form10-q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(mark
one)
|
|
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF
1934
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|
|
For
the quarterly period ended September 30, 2007
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|
|
or
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o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OF 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF
1934
|
|
|
For
the transition period from ____ to ____
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|
|
Commission
File Number: 000-31225
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|
,
Inc.
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|
|
(Exact
name of registrant as specified in its charter)
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|
Tennessee
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|
62-1812853
|
(State
or other jurisdiction of incorporation or organization)
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|
(I.R.S.
Employer Identification No.)
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211
Commerce Street, Suite 300, Nashville, Tennessee
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|
37201
|
(Address
of principal executive offices)
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|
(Zip
Code)
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(615)
744-3700
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|
(Registrant’s
telephone number, including area code)
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|
|
Not
Applicable
|
|
|
(Former
name, former address and former fiscal year, if changes since last
report)
|
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
Large
Accelerated Filer o
|
Accelerated
Filer x
|
Non-accelerated
Filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
As
of
October 31, 2007 there were 15,553,537 shares of common stock, $1.00 par value
per share, issued and outstanding.
Pinnacle
Financial Partners, Inc.
Report
on Form 10-Q
September
30, 2007
TABLE
OF CONTENTS
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Page
No.
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PART
I – Financial Information:
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2
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23
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44
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44
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PART
II – Other Information:
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45
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45
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46
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46
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46
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46
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46
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47
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FORWARD-LOOKING
STATEMENTS
Pinnacle
Financial Partners, Inc. (“Pinnacle Financial”) may from time to time make
written or oral statements, including statements contained in this report which
may constitute forward-looking statements within the meaning of Section 21E
of
the Securities Exchange Act of 1934 (the “Exchange Act”). The words
“expect”, “anticipate”, “intend”, “consider”, “plan”, “believe”, “seek”,
“should”, “estimate”, and similar expressions are intended to identify such
forward-looking statements, but other statements may constitute forward-looking
statements. All forward-looking statements are subject to risks,
uncertainties and other facts that may cause the actual results, performance
or
achievements of Pinnacle Financial to differ materially from any results
expressed or implied by such forward-looking statements. Such factors 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) the inability of Pinnacle Financial to continue to grow
its loan portfolio at historic rates in the
Nashville-Davidson-Murfreesboro-Franklin MSA or projected rates in the Knoxville
MSA, (iii) increased competition with other financial institutions, (iv) lack
of
sustained growth in the economy in the Nashville-Davidson-Murfreesboro-Franklin
MSA and the Knoxville MSA, (v) rapid fluctuations or unanticipated changes
in
interest rates, (vi) the inability of Pinnacle Financial to satisfy regulatory
requirements for its expansion plans, (vii) the inability of Pinnacle Financial
to execute its expansion plans and (viii) changes in the legislative and
regulatory environment. Additionally, risk factors exist in connection with
Pinnacle Financial's proposed merger with Mid-America Bancshares, Inc.
(“Mid-America”) including among others, (1) the risk that the cost savings and
any revenue synergies from the merger may not be realized or take longer than
anticipated, (2) disruption from the merger with customers, suppliers or
employee relationships, (3) the occurrence of any event, change or other
circumstances that could give rise to the termination of the merger agreement,
(4) the risk of successful integration of the two companies' businesses, (5)
the
failure of Mid-America's or Pinnacle Financial's shareholders to approve the
merger, (6) the amount of the costs, fees, expenses and charges related to
the
merger, and (7) the ability to obtain required governmental approvals of the
proposed terms of the merger and anticipated schedule. A more detailed
description of these and other risks is contained in Pinnacle Financial's most
recent annual report on Form 10-K and below in Item 1A of Part II. Many of
such
factors are beyond Pinnacle Financial's ability to control or predict, and
readers are cautioned not to put undue reliance on such forward-looking
statements. Pinnacle Financial disclaims any obligation to update or revise
any
forward-looking statements contained in this report, whether as a result of
new
information, future events or otherwise.
Item
1.
|
Part
I. FINANCIAL
INFORMATION
|
|
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
|
|
September
30,
2007
|
|
|
December
31,
2006
|
|
ASSETS
|
|
|
|
|
|
|
Cash
and noninterest-bearing due from banks
|
|
$ |
48,865,526
|
|
|
$ |
43,611,533
|
|
Interest-bearing
due from banks
|
|
|
5,819,607
|
|
|
|
1,041,174
|
|
Federal
funds sold
|
|
|
26,522,858
|
|
|
|
47,866,143
|
|
Cash
and cash equivalents
|
|
|
81,207,991
|
|
|
|
92,518,850
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale, at fair value
|
|
|
325,171,126
|
|
|
|
319,237,428
|
|
Securities
held-to-maturity (fair value of $26,603,414 and $26,594,235 at September
30, 2007 and December 31, 2006, respectively)
|
|
|
27,050,937
|
|
|
|
27,256,876
|
|
Mortgage
loans held-for-sale
|
|
|
5,685,674
|
|
|
|
5,654,381
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
1,731,245,280
|
|
|
|
1,497,734,824
|
|
Less
allowance for loan losses
|
|
|
(17,978,429 |
) |
|
|
(16,117,978 |
) |
Loans,
net
|
|
|
1,713,266,851
|
|
|
|
1,481,616,846
|
|
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
38,208,897
|
|
|
|
36,285,796
|
|
Investments
in unconsolidated subsidiaries and other entities
|
|
|
17,424,718
|
|
|
|
16,200,684
|
|
Accrued
interest receivable
|
|
|
12,056,089
|
|
|
|
11,019,173
|
|
Goodwill
|
|
|
114,287,640
|
|
|
|
114,287,640
|
|
Core
deposit intangible, net
|
|
|
9,837,744
|
|
|
|
11,385,006
|
|
Other
assets
|
|
|
23,881,242
|
|
|
|
26,724,183
|
|
Total
assets
|
|
$ |
2,368,078,909
|
|
|
$ |
2,142,186,863
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Noninterest-bearing
demand
|
|
$ |
316,542,088
|
|
|
$ |
300,977,814
|
|
Interest-bearing
demand
|
|
|
254,958,551
|
|
|
|
236,674,425
|
|
Savings
and money market accounts
|
|
|
538,976,126
|
|
|
|
485,935,897
|
|
Time
|
|
|
716,407,184
|
|
|
|
598,823,167
|
|
Total
deposits
|
|
|
1,826,883,949
|
|
|
|
1,622,411,303
|
|
Securities
sold under agreements to repurchase
|
|
|
145,331,726
|
|
|
|
141,015,761
|
|
Federal
Home Loan Bank advances
|
|
|
35,685,005
|
|
|
|
53,725,833
|
|
Federal
funds purchased
|
|
|
19,986,000
|
|
|
|
-
|
|
Subordinated
debt
|
|
|
51,548,000
|
|
|
|
51,548,000
|
|
Accrued
interest payable
|
|
|
5,973,825
|
|
|
|
4,952,422
|
|
Other
liabilities
|
|
|
8,033,974
|
|
|
|
12,516,523
|
|
Total
liabilities
|
|
|
2,093,442,479
|
|
|
|
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; 15,553,037
issued
and outstanding at September 30, 2007 and 15,446,074 issued and
outstanding at December 31, 2006
|
|
|
15,553,037
|
|
|
|
15,446,074
|
|
Additional
paid-in capital
|
|
|
213,644,006
|
|
|
|
211,502,516
|
|
Retained
earnings
|
|
|
47,908,839
|
|
|
|
31,109,324
|
|
Accumulated
other comprehensive loss, net of deferred income taxes
|
|
|
(2,469,452 |
) |
|
|
(2,040,893 |
) |
Total
stockholders’ equity
|
|
|
274,636,430
|
|
|
|
256,017,021
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
2,368,078,909
|
|
|
$ |
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
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans,
including fees
|
|
$ |
32,750,403
|
|
|
$ |
26,771,110
|
|
|
$ |
92,283,516
|
|
|
$ |
64,195,835
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
3,387,464
|
|
|
|
3,240,878
|
|
|
|
10,127,943
|
|
|
|
9,250,455
|
|
Tax-exempt
|
|
|
743,921
|
|
|
|
521,240
|
|
|
|
2,106,857
|
|
|
|
1,416,862
|
|
Federal
funds sold and other
|
|
|
1,464,795
|
|
|
|
806,829
|
|
|
|
3,075,372
|
|
|
|
1,591,941
|
|
Total
interest income
|
|
|
38,346,583
|
|
|
|
31,340,057
|
|
|
|
107,593,688
|
|
|
|
76,455,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
16,043,425
|
|
|
|
11,800,394
|
|
|
|
44,037,317
|
|
|
|
27,213,738
|
|
Securities
sold under agreements to repurchase
|
|
|
2,061,333
|
|
|
|
1,382,418
|
|
|
|
5,664,167
|
|
|
|
2,569,383
|
|
Federal
funds purchased and other borrowings
|
|
|
1,282,159
|
|
|
|
997,899
|
|
|
|
4,189,055
|
|
|
|
3,110,660
|
|
Total
interest expense
|
|
|
19,386,917
|
|
|
|
14,180,711
|
|
|
|
53,890,539
|
|
|
|
32,893,781
|
|
Net
interest income
|
|
|
18,959,666
|
|
|
|
17,159,346
|
|
|
|
53,703,149
|
|
|
|
43,561,312
|
|
Provision
for loan losses
|
|
|
772,064
|
|
|
|
586,589
|
|
|
|
2,460,028
|
|
|
|
2,680,638
|
|
Net
interest income after provision for loan losses
|
|
|
18,187,602
|
|
|
|
16,572,757
|
|
|
|
51,243,121
|
|
|
|
40,880,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
1,965,965
|
|
|
|
1,357,280
|
|
|
|
5,683,199
|
|
|
|
3,151,664
|
|
Investment
sales commissions
|
|
|
868,738
|
|
|
|
644,931
|
|
|
|
2,453,505
|
|
|
|
1,811,428
|
|
Insurance
sales commissions
|
|
|
563,367
|
|
|
|
549,584
|
|
|
|
1,829,282
|
|
|
|
1,562,946
|
|
Gain
on loans and loan participations sold, net
|
|
|
378,682
|
|
|
|
490,254
|
|
|
|
1,380,883
|
|
|
|
1,285,609
|
|
Trust
fees
|
|
|
466,581
|
|
|
|
311,997
|
|
|
|
1,312,076
|
|
|
|
675,994
|
|
Other
noninterest income
|
|
|
1,088,430
|
|
|
|
1,069,811
|
|
|
|
3,249,918
|
|
|
|
2,364,592
|
|
Total
noninterest income
|
|
|
5,331,763
|
|
|
|
4,423,857
|
|
|
|
15,908,863
|
|
|
|
10,852,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
|
9,106,256
|
|
|
|
7,576,011
|
|
|
|
26,167,610
|
|
|
|
19,314,365
|
|
Equipment
and occupancy
|
|
|
2,632,747
|
|
|
|
2,070,727
|
|
|
|
7,209,977
|
|
|
|
5,325,274
|
|
Marketing
and other business development
|
|
|
375,066
|
|
|
|
351,432
|
|
|
|
1,057,092
|
|
|
|
899,807
|
|
Postage
and supplies
|
|
|
474,083
|
|
|
|
487,689
|
|
|
|
1,453,197
|
|
|
|
1,118,308
|
|
Amortization
of core deposit intangible
|
|
|
515,754
|
|
|
|
534,957
|
|
|
|
1,547,262
|
|
|
|
1,248,335
|
|
Other
noninterest expense
|
|
|
2,005,752
|
|
|
|
1,815,392
|
|
|
|
5,282,516
|
|
|
|
3,999,832
|
|
Merger
related expense
|
|
|
-
|
|
|
|
218,167
|
|
|
|
-
|
|
|
|
1,582,734
|
|
Total
noninterest expense
|
|
|
15,109,658
|
|
|
|
13,054,375
|
|
|
|
42,717,654
|
|
|
|
33,488,655
|
|
Income
before income taxes
|
|
|
8,409,707
|
|
|
|
7,942,239
|
|
|
|
24,434,330
|
|
|
|
18,244,252
|
|
Income
tax expense
|
|
|
2,637,897
|
|
|
|
2,595,465
|
|
|
|
7,634,815
|
|
|
|
5,963,112
|
|
Net
income
|
|
$ |
5,771,810
|
|
|
$ |
5,346,774
|
|
|
$ |
16,799,515
|
|
|
$ |
12,281,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per common share
|
|
$ |
0.37
|
|
|
$ |
0.35
|
|
|
$ |
1.09
|
|
|
$ |
0.91
|
|
Diluted
net income per common share
|
|
$ |
0.35
|
|
|
$ |
0.32
|
|
|
$ |
1.01
|
|
|
$ |
0.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,503,284
|
|
|
|
15,393,735
|
|
|
|
15,477,339
|
|
|
|
13,450,282
|
|
Diluted
|
|
|
16,609,328
|
|
|
|
16,655,349
|
|
|
|
16,630,311
|
|
|
|
14,649,418
|
|
See
accompanying notes to consolidated financial statements.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
AND
COMPREHENSIVE INCOME
(Unaudited)
For
the
nine months ended September 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
|
|
|
93,435
|
|
|
|
93,435
|
|
|
|
964,582
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,058,017
|
|
Issuance
of restricted common shares pursuant to 2004 Equity Incentive
Plan
|
|
|
22,057
|
|
|
|
22,057
|
|
|
|
(22,057 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercise
of director common stock warrants
|
|
|
11,000
|
|
|
|
11,000
|
|
|
|
44,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55,000
|
|
Stock
based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
1,001,372
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,001,372
|
|
Dividends
paid to minority interest shareholders of PNFP Properties,
Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,813 |
) |
|
|
-
|
|
|
|
(7,813 |
) |
Merger
with Cavalry Bancorp, Inc.
|
|
|
6,856,298
|
|
|
|
6,856,298
|
|
|
|
164,231,274
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
171,087,572
|
|
Costs
to register common stock issued in connection with the merger with
Cavalry
Bancorp, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
(187,609 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(187,609 |
) |
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,281,140
|
|
|
|
-
|
|
|
|
12,281,140
|
|
Net
unrealized holding gains on available-for-sale securities, net of
deferred
tax expense of $205,497
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
335,284
|
|
|
|
335,284
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,616,424
|
|
Balances,
September 30, 2006
|
|
|
15,409,341
|
|
|
$ |
15,409,341
|
|
|
$ |
210,752,785
|
|
|
$ |
-
|
|
|
$ |
25,455,618
|
|
|
$ |
(2,558,356 |
) |
|
$ |
249,059,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
78,437
|
|
|
|
78,437
|
|
|
|
645,118
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
723,555
|
|
Issuance
of restricted common shares pursuant to 2004 Equity Incentive
Plan
|
|
|
28,526
|
|
|
|
28,526
|
|
|
|
(28,526 |
) |
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Stock
based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
1,524,898
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,524,898
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
16,799,515
|
|
|
|
-
|
|
|
|
16,799,515
|
|
Net
unrealized holding losses on available-for-sale securities, net of
deferred tax benefit of $262,665
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(428,559 |
) |
|
|
(428,559 |
) |
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,370,956
|
|
Balances,
September 30, 2007
|
|
|
15,553,037
|
|
|
$ |
15,553,037
|
|
|
$ |
213,644,006
|
|
|
$ |
-
|
|
|
$ |
47,908,839
|
|
|
$ |
(2,469,452 |
) |
|
$ |
274,636,430
|
|
See
accompanying notes to consolidated financial statements.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine
months ended
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
Operating
activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
16,799,515
|
|
|
$ |
12,281,140
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Net
amortization of premium on securities
|
|
|
376,450
|
|
|
|
591,794
|
|
Depreciation
and net amortization
|
|
|
2,010,487
|
|
|
|
1,263,375
|
|
Provision
for loan losses
|
|
|
2,460,028
|
|
|
|
2,680,638
|
|
Gains
on loans and loan participations sold, net
|
|
|
(1,380,883 |
) |
|
|
(1,285,609 |
) |
Stock-based
compensation expense
|
|
|
1,524,898
|
|
|
|
1,001,372
|
|
Deferred
tax (benefit) expense
|
|
|
1,587,523
|
|
|
|
(1,110,490 |
) |
Excess
tax benefit from stock compensation
|
|
|
(128,678 |
) |
|
|
(110,244 |
) |
Mortgage
loans held for sale:
|
|
|
|
|
|
|
|
|
Loans
originated
|
|
|
(125,018,617 |
) |
|
|
(104,455,073 |
) |
Loans
sold
|
|
|
126,137,833
|
|
|
|
102,030,399
|
|
(Increase)
decrease in other assets
|
|
|
1,728,650
|
|
|
|
(3,580,936 |
) |
Decrease
in other liabilities
|
|
|
(3,461,145 |
) |
|
|
(9,368,829 |
) |
Net
cash provided (used in) by operating activities
|
|
|
22,636,061
|
|
|
|
(62,463
|
) |
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
Activities
in securities available-for-sale:
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(36,988,675 |
) |
|
|
(38,573,610 |
) |
Sales
|
|
|
-
|
|
|
|
-
|
|
Maturities,
prepayments and calls
|
|
|
30,193,241
|
|
|
|
26,320,244
|
|
|
|
|
(6,795,434 |
) |
|
|
(12,253,366 |
) |
Increase
in loans, net
|
|
|
(232,911,778 |
) |
|
|
(205,522,296 |
) |
Purchases
of premises and equipment and software
|
|
|
(5,097,092 |
) |
|
|
(3,708,595 |
) |
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
|
|
|
(1,222,570 |
) |
|
|
(65,647 |
) |
Purchases
of other assets
|
|
|
-
|
|
|
|
(1,206,335 |
) |
Net
cash used in investing activities
|
|
|
(246,026,874 |
) |
|
|
(185,336,029 |
) |
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
205,095,262
|
|
|
|
192,206,552
|
|
Net
increase in securities sold under agreements to repurchase
|
|
|
4,315,965
|
|
|
|
56,520,032
|
|
Net
increase in Federal funds purchased
|
|
|
19,986,000
|
|
|
|
-
|
|
Advances
from Federal Home Loan Bank:
|
|
|
|
|
|
|
|
|
Issuances
|
|
|
35,000,000
|
|
|
|
31,000,000
|
|
Payments
|
|
|
(53,040,828 |
) |
|
|
(61,527,218 |
) |
Proceeds
from the issuance of subordinated debt
|
|
|
-
|
|
|
|
20,619,000
|
|
Exercise
of common stock warrants
|
|
|
-
|
|
|
|
55,000
|
|
Exercise
of common stock options
|
|
|
594,877
|
|
|
|
947,773
|
|
Excess
tax benefit from stock compensation
|
|
|
128,678
|
|
|
|
110,244
|
|
Costs
incurred in connection with registration of common stock issued in
merger
|
|
|
-
|
|
|
|
(187,609 |
) |
Net
cash provided by financing activities
|
|
|
212,079,954
|
|
|
|
239,743,774
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(11,310,859 |
) |
|
|
54,345,282
|
|
Cash
and cash equivalents, beginning of period
|
|
|
92,518,850
|
|
|
|
58,654,270
|
|
Cash
and cash equivalents, end of period
|
|
$ |
81,207,991
|
|
|
$ |
112,999,552
|
|
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.
On
the Consolidated Statements of Cash Flows for the nine months ended September
30, 2006, Pinnacle Financial reclassified $2.4 million of amortization of
intangible assets arising from the acquisition of Cavalry Bancorp, Inc.
("Cavalry") to properly reflect the cash flow from operations for that
period.
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 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 nine
months ended September 30, 2007 and 2006 as follows:
|
|
For
the nine months ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
Cash
Payments:
|
|
|
|
|
|
|
Interest
|
|
$ |
53,491,752
|
|
|
$ |
34,444,269
|
|
Income
taxes
|
|
|
7,850,000
|
|
|
|
6,380,000
|
|
Noncash
Transactions:
|
|
|
|
|
|
|
|
|
Loans
charged-off to the allowance for loan losses
|
|
|
809,703
|
|
|
|
627,838
|
|
Loans
foreclosed upon with repossessions transferred to other
assets
|
|
|
240,878
|
|
|
|
-
|
|
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
September 30, 2007 and 2006, there were options outstanding to purchase
1,929,000 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 nine months ended September 30, 2007 and 2006. There were
common stock options of 352,000, and 177,000 outstanding as of September 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 September 30, 2007 and 2006, Pinnacle
Financial had outstanding warrants to purchase 395,000 of common shares which
have been considered in the calculation of Pinnacle Financial’s diluted net
income per share for three and nine months ended September 30, 2007 and
2006.
The
following is a summary of the basic and diluted earnings per share calculation
for the three and nine months ended September 30, 2007 and 2006:
|
|
For
the three months ended September 30,
|
|
|
For
the nine months ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Basic
earnings per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
- Net income
|
|
$ |
5,771,810
|
|
|
$ |
5,346,774
|
|
|
$ |
16,799,515
|
|
|
$ |
12,281,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
- Average common shares outstanding
|
|
|
15,503,284
|
|
|
|
15,393,735
|
|
|
|
15,477,339
|
|
|
|
13,450,282
|
|
Basic
net income per share
|
|
$ |
0.37
|
|
|
$ |
0.35
|
|
|
$ |
1.09
|
|
|
$ |
0.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
- Net income
|
|
$ |
5,771,810
|
|
|
$ |
5,346,774
|
|
|
$ |
16,799,515
|
|
|
$ |
12,281,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
- Average common shares outstanding
|
|
|
15,503,284
|
|
|
|
15,393,735
|
|
|
|
15,477,339
|
|
|
|
13,450,282
|
|
Dilutive
shares contingently issuable
|
|
|
1,106,044
|
|
|
|
1,261,614
|
|
|
|
1,152,972
|
|
|
|
1,199,136
|
|
Average
diluted common shares outstanding
|
|
|
16,609,328
|
|
|
|
16,655,349
|
|
|
|
16,630,311
|
|
|
|
14,649,418
|
|
Diluted
net income per share
|
|
$ |
0.35
|
|
|
$ |
0.32
|
|
|
$ |
1.01
|
|
|
$ |
0.84
|
|
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. Pinnacle Financial’s total comprehensive income
for the nine months ended September 30, 2007 and 2006 is included in the
Consolidated Statements of Stockholders’ Equity and Comprehensive
Income.
Note
2. Definitive Merger Agreement with Mid-America Bancshares,
Inc.
On
August
15, 2007, Pinnacle Financial announced that it had entered into a definitive
merger agreement to acquire all of the outstanding common stock of Mid-America
Bancshares, Inc. (“Mid-America”), a two-bank holding company located in
Nashville, Tennessee with approximately $1.1 billion in assets as of September
30, 2007. Terms of the agreement call for each share of Mid-America
to be exchanged for 0.4655 Pinnacle shares and $1.50 in cash, which results
in
the transaction approximating 90 percent paid in Pinnacle Financial shares
and
10 percent paid in cash. As of the date the merger was announced, the
transaction has an implied purchase price of $196.2
million. Additionally, all Mid-America stock options and stock
appreciation rights will be converted to Pinnacle Financial stock options and
stock appreciation rights upon the closing of the
transaction. Mid-America was formed in 2006 for the purpose of
combining two Nashville community banks: PrimeTrust Bank and Bank of the South,
both founded in 2001. Subject to receipt of shareholder and
regulatory approval and the satisfaction of customary closing conditions, the
transaction is expected to close in the fourth quarter of 2007. At
that time, Pinnacle Financial will have estimated assets of approximately $3.7
billion with 31 offices in nine counties, including several high-growth
counties new to the Pinnacle footprint.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
aggregate consideration approximates 6.6 million shares of Pinnacle Financial
common stock and $21.3 million in cash. As a result,
Mid-America shareholders will own approximately 30 percent of the combined
company. Including restricted shares, Mid-America had approximately
14.2 million common shares outstanding as of August 15, 2007. In
order to finance the $21.3 million cash component of the aggregate
consideration, on October 31, 2007, Pinnacle Financial issued
approximately $30 million in trust preferred securities prior to the closing
of
the Mid-America transaction. The trust preferred securities will bear a
floating interest rate based on a spread over 3-month LIBOR of approximately
2.85% which is set each quarter and mature in 2037. Distributions are
payable quarterly. Subject to approval by the Federal Reserve Bank of
Atlanta, the trust preferred securities may be redeemed prior to maturity at
Pinnacle Financial’s option beginning in 2012.
Note
3. 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:
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.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 nine months
ended September 30, 2007 and 2006, $1,547,000 and $1,248,000 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 nine months ended
September 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 $2,061,000 and $2,382,000, 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 $1.9 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 September 30, 2007, the carrying value of
these loans had been reduced to $756,000 due to cash payments received from
the
borrowers.
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).
|
|
Nine
months ended September 30, 2006 (1)
|
|
Pro
Forma Income Statements:
|
|
|
|
Net
interest income
|
|
$ |
49,855
|
|
Provision
for loan losses
|
|
|
3,662
|
|
Noninterest
income
|
|
|
13,249
|
|
Noninterest
expense:
|
|
|
|
|
Compensation
|
|
|
22,095
|
|
Other
noninterest expense
|
|
|
15,140
|
|
Net
income before taxes
|
|
|
22,207
|
|
Income
tax expense
|
|
|
7,867
|
|
Net
income
|
|
$ |
14,340
|
|
|
|
|
|
|
Pro
Forma Per Share Information:
|
|
|
|
|
Basic
net income per common share
|
|
$ |
0.97
|
|
Diluted
net income per common share
|
|
$ |
0.89
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
Basic
|
|
|
14,840,326
|
|
Diluted
|
|
|
16,039,462
|
|
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
______________
|
(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 nine months ended September 30, 2006
by $7.5
million resulting in net income of $6,841,000 and a basic and fully
diluted net income per share of $0.46 and $0.43,
respectively.
|
During
the three and nine months ended September 30, 2006, Pinnacle Financial incurred
merger integration expense related to the merger with Cavalry of $218,000 and
$1,583,000, 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.
Note
4. Securities
The
amortized cost and fair value of securities available-for-sale and
held-to-maturity at September 30, 2007 and December 31, 2006 are summarized
as
follows:
|
|
September
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
|
|
|
37,094,336
|
|
|
|
39,148
|
|
|
|
171,478
|
|
|
|
36,962,006
|
|
Mortgage-backed
securities
|
|
|
216,191,499
|
|
|
|
309,176
|
|
|
|
3,523,811
|
|
|
|
212,976,864
|
|
State
and municipal securities
|
|
|
74,509,398
|
|
|
|
51,644
|
|
|
|
768,496
|
|
|
|
73,792,546
|
|
Corporate
notes and other
|
|
|
1,487,539
|
|
|
|
-
|
|
|
|
47,829
|
|
|
|
1,439,710
|
|
|
|
$ |
329,282,772
|
|
|
$ |
399,968
|
|
|
$ |
4,511,614
|
|
|
$ |
325,171,126
|
|
Securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agency securities
|
|
$ |
17,747,473
|
|
|
$ |
-
|
|
|
$ |
185,173
|
|
|
$ |
17,562,300
|
|
State
and municipal securities
|
|
|
9,303,464
|
|
|
|
-
|
|
|
|
262,350
|
|
|
|
9,041,114
|
|
|
|
$ |
27,050,937
|
|
|
$ |
-
|
|
|
$ |
447,523
|
|
|
$ |
26,603,414
|
|
|
|
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
September 30, 2007, approximately $176,081,000 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
September 30, 2007 and December 31, 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
September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agency securities
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
42,161,570
|
|
|
$ |
356,651
|
|
|
$ |
42,161,570
|
|
|
$ |
356,651
|
|
Mortgage-backed
securities
|
|
|
35,898,115
|
|
|
|
258,967
|
|
|
|
127,576,903
|
|
|
|
3,264,844
|
|
|
|
163,475,018
|
|
|
|
3,523,811
|
|
State
and municipal securities
|
|
|
33,377,347
|
|
|
|
254,388
|
|
|
|
35,579,684
|
|
|
|
776,458
|
|
|
|
68,957,031
|
|
|
|
1,030,846
|
|
Corporate
notes and other
|
|
|
-
|
|
|
|
-
|
|
|
|
1,439,710
|
|
|
|
47,829
|
|
|
|
1,439,710
|
|
|
|
47,829
|
|
Total
temporarily-impaired securities
|
|
$ |
69,275,462
|
|
|
$ |
513,355
|
|
|
$ |
206,757,867
|
|
|
$ |
4,445,782
|
|
|
$ |
276,033,329
|
|
|
$ |
4,959,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
5. Loans and Allowance for Loan Losses
The
composition of loans at September 30, 2007 and December 31, 2006 is summarized
as follows:
|
|
At
September 30,
|
|
|
At
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Commercial
real estate – Mortgage
|
|
$ |
315,340,104
|
|
|
$ |
284,301,650
|
|
Commercial
real estate – Construction
|
|
|
176,130,568
|
|
|
|
161,903,496
|
|
Commercial
– Other
|
|
|
780,340,943
|
|
|
|
608,529,830
|
|
Total
Commercial
|
|
|
1,271,811,615
|
|
|
|
1,054,734,976
|
|
Consumer
real estate – Mortgage
|
|
|
297,360,456
|
|
|
|
299,626,769
|
|
Consumer
real estate – Construction
|
|
|
112,889,641
|
|
|
|
91,193,738
|
|
Consumer
– Other
|
|
|
49,183,568
|
|
|
|
52,179,341
|
|
Total
Consumer
|
|
|
459,433,665
|
|
|
|
442,999,848
|
|
Total
Loans
|
|
|
1,731,245,280
|
|
|
|
1,497,734,824
|
|
Allowance
for loan losses
|
|
|
(17,978,429 |
) |
|
|
(16,117,978 |
) |
Loans,
net
|
|
$ |
1,713,266,851
|
|
|
$ |
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 nine months ended September 30, 2007
and for the year ended December 31, 2006 are as follows:
|
|
September
30, 2007
|
|
|
December
31, 2006
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$ |
16,117,978
|
|
|
$ |
7,857,774
|
|
Charged-off
loans
|
|
|
(809,704 |
) |
|
|
(818,467 |
) |
Recovery
of previously charged-off loans
|
|
|
210,127
|
|
|
|
244,343
|
|
Allowance
acquired in acquisition of Cavalry (see note 2)
|
|
|
-
|
|
|
|
5,102,296
|
|
Provision
for loan losses
|
|
|
2,460,028
|
|
|
|
3,732,032
|
|
Balance
at end of period
|
|
$ |
17,978,429
|
|
|
$ |
16,117,978
|
|
At
September 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 $2,364,000 and $7,070,000 at September
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 $108,000 and $202,000 for the nine months ended September 30, 2007
and
2006, respectively.
At
September 30, 2007, Pinnacle Financial had granted loans and other extensions
of
credit amounting to approximately $24,095,000 to certain directors, executive
officers, and their related entities, of which $14,676,000 had been drawn
upon. During the nine months ended September 30, 2007, $20,000 of new
loans to certain directors, executive officers, and their related entities
were
made and repayments totaled $2,085,000. 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 September 30,
2007.
During
the three and nine months ended September 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
nine months ended September 30, 2007 and 2006 of approximately $230,000 and
$224,000, 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
September 30, 2007, Pinnacle Financial was servicing $132 million of loans
for
correspondent banks and other entities, of which $125 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. As a result of the adoption
of SFAS 156, Pinnacle Financial has approximately $55,000 recorded as a
servicing liability as of September 30, 2007.
Note
6. Income Taxes
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.
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, 2005 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
nine months ended September 30, 2007 and 2006 consists of the
following:
|
|
Three
Months Ended September 30,
|
|
|
Nine
months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Current
tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
762,232
|
|
|
$ |
2,404,721
|
|
|
$ |
5,894,231
|
|
|
$ |
6,644,857
|
|
State
|
|
|
(40,480 |
) |
|
|
118,652
|
|
|
|
153,061
|
|
|
|
428,745
|
|
Total
current tax expense (benefit)
|
|
|
721,752
|
|
|
|
2,523,373
|
|
|
|
6,047,292
|
|
|
|
7,073,602
|
|
Deferred
tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,805,893
|
|
|
|
57,292
|
|
|
|
1,531,720
|
|
|
|
(949,171 |
) |
State
|
|
|
110,252
|
|
|
|
14,800
|
|
|
|
55,803
|
|
|
|
(161,319 |
) |
Total
deferred tax expense (benefit)
|
|
|
1,916,145
|
|
|
|
72,092
|
|
|
|
1,587,523
|
|
|
|
(1,110,490 |
) |
|
|
$ |
2,637,897
|
|
|
$ |
2,595,465
|
|
|
$ |
7,634,815
|
|
|
$ |
5,963,112
|
|
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 2006 to
income before income taxes. A reconciliation of the differences for the three
and nine months ended September 30, 2007 and 2006 is as follows:
|
|
Three
Months
Ended September 30,
|
|
|
Nine
months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes at statutory rate
|
|
$ |
2,943,397
|
|
|
$ |
2,779,782
|
|
|
$ |
8,552,015
|
|
|
$ |
6,385,488
|
|
State
tax expense, net of federal tax effect
|
|
|
45,352
|
|
|
|
86,743
|
|
|
|
135,762
|
|
|
|
173,827
|
|
Federal
tax credits
|
|
|
(90,000 |
) |
|
|
(75,000 |
) |
|
|
(270,000 |
) |
|
|
(225,000 |
) |
Tax-exempt
securities
|
|
|
(217,167 |
) |
|
|
(155,154 |
) |
|
|
(615,896 |
) |
|
|
(425,766 |
) |
Other
items
|
|
|
(43,685 |
) |
|
|
(40,906 |
) |
|
|
(167,066 |
) |
|
|
54,563
|
|
Income
tax expense
|
|
$ |
2,637,897
|
|
|
$ |
2,595,465
|
|
|
$ |
7,634,815
|
|
|
$ |
5,963,112
|
|
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.
The
components of deferred income taxes included in other assets in the accompanying
consolidated balance sheets at September 30, 2007 and December 31, 2006 are
as
follows:
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
2007
|
|
|
2006
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
$ |
7,049,011
|
|
|
$ |
6,654,334
|
|
Loans
|
|
|
1,018,955
|
|
|
|
1,337,983
|
|
Securities
|
|
|
1,514,302
|
|
|
|
1,251,636
|
|
Accrued
liability for supplemental retirement agreements
|
|
|
1,599,756
|
|
|
|
1,535,688
|
|
Deposits
|
|
|
342,186
|
|
|
|
585,568
|
|
Other
deferred tax assets
|
|
|
424,155
|
|
|
|
340,296
|
|
|
|
|
11,948,365
|
|
|
|
11,705,505
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,280,204
|
|
|
|
1,563,078
|
|
Core
deposit intangible asset
|
|
|
3,866,162
|
|
|
|
4,473,076
|
|
REIT
dividends
|
|
|
1,250,732
|
|
|
|
-
|
|
FHLB
dividends
|
|
|
855,833
|
|
|
|
770,156
|
|
Other
deferred tax liabilities
|
|
|
561,738
|
|
|
|
440,642
|
|
|
|
|
8,814,669
|
|
|
|
7,246,952
|
|
Net
deferred tax assets
|
|
$ |
3,133,696
|
|
|
$ |
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
7. Commitments and Contingent Liabilities
In
the
normal course of business, Pinnacle Financial has entered into off-balance
sheet
financial instruments which include commitments to extend credit (i.e.,
including unfunded lines of credit) and standby letters of credit. Commitments
to extend credit are usually the result of lines of credit granted to existing
borrowers under agreements that the total outstanding indebtedness will not
exceed a specific amount during the term of the indebtedness. Typical
borrowers are commercial concerns that use lines of credit to supplement their
treasury management functions, thus their total outstanding indebtedness may
fluctuate during any time period based on the seasonality of their business
and
the resultant timing of their cash flows. Other typical lines of
credit are related to home equity loans granted to
consumers. Commitments to extend credit generally have fixed
expiration dates or other termination clauses and may require payment of a
fee.
Standby
letters of credit are generally issued on behalf of an applicant (our customer)
to a specifically named beneficiary and are the result of a particular business
arrangement that exists between the applicant and the
beneficiary. Standby letters of credit have fixed expiration dates
and are usually for terms of two years or less unless terminated beforehand
due
to criteria specified in the standby letter of credit. A typical
arrangement involves the applicant routinely being indebted to the beneficiary
for such items as inventory purchases, insurance, utilities, lease guarantees
or
other third party commercial transactions. The standby letter of
credit would permit the beneficiary to obtain payment from Pinnacle Financial
under certain prescribed circumstances. Subsequently, Pinnacle
Financial would then seek reimbursement from the applicant pursuant to the
terms
of the standby letter of credit.
Pinnacle
Financial follows the same credit policies and underwriting practices when
making these commitments as it does for on-balance sheet
instruments. Each customer’s creditworthiness is evaluated on a
case-by-case basis, and the amount of collateral obtained, if any, is based
on
management’s credit evaluation of the customer. Collateral held
varies but may include cash, real estate and improvements, marketable
securities, accounts receivable, inventory, equipment, and personal
property.
The
contractual amounts of these commitments are not reflected in the consolidated
financial statements and would only be reflected if drawn upon. Since
many of the commitments are expected to expire without being drawn upon, the
contractual amounts do not necessarily represent future cash
requirements. However, should the commitments be drawn upon and
should our customers default on their resulting obligation to us, Pinnacle
Financial's maximum exposure to credit loss, without consideration of
collateral, is represented by the contractual amount of those
instruments.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A
summary
of Pinnacle Financial's total contractual amount for all off-balance sheet
commitments at September 30, 2007 is as follows:
Commitments
to extend credit
|
|
$ |
592,441,536
|
|
Standby
letters of credit
|
|
|
63,642,493
|
|
At
September 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 September 30, 2007, management is not aware of
any such proceedings against Pinnacle Financial.
Note
8. 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
September 30, 2007, of the approximately 1,929,000 stock options outstanding,
1,213,000 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 716,000 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 nine months
ended September 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
|
|
|
371,843
|
|
|
|
30.69
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(78,437 |
) |
|
|
7.58
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(22,608 |
) |
|
|
27.79
|
|
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2007
|
|
|
1,929,257
|
|
|
$ |
17.36
|
|
|
|
6.4
|
|
|
$ |
23,334
|
|
Outstanding
and expected to vest as of September 30,
2007
|
|
|
1,887,595
|
|
|
$ |
17.16
|
|
|
|
6.4
|
|
|
$ |
23,192
|
|
Options
exercisable at September 30, 2007
|
|
|
1,047,280
|
|
|
$ |
9.24
|
|
|
|
4.7
|
|
|
$ |
20,564
|
|
_______________
|
(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 $28.82 and $33.18 per common share for
the
approximately 1.6 million options that were in-the-money at September
30,
2007 and December 31, 2006.
|
During
the nine months ended September 30, 2007, 200,000 option awards vested at an
average exercise price of $16.84 and an intrinsic value of approximately $2.4
million.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During
the nine months ended September 30, 2007, the aggregate intrinsic value of
options exercised under the equity incentive plans was $1.79 million determined
as of the date of option exercise. As of September 30, 2007, there was
approximately $6.75 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 nine months ended September 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) “Share
Based Payments” (related to stock option awards) for the three and nine months
ended September 30, 2007 and 2006 was as follows:
|
|
Three
months ended September 30, 2007
|
|
|
|
|
|
|
Awards
granted with
the
intention to be
classified
as
incentive stock options
|
|
|
Non-qualified
stock
option
awards
|
|
|
Total
|
|
|
Three
months
ended
September
30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
$ |
113,000
|
|
|
$ |
339,000
|
|
|
$ |
452,000
|
|
|
$ |
285,000
|
|
Deferred
income tax benefit
|
|
|
-
|
|
|
|
133,000
|
|
|
|
133,000
|
|
|
|
57,000
|
|
Impact
of stock-based compensation expense after deferred income tax
benefit
|
|
$ |
113,000
|
|
|
$ |
206,000
|
|
|
$ |
319,000
|
|
|
$ |
228,000
|
|
Impact
on earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.01
|
|
|
$ |
0.01
|
|
|
$ |
0.02
|
|
|
$ |
0.01
|
|
Fully
diluted
|
|
$ |
0.01
|
|
|
$ |
0.01
|
|
|
$ |
0.02
|
|
|
$ |
0.01
|
|
|
|
Nine
months ended September 30, 2007
|
|
|
|
|
|
|
Awards
granted with
the
intention to be
classified
as
incentive stock options
|
|
|
Non-qualified
stock
option
awards
|
|
|
Total
|
|
|
Nine
months
ended
September
30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
$ |
344,000
|
|
|
$ |
909,000
|
|
|
$ |
1,253,000
|
|
|
$ |
690,000
|
|
Deferred
income tax benefit
|
|
|
-
|
|
|
|
356,000
|
|
|
|
356,000
|
|
|
|
99,000
|
|
Impact
of stock-based compensation expense after deferred income tax
benefit
|
|
$ |
344,000
|
|
|
$ |
553,000
|
|
|
$ |
897,000
|
|
|
$ |
591,000
|
|
Impact
on earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.02
|
|
|
$ |
0.04
|
|
|
$ |
0.06
|
|
|
$ |
0.04
|
|
Fully
diluted
|
|
$ |
0.02
|
|
|
$ |
0.03
|
|
|
$ |
0.05
|
|
|
$ |
0.04
|
|
For
purposes of these calculations, the fair value of options granted for the nine
months ended September 30, 2007 and 2006 was estimated using the Black-Scholes
option pricing model and the following assumptions:
|
2007
|
2006
|
|
|
|
Risk
free interest rate
|
4.72%
|
4.66%
|
Expected
life of options
|
6.50
years
|
6.50
years
|
Expected
dividend yield
|
0.00%
|
0.00%
|
Expected
volatility
|
21.12%
|
23.5%
|
Weighted
average fair value
|
$10.59
|
$10.29
|
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.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 September 30, 2007. During the
nine months ended September 30, 2007, Pinnacle Financial awarded 25,296 shares
of restricted common stock to certain executives of Pinnacle
Financial. The weighted average fair value of these awards as of the
date of grant was $29.39 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.
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 nine months ended September 30, 2007,
Pinnacle Financial recognized approximately $125,000 and $208,000, respectively,
in compensation costs attributable to all awards issued prior to September
30,
2007 to certain executives of Pinnacle Financial. During the nine
months ended September 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 $997,000
through September 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 nine months ended September 30, 2007, Pinnacle Financial recognized
approximately $68,000, in compensation costs attributable to these
awards.
A
summary
of activity for restricted share awards for the nine months ended September
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
|
|
|
-
|
|
|
|
25,296
|
|
|
|
25,296
|
|
|
|
-
|
|
|
|
3,230
|
|
|
|
3,230
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
12,755
|
|
|
|
(12,755 |
) |
|
|
-
|
|
|
|
4,000
|
|
|
|
(4,000 |
) |
|
|
-
|
|
Balances
at September 30, 2007
|
|
|
33,524
|
|
|
|
30,041
|
|
|
|
63,565
|
|
|
|
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 nine months ended September 30, 2007
and 2006, follows:
|
|
Three
months ended
September
30,
|
|
|
Nine
months ended
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
$ |
150,513
|
|
|
$ |
69,235
|
|
|
$ |
272,260
|
|
|
$ |
78,351
|
|
Income
tax benefit
|
|
|
(59,046 |
) |
|
|
(27,161 |
) |
|
|
(106,808 |
) |
|
|
(30,737 |
) |
Impact
of stock-based compensation expense, net of income tax
benefit
|
|
$ |
91,467
|
|
|
$ |
42,074
|
|
|
$ |
165,452
|
|
|
$ |
47,614
|
|
Impact
on earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.01
|
|
|
$ |
0.00
|
|
|
$ |
0.01
|
|
|
$ |
0.00
|
|
Fully
diluted
|
|
$ |
0.01
|
|
|
$ |
0.00
|
|
|
$ |
0.01
|
|
|
$ |
0.00
|
|
Note
9. 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 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 September 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
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle
Financial
|
|
$ |
224,912
|
|
|
|
11.2 |
% |
|
$ |
160,651
|
|
|
|
8.0 |
% |
|
not
applicable
|
|
Pinnacle
National
|
|
$ |
201,787
|
|
|
|
10.1 |
% |
|
$ |
159,5831
|
|
|
|
8.0 |
% |
|
$ |
199,789
|
|
|
|
10.0 |
% |
Tier
I capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle
Financial
|
|
$ |
206,924
|
|
|
|
10.3 |
% |
|
$ |
80,359
|
|
|
|
4.0 |
% |
|
not
applicable
|
|
Pinnacle
National
|
|
$ |
183,799
|
|
|
|
9.2 |
% |
|
$ |
79,912
|
|
|
|
4.0 |
% |
|
$ |
119,869
|
|
|
|
6.0 |
% |
Tier
I capital to average assets (*):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle
Financial
|
|
$ |
206,924
|
|
|
|
9.3 |
% |
|
$ |
89,000
|
|
|
|
4.0 |
% |
|
not
applicable
|
|
Pinnacle
National
|
|
$ |
183,799
|
|
|
|
8.3 |
% |
|
$ |
88,578
|
|
|
|
4.0 |
% |
|
$ |
110,722
|
|
|
|
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
10. 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 Services 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 September 30, 2007 and 2006 and for the three and
nine
months ended September 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 September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
18,916
|
|
|
$ |
-
|
|
|
$ |
44
|
|
|
$ |
-
|
|
|
$ |
18,960
|
|
Provision
for loan losses
|
|
|
772
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
772
|
|
Noninterest
income
|
|
|
2,606
|
|
|
|
1,458
|
|
|
|
704
|
|
|
|
564
|
|
|
|
5,332
|
|
Noninterest
expense
|
|
|
13,162
|
|
|
|
915
|
|
|
|
582
|
|
|
|
451
|
|
|
|
15,110
|
|
Income
tax expense
|
|
|
2,315
|
|
|
|
213
|
|
|
|
65
|
|
|
|
45
|
|
|
|
2,638
|
|
Net
income
|
|
$ |
5,273
|
|
|
$ |
330
|
|
|
$ |
101
|
|
|
$ |
68
|
|
|
$ |
5,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three months ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
17,159
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
17,159
|
|
Provision
for loan losses
|
|
|
587
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
587
|
|
Noninterest
income
|
|
|
2,451
|
|
|
|
838
|
|
|
|
446
|
|
|
|
689
|
|
|
|
4,424
|
|
Noninterest
expense
|
|
|
11,717
|
|
|
|
663
|
|
|
|
243
|
|
|
|
431
|
|
|
|
13,054
|
|
Income
tax expense
|
|
|
2,361
|
|
|
|
68
|
|
|
|
79
|
|
|
|
87
|
|
|
|
2,595
|
|
Net
income
|
|
$ |
4,945
|
|
|
$ |
107
|
|
|
$ |
124
|
|
|
$ |
171
|
|
|
$ |
5,347
|
|
|
|
Commercial
Banking
|
|
|
Trust
and Investment Services
|
|
|
Mortgage
Origination
|
|
|
Insurance
Services
|
|
|
Total
Company
|
|
For
the nine months ended September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
53,557
|
|
|
$ |
-
|
|
|
$ |
146
|
|
|
$ |
-
|
|
|
$ |
53,703
|
|
Provision
for loan losses
|
|
|
2,460
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,460
|
|
Noninterest
income
|
|
|
8,506
|
|
|
|
3,394
|
|
|
|
2,172
|
|
|
|
1,837
|
|
|
|
15,909
|
|
Noninterest
expense
|
|
|
38,016
|
|
|
|
1,633
|
|
|
|
1,712
|
|
|
|
1,357
|
|
|
|
42,718
|
|
Income
tax expense
|
|
|
6,514
|
|
|
|
691
|
|
|
|
238
|
|
|
|
191
|
|
|
|
7,634
|
|
Net
income
|
|
$ |
15,073
|
|
|
$ |
1,070
|
|
|
$ |
368
|
|
|
$ |
289
|
|
|
$ |
16,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the nine months ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$ |
43,561
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
-
|
|
|
$ |
43,561
|
|
Provision
for loan losses
|
|
|
2,681
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,681
|
|
Noninterest
income
|
|
|
5,874
|
|
|
|
2,208
|
|
|
|
1,187
|
|
|
|
1,583
|
|
|
|
10,852
|
|
Noninterest
expense
|
|
|
30,209
|
|
|
|
1,603
|
|
|
|
725
|
|
|
|
951
|
|
|
|
33,488
|
|
Income
tax expense
|
|
|
5,298
|
|
|
|
237
|
|
|
|
181
|
|
|
|
247
|
|
|
|
5,963
|
|
Net
income
|
|
$ |
11,247
|
|
|
$ |
368
|
|
|
$ |
281
|
|
|
$ |
385
|
|
|
$ |
12,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End
of period assets
|
|
$ |
2,351,546
|
|
|
$ |
393
|
|
|
$ |
11,783
|
|
|
$ |
4,357
|
|
|
$ |
2,368,079
|
|
As
of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End
of period assets
|
|
$ |
2,128,105
|
|
|
$ |
402
|
|
|
$ |
9,762
|
|
|
$ |
3,918
|
|
|
$ |
2,142,187
|
|
Note
11. 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 September 30, 2007
and the $51,548,000 obligation of Pinnacle Financial is reflected as
subordinated debt at September 30, 2007.
The
Trust
I Preferred Securities bear a floating interest rate based on a spread over
3-month LIBOR (8.16% at September 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 September 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 and in certain instances upon payment of a redemption
premium, 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
September 30, 2007 and December 31, 2006 and for the nine months ended September
30, 2007 and 2006:
Combined
Summary Balance Sheets
|
|
|
|
September
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
|
|
|
|
Nine
months ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
Income
– Interest income from subordinated debentures issued
by
Pinnacle Financial
|
|
$ |
2,651
|
|
|
$ |
1,617
|
|
Net
Income
|
|
$ |
2,651
|
|
|
$ |
1,617
|
|
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
|
|
|
-
|
|
|
|
-
|
|
|
|
1,617
|
|
|
|
1,617
|
|
Issuance
of trust preferred securities
|
|
|
20,000
|
|
|
|
619
|
|
|
|
-
|
|
|
|
20,619
|
|
Dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust
preferred securities
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,580 |
) |
|
|
(1,580 |
) |
Common
paid to Pinnacle Financial
|
|
|
-
|
|
|
|
-
|
|
|
|
(37 |
) |
|
|
(37 |
) |
Balances,
September 30, 2006
|
|
$ |
50,000
|
|
|
$ |
1,548
|
|
|
$ |
-
|
|
|
$ |
51,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2006
|
|
$ |
50,000
|
|
|
$ |
1,548
|
|
|
$ |
-
|
|
|
$ |
51,548
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
2,651
|
|
|
|
2,651
|
|
Issuance
of trust preferred securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust
preferred securities
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,592
|
) |
|
|
(2,592
|
) |
Common
paid to Pinnacle Financial
|
|
|
-
|
|
|
|
-
|
|
|
|
(59 |
) |
|
|
(59 |
) |
Balances,
September 30, 2007
|
|
$ |
50,000
|
|
|
$ |
1,548
|
|
|
$ |
-
|
|
|
$ |
51,548
|
|
In
addition, the Company has investments in other entities which totaled
approximately $1,288,000 and $66,000 at September 30, 2007 and December 31,
2006, respectively. These investments are reported at fair
value.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following is a discussion of our financial condition at September 30, 2007
and
December 31, 2006 and our results of operations for the three and nine months
ended September 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 nine months 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 September 30, 2007 and 2006 of
$0.35
and $0.32, respectively, and for the nine months ended September 30, 2007 and
2006 of $1.01 and $0.84, respectively. At September 30, 2007, loans totaled
$1.731 billion, as compared to $1.498 billion at December 31, 2006, while total
deposits increased to $1.827 billion at September 30, 2007 compared to $1.622
billion at December 31, 2006.
Mid-America
Bancshares, Inc. Acquisition. On August 15, 2007, we announced
that we had entered into a definitive merger agreement to acquire all of the
outstanding common stock of Mid-America Bancshares, Inc. (“Mid-America”), a
two-bank holding company located in Nashville, Tennessee with approximately
$1.1
billion in assets as of September 30, 2007. Terms of the agreement
call for each share of Mid-America to be exchanged for 0.4655 Pinnacle shares
and $1.50 in cash, which results in the transaction approximating 90 percent
paid in PNFP shares and 10 percent paid in cash. As of the date the
merger was announced, the transaction has an implied purchase price of $196.2
million. Mid-America was formed in 2006 for the purpose of combining
two high-growth community banks based in the
Nashville-Davidson-Murfreesboro-Franklin MSA: PrimeTrust Bank and Bank of the
South, both founded in 2001. Subject to receipt of shareholder
and regulatory approval and the satisfaction of customary closing conditions,
the transaction is expected to close in the fourth quarter of
2007. At that time, we estimate that we will have assets of
approximately $3.7 billion with 31 offices in nine counties, including
several high-growth counties new to the Pinnacle footprint.
The
aggregate consideration approximates 6.6 million shares of PNFP common stock
and
$21.3 million in cash. As a result, Mid-America shareholders
will own approximately 30 percent of the combined company. Including
restricted shares, Mid-America had approximately 14.2 million common shares
outstanding as of August 15, 2007. In order to finance the $21.3
million cash component of the aggregate consideration, we issued approximately
$30 million in trust preferred securities on October 31, 2007 prior to the
closing of the Mid-America transaction. We will use the excess funds
from the trust preferred issuance for general corporate purposes. The
trust preferred securities will bear a floating interest rate based on a spread
over 3-month LIBOR of approximately 2.85% which is set each quarter and mature
in 2037. Distributions are payable quarterly. Subject to
approval by the Federal Reserve Bank of Atlanta, the trust preferred securities
may be redeemed prior to maturity at our option beginning in 2012.
Systems
conversions are scheduled to be completed during the first quarter of
2008. Until that time, PrimeTrust and Bank of the South will continue
to operate under their current brands. PrimeTrust and Bank of the
South will change their names to Pinnacle when the systems platforms of the
three companies are combined.
The
Mid-America acquisition will have a significant impact on our future financial
condition and result of operations. Given we anticipate closing the
transaction during the fourth quarter of 2007, our fourth quarter results will
include Mid-America for a partial quarter’s results.
Cavalry
Bancorp, Inc. 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 approximated $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 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 nine months ended
September 30, 2007, approximately $516,000 and $1,547,000, respectively, of
amortization was recognized in the statement of income compared to $535,000
and
$1,248,000 for the three and nine months ended September 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 nine months ended
September 30, 2007, the accretion of the fair value discounts related to the
acquired loans and certificates of deposit increased net interest income by
approximately $541,000 and $2.1 million, respectively, compared to $950,000
and
$2.38 million for the three and nine months ended September 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 $1.9 million
for the remainder of 2007 and in subsequent years.
We
also
incurred approximately $218,000 and $1,583,000 in merger related expenses during
the three and nine months ended September 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 a range of $0.08 to $0.09
in
2007.
Results
of Operations. Our net interest income increased to $19.0
million for the third quarter of 2007 compared to $17.2 million for the third
quarter of 2006. The net interest margin (the ratio of net
interest income to average earning assets) for the three months ended September
30, 2007 was 3.54% compared to 3.95% for the same period in 2006. Our
net interest income increased to $53.7 million for the nine months ended
September 30, 2007 compared to $43.6 million for the nine months ended September
30, 2006. The net interest margin for the nine months ended
September 30, 2007 was 3.59% compared to 3.97% for the same period in
2006.
Our
provision for loan losses was $772,000 for the third quarter of 2007 compared
to
$587,000 for the same period in 2006. The provision for loan losses
was $2.5 million for the nine months ended September 30, 2007 compared to $2.7
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 that assessment on the level of the allowance
for loan losses.
Noninterest
income for the third quarter of 2007 compared to the same time period in 2006
increased by $908,000 or 20.5%. For the first nine months of 2007,
noninterest income was $5.1 million greater than the first nine 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 395.5 at September 30, 2006 to 450.5 at September 30,
2007. We expect to add additional employees during the remainder of
2007 which will cause our compensation and employee benefit expense to increase
in the fourth quarter of 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 62.20% for the third quarter of 2007 compared
to 60.48% for the same period in 2006. Our efficiency ratio was
61.37% for the nine months ended September 30, 2007 compared to 61.54% for
the
same period in 2006.
The
effective income tax expense rate for the three and nine months ended September
30, 2007 was approximately 31.37% and 31.25%, respectively, compared to an
effective income tax expense rate for the three and nine months ended September
30, 2006 of approximately 32.68% and 32.68%, 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 third quarter of 2007 was $5.8 million compared to $5.3 million
for the same period in 2006, an increase of 7.9%. Net income
for the first nine months of 2007 was $16.8 million compared to $12.3 million
for the same period in 2006, an increase of 36.8%. A significant
portion of the increase in net income for the first nine months of 2007 when
compared to 2006 is due to the Cavalry acquisition and Cavalry being included
in
our results for the entire 2007 period.
Financial
Condition. Loans increased $233.5 million during the first nine
months of 2007, or 20.8% on an annualized basis. 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 through additional provision
expense which would decrease our earnings.
We
have
successfully grown our total deposits to $1.827 billion at September 30, 2007
compared to $1.622 billion at December 31, 2006, an increase of $204.5
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
fluctuating. 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.
Capital
and Liquidity. At September 30, 2007, our capital ratios,
including our bank’s capital ratios, met regulatory minimum capital
requirements. Additionally, at September 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
September 30, 2007, we had $19.0 million 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 has been required to support
our growth. As of September 30, 2007, and after giving effect to our
trust preferred securities offering completed on October 31, 2007, we believe
we
have sufficient capital to support our current growth plans, including our
expansion into the Knoxville market and our acquisition of
Mid-America. 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.
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 probable. 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
probable. 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 estimate for these loan losses is 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 historical 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. The allocation for
those environmental factors is 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. The allowance allocation for each segment as
determined by the respective processes noted above 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.
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 nine months ended September 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
|
|
|
Nine
months ended
|
|
|
2007-2006
|
|
|
|
September
30,
|
|
|
Percent
|
|
|
September
30,
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
(decrease)
|
|
|
2007
|
|
|
2006
|
|
|
Increase
(decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$ |
38,347
|
|
|
$ |
31,340
|
|
|
|
22.4 |
% |
|
$ |
107,594
|
|
|
$ |
76,455
|
|
|
|
40.7 |
% |
Interest
expense
|
|
|
19,387
|
|
|
|
14,181
|
|
|
|
36.7 |
% |
|
|
53,891
|
|
|
|
32,894
|
|
|
|
63.8 |
% |
Net
interest income
|
|
|
18,960
|
|
|
|
17,159
|
|
|
|
10.5 |
% |
|
|
53,703
|
|
|
|
43,561
|
|
|
|
23.3 |
% |
Provision
for loan losses
|
|
|
772
|
|
|
|
587
|
|
|
|
31.5 |
% |
|
|
2,460
|
|
|
|
2,680
|
|
|
|
(8.2 |
)% |
Net
interest income after provision for loan losses
|
|
|
18,188
|
|
|
|
16,572
|
|
|
|
9.8 |
% |
|
|
51,243
|
|
|
|
40,881
|
|
|
|
25.3 |
% |
Noninterest
income
|
|
|
5,332
|
|
|
|
4,424
|
|
|
|
20.5 |
% |
|
|
15,909
|
|
|
|
10,852
|
|
|
|
46.6 |
% |
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger
related expense
|
|
|
-
|
|
|
|
218
|
|
|
|
(100.0 |
)% |
|
|
-
|
|
|
|
1,583
|
|
|
|
(100.0 |
)% |
Other
noninterest expense
|
|
|
15,110
|
|
|
|
12,836
|
|
|
|
17.7 |
% |
|
|
42,718
|
|
|
|
31,906
|
|
|
|
33.9 |
% |
Net
income before income taxes
|
|
|
8,410
|
|
|
|
7,942
|
|
|
|
5.9 |
% |
|
|
24,434
|
|
|
|
18,244
|
|
|
|
33.9 |
% |
Income
tax expense
|
|
|
2,638
|
|
|
|
2,595
|
|
|
|
1.7 |
% |
|
|
7,634
|
|
|
|
5,963
|
|
|
|
28.0 |
% |
Net
income
|
|
$ |
5,772
|
|
|
$ |
5,347
|
|
|
|
7.9 |
% |
|
$ |
16,800
|
|
|
$ |
12,281
|
|
|
|
36.8 |
% |
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
September 30, 2007 and 2006, we recorded net interest income of $18,960,000,
and
$17,159,000 respectively, which resulted in a net interest margin of 3.54%
and
3.95%. For the nine months ended September 30, 2007 and 2006, we
recorded net interest income of $53,703,000 and $43,561,000 which resulted
in a
net interest margin of 3.59% 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 nine months ended September
30,
2007 and 2006 (dollars in thousands):
(dollars
in thousands)
|
|
Three
months ended
September
30, 2007
|
|
|
Three
months ended
September
30, 2006
|
|
|
|
Average
Balances
|
|
|
Interest
|
|
|
Rates/
Yields
|
|
|
Average
Balances
|
|
|
Interest
|
|
|
Rates/
Yields
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
1,697,862
|
|
|
$ |
32,750
|
|
|
|
7.65 |
% |
|
$ |
1,375,036
|
|
|
$ |
26,771
|
|
|
|
7.72 |
% |
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
268,358
|
|
|
|
3,387
|
|
|
|
5.01 |
% |
|
|
260,688
|
|
|
|
3,241
|
|
|
|
4.93 |
% |
Tax-exempt
(1)
|
|
|
79,065
|
|
|
|
744
|
|
|
|
4.92 |
% |
|
|
56,644
|
|
|
|
521
|
|
|
|
4.81 |
% |
Federal
funds sold and other
|
|
|
106,298
|
|
|
|
1,466
|
|
|
|
5.62 |
% |
|
|
59,191
|
|
|
|
807
|
|
|
|
5.41 |
% |
Total
interest-earning assets
|
|
|
2,151,583
|
|
|
$ |
38,347
|
|
|
|
7.12 |
% |
|
|
1,751,559
|
|
|
$ |
31,340
|
|
|
|
7.14 |
% |
Nonearning
assets
|
|
|
226,918
|
|
|
|
|
|
|
|
|
|
|
|
235,677
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
2,378,501
|
|
|
|
|
|
|
|
|
|
|
$ |
1,987,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
checking
|
|
$ |
261,384
|
|
|
$ |
2,123
|
|
|
|
3.24 |
% |
|
$ |
181,752
|
|
|
$ |
1,202
|
|
|
|
2.62 |
% |
Savings
and money market
|
|
|
544,990
|
|
|
|
4,757
|
|
|
|
3.46 |
% |
|
|
473,883
|
|
|
|
3,809
|
|
|
|
3.19 |
% |
Certificates
of deposit
|
|
|
714,060
|
|
|
|
9,164
|
|
|
|
5.09 |
% |
|
|
598,220
|
|
|
|
6,789
|
|
|
|
4.50 |
% |
Total
interest bearing deposits
|
|
|
1,520,434
|
|
|
|
16,044
|
|
|
|
4.19 |
% |
|
|
1,253,855
|
|
|
|
11,800
|
|
|
|
3.73 |
% |
Securities
sold under agreements to repurchase
|
|
|
194,774
|
|
|
|
2,061
|
|
|
|
4.20 |
% |
|
|
122,292
|
|
|
|
1,383
|
|
|
|
4.49 |
% |
Federal
Home Loan Bank advances and other borrowings
|
|
|
29,946
|
|
|
|
385
|
|
|
|
5.10 |
% |
|
|
33,299
|
|
|
|
383
|
|
|
|
4.57 |
% |
Subordinated
debt
|
|
|
51,548
|
|
|
|
897
|
|
|
|
6.90 |
% |
|
|
36,084
|
|
|
|
615
|
|
|
|
6.75 |
% |
Total
interest-bearing liabilities
|
|
|
1,796,702
|
|
|
|
19,387
|
|
|
|
4.28 |
% |
|
|
1,445,530
|
|
|
|
14,181
|
|
|
|
3.89 |
% |
Noninterest-bearing
deposits
|
|
|
293,701
|
|
|
|
-
|
|
|
|
-
|
|
|
|
281,812
|
|
|
|
-
|
|
|
|
-
|
|
Total
deposits and interest-bearing liabilities
|
|
|
2,090,403
|
|
|
$ |
19,387
|
|
|
|
3.68 |
% |
|
|
1,727,342
|
|
|
$ |
14,181
|
|
|
|
3.26 |
% |
Other
liabilities
|
|
|
16,445
|
|
|
|
|
|
|
|
|
|
|
|
14,914
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
271,653
|
|
|
|
|
|
|
|
|
|
|
|
244,980
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,378,501
|
|
|
|
|
|
|
|
|
|
|
$ |
1,987,236
|
|
|
|
|
|
|
|
|
|
Netinterestincome
|
|
|
|
|
|
$ |
18,960
|
|
|
|
|
|
|
|
|
|
|
$ |
17,159
|
|
|
|
|
|
Net
interest spread (2)
|
|
|
|
|
|
|
|
|
|
|
2.84 |
% |
|
|
|
|
|
|
|
|
|
|
3.25 |
% |
Net
interest margin (3)
|
|
|
|
|
|
|
|
|
|
|
3.54 |
% |
|
|
|
|
|
|
|
|
|
|
3.95 |
% |
__________________
|
(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)
|
|
Nine
months ended
September
30, 2007
|
|
|
Nine
months ended
September
30, 2006
|
|
|
|
Average
Balances
|
|
|
Interest
|
|
|
Rates/
Yields
|
|
|
Average
Balances
|
|
|
Interest
|
|
|
Rates/
Yields
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$ |
1,609,200
|
|
|
$ |
92,283
|
|
|
|
7.67 |
% |
|
$ |
1,154,828
|
|
|
$ |
64,196
|
|
|
|
7.43 |
% |
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
271,017
|
|
|
|
10,128
|
|
|
|
5.00 |
% |
|
|
250,373
|
|
|
|
9,250
|
|
|
|
4.94 |
% |
Tax-exempt
(1)
|
|
|
75,694
|
|
|
|
2,107
|
|
|
|
4.91 |
% |
|
|
50,481
|
|
|
|
1,417
|
|
|
|
4.95 |
% |
Federal
funds sold and other
|
|
|
73,677
|
|
|
|
3,076
|
|
|
|
5.60 |
% |
|
|
37,120
|
|
|
|
1,592
|
|
|
|
5.73 |
% |
Total
interest-earning assets
|
|
|
2,029,588
|
|
|
$ |
107,594
|
|
|
|
7.14 |
% |
|
|
1,492,802
|
|
|
$ |
76,455
|
|
|
|
6.89 |
% |
Nonearning
assets
|
|
|
222,964
|
|
|
|
|
|
|
|
|
|
|
|
180,522
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
2,252,552
|
|
|
|
|
|
|
|
|
|
|
$ |
1,673,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
checking
|
|
$ |
253,411
|
|
|
$ |
6,226
|
|
|
|
3.29 |
% |
|
$ |
158,643
|
|
|
$ |
2,533
|
|
|
|
2.13 |
% |
Savings
and money market
|
|
|
514,080
|
|
|
|
13,121
|
|
|
|
3.41 |
% |
|
|
417,610
|
|
|
|
9,384
|
|
|
|
3.00 |
% |
Certificates
of deposit
|
|
|
661,468
|
|
|
|
24,690
|
|
|
|
4.99 |
% |
|
|
486,642
|
|
|
|
15,297
|
|
|
|
4.20 |
% |
Total
interest bearing deposits
|
|
|
1,428,959
|
|
|
|
44,037
|
|
|
|
4.12 |
% |
|
|
1,062,895
|
|
|
|
27,214
|
|
|
|
3.42 |
% |
Securities
sold under agreements to repurchase
|
|
|
174,942
|
|
|
|
5,664
|
|
|
|
4.33 |
% |
|
|
83,364
|
|
|
|
2,569
|
|
|
|
4.12 |
% |
Federal
Home Loan Bank advances and other borrowings
|
|
|
39,395
|
|
|
|
1,539
|
|
|
|
5.22 |
% |
|
|
42,708
|
|
|
|
1,495
|
|
|
|
4.67 |
% |
Subordinated
debt
|
|
|
51,548
|
|
|
|
2,651
|
|
|
|
6.88 |
% |
|
|
32,648
|
|
|
|
1,616
|
|
|
|
6.62 |
% |
Total
interest-bearing liabilities
|
|
|
1,694,844
|
|
|
|
53,891
|
|
|
|
4.25 |
% |
|
|
1,221,615
|
|
|
|
32,894
|
|
|
|
3.60 |
% |
Noninterest-bearing
deposits
|
|
|
279,935
|
|
|
|
-
|
|
|
|
-
|
|
|
|
248,448
|
|
|
|
-
|
|
|
|
-
|
|
Total
deposits and interest-bearing liabilities
|
|
|
1,974,779
|
|
|
$ |
53,891
|
|
|
|
3.65 |
% |
|
|
1,470,063
|
|
|
$ |
32,894
|
|
|
|
2.99 |
% |
Other
liabilities
|
|
|
12,714
|
|
|
|
|
|
|
|
|
|
|
|
11,623
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
265,059
|
|
|
|
|
|
|
|
|
|
|
|
191,638
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,252,552
|
|
|
|
|
|
|
|
|
|
|
$ |
1,673,324
|
|
|
|
|
|
|
|
|
|
Netinterestincome
|
|
|
|
|
|
$ |
53,703
|
|
|
|
|
|
|
|
|
|
|
$ |
43,561
|
|
|
|
|
|
Net
interest spread (2)
|
|
|
|
|
|
|
|
|
|
|
2.89 |
% |
|
|
|
|
|
|
|
|
|
|
3.29 |
% |
Net
interest margin (3)
|
|
|
|
|
|
|
|
|
|
|
3.59 |
% |
|
|
|
|
|
|
|
|
|
|
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.
|
In
comparing the decreases in the net interest margins between the three months
ended September 30, 2007 and 2006 and the nine months ended September 30, 2007
and 2006, the primary cause of the decreased margins was due to the continued
higher rate of increase for funding costs when compared to the yield on earning
assets. When comparing the three months ended September 30, 2007 to
the same period in 2006, funding costs increased by 42 basis points while
interest earning assets decreased by 2 basis points. The comparison
for the nine month periods reflect funding costs up 70 basis points while the
yield on interest earning assets increased by only 25 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 large enough to overcome the negative trends in rates such
that we experienced a 10.5% increase in net interest income comparing the three
months ended September 30, 2007 to the same period in 2006 and 23.3% increase
when comparing the nine months ended September 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 decreased during the third quarter of 2007 when compared
to
the same quarter in 2006 while they increased when comparing the
nine
month periods between 2007 and 2006. The decrease in the third
quarter of 2007 was caused primarily by a drop in our prime lending
rate
as a result of the Federal Reserve’s Open Market Committee dropping the
benchmark Fed funds rate by 50 basis points on September 18,
2007. Our weighted average prime rate for the third quarter of
2007 was 8.18% compared to 8.25% for the same quarter of 2006 while
our
weighted average prime rate for the first nine months of 2007 was
8.22%
compared to 7.96% in 2006. The pricing of a large portion of
our loan portfolio (approximately 44.6% of total loans at September
30,
2007 compared to 47.3% at September 30, 2006) is tied to our prime
rate.
|
|
·
|
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 nine months of 2007, average loan balances were 71.4% of total
assets compared to 69.0% 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 nine month periods.
|
|
·
|
During
the first nine months of
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.
|
|
·
|
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 September 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.
|
The
current shape of the yield curve represents a challenge for most banks,
including Pinnacle National, as we use a significant amount of short-term
funding to fund our balance sheet growth. This short-term
funding comes in the form of checking accounts, savings accounts, money market
accounts, short-term time deposits and securities sold under agreements to
repurchase. Rates paid on these deposits loosely correlate to the Fed
funds rate and short term treasury rates. During the first nine
months of 2007, the Fed funds rate has been higher than other longer term
treasuries (i.e., an inverted yield curve). As a result, depositors
will tend to maintain their funds in shorter-term deposit accounts where they
can achieve a higher yield on their deposit balances and not concern themselves
with long-term products because there is not enough rate increase for them
to
justify the longer maturity. Whereas in a more traditional rate
environment, depositors would either accept a lesser rate for more liquid
deposit accounts or choose a higher rate via a longer time deposit.
In
spite
of the current yield curve, we believe we will increase net interest income
through overall growth in earning assets. The additional revenues
provided by increased loan volumes should be sufficient to overcome any
immediate increases in funding costs such that we should be able to increase
our
current net interest income. Even though our net interest income will
likely increase, our net interest margins could decrease due to increasingly
competitive deposit pricing in our market. With the action steps taken as a
result of the recent Federal funds rate decrease and assuming two more further
Fed funds rate reductions before the end of 2007 (including the reduction that
occurred on October 31, 2007), we believe our net interest margin for the fourth
quarter of 2007 should be within a range of 3.50% to 3.65%, compared to 3.54%
for the third 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 $772,000 and $587,000 for the three months
ended September 30, 2007 and 2006, respectively and $2,460,000 and $2,680,000
for the nine months ended September 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 September 30, 2007. During the
three month periods ended September 30, 2007 and 2006, the provision for loan
losses increased by $185,000 while during the nine month periods ended September
30, 2007 and 2006, the provision for loan losses decreased by $220,000,
respectively. These changes are primarily attributable to the changes
in the levels of nonperforming loans, past due loans, risk grades, net
charge-off levels and loan volumes during the respective periods.
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 nine months
ended September 30, 2007 and 2006 (dollars in thousands):
|
|
Three
months ended
|
|
|
2007-2006
|
|
|
Nine
months ended
|
|
|
2007-2006
|
|
|
|
September
30,
|
|
|
Percent
|
|
|
September
30,
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
(decrease)
|
|
|
2007
|
|
|
2006
|
|
|
Increase
(decrease)
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
$ |
1,966
|
|
|
$ |
1,357
|
|
|
|
44.9 |
% |
|
$ |
5,683
|
|
|
$ |
3,152
|
|
|
|
80.3 |
% |
Investment
sales commissions
|
|
|
869
|
|
|
|
645
|
|
|
|
34.7 |
% |
|
|
2,454
|
|
|
|
1,811
|
|
|
|
35.5 |
% |
Gains
on sales of loans and loan participations, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
from the origination and sale of mortgage loans, net of sales
commissions
|
|
|
360
|
|
|
|
388
|
|
|
|
(7.2 |
)% |
|
|
1,151
|
|
|
|
1,061
|
|
|
|
8.5 |
% |
Gains
on loan participations sold, net
|
|
|
19
|
|
|
|
102
|
|
|
|
(81.4 |
)% |
|
|
230
|
|
|
|
224
|
|
|
|
2.7 |
% |
Insurance
sales commissions
|
|
|
563
|
|
|
|
550
|
|
|
|
2.4 |
% |
|
|
1,829
|
|
|
|
1,563
|
|
|
|
17.0 |
% |
Gain
on sale of investment securities, net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Trust
fees
|
|
|
467
|
|
|
|
312
|
|
|
|
49.7 |
% |
|
|
1,312
|
|
|
|
676
|
|
|
|
94.1 |
% |
Other
noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters
of credit fees
|
|
|
68
|
|
|
|
147
|
|
|
|
(53.7 |
)% |
|
|
170
|
|
|
|
368
|
|
|
|
(53.8 |
)% |
Bank-owned
life insurance
|
|
|
132
|
|
|
|
126
|
|
|
|
4.8 |
% |
|
|
403
|
|
|
|
281
|
|
|
|
43.4 |
% |
ATM,
check card and merchant card fees
|
|
|
743
|
|
|
|
615
|
|
|
|
20.8 |
% |
|
|
2,052
|
|
|
|
1,114
|
|
|
|
84.2 |
% |
Equity
in earnings of Collateral Plus, LLC
|
|
|
20
|
|
|
|
11
|
|
|
|
81.8 |
% |
|
|
109
|
|
|
|
80
|
|
|
|
36.3 |
% |
Other
noninterest income
|
|
|
125
|
|
|
|
171
|
|
|
|
(26.9 |
)% |
|
|
516
|
|
|
|
522
|
|
|
|
(1.1 |
)% |
Total
noninterest income
|
|
$ |
5,332
|
|
|
$ |
4,424
|
|
|
|
20.5 |
% |
|
$ |
15,909
|
|
|
$ |
10,852
|
|
|
|
46.6 |
% |
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 September 30, 2007, Pinnacle Asset Management was
receiving commissions and fees in connection with approximately $590 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 September 30, 2007, our trust department was receiving
fees on approximately $512 million in assets compared to $380 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.
Mortgage
related fees also contributed to the increase in noninterest income between
the
nine month periods in 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 September 30, 2007 and pursuant to participation
agreements with these correspondents, we had participated approximately $125.4
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 net gains, related to the aforementioned retained
cash flow asset, of $19,000 and $31,000 during the three months ended September
30, 2007 and 2006, respectively, and $230,000 and $224,000 during the first
nine
months ended September 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 the first nine months of 2007 and the
first nine months of 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 nine months ended September 30, 2007 and 2006 (dollars in
thousands):
|
|
Three
months ended
|
|
|
2007-2006
|
|
|
Nine
months ended
|
|
|
2007-2006
|
|
|
|
September
30,
|
|
|
Percent
|
|
|
September
30,
|
|
|
Percent
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase
(decrease)
|
|
|
2007
|
|
|
2006
|
|
|
Increase
(decrease)
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
$ |
6,042
|
|
|
$ |
4,964
|
|
|
|
21.7 |
% |
|
$ |
17,215
|
|
|
$ |
12,752
|
|
|
|
35.0 |
% |
Commissions
|
|
|
456
|
|
|
|
331
|
|
|
|
37.8 |
% |
|
|
1,246
|
|
|
|
890
|
|
|
|
40.0 |
% |
Other
compensation, primarily incentives
|
|
|
1,154
|
|
|
|
1,279
|
|
|
|
(9.8 |
)% |
|
|
3,389
|
|
|
|
2,999
|
|
|
|
13.0 |
% |
Employee
benefits and other
|
|
|
1,455
|
|
|
|
1,002
|
|
|
|
45.2 |
% |
|
|
4,317
|
|
|
|
2,674
|
|
|
|
61.4 |
% |
Total
compensation and employee benefits
|
|
|
9,107
|
|
|
|
7,576
|
|
|
|
20.2 |
% |
|
|
26,167
|
|
|
|
19,315
|
|
|
|
35.5 |
% |
Equipment
and occupancy
|
|
|
2,632
|
|
|
|
2,071
|
|
|
|
27.1 |
% |
|
|
7,210
|
|
|
|
5,325
|
|
|
|
35.4 |
% |
Marketing
and business development
|
|
|
375
|
|
|
|
351
|
|
|
|
6.8 |
% |
|
|
1,057
|
|
|
|
900
|
|
|
|
17.4 |
% |
Postage
and supplies
|
|
|
474
|
|
|
|
488
|
|
|
|
(2.9 |
)% |
|
|
1,453
|
|
|
|
1,118
|
|
|
|
30.0 |
% |
Amortization
of core deposit intangible
|
|
|
516
|
|
|
|
535
|
|
|
|
(3.6 |
)% |
|
|
1,547
|
|
|
|
1,248
|
|
|
|
24.0 |
% |
Other
noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting
and auditing
|
|
|
395
|
|
|
|
143
|
|
|
|
176.2 |
% |
|
|
816
|
|
|
|
616
|
|
|
|
32.6 |
% |
Consultants,
including independent loan review
|
|
|
33
|
|
|
|
58
|
|
|
|
(43.1 |
)% |
|
|
172
|
|
|
|
222
|
|
|
|
(22.5 |
)% |
Legal,
including borrower-related charges
|
|
|
85
|
|
|
|
47
|
|
|
|
80.9 |
% |
|
|
308
|
|
|
|
103
|
|
|
|
199.0 |
% |
OCC
exam fees
|
|
|
104
|
|
|
|
73
|
|
|
|
42.5 |
% |
|
|
255
|
|
|
|
187
|
|
|
|
36.4 |
% |
Directors'
fees
|
|
|
64
|
|
|
|
52
|
|
|
|
23.1 |
% |
|
|
182
|
|
|
|
178
|
|
|
|
2.2 |
% |
Insurance,
including FDIC assessments
|
|
|
380
|
|
|
|
189
|
|
|
|
101.1 |
% |
|
|
1,032
|
|
|
|
465
|
|
|
|
121.9 |
% |
Charitable
contributions
|
|
|
95
|
|
|
|
56
|
|
|
|
69.6 |
% |
|
|
286
|
|
|
|
163
|
|
|
|
75.5 |
% |
Other
professional fees
|
|
|
24
|
|
|
|
25
|
|
|
|
(4.0 |
)% |
|
|
102
|
|
|
|
62
|
|
|
|
64.5 |
% |
Other
noninterest expense
|
|
|
826
|
|
|
|
1,172
|
|
|
|
(29.5 |
)% |
|
|
2,130
|
|
|
|
2,004
|
|
|
|
6.3 |
% |
Total
other noninterest expense
|
|
|
2,006
|
|
|
|
1,815
|
|
|
|
10.5 |
% |
|
|
5,283
|
|
|
|
4,000
|
|
|
|
32.1 |
% |
Merger
related expense
|
|
|
-
|
|
|
|
218
|
|
|
|
(100.0 |
)% |
|
|
-
|
|
|
|
1,583
|
|
|
|
(100.0 |
)% |
Total
noninterest expense
|
|
$ |
15,110
|
|
|
$ |
13,054
|
|
|
|
15.7 |
% |
|
$ |
42,718
|
|
|
$ |
33,489
|
|
|
|
27.6 |
% |
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 September 30, 2007 and
2006, approximately $451,000 and $285,000, respectively, and for the nine months
ended September 30, 2007 and 2006, approximately $1,253,000 and $690,000,
respectively, of compensation expense related to stock options and restricted
share awards is included in other incentive compensation expense.
At
September 30, 2007, we employed 450.5 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 September
30, 2007 and 2006, were $503,000 and $1,105,000, respectively, and for the
nine
months ended September 30, 2007 and 2006, were $1,674,000 and $2,859,000,
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, we have anticipated a cash award to qualifying associates equal to
30%-40% of their targeted award and consequently we have recorded incentive
expense of 30%-40% of the targeted award for the first nine 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 30%-40% amount at September 30, 2007 based
on the new estimate. For the nine months ended September 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 third quarter of 2007 were greater than the third
quarter of 2006 amount by 27.1% primarily due to increased operating costs
and
the opening of the Donelson branch in Nashville during the first quarter of
2007
and the Knoxville expansion during the second quarter of
2007. Equipment and occupancy expenses in the first half of 2007 were
greater than the same period in 2006 amount by 35.4% 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 increases in 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 third quarter of 2007 and 2006 is $516,000 and
$535,000, respectively, and for the first nine months of 2007 and 2006 is
$1,547,000 and $1,248,000, 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 nine months ended September
30,
2006, we incurred $1,583,000 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 10.5% in the third quarter of 2007 when compared
to 2006 and 32.1% in the first nine months 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. Additionally, during 2007, the growth
we have experienced in deposit balances and the FDIC increasing the assessment
for deposit insurance coverage also contributed to the increase in other
expenses during 2007 when compared to 2006.
Our
efficiency ratio (ratio of noninterest expense to the sum of net interest income
and noninterest income) was 62.20% for the third quarter of 2007 compared to
60.48% in the third quarter 2006 and 61.37% for the first nine months of 2007
compared to 61.54% 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 $2.368 billion at September 30, 2007 from $2.142 billion at
December 31, 2006 based entirely on organic growth.
Loans. The
composition of loans at September 30, 2007 and at December 31, 2006 and the
percentage (%) of each classification to total loans are summarized as follows
(dollars in thousands):
|
|
September
30, 2007
|
|
|
December
31, 2006
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
Commercial
real estate - Mortgage
|
|
$ |
315,340
|
|
|
|
18.2 |
% |
|
$ |
284,302
|
|
|
|
19.0 |
% |
Commercial
real estate - Construction
|
|
|
176,131
|
|
|
|
10.2 |
% |
|
|
161,903
|
|
|
|
10.8 |
% |
Commercial
- Other
|
|
|
780,341
|
|
|
|
45.1 |
% |
|
|
608,530
|
|
|
|
40.6 |
% |
Total
commercial
|
|
|
1,271,812
|
|
|
|
73.5 |
% |
|
|
1,054,735
|
|
|
|
70.4 |
% |
Consumer
real estate - Mortgage
|
|
|
297,360
|
|
|
|
17.2 |
% |
|
|
299,627
|
|
|
|
20.0 |
% |
Consumer
real estate - Construction
|
|
|
112,890
|
|
|
|
6.5 |
% |
|
|
91,194
|
|
|
|
6.1 |
% |
Consumer
– Other
|
|
|
49,184
|
|
|
|
2.8 |
% |
|
|
52,179
|
|
|
|
3.5 |
% |
Total
consumer
|
|
|
459,434
|
|
|
|
26.5 |
% |
|
|
443,000
|
|
|
|
29.6 |
% |
Total
loans
|
|
$ |
1,731,246
|
|
|
|
100.0 |
% |
|
$ |
1,497,735
|
|
|
|
100.0 |
% |
During
the nine months ended September 30, 2007, our loan balances increased by $233.5
million, or 20.8% on an annualized basis. As noted above, we have
increased the percentage of commercial loans to total loans during the nine
months ended September 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 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 nine months ended September 30,
2007, the percentage of consumer mortgage loan portfolio to total loans
decreased by 2.8%. Although the consumer real estate market in the
Nashville MSA has generally remained 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 September 30, 2007 and December 31, 2006 (dollars in
thousands):
|
|
At
September 30, 2007
|
|
|
|
|
|
|
Outstanding
Principal Balances
|
|
|
Unfunded
Commitments
|
|
|
Total
exposure
|
|
|
Total
Exposure at December 31, 2006
|
|
Trucking
industry
|
|
$ |
70,816
|
|
|
$ |
25,802
|
|
|
$ |
96,618
|
|
|
$ |
89,862
|
|
Lessors
of nonresidential buildings
|
|
|
141,366
|
|
|
|
16,672
|
|
|
|
158,038
|
|
|
|
133,504
|
|
Lessors
of residential buildings
|
|
|
62,031
|
|
|
|
9,373
|
|
|
|
71,404
|
|
|
|
65,791
|
|
Land
subdividers
|
|
|
117,267
|
|
|
|
55,707
|
|
|
|
172,974
|
|
|
|
164,535
|
|
New
housing operative builders
|
|
|
140,334
|
|
|
|
84,951
|
|
|
|
225,285
|
|
|
|
192,373
|
|
The
following table classifies our fixed and variable rate loans at September 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 September 30, 2007
|
|
|
|
|
|
|
|
|
|
Fixed
|
|
|
Variable
|
|
|
|
|
|
At
September 30,
|
|
|
At
December 31,
|
|
|
|
Rates
|
|
|
Rates
|
|
|
Totals
|
|
|
2007
|
|
|
2006
|
|
Based
on contractual maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
within one year
|
|
$ |
97,583
|
|
|
$ |
632,688
|
|
|
$ |
730,271
|
|
|
|
42.2 |
% |
|
|
40.9 |
% |
Due
in one year to five years
|
|
|
494,933
|
|
|
|
208,466
|
|
|
|
703,399
|
|
|
|
40.6 |
% |
|
|
39.9 |
% |
Due
after five years
|
|
|
81,913
|
|
|
|
215,662
|
|
|
|
297,575
|
|
|
|
17.2 |
% |
|
|
19.2 |
% |
Totals
|
|
$ |
674,429
|
|
|
$ |
1,056,816
|
|
|
$ |
1,731,245
|
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based
on contractual repricing dates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daily
floating rate
|
|
$ |
-
|
|
|
$ |
771,707
|
|
|
$ |
771,707
|
|
|
|
44.6 |
% |
|
|
46.1 |
% |
Due
within one year
|
|
|
97,583
|
|
|
|
214,701
|
|
|
|
312,284
|
|
|
|
18.0 |
% |
|
|
13.6 |
% |
Due
in one year to five years
|
|
|
494,933
|
|
|
|
57,644
|
|
|
|
552,577
|
|
|
|
31.9 |
% |
|
|
34.2 |
% |
Due
after five years
|
|
|
81,913
|
|
|
|
12,764
|
|
|
|
94,677
|
|
|
|
5.5 |
% |
|
|
6.1 |
% |
Totals
|
|
$ |
674,429
|
|
|
$ |
1,056,816
|
|
|
$ |
1,731,245
|
|
|
|
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 September 30, 2007, we had $2,364,000 in loans on
nonaccrual compared to $7,070,000 at December 31, 2006. The decrease
in nonperforming loans between September 30, 2007 and December 31, 2006 was
primarily related to borrower payments received during the nine months ended
September 30, 2007.
At
September 30, 2007, we owned $878,000 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
was
$633,000 of other loans 90 past due and still accruing interest at September
30,
2007 compared to $737,000 at December 31, 2006. At September 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 September 30, 2007 and December 31, 2006 (dollars in thousands):
|
|
At
September 30,
|
|
|
At
Dec. 31,
|
|
|
|
2007
|
|
|
2006
|
|
Nonaccrual
loans (1)
|
|
$ |
2,364
|
|
|
$ |
7,070
|
|
Restructured
loans
|
|
|
-
|
|
|
|
-
|
|
Other
real estate owned
|
|
|
878
|
|
|
|
995
|
|
Total
nonperforming assets
|
|
|
3,242
|
|
|
|
8,065
|
|
Accruing
loans past due 90 days or more
|
|
|
633
|
|
|
|
737
|
|
Total
nonperforming assets and accruing loans past due 90 days or
more
|
|
$ |
3,875
|
|
|
$ |
8,802
|
|
Total
loans outstanding
|
|
$ |
1,731,245
|
|
|
$ |
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
|
|
|
21.55 |
% |
|
|
54.61 |
% |
___________________
(1)
|
Interest
income that would have been recorded during the nine months ended
September 30, 2007 related to nonaccrual loans was
$108,000.
|
Potential
problem assets, which are not included in nonperforming assets, amounted to
approximately $10.4 million or 0.40% of total loans outstanding at September
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 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.
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 September 30, 2007 and December
31, 2006, our allowance for loan losses was $17,978,000 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 nine months
ended September 30, 2007. The judgments and estimates associated with
our allowance determination are described under “Critical Accounting Estimates”
above.
Approximately
73.5% of our loan portfolio at September 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 September 30, 2007
and
December 31, 2006 and the percentage of loans in each category to the total
loans (dollars in thousands):
|
|
September
30, 2007
|
|
|
December
31, 2006
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
Commercial
real estate - Mortgage
|
|
$ |
4,919
|
|
|
|
18.2 |
% |
|
$ |
4,550
|
|
|
|
19.0 |
% |
Commercial
real estate - Construction
|
|
|
2,748
|
|
|
|
10.2 |
% |
|
|
2,591
|
|
|
|
10.8 |
% |
Commercial
- Other
|
|
|
8,089
|
|
|
|
45.1 |
% |
|
|
6,517
|
|
|
|
40.6 |
% |
Total
commercial
|
|
|
15,756
|
|
|
|
73.5 |
% |
|
|
13,658
|
|
|
|
70.4 |
% |
Consumer
real estate - Mortgage
|
|
|
761
|
|
|
|
17.2 |
% |
|
|
913
|
|
|
|
20.0 |
% |
Consumer
real estate - Construction
|
|
|
289
|
|
|
|
6.5 |
% |
|
|
278
|
|
|
|
6.1 |
% |
Consumer
- Other
|
|
|
820
|
|
|
|
2.8 |
% |
|
|
870
|
|
|
|
3.5 |
% |
Total
consumer
|
|
|
1,870
|
|
|
|
26.5 |
% |
|
|
2,061
|
|
|
|
29.6 |
% |
Unallocated
|
|
|
352
|
|
|
NA
|
|
|
|
399
|
|
|
NA
|
|
Total
allowance for loan losses
|
|
$ |
17,978
|
|
|
|
100.0 |
% |
|
$ |
16,118
|
|
|
|
100.0 |
% |
The
following is a summary of changes in the allowance for loan losses for the
nine
months ended September 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):
|
|
September
30,
2007
|
|
|
December
31,
2006
|
|
Balance
at beginning of period
|
|
$ |
16,118
|
|
|
$ |
7,858
|
|
Provision
for loan losses
|
|
|
2,460
|
|
|
|
3,732
|
|
Allowance
acquired in Cavalry acquisition
|
|
|
-
|
|
|
|
5,102
|
|
Charged-off
loans:
|
|
|
|
|
|
|
|
|
Commercial
real estate – Mortgage
|
|
|
(22 |
) |
|
|
-
|
|
Commercial
real estate - Construction
|
|
|
(135 |
) |
|
|
-
|
|
Commercial
– Other
|
|
|
(118 |
) |
|
|
(436 |
) |
Consumer
real estate – Mortgage
|
|
|
(334 |
) |
|
|
(46 |
) |
Consumer
real estate - Construction
|
|
|
-
|
|
|
|
-
|
|
Consumer
– Other
|
|
|
(201 |
) |
|
|
(336 |
) |
Total
charged-off loans
|
|
|
(810 |
) |
|
|
(818 |
) |
Recoveries
of previously charged-off loans:
|
|
|
|
|
|
|
|
|
Commercial
real estate - Mortgage
|
|
|
-
|
|
|
|
-
|
|
Commercial
real estate - Construction
|
|
|
1
|
|
|
|
-
|
|
Commercial
- Other
|
|
|
41
|
|
|
|
166
|
|
Consumer
real estate - Mortgage
|
|
|
125
|
|
|
|
-
|
|
Consumer
real estate - Construction
|
|
|
-
|
|
|
|
-
|
|
Consumer
- Other
|
|
|
43
|
|
|
|
78
|
|
Total
recoveries of previously charged-off loans
|
|
|
210
|
|
|
|
244
|
|
Net
(charge-offs) recoveries
|
|
|
(600 |
) |
|
|
(574 |
) |
Balance
at end of period
|
|
$ |
17,978
|
|
|
$ |
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
|
|
|
0.05 |
% |
|
|
0.05 |
% |
______________________
(*)
Net
charge-offs for the nine months ended September 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 $1.86 million between September 30, 2007 and December 31, 2006, the
ratio of our allowance for loan losses to total loans outstanding decreased
to
1.04% at September 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 certain of our credit quality measurements,
including our level of nonperforming loans, past due 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 $352 million
and $346 million at September 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 September 30, 2007 and at December 31, 2006 is as
follows:
|
September
30, 2007
|
December
31, 2006
|
Weighted
average life
|
4.56
years
|
4.93
years
|
Weighted
average coupon
|
4.651%
|
4.85%
|
Tax
equivalent yield
|
5.07%
|
5.01%
|
Deposits
and Other Borrowings. We had approximately
$1.827 billion of deposits at September 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 $145.0
million at September 30, 2007 and $141.0 million at December 31,
2006. Additionally, at September 30, 2007, we had borrowed
$35.7 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. During the first nine months of 2007, our core
funding has decreased from 63.3% of total funding at December 31, 2006 to 61.4%
at September 30, 2007. This decease is caused by the rapid growth in
loans such that we were not able to fund with core funding, but with non-core
funding primarily brokered deposits and other time deposits. We
believe we will continue to have rapid growth in our loan balances such that
core funding may continue to decrease slightly over the next several
quarters. The following table represents the balances of our deposits
and other fundings and the percentage of each type to the total at September
30,
2007 and December 31, 2006 (dollars in thousands):
|
|
September
30,
|
|
|
|
|
|
December
31,
|
|
|
|
|
|
|
2007
|
|
|
Percent
|
|
|
2006
|
|
|
Percent
|
|
Core
funding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
deposit accounts
|
|
$ |
316,542
|
|
|
|
15.2 |
% |
|
$ |
300,978
|
|
|
|
16.1 |
% |
Interest-bearing
demand accounts
|
|
|
254,959
|
|
|
|
12.3 |
% |
|
|
236,674
|
|
|
|
12.7 |
% |
Savings
and money market accounts
|
|
|
538,976
|
|
|
|
25.9 |
% |
|
|
485,936
|
|
|
|
26.0 |
% |
Time
deposit accounts less than $100,000
|
|
|
166,983
|
|
|
|
8.0 |
% |
|
|
158,687
|
|
|
|
8.5 |
% |
Total
core funding
|
|
|
1,277,460
|
|
|
|
61.4 |
% |
|
|
1,182,275
|
|
|
|
63.3 |
% |
Non-core
funding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposit accounts greater than $100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
funds
|
|
|
82,057
|
|
|
|
3.9 |
% |
|
|
98,286
|
|
|
|
5.3 |
% |
Brokered
deposits
|
|
|
147,249
|
|
|
|
7.1 |
% |
|
|
61,718
|
|
|
|
3.3 |
% |
Other
time deposits
|
|
|
320,118
|
|
|
|
15.2 |
% |
|
|
280,132
|
|
|
|
15.0 |
% |
Securities
sold under agreements to repurchase
|
|
|
145,332
|
|
|
|
7.0 |
% |
|
|
141,016
|
|
|
|
7.5 |
% |
Federal
Home Loan Bank advances and Federal funds purchased
|
|
|
55,671
|
|
|
|
2.7 |
% |
|
|
53,726
|
|
|
|
2.9 |
% |
Subordinated
debt
|
|
|
51,548
|
|
|
|
2.7 |
% |
|
|
51,548
|
|
|
|
2.8 |
% |
Total
non-core funding
|
|
|
801,975
|
|
|
|
38.6 |
% |
|
|
686,426
|
|
|
|
36.7 |
% |
Totals
|
|
$ |
2,079,435
|
|
|
|
100.0 |
% |
|
$ |
1,868,701
|
|
|
|
100.0 |
% |
The
amount of time deposits as of September 30, 2007 amounted to $716.4
million. The following table shows our time deposits in denominations
of under $100,000 and those of denominations of $100,000 and greater by category
based on time remaining until maturity of (1) three months or less, (2) over
three but less than six months, (3) over six but less than twelve months and
(4)
over twelve months and the weighted average rate for each category (dollars
in
thousands):
|
|
Balances
|
|
|
Weighted
Avg. Rate
|
|
Denominations
less than $100,000
|
|
|
|
|
|
|
Three
months or less
|
|
$ |
32,231
|
|
|
|
4.75 |
% |
Over
three but less than six months
|
|
|
45,729
|
|
|
|
4.82 |
% |
Over
six but less than twelve months
|
|
|
53,224
|
|
|
|
4.81 |
% |
Over
twelve months
|
|
|
35,799
|
|
|
|
4.77 |
% |
|
|
|
166,983
|
|
|
|
4.79 |
% |
Denomination
$100,000 and greater
|
|
|
|
|
|
|
|
|
Three
months or less
|
|
|
166,853
|
|
|
|
5.18 |
% |
Over
three but less than six months
|
|
|
105,075
|
|
|
|
5.04 |
% |
Over
six but less than twelve months
|
|
|
132,530
|
|
|
|
5.07 |
% |
Over
twelve months
|
|
|
144,966
|
|
|
|
5.12 |
% |
|
|
|
549,424
|
|
|
|
5.11 |
% |
Totals
|
|
$ |
716,407
|
|
|
|
5.03 |
% |
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 (8.49% at September 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 (6.88% at September 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 and upon payment in certain cases of a redemption premium,
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 September 30, 2007 and December 31, 2006, our
stockholders’ equity amounted to $274.6 million and $256.0 million,
respectively, or an increase of $18.6 million. This increase was
primarily attributable to $16.4 million in comprehensive income for the nine
months ended September 30, 2007, which was composed of $16.8 million in net
income together with $0.4 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 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 September 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 September 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 September 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 (“FHLB”). As a result, Pinnacle National receives advances
from the FHLB, 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 September 30, 2007,
Pinnacle National had received advances from the Federal Home Loan Bank of
Cincinnati totaling $25.7 million at the following rates and maturities (dollars
in thousands):
|
|
Amount
|
|
|
Interest
Rates
|
|
|
|
|
|
|
|
|
2008
|
|
$ |
10,000
|
|
|
|
4.97 |
% |
2009
|
|
|
15,000
|
|
|
|
5.01 |
% |
Thereafter
|
|
|
685
|
|
|
|
2.25 |
% |
Total
|
|
$ |
25,685
|
|
|
|
|
|
Weighted
average interest rate
|
|
|
|
|
|
|
4.92 |
% |
Our
borrowings also consist primarily of overnight FHLB advances. At
September 30, 2007, Pinnacle National had borrowed from the FHLB $10 million
on
an overnight basis. Pinnacle National also has 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. At September 30, 2007, Pinnacle National had borrowed from a
correspondent bank $19.986 million under such arrangements.
At
September 30, 2007, brokered certificates of deposit approximated $147.2 million
which represented 7.1% 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 nine
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
September 30, 2007, we had no significant commitments for capital
expenditures. However, we are in the process of developing our branch
network and 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, including our recently
entering into agreements to relocate our downtown office facility in Nashville,
Tennessee to a new facility projected to open in 2010.
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 September 30, 2007, we had outstanding
standby letters of credit of $63.6 million and unfunded loan commitments
outstanding of $592.4 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.
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 our 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.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The
information required by this Item 3 is included on pages 36 through 42 of
Part I - Item 2 - “Management’s Discussion and Analysis of Financial Condition
and Results of Operations.”
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Pinnacle
Financial maintains disclosure controls and procedures, as defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange
Act”), that are designed to ensure that information required to be disclosed by
it in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms and that such information is accumulated and communicated
to Pinnacle Financial’s management, including its Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. Pinnacle Financial carried out an evaluation,
under the supervision and with the participation of its management, including
its Chief Executive Officer and Chief Financial Officer, of the effectiveness
of
the design and operation of its disclosure controls and procedures as of the
end
of the period covered by this report. Based on the evaluation of
these disclosure controls and procedures, the Chief Executive Officer and Chief
Financial Officer concluded that Pinnacle Financial’s disclosure controls and
procedures were effective.
Changes
in Internal Controls
There
were no changes in Pinnacle Financial’s internal control over financial
reporting during Pinnacle Financial’s fiscal quarter ended September 30, 2007
that have materially affected, or are reasonably likely to materially affect,
Pinnacle Financial’s internal control over financial reporting.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
There
are
no material pending legal proceedings to which the Company is a party or of
which any of their property is the subject.
Except
as
disclosed in our Quarterly Report on Form 10-Q for the quarter ended March
31,
2007 and as set forth below, 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.
We
May Not Be Able To Successfully Integrate Mid-America or To Realize the
Anticipated Benefits of the Merger
The
merger of Mid-America with and into Pinnacle Financial involves the combination
of two bank holding companies that previously have operated independently and
in
the case of Mid-America, two separate bank subsidiaries that operate separate
from one another. A successful combination of the operations of the three bank
subsidiaries will depend substantially on our ability to consolidate operations,
systems and procedures and to eliminate redundancies and costs. We may not
be
able to combine our operations with the operations of Mid-America without
encountering difficulties, such as:
• the
loss of key employees and customers;
• the
disruption of operations and business;
• inability
to maintain and increase competitive presence;
• loan
and deposit attrition, customer loss and revenue loss;
• possible
inconsistencies in standards, control procedures and policies;
• unexpected
problems with costs, operations, personnel, technology and credit;
and/or
• problems
with the assimilation of new operations, sites or personnel, which could divert
resources from regular banking operations.
Additionally,
general market and economic conditions or governmental actions affecting the
financial industry generally may inhibit the successful integration of us and
Mid-America and our respective bank subsidiaries.
Further,
we entered into the merger agreement with the expectation that the merger will
result in various benefits including, among other things, benefits relating
to
enhanced revenues, a strengthened market position for the combined company,
cross selling opportunities, technology, cost savings and operating
efficiencies. Achieving the anticipated benefits of the merger is subject to
a
number of uncertainties, including whether we integrate Mid-America and its
bank
subsidiaries in an efficient and effective manner, and general competitive
factors in the marketplace. Failure to achieve these anticipated benefits could
result in a reduction in the price of our shares as well as in increased costs,
decreases in the amount of expected revenues and diversion of management’s time
and energy and could materially impact our business, financial condition and
operating results. Finally, any cost savings that are realized may be offset
by
losses in revenues or other charges to earnings.
The
Combined Company Will Incur Significant Transaction and Merger-Related Costs
in
Connection With the Merger
We
and
Mid-America expect to incur significant costs associated with combining the
operations of the two companies. We and Mid-America have just recently begun
collecting information in order to formulate detailed integration plans to
deliver anticipated cost savings. Additional unanticipated costs may be incurred
in the integration of our business with the business of Mid-America. Although
we
expect that the elimination of duplicative costs, as well as the realization
of
other efficiencies related to the integration of the businesses, may offset
incremental transaction and merger-related costs over time, this net benefit
may
not be achieved in the near term, or at all.
Whether
or not the merger is consummated, we and Mid-America will incur substantial
expenses, such as legal, accounting and financial advisory fees, in pursuing
the
merger. Completion of the merger is conditioned upon the receipt of all material
governmental authorizations, consents, orders and approvals, including approval
by federal banking regulators. We and Mid-America intend to pursue all required
approvals in accordance with the merger agreement.
Failure
To Complete the Merger Could Cause Our Stock Price To
Decline
If
the
merger is not completed for any reason, our stock price may decline because
costs related to the merger, such as legal, accounting and financial advisory
fees, must be paid even if the merger is not completed. In addition, if the
merger is not completed, our stock price may decline to the extent that the
current market price reflects a market assumption that the merger will be
completed.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
(c)
|
The
Company did not repurchase any shares of the Company’s common stock during
the quarter ended September 30,
2007.
|
ITEM
3. DEFAULTS UPON SENIOR
SECURITIES
Not
applicable
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
ITEM
5. OTHER INFORMATION
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
|
November
2, 2007
|
|
President
and Chief Executive Officer
|
|
|
/s/
Harold R. Carpenter
|
|
|
Harold
R. Carpenter
|
November
2, 2007
|
|
Chief
Financial Officer
|