PNFP 10-K 2007
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
For
Annual and Transition Reports Pursuant to Sections 13 or 15(d)
of
the Securities and Exchange Act of 1934
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the
fiscal year ended December 31, 2006
OR
[
] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
For
the
transition period from ________
to
________
Commission
File Number: 000-31225
,
INC.
|
(Exact
name of registrant as specified in charter)
|
Tennessee
|
000-31225
|
62-1812853
|
(State
or other jurisdiction
of
incorporation)
|
(Commission
File
Number)
|
(I.R.S.
Employer
Identification
No.)
|
211
Commerce Street, Suite 300, Nashville, Tennessee
|
37201
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (615)
744-3700
Securities
registered pursuant to Section 12 (b) of the Act:
Title
of Each Class
|
Securities
registered pursuant to Section 12 (g) of the Act:
|
Name
of Exchange on which Registered
|
Common
Stock, par value $1.00
|
None
|
Nasdaq
Global Select Market
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes [] No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes [] No [X]
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. Yes [X] No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
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 [] Accelerated Filer [X] Non-accelerated Filer [
]
Indicate
by check mark if the registrant is a shell company (as defined in Rule 12b-2
of
the Act. Yes [] No [X]
State
the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity
was
last sold, or the average bid and asked price of such common equity as of the
last business day of the registrant’s most recently completed second fiscal
quarter: $423,200,000 as of June 30, 2006.
APPLICABLE
ONLY TO CORPORATE REGISTRANTS
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date: 15,472,121 shares of common stock
as
of February 26, 2007.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement for the Annual Meeting of Shareholders, scheduled to
be
held April 17, 2007, are incorporated by reference into Part III of this Form
10-K.
TABLE
OF CONTENTS
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Page
No.
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PART
I
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ITEM
1. BUSINESS
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1
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|
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ITEM
1A. RISK FACTORS
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13
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ITEM
1B. UNRESOLVED STAFF COMMENTS
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17
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ITEM
2. PROPERTIES
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17
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|
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ITEM
3. LEGAL PROCEEDINGS
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18
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ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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18
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PART
II
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|
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ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND
ISSUER PURCHASES OF EQUITY SECURITIES
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18
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ITEM
6. SELECTED FINANCIAL DATA
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19
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ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS
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20
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ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
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44
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ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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45
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ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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81
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ITEM
9A. CONTROLS AND PROCEDURES
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81
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ITEM
9B. OTHER INFORMATION
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81
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PART
III
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ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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81
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ITEM
11. EXECUTIVE COMPENSATION
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82
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ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND
RELATED STOCKHOLDER MATTERS
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82
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ITEM
13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
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82
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ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
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82
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ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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83
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SIGNATURES
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85
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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 in “Item 1A. Risk Factors”
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, and (vi)
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. Forward-looking statements made
by
us in this report are also subject to those risks identified within “Item 1A.
Risk Factors.”
PART
I
Unless
this Form 10-K indicates otherwise or the context otherwise requires, the terms
“we,” “our,” “us,” “Pinnacle Financial Partners” or “Pinnacle Financial” as used
herein refer to Pinnacle Financial Partners, Inc. and its subsidiary Pinnacle
National Bank, which we sometimes refer to as “Pinnacle National,” “our bank
subsidiary” or “our bank” and its other subsidiaries. References herein to the
fiscal years 2002, 2003, 2004, 2005 and 2006 mean our fiscal years ended
December 31, 2002, 2003, 2004, 2005 and 2006, respectively.
ITEM
1. BUSINESS
OVERVIEW
Pinnacle
Financial is a Tennessee corporation that was incorporated on February 28,
2000 to organize and serve as the holding company for Pinnacle National, a
national bank chartered under the laws of the United States. Pinnacle National
commenced its banking operations on October 27, 2000, and operates as a
community bank in primarily an urban market emphasizing personalized banking
relationships with individuals and businesses located within the
Nashville-Davidson-Murfreesboro, Tennessee metropolitan statistical area, which
we sometimes refer to as the Nashville MSA. We own 100% of the capital stock
of
Pinnacle National.
On
March
15, 2006, we consummated the acquisition of Cavalry Bancorp, Inc. (“Cavalry”), a
one-bank holding company located in Murfreesboro, Tennessee with approximately
$672 million in assets as of the closing. During 2006, we successfully
integrated Cavalry. We measured success on several criteria and we believe
we
successfully integrated Cavalry as a result of:
1. |
Achievement
of all major integration milestones on
time,
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2. |
Achievement
of the financial synergies that were proposed at the time of Cavalry
transaction announcement,
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3. |
No
degradation in service quality as measured by internal client surveys,
and
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4. |
Continued
loan and deposit growth for the combined firm at rates exceeding
those of
the previous period.
|
Opportunity.
We
believe there are three major trends in the Nashville MSA that strengthen our
strategic market position as a locally managed community bank:
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•
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Customers
generally perceive that service levels at banks are declining. We
believe
this is largely attributable to merger-related integration issues
resulting from consolidation in the bank and brokerage industries.
Additionally, small business owners want a reliable point of contact
that
is knowledgeable about their business and the financial products
and
services that are important to the success of their business. In
fact,
Nashville is dominated by three large regional bank holding companies,
which are headquartered elsewhere, each of whom is experiencing declining
market share trends (other than after acquisitions) over the last
six
years;
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•
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Client
usage of more sophisticated financial products continues to grow,
causing
traditional banks to lose market share to other types of financial
services companies, such as mutual fund companies and securities
brokerage
firms; and
|
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•
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There
is significant growth in the demand for convenient access to financial
services, particularly through ATMs, telephone banking and Internet
banking.
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We
believe that our primary market segments, which are small businesses with annual
sales from $1 million to $50 million and households with investable assets
over $250,000, are more likely to be disaffected by the banking industry’s
perceived decline in customer service and lack of financial product
sophistication. To overcome these customer perceptions and attract business
from
these market segments, we seek to hire only seasoned professionals, from both
the banking and brokerage industries, and have strategically designed our
banking, investment and insurance products to meet the expected needs of our
targeted market segments. As an example, we consider our consumer brokerage
and
corporate treasury management products to be at least at parity with the large
regional banks that dominate our target segment in the Nashville market.
Accordingly, our marketing philosophy is centered on delivering exceptional
service and effective financial advice through highly trained personnel who
understand and care about the broad financial needs and objectives of our
clients.
Business
Strategies.
To carry
out our marketing philosophy, our specific business strategies have been and
will continue to be:
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•
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Hire
and retain highly experienced and qualified banking and financial
professionals with successful track records and, for client contact
personnel, established books of business with small businesses and
affluent households within the Nashville MSA. On average, our senior
customer contact personnel have in excess of 20 years experience
in the
Nashville MSA. We believe we will continue to experience success
in
attracting more market-best associates to our firm as well as retaining
our highly experienced and successful group of associates.
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•
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Provide
individualized attention with consistent, local decision-making authority.
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•
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Offer
a full line of financial services to include traditional depository
and
credit products, as well as sophisticated investment, trust and insurance
products. As of December 31, 2006, Pinnacle National’s brokerage division,
Pinnacle Asset Management, had accumulated approximately $597 million
in
brokerage assets.
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•
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Capitalize
on customer dissatisfaction that we believe exists and that has been
caused by what we believe to be our competitors’ less than satisfactory
response to the financial needs of today’s sophisticated consumers and
small- to medium-sized businesses. Since we began our company, we
have
historically surveyed our customers on numerous matters related to
their
relationship with us. Consistently, these surveys indicate that our
service quality is significantly better than their prior banking
relationships.
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•
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Build
on our directors’ and officers’ diverse personal and business contacts,
community involvement and professional expertise.
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•
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Establish
a distribution strategy designed to prudently expand our physical
and
virtual market presence, thereby providing convenient banking access
for
our clients 24 hours a day. We opened two new offices in 2005 and
intend to open two new offices in 2007. Our courier deposit pickup
service
consistently receives high marks from our small business customers.
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•
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Use
technology and strategic alliances, including those established through
Pinnacle Asset Management and Miller and Loughry Insurance Services
to
provide a broad array of sophisticated and convenient products and
services.
|
We
believe that our business strategies allow us to effectively distinguish
ourselves from other financial institutions operating within the Nashville
MSA
and successfully attract and retain business relationships with small businesses
and affluent households.
Market
Area. Pinnacle
National’s primary service area, which comprises the Nashville MSA, includes
Davidson County and twelve surrounding counties. This area represents a
geographic area that covers approximately 4,000 square miles and a
population in excess of 1.3 million people. For Pinnacle National, we
concentrate our market efforts on Davidson, Williamson, Sumner and Rutherford
counties which represent 77% of the Nashville MSA’s population base and 85% of
the deposit base (based on June 30, 2006 FDIC information).
The
economic success of Pinnacle National’s primary service area depends heavily
upon the economic viability of the metropolitan Nashville, Tennessee area.
Nashville is the capital of Tennessee and a city that we believe is an important
transportation, business and tourism center within the United States.
Additionally, the metropolitan Nashville area has attracted a number of
significant business relocations resulting in an expansion of its labor force
into many different industry sectors. In 2006, for the second year in a row
“Expansion Management” magazine noted that Nashville ranked first among cities
in the nation for companies that are looking to expand or relocate. Over the
last few years, Nashville has been chosen by such companies as Louisiana
Pacific, Nissan North America, CareMark and Dell to relocate their U.S.
headquarters or to significantly expand their operations.
Our
primary service area’s economic strength comes from its large employer base,
which includes several large enterprises such as Vanderbilt University and
Medical Center, HCA Inc., Saturn Corporation and Nissan Motor Manufacturing
Corporation USA. Additionally, according to the Nashville Area Chamber of
Commerce, the regional economy has outperformed the state and national economies
during the most recent time periods and continues to benefit from low
unemployment, consistent job growth, substantial outside investment and
expansion and a well trained and growing labor force. We anticipate that these
factors will continue to cause more businesses to relocate to, or start
operations in, the Nashville MSA and, in turn, will increase the demand for
depository and lending services within our market at a pace faster than national
averages. In comparing Nashville MSA deposits as of June 30, 2006 to those
at
June 30, 2005, the Nashville MSA deposits were 13.5% higher in 2006 than in
2005
which is 70% over the national average for deposit growth during the same time
period.
Pinnacle
National’s main office is located in Nashville’s central business district in
downtown Nashville. The downtown market consists of a variety of commercial
establishments and entertainment venues. We believe that the downtown area
is an
important location for financial institutions requiring visibility within
Nashville’s prominent commercial and private banking markets. Accordingly, we
believe that this location is well suited for our bank’s headquarters and
principal business development efforts.
Competitive
Conditions. The
Nashville MSA banking market is very competitive, with 58 financial institutions
with over $28.5 billion in deposits in the market as of June 30, 2006. According
to FDIC data, bank and thrift deposits in the Nashville MSA grew from
approximately $25.2 billion at June 30, 1995 to more than $28.5 billion at
June 30, 2006. As of June 30, 2006, approximately 70.4% of this deposit
base was controlled by large, multi-state banks headquartered outside of
Nashville, which included the six largest banks, Regions Financial
(headquartered in Birmingham, Alabama), Bank of America (headquartered in
Charlotte, North Carolina), First Horizon (headquartered in Memphis, Tennessee),
US Bancorp (headquartered in Milwaukee, Wisconsin), SunTrust (headquartered
in
Atlanta, Georgia), and Fifth Third (headquartered in Cincinnati, Ohio).
According to FDIC deposit information, the collective market share of deposits
in the Nashville MSA of Regions Financial (including the acquired Union Planters
National Bank, First American National Bank, and AmSouth Bank), Bank of America
and SunTrust (including the acquired National Bank of Commerce) declined from
70.4% to 54.0% during the ten years ended June 30, 2006. Consequently,
while large, multi-state institutions are well established in our market area,
we believe the general trends indicate that a majority of the community banks
in
the Nashville MSA have been able to increase their deposit market share in
recent years at the expense of these larger, multi-state banks. Furthermore,
continued consolidation of our industry, particularly with respect to the larger
regional banks that have presence in our market, we believe will create
additional opportunities for us as we capitalize on customer dissatisfaction
that usually occurs following a merger of these larger multistate
banks.
We
also
believe that Pinnacle National’s status as a community bank will not be enough
to compete in today’s financial industry. In the wake of modern technology and
the prosperity of the United States’ financial markets, banking clients have
generally become more sophisticated in their approach to selecting financial
services providers. We believe that the most important criteria to our bank’s
targeted clients when selecting a bank is their desire to receive exceptional
and personal customer service while being able to enjoy convenient access to
a
broad array of sophisticated financial products. Additionally, when presented
with a choice, we believe that many of our bank’s targeted clients would prefer
to deal with a locally-owned institution headquartered in Nashville, like
Pinnacle National, as opposed to a large, multi-state bank, where many important
decisions regarding a client’s financial affairs are made elsewhere.
Lending
Services
Pinnacle
National offers a full range of lending products, including commercial, real
estate and consumer loans to individuals and small-to medium-sized businesses
and professional entities. It competes for these loans with competitors who
are
well established in the Nashville MSA.
Pinnacle
National’s loan approval policies provide for various levels of officer lending
authority. When the amount of total loans to a single borrower exceeds that
individual officer’s lending authority, officers with a higher lending limit,
Pinnacle National’s board of directors or the executive committee of the board
will determine whether to approve the loan request.
Pinnacle
National’s lending activities are subject to a variety of lending limits imposed
by federal law. Differing limits apply based on the type of loan or the nature
of the borrower, including the borrower’s relationship to Pinnacle National. In
general, however, at December 31, 2006, Pinnacle National is able to loan any
one borrower a maximum amount equal to approximately $26.3 million plus an
additional $17.5 million, or a total of approximately $43.8 million,
for loans that meet certain additional federal collateral guidelines. These
legal limits will increase or decrease as Pinnacle National’s capital increases
or decreases as a result of its earnings or losses, the injection of additional
capital or other reasons. In addition to these regulatory limits, Pinnacle
National currently imposes upon itself an internal lending limit of $15 million,
which is less than the prescribed legal lending limit.
The
principal economic risk associated with each category of loans that Pinnacle
National expects to make is the creditworthiness of the borrower. General
economic factors affecting a commercial or consumer borrower’s ability to repay
include interest, inflation and unemployment rates, as well as other factors
affecting a borrower’s assets, clients, suppliers and employees. Many of
Pinnacle National’s commercial loans are made to small- to medium-sized
businesses that are sometimes less able to withstand competitive, economic
and
financial pressures than larger borrowers. During periods of economic weakness,
these businesses may be more adversely affected than larger enterprises, and
may
cause increased levels of nonaccrual or other problem loans, loan charge-offs
and higher provision for loan losses.
Pinnacle
National’s commercial clients borrow for a variety of purposes. The terms of
these loans will vary by purpose and by type of any underlying collateral and
include equipment loans and working capital loans. Commercial loans may be
unsecured or secured by accounts receivable or by other business assets.
Pinnacle National also makes a variety of commercial real estate loans,
residential real estate loans and real estate construction and development
loans.
Pinnacle
National also makes a variety of loans to individuals for personal, family,
investment and household purposes, including secured and unsecured installment
and term loans, residential first mortgage loans, home equity loans and home
equity lines of credit.
Investment
Securities
In
addition to loans, Pinnacle National has other investments primarily in
obligations of the United States government, obligations guaranteed as to
principal and interest by the United States government and other securities.
No
investment in any of those instruments exceeds any applicable limitation imposed
by law or regulation. The executive committee of the board of directors reviews
the investment portfolio on an ongoing basis in order to ensure that the
investments conform to Pinnacle National’s asset liability management policy as
set by the board of directors.
Asset
and Liability Management
Our
Asset
Liability Management Committee (“ALCO”), composed of senior managers of Pinnacle
National, manages Pinnacle National’s assets and liabilities and strives to
provide a stable, optimized net interest income and margin, adequate liquidity
and ultimately a suitable after-tax return on assets and return on equity.
ALCO
conducts these management functions within the framework of written policies
that Pinnacle National’s board of directors has adopted. ALCO works to maintain
a balanced position between rate sensitive assets and rate sensitive
liabilities.
Additionally,
we may use derivative financial instruments to improve the balance between
interest-sensitive assets and interest-sensitive liabilities. We may use
derivatives as one tool to manage our interest rate sensitivity while continuing
to meet the credit and deposit needs of our customers. At December 31, 2006
and 2005, we had not entered into any derivative contracts.
Deposit
Services
Pinnacle
National seeks to establish a broad base of core deposits, including savings,
checking, interest-bearing checking, money market and certificate of deposit
accounts. To attract deposits, Pinnacle National has employed a marketing plan
in its overall service area and features a broad product line and competitive
rates and services. The primary sources of deposits are residents and businesses
located in the Nashville MSA. Pinnacle National generally obtains these deposits
through personal solicitation by its officers and directors.
Investment,
Trust and Insurance Services
Pinnacle
National contracts with Raymond James Financial Service, Inc. (“RJFS”), a
registered broker-dealer and investment adviser, to offer and sell various
securities and other financial products to the public from Pinnacle National’s
locations through Pinnacle National employees that are also RJFS employees.
RJFS
is a subsidiary of Raymond James Financial, Inc.
Pinnacle
National offers, through RJFS, non-FDIC insured investment products in order
to
assist Pinnacle National’s clients in achieving their financial objectives
consistent with their risk tolerances. Pinnacle National’s suite of investment
products include:
• Mutual
Funds;
|
• Fixed
Annuities;
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• Variable
Annuities;
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• Stocks;
|
• Money
Market Instruments;
|
• Financial
Planning;
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• Treasury
Securities;
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• Asset
Management Accounts; and
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• Bonds;
|
• Listed
Options.
|
All
of
the financial products listed above are offered by RJFS from Pinnacle National’s
main office and its other offices. Additionally, we believe that the brokerage
and investment advisory program offered by RJFS complements Pinnacle National’s
general banking business, and further supports its business philosophy and
strategy of delivering to our clients those products and services that meet
their financial needs. In addition to the compliance monitoring provided by
RJFS, Pinnacle National has developed its own compliance-monitoring program
to
further ensure that Pinnacle National personnel deliver these products in a
manner consistent with the various regulations governing such activities.
Pinnacle
National receives a percentage of commission credits and fees generated by
the
program. Pinnacle National remains responsible for various expenses associated
with the program, including promotional expenses, furnishings and equipment
expenses and general personnel costs.
Pinnacle
National also maintains a trust department which provides fiduciary and
investment management services for individual and institutional clients. Account
types include personal trust, endowments, foundations, individual retirement
accounts, pensions and custody. Pinnacle Financial has also established Pinnacle
Advisory Services, Inc., a registered investment advisor, to provide investment
advisory services to its clients. Additionally, Miller and Loughry Insurance
Services, Inc., a wholly-owned subsidiary of Pinnacle National provides
insurance products, particularly in the property and casualty area, to its
clients.
Other
Banking Services
Given
client demand for increased convenience in accessing banking and investment
services, Pinnacle National also offers a broad array of convenience-centered
products and services, including 24 hour telephone and Internet banking,
debit cards, direct deposit and cash management services for small- to
medium-sized businesses. Additionally, Pinnacle National is associated with
a
nationwide network of automated teller machines of other financial institutions
that our clients are able to use throughout Tennessee and other regions. In
most
cases, Pinnacle National, in contrast to its competitors, reimburses its clients
for any fees that may be charged to the client for utilizing the nationwide
ATM
network which enables us to demonstrate greater convenience as compared to
these
competitors.
Pinnacle
National also offers its targeted commercial clients a courier service which
picks up non-cash deposits from the client’s place of business which also
enables us to demonstrate convenience greater than most of the larger regional
competitors. Pinnacle National provides this service through a third party
that
is approved by the State of Tennessee Public Service Commission for bank-related
work.
Employees
At
February 15, 2007, Pinnacle National employed 438 employees of which 397
were full time. Pinnacle National considers its relationship with all employees
to be excellent. Additionally, during 2006, Pinnacle Financial was named by
the
Nashville Business Journal as the “Best Place to Work in Nashville” among Middle
Tennessee’s large companies with more than 100 employees. This is the fourth
consecutive year for Pinnacle to receive top honors in the annual awards
program.
We
are
also one of a relatively small number of financial firms in the country that
provide stock options for all associates in a broad-based stock option plan.
We
believe this broad-based stock option plan directly aligns our employee base
with our shareholders, and that our associates have become even more engaged
in
the creation of shareholder value over the intermediate- and long-terms.
Information concerning these plans is included in the “Notes to the Consolidated
Financial Statements.”
Additionally,
all of our non-commission based employees participate in an annual cash
incentive plan whereby they receive a certain percentage of their annual base
salary should the firm meet certain soundness and earnings targets for the
year.
Information concerning this plan is included in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
Available
Information
We
file
reports with the Securities and Exchange Commission (“SEC”), including annual
reports on Form 10-K, quarterly reports on Form 10-Q and current reports on
Form
8-K. The public may read and copy any materials we file with the SEC at the
SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The
public may obtain information on the operation of the Public Reference Room
by
calling the SEC at 1-800-SEC-0330. We are an electronic filer, and the SEC
maintains an Internet site at http://www.sec.gov that contains the reports,
proxy and information statements, and other information we have filed
electronically. Our website address is www.pnfp.com.
Please
note that our website address is provided as an inactive textual reference
only.
We make available free of charge through our website, the annual report on
Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all
amendments to those reports as soon as reasonably practicable after such
material is electronically filed with or furnished to the SEC. The information
provided on our website is not part of this report, and is therefore not
incorporated by reference unless such information is otherwise specifically
referenced elsewhere in this report.
We
have
posted our Corporate Governance Guidelines, our Corporate Code of Conduct for
directors, officers and employees, and the charters of our Audit Committee,
Human Resources and Compensation Committee, and Nominating and Corporate
Governance Committee of our board of directors on the Corporate Governance
section of our website at www.pnfp.com.
Our
corporate governance materials are available free of charge upon request to
our
Corporate Secretary, Pinnacle Financial Partners, Inc., 211 Commerce
Street, Suite 300, Nashville, Tennessee 37201.
SUPERVISION
AND REGULATION
Both
Pinnacle Financial and Pinnacle National are subject to extensive state and
federal banking laws and regulations that impose restrictions on and provide
for
general regulatory oversight of Pinnacle Financial’s and Pinnacle National’s
operations. These laws and regulations are generally intended to protect
depositors and borrowers, not shareholders. The following discussion describes
the material elements of the regulatory framework which apply.
Pinnacle
Financial
We
are a
bank holding company under the federal Bank Holding Company Act of 1956. As
a
result, we are subject to the supervision, examination, and reporting
requirements of the Bank Holding Company Act and the regulations of the Federal
Reserve.
Acquisition
of Banks.
The Bank
Holding Company Act requires every bank holding company to obtain the Federal
Reserve’s prior approval before:
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Acquiring
direct or indirect ownership or control of any voting shares of any
bank
if, after the acquisition, the bank holding company will directly
or
indirectly own or control more than 5% of the bank’s voting shares;
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Acquiring
all or substantially all of the assets of any bank; or
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Merging
or consolidating with any other bank holding company.
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Additionally,
the Bank Holding Company Act provides that the Federal Reserve may not approve
any of these transactions if it would substantially lessen competition or
otherwise function as a restraint of trade, or result in or tend to create
a
monopoly, unless the anticompetitive effects of the proposed transaction are
clearly outweighed by the public interest in meeting the convenience and needs
of the communities to be served. The Federal Reserve is also required to
consider the financial and managerial resources and future prospects of the
bank
holding companies and banks concerned and the convenience and needs of the
communities to be served. The Federal Reserve’s consideration of financial
resources generally focuses on capital adequacy, which is discussed
below.
Under
the
Bank Holding Company Act, if adequately capitalized and adequately managed,
we
or any other bank holding company located in Tennessee may purchase a bank
located outside of Tennessee. Conversely, an adequately capitalized and
adequately managed bank holding company located outside of Tennessee may
purchase a bank located inside Tennessee. In each case, however, state law
restrictions may be placed on the acquisition of a bank that has only been
in
existence for a limited amount of time or will result in specified
concentrations of deposits. For example, Tennessee law currently prohibits
a
bank holding company from acquiring control of a Tennessee-based financial
institution until the target financial institution has been in operation for
three years.
Change
in Bank Control.
Subject
to various exceptions, the Bank Holding Company Act and the Federal Change
in
Bank Control Act, together with related regulations, require Federal Reserve
approval prior to any person or company acquiring “control” of a bank holding
company. Control is conclusively presumed to exist if an individual or company
acquires 25% or more of any class of voting securities of the bank holding
company. Control is rebuttably presumed to exist if a person or company acquires
10% or more, but less than 25%, of any class of voting securities and either:
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The
bank holding company has registered securities under Section 12 of
the Securities Exchange Act of 1934; or
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No
other person owns a greater percentage of that class of voting securities
immediately after the transaction.
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Our
common stock is registered under the Securities Exchange Act of 1934. The
regulations provide a procedure for challenge of the rebuttable control
presumption.
Permitted
Activities.
The
Gramm-Leach-Bliley Act of 1999 amended the Bank Holding Company Act and expanded
the activities in which bank holding companies and affiliates of banks are
permitted to engage. The Gramm-Leach-Bliley Act eliminates many federal and
state law barriers to affiliations among banks and securities firms, insurance
companies, and other financial service providers. Generally, if we qualify
and
elect to become a financial holding company, which is described below, we may
engage in activities that are:
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Financial
in nature;
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Incidental
to a financial activity; or
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Complementary
to a financial activity and do not pose a substantial risk to the
safety
or soundness of depository institutions or the financial system generally.
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The
Gramm-Leach-Bliley Act expressly lists the following activities as financial
in
nature:
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Lending,
trust and other banking activities;
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Insuring,
guaranteeing, or indemnifying against loss or harm, or providing
and
issuing annuities, and acting as principal, agent, or broker for
these
purposes, in any state;
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Providing
financial, investment, or advisory services;
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Issuing
or selling instruments representing interests in pools of assets
permissible for a bank to hold directly;
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Underwriting,
dealing in or making a market in securities;
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Activities
that the Federal Reserve has determined to be so closely related
to
banking or managing or controlling banks as to be a proper incident
to
banking or managing or controlling banks;
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Activities
permitted outside of the United States that the Federal Reserve has
determined to be usual in connection with banking or other financial
operations abroad;
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Merchant
banking through securities or insurance affiliates; and
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Insurance
company portfolio investments.
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The
Gramm-Leach-Bliley Act also authorizes the Federal Reserve, in consultation
with
the Secretary of the Treasury, to determine activities in addition to those
listed above that are financial in nature or incidental to such financial
activity. In determining whether a particular activity is financial in nature
or
incidental or complementary to a financial activity, the Federal Reserve must
consider (1) the purpose of the Bank Holding Company and Gramm-Leach-Bliley
Acts, (2) changes or reasonably expected changes in the marketplace in
which financial holding companies compete and in the technology for delivering
financial services, and (3) whether the activity is necessary or
appropriate to allow financial holding companies to effectively compete with
other financial service providers and to efficiently deliver information and
services.
To
qualify to become a financial holding company, any of our depository institution
subsidiaries must be well capitalized and well managed and must have a Community
Reinvestment Act rating of at least “satisfactory.” Additionally, we must file
an election with the Federal Reserve to become a financial holding company
and
provide the Federal Reserve with 30 days written notice prior to engaging
in a permitted financial activity. Although we do not have any immediate plans
to file an election with the Federal Reserve to become a financial holding
company, one of the primary reasons we selected the holding company structure
was to have increased flexibility. Accordingly, if deemed appropriate in the
future, we may seek to become a financial holding company.
Under
the
Bank Holding Company Act, a bank holding company, which has not qualified or
elected to become a financial holding company, is generally prohibited from
engaging in or acquiring direct or indirect control of more than 5% of the
voting shares of any company engaged in nonbanking activities unless, prior
to
the enactment of the Gramm-Leach-Bliley Act, the Federal Reserve found those
activities to be so closely related to banking as to be a proper incident to
the
business of banking. Activities that the Federal Reserve has found to be so
closely related to banking as to be a proper incident to the business of banking
include:
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Factoring
accounts receivable;
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Acquiring
or servicing loans;
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Leasing
personal property;
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Conducting
discount securities brokerage activities;
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Performing
selected data processing services;
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Acting
as agent or broker in selling credit life insurance and other types
of
insurance in connection with credit transactions; and
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Performing
selected insurance underwriting activities.
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Despite
prior approval, the Federal Reserve may order a bank holding company or its
subsidiaries to terminate any of these activities or to terminate its ownership
or control of any subsidiary when it has reasonable cause to believe that the
bank holding company’s continued ownership, activity or control constitutes a
serious risk to the financial safety, soundness, or stability of any of its
bank
subsidiaries.
Support
of Subsidiary Institutions.
Under
Federal Reserve policy, we are expected to act as a source of financial strength
for our subsidiary, Pinnacle National, and to commit resources to support
Pinnacle National. This support may be required at times when, without this
Federal Reserve policy, we might not be inclined to provide it. In the unlikely
event of our bankruptcy, any commitment by us to a federal bank regulatory
agency to maintain the capital of Pinnacle National would be assumed by the
bankruptcy trustee and entitled to a priority of payment.
Pinnacle
National
Pinnacle
National is a national bank chartered under the federal National Bank Act.
As a
result, it is subject to the supervision, examination and reporting requirements
of the National Bank Act and the regulations of the Office of the Comptroller
of
the Currency (the “OCC”). The OCC regularly examines Pinnacle National’s
operations and has the authority to approve or disapprove mergers, the
establishment of branches and similar corporate actions. The OCC also has the
power to prevent the continuance or development of unsafe or unsound banking
practices or other violations of law. Additionally, Pinnacle National’s deposits
are insured by the FDIC to the maximum extent provided by law. Pinnacle National
also is subject to numerous state and federal statutes and regulations that
will
affect its business, activities and operations.
Branching.
While
the OCC has authority to approve branch applications, national banks are
required by the National Bank Act to adhere to branching laws applicable to
state chartered banks in the states in which they are located. With prior
regulatory approval, Tennessee law permits banks based in the state to either
establish new or acquire existing branch offices throughout Tennessee. Pinnacle
National and any other national or state-chartered bank generally may branch
across state lines by merging with banks in other states if allowed by the
applicable states’ laws. Tennessee law, with limited exceptions, currently
permits branching across state lines either through interstate merger or branch
acquisition. Tennessee, however only permits an out-of-state bank, short of
an
interstate merger, to branch into Tennessee through branch acquisition if the
state of the out-of-state bank permits Tennessee based banks to acquire branches
there.
FDIC
Insurance.
The FDIC
has adopted a risk-based assessment system for insured depository institutions
that takes into account the risks attributable to different categories and
concentrations of assets and liabilities. In early 2006, Congress passed the
Federal Deposit Insurance Reform Act of 2005, which made certain changes to
the
Federal deposit insurance program. These changes included merging the Bank
Insurance Fund and the Savings Association Insurance Fund, increasing retirement
account coverage to $250,000 and providing for inflationary adjustments to
general coverage beginning in 2010, providing the FDIC with authority to set
the
fund’s reserve ratio within a specified range, and requiring dividends to banks
if the reserve ratio exceeds certain levels. The new statute grants banks an
assessment credit based on their share of the assessment base on December 31,
1996, and the amount of the credit can be used to reduce assessments in any
year
subject to certain limitations. Because it was not organized until 2000,
Pinnacle National was not be eligible to receive this one-time assessment
credit, however, approximately $297,000 in credits will be available to Pinnacle
National as a result of the acquisition of Cavalry.
The
FDIC
may terminate its insurance of deposits if it finds that the institution has
engaged in unsafe and unsound practices, is in an unsafe or unsound condition
to
continue operations, or has violated any applicable law, regulation, rule,
order
or condition imposed by the FDIC.
Capital
Adequacy
Both
Pinnacle Financial and Pinnacle National are required to comply with the capital
adequacy standards established by the Federal Reserve, in our case, and the
OCC,
in the case of Pinnacle National. The Federal Reserve has established a
risk-based and a leverage measure of capital adequacy for bank holding
companies. Pinnacle National is also subject to risk-based and leverage capital
requirements adopted by the OCC, which are substantially similar to those
adopted by the Federal Reserve for bank holding companies.
The
risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and
bank
holding companies, to account for off-balance-sheet exposure, and to minimize
disincentives for holding liquid assets. Assets and off-balance-sheet items,
such as letters of credit and unfunded loan commitments, are assigned to broad
risk categories, each with appropriate risk weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance-sheet items.
The
minimum guideline for the ratio of total capital to risk-weighted assets is
8%.
Total capital consists of two components, Tier 1 capital and Tier 2
capital. Tier 1 capital generally consists of common stock, minority
interests in the equity accounts of consolidated subsidiaries, noncumulative
perpetual preferred stock, and a limited amount of cumulative perpetual
preferred stock, less goodwill and other specified intangible assets.
Tier 1 capital must equal at least 4% of risk-weighted assets. Tier 2
capital generally consists of subordinated debt, other preferred stock, and
a
limited amount of loan loss reserves. The total amount of Tier 2 capital is
limited to 100% of Tier 1 capital.
In
addition, the Federal Reserve has established minimum leverage ratio guidelines
for bank holding companies. These guidelines provide for a minimum ratio of
Tier 1 capital to average assets, less goodwill and other specified
intangible assets, of 3% for bank holding companies that meet specified
criteria, including having the highest regulatory rating and implementing the
Federal Reserve’s risk-based capital measure for market risk. All other bank
holding companies generally are required to maintain a leverage ratio of at
least 4%. The guidelines also provide that bank holding companies experiencing
high internal growth, as is our case, or making acquisitions will be expected
to
maintain strong capital positions substantially above the minimum supervisory
levels. Furthermore, the Federal Reserve has indicated that it will consider
a
bank holding company’s Tier 1 capital leverage ratio, after deducting all
intangibles, and other indicators of capital strength in evaluating proposals
for expansion or new activities.
Information
concerning our regulatory ratios at December 31, 2006 is included in the “Notes
to the Consolidated Financial Statements.”
If
our
growth rate continues, as we presently anticipate, our assets will grow faster
than our capital and our capital ratios will decline. In order to maintain
capital at Pinnacle National at appropriate levels, we may be required to incur
borrowings or issue additional trust preferred or equity
securities.
Failure
to meet capital guidelines could subject a bank or bank holding company to
a
variety of enforcement remedies, including issuance of a capital directive,
the
termination of deposit insurance by the FDIC, a prohibition on accepting
brokered deposits, and other restrictions on its business. As described above,
significant additional restrictions can be imposed on FDIC-insured depository
institutions that fail to meet applicable capital requirements.
Prompt
Corrective Action
The
Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a
system of prompt corrective action to resolve the problems of undercapitalized
financial institutions. Under this system, the federal banking regulators have
established five capital categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized) into one of which all institutions are placed. Federal banking
regulators are required to take various mandatory supervisory actions and are
authorized to take other discretionary actions with respect to institutions
in
the three undercapitalized categories. The severity of the action depends upon
the capital category in which the institution is placed. Generally, subject
to a
narrow exception, the banking regulator must appoint a receiver or conservator
for an institution that is critically undercapitalized. The federal banking
agencies have specified by regulation the relevant capital level for each
category.
An
institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency.
A
bank holding company must guarantee that a subsidiary depository institution
meets its capital restoration plan, subject to various limitations. The
controlling holding company’s obligation to fund a capital restoration plan is
limited to the lesser of 5% of an undercapitalized subsidiary’s assets or the
amount required to meet regulatory capital requirements. An undercapitalized
institution is also generally prohibited from increasing its average total
assets, making acquisitions, establishing any branches or engaging in any new
line of business, except under an accepted capital restoration plan or with
FDIC
approval. The regulations also establish procedures for downgrading an
institution and a lower capital category based on supervisory factors other
than
capital. As of December 31, 2006, we believe Pinnacle National would be
considered “well capitalized” by its primary regulator.
Payment
of Dividends
We
are a
legal entity separate and distinct from Pinnacle National. Over time, the
principal source of our cash flow, including cash flow to pay dividends to
our
holders of trust preferred securities and to our common stock shareholders,
will
be dividends that Pinnacle National pays to us as its sole shareholder.
Statutory and regulatory limitations apply to Pinnacle National’s payment of
dividends to us as well as to our payment of dividends to our shareholders.
Until we require dividends from Pinnacle National, our cash flow requirements
will be satisfied through our existing cash balances, additional equity
offerings or additional offerings of trust preferred securities.
Pinnacle
National is required by federal law to obtain the prior approval of the OCC
for
payments of dividends if the total of all dividends declared by its board of
directors in any year will exceed (1) the total of Pinnacle National’s net
profits for that year, plus (2) Pinnacle National’s retained net profits of
the preceding two years, less any required transfers to surplus. We do not
anticipate that Pinnacle Financial will require any dividends from Pinnacle
National in 2007.
The
payment of dividends by Pinnacle National and us may also be affected by other
factors, such as the requirement to maintain adequate capital above regulatory
guidelines. If, in the opinion of the OCC, Pinnacle National was engaged in
or
about to engage in an unsafe or unsound practice, the OCC could require, after
notice and a hearing, that Pinnacle National stop or refrain from engaging
in
the practice. The federal banking agencies have indicated that paying dividends
that deplete a depository institution’s capital base to an inadequate level
would be an unsafe and unsound banking practice. Under the Federal Deposit
Insurance Corporation Improvement Act of 1991, a depository institution may
not
pay any dividend if payment would cause it to become undercapitalized or if
it
already is undercapitalized. Moreover, the federal agencies have issued policy
statements that provide that bank holding companies and insured banks should
generally only pay dividends out of current operating earnings. See “Prompt
Corrective Action” above.
Restrictions
on Transactions with Affiliates
Both
Pinnacle Financial and Pinnacle National are subject to the provisions of
Section 23A of the Federal Reserve Act. Section 23A places limits on
the amount of:
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bank’s loans or extensions of credit to affiliates;
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A
bank’s investment in affiliates;
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Assets
a bank may purchase from affiliates, except for real and personal
property
exempted by the Federal Reserve;
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The
amount of loans or extensions of credit to third parties collateralized
by
the securities or obligations of affiliates; and
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A
bank’s guarantee, acceptance or letter of credit issued on behalf of an
affiliate.
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The
total
amount of the above transactions is limited in amount, as to any one affiliate,
to 10% of a bank’s capital and surplus and, as to all affiliates combined, to
20% of a bank’s capital and surplus. In addition to the limitation on the amount
of these transactions, each of the above transactions must also meet specified
collateral requirements. Pinnacle National must also comply with other
provisions designed to avoid the taking of low-quality assets.
Pinnacle
Financial and Pinnacle National are also subject to the provisions of
Section 23B of the Federal Reserve Act which, among other things, prohibits
an institution from engaging in the above transactions with affiliates unless
the transactions are on terms substantially the same, or at least as favorable
to the institution or its subsidiaries, as those prevailing at the time for
comparable transactions with nonaffiliated companies.
Pinnacle
National is also subject to restrictions on extensions of credit to its
executive officers, directors, principal shareholders and their related
interests. These extensions of credit (1) must be made on substantially the
same terms, including interest rates and collateral, as those prevailing at
the
time for comparable transactions with third parties, and (2) must not
involve more than the normal risk of repayment or present other unfavorable
features.
Community
Reinvestment
The
Community Reinvestment Act requires that, in connection with examinations of
financial institutions within their respective jurisdictions, the Federal
Reserve, the OCC or the FDIC shall evaluate the record of each financial
institution in meeting the credit needs of its local community, including low-
and moderate-income neighborhoods. These facts are also considered in evaluating
mergers, acquisitions, and applications to open a branch or facility. Failure
to
adequately meet these criteria could impose additional requirements and
limitations on Pinnacle National. Additionally, banks are required to publicly
disclose the terms of various Community Reinvestment Act-related agreements.
During 2006, Pinnacle National received a “satisfactory” CRA rating from the
OCC.
Privacy
Under
the
Gramm-Leach-Bliley Act, financial institutions are required to disclose their
policies for collecting and protecting confidential information. Customers
generally may prevent financial institutions from sharing personal financial
information with nonaffiliated third parties except for third parties that
market the institutions’ own products and services. Additionally, financial
institutions generally may not disclose consumer account numbers to any
nonaffiliated third party for use in telemarketing, direct mail marketing or
other marketing through electronic mail to consumers. Pinnacle National has
established a privacy policy to ensure compliance with federal requirements.
Other
Consumer Laws and Regulations
Interest
and other charges collected or contracted for by Pinnacle National are subject
to state usury laws and federal laws concerning interest rates. For example,
under the Soldiers’ and Sailors’ Civil Relief Act of 1940, a lender is generally
prohibited from charging an annual interest rate in excess of 6% on any
obligations for which the borrower is a person on active duty with the United
States military. Pinnacle National’s loan operations are also subject to federal
laws applicable to credit transactions, such as the:
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Federal
Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers;
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Home
Mortgage Disclosure Act of 1975, requiring financial institutions
to
provide information to enable the public and public officials to
determine
whether a financial institution is fulfilling its obligation to help
meet
the housing needs of the community it serves;
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Equal
Credit Opportunity Act, prohibiting discrimination on the basis of
race,
creed or other prohibited factors in extending credit;
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Fair
Credit Reporting Act of 1978, governing the use and provision of
information to credit reporting agencies;
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Fair
Debt Collection Act, governing the manner in which consumer debts
may be
collected by collection agencies;
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Bank
Secrecy Act, governing how banks and other firms report certain currency
transactions which may involve “money laundering”
activities;
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Soldiers’
and Sailors’ Civil Relief Act of 1940, governing the repayment terms of,
and property rights underlying, secured obligations of persons in
military
service; and
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Rules
and regulations of the various federal agencies charged with the
responsibility of implementing the federal laws.
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Pinnacle
National’s deposit operations are subject to the:
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Right
to Financial Privacy Act, which imposes a duty to maintain confidentiality
of consumer financial records and prescribes procedures for complying
with
administrative subpoenas of financial records; and
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Electronic
Funds Transfer Act and Regulation E issued by the Federal Reserve to
implement that act, which govern automatic deposits to and withdrawals
from deposit accounts and customers’ rights and liabilities arising from
the use of automated teller machines and other electronic banking
services.
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Anti-Terrorism
Legislation
On
October 26, 2001, the President of the United States signed the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept
and
Obstruct Terrorism (USA PATRIOT) Act of 2001. Under the USA PATRIOT Act,
financial institutions are subject to prohibitions against specified financial
transactions and account relationships as well as enhanced due diligence and
“know your customer” standards in their dealings with foreign financial
institutions and foreign customers.
In
addition, the USA PATRIOT Act authorizes the Secretary of the Treasury to adopt
rules increasing the cooperation and information sharing between financial
institutions, regulators, and law enforcement authorities regarding individuals,
entities and organizations engaged in, or reasonably suspected based on credible
evidence of engaging in, terrorist acts or money laundering activities. Any
financial institution complying with these rules will not be deemed to have
violated the privacy provisions of the Gramm-Leach-Bliley Act, as discussed
above. Pinnacle National currently has policies and procedures in place designed
to comply with the USA PATRIOT Act.
Proposed
Legislation and Regulatory Action
New
regulations and statutes are regularly proposed that contain wide-ranging
proposals for altering the structures, regulations and competitive relationships
of the nation’s financial institutions. We cannot predict whether or in what
form any proposed regulation or statute will be adopted or the extent to which
our business may be affected by any new regulation or statute.
Effect
of Governmental Monetary Policies
Our
earnings are affected by domestic economic conditions and the monetary and
fiscal policies of the United States government and its agencies. The Federal
Reserve’s monetary policies have had, and are likely to continue to have, an
important impact on the operating results of commercial banks through the
Federal Reserve’s statutory power to implement national monetary policy in
order, among other things, to curb inflation or combat a recession. The Federal
Reserve, through its monetary and fiscal policies, affects the levels of bank
loans, investments and deposits through its control over the issuance of United
States government securities, its regulation of the discount rate applicable
to
member banks and its influence over reserve requirements to which member banks
are subject. We cannot predict the nature or impact of future changes in
monetary and fiscal policies.
ITEM
1A. RISK FACTORS
Investing
in our common stock involves various risks which are particular to our company,
our industry and our market area. Several risk factors regarding investing
in
our common stock are discussed below. This listing should not be considered
as
all-inclusive. If any of the following risks were to occur, we may not be able
to conduct our business as currently planned and our financial condition or
operating results could be negatively impacted. These matters could cause the
trading price of our common stock to decline in future periods.
We
are geographically concentrated in the Nashville, Tennessee MSA, and changes
in
local economic conditions impact our profitability.
We
operate primarily in the Nashville, Tennessee MSA, and substantially all of
our
loan customers and most of our deposit and other customers live or have
operations in the Nashville MSA. Accordingly, our success significantly depends
upon the growth in population, income levels, deposits and housing starts in
the
Nashville MSA, along with the continued attraction of business ventures to
the
area. Our profitability is impacted by the changes in general economic
conditions in this market. Additionally, unfavorable local or national economic
conditions could reduce our growth rate, affect the ability of our customers
to
repay their loans to us and generally affect our financial condition and results
of operations.
We
are
less able than a larger institution to spread the risks of unfavorable local
economic conditions across a large number of diversified economies. Moreover,
we
cannot give any assurance that we will benefit from any market growth or
favorable economic conditions in our primary market areas if they do occur.
Our
continued growth may require the need for additional capital and further
regulatory approvals which, if not obtained, could adversely impact our
profitability and implementation of our current business
plan.
To
continue to grow, we will need to provide sufficient capital to Pinnacle
National through earnings generation, additional equity or trust preferred
offerings or borrowed funds or any combination of these sources of funds. Should
we incur indebtedness, we are required to obtain certain regulatory approvals
beforehand. Should our growth exceed our expectations, as has been the case
to-date, we may need to raise additional capital over our projected capital
needs. However, our ability to raise additional capital, if needed, will depend
on conditions in the capital markets at that time, which are outside our
control, and on our financial performance. Accordingly, we cannot assure our
ability to raise additional capital if needed on terms acceptable to us. If
we
cannot raise additional capital when needed, our ability to further expand
and
grow our operations could be materially impaired. Additionally, our current
plan
involves increasing our branch network, which will require capital expenditures.
Our expansion efforts may also require certain regulatory approvals. Should
we
not be able to obtain such approvals or otherwise not be able to grow our asset
base, our ability to attain our long-term profitability goals will be more
difficult.
We
have a concentration of credit exposure to borrowers in certain industries
and
we also target small to medium-sized businesses.
At
December 31, 2006, we had significant credit exposures to borrowers in the
trucking industry; commercial and residential building lessors; new home
builders and to land subdividers. If any of these industries experience an
economic slowdown and, as a result, the borrowers in these industries are
unable
to perform their obligations under their existing loan agreements, our earnings
could be negatively impacted, causing the value of our common stock to decline.
Additionally,
a substantial focus of our marketing and business strategy is to serve small
to
medium-sized businesses in the Nashville MSA. As a result, a relatively high
percentage of our loan portfolio consists of commercial loans primarily to
small
to medium-sized business. At December 31, 2006, our commercial loans accounted
for 70% of our total loans. During periods of economic weakness, small to
medium-sized businesses may be impacted more severely than larger businesses.
Consequently, the ability of such businesses to repay their loans may
deteriorate, which would adversely impact our results of operations and
financial condition.
Changes
to current laws and regulations could adversely impact not only our results,
but
the results of our borrowers. New legislation or the loss of a significant
governmental contract could adversely impact a particular borrower’s business
model and, thus, cause their credit worthiness to deteriorate. Additionally,
changes in employment law, including increasing the minimum wage, could also
adversely impact our borrowers.
With
its acquisition of Cavalry, Pinnacle Financial significantly increased its
real
estate construction and development loans, which have a greater credit risk
than
residential mortgage loans.
Following
its acquisition of Cavalry, construction and development lending is a more
significant portion of Pinnacle Financial's loan portfolio than it was prior
to
the acquisition. The percentage of commercial real estate construction loans
in
Pinnacle National's portfolio increased to approximately 10.8% of its total
loans at December 31, 2006 from 4.7% at December 31, 2005. This type of lending
is generally considered to have more complex credit risks than traditional
single-family residential lending because the principal is concentrated in
a
limited number of loans with repayment dependent on the successful operation
of
the related real estate project. Consequently, these loans are more sensitive
to
adverse conditions in the real estate market or the general economy. These
loans
are generally less predictable and more difficult to evaluate and monitor
and
collateral may be difficult to dispose of in a market decline. Additionally,
Pinnacle National may experience significant construction loan loss because
independent appraisers or project engineers inaccurately estimate the cost
and
value of construction loan projects. Also, due to a general economic downturn
in
the construction industry, Pinnacle Financial's results of operations may
be
adversely impacted and its net book value may be reduced.
If
our allowance for loan losses is not sufficient to cover actual loan losses,
our
earnings will decrease.
If
loan
customers with significant loan balances fail to repay their loans according
to
the terms of these loans, our earnings would suffer. We make various assumptions
and judgments about the collectibility of our loan portfolio, including the
creditworthiness of our borrowers and the value of any collateral securing
the
repayment of our loans. We maintain an allowance for loan losses in an attempt
to cover the inherent risks associated with lending. In determining the size
of
this allowance, we rely on an analysis of our loan portfolio based on volume
and
types of loans, internal loan classifications, trends in classifications,
volume
and trends in delinquencies, nonaccruals and charge-offs, national and local
economic conditions, industry and peer bank loan quality indications, other
factors and other pertinent information. Because we are a relatively young
organization, our allowance estimation may be less reflective of our historical
loss experience than a more mature organization. If our assumptions are
inaccurate, our current allowance may not be sufficient to cover potential
loan
losses, and additional provisions may be necessary which would decrease our
earnings.
In
addition, federal and state regulators periodically review our loan portfolio
and may require us to increase our allowance for loan losses or recognize
loan
charge-offs. Their conclusions about the quality of our loan portfolio may
be
different than ours. Any increase in our allowance for loan losses or loan
charge-offs as required by these regulatory agencies could have a negative
effect on our operating results.
Fluctuations
in interest rates could reduce our profitability.
Changes
in interest rates may affect our level of interest income, the primary
component
of our gross revenue, as well as the level of our interest expense. Interest
rate fluctuations are caused by many factors which, for the most part,
are not
under our direct control. For example, national monetary policy plays a
significant role in the determination of interest rates. Additionally,
competitor pricing and the resulting negotiations that occur with our customers
also impact the rates we collect on loans and the rates we pay on deposits.
As
interest rates change, we expect that we will periodically experience “gaps” in
the interest rate sensitivities of our assets and liabilities, meaning that
either our interest-bearing liabilities will be more sensitive to changes
in
market interest rates than our interest-earning assets, or vice versa. In
either
event, if market interest rates should move contrary to our position, this
“gap”
may work against us, and our earnings may be negatively affected.
Changes
in the level of interest rates also may negatively affect our ability to
originate real estate loans, the value of our assets and our ability to realize
gains from the sale of our assets, all of which ultimately affect our earnings.
A decline in the market value of our assets may limit our ability to borrow
additional funds. As a result, we could be required to sell some of our loans
and investments under adverse market conditions, upon terms that are not
favorable to us, in order to maintain our liquidity. If those sales are made
at
prices lower than the amortized costs of the investments, we will incur losses.
The
slope
of the yield curve will impact our results over the long-term. The present
slope
of the yield curve has been classified as “inverted” by economists due to yields
on investments of shorter duration having a higher yield than investments which
have longer duration. The impact of an inverted yield curve is believed by
many
banking professionals to have a negative impact on bank earnings. We concur
with
this and believe that should the current inverted yield curve exist for an
extended period of time that this circumstance will likely have a negative
impact on our results.
Loss
of our senior executive officers or other key employees could impair our
relationship with our customers and adversely affect our
business.
We
have
assembled a senior management team which has a substantial background and
experience in banking and financial services in the Nashville market. Loss
of
these key personnel could negatively impact our earnings because of their
skills, customer relationships and/or the potential difficulty of promptly
replacing them.
Competition
with other banking institutions could adversely affect our
profitability.
A
number
of banking institutions in the Nashville market have higher lending limits,
more
banking offices, and a larger market share. In addition, our asset management
division competes with numerous brokerage firms and mutual fund companies which
are also much larger. In some respects, this may place these competitors in
a
competitive advantage, although many of our customers have selected us because
of service quality concerns at the larger enterprises. This competition may
limit or reduce our profitability, reduce our growth and adversely affect our
results of operations and financial condition.
We
may issue additional common stock or other equity securities in the future
which
could dilute the ownership interest of existing
shareholders.
In
order
to maintain our capital at desired or regulatory-required levels, we may be
required to issue additional shares of common stock, or securities convertible
into, exchangeable for or representing rights to acquire shares of common stock.
We may sell these shares at prices below the current market price of shares,
and
the sale of these shares may significantly dilute shareholder ownership. We
could also issue additional shares in connection with acquisitions of other
financial institutions.
Even
though our common stock is currently traded on the Nasdaq Stock Market’s Global
Select Market, it has less liquidity than the average stock quoted on a national
securities exchange.
The
trading volume in our common stock on the Nasdaq Global Select Market has been
relatively low when compared with larger companies listed on the Nasdaq Global
Select Market or other stock exchanges. Although we have experienced increased
liquidity in our stock, we cannot say with any certainty that a more active
and
liquid trading market for our common stock will continue to develop. Because
of
this, it may be more difficult for shareholders to sell a substantial number
of
shares for the same price at which shareholders could sell a smaller number
of
shares.
We
cannot
predict the effect, if any, that future sales of our common stock in the market,
or the availability of shares of common stock for sale in the market, will
have
on the market price of our common stock. We can give no assurance that sales
of
substantial amounts of common stock in the market, or the potential for large
amounts of sales in the market, would not cause the price of our common stock
to
decline or impair our future ability to raise capital through sales of our
common stock.
The
market price of our common stock may fluctuate in the future, and these
fluctuations may be unrelated to our performance. General market price declines
or overall market volatility in the future could adversely affect the price
of
our common stock, and the current market price may not be indicative of future
market prices.
If
a change in control or change in management is delayed or prevented, the market
price of our common stock could be negatively affected.
Provisions
in our corporate documents, as well as certain federal and state regulations,
may make it difficult and expensive to pursue a tender offer, change in control
or takeover attempt that our board of directors opposes. As a result, our
shareholders may not have an opportunity to participate in such a transaction,
and the trading price of our stock may not rise to the level of other
institutions that are more vulnerable to hostile takeovers. Anti-takeover
provisions contained in our charter also will make it more difficult for an
outside shareholder to remove our current board of directors or management.
Holders
of Pinnacle Financial's junior subordinated debentures have rights that are
senior to those of Pinnacle Financial's common
shareholders.
Pinnacle
Financial has supported its continued growth through the issuance of trust
preferred securities from special purpose trusts and accompanying junior
subordinated debentures. At December 31, 2006, Pinnacle Financial had
outstanding trust preferred securities and accompanying junior subordinated
debentures totaling $51.5 million. Payments of the principal and interest on
the
trust preferred securities of these trusts are conditionally guaranteed by
Pinnacle Financial. Further, the accompanying junior subordinated debentures
Pinnacle Financial issued to the trusts are senior to Pinnacle Financial's
shares of common stock. As a result, Pinnacle Financial must make payments
on
the junior subordinated debentures before any dividends can be paid on its
common stock and, in the event of Pinnacle Financial's bankruptcy, dissolution
or liquidation, the holders of the junior subordinated debentures must be
satisfied before any distributions can be made on Pinnacle Financial's common
stock. Pinnacle Financial has the right to defer distributions on its junior
subordinated debentures (and the related trust preferred securities) for up
to
five years, during which time no dividends may be paid on its common stock.
The
amount of common stock owned by, and other compensation arrangements with,
our
officers and directors may make it more difficult to obtain shareholder approval
of potential takeovers that they oppose.
As
of
February 27, 2007, directors and executive officers beneficially owned
approximately 13.2% of our common stock. Employment agreements with our senior
management also provide for significant payments under certain circumstances
following a change in control. These compensation arrangements, together with
the common stock, option and warrant ownership of our board and management,
could make it difficult or expensive to obtain majority support for shareholder
proposals or potential acquisition proposals of us that our directors and
officers oppose.
Our
business is dependent on technology, and an inability to invest in technological
improvements may adversely affect our results of operations and financial
condition.
The
financial services industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and services. In
addition to better serving customers, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. We have made
significant investments in data processing, management information systems
and
internet banking accessibility. Our future success will depend in part upon
our
ability to create additional efficiencies in our operations through the use
of
technology, particularly in light of our past and projected growth strategy.
Many of our competitors have substantially greater resources to invest in
technological improvements. We cannot make assurances that our technological
improvements will increase our operational efficiency or that we will be able
to
effectively implement new technology-driven products and services or be
successful in marketing these products and services to our customers.
Our
internal control over financial reporting may have weaknesses or inadequacies
that may be material.
Section 404
of the Sarbanes-Oxley Act of 2002 requires us to perform an evaluation of our
internal control over financial reporting and our auditor to attest to such
evaluation on an annual basis. Management concluded that our internal control
over financial reporting was effective at December 31, 2006 and our independent
registered public accounting firm attested to such conclusion. Management’s
report on internal control over financial reporting is included on page 46
of this Form 10-K and the report of our independent registered public accounting
firm on these matters is included on page 48 of this Form 10-K. Ongoing
compliance with these requirements is expected to be expensive and
time-consuming and may negatively impact our results of operations. While our
management did not identify any material weaknesses in our internal control
over
financial reporting at December 31, 2006, and concluded that our internal
control over financial reporting was effective, we cannot make any assurances
that material weaknesses in our internal control over financial reporting will
not be identified in the future. If any material weaknesses are identified
in
the future, we may be required to make material changes in our internal control
over financial reporting which could negatively impact our results of
operations. In addition, upon such occurrence, our management may not be able
to
conclude that our internal control
over
financial reporting is effective or our independent registered public accounting
firm may not be able to attest that our internal control over financial
reporting was effective. If we cannot conclude that our internal control over
financial reporting is effective or if our independent registered public
accounting firm is not able to timely attest to such evaluation, we may be
subject to regulatory scrutiny, and a loss of public confidence in our internal
control over financial reporting which may cause the value of our common stock
to decrease.
We
are subject to various statutes and regulations that may limit our ability
to
take certain actions.
We
operate in a highly regulated industry and are subject to examination,
supervision, and comprehensive regulation by various regulatory agencies. Our
compliance with these regulations is costly and restricts certain of our
activities, including payment of dividends, mergers and acquisitions,
investments, loans and interest rates charged, interest rates paid on deposits
and locations of offices. We are also subject to capitalization guidelines
established by our regulators, which require us to maintain adequate capital
to
support our growth.
The
laws
and regulations applicable to the banking industry could change at any time,
and
we cannot predict the effects of these changes on our business and
profitability. Because government regulation greatly affects the business and
financial results of all commercial banks and bank holding companies, our cost
of compliance could adversely affect our ability to operate profitably.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
Pinnacle
Financial’s principal offices are located at 211 Commerce Street in Nashville,
Tennessee in Davidson County. Pinnacle Financial leases these offices from
an
unrelated third party but owns the leasehold improvements.
Pinnacle
National leases additional offices at One Nashville Place, 150 Fourth Avenue
North in Nashville, Tennessee. Pinnacle Financial leases these offices from
an
unrelated third party but owns the leasehold improvements. Pinnacle National
leases the land for its Brentwood branch office building located in Williamson
County, Tennessee, from an unrelated third party but owns the building and
leasehold improvements. Pinnacle National also leases the land and office space
in a detached building on an adjacent lot for its Green Hills office location
in
Davidson County from an unrelated third party, but also owns the building and
leasehold improvements. Pinnacle National also leases the land and building
for
its West End office location in Davidson County from unrelated third parties,
but owns the leasehold improvements. Pinnacle National owns the land and
buildings and all improvements for its Rivergate, Cool Springs and Franklin
branch offices. Additionally, all office facilities and land acquired in the
Cavalry Bancorp, Inc. transaction are now owned by Pinnacle
National.
A
summary
of Pinnacle Financial’s leased facilities follows:
Property
Description
|
Approximate
Sq.
Footage
|
2006
Lease
Payments
|
Base
Lease
Expiration
Date
|
Base
Lease Term
with
Renewal Periods
|
Office
space at 211 Commerce Street
|
30,000
|
$
527,000
|
August
31, 2010
|
20
years
|
Brentwood
branch office
|
Land
only
|
$
105,000
|
March
31, 2010
|
20
years
|
Green
Hills branch office
|
3,700
& land
|
$
71,711
|
April
21, 2021
|
40
years
|
West
End branch office building and land
|
8,000
|
$167,000
|
March
28, 2014
|
20
years
|
Office
space at 150 4th
Avenue North
|
6,400
|
$
53,000
|
June
30, 2009
|
3
years
|
Other
than normal commercial real estate lending activities of Pinnacle National
and
its subsidiaries, the acquisition of mortgage-backed securities held in Pinnacle
National and its subsidiaries’ investment securities portfolio, the ownership of
branch office facilities, and consumer mortgage lending, Pinnacle National
and
its subsidiaries generally do not invest in real estate, interests in real
estate or securities of or interests in persons primarily engaged in real estate
activities.
ITEM
3. LEGAL PROCEEDINGS
As
of the
date hereof, there are no material pending legal proceedings to which Pinnacle
Financial or any of its subsidiaries is a party or of which any of its or its
subsidiaries’ properties are subject; nor are there material proceedings known
to Pinnacle Financial or any of its subsidiaries to be contemplated by any
governmental authority; nor are there material proceedings known to Pinnacle
Financial or any of its subsidiaries, pending or contemplated, in which any
director, officer or affiliate or any principal security holder of Pinnacle
Financial or any of its subsidiaries or any associate of any of the foregoing,
is a party adverse to Pinnacle Financial or any of its subsidiaries or has
a
material interest adverse to Pinnacle Financial or any of its
subsidiaries.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART
II
ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Pinnacle
Financial's common stock is traded on the Nasdaq Global Select Market’s under
the symbol “PNFP” and has traded on that market since July 3, 2006. Prior to
that date, Pinnacle Financial’s common stock traded on the Nasdaq National
Market for the periods presented. The following table shows the high and low
sales price information for Pinnacle Financial’s common stock for each quarter
in 2006 and 2005 as reported on the Nasdaq Global Select Market, or its
predecessor the Nasdaq National Market.
|
|
Price
Per Share
|
|
|
|
High
|
|
Low
|
|
2006:
|
|
|
|
|
|
First
quarter
|
|
$
|
28.84
|
|
$
|
24.75
|
|
Second
quarter
|
|
|
30.92
|
|
|
27.09
|
|
Third
quarter
|
|
|
37.41
|
|
|
28.93
|
|
Fourth
quarter
|
|
|
36.17
|
|
|
31.23
|
|
2005:
|
|
|
|
|
|
|
|
First
quarter
|
|
$
|
24.05
|
|
$
|
20.72
|
|
Second
quarter
|
|
|
25.14
|
|
|
20.50
|
|
Third
quarter
|
|
|
26.65
|
|
|
22.67
|
|
Fourth
quarter
|
|
|
25.96
|
|
|
21.70
|
|
As
of
February 15, 2007, Pinnacle Financial had approximately 900 shareholders of
record and, additionally, approximately 5,600 beneficial owners.
Pinnacle
Financial has not paid any cash dividends since inception, and it does not
anticipate that it will consider paying dividends until Pinnacle National has
achieved a level of profitability appropriate to fund such dividends and support
asset growth. See ITEM 1. “Business - Supervision and Regulation - Payment
of Dividends” and ITEM 7. “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” for additional information on
dividend restrictions applicable to Pinnacle Financial.
Pinnacle
Financial did not repurchase any shares of its common stock during the quarter
ended December 31, 2006.
ITEM
6. SELECTED FINANCIAL DATA
|
|
2006(1)
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
(in
thousands, except per share data, ratios and
percentages)
|
|
Statement
of Financial Condition Data:
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
2,142,187
|
|
$
|
1,016,772
|
|
$
|
727,139
|
|
$
|
498,421
|
|
$
|
305,279
|
|
Loans,
net of unearned income
|
|
|
1,497,735
|
|
|
648,024
|
|
|
472,362
|
|
|
297,004
|
|
|
209,743
|
|
Allowance
for loan losses
|
|
|
(16,118
|
)
|
|
(7,858
|
)
|
|
(5,650
|
)
|
|
(3,719
|
)
|
|
(2,677
|
)
|
Total
securities
|
|
|
346,494
|
|
|
279,080
|
|
|
208,170
|
|
|
139,944
|
|
|
73,980
|
|
Goodwill
and core deposit intangibles
|
|
|
125,673
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Deposits
and securities sold under agreements to repurchase
|
|
|
1,763,427
|
|
|
875,985
|
|
|
602,655
|
|
|
405,619
|
|
|
249,067
|
|
Advances
from FHLB
|
|
|
53,726
|
|
|
41,500
|
|
|
53,500
|
|
|
44,500
|
|
|
21,500
|
|
Subordinated
debt
|
|
|
51,548
|
|
|
30,929
|
|
|
10,310
|
|
|
10,310
|
|
|
--
|
|
Stockholders’
equity
|
|
|
256,017
|
|
|
63,436
|
|
|
57,880
|
|
|
34,336
|
|
|
32,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
109,696
|
|
$
|
46,308
|
|
$
|
27,679
|
|
$
|
18,262
|
|
$
|
12,561
|
|
Interest
expense
|
|
|
48,743
|
|
|
17,270
|
|
|
7,415
|
|
|
5,363
|
|
|
4,362
|
|
Net
interest income
|
|
|
60,953
|
|
|
29,038
|
|
|
20,264
|
|
|
12,899
|
|
|
8,199
|
|
Provision
for loan losses
|
|
|
3,732
|
|
|
2,152
|
|
|
2,948
|
|
|
1,157
|
|
|
938
|
|
Net
interest income after provision for loan losses
|
|
|
57,221
|
|
|
26,886
|
|
|
17,316
|
|
|
11,742
|
|
|
7,261
|
|
Noninterest
income
|
|
|
15,786
|
|
|
5,394
|
|
|
4,978
|
|
|
3,035
|
|
|
1,732
|
|
Noninterest
expense
|
|
|
46,624
|
|
|
21,032
|
|
|
14,803
|
|
|
10,796
|
|
|
7,989
|
|
Income
before income taxes
|
|
|
26,383
|
|
|
11,248
|
|
|
7,491
|
|
|
3,981
|
|
|
1,004
|
|
Income
tax expense
|
|
|
8,456
|
|
|
3,193
|
|
|
2,172
|
|
|
1,426
|
|
|
356
|
|
Net
income
|
|
$
|
17,927
|
|
$
|
8,055
|
|
$
|
5,319
|
|
$
|
2,555
|
|
$
|
648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share - basic
|
|
$
|
1.28
|
|
$
|
0.96
|
|
$
|
0.69
|
|
$
|
0.35
|
|
$
|
0.11
|
|
Weighted
average shares outstanding - basic
|
|
|
13,954,077
|
|
|
8,408,663
|
|
|
7,750,943
|
|
|
7,384,106
|
|
|
6,108,942
|
|
Earnings
per share - diluted
|
|
$
|
1.18
|
|
$
|
0.85
|
|
$
|
0.61
|
|
$
|
0.32
|
|
$
|
0.10
|
|
Weighted
average shares outstanding - diluted
|
|
|
15,156,837
|
|
|
9,464,500
|
|
|
8,698,139
|
|
|
7,876,006
|
|
|
6,236,844
|
|
Book
value per share
|
|
$
|
16.57
|
|
$
|
7.53
|
|
$
|
6.90
|
|
$
|
4.65
|
|
$
|
4.39
|
|
Common
shares outstanding at end of period
|
|
|
15,446,074
|
|
|
8,426,551
|
|
|
8,389,232
|
|
|
7,384,106
|
|
|
7,384,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
Ratios and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return
on average assets
|
|
|
1.01
|
%
|
|
0.93
|
%
|
|
0.89
|
%
|
|
0.66
|
%
|
|
0.29
|
%
|
Return
on average stockholders’ equity
|
|
|
8.66
|
%
|
|
13.23
|
%
|
|
12.31
|
%
|
|
7.70
|
%
|
|
2.47
|
%
|
Net
interest margin (2)
|
|
|
3.90
|
%
|
|
3.60
|
%
|
|
3.62
|
%
|
|
3.53
|
%
|
|
3.81
|
%
|
Net
interest spread (3)
|
|
|
3.20
|
%
|
|
3.16
|
%
|
|
3.34
|
%
|
|
3.23
|
%
|
|
3.42
|
%
|
Noninterest
income to average assets
|
|
|
0.89
|
%
|
|
0.62
|
%
|
|
0.83
|
%
|
|
0.78
|
%
|
|
0.76
|
%
|
Noninterest
expense to average assets
|
|
|
2.61
|
%
|
|
2.42
|
%
|
|
2.48
|
%
|
|
2.78
|
%
|
|
3.50
|
%
|
Efficiency
ratio (4)
|
|
|
60.80
|
%
|
|
61.1
|
%
|
|
58.6
|
%
|
|
67.8
|
%
|
|
80.4
|
%
|
Average
loan to average deposit ratio
|
|
|
88.73
|
%
|
|
81.3
|
%
|
|
79.0
|
%
|
|
85.5
|
%
|
|
98.5
|
%
|
Average
interest-earning assets to average interest-bearing
liabilities
|
|
|
122.10
|
%
|
|
120.0
|
%
|
|
120.0
|
%
|
|
118.9
|
%
|
|
119.6
|
%
|
Average
equity to average total assets ratio
|
|
|
11.64
|
%
|
|
7.00
|
%
|
|
7.23
|
%
|
|
8.54
|
%
|
|
11.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for loan losses to nonperforming assets
|
|
|
199.9
|
%
|
|
1,708.3
|
%
|
|
1,006.9
|
%
|
|
981.3
|
%
|
|
143.4
|
%
|
Allowance
for loan losses to total loans
|
|
|
1.08
|
%
|
|
1.21
|
%
|
|
1.20
|
%
|
|
1.25
|
%
|
|
1.28
|
%
|
Nonperforming
assets to total assets
|
|
|
0.37
|
%
|
|
0.05
|
%
|
|
0.08
|
%
|
|
0.08
|
%
|
|
0.61
|
%
|
Nonaccrual
loans to total loans
|
|
|
0.47
|
%
|
|
0.07
|
%
|
|
0.12
|
%
|
|
0.13
|
%
|
|
0.89
|
%
|
Net
loan charge-offs (recoveries) to average loans
|
|
|
0.05
|
%
|
|
(0.01
|
)%
|
|
0.27
|
%
|
|
0.05
|
%
|
|
0.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
(5)
|
|
|
9.5
|
%
|
|
9.9
|
%
|
|
9.7
|
%
|
|
9.7
|
%
|
|
11.1
|
%
|
Tier
1 risk-based capital
|
|
|
10.9
|
%
|
|
11.7
|
%
|
|
11.7
|
%
|
|
11.8
|
%
|
|
12.7
|
%
|
Total
risk-based capital
|
|
|
11.8
|
%
|
|
12.6
|
%
|
|
12.7
|
%
|
|
12.8
|
%
|
|
13.8
|
%
|
(1) |
Information
for 2006 fiscal year includes the operations of Cavalry, which
Pinnacle
Financial merged with on March 15, 2006 and reflects approximately
6.9
million shares of Pinnacle Financial common stock issued in connection
with the merger.
|
(2) |
Net
interest margin is the result of net interest income for the period
divided by average interest earning
assets.
|
(3) |
Net
interest spread is the result of the difference between the interest
yield
earned on interest earning assets less the interest paid on interest
bearing liabilities.
|
(4) |
Efficiency
ratio is the result of noninterest expense divided by the sum of
net
interest income and noninterest
income.
|
(5) |
Leverage
ratio is computed by dividing Tier 1 capital by average total assets
for
the fourth quarter of each year.
|
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following is a discussion of our financial condition at December 31, 2006 and
2005 and our results of operations for each of the three-years ended
December 31, 2006. 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.
Pinnacle
Financial’s rapid organic growth from its inception through the fourth quarter
of 2006 together with its merger with Cavalry Bancorp, Inc. (“Cavalry”), a
one-bank holding company located in Murfreesboro, Tennessee, on March 15, 2006
has had a material impact on Pinnacle Financial’s financial condition and
results of operations. This rapid growth resulted in net income for the year
ended December 31, 2006 of $1.18 per diluted share as compared to $0.85 and
$0.61 per diluted share for 2005 and 2004, respectively. At December 31, 2006,
loans totaled $1.498 billion, as compared to $648 million at December 31, 2005,
while total deposits increased to $1.622 billion at December 31, 2006 from
$810
million at December 31, 2005.
Acquisition.
On
March
15, 2006, we consummated our merger with Cavalry. 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 (dollars in
thousands):
Cash
and cash equivalents
|
|
$
|
37,420
|
|
Investment
securities - available-for-sale
|
|
|
39,476
|
|
Loans,
net of an allowance for loan losses of $5,102
|
|
|
545,598
|
|
Goodwill
|
|
|
114,288
|
|
Core
deposit intangible
|
|
|
13,168
|
|
Other
assets
|
|
|
42,937
|
|
Total
assets acquired
|
|
|
792,887
|
|
|
|
|
|
|
Deposits
|
|
|
583,992
|
|
Federal
Home Loan Bank advances
|
|
|
17,767
|
|
Other
liabilities
|
|
|
18,851
|
|
Total
liabilities assumed
|
|
|
620,610
|
|
Total
consideration paid for Cavalry
|
|
$
|
172,277
|
|
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 December 31, 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 investment banking fees, attorney’s fees and
other costs related to the purchase of Cavalry. 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.
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 year ended December
31, 2006, approximately $1.8 million was recognized in the statement of income.
Amortization expense associated with the core deposit 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 $2.9 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 year ended December 31, 2006, the accretion of the fair value discounts
related to the acquired loans and certificates of deposit increased net interest
income by approximately $3.7 million. 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 $4.0
million in subsequent years.
We
also
incurred approximately $1,636,000 in merger related expenses during the year
ended December 31, 2006 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 $61.0 million for 2006 compared to $29.0 million
for 2005 and $20.3 million in 2004. The net interest margin (the ratio of net
interest income to average earning assets) for 2006 was 3.90% for 2006 compared
to 3.60% for the same period in 2005 and 3.62% in 2004.
Our
provision for loan losses was $3.7 million for 2006 compared to $2.2 million
in
2005 and $2.9 million in 2004. The provision for loan losses increased primarily
due to increases in loan volumes and charge-offs in 2006 compared to 2005,
while
the decrease in expense between 2005 and 2004 was due to increases in loan
volumes offset by a significant decrease in charge-offs in 2005.
Noninterest
income for 2006 compared to 2005 increased by $10.4 million, or 193%. This
increase is 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. Noninterest income for
2005 compared to 2004 increased by $416,000, or 8.4%, which was due in large
part to increases in investment sales commissions, insurance commissions, trust
fees and other 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 404.0 at December 31, 2006. As a result, we experienced
increases in compensation and employee benefit expense. Additionally, we adopted
SFAS No. 123(R) in 2006 which addresses the accounting for employee equity
based
incentives which also increased our compensation and employee benefit expense
in
2006 when compared to no expense in 2006. We expect to add additional employees
throughout 2007 which will cause our compensation and employee benefit expense
to increase in 2007. Additionally, our branch expansion efforts during the
last
few years and the addition of the nine Cavalry branches 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 early 2007 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 60.6% in 2006 compared to 61.1% in 2005 and 58.6% in 2004. These
calculations include the impact of approximately $1,636,000 in merger related
charges in 2006.
The
effective income tax expense rate for 2006 was approximately 32.1% compared
to
an effective income tax expense rate for 2005 of approximately 28.4% and 29.0%
for 2004. The increase in the effective tax rate between the periods was due
to
the additional earnings being taxed at a higher rate as the various tax savings
initiatives (e.g., municipal bond income) had a lesser impact in 2006 when
compared to the previous periods. Additionally, the impact of our incentive
stock options and their treatment pursuant to the adoption of SFAS No. 123(R)
also contributed to the increase in our effective rate in 2006.
Net
income for 2006 was $17.9 million compared to $8.1 million in 2005, an increase
of 123%. Net income for 2005 was 51% higher than net income for 2004 of $5.3
million. Fully-diluted net income per common share was $1.18 for 2006 compared
to $0.85 for 2005 and $0.61 for 2004.
Excluding
the after-tax (rate of 39.23%) impact of merger related charges, net income
for
2006 was $18.9 million compared to $8.1 million for 2005, an increase of 135%.
As a result, adjusted diluted net income per common share was $1.25 for 2006
compared to $0.85 for 2005, an increase of 47%. For a reconciliation of these
non-GAAP financial measures to their most directly comparable GAAP financial
measure, see “Reconciliation of Non-GAAP financial measures” on page
25.
Financial
Condition.
Loans
increased $850 million during 2006 of which $551 million was attributable to
the
Cavalry acquisition. Thus, the net increase in our loan portfolio attributable
to organic growth was $299 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 $1.622 billion at December 31, 2006
compared to $810 million at December 31, 2005, an increase of $812 million,
of
which $584 million was attributable to the Cavalry acquisition. As a result,
we
increased our deposits by $228 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
competitive pressures dictate, 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 MSA and in our target markets of small to mid-sized businesses and
affluent clients, real estate professionals and consumers that desire a deep
relationship with their bank.
Capital
and Liquidity.
At
December 31, 2006, our capital ratios, including our bank’s capital ratios, met
regulatory minimum capital requirements. Additionally, at December 31, 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
past, we have been successful in procuring additional capital from the capital
markets (via public and private offerings of trust preferred securities and
common stock). This additional capital was required to support our growth.
As of
December 31, 2006, we believe we have sufficient capital to support our current
growth plans. However, expansion by acquisition of other banks or by branching
into a new geographic market could result in issuance of additional capital,
including additional common shares.
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, 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 (“allowance”). Our
management assesses the adequacy of the allowance 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. The level
of
the allowance is based upon management’s evaluation of the loan portfolios, past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower’s ability to repay (including the timing
of future payment), the estimated value of any underlying collateral,
composition of the loan portfolio, economic conditions, industry and peer bank
loan quality indications and other pertinent factors. This evaluation is
inherently subjective as it requires material estimates including the amounts
and timing of future cash flows expected to be received on impaired loans that
may be susceptible to significant change. Loan losses are charged off when
management believes that the full collectability of the loan is unlikely. A
loan
may be partially charged-off after a “confirming event” has occurred which
serves to validate that full repayment pursuant to the terms of the loan is
unlikely. Allocation of the allowance may be made for specific loans, but the
entire allowance is available for any loan that, in management’s judgment, is
deemed to be uncollectible.
Larger
balance commercial and commercial real estate loans are impaired when, based
on
current information and events, it is probable that we will be unable to collect
all amounts due according to the contractual terms of the loan agreement.
Collection of all amounts due according to the contractual terms means that
both
the contractual interest payments and the contractual principal payments of
a
loan will be collected as scheduled in the loan agreement.
An
impairment loss is recognized if the present value of expected future cash
flows
from the loan is less than the recorded investment in the loan (recorded
investment in the loan is the principal balance plus any accrued interest,
net
deferred loan fees or costs and unamortized premium or discount, and does not
reflect any direct write-down of the investment). The impairment loss is
recognized through the allowance. Loans that are impaired are recorded at the
present value of expected future cash flows discounted at the loan’s effective
interest rate, or if the loan is collateral dependent, impairment measurement
is
based on the fair value of the collateral, less estimated disposal costs. Income
is recognized on impaired loans on a cash basis.
The
level
of allowance maintained is believed by management to be adequate to absorb
losses inherent in the portfolio at the balance sheet date. The allowance is
increased by provisions charged to expense and decreased by charge-offs, net
of
recoveries of amounts previously charged-off.
In
assessing the adequacy of the consolidated allowance, 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. We incorporate loan review results
in the determination of whether or not it is probable that we will be able
to
collect all amounts due according to the contractual terms of a
loan.
As
part
of management’s quarterly assessment of the allowance, management divides the
loan portfolio into four segments: commercial, commercial real estate, consumer
and consumer real estate. Each segment is then analyzed such that an allocation
of the allowance is estimated for each loan segment.
The
allowance allocation for commercial and commercial real estate loans begins
with
a process of estimating the probable losses inherent for these types of loans.
The estimates for these loans are established by category and based on our
internal system of credit risk ratings and historical loss data for industry
and
various peer bank groups. The estimated loan loss allocation rate for our
internal system of credit risk grades for commercial and commercial real estate
is based on management’s experience with similarly graded loans, discussions
with banking regulators and our internal loan review processes. We then weight
the allocation methodologies for the commercial and commercial real estate
portfolios and determine a weighted average allocation for these
portfolios.
The
allowance allocation for consumer and consumer real estate loans which includes
installment, home equity, consumer mortgages, automobiles and others is
established for each of the categories by estimating losses inherent in that
particular category of consumer and consumer real estate loans. The estimated
loan loss allocation rate for each category is based on management’s experience.
Additionally, consumer and consumer real estate loans are analyzed based on
our
actual loss rates, industry loss rates and loss rates of various peer bank
groups. Consumer and consumer real estate loans are evaluated as a group by
category (i.e. retail real estate, installment, etc.) rather than on an
individual loan basis because these loans are smaller and homogeneous. We weight
the allocation methodologies for the consumer and consumer real estate
portfolios and determine a weighted average allocation for these
portfolios.
The
estimated loan loss allocation for all four loan portfolio segments is then
adjusted for management’s estimate of probable losses for several
“environmental” factors. The allocation for environmental factors is
particularly subjective and does not lend itself to exact mathematical
calculation. This amount represents estimated inherent credit losses which
may
exist, but have not yet been identified, as of the balance sheet date based
upon
quarterly trend assessments in delinquent and nonaccrual loans, unanticipated
charge-offs, credit concentration changes, prevailing economic conditions,
changes in lending personnel experience, changes in lending policies or
procedures and other influencing factors. These environmental factors are
considered for each of the four loan segments and the allowance allocation
as
determined by the processes noted above for each segment is increased or
decreased based on the incremental assessment of these various “environmental”
factors.
We
then
test the resulting allowance balance by comparing the balance in the allowance
to historical trends and industry 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 allowance
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
quarters ended March 31, 2006 and June 30, 2006, we assessed the allowance
in
two separate processes using methodologies for both the Pinnacle portfolios
as
the portfolios existed prior to the merger with Cavalry (the “Nashville market”)
and the Rutherford County portfolio. Our methodology for the first two quarters
of 2006 was consistent with the past methodologies of Pinnacle Financial and
Cavalry on a stand-alone basis. In view of the acquisition,
we
evaluated the respective assessment methodologies and made certain changes
as
noted above and implemented such changes during the third quarter of 2006.
The
revised assessment methodology did not significantly impact our recorded
allowance for loan losses.
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 (“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 - 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. We also engaged a firm to analyze the income tax
implications of the assets and liabilities acquired as well as the deductibility
of the various cash payments we and the former Cavalry made as a result of
this
merger. 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 during the first quarter of 2007.
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 is September 30. 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 fiscal years 2006, 2005 and 2004 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):
|
|
Years
ended
|
|
2006-2005
|
|
Year
ended
|
|
2005-2004
|
|
|
|
December
31,
|
|
Percent
|
|
December
31,
|
|
Percent
|
|
|
|
2006
|
|
2005
|
|
Increase
(Decrease)
|
|
2004
|
|
Increase
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
109,696
|
|
$
|
46,308
|
|
|
136.9
|
%
|
$
|
27,679
|
|
|
67.3
|
%
|
Interest
expense
|
|
|
48,743
|
|
|
17,270
|
|
|
182.2
|
%
|
|
7,415
|
|
|
132.9
|
%
|
Net
interest income
|
|
|
60,953
|
|
|
29,038
|
|
|
109.9
|
%
|
|
20,264
|
|
|
43.3
|
%
|
Provision
for loan losses
|
|
|
3,732
|
|
|
2,152
|
|
|
73.4
|
%
|
|
2,948
|
|
|
(27.0
|
%)
|
Net
interest income after provision for loan losses
|
|
|
57,221
|
|
|
26,886
|
|
|
112.8
|
%
|
|
17,316
|
|
|
55.3
|
%
|
Noninterest
income
|
|
|
15,786
|
|
|
5,394
|
|
|
192.7
|
%
|
|
4,978
|
|
|
8.4
|
%
|
Noninterest
expense
|
|
|
46,624
|
|
|
21,032
|
|
|
121.7
|
%
|
|
14,803
|
|
|
42.1
|
%
|
Net
income before income taxes
|
|
|
26,383
|
|
|
11,248
|
|
|
134.6
|
%
|
|
7,491
|
|
|
50.2
|
%
|
Income
tax expense
|
|
|
8,456
|
|
|
3,193
|
|
|
164.8
|
%
|
|
2,172
|
|
|
47.0
|
%
|
Net
income
|
|
$
|
17,927
|
|
$
|
8,055
|
|
|
122.6
|
%
|
$
|
5,319
|
|
|
51.4
|
%
|
Our
results for the year ended December 31, 2006 included merger related expense.
Excluding merger related expense from our net income resulted in diluted
net
income per common share for the year ended December 31, 2006 of $1.25.
A
comparison of these amounts to the same periods in 2005 and 2004 and a
reconciliation of this non-GAAP financial measure follow:
Reconciliation
of Non-GAAP financial measures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
17,927
|
|
$
|
8,055
|
|
|
|
|
$
|
5,319
|
|
|
|
|
Merger
related expense net of tax of $642 for the year ended December
31,
2006
|
|
|
994
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
|
Net
income excluding merger related expense
|
|
$
|
18,921
|
|
$
|
8,055
|
|
|
|
|
$
|
5,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully-diluted
net income per common share
|
|
$
|
1.18
|
|
$
|
0.85
|
|
|
|
|
$
|
0.61
|
|
|
|
|
Fully-diluted
net income per common share, excluding merger related
expense
|
|
$
|
1.25
|
|
$
|
0.85
|
|
|
|
|
$
|
0.61
|
|
|
|
|
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 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 2004 and
utilized non-GAAP 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
year ended December 31, 2006, we recorded net interest income of $60,953,000,
which resulted in a net interest margin of 3.90%. For the year ended December
31, 2005, we recorded net interest income of $29,038,000, which resulted in
a
net interest margin of 3.60%. For the year ended December 31, 2004, we recorded
net interest income of $20,264,000, which resulted in a net interest margin
of
3.62% for the year.
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 each of the years in the three-year period
ended December 31, 2006 (dollars in thousands):
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
Average
Balances
|
|
Interest
|
|
Rates/
Yields
|
|
Average
Balances
|
|
Interest
|
|
Rates/
Yields
|
|
Average
Balances
|
|
Interest
|
|
Rates/
Yields
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
(1)
|
|
$
|
1,226,803
|
|
$
|
92,006
|
|
|
7.50
|
%
|
$
|
562,061
|
|
$
|
35,167
|
|
|
6.26
|
%
|
$
|
373,287
|
|
$
|
19,910
|
|
|
5.34
|
%
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
254,906
|
|
|
12,615
|
|
|
4.95
|
%
|
|
204,532
|
|
|
9,086
|
|
|
4.44
|
%
|
|
162,712
|
|
|
6,936
|
|
|
4.26
|
%
|
Tax-exempt
(2)
|
|
|
54,270
|
|
|
2,016
|
|
|
4.90
|
%
|
|
31,578
|
|
|
1,116
|
|
|
4.66
|
%
|
|
13,899
|
|
|
491
|
|
|
4.55
|
%
|
Federal
funds sold and other
|
|
|
53,562
|
|
|
3,059
|
|
|
6.87
|
%
|
|
24,541
|
|
|
939
|
|
|
3.90
|
%
|
|
17,610
|
|
|
342
|
|
|
1.94
|
%
|
Total
interest-earning assets
|
|
|
1,589,541
|
|
|
109,696
|
|
|
6.95
|
%
|
|
822,712
|
|
|
46,308
|
|
|
5.68
|
%
|
|
567,508
|
|
|
27,679
|
|
|
4.91
|
%
|
Nonearning
assets
|
|
|
189,675
|
|
|
|
|
|
|
|
|
47,322
|
|
|
|
|
|
|
|
|
29,872
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,779,216
|
|
|
|
|
|
|
|
$
|
870,034
|
|
|
|
|
|
|
|
$
|
597,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
checking
|
|
$
|
171,637
|
|
$
|
4,074
|
|
|
2.37
|
%
|
$
|
65,119
|
|
$
|
659
|
|
|
1.01
|
%
|
$
|
38,544
|
|
$
|
191
|
|
|
0.50
|
%
|
Savings
and money market
|
|
|
435,082
|
|
|
13,532
|
|
|
3.11
|
%
|
|
250,136
|
|
|
4,860
|
|
|
1.94
|
%
|
|
173,318
|
|
|
1,520
|
|
|
0.88
|
%
|
Certificates
of deposit
|
|
|
516,394
|
|
|
22,426
|
|
|
4.34
|
%
|
|
256,056
|
|
|
8,171
|
|
|
3.19
|
%
|
|
182,221
|
|
|
4,118
|
|
|
2.26
|
%
|
Total
deposits
|
|
|
1,123,113
|
|
|
40,032
|
|
|
3.56
|
%
|
|
571,311
|
|
|
13,690
|
|
|
2.40
|
%
|
|
394,083
|
|
|
5,829
|
|
|
1.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
sold under agreements to repurchase
|
|
|
101,144
|
|
|
4,329
|
|
|
4.28
|
%
|
|
54,811
|
|
|
1,315
|
|
|
2.40
|
%
|
|
20,466
|
|
|
104
|
|
|
0.51
|
%
|
Federal
funds purchased
|
|
|
1,260
|
|
|
66
|
|
|
5.26
|
%
|
|
1,607
|
|
|
57
|
|
|
3.51
|
%
|
|
1,705
|
|
|
24
|
|
|
1.43
|
%
|
Federal
Home Loan Bank advances
|
|
|
38,468
|
|
|
1,812
|
|
|
4.71
|
%
|
|
42,326
|
|
|
1,222
|
|
|
2.89
|
%
|
|
46,284
|
|
|
1,027
|
|
|
2.22
|
%
|
Subordinated
debt
|
|
|
37,372
|
|
|
2,504
|
|
|
6.70
|
%
|
|
16,361
|
|
|
986
|
|
|
6.02
|
%
|
|
10,310
|
|
|
431
|
|
|
4.18
|
%
|
Total
interest-bearing liabilities
|
|
|
1,301,357
|
|
|
48,743
|
|
|
3.75
|
%
|
|
686,416
|
|
|
17,270
|
|
|
2.52
|
%
|
|
472,848
|
|
|
7,415
|
|
|
1.57
|
%
|
Noninterest-bearing
deposits
|
|
|
259,585
|
|
|
-
|
|
|
-
|
|
|
120,007
|
|
|
-
|
|
|
-
|
|
|
78,616
|
|
|
-
|
|
|
-
|
|
Total
deposits and interest-bearing liabilities
|
|
|
1,560,942
|
|
|
48,743
|
|
|
3.12
|
%
|
|
806,423
|
|
|
17,270
|
|
|
2.14
|
%
|
|
551,464
|
|
|
7,415
|
|
|
1.34
|
%
|
Other
liabilities
|
|
|
11,105
|
|
|
|
|
|
|
|
|
2,730
|
|
|
|
|
|
|
|
|
2,707
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
207,169
|
|
|
|
|
|
|
|
|
60,881
|
|
|
|
|
|
|
|
|
43,209
|
|
|
|
|
|
|
|
|
|
$
|
1,779,216
|
|
|
|
|
|
|
|
$
|
870,034
|
|
|
|
|
|
|
|
$
|
597,380
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
$
|
60,953
|
|
|
|
|
|
|
|
$
|
29,038
|
|
|
|
|
|
|
|
$
|
20,264
|
|
|
|
|
Net
interest spread (3)
|
|
|
|
|
|
|
|
|
3.20
|
%
|
|
|
|
|
|
|
|
3.16
|
%
|
|
|
|
|
|
|
|
3.34
|
%
|
Net
interest margin
|
|
|
|
|
|
|
|
|
3.90
|
%
|
|
|
|
|
|
|
|
3.60
|
%
|
|
|
|
|
|
|
|
3.62
|
%
|
(1) |
Average
balances of nonperforming loans are included in the above amounts.
|
(2) |
Yields
based on the carrying value of those tax exempt instruments are
shown on a
fully tax equivalent basis.
|
(3) |
The
net interest spread calculation excludes the impact of demand deposits.
Had the impact of demand deposits been included, the net interest
spread
for the year ended December 31, 2006 would have been 3.83% compared
to a
net interest spread for the years ended December 31, 2005 and 2004
of
3.54% and 3.56%, respectively.
|
As
noted
above, the net interest margin for 2006 was 3.90% compared to a net interest
margin of 3.60% for the same period in 2005. The net change in the net interest
margin was significant because the net increases in the yield on
interest-earning assets was approximately 127 basis points compared to the
increase in the rate paid on interest-bearing liabilities of 123 basis points.
The net interest margin for 2004 was 3.62%. 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 between 2006 and 2005 by 124 basis points.
The
pricing of a large portion of our loan portfolio is tied to our prime
rate. Our weighted average prime rate for 2004 was 4.40% compared
to 6.25%
in 2005 and 8.02% in 2006. The rates were higher in 2006 and 2005
due to
periodic increases in our prime lending rate which moves in concert
with
the Federal Reserve’s changes to its Federal funds
rate.
|
· |
We
have been able to grow our funding base significantly. For asset/liability
management purposes in 2005 and 2006, we elected to allocate a greater
proportion of such funds to our loan portfolio versus our securities
and
shorter-term investment portfolio than in 2004. For 2006, average
loan
balances were 69% of total assets compared to 65% in 2005 and 62%
in 2004.
Loans generally have higher yields than do securities and other
shorter-term investments. This change in allocation contributed to
the
increase in the overall total interest earning asset yields between
the
three years.
|
· |
During
2006, overall deposit rates were higher than those rates for the
comparable period in 2005 and 2004. 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 and
2004. We also monitor the pricing of similar products by our primary
competitors. 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 previous periods which resulted in increased
rates
paid on interest bearing
liabilities.
|
· |
During
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 61% in 2005 and 56% in 2004. These funding
sources generally have lower rates than do other funding sources,
such as
certificates of deposit and other borrowings.
|
· |
Also
impacting the net interest margin during 2006 compared to 2005 and
2004
was pricing of our floating rate subordinated indebtedness which
comprises
approximately $30 million of our aggregate subordinated indebtedness
as of
December 31, 2006. 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 previous years,
and,
as a result, the pricing for this funding source was higher in 2006.
Additionally, in September 2005, we issued an additional $20 million
in
fixed rate subordinated indebtedness at a rate of 5.848% for the
first
five years with a floating rate determined in relation to three-month
LIBOR thereafter.
|
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 and because Cavalry’s cost of funding were less
than ours.
We
believe that interest rates should remain fairly stable over the next few
quarters. We also believe we will continue to increase net interest income
through growth in earning assets with particular emphasis on floating rate
lending. However, the additional revenues provided by increased floating rate
loans may not be sufficient to overcome any immediate increases in funding
costs
such that we are unable to maintain our current net interest margin. As a
result, even though our net interest income will continue to increase, our
net
interest margins will likely decrease due to new deposits being obtained at
current market rates which are higher than our current average cost of funding
and the continued competitive deposit pricing in our market area. We believe
our
net interest margin for 2007 should be within a range of 3.60% to 3.80%,
compared to 3.74% for the fourth quarter of 2006.
Conversely,
should interest rates begin to fluctuate over the next few quarters, we believe
that in a rising interest rate environment we would be able to reprice our
assets more quickly than our funding costs and thus we believe we would be
able
to grow our net interest income and net interest margins in such an environment.
Conversely, in a falling rate environment, this would serve to have the opposite
effect on our net interest income and net interest margins. In a falling rate
environment, we may not be able to reduce our deposit funding costs as quickly
as our assets would reprice due to market pressures, while our net interest
income would not increase as fast as it would likely increase under a rising
or
stable interest rate environment.
Rate
and Volume Analysis. Net
interest income increased by $31,915,000 between the years ended December 31,
2006 and 2005 and by $8,774,000 between the years ended December 31, 2005 and
2004. The following is an analysis of the changes in our net interest income
comparing the changes attributable to rates and those attributable to volumes
(dollars in thousands):
|
|
2006
Compared to 2005
|
|
2005
Compared to 2004
|
|
|
|
Increase
(decrease) due to
|
|
Increase
(decrease) due to
|
|
|
|
Rate
|
|
Volume
|
|
Net
|
|
Rate
|
|
Volume
|
|
Net
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
6,970
|
|
$
|
49,869
|
|
$
|
56,839
|
|
$
|
3,434
|
|
$
|
11,823
|
|
$
|
15,257
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
1,043
|
|
|
2,486
|
|
|
3,529
|
|
|
293
|
|
|
1,857
|
|
|
2,150
|
|
Tax-exempt
|
|
|
76
|
|
|
824
|
|
|
900
|
|
|
15
|
|
|
610
|
|
|
625
|
|
Federal
funds sold
|
|
|
729
|
|
|
1,391
|
|
|
2,120
|
|
|
345
|
|
|
252
|
|
|
597
|
|
Total
interest-earning assets
|
|
|
8,818
|
|
|
54,570
|
|
|
63,388
|
|
|
4,087
|
|
|
14,542
|
|
|
18,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
checking
|
|
$
|
886
|
|
$
|
2,529
|
|
$
|
3,415
|
|
$
|
197
|
|
$
|
271
|
|
$
|
468
|
|
Savings
and money market
|
|
|
2,927
|
|
|
5,745
|
|
|
8,672
|
|
|
1,837
|
|
|
1,503
|
|
|
3,340
|
|
Certificates
of deposit
|
|
|
2,945
|
|
|
11,310
|
|
|
14,255
|
|
|
1,695
|
|
|
2,358
|
|
|
4,053
|
|
Total
deposits
|
|
|
6,758
|
|
|
19,584
|
|
|
26,342
|
|
|
3,729
|
|
|
4,132
|
|
|
7,861
|
|
Securities
sold under agreements to repurchase
|
|
|
1,031
|
|
|
1,983
|
|
|
3,014
|
|
|
387
|
|
|
824
|
|
|
1,211
|
|
Federal
funds purchased
|
|
|
28
|
|
|
(19
|
)
|
|
9
|
|
|
35
|
|
|
(2
|
)
|
|
33
|
|
Federal
Home Loan Bank advances
|
|
|
770
|
|
|
(180
|
)
|
|
590
|
|
|
310
|
|
|
(115
|
)
|
|
195
|
|
Subordinated
debt
|
|
|
111
|
|
|
1,407
|
|
|
1,518
|
|
|
190
|
|
|
365
|
|
|
555
|
|
Total
interest-bearing liabilities
|
|
|
8,698
|
|
|
22,775
|
|
|
31,473
|
|
|
4,651
|
|
|
5,204
|
|
|
9,855
|
|
Net
interest income
|
|
$
|
120
|
|
$
|
31,795
|
|
$
|
31,915
|
|
$
|
(564
|
)
|
$
|
9,338
|
|
$
|
8,774
|
|
Changes
in net interest income are attributed to either changes in average balances
(volume change) or changes in average rates (rate change) for earning assets
and
sources of funds on which interest is received or paid. Volume change is
calculated as change in volume times the previous rate while rate change is
change in rate times the previous volume. The change attributed to rates and
volumes (change in rate times change in volume) is considered above as a change
in volume.
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 $3,732,000, $2,152,000 and $2,948,000
for
the years ended December 31, 2006, 2005 and 2004, 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 December 31, 2006. A significant increase
in
loan growth and increased net-charge offs in 2006 were the primary reasons
for
the increased provision expense in 2006 when compared to 2005. A significant
decrease in gross charge-offs, increases in recoveries of previously charged-off
loans and improvement in the overall credit quality of our loan portfolio,
net
of the effect of an increase in loan volumes, were the primary causes for the
decrease in our provision for loan losses in 2005 when compared to
2004.
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 Pinnacle National's 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 and annual 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 over time as our lending and industry
concentration limits increase.
The
following is the makeup of our noninterest income for the years ended December
31, 2006, 2005 and 2004 (dollars in thousands):
|
|
Years
ended
|
|
2006-2005
|
|
Year
ended
|
|
2005-2004
|
|
|
|
December
31,
|
|
Percent
|
|
December
31,
|
|
Percent
|
|
|
|
2006
|
|
2005
|
|
Increase
(Decrease)
|
|
2004
|
|
Increase
(Decrease)
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
$
|
4,645
|
|
$
|
978
|
|
|
374.9
|
%
|
$
|
956
|
|
|
2.3
|
%
|
Investment
services
|
|
|
2,463
|
|
|
1,836
|
|
|
34.2
|
%
|
|
1,657
|
|
|
10.8
|
%
|
Gains
on sales of loans and loan participations, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
from the origination and sale of mortgage loans, net of sales
commissions
|
|
|
1,448
|
|
|
1,096
|
|
|
32.1
|
%
|
|
760
|
|
|
44.2
|
%
|
Gains
on loan participations sold, net
|
|
|
420
|
|
|
152
|
|
|
176.3
|
%
|
|
514
|
|
|
(70.4
|
%)
|
Insurance
sales commissions
|
|
|
2,123
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Gain
on sale of investment securities, net
|
|
|
-
|
|
|
114
|
|
|
(100.0
|
%)
|
|
357
|
|
|
(68.1
|
%)
|
Trust
fees
|
|
|
1,181
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other
noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ATM
and other consumer fees
|
|
|
1,796
|
|
|
90
|
|
|
1895.6
|
%
|
|
58
|
|
|
55.2
|
%
|
Letters
of credit fees
|
|
|
506
|
|
|
527
|
|
|
(4.0
|
%)
|
|
272
|
|
|
93.8
|
%
|
Bank-owned
life insurance
|
|
|
470
|
|
|
74
|
|
|
535.1
|
%
|
|
78
|
|
|
(5.1
|
%)
|
Equity
in earnings of Collateral Plus, LLC
|
|
|
120
|
|
|
216
|
|
|
(44.4
|
%)
|
|
9
|
|
|
-
|
|
Other
noninterest income
|
|
|
614
|
|
|
311
|
|
|
97.4
|
%
|
|
317
|
|
|
(1.9
|
%)
|
Total
noninterest income
|
|
$
|
15,786
|
|
$
|
5,394
|
|
|
192.7
|
%
|
$
|
4,978
|
|
|
8.4
|
%
|
Service
charge income for 2006 increased over that of 2005 and 2004 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 and 2004 was offset 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.
Also
included in noninterest income are commissions and fees from our financial
advisory unit, Pinnacle Asset Management, a division of Pinnacle National.
At
December 31, 2006, Pinnacle Asset Management was receiving commissions and
fees
in connection with approximately $597 million in brokerage assets held with
Raymond James Financial Services, Inc. compared to $441 million at December
31,
2005. Additionally, at December 31, 2006, our trust department was receiving
fees on approximately $395 million in assets and in 2006 we earned $2.1 million
for insurance commissions. Following our merger with Cavalry, we now offer
trust
services through Pinnacle National’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 and previous periods. These mortgage fees are
for loans originated in both the Nashville and Rutherford County markets that
are 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 commercial 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 December 31, 2006 and pursuant
to participation agreements with these correspondents, we had participated
approximately $95.4 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 gains,
net of amortization expense related to the aforementioned retained cash flow
asset, of $420,000, $152,000 and $234,000 during each of the years in the
three-year period ended December 31, 2006 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 may be reduced. In any event, the timing
of
participations may cause the level of gains, if any, to vary
significantly.
During
2004, we sold a loan to an individual and recorded a gain on the sale of this
loan of $280,000, which is also included in gains on sale of loans. We had
acquired this loan in a settlement agreement with a borrower for which we had
no
basis in the loan.
Also
included in noninterest income for 2005 and 2004, were net gains of
approximately $114,000 and $357,000 realized from the sale of available-for-sale
securities.
Included
in other noninterest income are miscellaneous consumer fees, such as ATM
revenues, merchant card and other electronic banking revenues. We experienced
a
significant increase in these revenues in 2006 compared to previous periods
due
primarily to the merger with Cavalry as Cavalry had a larger presence in these
business lines than we did.
Noninterest
income from the cash surrender value of bank-owned life insurance increased
significantly between 2006 and the previous periods. In connection with the
Cavalry merger, we became the owner and beneficiary of several life insurance
policies on former Cavalry executives. These policies were acquired by Cavalry
in connection with a supplemental retirement plan for these former Cavalry
executives.
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 years ended December 31, 2006
and 2005 was $120,000 and $216,000, respectively.
Additional
other noninterest income increased by approximately $303,000 during 2006 when
compared to 2005 and decreased by $6,000 in 2005 when compared to 2004. Most
of
these revenues are for loan late charges and other fees.
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 years ended December 31, 2006, 2005 and 2004
(dollars in thousands):
|
|
Years
ended
|
|
2006-2005
|
|
Year
ended
|
|
2005-2004
|
|
|
|
December
31,
|
|
Percent
|
|
December
31,
|
|
Percent
|
|
|
|
2006
|
|
2005
|
|
Increase
(Decrease)
|
|
2004
|
|
Increase
(Decrease)
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits:
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
$
|
18,017
|
|
$
|
8,592
|
|
|
109.7
|
%
|
$
|
5,897
|
|
|
45.7
|
%
|
Commissions
|
|
|
1,298
|
|
|
714
|
|
|
81.8
|
%
|
|
610
|
|
|
17.0
|
%
|
Other
compensation, primarily incentives
|
|
|
4,209
|
|
|
2,101
|
|
|
100.3
|
%
|
|
1,217
|
|
|
72.6
|
%
|
Equity
compensation expenses
|
|
|
1,475
|
|
|
245
|
|
|
502.0
|
%
|
|
43
|
|
|
469.8
|
%
|
Employee
benefits and other
|
|
|
2,470
|
|
|
1,479
|
|
|
67.0
|
%
|
|
1,279
|
|
|
15.6
|
%
|
Total
salaries and employee benefits
|
|
|
27,469
|
|
|
13,131
|
|
|
109.2
|
%
|
|
9,046
|
|
|
45.2
|
%
|
Equipment
and occupancy
|
|
|
7,522
|
|
|
3,767
|
|
|
99.7
|
%
|
|
2,406
|
|
|
56.6
|
%
|
Marketing
and business development
|
|
|
1,234
|
|
|
698
|
|
|
76.8
|
%
|
|
607
|
|
|
15.0
|
%
|
Postage
and supplies
|
|
|
1,510
|
|
|
618
|
|
|
144.3
|
%
|
|
492
|
|
|
25.6
|
%
|
Amortization
of core deposit intangible
|
|
|
1,783
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other
noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting
and auditing
|
|
|
742
|
|
|
646
|
|
|
14.9
|
%
|
|
540
|
|
|
19.6
|
%
|
Consultants,
including independent loan review
|
|
|
320
|
|
|
123
|
|
|
160.2
|
%
|
|
182
|
|
|
(32.4
|
)%
|
Legal,
including borrower-related charges
|
|
|
310
|
|
|
245
|
|
|
26.5
|
%
|
|
280
|
|
|
(12.5
|
)%
|
OCC
exam fees
|
|
|
257
|
|
|
182
|
|
|
41.2
|
%
|
|
131
|
|
|
38.9
|
%
|
Directors'
fees
|
|
|
257
|
|
|
229
|
|
|
12.2
|
%
|
|
138
|
|
|
65.9
|
%
|
Insurance,
including FDIC assessments
|
|
|
687
|
|
|
322
|
|
|
113.4
|
%
|
|
256
|
|
|
25.8
|
%
|
Other
noninterest expense
|
|
|
2,897
|
|
|
1,071
|
|
|
170.5
|
%
|
|
725
|
|
|
47.7
|
%
|
Total
other noninterest expense
|
|
|
5,470
|
|
|
2,818
|
|
|
94.1
|
%
|
|
2,252
|
|
|
25.1
|
%
|
Merger
related expense
|
|
|
1,636
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
noninterest expense
|
|
$
|
46,624
|
|
$
|
21,032
|
|
|
121.7
|
%
|
$
|
14,803
|
|
|
42.1
|
%
|
Expenses
have generally increased between the above periods due to our merger with
Cavalry, 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, audit expenses and other expenses which tend to increase in relation
to our growth. Additionally, we adopted SFAS No. 123(R) in 2006 which addresses
the accounting for employee equity based incentives. Our compensation expense
will increase in all future periods as a result of adopting this accounting
pronouncement. In 2006, approximately $1.01 million of compensation expense
related to stock options is included in equity compensation
expense.
At
December 31, 2006, we employed 404.0 full time equivalent employees compared
to
156.5 at December 31, 2005 and 122.0 at the end of 2004. We intend to continue
to add employees to our work force for the foreseeable future, which will cause
our salary costs to increase in future periods.
We
believe that variable pay incentives are a valuable tool in motivating an
employee base that is focused on providing our clients effective financial
advice and increasing shareholder value. As a result, and unlike many other
financial institutions, substantially all of our employees are eligible to
participate in an annual cash incentive plan. Included in the salary and
employee benefits amounts for the years ended December 31, 2006, 2005 and 2004,
were $4,104,000, $2,031,000 and $1,135,000, respectively, related to variable
cash awards. This expense will fluctuate from year to year and quarter to
quarter based on the estimation of achievement of performance targets and the
increase in the number of associates eligible to receive the award. For 2006,
the actual award to be paid to qualifying associates equaled 120% of their
targeted award. For 2005, the actual award to be paid to associates equaled
100%
of their targeted award compared to 80% in 2004. The incentive plan for 2007
is
expected to be structured similarly to prior year plans in that the award is
based on the achievement of soundness and earnings objectives. Because of the
relative experience of our associates, our compensation costs are, and we expect
will continue to be, higher on a per associate basis than other financial
institutions of a similar asset size; however, we believe the experience and
engagement of our associates also allows us to employ fewer people than most
financial institutions our size.
Equipment
and occupancy expenses in 2006 were greater than the 2005 amount by 99.7% due
primarily to the additional branches and equipment acquired with the Cavalry
merger. Additionally, during 2004, we opened a new branch office in the West
End
area of Nashville. In January of 2005 we opened an office in Franklin, Tennessee
and in the second quarter of 2005 we opened an office in Hendersonville,
Tennessee. We plan on opening an office in the Donelson area of Nashville,
Tennessee in the first quarter of 2007. These branch additions contributed
to
the increase in our equipment and occupancy expenses throughout the three year
period and will contribute to increases in expenses in the future.
Marketing
and other business development and postage and supplies expenses are higher
in
2006 compared to 2005 and 2004 due to increases in the number of customers
and
prospective customers; increases in the number of customer contact personnel
and
the corresponding increases in customer entertainment; and other business
development expenses. The addition of customers from the Cavalry merger had
a
direct impact on these increased charges.
Other
noninterest expenses increased 94.1% in 2006 over 2005 and 25.1% in 2005 over
2004. Most of these increases are attributable to increased audit and accounting
fees, legal fees and insurance expenses. Also contributing to the increases
in
2006 are incidental variable costs related to deposit gathering and lending.
Examples include expenses related to ATM networks, correspondent bank service
charges, check losses, appraisal expenses, closing attorney expenses and other
items which have increased significantly as a result of the Cavalry
merger.
Included
in noninterest expense for 2006 is $1.78 million of amortization of the core
deposit intangible and $1.64 million of merger related expenses directly
associated with the Cavalry merger. In connection with the Cavalry merger,
we
recognized an intangible asset of $13.2 million related to the fair value of
Cavalry’s core deposit base as of the merger date. 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 year ended December 31, 2006, approximately $1.78 million was recognized
in
the statement of income. Amortization expense associated with the core deposit
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.
The
merger related 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. We do not anticipate any additional merger related expenses
associated with the Cavalry transaction in 2007.
Our
efficiency ratio (ratio of noninterest expense to the sum of net interest income
and noninterest income) was 60.8% in 2006 compared to 61.1% in 2005 and to
58.6%
in 2004. The efficiency ratio measures the amount of expense that is incurred
to
generate a dollar of revenue.
Income
Taxes. The
effective income tax expense rate for the year ended December 31, 2006 was
approximately 32.1%, compared to an effective income tax expense rate for years
ended December 31, 2005 and 2004 of approximately 28.4% and 29.0%, respectively.
The increase in the effective tax rate in 2006 was due primarily to the
additional earnings being taxed at a higher rate as the various tax savings
initiatives (e.g., municipal bond income) had a lesser impact in 2006 when
compared to the previous periods. Additionally, the impact of our incentive
stock options and their treatment pursuant to the adoption of SFAS No. 123(R)
also contributed to the increase in our effective rate in 2006.
The
lower
effective tax rate in 2005 and 2004 was primarily due to additional tax-exempt
investment income and the formation of a real estate investment trust during
the
fourth quarter of 2004, which provides us with an alternative vehicle for
raising capital should we so desire. Additionally, the ownership structure
of
this real estate investment trust provides certain state income tax benefits
which also lowered our effective tax rate. Also for 2005 and 2004 our effective
rate was 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 to be realized thru 2010. The credit
available for each of the years in the three-year period ended December 31,
2006
was $300,000. Pinnacle Financial believes that it and its subsidiary has
complied with the various regulatory provisions of the New Markets Tax Credit
program and has claimed the credit in its 2004 and 2005 Federal income tax
return and will claim the credit in 2006.
Financial
Condition
Our
consolidated balance sheet at December 31, 2006 reflects significant growth
since December 31, 2004. Total assets grew from $727 million at December 31,
2004 to $1.02 billion at December 31, 2005 to $2.14 billion at December 31,
2006. Total deposits grew $812 million during 2006 and $239 million during
2005.
Excluding the deposits acquired with the Cavalry acquisition on March 15, 2006
of $584 million, total deposits increased by $228 million in 2006. We invested
substantially all of the additional deposits and other fundings in loans, which
grew by $850 million (of which $551 million was acquired with the Cavalry
acquisition) and $176 million during 2005, and securities, which increased
by
$67 million in 2006 (of which $39 million was acquired with the Cavalry
acquisition) and $71 million in 2005.
Loans.
The
composition of loans at December 31 for each of the past five years and the
percentage (%) of each classification to total loans are summarized as follows
(dollars in thousands):
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Commercial
real estate - Mortgage
|
|
$
|
284,302
|
|
|
19.0
|
%
|
$
|
148,102
|
|
|
22.9
|
%
|
$
|
117,123
|
|
|
24.8
|
%
|
$
|
68,507
|
|
|
23.1
|
%
|
$
|
58,965
|
|
|
28.1
|
%
|
Commercial
real estate - Construction
|
|
|
161,903
|
|
|
10.8
|
%
|
|
30,295
|
|
|
4.7
|
%
|
|
8,428
|
|
|
1.8
|
%
|
|
8,211
|
|
|
2.8
|
%
|
|
5,397
|
|
|
2.6
|
%
|
Commercial
- Other
|
|
|
608,530
|
|
|
40.6
|
%
|
|
239,129
|
|
|
36.9
|
%
|
|
189,456
|
|
|
40.1
|
%
|
|
129,882
|
|
|
43.7
|
%
|
|
98,722
|
|
|
47.1
|
%
|
Total
commercial
|
|
|
1,054,735
|
|
|
70.4
|
%
|
|
417,526
|
|
|
64.4
|
%
|
|
315,007
|
|
|
66.7
|
%
|
|
206,600
|
|
|
69.6
|
%
|
|
163,084
|
|
|
77.8
|
%
|
Consumer
real estate - Mortgage
|
|
|
299,627
|
|
|
20.0
|
%
|
|
169,953
|
|
|
26.2
|
%
|
|
126,907
|
|
|
26.9
|
%
|
|
76,042
|
|
|
25.6
|
%
|
|
37,533
|
|
|
17.9
|
%
|
Consumer
real estate - Construction
|
|
|
91,194
|
|
|
6.1
|
%
|
|
37,372
|
|
|
5.8
|
%
|
|
14,991
|
|
|
3.2
|
%
|
|
3,077
|
|
|
1.0
|
%
|
|
1,971
|
|
|
0.9
|
%
|
Consumer
- Other
|
|
|
52,179
|
|
|
3.5
|
%
|
|
23,173
|
|
|
3.6
|
%
|
|
15,457
|
|
|
3.3
|
%
|
|
11,285
|
|
|
3.8
|
%
|
|
7,155
|
|
|
3.4
|
%
|
Total
consumer
|
|
|
443,000
|
|
|
29.6
|
%
|
|
230,498
|
|
|
35.6
|
%
|
|
157,355
|
|
|
33.3
|
%
|
|
90,404
|
|
|
30.4
|
%
|
|
46,659
|
|
|
22.2
|
%
|
Total
loans
|
|
$
|
1,497,735
|
|
|
100.0
|
%
|
$
|
648,024
|
|
|
100.0
|
%
|
$
|
472,362
|
|
|
100.0
|
%
|
$
|
297,004
|
|
|
100.0
|
%
|
$
|
209,743
|
|
|
100.0
|
%
|
Primarily
due to the Cavalry merger, we have increased the percentage of our outstanding
loans in commercial real estate construction significantly. These types of
loans
require that we maintain effective credit and construction monitoring systems.
Also as a result of the Cavalry merger, we have increased our resources in
this
area so that we can attempt to 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.
The
following table classifies our fixed and variable rate loans at December 31,
2006 according to contractual maturities of (1) one year or less, (2) after
one
year through five years, and (3) after five years. The table also classifies
our
variable rate loans pursuant to the contractual repricing dates of the
underlying loans (dollars in thousands):
|
|
Amounts
at December 31, 2006
|
|
|
|
|
|
|
|
Fixed
|
|
Variable
|
|
|
|
At
December 31,
|
|
At
December 31,
|
|
|
|
Rates
|
|
Rates
|
|
Totals
|
|
2006
|
|
2005
|
|
Based
on contractual maturity:
|
|
|
|
|
|
|
|
|
|
|
|
Due
within one year
|
|
$
|
81,576
|
|
$
|
531,615
|
|
$
|
613,191
|
|
|
40.9
|
%
|
|
34.5
|
%
|
Due
in one year to five years
|
|
|
444,357
|
|
|
152,627
|
|
|
596,984
|
|
|
39.9
|
%
|
|
39.4
|
%
|
Due
after five years
|
|
|
79,557
|
|
|
208,003
|
|
|
287,560
|
|
|
19.2
|
%
|
|
26.0
|
%
|
Totals
|
|
$
|
605,490
|
|
$
|
892,245
|
|
$
|
1,497,735
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based
on contractual repricing dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daily
floating rate
|
|
$
|
-
|
|
$
|
689,954
|
|
$
|
689,954
|
|
|
46.1
|
%
|
|
53.5
|
%
|
Due
within one year
|
|
|
81,576
|
|
|
122,144
|
|
|
203,720
|
|
|
13.6
|
%
|
|
9.6
|
%
|
Due
in one year to five years
|
|
|
444,357
|
|
|
68,203
|
|
|
512,560
|
|
|
34.2
|
%
|
|
28.8
|
%
|
Due
after five years
|
|
|
79,557
|
|
|
11,944
|
|
|
91,501
|
|
|
6.1
|
%
|
|
8.1
|
%
|
Totals
|
|
$
|
605,490
|
|
$
|
892,245
|
|
$
|
1,497,735
|
|
|
100.0
|
%
|
|
100.0
|
%
|
The
above
information does not consider the impact of scheduled principal payments. Daily
floating rate loans are tied to Pinnacle National’s prime lending rate or a
national interest rate index with the underlying loan rates changing in relation
to changes in these indexes.
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 that our board of directors
approve any relationships that exceed this internal limit.
We
discontinue 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 December 31, 2006, we had $7,070,000 in loans on nonaccrual
compared to $460,000 at December 31, 2005. The increase in nonperforming loans
between December 31, 2005 and December 31, 2006 was primarily related to loans
acquired from Cavalry and identified as being impaired as discussed more fully
below and several larger loans identified in the fourth quarter of
2006.
At
December 31, 2006, we owned $995,000 in real estate which we had acquired from
borrowers. Substantially all of this amount relates to homes that are in various
stages of construction for which we believe we have adequate
collateral.
There
was
approximately $737,000 in other loans 90 days past due and still accruing
interest at December 31, 2006 compared to no loans at December 31, 2005. At
December 31, 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 December 31 for each of the years 2006, 2005, 2004, 2003 and 2002 (dollars
in
thousands):
|
|
At
December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Nonaccrual
loans (1)
|
|
$
|
7,070
|
|
$
|
460
|
|
$
|
561
|
|
$
|
379
|
|
$
|
1,845
|
|
Restructured
loans
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other
real estate owned
|
|
|
995
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Total
nonperforming assets
|
|
|
8,065
|
|
|
460
|
|
|
561
|
|
|
379
|
|
|
1,845
|
|
Accruing
loans past due 90 days or more
|
|
|
737
|
|
|
0
|
|
|
146
|
|
|
182
|
|
|
22
|
|
Total
nonperforming assets and accruing loans past due 90 days or
more
|
|
|
8,802
|
|
|
460
|
|
|
707
|
|
|
561
|
|
|
1,867
|
|
Total
loans outstanding
|
|
$
|
1,497,735
|
|
$
|
648,024
|
|
$
|
472,362
|
|
$
|
297,004
|
|
$
|
209,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of nonperforming assets and accruing loans past due 90 days or more
to
total loans outstanding at end of period
|
|
|
0.59
|
%
|
|
0.07
|
%
|
|
0.15
|
%
|
|
0.19
|
%
|
|
0.89
|
%
|
Ratio
of nonperforming assets and accruing loans past due 90 days or more
to
total allowance for loan losses at end of period
|
|
|
54.61
|
%
|
|
5.85
|
%
|
|
12.51
|
%
|
|
15.08
|
%
|
|
69.74
|
%
|
(1)
|
Interest
income that would have been recorded in 2006 related to nonaccrual
loans
was $283,000 compared to $21,000 for the year ended December 31,
2005 and
$41,000 for the year ended December 31, 2004, none of which is
included in
interest income or net income for the applicable
periods.
|
Potential
problem assets, which are not included in nonperforming assets, amounted to
approximately $6.0 million, or 0.24% of total loans outstanding at December
31,
2006, compared to $1.3 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 the
OCC, 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 December 31, 2006 and
December 31, 2005, our allowance for loan losses was $16,118,000 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
70% of our loan portfolio at December 31, 2006 consisted of commercial loans
compared to 64% at December 31, 2005. 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 to determine the amount
of additional allowance allocations due to these concentrations.
The
following table sets forth, based on management's best estimate, the allocation
of the ALL to types of loans as well as the unallocated portion as of
December 31 for each of the past five years and the percentage of loans in
each category to the total loans (dollars in thousands):
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Commercial
real estate - Mortgage
|
|
$
|
4,550
|
|
|
19.0
|
%
|
$
|
1,488
|
|
|
22.9
|
%
|
$
|
1,205
|
|
|
24.8
|
%
|
$
|
723
|
|
|
23.1
|
%
|
$
|
508
|
|
|
28.1
|
%
|
Commercial
real estate - Construction
|
|
|
2,591
|
|
|
10.8
|
%
|
|
630
|
|
|
4.7
|
%
|
|
188
|
|
|
1.8
|
%
|
|
103
|
|
|
2.8
|
%
|
|
59
|
|
|
2.6
|
%
|
Commercial
- Other
|
|
|
6,517
|
|
|
40.6
|
%
|
|
2,305
|
|
|
36.9
|
%
|
|
1,711
|
|
|
40.1
|
%
|
|
1,236
|
|
|
43.7
|
%
|
|
977
|
|
|
47.1
|
%
|
Total
commercial
|
|
|
13,658
|
|
|
70.4
|
%
|
|
4,423
|
|
|
64.4
|
%
|
|
3,104
|
|
|
66.7
|
%
|
|
2,062
|
|
|
69.6
|
%
|
|
1,544
|
|
|
77.8
|
%
|
Consumer
real estate - Mortgage
|
|
|
913
|
|
|
20.0
|
%
|
|
1,286
|
|
|
26.2
|
%
|
|
869
|
|
|
26.9
|
%
|
|
607
|
|
|
25.6
|
%
|
|
392
|
|
|
17.9
|
%
|
Consumer
real estate - Construction
|
|
|
278
|
|
|
6.1
|
%
|
|
60
|
|
|
5.8
|
%
|
|
39
|
|
|
3.2
|
%
|
|
10
|
|
|
1.0
|
%
|
|
13
|
|
|
0.9
|
%
|
Consumer
- Other
|
|
|
870
|
|
|
3.5
|
%
|
|
552
|
|
|
3.6
|
%
|
|
396
|
|
|
3.3
|
%
|
|
320
|
|
|
3.8
|
%
|
|
193
|
|
|
3.4
|
%
|
Total
consumer
|
|
|
2,061
|
|
|
29.6
|
%
|
|
1,898
|
|
|
35.6
|
%
|
|
1,304
|
|
|
33.3
|
%
|
|
937
|
|
|
30.4
|
%
|
|
598
|
|
|
22.2
|
%
|
Unallocated
|
|
|
399
|
|
|
NA
|
|
|
1,537
|
|
|
NA
|
|
|
1,242
|
|
|
NA
|
|
|
720
|
|
|
NA
|
|
|
535
|
|
|
NA
|
|
Total
allowance for loan losses
|
|
$
|
16,118
|
|
|
100.0
|
%
|
$
|
7,858
|
|
|
100.0
|
%
|
$
|
5,650
|
|
|
100.0
|
%
|
$
|
3,719
|
|
|
100.0
|
%
|
$
|
2,677
|
|
|
100.0
|
%
|
In
periods prior to 2006, the unallocated portion of the allowance consisted of
dollar amounts specifically set aside for certain general factors influencing
the allowance. These factors included ratio trends and other factors not
specifically allocated to each category. Establishing the percentages for these
factors was largely subjective but was supported by economic data, changes
made
in lending functions, and other support where appropriate. In 2006, the
unallocated portion decreased significantly, due to a more comprehensive and
refined model adopted to assess the adequacy of our allowance for loan losses.
As a result, in 2006, the model was refined to embed many of the factors
previously included in the unallocated portion of the allowance in the allocated
amounts above for each category. This enhancement established a method whereby
national and economic factors, concentrations in market segments, loan review
and portfolio performance could be assigned to these specific categories.
The
following is a summary of changes in the allowance for loan losses for the
years
ended December 31, 2006, 2005, 2004, 2003, and 2002 and the ratio of the
allowance for loan losses to total loans as of the end of each period (dollars
in thousands):
|
|
For
the year ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Balance
at beginning of period
|
|
$
|
7,858
|
|
$
|
5,650
|
|
$
|
3,719
|
|
$
|
2,677
|
|
$
|
1,832
|
|
Provision
for loan losses
|
|
|
3,732
|
|
|
2,152
|
|
|
2,948
|
|
|
1,157
|
|
|
938
|
|
Allowance
from Cavalry acquisition
|
|
|
5,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged-off
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate - Mortgage
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Commercial
real estate - Construction
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(91
|
)
|
Commercial
- Other
|
|
|
(436
|
)
|
|
(61
|
)
|
|
(50
|
)
|
|
-
|
|
|
-
|
|
Consumer
real estate - Mortgage
|
|
|
(46
|
)
|
|
(38
|
)
|
|
(834
|
)
|
|
(123
|
)
|
|
-
|
|
Consumer
real estate - Construction
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Consumer
- Other
|
|
|
(336
|
)
|
|
(109
|
)
|
|
(148
|
)
|
|
(44
|
)
|
|
(2
|
)
|
Total
charged-off loans
|
|
|
(818
|
)
|
|
(208
|
)
|
|
(1,032
|
)
|
|
(167
|
)
|
|
(93
|
)
|
Recoveries
of previously charged-off loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
real estate - Mortgage
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Commercial
real estate - Construction
|
|
|
-
|
|
|
-
|
|
|
2
|
|
|
49
|
|
|
-
|
|
Commercial
- Other
|
|
|
166
|
|
|
3
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Consumer
real estate - Mortgage
|
|
|
-
|
|
|
231
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Consumer
real estate - Construction
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Consumer
- Other
|
|
|
78
|
|
|
30
|
|
|
13
|
|
|
3
|
|
|
-
|
|
Total
recoveries of previously charged-off loans
|
|
|
244
|
|
|
264
|
|
|
15
|
|
|
52
|
|
|
-
|
|
Net
(charge-offs) recoveries
|
|
|
(574
|
)
|
|
56
|
|
|
(1,017
|
)
|
|
(115
|
)
|
|
(93
|
)
|
Balance
at end of period
|
|
$
|
16,118
|
|
$
|
7,858
|
|
$
|
5,650
|
|
$
|
3,719
|
|
$
|
2,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio
of allowance for loan losses to total loans outstanding at end of
period
|
|
|
1.08
|
%
|
|
1.21
|
%
|
|
1.20
|
%
|
|
1.25
|
%
|
|
1.28
|
%
|
Ratio
of net charge-offs (recoveries) to average loans outstanding for
the
period
|
|
|
0.05
|
%
|
|
(0.01
|
)%
|
|
0.27
|
%
|
|
0.05
|
%
|
|
0.05
|
%
|
Included
in charged-off loans in 2006 was one commercial borrower of approximately
$404,000 which had been on nonaccruing status since the fourth quarter of 2005.
Included in the charged-off loans during 2004 were two loans totaling
approximately $884,000, $834,000 of which had been on nonaccrual status since
June of 2004. We recovered approximately $231,000 of these particular
charge-offs in 2005.
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.
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 was 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 December 31, 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 $346.5 million,
$279.1 million and $208.2 million at December 31, 2006, 2005 and 2004,
respectively.
The
following table shows the carrying value of investment securities according
to
contractual maturity classifications of (1) one year or less, (2) after one
year
through five years, (3) after five years through ten years, and (4) after ten
years. Actual maturities may differ from contractual maturities of
mortgage-backed securities because the mortgages underlying the securities
may
be called or prepaid with or without penalty. Therefore, these securities are
not included in the maturity categories noted below as of December 31, 2006,
2005 and 2004 (dollars in thousands):
|
|
At
December 31,
|
|
|
|
U.S.
Treasury securities
|
|
U.S.
government agency securities
|
|
State
and Municipal securities
|
|
Corporate
securities
|
|
Totals
|
|
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
Amount
|
|
Yield
|
|
At
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
$
|
-
|
|
|
-
|
%
|
$
|
-
|
|
|
-
|
%
|
$
|
2,240
|
|
|
4.5
|
%
|
$
|
398
|
|
|
3.2
|
%
|
$
|
2,638
|
|
|
4.3
|
%
|
Due
in one year to five years
|
|
|
-
|
|
|
-
|
%
|
|
30,105
|
|
|
4.7
|
%
|
|
22,121
|
|
|
5.2
|
%
|
|
1,427
|
|
|
3.4
|
%
|
|
53,653
|
|
|
4.9
|
%
|
Due
in five years to ten years
|
|
|
-
|
|
|
-
|
%
|
|
7,524
|
|
|
5.2
|
%
|
|
28,848
|
|
|
5.4
|
%
|
|
-
|
|
|
-
|
%
|
|
36,372
|
|
|
5.4
|
%
|
Due
after ten years
|
|
|
-
|
|
|
-
|
%
|
|
-
|
|
|
-
|
%
|
|
8,750
|
|
|
5.7
|
%
|
|
-
|
|
|
-
|
%
|
|
8,750
|
|
|
5.7
|
%
|
|
|
|
- |
|
|
-
|
%
|
$
|
37,629
|
|
|
4.8
|
%
|
$
|
61,959
|
|
|
5.3
|
%
|
$
|
1,825
|
|
|
3.4
|
%
|
$
|
101,413
|
|
|
5.1
|
%
|
Securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
$
|
-
|
|
|
-
|
%
|
$
|
-
|
|
|
-
|
%
|
$
|
154
|
|
|
5.6
|
%
|
$
|
-
|
|
|
-
|
%
|
$
|
154
|
|
|
5.6
|
%
|
Due
in one year to five years
|
|
|
-
|
|
|
-
|
%
|
|
15,750
|
|
|
4.2
|
%
|
|
5,777
|
|
|
4.9
|
%
|
|
-
|
|
|
-
|
%
|
|
21,527
|
|
|
4.4
|
%
|
Due
in five years to ten years
|
|
|
-
|
|
|
-
|
%
|
|
1,997
|
|
|
4.8
|
%
|
|
3,579
|
|
|
5.0
|
%
|
|
-
|
|
|
-
|
%
|
|
5,576
|
|
|
4.9
|
%
|
Due
after ten years
|
|
|
-
|
|
|
-
|
%
|
|
-
|
|
|
-
|
%
|
|
-
|
|
|
-
|
%
|
|
-
|
|
|
-
|
%
|
|
-
|
|
|
-
|
%
|
|
|
$ |
-
|
|
|
-
|
%
|
$
|
17,747
|
|
|
4.3
|
%
|
$
|
9,510
|
|
|
5.0
|
%
|
$
|
-
|
|
|
-
|
%
|
$
|
27,257
|
|
|
4.5
|
%
|
At
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
$
|
-
|
|
|
-
|
%
|
$
|
-
|
|
|
-
|
%
|
$
|
-
|
|
|
-
|
%
|
$
|
404
|
|
|
3.3
|
%
|
$
|
404
|
|
|
3.3
|
%
|
Due
in one year to five years
|
|
|
-
|
|
|
-
|
%
|
|
16,205
|
|
|
4.3
|
%
|
|
5,105
|
|
|
4.5
|
%
|
|
1,802
|
|
|
3.4
|
%
|
|
23,112
|
|
|
4.3
|
%
|
Due
in five years to ten years
|
|
|
-
|
|
|
-
|
%
|
|
14,315
|
|
|
5.1
|
%
|
|
19,787
|
|
|
5.2
|
%
|
|
-
|
|
|
-
|
%
|
|
34,102
|
|
|
5.2
|
%
|
Due
after ten years
|
|
|
-
|
|
|
-
|
%
|
|
-
|
|
|
-
|
%
|
|
7,245
|
|
|
5.5
|
%
|
|
-
|
|
|
-
|
%
|
|
7,245
|
|
|
5.5
|
%
|
|
|
$ |
-
|
|
|
-
|
%
|
$
|
30,520
|
|
|
4.7
|
%
|
$
|
32,137
|
|
|
5.2
|
%
|
$
|
2,206
|
|
|
3.4
|
%
|
$
|
64,863
|
|
|
4.9
|
%
|
Securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
$
|
-
|
|
|
-
|
%
|
$
|
-
|
|
|
-
|
%
|
$
|
-
|
|
|
-
|
%
|
$
|
-
|
|
|
-
|
%
|
$
|
-
|
|
|
-
|
%
|
Due
in one year to five years
|
|
|
-
|
|
|
-
|
%
|
|
15,750
|
|
|
4.2
|
%
|
|
4,010
|
|
|
5.0
|
%
|
|
-
|
|
|
-
|
%
|
|
19,760
|
|
|
4.4
|
%
|
Due
in five years to ten years
|
|
|
-
|
|
|
-
|
%
|
|
1,997
|
|
|
5.0
|
%
|
|
5,574
|
|
|
5.0
|
%
|
|
-
|
|
|
-
|
%
|
|
7,571
|
|
|
5.0
|
%
|
Due
after ten years
|
|
|
-
|
|
|
-
|
%
|
|
-
|
|
|
-
|
%
|
|
-
|
|
|
-
|
%
|
|
-
|
|
|
-
|
%
|
|
-
|
|
|
-
|
%
|
|
|
$ |
- |
|
|
-
|
%
|
$
|
17,747
|
|
|
4.3
|
%
|
$
|
9,584
|
|
|
5.0
|
%
|
$
|
-
|
|
|
-
|
%
|
$
|
27,331
|
|
|
4.5
|
%
|
At
December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
$
|
-
|
|
|
-
|
%
|
$
|
-
|
|
|
-
|
%
|
|
-
|
|
|
-
|
%
|
|
-
|
|
|
-
|
%
|
|
-
|
|
|
-
|
%
|
Due
in one year to five years
|
|
|
-
|
|
|
-
|
%
|
|
2,982
|
|
|
3.5
|
%
|
|
-
|
|
|
-
|
%
|
|
2,270
|
|
|
3.4
|
%
|
|
5,252
|
|
|
3.5
|
%
|
Due
in five years to ten years
|
|
|
-
|
|
|
-
|
%
|
|
23,001
|
|
|
4.7
|
%
|
|
7,409
|
|
|
5.0
|
%
|
|
-
|
|
|
-
|
%
|
|
30,410
|
|
|
4.8
|
%
|
Due
after ten years
|
|
|
-
|
|
|
-
|
%
|
|
1,291
|
|
|
5.5
|
%
|
|
5,094
|
|
|
5.4
|
%
|
|
-
|
|
|
-
|
%
|
|
6,385
|
|
|
5.4
|
%
|
|
|
$ |
- |
|
|
-
|
%
|
$
|
27,274
|
|
|
4.6
|
%
|
$
|
12,503
|
|
|
5.2
|
%
|
$
|
2,270
|
|
|
3.4
|
%
|
$
|
42,047
|
|
|
4.7
|
%
|
Securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
in one year or less
|
|
$
|
-
|
|
|
-
|
%
|
$
|
-
|
|
|
-
|
%
|
$
|
-
|
|
|
-
|
%
|
$
|
-
|
|
|
-
|
%
|
$
|
-
|
|
|
-
|
%
|
Due
in one year to five years
|
|
|
-
|
|
|
-
|
%
|
|
3,250
|
|
|
4.1
|
%
|
|
844
|
|
|
4.3
|
%
|
|
-
|
|
|
-
|
%
|
|
4,094
|
|
|
4.1
|
%
|
Due
in five years to ten years
|
|
|
-
|
|
|
-
|
%
|
|
14,496
|
|
|
4.3
|
%
|
|
7,953
|
|
|
5.0
|
%
|
|
-
|
|
|
-
|
%
|
|
22,449
|
|
|
4.5
|
%
|
Due
after ten years
|
|
|
-
|
|
|
-
|
%
|
|
-
|
|
|
-
|
%
|
|
1,053
|
|
|
5.3
|
%
|
|
-
|
|
|
-
|
%
|
|
1,053
|
|
|
5.3
|
%
|
|
|
$ |
- |
|
|
-
|
%
|
$
|
17,746
|
|
|
4.3
|
%
|
$
|
9,850
|
|
|
5.0
|
%
|
$
|
-
|
|
|
-
|
%
|
$
|
27,596
|
|
|
4.5
|
%
|
We
computed yields using coupon interest, adding discount accretion or subtracting
premium amortization, as appropriate, on a ratable basis over the life of
each
security. We computed the weighted average yield for each maturity range
using
the acquisition price of each security in that range.
Deposits
and Other Borrowings. We
had
approximately $1.62 billion of deposits at December 31, 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 commercial clients and
provide them with short-term returns for their excess funds) amounted to $141.0
million at December 31, 2006 and $65.8 million at December 31, 2005.
Additionally, at December 31, 2006, we had borrowed $53.7 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 December 31, 2006
and
December 31, 2005 (dollars in thousands):
|
|
December
31,
|
|
|
|
December
31,
|
|
|
|
|
|
2006
|
|
Percent
|
|
2005
|
|
Percent
|
|
Core
funding:
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
deposit accounts
|
|
$
|
300,978
|
|
|
16.1
|
%
|
$
|
155,811
|
|
|
16.4
|
%
|
Interest-bearing
demand accounts
|
|
|
236,674
|
|
|
12.7
|
%
|
|
72,521
|
|
|
7.6
|
%
|
Savings
and money market accounts
|
|
|
485,936
|
|
|
26.0
|
%
|
|
304,162
|
|
|
32.1
|
%
|
Time
deposit accounts less than $100,000
|
|
|
158,687
|
|
|
8.5
|
%
|
|
31,408
|
|
|
3.3
|
%
|
Total
core funding
|
|
|
1,182,275
|
|
|
63.3
|
%
|
|
563,902
|
|
|
59.5
|
%
|
Non-core
funding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposit accounts greater than $100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
funds
|
|
|
98,286
|
|
|
5.3
|
%
|
|
106,928
|
|
|
11.3
|
%
|
Brokered
deposits
|
|
|
61,718
|
|
|
3.3
|
%
|
|
55,360
|
|
|
5.8
|
%
|
Other
time deposits
|
|
|
280,132
|
|
|
15.0
|
%
|
|
83,961
|
|
|
8.9
|
%
|
Securities
sold under agreements to repurchase
|
|
|
141,016
|
|
|
7.5
|
%
|
|
65,834
|
|
|
6.9
|
%
|
Federal
Home Loan Bank advances
|
|
|
53,726
|
|
|
2.9
|
%
|
|
41,500
|
|
|
4.4
|
%
|
Subordinated
debt
|
|
|
51,548
|
|
|
2.8
|
%
|
|
30,929
|
|
|
3.3
|
%
|
Total
non-core funding
|
|
|
686,426
|
|
|
36.7
|
%
|
|
384,512
|
|
|
40.5
|
%
|
Totals
|
|
$
|
1,868,701
|
|
|
100.0
|
%
|
$
|
948,414
|
|
|
100.0
|
%
|
The
amount of time deposits issued in amounts of $100,000 or more as of December
31,
2006 and 2005 amounted to $440.1 million and $246.2 million, respectively.
The
following table shows our time deposits over $100,000 by category at December
31, 2006, based on time remaining until maturity of (1) three months or less,
(2) over three but less than six months, (3) over six but less than twelve
months and (4) over twelve months (dollars in thousands):
|
|
At
December 31, 2006
|
|
Three
months or less
|
|
$
|
176,732
|
|
Over
three but less than six months
|
|
|
84,734
|
|
Over
six but less than twelve months
|
|
|
81,186
|
|
Over
twelve months
|
|
|
97,484
|
|
|
|
$
|
440,136
|
|
Subordinated
debt. On
December 29, 2003, we established PNFP Statutory Trust I; on September 15,
2005
we established PNFP Statutory Trust II; and on September 7, 2006 we established
PNFP Statutory Trust III (“Trust I”; “Trust II”; “Trust III” or collectively,
the “Trusts”). All are wholly-owned statutory business trusts. We are the
sole sponsor of the Trusts and acquired each Trust’s common securities for
$310,000; $619,000 and $619,000, respectively. The Trusts were created for
the
exclusive purpose of issuing 30-year capital trust preferred securities (“Trust
Preferred Securities”) in the aggregate amount of $10,000,000 for Trust I;
$20,000,000 for Trust II and
$20,000,000
for Trust III and using the proceeds to acquire junior subordinated debentures
(“Subordinated Debentures”) issued by Pinnacle Financial. The sole assets
of the Trusts are the Subordinated Debentures. Our $1,548,000 investment in
the
Trusts is included in investments in unconsolidated subsidiaries in the
accompanying consolidated balance sheets and our $51,548,000 obligation is
reflected as subordinated debt.
The
Trust
I Preferred Securities bear a floating interest rate based on a spread over
3-month LIBOR (8.16% at December 31, 2006) which is set each quarter and matures
on December 30, 2033. The Trust II Preferred Securities bear a fixed
interest rate of 5.848% per annum thru September 30, 2010 at which time the
securities will bear a floating rate set each quarter based on a spread over
3-month LIBOR. The Trust II securities mature on September 30, 2035. The
Trust III Preferred Securities bear a floating interest rate based on a spread
over 3-month LIBOR (7.02% at December 31, 2006) which is set each quarter and
mature on September 30, 2036.
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. We guarantee the payment of distributions and payments for
redemption or liquidation of the Trust Preferred Securities to the extent of
funds held by the Trusts. Pinnacle Financial’s 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.
The
Subordinated Debentures are unsecured, bear interest at a rate equal to the
rates paid by the Trusts on the Trust Preferred Securities and mature on the
same dates as those noted above for the Trust Preferred Securities.
Interest is payable quarterly. 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.
Subject
to approval by the Federal Reserve Bank of Atlanta, the Trust Preferred
Securities may be redeemed prior to maturity at our option on or after September
17, 2008 for Trust I; on or after September 30, 2010 for Trust II and September
30, 2011 for Trust III. 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 Trust 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 Trust
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.
The
Trust
Preferred Securities for the Trusts qualify as Tier I capital under current
regulatory definitions subject to certain limitations. Debt issuance costs
associated with Trust I of $120,000 consisting primarily of underwriting
discounts and professional fees are included in other assets in the accompanying
consolidated balance sheet. These debt issuance costs are being amortized over
ten years using the straight-line method. There are no debt issuance costs
associated with Trust II or Trust III.
Capital
Resources. At
December 31, 2006 and 2005, our stockholders’ equity amounted to $256.0 million
and $63.4 million, respectively. The 2006 increase of $192.6 million was
primarily attributable to $171.1 million of common stock issued in connection
with the Cavalry acquisition and $18.8 million in comprehensive income, which
was composed of $17.9 million in net income and $853,000 of net unrealized
holding gains associated with our available-for-sale portfolio. During 2005,
stockholders’ equity increased by $5.5 million due primarily to $8.1 million in
net income offset by other comprehensive loss of $2.9 million attributable
to
the after tax decrease in the fair value of our available-for-sale securities
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, anticipated
growth rates 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.
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 (e.g., 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 December 31, 2006 and 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 December 31, 2006, Pinnacle National
had received advances from the Federal Home Loan Bank of Cincinnati totaling
$53.7 million at the following rates and maturities (dollars in
thousands):
|
|
Amount
|
|
Interest
Rate Ranges
|
|
2007
|
|
$
|
28,054
|
|
|
3.2%
to 5.4
|
%
|
2008
|
|
|
10,054
|
|
|
4.8
|
%
|
2009
|
|
|
15,054
|
|
|
5.0
|
%
|
2010-2019
|
|
|
564
|
|
|
2.3
|
%
|
Total
|
|
$
|
53,726
|
|
|
|
|
Weighted
average interest rate
|
|
|
|
|
|
5.0
|
%
|
At
December 31, 2006, brokered certificates of deposit approximated $61.7 million
which represented 3.3% 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.
Our
short-term borrowings (borrowings which mature within the next fiscal year)
consist primarily of securities sold under agreements to repurchase (these
agreements are typically associated with comprehensive treasury management
programs for our clients and provide them with short-term returns for their
excess funds), Federal Home Loan Bank of Cincinnati advances and Federal funds
purchased. Information concerning our short-term borrowings as of and for each
of the years in the three-year period ended December 31, 2006 is as follows
(dollars in thousands):
|
|
2006
|
|
2005
|
|
2004
|
|
Amounts
outstanding at year-end:
|
|
|
|
|
|
|
|
Securities
sold under agreements to repurchase
|
|
$
|
141,016
|
|
$
|
65,834
|
|
$
|
31,928
|
|
Federal
Home Loan Bank advances
|
|
|
25,000
|
|
|
29,500
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average interest rates at year-end:
|
|
|
|
|
|
|
|
|
|
|
Securities
sold under agreements to repurchase
|
|
|
4.33
|
%
|
|
3.16
|
%
|
|
0.90
|
%
|
Federal
Home Loan Bank advances
|
|
|
5.36
|
%
|
|
3.21
|
%
|
|
2.52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
amount of borrowings at any month-end:
|
|
|
|
|
|
|
|
|
|
|
Securities
sold under agreements to repurchase
|
|
$
|
166,520
|
|
$
|
69,767
|
|
$
|
31,928
|
|
Federal
funds purchased
|
|
|
9,985
|
|
|
18,702
|
|
|
10,000
|
|
Federal
Home Loan Bank advances
|
|
|
25,000
|
|
|
35,500
|
|
|
31,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
balances for the year:
|
|
|
|
|
|
|
|
|
|
|
Securities
sold under agreements to repurchase
|
|
$
|
101,144
|
|
$
|
54,811
|
|
$
|
20,466
|
|
Federal
funds purchased
|
|
|
1,260
|
|
|
1,607
|
|
|
1,705
|
|
Federal
Home Loan Bank advances
|
|
|
6,284
|
|
|
24,208
|
|
|
18,250
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average interest rates for the year:
|
|
|
|
|
|
|
|
|
|
|
Securities
sold under agreements to repurchase
|
|
|
4.28
|
%
|
|
2.40
|
%
|
|
0.51
|
%
|
Federal
funds purchased
|
|
|
5.26
|
%
|
|
3.51
|
%
|
|
1.43
|
%
|
Federal
Home Loan Bank advances
|
|
|
4.70
|
%
|
|
2.65
|
%
|
|
2.01
|
%
|
At
December 31, 2006, we had no significant commitments for capital expenditures.
However, we are in the process of developing our branch network or other office
facilities in the Nashville 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 MSA.
The
following table presents additional information about our contractual
obligations as of December 31, 2006, which by their terms have contractual
maturity and termination dates subsequent to December 31, 2006 (dollars in
thousands):
|
|
Next
12 months
|
|
13-36
months
|
|
37-60
months
|
|
More
than 60 months
|
|
Totals
|
|
Contractual
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
Certificates
of deposit
|
|
$
|
462,839
|
|
$
|
114,694
|
|
$
|
21,280
|
|
$
|
10
|
|
$
|
598,823
|
|
Securities
sold under agreements to repurchase
|
|
|
141,016
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
141,016
|
|
Federal
Home Loan Bank advances
|
|
|
28,054
|
|
|
25,109
|
|
|
109
|
|
|
454
|
|
|
53,726
|
|
Subordinated
debt
|
|
|
-
|
|
|
10,310
|
|
|
41,238
|
|
|
-
|
|
|
51,548
|
|
Minimum
operating lease commitments
|
|
|
1,223
|
|
|
2,464
|
|
|
2,308
|
|
|
10,329
|
|
|
16,324
|
|
Totals
|
|
$
|
633,132
|
|
$
|
152,577
|
|
$
|
64,935
|
|
$
|
10,793
|
|
$
|
861,437
|
|
Our
management believes that we have adequate liquidity to meet all known
contractual obligations and unfunded commitments, including loan commitments
and
reasonable borrower, depositor, and creditor requirements over the next twelve
months.
Off-Balance
Sheet Arrangements.
At
December 31, 2006, we had outstanding standby letters of credit of $53.0 million
and unfunded loan commitments outstanding of $532.3 million. Because these
commitments generally have fixed expiration dates and many 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 December 31, 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. The
following table presents additional information about our unfunded commitments
as of December 31, 2006, which by their terms have contractual maturity dates
subsequent to December 31, 2006 (dollars in thousands):
|
|
Next
12 months
|
|
13-36
months
|
|
37-60
months
|
|
More
than 60 months
|
|
Totals
|
|
Unfunded
commitments:
|
|
|
|
|
|
|
|
|
|
|
|
Lines
of credit
|
|
$
|
341,751
|
|
$
|
85,698
|
|
$
|
20,923
|
|
$
|
84,011
|
|
$
|
532,383
|
|
Letters
of credit
|
|
|
44,555
|
|
|
8,219
|
|
|
187
|
|
|
-
|
|
|
52,961
|
|
Totals
|
|
$
|
386,306
|
|
$
|
93,917
|
|
$
|
21,110
|
|
$
|
84,011
|
|
$
|
585,344
|
|
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
SFAS
No.
156, “Accounting for Servicing of Financial Assets - an amendment of FASB
Statement No. 140.” SFAS No. 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 No. 156 is effective for fiscal
years beginning after December 15, 2006. We are currently evaluating the impact
of SFAS No. 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. We are 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, 2007. We are currently evaluating the impact of EITF No. 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 EITF also 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 No. 06-5 on its
consolidated financial statements.
SFAS
No.
157, “Fair Value Measurements” - SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements. SFAS No. 157 applies
only
to fair-value measurements that are already required or permitted by other
accounting standards and is expected to increase the consistency of those
measurements. The definition of fair value focuses on the exit price, i.e.,
the
price that would be received to sell an asset or paid to transfer a liability
in
an orderly transaction between market participants at the measurement date,
not
the entry price, i.e., the price that would be paid to acquire the asset or
received to assume the liability at the measurement date. The statement
emphasizes that fair value is a market-based measurement; not an entity-specific
measurement. Therefore, the fair value measurement should be determined based
on
the assumptions that market participants would use in pricing the asset or
liability. The effective date for SFAS No. 157 is for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. We
are
currently evaluating the impact of EITF 06-5 on its consolidated financial
statements.
FASB
Statement No. 158, “An Amendment to Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans” was issued September 29, 2006. SFAS No.
158 requires the recognition on the balance sheet of the overfunded or
underfunded status of a defined benefit postretirement obligation measured
as
the difference between the fair value of plan assets and the benefit obligation.
Recognition of “delayed” items should be considered in other comprehensive
income. The effective date of SFAS No. 158 for public entities is for fiscal
years ending after December 15, 2006. SFAS No. 158 did not have a material
impact on Pinnacle Financial’s 2006 consolidated financial
statements.
In
September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin No. 108, “Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements” (“SAB 108”). SAB 108 provides interpretive guidance on how the
effects of the carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement. The SEC staff believes
that registrants should quantify errors using both the balance sheet and income
statement approach when quantifying a misstatement that, when all relevant
quantitative and qualitative factors are considered, is material. SAB 108 is
effective for Pinnacle Financial’s fiscal year ending December 31, 2006. SAB 108
did not have a material impact on our 2006 consolidated financial
statements.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The
response to this Item is included in Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations, on pages 40 through
44 and is incorporated herein by reference.
ITEM
8. FINANCIAL STATEMENTS
Pinnacle
Financial Partners, Inc. and Subsidiaries
Consolidated
Financial Statements
Table
of Contents
Management
Report on Internal Control Over Financial Reporting
|
46
|
|
|
Report
of Independent Registered Public Accounting Firm
|
47
|
|
|
Report
of Independent Registered Public Accounting Firm
|
48
|
|
|
Consolidated
Financial Statements:
|
|
Consolidated
balance sheets
|
49
|
Consolidated
statements of income
|
50
|
Consolidated
statements of stockholders' equity and comprehensive income
|
51
|
Consolidated
statements of cash flows
|
52
|
Notes
to consolidated financial statements
|
53
|
MANAGEMENT
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The
management of Pinnacle Financial Partners, Inc. is responsible for establishing
and maintaining adequate internal control over financial reporting. Pinnacle
Financial Partners, Inc.’s internal control system was designed to provide
reasonable assurance to the Company’s management and board of directors
regarding the preparation and fair presentation of published financial
statements. All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.
Pinnacle
Financial Partners, Inc.’s management assessed the effectiveness of the
Company’s internal control over financial reporting as of December 31, 2006. In
making this assessment, it used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. In conducting the Pinnacle Financial Partners,
Inc.'s evaluation of the effectiveness of its internal control over financial
reporting, the Company has excluded the acquisition of Cavalry Bancorp, Inc.
(Cavalry), which was completed by Pinnacle Financial Partners, Inc. on March
15,
2006. At the acquisition date, total assets of Cavalry totaled $672
million. Further information concerning the acquisition of Cavalry appears
in Note 2, Merger with Cavalry Bancorp, Inc., to the accompanying audited
consolidated financial statements. Based on our assessment we believe that,
as
of December 31, 2006, the Company’s internal control over financial reporting is
effective based on those criteria.
Pinnacle
Financial Partners, Inc.’s independent registered public accounting firm has
issued an audit report on Pinnacle Financial Partners Inc.’s management’s
assessment of the company’s internal control over financial reporting. This
report appears on page 48 of this Annual Report on Form 10-K.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors
Pinnacle
Financial Partners, Inc.:
We
have
audited the accompanying consolidated balance sheets of Pinnacle Financial
Partners, Inc. and subsidiaries (the Company) as of December 31, 2006 and
2005, and the related consolidated statements of income, stockholders’ equity
and comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2006. These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of
December 31, 2006 and 2005, and the results of its operations and cash
flows for each of the years in the three-year period ended December 31,
2006, in conformity with U.S. generally accepted accounting
principles.
As
discussed in notes 1 and 14 to the consolidated financial statements, in 2006
the Company changed its method of accounting for share-based
payments.
We
also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal
Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated February 20, 2007 expressed an unqualified
opinion on management’s assessment of, and the effective operation of, internal
control over financial reporting.
/s/
KPMG
LLP
Nashville,
Tennessee
February 20,
2007
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board
of Directors and Stockholders
Pinnacle
Financial Partners, Inc.:
We
have
audited management’s assessment, included in the accompanying Report on Internal
Control Over Financial Reporting,
that
Pinnacle Financial Partners, Inc. (the Company) maintained effective internal
control over financial reporting as of December 31, 2006, based on criteria
established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
The
Company’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on
management’s assessment and an opinion on the effectiveness of the Company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures
of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use,
or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that the Company maintained effective internal
control over financial reporting as of December 31, 2006, is fairly stated,
in all material respects, based on criteria established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
Also,
in
our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal
Control—Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
The
Company acquired Cavalry Bancorp, Inc. (Cavalry) on March 15, 2006. Total assets
of Cavalry at the acquisition date totaled $672 million. Management excluded
Cavalry’s internal control over financial reporting from its assessment of the
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2006. Our audit of internal control over financial reporting of
the
Company also excluded an evaluation of the internal control over financial
reporting of Cavalry.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company
as of December 31, 2006 and 2005, and the related consolidated statements
of income, stockholders’ equity and comprehensive income, and cash flows for
each of the years in the three-year period ended December 31, 2006, and our
report dated February 20, 2007 expressed an unqualified opinion on those
consolidated financial statements.
/s/
KPMG
LLP
Nashville,
Tennessee
February 20,
2007
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
December
31,
|
|
ASSETS
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Cash
and noninterest-bearing due from banks
|
|
$
|
43,611,533
|
|
$
|
25,935,948
|
|
Interest-bearing
due from banks
|
|
|
1,041,174
|
|
|
839,960
|
|
Federal
funds sold
|
|
|
47,866,143
|
|
|
31,878,362
|
|
Cash
and cash equivalents
|
|
|
92,518,850
|
|
|
58,654,270
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale, at fair value
|
|
|
319,237,428
|
|
|
251,749,094
|
|
Securities
held-to-maturity (fair value of $26,594,235 and $26,546,297 at December
31, 2006 and December 31, 2005, respectively)
|
|
|
27,256,876
|
|
|
27,331,251
|
|
Mortgage
loans held-for-sale
|
|
|
5,654,381
|
|
|
4,874,323
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
1,497,734,824
|
|
|
648,024,032
|
|
Less
allowance for loan losses
|
|
|
(16,117,978
|
)
|
|
(7,857,774
|
)
|
Loans,
net
|
|
|
1,481,616,846
|
|
|
640,166,258
|
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
36,285,796
|
|
|
12,915,595
|
|
Investments
in unconsolidated subsidiaries and other entities
|
|
|
16,200,684
|
|
|
6,622,645
|
|
Accrued
interest receivable
|
|
|
11,019,173
|
|
|
4,870,197
|
|
Goodwill
|
|
|
114,287,640
|
|
|
-
|
|
Core
deposit intangible
|
|
|
11,385,006
|
|
|
-
|
|
Other
assets
|
|
|
26,724,183
|
|
|
9,588,097
|
|
Total
assets
|
|
$
|
2,142,186,863
|
|
$
|
1,016,771,730
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
Non-interest-bearing
|
|
|
300,977,814
|
|
|
155,811,214
|
|
Interest-bearing
|
|
|
236,674,425
|
|
|
72,520,757
|
|
Savings
and money market accounts
|
|
|
485,935,897
|
|
|
304,161,625
|
|
Time
|
|
|
598,823,167
|
|
|
277,657,129
|
|
Total
deposits
|
|
|
1,622,411,303
|
|
|
810,150,725
|
|
Securities
sold under agreements to repurchase
|
|
|
141,015,761
|
|
|
65,834,232
|
|
Federal
Home Loan Bank advances
|
|
|
53,725,833
|
|
|
41,500,000
|
|
Subordinated
debt
|
|
|
51,548,000
|
|
|
30,929,000
|
|
Accrued
interest payable
|
|
|
4,952,422
|
|
|
1,884,596
|
|
Other
liabilities
|
|
|
12,516,523
|
|
|
3,036,752
|
|
Total
liabilities
|
|
|
1,886,169,842
|
|
|
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; 15,446,074
issued
and outstanding at December 31, 2006 and 8,426,551 issued and outstanding
at December 31, 2005
|
|
|
15,446,074
|
|
|
8,426,551
|
|
Additional
paid-in capital
|
|
|
211,502,516
|
|
|
44,890,912
|
|
Unearned
compensation
|
|
|
-
|
|
|
(169,689
|
)
|
Retained
earnings
|
|
|
31,109,324
|
|
|
13,182,291
|
|
Accumulated
other comprehensive loss net of taxes
|
|
|
(2,040,893
|
)
|
|
(2,893,640
|
)
|
Total
stockholders’ equity
|
|
|
256,017,021
|
|
|
63,436,425
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
2,142,186,863
|
|
$
|
1,016,771,730
|
|
See
accompanying notes to consolidated financial statements.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
|
For
the years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Interest
income:
|
|
|
|
|
|
|
|
Loans,
including fees
|
|
$
|
92,005,602
|
|
$
|
35,166,671
|
|
$
|
19,909,900
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
12,614,623
|
|
|
9,086,134
|
|
|
6,935,902
|
|
Tax-exempt
|
|
|
2,016,044
|
|
|
1,115,486
|
|
|
490,757
|
|
Federal
funds sold and other
|
|
|
3,059,750
|
|
|
939,369
|
|
|
342,470
|
|
Total
interest income
|
|
|
109,696,019
|
|
|
46,307,660
|
|
|
27,679,029
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
40,032,020
|
|
|
13,690,649
|
|
|
5,829,395
|
|
Securities
sold under agreements to repurchase
|
|
|
4,329,327
|
|
|
1,315,122
|
|
|
104,085
|
|
Federal
funds purchased and other borrowings
|
|
|
4,381,878
|
|
|
2,263,851
|
|
|
1,481,072
|
|
Total
interest expense
|
|
|
48,743,225
|
|
|
17,269,622
|
|
|
7,414,552
|
|
Net
interest income
|
|
|
60,952,794
|
|
|
29,038,038
|
|
|
20,264,477
|
|
Provision
for loan losses
|
|
|
3,732,032
|
|
|
2,151,966
|
|
|
2,948,423
|
|
Net
interest income after provision for loan losses
|
|
|
57,220,762
|
|
|
26,886,072
|
|
|
17,316,054
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
4,645,685
|
|
|
977,386
|
|
|
955,851
|
|
Investment
sales commissions
|
|
|
2,463,205
|
|
|
1,835,757
|
|
|
1,656,743
|
|
Insurance
sales commissions
|
|
|
2,122,702
|
|
|
-
|
|
|
-
|
|
Gains
on loans and loan participations sold
|
|
|
1,868,184
|
|
|
1,247,898
|
|
|
1,274,331
|
|
Trust
fees
|
|
|
1,180,839
|
|
|
-
|
|
|
-
|
|
Gains
on sales of investment securities, net
|
|
|
-
|
|
|
114,410
|
|
|
357,196
|
|
Other
noninterest income
|
|
|
3,505,903
|
|
|
1,218,123
|
|
|
734,449
|
|
Total
noninterest income
|
|
|
15,786,518
|
|
|
5,393,574
|
|
|
4,978,570
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
27,469,275
|
|
|
13,130,779
|
|
|
9,046,490
|
|
Equipment
and occupancy
|
|
|
7,521,602
|
|
|
3,766,593
|
|
|
2,405,613
|
|
Marketing
and other business development
|
|
|
1,234,497
|
|
|
698,232
|
|
|
606,841
|
|
Postage
and supplies
|
|
|
1,510,048
|
|
|
618,060
|
|
|
492,254
|
|
Amortization
of core deposit intangible
|
|
|
1,783,230
|
|
|
-
|
|
|
-
|
|
Other
noninterest expense
|
|
|
5,469,777
|
|
|
2,818,352
|
|
|
2,252,233
|
|
Merger
related expense
|
|
|
1,635,831
|
|
|
-
|
|
|
-
|
|
Total
noninterest expense
|
|
|
46,624,260
|
|
|
21,032,016
|
|
|
14,803,431
|
|
Net
income before income taxes
|
|
|
26,383,020
|
|
|
11,247,630
|
|
|
7,491,193
|
|
Income
tax expense
|
|
|
8,455,987
|
|
|
3,192,362
|
|
|
2,172,283
|
|
Net
income
|
|
$
|
17,927,033
|
|
$
|
8,055,268
|
|
$
|
5,318,910
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share information:
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per common share
|
|
$
|
1.28
|
|
$
|
0.96
|
|
$
|
0.69
|
|
Diluted
net income per common share
|
|
$
|
1.18
|
|
$
|
0.85
|
|
$
|
0.61
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
13,954,077
|
|
|
8,408,663
|
|
|
7,750,943
|
|
Diluted
|
|
|
15,156,837
|
|
|
9,464,500
|
|
|
8,698,139
|
|
See
accompanying notes to consolidated financial statements.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
AND
COMPREHENSIVE INCOME
For
the
each of the years in the three-year period ended December 31,
2006
|
|
Common
Stock
|
|
Additional
Paid-in
|
|
Unearned
|
|
Retained
Earnings
(Accumulated)
|
|
Accumulated
Other
Comprehensive
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Compensation
|
|
Deficit)
|
|
Income
(Loss)
|
|
Equity
|
|
Balances,
December 31, 2003
|
|
|
7,384,106
|
|
$
|
7,384,106
|
|
$
|
26,990,894
|
|
$
|
-
|
|
$
|
(189,155
|
)
|
$
|
150,536
|
|
$
|
34,336,381
|
|
Exercise
of employee incentive common stock options and related tax
benefits
|
|
|
23,780
|
|
|
23,780
|
|
|
94,333
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
118,113
|
|
Proceeds
from the sale of common stock (less offering expenses of
$1,357,833)
|
|
|
977,500
|
|
|
977,500
|
|
|
17,214,667
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
18,192,167
|
|
Issuance
of restricted common shares pursuant to 2004 Equity Incentive
Plan
|
|
|
3,846
|
|
|
3,846
|
|
|
76,413
|
|
|
(80,259
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Compensation
expense for restricted shares
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
43,009
|
|
|
-
|
|
|
-
|
|
|
43,009
|
|
Dividends
paid to minority interest shareholders of PNFP Properties,
Inc.
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,732
|
)
|
|
-
|
|
|
(2,732
|
)
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,318,910
|
|
|
-
|
|
|
5,318,910
|
|
Net
unrealized holding losses on available-for-sale securities, net of
deferred tax benefit of $77,023
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(125,673
|
)
|
|
(125,673
|
)
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,193,237
|
|
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 incentive common stock options and related tax
benefits
|
|
|
20,953
|
|
|
20,953
|
|
|
153,808
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
174,761
|
|
Issuance
of restricted common shares pursuant to 2004 Equity Incentive
Plan
|
|
|
16,366
|
|
|
16,366
|
|
|
360,797
|
|
|
(377,163
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Compensation
expense for restricted shares
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
244,724
|
|
|
-
|
|
|
-
|
|
|
244,724
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8,055,268
|
|
|
-
|
|
|
8,055,268
|
|
Net
unrealized holding losses on available-for-sale securities, net of
deferred tax benefit of $1,788,761
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,918,503
|
)
|
|
(2,918,503
|
)
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,136,765
|
|
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 123(R)
|
|
|
-
|
|
|
-
|
|
|
(169,689
|
)
|
|
169,689
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercise
of employee incentive common stock options and related tax
benefits
|
|
|
130,168
|
|
|
130,168
|
|
|
1,240,724
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,370,892
|
|
Issuance
of restricted common shares pursuant to 2004 Equity Incentive
Plan
|
|
|
22,057
|
|
|
22,057
|
|
|
(22,057
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Exercise
of director common stock warrants
|
|
|
11,000
|
|
|
11,000
|
|
|
44,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
55,000
|
|
Compensation
expense for restricted shares
|
|
|
-
|
|
|
-
|
|
|
465,003
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
465,003
|
|
Compensation
expense for stock options
|
|
|
-
|
|
|
-
|
|
|
1,009,958
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,009,958
|
|
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
|
)
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
17,927,033
|
|
|
-
|
|
|
17,927,033
|
|
Net
unrealized holding gains on available-for-sale securities, net of
deferred
tax expense of $521,886
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
852,747
|
|
|
852,747
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,779,780
|
|
Balances,
December 31, 2006
|
|
|
15,446,074
|
|
$
|
15,446,074
|
|
$
|
211,502,516
|
|
$
|
-
|
|
$
|
31,109,324
|
|
$
|
(2,040,893
|
)
|
$
|
256,017,021
|
|
See
accompanying notes to consolidated financial statements.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For
the years ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Operating
activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
17,927,033
|
|
$
|
8,055,268
|
|
$
|
5,318,910
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Net
amortization of premiums on securities
|
|
|
629,634
|
|
|
1,130,766
|
|
|
1,050,687
|
|
Depreciation
and net amortization
|
|
|
1,382,401
|
|
|
1,699,380
|
|
|
1,204,446
|
|
Provision
for loan losses
|
|
|
3,732,032
|
|
|
2,151,966
|
|
|
2,948,423
|
|
Gains
on sales of investment securities, net
|
|
|
-
|
|
|
(114,410
|
)
|
|
(357,196
|
)
|
Gain
on loans and loan participations sold, net
|
|
|
(1,868,184
|
)
|
|
(1,247,898
|
)
|
|
(1,274,331
|
)
|
Stock-based
compensation expense
|
|
|
1,474,961
|
|
|
244,724
|
|
|
43,009
|
|
Deferred
tax benefit
|
|
|
(1,164,336
|
)
|
|
(575,755
|
)
|
|
(922,286
|
)
|
Tax
benefit on exercise of stock awards
|
|
|
-
|
|
|
(50,535
|
)
|
|
(1,912
|
)
|
Excess
tax benefit from stock compensation
|
|
|
(131,121
|
)
|
|
-
|
|
|
-
|
|
Mortgage
loans held for sale:
|
|
|
|
|
|
|
|
|
|
|
Loans
originated
|
|
|
(131,971,094
|
)
|
|
(102,874,134
|
)
|
|
(69,020,758
|
)
|
Loans
sold
|
|
|
134,301,622
|
|
|
100,730,532
|
|
|
70,009,143
|
|
Increase
in other assets
|
|
|
(6,103,122
|
)
|
|
(3,155,825
|
)
|
|
(1,399,138
|
)
|
Increase
(decrease) in other liabilities
|
|
|
(6,303,665
|
)
|
|
2,177,477
|
|
|
(856,925
|
)
|
Net
cash provided by operating activities
|
|
|
11,906,161
|
|
|
8,171,556
|
|
|
6,742,072
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
|
Activities
in available for sale securities:
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(62,760,686
|
)
|
|
(116,361,069
|
)
|
|
(132,755,709
|
)
|
Sales
|
|
|
-
|
|
|
6,791,867
|
|
|
28,461,405
|
|
Maturities,
prepayments and calls
|
|
|
35,568,504
|
|
|
32,935,215
|
|
|
35,172,378
|
|
Increase
in loans, net
|
|
|
(297,565,733
|
)
|
|
(175,606,019
|
)
|
|
(176,375,116
|
)
|
Purchases
of premises and equipment and software
|
|
|
(4,649,676
|
)
|
|
(3,438,916
|
)
|
|
(5,144,869
|
)
|
Cash
and cash equivalents acquired in merger with Cavalry Bancorp, Inc.,
net of
acquisition costs
|
|
|
36,230,539
|
|
|
-
|
|
|
-
|
|
Purchases
of other assets
|
|
|
(6,107,658
|
)
|
|
(2,708,000
|
)
|
|
(881,719
|
)
|
Net
cash used in investing activities
|
|
|
(299,284,710
|
)
|
|
(258,386,922
|
)
|
|
(251,523,630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
229,745,145
|
|
|
239,423,716
|
|
|
180,157,997
|
|
Net
increase in repurchase agreements
|
|
|
75,181,529
|
|
|
33,906,372
|
|
|
16,877,750
|
|
Federal
Home Loan Bank:
|
|
|
|
|
|
|
|
|
|
|
Issuances
|
|
|
56,000,000
|
|
|
62,000,000
|
|
|
48,000,000
|
|
Payments
|
|
|
(61,540,828
|
)
|
|
(74,000,000
|
)
|
|
(39,000,000
|
)
|
Proceeds
from issuance of subordinated debt
|
|
|
20,619,000
|
|
|
20,619,000
|
|
|
-
|
|
Net
proceeds from sale of common stock
|
|
|
-
|
|
|
-
|
|
|
18,192,167
|
|
Exercise
of common stock warrants
|
|
|
55,000
|
|
|
-
|
|
|
-
|
|
Exercise
of common stock options
|
|
|
1,239,771
|
|
|
174,761
|
|
|
118,113
|
|
Excess
tax benefit from stock compensation
|
|
|
131,121
|
|
|
-
|
|
|
-
|
|
Costs
incurred in connection with registration of common stock issued in
merger
|
|
|
(187,609
|
)
|
|
-
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
-
|
|
|
(2,732
|
)
|
Net
cash provided by financing activities
|
|
|
321,243,129
|
|
|
282,123,849
|
|
|
224,343,295
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
33,864,580
|
|
|
31,908,483
|
|
|
(20,438,263
|
)
|
Cash
and cash equivalents, beginning of period
|
|
|
58,654,270
|
|
|
26,745,787
|
|
|
47,184,050
|
|
Cash
and cash equivalents, end of period
|
|
$
|
92,518,850
|
|
$
|
58,654,270
|
|
$
|
26,745,787
|
|
See
accompanying notes to consolidated financial statements.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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,
PNFP Statutory Trust III and Collateral Plus, LLC, are affiliates of Pinnacle
Financial and 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 include 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 for the excess of the carrying amount
over the fair value of the asset. Assets to be disposed of are 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 is as of September 30 such
that the assessment will be completed during the fourth quarter of each year.
Should we determine in a future period that the goodwill recorded in connection
with our acquisition of Cavalry Bancorp, Inc. (“Cavalry”) has been impaired,
then a charge to our earnings will be recorded in the period such determination
is made.
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 each of the years in the three-year period ended
December 31, 2006 as follows:
|
|
For
the years ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Cash
Payments:
|
|
|
|
Interest
|
|
$
|
50,752,304
|
|
$
|
16,154,326
|
|
$
|
7,252,494
|
|
Income
taxes
|
|
|
8,280,000
|
|
|
3,802,633
|
|
|
3,681,817
|
|
Noncash
Transactions:
|
|
|
|
|
|
|
|
|
|
|
Common
stock and options issued to acquire Cavalry Bancorp, Inc. (see note
2)
|
|
|
171,087,572
|
|
|
-
|
|
|
-
|
|
Transfers
of available-for-sale securities to held-to-maturity
|
|
|
-
|
|
|
-
|
|
|
27,655,669
|
|
Loans
charged-off to the allowance for loan losses
|
|
|
818,467
|
|
|
207,647
|
|
|
1,032,378
|
|
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Securities
—
Securities are classified based on management’s intention on the date of
purchase. All debt securities classified as available-for-sale are recorded
at
fair value with any unrealized gains and losses reported in accumulated other
comprehensive income (loss), net of the deferred income tax effects. Securities
that Pinnacle Financial has both the positive intent and ability to hold to
maturity are classified as held to maturity and are carried at historical cost
and adjusted for amortization of premiums and accretion of discounts.
A
decline
in the fair value of any available-for-sale or held-to-maturity security below
cost that is deemed to be other-than-temporary results in a reduction in
carrying amount to fair value. The impairment is charged to earnings and a
new
cost basis for the security is established. To determine whether impairment
is
other-than-temporary, management considers whether it has the ability and intent
to hold the investment until a market price recovery and considers whether
evidence indicating the cost of the investment is recoverable outweighs evidence
to the contrary. Evidence considered in this assessment includes the reasons
for
the impairment, the severity and duration of the impairment, changes in value
subsequent to year-end and forecasted performance of the investee.
Interest
and dividends on securities, including amortization of premiums and accretion
of
discounts calculated under the effective interest method, are included in
interest income. For certain securities, amortization of premiums and accretion
of discounts is computed based on the anticipated life of the security which
may
not be the stated life of the security. Realized gains and losses from the
sale
of securities are determined using the specific identification method.
Loans
Held for Sale —
Loans
originated and intended for sale are carried at the lower of cost or estimated
fair value as determined on a loan-by-loan basis. Net unrealized losses, if
any,
are recognized through a valuation allowance by charges to income. Realized
gains and losses are recognized when legal title to the loans has been
transferred to the purchaser and payments have been received and are reflected
in the accompanying consolidated statement of income in gains on the sale of
loans and loan participations sold.
Loans
—
Loans
are reported at their outstanding principal balances less unearned income,
the
allowance for loan losses and any deferred fees or costs on originated loans.
Interest income on loans is accrued based on the principal balance outstanding.
Loan origination fees, net of certain loan origination costs, are deferred
and
recognized as an adjustment to the related loan yield using a method which
approximates the interest method. At December 31, 2006 and 2005, net deferred
loan fees of $3,393,000 and net deferred costs of $111,000, respectively, were
included in loans on the accompanying consolidated balance sheets. Net deferred
loan fees at December 31, 2006 includes the unamortized discount of $3,206,000
assigned to the loan portfolio acquired from the Cavalry acquisition as more
fully discussed in “Note 2 - Merger with Cavalry Bancorp, Inc.”
The
accrual of interest on loans is discontinued when there is a significant
deterioration in the financial condition of the borrower and full repayment
of
principal and interest is not expected or the principal or interest is more
than
90 days past due, unless the loan is both well-secured and in the process of
collection. Generally, all interest accrued but not collected for loans that
are
placed on nonaccrual status is reversed against current income. Interest income
is subsequently recognized only to the extent cash payments are received.
The
allowance for loan losses is maintained at a level that management believes
to
be adequate to absorb losses inherent in the loan portfolio. Loan losses are
charged against the allowance when they are known. Subsequent recoveries are
credited to the allowance. Management’s determination of the adequacy of the
allowance is based on an evaluation of the portfolio, current economic
conditions, volume, growth, composition of the loan portfolio, homogeneous
pools
of loans, risk ratings of specific loans, historical loan loss factors,
identified impaired loans and other factors related to the portfolio. This
evaluation is performed quarterly and is inherently subjective, as it requires
material estimates that are susceptible to significant change including the
amounts and timing of future cash flows expected to be received on any impaired
loans. In addition, regulatory agencies, as an integral part of their
examination process, will periodically review Pinnacle Financial’s allowance for
loan losses, and may require Pinnacle Financial to record adjustments to the
allowance based on their judgment about information available to them at the
time of their examinations.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
A
loan is
considered to be impaired when it is probable Pinnacle Financial will be unable
to collect all principal and interest payments due in accordance with the
contractual terms of the loan agreement. Individually identified impaired loans
are measured based on the present value of expected payments using the loan’s
original effective rate as the discount rate, the loan’s observable market
price, or the fair value of the collateral if the loan is collateral dependent.
If the recorded investment in the impaired loan exceeds the measure of fair
value, a valuation allowance may be established as a component of the allowance
for loan losses. Changes to the valuation allowance are recorded as a component
of the provision for loan losses.
Transfers
of Financial Assets —
Transfers of financial assets are accounted for as sales when control over
the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from Pinnacle Financial,
(2) the transferee obtains the right (free of conditions that constrain it
from taking advantage of that right) to pledge or exchange the transferred
assets, and (3) Pinnacle Financial does not maintain effective control over
the transferred assets through an agreement to repurchase them before maturity.
Premises
and Equipment and Leaseholds —
Premises and equipment are carried at cost less accumulated depreciation
computed principally by the straight-line method over the estimated useful
lives
of the assets or the expected lease terms for leasehold improvements, whichever
is shorter. Useful lives for all premises and equipment range between three
and
thirty years.
Pinnacle
National is the lessee with respect to several office locations. All such leases
are being accounted for as operating leases within the accompanying consolidated
financial statements. Several of these leases include rent escalation clauses.
Pinnacle National expenses the costs associated with these escalating payments
over the life of the expected lease term using the straight-line method. At
December 31, 2006, the deferred liability associated with these escalating
rentals was approximately $503,000 and is included in other liabilities in
the
accompanying consolidated balance sheets.
Investments
in unconsolidated subsidiaries and other entities —
In
addition to investments in unconsolidated subsidiaries, Pinnacle Financial
maintains certain investments, at cost, with certain regulatory and other
entities in which Pinnacle Financial has an ongoing business relationship.
These
entities are the Federal Reserve Bank of Atlanta, the Bankers’ Bank of Atlanta
and the Federal Home Loan Bank of Cincinnati. At December 31, 2006 and
2005, the cost of these investments was $12,794,000 and $4,598,000,
respectively. Pinnacle Financial determined that it is not practicable to
estimate the fair value of these investments. Pinnacle Financial has not
observed any events or changes in circumstances that would have had an adverse
effect on the fair value of the investment. Such investments are reflected
in
the accompanying consolidated balance sheets in investments in unconsolidated
subsidiaries and other entities.
Securities
sold under agreements to repurchase —
Pinnacle National routinely sells securities to certain treasury management
customers and then repurchases these securities the next day. Securities sold
under agreements to repurchase are reflected as a secured borrowing in the
accompanying consolidated balance sheets at the amount of cash received in
connection with each transaction.
Other
Assets —
Included in other assets as of December 31, 2006 and 2005, is approximately
$765,000 and $742,000, respectively, of computer software related assets, net
of
amortization. This software supports Pinnacle Financial’s primary data systems
and relates to amounts paid to vendors for installation and development of
such
systems. These amounts are amortized on a straight-line basis over periods
of
three to seven years. For the years ended December 31, 2006, 2005 and 2004,
Pinnacle Financial’s amortization expense was approximately $281,000, $272,000
and $162,000, respectively. Software maintenance fees are capitalized in other
assets and amortized over the term of the maintenance agreement.
Included
in other assets at December 31, 2006 is $995,000 of other real estate owned
(OREO). Pinnacle National had no OREO at December 31, 2005. OREO represents
properties acquired by Pinnacle National through loan defaults by customers.
The
property is recorded at the lower of cost or fair value minus estimated costs
to
sell at the date acquired. An allowance for losses on OREO may be maintained
for
subsequent valuation adjustments on a specific property basis, when necessary.
Any gains or losses realized at the time of disposal are reflected in
income.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Pinnacle
National is the owner and beneficiary of
various life insurance policies on certain key executives, including policies
that were acquired in its merger with Cavalry. These policies are reflected
in
the accompanying consolidated balance sheets at their respective cash surrender
values. At December 31, 2006 and 2005, the aggregate cash surrender value of
these policies, which is reflected in other assets, was $14,802,000 and
$2,084,000, respectively.
Also
included in other assets at December 31, 2006 and 2005 is $770,000 and $477,000,
respectively, which is related to loan participations which have been sold
to
correspondent banks. These amounts represent the present value, net of
amortization, of the future net cash flows retained by Pinnacle Financial.
These
amounts are amortized against net interest income over the life of the loan.
Amortization of these amounts was $127,000, $165,000 and $199,000 for the years
ended December 31, 2006, 2005 and 2004, respectively.
Trust
Fees - Trust
fees are recognized when earned.
Insurance
Sales Commissions - Insurance
sales commissions are recognized as of the effective date of the policy and
when
the premium due under the policy can be reasonably estimated and when the
premium is billable to the client, less a provision for commission refunds
in
the event of policy cancellation prior to termination date.
Income
Taxes —
Income
tax expense consists of current and deferred taxes. Current income tax
provisions approximate taxes to be paid or refunded for the applicable year.
Deferred income tax assets and liabilities are determined using the balance
sheet method. Under this method, the net deferred tax asset or liability is
determined based on the tax effects of the differences between the book and
tax
bases of the various balance sheet assets and liabilities and gives current
recognition to changes in tax rates and laws. Accordingly, the resulting net
deferred tax asset or net deferred tax liability is included in the accompanying
consolidated balance sheets in either other assets or other liabilities.
Recognition
of deferred tax assets is based on management’s belief that it is more likely
than not that the tax benefit associated with certain temporary differences,
tax
operating loss carryforwards and tax credits will be realized. A valuation
allowance is recorded for those deferred tax assets for which it is more likely
than not that realization will not occur.
Pinnacle
Financial and its wholly-owned subsidiaries file a consolidated income tax
return. Each entity provides for income taxes based on its contribution to
income or loss of the consolidated group.
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, warrants
and restricted shares. The dilutive effect of outstanding options, warrants
and
restricted shares is reflected in diluted earnings per share by application
of
the treasury stock method.
As
of
December 31, 2006 and 2005, there were common stock options outstanding to
purchase 1,658,000 and 1,242,000 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
years in the three year period ended December 31, 2006. There were common stock
options of 287,000, and 21,000 outstanding as of December 31, 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
December 31, 2006, 2005 and 2004, Pinnacle Financial had outstanding warrants
to
purchase 395,000, 406,000 and 406,000, respectively, of common shares which
have
been considered in the calculation of Pinnacle Financial’s diluted income per
share for each of the years in the three-year period ended December 31, 2006.
The
following is a summary of the basic and diluted earnings per share calculation
for each of the years in the three-year period ended December 31,
2006:
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
2006
|
|
2005
|
|
2004
|
|
Basic
earnings per share calculation:
|
|
|
|
|
|
|
|
Numerator
-
Net income
|
|
$
|
17,927,033
|
|
$
|
8,055,268
|
|
$
|
5,318,910
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
-
Average common shares outstanding
|
|
|
13,954,077
|
|
|
8,408,663
|
|
|
7,750,943
|
|
Basic
net income per share
|
|
$
|
1.28
|
|
$
|
0.96
|
|
$
|
0.69
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share calculation:
|
|
|
|
|
|
|
|
|
|
|
Numerator
-
Net income
|
|
$
|
17,927,033
|
|
$
|
8,055,268
|
|
$
|
5,318,910
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
-
Average common shares outstanding
|
|
|
13,954,077
|
|
|
8,408,663
|
|
|
7,750,943
|
|
Dilutive
shares contingently issuable
|
|
|
1,202,760
|
|
|
1,055,837
|
|
|
947,196
|
|
Average
diluted common shares outstanding
|
|
|
15,156,837
|
|
|
9,464,500
|
|
|
8,698,139
|
|
Diluted
net income per share
|
|
$
|
1.18
|
|
$
|
0.85
|
|
$
|
0.61
|
|
Stock-Based
Compensation —
On
January 1, 2006, Pinnacle Financial adopted Statement of Financial
Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment”
(“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,
(“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
year
ended December 31, 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 14 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 are 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 January 1, 2006
and
for the stock-based awards granted after January 1, 2006, 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 14 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.
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
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
|
|
|
114,287,640
|
|
Core
deposit intangible
|
|
|
13,168,236
|
|
Other
assets
|
|
|
42,936,956
|
|
Total
assets acquired
|
|
|
792,887,587
|
|
|
|
|
|
|
Deposits
|
|
|
583,992,422
|
|
Federal
Home Loan Bank advances
|
|
|
17,766,661
|
|
Other
liabilities
|
|
|
18,851,261
|
|
Total
liabilities assumed
|
|
|
620,610,344
|
|
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 December 31,
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 investment
banking fees, attorney’s fees and other costs related to the acquisition which
have been accounted for as a component of the purchase price. Pinnacle Financial
issued 6,856,298 shares of Pinnacle Financial common stock to the former Cavalry
shareholders. In accordance with EITF No. 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.
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
year ended December 31, 2006, approximately $1.8 million 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 $2.9 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 are being amortized into our
statements of income using a method that approximates the level yield method
over the anticipated
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
lives
of
the underlying financial assets or liabilities. For the year ended December
31,
2006, the accretion of the fair value discounts related to the acquired loans
and certificates of deposit increased net interest income by approximately
$3.7
million. 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 $4.0 million in
subsequent years.
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. At March 15, 2006, Pinnacle Financial
identified $3.9 million in loans to which the application of the provisions
of
SOP 03-03 was required. 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, thus reducing the carrying value of these loans to
$2.9 million as of March 15, 2006. At December 31, 2006, the carrying value
of
these loans had been reduced to $2.6 million due to cash payments received
from
the borrowers.
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).
|
|
Year
ended December 31,
|
|
|
|
2006
|
|
2005(1)
|
|
Pro
Forma Income Statements:
|
|
|
|
|
|
Net
interest income
|
|
$
|
65,071
|
|
$
|
56,932
|
|
Provision
for loan losses
|
|
|
4,713
|
|
|
2,880
|
|
Noninterest
income
|
|
|
18,183
|
|
|
17,726
|
|
Noninterest
expense (2):
|
|
|
|
|
|
|
|
Compensation
|
|
|
30,250
|
|
|
27,544
|
|
Other
noninterest expense
|
|
|
19,988
|
|
|
19,918
|
|
Net
income before taxes
|
|
|
28,303
|
|
|
24,316
|
|
Income
tax expense
|
|
|
10,005
|
|
|
7,706
|
|
Net
income
|
|
$
|
18,298
|
|
$
|
16,610
|
|
|
|
|
|
|
|
|
|
Pro
Forma Per Share Information:
|
|
|
|
|
|
|
|
Basic
net income per common share
|
|
$
|
1.23
|
|
$
|
1.09
|
|
Diluted
net income per common share
|
|
$
|
1.14
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
14,840,326
|
|
|
15,265,350
|
|
Diluted
|
|
|
16,043,087
|
|
|
16,426,733
|
|
(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 pro
forma
net income for the year ended December 31, 2005 by $427,000 resulting
in
pro forma net income of $16,184,000 or $1.06 per basic share and
$0.99 per
fully-diluted share.
|
(2) |
In
preparation and as a result of the merger during 2006, Cavalry and
Pinnacle Financial incurred significant merger related charges of
approximately $11.7 million in the aggregate, primarily for severance
benefits, accelerated vesting of defined compensation agreements,
investment banker fees, etc. Including these charges would have decreased
pro forma net income for year ended December 31, 2006 by $7.08 million
resulting in net income of $11,217,000 and a basic and fully diluted
pro
forma net income per share of $0.76 and $0.70,
respectively.
|
During
the year ended December 31, 2006, Pinnacle Financial incurred merger integration
expense related to the merger with Cavalry of $1,636,000. 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
Note
3. Restricted Cash Balances
Regulation
D of the Federal Reserve Act requires that banks maintain reserve balances
with
the Federal Reserve Bank based principally on the type and amount of their
deposits. At its option, Pinnacle Financial maintains additional balances to
compensate for clearing and other services. For the years ended December 31,
2006 and 2005, the average daily balance maintained at the Federal Reserve
was
approximately $600,000 and $593,000, respectively.
Note
4. Securities
The
amortized cost and fair value of securities available-for-sale and
held-to-maturity at December 31, 2006 and 2005 are summarized as
follows:
|
|
December
31, 2006
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized Gains
|
|
Gross
Unrealized Losses
|
|
Fair
Value
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
U.S.
Government agency securities
|
|
|
38,076,428
|
|
|
9,739
|
|
|
457,321
|
|
|
37,628,846
|
|
Mortgage-backed
securities
|
|
|
220,397,093
|
|
|
455,203
|
|
|
3,028,241
|
|
|
217,824,055
|
|
State
and municipal securities
|
|
|
62,215,952
|
|
|
131,412
|
|
|
388,124
|
|
|
61,959,240
|
|
Corporate
notes
|
|
|
1,887,475
|
|
|
-
|
|
|
62,188
|
|
|
1,825,287
|
|
|
|
$
|
322,576,948
|
|
$
|
596,354
|
|
$
|
3,935,874
|
|
$
|
319,237,428
|
|
Securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agency securities
|
|
$
|
17,747,278
|
|
$
|
-
|
|
$
|
378,528
|
|
$
|
17,368,700
|
|
State
and municipal securities
|
|
|
9,509,648
|
|
|
-
|
|
|
284,113
|
|
|
9,225,535
|
|
|
|
$
|
27,256,876
|
|
$
|
-
|
|
$
|
662,641
|
|
$
|
26,594,235
|
|
|
|
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
|
|
Pinnacle
Financial realized approximately $114,000 in net gains from the sale of
$6,792,000 of available-for-sale securities during the year ended December
31,
2005. There were no losses on the sale of securities during the year ended
December 31, 2005. Pinnacle Financial realized $357,000 in net gains on the
sale
of $28,461,000 of available-for-sale securities during the year ended December
31, 2004. During the year ended December 31, 2004, gross realized gains amounted
to $421,000 on the sale of $14.5 million of available-for-sale securities while
gross realized losses amounted to $64,000 on the sale of $13.9 million of
available-for-sale securities.
At
December 31, 2006, approximately $275,464,000 of Pinnacle Financial’s
available-for-sale portfolio was 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
The
amortized cost and fair value of debt securities as of December 31, 2006 by
contractual maturity are shown below. Actual maturities may differ from
contractual maturities of mortgage-backed securities since the mortgages
underlying the securities may be called or prepaid with or without penalty.
Therefore, these securities are not included in the maturity categories in
the
following summary.
|
|
Available-for-sale
|
|
Held-to-maturity
|
|
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Fair
Value
|
|
Due
in one year or less
|
|
$
|
2,645,238
|
|
$
|
2,638,716
|
|
$
|
153,894
|
|
$
|
153,633
|
|
Due
in one year to five years
|
|
|
54,183,409
|
|
|
53,652,713
|
|
|
21,527,276
|
|
|
21,029,557
|
|
Due
in five years to ten years
|
|
|
36,609,387
|
|
|
36,372,441
|
|
|
5,575,706
|
|
|
5,411,045
|
|
Due
after ten years
|
|
|
8,741,891
|
|
|
8,749,503
|
|
|
-
|
|
|
-
|
|
Mortgage-backed
securities
|
|
|
220,397,093
|
|
|
217,824,055
|
|
|
-
|
|
|
-
|
|
|
|
$
|
322,576,948
|
|
$
|
319,237,428
|
|
$
|
27,256,876
|
|
$
|
26,594,235
|
|
At
December 31, 2006 and 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
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agency securities
|
|
$
|
-
|
|
$
|
-
|
|
$
|
47,988,246
|
|
$
|
835,849
|
|
$
|
47,988,246
|
|
$
|
835,849
|
|
Mortgage-backed
securities
|
|
|
13,959,080
|
|
|
68,965
|
|
|
149,496,521
|
|
|
2,959,276
|
|
|
163,455,601
|
|
|
3,028,241
|
|
State
and municipal securities
|
|
|
13,975,595
|
|
|
47,071
|
|
|
35,660,379
|
|
|
625,166
|
|
|
49,635,974
|
|
|
672,237
|
|
Corporate
notes
|
|
|
-
|
|
|
-
|
|
|
1,825,286
|
|
|
62,188
|
|
|
1,825,286
|
|
|
62,188
|
|
Total
temporarily-impaired securities
|
|
$
|
27,934,675
|
|
$
|
116,036
|
|
$
|
234,970,432
|
|
$
|
4,482,479
|
|
$
|
262,905,107
|
|
$
|
4,598,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
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.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
5. Loans and Allowance for Loan Losses
The
composition of loans at December 31, 2006 and 2005 is summarized as
follows:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Commercial
real estate - Mortgage
|
|
$
|
284,301,650
|
|
$
|
148,102,053
|
|
Commercial
real estate - Construction
|
|
|
161,903,496
|
|
|
30,295,106
|
|
Commercial
- Other
|
|
|
608,529,830
|
|
|
239,128,969
|
|
Total
Commercial
|
|
|
1,054,734,976
|
|
|
417,526,128
|
|
Consumer
real estate - Mortgage
|
|
|
299,626,769
|
|
|
169,952,860
|
|
Consumer
real estate - Construction
|
|
|
91,193,738
|
|
|
37,371,834
|
|
Consumer
- Other
|
|
|
52,179,341
|
|
|
23,173,210
|
|
Total
Consumer
|
|
|
442,999,848
|
|
|
230,497,904
|
|
Total
Loans
|
|
|
1,497,734,824
|
|
|
648,024,032
|
|
Allowance
for loan losses
|
|
|
(16,117,978
|
)
|
|
(7,857,774
|
)
|
Loans,
net
|
|
$
|
1,481,616,846
|
|
$
|
640,166,258
|
|
Pinnacle
Financial periodically analyzes its commercial loan portfolio to determine
if a
concentration of credit risk exists to any one or more industries. Pinnacle
Financial utilizes broadly accepted industry classification systems in order
to
classify borrowers into various industry classifications. During 2005, Pinnacle
Financial changed from using the Standard Industry Code classification system
to
the North American Industry Classification System. Pinnacle Financial has a
credit exposure (loans outstanding plus unfunded lines of credit) exceeding
25%
of Pinnacle National’s total risk-based capital to borrowers in the following
industries at December 31, 2006 and 2005:
|
|
2006
|
|
2005
|
|
Trucking
industry
|
|
$
|
89,862,000
|
|
$
|
50,421,000
|
|
Lessors
of nonresidential buildings
|
|
|
133,504,000
|
|
|
60,932,000
|
|
Lessors
of residential buildings
|
|
|
65,791,000
|
|
|
17,956,000
|
|
Land
subdividers
|
|
|
164,535,000
|
|
|
37,963,000
|
|
New
housing operative builders
|
|
|
192,373,000
|
|
|
20,740,000
|
|
Changes
in the allowance for loan losses for each of the years in the three-year period
ended December 31, 2006 are as follows:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
7,857,774
|
|
$
|
5,650,014
|
|
$
|
3,718,598
|
|
Charged-off
loans
|
|
|
(818,467
|
)
|
|
(207,647
|
)
|
|
(1,032,378
|
)
|
Recovery
of previously charged-off loans
|
|
|
244,343
|
|
|
263,441
|
|
|
15,371
|
|
Allowance
from Cavalry acquisition (see note 2)
|
|
|
5,102,296
|
|
|
-
|
|
|
-
|
|
Provision
for loan losses
|
|
|
3,732,032
|
|
|
2,151,966
|
|
|
2,948,423
|
|
Balance
at end of period
|
|
$
|
16,117,978
|
|
$
|
7,857,774
|
|
$
|
5,650,014
|
|
At
December 31, 2006 and 2005, Pinnacle Financial had certain impaired loans on
nonaccruing interest status. The principal balance of these nonaccrual loans
amounted to $7,070,000 and $460,000 at December 31, 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 $283,000, $21,000 and $41,000 for each of the years in the
three-year period ended December 31, 2006, respectively. During the three year
period ended December 31, 2006, the average balance of nonaccrual loans was
$2,735,000, $387,000 and $776,000, respectively. As all loans that are deemed
impaired were either on nonaccruing interest status during the entire year
or
were placed on nonaccruing status on the date they were deemed impaired, no
interest income has been recognized on any impaired loans during the three
year
period ended December 31, 2006. At December 31, 2006 and 2005, Pinnacle
Financial did not have an allowance loans considered to be
impaired.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
At
December 31, 2006, Pinnacle Financial had granted loans and other extensions
of
credit amounting to approximately $23,392,000 to certain directors, executive
officers, and their related entities, of which approximately $16,858,000 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. During 2006, $10,640,000 of new loans were made, $120,000
of loans were purchased through the Cavalry Banking, Inc. acquisition, and
repayments totaled $860,000. The terms on these loans and extensions are on
substantially the same terms customary for other persons for the type of loan
involved. None of these loans to certain directors, executive officers, and
their related entities, were impaired at December 31, 2006 or
2005.
During
the three year period ended December 31, 2006, 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 each of the years in the three
year period ended December 31, 2006 of $420,000, $152,000 and $234,000,
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 banks based on their participation in the loan. At December 31
2006, Pinnacle Financial was servicing $106.8 million of loans for correspondent
banks and other entities, of which $95.4 million was commercial
loans.
Note
6. Premises and Equipment and Lease Commitments
Premises
and equipment at December 31, 2006 and 2005 are summarized as
follows:
|
|
Range
of Useful Lives
|
|
2006
|
|
2005
|
|
Land
|
|
|
-
|
|
$
|
9,545,667
|
|
$
|
2,502,524
|
|
Buildings
|
|
|
15
to 30 years
|
|
|
19,849,960
|
|
|
6,767,518
|
|
Leasehold
improvements
|
|
|
15
to 20 years
|
|
|
1,954,028
|
|
|
1,232,973
|
|
Furniture
and equipment
|
|
|
3
to 15 years
|
|
|
21,350,694
|
|
|
5,506,469
|
|
|
|
|
|
|
|
52,700,349
|
|
|
16,009,484
|
|
Accumulated
depreciation
|
|
|
|
|
|
(16,414,553
|
)
|
|
(3,093,889
|
)
|
|
|
|
|
|
$
|
36,285,796
|
|
$
|
12,915,595
|
|
Depreciation
expense was approximately $2,702,000, $997,000 and $657,000 for each of the
years in the three-year period ended December 31, 2006.
Pinnacle
Financial has entered into various operating leases, primarily for office space
and branch facilities. Rent expense related to these leases for 2006, 2005
and
2004 totaled $1,161,000, $950,000 and $636,000, respectively. At December 31,
2006, the approximate future minimum lease payments due under the aforementioned
operating leases for their base term is as follows:
2007
|
|
$
|
1,223,000
|
|
2008
|
|
|
1,248,000
|
|
2009
|
|
|
1,216,000
|
|
2010
|
|
|
1,181,000
|
|
2011
|
|
|
1,127,000
|
|
Thereafter
|
|
|
10,329,000
|
|
|
|
$
|
16,324,000
|
|
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
7.
Deposits
At
December 31, 2006, the scheduled maturities of time deposits are as
follows:
2007
|
|
$
|
462,839,784
|
|
2008
|
|
|
73,778,670
|
|
2009
|
|
|
40,914,883
|
|
2010
|
|
|
13,321,854
|
|
2011
|
|
|
7,957,377
|
|
2012
|
|
|
10,599
|
|
|
|
$
|
598,823,167
|
|
Additionally,
at December 31, 2006 and 2005, approximately $440,136,000 and $246,249,000,
respectively, of time deposits had been issued in denominations of $100,000
or
greater.
At
December 31, 2006, Pinnacle Financial had $1.7 million of deposit accounts
in
overdraft status and thus have been reclassified to loans on the accompanying
consolidated balance sheet.
Note
8. Federal Home Loan Bank Advances and Other Borrowings
Pinnacle
National is a member of the Federal Home Loan Bank of Cincinnati (“FHLB”) and as
a result, Pinnacle National is eligible for advances from the FHLB, pursuant
to
the terms of various borrowing agreements, which assists Pinnacle National
in
the funding of its home mortgage and commercial real estate loan portfolios.
Pinnacle National has pledged certain qualifying residential mortgage loans
and,
pursuant to a blanket lien, all qualifying commercial mortgage loans with an
aggregate carrying value of $122,019,000 as collateral under the borrowing
agreements with the FHLB.
At
December 31, 2006 and 2005, Pinnacle National had received advances from the
FHLB totaling $53,726,000 and $41,500,000, respectively. At December 31, 2006,
the scheduled maturities of these advances and interest rates are as follows:
|
|
Scheduled
Maturities
|
|
Interest
Rate Ranges
|
|
|
|
|
|
|
|
2007
|
|
$
|
28,054,437
|
|
|
3.2%
to 5.4%
|
|
2008
|
|
|
10,054,437
|
|
|
5.0%
|
|
2009
|
|
|
15,054,437
|
|
|
5.0%
|
|
2010-2019
|
|
|
562,515
|
|
|
2.3%
|
|
|
|
$
|
53,725,833
|
|
|
|
|
Weighted
average interest rate
|
|
|
|
|
|
5.0%
|
|
At
December 31, 2006, Pinnacle National has accommodations which allow it to
purchase Federal funds from several of its correspondent banks on an overnight
basis at prevailing overnight market rates. These accommodations are subject
to
various restrictions as to their term and availability, and in most cases,
must
be repaid within less than a month. There were no outstanding balances at
December 31, 2006 or 2005 under these arrangements.
Note
9. Investments in Affiliated Companies
On
December 29, 2003, we established PNFP Statutory Trust I; on September 15,
2005
we established PNFP Statutory Trust II; and on September 7, 2006 we established
PNFP Statutory Trust III (“Trust I”; “Trust II”; “Trust III” or collectively,
the “Trusts”). All are wholly-owned statutory business trusts. Pinnacle
Financial is the sole sponsor of the Trusts and acquired each Trust’s common
securities for $310,000; $619,000 and $619,000, respectively. The Trusts were
created for the exclusive purpose of issuing 30-year capital trust preferred
securities (“Trust Preferred Securities”) in the aggregate amount of $10,000,000
for Trust I; $20,000,000 for Trust II and $20,000,000 for Trust III and using
the proceeds to acquire junior subordinated debentures (“Subordinated
Debentures”) issued by Pinnacle Financial. The sole assets of the Trusts
are the Subordinated Debentures. Pinnacle Financial’s aggregate $1,548,000
investment in the Trusts is included in investments in unconsolidated
subsidiaries and other entities in the accompanying consolidated balance sheet
at December 31, 2006 and the $51,548,000 obligation of Pinnacle Financial is
reflected as subordinated debt at December 31, 2006.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
Trust
I Preferred Securities bear a floating interest rate based on a spread
over
3-month LIBOR (8.16% at December 31, 2006) which is set each quarter and
mature
on December 30, 2033. The Trust II Preferred Securities bear a fixed
interest rate of 5.848% per annum thru September 30, 2010 at which time
the
securities will bear a floating rate set each quarter based on a spread
over
3-month LIBOR. The Trust II securities mature on September 30, 2035. The
Trust III Preferred Securities bear a floating interest rate based on a
spread
over 3-month LIBOR (7.02% at December 31, 2006) which is set each quarter
and
mature on September 30, 2036.
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. Pinnacle Financial’s 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.
The
Subordinated Debentures are unsecured, bear interest at a rate equal to the
rates paid by the Trusts on the Trust Preferred Securities and mature on the
same dates as those noted above for the Trust Preferred Securities.
Interest is payable quarterly. Pinnacle Financial 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 Pinnacle Financial’s ability to pay dividends on our common
shares will be restricted.
Subject
to approval by the Federal Reserve Bank of Atlanta, the Trust Preferred
Securities may be redeemed prior to maturity at our option on or after September
17, 2008 for Trust I; on or after September 30, 2010 for Trust II and September
30, 2011 for Trust III. 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 Trust 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 Trust
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.
The
Trust
Preferred Securities for the Trusts qualify as Tier I capital under current
regulatory definitions subject to certain limitations. Debt issuance costs
associated with Trust I of $105,000 consisting primarily of underwriting
discounts and professional fees are included in other assets in the accompanying
consolidated balance sheet. These debt issuance costs are being amortized over
ten years using the straight-line method. There were no debt issuance costs
associated with Trust II or Trust III.
Combined
summary financial information for the Trusts follows (dollars in
thousands):
Combined
Summary Balance Sheets
|
|
|
|
December
31, 2006
|
|
December
31, 2005
|
|
Asset
-
Investment in subordinated debentures issued by Pinnacle
Financial
|
|
$
|
51,548
|
|
$
|
30,929
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Stockholder’s
equity
-
Trust preferred securities
|
|
|
50,000
|
|
|
30,000
|
|
Common
securities (100% owned by Pinnacle Financial)
|
|
|
1,548
|
|
|
929
|
|
Total
stockholder’s equity
|
|
|
51,548
|
|
|
30,929
|
|
Total
liabilities and stockholder’s equity
|
|
$
|
51,548
|
|
$
|
30,929
|
|
Combined
Summary Income Statement
|
|
|
|
Year
ended December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Income
- Interest
income from subordinated debentures issued by Pinnacle
Financial
|
|
$
|
2,504
|
|
$
|
986
|
|
$
|
431
|
|
Net
Income
|
|
$
|
2,504
|
|
$
|
986
|
|
$
|
431
|
|
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Combined
Summary Statement of Stockholder’s Equity
|
|
|
|
Trust
Preferred
Securities
|
|
Total
Common
Stock
|
|
Retained
Earnings
|
|
Stockholder’s
Equity
|
|
Balances,
December 31, 2003
|
|
$
|
10,000
|
|
$
|
310
|
|
$
|
-
|
|
$
|
10,310
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
431
|
|
|
431
|
|
Dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust
preferred securities
|
|
|
-
|
|
|
-
|
|
|
(418
|
)
|
|
(418
|
)
|
Common
paid to Pinnacle Financial
|
|
|
-
|
|
|
-
|
|
|
(13
|
)
|
|
(13
|
)
|
Balances,
December 31, 2004
|
|
$
|
10,000
|
|
$
|
310
|
|
$
|
-
|
|
$
|
10,310
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
986
|
|
|
986
|
|
Issuance
of trust preferred securities
|
|
|
20,000
|
|
|
619
|
|
|
-
|
|
|
20,619
|
|
Dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust
preferred securities
|
|
|
-
|
|
|
-
|
|
|
(956
|
)
|
|
(956
|
)
|
Common
paid to Pinnacle Financial
|
|
|
-
|
|
|
-
|
|
|
(30
|
)
|
|
(30
|
)
|
Balances,
December 31, 2005
|
|
$
|
30,000
|
|
$
|
929
|
|
$
|
-
|
|
$
|
30,929
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
2,504
|
|
|
2,504
|
|
Issuance
of trust preferred securities
|
|
|
20,000
|
|
|
619
|
|
|
-
|
|
|
20,619
|
|
Dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust
preferred securities
|
|
|
-
|
|
|
-
|
|
|
(2,428
|
)
|
|
(2,428
|
)
|
Common
paid to Pinnacle Financial
|
|
|
-
|
|
|
-
|
|
|
(76
|
)
|
|
(76
|
)
|
Balances,
December 31, 2006
|
|
$
|
50,000
|
|
$
|
1,548
|
|
$
|
-
|
|
$
|
51,548
|
|
Note
10. Income Taxes
Income
tax expense attributable to income from continuing operations for each of the
years in the three-year period ended December 31, 2006 consists of the
following:
|
|
2006
|
|
2005
|
|
2004
|
|
Current
tax expense:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
9,073,193
|
|
$
|
3,589,487
|
|
$
|
2,677,582
|
|
State
|
|
|
547,130
|
|
|
178,630
|
|
|
416,987
|
|
Total
current tax expense
|
|
|
9,620,323
|
|
|
3,768,117
|
|
|
3,094,569
|
|
Deferred
tax benefit:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(971,418
|
)
|
|
(479,072
|
)
|
|
(765,139
|
)
|
State
|
|
|
(192,918
|
)
|
|
(96,683
|
)
|
|
(157,147
|
)
|
Total
deferred tax benefit
|
|
|
(1,164,336
|
)
|
|
(575,755
|
)
|
|
(922,286
|
)
|
|
|
$
|
8,455,987
|
|
$
|
3,192,362
|
|
$
|
2,172,283
|
|
Pinnacle
Financial's income tax expense differs from the amounts computed by applying
the
Federal income tax statutory rates of 35% in 2006 and 34% in 2005 and 2004
to
income before income taxes. A reconciliation of the differences for each of
the
years in the three-year period ended December 31, 2006 is as
follows:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Income
taxes at statutory rate
|
|
$
|
9,234,057
|
|
$
|
3,824,194
|
|
$
|
2,547,006
|
|
State
tax expense, net of federal tax effect
|
|
|
230,238
|
|
|
54,085
|
|
|
171,494
|
|
Federal
tax credits
|
|
|
(300,000
|
)
|
|
(300,000
|
)
|
|
(300,000
|
)
|
Tax-exempt
securities
|
|
|
(602,100
|
)
|
|
(339,900
|
)
|
|
(156,354
|
)
|
Other
items
|
|
|
(106,208
|
)
|
|
(46,017
|
)
|
|
(89,863
|
)
|
Income
tax expense
|
|
$
|
8,455,987
|
|
$
|
3,192,362
|
|
$
|
2,172,283
|
|
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
effective tax rate for all years 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 in the three year period ended December 31, 2006 was $300,000.
Pinnacle Financial believes that it and its subsidiary have complied with the
various regulatory provisions of the New Markets Tax Credit program in each
of
these years. Also, 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.
The
components of deferred income taxes included in other assets in the accompanying
consolidated balance sheets at December 31, 2006 and 2005 are as
follows:
|
|
2006
|
|
2005
|
|
Deferred
tax assets:
|
|
|
|
|
|
Loan
loss allowance
|
|
$
|
6,654,334
|
|
$
|
3,019,094
|
|
Loans
|
|
|
1,337,983
|
|
|
44,316
|
|
Securities
|
|
|
1,251,636
|
|
|
1,773,521
|
|
Accrued
liability for supplemental retirement agreements
|
|
|
1,535,688
|
|
|
-
|
|
Deposits
|
|
|
585,568
|
|
|
-
|
|
Other
deferred tax assets
|
|
|
340,296
|
|
|
130,500
|
|
|
|
|
11,705,505
|
|
|
4,967,431
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,563,078
|
|
|
417,207
|
|
Core
deposit intangible asset
|
|
|
4,473,076
|
|
|
-
|
|
FHLB
dividends
|
|
|
770,156
|
|
|
-
|
|
Other
deferred tax liabilities
|
|
|
440,642
|
|
|
139,602
|
|
|
|
|
7,246,952
|
|
|
556,809
|
|
Net
deferred tax assets
|
|
$
|
4,458,553
|
|
$
|
4,410,622
|
|
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.
Note
11. 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.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 2006 is as follows:
Commitments
to extend credit
|
|
$
|
532,383,000
|
|
Standby
letters of credit
|
|
|
52,961,000
|
|
At
December 31, 2006, the fair value of Pinnacle Financial’s standby letters of
credit was $159,000. 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 December
31,
2006 will not have a material effect on Pinnacle Financial’s consolidated
financial statements.
Note
12. Common Stock Offerings and Warrants
During
2004, Pinnacle Financial concluded a follow-on offering of its common stock
to
the general public. As a result of this offering, Pinnacle Financial, through
its underwriters, sold 850,000 shares of common stock to the general public
at
$20 per share. The underwriters also exercised an over-allotment option and
purchased an additional 127,500 shares at $20 per share, less the applicable
underwriting discount. Net proceeds from the offering were approximately $18.2
million.
Three
executives of Pinnacle Financial (the Chairman of the Board, the President
and
Chief Executive Officer and the Chief Administrative Officer) along with nine
members of Pinnacle Financial’s Board of Directors and two other organizers of
Pinnacle Financial were awarded warrants to acquire 406,000 shares of common
stock at $5.00 per share. During 2006, 11,000 warrants were exercised and,
as a
result, 395,000 unexercised warrants were outstanding and exercisable at
December 31, 2006.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
13.
Salary Deferral Plans and Cavalry Supplemental Executive Retirement
Agreements
Pinnacle
Financial has a 401(k) retirement plan covering all employees who elect to
participate, subject to certain eligibility requirements. The Plan allows
employees to defer up to 15% of their salary subject to regulatory limitations
with Pinnacle Financial matching 100% of the first 4% in Pinnacle Financial
stock during 2006. In 2005 and 2004, the match was calculated at 50% of the
first 6% deferred in Pinnacle Financial stock. Subsequent to the merger with
Cavalry Bancorp, Inc. from March 15, 2006 through December 29, 2006, certain
employees participated in the Cavalry Bancorp 401(k) plan. On December 29,
2006,
the Cavalry Bancorp 401(k) plan was merged into the Pinnacle Financial 401(k)
plan. Pinnacle Financial’s expense associated with the matching component of the
plan(s) for each of the years in the three-year period ended December 31, 2006
was approximately $762,000, $259,000 and $199,000, respectively, and is included
in the accompanying statements of income in salaries and employee benefits
expense.
Prior
to
the merger with Pinnacle Financial, Cavalry maintained an employee stock
ownership plan for the benefit of certain employees (the “Cavalry ESOP”). The
Cavalry ESOP is a noncontributory retirement plan adopted by Cavalry in 1998
for
the benefit of certain employees who meet minimum eligibility requirements.
Cavalry Bancorp, Inc. was the Plan Sponsor and with the merger with Pinnacle
Financial, Pinnacle Financial became the Plan Sponsor on March 15, 2006. On
March 15, 2006, the Cavalry ESOP owned approximately 683,000 common shares
of
Pinnacle Financial. The Cavalry ESOP had no liabilities as of March 15, 2006,
thus all of the Pinnacle Financial shares owned by the Cavalry ESOP were
available for distribution to the participants in the Cavalry ESOP pursuant
to
the terms of the plan. The terms of the Cavalry ESOP did not change as a result
of the merger with Pinnacle Financial.
Pursuant
to the terms of the Cavalry ESOP, participation in the plan has been frozen
as
of March 15, 2006 and all participants in the plan were fully vested prior
to
the merger date. All assets of the plan were allocated to the participants
pursuant to the plan’s provisions. Thus, Pinnacle Financial is not required to
make future contributions to the Cavalry ESOP. Distributions to participants
are
only made upon the termination from employment from Pinnacle Financial or the
participant’s death, at which time, distributions will be made to the
participant’s beneficiaries.
Pinnacle
National serves as the Trustee of the Cavalry ESOP. During 2006, Pinnacle
National assessed the Cavalry ESOP no fees as Trustee. Additionally, Pinnacle
National incurred administrative expenses of $15,000, primarily auditing and
consulting expenses, to maintain the plan.
Prior
to
the merger with Pinnacle Financial, Cavalry had adopted nonqualified
noncontributory supplemental retirement agreements (the “Cavalry SRAs”) for
certain of the directors and executive officers of Cavalry. Cavalry invested
in
and, as a result of the Cavalry merger, Pinnacle Financial is the owner of
single premium life insurance policies on the life of each participant and
is
the beneficiary of the policy value. When a participant retires, the accumulated
gains on the policy allocated to such participant, if any, will be distributed
to the participant in equal installments for 15 years (the “Primary Benefit”).
In addition, any annual gains after the retirement date of the participant
will
be distributed on an annual basis for the lifetime of the participant (the
“Secondary Benefit”). As a result of the merger with Pinnacle Financial, all
participants became fully vested in the Cavalry SRAs. No new participants have
been added to the Cavalry SRAs as a result of the merger with Pinnacle
Financial.
The
Cavalry SRAs also provides the participants with death benefits, which is a
percentage of the net death proceeds for the policy, if any, applicable to
the
participant. The death benefits are not taxable to Pinnacle Financial or the
participant’s beneficiary.
Pinnacle
Financial recognized approximately $163,000 in compensation expense in the
year
ended December 31, 2006 related to the Cavalry SRAs. Additionally, Pinnacle
Financial incurred approximately $5,000 in administrative expenses to maintain
the Cavalry SRA during the year ended December 31, 2006. At December 31, 2006,
included in other liabilities is $3,915,000 which represents the net present
value of the future obligations owed the participants in the Cavalry SRAs using
a discount rate of 5.5%.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
14. 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
1999
Cavalry Bancorp, Inc. Stock Option 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 of the outstanding options under the Cavalry
Plan was adjusted using the same exchange ratio. All other terms of the Cavalry
options were unchanged. There were 195,551 Pinnacle shares which could be
acquired by the participants in the Cavalry Plan at exercise prices that ranged
between $10.26 per share and $13.68 per share.
As
of
December 31, 2006, of the 1,658,000 stock options outstanding, 1,298,000 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 361,000 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 twelve months
ended December 31, 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, 2003
|
|
|
907,400
|
|
$
|
5.39
|
|
|
|
|
|
|
|
Granted
|
|
|
189,080
|
|
|
14.65
|
|
|
|
|
|
|
|
Exercised
|
|
|
(23,780
|
)
|
|
4.89
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(4,350
|
)
|
|
7.86
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2004
|
|
|
1,068,350
|
|
$
|
7.03
|
|
|
|
|
|
|
|
Granted
|
|
|
209,482
|
|
|
23.74
|
|
|
|
|
|
|
|
Exercised
|
|
|
(20,953
|
)
|
|
5.93
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(14,486
|
)
|
|
14.93
|
|
|
|
|
|
|
|
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
|
|
|
365,519
|
|
|
24.00
|
|
|
|
|
|
|
|
Exercised
|
|
|
(130,168
|
)
|
|
9.69
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(14,836
|
)
|
|
15.45
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
1,658,459
|
|
$
|
12.93
|
|
|
6.4
|
|
$
|
31,848
|
|
Outstanding
and expected to vest at December 31, 2006
|
|
|
1,630,134
|
|
$
|
13.88
|
|
|
6.4
|
|
$
|
31,563
|
|
Options
exercisable at December 31, 2006
|
|
|
922,524
|
|
$
|
7.40
|
|
|
5.0
|
|
$
|
23,780
|
|
(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 $33.18 per common share for the 1.6 million
options that were in-the-money at December 31,
2006.
|
During
the year ended December 31, 2006, 155,000 option awards vested at an average
exercise price of $12.46 and an intrinsic value of approximately $5.14 million.
On January 19, 2007, Pinnacle Financial granted options to purchase 234,000
common shares to certain employees at an exercise price of $31.25 per share.
These options, which were issued as non-qualified stock options, will vest
in
varying increments over five years beginning one year after the date of the
grant and are exercisable over a period of ten years from the date of
grant.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
During
the years ended December 31, 2006, 2005 and 2004, the aggregate intrinsic
value
of options exercised under our equity incentive plans was $1,694,000, $354,000
and $6,000, respectively, determined as of the date of option exercise.
As of
December 31, 2006, there was approximately $4.39 million of total
unrecognized compensation cost related to unvested stock options 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 on January 1, 2006. Accordingly, during the year ended December 31,
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 year ended December 31, 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
year
ended December 31, 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
|
|
$
|
586,923
|
|
$
|
423,034
|
|
$
|
1,009,957
|
|
Deferred
income tax benefit
|
|
|
-
|
|
|
165,956
|
|
|
165,956
|
|
Impact
of stock-based compensation expense after deferred income tax
benefit
|
|
$
|
586,923
|
|
$
|
257,078
|
|
$
|
844,001
|
|
Impact
on earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
-weighted average shares outstanding
|
|
$
|
0.042
|
|
$
|
0.018
|
|
$
|
0.060
|
|
Fully
diluted - weighted average shares outstanding
|
|
$
|
0.039
|
|
$
|
0.017
|
|
$
|
0.056
|
|
For
purposes of these calculations, the fair value of options granted for each
of
the years in the three-year period ended December 31, 2006 was estimated using
the Black-Scholes option pricing model and the following
assumptions:
|
2006
|
2005
|
2004
|
|
|
|
|
Risk
free interest rate
|
4.65%
|
2.57%
|
1.11%
|
Expected
life of options
|
6.50
years
|
6.50
years
|
6.50
years
|
Expected
dividend yield
|
0.00%
|
0.00%
|
0.00%
|
Expected
volatility
|
23.1%
|
24.1%
|
21.4%
|
Weighted
average fair value
|
$10.44
|
$7.30
|
$3.62
|
Pinnacle
Financial’s computation of expected volatility is based on weekly historical
volatility since September of 2002. 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 or market-based awards, such
as
stock appreciation rights. There were no market-based awards or stock
appreciation rights outstanding as of December 31, 2006. During 2006, 2005
and
2004, Pinnacle Financial awarded 18,057 shares, 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 $34.96,
$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 any merger related expenses in 2006 and
thereafter. Compensation expense
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 2006, 2005 and 2004 fiscal years were achieved and the restrictions
related to 12,753, 6,734 shares and 1,282 shares, respectively, were released.
For each year in the three-year period ended December 31, 2006, Pinnacle
Financial recognized approximately $360,000, $245,000 and $43,000, respectively,
in compensation costs attributable to these awards. Accumulated compensation
costs since the date these shares were awarded have amounted to approximately
$648,000 through December 31, 2006.
During
2006, the Board of Directors of Pinnacle Financial awarded 4,400 shares of
restricted common stock to the 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 lapsed subsequent to December
31,
2006 on the one year anniversary date of the award based on each individual
board member meeting their attendance goals for the various board and board
committee meetings to which each member was scheduled to attend during the
fiscal year ended December 31, 2006 with the exception of one outside board
member who resigned his board seat and forfeited his restricted share award.
The
weighted average fair value of all restricted share awards granted to our
directors as of the date of grant was $26.14 per share. For the year ended
December 31, 2006, Pinnacle Financial recognized approximately $105,000, in
compensation costs attributable to these awards.
A
summary
of activity for restricted share awards for the year ended December 31, 2006
follows:
|
|
Executive
Management Awards
|
|
Board
of Director Awards
|
|
(number
of share awards)
|
|
Vested
|
|
Unvested
|
|
Totals
|
|
Vested
|
|
Unvested
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2005
|
|
|
8,016
|
|
|
12,196
|
|
|
20,212
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
18,057
|
|
|
18,057
|
|
|
-
|
|
|
4,400
|
|
|
4,400
|
|
Forfeited
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(400
|
)
|
|
(400
|
)
|
Vested
|
|
|
12,753
|
|
|
(12,753
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balances
at December 31, 2006
|
|
|
20,769
|
|
|
17,500
|
|
|
38,269
|
|
|
-
|
|
|
4,000
|
|
|
4,000
|
|
A
summary
of compensation expense, net of the impact of income taxes, related to
restricted stock awards for the three-year period ended December 31, 2006,
follows:
|
|
2006
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
$
|
465,003
|
|
$
|
244,724
|
|
$
|
43,009
|
|
Income
tax benefit
|
|
|
182,421
|
|
|
93,705
|
|
|
16,468
|
|
Impact
of stock-based compensation expense, net of income tax
benefit
|
|
$
|
282,582
|
|
$
|
151,019
|
|
$
|
26,541
|
|
Impact
on earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
-weighted average shares outstanding
|
|
$
|
0.020
|
|
$
|
0.018
|
|
$
|
0.003
|
|
Fully
diluted - weighted average shares outstanding
|
|
$
|
0.019
|
|
$
|
0.016
|
|
$
|
0.003
|
|
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 years ended December
31, 2005 and 2004:
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Net
income, as reported
|
|
$
|
8,055,268
|
|
$
|
5,318,910
|
|
Add:
Compensation expense recognized in the accompanying consolidated
statement
of income, net of related tax effects
|
|
|
167,981
|
|
|
32,252
|
|
Deduct:
Total stock-based compensation expense determined under the fair
value
based method for all awards, net of related tax effects
|
|
|
(859,350
|
)
|
|
(458,405
|
)
|
Pro
forma net income
|
|
$
|
7,363,899
|
|
$
|
4,892,757
|
|
|
|
|
|
|
|
|
|
Per
share information:
|
|
|
|
|
|
|
|
Basic
net income As
reported
|
|
$
|
0.96
|
|
$
|
0.69
|
|
Pro forma
|
|
|
0.88
|
|
|
0.63
|
|
|
|
|
|
|
|
|
|
Diluted
net income
As
reported
|
|
$
|
0.85
|
|
$
|
0.61
|
|
Pro
forma
|
|
|
0.78
|
|
|
0.56
|
|
Note
15. Employment Contracts
Pinnacle
Financial has entered into four continuously automatic-renewing three-year
employment agreements with four of its senior executives, the President and
Chief Executive Officer, the Chairman of the Board, the Chief Administrative
Officer and the Chief Financial Officer. These agreements will always have
a
three-year term unless any of the parties to the agreements gives notice of
intent not to renew the agreement. The agreements specify that in certain
defined “Terminating Events,” Pinnacle Financial will be obligated to pay each
of the four senior executives a certain amount which is based on their annual
salaries and bonuses. These Terminating Events include disability, change of
control and other events.
Pinnacle
Financial has entered into an employment agreement with one of its directors
who
served as the former Chief Executive Officer of Cavalry. This agreement shall
have an initial term that expires on April 25, 2007 (the 65th
birthday
of the director/employee). The agreement specifies that in certain defined
“Terminating Events,” Pinnacle Financial will be obligated to pay this
director/executive a certain amount which is based on his annual salary and
bonus. These Terminating Events include disability, change of control and other
events. Furthermore, pursuant to the employment agreement the director/employee
has agreed to a noncompetition and nonsolicitation clause for a period of three
years following his employment.
Note
16. Related Party Transactions
A
local
public relations company, of which one of Pinnacle Financial’s directors is a
principal, provides various services for Pinnacle Financial. For the years
ended
December 31, 2006, 2005, and 2004, Pinnacle Financial incurred approximately
$195,000, $187,000 and $141,000, respectively, in expense for services rendered
by this public relations company. Another director is an officer in an insurance
firm that serves as an agent in securing insurance in such areas as Pinnacle
Financial’s property and casualty insurance and other insurance
policies.
During
2004, Pinnacle Financial’s wholly-owned subsidiary, Pinnacle Credit Enhancement
Holdings, Inc. (“PCEH”), acquired 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 guarantees or letters of credit issued by
the
investors for the benefit of banks and other financial institutions. An employee
of Pinnacle National also owns a 24.5% interest in Collateral Plus, LLC. PCEH’s
24.5% ownership of Collateral Plus, LLC resulted in pre-tax earnings of $120,000
in 2006, $216,000 in 2005and $9,000 in 2004.
Also
see
“Note 5-Loans and Allowance for Loan Losses” concerning loans and other
extensions of credit to certain directors, officers, and their related
entities.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
17.
Fair Value of Financial Instruments
The
following
methods and assumptions were used by Pinnacle Financial in estimating its fair
value disclosures for financial instruments. In cases where quoted market prices
are not available, fair values are based on estimates using discounted cash
flow
models. Those models are significantly affected by the assumptions used,
including the discount rates and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. The use of different methodologies may have a
material effect on the estimated fair value amounts. The fair value estimates
presented herein are based on pertinent information available to management
as
of December 31, 2006 and 2005. Such amounts have not been revalued for purposes
of these consolidated financial statements since those dates and, therefore,
current estimates of fair value may differ significantly from the amounts
presented herein.
Cash,
Due From Banks and Fed Funds Sold
- The
carrying amounts of cash, due from banks, and federal funds sold approximate
their fair value.
Securities
-
Estimated fair values for securities available for sale and securities held
to
maturity are based on quoted market prices where available. If quoted market
prices are not available, estimated fair values are based on quoted market
prices of comparable instruments.
Loans
- For
variable-rate loans that reprice frequently and have no significant change
in
credit risk, fair values are equal to carrying values. For fixed rate loans
that
reprice within one year, fair values are equal to carrying values. For other
loans, fair values are estimated using discounted cash flow models, using
current market interest rates offered for loans with similar terms to borrowers
of similar credit quality. Fair values for impaired loans are estimated using
discounted cash flow models or based on the fair value of the underlying
collateral.
Deposits,
Securities Sold Under Agreements to Repurchase, Advances from the Federal Home
Loan Bank and Subordinated Debt -
The
carrying amounts of demand deposits, savings deposits, securities sold under
agreements to repurchase, floating rate advances from the Federal Home Loan
Bank
and floating rate subordinated debt approximate their fair values. Fair values
for certificates of deposit, fixed rate advances from the Federal Home Loan
Bank
and fixed rate subordinated debt are estimated using discounted cash flow
models, using current market interest rates offered on certificates, advances
and other borrowings with similar remaining maturities. For fixed rate
subordinated debt, the maturity is assumed to be as of the earliest date that
the indebtedness will be repriced.
Off-Balance
Sheet Instruments
- The
fair values of Pinnacle Financial's off-balance-sheet financial instruments
are
based on fees charged to enter into similar agreements. However, commitments
to
extend credit and standby letters of credit do not represent a significant
value
to Pinnacle Financial until such commitments are funded. Pinnacle Financial
has
determined that the fair value of commitments to extend credit is not
significant.
The
carrying amounts and estimated fair values of Pinnacle Financial's financial
instruments at December 31, 2006 and 2005 were as follows (in
thousands):
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
December
31, 2006
|
|
December
31, 2005
|
|
|
|
Carrying
Amount
|
|
Estimated
Fair
Value
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
Cash,
due from banks, and Federal funds sold
|
|
$
|
92,519
|
|
$
|
92,519
|
|
$
|
58,654
|
|
$
|
58,654
|
|
Securities
available-for-sale
|
|
|
319,237
|
|
|
319,237
|
|
|
251,749
|
|
|
251,749
|
|
Securities
held-to-maturity
|
|
|
27,257
|
|
|
26,594
|
|
|
27,331
|
|
|
26,546
|
|
Mortgage
loans held-for-sale
|
|
|
5,654
|
|
|
5,654
|
|
|
4,874
|
|
|
4,874
|
|
Loans,
net
|
|
|
1,481,617
|
|
|
1,469,642
|
|
|
640,166
|
|
|
630,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
and securities sold under agreements to repurchase
|
|
$
|
1,763,427
|
|
$
|
1,761,178
|
|
$
|
875,985
|
|
$
|
873,635
|
|
Federal
Home Loan Bank advances
|
|
|
53,726
|
|
|
53,481
|
|
|
41,500
|
|
|
40,889
|
|
Subordinated
debt
|
|
|
51,548
|
|
|
52,110
|
|
|
30,929
|
|
|
30,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
Amount
|
|
|
|
|
|
Notional
Amount
|
|
|
|
|
Off-balance
sheet instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
to extend credit
|
|
$
|
532,383
|
|
$
|
-
|
|
$
|
252,617
|
|
$
|
-
|
|
Standby
letters of credit
|
|
|
52,961
|
|
|
159
|
|
|
57,550
|
|
|
227
|
|
Note
18. 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.
At
December 31, 2006, pursuant to federal banking regulations, Pinnacle National
had approximately $28.8 million of net retained profits from the previous two
years available for dividend payments to Pinnacle Financial. At December 31,
2006, Pinnacle National had accumulated earnings of $34.3 million, thus
approximately $5.5 million of Pinnacle National’s net retained profits are
unavailable for the payment of dividends to Pinnacle Financial.
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 December 31, 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
|
|
Actual
|
|
Minimum
Capital
Requirement
|
|
Minimum
To
Be Well-Capitalized
Under
Prompt
Corrective
Action
Provisions
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
At
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle
Financial
|
|
$
|
202,881
|
|
|
11.8
|
%
|
$
|
137,638
|
|
|
8.0
|
%
|
not
applicable
|
Pinnacle
National
|
|
$
|
175,159
|
|
|
10.2
|
%
|
$
|
137,340
|
|
|
8.0
|
%
|
$
|
171,676
|
|
|
10.0
|
%
|
Tier
I capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle
Financial
|
|
$
|
186,763
|
|
|
10.9
|
%
|
$
|
68,819
|
|
|
4.0
|
%
|
not
applicable
|
Pinnacle
National
|
|
$
|
159,031
|
|
|
9.3
|
%
|
$
|
68,670
|
|
|
4.0
|
%
|
$
|
103,005
|
|
|
6.0
|
%
|
Tier
I capital to average assets (*):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle
Financial
|
|
$
|
186,763
|
|
|
9.5
|
%
|
$
|
79,021
|
|
|
4.0
|
%
|
not
applicable
|
Pinnacle
National
|
|
$
|
159,031
|
|
|
8.1
|
%
|
$
|
79,056
|
|
|
4.0
|
%
|
$
|
98,820
|
|
|
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
19. 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. Pinnacle Financial’s segments were changed in 2006 as a result
of the acquisition of Cavalry to include Trust with our Investment Services
segment and to add a new segment for Insurance Services. 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. Insurance Services reflect the activities of Pinnacle National’s wholly
owned subsidiary, Miller and Loughry. Miller and Loughry is a general insurance
agency located in Murfreesboro, Tennessee and is licensed to sell various
commercial and consumer insurance products. The following tables present
financial information for each reportable segment as of December 31, 2006 and
2005 and for each year in the three-year period ended December 31, 2006 (dollars
in thousands):
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Commercial
Banking
|
|
Trust
and Investment Services
|
|
Mortgage
Origination
|
|
Insurance
Services
|
|
Total
Company
|
|
For
the year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
60,953
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
60,953
|
|
Provision
for loan losses
|
|
|
3,732
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,732
|
|
Noninterest
income
|
|
|
8,705
|
|
|
3,316
|
|
|
1,647
|
|
|
2,119
|
|
|
15,787
|
|
Noninterest
expense
|
|
|
41,930
|
|
|
2,375
|
|
|
976
|
|
|
1,343
|
|
|
46,624
|
|
Income
tax expense
|
|
|
7,508
|
|
|
369
|
|
|
263
|
|
|
317
|
|
|
8,457
|
|
Net
income
|
|
$
|
16,488
|
|
$
|
572
|
|
$
|
408
|
|
$
|
459
|
|
$
|
17,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
29,038
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
29,038
|
|
Provision
for loan losses
|
|
|
2,152
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,152
|
|
Noninterest
income
|
|
|
2,675
|
|
|
1,573
|
|
|
1,146
|
|
|
-
|
|
|
5,394
|
|
Noninterest
expense
|
|
|
19,315
|
|
|
1,171
|
|
|
546
|
|
|
-
|
|
|
21,032
|
|
Income
tax expense
|
|
|
2,809
|
|
|
154
|
|
|
230
|
|
|
-
|
|
|
3,193
|
|
Net
income
|
|
$
|
7,437
|
|
$
|
248
|
|
$
|
370
|
|
$
|
-
|
|
$
|
8,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
20,264
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
20,264
|
|
Provision
for loan losses
|
|
|
2,948
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,948
|
|
Noninterest
income
|
|
|
2,348
|
|
|
1,313
|
|
|
1,317
|
|
|
-
|
|
|
4,978
|
|
Noninterest
expense
|
|
|
12,884
|
|
|
1,004
|
|
|
915
|
|
|
-
|
|
|
14,803
|
|
Income
tax expense
|
|
|
1,900
|
|
|
118
|
|
|
154
|
|
|
-
|
|
|
2,172
|
|
Net
income
|
|
$
|
4,880
|
|
$
|
191
|
|
$
|
248
|
|
$
|
-
|
|
$
|
5,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End
of period assets
|
|
$
|
2,138,269
|
|
$
|
-
|
|
$
|
-
|
|
$
|
3,918
|
|
$
|
2,142,187
|
|
As
of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End
of period assets
|
|
$
|
1,016,772
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,016,772
|
|
At
December 31, 2006, Pinnacle Financial had approximately $125.7 million in
goodwill and core deposit intangible assets, all of which had been assigned
to
the Commercial Banking segment.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
20. Parent Company Only Financial Information
The
following information presents the condensed balance sheets, statements of
income, and cash flows of Pinnacle Financial as of December 31, 2006 and 2005
and for each of the years in the three-year period ended December 31,
2006:
CONDENSED
BALANCE SHEETS
|
|
2006
|
|
2005
|
|
Assets:
|
|
|
|
|
|
Cash
|
|
$
|
24,803,538
|
|
$
|
12,679,759
|
|
Investments
in consolidated subsidiaries:
|
|
|
|
|
|
|
|
Pinnacle
National
|
|
|
277,481,220
|
|
|
79,463,336
|
|
Pinnacle
Advisory Services.
|
|
|
124,716
|
|
|
107,086
|
|
Pinnacle
Credit Enhancement Holdings
|
|
|
185,325
|
|
|
123,431
|
|
PNFP
Insurance
|
|
|
477,473
|
|
|
-
|
|
Investment
in unconsolidated subsidiaries:
|
|
|
|
|
|
|
|
PNFP
Statutory Trust I
|
|
|
310,000
|
|
|
310,000
|
|
PNFP
Statutory Trust II
|
|
|
619,000
|
|
|
619,000
|
|
PNFP
Statutory Trust III
|
|
|
619,000
|
|
|
-
|
|
Income
taxes receivable from subsidiaries
|
|
|
1,298,299
|
|
|
676,886
|
|
Current
income tax receivable
|
|
|
1,049,604
|
|
|
-
|
|
Other
assets
|
|
|
786,846
|
|
|
618,650
|
|
|
|
$
|
307,755,021
|
|
$
|
94,598,148
|
|
Liabilities
and stockholders’ equity:
|
|
|
|
|
|
|
|
Current
income taxes payable
|
|
|
-
|
|
|
232,723
|
|
Subordinated
debt
|
|
|
51,548,000
|
|
|
30,929,000
|
|
Other
liabilities
|
|
|
190,000
|
|
|
-
|
|
Stockholders’
equity
|
|
|
256,017,021
|
|
|
63,436,425
|
|
|
|
$
|
307,755,021
|
|
$
|
94,598,148
|
|
CONDENSED
STATEMENTS OF INCOME
|
|
2006
|
|
2005
|
|
2004
|
|
Revenues
- Interest income
|
|
$
|
267,154
|
|
$
|
133,748
|
|
$
|
63,121
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Interest
expense - subordinated debentures
|
|
|
2,504,033
|
|
|
985,645
|
|
|
431,318
|
|
Stock-based
compensation expense
|
|
|
1,474,960
|
|
|
244,724
|
|
|
43,009
|
|
Other
expense
|
|
|
245,528
|
|
|
58,772
|
|
|
100,179
|
|
Loss
before income taxes and equity in income of subsidiaries
|
|
|
(3,957,367
|
)
|
|
(1,155,393
|
)
|
|
(511,385
|
)
|
Income
tax expense
|
|
|
1,632,738
|
|
|
438,270
|
|
|
198,516
|
|
Loss
before equity in income of subsidiaries
|
|
|
(2,324,629
|
)
|
|
(717,123
|
)
|
|
(312,869
|
)
|
Equity
in income of subsidiaries
|
|
|
20,251,662
|
|
|
8,772,391
|
|
|
5,631,779
|
|
Net
income
|
|
$
|
17,927,033
|
|
$
|
8,055,268
|
|
$
|
5,318,910
|
|
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED
STATEMENTS OF CASH FLOWS
|
|
2006
|
|
2005
|
|
2004
|
|
Operating
activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
17,927,033
|
|
$
|
8,055,268
|
|
$
|
5,318,910
|
|
Adjustments
to reconcile net income to net cash provided (used) by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
1,474,960
|
|
|
244,724
|
|
|
43,009
|
|
Decrease
(increase) in income tax receivable, net
|
|
|
(1,921,194
|
)
|
|
1,000,352
|
|
|
(1,449,903
|
)
|
Decrease
(increase) in other assets
|
|
|
1,118,127
|
|
|
(479,474
|
)
|
|
12,365
|
|
Increase
(decrease) in other liabilities
|
|
|
190,000
|
|
|
99,726
|
|
|
(4,832
|
)
|
Tax
benefit from exercise of stock awards
|
|
|
-
|
|
|
(50,535
|
)
|
|
(1,912
|
)
|
Excess
tax benefit from stock compensation
|
|
|
(131,121
|
)
|
|
|
|
|
|
|
Deferred
tax benefit
|
|
|
(232,866
|
)
|
|
-
|
|
|
-
|
|
Equity
in income of subsidiaries
|
|
|
(20,251,662
|
)
|
|
(8,772,391
|
)
|
|
(5,631,779
|
)
|
Net
cash provided (used) by operating activities
|
|
|
(1,826,723
|
)
|
|
97,670
|
|
|
(1,714,142
|
)
|
Investing
activities
-
|
|
|
|
|
|
|
|
|
|
|
Investment
in unconsolidated subsidiaries
|
|
|
(619,000
|
)
|
|
(619,000
|
)
|
|
-
|
|
Investment
in consolidated subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
Pinnacle
National
|
|
|
(10,000,000
|
)
|
|
(15,500,000
|
)
|
|
(17,556,000
|
)
|
Other
subsidiaries
|
|
|
(350,250
|
)
|
|
(183,721
|
)
|
|
(57,812
|
)
|
Investments
in other entities
|
|
|
(65,647
|
)
|
|
-
|
|
|
-
|
|
Cash
and cash equivalents acquired in merger with Cavalry
|
|
|
3,128,116
|
|
|
-
|
|
|
-
|
|
Net
cash used by investing activities
|
|
|
(7,906,781
|
)
|
|
(16,302,721
|
)
|
|
(17,613,812
|
)
|
Financing
activities
-
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of subordinated debt
|
|
|
20,619,000
|
|
|
20,619,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
proceeds from sale of common stock
|
|
|
-
|
|
|
-
|
|
|
18,192,167
|
|
Exercise
of common stock warrants
|
|
|
55,000
|
|
|
-
|
|
|
-
|
|
Exercise
of common stock options
|
|
|
1,239,771
|
|
|
174,761
|
|
|
118,113
|
|
Excess
tax benefit from stock compensation arrangements
|
|
|
131,121
|
|
|
-
|
|
|
-
|
|
Costs
incurred in connection with registration of common stock issued in
merger
|
|
|
(187,609
|
)
|
|
-
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
21,857,283
|
|
|
20,793,761
|
|
|
18,310,280
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
12,123,779
|
|
|
4,588,710
|
|
|
(1,017,674
|
)
|
Cash,
beginning of year
|
|
|
12,679,759
|
|
|
8,091,049
|
|
|
9,108,723
|
|
Cash,
end of year
|
|
$
|
24,803,538
|
|
$
|
12,679,759
|
|
$
|
8,091,049
|
|
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
21. Quarterly Financial Results (unaudited)
A
summary
of selected consolidated quarterly financial data for each of the years in
the
three-year period ended December 31, 2006 follows:
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
(in
thousands, except per share data)
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
16,811
|
|
$
|
28,305
|
|
$
|
31,340
|
|
$
|
33,241
|
|
Net
interest income
|
|
|
9,507
|
|
|
16,895
|
|
|
17,159
|
|
|
17,391
|
|
Provision
for loan losses
|
|
|
387
|
|
|
1,707
|
|
|
587
|
|
|
1,051
|
|
Net
income before taxes
|
|
|
3,839
|
|
|
6,463
|
|
|
7,942
|
|
|
8,139
|
|
Net
income
|
|
|
2,612
|
|
|
4,322
|
|
|
5,347
|
|
|
5,646
|
|
Basic
net income per share
|
|
$
|
0.27
|
|
$
|
0.28
|
|
$
|
0.35
|
|
$
|
0.37
|
|
Diluted
net income per share
|
|
$
|
0.24
|
|
$
|
0.26
|
|
$
|
0.32
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
9,270
|
|
$
|
10,544
|
|
$
|
12,379
|
|
$
|
14,118
|
|
Net
interest income
|
|
|
6,503
|
|
|
6,795
|
|
|
7,456
|
|
|
8,287
|
|
Provision
for loan losses
|
|
|
601
|
|
|
483
|
|
|
366
|
|
|
702
|
|
Net
income before taxes
|
|
|
2,499
|
|
|
2,762
|
|
|
2,867
|
|
|
3,119
|
|
Net
income
|
|
|
1,780
|
|
|
1,959
|
|
|
2,078
|
|
|
2,238
|
|
Basic
net income per share
|
|
$
|
0.21
|
|
$
|
0.23
|
|
$
|
0.25
|
|
$
|
0.27
|
|
Diluted
net income per share
|
|
$
|
0.19
|
|
$
|
0.21
|
|
$
|
0.22
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
5,666
|
|
$
|
6,225
|
|
$
|
7,214
|
|
$
|
8,574
|
|
Net
interest income
|
|
|
4,152
|
|
|
4,536
|
|
|
5,299
|
|
|
6,278
|
|
Provision
for loan losses
|
|
|
354
|
|
|
449
|
|
|
1,012
|
|
|
1,134
|
|
Net
income before taxes
|
|
|
1,611
|
|
|
1,655
|
|
|
1,961
|
|
|
2,263
|
|
Net
income
|
|
|
1,071
|
|
|
1,168
|
|
|
1,391
|
|
|
1,689
|
|
Basic
net income per share
|
|
$
|
0.15
|
|
$
|
0.16
|
|
$
|
0.18
|
|
$
|
0.20
|
|
Diluted
net income per share
|
|
$
|
0.13
|
|
$
|
0.14
|
|
$
|
0.16
|
|
$
|
0.18
|
|
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM
9A. 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.
Management
Report on Internal Control Over Financial Reporting
The
report of Pinnacle Financial's management on Pinnacle Financial’s internal
control over financial reporting is set forth on page 46 of this Annual Report
on Form 10-K. The attestation of Pinnacle Financial’s independent registered
public accounting firm related to the report is set forth on page 48 of this
Annual Report on Form 10-K.
Changes
in Internal Controls
For
the
three months ended December 31, 2006, Pinnacle Financial continued to expand
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.
There
were no changes in Pinnacle Financial’s internal control over financial
reporting during Pinnacle Financial’s fiscal quarter ended December 31, 2006
that have materially affected, or are reasonably likely to materially affect,
Pinnacle Financial’s internal control over financial reporting.
ITEM
9B. OTHER INFORMATION
None.
The
responses to this Item will be included in Pinnacle Financial’s Proxy Statement
for the Annual Meeting of Shareholders to be held April 17, 2007, which will
be
filed on or before March 14, 2007 under the headings “Corporate Governance,”
“Proposal #1 Election of Directors,” “Executive Management Information,”
"Section 16A Beneficial Ownership Reporting Compliance" and “Security Ownership
of Certain Beneficial Owners and Management” and are incorporated herein by
reference.
The
responses to this Item will be included in Pinnacle Financial’s Proxy Statement
for the Annual Meeting of Shareholders to be held April 17, 2007, which will
be
filed on or before March 14, 2007 under the heading, "Executive Compensation"
and are incorporated herein by reference.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
responses to this Item will be included in Pinnacle Financial’s Proxy Statement
for the Annual Meeting of Shareholders to be held April 17, 2007, which will
be
filed on or before March 14, 2007 under the headings, “Security Ownership of
Certain Beneficial Owners and Management,” and “Executive Compensation,” and are
incorporated herein by reference.
The
following table summarizes information concerning the Company's equity
compensation plans at December 31, 2006:
Plan
Category
|
Number
of Securities to be Issued upon Exercise of Outstanding Options,
Warrants
and Rights
|
Weighted
Average Exercise Price of Outstanding Options, Warrants and
Rights
|
Number
of Securities Remaining Available for Future Issuance Under Equity
Compensation Plans (Excluding Securities Reflected in First
Column)
|
Equity
compensation plans approved by shareholders:
|
|
|
|
2000
Stock Incentive Plan
|
909,225
|
$7.51
|
-
|
2004
Equity Incentive Plan
|
634,185
|
$23.06
|
609,922
|
1999
Cavalry Bancorp, Inc. Stock Option Plan
|
115,049
|
$10.79
|
-
|
Equity
compensation plans not approved by shareholders
|
N/A
|
N/A
|
N/A
|
Total
|
1,658,459
|
$12.93
|
609,922
|
The
responses to this Item will be included in Pinnacle Financial’s Proxy Statement
for the Annual Meeting of Shareholders to be held April 17, 2007, which will
be
filed on or before March 14, 2007 under the headings, "Security Ownership
of
Certain Beneficial Owners and Management - Certain Relationships and Related
Transactions," "Executive Compensation," and “Corporate Governance-Director
Independence” and are incorporated herein by reference.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The
responses to this Item will be included in Pinnacle Financial’s Proxy Statement
for the Annual Meeting of Shareholders to be held April 17, 2007, which will
be
filed on or before March 14, 2007 under the heading, "Independent Registered
Public Accounting Firm" and are incorporated herein by reference.
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit
No.
|
Description
|
2.1
|
Merger
Agreement, dated September 30, 2005, by and between Pinnacle Financial
Partners, Inc. and Cavalry Bancorp, Inc. (schedules and exhibits
to which
been omitted pursuant to Items 601(b)(2) of Regulations S-K (1)
|
3.1
|
Amended
and Restated Charter (2)
|
3.2
|
Bylaws
(3)
|
4.1.1
|
Specimen
Common Stock Certificate (4)
|
4.1.2
|
See
Exhibits 3.1 and 3.2 for provisions of the Charter and Bylaws defining
rights of holders of the Common Stock
|
10.1
|
Lease
Agreement by and between TMP, Inc. (former name of Pinnacle Financial
Partners, Inc.) and Commercial Street Associates dated March 16,
2000
(main office)
(4)
|
10.4
|
Form
of Pinnacle Financial Partners, Inc.'s Organizers' Warrant Agreement
(4)
|
10.7
|
Employment
Agreement dated as of August 1, 2000 by and between Pinnacle National
Bank, Pinnacle Financial Partners, Inc. and Robert A. McCabe, Jr.
(4)
*
|
10.8
|
Employment
Agreement dated as of April 1, 2000 by and between Pinnacle National
Bank,
Pinnacle Financial Partners, Inc. and Hugh M. Queener (4)
*
|
10.9
|
Letter
Agreement dated March 14, 2000 and accepted March 16, 2000 by and
between
Pinnacle Financial Corporation (now known as Pinnacle Financial Partners,
Inc.) and Atkinson Public Relations (4)
|
10.14
|
Employment
Agreement dated March 1, 2000 by and between Pinnacle National Bank,
Pinnacle Financial Partners, Inc. and M. Terry Turner (4)
*
|
10.15
|
Pinnacle
Financial Partners, Inc. 2000 Stock Incentive Plan (4)
*
|
10.16
|
Form
of Pinnacle Financial Partners, Inc.'s Stock Option Award (4)
*
|
10.18
|
Agreement
for Assignment of Lease by and between Franklin National Bank and
TMP,
Inc., now known as Pinnacle Financial Partners, Inc., effective July
17,
2000 (4)
|
10.19
|
Form
of Assignment of Lease and Consent of Landlord by Franklin National
Bank,
Pinnacle Financial Partners, Inc., formerly TMP, Inc., and Stearns
Investments, Jack J. Stearns and Edna Stearns, General Partners
(4)
|
10.21
|
Green
Hills Office Lease (5)
|
10.23
|
Form
of Restricted Stock Award Agreement (6)
|
10.24
|
Form
of Incentive Stock Option Agreement (6)
|
10.25
|
Lease
Agreement for West End Lease (7)
|
10.26
|
Lease
Amendments for Commerce Street location (7)
|
10.27
|
Pinnacle
Financial Partners, Inc. 2004 Equity Incentive Plan (8)
*
|
10.28
|
2005
Annual Cash Incentive Plan (2)
*
|
10.29
|
Fourth
Amendment to Commerce Street Lease (2)
|
10.30
|
Employment
Agreement by and between Pinnacle National Bank and Ed C. Loughry,
Jr.
(9)
*
|
10.31
|
Employment
Agreement by and between Pinnacle National Bank and William S. Jones
(9)
*
|
10.32
|
Consulting
Agreement by and between Pinnacle National Bank and Ronnie F. Knight
(9)
*
|
10.33
|
2006
Director Compensation Summary
(10) *
|
10.34
|
Form
of Restricted Stock Agreement for non-employee directors (10)
*
|
10.35
|
Form
of Non-Qualified Stock Option Agreement (11)
*
|
10.36
|
2006
Annual Cash Incentive Plan (12)*
|
10.37
|
Employment
Agreement dated as of March 14, 2006 by and among Pinnacle Financial
Partners, Inc., Pinnacle National Bank and Harold R. Carpenter
(12)*
|
10.38
|
Calvary
Bancorp, Inc. 1999 Stock Option Plan (13)*
|
10.39
|
Amendment
No. 1 to Calvary Bancorp, Inc. 1999 Stock Option Plan (13)*
|
10.40
|
Form
of Non-Qualified Stock Option Agreement (13)*
|
10.41
|
Amendment
No. 1 to Pinnacle Financial Partners, Inc. 2000 Stock Incentive Plan
(13)*
|
10.42
|
Amendment
No. 3 to Pinnacle Financial Partners, Inc. 2004 Equity Incentive
Plan
(13)*
|
10.43
|
2007
Named Executive Officer Summary*
|
10.44
|
Form
of Restricted Stock Award Agreement*
|
21.1
|
Subsidiaries
of Pinnacle Financial Partners, Inc.
|
23.1
|
Consent
of KPMG LLP
|
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
|
(*)
Management compensatory plan or arrangement
|
(1)
|
Registrant
hereby incorporates by reference to Registrant’s Current Report on Form
8-K filed on October 3, 2005.
|
|
(2)
|
Registrant
hereby incorporates by reference to Registrant’s Form 10-Q for the quarter
ended March 31, 2005.
|
|
(3)
|
Registrant
hereby incorporates by reference to Registrant’s Form 10-KSB for the
fiscal year ended December 31, 2002 as filed with the SEC on
March 6, 2003.
|
|
(4)
|
Registrant
hereby incorporates by reference to the Registrant’s Registration
Statement on Form SB-2, as amended (File
No. 333-38018).
|
|
(5)
|
Registrant
hereby incorporates by reference to the Registrant’s Form 10-KSB for the
fiscal year ended December 31, 2000 as filed with the SEC on March
29, 2001.
|
|
(6)
|
Registrant
hereby incorporates by reference to Registrant’s Form 10-Q for the quarter
ended September 30, 2004.
|
|
(7)
|
Registrant
hereby incorporates by reference to Registrant’s Form 10-K for the
fiscal year ended December 31, 2004 as filed with the SEC on February
28, 2005.
|
|
(8)
|
Registrant
hereby incorporates by reference to Registrant’s Current Report on Form
8-K filed on April 19, 2005.
|
|
(9)
|
Registrant
hereby incorporates by reference to Registrant’s Registration Statement on
Form S-4, as amended (File No.
333-129076).
|
|
(10)
|
Registrant
hereby incorporates by reference to Registrant’s Current Report on Form
8-K filed on
January 23, 2006.
|
(11)
Registrant hereby incorporates by reference to Registrant’s Form 10-K for the
fiscal year ended December 31, 2005 as filed with the SEC on February 24,
2006.
(12) |
Registrant
hereby incorporates by reference to Registrant’s Current Report on Form
8-K filed on March 20, 2006.
|
(13)
Registrant
hereby incorporates by reference to Registrant’s Form 10-Q for the quarter ended
on September 30, 2006.
Pinnacle
Financial is a party to certain agreements entered into in connection with
the
offering by PNFP Statutory Trust I, PNFP Statutory Trust II and PNFP Statutory
Trust III of an aggregate of $50,000,000 in trust preferred securities, as
more
fully described in this Annual Report on Form 10-K. In accordance with Item
601(b)(4)(ii) of Regulation SB, and because the total amount of the trust
preferred securities is not in excess of 10% of Pinnacle Financial’s total
assets, Pinnacle Financial has not filed the various documents and agreements
associated with the trust preferred securities herewith. Pinnacle Financial
has,
however, agreed to furnish copies of the various documents and agreements
associated with the trust preferred securities to the Securities and Exchange
Commission upon request.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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
|
|
|
|
|
|
|
|
By:
|
/s/
M. Terry Turner
|
|
|
M.
Terry Turner
|
Date:
February 27, 2007
|
|
President
and Chief Executive Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has
been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
SIGNATURES
|
TITLE
|
DATE
|
|
|
|
/s/
Robert A. McCabe, Jr.
|
Chairman
of the Board
|
February
27, 2007
|
Robert
A. McCabe, Jr.
|
|
|
|
|
|
/s/
M. Terry Turner
|
Director,
President and Chief Executive Officer
|
February
27, 2007
|
M.
Terry Turner
|
(Principal
Executive Officer)
|
|
|
|
|
/s/
Harold R. Carpenter
|
Chief
Financial Officer
|
February
27, 2007
|
Harold
R. Carpenter
|
(Principal
Financial and Accounting Officer)
|
|
|
|
|
/s/
Sue R. Atkinson
|
Director
|
February
27, 2007
|
Sue
R. Atkinson
|
|
|
|
|
|
/s/
Gregory L. Burns
|
Director
|
February
27, 2007
|
Gregory
L. Burns
|
|
|
|
|
|
/s/
James C. Cope
|
Director
|
February
27, 2007
|
James
C. Cope
|
|
|
|
|
|
/s/
Colleen Conway-Welch
|
Director
|
February
27, 2007
|
Colleen
Conway-Welch
|
|
|
|
|
|
/s/ Clay
T. Jackson |
Director
|
February
27, 2007
|
Clay
T. Jackson
|
|
|
|
|
|
/s/
William H. Huddleston
|
Director
|
February
27, 2007
|
William
H. Huddleston
|
|
|
|
|
|
/s/
Ed C. Loughry, Jr.
|
Director
|
February
27, 2007
|
Ed
C. Loughry, Jr.
|
|
|
|
|
|
/s/
Hal N. Pennington
|
Director
|
February
27, 2007
|
Hal
N. Pennington
|
|
|
|
|
|
/s/
Dale W. Polley
|
Director
|
February
27, 2007
|
Dale
W. Polley
|
|
|
|
|
|
/s/
James L. Shaub, II
|
Director
|
February
27, 2007
|
James
L. Shaub, II
|
|
|
|
|
|
/s/
Reese L. Smith, III
|
Director
|
February
27, 2007
|
Reese
L. Smith, III
|
|
|
EXHIBIT
INDEX
Exhibit
No.
|
Description
|
2.1
|
Merger
Agreement, dated September 30, 2005, by and between Pinnacle Financial
Partners, Inc. and Cavalry Bancorp, Inc. (schedules and exhibits
to which
been omitted pursuant to Items 601(b)(2) of Regulations S-K (1)
|
3.1
|
Amended
and Restated Charter (2)
|
3.2
|
Bylaws
(3)
|
4.1.3
|
Specimen
Common Stock Certificate (4)
|
4.1.4
|
See
Exhibits 3.1 and 3.2 for provisions of the Charter and Bylaws defining
rights of holders of the Common Stock
|
10.1
|
Lease
Agreement by and between TMP, Inc. (former name of Pinnacle Financial
Partners, Inc.) and Commercial Street Associates dated March 16,
2000
(main office)
(4)
|
10.4
|
Form
of Pinnacle Financial Partners, Inc.'s Organizers' Warrant Agreement
(4)
|
10.7
|
Employment
Agreement dated as of August 1, 2000 by and between Pinnacle National
Bank, Pinnacle Financial Partners, Inc. and Robert A. McCabe, Jr.
(4)
*
|
10.8
|
Employment
Agreement dated as of April 1, 2000 by and between Pinnacle National
Bank,
Pinnacle Financial Partners, Inc. and Hugh M. Queener (4)
*
|
10.9
|
Letter
Agreement dated March 14, 2000 and accepted March 16, 2000 by and
between
Pinnacle Financial Corporation (now known as Pinnacle Financial Partners,
Inc.) and Atkinson Public Relations (4)
|
10.14
|
Employment
Agreement dated March 1, 2000 by and between Pinnacle National Bank,
Pinnacle Financial Partners, Inc. and M. Terry Turner (4)
*
|
10.15
|
Pinnacle
Financial Partners, Inc. 2000 Stock Incentive Plan (4)
*
|
10.16
|
Form
of Pinnacle Financial Partners, Inc.'s Stock Option Award (4)
*
|
10.18
|
Agreement
for Assignment of Lease by and between Franklin National Bank and
TMP,
Inc., now known as Pinnacle Financial Partners, Inc., effective July
17,
2000 (4)
|
10.19
|
Form
of Assignment of Lease and Consent of Landlord by Franklin National
Bank,
Pinnacle Financial Partners, Inc., formerly TMP, Inc., and Stearns
Investments, Jack J. Stearns and Edna Stearns, General Partners
(4)
|
10.22
|
Green
Hills Office Lease (5)
|
10.23
|
Form
of Restricted Stock Award Agreement (6)
|
10.24
|
Form
of Incentive Stock Option Agreement (6)
|
10.25
|
Lease
Agreement for West End Lease (7)
|
10.26
|
Lease
Amendments for Commerce Street location (7)
|
10.27
|
Pinnacle
Financial Partners, Inc. 2004 Equity Incentive Plan (8)
*
|
10.28
|
2005
Annual Cash Incentive Plan (2)
*
|
10.29
|
Fourth
Amendment to Commerce Street Lease (2)
|
10.30
|
Employment
Agreement by and between Pinnacle National Bank and Ed C. Loughry,
Jr.
(9)
*
|
10.31
|
Employment
Agreement by and between Pinnacle National Bank and William S. Jones
(9)
*
|
10.32
|
Consulting
Agreement by and between Pinnacle National Bank and Ronnie F. Knight
(9)
*
|
10.33
|
2006
Director Compensation Summary
(10) *
|
10.34
|
Form
of Restricted Stock Agreement for non-employee directors (10)
*
|
10.35
|
Form
of Non-Qualified Stock Option Agreement
(11)*
|
10.36
|
2006
Annual Cash Incentive Plan (12)*
|
10.37
|
Employment
Agreement dated as of March 14, 2006 by and among Pinnacle Financial
Partners, Inc., Pinnacle National Bank and Harold R. Carpenter
(12)*
|
10.38
|
Calvary
Bancorp, Inc. 1999 Stock Option Plan (13)*
|
10.39
|
Amendment
No. 1 to Calvary Bancorp, Inc. 1999 Stock Option Plan (13)*
|
10.40
|
Form
of Non-Qualified Stock Option Agreement (13)*
|
10.41
|
Amendment
No. 1 to Pinnacle Financial Partners, Inc. 2000 Stock Incentive Plan
(13)*
|
10.42
|
Amendment
No. 3 to Pinnacle Financial Partners, Inc. 2004 Equity Incentive
Plan
(13)*
|
10.43
|
2007
Named Executive Officer Summary*
|
10.44
|
Form
of Restricted Stock Award Agreement*
|
21.1
|
Subsidiaries
of Pinnacle Financial Partners, Inc.
|
23.1
|
Consent
of KPMG LLP
|
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
|
(*)
Management compensatory plan or arrangement