10-Q 1 form10q.htm PINNACLE FINANCIAL PARTNERS INC 10-Q 3-31-2013 form10q.htm
 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
 
(mark one)
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
or
o  TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number: 000-31225

, Inc.
(Exact name of registrant as specified in its charter)

Tennessee
  
62-1812853
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification No.)

150 Third Avenue South, Suite 900, Nashville, Tennessee
  
37201
(Address of principal executive offices)
  
(Zip Code)

(615) 744-3700
 (Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changes since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes  x
No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).
 
Yes  x
No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
Large Accelerated Filer o
Accelerated Filer x
  
Non-accelerated Filer   o
(do not check if you are a smaller reporting company)
Smaller reporting company o
  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes  o
No  x
 
As of April 30, 2013 there were 35,028,737 shares of common stock, $1.00 par value per share, issued and outstanding.
 
 
 
 
 
Pinnacle Financial Partners, Inc.
Report on Form 10-Q
March 31, 2013

TABLE OF CONTENTS
Page No.
     
PART I – Financial Information:  
   
  3
     
  28
     
  43
     
  44
     
PART II – Other Information:  
   
  44
     
  44
     
  44
     
  45
     
  45
     
  45
     
  45
     
Signatures 46

 
Page 1

FORWARD-LOOKING STATEMENTS

Certain of the statements in this report may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “expect,” “anticipate,” “goal,” “objective,” “intend,” “plan,” “believe,” ”should,” “seek,” “estimate” and similar expressions are intended to identify such forward-looking statements, but other statements not based on historical information may also be considered forward-looking. All forward-looking statements are subject to risks, uncertainties and other factors that may cause the actual results, performance or achievements of Pinnacle Financial to differ materially from any results expressed or implied by such forward-looking statements. Such risks include, without limitation, (i) deterioration in the financial condition of borrowers resulting in significant loan losses and provisions for those losses; (ii) continuation of the historically low, short-term interest rate environment; (iii) the inability of Pinnacle Financial to grow its loan portfolio in the Nashville-Davidson-Murfreesboro-Franklin MSA (the “Nashville MSA”) and the Knoxville MSA; (iv) changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments; (v) effectiveness of Pinnacle Financial’s asset management activities in improving, resolving or liquidating lower-quality assets; (vi) increased competition with other financial institutions; (vii) greater than anticipated adverse conditions in the national or local economies including the Nashville MSA and the Knoxville MSA, particularly in commercial and residential real estate markets; (viii) rapid fluctuations or unanticipated changes in interest rates; (ix) the results of regulatory examinations; (x) the development of any new market other than Nashville or Knoxville; (xi) a merger or acquisition; (xii) any matter that would cause Pinnacle Financial to conclude that there was impairment of any asset, including intangible assets; (xiii) the ability to attract additional financial advisors or to attract customers from other financial institutions and conversely, the inability to realize the economic benefits of newly hired financial advisors; (xiv) the ability to retain large, uninsured deposits with the expiration of the FDIC’s transaction account guarantee program; (xv) further deterioration in the valuation of other real estate owned and increased expenses associated therewith; (xvi) inability to comply with regulatory capital requirements; and, (xvii) changes in state and federal legislation, regulations or policies applicable to banks and other financial service providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy, including implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). A more detailed description of these and other risks is contained in “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 22, 2013.  Many of such factors are beyond Pinnacle Financial’s ability to control or predict, and readers are cautioned not to put undue reliance on such forward-looking statements. Pinnacle Financial disclaims any obligation to update or revise any forward-looking statements contained in this quarterly report, whether as a result of new information, future events or otherwise.
 
 
Page 2

Item 1.
Part I. Financial Information

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
   
March 31,
2013
    
December 31,
2012
  
ASSETS
            
Cash and noninterest-bearing due from banks
   $ 57,906,350     $ 51,946,542  
Interest-bearing due from banks
     38,860,678       111,535,083  
Federal funds sold and other
     2,792,238       1,807,044  
Cash and cash equivalents
     99,559,266       165,288,669  
                 
Securities available-for-sale, at fair value
     683,545,006       706,577,806  
Securities held-to-maturity (fair value of $40,376,745 and $583,212 at March 31, 2013 and December 31, 2012, respectively)
     40,458,642       574,863  
Mortgage loans held-for-sale
     30,326,709       41,194,639  
                 
Loans
     3,772,363,758       3,712,162,430  
Less allowance for loan losses
     (69,411,493 )     (69,417,437 )
Loans, net
     3,702,952,265       3,642,744,993  
                 
Premises and equipment, net
     75,760,671       75,804,895  
Other investments
     27,311,943       26,962,890  
Accrued interest receivable
     16,940,917       14,856,615  
Goodwill
     244,011,793       244,040,421  
Core deposits and other intangible assets
     4,582,286       5,103,273  
Other real estate owned
     16,802,183       18,580,097  
Other assets
     128,683,433       98,819,455  
Total assets
   $ 5,070,935,114     $ 5,040,548,616  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                
Deposits:
                
Noninterest-bearing
   $ 977,495,990     $ 985,689,460  
Interest-bearing
     788,631,493       760,786,247  
Savings and money market accounts
     1,564,517,135       1,662,256,403  
Time
     572,250,233       606,455,873  
Total deposits
     3,902,894,851       4,015,187,983  
Securities sold under agreements to repurchase
     129,099,508       114,667,475  
Federal Home Loan Bank advances
     200,796,066       75,850,390  
Subordinated debt and other borrowings
     105,533,292       106,158,292  
Accrued interest payable
     1,235,441       1,360,598  
Other liabilities
     39,942,214       48,252,519  
Total liabilities
     4,379,501,372       4,361,477,257  
Stockholders’ equity:
                
Preferred stock, no par value, 10,000,000 shares authorized; no shares issued and outstanding
     -       -  
Common stock, par value $1.00; 90,000,000 shares authorized; 35,022,487 and 34,696,597 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively
     35,022,487       34,696,597  
Additional paid-in capital
     544,619,717       543,760,439  
Retained earnings
     100,834,814       87,386,689  
Accumulated other comprehensive income, net of taxes
     10,956,724       13,227,634  
Total stockholders’ equity
     691,433,742       679,071,359  
Total liabilities and stockholders’ equity
   $ 5,070,935,114     $ 5,040,548,616  

See accompanying notes to consolidated financial statements
 
 
Page 3

INNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

   
Three Months Ended
March 31,
  
   
2013
    
2012
  
Interest income:
            
Loans, including fees
   $ 41,514,213     $ 38,637,719  
Securities:
                
Taxable
     3,670,934       4,929,284  
Tax-exempt
     1,656,408       1,703,146  
Federal funds sold and other
     314,772       553,939  
Total interest income
     47,156,327       45,824,088  
                 
Interest expense:
                
Deposits
     3,412,396       4,827,476  
Securities sold under agreements to repurchase
     77,816       155,576  
Federal Home Loan Bank advances and other borrowings
     907,641       1,337,031  
Total interest expense
     4,397,853       6,320,083  
Net interest income
     42,758,474       39,504,005  
Provision for loan losses
     2,172,404       1,034,245  
Net interest income after provision for loan losses
     40,586,070       38,469,760  
                 
Noninterest income:
                
Service charges on deposit accounts
     2,480,244       2,323,962  
Investment services
     1,792,640       1,646,778  
Insurance sales commissions
     1,393,304       1,287,560  
Gain on mortgage loans sold, net
     1,813,488       1,494,472  
Gain on sale of investment securities, net
     -       113,600  
Trust fees
     944,332       795,435  
Other noninterest income
     3,478,348       2,287,531  
Total noninterest income
     11,902,356       9,949,338  
                 
Noninterest expense:
                
Salaries and employee benefits
     19,572,356       19,792,566  
Equipment and occupancy
     5,113,050       5,008,655  
Other real estate expense
     720,962       4,676,064  
Marketing and other business development
     790,671       785,325  
Postage and supplies
     591,488       563,294  
Amortization of intangibles
     520,987       686,067  
Other noninterest expense
     5,130,495       4,307,735  
Total noninterest expense
     32,440,009       35,819,706  
Income before income taxes
     20,048,417       12,599,392  
Income tax expense
     6,600,292       4,234,438  
Net income
     13,448,125       8,364,954  
Preferred stock dividends
     -       900,519  
Accretion on preferred stock discount
     -       258,647  
Net income available to common stockholders
   $ 13,448,125     $ 7,205,788  
Per share information:
                
Basic net income per common share available to common stockholders
   $ 0.40     $ 0.21  
Diluted net income per common share available to common stockholders
   $ 0.39     $ 0.21  
Weighted average shares outstanding:
                
Basic
     33,987,265       33,811,871  
Diluted
     34,206,202       34,423,898  

See accompanying notes to consolidated financial statements.

 
Page 4

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
   
Three Months Ended
March 31,
  
   
2013
    
2012
  
Net income
   $ 13,448,125     $ 8,364,954  
Other comprehensive income, net of tax:
                
Decrease in net gains on securities available-for-sale, net of tax
     (2,270,910 )     (771,981 )
Net gains on sale of investment securities reclassified from other comprehensive income into net income, net of tax
     -       (75,431 )
Total comprehensive income
   $ 11,177,215     $ 7,517,542  

See accompanying notes to consolidated financial statements.

 
Page 5

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
 
   
Preferred
                 Common    
Additional
           Accumulated     Total  
   
Stock
    
Common Stock
     Stock     Paid-in     Retained    
Other Comp.
     Stockholders’  
   
Amount
    
Shares
    
Amount
    
Warrants
    
Capital
    
Earnings
    
Income, net
    
Equity
  
                                                 
Balances, December 31, 2011
   $ 69,096,828       34,354,960     $ 34,354,960     $ 3,348,402     $ 536,227,537     $ 49,783,584     $ 17,333,257     $ 710,144,568  
Exercise of employee common stock options and related tax benefits
     -       180,487       180,487       -       304,428       -       -       484,915  
Issuance of restricted common shares, net of forfeitures
             95,912       95,912       -       (95,912 )     -       -       -  
Issuance of salary stock units
     -       27,672       27,672       -       449,891       -       -       477,563  
Restricted shares withheld for taxes
     -       (43,018 )     (43,018 )     -       (36,459 )     -       -       (79,477 )
Compensation expense for restricted shares
     -       -       -       -       857,160       -       -       857,160  
Compensation expense for stock options
     -       -       -       -       153,801       -       -       153,801  
Accretion on preferred stock discount
     258,647       -       -       -       -       (258,647 )     -       -  
Preferred dividends paid
     -       -       -       -       -       (890,624 )     -       (890,624 )
Net income
     -       -       -       -       -       8,364,954       -       8,364,954  
Other comprehensive loss
     -       -       -       -       -       -       (847,412 )     (847,412 )
Balances, March 31, 2012
   $ 69,355,475       34,616,013     $ 34,616,013     $ 3,348,402     $ 537,860,446     $ 56,999,267     $ 16,485,845     $ 718,665,448  
                                                                 
Balances, December 31, 2012
   $ -       34,696,597     $ 34,696,597     $ -     $ 543,760,439     $ 87,386,689     $ 13,227,634     $ 679,071,359  
Exercise of employee common stock options and related tax benefits
     -       88,845       88,845       -       902,533       -       -       991,378  
Issuance of restricted common shares, net of forfeitures
     -       274,545       274,545       -       (274,545 )     -       -       -  
Restricted shares withheld for taxes
     -       (37,500 )     (37,500 )     -       (731,679 )     -       -       (769,179 )
Compensation expense for restricted shares
     -       -       -       -       950,498       -       -       950,498  
Compensation expense for stock options
     -       -       -       -       12,471       -       -       12,471  
Net income
     -       -       -       -       -       13,448,125       -       13,448,125  
Other comprehensive loss
     -       -       -       -       -       -       (2,270,910 )     (2,270,910 )
Balances, March 31, 2013
   $ -       35,022,487     $ 35,022,487     $ -     $ 544,619,717     $ 100,834,814     $ 10,956,724     $ 691,433,742  

See accompanying notes to consolidated financial statements.
 
 
Page 6
 
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
   
Three Months ended
March 31,
  
   
2013
    
2012
  
Operating activities:
            
Net income
   $ 13,448,125     $ 8,364,954  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Net amortization/accretion of premium/discount on securities
     988,811       1,971,889  
Depreciation and amortization
     2,432,535       2,660,347  
Provision for loan losses
     2,172,404       1,034,245  
Gain on mortgage loans sold, net
     (1,813,488 )     (1,494,472 )
Gain on sale of investment securities, net
     -       (113,600 )
Stock-based compensation expense
     962,969       1,488,522  
Deferred tax benefit
     (698,661 )     (1,831,027 )
(Gains) losses on dispositions of other real estate and other investments
     (866,306 )     4,283,855  
Excess tax benefit from stock compensation
     (28,628 )     (4,978 )
Mortgage loans held for sale:
                
Loans originated
     (107,845,659 )     (105,694,598 )
Loans sold
     120,569,000       119,023,000  
Decrease in other assets
     3,050,703       15,794,855  
Decrease in other liabilities
     (8,339,670 )     (3,128,767 )
Net cash provided by operating activities
     24,032,135       42,354,225  
                 
Investing activities:
                
Activities in securities available-for-sale:
                
Purchases
     (65,052,729 )     (17,954,670 )
Sales
     -       14,359,785  
Maturities, prepayments and calls
     43,551,916       56,585,619  
Activities in securities held-to-maturity:
                
Maturities, prepayments and calls
     (75,868 )     1,280,000  
Increase in loans, net
     (63,167,119 )     (54,941,031 )
Purchases of software, premises and equipment
     (1,442,076 )     (1,271,826 )
Purchase of bank owned life insurance
     (30,000,000 )     -  
Increase in other investments
     (303,750 )     (286,569 )
Net cash used in investing activities
     (116,489,626 )     (2,228,692 )
                 
Financing activities:
                
Net decrease in deposits
     (112,293,132 )     (66,220,256 )
Net increase (decrease) in securities sold under agreements to repurchase
     14,432,033       (13,502,880 )
Advances from Federal Home Loan Bank:
                
Issuances
     240,000,000       215,000,000  
Payments/maturities
     (115,036,641 )     (215,017,901 )
Decrease in other borrowings
     (625,000 )     -  
Exercise of common stock options and stock appreciation rights
     222,200       405,438  
Excess tax benefit from stock compensation
     28,628       4,978  
Preferred dividends paid
     -       (890,624 )
Net cash provided by (used in) financing activities
     26,728,088       (80,221,245 )
Net decrease in cash and cash equivalents
     (65,729,403 )     (40,095,712 )
Cash and cash equivalents, beginning of period
     165,288,669       172,163,040  
Cash and cash equivalents, end of period
   $ 99,559,266     $ 132,067,328  

See accompanying notes to consolidated financial statements.

 
Page 7

PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1.       Summary of Significant Accounting Policies

Nature of Business — Pinnacle Financial Partners, Inc. (Pinnacle Financial) is a bank holding company whose primary business is conducted by its wholly-owned subsidiary, Pinnacle Bank. Pinnacle Bank is a commercial bank headquartered in Nashville, Tennessee. Pinnacle Bank provides a full range of banking services in its primary market areas of the Nashville-Davidson-Murfreesboro-Franklin, Tennessee and Knoxville, Tennessee Metropolitan Statistical Areas.

Basis of Presentation — The accompanying unaudited consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (U.S. GAAP).  All adjustments consisting of normally recurring accruals that, in the opinion of management, are necessary for a fair presentation of the financial position and results of operations for the periods covered by the report have been included.  The accompanying unaudited consolidated financial statements should be read in conjunction with the Pinnacle Financial consolidated financial statements and related notes appearing in the 2012 Annual Report previously filed on Form 10-K.

These consolidated financial statements include the accounts of Pinnacle Financial and its wholly-owned subsidiaries. PNFP Statutory Trust I, PNFP Statutory Trust II, PNFP Statutory Trust III and PNFP Statutory Trust IV are affiliates of Pinnacle Financial and are included in these consolidated financial statements pursuant to the equity method of accounting.  Significant intercompany transactions and accounts are eliminated in consolidation.

Use of Estimates — The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term include the determination of the allowance for loan losses, any potential impairment of intangible assets, including goodwill and the valuation of deferred tax assets, other real estate owned, and our investment portfolio, including other-than-temporary impairment. These financial statements should be read in conjunction with Pinnacle Financial’s Annual Report on Form 10-K for the year ended December 31, 2012. There have been no significant changes to Pinnacle Financial’s significant accounting policies as disclosed in Pinnacle Financial’s Annual Report on Form 10-K for the year ended December 31, 2012.

Recently Adopted Accounting Pronouncements —  In February 2013, the FASB issued Accounting Standards Update 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" which provides disclosure guidance on amounts reclassified out of AOCI by component.  The adoption did not have any impact on our financial position or results of operations but has impacted our financial statement disclosure.  As shown on the statement of other comprehensive income for the three months ended March 31, 2012, Pinnacle Financial reclassified approximately $75,000, net of tax, out of accumulated other comprehensive income into net income related to net gains on sale of investment securities.

Cash Flow Information — Supplemental cash flow information addressing certain cash and noncash transactions for each of the three months ended March 31, 2013 and 2012 was as follows:

   
For the three months ended March 31,
  
   
2013
    
2012
  
Cash Transactions:
            
Interest paid
   $ 4,540,692     $ 6,659,856  
Income taxes paid, net
     7,100,000       7,825,894  
Noncash Transactions:
                
Loans charged-off to the allowance for loan losses
     3,557,313       4,925,559  
Loans foreclosed upon and transferred to other real estate owned
     550,000       4,574,792  
Available-for-sale securities transferred to held-to-maturity portfolio
     39,959,647       -  

 
Page 8
 
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Income Per Common Share — Basic net income per common share available to common stockholders (EPS) is computed by dividing net income available to common stockholders by the weighted average common shares outstanding for the period.  Weighted average common shares outstanding also include salary stock units issued to the named executive officers.  Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock were exercised or converted.  The difference between basic and diluted weighted average shares outstanding is attributable to common stock options, common stock appreciation rights, warrants and restricted shares with time-based vesting criteria. The dilutive effect of outstanding options, common stock appreciation rights, warrants and restricted shares with time-based vesting criteria is reflected in diluted EPS by application of the treasury stock method.

For the three months ended March 31, 2013, approximately 219,000 shares associated with dilutive stock options, stock appreciation rights and restricted shares with time-based vesting criteria were included in the net income per share calculation.  For the three months ended March 31, 2012, there were approximately 612,000 shares associated with dilutive stock options, stock appreciation rights and time-based restricted shares with time-based vesting criteria outstanding to purchase common shares that were included in the net income per share calculation.

The following is a summary of the basic and diluted net income per share calculations for the three months ended March 31, 2013 and 2012:

   
For the three months ended
March 31,
  
   
2013
    
2012
  
Basic net income per share calculation:
            
Numerator - Net income available to common stockholders
   $ 13,448,125     $ 7,205,788  
                 
Denominator - Average common shares outstanding
     33,987,265       33,811,871  
Basic net income per share available to common stockholders
   $ 0.40     $ 0.21  
                 
Diluted net income per share calculation:
                
Numerator – Net income available to common stockholders
   $ 13,448,125     $ 7,205,788  
                 
Denominator - Average common shares outstanding
     33,987,265       33,811,871  
Dilutive shares contingently issuable
     218,937       612,027  
Average diluted common shares outstanding
     34,206,202       34,423,898  
Diluted net income per share available to common stockholders
   $ 0.39     $ 0.21  
 
Note 2.      Participation in U.S. Treasury Capital Purchase Program (CPP)
 
On December 12, 2008, Pinnacle Financial issued 95,000 shares of preferred stock to the U.S. Treasury (the Treasury) for $95 million pursuant to the CPP.  For the time the CPP preferred stock was outstanding, the CPP preferred stock was non-voting, other than having class voting rights on certain matters, and paid cumulative dividends quarterly at a rate of 5% per annum. Pinnacle Financial redeemed the preferred shares issued to the Treasury under the CPP in two transactions.   During the fourth quarter of 2011, Pinnacle Financial redeemed 23,750 of the preferred shares in a transaction totaling approximately $23.9 million, including accrued but unpaid dividends of $142,000.  During the second quarter of 2012, Pinnacle Financial completed the redemption of the remaining 71,250 preferred shares outstanding in a transaction totaling $71.6 million which included accrued but unpaid dividends of $346,000.  Concurrently, Pinnacle Financial accelerated the accretion of the remaining preferred stock discount of approximately $1.7 million during the second quarter of 2012.
 
Additionally, Pinnacle Financial issued warrants to purchase 534,910 shares of common stock to the Treasury as a condition to its participation in the CPP.  The warrants had an exercise price of $26.64 each, were immediately exercisable and expired 10 years from the date of issuance.  On June 16, 2009, Pinnacle Financial completed the sale of 8,855,000 shares of its common stock in a public offering, resulting in net proceeds to Pinnacle Financial of approximately $109 million.  As a result, and pursuant to the terms of the warrants, the number of shares issuable upon exercise of the warrants was reduced by 50%, or 267,455 shares.  During the third quarter of 2012, Pinnacle Financial repurchased all of the remaining outstanding warrants held by the Treasury for $755,000.
 
 
Page 9
 
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 3.      Securities
 
The amortized cost and fair value of securities available-for-sale and held-to-maturity at March 31, 2013 and December 31, 2012 are summarized as follows (in thousands):
 
March 31, 2013
  
 
Amortized
 Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Fair
Value
  
Securities available-for-sale:
                        
U.S. government agency securities
   $ 139,609     $ 55     $ 1,420     $ 138,244  
Mortgage-backed securities
     358,702       14,750       1,595       371,857  
State and municipal securities
     134,731       10,563       187       145,107  
Agency-backed securities
     17,393       -       35       17,358  
Corporate notes and other
     9,512       1,469       2       10,979  
    $ 659,947     $ 26,837     $ 3,239     $ 683,545  
Securities held-to-maturity:
                                
State and municipal securities
   $ 40,459     $ 9     $ 91     $ 40,377  
    $ 40,459     $ 9     $ 91     $ 40,377  
 
 
December 31, 2012
  
 
Amortized
 Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
  
Fair
Value
  
Securities available-for-sale:
                                
U.S. government agency securities
   $ 110,817     $ 49     $ 414     $ 110,452  
Mortgage-backed securities
     360,504       15,770       623       375,651  
State and municipal securities
     177,364       14,489       126       191,727  
Agency-backed securities
     17,361       -       9       17,352  
Corporate notes and other
     9,881       1,519       4       11,396  
    $ 675,927     $ 31,827     $ 1,176     $ 706,578  
Securities held-to-maturity:
                                
State and municipal securities
   $ 575     $ 8     $ -     $ 583  
    $ 575     $ 8     $ -     $ 583  

At March 31, 2013, approximately $612.3 million of securities within Pinnacle Financial’s investment portfolio were either pledged to secure public funds and other deposits or securities sold under agreements to repurchase.

During the first quarter of 2013, approximately $40.0 million of available-for-sale securities were transferred to the held-to-maturity portfolio.  The transfers of debt securities into the held-to-maturity category from the available-for-sale category were made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer was retained in other comprehensive income and in the carrying value of the held-to-maturity securities. Such amounts will be amortized to interest income over the remaining life of the securities.

The amortized cost and fair value of debt securities as of March 31, 2013 by contractual maturity are shown below. Actual maturities may differ from contractual maturities of mortgage- and asset-backed securities since the mortgages and assets underlying the securities may be called or prepaid with or without penalty. Therefore, these securities are not included in the maturity categories in the following summary (in thousands):

   
March 31, 2013
  
   
Available-for-sale
    
Held-to-maturity
  
   
Amortized
Cost
    
Fair
Value
    
Amortized Cost
    
Fair
Value
  
Due in one year or less
   $ 9,570     $ 9,717     $ 1,891     $ 1,891  
Due in one year to five years
     20,923       21,543       1,016       1,021  
Due in five years to ten years
     142,376       149,503       9,510       9,509  
Due after ten years
     110,983       113,567       28,042       27,956  
Mortgage-backed securities
     358,702       371,857       -       -  
Asset-backed securities
     17,393       17,358       -       -  
    $ 659,947     $ 683,545     $ 40,459     $ 40,377  
 
 
Page 10
 
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
At March 31, 2013 and December 31, 2012, included in securities were the following available-for-sale investments with unrealized losses.  The information below classifies these investments according to the term of the unrealized losses of less than twelve months or twelve months or longer (in thousands):
 
   
Investments with an
Unrealized Loss of
less than 12 months
    
Investments with an
Unrealized Loss of
12 months or longer
    
Total Investments
with an
Unrealized Loss
  
   
Fair Value
    
Unrealized
Losses
    
Fair Value
    
Unrealized
Losses
    
Fair Value
    
Unrealized
Losses
  
At March 31, 2013:
                                    
                                     
U.S. government agency securities
   $ 121,169     $ 1,420     $ -     $ -     $ 121,169     $ 1,420  
Mortgage-backed securities
     67,940       1,595       -       -       67,940       1,595  
State and municipal securities
     41,084       187       -       -       41,084       187  
Agency-backed securities
     17,358       35       -       -       17,358       35  
Corporate notes
     364       2       -       -       364       2  
Total temporarily-impaired securities
   $ 247,915     $ 3,239     $ -     $ -     $ 247,915     $ 3,239  
                                                 
At December 31, 2012:
                                                
                                                 
U.S. government agency securities
   $ 78,899     $ 414     $ -     $ -     $ 78,899     $ 414  
Mortgage-backed securities
     40,988       623       -       -       40,988       623  
State and municipal securities
     5,179       126       -       -       5,179       126  
Agency-backed securities
     17,353       9       -       -       17,353       9  
Corporate notes
     162       4       -       -       162       4  
Total temporarily-impaired securities
   $ 142,581     $ 1,176     $ -     $ -     $ 142,581     $ 1,176  
 
The applicable dates for determining when securities are in an unrealized loss position are March 31, 2013 and December 31, 2012.  As such, it is possible that a security had a market value that exceeded its amortized cost on other days during the past twelve-month periods ended March 31, 2013 and December 31, 2012, but is in the “Investments with an Unrealized Loss of less than 12 months” category above.
 
As shown in the tables above, at March 31, 2013, Pinnacle Financial had approximately $3.2 million in unrealized losses on $247.9 million of available-for-sale securities. Any unrealized losses associated with these investment securities are driven by changes in interest rates and are not due to the credit quality of the securities.  These securities will continue to be monitored as a part of our ongoing impairment analysis, but are expected to perform even if the rating agencies reduce the credit rating of the bond issuers.  Management evaluates the financial performance of the issuers on a quarterly basis to determine if it is probable that the issuers can make all contractual principal and interest payments.  Because Pinnacle Financial currently does not intend to sell those securities that have an unrealized loss at March 31, 2013, and it is not more-likely-than-not that Pinnacle Financial will be required to sell the securities before recovery of their amortized cost bases, which may be maturity, Pinnacle Financial does not consider these securities to be other-than-temporarily impaired at March 31, 2013.
 
Periodically, available-for-sale securities may be sold or the composition of the portfolio realigned to improve yields, quality or marketability, or to implement changes in investment or asset/liability strategy, including maintaining collateral requirements, and raising funds for liquidity purposes. Additionally, if an available-for-sale security loses its investment grade, tax-exempt status, the underlying credit support is terminated or collection otherwise becomes uncertain based on factors known to management, Pinnacle Financial will consider selling the security, but will review each security on a case-by-case basis as these factors become known. No securities were sold during the three months ended March 31, 2013.
 
The carrying values of Pinnacle Financial’s investment securities could decline in the future if the financial condition of issuers deteriorates and management determines it is probable that Pinnacle Financial will not recover the entire amortized cost bases of the securities.  As a result, there is a risk that other-than-temporary impairment charges may occur in the future.
 
Note 4.      Loans and Allowance for Loan Losses

For financial reporting purposes, Pinnacle Financial classifies its loan portfolio based on the underlying collateral utilized to secure each loan. This classification is consistent with those utilized in the Quarterly Report of Condition and Income filed with the Federal Deposit Insurance Corporation (FDIC).
 
 
Page 11
 
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Commercial loans receive risk ratings by the assigned financial advisor subject to validation by Pinnacle Financial’s independent loan review department.  Risk ratings are categorized as pass, special mention, substandard, substandard-nonaccrual or doubtful-nonaccrual.  Pinnacle Financial believes that its categories follow those used by Pinnacle Bank’s primary regulators.  At March 31, 2013, approximately 75% of our loan portfolio was analyzed as a commercial loan type with a specifically assigned risk rating in the allowance for loan loss assessment.  Consumer loans and small business loans are generally not assigned an individual risk rating but are evaluated as either accrual or nonaccrual based on the performance of the individual loans.  However, certain consumer real estate-mortgage loans and certain consumer and other loans receive a specific risk rating due to the loan proceeds being used for commercial purposes even though the collateral may be of a consumer loan nature.

Risk ratings are subject to continual review by the loan officer.  At least annually, our credit policy requires that every risk rated loan of $500,000 or more be subject to a formal credit risk review process. Each loan grade is also subject to review by our independent loan review department, which reviews a significant portion of our risk rated portfolio annually.  Included in the coverage are independent loan reviews of loans in targeted higher-risk portfolio segments.

The following table presents our loan balances by primary loan classification and the amount within each risk rating category.  Pass rated loans include all credits other than those included in special mention, substandard, substandard-nonaccrual and doubtful-nonaccrual which are defined as follows:

 
·
Special mention loans have potential weaknesses that deserve management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in Pinnacle Financial’s credit position at some future date.
 
·
Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.  Assets so classified must have a well-defined weakness or weaknesses that jeopardize collection of the debt.  Substandard loans are characterized by the distinct possibility that Pinnacle Financial will sustain some loss if the deficiencies are not corrected.
 
·
Substandard-nonaccrual loans are substandard loans that have been placed on nonaccrual status.
 
·
Doubtful-nonaccrual loans have all the characteristics of substandard-nonaccrual loans with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

The following table outlines the amount of each loan classification categorized into each risk rating category as of March 31, 2013 and December 31, 2012 (in thousands):

March 31, 2013
  
Commercial
real estate -
mortgage
    
Consumer
real estate -
mortgage
    
Construction
and land
development
    
Commercial
and
industrial
    
Consumer
and other
    
Total
  
Accruing loans
                                    
Pass
   $ 1,203,486     $ 649,150     $ 257,668     $ 1,349,725     $ 107,814     $ 3,567,843  
Special Mention
     10,556       2,601       27,696       24,947       -       65,800  
Substandard (1)
     38,829       11,414       19,201       26,774       -       96,218  
Total
     1,252,871       663,165       304,565       1,401,446       107,814       3,729,861  
Impaired loans
                                                
Nonaccrual loans
                                                
Substandard-nonaccrual
     11,064       7,494       1,799       1,372       103       21,832  
Doubtful-nonaccrual
     1       -       -       3       -       4  
Total nonaccrual loans
     11,065       7,494       1,799       1,375       103       21,836  
Troubled debt restructurings(2)
                                                
Pass
     316       2,778       69       433       315       3,911  
Special Mention
     -       -       -       -       -       -  
Substandard
     14,387       2,195       -       174       -       16,756  
Total troubled debt restructurings
     14,703       4,973       69       607       315       20,667  
Total impaired loans
     25,768       12,467       1,868       1,982       418       42,503  
Total loans
   $ 1,278,639     $ 675,632     $ 306,433     $ 1,403,428     $ 108,232     $ 3,772,364  

 
Page 12
 
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
December 31, 2012
  
Commercial
real estate -
mortgage
    
Consumer
real estate -
mortgage
    
Construction
and land
development
    
Commercial
and
industrial
    
Consumer
and other
    
Total
  
Accruing loans
                                    
Pass
   $ 1,093,628     $ 649,571     $ 259,878     $ 1,390,207     $ 93,712     $ 3,486,996  
Special Mention
     12,670       4,242       29,472       23,133       -       69,517  
Substandard (1)
     42,343       13,896       19,622       29,513       -       105,374  
Total
     1,148,641       667,709       308,972       1,442,853       93,712       3,661,887  
Impaired loans
                                                
Nonaccrual loans
                                                
Substandard-nonaccrual
     9,290       5,877       4,509       3,035       79       22,790  
Doubtful-nonaccrual
     1       29       -       3       -       33  
Total nonaccrual loans
     9,291       5,906       4,509       3,038       79       22,823  
Troubled debt restructurings(2)
                                                
Pass
     4,705       3,623       71       502       119       9,020  
Special Mention
     -       -       -       -       -       -  
Substandard
     15,559       2,688       -       185       -       18,432  
Total troubled debt restructurings
     20,264       6,311       71       687       119       27,452  
Total impaired loans
     29,555       12,217       4,580       3,725       198       50,275  
Total loans
   $ 1,178,196     $ 679,926     $ 313,552     $ 1,446,578     $ 93,910     $ 3,712,162  
 
(1)
Potential problem loans represent those loans with a well-defined weakness and where information about possible credit problems of borrowers has caused management to have 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 Bank’s primary regulators for loans classified as substandard, excluding the impact of substandard nonaccrual loans and substandard troubled debt restructurings. Potential problem loans, which are not included in nonaccrual loans, amounted to approximately $96.2 million at March 31, 2013, compared to $105.4 million at December 31, 2012.
 
(2)
Troubled debt restructurings are presented as an impaired loan; however, they continue to accrue interest at contractual rates.

At March 31, 2013 and December 31, 2012, all loans classified as nonaccrual were deemed to be impaired.  The principal balances of these nonaccrual loans amounted to $21.8 million and $22.8 million at March 31, 2013 and December 31, 2012, respectively, and are included in the table above.  For the three months ended March 31, 2013, the average balance of nonaccrual loans was $24.2 million as compared to $32.6 million for the twelve months ended December 31, 2012.  At the date such loans were placed on nonaccrual status, Pinnacle Financial reversed all previously accrued interest income against current year earnings.  Had these nonaccrual loans been on accruing status, interest income would have been higher by $292,000, respectively, for the three months ended March 31, 2013 compared to $759,000, respectively, for the three months ended March 31, 2012, respectively.
 
The following table details the recorded investment, unpaid principal balance and related allowance and average recorded investment of our nonaccrual loans at March 31, 2013 and December 31, 2012 by loan classification and the amount of interest income recognized on a cash basis throughout the quarter and year-to-date period then ended, respectively, on these loans that remain on the balance sheets (in thousands):
   
At March 31, 2013
    
For the three months ended
March 31, 2013
  
   
Recorded
investment
    
Unpaid
principal
balance
    
Related
allowance(1)
    
Average
recorded
investment
    
Interest
income
recognized
  
Collateral dependent nonaccrual loans:
                              
Commercial real estate – mortgage
   $ 8,352     $ 8,772     $ -     $ 9,220     $ -  
Consumer real estate – mortgage
     5,030       5,158       -       5,162       -  
Construction and land development
     1,516       1,605       -       1,526       -  
Commercial and industrial
     690       724       -       699       -  
Consumer and other
     -       -       -       -       -  
Total
   $ 15,588     $ 16,259     $ -     $ 16,607     $ -  
                                         
Cash flow dependent nonaccrual loans:
                                        
Commercial real estate – mortgage
   $ 2,713     $ 2,773     $ 571     $ 2,901     $ -  
Consumer real estate – mortgage
     2,464       2,582       852       2,488       -  
Construction and land development
     283       350       111       297       -  
Commercial and industrial
     685       1,989       174       1,770       -  
Consumer and other
     103       128       40       104       -  
Total
   $ 6,248     $ 7,822     $ 1,748     $ 7,560     $ -  
Total nonaccrual loans
   $ 21,836     $ 24,081     $ 1,748     $ 24,167     $ -  
 
 
Page 13
 
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
   
At December 31, 2012
    
For the year ended
December 31, 2012
  
   
Recorded
investment
    
Unpaid
principal
balance
    
Related
allowance(1)
    
Average
recorded
investment
    
Interest
income
recognized
  
Collateral dependent nonaccrual loans:
                              
Commercial real estate – mortgage
   $ 8,740     $ 11,187     $ -     $ 9,612     $ -  
Consumer real estate – mortgage
     3,641       6,394       -       5,266       -  
Construction and land development
     1,546       2,062       -       1,753       -  
Commercial and industrial
     1,547       1,761       -       2,064       -  
Consumer and other
     -       -       -       -       -  
Total
   $ 15,474     $ 21,404     $ -     $ 18,695     $ -  
                                         
Cash flow dependent nonaccrual loans:
                                        
Commercial real estate – mortgage
   $ 551     $ 1,841     $ 154     $ 2,893     $ -  
Consumer real estate – mortgage
     2,265       4,473       573       4,656       -  
Construction and land development
     2,963       4,701       201       4,147       -  
Commercial and industrial
     1,491       2,459       814       2,089       -  
Consumer and other
     79       179       22       143       -  
Total
   $ 7,349     $ 13,653     $ 1,764     $ 13,928     $ -  
                                         
Total nonaccrual loans
   $ 22,823     $ 35,057     $ 1,764     $ 32,623     $ -  
 
(1)
Collateral dependent loans are typically charged-off to their net realizable value pursuant to requirements of our primary regulators and no specific allowance is carried related to those loans.

Pinnacle Financial’s policy is that once a loan is placed on nonaccrual status each subsequent payment is reviewed on a case-by-case basis to determine if the payment should be applied to interest or principal pursuant to regulatory guidelines. Pinnacle Financial recognized no interest income from cash payments received on nonaccrual loans during the three months ended March 31, 2013 or during the year ended December 31, 2012.

Impaired loans also include loans that Pinnacle Bank has elected to formally restructure when, due to the weakening credit status of a borrower, the restructuring may facilitate a repayment plan that seeks to minimize the potential losses that Pinnacle Bank may have to otherwise incur.  If on nonaccrual status as of the date of restructuring, the loans are included in nonaccrual loans. Loans that have been restructured that were performing as of the restructure date and continue to perform in accordance with the restructured terms are reported separately as troubled debt restructurings.

At March 31, 2013 and December 31, 2012, there were $20.7 million and $27.5 million, respectively, of troubled debt restructurings that were performing as of their restructure date and which were accruing interest. These troubled debt restructurings are considered impaired loans pursuant to U.S. GAAP. Troubled commercial loans are restructured by specialists within our Special Assets Group, and all restructurings are approved by committees and credit officers separate and apart from the normal loan approval process.  These specialists are charged with reducing Pinnacle Financial’s overall risk and exposure to loss in the event of a restructuring by obtaining some or all of the following:  improved documentation, additional guaranties, increase in curtailments, reduction in collateral release terms, additional collateral or other similar strategies.
 
 
Page 14
 
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following table outlines the amount of each troubled debt restructuring categorized by loan classification made during the three months ended March 31, 2013 and 2012 (dollars in thousands):

   
March 31, 2013
    
March 31, 2012
  
   
Number
of
contracts
    
Pre
Modification
Outstanding
Recorded
Investment
    
Post
Modification
Outstanding
Recorded
Investment,
net of related
allowance
    
Number
of
contracts
    
Pre
Modification
Outstanding
Recorded
Investment
    
Post
Modification
Outstanding
Recorded
Investment,
net of related
allowance
  
Commercial real estate – mortgage
     -     $ -     $ -       -     $ -     $ -  
Consumer real estate – mortgage
     1       432       359       1       343       288  
Construction and land development
     -       -       -       -       -       -  
Commercial and industrial
     -       -       -       1       39       32  
Consumer and other
     1       200       170       -       -       -  
      2     $ 632     $ 529       2     $ 382     $ 320  

During the three months ended March 31, 2013, two consumer real estate loans totaling $1.0 million which were previously classified as troubled debt restructurings subsequently defaulted. During the three months ended March 31, 2012, four commercial loans totaling $194,000 and two consumer loans totaling $154,000 which were previously classified as troubled debt restructurings defaulted due to their lack of performance. A default is defined as an occurrence which violates the terms of the receivable’s contract.

In addition to the loan metrics above, Pinnacle Financial analyzes its commercial loan portfolio to determine if a concentration of credit risk exists to any industries.  Pinnacle Financial utilizes broadly accepted industry classification systems in order to classify borrowers into various industry classifications.  Pinnacle Financial has a credit exposure (loans outstanding plus unfunded lines of credit) exceeding 25% of Pinnacle Bank’s total risk-based capital to borrowers in the following industries at March 31, 2013 with the comparative exposures for December 31, 2012 (in thousands):

   
At March 31, 2013
        
   
Outstanding
Principal
Balances
    
Unfunded
Commitments
    
Total exposure
    
Total Exposure
at December 31,
2012
  
                         
Lessors of nonresidential buildings
   $ 419,148     $ 46,935     $ 466,083     $ 440,237  
Lessors of residential buildings
     197,042       27,838       224,880       215,899  
Land subdividers
     87,587       13,797       101,384       108,283  

The table below presents past due balances at March 31, 2013 and December 31, 2012, by loan classification and segment allocated between accruing and nonaccrual status (in thousands):

March 31, 2013
  
30-89 days
past due and
accruing
    
90 days or
more past
due and
accruing
    
Total past
due and
accruing
    
Nonaccrual(1)
    
Current
and accruing
    
Total
Loans
Commercial real estate:
                              
Owner-occupied
   $ 1,681     $ 94     $ 1,775     $ 7,150     $ 609,333     $ 618,258  
All other
     -       -       -       3,915       656,466       660,381  
Consumer real estate – mortgage
     1,663       -       1,663       7,494       666,475       675,632  
Construction and land development
     486       -       486       1,799       304,148       306,433  
Commercial and industrial
     4,314       -       4,314       1,375       1,397,739       1,403,428  
Consumer and other
     387       58       445       103       107,684       108,232  
    $ 8,531     $ 152     $ 8,683     $ 21,836     $ 3,741,845     $ 3,772,364  

 
Page 15
 
PINNACLE FINANCIAL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

December 31, 2012
  
30-89 days
past due and
accruing
    
90 days or
more past
due and
accruing
    
Total past
due and
accruing
    
Nonaccrual(1)
    
Current
and accruing
    
Total
Loans
  
Commercial real estate: