Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2004
Commission File No: 000-31225
Pinnacle Financial Partners, Inc. | ||
(Exact name of registrant as specified in its charter) |
Tennessee | 62-1812853 | |
(State or jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
The Commerce Center, 211 Commerce Street, Suite 300, Nashville, Tennessee 37201 | ||
(Address of principal executive offices) |
(615) 744-3700 | ||
(Registrant’s telephone number, including area code) |
Not Applicable | ||
(Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act.) Yes [ ] No [X]
As of April 30, 2004, there were 3,692,053 shares of common stock, $1.00 par value per share, issued and outstanding.
Pinnacle Financial Partners, Inc.
Report on Form 10-Q
March 31, 2004
TABLE OF CONTENTS
Page No. | ||||||||
PART I: | ||||||||
Item 1. Consolidated Financial Statements (Unaudited) | 3 | |||||||
16 | ||||||||
36 | ||||||||
36 | ||||||||
37 | ||||||||
37 | ||||||||
37 | ||||||||
37 | ||||||||
37 | ||||||||
37 | ||||||||
39 | ||||||||
EX-3.1 AMENDED CHARTER | ||||||||
EX-31.1 RULE13a-14(a) CERTIFICATION OF THE CEO | ||||||||
EX-31.2 RULE13a-14(a) CERTIFICATION OF THE CFO | ||||||||
EX-32.1 SECTION 1350 CERTIFICATION OF THE CEO | ||||||||
EX-32.2 SECTION 1350 CERTIFICATION OF THE CFO |
FORWARD-LOOKING STATEMENTS
Pinnacle Financial Partners, Inc. (“Pinnacle Financial”) may from time to time make written or oral statements, including statements contained in this report which may constitute forward-looking statements within the meaning of Section 21E of the Securities Act of 1934 (the “Exchange Act”). The words “expect”, “anticipate”, “intend”, “consider”, “plan”, “believe”, “seek”, “should”, “estimate”, and similar expressions are intended to identify such forward-looking statements, but other statements may constitute forward-looking statements. These statements should be considered subject to various risks and uncertainties. Such forward-looking statements are made based upon management’s belief as well as assumptions made by, and information currently available to, management pursuant to “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Pinnacle Financial’s actual results may differ materially from the results anticipated in forward-looking statements due to a variety of factors. Such factors are described below and include, without limitation, (i) unanticipated deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses, (ii) increased competition with other financial institutions, (iii) lack of sustained growth in the economy in the Nashville, Tennessee area, (iv) rapid fluctuations or unanticipated changes in interest rates, (v) the inability of our bank subsidiary, Pinnacle National Bank (“Pinnacle National”) to satisfy regulatory requirements for its expansion plans, and (vi) changes in the legislative and regulatory environment. Many of such factors are beyond Pinnacle Financial’s ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. Pinnacle Financial does not intend to update or reissue any forward-looking statements contained in this report as a result of new information or other circumstances that may become known to Pinnacle Financial.
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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, | December 31, | |||||||
2004 | 2003 | |||||||
ASSETS | ||||||||
Cash and noninterest-bearing due from banks | $ | 17,476,720 | $ | 13,768,278 | ||||
Interest-bearing due from banks | 200,444 | 1,180,371 | ||||||
Federal funds sold | 21,328,406 | 32,235,401 | ||||||
Cash and cash equivalents | 39,005,570 | 47,184,050 | ||||||
Securities available-for-sale, at fair value | 134,382,875 | 139,944,238 | ||||||
Securities held-to-maturity (fair value of $27,655,669) | 27,655,669 | — | ||||||
Mortgage loans held-for-sale | 4,057,322 | 1,582,600 | ||||||
Loans | 323,415,679 | 297,004,110 | ||||||
Less allowance for loan losses | (4,042,456 | ) | (3,718,598 | ) | ||||
Loans, net | 319,373,223 | 293,285,512 | ||||||
Premises and equipment, net | 6,946,340 | 6,911,359 | ||||||
Other assets | 9,630,504 | 9,512,899 | ||||||
Total assets | $ | 541,051,503 | $ | 498,420,658 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Deposits: | ||||||||
Noninterest-bearing demand | $ | 66,620,906 | $ | 60,796,396 | ||||
Interest-bearing demand | 40,039,818 | 31,407,213 | ||||||
Savings and money market accounts | 165,388,834 | 140,383,878 | ||||||
Time | 165,551,209 | 157,981,525 | ||||||
Total deposits | 437,600,767 | 390,569,012 | ||||||
Securities sold under agreements to repurchase | 14,699,182 | 15,050,110 | ||||||
Federal Home Loan Bank advances | 40,500,000 | 44,500,000 | ||||||
Subordinated debt | 10,310,000 | 10,310,000 | ||||||
Other liabilities | 1,675,267 | 3,655,155 | ||||||
Total liabilities | 504,785,216 | 464,084,277 | ||||||
Commitments and contingent liabilities | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock, no par value; 10,000,000 shares authorized; no shares issued and outstanding | — | — | ||||||
Common stock, par value $1.00; 10,000,000 shares authorized; 3,692,053 issued and outstanding at March 31, 2004 and December 31, 2003 | 3,692,053 | 3,692,053 | ||||||
Additional paid-in capital | 30,682,947 | 30,682,947 | ||||||
Retained earnings (accumulated deficit) | 881,867 | (189,155 | ) | |||||
Accumulated other comprehensive income, net | 1,009,420 | 150,536 | ||||||
Total stockholders’ equity | 36,266,287 | 34,336,381 | ||||||
Total liabilities and stockholders’ equity | $ | 541,051,503 | $ | 498,420,658 | ||||
See accompanying notes to consolidated financial statements.
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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended | ||||||||
March 31, | ||||||||
2004 | 2003 | |||||||
Interest income: | ||||||||
Loans, including fees | $ | 3,946,572 | 2,963,513 | |||||
Securities: | ||||||||
Taxable | 1,550,859 | 908,046 | ||||||
Tax-exempt | 85,975 | 37,863 | ||||||
Federal funds sold and other | 82,716 | 36,411 | ||||||
Total interest income | 5,666,122 | 3,945,833 | ||||||
Interest expense: | ||||||||
Deposits | 1,171,188 | 1,072,672 | ||||||
Securities sold under agreements to repurchase | 9,293 | 14,796 | ||||||
Federal funds purchased and other borrowings | 333,349 | 222,130 | ||||||
Total interest expense | 1,513,830 | 1,309,598 | ||||||
Net interest income | 4,152,292 | 2,636,235 | ||||||
Provision for loan losses | 353,848 | 288,026 | ||||||
Net interest income after provision for loan losses | 3,798,444 | 2,348,209 | ||||||
Noninterest income: | ||||||||
Service charges on deposit accounts | 163,845 | 101,753 | ||||||
Investment services | 389,579 | 155,932 | ||||||
Fees from the origination of mortgage loans | 191,920 | 46,188 | ||||||
Gains on loan participations sold, net | 121,617 | 2,189 | ||||||
Gains on sales of investment securities, net | 248,353 | 17,698 | ||||||
Other noninterest income | 110,042 | 138,422 | ||||||
Total noninterest income | 1,225,356 | 462,182 | ||||||
Noninterest expense: | ||||||||
Compensation and employee benefits | 2,267,342 | 1,434,912 | ||||||
Equipment and occupancy | 505,690 | 396,825 | ||||||
Marketing and other business development | 149,158 | 75,490 | ||||||
Administrative | 220,698 | 150,115 | ||||||
Postage and supplies | 99,138 | 73,262 | ||||||
Other noninterest expense | 170,760 | 111,660 | ||||||
Total noninterest expense | 3,412,786 | 2,242,264 | ||||||
Income before income taxes | 1,611,014 | 568,127 | ||||||
Income tax expense | 539,992 | 195,148 | ||||||
Net income | $ | 1,071,022 | 372,979 | |||||
Per share information: | ||||||||
Basic net income per common share | $ | 0.29 | 0.10 | |||||
Diluted net income per common share | $ | 0.26 | 0.10 | |||||
Weighted average shares outstanding: | ||||||||
Basic | 3,692,053 | 3,692,053 | ||||||
Diluted | 4,106,865 | 3,841,631 |
See accompanying notes to consolidated financial statements.
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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
For the three months ended March 31, 2004 and 2003
Common Stock | Additional | Retained Earnings | Accumulated Other | Total | ||||||||||||||||||||
Paid-in | (Accumulated | Comprehensive | Stockholders’ | |||||||||||||||||||||
Shares | Amount | Capital | Deficit) | Income (Loss) | Equity | |||||||||||||||||||
Balances, December 31, 2002 | 3,692,053 | $ | 3,692,053 | $ | 30,682,947 | $ | (2,743,794 | ) | $ | 772,441 | $ | 32,403,647 | ||||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Net income | — | — | — | 372,979 | — | 372,979 | ||||||||||||||||||
Net unrealized holding losses on available-for-sale securities, net of deferred tax benefit of $(244,583) | — | — | — | — | (373,385 | ) | (373,385 | ) | ||||||||||||||||
Total comprehensive (loss) | (406 | ) | ||||||||||||||||||||||
Balances, March 31, 2003 | 3,692,053 | $ | 3,692,053 | $ | 30,682,947 | $ | (2,370,815 | ) | $ | 399,056 | $ | 32,403,241 | ||||||||||||
Balances, December 31, 2003 | 3,692,053 | $ | 3,692,053 | $ | 30,682,947 | $ | (189,155 | ) | $ | 150,536 | $ | 34,336,381 | ||||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Net income | — | — | — | 1,071,022 | — | 1,071,022 | ||||||||||||||||||
Net unrealized holding gains on available-for-sale securities, net of deferred tax expense of $533,648 | — | — | — | — | 858,884 | 858,884 | ||||||||||||||||||
Total comprehensive income | 1,930,106 | |||||||||||||||||||||||
Balances, March 31, 2004 | 3,692,053 | $ | 3,692,053 | $ | 30,682,947 | $ | 881,867 | $ | 1,009,420 | $ | 36,266,287 | |||||||||||||
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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended | ||||||||
March 31, | ||||||||
2004 | 2003 | |||||||
Operating activities: | ||||||||
Net income | $ | 1,071,022 | $ | 372,979 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Net amortization of available-for-sale securities | 189,637 | 163,888 | ||||||
Depreciation and amortization | 259,935 | 216,212 | ||||||
Provision for loan losses | 353,848 | 288,026 | ||||||
Gain on sale of investment securities, net | (248,353 | ) | (17,698 | ) | ||||
Gain on participations sold | (121,617 | ) | (2,189 | ) | ||||
Deferred tax expense (benefit) | (320,638 | ) | 195,148 | |||||
Mortgage loans held for sale: | ||||||||
Loans originated | (10,844,562 | ) | (2,248,500 | ) | ||||
Loans sold | 8,369,840 | 1,458,350 | ||||||
(Increase) decrease in other assets | 12,835 | (548,741 | ) | |||||
Decrease in other liabilities | (1,979,888 | ) | (949,325 | ) | ||||
Net cash used in operating activities | (3,257,941 | ) | (1,071,850 | ) | ||||
Investing activities: | ||||||||
Activities in securities available-for-sale: | ||||||||
Purchases | (51,539,860 | ) | (42,333,066 | ) | ||||
Sales | 21,876,953 | 12,403,500 | ||||||
Maturities, prepayments and calls | 9,012,617 | 10,683,228 | ||||||
Net increase in loans | (26,441,559 | ) | (19,204,279 | ) | ||||
Purchases of premises and equipment and software | (219,717 | ) | (906,305 | ) | ||||
Purchases of other assets | (289,800 | ) | (292,700 | ) | ||||
Net cash used in investing activities | (47,601,366 | ) | (39,649,622 | ) | ||||
Financing activities: | ||||||||
Net increase in deposits | 47,031,755 | 32,715,202 | ||||||
Net increase (decrease) in securities sold under agreements to repurchase | (350,928 | ) | 795,419 | |||||
Advances from Federal Home Loan Bank: | ||||||||
Issuances | 4,000,000 | 11,000,000 | ||||||
Payments | (8,000,000 | ) | — | |||||
Net cash provided by financing activities | 42,680,827 | 44,510,621 | ||||||
Net increase (decrease) in cash and cash equivalents | (8,178,480 | ) | 3,789,149 | |||||
Cash and cash equivalents, beginning of period | 47,184,050 | 12,942,129 | ||||||
Cash and cash equivalents, end of period | $ | 39,005,570 | $ | 16,731,278 | ||||
Supplemental disclosure: | ||||||||
Cash paid for interest | $ | 1,439,283 | $ | 1,374,243 | ||||
Cash paid for income taxes | $ | 1,226,817 | $ | — | ||||
Transfers of securities available-for-sale to held-to-maturity | $ | 27,655,669 | $ | — | ||||
See accompanying notes to consolidated financial statements.
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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) was formed on February 28, 2000 (inception) and is a bank holding company whose business is conducted by its wholly-owned subsidiary, Pinnacle National Bank (Pinnacle National). Additionally, PFP Title Company is a wholly-owned subsidiary of Pinnacle National. Pinnacle National is a commercial bank located in Nashville, Tennessee. Pinnacle National provides a full range of banking services in its primary market area of Davidson County and the surrounding counties. Pinnacle National commenced its banking operations on October 27, 2000. PFP Title Company sells title insurance policies to Pinnacle National customers and others. PNFP Statutory Trust I, a wholly-owned subsidiary of Pinnacle Financial, was created for the exclusive purpose of issuing capital trust preferred securities.
Basis of Presentation— These consolidated financial statements include the accounts of Pinnacle Financial. Significant intercompany transactions and accounts are eliminated in consolidation, other than the accounts of PNFP Statutory Trust I which are included in these consolidated financial statements pursuant to the equity method of accounting.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information, refer to the consolidated financial statements and footnotes thereto included in Pinnacle Financial’s Form 10-KSB for the fiscal year ended December 31, 2003 as filed with the Securities and Exchange Commission.
Use of Estimates— The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses.
Stock-Based Compensation— In December 2002, the FASB issued SFAS No. 148,“Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123”. This Statement amends Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2003 and are included below.
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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Pinnacle Financial applies APB Opinion 25 and related interpretations in accounting for the stock option plan. All option grants carry exercise prices equal to or above the fair value of the common stock on the date of grant. Accordingly, no compensation cost has been recognized. Had compensation cost for Pinnacle Financial’s stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method prescribed in SFAS No. 123, “Accounting for Stock-Based Compensation,” Pinnacle Financial’s net income per share would have been adjusted to the pro forma amounts indicated below for the three months ended March 31, 2004 and 2003:
2004 | 2003 | |||||||
Net income, as reported | $ | 1,071,022 | $ | 372,979 | ||||
Deduct: Total stock-based compensation expense determined under the fair value based method for all awards, net of related tax effects | (66,620 | ) | (43,909 | ) | ||||
Pro forma net income | $ | 1,004,402 | $ | 329,070 | ||||
Per share information: | ||||||||
Basic net income | As reported | $ | 0.29 | $ | 0.10 | |||
Pro forma | $ | 0.27 | $ | 0.09 | ||||
Diluted net income | As reported | $ | 0.26 | $ | 0.10 | |||
Pro forma | $ | 0.24 | $ | 0.09 |
For purposes of these calculations, the fair value of options granted for the three months ended March 31, 2004 and 2003 was estimated using the Black-Scholes option pricing model and the following assumptions:
2004 | 2003 | |||||||
Risk free interest rate | 1.00 | % | 1.25 | % | ||||
Expected life of the options | 5.0 years | 5.0 years | ||||||
Expected dividend yield | 0.00 | % | 0.00 | % | ||||
Expected volatility | 26.7 | % | 38.1 | % | ||||
Weighted average fair value | $ | 6.30 | $ | 4.67 |
Income Per Common Share— Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted. The difference between basic and diluted weighted average shares outstanding was attributable to common stock options and warrants.
As of March 31, 2004 and 2003, there were common stock options outstanding to purchase up to 505,245 and 404,100 common shares, respectively. Substantially all of these shares have exercise prices, which when considered in relation to the average market price of Pinnacle Financial’s common stock for the respective reporting period, are considered dilutive and are considered in Pinnacle Financial’s diluted income per share calculation for the three months ended March 31, 2004 and 2003. Also, at March 31, 2004, there were 198,420 options outstanding to purchase common stock which were exercisable by the option holder.
Additionally, as of March 31, 2004, Pinnacle Financial had dilutive warrants outstanding to purchase 203,000 common shares which have also been considered in the calculation of Pinnacle Financial’s diluted income per share for the three months ended March 31, 2004 and 2003. At March 31, 2004, all of the outstanding warrants to purchase common stock were exercisable by the warrant holder.
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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 calculation for the three months ended March 31, 2004 and 2003:
2004 | 2003 | |||||||
Basic earnings per share calculation: | ||||||||
Numerator– Net income | $ | 1,071,022 | $ | 372,979 | ||||
Denominator– Average common shares outstanding | 3,692,053 | 3,692,053 | ||||||
Basic net income per share | $ | 0.29 | $ | 0.10 | ||||
Diluted earnings per share calculation: | ||||||||
Numerator– Net income | $ | 1,071,022 | $ | 372,979 | ||||
Denominator– Average common shares outstanding | 3,692,053 | 3,692,053 | ||||||
Dilutive shares contingently issuable | 414,811 | 149,578 | ||||||
Average dilutive common shares outstanding | 4,106,865 | 3,841,631 | ||||||
Diluted net income per share | $ | 0.26 | $ | 0.10 |
On April 20, 2004, the Board of Directors of Pinnacle Financial approved a two for one stock split of the Company’s common stock payable as a 100% stock dividend on May 10, 2004 to shareholders of record on April 30, 2004. Pinnacle Financial will retroactively apply the impact of this stock split in all financial statements published after May 10, 2004. The following is the pro forma impact of the stock split on Pinnacle Financial’s reported basic and diluted net income per common share for the three months ended March 31, 2004 and 2003.
2004 | 2003 | |||||||
Pro Forma per share information: | ||||||||
Basic net income | As reported | $ | 0.29 | $ | 0.10 | |||
Pro forma for stock split | $ | 0.15 | $ | 0.05 | ||||
Diluted net income | As reported | $ | 0.26 | $ | 0.10 | |||
Pro forma for stock split | $ | 0.13 | $ | 0.05 |
Business Segments— Pinnacle Financial operates in one business segment, commercial banking, and has no individually significant business segments.
Comprehensive Income (Loss)—Other comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income. Currently, Pinnacle Financial’s other comprehensive income (loss) consists of unrealized gains and losses, net of deferred income taxes, on available-for-sale securities.
Recent Accounting Pronouncements— In March 2004, the SEC issued Staff Accounting Bulletin No. 105,Application of Accounting Principles to Loan Commitments. Current accounting guidance requires the commitment to originate mortgage loans to be held for sale be recognized on the balance sheet at fair value from inception through expiration or funding. SAB 105 requires that the fair-value measurement include only differences between the guaranteed interest rate in the loan commitment and a market interest rate, excluding any expected future cash flows related to the customer relationship or loan servicing. SAB 105 is effective for commitments to originate mortgage loans to be held for sale that are entered into after March 31, 2004. Its adoption is not expected to have a material impact on the consolidated financial position on results of operations of Pinnacle Financial.
In March 2004, the FASB’s Emerging Issues Task Force reached a consensus on EITF Issue No. 03-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The guidance prescribes a three-step model for determining whether an investment is other-than-temporarily impaired and requires disclosures about unrealized losses on investments. The accounting guidance is effective for reporting periods beginning after June 15, 2004, while the disclosure requirements are effective for annual reporting periods ending after June 15, 2004. Pinnacle Financial has adopted the requirements of this EITF.
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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Reclassifications– Certain previous amounts have been reclassified to conform to the 2004 presentation. Such reclassifications had no impact on net income or loss during any period.
Note 2. Securities
The amortized cost and fair value of securities at March 31, 2004 and December 31, 2003 are summarized as follows:
March 31, 2004 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Securities available-for-sale: | ||||||||||||||||
U.S. government and agency securities | $ | 9,413,110 | $ | 122,027 | $ | — | $ | 9,535,137 | ||||||||
Mortgage-backed securities | 121,511,432 | 1,328,861 | (152,440 | ) | 122,687,853 | |||||||||||
State and municipal securities | 1,179,509 | 4,904 | (37 | ) | 1,184,374 | |||||||||||
Corporate notes | 975,746 | — | (237 | ) | 975,509 | |||||||||||
$ | 133,079,797 | $ | 1,455,792 | $ | (152,714 | ) | $ | 134,382,875 | ||||||||
Securities held-to-maturity: | ||||||||||||||||
U.S. government and agency securities | $ | 17,746,250 | $ | — | $ | — | $ | 17,746,250 | ||||||||
State and municipal securities | 9,909,419 | — | — | 9,909,419 | ||||||||||||
$ | 27,655,669 | $ | — | $ | — | $ | 27,655,669 | |||||||||
December 31, 2003 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Securities available-for-sale: | ||||||||||||||||
U.S. government and agency securities | $ | 27,023,126 | $ | 353,204 | $ | (104,354 | ) | $ | 27,271,976 | |||||||
Mortgage-backed securities | 103,087,958 | 506,881 | (616,953 | ) | 102,977,886 | |||||||||||
State and municipal securities | 9,590,357 | 142,970 | (38,951 | ) | 9,694,376 | |||||||||||
$ | 139,701,441 | $ | 1,003,055 | $ | (760,258 | ) | $ | 139,944,238 | ||||||||
On March 31, 2004, Pinnacle National transferred approximately $27,656,000 of available-for-sale securities to held-to-maturity at fair value. The transfer consisted of substantially all of Pinnacle National’s holdings of Tennessee municipal securities and several of its longer-term agency securities. The unrealized gain on such securities as of the date of transfer was approximately $325,000. This amount is reflected in the accumulated other comprehensive income, net of tax, and will be amortized over the remaining lives of the respective held-to-maturity securities.
Pinnacle Financial realized approximately $248,000 in net gains from the sale of $21,877,000 of available-for-sale securities during the three months ended March 31, 2004 and $18,000 in net gains on the sale of $12,404,000 of available-for-sale securities during the three months ended March 31, 2003. Gross realized gains amounted to $312,000 on the sale of $10.9 million of available-for-sale securities while gross realized losses amounted to $64,000 on the sale of $11.0 million of available-for-sale securities during the three months ended March 31, 2004. Gross realized gains amounted to $32,000 on the sale of $14.4 million of available-for-sale securities while gross realized losses amounted to $14,000 on the sale of $2.0 million of available-for-sale securities during the three months ended March 31, 2003. At March 31, 2004, approximately $88,747,000 of Pinnacle Financial’s available-for-sale portfolio was pledged to secure public fund deposits and securities sold under agreements to repurchase.
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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3. Loans and Allowance for Loan Losses
The composition of loans at March 31, 2004 and December 31, 2003 is summarized as follows:
2004 | 2003 | |||||||
Commercial real estate – Mortgage | $ | 75,404,031 | $ | 68,507,350 | ||||
Commercial real estate – Construction | 9,336,937 | 8,210,646 | ||||||
Commercial – Other | 141,992,839 | 129,881,732 | ||||||
Total Commercial | 226,733,807 | 206,599,728 | ||||||
Consumer real estate – Mortgage | 81,977,894 | 76,041,526 | ||||||
Consumer real estate – Construction | 3,504,007 | 3,077,656 | ||||||
Consumer – Other | 11,199,971 | 11,285,200 | ||||||
Total Consumer | 96,681,872 | 90,404,382 | ||||||
Total Loans | 323,415,679 | 297,004,110 | ||||||
Allowance for loan losses | (4,042,456 | ) | (3,718,598 | ) | ||||
Loans, net | $ | 319,373,223 | $ | 293,285,512 | ||||
Using standard industry codes, Pinnacle Financial periodically analyzes its commercial loan portfolio to determine if a concentration of credit risk exists to any one or more industries. Pinnacle Financial has a meaningful credit exposure (loans outstanding plus unfunded lines of credit) to borrowers in the trucking industry and to operators of nonresidential buildings. Credit exposure to the trucking industry approximated $33.0 million and $35.0 million, while credit exposure to operators of nonresidential buildings approximated $16.8 million and $16.6 million at March 31, 2004 and December 31, 2003, respectively. Levels of exposure to these industry groups are periodically evaluated in order to determine if additional allowance allocations are warranted.
At March 31, 2004 and 2003, Pinnacle Financial had certain impaired loans on nonaccruing interest status. The principal balance of these nonaccrual loans amounted to $86,000 and $1,095,000 at March 31, 2004 and 2003, respectively. In each case, at the date such loans were placed on nonaccrual, Pinnacle Financial reversed all previously accrued interest income against current year earnings. Had these loans been on accruing status, interest income would have been higher by $1,000 and $29,000 for the three months ended March 31, 2004 and 2003, respectively.
Changes in the allowance for loan losses for the three months ended March 31, 2004 and for the year ended December 31, 2003 are as follows:
2004 | 2003 | |||||||
Balance at beginning of period | $ | 3,718,598 | $ | 2,677,043 | ||||
Charged-off loans | (32,489 | ) | (167,023 | ) | ||||
Recovery of previously charged-off loans | 2,499 | 51,298 | ||||||
Provision for loan losses | 353,848 | 1,157,280 | ||||||
Balance at end of period | $ | 4,042,456 | $ | 3,718,598 | ||||
At March 31, 2004, Pinnacle Financial has granted loans and other extensions of credit amounting to approximately $6,869,000 to certain directors, executive officers, and their related entities of which $3,867,000 had been drawn upon. The terms on these loans and extensions are on substantially the same terms customary for other persons for the type of loan involved.
During the three months ended March 31, 2004 and 2003, Pinnacle Financial sold participations in certain loans to correspondent banks at an interest rate that was less than that of the borrower’s rate of interest. In accordance with generally accepted accounting principles, Pinnacle Financial has reflected a gain on the sale of these participated loans for the three months ended March 31, 2004 and 2003 of approximately $122,000 and $2,000, respectively, which is attributable to the present value of the future net cash flows of the difference between the interest payments the borrower is projected to pay Pinnacle Financial and the amount of interest that will be owed the correspondent based on their future participation in the loan.
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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4. Income Taxes
Income tax expense for the three months ended March 31, 2004 and 2003 consists of the following:
2004 | 2003 | |||||||
Current tax expense: | ||||||||
Federal | $ | 750,857 | $ | — | ||||
State | 109,773 | — | ||||||
Total current tax expense | 860,630 | — | ||||||
Deferred tax expense: | ||||||||
Federal | (265,626 | ) | 164,310 | |||||
State | (55,012 | ) | 30,838 | |||||
Total deferred tax expense | (320,638 | ) | 195,148 | |||||
$ | 539,992 | $ | 195,148 | |||||
Pinnacle Financial’s income tax expense differs from the amounts computed by applying the Federal income tax statutory rates of 34% in 2004 and 2003 to income before income taxes. A reconciliation of the differences for the three months ended March 31, 2004 and 2003 is as follows:
2004 | 2003 | |||||||
Income taxes at statutory rate | $ | 547,744 | $ | 193,163 | ||||
State tax benefit, net of federal tax effect | 36,142 | 20,353 | ||||||
Other items | (43,894 | ) | (18,368 | ) | ||||
Income tax expense | $ | 539,992 | $ | 195,148 | ||||
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that Pinnacle Financial will realize the benefit of these deductible differences. However, the amount of the deferred tax asset considered realizable could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. The components of deferred income taxes included in other assets in the accompanying consolidated balance sheets at March 31, 2004 and December 31, 2003 are as follows:
2004 | 2003 | |||||||
Deferred tax assets: | ||||||||
Loan loss allowance | $ | 1,526,331 | $ | 1,402,434 | ||||
Other accruals | 122,267 | 109,026 | ||||||
1,648,598 | 1,511,460 | |||||||
Deferred tax liabilities: | ||||||||
Depreciation and amortization | 188,900 | 231,524 | ||||||
Securities | 618,677 | 92,263 | ||||||
Other accruals | — | 140,874 | ||||||
807,577 | 464,664 | |||||||
Net deferred tax assets | $ | 841,021 | $ | 1,046,799 | ||||
Note 5. 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
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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
management functions, thus their total outstanding indebtedness may fluctuate during any time period based on the seasonality of their business and the resultant timing of their cash flows. Other typical lines of credit are related to home equity loans granted to consumers. Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee.
Standby letters of credit are generally issued on behalf of an applicant (our customer) to a specifically named beneficiary and are the result of a particular business arrangement that exists between the applicant and the beneficiary. Standby letters of credit have fixed expiration dates and are usually for terms of two years or less unless terminated beforehand due to criteria specified in the standby letter of credit. A typical arrangement involves the applicant routinely being indebted to the beneficiary for such items as inventory purchases, insurance, utilities, lease guarantees or other third party commercial transactions. The standby letter of credit would permit the beneficiary to obtain payment from Pinnacle Financial under certain prescribed circumstances. Subsequently, Pinnacle Financial would then seek reimbursement from the applicant pursuant to the terms of the standby letter of credit.
Pinnacle Financial follows the same credit policies and underwriting practices when making these commitments as it does for on-balance sheet instruments. Each customer’s creditworthiness is evaluated on a case-by-case basis and the amount of collateral obtained, if any, is based on management’s credit evaluation of the customer. Collateral held varies but may include cash, real estate and improvements, marketable securities, accounts receivable, inventory, equipment, and personal property.
The contractual amounts of these commitments are not reflected in the consolidated financial statements and would only be reflected if drawn upon. Since many of the commitments are expected to expire without being drawn upon, the contractual amounts do not necessarily represent future cash requirements. However, should the commitments be drawn upon and should our customers default on their resulting obligation to us, Pinnacle Financial’s maximum exposure to credit loss, without consideration of collateral, is represented by the contractual amount of those instruments.
A summary of Pinnacle Financial’s total contractual amount for all off-balance sheet commitments at March 31, 2004 is as follows:
Commitments to extend credit | $ | 109,300,000 | ||
Standby letters of credit | $ | 32,803,000 |
At March 31, 2004, the fair value of Pinnacle Financial’s standby letters of credit was $146,000. 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.
In the normal course of business, Pinnacle Financial may become involved in various legal proceedings. As of March 31, 2004, the management of Pinnacle Financial is not aware of any such proceedings against Pinnacle Financial.
Note 6. Stock Option Plan
Pinnacle Financial has a stock option plan under which it has granted options to its employees to purchase common stock at or above the fair market value on the date of grant. All of the options are intended to be incentive stock options qualifying under Section 422 of the Internal Revenue Code for favorable tax treatment. Options under the plan vest in varying increments over five years beginning one year after the date of the grant and are exercisable over a period of ten years from the date of grant. The shareholders of Pinnacle Financial have already approved an allocation of 520,000 common shares toward this plan.
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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A summary of the plan changes for the three-month period ended March 31, 2004 is as follows:
Weighted- | ||||||||
Average | ||||||||
Exercise | ||||||||
Number | Price | |||||||
Outstanding at December 31, 2003 | 453,700 | $ | 10.78 | |||||
Granted | 52,495 | 24.74 | ||||||
Exercised | — | — | ||||||
Forfeited | (950 | ) | 9.47 | |||||
Outstanding at March 31, 2004 | 505,245 | $ | 12.26 | |||||
The following table summarizes information about Pinnacle Financial’s stock option plan at March 31, 2004:
Number of | Remaining | Number of | ||||||||||||||
Shares | Contractual | Exercise | Shares | |||||||||||||
Grant date | Outstanding | Life in Years | Price | Exercisable | ||||||||||||
December, 2000 | 184,200 | 6.75 | $ | 10.00 | 110,520 | |||||||||||
March, 2001 | 49,100 | 7.00 | 7.64 | 29,460 | ||||||||||||
November, 2001 | 1,050 | 7.75 | 7.75 | 420 | ||||||||||||
February, 2002 | 121,300 | 8.00 | 9.92 | 48,520 | ||||||||||||
September, 2002 | 2,300 | 8.50 | 11.50 | 460 | ||||||||||||
December, 2002 | 2,500 | 8.75 | 12.91 | 500 | ||||||||||||
February, 2003 | 42,700 | 9.00 | 13.30 | 8,540 | ||||||||||||
April, 2003 | 23,100 | 9.00 | 13.43 | — | ||||||||||||
June, 2003 | 3,600 | 9.25 | 16.25 | — | ||||||||||||
September, 2003 | 4,100 | 9.50 | 18.00 | — | ||||||||||||
September, 2003 | 6,000 | 9.50 | 19.50 | — | ||||||||||||
September, 2003 | 5,300 | 9.50 | 19.28 | — | ||||||||||||
November, 2003 | 7,500 | 9.75 | 23.88 | — | ||||||||||||
January, 2004 | 49,145 | 10.00 | 24.74 | — | ||||||||||||
January, 2004 | 3,000 | 10.00 | 24.75 | — | ||||||||||||
January, 2004 | 350 | 10.00 | 29.44 | — | ||||||||||||
505,245 | 6.83 | $ | 12.26 | 198,420 | ||||||||||||
Note 7. Regulatory Matters
Pinnacle National is subject to certain restrictions on the amount of dividends that may be declared without prior regulatory approval. Pinnacle Financial and Pinnacle National are subject to various other regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Pinnacle Financial and Pinnacle National must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Pinnacle Financial’s and Pinnacle National’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require Pinnacle Financial and Pinnacle National to maintain minimum amounts and ratios of Total and Tier I capital to risk-weighted assets and of Tier I capital to average assets. Management believes, as of March 31, 2004 and December 31, 2003, Pinnacle Financial and Pinnacle National meet all capital adequacy requirements to which they are subject. To be categorized as well-capitalized, Pinnacle National must maintain minimum Total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. Pinnacle Financial and Pinnacle National’s actual capital amounts and ratios are presented in the following table (dollars in thousands):
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PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Minimum | ||||||||||||||||||||||||
To Be Well-Capitalized | ||||||||||||||||||||||||
Minimum | Under Prompt | |||||||||||||||||||||||
Capital | Corrective | |||||||||||||||||||||||
Actual | Requirement | Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
At March 31, 2004 | ||||||||||||||||||||||||
Total capital to risk weighted assets: | ||||||||||||||||||||||||
Pinnacle Financial | $ | 49,624 | 12.1 | % | $ | 32,691 | 8.0 | % | not applicable | |||||||||||||||
Pinnacle National | $ | 42,571 | 10.6 | % | $ | 32,113 | 8.0 | % | $ | 40,141 | 10.0 | % | ||||||||||||
Tier I capital to risk weighted assets: | ||||||||||||||||||||||||
Pinnacle Financial | $ | 45,567 | 11.2 | % | $ | 16,345 | 4.0 | % | not applicable | |||||||||||||||
Pinnacle National | $ | 38,519 | 9.6 | % | $ | 16,056 | 4.0 | % | $ | 24,085 | 6.0 | % | ||||||||||||
Tier I capital to average assets (*): | ||||||||||||||||||||||||
Pinnacle Financial | $ | 45,567 | 9.0 | % | $ | 20,343 | 4.0 | % | not applicable | |||||||||||||||
Pinnacle National | $ | 38,519 | 7.6 | % | $ | 20,324 | 4.0 | % | $ | 25,405 | 5.0 | % | ||||||||||||
At December 31, 2003 | ||||||||||||||||||||||||
Total capital to risk weighted assets: | ||||||||||||||||||||||||
Pinnacle Financial | $ | 47,914 | 12.8 | % | $ | 29,981 | 8.0 | % | not applicable | |||||||||||||||
Pinnacle National | $ | 38,617 | 10.3 | % | $ | 29,944 | 8.0 | % | $ | 37,430 | 10.0 | % | ||||||||||||
Tier I capital to risk weighted assets: | ||||||||||||||||||||||||
Pinnacle Financial | $ | 44,185 | 11.8 | % | $ | 14,990 | 4.0 | % | not applicable | |||||||||||||||
Pinnacle National | $ | 34,888 | 9.3 | % | $ | 14,972 | 4.0 | % | $ | 22,458 | 6.0 | % | ||||||||||||
Tier I capital to average assets (*): | ||||||||||||||||||||||||
Pinnacle Financial | $ | 44,185 | 9.7 | % | $ | 18,188 | 4.0 | % | not applicable | |||||||||||||||
Pinnacle National | $ | 34,888 | 7.7 | % | $ | 18,188 | 4.0 | % | $ | 22,735 | 5.0 | % |
(*) | Average assets for the above calculations were as of the most recent quarter for each period noted. |
In connection with approving Pinnacle Financial’s issuance of Trust Preferred Securities, the Federal Reserve Bank of Atlanta (“FRB-Atlanta”) required Pinnacle Financial to maintain a Total capital to risk-weighted assets ratio of 10%, a Tier 1 capital to risk-weighted assets ratio of 6% and a Tier 1 capital to average-assets ratio of 5% during the year ended December 31, 2004. Furthermore, and in order to provide additional assurance to the FRB-Atlanta as to the maintenance of these ratios, Pinnacle Financial’s President and Chief Executive Officer, Chairman and Chief Administrative Officer agreed to exercise their common stock warrant agreements should it become apparent that maintenance of the ratios at the required levels would not occur otherwise during the year ended December 31, 2004.
Note 8. Subsequent Events
On April 20, 2004, the shareholders of Pinnacle Financial approved an increase in the number of authorized shares of capital stock from 20,000,000 shares to 30,000,000 shares. With the increase, the number of authorized shares of common stock was increased from 10,000,000 shares to 20,000,000 shares and the number of authorized shares of preferred stock remained at 10,000,000 shares.
On April 20, 2004, the shareholders also approved the 2004 Equity Incentive Plan which would set aside for issuance up to 264,755 shares of Pinnacle Financial common stock. This includes a new allocation of 250,000 shares plus 14,755 shares from the previous stock option plan.
On April 20, 2004, the Board of Directors of Pinnacle Financial approved a two for one stock split of the Company’s common stock payable as a 100% stock dividend on May 10, 2004 to shareholders of record on April 30, 2004. Pinnacle Financial will retroactively apply the impact of this stock split in all financial statements published after May 10, 2004.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of our financial condition at March 31, 2004 and December 31, 2003 and our results of operations for the three months ended March 31, 2004 and 2003. 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. You should read the following discussion and analysis along with our consolidated financial statements and the related notes included elsewhere herein.
Overview
General.Pinnacle Financial’s rapid growth from its inception through the first quarter of 2004 continues to have a material impact on Pinnacle Financial’s financial condition and results of operations. This rapid growth resulted in net income for the three months ended March 31, 2004 of $0.26 per diluted share as compared to $0.10 per diluted share for the three months ended March 31, 2003. At March 31, 2004, loans totaled $323 million, as compared to $297 million at December 31, 2003, while total deposits were $438 million at March 31, 2004 compared to $391 million at December 31, 2003.
Financial Condition.The $26 million increase in loans for 2004 contributed to the increase in Pinnacle Financial’s net income for the three months ended March 31, 2004 when compared to an increase of $19 million for the similar period in 2003. This increase in volume offset the decrease in average yields on loans between 2003 and 2002. As Pinnacle Financial seeks to increase its loan portfolio it must also continue to monitor the risks inherent in its lending operations. If Pinnacle Financial’s allowance for loan losses is not sufficient to cover loan losses in Pinnacle Financial’s loan portfolio, increases to the allowance for loan losses would be required which would decrease Pinnacle Financial’s earnings.
Pinnacle Financial has successfully grown its total deposits to $438 million at March 31, 2004. This growth in deposits has allowed Pinnacle Financial to fund its asset growth at a lower cost than in 2003. While rates paid on deposits decreased during the first quarter of 2004 compared to the same quarter in 2003, Pinnacle Financial, for competitive reasons, has typically adjusted its deposit rates more slowly than its loan yields during a period of declining interest rates. As such, Pinnacle Financial’s deposit funding costs do not decrease as quickly as do revenues from interest income on earning assets, thus reducing Pinnacle Financial’s net interest margin. In addition, Pinnacle Financial believes that in certain cases rates paid on deposits have decreased to such levels that further reductions could put Pinnacle Financial at a competitive disadvantage as customers seek higher returns on their balances. The reverse impact would likely result in a scenario of rising interest rates.
Results of Operations.Pinnacle Financial’s net interest income increased from $2.6 million in the first quarter of 2003 to $4.2 million in 2004. The net interest margin (the ratio of net interest income to average earning assets for the period) was approximately 3.5% for both periods.
The increase in loan volumes for the three months ended March 31, 2004 was also the primary cause for the $66,000 increase in Pinnacle Financial’s provision for loan losses when compared to the same period in 2003. As Pinnacle Financial’s loan portfolio continues to grow, Pinnacle Financial expects that it will continue to record a provision for loan losses consistent with the growth in the loan portfolio.
Noninterest income for Pinnacle Financial also increased by 166% from 2003 to 2004. Much of the increase was due to Pinnacle Financial initiating a mortgage origination unit during the first quarter of 2003, which contributed $146,000 in increased fees during the three months ended March 31, 2004 when compared to the three months ended March 31, 2003 and a $234,000 increase in investment services revenues during the first quarter of 2004 compared to the same period in 2003. We also recorded $248,000 in gains on the sales of securities available-for-sale and $122,000 in gains on the sale of loans.
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Pinnacle Financial’s continued growth in 2004 when compared to 2003 resulted in an increase of approximately $1.2 million in noninterest expense related to salaries and employee benefits, equipment and occupancy expenses and other operating expenses. As Pinnacle Financial increased its number of full-time equivalent employees from 65.5 at March 31, 2003 to 95.0 at March 31, 2004, Pinnacle Financial experienced an approximately $833,000 increase in compensation and employee benefit expense. Pinnacle Financial expects to add additional employees throughout 2004 which will cause Pinnacle Financial’s compensation and employee benefit expense to increase in future periods. Pinnacle Financial’s branch expansion efforts in 2003 also resulted in increased noninterest expense for 2003 and the first quarter of 2004. The increased operational expenses for the branches opened in 2003 and the expected opening of two additional branches in 2004 will continue to result in increased noninterest expense in future periods. Although Pinnacle Financial’s expenses increased in 2004 when compared to 2003, Pinnacle Financial’s efficiency ratio, the ratio of noninterest expense to the sum of net interest income and noninterest income, decreased from 72.4% for the three months ended March 31, 2003 compared to 63.5% for the three months ended March 31, 2004.
Furthermore, we believe that a rising interest rate environment will result in increased earnings for us over that of a falling rate environment. Currently, approximately 52% of our loan volumes are floating rate loans that reprice with adjustments to our prime lending rate or other similarly published overnite interest rate indices. We also believe we will continue to grow our balance sheet with continued emphasis on floating rate lending. The additional revenues provided by these two items should be sufficient to overcome any immediate increases in funding costs which would also be incurred in rising rate environment.
Conversely, a falling rate environment would serve to have the opposite effect on our earnings. Additionally, in a falling rate environment, we may not be able to reduce our deposit funding costs by any meaningful amount due to market pressures, while our interest income would decrease at a more rapid pace, as we do not believe interest rate “floors” which are included in many of our floating rate loan documents could be practically enforced.
Capital and Liquidity.On December 30, 2003, Pinnacle Financial issued $10 million in trust preferred securities which bear interest at a floating rate based on a spread over 3-month LIBOR, which is set each quarter, and mature on December 30, 2033. Pinnacle Financial believes that the proceeds from this offering should provide, under current regulatory guidelines, the regulatory capital Pinnacle Financial needs to support its anticipated growth in 2004. At March 31, 2004, Pinnacle Financial’s capital ratios, including Pinnacle National’s capital ratios, met regulatory minimum capital requirements. Additionally, at March 31, 2004, Pinnacle National would be considered to be “well-capitalized” pursuant to banking regulations.
Critical Accounting Estimates
The accounting principles we follow and our methods of applying these principles conform with accounting principles generally accepted in the United States 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 (ALL), have been critical to the determination of our financial position and results of operations.
Allowance for Loan Losses (ALL).Our management assesses the adequacy of the ALL 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 ALL consists of two portions (1) an allocated amount representative of specifically identified credit exposure and exposures readily predictable by historical or comparative experience; and (2) an unallocated amount representative of inherent loss which is not readily identifiable. Even though the ALL is composed of two components, the entire ALL is available to absorb any credit losses.
We establish the allocated amount separately for two different risk groups (1) unique loans (commercial loans, including those loans considered impaired); and (2) homogeneous loans (generally consumer loans). We base the allocation for unique loans primarily on risk rating grades assigned to each of these loans as a result of our loan management and review processes. We then assign each risk-rating grade a loss ratio, which is determined based on
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the experience of management, discussions with banking regulators and our independent loan review process. We estimate losses on impaired loans based on estimated cash flows discounted at the loan’s original effective interest rate or based on the underlying collateral value. Based on management’s experience, we also assign loss ratios to our consumer portfolio. These loss ratios are assigned to the various homogenous categories of the consumer portfolio (e.g., automobile, residential mortgage, home equity).
The unallocated amount is particularly subjective and does not lend itself to exact mathematical calculation. The unallocated amount represents estimated inherent credit losses which may exist, but have not yet been identified, as of the balance sheet date. In estimating the unallocated amount, such matters as changes in the local or national economy, the depth or experience in the lending staff, any concentrations of credit in any particular industry group, and new banking laws or regulations. After we assess applicable factors, we evaluate the aggregate unallocated amount based on our management’s experience.
We then test the resulting ALL balance by comparing the balance in the ALL to historical trends and peer information. Our management then evaluates the result of the procedures performed, including the result of our testing, and concludes on the appropriateness of the balance of the ALL in its entirety. The audit committee of our board of directors reviews the assessment prior to the filing of quarterly and annual financial information.
In assessing the adequacy of the ALL, we also rely on an ongoing independent loan review process. We undertake this process both to ascertain whether there are loans in the portfolio whose credit quality has weakened over time and to assist in our overall evaluation of the risk characteristics of the entire loan portfolio. Our loan review process includes the judgment of management, the input from our independent loan reviewer, who is not an employee of Pinnacle National, and reviews that may have been conducted by bank regulatory agencies as part of their usual examination process.
Results of Operations
Our results for the three months ended March 31, 2004 and 2003 were highlighted by the continued growth in loans and other earning assets and deposits, which resulted in increased revenues and expenses. The net income for the three months ended March 31, 2004 and 2003 was $1,071,000 and $373,000, respectively. The following is a more detailed discussion of results of our operations.
Net Interest Income.Net interest income represents the amount by which interest earned on various earning assets exceeds interest paid on deposits and other interest bearing liabilities and is the most significant component of our earnings. For the three months ended March 31, 2004, we recorded net interest income of $4,152,000, which resulted in a net interest margin of 3.49% for the period. For the three months ended March 31, 2003, we recorded net interest income of $2,636,000 which resulted in a net interest margin of 3.46% for the period. During the first quarter of 2002, the Federal funds rate was 1.25% compared to 1.00% for the first quarter of 2003. Our management believes this historically low interest rate environment continues to have a negative impact on our net interest income as a significant number of our customers are adjustable rate borrowers with their lines of credit tied primarily to our prime lending rate which declined in lock-step with the Federal funds rate declines.
The following table sets forth the amount of our average balances, interest income or interest expense for each category of interest-earning assets and interest-bearing liabilities and the average interest rate for total interest-earning assets and total interest-bearing liabilities, net interest spread and net yield on average interest-earning assets for the three months ended March 31, 2004 and 2003 (dollars in thousands):
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Three months ended | Three months ended | |||||||||||||||||||||||
March 31, 2004 | March 31, 2003 | |||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | |||||||||||||||||||||
Balances | Interest | Rate(1) | Balances | Interest | Rate(1) | |||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||||
Loans | $ | 306,549 | $ | 3,947 | 5.14 | % | $ | 217,690 | $ | 2,964 | 5.52 | % | ||||||||||||
Securities: | ||||||||||||||||||||||||
Taxable | 140,007 | 1,551 | 4.44 | 83,129 | 908 | 4.43 | ||||||||||||||||||
Tax-exempt | 9,795 | 86 | 4.52 | 3,995 | 38 | 4.61 | ||||||||||||||||||
Federal funds sold | 22,024 | 49 | 0.91 | 5,458 | 12 | 0.88 | ||||||||||||||||||
Other | 2,401 | 33 | 6.15 | 1,955 | 24 | 5.52 | ||||||||||||||||||
Total interest-earning assets | 480,776 | 5,666 | 4.73 | 312,227 | 3,946 | 5.14 | ||||||||||||||||||
Non-earning assets | 27,664 | 13,881 | ||||||||||||||||||||||
Total assets | $ | 508,440 | $ | 326,108 | ||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Interest-bearing deposits: | ||||||||||||||||||||||||
Interest checking | 32,859 | 42 | 0.51 | % | 13,571 | 22 | 0.64 | % | ||||||||||||||||
Savings and money market | 146,731 | 286 | 0.78 | 79,262 | 205 | 1.05 | ||||||||||||||||||
Certificates of deposit | 161,559 | 843 | 2.09 | 120,434 | 846 | 2.85 | ||||||||||||||||||
Total interest-bearing deposits | 341,149 | 1,171 | 1.38 | 213,267 | 1,073 | 2.04 | ||||||||||||||||||
Securities sold under agreements to repurchase | 14,868 | 9 | 0.25 | 14,106 | 15 | 0.43 | ||||||||||||||||||
Federal funds purchased | — | — | — | 4,248 | 16 | 1.53 | ||||||||||||||||||
Federal Home Loan Bank advances | 42,379 | 231 | 2.19 | 29,994 | 206 | 2.79 | ||||||||||||||||||
Subordinated debt | 10,310 | 103 | 3.98 | — | — | — | ||||||||||||||||||
Total interest-bearing liabilities | 408,706 | 1,514 | 1.49 | 261,615 | 1,310 | 2.03 | ||||||||||||||||||
Non-interest bearing demand deposits | 61,454 | — | — | 30,278 | — | — | ||||||||||||||||||
Total deposits and interest-bearing liabilities | 470,160 | 1,514 | 1.29 | 291,893 | 1,310 | 1.82 | ||||||||||||||||||
Other liabilities | 2,575 | 1,540 | ||||||||||||||||||||||
Stockholders’ equity | 35,705 | 32,675 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 508,440 | $ | 326,108 | ||||||||||||||||||||
Net interest income | $ | 4,152 | $ | 2,636 | ||||||||||||||||||||
Net interest spread (2) | 3.25 | % | 3.32 | % | ||||||||||||||||||||
Net interest margin (3) | 3.49 | % | 3.46 | % |
(1) | Yields computed on tax-exempt instruments on a tax equivalent basis. | |
(2) | Yields realized on interest-earning assets less the rates paid on interest-bearing liabilities. | |
(3) | Net interest margin is the result of annualized net interest income divided by average interest-earning assets for the period. |
As noted above, the net interest margin for the first quarter of 2004 was 3.49% compared to a net interest margin of 3.46% for the same period in 2003, an increase of 0.03%. The net change in the net interest margin was relatively small because the net decrease in the yield on interest-earning assets between the two periods of 41 basis points approximated the net decrease in the rate paid on interest-bearing liabilities between the two periods of 53 basis points. Other matters related to the changes in net interest income, net interest yields and rates, and net interest margin are presented below:
• | Our loan yields decreased from 5.52% for 2003 to 5.14% for 2004, a decrease of 38 basis points. Approximately 53% of our loans are floating rate loans whereby the interest rate charged the borrower is tied, in substantially all cases, to our prime rate. During the first quarter of 2003, our prime rate was 4.25% compared to a prime rate of 4% for the first quarter of 2004. |
• | During 2004, we were able to grow our funding base significantly. For asset/liability management purposes in 2004, we elected to allocate a greater proportion of such funds to our securities portfolio versus our loan portfolio than in 2003. Our securities portfolio generally has lower yields than do loans. |
• | During 2004, overall deposit rates were less than those rates for the comparable period in 2003. In some cases, rates for 2004 have decreased to such levels that further decreases in deposit rates approach what we |
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term “embedded floors” or rates that it is not reasonable or practical to go below, such that further decreases in deposit rates could place us in a competitive disadvantage as customers seek higher returns on their balances. Changes in interest rates paid on such products as interest checking, savings and money market, securities sold under agreements to repurchase and Federal funds purchased will increase or decrease in a manner that is consistent with changes in the short-term rate environment. During 2004, and as was the case with our prime lending rate, short-term rates were less in 2004 than in 2003. We also monitor the pricing of similar products by our primary competitors. The changes in the short-term rate environment and the information we obtained from price shopping our primary competitors allowed us to reduce these rates in 2004 compared to the same period in 2003. |
• | The short- and long-term rate environment also impacts rates paid on certificates of deposit and advances from the FHLB, however, these items are also impacted by our decisions to alter the mix of maturities of the underlying accounts within these items. Furthermore, the timing of the initial sale of the certificate of deposit or the funding of the FHLB advance also impacts the rates paid on these items. The results for the first three months of 2003 were impacted by certificates of deposit and advances from the FHLB that had been acquired during periods of higher interest rates. Such items matured during the interim period between the three months ended March 31, 2004 and 2003, and were replaced by certificates of deposit and advances from the FHLB which had lower interest rates. These matters contributed to the reduction in the rates paid on certificates of deposit and advances from the FHLB between the two periods. |
• | Also impacting the net interest margin during the first three months of 2004 was the issuance of subordinated indebtedness. This indebtedness was issued at the end of 2003, thus it did not impact the prior period’s results. |
Rate and Volume Analysis.As noted above, net interest income increased by $1,516,000 between the three months ended March 31, 2004 and 2003. The following is an analysis of the changes in our net interest income comparing the changes attributable to rates and those attributable to volumes (dollars in thousands):
Increase (decrease) due to | Total increase | |||||||||||
Dollar change in interest income and expense | Volume | Rate | (decrease) | |||||||||
Interest-earning assets: | ||||||||||||
Loans | $ | 1,202 | $ | (219 | ) | $ | 983 | |||||
Securities: | ||||||||||||
Taxable | 640 | 3 | 643 | |||||||||
Tax-exempt | 48 | — | 48 | |||||||||
Federal funds sold and securities purchased under agreements to resell | 38 | — | 38 | |||||||||
Other | 6 | 2 | 8 | |||||||||
1,934 | 214 | 1,720 | ||||||||||
Interest-bearing liabilities: | ||||||||||||
Interest checking | $ | 26 | $ | (6 | ) | $ | 20 | |||||
Savings and money market accounts | 144 | (64 | ) | 80 | ||||||||
Certificates of deposit | 254 | (256 | ) | (2 | ) | |||||||
Total interest-bearing deposits | 424 | (326 | ) | 98 | ||||||||
Securities sold under agreements to repurchase | 1 | (7 | ) | (6 | ) | |||||||
Federal funds purchased | (8 | ) | (8 | ) | (16 | ) | ||||||
Federal Home Loan Bank advances | 76 | (51 | ) | 25 | ||||||||
Subordinated debt | 103 | — | 103 | |||||||||
596 | (392 | ) | 204 | |||||||||
Increase (decrease) in net interest income | $ | 1,338 | $ | (178 | ) | $ | 1,516 | |||||
(1) | The above amounts are presented on a fully tax equivalent basis. | |
(2) | Changes in net interest income are attributed to either changes in average balances (volume change) or changes in average rates (rate change) for earning assets and sources of funds on which interest is received or paid. Volume change is calculated as change in volume times the previous rate while rate change is calculated as a change in rate times the previous volume. The change attributed to rates and volumes (change in rate times change in volume) is allocated between volume change and rate change at the ratio of how much each component bears to the absolute value of their total. |
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In December 2003, Pinnacle National acquired for $500,000 a $1,500,000 loan which it had previously sold to another financial institution. At March 31, 2004, the net book value of such loan is $86,000 and the loan is on nonaccrual status. Pinnacle Financial is currently accounting for the discount under the cost-recovery method pursuant to Practice Bulletin Number 6,Amortization of Discounts on Certain Acquired Loans,issued by the Accounting Standards Executive Committee (AcSEC). Under the cost-recovery method of accounting, cash collections are first applied against the recorded amount of the loan; when the loan has been reduced to zero, any additional amounts received are recognized as income. The cost-recovery method will continue to be used by Pinnacle until such time that management determines that collection of the discount is probable and the timing of collection can be reasonably estimated. At the time when management can make such determination with respect to the discount, or some portion thereof, Pinnacle will begin amortizing to interest income such amount over the time period that the payments are probable of collection.
Provision for Loan Losses.The provision for loan losses represents a charge to earnings necessary to establish an allowance for loan losses that, in our management’s evaluation, should be adequate to provide coverage for the inherent losses on outstanding loans. The provision for loan losses amounted to $354,000 and $288,000 for the three months ended March 31, 2004 and 2003, respectively.
Based upon our management’s evaluation of the loan portfolio, our management believes the allowance for loan losses to be adequate to absorb our estimate of probable losses existing in the loan portfolio at the balance sheet date. The increase in the provision for loan losses for the three months ended March 31, 2004 when compared to the three months ended March 31, 2003 was primarily due to the increase in loans throughout 2004 when compared to 2003 offset by lower net charge-off’s for 2004 compared to 2003.
Based upon our management’s assessment of the loan portfolio, we adjust our ALL to an amount deemed appropriate to adequately cover inherent risks in the loan portfolio. While our policies and procedures used to estimate the ALL, as well as the resultant provision for loan losses charged to operations, are considered adequate by our management and are reviewed from time to time by Pinnacle National’s regulators, they are necessarily approximate and imprecise. There exist factors beyond our control, such as general economic conditions both locally and nationally, which may negatively impact, materially, the adequacy of our ALL and, thus, the resulting provision for loan losses.
Noninterest Income.Pinnacle Financial’s noninterest income is composed of several components, some of which vary significantly between quarterly periods. Service charges on deposit accounts and other noninterest income generally reflect Pinnacle Financial’s growth, while investment services and fees from the origination of mortgage loans will often reflect market conditions and fluctuate from period to period. The opportunities for recognition of gains on loan participations sold and gain on sales of investment securities may also vary widely from quarter to quarter.
The following is the makeup of our noninterest income for the three months ended March 31, 2004 and 2003 (dollars in thousands):
% increase | ||||||||||||
2004 | 2003 | (decrease) | ||||||||||
Noninterest income: | ||||||||||||
Service charges on deposit accounts | $ | 164 | $ | 102 | 60.8 | % | ||||||
Investment services | 390 | 156 | 150.0 | % | ||||||||
Fees from the origination of mortgage loan | 192 | 46 | 317.4 | % | ||||||||
Gains on loan participations sold, net | 122 | 2 | 6,000.0 | % | ||||||||
Gains on sales of investment securities, net | 248 | 18 | 1,277.8 | % | ||||||||
Other noninterest income | 109 | 138 | (21.0 | )% | ||||||||
Total noninterest income | $ | 1,225 | $ | 462 | 165.2 | % | ||||||
As shown, the largest component of noninterest income is commissions and fees from our financial advisory unit, Pinnacle Asset Management, a division of Pinnacle National. At March 31, 2004, Pinnacle Asset Management was receiving commissions and fees in connection with approximately $351 million in brokerage assets held with Raymond James Financial Services, Inc. compared to $177 million at March 31, 2003.
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Service charge income for 2004 increased over that of 2003 due to an increase in both the balance and number of deposit accounts subject to service charges. Additionally, mortgage related fees, attributable to Pinnacle National beginning a mortgage origination unit during the first quarter of 2003, also provided for a significant portion of the increase in noninterest income between 2004 and 2003. These mortgage fees are for loans originated by Pinnacle National and subsequently sold to third-party investors. All loans are sold whereby servicing rights transfer 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.
Another noninterest income item for the three months ended March 31, 2004 and 2003 was related to our sale of certain loan participations to our correspondent banks that were primarily related to new lending transactions in excess of internal loan limits. At March 31, 2004 and pursuant to participation agreements with these correspondents, we had participated approximately $55 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 loan’s contracted interest rate. Pursuant to Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities — a replacement of FASB Statement No. 125,” we recorded $122,000, which represents the net present value of these future net revenues, as a gain on sale of participations in our results of operations during the three months ended March 31, 2004 compared to $2,000 during the three months ended March 31 2003. We intend to maintain relationships with our correspondents in order to participate future loans to these correspondents in a similar manner. However, the timing of participations may cause the level of gains, if any, to vary significantly.
Also included in noninterest income for the three months ended March 31, 2004, were net gains of approximately $248,000 realized from the sale of approximately $22 million of available-for-sale securities.
During the year ended December 31, 2002, Pinnacle National acquired life insurance policies on five key executives. Pinnacle National is the beneficiary of the death proceeds from these policies. To acquire these policies, Pinnacle National paid a one-time premium of $1.8 million and, in return, Pinnacle National was guaranteed an initial crediting rate for the first year of the contracts which is then reset quarterly thereafter. This crediting rate serves to increase the cash surrender value of the policies over the life of the policies and amounted to approximately $25,000 during the three months ended March 31, 2004 and 2003. At March��31, 2004, the aggregate cash surrender value of these policies, which is reflected in other assets on our consolidated balance sheet, was $1,956,000. Pinnacle National has not borrowed any funds against these policies as of March 31, 2004.
Noninterest Expense.Noninterest expense consists of salaries and employee benefits, equipment and occupancy expenses, and other operating expenses. The following is the makeup of our noninterest expense for the three months ended March 31, 2004 and 2003 (dollars in thousands):
2004 | 2003 | % increase | ||||||||||
Noninterest expense: | ||||||||||||
Compensation and employee benefits | $ | 2,267 | $ | 1,435 | 58.0 | % | ||||||
Equipment and occupancy | 506 | 397 | 27.5 | % | ||||||||
Marketing and other business development | 149 | 75 | 98.7 | % | ||||||||
Administrative | 221 | 150 | 47.3 | % | ||||||||
Postage and supplies | 99 | 73 | 35.6 | % | ||||||||
Other noninterest expense | 171 | 112 | 52.7 | % | ||||||||
Total noninterest expense | $ | 3,413 | $ | 2,242 | 52.2 | % | ||||||
Expenses have increased during the above periods due to personnel additions occurring throughout the periods, the continued development of our branch network and other expenses which increase in relation to our growth rate. We anticipate increases in our expenses during 2004 for such items as additional personnel, the opening of additional branches, and other expenses which tend to increase in relation to our growth.
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At March 31, 2004, we employed 95 full time equivalent employees compared to 65.5 at March 31, 2003. We intend to continue to add employees to our work force during 2004, which will cause our salary costs to increase in future periods. Also, during 2003 we opened two new branch offices in the Rivergate area of Nashville and in the Cool Springs area of Williamson County. The additional costs to operate these branches also served to increase our occupancy and equipment expenses in 2004 over that of 2003 due to the branches only being open for partial years in 2003. Our intent is to open additional branch offices in 2004 which will also cause expenses to increase in future periods.
Our efficiency ratio (ratio of noninterest expense to the sum of net interest income and noninterest income) was 63.5% in the first quarter of 2004 compared to 72.4% in the first quarter of 2003. The efficiency ratio measures the amount of expense that is incurred to generate a dollar of revenue. Although our absolute expense level increased between the three month periods ended March 31, 2004 and March 31, 2003, the efficiency ratio improved.
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 in what we believe differentiates us from many other financial institutions, substantially all of our employees are eligible for variable pay incentives. Included in the three months ended March 31, 2004 and 2003 are personnel expense amounts of $290,000 and $175,000 in costs related to these variable pay awards. The increase in awards in 2004 from the previous year was primarily due to increases in number of personnel. The incentive plan for 2004 is structured similarly to that of the 2003 plan. Because of the relative experience of our associates, our compensation costs are and will continue to be higher on a per associate basis than most financial institutions. However, we believe that we are able to translate that into shareholder value as evidenced by the fact that the average bank our size requires approximately twice as many people according to America’s Community Banker 2003 Compensation Survey.
Income Taxes.The effective income tax expense rate for the three months ended March 31, 2004 was approximately 33.5% compared to an effective income tax expense rate for the three months ended March 31, 2003 of approximately 34.3%. The reduction in the effective tax rate for the first quarter of 2004 was primarily due to state jobs tax credits.
Quarterly Information.The following is a summary of quarterly balance sheet and results of operations information for the last six quarters (dollars in thousands, except per share data).
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March | December | September | June | March | December | |||||||||||||||||||
2004 | 2003 | 2003 | 2003 | 2003 | 2002 | |||||||||||||||||||
Balance sheet data, at quarter end: | ||||||||||||||||||||||||
Total assets | $ | 541,052 | 498,421 | 440,693 | 403,229 | 348,366 | 305,279 | |||||||||||||||||
Total loans | 323,416 | 297,004 | 279,702 | 255,448 | 228,842 | 209,743 | ||||||||||||||||||
Allowance for loan losses | (4,042 | ) | (3,719 | ) | (3,492 | ) | (3,189 | ) | (2,860 | ) | (2,677 | ) | ||||||||||||
Securities | 162,039 | 139,944 | 115,421 | 99,968 | 94,600 | 73,980 | ||||||||||||||||||
Total deposits | 437,601 | 390,569 | 347,191 | 309,089 | 266,732 | 234,016 | ||||||||||||||||||
Securities sold under agreements to repurchase | 14,699 | 15,050 | 19,291 | 17,803 | 15,846 | 15,050 | ||||||||||||||||||
Advances from FHLB | 40,500 | 44,500 | 39,500 | 41,500 | 32,500 | 21,500 | ||||||||||||||||||
Subordinated debt | 10,310 | 10,310 | — | — | — | — | ||||||||||||||||||
Total stockholders’ equity | 36,266 | 34,336 | 33,245 | 33,627 | 32,403 | 32,404 | ||||||||||||||||||
Balance sheet data, quarterly averages: | ||||||||||||||||||||||||
Total assets | $ | 508,260 | 454,700 | 406,142 | 365,385 | 326,108 | 285,929 | |||||||||||||||||
Total loans | 306,549 | 283,387 | 269,703 | 245,383 | 217,690 | 201,290 | ||||||||||||||||||
Securities | 149,802 | 137,243 | 107,162 | 95,351 | 87,124 | 63,150 | ||||||||||||||||||
Total deposits | 402,603 | 356,030 | 314,302 | 277,592 | 243,545 | 215,617 | ||||||||||||||||||
Securities sold under agreements to repurchase | 14,868 | 16,013 | 16,136 | 11,728 | 14,106 | 16,685 | ||||||||||||||||||
Advances from FHLB | 42,379 | 43,630 | 40,239 | 38,137 | 29,994 | 18,054 | ||||||||||||||||||
Subordinated debt | 10,310 | 655 | — | — | — | — | ||||||||||||||||||
Total stockholders’ equity | 35,705 | 33,935 | 32,542 | 32,944 | 32,675 | 32,167 | ||||||||||||||||||
Statement of operations data, for the three months ended: | ||||||||||||||||||||||||
Interest income | $ | 5,666 | 5,244 | 4,702 | 4,369 | 3,946 | 3,691 | |||||||||||||||||
Interest expense | 1,514 | 1,351 | 1,317 | 1,385 | 1,310 | 1,268 | ||||||||||||||||||
Net interest income | 4,152 | 3,893 | 3,385 | 2,984 | 2,636 | 2,423 | ||||||||||||||||||
Provision for loan losses | 354 | 204 | 318 | 347 | 288 | 250 | ||||||||||||||||||
Net interest income after provision for loan losses | 3,798 | 3,689 | 3,067 | 2,637 | 2,348 | 2,173 | ||||||||||||||||||
Noninterest income | 1,225 | 924 | 1,024 | 877 | 462 | 469 | ||||||||||||||||||
Noninterest expense | 3,412 | 3,268 | 2,863 | 2,675 | 2,242 | 2,230 | ||||||||||||||||||
Net income before taxes | 1,611 | 1,345 | 1,228 | 839 | 568 | 412 | ||||||||||||||||||
Income tax expense | 540 | 487 | 441 | 302 | 195 | 127 | ||||||||||||||||||
Net income | $ | 1,071 | 858 | 787 | 537 | 373 | 285 | |||||||||||||||||
Per share data: | ||||||||||||||||||||||||
Earnings – basic | $ | 0.29 | 0.23 | 0.21 | 0.15 | 0.10 | 0.08 | |||||||||||||||||
Earnings – diluted | $ | 0.26 | 0.21 | 0.20 | 0.14 | 0.10 | 0.08 | |||||||||||||||||
Book value at quarter end | $ | 9.82 | 9.30 | 9.00 | 9.11 | 8.78 | 8.78 | |||||||||||||||||
Weighted avg. shares – basic | 3,692,053 | 3,692,053 | 3,692,053 | 3,692,053 | 3,692,053 | 3,692,053 | ||||||||||||||||||
Weighted avg. shares – diluted | 4,106,865 | 4,057,444 | 3,972,327 | 3,880,642 | 3,841,631 | 3,795,967 | ||||||||||||||||||
Common shares outstanding | 3,692,053 | 3,692,053 | 3,692,053 | 3,692,053 | 3,692,053 | 3,692,053 |
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Financial Condition
Our consolidated balance sheet at March 31, 2004 reflects significant growth since December 31, 2003. Total assets grew to $541 million as of March 31, 2004 up 34 percent on an annualized basis from the $498 million reported at December 31, 2003 and up 55 percent from the $348 million reported at March 31, 2003. Loans as of March 31, 2004 were $323 million compared to $297 million at December 31, 2003 and $228 million at March 31, 2003. Total deposits increased to $438 million at March 31, 2004, compared to $391 million at December 31, 2003 and $267 million at March 31, 2003.
Net loan growth for the quarter ended March 31, 2004 was $26 million, compared to $17 million during the fourth quarter of 2003 and $19 million during the first quarter of 2003. Total deposit growth for the quarter ended March 31, 2004, was $47 million, compared to $43 million during the fourth quarter of 2003 and $33 million during the first quarter of 2003.
Loans.The composition of loans at March 31, 2004 and December 31, 2003 and the percentage (%) of each classification to total loans are summarized as follows (dollars in thousands):
2004 | 2003 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Commercial real estate – Mortgage | $ | 75,404 | 23.3 | % | $ | 68,507 | 23.1 | % | ||||||||
Commercial real estate – Construction | 9,337 | 2.9 | 8,211 | 2.8 | ||||||||||||
Commercial – Other | 141,993 | 43.8 | 129,882 | 43.7 | ||||||||||||
Total commercial | 226,734 | 70.1 | 206,600 | 69.6 | ||||||||||||
Consumer real estate – Mortgage | 81,978 | 25.3 | 76,042 | 25.6 | ||||||||||||
Consumer real estate – Construction | 3,504 | 1.1 | 3,077 | 1.0 | ||||||||||||
Consumer – Other | 11,200 | 3.5 | 11,285 | 3.8 | ||||||||||||
Total consumer | 96,682 | 29.9 | 90,404 | 30.4 | ||||||||||||
Total loans | $ | 323,416 | 100.0 | % | $ | 297,004 | 100.0 | % | ||||||||
The following table classifies our fixed and variable rate loans at March 31, 2004 according to contractual maturities of (1) one year or less, (2) after one year through five years, and (3) after five years along with percentage comparisons to December 31, 2003. The table also classifies our variable rate loans pursuant to the contractual repricing dates of the underlying loans (dollars in thousands):
Amounts at March 31, 2004 | Percentages to total loans | |||||||||||||||||||
Fixed | Variable | at Mar. 31, | at Dec. 31, | |||||||||||||||||
Rates | Rates | Total | 2004 | 2003 | ||||||||||||||||
Based on contractual maturities: | ||||||||||||||||||||
Due within one year | $ | 6,032 | $ | 101,935 | $ | 107,967 | 33.4 | % | 31.7 | % | ||||||||||
Due in one year through five years | 70,034 | 56,194 | 126,228 | 39.0 | 44.0 | |||||||||||||||
Due after five years | 17,542 | 71,679 | 89,221 | 27.6 | 24.3 | |||||||||||||||
$ | 93,608 | $ | 229,808 | $ | 323,416 | 100.0 | % | 100.0 | % | |||||||||||
Based on contractual repricing dates: | ||||||||||||||||||||
Daily floating rate | $ | — | $ | 169,494 | $ | 169,494 | 52.4 | % | 52.7 | % | ||||||||||
Reprice within one year | 6,032 | 29,889 | 35,921 | 11.1 | 8.6 | |||||||||||||||
Reprice in one year through five years | 70,034 | 29,762 | 99,796 | 30.9 | 35.2 | |||||||||||||||
Reprice after five years | 17,542 | 663 | 18,205 | 5.6 | 3.5 | |||||||||||||||
$ | 93,608 | $ | 229,808 | $ | 323,416 | 100.0 | % | 100.0 | % | |||||||||||
Non-Performing Assets.The specific economic and credit risks associated with our loan portfolio, include, but are not limited to, a general downturn in the economy which could affect employment rates in our market area, general real estate market deterioration, interest rate fluctuations, deteriorated or non-existent collateral, title defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and any violation of banking laws and regulations.
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We attempt to reduce these economic and credit risks by adherence to loan to value guidelines for collateralized loans, by investigating the creditworthiness of the borrower and by monitoring the borrower’s financial position. Also, we establish and periodically review our lending policies and procedures. Banking regulations limit our exposure by prohibiting loan relationships that exceed 15% of Pinnacle National’s statutory capital in the case of loans that are not fully secured by readily marketable or other permissible types of collateral.
Pinnacle National discontinues the accrual of interest income when (1) there is a significant deterioration in the financial condition of the borrower and full repayment of principal and interest is not expected or (2) the principal or interest is more than 90 days past due, unless the loan is both well-secured and in the process of collection. At March 31, 2004, we had $86,000 in loans on nonaccrual compared to $379,000 at December 31, 2003.
There were approximately $64,000 in other loans at March 31, 2004 which were 90 days past due and still accruing interest. At March 31, 2004 and December 31, 2003, no loans were deemed to be a restructured loan. Additionally, we had no repossessed real estate properties classified as Other Real Estate Owned at March 31, 2004 and December 31, 2003. The following table is a summary of our nonperforming assets at March 31, 2004 and December 31, 2003 (dollars in thousands):
2004 | 2003 | |||||||
Nonaccrual loans (1) | $ | 86 | $ | 379 | ||||
Restructured loans | — | — | ||||||
Other real estate owned | — | — | ||||||
Total nonperforming assets | 86 | 379 | ||||||
Accruing loans past due 90 days or more | 64 | 182 | ||||||
Total nonperforming assets and accruing loans past due 90 days or more | $ | 150 | $ | 561 | ||||
Total loans outstanding | $ | 323,416 | $ | 297,004 | ||||
Ratio of total nonperforming assets and accruing loans past due 90 days or more to total loans outstanding at end of period | 0.05 | % | 0.19 | % | ||||
Ratio of total nonperforming assets and accruing loans past due 90 days or more to total allowance for loan losses at end of period | 3.71 | % | 15.08 | % | ||||
(1) | Interest income that would have been recorded during the first quarter of 2004 related to nonaccrual loans was $1,000 compared to $29,000 for the three months ended March 31, 2003, none of which is included in interest income or net income for the applicable periods. |
Potential problem assets, which are not included in nonperforming assets, amounted to $1,849,000 at March 31, 2004 or 0.57% of total loans compared to $1,687,000 or 0.57% of total loans at December 31, 2003. Potential problem assets represent those assets with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. This definition is believed to be substantially consistent with the standards established by Pinnacle National’s primary regulator for loans classified as substandard.
Allowance for Loan Losses (ALL).We maintain the ALL at a level that our management deems appropriate to adequately cover the inherent risks in the loan portfolio. As of March 31, 2004 and December 31, 2003, our allowance for loan losses was $4,042,000 and $3,719,000, respectively. Our management deemed these amounts to be adequate. The judgments and estimates associated with our ALL determination are described under “Critical Accounting Estimates” above.
Approximately 76% of our loan portfolio at March 31, 2004 and December 31, 2003 consisted of commercial loans. Using standard industry codes, we periodically analyze our loan position with respect to our borrowers’ industries to determine if a concentration of credit risk exists to any one or more industries. We do have a significant credit exposure of loans outstanding plus unfunded lines and letters of credit to borrowers in the trucking industry and to operators of nonresidential buildings at December 31, 2003 and 2002. Credit exposure to the trucking industry approximated $33.0 million at March 31, 2004 and $35.0 million at December 31, 2003. Credit exposure to operators of nonresidential buildings approximated $16.8 million at March 31, 2004 and
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$16.6 million at December 31, 2003. We evaluate our exposure level to these industry groups periodically in order to determine if additional allowance allocations are warranted. At March 31, 2004 and December 31, 2003, we determined that we did not have any excessive exposure to any single industry which would warrant additional allowance allocations.
The following table sets forth, based on management’s best estimate, the allocation of the ALL to types of loans as well as the unallocated portion as of March 31, 2004 and December 31, 2003 and the percentage (%) of loans in each category to the total loans (dollars in thousands):
2004 | 2003 | |||||||||||||||
Amount | % | Amount | % | |||||||||||||
Commercial | $ | 2,478 | 70.1 | % | $ | 2,329 | 69.6 | % | ||||||||
Consumer | 681 | 29.9 | 670 | 30.4 | ||||||||||||
Unallocated | 884 | na | 720 | na | ||||||||||||
$ | 4,042 | 100.0 | % | $ | 3,719 | 100.0 | % | |||||||||
The following is a summary of changes in the allowance for loan losses for the three months ended March 31, 2004 and for the year ended December 31, 2003 and the ratio of the allowance for loan losses to total loans as of the end of each period (dollars in thousands):
2004 | 2003 | |||||||
Balance at beginning of period | $ | 3,719 | $ | 2,677 | ||||
Provision for loan losses | 353 | 1,157 | ||||||
Charged-off loans | (33 | ) | (167 | ) | ||||
Recoveries of previously charged-off loans | 3 | 52 | ||||||
Balance at end of period | $ | 4,042 | $ | 3,719 | ||||
Ratio of the allowance for loan losses to total loans outstanding at end of period | 1.25 | % | 1.28 | % | ||||
Ratio of net charge-offs to average loans outstanding for the period (1) | 0.04 | % | 0.05 | % | ||||
(1) | The ratio of net charge-off’s to average loans outstanding for the three months ended March 31, 2004 was computing by annualizing the net charge-off amount to a twelve-month period. |
During the first quarter of 2004, we charged-off $33,000 related to several consumer loans. As a relatively new institution, we do not have loss experience comparable to more mature financial institutions; however, as our loan portfolio matures, we will have additional charge-offs and we will consider the amount and nature of our charge-offs in determining the adequacy of our allowance for loan losses.
Investments.The following table summarizes the amortized cost and fair value of our securities at March 31, 2004 and December 31, 2003 (dollars in thousands):
March 31, 2004 | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Securities available-for-sale: | ||||||||||||||||
U.S. government and agency securities | $ | 9,413 | $ | 122 | $ | — | $ | 9,535 | ||||||||
Mortgage-backed securities | 121,511 | 1,329 | (152 | ) | 122,688 | |||||||||||
State and municipal securities | 1,180 | 5 | (1 | ) | 1,184 | |||||||||||
Corporate notes | 976 | — | — | 976 | ||||||||||||
$ | 133,080 | $ | 1,456 | $ | (153 | ) | $ | 134,383 | ||||||||
Securities held-to-maturity: | ||||||||||||||||
U.S. government and agency securities | $ | 17,746 | $ | — | $ | — | $ | 17,746 | ||||||||
State and municipal securities | 9,910 | — | — | 9,910 | ||||||||||||
$ | 27,656 | $ | — | $ | — | $ | 27,656 | |||||||||
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December 31, 2003 (1) | ||||||||||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Securities available-for-sale: | ||||||||||||||||
U.S. government and agency securities | $ | 27,023 | $ | 353 | $ | (104 | ) | $ | 27,272 | |||||||
Mortgage-backed securities | 103,088 | 507 | (617 | ) | 102,978 | |||||||||||
State and municipal securities | 9,590 | 143 | (39 | ) | 9,694 | |||||||||||
$ | 139,701 | $ | 1,003 | $ | (760 | ) | $ | 139,944 | ||||||||
(1) | At December 31, 2003, Pinnacle National had no securities classified as “held-to-maturity”. |
On March 31, 2004, Pinnacle National transferred $27.7 million of available-for-sale securities to held-to-maturity at fair value. The transfer consisted of substantially all of Pinnacle National’s holdings of Tennessee municipal securities and several of its longer-term agency securities. These securities were selected for the held-to-maturity classification because we have the ability and intent to hold such securities until their maturity. The unrealized gain on such securities as of the date of transfer was $325,000. This amount is reflected in the accumulated other comprehensive income, net of tax, and will be amortized over the remaining lives of the respective held-to-maturity securities.
During the first quarter of 2004, we sold $22 million of available-for-sale securities at a net gain of $248,000. At March 31, 2004, approximately $89 million of our available-for-sale portfolio was pledged to secure public fund and other deposits and securities sold under agreements to repurchase.
The following table shows the carrying value of investment securities according to contractual maturity classifications of (1) one year or less, (2) after one year through five years, (3) after five years through ten years, and (4) after ten years. Actual maturities may differ from contractual maturities of mortgage-backed securities because the mortgages underlying the securities may be called or prepaid with or without penalty. Therefore, these securities are not included in the maturity categories noted below as of March 31, 2004 and December 31, 2003 (dollars in thousands):
March 31, 2004 | ||||||||||||||||||||||||||||||||
U.S. government | State and | |||||||||||||||||||||||||||||||
and agency | municipal | Corporate | ||||||||||||||||||||||||||||||
securities | securities | securities | Totals | |||||||||||||||||||||||||||||
Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | |||||||||||||||||||||||||
Securities available-for-sale: | ||||||||||||||||||||||||||||||||
Due in one year or less | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | ||||||||||||||||
Due in one year to five years | 3,000 | 3.5 | % | — | — | 976 | 3.4 | % | 3,976 | 3.5 | % | |||||||||||||||||||||
Due in five years to ten years | 6,535 | 4.7 | % | — | — | — | — | 6,535 | 4.7 | % | ||||||||||||||||||||||
Due after ten years | — | — | 1,184 | 5.9 | % | — | — | % | 1,184 | 5.9 | % | |||||||||||||||||||||
$ | 9,535 | 4.3 | % | $ | 1,184 | 5.9 | % | $ | 976 | 3.4 | % | $ | 11,695 | 4.4 | % | |||||||||||||||||
Securities held-to-maturity: | ||||||||||||||||||||||||||||||||
Due in one year or less | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | ||||||||||||||||
Due in one year to five years | — | — | 2,038 | 4.8 | % | — | — | 2,038 | 4.8 | % | ||||||||||||||||||||||
Due in five years to ten years | 17,746 | 4.2 | % | 7,392 | 5.0 | % | — | — | 25,138 | 4.5 | % | |||||||||||||||||||||
Due after ten years | — | — | 480 | 5.2 | % | — | — | 480 | 5.2 | % | ||||||||||||||||||||||
$ | 17,746 | 4.2 | % | $ | 9,910 | 4.9 | % | $ | — | — | % | $ | 27,656 | 4.5 | % | |||||||||||||||||
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December 31, 2003 (1) | ||||||||||||||||||||||||||||||||
U.S. government | State and | |||||||||||||||||||||||||||||||
and agency | municipal | Corporate | ||||||||||||||||||||||||||||||
securities | securities | securities | Totals | |||||||||||||||||||||||||||||
Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | |||||||||||||||||||||||||
Securities available-for-sale: | ||||||||||||||||||||||||||||||||
Due in one year or less | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | ||||||||||||||||
Due in one year to five years | 4,036 | 4.0 | % | 2,005 | 4.8 | % | — | — | 6,041 | 4.3 | % | |||||||||||||||||||||
Due in five years to ten years | 23,236 | 4.4 | % | 7,221 | 5.0 | % | — | — | 30,457 | 4.6 | % | |||||||||||||||||||||
Due after ten years | — | — | 468 | 5.2 | % | — | — | % | 468 | 5.2 | % | |||||||||||||||||||||
$ | 27,272 | 4.3 | % | $ | 9,694 | 4.9 | % | $ | — | — | % | $ | 36,966 | 4.7 | % | |||||||||||||||||
(1) | At December 31, 2003, Pinnacle National had no securities classified as “held-to-maturity”. We computed yields using coupon interest, adding discount accretion or subtracting premium amortization, as appropriate, on a ratable basis over the life of each security. We computed the weighted average yield for each maturity range using the acquisition price of each security in that range. |
Deposits and Other Borrowings.We had approximately $438 million of deposits at March 31, 2004 compared to $391 million at December 31, 2003. Our deposits consist of noninterest and interest-bearing demand accounts, savings, money market and time deposits. Additionally, we entered into agreements with certain customers to sell certain of our securities under agreements to repurchase the security the following day. These agreements (which provide customers with short-term returns for their excess funds) amounted to $14.7 million at March 31, 2004 compared to $15.1 million at December 31, 2003. Additionally, at March 31, 2004, we had borrowed $40.5 million in advances from the Federal Home Loan Bank of Cincinnati compared to $44.5 million at December 31, 2003.
Generally, banks classify their funding base as either core funding or non-core funding. Core funding consists of all deposits other than time deposits issued in denominations of $100,000 or greater while all other funding is deemed to be non-core. The following table represents the balances of our deposits and other fundings and the percentage of each type to the total at March 31, 2004 and December 31, 2003 (dollars in thousands):
March 31, 2004 | December 31, 2003 | |||||||||||||||
Amount | Percentage | Amount | Percentage | |||||||||||||
Core funding: | ||||||||||||||||
Noninterest-bearing demand deposits | $ | 66,621 | 13.2 | % | $ | 60,796 | 13.2 | % | ||||||||
Interest-bearing demand deposits | 40,040 | 8.0 | 31,407 | 6.8 | ||||||||||||
Savings and money market deposits | 165,389 | 32.9 | 140,384 | 30.5 | ||||||||||||
Time deposits less than $100,000 | 44,014 | 8.7 | 43,996 | 9.6 | ||||||||||||
Total core funding | 316,064 | 62.8 | 276,583 | 60.1 | ||||||||||||
Non-core funding: | ||||||||||||||||
Time deposits greater than $100,000 | ||||||||||||||||
Public funds | 36,364 | 7.2 | 26,812 | 5.8 | ||||||||||||
Brokered deposits | 36,387 | 7.2 | 39,364 | 8.5 | ||||||||||||
Other time deposits greater than $100,000 | 48,787 | 9.7 | 47,810 | 10.4 | ||||||||||||
Securities sold under agreements to repurchase | 14,699 | 2.9 | 15,050 | 3.3 | ||||||||||||
Federal Home Loan Bank advances | 40,500 | 8.1 | 44,500 | 9.7 | ||||||||||||
Subordinated debt | 10,310 | 2.1 | 10,310 | 2.2 | ||||||||||||
Total non-core funding | 187,047 | 37.2 | 183,846 | 39.9 | ||||||||||||
$ | 503,111 | 100.0 | % | $ | 460,429 | 100.0 | % | |||||||||
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The amount of time deposits issued in amounts of $100,000 or more as of March 31, 2004 and December 31, 2003 amounted to $121.5 million and $114.0 million, respectively. The following table shows our time deposits over $100,000 by category at March 31, 2004 and December 31, 2003, 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 (dollars in thousands):
March 31, 2004 | December 31, 2003 | |||||||
Three months or less | $ | 34,542 | $ | 32,054 | ||||
Over three but less than six months | 43,323 | 28,109 | ||||||
Over six but less than twelve months | 19,330 | 28,502 | ||||||
Over twelve months | 24,343 | 25,321 | ||||||
$ | 121,538 | $ | 113,986 | |||||
Subordinated debt.On December 29, 2003, we established PNFP Statutory Trust I (“Trust”), a wholly-owned statutory business trust. Pinnacle Financial is the sole sponsor of the trust and owns $310,000 of the Trust’s common securities. The Trust was created for the exclusive purpose of issuing 30-year capital trust preferred securities (“Trust Preferred Securities”) in the aggregate amount of $10,000,000 and using the proceeds from the issuance of the common and preferred securities to purchase $10,310,000 of junior subordinated debentures (“Subordinated Debentures”) issued by Pinnacle Financial. The sole assets of the Trust are the Subordinated Debentures. Pinnacle Financial’s $310,000 investment in the Trust is included in other assets and the $10,310,000 obligation of Pinnacle Financial is included in subordinated debt.
The Trust Preferred Securities bear a floating interest rate based on a spread over 3-month LIBOR which is set each quarter and matures on December 30, 2033. Distributions are payable quarterly. The Trust Preferred Securities are subject to mandatory redemption upon repayment of the Subordinated Debentures at their stated maturity date or their earlier redemption in an amount equal to their liquidation amount plus accumulated and unpaid distributions to the date of redemption. Pinnacle Financial guarantees the payment of distributions and payments for redemption or liquidation of the Trust Preferred Securities to the extent of funds held by the Trust. Pinnacle Financial’s obligations under the Subordinated Debentures together with the guarantee and other back-up obligations, in the aggregate, constitute a full and unconditional guarantee by Pinnacle Financial of the obligations of the Trust under the Trust Preferred Securities.
The Subordinated Debentures are unsecured, bear an interest rate based on a spread over 3-month LIBOR (equal to the spread paid by the Trust on the Trust Preferred Securities) which is set each quarter and matures on December 30, 2033. Interest is payable quarterly. Pinnacle Financial may defer the payment of interest at any time for a period not exceeding 20 consecutive quarters provided that deferral period does not extend past the stated maturity. During any such deferral period, distributions on the Trust Preferred Securities will also be deferred and Pinnacle Financial’s ability to pay dividends on our common shares will be restricted.
Subject to approval by the Federal Reserve Bank of Atlanta, the Trust Preferred Securities may be redeemed prior to maturity at our option on or after September 17, 2008. The Trust Preferred Securities may also be redeemed at any time in whole (but not in part) in the event of unfavorable changes in laws or regulations that result in (1) the Trust becoming subject to federal income tax on income received on the Subordinated Debentures, (2) interest payable by the parent company on the Subordinated Debentures becoming non-deductible for federal tax purposes, (3) the requirement for the Trust to register under the Investment Company Act of 1940, as amended, or (4) loss of the ability to treat the Trust Preferred Securities as “Tier I capital” under the Federal Reserve capital adequacy guidelines.
The Trust Preferred Securities qualify as Tier I capital under current regulatory interpretations. However, banking regulators are currently reviewing such treatment, the outcome of which is not known. Should the banking regulators determine that treatment of trust preferred securities shall not be treated as Tier 1 capital, such determination would have an impact on Pinnacle Financial; however Pinnacle Financial’s capital structure, at the present time and based on our current growth projections, is such that utilization of the Trust Preferred Securities as Tier II capital is more critical to Pinnacle Financial than the Trust Preferred Securities maintaining their present Tier I capital treatment. To our knowledge, there has been no serious consideration given by banking regulators to disqualify trust preferred securities as Tier II capital.
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Capital Resources.At March 31, 2004 and December 31, 2003, our stockholders’ equity amounted to $36.3 million and $34.3 million, respectively. The change in stockholders’ equity between December 31, 2003 and March 31, 2004 was attributable to our net income for the three months ended March 31, 2004 of $1,071,000 and the net increase in comprehensive income of $859,000 attributable to the increase in fair value of our available-for-sale securities portfolio.
Generally, banking laws and regulations require banks and bank holding companies to maintain certain minimum capital ratios in order to engage in certain activities or be eligible for certain types of regulatory relief. At March 31, 2004 and December 31, 2003, our capital ratios, including Pinnacle National’s capital ratios, met regulatory minimum capital requirements. At March 31, 2004 and December 31, 2003, Pinnacle National was categorized as “well-capitalized”. 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. Additionally, Pinnacle Financial and Pinnacle National must maintain certain minimum capital ratios for regulatory purposes. The following table presents actual, minimum and “well-capitalized” capital amounts and ratios at March 31, 2004 and December 31, 2003:
Minimum | ||||||||||||||||||||||||
To Be “Well-Capitalized” | ||||||||||||||||||||||||
Minimum | Under Prompt | |||||||||||||||||||||||
Capital | Corrective | |||||||||||||||||||||||
Actual | Requirement | Action Provisions | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
At March 31, 2004 | ||||||||||||||||||||||||
Total capital to risk weighted assets: | ||||||||||||||||||||||||
Pinnacle Financial | $ | 49,624 | 12.1 | % | $ | 32,691 | 8.0 | % | not applicable | |||||||||||||||
Pinnacle National | $ | 42,571 | 10.6 | % | $ | 32,113 | 8.0 | % | $ | 40,141 | 10.0 | % | ||||||||||||
Tier I capital to risk weighted assets: | ||||||||||||||||||||||||
Pinnacle Financial | $ | 45,567 | 11.2 | % | $ | 16,345 | 4.0 | % | not applicable | |||||||||||||||
Pinnacle National | $ | 38,519 | 9.6 | % | $ | 16,056 | 4.0 | % | $ | 24,085 | 6.0 | % | ||||||||||||
Tier I capital to average assets (*): | ||||||||||||||||||||||||
Pinnacle Financial | $ | 45,567 | 9.0 | % | $ | 20,343 | 4.0 | % | not applicable | |||||||||||||||
Pinnacle National | $ | 38,519 | 7.6 | % | $ | 20,324 | 4.0 | % | $ | 25,405 | 5.0 | % | ||||||||||||
At December 31, 2003 | ||||||||||||||||||||||||
Total capital to risk weighted assets: | ||||||||||||||||||||||||
Pinnacle Financial | $ | 47,914 | 12.8 | % | $ | 29,981 | 8.0 | % | not applicable | |||||||||||||||
Pinnacle National | $ | 38,617 | 10.3 | % | $ | 29,944 | 8.0 | % | $ | 37,430 | 10.0 | % | ||||||||||||
Tier I capital to risk weighted assets: | ||||||||||||||||||||||||
Pinnacle Financial | $ | 44,185 | 11.8 | % | $ | 14,990 | 4.0 | % | not applicable | |||||||||||||||
Pinnacle National | $ | 34,888 | 9.3 | % | $ | 14,972 | 4.0 | % | $ | 22,458 | 6.0 | % | ||||||||||||
Tier I capital to average assets (*): | ||||||||||||||||||||||||
Pinnacle Financial | $ | 44,185 | 9.7 | % | $ | 18,188 | 4.0 | % | not applicable | |||||||||||||||
Pinnacle National | $ | 34,888 | 7.7 | % | $ | 18,188 | 4.0 | % | $ | 22,735 | 5.0 | % |
(*) | Average assets for the above calculations were as of the most recent quarter for each period noted. |
In connection with approving Pinnacle Financial’s issuance of Trust Preferred Securities, the Federal Reserve Bank of Atlanta (“FRB-Atlanta”) required Pinnacle Financial to maintain a Total capital to risk-weighted assets ratio of 10%, a Tier 1 capital to risk-weighted assets ratio of 6% and a Tier 1 capital to average-assets ratio of 5% during the period ended December 31, 2004. In connection with such approval, Pinnacle Financial’s President and Chief Executive Officer, Chairman and Chief Administrative Officer committed to the FRB-Atlanta that if required to enable Pinnacle Financial to make interest payments in 2004 on its Subordinated Debentures under certain circumstances, they would exercise up to 92,500 warrants to acquire Pinnacle Financial common stock held by them to provide funds for such payment.
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, or the “OCC”. We, in turn, are also subject to limits on payment of dividends to our shareholders by the rules, regulations and policies of federal banking authorities. We have not paid any dividends to date, nor do we anticipate paying dividends to our shareholders for the foreseeable future. Future dividend policy will depend on Pinnacle National’s earnings, capital position, financial condition and other factors.
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Return on Assets and Stockholders’ Equity.The following table shows return on average assets (net income divided by average total assets), return on average equity (net income divided by average stockholders’ equity), dividend payout ratio (dividends declared per share divided by net income per share) and stockholders’ equity to asset ratio (average stockholders’ equity divided by average total assets) for the three-month period ended March 31, 2004 compared to the year ended December 31, 2003.
2004 | 2003 | |||||||
Return on average assets | 0.85 | % | 0.66 | % | ||||
Return on average equity | 12.03 | % | 7.70 | % | ||||
Dividend payout ratio | — | % | — | % | ||||
Average equity to average assets ratio | 7.02 | % | 8.54 | % |
(1) | The return on average assets and return on average equity for the three months ended March 31, 2004 was computed by annualizing the numerator to a twelve-month period. |
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, an economic value of equity model, and gap analysis computations. These measurements are used in conjunction with competitive pricing analysis.
Earnings simulation model. We believe that interest rate risk is best measured by our earnings simulation modeling. Forecasted levels of earning assets, interest-bearing liabilities, and off-balance sheet financial instruments are combined with ALCO forecasts of interest rates for the next 12 months and are combined with other factors in order to produce various earnings simulations. To limit interest rate risk, we have guidelines for our earnings at risk which seek to limit the variance of net income to less than 10 percent for a 200 basis point change up or down in rates from management’s most likely interest rate forecast over the next twelve months. We have operated within this guideline since inception. The results of our current simulation model would indicate that our net interest income should increase with a gradual rise in interest rates over the next twelve months and decrease should interest rates fall over the same period.
Economic value of equity. Our economic value of equity model measures the extent that estimated economic values of our assets, liabilities and off-balance sheet items will change as a result of interest rate changes. Economic values are determined by discounting expected cash flows from assets, liabilities and off-balance sheet items, which establishes a base case economic value of equity. To help limit interest rate risk, we have a guideline stating that for an instantaneous 200 basis point change in interest rates up or down, the economic value of equity will not change by more than 20 percent from the base case. We have operated within this guideline since inception.
Gap analysis.An asset or liability is considered to be interest rate-sensitive if it will reprice or mature within the time period analyzed; for example, within three months or one year. The interest rate-sensitivity gap is the difference between the interest-earning assets and interest-bearing liabilities scheduled to mature or reprice within such time period. A gap is considered positive when the amount of interest rate-sensitive assets exceeds the amount of interest rate-sensitive liabilities. A gap is considered negative when the amount of interest rate-sensitive liabilities exceeds the interest rate-sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income, while a positive gap would tend to result in an increase in net interest income.
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Conversely, during a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to adversely affect net interest income. If our assets and liabilities were equally flexible and moved concurrently, the impact of any increase or decrease in interest rates on net interest income would be minimal. To assist us in managing our interest rate sensitivity, we have established a cumulative twelve-month interest rate-sensitivity gap ratio of earning assets to interest bearing liabilities of 75% to 125% in this time horizon. We have operated within these amounts since inception.
Each of the above analyses may not, on their own, be an accurate indicator of how our net interest income will be affected by changes in interest rates. Income associated with interest-earning assets and costs associated with interest-bearing liabilities may not be affected uniformly by changes in interest rates. In addition, the magnitude and duration of changes in interest rates may have a significant impact on net interest income. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Interest rates on certain types of assets and liabilities fluctuate in advance of changes in general market rates, while interest rates on other types may lag behind changes in general market rates. In addition, certain assets, such as adjustable rate mortgage loans, have features (generally referred to as “interest rate caps and floors”) which limit changes in interest rates. Prepayment and early withdrawal levels also could deviate significantly from those assumed in calculating the maturity of certain instruments. The ability of many borrowers to service their debts also may decrease during periods of rising interest rates. ALCO reviews each of the above interest rate sensitivity analyses along with several different interest rate scenarios as part of its responsibility to provide a satisfactory, consistent level of profitability within the framework of established liquidity, loan, investment, borrowing, and capital policies.
We may also use derivative financial instruments to improve the balance between interest-sensitive assets and interest-sensitive liabilities and as one tool to manage our interest rate sensitivity while continuing to meet the credit and deposit needs of our customers. At March 31, 2004 and December 31, 2003, we had not entered into any derivative contracts to assist managing our interest rate sensitivity.
Liquidity Risk Management.The purpose of liquidity risk management is to ensure that there are sufficient cash flows to satisfy loan demand, deposit withdrawals, and our other needs. Traditional sources of liquidity for a bank include asset maturities and growth in core deposits. A bank may achieve its desired liquidity objectives from the management of its assets and liabilities and by internally generated funding through its operations. Funds invested in marketable instruments that can be readily sold and the continuous maturing of other earning assets are sources of liquidity from an asset perspective. The liability base provides sources of liquidity through attraction of increased deposits and borrowing funds from various other institutions.
Changes in interest rates also affect our liquidity position. We currently price deposits in response to market rates and our management intends to continue this policy. If deposits are not priced in response to market rates, a loss of deposits could occur which would negatively affect our liquidity position.
Scheduled loan payments are a relatively stable source of funds, but loan payoffs and deposit flows fluctuate significantly, being influenced by interest rates, general economic conditions and competition. Additionally, debt security investments are subject to prepayment and call provisions that could accelerate their payoff prior to stated maturity. We attempt to price our deposit products to meet our asset/liability objectives consistent with local market conditions. Our ALCO is responsible for monitoring our ongoing liquidity needs. Our regulators also monitor our liquidity and capital resources on a periodic basis.
In addition, Pinnacle National is a member of the Federal Home Loan Bank of Cincinnati. As a result, Pinnacle National receives advances from the Federal Home Loan Bank of Cincinnati, pursuant to the terms of various borrowing agreements, which assist it in the funding of its home mortgage and commercial real estate loan portfolios. Pinnacle National has pledged under the borrowing agreements with the Federal Home Loan Bank of Cincinnati certain qualifying residential mortgage loans and, pursuant to a blanket lien, all qualifying commercial mortgage loans as collateral. At March 31, 2004, Pinnacle National had received advances from the Federal Home Loan Bank of Cincinnati totaling $40.5 million at the following rates and maturities (dollars in thousands):
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Amount | Interest Rate | |||||||
June 18, 2004 | 3,000 | 1.24 | ||||||
July 28, 2004 | 2,000 | 1.90 | ||||||
July 30, 2004 | 4,000 | 2.94 | ||||||
September 15, 2004 | 5,000 | 1.28 | ||||||
January 28, 2005 | 2,000 | 2.18 | ||||||
October 14, 2005 | 3,000 | 3.10 | ||||||
December 30, 2005 | 3,000 | 2.40 | ||||||
January 27, 2006 | 2,000 | 2.79 | ||||||
March 12, 2006 | 3,000 | 1.97 | ||||||
March 31, 2006 | 4,000 | 2.10 | ||||||
April 17, 2006 | 2,000 | 2.64 | ||||||
April 28, 2006 | 1,500 | 2.52 | ||||||
September 30, 2006 | 4,000 | 2.39 | ||||||
January 26, 2007 | 2,000 | 3.24 | ||||||
$ | 40,500 | |||||||
Weighted average interest rate | 2.26 | % | ||||||
At March 31, 2004, brokered certificates of deposit approximated $36.4 million which represented 7.2% of total fundings compared to $39.4 million and 8.5% at December 31, 2002. We issue these brokered certificates through several different brokerage houses based on competitive bid. Typically, these funds are for varying maturities from six months to two years and are issued at rates which are competitive to rates we would be required to pay to attract similar deposits from the local market as well as rates for Federal Home Loan Bank of Cincinnati advances of similar maturities. We consider these deposits to be a ready source of liquidity under current market conditions.
At March 31, 2004, we had no significant commitments for capital expenditures. However, we are in the process of developing our branch network in Davidson, Williamson and surrounding counties. As a result, we anticipate that we will enter into contracts to buy property or construct branch facilities and/or lease agreements to lease property and/or rent currently constructed facilities in Davidson, Williamson and surrounding counties.
The following table presents additional information about our contractual obligations as of March 31, 2004, which by their terms have contractual maturity and termination dates subsequent to March 31, 2004 (dollars in thousands):
Next 12 | 13-36 | 37-60 | More than | |||||||||||||||||||||
Months | Months | Months | 60 Months | Totals | ||||||||||||||||||||
Contractual obligations: | ||||||||||||||||||||||||
Certificates of deposit | $ | 123,852 | $ | 41,405 | $ | 294 | $ | — | $ | 165,551 | ||||||||||||||
Securities sold under agreements to repurchase | 14,699 | — | — | — | 14,699 | |||||||||||||||||||
Federal Home Loan Bank advances | 16,000 | 24,500 | — | — | 40,500 | |||||||||||||||||||
Subordinated debt | — | — | — | 10,310 | 10,310 | |||||||||||||||||||
Minimum operating lease commitments | 571 | 1,205 | 1,279 | 2,031 | 5,086 | |||||||||||||||||||
Totals | $ | 155,122 | $ | 67,110 | $ | 1,573 | $ | 12,341 | $ | 236,146 | ||||||||||||||
Our management believes that we have adequate liquidity to meet all known contractual obligations and unfunded commitments, including loan commitments and reasonable borrower, depositor, and creditor requirements over the next twelve months.
Off-Balance Sheet Arrangements.At March 31, 2004, we had outstanding standby letters of credit of $32.8 million and unfunded loan commitments outstanding of $109.3 million. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, Pinnacle National has the ability to liquidate Federal funds sold or securities available-for-sale, or on a short-term basis to borrow and purchase Federal funds from other financial institutions. At March 31, 2004, Pinnacle National had accommodations with upstream correspondent banks for unsecured short-term advances. These accommodations have various covenants related to their term and availability, and in most cases must be repaid within less than a month. The following table presents additional information about our unfunded commitments
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as of March 31, 2004, which by their terms have contractual maturity dates subsequent to March 31, 2004 (dollars in thousands):
Next 12 | 13-36 | 37-60 | More than | |||||||||||||||||
Months | Months | Months | 60 Months | Totals | ||||||||||||||||
Unfunded commitments: | ||||||||||||||||||||
Letters of credit | $ | 30,692 | $ | 2,081 | $ | 30 | $ | — | $ | 32,803 | ||||||||||
Lines of credit | 67,355 | 13,072 | 2,059 | 26,814 | 109,300 | |||||||||||||||
Totals | $ | 98,047 | $ | 13,280 | $ | 2,089 | $ | 26,814 | $ | 142,103 | ||||||||||
Impact of Inflation
The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with accounting principles generally accepted in the United States and practices within the banking industry which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution’s performance than the effects of general levels of inflation.
Recent Accounting Pronouncements
In March 2004, the SEC issued Staff Accounting Bulletin No. 105,Application of Accounting Principles to Loan Commitments. Current accounting guidance requires the commitment to originate mortgage loans to be held for sale be recognized on the balance sheet at fair value from inception through expiration or funding. SAB 105 requires that the fair-value measurement include only differences between the guaranteed interest rate in the loan commitment and a market interest rate, excluding any expected future cash flows related to the customer relationship or loan servicing. SAB 105 is effective for commitments to originate mortgage loans to be held for sale that are entered into after March 31, 2004. Its adoption is not expected to have a material impact on the consolidated financial position on results of operations of Pinnacle Financial.
In March 2004, the FASB’s Emerging Issues Task Force reached a consensus on EITF Issue No. 03-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The guidance prescribes a three-step model for determining whether an investment is other-than-temporarily impaired and requires disclosures about unrealized losses on investments. The accounting guidance is effective for reporting periods beginning after June 15, 2004, while the disclosure requirements are effective for annual reporting periods ending after June 15, 2004. Pinnacle Financial has adopted the requirements of this EITF.
Other Accounting Developments
In March 2004, the FASB issued an exposure document entitledShare-Based Payment - an amendment of Statements No. 123 and 95 (Proposed Statement of Financial Accounting Standards). The proposed Statement would eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25 and generally require instead that such transactions be accounted for using a fair-value-based method. This accounting, if approved, will result in additional compensation expense charges to our future results of operations. The proposed Statement, if adopted, would be applied to public entities prospectively for fiscal years beginning after December 15, 2004, as if all share-based compensation awards granted, modified, or settled after December 15, 1994, had been accounted for using the fair-value method of accounting. Retrospective application of the proposed Statement is not permitted.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information required by this Item 3 is included on pages 32 through 35 of Item 2 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Pinnacle Financial maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to Pinnacle Financial’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Pinnacle Financial carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that Pinnacle Financial’s disclosure controls and procedures were effective.
Changes in Internal Controls
There were no changes in Pinnacle Financial’s internal control over financial reporting during Pinnacle Financial’s fiscal quarter ended March 31, 2004 that have materially affected, or are reasonably likely to materially affect, Pinnacle Financial’s internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which Pinnacle Financial or any of its subsidiaries are or of which any of their property is the subject.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a) Not applicable
(b) Not applicable
(c) Not applicable
(d) Not applicable
(e) None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 | Charter, as amended and restated (restated for SEC electronic filing purposes only) | |
10.22 | Pinnacle Financial Partners, Inc. 2004 Equity Incentive Plan (Incorporated by reference to Exhibit No. 10.1 to the Registration Statement on Form S-8 (Registration No. 323-614799) of the Company filed with the Securities and Exchange Commission on April 23, 2004) | |
31.1 | Certification pursuant to Rule 13a-14(a)/15d-14(a) | |
31.2 | Certification pursuant to Rule 13a-14(a)/15d-14(a) | |
32.1 | Certification pursuant to 18 USC Section 1350 – Sarbanes-Oxley Act of 2002 | |
32.2 | Certification pursuant to 18 USC Section 1350 – Sarbanes-Oxley Act of 2002 |
(b) Reports on Form 8-K
A current report on Form 8-K dated January 20, 2004, was furnished to the Securities and Exchange Commission under Item 7. “Financial Statements, Pro Forma Financial Information and Exhibits”, Item 9 “Regulation FD Disclosure” and Item 12 “Results of Operations and Financial Condition” of such form, and was furnished to disclose the press release issued by the Company on January 20, 2004 announcing the Company’s results for the year ended December 31, 2003.
A current report on Form 8-K dated February 2, 2004, was furnished to the Securities and Exchange Commission under Item 7. “Financial Statements, Pro Forma Financial Information and
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Exhibits”, Item 9 “Regulation FD Disclosure” and Item 12 “Results of Operations and Financial Condition” of such form, and was furnished to disclose a slide package prepared for use by M. Terry Turner, President and Chief Executive Officer; Robert A. McCabe, Jr., Chairman of the Board; and Harold R. Carpenter, Chief Financial Officer of Pinnacle Financial Partners, Inc. for presentation to investment analysts, institutional and other investors and others.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PINNACLE FINANCIAL PARTNERS, INC. | ||
By: /s/ M. Terry Turner | ||
M. Terry Turner | ||
President and Chief Executive Officer | ||
Date: May 6, 2004 | ||
By: /s/ Harold R. Carpenter | ||
Harold R. Carpenter | ||
Chief Financial Officer | ||
Date: May 6, 2004 |
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