
63,436,425
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
1,985,624,791
|
|
$
|
1,016,771,730
|
|
See
accompanying notes to consolidated financial statements.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
(Unaudited)
|
|
Three
Months Ended
June
30,
|
|
Six
Months Ended
June
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
Loans,
including fees
|
|
$
|
24,245,895
|
|
$
|
8,002,502
|
|
$
|
37,424,725
|
|
$
|
14,956,867
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
3,148,459
|
|
|
2,134,735
|
|
|
6,009,577
|
|
|
4,156,518
|
|
Tax-exempt
|
|
|
494,849
|
|
|
238,914
|
|
|
895,622
|
|
|
440,338
|
|
Federal
funds sold and other
|
|
|
415,437
|
|
|
167,664
|
|
|
785,112
|
|
|
256,970
|
|
Total
interest income
|
|
|
28,304,640
|
|
|
10,543,815
|
|
|
45,115,036
|
|
|
19,810,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
9,563,035
|
|
|
2,877,229
|
|
|
15,413,344
|
|
|
5,031,190
|
|
Securities
sold under agreements to repurchase
|
|
|
678,177
|
|
|
253,121
|
|
|
1,186,965
|
|
|
403,383
|
|
Federal
funds purchased and other borrowings
|
|
|
1,168,265
|
|
|
618,274
|
|
|
2,112,761
|
|
|
1,080,812
|
|
Total
interest expense
|
|
|
11,409,477
|
|
|
3,748,624
|
|
|
18,713,070
|
|
|
6,515,385
|
|
Net
interest income
|
|
|
16,895,163
|
|
|
6,795,191
|
|
|
26,401,966
|
|
|
13,295,308
|
|
Provision
for loan losses
|
|
|
1,706,865
|
|
|
482,690
|
|
|
2,094,049
|
|
|
1,083,940
|
|
Net
interest income after provision for loan losses
|
|
|
15,188,298
|
|
|
6,312,501
|
|
|
24,307,917
|
|
|
12,211,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
1,356,114
|
|
|
241,436
|
|
|
1,794,384
|
|
|
503,136
|
|
Investment
sales commissions
|
|
|
652,900
|
|
|
491,453
|
|
|
1,166,497
|
|
|
928,877
|
|
Insurance
sales commissions
|
|
|
748,534
|
|
|
-
|
|
|
1,013,362
|
|
|
-
|
|
Gain
on loans and loan participations sold, net
|
|
|
470,809
|
|
|
390,261
|
|
|
795,355
|
|
|
550,816
|
|
Trust
fees
|
|
|
311,997
|
|
|
-
|
|
|
363,997
|
|
|
-
|
|
Gain
on sales of investment securities, net
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
114,410
|
|
Other
noninterest income
|
|
|
839,771
|
|
|
289,915
|
|
|
1,294,781
|
|
|
496,481
|
|
Total
noninterest income
|
|
|
4,380,125
|
|
|
1,413,065
|
|
|
6,428,376
|
|
|
2,593,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
|
7,289,996
|
|
|
3,110,718
|
|
|
11,738,354
|
|
|
6,081,276
|
|
Equipment
and occupancy
|
|
|
2,081,194
|
|
|
893,938
|
|
|
3,254,547
|
|
|
1,677,963
|
|
Marketing
and other business development
|
|
|
357,904
|
|
|
179,715
|
|
|
548,375
|
|
|
292,883
|
|
Postage
and supplies
|
|
|
445,211
|
|
|
158,396
|
|
|
630,619
|
|
|
293,934
|
|
Other
noninterest expense
|
|
|
2,009,520
|
|
|
620,452
|
|
|
2,897,816
|
|
|
1,198,037
|
|
Merger
related expense
|
|
|
921,237
|
|
|
-
|
|
|
1,364,567
|
|
|
-
|
|
Total
noninterest expense
|
|
|
13,105,062
|
|
|
4,963,219
|
|
|
20,434,278
|
|
|
9,544,093
|
|
Income
before income taxes
|
|
|
6,463,361
|
|
|
2,762,347
|
|
|
10,302,017
|
|
|
5,260,995
|
|
Income
tax expense
|
|
|
2,140,887
|
|
|
803,178
|
|
|
3,367,647
|
|
|
1,522,073
|
|
Net
income
|
|
$
|
4,322,474
|
|
$
|
1,959,169
|
|
$
|
6,934,370
|
|
$
|
3,738,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per common share
|
|
$
|
0.28
|
|
$
|
0.23
|
|
$
|
0.56
|
|
$
|
0.45
|
|
Diluted
net income per common share
|
|
$
|
0.26
|
|
$
|
0.21
|
|
$
|
0.51
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,335,754
|
|
|
8,401,198
|
|
|
12,473,187
|
|
|
8,395,260
|
|
Diluted
|
|
|
16,503,692
|
|
|
9,434,260
|
|
|
13,640,565
|
|
|
9,435,754
|
|
See
accompanying notes to consolidated financial statements.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
AND
COMPREHENSIVE INCOME
(Unaudited)
For
the
six months ended June 30, 2006 and 2005
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Additional
Paid-in
Capital
|
|
Unearned
Compensation
|
|
Retained
Earnings
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
Total
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2004
|
|
|
8,389,232
|
|
$
|
8,389,232
|
|
$
|
44,376,307
|
|
$
|
(37,250
|
)
|
$
|
5,127,023
|
|
$
|
24,863
|
|
$
|
57,880,175
|
|
Exercise
of employee common stock options and related tax benefits
|
|
|
16,659
|
|
|
16,659
|
|
|
108,103
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
124,762
|
|
Amortization
of unearned compensation associated with restricted shares
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
15,000
|
|
|
-
|
|
|
-
|
|
|
15,000
|
|
Dividends
paid to minority interest shareholders of PNFP Properties,
Inc.
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(7,811
|
)
|
|
-
|
|
|
(7,811
|
)
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,738,922
|
|
|
-
|
|
|
3,738,922
|
|
Net
unrealized holding losses on available-for-sale securities, net of
deferred tax benefit of $153,376
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(250,244
|
)
|
|
(250,244
|
)
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,488,678
|
|
Balances,
June 30, 2005
|
|
|
8,405,891
|
|
$
|
8,405,891
|
|
$
|
44,484,410
|
|
$
|
(22,250
|
)
|
$
|
8,858,134
|
|
$
|
(225,381
|
)
|
$
|
61,500,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2005
|
|
|
8,426,551
|
|
$
|
8,426,551
|
|
$
|
44,890,912
|
|
$
|
(169,689
|
)
|
$
|
13,182,291
|
|
$
|
(2,893,640
|
)
|
$
|
63,436,425
|
|
Transfer
of unearned compensation to additional paid-in capital upon adoption
of
SFAS No. 123(R)
|
|
|
-
|
|
|
-
|
|
|
(169,689
|
)
|
|
169,689
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercise
of employee common stock options and related tax benefits
|
|
|
83,667
|
|
|
83,667
|
|
|
813,688
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
897,355
|
|
Issuance
of restricted common shares pursuant to 2004 Equity Incentive
Plan
|
|
|
4,400
|
|
|
4,400
|
|
|
(4,400
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Amortization
expense for restricted shares
|
|
|
-
|
|
|
-
|
|
|
127,218
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
127,218
|
|
Dividends
paid to minority interest shareholders of PNFP Properties,
Inc.
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(7,813
|
)
|
|
-
|
|
|
(7,813
|
)
|
Merger
with Cavalry Bancorp, Inc.
|
|
|
6,856,298
|
|
|
6,856,298
|
|
|
164,231,274
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
171,087,572
|
|
Costs
to register common stock issued in connection with the merger with
Cavalry
Bancorp, Inc.
|
|
|
-
|
|
|
-
|
|
|
(187,609
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(187,609
|
)
|
Stock
based compensation expense
|
|
|
-
|
|
|
-
|
|
|
405,394
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
405,394
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
6,934,370
|
|
|
-
|
|
|
6,934,370
|
|
Net
unrealized holding losses on available-for-sale securities, net of
deferred tax benefit of $2,316,138
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,954,393
|
)
|
|
(3,954,393
|
)
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,979,977
|
|
Balances,
June 30, 2006
|
|
|
15,370,916
|
|
$
|
15,370,916
|
|
$
|
210,106,788
|
|
$
|
-
|
|
$
|
20,108,848
|
|
$
|
(6,848,033
|
)
|
$
|
238,738,519
|
|
See
accompanying notes to consolidated financial statements.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
STATEMENTS
OF CASH FLOWS
(Unaudited)
|
|
Six
months ended
June
30,
|
|
|
|
2006
|
|
2005
|
|
Operating
activities:
|
|
|
|
|
|
Net
income
|
|
$
|
6,934,370
|
|
$
|
3,738,922
|
|
Adjustments
to reconcile net income to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Net
amortization of securities
|
|
|
407,638
|
|
|
528,943
|
|
Depreciation
and amortization
|
|
|
2,102,657
|
|
|
789,844
|
|
Provision
for loan losses
|
|
|
2,094,049
|
|
|
1,083,940
|
|
Gain
on sale of investment securities, net
|
|
|
-
|
|
|
(114,410
|
)
|
Gains
on loans and loan participations sold, net
|
|
|
(795,355
|
)
|
|
(550,816
|
)
|
Stock-based
compensation expense
|
|
|
532,612
|
|
|
-
|
|
Deferred
tax benefit
|
|
|
(1,155,385
|
)
|
|
(505,845
|
)
|
Tax
benefit on exercise of stock awards
|
|
|
-
|
|
|
26,200
|
|
Excess
tax benefit from stock compensation arrangements
|
|
|
(74,908
|
)
|
|
-
|
|
Mortgage
loans held for sale:
|
|
|
|
|
|
|
|
Loans
originated
|
|
|
(61,896,095
|
)
|
|
(48,598,700
|
)
|
Loans
sold
|
|
|
60,374,707
|
|
|
44,053,817
|
|
Increase
in other assets
|
|
|
(7,284,404
|
)
|
|
(1,135,156
|
)
|
Increase
(decrease) in other liabilities
|
|
|
(7,133,755
|
)
|
|
366,512
|
|
Net
cash used in operating activities
|
|
|
(5,893,869
|
)
|
|
(316,749
|
)
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
Activities
in securities available-for-sale:
|
|
|
|
|
|
|
|
Purchases
|
|
|
(10,779,152
|
)
|
|
(40,986,522
|
)
|
Sales
|
|
|
-
|
|
|
6,791,867
|
|
Maturities,
prepayments and calls
|
|
|
17,014,717
|
|
|
13,608,270
|
|
|
|
|
6,235,565
|
|
|
(20,586,385
|
)
|
Net
increase in loans
|
|
|
(159,916,412
|
)
|
|
(84,499,040
|
)
|
Purchases
of premises and equipment and software
|
|
|
(2,852,886
|
)
|
|
(2,430,251
|
)
|
Cash
and cash equivalents acquired in merger with Cavalry Bancorp,
Inc.
|
|
|
37,420,210
|
|
|
-
|
|
Purchases
of other assets
|
|
|
(519,689
|
)
|
|
(797,850
|
)
|
Net
cash used in investing activities
|
|
|
(119,633,212
|
)
|
|
(108,313,526
|
)
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
166,094,406
|
|
|
119,192,279
|
|
Net
increase in securities sold under agreements to repurchase
|
|
|
38,545,678
|
|
|
25,749,111
|
|
Advances
from Federal Home Loan Bank:
|
|
|
|
|
|
|
|
Issuances
|
|
|
31,000,000
|
|
|
27,000,000
|
|
Payments
|
|
|
(56,518,145
|
)
|
|
(31,000,000
|
)
|
Exercise
of common stock options
|
|
|
822,447
|
|
|
98,562
|
|
Excess
tax benefit from stock compensation arrangements
|
|
|
74,908
|
|
|
-
|
|
Costs
incurred in connection with registration of common stock issued in
merger
|
|
|
(187,609
|
)
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
179,739,508
|
|
|
141,039,952
|
|
Net
increase in cash and cash equivalents
|
|
|
54,212,427
|
|
|
32,409,677
|
|
Cash
and cash equivalents, beginning of period
|
|
|
58,654,270
|
|
|
26,745,787
|
|
Cash
and cash equivalents, end of period
|
|
$
|
112,866,697
|
|
$
|
59,155,464
|
|
See
accompanying notes to consolidated financial statements.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1. Summary of Significant Accounting Policies
Nature
of Business —
Pinnacle Financial Partners, Inc. (Pinnacle Financial) is a bank holding company
whose primary business is conducted by its wholly-owned subsidiary, Pinnacle
National Bank (Pinnacle National). Pinnacle National is a commercial bank
located in Nashville, Tennessee. Pinnacle National provides a full range of
banking services in its primary market areas of Davidson, Rutherford,
Williamson, Sumner and Bedford Counties. Pinnacle Financial and Pinnacle
National have formed several subsidiaries for various purposes as
follows:
· |
PFP
Title Company is a wholly-owned subsidiary of Pinnacle National.
PFP Title
Company is licensed to sell title insurance policies to Pinnacle
National
customers and others.
|
· |
PNFP
Holdings, Inc. is a wholly-owned subsidiary of PFP Title Company
and is
the parent of PNFP Properties, Inc., which was established as a Real
Estate Investment Trust pursuant to Internal Revenue Service regulations.
|
· |
Pinnacle
Community Development, Inc. is a wholly-owned subsidiary of Pinnacle
National and is certified as a Community Development Entity by the
Community Development Financial Institutions Fund of the United States
Department of the Treasury.
|
· |
PNFP
Statutory Trust I and PNFP Statutory Trust II, wholly-owned subsidiaries
of Pinnacle Financial, were created for the exclusive purpose of
issuing
capital trust preferred securities.
|
· |
Pinnacle
Advisory Services, Inc. is a wholly-owned subsidiary of Pinnacle
Financial
and was established as a registered investment advisor pursuant to
regulations promulgated by the Board of Governors of the Federal
Reserve
System.
|
· |
Miller
and Loughry Insurance and Services, Inc. is a wholly-owned subsidiary
of
Pinnacle National. Miller and Loughry is a general insurance agency
located in Murfreesboro, Tennessee and is licensed to sell various
commercial and consumer insurance products.
|
· |
Pinnacle
Credit Enhancement Holdings, Inc. is a wholly-owned subsidiary of
Pinnacle
Financial and was established to own a 24.5% membership interest
in
Collateral Plus, LLC. Collateral Plus, LLC serves as an intermediary
between investors and borrowers in certain financial transactions
whereby
the borrowers require enhanced collateral in the form of letters
of credit
issued by the investors for the benefit of banks and other financial
institutions.
|
Basis
of Presentation —
These
consolidated financial statements include the accounts of Pinnacle Financial
and
its wholly-owned subsidiaries. PNFP Statutory Trust I, PNFP Statutory Trust
II
and Collateral Plus, LLC, are included in these consolidated financial
statements pursuant to the equity method of accounting. Significant intercompany
transactions and accounts are eliminated in consolidation.
Use
of Estimates —
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosures of contingent assets and liabilities as of the balance sheet date
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses.
Impairment—
Long-lived assets, including purchased intangible assets subject to
amortization, such as Pinnacle Financial’s core deposit intangible asset, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability
of
assets to be held and used is measured by a comparison of the carrying amount
of
an asset to estimated undiscounted future cash flows expected to be generated
by
the asset. If the carrying amount of an asset exceeds its estimated future
cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of would be separately presented in the balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell, and are no longer
depreciated.
Goodwill
and intangible assets that have indefinite useful lives are tested annually
for
impairment, and are tested for impairment more frequently if events and
circumstances indicate that the asset might be impaired. An impairment loss
is
recognized to the extent that the carrying amount exceeds the asset’s fair
value. Pinnacle Financial’s annual assessment date will be September 30.
Accordingly, should we determine in a future period that the goodwill recorded
in connection with our acquisition of Cavalry has been impaired, then a charge
to our earnings will be recorded in the period such determination is
made.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Cash
and Cash Flows —
Cash
on
hand, cash items in process of collection, amounts due from banks, Federal
funds
sold and securities purchased under agreements to resell, with original
maturities within ninety days, are included in cash and cash equivalents. The
following supplemental cash flow information addresses certain cash payments
and
noncash transactions for the six months ended June 30, 2006 and 2005 as follows:
|
|
For
the six months ended June 30,
|
|
|
|
2006
|
|
2005
|
|
Cash
Payments:
|
|
|
|
|
|
Interest
|
|
$
|
12,618,997
|
|
$
|
5,863,115
|
|
Income
taxes
|
|
|
3,600,000
|
|
|
1,770,000
|
|
Noncash
Transactions:
|
|
|
|
|
|
|
|
Loans
charged-off to the allowance for loan losses
|
|
|
500,158
|
|
|
95,148
|
|
Loans
foreclosed upon with repossessions transferred to other
assets
|
|
|
-
|
|
|
34,750
|
|
Common
stock and options issued to acquire Cavalry Bancorp, Inc.
|
|
|
171,087,572
|
|
|
-
|
|
Income
Per Common Share —
Basic earnings per share (“EPS”) is computed by dividing net income by the
weighted average common shares outstanding for the period. Diluted EPS reflects
the dilution that could occur if securities or other contracts to issue common
stock were exercised or converted. The difference between basic and diluted
weighted average shares outstanding was attributable to common stock options
and
warrants.
The
dilutive effect of outstanding options and warrants is reflected in diluted
earnings per share by application of the treasury stock method, which in 2006
includes consideration of stock-based compensation attributable to future
services resulting from the adoption of Statement of Financial Accounting
Standards No. 123 (revised 2004), “Share-Based Payment”
(“SFAS No.123(R)”).
As
of
June 30, 2006 and 2005, there were common stock options outstanding to purchase
up to 1.6 million and 1.2 million common shares, respectively. Most of these
options have exercise prices (and in 2006, compensation costs attributable
to
current services), which when considered in relation to the average market
price
of Pinnacle Financial’s common stock, are considered dilutive and are considered
in Pinnacle Financial’s diluted income per share calculation for each of the
three and six month periods ended June 30, 2006 and 2005. There were common
stock options of 380,000 and 149,000 outstanding as of June 30, 2006 and 2005,
respectively, which were considered anti-dilutive and thus have not been
considered in the fully-diluted share calculations below. Additionally, as
of
June 30, 2006 and 2005, Pinnacle Financial had outstanding warrants to purchase
406,000 common shares which have been considered in the calculation of Pinnacle
Financial’s diluted income per share for the three and six months ended June 30,
2006 and 2005.
The
following is a summary of the basic and diluted earnings per share calculation
for the three and six months ended June 30, 2006 and 2005:
|
|
For
the three months ended June 30,
|
|
For
the six months ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Basic
earnings per share calculation:
|
|
|
|
|
|
|
|
|
|
Numerator
-
Net income
|
|
$
|
4,322,474
|
|
$
|
1,959,169
|
|
$
|
6,934,370
|
|
$
|
3,738,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
-
Average common shares outstanding
|
|
|
15,335,754
|
|
|
8,401,198
|
|
|
12,473,187
|
|
|
8,395,260
|
|
Basic
net income per share
|
|
$
|
0.28
|
|
$
|
0.23
|
|
$
|
0.56
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
-
Net income
|
|
$
|
4,322,474
|
|
$
|
1,959,169
|
|
$
|
6,934,370
|
|
$
|
3,738,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
-
Average common shares outstanding
|
|
|
15,335,754
|
|
|
8,401,198
|
|
|
12,473,187
|
|
|
8,395,260
|
|
Dilutive
shares contingently issuable
|
|
|
1,167,938
|
|
|
1,033,062
|
|
|
1,167,378
|
|
|
1,040,494
|
|
Average
diluted common shares outstanding
|
|
|
16,503,692
|
|
|
9,434,260
|
|
|
13,640,565
|
|
|
9,435,754
|
|
Diluted
net income per share
|
|
$
|
0.26
|
|
$
|
0.21
|
|
$
|
0.51
|
|
$
|
0.40
|
|
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Stock-Based
Compensation —
On
January 1, 2006, Pinnacle Financial adopted SFAS No. 123(R), that
addresses the accounting for share-based payment transactions in which a company
receives employee services in exchange for equity instruments. SFAS No. 123(R)
eliminates the ability to account for share-based compensation transactions,
as
Pinnacle Financial formerly did, using the intrinsic value method as prescribed
by Accounting Principles Board, or APB, Opinion No. 25, “Accounting for
Stock Issued to Employees,” and generally requires that such transactions be
accounted for using a fair-value-based method and recognized as expense in
the
accompanying consolidated statement of income.
Pinnacle
Financial adopted SFAS No. 123(R) using the modified prospective method
which requires the application of the accounting standard as of January 1,
2006. The accompanying consolidated financial statements as of and for the
first
six months of 2006 reflect the impact of adopting SFAS No. 123(R). In
accordance with the modified prospective method, consolidated financial
statements for prior periods have not been restated to reflect, and do not
include, the impact of SFAS No. 123(R).
See
Note 7 for further
details.
Stock-based
compensation expense recognized during the period is based on the value of
the
portion of stock-based payment awards that is ultimately expected to vest.
Stock-based compensation expense recognized in the accompanying consolidated
statement of income during 2006 included compensation expense for stock-based
payment awards granted prior to, but not yet vested, as of December 31,
2005 based on the grant date fair value estimated in accordance with SFAS
No. 123(R). As stock-based compensation expense recognized in the
accompanying statement of income for 2006 is based on awards ultimately expected
to vest, it has been reduced for estimated forfeitures. SFAS No. 123(R)
requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. In the pro forma information for 2005,
which
is also detailed in Note 7, we accounted
for
forfeitures as they occurred.
Comprehensive
Income (Loss) —SFAS
No. 130, “Reporting Comprehensive Income” describes comprehensive income as
the total of all components of comprehensive income including net income. Other
comprehensive income refers to revenues, expenses, gains and losses that under
generally accepted accounting principles are included in comprehensive income
but excluded from net income. Currently, Pinnacle Financial’s other
comprehensive income (loss) consists of unrealized gains and losses, net of
deferred income taxes, on available-for-sale securities.
Recent
Accounting Pronouncements —
FASB
Staff Position on SFAS No. 115-1 and SFAS No. 124-1 (the “FSP”), “The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,” was
issued in November 2005 and addresses the determination of when an investment
is
considered impaired; whether the impairment is other-than-temporary; and how
to
measure an impairment loss. The FSP also addresses accounting considerations
subsequent to the recognition of an other-than-temporary impairment on a debt
security, and requires certain disclosures about unrealized losses that have
not
been recognized as other-than-temporary impairments. The FSP replaces the
impairment guidance on Emerging Issues Task Force (“EITF”) Issue No. 03-1 with
references to existing authoritative literature concerning other-than-temporary
determinations. Under the FSP, losses arising from impairment deemed to be
other-than-temporary, must be recognized in earnings at an amount equal to
the
entire difference between the securities cost and its fair value at the
financial statement date, without considering partial recoveries subsequent
to
that date. The FSP also requires that an investor recognize an
other-than-temporary impairment loss when a decision to sell a security has
been
made and the investor does not expect the fair value of the security to fully
recover prior to the expected time of sale. The FSP was effective for reporting
periods beginning after December 15, 2005. The initial adoption of this
statement did not have a material impact on Pinnacle Financial’s consolidated
financial statements.
In
May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3.”
This statement changes the requirements for the accounting for and reporting
of
a change in accounting principle. This statement applies to all voluntary
changes in accounting principle. It also applies to changes required by an
accounting pronouncement in the unusual instance that the pronouncement does
not
include specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. APB 20
previously required that most voluntary changes in accounting principle be
recognized by including in net income of the period of the change the cumulative
effect of changing to the new accounting principle. SFAS 154 requires
retrospective application to prior period financial statements of changes in
accounting principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. This statement
does not change the guidance for reporting the correction of an error in
previously issued financial statements or the change in an accounting estimate.
SFAS 154 was effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SFAS
No.
156, "Accounting for Servicing of Financial Assets - an amendment of FASB
Statement No. 140." SFAS 156 requires an entity to recognize a servicing
asset or servicing liability each time it undertakes a contractual obligation
to
service a financial asset in certain circumstances. All separately recognized
servicing assets and servicing liabilities are required to be initially measured
at fair value. Subsequent measurement methods include the amortization method,
whereby servicing assets or servicing liabilities are amortized in proportion
to
and over the period of estimated net servicing income or net servicing loss,
or
the fair value method, whereby servicing assets or servicing liabilities are
measured at fair value at each reporting date and changes in fair value are
reported in earnings in the period in which they occur. If the amortization
method is used, an entity must assess servicing assets or servicing liabilities
for impairment or increased obligation based on the fair value at each reporting
date. SFAS 156 is effective for fiscal years beginning after December 15,
2006. Pinnacle Financial is currently evaluating the impact of SFAS 156 on
its
consolidated financial statements.
In
July
2006, the FASB issued FASB Interpretation 48, “Accounting for Income Tax
Uncertainties” (“FIN 48”). FIN 48 defines the threshold for recognizing the
benefits of tax return positions in the financial statements as
“more-likely-than-not” to be sustained by the taxing authority. The recently
issued literature also provides guidance on the derecognition, measurement
and
classification of income tax uncertainties, along with any related interest
and
penalties. FIN 48 also includes guidance concerning accounting for income tax
uncertainties in interim periods and increases the level of disclosures
associated with any recorded income tax uncertainties. FIN 48 is effective
for
fiscal years beginning after December 15, 2006. The differences between the
amounts recognized in the statements of financial position prior to the adoption
of FIN 48 and the amounts reported after adoption will be accounted for as
a
cumulative-effect adjustment recorded to the beginning balance of retained
earnings. Pinnacle Financial is currently evaluating the impact of FIN 48 on
its
consolidated financial statements..
In
June
2006, the Emerging Issues Task Force issued EITF No. 06-4, “Accounting for
Deferred Compensation and Postretirement Benefits Aspects of Endorsement
Split-Dollar Life Insurance Arrangements”. The EITF concluded that deferred
compensation or postretirement benefit aspects of an endorsement split-dollar
life insurance arrangement should be recognized as a liability by the employer
and the obligation is not effectively settled by the purchase of a life
insurance policy. The effective date is for fiscal years beginning after
December 15, 2006. Pinnacle Financial is currently evaluating the impact of
EITF
06-4 on its consolidated financial statements..
In
June
2006, the Emerging Issues Task Force issued EITF No. 06-5, “Accounting for
Purchases of Life Insurance - Determining the Amount that Could Be Realized
in
Accordance with FASB Tech Bulletin 85-4”. The EITF concluded that a policyholder
should consider any additional amounts included in the contractual terms of
the
life insurance policy in determining the “amount that could be realized under
the insurance contract.” For group policies with multiple certificates or
multiple policies with a group rider, the Task Force also tentatively concluded
that the amount that could be realized should be determined at the individual
policy or certificate level, i.e., amounts that would be realized only upon
surrendering all of the policies or certificates would not be included when
measuring the assets. The effective date is for fiscal years beginning after
December 15, 2006. Pinnacle Financial is currently evaluating the impact of
EITF
06-5 on its consolidated financial statements..
Note
2. Merger with Cavalry Bancorp, Inc.
On
March
15, 2006, Pinnacle Financial consummated its merger with Cavalry Bancorp, Inc.
(“Cavalry”), a one-bank holding company located in Murfreesboro, Tennessee.
Pursuant to the merger agreement, Pinnacle acquired all Cavalry common stock
via
a tax-free exchange whereby Cavalry shareholders received a fixed exchange
ratio
of 0.95 shares of Pinnacle Financial common stock for each share of Cavalry
common stock, or approximately 6.9 million Pinnacle Financial shares. The
accompanying consolidated financial statements include the activities of the
former Cavalry since March 15, 2006.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In
accordance with SFAS No. 141, “Accounting for Business Combinations” (“SFAS No.
141”), SFAS No. 142, “Goodwill and Intangible Assets” (“SFAS No. 142”) and SFAS
No. 147, “Acquisition of Certain Financial Institutions” (“SFAS No. 147”),
Pinnacle Financial recorded at fair value the following assets and liabilities
of Cavalry as of March 15, 2006:
Cash
and cash equivalents
|
|
$
|
37,420,210
|
|
Investment
securities - available-for-sale
|
|
|
39,476,178
|
|
Loans,
net of an allowance for loan losses of $5,102,296
|
|
|
545,598,367
|
|
Goodwill
|
|
|
115,835,254
|
|
Core
deposit intangible
|
|
|
13,168,236
|
|
Other
assets
|
|
|
47,441,280
|
|
Total
assets acquired
|
|
|
798,939,525
|
|
|
|
|
|
|
Deposits
|
|
|
583,640,043
|
|
Federal
Home Loan Bank advances
|
|
|
17,766,661
|
|
Other
liabilities
|
|
|
25,255,578
|
|
Total
liabilities assumed
|
|
|
626,662,282
|
|
Total
consideration paid for Cavalry
|
|
$
|
172,277,243
|
|
As
discussed more fully below, total consideration is comprised of $171.1 million
in Pinnacle Financial common shares issued to former Cavalry shareholders and
options issued to former Cavalry option holders and $1.2 million in acquisition
costs. Pinnacle Financial is in the process of finalizing the allocation of
the
purchase price to the acquired net assets noted above. Accordingly, the above
allocations should be considered preliminary as of June 30, 2006.
As
noted
above, total consideration for Cavalry approximates $172.3 million of which
$171.1 million was in the form of Pinnacle Financial common shares and options
to acquire Pinnacle Financial common shares and $1.2 million in costs related
to
the acquisition. Pinnacle Financial issued 6,856,298 shares of Pinnacle
Financial common stock to the former Cavalry shareholders. In accordance with
EITF 99-12, “Determination of the Measurement Date for the Market Price of
Acquirer Securities Issued in a Purchase Business Combination,” the
consideration shares were valued at $24.53 per common share which represents
the
average closing price of Pinnacle Financial common stock from the two days
prior
to the merger announcement on September 30, 2005 through the two days after
the
merger announcement. Aggregate consideration for the common stock issued was
approximately $168.2 million. Additionally, Pinnacle Financial also has assumed
the Cavalry Bancorp, Inc. 1999 Stock Incentive Plan (the “Cavalry Plan”)
pursuant to which Pinnacle is obligated to issue 195,551 shares of Pinnacle
Financial common stock upon exercise of stock options awarded to certain former
Cavalry employees who held outstanding options as of March 15, 2006. All of
these options were fully vested prior to the merger announcement date and expire
at various dates between 2011 and 2012. The exercise prices for these stock
options range between $10.26 per share and $13.68 per share. In accordance
with
SFAS No. 141, Pinnacle Financial has considered the fair value of these options
in determining the acquisition cost of Cavalry. The fair value of these vested
options approximated $2.9 million which has been included as a component of
the
aggregate purchase price. Additionally, Pinnacle Financial has incurred
approximately $1.2 million in acquisition costs associated with the purchase
of
Cavalry through June 30, 2006. These costs primarily relate to investment
banking and attorney fees.
In
accordance with SFAS Nos. 141 and 142, Pinnacle Financial has recognized $13.2
million as a core deposit intangible. This identified intangible is being
amortized over seven years using an accelerated method which anticipates the
life of the underlying deposits to which the intangible is attributable. For
the
three and six months ended June 30, 2006, approximately $647,000 and $713,000,
respectively, was recognized in the accompanying statement of income as other
noninterest expense. Amortization expense associated with this identified
intangible will approximate $1.8 million to $2.1 million per year for the next
five years with lesser amounts for the remaining two years.
Pinnacle
Financial also recorded other adjustments to the carrying value of Cavalry’s
assets and liabilities in order to reflect the fair value of those net assets
in
accordance with generally accepted accounting principles, including a $4.8
million discount associated with the loan portfolio, a $2.6 million premium
for
Cavalry’s certificates of deposit and a $4.6 million premium for Cavalry’s land
and buildings. Pinnacle Financial also recorded the corresponding deferred
tax
asset or liability associated with these adjustments. The discounts and premiums
related to financial assets and liabilities will be amortized into our
statements of income in future periods using a method that approximates the
level yield method over the anticipated lives of the underlying financial assets
or liabilities. For the three and six months ended June 30, 2006, the accretion
of the fair value discounts related to the acquired loans and certificates
of
deposit increased net interest income by approximately $1.1 million and $1.3
million, respectively. Based on the estimated useful lives of the acquired
loans
and deposits, Pinnacle Financial expects to recognize increases in net interest
income related to accretion of these purchase accounting adjustments of $1.9
million for the remainder of fiscal year 2006 and $4.1 million in subsequent
years.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Statement
of Position 03-03, Accounting
for Certain Loans or Debt Securities Acquired in a Transfer
(“SOP
03-03”) addresses accounting for differences between contractual cash flows and
cash flows expected to be collected from an investor's initial investment in
loans or debt securities (loans) acquired in a transfer if those differences
are
attributable, at least in part, to credit quality. It includes loans
acquired in purchase business combinations and applies to all nongovernmental
entities, including not-for-profit organizations. The SOP does not apply
to loans originated by the entity. The preliminary purchase accounting
adjustments reflect a reduction in loans and the allowance for loan losses
of
$1.0 million related to Cavalry’s impaired loans.
The
following pro forma income statements assume the merger was consummated on
January 1, 2005. The pro forma information does not reflect Pinnacle Financial’s
results of operations that would have actually occurred had the merger been
consummated on such date (dollars in thousands).
|
|
Six
Months Ended June 30,
|
|
|
|
2006
|
|
2005(1)
|
|
Pro
Forma Income Statements:
|
|
|
|
|
|
Net
interest income
|
|
$
|
31,866
|
|
$
|
26,568
|
|
Provision
for loan losses
|
|
|
3,075
|
|
|
1,195
|
|
Noninterest
income
|
|
|
8,825
|
|
|
8,633
|
|
Noninterest
expense (2):
|
|
|
|
|
|
|
|
Compensation
|
|
|
14,519
|
|
|
12,480
|
|
Other
noninterest expense
|
|
|
9,714
|
|
|
9,042
|
|
Net
income before taxes
|
|
|
13,383
|
|
|
12,484
|
|
Income
tax expense
|
|
|
5,376
|
|
|
3,855
|
|
Net
income
|
|
$
|
8,007
|
|
$
|
8,629
|
|
|
|
|
|
|
|
|
|
Pro
Forma Per Share Information:
|
|
|
|
|
|
|
|
Basic
net income per common share
|
|
$
|
0.52
|
|
$
|
0.57
|
|
Diluted
net income per common share
|
|
$
|
0.49
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
15,314,194
|
|
|
15,251,947
|
|
Diluted
|
|
|
16,481,573
|
|
|
16,396,739
|
|
(1) |
In
the first quarter of 2005, Cavalry recorded a tax benefit of $427,000
due
to a cash distribution of dividends to the participants in their
employee
stock ownership plan. Excluding this benefit would have lowered net
income
for the six months ended June 30, 2005 by $427,000 resulting in net
income
of $8,202,000 or $0.54 per basic share and $0.50 per fully-diluted
share.
|
(2) |
In
preparation for the merger during the first quarter of 2006, Cavalry
and
Pinnacle incurred significant merger related charges of approximately
$10.6 million in the aggregate primarily for severance benefits,
accelerated vesting of defined compensation agreements, investment
banker
fees, etc. Including these charges would have decreased net income
for the
six months ended June 30, 2006 by $6.45 million resulting in net
income of
$1,558,000 and a basic and fully diluted net income per share of
$0.10 and
$0.09, respectively.
|
During
the three and six months ended June 30, 2006, Pinnacle Financial incurred merger
integration expense related to the merger with Cavalry of $921,000 and
$1,365,000, respectively. These expenses were directly related to the merger,
recognized as incurred and reflected on the accompanying consolidated statement
of income as merger related expense.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
3. Securities
The
amortized cost and fair value of securities available-for-sale and
held-to-maturity at June 30, 2006 and December 31, 2005 are summarized as
follows:
|
|
June
30, 2006
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
U.S.
government agency securities
|
|
|
32,065,061
|
|
|
-
|
|
|
1,172,989
|
|
|
30,892,072
|
|
Mortgage-backed
securities
|
|
|
208,565,166
|
|
|
-
|
|
|
8,606,904
|
|
|
199,958,262
|
|
State
and municipal securities
|
|
|
46,391,122
|
|
|
2,679
|
|
|
1,082,438
|
|
|
45,311,363
|
|
Corporate
notes and other
|
|
|
2,293,310
|
|
|
-
|
|
|
106,595
|
|
|
2,186,715
|
|
|
|
$
|
289,314,659
|
|
$
|
2,679
|
|
$
|
10,968,926
|
|
$
|
278,348,412
|
|
Securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agency securities
|
|
$
|
17,747,054
|
|
$
|
-
|
|
$
|
804,129
|
|
$
|
16,942,925
|
|
State
and municipal securities
|
|
|
9,547,323
|
|
|
-
|
|
|
421,904
|
|
|
9,125,419
|
|
|
|
$
|
27,294,377
|
|
$
|
-
|
|
$
|
1,226,033
|
|
$
|
26,068,344
|
|
|
|
December
31, 2005
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
U.S.
government agency securities
|
|
|
31,054,469
|
|
|
-
|
|
|
534,899
|
|
|
30,519,570
|
|
Mortgage-backed
securities
|
|
|
190,708,007
|
|
|
44,378
|
|
|
3,866,210
|
|
|
186,886,175
|
|
State
and municipal securities
|
|
|
32,583,283
|
|
|
19,044
|
|
|
464,984
|
|
|
32,137,343
|
|
Corporate
notes
|
|
|
2,300,442
|
|
|
-
|
|
|
94,436
|
|
|
2,206,006
|
|
|
|
$
|
256,646,201
|
|
$
|
63,422
|
|
$
|
4,960,529
|
|
$
|
251,749,094
|
|
Securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agency securities
|
|
$
|
17,746,883
|
|
$
|
-
|
|
$
|
441,208
|
|
$
|
17,305,675
|
|
State
and municipal securities
|
|
|
9,584,368
|
|
|
-
|
|
|
343,746
|
|
|
9,240,622
|
|
|
|
$
|
27,331,251
|
|
$
|
-
|
|
$
|
784,954
|
|
$
|
26,546,297
|
|
On
March
31, 2004, Pinnacle National transferred approximately $27,656,000 of
available-for-sale securities to held-to-maturity at fair value. The transfer
consisted of substantially all of Pinnacle National’s holdings of Tennessee
municipal securities and several of its longer-term agency securities. The
net
unrealized gain on such securities as of the date of transfer was approximately
$325,000. This amount is reflected in the accumulated other comprehensive
income, net of tax, and is being amortized over the remaining lives of the
respective held-to-maturity securities. At June 30, 2006, the unamortized amount
approximated $203,000.
Pinnacle
Financial realized approximately $114,000 in gains from the sale of $6,792,000
of available-for-sale securities during the six months ended June 30, 2005.
There were no sales of securities during the three months ended June 30, 2005
and during the three and six months ended June 30, 2006.
At
June
30, 2006, approximately $295,426,000 of Pinnacle Financial’s securities were
pledged to secure public funds and other deposits and securities sold under
agreements to repurchase.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At
June
30, 2006 and December 31, 2005, included in securities were the following
investments with unrealized losses. The information below classifies these
investments according to the term of the unrealized loss of less than twelve
months or twelve months or longer:
|
|
Investments
With an Unrealized
Loss
of Less than 12 months
|
|
Investments
With an Unrealized
Loss
of 12 months or longer
|
|
Total
Investments With an Unrealized Loss
|
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
At
June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agency securities
|
|
$
|
24,176,940
|
|
$
|
904,174
|
|
$
|
22,658,525
|
|
$
|
1,072,944
|
|
$
|
46,835,465
|
|
$
|
1,977,118
|
|
Mortgage-backed
securities
|
|
|
121,642,883
|
|
|
4,140,593
|
|
|
78,082,370
|
|
|
4,466,311
|
|
|
199,725,253
|
|
|
8,606,904
|
|
State
and municipal securities
|
|
|
34,969,725
|
|
|
799,039
|
|
|
16,949,221
|
|
|
705,304
|
|
|
51,918,946
|
|
|
1,504,343
|
|
Corporate
notes
|
|
|
-
|
|
|
-
|
|
|
2,186,715
|
|
|
106,594
|
|
|
2,186,715
|
|
|
106,594
|
|
Total
temporarily-impaired securities
|
|
$
|
180,789,548
|
|
$
|
5,843,806
|
|
$
|
119,876,831
|
|
$
|
6,351,153
|
|
$
|
300,666,379
|
|
$
|
12,194,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agency securities
|
|
$
|
28,605,270
|
|
$
|
463,534
|
|
$
|
19,219,975
|
|
$
|
512,573
|
|
$
|
47,825,245
|
|
$
|
976,107
|
|
Mortgage-backed
securities
|
|
|
110,636,351
|
|
|
1,586,394
|
|
|
69,512,865
|
|
|
2,279,816
|
|
|
180,149,216
|
|
|
3,866,210
|
|
State
and municipal securities
|
|
|
22,692,062
|
|
|
341,869
|
|
|
14,074,344
|
|
|
466,861
|
|
|
36,766,406
|
|
|
808,730
|
|
Corporate
notes
|
|
|
-
|
|
|
-
|
|
|
2,206,006
|
|
|
94,436
|
|
|
2,206,006
|
|
|
94,436
|
|
Total
temporarily-impaired securities
|
|
$
|
161,933,683
|
|
$
|
2,391,797
|
|
$
|
105,013,190
|
|
$
|
3,353,686
|
|
$
|
266,946,873
|
|
$
|
5,745,483
|
|
Management
evaluates securities for other-than-temporary impairment on at least a quarterly
basis, and more frequently when economic or market concerns warrant such
evaluation. Consideration is given to (1) the length of time and the extent
to
which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of Pinnacle
Financial to retain its investment in the issue for a period of time sufficient
to allow for any anticipated recovery in fair value. Because the declines in
fair value noted above were attributable to increases in interest rates and
not
attributable to credit quality and because Pinnacle Financial has the ability
and intent to hold all of these investments until a market price recovery or
maturity, the impairment of these investments is not deemed to be
other-than-temporary.
Note
4. Loans and Allowance for Loan Losses
The
composition of loans at June 30, 2006 and December 31, 2005 is summarized as
follows:
|
|
At
June 30,
|
|
At
December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Commercial
real estate - Mortgage
|
|
$
|
260,167,585
|
|
$
|
148,102,053
|
|
Commercial
real estate - Construction
|
|
|
164,049,024
|
|
|
30,295,106
|
|
Commercial
- Other
|
|
|
503,797,138
|
|
|
239,128,969
|
|
Total
Commercial
|
|
|
928,013,747
|
|
|
417,526,128
|
|
Consumer
real estate - Mortgage
|
|
|
294,118,769
|
|
|
169,952,860
|
|
Consumer
real estate - Construction
|
|
|
86,978,487
|
|
|
37,371,834
|
|
Consumer
- Other
|
|
|
49,162,350
|
|
|
23,173,210
|
|
Total
Consumer
|
|
|
430,259,606
|
|
|
230,497,904
|
|
Total
Loans
|
|
|
1,358,273,353
|
|
|
648,024,032
|
|
Allowance
for loan losses
|
|
|
(14,686,365
|
)
|
|
(7,857,774
|
)
|
Loans,
net
|
|
$
|
1,343,586,988
|
|
$
|
640,166,258
|
|
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Changes
in the allowance for loan losses for the six months ended June 30, 2006 and
for
the year ended December 31, 2005 are as follows:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
7,857,774
|
|
$
|
5,650,014
|
|
Charged-off
loans
|
|
|
(500,158
|
)
|
|
(207,647
|
)
|
Recovery
of previously charged-off loans
|
|
|
132,404
|
|
|
263,441
|
|
Allowance
from Cavalry acquisition (see note 2)
|
|
|
5,102,296
|
|
|
-
|
|
Provision
for loan losses
|
|
|
2,094,049
|
|
|
2,151,966
|
|
Balance
at end of period
|
|
$
|
14,686,365
|
|
$
|
7,857,774
|
|
At
June
30, 2006 and 2005, Pinnacle Financial had certain impaired loans on nonaccruing
interest status. The principal balance of these nonaccrual loans amounted to
$2,867,000 and $561,000 at June 30, 2006 and 2005, respectively. In each case,
at the date such loans were placed on nonaccrual, Pinnacle Financial reversed
all previously accrued interest income against current year earnings. Had these
loans been on accruing status, interest income would have been higher by $54,000
and $29,000 for the six months ended June 30, 2006 and 2005,
respectively.
At
June
30, 2006, Pinnacle Financial had granted loans and other extensions of credit
amounting to approximately $13,350,000 to certain directors, executive officers,
and their related entities, of which approximately $7,055,000 had been drawn
upon. At December 31, 2005, Pinnacle Financial had granted loans and other
extensions of credit amounting to approximately $13,223,000 to certain
directors, executive officers, and their related entities, of which $6,958,000
had been drawn upon. The terms on these loans and extensions are on
substantially the same terms customary for other persons for the type of loan
involved.
During
the three and six months ended June 30, 2006 and 2005, Pinnacle Financial sold
participations in certain loans to correspondent banks at an interest rate
that
was less than that of the borrower’s rate of interest. In accordance with
generally accepted accounting principles, Pinnacle Financial has reflected
a net
gain on the sale of these participated loans for the three months ended June
30,
2006 and 2005 of approximately $49,000 and $152,000, respectively, and for
the
six months ended June 30, 2006 and 2005, Pinnacle Financial reflected a net
gain
on the sale of participated loans of $123,000 and $137,000, respectively, which
is attributable to the present value of the future net cash flows of the
difference between the interest payments the borrower is projected to pay
Pinnacle Financial and the amount of interest that will be owed the
correspondent based on their participation in the loan.
Note
5. Income Taxes
Income
tax expense attributable to income from continuing operations for the three
and
six months ended June 30, 2006 and 2005 consists of the following:
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Current
tax expense:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
2,738,722
|
|
$
|
945,422
|
|
$
|
4,212,938
|
|
$
|
1,935,269
|
|
State
|
|
|
200,060
|
|
|
32,107
|
|
|
310,094
|
|
|
92,649
|
|
Total
current tax expense
|
|
|
2,938,780
|
|
|
977,529
|
|
|
4,523,032
|
|
|
2,027,918
|
|
Deferred
tax benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(667,940
|
)
|
|
(144,933
|
)
|
|
(979,266
|
)
|
|
(420,494
|
)
|
State
|
|
|
(129,953
|
)
|
|
(29,418
|
)
|
|
(176,119
|
)
|
|
(85,351
|
)
|
Total
deferred tax benefit
|
|
|
(797,893
|
)
|
|
(174,351
|
)
|
|
(1,155,385
|
)
|
|
(505,845
|
)
|
|
|
$
|
2,140,887
|
|
$
|
803,178
|
|
$
|
3,367,647
|
|
$
|
1,522,073
|
|
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Pinnacle
Financial's income tax expense (benefit) differs from the amounts computed
by
applying the Federal income tax statutory rates of 35% in 2006 and 34% in 2005
to income before income taxes. A reconciliation of the differences for the
three
and six months ended June 30, 2006 and 2005 is as follows:
|
|
Three
Months Ended
June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes at statutory rate
|
|
$
|
2,262,176
|
|
$
|
939,197
|
|
$
|
3,605,706
|
|
$
|
1,788,737
|
|
State
tax expense, net of federal tax effect
|
|
|
45,568
|
|
|
1,775
|
|
|
87,084
|
|
|
23,395
|
|
Federal
tax credits
|
|
|
(75,000
|
)
|
|
(75,000
|
)
|
|
(150,000
|
)
|
|
(150,000
|
)
|
Tax-exempt
securities
|
|
|
(150,639
|
)
|
|
(62,628
|
)
|
|
(270,612
|
)
|
|
(115,977
|
)
|
Other
items
|
|
|
58,782
|
|
|
(166
|
)
|
|
95,469
|
|
|
(24,082
|
)
|
Income
tax expense
|
|
$
|
2,140,887
|
|
$
|
803,178
|
|
$
|
3,367,647
|
|
$
|
1,522,073
|
|
The
effective tax rate for 2006 and 2005 is impacted by Federal tax credits related
to the New Markets Tax Credit program whereby a subsidiary of Pinnacle National
has been awarded approximately $2.3 million in future Federal tax credits which
are available thru 2010. Tax benefits related to these credits will be
recognized for financial reporting purposes in the same periods that the credits
are recognized in the Company’s income tax returns. The credit that is available
for each of the years ended December 31, 2006 and 2005 is $300,000. Pinnacle
Financial believes that it will comply with the various regulatory provisions
of
the New Markets Tax Credit program in fiscal 2006, and therefore has reflected
the impact of the credits in its estimated annual effective tax rate for 2006.
During 2004, Pinnacle National formed a real estate investment trust which
provides Pinnacle Financial with an alternative vehicle for raising capital.
Additionally, the ownership structure of this real estate investment trust
provides certain state income tax benefits to Pinnacle National and Pinnacle
Financial.
In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level
of
historical taxable income and projections for future taxable income over the
periods in which the deferred tax assets are deductible, management believes
it
is more likely than not that Pinnacle Financial will realize the benefit of
these deductible differences. However, the amount of the deferred tax asset
considered realizable could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
The
components of deferred income taxes included in other assets in the accompanying
consolidated balance sheets at June 30, 2006 and December 31, 2005 are as
follows:
|
|
2006
|
|
2005
|
|
Deferred
tax assets:
|
|
|
|
|
|
Loans
and loan loss allowance
|
|
$
|
8,008,908
|
|
$
|
3,019,094
|
|
Securities
|
|
|
4,089,659
|
|
|
1,773,521
|
|
Merger
related deferred deductions
|
|
|
1,082,765
|
|
|
-
|
|
Accrued
liability for salaried executive retirement plan
|
|
|
1,461,516
|
|
|
-
|
|
Other
deferred tax assets
|
|
|
156,075
|
|
|
174,816
|
|
|
|
|
14,798,923
|
|
|
4,967,431
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,100,308
|
|
|
417,207
|
|
Deposits
|
|
|
4,107,535
|
|
|
-
|
|
FHLB
dividends
|
|
|
694,837
|
|
|
-
|
|
Other
deferred tax liabilities
|
|
|
61,264
|
|
|
139,602
|
|
|
|
|
6,963,944
|
|
|
556,809
|
|
Net
deferred tax assets
|
|
$
|
7,834,977
|
|
$
|
4,410,622
|
|
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
6. Commitments and Contingent Liabilities
In
the
normal course of business, Pinnacle Financial has entered into off-balance
sheet
financial instruments which include commitments to extend credit (i.e.,
including unfunded lines of credit) and standby letters of credit. Commitments
to extend credit are usually the result of lines of credit granted to existing
borrowers under agreements that the total outstanding indebtedness will not
exceed a specific amount during the term of the indebtedness. Typical borrowers
are commercial concerns that use lines of credit to supplement their treasury
management functions, thus their total outstanding indebtedness may fluctuate
during any time period based on the seasonality of their business and the
resultant timing of their cash flows. Other typical lines of credit are related
to home equity loans granted to consumers. Commitments to extend credit
generally have fixed expiration dates or other termination clauses and may
require payment of a fee.
Standby
letters of credit are generally issued on behalf of an applicant (our customer)
to a specifically named beneficiary and are the result of a particular business
arrangement that exists between the applicant and the beneficiary. Standby
letters of credit have fixed expiration dates and are usually for terms of
two
years or less unless terminated beforehand due to criteria specified in the
standby letter of credit. A typical arrangement involves the applicant routinely
being indebted to the beneficiary for such items as inventory purchases,
insurance, utilities, lease guarantees or other third party commercial
transactions. The standby letter of credit would permit the beneficiary to
obtain payment from Pinnacle Financial under certain prescribed circumstances.
Subsequently, Pinnacle Financial would then seek reimbursement from the
applicant pursuant to the terms of the standby letter of credit.
Pinnacle
Financial follows the same credit policies and underwriting practices when
making these commitments as it does for on-balance sheet instruments. Each
customer’s creditworthiness is evaluated on a case-by-case basis, and the amount
of collateral obtained, if any, is based on management’s credit evaluation of
the customer. Collateral held varies but may include cash, real estate and
improvements, marketable securities, accounts receivable, inventory, equipment,
and personal property.
The
contractual amounts of these commitments are not reflected in the consolidated
financial statements and would only be reflected if drawn upon. Since many
of
the commitments are expected to expire without being drawn upon, the contractual
amounts do not necessarily represent future cash requirements. However, should
the commitments be drawn upon and should our customers default on their
resulting obligation to us, Pinnacle Financial's maximum exposure to credit
loss, without consideration of collateral, is represented by the contractual
amount of those instruments.
A
summary
of Pinnacle Financial's total contractual amount for all off-balance sheet
commitments at June 30, 2006 is as follows:
Commitments
to extend credit
|
|
$
|
459,129,544
|
|
Standby
letters of credit
|
|
$
|
61,678,900
|
|
At
June
30, 2006, the fair value of Pinnacle Financial’s standby letters of credit was
$211,000. This amount represents the unamortized fee associated with these
standby letters of credit and is included in the consolidated balance sheet
of
Pinnacle Financial. This fair value will decrease over time as the existing
standby letters of credit approach their expiration dates.
Various
legal claims also arise from time to time in the normal course of business.
In
the opinion of management, the resolution of claims outstanding at June 30,
2006
will not have a material effect on Pinnacle Financial’s consolidated financial
statements.
Note
7. Stock Option Plan and Restricted Shares
Pinnacle
Financial has two equity incentive plans under which it has granted stock
options to its employees to purchase common stock at or above the fair market
value on the date of grant and granted restricted share awards to employees
and
directors. During the first quarter of 2006 and in connection with its merger
with Cavalry, Pinnacle Financial assumed a third equity incentive plan, (the
“Cavalry Plan”). All options granted under the Cavalry Plan were fully vested
prior to Pinnacle Financial’s merger with Cavalry and expire at various dates
between January 2011 and June 2012. In connection with the merger, all options
to acquire Cavalry common stock were converted to options to acquire Pinnacle
Financial common stock at the 0.95 exchange ratio. The exercise price was
adjusted using the same conversion ratio. All other terms of the Cavalry options
were unchanged. There are 195,551 Pinnacle shares which can be acquired by
the
participants in the Cavalry Plan at exercise prices that range between $10.26
per share and $13.68 per share.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As
of
June 30, 2006, of the 1,562,000 stock options outstanding, 1,352,000 options
were granted with the intention to be incentive stock options qualifying under
Section 422 of the Internal Revenue Code for favorable tax treatment to the
option holder while 210,000 options would be deemed non-qualified stock options
and thus not subject to favorable tax treatment to the option holder. All stock
options under the plans vest in equal increments over five years from the date
of grant and are exercisable over a period of ten years from the date of grant.
A
summary
of the activity within the three equity incentive plans during the six months
ended June 30, 2006 and information regarding expected vesting, contractual
terms remaining, intrinsic values and other matters was as follows:
|
|
Number
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Contractual
Remaining
Term
(in
years)
|
|
Aggregate
Intrinsic
Value
(1)
(000’s)
|
|
Outstanding
at December 31, 2005
|
|
|
1,242,393
|
|
$
|
9.78
|
|
|
|
|
|
|
|
Additional
stock option grants resulting from assumption of the Cavalry
Plan
|
|
|
195,551
|
|
|
10.80
|
|
|
|
|
|
|
|
Granted
|
|
|
210,569
|
|
|
26.57
|
|
|
|
|
|
|
|
Exercised
|
|
|
(83,667
|
)
|
|
9.83
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(3,182
|
)
|
|
18.36
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2006
|
|
|
1,561,664
|
|
$
|
12.15
|
|
|
6.57
|
|
$
|
28,543
|
|
Outstanding
and expected to vest at June 30, 2006
|
|
|
1,533,201
|
|
$
|
12.07
|
|
|
6.56
|
|
$
|
28,153
|
|
Options
exercisable at June 30, 2006
|
|
|
943,308
|
|
$
|
7.22
|
|
|
5.38
|
|
$
|
21,891
|
|
|
(1)
|
The
aggregate intrinsic value is calculated as the difference between
the
exercise price of the underlying awards and the quoted price of Pinnacle
Financial common stock of $30.43 per common share for the 1.56 million
options that were in-the-money at June 30,
2006.
|
During
the six months ended June 30, 2006, 133,453 option awards vested at an average
exercise price of $11.82 and an intrinsic value of approximately $4.06
million.
During
the six months ended June 30, 2006 and 2005, the aggregate intrinsic value
of
options exercised under our equity incentive plans was
$1,479,000 and $274,000, respectively, determined
as of
the date of option exercise. As of June 30, 2006, there was approximately
$3.4 million of total unrecognized compensation cost related to unvested
share-based compensation arrangements granted under our equity incentive plans.
That cost is expected to be recognized over a weighted-average period of 3.9
years.
Pinnacle
Financial adopted SFAS No. 123(R) using the modified prospective transition
method beginning January 1, 2006. Accordingly, during the six-month period
ended June 30, 2006, we recorded stock-based compensation expense using the
Black-Scholes valuation model for awards granted prior to, but not yet vested,
as of January 1, 2006 and for stock-based awards granted after January 1,
2006, based on fair value estimated using the Black-Scholes valuation model.
For
these awards, we have recognized compensation expense using a straight-line
amortization method. As SFAS No. 123(R) requires that stock-based
compensation expense be based on awards that are ultimately expected to vest,
stock-based compensation for the six-month period ended June 30, 2006 has been
reduced for estimated forfeitures. The impact on our results of operations
(compensation and employee benefits expense) and earnings per share of recording
stock-based compensation in accordance with SFAS No. 123(R) (related to stock
option awards) for the six-month period ended June 30, 2006 was as
follows:
|
|
Awards
granted with
the
intention to be classified
as
incentive stock options
|
|
Non-qualified
stock
option
awards
|
|
Totals
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
$
|
284,625
|
|
$
|
120,769
|
|
$
|
405,394
|
|
Deferred
income tax benefit
|
|
|
-
|
|
|
42,269
|
|
|
42,269
|
|
Impact
of stock-based compensation expense after deferred income tax
benefit
|
|
$
|
284,625
|
|
$
|
78,500
|
|
$
|
363,125
|
|
Impact
on earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
- 12,473,187 weighted average shares outstanding
|
|
$
|
0.023
|
|
$
|
0.006
|
|
$
|
0.029
|
|
Fully
diluted - 13,640,565 weighted average shares outstanding
|
|
$
|
0.021
|
|
$
|
0.006
|
|
$
|
0.027
|
|
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For
purposes of these calculations, the fair value of options granted for each
of
the six months ended June 30, 2006 and 2005 was estimated using the
Black-Scholes option pricing model and the following assumptions:
|
For
the six months ended June 30,
|
|
2006
|
2005
|
|
|
|
Risk
free interest rate
|
4.48%
|
2.37%
|
Expected
life of options
|
6.50
years
|
5.00
years
|
Expected
dividend yield
|
0.00%
|
0.00%
|
Expected
volatility
|
23.6%
|
39.6%
|
Weighted
average fair value
|
$9.61
|
$8.98
|
Pinnacle
Financial’s computation of expected volatility is based on historical
volatility. Pinnacle
Financial used the simplified method in determining the estimated life of stock
option issuances. The
risk
free interest rate of the award is based on the closing market bid for U.S.
Treasury securities corresponding to the expected life of the stock option
issuances in effect at the time of grant.
Additionally,
Pinnacle Financial’s 2004 Equity Incentive Plan provides for the granting of
restricted share awards and other performance-based awards, such as stock
appreciation rights. During 2005 and 2004, Pinnacle Financial awarded 16,366
shares and 3,846 shares, respectively, of restricted common stock to certain
executives of Pinnacle Financial. The fair value of these awards as of the
date
of grant was $24.98 and $22.62 per share, respectively. The forfeiture
restrictions on the restricted shares lapse in three separate traunches should
Pinnacle Financial achieve certain earnings and soundness targets over the
subsequent three year period, excluding the impact of merger related expense
in
2006. Compensation expense associated with the restricted share awards is
recognized over the time period that the restrictions associated with the awards
lapse based on a graded vesting schedule such that each traunche is amortized
separately. Earnings and soundness targets for the 2005 and 2004 fiscal years
were achieved and the restrictions related to 6,734 shares and 1,282 shares,
respectively, were released. For the six months ended June 30, 2006 and 2005,
Pinnacle Financial recognized approximately $76,000 and $15,000, respectively,
in compensation costs attributable to these awards. Accumulated compensation
costs since the date these shares were awarded have amounted to approximately
$402,000 through June 30, 2006. Pinnacle Financial anticipates that should
the
remaining restrictions on these restricted shares lapse, Pinnacle Financial
will
incur an additional $131,000 in compensation costs based on the closing price
at
June 30, 20006 of Pinnacle Financial common stock on the NASDAQ National Market.
During
2006, the Board of Directors of Pinnacle Financial awarded 4,400 shares of
restricted common stock to the eleven outside members of the board in accordance
with their 2006 board compensation package. Each board member received an award
of 400 shares. The restrictions on these shares will lapse on the one year
anniversary date of the award provided the individual board members meets
attendance goals for the various board and board committee meetings to which
they are scheduled to attend during the fiscal year ended December 31, 2006.
The
weighted average fair value of these awards as of the date of grant was $26.05
per share. For the six months ended June 30, 2006, Pinnacle Financial recognized
approximately $52,000, respectively, in compensation costs attributable to
these
awards. Accumulated compensation costs since the date these shares were awarded
have amounted to approximately $52,000 through June 30, 2006. Pinnacle Financial
anticipates that should the remaining restrictions on these shares lapse,
Pinnacle Financial will incur an additional $63,000 in compensation costs.
|
|
Executive
Management Grants
|
|
Board
of Director Grants
|
|
(number
of share awards)
|
|
Vested
|
|
Unvested
|
|
Totals
|
|
Vested
|
|
Unvested
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at Dec. 31, 2005
|
|
|
8,014
|
|
|
12,198
|
|
|
20,212
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
4,400
|
|
|
4,400
|
|
Forfeited
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Vested
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balances
at June 30, 2006
|
|
|
8,014
|
|
|
12,198
|
|
|
20,212
|
|
|
-
|
|
|
4,400
|
|
|
4,400
|
|
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Prior
to
January 1, 2006, Pinnacle Financial applied APB Opinion No. 25 and related
interpretations in accounting for its stock option plans. All option grants
carry exercise prices equal to or above the fair value of the common stock
on
the date of grant. Accordingly, no compensation cost had been recognized for
such periods. Had compensation cost for Pinnacle Financial’s equity incentive
plans been determined based on the fair value at the grant dates for awards
under the plans consistent with the method prescribed in SFAS No. 123(R),
Pinnacle Financial’s net income and net income per share would have been
adjusted to the pro forma amounts indicated below for the three and six months
ended June 30, 2005:
|
|
For
the three
months
ended June 30, 2005
|
|
For
the six
months
ended June 30, 2005
|
|
|
|
|
|
|
|
Net
income, as reported
|
|
$
|
1,959,169
|
|
$
|
3,738,922
|
|
Add:
Compensation expense recognized in the accompanying consolidated
statement
of income, net of related tax effects
|
|
|
4,558
|
|
|
9,116
|
|
Deduct:
Total stock-based compensation expense determined under the fair
value
based method for all awards, net of related tax effects
|
|
|
(182,609
|
)
|
|
(352,365
|
)
|
Pro
forma net income
|
|
$
|
1,781,119
|
|
$
|
3,395,673
|
|
|
|
|
|
|
|
|
|
Per
share information:
|
|
|
|
|
|
|
|
Basic
net
income As
reported
|
|
$
|
0.23
|
|
$
|
0.45
|
|
Pro
forma
|
|
|
0.21
|
|
|
0.40
|
|
|
|
|
|
|
|
|
|
Diluted
net
income
As reported
|
|
$
|
0.21
|
|
$
|
0.40
|
|
Pro forma
|
|
|
0.19
|
|
|
0.36
|
|
Note
8. Regulatory Matters
Pinnacle
National is subject to restrictions on the payment of dividends to Pinnacle
Financial under federal banking laws and the regulations of the Office of the
Comptroller of the Currency. Pinnacle Financial is also subject to limits on
payment of dividends to its shareholders by the rules, regulations and policies
of federal banking authorities. Pinnacle Financial has not paid any cash
dividends since inception, and it does not anticipate that it will consider
paying dividends until Pinnacle National generates sufficient capital from
operations to support both anticipated asset growth and dividend payments.
Pinnacle
Financial and Pinnacle National are subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly additional
discretionary actions, by regulators that, if undertaken, could have a direct
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, Pinnacle Financial
and Pinnacle National must meet specific capital guidelines that involve
quantitative measures of the assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. Pinnacle Financial’s
and Pinnacle National’s capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and
other factors.
Quantitative
measures established by regulation to ensure capital adequacy require Pinnacle
Financial and Pinnacle National to maintain minimum amounts and ratios of Total
and Tier I capital to risk-weighted assets and of Tier I capital to average
assets. Management believes, as of June 30, 2006 and December 31, 2005, that
Pinnacle Financial and Pinnacle National met all capital adequacy requirements
to which they are subject. To be categorized as well-capitalized, Pinnacle
National must maintain minimum Total risk-based, Tier I risk-based, and Tier
I
leverage ratios as set forth in the following table. Pinnacle Financial and
Pinnacle National’s actual capital amounts and ratios are presented in the
following table (dollars in thousands):
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
Actual
|
|
Minimum
Capital
Requirement
|
|
Minimum
To
Be Well-Capitalized
Under
Prompt
Corrective
Action
Provisions
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
At
June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle
Financial
|
|
$
|
165,055
|
|
|
10.4
|
%
|
$
|
127,061
|
|
|
8.0
|
%
|
not
applicable
|
Pinnacle
National
|
|
$
|
159,718
|
|
|
10.1
|
%
|
$
|
126,959
|
|
|
8.0
|
%
|
$
|
158,699
|
|
|
10.0
|
%
|
Tier
I capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle
Financial
|
|
$
|
150,368
|
|
|
9.5
|
%
|
$
|
63,531
|
|
|
4.0
|
%
|
not
applicable
|
Pinnacle
National
|
|
$
|
145,032
|
|
|
9.1
|
%
|
$
|
63,480
|
|
|
4.0
|
%
|
$
|
95,220
|
|
|
6.0
|
%
|
Tier
I capital to average assets (*):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle
Financial
|
|
$
|
150,368
|
|
|
8.6
|
%
|
$
|
70,222
|
|
|
4.0
|
%
|
not
applicable
|
Pinnacle
National
|
|
$
|
145,032
|
|
|
8.3
|
%
|
$
|
70,238
|
|
|
4.0
|
%
|
$
|
87,798
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle
Financial
|
|
$
|
105,101
|
|
|
12.6
|
%
|
$
|
66,521
|
|
|
8.0
|
%
|
not
applicable
|
Pinnacle
National
|
|
$
|
90,215
|
|
|
10.9
|
%
|
$
|
66,334
|
|
|
8.0
|
%
|
$
|
82,917
|
|
|
10.0
|
%
|
Tier
I capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle
Financial
|
|
$
|
97,243
|
|
|
11.7
|
%
|
$
|
33,261
|
|
|
4.0
|
%
|
not
applicable
|
Pinnacle
National
|
|
$
|
82,357
|
|
|
9.9
|
%
|
$
|
33,167
|
|
|
4.0
|
%
|
$
|
49,751
|
|
|
6.0
|
%
|
Tier
I capital to average assets (*):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle
Financial
|
|
$
|
97,243
|
|
|
9.9
|
%
|
$
|
39,444
|
|
|
4.0
|
%
|
not
applicable
|
Pinnacle
National
|
|
$
|
82,357
|
|
|
8.4
|
%
|
$
|
39,444
|
|
|
4.0
|
%
|
$
|
49,305
|
|
|
5.0
|
%
|
(*)
Average assets for the above calculations were based on the most recent
quarter.
Note
9. Business Segment Information
Pinnacle
Financial has four reporting segments comprised of commercial banking, trust
and
investment services, mortgage origination and insurance services. Pinnacle
Financial’s primary segment is commercial banking which consists of commercial
loan and deposit services as well as the activities of Pinnacle National’s
branch locations. Trust and investment services include trust services offered
by Pinnacle National and all brokerage and investment activities associated
with
Pinnacle Asset Management, an operating unit within Pinnacle National. Mortgage
origination is also a separate unit within Pinnacle National and focuses on
the
origination of residential mortgage loans for sale to investors in the secondary
residential mortgage market. The following tables present financial information
for each reportable segment for the six months ended June 30, 2006 and 2005
(dollars in thousands):
|
|
Commercial
Banking
|
|
Trust
and Investment Services
|
|
Mortgage
Origination
|
|
Insurance
Services
|
|
Total
Company
|
|
For
the six months ended June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
26,402
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
26,402
|
|
Provision
for loan losses
|
|
|
2,094
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,094
|
|
Noninterest
income
|
|
|
3,423
|
|
|
1,370
|
|
|
741
|
|
|
894
|
|
|
6,428
|
|
Noninterest
expense
|
|
|
18,492
|
|
|
940
|
|
|
482
|
|
|
520
|
|
|
20,434
|
|
Income
tax expense
|
|
|
2,937
|
|
|
169
|
|
|
102
|
|
|
160
|
|
|
3,368
|
|
Net
income
|
|
$
|
6,302
|
|
$
|
261
|
|
|
157
|
|
$
|
214
|
|
$
|
6,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End
of period assets
|
|
$
|
1,981,570
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4,055
|
|
$
|
1,985,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the six months ended June 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
13,295
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
13,295
|
|
Provision
for loan losses
|
|
|
1,084
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,084
|
|
Noninterest
income
|
|
|
1,007
|
|
|
774
|
|
|
813
|
|
|
-
|
|
|
2,594
|
|
Noninterest
expense
|
|
|
8,318
|
|
|
582
|
|
|
644
|
|
|
-
|
|
|
9,544
|
|
Income
tax expense
|
|
|
1,381
|
|
|
75
|
|
|
66
|
|
|
-
|
|
|
1,522
|
|
Net
income
|
|
$
|
3,519
|
|
$
|
117
|
|
$
|
103
|
|
$
|
-
|
|
$
|
3,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End
of period assets
|
|
$
|
872,076
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
872,076
|
|
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
10. Investments in Affiliated Companies
Investments
in affiliated companies accounted for under the equity method consist of 100%
of
the common securities of PNFP Statutory Trust I and PNFP Statutory Trust II,
wholly-owned statutory business trusts (collectively, the Trusts). The Trusts
were formed on December 30, 2003 and September 15, 2005, respectively.
Combined summary financial information for the Trusts follows (dollars in
thousands):
Combined
Summary Balance Sheets
|
|
|
|
June
30, 2006
|
|
December
31 2005
|
|
Asset
-
Investment in subordinated debentures issued by Pinnacle
Financial
|
|
$
|
30,929
|
|
$
|
30,929
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Stockholder’s
equity
-
Trust preferred securities
|
|
|
30,000
|
|
|
30,000
|
|
Common
securities (100% owned by Pinnacle Financial)
|
|
|
929
|
|
|
929
|
|
Total
stockholder’s equity
|
|
|
30,929
|
|
|
30,929
|
|
Total
liabilities and stockholder’s equity
|
|
$
|
30,929
|
|
$
|
30,929
|
|
Combined
Summary Income Statement
|
|
|
|
Six
months ended June 30,
|
|
|
|
2006
|
|
2005
|
|
Income
- Interest
income from subordinated debentures issued by Pinnacle
Financial
|
|
$
|
1,001
|
|
$
|
289
|
|
Net
Income
|
|
$
|
1,001
|
|
$
|
289
|
|
Combined
Summary Statement of Stockholder’s Equity
|
|
|
|
Trust
Preferred
Securities
|
|
Total
Common
Stock
|
|
Retained
Earnings
|
|
Stockholder’s
Equity
|
|
Beginning
balances, December 31, 2005
|
|
$
|
30,000
|
|
$
|
929
|
|
$
|
-
|
|
$
|
30,929
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
1,001
|
|
|
1,001
|
|
Dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust
preferred securities
|
|
|
-
|
|
|
-
|
|
|
(986
|
)
|
|
(986
|
)
|
Common
paid to Pinnacle Financial
|
|
|
-
|
|
|
-
|
|
|
(15
|
)
|
|
(15
|
)
|
Ending
balances, June 30, 2006
|
|
$
|
30,000
|
|
$
|
929
|
|
$
|
-
|
|
$
|
30,929
|
|
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, 2006 and
December 31, 2005 and our results of operations for the three and six months
ended June 30, 2006 and 2005. 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
General.
Our
rapid
growth from inception through the second quarter of 2006 has had a material
impact on our financial condition and results of operations. This rapid growth
resulted in fully diluted net income per common share for the three months
ended
June 30, 2006 and 2005 of $0.26 and $0.21, respectively. At June 30, 2006,
loans
totaled $1.36 billion, as compared to $648 million at December 31, 2005, while
total deposits increased to $1.56 billion at June 30, 2006 compared to $810
million at December 31, 2005.
Acquisition.
On
March
15, 2006, we consummated our merger with Cavalry Bancorp, Inc. (“Cavalry”), a
one-bank holding company located in Murfreesboro, Tennessee. Pursuant to the
merger agreement, we acquired all Cavalry common stock via a tax-free exchange
whereby Cavalry shareholders received a fixed exchange ratio of 0.95 shares
of
our common stock for each share of Cavalry common stock, or approximately 6.9
million Pinnacle Financial shares. The financial information herein includes
the
activities of the former Cavalry (the “Rutherford County market”) since March
15, 2006.
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141,
“Accounting for Business Combinations” (“SFAS No. 141”), SFAS No. 142, “Goodwill
and Intangible Assets” (“SFAS No. 142”) and SFAS No. 147, “Acquisition of
Certain Financial Institutions” (“SFAS No. 147”), we recorded at fair value the
following assets and liabilities of Cavalry as of March 15, 2006:
Cash
and cash equivalents
|
|
$
|
37,420,210
|
|
Investment
securities - available-for-sale
|
|
|
39,476,178
|
|
Loans,
net of an allowance for loan losses of $5,102,296
|
|
|
545,598,367
|
|
Goodwill
|
|
|
115,835,254
|
|
Core
deposit intangible
|
|
|
13,168,236
|
|
Other
assets
|
|
|
47,441,280
|
|
Total
assets acquired
|
|
|
798,939,525
|
|
Deposits
|
|
|
583,640,043
|
|
Federal
Home Loan Bank advances
|
|
|
17,766,661
|
|
Other
liabilities
|
|
|
25,255,578
|
|
Total
liabilities assumed
|
|
|
626,662,282
|
|
Total
consideration paid for Cavalry
|
|
$
|
172,277,243
|
|
We
are in the process of finalizing the allocation of the purchase price to the
acquired net assets noted above. Accordingly, the above allocations should
be
considered preliminary as of June 30, 2006.
As
noted
above, total consideration for Cavalry approximates $172.3 million of which
$171.1 million was in the form of our common shares and options to acquire
our
common shares and $1.2 million in costs related to the acquisition. We issued
6,856,298 shares of our common stock to the former Cavalry shareholders. In
accordance with EITF 99-12, “Determination of the Measurement Date for the
Market Price of Acquirer Securities Issued in a Purchase Business Combination,”
the shares were valued at $24.53 per common share which represents the average
closing price of our common stock from the two days prior to the merger
announcement on September 30, 2005 through the two days after the merger
announcement. Aggregate consideration for the common stock issued was
approximately $168.2 million. Additionally, we also have assumed the Cavalry
Bancorp, Inc. 1999 Stock Incentive Plan (the “Cavalry Plan”) pursuant to which
we were obligated to issue 195,551 shares of our common stock upon exercise
of
stock options awarded to certain former Cavalry employees who held outstanding
options as of March 15, 2006. All of these options were fully vested prior
to
the merger announcement date and expire at various dates between 2011 and 2012.
The exercise prices for these stock options range between $10.26 per share
and
$13.68 per share. In accordance with SFAS No. 141, we considered the fair value
of these options in determining the acquisition cost of Cavalry. The fair value
of these vested options approximated $2.9 million which has been included as
a
component of the aggregate purchase price.
Additionally,
we have incurred approximately $1.2 million in acquisition costs associated
with
the purchase of Cavalry through June 30, 2006. These costs primarily relate
to
investment banking and attorney fees.
In
accordance with SFAS Nos. 141 and 142, we recognized $13.2 million as a core
deposit intangible. This identified intangible is being amortized over seven
years using an accelerated method which anticipates the life of the underlying
deposits to which the intangible is attributable. For the three and six months
ended June 30, 2006, approximately $647,000 and $713,000, respectively, was
recognized in the statement of income as other noninterest expense. Amortization
expense associated with this identified intangible will approximate $1.8 million
to $2.1 million per year for the next five years with lesser amounts for the
remaining two years.
We
also
recorded other adjustments to the carrying value of Cavalry’s assets and
liabilities in order to reflect the fair value of those net assets in accordance
with generally accepted accounting principles, including a $4.8 million discount
associated with the loan portfolio, a $2.6 million premium for Cavalry’s
certificates of deposit and a $4.6 million premium for Cavalry’s land and
buildings. We have also recorded the corresponding deferred tax asset or
liability associated with these adjustments. The discounts and premiums related
to financial assets and liabilities will be amortized into our statements of
income in future periods using a method that approximates the level yield method
over the anticipated lives of the underlying financial assets or liabilities.
For the three and six months ended June 30, 2006, the accretion of the fair
value discounts related to the acquired loans and certificates of deposit
increased net interest income by approximately $1.1 million and $1.3 million,
respectively. Based on the estimated useful lives of the acquired loans and
deposits, we expect to recognize increases in net interest income related to
accretion of these purchase accounting adjustments of $1.9 million for the
remainder of fiscal year 2006 and $4.1 million in subsequent years.
The
Cavalry acquisition had a significant impact on our financial condition as
of
June 30, 2006. As of June 30, 2006, the Rutherford County market composed
approximately 42.4% of our total loans and 41.9% of total deposits. Our
consolidated balance sheet at June 30, 2006 reflects $1.36 billion in loans
and
$1.56 billion in deposits which compares to approximately $1.01 billion in
loans
and $1.23 billion in deposits at June 30, 2005. The June 30, 2005 amounts are
the sum of loans and deposits for Pinnacle Financial and Cavalry as of that
date
which results in an increase of 35% in loans and 27% in deposits between the
two
periods.
We
also
incurred approximately $921,000 and $1,365,000 in merger related expenses during
the three and six months ended June 30, 2006, respectively, directly related
to
the Cavalry merger. These charges were for our integration of Cavalry and
accelerated depreciation and amortization related to software and other
technology assets whose useful lives were shortened as a result of the Cavalry
acquisition.
Results
of Operations. Our
net
interest income increased to $16.9 million for the second quarter of 2006
compared to $6.8 million for the second quarter of 2005. Our net interest income
increased to $26.4 million for the first six months of 2006 compared to $13.3
million for the same period in 2005. The net interest margin (the ratio of
net
interest income to average earning assets) for the period was 4.17% for the
second quarter of 2006 compared to 3.57% for the same period in 2005. The net
interest margin was 3.97% for the first six months of 2006 compared to 3.67%
for
the same period in 2005.
Prior
to
the merger with Cavalry, Cavalry’s net interest margin was higher than ours. As
a result, since the merger date, our net interest margin is higher compared
to
the same periods last year due to the impact of the net assets of Cavalry being
included with our net assets. We believe our net interest margin for the third
quarter of 2006 will be lower than our net interest margin for the second
quarter of 2006. Based on our current models, we believe our net interest margin
for the third quarter of 2006 should be within a range of 3.90% to 4.10%,
compared to 4.17% for the second quarter of 2006.
Absent
the impact of continued competitive pressure on deposit pricing, we believe
that
a rising interest rate environment, which we believe is more likely than a
falling rate environment over the next few quarters, should result in greater
net interest income for us than in a falling or stagnant rate environment.
We
also believe we will continue to increase assets with particular emphasis on
floating rate lending. However, the additional revenues provided by these two
items may not be sufficient to overcome any immediate increases in funding
costs
which would also be incurred in a rising rate environment as a result of
competitive deposit pricing in our market area.
Conversely,
a falling rate environment would serve to have the opposite effect on our net
interest income. In a falling rate environment, we may not be able to reduce
our
deposit funding costs by any meaningful amount due to market pressures, while
our interest income would decrease at a more rapid pace.
Our
provision for loan losses was $1,707,000 for the second quarter of 2006 compared
to $483,000 for the same period in 2005 and $2,094,000 for the first six months
of 2006 compared to $1,084,000 for the same period in 2005. Although we
continued to make provisions due to the increases in loan volumes in 2006
compared to 2005, the provision amount also increased due to increases in
charge-offs in 2006 compared to 2005.
Noninterest
income for the second quarter of 2006 compared to the same time period in 2005
increased by $2,967,000, or 210%. For the first six months of 2006, noninterest
income was $3,834,000 greater than the first six months of 2005. These increases
are largely attributable to the fee businesses associated with the Cavalry
acquisition, particularly with regard to service charges on deposit accounts,
insurance sales commissions and trust fees.
Our
continued growth in 2006 resulted in increased noninterest expense compared
to
2005 due to the addition of the Rutherford County market, increases in salaries
and employee benefits, equipment and occupancy expenses and other operating
expenses. The number of full-time equivalent employees increased from 156.5
at
December 31, 2005 to 359.0 at June 30, 2006. As a result, we experienced
increases in compensation and employee benefit expense. We expect to add
additional employees throughout 2006 which will cause our compensation and
employee benefit expense to increase in future periods. Additionally, our branch
expansion efforts during the last few years also increased noninterest expense.
The increased operational expenses for the recently opened branches and the
additional planned branch in the Donelson area of Davidson County expected
to
open in late 2006 will continue to result in increased noninterest expense
in
future periods. Our efficiency ratio (the ratio of noninterest expense to the
sum of net interest income and noninterest income) was 61.6% for the second
quarter of 2006 compared to 60.4% for the same period of 2005 and 62.2% for
the
first six months of 2006 compared to 60.1% for the first six months of 2005.
These calculations include the impact of approximately $921,000 and $1,365,000
in merger related charges for the three and six months ended June 30, 2006,
respectively.
The
effective income tax expense rate for the three and six months ended June 30,
2006 was approximately 33.1% and 32.7%, respectively, compared to an effective
income tax expense rate for the three and six months ended June 30, 2005 of
approximately 29.1% and 28.9%, respectively. The increase in the effective
tax
rate between 2006 and 2005 was due to the additional earnings (primarily
attributable to operations within our Rutherford County market) in 2006 over
that of 2005 being taxed at a higher rate as the various tax savings initiatives
(i.e., municipal bond income) had a lesser impact in 2006 when compared to
2005
and the impact of our incentive stock options and their treatment pursuant
to
the adoption of SFAS No. 123(R).
Net
income for the second quarter of 2006 was $4.3 million compared to $2.0 million
for the second quarter of 2005, an increase of 121%. Net income for the first
six months of 2006 was $6.9 million compared to $3.7 million for the same period
in 2005, an increase of 86%. Fully-diluted net income per common share was
$0.26
for the second quarter of 2006 compared to $0.21 for the second quarter of
2005,
an increase of 13%. Fully-diluted net income per common share was $0.51 for
the
first six months of 2006 compared to $0.40 for the same period in 2005, an
increase of 28%.
Excluding
the impact of merger related charges at the statutory tax rate of 39.23%, net
income for the second quarter of 2006 was $4.9 million compared to $2.0 million
for the second quarter of 2005, an increase of 149%. Additionally, excluding
the
after tax impact of merger related charges, net income for the first six months
of 2006 was $7.8 million compared to $3.7 million for the same period in 2005,
an increase of 108%. As a result, as adjusted fully-diluted net income per
common share was $0.30 for the second quarter of 2006 compared to $0.21 for
the
second quarter of 2005, an increase of 30%. As adjusted fully-diluted net income
per common share was $0.57 for the first six months of 2006 compared to $0.40
for the same period in 2005, an increase of 43%. For a reconciliation of these
non-GAAP financial measures to their most directly comparable GAAP financial
measure, see “-Reconciliation of Non-GAAP financial measures”
below.
Financial
Condition.
Loans
increased $710 million during the first six months of 2006 of which $546 million
was attributable to the Cavalry acquisition. Thus, the net increase in our
loan
portfolio attributable to organic growth was $160 million. As we seek to
increase our loan portfolio, we must also continue to monitor the risks inherent
in our lending operations. If our allowance for loan losses is not sufficient
to
cover the estimated loan losses in our loan portfolio, increases to the
allowance for loan losses would be required which would decrease our
earnings.
We
have
successfully grown our total deposits to $1.56 billion at June 30, 2006 compared
to $810 million at December 31, 2005, an increase of $750 million of which
$584
million was attributable to the Cavalry acquisition. As a result, we increased
our deposits by $166 million, excluding the Cavalry acquisition. This growth
in
deposits had a higher funding cost due to rising rates and increased deposit
pricing competition in 2006 compared to 2005. We typically adjust our loan
yields at a faster rate than we adjust our deposit rates. As such, unless
significant competitive pressures exist, our deposit funding costs do not
usually adjust as quickly as do revenues from interest income on floating rate
earning assets.
We
continue to believe there is broad acceptance of our business model within
the
Nashville/Davidson/Murfreesboro MSA and in our target markets of small
businesses and affluent clients. As a result, and because our sales pipeline
remains strong at the current time, we believe we will continue to increase
our
loan and deposit balances for the remainder of 2006 at amounts comparable to
prior periods but less than the increase for the second quarter of
2006.
Capital
and Liquidity.
At June
30, 2006, our capital ratios, including our bank’s capital ratios, met
regulatory minimum capital requirements. Additionally, at June 30, 2006, our
bank would be considered to be “well-capitalized” pursuant to banking
regulations. As our bank grows it will require additional capital from us over
that which can be earned through operations. We anticipate that we will continue
to use various capital raising techniques in order to support the growth of
our
bank. In the near term, the most likely form of new capital will be from the
issuance of trust preferred securities where we have significant capacity to
include trust preferred securities as Tier 1 capital pursuant to regulatory
guidelines. Capital raised through trust preferred issuances would not dilute
our current shareholder base.
In
the
past, we have been successful in procuring additional capital from the capital
markets (via public and private offerings). This additional capital was required
to support our growth. As of June 30, 2006, we believe we have, or can generate
through trust preferred offerings, sufficient capital to support our current
growth plans. As a result, we do not foresee the need to consider any additional
public or private offerings of common stock at this time. Although we do not
have any current plans to do so, should we consider entering any additional
markets other than the Nashville/Davidson/Murfreesboro MSA, the market expansion
may require us to raise additional capital which would likely be in the form
of
common equity.
Critical
Accounting Estimates
The
accounting principles we follow and our methods of applying these principles
conform with United States generally accepted accounting principles and with
general practices within the banking industry. In connection with the
application of those principles, we have made judgments and estimates which,
in
the case of the determination of our allowance for loan losses (“ALL”), the
adoption of SFAS No. 123 (revised 2004), “Share Based Payments” (“SFAS No.
123(R)”) and the accounting for the Cavalry merger have been critical to the
determination of our financial position and results of operations.
Allowance
for Loan Losses (ALL). Our
management assesses the adequacy of the ALL prior to the end of each calendar
quarter. This assessment includes procedures to estimate the allowance and
test
the adequacy and appropriateness of the resulting balance. For the June 30,
2006
financial statements, we elected to assess the ALL in two separate processes
using methodologies for both the Pinnacle footprint as it existed prior to
the
merger with Cavalry (the “Nashville market”) and the Rutherford County market.
Our methodology for the first six months of 2006 was consistent with the past
practices of Pinnacle Financial and Cavalry on a stand-alone basis. In view
of
the acquisition,
we
are
currently evaluating what changes should be made to the process by which we
determine our consolidated allowance for loan losses. We expect to implement
any
such changes prior to the end of the third quarter of 2006.
For
the
Nashville market, the ALL consists of two portions: (1) an allocated amount
representative of specifically identified credit exposure and exposures readily
predictable by historical or comparative experience; and (2) an unallocated
amount representative of inherent loss which is not readily identifiable. Even
though the ALL is composed of two components, the entire ALL is available to
absorb any credit losses.
We
establish the allocated amount separately for two different risk groups: (1)
unique loans (commercial loans, including those loans considered impaired);
and
(2) homogeneous loans (generally consumer loans). We base the allocation for
unique loans primarily on risk rating grades assigned to each of these loans
as
a result of our loan management and review processes. We then assign each
risk-rating grade a loss ratio, which is determined based on the experience
of
management, discussions with banking regulators and our independent loan review
process. We estimate losses on impaired loans based on estimated cash flows
discounted at the loan’s original effective interest rate or based on the
underlying collateral value. Based on management’s experience, we also assign
loss ratios to our consumer portfolio. These loss ratios are assigned to the
various homogenous categories of the consumer portfolio (e.g., automobile,
residential mortgage, home equity).
The
unallocated amount is particularly subjective and does not lend itself to exact
mathematical calculation. The unallocated amount represents estimated inherent
credit losses which may exist, but have not yet been identified, as of the
balance sheet date. In estimating the unallocated amount, we consider such
matters as changes in the local or national economy, the depth or experience
in
the lending staff, any concentrations of credit in any particular industry
group, and new banking laws or regulations. After we assess applicable factors,
we evaluate the aggregate unallocated amount based on our management’s
experience.
We
then
test the resulting ALL balance by comparing the balance in the ALL to historical
trends and peer information. Our management then evaluates the result of the
procedures performed, including the result of our testing, and concludes on
the
appropriateness of the balance of the ALL in its entirety. The audit committee
of our board of directors reviews the assessment prior to the filing of
quarterly and annual financial information.
For
the
Rutherford County market, the allowance for loan losses methodology incorporates
a variety of risk considerations, both quantitative and qualitative, in
establishing an allowance that management believes to be appropriate for each
reporting date. Quantitative factors include the historical loss experience,
delinquency and charge-off trends, collateral values, and changes in
non-performing loans in Rutherford County. The Rutherford County market also
incorporates known information about individual loans, including borrower’s
sensitivity to interest rate movements and other relevant factors. Qualitative
factors include the general economic environment in the market and throughout
the Southeast and the state of industries predominant in the Middle Tennessee
area.
In
assessing the adequacy of the consolidated ALL, we also consider the results
of
our ongoing independent loan review process. We undertake this process both
to
ascertain whether there are loans in the portfolio whose credit quality has
weakened over time and to assist in our overall evaluation of the risk
characteristics of the entire loan portfolio. Our loan review process includes
the judgment of management, the input from our independent loan reviewer, and
reviews that may have been conducted by bank regulatory agencies as part of
their usual examination process.
Share
Based Payments -
On
January 1, 2006, we adopted SFAS No. 123(R), which addresses the
accounting for share-based payment transactions in which a company receives
employee services in exchange for equity instruments. SFAS No.123(R) eliminates
the ability to account for share-based compensation transactions, as we formerly
did, using the intrinsic value method as prescribed by Accounting Principles
Board, or APB, Opinion No. 25, “Accounting for Stock Issued to Employees,”
and generally requires that such transactions be accounted for using a
fair-value-based method and recognized as an expense.
We
adopted SFAS No. 123(R) using the modified prospective method which requires
the
application of the accounting standard as of January 1, 2006. The
accompanying consolidated financial statements for 2006 reflect the impact
of
adopting SFAS No. 123(R). In accordance with the modified prospective method,
the consolidated financial statements for prior periods have not been restated
to reflect, and do not include, the impact of SFAS No. 123(R).
Application of SFAS No. 123(R) required us to assess numerous factors including
the historical volatility of our stock price, anticipated option forfeitures
and
estimates concerning the length of time that our options would remain
unexercised. Many of these assessments impact the fair value of the underlying
stock option more significantly than others and changes to these assessments
in
future periods could be significant. We believe the assumptions we have
incorporated into our stock option fair value assessments are
reasonable.
Accounting
for the Cavalry Acquisition - In
accordance with SFAS No. 141, SFAS No. 142 and SFAS No. 147, we recorded the
assets and liabilities of Cavalry as of March 15, 2006 at estimated fair value.
Arriving at these fair values required numerous assumptions regarding the
economic life of assets, decay rates for liabilities and other factors. We
engaged a third party to assist us in valuing certain of the financial assets
and liabilities of Cavalry. We also engaged a real estate appraisal firm to
value the more significant properties that were acquired by us in the
acquisition. As a result, we consider the values we have assigned to the
acquired assets and liabilities of Cavalry to be reasonable and consistent
with
the application of generally accepted accounting principles. However, we are
still in the process of obtaining and evaluating certain other information.
Accordingly, we may have to reassess our purchase price allocations. We believe
that we will conclude the allocation of the purchase price to the acquired
net
assets in the third quarter of 2006.
Long-lived
assets, including purchased intangible assets subject to amortization, such
as
our core deposit intangible asset, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured
by
a comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of
an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds
the
fair value of the asset. Assets to be disposed of would be separately presented
in the balance sheet and reported at the lower of the carrying amount or fair
value less costs to sell, and are no longer depreciated.
Goodwill
and intangible assets that have indefinite useful lives are tested annually
for
impairment, and are tested for impairment more frequently if events and
circumstances indicate that the asset might be impaired. An impairment loss
is
recognized to the extent that the carrying amount exceeds the asset’s fair
value. Our annual assessment date will be September 30. Accordingly, should
we
determine in a future period that the goodwill recorded in connection with
our
acquisition of Cavalry has been impaired, then a charge to our earnings will
be
recorded in the period such determination is made.
Results
of Operations
Our
results for the three and six months ended June 30, 2006 and 2005 were
highlighted by the continued growth in loans and other earning assets and
deposits, which resulted in increased revenues and expenses. The following
is a
summary of our results of operations (dollars in thousands):
|
|
Three
months ended
|
|
2006-2005
|
|
Six
months ended
|
|
2006-2005
|
|
|
|
June
30, 2006
|
|
Percent
|
|
June
30, 2006
|
|
Percent
|
|
|
|
2006
|
|
2005
|
|
Increase
(decrease)
|
|
2006
|
|
2005
|
|
Increase
(decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
28,305
|
|
$
|
10,544
|
|
|
168.4
|
%
|
$
|
45,115
|
|
$
|
19,811
|
|
|
127.7
|
%
|
Interest
expense
|
|
|
11,410
|
|
|
3,749
|
|
|
204.3
|
%
|
|
18,713
|
|
|
6,516
|
|
|
187.2
|
%
|
Net
interest income
|
|
|
16,895
|
|
|
6,795
|
|
|
148.6
|
%
|
|
26,402
|
|
|
13,295
|
|
|
98.6
|
%
|
Provision
for loan losses
|
|
|
1,707
|
|
|
483
|
|
|
253.4
|
%
|
|
2,094
|
|
|
1,084
|
|
|
93.2
|
%
|
Net
interest income after provision for loan losses
|
|
|
15,188
|
|
|
6,312
|
|
|
140.6
|
%
|
|
24,308
|
|
|
12,211
|
|
|
99.1
|
%
|
Noninterest
income
|
|
|
4,380
|
|
|
1,413
|
|
|
210.0
|
%
|
|
6,428
|
|
|
2,594
|
|
|
147.8
|
%
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger
related expense
|
|
|
921
|
|
|
-
|
|
|
-
|
|
|
1,365
|
|
|
-
|
|
|
-
|
|
Other
noninterest expense
|
|
|
12,184
|
|
|
4,963
|
|
|
145.5
|
%
|
|
19,069
|
|
|
9,544
|
|
|
99.8
|
%
|
Net
income before income taxes
|
|
|
6,463
|
|
|
2,762
|
|
|
134.0
|
%
|
|
10,302
|
|
|
5,261
|
|
|
95.8
|
%
|
Income
tax expense
|
|
|
2,141
|
|
|
803
|
|
|
166.6
|
%
|
|
3,368
|
|
|
1,522
|
|
|
121.3
|
%
|
Net
income
|
|
$
|
4,322
|
|
$
|
1,959
|
|
|
120.6
|
%
|
$
|
6,934
|
|
$
|
3,739
|
|
|
85.5
|
%
|
Our
results for the three and six months ended June 30, 2006 included merger related
expense. Excluding merger related expense from our net income resulted in fully
diluted net income per common share for the three and six months ended June
30,
2006 of $0.30 and $0.57, respectively. A comparison of these amounts to the
same
periods in 2005 and a reconciliation of this non-GAAP financial measure follow:
|
|
Three
months ended
|
|
Six
months ended
|
|
|
|
June
30, 2006
|
|
June
30, 2006
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Reconciliation
of Non-GAAP financial measures:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
4,322
|
|
$
|
1,959
|
|
$
|
6,934
|
|
$
|
3,739
|
|
Merger
related expense net of tax of $361and $535 for the three and six
months
ended June 30, 2006, respectively
|
|
|
560
|
|
|
-
|
|
|
830
|
|
|
-
|
|
Net
income excluding merger related expense
|
|
$
|
4,882
|
|
$
|
1,959
|
|
$
|
7,764
|
|
$
|
3,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully-diluted
net income per common share
|
|
$
|
0.26
|
|
$
|
0.21
|
|
$
|
0.51
|
|
$
|
0.40
|
|
Fully-diluted
net income per common share, excluding merger related
expense
|
|
$
|
0.30
|
|
$
|
0.21
|
|
$
|
0.57
|
|
$
|
0.40
|
|
The
presentation of this non-GAAP financial information is not intended to be
considered in isolation or as a substitute for any measure prepared in
accordance with GAAP. Because non-GAAP financial measures presented are not
measurements determined in accordance with GAAP and are susceptible to varying
calculations, these non-GAAP financial measures, as presented, may not be
comparable to other similarly titled measures presented by other companies.
Pinnacle
Financial believes that these non-GAAP financial measures excluding the impact
of merger related expenses facilitate making period-to-period comparisons and
are meaningful indications of its operating performance. Pinnacle Financial
included non-GAAP net income and non-GAAP fully-diluted EPS because it believes
that these measures more clearly reflects our operating performance for the
2006
second quarter and six months ended June 30, 2006 when compared to the same
period in 2005 and because we believe that the information provides investors
with additional information to evaluate our past financial results and ongoing
operational performance.
Pinnacle
Financial’s management utilizes this non-GAAP financial information to compare
our operating performance versus the comparable periods in 2005 and will utilize
non-GAAP fully-diluted earnings per share for the 2006 fiscal year (excluding
the merger related expenses) in calculating whether or not we met the
performance targets of our 2006 Annual Cash Incentive Plan and our earnings
per
share targets in our restricted stock award agreements.
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 earnings. For
the
three months ended June 30, 2006 and 2005, we recorded net interest income
of
$16,895,000, and $6,795,000 respectively, which resulted in a net interest
margin of 4.17% and 3.57%. For the six months ended June 30, 2006, and 2005
we
recorded net interest income of $26,402,000 and $13,295,000 which resulted
in a
net interest margin of 3.97% and 3.67% respectively.
The
following table sets 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 total
interest-earning assets and total interest-bearing liabilities, net interest
spread and net interest margin for the three and six months ended June 30,
2006
and 2005 (dollars in thousands):
(dollars
in thousands)
|
|
Three
months ended
June
30, 2006
|
|
Three
months ended
June
30, 2005
|
|
|
|
Average
Balances
|
|
Interest
|
|
Rates/
Yields
|
|
Average
Balances
|
|
Interest
|
|
Rates/
Yields
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
1,328,121
|
|
$
|
24,246
|
|
|
7.32
|
%
|
$
|
537,313
|
|
$
|
8,002
|
|
|
5.88
|
%
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
248,682
|
|
|
3,148
|
|
|
5.08
|
%
|
|
194,840
|
|
|
2,135
|
|
|
4.39
|
%
|
Tax-exempt
(1)
|
|
|
50,227
|
|
|
495
|
|
|
5.21
|
%
|
|
27,332
|
|
|
239
|
|
|
4.62
|
%
|
Federal
funds sold
|
|
|
16,613
|
|
|
259
|
|
|
6.05
|
%
|
|
14,879
|
|
|
111
|
|
|
2.99
|
%
|
Other
|
|
|
8,319
|
|
|
157
|
|
|
9.08
|
%
|
|
3,730
|
|
|
57
|
|
|
7.08
|
%
|
Total
interest-earning assets
|
|
|
1,651,962
|
|
|
28,305
|
|
|
6.92
|
%
|
|
778,094
|
|
|
10,544
|
|
|
5.48
|
%
|
Nonearning
assets
|
|
|
226,950
|
|
|
|
|
|
|
|
|
44,250
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,878,912
|
|
|
|
|
|
|
|
$
|
822,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
checking
|
|
$
|
190,055
|
|
$
|
848
|
|
|
1.79
|
%
|
$
|
57,652
|
|
$
|
90
|
|
|
0.62
|
%
|
Savings
and money market
|
|
|
434,094
|
|
|
3,234
|
|
|
2.99
|
%
|
|
218,685
|
|
|
906
|
|
|
1.66
|
%
|
Certificates
of deposit
|
|
|
546,715
|
|
|
5,481
|
|
|
4.02
|
%
|
|
252,402
|
|
|
1,882
|
|
|
2.99
|
%
|
Total
deposits
|
|
|
1,170,864
|
|
|
9,563
|
|
|
3.28
|
%
|
|
528,739
|
|
|
2,878
|
|
|
2.18
|
%
|
Securities
sold under agreements to repurchase
|
|
|
68,079
|
|
|
678
|
|
|
4.00
|
%
|
|
49,883
|
|
|
253
|
|
|
2.04
|
%
|
Federal
funds purchased
|
|
|
3,696
|
|
|
48
|
|
|
5.15
|
%
|
|
4,775
|
|
|
40
|
|
|
3.38
|
%
|
Federal
Home Loan Bank advances
|
|
|
44,417
|
|
|
605
|
|
|
5.46
|
%
|
|
54,951
|
|
|
424
|
|
|
3.10
|
%
|
Subordinated
debt
|
|
|
30,929
|
|
|
516
|
|
|
6.69
|
%
|
|
10,310
|
|
|
154
|
|
|
5.98
|
%
|
Total
interest-bearing liabilities
|
|
|
1,317,985
|
|
|
11,410
|
|
|
3.47
|
%
|
|
648,658
|
|
|
3,749
|
|
|
2.32
|
%
|
Noninterest-bearing
deposits
|
|
|
311,286
|
|
|
-
|
|
|
-
|
|
|
111,937
|
|
|
-
|
|
|
-
|
|
Total
deposits and interest-bearing liabilities
|
|
|
1,629,271
|
|
|
11,410
|
|
|
2.81
|
%
|
|
760,595
|
|
|
3,749
|
|
|
1.98
|
%
|
Other
liabilities
|
|
|
15,241
|
|
|
|
|
|
|
|
|
2,180
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
234,400
|
|
|
|
|
|
|
|
|
59,569
|
|
|
|
|
|
|
|
|
|
$
|
1,878,912
|
|
|
|
|
|
|
|
$
|
822,344
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
$
|
16,895
|
|
|
|
|
|
|
|
$
|
6,795
|
|
|
|
|
Net
interest spread (2)
|
|
|
|
|
|
|
|
|
3.45
|
%
|
|
|
|
|
|
|
|
3.16
|
%
|
Net
interest margin (3)
|
|
|
|
|
|
|
|
|
4.17
|
%
|
|
|
|
|
|
|
|
3.57
|
%
|
(1) |
Yields
computed on tax-exempt instruments on a tax equivalent
basis.
|
(2) |
Yields
realized on interest-earning assets less the rates paid on
interest-bearing liabilities.
|
(3) |
Net
interest margin is the result of annualized net interest income divided
by
average interest-earning assets for the
period.
|
(dollars
in thousands)
|
|
Six
months ended
June
30, 2006
|
|
Six
months ended
June
30, 2005
|
|
|
|
Average
Balances
|
|
Interest
|
|
Rates/
Yields
|
|
Average
Balances
|
|
Interest
|
|
Rates/
Yields
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
1,044,724
|
|
$
|
37,424
|
|
|
7.22
|
%
|
$
|
512,813
|
|
$
|
14,957
|
|
|
5.88
|
%
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
245,216
|
|
|
6,010
|
|
|
4.94
|
%
|
|
189,883
|
|
|
4,157
|
|
|
4.41
|
%
|
Tax-exempt
(1)
|
|
|
47,399
|
|
|
896
|
|
|
5.04
|
%
|
|
25,329
|
|
|
440
|
|
|
4.62
|
%
|
Federal
funds sold
|
|
|
19,617
|
|
|
540
|
|
|
5.55
|
%
|
|
11,864
|
|
|
157
|
|
|
2.66
|
%
|
Other
|
|
|
6,468
|
|
|
245
|
|
|
8.44
|
%
|
|
3,503
|
|
|
100
|
|
|
6.85
|
%
|
Total
interest-earning assets
|
|
|
1,363,424
|
|
|
45,115
|
|
|
6.72
|
%
|
|
743,392
|
|
|
19,811
|
|
|
5.42
|
%
|
Nonearning
assets
|
|
|
152,944
|
|
|
|
|
|
|
|
|
46,222
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,516,368
|
|
|
|
|
|
|
|
$
|
789,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
checking
|
|
$
|
147,089
|
|
$
|
1,330
|
|
|
1.82
|
%
|
$
|
57,695
|
|
$
|
162
|
|
|
0.57
|
%
|
Savings
and money market
|
|
|
389,473
|
|
|
5,574
|
|
|
2.89
|
%
|
|
220,382
|
|
|
1,604
|
|
|
1.47
|
%
|
Certificates
of deposit
|
|
|
430,854
|
|
|
8,509
|
|
|
3.98
|
%
|
|
234,507
|
|
|
3,266
|
|
|
2.81
|
%
|
Total
deposits
|
|
|
967,416
|
|
|
15,413
|
|
|
3.21
|
%
|
|
512,584
|
|
|
5,032
|
|
|
1.98
|
%
|
Securities
sold under agreements to repurchase
|
|
|
63,901
|
|
|
1,187
|
|
|
3.75
|
%
|
|
44,016
|
|
|
403
|
|
|
1.85
|
%
|
Federal
funds purchased
|
|
|
2,036
|
|
|
52
|
|
|
5.14
|
%
|
|
2,694
|
|
|
44
|
|
|
3.33
|
%
|
Federal
Home Loan Bank advances
|
|
|
45,376
|
|
|
1,060
|
|
|
4.71
|
%
|
|
52,592
|
|
|
748
|
|
|
2.87
|
%
|
Subordinated
debt
|
|
|
30,929
|
|
|
1,001
|
|
|
6.53
|
%
|
|
10,310
|
|
|
289
|
|
|
5.65
|
%
|
Total
interest-bearing liabilities
|
|
|
1,109,658
|
|
|
18,713
|
|
|
3.40
|
%
|
|
622,196
|
|
|
6,516
|
|
|
2.11
|
%
|
Noninterest-bearing
deposits
|
|
|
231,767
|
|
|
-
|
|
|
-
|
|
|
106,433
|
|
|
-
|
|
|
-
|
|
Total
deposits and interest-bearing liabilities
|
|
|
1,341,425
|
|
|
18,713
|
|
|
2.81
|
%
|
|
728,629
|
|
|
6,516
|
|
|
1.80
|
%
|
Other
liabilities
|
|
|
9,976
|
|
|
|
|
|
|
|
|
1,990
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
164,967
|
|
|
|
|
|
|
|
|
58,995
|
|
|
|
|
|
|
|
|
|
$
|
1,516,368
|
|
|
|
|
|
|
|
$
|
789,614
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
$
|
26,402
|
|
|
|
|
|
|
|
$
|
13,295
|
|
|
|
|
Net
interest spread (2)
|
|
|
|
|
|
|
|
|
3.32
|
%
|
|
|
|
|
|
|
|
3.31
|
%
|
Net
interest margin (3)
|
|
|
|
|
|
|
|
|
3.97
|
%
|
|
|
|
|
|
|
|
3.67
|
%
|
(1) |
Yields
computed on tax-exempt instruments on a tax equivalent
basis.
|
(2) |
Yields
realized on interest-earning assets less the rates paid on
interest-bearing liabilities.
|
(3) |
Net
interest margin is the result of annualized net interest income divided
by
average interest-earning assets for the
period.
|
As
noted
above, the net interest margin for the three and six months ended June 30,
2006
was 4.17% and 3.97%, respectively, compared to a net interest margin of 3.57%
and 3.67% for the same periods in 2005. The increase in our net interest margin
was significant between 2006 and 2005 and was largely due to the addition of
the
net assets of Cavalry. Other matters related to the changes in net interest
income, net interest yields and rates, and net interest margin are presented
below:
· |
Our
loan yields increased by 134 basis points for the first six months
of 2006
when compared to the first six months of 2005. The pricing of a large
portion of our loan portfolio is tied to our prime rate which increased
throughout 2005 and through June 30, 2006 consistent with the announced
increases in the Federal funds target rate by the Open Market Committee
of
the Federal Reserve System. During the period from January 1, 2005
through
June 30, 2006, the Open Market Committee increased the Federal funds
target rate from 2.25% to 5.25%.
|
· |
We
have been able to grow our funding base significantly. For asset/liability
management, we continue to allocate a greater proportion of such
funds to
our loan portfolio versus our securities and shorter-term investment
portfolio. Average loan balances for the first six months of 2006
approximated 69% of total assets compared to 65% for the same period
in
2005. Loans generally have higher yields than do securities and other
shorter-term investments.
|
· |
Impacting
our net interest margin at any point in time will be the level of
fixed
rate assets and liabilities. In a rising rate environment, these
assets
and liabilities do not reprice and thus impact the performance of
our net
interest margin. Fixed rate assets include fixed rate loans and
substantially our entire investment portfolio. Fixed rate liabilities
include, certificates of deposits, FHLB advances and a portion of
our
subordinated indebtedness. In a rising rate environment these liabilities
impact our margin positively. We have experienced a rising rate
environment over the last few quarters. We believe that since we
have more
fixed rate assets than fixed rate liabilities the negative impact
of our
fixed rate assets impacted our net interest margin to a greater degree
than the impact of our fixed rate liabilities when comparing the
three and
six months ended June 30, 2006 with that of the comparable prior
year
periods.
|
· |
During
2006, overall deposit rates were higher than those rates for the
comparable period in 2005. Changes in interest rates paid on such
products
as interest checking, savings and money market accounts, securities
sold
under agreements to repurchase and Federal funds purchased will generally
increase or decrease in a manner that is consistent with changes
in the
short-term rate environment. During 2006, as was the case with our
prime
lending rate, short-term rates were higher than in 2005. We also
monitor
the pricing of similar products by our primary competitors. Deposit
pricing in our markets has been very competitive over the last few
years
and we anticipate that such pricing pressure will continue. The changes
in
the short-term rate environment and the pricing of our primary competitors
required us to increase these rates in 2006 compared to the same
period in
2005 which resulted in increased pressure on our net interest margin.
|
· |
During
the first six months of 2006, the average balances of noninterest
bearing
deposit balances, interest bearing transaction accounts, savings
and money
market accounts and securities sold under agreements to repurchase
amounted to 62% of our total funding compared to 59% for the first
six
month in 2005. These funding sources generally have lower rates than
do
other funding sources, such as certificates of deposit and other
borrowings. As a result, this contributed favorably to our net interest
margin in 2006 when compared to 2005.
|
· |
Also
impacting the net interest margin during 2006 compared to 2005 was
pricing
of our floating rate subordinated indebtedness and the incurrence
of
additional fixed rate subordinated indebtedness. The average rate
on our
subordinated indebtedness increased by 88 basis points during the
first
six months of 2006 when compared to the same period in 2005. The
interest
rate charged on this indebtedness is generally higher than other
funding
sources. The rate charged on the floating rate portion of the indebtedness
is determined in relation to the three-month LIBOR index and reprices
quarterly. During 2006, the short-term interest rate environment
was
higher than during 2005, and, as a result, the pricing for this funding
source was higher in 2006 than in 2005. Additionally, in September
2005,
we issued an additional $20 million in fixed rate subordinated
indebtedness at a rate of 5.85% for the first five years with a floating
rate determined in relation to three-month LIBOR
thereafter.
|
Provision
for Loan Losses. The
provision for loan losses represents a charge to earnings necessary to establish
an allowance for loan losses that, in our management’s evaluation, should be
adequate to provide coverage for the inherent losses on outstanding loans.
The
provision for loan losses amounted to $1,707,000 and $483,000 for the three
months ended June 30, 2006 and 2005, respectively and $2,094,000 and $1,084,000
for the six months ended June 30, 2006 and 2005, respectively.
Based
upon our management's 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, 2006. An increase in loan volumes
and
an increase in charge-offs were the primary causes for the increase in our
provision for loan losses in 2006 when compared to 2005.
Based
upon management's assessment of the loan portfolio, we adjust our allowance
for
loan losses to an amount deemed appropriate to adequately cover inherent risks
in the loan portfolio. 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 our management and are
reviewed from time to time by our regulators, they are necessarily approximate
and imprecise. There exist factors beyond our control, such as general economic
conditions both locally and nationally, which may negatively impact, materially,
the adequacy of our allowance for loan losses and, thus, the resulting provision
for loan losses.
Noninterest
Income. Our
noninterest income is composed of several components, some of which vary
significantly between quarterly periods. Service charges on deposit accounts
and
other noninterest income generally reflect our growth, while investment services
and fees from the origination of mortgage loans will often reflect market
conditions and fluctuate from period to period. The opportunities for
recognition of gains on loans and loan participations sold and gains on sales
of
investment securities may also vary widely from quarter to quarter and year
to
year and may diminish overtime as our lending and industry concentration limits
increase.
The
following is the makeup of our noninterest income for the three and six months
ended June 30, 2006 and 2005 (dollars in thousands):
|
|
Three
months ended
|
|
2006-2005
|
|
Six
months ended
|
|
2006-2005
|
|
|
|
June
30,
|
|
Percent
|
|
June
30,
|
|
Percent
|
|
|
|
2006
|
|
2005
|
|
Increase
(decrease)
|
|
2006
|
|
2005
|
|
Increase
(decrease)
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
$
|
1,356
|
|
$
|
242
|
|
|
460.3
|
%
|
$
|
1,794
|
|
$
|
503
|
|
|
256.7
|
%
|
Investment
services
|
|
|
653
|
|
|
491
|
|
|
33.0
|
%
|
|
1,166
|
|
|
929
|
|
|
25.5
|
%
|
Gains
on sales of loans and loan participations, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
from the origination and sale of mortgage loans, net of sales
commissions
|
|
|
422
|
|
|
239
|
|
|
76.6
|
%
|
|
673
|
|
|
414
|
|
|
62.6
|
%
|
Gains
on loan participations sold, net
|
|
|
49
|
|
|
151
|
|
|
(67.5
|
%)
|
|
122
|
|
|
137
|
|
|
(10.9
|
%)
|
Insurance
sales commissions
|
|
|
749
|
|
|
-
|
|
|
-
|
|
|
1,013
|
|
|
-
|
|
|
-
|
|
Gain
on sale of investment securities, net
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
114
|
|
|
(100.0
|
%)
|
Trust
fees
|
|
|
312
|
|
|
-
|
|
|
-
|
|
|
364
|
|
|
-
|
|
|
-
|
|
Other
noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters
of credit fees
|
|
|
88
|
|
|
122
|
|
|
(27.9
|
%)
|
|
221
|
|
|
238
|
|
|
(7.1
|
%)
|
Bank-owned
life insurance
|
|
|
119
|
|
|
18
|
|
|
561.1
|
%
|
|
155
|
|
|
37
|
|
|
318.9
|
%
|
Equity
in earnings of Collateral Plus, LLC
|
|
|
22
|
|
|
5
|
|
|
340.0
|
%
|
|
59
|
|
|
116
|
|
|
(49.1
|
%)
|
Other
noninterest income
|
|
|
610
|
|
|
145
|
|
|
320.7
|
%
|
|
861
|
|
|
106
|
|
|
712.3
|
%
|
Total
noninterest income
|
|
$
|
4,380
|
|
$
|
1,413
|
|
|
210.0
|
%
|
$
|
6,428
|
|
$
|
2,594
|
|
|
147.8
|
%
|
Service
charge income for 2006 increased over that of 2005 due to increased volumes
from
our Rutherford County market and an increase in the number of Nashville deposit
accounts subject to service charges. However, for the Nashville accounts, the
increase in service charges in 2006 when compared to 2005 was offset
significantly by the earnings credit rate provided by Pinnacle National to
its
commercial deposit customers. This earnings credit rate serves to reduce the
deposit service charges for our commercial customers and is based on the average
balances of their checking accounts at Pinnacle National. This earnings credit
rate is indexed to a national index.
Also
included in noninterest income are commissions and fees from our financial
advisory unit, Pinnacle Asset Management, a division of Pinnacle National.
At
June 30, 2006, Pinnacle Asset Management was receiving commissions and fees
in
connection with approximately $501 million in brokerage assets held with Raymond
James Financial Services, Inc. compared to $441 million at December 31, 2005.
Additionally, at June 30, 2006 our trust department was receiving fees on
approximately $295 million in assets. Following our merger with Cavalry, we
now
offer trust services through the bank’s trust division and insurance services
through Miller and Loughry Insurance and Services, Inc. which we believe will
increase our noninterest income in future periods.
Additionally,
mortgage related fees also provided for a significant portion of the increase
in
noninterest income between 2006 an 2005. These mortgage fees are for loans
originated in both the Nashville and Rutherford County markets and 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 decrease in rising interest rate environments. As a
result, mortgage origination fees may fluctuate greatly in response to a
changing rate environment.
We
also
sell certain loan participations to our correspondent banks. Such sales are
primarily related to new lending transactions in excess of internal loan limits
or industry concentration limits. At June 30, 2006 and pursuant to participation
agreements with these correspondents, we had participated approximately $80.4
million of originated loans to these other banks compared to $60.3 million
at
December 31, 2005. These participation agreements have various provisions
regarding collateral position, pricing and other matters. Many of these
agreements provide that we pay the correspondent less than the loan’s contracted
interest rate. Pursuant to SFAS No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities — a replacement of FASB Statement
No. 125”,
in
those transactions whereby the correspondent is receiving a lesser amount of
interest than the amount owed by the customer, we record a net gain along with
a
corresponding asset representing the present value of our net retained cash
flows. The resulting asset is amortized over the term of the loan. Conversely,
should a loan be paid prior to maturity any remaining unamortized asset is
charged as a reduction to gains on loan participations sold. We recorded net
gains of $49,000 and $122,000 during the three and six months ended June 30,
2006, respectively, compared to net gains of $151,000 and $137,000 for the
same
periods in 2005 related to the loan participation transactions. We intend to
maintain relationships with our correspondents in order to sell participations
in future loans to these or other correspondents primarily due to limitations
on
loans to a single borrower or industry concentrations. In general, the Cavalry
merger has resulted in an increase in capital which has resulted in increased
lending limits for such items as loans to a single borrower and loans to a
single industry such that our need to participate such loans in the future
will
be reduced. In any event, the timing of participations may cause the level
of
gains, if any, to vary significantly.
Also
included in noninterest income for the six months ended June 30, 2005, were
net
gains of approximately $114,000 realized from the sale of approximately $6.8
million of available-for-sale securities.
At
the
end of 2004, we formed a wholly-owned subsidiary, Pinnacle Credit Enhancement
Holdings, Inc. (“PCEH”). PCEH owns a 24.5% interest in Collateral Plus, LLC.
Collateral Plus, LLC serves as an intermediary between investors and borrowers
in certain financial transactions whereby the borrowers require enhanced
collateral in the form of guarantees or letters of credit issued by the
investors for the benefit of banks and other financial institutions. Our equity
in the earnings of Collateral Plus, LLC for the three and six months ended
June
30, 2006 was $22,000 and $59,000, respectively.
Noninterest
Expense. Noninterest
expense consists of salaries and employee benefits, equipment and occupancy
expenses, and other operating expenses. The following is the makeup of our
noninterest expense for the three and six months ended June 30, 2006 and 2005
(dollars in thousands):
|
|
Three
months ended
|
|
2006-2005
|
|
Six
months ended
|
|
2006-2005
|
|
|
|
June
30,
|
|
Percent
|
|
June
30,
|
|
Percent
|
|
|
|
2006
|
|
2005
|
|
Increase
(decrease)
|
|
2006
|
|
2005
|
|
Increase
(decrease)
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
$
|
4,798
|
|
$
|
2,316
|
|
|
107.2
|
%
|
$
|
7,788
|
|
$
|
4,466
|
|
|
74.4
|
%
|
Commissions
|
|
|
325
|
|
|
183
|
|
|
77.6
|
%
|
|
559
|
|
|
353
|
|
|
58.4
|
%
|
Other
compensation, primarily incentives
|
|
|
1,100
|
|
|
419
|
|
|
162.5
|
%
|
|
1,720
|
|
|
926
|
|
|
85.7
|
%
|
Employee
benefits and other
|
|
|
1,067
|
|
|
193
|
|
|
452.8
|
%
|
|
1,671
|
|
|
336
|
|
|
397.3
|
%
|
Total
salaries and employee benefits
|
|
|
7,290
|
|
|
3,111
|
|
|
134.3
|
%
|
|
11,738
|
|
|
6,081
|
|
|
93.0
|
%
|
Equipment
and occupancy
|
|
|
2,081
|
|
|
894
|
|
|
132.9
|
%
|
|
3,254
|
|
|
1,678
|
|
|
93.9
|
%
|
Marketing
and business development
|
|
|
358
|
|
|
180
|
|
|
98.9
|
%
|
|
548
|
|
|
293
|
|
|
87.0
|
%
|
Postage
and supplies
|
|
|
445
|
|
|
158
|
|
|
181.6
|
%
|
|
631
|
|
|
294
|
|
|
114.6
|
%
|
Other
noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting
and auditing
|
|
|
301
|
|
|
90
|
|
|
234.4
|
%
|
|
473
|
|
|
180
|
|
|
162.8
|
%
|
Consultants,
including independent loan review
|
|
|
133
|
|
|
31
|
|
|
329.0
|
%
|
|
164
|
|
|
63
|
|
|
160.3
|
%
|
Legal,
including borrower-related charges
|
|
|
24
|
|
|
36
|
|
|
(33.3
|
)%
|
|
56
|
|
|
63
|
|
|
(11.1
|
)%
|
OCC
exam fees
|
|
|
58
|
|
|
42
|
|
|
38.1
|
%
|
|
114
|
|
|
84
|
|
|
35.7
|
%
|
Directors'
fees
|
|
|
70
|
|
|
34
|
|
|
105.9
|
%
|
|
126
|
|
|
99
|
|
|
27.3
|
%
|
Insurance,
including FDIC assessments
|
|
|
175
|
|
|
72
|
|
|
143.1
|
%
|
|
276
|
|
|
152
|
|
|
81.6
|
%
|
Other
noninterest expense
|
|
|
1,249
|
|
|
315
|
|
|
296.2
|
%
|
|
1,689
|
|
|
557
|
|
|
203.1
|
%
|
Total
other noninterest expense
|
|
|
2,010
|
|
|
620
|
|
|
224.0
|
%
|
|
2,898
|
|
|
1,198
|
|
|
141.8
|
%
|
Merger
related expense
|
|
|
921
|
|
|
0
|
|
|
-
|
|
|
1,365
|
|
|
0
|
|
|
-
|
|
Total
noninterest expense
|
|
$
|
13,105
|
|
$
|
4,963
|
|
|
164.1
|
%
|
$
|
20,434
|
|
$
|
9,544
|
|
|
114.1
|
%
|
Expenses
have generally increased between the above periods due to personnel additions
occurring throughout each period, the continued development of our branch
network and other expenses which increase in relation to our growth rate. We
anticipate continued increases in our expenses in the future for such items
as
additional personnel, the opening of additional branches, legal and audit
expenses and other expenses which tend to increase in relation to our growth.
We
also will have increased noninterest expense as a result of our merger with
Cavalry. Additionally, we adopted SFAS No. 123(R) in 2006 which addresses the
accounting for employee equity based incentives. As a result, our compensation
expense will increase in all future periods as a result of this accounting
pronouncement. For the three and six months ended June 30, 2006, approximately
$250,000 and $405,000, respectively, of compensation expense related to stock
options is included in employee benefits and other expense.
At
December 31, 2005, we employed 156.5 full time equivalent employees compared
to
359.0 at June 30, 2006, an increase of 202.5 full time employees. We intend
to
continue to add employees to our work force for the foreseeable future, which
will cause our salary and employee benefit costs to increase in future periods.
Included
in noninterest expense for the three and six months ended June 30, 2006 is
$921,000 and $1,365,000, respectively, of merger related expenses associated
with the Cavalry merger. These charges consisted of integration costs incurred
in connection with the merger, including accelerated depreciation associated
with software and other technology assets whose useful lives were shortened
as a
result of the Cavalry acquisition.
Financial
Condition
Our
consolidated balance sheet at June 30, 2006 reflects significant growth since
December 31, 2005 as a result of our organic growth and the consummation of
our
merger with Cavalry. Total assets grew to $1.99 billion at June 30, 2006 from
$1.02 billion at December 31, 2005, a 95.3% increase. Total deposits grew $750
million during the six months ended June, 2006, including $584 million acquired
with the Cavalry merger. Substantially all of the additional deposits and other
fundings were invested in loans, which grew by $710 million during the six
months ended June 30, 2006, including $546 million in loans acquired in the
Cavalry merger.
Loans.
The
composition of loans at June 30, 2006 and at December 31, 2005 and the
percentage (%) of each classification to total loans are summarized as follows
(dollars in thousands):
|
|
June
30, 2006
|
|
December
31, 2005
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Commercial
real estate - Mortgage
|
|
$
|
260,168
|
|
|
19.2
|
%
|
$
|
148,102
|
|
|
22.9
|
%
|
Commercial
real estate - Construction
|
|
|
164,049
|
|
|
12.1
|
%
|
|
30,295
|
|
|
4.7
|
%
|
Commercial
- Other
|
|
|
503,797
|
|
|
37.0
|
%
|
|
239,129
|
|
|
36.9
|
%
|
Total
commercial
|
|
|
928,014
|
|
|
68.3
|
%
|
|
417,526
|
|
|
64.4
|
%
|
Consumer
real estate - Mortgage
|
|
|
294,119
|
|
|
21.7
|
%
|
|
169,953
|
|
|
26.2
|
%
|
Consumer
real estate - Construction
|
|
|
86,978
|
|
|
6.4
|
%
|
|
37,372
|
|
|
5.8
|
%
|
Consumer
- Other
|
|
|
49,162
|
|
|
3.6
|
%
|
|
23,173
|
|
|
3.6
|
%
|
Total
consumer
|
|
|
430,259
|
|
|
31.7
|
%
|
|
230,498
|
|
|
35.6
|
%
|
Total
loans
|
|
$
|
1,358,273
|
|
|
100.0
|
%
|
$
|
648,024
|
|
|
100.0
|
%
|
As
noted
above, based largely on the Cavalry merger, we have increased the percentage
of
our outstanding loans in commercial and consumer real estate construction
significantly. These types of loans require that we maintain effective credit
and construction monitoring systems. Also and as a result of the Cavalry merger,
we have increased our resources in this area so that we can effectively manage
this area of exposure through utilization of experienced professionals who
are
well-trained in this type of lending and who have significant experience in
our
geographic market.
Non-Performing
Assets. The
specific economic and credit risks associated with our loan portfolio include,
but are not limited to, a general downturn in the economy which could affect
employment rates in our market area, general real estate market deterioration,
interest rate fluctuations, deteriorated or non-existent collateral, title
defects, inaccurate appraisals, financial deterioration of borrowers, fraud,
and
any violation of laws and regulations.
We
attempt to reduce these economic and credit risks by adherence to loan to value
guidelines for collateralized loans, by investigating the creditworthiness
of
the borrower and by monitoring the borrower's financial position. Also, we
establish and periodically review our lending policies and procedures. Banking
regulations limit our exposure by prohibiting loan relationships that exceed
15%
of Pinnacle National’s statutory capital in the case of loans that are not fully
secured by readily marketable or other permissible types of collateral.
Furthermore, we have an internal limit for aggregate indebtedness to a single
borrower of $15 million. Our loan policy requires our board of directors approve
any relationships that exceed this internal limit.
Pinnacle
National discontinues the accrual of interest income when (1) there is a
significant deterioration in the financial condition of the borrower and full
repayment of principal and interest is not expected or (2) the principal or
interest is more than 90 days past due, unless the loan is both well-secured
and
in the process of collection. At June 30, 2006, we had $2,867,000 in loans
on
nonaccrual compared to $460,000 at December 31, 2005. The increase in
nonperforming loans between December 31, 2005 and June 30, 2006 was related
to
loans acquired from Cavalry and identified as being impaired as discussed more
fully below.
There
was
approximately $492,000 in other loans 90 past due and still accruing interest
at
June 30, 2006 compared to no loans at December 31, 2005. At June 30, 2006 and
at
December 31, 2005, no loans were deemed to be restructured loans. The following
table is a summary of our nonperforming assets at June 30, 2006 and December
31,
2005 (dollars in thousands):
|
|
At
June 30,
|
|
At
Dec. 31,
|
|
|
|
2006
|
|
2005
|
|
Nonaccrual
loans (1)
|
|
$
|
2,867
|
|
$
|
460
|
|
Restructured
loans
|
|
|
-
|
|
|
-
|
|
Other
real estate owned
|
|
|
67
|
|
|
-
|
|
Total
nonperforming assets
|
|
|
2,934
|
|
|
460
|
|
Accruing
loans past due 90 days or more
|
|
|
492
|
|
|
-
|
|
Total
nonperforming assets and accruing loans past due 90 days or
more
|
|
$
|
3,426
|
|
$
|
460
|
|
Total
loans outstanding
|
|
$
|
1,358,273
|
|
$
|
648,024
|
|
Ratio
of nonperforming assets and accruing loans past due 90 days or more
to
total loans outstanding at end of period
|
|
|
0.25
|
%
|
|
0.07
|
%
|
Ratio
of nonperforming assets and accruing loans past 90 days or more to
total
allowance for loan losses at end of period
|
|
|
23.32
|
%
|
|
5.85
|
%
|
(1) Interest
income that would have been recorded in 2006 related to nonaccrual loans was
$54,000.
Potential
problem assets, which are not included in nonperforming assets, amounted to
approximately $4.2 million or 0.31% of total loans outstanding at June 30,
2006,
compared to $1.2 million or 0.20% of total loans outstanding at December 31,
2005. Potential problem assets represent those assets with a potential weakness
or a well-defined weakness and where information about possible credit problems
of borrowers has caused management to have serious doubts about the borrower’s
ability to comply with present repayment terms. This definition is believed
to
be substantially consistent with the standards established by Pinnacle
National’s primary regulator for loans classified as substandard.
Allowance
for Loan Losses (ALL). We
maintain the ALL at a level that our management deems appropriate to adequately
cover the inherent risks in the loan portfolio. As of June 30, 2006 and December
31, 2005, our allowance for loan losses was $14,686,000 and $7,858,000,
respectively, which our management deemed to be adequate at each of the
respective dates. The significant increase in our ALL was primarily the result
of our merger with Cavalry. The judgments and estimates associated with our
ALL
determination are described under "Critical Accounting Estimates"
above.
Approximately
68% of our loan portfolio at June 30, 2006 consisted of commercial loans
compared to 64% at December 31, 2005. Using the North American Industry
Classification System, we periodically analyze our loan position with respect
to
our borrowers’ industries to determine if a concentration of credit risk exists
to any one or more industries. We have significant credit exposures arising
from
loans outstanding and unfunded lines of credit to borrowers in the home building
and land subdividing industry, the trucking industry and to lessors of
residential and commercial properties. We evaluate our exposure level to these
industry groups periodically in order to determine if additional allowance
allocations are warranted. At June 30, 2006 and December 31, 2005, we determined
that we did not have any excessive exposure to any single industry which would
warrant additional allowance allocations.
The
following is a summary of changes in the allowance for loan losses for the
six
months ended June 30, 2006 and for the year ended December 31, 2005 and the
ratio of the allowance for loan losses to total loans as of the end of each
period (dollars in thousands):
|
|
Six
months ended
June
30, 2006
|
|
Year
ended
Dec.
31, 2005
|
|
Balance
at beginning of period
|
|
$
|
7,858
|
|
$
|
5,650
|
|
Provision
for loan losses
|
|
|
2,094
|
|
|
2,152
|
|
Allowance
from Cavalry acquisition
|
|
|
5,102
|
|
|
-
|
|
Charged-off
loans:
|
|
|
|
|
|
|
|
Commercial
real estate - Mortgage
|
|
|
-
|
|
|
-
|
|
Commercial
real estate - Construction
|
|
|
-
|
|
|
-
|
|
Commercial
- Other
|
|
|
(404
|
)
|
|
(61
|
)
|
Consumer
real estate - Mortgage
|
|
|
-
|
|
|
(38
|
)
|
Consumer
real estate - Construction
|
|
|
-
|
|
|
-
|
|
Consumer
- Other
|
|
|
(96
|
)
|
|
(109
|
)
|
Total
charged-off loans
|
|
|
(500
|
)
|
|
(208
|
)
|
Recoveries
of previously charged-off loans:
|
|
|
|
|
|
|
|
Commercial
real estate - Mortgage
|
|
|
-
|
|
|
-
|
|
Commercial
real estate - Construction
|
|
|
-
|
|
|
-
|
|
Commercial
- Other
|
|
|
102
|
|
|
3
|
|
Consumer
real estate - Mortgage
|
|
|
-
|
|
|
231
|
|
Consumer
real estate - Construction
|
|
|
-
|
|
|
-
|
|
Consumer
- Other
|
|
|
30
|
|
|
30
|
|
Total
recoveries of previously charged-off loans
|
|
|
132
|
|
|
264
|
|
Net
(charge-offs) recoveries
|
|
|
(368
|
)
|
|
56
|
|
Balance
at end of period
|
|
$
|
14,686
|
|
$
|
7,858
|
|
|
|
|
|
|
|
|
|
Ratio
of allowance for loan losses to total loans outstanding at end of
period
|
|
|
1.08
|
%
|
|
1.21
|
%
|
Ratio
of net charge-offs to average loans outstanding for the
period
|
|
|
0.04
|
%
|
|
(0.01
|
)%
|
As
a
relatively new institution (excluding the impact of Cavalry), we do not have
extensive loss experience comparable to more mature financial institutions;
however, as our loan portfolio matures, we will have additional charge-offs
as
our losses materialize. We consider the amount and nature of our charge-offs
in
determining the adequacy of our allowance for loan losses.
At
June
30, 2006, we assessed our allowance for loan losses using an assessment
methodology for Pinnacle and a separate methodology for the former Cavalry
franchise, the Cavalry methodology being consistent with Cavalry’s past
practice. In
view
of the acquisition,
we
are
currently evaluating what changes should be made to the process by which we
determine our consolidated allowance for loan losses. We expect to implement
any
such changes prior to the end of the third quarter of 2006.
Statement
of Position 03-03, Accounting
for Certain Loans or Debt Securities Acquired in a Transfer
(“SOP
03-03”) addresses accounting for differences between contractual cash flows and
cash flows expected to be collected from an investor's initial investment in
loans or debt securities (loans) acquired in a transfer if those differences
are
attributable, at least in part, to credit quality (i.e., “impaired
loans”). SOP 03-03 does not apply to loans originated by us but does apply
to the loans we acquired in our merger with Cavalry. Our assessment indicated
that Cavalry had approximately $3.9 million of loans to which the application
of
the provisions of SOP 03-03 is required. As a result of the application of
SOP
03-03, we recorded preliminary purchase accounting adjustments to reflect a
reduction in loans and the allowance for loan losses of $1.0 million related
to
these impaired loans thus reducing the carrying value of these loans to $2.9
million at March 15, 2006. All of these loans were classified as nonperforming
at June 30, 2006. The resulting impact on Cavalry’s allowance for loan losses at
March 15, 2006 was as follows:
Impact
of SOP 03-03 on Rutherford County’s allowance for loan losses at March 15,
2006
|
|
Before
Application
of
SOP
03-03
|
|
Impact
of
Application
SOP
03-03
|
|
After
Application
of
SOP
03-03
|
|
Allowance
for loan losses
|
|
$
|
6,129
|
|
$
|
1,027
|
|
$
|
5,102
|
|
Fair
value of Cavalry loans at acquisition date
|
|
|
|
|
|
|
|
$
|
550,700
|
|
Allowance
for loan losses to fair value of Cavalry loans at acquisition
date
|
|
|
1.11
|
%
|
|
|
|
|
0.93
|
%
|
Investments. Our
investment portfolio, consisting primarily of Federal agency bonds, state and
municipal securities and mortgage-backed securities, amounted to $305.6 million
at June 30, 2006 and $279.1 million at December 31, 2005. Our investment
portfolio serves many purposes including serving as a stable source of income,
collateral for public funds and as a liquidity source. The most significant
component of our investment portfolio is our mortgage-backed securities. At
June
30, 2006, the fair value of our mortgage-backed securities was approximately
$200.0 million compared to a fair value at December 31, 2005, of approximately
$186.9 million. All of these securities were included in our available-for-sale
securities portfolio. A statistical comparison of our mortgage-backed portfolio
at June 30, 2006 and at December 31, 2005 is as follows:
|
June
30, 2006
|
December
31, 2005
|
Weighted
average life
|
4.60
years
|
4.81 years
|
Weighted
average coupon
|
5.17
%
|
5.24
%
|
Tax
equivalent yield
|
4.88
%
|
4.74
%
|
Modified
duration (*)
|
3.75
%
|
3.71
%
|
__________
(*)
Modified duration represents an approximation of the change in value of a
security for every 100 basis point increase or decrease in market interest
rates.
Deposits
and Other Borrowings. We
had
approximately $1.56 billion of deposits at June 30, 2006 compared to $810
million at December 31, 2005. Our deposits consist of noninterest and
interest-bearing demand accounts, savings accounts, money market accounts and
time deposits. Additionally, we entered into agreements with certain customers
to sell certain of our securities under agreements to repurchase the security
the following day. These agreements (which are typically associated with
comprehensive treasury management programs for our clients and provide them
with
short-term returns for their excess funds) amounted to $104.4 million at June
30, 2006 and $65.8 million at December 31, 2005. Additionally, at June 30,
2006,
we had borrowed $33.7 million in advances from the Federal Home Loan Bank of
Cincinnati compared to $41.5 million at December 31, 2005.
Generally,
banks classify their funding base as either core funding or non-core funding.
Core funding consists of all deposits other than time deposits issued in
denominations of $100,000 or greater while all other funding is deemed to be
non-core. The following table represents the balances of our deposits and other
fundings and the percentage of each type to the total at June 30, 2006 and
December 31, 2005 (dollars in thousands):
|
|
June
30,
|
|
|
|
Dec.
31,
|
|
|
|
|
|
2006
|
|
Percent
|
|
2005
|
|
Percent
|
|
Core
funding:
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
deposit accounts
|
|
$
|
312,709
|
|
|
18.1
|
%
|
$
|
155,811
|
|
|
16.4
|
%
|
Interest-bearing
demand accounts
|
|
|
186,750
|
|
|
10.8
|
%
|
|
72,521
|
|
|
7.6
|
%
|
Savings
and money market accounts
|
|
|
456,055
|
|
|
26.4
|
%
|
|
304,162
|
|
|
32.1
|
%
|
Time
deposit accounts less than $100,000
|
|
|
147,431
|
|
|
8.5
|
%
|
|
31,408
|
|
|
3.3
|
%
|
Total
core funding
|
|
|
1,102,945
|
|
|
63.8
|
%
|
|
563,902
|
|
|
59.5
|
%
|
Non-core
funding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposit accounts greater than $100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
funds
|
|
|
120,342
|
|
|
7.0
|
%
|
|
106,928
|
|
|
11.3
|
%
|
Brokered
deposits
|
|
|
78,636
|
|
|
4.5
|
%
|
|
55,360
|
|
|
5.8
|
%
|
Other
time deposits
|
|
|
257,963
|
|
|
14.9
|
%
|
|
83,961
|
|
|
8.9
|
%
|
Securities
sold under agreements to repurchase
|
|
|
104,380
|
|
|
6.0
|
%
|
|
65,834
|
|
|
6.9
|
%
|
Federal
Home Loan Bank advances
|
|
|
33,749
|
|
|
2.0
|
%
|
|
41,500
|
|
|
4.4
|
%
|
Subordinated
debt
|
|
|
30,929
|
|
|
1.8
|
%
|
|
30,929
|
|
|
3.3
|
%
|
Total
non-core funding
|
|
|
625,999
|
|
|
36.2
|
%
|
|
384,512
|
|
|
40.5
|
%
|
Totals
|
|
$
|
1,728,944
|
|
|
100.0
|
%
|
$
|
948,414
|
|
|
100.0
|
%
|
Subordinated
debt. In
2003,
we established PNFP Statutory Trust I, and in September of 2005, we established
PNFP Statutory Trust II (collectively, the “Trusts”). Both are
wholly-owned statutory business trusts. Pinnacle Financial is the sole sponsor
of the Trusts and owns $929,000 of the Trusts’ common securities. The Trusts
were created for the exclusive purpose of issuing 30-year capital trust
preferred securities (“Trust Preferred Securities”) in the aggregate amount of
$30,000,000 and using the proceeds from the issuance of the common and preferred
securities to purchase $30,929,000 of junior subordinated debentures
(“Subordinated Debentures”) issued by Pinnacle Financial. The sole assets
of the Trusts are the Subordinated Debentures. Our $929,000 investment in the
Trusts is included in other assets and the $30,929,000 obligation of Pinnacle
Financial is included in subordinated debt.
The
$10
million in Trust Preferred Securities issued in 2003 bear a floating interest
rate based on a spread over 3-month LIBOR which is set each quarter and mature
on December 30, 2033. The $20 million in Trust Preferred Securities issued
in
2005 bear interest at a fixed rate of 5.848% for the first five years and then
at a floating rate based on a spread over 3-month LIBOR which is set each
quarter and mature on September 30, 2035. Distributions are payable
quarterly. The Trust Preferred Securities are subject to mandatory
redemption upon repayment of the Subordinated Debentures at their stated
maturity date or their earlier redemption in an amount equal to their
liquidation amount plus accumulated and unpaid distributions to the date of
redemption. Pinnacle Financial guarantees the payment of distributions and
payments for redemption or liquidation of the Trust Preferred Securities to
the
extent of funds held by the Trusts. Our obligations under the Subordinated
Debentures together with the guarantee and other back-up obligations, in the
aggregate, constitute a full and unconditional guarantee by Pinnacle Financial
of the obligations of the Trusts under the Trust Preferred Securities.
Interest
on the Subordinated Debentures is payable quarterly on each of the
debentures. We may defer the payment of interest at any time for a period
not exceeding 20 consecutive quarters provided that the deferral period does
not
extend past the stated maturity. During any such deferral period,
distributions on the Trust Preferred Securities will also be deferred and our
ability to pay dividends on our common shares will be restricted.
The
Trust
Preferred Securities may be redeemed prior to maturity at our option on or
after
September 17, 2008 for PNFP Statutory Trust I and on or after September 30,
2010
for PNFP Statutory Trust II. The Trust Preferred Securities may also be
redeemed at any time in whole (but not in part) in the event of unfavorable
changes in laws or regulations that result in (1) the Trusts becoming
subject to federal income tax on income received on the Subordinated Debentures,
(2) interest payable by the parent company on the Subordinated Debentures
becoming non-deductible for federal tax purposes, (3) the requirement for the
Trusts to register under the Investment Company Act of 1940, as amended, or
(4)
loss of the ability to treat the Trust Preferred Securities as “Tier I capital”
under the Federal Reserve capital adequacy guidelines.
Capital
Resources.
At June
30, 2006 and December 31, 2005, our stockholders’ equity amounted to $238.7
million and $63.4 million, respectively, or an increase of $175.3 million.
This
increase was primarily attributable to $171.1 million as a result of the Cavalry
acquisition and $3.0 million in comprehensive income, which was composed of
$6.9
million in net income offset by $3.9 million of net unrealized holding losses
associated with our available-for-sale portfolio.
Dividends.
Pinnacle
National is subject to restrictions on the payment of dividends to Pinnacle
Financial under federal banking laws and the regulations of the Office of the
Comptroller of the Currency. We, in turn, are also subject to limits on payment
of dividends to our shareholders by the rules, regulations and policies of
federal banking authorities and the laws of the State of Tennessee. We have
not
paid any dividends to date, nor do we anticipate paying dividends to our
shareholders for the foreseeable future. Future dividend policy will depend
on
Pinnacle National's earnings, capital position, financial condition and other
factors.
Market
and Liquidity Risk Management
Our
objective is to manage assets and liabilities to provide a satisfactory,
consistent level of profitability within the framework of established liquidity,
loan, investment, borrowing, and capital policies. Our Asset Liability
Management Committee (“ALCO”) is charged with the responsibility of monitoring
these policies, which are designed to ensure acceptable composition of
asset/liability mix. Two critical areas of focus for ALCO are interest rate
sensitivity and liquidity risk management.
As
a
result of our merger with Cavalry, we are currently reviewing our interest
rate
sensitivity and liquidity risk management systems. We anticipate that during
2006, we may make certain modifications to these risk management systems.
Although these modifications could be significant, we do not believe the impact
of the addition of the net assets of Cavalry will cause our risk levels to
fall
materially outside our internal guidelines.
Interest
Rate Sensitivity.
In the
normal course of business, we are exposed to market risk arising from
fluctuations in interest rates. ALCO measures and evaluates the interest rate
risk so that we can meet customer demands for various types of loans and
deposits. ALCO determines the most appropriate amounts of on-balance sheet
and
off-balance sheet items. Measurements which we use to help us manage interest
rate sensitivity include an earnings simulation model, an economic value of
equity model, and gap analysis computations. These measurements are used in
conjunction with competitive pricing analysis.
Earnings
simulation model. We
believe that interest rate risk is best measured by our earnings simulation
modeling. Forecasted levels of earning assets, interest-bearing liabilities,
and
off-balance sheet financial instruments are combined with ALCO forecasts of
interest rates for the next 12 months and are combined with other factors in
order to produce various earnings simulations. To limit interest rate risk,
we
have guidelines for our earnings at risk which seek to limit the variance of
net
income to less than 10 percent for a 200 basis point change up or down in rates
from management’s flat interest rate forecast over the next twelve months. The
results of our current simulation model would indicate that our net interest
income should increase with a gradual rise in interest rates over the next
twelve months and decrease should interest rates fall over the same
period.
Economic
value of equity. Our
economic value of equity model measures the extent that estimated economic
values of our assets, liabilities and off-balance sheet items will change as
a
result of interest rate changes. Economic values are determined by discounting
expected cash flows from assets, liabilities and off-balance sheet items, which
establishes a base case economic value of equity. To help limit interest rate
risk, we have a guideline stating that for an instantaneous 200 basis point
change in interest rates up or down, the economic value of equity will not
change by more than 20 percent from the base case.
Gap
analysis.
An
asset
or liability is considered to be interest rate-sensitive if it will reprice
or
mature within the time period analyzed; for example, within three months or
one
year. The interest rate-sensitivity gap is the difference between the
interest-earning assets and interest-bearing liabilities scheduled to mature
or
reprice within such time period. A gap is considered positive when the amount
of
interest rate-sensitive assets exceeds the amount of interest rate-sensitive
liabilities (i.e., “asset sensitive”). A gap is considered negative when the
amount of interest rate-sensitive liabilities exceeds the interest
rate-sensitive assets (i.e., “liability sensitive). During a period of rising
interest rates, a negative gap would tend to adversely affect net interest
income, while a positive gap would tend to result in an increase in net interest
income. Conversely, during a period of falling interest rates, a negative gap
would tend to result in an increase in net interest income, while a positive
gap
would tend to adversely affect net interest income. If our assets and
liabilities were equally flexible and moved concurrently, the impact of any
increase or decrease in interest rates on net interest income would be minimal.
Each
of
the above analyses may not, on its own, be an accurate indicator of how our
net
interest income will be affected by changes in interest rates. Income associated
with interest-earning assets and costs associated with interest-bearing
liabilities may not be affected uniformly by changes in interest rates. In
addition, the magnitude and duration of changes in interest rates may have
a
significant impact on net interest income. For example, although certain assets
and liabilities may have similar maturities or periods of repricing, they may
react in different degrees to changes in market interest rates. Interest rates
on certain types of assets and liabilities fluctuate in advance of changes
in
general market rates, while interest rates on other types may lag behind changes
in general market rates. In addition, certain assets, such as adjustable rate
mortgage loans, have features (generally referred to as "interest rate caps
and
floors") which limit changes in interest rates. Prepayment and early withdrawal
levels also could deviate significantly from those assumed in calculating the
maturity of certain instruments. The ability of many borrowers to service their
debts also may decrease during periods of rising interest rates. ALCO reviews
each of the above interest rate sensitivity analyses along with several
different interest rate scenarios as part of its responsibility to provide
a
satisfactory, consistent level of profitability within the framework of
established liquidity, loan, investment, borrowing, and capital policies.
We
may
also use derivative financial instruments to improve the balance between
interest-sensitive assets and interest-sensitive liabilities and as one tool
to
manage our interest rate sensitivity while continuing to meet the credit and
deposit needs of our customers. At June 30, 2006 and December 31, 2005, we
had
not entered into any derivative contracts to assist managing our interest rate
sensitivity.
Liquidity
Risk Management. The
purpose of liquidity risk management is to ensure that there are sufficient
cash
flows to satisfy loan demand, deposit withdrawals, and our other needs.
Traditional sources of liquidity for a bank include asset maturities and growth
in core deposits. A bank may achieve its desired liquidity objectives from
the
management of its assets and liabilities and by internally generated funding
through its operations. Funds invested in marketable instruments that can be
readily sold and the continuous maturing of other earning assets are sources
of
liquidity from an asset perspective. The liability base provides sources of
liquidity through attraction of increased deposits and borrowing funds from
various other institutions.
Changes
in interest rates also affect our liquidity position. We currently price
deposits in response to market rates and our management intends to continue
this
policy. If deposits are not priced in response to market rates, a loss of
deposits could occur which would negatively affect our liquidity
position.
Scheduled
loan payments are a relatively stable source of funds, but loan payoffs and
deposit flows fluctuate significantly, being influenced by interest rates,
general economic conditions and competition. Additionally, debt security
investments are subject to prepayment and call provisions that could accelerate
their payoff prior to stated maturity. We attempt to price our deposit products
to meet our asset/liability objectives consistent with local market conditions.
Our ALCO is responsible for monitoring our ongoing liquidity needs. Our
regulators also monitor our liquidity and capital resources on a periodic basis.
In
addition, Pinnacle National is a member of the Federal Home Loan Bank of
Cincinnati. As a result, Pinnacle National receives advances from the Federal
Home Loan Bank of Cincinnati, pursuant to the terms of various borrowing
agreements, which assist it in the funding of its home mortgage and commercial
real estate loan portfolios. Pinnacle National has pledged under the borrowing
agreements with the Federal Home Loan Bank of Cincinnati certain qualifying
residential mortgage loans and, pursuant to a blanket lien, all qualifying
commercial mortgage loans as collateral. At June 30, 2006, Pinnacle National
had
received advances from the Federal Home Loan Bank of Cincinnati totaling $33.7
million at the following rates and maturities (dollars in
thousands):
|
|
Amount
|
|
Interest
Rate
|
|
|
|
|
|
|
|
August
25, 2006
|
|
$
|
1,000
|
|
|
3.81
|
%
|
September
29, 2006
|
|
|
4,000
|
|
|
2.39
|
|
January
26, 2007
|
|
|
2,000
|
|
|
3.24
|
|
September
4, 2007
|
|
|
1,000
|
|
|
3.95
|
|
December
29, 2008
|
|
|
10,000
|
|
|
4.97
|
|
January
27, 2009
|
|
|
15,000
|
|
|
5.01
|
|
April
1, 2020
|
|
|
749
|
|
|
2.25
|
|
Total
|
|
$
|
33,749
|
|
|
|
|
Weighted
average interest rate
|
|
|
|
|
|
4.45
|
%
|
At
June
30, 2006, brokered certificates of deposit approximated $78.6 million which
represented 4.5% of total fundings compared to $55.4 million and 5.8% at
December 31, 2005. We issue these brokered certificates through several
different brokerage houses based on competitive bid. Typically, these funds
are
for varying maturities from six months to two years and are issued at rates
which are competitive to rates we would be required to pay to attract similar
deposits from the local market as well as rates for Federal Home Loan Bank
of
Cincinnati advances of similar maturities. We consider these deposits to be
a
ready source of liquidity under current market conditions.
At
June
30, 2006, we had no significant commitments for capital expenditures. However,
we are in the process of developing our branch network in the
Nashville/Davidson/Murfreesboro MSA. As a result, we anticipate that we will
enter into contracts to buy property or construct branch facilities and/or
lease
agreements to lease facilities in the Nashville/Davidson/Murfreesboro MSA.
Off-Balance
Sheet Arrangements.
At June
30, 2006, we had outstanding standby letters of credit of $61.7 million and
unfunded loan commitments outstanding of $459.1 million. Because these
commitments generally have fixed expiration dates and most will expire without
being drawn upon, the total commitment level does not necessarily represent
future cash requirements. If needed to fund these outstanding commitments,
Pinnacle National has the ability to liquidate Federal funds sold or securities
available-for-sale, or on a short-term basis to borrow and purchase Federal
funds from other financial institutions. At June 30, 2006, Pinnacle National
had
accommodations with upstream correspondent banks for unsecured short-term
advances. These accommodations have various covenants related to their term
and
availability, and in most cases must be repaid within less than a month.
Impact
of Inflation
The
consolidated financial statements and related consolidated financial data
presented herein have been prepared in accordance with accounting principles
generally accepted in the United States and practices within the banking
industry which require the measurement of financial position and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, virtually all the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant impact on a financial institution's performance than the effects
of
general levels of inflation.
Recent
Accounting Pronouncements
FASB
Staff Position on SFAS No. 115-1 and SFAS No. 124-1 (“the FSP”), “The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,” was
issued in November 2005 and addresses the determination of when an investment
is
considered impaired; whether the impairment is other-than-temporary; and how
to
measure an impairment loss. The FSP also addresses accounting considerations
subsequent to the recognition of an other-than-temporary impairment on a debt
security, and requires certain disclosures about unrealized losses that have
not
been recognized as other-than-temporary impairments. The FSP replaces the
impairment guidance on Emerging Issues Task Force (EITF) Issue No. 03-1 with
references to existing authoritative literature concerning other-than-temporary
determinations. Under the FSP, losses arising from impairment deemed to be
other-than-temporary, must be recognized in earnings at an amount equal to
the
entire difference between the securities cost and its fair value at the
financial statement date, without considering partial recoveries subsequent
to
that date. The FSP also requires that an investor recognize an
other-than-temporary impairment loss when a decision to sell a security has
been
made and the investor does not expect the fair value of the security to fully
recover prior to the expected time of sale. The FSP was effective for reporting
periods beginning after December 15, 2005. The initial adoption of this
statement did not have a material impact on our financial position or results
of
operations.
In
May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3.”
This statement changes the requirements for the accounting for and reporting
of
a change in accounting principle. This statement applies to all voluntary
changes in accounting principle. It also applies to changes required by an
accounting pronouncement in the unusual instance that the pronouncement does
not
include specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed. APB 20
previously required that most voluntary changes in accounting principle be
recognized by including in net income of the period of the change the cumulative
effect of changing to the new accounting principle. SFAS 154 requires
retrospective application to prior period financial statements of changes in
accounting principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. This statement
does not change the guidance for reporting the correction of an error in
previously issued financial statements or the change in an accounting estimate.
SFAS 154 was effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005.
SFAS
No.
156, "Accounting for Servicing of Financial Assets - an amendment of FASB
Statement No. 140." SFAS 156requires an entity to recognize a servicing
asset or servicing liability each time it undertakes a contractual obligation
to
service a financial asset in certain circumstances. All separately recognized
servicing assets and servicing liabilities are required to be initially measured
at fair value. Subsequent measurement methods include the amortization
method,
whereby servicing assets or servicing liabilities are amortized in proportion
to
and over the period of estimated net servicing income or net servicing loss,
or
the fair
value
method,
whereby servicing assets or servicing liabilities are measured at fair value
at
each reporting date and changes in fair value are reported in earnings in the
period in which they occur. If the amortization method is used, an entity must
assess servicing assets or servicing liabilities for impairment or increased
obligation based on the fair value at each reporting date. SFAS 156 is
effective for fiscal years beginning after December 15, 2006. We are currently
evaluating the impact of SFAS 156 on our consolidated financial
statements.
In
July
2006, the FASB issued FASB Interpretation 48, “Accounting for Income Tax
Uncertainties” (“FIN 48”). FIN 48 defines the threshold for recognizing the
benefits of tax return positions in the financial statements as
“more-likely-than-not” to be sustained by the taxing authority. The recently
issued literature also provides guidance on the derecognition, measurement
and
classification of income tax uncertainties, along with any related interest
and
penalties. FIN 48 also includes guidance concerning accounting for income tax
uncertainties in interim periods and increases the level of disclosures
associated with any recorded income tax uncertainties. FIN 48 is effective
for
fiscal years beginning after December 15, 2006. The differences between the
amounts recognized in the statements of financial position prior to the adoption
of FIN 48 and the amounts reported after adoption will be accounted for as
a
cumulative-effect adjustment recorded to the beginning balance of retained
earnings. We are currently evaluating the impact of FIN 48 on our consolidated
financial statements.
In
June
2006, the Emerging Issues Task Force issued EITF No. 06-4, “Accounting for
Deferred Compensation and Postretirement Benefits Aspects of Endorsement
Split-Dollar Life Insurance Arrangements.” The EITF concluded that deferred
compensation or postretirement benefit aspects of an endorsement split-dollar
life insurance arrangement should be recognized as a liability by the employer
and the obligation is not effectively settled by the purchase of a life
insurance policy. The effective date is for fiscal years beginning after
December 15, 2006. We are currently evaluating the impact of EITF 06-4 on our
consolidated financial statements.
In
June
2006, the Emerging Issues Task Force issued EITF No. 06-5, “Accounting for
Purchases of Life Insurance - Determining the Amount that Could Be Realized
in
Accordance with FASB Tech Bulletin 85-4.” The EITF concluded that a policyholder
should consider any additional amounts included in the contractual terms of
the
life insurance policy in determining the “amount that could be realized under
the insurance contract.” For group policies with multiple certificates or
multiple policies with a group rider, the Task Force also tentatively concluded
that the amount that could be realized should be determined at the individual
policy or certificate level, i.e., amounts that would be realized only upon
surrendering all of the policies or certificates would not be included when
measuring the assets. The effective date is for fiscal years beginning after
December 15, 2006. We are currently evaluating the impact of EITF 06-5 on our
consolidated financial statements.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The
information required by this Item 3 is included on pages 40 through
42 of
Item 2
- “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Pinnacle
Financial maintains disclosure controls and procedures, as defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange
Act”), that are designed to ensure that information required to be disclosed by
it in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms and that such information is accumulated and communicated
to Pinnacle Financial’s management, including its Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. Pinnacle Financial carried out an evaluation, under the
supervision and with the participation of its management, including its Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of its disclosure controls and procedures as of the end
of
the period covered by this report. Based on the evaluation of these disclosure
controls and procedures, the Chief Executive Officer and Chief Financial Officer
concluded that Pinnacle Financial’s disclosure controls and procedures were
effective.
Changes
in Internal Controls
For
the
three months ended June 30, 2006, Pinnacle Financial expanded its internal
control system over financial reporting to incorporate procedures specifically
related to its merger with Cavalry Bancorp, Inc. We reviewed the financial
information obtained from Cavalry from April 1, 2006 thru the date such
information was integrated into Pinnacle Financial’s financial data systems and
performed additional procedures with respect to such information in order to
determine its accuracy and reliability. Pinnacle Financial anticipates that
it
will continue to monitor and enhance its system of internal controls over
financial reporting in 2006, particularly with respect to the continued
integration of Cavalry.
There
were no other changes in Pinnacle Financial’s internal control over financial
reporting during Pinnacle Financial’s fiscal quarter ended June 30, 2006 that
have materially affected, or are reasonably likely to materially affect,
Pinnacle Financial’s internal control over financial reporting.
ITEM
1. LEGAL PROCEEDINGS
There
are
no material pending legal proceedings to which the Company is a party or of
which any of their property is the subject.
ITEM
1A. RISK FACTORS
There
have been no material changes to our risk factors as previously disclosed in
Part I, Item IA of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2005.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)
|
Not
applicable
|
(b)
|
Not
applicable
|
(c)
|
The
Company did not repurchase any shares of the Company’s common stock during
the quarter ended June 30, 2006.
|
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
Not
applicable
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
(a)
|
The
annual meeting of the shareholders of the Company was held on May
16,
2006.
|
|
(b)
|
The
following directors were elected at the meeting to serve until the
annual
meeting of shareholders in the year 2008 (Class
II):
|
|
Votes
|
Votes
|
Broker
|
|
For
|
Withheld
|
Non-votes
|
James
C. Cope
|
13,421,995
|
126,638
|
-
|
William
H. Huddleston, IV
|
13,417,616
|
131,017
|
-
|
Hal
N. Pennington
|
13,428,270
|
120,363
|
-
|
The
following directors were elected at the meeting to serve until the annual
meeting of shareholders in the year 2009 (Class III):
Ed
C. Loughry, Jr.
|
13,420,922
|
127,711
|
-
|
Dale
W. Polley
|
13,413,046
|
135,587
|
-
|
James
L. Shaub, II
|
13,423,170
|
125,463
|
-
|
Reese
L. Smith, III
|
13,421,090
|
127,543
|
-
|
M.
Terry Turner
|
13,428,170
|
120,463
|
-
|
In
addition, the following directors continue in office until the annual meeting
of
shareholders in the year indicated:
Sue
G. Atkinson
|
2007
|
Colleen
Conway-Welch
|
2007
|
Gregory
L. Burns
|
2007
|
Clay
T. Jackson
|
2007
|
Robert
A. McCabe, Jr.
|
2008
|
|
|
|
(c)
|
Other
matters voted upon and the results of the voting were as
follows:
|
At
the
annual meeting of shareholders, the shareholders of Pinnacle Financial approved
an increase in the number of authorized shares of capital stock from 50,000,000
shares to 100,000,000 shares. With the increase, the number of authorized shares
of common stock was increased from 40,000,000 shares to 90,000,000 shares and
the number of authorized shares of preferred stock remained at 10,000,000
shares. The shareholders voted 12,391,040 in the affirmative and 1,132,359
against the proposal with 25,234 abstentions.
|
|
At
the annual meeting of shareholders, the shareholders also approved
an
amendment to the 2004 Equity Incentive Plan which would set aside
for
issuance an additional 500,000 shares of Pinnacle Financial common
stock.
The shareholders voted 8,395,055 in the affirmative and 929,197 against
the proposal with 107,299 abstentions and 4,117,082 broker
non-votes.
|
|
|
At
the annual meeting of shareholders, the shareholders also ratified
the
appointment of KPMG LLP as Pinnacle Financial’s independent registered
public accounting firm for the fiscal year ending December 31, 2006.
The
shareholders voted 13,467,650 in the affirmative and 57,878 against
the
proposal with 17,585 abstentions.
|
ITEM
5. OTHER INFORMATION
None
ITEM
6. EXHIBITS
31.1
|
Certification
pursuant to Rule 13a-14(a)/15d-14(a)
|
31.2
|
Certification
pursuant to Rule 13a-14(a)/15d-14(a)
|
32.1
|
Certification
pursuant to 18 USC Section 1350 - Sarbanes-Oxley Act of 2002
|
32.2
|
Certification
pursuant to 18 USC Section 1350 - Sarbanes-Oxley Act of 2002
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
.
|
|
PINNACLE
FINANCIAL PARTNERS, INC
|
|
|
|
|
|
|
|
|
/s/
M. Terry Turner
|
|
|
M.
Terry Turner
|
August
7, 2006
|
|
President
and Chief Executive Officer
|
|
|
/s/
Harold R. Carpenter
|
|
|
Harold
R. Carpenter
|
August
7, 2006
|
|
Chief
Financial Officer
|