Pinnacle
Financial Partners, Inc.
Report
on Form 10-Q
June
30, 2007
|
|
|
|
Page
No.
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
23
|
|
|
|
|
|
43
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
44
|
|
|
|
|
|
44
|
|
|
|
|
|
44
|
|
|
|
|
|
44
|
|
|
|
|
|
44
|
|
|
|
|
|
45
|
|
|
|
|
|
46
|
|
FORWARD-LOOKING
STATEMENTS
Pinnacle
Financial Partners, Inc. (“Pinnacle Financial”) may from time to time make
written or oral statements, including statements contained in this report
which
may constitute forward-looking statements within the meaning of Section
21E of
the Securities Exchange Act of 1934 (the “Exchange Act”). The words
“expect”, “anticipate”, “intend”, “consider”, “plan”, “believe”, “seek”,
“should”, “estimate”, and similar expressions are intended to identify such
forward-looking statements, but other statements may constitute forward-looking
statements. These statements should be considered subject to various
risks and uncertainties. Such forward-looking statements are made
based upon management's belief as well as assumptions made by, and information
currently available to, management pursuant to "safe harbor" provisions
of the
Private Securities Litigation Reform Act of 1995. Pinnacle Financial’s actual
results may differ materially from the results anticipated in forward-looking
statements due to a variety of factors. Such factors are described below
and in
Pinnacle Financial’s Form 10-K, as updated by Item 1A of part II of this Form
10-Q 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 or Knoxville, Tennessee areas, (iv) rapid fluctuations
or
unanticipated changes in interest rates, (v) the inability of our bank
subsidiary, Pinnacle National Bank to satisfy regulatory requirements for
its
expansion plans, (vi) the inability of Pinnacle Financial to achieve its
targeted expansion goals in the Knoxville, Tennessee market, (vii) the
ability
of Pinnacle Financial to grow its loan portfolio at historic or planned
rates
and (viii) changes in the legislative and regulatory environment, including
compliance with the various provisions of the Sarbanes-Oxley Act of
2002. Many of such factors are beyond Pinnacle Financial’s ability to
control or predict, and readers are cautioned not to put undue reliance
on such
forward-looking statements. Pinnacle Financial does not intend to
update or reissue any forward-looking statements contained in this report
as a
result of new information or other circumstances that may become known
to
Pinnacle Financial.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
|
|
June
30,
2007
|
|
|
December
31,
2006
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and noninterest-bearing due from banks
|
|
$ |
51,816,558
|
|
|
$ |
43,611,533
|
|
Interest-bearing
due from banks
|
|
|
10,375,896
|
|
|
|
1,041,174
|
|
Federal
funds sold
|
|
|
43,808,801
|
|
|
|
47,866,143
|
|
Cash
and cash equivalents
|
|
|
106,001,255
|
|
|
|
92,518,850
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale, at fair value
|
|
|
312,712,769
|
|
|
|
319,237,428
|
|
Securities
held-to-maturity (fair value of $26,211,163 and $26,594,235 at
June 30,
2007 and December 31, 2006, respectively)
|
|
|
27,068,467
|
|
|
|
27,256,876
|
|
Mortgage
loans held-for-sale
|
|
|
4,972,689
|
|
|
|
5,654,381
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
1,663,029,941
|
|
|
|
1,497,734,824
|
|
Less
allowance for loan losses
|
|
|
(17,375,408 |
) |
|
|
(16,117,978 |
) |
Loans,
net
|
|
|
1,645,654,533
|
|
|
|
1,481,616,846
|
|
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
37,854,546
|
|
|
|
36,285,796
|
|
Investments
in unconsolidated subsidiaries and other entities
|
|
|
17,000,500
|
|
|
|
16,200,684
|
|
Accrued
interest receivable
|
|
|
11,434,826
|
|
|
|
11,019,173
|
|
Goodwill
|
|
|
114,287,640
|
|
|
|
114,287,640
|
|
Core
deposit intangible, net
|
|
|
10,353,498
|
|
|
|
11,385,006
|
|
Other
assets
|
|
|
27,986,475
|
|
|
|
26,724,183
|
|
Total
assets
|
|
$ |
2,315,327,198
|
|
|
$ |
2,142,186,863
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand
|
|
$ |
294,630,589
|
|
|
$ |
300,977,814
|
|
Interest-bearing
demand
|
|
|
284,080,394
|
|
|
|
236,674,425
|
|
Savings
and money market accounts
|
|
|
530,081,179
|
|
|
|
485,935,897
|
|
Time
|
|
|
688,744,094
|
|
|
|
598,823,167
|
|
Total
deposits
|
|
|
1,797,536,256
|
|
|
|
1,622,411,303
|
|
Securities
sold under agreements to repurchase
|
|
|
140,442,583
|
|
|
|
141,015,761
|
|
Federal
Home Loan Bank advances
|
|
|
26,698,614
|
|
|
|
53,725,833
|
|
Federal
funds purchased
|
|
|
20,000,000
|
|
|
|
-
|
|
Subordinated
debt
|
|
|
51,548,000
|
|
|
|
51,548,000
|
|
Accrued
interest payable
|
|
|
5,960,627
|
|
|
|
4,952,422
|
|
Other
liabilities
|
|
|
7,946,624
|
|
|
|
12,516,523
|
|
Total
liabilities
|
|
|
2,050,132,704
|
|
|
|
1,886,169,842
|
|
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;
|
|
|
|
|
|
|
|
|
15,545,581
issued and outstanding at June 30, 2007 and
|
|
|
|
|
|
|
|
|
15,446,074
issued and outstanding at December 31, 2006
|
|
|
15,545,581
|
|
|
|
15,446,074
|
|
Additional
paid-in capital
|
|
|
212,922,658
|
|
|
|
211,502,516
|
|
Retained
earnings
|
|
|
42,137,029
|
|
|
|
31,109,324
|
|
Accumulated
other comprehensive loss, net of deferred income taxes
|
|
|
(5,410,774 |
) |
|
|
(2,040,893 |
) |
Total
stockholders’ equity
|
|
|
265,194,494
|
|
|
|
256,017,021
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
2,315,327,198
|
|
|
$ |
2,142,186,863
|
|
See
accompanying notes to consolidated financial statements.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS
OF INCOME
(Unaudited)
|
|
Three
Months Ended
June
30,
|
|
|
Six
Months Ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
including fees
|
|
$ |
30,555,889
|
|
|
$ |
24,245,895
|
|
|
$ |
59,533,113
|
|
|
$ |
37,424,725
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
3,394,359
|
|
|
|
3,148,459
|
|
|
|
6,740,479
|
|
|
|
6,009,577
|
|
Tax-exempt
|
|
|
693,417
|
|
|
|
494,849
|
|
|
|
1,362,936
|
|
|
|
895,622
|
|
Federal
funds sold and other
|
|
|
864,198
|
|
|
|
415,437
|
|
|
|
1,610,577
|
|
|
|
785,112
|
|
Total
interest income
|
|
|
35,507,863
|
|
|
|
28,304,640
|
|
|
|
69,247,105
|
|
|
|
45,115,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
14,456,629
|
|
|
|
9,563,035
|
|
|
|
27,993,892
|
|
|
|
15,413,344
|
|
Securities
sold under agreements to repurchase
|
|
|
1,890,743
|
|
|
|
678,177
|
|
|
|
3,602,834
|
|
|
|
1,186,965
|
|
Federal
funds purchased and other borrowings
|
|
|
1,499,436
|
|
|
|
1,168,265
|
|
|
|
2,906,896
|
|
|
|
2,112,761
|
|
Total
interest expense
|
|
|
17,846,808
|
|
|
|
11,409,477
|
|
|
|
34,503,622
|
|
|
|
18,713,070
|
|
Net
interest income
|
|
|
17,661,055
|
|
|
|
16,895,163
|
|
|
|
34,743,483
|
|
|
|
26,401,966
|
|
Provision
for loan losses
|
|
|
899,998
|
|
|
|
1,706,865
|
|
|
|
1,687,964
|
|
|
|
2,094,049
|
|
Net
interest income after provision for loan losses
|
|
|
16,761,057
|
|
|
|
15,188,298
|
|
|
|
33,055,519
|
|
|
|
24,307,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
1,920,085
|
|
|
|
1,356,114
|
|
|
|
3,717,234
|
|
|
|
1,794,384
|
|
Investment
sales commissions
|
|
|
850,207
|
|
|
|
652,900
|
|
|
|
1,584,767
|
|
|
|
1,166,497
|
|
Insurance
sales commissions
|
|
|
628,953
|
|
|
|
748,534
|
|
|
|
1,265,915
|
|
|
|
1,013,362
|
|
Gain
on loans and loan participations sold, net
|
|
|
638,895
|
|
|
|
470,809
|
|
|
|
1,002,201
|
|
|
|
795,355
|
|
Trust
fees
|
|
|
425,205
|
|
|
|
311,997
|
|
|
|
845,495
|
|
|
|
363,997
|
|
Other
noninterest income
|
|
|
1,088,172
|
|
|
|
839,771
|
|
|
|
2,161,488
|
|
|
|
1,294,781
|
|
Total
noninterest income
|
|
|
5,551,517
|
|
|
|
4,380,125
|
|
|
|
10,577,100
|
|
|
|
6,428,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
|
8,794,853
|
|
|
|
7,289,996
|
|
|
|
17,061,354
|
|
|
|
11,738,354
|
|
Equipment
and occupancy
|
|
|
2,412,528
|
|
|
|
2,081,194
|
|
|
|
4,577,230
|
|
|
|
3,254,547
|
|
Marketing
and other business development
|
|
|
430,291
|
|
|
|
357,904
|
|
|
|
682,026
|
|
|
|
548,375
|
|
Postage
and supplies
|
|
|
524,197
|
|
|
|
445,211
|
|
|
|
979,114
|
|
|
|
630,619
|
|
Amortization
of core deposit intangible
|
|
|
515,755
|
|
|
|
515,755
|
|
|
|
1,031,508
|
|
|
|
647,437
|
|
Other
noninterest expense
|
|
|
1,806,680
|
|
|
|
1,493,765
|
|
|
|
3,276,764
|
|
|
|
2,250,377
|
|
Merger
related expense
|
|
|
-
|
|
|
|
921,237
|
|
|
|
-
|
|
|
|
1,364,567
|
|
Total
noninterest expense
|
|
|
14,484,304
|
|
|
|
13,105,062
|
|
|
|
27,607,996
|
|
|
|
20,434,276
|
|
Income
before income taxes
|
|
|
7,828,270
|
|
|
|
6,463,361
|
|
|
|
16,024,623
|
|
|
|
10,302,017
|
|
Income
tax expense
|
|
|
2,402,405
|
|
|
|
2,140,887
|
|
|
|
4,996,918
|
|
|
|
3,367,647
|
|
Net
income
|
|
$ |
5,425,865
|
|
|
$ |
4,322,474
|
|
|
$ |
11,027,705
|
|
|
$ |
6,934,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per common share
|
|
$ |
0.35
|
|
|
$ |
0.28
|
|
|
$ |
0.71
|
|
|
$ |
0.56
|
|
Diluted
net income per common share
|
|
$ |
0.33
|
|
|
$ |
0.26
|
|
|
$ |
0.66
|
|
|
$ |
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,494,522
|
|
|
|
15,335,754
|
|
|
|
15,464,151
|
|
|
|
12,473,187
|
|
Diluted
|
|
|
16,664,213
|
|
|
|
16,503,692
|
|
|
|
16,640,977
|
|
|
|
13,640,565
|
|
See
accompanying notes to consolidated financial statements.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
AND
COMPREHENSIVE INCOME
(Unaudited)
For
the six months ended June 30, 2007 and
2006
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Additional
Paid-in
Capital
|
|
|
Unearned
Compensation
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other Comprehensive Loss
|
|
|
Total
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2005
|
|
|
8,426,551
|
|
|
$ |
8,426,551
|
|
|
$ |
44,890,912
|
|
|
$ |
(169,689 |
) |
|
$ |
13,182,291
|
|
|
$ |
(2,893,640 |
) |
|
$ |
63,436,425
|
|
Transfer
of unearned compensation to additional paid-in capital upon adoption
of
SFAS No. 123(R)
|
|
|
-
|
|
|
|
-
|
|
|
|
(169,689 |
) |
|
|
169,689
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercise
of employee common stock options and related tax benefits
|
|
|
83,667
|
|
|
|
83,667
|
|
|
|
813,688
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
897,355
|
|
Issuance
of restricted common shares pursuant to 2004 Equity Incentive
Plan
|
|
|
4,400
|
|
|
|
4,400
|
|
|
|
(4,400 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Compensation
expense for restricted stock
|
|
|
-
|
|
|
|
-
|
|
|
|
127,218
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
127,218
|
|
Compensation
expense for stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
405,394
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
405,394
|
|
Merger
with Cavalry Bancorp, Inc.
|
|
|
6,856,298
|
|
|
|
6,856,298
|
|
|
|
164,231,274
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
171,087,572
|
|
Dividends
paid to minority interest shareholders of PNFP Properties,
Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,813 |
) |
|
|
-
|
|
|
|
(7,813 |
) |
Costs
to register common stock issued in connection with the merger
with Cavalry
Bancorp, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
(187,609 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(187,609 |
) |
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,934,370
|
|
|
|
-
|
|
|
|
6,934,370
|
|
Net
unrealized holding losses on available-for-sale securities, net
of
deferred tax benefit of $2,316,138
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,954,393 |
) |
|
|
(3,954,393 |
) |
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,979,977
|
|
Balances,
June 30, 2006
|
|
|
15,370,916
|
|
|
$ |
15,370,916
|
|
|
$ |
210,106,788
|
|
|
$ |
-
|
|
|
$ |
20,108,848
|
|
|
$ |
(6,848,033 |
) |
|
$ |
238,738,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2006
|
|
|
15,446,074
|
|
|
$ |
15,446,074
|
|
|
$ |
211,502,516
|
|
|
$ |
-
|
|
|
$ |
31,109,324
|
|
|
$ |
(2,040,893 |
) |
|
$ |
256,017,021
|
|
Exercise
of employee common stock options and related tax benefits
|
|
|
70,981
|
|
|
|
70,981
|
|
|
|
525,216
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
596,197
|
|
Issuance
of restricted common shares pursuant to 2004 Equity Incentive
Plan
|
|
|
28,526
|
|
|
|
28,526
|
|
|
|
(28,526 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Compensation
expense for restricted stock
|
|
|
-
|
|
|
|
-
|
|
|
|
121,747
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
121,747
|
|
Compensation
expense for stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
801,705
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
801,705
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,027,705
|
|
|
|
-
|
|
|
|
11,027,705
|
|
Net
unrealized holding losses on available-for-sale securities, net
of
deferred tax benefit of $1,285,456
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,369,881 |
) |
|
|
(3,369,881 |
) |
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,657,824
|
|
Balances,
June 30, 2007
|
|
|
15,545,581
|
|
|
$ |
15,545,581
|
|
|
$ |
212,922,658
|
|
|
$ |
-
|
|
|
$ |
42,137,029
|
|
|
$ |
(5,410,774 |
) |
|
$ |
265,194,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Six
months ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
Operating
activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
11,027,705
|
|
|
$ |
6,934,370
|
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Net
amortization of premium on securities
|
|
|
256,167
|
|
|
|
407,638
|
|
Depreciation
and net amortization
|
|
|
1,040,380
|
|
|
|
2,102,657
|
|
Provision
for loan losses
|
|
|
1,687,964
|
|
|
|
2,094,049
|
|
Gains
on loans and loan participations sold, net
|
|
|
(1,002,201 |
) |
|
|
(795,355 |
) |
Stock-based
compensation expense
|
|
|
923,452
|
|
|
|
532,612
|
|
Deferred
tax benefit from exercise of stock options
|
|
|
(328,621 |
) |
|
|
(1,155,385 |
) |
Excess
tax benefit from stock compensation
|
|
|
(94,640 |
) |
|
|
(74,908 |
) |
Mortgage
loans held for sale:
|
|
|
|
|
|
|
|
|
Loans
originated
|
|
|
(81,770,437 |
) |
|
|
(61,896,095 |
) |
Loans
sold
|
|
|
83,242,466
|
|
|
|
60,374,707
|
|
(Increase)
decrease in other assets
|
|
|
1,263,176
|
|
|
|
(7,284,404 |
) |
Decrease
in other liabilities
|
|
|
(3,561,695 |
) |
|
|
(7,225,932 |
) |
Net
cash provided by (used in) operating activities
|
|
|
12,683,716
|
|
|
|
(5,986,046 |
) |
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
Activities
in securities available-for-sale:
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(19,457,551 |
) |
|
|
(10,779,152 |
) |
Sales
|
|
|
-
|
|
|
|
-
|
|
Maturities,
prepayments and calls
|
|
|
20,479,160
|
|
|
|
17,014,717
|
|
|
|
|
1,021,609
|
|
|
|
6,235,565
|
|
Increase
in loans, net
|
|
|
(164,558,472 |
) |
|
|
(159,916,412 |
) |
Purchases
of premises and equipment and software
|
|
|
(3,425,182 |
) |
|
|
(2,852,886 |
) |
Cash
and cash equivalents acquired in merger with Cavalry Bancorp,
Inc., net of acquisition costs
|
|
|
-
|
|
|
|
37,420,210
|
|
Investments
in unconsolidated subsidiaries and other entities
|
|
|
(823,474 |
) |
|
|
-
|
|
Purchases
of other assets
|
|
|
-
|
|
|
|
(519,689 |
) |
Net
cash used in investing activities
|
|
|
(167,785,519 |
) |
|
|
(119,633,212 |
) |
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
175,588,408
|
|
|
|
166,094,406
|
|
Net
increase (decrease) in securities sold under agreements to
repurchase
|
|
|
(573,178 |
) |
|
|
38,545,678
|
|
Net
increase in Federal funds purchased
|
|
|
20,000,000
|
|
|
|
-
|
|
Advances
from Federal Home Loan Bank:
|
|
|
|
|
|
|
|
|
Issuances
|
|
|
45,000,000
|
|
|
|
31,000,000
|
|
Payments
|
|
|
(72,027,219 |
) |
|
|
(56,518,145 |
) |
Exercise
of common stock options
|
|
|
501,557
|
|
|
|
822,447
|
|
Excess
tax benefit from stock compensation
|
|
|
94,640
|
|
|
|
74,908
|
|
Costs
incurred in connection with registration of common stock issued
in
merger
|
|
|
-
|
|
|
|
(187,609 |
) |
Net
cash provided by financing activities
|
|
|
168,584,208
|
|
|
|
179,831,685
|
|
Net
increase in cash and cash equivalents
|
|
|
13,482,405
|
|
|
|
54,212,427
|
|
Cash
and cash equivalents, beginning of period
|
|
|
92,518,850
|
|
|
|
58,654,270
|
|
Cash
and cash equivalents, end of period
|
|
$ |
106,001,255
|
|
|
$ |
112,866,697
|
|
See
accompanying notes to consolidated financial statements.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1.
|
Summary
of Significant Accounting
Policies
|
Nature
of Business — Pinnacle Financial Partners, Inc. (Pinnacle Financial) is a
bank holding company whose primary business is conducted by its wholly-owned
subsidiary, Pinnacle National Bank (Pinnacle National). Pinnacle
National is a commercial bank headquartered in Nashville, Tennessee with
operations in Nashville and Knoxville, Tennessee. Pinnacle National provides
a
full range of financial services, including banking, investments, mortgages,
and
insurance.
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. The unaudited consolidated financial statements
include, in the opinion of management, all adjustments necessary for a
fair
presentation of such financial statements for all periods
presented.
Use
of Estimates — The preparation of financial statements in conformity with
U.S. generally accepted accounting principles 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 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 Pinnacle Financial determine in a future period that the
goodwill recorded in connection with the acquisition of Cavalry Bancorp,
Inc.
(“Cavalry”) has been impaired, then a charge to 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
six
months ended June 30, 2007 and 2006 as follows:
|
|
For
the six months ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
Cash
Payments:
|
|
|
|
|
|
|
Interest
|
|
$ |
35,975,282
|
|
|
$ |
12,618,997
|
|
Income
taxes
|
|
|
7,850,000
|
|
|
|
3,600,000
|
|
Noncash
Transactions:
|
|
|
|
|
|
|
|
|
Loans
charged-off to the allowance for loan losses
|
|
|
552,180
|
|
|
|
500,158
|
|
Loans
foreclosed upon with repossessions transferred to other
assets
|
|
|
110,570
|
|
|
|
-
|
|
Common
stock and options issued to acquire Cavalry Bancorp, Inc
|
|
|
-
|
|
|
|
171,087,572
|
|
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
June 30, 2007 and 2006, there were options outstanding to purchase 1,902,000
and
1,562,000 common shares, respectively. Most of these options have
exercise prices, compensation costs attributable to future services and
excess
tax benefits, 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 the three and six
months ended June 30, 2007 and 2006. There were common stock options
of 221,000, and 380,000 outstanding as of June 30, 2007 and 2006, respectively,
which were considered anti-dilutive and thus have not been considered in
the
diluted earnings per share calculations below. Additionally, as of
June 30, 2007 and 2006, Pinnacle Financial had outstanding warrants to
purchase
395,000 and 406,000, respectively, of common shares which have been considered
in the calculation of Pinnacle Financial’s diluted net income per share for
three and six months ended June 30, 2007 and 2006.
The
following is a summary of the basic and diluted earnings per share calculation
for the three and six months ended June 30, 2007 and 2006:
|
|
For
the three months ended June 30,
|
|
|
For
the six months ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Basic
earnings per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
- Net income
|
|
$ |
5,425,865
|
|
|
$ |
4,322,474
|
|
|
$ |
11,027,705
|
|
|
$ |
6,934,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
- Average common shares outstanding
|
|
|
15,494,522
|
|
|
|
15,335,754
|
|
|
|
15,464,151
|
|
|
|
12,473,187
|
|
Basic
net income per share
|
|
$ |
0.35
|
|
|
$ |
0.28
|
|
|
$ |
0.71
|
|
|
$ |
0.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
- Net income
|
|
$ |
5,425,865
|
|
|
$ |
4,322,474
|
|
|
$ |
11,027,705
|
|
|
$ |
6,934,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
- Average common shares outstanding
|
|
|
15,494,522
|
|
|
|
15,335,754
|
|
|
|
15,464,151
|
|
|
|
12,473,187
|
|
Dilutive
shares contingently issuable
|
|
|
1,169,691
|
|
|
|
1,167,938
|
|
|
|
1,176,826
|
|
|
|
1,167,378
|
|
Average
diluted common shares outstanding
|
|
|
16,664,213
|
|
|
|
16,503,692
|
|
|
|
16,640,977
|
|
|
|
13,640,565
|
|
Diluted
net income per share
|
|
$ |
0.33
|
|
|
$ |
0.26
|
|
|
$ |
0.66
|
|
|
$ |
0.51
|
|
Comprehensive
Income — 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 U.S. generally accepted accounting principles
are
included in comprehensive income but excluded from net income. Currently,
Pinnacle Financial’s other comprehensive income consists of unrealized gains and
losses, net of deferred income taxes, on securities
available-for-sale.
Note
2.
|
Merger
with Cavalry Bancorp, Inc.
|
On
March
15, 2006, Pinnacle Financial consummated its merger with Cavalry, a one-bank
holding company located in Murfreesboro, Tennessee. Pursuant to the merger
agreement, Pinnacle acquired all of the outstanding shares of 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.
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:
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
shown
in the table 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 recognized $13.2
million as a core deposit intangible in connection with its merger with
Cavalry. 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 six months
ended June 30, 2007 and 2006, $1,032,000 and $647,000 of amortization,
respectively, was recognized in the accompanying statement of
income. Amortization expense associated with this identified
intangible will approximate $1.8 million to $2.1 million per year for the
next
four 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 U.S. 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 assets or liabilities associated with these
adjustments. The discounts and premiums related to financial assets
and liabilities are being amortized into the statements of income using
a method
that approximates the level yield method over the anticipated lives of
the
underlying financial assets or liabilities. For the six months ended
June 30, 2007 and 2006, the accretion of the fair value discounts related
to the
acquired loans and certificates of deposit increased net interest income
by
approximately $1,520,000 and $1,639,000, respectively. Based on the
estimated useful lives of the acquired loans and deposits, Pinnacle Financial
expects to recognize increases in net interest income related to accretion
of
these purchase accounting adjustments of $2.5 million for the remainder
of 2007
and 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 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 June
30, 2007, the carrying value of these loans had been reduced to $903,000
due to
cash payments received from the borrowers.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
following pro forma income statements assume the merger was consummated
on
January 1, 2006 and purchase accounting adjustments began to be recorded
at that
time. 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, except per share
information).
|
|
Six
months ended June 30,
|
|
|
|
2007
|
|
|
2006(1)
|
|
Pro
Forma Income Statements:
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
34,737
|
|
|
$ |
32,775
|
|
Provision
for loan losses
|
|
|
1,688
|
|
|
|
3,075
|
|
Noninterest
income
|
|
|
10,577
|
|
|
|
8,825
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
17,061
|
|
|
|
14,519
|
|
Other
noninterest expense
|
|
|
10,547
|
|
|
|
9,752
|
|
Net
income before taxes
|
|
|
16,018
|
|
|
|
14,254
|
|
Income
tax expense
|
|
|
4,995
|
|
|
|
6,075
|
|
Net
income
|
|
$ |
11,023
|
|
|
$ |
8,179
|
|
|
|
|
|
|
|
|
|
|
Pro
Forma Per Share Information:
|
|
|
|
|
|
|
|
|
Basic
net income per common share
|
|
$ |
0.71
|
|
|
$ |
0.53
|
|
Diluted
net income per common share
|
|
$ |
0.66
|
|
|
$ |
0.50
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,494,522
|
|
|
|
15,314,194
|
|
Diluted
|
|
|
16,664,213
|
|
|
|
16,481,573
|
|
(1)
|
In
preparation and as a result of the merger during 2006, Cavalry
and
Pinnacle Financial incurred significant merger related charges
of
approximately $10.6 million in the aggregate, primarily for severance
benefits, accelerated vesting of defined compensation agreements,
investment banker fees, etc. Including these charges would have
decreased
pro forma net income for the six months ended June 30, 2006 by
$6.1
million resulting in net income of $2,080,000 and a basic and
fully
diluted net income per share of $0.14 and $0.13,
respectively.
|
During
the three and six months ended June 30, 2006, Pinnacle Financial incurred
merger
integration expense related to the merger with Cavalry of $921,000 and
$1,365,000, respectively. These expenses were directly related to the
merger, recognized as incurred and reflected on the accompanying consolidated
statement of income as merger related expense.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
amortized cost and fair value of securities available-for-sale and
held-to-maturity at June 30, 2007 and December 31, 2006 are summarized
as
follows:
|
|
June
30, 2007
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Fair
Value
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
U.S.
government agency securities
|
|
|
37,088,067
|
|
|
|
-
|
|
|
|
748,524
|
|
|
|
36,339,543
|
|
Mortgage-backed
securities
|
|
|
214,963,742
|
|
|
|
33,903
|
|
|
|
6,512,318
|
|
|
|
208,485,327
|
|
State
and municipal securities
|
|
|
67,633,103
|
|
|
|
1,315
|
|
|
|
1,582,346
|
|
|
|
66,052,072
|
|
Corporate
notes and other
|
|
|
1,886,814
|
|
|
|
-
|
|
|
|
50,987
|
|
|
|
1,835,827
|
|
|
|
$ |
321,571,726
|
|
|
$ |
35,218
|
|
|
$ |
8,894,175
|
|
|
$ |
312,712,769
|
|
Securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agency securities
|
|
$ |
17,747,406
|
|
|
$ |
-
|
|
|
$ |
491,431
|
|
|
$ |
17,255,975
|
|
State
and municipal securities
|
|
|
9,321,061
|
|
|
|
-
|
|
|
|
365,873
|
|
|
|
8,955,188
|
|
|
|
$ |
27,068,467
|
|
|
$ |
-
|
|
|
$ |
857,304
|
|
|
$ |
26,211,163
|
|
|
|
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 and other
|
|
|
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
|
|
$ |
17,747,228
|
|
|
$ |
-
|
|
|
$ |
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
|
|
At
June
30, 2007, approximately $306,514,000 of Pinnacle Financial’s investment
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
(Unaudited)
At
June 30, 2007 and 2006, included in securities were the following investments
with unrealized losses. The information below classifies these
investments according to the term of the unrealized loss of less than twelve
months or twelve months or longer:
|
|
Investments
with an Unrealized Loss of less than 12 months
|
|
|
Investments
with an Unrealized Loss of 12 months or longer
|
|
|
Total
Investments with an Unrealized Loss
|
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
At
June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agency securities
|
|
$ |
5,942,800
|
|
|
$ |
56,794
|
|
|
$ |
47,652,718
|
|
|
$ |
1,183,161
|
|
|
$ |
53,595,518
|
|
|
$ |
1,239,955
|
|
Mortgage-backed
securities
|
|
|
58,120,871
|
|
|
|
869,050
|
|
|
|
143,303,914
|
|
|
|
5,643,267
|
|
|
|
201,424,785
|
|
|
|
6,512,317
|
|
State
and municipal securities
|
|
|
34,888,249
|
|
|
|
602,524
|
|
|
|
38,230,860
|
|
|
|
1,345,696
|
|
|
|
73,119,109
|
|
|
|
1,948,220
|
|
Corporate
notes and other
|
|
|
-
|
|
|
|
-
|
|
|
|
1,835,827
|
|
|
|
50,987
|
|
|
|
1,835,827
|
|
|
|
50,987
|
|
Total
temporarily-impaired securities
|
|
$ |
98,951,920
|
|
|
$ |
1,528,368
|
|
|
$ |
231,023,319
|
|
|
$ |
8,223,111
|
|
|
$ |
329,975,239
|
|
|
$ |
9,751,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and other
|
|
|
-
|
|
|
|
-
|
|
|
|
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
|
|
Management
evaluates securities for other-than-temporary impairment on at least a
quarterly
basis, and more frequently when economic or market concerns warrant such
evaluation. Consideration is given to (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer, and (3) the intent and
ability
of Pinnacle Financial to retain its investment in the issue for a period
of time
sufficient to allow for any anticipated recovery in fair
value. Because the declines in fair value noted above were
attributable to increases in interest rates and not attributable to credit
quality and because Pinnacle Financial has the ability and intent to hold
all of
these investments until a market price recovery or maturity, the impairment
of
these investments is not deemed to be other-than-temporary.
Note
4.
|
Loans
and Allowance for Loan
Losses
|
The
composition of loans at June 30, 2007 and December 31, 2006 is summarized
as
follows:
|
|
At
June 30,
|
|
|
At
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Commercial
real estate – Mortgage
|
|
$ |
307,757,223
|
|
|
$ |
284,301,650
|
|
Commercial
real estate – Construction
|
|
|
177,425,911
|
|
|
|
161,903,496
|
|
Commercial
– Other
|
|
|
738,866,187
|
|
|
|
608,529,830
|
|
Total
Commercial
|
|
|
1,224,049,321
|
|
|
|
1,054,734,976
|
|
Consumer
real estate – Mortgage
|
|
|
288,325,366
|
|
|
|
299,626,769
|
|
Consumer
real estate – Construction
|
|
|
102,998,286
|
|
|
|
91,193,738
|
|
Consumer
– Other
|
|
|
47,656,968
|
|
|
|
52,179,341
|
|
Total
Consumer
|
|
|
438,980,620
|
|
|
|
442,999,848
|
|
Total
Loans
|
|
|
1,663,029,941
|
|
|
|
1,497,734,824
|
|
Allowance
for loan losses
|
|
|
(17,375,408 |
) |
|
|
(16,117,978 |
) |
Loans,
net
|
|
$ |
1,645,654,533
|
|
|
$ |
1,481,616,846
|
|
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Changes
in the allowance for loan losses for the six months ended June 30, 2007
and for
the year ended December 31, 2006 are as follows:
|
|
June
30, 2007
|
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$ |
16,117,978
|
|
|
$ |
7,857,774
|
|
Charged-off
loans
|
|
|
(552,180 |
) |
|
|
(818,467 |
) |
Recovery
of previously charged-off loans
|
|
|
121,646
|
|
|
|
244,343
|
|
Allowance
acquired in acquisition of Cavalry (see note 2)
|
|
|
-
|
|
|
|
5,102,296
|
|
Provision
for loan losses
|
|
|
1,687,964
|
|
|
|
3,732,032
|
|
Balance
at end of period
|
|
$ |
17,375,408
|
|
|
$ |
16,117,978
|
|
At
June
30, 2007 and at December 31, 2006, Pinnacle Financial had certain impaired
loans
on nonaccruing interest status. The principal balance of these
nonaccrual loans amounted to $2,392,000 and $7,070,000 at June 30, 2007
and
December 31, 2006, 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 nonaccruing loans
been on accruing status, interest income would have been higher by $230,000
and
$54,000 for the six months ended June 30, 2007 and 2006,
respectively.
At
June
30, 2007, Pinnacle Financial had granted loans and other extensions of
credit
amounting to approximately $23,598,000 to certain directors, executive
officers,
and their related entities, of which $14,137,000 had been drawn
upon. During the six months ended June 30, 2007, $20,000 of new loans
to certain directors, executive officers, and their related entities were
made
and repayments totaled $3,344,000. At December 31, 2006, Pinnacle Financial
had
granted loans and other extensions of credit amounting to approximately
$29,942,000 to certain directors, executive officers, and their related
entities, of which approximately $17,461,000 had been drawn upon. The terms
of
these loans and extensions are 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 June 30,
2007.
During
the three and six months ended June 30, 2007 and 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 U.S. generally accepted accounting principles, Pinnacle Financial
recognized a net gain on the sale of these participated loans for the six
months
ended June 30, 2007 and 2006 of approximately $212,000 and $122,000,
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 bank based on their participation in the loans. At June
30, 2007, Pinnacle Financial was servicing $129 million of loans for
correspondent banks and other entities, of which $116 million was commercial
loans.
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. Pinnacle Financial’s
adoption of SFAS No. 156 did not have a material impact on the consolidated
financial statements.
FASB
Interpretation 48, “Accounting for Income Tax Uncertainties” (“FIN 48”) was
issued in June 2006 and 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. FIN 48 also provides guidance on
the derecognition, measurement and classification of income tax uncertainties,
along with any related interest and penalties and includes guidance concerning
accounting for income tax uncertainties in interim
periods. Pinnacle Financial adopted the provisions of FIN
48, on January 1, 2007, and determined there was no need to make an adjustment
to retained earnings upon adoption of this Interpretation. As of
January 1, 2007, Pinnacle Financial had $700,000 of unrecognized tax
benefits related to Federal income tax matters. During the six months
ended June 30, 2007, Pinnacle Financial reduced the amount of unrecognized
tax
benefits by $86,000, leaving $614,000 remaining, as the result of the resolution
of certain uncertainties related to a prior year tax return. If
ultimately recognized, this amount will reduce goodwill associated with
the
acquisition of Cavalry and therefore would not impact the Company’s effective
tax rate. The Company does not anticipate any material increase or
decrease in unrecognized tax benefits during 2007 relative to any tax positions
taken prior to January 1, 2007.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As
of
January 1, 2007, Pinnacle Financial has accrued no interest and no penalties
related to uncertain tax positions. It is Pinnacle Financial’s policy
to recognize interest and/or penalties related to income tax matters in
income
tax expense.
Pinnacle
Financial and its subsidiaries file a consolidated U.S. Federal income
tax
return. The Company is currently open to audit under the statute of
limitations by the Internal Revenue Service for the years ended
December 31, 2003 through 2006. Pinnacle Financial and its subsidiaries’
state income tax returns are open to audit under the statute of limitations
for
the years ended December 31, 2002 through 2006.
Income
tax expense attributable to income from continuing operations for the three
and
six months ended June 30, 2007 and 2006 consists of the following:
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Current
tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
2,738,401
|
|
|
$ |
2,738,720
|
|
|
$ |
5,131,999
|
|
|
$ |
4,212,938
|
|
State
|
|
|
126,740
|
|
|
|
200,060
|
|
|
|
193,541
|
|
|
|
310,094
|
|
Total
current tax expense (benefit)
|
|
|
2,865,141
|
|
|
|
2,938,780
|
|
|
|
5,325,540
|
|
|
|
4,523,032
|
|
Deferred
tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(386,066 |
) |
|
|
(667,940 |
) |
|
|
(274,172 |
) |
|
|
(979,266 |
) |
State
|
|
|
(76,670 |
) |
|
|
(129,953 |
) |
|
|
(54,449 |
) |
|
|
(176,119 |
) |
Total
deferred tax expense (benefit)
|
|
|
(462,736 |
) |
|
|
(797,893 |
) |
|
|
(328,621 |
) |
|
|
(1,155,385 |
) |
|
|
$ |
2,402,405
|
|
|
$ |
2,140,887
|
|
|
$ |
4,996,919
|
|
|
$ |
3,367,647
|
|
Pinnacle
Financial's income tax expense (benefit) differs from the amounts computed
by
applying the Federal income tax statutory rates of 35% in 2007 and 34%
in 2006
to income before income taxes. A reconciliation of the differences for
the three
and six months ended June 30, 2007 and 2006 is as follows:
|
|
Three
Months Ended
June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes at statutory rate
|
|
$ |
2,739,894
|
|
|
$ |
2,262,176
|
|
|
$ |
5,608,618
|
|
|
$ |
3,605,706
|
|
State
tax expense, net of federal tax effect
|
|
|
32,546
|
|
|
|
45,568
|
|
|
|
90,410
|
|
|
|
87,084
|
|
Federal
tax credits
|
|
|
(90,000 |
) |
|
|
(75,000 |
) |
|
|
(180,000 |
) |
|
|
(150,000 |
) |
Tax-exempt
securities
|
|
|
(202,123 |
) |
|
|
(150,639 |
) |
|
|
(398,730 |
) |
|
|
(270,612 |
) |
Insurance
related items
|
|
|
(161,541 |
) |
|
|
(41,607 |
) |
|
|
(324,486 |
) |
|
|
(54,351 |
) |
Other
items
|
|
|
83,629
|
|
|
|
100,389
|
|
|
|
201,106
|
|
|
|
149,820
|
|
Income
tax expense
|
|
$ |
2,402,405
|
|
|
$ |
2,140,887
|
|
|
$ |
4,996,918
|
|
|
$ |
3,367,647
|
|
The
effective tax rate for 2007 and 2006 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 the year ended December 31, 2007 is $360,000
and
for the year ended December 31, 2006 is $300,000. Pinnacle Financial
believes that it will comply with the various regulatory provisions of
the New
Markets Tax Credit program, and therefore has reflected the impact of the
credits in its estimated annual effective tax rate for 2007 and
2006.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
components of deferred income taxes included in other assets in the accompanying
consolidated balance sheets at June 30, 2007 and December 31, 2006 are
as
follows:
|
|
2007
|
|
|
2006
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
$ |
7,147,562
|
|
|
$ |
6,654,334
|
|
Loans
|
|
|
1,068,495
|
|
|
|
1,337,983
|
|
Securities
|
|
|
3,317,047
|
|
|
|
1,251,636
|
|
Accrued
liability for supplemental retirement agreements
|
|
|
1,568,234
|
|
|
|
1,535,688
|
|
Deposits
|
|
|
405,848
|
|
|
|
585,568
|
|
Other
deferred tax assets
|
|
|
349,517
|
|
|
|
340,296
|
|
|
|
|
13,856,703
|
|
|
|
11,705,505
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,511,134
|
|
|
|
1,563,078
|
|
Core
deposit intangible asset
|
|
|
4,068,467
|
|
|
|
4,473,076
|
|
FHLB
dividends
|
|
|
837,744
|
|
|
|
770,156
|
|
Other
deferred tax liabilities
|
|
|
586,771
|
|
|
|
440,642
|
|
|
|
|
7,004,116
|
|
|
|
7,246,952
|
|
Net
deferred tax assets
|
|
$ |
6,852,587
|
|
|
$ |
4,458,553
|
|
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
6.
|
Commitments
and Contingent Liabilities
|
In
the
normal course of business, Pinnacle Financial has entered into off-balance
sheet
financial instruments which include commitments to extend credit (i.e.,
including unfunded lines of credit) and standby letters of credit. Commitments
to extend credit are usually the result of lines of credit granted to existing
borrowers under agreements that the total outstanding indebtedness will
not
exceed a specific amount during the term of the indebtedness. Typical
borrowers are commercial concerns that use lines of credit to supplement
their
treasury management functions, thus their total outstanding indebtedness
may
fluctuate during any time period based on the seasonality of their business
and
the resultant timing of their cash flows. Other typical lines of
credit are related to home equity loans granted to
consumers. Commitments to extend credit generally have fixed
expiration dates or other termination clauses and may require payment of
a
fee.
Standby
letters of credit are generally issued on behalf of an applicant (our customer)
to a specifically named beneficiary and are the result of a particular
business
arrangement that exists between the applicant and the
beneficiary. Standby letters of credit have fixed expiration dates
and are usually for terms of two years or less unless terminated beforehand
due
to criteria specified in the standby letter of credit. A typical
arrangement involves the applicant routinely being indebted to the beneficiary
for such items as inventory purchases, insurance, utilities, lease guarantees
or
other third party commercial transactions. The standby letter of
credit would permit the beneficiary to obtain payment from Pinnacle Financial
under certain prescribed circumstances. Subsequently, Pinnacle
Financial would then seek reimbursement from the applicant pursuant to
the terms
of the standby letter of credit.
Pinnacle
Financial follows the same credit policies and underwriting practices when
making these commitments as it does for on-balance sheet
instruments. Each customer’s creditworthiness is evaluated on a
case-by-case basis, and the amount of collateral obtained, if any, is based
on
management’s credit evaluation of the customer. Collateral held
varies but may include cash, real estate and improvements, marketable
securities, accounts receivable, inventory, equipment, and personal
property.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
contractual amounts of these commitments are not reflected in the consolidated
financial statements and would only be reflected if drawn upon. Since
many of the commitments are expected to expire without being drawn upon,
the
contractual amounts do not necessarily represent future cash
requirements. However, should the commitments be drawn upon and
should our customers default on their resulting obligation to us, Pinnacle
Financial's maximum exposure to credit loss, without consideration of
collateral, is represented by the contractual amount of those
instruments.
A
summary
of Pinnacle Financial's total contractual amount for all off-balance sheet
commitments at June 30, 2007 is as follows:
|
Commitments
to extend credit
|
$ 542,953,929
|
|
|
Standby
letters of credit
|
62,979,736
|
|
At
June
30, 2007, the fair value of Pinnacle Financial’s standby letters of credit was
$211,000. This amount represents the unamortized fee associated with
these standby letters of credit and is included in the consolidated balance
sheet of Pinnacle Financial. This fair value will decrease over time
as the existing standby letters of credit approach their expiration
dates.
Various
legal claims also arise from time to time in the normal course of
business. As of June 30, 2007, management is not aware of any
such proceedings against Pinnacle Financial.
Note
7.
|
Stock
Option Plan and Restricted
Shares
|
Pinnacle
Financial has two equity incentive plans under which it has granted stock
options to its employees to purchase common stock at or above the fair
market
value on the date of grant and granted restricted share awards to employees
and
directors. During the first quarter of 2006 and in connection with
its merger with Cavalry, Pinnacle Financial assumed a third equity incentive
plan, the 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.
As
of
June 30, 2007, of the approximately 1,902,000 stock options outstanding,
1,225,000 of those 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 677,000 options would be deemed
non-qualified stock options and thus not subject to favorable tax treatment
to
the option holder. All stock options under the plans vest in equal
increments over five years from the date of grant and are exercisable over
a
period of ten years from the date of grant.
A
summary
of the activity within the three equity incentive plans during the six
months
ended June 30, 2007 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, 2006
|
|
|
1,658,459
|
|
|
$ |
12.93
|
|
|
|
6.4
|
|
|
$ |
31,848
|
|
Granted
|
|
|
327,843
|
|
|
|
30.98
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(70,981 |
) |
|
|
7.07
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(13,188 |
) |
|
|
29.43
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2007
|
|
|
1,902,133
|
|
|
$ |
17.12
|
|
|
|
6.6
|
|
|
$ |
24,262
|
|
Outstanding
and expected to vest as of June 30,
2007
|
|
|
1,859,493
|
|
|
$ |
16.90
|
|
|
|
6.6
|
|
|
$ |
24,095
|
|
Options
exercisable at June 30, 2007
|
|
|
1,028,479
|
|
|
$ |
8.80
|
|
|
|
4.9
|
|
|
$ |
21,149
|
|
(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 $29.36 and $33.18 per common share
for the
approximately 1.3 million and 1.6 million options that were in-the-money
at June 30, 2007 and December 31, 2006,
respectively.
|
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During
the six months ended June 30, 2007, 175,000 option awards vested at an
average
exercise price of $15.35 and an intrinsic value of approximately $2.4
million.
During
the six months ended June 30, 2007, the aggregate intrinsic value of options
exercised under the equity incentive plans was $1.66 million determined
as of
the date of option exercise. As of June 30, 2007, there was approximately
$6.64 million of total unrecognized compensation cost related to unvested
stock options granted under the equity incentive plans. That cost is expected
to
be recognized over a weighted-average period of 4.0 years.
During
the three and six months ended June 30, 2007 and 2006, Pinnacle Financial
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. For these
awards, Pinnacle Financial has recognized compensation expense using a
straight-line amortization method. Stock-based compensation expense has
been
reduced for estimated forfeitures. The impact on the Company’s 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 three and six months ended June
30,
2007 and 2006 was as follows:
|
|
Three
months ended June 30, 2007
|
|
|
|
|
|
|
Awards
granted with the
intention to be classified as
incentive stock options
|
|
|
Non-qualified
stock option
awards
|
|
|
Total
|
|
|
Three
months ended
June 30,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
$ |
116,000
|
|
|
$ |
341,000
|
|
|
$ |
457,000
|
|
|
$ |
218,000
|
|
Deferred
income tax benefit
|
|
|
-
|
|
|
|
134,000
|
|
|
|
134,000
|
|
|
|
8,000
|
|
Impact
of stock-based compensation expense after deferred income tax
benefit
|
|
$ |
116,000
|
|
|
$ |
207,000
|
|
|
$ |
323,000
|
|
|
$ |
210,000
|
|
Impact
on earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.01
|
|
|
$ |
0.01
|
|
|
$ |
0.02
|
|
|
$ |
0.01
|
|
Fully
diluted
|
|
$ |
0.01
|
|
|
$ |
0.01
|
|
|
$ |
0.02
|
|
|
$ |
0.01
|
|
|
|
Six
months ended June 30, 2007
|
|
|
|
|
|
|
Awards
granted with the
intention to be classified as
incentive stock options
|
|
|
Non-qualified
stock option
awards
|
|
|
Total
|
|
|
Six
months ended
June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
$ |
233,000
|
|
|
$ |
569,000
|
|
|
$ |
801,000
|
|
|
$ |
405,000
|
|
Deferred
income tax benefit
|
|
|
-
|
|
|
|
223,000
|
|
|
|
223,000
|
|
|
|
42,000
|
|
Impact
of stock-based compensation expense after deferred income tax
benefit
|
|
$ |
233,000
|
|
|
$ |
346,000
|
|
|
$ |
578,000
|
|
|
$ |
363,000
|
|
Impact
on earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.02
|
|
|
$ |
0.02
|
|
|
$ |
0.04
|
|
|
$ |
0.03
|
|
Fully
diluted
|
|
$ |
0.01
|
|
|
$ |
0.02
|
|
|
$ |
0.03
|
|
|
$ |
0.03
|
|
For
purposes of these calculations, the fair value of options granted for the
six
months ended June 30, 2007 and 2006 was estimated using the Black-Scholes
option
pricing model and the following assumptions:
|
2007
|
|
2006
|
|
|
|
|
Risk
free interest rate
|
4.63%
|
|
4.48%
|
Expected
life of options
|
6.50
years
|
|
6.50
years
|
Expected
dividend yield
|
0.00%
|
|
0.00%
|
Expected
volatility
|
20.8%
|
|
23.6%
|
Weighted
average fair value
|
$10.13
|
|
$9.61
|
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 June 30, 2007. During the six
months ended June 30, 2007, Pinnacle Financial awarded 25,296 shares of
restricted common stock to certain executives of Pinnacle
Financial. Of these awards, 8,423 are considered granted for
financial reporting purposes. The fair value of these awards as of
the date of grant was $31.25 per share. 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. 16,873 of the shares awarded on June 30, 2007 are
not yet deemed to be granted for financial reporting purposes because the
key
terms required to be achieved in order for the forfeiture restrictions
to lapse
have not yet been defined. These terms will be defined in the third
quarter of 2007 at the conclusion of Pinnacle Financial’s usual strategic
planning process.
Compensation
expense associated with these 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 year’s traunche is amortized
separately. For the three and six months ended June 30, 2007,
Pinnacle Financial recognized approximately $16,000 and $122,000, respectively,
in compensation costs attributable to all awards issued prior to June 30,
2007
to certain executives of Pinnacle Financial. During the six months
ended June 30, 2007, $89,000 in previously expensed compensation associated
with
certain traunches of restricted share awards was reversed when Pinnacle
Financial determined that the performance targets required to vest the
awards
were unlikely to be achieved. Accumulated compensation costs since
the date these shares were awarded have amounted to approximately $872,000
through June 30, 2007.
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, of which 400 were
forfeited. On March 20, 2007, the Board of Directors of Pinnacle
Financial awarded 3,230 shares of restricted common stock to the outside
members
of the board in accordance with their 2007 board compensation
package. Each board member received an award of 323
shares. The restrictions on the shares issued in 2007 are expected to
lapse on January 18, 2008 if each individual board member meets his or
her
attendance goals for the various board and board committee meetings to
which
each member is scheduled to attend during the year ended December 31,
2007. The fair value of these restricted share awards granted to our
directors in 2007 as of the date of grant was $30.99 per share. For
the six months ended June 30, 2007, Pinnacle Financial recognized approximately
$35,000, in compensation costs attributable to these awards.
A
summary
of activity for restricted share awards for the six months ended June 30,
2007
follows:
|
|
Executive
Management Awards
|
|
|
Board
of Director Awards
|
|
(number
of share awards)
|
|
Vested
|
|
|
Unvested
|
|
|
Totals
|
|
|
Vested
|
|
|
Unvested
|
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2006
|
|
|
20,769
|
|
|
|
17,500
|
|
|
|
38,269
|
|
|
|
-
|
|
|
|
4,000
|
|
|
|
4,000
|
|
Granted
|
|
|
-
|
|
|
|
8,431
|
|
|
|
8,431
|
|
|
|
-
|
|
|
|
3,230
|
|
|
|
3,230
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
12,755
|
|
|
|
(12,755 |
) |
|
|
-
|
|
|
|
4,000
|
|
|
|
(4,000 |
) |
|
|
-
|
|
Balances
at June 30, 2007
|
|
|
33,524
|
|
|
|
13,176
|
|
|
|
46,700
|
|
|
|
4,000
|
|
|
|
3,230
|
|
|
|
7,230
|
|
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A
summary
of compensation expense, net of the impact of income taxes, related to
restricted stock awards for the three and six months ended June 30, 2007
and
2006, follows:
|
|
Three
months
ended
June 30,
|
|
|
|
|
|
Six
months
ended
June
30,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
$ |
16,000
|
|
|
$ |
34,000
|
|
|
$ |
122,000
|
|
|
$ |
127,000
|
|
Income
tax benefit
|
|
|
6,000
|
|
|
|
13,000
|
|
|
|
47,000
|
|
|
|
50,000
|
|
Impact
of stock-based compensation expense, net of income tax
benefit
|
|
$ |
10,000
|
|
|
$ |
21,000
|
|
|
$ |
75,000
|
|
|
$ |
77,000
|
|
Impact
on earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.00
|
|
|
$ |
0.00
|
|
|
$ |
0.00
|
|
|
$ |
0.01
|
|
Fully
diluted
|
|
$ |
0.00
|
|
|
$ |
0.00
|
|
|
$ |
0.00
|
|
|
$ |
0.01
|
|
Note
8.
|
Regulatory
Matters
|
Pinnacle
National is subject to restrictions on the payment of dividends to Pinnacle
Financial under Federal banking laws and the regulations of the Office
of the
Comptroller of the Currency. Pinnacle Financial is also subject to
limits on payment of dividends to its shareholders by the rules, regulations
and
policies of Federal banking authorities. Pinnacle Financial has not
paid any cash dividends since inception, and it does not anticipate that
it will
consider paying dividends until Pinnacle National generates sufficient
capital
from operations to support both anticipated asset growth and dividend
payments.
Pinnacle
Financial and Pinnacle National are subject to various regulatory capital
requirements administered by Federal banking agencies. Failure to meet
minimum
capital requirements can initiate certain mandatory, and possibly additional
discretionary actions, by regulators that, if undertaken, could have a
direct
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, Pinnacle Financial
and Pinnacle National must meet specific capital guidelines that involve
quantitative measures of the assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. Pinnacle Financial’s
and Pinnacle National’s capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and
other factors.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Quantitative
measures established by regulation to ensure capital adequacy require Pinnacle
Financial and Pinnacle National to maintain minimum amounts and ratios
of Total
and Tier I capital to risk-weighted assets and of Tier I capital to average
assets. Management believes, as of June 30, 2007 and December 31, 2006,
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):
|
|
Actual
|
|
|
Minimum
Capital
Requirement
|
|
|
Minimum
To
Be Well-Capitalized
Under
Prompt
Corrective
Action
Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
At
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle
Financial
|
|
$ |
217,400
|
|
|
|
11.3 |
% |
|
$ |
153,707
|
|
|
|
8.0 |
% |
|
not
applicable
|
|
Pinnacle
National
|
|
$ |
194,373
|
|
|
|
10.1 |
% |
|
$ |
153,431
|
|
|
|
8.0 |
% |
|
$ |
191,754
|
|
|
|
10.0 |
% |
Tier
I capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle
Financial
|
|
$ |
200,025
|
|
|
|
10.4 |
% |
|
$ |
76,854
|
|
|
|
4.0 |
% |
|
not
applicable
|
|
Pinnacle
National
|
|
$ |
176,988
|
|
|
|
9.2 |
% |
|
$ |
76,715
|
|
|
|
4.0 |
% |
|
$ |
115,052
|
|
|
|
6.0 |
% |
Tier
I capital to average assets (*):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle
Financial
|
|
$ |
200,025
|
|
|
|
9.5 |
% |
|
$ |
84,342
|
|
|
|
4.0 |
% |
|
not
applicable
|
|
Pinnacle
National
|
|
$ |
176,988
|
|
|
|
8.4 |
% |
|
$ |
84,381
|
|
|
|
4.0 |
% |
|
$ |
105,477
|
|
|
|
5.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
% |
(*)
Average assets for the above calculations were based on the most recent
quarter.
Note
9.
|
Business
Segment Information
|
Pinnacle
Financial has four reporting segments comprised of commercial banking,
trust and
investment services, mortgage origination and insurance
services. Pinnacle Financial’s primary segment is commercial banking
which consists of commercial loan and deposit services as well as the activities
of Pinnacle National’s branch locations. Pinnacle Financial’s
segments were changed in 2006 as a result of the acquisition of Cavalry
to
include Trust within the 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 Insurance Services,
Inc. 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 June 30, 2007 and 2006 and for the three and six
months
ended June 30, 2007 and 2006 (dollars in thousands):
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
Commercial
Banking
|
|
|
Trust
and Investment Services
|
|
|
Mortgage
Origination
|
|
|
Insurance
Services
|
|
|
Total
Company
|
|
For
the three months ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
17,661
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
17,661
|
|
Provision
for loan losses
|
|
|
900
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
900
|
|
Noninterest
income
|
|
|
2,851
|
|
|
|
1,122
|
|
|
|
949
|
|
|
|
630
|
|
|
|
5,552
|
|
Noninterest
expense
|
|
|
12,558
|
|
|
|
816
|
|
|
|
643
|
|
|
|
467
|
|
|
|
14,484
|
|
Income
tax expense
|
|
|
2,099
|
|
|
|
120
|
|
|
|
120
|
|
|
|
64
|
|
|
|
2,403
|
|
Net
income
|
|
$ |
4,955
|
|
|
$ |
186
|
|
|
$ |
186
|
|
|
$ |
99
|
|
|
$ |
5,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three months ended June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
16,898
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
(3 |
) |
|
$ |
16,895
|
|
Provision
for loan losses
|
|
|
1,707
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,707
|
|
Noninterest
income
|
|
|
2,357
|
|
|
|
941
|
|
|
|
453
|
|
|
|
629
|
|
|
|
4,380
|
|
Noninterest
expense
|
|
|
11,776
|
|
|
|
568
|
|
|
|
317
|
|
|
|
444
|
|
|
|
13,105
|
|
Income
tax expense
|
|
|
1,854
|
|
|
|
148
|
|
|
|
55
|
|
|
|
84
|
|
|
|
2,141
|
|
Net
income
|
|
$ |
3,918
|
|
|
$ |
225
|
|
|
$ |
81
|
|
|
$ |
98
|
|
|
$ |
4,322
|
|
|
|
Commercial
Banking
|
|
|
Trust
and Investment Services
|
|
|
Mortgage
Origination
|
|
|
Insurance
Services
|
|
|
Total
Company
|
|
For
the six months ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
34,743
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
34,743
|
|
Provision
for loan losses
|
|
|
1,688
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,688
|
|
Noninterest
income
|
|
|
5,498
|
|
|
|
2,236
|
|
|
|
1,570
|
|
|
|
1,273
|
|
|
|
10,577
|
|
Noninterest
expense
|
|
|
23,955
|
|
|
|
1,617
|
|
|
|
1,130
|
|
|
|
906
|
|
|
|
27,608
|
|
Income
tax expense
|
|
|
4,433
|
|
|
|
243
|
|
|
|
173
|
|
|
|
147
|
|
|
|
4,996
|
|
Net
income
|
|
$ |
10,165
|
|
|
$ |
376
|
|
|
$ |
267
|
|
|
$ |
220
|
|
|
$ |
11,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the six months ended June 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
26,402
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
26,402
|
|
Provision
for loan losses
|
|
|
2,094
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,094
|
|
Noninterest
income
|
|
|
3,423
|
|
|
|
1,370
|
|
|
|
741
|
|
|
|
894
|
|
|
|
6,428
|
|
Noninterest
expense
|
|
|
18,492
|
|
|
|
940
|
|
|
|
482
|
|
|
|
520
|
|
|
|
20,434
|
|
Income
tax expense
|
|
|
2,937
|
|
|
|
169
|
|
|
|
102
|
|
|
|
160
|
|
|
|
3,368
|
|
Net
income
|
|
$ |
6,302
|
|
|
$ |
261
|
|
|
$ |
157
|
|
|
$ |
214
|
|
|
$ |
6,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End
of period assets
|
|
$ |
2,306,150
|
|
|
$ |
-
|
|
|
$ |
4,973
|
|
|
$ |
4,204
|
|
|
$ |
2,315,327
|
|
As
of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End
of period assets
|
|
$ |
2,132,615
|
|
|
$ |
-
|
|
|
$ |
5,654
|
|
|
$ |
3,918
|
|
|
$ |
2,142,187
|
|
Note
10.
|
Investments
in Unconsolidated Subsidiaries and Other
Entities
|
On
December 29, 2003, the Company established PNFP Statutory Trust I; on September
15, 2005 the Company established PNFP Statutory Trust II; and on September
7,
2006 the Company 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 June 30, 2007
and the
$51,548,000 obligation of Pinnacle Financial is reflected as subordinated
debt
at June 30, 2007.
The
Trust
I Preferred Securities bear a floating interest rate based on a spread
over
3-month LIBOR (8.16% at June 30, 2007) 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 after 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 (7.00% at June 30, 2007) which is set each quarter
and
mature on September 30, 2036.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 the Company’s 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)
at
June 30, 2007 and December 31, 2006 and for the six months ended June 30,
2007
and 2006:
Combined
Summary Balance
Sheets
|
|
|
June
30, 2007
|
|
|
December
31, 2006
|
|
Asset–
Investment in subordinated debentures issued by Pinnacle
Financial
|
|
$ |
51,548
|
|
|
$ |
51,548
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
$ |
-
|
|
|
$ |
-
|
|
|
|
|
|
|
|
|
|
|
Stockholder’s
equity– Trust preferred securities
|
|
|
50,000
|
|
|
|
50,000
|
|
Common
securities (100% owned by Pinnacle Financial)
|
|
|
1,548
|
|
|
|
1,548
|
|
Total
stockholder’s equity
|
|
|
51,548
|
|
|
|
51,548
|
|
Total
liabilities and stockholder’s equity
|
|
$ |
51,548
|
|
|
$ |
51,548
|
|
Combined
Summary Income
Statements
|
|
|
Six
months ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
Income
– Interest income from subordinated debentures issued
by
Pinnacle Financial
|
|
$ |
1,754
|
|
|
$ |
1,001
|
|
Net
Income
|
|
$ |
1,754
|
|
|
$ |
1,001
|
|
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Combined
Summary Statements of Stockholder’s
Equity
|
|
|
Trust
Preferred
Securities
|
|
|
Total
Common
Stock
|
|
|
Retained
Earnings
|
|
|
Stockholder’s
Equity
|
|
Balances,
December 31, 2005
|
|
$ |
30,000
|
|
|
$ |
929
|
|
|
$ |
-
|
|
|
$ |
30,929
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
1,001
|
|
|
|
1,001
|
|
Dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust
preferred securities
|
|
|
-
|
|
|
|
-
|
|
|
|
(986 |
) |
|
|
(986 |
) |
Common
paid to Pinnacle Financial
|
|
|
-
|
|
|
|
-
|
|
|
|
(15 |
) |
|
|
(15 |
) |
Balances,
June 30, 2006
|
|
$ |
30,000
|
|
|
$ |
929
|
|
|
$ |
-
|
|
|
$ |
30,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2006
|
|
$ |
50,000
|
|
|
$ |
1,548
|
|
|
$ |
-
|
|
|
$ |
51,548
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
1,754
|
|
|
|
1,754
|
|
Issuance
of trust preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust
preferred securities
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,721 |
) |
|
|
(1,721 |
) |
Common
paid to Pinnacle Financial
|
|
|
-
|
|
|
|
-
|
|
|
|
(33 |
) |
|
|
(33 |
) |
Balances,
June 30, 2007
|
|
$ |
50,000
|
|
|
$ |
1,548
|
|
|
$ |
-
|
|
|
$ |
51,548
|
|
In
addition, the Company has investments in other entities which totaled
approximately $889,000 and $66,000 at June 30, 2007 and December 31, 2006,
respectively. These investments are reported at fair
value.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following is a discussion of our financial condition at June 30, 2007 and
December 31, 2006 and our results of operations for the three and six months
ended June 30, 2007 and 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. Our
rapid growth from inception through the first half of 2007 has had a material
impact on our financial condition and results of
operations. This rapid growth resulted in fully diluted net
income per share for the three months ended June 30, 2007 and 2006 of $0.33
and
$0.26, respectively, and for the six months ended June 30, 2007 and 2006
of
$0.66 and $0.51, respectively. At June 30, 2007, loans totaled $1.663 billion,
as compared to $1.498 billion at December 31, 2006, while total deposits
increased to $1.798 billion at June 30, 2007 compared to $1.622 billion
at
December 31, 2006.
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
|
|
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 in connection with our merger with Cavalry. This
identified intangible is being amortized over seven years using an accelerated
method which anticipates the life of the underlying deposits to which the
intangible is attributable. For the three and six months ended June
30, 2007, approximately $516,000 and $1,032,000, respectively, of amortization
was recognized in the statement of income compared to $516,000 and $647,000
for
the three and six months ended June 30, 2006. Amortization expense
associated with the core deposit intangible will approximate $1.8 million
to
$2.1 million per year for the next four 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 U.S. 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
assets or liabilities associated with these adjustments. The
discounts and premiums related to financial assets and liabilities will
be
amortized into our statements of income in future periods using a method
that
approximates the level yield method over the anticipated lives of the underlying
financial assets or liabilities. For the three and six months ended
June 30, 2007, the accretion of the fair value discounts related to the
acquired
loans and certificates of deposit increased net interest income by approximately
$687,000 and $1,520,000 respectively, compared to $1,208,000 and $1,639,000
for
the three and six months ended June 30, 2006, respectively. Based on
the estimated useful lives of the acquired loans and deposits, we expect
to
recognize increases in net interest income related to accretion of these
purchase accounting adjustments of $2.5 million for the remainder of 2007
and in
subsequent years.
We
also
incurred approximately $921,000 and $1,365,000 in merger related expenses
during
the three and six months ended June 30, 2006, respectively, directly related
to
the Cavalry merger. These charges were for our integration of Cavalry
and accelerated depreciation and amortization related to software and other
technology assets whose useful lives were shortened as a result of the
Cavalry
acquisition. We do not anticipate any merger related expenses
associated with the Cavalry merger in 2007.
Knoxville,
Tennessee Expansion. On April 9, 2007, we announced our plans to
expand to the Knoxville, Tennessee, market and the hiring of two prominent
veteran bankers to lead our firm in Knoxville. We have estimated that
our expansion into Knoxville will result in a reduction in our net income
for
2007 as we hire new associates in that market and build out our initial
branch
network. Our current estimates are that our Knoxville expansion will
negatively impact our diluted earnings per share by $0.08 in 2007.
Results
of Operations. Our net interest income increased to $17.7
million for the second quarter of 2007 compared to $16.9 million for the
second
quarter of 2006. The net interest margin (the ratio of net
interest income to average earning assets) for the three months ended June
30,
2007 was 3.58% compared to 4.17% for the same period in 2006. Our net
interest income increased to $34.7 million for the six months ended June
30,
2007 compared to $26.4 million for the six months ended June 30,
2006. The net interest margin for the six months ended June 30,
2007 was 3.61% compared to 3.97% for the same period in 2006.
Our
provision for loan losses was $900,000 for the second quarter of 2007 compared
to $1.7 million for the same period in 2006. The provision for loan
losses was $1.7 million for the six months ended June 30, 2007 compared
to $2.1
million for the same period in 2006. Impacting the provision for loan
losses in any accounting period are several matters including the amount
of loan
growth during the period, the level of charge-offs or recoveries incurred
during
the period, the results of our quarterly assessment of the inherent risks
of our
loan portfolio and the impact of the assessment on the level of the allowance
for loan losses.
Noninterest
income for the second quarter of 2007 compared to the same time period
in 2006
increased by $1.2 million or 26.7%. For the first six months of 2007,
noninterest income was $4.1 million greater than the first six months of
2006. These increases are largely attributable to the fee businesses
associated with the Cavalry acquisition, particularly with regard to service
charges on deposit accounts, insurance sales commissions and trust
fees.
Our
continued growth during 2007 resulted in increased noninterest expense
compared
to 2006 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 359.0 at June 30, 2006 to 441.0 at June 30, 2007. 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 and our recently
announced expansion into the Knoxville, Tennessee market will result in
increased operating expenses in the future.
Our
efficiency ratio (the ratio of noninterest expense to the sum of net interest
income and noninterest income) was 62.4% for the second quarter of 2007
compared
to 61.60% for the same period in 2006. Our efficiency ratio was 60.9%
for the six months ended June 30, 2007 compared to 62.2% for the same period
in
2006.
The
effective income tax expense rate for the three and six months ended June
30,
2007 was approximately 30.7% and 31.2%, respectively, compared to an effective
income tax expense rate for the three and six months ended June 30, 2006
of
approximately 33.1% and 32.7%, respectively. The slight decrease in
the effective tax rate between the two periods was due to increased bank
owned
life insurance acquired with the Cavalry acquisition and other tax
initiatives.
Net
income for the second quarter of 2007 was $5.4 million compared to $4.3
million
for the same period in 2006, an increase of 25.5%. Net income
for the first six months of 2007 was $11.0 million compared to $6.9 million
for
the same period in 2006, an increase of 59.0%.
Financial
Condition. Loans increased $165.3 million during the first six
months of 2007. 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 $1.798 billion at June 30, 2007
compared to $1.622 billion at December 31, 2006, an increase of $176.1
million. This growth in deposits had a higher funding cost due to
rising rates and increased deposit pricing competition in 2007 compared
to
2006. We typically adjust our loan yields at a faster rate than we
adjust our deposit rates in an environment where short term rates are
increasing. 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 when short term rates are
increasing.
Capital
and Liquidity. At June 30, 2007, our capital ratios, including
our bank’s capital ratios, met regulatory minimum capital
requirements. Additionally, at June 30, 2007, 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. At June 30,
2007, Pinnacle Financial had $18.8 million in capital that could be transferred
to Pinnacle National in order to continue to meet capital
requirements. 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 June 30, 2007, we believe we have sufficient capital to
support our current growth plans, including our expansion into the Knoxville
market. 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 or trust preferred
securities.
We
continue to believe there is broad acceptance of our business model 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.
Critical
Accounting Estimates
The
accounting principles we follow and our methods of applying these principles
conform with U.S. 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 application
of SFAS No. 123 (revised 2004), “Share Based Payments” (“SFAS No. 123(R)”) and
the assessment of impairment of the intangibles resulting from 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.
As
of
June 30, 2006 and March 31, 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 – Our stock compensation is subject to financial accounting
standards that 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.
Impairment
of Intangible Assets - 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 the three and six months ended June 30, 2007 and 2006 were
highlighted by the continued growth in loans and other earning assets and
deposits, which resulted in increased revenues and expenses. The
following is a summary of our results of operations (dollars in
thousands):
|
|
Three
months ended
|
|
|
2007-2006
|
|
|
Six
months ended
|
|
|
2007-2006
|
|
|
|
June
30,
|
|
|
Percent
|
|
|
June
30,
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase(decrease)
|
|
|
2007
|
|
|
2006
|
|
|
Increase(decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
35,508
|
|
|
$ |
28,305
|
|
|
|
25.4 |
% |
|
$ |
69,247
|
|
|
$ |
45,115
|
|
|
|
53.5 |
% |
Interest
expense
|
|
|
17,847
|
|
|
|
11,410
|
|
|
|
56.4 |
% |
|
|
34,504
|
|
|
|
18,713
|
|
|
|
84.4 |
% |
Net
interest income
|
|
|
17,661
|
|
|
|
16,895
|
|
|
|
4.5 |
% |
|
|
34,743
|
|
|
|
26,402
|
|
|
|
31.6 |
% |
Provision
for loan losses
|
|
|
900
|
|
|
|
1,707
|
|
|
|
(47.3 |
%) |
|
|
1,688
|
|
|
|
2,094
|
|
|
|
(19.4 |
%) |
Net
interest income after provision for loan losses
|
|
|
16,761
|
|
|
|
15,188
|
|
|
|
10.4 |
% |
|
|
33,055
|
|
|
|
24,308
|
|
|
|
36.0 |
% |
Noninterest
income
|
|
|
5,551
|
|
|
|
4,380
|
|
|
|
26.7 |
% |
|
|
10,578
|
|
|
|
6,428
|
|
|
|
64.6 |
% |
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger
related expense
|
|
|
-
|
|
|
|
921
|
|
|
|
(100.0 |
%) |
|
|
-
|
|
|
|
1,365
|
|
|
|
(100.0 |
%) |
Other
noninterest expense
|
|
|
14,484
|
|
|
|
12,184
|
|
|
|
18.9 |
% |
|
|
27,608
|
|
|
|
19,069
|
|
|
|
44.8 |
% |
Net
income before income taxes
|
|
|
7,828
|
|
|
|
6,463
|
|
|
|
21.1 |
% |
|
|
16,025
|
|
|
|
10,302
|
|
|
|
55.6 |
% |
Income
tax expense
|
|
|
2,402
|
|
|
|
2,141
|
|
|
|
12.2 |
% |
|
|
4,997
|
|
|
|
3,368
|
|
|
|
48.4 |
% |
Net
income
|
|
$ |
5,426
|
|
|
$ |
4,322
|
|
|
|
25.5 |
% |
|
$ |
11,028
|
|
|
$ |
6,934
|
|
|
|
59.0 |
% |
Net
Interest Income. Net interest income represents the
amount by which interest earned on various earning assets exceeds interest
paid
on deposits and other interest bearing liabilities and is the most significant
component of our earnings. For the three months ended June
30, 2007 and 2006, we recorded net interest income of $17,661,000, and
$16,895,000 respectively, which resulted in a net interest margin of 3.58%
and
4.17%. For the six months ended June 30, 2007 and 2006, we recorded
net interest income of $34,743,000 and $26,402,000 which resulted in a
net
interest margin of 3.61% and 3.97% respectively.
The
following table sets forth the amount of our average balances, interest
income
or interest expense for each category of interest-earning assets and
interest-bearing liabilities and the average interest rate for total
interest-earning assets and total interest-bearing liabilities, net interest
spread and net interest margin for the three and six months ended June
30, 2007
and 2006 (dollars in thousands):
(dollars
in thousands)
|
|
Three
months ended
June
30, 2007
|
|
|
Three
months ended
June
30, 2006
|
|
|
|
Average
Balances
|
|
|
Interest
|
|
|
Rates/
Yields
|
|
|
Average
Balances
|
|
|
Interest
|
|
|
Rates/
Yields
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
1,598,967
|
|
|
$ |
30,556
|
|
|
|
7.66 |
% |
|
$ |
1,328,121
|
|
|
$ |
24,246
|
|
|
|
7.32 |
% |
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
272,024
|
|
|
|
3,394
|
|
|
|
5.00 |
% |
|
|
248,682
|
|
|
|
3,148
|
|
|
|
5.08 |
% |
Tax-exempt
(1)
|
|
|
75,057
|
|
|
|
693
|
|
|
|
4.89 |
% |
|
|
50,227
|
|
|
|
495
|
|
|
|
5.21 |
% |
Federal
funds sold and other
|
|
|
58,836
|
|
|
|
865
|
|
|
|
6.08 |
% |
|
|
24,932
|
|
|
|
416
|
|
|
|
7.09 |
% |
Total
interest-earning assets
|
|
|
2,004,884
|
|
|
|
35,508
|
|
|
|
7.15 |
% |
|
|
1,651,962
|
|
|
|
28,305
|
|
|
|
6.92 |
% |
Nonearning
assets
|
|
|
224,343
|
|
|
|
|
|
|
|
|
|
|
|
226,950
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
2,229,227
|
|
|
|
|
|
|
|
|
|
|
$ |
1,878,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
checking
|
|
$ |
254,171
|
|
|
$ |
2,147
|
|
|
|
3.39 |
% |
|
$ |
190,055
|
|
|
$ |
848
|
|
|
|
1.79 |
% |
Savings
and money market
|
|
|
501,373
|
|
|
|
4,239
|
|
|
|
3.39 |
% |
|
|
434,094
|
|
|
|
3,234
|
|
|
|
2.99 |
% |
Certificates
of deposit
|
|
|
646,251
|
|
|
|
8,071
|
|
|
|
5.01 |
% |
|
|
546,715
|
|
|
|
5,481
|
|
|
|
4.02 |
% |
Total
interest bearing deposits
|
|
|
1,401,795
|
|
|
|
14,457
|
|
|
|
4.14 |
% |
|
|
1,170,864
|
|
|
|
9,563
|
|
|
|
3.28 |
% |
Securities
sold under agreements to repurchase
|
|
|
172,872
|
|
|
|
1,891
|
|
|
|
4.39 |
% |
|
|
68,079
|
|
|
|
678
|
|
|
|
4.00 |
% |
Federal
Home Loan Bank advances and other borrowings
|
|
|
47,998
|
|
|
|
621
|
|
|
|
5.19 |
% |
|
|
48,113
|
|
|
|
653
|
|
|
|
5.44 |
% |
Subordinated
debt
|
|
|
51,548
|
|
|
|
878
|
|
|
|
6.84 |
% |
|
|
30,929
|
|
|
|
516
|
|
|
|
6.69 |
% |
Total
interest-bearing liabilities
|
|
|
1,674,213
|
|
|
|
17,847
|
|
|
|
4.28 |
% |
|
|
1,317,985
|
|
|
|
11,410
|
|
|
|
3.47 |
% |
Noninterest-bearing
deposits
|
|
|
276,241
|
|
|
|
-
|
|
|
|
-
|
|
|
|
311,286
|
|
|
|
-
|
|
|
|
-
|
|
Total
deposits and interest-bearing liabilities
|
|
|
1,950,454
|
|
|
|
17,847
|
|
|
|
3.67 |
% |
|
|
1,629,271
|
|
|
|
11,410
|
|
|
|
2.81 |
% |
Other
liabilities
|
|
|
14,718
|
|
|
|
|
|
|
|
|
|
|
|
15,241
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
264,055
|
|
|
|
|
|
|
|
|
|
|
|
234,400
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,229,227
|
|
|
|
|
|
|
|
|
|
|
$ |
1,878,912
|
|
|
|
|
|
|
|
|
|
Net
interest
income
|
|
|
|
|
|
$ |
17,661
|
|
|
|
|
|
|
|
|
|
|
$ |
16,895
|
|
|
|
|
|
Net
interest spread (2)
|
|
|
|
|
|
|
|
|
|
|
2.88 |
% |
|
|
|
|
|
|
|
|
|
|
3.45 |
% |
Net
interest margin (3)
|
|
|
|
|
|
|
|
|
|
|
3.58 |
% |
|
|
|
|
|
|
|
|
|
|
4.17 |
% |
(1)
|
Yields
computed on tax-exempt instruments on a tax equivalent
basis.
|
(2)
|
Yields
realized on interest-earning assets less the rates paid on
interest-bearing liabilities.
|
(3)
|
Net
interest margin is the result of annualized net interest income
calculated
on a tax-equivalent basis divided by average interest-earning
assets for
the period.
|
(dollars
in thousands)
|
|
Six
months ended
June
30, 2007
|
|
|
Six
months ended
June
30, 2006
|
|
|
|
Average
Balances
|
|
|
Interest
|
|
|
Rates/
Yields
|
|
|
Average
Balances
|
|
|
Interest
|
|
|
Rates/
Yields
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
1,564,869
|
|
|
$ |
59,533
|
|
|
|
7.67 |
% |
|
$ |
1,044,724
|
|
|
$ |
37,425
|
|
|
|
7.22 |
% |
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
272,346
|
|
|
|
6,740
|
|
|
|
4.99 |
% |
|
|
245,216
|
|
|
|
6,009
|
|
|
|
4.94 |
% |
Tax-exempt
(1)
|
|
|
74,009
|
|
|
|
1,363
|
|
|
|
4.90 |
% |
|
|
47,399
|
|
|
|
896
|
|
|
|
5.04 |
% |
Federal
funds sold and other
|
|
|
57,367
|
|
|
|
1,611
|
|
|
|
5.66 |
% |
|
|
26,085
|
|
|
|
785
|
|
|
|
6.45 |
% |
Total
interest-earning assets
|
|
|
1,968,591
|
|
|
|
69,247
|
|
|
|
7.14 |
% |
|
|
1,363,424
|
|
|
|
45,115
|
|
|
|
6.72 |
% |
Nonearning
assets
|
|
|
220,987
|
|
|
|
|
|
|
|
|
|
|
|
152,944
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
2,189,578
|
|
|
|
|
|
|
|
|
|
|
$ |
1,516,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
checking
|
|
$ |
249,425
|
|
|
$ |
4,104
|
|
|
|
3.32 |
% |
|
$ |
147,089
|
|
|
$ |
1,330
|
|
|
|
1.82 |
% |
Savings
and money market
|
|
|
498,625
|
|
|
|
8,364
|
|
|
|
3.38 |
% |
|
|
389,473
|
|
|
|
5,574
|
|
|
|
2.89 |
% |
Certificates
of deposit
|
|
|
635,172
|
|
|
|
15,526
|
|
|
|
4.93 |
% |
|
|
430,854
|
|
|
|
8,509
|
|
|
|
3.98 |
% |
Total
interest bearing deposits
|
|
|
1,383,222
|
|
|
|
27,994
|
|
|
|
4.08 |
% |
|
|
967,416
|
|
|
|
15,413
|
|
|
|
3.21 |
% |
Securities
sold under agreements to repurchase
|
|
|
165,026
|
|
|
|
3,603
|
|
|
|
4.40 |
% |
|
|
63,901
|
|
|
|
1,187
|
|
|
|
3.75 |
% |
Federal
Home Loan Bank advances and other borrowings
|
|
|
44,120
|
|
|
|
1,152
|
|
|
|
5.04 |
% |
|
|
47,412
|
|
|
|
1,112
|
|
|
|
4.73 |
% |
Subordinated
debt
|
|
|
51,548
|
|
|
|
1,755
|
|
|
|
6.86 |
% |
|
|
30,929
|
|
|
|
1,001
|
|
|
|
6.53 |
% |
Total
interest-bearing liabilities
|
|
|
1,643,916
|
|
|
|
34,504
|
|
|
|
4.23 |
% |
|
|
1,109,658
|
|
|
|
18,713
|
|
|
|
3.40 |
% |
Noninterest-bearing
deposits
|
|
|
273,052
|
|
|
|
-
|
|
|
|
-
|
|
|
|
231,767
|
|
|
|
-
|
|
|
|
-
|
|
Total
deposits and interest-bearing liabilities
|
|
|
1,916,968
|
|
|
|
34,504
|
|
|
|
3.63 |
% |
|
|
1,341,425
|
|
|
|
18,713
|
|
|
|
2.81 |
% |
Other
liabilities
|
|
|
10,849
|
|
|
|
|
|
|
|
|
|
|
|
9,976
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
261,761
|
|
|
|
|
|
|
|
|
|
|
|
164,967
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,189,578
|
|
|
|
|
|
|
|
|
|
|
$ |
1,516,368
|
|
|
|
|
|
|
|
|
|
Net
interest
income
|
|
|
|
|
|
$ |
34,743
|
|
|
|
|
|
|
|
|
|
|
$ |
26,402
|
|
|
|
|
|
Net
interest spread (2)
|
|
|
|
|
|
|
|
|
|
|
2.91 |
% |
|
|
|
|
|
|
|
|
|
|
3.32 |
% |
Net
interest margin (3)
|
|
|
|
|
|
|
|
|
|
|
3.61 |
% |
|
|
|
|
|
|
|
|
|
|
3.97 |
% |
(1)
|
Yields
computed on tax-exempt instruments on a tax equivalent
basis.
|
(2)
|
Yields
realized on interest-earning assets less the rates paid on
interest-bearing liabilities.
|
(3)
|
Net
interest margin is the result of annualized net interest income
calculated
on a tax-equivalent basis divided by average interest-earning
assets for
the period.
|
As
noted
above, the net interest margin for the three and six months ended June
30, 2007
was 3.58% and 3.61%, respectively, compared to a net interest margin of
4.17%
and 3.97% for the same periods in 2006. In comparing the decreases in
the net interest margins between the three months ended June 30, 2007 and
2006
and the six months ended June 30, 2007 and 2006, the primary cause of the
decreased margins was due to the higher rate of increase for funding costs
over
the increased rates for interest earning assets. When comparing the
three months ended June 30, 2007 to the same period in 2006, funding costs
increased by 86 basis points while interest earning assets increased only
23
basis points. The comparison for the six month periods had similar
results with funding costs up 82 basis points while interest earning assets
increasing by only 42 basis points. We believe substantially all
small cap community banks are experiencing similar trends across the
country. However, for Pinnacle, our absolute growth in average
earning asset balances, primarily loan balances, has been enough to overcome
the
negative trends in rates such that we experienced a 4.5% increase in net
interest income comparing the three months ended June 30, 2007 to the same
period in 2006 and 31.6% increase when comparing the six months ended June
30,
2007 to the same period in 2006.
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 2007 and 2006. The pricing of a
large portion of our loan portfolio (approximately 45.4% of total
loans at
June 30, 2007 compared to 47.0% at June 30, 2006) is tied to
our prime
rate. Our weighted average prime rate for the first six months
of 2007 was 8.25% compared to 7.66% in
2006.
|
|
·
|
We
have been able to grow our funding base significantly. For
asset/liability management purposes in 2007 and 2006, we elected
to
allocate a greater proportion of such funds to our loan portfolio
versus
our securities and shorter-term investment portfolio. For the
first six months of 2007, average loan balances were 71.5% of
total assets
compared to 68.9% in 2006. 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 two
periods.
|
|
·
|
During
2007, overall deposit
rates were higher than those rates for the comparable period
in
2006. 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 2007, as was the case with
our prime lending rate, short-term rates were higher than in
2006. 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 2007 compared to the previous periods
which
resulted in increased rates paid on interest bearing
liabilities.
|
|
·
|
During
2007, 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 61.9% of our total funding
compared
to 54.9% in 2006. These funding sources generally have lower
rates than do other funding sources, such as certificates of
deposit and
other borrowings and, as a result, these products served to offset
some of
the increase in funding costs in
2007.
|
|
·
|
Also
impacting the net interest margin during 2007 compared to 2006
was pricing
of our floating rate subordinated indebtedness which comprises
approximately $31 million of the $52 million of subordinated
indebtedness
as of June 30, 2007. 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 2007, the short-term interest rate
environment was higher than previous years, and, as a result,
the pricing
for this funding source was higher in
2007.
|
There
continues to be speculation in the marketplace as to the direction of interest
rates and whether the Federal Reserve will increase or decrease the Federal
funds target rate from the current 5.25%. As to intermediate and
long-term rates, many economists are forecasting that these rates should
increase over the next several quarters such that the “yield curve” approaches a
more traditional position; however, these forecasts are always accompanied
by
many qualifiers. As a result, we continue to forecast in our modeling
that interest rates will remain stable over the next few quarters.
The
current shape of the yield curve represents a challenge for most banks,
including Pinnacle National. However, we believe we will increase net
interest income through growth in earning assets with continued emphasis
on
floating rate lending. 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 likely
increase, our net interest margins could 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 the remainder of 2007
should be within a range of 3.45% to 3.65%, compared to 3.58% for the second
quarter of 2007.
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 $900,000 and $1,707,000 for the three
months ended June 30, 2007 and 2006, respectively and $1,688,000 and $2,094,000
for the six months ended June 30, 2007 and 2006, respectively.
Based
upon our management's evaluation of the loan portfolio, we believe the
allowance
for loan losses to be adequate to absorb our estimate of probable losses
existing in the loan portfolio at June 30, 2007. During the three and
six month periods ended June 30, 2007 and 2006, the provision for loan
losses
decreased by $807,000 and $406,000, respectively. These decreases
were primarily attributable to the relatively low levels of nonperforming
loans,
past due loans, risk grades and net charge-off levels which resulted in
reduced
provisioning through our quarterly allowance for loan loss risk
assessment. These decreases were offset by increased provisioning due
to increases in charged off loans and loan volumes.
Based
upon management's assessment of the loan portfolio, we adjust our allowance
for
loan losses to an amount deemed appropriate to adequately cover inherent
risks
in the loan portfolio. While our policies and procedures used to
estimate the allowance for loan losses, as well as the resultant provision
for
loan losses charged to operations, are considered adequate by our management
and
are reviewed from time to time by our regulators, they are necessarily
approximate and imprecise. There exist factors beyond our control,
such as general economic conditions both locally and nationally, which
may
negatively impact, materially, the adequacy of our allowance for loan losses
and, thus, the resulting provision for loan losses.
Noninterest
Income. Our noninterest income is composed of several
components, some of which vary significantly between quarterly
periods. Service charges on deposit accounts and other noninterest
income generally reflect our growth, while investment services and fees
from the
origination of mortgage loans will often reflect market conditions and
fluctuate
from period to period. The opportunities for recognition of gains on
loans and loan participations sold and gains on sales of investment securities
may also vary widely from quarter to quarter and year to year.
The
following is the makeup of our noninterest income for the three and six
months
ended June 30, 2007 and 2006 (dollars in thousands):
|
|
Three
months ended
|
|
|
2007-2006
|
|
|
Six
months ended
|
|
|
2007-2006
|
|
|
|
June
30,
|
|
|
Percent
|
|
|
June
30,
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
(decrease)
|
|
|
2007
|
|
|
2006
|
|
|
Increase
(decrease)
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
$ |
1,920
|
|
|
$ |
1,356
|
|
|
|
41.6 |
% |
|
$ |
3,717
|
|
|
$ |
1,794
|
|
|
|
107.2 |
% |
Investment
sales commissions
|
|
|
850
|
|
|
|
653
|
|
|
|
30.2 |
% |
|
|
1,585
|
|
|
|
1,166
|
|
|
|
35.9 |
% |
Gains
on sales of loans and loan participations, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
from the origination and sale of mortgage loans, net of sales
commissions
|
|
|
472
|
|
|
|
422
|
|
|
|
11.8 |
% |
|
|
790
|
|
|
|
673
|
|
|
|
17.4 |
% |
Gains
on loan participations sold, net
|
|
|
167
|
|
|
|
49
|
|
|
|
240.8 |
% |
|
|
212
|
|
|
|
122
|
|
|
|
73.8 |
% |
Insurance
sales commissions
|
|
|
629
|
|
|
|
749
|
|
|
|
(16.0 |
%) |
|
|
1,266
|
|
|
|
1,013
|
|
|
|
25.0 |
% |
Gain
on sale of investment securities, net
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0 |
% |
|
|
-
|
|
|
|
-
|
|
|
|
0.0 |
% |
Trust
fees
|
|
|
425
|
|
|
|
312
|
|
|
|
36.2 |
% |
|
|
845
|
|
|
|
364
|
|
|
|
132.1 |
% |
Other
noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters
of credit fees
|
|
|
42
|
|
|
|
88
|
|
|
|
(52.3 |
%) |
|
|
102
|
|
|
|
221
|
|
|
|
(53.8 |
%) |
Bank-owned
life insurance
|
|
|
133
|
|
|
|
119
|
|
|
|
11.8 |
% |
|
|
271
|
|
|
|
155
|
|
|
|
74.8 |
% |
ATM,
check card and merchant card fees
|
|
|
672
|
|
|
|
466
|
|
|
|
44.2 |
% |
|
|
1,309
|
|
|
|
500
|
|
|
|
161.8 |
% |
Equity
in earnings of Collateral Plus, LLC
|
|
|
78
|
|
|
|
22
|
|
|
|
254.5 |
% |
|
|
89
|
|
|
|
59
|
|
|
|
50.8 |
% |
Other
noninterest income
|
|
|
163
|
|
|
|
144
|
|
|
|
13.2 |
% |
|
|
392
|
|
|
|
361
|
|
|
|
8.6 |
% |
Total
noninterest income
|
|
$ |
5,551
|
|
|
$ |
4,380
|
|
|
|
26.7 |
% |
|
$ |
10,578
|
|
|
$ |
6,428
|
|
|
|
64.6 |
% |
Service
charge income for 2007 increased over that of 2006 due to increased volumes
from
our Rutherford County market and an increase in the number of Nashville
deposit
accounts subject to service charges. We increased the number of
customers utilizing overdraft protection and we increased our per item
insufficient fund charge by approximately 13%, which also contributed to
the
increase in service charge revenue in 2007.
Also
included in noninterest income are commissions and fees from our financial
advisory unit, Pinnacle Asset Management, a division of Pinnacle
National. At June 30, 2007, Pinnacle Asset Management was receiving
commissions and fees in connection with approximately $643 million in brokerage
assets held with Raymond James Financial Services, Inc. compared to $597
million
at December 31, 2006. Additionally, following our merger with
Cavalry, we now offer trust services through Pinnacle National’s trust
division. At June 30, 2007, our trust department was receiving fees
on approximately $436 million in assets compared to $395 million at December
31,
2006. Also, following our merger with Cavalry, we offer
insurance services through Miller and Loughry Insurance and Services, Inc.
which
resulted in insurance sales commissions to Pinnacle National.
Additionally,
mortgage related fees contributed to the increase in noninterest income
between
2007 and 2006. 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 June 30, 2007 and pursuant to participation agreements
with these correspondents, we had participated approximately $128.8 million
of
originated loans to these other banks compared to $95.4 million at December
31,
2006. 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 $167,000 and
$49,000
during the three months ended June 30, 2007 and 2006, respectively, and
$212,000
and $122,000 during the first six months ended June 30, 2007 and 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 any event, the
timing of participations may cause the level of gains, if any, to vary
significantly.
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 2007 compared to
2006
due primarily to the merger with Cavalry.
Additionally,
noninterest income from the cash surrender value of bank-owned life insurance
increased significantly between 2007 and 2006. 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.
Noninterest
Expense. Noninterest expense consists of compensation
and employee benefits, equipment and occupancy expenses, and other operating
expenses. The following is the makeup of our noninterest expense for
the three and six months ended June 30, 2007 and 2006 (dollars in
thousands):
|
|
Three
months ended
|
|
|
2007-2006
|
|
|
Six
months ended
|
|
|
2007-2006
|
|
|
|
June
30,
|
|
|
Percent
|
|
|
June
30,
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
(decrease)
|
|
|
2007
|
|
|
2006
|
|
|
Increase
(decrease)
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
$ |
5,758
|
|
|
$ |
4,798
|
|
|
|
20.0 |
% |
|
$ |
11,173
|
|
|
$ |
7,788
|
|
|
|
43.5 |
% |
Commissions
|
|
|
400
|
|
|
|
325
|
|
|
|
23.1 |
% |
|
|
790
|
|
|
|
559
|
|
|
|
41.3 |
% |
Other
compensation, primarily incentives
|
|
|
1,121
|
|
|
|
1,100
|
|
|
|
1.9 |
% |
|
|
2,236
|
|
|
|
1,720
|
|
|
|
30.0 |
% |
Employee
benefits and other
|
|
|
1,516
|
|
|
|
1,067
|
|
|
|
42.1 |
% |
|
|
2,862
|
|
|
|
1,671
|
|
|
|
71.3 |
% |
Total
compensation and employee benefits
|
|
|
8,795
|
|
|
|
7,290
|
|
|
|
20.6 |
% |
|
|
17,061
|
|
|
|
11,738
|
|
|
|
45.3 |
% |
Equipment
and occupancy
|
|
|
2,413
|
|
|
|
2,081
|
|
|
|
16.0 |
% |
|
|
4,577
|
|
|
|
3,254
|
|
|
|
40.7 |
% |
Marketing
and business development
|
|
|
430
|
|
|
|
358
|
|
|
|
20.1 |
% |
|
|
682
|
|
|
|
548
|
|
|
|
24.5 |
% |
Postage
and supplies
|
|
|
524
|
|
|
|
445
|
|
|
|
17.8 |
% |
|
|
979
|
|
|
|
631
|
|
|
|
55.2 |
% |
Amortization
of core deposit intangible
|
|
|
516
|
|
|
|
516
|
|
|
|
-
|
|
|
|
1,032
|
|
|
|
647
|
|
|
|
59.5 |
% |
Other
noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting
and auditing
|
|
|
250
|
|
|
|
301
|
|
|
|
(16.9 |
%) |
|
|
421
|
|
|
|
473
|
|
|
|
(11.0 |
%) |
Consultants,
including independent loan review
|
|
|
123
|
|
|
|
133
|
|
|
|
(7.5 |
%) |
|
|
217
|
|
|
|
164
|
|
|
|
32.3 |
% |
Legal,
including borrower-related charges
|
|
|
90
|
|
|
|
85
|
|
|
|
5.9 |
% |
|
|
223
|
|
|
|
122
|
|
|
|
82.8 |
% |
OCC
exam fees
|
|
|
104
|
|
|
|
58
|
|
|
|
79.3 |
% |
|
|
151
|
|
|
|
114
|
|
|
|
32.5 |
% |
Directors'
fees
|
|
|
57
|
|
|
|
70
|
|
|
|
(18.6 |
%) |
|
|
117
|
|
|
|
126
|
|
|
|
(7.1 |
%) |
Insurance,
including FDIC assessments
|
|
|
308
|
|
|
|
175
|
|
|
|
76.0 |
% |
|
|
592
|
|
|
|
276
|
|
|
|
114.5 |
% |
Charitable
contributions
|
|
|
190
|
|
|
|
107
|
|
|
|
77.6 |
% |
|
|
97
|
|
|
|
73
|
|
|
|
32.9 |
% |
Other
professional fees
|
|
|
78
|
|
|
|
37
|
|
|
|
110.8 |
% |
|
|
45
|
|
|
|
36
|
|
|
|
25.0 |
% |
Other
noninterest expense
|
|
|
606
|
|
|
|
528
|
|
|
|
44.3 |
% |
|
|
1414
|
|
|
|
867
|
|
|
|
63.1 |
% |
Total
other noninterest expense
|
|
|
1,806
|
|
|
|
1,494
|
|
|
|
20.9 |
% |
|
|
3,277
|
|
|
|
2,251
|
|
|
|
45.6 |
% |
Merger
related expense
|
|
|
-
|
|
|
|
921
|
|
|
|
(100.0 |
%) |
|
|
-
|
|
|
|
1,365
|
|
|
|
(100.0 |
%) |
Total
noninterest expense
|
|
$ |
14,484
|
|
|
$ |
13,105
|
|
|
|
10.5 |
% |
|
$ |
27,608
|
|
|
$ |
20,434
|
|
|
|
35.1 |
% |
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. For the three months ended June 30, 2007 and 2006,
approximately $456,000 and $250,000, respectively, and for the six
months ended June 30, 2007 and 2006, approximately $923,000 and $532,000,
respectively, of compensation expense related to stock options and restricted
share awards is included in other incentive compensation expense.
At
June
30, 2007, we employed 441.0 full time equivalent employees compared to
404.0 at
December 31, 2006. We intend to continue to add employees in both the
Nashville and Knoxville markets 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. Under the plan, the
targeted level of incentive payments requires the Company to achieve a
certain
targeted earnings per share. To the extent that actual earnings per
share are above or below targeted earnings per share, the aggregate incentive
payments are increased or decreased.
Included
in the salary and employee benefits amounts for the three months ended
June 30,
2007 and 2006, were $581,000 and $1,100,000, respectively, and for the
six
months ended June 30, 2007 and 2006, were $1,171,000 and $1,580,000,
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. Based on our current earnings forecast
for 2007, for the six months ended June 30, 2007, we have anticipated a
cash
award to qualifying associates equal to 40% of their targeted award and
consequently we have recorded incentive expense of 40% of the targeted
award for
the first six months of 2007. We will continue to review our
anticipated 2007 cash incentive expense throughout 2007 which may require
us to
increase or decrease the anticipated award above or below the 40% amount
at June
30, 2007 based on the new estimate. For the six months ended June 30,
2006, the anticipated award to be paid to associates equaled 100% of their
targeted award. The incentive plan for 2007 is structured similarly
to prior year plans in that the award is based on the achievement of soundness
and earnings objectives. Additionally, our Human Resources and
Compensation Committee of the Board of Directors has the ability to change
the
parameters of the variable cash award at any time prior to final distribution
of
the awards in order to take into account current events and circumstances
and
maximize the benefit of the awards to our firm and to the
associates.
Equipment
and occupancy expenses in the second quarter of 2007 were greater than
the
second quarter of 2006 amount by 16% primarily due to increased operating
costs
and the opening of the Donelson branch in Nashville during the first quarter
of
2007. Equipment and occupancy expenses in the first half of 2007 were
greater than the same period in 2006 amount by 41% primarily due to the
additional branches and equipment acquired with the Cavalry
merger. These branch additions, and our planned expansion into the
Knoxville market, will contribute toward an increase in our equipment and
occupancy expenses throughout 2007 and future periods.
Marketing
and other business development and postage and supplies expenses are higher
in
2007 compared to 2006 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.
Included
in noninterest expense for the second quarter of 2007 and 2006 is $516,000
and
$516,000, respectively, and for the first six months of 2007 and 2006 is
$1,032,000 and $647,000, respectively, of amortization of the 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. Amortization
expense associated with the core deposit intangible will approximate $1.8
million to $2.1 million per year for the next four years with lesser amounts
for
the remaining two years. Additionally, for the six months ended June 30,
2006,
we incurred $1,365,000 of merger related expenses directly associated with
the
Cavalry merger. 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.
Other
noninterest expenses increased 20.9% in the second quarter of 2007 when
compared
to 2006 and 45.6% in the first half of 2007 over 2006. Most of these
increases are attributable to increased contributions, professional fees
and
expenses associated with our wholly-owned subsidiary PNFP Insurance, which
was
formed in late 2006.
Our
efficiency ratio (ratio of noninterest expense to the sum of net interest
income
and noninterest income) was 62.4% for the second quarter of 2007 compared
to
61.6% in the second quarter 2006 and 60.9% for the first six months of
2007
compared to 62.2% in 2006. The efficiency ratio measures the amount
of expense that is incurred to generate a dollar of revenue.
Financial
Condition
Total
assets grew to $2.315 billion at June 30, 2007 from $2.142 billion at December
31, 2006 based entirely on organic growth.
Loans. The
composition of loans at June 30, 2007 and at December 31, 2006 and the
percentage (%) of each classification to total loans are summarized as
follows
(dollars in thousands):
|
|
June
30, 2007
|
|
|
December
31, 2006
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
Commercial
real estate - Mortgage
|
|
$ |
307,757
|
|
|
|
18.5 |
% |
|
$ |
284,302
|
|
|
|
19.0 |
% |
Commercial
real estate - Construction
|
|
|
177,426
|
|
|
|
10.7 |
% |
|
|
161,903
|
|
|
|
10.8 |
% |
Commercial
- Other
|
|
|
738,866
|
|
|
|
44.4 |
% |
|
|
608,530
|
|
|
|
40.6 |
% |
Total
commercial
|
|
|
1,224,049
|
|
|
|
73.6 |
% |
|
|
1,054,735
|
|
|
|
70.4 |
% |
Consumer
real estate - Mortgage
|
|
|
288,325
|
|
|
|
17.3 |
% |
|
|
299,627
|
|
|
|
20.0 |
% |
Consumer
real estate - Construction
|
|
|
102,998
|
|
|
|
6.2 |
% |
|
|
91,194
|
|
|
|
6.1 |
% |
Consumer
– Other
|
|
|
47,658
|
|
|
|
2.9 |
% |
|
|
52,179
|
|
|
|
3.5 |
% |
Total
consumer
|
|
|
438,981
|
|
|
|
26.4 |
% |
|
|
443,000
|
|
|
|
29.6 |
% |
Total
loans
|
|
$ |
1,663,030
|
|
|
|
100.0 |
% |
|
$ |
1,497,735
|
|
|
|
100.0 |
% |
During
the six months ended June 30, 2007, our loan balances increased by $165.3
million, or 22% on an annualized basis. As noted above, we have
increased the percentage commercial loans to total loans during the six
months
ended June 30, 2007. Most of this increase was in our
commercial-other portfolio (i.e., commercial and industrial
loans). Although the percentage of commercial real estate loans in
relation to total loans has decreased slightly, we have increased the balances
of our commercial real estate loans with much of this increase attributable
to
owner-occupied mortgage loans, build-to-suit commercial loans and owner-occupied
construction project loans. The increase in owner-occupied lending
has been offset by decreases in loans to real estate developers, primarily
due
to the broader economy and developers avoiding increases in
inventories. Additionally, during the six months ended June 30, 2007,
the percentage of consumer mortgage loan portfolio to total loans decreased
by
2.7%. Although the consumer real estate market in the Nashville MSA
is exceptionally strong, we believe this decrease is due to the impact
of higher
consumer mortgage rates and a general reduction in consumer real estate
activity
in 2007 when compared to last year.
We
periodically analyze our commercial loan portfolio to determine if a
concentration of credit risk exists to any one or more industries. We
use broadly accepted industry classification systems in order to classify
borrowers into various industry classifications. As a result, we have
a credit exposure (loans outstanding plus unfunded commitments) exceeding
25% of
Pinnacle National’s total risk-based capital to borrowers in the following
industries at June 30, 2007 and December 31, 2006 (dollars in
thousands):
|
|
|
|
|
At
June 30, 2007
|
|
|
|
|
|
|
|
|
|
Outstanding
Principal Balances
|
|
|
Unfunded
Commitments
|
|
|
Total
exposure
|
|
|
Total
Exposure at December 31, 2006
|
|
Trucking
industry
|
|
$ |
65,459
|
|
|
$ |
28,984
|
|
|
$ |
99,443
|
|
|
$ |
89,862
|
|
Lessors
of nonresidential buildings
|
|
|
144,663
|
|
|
|
17,718
|
|
|
|
162,381
|
|
|
|
133,504
|
|
Lessors
of residential buildings
|
|
|
63,594
|
|
|
|
7,012
|
|
|
|
70,606
|
|
|
|
65,791
|
|
Land
subdividers
|
|
|
126,711
|
|
|
|
53,989
|
|
|
|
180,700
|
|
|
|
164,535
|
|
New
housing operative builders
|
|
|
131,572
|
|
|
|
81,263
|
|
|
|
212,835
|
|
|
|
192,373
|
|
The
following table classifies our fixed and variable rate loans at June 30,
2007
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 June 30, 2007
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
Variable
|
|
|
|
|
|
At
June 30,
|
|
|
At
December 31,
|
|
|
|
Rates
|
|
|
Rates
|
|
|
Totals
|
|
|
2007
|
|
|
2006
|
|
Based
on contractual maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
within one year
|
|
$ |
89,645
|
|
|
$ |
615,739
|
|
|
$ |
705,384
|
|
|
|
42.4 |
% |
|
|
40.9 |
% |
Due
in one year to five years
|
|
|
480,883
|
|
|
|
183,489
|
|
|
|
664,372
|
|
|
|
40.0 |
% |
|
|
39.9 |
% |
Due
after five years
|
|
|
79,814
|
|
|
|
213,460
|
|
|
|
293,274
|
|
|
|
17.6 |
% |
|
|
19.2 |
% |
Totals
|
|
$ |
650,342
|
|
|
$ |
1,012,688
|
|
|
$ |
1,663,030
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based
on contractual repricing dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daily
floating rate
|
|
$ |
-
|
|
|
$ |
755,310
|
|
|
$ |
755,310
|
|
|
|
45.4 |
% |
|
|
46.1 |
% |
Due
within one year
|
|
|
89,645
|
|
|
|
183,013
|
|
|
|
272,658
|
|
|
|
16.4 |
% |
|
|
13.6 |
% |
Due
in one year to five years
|
|
|
480,883
|
|
|
|
63,474
|
|
|
|
544,357
|
|
|
|
32.7 |
% |
|
|
34.2 |
% |
Due
after five years
|
|
|
79,814
|
|
|
|
10,891
|
|
|
|
90,705
|
|
|
|
5.5 |
% |
|
|
6.1 |
% |
Totals
|
|
$ |
650,342
|
|
|
$ |
1,012,688
|
|
|
$ |
1,663,030
|
|
|
|
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 June 30, 2007, we had $2,392,000 in loans on
nonaccrual compared to $7,070,000 at December 31, 2006. The decrease
in nonperforming loans between June 30, 2007 and December 31, 2006 was
primarily
related to borrower payments received during the six months ended June
30,
2007.
At
June
30, 2007, we owned $687,000 in real estate which we had acquired, usually
through foreclosure, from borrowers compared to $995,000 at December 31,
2006. Substantially all of these amounts relate to homes that are in
various stages of construction for which we believe we have adequate
collateral.
There
were $606,000 of other loans 90 past due and still accruing interest at
June 30,
2007 compared to $737,000 at December 31, 2006. At June 30, 2007 and
at December 31, 2006, no loans were deemed to be restructured
loans. The following table is a summary of our nonperforming assets
at June 30, 2007 and December 31, 2006 (dollars in thousands):
|
|
At
June 30,
|
|
|
At
Dec. 31,
|
|
|
|
2007
|
|
|
2006
|
|
Nonaccrual
loans (1)
|
|
$ |
2,392
|
|
|
$ |
7,070
|
|
Restructured
loans
|
|
|
-
|
|
|
|
-
|
|
Other
real estate owned
|
|
|
687
|
|
|
|
995
|
|
Total
nonperforming assets
|
|
|
3,079
|
|
|
|
8,065
|
|
Accruing
loans past due 90 days or more
|
|
|
606
|
|
|
|
737
|
|
Total
nonperforming assets and accruing loans past due 90 days or
more
|
|
$ |
3,685
|
|
|
$ |
8,802
|
|
Total
loans outstanding
|
|
$ |
1,663,030
|
|
|
$ |
1,497,735
|
|
Ratio
of nonperforming assets and accruing loans past due 90 days or
more to
total loans outstanding at end of period
|
|
|
0.22 |
% |
|
|
0.59 |
% |
Ratio
of nonperforming assets and accruing loans past 90 days or more
to total
allowance for loan losses at end of period
|
|
|
21.21 |
% |
|
|
54.61 |
% |
________________________
(1)
|
Interest
income that would have been recorded during the six months ended
June 30,
2007 related to nonaccrual loans was
$230,000.
|
Potential
problem assets, which are not included in nonperforming assets, amounted
to
approximately $2.1 million or 0.16% of total loans outstanding at June
30, 2007,
compared to $6.0 million, or 0.24% of total loans outstanding at December
31,
2006. 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 Office of the Comptroller of the
Currency
(OCC), Pinnacle National’s primary regulator for loans classified as
substandard.
We
believe that over an extended period of time our credit statistics will
outperform our peers due to our hiring philosophy of recruiting only experienced
lenders and their focused marketing to high quality borrowers in middle
Tennessee and Knoxville.
Allowance
for Loan Losses (allowance). We maintain the allowance at a
level that our management deems appropriate to adequately cover the inherent
risks in the loan portfolio. As of June 30, 2007 and December 31,
2006, our allowance for loan losses was $17,375,000 and $16,118,000,
respectively, which our management deemed to be adequate at each of the
respective dates. The increase in our allowance was primarily the
result of increases in loan balances and net charge-offs for the six months
ended June 30, 2007. The judgments and estimates associated with our
allowance determination are described under “Critical Accounting Estimates”
above.
Approximately
73.6% of our loan portfolio at June 30, 2007 consisted of commercial loans
compared to 70.4% at December 31, 2006. The following table sets
forth, based on management's best estimate, the allocation of the allowance
to
types of loans as well as the unallocated portion as of June 30, 2007 and
December 31, 2006 and the percentage of loans in each category to the total
loans (dollars in thousands):
|
|
June
30, 2007
|
|
|
December
31, 2006
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
Commercial
real estate - Mortgage
|
|
$ |
4,913
|
|
|
|
18.5 |
% |
|
$ |
4,550
|
|
|
|
19.0 |
% |
Commercial
real estate - Construction
|
|
|
2,833
|
|
|
|
10.7 |
% |
|
|
2,591
|
|
|
|
10.8 |
% |
Commercial
- Other
|
|
|
7,436
|
|
|
|
44.4 |
% |
|
|
6,517
|
|
|
|
40.6 |
% |
Total
commercial
|
|
|
15,182
|
|
|
|
73.6 |
% |
|
|
13,658
|
|
|
|
70.4 |
% |
Consumer
real estate - Mortgage
|
|
|
768
|
|
|
|
17.3 |
% |
|
|
913
|
|
|
|
20.0 |
% |
Consumer
real estate - Construction
|
|
|
274
|
|
|
|
6.2 |
% |
|
|
278
|
|
|
|
6.1 |
% |
Consumer
- Other
|
|
|
803
|
|
|
|
2.9 |
% |
|
|
870
|
|
|
|
3.5 |
% |
Total
consumer
|
|
|
1,845
|
|
|
|
26.4 |
% |
|
|
2,061
|
|
|
|
29.6 |
% |
Unallocated
|
|
|
348
|
|
|
NA
|
|
|
|
399
|
|
|
NA
|
|
Total
allowance for loan losses
|
|
$ |
17,375
|
|
|
|
100.0 |
% |
|
$ |
16,118
|
|
|
|
100.0 |
% |
The
following is a summary of changes in the allowance for loan losses for
the six
months ended June 30, 2007 and for the year ended December 31, 2006 and
the
ratio of the allowance for loan losses to total loans as of the end of
each
period (dollars in thousands):
|
|
June
30,
2007
|
|
|
Dec.
31,
2006
|
|
Balance
at beginning of period
|
|
$ |
16,118
|
|
|
$ |
7,858
|
|
Provision
for loan losses
|
|
|
1,688
|
|
|
|
3,732
|
|
Allowance
acquired in Cavalry acquisition
|
|
|
-
|
|
|
|
5,102
|
|
Charged-off
loans:
|
|
|
|
|
|
|
|
|
Commercial
real estate – Mortgage
|
|
|
-
|
|
|
|
-
|
|
Commercial
real estate - Construction
|
|
|
-
|
|
|
|
-
|
|
Commercial
– Other
|
|
|
(118 |
) |
|
|
(436 |
) |
Consumer
real estate – Mortgage
|
|
|
(298 |
) |
|
|
(46 |
) |
Consumer
real estate - Construction
|
|
|
-
|
|
|
|
-
|
|
Consumer
– Other
|
|
|
(136 |
) |
|
|
(336 |
) |
Total
charged-off loans
|
|
|
(552 |
) |
|
|
(818 |
) |
Recoveries
of previously charged-off loans:
|
|
|
|
|
|
|
|
|
Commercial
real estate - Mortgage
|
|
|
-
|
|
|
|
-
|
|
Commercial
real estate - Construction
|
|
|
-
|
|
|
|
-
|
|
Commercial
- Other
|
|
|
37
|
|
|
|
166
|
|
Consumer
real estate - Mortgage
|
|
|
61
|
|
|
|
-
|
|
Consumer
real estate - Construction
|
|
|
-
|
|
|
|
-
|
|
Consumer
- Other
|
|
|
23
|
|
|
|
78
|
|
Total
recoveries of previously charged-off loans
|
|
|
121
|
|
|
|
244
|
|
Net
(charge-offs) recoveries
|
|
|
(431 |
) |
|
|
(574 |
) |
Balance
at end of period
|
|
$ |
17,375
|
|
|
$ |
16,118
|
|
|
|
|
|
|
|
|
|
|
Ratio
of allowance for loan losses to total loans outstanding at end
of
period
|
|
|
1.04 |
% |
|
|
1.08 |
% |
Ratio
of net charge-offs (*) to average loans outstanding for the
period
|
|
|
0.06 |
% |
|
|
0.05 |
% |
(*)
Net
charge-offs for the six months ended June 30, 2007 have been
annualized.
As
noted
in our critical accounting policies, 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. Although the allowance
increased by $1.26 million between June 30, 2007 and December 31, 2006,
the
ratio of our allowance for loan losses to total loans outstanding decreased
to
1.04% at June 30, 2007 compared to 1.08% at December 31, 2006. The
reduction in the ratio between the two dates is primarily attributable
to
improvements in many of our credit quality measurements, including our
level of
nonperforming loans, past due loans, potential problem loans and other
matters. In the future, the allowance to total loans outstanding
ratio will increase or decrease to the extent the factors that influence
our
quarterly allowance assessment in their entirety either improve or
weaken.
Investments. Our
investment portfolio, consisting primarily of Federal agency bonds, state
and
municipal securities and mortgage-backed securities, amounted to $340 million
and $346 million at June 30, 2007 and December 31, 2006,
respectively. Our investment portfolio serves many purposes
including serving as a stable source of income, collateral for public funds
and
as a liquidity source. A statistical comparison of our entire
investment portfolio at June 30, 2007 and at December 31, 2006 is as
follows:
|
June
30, 2007
|
December
31, 2006
|
Weighted
average life
|
4.81
years
|
4.93
years
|
Weighted
average coupon
|
5.04%
|
4.85%
|
Tax
equivalent yield
|
4.91%
|
5.01%
|
Deposits
and Other Borrowings. We had approximately
$1.798 billion of deposits at June 30, 2007 compared to $1.622 billion
at
December 31, 2006. Our deposits consist of noninterest and
interest-bearing demand accounts, savings accounts, money market accounts
and
time deposits. Additionally, we entered into agreements with certain
customers to sell certain of our securities under agreements to repurchase
the
security the following day. These agreements (which are typically
associated with comprehensive treasury management programs for our clients
and
provide them with short-term returns for their excess funds) amounted to
$140.0
million at June 30, 2007 and $141.0 million at December 31,
2006. Additionally, at June 30, 2007, we had borrowed $26.7
million in advances from the Federal Home Loan Bank of Cincinnati compared
to
$53.7 million at December 31, 2006.
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. All other funding
is
deemed to be non-core. The following table represents the balances of
our deposits and other fundings and the percentage of each type to the
total at
June 30, 2007 and December 31, 2006 (dollars in thousands):
|
|
June
30,
|
|
|
|
|
|
December
31,
|
|
|
|
|
|
|
2007
|
|
|
Percent
|
|
|
2006
|
|
|
Percent
|
|
Core
funding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
deposit accounts
|
|
$ |
294,631
|
|
|
|
14.5 |
% |
|
$ |
300,978
|
|
|
|
16.1 |
% |
Interest-bearing
demand accounts
|
|
|
284,080
|
|
|
|
14.0 |
% |
|
|
236,674
|
|
|
|
12.7 |
% |
Savings
and money market accounts
|
|
|
530,081
|
|
|
|
26.0 |
% |
|
|
485,936
|
|
|
|
26.0 |
% |
Time
deposit accounts less than $100,000
|
|
|
159,741
|
|
|
|
7.8 |
% |
|
|
158,687
|
|
|
|
8.5 |
% |
Total
core funding
|
|
|
1,268,533
|
|
|
|
62.3 |
% |
|
|
1,182,275
|
|
|
|
63.3 |
% |
Non-core
funding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposit accounts greater than $100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
funds
|
|
|
95,827
|
|
|
|
4.7 |
% |
|
|
98,286
|
|
|
|
5.3 |
% |
Brokered
deposits
|
|
|
146,802
|
|
|
|
7.2 |
% |
|
|
61,718
|
|
|
|
3.3 |
% |
Other
time deposits
|
|
|
286,373
|
|
|
|
14.1 |
% |
|
|
280,132
|
|
|
|
15.0 |
% |
Securities
sold under agreements to repurchase
|
|
|
140,443
|
|
|
|
6.9 |
% |
|
|
141,016
|
|
|
|
7.5 |
% |
Federal
Home Loan Bank advances and Federal funds purchased
|
|
|
46,699
|
|
|
|
2.3 |
% |
|
|
53,726
|
|
|
|
2.9 |
% |
Subordinated
debt
|
|
|
51,548
|
|
|
|
2.5 |
% |
|
|
51,548
|
|
|
|
2.8 |
% |
Total
non-core funding
|
|
|
767,692
|
|
|
|
37.7 |
% |
|
|
686,426
|
|
|
|
36.7 |
% |
Totals
|
|
$ |
2,036,225
|
|
|
|
100.0 |
% |
|
$ |
1,868,701
|
|
|
|
100.0 |
% |
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 June 30, 2007) 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 after 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 (7.00% at June 30, 2007) 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.
Capital
Resources. At June 30, 2007 and December 31, 2006, our
stockholders’ equity amounted to $265.2 million and $256.0 million,
respectively, or an increase of $9.2 million. This increase was
primarily attributable to $7.7 million in comprehensive income, which was
composed of $11.0 million in net income together with $3.3 million of net
unrealized holding losses associated with our available-for-sale
portfolio.
Dividends. Pinnacle
National is subject to restrictions on the payment of dividends to Pinnacle
Financial under Federal banking laws and the regulations of the Office
of the
Comptroller of the Currency. We, in turn, are also subject to limits
on payment of dividends to our shareholders by the rules, regulations and
policies of Federal banking authorities and the laws of the State of
Tennessee. We have not paid any dividends to date, nor do we
anticipate paying dividends to our shareholders for the foreseeable
future. Future dividend policy will depend on Pinnacle National's
earnings, capital position, financial condition and other factors.
Market
and Liquidity Risk Management
Our
objective is to manage assets and liabilities to provide a satisfactory,
consistent level of profitability within the framework of established liquidity,
loan, investment, borrowing, and capital policies. Our Asset
Liability Management Committee (“ALCO”) is charged with the responsibility of
monitoring these policies, which are designed to ensure acceptable composition
of asset/liability mix. Two critical areas of focus for ALCO are
interest rate sensitivity and liquidity risk management.
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
and an
economic value of equity model. 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 interest income
to less
than a 20 percent decline for a 300 basis point change up or down in rates
from
management’s flat interest rate forecast over the next twelve months; to less
than a 10 percent decline for a 200 basis point change up or down in rates
from
management’s flat interest rate forecast over the next twelve months; and to
less than a 5 percent decline for a 100 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 we are in compliance with our current guidelines at June 30,
2007.
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 300 basis point change
in
interest rates up or down, the economic value of equity should not decrease
by
more than 30 percent from the base case; for a 200 basis point instantaneous
change in interest rates up or down, the economic value of equity should
not
decrease by more than 20 percent; and for a 100 basis point instantaneous
change
in interest rates up or down, the economic value of equity should not decrease
by more than 10 percent. The results of our current economic
value of equity model would indicate that we are in compliance with our
current
guidelines at June 30, 2007.
Each
of
the above analyses may not, on its own, be an accurate indicator of how
our net
interest income will be affected by changes in interest rates. Income
associated with interest-earning assets and costs associated with
interest-bearing liabilities may not be affected uniformly by changes in
interest rates. In addition, the magnitude and duration of changes in
interest rates may have a significant impact on net interest
income. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different
degrees
to changes in market interest rates. Interest rates on certain types
of assets and liabilities fluctuate in advance of changes in general market
rates, while interest rates on other types may lag behind changes in general
market rates. In addition, certain assets, such as adjustable rate
mortgage loans, have features (generally referred to as "interest rate
caps and
floors") which limit changes in interest rates. Prepayment and early
withdrawal levels also could deviate significantly from those assumed in
calculating the maturity of certain instruments. The ability of many borrowers
to service their debts also may decrease during periods of rising interest
rates. ALCO reviews each of the above interest rate sensitivity
analyses along with several different interest rate scenarios as part of
its
responsibility to provide a satisfactory, consistent level of profitability
within the framework of established liquidity, loan, investment, borrowing,
and
capital policies.
We
may
also use derivative financial instruments to improve the balance between
interest-sensitive assets and interest-sensitive liabilities and as one
tool to
manage our interest rate sensitivity while continuing to meet the credit
and
deposit needs of our customers. At June 30, 2007 and December 31,
2006, we had not entered into any derivative contracts to assist managing
our
interest rate sensitivity.
Liquidity
Risk Management. The purpose of liquidity risk
management is to ensure that there are sufficient cash flows to satisfy
loan
demand, deposit withdrawals, and our other needs. Traditional sources
of liquidity for a bank include asset maturities and growth in core
deposits. A bank may achieve its desired liquidity objectives from
the management of its assets and liabilities and by internally generated
funding
through its operations. Funds invested in marketable instruments that
can be readily sold and the continuous maturing of other earning assets
are
sources of liquidity from an asset perspective. The liability base
provides sources of liquidity through attraction of increased deposits
and
borrowing funds from various other institutions.
Changes
in interest rates also affect our liquidity position. We currently
price deposits in response to market rates and our management intends to
continue this policy. If deposits are not priced in response to
market rates, a loss of deposits could occur which would negatively affect
our
liquidity position.
Scheduled
loan payments are a relatively stable source of funds, but loan payoffs
and
deposit flows fluctuate significantly, being influenced by interest rates,
general economic conditions and competition. Additionally, debt security
investments are subject to prepayment and call provisions that could accelerate
their payoff prior to stated maturity. We attempt to price our
deposit products to meet our asset/liability objectives consistent with
local
market conditions. Our ALCO is responsible for monitoring our ongoing
liquidity needs. Our regulators also monitor our liquidity and
capital resources on a periodic basis.
In
addition, Pinnacle National is a member of the Federal Home Loan Bank of
Cincinnati. As a result, Pinnacle National receives advances from the
Federal Home Loan Bank of Cincinnati, pursuant to the terms of various
borrowing
agreements, which assist it in the funding of its home mortgage and commercial
real estate loan portfolios. Pinnacle National has pledged
under the borrowing agreements with the Federal Home Loan Bank of Cincinnati
certain qualifying residential mortgage loans and, pursuant to a blanket
lien,
all qualifying commercial mortgage loans as collateral. At June 30,
2007, Pinnacle National had received advances from the Federal Home Loan
Bank of
Cincinnati totaling $26.7 million at the following rates and maturities
(dollars
in thousands):
|
Amount
|
Interest
Rates
|
2007
|
$ 1,000
|
4.0%
|
2008
|
10,000
|
5.0%
|
2009
|
15,000
|
5.0%
|
Thereafter
|
699
|
2.3%
|
Total
|
$
26,699
|
|
Weighted
average interest rate
|
|
4.9%
|
At
June
30, 2007, brokered certificates of deposit approximated $146.8 million
which
represented 7.2% of total fundings compared to $61.7 million and 3.3% at
December 31, 2006. We issue these brokered certificates through
several different brokerage houses based on competitive
bid. Typically, these funds are for varying maturities from six
months to two years and are issued at rates which are competitive to rates
we
would be required to pay to attract similar deposits from the local market
as
well as rates for Federal Home Loan Bank of Cincinnati advances of similar
maturities. We consider these deposits to be a ready source of
liquidity under current market conditions.
At
June
30, 2007, 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 and the Knoxville
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 and Knoxville MSA.
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 June 30, 2007, we had outstanding standby
letters of credit of $63.0 million and unfunded loan commitments outstanding
of
$543.0 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
June
30, 2007, Pinnacle National had accommodations with upstream correspondent
banks
for unsecured short-term advances. These accommodations have various
covenants related to their term and availability, and in most cases must
be
repaid within less than a month.
Impact
of Inflation
The
consolidated financial statements and related consolidated financial data
presented herein have been prepared in accordance with accounting principles
generally accepted in the United States and practices within the banking
industry which require the measurement of financial position and operating
results in terms of historical dollars without considering the changes
in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, virtually all the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a
more
significant impact on a financial institution's performance than the effects
of
general levels of inflation.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued 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 SFAS No. 157 on its consolidated financial
statements.
In
February of 2007, the FASB issued Statement of Financial Accounting Standard
No. 159 (“SFAS 159”), The Fair Value Option for Financial Assets and
Financial Liabilities, which gives entities the option to measure eligible
financial assets, and financial liabilities at fair value on an instrument
by
instrument basis, that are otherwise not permitted to be accounted for
at fair
value under other accounting standards. The election to use the fair value
option is available when an entity first recognizes a financial asset or
financial liability. Subsequent changes in fair value must be recorded
in
earnings. This statement is effective as of the beginning of a company’s first
fiscal year after November 15, 2007. We are in the process of analyzing the
impact of SFAS 159.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
The
information required by this Item 3 is included on pages 35 through 40 of
Part I - Item 2 - “Management’s Discussion and Analysis of Financial Condition
and Results of Operations.”
Evaluation
of Disclosure Controls and Procedures
Pinnacle
Financial maintains disclosure controls and procedures, as defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange
Act”), that are designed to ensure that information required to be disclosed
by
it in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
the
SEC’s rules and forms and that such information is accumulated and communicated
to Pinnacle Financial’s management, including its Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. Pinnacle Financial carried out an evaluation,
under the supervision and with the participation of its management, including
its Chief Executive Officer and Chief Financial Officer, of the effectiveness
of
the design and operation of its disclosure controls and procedures as of
the end
of the period covered by this report. Based on the evaluation of
these disclosure controls and procedures, the Chief Executive Officer and
Chief
Financial Officer concluded that Pinnacle Financial’s disclosure controls and
procedures were effective.
Changes
in Internal Controls
There
were no changes in Pinnacle Financial’s internal control over financial
reporting during Pinnacle Financial’s fiscal quarter ended June 30, 2007 that
have materially affected, or are reasonably likely to materially affect,
Pinnacle Financial’s internal control over financial reporting.
There
are
no material pending legal proceedings to which the Company is a party or
of
which any of their property is the subject.
Except
as
disclosed in our Quarterly Report on Form 10-Q for the quarter ended March
31,
2007, there have been no material changes to our risk factors as previously
disclosed in Part I, Item IA of our Annual Report on Form 10-K for the
fiscal
year ended December 31, 2006.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
(a) Not
applicable
(b) Not
applicable
(c) The
Company did not repurchase any shares of the Company’s common stock during the
quarter ended June 30, 2007.
|
DEFAULTS
UPON SENIOR SECURITIES
|
Not
applicable
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
|
(a)
|
Our
annual meeting of the shareholders was held on April 17,
2007. There were 12,795,756 shares of common stock represented
at the meeting either in person or by
proxy.
|
|
(b)
|
The
following directors were elected at the meeting to serve until
the annual
meeting of shareholders in the year 2010 (Class
I):
|
|
Votes
|
Votes
|
Broker
|
|
For
|
Withheld
|
Non-votes
|
Sue
G. Atkinson
|
12,609,746
|
186,010
|
-
|
Colleen
Conway-Welch
|
12,079,773
|
715,983
|
-
|
Gregory
L. Burns
|
12,613,806
|
181,950
|
-
|
Clay
T. Jackson
|
12,066,932
|
728,824
|
-
|
|
(c)
|
Other
matters voted upon and the results of the voting were as
follows:
|
At
the
annual meeting of shareholders, the shareholders also ratified the appointment
of KPMG LLP as Pinnacle Financial’s independent registered public accounting
firm for the fiscal year ending December 31, 2007. The shareholders voted
12,675,448 in the affirmative and 105,446 against the proposal with 14,862
abstentions.
None
|
|
Certification
pursuant to
Rule 13a-14(a)/15d-14(a)
|
|
|
Certification
pursuant to
Rule 13a-14(a)/15d-14(a)
|
|
|
Certification
pursuant to 18 USC Section 1350 – Sarbanes-Oxley Act of
2002
|
|
|
Certification
pursuant to 18 USC Section 1350 – Sarbanes-Oxley Act of
2002
|
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 Quarterly Report on Form 10-Q. 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.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned,
thereunto
duly authorized.
|
PINNACLE
FINANCIAL PARTNERS, INC.
|
|
|
|
|
|
|
|
|
/s/
M. Terry Turner
|
|
|
M.
Terry Turner
|
|
August
1, 2007
|
President
and Chief Executive Officer
|
|
|
|
|
|
|
|
|
/s/
Harold R. Carpenter
|
|
|
Harold
R. Carpenter
|
|
August
1, 2007
|
Chief
Financial Officer
|
|
Page
46