10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(mark one)
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þ |
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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 September 30, 2009
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 incorporation or
organization)
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(I.R.S. Employer Identification No.) |
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211 Commerce Street, Suite 300, Nashville, Tennessee
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37201 |
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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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that the
registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. 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 þ
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Non-accelerated Filer o
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Smaller reporting company o |
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(do not check if you are a smaller 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 þ
As of October 23, 2009 there were 32,956,737 shares of common stock, $1.00 par value per share,
issued and outstanding.
Pinnacle Financial Partners, Inc.
Report on Form 10-Q
September 30, 2009
TABLE OF CONTENTS
Page 1
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 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The words expect, anticipate, intend,
plan, believe, seek, estimate, goal, target, should, shouldnt and similar
expressions are intended to identify such forward-looking statements, but other statements not
based on historical information may also be considered forward-looking. All forward-looking
statements are subject to risks, uncertainties and other facts that may cause the actual results,
performance or achievements of Pinnacle Financial to differ materially from any results expressed
or implied by such forward-looking statements. Such factors include, without limitation, (i)
deterioration in the financial condition of borrowers resulting in significant increases in loan
losses and provisions for those losses; (ii) continuation of the historically low short-term
interest rate environment; (iii) the inability of Pinnacle Financial to continue to grow its loan
portfolio in the Nashville-Davidson-Murfreesboro-Franklin MSA and the Knoxville MSA; (iv) changes
in loan underwriting, credit review or loss reserve policies associated with economic conditions,
examination conclusions, or regulatory developments; (v) increased competition with other financial
institutions; (vi) greater than anticipated deterioration or lack of sustained growth in the
national or local economies including the Nashville-Davidson-Murfreesboro-Franklin MSA and the
Knoxville MSA, particularly in commercial and residential real estate markets; (vii) rapid
fluctuations or unanticipated changes in interest rates; (viii) the results of regulatory
examinations; (ix) the development of any new market other than Nashville or Knoxville; (x) a
merger or acquisition; (xi) any activity in the capital markets that would cause Pinnacle Financial
to conclude that there was impairment of any asset, including intangible assets; (xii) the impact
of governmental restrictions on entities participating in the Capital Purchase Program, of the U.S.
Department of the Treasury (the Treasury); and (xiii) changes in state and federal legislation,
regulations or policies applicable to banks and other financial service providers, including
regulatory or legislative developments arising out of current unsettled conditions in the economy.
A more detailed description of these and other risks is contained in Pinnacle Financials most
recent annual report on Form 10-K as updated by its Current Report on Form 8-K filed with the
Securities and Exchange Commission on October 21, 2009, its Quarterly Report on Form 10-Q filed
with the Securities and Exchange Commission on August 3, 2009 and in Part II Item 1A Risk Factors
below. Many of such factors are beyond Pinnacles ability to control or predict, and readers are
cautioned not to put undue reliance on such forward-looking statements. Pinnacle disclaims any
obligation to update or revise any forward-looking statements contained in this report, whether as
a result of new information, future events or otherwise.
Page 2
Part I. Financial Information
Item 1.
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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September 30, |
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December 31, |
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2009 |
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2008 |
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ASSETS |
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Cash and noninterest-bearing due from banks |
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$ |
50,524,482 |
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$ |
68,388,961 |
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Interest-bearing due from banks |
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55,914,345 |
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8,869,680 |
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Federal funds sold |
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14,584,425 |
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12,994,114 |
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Cash and cash equivalents |
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121,023,252 |
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90,252,755 |
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Securities available-for-sale, at fair value |
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925,888,875 |
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839,229,428 |
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Securities held-to-maturity (fair value of $6,766,695 and $10,642,973 at September 30, 2009 and December 31, 2008, respectively) |
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6,550,727 |
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10,551,256 |
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Mortgage loans held-for-sale |
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15,334,959 |
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25,476,788 |
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Loans |
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3,607,886,366 |
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3,354,907,269 |
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Less allowance for loan losses |
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(82,981,386 |
) |
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(36,484,073 |
) |
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Loans, net |
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3,524,904,980 |
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3,318,423,196 |
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Premises and equipment, net |
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74,105,789 |
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68,865,221 |
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Other investments |
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37,960,842 |
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33,616,450 |
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Accrued interest receivable |
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18,008,909 |
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17,565,141 |
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Goodwill |
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244,116,260 |
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244,160,624 |
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Core deposits and other intangible assets |
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14,459,850 |
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16,871,202 |
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Other real estate |
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22,768,379 |
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18,305,880 |
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Other assets |
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89,587,040 |
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70,756,823 |
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Total assets |
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$ |
5,094,709,862 |
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$ |
4,754,074,764 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Deposits: |
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Noninterest-bearing |
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$ |
504,480,992 |
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$ |
424,756,813 |
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Interest-bearing |
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356,390,529 |
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375,992,912 |
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Savings and money market accounts |
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948,874,564 |
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694,582,319 |
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Time |
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2,010,162,777 |
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2,037,914,307 |
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Total deposits |
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3,819,908,862 |
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3,533,246,351 |
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Securities sold under agreements to repurchase |
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215,673,900 |
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184,297,793 |
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Federal Home Loan Bank advances and other borrowings |
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222,986,207 |
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201,966,181 |
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Federal funds purchased |
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71,643,000 |
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Subordinated debt |
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97,476,000 |
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97,476,000 |
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Accrued interest payable |
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8,018,015 |
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8,326,264 |
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Other liabilities |
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20,555,750 |
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29,820,779 |
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Total liabilities |
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4,384,618,734 |
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4,126,776,368 |
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Stockholders equity: |
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Preferred stock, no par value; 10,000,000 shares authorized; 95,000 shares issued and outstanding at September 30, 2009,
and December 31, 2008 |
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89,167,706 |
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88,348,647 |
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Common stock, par value $1.00; 90,000,000 shares authorized;
32,956,737 issued and outstanding at September 30, 2009 and 23,762,124 issued and outstanding at December 31, 2008 |
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32,956,737 |
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23,762,124 |
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Common stock warrants |
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3,348,402 |
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6,696,804 |
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Additional paid-in capital |
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523,232,882 |
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417,040,974 |
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Retained earnings |
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47,322,426 |
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84,380,447 |
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Accumulated other comprehensive income, net of taxes |
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14,062,975 |
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7,069,400 |
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Total stockholders equity |
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710,091,128 |
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627,298,396 |
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Total liabilities and stockholders equity |
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$ |
5,094,709,862 |
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$ |
4,754,074,764 |
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See accompanying notes to consolidated financial statements.
Page 3
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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Interest income: |
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Loans, including fees |
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$ |
41,665,915 |
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$ |
44,075,167 |
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$ |
119,818,533 |
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$ |
131,694,867 |
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Securities: |
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Taxable |
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8,607,924 |
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6,005,024 |
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26,088,836 |
|
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|
15,434,782 |
|
Tax-exempt |
|
|
1,694,323 |
|
|
|
1,339,930 |
|
|
|
4,742,447 |
|
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|
4,030,699 |
|
Federal funds sold and other |
|
|
473,663 |
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|
|
452,690 |
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|
1,338,587 |
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1,647,725 |
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|
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|
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Total interest income |
|
|
52,441,825 |
|
|
|
51,872,811 |
|
|
|
151,988,403 |
|
|
|
152,808,073 |
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Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
15,099,627 |
|
|
|
18,778,955 |
|
|
|
49,253,606 |
|
|
|
57,583,697 |
|
Securities sold under agreements to repurchase |
|
|
363,302 |
|
|
|
681,912 |
|
|
|
1,147,363 |
|
|
|
2,081,055 |
|
Federal Home Loan Bank advances and other borrowings |
|
|
2,430,839 |
|
|
|
3,130,448 |
|
|
|
7,826,936 |
|
|
|
8,820,575 |
|
|
|
|
|
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|
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|
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|
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Total interest expense |
|
|
17,893,768 |
|
|
|
22,591,315 |
|
|
|
58,227,905 |
|
|
|
68,485,327 |
|
|
|
|
|
|
|
|
|
|
|
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|
Net interest income |
|
|
34,548,057 |
|
|
|
29,281,496 |
|
|
|
93,760,498 |
|
|
|
84,322,746 |
|
Provision for loan losses |
|
|
22,134,025 |
|
|
|
3,124,819 |
|
|
|
101,063,950 |
|
|
|
7,503,412 |
|
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Net interest income after provision for loan losses |
|
|
12,414,032 |
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|
26,156,677 |
|
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(7,303,452 |
) |
|
|
76,819,334 |
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Noninterest income: |
|
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|
|
|
|
|
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|
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|
Service charges on deposit accounts |
|
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2,559,394 |
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|
2,778,097 |
|
|
|
7,604,774 |
|
|
|
8,036,320 |
|
Investment services |
|
|
1,112,059 |
|
|
|
1,271,284 |
|
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|
3,044,444 |
|
|
|
3,759,779 |
|
Insurance sales commissions |
|
|
906,298 |
|
|
|
959,104 |
|
|
|
3,130,849 |
|
|
|
2,612,225 |
|
Gain on loan sales and loan participations, net |
|
|
899,553 |
|
|
|
1,460,478 |
|
|
|
3,820,667 |
|
|
|
2,996,390 |
|
Gain on investment sales, net |
|
|
|
|
|
|
|
|
|
|
6,462,241 |
|
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|
Net gain on sale of premises |
|
|
13,895 |
|
|
|
|
|
|
|
22,784 |
|
|
|
1,010,881 |
|
Trust fees |
|
|
585,737 |
|
|
|
584,927 |
|
|
|
1,885,091 |
|
|
|
1,621,385 |
|
Other noninterest income |
|
|
1,660,156 |
|
|
|
2,199,051 |
|
|
|
5,504,191 |
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6,641,819 |
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|
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|
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|
Total noninterest income |
|
|
7,737,092 |
|
|
|
9,252,941 |
|
|
|
31,475,041 |
|
|
|
26,678,829 |
|
|
|
|
|
|
|
|
|
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|
|
|
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|
|
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|
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Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
14,245,485 |
|
|
|
13,013,116 |
|
|
|
41,672,578 |
|
|
|
39,382,393 |
|
Equipment and occupancy |
|
|
4,445,666 |
|
|
|
3,731,932 |
|
|
|
12,991,928 |
|
|
|
11,235,137 |
|
Foreclosed real estate expense |
|
|
1,250,152 |
|
|
|
95,255 |
|
|
|
5,864,375 |
|
|
|
285,061 |
|
Marketing and other business development |
|
|
512,063 |
|
|
|
380,555 |
|
|
|
1,417,780 |
|
|
|
1,234,933 |
|
Postage and supplies |
|
|
515,110 |
|
|
|
761,744 |
|
|
|
2,174,796 |
|
|
|
2,253,371 |
|
Amortization of intangibles |
|
|
776,784 |
|
|
|
788,267 |
|
|
|
2,411,351 |
|
|
|
2,312,333 |
|
Insurance, including FDIC premiums |
|
|
2,587,973 |
|
|
|
712,351 |
|
|
|
7,698,031 |
|
|
|
2,215,418 |
|
Merger related expense |
|
|
|
|
|
|
1,165,177 |
|
|
|
|
|
|
|
5,620,216 |
|
Other noninterest expense |
|
|
2,947,106 |
|
|
|
2,677,975 |
|
|
|
8,898,934 |
|
|
|
7,354,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
|
27,280,339 |
|
|
|
23,326,372 |
|
|
|
83,129,773 |
|
|
|
71,893,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(7,129,215 |
) |
|
|
12,083,246 |
|
|
|
(58,958,184 |
) |
|
|
31,604,985 |
|
Income tax expense (benefit) |
|
|
(3,782,045 |
) |
|
|
3,288,104 |
|
|
|
(25,925,471 |
) |
|
|
8,783,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(3,347,170 |
) |
|
|
8,795,142 |
|
|
|
(33,032,713 |
) |
|
|
22,821,065 |
|
Preferred stock dividends |
|
|
1,213,889 |
|
|
|
|
|
|
|
3,602,083 |
|
|
|
|
|
Accretion on preferred stock discount |
|
|
290,105 |
|
|
|
|
|
|
|
819,059 |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common stockholders |
|
$ |
(4,851,164 |
) |
|
$ |
8,795,142 |
|
|
$ |
(37,453,855 |
) |
|
$ |
22,821,065 |
|
|
|
|
|
|
|
|
|
|
|
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|
|
Per share information: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share available to common stockholders |
|
$ |
(0.15 |
) |
|
$ |
0.38 |
|
|
$ |
(1.39 |
) |
|
$ |
1.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per common share available to common stockholders |
|
$ |
(0.15 |
) |
|
$ |
0.36 |
|
|
$ |
(1.39 |
) |
|
$ |
0.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
32,460,614 |
|
|
|
23,174,998 |
|
|
|
27,011,749 |
|
|
|
22,559,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
32,460,614 |
|
|
|
24,439,642 |
|
|
|
27,011,749 |
|
|
|
23,826,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
Page 4
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
|
Additional |
|
|
|
|
|
|
Other Comp. |
|
|
Total |
|
|
|
Preferred Stock |
|
|
Common Stock |
|
|
Stock |
|
|
Paid-in |
|
|
Retained |
|
|
Income |
|
|
Stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Warrants |
|
|
Capital |
|
|
Earnings |
|
|
(Loss), net |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
|
Proceeds from the sale of common stock (less offering expenses of $45,242) |
|
|
|
|
|
|
|
|
|
|
1,000,000 |
|
|
|
1,000,000 |
|
|
|
|
|
|
|
20,454,758 |
|
|
|
|
|
|
|
|
|
|
|
21,454,758 |
|
Exercise of employee common stock options, stock appreciation rights, common stock warrants and related tax
benefits |
|
|
|
|
|
|
|
|
|
|
267,403 |
|
|
|
267,403 |
|
|
|
|
|
|
|
3,134,699 |
|
|
|
|
|
|
|
|
|
|
|
3,402,102 |
|
Issuance of restricted common shares pursuant to 2004 Equity Incentive Plan, net of forfeitures |
|
|
|
|
|
|
|
|
|
|
167,570 |
|
|
|
167,570 |
|
|
|
|
|
|
|
(167,570 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense for restricted shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
260,439 |
|
|
|
|
|
|
|
|
|
|
|
260,439 |
|
Compensation expense for stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,446,089 |
|
|
|
|
|
|
|
|
|
|
|
1,446,089 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,821,065 |
|
|
|
|
|
|
|
22,821,065 |
|
Net unrealized holding losses on securities available-for-sale, net of deferred tax benefit of $1,712,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,827,340 |
) |
|
|
(2,827,340 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,993,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, September 30, 2008 |
|
|
|
|
|
|
|
|
|
|
23,699,790 |
|
|
$ |
23,699,790 |
|
|
$ |
|
|
|
$ |
416,105,723 |
|
|
$ |
76,373,045 |
|
|
$ |
(3,609,850 |
) |
|
$ |
512,568,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2008 |
|
|
95,000 |
|
|
$ |
88,348,647 |
|
|
|
23,762,124 |
|
|
$ |
23,762,124 |
|
|
$ |
6,696,804 |
|
|
$ |
417,040,974 |
|
|
$ |
84,380,447 |
|
|
$ |
7,069,400 |
|
|
$ |
627,298,396 |
|
Exercise of employee common stock options, stock appreciation rights, common stock warrants and related tax
benefits |
|
|
|
|
|
|
|
|
|
|
59,319 |
|
|
|
59,319 |
|
|
|
|
|
|
|
641,191 |
|
|
|
|
|
|
|
|
|
|
|
700,510 |
|
Issuance of restricted common shares, net of forfeitures |
|
|
|
|
|
|
|
|
|
|
283,488 |
|
|
|
283,488 |
|
|
|
|
|
|
|
(283,488 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Restricted shares withheld for taxes |
|
|
|
|
|
|
|
|
|
|
(3,194 |
) |
|
|
(3,194 |
) |
|
|
|
|
|
|
(58,531 |
) |
|
|
|
|
|
|
|
|
|
|
(61,725 |
) |
Issuance of 8,855,000 shares of common stock, net of offering costs of $6,087,215 |
|
|
|
|
|
|
|
|
|
|
8,855,000 |
|
|
|
8,855,000 |
|
|
|
|
|
|
|
100,172,785 |
|
|
|
|
|
|
|
|
|
|
|
109,027,785 |
|
Cancellation of 267,455 warrants previously issued to U.S. Treasury |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,348,402 |
) |
|
|
3,348,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense for restricted shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,009,611 |
|
|
|
|
|
|
|
|
|
|
|
1,009,611 |
|
Compensation expense for stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,361,938 |
|
|
|
|
|
|
|
|
|
|
|
1,361,938 |
|
Accretion on preferred stock discount |
|
|
|
|
|
|
819,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(819,059 |
) |
|
|
|
|
|
|
|
|
Preferred dividends paid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,206,249 |
) |
|
|
|
|
|
|
(3,206,249 |
) |
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,032,713 |
) |
|
|
|
|
|
|
(33,032,713 |
) |
Net unrealized holding gains on securities available-for-sale, net of deferred tax expense of $4,734,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,993,575 |
|
|
|
6,993,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26,039,138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, September 30, 2009 |
|
|
95,000 |
|
|
$ |
89,167,706 |
|
|
|
32,956,737 |
|
|
$ |
32,956,737 |
|
|
$ |
3,348,402 |
|
|
$ |
523,232,882 |
|
|
$ |
47,322,426 |
|
|
$ |
14,062,975 |
|
|
$ |
710,091,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
Page 5
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(33,032,713 |
) |
|
$ |
22,821,065 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Net amortization/accretion of premium/discount on securities |
|
|
3,631,779 |
|
|
|
526,022 |
|
Depreciation and amortization |
|
|
7,833,796 |
|
|
|
4,788,550 |
|
Provision for loan losses |
|
|
101,063,950 |
|
|
|
7,503,412 |
|
Gain on loan sales |
|
|
(3,820,667 |
) |
|
|
(2,996,390 |
) |
Gain on investment sales, net |
|
|
(6,462,241 |
) |
|
|
|
|
Net gains on sale of premises |
|
|
(22,784 |
) |
|
|
(1,010,881 |
) |
Stock-based compensation expense |
|
|
2,371,549 |
|
|
|
1,706,528 |
|
Deferred tax (benefit) expense |
|
|
(25,140,069 |
) |
|
|
(1,274,403 |
) |
Losses on foreclosed real estate and other investments |
|
|
4,517,522 |
|
|
|
194,558 |
|
Excess tax benefit from stock compensation |
|
|
(44,364 |
) |
|
|
(805,414 |
) |
Mortgage loans held for sale: |
|
|
|
|
|
|
|
|
Loans originated |
|
|
(509,606,923 |
) |
|
|
(212,279,309 |
) |
Loans sold |
|
|
523,338,574 |
|
|
|
211,353,184 |
|
Decrease in other assets |
|
|
17,377,317 |
|
|
|
7,912,982 |
|
Increase (decrease) in other liabilities |
|
|
(9,573,279 |
) |
|
|
2,672,391 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
72,431,447 |
|
|
|
41,112,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Activities in securities available-for-sale: |
|
|
|
|
|
|
|
|
Purchases |
|
|
(614,690,009 |
) |
|
|
(233,008,882 |
) |
Sales |
|
|
346,895,583 |
|
|
|
|
|
Maturities, prepayments and calls |
|
|
195,745,788 |
|
|
|
105,725,683 |
|
Activities in securities held-to-maturity: |
|
|
|
|
|
|
|
|
Maturities, prepayments and calls |
|
|
3,960,000 |
|
|
|
16,080,000 |
|
Increase in loans, net |
|
|
(332,879,425 |
) |
|
|
(472,054,326 |
) |
Purchases of premises and equipment and software |
|
|
(10,419,279 |
) |
|
|
(6,198,441 |
) |
Proceeds from the sale of premises and equipment and software |
|
|
14,885 |
|
|
|
2,821,702 |
|
Cash used for acquisition |
|
|
|
|
|
|
(3,800,000 |
) |
Other investments |
|
|
(4,709,089 |
) |
|
|
(2,583,983 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(416,081,546 |
) |
|
|
(593,018,247 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Net increase in deposits |
|
|
287,043,453 |
|
|
|
371,825,090 |
|
Net increase in securities sold under agreements to repurchase |
|
|
31,376,107 |
|
|
|
42,736,082 |
|
Net decrease in Federal funds purchased |
|
|
(71,643,000 |
) |
|
|
(39,682,000 |
) |
Advances from Federal Home Loan Bank: |
|
|
|
|
|
|
|
|
Issuances |
|
|
70,000,000 |
|
|
|
110,478,047 |
|
Payments |
|
|
(30,860,649 |
) |
|
|
(13,882,995 |
) |
Net increase (decrease) in borrowings under lines of credit |
|
|
(18,000,000 |
) |
|
|
9,000,000 |
|
Preferred dividends paid |
|
|
(3,206,249 |
) |
|
|
|
|
Proceeds from the issuance of subordinated debt |
|
|
|
|
|
|
15,000,000 |
|
Issuance of common stock, net of expenses |
|
|
109,027,785 |
|
|
|
21,454,758 |
|
Exercise of common stock options and stock appreciation rights |
|
|
638,785 |
|
|
|
3,246,298 |
|
Excess tax benefit from stock compensation |
|
|
44,364 |
|
|
|
805,414 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
374,420,596 |
|
|
|
520,800,694 |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
30,770,497 |
|
|
|
(31,105,258 |
) |
Cash and cash equivalents, beginning of period |
|
|
90,252,755 |
|
|
|
122,503,863 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
121,023,252 |
|
|
$ |
91,398,605 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
Page 6
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Nature of Business Pinnacle Financial Partners, Inc. (Pinnacle Financial) is a bank holding
company whose primary business is conducted by its wholly-owned subsidiary, Pinnacle National Bank
(Pinnacle National). Pinnacle National is a commercial bank headquartered in Nashville, Tennessee.
Pinnacle National provides a full range of banking services in its primary market areas of the
Nashville-Davidson-Rutherford-Franklin, Tennessee and Knoxville, Tennessee 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.
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 opinion 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 in the 2008 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.
Accounting Standards Codification In June 2009, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard (SFAS) No. 168, The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement
of FASB Statement No. 162. This statement modifies the Generally Accepted Accounting Principles
(GAAP) hierarchy by establishing only two levels of GAAP, authoritative and nonauthoritative
accounting literature. Effective July 2009, the FASB Accounting Standards Codification (ASC),
also known collectively as the Codification, is considered the single source of authoritative
U.S. accounting and reporting standards, except for additional authoritative rules and interpretive
releases issued by the Securities and Exchange Commission (SEC). Nonauthoritative guidance and
literature would include, among other things, FASB Concepts Statements, American Institute of
Certified Public Accountants Issue Papers and Technical Practice Aids and accounting textbooks. The
Codification was developed to organize GAAP pronouncements by topic so that users can more easily
access authoritative accounting guidance. It is organized by topic, subtopic, section, and
paragraph, each of which is identified by a numerical designation. FASB ASC 105-10, Generally
Accepted Accounting Principles, became applicable beginning in third quarter 2009. All accounting
references have been updated, and therefore SFAS references have been replaced with ASC references
except for SFAS references that have not been integrated into the codification.
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, determination of any impairment of intangibles and the valuation of other real estate.
Page 7
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Cash Flow Information Supplemental cash flow information addressing certain cash payments and
noncash transactions for each of the nine months ended September 30, 2009 and 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended |
|
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
Cash Payments: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
59,036,422 |
|
|
$ |
72,581,518 |
|
Income taxes |
|
|
3,200,000 |
|
|
|
7,500,000 |
|
Noncash Transactions: |
|
|
|
|
|
|
|
|
Loans charged-off to the allowance for loan losses |
|
|
55,120,618 |
|
|
|
2,442,259 |
|
Loans foreclosed upon with repossessions, transferred to other real estate |
|
|
24,706,149 |
|
|
|
18,195,935 |
|
Net unrealized holding losses (gains) on available-for-sale securities,
net of deferred taxes |
|
|
6,993,575 |
|
|
|
(2,827,340 |
) |
Income (Loss) Per Common Share Basic net income (loss) per share available to common
stockholders (EPS) is computed by dividing net income or loss available to common stockholders 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 is
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 EPS by application of the treasury stock method.
As of September 30, 2009, there were 2,149,000 stock options and 10,000 stock appreciation
rights outstanding to purchase common shares. Most of these options and stock appreciation rights
have exercise prices and compensation costs attributable to current services, which is less than
the average market price of Pinnacle Financials common stock. Additionally, as of September 30,
2009, Pinnacle Financial had outstanding warrants to purchase 612,455 of common shares. Due to the
net loss attributable to common stockholders for the three and nine months ended September 30,
2009, no potentially dilutive shares related to these stock options, stock appreciation rights, and
warrants were included in the loss per share calculations, as including such shares would have an
antidilutive effect on earnings per share. As of September 30, 2008, there were 2,253,000 stock
options and 12,000 stock appreciation rights outstanding to purchase common shares. Most of these
options and stock appreciation rights 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 and nine months ended September 30, 2008. As
of September 30, 2008, Pinnacle Financial had outstanding warrants to purchase 370,000 of common
shares which have been considered in the calculation of Pinnacle Financials diluted earnings per
share for the three and nine months ended September 30, 2008.
Page 8
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following is a summary of the basic and diluted earnings per share calculations for the
three and nine months ended September 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Basic earnings per share calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator Net income (loss) available to common stockholders |
|
$ |
(4,851,164 |
) |
|
$ |
8,795,142 |
|
|
$ |
(37,453,855 |
) |
|
$ |
22,821,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator Average common shares outstanding |
|
|
32,460,614 |
|
|
|
23,174,998 |
|
|
|
27,011,749 |
|
|
|
22,559,449 |
|
Basic net income (loss) per share available to common stockholders |
|
$ |
(0.15 |
) |
|
$ |
0.38 |
|
|
$ |
(1.39 |
) |
|
$ |
1.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator Net income (loss) available to common stockholders |
|
$ |
(4,851,164 |
) |
|
$ |
8,795,142 |
|
|
$ |
(37,453,855 |
) |
|
$ |
22,821,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator Average common shares outstanding |
|
|
32,460,614 |
|
|
|
23,174,998 |
|
|
|
27,011,749 |
|
|
|
22,559,449 |
|
Dilutive shares contingently issuable |
|
|
|
|
|
|
1,264,644 |
|
|
|
|
|
|
|
1,266,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average diluted common shares outstanding |
|
|
32,460,614 |
|
|
|
24,439,642 |
|
|
|
27,011,749 |
|
|
|
23,826,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share available to common stockholders |
|
$ |
(0.15 |
) |
|
$ |
0.36 |
|
|
$ |
(1.39 |
) |
|
$ |
0.96 |
|
Recently Adopted Accounting Pronouncements
Fair Value Measurement In April 2009, the FASB issued ASC 820-10-65-4, Fair Value
Measurements and Disclosures. FASB ASC 820-10-65-4 provides additional guidance for estimating
fair value in accordance with FASB ASC 820 when the volume and level of activity for the asset or
liability have decreased significantly. FASB ASC 820-10-65-4 also provides guidance on identifying
circumstances that indicate a transaction is not orderly. The provisions of FASB ASC 820-10-65-4
were effective April 1, 2009. There was no impact as a result of adopting FASB ASC 820-10-65-4.
In April 2009, the FASB issued ASC 825-10-65-1, Financial Instruments, which requires
disclosures about fair value of financial instruments in interim reporting periods of publicly
traded companies that were previously only required to be disclosed in annual financial
statements. The provisions of FASB ASC 825-10-65-1 were effective April 1, 2009. As FASB ASC
825-10-65-1 amends only the disclosure requirements about fair value of financial instruments in
interim periods, the adoption of FASB ASC 825-10-65-1 had no impact to Pinnacle Financials
financial condition or results of operations.
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.
Subsequent Events We adopted the provisions of FASB ASC 855, Subsequent Events, during the
period ended June 30, 2009. FASB ASC 855 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before financial statements are
issued. The adoption of FASB ASC 855 did not impact our financial statements. We evaluated all
events or transactions that occurred after September 30, 2009, through October 28, 2009, the date
we issued these financial statements. During this period we did not have any material recognizable
subsequent events that required recognition in our disclosures to the September 30, 2009 financial
statements.
Page 9
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other-than-temporary impairment In April 2009, the FASB issued ASC 320-10-65-1, Investments
Debt and Equity Securities, that amends current other-than-temporary impairment guidance in GAAP for
debt securities to make the guidance more operational and to improve the presentation and
disclosure of other-than-temporary impairments on debt and equity securities in the financial
statements. This ASC does not amend existing recognition and measurement guidance related to
other-than-temporary impairments of equity securities. The provisions of FASB ASC 320-10-65-1 are
effective for the Companys interim period ending on June 30, 2009. There was no impact from the
adoption of FASB ASC 320-10-65-1 on Pinnacle Financials financial position, results of operations
or cash flows.
Note 2. Participation in U.S. Treasury Capital Purchase Program and Private Placement of Common
Stock
On December 12, 2008, Pinnacle Financial issued 95,000 shares of preferred stock to the U.S.
Treasury for $95 million pursuant to the U.S. Treasurys Capital Purchase Program (CPP) under the
Troubled Assets Relief Program (TARP). Additionally, Pinnacle Financial issued warrants to
purchase 534,910 shares of common stock to the U.S. Treasury as a condition to its participation in
the CPP. The warrants have an exercise price of $26.64 each and are immediately exercisable and
expire 10 years from the date of issuance. Proceeds from this sale of the preferred stock are
expected to be used for general corporate purposes, including supporting the continued, anticipated
growth of Pinnacle National. The CPP preferred stock is non-voting, other than having class voting
rights on certain matters, and pays cumulative dividends quarterly at a rate of 5% per annum for
the first five years and 9% thereafter. Pinnacle Financial can redeem the preferred shares issued
to the U.S. Treasury under the CPP at any time subject to a requirement that it must consult with
its primary federal regulators before redemption.
Management used a cost of capital model to calculate the fair value of the Series A preferred
stock issued to the U.S. Treasury in connection with the CPP. The cost of capital model involved
estimating a reasonable return for a similar $95 million capital investment in Pinnacle Financial.
The model incorporated a risk free rate (Long Term U.S. Treasury bond rate) added to a market
premium for Pinnacle Financials common stock. For the market premium for Pinnacle Financials
common stock, Pinnacle Financial multiplied its beta factor as reported on the Nasdaq Global Select
Markets website as of December 11, 2008 by 5% (the result of which was the estimated market risk
premium). Additionally, due to the relatively small size of the offering, Pinnacle Financial added
an additional risk premium of 2.3% to the total. The result was a cost of capital calculation of
8.3%. Pinnacle Financial believed 8.3% was a reasonable after-tax return to an investor who might
be willing to acquire a $95 million interest in Pinnacle Financial. Pinnacle Financial then
forecasted the cash outflows of the preferred stock issuance at the 5% dividend rate assuming a
terminal payment of $95 million five years from issuance prior to the dividend payment rates
increase from 5% to 9%. Using a discounted cash flow model with a discount rate of 8.3%, the
result was a fair value for the Series A preferred stock of $83.7 million.
The fair value of the common stock warrants issued in tandem with the Series A preferred stock
was determined to be approximately $6.3 million. The fair value of the common stock warrants as of
December 12, 2008 was estimated using the Black-Scholes option pricing model and the following
assumptions:
|
|
|
|
|
Risk free interest rate |
|
|
2.64 |
% |
Expected life of warrants |
|
|
10 years |
|
Expected dividend yield |
|
|
0.00 |
% |
Expected volatility |
|
|
30.3 |
% |
Weighted average fair value |
|
$ |
11.86 |
|
Pinnacle Financials computation of expected volatility is based on weekly historical
volatility since September of 2002. The risk free interest rate of the warrants were based on the
closing market bid for U.S. Treasury securities corresponding to the expected life of the common
stock warrants in effect at the time of grant.
The fair value of the Series A preferred stock and the fair value of the common stock warrants
were summed and the initial carrying amounts for the Series A preferred stock and the common stock
warrants were calculated based on an allocation of the two fair value components. The aggregate
fair value result for both the Series A preferred stock and the common stock warrants was
calculated to be $90.0 million, with 7% of this aggregate total allocated to the warrants and 93%
allocated to the Preferred Stock. As a result of this allocation, the $95 million issuance
resulted in the warrants having a value of $6.7 million and the Series A preferred stock having an
initial value of $88.3 million.
Page 10
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Management calculated the accretion amount of the Series A preferred stock discount using the
effective interest method which resulted in an effective rate of 6.51%. That is, to accrete the
$6.7 million discount on the Series A preferred stock over the next five years on an effective
interest method resulted in a calculation of 6.51% for the five year period. The $6.7 million will
be accreted as a reduction in net income available for common stockholders over the next five years
at approximately $1.1 million to $1.3 million per year.
On June 16, 2009, Pinnacle Financial completed the sale of 8,855,000 shares of its common
stock in a public offering, resulting in net proceeds to Pinnacle Financial of approximately $109.0
million. As a result, and pursuant to the terms of the warrants issued to the U.S. Treasury in
connection with Pinnacle Financials participation in the CPP, the number of shares issuable upon
exercise of the warrants issued to the U.S. Treasury in connection with the CPP was reduced by 50%,
or 267,455 shares.
Note 3. Securities
The amortized cost and fair value of securities available-for-sale and held-to-maturity at
September 30, 2009 and December 31, 2008 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
Amortized |
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
Securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
U.S. government agency securities |
|
|
225,374,270 |
|
|
|
3,385,210 |
|
|
|
304,927 |
|
|
|
228,454,553 |
|
Mortgage-backed securities |
|
|
492,873,681 |
|
|
|
12,398,370 |
|
|
|
231,431 |
|
|
|
505,040,620 |
|
State and municipal securities |
|
|
174,439,130 |
|
|
|
7,931,076 |
|
|
|
486,088 |
|
|
|
181,884,118 |
|
Corporate notes and other |
|
|
10,109,707 |
|
|
|
547,039 |
|
|
|
147,162 |
|
|
|
10,509,584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
902,796,788 |
|
|
$ |
24,261,695 |
|
|
$ |
1,169,608 |
|
|
$ |
925,888,875 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
State and municipal securities |
|
|
6,550,727 |
|
|
|
265,190 |
|
|
|
49,222 |
|
|
|
6,766,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,550,727 |
|
|
$ |
265,190 |
|
|
$ |
49,222 |
|
|
$ |
6,766,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 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 |
|
|
62,861,379 |
|
|
|
1,561,974 |
|
|
|
|
|
|
|
64,423,353 |
|
Mortgage-backed securities |
|
|
626,414,161 |
|
|
|
12,140,209 |
|
|
|
197,086 |
|
|
|
638,357,284 |
|
State and municipal securities |
|
|
136,727,876 |
|
|
|
1,454,803 |
|
|
|
3,357,443 |
|
|
|
134,825,236 |
|
Corporate notes |
|
|
1,907,722 |
|
|
|
3,785 |
|
|
|
287,952 |
|
|
|
1,623,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
827,911,138 |
|
|
$ |
15,160,771 |
|
|
$ |
3,842,481 |
|
|
$ |
839,229,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency securities |
|
$ |
1,997,967 |
|
|
$ |
5,593 |
|
|
$ |
|
|
|
$ |
2,003,560 |
|
State and municipal securities |
|
|
8,553,289 |
|
|
|
172,589 |
|
|
|
86,465 |
|
|
|
8,639,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,551,256 |
|
|
$ |
178,182 |
|
|
$ |
86,465 |
|
|
$ |
10,642,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 11
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During the nine months ended September 30, 2009, Pinnacle Financial realized approximately
$8.45 million in gains and $1.59 million in losses from the sale of $347 million of
available-for-sale securities. During the second quarter of 2009, we determined that an
available-for-sale corporate security was other than temporarily impaired as the credit worthiness
of the security had deteriorated. This impairment analysis resulted in a $400,000 charge during the
second quarter of 2009 with this amount offsetting the gain on the sale of investment securities.
At September 30, 2009, approximately $850.7 million of Pinnacle Financials investment portfolio
was pledged to secure public funds and other deposits and securities sold under agreements to
repurchase.
The amortized cost and fair value of debt securities as of September 30, 2009 by contractual
maturity are shown below. Actual maturities may differ from contractual maturities of
mortgage-backed securities since the mortgages underlying the securities may be called or prepaid
with or without penalty. Therefore, these securities are not included in the maturity categories in
the following summary.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
Held-to-maturity |
|
|
|
Amortized |
|
|
Fair |
|
|
Amortized |
|
|
Fair |
|
|
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
Due in one year or less |
|
$ |
1,600,110 |
|
|
$ |
1,610,302 |
|
|
$ |
765,305 |
|
|
$ |
775,906 |
|
Due in one year to five years |
|
|
22,092,294 |
|
|
|
22,927,066 |
|
|
|
5,124,377 |
|
|
|
5,301,843 |
|
Due in five years to ten years |
|
|
112,233,165 |
|
|
|
115,232,296 |
|
|
|
661,045 |
|
|
|
688,946 |
|
Due after ten years |
|
|
273,997,538 |
|
|
|
281,078,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
409,923,107 |
|
|
$ |
420,848,255 |
|
|
$ |
6,550,727 |
|
|
$ |
6,766,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2009 and December 31, 2008, included in securities were the following
investments with unrealized losses. The information below classifies these investments according
to the term of the unrealized losses 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 September 30, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency securities |
|
$ |
32,137,459 |
|
|
$ |
304,927 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
32,137,459 |
|
|
$ |
304,927 |
|
Mortgage-backed securities |
|
|
27,374,928 |
|
|
|
223,564 |
|
|
|
371,915 |
|
|
|
7,867 |
|
|
|
27,746,843 |
|
|
|
231,431 |
|
State and municipal securities |
|
|
4,786,793 |
|
|
|
193,618 |
|
|
|
8,007,632 |
|
|
|
341,692 |
|
|
|
12,794,425 |
|
|
|
535,310 |
|
Corporate notes |
|
|
363,160 |
|
|
|
147,162 |
|
|
|
|
|
|
|
|
|
|
|
363,160 |
|
|
|
147,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily-impaired securities |
|
$ |
64,662,340 |
|
|
$ |
869,270 |
|
|
$ |
8,379,547 |
|
|
$ |
349,559 |
|
|
$ |
73,041,887 |
|
|
$ |
1,218,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Mortgage-backed securities |
|
|
29,622,695 |
|
|
|
119,315 |
|
|
|
2,520,127 |
|
|
|
77,771 |
|
|
|
32,142,822 |
|
|
|
197,086 |
|
State and municipal securities |
|
|
28,560,915 |
|
|
|
1,095,573 |
|
|
|
32,466,087 |
|
|
|
2,348,335 |
|
|
|
61,027,002 |
|
|
|
3,443,908 |
|
Corporate notes |
|
|
242,520 |
|
|
|
157,480 |
|
|
|
859,475 |
|
|
|
130,472 |
|
|
|
1,101,995 |
|
|
|
287,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily-impaired securities |
|
$ |
58,426,130 |
|
|
$ |
1,372,368 |
|
|
$ |
35,845,689 |
|
|
$ |
2,556,578 |
|
|
$ |
94,271,819 |
|
|
$ |
3,928,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The applicable date for determining when securities are in an unrealized loss position is
September 30, 2009. As such, it is possible that a security had a market value that exceeded its
amortized cost on other days during the past twelve-month period.
The unrealized losses associated with these investment securities are primarily driven by
changes in interest rates and are not due to the credit quality of the securities. These
securities will continue to be monitored as a part of our ongoing impairment analysis, but are
expected to perform even if the rating agencies reduce the credit rating of the bond insurers.
Management evaluates the financial performance of the issuers on a quarterly basis to determine if
it is probable that the issuers can make all contractual principal and interest payments.
Because Pinnacle Financial does not intend to sell these securities and it is not more likely
than not that Pinnacle Financial will be required to sell the securities before recovery of their
amortized cost bases, which may be maturity, Pinnacle Financial does not consider these securities
to be other-than-temporarily impaired at September 30, 2009.
The carrying values of Pinnacle Financials investment securities could decline in the future
if the financial condition of issuers deteriorate and management determines it is probable that
Pinnacle Financial will not recover the entire amortized cost bases of the securities. As a
result, there is a risk that other-than-temporary impairment charges may occur in the future given
the current economic environment.
Page 12
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4. Loans and Allowance for Loan Losses
The composition of loans at September 30, 2009 and December 31, 2008 is summarized in the
table below.
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
At December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Commercial real estate mortgage |
|
$ |
1,136,134,348 |
|
|
$ |
963,530,444 |
|
Consumer real estate mortgage |
|
|
754,411,678 |
|
|
|
675,605,596 |
|
Construction and land development |
|
|
583,948,510 |
|
|
|
658,798,934 |
|
Commercial and industrial |
|
|
1,034,971,292 |
|
|
|
966,562,521 |
|
Consumer and other |
|
|
98,420,538 |
|
|
|
90,409,774 |
|
|
|
|
|
|
|
|
Total loans |
|
|
3,607,886,366 |
|
|
|
3,354,907,269 |
|
Allowance for loan losses |
|
|
(82,981,386 |
) |
|
|
(36,484,073 |
) |
|
|
|
|
|
|
|
Loans, net |
|
$ |
3,524,904,980 |
|
|
$ |
3,318,423,196 |
|
|
|
|
|
|
|
|
Changes in the allowance for loan losses for the nine months ended September 30, 2009 and for
the year ended December 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
Balance at beginning of period |
|
$ |
36,484,073 |
|
|
$ |
28,470,207 |
|
Charged-off loans |
|
|
(55,120,618 |
) |
|
|
(5,133,274 |
) |
Recovery of previously charged-off loans |
|
|
553,981 |
|
|
|
1,933,597 |
|
Provision for loan losses |
|
|
101,063,950 |
|
|
|
11,213,543 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
82,981,386 |
|
|
$ |
36,484,073 |
|
|
|
|
|
|
|
|
At September 30, 2009, Pinnacle Financial had certain impaired loans of $121,726,000 which
were on nonaccruing interest status. At December 31, 2008, Pinnacle Financial had certain impaired
loans of $10,860,000 which were on nonaccruing interest status. 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 $4.6 million and $794,000 for the nine months ended September 30,
2009 and 2008, respectively.
Impaired loans also include loans that Pinnacle National may elect to formally restructure due
to the weakening credit status of a borrower such that the restructuring may facilitate a repayment
plan that minimizes the potential losses that Pinnacle National may have to otherwise incur. These
loans are classified as impaired loans and, if on nonaccruing status as of the date of
restructuring, the loans are included in the nonperforming loan balances noted above. Not included
in nonperforming loans are loans that have been restructured that were performing as of the
restructure date. At September 30, 2009, there were $12.83 million of accruing restructured loans
that remain in a performing status. There were no accruing restructured loans at December 31,
2008.
Potential problem loans, which are not included in nonperforming assets, amounted to
approximately $259.5 million at September 30, 2009 compared to $27.8 million at December 31, 2008.
Potential problem loans represent those loans 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 Office of the Comptroller of the
Currency, Pinnacle Nationals primary regulator, for loans classified as substandard, excluding the
impact of nonperforming loans.
At September 30, 2009, Pinnacle Financial had granted loans and other extensions of credit
amounting to approximately $27,319,000 to directors, executive officers, and their related
entities, of which $21,220,000 had been drawn upon. During the nine months ended September 30,
2009, $2,587,000 of loan and other commitment increases and $3,390,000 of principal 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
similarly situated for the type of loan involved. None of these loans to directors, executive
officers, and their related entities were impaired at September 30, 2009.
Page 13
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At September 30, 2009, Pinnacle Financial had approximately $15.3 million of mortgage loans
held-for-sale compared to approximately $25.5 million at December 31, 2008. These loans are
marketed to potential investors prior to closing the loan with the borrower such that there is an
agreement for the subsequent sale of the loan between the eventual investor and Pinnacle Financial
prior to the loan being closed with the borrower. Pinnacle Financial sells loans to investors on a
loan-by-loan basis and has not entered into any forward commitments with investors for future loan
sales. All of these loan sales transfer servicing rights to the buyer. During the nine months
ended September 30, 2009, Pinnacle Financial recognized $4,052,000 in gains on the sale of these
loans compared to $2,289,000, in the nine months ended September 30, 2008.
At September 30, 2009, Pinnacle Financial owned $22,768,000 in other real estate which had
been acquired, usually through foreclosure, from borrowers compared to $18,306,000 at December 31,
2008. Substantially all of these amounts relate to homes and residential development projects that
are either completed or are in various stages of construction for which Pinnacle Financial believes
it has adequate collateral.
Note 5. Income Taxes
Pinnacle Financials income tax expense (benefit) differs from the amounts computed by
applying the Federal income tax statutory rates of 35% to income (loss) before income taxes. A
reconciliation of the differences for the three and nine months ended September 30, 2009 and 2008
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) at statutory rate |
|
$ |
(2,495,225 |
) |
|
$ |
4,229,136 |
|
|
$ |
(20,635,364 |
) |
|
$ |
11,061,745 |
|
State tax (benefit) expense, net of
Federal tax effect |
|
|
(602,022 |
) |
|
|
(103,272 |
) |
|
|
(3,398,928 |
) |
|
|
(262,076 |
) |
Federal tax credits |
|
|
(90,000 |
) |
|
|
(90,000 |
) |
|
|
(270,000 |
) |
|
|
(270,000 |
) |
Tax-exempt securities |
|
|
(587,134 |
) |
|
|
(397,123 |
) |
|
|
(1,661,969 |
) |
|
|
(1,246,644 |
) |
Bank owned life insurance |
|
|
(50,322 |
) |
|
|
(78,750 |
) |
|
|
(130,569 |
) |
|
|
(313,129 |
) |
Insurance premiums |
|
|
(84,420 |
) |
|
|
(83,007 |
) |
|
|
(296,786 |
) |
|
|
(290,542 |
) |
Other items |
|
|
127,078 |
|
|
|
(188,880 |
) |
|
|
468,145 |
|
|
|
104,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
$ |
(3,782,045 |
) |
|
$ |
3,288,104 |
|
|
$ |
(25,925,471 |
) |
|
$ |
8,783,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under FASB ASC 740, Income Taxes, companies are required to apply their estimated full
year tax rate on a year to date basis in each interim period. Under FASB ASC 740-270 Accounting
for Income Taxes in Interim Periods companies should not apply the estimated full year tax rate to
interim results if the expected annual effective tax benefit rate exceeds the tax benefit rate
based on interim items only. FASB ASC 740-270 requires that the tax benefit recognized be limited
to the benefit calculated on interim items only. As such, Pinnacle Financial recorded a tax
benefit through the third quarter based on the actual year-to-date results, in accordance with FASB
ASC 740-270.
The effective tax rate for 2009 and 2008 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 that the
credits are recognized in the Companys income tax returns. The credit that is available for the
year ending December 31, 2009 and for the year ended December 31, 2008 is $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 2009 and 2008.
Page 14
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 September 30, 2009 is as follows:
|
|
|
|
|
Commitments to extend credit |
|
$ |
935,147,000 |
|
Standby letters of credit |
|
|
92,427,000 |
|
At September 30, 2009, the fair value of Pinnacle Financials standby letters of credit was
$312,000. This amount represents the unamortized fee associated with these standby letters of
credit and is included in the consolidated balance sheet of Pinnacle Financial. This fair value
will decrease over time as the existing standby letters of credit approach their expiration dates.
Various legal claims also arise from time to time in the normal course of business. In the
opinion of management, the resolution of these claims outstanding at September 30, 2009 will not
have a material impact on Pinnacle Financials financial statements.
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. (Visa), 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 expensed and 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 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. During the fourth quarter of 2008, Pinnacle National expensed and
recognized an additional $28,000 contingent liability for the revised estimated settlement of
Visas Discover litigation. There have been no material changes to the contingent liability as of
September 30, 2009.
Page 15
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Visa completed an initial public offering (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. Stock Options, Stock Appreciation Rights and Restricted Shares
Pinnacle Financial has two equity incentive plans. Additionally, Pinnacle Financial has
acquired equity plans in connection with acquisitions of Cavalry Bancorp, Inc. (Cavalry) and
Mid-America Bancshares, Inc. (Mid-America) under which it has granted stock options and stock
appreciation rights 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 September 30,
2009, there were 1,005,721 shares available for issue under these plans.
During the first quarter of 2006 and in connection with its merger with Cavalry, Pinnacle
Financial assumed a third equity incentive plan, the 1999 Cavalry Bancorp, Inc. Stock Option Plan
(the Cavalry Plan). All options granted under the Cavalry Plan were fully vested prior to
Pinnacle Financials merger with Cavalry and expire at various dates between January 2011 and June
2012. In connection with the merger, all options to acquire Cavalry common stock were converted to
options to acquire Pinnacle Financials common stock at the 0.95 exchange ratio. The exercise
price of the outstanding options under the Cavalry Plan was adjusted using the same exchange ratio.
All other terms of the Cavalry options were unchanged. At September 30, 2009, there were 71,590
Pinnacle Financial shares remaining to be acquired by the participants in the Cavalry Plan at
exercise prices that ranged between $10.26 per share and $13.68 per share.
On November 30, 2007 and in connection with its merger with Mid-America, Pinnacle Financial
assumed several equity incentive plans, including the Mid-America Bancshares, Inc. 2006 Omnibus
Equity Incentive Plan (the Mid-America Plans). All options and stock appreciation rights granted
under the Mid-America Plans were fully vested prior to Pinnacle Financials merger with Mid-America
and expire at various dates between June 2011 and July 2017. In connection with the merger, all
options and stock appreciation rights to acquire Mid-America common stock were converted to options
or stock appreciation rights, as applicable, to acquire Pinnacle Financial common stock at the
0.4655 exchange ratio. The exercise price of the outstanding options and stock appreciation rights
under the Mid-America Plans was adjusted using the same exchange ratio with the exercise price also
being reduced by $1.50 per share. All other terms of the Mid-America options and stock
appreciation rights were unchanged. There were 487,834 Pinnacle Financial shares which could be
acquired by the participants in the Mid-America Plans at exercise prices that ranged between $6.63
per share and $21.37 per share. At September 30, 2009, there were 75,132 shares available for
issue under the Mid-America Plans, which shares may only be issued to Pinnacle associates that were
Mid-America associates prior to the merger.
Page 16
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Common Stock Options and Stock Appreciation Rights
As of September 30, 2009, there were 2,149,000 stock options and 10,000 stock appreciation
rights outstanding to purchase common shares. A summary of the activity within the equity
incentive plans during the nine months ended September 30, 2009 and information regarding expected
vesting, contractual terms remaining, intrinsic values and other matters was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
|
|
|
|
Exercise |
|
|
Remaining Term |
|
|
Value (1) |
|
|
|
Number |
|
|
Price |
|
|
(in years) |
|
|
(000s) |
|
Outstanding at December 31, 2008 |
|
|
2,232,100 |
|
|
$ |
17.41 |
|
|
|
5.99 |
|
|
$ |
28,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised (2) |
|
|
(59,319 |
) |
|
|
9.87 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(13,861 |
) |
|
|
27.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2009 |
|
|
2,158,920 |
|
|
$ |
17.53 |
|
|
|
5.49 |
|
|
$ |
5,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and expected to vest as of
September 30, 2009 |
|
|
2,128,069 |
|
|
$ |
17.36 |
|
|
|
5.47 |
|
|
$ |
5,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at September 30, 2009 (3) |
|
|
1,643,182 |
|
|
$ |
14.36 |
|
|
|
4.84 |
|
|
$ |
5,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The aggregate intrinsic value is calculated as the difference between the exercise
price of the underlying awards and the quoted closing price of Pinnacle Financial common
stock of $12.71 per common share for the approximately 856,000 options and stock
appreciation rights that were in-the-money at September 30, 2009. |
|
(2) |
|
There were no stock appreciation rights exercised during the nine months ended
September 30, 2009. |
|
(3) |
|
In addition to these outstanding options, there were 345,000 warrants issued to
founders of Pinnacle Financial that were outstanding at September 30, 2009 and December 31,
2008. Additionally, there were 267,455 and 534,910 warrants outstanding at September 30,
2009 and December 31, 2008 that were issued in conjunction with the CPP. These warrants,
if exercised, will result in the issuance of common shares. |
During the nine months ended September 30, 2009, approximately 214,000 option awards vested at
an average exercise price of $22.00 and an intrinsic value of approximately $2.2 million.
As of September 30, 2009, there was approximately $3.9 million of total unrecognized
compensation cost related to unvested stock options granted under our equity incentive plans. That
cost is expected to be recognized over a weighted-average period of 3.0 years.
During the nine months ended September 30, 2009 and 2008, Pinnacle Financial recorded stock
option compensation expense of $1,362,000 and $1,446,000, respectively, using the Black-Scholes
valuation model for awards granted prior to, but not yet vested, as of January 1, 2006 and for
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.
There were no options granted in the nine month period ended September 30, 2009. The fair
value of options granted for the nine month period ended September 30, 2008 was estimated using the
Black-Scholes option pricing model and the following assumptions:
|
|
|
|
|
|
|
2008 |
|
|
Risk free interest rate |
|
|
3.20 |
% |
Expected life of options |
|
|
6.5 years |
|
Expected dividend yield |
|
|
0.00 |
% |
Expected volatility |
|
|
28.5 |
% |
Weighted average fair value |
|
$ |
7.76 |
|
Page 17
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Pinnacle Financials computation of expected volatility is based on weekly historical
volatility since September 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 and the Mid-America Plans
provide for the granting of restricted share awards and other performance or market-based awards.
There were no market-based awards outstanding as of September 30, 2009 under either of these plans.
During the nine months ended September 30, 2009, Pinnacle Financial awarded 300,873 shares of
restricted common stock to certain Pinnacle Financial associates and outside directors.
A summary of activity for unvested restricted share awards for the nine months ended September
30, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Date Weighted- |
|
|
|
Number |
|
|
Average Cost |
|
Unvested at December 31, 2008 |
|
|
231,881 |
|
|
$ |
24.76 |
|
Shares awarded |
|
|
300,873 |
|
|
|
19.31 |
|
Restrictions lapsed and shares released to associates/directors |
|
|
(34,123 |
) |
|
|
23.99 |
|
Shares forfeited |
|
|
(20,579 |
) |
|
|
29.89 |
|
|
|
|
|
|
|
|
Unvested at September 30, 2009 |
|
|
478,052 |
|
|
$ |
21.25 |
|
|
|
|
|
|
|
|
Status of 2009 Restricted Share Awards: There were 300,873 restricted share awards granted
during the nine months ended September 30, 2009. The following discusses the current status of
these awards:
|
|
|
The forfeiture restrictions on 30,878 restricted share awards granted to executive
management personnel in 2009 lapse in three equal installments should Pinnacle Financial
achieve certain earnings and soundness targets over each year of the subsequent three-year
period (or, alternatively, the cumulative three-year period). |
|
|
|
The forfeiture restrictions on another 92,669 restricted share awards granted to
executive management personnel lapse in equal installments on the anniversary date of the
grant over a 10 year period or until the associate is 65 years of age, whichever is earlier
so long as Pinnacle Financial is profitable for that year. |
|
|
|
The forfeiture restrictions on 163,214 restricted share awards lapse in five equal
installments on the anniversary date of the grant. |
|
|
|
During the first quarter of 2009, 14,112 restricted share awards were issued to the
outside members of the board of directors in accordance with their board compensation plan.
Restrictions lapse 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. Each non-employee board member
received an award of 1,008 shares. |
Compensation expense associated with the performance based restricted share awards is
recognized over the time period that the restrictions associated with the awards are anticipated to
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 nine months ended September 30, 2009 and 2008, Pinnacle Financial recognized
approximately $1,010,000 and $260,000, respectively, in compensation costs attributable to all
restricted share awards issued prior to September 30, 2009 and September 30, 2008.
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 and by its participation in the CPP.
Pinnacle Financial has not paid any cash dividends since inception, and it does not anticipate
that it will consider paying dividends until Pinnacle Financial generates sufficient capital
through net income from operations to support both anticipated asset growth and dividend payments.
During the nine months ended September 30, 2009, Pinnacle National paid dividend payments of $3.5
million to Pinnacle Financial to fund Pinnacle Financials interest payments due on its
subordinated indebtedness and an additional $3.6 million to Pinnacle Financial to fund Pinnacle
Financials preferred stock dividend payable on the shares issued to the U.S. Treasury in the CPP.
At September 30, 2009, pursuant to federal banking regulations, Pinnacle National had approximately
$16.8 million of net retained profits from the previous two years available for future dividend
payments to Pinnacle Financial.
Page 18
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During the second quarter of 2009, Pinnacle Financial sought permission from its primary
federal regulators to redeem the preferred shares it sold to the U.S. Treasury through the CPP.
During the third quarter of 2009 and after consideration of various factors, Pinnacle Financial
withdrew its application to redeem the preferred shares it sold the U.S. Treasury through the CPP.
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 Pinnacle National to maintain minimum amounts and ratios of Total and Tier I capital
to risk-weighted assets and of Tier I capital to average assets. Management believes, as of
September 30, 2009, that Pinnacle Financial and Pinnacle National met all capital adequacy
requirements to which they are subject. To be categorized as well-capitalized, Pinnacle National
must maintain minimum Total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth
in the following table. Pinnacle Financials and Pinnacle Nationals 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 September 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle Financial |
|
$ |
588,640 |
|
|
|
14.71 |
% |
|
$ |
322,658 |
|
|
|
8.0 |
% |
|
not applicable |
Pinnacle National |
|
$ |
487,238 |
|
|
|
12.18 |
% |
|
$ |
322,642 |
|
|
|
8.0 |
% |
|
$ |
403,303 |
|
|
|
10.0 |
% |
Tier I capital to risk weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle Financial |
|
$ |
523,225 |
|
|
|
13.08 |
% |
|
$ |
161,329 |
|
|
|
4.0 |
% |
|
not applicable |
Pinnacle National |
|
$ |
421,825 |
|
|
|
10.55 |
% |
|
$ |
161,321 |
|
|
|
4.0 |
% |
|
$ |
241,982 |
|
|
|
6.0 |
% |
Tier I capital to average assets (*): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pinnacle Financial |
|
$ |
523,225 |
|
|
|
10.93 |
% |
|
$ |
191,043 |
|
|
|
4.0 |
% |
|
not applicable |
Pinnacle National |
|
$ |
421,825 |
|
|
|
8.84 |
% |
|
$ |
190,843 |
|
|
|
4.0 |
% |
|
$ |
238,554 |
|
|
|
5.0 |
% |
|
|
|
(*) |
|
Average assets for the above calculations were based on the most recent quarter. |
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. Pinnacle Financial enters 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 are 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 Pinnacle Financial, and results in
credit risk to Pinnacle Financial. When the fair value of a derivative instrument contract is
negative, Pinnacle Financial owes the customer or counterparty and therefore, has no credit risk.
Page 19
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of Pinnacle Financials interest rate swaps as of September 30, 2009 is included in
the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
|
|
|
|
|
Estimated Fair |
|
|
|
Notional Amount |
|
|
Value |
|
Interest rate swap agreements: |
|
|
|
|
|
|
|
|
Pay fixed / receive variable swaps |
|
$ |
248,291 |
|
|
$ |
13,193 |
|
Pay variable / receive fixed swaps |
|
|
248,291 |
|
|
|
(13,376 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
496,582 |
|
|
$ |
(183 |
) |
|
|
|
|
|
|
|
Note 10. Fair Value of Financial Instruments
In September 2006, the FASB issued ASC 820, Fair Value Measurements and Disclosures. FASB
ASC 820, 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.
FASB ASC 820 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.
Valuation Hierarchy
FASB ASC 820 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 assets and liabilities measured at fair value,
as well as the general classification of such assets and liabilities pursuant to the valuation
hierarchy.
Assets
Securities available for sale 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 and are classified within Level 2 of the
valuation hierarchy. 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.
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. 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 or the expense is
recognized as a charge-off. Impaired loans are classified within Level 3 of the hierarchy.
Page 20
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 investments are included in Level 3 of
the valuation hierarchy.
Other real estate Other real estate, consisting of properties obtained through foreclosure
or in satisfaction of loans, is initially recorded at fair value, determined on the basis of
current appraisals, comparable sales, and other estimates of value obtained principally from
independent sources, adjusted for estimated selling costs. At the time of foreclosure, any excess
of the loan balance over the fair value of the real estate held as collateral is treated as a
charge against the allowance for loan losses. Gains or losses on sale and any subsequent
adjustments to the fair value are recorded as a component of foreclosed real estate expense. Other
real estate is included in Level 3 of the valuation hierarchy.
Other assets Included in other assets are certain assets carried at fair value, including
the cash surrender value of bank owned life insurance policies and interest rate swap agreements.
The carrying amount of the cash surrender value 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.
Pinnacle Financial reflects these assets within Level 3 of the valuation hierarchy. 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.
Page 21
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables present the financial instruments carried at fair value as of September
30, 2009, by caption on the consolidated balance sheets and by FASB ASC 820 valuation hierarchy (as
described above) (dollars in thousands):
Assets and liabilities measured at fair value on a recurring basis as of September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Models with |
|
|
|
|
|
|
|
|
|
|
|
Models with |
|
|
significant |
|
|
|
Total carrying |
|
|
Quoted market |
|
|
significant |
|
|
unobservable |
|
|
|
value in the |
|
|
prices in an |
|
|
observable market |
|
|
market |
|
|
|
consolidated |
|
|
active market |
|
|
parameters |
|
|
parameters |
|
|
|
balance sheet |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Investment securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
U.S. government agency securities |
|
|
228,454 |
|
|
|
|
|
|
|
228,454 |
|
|
|
|
|
Mortgage-backed securities |
|
|
505,041 |
|
|
|
|
|
|
|
505,041 |
|
|
|
|
|
State and municipal securities |
|
|
181,884 |
|
|
|
|
|
|
|
181,844 |
|
|
|
|
|
Corporate notes and other |
|
|
10,510 |
|
|
|
|
|
|
|
10,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available for sale |
|
|
925,889 |
|
|
|
|
|
|
|
925,889 |
|
|
|
|
|
Other investments |
|
|
1,798 |
|
|
|
|
|
|
|
|
|
|
|
1,798 |
|
Other assets |
|
|
60,639 |
|
|
|
|
|
|
|
13,193 |
|
|
|
47,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value |
|
$ |
988,326 |
|
|
$ |
|
|
|
$ |
939,082 |
|
|
$ |
49,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
$ |
13,376 |
|
|
$ |
|
|
|
$ |
13,376 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value |
|
$ |
13,376 |
|
|
$ |
|
|
|
$ |
13,376 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and liabilities measured at fair value on a nonrecurring basis as of September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Models with |
|
|
|
|
|
|
|
|
|
|
|
Models with |
|
|
significant |
|
|
|
Total carrying |
|
|
Quoted market |
|
|
significant |
|
|
unobservable |
|
|
|
value in the |
|
|
prices in an |
|
|
observable market |
|
|
market |
|
|
|
consolidated |
|
|
active market |
|
|
parameters |
|
|
parameters |
|
|
|
balance sheet |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Other real estate |
|
$ |
22,768 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
22,768 |
|
Impaired loans, net (1) |
|
|
109,284 |
|
|
|
|
|
|
|
|
|
|
|
109,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
132,052 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
132,052 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amount is net of a valuation allowance of $12.4 million as required by FASB ASC
310-10,Receivables. |
Changes in level 3 fair value measurements
The table below includes a rollforward of the balance sheet amounts for the nine months ended
September 30, 2009 (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),
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.
Page 22
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Other |
|
Nine months ended September 30, 2009 (in thousands) |
|
Assets |
|
|
Liabilities |
|
Fair value, January 1, 2009 |
|
$ |
48,974 |
|
|
$ |
|
|
Total realized gains (losses) included in income |
|
|
171 |
|
|
|
|
|
Change in unrealized gains (losses) included in other
comprehensive income
for assets and liabilities still held at September 30, 2009 |
|
|
|
|
|
|
|
|
Purchases, issuances and settlements, net |
|
|
377 |
|
|
|
|
|
Transfers in and/or (out) of Level 3 |
|
|
(278 |
) |
|
|
|
|
|
|
|
|
|
|
|
Fair value, September 30, 2009 |
|
$ |
49,244 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Total realized gains (losses) included in income related to
financial assets and liabilities still on the consolidated
balance sheet at September 30, 2009 |
|
$ |
171 |
|
|
$ |
|
|
|
|
|
|
|
|
|
The following methods and assumptions were used by Pinnacle Financial in estimating its fair
value disclosures for financial instruments that are not measured at fair value. In cases where
quoted market prices are not available, fair values are based on estimates using discounted cash
flow models. Those models are significantly affected by the assumptions used, including the
discount rates and estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many cases, could not be
realized in immediate settlement of the instrument. The use of different methodologies may have a
material effect on the estimated fair value amounts. The fair value estimates presented herein are
based on pertinent information available to management as of September 30, 2009 and December 31,
2008. Such amounts have not been revalued for purposes of these consolidated financial statements
since those dates and, therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
Cash, Due From Banks and Federal Funds Sold The carrying amounts of cash, due from banks,
and federal funds sold approximate their fair value.
Securities held to maturity Estimated fair values for securities held to maturity are based on
quoted market prices where available. If quoted market prices are not available, estimated
fair values are based on quoted market prices of comparable instruments.
Loans For variable-rate loans that reprice frequently and have no significant change in
credit risk, fair values approximate carrying values. For other loans, fair values are
estimated using discounted cash flow models, using current market interest rates offered
for loans with similar terms to borrowers of similar credit quality. Fair values for
impaired loans are estimated using discounted cash flow models or based on the fair value
of the underlying collateral.
Mortgage loans held-for-sale Mortgage loans held-for-sale are carried at the lower of cost or
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.
Deposits, Securities Sold Under Agreements to Repurchase, Federal Home Loan Bank Advances and
Other Borrowings and Subordinated Debt The carrying amounts of demand deposits, savings
deposits, securities sold under agreements to repurchase, floating rate advances from the
Federal Home Loan Bank and floating rate subordinated debt approximate their fair values.
Fair values for certificates of deposit, fixed rate advances from the Federal Home Loan
Bank and fixed rate subordinated debt are estimated using discounted cash flow models,
using current market interest rates offered on certificates, advances and other borrowings
with similar remaining maturities. For fixed rate subordinated debt, the maturity is
assumed to be as of the earliest date that the indebtedness will be repriced.
Federal Funds Purchased The carrying amounts of federal funds purchased approximate their fair
value.
Off-Balance Sheet Instruments The fair values of Pinnacle Financials off-balance-sheet
financial instruments are based on fees charged to enter into similar agreements. However,
commitments to extend credit do not represent a significant value to Pinnacle Financial
until such commitments are funded. Pinnacle Financial has determined that the fair value of
commitments to extend credit is not significant.
Page 23
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The carrying amounts and estimated fair values of Pinnacle Financials financial instruments
at September 30, 2009 and December 31, 2008 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
|
Estimated |
|
|
|
Carrying Amount |
|
|
Fair Value |
|
|
Carrying Amount |
|
|
Fair Value |
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, due from banks, and
Federal funds sold |
|
$ |
121,023 |
|
|
$ |
121,023 |
|
|
$ |
90,253 |
|
|
$ |
90,253 |
|
Securities available-for-sale |
|
|
925,889 |
|
|
|
925,889 |
|
|
|
839,229 |
|
|
|
839,229 |
|
Securities held-to-maturity |
|
|
6,551 |
|
|
|
6,767 |
|
|
|
10,551 |
|
|
|
10,643 |
|
Mortgage loans held-for-sale |
|
|
15,335 |
|
|
|
15,335 |
|
|
|
25,477 |
|
|
|
25,477 |
|
Loans, net |
|
|
3,524,905 |
|
|
|
3,554,018 |
|
|
|
3,318,423 |
|
|
|
3,338,609 |
|
Derivative assets |
|
|
13,193 |
|
|
|
13,193 |
|
|
|
16,309 |
|
|
|
16,309 |
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits and securities sold
under agreements to
repurchase |
|
$ |
4,035,583 |
|
|
$ |
4,053,212 |
|
|
$ |
3,717,544 |
|
|
$ |
3,727,094 |
|
Federal Home Loan Bank
advances and other
borrowings |
|
|
222,986 |
|
|
|
228,346 |
|
|
|
201,966 |
|
|
|
205,297 |
|
Federal Funds Purchased |
|
|
|
|
|
|
|
|
|
|
71,643 |
|
|
|
71,643 |
|
Subordinated debt |
|
|
97,476 |
|
|
|
99,169 |
|
|
|
97,476 |
|
|
|
104,268 |
|
Derivative liabilities |
|
|
13,376 |
|
|
|
13,376 |
|
|
|
16,431 |
|
|
|
16,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
|
|
|
|
Notional |
|
|
|
|
|
|
|
Amount |
|
|
|
|
|
|
Amount |
|
|
|
|
|
Off-balance sheet instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit |
|
$ |
935,147 |
|
|
$ |
|
|
|
$ |
1,010,353 |
|
|
$ |
|
|
Standby letters of credit |
|
|
92,427 |
|
|
|
312 |
|
|
|
85,975 |
|
|
|
325 |
|
Page 24
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS |
The following is a discussion of our financial condition at September 30, 2009 and December 31,
2008 and our results of operations for the three and nine months ended September 30, 2009 and 2008.
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 continued organic growth, together with continuing deterioration in the economy in
our principal markets, particularly the residential real estate market, materially impacted our
financial condition and results of operations in 2009 as compared to 2008. Our fully diluted net
loss per share for the three months ended September 30, 2009 was $0.15, compared to fully diluted
net income per share of $0.36 for the same period in 2008. Our fully diluted net loss per share
for the nine months ended September 30, 2009 was $1.39, compared to fully diluted net income per
share of $0.96 for the same period in 2008. At September 30, 2009, loans totaled $3.608 billion,
as compared to $3.355 billion at December 31, 2008, while total deposits increased to $3.820
billion at September 30, 2009 from $3.533 billion at December 31, 2008.
Results of Operations. Our net interest income increased to $34.5 million for the third quarter of
2009 compared to $29.3 million for the third quarter of 2008. Our net interest income increased
to $93.8 million for the first nine months of 2009 compared to $84.3 million for the same period in
2008. The net interest margin (the ratio of net interest income to average earning assets) for
the three months ended September 30, 2009 was 3.05% compared to 3.14% for the same period in 2008.
The net interest margin for the nine months ended September 30, 2009 was 2.84% compared to 3.24%
for the same period in 2008.
Our provision for loan losses was $22.1 million for the third quarter of 2009 compared to $3.1
million for the same period in 2008. The provision for loan losses was $101.1 million for the nine
months ended September 30, 2009 compared to $7.5 million for the same period in 2008. Impacting
the provision for loan losses in any accounting period are several matters including the amount of
loan growth during the period, the level of charge-offs or recoveries incurred during the period,
the changes in the amount of impaired loans, changes in the risk ratings assigned to our loans and
the results of our quarterly assessment of the inherent risks of our loan portfolio. During the
third quarter of 2009, we incurred net charge-offs of $5.2 million compared to $73,000 in the third
quarter of 2008. Additionally, during the first nine months of 2009, we increased our allowance
for loan losses as a percentage of total loans from 1.09% at December 31, 2008 to 2.30% at
September 30, 2009 due to these increased levels of charge-offs and nonperforming loans and the
continued weakening in the economy.
Noninterest income for the three months ended September 30, 2009 compared to the same period in
2008 decreased by $1.5 million, or 16.4%. Noninterest income for the nine months ended September
30, 2009 compared to the same period in 2008 increased by $4.8 million, or 18.0%. This increase
was primarily due to our recording net gains on the sale of investment securities, as a result of
restructuring of the bond portfolio, of approximately $6.5 million for the nine months ended
September 30, 2009. Excluding gains on the sale of investment securities, Pinnacles noninterest
income for the nine months ended September 30, 2009 compared to the same period in 2008 decreased
by 6.2%. The decrease is largely attributable to reduced service charge income and investment
services income.
A number of factors contributed to increased noninterest expense for the first nine months of 2009
compared to 2008 including: increases in salaries and employee benefits, increased FDIC insurance
assessments, increased costs associated with the disposal and maintenance of other real estate
owned, and other operating expenses. The number of full-time equivalent employees increased from
723.0 at September 30, 2008 to 768.0 at September 30, 2009. As a result, we experienced increases
in compensation and employee benefit expense. We expect to add additional employees throughout
2009 which should also cause our compensation and employee benefit expense to increase in 2009.
Additionally, our branch expansion efforts during the last few years, including ongoing
construction of four branch offices, and the addition of the new associates in 2009 will also
increase noninterest expense. We also expensed $2.3 million in the second quarter of 2009 related
to a special one-time FDIC assessment. Our efficiency ratio (the ratio of noninterest expense to
the sum of net interest income and noninterest income) was 64.52% for the third quarter of 2009
compared to 60.53% for the same period in 2008. Our efficiency ratio was 66.38% for the first nine
months of 2009 compared with 64.80% for the same period in 2008.
Page 25
Due to the continued operating losses of the company, the effective tax benefit rate for the three
and nine months ended September 30, 2009 was approximately 53.0% and 44.0% respectively, compared
to an effective income tax expense rate for the three and nine months ended September 30, 2008 of
approximately 27.2% and 27.8%. We anticipate that for the year ending December 31, 2009 that our
effective tax benefit rate will approximate 45%. Under FASB ASC 740-270, Accounting for Income
Taxes in Interim Periods companies should not apply the estimated full year tax rate to interim
results if the expected annual effective tax benefit rate exceeds the tax benefit rate based on
interim items only. FASB ASC 740-270 requires that the tax benefit recognized be limited to the
benefit calculated on interim items only. As such, we recorded a tax benefit through the second
quarter based on the actual year-to-date results, in accordance with FASB ASC 740-270.
Net loss available to common stockholders for the third quarter of 2009 was $4.9 million compared
to net income available to common stockholders of $8.8 million for the same period in 2008, a
decrease of 155.2%. Net loss for the first nine months of 2009 was $37.5 million compared to net
income available to common stockholders of $22.8 million for the same period in 2008, a decrease of
264.1%. Included in net loss available to common stockholders for the three and nine months ended
September 30, 2009 was approximately $1.5 million and $4.4 million of charges related to preferred
stock dividends and accretion of the preferred stock discount related to our participation in the
U.S. Department of Treasurys Capital Purchase Program (the CPP).
Financial Condition. Loans increased $253.0 million during the first nine months of 2009. We have
grown our total deposits to $3.820 billion at September 30, 2009 compared to $3.533 billion at
December 31, 2008, an increase of $286.7 million. In comparing the composition of the average
balances of our deposits between the second quarter of 2009 with the second quarter of 2008, 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 September 30, 2009, our capital ratios, including our banks capital
ratios, exceeded regulatory minimum capital requirements. Additionally, at September 30, 2009, our
bank would be considered to be well-capitalized pursuant to banking regulations. Our bank may
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 capital
needs of our bank.
During the third quarter of 2008, we sold 1.0 million shares of our common stock for $21.5 million.
During the fourth quarter of 2008, we further increased our capital through our participation in
the CPP, issuing 95,000 shares of preferred stock for $95 million. Additionally, we issued 534,910
common stock warrants to the U.S. Treasury. The warrants have an exercise price of $26.64 each, are
immediately exercisable and expire 10 years from the date of issuance. The common stock warrants
have been assigned a fair value of $6.7 million, as of December 12, 2008 and that amount has been
recorded as the discount on the preferred stock which will be accreted as a reduction in net income
available to common stockholders over the next five years at approximately $1.1 million to $1.3
million per year. The resulting $88.3 million has been assigned to the Series A preferred stock
issued in the CPP and will be accreted up to the redemption amount of $95 million over the next
five years, a further increase of capital.
On June 16, 2009, we issued 8,855,000 shares through a public offering of our common stock
resulting in net proceeds to us of approximately $109.0 million. As a result, and pursuant to the
terms of the warrants issued to the U.S. Treasury in connection with our participant in the CPP,
the number of shares issuable upon exercise of the warrants issued to the U.S. Treasury in
connection with the CPP was reduced by 50%, or 267,455 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 and the assessment of impairment
of the intangibles resulting from our mergers with Mid-America Bancshares, Inc. (Mid-America) in
2007 and Cavalry Bancorp, Inc. (Cavalry) in 2006 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,
current asset quality trends, 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, including regulatory
recommendations. 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.
Page 26
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 interest and principal payments of a loan will be collected
as scheduled in the loan agreement.
An impairment allowance is recognized if the fair value of 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 of deferred loan fees or costs and unamortized premium or discount). 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. Management believes it follows appropriate accounting and regulatory
guidance in determining impairment and accrual status of impaired loans.
The level of allowance maintained is believed by management to be adequate to absorb probable
losses inherent in the portfolio at the balance sheet date. The allowance is increased by
provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously
charged-off.
In assessing the adequacy of the 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 reviewers, 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.
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. The estimated loan loss allocation rate for our internal system of credit risk grades
for commercial and commercial real estate loans is based on managements experience with similarly
graded loans, discussions with banking regulators and industry loss factors. Beginning in 2008, we
also performed a migration analysis of all loans that were charged-off during the previous two
years. A migration analysis assists in evaluating loan loss allocation rates for the various risk
grades assigned to loans in our portfolio. We incorporated the migration analysis along with other
factors to determine the loss allocation rates for the commercial and commercial real estate
portfolios. Subsequently, we weighted the allocation methodologies for the commercial and
commercial real estate portfolios and determined 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, discussions with banking regulators, consideration of 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 probable inherent credit losses which exist, but
have not yet been identified, as of the balance sheet date, and are 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 component, is increased or decreased based on the incremental
assessment of these various environmental factors.
Page 27
The assessment also includes an unallocated component. We believe that the unallocated amount is
warranted for inherent factors that cannot be practically assigned to individual loan categories.
An example is the imprecision in the overall measurement process, in particular the volatility of
the national and local economy.
We then test the resulting allowance 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.
Impairment of Intangible Assets Long-lived assets, including purchased intangible assets subject
to amortization, such as our core deposit intangible asset, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by
the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an
impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of would be separately presented in the balance
sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no
longer depreciated.
Goodwill and intangible assets that have indefinite useful lives are evaluated for impairment
annually and are evaluated for impairment more frequently if events and circumstances indicate that
the asset might be impaired. That annual assessment date is September 30. An impairment loss is
recognized to the extent that the carrying amount exceeds the assets fair value. The goodwill
impairment analysis is a two-step test. The first step, used to identify potential impairment,
involves comparing each reporting units estimated fair value to its carrying value, including
goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is
considered not to be impaired. If the carrying value exceeds estimated fair value, there is an
indication of potential impairment and the second step is performed to measure the amount of
impairment.
If required, the second step involves calculating an implied fair value of goodwill for each
reporting unit for which the first step indicated potential impairment. The implied fair value of
goodwill is determined in a manner similar to the amount of goodwill calculated in a business
combination, by measuring the excess of the estimated fair value of the reporting unit, as
determined in the first step, over the aggregate estimated fair values of the individual assets,
liabilities and identifiable intangibles as if the reporting unit was being acquired in a business
combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned
to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a
reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for
the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting
unit, and the loss establishes a new basis in the goodwill.
Our stock price has historically traded above its book value per common share and tangible book
value per common share. At September 30, 2009, our stock price was trading below its book value
per common share, but above its tangible book value per common share. We performed our annual
evaluation of whether there were indications of potential goodwill impairment as of September 30,
2009. The results of our evaluation determined that there was no indication of potential
impairment of goodwill at September 30, 2009. However, should our future earnings and cash flows
decline and/or discount rates increase, or should there be a significant decline in our stock price
below book value, an impairment charge to goodwill and other intangible assets may be required.
Page 28
Results of Operations
The following is a summary of our results of operations (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009-2008 |
|
|
|
|
|
|
|
|
|
|
2009-2008 |
|
|
|
Three months ended |
|
|
Percent |
|
|
Nine months ended |
|
|
Percent |
|
|
|
September 30, |
|
|
Increase |
|
|
September 30, |
|
|
Increase |
|
|
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
Interest income |
|
$ |
52,442 |
|
|
$ |
51,873 |
|
|
|
1.1 |
% |
|
$ |
151,989 |
|
|
$ |
152,808 |
|
|
|
-0.5 |
% |
Interest expense |
|
|
17,894 |
|
|
|
22,591 |
|
|
|
-20.8 |
% |
|
|
58,228 |
|
|
|
68,485 |
|
|
|
-15.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
34,548 |
|
|
|
29,282 |
|
|
|
18.0 |
% |
|
|
93,761 |
|
|
|
84,323 |
|
|
|
11.2 |
% |
Provision for loan losses |
|
|
22,134 |
|
|
|
3,125 |
|
|
|
608.3 |
% |
|
|
101,064 |
|
|
|
7,504 |
|
|
|
1,246.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses |
|
|
12,414 |
|
|
|
26,157 |
|
|
|
-52.5 |
% |
|
|
(7,303 |
) |
|
|
76,819 |
|
|
|
-109.5 |
% |
Noninterest income |
|
|
7,737 |
|
|
|
9,253 |
|
|
|
-16.4 |
% |
|
|
31,475 |
|
|
|
26,679 |
|
|
|
18.0 |
% |
Noninterest expense |
|
|
27,280 |
|
|
|
23,327 |
|
|
|
16.9 |
% |
|
|
83,130 |
|
|
|
71,893 |
|
|
|
15.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income taxes |
|
|
(7,129 |
) |
|
|
12,083 |
|
|
|
-159.0 |
% |
|
|
(58,958 |
) |
|
|
31,605 |
|
|
|
-286.5 |
% |
Income tax expense (benefit) |
|
|
(3,782 |
) |
|
|
3,288 |
|
|
|
-215.0 |
% |
|
|
(25,925 |
) |
|
|
8,784 |
|
|
|
-395.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(3,347 |
) |
|
|
8,795 |
|
|
|
-138.1 |
% |
|
|
(33,033 |
) |
|
|
22,821 |
|
|
|
-244.7 |
% |
Preferred dividends and preferred stock discount
accretion |
|
|
1,504 |
|
|
|
|
|
|
|
|
|
|
|
4,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common
stockholders |
|
$ |
(4,851 |
) |
|
$ |
8,795 |
|
|
|
-155.2 |
% |
|
$ |
(37,454 |
) |
|
$ |
22,821 |
|
|
|
-264.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per common share available to
common stockholders |
|
$ |
(0.15 |
) |
|
$ |
0.38 |
|
|
|
-139.5 |
% |
|
$ |
(1.39 |
) |
|
$ |
1.01 |
|
|
|
-237.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income(loss) per common share available
to common stockholders |
|
$ |
(0.15 |
) |
|
$ |
0.36 |
|
|
|
-141.7 |
% |
|
$ |
(1.39 |
) |
|
$ |
0.96 |
|
|
|
-244.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income. Net interest income represents the amount by which interest earned on various
earning assets exceeds interest paid on deposits and other interest bearing liabilities and is one
of the most significant components of our results of operations. For the three months ended
September 30, 2009 and 2008, we recorded net interest income of $34.5 million and $29.3 million
respectively, which resulted in a net interest margin of 3.05% and 3.14%. For the nine months
ended September 30, 2009 and 2008, we recorded net interest income of $93.8 million and $84.3
million respectively, which resulted in a net interest margin of 2.84% and 3.24%.
Page 29
The following tables set 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 interest-earning assets and interest-bearing liabilities, net interest
spread and net interest margin for the three and nine months ended September 30, 2009 and 2008
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Three months ended |
|
|
|
September 30, 2009 |
|
|
September 30, 2008 |
|
|
|
Average |
|
|
|
|
|
|
Rates/ |
|
|
Average |
|
|
|
|
|
|
Rates/ |
|
|
|
Balances |
|
|
Interest |
|
|
Yields |
|
|
Balances |
|
|
Interest |
|
|
Yields |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
3,583,182 |
|
|
$ |
41,666 |
|
|
|
4.61 |
% |
|
$ |
3,129,549 |
|
|
$ |
44,075 |
|
|
|
5.60 |
% |
Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
749,457 |
|
|
|
8,608 |
|
|
|
4.56 |
% |
|
|
455,945 |
|
|
|
6,005 |
|
|
|
5.24 |
% |
Tax-exempt (1) |
|
|
169,171 |
|
|
|
1,694 |
|
|
|
5.24 |
% |
|
|
134,198 |
|
|
|
1,340 |
|
|
|
5.24 |
% |
Federal funds sold and other |
|
|
74,663 |
|
|
|
474 |
|
|
|
2.76 |
% |
|
|
45,890 |
|
|
|
453 |
|
|
|
4.37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
4,576,473 |
|
|
$ |
52,442 |
|
|
|
4.60 |
% |
|
|
3,765,582 |
|
|
$ |
51,873 |
|
|
|
5.53 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonearning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets |
|
|
259,016 |
|
|
|
|
|
|
|
|
|
|
|
261,584 |
|
|
|
|
|
|
|
|
|
Other nonearning assets |
|
|
193,366 |
|
|
|
|
|
|
|
|
|
|
|
175,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
5,028,855 |
|
|
|
|
|
|
|
|
|
|
$ |
4,202,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking |
|
$ |
348,300 |
|
|
$ |
508 |
|
|
|
0.58 |
% |
|
$ |
373,567 |
|
|
$ |
1,109 |
|
|
|
1.18 |
% |
Savings and money market |
|
|
916,669 |
|
|
|
2,967 |
|
|
|
1.28 |
% |
|
|
706,225 |
|
|
|
2,856 |
|
|
|
1.61 |
% |
Time |
|
|
2,018,814 |
|
|
|
11,625 |
|
|
|
2.28 |
% |
|
|
1,689,221 |
|
|
|
14,814 |
|
|
|
3.49 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits |
|
|
3,283,783 |
|
|
|
15,100 |
|
|
|
1.82 |
% |
|
|
2,769,013 |
|
|
|
18,779 |
|
|
|
2.70 |
% |
Securities sold under agreements to repurchase |
|
|
223,737 |
|
|
|
363 |
|
|
|
0.64 |
% |
|
|
204,101 |
|
|
|
682 |
|
|
|
1.33 |
% |
Federal Home Loan Bank advances
and other borrowings |
|
|
236,660 |
|
|
|
1,481 |
|
|
|
2.48 |
% |
|
|
215,739 |
|
|
|
1,845 |
|
|
|
3.40 |
% |
Subordinated debt |
|
|
97,476 |
|
|
|
950 |
|
|
|
3.86 |
% |
|
|
90,465 |
|
|
|
1,285 |
|
|
|
5.65 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
3,841,656 |
|
|
|
17,894 |
|
|
|
1.85 |
% |
|
|
3,279,318 |
|
|
|
22,591 |
|
|
|
2.74 |
% |
Noninterest-bearing deposits |
|
|
462,783 |
|
|
|
|
|
|
|
|
|
|
|
409,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits and interest-bearing liabilities |
|
|
4,304,439 |
|
|
$ |
17,894 |
|
|
|
1.65 |
% |
|
|
3,689,168 |
|
|
$ |
22,591 |
|
|
|
2.44 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
8,572 |
|
|
|
|
|
|
|
|
|
|
|
10,849 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
715,844 |
|
|
|
|
|
|
|
|
|
|
|
502,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
5,028,855 |
|
|
|
|
|
|
|
|
|
|
$ |
4,202,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
34,548 |
|
|
|
|
|
|
|
|
|
|
$ |
29,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread (2) |
|
|
|
|
|
|
|
|
|
|
2.75 |
% |
|
|
|
|
|
|
|
|
|
|
2.79 |
% |
Net interest margin (3) |
|
|
|
|
|
|
|
|
|
|
3.05 |
% |
|
|
|
|
|
|
|
|
|
|
3.14 |
% |
|
|
|
(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 30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended |
|
|
Nine months ended |
|
|
|
September 30, 2009 |
|
|
September 30, 2008 |
|
|
|
Average |
|
|
|
|
|
|
Rates/ |
|
|
Average |
|
|
|
|
|
|
Rates/ |
|
|
|
Balances |
|
|
Interest |
|
|
Yields |
|
|
Balances |
|
|
Interest |
|
|
Yields |
|
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
|
$ |
3,506,243 |
|
|
$ |
119,819 |
|
|
|
4.57 |
% |
|
$ |
2,944,422 |
|
|
$ |
131,695 |
|
|
|
5.98 |
% |
Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
739,480 |
|
|
|
26,089 |
|
|
|
4.72 |
% |
|
|
401,268 |
|
|
|
15,435 |
|
|
|
5.14 |
% |
Tax-exempt (1) |
|
|
159,086 |
|
|
|
4,742 |
|
|
|
5.26 |
% |
|
|
135,702 |
|
|
|
4,030 |
|
|
|
5.23 |
% |
Federal funds sold and other |
|
|
82,614 |
|
|
|
1,339 |
|
|
|
2.35 |
% |
|
|
48,904 |
|
|
|
1,648 |
|
|
|
4.86 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
4,487,423 |
|
|
$ |
151,989 |
|
|
|
4.58 |
% |
|
|
3,530,296 |
|
|
$ |
152,808 |
|
|
|
5.84 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonearning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets |
|
|
259,894 |
|
|
|
|
|
|
|
|
|
|
|
259,869 |
|
|
|
|
|
|
|
|
|
Other nonearning assets |
|
|
219,859 |
|
|
|
|
|
|
|
|
|
|
|
173,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,967,176 |
|
|
|
|
|
|
|
|
|
|
$ |
3,963,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking |
|
$ |
355,677 |
|
|
$ |
1,405 |
|
|
|
0.53 |
% |
|
$ |
385,863 |
|
|
$ |
4,577 |
|
|
|
1.58 |
% |
Savings and money market |
|
|
802,946 |
|
|
|
7,322 |
|
|
|
1.22 |
% |
|
|
715,019 |
|
|
|
9,676 |
|
|
|
1.81 |
% |
Time |
|
|
2,106,428 |
|
|
|
40,527 |
|
|
|
2.57 |
% |
|
|
1,509,602 |
|
|
|
43,331 |
|
|
|
3.83 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest bearing deposits |
|
|
3,265,051 |
|
|
|
49,254 |
|
|
|
2.02 |
% |
|
|
2,610,484 |
|
|
|
57,584 |
|
|
|
2.95 |
% |
Securities sold under agreements to repurchase |
|
|
232,450 |
|
|
|
1,147 |
|
|
|
0.66 |
% |
|
|
182,698 |
|
|
|
2,081 |
|
|
|
1.52 |
% |
Federal Home Loan Bank advances
and other borrowings |
|
|
254,145 |
|
|
|
4,657 |
|
|
|
2.45 |
% |
|
|
189,438 |
|
|
|
4,958 |
|
|
|
3.50 |
% |
Subordinated debt |
|
|
97,476 |
|
|
|
3,170 |
|
|
|
4.35 |
% |
|
|
85,139 |
|
|
|
3,862 |
|
|
|
6.06 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
3,849,122 |
|
|
|
58,228 |
|
|
|
2.02 |
% |
|
|
3,067,759 |
|
|
|
68,485 |
|
|
|
2.98 |
% |
Noninterest-bearing deposits |
|
|
445,616 |
|
|
|
|
|
|
|
|
|
|
|
392,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits and interest-bearing liabilities |
|
|
4,294,738 |
|
|
$ |
58,228 |
|
|
|
1.81 |
% |
|
|
3,459,959 |
|
|
$ |
68,485 |
|
|
|
2.64 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
5,436 |
|
|
|
|
|
|
|
|
|
|
|
18,586 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
667,002 |
|
|
|
|
|
|
|
|
|
|
|
484,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
4,967,176 |
|
|
|
|
|
|
|
|
|
|
$ |
3,963,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
93,761 |
|
|
|
|
|
|
|
|
|
|
$ |
84,323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread (2) |
|
|
|
|
|
|
|
|
|
|
2.56 |
% |
|
|
|
|
|
|
|
|
|
|
2.86 |
% |
Net interest margin (3) |
|
|
|
|
|
|
|
|
|
|
2.84 |
% |
|
|
|
|
|
|
|
|
|
|
3.24 |
% |
|
|
|
(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 31
As noted above, the net interest margin for the three and nine months ended September 30, 2009 was
3.05% and 2.84% respectively, compared to a net interest margin of 3.14% and 3.24% for the same
periods in 2008. Our net interest margin decreased by 0.09% when comparing the three months ended
September 30, 2009 to the three months ended September 30, 2008 and 0.40% when comparing the nine
months ended September 30, 2009 to the nine months ended September 30, 2008. Matters related to
the changes in net interest income, net interest yields and rates, and net interest margin are
presented below:
|
|
|
Our loan yields decreased by 0.99% and 1.41% during the three and nine months ended
September 30, 2009 when compared to the same periods in 2008. 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 three and nine months ended
September 30, 2009 was 3.25%, compared to 5.00% and 5.43%, respectively, for the same
periods in 2008 reflecting the reduction of the Federal Funds rate between these periods.
Our prime lending rate moves in concert with the Federal Reserves changes to its Federal
funds rate. The reduction in loan rates had a negative impact on our margin when comparing
the three and nine months ended September 30, 2009 with the same period in 2008. |
|
|
|
|
During the third quarter of 2009, overall deposit rates were less than those rates for
the comparable period in 2008 by 0.88%. For the nine months ended September 30, 2009,
deposit rates decreased 0.93% over the same period in 2008. Changes in interest rates paid
on such products as interest checking, savings and money market accounts, securities sold
under agreements to repurchase and Federal funds purchased will generally increase or
decrease in a manner that is consistent with changes in the short-term rate environment.
There was a significant decrease in the short term rate environment during 2009 when
compared to 2008. As a result, the rates for those products experienced a large decrease
between the two periods. However, competitive deposit pricing pressures in our market
limited our ability to reduce our funding costs more aggressively and thus negatively
impacted our net interest margin. We routinely monitor the pricing of deposit products by
our primary competitors. We believe that our markets are very competitive banking markets
with several new market entrants seeking deposit growth. As a result, competitive
limitations on our ability to more significantly lower rates paid on our deposit products
had a negative impact on our margin during 2009. |
|
|
|
|
During the third quarter of 2009, the balances of noninterest bearing deposit balances,
interest bearing transaction accounts, savings and money market accounts and securities
sold under agreements to repurchase amounted to 46.6% of our total funding compared to
48.4% during the same period in 2008. The decrease in these products as a percentage of
total funding is attributable to the competitiveness within these products among the local
banking franchises and the significant growth we have experienced as we have elected to
fund lending opportunities through noncore sources. These funding sources generally have
lower rates than do other funding sources, such as certificates of deposit and other
borrowings. Additionally, noninterest bearing deposits increased to 11.6% of total funding
in 2009, compared to 11.3% in 2008. Maintaining our noninterest bearing deposit balances
in relation to total funding is critical to maintaining and growing our net interest
margin. |
|
|
|
|
Also negatively impacting our net interest margin is the increase in nonperforming
assets during the three and nine months ended September, 30, 2009 when compared to the same
periods in 2008. Average nonperforming assets were $86.6 million for the nine months ended
September 30, 2009 compared to $23.5 million for the nine months ended September 30, 2008,
an increase of 268.5%. |
During the nine months ended September 30, 2009, the yield curve was steeper than the same period
in 2008 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 and securities sold under agreements to
repurchase. Rates paid on these short-term deposits generally correlate to the Federal funds rate
and short term treasury rates. During the fourth quarter of 2008, the Federal Reserve, in response
to increasing economic instability, reduced the targeted Federal funds rate such that the targeted
rate at year end 2008 was less than 0.25%. At this time, we do not believe we will be able to
further reduce the rates we are paying on our short-term deposits, such as interest checking,
savings and money market accounts due to competitive pressures. Conversely, we have been
successful in reducing the rates we have been paying on time deposits throughout 2009 contributing
to an increase in margins on a linked quarter basis for the first nine months of 2009.
We believe we should be able to increase net interest income through overall growth in earning
assets in 2009 compared to previous periods. The additional revenues provided by increased loan
volumes should be sufficient to overcome increases in funding costs, and thus we should be able to
increase our current net interest income. We also believe our net interest margin should increase
during the remainder of 2009 due to several factors related to pricing adjustments for certain
loans and deposits. One factor is that we believe the rates we charge our loan customers are
beginning to increase as we experience more pricing leverage with our borrowers during this credit
cycle which includes not only implementation of more risk-based pricing initiatives but also the
implementation of loan rate floors on floating and variable rate loan products. Offsetting the
positive impact of any initiative we
deploy to enhance our net interest margin will be the ongoing negative impact of increased levels
of nonperforming assets during 2009.
Page 32
Provision for Loan Losses. The provision for loan losses represents a charge to earnings necessary
to establish an allowance for loan losses that, in managements evaluation, should be adequate to
provide coverage for the inherent losses on outstanding loans. The provision for loan losses
amounted to $22.1 million and $3.1 million for the three months ended September 30, 2009 and 2008
respectively, and $101.1 million and $7.5 million for the nine months ended September 30, 2009 and
2008, respectively.
Increases in nonperforming loans, net-charge offs and an overall increase in our allowance for
loan losses in relation to loan balances during the third quarter of 2009 were the primary reasons
for the increase in the provision expense in 2009 when compared to 2008. These increases were
caused primarily by continued deterioration in our construction and development loan portfolio,
particularly loans to residential builders and developers. Our construction and development loan
portfolio has experienced weakness due to continued decreased real estate sales which has led to
falling appraisal values of the collateral which secures our construction and development loan
portfolio. Our collateral, for substantially all construction and development loans, is our
primary source of repayment and as the value of the collateral deteriorates, ultimate repayment by
the borrower becomes increasingly difficult. As a result, we have increased our allowance for loan
losses which has led to increased provision expense in 2009 compared to 2008.
During the second quarter of 2009, we charged off a loan to a one-bank holding company for $21.5
million after their subsidiary bank was placed in receivership by their regulators which also
contributed to increased provision expense for 2009.
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. 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 September 30, 2009.
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 management
and are reviewed from time to time by our regulators, they are necessarily approximate and
imprecise. There are factors beyond our control, such as conditions in the local and national
economy, a local real estate market or particular industry conditions which may negatively impact,
materially, our asset quality and 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 and gains on the sale of securities will often reflect market
conditions and fluctuate from period to period. The opportunities for recognition of gains on
loans and loan participations sold and gains on sales of investment securities may also vary widely
from quarter to quarter and year to year. We anticipate that for the remainder of 2009, we should
experience modest increases in noninterest income primarily attributable to the hiring of new
associates in our various fee-based businesses.
Page 33
The following is the makeup of our noninterest income for the three and nine months ended September
30, 2009 and 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009-2008 |
|
|
|
|
|
|
|
|
|
|
2009-2008 |
|
|
|
Three months ended |
|
|
Percent |
|
|
Nine months ended |
|
|
Percent |
|
|
|
September 30, |
|
|
Increase |
|
|
September 30, |
|
|
Increase |
|
|
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
$ |
2,560 |
|
|
$ |
2,778 |
|
|
|
-7.8 |
% |
|
$ |
7,605 |
|
|
$ |
8,036 |
|
|
|
-5.4 |
% |
Investment services |
|
|
1,113 |
|
|
|
1,271 |
|
|
|
-12.5 |
% |
|
|
3,044 |
|
|
|
3,760 |
|
|
|
-19.0 |
% |
Insurance sales commissions |
|
|
906 |
|
|
|
959 |
|
|
|
-5.5 |
% |
|
|
3,131 |
|
|
|
2,612 |
|
|
|
19.9 |
% |
Gains on loans sold, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees from the origination and sale of
mortgage loans, net of sales commissions |
|
|
893 |
|
|
|
765 |
|
|
|
16.7 |
% |
|
|
4,052 |
|
|
|
2,289 |
|
|
|
77.0 |
% |
Gains (losses) on loan sales and loan
participations, net |
|
|
7 |
|
|
|
695 |
|
|
|
-99.0 |
% |
|
|
(231 |
) |
|
|
707 |
|
|
|
-132.7 |
% |
Net gain on sale of investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,462 |
|
|
|
|
|
|
|
|
|
Net gain on sale of premises |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
23 |
|
|
|
1,011 |
|
|
|
-97.7 |
% |
Trust fees |
|
|
586 |
|
|
|
585 |
|
|
|
0.2 |
% |
|
|
1,885 |
|
|
|
1,621 |
|
|
|
16.3 |
% |
Other noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ATM and other consumer fees |
|
|
1,144 |
|
|
|
1,074 |
|
|
|
6.5 |
% |
|
|
3,316 |
|
|
|
3,060 |
|
|
|
8.4 |
% |
Letters of credit fees |
|
|
79 |
|
|
|
104 |
|
|
|
-24.0 |
% |
|
|
312 |
|
|
|
236 |
|
|
|
32.2 |
% |
Bank-owned life insurance |
|
|
144 |
|
|
|
225 |
|
|
|
-36.0 |
% |
|
|
373 |
|
|
|
895 |
|
|
|
-58.3 |
% |
Swap fees on customer loan transactions, net |
|
|
38 |
|
|
|
262 |
|
|
|
-85.5 |
% |
|
|
448 |
|
|
|
763 |
|
|
|
-41.3 |
% |
Visa related gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203 |
|
|
|
-100.0 |
% |
Other noninterest income |
|
|
253 |
|
|
|
535 |
|
|
|
-52.5 |
% |
|
|
1,055 |
|
|
|
1,486 |
|
|
|
-29.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income |
|
$ |
7,737 |
|
|
$ |
9,253 |
|
|
|
-16.4 |
% |
|
$ |
31,475 |
|
|
$ |
26,679 |
|
|
|
18.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charge income for 2009 decreased from that in 2008 due to decreased overdraft protection
and insufficient fund charges.
Included in noninterest income are commissions and fees from our financial advisory unit, Pinnacle
Asset Management, a division of Pinnacle National. At September 30, 2009, Pinnacle Asset
Management was receiving commissions and fees in connection with approximately $898 million in
brokerage assets held with Raymond James Financial Services, Inc. compared to $848 million at
September 30, 2008. We also offer trust services through Pinnacle Nationals trust division. At
September 30, 2009, our trust department was receiving fees on approximately $607 million in assets
compared to $537 million at September 30, 2008. The business development efforts of our trust
department resulted in an increase in assets under management. We also increased the number of
trust advisors in the past year. These factors contributed to an increase in trust fees for the
first nine months of 2009 compared to the same period in 2008.
Additionally, fees from the origination and sale of mortgage loans also provided for a significant
portion of the increase in noninterest income. These mortgage fees are for loans originated in
both the middle Tennessee and Knoxville markets that are subsequently sold to third-party
investors. All of these loan sales transfer servicing rights to the buyer. Generally, mortgage
origination fees increase in lower interest rate environments and decrease in rising interest rate
environments. As a result, mortgage origination fees may fluctuate greatly in response to a
changing rate environment. Also impacting mortgage origination fees are the number of mortgage
originators we have offering these products. We increased the number of mortgage originators in
the past year. These originators are largely commission-based employees. The gross fees from the
origination and sale of mortgage loans have been offset by the commission expense associated with
these originations.
We also sell certain commercial loan participations to our correspondent banks. Such sales are
primarily related to new lending transactions in excess of internal loan limits or industry
concentration limits. At September 30, 2009 and pursuant to participation agreements with these
correspondents, we had participated approximately $89.8 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. 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. At each quarter end, we evaluate the discount rate we are using to measure the present value
of these future cash flows and adjust this discount rate to a market based rate. Should the
discount rate we are using to measure these cash flows change during the current accounting period,
the result of the change is reflected in our statements of operations.
Page 34
As a result of these matters, during the three months ended September 30, 2009 we recorded a gain
of $7,000 compared to no gains recognized during the three months ended September 30, 2008.
Additionally, Pinnacle Financial recognized a gain of $695,000 for the three months ended September
30, 2008 related to the sale of four related impaired loans to a group of outside investors.
During the nine months ended September 30, 2009 we expensed $231,000 compared to a $12,000 gain
during the nine months ended September 30, 2008. 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.
During the nine months ended September 30, 2009, we sold approximately $347 million of our
available-for-sale investment securities in order to reposition our bond portfolio for asset
liability management purposes. As a result of the sale of these securities, we realized a $6.9
million gain for the nine months ended September 30, 2009. During the second quarter of 2009, we
determined that an available-for-sale corporate security was other than temporarily impaired as the
credit worthiness of the security had deteriorated. This security was a bank holding company trust
preferred security acquired in the Mid-America merger. During 2009, this bank holding companys
subsidiary bank was placed under an administrative order by its regulator. This impairment
analysis resulted in a $400,000 charge during the second quarter of 2009 with this amount
offsetting the gains on the sale of investment securities.
Included in other noninterest income are miscellaneous consumer fees, such as ATM revenues,
merchant card and other electronic banking revenues. We experienced a significant increase in
these revenues in 2009 compared to 2008 due primarily to increased volumes from new customers.
Additionally, noninterest income from the cash surrender value of bank-owned life insurance
decreased between the first nine months of 2009 and the first nine months of 2008. The assets that
support these policies are administered by the life insurance carriers and the income we receive
(i.e., increases or decreases in the cash surrender value of the policies) on these policies is
dependent upon the returns the insurance carriers are able to earn on the underlying investments
that support the policies. With the national recession, the policy investment returns have
underperformed. We anticipate that such underperformance will continue through 2009.
Also included in other noninterest income is $38,000 and $448,000, respectively, for the three and
nine months ended September 30, 2009 and $262,000 and $763,000, respectively, for the three and
nine months ended September 30, 2008 in fees we receive when we originate an interest rate swap
transaction for commercial borrowers and a counterparty interest rate swap transaction with a third
party provider. This amount will fluctuate significantly based on both borrower demand for this
product and the interest rate environment.
Page 35
Noninterest Expense. Noninterest expense consists of salaries and employee benefits, equipment and
occupancy expenses, and other operating expenses. The following is the makeup of our noninterest
expense for the three and nine months ended September 30, 2009 and 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009-2008 |
|
|
|
|
|
|
|
|
|
|
2009-2008 |
|
|
|
Three months ended |
|
|
Percent |
|
|
Nine months ended |
|
|
Percent |
|
|
|
September 30, |
|
|
Increase |
|
|
September 30, |
|
|
Increase |
|
|
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries |
|
$ |
9,759 |
|
|
$ |
7,143 |
|
|
|
36.6 |
% |
|
$ |
28,094 |
|
|
$ |
23,365 |
|
|
|
20.2 |
% |
Commissions |
|
|
649 |
|
|
|
732 |
|
|
|
-11.3 |
% |
|
|
1,861 |
|
|
|
1,989 |
|
|
|
-6.4 |
% |
Other compensation, primarily incentives |
|
|
1,081 |
|
|
|
2,821 |
|
|
|
-61.7 |
% |
|
|
3,530 |
|
|
|
6,952 |
|
|
|
-49.2 |
% |
Employee benefits and other |
|
|
2,757 |
|
|
|
2,317 |
|
|
|
19.0 |
% |
|
|
8,188 |
|
|
|
7,076 |
|
|
|
15.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total salaries and employee benefits |
|
|
14,246 |
|
|
|
13,013 |
|
|
|
9.5 |
% |
|
|
41,673 |
|
|
|
39,382 |
|
|
|
5.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment and occupancy |
|
|
4,446 |
|
|
|
3,732 |
|
|
|
19.1 |
% |
|
|
12,992 |
|
|
|
11,235 |
|
|
|
15.6 |
% |
Foreclosed real estate expense |
|
|
1,250 |
|
|
|
95 |
|
|
|
1,215.8 |
% |
|
|
5,864 |
|
|
|
285 |
|
|
|
1,957.5 |
% |
Marketing and business development |
|
|
512 |
|
|
|
381 |
|
|
|
34.4 |
% |
|
|
1,418 |
|
|
|
1,235 |
|
|
|
14.8 |
% |
Postage and supplies |
|
|
515 |
|
|
|
762 |
|
|
|
-32.4 |
% |
|
|
2,175 |
|
|
|
2,253 |
|
|
|
-3.5 |
% |
Amortization of intangibles |
|
|
776 |
|
|
|
788 |
|
|
|
-1.5 |
% |
|
|
2,411 |
|
|
|
2,312 |
|
|
|
4.3 |
% |
Other noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees |
|
|
553 |
|
|
|
428 |
|
|
|
29.2 |
% |
|
|
1,615 |
|
|
|
831 |
|
|
|
94.3 |
% |
Legal, including borrower-related charges |
|
|
329 |
|
|
|
296 |
|
|
|
11.1 |
% |
|
|
1,392 |
|
|
|
606 |
|
|
|
129.7 |
% |
Directors fees |
|
|
207 |
|
|
|
134 |
|
|
|
54.5 |
% |
|
|
583 |
|
|
|
373 |
|
|
|
56.3 |
% |
Insurance, including FDIC assessments |
|
|
2,588 |
|
|
|
712 |
|
|
|
263.5 |
% |
|
|
7,698 |
|
|
|
2,215 |
|
|
|
247.5 |
% |
Contributions |
|
|
133 |
|
|
|
87 |
|
|
|
52.9 |
% |
|
|
516 |
|
|
|
387 |
|
|
|
33.3 |
% |
Other noninterest expense |
|
|
1,725 |
|
|
|
1,734 |
|
|
|
-0.5 |
% |
|
|
4,793 |
|
|
|
5,159 |
|
|
|
-7.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other noninterest expense |
|
|
5,535 |
|
|
|
3,391 |
|
|
|
63.3 |
% |
|
|
16,597 |
|
|
|
9,571 |
|
|
|
73.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger related expense |
|
|
|
|
|
|
1,165 |
|
|
|
|
|
|
|
|
|
|
|
5,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense |
|
$ |
27,280 |
|
|
$ |
23,327 |
|
|
|
16.9 |
% |
|
$ |
83,130 |
|
|
$ |
71,893 |
|
|
|
15.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses have generally increased between the above periods due to personnel additions occurring
throughout each period, the continued development of our branch network and other expenses which
increase in relation to our growth rate. We anticipate continued increases in our expenses in the
future for such items as additional personnel, the opening of additional branches, audit expenses
and other expenses which tend to increase in relation to our growth. In addition, in 2009 we have
experienced increases in noninterest expense related to increased levels of foreclosed real estate
and a special FDIC assessment expensed in the second quarter.
At September 30, 2009, we employed 768.0 full-time equivalent employees compared to 723.0 at
September 30, 2008. 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, all of our non-commissioned employees are
eligible to participate in an annual cash incentive plan. Under the plan, the targeted level of
incentive payments requires us to achieve a certain soundness threshold and a targeted earnings per
share. To the extent that actual earnings per share are above or below targeted earnings per
share, the aggregate incentive payments are increased or decreased. 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.
Page 36
Due to the losses we incurred during 2009 and the continued weakness in our loan portfolio, we do
not expect to pay any variable pay incentives in 2009. Furthermore, so long as the preferred stock
is outstanding, we cannot pay cash incentives to our named executive officers, and stock incentives
to such executives are limited. Included in the salary and employee benefits amounts for the three
months ended September 30, 2008, were $1.3 million and for the nine months ended September 30,
2008, were $2.8 million 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 internal earnings
forecast for 2009, for the three and nine months ended September 30, 2009, we have not accrued any
expense for cash incentives. Included in merger related expense for the first quarter of 2008 are
incentive payments made to certain executives, including Pinnacle Financials named executive
officers, pursuant to a special incentive plan approved by the Committee for achievement of
predetermined targets in association with the Mid-America acquisition.
Additionally, included in compensation expense for the three months ended September 30, 2009 and
2008, were approximately $665,000 and $691,000 respectively, and for the nine months ended
September 30, 2009 and 2008, were $2,372,000 and $1,707,000, respectively, of compensation expense
related to stock options and restricted share awards.
Foreclosed real estate expense was $1.3 million for the third quarter of 2009 compared to $95,000
for the third quarter of 2008. Foreclosed real estate expense was $5.9 million for the first nine
months of 2009 compared to $285,000 for the same period in 2008. The increase in foreclosed real
estate expense is related to the continued deterioration of local real estate values, particularly
with respect to foreclosed properties acquired from builders and residential land developers.
Foreclosed real estate expense is composed of three types of charges: maintenance costs, valuation
adjustments based on new appraisal values and gains or losses on disposition. At September 30,
2009, we had $22.8 million in other real estate compared to $18.3 million at September 30, 2008.
We anticipate increased foreclosed real estate charges as we anticipate increased balances of other
real estate. Marketing and other business development and postage and supplies expenses are higher
in 2009 compared to 2008 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 third quarter of 2009 and 2008 is $776,000 and $788,000
respectively, of amortization of intangibles related primarily to the Mid-America and Cavalry
mergers. For Mid-America, 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 Cavalry, this identified intangible is being amortized over seven years using an
accelerated method which anticipates the life of the underlying deposits to which the intangible is
attributable. Additionally, in connection with our acquisition of Beach and Gentry in July of
2008, we recorded a customer list intangible of $1,270,000 which is being amortized over 20 years
on an accelerated basis. Amortization of this intangible amounted to $30,000 and $91,000 during
the three and nine months ended September 30, 2009.
Total other noninterest expenses increased 63.3% in the third quarter of 2009 when compared to 2008
and 73.4% for the nine months ended September 30, 2009 when compared to 2008. Most of these
increases are attributable FDIC insurance premiums and legal fees. Recently, the Federal Deposit
Insurance Corporation (FDIC) finalized its deposit insurance assessment rates for 2009. As a
result of the requirement to increase the FDICs Bank Insurance Fund to statutory levels over a
prescribed period of time and increased pressure on the funds reserves due to the increasing
number of bank failures, FDIC insurance costs for 2009 will be significantly higher for all insured
depository institutions. Also during the second quarter of 2009 a special assessment from the FDIC
of approximately $2.3 million was accrued to provide additional reserves for the FDICs Bank
Insurance Fund. We anticipate more bank failures through the duration of this credit cycle and as
a result higher assessments.
During the nine months ended September 30, 2008, we incurred approximately $5.6 million in merger
related expenses, primarily related to retention bonuses and accruals, in connection with our
merger with Mid-America, which was acquired during 2007. We do not anticipate any merger related
expenses in connection with this acquisition during 2009.
Our efficiency ratio (ratio of noninterest expense to the sum of net interest income and
noninterest income) was 64.52% for the third quarter of 2009 compared to 60.53% in the third
quarter 2008 and 66.38% for the first nine months of 2009 compared to 64.8% in 2008. The
efficiency ratio measures the amount of expense that is incurred to generate a dollar of revenue.
Page 37
Financial Condition
Our consolidated balance sheet at September 30, 2009 reflects organic growth since December 31,
2008. Total assets grew to $5.09 billion at September 30, 2009 from $4.75 billion at December 31,
2008, an increase of 7.2%.
Loans. The composition of loans at September 30, 2009 and at December 31, 2008 and the percentage
(%) of each classification to total loans are summarized as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
|
|
Amount |
|
|
Percent |
|
|
Amount |
|
|
Percent |
|
Commercial real estate Mortgage |
|
$ |
1,136,134 |
|
|
|
31.5 |
% |
|
$ |
963,530 |
|
|
|
28.7 |
% |
Consumer real estate Mortgage |
|
|
754,412 |
|
|
|
20.9 |
% |
|
|
675,606 |
|
|
|
20.1 |
% |
Construction and land development |
|
|
583,948 |
|
|
|
16.2 |
% |
|
|
658,799 |
|
|
|
19.6 |
% |
Commercial and industrial |
|
|
1,034,971 |
|
|
|
28.7 |
% |
|
|
966,563 |
|
|
|
28.8 |
% |
Consumer and other |
|
|
98,421 |
|
|
|
2.7 |
% |
|
|
90,409 |
|
|
|
2.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
3,607,886 |
|
|
|
100.0 |
% |
|
$ |
3,354,907 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Although the allocation of our loan portfolio did not change significantly during the nine months
ended September 30, 2009 when compared to December 31, 2008, we experienced a decrease of 11.4% in
the construction and land development loan classification as well as an increase of 17.9% in the
commercial real estate classification. The decrease in the construction and land development
classification is due in part to our decision to reduce our exposure to this particular segment,
particularly the residential construction and land development segment. The reduction in our
appetite for these type loans will reduce our loan growth in the future in comparison to historical
periods. The increase in the commercial real estate mortgage category primarily reflects
increased owner-occupied commercial real estate loans. The owner-occupied commercial real estate
is similar in many ways to our commercial and industrial lending in that these loans are generally
made to businesses on the basis of the cash flows of the business rather than on the valuation of
the real estate. We continue to have loan demand for these types of commercial real estate
mortgage products. Our consumer real estate mortgage portfolio does not include any ARM loans,
subprime loans, or any material amount of other high risk consumer mortgage products.
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 September 30, 2009 and
December 31, 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2009 |
|
|
|
|
|
|
Outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
|
Unfunded |
|
|
|
|
|
|
Total Exposure at |
|
|
|
Balances |
|
|
Commitments |
|
|
Total exposure |
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lessors of nonresidential buildings |
|
$ |
453,985 |
|
|
$ |
54,715 |
|
|
$ |
508,700 |
|
|
$ |
406,798 |
|
Lessors of residential buildings |
|
|
153,504 |
|
|
|
16,240 |
|
|
|
169,744 |
|
|
|
159,261 |
|
Land subdividers |
|
|
199,788 |
|
|
|
45,498 |
|
|
|
245,286 |
|
|
|
319,701 |
|
New housing operative builders |
|
|
149,487 |
|
|
|
40,165 |
|
|
|
189,652 |
|
|
|
261,625 |
|
Page 38
The following table classifies our fixed and variable rate loans at September 30, 2009 according to
contractual maturities of (1) one year or less, (2) after one year through five years, and (3)
after five years. The table also classifies our variable rate loans pursuant to the contractual
repricing dates of the underlying loans (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts at September 30, 2009 |
|
|
|
|
|
|
|
|
|
Fixed |
|
|
Variable |
|
|
|
|
|
|
At September 30, |
|
|
At December 31, |
|
|
|
Rates |
|
|
Rates |
|
|
Totals |
|
|
2009 |
|
|
2008 |
|
Based on contractual maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year |
|
$ |
202,849 |
|
|
$ |
1,119,724 |
|
|
$ |
1,322,573 |
|
|
|
36.7 |
% |
|
|
40.9 |
% |
Due in one year to five years |
|
|
876,964 |
|
|
|
667,130 |
|
|
|
1,544,094 |
|
|
|
42.8 |
% |
|
|
38.9 |
% |
Due after five years |
|
|
112,398 |
|
|
|
628,821 |
|
|
|
741,219 |
|
|
|
20.5 |
% |
|
|
20.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
1,192,211 |
|
|
$ |
2,415,675 |
|
|
$ |
3,607,886 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on contractual repricing dates: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daily floating rate |
|
$ |
|
|
|
$ |
1,432,737 |
|
|
$ |
1,432,737 |
|
|
|
39.7 |
% |
|
|
41.8 |
% |
Due within one year |
|
|
202,849 |
|
|
|
855,443 |
|
|
|
1,058,292 |
|
|
|
29.4 |
% |
|
|
25.3 |
% |
Due in one year to five years |
|
|
876,964 |
|
|
|
119,950 |
|
|
|
996,914 |
|
|
|
27.6 |
% |
|
|
28.3 |
% |
Due after five years |
|
|
112,398 |
|
|
|
7,545 |
|
|
|
119,943 |
|
|
|
3.3 |
% |
|
|
4.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
1,192,211 |
|
|
$ |
2,415,675 |
|
|
$ |
3,607,886 |
|
|
|
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. Interest rate floors are currently in effect on $1.0 billion of our daily
floating rate loan portfolio and on $370 million of our variable rate loan portfolio at
varying maturities. The weighted average rate of the floors for the floating rate
portfolio is 4.73% and the weighted average rate of the floors for the variable rate
portfolio is 4.71%. As a result, interest income on these loans will not adjust until the
contractual rate on the underlying loan exceeds the interest rate floor.
The specific economic and credit risks associated with our loan portfolio include, but are not
limited to, the impact of recessionary economic conditions on our borrowers cash flows, real
estate market sales volumes and valuations, real estate industry concentrations, deterioration in
certain credits, interest rate fluctuations, reduced collateral values 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 which would approximate $65.33 million.
Furthermore, we have an internal limit for aggregate credit exposure (loans outstanding plus
unfunded commitments) to a single borrower of $22 million (i.e., house limit). Our loan policy
requires that our Executive Committee of the board of directors approve any relationships that
exceed this internal limit. Subsequent to September 30, 2009, the Executive Committee approved
managements recommendation to reduce our house limit to $15 million. Current relationships in
excess of $15 million will be addressed on an exception basis.
Non-Performing Assets. At September 30, 2009 we had $144.5 million in nonperforming assets
compared to $29.2 million at December 31, 2008. Included in nonperforming assets were $121.7
million in nonperforming loans at September 30, 2009 and $10.9 million at December 31, 2008. The
increase in non-performing asset balances that Pinnacle Financial experienced in the nine months
ended September 30, 2009 is primarily related to a weakened residential real estate market in
Pinnacle Financials market areas. Home builders and developers and sub-dividers of land have
continued to experience stress due to a combination of declining residential real estate demand and
resulting price and collateral value declines in Pinnacle Financials market areas. Further,
housing starts in Pinnacle Financials market areas continue to slow.
The Greater Nashville Association of Realtors (GNAR) reported that the average median residential
home price for the quarter ended September 30, 2009 was $163,700, a decrease of 3.6% from the same
quarter a year earlier. GNAR also reported that the number of residential inventory at September
30, 2009 was 14,700 homes, a decrease of 2.6% from a year earlier. Median home prices have fallen
indicating that home values have decreased. Although fewer homes for sale could be considered a
positive in this market, it also indicates that fewer home owners are willing to consider selling
their home and subsequently acquire another home. An extended recessionary period will likely
cause our construction and land development loans to continue to underperform and our nonperforming
assets and loan losses to continue to increase for this segment of our loan portfolio. We believe
our nonperforming asset levels will remain elevated.
Page 39
We have enhanced our credit administration resources dedicated to the residential construction and
residential development portfolios by assigning senior executives and bankers to these portfolios.
These individuals meet frequently to discuss the performance of the portfolio and specific
relationships with emphasis on the underperforming assets. Their objective is to identify
relationships that warrant continued support and remediate those relationships that will tend to
cause our portfolio to underperform over the long term. We have reappraised many nonperforming
assets to ascertain appropriate valuations, and we continue to systematically review these
valuations as new data is received.
All non-accruing loans are reviewed by and, in many cases, reassigned to a senior officer that was
not the individual responsible for originating the loan. If the loan is reassigned, the senior
officer is responsible for developing an action plan designed to minimize any future losses that
may accrue to us. Typically, these senior officers review our loan files, interview past loan
officers assigned to the relationship, meet with borrowers, inspect collateral, reappraise
collateral and/or consult with legal counsel. The senior officer then recommends an action plan to
a committee of senior associates including lenders and workout specialists, which could include
foreclosure, restructuring the loan, issuing demand letters or other actions.
We discontinue the accrual of interest income when (1) there is a significant deterioration in the
financial condition of the borrower and full repayment of principal and interest is not expected or
(2) the principal or interest is more than 90 days past due, unless the loan is both well-secured
and in the process of collection. At September 30, 2009, we had $121.7 million in loans on
nonaccrual compared to $10.9 million at December 31, 2008, of which $86.7 million and $5.0 million,
respectively, were residential construction and land development loans.
At September 30, 2009, we owned $22.8 million in real estate which we had acquired, usually through
foreclosure, from borrowers compared to $18.3 million at December 31, 2008, all of which is located
within our principal markets. Substantially all of these amounts relate to new home construction
and residential development projects that are either completed or are in various stages of
construction for which we believe we have adequate collateral, as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Sept. 30, |
|
|
Dec. 31, |
|
|
|
2009 |
|
|
2008 |
|
New home construction |
|
$ |
8,174 |
|
|
$ |
12,927 |
|
Developed lots |
|
|
3,329 |
|
|
|
2,601 |
|
Undeveloped land |
|
|
7,707 |
|
|
|
1,062 |
|
Other |
|
|
3,558 |
|
|
|
1,716 |
|
|
|
|
|
|
|
|
|
|
$ |
22,768 |
|
|
$ |
18,306 |
|
|
|
|
|
|
|
|
Due to the weakening credit status of a borrower, we may elect to formally restructure certain
loans to facilitate a repayment plan that minimizes the potential losses that we might incur.
Restructured loans are classified as impaired loans and, if on nonaccruing status as of the date of
restructuring, the loans are included in the nonperforming loan balances noted above. Not included
in nonperforming loans are loans that have been restructured that were performing as of the
restructure date. At September 30, 2009, there were $12.8 million of accruing restructured loans
that remain in a performing status. There were no accruing restructured loans at December 31,
2008.
There was $65,000 in loans 90 days past due and still accruing interest at September 30, 2009
compared to $1.5 million at December 31, 2008.
Page 40
The following table is a summary of our nonperforming assets at September 30, 2009 and December 31,
2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
At December 31, |
|
|
|
2009 |
|
|
2008 |
|
Nonperforming loans (1) |
|
|
|
|
|
|
|
|
Commercial real estate mortgage |
|
$ |
17,328 |
|
|
$ |
1,566 |
|
Consumer real estate mortgage |
|
|
12,756 |
|
|
|
3,140 |
|
Construction and land development |
|
|
86,707 |
|
|
|
5,016 |
|
Commercial and industrial |
|
|
4,136 |
|
|
|
1,108 |
|
Consumer and other |
|
|
799 |
|
|
|
30 |
|
|
|
|
|
|
|
|
Total nonaccrual/nonperforming loans |
|
|
121,726 |
|
|
|
10,860 |
|
Other real estate owned |
|
|
22,768 |
|
|
|
18,306 |
|
|
|
|
|
|
|
|
Total nonperforming assets |
|
$ |
144,494 |
|
|
$ |
29,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios: |
|
|
|
|
|
|
|
|
Nonperforming loans to total loans |
|
|
3.37 |
% |
|
|
0.32 |
% |
Nonperforming assets to total loans plus other real estate |
|
|
3.98 |
% |
|
|
0.86 |
% |
Restructured loans (accruing) (1) |
|
$ |
12,827 |
|
|
$ |
|
|
Accruing loans past due 90 days or more |
|
$ |
65 |
|
|
$ |
1,508 |
|
|
|
|
(1) |
|
Nonperforming loans exclude loans that have been restructured and remain on accruing
status. These loans are not considered to be nonperforming because they were performing
loans immediately prior to their restructuring and are currently performing in accordance
with the restructured terms. |
Potential Problem Loans. Potential problem loans, which are not included in nonperforming assets,
amounted to approximately $259.5 million or 7.2% of total loans at September 30, 2009 compared to
$27.8 million or 0.83% at December 31, 2008. Potential problem loans represent those loans 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, excluding
the impact of nonperforming loans. The large increase in potential problem loans was caused
primarily by the downgrade of additional residential construction and development loans, commercial
and industrial loans, and commercial real estate loans.
Approximately $20.3 million of potential problem loans are past due at least 30 but less than 90
days as of September 30, 2009. The following table is a summary of our performing loans that are
past due at least 30 days but less than 90 days as of September 30, 2009 and December 31, 2008
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
At September 30, |
|
|
At December 31, |
|
|
|
2009 |
|
|
2008 |
|
Commercial real estate mortgage |
|
$ |
5,664 |
|
|
$ |
3,333 |
|
Consumer real estate mortgage |
|
|
6,776 |
|
|
|
5,836 |
|
Construction and land development |
|
|
8,054 |
|
|
|
6,161 |
|
Commercial and industrial |
|
|
9,790 |
|
|
|
2,523 |
|
Consumer and other |
|
|
728 |
|
|
|
787 |
|
|
|
|
|
|
|
|
Total performing loans past due 30 to 90 days |
|
$ |
31,012 |
|
|
$ |
18,640 |
|
|
|
|
|
|
|
|
Allowance for Loan Losses (allowance). We maintain the allowance at a level that our management
deems appropriate to adequately cover the probable losses inherent in the loan portfolio. As of
September 30, 2009 and December 31, 2008, our allowance for loan losses was $82.9 million and $36.5
million, respectively, which our management deemed to be adequate at each of the respective dates.
The judgments and estimates associated with our allowance determination are described under
Critical Accounting Estimates above.
Page 41
The following is a summary of changes in the allowance for loan losses for the nine months ended
September 30, 2009 and for the year ended December 31, 2008 and the ratio of the allowance for loan
losses to total loans as of the end of each period (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine months |
|
|
Year |
|
|
|
ended |
|
|
ended |
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Balance at beginning of period |
|
$ |
36,484 |
|
|
$ |
28,470 |
|
Provision for loan losses |
|
|
101,064 |
|
|
|
11,214 |
|
Charged-off loans: |
|
|
|
|
|
|
|
|
Commercial real estate Mortgage |
|
|
(917 |
) |
|
|
(62 |
) |
Consumer real estate Mortgage |
|
|
(4,020 |
) |
|
|
(1,144 |
) |
Construction and land development |
|
|
(18,707 |
) |
|
|
(2,172 |
) |
Commercial and industrial (2) |
|
|
(30,309 |
) |
|
|
(773 |
) |
Consumer and other loans |
|
|
(1,168 |
) |
|
|
(982 |
) |
|
|
|
|
|
|
|
Total charged-off loans |
|
|
(55,121 |
) |
|
|
(5,133 |
) |
|
|
|
|
|
|
|
Recoveries of previously charged-off loans: |
|
|
|
|
|
|
|
|
Commercial real estate Mortgage |
|
|
|
|
|
|
731 |
|
Consumer real estate Mortgage |
|
|
137 |
|
|
|
3 |
|
Construction and land development |
|
|
71 |
|
|
|
55 |
|
Commercial and industrial |
|
|
147 |
|
|
|
844 |
|
Consumer and other loans |
|
|
199 |
|
|
|
300 |
|
|
|
|
|
|
|
|
Total recoveries of previously charged-off loans |
|
|
554 |
|
|
|
1,933 |
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries |
|
|
(54,567 |
) |
|
|
(3,200 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
82,981 |
|
|
$ |
36,484 |
|
|
|
|
|
|
|
|
Ratio of allowance for loan losses to total loans outstanding at end of
period |
|
|
2.30 |
% |
|
|
1.09 |
% |
|
|
|
|
|
|
|
Ratio of net charge-offs (1) to average loans outstanding for the period |
|
|
2.04 |
% |
|
|
0.11 |
% |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net charge-offs for the nine months ended September 30, 2009 have been annualized. |
|
(2) |
|
Includes a $21.5 million charge-off of a loan in the second quarter of 2009. |
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, consideration of internal and regulatory examinations, and other pertinent
factors. This evaluation is inherently subjective as it requires material estimates including the
value of collateral and the amounts and timing of future cash flows expected to be received on
impaired loans that may be susceptible to significant change.
The allowance increased by $46.4 million between September 30, 2009 and December 31, 2008 and the
ratio of our allowance for loan losses to total loans outstanding increased to 2.30% at September
30, 2009 from 1.09% at December 31, 2008. The significant increase in nonperforming loans,
potential problem loans and net-charge offs during the first nine months of 2009 were the primary
reasons for the increase in the allowance for loan losses in 2009 when compared to 2008.
Investments. Our investment portfolio, consisting primarily of Federal agency bonds, state and
municipal securities and mortgage-backed securities, amounted to $932.4 million and $849.8 million
at September 30, 2009 and December 31, 2008, respectively. Our investment portfolio serves many
purposes including serving as a stable source of income, collateral for public funds and as a
potential liquidity source. A summary of our investment portfolio at September 30, 2009 follows:
|
|
|
|
|
|
|
September 30, 2009 |
|
Weighted average life |
|
|
3.93 years |
|
Weighted average coupon |
|
|
5.08 |
% |
Tax equivalent yield |
|
|
4.95 |
% |
Page 42
Deposits and Other Borrowings. We had approximately $3.82 billion of deposits at September 30,
2009 compared to $3.53 billion at December 31, 2008. 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 securities under
agreements to repurchase the security the following day. These agreements (which are typically
associated with comprehensive treasury management programs for our clients and provide them with
short-term returns for their excess funds) amounted to $215.7 million at September 30, 2009 and
$184.3 million at December 31, 2008. Additionally, at September 30, 2009, we had borrowed $223.0
million in advances from the Federal Home Loan Bank of Cincinnati compared to $183.3 million at
December 31, 2008.
Generally, we have classified our funding base as either core funding or non-core funding. Core
funding consists of all deposits other than time deposits issued in denominations of $100,000 or
greater. All other funding is deemed to be non-core. The following table represents the balances
of our deposits and other fundings and the percentage of each type to the total at September 30,
2009 and December 31, 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
2009 |
|
|
Percent |
|
|
2008 |
|
|
Percent |
|
Core funding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposit accounts |
|
$ |
504,481 |
|
|
|
11.6 |
% |
|
$ |
424,757 |
|
|
|
10.4 |
% |
Interest-bearing demand accounts |
|
|
356,391 |
|
|
|
8.2 |
% |
|
|
375,993 |
|
|
|
9.2 |
% |
Savings and money market accounts |
|
|
948,875 |
|
|
|
21.8 |
% |
|
|
694,582 |
|
|
|
17.0 |
% |
Time deposit accounts less than $100,000 |
|
|
432,498 |
|
|
|
9.9 |
% |
|
|
570,443 |
|
|
|
13.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total core funding |
|
|
2,242,245 |
|
|
|
51.5 |
% |
|
|
2,065,775 |
|
|
|
50.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-core funding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Relationship based non-core funding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposit accounts greater than $100,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reciprocating time deposits |
|
|
209,546 |
|
|
|
4.8 |
% |
|
|
36,924 |
|
|
|
0.9 |
% |
Other time deposits |
|
|
639,006 |
|
|
|
14.7 |
% |
|
|
599,947 |
|
|
|
14.7 |
% |
Securities sold under agreements to
repurchase |
|
|
215,674 |
|
|
|
5.0 |
% |
|
|
184,298 |
|
|
|
4.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total relationship based non-core funding |
|
|
1,064,226 |
|
|
|
24.5 |
% |
|
|
821,169 |
|
|
|
20.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale funding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposit accounts greater than $100,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public funds |
|
|
290,000 |
|
|
|
6.6 |
% |
|
|
245,000 |
|
|
|
6.0 |
% |
Brokered deposits |
|
|
439,112 |
|
|
|
10.1 |
% |
|
|
585,599 |
|
|
|
14.3 |
% |
Federal Home Loan Bank advances, Federal
funds purchased and other borrowings |
|
|
222,986 |
|
|
|
5.1 |
% |
|
|
273,609 |
|
|
|
6.7 |
% |
Subordinated debt Pinnacle National |
|
|
15,000 |
|
|
|
1.9 |
% |
|
|
15,000 |
|
|
|
0.4 |
% |
Subordinated debt Pinnacle Financial |
|
|
82,476 |
|
|
|
.3 |
% |
|
|
82,476 |
|
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total wholesale funding |
|
|
1,049,574 |
|
|
|
24.0 |
% |
|
|
1,201,684 |
|
|
|
29.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-core funding |
|
|
2,113,800 |
|
|
|
48.5 |
% |
|
|
2,022,853 |
|
|
|
49.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
4,356,045 |
|
|
|
100.0 |
% |
|
$ |
4,088,628 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Our funding policies limit the amount of non-core funding we can use to support our growth.
Periodically, we may exceed our policy limitations, at which time management will develop plans to
bring our core funding ratios back within compliance. At September 30, 2009, we were in compliance
with our core funding policies. As noted in the table above, our core funding as a percentage of
total funding increased from 50.5% at December 31, 2008 to 51.5% at September 30, 2009. The
reciprocating time deposit category consists of deposits we receive from a bank network (the CDARS
network) in connection with deposits of our customers in excess of our FDIC coverage limit that we
place with the CDARS network. With the temporary increase in FDIC coverage from $100,000 to
$250,000, the CDARS network which manages the reciprocating time deposit programs began placing
funds in time deposits greater than $100,000 increments, thus elevating the amount of time deposits
above the $100,000 core threshold. In addition, the temporary insurance limit increase resulted in
a significant increase in time deposits of our customers between $100,000 and the new insurance
limits. Growing our core deposit base is a key strategic objective of our firm.
Page 43
The amount of time deposits as of September 30, 2009 amounted to $2.0 billion. 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 |
|
$ |
70,706 |
|
|
|
2.99 |
% |
Over three but less than six months |
|
|
133,181 |
|
|
|
2.39 |
% |
Over six but less than twelve months |
|
|
105,802 |
|
|
|
2.51 |
% |
Over twelve months |
|
|
122,809 |
|
|
|
0.91 |
% |
|
|
|
|
|
|
|
|
|
|
432,498 |
|
|
|
2.09 |
% |
|
|
|
|
|
|
|
Denomination $100,000 and greater |
|
|
|
|
|
|
|
|
Three months or less |
|
|
699,930 |
|
|
|
1.46 |
% |
Over three but less than six months |
|
|
399,388 |
|
|
|
2.17 |
% |
Over six but less than twelve months |
|
|
218,339 |
|
|
|
2.74 |
% |
Over twelve months |
|
|
260,007 |
|
|
|
2.53 |
% |
|
|
|
|
|
|
|
|
|
|
1,577,664 |
|
|
|
1.99 |
% |
|
|
|
|
|
|
|
Totals |
|
$ |
2,010,162 |
|
|
|
2.02 |
% |
|
|
|
|
|
|
|
Subordinated debt and other borrowings. 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 Pinnacle Financial subsidiaries that are 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 September 30, 2009, 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
(3.09% at September 30, 2009) which is set each quarter and matures on December 30, 2033. The
Trust II Preferred Securities bear a fixed interest rate of 5.85% per annum thru September 30, 2010
after which time the securities will bear a floating rate set each quarter based on a spread over
3-month LIBOR. The Trust II securities mature on September 30, 2035. The Trust III Preferred
Securities bear a floating interest rate based on a spread over 3-month LIBOR (1.93% at September
30, 2009) 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 (3.15% at September
30, 2009) which is set each quarter and matures 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 and the limitations on repurchase
resulting from Pinnacle Financials participation in the CPP, the Trust Preferred Securities may be
redeemed subject to the limitations imposed under the CPP 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 subject to the CPP restrictions in whole (but not in part) in the event of unfavorable changes in laws or
regulations that result in (1) the Trust becoming subject to federal income tax on income received
on the Subordinated Debentures, (2) interest payable by the parent company on the Subordinated
Debentures becoming non-deductible for Federal tax purposes, (3) the requirement for the Trust to
register under the Investment Company Act of 1940, as amended, or (4) loss of the ability to treat
the Trust Preferred Securities as Tier I capital under the Federal Reserve capital adequacy
guidelines.
Page 44
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.
During the second quarter of 2009, we terminated a loan agreement related to a $25 million line of
credit with a regional bank. This line of credit was used to support the growth of Pinnacle
National. The balance owed pursuant to this line of credit at March 31, 2009 was $18 million which
was paid by Pinnacle Financial prior to termination in the second quarter. The line of credit had
a one year term, contained customary affirmative and negative covenants regarding the operation of
our business and a negative pledge on the common stock of Pinnacle National.
On August 5, 2008, Pinnacle National also entered into a $15 million subordinated term loan with a
regional bank. The loan bears interest at three month LIBOR plus 3.5%, matures in 2015 and
qualifies as Tier 2 capital for regulatory capital purposes until 2010 and at a decreasing
percentage each year thereafter. This additional bank level capital has been utilized to support
our growth.
Capital Resources. At September 30, 2009 and December 31, 2008, our stockholders equity amounted
to $710.1 million and $627.3 million, respectively, an increase of approximately $82.8 million.
This increase was primarily attributable to our second quarter 2009 common equity raise completed
on June 16, 2009 which netted us approximately $109.0 million in additional capital from the sale
of 8,855,000 shares of our common stock. This increase was offset by $26.0 million decrease in
comprehensive loss, which was composed of $33.0 million in net losses together with $7.0 million of
net unrealized holding gains associated with our available-for-sale portfolio.
On December 12, 2008, we issued 95,000 shares of preferred stock to the U.S. Treasury for $95
million pursuant to the CPP. Additionally, we issued 534,910 common stock warrants to the U.S.
Treasury as a condition to our participation in the CPP. The warrants have an exercise price of
$26.64 each, are immediately exercisable and expire 10 years from the date of issuance. During the
three and nine months ended September 30, 2009, the accrued dividend costs and the accretion of the
discount recorded on the preferred stock totaled $1.5 million and $4.4 million, respectively.
The Series A preferred stock sold pursuant to the CPP is non-voting, other than having class voting
rights on certain matters, and pays cumulative dividends quarterly at a rate of 5% per annum for
the first five years and 9% thereafter. The preferred shares are only redeemable at our option
under certain circumstances during the first three years and are redeemable thereafter without
restriction. As a result of our participation in CPP, our capital ratios have been further
enhanced.
On June 16, 2009, we completed the sale of 8,855,000 shares of our common stock in a public
offering, resulting in net proceeds to Pinnacle Financial of approximately $109.0 million. As a
result, and pursuant to the terms of the warrant issued to the U.S. Treasury in connection with our
participation in the CPP, the number of shares issuable upon exercise of the warrant issued to the
U.S. Treasury in connection with the CPP was reduced by 50%, or 267,455 shares.
During the second quarter of 2009, we sought permission from our primary federal regulators to
redeem the preferred shares we sold to the U.S. Treasury through the CPP. During the third quarter
of 2009 and after consideration of various factors, we withdrew our application to redeem the
preferred shares we sold the U.S. Treasury through the CPP.
Because of its recent losses and higher levels of problem and potential problem loans, we have
established internal capital guidelines for Pinnacle Nationals Tier 1 leverage ratio of at least
8% and a total risk-based capital ratio of at least 11%. Pinnacle Nationals tier 1 leverage ratio
and total risk-based capital ratio were 8.8% and 12.2%, respectively, as of September 30, 2009.
At September 30, 2009, Pinnacle Financials Tier 1 risk-based capital ratio was 13.1%, our total
risk-based capital was 14.7% and our leverage ratio was 10.9%, compared to 12.1%, 13.5% and 10.5%
at December 31, 2008, respectively.
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. During the nine months ended September 30, 2009, Pinnacle National paid $7.1 million in
dividends to Pinnacle Financial. Pinnacle Financial is subject to limits on payment of dividends
to its shareholders by the rules, regulations and policies of Federal banking authorities, the laws
of the State of Tennessee
and as a result of its participation in the CPP (as more fully discussed in Pinnacle Financials
2008 Annual Report on Form
10-K). Pinnacle Financial has not paid any dividends to date, nor does
it anticipate paying dividends to its shareholders for the foreseeable future. Future dividend
policy will depend on Pinnacle Financials earnings, capital position, financial condition and
other factors.
Page 45
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 gradual 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 gradual 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 gradual 100 basis point change up or down in rates from managements flat
interest rate forecast over the next twelve months.
Economic value of equity. Our economic value of equity model measures the extent that
estimated economic values of our assets, liabilities and off-balance sheet items will
change as a result of interest rate changes. Economic values are determined by discounting
expected cash flows from assets, liabilities and off-balance sheet items, which establishes
a base case economic value of equity. To help limit interest rate risk, we have a
guideline stating that for an instantaneous 300 basis point change in interest rates up or
down, the economic value of equity should not decrease by more than 30 percent from the
base case; for a 200 basis point instantaneous change in interest rates up or down, the
economic value of equity should not decrease by more than 20 percent; and for a 100 basis
point instantaneous change in interest rates up or down, the economic value of equity
should not decrease by more than 10 percent.
At September 30, 2009, our model results indicate that our most likely rate scenario optimizes our
net interest income. Our most likely rate forecast currently anticipates no change in the Federal
funds rate for the next twelve months although our modeling does anticipate changes in intermediate
and longer term rates based on a consensus of national economists forecasts. However, much of our
balance sheet pricing is aligned with the Federal funds rates and other shorter term rates. Should
rates rise sooner than anticipated, the floors on our floating rate assets will limit our ability
to increase our net interest income until rates rise enough to surpass these established loan
floors. Should the rate environment begin to decrease, the rates we are currently paying to our
depositors, we believe, are at their competitive lows and because we have a meaningful volume of
floating rate assets that are not priced using interest rate floors, we would not be able to
increase our net interest income meaningfully during a falling interest rate cycle. Traditionally,
we maintain an asset sensitive balance sheet. We will likely maintain a balance sheet that is more
asset sensitive once this credit cycle has abated and short-term interest rates increase. Asset
sensitivity implies that our assets will reprice faster than our liabilities. As a result and
absent the impact of interest rate floors, an interest rate increase should be beneficial to us as
our asset yields would increase at a more rapid rate than the costs of our liabilities.
Each of the above analyses may not, on its own, be an accurate indicator of how our net interest
income will be affected by changes in interest rates. Income associated with interest-earning
assets and costs associated with interest-bearing liabilities may not be affected uniformly by
changes in interest rates. In addition, the magnitude and duration of changes in interest rates
may have a significant impact on net interest income. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react in different
degrees to changes in market interest rates. Interest rates on certain types of assets and
liabilities fluctuate in advance of changes in general market rates, while interest rates on other
types may lag behind changes in general market rates. In addition, certain assets, such as
adjustable rate mortgage loans, have features (generally referred to as interest rate caps and
floors) which limit changes in interest rates. Prepayment and early withdrawal levels also could
deviate significantly from those assumed in calculating the maturity of certain instruments. The
ability of many borrowers to service their debts also may decrease during periods of rising
interest rates. ALCO reviews each of the above interest rate sensitivity analyses along with
several different interest rate scenarios as part of its responsibility to provide a satisfactory,
consistent level of
profitability within the framework of established liquidity, loan, investment, borrowing, and
capital policies. At September 30, 2009 and December 31, 2008, we had not entered into any
derivative contracts to assist managing our interest rate sensitivity.
Page 46
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. We periodically enter into
interest rate swaps (swaps) to facilitate customer transactions and meet their financing needs.
These swaps qualify as derivatives, but are not designed as hedging instruments.
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. Under the borrowing agreements with the Federal Home Loan Bank of
Cincinnati, Pinnacle National has pledged certain qualifying residential mortgage loans and,
pursuant to a blanket lien, all qualifying commercial mortgage loans as collateral. At September
30, 2009, Pinnacle National had received advances from the Federal Home Loan Bank of Cincinnati
totaling $223.0 million at the following rates and maturities (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
Interest Rates |
|
2009 |
|
$ |
10,039 |
|
|
|
0.93 |
% |
2010 |
|
|
91,457 |
|
|
|
2.42 |
% |
2011 |
|
|
10,091 |
|
|
|
1.90 |
% |
2012 |
|
|
30,089 |
|
|
|
3.50 |
% |
Thereafter |
|
|
81,310 |
|
|
|
2.86 |
% |
|
|
|
|
|
|
|
|
Total |
|
$ |
222,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average interest rate |
|
|
|
|
|
|
2.64 |
% |
|
|
|
|
|
|
|
|
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. There were no outstanding
borrowings under these agreements at September 30, 2009, and for the nine months ended September
30, 2009, we averaged borrowings from correspondent banks of $13.7 million under such agreements.
At September 30, 2009, brokered certificates of deposit approximated $439.1 million which
represented 10.1% of total funding compared to $585.6 million and 14.3% at December 31, 2008. We
issue these brokered certificates through several different brokerage houses based on competitive
bid. Typically, these funds are for varying maturities up to two years and are issued at rates
which are competitive to rates we would be required to pay to attract similar deposits within our
local markets as well as rates for Federal Home Loan Bank of Cincinnati advances of similar
maturities. We consider these deposits to be a ready source of liquidity under current market
conditions.
At September 30, 2009, 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 entering into agreements to relocate our downtown office facility in
Nashville, Tennessee to a new facility projected to open in 2010.
Page 47
Our management believes that we have adequate liquidity to meet all known contractual obligations
and unfunded commitments, including loan commitments and reasonable borrower, depositor, and
creditor requirements over the next twelve months.
Off-Balance Sheet Arrangements. At September 30, 2009, we had outstanding standby letters of
credit of $92.4 million and unfunded loan commitments outstanding of $935.1 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.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) No. 168, The FASB Accounting Standards Codification and the Hierarchy
of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162 . This
statement modifies the Generally Accepted Accounting Principles (GAAP) hierarchy by establishing
only two levels of GAAP, authoritative and nonauthoritative accounting literature. Effective July
2009, the FASB Accounting Standards Codification (ASC), also known collectively as the
Codification, is considered the single source of authoritative U.S. accounting and reporting
standards, except for additional authoritative rules and interpretive releases issued by the SEC.
Nonauthoritative guidance and literature would include, among other things, FASB Concepts
Statements, American Institute of Certified Public Accountants Issue Papers and Technical Practice
Aids and accounting textbooks. The Codification was developed to organize GAAP pronouncements by
topic so that users can more easily access authoritative accounting guidance. It is organized by
topic, subtopic, section, and paragraph, each of which is identified by a numerical designation. FASB ASC 105-10 Generally
Accepted Accounting Principles became applicable beginning in third quarter of 2009. All accounting references have
been updated, and therefore SFAS references have been replaced with ASC references except for SFAS
references that have not been integrated into the codification.
In June 2009, the FASB issued SFAS 166, Accounting for Transfers of Financial Assets an
amendment of FASB Statement No. 140 (ASC 860). SFAS No. 166 provides for the removal of the
qualifying special purpose entity (QSPE) concept from GAAP, resulting in the evaluation of all
former QSPEs for consolidation on and after January 1, 2010 in accordance with Statement of
Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (ASC
810-10-05-8). SFAS No. 166 modifies the criteria for achieving sale accounting for transfers of
financial assets and defines the term participating interest to establish specific conditions for
reporting a transfer of a portion of a financial asset as a sale. SFAS No. 166 also provides that a
transferor should recognize and initially measure at fair value all assets obtained (including a
transferors beneficial interest) and liabilities incurred as a result of a transfer of financial
assets accounted for as a sale. SFAS No. 166 requires enhanced disclosures which are generally
consistent with, and supersede, the disclosures previously required by ASC 860-10-65-2. SFAS No.
166 is effective prospectively for new transfers of financial assets occurring in fiscal years
beginning after November 15, 2009, and in interim periods within those fiscal years. SFAS No. 166s
disclosure requirements should be applied to transfers that occurred both before and after its
effective date, with comparative disclosures required only for periods subsequent to initial
adoption for those disclosures not previously required under ASC 860-10-65-2. This statement is not
expected to have a significant impact to Pinnacle Financials financial condition or results of
operations.
Page 48
In June 2009, the FASB issued SFAS No. 167 which revises the criteria for determining the primary
beneficiary of a variable interest entity (VIE) by replacing the prior quantitative-based risks and
rewards test required under FASB Interpretation No. 46-R, Consolidation of Variable Interest
Entities revised December 2003 (ASC 810-10-05-8) with a qualitative analysis. While SFAS No.
167 retains the guidance in ASC 810-10-05-8 which requires a reassessment of whether an entity is a
VIE only when certain triggering events occur, it adds an additional criterion which triggers a
reassessment of an entitys status when an event occurs such that the holders of the equity
investment at risk, as a group, lose the power from voting rights or similar rights of those
investments to direct the activities of the entity that most significantly impact the entitys
economic performance. Additionally, SFAS No. 167 requires continual reconsideration of conclusions
regarding which interest holder is the VIEs primary beneficiary. SFAS No. 167 requires separate
presentation on the face of the balance sheet of the assets of a consolidated VIE that can only be used to settle the VIEs obligations and the liabilities of a consolidated VIE for which creditors
or beneficial interest holders have no recourse to the general credit of the primary beneficiary.
SFAS No. 167 also requires enhanced disclosures which are generally consistent with, and supersede,
the disclosures previously required by ASC 860-10-65-2. SFAS No. 167 is effective for periods
beginning after November 15, 2009, and requires reevaluation under its amended consolidation
requirements of all QSPEs and entities currently subject to ASC 810-10-05-8 as of the beginning of
the first annual period that begins after November 15, 2009. If consolidation of a VIE is required
upon initial adoption, the assets, liabilities, and noncontrolling interests of the VIE should be
measured at their carrying amounts as if SFAS No. 167 had been applied from inception of the VIE,
with any difference between the net amounts recognized and the amount of any previously recognized
interests reflected as a cumulative effect adjustment to undivided profits. However, if determining
the carrying amounts is not practicable, the assets, liabilities, and noncontrolling interests of
the VIE may be measured at fair value. Further, if determining the carrying amounts is not
practicable, and if the activities of the VIE are primarily related to securitizations or other
forms of asset-backed financings and the assets of the VIE can be used only to settle obligations
of the entity, then the assets and liabilities of the VIE may be measured at their unpaid principal
balances. The fair value option provided under SFAS No. 159 may also be elected for financial
assets and financial liabilities requiring consolidation as a result of initial adoption, provided
that the election is made for all eligible financial assets and financial liabilities of the VIE.
If initial application of SFAS No. 167 results in deconsolidation of a VIE, any retained interest
in the VIE should be measured at its carrying value as if SFAS No. 167 had been applied from
inception of the VIE. Comparative disclosures are required only for periods subsequent to initial
adoption for those disclosures not previously required under ASC 860-10-65-2. This statement is not
expected to have a significant impact to Pinnacle Financials financial condition or results of
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this Item 3 is included on pages 46 through 47 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 September 30, 2009 that have materially affected, or are
reasonably likely to materially affect, Pinnacle Financials internal control over financial
reporting.
Page 49
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
Except as set forth below, there have been no material changes to our risk factors as
previously disclosed in Part I, Item IA of our Annual Report on Form 10-K for the fiscal
year ended December 31, 2008.
Recent negative developments in the U.S. and local economy and in local real estate
markets have adversely impacted our operations and results and may continue to
adversely impact our results in the future.
Economic conditions in the markets in which we operate have deteriorated
significantly since early 2008. As a result, we have experienced a significant
reduction in our earnings, resulting primarily from provisions for loan losses
related to declining collateral values in our construction and development loan
portfolio. We believe that this difficult economic environment will continue at
least throughout the remainder of 2009 and in 2010, and we expect that our results
of operations will continue to be negatively impacted as a result. There can be no
assurance that the economic conditions that have adversely affected the financial
services industry, and the capital, credit and real estate markets generally or us
in particular, will improve in the near future, or thereafter, in which case we
could continue to experience significant losses and write-downs of assets, and
could face capital and liquidity constraints or other business challenges.
Our loan portfolio includes a significant amount of real estate construction and
development loans, which have a greater credit risk than residential mortgage
loans.
The percentage of real estate construction and development loans in our bank
subsidiarys portfolio was approximately 16.2% of total loans at September 30,
2009, and these loans make up approximately 71.2% of our non-performing loans at
September 30, 2009. This type of lending is generally considered to have relatively
high credit risks because the principal is concentrated in a limited number of
loans with repayment dependent on the successful operation of the related real
estate project. Consequently, these loans are more sensitive to the current adverse
conditions in the real estate market and the general economy. Throughout 2009, the
number of newly constructed homes or lots sold in our market areas has continued to
decline, negatively affecting collateral values and contributing to increased
provision expense and higher levels of non-performing assets. A continued reduction
in residential real estate market prices and demand could result in further price
reductions in home and land values adversely affecting the value of collateral
securing the construction and development loans that we hold. These adverse
economic and real estate market conditions may lead to further increases in
non-performing loans and other real estate owned, increased charge offs from the
disposition of non-performing assets, and increases in provision for loan losses,
all of which would negatively impact our financial condition and results of
operations.
Page 50
We have a concentration of credit exposure to borrowers in certain industries and
we also target small to medium-sized businesses.
At September 30, 2009, we had significant credit exposures to borrowers in certain
business, including the commercial and residential building lessors, new home
building, and land subdividers. These industries are experiencing adversity in the
current recession
and, as a result, an increased level of borrowers in these industries have been
unable to perform their obligations under their existing loan agreements with us,
or have suffered loan downgrades which has negatively impacted our results of
operations. If the current recessionary environment continues, these industry
concentrations could result in higher than normal deterioration in credit quality,
past dues, loan charge offs and collateral value declines, which could cause our
earnings to be negatively impacted. Furthermore, any of our large credit exposures
that deteriorates unexpectedly could cause us to have to make significant
additional loan loss provisions, negatively impacting our earnings. In May 2009, we
charged off in full a $21.5 million loan to a bank holding company, the subsidiary
bank of which was placed in receivership by the OCC during the first quarter of
2009.
Additionally, a substantial focus of our marketing and business strategy is to
serve small to medium-sized businesses in the Nashville and Knoxville MSAs. As a
result, a relatively high percentage of our loan portfolio consists of commercial
loans primarily to small to medium-sized businesses. At September 30, 2009, our
commercial and industrial loans accounted for almost 28.7% of our total loans.
During periods of economic weakness like those we are currently experiencing, small
to medium-sized businesses may be impacted more severely and more quickly than
larger businesses. Consequently, the ability of such businesses to repay their
loans may deteriorate, and in some cases this deterioration may occur quickly,
which would adversely impact our results of operations and financial condition.
We are geographically concentrated in the Nashville, Tennessee and Knoxville,
Tennessee MSAs, and changes in local economic conditions impact our profitability.
We currently operate primarily in the Nashville, Tennessee and Knoxville, Tennessee
MSAs, and most of our loan, deposit and other customers live or have operations in
these areas. Accordingly, our success significantly depends upon the growth in
population, income levels, deposits and housing starts in these markets, along with
the continued attraction of business ventures to the areas, and our profitability
is impacted by the changes in general economic conditions in these markets.
Economic conditions in the Nashville and Knoxville MSAs have weakened in 2009,
negatively affecting our operations, particularly the real estate construction and
development segment of our loan portfolio. Unemployment has risen significantly in
both markets in 2009 from 2008 levels. We cannot assure you that economic
conditions in our markets will improve over the remainder of 2009 or during 2010 or
thereafter, and continued weak economic conditions in our markets could reduce our
growth rate, affect the ability of our customers to repay their loans and generally
affect our financial condition and results of operations.
We are less able than a larger institution to spread the risks of unfavorable local
economic conditions across a large number of diversified economies. Moreover, we
cannot give any assurance that we will benefit from any market growth or return of
more favorable economic conditions in our primary market areas if they do occur.
If our allowance for loan losses is not sufficient to cover actual loan losses, our
earnings will decrease.
If loan customers with significant loan balances fail to repay their loans, our
earnings and capital levels will suffer. We make various assumptions and judgments
about the probable losses in our loan portfolio, including the creditworthiness of
our borrowers and the value of any collateral securing the loans. We maintain an
allowance for loan losses to cover our estimate of the probable losses in our loan
portfolio. In determining the size of this allowance, we rely on an analysis of our
loan portfolio based on volume and types of loans, internal loan classifications,
trends in classifications, volume and trends in delinquencies, nonaccruals and
charge-offs, national and local economic conditions,
industry and peer bank loan quality indications, and other pertinent factors and
information. If our assumptions are inaccurate, our current allowance may not be
sufficient to cover potential loan losses, and additional provisions may be
necessary which would decrease our earnings.
Page 51
In addition, federal and state regulators periodically review our loan portfolio
and may require us to increase our allowance for loan losses or recognize loan
charge-offs. Their conclusions about the quality of our loan portfolio may be
different than ours. Any increase in our allowance for loan losses or loan charge
offs as required by these regulatory agencies could have a negative effect on our
operating results. Moreover, additions to the allowance may be necessary based on
changes in economic and real estate market conditions, new information regarding
existing loans, identification of additional problem loans and other factors, both
within and outside of our managements control.
We have increased levels of other real estate, primarily as a result of
foreclosures, and we anticipate higher levels of foreclosed real estate expense.
As we have begun to resolve non-performing real estate loans, we have increased the
level of foreclosed properties primarily those acquired from builders and from
residential land developers. Foreclosed real estate expense consists of three types
of charges: maintenance costs, valuation adjustments owed on new appraisal values
and gains or losses on disposition. These charges will increase as levels of other
real estate increase, and also as local real estate values decline.
Recent legislative and regulatory initiatives that were enacted in response to the
recent financial crisis are beginning to wind down.
The U.S. federal, state and foreign governments have taken various actions in an
attempt to deal with the worldwide financial crisis and the severe decline in the
global economy. Some of these programs are beginning to expire and the impact of
the wind down on the financial sector and on the economic recovery is unknown. In
the United States, the Emergency Economic Stabilization Act of 2008 or EESA, was
enacted on October 3, 2008. The Troubled Asset Relief Program, or TARP,
established pursuant to EESA, includes the Capital Purchase Program, pursuant to
which Treasury is authorized to purchase senior preferred stock and common or
preferred stock warrants from participating financial institutions. TARP also
authorized the purchase of other securities and financial instruments for the
purpose of stabilizing and providing liquidity to U.S. financial markets. TARP is
scheduled to expire December 31, 2009, although the Treasury has announced it will
likely extend it until October 31, 2010. On September 18, 2009, the Treasury
guarantee on money market mutual funds expired. On October 20, 2009, the FDIC
announced that the Temporary Loan Guaranty Program pursuant to which the FDIC
guarantees unsecured debt of banks and certain holding companies would expire
October 31, 2009, except for a temporary emergency facility. The Transaction
Account Guarantee portion of the program, which guarantees non interest bearing
bank transaction accounts on an unlimited basis, is scheduled to continue until
June 30, 2010.
Page 52
National or state legislation or regulation may increase our expenses and reduce
earnings.
Federal bank regulators are increasing regulatory scrutiny, and additional
restrictions on financial institutions have been proposed by regulators and by
Congress. Changes in tax law, federal legislation, regulation or policies, such as
bankruptcy laws, deposit insurance, consumer protection laws, and capital
requirements, among others, can result in significant increases in our expenses
and/or charge-offs, which may adversely affect our earnings. Changes in state or
federal tax laws or regulations can have a similar
impact. Furthermore, financial institution regulatory agencies are expected to
continue to be very aggressive in responding to concerns and trends identified in
examinations, including the continued issuance of additional formal or enforcement
or supervisory actions. If we were required to enter into such actions with our
regulators, we could be required to agree to limitations or take actions that limit
our operational flexibility, restrict our growth or increase our capital or
liquidity levels. Failure to comply with any formal or informal regulatory
restrictions would lead to further regulatory enforcement actions. Negative
developments in the financial services industry and the impact of recently enacted
or new legislation in response to those developments could negatively impact our
operations by restricting our business operations, including our ability to
originate or sell loans, and adversely impact our financial performance. In
addition, industry, legislative or regulatory developments may cause us to
materially change our existing strategic direction, capital strategies,
compensation or operating plans.
We may not be able to continue to expand into the Knoxville MSA in the time frame
and at the levels that we currently expect.
In order to continue our expansion into the Knoxville MSA, we will be required to
hire additional associates and build out a branch network. We cannot assure you
that we will be able to hire the number of experienced associates that we need to
successfully execute our strategy in the Knoxville MSA, nor can we assure you that
the associates we hire will be able to successfully execute our growth strategy in
that market. Because we seek to hire experienced associates, the compensation cost
associated with these individuals may be higher than that of other financial
institutions of similar size in the market. If we are unable to grow our loan
portfolio at planned rates, the increased compensation expense of these experienced
associates may negatively impact our results of operations. Because there will be a
period of time before we are able to fully deploy our resources in the Knoxville
MSA, our start up costs, including the cost of our associates and our branch
expansion, will negatively impact our results of operations. In addition, if we are
not able to expand our branch footprint in the Knoxville MSA in the time period
that we have targeted, our results of operations may be negatively impacted.
Execution of our growth plans in the Knoxville MSA also depends on continued growth
in the Knoxville economy, and continued unfavorable local or national economic
conditions could reduce our growth rate, affect the ability of our customers to
repay their obligations to us and generally negatively affect our financial
condition and results of operations.
Our ability to maintain required capital levels and adequate sources of funding and
liquidity could be impacted by changes in the capital markets and deteriorating
economic and market conditions.
We, and Pinnacle National, are required to maintain certain capital levels
established by banking regulations or specified by bank regulators. We must also
maintain adequate funding sources in the normal course of business to support our
operations and fund outstanding liabilities. Our ability to maintain capital
levels, sources of funding and liquidity could be impacted by changes in the
capital markets in which we operate and deteriorating economic and market
conditions. In addition, we have from time to time supported our capital position
with the issuance of trust preferred securities. The trust preferred market has
deteriorated significantly since the second half of 2007 and it is unlikely that we
would be able to issue trust preferred securities in the future on terms consistent
with our previous issuances, if at all.
Failure by our bank subsidiary to meet applicable capital guidelines or to satisfy
certain other regulatory requirements could subject our bank subsidiary to a
variety of enforcement remedies available to the federal regulatory authorities.
These include limitations on the ability to pay dividends, the issuance by the
regulatory authority of a capital directive to increase capital, and the
termination of deposit insurance by the FDIC.
Page 53
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Noncore funding represents a large component of our funding base. |
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In addition to the traditional core deposits, such as demand deposit accounts,
interest checking, money market savings and certificates of deposits, we utilize
several noncore funding sources, such as brokered certificates of deposit, Federal
Home Loan Bank, or FHLB, of Cincinnati advances, federal funds purchased and other
sources. We utilize these noncore funding sources to fund the ongoing operations
and growth of Pinnacle National. The availability of these noncore funding sources
are subject to broad economic conditions and, as such, the cost of funds may
fluctuate significantly and/or be restricted at, thus impacting our net interest
income, our immediate liquidity and/or our access to additional liquidity. |
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Brokered certificates of deposit have received scrutiny from regulators in recent
months. We impose upon ourselves limitations as to the absolute level of brokered
deposits we may have on our balance sheet at any point in time. The pricing of
these deposits are subject to the broader wholesale funding market and may
fluctuate significantly in a very short period of time. Additionally, the
availability of these deposits is impacted by overall market conditions as
investors determine whether to invest in less risky certificates of deposit or in
riskier debt and equity markets. As money flows between these various investment
instruments, market conditions will impact the pricing and availability of brokered
funds, which may negatively impact our liquidity and cost of funds. |
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The financial media has disclosed that the nations FHLB system may be under stress
due to deterioration in the financial markets. The capital positions of several
FHLB institutions have deteriorated to the point that they may suspend dividend
payments to their members. Pinnacle National is a member of the FHLB of Cincinnati
which continues to pay dividends. However, should financial conditions continue to
weaken, the FHLB system (including the FHLB of Cincinnati) in the future may have
to, not only suspend dividend payments, but also curtail advances to member
institutions, like Pinnacle National. |
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Should the FHLB system deteriorate to the point of not being able to fund future
advances to banks, including Pinnacle National, this would place increased pressure
on other wholesale funding sources. |
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We impose certain internal limits as to the absolute level of noncore funding we
will incur at any point in time. Should we exceed those limitations, we may need to
modify our growth plans, liquidate certain assets, participate loans to
correspondents or execute other actions to allow for us to return to an acceptable
level of noncore funding within a reasonable amount of time. |
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If the federal funds rate remains at current extremely low levels, our net interest
margin, and consequently our net earnings, may continue to be negatively impacted. |
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Because of significant competitive deposit pricing pressures in our market and the
negative impact of these pressures on our cost of funds, coupled with the fact that
a significant portion of our loan portfolio has variable rate pricing that moves in
concert with changes to the Federal Reserve Board of Governors federal funds rate
(which is at an extremely low rate as a result of the current recession), we
experienced net interest margin compression throughout 2008 and in the first half
of 2009. Because of these competitive pressures, we were unable to lower the rate
that we pay on interest-bearing liabilities to the same extent and as quickly as
the yields we charge on interest-earning assets. As a result, our net interest
margin, and consequently our profitability, has been negatively impacted. We have
recently taken various actions which improved our net interest margin in the third
quarter of 2009. If the Federal Reserve Board of Governors federal funds rate
remains at extremely low levels for a prolonged period, our higher funding costs
may cause our net interest margin to be lower than other institutions. |
Page 54
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Fluctuations in interest rates could reduce our profitability. |
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The absolute level of interest rates as well as changes in interest rates may
affect our level of interest income, the primary component of our gross revenue, as
well as the level of our interest expense. Interest rate fluctuations are caused by
many factors which, for the most part, are not under our control. For example,
national monetary policy plays a significant role in the determination of interest
rates. Additionally, competitor pricing and the resulting negotiations that occur
with our customers also impact the rates we collect on loans and the rates we pay
on deposits. |
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As interest rates change, we expect that we will periodically experience gaps in
the interest rate sensitivities of our assets and liabilities, meaning that either
our interest-bearing liabilities will be more sensitive to changes in market
interest rates than our interest-earning assets, or vice versa. In either event, if
market interest rates should move contrary to our position, this gap may work
against us, and our earnings may be negatively affected. Changes in the level of
interest rates also may negatively affect our ability to originate real estate
loans, the value of our assets and our ability to realize gains from the sale of
our assets, all of which ultimately affect our earnings. A decline in the market
value of our assets may limit our ability to borrow additional funds. As a result,
we could be required to sell some of our loans and investments under adverse market
conditions, upon terms that are not favorable to us, in order to maintain our
liquidity. If those sales are made at prices lower than the amortized costs of the
investments, we will incur losses. |
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A decline in our stock price or expected future cash flows, or a material adverse
change in our results of operations or prospects, could result in impairment of our
goodwill. |
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A significant and sustained decline in our stock price and market capitalization
below book value, a significant decline in our expected future cash flows, a
significant adverse change in the business climate, slower growth rates or other
factors could result in impairment of our goodwill. If we were to conclude that a
write-down of our goodwill is necessary, then the appropriate charge would likely
cause a material loss. Any significant loss would adversely impact the capacity of
Pinnacle National to pay dividends to us without seeking prior regulatory approval,
which could adversely affect our ability to pay required interest payments and
preferred stock dividends. |
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Competition with other banking institutions could adversely affect our
profitability. |
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A number of banking institutions in the Nashville market have higher lending
limits, more banking offices, and a larger market share of loans or deposits. In
addition, our asset management division competes with numerous brokerage firms and
mutual fund companies which are also much larger. In some respects, this may place
these competitors in a competitive advantage, although many of our customers have
selected us because of service quality concerns at the larger enterprises. This
competition may limit or reduce our profitability, reduce our growth and adversely
affect our results of operations and financial condition. |
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Loss of our senior executive officers or other key employees could impair our
relationship with our customers and adversely affect our business. |
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We have assembled a senior management team which has substantial background and
experience in banking and financial services in the Nashville market. Loss of these
key personnel could negatively impact our earnings because of their skills,
customer relationships and/or the potential difficulty of promptly replacing them. |
Page 55
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The limitations on bonuses, retention awards, severance payments and incentive
compensation contained in ARRA may adversely affect our ability to retain our
highest performing employees. |
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For so long as any equity securities that we issued to the U.S. Treasury under the
CPP remain outstanding, ARRA restricts bonuses, retention awards, severance
payments and other incentive compensation payable to our five senior executive
officers and up to the next 20 highest paid employees. It is possible that we may
be unable to create a compensation structure that permits us to retain our highest
performing employees or recruit additional employees, especially if we are
competing against institutions that are not subject to the same restrictions. If
this were to occur, our business and results of operations could be materially
adversely affected. |
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Our business is dependent on technology, and an inability to invest in
technological improvements may adversely affect our results of operations and
financial condition. |
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The financial services industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and services. In addition
to better serving customers, the effective use of technology increases efficiency
and enables financial institutions to reduce costs. We have made significant
investments in data processing, management information systems and internet banking
accessibility. Our future success will depend in part upon our ability to create
additional efficiencies in our operations through the use of technology,
particularly in light of our past and projected growth strategy. Many of our
competitors have substantially greater resources to invest in technological
improvements. We cannot make assurances that our technological improvements will
increase our operational efficiency or that we will be able to effectively
implement new technology-driven products and services or be successful in marketing
these products and services to our customers. |
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We are subject to various statutes and regulations that may impose additional costs
or limit our ability to take certain actions. |
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We operate in a highly regulated industry and are subject to examination,
supervision, and comprehensive regulation by various regulatory agencies. Our
compliance with these regulations is costly and restricts certain of our
activities, including payment of dividends, mergers and acquisitions, investments,
loans and interest rates charged, interest rates paid on deposits and locations of
offices. We are also subject to capital guidelines established by our regulators,
which require us to maintain adequate capital to support our growth. Recent bank
and thrift closures have depleted the Deposit Insurance Fund, and we were assessed
a $2.3 million special assessment in the second quarter of 2009. It is possible
that our assessments may increase in the future. Any future assessment increases
could negatively impact our results of operations. The laws and regulations
applicable to the banking industry could change at any time, and we cannot predict
the effects of these changes on our business and profitability. Because
government regulation greatly affects the business and financial results of all
commercial banks and bank holding companies, our cost of compliance could adversely
affect our ability to operate profitably. |
Page 56
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ITEM 2. |
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
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Maximum |
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Total Number |
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Number (or |
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of Shares |
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Approximate |
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Purchased as |
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Dollar Value) of |
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Average |
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Part of Publicly |
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Shares That May |
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Total Number |
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Price |
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Announced |
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Yet Be Purchased |
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of Shares |
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Paid Per |
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Plans or |
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Under the Plans |
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Period |
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Repurchased (1) |
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Share |
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Programs |
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or Programs |
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July 1, 2009 to July 31, 2009 |
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$ |
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August 1, 2009 to August 31, 2009 |
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650 |
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15.12 |
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September 1, 2009 to September 30, 2009 |
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Total |
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650 |
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$ |
15.12 |
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(1) |
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During the quarter ended September 30, 2009, 5,345 shares of restricted stock
previously awarded to certain of our associates vested. We withheld 650 shares to satisfy
tax withholding requirements for these associates. |
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ITEM 3. |
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DEFAULTS UPON SENIOR SECURITIES |
Not applicable
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ITEM 4. |
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None
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ITEM 5. |
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OTHER INFORMATION |
None
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31.1 |
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Certification pursuant to Rule 13a-14(a)/15d-14(a) |
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31.2 |
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Certification pursuant to Rule 13a-14(a)/15d-14(a) |
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32.1 |
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Certification pursuant to 18 USC Section 1350 Sarbanes-Oxley Act of 2002 |
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32.2 |
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Certification pursuant to 18 USC Section 1350 Sarbanes-Oxley Act of 2002 |
Page 57
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.
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PINNACLE FINANCIAL PARTNERS, INC. |
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/s/ M. Terry Turner |
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M. Terry Turner |
October 28, 2009
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President and Chief Executive Officer |
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/s/ Harold R. Carpenter |
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Harold R. Carpenter |
October 28, 2009
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Chief Financial Officer |
Page 58
EXHIBIT INDEX
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Exhibit No. |
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Description |
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31.1 |
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Certification pursuant to Rule 13a-14(a)/15d-14(a) |
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31.2 |
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Certification pursuant to Rule 13a-14(a)/15d-14(a) |
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32.1 |
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Certification pursuant to 18 USC Section 1350 Sarbanes-Oxley Act of 2002 |
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32.2 |
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Certification pursuant to 18 USC Section 1350 Sarbanes-Oxley Act of 2002 |
Page 59