PNFP 3rd Quarter 10Q
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
For
the
quarterly period ended September 30, 2006
or
o
TRANSITION
REPORT PURSUANT TO SECTION 13 OF 15(d)
OF
THE SECURITIES AND EXCHANGE ACT OF 1934
For
the transition period from ____ to ____Commission
File Number: 000-31225
,
Inc.
|
(Exact
name
of registrant as specified in its
charter)
|
Tennessee
|
|
62-1812853
|
(State
or other
jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
211
Commerce Street, Suite 300, Nashville, Tennessee
|
|
37201
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(615)
744-3700
|
(Registrant’s
telephone number, including area
code)
|
Not
Applicable
|
(Former
name, former address and former fiscal year,
if changes since last report)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
Accelerated Filer o
|
Accelerated
Filer x
|
Non-accelerated
Filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
As
of
October 31, 2006 there were 15,410,541 shares of common stock, $1.00 par value
per share, issued and outstanding.
Pinnacle
Financial Partners, Inc.
Report
on Form 10-Q
September
30, 2006
TABLE
OF CONTENTS
|
|
|
Page
No.
|
PART
I:
|
|
Item
1. Consolidated Financial Statements (Unaudited)
|
2
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
26
|
Item
3. Quantitative and Qualitative Disclosures About Market Risk
|
49
|
Item
4. Controls and Procedures
|
49
|
|
|
PART
II:
|
|
Item
1. Legal Proceedings
|
50
|
Item
1A. Risk Factors
|
50
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
50
|
Item
3. Defaults Upon Senior Securities
|
50
|
Item
4. Submission of Matters to a Vote of Security Holders
|
50
|
Item
5. Other Information
|
50
|
Item
6. Exhibits
|
50
|
Signatures
|
51
|
FORWARD-LOOKING
STATEMENTS
Pinnacle
Financial Partners, Inc. (“Pinnacle Financial”) may from time to time make
written or oral statements, including statements contained in this report which
may constitute forward-looking statements within the meaning of Section 21E
of
the Securities Exchange Act of 1934 (the “Exchange Act”). The words “expect”,
“anticipate”, “intend”, “consider”, “plan”, “believe”, “seek”, “should”,
“estimate”, and similar expressions are intended to identify such
forward-looking statements, but other statements may constitute forward-looking
statements. These statements should be considered subject to various risks
and
uncertainties. Such forward-looking statements are made based upon management's
belief as well as assumptions made by, and information currently available
to,
management pursuant to "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. Pinnacle Financial’s actual results may differ
materially from the results anticipated in forward-looking statements due to
a
variety of factors. Such factors are described below and in Pinnacle Financial’s
Form 10-K and include, without limitation, (i) unanticipated deterioration
in
the financial condition of borrowers resulting in significant increases in
loan
losses and provisions for those losses, (ii) increased competition with other
financial institutions, (iii) lack of sustained growth in the economy in the
Nashville/Davidson/Murfreesboro MSA, (iv) rapid fluctuations or unanticipated
changes in interest rates, (v) the inability of our bank subsidiary, Pinnacle
National Bank, to satisfy regulatory requirements for its expansion plans,
(vi)
the ability to successfully integrate Pinnacle Financial’s operations with the
former Cavalry Bancorp, Inc., (vii) the ability of Pinnacle Financial to grow
its loan portfolio at historic rates, (viii) the ability of Pinnacle Financial
to execute its expansion plans and (ix) changes in the legislative and
regulatory environment, including compliance with the various provisions of
the
Sarbanes-Oxley Act of 2002. Many of such factors are beyond Pinnacle Financial’s
ability to control or predict, and readers are cautioned not to put undue
reliance on such forward-looking statements. Pinnacle Financial does not intend
to update or reissue any forward-looking statements contained in this report
as
a result of new information or other circumstances that may become known to
Pinnacle Financial.
Item
1. Part
I. FINANCIAL INFORMATION
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
|
|
September
30,
2006
|
|
December
31,
2005
|
|
ASSETS
|
|
|
|
|
|
Cash
and noninterest-bearing due from banks
|
|
$
|
55,199,117
|
|
$
|
25,935,948
|
|
Interest-bearing
due from banks
|
|
|
6,176,891
|
|
|
839,960
|
|
Federal
funds sold
|
|
|
51,623,544
|
|
|
31,878,362
|
|
Cash
and cash equivalents
|
|
|
112,999,552
|
|
|
58,654,270
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale, at fair value
|
|
|
303,483,224
|
|
|
251,749,094
|
|
Securities
held-to-maturity (fair value of $26,531,147 and $26,546,297 at September
30, 2006 and December 31, 2005, respectively)
|
|
|
27,275,651
|
|
|
27,331,251
|
|
Mortgage
loans held-for-sale
|
|
|
8,960,447
|
|
|
4,874,323
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
1,405,401,429
|
|
|
648,024,032
|
|
Less
allowance for loan losses
|
|
|
(15,172,446
|
)
|
|
(7,857,774
|
)
|
Loans,
net
|
|
|
1,390,228,983
|
|
|
640,166,258
|
|
|
|
|
|
|
|
|
|
Premises
and equipment, net
|
|
|
36,222,088
|
|
|
12,915,595
|
|
Investments
in unconsolidated subsidiaries and other entities
|
|
|
11,278,614
|
|
|
6,622,645
|
|
Accrued
interest receivable
|
|
|
10,455,981
|
|
|
4,870,197
|
|
Goodwill
|
|
|
115,064,500
|
|
|
-
|
|
Core
deposit intangible
|
|
|
11,920,001
|
|
|
-
|
|
Other
assets
|
|
|
24,363,133
|
|
|
9,588,097
|
|
Total
assets
|
|
$
|
2,052,252,174
|
|
$
|
1,016,771,730
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
Noninterest-bearing
demand
|
|
$
|
306,296,117
|
|
$
|
155,811,214
|
|
Interest-bearing
demand
|
|
|
199,967,210
|
|
|
72,520,757
|
|
Savings
and money market accounts
|
|
|
481,684,245
|
|
|
304,161,625
|
|
Time
|
|
|
597,290,358
|
|
|
277,657,129
|
|
Total
deposits
|
|
|
1,585,237,930
|
|
|
810,150,725
|
|
Securities
sold under agreements to repurchase
|
|
|
122,354,264
|
|
|
65,834,232
|
|
Federal
Home Loan Bank advances
|
|
|
28,739,443
|
|
|
41,500,000
|
|
Subordinated
debt
|
|
|
51,548,000
|
|
|
30,929,000
|
|
Accrued
interest payable
|
|
|
4,183,121
|
|
|
1,884,596
|
|
Other
liabilities
|
|
|
11,130,028
|
|
|
3,036,752
|
|
Total
liabilities
|
|
|
1,803,192,786
|
|
|
953,335,305
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Preferred
stock, no par value; 10,000,000 shares authorized; no shares issued
and
outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock, par value $1.00; 90,000,000 shares authorized; 15,409,341
issued
and outstanding at September 30, 2006 and 8,426,551 issued and outstanding
at December 31, 2005
|
|
|
15,409,341
|
|
|
8,426,551
|
|
Additional
paid-in capital
|
|
|
210,752,785
|
|
|
44,890,912
|
|
Unearned
compensation
|
|
|
-
|
|
|
(169,689
|
)
|
Retained
earnings
|
|
|
25,455,618
|
|
|
13,182,291
|
|
Accumulated
other comprehensive loss, net
|
|
|
(2,558,356
|
)
|
|
(2,893,640
|
)
|
Stockholders’
equity
|
|
|
249,059,388
|
|
|
63,436,425
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
2,052,252,174
|
|
$
|
1,016,771,730
|
|
See
accompanying notes to consolidated financial statements.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
(Unaudited)
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Interest
income:
|
|
|
|
|
|
|
|
|
|
Loans,
including fees
|
|
$
|
26,771,110
|
|
$
|
9,470,954
|
|
$
|
64,195,835
|
|
$
|
24,427,821
|
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
3,240,878
|
|
|
2,245,019
|
|
|
9,250,455
|
|
|
6,401,537
|
|
Tax-exempt
|
|
|
521,240
|
|
|
318,235
|
|
|
1,416,862
|
|
|
758,572
|
|
Federal
funds sold and other
|
|
|
806,829
|
|
|
344,498
|
|
|
1,591,941
|
|
|
601,468
|
|
Total
interest income
|
|
|
31,340,057
|
|
|
12,378,706
|
|
|
76,455,093
|
|
|
32,189,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
11,800,394
|
|
|
3,968,648
|
|
|
27,213,738
|
|
|
8,999,838
|
|
Securities
sold under agreements to repurchase
|
|
|
1,382,418
|
|
|
399,731
|
|
|
2,569,383
|
|
|
803,114
|
|
Federal
funds purchased and other borrowings
|
|
|
997,899
|
|
|
554,694
|
|
|
3,110,660
|
|
|
1,635,506
|
|
Total
interest expense
|
|
|
14,180,711
|
|
|
4,923,073
|
|
|
32,893,781
|
|
|
11,438,458
|
|
Net
interest income
|
|
|
17,159,346
|
|
|
7,455,633
|
|
|
43,561,312
|
|
|
20,750,940
|
|
Provision
for loan losses
|
|
|
586,589
|
|
|
366,304
|
|
|
2,680,638
|
|
|
1,450,244
|
|
Net
interest income after provision for loan losses
|
|
|
16,572,757
|
|
|
7,089,329
|
|
|
40,880,674
|
|
|
19,300,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
1,357,280
|
|
|
228,994
|
|
|
3,151,664
|
|
|
732,130
|
|
Investment
sales commissions
|
|
|
644,931
|
|
|
474,354
|
|
|
1,811,428
|
|
|
1,403,231
|
|
Insurance
sales commissions
|
|
|
549,584
|
|
|
-
|
|
|
1,562,946
|
|
|
-
|
|
Gain
on loans and loan participations sold, net
|
|
|
490,254
|
|
|
348,577
|
|
|
1,285,609
|
|
|
899,393
|
|
Trust
fees
|
|
|
311,997
|
|
|
-
|
|
|
675,994
|
|
|
-
|
|
Gain
on sales of investment securities, net
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
114,410
|
|
Other
noninterest income
|
|
|
1,069,811
|
|
|
247,208
|
|
|
2,364,592
|
|
|
743,689
|
|
Total
noninterest income
|
|
|
4,423,857
|
|
|
1,299,133
|
|
|
10,852,233
|
|
|
3,892,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
and employee benefits
|
|
|
7,576,011
|
|
|
3,410,436
|
|
|
19,314,365
|
|
|
9,491,712
|
|
Equipment
and occupancy
|
|
|
2,070,727
|
|
|
1,034,661
|
|
|
5,325,274
|
|
|
2,712,624
|
|
Marketing
and other business development
|
|
|
351,432
|
|
|
186,430
|
|
|
899,807
|
|
|
479,313
|
|
Postage
and supplies
|
|
|
487,689
|
|
|
159,782
|
|
|
1,118,308
|
|
|
453,716
|
|
Amortization
of core deposit intangible
|
|
|
534,957
|
|
|
-
|
|
|
1,248,335
|
|
|
-
|
|
Other
noninterest expense
|
|
|
1,815,392
|
|
|
729,528
|
|
|
3,999,832
|
|
|
1,927,564
|
|
Merger
related expense
|
|
|
218,167
|
|
|
-
|
|
|
1,582,734
|
|
|
-
|
|
Total
noninterest expense
|
|
|
13,054,375
|
|
|
5,520,837
|
|
|
33,488,655
|
|
|
15,064,929
|
|
Income
before income taxes
|
|
|
7,942,239
|
|
|
2,867,625
|
|
|
18,244,252
|
|
|
8,128,620
|
|
Income
tax expense
|
|
|
2,595,465
|
|
|
789,382
|
|
|
5,963,112
|
|
|
2,311,455
|
|
Net
income
|
|
$
|
5,346,774
|
|
$
|
2,078,243
|
|
$
|
12,281,140
|
|
$
|
5,817,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per common share
|
|
$
|
0.35
|
|
$
|
0.25
|
|
$
|
0.91
|
|
$
|
0.69
|
|
Diluted
net income per common share
|
|
$
|
0.32
|
|
$
|
0.22
|
|
$
|
0.84
|
|
$
|
0.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,393,735
|
|
|
8,417,980
|
|
|
13,450,282
|
|
|
8,402,916
|
|
Diluted
|
|
|
16,655,349
|
|
|
9,495,187
|
|
|
14,649,418
|
|
|
9,455,756
|
|
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, 2006 and 2005
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Additional
Paid-in
Capital
|
|
Unearned
Compensation
|
|
Retained
Earnings
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
Total
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2004
|
|
|
8,389,232
|
|
$
|
8,389,232
|
|
$
|
44,376,307
|
|
$
|
(37,250
|
)
|
$
|
5,127,023
|
|
$
|
24,863
|
|
$
|
57,880,175
|
|
Exercise
of employee common stock options and related tax benefits
|
|
|
18,619
|
|
|
18,619
|
|
|
124,951
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
143,570
|
|
Issuance
of restricted common shares pursuant to 2004 Equity Incentive
Plan
|
|
|
16,366
|
|
|
16,366
|
|
|
403,601
|
|
|
(419,967
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Amortization
of unearned compensation associated with restricted shares
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
128,920
|
|
|
-
|
|
|
-
|
|
|
128,920
|
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,817,165
|
|
|
-
|
|
|
5,817,165
|
|
Net
unrealized holding losses on available-for-sale securities, net of
deferred tax benefit of $153,376
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,078,951
|
)
|
|
(1,078,951
|
)
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,738,214
|
|
Balances,
September 30, 2005
|
|
|
8,424,217
|
|
$
|
8,424,217
|
|
$
|
44,904,859
|
|
$
|
(328,297
|
)
|
$
|
10,944,188
|
|
$
|
(1,054,088
|
)
|
$
|
62,890,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Amortization
expense for restricted shares
|
|
|
-
|
|
|
-
|
|
|
311,229
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
311,229
|
|
Dividends
paid to minority interest shareholders of PNFP Properties,
Inc.
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(7,813
|
)
|
|
-
|
|
|
(7,813
|
)
|
Merger
with Cavalry Bancorp, Inc.
|
|
|
6,856,298
|
|
|
6,856,298
|
|
|
164,231,274
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
171,087,572
|
|
Costs
to register common stock issued in connection with the merger with
Cavalry
Bancorp, Inc.
|
|
|
-
|
|
|
-
|
|
|
(187,609
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(187,609
|
)
|
Stock
based compensation expense
|
|
|
-
|
|
|
-
|
|
|
690,143
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
690,143
|
|
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
|
|
See
accompanying notes to consolidated financial statements.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine
months ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
Operating
activities:
|
|
|
|
|
|
Net
income
|
|
$
|
12,281,140
|
|
$
|
5,817,165
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Net
amortization of securities
|
|
|
591,794
|
|
|
838,169
|
|
Depreciation
and amortization
|
|
|
3,645,465
|
|
|
1,293,099
|
|
Provision
for loan losses
|
|
|
2,680,638
|
|
|
1,450,244
|
|
Gain
on sale of investment securities, net
|
|
|
-
|
|
|
(114,410
|
)
|
Gains
on loans and loan participations sold, net
|
|
|
(1,285,609
|
)
|
|
(899,393
|
)
|
Stock-based
compensation expense
|
|
|
1,001,372
|
|
|
128,920
|
|
Deferred
tax benefit
|
|
|
(1,110,490
|
)
|
|
(460,109
|
)
|
Tax
benefit on exercise of stock awards
|
|
|
-
|
|
|
26,200
|
|
Excess
tax benefit from stock compensation arrangements
|
|
|
(110,244
|
)
|
|
-
|
|
Mortgage
loans held for sale:
|
|
|
|
|
|
|
|
Loans
originated
|
|
|
(104,455,073
|
)
|
|
(74,482,774
|
)
|
Loans
sold
|
|
|
102,030,399
|
|
|
70,543,400
|
|
Increase
in other assets
|
|
|
(3,580,936
|
)
|
|
(3,218,949
|
)
|
Increase
(decrease) in other liabilities
|
|
|
(9,368,829
|
)
|
|
1,118,840
|
|
Net
cash provided by operating activities
|
|
|
2,319,627
|
|
|
2,040,402
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
Activities
in securities available-for-sale:
|
|
|
|
|
|
|
|
Purchases
|
|
|
(38,573,610
|
)
|
|
(70,642,913
|
)
|
Sales
|
|
|
-
|
|
|
6,791,867
|
|
Maturities,
prepayments and calls
|
|
|
26,320,244
|
|
|
22,642,721
|
|
|
|
|
(12,253,366
|
)
|
|
(41,208,325
|
)
|
Net
increase in loans
|
|
|
(207,144,996
|
)
|
|
(131,791,769
|
)
|
Purchases
of premises and equipment and software
|
|
|
(3,708,595
|
)
|
|
(3,334,110
|
)
|
Cash
and cash equivalents acquired in merger with Cavalry Bancorp,
Inc.
|
|
|
37,420,210
|
|
|
-
|
|
Purchases
of other assets
|
|
|
(1,271,982
|
)
|
|
(827,850
|
)
|
Net
cash used in investing activities
|
|
|
(186,958,729
|
)
|
|
(177,102,054
|
)
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
Net
increase in deposits
|
|
|
191,447,162
|
|
|
217,900,717
|
|
Net
increase in securities sold under agreements to repurchase
|
|
|
56,520,032
|
|
|
35,723,929
|
|
Advances
from Federal Home Loan Bank:
|
|
|
|
|
|
|
|
Issuances
|
|
|
31,000,000
|
|
|
27,000,000
|
|
Payments
|
|
|
(61,527,218
|
)
|
|
(56,000,000
|
)
|
Proceeds
from the issuance of subordinated debt
|
|
|
20,619,000
|
|
|
20,619,000
|
|
Exercise
of common stock warrants
|
|
|
55,000
|
|
|
-
|
|
Exercise
of common stock options
|
|
|
947,773
|
|
|
143,570
|
|
Excess
tax benefit from stock compensation arrangements
|
|
|
110,244
|
|
|
-
|
|
Costs
incurred in connection with registration of common stock issued in
merger
|
|
|
(187,609
|
)
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
238,984,384
|
|
|
245,387,216
|
|
Net
increase in cash and cash equivalents
|
|
|
54,345,282
|
|
|
70,325,564
|
|
Cash
and cash equivalents, beginning of period
|
|
|
58,654,270
|
|
|
26,745,787
|
|
Cash
and cash equivalents, end of period
|
|
$
|
112,999,552
|
|
$
|
97,071,351
|
|
See
accompanying notes to consolidated financial statements.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
1. Summary of Significant Accounting Policies
Nature
of Business —
Pinnacle Financial Partners, Inc. (Pinnacle Financial) is a bank holding company
whose primary business is conducted by its wholly-owned subsidiary, Pinnacle
National Bank (Pinnacle National). Pinnacle National is a commercial bank
located in Nashville, Tennessee. Pinnacle National provides a full range of
banking services in its primary market areas of Davidson, Rutherford,
Williamson, Sumner and Bedford Counties. Pinnacle Financial and Pinnacle
National have formed several subsidiaries for various purposes as
follows:
· |
PFP
Title Company is a wholly-owned subsidiary of Pinnacle National.
PFP Title
Company is licensed to sell title insurance policies to Pinnacle
National
customers and others.
|
· |
PNFP
Holdings, Inc. is a wholly-owned subsidiary of PFP Title Company
and is
the parent of PNFP Properties, Inc., which was established as a Real
Estate Investment Trust pursuant to Internal Revenue Service regulations.
|
· |
Pinnacle
Community Development, Inc. is a wholly-owned subsidiary of Pinnacle
National and is certified as a Community Development Entity by the
Community Development Financial Institutions Fund of the United States
Department of the Treasury.
|
· |
PNFP
Statutory Trust I, PNFP Statutory Trust II and PNFP Statutory Trust
III,
wholly-owned subsidiaries of Pinnacle Financial, were created for
the
exclusive purpose of issuing capital trust preferred securities.
|
· |
Pinnacle
Advisory Services, Inc. is a wholly-owned subsidiary of Pinnacle
Financial
and was established as a registered investment advisor pursuant to
regulations promulgated by the Board of Governors of the Federal
Reserve
System.
|
· |
Miller
and Loughry Insurance and Services, Inc. is a wholly-owned subsidiary
of
Pinnacle National. Miller and Loughry is a general insurance agency
located in Murfreesboro, Tennessee and is licensed to sell various
commercial and consumer insurance products.
|
· |
Pinnacle
Credit Enhancement Holdings, Inc. is a wholly-owned subsidiary of
Pinnacle
Financial and was established to own a 24.5% membership interest
in
Collateral Plus, LLC. Collateral Plus, LLC serves as an intermediary
between investors and borrowers in certain financial transactions
whereby
the borrowers require enhanced collateral in the form of letters
of credit
issued by the investors for the benefit of banks and other financial
institutions.
|
Basis
of Presentation —
These
consolidated financial statements include the accounts of Pinnacle Financial
and
its wholly-owned subsidiaries. PNFP Statutory Trust I, PNFP Statutory Trust
II,
PNFP Statutory Trust III and Collateral Plus, LLC, are included in these
consolidated financial statements pursuant to the equity method of accounting.
Significant intercompany transactions and accounts are eliminated in
consolidation.
Use
of Estimates —
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities
and
disclosures of contingent assets and liabilities as of the balance sheet date
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses.
Impairment—
Long-lived assets, including purchased intangible assets subject to
amortization, such as Pinnacle Financial’s core deposit intangible asset, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability
of
assets to be held and used is measured by a comparison of the carrying amount
of
an asset to estimated undiscounted future cash flows expected to be generated
by
the asset. If the carrying amount of an asset exceeds its estimated future
cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of would be separately presented in the balance sheet and reported at the lower
of the carrying amount or fair value less costs to sell, and are no longer
depreciated.
Goodwill
and intangible assets that have indefinite useful lives are tested annually
for
impairment, and are tested for impairment more frequently if events and
circumstances indicate that the asset might be impaired. An impairment loss
is
recognized to the extent that the carrying amount exceeds the asset’s fair
value. Pinnacle Financial’s annual assessment date will be as of September 30
such that the assessment will be completed during the fourth quarter of each
year. Accordingly, should we determine in a future period that the goodwill
recorded in connection with our acquisition of Cavalry has been impaired, then
a
charge to our earnings will be recorded in the period such determination is
made.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Cash
and Cash Flows —
Cash
on
hand, cash items in process of collection, amounts due from banks, Federal
funds
sold and securities purchased under agreements to resell, with original
maturities within ninety days, are included in cash and cash equivalents. The
following supplemental cash flow information addresses certain cash payments
and
noncash transactions for the nine months ended September 30, 2006 and 2005
as
follows:
|
|
For
the nine months ended September 30,
|
|
|
|
2006
|
|
2005
|
|
Cash
Payments:
|
|
|
|
|
|
Interest
|
|
$
|
34,444,269
|
|
$
|
10,692,618
|
|
Income
taxes
|
|
|
6,380,000
|
|
|
2,660,133
|
|
Noncash
Transactions:
|
|
|
|
|
|
|
|
Loans
charged-off to the allowance for loan losses
|
|
|
627,838
|
|
|
125,449
|
|
Loans
foreclosed upon with repossessions transferred to other
assets
|
|
|
-
|
|
|
34,750
|
|
Common
stock and options issued to acquire Cavalry Bancorp, Inc.
|
|
|
171,087,572
|
|
|
-
|
|
Income
Per Common Share —
Basic
earnings per share (“EPS”) is computed by dividing net income by the weighted
average common shares outstanding for the period. Diluted EPS reflects the
dilution that could occur if securities or other contracts to issue common
stock
were exercised or converted. The difference between basic and diluted weighted
average shares outstanding was attributable to common stock options and
warrants.
The
dilutive effect of outstanding options and warrants is reflected in diluted
earnings per share by application of the treasury stock method, which in 2006
includes consideration of stock-based compensation attributable to future
services resulting from the adoption of Statement of Financial Accounting
Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment”
(“SFAS No.123(R)”).
As
of
September 30, 2006 and 2005, there were common stock options outstanding to
purchase up to 1.6 million and 1.2 million common shares, respectively. Most
of
these options have exercise prices (and in 2006, compensation costs attributable
to current services), which when considered in relation to the average market
price of Pinnacle Financial’s common stock, are considered dilutive and are
considered in Pinnacle Financial’s diluted income per share calculation for each
of the three and nine month periods ended September 30, 2006 and 2005. There
were common stock options of 177,000 and 8,000 outstanding as of September
30,
2006 and 2005, respectively, which were considered anti-dilutive and thus have
not been considered in the fully-diluted share calculations below. Additionally,
as of September 30, 2006 and 2005, Pinnacle Financial had outstanding warrants
to purchase 395,000 and 406,000, respectively, of common shares which have
been
considered in the calculation of Pinnacle Financial’s diluted income per share
for the three and nine months ended September 30, 2006 and 2005.
The
following is a summary of the basic and diluted earnings per share calculation
for the three and nine months ended September 30, 2006 and 2005:
|
|
For
the three months ended September 30,
|
|
For
the nine months ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Basic
earnings per share calculation:
|
|
|
|
|
|
|
|
|
|
Numerator
-
Net income
|
|
$
|
5,346,774
|
|
$
|
2,078,243
|
|
$
|
12,281,140
|
|
$
|
5,817,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
-
Average common shares outstanding
|
|
|
15,393,735
|
|
|
8,417,980
|
|
|
13,450,282
|
|
|
8,402,916
|
|
Basic
net income per share
|
|
$
|
0.35
|
|
$
|
0.25
|
|
$
|
0.91
|
|
$
|
0.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
-
Net income
|
|
$
|
5,346,774
|
|
$
|
2,078,243
|
|
$
|
12,281,140
|
|
$
|
5,817,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
-
Average common shares outstanding
|
|
|
15,393,735
|
|
|
8,417,980
|
|
|
13,450,282
|
|
|
8,402,916
|
|
Dilutive
shares contingently issuable
|
|
|
1,261,614
|
|
|
1,077,207
|
|
|
1,199,136
|
|
|
1,052,840
|
|
Average
diluted common shares outstanding
|
|
|
16,655,349
|
|
|
9,495,187
|
|
|
14,649,418
|
|
|
9,455,756
|
|
Diluted
net income per share
|
|
$
|
0.32
|
|
$
|
0.22
|
|
$
|
0.84
|
|
$
|
0.62
|
|
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Stock-Based
Compensation —
On
January 1, 2006, Pinnacle Financial adopted SFAS No. 123(R), that
addresses the accounting for share-based payment transactions in which a company
receives employee services in exchange for equity instruments. SFAS No. 123(R)
eliminates the ability to account for share-based compensation transactions,
as
Pinnacle Financial formerly did, using the intrinsic value method as prescribed
by Accounting Principles Board, (“APB”), Opinion No. 25, “Accounting for
Stock Issued to Employees,” and generally requires that such transactions be
accounted for using a fair-value-based method and recognized as expense in
the
accompanying consolidated statement of income.
Pinnacle
Financial adopted SFAS No. 123(R) using the modified prospective method
which requires the application of the accounting standard as of January 1,
2006. The accompanying consolidated financial statements as of and for the
first
nine months of 2006 reflect the impact of adopting SFAS No. 123(R). In
accordance with the modified prospective method, consolidated financial
statements for prior periods have not been restated to reflect, and do not
include, the impact of SFAS No. 123(R).
See
Note 7 for further
details.
Stock-based
compensation expense recognized during the period is based on the value of
the
portion of stock-based payment awards that is ultimately expected to vest.
Stock-based compensation expense recognized in the accompanying consolidated
statement of income during 2006 included compensation expense for stock-based
payment awards granted prior to, but not yet vested, as of January 1, 2006
and
for the stock-based awards granted after January 1, 2006, based on the grant
date fair value estimated in accordance with SFAS No. 123(R). As
stock-based compensation expense recognized in the accompanying statement of
income for 2006 is based on awards ultimately expected to vest, it has been
reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures to
be estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. In the pro forma
information for 2005,
which
is also detailed in Note 7, we accounted
for
forfeitures as they occurred.
Comprehensive
Income (Loss) —SFAS
No. 130, “Reporting Comprehensive Income” describes comprehensive income as
the total of all components of comprehensive income including net income. Other
comprehensive income refers to revenues, expenses, gains and losses that under
generally accepted accounting principles are included in comprehensive income
but excluded from net income. Currently, Pinnacle Financial’s other
comprehensive income (loss) consists of unrealized gains and losses, net of
deferred income taxes, on available-for-sale securities.
Recent
Accounting Pronouncements —
FASB
Staff Position on SFAS No. 115-1 and SFAS No. 124-1 (the “FSP”), “The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,” was
issued in November 2005 and addresses the determination of when an investment
is
considered impaired; whether the impairment is other-than-temporary; and how
to
measure an impairment loss. The FSP also addresses accounting considerations
subsequent to the recognition of an other-than-temporary impairment on a debt
security, and requires certain disclosures about unrealized losses that have
not
been recognized as other-than-temporary impairments. The FSP replaces the
impairment guidance on Emerging Issues Task Force (“EITF”) Issue No. 03-1 with
references to existing authoritative literature concerning other-than-temporary
determinations. Under the FSP, losses arising from impairment deemed to be
other-than-temporary, must be recognized in earnings at an amount equal to
the
entire difference between the securities cost and its fair value at the
financial statement date, without considering partial recoveries subsequent
to
that date. The FSP also requires that an investor recognize an
other-than-temporary impairment loss when a decision to sell a security has
been
made and the investor does not expect the fair value of the security to fully
recover prior to the expected time of sale. The FSP was effective for reporting
periods beginning after December 15, 2005. The initial adoption of this
statement did not have a material impact on Pinnacle Financial’s consolidated
financial statements.
In
May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3”
(“SFAS No. 154”). This statement changes the requirements for the accounting for
and reporting of a change in accounting principle. This statement applies to
all
voluntary changes in accounting principle. It also applies to changes required
by an accounting pronouncement in the unusual instance that the pronouncement
does not include specific transition provisions. When a pronouncement includes
specific transition provisions, those provisions should be followed. APB Opinion
No. 20 previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of the change
the cumulative effect of changing to the new accounting principle. SFAS No.
154
requires retrospective application to prior period financial statements of
changes in accounting principle, unless it is impracticable to determine either
the period-specific effects or the cumulative effect of the change. This
statement does not change the guidance for reporting the correction of an error
in previously issued financial statements or the change in an accounting
estimate. SFAS 154 was effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
SFAS
No.
156, “Accounting for Servicing of Financial Assets - an amendment of FASB
Statement No. 140.” SFAS No. 156 requires an entity to recognize a
servicing asset or servicing liability each time it undertakes a contractual
obligation to service a financial asset in certain circumstances. All separately
recognized servicing assets and servicing liabilities are required to be
initially measured at fair value. Subsequent measurement methods include the
amortization method, whereby servicing assets or servicing liabilities are
amortized in proportion to and over the period of estimated net servicing income
or net servicing loss, or the fair value method, whereby servicing assets or
servicing liabilities are measured at fair value at each reporting date and
changes in fair value are reported in earnings in the period in which they
occur. If the amortization method is used, an entity must assess servicing
assets or servicing liabilities for impairment or increased obligation based
on
the fair value at each reporting date. SFAS No. 156 is effective for fiscal
years beginning after December 15, 2006. Pinnacle Financial is currently
evaluating the impact of SFAS No. 156 on its consolidated financial
statements.
In
July
2006, the FASB issued FASB Interpretation 48, “Accounting for Income Tax
Uncertainties” (“FIN 48”). FIN 48 defines the threshold for recognizing the
benefits of tax return positions in the financial statements as
“more-likely-than-not” to be sustained by the taxing authority. The recently
issued literature also provides guidance on the derecognition, measurement
and
classification of income tax uncertainties, along with any related interest
and
penalties. FIN 48 also includes guidance concerning accounting for income tax
uncertainties in interim periods and increases the level of disclosures
associated with any recorded income tax uncertainties. FIN 48 is effective
for
fiscal years beginning after December 15, 2006. The differences between the
amounts recognized in the statements of financial position prior to the adoption
of FIN 48 and the amounts reported after adoption will be accounted for as
a
cumulative-effect adjustment recorded to the beginning balance of retained
earnings. Pinnacle Financial is currently evaluating the impact of FIN 48 on
its
consolidated financial statements.
In
June
2006, the Emerging Issues Task Force issued EITF No. 06-4, “Accounting for
Deferred Compensation and Postretirement Benefits Aspects of Endorsement
Split-Dollar Life Insurance Arrangements.” The EITF concluded that deferred
compensation or postretirement benefit aspects of an endorsement split-dollar
life insurance arrangement should be recognized as a liability by the employer
and the obligation is not effectively settled by the purchase of a life
insurance policy. The effective date is for fiscal years beginning after
December 15, 2007. Pinnacle Financial is currently evaluating the impact of
EITF
No. 06-4 on its consolidated financial statements.
In
June
2006, the Emerging Issues Task Force issued EITF No. 06-5, “Accounting for
Purchases of Life Insurance - Determining the Amount that Could Be Realized
in
Accordance with FASB Tech Bulletin 85-4.” The EITF concluded that a policyholder
should consider any additional amounts included in the contractual terms of
the
life insurance policy in determining the “amount that could be realized under
the insurance contract.” For group policies with multiple certificates or
multiple policies with a group rider, the EITF also concluded that the amount
that could be realized should be determined at the individual policy or
certificate level, i.e., amounts that would be realized only upon surrendering
all of the policies or certificates would not be included when measuring the
assets. The effective date is for fiscal years beginning after December 15,
2006. Pinnacle Financial is currently evaluating the impact of EITF No. 06-5
on
its consolidated financial statements.
SFAS
No.
157, “Fair Value Measurements” - SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements. SFAS No. 157 applies
only
to fair-value measurements that are already required or permitted by other
accounting standards and is expected to increase the consistency of those
measurements. The definition of fair value focuses on the exit
price,
i.e.,
the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date, not the entry
price,
i.e.,
the price that would be paid to acquire the asset or received to assume the
liability at the measurement date. The statement emphasizes that fair value
is a
market-based measurement; not an entity-specific measurement. Therefore, the
fair value measurement should be determined based on the assumptions that market
participants would use in pricing the asset or liability. The effective date
for
SFAS No. 157 is for fiscal years beginning
after
November 15, 2007, and interim periods within those fiscal years. Pinnacle
Financial is currently evaluating the impact of EITF 06-5 on its consolidated
financial statements.
FASB
Statement No. 158, “An Amendment to Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans” was issued September 29, 2006. SFAS No.
158 requires the recognition on the balance sheet of the overfunded or
underfunded status of a defined benefit postretirement obligation measured
as
the difference between the fair value of plan assets and the benefit obligation.
Recognition of “delayed” items should be considered in other comprehensive
income. The effective date of SFAS No. 158 for public entities is for fiscal
years ending
after
December 15, 2006. Pinnacle Financial does not anticipate that SFAS No. 158
will
have a material impact on Pinnacle Financial’s consolidated financial
statements.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In
September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin No. 108, “Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements” (“SAB 108”). SAB 108 provides interpretive guidance on how the
effects of the carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement. The SEC staff believes
that registrants should quantify errors using both the balance sheet and income
statement approach when quantifying a misstatement that, when all relevant
quantitative and qualitative factors are considered, is material. SAB 108 is
effective for Pinnacle Financial’s fiscal year ending December 31, 2006.
Pinnacle Financial is currently evaluating the impact of SAB 108 on the
Company’s consolidated financial statements.
Note
2. Merger with Cavalry Bancorp, Inc.
On
March
15, 2006, Pinnacle Financial consummated its merger with Cavalry Bancorp, Inc.
(“Cavalry”), a one-bank holding company located in Murfreesboro, Tennessee.
Pursuant to the merger agreement, Pinnacle acquired all Cavalry common stock
via
a tax-free exchange whereby Cavalry shareholders received a fixed exchange
ratio
of 0.95 shares of Pinnacle Financial common stock for each share of Cavalry
common stock, or approximately 6.9 million Pinnacle Financial shares. The
accompanying consolidated financial statements include the activities of the
former Cavalry since March 15, 2006.
In
accordance with SFAS No. 141, “Accounting for Business Combinations” (“SFAS No.
141”), SFAS No. 142, “Goodwill and Intangible Assets” (“SFAS No. 142”) and SFAS
No. 147, “Acquisition of Certain Financial Institutions” (“SFAS No. 147”),
Pinnacle Financial recorded at fair value the following assets and liabilities
of Cavalry as of March 15, 2006:
Cash
and cash equivalents
|
|
$
|
37,420,210
|
|
Investment
securities - available-for-sale
|
|
|
39,476,178
|
|
Loans,
net of an allowance for loan losses of $5,102,296
|
|
|
545,598,367
|
|
Goodwill
|
|
|
115,064,500
|
|
Core
deposit intangible
|
|
|
13,168,236
|
|
Other
assets
|
|
|
47,933,728
|
|
Total
assets acquired
|
|
|
798,661,219
|
|
|
|
|
|
|
Deposits
|
|
|
583,640,043
|
|
Federal
Home Loan Bank advances
|
|
|
17,766,661
|
|
Other
liabilities
|
|
|
24,977,272
|
|
Total
liabilities assumed
|
|
|
626,383,976
|
|
Total
consideration paid for Cavalry
|
|
$
|
172,277,243
|
|
As
discussed more fully below, total consideration is comprised of $171.1 million
in Pinnacle Financial common shares issued to former Cavalry shareholders and
options issued to former Cavalry option holders and $1.2 million in acquisition
costs. Pinnacle Financial is in the process of finalizing the allocation of
the
purchase price to the acquired net assets noted above. Accordingly, the above
allocations should be considered preliminary as of September 30,
2006.
As
noted
above, total consideration for Cavalry approximates $172.3 million of which
$171.1 million was in the form of Pinnacle Financial common shares and options
to acquire Pinnacle Financial common shares and $1.2 million in 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 has recognized $13.2
million as a core deposit intangible. This identified intangible is being
amortized over seven years using an accelerated method which anticipates the
life of the underlying deposits to which the intangible is attributable. For
the
three and nine months ended September 30, 2006, approximately $535,000 and
$1,248,000, respectively, was recognized in the accompanying statement of income
as other noninterest expense. Amortization expense associated with this
identified intangible will approximate $1.8 million to $2.1 million per year
for
the next five years with lesser amounts for the remaining two
years.
Pinnacle
Financial also recorded other adjustments to the carrying value of Cavalry’s
assets and liabilities in order to reflect the fair value of those net assets
in
accordance with generally accepted accounting principles, including a $4.8
million discount associated with the loan portfolio, a $2.6 million premium
for
Cavalry’s certificates of deposit and a $4.6 million premium for Cavalry’s land
and buildings. Pinnacle Financial also recorded the corresponding deferred
tax
asset or liability associated with these adjustments. The discounts and premiums
related to financial assets and liabilities will be amortized into our
statements of income in future periods using a method that approximates the
level yield method over the anticipated lives of the underlying financial assets
or liabilities. For the three and nine months ended September 30, 2006, the
accretion of the fair value discounts related to the acquired loans and
certificates of deposit increased net interest income by approximately $950,000
and $2.38 million, respectively. Based on the estimated useful lives of the
acquired loans and deposits, Pinnacle Financial expects to recognize increases
in net interest income related to accretion of these purchase accounting
adjustments of $850,000 for the remainder of fiscal year 2006 and $4.1 million
in subsequent years.
Statement
of Position 03-03, Accounting
for Certain Loans or Debt Securities Acquired in a Transfer
(“SOP
03-03”) addresses accounting for differences between contractual cash flows and
cash flows expected to be collected from an investor's initial investment in
loans or debt securities (loans) acquired in a transfer if those differences
are
attributable, at least in part, to credit quality. It includes loans
acquired in purchase business combinations and applies to all nongovernmental
entities, including not-for-profit organizations. The SOP does not apply
to loans originated by the entity. The preliminary purchase accounting
adjustments reflect a reduction in loans and the allowance for loan losses
of
$1.0 million related to Cavalry’s impaired loans.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
following pro forma income statements assume the merger was consummated on
January 1, 2005. The pro forma information does not reflect Pinnacle Financial’s
results of operations that would have actually occurred had the merger been
consummated on such date (dollars in thousands).
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
|
2005(1)
|
|
Pro
Forma Income Statements:
|
|
|
|
|
|
Net
interest income
|
|
$
|
48,512
|
|
$
|
40,674
|
|
Provision
for loan losses
|
|
|
3,662
|
|
|
1,661
|
|
Noninterest
income
|
|
|
13,249
|
|
|
13,051
|
|
Noninterest
expense (2):
|
|
|
|
|
|
|
|
Compensation
|
|
|
22,095
|
|
|
19,158
|
|
Other
noninterest expense
|
|
|
15,094
|
|
|
13,984
|
|
Net
income before taxes
|
|
|
20,910
|
|
|
18,922
|
|
Income
tax expense
|
|
|
7,809
|
|
|
6,092
|
|
Net
income
|
|
$
|
13,101
|
|
$
|
12,830
|
|
|
|
|
|
|
|
|
|
Pro
Forma Per Share Information:
|
|
|
|
|
|
|
|
Basic
net income per common share
|
|
$
|
0.86
|
|
$
|
0.84
|
|
Diluted
net income per common share
|
|
$
|
0.79
|
|
$
|
0.78
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
15,308,766
|
|
|
15,259,603
|
|
Diluted
|
|
|
16,507,901
|
|
|
16,417,195
|
|
(1) |
In
the first quarter of 2005, Cavalry recorded a tax benefit of $427,000
due
to a cash distribution of dividends to the participants in their
employee
stock ownership plan. Excluding this benefit would have lowered pro
forma
net income for the nine months ended September 30, 2005 by $427,000
resulting in pro forma net income of $12,404,000 or $0.81 per basic
share
and $0.76 per fully-diluted share.
|
(2) |
In
preparation and as a result of the merger during 2006, Cavalry and
Pinnacle Financial incurred significant merger related charges of
approximately $11.6 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 $7.05
million resulting in net income of $6,051,000 and a basic and fully
diluted pro forma net income per share of $0.40 and $0.37, 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.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
3. Securities
The
amortized cost and fair value of securities available-for-sale and
held-to-maturity at September 30, 2006 and December 31, 2005 are summarized
as
follows:
|
|
September
30, 2006
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
U.S.
government agency securities
|
|
|
32,071,059
|
|
|
10,369
|
|
|
515,196
|
|
|
31,566,232
|
|
Mortgage-backed
securities
|
|
|
222,272,968
|
|
|
326,785
|
|
|
3,610,267
|
|
|
218,989,486
|
|
State
and municipal securities
|
|
|
51,166,848
|
|
|
77,279
|
|
|
534,778
|
|
|
50,709,349
|
|
Corporate
notes and other
|
|
|
2,289,519
|
|
|
-
|
|
|
71,362
|
|
|
2,218,157
|
|
|
|
$
|
307,800,394
|
|
$
|
414,433
|
|
$
|
4,731,603
|
|
$
|
303,483,224
|
|
Securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agency securities
|
|
$
|
17,747,119
|
|
$
|
-
|
|
$
|
416,594
|
|
$
|
17,330,525
|
|
State
and municipal securities
|
|
|
9,528,532
|
|
|
-
|
|
|
327,910
|
|
|
9,200,622
|
|
|
|
$
|
27,275,651
|
|
$
|
-
|
|
$
|
744,504
|
|
$
|
26,531,147
|
|
|
|
December
31, 2005
|
|
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
|
Securities
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury securities
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
U.S.
government agency securities
|
|
|
31,054,469
|
|
|
-
|
|
|
534,899
|
|
|
30,519,570
|
|
Mortgage-backed
securities
|
|
|
190,708,007
|
|
|
44,378
|
|
|
3,866,210
|
|
|
186,886,175
|
|
State
and municipal securities
|
|
|
32,583,283
|
|
|
19,044
|
|
|
464,984
|
|
|
32,137,343
|
|
Corporate
notes
|
|
|
2,300,442
|
|
|
-
|
|
|
94,436
|
|
|
2,206,006
|
|
|
|
$
|
256,646,201
|
|
$
|
63,422
|
|
$
|
4,960,529
|
|
$
|
251,749,094
|
|
Securities
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agency securities
|
|
$
|
17,746,883
|
|
$
|
-
|
|
$
|
441,208
|
|
$
|
17,305,675
|
|
State
and municipal securities
|
|
|
9,584,368
|
|
|
-
|
|
|
343,746
|
|
|
9,240,622
|
|
|
|
$
|
27,331,251
|
|
$
|
-
|
|
$
|
784,954
|
|
$
|
26,546,297
|
|
On
March
31, 2004, Pinnacle National transferred approximately $27,656,000 of
available-for-sale securities to held-to-maturity at fair value. The transfer
consisted of substantially all of Pinnacle National’s holdings of Tennessee
municipal securities and several of its longer-term agency securities. The
net
unrealized gain on such securities as of the date of transfer was approximately
$325,000. This amount is reflected in the accumulated other comprehensive
income, net of tax, and is being amortized over the remaining lives of the
respective held-to-maturity securities. At September 30, 2006, the unamortized
amount approximated $191,000.
Pinnacle
Financial realized approximately $114,000 in gains from the sale of $6,792,000
of available-for-sale securities during the nine months ended September 30,
2005. There were no sales of securities during the three months ended September
30, 2005 or during the three and nine months ended September 30,
2006.
At
September 30, 2006, approximately $306,331,000 of Pinnacle Financial’s
securities were pledged to secure public funds and other deposits and securities
sold under agreements to repurchase.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At
September 30, 2006 and December 31, 2005, included in securities were the
following investments with unrealized losses. The information below classifies
these investments according to the term of the unrealized loss of less than
twelve months or twelve months or longer:
|
|
Investments
With an Unrealized Loss of Less than 12 months
|
|
Investments
With an Unrealized Loss of 12 months or longer
|
|
Total
Investments With an Unrealized Loss
|
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
At
September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agency securities
|
|
$
|
7,761,607
|
|
$
|
49,142
|
|
$
|
40,125,251
|
|
$
|
882,647
|
|
$
|
47,886,858
|
|
$
|
931,789
|
|
Mortgage-backed
securities
|
|
|
48,077,830
|
|
|
447,709
|
|
|
129,662,420
|
|
|
3,162,559
|
|
|
177,740,250
|
|
|
3,610,268
|
|
State
and municipal securities
|
|
|
22,638,865
|
|
|
209,771
|
|
|
24,237,720
|
|
|
652,917
|
|
|
46,876,585
|
|
|
862,688
|
|
Corporate
notes
|
|
|
-
|
|
|
-
|
|
|
2,218,157
|
|
|
71,362
|
|
|
2,218,157
|
|
|
71,362
|
|
Total
temporarily-impaired securities
|
|
$
|
78,478,302
|
|
$
|
706,622
|
|
$
|
196,243,548
|
|
$
|
4,769,485
|
|
$
|
274,721,850
|
|
$
|
5,476,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government agency securities
|
|
$
|
28,605,270
|
|
$
|
463,534
|
|
$
|
19,219,975
|
|
$
|
512,573
|
|
$
|
47,825,245
|
|
$
|
976,107
|
|
Mortgage-backed
securities
|
|
|
110,636,351
|
|
|
1,586,394
|
|
|
69,512,865
|
|
|
2,279,816
|
|
|
180,149,216
|
|
|
3,866,210
|
|
State
and municipal securities
|
|
|
22,692,062
|
|
|
341,869
|
|
|
14,074,344
|
|
|
466,861
|
|
|
36,766,406
|
|
|
808,730
|
|
Corporate
notes
|
|
|
-
|
|
|
-
|
|
|
2,206,006
|
|
|
94,436
|
|
|
2,206,006
|
|
|
94,436
|
|
Total
temporarily-impaired securities
|
|
$
|
161,933,683
|
|
$
|
2,391,797
|
|
$
|
105,013,190
|
|
$
|
3,353,686
|
|
$
|
266,946,873
|
|
$
|
5,745,483
|
|
Management
evaluates securities for other-than-temporary impairment on at least a quarterly
basis, and more frequently when economic or market concerns warrant such
evaluation. Consideration is given to (1) the length of time and the extent
to
which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of Pinnacle
Financial to retain its investment in the issue for a period of time sufficient
to allow for any anticipated recovery in fair value. Because the declines in
fair value noted above were attributable to increases in interest rates and
not
attributable to credit quality and because Pinnacle Financial has the ability
and intent to hold all of these investments until a market price recovery or
maturity, the impairment of these investments is not deemed to be
other-than-temporary.
Note
4. Loans and Allowance for Loan Losses
The
composition of loans at September 30, 2006 and December 31, 2005 is summarized
as follows:
|
|
At
September 30,
|
|
At
December 31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Commercial
real estate - Mortgage
|
|
$
|
265,173,969
|
|
$
|
148,102,053
|
|
Commercial
real estate - Construction
|
|
|
152,627,475
|
|
|
30,295,106
|
|
Commercial
- Other
|
|
|
554,617,009
|
|
|
239,128,969
|
|
Total
Commercial
|
|
|
972,418,453
|
|
|
417,526,128
|
|
Consumer
real estate - Mortgage
|
|
|
292,206,262
|
|
|
169,952,860
|
|
Consumer
real estate - Construction
|
|
|
87,890,024
|
|
|
37,371,834
|
|
Consumer
- Other
|
|
|
52,886,690
|
|
|
23,173,210
|
|
Total
Consumer
|
|
|
432,982,976
|
|
|
230,497,904
|
|
Total
Loans
|
|
|
1,405,401,429
|
|
|
648,024,032
|
|
Allowance
for loan losses
|
|
|
(15,172,446
|
)
|
|
(7,857,774
|
)
|
Loans,
net
|
|
$
|
1,390,228,983
|
|
$
|
640,166,258
|
|
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, 2006
and for the year ended December 31, 2005 are as follows:
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
7,857,774
|
|
$
|
5,650,014
|
|
Charged-off
loans
|
|
|
(627,838
|
)
|
|
(207,647
|
)
|
Recovery
of previously charged-off loans
|
|
|
159,576
|
|
|
263,441
|
|
Allowance
from Cavalry acquisition (see note 2)
|
|
|
5,102,296
|
|
|
-
|
|
Provision
for loan losses
|
|
|
2,680,638
|
|
|
2,151,966
|
|
Balance
at end of period
|
|
$
|
15,172,446
|
|
$
|
7,857,774
|
|
At
September 30, 2006 and 2005, Pinnacle Financial had certain impaired loans
on
nonaccruing interest status. The principal balance of these nonaccrual loans
amounted to $3,477,000 and $61,000 at September 30, 2006 and 2005, respectively.
In each case, at the date such loans were placed on nonaccrual, Pinnacle
Financial reversed all previously accrued interest income against current year
earnings. Had these loans been on accruing status, interest income would have
been higher by $202,000 and $32,000 for the nine months ended September 30,
2006
and 2005, respectively.
At
September 30, 2006, Pinnacle Financial had granted loans and other extensions
of
credit amounting to approximately $18,392,000 to certain directors, executive
officers, and their related entities, of which approximately $11,778,000 had
been drawn upon. At December 31, 2005, Pinnacle Financial had granted loans
and
other extensions of credit amounting to approximately $13,223,000 to certain
directors, executive officers, and their related entities, of which $6,958,000
had been drawn upon. The terms on these loans and extensions are on
substantially the same terms customary for other persons for the type of loan
involved.
During
the three and nine months ended September 30, 2006 and 2005, Pinnacle Financial
sold participations in certain loans to correspondent banks at an interest
rate
that was less than that of the borrower’s rate of interest. In accordance with
generally accepted accounting principles, Pinnacle Financial has reflected
a net
gain on the sale of these participated loans for the three months ended
September 30, 2006 of approximately $102,000 and a net loss of $26,000 for
the
three months ended September 30, 2005, and, for the nine months ended September
30, 2006 and 2005, Pinnacle Financial reflected a net gain on the sale of
participated loans of $224,000 and $111,000, respectively, which is attributable
to the present value of the future net cash flows of the difference between
the
interest payments the borrower is projected to pay Pinnacle Financial and the
amount of interest that will be owed the correspondent banks based on their
participation in the loan.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
5. Income Taxes
Income
tax expense attributable to income from continuing operations for the three
and
nine months ended September 30, 2006 and 2005 consists of the
following:
|
|
Three
Months Ended
September
30,
|
|
Nine
Months Ended
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Current
tax expense:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
2,404,721
|
|
$
|
742,824
|
|
$
|
6,644,857
|
|
$
|
2,678,092
|
|
State
|
|
|
118,652
|
|
|
822
|
|
|
428,745
|
|
|
93,472
|
|
Total
current tax expense
|
|
|
2,523,373
|
|
|
743,646
|
|
|
7,073,602
|
|
|
2,771,564
|
|
Deferred
tax benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
57,292
|
|
|
37,534
|
|
|
(949,171
|
)
|
|
(382,960
|
)
|
State
|
|
|
14,800
|
|
|
8,201
|
|
|
(161,319
|
)
|
|
(77,149
|
)
|
Total
deferred tax expense (benefit)
|
|
|
72,092
|
|
|
45,736
|
|
|
(1,110,490
|
)
|
|
(460,109
|
)
|
|
|
$
|
2,595,465
|
|
$
|
789,382
|
|
$
|
5,963,112
|
|
$
|
2,311,455
|
|
Pinnacle
Financial's income tax expense (benefit) differs from the amounts computed
by
applying the Federal income tax statutory rates of 35% in 2006 and 34% in 2005
to income before income taxes. A reconciliation of the differences for the
three
and nine months ended September 30, 2006 and 2005 is as follows:
|
|
Three
Months Ended
September 30,
|
|
Nine
Months Ended September 30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes at statutory rate
|
|
$
|
2,779,782
|
|
$
|
974,994
|
|
$
|
6,385,488
|
|
$
|
2,763,731
|
|
State
tax expense, net of federal tax effect
|
|
|
86,743
|
|
|
(12,622
|
)
|
|
173,827
|
|
|
10,773
|
|
Federal
tax credits
|
|
|
(75,000
|
)
|
|
(75,000
|
)
|
|
(225,000
|
)
|
|
(225,000
|
)
|
Tax-exempt
securities
|
|
|
(155,154
|
)
|
|
(116,739
|
)
|
|
(425,766
|
)
|
|
(232,716
|
)
|
Other
items
|
|
|
(40,906
|
)
|
|
18,749
|
|
|
54,563
|
|
|
(5,333
|
)
|
Income
tax expense
|
|
$
|
2,595,465
|
|
$
|
789,382
|
|
$
|
5,963,112
|
|
$
|
2,311,455
|
|
The
effective tax rate for 2006 and 2005 is impacted by Federal tax credits related
to the New Markets Tax Credit program whereby a subsidiary of Pinnacle National
has been awarded approximately $2.3 million in future Federal tax credits which
are available thru 2010. Tax benefits related to these credits will be
recognized for financial reporting purposes in the same periods that the credits
are recognized in the Company’s income tax returns. The credit that is available
for each of the years ended December 31, 2006 and 2005 is $300,000. Pinnacle
Financial believes that it will comply with the various regulatory provisions
of
the New Markets Tax Credit program in fiscal 2006, and therefore has reflected
the impact of the credits in its estimated annual effective tax rate for 2006.
During 2004, Pinnacle National formed a real estate investment trust which
provides Pinnacle Financial with an alternative vehicle for raising capital.
Additionally, the ownership structure of this real estate investment trust
provides certain state income tax benefits to Pinnacle National and Pinnacle
Financial.
In
assessing the realizability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level
of
historical taxable income and projections for future taxable income over the
periods in which the deferred tax assets are deductible, management believes
it
is more likely than not that Pinnacle Financial will realize the benefit of
these deductible differences. However, the amount of the deferred tax asset
considered realizable could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
components of deferred income taxes included in other assets in the accompanying
consolidated balance sheets at September 30, 2006 and December 31, 2005 are
as
follows:
|
|
September
30, 2006
|
|
December
31, 2005
|
|
Deferred
tax assets:
|
|
|
|
|
|
Loans
and loan loss allowance
|
|
$
|
7,808,264
|
|
$
|
3,019,094
|
|
Securities
|
|
|
1,568,024
|
|
|
1,773,521
|
|
Merger
related deferred deductions
|
|
|
1,447,810
|
|
|
-
|
|
Accrued
liability for salaried executive retirement plan
|
|
|
1,486,314
|
|
|
-
|
|
Other
deferred tax assets
|
|
|
192,024
|
|
|
174,816
|
|
|
|
|
12,502,436
|
|
|
4,967,431
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,805,264
|
|
|
417,207
|
|
Deposits
|
|
|
4,051,911
|
|
|
-
|
|
FHLB
dividends
|
|
|
724,633
|
|
|
-
|
|
Other
deferred tax liabilities
|
|
|
499,272
|
|
|
139,602
|
|
|
|
|
7,081,080
|
|
|
556,809
|
|
Net
deferred tax assets
|
|
$
|
5,421,356
|
|
$
|
4,410,622
|
|
Note
6. Commitments and Contingent Liabilities
In
the
normal course of business, Pinnacle Financial has entered into off-balance
sheet
financial instruments which include commitments to extend credit (i.e.,
including unfunded lines of credit) and standby letters of credit. Commitments
to extend credit are usually the result of lines of credit granted to existing
borrowers under agreements that the total outstanding indebtedness will not
exceed a specific amount during the term of the indebtedness. Typical borrowers
are commercial concerns that use lines of credit to supplement their treasury
management functions; thus, their total outstanding indebtedness may fluctuate
during any time period based on the seasonality of their business and the
resultant timing of their cash flows. Other typical lines of credit are related
to home equity loans granted to consumers. Commitments to extend credit
generally have fixed expiration dates or other termination clauses and may
require payment of a fee.
Standby
letters of credit are generally issued on behalf of an applicant (our customer)
to a specifically named beneficiary and are the result of a particular business
arrangement that exists between the applicant and the beneficiary. Standby
letters of credit have fixed expiration dates and are usually for terms of
two
years or less unless terminated beforehand due to criteria specified in the
standby letter of credit. A typical arrangement involves the applicant routinely
being indebted to the beneficiary for such items as inventory purchases,
insurance, utilities, lease guarantees or other third party commercial
transactions. The standby letter of credit would permit the beneficiary to
obtain payment from Pinnacle Financial under certain prescribed circumstances.
Subsequently, Pinnacle Financial would then seek reimbursement from the
applicant pursuant to the terms of the standby letter of credit.
Pinnacle
Financial follows the same credit policies and underwriting practices when
making these commitments as it does for on-balance sheet instruments. Each
customer’s creditworthiness is evaluated on a case-by-case basis, and the amount
of collateral obtained, if any, is based on management’s credit evaluation of
the customer. Collateral held varies but may include cash, real estate and
improvements, marketable securities, accounts receivable, inventory, equipment,
and personal property.
The
contractual amounts of these commitments are not reflected in the consolidated
financial statements and would only be reflected if drawn upon. Since many
of
the commitments are expected to expire without being drawn upon, the contractual
amounts do not necessarily represent future cash requirements. However, should
the commitments be drawn upon and should our customers default on their
resulting obligation to us, Pinnacle Financial's maximum exposure to credit
loss, without consideration of collateral, is represented by the contractual
amount of those instruments.
A
summary
of Pinnacle Financial's total contractual amount for all off-balance sheet
commitments at September 30, 2006 is as follows:
Commitments
to extend credit
|
|
$
|
502,295,000
|
|
Standby
letters of credit
|
|
$
|
56,439,000
|
|
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At
September 30, 2006, the fair value of Pinnacle Financial’s standby letters of
credit was $163,000. This amount represents the unamortized fee associated
with
these standby letters of credit and is included in the consolidated balance
sheet of Pinnacle Financial. This fair value will decrease over time as the
existing standby letters of credit approach their expiration dates.
Various
legal claims also arise from time to time in the normal course of business.
In
the opinion of management, the resolution of claims outstanding at September
30,
2006 will not have a material effect on Pinnacle Financial’s consolidated
financial statements.
Note
7. Stock Option Plan and Restricted Shares
Pinnacle
Financial has two equity incentive plans under which it has granted stock
options to its employees to purchase common stock at or above the fair market
value on the date of grant and granted restricted share awards to employees
and
directors. During the first quarter of 2006 and in connection with its merger
with Cavalry, Pinnacle Financial assumed a third equity incentive plan, (the
“Cavalry Plan”). All options granted under the Cavalry Plan were fully vested
prior to Pinnacle Financial’s merger with Cavalry and expire at various dates
between January 2011 and June 2012. In connection with the merger, all options
to acquire Cavalry common stock were converted to options to acquire Pinnacle
Financial common stock at the 0.95 exchange ratio. The exercise price of the
outstanding options under the Cavalry Plan was adjusted using the same
conversion ratio. All other terms of the Cavalry options were unchanged. There
were 195,551 Pinnacle shares which could be acquired by the participants in
the
Cavalry Plan at exercise prices that ranged between $10.26 per share and $13.68
per share.
As
of
September 30, 2006, of the 1,649,000 stock options outstanding, 1,341,000
options were granted with the intention to be incentive stock options qualifying
under Section 422 of the Internal Revenue Code for favorable tax treatment
to
the option holder while 308,000 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, 2006 and information regarding expected vesting, contractual
terms remaining, intrinsic values and other matters was as follows:
|
|
Number
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Contractual
Remaining
Term
(in
years)
|
|
Aggregate
Intrinsic
Value
(1)
(000’s)
|
|
Outstanding
at December 31, 2005
|
|
|
1,242,393
|
|
$
|
9.78
|
|
|
|
|
|
|
|
Additional
stock option grants resulting from assumption of the Cavalry
Plan
|
|
|
195,551
|
|
|
10.80
|
|
|
|
|
|
|
|
Granted
|
|
|
310,569
|
|
|
28.24
|
|
|
|
|
|
|
|
Exercised
|
|
|
(93,435
|
)
|
|
10.15
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(5,832
|
)
|
|
12.65
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2006
|
|
|
1,649,246
|
|
$
|
13.31
|
|
|
6.53
|
|
$
|
37,123
|
|
Outstanding
and expected to vest at September 30, 2006
|
|
|
1,623,405
|
|
$
|
13.16
|
|
|
6.50
|
|
$
|
36,749
|
|
Options
exercisable at September 30, 2006
|
|
|
954,346
|
|
$
|
7.39
|
|
|
5.17
|
|
$
|
27,117
|
|
|
(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 $35.80 per common share for the 1.65 million
options that were in-the-money at September 30,
2006.
|
During
the nine months ended September 30, 2006, 149,491 option awards vested at an
average exercise price of $12.35 and an intrinsic value of approximately $5.35
million.
During
the nine months ended September 30, 2006 and 2005, the aggregate intrinsic
value
of options exercised under our equity incentive plans was
$1,553,000 and $314,000, respectively, determined
as of
the date of option exercise. As of September 30, 2006, there was approximately
$4.15 million of total unrecognized compensation cost related to unvested
share-based compensation arrangements granted under our equity incentive plans.
That cost is expected to be recognized over a weighted-average period of 3.42
years.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Pinnacle
Financial adopted SFAS No. 123(R) using the modified prospective transition
method on January 1, 2006. Accordingly, during the nine month period ended
September 30, 2006, we recorded stock-based compensation expense using the
Black-Scholes valuation model for awards granted prior to, but not yet vested,
as of January 1, 2006 and for stock-based awards granted after January 1,
2006, based on fair value estimated using the Black-Scholes valuation model.
For
these awards, we have recognized compensation expense using a straight-line
amortization method. As SFAS No. 123(R) requires that stock-based
compensation expense be based on awards that are ultimately expected to vest,
stock-based compensation for the nine month period ended September 30, 2006
has
been reduced for estimated forfeitures. The impact on our results of operations
(compensation and employee benefits expense) and earnings per share of recording
stock-based compensation in accordance with SFAS No. 123(R) (related to stock
option awards) for the nine month period ended September 30, 2006 was as
follows:
|
|
Awards
granted with
the
intention to be classified
as
incentive stock options
|
|
Non-qualified
stock
option
awards
|
|
Totals
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
$
|
437,911
|
|
$
|
252,232
|
|
$
|
690,143
|
|
Deferred
income tax benefit
|
|
|
-
|
|
|
98,951
|
|
|
98,951
|
|
Impact
of stock-based compensation expense after deferred income tax
benefit
|
|
$
|
437,911
|
|
$
|
153,281
|
|
$
|
591,192
|
|
Impact
on earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Basic
- 13,450,282 weighted average shares outstanding
|
|
$
|
0.033
|
|
$
|
0.011
|
|
$
|
0.044
|
|
Fully
diluted - 14,649,418 weighted average shares outstanding
|
|
$
|
0.030
|
|
$
|
0.010
|
|
$
|
0.040
|
|
For
purposes of these calculations, the fair value of options granted for each
of
the nine months ended September 30, 2006 and 2005 was estimated using the
Black-Scholes option pricing model and the following assumptions:
|
For
the nine months ended September 30,
|
|
2006
|
2005
|
|
|
|
Risk
free interest rate
|
4.66%
|
2.89%
|
Expected
life of options
|
6.50
years
|
6.50
years
|
Expected
dividend yield
|
0.00%
|
0.00%
|
Expected
volatility
|
23.5%
|
23.9%
|
Weighted
average fair value
|
$10.29
|
$7.43
|
Pinnacle
Financial’s computation of expected volatility is based on weekly historical
volatility since September of 2002. Pinnacle
Financial used the simplified method in determining the estimated life of stock
option issuances. The
risk
free interest rate of the award is based on the closing market bid for U.S.
Treasury securities corresponding to the expected life of the stock option
issuances in effect at the time of grant.
Additionally,
Pinnacle Financial’s 2004 Equity Incentive Plan provides for the granting of
restricted share awards and other performance or market-based awards, such
as
stock appreciation rights. There were no market-based awards or stock
appreciation rights outstanding as of September 30, 2006. During 2005 and 2004,
Pinnacle Financial awarded 16,366 shares and 3,846 shares, respectively, of
restricted common stock to certain executives of Pinnacle Financial. The fair
value of these awards as of the date of grant was $24.98 and $22.62 per share,
respectively. The forfeiture restrictions on the restricted shares lapse in
three separate traunches should Pinnacle Financial achieve certain earnings
and
soundness targets over the subsequent three year period, excluding the impact
of
merger related expense in 2006. Compensation expense associated with the
restricted share awards is recognized over the time period that the restrictions
associated with the awards lapse based on a graded vesting schedule such that
each traunche is amortized separately. Earnings and soundness targets for the
2005 and 2004 fiscal years were achieved and the restrictions related to 6,734
shares and 1,282 shares, respectively, were released.
For
the
nine months ended September 30, 2006 and 2005, Pinnacle Financial recognized
approximately $130,000 and $129,000, respectively, in compensation costs
attributable to these awards. Accumulated compensation costs since the date
these shares were awarded have amounted to approximately $460,000 through
September 30, 2006.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During
the three months ended September 30, 2006, Pinnacle Financial awarded 18,057
restricted shares to certain executives of Pinnacle Financial. The fair value
of
these awards as of the date of grant was $34.96. The forfeiture restrictions
on
the restricted shares lapse in three separate traunches should Pinnacle
Financial achieve certain earnings and soundness targets over the subsequent
three year period, excluding the impact of merger related expense in 2006.
Compensation expense associated with the restricted share awards is recognized
over the time period that the restrictions associated with the awards lapse
based on a vesting schedule such that all traunches are amortized separately.
For the three months ended September 30, 2006, Pinnacle Financial recognized
approximately $105,000 in compensation costs attributable to these awards.
During
the first and second quarters of 2006, the Board of Directors of Pinnacle
Financial awarded 4,400 shares of restricted common stock to the outside members
of the board in accordance with their 2006 board compensation package. Each
board member received an award of 400 shares. The restrictions on these shares
will lapse on the one year anniversary date of the award provided the individual
board member meets attendance goals for the various board and board committee
meetings to which such member is scheduled to attend during the fiscal year
ending December 31, 2006. During the third quarter, one outside board member
resigned his board seat and forfeited his restricted share award. The weighted
average fair value of all restricted share awards granted to our directors
as of
the date of grant was $26.05 per share. For the nine months ended September
30,
2006, Pinnacle Financial recognized approximately $76,000, in compensation
costs
attributable to these awards. Pinnacle Financial anticipates that should the
remaining restrictions on these shares lapse, Pinnacle Financial will incur
an
additional $29,000 in compensation costs.
A
summary
of activity for restricted share awards for the nine months ended September
30,
2006 follows:
|
|
Executive
Management Awards
|
|
Board
of Director Awards
|
|
(number
of share awards)
|
|
Vested
|
|
Unvested
|
|
Totals
|
|
Vested
|
|
Unvested
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at Dec. 31, 2005
|
|
|
8,014
|
|
|
12,198
|
|
|
20,212
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
18,057
|
|
|
18,057
|
|
|
-
|
|
|
4,400
|
|
|
4,400
|
|
Forfeited
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(400
|
)
|
|
(400
|
)
|
Vested
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Balances at September 30, 2006
|
|
|
8,014
|
|
|
30,255
|
|
|
38,269
|
|
|
-
|
|
|
4,000
|
|
|
4,000
|
|
Prior
to
January 1, 2006, Pinnacle Financial applied APB Opinion No. 25 and related
interpretations in accounting for its stock option plans. All option grants
carry exercise prices equal to or above the fair value of the common stock
on
the date of grant. Accordingly, no compensation cost had been recognized for
such periods. Had compensation cost for Pinnacle Financial’s equity incentive
plans been determined based on the fair value at the grant dates for awards
under the plans consistent with the method prescribed in SFAS No. 123(R),
Pinnacle Financial’s net income and net income per share would have been
adjusted to the pro forma amounts indicated below for the three and nine months
ended September 30, 2005:
|
|
For
the three
months
ended September 30, 2005
|
|
For
the nine
months
ended
September
30, 2005
|
|
|
|
|
|
|
|
Net
income, as reported
|
|
$
|
2,078,243
|
|
$
|
5,817,165
|
|
Add:
Compensation expense recognized in the accompanying consolidated
statement
of income, net of related tax effects
|
|
|
69,235
|
|
|
78,351
|
|
Deduct:
Total stock-based compensation expense determined under the fair
value
based method for all awards, net of related tax effects
|
|
|
(212,547
|
)
|
|
(564,912
|
)
|
Pro
forma net income
|
|
$
|
1,934,931
|
|
$
|
5,330,604
|
|
|
|
|
|
|
|
|
|
Per
share information:
|
|
|
|
|
|
|
|
Basic
net
income
As reported
|
|
$
|
0.25
|
|
$
|
0.69
|
|
Pro forma
|
|
|
0.23
|
|
|
0.63
|
|
|
|
|
|
|
|
|
|
Diluted
net
income
As reported
|
|
$
|
0.22
|
|
$
|
0.62
|
|
Pro
forma
|
|
|
0.20
|
|
|
0.56
|
|
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
8. Regulatory Matters
Pinnacle
National is subject to restrictions on the payment of dividends to Pinnacle
Financial under federal banking laws and the regulations of the Office of the
Comptroller of the Currency. Pinnacle Financial is also subject to limits on
payment of dividends to its shareholders by the rules, regulations and policies
of federal banking authorities. Pinnacle Financial has not paid any cash
dividends since inception, and it does not anticipate that it will consider
paying dividends until Pinnacle National generates sufficient capital from
operations to support both anticipated asset growth and dividend payments.
Pinnacle
Financial and Pinnacle National are subject to various regulatory capital
requirements administered by federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly additional
discretionary actions, by regulators that, if undertaken, could have a direct
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, Pinnacle Financial
and Pinnacle National must meet specific capital guidelines that involve
quantitative measures of the assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. Pinnacle Financial’s
and Pinnacle National’s capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and
other factors.
Quantitative
measures established by regulation to ensure capital adequacy require Pinnacle
Financial and Pinnacle National to maintain minimum amounts and ratios of Total
and Tier I capital to risk-weighted assets and of Tier I capital to average
assets. Management believes, as of September 30, 2006 and December 31, 2005,
that Pinnacle Financial and Pinnacle National met all capital adequacy
requirements to which they are subject. To be categorized as well-capitalized,
Pinnacle National must maintain minimum Total risk-based, Tier I risk-based,
and
Tier I leverage ratios as set forth in the following table. Pinnacle Financial
and Pinnacle National’s actual capital amounts and ratios are presented in the
following table (dollars in thousands):
|
|
Actual
|
|
Minimum
Capital
Requirement
|
|
Minimum
To
Be Well-Capitalized
Under
Prompt
Corrective
Action
Provisions
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
At
September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle
Financial
|
|
$
|
194,427
|
|
|
12.0
|
%
|
$
|
130,154
|
|
|
8.0
|
%
|
not
applicable
|
Pinnacle
National
|
|
$
|
165,699
|
|
|
10.2
|
%
|
$
|
130,002
|
|
|
8.0
|
%
|
$
|
161,966
|
|
|
10.0
|
%
|
Tier
I capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle
Financial
|
|
$
|
172,339
|
|
|
10.6
|
%
|
$
|
65,077
|
|
|
4.0
|
%
|
not
applicable
|
Pinnacle
National
|
|
$
|
150,517
|
|
|
9.3
|
%
|
$
|
65,001
|
|
|
4.0
|
%
|
$
|
97,179
|
|
|
6.0
|
%
|
Tier
I capital to average assets (*):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle
Financial
|
|
$
|
172,339
|
|
|
9.2
|
%
|
$
|
74,597
|
|
|
4.0
|
%
|
not
applicable
|
Pinnacle
National
|
|
$
|
150,517
|
|
|
8.1
|
%
|
$
|
74,569
|
|
|
4.0
|
%
|
$
|
93,211
|
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle
Financial
|
|
$
|
105,101
|
|
|
12.6
|
%
|
$
|
66,521
|
|
|
8.0
|
%
|
not
applicable
|
Pinnacle
National
|
|
$
|
90,215
|
|
|
10.9
|
%
|
$
|
66,334
|
|
|
8.0
|
%
|
$
|
82,917
|
|
|
10.0
|
%
|
Tier
I capital to risk weighted assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle
Financial
|
|
$
|
97,243
|
|
|
11.7
|
%
|
$
|
33,261
|
|
|
4.0
|
%
|
not
applicable
|
Pinnacle
National
|
|
$
|
82,357
|
|
|
9.9
|
%
|
$
|
33,167
|
|
|
4.0
|
%
|
$
|
49,751
|
|
|
6.0
|
%
|
Tier
I capital to average assets (*):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle
Financial
|
|
$
|
97,243
|
|
|
9.9
|
%
|
$
|
39,444
|
|
|
4.0
|
%
|
not
applicable
|
Pinnacle
National
|
|
$
|
82,357
|
|
|
8.4
|
%
|
$
|
39,444
|
|
|
4.0
|
%
|
$
|
49,305
|
|
|
5.0
|
%
|
(*)
Average assets for the above calculations were based on the most recent
quarter.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note
9. Business Segment Information
Pinnacle
Financial has four reporting segments comprised of commercial banking, trust
and
investment services, mortgage origination and insurance services. Pinnacle
Financial’s primary segment is commercial banking which consists of commercial
loan and deposit services as well as the activities of Pinnacle National’s
branch locations. Trust and investment services include trust services offered
by Pinnacle National and all brokerage and investment activities associated
with
Pinnacle Asset Management, an operating unit within Pinnacle National. Mortgage
origination is also a separate unit within Pinnacle National and focuses on
the
origination of residential mortgage loans for sale to investors in the secondary
residential mortgage market. Insurance Services reflect the activities of
Pinnacle National’s wholly owned subsidiary, Miller and Loughry. Miller and
Loughry is a general insurance agency located in Murfreesboro, Tennessee and
is
licensed to sell various commercial and consumer insurance products. The
following tables present financial information for each reportable segment
as of
and for the three and nine months ended September 30, 2006 and 2005 (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, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the three months ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
7,456
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
7,456
|
|
Provision
for loan losses
|
|
|
366
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
366
|
|
Noninterest
income
|
|
|
347
|
|
|
413
|
|
|
539
|
|
|
-
|
|
|
1,299
|
|
Noninterest
expense
|
|
|
4,911
|
|
|
303
|
|
|
307
|
|
|
-
|
|
|
5,521
|
|
Income
tax expense
|
|
|
656
|
|
|
43
|
|
|
91
|
|
|
-
|
|
|
790
|
|
Net
income
|
|
$
|
1,870
|
|
$
|
67
|
|
$
|
141
|
|
$
|
-
|
|
$
|
2,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the nine months ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
$
|
20,751
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
20,751
|
|
Provision
for loan losses
|
|
|
1,450
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,450
|
|
Noninterest
income
|
|
|
1,354
|
|
|
1,187
|
|
|
1,352
|
|
|
-
|
|
|
3,893
|
|
Noninterest
expense
|
|
|
13,229
|
|
|
885
|
|
|
951
|
|
|
-
|
|
|
15,065
|
|
Income
tax expense
|
|
|
2,037
|
|
|
118
|
|
|
157
|
|
|
-
|
|
|
2,312
|
|
Net
income
|
|
$
|
5,389
|
|
$
|
184
|
|
$
|
284
|
|
$
|
-
|
|
$
|
5,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End
of period assets
|
|
$
|
2,048,033
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4,219
|
|
$
|
2,052,252
|
|
As
of September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End
of period assets
|
|
$
|
978,539
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
978,539
|
|
Note
10. Investments in Affiliated Companies
On
December 29, 2003, we established PNFP Statutory Trust I; on September 15,
2005
we established PNFP Statutory Trust II; and on September 7, 2006 we established
PNFP Statutory Trust III (“Trust I”; “Trust II”; “Trust III” or collectively,
the “Trusts”). All are wholly-owned statutory business trusts. Pinnacle
Financial is the sole sponsor of the Trusts and acquired each Trust’s common
securities for $310,000; $619,000 and $619,000, respectively. The Trusts were
created for the exclusive purpose of issuing 30-year capital trust preferred
securities (“Trust Preferred Securities”) in the aggregate amount of $10,000,000
for Trust I; $20,000,000 for Trust II and $20,000,000 for Trust III and using
the proceeds to acquire junior subordinated debentures (“Subordinated
Debentures”) issued by Pinnacle Financial. The sole assets of the Trusts
are the Subordinated Debentures. Pinnacle Financial’s aggregate $1,548,000
investment in the Trusts is included in investments in unconsolidated
subsidiaries and other entities in the accompanying consolidated balance sheets
and the $51,548,000 obligation of Pinnacle Financial is reflected as
subordinated debt.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The
Trust
I Preferred Securities bear a floating interest rate based on a spread over
3-month LIBOR (8.19% at September 30, 2006) which is set each quarter and
matures on December 30, 2033. The Trust II Preferred Securities bear a
fixed interest rate of 5.848% per annum thru September 30, 2010 at which time
the securities will bear a floating rate set each quarter based on a spread
over
3-month LIBOR. The Trust II securities mature on September 30, 2035. The
Trust III Preferred Securities bear a floating interest rate based on a spread
over 3-month LIBOR (7.02% at September 30, 2006) which is set each quarter
and
mature on September 30, 2036.
Distributions
are payable quarterly. The Trust Preferred Securities are subject to
mandatory redemption upon repayment of the Subordinated Debentures at their
stated maturity date or their earlier redemption in an amount equal to their
liquidation amount plus accumulated and unpaid distributions to the date of
redemption. Pinnacle Financial guarantees the payment of distributions and
payments for redemption or liquidation of the Trust Preferred Securities to
the
extent of funds held by the Trusts. Pinnacle Financial’s obligations under
the Subordinated Debentures together with the guarantee and other back-up
obligations, in the aggregate, constitute a full and unconditional guarantee
by
Pinnacle Financial of the obligations of the Trusts under the Trust Preferred
Securities.
The
Subordinated Debentures are unsecured, bear interest at a rate equal to the
rates paid by the Trusts on the Trust Preferred Securities and mature on the
same dates as those noted above for the Trust Preferred Securities.
Interest is payable quarterly. Pinnacle Financial may defer the payment of
interest at any time for a period not exceeding 20 consecutive quarters provided
that deferral period does not extend past the stated maturity. During any
such deferral period, distributions on the Trust Preferred Securities will
also
be deferred and Pinnacle Financial’s ability to pay dividends on our common
shares will be restricted.
Subject
to approval by the Federal Reserve Bank of Atlanta, the Trust Preferred
Securities may be redeemed prior to maturity at our option on or after September
17, 2008 for Trust I; on or after September 30, 2010 for Trust II and September
30, 2011 for Trust III. The Trust Preferred Securities may also be
redeemed at any time in whole (but not in part) in the event of unfavorable
changes in laws or regulations that result in (1) the Trust becoming subject
to
federal income tax on income received on the Subordinated Debentures, (2)
interest payable by the parent company on the Subordinated Debentures becoming
non-deductible for federal tax purposes, (3) the requirement for the Trust
to
register under the Investment Company Act of 1940, as amended, or (4) loss
of
the ability to treat the Trust Preferred Securities as “Tier I capital” under
the Federal Reserve capital adequacy guidelines.
The
Trust
Preferred Securities for the Trusts qualify as Tier I capital under current
regulatory definitions subject to certain limitations. Debt issuance costs
associated with Trust I of $120,000 consisting primarily of underwriting
discounts and professional fees are included in other assets in the accompanying
consolidated balance sheet. These debt issuance costs are being amortized over
ten years using the straight-line method. There were no debt issuance costs
associated with Trust II or Trust III.
PINNACLE
FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Combined
summary financial information for the Trusts follows (dollars in
thousands):
Combined
Summary Balance Sheets
|
|
|
|
September
30, 2006
|
|
December
31, 2005
|
|
Asset
-
Investment in subordinated debentures issued by Pinnacle
Financial
|
|
$
|
51,548
|
|
$
|
30,929
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Stockholder’s
equity
-
Trust preferred securities
|
|
|
50,000
|
|
|
30,000
|
|
Common
securities (100% owned by Pinnacle Financial)
|
|
|
1,548
|
|
|
929
|
|
Total
stockholder’s equity
|
|
|
51,548
|
|
|
30,929
|
|
Total
liabilities and stockholder’s equity
|
|
$
|
51,548
|
|
$
|
30,929
|
|
Combined
Summary Income Statement
|
|
|
|
Nine
months ended September 30,
|
|
|
|
2006
|
|
2005
|
|
Income
- Interest
income from subordinated debentures issued by Pinnacle
Financial
|
|
$
|
1,617
|
|
$
|
506
|
|
Net
Income
|
|
$
|
1,617
|
|
$
|
506
|
|
Combined
Summary Statement of Stockholder’s Equity
|
|
|
|
Trust
Preferred
Securities
|
|
Total
Common
Stock
|
|
Retained
Earnings
|
|
Stockholder’s
Equity
|
|
Beginning
balances, December 31, 2005
|
|
$
|
30,000
|
|
$
|
929
|
|
$
|
-
|
|
$
|
30,929
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
1,617
|
|
|
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
|
)
|
Ending
balances, September 30, 2006
|
|
$
|
50,000
|
|
$
|
1,548
|
|
$
|
-
|
|
$
|
51,548
|
|
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, 2006
and
December 31, 2005 and our results of operations for the three and nine months
ended September 30, 2006 and 2005. The purpose of this discussion is to focus
on
information about our financial condition and results of operations which is
not
otherwise apparent from the consolidated financial statements. The following
discussion and analysis should be read along with our consolidated financial
statements and the related notes included elsewhere herein.
Overview
General.
Our
rapid
growth from inception through the third quarter of 2006 has had a material
impact on our financial condition and results of operations. This rapid growth
resulted in fully diluted net income per common share for the three months
ended
September 30, 2006 and 2005 of $0.32 and $0.22, respectively. At September
30,
2006, loans totaled $1.41 billion, as compared to $648 million at December
31,
2005, while total deposits increased to $1.59 billion at September 30, 2006
compared to $810 million at December 31, 2005.
Acquisition.
On
March
15, 2006, we consummated our merger with Cavalry Bancorp, Inc. (“Cavalry”), a
one-bank holding company located in Murfreesboro, Tennessee. Pursuant to the
merger agreement, we acquired all Cavalry common stock via a tax-free exchange
whereby Cavalry shareholders received a fixed exchange ratio of 0.95 shares
of
our common stock for each share of Cavalry common stock, or approximately 6.9
million Pinnacle Financial shares. The financial information herein includes
the
activities of the former Cavalry (the “Rutherford County market”) since March
15, 2006.
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141,
“Accounting for Business Combinations” (“SFAS No. 141”), SFAS No. 142, “Goodwill
and Intangible Assets” (“SFAS No. 142”) and SFAS No. 147, “Acquisition of
Certain Financial Institutions” (“SFAS No. 147”), we recorded at fair value the
following assets and liabilities of Cavalry as of March 15, 2006:
Cash
and cash equivalents
|
|
$
|
37,420,210
|
|
Investment
securities - available-for-sale
|
|
|
39,476,178
|
|
Loans,
net of an allowance for loan losses of $5,102,296
|
|
|
545,598,367
|
|
Goodwill
|
|
|
115,064,500
|
|
Core
deposit intangible
|
|
|
13,168,236
|
|
Other
assets
|
|
|
47,933,728
|
|
Total
assets acquired
|
|
|
798,661,219
|
|
|
|
|
|
|
Deposits
|
|
|
583,640,043
|
|
Federal
Home Loan Bank advances
|
|
|
17,766,661
|
|
Other
liabilities
|
|
|
24,977,272
|
|
Total
liabilities assumed
|
|
|
626,383,976
|
|
Total
consideration paid for Cavalry
|
|
$
|
172,277,243
|
|
We
are in the process of finalizing the allocation of the purchase price to the
acquired net assets noted above. Accordingly, the above allocations should
be
considered preliminary as of September 30, 2006.
As
noted
above, total consideration for Cavalry approximates $172.3 million of which
$171.1 million was in the form of our common shares and options to acquire
our
common shares and $1.2 million in investment banking fees, attorney’s fees and
other charges related to the purchase of Cavalry. We issued 6,856,298 shares
of
our common stock to the former Cavalry shareholders. In accordance with EITF
99-12, “Determination of the Measurement Date for the Market Price of Acquirer
Securities Issued in a Purchase Business Combination,” the shares were valued at
$24.53 per common share which represents the average closing price of our common
stock from the two days prior to the merger announcement on September 30, 2005
through the two days after the merger announcement. Aggregate consideration
for
the common stock issued was approximately $168.2 million. Additionally, we
also
have assumed the Cavalry Bancorp, Inc. 1999 Stock Incentive Plan (the “Cavalry
Plan”) pursuant to which we were obligated to issue 195,551 shares of our common
stock upon exercise of stock options awarded to certain former Cavalry employees
who held outstanding options as of March 15, 2006. All of these options were
fully vested prior to the merger announcement date and expire at various dates
between 2011 and 2012. The exercise prices for these stock options range between
$10.26 per share and $13.68 per share. In accordance with SFAS No. 141, we
considered the fair value of these options in determining the acquisition cost
of Cavalry. The fair value of these vested options approximated $2.9 million
which has been included as a component of the aggregate purchase
price.
In
accordance with SFAS Nos. 141 and 142, we recognized $13.2 million as a core
deposit intangible. This identified intangible is being amortized over seven
years using an accelerated method which anticipates the life of the underlying
deposits to which the intangible is attributable. For the three and nine months
ended September 30, 2006, approximately $535,000 and $1,248,000, respectively,
was recognized in the statement of income. Amortization expense associated
with
the core deposit intangible will approximate $1.8 million to $2.1 million per
year for the next five years with lesser amounts for the remaining two
years.
We
also
recorded other adjustments to the carrying value of Cavalry’s assets and
liabilities in order to reflect the fair value of those net assets in accordance
with generally accepted accounting principles, including a $4.8 million discount
associated with the loan portfolio, a $2.6 million premium for Cavalry’s
certificates of deposit and a $4.6 million premium for Cavalry’s land and
buildings. We have also recorded the corresponding deferred tax asset or
liability associated with these adjustments. The discounts and premiums related
to financial assets and liabilities will be amortized into our statements of
income in future periods using a method that approximates the level yield method
over the anticipated lives of the underlying financial assets or liabilities.
For the three and nine months ended September 30, 2006, the accretion of the
fair value discounts related to the acquired loans and certificates of deposit
increased net interest income by approximately $950,000 and $2.38 million,
respectively. Based on the estimated useful lives of the acquired loans and
deposits, we expect to recognize increases in net interest income related to
accretion of these purchase accounting adjustments of $850,000 for the remainder
of fiscal year 2006 and $4.1 million 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.
Results
of Operations. Our
net
interest income increased to $17.2 million for the third quarter of 2006
compared to $7.5 million for the third quarter of 2005. Our net interest income
increased to $43.6 million for the first nine months of 2006 compared to $20.8
million for the same period in 2005. The net interest margin (the ratio of
net
interest income to average earning assets) for the period was 3.95% for the
third quarter of 2006 compared to 3.48% for the same period in 2005. The net
interest margin was 3.97% for the first nine months of 2006 compared to 3.60%
for the same period in 2005.
Our
provision for loan losses was $587,000 for the third quarter of 2006 compared
to
$366,000 for the same period in 2005 and $2,681,000 for the first nine months
of
2006 compared to $1,450,000 for the same period in 2005. The provision for
loan
losses increased due to increases in loan volumes and charge-offs in 2006
compared to 2005.
Noninterest
income for the third quarter of 2006 compared to the same time period in 2005
increased by $3,125,000, or 241%. For the first nine months of 2006, noninterest
income was $6,959,000 greater than the first nine months of 2005. These
increases are largely attributable to the fee businesses associated with the
Cavalry acquisition, particularly with regard to service charges on deposit
accounts, insurance sales commissions and trust fees.
Our
continued growth in 2006 resulted in increased noninterest expense compared
to
2005 due to the addition of the Rutherford County market, increases in salaries
and employee benefits, equipment and occupancy expenses and other operating
expenses. The number of full-time equivalent employees increased from 156.5
at
December 31, 2005 to 395.5 at September 30, 2006. As a result, we experienced
increases in compensation and employee benefit expense. We expect to add
additional employees throughout 2006 which will cause our compensation and
employee benefit expense to increase in future periods. Additionally, our branch
expansion efforts during the last few years also increased noninterest expense.
The increased operational expenses for the recently opened branches and the
additional planned branch in the Donelson area of Davidson County expected
to
open in early 2007 will continue to result in increased noninterest expense
in
future periods. Our efficiency ratio (the ratio of noninterest expense to the
sum of net interest income and noninterest income) was 60.5% for the third
quarter of 2006 compared to 63.1% for the same period of 2005 and 61.5% for
the
first nine months of 2006 compared to 61.1% for the first nine months of 2005.
These calculations include the impact of approximately $218,000 and $1,583,000
in merger related charges for the three and nine months ended September 30,
2006, respectively.
The
effective income tax expense rate for the three and nine months ended September
30, 2006 was approximately 32.7% compared to an effective income tax expense
rate for the three and nine months ended September 30, 2005 of approximately
27.5% and 28.4%, respectively. The increase in the effective tax rate between
2006 and 2005 was due to the additional earnings being taxed at a higher rate
as
the various tax savings initiatives (e.g.., municipal bond income) had a lesser
impact in 2006 when compared to 2005 and the impact of our incentive stock
options and their treatment pursuant to the adoption of SFAS No. 123(R) also
contributed to the increase in our effective rate.
Net
income for the third quarter of 2006 was $5.4 million compared to $2.1 million
for the third quarter of 2005, an increase of 157%. Net income for the first
nine months of 2006 was $12.3 million compared to $5.8 million for the same
period in 2005, an increase of 111%. Fully-diluted net income per common share
was $0.32 for the third quarter of 2006 compared to $0.22 for the third quarter
of 2005, an increase of 45%. Fully-diluted net income per common share was
$0.84
for the first nine months of 2006 compared to $0.62 for the same period in
2005,
an increase of 35%.
Excluding
the impact of merger related charges at the statutory tax rate of 39.23%, net
income for the third quarter of 2006 was $5.5 million compared to $2.1 million
for the third quarter of 2005, an increase of 164%. Additionally, excluding
the
after tax impact of merger related charges, net income for the first nine months
of 2006 was $13.2 million compared to $5.8 million for the same period in 2005,
an increase of 128%. As a result, as adjusted diluted net income per common
share was $0.33 for the third quarter of 2006 compared to $0.22 for the third
quarter of 2005, an increase of 50%. As adjusted diluted net income per common
share was $0.90 for the first nine months of 2006 compared to $0.62 for the
same
period in 2005, an increase of 45%. For a reconciliation of these non-GAAP
financial measures to their most directly comparable GAAP financial measure,
see
“Reconciliation of Non-GAAP financial measures” on page 31.
Financial
Condition.
Loans
increased $757 million during the first nine months of 2006 of which $551
million was attributable to the Cavalry acquisition. Thus, the net increase
in
our loan portfolio attributable to organic growth was $207 million. As we seek
to increase our loan portfolio, we must also continue to monitor the risks
inherent in our lending operations. If our allowance for loan losses is not
sufficient to cover the estimated loan losses in our loan portfolio, increases
to the allowance for loan losses would be required which would decrease our
earnings.
We
have
successfully grown our total deposits to $1.59 billion at September 30, 2006
compared to $810 million at December 31, 2005, an increase of $775 million
of
which $584 million was attributable to the Cavalry acquisition. As a result,
we
increased our deposits by $191 million, excluding the Cavalry acquisition.
This
growth in deposits had a higher funding cost due to rising rates and increased
deposit pricing competition in 2006 compared to 2005. We typically adjust our
loan yields at a faster rate than we adjust our deposit rates. As such, unless
competitive pressures dictate, our deposit funding costs do not usually adjust
as quickly as do revenues from interest income on floating rate earning assets.
We
continue to believe there is broad acceptance of our business model within
the
Nashville/Davidson/Murfreesboro MSA and in our target markets of small
businesses and affluent clients.
Capital
and Liquidity.
At
September 30, 2006, our capital ratios, including our bank’s capital ratios, met
regulatory minimum capital requirements. Additionally, at September 30, 2006,
our bank would be considered to be “well-capitalized” pursuant to banking
regulations. As our bank grows it will require additional capital from us over
that which can be earned through operations. We anticipate that we will continue
to use various capital raising techniques in order to support the growth of
our
bank.
In
the
past, we have been successful in procuring additional capital from the capital
markets (via public and private offerings). This additional capital was required
to support our growth. As of September 30, 2006, we believe we have sufficient
capital to support our current growth plans. However, expansion by acquisition
of other banks or by branching into a new geographic market could result in
issuance of additional capital, including additional common shares.
Critical
Accounting Estimates
The
accounting principles we follow and our methods of applying these principles
conform with United States generally accepted accounting principles and with
general practices within the banking industry. In connection with the
application of those principles, we have made judgments and estimates which,
in
the case of the determination of our allowance for loan losses, the adoption
of
SFAS No. 123 (revised 2004), “Share Based Payments” (“SFAS No. 123(R)”) and the
accounting for the Cavalry merger have been critical to the determination of
our
financial position and results of operations.
Allowance
for Loan Losses (“allowance”). Our
management assesses the adequacy of the allowance prior to the end of each
calendar quarter. This assessment includes procedures to estimate the allowance
and test the adequacy and appropriateness of the resulting balance. The level
of
the allowance is based upon management’s evaluation of the loan portfolios, past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower’s ability to repay (including the timing
of future payment), the estimated value of any underlying collateral,
composition of the loan portfolio, economic conditions, and other pertinent
factors. This evaluation is inherently subjective as it requires material
estimates including the amounts and timing of future cash flows expected to
be
received on impaired loans that may be susceptible to significant change. Loan
losses are charged off when management believes that the full collectability
of
the loan is unlikely. A loan may be partially charged-off after a “confirming
event” has occurred which serves to validate that full repayment pursuant to the
terms of the loan is unlikely. Allocation of the allowance may be made for
specific loans, but the entire allowance is available for any loan that, in
management’s judgment, is deemed to be uncollectible.
Larger
balance commercial and commercial real estate loans are impaired when, based
on
current information and events, it is probable that we will be unable to collect
all amounts due according to the contractual terms of the loan agreement.
Collection of all amounts due according to the contractual terms means that
both
the contractual interest payments and the contractual principal payments of
a
loan will be collected as scheduled in the loan agreement.
An
impairment loss is recognized if the present value of expected future cash
flows
from the loan is less than the recorded investment in the loan (recorded
investment in the loan is the principal balance plus any accrued interest,
net
deferred loan fees or costs and unamortized premium or discount, and does not
reflect any direct write-down of the investment). The impairment loss is
recognized through the allowance. Loans that are impaired are recorded at the
present value of expected future cash flows discounted at the loan’s effective
interest rate or if the loan is collateral dependent, impairment measurement
is
based on the fair value of the collateral. 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. The allowance is increased by provisions
charged to expense and decreased by charge-offs, net of recoveries of amounts
previously charged-off.
In
assessing the adequacy of the consolidated allowance, we also consider the
results of our ongoing independent loan review process. We undertake this
process both to ascertain whether there are loans in the portfolio whose credit
quality has weakened over time and to assist in our overall evaluation of the
risk characteristics of the entire loan portfolio. Our loan review process
includes the judgment of management, the input from our independent loan
reviewer, and reviews that may have been conducted by bank regulatory agencies
as part of their usual examination process. We incorporate loan review results
in the determination of whether or not it is probable that we will be able
to
collect all amounts due according to the contractual terms of a
loan.
As
part
of management’s quarterly assessment of the allowance, management divides the
loan portfolio into four segments: commercial, commercial real estate, consumer
and consumer real estate. Each segment is then analyzed such that an allocation
of the allowance is estimated for each loan segment.
The
allowance allocation for commercial and commercial real estate loans begins
with
a process of estimating the probable losses inherent for these types of loans.
The estimates for these loans are established by category and based on our
internal system of credit risk ratings, selected national benchmarks for
expected loan losses and historical loss data for various peer bank groups.
The
estimated loan loss allocation rate for our internal system of credit risk
grades for commercial and commercial real estate is based on management’s
experience with similarly graded loans, discussions with banking regulators
and
our internal loan review processes. We then weight the allocation methodologies
for the commercial and commercial real estate portfolios and determine a
weighted average allocation for these portfolios.
The
allowance allocation for consumer and consumer real estate loans which includes
installment, home equity, consumer mortgages, automobiles and others is
established for each of the categories by estimating losses inherent in that
particular category of consumer and consumer real estate loans. The estimated
loan loss allocation rate for each category is based on management’s experience.
Additionally, consumer and consumer real estate loans are analyzed based on
our
actual loss rates 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 and
include trends in delinquent and nonaccrual loans, unanticipated charge-offs,
credit concentration changes, prevailing economic conditions, changes in lending
personnel experience, changes in lending policies or procedures and other
influencing factors. These environmental factors are considered for each of
the
four loan segments and the allowance allocation as determined by the processes
noted above for each segment is increased or decreased based on the incremental
assessment of these various “environmental” factors.
We
then
test the resulting allowance balance by comparing the balance in the allowance
to historical trends and peer information. Our management then evaluates the
result of the procedures performed, including the result of our testing, and
concludes on the appropriateness of the balance of the allowance in its
entirety. The audit committee of our board of directors reviews the assessment
prior to the filing of quarterly and annual financial information.
For
periods before the three months ended September 30, 2006, we assessed the
allowance in two separate processes using methodologies for both the Pinnacle
portfolios as it existed prior to the merger with Cavalry (the “Nashville
market”) and the Rutherford County portfolio. Our methodology for the first two
quarters of 2006 was consistent with the past methodologies of Pinnacle
Financial and Cavalry on a stand-alone basis. In view of the
acquisition,
we
evaluated the respective assessment methodologies and made certain changes
as
noted above and implemented such changes during the third quarter of 2006.
The
revised assessment methodology did not significantly impact our recorded
allowance for loan losses.
Share
Based Payments -
On
January 1, 2006, we adopted SFAS No. 123(R), which addresses the
accounting for share-based
payment
transactions in which a company receives employee services in exchange for
equity instruments. SFAS No.123(R) eliminates the ability to account for
share-based compensation transactions, as we formerly did, using the intrinsic
value method as prescribed by Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to Employees,” and generally requires
that such transactions be accounted for using a fair-value-based method and
recognized as an expense.
We
adopted SFAS No. 123(R) using the modified prospective method which requires
the
application of the accounting standard as of January 1, 2006. The
accompanying consolidated financial statements for 2006 reflect the impact
of
adopting SFAS No. 123(R). In accordance with the modified prospective method,
the consolidated financial statements for prior periods have not been restated
to reflect, and do not include, the impact of SFAS No. 123(R).
Application of SFAS No. 123(R) required us to assess numerous factors including
the historical volatility of our stock price, anticipated option forfeitures
and
estimates concerning the length of time that our options would remain
unexercised. Many of these assessments impact the fair value of the underlying
stock option more significantly than others and changes to these assessments
in
future periods could be significant. We believe the assumptions we have
incorporated into our stock option fair value assessments are
reasonable.
Accounting
for the Cavalry Acquisition - We
recorded the assets and liabilities of Cavalry as of March 15, 2006 at estimated
fair value. Arriving at these fair values required numerous assumptions
regarding the economic life of assets, decay rates for liabilities and other
factors. We engaged a third party to assist us in valuing certain of the
financial assets and liabilities of Cavalry. We also engaged a real estate
appraisal firm to value the more significant properties that were acquired
by us
in the acquisition. As a result, we consider the values we have assigned to
the
acquired assets and liabilities of Cavalry to be reasonable and consistent
with
the application of generally accepted accounting principles. However, we are
still in the process of obtaining and evaluating certain other information.
Accordingly, we may have to reassess our purchase price allocations. We believe
that we will conclude the allocation of the purchase price to the acquired
net
assets prior to the end of 2006.
Long-lived
assets, including purchased intangible assets subject to amortization, such
as
our core deposit intangible asset, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured
by
a comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of
an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds
the
fair value of the asset. Assets to be disposed of would be separately presented
in the balance sheet and reported at the lower of the carrying amount or fair
value less costs to sell, and are no longer depreciated.
Goodwill
and intangible assets that have indefinite useful lives are tested annually
for
impairment, and are tested for impairment more frequently if events and
circumstances indicate that the asset might be impaired. An impairment loss
is
recognized to the extent that the carrying amount exceeds the asset’s fair
value. Our annual assessment date will be September 30. Accordingly, should
we
determine in a future period that the goodwill recorded in connection with
our
acquisition of Cavalry has been impaired, then a charge to our earnings will
be
recorded in the period such determination is made.
Results
of Operations
Our
results for the three and nine months ended September 30, 2006 and 2005 were
highlighted by the continued growth in loans and other earning assets and
deposits, which resulted in increased revenues and expenses. The following
is a
summary of our results of operations (dollars in thousands):
|
|
Three
months ended
|
|
2006-2005
|
|
Nine
months ended
|
|
2006-2005
|
|
|
|
September
30, 2006
|
|
Percent
|
|
September
30, 2006
|
|
Percent
|
|
|
|
2006
|
|
2005
|
|
Increase
|
|
2006
|
|
2005
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
31,340
|
|
$
|
12,378
|
|
|
153.2
|
%
|
$
|
76,455
|
|
$
|
32,189
|
|
|
137.5
|
%
|
Interest
expense
|
|
|
14,181
|
|
|
4,923
|
|
|
188.1
|
%
|
|
32,894
|
|
|
11,438
|
|
|
187.6
|
%
|
Net
interest income
|
|
|
17,159
|
|
|
7,455
|
|
|
130.2
|
%
|
|
43,561
|
|
|
20,751
|
|
|
109.9
|
%
|
Provision
for loan losses
|
|
|
587
|
|
|
366
|
|
|
60.4
|
%
|
|
2,680
|
|
|
1,450
|
|
|
84.8
|
%
|
Net
interest income after provision for loan losses
|
|
|
16,572
|
|
|
7,089
|
|
|
133.8
|
%
|
|
40,881
|
|
|
19,301
|
|
|
111.8
|
%
|
Noninterest
income
|
|
|
4,424
|
|
|
1,299
|
|
|
240.6
|
%
|
|
10,852
|
|
|
3,893
|
|
|
178.8
|
%
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger
related expense
|
|
|
218
|
|
|
-
|
|
|
-
|
|
|
1,583
|
|
|
-
|
|
|
-
|
|
Other
noninterest expense
|
|
|
12,836
|
|
|
5,521
|
|
|
132.5
|
%
|
|
31,906
|
|
|
15,065
|
|
|
111.8
|
%
|
Net
income before income taxes
|
|
|
7,942
|
|
|
2,867
|
|
|
177.0
|
%
|
|
18,244
|
|
|
8,129
|
|
|
124.4
|
%
|
Income
tax expense
|
|
|
2,595
|
|
|
789
|
|
|
228.9
|
%
|
|
5,963
|
|
|
2,312
|
|
|
157.9
|
%
|
Net
income
|
|
$
|
5,347
|
|
$
|
2,078
|
|
|
157.3
|
%
|
$
|
12,281
|
|
$
|
5,817
|
|
|
111.1
|
%
|
Our
results for the three and nine months ended September 30, 2006 included merger
related expense. Excluding merger related expense from our net income resulted
in diluted net income per common share for the three and nine months ended
September 30, 2006 of $0.33 and $0.90, respectively. A comparison of these
amounts to the same periods in 2005 and a reconciliation of this non-GAAP
financial measure follow:
|
|
Three
months ended
|
|
Nine
months ended
|
|
|
|
September
30, 2006
|
|
September
30, 2006
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Reconciliation
of Non-GAAP financial measures :
|
|
Net
income
|
|
$
|
5,347
|
|
$
|
2,078
|
|
$
|
12,281
|
|
$
|
5,817
|
|
Merger
related expense net of tax of $86 and $621 for the three and nine
months
ended September 30, 2006, respectively
|
|
|
132
|
|
|
-
|
|
|
962
|
|
|
-
|
|
Net
income excluding merger related expense
|
|
$
|
5,479
|
|
$
|
2,078
|
|
$
|
13,243
|
|
$
|
5,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per common share
|
|
$
|
0.32
|
|
$
|
0.22
|
|
$
|
0.84
|
|
$
|
0.62
|
|
Diluted
net income per common share, excluding merger related
expense
|
|
$
|
0.33
|
|
$
|
0.22
|
|
$
|
0.90
|
|
$
|
0.62
|
|
The
presentation of this non-GAAP financial information is not intended to be
considered in isolation or as a substitute for any measure prepared in
accordance with GAAP. Because non-GAAP financial measures presented are not
measurements determined in accordance with GAAP and are susceptible to varying
calculations, these non-GAAP financial measures, as presented, may not be
comparable to other similarly titled measures presented by other companies.
Pinnacle
Financial believes that these non-GAAP financial measures excluding the impact
of merger related expenses facilitate making period-to-period comparisons and
are meaningful indications of its operating performance. Pinnacle Financial
included non-GAAP net income and non-GAAP diluted EPS because it believes that
these measures more clearly reflect our operating performance for the 2006
third
quarter and nine months ended September 30, 2006 when compared to the same
periods in 2005 and because we believe that the information provides investors
with additional information to evaluate our past financial results and ongoing
operational performance.
Pinnacle
Financial’s management utilizes this non-GAAP financial information to compare
our operating performance versus the comparable periods in 2005 and will utilize
non-GAAP diluted earnings per share for the 2006 fiscal year (excluding the
merger related expenses) in calculating whether or not we met the performance
targets of our 2006 Annual Cash Incentive Plan and our earnings per share
targets in our restricted stock award agreements.
Net
Interest Income. Net
interest income represents the amount by which interest earned on various
earning assets exceeds interest paid on deposits and other interest bearing
liabilities and is the most significant component of our earnings. For
the
three months ended September 30, 2006 and 2005, we recorded net interest income
of $17,159,000 and $7,455,000, respectively, which resulted in a net interest
margin of 3.95% and 3.48%. For the nine months ended September 30, 2006, and
2005, we recorded net interest income of $43,561,000 and $20,751,000 which
resulted in a net interest margin of 3.97% and 3.60%, 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,
2006 and 2005 (dollars in thousands):
|
|
Three
months ended
|
|
Three
months ended
|
|
(dollars
in thousands)
|
|
September
30, 2006
|
|
September
30, 2005
|
|
|
|
Average
Balances
|
|
Interest
|
|
Rates/
Yields
|
|
Average
Balances
|
|
Interest
|
|
Rates/
Yields
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
1,375,036
|
|
$
|
26,771
|
|
|
7.72
|
%
|
$
|
587,902
|
|
$
|
9,471
|
|
|
6.40
|
%
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
260,688
|
|
|
3,241
|
|
|
4.93
|
%
|
|
205,213
|
|
|
2,245
|
|
|
4.34
|
%
|
Tax-exempt
(1)
|
|
|
56,644
|
|
|
521
|
|
|
4.81
|
%
|
|
35,312
|
|
|
318
|
|
|
4.72
|
%
|
Federal
funds sold
|
|
|
51,075
|
|
|
685
|
|
|
5.32
|
%
|
|
34,204
|
|
|
282
|
|
|
3.27
|
%
|
Other
|
|
|
8,116
|
|
|
122
|
|
|
7.16
|
%
|
|
4,075
|
|
|
62
|
|
|
7.02
|
%
|
Total
interest-earning assets
|
|
|
1,751,559
|
|
$
|
31,340
|
|
|
7.14
|
%
|
|
866,706
|
|
$
|
12,378
|
|
|
5.73
|
%
|
Nonearning
assets
|
|
|
235,677
|
|
|
|
|
|
|
|
|
48,095
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,987,236
|
|
|
|
|
|
|
|
$
|
914,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
checking
|
|
$
|
181,752
|
|
$
|
1,202
|
|
|
2.62
|
%
|
$
|
64,369
|
|
$
|
242
|
|
|
1.49
|
%
|
Savings
and money market
|
|
|
473,883
|
|
|
3,809
|
|
|
3.19
|
%
|
|
266,327
|
|
|
1,408
|
|
|
2.10
|
%
|
Certificates
of deposit
|
|
|
598,220
|
|
|
6,789
|
|
|
4.50
|
%
|
|
274,303
|
|
|
2,319
|
|
|
3.35
|
%
|
Total
deposits
|
|
|
1,253,855
|
|
|
11,800
|
|
|
3.73
|
%
|
|
604,999
|
|
|
3,969
|
|
|
2.60
|
%
|
Securities
sold under agreements to repurchase
|
|
|
122,292
|
|
|
1,383
|
|
|
4.49
|
%
|
|
63,337
|
|
|
400
|
|
|
2.50
|
%
|
Federal
funds purchased
|
|
|
-
|
|
|
-
|
|
|
0.00
|
%
|
|
-
|
|
|
-
|
|
|
0.00
|
%
|
Federal
Home Loan Bank advances
|
|
|
33,299
|
|
|
383
|
|
|
4.57
|
%
|
|
41,456
|
|
|
336
|
|
|
3.22
|
%
|
Subordinated
debt
|
|
|
36,084
|
|
|
615
|
|
|
6.75
|
%
|
|
13,896
|
|
|
218
|
|
|
6.22
|
%
|
Total
interest-bearing liabilities
|
|
|
1,445,530
|
|
|
14,181
|
|
|
3.89
|
%
|
|
723,688
|
|
|
4,923
|
|
|
2.72
|
%
|
Noninterest-bearing
deposits
|
|
|
281,812
|
|
|
-
|
|
|
-
|
|
|
125,447
|
|
|
-
|
|
|
-
|
|
Total
deposits and interest-bearing liabilities
|
|
|
1,727,342
|
|
$
|
14,181
|
|
|
3.26
|
%
|
|
849,135
|
|
$
|
4,923
|
|
|
2.30
|
%
|
Other
liabilities
|
|
|
14,914
|
|
|
|
|
|
|
|
|
3,328
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
244,980
|
|
|
|
|
|
|
|
|
62,338
|
|
|
|
|
|
|
|
|
|
$
|
1,987,236
|
|
|
|
|
|
|
|
$
|
914,801
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
$
|
17,159
|
|
|
|
|
|
|
|
$
|
7,455
|
|
|
|
|
Net
interest spread (2)
|
|
|
|
|
|
|
|
|
3.25
|
%
|
|
|
|
|
|
|
|
3.01
|
%
|
Net
interest margin (3)
|
|
|
|
|
|
|
|
|
3.95
|
%
|
|
|
|
|
|
|
|
3.48
|
%
|
(1) |
Yields
computed on tax-exempt instruments on a tax equivalent
basis.
|
(2) |
Yields
realized on interest-earning assets less the rates paid on
interest-bearing liabilities.
|
(3) |
Net
interest margin is the result of annualized net interest income divided
by
average interest-earning assets for the
period.
|
|
|
Nine
months ended
|
|
Nine
months ended
|
|
(dollars
in thousands) |
|
September
30, 2006
|
|
September
30, 2005
|
|
|
|
Average
Balances
|
|
Interest
|
|
Rates/
Yields
|
|
Average
Balances
|
|
Interest
|
|
Rates/
Yields
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
1,154,828
|
|
$
|
64,196
|
|
|
7.43
|
%
|
$
|
537,842
|
|
$
|
24,428
|
|
|
6.08
|
%
|
Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
250,373
|
|
|
9,250
|
|
|
4.94
|
%
|
|
194,993
|
|
|
6,401
|
|
|
4.39
|
%
|
Tax-exempt
(1)
|
|
|
50,481
|
|
|
1,417
|
|
|
4.95
|
%
|
|
28,657
|
|
|
758
|
|
|
4.67
|
%
|
Federal
funds sold
|
|
|
30,103
|
|
|
1,225
|
|
|
5.44
|
%
|
|
19,311
|
|
|
436
|
|
|
3.02
|
%
|
Other
|
|
|
7,017
|
|
|
367
|
|
|
7.95
|
%
|
|
3,694
|
|
|
166
|
|
|
6.92
|
%
|
Total
interest-earning assets
|
|
|
1,492,802
|
|
$
|
76,455
|
|
|
6.89
|
%
|
|
784,497
|
|
$
|
32,189
|
|
|
5.53
|
%
|
Nonearning
assets
|
|
|
180,522
|
|
|
|
|
|
|
|
|
46,846
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,673,324
|
|
|
|
|
|
|
|
$
|
831,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
checking
|
|
$
|
158,643
|
|
$
|
2,532
|
|
|
2.13
|
%
|
$
|
59,919
|
|
$
|
403
|
|
|
0.90
|
%
|
Savings
and money market
|
|
|
417,610
|
|
|
9,384
|
|
|
3.00
|
%
|
|
235,697
|
|
|
3,012
|
|
|
1.71
|
%
|
Certificates
of deposit
|
|
|
486,642
|
|
|
15,297
|
|
|
4.20
|
%
|
|
247,773
|
|
|
5,585
|
|
|
3.01
|
%
|
Total
deposits
|
|
|
1,062,895
|
|
|
27,213
|
|
|
3.42
|
%
|
|
543,389
|
|
|
9,000
|
|
|
2.21
|
%
|
Securities
sold under agreements to repurchase
|
|
|
83,364
|
|
|
2,569
|
|
|
4.12
|
%
|
|
50,456
|
|
|
803
|
|
|
2.13
|
%
|
Federal
funds purchased
|
|
|
41,351
|
|
|
52
|
|
|
5.11
|
%
|
|
1,796
|
|
|
45
|
|
|
3.31
|
%
|
Federal
Home Loan Bank advances
|
|
|
32,647
|
|
|
1,443
|
|
|
4.66
|
%
|
|
48,880
|
|
|
1,084
|
|
|
2.97
|
%
|
Subordinated
debt
|
|
|
1,358
|
|
|
1,617
|
|
|
6.62
|
%
|
|
11,506
|
|
|
506
|
|
|
5.89
|
%
|
Total
interest-bearing liabilities
|
|
|
1,221,615
|
|
|
32,894
|
|
|
3.60
|
%
|
|
656,027
|
|
|
11,438
|
|
|
2.33
|
%
|
Noninterest-bearing
deposits
|
|
|
248,448
|
|
|
-
|
|
|
-
|
|
|
112,771
|
|
|
-
|
|
|
-
|
|
Total
deposits and interest-bearing liabilities
|
|
|
1,470,063
|
|
$
|
32,894
|
|
|
2.99
|
%
|
|
768,798
|
|
$
|
11,438
|
|
|
1.99
|
%
|
Other
liabilities
|
|
|
11,623
|
|
|
|
|
|
|
|
|
2,436
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
191,638
|
|
|
|
|
|
|
|
|
60,109
|
|
|
|
|
|
|
|
|
|
$
|
1,673,324
|
|
|
|
|
|
|
|
$
|
831,343
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
$
|
43,561
|
|
|
|
|
|
|
|
$
|
20,751
|
|
|
|
|
Net
interest spread (2)
|
|
|
|
|
|
|
|
|
3.29
|
%
|
|
|
|
|
|
|
|
3.20
|
%
|
Net
interest margin (3)
|
|
|
|
|
|
|
|
|
3.97
|
%
|
|
|
|
|
|
|
|
3.60
|
%
|
(1) |
Yields
computed on tax-exempt instruments on a tax equivalent
basis.
|
(2) |
Yields
realized on interest-earning assets less the rates paid on
interest-bearing liabilities.
|
(3) |
Net
interest margin is the result of annualized net interest income divided
by
average interest-earning assets for the
period.
|
As
noted
above, the net interest margin for the three and nine months ended September
30,
2006 was 3.95% and 3.97%, respectively, compared to a net interest margin of
3.48% and 3.60% for the same periods in 2005. The increase in our net interest
margin was significant between 2006 and 2005 and was largely due to the addition
of the net assets of Cavalry. Other matters related to the changes in net
interest income, net interest yields and rates, and net interest margin are
presented below:
· |
Our
loan yields increased by 135 basis points for the first nine months
of
2006 when compared to the first nine months of 2005. The pricing
of a
large portion of our loan portfolio is tied to our prime rate which
increased throughout 2005 and through September 30, 2006 consistent
with
the announced increases in the Federal funds target rate by the Open
Market Committee of the Federal Reserve System. During the period
from
January 1, 2005 through September 30, 2006, the Open Market Committee
increased the Federal funds target rate from 2.25% to 5.25%.
|
· |
We
have been able to grow our funding base significantly. For asset/liability
management, we continue to allocate a greater proportion of such
funds to
our loan portfolio versus our securities and shorter-term investment
portfolio. Average loan balances for the first nine months of 2006
approximated 77% of total interest-earning assets compared to 69%
for the
same period in 2005. Loans generally have higher yields than do securities
and other shorter-term investments.
|
· |
Impacting
our net interest margin at any point in time will be the level of
fixed
rate assets and liabilities. In a rising rate environment, these
assets
and liabilities do not reprice and thus impact the performance of
our net
interest margin. Fixed rate assets include fixed rate loans and
substantially all of our investment portfolio. Fixed rate liabilities
include certificates of deposits, FHLB advances and a portion of
our
subordinated indebtedness. In a rising rate environment these liabilities
impact our margin positively. We have experienced a rising rate
environment over the last few quarters. We believe that since we
have more
fixed rate assets than fixed rate liabilities the negative impact
of our
fixed rate assets impacted our net interest margin to a greater degree
than the impact of our fixed rate liabilities when comparing the
three and
nine months ended September 30, 2006 with that of the comparable
prior
year periods.
|
· |
During
2006, overall deposit rates were higher than those rates for the
comparable period in 2005. Changes in interest rates paid on such
products
as interest checking, savings and money market accounts, securities
sold
under agreements to repurchase and Federal funds purchased will generally
increase or decrease in a manner that is consistent with changes
in the
short-term rate environment. During 2006, as was the case with our
prime
lending rate, short-term rates were higher than in 2005. We also
monitor
the pricing of similar products by our primary competitors. Deposit
pricing in our markets has been very competitive over the last few
years
and we anticipate that such pricing pressure will continue. The changes
in
the short-term rate environment and the pricing of our primary competitors
required us to increase these rates in 2006 compared to the same
period in
2005 which resulted in increased pressure on our net interest margin.
|
· |
During
the first nine months of 2006, the average balances of noninterest
bearing
deposit balances, interest bearing transaction accounts, savings
and money
market accounts and securities sold under agreements to repurchase
amounted to 62% of our total funding compared to 60% for the first
nine
month in 2005. These funding sources generally have lower rates than
do
other funding sources, such as certificates of deposit and other
borrowings and contributed favorably to our net interest margin in
2006
when compared to 2005.
|
· |
Also
impacting the net interest margin during 2006 compared to 2005 was
pricing
of our floating rate subordinated indebtedness and the incurrence
of
additional fixed rate subordinated indebtedness. The average rate
on our
subordinated indebtedness increased by 73 basis points during the
first
nine months of 2006 when compared to the same period in 2005. The
interest
rate charged on this indebtedness is generally higher than other
funding
sources. The rate charged on the floating rate portion of the indebtedness
is determined in relation to the three-month LIBOR index and reprices
quarterly. During 2006, the short-term interest rate environment
was
higher than during 2005, and, as a result, the pricing for this funding
source was higher in 2006 than in 2005.
|
Prior
to
the merger with Cavalry, Cavalry’s net interest margin was higher than ours. As
a result, since the merger date, our net interest margin is higher compared
to
the same periods last year due to the impact of the net assets of Cavalry being
included with our net assets.
We
believe that interest rates should remain fairly stable over the next few
quarters. We also believe we will continue to increase net interest income
through growth in earning assets with particular emphasis on floating rate
lending. However, the additional revenues provided by increased floating rate
loans may not be sufficient to overcome any immediate increases in funding
costs
in such that we maintain our current net interest margin. As a result, even
though our net interest income will continue to increase, our net interest
margins will likely decrease due to new deposits being obtained at current
market rates which are higher and the continued competitive deposit pricing
in
our market area. We believe our net interest margin for the fourth quarter
of
2006 will be lower than our net interest margin for the third quarter of 2006.
Based on our current models, we believe our net interest margin for the fourth
quarter of 2006 should be within a range of 3.60% to 3.85%, compared to 3.95%
for the third quarter of 2006.
Conversely,
should interest rates begin to fluctuate over the next few quarters, we believe
that in a rising interest rate environment we would be able to reprice our
assets more quickly than our funding costs and thus we believe we would be
able
to grow our net interest income and net interest margins in such an environment.
Conversely, in a falling rate environment, this would serve to have the opposite
effect on our net interest income and net interest margins. In a falling rate
environment, we may not be able to reduce our deposit funding costs by any
meaningful amount due to market pressures, while our net interest income would
not increase as fast as it would likely increase under a rising or stable
interest rate environment.
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 $587,000 and $366,000 for the three months
ended September 30, 2006 and 2005, respectively and $2,680,000 and $1,450,000
for the nine months ended September 30, 2006 and 2005, respectively.
Based
upon our management's evaluation of the loan portfolio, we believe the allowance
for loan losses to be adequate to absorb our estimate of probable losses
existing in the loan portfolio at September 30, 2006. An increase in loan
volumes and an increase in charge-offs were the primary causes for the increase
in our provision for loan losses in 2006 when compared to 2005.
Based
upon management's assessment of the loan portfolio, we adjust our allowance
for
loan losses to an amount deemed appropriate to adequately cover inherent risks
in the loan portfolio. While our policies and procedures used to estimate the
allowance for loan losses, as well as the resultant provision for loan losses
charged to operations, are considered adequate by our management and are
reviewed from time to time by our regulators, they are necessarily approximate
and imprecise. There exist factors beyond our control, such as general economic
conditions, both locally and nationally, which may negatively impact,
materially, the adequacy of our allowance for loan losses and, thus, the
resulting provision for loan losses.
Noninterest
Income. Our
noninterest income is composed of several components, some of which vary
significantly between quarterly periods. Service charges on deposit accounts
and
other noninterest income generally reflect our growth, while investment services
and fees from the origination of mortgage loans will often reflect market
conditions and fluctuate from period to period. The opportunities for
recognition of gains on loans and loan participations sold and gains on sales
of
investment securities may also vary widely from quarter to quarter and year
to
year and may diminish over time as our lending and industry concentration limits
increase.
The
following is the makeup of our noninterest income for the three and nine months
ended September 30, 2006 and 2005 (dollars in thousands):
|
|
Three
months ended
|
|
2006-2005
|
|
Nine
months ended
|
|
2006-2005
|
|
|
|
September
30,
|
|
Percent
|
|
September
30,
|
|
Percent
|
|
|
|
2006
|
|
2005
|
|
Increase
(decrease)
|
|
2006
|
|
2005
|
|
Increase
(decrease)
|
|
Noninterest
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
$
|
1,357
|
|
$
|
229
|
|
|
492.6
|
%
|
$
|
3,152
|
|
$
|
732
|
|
|
330.6
|
%
|
Investment
services
|
|
|
645
|
|
|
474
|
|
|
36.1
|
%
|
|
1,811
|
|
|
1,403
|
|
|
29.1
|
%
|
Gains
on loans and loan participations sold, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
from the origination and sale of mortgage loans, net of sales
commissions
|
|
|
388
|
|
|
375
|
|
|
3.5
|
%
|
|
1,061
|
|
|
790
|
|
|
34.3
|
%
|
Gains
(losses) on loan participations sold, net
|
|
|
102
|
|
|
(26
|
)
|
|
492.3
|
%
|
|
224
|
|
|
110
|
|
|
103.6
|
%
|
Insurance
sales commissions
|
|
|
550
|
|
|
-
|
|
|
-
|
|
|
1,563
|
|
|
-
|
|
|
-
|
|
Gain
on sale of investment securities, net
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
114
|
|
|
-
|
|
Trust
fees
|
|
|
312
|
|
|
-
|
|
|
-
|
|
|
676
|
|
|
-
|
|
|
-
|
|
Other
noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters
of credit fees
|
|
|
147
|
|
|
120
|
|
|
22.5
|
%
|
|
368
|
|
|
359
|
|
|
2.5
|
%
|
Bank-owned
life insurance
|
|
|
126
|
|
|
18
|
|
|
600.0
|
%
|
|
281
|
|
|
55
|
|
|
410.9
|
%
|
Equity
in earnings of Collateral Plus, LLC
|
|
|
11
|
|
|
76
|
|
|
(72.4
|
%)
|
|
80
|
|
|
140
|
|
|
(42.9
|
%)
|
Other
noninterest income
|
|
|
776
|
|
|
33
|
|
|
2251.5
|
%
|
|
1,636
|
|
|
190
|
|
|
765.6
|
%
|
Total
noninterest income
|
|
$
|
4,424
|
|
$
|
1,299
|
|
|
240.6
|
%
|
$
|
10,852
|
|
$
|
3,893
|
|
|
178.8
|
%
|
Service
charge income for 2006 increased over that of 2005 due to increased volumes
from
our Rutherford County market and an increase in the number of Nashville deposit
accounts subject to service charges. However, for the Nashville accounts, the
increase in service charges in 2006 when compared to 2005 was offset
significantly by the earnings credit rate provided by Pinnacle National to
its
commercial deposit customers. This earnings credit rate serves to reduce the
deposit service charges for our commercial customers and is based on the average
balances of their checking accounts at Pinnacle National. This earnings credit
rate is indexed to a national index.
Also
included in noninterest income are commissions and fees from our financial
advisory unit, Pinnacle Asset Management, a division of Pinnacle National.
At
September 30, 2006, Pinnacle Asset Management was receiving commissions and
fees
in connection with approximately $553 million in brokerage assets held with
Raymond James Financial Services, Inc. compared to $441 million at December
31,
2005. Additionally, at September 30, 2006, our trust department was receiving
fees on approximately $360 million in assets. Following our merger with Cavalry,
we now offer trust services through the bank’s trust division and insurance
services through Miller and Loughry Insurance and Services, Inc. which we
believe will increase our noninterest income in future periods.
Additionally,
mortgage related fees also provided for a significant portion of the increase
in
noninterest income between 2006 an 2005. These mortgage fees are for loans
originated in both the Nashville and Rutherford County markets and subsequently
sold to third-party investors. All of these loan sales transfer servicing rights
to the buyer. Generally, mortgage origination fees increase in lower interest
rate environments and decrease in rising interest rate environments. As a
result, mortgage origination fees may fluctuate greatly in response to a
changing rate environment.
We
also
sell certain loan participations to our correspondent banks. Such sales are
primarily related to new lending transactions in excess of internal loan limits
or industry concentration limits. At September 30, 2006 and pursuant to
participation agreements with these correspondents, we had participated
approximately $85.3 million of originated loans to these other banks compared
to
$60.3 million at December 31, 2005. These participation agreements have various
provisions regarding collateral position, pricing and other matters. Many of
these agreements provide that we pay the correspondent less than the loan’s
contracted interest rate. Pursuant to SFAS No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities — a replacement of FASB Statement
No. 125”,
in
those transactions whereby the correspondent is receiving a lesser amount of
interest than the amount owed by the customer, we record a net gain along with
a
corresponding asset representing the present value of our net retained cash
flows. The resulting asset is amortized over the term of the loan. Conversely,
should a loan be paid prior to maturity, any remaining unamortized asset is
charged as a reduction to gains on loan participations sold. We recorded net
gains of $102,000 and $224,000, respectively, during the three and nine months
ended September 30, 2006, respectively, compared to a net loss of $26,000 and
a
net gain of $110,000 for the same periods in 2005 related to the loan
participation transactions. We intend to maintain relationships with our
correspondents in order to sell participations in future loans to these or
other
correspondents primarily due to limitations on loans to a single borrower or
industry concentrations. In general, the Cavalry merger has resulted in an
increase in capital which has resulted in increased lending limits for such
items as loans to a single borrower and loans to a single industry such that
our
need to participate such loans in the future may be reduced. In any event,
the
timing of participations may cause the level of gains, if any, to vary
significantly.
Also
included in noninterest income for the nine months ended September 30, 2005,
were net gains of approximately $114,000 realized from the sale of approximately
$6.8 million of available-for-sale securities.
At
the
end of 2004, we formed a wholly-owned subsidiary, Pinnacle Credit Enhancement
Holdings, Inc. (“PCEH”). PCEH owns a 24.5% interest in Collateral Plus, LLC.
Collateral Plus, LLC serves as an intermediary between investors and borrowers
in certain financial transactions whereby the borrowers require enhanced
collateral in the form of guarantees or letters of credit issued by the
investors for the benefit of banks and other financial institutions. Our equity
in the earnings of Collateral Plus, LLC for the three and nine months ended
September 30, 2006 was $11,000 and $80,000, respectively.
Additional
other noninterest income increased by approximately $743,000 during the three
months ended September 30, 2006 when compared to the same period in 2005 and
increased by approximately $1.45 million for the nine months ended September
30,
2006 when compared to the nine months ended September 30, 2005. Most of this
increase was attributable to increases in ATM fees, merchant banking and other
electronic banking fees.
Noninterest
Expense. Noninterest
expense consists of salaries and employee benefits, equipment and occupancy
expenses, and other operating expenses. The following is the makeup of our
noninterest expense for the three and nine months ended September 30, 2006
and
2005 (dollars in thousands):
|
|
Three
months ended
|
|
2006-2005
|
|
Nine
months ended
|
|
2006-2005
|
|
|
|
September
30,
|
|
Percent
|
|
September
30,
|
|
Percent
|
|
|
|
2006
|
|
2005
|
|
Increase
(decrease)
|
|
2006
|
|
2005
|
|
Increase
(decrease)
|
|
Noninterest
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
|
|
$
|
4,964
|
|
$
|
2,315
|
|
|
114.4
|
%
|
$
|
12,752
|
|
$
|
6,239
|
|
|
104.4
|
%
|
Commissions
|
|
|
331
|
|
|
179
|
|
|
84.9
|
%
|
|
890
|
|
|
533
|
|
|
67.0
|
%
|
Other
compensation, primarily incentives
|
|
|
1,279
|
|
|
531
|
|
|
140.9
|
%
|
|
2,999
|
|
|
1,574
|
|
|
90.5
|
%
|
Employee
benefits and other
|
|
|
1,002
|
|
|
385
|
|
|
160.3
|
%
|
|
2,674
|
|
|
1,146
|
|
|
133.2
|
%
|
Total
salaries and employee benefits
|
|
|
7,576
|
|
|
3,410
|
|
|
122.2
|
%
|
|
19,315
|
|
|
9,492
|
|
|
103.5
|
%
|
Equipment
and occupancy
|
|
|
2,071
|
|
|
1,035
|
|
|
100.1
|
%
|
|
5,325
|
|
|
2,713
|
|
|
96.3
|
%
|
Marketing
and business development
|
|
|
351
|
|
|
186
|
|
|
88.7
|
%
|
|
900
|
|
|
479
|
|
|
87.9
|
%
|
Postage
and supplies
|
|
|
488
|
|
|
160
|
|
|
205.0
|
%
|
|
1,118
|
|
|
454
|
|
|
146.3
|
%
|
Amortization
of core deposit intangible
|
|
|
535
|
|
|
-
|
|
|
-
|
|
|
1,248
|
|
|
-
|
|
|
-
|
|
Other
noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting
and auditing
|
|
|
143
|
|
|
140
|
|
|
2.1
|
%
|
|
616
|
|
|
320
|
|
|
92.5
|
%
|
Consultants,
including independent loan review
|
|
|
58
|
|
|
26
|
|
|
123.1
|
%
|
|
222
|
|
|
89
|
|
|
149.4
|
%
|
Legal,
including borrower-related charges
|
|
|
47
|
|
|
113
|
|
|
(58.4
|
)%
|
|
103
|
|
|
205
|
|
|
(49.8
|
)%
|
OCC
exam fees
|
|
|
73
|
|
|
49
|
|
|
49.0
|
%
|
|
187
|
|
|
133
|
|
|
40.6
|
%
|
Directors'
fees
|
|
|
52
|
|
|
77
|
|
|
(32.5
|
)%
|
|
178
|
|
|
175
|
|
|
1.7
|
%
|
Insurance,
including FDIC assessments
|
|
|
189
|
|
|
82
|
|
|
130.5
|
%
|
|
465
|
|
|
235
|
|
|
97.9
|
%
|
Other
noninterest expense
|
|
|
1,253
|
|
|
243
|
|
|
415.6
|
%
|
|
2,229
|
|
|
770
|
|
|
189.5
|
%
|
Total
other noninterest expense
|
|
|
1,815
|
|
|
730
|
|
|
148.6
|
%
|
|
4,000
|
|
|
1,927
|
|
|
107.6
|
%
|
Merger
related expense
|
|
|
218
|
|
|
-
|
|
|
-
|
|
|
1,583
|
|
|
-
|
|
|
-
|
|
Total
noninterest expense
|
|
$
|
13,054
|
|
$
|
5,521
|
|
|
136.4
|
%
|
$
|
33,489
|
|
$
|
15,065
|
|
|
122.3
|
%
|
Expenses
have generally increased between the above periods due to our merger with
Cavalry, personnel additions occurring throughout each period, the continued
development of our branch network and other expenses which increase in relation
to our growth rate. We anticipate continued increases in our expenses in the
future for such items as additional personnel, the opening of additional
branches, audit expenses and other expenses which tend to increase in relation
to our growth. Additionally, we adopted SFAS No. 123(R) in 2006 which addresses
the accounting for employee equity based incentives. Our compensation expense
will increase in all future periods as a result of adopting this accounting
pronouncement. For the three and nine months ended September 30, 2006,
approximately $285,000 and $690,000, respectively, of compensation expense
related to stock options is included in employee benefits and other
expense.
At
December 31, 2005, we employed 156.5 full time equivalent employees compared
to
395.5 at September 30, 2006, an increase of 239.0 full time employees. We intend
to continue to add employees to our work force for the foreseeable future,
which
will cause our salary and employee benefit costs to increase in future periods.
Included
in other noninterest expense for the three and nine months ended September
30,
2006 and 2005 are incidental variable costs related to deposit gathering and
lending. Examples include expenses related to ATM networks, correspondent bank
service charges, check losses, appraisal expenses, closing attorney expenses
and
other items which have increased significantly as a result of the Cavalry
merger.
Included
in noninterest expense for the three and nine months ended September 30, 2006
is
$218,000 and $1,583,000, respectively, of merger related expenses directly
associated with the Cavalry merger. These charges consisted of integration
costs
incurred in connection with the merger, including accelerated depreciation
associated with software and other technology assets whose useful lives were
shortened as a result of the Cavalry acquisition.
Financial
Condition
Our
consolidated balance sheet at September 30, 2006 reflects significant growth
since December 31, 2005 as a result of our organic growth and the consummation
of our merger with Cavalry. Total assets grew to $2.05 billion at September
30,
2006 from $1.02 billion at December 31, 2005, a 101.8% increase. Total deposits
grew $775 million during the nine months ended September 30, 2006, including
$584 million acquired with the Cavalry merger. Substantially all of the
additional deposits and other fundings were invested in loans, which grew by
$757 million during the nine months ended September 30, 2006, including $551
million in loans acquired in the Cavalry merger.
Loans.
The
composition of loans at September 30, 2006 and at December 31, 2005 and the
percentage (%) of each classification to total loans are summarized as follows
(dollars in thousands):
|
|
September
30, 2006
|
|
December
31, 2005
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Commercial
real estate - Mortgage
|
|
$
|
265,174
|
|
|
18.9
|
%
|
$
|
148,102
|
|
|
22.9
|
%
|
Commercial
real estate - Construction
|
|
|
152,627
|
|
|
10.9
|
%
|
|
30,295
|
|
|
4.7
|
%
|
Commercial
- Other
|
|
|
554,617
|
|
|
39.5
|
%
|
|
239,129
|
|
|
36.9
|
%
|
Total
commercial
|
|
|
972,418
|
|
|
69.2
|
%
|
|
417,526
|
|
|
64.4
|
%
|
Consumer
real estate - Mortgage
|
|
|
292,206
|
|
|
20.8
|
%
|
|
169,953
|
|
|
26.2
|
%
|
Consumer
real estate - Construction
|
|
|
87,890
|
|
|
6.3
|
%
|
|
37,372
|
|
|
5.8
|
%
|
Consumer
- Other
|
|
|
52,887
|
|
|
3.8
|
%
|
|
23,173
|
|
|
3.6
|
%
|
Total
consumer
|
|
|
432,983
|
|
|
30.8
|
%
|
|
230,498
|
|
|
35.6
|
%
|
Total
loans
|
|
$
|
1,405,401
|
|
|
100.0
|
%
|
$
|
648,024
|
|
|
100.0
|
%
|
Primarily
due to the Cavalry merger, we have increased the percentage of our outstanding
loans in commercial and consumer real estate construction significantly. These
types of loans require that we maintain effective credit and construction
monitoring systems. Also as a result of the Cavalry merger, we have increased
our resources in this area so that we can effectively manage this area of
exposure through utilization of experienced professionals who are well-trained
in this type of lending and who have significant experience in our geographic
market.
Non-Performing
Assets. The
specific economic and credit risks associated with our loan portfolio include,
but are not limited to, a general downturn in the economy which could affect
employment rates in our market area, general real estate market deterioration,
interest rate fluctuations, deteriorated or non-existent collateral, title
defects, inaccurate appraisals, financial deterioration of borrowers, fraud,
and
any violation of laws and regulations.
We
attempt to reduce these economic and credit risks by adherence to loan to value
guidelines for collateralized loans, by investigating the creditworthiness
of
the borrower and by monitoring the borrower's financial position. Also, we
establish and periodically review our lending policies and procedures. Banking
regulations limit our exposure by prohibiting loan relationships that exceed
15%
of Pinnacle National’s statutory capital in the case of loans that are not fully
secured by readily marketable or other permissible types of collateral.
Furthermore, we have an internal limit for aggregate indebtedness to a single
borrower of $12 million. Our loan policy requires our board of directors approve
any relationships that exceed this internal limit.
Pinnacle
National discontinues the accrual of interest income when (1) there is a
significant deterioration in the financial condition of the borrower and full
repayment of principal and interest is not expected or (2) the principal or
interest is more than 90 days past due, unless the loan is both well-secured
and
in the process of collection. At September 30, 2006, we had $3,477,000 in loans
on nonaccrual compared to $460,000 at December 31, 2005. The increase in
nonperforming loans between December 31, 2005 and September 30, 2006 was
primarily related to loans acquired from Cavalry and identified as being
impaired as discussed more fully below.
There
was
approximately $1,123,000 in other loans 90 days past due and still accruing
interest at September 30, 2006 compared to no loans at December 31, 2005. At
September 30, 2006 and at December 31, 2005, no loans were deemed to be
restructured loans. The following table is a summary of our nonperforming assets
at September 30, 2006 and December 31, 2005 (dollars in thousands):
|
|
At
Sept. 30,
|
|
At
Dec. 31,
|
|
|
|
2006
|
|
2005
|
|
Nonaccrual
loans (1)
|
|
$
|
3,477
|
|
$
|
460
|
|
Restructured
loans
|
|
|
-
|
|
|
-
|
|
Other
real estate owned
|
|
|
-
|
|
|
-
|
|
Total
nonperforming assets
|
|
|
3,477
|
|
|
460
|
|
Accruing
loans past due 90 days or more
|
|
|
1,123
|
|
|
-
|
|
Total
nonperforming assets and accruing loans past due 90 days or
more
|
|
$
|
4,600
|
|
$
|
460
|
|
Total
loans outstanding
|
|
$
|
1,405,401
|
|
$
|
648,024
|
|
Ratio
of nonperforming assets and accruing loans past due 90 days or more
to
total loans outstanding at end of period
|
|
|
0.33
|
%
|
|
0.07
|
%
|
Ratio
of nonperforming assets and accruing loans past 90 days or more to
total
allowance for loan losses at end of period
|
|
|
30.32
|
%
|
|
5.85
|
%
|
(1)
Interest income that would have been recorded in 2006 related to nonaccrual
loans was $202,000.
Potential
problem assets, which are not included in nonperforming assets, amounted to
approximately $10.8 million, or 0.77% of total loans outstanding at September
30, 2006, compared to $1.3 million, or 0.20% of total loans outstanding at
December 31, 2005. Potential problem assets represent those assets with a
potential weakness or a well-defined weakness and where information about
possible credit problems of borrowers has caused management to have serious
doubts about the borrower’s ability to comply with present repayment terms. This
definition is believed to be substantially consistent with the standards
established by Pinnacle National’s primary regulator for loans classified as
substandard.
Allowance
for Loan Losses (ALL). We
maintain the ALL at a level that our management deems appropriate to adequately
cover the inherent risks in the loan portfolio. As of September 30, 2006 and
December 31, 2005, our allowance for loan losses was $15,172,000 and $7,858,000,
respectively, which our management deemed to be adequate at each of the
respective dates. The significant increase in our ALL was primarily the result
of our merger with Cavalry. The judgments and estimates associated with our
ALL
determination are described under “Critical Accounting Estimates”
above.
Approximately
69% of our loan portfolio at September 30, 2006 consisted of commercial loans
compared to 64% at December 31, 2005. We periodically analyze our loan position
with respect to our borrowers’ industries to determine if a concentration of
credit risk exists to any one or more industries. We have significant credit
exposures arising from loans outstanding and unfunded lines of credit to
borrowers in the home building and land subdividing industry, the trucking
industry and to lessors of residential and commercial properties. We evaluate
our exposure level to these industry groups periodically to determine the amount
of additional allowance allocations due to these concentrations.
The
following is a summary of changes in the allowance for loan losses for the
nine
months ended September 30, 2006 and for the year ended December 31, 2005 and
the
ratio of the allowance for loan losses to total loans as of the end of each
period (dollars in thousands):
|
|
Nine
months ended
Sept.
30, 2006
|
|
Year
ended
Dec.
31, 2005
|
|
Balance
at beginning of period
|
|
$
|
7,858
|
|
$
|
5,650
|
|
Provision
for loan losses
|
|
|
2,680
|
|
|
2,152
|
|
Allowance
from Cavalry acquisition
|
|
|
5,102
|
|
|
-
|
|
Charged-off
loans:
|
|
|
|
|
|
|
|
Commercial
real estate - Mortgage
|
|
|
-
|
|
|
-
|
|
Commercial
real estate - Construction
|
|
|
-
|
|
|
-
|
|
Commercial
- Other
|
|
|
403
|
|
|
61
|
|
Consumer
real estate - Mortgage
|
|
|
24
|
|
|
38
|
|
Consumer
real estate - Construction
|
|
|
-
|
|
|
-
|
|
Consumer
- Other
|
|
|
200
|
|
|
109
|
|
Total
charged-off loans
|
|
|
627
|
|
|
208
|
|
Recoveries
of previously charged-off loans:
|
|
|
|
|
|
|
|
Commercial
real estate - Mortgage
|
|
|
-
|
|
|
-
|
|
Commercial
real estate - Construction
|
|
|
-
|
|
|
-
|
|
Commercial
- Other
|
|
|
(108
|
)
|
|
(3
|
)
|
Consumer
real estate - Mortgage
|
|
|
-
|
|
|
(231
|
)
|
Consumer
real estate - Construction
|
|
|
-
|
|
|
-
|
|
Consumer
- Other
|
|
|
(51
|
)
|
|
(30
|
)
|
Total
recoveries of previously charged-off loans
|
|
|
(159
|
)
|
|
(264
|
)
|
Net
charge-offs (recoveries)
|
|
|
468
|
|
|
(56
|
)
|
Balance
at end of period
|
|
$
|
15,172
|
|
$
|
7,858
|
|
|
|
|
|
|
|
|
|
Ratio
of allowance for loan losses to total loans outstanding at end of
period
|
|
|
1.08
|
%
|
|
1.21
|
%
|
Ratio
of net charge-offs (recoveries) to average loans outstanding for
the
period
|
|
|
0.04
|
%
|
|
(0.01
|
)%
|
As
a
relatively new institution (excluding the impact of Cavalry), we do not have
extensive loss experience comparable to more mature financial institutions;
however, as our loan portfolio matures, we will have additional charge-offs
as
our losses materialize. We consider the amount and nature of our charge-offs
in
determining the adequacy of our allowance for loan losses.
Statement
of Position 03-03, Accounting
for Certain Loans or Debt Securities Acquired in a Transfer
(“SOP
03-03”) addresses accounting for differences between contractual cash flows and
cash flows expected to be collected from an investor's initial investment in
loans or debt securities (loans) acquired in a transfer if those differences
are
attributable, at least in part, to credit quality (i.e., “impaired
loans”). SOP 03-03 does not apply to loans originated by us but does apply
to the loans we acquired in our merger with Cavalry. Our assessment indicated
that Cavalry had approximately $3.9 million of loans to which the application
of
the provisions of SOP 03-03 is required. As a result of the application of
SOP
03-03, we recorded preliminary purchase accounting adjustments to reflect a
reduction in loans and the allowance for loan losses of $1.0 million related
to
these impaired loans thus reducing the carrying value of these loans to $2.9
million at March 15, 2006. All of these loans were classified as nonperforming
at September 30, 2006. The resulting impact on Cavalry’s allowance for loan
losses at March 15, 2006 was as follows:
Impact
of SOP 03-03 on Rutherford County’s allowance for loan losses at March 15,
2006
|
|
Before
Application
of
SOP
03-03
|
|
Impact
of
Application
SOP
03-03
|
|
After
Application
of
SOP
03-03
|
|
Allowance
for loan losses
|
|
$
|
6,129
|
|
$
|
1,027
|
|
$
|
5,102
|
|
Fair
value of Cavalry loans at acquisition date
|
|
|
|
|
|
|
|
$
|
550,700
|
|
Allowance
for loan losses to fair value of Cavalry loans at acquisition
date
|
|
|
1.11
|
%
|
|
|
|
|
0.93
|
%
|
Investments. Our
investment portfolio, consisting primarily of Federal agency bonds, state and
municipal securities and mortgage-backed securities, amounted to $330.8 million
at September 30, 2006 and $279.1 million at December 31, 2005. Our investment
portfolio serves many purposes including serving as a stable source of income,
collateral for public funds and as a liquidity source. The most significant
component of our investment portfolio is our mortgage-backed securities. At
September 30, 2006, the fair value of our mortgage-backed securities was
approximately $219.0 million compared to a fair value at December 31, 2005,
of
approximately $186.9 million. All of these securities were included in our
available-for-sale securities portfolio. A statistical comparison of our
mortgage-backed portfolio at September 30, 2006 and at December 31, 2005 is
as
follows:
|
September
30, 2006
|
December
31, 2005
|
Weighted
average life
|
4.72
years
|
4.81
years
|
Weighted
average coupon
|
5.21
%
|
5.24
%
|
Tax
equivalent yield
|
5.00
%
|
4.74
%
|
Modified
duration (*)
|
3.65
%
|
3.71
%
|
__________
(*)
Modified duration represents an approximation of the change in value of a
security for every 100 basis point increase or decrease in market interest
rates.
Deposits
and Other Borrowings. We
had
approximately $1.59 billion of deposits at September 30, 2006 compared to $810
million at December 31, 2005. Our deposits consist of noninterest and
interest-bearing demand accounts, savings accounts, money market accounts and
time deposits. Additionally, we entered into agreements with certain customers
to sell certain of our securities under agreements to repurchase the security
the following day. These agreements (which are typically associated with
comprehensive treasury management programs for our commercial clients and
provide them with short-term returns for their excess funds) amounted to $122.4
million at September 30, 2006 and $65.8 million at December 31, 2005.
Additionally, at September 30, 2006, we had borrowed $28.7 million in advances
from the Federal Home Loan Bank of Cincinnati compared to $41.5 million at
December 31, 2005.
Generally,
banks classify their funding base as either core funding or non-core funding.
Core funding consists of all deposits other than time deposits issued in
denominations of $100,000 or greater while all other funding is deemed to be
non-core. The following table represents the balances of our deposits and other
fundings and the percentage of each type to the total at September 30, 2006
and
December 31, 2005 (dollars in thousands):
|
|
Sept.
30,
|
|
|
|
Dec.
31,
|
|
|
|
|
|
2006
|
|
Percent
|
|
2005
|
|
Percent
|
|
Core
funding:
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
deposit accounts
|
|
$
|
306,296
|
|
|
17.1
|
%
|
$
|
155,811
|
|
|
16.4
|
%
|
Interest-bearing
demand accounts
|
|
|
199,967
|
|
|
11.2
|
%
|
|
72,521
|
|
|
7.6
|
%
|
Savings
and money market accounts
|
|
|
481,684
|
|
|
26.9
|
%
|
|
304,162
|
|
|
32.1
|
%
|
Time
deposit accounts less than $100,000
|
|
|
151,239
|
|
|
8.5
|
%
|
|
31,408
|
|
|
3.3
|
%
|
Total
core funding
|
|
|
1,139,186
|
|
|
63.7
|
%
|
|
563,902
|
|
|
59.5
|
%
|
Non-core
funding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
deposit accounts greater than $100,000:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public
funds
|
|
|
202,503
|
|
|
11.3
|
%
|
|
106,928
|
|
|
11.3
|
%
|
Brokered
deposits
|
|
|
71,518
|
|
|
4.0
|
%
|
|
55,360
|
|
|
5.8
|
%
|
Other
time deposits
|
|
|
172,032
|
|
|
9.6
|
%
|
|
83,961
|
|
|
8.9
|
%
|
Securities
sold under agreements to repurchase
|
|
|
122,354
|
|
|
6.8
|
%
|
|
65,834
|
|
|
6.9
|
%
|
Federal
Home Loan Bank advances
|
|
|
28,739
|
|
|
1.6
|
%
|
|
41,500
|
|
|
4.4
|
%
|
Subordinated
debt
|
|
|
51,548
|
|
|
2.9
|
%
|
|
30,929
|
|
|
3.3
|
%
|
Total
non-core funding
|
|
|
648,694
|
|
|
36.3
|
%
|
|
384,512
|
|
|
40.5
|
%
|
Totals
|
|
$
|
1,787,880
|
|
|
100.0
|
%
|
$
|
948,414
|
|
|
100.0
|
%
|
Subordinated
debt. On
December 29, 2003, we established PNFP Statutory Trust I; on September 15,
2005
we established PNFP Statutory Trust II; and on September 7, 2006 we established
PNFP Statutory Trust III (“Trust I”; “Trust II”; “Trust III” or collectively,
the “Trusts”). All are wholly-owned statutory business trusts. We are the
sole sponsor of the Trusts and acquired each Trust’s common securities for
$310,000; $619,000 and $619,000, respectively. The Trusts were created for
the
exclusive purpose of issuing 30-year capital trust preferred securities (“Trust
Preferred Securities”) in the aggregate amount of $10,000,000 for Trust I;
$20,000,000 for Trust II and $20,000,000 for Trust III and using the proceeds
to
acquire junior subordinated debentures (“Subordinated Debentures”) issued by
Pinnacle Financial. The sole assets of the Trusts are the Subordinated
Debentures. Our $1,548,000 investment in the Trusts is included in investments
in unconsolidated subsidiaries in the accompanying consolidated balance sheets
and our $51,548,000 obligation is reflected as subordinated debt.
The
Trust
I Preferred Securities bear a floating interest rate based on a spread over
3-month LIBOR (8.19% at September 30, 2006) which is set each quarter and
matures on December 30, 2033. The Trust II Preferred Securities bear a
fixed interest rate of 5.848% per annum thru September 30, 2010 at which time
the securities will bear a floating rate set each quarter based on a spread
over
3-month LIBOR. The Trust II securities mature on September 30, 2035. The
Trust III Preferred Securities bear a floating interest rate based on a spread
over 3-month LIBOR (7.02% at September 30, 2006) which is set each quarter
and
mature on September 30, 2036.
Distributions
are payable quarterly. The Trust Preferred Securities are subject to
mandatory redemption upon repayment of the Subordinated Debentures at their
stated maturity date or their earlier redemption in an amount equal to their
liquidation amount plus accumulated and unpaid distributions to the date of
redemption. We guarantee the payment of distributions and payments for
redemption or liquidation of the Trust Preferred Securities to the extent of
funds held by the Trusts. Pinnacle Financial’s obligations under the
Subordinated Debentures together with the guarantee and other back-up
obligations, in the aggregate, constitute a full and unconditional guarantee
by
Pinnacle Financial of the obligations of the Trusts under the Trust Preferred
Securities.
The
Subordinated Debentures are unsecured, bear interest at a rate equal to the
rates paid by the Trusts on the Trust Preferred Securities and mature on the
same dates as those noted above for the Trust Preferred Securities.
Interest is payable quarterly. We may defer the payment of interest at any
time for a period not exceeding 20 consecutive quarters provided that deferral
period does not extend past the stated maturity. During any such deferral
period, distributions on the Trust Preferred Securities will also be deferred
and our ability to pay dividends on our common shares will be restricted.
Subject
to approval by the Federal Reserve Bank of Atlanta, the Trust Preferred
Securities may be redeemed prior to maturity at our option on or after September
17, 2008 for Trust I; on or after September 30, 2010 for Trust II and September
30, 2011 for Trust III. The Trust Preferred Securities may also be
redeemed at any time in whole (but not in part) in the event of unfavorable
changes in laws or regulations that result in (1) the Trust becoming subject
to
federal income tax on income received on the Subordinated Debentures, (2)
interest payable by the parent company on the Subordinated Debentures becoming
non-deductible for federal tax purposes, (3) the requirement for the Trust
to
register under the Investment Company Act of 1940, as amended, or (4) loss
of
the ability to treat the Trust Preferred Securities as “Tier I capital” under
the Federal Reserve capital adequacy guidelines.
The
Trust
Preferred Securities for the Trusts qualify as Tier I capital under current
regulatory definitions subject to certain limitations. Debt issuance costs
associated with Trust I of $120,000 consisting primarily of underwriting
discounts and professional fees are included in other assets in the accompanying
consolidated balance sheet. These debt issuance costs are being amortized over
ten years using the straight-line method. There are no debt issuance costs
associated with Trust II or Trust III.
Capital
Resources.
At
September 30, 2006 and December 31, 2005, our stockholders’ equity amounted to
$249.1 million and $63.4 million, respectively, or an increase of $185.7
million. This increase was primarily attributable to $171.1 million of common
stock issued in connection with the Cavalry acquisition and $12.6 million in
comprehensive income, which was composed of $12.3 million in net income and
$335,000 of net unrealized holding gains associated with our available-for-sale
portfolio.
Dividends.
Pinnacle
National is subject to restrictions on the payment of dividends to Pinnacle
Financial under federal banking laws and the regulations of the Office of the
Comptroller of the Currency. We, in turn, are also subject to limits on payment
of dividends to our shareholders by the rules, regulations and policies of
federal banking authorities and the laws of the State of Tennessee. We have
not
paid any dividends to date, nor do we anticipate paying dividends to our
shareholders for the foreseeable future. Future dividend policy will depend
on
Pinnacle National's earnings, capital position, financial condition and other
factors.
Market
and Liquidity Risk Management
Our
objective is to manage assets and liabilities to provide a satisfactory,
consistent level of profitability within the framework of established liquidity,
loan, investment, borrowing, and capital policies. Our Asset Liability
Management Committee (“ALCO”) is charged with the responsibility of monitoring
these policies, which are designed to ensure acceptable composition of
asset/liability mix. Two critical areas of focus for ALCO are interest rate
sensitivity and liquidity risk management.
As
a
result of our merger with Cavalry, we are currently reviewing our interest
rate
sensitivity and liquidity risk management systems. We anticipate that during
2006, we may make certain modifications to these risk management systems.
Although these modifications could be significant, we do not believe the impact
of the addition of the net assets of Cavalry will cause our risk levels to
fall
materially outside our internal guidelines.
Interest
Rate Sensitivity.
In the
normal course of business, we are exposed to market risk arising from
fluctuations in interest rates. ALCO measures and evaluates the interest rate
risk so that we can meet customer demands for various types of loans and
deposits. ALCO determines the most appropriate amounts of on-balance sheet
and
off-balance sheet items. Measurements which we use to help us manage interest
rate sensitivity include an earnings simulation model, an economic value of
equity model, and gap analysis computations. These measurements are used in
conjunction with competitive pricing analysis.
Earnings
simulation model. We
believe that interest rate risk is best measured by our earnings simulation
modeling. Forecasted levels of earning assets, interest-bearing liabilities,
and
off-balance sheet financial instruments are combined with ALCO forecasts of
interest rates for the next 12 months and are combined with other factors in
order to produce various earnings simulations. To limit interest rate risk,
we
have guidelines for our earnings at risk which seek to limit the variance of
net
income to less than 10 percent for a 200 basis point change up or down in rates
from management’s flat interest rate forecast over the next twelve months. The
results of our current simulation model would indicate that our net interest
income should increase with a gradual rise in interest rates over the next
twelve months and decrease should interest rates fall over the same
period.
Economic
value of equity. Our
economic value of equity model measures the extent that estimated economic
values of our assets, liabilities and off-balance sheet items will change as
a
result of interest rate changes. Economic values are determined by discounting
expected cash flows from assets, liabilities and off-balance sheet items, which
establishes a base case economic value of equity. To help limit interest rate
risk, we have a guideline stating that for an instantaneous 200 basis point
change in interest rates up or down, the economic value of equity will not
change by more than 20 percent from the base case.
Gap
analysis.
An
asset
or liability is considered to be interest rate-sensitive if it will reprice
or
mature within the time period analyzed (e.g.,, within three months or one year).
The interest rate-sensitivity gap is the difference between the interest-earning
assets and interest-bearing liabilities scheduled to mature or reprice within
such time period. A gap is considered positive when the amount of interest
rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities
(i.e., “asset sensitive”). A gap is considered negative when the amount of
interest rate-sensitive liabilities exceeds the interest rate-sensitive assets
(i.e., “liability sensitive). During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income, while a
positive gap would tend to result in an increase in net interest income.
Conversely, during a period of falling interest rates, a negative gap would
tend
to result in an increase in net interest income, while a positive gap would
tend
to adversely affect net interest income. If our assets and liabilities were
equally flexible and moved concurrently, the impact of any increase or decrease
in interest rates on net interest income would be minimal.
Each
of
the above analyses may not, on its own, be an accurate indicator of how our
net
interest income will be affected by changes in interest rates. Income associated
with interest-earning assets and costs associated with interest-bearing
liabilities may not be affected uniformly by changes in interest rates. In
addition, the magnitude and duration of changes in interest rates may have
a
significant impact on net interest income. For example, although certain assets
and liabilities may have similar maturities or periods of repricing, they may
react in different degrees to changes in market interest rates. Interest rates
on certain types of assets and liabilities fluctuate in advance of changes
in
general market rates, while interest rates on other types may lag behind changes
in general market rates. In addition, certain assets, such as adjustable rate
mortgage loans, have features (generally referred to as "interest rate caps
and
floors") which limit changes in interest rates. Prepayment and early withdrawal
levels also could deviate significantly from those assumed in calculating the
maturity of certain instruments. The ability of many borrowers to service their
debts also may decrease during periods of rising interest rates. ALCO reviews
each of the above interest rate sensitivity analyses along with several
different interest rate scenarios as part of its responsibility to provide
a
satisfactory, consistent level of profitability within the framework of
established liquidity, loan, investment, borrowing, and capital policies.
We
may
also use derivative financial instruments to improve the balance between
interest-sensitive assets and interest-sensitive liabilities and as one tool
to
manage our interest rate sensitivity while continuing to meet the credit and
deposit needs of our customers. At September 30, 2006 and December 31, 2005,
we
had not entered into any derivative contracts to assist managing our interest
rate sensitivity.
Liquidity
Risk Management. The
purpose of liquidity risk management is to ensure that there are sufficient
cash
flows to satisfy loan demand, deposit withdrawals, and our other needs.
Traditional sources of liquidity for a bank include asset maturities and growth
in core deposits. A bank may achieve its desired liquidity objectives from
the
management of its assets and liabilities and by internally generated funding
through its operations. Funds invested in marketable instruments that can be
readily sold and the continuous maturing of other earning assets are sources
of
liquidity from an asset perspective. The liability base provides sources of
liquidity through attraction of increased deposits and borrowing funds from
various other institutions.
Changes
in interest rates also affect our liquidity position. We currently price
deposits in response to market rates and our management intends to continue
this
policy. If deposits are not priced in response to market rates, a loss of
deposits could occur which would negatively affect our liquidity
position.
Scheduled
loan payments are a relatively stable source of funds, but loan payoffs and
deposit flows fluctuate significantly, being influenced by interest rates,
general economic conditions and competition. Additionally, debt security
investments are subject to prepayment and call provisions that could accelerate
their payoff prior to stated maturity. We attempt to price our deposit products
to meet our asset/liability objectives consistent with local market conditions.
Our ALCO is responsible for monitoring our ongoing liquidity needs. Our
regulators also monitor our liquidity and capital resources on a periodic basis.
In
addition, Pinnacle National is a member of the Federal Home Loan Bank of
Cincinnati. As a result, Pinnacle National receives advances from the Federal
Home Loan Bank of Cincinnati, pursuant to the terms of various borrowing
agreements, which assist it in the funding of its home mortgage and commercial
real estate loan portfolios. Pinnacle National has pledged under the borrowing
agreements with the Federal Home Loan Bank of Cincinnati certain qualifying
residential mortgage loans and, pursuant to a blanket lien, all qualifying
commercial mortgage loans as collateral. At September 30, 2006, Pinnacle
National had received advances from the Federal Home Loan Bank of Cincinnati
totaling $28.7 million at the following rates and maturities (dollars in
thousands):
|
|
Amount
|
|
Interest
Rate
|
|
|
|
|
|
|
|
January
26, 2007
|
|
$
|
2,000
|
|
|
3.24
|
|
September
4, 2007
|
|
|
1,000
|
|
|
3.95
|
|
December
29, 2008
|
|
|
10,000
|
|
|
4.97
|
|
January
27, 2009
|
|
|
15,000
|
|
|
5.01
|
|
April
1, 2020
|
|
|
739
|
|
|
2.25
|
|
Total
|
|
$
|
28,739
|
|
|
|
|
Weighted
average interest rate
|
|
|
|
|
|
4.77
|
%
|
At
September 30, 2006, brokered certificates of deposit approximated $71.5 million
which represented 4.0% of total fundings compared to $55.4 million and 5.8%
at
December 31, 2005. We issue these brokered certificates through several
different brokerage houses based on competitive bid. Typically, these funds
are
for varying maturities from 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, 2006, we had no significant commitments for capital expenditures.
However, we are in the process of developing our branch network in the
Nashville/Davidson/Murfreesboro MSA. As a result, we anticipate that we will
enter into contracts to buy property or construct branch facilities and/or
lease
agreements to lease facilities in the Nashville/Davidson/Murfreesboro MSA.
Off-Balance
Sheet Arrangements.
At
September 30, 2006, we had outstanding standby letters of credit of $56.4
million and unfunded loan commitments outstanding of $502.3 million. Because
these commitments generally have fixed expiration dates and most will expire
without being drawn upon, the total commitment level does not necessarily
represent future cash requirements. If needed to fund these outstanding
commitments, Pinnacle National has the ability to liquidate Federal funds sold
or securities available-for-sale, or on a short-term basis to borrow and
purchase Federal funds from other financial institutions. At September 30,
2006,
Pinnacle National had accommodations with upstream correspondent banks for
unsecured short-term advances. These accommodations have various covenants
related to their term and availability, and in most cases must be repaid within
less than a month.
Impact
of Inflation
The
consolidated financial statements and related consolidated financial data
presented herein have been prepared in accordance with accounting principles
generally accepted in the United States and practices within the banking
industry which require the measurement of financial position and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, virtually all the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant impact on a financial institution's performance than the effects
of
general levels of inflation.
Recent
Accounting Pronouncements
FASB
Staff Position on SFAS No. 115-1 and SFAS No. 124-1 (the “FSP”), “The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments,” was
issued in November 2005 and addresses the determination of when an investment
is
considered impaired; whether the impairment is other-than-temporary; and how
to
measure an impairment loss. The FSP also addresses accounting considerations
subsequent to the recognition of an other-than-temporary impairment on a debt
security, and requires certain disclosures about unrealized losses that have
not
been recognized as other-than-temporary impairments. The FSP replaces the
impairment guidance on Emerging Issues Task Force (EITF) Issue No. 03-1 with
references to existing authoritative literature concerning other-than-temporary
determinations. Under the FSP, losses arising from impairment deemed to be
other-than-temporary, must be recognized in earnings at an amount equal to
the
entire difference between the securities cost and its fair value at the
financial statement date, without considering partial recoveries subsequent
to
that date. The FSP also requires that an investor recognize an
other-than-temporary impairment loss when a decision to sell a security has
been
made and the investor does not expect the fair value of the security to fully
recover prior to the expected time of sale. The FSP was effective for reporting
periods beginning after December 15, 2005. The initial adoption of this
statement did not have a material impact on our financial position or results
of
operations.
In
May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error
Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3”
(“SFAS No. 154”). This statement changes the requirements for the accounting for
and reporting of a change in accounting principle. This statement applies to
all
voluntary changes in accounting principle. It also applies to changes required
by an accounting pronouncement in the unusual instance that the pronouncement
does not include specific transition provisions. When a pronouncement includes
specific transition provisions, those provisions should be followed.
APB Opinion No. 20 previously required that most voluntary changes in
accounting principle be recognized by including in net income of the period
of
the change the cumulative effect of changing to the new accounting principle.
SFAS No.154 requires retrospective application to prior period financial
statements of changes in accounting principle, unless it is impracticable to
determine either the period-specific effects or the cumulative effect of the
change. This statement does not change the guidance for reporting the correction
of an error in previously issued financial statements or the change in an
accounting estimate. SFAS No. 154 was effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15,
2005.
SFAS
No.
156, "Accounting for Servicing of Financial Assets - an amendment of FASB
Statement No. 140." SFAS 156requires an entity to recognize a servicing
asset or servicing liability each time it undertakes a contractual obligation
to
service a financial asset in certain circumstances. All separately recognized
servicing assets and servicing liabilities are required to be initially measured
at fair value. Subsequent measurement methods include the amortization method,
whereby servicing assets or servicing liabilities are amortized in proportion
to
and over the period of estimated net servicing income or net servicing loss,
or
the fair value method, whereby servicing assets or servicing liabilities are
measured at fair value at each reporting date and changes in fair value are
reported in earnings in the period in which they occur. If the amortization
method is used, an entity must assess servicing assets or servicing liabilities
for impairment or increased obligation based on the fair value at each reporting
date. SFAS No. 156 is effective for fiscal years beginning after December
15, 2006. We are currently evaluating the impact of SFAS No. 156 on our
consolidated financial statements.
In
July
2006, the FASB issued FASB Interpretation 48, “Accounting for Income Tax
Uncertainties” (“FIN 48”). FIN 48 defines the threshold for recognizing the
benefits of tax return positions in the financial statements as
“more-likely-than-not” to be sustained by the taxing authority. The recently
issued literature also provides guidance on the derecognition, measurement
and
classification of income tax uncertainties, along with any related interest
and
penalties. FIN 48 also includes guidance concerning accounting for income tax
uncertainties in interim periods and increases the level of disclosures
associated with any recorded income tax uncertainties. FIN 48 is effective
for
fiscal years beginning after December 15, 2006. The differences between the
amounts recognized in the statements of financial position prior to the adoption
of FIN 48 and the amounts reported after adoption will be accounted for as
a
cumulative-effect adjustment recorded to the beginning balance of retained
earnings. We are currently evaluating the impact of FIN 48 on our consolidated
financial statements.
In
June
2006, the Emerging Issues Task Force issued EITF No. 06-4, “Accounting for
Deferred Compensation and Postretirement Benefits Aspects of Endorsement
Split-Dollar Life Insurance Arrangements.” The EITF concluded that deferred
compensation or postretirement benefit aspects of an endorsement split-dollar
life insurance arrangement should be recognized as a liability by the employer
and the obligation is not effectively settled by the purchase of a life
insurance policy. The effective date is for fiscal years beginning after
December 15, 2006. We are currently evaluating the impact of EITF No. 06-4
on
our consolidated financial statements.
In
June
2006, the Emerging Issues Task Force issued EITF No. 06-5, “Accounting for
Purchases of Life Insurance - Determining the Amount that Could Be Realized
in
Accordance with FASB Tech Bulletin 85-4.” The EITF concluded that a policyholder
should consider any additional amounts included in the contractual terms of
the
life insurance policy in determining the “amount that could be realized under
the insurance contract.” For group policies with multiple certificates or
multiple policies with a group rider, the EITF also tentatively concluded that
the amount that could be realized should be determined at the individual policy
or certificate level, i.e., amounts that would be realized only upon
surrendering all of the policies or certificates would not be included when
measuring the assets. The effective date is for fiscal years beginning after
December 15, 2006. We are currently evaluating the impact of EITF No. 06-5
on
our consolidated financial statements.
SFAS
No.
157, “Fair Value Measurements” - SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles
and expands disclosures about fair value measurements. SFAS No. 157 applies
only
to fair-value measurements that are already required or permitted by other
accounting standards and is expected to increase the consistency of those
measurements. The definition of fair value focuses on the exit
price,
i.e.,
the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date, not the entry
price,
i.e.,
the price that would be paid to acquire the asset or received to assume the
liability at the measurement date. The statement emphasizes that fair value
is a
market-based measurement; not an entity-specific measurement. Therefore, the
fair value measurement should be determined based on the assumptions that market
participants would use in pricing the asset or liability. The effective date
for
SFAS No. 157 is for fiscal years beginning
after
November 15, 2007, and interim periods within those fiscal years. Pinnacle
Financial is currently evaluating the impact of EITF 06-5 on its consolidated
financial statements.
FASB
Statement No. 158, “An Amendment to Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans” was issued September 29, 2006. SFAS No.
158 requires the recognition on the balance sheet of the overfunded or
underfunded status of a defined benefit postretirement obligation measured
as
the difference between the fair value of plan assets and the benefit obligation.
Recognition of “delayed” items should be considered in other comprehensive
income. The effective date of SFAS No. 158 for public entities is for fiscal
years ending
after
December 15, 2006. Pinnacle Financial does not anticipate that SFAS No. 158
will
have a material impact on Pinnacle Financial’s consolidated financial
statements.
In
September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
Accounting Bulletin No. 108, “Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements” (“SAB 108”). SAB 108 provides interpretive guidance on how the
effects of the carryover or reversal of prior year misstatements should be
considered in quantifying a current year misstatement. The SEC staff believes
that registrants should quantify errors using both the balance sheet and income
statement approach when quantifying a misstatement that, when all relevant
quantitative and qualitative factors are considered, is material. SAB 108 is
effective for our fiscal year ending December 31, 2006. We are currently
evaluating the impact of SAB 108 on the Company’s consolidated financial
statements.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The
information required by this Item 3 is included on pages 44 through
46 of
Item 2
- “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Pinnacle
Financial maintains disclosure controls and procedures, as defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange
Act”), that are designed to ensure that information required to be disclosed
by
it in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms and that such information is accumulated and communicated
to Pinnacle Financial’s management, including its Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. Pinnacle Financial carried out an evaluation, under
the
supervision and with the participation of its management, including its Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of its disclosure controls and procedures as of the
end of
the period covered by this report. Based on the evaluation of these disclosure
controls and procedures, the Chief Executive Officer and Chief Financial
Officer
concluded that Pinnacle Financial’s disclosure controls and procedures were
effective.
Changes
in Internal Controls
For
the
three months ended September 30, 2006, Pinnacle Financial continued to expand
its internal control system over financial reporting to incorporate procedures
specifically related to its merger with Cavalry Bancorp, Inc. We reviewed
the
financial information obtained from Cavalry from April 1, 2006 thru the date
such information was integrated into Pinnacle Financial’s financial data systems
and performed additional procedures with respect to such information in order
to
determine its accuracy and reliability. Pinnacle Financial anticipates that
it
will continue to monitor and enhance its system of internal controls over
financial reporting in the fourth quarter of 2006, particularly with respect
to
the continued integration of Cavalry.
There
were no other changes in Pinnacle Financial’s internal control over financial
reporting during Pinnacle Financial’s fiscal quarter ended September 30, 2006
that have materially affected, or are reasonably likely to materially affect,
Pinnacle Financial’s internal control over financial reporting.
ITEM
1. LEGAL PROCEEDINGS
There
are
no material pending legal proceedings to which the Company is a party or
of
which any of their property is the subject.
ITEM
1A. RISK FACTORS
There
have been no material changes to our risk factors as previously disclosed
in
Part I, Item IA of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2005.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)
|
Not
applicable
|
(b)
|
Not
applicable
|
(c)
|
The
Company did not repurchase any shares of the Company’s common stock during
the quarter ended September 30, 2006.
|
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM
5. OTHER INFORMATION
None
ITEM
6. EXHIBITS
10.1
|
Cavalry
Bancorp, Inc. 1999 Stock Option Plan
|
10.2
|
Amendment
No. 1 to Cavalry Bancorp, Inc. 1999 Stock Option Plan
|
10.3
|
Amendment
No. 1 to Pinnacle Financial Partners, Inc. 2000 Stock Incentive
Plan
|
10.4
|
Amendment
No. 3 to Pinnacle Financial Partners, Inc. 2004 Equity Incentive
Plan
|
10.5
|
Form
of Nonqualified Stock Option Agreement
|
31.1
|
Certification
pursuant to Rule 13a-14(a)/15d-14(a)
|
31.2
|
Certification
pursuant to Rule 13a-14(a)/15d-14(a)
|
32.1
|
Certification
pursuant to 18 USC Section 1350 - Sarbanes-Oxley Act of 2002
|
32.2
|
Certification
pursuant to 18 USC Section 1350 - Sarbanes-Oxley Act of 2002
|
Pinnacle
Financial is a party to certain agreements entered into in connection with
the
offering by PNFP Statutory Trust III of $20,000,000 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 issued by PNFP Statutory Trust III,
as
well as similar securities issued by PNFP Statutory Trust I and PNFP Statutory
Trust II, 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 will, however, furnish
copies of the various documents and agreements associated with the trust
preferred securities to the Securities and Exchange Commission upon
request.
SIGNATURES
Pursuant
to the requirements of 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
8, 2006
|
|
President
and Chief Executive Officer
|
|
|
/s/
Harold R. Carpenter
|
|
|
Harold
R. Carpenter
|
November
8, 2006
|
|
Chief
Financial Officer
|