Pinnacle Financial Partners
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(mark one)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2008
or
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o |
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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)
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Tennessee
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62-1812853 |
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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211 Commerce Street, Suite 300, Nashville, Tennessee
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37201 |
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(Address of principal executive offices)
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(Zip Code) |
(615) 744-3700
(Registrants 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.
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definitions of large accelerated filer, accelerated filer and
smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large Accelerated Filer o
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Accelerated Filer
x |
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Non-accelerated Filer o
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Smaller reporting company o |
(do not check if you are a smaller |
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reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No x
As of May 7, 2008 there were 22,596,497 shares of common stock, $1.00 par value per share, issued
and outstanding.
Pinnacle Financial Partners, Inc.
Report on Form 10-Q
March 31, 2008
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 managements 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 Financials actual
results may differ materially from the results anticipated in
forward-looking statements due to a variety of factors. Such factors
are described below in Item 1A. Risk Factors and include, without
limitation, (i) unanticipated deterioration in the financial
condition of borrowers resulting in significant increases in loan
losses and provisions for those losses, (ii) increased competition
with other financial institutions, (iii) lack of sustained growth in
the economy in the Nashville and Knoxville, Tennessee areas, (iv)
rapid fluctuations or unanticipated changes in interest rates, (v)
the inability of our bank subsidiary, Pinnacle National Bank, to
satisfy regulatory requirements for its expansion plans, and (vi)
changes in state or federal legislation or regulations applicable to
financial service providers, including banks. Many of such factors
are beyond Pinnacle Financials ability to control or predict, and
readers are cautioned not to put undue reliance on such
forward-looking statements. Pinnacle Financial does not intend to
update or reissue any forward-looking statements contained in this
report as a result of new information or other circumstances that may
become known to Pinnacle Financial. Forward-looking statements made
by us in this report are also subject to those risks identified
within Item 1A. Risk Factors.
Page 1
Item 1.
Part I. FINANCIAL INFORMATION
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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March 31, |
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December 31, |
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2008 |
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2007 |
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ASSETS |
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Cash and noninterest-bearing due from banks |
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$ |
68,352,893 |
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$ |
76,941,931 |
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Interest-bearing due from banks |
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26,890,349 |
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24,706,966 |
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Federal funds sold |
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21,043,348 |
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20,854,966 |
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Cash and cash equivalents |
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116,286,590 |
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122,503,863 |
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Securities available-for-sale, at fair value |
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494,114,484 |
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495,651,939 |
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Securities held-to-maturity (fair value of $11,375,050 and
$26,883,473 at March 31, 2008 and December 31, 2007, respectively) |
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11,262,901 |
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27,033,356 |
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Mortgage loans held-for-sale |
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13,672,849 |
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11,251,652 |
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Loans |
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2,866,535,567 |
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2,749,640,689 |
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Less allowance for loan losses |
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(29,871,384 |
) |
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(28,470,207 |
) |
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Loans, net |
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2,836,664,183 |
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2,721,170,482 |
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Premises and equipment, net |
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69,168,517 |
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68,385,946 |
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Other investments |
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24,752,783 |
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22,636,029 |
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Accrued interest receivable |
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16,630,336 |
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18,383,004 |
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Goodwill |
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242,107,449 |
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243,573,636 |
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Core deposit intangible, net |
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17,935,955 |
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17,325,988 |
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Other assets |
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46,690,061 |
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46,254,566 |
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Total assets |
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$ |
3,889,286,108 |
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$ |
3,794,170,461 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Deposits: |
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Non-interest-bearing |
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$ |
429,289,392 |
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$ |
400,120,147 |
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Interest-bearing |
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406,906,848 |
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410,661,187 |
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Savings and money market accounts |
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757,776,325 |
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742,354,465 |
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Time |
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1,373,052,003 |
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1,372,183,317 |
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Total deposits |
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2,967,024,568 |
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2,925,319,116 |
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Securities sold under agreements to repurchase |
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171,186,458 |
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156,070,830 |
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Federal Home Loan Bank advances and other borrowings |
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168,605,882 |
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141,666,133 |
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Subordinated debt |
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82,476,000 |
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82,476,000 |
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Accrued interest payable |
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9,679,145 |
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10,374,538 |
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Other liabilities |
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13,155,622 |
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11,653,550 |
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Total liabilities |
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3,412,127,675 |
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3,327,560,167 |
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Stockholders equity: |
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Preferred stock, no par value; 10,000,000 shares authorized; no
shares issued and outstanding |
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Common stock, par value $1.00; 90,000,000 shares authorized;
22,467,263 issued and outstanding at March 31, 2008
and 22,264,817 issued and outstanding at December 31,
2007 |
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22,467,263 |
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22,264,817 |
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Additional paid-in capital |
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391,942,152 |
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390,977,308 |
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Retained earnings |
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59,616,770 |
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54,150,679 |
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Accumulated other comprehensive income (loss), net of taxes |
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3,132,248 |
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(782,510 |
) |
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Total stockholders equity |
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477,158,433 |
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466,610,294 |
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Total liabilities and stockholders equity |
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$ |
3,889,286,108 |
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$ |
3,794,170,461 |
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See accompanying notes to consolidated financial statements.
Page 2
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
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Three months ended |
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March 31, |
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2008 |
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2007 |
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Interest income: |
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Loans, including fees |
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$ |
45,392,162 |
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$ |
28,977,224 |
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Securities: |
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Taxable |
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4,637,277 |
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3,346,120 |
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Tax-exempt |
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1,351,037 |
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669,519 |
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Federal funds sold and other |
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780,917 |
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746,379 |
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Total interest income |
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52,161,393 |
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33,739,242 |
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Interest expense: |
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Deposits |
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21,085,633 |
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13,537,263 |
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Securities sold under agreements to repurchase |
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832,053 |
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1,712,091 |
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Federal funds purchased and other borrowings |
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2,884,586 |
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1,407,460 |
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Total interest expense |
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24,802,272 |
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16,656,814 |
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Net interest income |
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27,359,121 |
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17,082,428 |
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Provision for loan losses |
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1,591,123 |
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787,966 |
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Net interest income after provision for loan losses |
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25,767,998 |
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16,294,462 |
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Noninterest income: |
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Service charges on deposit accounts |
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2,573,737 |
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1,797,149 |
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Investment services |
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1,268,248 |
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|
734,560 |
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Insurance sales commissions |
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1,063,663 |
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|
636,962 |
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Gain on loans and loan participations sold, net |
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656,088 |
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|
363,306 |
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Trust fees |
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505,000 |
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|
420,290 |
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Other noninterest income |
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2,300,667 |
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1,073,316 |
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Total noninterest income |
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8,367,403 |
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5,025,583 |
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Noninterest expense: |
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Salaries and employee benefits |
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13,866,737 |
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8,266,501 |
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Equipment and occupancy |
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4,276,273 |
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2,164,702 |
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Marketing and other business development |
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|
375,871 |
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|
251,735 |
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Postage and supplies |
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|
648,340 |
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|
454,916 |
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Amortization of core deposit intangible |
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|
766,033 |
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|
515,754 |
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Other noninterest expense |
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|
2,452,641 |
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1,470,083 |
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Merger related expense |
|
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3,105,763 |
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Total noninterest expense |
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25,491,658 |
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13,123,691 |
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Income before income taxes |
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8,643,743 |
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8,196,354 |
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Income tax expense |
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2,578,953 |
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2,594,513 |
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Net income |
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$ |
6,064,790 |
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$ |
5,601,841 |
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Per share information: |
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Basic net income per common share |
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$ |
0.27 |
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$ |
0.36 |
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Diluted net income per common share |
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$ |
0.26 |
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$ |
0.34 |
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Weighted average shares outstanding: |
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Basic |
|
|
22,331,398 |
|
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|
15,433,442 |
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Diluted |
|
|
23,484,754 |
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|
16,617,484 |
|
See accompanying notes to consolidated financial statements.
Page 3
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
For the three months ended March 31, 2008 and 2007
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Common Stock |
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Accumulated |
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Additional |
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Other |
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Total |
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Paid-in |
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Retained |
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Comprehensive |
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Stockholders' |
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Shares |
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Amount |
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Capital |
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Earnings |
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Income (Loss) |
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Equity |
|
Balances, December 31, 2006 |
|
|
15,446,074 |
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|
$ |
15,446,074 |
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|
$ |
211,502,516 |
|
|
$ |
31,109,324 |
|
|
$ |
(2,040,893 |
) |
|
$ |
256,017,021 |
|
Exercise of employee common
stock options and related
tax benefits |
|
|
58,475 |
|
|
|
58,475 |
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|
|
389,808 |
|
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|
|
|
|
|
|
|
|
|
448,283 |
|
Issuance of restricted
common shares pursuant to
2004 Equity Incentive Plan |
|
|
26,426 |
|
|
|
26,426 |
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|
|
(26,426 |
) |
|
|
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|
|
|
|
|
|
|
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|
Compensation expense for
restricted stock |
|
|
|
|
|
|
|
|
|
|
105,282 |
|
|
|
|
|
|
|
|
|
|
|
105,282 |
|
Compensation expense for
stock options |
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|
|
|
|
|
|
|
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|
362,000 |
|
|
|
|
|
|
|
|
|
|
|
362,000 |
|
Comprehensive income: |
|
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|
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Net income |
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|
|
|
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|
|
|
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|
5,601,841 |
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|
|
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|
5,601,841 |
|
Net unrealized holding
gains on
available-for-sale
securities, net of
deferred taxes of $234,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
382,094 |
|
|
|
382,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
5,983,935 |
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|
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|
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|
|
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|
|
|
|
|
|
|
Balances, March 31, 2007 |
|
|
15,530,975 |
|
|
$ |
15,530,975 |
|
|
$ |
212,333,180 |
|
|
$ |
36,711,165 |
|
|
$ |
(1,658,799 |
) |
|
$ |
262,916,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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|
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|
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|
|
|
|
|
|
Balances, December 31, 2007 |
|
|
22,264,817 |
|
|
$ |
22,264,817 |
|
|
$ |
390,977,308 |
|
|
$ |
54,150,679 |
|
|
$ |
(782,510 |
) |
|
$ |
466,610,294 |
|
Cumulative effect of change
in accounting principle due
to adoption of EITF 06-4,
net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(598,699 |
) |
|
|
|
|
|
|
(598,699 |
) |
Exercise of employee common
stock options and stock
appreciation rights and
related tax benefits |
|
|
62,073 |
|
|
|
62,073 |
|
|
|
623,276 |
|
|
|
|
|
|
|
|
|
|
|
685,349 |
|
Issuance of restricted
common shares pursuant to
2004 Equity Incentive Plan |
|
|
140,373 |
|
|
|
140,373 |
|
|
|
(140,373 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense for
restricted stock |
|
|
|
|
|
|
|
|
|
|
(32,641 |
) |
|
|
|
|
|
|
|
|
|
|
(32,641 |
) |
Compensation expense for
stock options |
|
|
|
|
|
|
|
|
|
|
514,582 |
|
|
|
|
|
|
|
|
|
|
|
514,582 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,064,790 |
|
|
|
|
|
|
|
6,064,790 |
|
Net unrealized holding
gains on
available-for-sale
securities, net of
deferred taxes of $2,404,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,914,758 |
|
|
|
3,914,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,979,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, March 31, 2008 |
|
|
22,467,263 |
|
|
$ |
22,467,263 |
|
|
$ |
391,942,152 |
|
|
$ |
59,616,770 |
|
|
$ |
3,132,248 |
|
|
$ |
477,158,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
Page 4
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,064,790 |
|
|
$ |
5,601,841 |
|
Adjustments to reconcile net income to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
Net amortization of premium on securities |
|
|
182,563 |
|
|
|
132,221 |
|
Depreciation and net amortization |
|
|
1,112,113 |
|
|
|
1,823,194 |
|
Provision for loan losses |
|
|
1,591,123 |
|
|
|
787,966 |
|
Gains on loans and loan participations sold, net |
|
|
(656,088 |
) |
|
|
(363,306 |
) |
Stock-based compensation expense |
|
|
481,941 |
|
|
|
467,282 |
|
Deferred tax (benefit) expense |
|
|
1,487,344 |
|
|
|
(1,310,271 |
) |
Excess tax benefit from stock compensation |
|
|
(50,299 |
) |
|
|
(20,742 |
) |
Mortgage loans held for sale: |
|
|
|
|
|
|
|
|
Loans originated |
|
|
(61,526,765 |
) |
|
|
(36,739,515 |
) |
Loans sold |
|
|
59,757,305 |
|
|
|
31,044,228 |
|
Increase in other assets |
|
|
273,098 |
|
|
|
2,035,596 |
|
Decrease in other liabilities |
|
|
(257,260 |
) |
|
|
(2,504,034 |
) |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
8,459,865 |
|
|
|
954,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Purchases of securities available-for-sale |
|
|
(57,529,865 |
) |
|
|
(3,355,360 |
) |
Maturities, prepayments and calls of securities available-for-sale |
|
|
65,224,367 |
|
|
|
9,928,338 |
|
Maturities, prepayments and calls of securities held-to-maturity |
|
|
15,750,000 |
|
|
|
150,000 |
|
Increase in loans, net |
|
|
(119,667,223 |
) |
|
|
(56,801,579 |
) |
Purchases of premises and equipment and software |
|
|
(2,603,806 |
) |
|
|
(2,292,955 |
) |
Purchases of other investments |
|
|
(1,486,800 |
) |
|
|
(718,846 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(100,313,327 |
) |
|
|
(53,090,402 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Net increase in deposits |
|
|
42,735,290 |
|
|
|
78,001,234 |
|
Net increase (decrease) in securities sold under agreements to repurchase |
|
|
15,115,628 |
|
|
|
(24,064,130 |
) |
Net increase (decrease) in Federal funds purchased |
|
|
(39,668,000 |
) |
|
|
19,907,000 |
|
Advances from Federal Home Loan Bank: |
|
|
|
|
|
|
|
|
Issuances |
|
|
70,000,000 |
|
|
|
|
|
Payments |
|
|
(3,336,883 |
) |
|
|
(27,013,609 |
) |
Exercise of common stock options and stock appreciation rights |
|
|
739,855 |
|
|
|
427,541 |
|
Excess tax benefit from stock compensation |
|
|
50,299 |
|
|
|
20,742 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
85,636,189 |
|
|
|
47,278,778 |
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(6,217,273 |
) |
|
|
(4,857,164 |
) |
Cash and cash equivalents, beginning of period |
|
|
122,503,863 |
|
|
|
92,518,850 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
116,286,590 |
|
|
$ |
87,661,686 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
Page 5
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 the
Nashville-Davidson-Rutherford-Franklin and Knoxville Metropolitan Statistical Areas.
In addition to Pinnacle National, Pinnacle Financial, for the time period following its merger
with Mid-America Bancshares, Inc. (Mid-America) on November 30, 2007 through February 29, 2008,
conducted banking operations through the two banks formerly owned by Mid-America: PrimeTrust Bank
in Nashville, Tennessee and Bank of the South in Mt. Juliet, Tennessee. On February 29, 2008,
Pinnacle National purchased all of the assets and assumed all of the liabilities of PrimeTrust Bank
and contemporaneously, through a series of transactions, sold the charter (and rights to operate a
branch in Tennessee) of PrimeTrust Bank to an unaffiliated out-of-state third party for $500,000.
Pinnacle Financial also merged Bank of the South into Pinnacle National on that date. References
to Pinnacle National as of December 31, 2007 include PrimeTrust Bank and Bank of the South.
Basis of Presentation The accompanying unaudited consolidated financial statements have
been prepared in accordance with instructions to Form 10-Q and therefore do not include all
information and footnotes necessary for a fair presentation of financial position, results of
operations, and cash flows in conformity with U.S. generally accepted accounting principles All
adjustments consisting of normally recurring accruals that, in the option of management, are
necessary for a fair presentation of the financial position and results of operations for the
periods covered by the report have been included. The accompanying unaudited consolidated
financial statements should be read in conjunction with the Pinnacle Financial consolidated
financial statements and related notes appearing the 2007 Annual Report previously filed on Form
10-K.
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, PNFP Statutory Trust IV and Collateral Plus, LLC, are affiliates of Pinnacle Financial and are
included in these consolidated financial statements pursuant to the equity method of accounting.
Significant intercompany transactions and accounts are eliminated in
consolidation.
Use of Estimates The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities
as of the balance sheet date and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Material estimates that are particularly
susceptible to significant change in the near term include the determination of the allowance for
loan losses.
Cash Flow Information The following supplemental cash flow information addresses certain
cash payments and noncash transactions for the three months ended March 31, 2008 and 2007 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Cash Payments: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
25,035,879 |
|
|
$ |
16,469,389 |
|
Income taxes |
|
|
|
|
|
|
1,100,000 |
|
|
|
|
|
|
|
|
|
|
Noncash Transactions: |
|
|
|
|
|
|
|
|
Loans charged-off to the allowance for loan losses |
|
|
757,276 |
|
|
|
187,818 |
|
Loans foreclosed upon with repossessions transferred to other assets |
|
|
2,855,967 |
|
|
|
110,570 |
|
Net unrealized holding gains on available-for-sale securities, net
of deferred taxes |
|
|
3,914,758 |
|
|
|
382,094 |
|
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, common stock appreciation rights, warrants and restricted
shares. The dilutive effect of outstanding options, common stock appreciation rights, warrants and
restricted shares is reflected in diluted earnings per share by application of the treasury stock
method.
Page 6
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of March 31, 2008, there were 2,457,000 stock options and 14,000 stock appreciation rights
outstanding to purchase common shares. As of March 31, 2007, there were 1,846,000 stock options
outstanding to purchase common shares. Most of these options have exercise prices and compensation
costs attributable to current services, which when considered in relation to the average market
price of Pinnacle Financials common stock, are considered dilutive and are considered in Pinnacle
Financials diluted income per share calculation for the three months ended March 31, 2008 and
2007. There were common stock options of 481,000 and 618,000 outstanding as of March 31, 2008 and
2007, respectively, which were considered anti-dilutive and thus have not been considered in the
fully-diluted share calculations below. Additionally, as of March 31, 2008 and 2007, Pinnacle
Financial had outstanding warrants to purchase 395,000 common shares which have been considered in
the calculation of Pinnacle Financials diluted income per share for the three months ended March
31, 2008 and 2007.
The following is a summary of the basic and diluted earnings per share calculation for the
three months ended March 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Basic earnings per share calculation: |
|
|
|
|
|
|
|
|
Numerator - Net income |
|
$ |
6,064,790 |
|
|
$ |
5,601,841 |
|
|
|
|
|
|
|
|
|
|
Denominator - Average common shares outstanding |
|
|
22,331,398 |
|
|
|
15,433,442 |
|
Basic net income per share |
|
$ |
0.27 |
|
|
$ |
0.36 |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share calculation: |
|
|
|
|
|
|
|
|
Numerator - Net income |
|
$ |
6,064,790 |
|
|
$ |
5,601,841 |
|
|
|
|
|
|
|
|
|
|
Denominator - Average common shares outstanding |
|
|
22,331,398 |
|
|
|
15,433,442 |
|
Dilutive shares contingently issuable |
|
|
1,153,356 |
|
|
|
1,184,042 |
|
|
|
|
|
|
|
|
Average diluted common shares outstanding |
|
|
23,484,754 |
|
|
|
16,617,484 |
|
|
|
|
|
|
|
|
Diluted net income per share |
|
$ |
0.26 |
|
|
$ |
0.34 |
|
Newly Adopted Accounting Pronouncements
Split-Dollar Life Insurance Arrangements Pinnacle Financial acquired Cavalry Banking, Inc.
in March of 2006. Certain executives and directors of Cavalry Banking, Inc. were participants in a
deferred compensation arrangement which included split-dollar life insurance arrangements. In
September 2006, the FASB ratified the consensuses reached by the Task Force on Issue No. 06-4 (EITF
06-4) Accounting for Deferred Compensation and Postretirement Benefit 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. On January 1, 2008, we accounted for this EITF as a change in accounting
principle and recorded a liability of $985,000 along with a corresponding adjustment to beginning
retained earnings, net of tax.
Fair Value Measurement - In September 2006, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 157 (SFAS 157), Fair Value
Measurements SFAS 157, which defines fair value, establishes a framework for measuring fair
value in U.S. generally accepted accounting principles and expands disclosures about fair value
measurements. SFAS 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-
Page 7
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 partially adopted SFAS 157 effective January 1,
2008. The adoption of SFAS 157 had no impact on the consolidated financial statements of Pinnacle
Financial. SFAS 157 has not been applied to nonfinancial assets and liabilities pursuant to FSP
FAS 157-2. This standard is applicable for nonfinancial assets and liabilities for fiscal periods
beginning after November 30, 2008.
In February of 2007, the FASB issued SFAS No. 159 (SFAS 159), The Fair Value Option for
Financial Assets and Financial Liabilities, which gives entities the option to measure eligible
financial assets, and financial liabilities at fair value on an instrument by instrument basis,
that are otherwise not permitted to be accounted for at fair value under other accounting
standards. The election to use the fair value option is available when an entity first recognizes a
financial asset or financial liability. Subsequent changes in fair value must be recorded in
earnings. This statement was effective as of January 1, 2008; however it had no impact on the
consolidated financial statements of Pinnacle Financial because it did not elect the fair value
option for any financial instrument not presently being accounted for at fair value.
Pinnacle Financial has an established process for determining fair values. Fair value is based
upon quoted market prices, where available. If listed prices or quotes are not available, fair
value is based upon internally developed models or processes that use primarily market-based or
independently-sourced market data, including interest rate yield curves, option volatilities and
third party information. Valuation adjustments may be made to ensure that financial instruments are
recorded at fair value. Furthermore, while Pinnacle Financial believes its valuation methods are
appropriate and consistent with other market participants, the use of different methodologies, or
assumptions, to determine the fair value of certain financial instruments could result in a
different estimate of fair value at the reporting date.
Valuation Hierarchy
SFAS 157 establishes a three-level valuation hierarchy for disclosure of fair value
measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of
an asset or liability as of the measurement date. The three levels are defined as follows.
|
|
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or
liabilities in active markets. |
|
|
|
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in
active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for
substantially the full term of the financial instrument. |
|
|
|
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
A financial instruments categorization within the valuation hierarchy is based upon the
lowest level of input that is significant to the fair value measurement. Following is a
description of the valuation methodologies used for instruments measured at fair value, as well as
the general classification of such instruments pursuant to the valuation hierarchy.
Assets
Securities Where quoted prices are available in an active market, securities are classified
within level 1 of the valuation hierarchy. Level 1 securities include highly liquid government
securities and certain other products. If quoted market prices are not available, then fair values
are estimated by using pricing models, quoted prices of securities with similar characteristics, or
discounted cash flows. In certain cases where there is limited activity or less transparency around
inputs to the valuation, securities are classified within level 3 of the valuation hierarchy.
Mortgage loans held-for-sale - Mortgage loans held-for-sale are carried at fair value and are
classified within level 2 of the valuation hierarchy. The inputs for valuation of these assets are
based on the anticipated sales price of these loans as the loans are usually sold within a few
weeks of their origination.
Page 8
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Impaired loans A loan is considered to be impaired when it is probable Pinnacle Financial
will be unable to collect all principal and interest payments due in accordance with the
contractual terms of the loan agreement. Individually identified impaired loans are measured based
on the present value of expected payments using the loans original effective rate as the discount
rate, the loans observable market price, or the fair value of the collateral if the loan is
collateral dependent. If the recorded investment in the impaired loan exceeds the measure of fair
value, a valuation allowance may be established as a component of the allowance for loan losses.
Impaired loans are classified within level 3 of the hierarchy.
Other investments Included in other investments are investments in certain nonpublic
private equity funds. The valuation of nonpublic private equity investments requires significant
management judgment due to the absence of quoted market prices, inherent lack of liquidity and the
long-term nature of such assets. These investments are valued initially based upon transaction
price. The carrying values of other investments are adjusted either upwards or downwards from the
transaction price to reflect expected exit values as evidenced by financing and sale transactions
with third parties, or when determination of a valuation adjustment is confirmed through ongoing
reviews by senior investment managers. A variety of factors are reviewed and monitored to assess
positive and negative changes in valuation including, but not limited to, current operating
performance and future expectations of the particular investment, industry valuations of comparable
public companies, changes in market outlook and the third-party financing environment over time. In
determining valuation adjustments resulting from the investment review process, emphasis is placed
on current company performance and market conditions. These equity investments are included in
level 3 of the valuation hierarchy.
Other assets Included in other assets are certain assets carried at fair value, including
the cash value of bank owned life insurance policies and interest rate swap agreements. The
carrying amount of bank owned life insurance is based on information received from the insurance
carriers indicating the financial performance of the policies and the amount Pinnacle Financial
would receive should the policies be surrendered. The carrying amount of interest rate swap
agreements is based on information obtained from a third party bank. Pinnacle Financial reflects
these assets within level 2 of the valuation hierarchy.
Liabilities
Other liabilities Pinnacle Financial has certain liabilities carried at fair value
including certain interest rate swap agreements. The fair value of these liabilities is based on
information obtained from a third party bank and is reflected within level 2 of the valuation
hierarchy.
The following table presents the financial instruments carried at fair value as of March 31,
2008, by caption on the consolidated balance sheets and by SFAS 157 valuation hierarchy (as
described above) (dollars in thousands):
Assets and liabilities measured at fair value on a recurring basis as of March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
models with |
|
|
Internal models |
|
|
|
carrying |
|
|
Quoted |
|
|
significant |
|
|
with significant |
|
|
|
value in the |
|
|
market prices |
|
|
observable |
|
|
unobservable |
|
|
|
consolidated |
|
|
in an active |
|
|
market |
|
|
market |
|
|
|
balance sheet |
|
|
market |
|
|
parameters |
|
|
parameters |
|
|
|
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Available-for-sale securities |
|
$ |
494,114 |
|
|
$ |
|
|
|
$ |
494,114 |
|
|
$ |
|
|
Mortgage loans held-for-sale |
|
|
13,673 |
|
|
|
|
|
|
|
13,673 |
|
|
|
|
|
Other investments |
|
|
1,329 |
|
|
|
|
|
|
|
|
|
|
|
1,329 |
|
Other assets |
|
|
37,401 |
|
|
|
|
|
|
|
2,609 |
|
|
|
34,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value |
|
$ |
546,517 |
|
|
$ |
|
|
|
$ |
510,396 |
|
|
$ |
36,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
2,632 |
|
|
|
|
|
|
|
2,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value |
|
$ |
2,632 |
|
|
$ |
|
|
|
$ |
2,632 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 9
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Assets and liabilities measured at fair value on a nonrecurring basis as of March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal |
|
|
|
|
|
|
Total |
|
|
|
|
|
|
models with |
|
|
Internal models |
|
|
|
carrying |
|
|
Quoted |
|
|
significant |
|
|
with significant |
|
|
|
value in the |
|
|
market prices |
|
|
observable |
|
|
unobservable |
|
|
|
consolidated |
|
|
in an active |
|
|
market |
|
|
market |
|
|
|
balance sheet |
|
|
market |
|
|
parameters |
|
|
parameters |
|
|
|
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Impaired loans |
|
$ |
17,124 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
17,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value |
|
$ |
17,124 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
17,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in level 3 fair value measurements
The table below includes a rollforward of the balance sheet amounts for the first quarter of
2008 (including the change in fair value) for financial instruments classified by Pinnacle
Financial within level 3 of the valuation hierarchy for assets and
liabilities measured at fair value on a recurring basis. When a determination is made to classify a
financial instrument within level 3 of the valuation hierarchy, the determination is based upon the
significance of the unobservable factors to the overall fair value measurement. However, since
level 3 financial instruments typically include, in addition to the unobservable or level 3
components, observable components (that is, components that are actively quoted and can be
validated to external sources); accordingly, the gains and losses in the table below include
changes in fair value due in part to observable factors that are part of the valuation methodology.
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2008 (in thousands) |
|
Assets |
|
|
Liabilities |
|
Fair value, January 1, 2008 |
|
$ |
35,336 |
|
|
$ |
|
|
Total realized and unrealized gains and (losses)
included in income |
|
|
65 |
|
|
|
|
|
Purchases, issuances and settlements, net |
|
|
720 |
|
|
|
|
|
Transfers in and/or out of level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value, March 31, 2008 |
|
$ |
36,121 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Total unrealized gains and (losses) included in
income related to financial assets and
liabilities still on the consolidated balance
sheet at March 31, 2008 |
|
$ |
65 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Note 2. Merger with Mid-America Bancshares, Inc.
On November 30, 2007, Pinnacle Financial consummated its merger with Mid-America, a two-bank
holding company located in Nashville, Tennessee.
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 Mid-America as of November 30, 2007. The table below details
the amounts our consolidated financial statements as of December 31, 2007 and the updated amounts
as of March 31, 2008 for changes in the purchase price allocation recorded during the first quarter
of 2008 (in thousands):
Page 10
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in |
|
|
|
|
|
|
|
|
|
|
purchase price |
|
|
|
|
|
|
|
|
|
|
allocation |
|
|
|
|
|
|
November 30, 2007 |
|
|
recorded during |
|
|
Revised November |
|
|
|
purchase price |
|
|
first quarter of |
|
|
30, 2007 purchase |
|
Mid-America Purchase Price Allocation (1) |
|
allocation |
|
|
2008 |
|
|
price allocation |
|
Cash and cash equivalents |
|
$ |
60,795 |
|
|
$ |
|
|
|
$ |
60,795 |
|
Investment securities available-for-sale |
|
|
147,766 |
|
|
|
|
|
|
|
147,766 |
|
Loans, net of an allowance for loan losses of $8,695 |
|
|
855,887 |
|
|
|
|
|
|
|
855,887 |
|
Goodwill |
|
|
129,334 |
|
|
|
(1,466 |
) |
|
|
127,868 |
|
Core deposit intangible |
|
|
8,085 |
|
|
|
1,351 |
|
|
|
9,436 |
|
Other assets |
|
|
49,854 |
|
|
|
139 |
|
|
|
49,993 |
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired |
|
|
1,251,721 |
|
|
|
24 |
|
|
|
1,251,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
957,076 |
|
|
|
|
|
|
|
957,076 |
|
Federal Home Loan Bank advances |
|
|
61,383 |
|
|
|
|
|
|
|
61,383 |
|
Other liabilities |
|
|
27,107 |
|
|
|
79 |
|
|
|
27,186 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed |
|
|
1,045,566 |
|
|
|
79 |
|
|
|
1,045,645 |
|
|
|
|
|
|
|
|
|
|
|
Total consideration paid for Mid-America |
|
$ |
206,155 |
|
|
$ |
(55 |
) |
|
$ |
206,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Pinnacle Financial is still 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 March 31, 2008. |
In accordance with SFAS Nos. 141 and 142, Pinnacle Financial has preliminarily recognized $9.4
million as a core deposit intangible through March 31, 2008. This identified intangible is being
amortized over ten years using an accelerated method which anticipates the life of the underlying
deposits to which the intangible is attributable. For the three months ended March 31, 2008,
approximately $273,000 was recognized in the accompanying consolidated statement of income as other
noninterest expense. Amortization expense associated with this identified intangible will
approximate $700,000 to $1.1 million per year for the next ten years.
At November 30, 2007, Pinnacle Financial also recorded other adjustments to the carrying value
of Mid-Americas assets and liabilities in order to reflect the fair value at the date of
acquisition. The discounts and premiums related to financial assets and liabilities are being
accreted and amortized into the consolidated statements of income using a method that approximates
the level yield over the anticipated lives of the underlying financial assets or liabilities. For
the quarter ended March 31, 2008, the accretion and amortization of the fair value discounts and
premiums related to the acquired assets and liabilities increased net interest income by
approximately $1,111,000. Based on the estimated useful lives of the acquired loans, deposits and
FHLB advances, Pinnacle Financial will recognize increases in net interest income related to
accretion of these purchase accounting adjustments of $2.91 million in subsequent years.
Page 11
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, 2007
and thus the amounts in the pro form information below will differ from the actual results as
presented in the accompanying consolidated statements of income. The pro forma information does
not reflect Pinnacle Financials results of operations that would have actually occurred had the
merger been consummated on such date (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(unaudited) |
|
Pro Forma Income Statements: |
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
26,452 |
|
|
$ |
26,024 |
|
Provision for loan losses |
|
|
1,591 |
|
|
|
976 |
|
Noninterest income |
|
|
8,367 |
|
|
|
6,923 |
|
Noninterest expense |
|
|
25,486 |
|
|
|
20,707 |
|
|
|
|
|
|
|
|
Net income before taxes |
|
|
7,742 |
|
|
|
11,264 |
|
Income tax expense |
|
|
2,225 |
|
|
|
3,653 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,516 |
|
|
$ |
7,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma Per Share Information: |
|
|
|
|
|
|
|
|
Basic net income per common share |
|
$ |
0.25 |
|
|
$ |
0..34 |
|
Diluted net income per common share |
|
$ |
0.24 |
|
|
$ |
0..33 |
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
22,088,665 |
|
|
|
22,110,022 |
|
Diluted |
|
|
23,242,022 |
|
|
|
23,294,064 |
|
During the three months ended March 31, 2008, Pinnacle Financial incurred merger integration
expense related to the merger with Mid-America of $3,106,000. These expenses were directly related
to the merger and consisted primarily of severance costs and costs to integrate systems and are
reflected on the accompanying consolidated statement of income as merger related expense.
Following the merger with Mid-America, on February 29, 2008, Pinnacle National purchased all
of the assets and assumed all of the liabilities of PrimeTrust Bank and simultaneously sold the
charter of PrimeTrust Bank to an unaffiliated third party for $500,000. Pinnacle Financial also
merged Bank of the South into Pinnacle National on that date, leaving Pinnacle National as the sole
banking subsidiary of Pinnacle Financial. Goodwill was reduced for the proceeds of the sale of the
charter, and therefore no gain was recorded.
Page 12
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
March 31, 2008 and December 31, 2007 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
U.S. government agency securities |
|
|
32,921,120 |
|
|
|
624,092 |
|
|
|
3,022 |
|
|
|
33,542,190 |
|
Mortgage-backed securities |
|
|
329,639,159 |
|
|
|
4,361,031 |
|
|
|
280,933 |
|
|
|
333,719,257 |
|
State and municipal securities |
|
|
124,204,397 |
|
|
|
2,045,951 |
|
|
|
1,774,177 |
|
|
|
124,476,171 |
|
Corporate notes and other |
|
|
2,414,318 |
|
|
|
17,961 |
|
|
|
55,413 |
|
|
|
2,376,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
489,178,994 |
|
|
$ |
7,049,035 |
|
|
$ |
2,113,545 |
|
|
$ |
494,114,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency securities |
|
$ |
1,997,672 |
|
|
$ |
14,628 |
|
|
$ |
|
|
|
$ |
2,012,300 |
|
State and municipal securities |
|
|
9,265,229 |
|
|
|
105,508 |
|
|
|
7,987 |
|
|
|
9,362,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,262,901 |
|
|
$ |
120,136 |
|
|
$ |
7,987 |
|
|
$ |
11,375,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
U.S. Government agency securities |
|
|
69,481,328 |
|
|
|
220,833 |
|
|
|
39,598 |
|
|
|
69,662,563 |
|
Mortgage-backed securities |
|
|
297,909,174 |
|
|
|
1,237,807 |
|
|
|
1,441,635 |
|
|
|
297,705,346 |
|
State and municipal securities |
|
|
127,220,978 |
|
|
|
206,102 |
|
|
|
1,521,273 |
|
|
|
125,905,807 |
|
Corporate notes |
|
|
2,415,783 |
|
|
|
|
|
|
|
37,560 |
|
|
|
2,378,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
497,027,263 |
|
|
$ |
1,664,742 |
|
|
$ |
3,040,066 |
|
|
$ |
495,651,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency securities |
|
$ |
17,747,589 |
|
|
$ |
4,436 |
|
|
$ |
|
|
|
$ |
17,752,025 |
|
State and municipal securities |
|
|
9,285,767 |
|
|
|
4,242 |
|
|
|
158,561 |
|
|
|
9,131,448 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
27,033,356 |
|
|
$ |
8,678 |
|
|
$ |
158,561 |
|
|
$ |
26,883,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2008, approximately $424,263,000 of Pinnacle Financials investment portfolio was
pledged to secure public funds and other deposits and securities sold under agreements to
repurchase.
Page 13
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At March 31, 2008 and December 31, 2007, 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 |
|
|
Investments with an Unrealized |
|
|
Total Investments with an |
|
|
|
12 months |
|
|
Loss of 12 months or longer |
|
|
Unrealized Loss |
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
Unrealized |
|
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
|
Fair Value |
|
|
Losses |
|
At March 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency securities |
|
$ |
853,999 |
|
|
$ |
3,022 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
853,999 |
|
|
$ |
3,022 |
|
Mortgage-backed securities |
|
|
31,580,268 |
|
|
|
147,641 |
|
|
|
15,696,314 |
|
|
|
133,292 |
|
|
|
47,276,582 |
|
|
|
280,933 |
|
State and municipal securities |
|
|
43,869,958 |
|
|
|
1,773,395 |
|
|
|
1,561,784 |
|
|
|
8,769 |
|
|
|
45,431,742 |
|
|
|
1,782,164 |
|
Corporate notes |
|
|
493,601 |
|
|
|
6,518 |
|
|
|
441,000 |
|
|
|
48,895 |
|
|
|
934,601 |
|
|
|
55,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily-impaired securities |
|
$ |
76,797,826 |
|
|
$ |
1,930,576 |
|
|
$ |
17,699,098 |
|
|
$ |
190,956 |
|
|
$ |
94,496,924 |
|
|
$ |
2,121,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency securities |
|
$ |
13,942,078 |
|
|
$ |
25,198 |
|
|
$ |
2,985,600 |
|
|
$ |
14,400 |
|
|
$ |
16,927,678 |
|
|
$ |
39,598 |
|
Mortgage-backed securities |
|
|
51,240,090 |
|
|
|
181,098 |
|
|
|
97,593,453 |
|
|
|
1,260,537 |
|
|
|
148.833.543 |
|
|
|
1.441.635 |
|
State and municipal securities |
|
|
54,467,544 |
|
|
|
1,193,763 |
|
|
|
35,481,739 |
|
|
|
486,071 |
|
|
|
89,949,283 |
|
|
|
1,679,834 |
|
Corporate notes |
|
|
527,115 |
|
|
|
300 |
|
|
|
1,451,108 |
|
|
|
37,260 |
|
|
|
1,978,223 |
|
|
|
37,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily-impaired securities |
|
$ |
120,176,827 |
|
|
$ |
1,400,359 |
|
|
$ |
137,511,900 |
|
|
$ |
1,798,268 |
|
|
$ |
257,688,727 |
|
|
$ |
3,198,627 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2008 and December 31, 2007 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
At March 31, |
|
|
At December 31, |
|
|
|
2008 |
|
|
2007 |
|
Commercial real estate Mortgage |
|
$ |
771,926,021 |
|
|
$ |
728,200,839 |
|
Consumer real estate Mortgage |
|
|
584,104,279 |
|
|
|
562,720,828 |
|
Construction and land development |
|
|
557,069,605 |
|
|
|
517,399,037 |
|
Commercial and industrial |
|
|
859,364,380 |
|
|
|
838,160,611 |
|
Consumer and other |
|
|
94,071,282 |
|
|
|
103,159,374 |
|
|
|
|
|
|
|
|
Total Loans |
|
|
2,866,535,567 |
|
|
|
2,749,640,689 |
|
Allowance for loan losses |
|
|
(29,871,384 |
) |
|
|
(28,470,207 |
) |
|
|
|
|
|
|
|
Loans, net |
|
$ |
2,836,664,183 |
|
|
$ |
2,721,170,482 |
|
|
|
|
|
|
|
|
Page 14
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Changes in the allowance for loan losses for the three months ended March 31, 2008 and for the
year ended December 31, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
December 31, 2007 |
|
Balance at beginning of period |
|
$ |
28,470,207 |
|
|
$ |
16,117,978 |
|
Charged-off loans |
|
|
(757,276 |
) |
|
|
(1,341,890 |
) |
Recovery of previously charged-off loans |
|
|
567,330 |
|
|
|
279,491 |
|
Allowance from Mid-America acquisition |
|
|
|
|
|
|
8,694,787 |
|
Provision for loan losses |
|
|
1,591,123 |
|
|
|
4,719,841 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
29,871,384 |
|
|
$ |
28,470,207 |
|
|
|
|
|
|
|
|
At March 31, 2008 and at December 31, 2007, Pinnacle Financial had certain impaired loans on
nonaccruing interest status. The principal balance of these nonaccrual loans amounted to
$17,124,000 and $19,677,000 at March 31, 2008 and December 31, 2007, respectively. In each case,
at the date such loans were placed on nonaccrual status, Pinnacle Financial reversed all previously
accrued interest income against current year earnings. Had nonaccruing loans been on accruing
status, interest income would have been higher by $482,000 and $102,000 for the three months ended
March 31, 2008 and 2007, respectively.
At March 31, 2008, Pinnacle Financial had granted loans and other extensions of credit
amounting to approximately $28,936,000 to directors, executive officers, and their related
entities, of which $20,391,000 had been drawn upon. During the three months ended March 31, 2008,
$1,602,000 of loan and other commitment increases and $319,000 of principle and other reductions
were made by directors, executive officers, and their related entities. The terms on these loans
and extensions are on substantially the same terms customary for other persons for the type of loan
involved. None of these loans to directors, executive officers, and their related entities, were
impaired at March 31, 2008.
During the three months ended March 31, 2008 and 2007, Pinnacle Financial sold participations
in certain loans to correspondent banks at an interest rate that was less than that of the
borrowers rate of interest. In accordance with U.S. generally accepted accounting principles,
Pinnacle Financial recognized a net gain on the sale of these participated loans for the three
months ended March 31, 2008 and 2007 of approximately $4,000 and $45,000, respectively, which is
attributable to the present value of the future net cash flows of the difference between the
interest payments the borrower is projected to pay Pinnacle Financial and the amount of interest
that will be owed the correspondent bank based on their participation in the loans. At March 31,
2008, Pinnacle Financial was servicing $165 million of loans for correspondent banks and other
entities, of which $114 million was commercial loans.
Note 5. Income Taxes
Pinnacle Financials income tax expense differs from the amounts computed by applying the
Federal income tax statutory rates of 35% to income before income taxes. A reconciliation of the
differences for the three months ended March 31, 2008 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Income taxes at statutory rate |
|
$ |
3,025,310 |
|
|
$ |
2,868,724 |
|
State tax (benefit) expense, net of
Federal tax effect |
|
|
(14,857 |
) |
|
|
57,864 |
|
Federal tax credits |
|
|
(57,625 |
) |
|
|
(90,000 |
) |
Tax-exempt securities |
|
|
(296,618 |
) |
|
|
(196,607 |
) |
Bank owned life insurance |
|
|
(81,097 |
) |
|
|
(48,134 |
) |
Insurance premiums |
|
|
(63,184 |
) |
|
|
(102,430 |
) |
Other items |
|
|
67,024 |
|
|
|
105,096 |
|
|
|
|
|
|
|
|
Income tax expense |
|
$ |
2,578,953 |
|
|
$ |
2,594,513 |
|
|
|
|
|
|
|
|
The effective tax rate for 2008 and 2007 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 through 2010. Tax benefits related
to these credits will be recognized for financial reporting purposes in the same periods
Page 15
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
that the credits are recognized in the Companys income tax returns. The credit that was
available for the years ended December 31, 2008 and 2007 was $360,000. Pinnacle Financial believes
that it will comply with the various regulatory provisions of the New Markets Tax Credit program,
and therefore has reflected the impact of the credits in its estimated annual effective tax rate
for 2008 and 2007.
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 customers creditworthiness is
evaluated on a case-by-case basis, and the amount of collateral obtained, if any, is based on
managements 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 Financials maximum exposure to credit loss, without
consideration of collateral, is represented by the contractual amount of those instruments.
A summary of Pinnacle Financials total contractual amount for all off-balance sheet
commitments at March 31, 2008 is as follows:
|
|
|
|
|
Commitments to extend credit |
|
$ |
869,938,000 |
|
Standby letters of credit |
|
|
90,893,000 |
|
Various legal claims also arise from time to time in the normal course of business. As of
March 31, 2008, management is not aware of any such proceedings against Pinnacle Financial.
Visa Litigation
Pinnacle National is a member of the Visa USA network. Under Visa USA bylaws, Visa members are
obligated to indemnify Visa USA and/or its parent company, Visa, Inc., for potential future
settlement of, or judgments resulting from, certain litigation, which Visa refers to as the
covered litigation. Pinnacle Nationals indemnification obligation is limited to its membership
proportion of Visa USA. On November 7, 2007, Visa announced the settlement of its American Express
litigation, and disclosed in its annual report to the SEC on Form 10-K for the year ended September
30, 2007 that Visa had accrued a contingent liability for the estimated settlement of its Discover
litigation. Accordingly, Pinnacle National has recognized a contingent liability in the amount of
$145,000 as an estimate for its membership proportion of the American Express settlement and the
potential Discover
Page 16
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
settlement, as well as its membership proportion of the amount that Pinnacle National
estimates will be required for Visa to settle the remaining covered litigation.
Visa, Inc. completed an initial public offering (the Visa IPO) in March 2008. Visa used a
portion of the proceeds from the IPO to establish a $3.0 billion escrow for settlement of covered
litigation and used substantially all of the remaining portion to redeem class B and class C shares
held by Visa issuing members. During the three months ended March 31, 2008, Pinnacle Financial
recognized a pre-tax gain of $140,000 on redemption proceeds received from Visa, Inc. and reversed
$63,000 of the $145,000 litigation expense recognized as its pro-rata share of the $3.0 billion
escrow funded by Visa, Inc. The timing for ultimate settlement of all covered litigation is not
determinable at this time.
Note 7. Equity Compensation
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. At March 31, 2008, there were 452,083
shares available for issue under these plans.
Common Stock Options and Stock Appreciation Rights
As of March 31, 2008, of the 2,457,431 stock options and 14,070 stock appreciation rights
outstanding, 1,365,356 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 1,106,145 options would be deemed non-qualified stock options or stock appreciation
rights and thus not subject to favorable tax treatment to the option holder. All stock options
granted under the Pinnacle equity incentive 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 stock option and stock appreciation rights activity during the three months
ended March 31, 2008 and information regarding expected vesting, contractual terms remaining,
intrinsic values and other matters was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Contractual |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
|
|
|
|
Exercise |
|
|
Term |
|
|
Value (1) |
|
|
|
Number |
|
|
Price |
|
|
(in years) |
|
|
(000's) |
|
Outstanding at December 31, 2007 |
|
|
2,398,823 |
|
|
$ |
16.84 |
|
|
|
6.9 |
|
|
$ |
23,784 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
163,360 |
|
|
|
21.51 |
|
|
|
|
|
|
|
|
|
Exercised (2) |
|
|
(63,527 |
) |
|
|
11.55 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(27,155 |
) |
|
|
27.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2008 |
|
|
2,471,501 |
|
|
$ |
17.14 |
|
|
|
6.9 |
|
|
$ |
23,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and expected to vest as
of March 31, 2008 |
|
|
2,431,645 |
|
|
$ |
17.01 |
|
|
|
6.9 |
|
|
$ |
23,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at March 31, 2008 |
|
|
1,610,064 |
|
|
$ |
12.11 |
|
|
|
6.1 |
|
|
$ |
20,937 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
$25.60 per common share for the approximately 1.8 million options and stock appreciation
rights that were in-the-money at March 31, 2008. |
|
(2) |
|
The 626 stock appreciation rights exercised during 2008 resulted in the issuance of 314
shares of Pinnacle Financial common stock. |
During the three months ended March 31, 2008, 141,632 option awards vested at an average
exercise price of $24.54 and an intrinsic value of approximately $3.3 million. On January 18,
2008, Pinnacle Financial granted options to purchase 163,360 common shares to certain employees at
an exercise price of $21.51 per share. These options, which were issued as non-qualified stock
options, will vest in varying increments over five years beginning one year after the date of the
grant and are exercisable over a period of ten years from the date of grant. Pursuant to SAB 110,
Share-Based Payment, Pinnacle Financial will continue to use the simplified method for estimating
the expense of stock compensation during 2008.
Page 17
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During the three months ended March 31, 2008, the aggregate intrinsic value of options and
stock appreciation rights exercised was $1.4 million determined as of the date of exercise. As of
March 31, 2008, there was approximately $6.7 million of total unrecognized compensation cost
related to unvested stock options granted. That cost is expected to be recognized over a
weighted-average period of 3.1 years.
During the three months ended March 31, 2008 and 2007, Pinnacle Financial recorded stock-based
compensation expense of $515,000 and $362,000 for the three months ended March 31, 2008 and 2007,
respectively, using the Black-Scholes valuation model for awards granted prior to, but not yet
vested, as of January 1, 2006 and for stock-based awards granted after January 1, 2006. For these
awards, Pinnacle Financial has recognized compensation expense using a straight-line amortization
method. Stock-based compensation expense has been reduced for estimated forfeitures.
The fair value of options granted for each of the three month periods ended March 31, 2008 and
2007 was estimated using the Black-Scholes option pricing model and the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
Risk free interest rate |
|
|
3.20 |
% |
|
|
4.78 |
% |
Expected life of options |
|
6.5 years |
|
6.5 years |
Expected dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
Expected volatility |
|
|
24.58 |
% |
|
|
20.94 |
% |
Weighted average fair value |
|
$ |
7.07 |
|
|
$ |
10.79 |
|
Pinnacle Financials 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.
Restricted Shares
Additionally, Pinnacle Financials 2004 Equity Incentive Plan provides for the granting of
restricted share awards and other performance or market-based awards. There were no market-based
awards outstanding as of March 31, 2008 under the 2004 Equity Incentive Plan. During the three
months ended March 31, 2008, Pinnacle Financial awarded 140,373 shares of restricted common stock
to Pinnacle Financial directors, officers and associates. The weighted average fair value of these
awards as of the date of grant was $21.95 per share. The forfeiture restrictions on 77,000 of the
restricted shares awarded to Pinnacle Financial associates lapse in annual increments of 20% over
the next five years. The forfeiture restrictions on 26,805 restricted shares awarded to members of
Pinnacle Financials senior management lapse in three separate traunches should Pinnacle achieve
certain earnings and soundness targets over the subsequent three year period. Additionally, the
forfeiture restrictions on 26,805 restricted shares issued to members of Pinnacle Financials
senior management lapse in annual increments of 10% over the next ten years if Pinnacle Financial
is profitable in the prior year. The remaining 9,763 restricted shares were awarded to Pinnacle
Financial directors with the restrictions on these shares lapsing on the one year anniversary date
of the award based on each individual board member meeting their attendance goals for the various
board and board committee meetings to which each member was scheduled to attend during the period
from March 1, 2008 through February 28, 2009.
Compensation expense associated with the performance based 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. Compensation expense
associated with the time based restricted share awards is recognized over the time period that the
restrictions associated with the awards lapse based on the total cost of the award. For the three
months ended March 31, 2008, Pinnacle Financial recognized approximately $168,000 in compensation
costs attributable to all restricted share awards issued prior to March 31, 2008. During the three
months ended March 31, 2008, $201,000 in previously expensed compensation associated with certain
traunches of restricted share awards was reversed when Pinnacle Financial determined that the
performance targets required to vest the awards were unlikely to be achieved.
Page 18
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of activity for unvested restricted share awards for the three months ended March
31, 2008 follows:
|
|
|
|
|
|
|
Number |
|
Unvested awards at December 31, 2007 |
|
|
54,349 |
|
New awards granted |
|
|
140,373 |
|
Awards whereby restrictions have lapsed and shares released to
participants |
|
|
(3,230 |
) |
Forfeited awards (i.e., restrictions not met by participants) |
|
|
|
|
|
|
|
|
Unvested awards at March 31, 2008 |
|
|
191,492 |
|
|
|
|
|
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. At March 31, 2008, pursuant to federal banking
regulations, Pinnacle National had approximately $50.4 million of net retained profits from the
previous two years available for dividend payments to Pinnacle Financial.
Pinnacle Financial and its banking subsidiary 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 its banking subsidiary 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 Financials and its banking subsidiary 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 its banking subsidiaries 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
March 31, 2008, that Pinnacle Financial and its banking subsidiary 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 its banking subsidiaries actual capital amounts and
ratios are presented in the following table (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well-Capitalized |
|
|
|
|
|
|
|
|
|
|
|
Minimum |
|
|
Under Prompt |
|
|
|
|
|
|
|
|
|
|
|
Capital |
|
|
Corrective |
|
|
|
Actual |
|
|
Requirement |
|
|
Action Provisions |
|
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
At March 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle Financial |
|
$ |
330,975 |
|
|
|
10.4 |
% |
|
$ |
254,510 |
|
|
|
8.0 |
% |
|
not applicable |
Pinnacle National |
|
$ |
323,346 |
|
|
|
10.2 |
% |
|
$ |
254,112 |
|
|
|
8.0 |
% |
|
$ |
317,641 |
|
|
|
10.0 |
% |
Tier I capital to risk weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle Financial |
|
$ |
301,103 |
|
|
|
9.5 |
% |
|
$ |
127,255 |
|
|
|
4.0 |
% |
|
not applicable |
Pinnacle National |
|
$ |
293,419 |
|
|
|
9.2 |
% |
|
$ |
127,056 |
|
|
|
4.0 |
% |
|
$ |
190,584 |
|
|
|
6.0 |
% |
Tier I capital to average assets (*): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle Financial |
|
$ |
301,103 |
|
|
|
8.6 |
% |
|
$ |
140,841 |
|
|
|
4.0 |
% |
|
not applicable |
Pinnacle National |
|
$ |
293,419 |
|
|
|
8.3 |
% |
|
$ |
140,873 |
|
|
|
4.0 |
% |
|
$ |
176,092 |
|
|
|
5.0 |
% |
|
|
|
(*) |
|
Average assets for the above calculations were based on the most recent quarter. |
Page 19
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 9. Derivative Instruments
Financial derivatives are reported at fair value in other assets or other liabilities. The
accounting for changes in the fair value of a derivative depends on whether it has been designated
and qualifies as part of a hedging relationship. For derivatives not designated as hedges, the
gain or loss is recognized in current earnings. Beginning in 2007, Pinnacle Financial entered into
interest rate swaps (swaps) to facilitate customer transactions and meet their financing needs.
Upon entering into these instruments to meet customer needs, Pinnacle Financial enters into
offsetting positions in order to minimize the risk to Pinnacle Financial. These swaps qualify as
derivatives, but are not designated as hedging instruments.
Interest rate swap contracts involve the risk of dealing with counterparties and their ability
to meet contractual terms. When the fair value of a derivative instrument contract is positive,
this generally indicates that the counter party or customer owes the Company, and results in credit
risk to the Company. When the fair value of a derivative instrument contract is negative, the
Company owes the customer or counterparty and therefore, has no credit risk.
A summary of Pinnacle Financials interest rate swaps is included in the following table (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
|
Notional |
|
|
Estimated Fair |
|
|
|
Amount |
|
|
Value |
|
Interest rate swap agreements: |
|
|
|
|
|
|
|
|
Pay fixed / receive variable swaps |
|
$ |
59,243 |
|
|
$ |
2,609 |
|
Pay variable / receive fixed swaps |
|
|
59,243 |
|
|
|
(2,632 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
118,486 |
|
|
$ |
(23 |
) |
|
|
|
|
|
|
|
Note 10. Business Segment Information
Pinnacle Financial has four reporting segments comprised of commercial banking, trust and
investment services, mortgage origination and insurance services. Pinnacle Financials primary
segment is commercial banking which consists of commercial loan and deposit services as well as the
activities of Pinnacle Nationals 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 Nationals wholly owned subsidiary, Miller and Loughry
Insurance Services, Inc. Miller and Loughry is a general insurance agency located in Murfreesboro,
Tennessee and is licensed to sell various commercial and consumer insurance products.
Page 20
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables present financial information for each reportable segment as of March 31,
2008 and 2007 and for the three months ended March 31, 2008 and 2007 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust and |
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
Investment |
|
|
Mortgage |
|
|
Insurance |
|
|
Total |
|
|
|
Banking |
|
|
Services |
|
|
Origination |
|
|
Services |
|
|
Company |
|
For the three months ended March 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
27,285 |
|
|
$ |
|
|
|
$ |
74 |
|
|
$ |
|
|
|
$ |
27,359 |
|
Provision for loan losses |
|
|
1,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,591 |
|
Noninterest income |
|
|
4,459 |
|
|
|
1,670 |
|
|
|
1,175 |
|
|
|
1,064 |
|
|
|
8,368 |
|
Noninterest expense |
|
|
22,709 |
|
|
|
1,305 |
|
|
|
1,031 |
|
|
|
447 |
|
|
|
25,492 |
|
Income tax expense |
|
|
2,106 |
|
|
|
144 |
|
|
|
86 |
|
|
|
243 |
|
|
|
2,579 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,338 |
|
|
$ |
221 |
|
|
$ |
132 |
|
|
|
374 |
|
|
|
6,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period assets |
|
$ |
3,884,042 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,244 |
|
|
$ |
3,889,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
17,047 |
|
|
$ |
|
|
|
$ |
35 |
|
|
$ |
|
|
|
$ |
17,082 |
|
Provision for loan losses |
|
|
788 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
788 |
|
Noninterest income |
|
|
2,648 |
|
|
|
1,114 |
|
|
|
586 |
|
|
|
643 |
|
|
|
5,026 |
|
Noninterest expense |
|
|
11,397 |
|
|
|
800 |
|
|
|
487 |
|
|
|
440 |
|
|
|
13,124 |
|
Income tax expense |
|
|
2,338 |
|
|
|
123 |
|
|
|
53 |
|
|
|
80 |
|
|
|
2,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
5,207 |
|
|
$ |
191 |
|
|
$ |
81 |
|
|
$ |
123 |
|
|
$ |
5,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of period assets |
|
$ |
2,188,750 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,382 |
|
|
$ |
2,193,132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 21
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of our financial condition at March 31, 2008 and December 31, 2007
and our results of operations for the three months ended March 31, 2008 and 2007. 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 organic growth together with our merger with Mid-America Bancshares, Inc.
(Mid-America), a two-bank holding company in Nashville, Tennessee, on November 30, 2007 and our
expansion in the Knoxville, Tennessee market has had a material impact on Pinnacle Financials
financial condition and results of operations in 2008 as compared to 2007. This rapid growth along
with the Mid-America merger and the Knoxville market expansion are discussed more fully below. Our
fully diluted net income per share for the three months ended March 31, 2008 and 2007 was $0.26 and
$0.34, respectively. At March 31, 2008, loans totaled $2.867 billion, as compared to $2.750
billion at December 31, 2007, while total deposits increased to $2.967 billion at March 31, 2008
from $2.925 billion at December 31, 2007.
Acquisition Mid-America. On November 30, 2007, we consummated a merger with Mid-America.
Pursuant to the merger agreement, Mid-America shareholders received a fixed exchange ratio of
0.4655 shares of our common stock and $1.50 in cash for each share of Mid-America common stock, or
approximately 6.7 million Pinnacle Financial shares and $21.6 million in cash. We financed the
cash portion of the merger consideration with the proceeds of a $30 million trust preferred
securities offering by an affiliated trust. The accompanying consolidated financial statements
include the activities of the former Mid-America since November 30, 2007.
In accordance with SFAS Nos. 141 and 142, we have preliminarily recognized $9.4 million as a core
deposit intangible. This identified intangible is being amortized over ten years using an
accelerated method which anticipates the life of the underlying deposits to which the intangible is
attributable. For the three months ended March 31, 2008, approximately $273,000 was recognized in
the accompanying statement of income as other noninterest expense. Amortization expense associated
with this identified intangible will approximate $700,000 to $1.1 million per year for the next ten
years.
We also recorded other adjustments to the carrying value of Mid-Americas assets and liabilities in
order to reflect the fair value of those net assets acquired at November 30, 2007. The discounts
and premiums related to financial assets and liabilities are being accreted and amortized into our
statements of income using a method that approximates the level yield method over the anticipated
lives of the underlying financial assets or liabilities. For the three months ended March 31,
2008, the accretion and amortization of the fair value discounts and premiums related to the
acquired loans, certificates of deposit and FHLB advances increased net interest income by
approximately $1.111 million. Based on the estimated useful lives of the acquired loans, deposits
and FHLB advances, we expect to recognize increases in net interest income related to accretion of
these purchase accounting adjustments of $2.9 million in subsequent years. 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 March 31, 2008.
During the three months ended March 31, 2008, we incurred merger integration expense related to the
merger with Mid-America of $3.106 million. These expenses were directly related to the merger, and
consisted primarily of severance costs and costs to integrate processing systems and are reflected
in the accompanying consolidated statement of income as merger related expense.
Knoxville expansion. During April of 2007, we announced a de novo expansion of our firm to the
Knoxville MSA. At that time, we had hired several new associates from other financial institutions
in that market and had negotiated a lease agreement for our main office facility with future plans
to construct four additional offices over the next few years. In June of 2007, we opened our first
full service branch facility in Knoxville. At March 31, 2008, our Knoxville facility had recorded
$159.0 million in loan balances and $35.4 million in deposit balances. At March 31, 2008, we
employed 23 associates in the Knoxville MSA. We incurred approximately $549,000 in loan loss
provision and approximately $814,000 in noninterest expenses for compensation, occupancy and other
expenses related to the Knoxville expansion. As a result, we estimate that the Knoxville expansion
lost approximately $0.02 per fully diluted share during the first quarter of 2008.
Page 22
Results of Operations. Our net interest income increased to $27.4 million for the first three
months of 2008 compared to $17.1 million for first three months of 2007, primarily due to increased
volumes of earning assets as a result of the Mid-America acquisition. The net interest margin
(the ratio of net interest income to average earning assets) for the three months ended March 31,
2008 was 3.37% compared to 3.64% for the same period in 2007.
Our provision for loan losses was $1,591,000 for the first three months of 2008 compared to
$788,000 for the same period in 2007. The provision for loan losses increased primarily due to
increases in loan volumes and charge-offs in 2008 compared to 2007.
Noninterest income for the three months ended March 31, 2008 compared to the same period in 2007
increased by $3.34 million, or 66.5%. This increase is largely attributable to the fee businesses
associated with the Mid-America acquisition, particularly with regard to service charges on deposit
accounts, investment services commissions and other noninterest income. We also recorded during
the first three months of 2008 approximately $450,000 in insurance commissions received from one of
our carriers due to favorable claims experience by that carrier.
Our continued growth in 2008 resulted in increased noninterest expense compared to 2007 due to the
addition of Mid-America, our expansion into the Knoxville MSA, increases in salaries and employee
benefits, equipment and occupancy expenses and other operating expenses. The number of full-time
equivalent employees increased from 419.5 at March 31, 2007 to 686.0 at March 31, 2008. As a
result, we experienced increases in compensation and employee benefit expense. In addition to
incurring a full quarter of the Mid-America expense in 2008, we expect to add additional employees
throughout 2008 which will also cause our compensation and employee benefit expense to increase in
2008 when compared to the comparable period in 2007. Additionally, our branch expansion efforts
during the last few years and the addition of the eleven Mid-America branches will also increase
noninterest expense. The increased operational expenses for the recently opened branches and the
additional planned branch in Knoxville expected to open in the last half of 2008 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 71.4% for the
first three months of 2008 compared to 59.4% for the same period in 2007. These calculations
include the impact of approximately $3,106,000 in Mid-America merger related charges in incurred in
the first quarter of 2008.
The effective income tax expense rate for the three months ended March 31, 2008 was approximately
29.8% compared to an effective income tax expense rate for the three months ended March 31, 2007 of
approximately 31.7%. The decrease in the effective rate for 2007 compared to 2006 was due to
increased investments in bank qualified municipal securities and bank owned life insurance.
Net income for the first three months of 2008 was $6.1 million compared to $5.6 million for the
same period in 2007, an increase of 8.3%.
Excluding the after-tax (rate of 39.23%) impact of merger related expenses in the first quarter of
2008, net income was $8.0 million compared to $5.6 million in the first quarter of 2007, an
increase of 41.9%. As a result, diluted net income per common share, excluding merger related
expenses was $0.34 for the first three months of 2008 and 2007. For a reconciliation of these
non-GAAP financial measures to their most directly comparable U.S. generally accepted accounting
principles (GAAP) financial measure, see Reconciliation of Non-GAAP financial measures below.
Financial Condition. Loans increased $116.9 million during the first three months of 2008. 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 $2.967 billion at March 31, 2008 compared to
$2.925 billion at December 31, 2007, an increase of $41.7 million. In comparing the composition of
the average balances of our deposits between the first quarter of 2008 with the first quarter of
2007, we have experienced increased growth in our higher cost certificate of deposit balances than
in any other category. This increase in reliance on higher cost deposits has contributed to a
reduced net interest margin between the two periods.
Capital and Liquidity. At March 31, 2008, our capital ratios, including our banks capital ratios,
met regulatory minimum capital requirements. Additionally, at March 31, 2008, our bank would be
considered to be well-capitalized pursuant to banking
Page 23
regulations. As our bank grows it will require additional capital from us over that which can be
earned through operations. We anticipate that we will continue to use various capital raising
techniques in order to support the growth of our bank.
In the past, we have been successful in procuring additional capital from the capital markets (via
public and private offerings of trust preferred securities and common stock). This additional
capital was required to support our growth. As of March 31, 2008, we believe should we continue
our rapid growth, should we acquire any other banks or should we expand into a new geographic
market those matters 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 U.S.
generally accepted accounting principles and with general practices within the banking industry.
In connection with the application of those principles, we have made judgments and estimates which,
in the case of the determination of our allowance for loan losses, the application of SFAS No. 123
(revised 2004), Share Based Payments (SFAS No. 123(R)) and the assessment of impairment of the
intangibles resulting from the Mid-America and Cavalry mergers 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 managements evaluation of the loan portfolios, past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect the borrowers
ability to repay (including the timing of future payment), the estimated value of any underlying
collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan
quality indications and other pertinent factors. This evaluation is inherently subjective as it
requires material estimates including the amounts and timing of future cash flows expected to be
received on impaired loans that may be susceptible to significant change. Loan losses are charged
off when management believes that the full collectability of the loan is unlikely. A loan may be
partially charged-off after a confirming event has occurred which serves to validate that full
repayment pursuant to the terms of the loan is unlikely. Allocation of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in managements
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 allowance 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
is recognized through the allowance. Loans that are impaired are recorded at the present value of
expected future cash flows discounted at the loans effective interest rate, or if the loan is
collateral dependent, impairment measurement is based on the fair value of the collateral, less
estimated disposal costs. Income is recognized on impaired loans on a cash basis.
The level of allowance maintained is believed by management to be adequate to absorb probable
losses in the portfolio at the balance sheet date. The allowance is increased by provisions
charged to expense and decreased by charge-offs, net of recoveries of amounts previously
charged-off.
In assessing the adequacy of the 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 managements 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.
Page 24
The allowance allocation for commercial and commercial real estate loans begins with a process of
estimating the probable losses inherent for these types of loans. The estimates for these loans
are established by category and based on our internal system of credit risk ratings and historical
loss data for industry and various peer bank groups. The estimated loan loss allocation rate for
our internal system of credit risk grades for commercial and commercial real estate is based on
managements 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 probable 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 managements
experience. Additionally, consumer and consumer real estate loans are analyzed based on our actual
loss rates, industry loss rates and loss rates of various peer bank groups. Consumer and consumer
real estate loans are evaluated as a group by category (i.e. retail real estate, installment, etc.)
rather than on an individual loan basis because these loans are smaller and homogeneous. We weight
the allocation methodologies for the consumer and consumer real estate portfolios and determine a
weighted average allocation for these portfolios.
The estimated loan loss allocation for all four loan portfolio segments is then adjusted for
managements estimate of probable losses for several environmental factors. The allocation for
environmental factors is particularly subjective and does not lend itself to exact mathematical
calculation. This amount represents estimated inherent credit losses which may exist, but have not
yet been identified, as of the balance sheet date based upon quarterly trend assessments in
delinquent and nonaccrual loans, unanticipated charge-offs, credit concentration changes,
prevailing economic conditions, changes in lending personnel experience, changes in lending
policies or procedures and other influencing factors. These environmental factors are considered
for each of the four loan segments and the allowance allocation as determined by the processes
noted above for each segment is increased or decreased based on the incremental assessment of these
various environmental factors.
We then test the resulting allowance balance by comparing the balance in the allowance to
historical trends and industry and peer information. Our management then evaluates the result of
the procedures performed, including the result of our testing, and concludes on the appropriateness
of the balance of the allowance in its entirety. The audit committee of our board of directors
reviews and approves the assessment prior to the filing of quarterly and annual financial
information.
We are in the process of reevaluating our quarterly allowance assessment process, particularly in
the area of estimating loss allocation rates and the allocation of environmental factors. The
results of the reevaluation are not yet completed and will be incorporated into our June 30, 2008
assessment. The impact of this reevaluation is unknown at this time.
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. 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 Mid-America and Cavalry Acquisitions We recorded the assets and liabilities of
Mid-America as of November 30, 2007 and 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. We also engaged a real estate appraisal firm to
value the more significant properties that were acquired and engaged a firm to analyze the income
tax implications of the assets and liabilities acquired as well as the deductibility of the various
cash payments we and the former Mid-America and Cavalry made and will make as a result of these
mergers. As a result, we consider the values we have assigned to the acquired assets and
liabilities to be reasonable and consistent with the application of U.S. generally accepted
accounting principles (GAAP). We are still in the process of obtaining and evaluating certain
other information with respect to Mid-America. Accordingly, we may have to reassess our
Mid-America
Page 25
purchase price allocations. We will conclude the allocation of the Mid-America purchase price to
the acquired net assets during the remainder of 2008.
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 assets fair value. Our annual assessment date is September 30. Should we
determine in a future period that the goodwill recorded in connection with our acquisitions have
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 months ended March 31, 2008 and 2007 were highlighted by the continued
growth in loans and other earning assets and deposits, primarily as a result of the Mid-America
acquisition and the Knoxville expansion, which resulted in increased revenues and expenses. The
following is a summary of our results of operations (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
March 31, |
|
|
2008-2007 |
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
2008 |
|
|
2007 |
|
|
Increase |
|
Interest income |
|
$ |
52,161 |
|
|
$ |
33,739 |
|
|
|
54.6 |
% |
Interest expense |
|
|
24,802 |
|
|
|
16,657 |
|
|
|
48.9 |
% |
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
27,359 |
|
|
|
17,082 |
|
|
|
60.2 |
% |
Provision for loan losses |
|
|
1,591 |
|
|
|
788 |
|
|
|
101.9 |
% |
|
|
|
|
|
|
|
|
|
|
Net interest income after
provision for loan losses |
|
|
25,768 |
|
|
|
16,294 |
|
|
|
58.1 |
% |
Noninterest income |
|
|
8,367 |
|
|
|
5,026 |
|
|
|
66.5 |
% |
Noninterest expense |
|
|
25,491 |
|
|
|
13,124 |
|
|
|
94.2 |
% |
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
8,644 |
|
|
|
8,196 |
|
|
|
5.5 |
% |
Income tax expense |
|
|
2,579 |
|
|
|
2,594 |
|
|
|
(0.6 |
)% |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,065 |
|
|
$ |
5,602 |
|
|
|
8.3 |
% |
|
|
|
|
|
|
|
|
|
|
Our results for the three months ended March 31, 2008 included merger related expense, of $3.106
million. Excluding merger related expense from our net income resulted in diluted net income per
common share for the three months ended March 31, 2008 of $0.34. A comparison of these amounts to
our results for the three months ended March 31, 2007 and a reconciliation of this non-GAAP
financial measure follow (dollars in thousands):
Reconciliation of Non-GAAP financial measures:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2008 |
|
|
2007 |
|
Net income, as reported |
|
$ |
6,065 |
|
|
$ |
5,602 |
|
Merger related expense, net of tax |
|
|
1,887 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income excluding merger related expense |
|
$ |
7,952 |
|
|
$ |
5,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully-diluted net income per common share, as reported |
|
$ |
0.26 |
|
|
$ |
0.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully-diluted net income per common share, excluding
merger related expense |
|
$ |
0.34 |
|
|
$ |
0.34 |
|
|
|
|
|
|
|
|
Page 26
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 this non-GAAP financial measure, excluding the impact of merger
related expense, facilitates making period-to-period comparisons, is a meaningful indication of our
operating performance, and provides investors with additional information to evaluate our past
financial results and ongoing operational performance.
Pinnacle Financials management and board utilizes this non-GAAP financial information to compare
our operating performance between accounting periods and has utilized non-GAAP diluted earnings per
share (excluding the merger related expenses) in establishing the performance targets of our 2008
Annual Cash Incentive Plan and in calculating whether we have met or will meet 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 March 31, 2008, we recorded
net interest income of $27.4 million, which resulted in a net interest margin of 3.37%. For the
three months ended March 31, 2007, we recorded net interest income of $17.1 million, which resulted
in a net interest margin of 3.64%.
Page 27
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 months ended March 31, 2008 and 2007 (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Three months ended |
|
(dollars in thousands) |
|
March 31, 2008 |
|
|
March 31, 2007 |
|
|
|
Average |
|
|
|
|
|
|
Rates/ |
|
|
Average |
|
|
|
|
|
|
Rates/ |
|
|
|
Balances |
|
|
Interest |
|
|
Yields |
|
|
Balances |
|
|
Interest |
|
|
Yields |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
2,761,745 |
|
|
$ |
45,392 |
|
|
|
6.61 |
% |
|
$ |
1,530,771 |
|
|
$ |
28,977 |
|
|
|
7.68 |
% |
Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
367,125 |
|
|
|
4,637 |
|
|
|
5.12 |
% |
|
|
272,669 |
|
|
|
3,346 |
|
|
|
4.98 |
% |
Tax-exempt (1) |
|
|
136,690 |
|
|
|
1,351 |
|
|
|
5.24 |
% |
|
|
72,961 |
|
|
|
670 |
|
|
|
4.91 |
% |
Federal funds sold and other |
|
|
58,892 |
|
|
|
781 |
|
|
|
5.56 |
% |
|
|
55,897 |
|
|
|
746 |
|
|
|
5.42 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
3,324,452 |
|
|
|
52,161 |
|
|
|
6.37 |
% |
|
|
1,932,298 |
|
|
|
33,739 |
|
|
|
7.13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonearning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets |
|
|
258,807 |
|
|
|
|
|
|
|
|
|
|
|
122,728 |
|
|
|
|
|
|
|
|
|
Other nonearning assets |
|
|
190,783 |
|
|
|
|
|
|
|
|
|
|
|
94,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,774,042 |
|
|
|
|
|
|
|
|
|
|
$ |
2,149,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking |
|
$ |
404,307 |
|
|
$ |
2,129 |
|
|
|
2.12 |
% |
|
$ |
244,680 |
|
|
$ |
1,957 |
|
|
|
3.24 |
% |
Savings and money market |
|
|
735,899 |
|
|
|
4,098 |
|
|
|
2.24 |
% |
|
|
495,877 |
|
|
|
4,125 |
|
|
|
3.37 |
% |
Certificates of deposit |
|
|
1,372,899 |
|
|
|
14,859 |
|
|
|
4.35 |
% |
|
|
624,092 |
|
|
|
7,456 |
|
|
|
4.84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits |
|
|
2,513,105 |
|
|
|
21,086 |
|
|
|
3.37 |
% |
|
|
1,364,649 |
|
|
|
13,538 |
|
|
|
4.02 |
% |
Securities sold under agreements to repurchase |
|
|
169,146 |
|
|
|
832 |
|
|
|
1.98 |
% |
|
|
157,180 |
|
|
|
1,712 |
|
|
|
4.42 |
% |
Federal Home Loan Bank advances
and other borrowings |
|
|
143,802 |
|
|
|
1,426 |
|
|
|
3.99 |
% |
|
|
40,241 |
|
|
|
531 |
|
|
|
5.36 |
% |
Subordinated debt |
|
|
82,476 |
|
|
|
1,458 |
|
|
|
7.11 |
% |
|
|
51,548 |
|
|
|
876 |
|
|
|
6.89 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
2,908,529 |
|
|
|
24,802 |
|
|
|
3.43 |
% |
|
|
1,613,618 |
|
|
|
16,657 |
|
|
|
4.19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
|
368,413 |
|
|
|
|
|
|
|
|
|
|
|
269,864 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits and interest-bearing liabilities |
|
|
3,276,942 |
|
|
|
24,802 |
|
|
|
3.04 |
% |
|
|
1,883,482 |
|
|
|
16,657 |
|
|
|
3.59 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
22,661 |
|
|
|
|
|
|
|
|
|
|
|
6,980 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
474,439 |
|
|
|
|
|
|
|
|
|
|
|
259,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,774,042 |
|
|
|
|
|
|
|
|
|
|
$ |
2,149,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
27,359 |
|
|
|
|
|
|
|
|
|
|
$ |
17,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread (2) |
|
|
|
|
|
|
|
|
|
|
2.94 |
% |
|
|
|
|
|
|
|
|
|
|
2.94 |
% |
Net interest margin (3) |
|
|
|
|
|
|
|
|
|
|
3.37 |
% |
|
|
|
|
|
|
|
|
|
|
3.64 |
% |
|
|
|
(1) |
|
Yields computed on tax-exempt instruments on a tax equivalent basis. |
|
(2) |
|
Yields realized on interest-earning assets less the rates paid on interest-bearing
liabilities. |
|
(3) |
|
Net interest margin is the result of annualized net interest income calculated on a
tax-equivalent basis divided by average interest-earning assets for the period. |
Page 28
As noted above, the net interest margin for the three months ended March 31, 2008 was 3.37%
compared to a net interest margin of 3.64% for the same period in 2007. Our net interest margin
for the three months ended March 31, 2008 was 0.27% less than our margin during the same time in
the previous year. This was the result of our earning asset yields for the three months ended
March 31, 2008 being 0.76% less than the earning asset yields for the previous year while our
funding costs were only 0.55% less. Also impacting our net interest margin comparisons between the
two periods was Mid-America which had more noncore deposits and a higher funding cost. Other
matters related to our net interest income, net interest yields and rates, and net interest margin
are presented below:
|
|
|
Our loan yields were 1.07% less during the first three months of 2008 when compared to
the same period in 2007. A significant amount of our loan portfolio has variable rate
pricing with a large portion of these loans tied to our prime lending rate. Our weighted
average prime rate for the first three months of 2008 was 3.13% compared to 5.25% for the
same period in 2007. Our prime lending rate moves in concert with the Federal Reserves
changes to its Federal funds rate. |
|
|
|
|
We have been able to grow our funding base significantly. For asset/liability
management purposes, we elected to allocate a greater proportion of such funds to our loan
portfolio versus our securities and shorter-term investment portfolio during the three
month period noted above. For the first three months of 2008, average loan balances were
83.1% of total interest-earning assets compared to 79.2% during the same period in 2007.
Loans generally have higher yields than do securities and other shorter-term investments.
This change in allocation reduced the decline in overall total interest earning asset
yields between the two periods. |
|
|
|
|
During the first three months of 2008, overall deposit rates were less than those rates
for the comparable period in 2007 by 0.65%. Normally, interest rates paid on products such
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. There was a significant
decrease in the short term rate environment during the first three months of 2008 when
compared with the first three months of 2007. As a result, the rates for those products
experienced a large decrease between the two periods. However, another factor influencing
our margin is competitor pricing. We routinely monitor the pricing of deposit products by
our primary competitors. We believe that our markets are very competitive banking markets
with new banks entering our markets continually. As a result, even though the short-term
rate environment may allow for rate decreases in our short-term funding base; these
decreases will be offset by competitive pressures. |
|
|
|
|
During the first three months of 2008, 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 51.2% of our total funding
compared to 62.0% during the same period in 2007. These funding sources generally have
lower rates than do other funding sources, such as certificates of deposit and other
borrowings. Additionally, noninterest bearing deposits comprised only 11.2% of total
funding in 2008, compared to 14.3% in 2007. Maintaining our noninterest bearing deposit
balances in relation to total funding is critical to maintaining and growing our net
interest margin and receives a great deal of emphasis by management. Thus, the mix of our
deposit base in 2008 was weighted more to higher cost time deposits and other wholesale
funding sources which also contributed to our lower net interest margin in 2008. |
|
|
|
|
Also impacting the net interest margin during the first three months of 2008 was pricing
of our floating rate subordinated indebtedness. The interest rate charged on this
indebtedness is generally higher than other funding sources. In October 2007, we issued an
additional $30 million in floating rate subordinated indebtedness to fund the cash
component of the Mid-America purchase price. The rate we are required to pay on this
indebtedness is 285 points over three-month LIBOR. This spread is higher than similar
forms of subordinated indebtedness which were issued in previous periods. |
During the three months ended March 31, 2008, the yield curve steepened which is advantageous for
most banks, including us, as we use a significant amount of short-term funding to fund our balance
sheet growth. This short-term funding comes in the form of checking accounts, savings accounts,
money market accounts, short-term time deposits and securities sold under agreements to repurchase.
Rates paid on these short-term deposits generally correlate to the Fed funds rate and short term
treasury rates. During most of 2007, the Fed funds rate was higher than other longer term
treasuries (i.e., an inverted yield curve). As a result, for most of 2007 depositors tended to
maintain their funds in shorter-term deposit accounts where they could achieve a higher yield on
their deposit balances and did not concern themselves with long-term products because there was not
enough yield for them to justify the longer maturity. In a more traditional rate environment,
depositors typically would either accept a lesser rate for more liquid deposit
Page 29
accounts or choose a higher rate for a longer time deposit. We believe a more normalized yield
curve will be advantageous to us as our deposit base tends to prefer shorter term instruments.
On April 30, 2008, the Federal Reserve reduced the targeted Federal funds rate such that the
targeted rate is now 2%. This reduction will, in all likelihood, compress our net interest margins
in the near term as we will experience reduced yields on a significant portion of our earning asset
base and will not be able to counter this impact via reduced funding costs quickly. Generally, we
should be able to reduce our funding costs over an extended period of time following a Federal
Reserve rate reduction. Traditionally, we maintain an asset sensitive balance sheet, thus when
rates are stable to increasing our net interest margins should expand.
We believe we should be able to increase net interest income through overall growth in earning
assets in 2008 compared to previous periods. The additional revenues provided by increased loan
volumes should be sufficient to overcome any immediate increases in funding costs, and thus we
should be able to increase our current net interest income. Our net interest margins will likely
decrease due to increasingly competitive deposit pricing in our markets and further near-term rate
reductions by the Federal Reserve. In the last few months of 2007 and first few months of 2008,
the Federal Reserve reduced short-term rates dramatically. We have taken steps to counter the
impact of these rate decreases on our floating rate assets (including prime rate loans) by reducing
deposit rates to an appropriate level where we believe we can sustain our funding base. We believe
it will take more time for our competition in our market to begin to price in the full impact of
these rate decreases, and for competitive reasons we will not be able to counter the full impact of
these rate decreases on our net interest margin. As a result, we believe our net interest margins
in 2008 will be lower than in 2007.
Provision for Loan Losses. The provision for loan losses represents a charge to earnings necessary
to establish an allowance for loan losses that, in our managements evaluation, should be adequate
to provide coverage for the inherent losses on outstanding loans. The provision for loan losses
amounted to $1,591,000 and $788,000 for the three months ended March 31, 2008 and 2007,
respectively.
Based upon our 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 March 31,
2008. A significant increase in loan growth and increased net-charge offs during the first three
months of 2008 were the primary reasons for the increased provision expense in 2008 when compared
to 2007.
Based upon managements assessment of the loan portfolio, we adjust our allowance for loan losses
to an amount deemed appropriate to adequately cover probable losses 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 regulators, they are necessarily approximate.
There exist factors beyond our control, such as general economic conditions both locally and
nationally, which may negatively impact, materially, the adequacy of our allowance for loan losses
and, thus, the resulting provision for loan losses.
Noninterest Income. Our noninterest income is composed of several components, some of which vary
significantly between quarterly and annual periods. Service charges on deposit accounts and other
noninterest income generally reflect our growth, while investment services and fees from the
origination of mortgage loans will often reflect market conditions and fluctuate from period to
period. The opportunities for recognition of gains on loans and loan participations sold 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.
Page 30
The following is the makeup of our noninterest income for the three months ended March 31, 2008 and
2007 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
March 31, |
|
|
2008-2007 |
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
2008 |
|
|
2007 |
|
|
Increase (decrease) |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
$ |
2,574 |
|
|
$ |
1,797 |
|
|
|
43.2 |
% |
Investment services |
|
|
1,268 |
|
|
|
735 |
|
|
|
72.5 |
% |
Insurance sales commissions |
|
|
1,064 |
|
|
|
637 |
|
|
|
67.0 |
% |
Gains on sales of loans and loan participations, net: |
|
|
|
|
|
|
|
|
|
|
|
|
Fees from the origination and sale of mortgage
loans, net of sales commissions |
|
|
652 |
|
|
|
318 |
|
|
|
105.0 |
% |
Gains on loans and loan participations sold, net |
|
|
4 |
|
|
|
45 |
|
|
|
(91.1 |
)% |
Trust fees |
|
|
505 |
|
|
|
420 |
|
|
|
20.2 |
% |
Other noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
ATM and other consumer fees |
|
|
943 |
|
|
|
519 |
|
|
|
81.7 |
% |
Letters of credit fees |
|
|
86 |
|
|
|
60 |
|
|
|
43.3 |
% |
Bank-owned life insurance |
|
|
362 |
|
|
|
138 |
|
|
|
162.3 |
% |
Equity in earnings of Collateral Plus, LLC |
|
|
24 |
|
|
|
11 |
|
|
|
118.2 |
% |
Swap fees on customer loan transactions, net |
|
|
183 |
|
|
|
|
|
|
|
|
|
Visa related gains |
|
|
203 |
|
|
|
|
|
|
|
|
|
Other noninterest income |
|
|
499 |
|
|
|
346 |
|
|
|
44.2 |
% |
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
$ |
8,367 |
|
|
$ |
5,026 |
|
|
|
66.5 |
% |
|
|
|
|
|
|
|
|
|
|
Service charge income for the first three months of 2008 increased over that of the same period in
2007 due to the Mid-America acquisition, an increased number of customers utilizing overdraft
protection products and an increased per item insufficient fund charge. Additionally, we have
increased the number of deposit accounts subject to service charges. Also, the increase in service
charges in 2008 when compared to 2007 was impacted by a decreased earnings credit rate provided by
Pinnacle National to its commercial deposit customers.
Also included in noninterest income are commissions and fees from our financial advisory unit,
Pinnacle Asset Management, a division of Pinnacle National. Our Mid-America acquisition had a
significant impact on our investment services fees, as a significant amount of Mid-Americas fee
business was attributable to wealth management, particularly brokerage services. At March 31,
2008, Pinnacle Asset Management was receiving commissions and fees in connection with approximately
$859 million in brokerage assets held with Raymond James Financial Services, Inc. compared to $617
million at March 31, 2007. We also offer trust services through Pinnacle Nationals trust
division. At March 31, 2008, our trust department was receiving fees on approximately $493 million
in assets compared to $400 million at March 31, 2008. We offer insurance services through Miller
and Loughry Insurance and Services, Inc. which we believe will continue to increase our noninterest
income in future periods. During the first three months of 2008, Miller and Loughry received
approximately $450,000 in fees from one of its insurance carriers due to favorable claims
experience by that carrier. We do not anticipate any additional similar fees from this insurance
carrier this year.
Additionally, mortgage related fees for the first quarter of 2008 also provided for a significant
portion of the increase in noninterest income between the first three months of 2008 when compared
to 2007. These mortgage fees are for loans originated in our market areas that are subsequently
sold to third-party investors. All of these loan sales transfer servicing rights to the buyer.
Generally, mortgage origination fees increase in lower interest rate environments and decrease in
rising interest rate environments. As a result, mortgage origination fees may fluctuate greatly in
response to a changing rate environment. Also, impacting mortgage origination fees are the number
of mortgage originators we have offering these products. These originators are largely
commission-based employees. We have steadily increased the number of originators working for us
over the years and plan to continue to increase our mortgage origination work force in 2008.
We also sell certain commercial loan participations to our correspondent banks. Such sales are
primarily related to new lending transactions in excess of internal loan limits or industry
concentration limits. At March 31, 2008 and pursuant to participation agreements with these
correspondents, we had participated approximately $113.7 million of originated loans to these other
banks. 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 loans contracted interest rate. Pursuant to SFAS No. 140,
Page 31
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities a
replacement of Financial Accounting Standards Board (FASB) Statement No. 125, in those
transactions whereby the correspondent is receiving a lesser amount of interest than the amount
owed by the customer, we record a net gain along with a corresponding asset representing the
present value of our net retained cash flows. The resulting asset is amortized over the term of the
loan. Conversely, should a loan be paid prior to maturity, any remaining unamortized asset is
charged as a reduction to gains on loan participations sold. We recorded gains, net of
amortization expense related to the aforementioned retained cash flow asset, of $4,000 and $45,000
during the three months ended March 31, 2008 and 2007, respectively, 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, our acquisitions
and our growth have 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.
Included in other noninterest income are miscellaneous consumer fees, such as ATM revenues,
merchant card and other electronic banking revenues. We experienced a significant increase in
these revenues during the first three months of 2008 compared to the same time period in 2007 due
primarily to the merger with Mid-America.
Additionally, noninterest income from the cash surrender value of bank-owned life insurance
increased significantly between the first three months of 2008 and the first three months of 2007.
During the fourth quarter of 2007, we acquired approximately $20 million in additional bank-owned
life insurance. These policies insure numerous executives, managers and other personnel of our
company. For these new policies, Pinnacle National is the sole beneficiary of these policies.
Also included in other noninterest income is $183,000 in fees we receive when we originate an
interest rate swap transaction between an individual commercial borrower and a third party
provider. This amount will fluctuate significantly based on both borrower demand for this product
and the interest rate environment. During the first quarter of 2008,
we recorded $145,000 in expense associated with the Visa litigation
contingency. Additionally, we recorded
$140,000 in gains from the redemption of Visa stock and $63,000 in gains from the reduction in the
liability established for Visa related contingencies. Other noninterest income also increased by
approximately $233,000 during the first quarter of 2008 when compared to the same period in 2007.
Most of this increase was due to the Mid-America transaction with most of these revenues being for
loan late charges and other fees.
Noninterest Expense. Noninterest expense consists of salaries and employee benefits, equipment and
occupancy expenses, and other operating expenses. The following is the makeup of our noninterest
expense for the three months ended March 31, 2008 and 2007 (dollars in thousands):
Page 32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
March 31, |
|
|
2008-2007 |
|
|
|
|
|
|
|
|
|
|
|
Percent |
|
|
|
2008 |
|
|
2007 |
|
|
Increase (decrease) |
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries |
|
$ |
8,726 |
|
|
$ |
5,507 |
|
|
|
58.5 |
% |
Commissions |
|
|
637 |
|
|
|
391 |
|
|
|
62.9 |
% |
Other compensation, primarily incentives |
|
|
2,110 |
|
|
|
1,022 |
|
|
|
106.5 |
% |
Employee benefits and other |
|
|
2,394 |
|
|
|
1,347 |
|
|
|
77.7 |
% |
Total salaries and employee benefits |
|
|
13,867 |
|
|
|
8,267 |
|
|
|
67.7 |
% |
|
|
|
|
|
|
|
|
|
|
Equipment and occupancy |
|
|
4,276 |
|
|
|
2,165 |
|
|
|
97.5 |
% |
Marketing and business development |
|
|
376 |
|
|
|
252 |
|
|
|
49.2 |
% |
Postage and supplies |
|
|
648 |
|
|
|
454 |
|
|
|
42.7 |
% |
Amortization of core deposit intangible |
|
|
766 |
|
|
|
516 |
|
|
|
48.4 |
% |
Other noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
Other real estate |
|
|
61 |
|
|
|
5 |
|
|
|
1120.0 |
% |
Professional fees |
|
|
44 |
|
|
|
186 |
|
|
|
(76.3 |
)% |
Legal, including borrower-related charges |
|
|
158 |
|
|
|
132 |
|
|
|
19.7 |
% |
Directors fees |
|
|
83 |
|
|
|
60 |
|
|
|
38.3 |
% |
Insurance, including FDIC assessments |
|
|
727 |
|
|
|
349 |
|
|
|
108.3 |
% |
Charitable contributions |
|
|
109 |
|
|
|
93 |
|
|
|
17.2 |
% |
Other noninterest expense |
|
|
1,271 |
|
|
|
645 |
|
|
|
97.1 |
% |
|
|
|
|
|
|
|
|
|
|
Total other noninterest expense |
|
|
2,453 |
|
|
|
1,470 |
|
|
|
66.9 |
% |
|
|
|
|
|
|
|
|
|
|
Merger related expense |
|
|
3,106 |
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
25,491 |
|
|
$ |
13,124 |
|
|
|
94.2 |
% |
|
|
|
|
|
|
|
|
|
|
Expenses have generally increased between the above periods due to our merger with Mid-America,
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 and other expenses which tend to increase in relation to our growth.
Additionally, for the three months ended March 31, 2008 and 2007, approximately $481,000 and
$467,000, respectively, of compensation expense related to stock options and restricted share
awards is included in other incentive compensation expense.
At March 31, 2008, we employed 686.0 full time equivalent employees compared to 419.5 at March 31,
2007. We intend to continue to add employees to our work force for the foreseeable future, which
will cause our salary and employee benefits costs to increase in future periods.
We believe that variable pay incentives are a valuable tool in motivating an employee base that is
focused on providing our clients effective financial advice and increasing shareholder value. As a
result, and unlike many other financial institutions, our employees have historically participated
in our annual cash incentive plan. Under the plan, the targeted level of incentive payments
requires the Company to achieve a certain soundness threshold and a targeted fully diluted earnings
per share. To the extent that actual earnings per share are above or below targeted earnings per
share, the aggregate incentive payments are increased or decreased. Additionally, our Human
Resources and Compensation Committee (the Committee) of the Board of Directors has the ability to
change the parameters of the variable cash award at any time prior to final distribution of the
awards in order to take into account current events and circumstances and maximize the benefit of
the awards to our firm and to the associates.
Included in the salary and employee benefits amounts for the three months ended March 31, 2008 and
2007, were $1,486,000 and $590,000, respectively, related to variable cash awards. This expense
will fluctuate from year to year and quarter to quarter based on the estimation of achievement of
performance targets and the increase in the number of associates eligible to receive the award.
Based on our current earnings forecast for 2008, for the three months ended March 31, 2008, we have
anticipated a cash award to qualifying associates equal to 100% of their targeted award and
consequently we have recorded the quarterly portion of this incentive expense assuming 100% of the
targeted award. We will continue to review our anticipated 2008 cash incentive expense throughout
2008 which may require us to increase or decrease the anticipated award above or below the 100%
amount at March 31, 2008 based on the new estimate. For the three months ended March 31, 2007, the
anticipated award to be paid to associates equaled
Page 33
50% of their targeted award. The incentive plan for 2008 is structured similarly to prior year
plans in that the award is based on the achievement of soundness and earnings objectives.
In connection with our merger with Mid-America, all former associates of Mid-America that were
displaced by our merger were granted a retention bonus award provided they worked through a
predetermined date. Also, those associates that continue as Pinnacle associates following the
merger are eligible for a retention bonus should they continue their employment through December
31, 2008. We anticipate that this retention bonus award will approximate $4.6 million and will be
treated as a merger related expense in 2008, of which $1.4 million was accrued during the first
three months of 2008. Since these associates have agreed to a retention bonus award, they are not
eligible to participate in any of our other cash or equity incentive award plans until 2009.
Equipment and occupancy expenses in the first quarter of 2008 were greater than the first quarter
of 2007 by 97.5%. This increase is primarily attributable to our market expansion to Knoxville,
Tennessee which began in the second quarter of 2007, our new branch facility in the Donelson area
of Nashville which opened late in the first quarter of 2007, and a full quarter of expenses
associated with the eleven Mid-America branches which were acquired on November 30, 2007. These
additions contributed to the increase in our equipment and occupancy expenses between the two
periods and will contribute to increases in expenses in the future as we construct new facilities,
including new facilities currently planned in both the Nashville and Knoxville MSAs.
Marketing and other business development and postage and supplies expenses are higher in 2008
compared to 2007 due to increases in the number of customers and prospective customers; increases
in the number of customer contact personnel and the corresponding increases in customer
entertainment; and other business development expenses.
Included in noninterest expense for the first quarter of 2008 and 2007 is $766,000 and $516,000,
respectively of amortization of the core deposit intangible. For Mid-America, this identified
intangible is being amortized over ten years using an accelerated method which anticipates the life
of the underlying deposits. For Cavalry, this identified intangible is being amortized over seven
years using an accelerated method which anticipates the life of the underlying deposits.
Amortization expense associated with these core deposit intangibles will approximate $2.5 million
to $2.9 million per year for the next five years with lesser amounts for the remaining years.
Additionally, for the three months ended March 31, 2008, we incurred $3.106 million of merger
related expense directly associated with the Mid-America merger. The merger related charges
consisted of integration costs incurred in connection with the merger, including approximately
$1.42 million of retention bonuses payable to Mid-America associates, $876,000 in conversion
related incentive payments and other personnel costs, $637,000 in information technology conversion
matters and $148,000 in other integration charges. We anticipate additional merger related
expenses associated with the Mid-America transaction in 2008 as we fully integrate this acquisition
of approximately $4.75 million.
Other noninterest expenses increased $983,000 in the first quarter of 2008 when compared to the
same quarter in 2007. Most of these increases are attributable to increased insurance and other
noninterest expenses which include 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 Mid-America merger.
Our efficiency ratio (ratio of noninterest expense to the sum of net interest income and
noninterest income) was 71.4% for the first three months of 2008 compared to 59.4% in 2007. The
efficiency ratio for the first three months of 2008 includes the impact of merger related expenses
of $3.106 million. Excluding merger related expenses from the efficiency ratio would result in
total noninterest expense of $22.39 million compared to the sum of net interest income and
noninterest income of $35.73 million or an efficiency ratio of 62.7%. The efficiency ratio
measures the amount of expense that is incurred to generate a dollar of revenue.
Financial Condition
Our consolidated balance sheet at March 31, 2008 reflects organic growth since December 31, 2007.
Total assets grew to $3.89 billion at March 31, 2008 from $3.79 billion at December 31, 2007.
Page 34
Loans. The composition of loans at March 31, 2008 and at December 31, 2007 and the percentage (%)
of each classification to total loans are summarized as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
December 31, 2007 |
|
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
Commercial real estate Mortgage |
|
$ |
771,926 |
|
|
|
26.9 |
% |
|
$ |
728,201 |
|
|
|
26.5 |
% |
Consumer real estate Mortgage |
|
|
584,104 |
|
|
|
20.4 |
% |
|
|
562,721 |
|
|
|
20.5 |
% |
Construction and land development |
|
|
557,070 |
|
|
|
19.4 |
% |
|
|
517,399 |
|
|
|
18.8 |
% |
Commercial and industrial |
|
|
859,364 |
|
|
|
30.0 |
% |
|
|
838,161 |
|
|
|
30.5 |
% |
Consumer and other loans |
|
|
94,072 |
|
|
|
3.3 |
% |
|
|
103,159 |
|
|
|
3.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
2,866,536 |
|
|
|
100.0 |
% |
|
$ |
2,749,641 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Although the allocation of our loan portfolio did not change significantly during the three months
ended March 31, 2008 we did experience an increase of 0.4% in the commercial real estate
classification and a 0.6% increase in the construction and land development classification. A
portion of this increase is attributable to the conversion of the Mid-America loan systems to
Pinnacle Nationals loan accounting systems in which we reclassified several borrowers which were
previously classified as commercial real estate and construction and land development.
Additionally, we continue to have loan demand for our commercial real estate and construction
lending products; we will continue to pursue quality real estate lending opportunities. Because
these types of loans require that we maintain effective credit and construction monitoring systems,
we have increased our resources in this area. We believe 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.
We periodically analyze our commercial loan portfolio to determine if a concentration of credit
risk exists to any one or more industries. We use broadly accepted industry classification systems
in order to classify borrowers into various industry classifications. As a result, we have a
credit exposure (loans outstanding plus unfunded commitments) exceeding 25% of Pinnacle Nationals
total risk-based capital to borrowers in the following industries at March 31, 2008 and December
31, 2007 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2008 |
|
|
|
|
|
|
Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
|
Unfunded |
|
|
|
|
|
|
Total Exposure at |
|
|
|
Balances |
|
|
Commitments |
|
|
Total exposure |
|
|
December 31, 2007 |
|
Trucking industry |
|
$ |
86,903 |
|
|
$ |
26,125 |
|
|
$ |
113,028 |
|
|
$ |
109,118 |
|
Lessors of nonresidential buildings |
|
|
235,618 |
|
|
|
46,088 |
|
|
|
281,706 |
|
|
|
249,959 |
|
Lessors of residential buildings |
|
|
111,488 |
|
|
|
12,508 |
|
|
|
123,996 |
|
|
|
135,413 |
|
Land subdividers |
|
|
202,864 |
|
|
|
74,692 |
|
|
|
277,556 |
|
|
|
283,327 |
|
New housing operative builders |
|
|
168,138 |
|
|
|
97,246 |
|
|
|
265,384 |
|
|
|
269,744 |
|
New single family housing
construction |
|
|
77,727 |
|
|
|
26,009 |
|
|
|
103,736 |
|
|
|
104,980 |
|
The following table classifies our fixed and variable rate loans at March 31, 2008 according to
contractual maturities of (1) one year or less, (2) after one year through five years, and (3)
after five years. The table also classifies our variable rate loans pursuant to the contractual
repricing dates of the underlying loans (dollars in thousands):
Page 35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts at March 31, 2008 |
|
|
|
|
|
|
|
|
|
Fixed |
|
|
Variable |
|
|
|
|
|
|
At March 31, |
|
|
At December 31, |
|
|
|
Rates |
|
|
Rates |
|
|
Totals |
|
|
2008 |
|
|
2007 |
|
Based on contractual maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year |
|
$ |
241,065 |
|
|
$ |
1,011,282 |
|
|
$ |
1,252,347 |
|
|
|
43.7 |
% |
|
|
44.5 |
% |
Due in one year to five years |
|
|
810,235 |
|
|
|
325,748 |
|
|
|
1,135,983 |
|
|
|
39.6 |
% |
|
|
39.9 |
% |
Due after five years |
|
|
135,565 |
|
|
|
342,641 |
|
|
|
478,206 |
|
|
|
16.7 |
% |
|
|
15.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
1,186,865 |
|
|
$ |
1,679,671 |
|
|
$ |
2,866,536 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on contractual repricing dates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daily floating rate |
|
$ |
|
|
|
$ |
1,185,380 |
|
|
$ |
1,185,380 |
|
|
|
41.4 |
% |
|
|
40.0 |
% |
Due within one year |
|
|
241,065 |
|
|
|
394,953 |
|
|
|
636,018 |
|
|
|
22.2 |
% |
|
|
21.2 |
% |
Due in one year to five years |
|
|
810,235 |
|
|
|
91,908 |
|
|
|
902,143 |
|
|
|
31.4 |
% |
|
|
32.4 |
% |
Due after five years |
|
|
135,565 |
|
|
|
7,430 |
|
|
|
142,995 |
|
|
|
5.0 |
% |
|
|
6.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
1,186,865 |
|
|
$ |
1,679,671 |
|
|
$ |
2,866,536 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The above information does not consider the impact of scheduled principal payments. Daily floating
rate loans are tied to Pinnacle Nationals prime lending rate or a national interest rate index
with the underlying loan rates changing in relation to changes in these indexes. |
Non-Performing Assets. The specific economic and credit risks associated with our loan portfolio
include, but are not limited to, a general downturn in the economy which could affect employment
rates in our market area, general real estate market deterioration, interest rate fluctuations,
deteriorated or non-existent collateral, title defects, inaccurate appraisals, financial
deterioration of borrowers, fraud, and any violation of laws and regulations.
We attempt to reduce these economic and credit risks by adherence to loan to value guidelines for
collateralized loans, by investigating the creditworthiness of the borrower and by monitoring the
borrowers 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 Nationals 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 credit exposure (loans outstanding plus unfunded commitments) to a single
borrower of $22 million. Our loan policy requires that our board of directors approve any
relationships that exceed this internal limit.
We discontinue the accrual of interest income when (1) there is a significant deterioration in the
financial condition of the borrower and full repayment of principal and interest is not expected or
(2) the principal or interest is more than 90 days past due, unless the loan is both well-secured
and in the process of collection. At March 31, 2008, we had $17,124,000 in loans on nonaccrual
compared to $19,677,000 at December 31, 2007. The decrease in nonperforming loans between March
31, 2008 and December 31, 2007 was primarily related to borrower payments received during the three
months ended March 31, 2008 and transfers of certain loans to other real estate owned.
At March 31, 2008, we owned $3,567,000 in real estate which we had acquired, usually through
foreclosure, from borrowers compared to $1,673,000 at December 31, 2007. Substantially all of this
amount relates to homes that are in various stages of construction for which we believe we have
adequate collateral.
There was $2.0 million of other loans 90 past due and still accruing interest at March 31, 2008
compared to $1.61 million at December 31, 2007. At March 31, 2008 and at December 31, 2007, no
loans were deemed to be restructured loans. The following table is a summary of our nonperforming
assets at March 31, 2008 and December 31, 2007 (dollars in thousands):
Page 36
|
|
|
|
|
|
|
|
|
|
|
At Mar. 31, |
|
|
At Dec. 31, |
|
|
|
2008 |
|
|
2007 |
|
Nonaccrual loans (1) |
|
$ |
17,124 |
|
|
$ |
19,677 |
|
Restructured loans |
|
|
|
|
|
|
|
|
Other real estate owned |
|
|
3,567 |
|
|
|
1,673 |
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
|
20,691 |
|
|
|
21,350 |
|
Accruing loans past due 90 days or more |
|
|
2,002 |
|
|
|
1,613 |
|
|
|
|
|
|
|
|
Total nonperforming assets and accruing loans past due 90 days or more |
|
$ |
22,693 |
|
|
$ |
22,963 |
|
|
|
|
|
|
|
|
Total loans outstanding |
|
$ |
2,866,536 |
|
|
$ |
2,749,641 |
|
|
|
|
|
|
|
|
Ratio of nonperforming assets and accruing loans past due 90 days or
more to total loans outstanding at end of period |
|
|
0.80 |
% |
|
|
0.84 |
% |
|
|
|
|
|
|
|
Ratio of nonperforming assets and accruing loans past 90 days or more
to total allowance for loan losses at end of period |
|
|
75.97 |
% |
|
|
80.66 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest income that would have been recorded during the three months ended March 31,
2008 related to nonaccrual loans was $482,000. |
Potential problem assets, which are not included in nonperforming assets, amounted to approximately
$1.35 million or 0.05% of total loans outstanding at March 31, 2008. Potential problem assets
represent those assets with a well-defined weakness and where information about possible credit
problems of borrowers has caused management to have serious doubts about the borrowers ability to
comply with present repayment terms. This definition is believed to be substantially consistent
with the standards established by the OCC, Pinnacle Nationals primary regulator, for loans
classified as substandard.
Allowance for Loan Losses (allowance). We maintain the allowance at a level that our management
deems appropriate to adequately cover the inherent risks in the loan portfolio. As of March 31,
2008 and December 31, 2007, our allowance for loan losses was $29,871,000 and $28,470,000,
respectively, which our management deemed to be adequate at each of the respective dates. The
judgments and estimates associated with our ALL determination are described under Critical
Accounting Estimates above. The following is a summary of changes in the allowance for loan
losses for the three months ended March 31, 2008 and for the year ended December 31, 2007 and the
ratio of the allowance for loan losses to total loans as of the end of each period (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
At Mar. 31, |
|
|
At Dec. 31, |
|
|
|
2008 |
|
|
2007 |
|
Balance at beginning of period |
|
$ |
28,470 |
|
|
$ |
16,118 |
|
Provision for loan losses |
|
|
1,591 |
|
|
|
4,720 |
|
Allowance from Mid-America acquisition |
|
|
|
|
|
|
8,695 |
|
Charged-off loans: |
|
|
|
|
|
|
|
|
Commercial real estate Mortgage |
|
|
|
|
|
|
(22 |
) |
Consumer real estate Mortgage |
|
|
(481 |
) |
|
|
(364 |
) |
Construction and land development |
|
|
|
|
|
|
(271 |
) |
Commercial and industrial |
|
|
(102 |
) |
|
|
(326 |
) |
Consumer and other loans |
|
|
(174 |
) |
|
|
(359 |
) |
|
|
|
|
|
|
|
Total charged-off loans |
|
|
(757 |
) |
|
|
(1,342 |
) |
|
|
|
|
|
|
|
Recoveries of previously charged-off loans: |
|
|
|
|
|
|
|
|
Commercial real estate Mortgage |
|
|
|
|
|
|
|
|
Consumer real estate Mortgage |
|
|
|
|
|
|
125 |
|
Construction and land development |
|
|
355 |
|
|
|
1 |
|
Commercial and industrial |
|
|
100 |
|
|
|
51 |
|
Consumer and other loans |
|
|
112 |
|
|
|
102 |
|
|
|
|
|
|
|
|
Total recoveries of previously charged-off loans |
|
|
567 |
|
|
|
279 |
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries |
|
|
(190 |
) |
|
|
(1,063 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
29,871 |
|
|
$ |
28,470 |
|
|
|
|
|
|
|
|
Ratio of allowance for loan losses to total loans outstanding at end of
period |
|
|
1.04 |
% |
|
|
1.04 |
% |
|
|
|
|
|
|
|
Ratio of net charge-offs (*) to average loans outstanding for the period |
|
|
0.03 |
% |
|
|
0.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
(*) Net charge-offs for the three months ended March 31, 2008 have been annualized. |
Page 37
As noted in our critical accounting policies, management assesses the adequacy of the allowance
prior to the end of each calendar quarter. This assessment includes procedures to estimate the
allowance and test the adequacy and appropriateness of the resulting balance. The level of the
allowance is based upon managements evaluation of the loan portfolios, past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect the borrowers
ability to repay (including the timing of future payment), the estimated value of any underlying
collateral, composition of the loan portfolio, economic conditions, industry and peer bank loan
quality indications and other pertinent factors. This evaluation is inherently subjective as it
requires material estimates including the amounts and timing of future cash flows expected to be
received on impaired loans that may be susceptible to significant change. Although the allowance
increased by $1.4 million between March 31, 2008 and December 31, 2007, the ratio of our allowance
for loan losses to total loans outstanding remained unchanged at 1.04% at both March 31, 2008 and
December 31, 2007. In the future, the allowance to total loans outstanding ratio will increase or
decrease to the extent the factors that influence our quarterly allowance assessment in their
entirety either improve or weaken.
Investments. Our investment portfolio, consisting primarily of Federal agency bonds, state and
municipal securities and mortgage-backed securities, amounted to $505.4 million and $522.7 million
at March 31, 2008 and December 31, 2007, respectively. Our investment portfolio serves many
purposes including serving as a stable source of income, collateral for public funds and as a
liquidity source. A statistical comparison of our entire investment portfolio at March 31, 2008 is
as follows:
|
|
|
|
|
|
|
March 31, 2008 |
|
Weighted average life |
|
6.6 years |
Weighted average coupon |
|
|
4.95 |
% |
Tax equivalent yield |
|
|
5.37 |
% |
Deposits and Other Borrowings. We had approximately $2.97 billion of deposits at March 31, 2008
compared to $2.93 billion at December 31, 2007. 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 the client with short-term returns for their excess funds) amounted to $171.2 million at
March 31, 2008 and $156.1 million at December 31, 2007. Additionally, at March 31, 2008, we had
borrowed $159.4 million in advances from the Federal Home Loan Bank of Cincinnati compared to $92.8
million at December 31, 2007.
Traditionally, 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 March
31, 2008 and December 31, 2007 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
2008 |
|
|
Percent |
|
|
2007 |
|
|
Percent |
|
Core funding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposit accounts |
|
$ |
429,289 |
|
|
|
12.7 |
% |
|
$ |
400,120 |
|
|
|
12.1 |
% |
Interest-bearing demand accounts |
|
|
406,907 |
|
|
|
12.0 |
% |
|
|
410,661 |
|
|
|
12.4 |
% |
Savings and money market accounts |
|
|
757,776 |
|
|
|
22.4 |
% |
|
|
742,354 |
|
|
|
22.5 |
% |
Time deposit accounts less than $100,000 |
|
|
358,738 |
|
|
|
10.6 |
% |
|
|
371,881 |
|
|
|
11.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core funding |
|
|
1,952,710 |
|
|
|
57.6 |
% |
|
|
1,925,016 |
|
|
|
58.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-core funding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposit accounts greater than $100,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public funds |
|
|
154,187 |
|
|
|
4.5 |
% |
|
|
104,902 |
|
|
|
3.2 |
% |
Brokered deposits |
|
|
224,287 |
|
|
|
6.6 |
% |
|
|
163,188 |
|
|
|
4.9 |
% |
Other time deposits |
|
|
635,841 |
|
|
|
18.8 |
% |
|
|
732,213 |
|
|
|
22.2 |
% |
Securities sold under agreements to
repurchase |
|
|
171,186 |
|
|
|
5.1 |
% |
|
|
156,071 |
|
|
|
4.7 |
% |
Federal Home Loan Bank advances and other
borrowings |
|
|
168,606 |
|
|
|
5.0 |
% |
|
|
141,666 |
|
|
|
4.3 |
% |
Subordinated debt |
|
|
82,476 |
|
|
|
2.4 |
% |
|
|
82,476 |
|
|
|
2.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-core funding |
|
|
1,436,583 |
|
|
|
42.4 |
% |
|
|
1,380,516 |
|
|
|
41.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
3,389,293 |
|
|
|
100.0 |
% |
|
$ |
3,305,532 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 38
The amount of time deposits as of March 31, 2008 amounted to $1.373 million. The following table
shows our time deposits in denominations of under $100,000 and those of denominations of $100,000
or greater by category based on time remaining until maturity of (1) three months or less, (2) over
three but less than six months, (3) over six but less than twelve months and (4) over twelve months
and the weighted average rate for each category (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Balances |
|
|
Weighted Avg. Rate |
|
Denominations less than $100,000 |
|
|
|
|
|
|
|
|
Three months or less |
|
$ |
122,951 |
|
|
|
4.39 |
% |
Over three but less than six months |
|
|
106,267 |
|
|
|
4.45 |
% |
Over six but less than twelve months |
|
|
88,204 |
|
|
|
4.04 |
% |
Over twelve months |
|
|
41,316 |
|
|
|
4.43 |
% |
|
|
|
|
|
|
|
|
|
|
358,738 |
|
|
|
4.33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denomination $100,000 and greater |
|
|
|
|
|
|
|
|
Three months or less |
|
|
442,457 |
|
|
|
3.87 |
% |
Over three but less than six months |
|
|
238,001 |
|
|
|
4.25 |
% |
Over six but less than twelve months |
|
|
224,260 |
|
|
|
4.26 |
% |
Over twelve months |
|
|
109,596 |
|
|
|
4.98 |
% |
|
|
|
|
|
|
|
|
|
|
1,014,314 |
|
|
|
4.17 |
% |
|
|
|
|
|
|
|
Totals |
|
$ |
1,373,052 |
|
|
|
4.21 |
% |
|
|
|
|
|
|
|
Subordinated debt and holding company line of credit. On December 29, 2003, we established PNFP
Statutory Trust I; on September 15, 2005 we established PNFP Statutory Trust II; on September 7,
2006 we established PNFP Statutory Trust III and on October 31, 2007 we established PNFP Statutory
Trust IV (Trust I; Trust II; Trust III, Trust IV or collectively, the Trusts). All are
wholly-owned statutory business trusts. We are the sole sponsor of the Trusts and acquired each
Trusts common securities for $310,000; $619,000; $619,000 and $928,000, 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; $20,000,000 for Trust III; and $30,000,000 for Trust IV 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. At March 31, 2008, our $2,476,000 investment
in the Trusts is included in investments in unconsolidated subsidiaries in the accompanying
consolidated balance sheets and our $82,476,000 obligation is reflected as subordinated debt.
The Trust I Preferred Securities bear a floating interest rate based on a spread over 3-month LIBOR
(5.60% at March 31, 2008) 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 through 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 (4.35% at March 31, 2008) which
is set each quarter and mature on September 30, 2036. The Trust IV Preferred Securities bear a
floating interest rate based on a spread over 3-month LIBOR (5.65% at March 31, 2008) which is set
each quarter and mature on September 30, 2037.
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 Financials obligations under the Subordinated Debentures together with the
guarantee and other back-up obligations, in the aggregate, constitute a full and unconditional
guarantee by Pinnacle Financial of the obligations of the Trusts under the Trust Preferred
Securities.
The Subordinated Debentures are unsecured; bear interest at a rate equal to the rates paid by the
Trusts on the Trust Preferred Securities and mature on the same dates as those noted above for the
Trust Preferred Securities. Interest is payable quarterly. We may defer the payment of interest
at any time for a period not exceeding 20 consecutive quarters provided that the deferral period
does not extend past the stated maturity. During any such deferral period, distributions on the
Trust Preferred Securities will also be deferred and our ability to pay dividends on our common
shares will be restricted.
Subject to approval by the Federal Reserve Bank of Atlanta, the Trust Preferred Securities may be
redeemed prior to maturity at our option on or after September 17, 2008 for Trust I; on or after
September 30, 2010 for Trust II; September 30, 2011 for Trust III and September 30, 2012 for Trust
IV. 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
Page 39
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, Trust III or Trust IV.
At March 31, 2008, we had a loan agreement related to a $25 million line of credit with a regional
bank. This line of credit will be used to support the growth of Pinnacle National. The balance
owed pursuant to this line of credit at March 31, 2008 was $9 million. The $25 million line of
credit has a one year term, contains customary affirmative and negative covenants regarding the
operation of our business, a negative pledge on the common stock of Pinnacle National and is priced
at 30-day LIBOR plus 125 basis points.
Capital Resources. At March 31, 2008 and December 31, 2007, our stockholders equity amounted to
$477.2 million and $466.6 million, respectively, or an increase of $10.6 million. This increase
was primarily attributable to $9.98 million in comprehensive income, which was composed of $6.06
million in net income together with $3.91 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. Pinnacle Financial has not paid any dividends to date, nor does Pinnacle Financial
anticipate paying dividends to its shareholders for the foreseeable future. Future dividend policy
will depend on Pinnacle Financials and Pinnacle Nationals earnings, capital position, financial
condition, anticipated growth rates and other factors.
Market and Liquidity Risk Management
Our objective is to manage assets and liabilities to provide a satisfactory, consistent level of
profitability within the framework of established liquidity, loan, investment, borrowing, and
capital policies. Our Asset Liability Management Committee (ALCO) is charged with the
responsibility of monitoring these policies, which are designed to ensure acceptable composition of
asset/liability mix. Two critical areas of focus for ALCO are interest rate sensitivity and
liquidity risk management.
Interest Rate Sensitivity. In the normal course of business, we are exposed to market risk arising
from fluctuations in interest rates. ALCO measures and evaluates the interest rate risk so that we
can meet customer demands for various types of loans and deposits. ALCO determines the most
appropriate amounts of on-balance sheet and off-balance sheet items. Measurements which we use to
help us manage interest rate sensitivity include an earnings simulation model and an economic value
of equity model. These measurements are used in conjunction with competitive pricing analysis.
Earnings simulation model. We believe that interest rate risk is best measured by our
earnings simulation modeling. Forecasted levels of earning assets, interest-bearing
liabilities, and off-balance sheet financial instruments are combined with ALCO forecasts
of interest rates for the next 12 months and are combined with other factors in order to
produce various earnings simulations. To limit interest rate risk, we have guidelines for
our earnings at risk which seek to limit the variance of net interest income to less than a
20 percent decline for a 300 basis point change up or down in rates from managements flat
interest rate forecast over the next twelve months; to less than a 10 percent decline for a
200 basis point change up or down in rates from managements flat interest rate forecast
over the next twelve months; and to less than a 5 percent decline for a 100 basis point
change up or down in rates from managements flat interest rate forecast over the next
twelve months. The results of our current simulation model would indicate that we are in
compliance with our current guidelines at March 31, 2008.
Economic value of equity. Our economic value of equity model measures the extent that
estimated economic values of our assets, liabilities and off-balance sheet items will
change as a result of interest rate changes. Economic values are determined by discounting
expected cash flows from assets, liabilities and off-balance sheet items, which establishes
a base case economic value of equity. To help limit interest rate risk, we have a
guideline stating that for an instantaneous 300 basis point change in interest rates up or
down, the economic value of equity will not decrease by more than 30 percent from the base
case; for a 200 basis point instantaneous change in interest rates up or down, the economic
value of equity should not decrease by more than 20 percent; and for a 100 basis point
instantaneous change in interest rates up or down, the economic value of equity will not
decrease by more than 10 percent. The results of our current economic value of equity
model would indicate that we are in compliance with our current guidelines at March 31,
2008.
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
Page 40
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. Beginning in 2007, we
entered into interest rate swaps (swaps) to facilitate customer transactions and meet their
financing needs. These swaps qualify as derivatives, but are not designated as hedging
instruments. At March 31, 2008 and December 31, 2007, we had not entered into any derivative
contracts to assist managing our interest rate sensitivity.
Liquidity Risk Management. The purpose of liquidity risk management is to ensure that there are
sufficient cash flows to satisfy loan demand, deposit withdrawals, and our other needs.
Traditional sources of liquidity for a bank include asset maturities and growth in core deposits.
A bank may achieve its desired liquidity objectives from the management of its assets and
liabilities and by internally generated funding through its operations. Funds invested in
marketable instruments that can be readily sold and the continuous maturing of other earning assets
are sources of liquidity from an asset perspective. The liability base provides sources of
liquidity through attraction of increased deposits and borrowing funds from various other
institutions.
Changes in interest rates also affect our liquidity position. We currently price deposits in
response to market rates and our management intends to continue this policy. If deposits are not
priced in response to market rates, a loss of deposits could occur which would negatively affect
our liquidity position.
Scheduled loan payments are a relatively stable source of funds, but loan payoffs and deposit flows
fluctuate significantly, being influenced by interest rates, general economic conditions and
competition. Additionally, debt security investments are subject to prepayment and call provisions
that could accelerate their payoff prior to stated maturity. We attempt to price our deposit
products to meet our asset/liability objectives consistent with local market conditions. Our ALCO
is responsible for monitoring our ongoing liquidity needs. Our regulators also monitor our
liquidity and capital resources on a periodic basis.
In addition, Pinnacle National is a member of the Federal Home Loan Bank of Cincinnati (FHLB).
As a result, Pinnacle National receives advances from the FHLB, pursuant to the terms of various
borrowing agreements, which assist it in the funding of its home mortgage and commercial real
estate loan portfolios. Pinnacle National has pledged under the borrowing agreements with the
Federal Home Loan Bank of Cincinnati certain qualifying residential mortgage loans and, pursuant to
a blanket lien, all qualifying commercial mortgage loans as collateral. At March 31, 2008, our
bank subsidiaries had received advances from the Federal Home Loan Bank of Cincinnati totaling
$159.4 million at the following rates and maturities (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
Interest Rates |
|
2008 |
|
$ |
40,000 |
|
|
|
3.61 |
% |
2009 |
|
|
15,000 |
|
|
|
5.01 |
% |
2010 |
|
|
12,926 |
|
|
|
4.56 |
% |
2012 |
|
|
30,000 |
|
|
|
3.51 |
% |
Thereafter |
|
|
61,486 |
|
|
|
2.92 |
% |
|
|
|
|
|
|
|
|
Total |
|
$ |
159,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average interest rate |
|
|
|
|
|
|
3.54 |
% |
|
|
|
|
|
|
|
|
Pinnacle National also has accommodations with upstream correspondent banks for unsecured
short-term advances. These accommodations have various covenants related to their term and
availability, and in most cases must be repaid within less than a month. At March 31, 2008, we had
borrowed from correspondent banks $194,000 under such agreements.
At March 31, 2008, brokered certificates of deposit approximated $224.3 million which represented
6.6% of total fundings compared to $163.2 million and 4.9% at December 31, 2007. 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.
Page 41
At March 31, 2008, we had no significant commitments for capital expenditures. However, we are in
the process of developing our branch network or other office facilities in the Nashville MSA and
the Knoxville MSA. As a result, we anticipate that we will enter into contracts to buy property or
construct branch facilities and/or lease agreements to lease facilities in the Nashville MSA and
Knoxville MSA, including recently entering into agreements to relocate our downtown office facility
in Nashville, Tennessee to a new facility projected to open in 2010.
Our management believes that we have adequate liquidity to meet all known contractual obligations
and unfunded commitments, including loan commitments and reasonable borrower, depositor, and
creditor requirements over the next twelve months.
Off-Balance Sheet Arrangements. At March 31, 2008, we had outstanding standby letters of credit of
$90.9 million and unfunded loan commitments outstanding of $870.0 million. Because these
commitments generally have fixed expiration dates and many will expire without being drawn upon,
the total commitment level does not necessarily represent future cash requirements. If needed to
fund these outstanding commitments, Pinnacle National has the ability to liquidate Federal funds
sold or securities available-for-sale, or on a short-term basis to borrow and purchase Federal
funds from other financial institutions.
Impact of Inflation
The consolidated financial statements and related consolidated financial data presented herein have
been prepared in accordance with U.S. generally accepted accounting principles 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 institutions performance than the effects of general levels
of inflation.
Recently Adopted Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements SFAS No. 157, which
defines fair value, establishes a framework for measuring fair value in U.S. 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 adopted
SFAS No. 157 effective January 1, 2008. The adoption of SFAS No. 157 had no impact on our
consolidated financial statements.
In February of 2007, the FASB issued Statement of Financial Accounting Standard No. 159 (SFAS
159), The Fair Value Option for Financial Assets and Financial Liabilities, which gives entities
the option to measure eligible financial assets, and financial liabilities at fair value on an
instrument by instrument basis, that are otherwise not permitted to be accounted for at fair value
under other accounting standards. The election to use the fair value option is available when an
entity first recognizes a financial asset or financial liability. Subsequent changes in fair value
must be recorded in earnings. This statement was effective as of January 1, 2008, however it had no
impact on the consolidated financial statements of Pinnacle Financial because it did not elect the
fair value option for any financial instrument not presently being accounting for at fair value.
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 was for fiscal years beginning after December 15, 2007. On January 1, 2008, we
accounted for this EITF as a change in accounting principle and recorded a liability of $985,000
along with a corresponding adjustment of $598,700 to beginning retained earnings, net of tax.
In December 2007, the SEC issued SAB 110, Share-Based Payment. SAB 110 allows eligible public
companies to continue to use a simplified method for estimating the expense of stock options if
their own historical experience isnt sufficient to provide a reasonable basis. Under SAB 107,
Share-Based Payment, the simplified method was scheduled to expire for all grants made after
December 31, 2007. The SAB describes disclosures that should be provided if a company is using the
simplified method for all or a portion of its stock option grants beyond December 31, 2007. The
provisions of this bulletin became effective on January 1, 2008.
Page 42
Pinnacle Financial continues to use the simplified method allowed by SAB 110 for determining the
expected term component for share options granted during 2008.
Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS 141R, Business Combinations. SFAS 141R clarifies the
definitions of both a business combination and a business. All business combinations will be
accounted for under the acquisition method (previously referred to as the purchase method). This
standard defines the acquisition date as the only relevant date for recognition and measurement of
the fair value of consideration paid. SFAS 141R requires the acquirer to expense all acquisition
related costs. SFAS 141R will also require acquired loans to be recorded net of the allowance for
loan losses on the date of acquisition. SFAS 141R defines the measurement period as the time after
the acquisition date during which the acquirer may make adjustments to the provisional amounts
recognized at the acquisition date. This period cannot exceed one year, and any subsequent
adjustments made to provisional amounts are done retrospectively and restate prior period data. The
provisions of this statement are effective for business combinations during fiscal years beginning
after December 15, 2008. Pinnacle Financial has not determined the impact that SFAS 141R will have
on its financial position and results of operations and believes that such determination will not
be meaningful until Pinnacle Financial enters into a business combination.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in consolidated financial
statements An Amendment of ARB No. 51. SFAS No. 160 requires noncontrolling interests to be
treated as a separate component of equity, not as a liability or other item outside of equity.
Disclosure requirements include net income and comprehensive income to be displayed for both the
controlling and noncontrolling interests and a separate schedule that shows the effects of any
transactions with the noncontrolling interests on the equity attributable to the controlling
interest. The provisions of this statement are effective for fiscal years beginning after December
15, 2008. This statement should be applied prospectively except for the presentation and disclosure
requirements which shall be applied retrospectively for all periods presented. Pinnacle Financial
does not expect the impact of SFAS No. 160 on its financial position, results of operations or cash
flows to be material.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item 3 is included on pages 40 through 42 of Part I Item 2 -
Managements 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 SECs rules and forms and that such information is accumulated and communicated
to Pinnacle Financials 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
Financials disclosure controls and procedures were effective.
Changes in Internal Controls
There were no changes in Pinnacle Financials internal control over financial reporting during
Pinnacle Financials fiscal quarter ended March 31, 2008 that have materially affected, or are
reasonably likely to materially affect, Pinnacle Financials internal control over financial
reporting.
Page 43
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party or of which
any of their property is the subject.
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, 2007.
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 Companys common
stock during the quarter ended March 31, 2008. |
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
|
|
|
|
|
|
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 |
Page 44
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 |
|
May 9, 2008 |
President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
/s/ Harold R. Carpenter
|
|
|
Harold R. Carpenter |
|
May 9, 2008 |
Chief Financial Officer |
|
Page 45